Bourgeois internationalist split revealed in "Depression Economics"
The Return of Depression Economics
by Paul Krugman
(New York: W.W. Norton & Co., 1999), 176pp. reviewed by MC5
Influential economics professor and government consultant Paul Krugman has rushed to publish a book updating the situation of the economic crisis in Asia. Extolled by Fortune Magazine, the Boston Globe and Newsweek, Krugman is someone to read to know what the ruling class economists are thinking. There is nothing otherwise remarkable about this book.
The title will help to sell books, but Krugman does not predict immediate and dire depression for the United $tates or European economies. He calls the current situation in Asia the "Great Recession."(p. xi) "Over the course of the last two years seven economies -- economies that still produce about a quarter of the world's output and that are home to two-thirds of a billion people -- have experienced an economic slump that bears an eerie resemblance to the Great Depression. Now as then, the crisis has struck out of a clear blue sky, with most pundits predicting a continuing boom even as the slump gathered momentum; now as then the conventional economic medicine has proved ineffective, perhaps even counterproductive."(pp. vii-viii)
The book actually turns into a discussion of economic development internationally. We shall have to agree with Krugman that it ends in "amateur sociology," because it simply does not take up the issues exhaustively. He claims that 1977 to 1997 were years of "unmistakable improvement in the lives of ordinary people,"(p. 17) but he provides no systematic evidence. On this point, we prefer the MIT Business School Dean Lester Thurow to the MIT professor Krugman. Thurow has demonstrated a more thorough statistical and historical sense of the failure of capitalism for most of the world's countries as MIM has reviewed elsewhere.
Overproduction and economic dislocation
The conclusion Krugman draws to justify the title of the book is that "for the first time in two generations, failures on the demand side of the economy -- insufficient private spending to make use of the available productive capacity -- have become the clear and present limitation on prosperity for a large part of the world."(p. 155)
Recent reports from China add vindication for Krugman's thesis. China is currently experiencing deflation -- falling prices -- resulting from classic capitalist overproduction. Chinese rulers are trying to encourage spending over saving by promising guaranteed income for the poor. The thought is that if people feel secure in the event of retirement or economic crisis, they will spend more.
For Japan, Krugman advises the government to create inflation so that consumers know they cannot save their money. He says that is the only way out of Japan's "liquidity crisis," which is as bad as anything in world history. The "liquidity crisis" right now means that in Japan it is possible to borrow money at 0% interest and still no one does so to undertake successful expansion of business.
From MIM's point of view, these are not the most interesting aspects of the book. Although it is interesting to note the splits in the imperialist ruling class and resistance to Keynesian thinking,(1) what Krugman says on this score is not all that surprising. Krugman finds it interesting because "I continue to be astonished at how few economists around the world have realized just how important a problem Japan's trap is both as a practical matter and as a challenge to our economic doctrines."(p. 77)
Let us complete this thought for Krugman. The reason the press and respectable government officials howl at Krugman is that inflation with a 0% interest rate is a negative interest rate. That means owners of capital are giving their capital away. As MIM has explained before, such conditions eliminate the rationale for capitalism. Krugman tells a metaphorical story in which the loss of capital is temporary, but it is understandable that the capitalists don't want to hear about it even temporarily.
The Keynesian "liquidity trap" is especially bad for capitalists, because the answer of cracking down on worker wages to raise profits and interest rates only worsens the "effective demand" problem according to Keynesian theory. The way the United $tates has gotten out of such traps in the past is by destroying some of its capital and people in war. Environmental devastation will do equally well within the logic of the capitalist system.
Comments on Mao
Interestingly enough, Krugman starts the book with comments on Mao. As MIM does, Krugman concludes that the steam went out of our movement with the defeat of the Cultural Revolution in China. Next the Soviet Union collapsed.(p. 3) Also like MIM, he notes that certain trends for armed struggle in Europe relied on Soviet aid(p. 5) -- even while making vague noises for Mao without supporting the idea of the Cultural Revolution. Similar such tendencies arose here in the United $tates with certain descendants of the Weather Underground that gave up criticizing the Soviet Union while still claiming independence from it. Unfortunately, some claiming inspiration from the comrades in Peru following the great Maoist leader Comrade Gonazalo are busy chasing after the remnants of this movement and they know not what they are tailing.
Krugman's point is that we communists are dead and that has changed the economic situation in the world, with more investors willing to invest in the Third World than ever -- without fear of expropriation. In contrast, MIM points to Mao on development questions because only those countries that uprooted semi-feudalism through harsh class struggle managed to get on the positive economic growth path. That is why Indonesia and Thailand recently collapsed and could not sustain the momentum that imperialist speculators had created in those two countries. MIM explained the success of the "Four Tigers" -- exceptional successes in neo-colonial Asia -- in 1993.(2)
Like some of the most superficial and ahistorical sociologists, Krugman believes the idea that the "Confucian ethic" explains why Taiwan, Korea, China etc. are experiencing economic growth. Confucius was a teacher around 500 B.C. who founded a secular religion. His influence existed for thousands of years, so the obvious question was why Confucianism did not bring economic growth much earlier. To avoid Marxist explanations of economic development, Krugman and others prefer to muse about Confucianism as the cause of change in East Asia today.(p. 36)
The bourgeois mouthpieces come up with mini-theories the way some people eat potato-chips to avoid the simple truth that Japan, Taiwan, Korea and China all crushed their landlord classes and were therefore able to develop as capitalist economies while other countries continue to stifle under semi-feudalism backed with U.$. military aid. At least Krugman is still admitting that Stalin's economy was the fastest growing one in the world up to the immediate aftermath of World War Two. He says Japan became the first to surpass it in the 1953 to 1973 period(p. 61) -- a period MIM will point out came directly after the U.S. Army imposed land reform in Japan.
