Duvinrouge says many ‘socialists’ have got pleasure from seeing Krugman expose the prejudices and flaws in those advocating austerity as a solution to the crisis. He is right that austerity won’t work and is mainly being pursued for ideological purposes. However, he is wrong to believe that Keynesian fiscal stimulus can solve the crisis. He is wrong because he misdiagnoses the crisis and misunderstands the nature of value.
For Keynesians like Krugman, the problem is a lack of demand because the private sector is not investing. Without a surge in exports they argue that it is the government’s job to take up the slack and restore effective monetary demand. This would have some merit if the problem was just a lack of demand due to producers not investing and instead hoarding their money. But this ignores the mountain of debt and the reasons why there is so much debt.
Essentially, I believe there are two reasons. Firstly, as Andrew Kliman shows, there is evidence of a falling rate of profit and financialisation is a reaction to this. Secondly, there is also a realisation problem. Because we live in a capitalist world where commodity production rules, Say’s Law doesn’t hold – production doesn’t create its own demand. There has to be sufficient commodity money to circulate the commodities produced. Without a corresponding growth in commodity money we get a crisis of overproduction – an overproduction of commodities relative to the money commodity. This is permitted to happen due to credit/debt, which is claims on future labour time. When there was a gold standard overproduction had its limits. When it became apparent that the credit money was better converted to gold, the rush to gold caused a credit crunch, recession and debts to go unpaid. This is how the law of value restore the balance between the production of commodities and the money commodity. But since the collapse of Bretton Woods the connection between token money and labour values isn’t so clear. We still see the rush to ‘hard cash’. The dollar and US, UK and German government bonds are foolishly seen as a store of value. And of course people still buy gold. But it’s still not clear to most that aggregate prices are out of line with values and that only a recession (or in this current crisis a severe depression) can restore profitability. Least of all it seems clear to Krugman and his fellow Keynesians.