Karl Marx would be pissed off that this guy was stealing his ideas, watering them down for general consumption, and getting famous for this sell-out.
Keynes declining demand theory comes straight out of Marx, except he pretended for political reasons that this type of depressionary decline is only temporary. This is horseshit and everyone at the time knew it, because they knew their Marx, but it was politically necessary, because the classical economics literature did not accept anything related to Marx. In order to get published, you had to assume that the Pareto ideal economic equilibrium was where markets were always going.
Market equilibrium is the situation where all production is competitive, all salaries are competitive, and there is more or less full employment and full production, and all the people working can collectively purchase all the goods they collectively manufacture. This ideal means that all corporations are making zero profits (beyond the amount they need to pay to insure their risk, pay their debts, and provide return on their capital investment), all employees are making roughly the same salary (or else they would switch jobs), and all entrepreneurs and sporadic workers are only making as much more than regular employees as would justify their risk or lean years (or else more people would become entrepreneurs). In equilibrium, the mean salary is just the amount required to purchase all industrial output, at peak capacity.
This market equilibrium is a hopeless fantasy when you look at real markets. Even allowing for corrections to ideality, you predict slight fluctuations, a Gaussian distribution. But it's always a huge tail. This means that there is never market equilibrium in industrial economies.
But people don't usually care about how much the market looks like a textbook market, so long as there is growth. I care. The textbook ideal efficient market is like a dream.
From 1929-1933, the intrinsic industrial capacity of the US didn't change a whole lot, but industrial output collapsed, and factories were sitting idle. Somebody had to address the obvious facts.
Marx had already noted that when there is a pool of unemployed workers, the market wage can collapse from the ideal equilibrium value, where the workers can purchase all industrial output, to subsistence level, due to competition from unemployed workers. The reason is simply that the workers are supposed to be charging a competitive price at full employment to have market equilibrium, and when there is a pool of unemployed, they are instead forced to take the minimum wage which will keep them better off than the unemployed, which is subsistence. Drastically low wages mean that the workers can't purchase the full industrial output, and industrial production collapses.
Contrary to what Keynes says, this is a stable situation, it never corrects itself. The reason is that the industrial capacity already exists to absorb the workers, they are not idle because their labor cannot be used, but simply because the demand has slackened due to the symmetry breaking in the market--- there is a spontaneous segregation which produces workers which compete with the unemployed and earn little more than subsistence (in the absence of government intervention, like minimum wage and maximum working time), and other workers who can siphon off large swaths of industrial profit into their pockets.
You can see this symmetry breaking in extremely simple models of economic production, which appear nowhere in the economics literature, where this is considered crazy-talk. You can make up an economy of 10 firms with 10,000 workers in equilibrium, and suddenly perturb this economy by adding 100 unemployed workers. The correct equilibrium market response is to expand capacity to absorb the 100 workers, but if there is a time delay to expand the capacity, there is an instability: the 100 unemployed workers drive the 10,000 workers salary down to subsistence by competition, the workers can't buy the output of the factories anymore, and the factories close or sit idle, because you broke the equilibrium. The unemployment grows to huge levels, and it stays that way forever, because there is no capital for expansion, nor would anyone expand, because there are no consumers to purchase the output of the expansion, they can't even purchase all the goods you could be making now!
This instability model is the basis of the classic Marxist prediction for the collapse of capitalism, and it matches the great depression. One should conclude that Marx's model is accurate, the economic equilibrium is not stable to unemployment rising, and the system can fail to find the classical equilibrium permanently.
Economists wanted to match the real world, but they didn't want to agree with Marx. So Keynes made the following bullshitty but plausible sounding explanation for the observations, which kept the main idea: during deflationary times, the workers salaries, for some reason, can't reach proper equilibrium, because they psychologically won't accept wage-cuts, which he claimed would fix the unemployment problem. So the market temporarily contracts because the unemployment rises, and the too-few employed workers have too little money to produce the approrpriate demand.
