Riccardo Bellofiore, Steve Keen and the delusions of debt

Most were agreed that the Greek people should not pay the huge debt payments they owe to the very banks in Europe and the US that caused the crisis in the first place.  Fiscal austerity was not only going to cut the living standards of the Greek people by around 30%; it would not work in restoring economic growth for Greece.  But the attendees were unclear or disagreed on what policies to adopt as an alternative beyond defaulting on the debt.  Some wanted Greece to leave the Eurozone too and some did not want that.  I’ve outlined my view in previous posts (An alternative programme for Europe, 11 September 2011).  So I’m not going to repeat the points now.
Instead I want to take on some interesting points made in a frontispiece article for the conference presented by Italian left economist, Riccardo Bellofiore (The postman always rings twice: the euro crisis inside the global crisis).  Bellofiore argues that the euro crisis is really just part of an overall global debt crisis.  As he puts its: “demand and the low growth in Europe, as well as the current sovereign debt crisis, came wholly from outside… if only the economic analysis of the Left would have escaped obsolete readings, such as the tendential fall in the rate of profit or would have resisted the underconsumption temptation (according to which the global crisis was of a world of low wages), it could have seen in advance that was the collapse of ‘privatised Keynesianism’.
So, according to Bellofiore, capitalism got into crisis because of privatised Keynesianism, not because of falling profitability or underconsumption.  By privatised Keynesianism, Bellofiore means uncontrolled private debt expansion that creates an ‘imbalance’ in the capitalist economy which must eventually be corrected through a crisis.  Thus the cause of capitalist crisis is not the Marxist one of profitability or rising inequality (currently the vogue among non-mainstream heterodox economists), but uncontrolled debt.
This is more or less the theory of Herman Minsky, student of Joseph Schumpeter and follower of John Maynard Keynes.  Bellofiore makes the point that in a monetary economy there can be no growth without credit or debt.  Debt or credit is a ‘good thing’ if it is applied to productive investments and it is bad if it is used just to speculate in financial instruments or to invest in unproductive activities like property.  Bellofiore’s conclusion is that we need to replace ‘privatised Keynesianism’ with the ‘socialised investment’.   As Keynes put in The General Theory of Employment, Interest and Money: ‘It seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialization of investment will prove the only means of securing an approximation to full employment.’ (p378)   ‘Only experience… can show how far management of the rate of interest is capable of continuously stimulating the appropriate volume of investment… I am now somewhat sceptical of the success of a merely monetary policy directed towards influencing the rate of interest… I expect to see the State… taking an ever greater responsibility for directly organising investment; since it seems likely that the fluctuations in the market estimation of the marginal efficiency of different types of capital… will be too great to be offset by any practicable changes in the rate of interest.’ (p164)  – in other words, profitability is more important for capitalists than cheap money in deciding on investing. Therefore Keynes concluded “ that the duty of ordering the current volume of investment cannot safely be left in private hands.’ (p320).
What Keynes meant about ‘ordering’ investment is ambiguous. Keynes seemed to see ‘socialised investment’ as a supplement to the private sector.  Minsky seemed to go further because, for him, under capitalism, credit or debt becomes uncontrollable and takes on a Ponzi-like form that eventually leads to a credit crunch and crisis.  This was the real cause of capitalist crises, not the Marxist explanation.  Profitability is not the problem but the lack of demand created by a mountain of credit (what Marx called fictitious capital) – see my critique of Minsky in my paper (The causes of the Great Recession) – see p 17.  So, for Minsky, government investment must replace private investment to sustain demand.
This brings me to the second meeting.  This was entitled  The deluded discipline of economics and organised by Prime Economics (http://www.primeeconomics.org), which is a left Keynesian policy research group based in London.  The main speaker was Steve Keen, the Australian economist who was promoting the second edition of his book, Debunking Economics – (http://www.amazon.co.uk/Debunking-Economics-Revised-Expanded-Dethroned/dp/1848139926/ref=sr_1_1?ie=UTF8&qid=1317987820&sr=8-1).  This is a brilliant destruction of the unrealistic and contradictory assumptions and conclusions of modern mainstream economics, particularly neoclassical theory.  Don’t miss it.  Steve Keen was also the winner of the Real Economics Review prize for predicting the global financial crisis of 2008-9, which he won over the competition of greater media luminaries like Nouriel Roubini (see my paper op cit).
