Creative destruction: our economic crisis was wholly predictable: Keynes, Hobson, Marx – and the crisis of capitalism. Is it to the wrong ideas of economists or to the interests of the power-holders that we should turn to explain the "Great Contraction" of 2008-2009? John Maynard Keynes believed that the Great Depression of 1929-32 was caused by the wrong theory of how the economy worked in the minds of policymakers – the remedy for which was to equip them with the right theory. But this ignored one thing: that the reigning ideas are, more often than not, the product of the dominant power structures. – New Statesman
Dominant Social Theme: Keynes got it right for the right reasons.
Free-Market Analysis: This article gives us a concise insight into the theories of three great minds regarding the much discussed and maligned business cycle. Of course, these minds are "great" in a historical context. We don't consider any of them great within the context of free-market thinking.
Let's look at J.A. Hobson and Karl Marx first. Hobson was a Fabian socialist and Marx, of course, was a communist theorist. Both believed in international government activism to relieve the perceived problems inherent in the operation of the Invisible Hand.
Hobson, according to the article, argued that it was the unequal distribution of wealth that causes too much of the national income to be saved and too little consumed, leading to slumps. Because there are more people producing than consuming, periodically, there are great capitalist crises.
Marx argued famously that "crises were the result of a fall in the profit rate." Workers were not paid fully for the value of what they produced, and this "surplus value" lined the pockets of capitalists. Additionally, the industrial revolution made surplus value difficult to generate, leading again to slumps and depressions.
It would seem in both Hobson and Marx's case that the real reason for cyclical downturns had to do with failure of markets, an old canard that is utilized to justify calls for bureaucracy to force people to act in their own self-interest by confiscating revenue (taxes) and creating money from nothing.
One can argue that in a sense both Hobson and Marx looked at the world via the lens of classical economics. Classical economics holds that human beings are not actors but are merely acted upon. That is, humans will take no steps to better their own lot but will wait passively for government or some other force to come to their aid.
The Austrians, under Ludwig von Mises, took a decidedly different view, which has led to the ostracization of those who subscribe to it. Misesian, free-market economics holds that it is government itself through the operation of central banking that creates booms and busts. First governments and their central banks print too much causing a boom. And then the boom inevitably degrades into a bust because the economy has been distorted by the excessive money printing.
Now let's look at Keynes.
The strong message of Keynes's General Theory is that investment is the unruly element in a decentralised market economy, because of the existence of irreducible uncertainty. For one reason or another, businessmen lose confidence in the future and stop investing at the same rate as before. This is how recessions or depressions start.
In Keynes's theory there is no automatic recovery mechanism, so that, in the absence of an external stimulus, a collapsed economy might get stuck in a situation of "underemployment equilibrium".
The present crisis exhibits the truth of both parts of this analysis: there was a collapse of "animal spirits" in 2007-2008 and the developed world has since been in semi-slump.
We can see from the above that when it comes to Keynes there is no specific trigger for a downturn. The reason given for a downturn is that "businessmen lose confidence in the future."
For us, this makes Keynes a very dissatisfactory economist, indeed. He never really explains slumps – depressions – any more than Hobson or Marx. Here's how the article summarizes it:
Keynes explained that it was uncertainty that causes economies to crash. Hobson explained how unequal income distribution makes crises more likely and recoveries more difficult. Marx explained that this inequality is inherent in the power structure of the capitalist system. All have their part to play in explaining the crisis and collapse of 2008 …
Keynes, Hobson and Marx all suggest permanent remedies for the tendencies towards crisis. Keynes called on the state to maintain enough effective demand in the economy to offset the ravages of uncertainty. Hobson wanted the state to redistribute income in order to reduce the share of saving in national income. Marx's more radical cure, as we know, was to abolish surplus value – the profit-seeking system we call capitalism – altogether.
Keynes never engaged properly with Marx, but he saw some similarity between his views and Hobson's because Hobson, as Keynes did, challenged the core classical belief that saving is always good.
Keynes is surely the most important economist of these three in the modern era. Central banking policy around the world is based primarily on Keynes's point of view, or at least what Keynes is supposed to have written and thought, whether or not he actually did.
Our point about Keynes has always been that we find his argument about what causes modern business cycles to be extraordinarily unpersuasive. He believed that businessmen lost "confidence," but never bothered to explain fully how this occurred and why. We would tend to think he didn't because he couldn't.
Keynes was a Fabian socialist, and it is our opinion, shared by some others in the free-market community, that he wrote his great General Theory to justify government management of economies. In order to do this, he had to avoid providing a detailed theory about how slumps take place because his primary motivation was to provide a nascent globalist bureaucracy with a justification for activist government.
Keynes's General Theory is therefore intended to buttress the necessity of the rule of a few over the many via force. This may be admirable reasoning for those who are in charge but it seems to us to fail as convincing economics.
Yet this man is revered in bureaucratic circles above all. We have seen with our own eyes even in the past half-decade how destructive government and central banking policies have been to the larger economy. And we have seen with our own eyes that Keynes's remedies are abysmal failures.
Yet Keynes continues to hold sway with Western central planners who use his incomprehensible theories to justify all manner of wasteful government solutions to remedy the Great Recession initially caused by public/private monopoly central banking,
For us, the only persuasive analysis of the business cycle is Misesian. And the only solution is to allow the market itself to create money and moderate the supply via the Invisible Hand of competition. In the Internet Era, this perspective has swept the Western world, with millions apparently seeing the logic of the Austrian analysis. Yet governments and their central bankers and policy makers staunchly continue to resist these conclusions.