Workers Vanguard No.

932 13 March 2009 -- From the Archives of Workers Vanguard

Fiscal Fiddling Can’t Stop Depression

The deepening economic crisis has meant the loss of It was predictable that a world depression would lead
jobs, homes and savings for millions of working people. to the collapse of optimism concerning Keynesian eco-
It has also demonstrated the utter fallacy of the eco- nomic policies. The anti-Keynesian right (well repre-
nomic doctrine of monetarism, which maintained that sented in the Ford administration by the Ayn Randite
economic crises could be minimized, if not eliminated, Alan Greenspan and by former Wall Street bond dealer
by adjusting the amount of money in the banking system William Simon) had argued for years that government
along with interest rates. Monetarism was the gospel deficits must generate ever-increasing inflation, and
for bourgeois economists in the right-wing climate now claims vindication.
marked by the ascendancy of Ronald Reagan and Brit- Even the Keynesian liberals appear unsure of them-
ain’s Margaret Thatcher in the 1980s. The counter- selves, observing that the “trade-off” between inflation
revolutionary destruction of the Soviet Union in 1991- and unemployment has become most painful. Thus Sir
92 and the attendant “death of communism” triumphal- John Hicks, one of the original architects of the
ism in the western imperialist countries, centrally the “Keynesian Revolution,” has recently brought out a
U.S., put more wind in the sails of the “free market” book entitled, significantly, The Crisis of Keynesian
ideologues of monetarism. Economics. And revisionist Marxists who had earlier
Today, with the monetarist myth in tatters, bourgeois written about the “relative stability of neo-capitalism”
economists have rushed to embrace the ideas of John are now dusting off their copies of Capital and assert-
Maynard Keynes, the British economist who, during the ing that its venerable truths still haunt the capitalist
Great Depression of the 1930s, championed the notion world.
that capitalist economic crises could be overcome We are witnessing a notable intellectual convergence
through government deficit spending. That is the idea ranging from bourgeois reactionaries (Milton Fried-
behind President Barack Obama’s “stimulus” package, man) to ostensible Marxists (Ernest Mandel), and in-
an expenditure of almost $800 billion financed by gov- cluding a number of liberals (John K. Galbraith, John
ernment borrowing that is supposed to “jump start” the Hicks, Abba Lerner): Keynesian economics, which
economy. In reality, Keynesian economic schemes, no supposedly “worked” for a generation, has now been
less than monetarist ones, run up against the destruc- overcome, they agree, by unprecedented global infla-
tive irrationality of the capitalist system, analyzed and tion and the worst crisis since 1929. Despite its wide-
explained by Karl Marx and highlighted by the boom- spread acceptance, however, this thesis is false.
and-bust cycle. Keynesian fiscal policies never did, and never could,
The article reprinted below, first published in WV stop the cyclical crises of overproduction which are
No. 64, 14 March 1975, presents a Marxist critique of inherent in the capitalist system.
Keynes’s economic theory. A major world slump as severe as the present one
has been possible at least since the world recession of
The current extremely sharp economic downturn has 1958. That such a slump did not occur before 1974 is
produced a wave of pessimism extending from the due to contingent factors and not to the effectiveness of
Stock Exchange and White House to the academic Keynesian countermeasures. For example, in 1967 the
redoubts of bourgeois economics. While President Ford U.S. would have had a recession except for the expan-
proclaims that unemployment will not drop below 8 sion of the Vietnam War. Output actually did fall in the
percent again for another two years, the president of the first quarter of that year and there was a 1967 recession
American Economics Association, Robert A. Gordon, in West Germany, then the second-largest capitalist
declares: “I don’t think we have a body of economic economy. Without the sudden escalation of the Viet-
theory that is of great help to use in today’s world” nam War, this conjuncture would undoubtedly have
(Wall Street Journal, 30 December 1974). caused a world economic crisis, possibly quite severe.
