Smith, Marx, Kondratieff and Keynes: Their Intellectual Life Spans, the Convergence of their Theories based upon the Long Wave Hypothesis and the Internet
Broadway @ 50th
Street, NYC
June 6, 1998
1.
Introduction
2.
Smith, Marx and Keynes
3.
Long Waves and the Contradictions between Smith, Marx and Keynes
4.
Major Modern Economists and Their Long Wave Overlap
5.
Production Consumption Balance and the Long Waves
6.
Keynes, Secular Stagnation and the Great Depression
7.
Keynes: Fiscal Deficit Policy, the First Debt Wave and Monetarism
8.
Keynes's Debt Waves 1 and 2: Roosevelt to Reagan
9.
From Labor Long Waves to Debt Long Waves to Knowledge Long Waves
10.
Market Crash of 1987, the Internet and the Knowledge Wave
11.
Crisis in the Economy and Economic Theory
12. The Internet, Falling Rate of Profit and Knowledge-Based
Accumulation
Chart
1 First Three Long Waves as Defined by Kondratieff
Chart
2 Major Modern Economists and Long Wave Overlap with Their Life
Spans
Chart 3 Major Modern Economists with their Life Dates and Economic
Assumptions on
Production-Consumption Balance, Economic
Destabilization-Stabilization Effects and Long Waves
Chart 4. Six Long Waves From 1790 to 2000 with Upswing and
Downswing Dates, Type of
Innovation, and Starting and Concluding Innovations
The
central economic question from the dawn of capitalism in the late
1700s has been over the stability of the relationship between
production and consumption. There have been roughly three answers
to this question, yes, no and maybe. Adam Smith claimed a
completely harmonious relationship, Karl Marx claimed a completely
contradictory relationship while two other economists, Nicholai
Kondratieff and John Maynard Keynes, fell between the two
extremes. The one constant between these views seems to have been
a common acceptance of the labor theory of value, although not
always explicitly stated, but with different beliefs in the labor
theory's implications for the production-consumption ratio and
monetary policy.
In
short, Smith believed that production could never greatly exceed
consumption, while Marx believed that production would
catastrophically outstrip consumption. Kondratieff believed in a
long term- but cyclical- stability within capitalism over forty to
fifty year time spans with serious periodic depressions.
Kondratieff felt that there was an internal restabilizing factor
within capitalism, which reasserted itself during serious
depressions, with each major down turn holding within itself the
seeds for the next upturn. Keynes knew that capitalism could build
more capacity than it could absorb. However he believed that these
imbalances could be resolved through 'counter-cyclical' deficit
speeding by the federal government. For Keynes, the weak point of
capitalism lay within investment, and serious depressions made
further private investment difficult, opening the door to direct
federal intervention through the 'counter-cyclical' deficit
spending. This type of intervention has become known as fiscal and
monetary policy.
This
paper attempts to show a convergence of these seemingly
oppositional approaches through the common denominator of the
labor theory of value. Thus Smith created the labor theory of
value to describe how a small village economy worked, but Marx
later showed the consequences of how the labor theory would
function within a larger capitalist system, leading to excess
production and a serious economic downturn, followed by a
political collapse. Kondratieff believed that periodic downturns
were resolvable within capitalism. Other long wave writers
suggested that new labor-based innovations brought capitalism out
of the serious depressions, in effect reestablishing the labor
theory for another period, of perhaps twenty years.
The
1920s experienced a different type of innovation, more accurately,
the reapplication of an earlier invention electricity, to the
assembly lines.1
Electricity-based changes to the assembly lines allowed total
manufacturing output to increase, while decreasing the number of
manufacturing workers. A similar trend occurred on the farms
simultaneously. The increase in productivity of almost fifty
percent over five years during the early and middle 1920s allowed
profits to rise, driving the stock market forward during 1928 and
1929. Yet as wages failed to keep up with productivity,
overproduction increased and a mountain of inventory arose,
leading into the Great Depression.2
The Great Depression marked the end of conventional labor-based,
innovation-driven long waves. Innovation during the 1930s
continued the model of the 1920s and was more oriented to
decreasing the number of workers by individual companies, in a
partly successful attempt to maintain short-term corporate
profitability by decreasing labor costs. The countrywide effect
was that production continued to exceed consumption throughout
most of the 1930s.
The
description of this economic collapse by Keynes was 'secular
stagnation.' Keynes attempted to use federal deficit spending to
reemploy out-of work labor, thus in effect refloating the labor
theory of value until private investment could restart and support
the labor theory again. Only worldwide war gave Franklin Roosevelt
the political power to wrest control over 1920s-1930s-investment
model from the corporate sector and direct investment in such a
fashion as to rebalance production and consumption through the
war. This model of debt-driven consumption continued after 1945,
ending approximately in the stock market crash of October 1987.
There Federal Reserve chairman Alan Greenspan began guiding the
economy out of the labor theory of value, towards some new
amorphous model. As Internet usage began accelerating in the early
1990s, the outline of a post-labor economy began coming into
focus.
The
conclusion of the paper seeks to show how the
information-knowledge revolution over the Internet is finishing
off the Roosevelt-Keynesian solution to the 1930's stagnation,
probably eroding the labor theory of value permanently and thus
destabilizing all previous explanations for capitalist
development. The paper seeks to lay a foundation for a new
monetary system, based in converting large amounts of
knowledge-induced or knowledge-directed goods and services into
consumption.3
Each
of the four economists wrote in different parts of the world and
in very different economic times, with little intellectual overlap
during their respective working periods. Capitalism was an
evolving phenomena, which each economist described to the best of
their abilities during their lifetimes. Each economist's
interpretation was influenced by the channel of information, which
was then available, and by the relative development of capitalism
itself.
