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Keynes, MARXISM, REAGAN, OBAMA, AND AMERICA'S ECONOMY
John Maynard Keynes
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John Maynard Keynes Western Economists
20th-Century Economists
(Keynesian economics)
John Maynard Keynes (right) and Harry Dexter White at the Bretton Woods Conference
keynesian economics
Full name John Maynard Keynes
Birth June 5, 1883(1883-06-05) Cambridge, England, UK
Death April 21, 1946 (aged 62) Tilton, East Sussex, England, UK
School/tradition Keynesian
Main interests economics, political economy, Probability
Notable ideas Spending multiplier
Influenced by[show]
Knut Wicksell, Arthur C. Pigou, Alfred Marshall, Adam Smith, David Ricardo, Dennis Robertson, Karl Marx, Thomas Malthus, Michal Kalecki, J.S. Mill
Influenced[show]
T. K. Whitaker, Michal Kalecki Simon Kuznets, Paul Samuelson, John Hicks, G.L.S. Shackle, Silvio Gesell, William Vickrey, Galbraith
John Maynard Keynes, 1st Baron Keynes (pronounced /'ke?nz/ "cains") (June 5, 1883 – April 21, 1946) was a British economist whose ideas, called Keynesian economics, have had a major impact on modern economic and political theory as well as on many governments' fiscal policies. He advocated interventionist government policy, by which the government would use fiscal and monetary measures to mitigate the adverse effects of economic recessions, depressions and booms. He is one of the fathers of modern theoretical macroeconomics and considered among the most influential economists of the 20th century.
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In economics Keynesianism (pronounced /'ke?nzi?n/, also Keynesian economics and Keynesian Theory), is based on the ideas of twentieth-century British economist John Maynard Keynes. According to Keynesian economics the state should stimulate economic growth and improve stability in the private sector — through, for example, adjusting interest rates and taxation and funding public projects.
The theories forming the basis of Keynesian economics were first presented in The General Theory of Employment, Interest and Money, published in 1936.
In Keynes's theory, some micro-level actions of individuals and firms can lead to aggregate macroeconomic outcomes in which the economy operates below its potential output and growth. Many classical economists had believed in Say's Law, that supply creates its own demand, so that a "general glut" would therefore be impossible. Keynes contended that aggregate demand for goods might be insufficient during economic downturns, leading to unnecessarily high unemployment and losses of potential output. Keynes argued that government policies could be used to increase aggregate demand, thus increasing economic activity and reducing high unemployment and deflation.
Keynes argued that the solution to depression was to stimulate the economy ("inducement to invest") through some combination of two approaches :
* a reduction in interest rates.
* Government investment in infrastructure - the injection of income results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment.[1]
A central conclusion of Keynesian economics is that in some situations, no strong automatic mechanism moves output and employment towards full employment levels. This conclusion conflicts with economic approaches that assume a general tendency towards an equilibrium. In the 'neoclassical synthesis', which combines Keynesian macro concepts with a micro foundation, the conditions of General equilibrium allow for price adjustment to achieve this goal.
The New classical macroeconomics movement, which began in the late 1960s and early 1970s, criticized Keynesian theories, while New Keynesian economics have sought to base Keynes's idea on more rigorous theoretical foundations.
More broadly, Keynes saw his as a general theory, in which utilization of resources could be high or low, whereas previous economics focused on the particular case of full utilization.
Some interpretations of Keynes have emphasized his stress on the international coordination of Keynesian policies, the need for international economic institutions, and the ways in which economic forces could lead to war or could promote peace.
Keynes sought to distinguish his theories from "classical economics," by which he meant the economic theories of David Ricardo and his followers, including John Stuart Mill, Alfred Marshall, F.Y. Edgeworth, and A. Cecil Pigou. A central tenet of the classical view, known as Say's law, states that “supply creates its own demand.” Say's Law can be interpreted in two ways. First, the claim that the total value of output is equal to the sum of income earned in production is a result of a national income accounting identity, and is therefore indisputable. A second and stronger claim, however, that the "costs of output are always covered in the aggregate by the sale-proceeds resulting from demand" depends on how consumption and saving are linked to production and investment. In particular, Keynes argued that the second, strong form of Say's Law only holds if increases in individual savings exactly match an increase in aggregate investment. (cf. General Theory, Ch.1,2)
Keynes sought to develop a theory that would explain determinants of saving, consumption, investment and production. In that theory, the interaction of aggregate demand and aggregate supply determines the level of output and employment in the economy.
Because of what he considered the failure of the “Classical Theory” in the 1930s, Keynes firmly objects to its main theory--adjustments in prices would automatically make demand tend to the full employment level.
Neo-classical theory supports that the two main costs that shift demand and supply are labor and money. Through the distribution of the monetary policy, demand and supply can be adjusted. If there were more labor than demand for it, wages would fall until hiring began again. If there was too much saving, and not enough consumption, then interest rates would fall until people either cut their savings rate or started borrowing.
[edit] Wages and spending
During the Great Depression, the classical theory defined economic collapse as simply a lost incentive to produce. Mass unemployment was caused only by high and rigid real wages.
To Keynes, the determination of wages is more complicated. First, he argued that it is not real but nominal wages that are set in negotiations between employers and workers, as opposed to a barter relationship. First, nominal wage cuts would be difficult to put into effect because of laws and wage contracts. Even classical economists admitted that these exist; unlike Keynes, they advocated abolishing minimum wages, unions, and long-term contracts, increasing labor-market flexibility. However, to Keynes, people will resist nominal wage reductions, even without unions, until they see other wages falling and a general fall of prices.
He also argued that to boost employment, real wages had to go down: nominal wages would have to fall more than prices. However, doing so would reduce consumer demand, so that the aggregate demand for goods would drop. This would in turn reduce business sales revenues and expected profits. Investment in new plants and equipment—perhaps already discouraged by previous excesses—would then become more risky, less likely. Instead of raising business expectations, wage cuts could make matters much worse.
Further, if wages and prices were falling, people would start to expect them to fall. This could make the economy spiral downward as those who had money would simply wait as falling prices made it more valuable—rather than spending. As Irving Fisher argued in 1933, in his Debt-Deflation Theory of Great Depressions, deflation (falling prices) can make a depression deeper as falling prices and wages made pre-existing nominal debts more valuable in real terms.
[edit] Excessive saving
Classics on Saving and Investment.
To Keynes, excessive saving, i.e. saving beyond planned investment, was a serious problem, encouraging recession or even depression. Excessive saving results if investment falls, perhaps due to falling consumer demand, over-investment in earlier years, or pessimistic business expectations, and if saving does not immediately fall in step, the economy would decline.
The classical economists argued that interest rates would fall due to the excess supply of "loanable funds". The first diagram, adapted from the only graph in The General Theory, shows this process. (For simplicity, other sources of the demand for or supply of funds are ignored here.) Assume that fixed investment in capital goods falls from "old I" to "new I" (step a). Second (step b), the resulting excess of saving causes interest-rate cuts, abolishing the excess supply: so again we have saving (S) equal to investment. The interest-rate fall prevents that of production and employment.
Keynes had a complex argument against this laissez-faire response. The graph below summarizes his argument, assuming again that fixed investment falls (step A). First, saving does not fall much as interest rates fall, since the income and substitution effects of falling rates go in conflicting directions. Second, since planned fixed investment in plant and equipment is mostly based on long-term expectations of future profitability, that spending does not rise much as interest rates fall. So S and I are drawn as steep (inelastic) in the graph. Given the inelasticity of both demand and supply, a large interest-rate fall is needed to close the saving/investment gap. As drawn, this requires a negative interest rate at equilibrium (where the new I line would intersect the old S line). However, this negative interest rate is not necessary to Keynes's argument.
Keynes on Saving and Investment.
