Anwar Shaikh - An Introduction to the History of

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Crisis Theories

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<ul><li><p>An Introduction to the History of Crisis TheoriesANWAR SHAIKH</p><p>1978</p><p> U.S. Capitalism in Crisis, U.R.P.E., New York.</p><p>This paper is about the history of crisistheories. Broadly speaking, the term "crisis" asused here refers to a generalized set of failures inthe economic and political relations of capitalistreproduction. In particular, the crises we seek toexamine are those towards which the system isinternally driven, by its own principles of opera-tion. As we shall see, it is in the nature of capitalistproduction to be constantly exposed to a varietyof internally and externally generated disturbancesand dislocations. But only at certain times do these"shocks" set off general crises. When the system ishealthy, it rapidly revives from all sorts of set-backs; when it is unhealthy, practically anythingcan trigger its collapse. What we seek to examineis different explanations of how and why thesystem periodically becomes unhealthy.</p><p>I Reproduction and Crisis</p><p>Consider how peculiar capitalist society is. Itis a complex, interdependent social network,whose reproduction requires a precise pattern ofcomplementarity among different productiveactivities: and yet these activities are undertakenby hundreds of thousands of individual capitalists</p><p>who are only concerned with their private greedfor profit. It is a. class structure, in which thecontinued existence of the capitalist class requiresthe continued existence of the working class: andyet no blood lines, no tradition, no religiousprinciple announces who is to rule and who is tobe ruled. It is a cooperative human community,and yet it ceaselessly pits each against the other:capitalist against worker, but also capitalistagainst capitalist and worker against worker.</p><p>The truly difficult question about such asociety is not why it ever breaks down, but why itcontinues to function. In this regard, it isimportant to realize that any explanation of howcapitalism reproduces itself is at the same time(implicitly or explicitly) an answer to the questionof how and why non-reproduction occurs, andvice versa: in other words, the analysis of repro-duction and the analysis of crisis are inseperable.This is true whether or not a particular theorymakes this connection explicit.</p><p>In the history of economic thought, we candistinguish three basic lines of analysis aboutcapitalist reproduction. First, and most popular, isthe notion that capitalism is capable of automaticself-reproduction. It may be smooth and efficient(neoclassical theory), or it may be erratic andwasteful (Keynes), but it is self-equilibrating.</p><p>219</p></li><li><p>Above all, there are no necessary limits to thecapitalist system or to its historical existence: if leftto itself (neoclassical theory) or if properlymanaged (Keynes) it can last forever. Naturally,this has always been the dominant conception inbourgeois theory.</p><p>The second position takes the opposite tack:here, it is argued that/ by itself, the capitalist sys-tem is incapable of self-expansion. It must grow tosurvive, but it requires some external source ofdemand (like the non-capitalist world) in order tokeep it growing. This means that its reproductionis ultimately regulated by factors outside of thesystem: the limits to the system are external to it.The different schools of underconsumption, in-cluding Marxist ones, have their origin in this lineof thought.</p><p>Lastly, there is the position that, thoughcapitalism is capable of self-expansion, the ac-cumulation process deepens the internal contra-dictions on which it is based, until they erupt in acrisis: the limits to capitalism are internal to it.This line is almost exclusively Marxist, andincludes both "falling rate of profit" and "profitsqueeze" explanations of crisis.</p><p>Each of the above positions implies a corres-ponding notion of crisis, why they occur and whatthey imply. We will therefore examine each inturn.</p><p>II Capitalism as AutomaticallySelf-Reproducing</p><p>In what follows we will discuss the laissez-faire and Keynesian traditions of orthodox theoryin separate sections.</p><p>A. The Laissez-Faire Tradition</p><p>Unfortunately we are all too familiar with thenotion of capitalism as a self-regulating, smooth,efficient and harmonious system. From its begin-ning in Adam Smith's "Invisible Hand" to theimpotent elegance of modern general equilibriumanalysis this one conception has dominatedbourgeois theory. The fundamental contradictionof all human existence is said to arise from theinsatiability of human wants in the face of thelimited availability of physical resources.1 Theinsatiable greed of capitalism is thus transformedinto an attribute of Human Nature; its insaneplunder of our planet is therefore only "natural,"the inevitable outcome of a battle within Natureitself. Human Nature meets Physical Nature. Inthis way greed, competition and selfishness areeternal: there is nothing we can do about them, no</p><p>way we can eliminate them. In fact, on this basiscapitalism is presented as that social set of ruleswhich automatically permits the freest expressionto the above "intrinsic" human drives. Moreover,since it represents the optimal institutional solu-tion to an eternal "natural" conflict, capitalismremains eternally optimal. It has no limits otherthan some unimaginable mutation in HumanNature or some unimaginable destruction inPhysical Nature. Leave it alone, and capitalismwill reproduce itself smoothly, efficiently andprobably forever. So the story goes.