In
the classical era of the late 1700s, Adam Smith believed that an
'invisible hand' kept production and consumption together. Human
labor provided both the production as well as monetary value
necessary for consuming the output of others in the village. This
'labor theory' of value as described by Smith and later by David
Ricardo, simply stated that the number of hours of human labor
involved in the production of an article largely determined its
market price.
Sixty
years later Karl Marx, using this same labor theory of value,
claimed that capitalism was inherently incapable of providing
enough total buying power to keep production recycling into
consumption:
He
[Marx] took over the analytic framework of classical political
economy [Smith and Ricardo]
and
employed it to arrive at radically [different] conclusions
arguably implicit in
the
framework, but surely far removed from the intent and spirit of
the classical
economists
themselves. 4
Marx
believed that not enough monetary value was being transferred to
the working class to maintain the long-term balance between
production and consumption. He believed that production would
ultimately so outstrip consumption that the resulting instability
would lead to a revolution by the working class in the advanced
industrial countries.
Writing
during the 1930s, British economist John Maynard Keynes believed
that 'overinvestment' could lead to excessive productive capacity
and that the national inventory could get ahead of total
consumption power. The whole economy could almost stop, as was the
case during the Great Depression. However, Keynes believed that
the solution for such a period of stagnation was for the federal
government to run deficits, stimulate consumption and restart
production.
3.
Long Waves and the Contradictions between Smith, Marx and Keynes
The
seeming contradictions between Smith, Marx and Keynes can be
resolved however by reference to another less well known idea, the
'long wave' theory associated with Nicholai Kondratieff. 5
This idea can be compared with an elongated business cycle, but
this was not Kondratieff's intent. Kondratieff was writing in
Russia before World War l and around 1915 was publishing his
theories. These forty to fifty year 'long waves' represented the
rise and fall of the overall capitalist system. Kondratieff was
somewhat unclear as to the exact cause of the long waves.
Kondratieff believed that starting around 1790 capitalism had had two complete 'waves' of economic growth and decline, with a third wave rising in the early 1900s. Schumpeter believed that each of these waves had been associated with a substantially new labor-based innovation, which had in turn increased employment. Here are the innovations and approximate starting dates of the first three long waves as defined by Kondratieff.
| Wave | Innovation | Starting
Date |
| 1 | Cotton gin and clothing manufacturing | 1790 |
| 2 | Railroads and steel production | 1840 |
| 3 | Automobiles, oil and electricity | 1890 |
Each
of these long waves created very wealthy families. Thus the
railroad and steel families included the Astors and the Carnegies.
Thus the oil and automobile dynasties included the Rockefellers
and the Fords.
Later
during the 1930s, Joseph A. Schumpeter revised Kondratieff's
theory and claimed that the capitalist entrepreneur was
responsible for particular labor-based innovations, which then
precipitated the long waves. The version of long wave theory
presented here is a conflation of Kondratieff and Schumpeter. This
version suggests that periodic severe depressions in capitalism
have been relieved by new labor-based innovations, less than
through the wringing out of bad debt through debt-deflation as
claimed by conventional economics. 6
The long wave collapses have occurred in the way that Marx
described. However, so long as new labor-based innovations have
developed, capitalism has rebuilt itself each time from each
collapse.
4.
Major Modern Economists and Their Long Wave Overlap
The development of a long wave theory or a business cycle theory could not have occurred prior to the existence of more than one such long wave or cycle and the development of sufficiently strong databases to supply the evidence for such a theory. The economic data which has existed for much of the twentieth century and which formed the basis for the long wave theory of Kondratieff, did not exist during either Smith's or Marx's era. Thus Adam Smith could scarcely have imagined any type of cyclical theory, based in modern economics. 7 Thus Marx lived and wrote during the long wave down turn of cotton-based manufacturing and the upturn of the steel-based railroad long wave. Yet, an economic database to explain either long wave did not exist. All Marx had to consider was his theory of capitalist development, the labor theory of value, the 1840-1850s economic problems and whatever anecdotal economic evidence he could find in the newspapers of his era.
Major Modern Economists and Long Wave Overlap with Their Life Spans
| Economist | Life Dates | Long Wave Overlap |
| Adam Smith | 1723-1790 | None: beginnings of first long wave |
| Karl Marx | 1818-1883 | 1: Cotton manufacturing; |
| N. V. Kondratieff | 1892-1930 ? | 2:
Railroads and steel 3: Automobiles, oil and electricity |
| John M. Keynes | 1883-1946 | 2:
Railroads and steel 3: Automobiles, oil and electricity |
5.
Production Consumption Balance and the Long Waves
Adam
Smith wrote the first major description of village-level
capitalism in 1776, The Wealth of Nations, the same year as the
start of the American Revolution. In it, Smith described how an
'invisible hand' seemed to balance out the productive capacity of
the village with its consumptive needs. The clear implication was
that production and consumption would by and large stay in
balance, again with guidance of the 'invisible hand'. His
interpretation of economics was colored by the fact that modern
capitalism had just begun, and the 'invisible hand' did indeed
function at least somewhat as he described it. However, the first
long wave economic boom was not even on the horizon. When Smith
wrote, knowledge was hardly a factor the economy, his 'invisible
hand' idea implied that knowledge didn't really matter.
Marx
was writing by 1850 and died in 1883. He lived most of his life
during the first long wave based upon cotton manufacturing. He saw
an entirely different industrial capitalism, than the
village-based capitalism of Smith. His life did not end during the
first long wave, but his theoretical views were formed by it. He
was unable to see beyond the general tendency of capitalism to
eliminate human labor and increase machine-based debt in the
production process. Thus he believed that the equivalent of a
single long wave would rise, crest and fall, dragging capitalism
down with it. Marx lived to see the first long wave fall and the
revolutions of the 1850s, but could not understand how a second
labor-based wave might get started and restabilize capitalism.