Third, Keynes argued that saving and investment are not the main determinants of interest rates, especially in the short run. Instead, the supply of and the demand for the stock of money determine interest rates in the short run. (This is not drawn in the graph.) Neither changes quickly in response to excessive saving to allow fast interest-rate adjustment.
Finally, because of fear of capital losses on assets besides money, Keynes suggested that there may be a "liquidity trap" setting a floor under which interest rates cannot fall. (In this trap, bond-holders, fearing rises in interest rates (because rates are so low), fear capital losses on their bonds and thus try to sell them to attain money (liquidity).) Even economists who reject this liquidity trap now realize that nominal interest rates cannot fall below zero (or slightly higher). In the diagram, the equilibrium suggested by the new I line and the old S line cannot be reached, so that excess saving persists. Some (such as Paul Krugman) see this latter kind of liquidity trap as prevailing in Japan in the 1990s.
Even if this "trap" does not exist, there is a fourth element to Keynes's critique (perhaps the most important part). Saving involves not spending all of one's income. It thus means insufficient demand for business output, unless it is balanced by other sources of demand, such as fixed investment. Thus, excessive saving corresponds to an unwanted accumulation of inventories, or what classical economists called a general glut [2]. This pile-up of unsold goods and materials encourages businesses to decrease both production and employment. This in turn lowers people's incomes—and saving, causing a leftward shift in the S line in the diagram (step B). For Keynes, the fall in income did most of the job by ending excessive saving and allowing the loanable funds market to attain equilibrium. Instead of interest-rate adjustment solving the problem, a recession does so. Thus in the diagram, the interest-rate change is small.
Whereas the classical economists assumed that the level of output and income was constant and given at any one time (except for short-lived deviations), Keynes saw this as the key variable that adjusted to equate saving and investment.
Finally, a recession undermines the business incentive to engage in fixed investment. With falling incomes and demand for products, the desired demand for factories and equipment (not to mention housing) will fall. This accelerator effect would shift the I line to the left again, a change not shown in the diagram above. This recreates the problem of excessive saving and encourages the recession to continue.
In sum, to Keynes there is interaction between excess supplies in different markets, as unemployment in labor markets encourages excessive saving—and vice-versa. Rather than prices adjusting to attain equilibrium, the main story is one of quantity adjustment allowing recessions and possible attainment of underemployment equilibrium.
[edit] Active fiscal policy
As noted,[clarification needed] the classicals wanted to balance the government budget. To Keynes, this would exacerbate the underlying problem: following either policy[clarification needed] would raise saving (broadly defined) and thus lower the demand for both products and labor. For example, Keynesians see Herbert Hoover's June 1932 tax increase as making the Depression worse.[citation needed][clarification needed]
Keynes's ideas influenced Franklin D. Roosevelt's view that insufficient buying-power caused the Depression. During his presidency, Roosevelt adopted some aspects of Keynesian economics, especially after 1937, when, in the depths of the Depression, the United States suffered from recession yet again following fiscal contraction. But to many the true success of Keynesian policy can be seen at the onset of World War II, which provided a kick to the world economy, removed uncertainty, and forced the rebuilding of destroyed capital. Keynesian ideas became almost official in social-democratic Europe after the war and in the U.S. in the 1960s.
Keynes's theory suggested that active government policy could be effective in managing the economy. Rather than seeing unbalanced government budgets as wrong, Keynes advocated what has been called countercyclical fiscal policies, that is policies which acted against the tide of the business cycle: deficit spending when a nation's economy suffers from recession or when recovery is long-delayed and unemployment is persistently high—and the suppression of inflation in boom times by either increasing taxes or cutting back on government outlays. He argued that governments should solve problems in the short run rather than waiting for market forces to do it in the long run, because "in the long run, we are all dead." [3]
This contrasted with the classical and neoclassical economic analysis of fiscal policy. Fiscal stimulus (deficit spending) could actuate production. But to these schools, there was no reason to believe that this stimulation would outrun the side-effects that "crowd out" private investment: first, it would increase the demand for labor and raise wages, hurting profitability; Second, a government deficit increases the stock of government bonds, reducing their market price and encouraging high interest rates, making it more expensive for business to finance fixed investment. Thus, efforts to stimulate the economy would be self-defeating.
The Keynesian response is that such fiscal policy is only appropriate when unemployment is persistently high, above what is now termed the Non-Accelerating Inflation Rate of Unemployment, or "NAIRU". In that case, crowding out is minimal. Further, private investment can be "crowded in": fiscal stimulus raises the market for business output, raising cash flow and profitability, spurring business optimism. To Keynes, this accelerator effect meant that government and business could be complements rather than substitutes in this situation. Second, as the stimulus occurs, gross domestic product rises, raising the amount of saving, helping to finance the increase in fixed investment. Finally, government outlays need not always be wasteful: government investment in public goods that will not be provided by profit-seekers will encourage the private sector's growth. That is, government spending on such things as basic research, public health, education, and infrastructure could help the long-term growth of potential output.
Invoking public choice theory, classical and neoclassical economists doubt that the government will ever be this beneficial and suggest that its policies will typically be dominated by special interest groups, including the government bureaucracy. Thus, they use their political theory to reject Keynes' economic theory.
A Keynesian economist might point out that classical and neoclassical theory does not explain why firms acting as "special interests" to influence government policy are assumed to produce a negative outcome, while those same firms acting with the same motivations outside of the government are supposed to produce positive outcomes. Libertarians counter that because both parties consent, free trade increases net happiness, but government imposes its will by force, decreasing happiness. Therefore firms that manipulate the government do net harm, while firms that respond to the free market do net good.
In Keynes' theory, there must be significant slack in the labor market before fiscal expansion is justified. Both conservative and some neoliberal economists question this assumption, unless labor unions or the government "meddle" in the free market, creating persistent supply-side or classical unemployment.[clarification needed] Their solution is to increase labor-market flexibility, e.g., by cutting wages, busting unions, and deregulating business.
Deficit spending is not Keynesianism. Governments had long used deficits to finance wars. Keynesianism recommends counter-cyclical policies to smooth out fluctuations in the business cycle. An example of a counter-cyclical policy is raising taxes to cool the economy and to prevent inflation when there is abundant demand-side growth, and engaging in deficit spending on labor-intensive infrastructure projects to stimulate employment and stabilize wages during economic downturns. Classical economics, on the other hand, argues that one should cut taxes when there are budget surpluses, and cut spending—or, less likely, increase taxes—during economic downturns. Keynesian economists believe that adding to profits and incomes during boom cycles through tax cuts, and removing income and profits from the economy through cuts in spending and/or increased taxes during downturns, tends to exacerbate the negative effects of the business cycle. This effect is especially pronounced when the government controls a large fraction of the economy, and is therefore one reason fiscal conservatives advocate a much smaller government.
[edit] "Multiplier effect" and interest rates
Main article: Multiplier (economics)
Two aspects of Keynes' model had implications for policy:
First, there is the "Keynesian multiplier", first developed by Richard F. Kahn in 1931. Exogenous increases in spending, such as an increase in government outlays, increases total spending by a multiple of that increase. A government could stimulate a great deal of new production with a modest outlay if:
1. The people who receive this money then spend most on consumption goods and save the rest.
2. This extra spending allows businesses to hire more people and pay them, which in turn allows a further increase consumer spending.
This process continues. At each step, the increase in spending is smaller than in the previous step, so that the multiplier process tapers off and allows the attainment of an equilibrium. This story is modified and moderated if we move beyond a "closed economy" and bring in the role of taxation: the rise in imports and tax payments at each step reduces the amount of induced consumer spending and the size of the multiplier effect.
Second, Keynes re-analyzed the effect of the interest rate on investment. In the classical model, the supply of funds (saving) determined the amount of fixed business investment. That is, since all savings was placed in banks, and all business investors in need of borrowed funds went to banks, the amount of savings determined the amount that was available to invest. To Keynes, the amount of investment was determined independently by long-term profit expectations and, to a lesser extent, the interest rate. The latter opens the possibility of regulating the economy through money supply changes, via monetary policy. Under conditions such as the Great Depression, Keynes argued that this approach would be relatively ineffective compared to fiscal policy. But during more "normal" times, monetary expansion can stimulate the economy, mostly by encouraging construction of new housing.