</p><p>Since the system is viewed as self-regulating,the process of regulation tends to be ignored.Thus, the dominant tendency within this proble-matic is to concentrate on either static or balancedgrowth equilibria. In this way the impression isgiven that the adjustment process itself is negligi-ble. Indeed, this strategy is quite necessary, sincethe notion of a prolonged adjustment process is athreat to the concept of equilibrium and hence tothe cherished optimality of the system.</p><p>Even so, crises occur anyway. This tends tomake economists resentful, at times quite surly.Nonetheless, their ideological function requirethem to (periodically, at least) deal with thequestion of crises.</p><p>Economists who study the history of empiri-cal phenomena are inevitably impressed not onlywith the frequency of crises but also with theirapparent regularity. In the U.S., for exampleWesley Clair Mitchell counts fifteen "crises"within the 110 years from 1810 to 1920, while PaulSamuelson lists seven "recessions" in the thirtyyears from 1945 to 1975.2 In between was theGreat Depression which lasted almost ten years!</p><p>There are basically only two ways to absorbthis evidence into the main body of theory withoutpermanently damaging it. First and foremost, itcan be argued that in principle crises need neveroccur; that they do in fact occur may then beattributed to factors which are external to thenormal functioning of capitalist reproduction.Through no fault of its own, the system isperiodically disrupted by crises. In this traditionwe find crisis blamed either on Nature (sunspots,crop failures in general, etc.) and/or on HumanNature (psychological cycles of optimism anddespair, wars, revolutions, and political blur/- ,ders).3</p><p>But the regularity of crises proves hard to pinon sunspots or consumer bio-rhythms, while theone-shot explanations like wars and politicalblunders are just not adequate to explain appar-ently cyclical phenomena. Consequently we get</p><p>220</p></li><li><p>the concept of the business cycle; it represents theother basic way to absorb the phenomena of crisesinto orthodox theory. Within this concept, thesystem is still viewed as being self-regulating: onlynow the adjustment process is seen as beingcyclical rather than smooth. Various factorsinternal to the system's operation give rise to self-generating cycles, so that self-reproduction has aninternal rhythm.</p><p>It is important to note that in orthodox theorya cycle is not a crisis. In order to be consistent withthe overall theoretical structure, cycles must beviewed as being essentially "small fluctuations,"second order variations which at first approxima-tion one may justifiably neglect. In this way thecyclical nature of the adjustment process does not-represent a limit to the ability of the system toreproduce itself.</p><p>The branch of orthodox economics known asbusiness cycle theory is a combination of thesetwo basic approaches. Regular, non-violent fluc-tuations are internal to the system: contractionsand expansions are part of the normal businesscycle. Violent or prolonged expansions andcontractions, however, arise from external factorsoriginating in Nature and Human Nature, factorswhich either turn a cycle into a crisis, orprecipitate one entirely on their own. Crises, there-fore, remain outside the normal process ofcapitalist reproduction.</p><p>In spite of its yeoman service, business cycletheory has always occupied a minor role in laissez-faire economics. Its subject matter was toodangerous, its history too tainted by anti-capitalistsentiments, for it to be comfortably integrated intothe main body of theory. With the advent ofKeynesian economics, however, this changed. Weshall see why shortly.</p><p>B The (Right) Keynesian Tradition</p><p>We have so far been speaking of the "laissez-faire" tradition within bourgeois theory, since thishas almost always been the dominant one. But themassive worldwide collapse of capitalism duringthe Great Depression dealt this tradition a stagger-ing blow. The collapse itself was "easily" explainedby the faithful in a variety of ways similar to thosedescribed above: what was inexplicable was thefact that the system did not seem to exhibit anytendency to snap back to "normal" full employ-ment equilibrium. Even by official (conservative).estimates unemployment in the U.S. hoveredaround ten million people in 1939 a full tenyears after the "Great Crash."</p><p>As the Depression dragged on, as socialunrest deepened, laissez-faire theory fell increas-ingly into disrepute and Keynesian theory rapidlytook its place.