Marx was alive as the second long wave based upon railroads and
steel started, but died before it had crested and fallen.
Kondratieff was writing near the start of the 1900s and his major theory was published in the United States around 1926. He lived after the two long waves of the 1800s had risen and fallen. Thus the cotton manufacturing era and the railroad era had come and gone by the time Kondratieff was forming his economic views. And a third long wave was making serious progress, that of automobiles, highways and electricity.
Major Modern
Economists with their Life Dates and Economic Assumptions on
Production-Consumption Balance, Economic
Destabilization-Stabilization Effects and Long Waves
|
Economist
Life Dates |
Production
Consumption Balance Integral to Capitalism |
Destabilization
Effect on the Economy |
Stabilization
Effect on the Economy |
Long
Waves Acceptance |
|
Adam
Smith |
Yes,
but implicit |
Did
not exist |
Invisible
Hand |
No,
waves had not started |
|
Karl
Marx |
No |
Over-production |
None,
Revolution |
Yes,
but only one, followed by a collapse |
|
Nicholai
Kondratieff |
No |
Over-production |
Implicit,
from long wave activity |
Yes |
|
John
Maynard |
No |
Over-investing
leading to gap between aggregate production and aggregate
demand |
Fiscal
Policy:counter-cyclical federal deficits,leading to
increased monetary velocity |
Questionable,
he accepted business cycles but perhaps not long waves |
Kondratieff
contradicted Marx, in that he claimed that capitalism was in fact
regenerating itself through periodic waves of upward movement
after periods of downward movement. What defined these upward
movements was an internal ability of capitalism to develop new
innovations, which then pulled labor back into the production
process after a long wave crash. 9
There seems to be an implicit acceptance of Marx's analysis of the
internal workings of capitalism, but a revision of Marx concerning
periodic new labor-based innovations and upwards swings in the
economy. Kondratieff did not set forth a theory for the long wave,
although he did note that innovations developed during the down
side of one long wave were often later used the next upswing.10
After the collapse of the third long wave into the Great
Depression in 1929,
Stalin
imprisoned Kondratieff and he probably did not live to see the
resuscitation of capitalism through a war financed with massive
fiscal debt, as hypothesized by John Maynard Keynes.
6.
Keynes, Secular Stagnation and the Great Depression
John
Maynard Keynes was a young man at the World War l Paris peace
talks in 1919. He had written a devastating analysis of the likely
results of the Treaty of Versailles upon the German economy. 11
The
Economic Consequences of the Peace (1919) met with a reception
that makes the word
success
sound commonplace and insipid...Primarily the feat was one of
moral
courage.
But the book is a masterpiece--packed with practical wisdom that
never lacks
depth;
pitilessly logical yet never cold; genuinely humane but nowhere
sentimental;
meeting
all facts without vain regrets but also without hopelessness: it
is sound advice
added
to sound analysis. And it is a work of art... the very polish of
the exposition--never
again
was he to write so well-- brings out its simplicity. 12
For
his efforts, he had been banished from British political circles
for several years. Keynes had had the benefit of both Marx and
Kondratieff's theories as he wrote during the late 1920s and early
1930s, but I am not aware of any self-admitted significant
influence upon Keynes by either writer. 13
However, Keynes clearly was trying to counteract a serious
business cycle problem during the 1930s, at least as he saw it.
Keynes did not have a full-fledged theory of the business cycle,
although he believed that cycles were largely the result of
instability in private investment.14
In a book published not long after Keynes' death, Lloyd A. Metzler
described Keynes' views on business cycles:
The
pure theory of business cycles was never one of Keynes' primary
interests. In this
field,
as in other branches of economics, he found the practical problems
of the day more
absorbing
than discussions of theory for its own sake...Likewise in
depressions, the
causes
of a cumulative downward spiral, and the economic forces which
govern the
length
of this downward movement, were his main concern...He continued to
believe that
the
fluctuations of economic activity occur with some regularity, and
that this regularity
can
be explained on economic grounds. 15
What
in fact Keynes was trying to remedy was the crash of the third
long wave of automobiles and electricity. Unfortunately no new
labor-based innovation was ready to restart employment. Moreover,
something unique to capitalist development had occurred on the
assembly lines during the early 1920s, a technique which permitted
output to increase even with a declining number of workers.
A
1929 book by a then mainstream economist, Irving Fisher, described
the 1920s situation in a nutshell, although a theoretical
explanation probably could not have been developed at the time for
avoiding the coming depression. Between 1899 and 1921,
manufacturing output rose in congruence with increases in both
horsepower and workers, but after 1923, output rose even with a
gradual decline in the workforce. 16
Thus for the first time in the history of modern capitalism, an
innovation was put into the system which permitted rapid increases
in productivity and total manufacturing output- simultaneous with
declines in the number of workers providing the labor.
This
was an extremely radical event. At first it drove up the price of
stock- since above average profits were possible from companies
employing the new technology. But after the collapse of 1929, the
new technology permitted the monopoly manufacturing companies to
gradually decrease their worker level and yet maintain roughly the
same or perhaps higher output. Even in a situation where
production was declining, these techniques would allow the
necessary labor to drop even more rapidly than the level of
production, thus allowing the companies a chance to keep profits
from collapsing completely.
This
combined with the lack of a new labor-based innovation was a major
reason, if not the major reason why the economy did not begin to
improve after the initial shock of the stock market crash began to
wear off after several months during 1930. During previous eras of
capitalism, it had never been possible to have such increases in
output or the maintenance of a stable level of output, while
simultaneously being able to cut the total system-wide number of
workers. Thus if the number of people with wages was dropping,
even as the nation-wide output was stable [or dropping slower than
the rate of employee layoffs] and if those companies were able to
keep their prices at roughly the same level- the system was
incapable of clearing the aggregate output with the available
aggregate wage income. This was and remains a good formula for
creating a stagnating economy.