[edit] Postwar Keynesianism
After Keynes, Keynesian analysis was combined with neoclassical economics to produce what is generally termed the "neoclassical synthesis" which dominates mainstream macroeconomic thought. Though it was widely held that there was no strong automatic tendency to full employment, many believed that if government policy were used to ensure it, the economy would behave as classical or neoclassical theory predicted.
In the post-WWII years, Keynes's policy ideas were widely accepted. For the first time, governments prepared good quality economic statistics on an ongoing basis and had a theory that told them what to do. In this era of new liberalism and social democracy, most western capitalist countries enjoyed low, stable unemployment and modest inflation.
It was with John Hicks that Keynesian economics produced a clear model which policy-makers could use to attempt to understand and control economic activity. This model, the IS-LM model is nearly as influential as Keynes' original analysis in determining actual policy and economics education. It relates aggregate demand and employment to three exogenous quantities, i.e., the amount of money in circulation, the government budget, and the state of business expectations. This model was very popular with economists after World War II because it could be understood in terms of general equilibrium theory. This encouraged a much more static vision of macroeconomics than that described above.[citation needed]
The second main part of a Keynesian policy-maker's theoretical apparatus was the Phillips curve. This curve, which was more of an empirical observation than a theory, indicated that increased employment, and decreased unemployment, implied increased inflation. Keynes had only predicted that falling unemployment would cause a higher price, not a higher inflation rate. Thus, the economist could use the IS-LM model to predict, for example, that an increase in the money supply would raise output and employment—and then use the Phillips curve to predict an increase in inflation.[citation needed]
Through the 1950s, moderate degrees of government demand leading industrial development, and use of fiscal and monetary counter-cyclical policies continued, and reached a peak in the "go go" 1960s, where it seemed to many Keynesians that prosperity was now permanent. However, with the oil shock of 1973, and the economic problems of the 1970s, modern liberal economics began to fall out of favor. During this time, many economies experienced high and rising unemployment, coupled with high and rising inflation, contradicting the Phillips curve's prediction. This stagflation meant that the simultaneous application of expansionary (anti-recession) and contractionary (anti-inflation) policies appeared to be necessary, a clear impossibility. This dilemma led to the end of the Keynesian near-consensus of the 1960s, and the rise throughout the 1970s of ideas based upon more classical analysis, including monetarism, supply-side economics[citation needed] and new classical economics. At the same time Keynesians began during the period to reorganize their thinking (some becoming associated with New Keynesian economics); one strategy, utilized also as a critique of the notably high unemployment and potentially disappointing GNP growth rates associated with the latter two theories by the mid-1980s, was to emphasize low unemployment and maximal economic growth at the cost of somewhat higher inflation (its consequences kept in check by indexing and other methods, and its overall rate kept lower and steadier by such potential policies as Martin Weitzman's share economy)[4].
[edit] Criticism
The impact of Keynesianism can be seen by the wave of economists who have based their analysis on a criticism of Keynesianism.
[edit] Monetarist criticism
One school began in the late 1940s with Milton Friedman. Instead of rejecting macro-measurements and macro-models of the economy, the monetarist school embraced the techniques of treating the entire economy as having a supply and demand equilibrium. However, they regarded inflation as solely being due to the variations in the money supply, rather than as being a consequence of aggregate demand. They argued that the "crowding out" effects discussed above would hobble or deprive fiscal policy of its positive effect. Instead, the focus should be on monetary policy, which was largely ignored by early Keynesians.
Monetarism had an ideological as well as a practical appeal: monetary policy does not, at least on the surface, imply as much government intervention in the economy as other measures. The monetarist critique pushed Keynesians toward a more balanced view of monetary policy, and inspired a wave of revisions to Keynesian theory.
[edit] The Lucas critique
Another influential school of thought was based on the Lucas critique of Keynesian economics. This called for greater consistency with microeconomic theory and rationality, and particularly emphasized the idea of rational expectations. Lucas and others argued that Keynesian economics required remarkably foolish and short-sighted behavior from people, which totally contradicted the economic understanding of their behavior at a micro level. New classical economics introduced a set of macroeconomic theories which were based on optimising microeconomic behavior, for instance real business cycles.
[edit] The Austrian School
Keynesian ideas were criticized by Austrian economist and philosopher Friedrich Hayek. Hayek's most famous work The Road to Serfdom, was written in 1944. Hayek taught at the London School of Economics from 1931 to 1950. Hayek criticized Keynesian economic policies for what he called their fundamentally collectivist approach, arguing that such theories, no matter their presumptively utilitarian intentions, require centralized planning, which Hayek argued leads to totalitarian abuses. Keynes seems to have noted this concern, since, in the foreword to the German version of the 'The General Theory of Employment Interest and Money', he declared that "the theory of aggregated production, which is the point of ['The General Theory of Employment Interest and Money'], nevertheless can be much easier adapted to the conditions of a totalitarian state [eines totalen Staates] than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire." [5]
Another criticism leveled by Hayek against Keynes was that the study of the economy by the relations between aggregates is fallacious, and that recessions are caused by micro-economic factors. Hayek claimed that what starts as temporary governmental fixes usually become permanent and expanding government programs, which stifle the private sector and civil society. Keynes himself described the critique as "deeply moving", which was quoted on the cover of the Road to Serfdom.
Henry Hazlitt criticized, paragraph by paragraph, Keyne's The General Theory of Employment, Interest, and Money in The Failure of the 'New Economics': An Analysis of the Keynesian Fallacies.
Anarcho-capitalist Murray Rothbard was also fond of pointing out perceived flaws in Keynesian economics. Rothbard accuses that Keynesianism has "its roots deep in medieval and mercantilist thought."[6]
[edit] Methodological Disagreement and Different Results that Emerge
Beginning in the late 1950s New Classical Macroeconomists began to disagree with the methodology employed by Keynes and his successors. Keynesians emphasized the dependence of consumption on disposable income and, also, of investment on current profits and current cash flow. In addition Keynes posited a Phillips curve that tied nominal wage inflation to unemployment rate. To buttress these theories Keynesians typically traced the logical foundations of their model (using introspection) and buttressed their assumptions with statistical evidence.[7] New Classical theorists demanded that Macroeconomic be grounded on the same foundations as Microeconomic theory, profit-maximizing firms and utility maximizing consumers.[7]
The result of this shift in methodology produced several important divergences from Keynesian Macro economics:[7]
1. Independence of Consumption and current Income (life-cycle permanent income hypothesis)
2. Irrelevance of Current Profits to Investment (Modigliani-Miller theorem)
3. Long run independence of inflation and unemployment (natural rate of unemployment)
4. The inability of monetary policy to stabilize output (rational expectations)
5. Irrelevance of Taxes and Budget Deficits to Consumption (Ricardian Equivalence)
[edit] Keynesian responses to the critics
The heart of the 'new Keynesian' view rests on microeconomic models that indicate that nominal wages and prices are "sticky," i.e., do not change easily or quickly with changes in supply and demand, so that quantity adjustment prevails. According to economist Paul Krugman, "while I regard the evidence for such stickiness as overwhelming, the assumption of at least temporarily rigid nominal prices is one of those things that works beautifully in practice but very badly in theory."[8] This integration is further spurred by the work of other economists which questions rational decision-making in a perfect information environment as a necessity for micro-economic theory. Imperfect decision making such as that investigated by Joseph Stiglitz underlines the importance of management of risk in the economy.