Keen argued that mainstream economics could not have predicted the crisis because it is wedded to a fetish that economics is really a process of supply meeting demand at the intersection of two curves to achieve equilibrium.  Dynamic, unstable processes in the real world are ignored or denied.  Neoclassical economics is a neat and plausible theory, but wrong.  It makes some psychological assumptions about individual needs and tastes and ignores income inequality, different savings patterns and social classes.  It assumes that an individual demand curve can just be aggregated to the macro level of the whole economy.  Indeed, for the neoclassical model, there is only one demand curve, not even an aggregation of lots of individual ones.  But the world of the individual cannot be just multiplied to the aggregate – this is a fallacy of composition.  There is not a straight path from the micro to the macro.  This was the mistake of all those previous theorists like Say or Walras that assumed that because an individual seller must have a buyer, so total supply in an economy must be matched by total demand.  This was fallacy first debunked by Marx and later by Keynes (who never read Marx).
Keen made fun with the various statements of mainstream economists prior to the crisis.  And he quoted Nobel prize winning neoclassical economist Robert Solow who attacked the fetishism of the mainstream.  I have another quote from Solow, when the octogenarian gave evidence to the US Congress on the state of mainstream economics in July 2010:  “The macroeconomics that dominates serious thinking, certainly in our elite universities and in many central banks and other influential policy circles seems to have absolutely nothing to say about the problem.  One single combination worker-owner-consumer-everything else simplified economy has nothing useful to say about anti-recession policy because it has built into its essentially implausible assumptions the conclusion that there is nothing for macroeconomic policy to do”. That’s why mainstream economics got things so wrong and remains in denial.
Uncertainty, change and, above all, the intervention of money and credit disprove the neoclassical assumptions.  And that is where Keen makes his key point that, in a modern capitalist economy credit is necessary to ensure investment and growth.  But once credit is in the economic process, there is nothing to stop it mismatching demand and supply.  Indeed, to really measure the level of demand, credit must be added to income.  And Keen discovered that in the major capitalist economies leading up to the crisis of 2007, private sector credit outstripped the growth of national income.  It reached record levels, over 300% of GDP in the US.   That credit bubble was bound to burst and thus caused the Great Recession.
Undoubtedly the rise of excessive credit in the major capitalist economies was a feature of the period before the crisis.  And its very size meant that the crunch would be correspondingly more severe as capitalist sector saw the value of this fictitious capital destroyed.  But is it really right to say that excessive credit is the cause of capitalist crisis?  Marx argued that credit gets out of hand because capitalists find that profitability is falling and they look to boost the mass of profits by extending credit.  Uncontrollable credit is a product of falling profitability.  In my book, The Great Recession, I provide evidence for this point and in my paper (op cit, p30).
But there appears to be no role for profit and profitability in Keen’s crisis model.  Indeed, in his book, he starts his model with capital (or money if you prefer), which leads to investment, then income and, within income, to profits and wages.  As I have argued in a previous post, this is back to front (see Double dips, deficits and debt, 24 August 2011).  I think it is a delusion or a fetish to look at credit as the main or only cause of crisis.  In a capitalist economy, profit rules.  If you deny that, you are denying that capitalism is the right term to describe the modern economy.   Maybe it would be better to talk about a credit economy, and credit providers or creators and not capitalists. We must start with profit,which leads to money, investment and capital accumulation and then to employment and incomes.  The Keynesian/Keen model assumes that capital (or credit) is already in place with or without profits.  The issue for Keen is that you can have too much of a ‘good thing’.
This leads to some interesting policy conclusions.  If excessive credit is to blame for capitalist crises and not any flaws in the profit mode of production, then the answer is the control of credit.  Indeed, in the meeting Keen argued that the best policy prescription was to keep private sector credit at about 50% of GDP in capitalist economies (it is way over 100% in most).   Then financial crises could be avoided.  Even if that were true, how could it be done without public ownership and control of the banking sector?  No doubt, Keen would support that measure.
Ann Pettifor from Prime Economics also spoke at the meeting and promoted the idea that we need more credit expansion to get the economy out of the depression it is in.  For her, credit creates activity and income (in contrast to Marx who reckoned that activity by labour created income).   And yet we had just heard from Keen that too much credit causes crises!  This becomes almost semantic: debt is bad, but credit is good.  Of course, Pettifor was arguing that banks need to provide credit for productive purposes to households and small businesses and not speculate in stocks and bonds.  But that means converting the banks into public service entities.  Doing so, poses the question of control over the whole private sector and its ability to make profits.   It can’t stop at controlling credit: ‘socialised investment’ in credit would not be enough.