The part of this that is correct is just the same as what Marx said. The part that is wrong is where it differs from Marx. This is not a temporary glitch--- the market will never ever find equilibrium again in these circumstances (you can do the experiment, it has been done in certain parts of the third world, and in the presence of an underclass, the underclass is stable, and the economy develops among a separate class which can charge prices for labor on an entirely different scale). Keynes's argument for taking action anyway, despite the fact that this problem would ostensibly fix itself, was that "in the long run, we're all dead".
The fix that follows from this watered down hogwash is basically a milder form of the fix proposed by Marxism, government intervention to prop up demand, so as to increase the purchasing power of workers to buy the products the industrial economy can produce. This is what was done, and the situation improved--- economic growth is restored when the government expenditures compensate for the loss of demand.
But the reason for the low wages is not properly understood in Keynsianism. The real reason is Marx's: in the presence of a pool of unemployed people, there is class separation, and for the lowest classes, wages are driven to subsistence by competition. The only people making money are those that have some sort of leverage to charge monopolist's prices for their labor, and these form a distinct social class from the workers, and the class structure keeps market equilibrium permanently, not temporarily, out of reach.
This doesn't mean that the traditional fix that Marxists advocated is a good one.
I have a small question about accounting. You say "all the people working can collectively purchase all the goods", but doesn't that neglect return on capital? You mention that corps in this efficient market would have no profit, but they would still have return on capital, and would still result in a gradual real appreciation of capital accounts, and if we're at steady state the capital gains should be used to buy goods so that the capital account is constant. So then isn't the total economic output purchased by a combination of wages + capital returns?
The capital would be equally invested by the collective of all persons, and yes, you would have a uniform equal return on capital for all firms, this is included in the costs of the firm, since it would have to pay this out in dividends to all the investors, which can be considered as a contribution to the uniform worker/manager salary in the model.
What would you say in regards to the empirical findings that wages exhibit downward stickiness during a crisis, such as the 2007 recession, in at least the US?
It's true, wages are sticky down, I'm not saying Keynes didn't detect a true phenomenon, he did. But he took this little thimble of a phenomenon and he attributed an ocean of data to it! It was a way to fit reduced demand into a neoclassical model, where you aren't allowed by politics to say "hold on, wages don't look like a competitive equilibrium."
The phenomenon of too-low employee wages and insufficient demand has to do with labor wages driven down by competition, and other wages, managerial wages, propped up by lack of competition due to in-house hiring. If it were not so, then there would be full employment, competitive wages for manual labor and managerial positions both, and you would pay a CEO approximately the same salary as a network technician, up to a factor of 2. The factor of 2 would probably make the technician salary higher, because people would compete for CEO, there is a much higher number of people who can do the job of CEO than the job of network technician.
But the job of CEO has a salary determined by politics, and a closed class of people is given this position, with only competition between this small group, while network technician is open to everybody, so even though the skills are more rarified, the position has lower salary. This is the real market distortion, the class structure, and the stickiness of wages is an excuse to get the same effect (too low demand) from a completely different mechanism. It was a clever trick by Keynes, he managed to get Marxist phenomena discussed in mainstream economics journals, but it's the same as Ptolmey getting non-uniform orbits discussed in geocentric circles, it's still a sell-out.
To see that the real cause of too-low demand is non-equilibrium worker pay, as if this obvious fact needed more evidence than what is found in Capital, you can note that inflation can fix wage-stickiness entirely, so if there is high inflation, wages go down automatically. So if Keynes were right and the low-demand were caused by wage stickiness, inflation and recession would be incompatible. This is not so, as was shown in the 1970s stagflation. This indeed shows that Keynes's mechanism is faulty. But the reason is that Marx's mechanism is correct, and Keynes was just making up any old phony excuse to get Marx's thing recognized when it was politically out.
This has widened my views by a considerable amount. Thank you for your thoughtful responses.
As a side note: have you seen Lincoln? If not, consider reading up on Thaddeus Stevens (amazing man) and watching the movie. My simple spoiler-free synopsis is: even if you cannot get everything you want, that should not stop you from getting as much as you can.
Simplifying things a bit: would you prefer neoclassical economics over Keynesism?