Over time, many macroeconomists have returned to the IS-LM model and the Phillips Curve as a first approximation of how an economy works. New versions of the Phillips Curve, such as the "Triangle Model", allow for stagflation, since the curve can shift due to supply shocks or changes in built-in inflation. In the 1990s, the original ideas of "full employment" had been modified by the NAIRU doctrine, sometimes called the "natural rate of unemployment." NAIRU advocates suggest restraint in combating unemployment, in case accelerating inflation should result. However, it is unclear exactly what the value of the NAIRU should be—or whether it even exists.
For the Keynesian revival of 2008, see 2008-2009 Keynesian resurgence.
[edit] See also
* Keynesian formula
* Microfoundations
* Military Keynesianism
* New Keynesian economics
* Post-Keynesian economics
* State Capitalism
* Underconsumption
Retrieved from "http://en.wikipedia.org/wiki/Keynesian_economics"
Categories: Keynesian economics | Economic ideologies
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these are all WIKIPEDIA
The Keynesian formula was developed by the British economist John Maynard Keynes. Keynes was an influential economist who was greatly influenced by the events of the Great Depression in the 1930s. He was a great influence upon government economic policy after the Second World War and was involved in the establishment of The World Bank and the International Monetary Fund at the Bretton Woods Conference in 1944. Keynes explained that the level of output and employment in the economy was determined by aggregate demand or effective demand. In a reversal of Say's Law, Keynes in essence argued that "man creates his own supply," up to the limit set by full employment. Monetarists have always been critical of Keynes' work.
Contents Composition of the Keynesian Formula
The Keynesian Formula consists of the following make-up:
Consumption + Investment + Government Spending + Exports - Imports = Gross Domestic Product
ie C+I+G+X-M= GDP or Y
[edit] Consumption
In Keynesian economics aggregate consumption is total personal consumption expenditure, i.e., the purchase of currently produced goods and services out of income, out of savings (net worth), or from borrowed funds. It refers to that part of disposable income (income after taxes paid and payments received) that does not go to saving.
[edit] Investment
Investment is a term with several closely-related meanings in business management,finance and economics, related to saving or deferring consumption. An asset is usually purchased, or equivalently a deposit is made in a bank, in hopes of getting a future return or interest from it. Literally, the word means the "action of putting something in to somewhere else" (perhaps originally related to a person's garment or 'vestment').
[edit] Government Spending
Government spending or government expenditure consists of government purchases, which can be financed by seigniorage (the creation of money for government funding, at a heavy price of high inflation and other possibly devastating consequences), taxes, or government borrowing. It is considered to be one of the major components of gross domestic product.
John Maynard Keynes was one of the first economists to advocate government deficit spending as part of a fiscal policy to cure an economic contraction. In Keynesian economics, increased government spending is thought to raise aggregate demand and increase consumption.
[edit] Exports
In economics, an export is any good or commodity, transported from one country to another country in a legitimate fashion, typically for use in trade. Export is an important part of international trade. Its counterpart is import.
Export goods or services are provided to foreign consumers by domestic producers. Export of commercial quantities of goods normally requires involvement of the Customs authorities in both the country of export and the country of import.
[edit] Imports
In economics, an import is any good or commodity, brought into one country from another country in a legitimate fashion, typically for use in trade. Import goods or services are provided to domestic consumers by foreign producers. Import of commercial quantities of goods normally requires involvement of the Customs authorities in both the country of import and the country of export.
[edit] GDP
A common measurement of national income.
[edit] Economic Consequences
If the rate of consumption, investment, government spending and/or exports increases, there will be an overall increase in gross domestic product. This will have a resulting effect on aggregate demand, causing it to rise and, thus resulting in the aggregate demand curve shifting outwards. Alternatively, if there was a decrease in the mentioned factors, the result will be a fall in aggregate demand, thus causing and inward shift in the aggregate demand curve.
The Keynesian Formula can be used to track changes in aggregate demand, gross domestic product and what consequence that will have on the price level (inflation). This formula is a tool for analysing macroeconomic performance.
Retrieved from "http://en.wikipedia.org/wiki/Keynesian_formula"
Category: Keynesian economics
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SUPPLY-SIDE, REAGANOMICS
Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created using incentives for people to produce (supply) goods and services, such as adjusting income tax and capital gains tax rates, and by allow greater flexibility by reducing regulation. The term supply-side economics was coined by journalist Jude Wanniski in 1975, and popularized the ideas of economists Robert Mundell and Arthur Laffer. Today, supply-side economics is often conflated with the politically rhetorical term "trickle-down economics."[1]
The typical policy recommendation of supply-side economics is to achieve the proper level of marginal tax rates, which, by virtue of the high rate of taxes in general, equates with cutting of taxes.[2] Maximum benefits are achieved by optimizing the marginal tax rates of those with high incomes and capital investments who are deemed most likely to increase supply and thus spur growth.[3] Keynesian macroeconomics, by contrast, contends that tax cuts should be used to increase demand, not supply, and thus should be targeted at cash-strapped, lower-income earners, who are more likely to spend additional income.[4][5]
Many early proponents argued that the size of the economic growth would be significant enough that the increased government revenue from a faster growing economy would be sufficient to compensate completely for the short-term costs of a tax cut, and that tax cuts could, in fact, cause overall revenue to increase.[6] Some hold this was borne out during the 1980s when, advocates of supply-side economics (so-called “supply-siders") claim, tax cuts ultimately led to an overall increase in governmental revenue due to stronger economic growth. Other economists, however, dispute this assertion.[7][8] Some contemporary economists do not consider supply-side economics a tenable economic theory, with Alan Blinder calling it an "ill-fated" and perhaps "silly" school on the pages of a 2006 textbook. [4] Greg Mankiw, former chairman of President George W. Bush's Council of Economic Advisors, offered similarly sharp criticism of the school in the early editions of his introductory economics textbook.[9] In a 1992 article for the Harvard International Review, James Tobin wrote, "[The] idea that tax cuts would actually increase revenues turned out to deserve the ridicule…"[10] While few modern economists claim that tax cuts will completely pay for themselves, some empirical and theoretical research suggests that tax cuts do help to pay for themselves through increased economic growth, though the end result, even conservative economists contend, will be a significant reduction in revenues.[3] The Reagan administration was the first to implement supply-side policies and call them that. Some maintain that they failed to deliver the promised benefits.[11]
“ The extreme promises of supply-side economics did not materialize. President Reagan argued that because of the effect depicted in the Laffer curve, the government could maintain expenditures, cut tax rates, and balance the budget. This was not the case. Government revenues fell sharply from levels that would have been realized without the tax cuts.
- Karl Case & Ray Fair, Principles of Economics (2007), p. 695.[11] ”
Supply side proponents Trabandt and Uhlig argue that "static scoring overestimates the revenue loss for labor and capital tax cuts",[12] and that instead "dynamic scoring" is a better predictor for the effects of tax cuts.
Historical origins
Supply-side economics developed during the 1970s in response to the Keynesian dominance of economic policy, and in particular the failure of demand management to stabilize Western economies during the stagflation of the 1970s, in the wake of the oil crisis in 1973.[13] It drew on a range of non-Keynesian economic thought, particularly Austrian school thinking on entrepreneurship and new classical macroeconomics. The intellectual roots of supply-side economics have also been traced back to various early economic thinkers such as Ibn Khaldun, Jonathan Swift, David Hume, Adam Smith and Alexander Hamilton.[14]
As in classical economics, supply-side economics proposed that production or supply is the key to economic prosperity and that consumption or demand is merely a secondary consequence. Early on this idea had been summarized in Say's Law of economics, which states: "A product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value." John Maynard Keynes, the founder of Keynesianism, summarized Say's Law as "supply creates its own demand." He turned Say's Law on its head in the 1930s by declaring that demand creates its own supply. [15] However, Say's Law does not state that production creates a demand for the product itself, but rather a demand for "other products to the full extent of its own value." A better formulation of the law is that the supply of one good constitutes demand for one or more other goods.[16]
In 1978 Jude Wanniski published The Way the World Works in which he laid out the central thesis of supply-side economics and detailed the failure of high tax-rate progressive income tax systems and U.S. monetary policy under Nixon in the 1970s. Wanniski advocated lower tax rates and a return to some kind of gold standard, similar to the 1944-1971 Bretton Woods System that Nixon abandoned.
