why krugman is wrong

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.

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interview with andrew kliman

Duvinrouge: Can you tell me what the key message of your new book, The Failure of Capitalist Production, is?

 

Andrew Kliman: The Great Recession was waiting to happen. There were unresolved problems in the system of capitalist production that had been building up over a third of a century. The rate of profit fell and never recovered in a sustained manner, which resulted in persistently sluggish investment and economic growth, which in turn resulted in rising debt burdens. And these problems induced governments to solve them or paper them over with policies that made the debt build-up even bigger.

DVR: Your book is full of statistics and as we know interpretations of statistics can be very different. It would appear that your choice of historical cost as opposed to current cost is crucial. Please can you explain the difference?

 

Accountants can value assets at their current cost or at their original cost when they were acquired. The latter is usually called their “historical cost.” Both methods have their place. But one thing you can’t do is compute the rate of profit, i.e., the rate of return on investment, by dividing profit by the current cost of the capital assets. It’s not wrong to do this; it’s impossible. What you wind up with just isn’t a rate of return on investment. What the assets are currently worth is simply not the same thing as the amount of money that has actually been invested in them. To measure the latter, you have to take their historical cost and subtract depreciation.

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the historical limits of capitalism

Just as feudalism was historically limited, so too capitalism, writes duvinrouge.

The rise of capitalists and their taking power from the nobility was a reflection of the changing economic conditions as manufacturing became more important than agriculture. Looking back, it’s quite easy to understand how the increasingly economically powerful capitalists seized power. The case for the workers taking power isn’t so obvious though. Many seem to think that capitalism will continue forever unless a political party can persuade working people of a better alternative. Such a subjectivist position shows a lack of understanding of how capitalism works and what Marx was getting at in Volume III of Das Kapital.

‘The Law of the Tendential Fall in the Rate of Profit’ is part three of Volume III. To understand the importance of this requires a good understanding of how capitalism works, what value is and in particular, the difference between absolute and relative surplus value. Value is essentially labour time. Not necessarily the sum of all actual labour time that has gone into all commodities produced, but the market-determined ‘socially necessarily’ labour time; not all commodities taken to market are bought at prices that cover their costs and return a profit because the capitalist has to anticipate demand. (Don’t worry if you don’t fully grasp ‘socially necessary’ labour time, the key point is values (prices) reflect labour time).

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euro crisis is more than a euro crisis

Even if there was no Euro, or even if there was the Euro and political union, there would still be a crisis. Why? Because the crisis is a crisis of value, says duvinrouge.

That’s not to understate the problem of trying to get economic convergence of divergent economies through monetary union. It cannot be done without a political union that is prepared to use regional policy and the consequent transfer of wealth from north to south. Even without the backdrop of world capitalist crisis the Euro‘s future would be in doubt. But it is the recurrent capitalist crises that bring such problems to a head. And still it is left to Marxists to explain why capitalism is crisis.

Say’s law (supply creates its own demand) does not hold because production is commodity production – things are produced to be exchanged for money, furthermore a monetary amount greater than the original outlay. This increase in value occurs in production – the amount paid to labour in wages is less than the value created by the labourer. But it’s not just about increasing value in production; there’s also the need for the effective demand – money – to be there.

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