A
shift in the use of electricity on the assembly line was the prime
cause of this early 1920s shift. Electricity moved from being:
1.
a consumer invention for lighting and other household uses, or
2.
used in the factories for powering the long, belt-driven assembly
lines,
into
powering a completely new point-of-production assembly line
system. This new point-of-production assembly line system was the
reason for the radical shift in the relationship between labor
usage and power increases in the manufacturing sector. This
process drove total manufacturing output well beyond total
consumption power in America. Thus Keynes faced two serious
problems as he began trying to restart the capitalist system
during the 1930s; the lack of a new labor-using innovation and the
application of an innovation which was drastically lowering the
labor needed in the existing sectors. Ultimately, only massive war
would begin to bring consumption and production back into balance.
Here Keynes would provide the democracies with an economic idea
sufficient to finance the war: massive federal deficit spending.
7.
Keynes: Fiscal Deficit Policy, the First Debt Wave and Monetarism
Keynes
accepted the reality that production could greatly exceed
consumption, but he believed that the federal government could
rebalance such gaps. 17
Keynes believed that 'overinvestment' could lead to a situation
where too much productive capacity or 'aggregate supply' would
exist for the existing wage-base or 'aggregate demand' to be able
to purchase it. In such a situation, as the inventory buildup
gradually forced business to layoff more and more workers, the
federal government could rebalance production and consumption
through deficit or 'counter-cyclical' spending. The federal
government had the legal ability to run deficits, and according to
Keynes, had the responsibility to do so when unemployment became a
serious drag on the general economy.
In
Keynes' model, as business inventory was purchased by the federal
government, business would again begin rehiring unemployed labor.
Federal deficits would increase the monetary velocity and each
dollar of federal spending might account for several more dollars
of private spending. That is, the newly hired labor would again
begin making purchases and shortly, the production and consumption
would again be in rough balance. At that point, ideally the
federal government could begin to run a surplus and pay off the
debt of the previous downturn.
Possibly
the overlap between the currently powerful monetarists running the
American, European and Japanese central banks; and Keynes lies in
the question of monetary velocity, more precisely how to improve
the speed of money turnover during a downturn. For the
monetarists, improving interest rates should usually resolve the
problem. However, Keynes was sure that some economic crises were
too deep to be resolved by simply lowering interest rates and
required direct federal intervention in the economy.
Keynes
was not convinced that interest rate policy was any more important
to investors than their belief that a given level of investment
would return a particular level of profit. Keynes emphasized
effective demand in a complete system:
1.
household demand for consumer goods
2.
business demand for investment goods
3.
government demand for public goods
Household
consumption was relatively stable, largely determined by income
itself- but business investment was the weak link. Interest rates
as well as profit expectations determined the
rate of investment. Investors compare known interest rates with
expected profit rates- to decide how much or how little to invest.
18
For
Keynes, the key to understanding lay in that household consumption
would almost always remain close to the levels of household
income, it was almost a constant. The problem, was that investment
depended upon the perception of the capitalist owners-investors,
that more profits could be derived by further investment. Thus
investment was not a constant, at least not private investment.
High levels of private savings would not necessarily lead to
equivalent levels of private investment. When for whatever reason,
private investment lagged to the point where employment was in
trouble, the federal government was obligated to make up for the
investment slowdown. Under ideal circumstances, the federal
government could provide enough economic lift to being private
investment back into the market.
The
problem with the monetary revision of Keynes's theory is that
monetary policy and interest rates alone do not determine the
decision to invest by the private sector. Low interest rates will
not encourage scared investors, if they do not see profits arising
from investment. Thus the Japanese central bank has had its
discount interest rate at one-half of one percent for many months
and the Japanese economy is still sitting dead in the water,
stagnating except for its increasing exports to the United States.
And high interest rates will not necessarily prevent investment
from occurring, if investors believe that profits can be derived
above the costs of borrowing.
Naturally,
low interest rates are generally preferable all around- but
interest rates were not the crucial element for investment.
Monetarists seem to believe that the leveraging
of interest rates and the money supply are the crucial elements
for keeping production and consumption together. The idea that
interest rates might drop too low to be a factor in corporate
investment decisions, the 'liquidity squeeze' or 'liquidity trap',
is not generally a part of the monetarist formula of economics. 19
Keynes
died in 1946, not long after the end of World War ll. The British
and Americans had run the war under Keynes's guidance and he died
as the western allies were attempting to rebuild the economic
foundations of capitalism.
8.
Keynes's Debt Waves 1 and 2: Roosevelt to Reagan
After
World War ll., there was a breakdown of both Keynes and
Kondratieff's theories. First, the capitalist system did not
return to the Great Depression after the end of wartime deficit
spending, as was feared by many Keynesian economists. 20
And in contradiction to Kondratieff, the capitalist system took
off on another twenty-year boom, without another major labor-based
innovation. What I believe occurred, is that deficit spending
simply shifted from the federal government to the business and
household sectors and these new deficits or debts drove economic
growth after the war. 21
Thus a new type of long wave developed out of the application of
Keynes's theories to the Great Depression- a debt long wave,
funded by very large increases in the annual federal deficits and
in aggregate federal debt. This increase in federal debt amounted
to a large shift, from about 30 % of GDP in 1939 to about 150 % of
GDP in 1945. It was this rapid increase in federal debt from 1939
until 1945, which restarted the American economy, and it was the
replacement of this federal debt with business and household debt
from 1945 until about 1966, which kept the economy booming. The
world economy stumbled from about 1970 until 1983, Ronald Reagan's
third year in office. And it took an increase in overall
countrywide debt from about 175 % of GDP in 1981 to about 250 % of
GDP in 1987 to restart the economy. Thus two debt waves have moved
through the American economy since the Great Depression, the first
under Roosevelt, and the second under Reagan. 22
This
may seem like ancient history to some, but there is a point to all
of this. Ronald Reagan's economy in many ways emulated
Roosevelt's- in particular his massive federal deficits used to
fund the moral equivalent of war, his military build-up against
the weakening Soviet empire. David Stockman has commented in
several places about the sheer stupidity of Reagan's economic
policies and others have called it 'military Keynesianism', as if
the original 'test' of Keynesianism during World War ll. was some
other variety of Keynes' theory. 23
The reality is that both major applications of Keynes' theory
occurred during what was considered during both occasions to have
been fairly serious economic troubles. Although the unemployment
rate in 1981 was not as bad as 1931, the prime rate in 1981 to
1982 was so high, that housing construction fell flat, and another
year of two of such rates could have stifled automobile
manufacturing as well. Moreover, both such 'tests' of Keynes'
theory occurred along side large-scale military build-ups.