In 1983, economist Victor Canto, a disciple of Arthur Laffer, published The Foundations of Supply-Side Economics. This theory focuses on the effects of marginal tax rates on the incentive to work and save, which affect the growth of the "supply side" or what Keynesians call potential output. While the latter focus on changes in the rate of supply-side growth in the long run, the "new" supply-siders often promised short-term results.
The supply-siders were influenced strongly by the idea of the Laffer curve, which states that tax rates and tax revenues were distinct -- that tax rates too high or too low will not maximize tax revenues. Supply-siders felt that in a high tax rate environment, lowering taxes to the right level can raise revenue by causing faster economic growth. They pointed to the tax cuts of the Kennedy administration and the high rates of the Hoover and Nixon administrations in justification.[citation needed]
This led the supply-siders to advocate large reductions in marginal income and capital gains tax rates to encourage allocation of assets to investment, which would produce more supply. Jude Wanniski and many others advocate a zero capital gains rate.[17][not in citation given] The increased aggregate supply would result in increased aggregate demand, hence the term "Supply-Side Economics".
Furthermore, in response to inflation, supply-siders called for indexed marginal income tax rates, as monetary inflation had pushed wage earners into higher marginal income tax brackets that remained static; that is, as wages increased to maintain purchasing power with prices, income tax brackets were not adjusted accordingly and thus wage earners were pushed into higher income tax brackets than tax policy had intended. [13]
Supply-side economics has been criticized as essentially politically conservative. Supply-side advocates claim that they are not following an ideology, but are reinstating classical economics. Yet, supply-siders such as Jude Wanniski have argued for lower tax rates to increase tax revenues, and that redistribution of income through taxation was essential to the health of the polity -- a fact which is anathema to traditional conservatives.
Some economists see similarities between supply-side proposals and Keynesian economics. If the result of changes to the tax structure is a fiscal deficit then the 'supply-side' policy is effectively stimulating demand through the Keynesian multiplier effect. Supply-side proponents would point out, in response, that the level of taxation and spending is important for economic incentives, not just the size of the deficit.
The Reagan administration justified such changes in socioeconomic terms with the argument that "a rising tide lifts all boats".
[edit] Marx and Smith
Both supply-siders and their opponents have been keen to claim the mantles of thinkers as diverse as Karl Marx and Adam Smith. Jude Wanniski has claimed both as supply-side thinkers due to their advocacy of a gold monetary standard and more specifically their focus on the agents of production in an economy. Barton Biggs, chief investment strategist of Morgan Stanley, described Wanniski's book about supply-side economics, The Way the World Works, as the "most important" economic book published since Marx's writings. [18]
[edit] Supply-side vs. Monetarism
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Supply-side supporters disagreed with Chicago school monetarist Milton Friedman by arguing that cutting tax rates alone would be sufficient to grow GDP, lift tax revenues and balance the budget.
Friedman, however, retained a more conventional monetarist view, believing that while tax cuts were on the whole desirable, money supply was the crucial variable.
[edit] Fiscal policy theory
Supply-side economics holds that increased taxation steadily reduces economic trade between economic participants within a nation and that it discourages investment. Taxes act as a type of trade barrier or tariff that causes economic participants to revert to less efficient means of satisfying their needs. As such, higher taxation lead to lower levels of specialization and lower economic efficiency. The idea is said to be illustrated by the Laffer curve. (Case & Fair, 1999: 780, 781).
Crucial to the operation of supply-side theory is the expansion of free trade and free movement of capital. It is argued that free capital movement, in addition to the classical reasoning of comparative advantage, frequently allows an economic expansion. Lowering tax barriers to trade provides to the domestic economy all the advantages that the international economy gets from lower tariff barriers.
Supply-side economists have less to say on the effects of deficits, and sometimes cite Robert Barro’s work that states that rational economic actors will buy bonds in sufficient quantities to reduce long term interest rates.[2] Critics argue that standard exchange rate theory would predict, instead, a devaluation of the currency of the nation running the high budget deficit, and eventual "crowding out" of private investment.
According to Mundell, "Fiscal discipline is a learned behavior." To put it another way, eventually the unfavourable effects of running persistent budget deficits will force governments to reduce spending in line with their levels of revenue. This view is also promoted by Victor Canto.
The central issue at stake is the point of diminishing returns on liquidity in the investment sector: Is there a point where additional money is "pushing on a string"? To the supply-side economist, reallocation away from consumption to private investment, and most especially from public investment to private investment, will always yield superior economic results. In standard monetarist and Keynesian theory, however, there will be a point where increases in asset prices will produce no new supply, that is where investment demand will outrun potential investment supply, and produce instead, assets inflation, or in common terms a bubble. The existence of this point, and where it is should it exist, is the essential question of the efficacy of supply-side economics.
[edit] Monetary policy theory
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Some supply-siders advocate that monetary policy should be based on a price rule. The aim of monetary policy should be to target a specific value of money irrespective of the quantity of money that must be created or withdrawn by the central bank to achieve this target. This contrasts with monetarism's focus on the quantity of money, and Keynesian theory's emphasis on real aggregate demand. The important difference is that to a monetarist the quantity of money, specifically represented by the money supply is the crucial determining variable for the relationship between the supply and demand for money, while to a Keynesian adequate demand to support the available money supply is important. Keynes famously remarked that "money doesn't matter".
This is an area where supply-side theory has been particularly influential. Under macroeconomic theory, the general level of price was based on the strict increase in price of a basket of goods. Under supply-side theory, the rate of inflation should be based on the substitutions that individuals make in the market place, and should take into account the improved quality of goods. In the late 1980s and through the 1990s, under Presidents of both American political parties, shifts were made in the calculation of the broadly followed measure of inflation the "Consumer Price Index for Urban Consumers", or CPI-W, which reflected supply-side ideas on substitution. The argument for factoring in goods quality was not accepted, which has led supply-side economists to claim that the real CPI is actually between 0.5% and 1% lower than the stated rate.
This area represents one of the points of contention between conservative economic theorists who argue for a quantity of money theory of inflation, including Austrian economics, many strict gold standard economists and traditional monetarists, and supply-side theorists. According to the increases in money supply during the 1990s, the real rate of inflation must be higher than is currently stated. These economists argue that the cost of housing is understated in the CPI-W, and that the inflation rate should be between 0.5% and 1% higher. It is for this reason that many central bankers, investment analysts and economists follow the GDP deflator which measures the total output of the society and the prices paid for all goods, not merely consumer goods.
Some supply-siders view gold as the best unit of account with which to measure the price of fiat money, which is defined as a money supply not directly limited by specie or hard assets. Hence the purest supply-siders are in general advocates of a gold standard. However the reverse is not true; many gold standard advocates are harsh critics of supply-side economics.
Supply-side economists assert that the value of money is purely dictated by the supply and demand for money. In fiat money system the government has a legislated monopoly on the supply of base money. Hence it has some control over the value of money. Any decline in the value of money (or appreciation) is then viewed by some as the result of errant central bank policy.
[edit] U.S. monetary and fiscal experience
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Supply-side economists seek a cause and effect relationship between lowering marginal rates on capital formation and economic expansion. The supply-side history of economics since the 1960s hinges on the following key turning points:
[edit] The 1970s
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In 1971, Richard Nixon ended the convertibility of the US dollar into gold, which meant the end of the Bretton Woods system. Commodity prices, including oil and gold particularly, which had been rising steadily in response to the dollar glut, spiked upwards. The supply-side explanation for this event is that taxation on investment had depleted the incentive to capital investment either in new sources of materials or in substitute goods, which when combined with eroding confidence in the U.S. dollar cause it to be rapidly devalued. Many supply siders agree with gold investors in saying that the value of commodities remained constant and that it was the dollar that devalued.