The role of speculators
Bourgeois economics has become a branch of psychology and Krugman provides the proof. (See for example how NAFTA was purely psychological and merely reflected what was already happening.(p. 44))
MIM has previously reported on a very significant split in the bourgeois internationalist camp between those grouped around the International Monetary Fund (IMF) and those grouped around the World Bank. Jeffrey Sachs and Krugman line up against the IMF. However, Krugman explains the rationale that the IMF has for its line of approach.
All over the world, the IMF demands austerity policies of countries on the brink or in the midst of total economic collapse. Asking for and obtaining 50% interest rates, higher taxes and lower social spending is the norm in order for the IMF to loan out money to desperately poor countries. Most of these countries need a massive boost in "effective demand" as the Keynesians say. But instead of following the prescriptions of Arjun Makhijani, reviewed by MIM in MIM Theory and in our bookstore,(3) the IMF makes a bad situation worse in country after country.
Significantly, the academic economists have finally figured out why the IMF does this. The role of the IMF is essentially psychological. There may be no good economic reason to impose austerity and raise interest rates in a crisis-ridden country, but the IMF demands it anyway to appease speculators. Investor perception matters more than economic reality.
While the notion of "contagion" has become disrespected in bourgeois sociology, Krugman uses it to refer to speculator behavior. The reason the East Asian economies fell like dominoes is that international investors viewed all East Asian countries as in the same boat, regardless of the facts.(p. 97)
Without using the word "racism," Krugman admits that there is a double-standard. Speaking of the U.S. Treasury (which emerges as "good guys") and the IMF, Krugman says, "why did these extremely clever men advocate policies for emerging market economies that would have been regarded as completely perverse if applied at home? . . . The short answer is 'fear of speculators.'"(p. 104) If there is a double-standard in the thinking of capital investors, then there is a double-standard in capitalist reality.
According to Krugman, "Thus it is possible in principle that a loss of confidence in a country can produce an economic crisis that justifies that loss of confidence -- that countries may be vulnerable to what economists call 'self-fulfilling speculative attacks.' And while many economists used to be skeptical about the importance of such self-fulfilling crises, the experience of the 1990s in Latin America and Asia has settled those doubts, at least as a practical matter."(p. 110)
What the IMF has done is "an exercise in amateur psychology, in which the IMF and the Treasury Department tried to persuade countries to do things they hoped would be perceived by the market as favorable."(pp. 113-4) For Krugman to say this in public is a little like pulling the curtain on the Wizard of Oz. It too can have effects on speculative action and perhaps make the bluffing job of the IMF and treasuries everywhere more difficult. If he is right, Krugman is showing a slight lack of bourgeois discipline by crowing about it.
The role of speculators' perceptions is the revenge of reality on bourgeois economics referred to as "neoclassical theory" in the Ivory Tower. Over a hundred years ago, these bourgeois economists abandoned physical theories of economics and took up subjectivist ones based in such phoniness as "marginal utility." Now they wonder why they have to pander to speculators' inconsistent mentalities to make the economy or at least their perceptions of the economy work. Yet books like ITAL Against the Gods END have already argued that it is not possible to know scientifically anything that goes into market decisions. People have too many inner mental contradictions as psychologists and market researchers have already revealed.
Krugman himself ends up being for capital controls -- meaning restrictions on the movement of capital across borders. He defended Malaysia's actions to cut off speculators. Describing how capital sometimes needs to be "grounded" the way a parent disciplines a child, Krugman says "it would be safe for each investor if he were sure that other investors were not about to take flight. But investors mistrusted ITAL each other END -- and the crisis came."(p. 164) Communists have known since Marx that such individualist mistrust is built into the capitalist system. This is why we refer to an anarchy of capitalist production -- because private investment and production leave economic policy to the realm of individualist choice.
Krugman himself is for growth and full employment, but speculators can make money whether the economy is growing or not as Krugman proves. In fact, the most famous speculation in history was by Soros against the British Pound. He made money when the British currency went down. The aspirations of workers, the petty bourgeoisie and even the aspiring nouveaux riche center on economic growth, but speculators don't care. One speculator's loss is another's gain. A broke speculator has no power; once s/he realizes the nature of the system and is angered by it, s/he is no longer powerful enough to do anything about it.
At the moment, the left-leaning faction of bourgeois internationalists has the IMF faction of bourgeois internationalists back on its heels. The IMF is also getting criticism from the far right. Roughly-speaking, the way Krugman paints it this is a conflict between New Money and Old Money. Old Money leads a purely hereditary and paper existence while New Money arises in the process of economic growth. Old Money believes economic crises are caused by "bad loans" that require more self-discipline or regulation. Old Money will abide by government regulation if taxpayers pay for Old Money's mistakes in making bad loans. New Money cannot dispense with Old Money, because the two both agree that merely owning things should be rewarded with profits or interest income.
1. John Maynard Keynes was the British economist who became famous during the Great Depression of the 1930s for advising government intervention to save capitalism from itself.
2. MIM Theory 4: A Spiral Trajectory, The Failure and Success of Communist Development, pp. 76-9. (Available from MIM for $6.)
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