As
much by luck and ignorance as by anything else, Reagan stumbled
through his first two years, then as capital began flowing inward
from around the world, seeking the outrageous interest rates in
America; that in combination with his military build-up kick
started the economy and by 1984, it was indeed 'morning in
America'. Reagan floated through his reelection and continued to
run massive deficits. In October 1987, the market finally
collapsed, but through the luck of history, Paul Volker had left
the chair of the Federal Reserve and Alan Greenspan had moved in.
Greenspan flooded the financial system with money and probably
prevented a far worse collapse, perhaps a second Great Depression.
Had Volker remained as chair of the Federal Reserve, it is
entirely possible that he would have maintained a tight money
supply and kept interest rates high for too long. It had been
Volker who between 1978 and 1982 had sent the American economy
into deep recession, through tight Federal Reserve policies.
9.
From Labor Long Waves to Debt Long Waves to Knowledge Long Waves
Again,
all of this history is necessary, because the last two hundred
years of economic growth have not been automatic. Growth has come
and gone in fairly coherent forty-year waves. The crashes of first
two waves were resolved though internal innovations, the rise of
railroads in the 1850s and rise of automobiles and electricity in
the early 1900s. The third crash in 1929 was resolved about ten
years after it started and only through massive federal deficits
funding a massive war. The fourth crash or more accurately, the
slow-down in western economic growth which started around 1970;
was also resolved about ten years after its start, again by a
massive rise in the federal deficit starting in 1981-1982.
The
common feature of the crashes of the first four long waves was
that the crashes were resolved by something which put the
unemployed back to work, by stimulating investment (please see
Chart 4). The crucial ingredient to the resolution of all four
previous crises has been that paid wage employment was rapidly
increased by something. The initial long wave was probably
caused by the evolution of the labor theory of value, along side
the creation of clothing manufacturing, themselves made possible
by the invention of the cotton gin by Eli Whitney. Put into rough
Marxist nomenclature, each of the first four long wave crashes
were resolved as the labor theory of value was restored, for
another period of time. Another way of looking at matters, is that
this something stimulated investment again, which in turn
caused industry to need more human labor, which in turn allowed
private consumption to grow. The first two long wave crashes were
resolved by increased private investment stimulated first by the
building of the railroad grid starting in the 1840s, then later by
the building of the highway and electrical grids starting in the
late 1890s. The crash of the third long wave did not have an
innovation, which encouraged direct private investment, and the
only stimulus was that provided by war later.
In the 1850s, this something was the railroads, in the 1890s, this
something was automobiles and electricity. In the 1930s,
this something was war, funded by American federal debt. In
the 1980s, this something was the Second Cold War, funded
again by massive federal debt. Thus the first two downswings were
resolved by labor-based innovations from the private sector, while
downswings three and four were resolved by the public sector, with
large-scale fiscal deficits funding large military buildups. These
last two downswings were resolved within a Keynesian model of
fiscal intervention by the federal government.
Six
Long Waves From 1790 to 2000 with Upswing and Downswing Dates,
Type of
Innovation, and Starting and Concluding Innovations
|
Wave
with Upswing- |
Type
of Innovation |
Major
Precipitating Innovation |
Major
Concluding Innovation for |
|
1 |
Labor |
Cotton
gin, |
Railroads,Steel |
|
2 |
Labor |
Railroads,Steel |
Oil,Electricity,Consumer
Products,Automobiles |
|
3 |
Labor |
Oil,Electricity,Consumer
Products,Automobiles |
No
major labor-based innovation,Debt-Funded war: World War II |
|
4 |
Debt/war |
No
major labor-based innovation,Debt-Funded war: World War
II;Ratio of Debt to GDP rose from about 30% to
150%;Recovery of Europe and Japanese economies |
No
major labor-based innovation; Recovery from World War II;
Debt funded 'war': Second Cold War |
|
5 |
Debt/war |
No
major labor-based innovation; Recovery from World War II;
Debt funded 'war': Second Cold War; Ratio of Debt to GDP
rose from about 175% to about 250% |
No
major labor or debt-based innovation;Continued fiscal and
monetary stimulation in the 1990s leading to creation of
Web and knowledge-based economy |
|
6 |
Knowledge |
No
major labor or debt-based innovation;Continued fiscal and
monetary stimulation in the 1990s leading to creation of
Web and knowledge-based economy |
Development
of alternative monetary system for consumption,
independent of labor force participation |
10.