At the same time the Mundell-Fleming model of currency flows gained greater credence when it was codified into a single set of equations, and became increasingly influential in neo-liberal economics. The argument for a floating currency regime had first been adopted by Friedman, but supply-side economists such as Wanniski typically argued that exchange rates should be fixed relative to gold. Mundell was the author of the influential view that it was Johnson's budget deficits that were the cause of inflationary pressure. However, as Lester Thurow pointed out, the standard model of inflationary pressure shows that Johnson's peak year of deficits would have created only a small upward pressure, that instead it was persistent American trade deficits through the 1960s which had a greater effect on the imbalance between the value of the U.S. dollar and the gold to which it was, in theory, convertible.
[edit] Stagflation
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The stock market lost half of its value between 1972 and 1982.
Robert Mundell believes Nixon's failure to cut taxes in the early 1970s to be the cause of stagflation, his argument being that the incentive for individuals to invest was reduced to below zero. Measuring the S&P 500 in inflation-adjusted terms, the stock market lost half of its value between the market peak of 1972 and its bottom in 1982, with money seeking better returns in real estate and commodities instead. The argument from the supply-side point of view then goes on to state that the cuts in capital gains tax rates that were part of the 1981 tax package returned incentives to invest. The Keynesian point of view is that after a long bear market, money had fled from stocks and was set to return, once the expectation of inflation had been reduced. Neither of these two arguments fully accounts for the rise of equities over the course of the "long Bull Market" of 1982-2000.
The importance of this argument needs to be seen in light of the effects of the inflation of the late 1970s, where credit became constricted, as interest rates rose rapidly, and the number of borrowers who could qualify for even standard mortgages fell. Inflation acted as a tax on wage increases, because the highly progressive income tax system of the time meant that more and more households suffered from "bracket creep" - in which a wage increase would be reduced in value by the increased taxes collected. The effects of inflation produced, in 1980, a strong political consensus for a change in basic policy.
[edit] Reaganomics
Main article: Reaganomics
Ronald Reagan made supply-side economics a household phrase, and promised an across the board reduction in income tax rates and an even larger reduction in capital gains tax rates. (Case & Fair, 1999: 781, 782). When vying for the Republican party presidential nomination for the 1980 election, George H.W. Bush derided Reagan's supply-side policies as "voodoo economics". However, later he seemed to give lip service to these policies to secure the Republican nomination in 1988, and is speculated by some to have lost in his re-election bid in 1992 by allowing tax increases. (See: "Read my lips: No new taxes.")
The centerpiece of the supply-side argument is the economic rebound from the 1980-1982 double dip recession, combined with the continued fall in commodity prices. The "across the board" tax cuts of 1981 are seen as the great motivator for the "Seven Fat Years". Critics of this view point out that the "rebound" from the recession of 1981-1982 is exactly in accordance with the "disinflation" scenario predicted by IS/LM models of the late 1970s: essentially that the increases in fed funds rates squeezed out inflation, and that federal budget deficits acted to "prime the pump". This model had been the basis of Volcker's federal reserve policy.
In 1981, Robert Mundell told Ronald Reagan that by cutting upper bracket taxation rates and lowering tax rates on capital gains, national output would increase so much that tax revenues would also increase. Mundell claimed that the economic expansion would also mop up excess liquidity and bring inflation back under control. After the tax cuts were implemented, nominal revenues quickly returned to - and ultimately surpassed - previous levels. While revenues dropped as a share of GDP, supply-siders note they intended for this fall to happen, since cutting tax rates would preclude a rise in taxes collected relative to national income.
The question of whether the tax cuts proved Mundell's predictions correct has sparked much debate between supply-siders and mainstream economists. While nominal revenues rebounded after the tax cuts, mainstream economists note that comparing nominal tax collections over time fails to take into account inflation. By converting tax revenues from nominal to real terms, these economists have shown that tax revenues did not surpass their 1981 levels until 1987.
Defenders of supply-side economics also complain that the focus of the debate on government revenue tends to ignore the societal benefits of economic growth, primarily lower levels of unemployment, higher wages for workers and lower prices for consumers. This is a rhetorical argument derisively known as trickle-down economics, and should be viewed as distinct from the economic theory of supply-side economics.
In the United States, commentators frequently equate supply-side economics with Reaganomics. The fiscal policies of Ronald Reagan were largely based on supply-side economics. During Reagan's 1980 presidential campaign, the key economic concern was double digit inflation, which Reagan described as "Too many dollars chasing too few goods", but rather than the usual dose of tight money, recession and layoffs, with their consequent loss of production and wealth, he promised a gradual and painless way to fight inflation by "producing our way out of it". [19] Switching from an earlier monetarist policy, Federal Reserve chair Paul Volcker began a policy of tighter monetary policies such as lower money supply growth to break the inflationary psychology and squeeze inflationary expectations out of the economic system. [20] Therefore, supply-side supporters argue, "Reaganomics" was only partially based on supply-side economics. However, under Reagan, Congress passed a plan that would slash taxes by $749 billion over five years. As a result, Jason Hymowitz cited Reagan—along with Jack Kemp—as a great advocate for supply-side economics in politics and repeatedly praised his leadership. [21]
Critics of "Reaganomics" claim it failed to produce much of the exaggerated gains some supply-siders had promised. Krugman later summarized the situation: "When Ronald Reagan was elected, the supply-siders got a chance to try out their ideas. Unfortunately, they failed." Although he credited supply-side economics for being more successful than monetarism which he claimed "left the economy in ruins", he stated that supply-side economics produced results which fell "so far short of what it promised," describing the supply-side theory as "free lunches". [22] Krugman and other critics point to increased budget deficits during the Reagan administration as proof that the Laffer Curve is wrong. Supply-side advocates claim that revenues increased, but that spending increased faster. However, they typically point to total revenues[23] even though it was only income taxes rates that were cut. [24] That table also does not account for inflation. For example, of the increase from $600.6 billion in 1983 to $666.5 billion in 1984, $26 billion is due to inflation, $18.3 billion to corporate taxes and $21.4 billion to social insurance revenues (mostly FICA taxes). [25] Income tax revenues in constant dollars decreased by $2.77 billion in that year. Supply-siders cannot legitimately take credit for increased FICA tax revenue, because in 1983 FICA tax rates were increased from 6.7% to 7% and the ceiling was raised by $2,100. For the self employed, the FICA tax rate went from 9.35% to 14%. [26] The FICA tax rate increased throughout Reagan's term, jumping to 7.51% in 1988 and the ceiling was raised by 61% through Reagan's two terms. Those tax hikes on wage earners, along with inflation, are the source of the revenue gains of the early 1980s. But, despite much debate on if tax rate cuts increased revenues, the Reagan policies of the 1980s succeeded in a dramatic raise in economic growth in following the tax cuts, reversing the economic decline of the 1970s.[27]
It has been contended by some supply-side critics that the argument to lower taxes to increase revenues was a smokescreen for "starving" the government of revenues and who hoped that the tax cuts would lead to a commensurate drop in government spending. However, this did not turn out to be the case on the spending side; Paul Samuelson called this notion "the tape worm theory—the idea that the way to get rid of a tape worm is [to] stab your patient in the stomach". [28] Supply-side advocates like Wanniski counter that social and fiscal conservatives who supported the supply-side prescription on tax policy for this reason were misguided and did not understand the Laffer Curve.[29]
There is frequent confusion on the meaning of the term 'supply-side economics', between the related ideas of the existence of the Laffer Curve and the belief that decreasing tax rates can increase tax revenues. But many supply-side economists doubt the latter claim, while still supporting the general policy of tax cuts. Economist Gregory Mankiw used the term "fad economics" to describe the notion of tax rate cuts increasing revenue in the third edition of his Principles of Macroeconomics textbook in a section entitled "Charlatans and Cranks":
“ An example of fad economics occurred in 1980, when a small group of economists advised Presidential candidate, Ronald Reagan, that an across-the-board cut in income tax rates would raise tax revenue. They argued that if people could keep a higher fraction of their income, people would work harder to earn more income. Even though tax rates would be lower, income would rise by so much, they claimed, that tax revenues would rise. Almost all professional economists, including most of those who supported Reagan's proposal to cut taxes, viewed this outcome as far too optimistic. Lower tax rates might encourage people to work harder and this extra effort would offset the direct effects of lower tax rates to some extent, but there was no credible evidence that work effort would rise by enough to cause tax revenues to rise in the face of lower tax rates. … People on fad diets put their health at risk but rarely achieve the permanent weight loss they desire. Similarly, when politicians rely on the advice of charlatans and cranks, they rarely get the desirable results they anticipate. After Reagan's election, Congress passed the cut in tax rates that Reagan advocated, but the tax cut did not cause tax revenues to rise.[30][31] ”
[edit] Criticism
The Laffer curve, with "Tax Rate (%)" on the x-axis, and "Government Revenue" on the y-axis.