During most of the 1960s U.S. government eco- Only an idiot objectivist could deny this historic possi-
nomic policy was dominated by Kennedyesque “whiz bility.
kids” who claimed to be able to simultaneously hold The fact that a major world slump did not occur in
down prices and stimulate investment through adroit the 20 years preceding 1974 is not due to credit infla-
manipulation of fiscal “levers.” Now, however, with tion, an ever-increasing arms budget, Keynesian stabi-
the onset of double-digit inflation and a slump of de- lization policies or any other deliberate government
pression proportions, these claims are rapidly being policy. There has been no fundamental change in the
debunked. structure of postwar capitalism that would justify the
Marx vs. Keynes From the Archives of Workers Vanguard, No. 64, 14 March 1975 page 2 from 7

various labels popular in liberal and revisionist Marxist Mandel. In truth, the supposed expanded role of state
theorizing—e.g., neo-capitalism, the mixed economy, expenditure is the greatest of all myths of the “Keynes-
the permanent war economy, etc. ian Revolution.”
Myths of the “Keynesian Revolution”
It can be easily disproved by a few statistics which
indicate government expenditure as a percentage of
John Maynard Keynes was not responsible for de- gross national product for the major capitalist powers
veloping or even for popularizing the policy that capi- during the interwar period (1920-39) and during the
talist governments should increase their expenditures 1961-70 decade:
during an economic downturn, financing this through
borrowing rather than increased taxation. This bour- Country 1921-1939 1961-1970
geois reform measure has a long and respectable his- France 14% 13%
tory going back to at least the 1890s. 1
Germany 18% 16%
Thus the minority report of the English Poor Law 2
Commission of 1909 stated, “We think that the Gov- Great Britain 21% 19%
ernment can do a great deal to regularize the aggregate Japan 10% 8%
demand for labour as between one year and another, by United States 11% 20%
a deliberate arrangement of its work of a capital na- Sources: OECD, National Accounts, 1961-1972; U.S.
ture.” In 1921 President Harding’s Conference on Un- Department of Commerce, Long-Term Economic
employment recommended expanded public works Growth, 1860-1970; Mitchell, Abstract of British His-
during the postwar downturn, a recommendation en- torical Statistics; Stolper, The German Economy, 1870-
dorsed by such conservative organizations as the U.S. 1940; Maddison, Economic Growth in the West; Oh-
Chamber of Commerce. kawa and Rosovsky, Japanese Economic Growth.
Moreover, in 1930 a bill was introduced into the U.S. 1
German interwar figures only cover 1925-39.
Senate (No. 3059) calling for “advanced planning and 2
British figures are based on national product net of
regulated construction of certain public works, for the depreciation, giving them a slight upward bias relative
stabilization of industry, and for the prevention of un- to the other countries.
employment during periods of business depression.”
This principle was incorporated into the National In- These few figures utterly destroy the notion of a
dustrial Recovery Act of 1933, a half decade before the “Keynesian Revolution” involving major structural
popularization of Keynesian economics. changes in the capitalist system following World War
What, then, is the significance of Keynesianism— II. Only in the United States was there a significant rise
why all the hullabaloo? While practical politicians had in the level of government expenditure. In all other
advocated and partly attempted expanded government major capitalist countries, the weight of the state budget
expenditure during economic downturns, orthodox in the economy declined slightly. And the expanded
bourgeois economic theory (particularly in English- role of the state budget in the U.S. is entirely accounted
speaking countries) still held that slumps were easily for by the greatly increased military expenditure re-
self-correcting through a fall in the rate of interest. quired by the emergence of American imperialism as
According to the textbooks, government policy during world gendarme in the postwar period.
a downturn should be to expand bank reserves and run Moreover, the relative weight of military expenditure
a balanced budget. in the U.S. has been steadily declining since the Korean
What Keynes did was to provide a theoretical justifi- War, except for the Vietnam War years. In 1954 (the
cation, within the framework of bourgeois economic year following the end of the Korean War) the military
doctrine, for the deficit spending which most capitalist budget accounted for 11 percent of the U.S. gross na-
governments practiced in the 1930s, as well as in ear- tional product (GNP); by 1965 (the year before the
lier slumps. The “Keynesian Revolution” was a revolu- Vietnam buildup) the figure had fallen to 7 percent; and
tion in university economics departments, in the writing in 1973 military spending accounted for only 6 percent
of textbooks, not in actual government policy. of GNP (Economic Report of the President, 1974). So
In the post-World War II period, capitalist politicians much for the “permanent war economy” theory!