11 thoughts on “Riccardo Bellofiore, Steve Keen and the delusions of debt

  1. “In a capitalist economy, profit rules. If you deny that, you are denying that capitalism is the right term to describe the modern economy.” Okay, let’s go along with you here. The first question that arises is: profit from what, exactly? According to the Roberts theory, profit is a sort of blob excreted by production, and if less blob is being excreted, the economy crashes – to forestall the crash more and more credit is injected. This however is not a very realistic portrayal of what actually happens. The economy doesn’t simply consist of production (in the Robertsonian theory, everything that is not production seems to be fictitious capital). Marx already knew that quite well. So he distinguished already between real capital and money capital, and between money capital, bank capital and fictitious capital. The accumulation process does not begin and end with investment in production. Assets are accumulated also external to production, in the form of durables, real estate and financial assets. The fundamentalist falling rate of profit theory claims that what happens in one-quarter or one-third of the economy can explain the whole economy, and it can’t. The essential point to understand in Steve Keen’s story is that – as Adair Turner admitted -credit growth just isn’t very easily manageable. Because exactly how much credit is too much credit? Basically, you don’t know that in advance, and you can’t know it or predict it in advance. The only real proof of excess credit is that credit defaults increase beyond an acceptable level. Inversely, in a liquidity crisis, when credit provision and interbank lending peters out, you don’t know just exactly how much injected funds will solve the liquidity crisis either. So the conclusion is that if you really want to control credit growth, then you can really do it only by dictating the investment policy of financial institutions. In reality, the credit crunch is being used as a lever to force through a restructuring of state policy as a whole. It is a fight among financial institutions, and between financial institutions and states about the future of the financial regime, of which a substantial fraction of ordinary people are the main victims. Consumer credit is only the minor part of total credit. The major part consists of credit for means of production, commercial trade, real estate and financial assets.

  2. JB, yours is an odd argument about what Marx thought. He was pretty clear that capital is only valorised in the process of production (which under capitalism involves exploitation — extraction of surplus value). The question of where the surplus value ends up is a separate question for him: A finance or real estate capitalist can accumulate capital but the surplus value they are accumulating was not created by any process within the financial or real estate industries. This doesn’t make credit, or a complex financial system, any less valuable to capitalists and/or the system as a whole, but to suggest that profit is created there is mistaken.

    The LTRPF doesn’t seek to ignore these changes; the question is how they are connected with the fundamental problem of rising organic composition of capital in the productive economy Those connections require analytical and empirical mediations to be drawn between those sectors.

    I think Marx’s answer to “how much credit is too much?” would not posit an abstract ratio like Keen’s. Instead he would argue that eventually conjunctural tipping points emerge when it becomes obvious that debts will not be paid and creditors try to collect on what is owed, but find that the debtors can’t pay. A tipping point will not only occur because of a certain ratio, but on psychological assessments by creditors (and debtors) of the situation, influenced by a myriad of political and ideological factors operating at the time.

