Keynes, Hayek, and the Falling Rate of Profit

Found this among some old notes.  I barely remember writing it.  The original Google Doc has "REQUIRES CHECKING AND EXPANSION" at the top, but I never got around to it, so it may be a bit rough/inexact.  Anyway, it's something to post.

Hayek and the Austrians argued that excessive credit in the 1920s led to “an imbalance in the structure of production” which would be made worse by increasing the money supply.  ‘Lopsided production’, or ‘malinvestment’, as they call it.

Marx saw ‘restructuring’ through crisis as part of how capitalism recoups the fall in the rate of profit.  Similarly, as noted, the Austrians see crises as the only way to reinvigorate the system.  Crises do, of course, lead to large scale restructuring of industry in the form of mass closures, buy-outs, transfers abroad, a shrinking workforce (especially in some formerly big-employers), and ultimately in concentration and centralisation. 

Schumpeter – who is an odd one, half in the Austrian camp and half not - tries to explain why capitalist expansion takes place at different speeds at different times with his idea of ‘long waves’, based on differing tempos of innovation.  But innovation depends upon the wider dynamics of the system, so this rather begs the question.  (There is something to be said for some version of the ‘long waves’ theory, originally developed by Kondratieff – but only when linked to a Marxist understanding of where crises come from, which is what Mandel tried to do.)

Neoliberal ideology embraces Schumpeter’s ‘creative destruction’ to an extent, but the practice was to intervene to prop up industries, subsidise them, extend cheap credit, lower taxes on business, lower their costs through reducing regulation (or enforcement of regulation), facilitate big borrowing.  The doctrine of ‘too big to fail’ is an iteration of this.  Immediately after the crash of 07-08, the powers-that-be in the US permitted Lehman Brothers to go bust, and instantly realised they’d made a terrible mistake.  The bankruptcy triggered a fresh crisis of confidence in the US financial system, and the government had to rush to the rescue with massive bail-outs, to restore investor confidence once it was realised that, in the words of George W. Bush, “this sucker could go down”. 

Hayek and the Austrians explained the Great Depression of the ‘30s as having been caused by excessive credit in the ‘20s, leading to an “imbalance in the structure of production”.  Such problems are only exacerbated by increasing the money supply (contra Friedman, the arch-monetarist). 

Ironically, the rival marginalists Keynes and Hayek both stumbled upon a glimpse of a structural explanation for crisis.  And even more ironically, in so doing, both nearly independently converged on aspects of Marx’s explanation. 

Keynes explained instability in capitalism as a result of imbalances between saving and investment, themselves often stemming from psychological reasons, and rectifiable (in principle at least) through government spending, tax cuts to boost spending power, low interest rates, etc.  But, amid his other explanations, Keynes also says that more investment in expanding capital leads to a decline in returns.  He calls this a decline in “the marginal efficiency of capital”, blunting further investment.  Rooted as he is in supply and demand, he sees this as the supply of capital leading to a fall in demand for it.  In marginalist terms, the marginal utility of extra units falls.  This turns booms into slumps.  This structural observation has been quietly dumped by almost all Keynes’ followers and makes no appearance in almost any accounts of his ideas.  The reason is that he is almost noticing the fall in the rate of profit as a cause of crisis. 

Hayek converges upon a similar view of what happens to profits from a different route.  Hayek says crises are caused by excessive credit leading to the output of producer goods growing too rapidly in relation to the output of consumer goods.  This is not unlike Marx’s account of crises of overproduction, and his account of them arising from the rising organic composition of capital (i.e. the ratio of constant capital to variable capital in the production process), though Hayek sees the problem as one of policy whereas for Marx it is structural to the system.  Hayek is guided by the Austrian idea of ‘lopsidedness’ in the ‘roundabout processes of production’, whereas for Marx overproduction is general.  Even so, Hayek almost recognises a structural problem – the very rising ‘organic composition of capital’, i.e. more spending on machinery etc than labour, identified by Marx as a structural cause of crisis!  When attempting to explain why the production sector can’t simply carry the system onward and avoid slump that way, he decides that profits fall owing to the very high proportion of spending on means of production to spending on workers.  Hayek notices – reluctantly, and without accepting the consequent conclusions, just like Keynes – that investment in production creates downward pressures on the rate of profit. 

As Chris Harman puts it: “both Keynes and Hayek recognised, though they clearly could not explain, the feature that is central to Marx’s theory of capitalist crisis – the downward pressures on the rate of profit.”

The ‘business cycle’ becomes, for Hayek, a means by which different sectors of production (producer and consumer goods) adjust to each other after coming out of balance.  Again, this is not unlike Marx’s view of restructuring, though it is based on a fundamentally different view.  For Hayek, the crisis leads to the adjustment that will restore the system, much as Marx sees the restructuring caused by crisis as being the mechanism whereby the crisis is temporarily resolved.  It is simply that, whereas for Marx this is a negative thing, an endlessly self-repeating, structurally unavoidable cycle of wastage and destruction and misery, for Hayek it is a positive thing. 

Never was there a better demonstration of how class position can affect how one sees exactly the same thing.  Marx sees it clearly and negatively; Hayek obscurely and positively; Keynes dimly and anxiously.