have claimed that the relative economic stability has Marxism vs. Keynesianism
been due to their effective use of Keynesian stabiliza-
Before undertaking a Marxist criticism of Keyne-
tion policies. This assertion—that capitalist govern-
sianism it is necessary to indicate more precisely what
ments can and do control the economy for the benefit
it is that the latter asserts. According to the pre-
of “the people”—is partly bourgeois propaganda and
Keynesian orthodoxy of bourgeois economics, a fall in
partly bourgeois false consciousness.
the volume of investment that precipitated a slump
The notion that the proportion of government
would also free money capital, which in turn would
expenditure has increased greatly since World War II is
enter the loan market and drive down the rate of inter-
so widespread that it is taken as a matter of course by
est. This fall in interest rates would then stimulate in-
virtually all political tendencies, including bourgeois
vestment to the point that full employment of resources
reaction, Keynesian liberalism, social-democratic and
was restored. All the government had to do was to see
Stalinist reformism, and revisionist “Marxism” à la
Marx vs. Keynes From the Archives of Workers Vanguard, No. 64, 14 March 1975 page 3 from 7

that the crisis did not disorganize the banking system, Herald Tribune, 15-16 February). The expansion and
i.e., to ensure that the mechanisms of credit expansion contraction of credit is a passive result, not a cause, of
remained functioning. changes in production.
Keynes accepted the theory that a sufficient fall of Underlying the analytical difference over the role of
interest rates would restore a full-employment level of credit and interest between bourgeois and Marxist eco-
investment in a slump. His major work, The General nomics is the concept of class. In bourgeois economics
Theory of Employment, Interest and Money, is an at- there is no capitalist class. Instead, atomized non-
tempt to explain why such a sufficient fall of interest capitalist entrepreneurs borrow from equally atomized
rates does not occur. Keynes asserted that rentiers held rentiers, using the funds to establish productive enter-
some notion of a normal rate of interest. If the rate falls prises. Entrepreneurs and rentiers are linked solely
much below this, lenders will expect it to rise again, through the rate of interest.
thereby producing a capital loss on bonds purchased at According to Marxism, however, the capitalist class
the lower rates. In a general sense, Keynesianism holds is a definite concrete group composed of those who
that at some abnormally low rate of interest (termed the own and have a monopoly over the means of produc-
“liquidity trap”) lenders will hoard money in anticipa- tion (including loanable capital). The capitalist class is
tion of higher rates in the future. This is less an ex- bound together by innumerable personal, familial and
planatory theory than a description of the monetary organizational filiations; the atomized non-capitalist
aspect of a crisis/slump. entrepreneur—the central figure of bourgeois economic
From these premises Keynes argued that government theory—is a fiction. The capacity to borrow is strictly
efforts to expand money and credit during a slump limited by one’s ownership of the capital assets re-
would be ineffective, producing simply money hoards quired for security against loans. In reality, credit under
and/or excess bank reserves. Therefore, he argued that capitalism is always rationed, on the basis of specific
increased state expenditures would have to substitute monopoly complexes involving financial, industrial and
for inadequate capital investment. This, in a nutshell, commercial capitalists. The clearest example of this is
was the “Keynesian Revolution.” the Japanese zaibatsu system, but the same phenome-
In order to understand the difference between Marx- non holds throughout the capitalist world.
ist and bourgeois (including Keynesian) analyses of From the Marxist standpoint the fundamental fallacy
economic cycles, it is necessary to take account of a of Keynesian economics is the assertion that the expan-
fundamental difference concerning the role played by sion of the government sector will leave the rate of
the rate of interest. In bourgeois economics the level of profit, and therefore the level of private investment,
investment is determined by the difference between the unchanged. Whether financed through borrowing or
rate of interest on borrowed money capital and the rate taxation, government expenditure constitutes overhead
of profit on the physical means of production. As long costs of the capitalist system—a part of the total social
as the interest rate is substantially below the profit rate capital expended and replaced, denoted by “constant
entrepreneurs will presumably borrow and invest until capital” in Marx’s equation for the components of the
this gap is eliminated. A historical tendency for the rate commodity product. (For a fuller discussion of this
of profit to fall, projected by many bourgeois econo- question, see “Myth of Neo-Capitalism,” RCY Newslet-
mists (including Keynes), is not viewed as a fundamen- ter No. 10, January-February 1972.)
