Boom and Bust

SCIABRRC at ACFcluster.NYU.EDU SCIABRRC at ACFcluster.NYU.EDU
Sat Sep 17 15:39:12 MDT 1994


     Steve Keen raises a host of very interesting issues in
one of his most recent posts.  He makes reference to me with
regard to the Austrian school and its perspective on
subjective marginal utility.  What is more interesting
however, are the provocative similarities between the
Austrian and Marxian approaches with regard to business cycle
theory.  (I find it interesting too, that Steve sees "chaos"
theory as friendly to the Marxian `dialectical' approach;
modern-day Austrians also argue in favor of `chaos' theory -
which is a scientific counterpart to their `spontaneous
order' formulations.)

     Steve states that, in Marx's theory, "the banking sector
provides an additional crucial component" in the cyclical
patterns of political economy, "both in its expansion and
contraction of credit over the cycle, and the role the
accumulation of debt plays."  Steve however, points to Minsky
who argues, in essence, that the welfare state has prevented
the collapse of capitalism:

     " . . . `big government' makes crashes of the Great
       Depression kind almost impossible. . . . `Pure'
       capitalism, without this big government aspect, could
       quite possibly plunge into a terminal crisis - - whose
       root cause was cyclical, not secular. "

     By contrast, the Austrians contend that it is precisely
`big government' which make the Great Depression - and
cyclical patterns in general - INEVITABLE in modern political
economy.  It is precisely `pure' capitalism that could
forever banish the cyclical patterns that have been observed
throughout economic history.

     The Austrians argue that system-wide discoordination of
prices is impossible in a free market.  Such discoordination
results from an inflationary distortion in the structure of
relative prices.  It is the necessary by-product of credit
expansion through the state-banking nexus.  Inflation dupes
the production process into an extension of productive
activity due to an artificial lowering of the interest rate.
Many investments undertaken during the inflationary boom are
MALinvestments since they do not reflect the actual savings-
investment ratios.  Their liquidation during the
depressionary phase of the business cycle is essential.
Typically, continued political intervention postpones the
reassertion of genuine price patterns.  Ultimately, the
establishment of a central banking system based on
fractional-reserve principles facilitates the redistribution
and consolidation of wealth and power.

     The Austrians draw heavily from New Left revisionist
historians who provide keen insights into the historical
evolution of the system of interventionism.  Such historians
as Kolko and Weinstein have shown that the movement toward
central banking was prompted by the bankers themselves who
had always enjoyed an incestuous relationship with the state,
extending credit to its bureaucratic agencies, financing
its debts, funding its welfare and warfare expansions.  For
the Austrians, the establishment of the Federal Reserve
System accomplished the ultimate cartelization of the banking
sector, consolidating the inflationary dynamic.  Like
counterfeiters, the central bankers undermined the gold
standard, insidiously increasing the money supply, and
redistributing income toward the banks and their chief
corporate debtors.  The Great Crash, and the ensuing Great
Depression, were the prototypical results of such credit
expansion.

     But for the Austrians, the counterfeiters and their
cohorts are ALWAYS the beneficiaries in ANY fiduciary
expansion; it is within the banking system that "ultimate
decision-making" resides in the modern corporativist order.
Moreover, the welfare state does not banish the business
cycle; it merely provides a host of institutional mechanisms
which buffer social unrest in times of depression.  When all
else fails, the interventionist state has become openly
militarist, uniting its welfare and warfare functions, and
internationalizing its redistributive effects.

     Ironically, Marx shares with his latter day Austrian
rivals, an understanding of the POLITICAL character of the
business cycle.  Yet the implications of his analysis are
vastly different.  While Mises, Hayek, Rothbard, and the
Austrians argue for the abolition of central banking, and the
separation of the political sphere from money and credit,
Marx advocates using the credit system as a mechanism for
socialist transformation.

     Marx believes that capitalism, based on the distinction
between purchase and sale, makes an exchange economy
necessary.  The exchange process makes possible the emergence
of pseudo-transactions through an inflationary credit system.
Like Hayek, Marx views the state as the source of inflation.
The state's central bank is the `pivot' of the credit system.
Its artificially-induced monetary expansion engenders an
illusory accumulation process in which `fictitious money-
capital' distorts the structure of prices.  This leads to
over-production and over-speculation.  Real prices - those
that reflect actual supply and demand - appear nowhere, until
the crisis begins the necessary corrective measures.

     Marx views the business cycle as an extension of
intensifying class struggle.  The state's ability to thrust
an arbitrary amount of unbacked paper money into circulation
creates an inflationary dynamic which favors debtors at the
expense of creditors.  The credit system becomes an
instrument for the "ever-growing control of industrialists
and merchants over the money savings of all classes of
society."  It provides "swindlers" with the ability to buy up
depreciated commodities.  Yet, the credit system is a
historically progressive institution, according to Marx.
Despite its distortive effects, it accelerates the expansion
of the global market and polarizes classes in capitalist
society.  It facilitates socialized control of production and
capital investment.

     Like Marx, the Austrians show a genuine grasp of the
political roots of economic crisis.  Unlike Marx, however,
the Austrians stand by their belief that only the price
system can transmit accurate knowledge of relative
scarcities.  It is the UNDILUTED price system which is the
best mechanism for the dynamic evolution and coordination of
social production.

                              - Chris
=============================================================
Dr. Chris M. Sciabarra
Visiting Scholar, N.Y.U. Department of Politics
INTERNET:  sciabrrc at acfcluster.nyu.edu
  BITNET:  sciabrrc at nyuacf
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