</p><p>Keynes attacked the orthodox notion that"supply determined its own demand," for it wasthis notion which led to the conclusion thatcapitalism tended automatically to, more or less,fully utilize the available labor force and means ofproduction. Instead, in his analysis the level ofinvestment spending planned by capitalists is thecrucial factor in determining the level of outputand employment. But investment plans depend toa significant extent on the anticipation of profits,on the "expectations" and "animal spirits" ofcapitalists. Two major conclusions follow fromthis. First, since "expectations" are notoriouslyvolatile, capitalist reproduction is likely to bequite erratic. Second and even more important,there exists no automatic mechanism withincapitalism which would make capitalists plan justthe right amount of investment so as to assure fullemployment. It should be noted, however, thatthe system is presumed to be automatically self-equilibrating: it is just that the equilibrium doesnot preclude persistent unemployment or infla-tion.</p><p>The so-called Keynesian Revolution was anambivalent one, however. Much of the "deep"structure of Keynes' analysis was the same as thatof the orthodoxy he attacked:4 the division ofsociety into producers and consumers (not classes)the same basic view of human nature, the crucialimportance of psychological "propensities" andpreferences, the role of supply and demand, andabove all the general reliance on equilibriumanalysis. It is no wonder then that a portion of theorthodoxy was able to absorb Keynes into a newversion of bourgeois theory. Conceding that therewas indeed no automatic mechanism to makecapitalist reproduction smooth, efficient and crisisfree, the neoclassical Keynesians (Bastard Keynes-ians, as Joan Robinson calls them) turned to theState as the mechanism which would bring to lifethe society pictured in the laissez-faire parables. Ifthe State did its job well, it would manipulateaggregate demand so as to maintain near fullemployment with little or no inflation; with thismodification, "the rest of the doctrines of the(orthodoxy) could be revived."5</p><p>Since economic fluctuations are an admis-sable part of Keynesian theory, business cycletheory becomes a much less dangerous branch ofeconomics. Indeed, since the State in principle caneliminate fluctuations, it becomes imperative to</p><p>221</p></li><li><p>study cycles and crises in detail in order to knowhow to counter them. Consequently, a greatwealth of information about crises has sprung upsince the so-called Keynesian Revolution.</p><p>Not surprisingly, Keynesians tend to see theerratic and violent history of capitalist accumula-tion as a series of errors in "policy."' Their viewson the current crisis are no exception.</p><p>Keynes also generated another branch offollowers, the so-called left Keynesians, amongwhom the leading figure is Joan Robinson. Herviews, along with those of Michael Kalecki andJoseph Steindl, will be discussed in the nextsection.</p><p>Ill Capitalism as Incapable of Self-Expansion</p><p>From the very beginning, the laissez-fairevision of a harmonious, crisis-free capitalism hasbeen bedeviled by an equally old and equallypersistent notion of capitalism as being inherentlyincapable of accumulation. The internal forces ofthe system, it is argued, can at best reproduce it atsome stationary level: but as stagnant capitalismsoon degenerates. Competition sets each againstthe other, yet because there is no growth no onecan gain except at the expense of someone else.Capital is set against capital, worker againstworker, and class against class. Either theantagonisms become too intense and the systemexplodes, or else it decays into a society (likeChina of old) in which a tiny ruling elite rests on abase of mass poverty and human misery. In eithercase, a non-accumulating capitalism will not lastlong.</p><p>Interestingly enough, this countervailing ar-gument begins from the same initial conception asthe theory it attacks. Orthodox theory has alwaysinsisted that the ultimate goal of all capitalistproduction is to provide for consumption: thatwhich is not consumed now is plowed back intoproduction in order to provide for future con-sumption. Either way, it is consumption whichrules the roost. In the dark glass of underconsump-tion theory, this same notion becomes a weapon inthe attack on capitalism. Throughout the long andcomplex history of this branch of crisis theory, thefollowing argument appears again and again: yes,the ultimate regulator of all production is indeedconsumption, currently or in the future; however,capitalist production responds not to need but topurchasing power, not to demand but to "effec-tive" demand (i.e. demand backed by money).And such is its contradictory nature, that if left toitself it is incapable of generating sufficient</p><p>effective demand to support accumulation. Theintrinsic mechanisms of the system, in otherwords, tend to point it towards a stationary state:it requires some external source of effectivedemand external, that is, to its basic mecha-nisms in order to continue...</p></li></ul>