Market Crash of 1987, the Internet and the Knowledge Wave
Another
potential depression-level crisis occurred in the fall of 1987,
when the American stock market crashed deeply again. The then new
chief of the Federal Reserve, Alan Greenspan, protected the
financial system by providing large amounts of money for the
banking system. This action was very necessary at the time, as the
potential for a general depression was very great. Nobel economist
Paul A. Samuelson believes that the crash could have led into
another Great Depression:
'On
every proper Richter scale, the 1987 crash rivaled that of the
1929 crash. By contrast
with
journalists, mainstream economists correctly computed that the
late-1987 25 percent
erosion
of worldwide asset values was prone to reduce by about 1 percent
per annum the
likely
1987-1989 growth in global output. Had you told those economists
to factor into
their
IS-LM diagrams [econometric charts] the worldwide acceleration of
the money
supply
induced by the October 1987 crash, their regressions [econometric
statistical
equations]
would have projected the continuance of the 1982 recovery that
history
has
recorded in 1988-1989. 24
Samuelson
seems to believe that the accelerated money supply in late 1987
probably was the difference, but that accelerated money
supplies will not always work to resolve a crisis- as when a
crash occurs against a backdrop of previously existing
stagflation.[my emphasis] What Mr. Samuelson seemingly ignores in
his criticism of the late 1987 projections by mainstream
economists, is that they could not be sure that Mr. Greenspan
would in fact dump enough dollars into the American banking system
to keep the stock market crash from deteriorating out of control
into a full-fledged depression. The previous chair of the Fed,
Paul Volker, had engineered the economic collapse of the American
economy in 1978 through high interest rates, wrecking whatever
chances Jimmy Carter had had of retaining the presidency. Volker
has maintained a deep suspicion of using government policy for
dealing with economic crises and in fall 1987, no one could have
been sure whether Greenspan would have had the ability to break
with Volker and to use the monetary tools of the Fed:
'This
leaves me with the disturbing question of whether by using these
tools [devices for
dealing
with potential crises- FDIC, FSLIC and the Federal Reserve]
repeatedly and
aggressively,
we end up reinforcing the behavior patterns that aggravate risk in
the first place. 25
Moreover
during November and December 1987, no one including Greenspan,
could be sure that dumping large amounts of dollars into the
American financial system would succeed in preventing a new
depression. No more that we can be sure that a 1997 bailout of
Korea similar to the earlier bailout of Mexico, will keep Korea
from going further down and possibly dragging Japan down as well.
Monetary policy is not always a guarantee in dealing with
financial crises.
Still,
this single action did not restore private investment, although
federal deficits continued at approximately the same level in 1988
and 1989 as in previous Reagan years. Greenspan kept the discount
rate above ten percent for almost two years after the 1987 crash,
waiting until mid-1989 to begin lowering it. However, private
investment remained on hold for much of the next two years as the
American economy basically sat dead in the water. Between 1989 and
the end of 1992, Greenspan lowered the discount rate from about
ten percent to about three percent and only in the last three
months of 1992 did the economy start to register growth. Sadly for
George Bush, the stirrings in the economy did not come soon enough
to save his presidency.
Then
too, in 1987 there was no new innovation like point-of- production
electrical motors on the assembly line in the 1920s, which could
permit the capitalist system to begin dropping labor from
production, even as production was held steady or increased. Thus
Greenspan's 1987 loose money policy prevented the onset of a new
Great Depression and his 1989 to 1992 loose interest policy helped
guide the economy towards growth for the rest of the 1990s. It is
a serious question as to whether either loose money or low
interest rates would have salvaged the economy by 1994, had the
Internet been as widely available as it later became after 1995.
11.
Crisis in the Economy and Economic Theory
However
today a new crisis looms, in that the collective solutions to
crashes three and four, have left modern economic policy in a
severe bind. The collective federal debts from the 1940s until now
have left the American economy water-logged and probably unable to
run a third debt surge, comparable to the early 1940s or the early
1980s. Additional corporate and household debt from the 1980s and
1990s compound the problem. There is no new labor-intensive
innovation on the horizon, capable of putting large numbers of
unemployed back to work when the next crisis hits. Moreover, the
Federal Reserve cannot again drop the interest rate by seven
points, as it did between 1989 and 1992. Moreover this idea of the
elimination of the business cycle seems baseless. Less than five
years ago, a theory existed which claimed that the 'end of
history' had occurred with the fall of communism. The 'end of the
business cycle' theory will last until the next severe recession
hits.
Worse
yet combination of the computer and the Internet, the only major
technical innovations of the 1940s and the 1980s, actually
threatens the currently existing labor-based job structure. And
the currently evolving computer networks will shortly be
interconnected in a way unimaginable even five years ago,
rendering large numbers of current jobs redundant. 26
As the total wage structure begins to collapse with the
interconnection of these corporate and government networks, the
current labor-based monetary system will be unable to keep
production and consumption in even approximate balance.
At
this point, a new form of demand will have to be created, or the
entire modern economic apparatus may simply buckle and collapse. A
synthetic wage structure will have to be created and funded,
probably through the merging of fiscal and monetary policy. These
synthetic wages will have to be issued to adult citizens,
regardless of their participation in the labor market. And more
crucially, the almost damning stigma associated with 'welfare' and
welfare recipients must be eliminated, or the system will not
work, regardless of the technical capacity of the new, evolving
system. In a future society where no more than fifty percent of
the adult citizens are required to produce the same or greater
Gross Domestic Production as today, a whole new cultural outlook
on wages will have to evolve and damned fast.
12.