Critics of supply-side economics point to the lack of academic economics credentials by movement leaders such as Jude Wanniski and Robert Bartley to imply that the theories were bankrupt.[8] Mundell in his Nobel Prize lecture (awarded for unrelated work in optimum currency area) countered that the success of price stability was proof that the supply-side revolution had worked. The continuing debate over supply-side policies tends to focus on the massive federal and current account deficits, increased income inequality and its failure to promote growth.[7]
Many critics of supply-side economics are actually critics of politicians and pundits who misunderstand the Laffer curve, typically claiming that every tax cut will increase revenues. For example, in 2006 Sebastian Mallaby of The Washington Post quoted George W. Bush, Dick Cheney, Bill Frist, Chuck Grassley, and Rick Santorum misstating the effect of the Bush Administration's tax cuts.[32] On January 3, 2007, George W. Bush wrote an article claiming "It is also a fact that our tax cuts have fueled robust economic growth and record revenues."[33] Andrew Samwick, who was Chief Economist on Bush's Council of Economic Advisers from 2003-2004 responded to the claim:
You are smart people. You know that the tax cuts have not fueled record revenues. You know what it takes to establish causality. You know that the first order effect of cutting taxes is to lower tax revenues. We all agree that the ultimate reduction in tax revenues can be less than this first order effect, because lower tax rates encourage greater economic activity and thus expand the tax base. No thoughtful person believes that this possible offset more than compensated for the first effect for these tax cuts. Not a single one.[34]
The Congressional Budget Office (CBO) has estimated that extending the Bush tax cuts of 2001-2003 beyond their 2010 expiration would increase deficits by $1.8 trillion dollars over the following decade.[35] The CBO also completed a study in 2005 analyzing a hypothetical 10% income tax cut and concluded that under various scenarios there would be minimal offsets to the loss of revenue. In other words, deficits would increase by nearly the same amount as the tax cut in the first five years, with limited feedback revenue thereafter.[36]
Some politicians and supply-side advocates may misunderstand the Laffer curve[citation needed]. They claim that every tax cut will increase revenues, when the curve clearly shows that only cutting tax rates to the right of the peak rate will increase revenues. Cutting tax rates to the left of the peak rate will decrease revenues. Since Reagan's income tax cuts in the 1980s did not increase receipts, the Laffer curve would suggest that further tax cuts will not increase revenues either, since the economy is apparently to the left of the peak.[citation needed] Between 2000 and 2004, income tax revenues fell from $1,004.5 billion to $809 billion, while FICA tax revenues increased from $652.9 billion to $733.4. Since 1997, the US Treasury has been reporting the combination of income tax and FICA tax revenues, so decreases in income tax revenues are hidden by increases in FICA tax revenues.[37] Depending on the model and values of variables that are used, some have estimated the peak rate to be between 60-80% for labor tax and 50-60% for capital tax.[12]
The paradigm of a tax system which rewards investment over consumption was accepted across the political spectrum, and no plan not rooted in supply-side economic theories has been advanced in the United States since 1982 (with the exception of the Clinton tax increases of 1993)[dubious – discuss] which had any serious chance of passage into law. In 1986, a tax overhaul, described by Mundell as "the completion of the supply-side revolution" was drafted. It included increases in payroll taxes, decreases in top marginal rates, and increases in capital gains taxes. Combined with the mortgage interest deduction and the regressive effects of state taxation, it produces closer to a flat-tax effect. Proponents, such as Mundell and Laffer, point to the dramatic rise in the stock market as a sign that the tax overhaul was effective, although they note that the hike in capital gains may be more trouble than it was worth.
Cutting marginal tax rates can also be perceived as primarily beneficial to the wealthy, which commentators such as Paul Krugman see as politically rather than economically motivated.[38]
The economist John Kenneth Galbraith noted that supply side economics was not a new theory. He wrote, "Mr. David Stockman has said that supply-side economics was merely a cover for the trickle-down approach to economic policy—what an older and less elegant generation called the horse-and-sparrow theory: If you feed the horse enough oats, some will pass through to the road for the sparrows."[39] Galbraith claimed that the horse and sparrow theory was partly to blame for the Panic of 1896.
[edit] The 1990s
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Supply-siders blame the 1991 recession on the Federal Reserve, and argue that Clinton's tax increases, since they did not change marginal capital gains tax rates, left the supply-side nature of the 1986 tax bill in place. Similarly, supply-side economists have argued that since the early phases of the massive tax breaks of George W. Bush's first two years were based on credits and not cuts in marginal rates, they did not act to stimulate the economy, although the effect on individual income remains the same.
More generally, traditional economists point to the "overhang" of deficits from the Reagan era, the S&L bailout, the effects of a ballooning federal budget deficit, the defense budget cuts which began in earnest in 1989, and the expectation of a lack of continued fiscal discipline as the source of the recession. These arguments blame the legacy of Democratic Deficits forced upon Reagan, rather than deficits created by Reagan's own administration. Critics of supply-side economics often argue the inflated government deficits that accompanied the arrival of supply-side economics are of greater concern than the economic and stock market success of supply-side theory.
[edit] A Trojan Horse
Other critiques of supply-side economics dismiss the entire project as a Trojan horse for reducing marginal tax rates on upper income brackets and ultimately a failure. These critiques are found in Samuel Bowles' work, which argues that real productivity fell under supply-side taxation regimes on a unit-worker basis. Nobel laureate economist Paul Krugman of Princeton called supply-side economics "Peddling Prosperity" and dismissed it as being unworthy of serious economists in a 1994 book written for the general audience. [3]
David Stockman, Ronald Reagan's budget director, admitted that the 1981 tax cut was a Trojan horse:
“ The hard part of the supply-side tax cut is dropping the top rate from 70 to 50 percent—the rest of it is a secondary matter. The original argument was that the top bracket was too high, and that's having the most devastating effect on the economy. Then, the general argument was that, in order to make this palatable as a political matter, you had to bring down all the brackets. But, I mean, Kemp-Roth was always a Trojan horse to bring down the top rate.[40] ”
[edit] Research since 2000
In 2003, the Wall Street Journal declared the debate over supply-side economics to have ended "with a whimper" after extensive modeling performed by the Congressional Budget Office (CBO) failed to support the most extreme claims of supply-side policies. [41] It was also suggested that Dan Crippen may have lost his chance at reappointment as head of the CBO for failing to support supply-side inspired dynamic scoring. This research undermines the claim that tax cuts can completely compensate for the initial loss of revenue due to the cut, but does acknowledge that resulting growth from the tax cut does replace some of the lost revenue, and the CBO has come under fire[by whom?] for using low estimates.
