Review of Steve Keen
Steve Keen, the author of Debunking Economics, argues that economic crises are caused by excessive private debt. He claims that the financial sector plays a key role in creating this debt. The banks, he argues, are not simple intermediaries between lender and borrow. When they lend they increase debt and thereby credit and money. He claims that austerity imposed by the state is not the solution. For him the latter intensifies the problem. For Keen when private debt is contracting cutting back on public debt through austerity simply magnifies the problem. On this basis, if anything, the state needs to expand its intervention under such conditions. Keen fails to understand that the problem is due to lack of total profitability or surplus value. It is then a problem located in the process that generates surplus value (profit). The problem is not created in the circulation process. Consequently the problem is not due to the diminution of private borrowing. The latter is merely a symptom of the problem. Hence Increased state borrowing cannot solve the problem. Indeed increased state borrowing merely sustains weak private capitalists in business. This prevents the crisis from forcing out weak capital as a means towards restoring profitability. Keen never informs us as to what, itself, is the cause of debt. This is because capital is the source of debt and thereby its regulator –the law of value. The financial system, including the banks, is thereby the product of value relations. Keen fails to view social categories historically.
Keen, instead, falsely bases the existence of the crisis free stage of the economic cycle on subjective factors: psychology and memory. He makes the false assumption that memory of the previous debt ridden crisis makes investors and others risk adverse. This is hardly a justifiable assumption as a basis for offering an understanding of the economic cycle. It makes the false assumption that subjective factors standing outside the economic cycle are the cause that leads to crises. It also, in a sense, implies that the fading of memory explains the shift away from being risk adverse leading to the burgeoning of debt. Consequently the cycle of remembering and forgetting is the basis for the debt and economic cycles. Now psychology is the ultimate basis for economic behaviour. This is no better a basis than the utilitarianism, that Keen criticises, as the basis of neo-classical economics. Keen is forced to promote a fictitious account of the existence of economic recovery because of his repudiation of the process of capitalist production as the core location of crises. Because he has rejected a materialist account of the capitalist economy based in the production process he must resort to idealistic assumptions. But these are no more than mere myths.
The problem with Keen is that he views the problem in reverse. By privileging debt as opposed to production he reverses the problem thereby taking surface appearances as the source of the problem. For him result is cause. But the problem is not excessive debt but the opposite: over-investment of capital with respect to the degree of exploitation obtaining. It is this that is responsible for excessive debt. Capital is over-produced in relation to profitability.
In contrast for Keen over-accumulation of capital is driven and facilitated by excessive accumulation of debt. Credit not production is cause. He fails to understand the opposite to be the case. The over-accumulation of debt is a product of the over-accumulation of capital. Because there is an ultimate limit to the overproduction of capital there is a limit to the scale of possible debt. As capital accelerates to such a degree that it turns into over-accumulation credit consequently contracts. It is over-accumulation that causes both excessive debt and the consequent credit contraction. Under these circumstances the ratio of debt to GDP spirals out of control. But this ratio is merely an index that over-production of capital has occurred.
The contraction of credit manifests itself on financial markets through the emergence of wild speculation. Eventually there is a credit crunch. Credit thereby becomes less available to make investments and to meet debt obligations. This is a chain like reaction.
The state steps in to compensate for private credit contraction through what is known today as quantitative easing. This prevents the contraction from sufficiently deepening to make a robust recovery a reality. Consequently the conditions for a real recovery never assert themselves. This then leads to further problems. To realise real recovery the crisis needs to deepen sufficiently to restore profitability. This is because the general rate of profit is the source of the problem –not debt. This means that many weaker capitalists are eliminated. It also entails the pauperisation of much of the working class. It is the restoration of profitability through the destruction and devaluation of capital that creates the conditions for recovery. But under certain very adverse conditions war may be a necessary condition too. This was the case in the period leading up to the Second World War. And the Great Depression, then, was obviously not caused by excessive debt accumulation. Under these conditions the fall in the general rate of profit is arrested and restored to a higher rate.
However this does not provide a permanent solution to the capitalist economic crisis. The contradictions ultimately reassert themselves. Ultimately the only solution is the elimination of the existence of social relations in the form of value relations. This is achieved through the realisation of communism by social revolution.
Keen maintains that the problem is caused by the excessively high ratio of debt to GDP. Debt here is a multiple of the GDP. This, he claims, becomes increasingly unsustainable eventually leading to a steep fall in asset prices. Under these circumstances Ponzi finance is the first to collapse. This initiates a domino effect that runs right through the financial system. For Keen modern capitalism is powered by debt. The debt cycle drives the economic cycle.
The possibility of the existence of credit relations originates in money’s function as means of payment. The possibility of credit is a product of the inner nature of the capitalist mode of production itself. The limits of the valorisation of capital determines the limits of credit and debt. Not the reverse as Keen holds. The more profitable capital is, the more credit becomes available. The quantity of capital and the scale of its valorisation dictate the degree to which credit and debt can expand. Capital constrains credit expansion. Otherwise it's expansion would proceed ad infinitum. Then growth would prove an endless process. But the more disproportionate the volume of credit in relation to industrial capital the greater the intensity of the contradictions that manifest themselves. The rate of credit expansion is forced to contract. Credit turns into its opposite. This contraction entails a fall in demand and a corresponding contraction of the economy. Excessive accumulated debt is the appearance of the crisis not its cause.
The underlying cause is the inadequate valorisation of capital. It's inadequate expansion. Credit expansion and debt is capital’s attempt to overcome its immanent limits or barriers. Because it cannot overcome its limits a crisis is generated. The crisis is the solution to the problem. But it is merely a provisional solution. Revolution is the authentic solution.