tal barrier to expanded production. As long as the rate Assuming, as Marx did, that the share of wages of
of interest is sufficiently low, a full-employment level productive workers (variable capital) is determined in
of investment is supposedly assured. the labor market, then an increase in government over-
In contrast, for Marx the level of investment is de- head costs (constant capital) must reduce the potential
termined by the rate of profit on the privately owned surplus value and therefore the rate of profit as well. A
means of production. The interest rate is part of and constantly expanding government sector would tend to
governed by the profit rate on the real means of produc- drive down the rate of profit, progressively arresting
tion. During a slump, despite abnormally low rates of private capitalist investment.
interest, loanable capital remains unused. Thus Marx The Limits of Mattick’s “Mixed Economy”
referred to “the phase of the industrial cycle immedi-
ately after a crisis, when loanable capital lies idle in Published in 1969, Paul Mattick’s book Marx and
great masses” (Capital, Vol. III, Chapter 30). Keynes, which carries the more indicative subtitle, The
The validity of the Marxist position was demon- Limits of the Mixed Economy, accepts the common
strated during the late 1930s when excess bank reserves revisionist/reformist/liberal view that for a certain his-
(an index of the difference between actual loans and the toric period Keynesianism produced “prosperity”:
legally authorized lending capacity) were at the highest “Government induced production may even bolster
level in U.S. history, in spite of the unusually low inter- the rate of economic growth. Conditions of ‘prosperity’
est rates. The exact same phenomenon is occurring in more impressive than those brought forth under laissez-
the present depression. Bank deposits in the U.S. are faire conditions may arise.... At any rate, recent eco-
now declining at an annual rate of 0.6 percent as bank nomic history has demonstrated the possibility of a
loans fall, although the falling interest rates are now ‘prosperous’ development of a mixed economy.”
even lower than the rate of inflation (International
Marx vs. Keynes From the Archives of Workers Vanguard, No. 64, 14 March 1975 page 4 from 7

However, Mattick at least makes a serious attempt to The Mandelian School of Falsification
develop the internal contradictions of Keynesian eco- In “The Generalized Recession of the International
nomic policy and holds that increased government Capitalist Economy” (Inprecor, 16 January 1975)
expenditure must eventually destroy capitalist stability: Ernest Mandel, theoretician-leader of the pseudo-
“Once non-profit production becomes an Trotskyist United Secretariat, attempts a major analysis
institutionalized part of the economy, a vicious circle of the world conjuncture. The article begins with a
begins to operate. Government production is begun statement of self-praise to the effect that the author,
because private capital accumulation is diminishing. unlike many others, always rejected the idea that
Using this method diminishes private capital Keynesian economic policies could stabilize capitalist
accumulation even more; so non-profit production is industrial cycles:
increased.... The limits of private capital production are “While the recession may be a surprise to all those in
thus, finally, the limits of government induced produc- bourgeois and petty-bourgeois circles and in the work-
tion.”
The most orthodox of the various revisionist theore- ers movement who had been taken in by the claim that
ticians of postwar capitalism (e.g., Mandel, Paul the governments of Capital endowed with neo-
Sweezy, Michael Kidron), Mattick is the most grudging Keynesian techniques would henceforth be in a position
in giving ground before the claims of Keynesianism. In to ‘control the cycle,’ it was foreseen and predicted by
contrast to Mandel and Sweezy, Mattick’s work has the our movement, almost to the date.”