The Internet, Falling Rate of Profit and Knowledge-Based
Accumulation
Today,
the crisis is unique to modern economics, in the sense that all
previous interpretations of the business cycle and/or the long
waves are probably out of date. 27
After five long waves, three labor-based and two debt-based, the
first knowledge long wave looms. It has no readily apparent theory
of value with which to replace the labor theory. And it may not
act like any of the previous long waves, in terms of providing
high profits for selected sectors and average profits for the
other sectors of the economy. In many ways, the Internet may be
seen as a vast 'falling rate of profit' mechanism, in that it
seems to be almost congenitally hostile to profitability in the
conventional sense of the word. The Internet is the perfect
innovation for driving down overall profitability in the American
economy. A recent article on Web bookseller Amazon.com illustrates
this situation:
The
Net, by its very nature is hostile to profit margins...Most
investors seem to
believe
that the Internet will someday produce unusually rich returns
because it is a
cheaper
way to reach customers, without onerous expenses such as paper
record-keeping,
brick-and-mortar
shops and piled-up inventory. Yet the very things that attract
users to
the
Internet--make it treacherous for profit-hungry merchants. With
just a few keystrokes,
customers
can play business rivals against each other. That ability is
turning the Net into
a
relentlessly efficient market in which vendors will be
hard-pressed to win, and defend,
any
lasting competitive advantage.[my emphasis] 28
And
what is even worse, a knowledge-based economy may not even
function as a long wave, the only type of capitalism, which has
existed since the late 1700s. In many ways, a knowledge-based
economy could be almost the death of capitalism as we know it,
replacing large swaths of the professional classes, especially in
the investment, media, entertainment and academic sectors. 29
This
new type of economy has no historical precedent. It probably
represents the accumulation of most societal information from
myriad sources, into a comparative handful of very large aggregate
databases. These very large databases are known as 'data
warehouses' in the corporate world. Such databases would merge
vast amounts of information onto large web-based systems.
Sophisticated search engines and extensive indexing would allow
access to needed information in much shorter times than previous.
What
is at issue is not another labor-based long wave cresting again,
or even of a Great Depression-like problem, possibly resolvable by
another 'debt-wave'. It is the rise of a non-labor-based economy,
based increasingly upon the accumulation and distribution of goods
and services through largely through the flow of knowledge over
the Web. This type of accumulation is very different from the
labor-based accumulation defined by Marx. It is also radically
different from the debt-based accumulation model, which eventually
developed out of John Keynes's theories.
This
knowledge-based accumulation may require such drastic, sudden
changes in the entire society, that simply to broach them would
make a writer comparable to an ancient biblical prophet,
discussing the fall of a society or laughably compared with
Chicken Little's astronomical views. Yet, as more and more of the
economy gets wired into the Internet-World Wide Web and as more
and more companies are created to support the shift to a
knowledge-based system, a serious question keeps arising. Where
are the huge profits normally associated with such changes in the
capitalist system? In fact, where are even average or minimal
profits outside of a handful of companies such as Microsoft? And
even Microsoft's profits are largely a function of its current
monopoly control over the desktop.
With large amounts of adult labor rendered redundant through the
creation of aggregate, nation-wide, financial, educational, legal,
military and other databases, and the labor theory of value
displaced, a new theory of monetary production will be necessary.
And the selfish, greed-driven model of American citizenship will
gradually have to be replaced with a more altruistic and
system-wide model. In a modern society where perhaps one third or
more of the adults are simply no longer needed in the production
process, those working must be willing to support people no longer
working. And those no longer working must not be allowed to slip
through the safety net, into grinding poverty. Personal identity
can no longer be a function of one's participation in the labor
force. And those remaining in the professional and investment
process must begin to develop a more long-term and system-wide
appreciation for the results of their practices.
Such
a transformation or transition to postcapitalism may seem
difficult, but it must not be impossible, for such a failure may
well send America and the globe back towards the 1800s, if not to
the 1600s.
Dates
of Writing:
Windsor
Park, Valdosta, Ga.
September 26 ,1997
Ormond
Beach, Fla.
October 6, 1997
East
81st, NYC
October 19, 1997
West
125th Street, NYC
October 19, 1997
Broadway
@ 50th Street, NYC
June 6, 1998
1
This process was described as 'disaccumulation' by Martin J. Sklar
in a 1968 paper in Radical America. Martin J. Sklar, The
United States as a Developing Country: Studies in U.S. History in
the Progressive Era and the 1920s. Cambridge, Mass.: Cambridge
University Press, 1992, p. 149-170.
2 [html connection to section on Sklar, Harris
and Carlo]
3 [html connection to other monetary sections]1.
Rosett on Greenspan
4 James A. Caporaso and David P. Levine, Theories of Political Economy. Cambridge: Cambridge University Press, 1992, p. 53.
5 Few original ideas exist in any field. And the development of any relatively original idea is seldom accomplished by any one writer. In the case of the long wave concept, other writers should be mentioned, especially Austrian Joseph A. Schumpeter. It was Schumpeter, far more than Kondratieff who saw innovation and the entrepreneur, as the source for new long waves. Kondratieff looked for a more internal explanation. I have conflated Kondratieff, Schumpeter and other writers under the rubric of the long wave, perhaps unfairly. For a longer more detailed discussion of the long wave model, see Ernest Mandel, The Long Waves of Capitalist Expansion and Late Capitalism. Mandel was a contemporary of Leon Trotsky and argued with him over the long wave concept. It was Mandel who first noticed the problems in capitalism which resumed during the mid 1960s and who interpreted those problems from a long wave approach. I should add that I believe his particular interpretation was inaccurate, but a version of the long wave hypothesis is in fact applicable to capitalism then and presently.
6
Irving Fisher,"The Debt-Deflation Theory of Great
Depressions", Econometrica 1, October, 1933, p.
337-357. [html to sections on Peter Temin and Fisher]
7 Perhaps two books have been published during
the last year which attempt to look at Europe's economy over about
the last thousand years. My impression is that both books tend to
mask the differences between the modern capitalist era from the
time of Adam Smith forward, with the feudal or even Dark Age
periods. In this, they follow Immanuel Wallerstein's lead.