The state engages in an austerity programme of cuts in state spending. This adds to the painful nature of the crisis. It entails further hardships both for elements within the capitalist class, itself, and the working class. The state fears the deepening of the crisis for political reasons. Consequently instead of the crisis deepening itself to the degree necessary for a full recovery the state steps in to try to moderate the crisis. But this intervention fails to solve the problems of capitalism. It merely distorts the form by which the laws of capitalism manifest themselves.
The reproduction process of capital consists of the production process and the circulation process. It is a contradictory unity. The circulation process involves circulation time. It is a necessary form of the expanded reproduction of capital. In contrast to the production process it cannot produce value. It forms a barrier to the production process. Circulation is a contradiction. It both facilitates and hinders the valorisation process. Circulation time is always a barrier to the creation and realisation of value. Consequently the necessary tendency of capital is not only to shorten circulation time but to reduce it to nothing wherever possible i.e. to bring about circulation without circulation time.
Capital endeavours to overcome this barrier through credit. Valorised capital finds its realisation in capital’s circulation process.
Credit emerges from the reproduction process to overcome this barrier. In other words the capitalist secures credit to facilitate the fluent continuity of the circulation of capital. The banks are an institutional form by which this is achieved. However money capital cannot directly valorise itself. It is only capital (self expanding value) in the form of the process of production that achieves this. It is therefore imperative that money capital functions within the circulation of capital as soon as and as little as possible. In this way the scale of valorisation is maximised. But there is no guarantee that this is always achieved. This is because of the separation of sale and purchase –the source of the possibility of crises.
Capital can only create surplus value within the production process. Each phase of production must be followed by a phase of circulation which continually interrupts the continuity of production. Thus the conditions of production arising out of the nature of capital contradict each other. The contradiction is superseded and overcome in only two ways: by the division of capital and through credit.
Circulation time is a barrier to the creation and realisation of value. Consequently the necessary tendency of capital is not only to shorten circulation time but to reduce it to nothing wherever possible i.e. to bring about circulation without circulation time.
In this context the function of money is bound up with unproductive expenditure. Insofar as money is value it is a cost of circulation to capitalist production. Money in the form of capital, money capital, cannot produce value. Hence capital strives to economise on money positing it as a merely formal moment.
The entire credit system together with the over-trading and over-speculation connected with it rests on the necessity of valorisation expanding and leaping over the barrier of circulation and the sphere of exchange. Credit is an inherent form of the capitalist mode of production. However it cannot create surplus value. It is confined to the non-valorising circulation process. Credit helps to keep the acts of buying and selling further apart in time and thereby forms the basis for speculation. It arises out of the difficulty of employing capital profitably. Credit and debt exists within the framework of the drive for valorisation. Overproduction and the credit system are means by which capital seeks to break through its own barriers and to produce over and above its own limits.
As capital expands it causes credit and debt to grow. In the absence of such credit the economy would not grow. Its rate of expansion cannot be subjectively regulated. This is why the state’s relentless attempts to manage money never eliminate crisis, stagnation and even war. The drive to valorise capital cannot exist in the absence of credit and thereby debt. This is why valorisation historically creates credit and debt.
Credit is derived from the existence of money in the form of means of payment. But the production process creates money and money capital. The circulation time is shortened by credit thereby rendering the valorisation of capital increasingly independent of the circulation process. The greater this independence the greater the disconnection between the production process and the real market. The real market becomes increasingly independent from the valorisation needs of the production process itself. It is this independence that provides the condition for the emergence of Ponzi finance. Consequently there are increasingly less constraints on the degree to which production grows. Production becomes increasingly production for production’s sake. But this state of affairs cannot be indefinitely sustained. Capital cannot transcend its immanent limits.
Credit becomes increasingly speculative acquiring a Ponzi character. As Keen puts it the ratio of debt to GDP spirals out of control. This is just another way of saying that capital fails to valorise on a scale sufficient to justify the volume and rate of debt expansion. In other words the production of surplus value fails to grow at a volume or rate commensurate with the volume of debt. This means that the base (let us say the GDP) on which this massive volume of debt rests is too small to sustain it. Eventually this debt becomes increasingly chimerical and thereby, in a sense, increasingly meaningless. This is because it is ultimately disconnected from its source –the production process. The credit system collapses and production consequently contracts. Investment slows down even coming to a virtual halt. Keen by suggesting that austerity intensifies the problem does not understand the unproductive nature of much of state spending. As unproductive it is a form of expenditure that contributes nothing to the creation of surplus value and thereby growth. In fact it largely constitutes a deduction from total profit.
For Keen it is not a question of diminishing profitability being the central problem. It is debt becoming increasingly excessive and assuming a Ponzi character. Ponzi finance becomes unsustainable because of falling asset prices. But it is not falling asset prices that is the cause of the problem. It is the growing difficulties with valorisation. In this way Keen fetishises debt positing its cycle as the driver of valorisation.
Crisis is the forcible establishment of unity between elements that have become independent. Although it appears in the process of circulation the crisis is an interruption in the process of reproduction as a whole.
Keen essentially shares the same conception as neo-classical economics, Austrian economics and the various forms of Keynesian economics. None of them see the contradiction in the capitalist mode of production as the source of the problem. Instead they see the product of capitalism, credit and debt etc, as the cause of capitalism. They see circulation as the problem. This is why they believe that it can be seriously modified or changed by the state in one way or another such as budget deficits, quantitative easing etc. But ultimately the laws of capitalism cannot be managed. Ultimately they must manifest themselves even if in a distorted way. Capitalism, not debt, is the problem. It must be abolished and replaced by communism.