virtue of recognizing that expanded government expen- And who are these unnamed figures in the workers
diture drives down the rate of profit on private capital movement who believed—oh, how naively—that “neo-
and therefore inhibits productive investment. However, Keynesian techniques” could “control the cycle”? Per-
Mattick would have been more consistent with Marxist haps Mandel is referring to the author of the following
economics if instead of treating government expendi- excerpts from a well-known book on Marxist econom-
ture as a non-profit component of surplus value he ics published in 1962:
treated it as a subtraction from the gross value of out- “Since the Second World War, capitalism has ex-
put, in the form of constant capital expended and re- perienced four marked recessions: in 1948-49, 1953-54,
placed. 1957-58, and 1960-61. It has had no grave crisis, and
Mattick’s work is a partially correct explanation of certainly nothing of the dimensions of 1929 or of 1938.
why those capitalist countries bearing a heavy burden Have we here a new phenomenon in the history of
of government expenditure (the U.S., Great Britain) capitalism? We do not think it necessary to deny this,
have grown much slower than those economies with a as certain Marxist theoreticians do.... The origins of the
relatively limited state sector (Japan, France). Yet his phenomenon are connected with all the features of the
theory cannot explain the onset of a major world de- phase of capitalist decline which we have listed. The
pression, nor does Mattick project such a development. capitalist economy of this phase tends to ensure greater
The logic of his theoretical model is for progressive stability both of consumption and of investment than in
stagnation, not a general world slump. the era of free competition, or than during the first
According to Mattick’s model, a sharp fall in private phase of monopoly capitalism; it tends toward a reduc-
investment such as occurred in 1974 should have been tion in cyclical fluctuations, resulting above all from
preceded and caused by a sharp rise in the share of the increasing intervention of the state in economic
government expenditure. But this did not at all happen life.” [emphasis in original]
during the 1972-73 boom. The share of government What is this supposedly Marxist work which claims
outlays in the advanced capitalist countries remained that state intervention has ensured “greater stability”
virtually unchanged during that period, as can be seen and “a reduction of cyclical fluctuations”? It is entitled
from the following figures: Marxist Economic Theory (the excerpts are from Chap-
Government Expenditures as Percentage of GNP ter 14) and is written by one Ernest Mandel.
To be fair to Mandel, it should be noted that he al-
Country 1971 1973
ways hedges his bets. He has not completely rejected
France 12% 12% the efficacy of Keynesian countercyclical measures.
Japan 9% 9% Buried in the Inprecor article is a statement that gov-
United States 22% 22% ernmental intervention can arrest and reverse the pre-
sent world economic crisis:
West Germany 17% 18%
“The recession is precisely a crisis of overproduction
Source: OECD, Economic Outlook, December 1972 whose breadth and duration are limited by an injection
and December 1974. of inflationary buying power. Thus, if the economy is
Thus even at the empirical level it is indisputable refloated by means of such injections—first of all in
that the current world economic crisis cannot be attrib- West Germany, then in the United States and Japan—
uted to the limits of Keynesianism, at least not in the the international capitalist economy will avert a grave
sense of intolerably large government expenditure rela- depression this time.”
tive to private capitalist production. If this were possible, one wonders why the capitalist
governments have let things go so far.
Marx vs. Keynes From the Archives of Workers Vanguard, No. 64, 14 March 1975 page 5 from 7

Despite his usual fine-print escape clauses, Mandel’s World crises are marked and intensified above all by
latest contribution is a dishonest repudiation of the major bank failures: the Austrian Credit-Anstalt in
analysis of contemporary capitalism expressed in his 1931, Bankhaus Herstatt in West Germany and Frank-
principal writings during the 1960s. Having served its lin National Bank in the U.S. in 1974. The partial dis-
purpose as an impressionistic justification for opportun- placement of banks by industrial firms in financing
ist policies of adaptation to the labor bureaucracy, international trade and investment has a certain effect
“neocapitalism” has now been discreetly removed from on present-day capitalism. But it certainly does not
the Mandelian vocabulary. qualitatively raise the level of international economic
A Professional Impressionist Views the Conjuncture integration, permitting world economic crises for the
Having “disappeared” his belief in the efficacy of first time.