8 Need life date on Kondratieff and his view on
overproduction. Berry notes a date of 1892 (green paper)
9 Again, the emphasis upon the role of the
entrepreneur as the engine of regeneration is based more in
Schumpeter than in Kondratieff.
10 Michael P. Niemira and Philip A. Klein, Forecasting
Financial and Economic Cycles. New York: John Wiley and Sons,
Inc, 1994, p. 29.
11 The Economic Consequences of the Peace.
12
Joseph A. Schumpeter,' Keynes, the Economist (2) in The New
Economics: Keynes' Influence on Theory and Public Policy,
Seymour E. Harris (ed.), New York: Alfred A. Knopf, 1949, p. 78,
79. This book was a collection of essays by numerous members of
the Keynesian establishment, shortly after his death. Contributors
included prominent economists of the era, including Joseph A.
Schumpeter, Paul Samuelson, Joan Robinson, Wassily Leontief and
Alvin H. Hansen, and a rising, future Nobel economist, James
Tobin.
13 In the introduction to a 1984 translation of
Kondratieff, a writer claims that Keynes had in fact accepted
Kondratieff, through reference to the 'Gibson Paradox'. Julian
Snyder in Nikolai Kondratieff, The Long Wave Cycle.
translated by Guy Daniels, Richardson & Snyder, 1984, p. 12,
13. Still, this is a slim reed upon which to make such a claim
about Keynes.
14 Michael P. Niemira and Philip A. Klein,
Forecasting Financial and Economic Cycles. New York, John
Wiley and Sons, Inc, 1994, p. 62, 64.
15 Lloyd A. Metzler,'Keynes and the Theory of
Business Cycles', in The New Economics: Keynes' Influence on
Theory and Public Policy, Seymour E. Harris (ed.), New York:
Alfred A. Knopf, 1949, p. 436.
16 Irving Fisher, The Stock Market Crash and After. New York: The MacMillan Company, 1930, page facing the title page. The Growth of Manufactures: 1919-1926 Compared With Preceding Two Decades. In a 1968 article, Martin J. Sklar would describe this situation as a 'disaccumulation' crisis, using similar data from the same Hoover Committee on Recent Economic Changes report used earlier by Fisher.
Martin
J. Sklar, The United States as a Developing Country: Studies in
U.S. History in the Progressive Era and
the 1920s. Cambridge, Mass.: Cambridge University Press, 1992,
p. 149-170.
17
See The New York Times, February 21, 1998 article on Jean
Baptist Say by Louis Uchitelle. He noted that Say did not actually
write the famous dictum 'Supply creates its own demand'. Keynes
used Say as an example of the conventional economic thinking of
the 1930s.
18 Michael P. Niemira and Philip A. Klein, Forecasting
Financial and Economic Cycles. New York, John Wiley and Sons,
Inc, 1994, p. 62, 64. Needs to be rechecked with Robert
Lekachman's The Age of Keynes .
19
The collapse of the Asian capitalist economies has led to a fresh
use of terms popular during the Great Depression, including the
term 'liquidity squeeze' or 'liquidity trap', even the term
'depression' itself. The Japanese economy has never recovered from
their stock market collapse near the end of the Reagan-Bush years,
when it fell from a level of about 36000 to less then half, about
16,000. Today the Neisi Index is around 15,000.
20 Seymour E. Harris, ed., Postwar Economic
Problems. New York: McGraw-Hill Company, Inc., 1943, p.xi,
xii, 5. The contributors list included persons from Fortune
Magazine, the Federal Reserve Board, the Federal Works Agency
and a host of major academics from all over the country and the
federal government. The book was not written by a group of left
propagandists. The editor made it clear that Lord John Maynard
Keynes was the primary influence upon the book. While it was
possible that some of the assemblage had leanings further left,
Marx was not even listed in the index, nor was communism or the
Soviet Union.
21 See Reuben Norman Jr' Gross National Debt
and Gross Domestic Product'., Charts 3 and 4 . This paper was run
in 1993 and is not on site yet.
22 See also Benjamin M. Friedman,'Views on the Likelihood of Financial Crisis', in Martin Feldstein, ed., The Risk of Economic Crisis, Chicago: The University of Chicago Press, 1991, p. 31. He has a chart of aggregate debt similar to RLNs, 1993. Friedman however takes a different view of aggregate debt.
23
Stockman was Reagan's primary financial advisor during the early
days of his administration. Later Stockman became head of the
Office of Budget and Management.
24
Paul A. Samuelson,'A Personal View on Crises and Economic Cycles',
in Martin Feldstein, ed., The Risk of Economic Crisis.
Chicago: University of Chicago Press, 1991, p. 168-170.
25 Paul Volker,'Financial Crises and the
Macroeconomy', in Martin Feldstein, ed., The Risk of Economic
Crisis. Chicago: University of Chicago Press, 1991, p.
174-175. This statement by Volker is a view on 'moral hazzard'.
26
[html connections to sections on TCP/IP]
27
Some support for this view may be found in the closing sentences
of a 1994 economics book:
"The U.S. economic experience in the early 1990s underscores Lamontagne's [Maurice, Canadian cabinet minister] point [Schumpeter's Three-Cycle model]: the "long cycle" is a paramount and very real concern for the United States. The long cycle of the 1990s is being driven not only by demographics but also by the federal government's deficit control". [my emphasis]
Michael
P. Niemira and Philip A. Klein, Forecasting Financial and
Economic Cycles. New York: John Wiley and
Sons, Inc, 1994, p. 303.
28 George Anders,'Cybersqueeze, Comparison
Shopping Is the Web's Virtue- Unless You're a Seller: Amazon.com,
Others Face Weak Pricing and Losses Even as Their Stocks Soar', The
Wall Street Journal, July 23, 1998, p. A1, A8.
29 [html sections on Falling Rate of Profit
model on Internet- several sections]