I also had the same reaction to Lincoln--- I was astonished that Thaddeus Stevens was presented positively. It is truly astonishing, if you compare to the portrayal of Stevens in "Birth of a Nation", or generally the treatment of the great Republicans of reconstruction in textbooks. This stuff was something that DuBois wrote about in the 1910s, preserving the proper history, and the left sorted it out in the 1960s (basically by ripping off DuBois), but now it is on the screen too (thank you, Mr. Spielberg!) Coincidentally, Stevens and fellow Republicans were the earliest American readers of Marx. These guys were my heroes growing up.
I hope I am not too harsh on Keynes--- he really did want a sort of half-way house between Marxism and neoclassical stuff. Maybe it's the best one can do in the climate in economics departments. But really, somebody has to just stand up and say "wages are not in competitive equilibrium without full employment" , and stand firm on this.
I don't have a great idea for making markets more efficient, but I am sure that it is possible. From historical data, simply redistributing incomes goes a long way--- just ~50% taxes on highest brackets coupled with an earned-income-tax-credit brings you close enough so that Clinton/Gore policies ran circles around other economies in the 90s. This was also true of Eisenhower era policies (90% tax on highest brackets plus road/military spending), or even Kennedy era. Reagan era had growth, but it was bracketed by two major recessions with slacking demand, and the Bush tax cuts seem to have led to the biggest recession since the great depression.
Ultimately, I believe any dispassionate honest observer has to admit that wages don't go to competitive equilibrium on their own, that the class structure gets in the way, making certain wages permanently depressed, and other wages artificially elevated, thereby wrecking the demand necessary for the market to function. This is more or less what Keynes said, except he couched it in terms of stickiness and responses, and the details are wrong, although the prediction is right, because it is stolen from Marx.
One fix perhaps is to have a guarantee of employment, so that if you are unemployed, you can go to an office and get a government job, paying minimum wage. This will allow the government to absorb the slack of depressionary labor losses. But any such measure (like FDR's WPA) is permanently opposed by business interests, precisely because giving unemployed people options to stay alive removes the competitive downward pressure on wages, raising costs of doing business.
I just learned recently that in 1930 John Maynard Keynes was talking about a 15 hour work week by 2030. That is more important than any disagreement with Marx.
How many television commercials did Marx and Keynes see by the time they were 18 years old? The problem now is consumerism. Economics has gone from the Dismal Science to the Delusional Science.
Keynes was trying to restore a market equilibrium by government intervention, and the interventions were minimum wage, maximum work-week, and propped up consumer demand. So Keynes and his followers, including those in Eisenhower times like Richard Nixon, were very happy with consumerism! This consumerism prevents a great depression, since it means that the entire industrial output is purchased, it doesn't collect dust on shelves. But to keep the economy stable and growing, the government kept on ensuring that worker wages were always what was required to purchase the entire industrial output, and the rest was purchased by government military contracts. This created the "military industrial complex", as Eisenhower put it, but it was certainly better than the political troubles in a totally planned economy.
The idea that Keynes was proposing, the gradually falling work-week, was first proposed in the Marxist literature by Engels. He concluded from the rise of automation that once production is planned, the gradual automation would lead to a 15 hr work week. These predictions are silly, in my opinion, since the character of economic work simply changes. If the work-week for industrial production plummets to 15 hours, that would just mean there are 25 hours for web-design, book-writing, hip-hop producing, viral-video making, and so on, freed up by the market. This was just a misunderstanding of how equilibrium works by Engels, Marx never made such a prediction while he was alive.
It is certainly curious that double-entry accounting is 700 years old and no one suggests that it be mandatory in our schools and that high school graduates know to concentrate on NET WORTH.
Planned obsolescence is bad for Net Worth but no economists discuss the depreciation of durable consumer goods. The Laws of Physics do not care about Capitalism, Socialism, Communism or any other ism. But global warming is the result of Physics.
I don't know why this is relevant--- there are certainly bad things in the world, but this answer is simply about idealized models of industrial economic production. While it is true that there are all sorts of externalities of pollution and irrational debt-load, and all sorts of things the corrupt a free market, the elephant in the room is that there is a possibility that the market will fail simply because of a non-equilibrium salary of workers which is insufficient to purchase the output of the industrial society.