Keynesian stabilization policies, Mandel resorts to Mandel’s second reason is that the displacement of
various ad hoc theories to explain the present conjunc- the dollar exchange standard by managed fluctuating
ture. His central theme is why there is a world crisis rates in 1971 has prevented competitive devaluation,
now, whereas during the past 20 years the various na- thus requiring simultaneous deflationary policies:
tional slumps (sometimes severe) were largely isolated “...as soon as the collapse of the international mone-
in time from one another. As Mandel puts it: tary system led to the system of floating exchange
“The generalized recession will be the most serious rates, that is, as soon as it became impossible to resort
recession in the post-war period, precisely because it is to sharp devaluations to boost exports, all governments
generalized. The lack of synchronization of the indus- were obliged by interimperialist competition to apply
trial cycle during the 1948-68 period reduced the an antiinflationary policy simultaneously.” [emphasis
breadth of recessions.” in original]
It is an indisputable empirical fact that since the This argument is simply false, totally wrong. The
1958 recession (not since 1948 as Mandel contends), fixed exchange rate system set up at Bretton Woods in
the various national economic downturns have not 1944 was deflationary and acted as a limit to deficit
reinforced and have partly offset each other. This spending. Several prominent British Keynesians, such
statement can be transformed from an empirical de- as Roy Harrod and James Meade, long advocated fluc-
scription into a causal theory only if it is asserted that tuating exchange rates in order to pursue more expan-
the absence of conjunctural synchronization was not sionary monetary and fiscal policies.
due to contingent factors, but rather was inherent in the Before August 1971 competitive devaluation was
structure of postwar capitalism (at least until recently). exceptional, to be used only in extremis; today it is the
This is precisely what Mandel now seeks to demon- rule. During the 1950s and 1960s governments often
strate: resorted to deflationary measures to protect an overval-
“This synchronization is not an accidental feature. It ued exchange rate (for instance, the policies of the
results from deeper economic transformations that second Eisenhower administration, the austerity pro-
occurred during the long period of expansion that pre- gram of the early Gaullist regime and the “stop-go”
ceded the recession.” policies of various British governments before the 1968
Mandel advances three reasons to support this thesis. devaluation of the pound).
The first is that the world economy in the l950s-1960s Mandel’s third reason is that since periods of na-
was not sufficiently integrated (!) to permit a general- tional economic slump are becoming longer they are
ized crisis. But during that period, the world economy more likely to overlap with recessions in other coun-
became sufficiently integrated, particularly due to the tries:
expansion of multinational firms: “The phases of stagnation, and even recession, are
“Internationalization of production took new leaps beginning to be longer. Obviously, this leads to syn-
forward, marked by advances in the international divi- chronization. When they occur in a dozen countries at
sion of labor among all the imperialist countries. From once, recessions that last six months are less easily
the standpoint of the organization of capital, this re- surmounted than recessions that last two years.”
flected itself in the rise of multinational firms which This is, of course, a statistical truism. However, since
produced surplus value in a great number of countries the prolongation of an economic crisis in one country is
simultaneously....” strongly influenced by simultaneous slumps in the rest
Apparently it really is necessary to point out to of the world, Mandel’s reasoning is completely circu-
Mandel that the world economy has been sufficiently lar. Thus his third “reason” is no reason at all but sim-
integrated to generate international crises/slumps for ply another way of describing a general world down-
more than a century! The principal basis of that integra- turn.
tion is world commodity trade and its associated com- In short, of Mandel’s three reasons why a general
plex of financial claims. The principal “multinational world slump is occurring now but was not possible in
firms” which extract surplus value in a “great number the preceding period, the first is irrelevant, the second
of countries simultaneously” are today, as they have is false and the third is meaningless.
been for centuries, the great banks, not industrial corpo-
rations.