    The LTRPF thus underlies the surface credit-debt relationship in the plane of banking and finance, even if those more “surface” phenomena cannot be reduced to underlying profitability in a mechanical way.

    Of course, one can reject Marx’s theory, but as Michael demonstrates on this blog, its has an explanatory power about the failure of Keynesian and “austerian” models of the crisis to really show a way forward that seems to get proven again and again in practice as the crisis deepens.

  3. Dr Tad,

    Your argument sounds very much like that of the New Marxist Exploiting Class, or what Joan Robinson called “Billy Graham Marxism”. When Marx penned Capital Vol. 3, he said very explicitly once again that he was only dealing with the capitalist of production and not with the whole economy – thus, for example, he deliberately did not discuss public finance and bank credit in any detail. But then the Billy Graham Marxists come along and present Marx’s theory of the capitalist moe of production as a theory of the whole economy or of the world economy. But Marx made no such claim. At the simplest level, your fundamentalist theory is wrong because you have falsely interpreted accumulation as occurring ONLY in the circuit M-C…P…C’-M’ (flatly contradicting Marx) and because you falsely assume that any asset other than means of production doesn’t really exist at all, because… it is fictitious capital. As soon as you admit that in the advanced capitalist countries the physical and financial capital directly tied up in production is only a minor part of society’s total capital, a fall in the average industrial rate of profit (which is what Marx talks about) is at best only one factor in a recession. In the real world (as distinct from Marxist fantasy) accumulation can occur in two ways: by creating net new wealth, or by one owner appropriating wealth at the expense of another. This simple point, wellknown to Marx, is simply ignored by the fundamentalists. No discussion of the average rate of industrial profit is complete without an analysis of unequal exchange. It is not difficult to show that exchange rate fluctuations can often make far greater differences to profits than most other factors. The Billy Graham Marxists think of themselves as very profound, when they have proved that the ration between GDP (less depreciation and compensation of employees) and fixed assets tends to decline, but they are (1) clueless about the real meaning of the aggregates involved in this ratio, and (2) they forget that in the real world, businesses do not account for their profits in this way.

  4. It’s just a mistake I fel to confuse the longrun developmental dynamics of the capitalist mode of production, arrived at through a critical reconstruction of economic theory and economic history, with the analysis of shortrun economic fluctuations. They are different kettles of fish.

  5. Jurriaan, as I have just been part of a reading group on Capital Vol 2, I am well aware that accumulation doesn’t just happen in the circuit M-C…P…C’-M’. Marx sets out 3 different circuits of industrial capital, of which that is only one. But that doesn’t change my point that Marx’s argument is that surplus value is only extracted in the sphere of production, and not the sphere of circulation (the focus of Vol 2), something he stresses over and over (and over).

    The fact that Vol 3 focuses on the entire productive economy doesn’t detract from that basic contention. It also doesn’t mean that profits aren’t accumulated both within and outside production, as I said in my comment above (which you seem to tell me off not acknowledging when I already have).

    It’s just that Marx is explicit that surplus-value is only extracted within production of commodities. The distinction between surplus-value and profits is precisely about the distinction between the social substance being extracted (across a whole economy) and the share of that going to any individual capital. But the total surplus-value and total profits in an economy add up to the same.

    Of course Marx left us with a necessarily incomplete account of the world economy, not just in his limited discussions of credit, banking and fictitious capital, but in the fact he couldn’t have foreseen the emergence of specific forms of derivatives, etc, that came after his death, nor the size and complexity of the financial economy that was to emerge post-WWII and especially more recently. But he was crystal clear that in a capitalist system what you call “net new wealth” could not be “created” outside of the application of human labour to production of commodities.

    Now, again, fair enough if you think Marx was wrong or the world has changed to invalidate his conclusions, but given that he hammers this issue relentlessly in Capital (to the point you sometimes want to slap him!) you shouldn’t re-write him.