This is actually possible, both theoretically and experimentally, it is the behavior in a depression, but it is consistently denied by economists, for political reasons, because of the polarization of economics since Marx's time.
Have you ever read the The General Theory of Employment, Interest and Money? The reason why I am asking, is that you make it sound like Keynes accepted the Walrasian Equilibrium Theorem and at heart believed in the foundations of capitalism and that it just needed some fixing. This is not what I seem to collect when I read books about Keynes (David Schweickart's "After Capitalism" and Paul Davidson's "The Keynes Solution: The Path to Global Economic Prosperity" - from your post, it would appear that you might be very interested in reading the former, which I can personally recommend as a Marxist myself) I get the impression that Keynes was appalled just as much as Marx but instead of focusing on class struggle, he focused on Effective demand and a much more mathematical and technical approach than Marx did.
Now, I haven't read the General Theory myself, so I won't go into detail about your comments, I just want to inquire! The reason why I do this, is because I want to make sure that you aren't confusing Keynes with Keynesians. Traditional Keynesianism is much much more focused on classical economics and general equilibrium than Keynes was himself. Paul Davidson argues that it was necessary to do so, partly because they needed to "sell Keynes to the public" and thus had to water down his, at that time, revolutionary ideas of economics (and in the US in particular due to McCarthyism in the years following Keynes' death). This is sometimes also referred to as the Neoclassical synthesis, which combined the classical theorem with a Keynesian approach - but that wasn't what Keynes originally thought and certainly not what he wrote about in the General Theory.
All too often I hear Keynes' ideas being discredited, only to realize that those were the ideas of his followers and of "phony" Keynesians. The way I see it, Keynes and Marx are in the same league when it comes to criticizing capitalism. Just because Keynes follows a different path in doing so doesn't mean it is an inferior path in itself. Personally, I believe that what is needed is a Marxist-Keynesian synthesis, which is very similiar to what Schweickart argues about in his revised edition from 2011 (Economic democracy).
I skimmed it at a book store years ago, to make sure there was nothing important there, I didn't read it in detail. My reaction is to what people say about it, and also to the chapters I concentrated on while skimming--- which did not accept that price of labor was determined by class structure, but instead attributed it to failure to find the correct equilibration.
I accept the Walrasian equilbirium theorem and I at heart believe in the foundations of capitalism and that it just needs some fixing.
I am NOT a Marxist, in the sense of a planned economy. I believe in using confiscatory taxes and handouts to engineer equality of outcome without getting rid of people's ability to own businesses. But I also believe in smashing monopolistic businesses to small smithereens, using graduated income taxes on corporations that punish large size, and I prefer to buy from worker-controlled industries.
Thank you for clearing that. And trust me, I'm not a Marxist in that sense either - I think you'll enjoy "After Capitalism" then!
Isn't it amazing that a form of Capitalism survives over a hundred years after Marx's dire predictions? Why do you suppose that is the case?
Because the statist alternative is far worse.
But Der Heilige Karl said the State would wither away. Why didn't it?
I don't understand. Karl Marx said the state would wither away under communism. I am not talking about his predictions for communism. I am talking about his predictions for capitalism.
The main prediction Marx made is that under capitalism, class issues would lead to worker income becoming too low to purchase industrial output. This prediction is correct, it was stolen by Keynes, who made up crap to justify it (the real reason is Marx's) and it can easily be fixed by taking money away from rich people and giving it to poor people. In a functioning market, there are neither.
As for the state withering away, Marx's prediction was that the state in communism would not be intrusive, because the state wouldn't need to deal with property disputes all that often, as it does under capitalism. He imagined worker committees like in 1917 Soviets, or 1936 Spain, integrated into an economy by orders and collective planning which was non-governmental and voluntary.
I don't know if this vision is possible, and I really don't care. My goal is simply to make equality, which is demanded by capitalism too, except people forget. Then later if you want to make little communes, maybe you can do it, but there are issues with committee politics you need to fix first.