Marx vs. Keynes From the Archives of Workers Vanguard, No. 64, 14 March 1975 page 6 from 7

Is Inflation the Achilles Heel of Keynesianism? on agricultural and raw material supplies—account for
Virtually all liberal bourgeois, reformist and revi- the price explosion of the last few years.
sionist economists maintain that the only obstacle to Even discounting the fact that it is empirically false,
effective Keynesian policies is inflation. Expanded the argument that Keynesianism is now ineffective
government expenditure can always produce full em- because it leads to intolerable inflation is not a funda-
ployment, they say, but sometimes only at the cost of mental but rather a temporary, conjunctural one. As an
intolerable rates of inflation. From bourgeois reaction- attempted objective analysis it is similar to the present
aries like Milton Friedman to the pseudo-Marxist position of certain right-wing Keynesians, such as Fed-
Ernest Mandel there is agreement that Keynesian poli- eral Reserve Board chairman Arthur F. Burns and
cies must generate ever-higher levels of inflation. Is Ford’s economic adviser William Fellner, who contend
this contention valid? that a few years of high-unemployment slump are
The accelerated inflation of the past few years is an needed to drain the inflationary pressures out of the
indisputable empirical fact. In the period 1961-71 con- world capitalist system. After that, they contend,
sumer prices in the advanced capitalist countries in- Keynesian policies can again produce 10 or 20 years of
creased at an annual rate of 3.7 percent; in 1972 this low-inflation, mild-recession expansion.
rose to 4.7 percent, in 1973 to 7.7 percent and in 1974 If there is no major war nor a mass revolutionary up-
to 14.1 percent (OECD, Economic Outlook, December heaval in West Europe during the next few years (both
1974)! Is this accelerated inflation an inevitable result are genuine possibilities), the world depression should
of 20 years of Keynesian policies? deepen this year, giving way to high-unemployment
Earlier in this article it was pointed out that the share stagnation lasting at least through 1976. If this occurs,
of government expenditure did not increase during the in two years the rate of inflation will be greatly re-
1972-73 boom. Thus the price explosion during the past duced; it already shows numerous signs of slowing.
few years cannot be attributed to ever-greater budget Those leftists whose central argument against bour-
deficits to finance ever-greater government spending. geois economic reformism is that it leads to ever-
The very sharpness of the price increases since 1971 accelerating inflation will then find themselves theo-
argues against the theory that it is an organic, inevitable retically defenseless against the claims of resurgent
outcome of a generation of deficit spending. Keynesianism.
What then is the cause of the increased inflation of The “theory” that for a generation capitalist govern-
the past three years? One major cause has already been ments were able to prevent major crises and stimulate
touched on. The dollar exchange standard, which col- exceptional economic expansion has an implacable
lapsed in August 1971, had an effect partially similar to revisionist logic. Whatever the subjective attitudes of
the pre-World War I gold standard. The maintenance of its proponents this view leads straight to the conclusion
a fixed exchange rate served as an external limit to the that we have been living in an epoch of capitalist eco-
expansion of domestic money and credit. Since 1971 nomic stability. Such arguments have nothing in com-
capitalist governments have taken the “easy way” out mon with Marxism. On the contrary, the Transitional
of balance-of-payments deficits by allowing their cur- Program of the Fourth International has as its corner-
rencies to depreciate. Exchange-rate devaluation further stone the Leninist theory of imperialism as the highest
feeds domestic inflation, producing a vicious spiral. (last) stage of capitalism, its epoch of decay and a pe-
Britain and Italy are the clearest examples of this proc- riod of wars and revolutions. This must be our perspec-
ess. tive.
The second reason for the accelerated inflation is that
the sharp 1972-73 world boom had an effect on agricul-
tural and raw material supplies similar to that of a ma-
jor war. From the Korean War through 1971 the terms
of trade for agricultural products/raw materials had
deteriorated relative to manufactures, producing a fun-
damental imbalance in global productive capacity.
During 1972 when industrial output in the advanced
capitalist countries increased by 8 percent, global food
production actually fell slightly (OECD, Economic
Outlook, December 1973). These physical shortages
quickly generated speculation, hoarding and cartel
manipulation. Between 1971 and 1973 the index of
world raw material prices increased by over 80 percent,
as did the price of internationally traded food products
(OECD, Economic Outlook, December 1974). Thus
two factors—the widespread resort to competitive de-
valuation after 1971 and the effect of the 1972-73 boom