    My point was not that only the industrial profit rate matters in any given crisis (I was careful to say that) and neither is Michael’s in all the posts of his that I’ve read here. But if Marx is right about the above then the underlying problem is the TRPF.

  6. Dr Tad,

    Firstly, Capital Vol. 2 does not focus on the “entire productive economy” so your study group ought to study some more. Secondly, when Marx first introduces the concept of surplus value in Capital Vol. 1, it is in the context of the circuit M-C-M’, which Marx calls the “general formula for capital” (Penguin edition, p. 257). The “increment or excess over the original value”, i.e. M’-M, is what Marx calls surplus value (Penguin edition, p. 251). According to the Marxist blob theory, however, surplus value is simply a component of bourgeois “value-added”, that is to say a component of the new net product. But this has nothing to do with Marx – Marx’s concept of surplus-value is not defined by the new net product, because it refers instead to the amount by which the value of CAPITAL has increased. Marx makes this very explicit on the very next page: “The value originally advanced, therefore, not only remains intact while in circulation, but increases its magnitude, adds to itself a surplus-value, or is valorized. And this movement converts it into capital”. The Billy Graham Marxists confuse and rewrite Marx’s theory with bourgeois accounting theory, and then serve up their concoction as the genuine article. It is true that Marx affirms that no net additional value can arise out of the act of exchange itself; if goods are simply sold for more than they were bought for, no new product-value is directly produced by that transaction, since there are no more goods than there were before (already at this point, the fundamentalist blob Marxists have lost the plot, since “value-added” in national accounts CAN increase through buying cheap and seling dear, if the activity is statistically defined as “production”). But this does not mean that surplus-value does not emerge in exchange, that it is not “realized” in exchange, for, at the end of the trading operation, the capitalist owns more capital than he started out with; the value of his capital has increased. In other words, he has realized a surplus-value, IRRESPECTIVE of where that surplus-value originated. Thirdly, I realize that it sounds sexy to say that “the underlying problem is the TPRF” but this is a purely metaphysical statement which cannot be proved! If somebody is badly overweight, we cannot conclude from that fact what the cause of his death will be. Even if we accept that the average profit rate on production capital has decreased while the concentration and centralization of capital have increased (while the volume of profit has increased), this cannot explain the capitalist crisis by itself, since out of the total capital in the real world, production capital is only the minor component. For every dollar of production capital in the world, there are two or three dollars of non-production capital. Just because Marx’s Capital was an uncompleted work, which did not discuss the credit system in any detail, nor state operations, nor consumption, nor the legal system of property rights and personal rights, doesn’t mean that we should make the mistake of treating Marx’s Capital as a theory of bourgeois society as a whole. Because if we do, we just get a deformed blob theory, a “Marxist” theory which disinforms people, a theory of the New Marxist Exploiting Class. Fourthly, it is not the TPRF that is the “underlying problem”, rather the underlying problem is the conflict between the capitalist property system and the social relations of bourgeois society. And lastly, for Marx the crises on the world market were the expression of ALL the contradictions of capitalism, and not simply the TPRF.

  7. Jurriaan, you clearly haven’t attempted to respond to my arguments except with more evangelistic bluster. I take special umbrage at your sneering dismissal at the start when you accuse me of confusing volumes 2 & 3 of Capital when I did no such thing. You should go back and read what I wrote and realise you misread me. Clearly you’re not here to seriously debate but to fulminate. Apologies for not realising that before.

  8. Personally I prefer to side with Marx against the Marxists. At the very core of their theories, the Marxists side with the bourgeois class and against the workers. That’s because the Marxists aspire to be a new boss class. They aim to ride to power on the back of sympathy for oppressed workers. Thus, for example, the Marxists say we should jerk a tear for the poor Greek workers… because the Greek state bureaucracy doesn’t have Marxist bosses ruling over it! If the Greek state bureaucracy had Marxist bosses, so the Marxists argue, then the bureaucracy would not be corrupt… In fact it would not be a bureaucracy at all but a (sic.!) “socialist public service”.

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