Before President Bush signed the 2003 tax cuts, the Economic Policy Institute (EPI) released a statement signed by ten Nobel prize laureates entitled "Economists' Statement Opposing the Bush Tax Cuts," which states that:
“
Passing these tax cuts will worsen the long-term budget outlook, adding to the nation’s projected chronic deficits. This fiscal deterioration will reduce the capacity of the government to finance Social Security and Medicare benefits as well as investments in schools, health, infrastructure, and basic research. Moreover, the proposed tax cuts will generate further inequalities in after-tax income.[42]
”
Nobel laureate economist Milton Friedman agreed the tax cuts would reduce tax revenues and result in intolerable deficits, though he supported them as means to restrain federal spending. [43] Friedman characterized the reduced government tax revenue as "cutting their allowance".
Supporters of the Bush tax plan point out that the predictions of the EPI article differ from recent short-term trends. Specifically, the budget deficit shrank significantly during 2005, 2006, and 2007[44] and the length of time before Social Security becomes insolvent has improved slightly, rather than worsening as EPI predicted.[45]
Later analysis of the Bush tax cuts by the Economic Policy Institute claims that the Bush tax cuts have failed to promote growth, as all macroeconomic growth indicators, save the housing market, were well below average for the 2001 to 2005 business cycle. These critics argue that the Bush tax cuts have done little more than deprive government of revenue, increase deficit and after-tax income inequality. [46] In the two years since that report, though, growth has remained strong, and newer numbers dispute the conclusions of the EPI report. The Bush administration points to the long period of sustained growth, both in GDP and in overall job numbers, as well as increases in personal income and decreases in the government deficit. [47]
The results of the tax cuts in the U.S. in 2001 and 2003 are mixed. While results show a temporary decline in tax receipts, they later recovered due to economic growth. In this analysis, it is difficult to discern the reason for the decreases in tax revenue because 2001 was the same year that the dot-com bubble burst. Total Federal Revenues in FY2000 were $2,025 billion (in inflation adjusted dollars). [48] In 2001, President George W. Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001. Rather than wait for the start of the new fiscal year, income tax rate reductions started on July 1, 2001. In addition, rebate checks were sent to everyone that filed a 2000 income tax return (before Oct 1, the start of the new federal fiscal year). [49] Federal revenues in FY2001 were $1,946 billion, $79 billion lower than in FY2000. More of the 2001 tax cut took effect at the start of FY2002, including cuts in the estate tax, retirement and educational savings. [50] Federal revenues in FY2002 were $1,777 billion, $247 billion lower than in FY2000.
In 2003, President Bush signed the Jobs and Growth Tax Relief Reconciliation Act of 2003. Income tax rates were immediately reduced and rebate checks issued (without waiting for the new fiscal year). [51] Federal revenues in FY2003 were $1,665 billion, $360 billion lower than in FY2000. Federal revenues in FY2004 were 1,707 billion, $318 billion lower than in FY2000. Federal revenues in FY2005 were $1,888, $137 billion lower than in FY2000, but by 2006 revenue had completely recovered (in inflation adjusted dollars), with receipts at $2,037 Billion, $12 billion higher than 2000. The cumulative total of federal revenues less than in FY2000 for the fiscal years 2001-2005 was $1.142 trillion, with that amount expected to be recovered by 2011, with 2012 expected to produce an additional $400 billion in excess revenue over 2000.
Federal revenues include revenue from different taxes that were cut, stayed the same, or were raised. For example, the Social Security FICA tax rate stayed the same while the maximum income subject to the tax was increased each year, resulting in a tax increase for those earning more than the previous limit.[52] Social Security tax revenues increased each and every year. Including increasing tax revenues from taxes that stayed the same or were increased hides the magnitude of the revenue decrease in taxes that were cut. Income tax rates were cut and income tax revenues were lower than the FY2000 level each and every fiscal year from 2001-2005, a cumulative revenue decrease of $640 billion (measured in nominal dollars). But, by 2006 revenues exceeded the 2000 level. Likewise Corporate income tax rates were cut and revenues were lower than the FY2000 level each and every fiscal year from 2001-2004. But, by 2005 the inflation adjusted take exceeded that of 2000 by over 20%, and by 2006 nearly 50% higher.
In 2006, the CBO released a study titled "A Dynamic Analysis of Permanent Extension of the President's Tax Relief." [53] This study found that under the best possible scenario, making tax cuts permanent would increase the economy "over the long run" by 0.7%. Since the "long run" is not defined, some commentators[54] have suggested that 20 years should be used, making the annual best case GDP growth equal to 0.04%. When compared with the cost of the tax cuts, the best case growth scenario is still not sufficient to pay for the tax cuts. Previous official CBO estimates had identified the tax cuts as costing the equivalent of 1.4% of the GDP in revenue. According to the study, if the best case growth scenario is applied, the tax cuts would still cost the equivalent of 1.27% of the GDP.[54]
This study was criticized by many economists, including Harvard Economics Professor Greg Mankiw, who pointed out that the CBO used a very low value for the earnings-weighted compensated labor supply elasticity of 0.14.[55] In a paper published in the Journal of Public Economics, Mankiw and Matthew Weinzierl noted that the current economics research would place an appropriate value for labor supply elasticity at around 0.5[56], although Dr. Mankiw notes, "unfortunately, the academic literature on this topic is far from conclusive."
A recent working paper sponsored by the IMF showed "that the Laffer curve can arise even with very small changes in labor supply effects" but that "labor supply changes do not cause the Laffer effect."[57] This is contrary to the supply-side explanation of the Laffer curve, in which the increases in tax revenue are held to be the result of an increase in labor supply.[58] Instead their proposed mechanism for the Laffer effect was that "tax rate cuts can increase revenues by improving tax compliance." The study examined in particular the case of Russia which has comparatively high rates of tax evasion. In that case, their tax compliance model did yield significant revenue increases:
“ To illustrate the potential effects of tax rate cuts on tax revenues consider the example of Russia. Russia introduced a flat 13 percent personal income tax rate, replacing the three tiered, 12, 20 and 30 percent previous rates (as detailed in Ivanova, Keen and Klemm, 2005). The tax exempt income was also increased, further decreasing the tax burden. Considering social tax reforms enacted at the same time, tax rates were cut substantially for most taxpayers. However, personal income tax (PIT) revenues have increased significantly: 46 percent in nominal and 26 percent real terms during the next year. Even more interesting PIT revenues have increased from 2.4 percent to 2.9 percent of GDP—a more than 20 percent increase relative to GDP. PIT revenues continued to increase to 3.3 percent during the next year, representing a further 14 percent gain relative to GDP.[57] ”
[edit] Supply-side economics in popular culture
Supply-side economics have been discussed and critiqued in books, songs and films. The social activist and cartoonist Dan Perkins (who writes under the pen name Tom Tomorrow) has repeatedly criticized the theory in his weekly cartoon, This Modern World.
The band Radiohead have alluded to their opposition to such policies in the song "Electioneering". http://www.greenplastic.com/lyrics/electioneering.php
It was also mentioned by Ben Stein in the popular 1986 movie Ferris Bueller's Day Off.
Comedian and author Al Franken lampoons Supply Side Economics in his 2004 book "Lies and the Lying Liars Who Tell Them - A Fair and Balanced Look at the Right," in a comic book style chapter illustrated by Don Simpson entitled The Gospel of Supply Side Jesus.
[edit] See also
* Gold standard
* Mellonomics
* Monetarism
* Progressive tax
* Regressive tax
* Reaganomics
* List of supply-side economists
[edit] Notes and references
This article's citation style may be unclear. The references used may be clearer with a different or consistent style of citation, footnoting, or external linking.
1. ^ Martin, Douglas (2005-08-31). "Jude Wanniski, 69, Journalist Who Coined the Term 'Supply-Side Economics,' Dies". New York Times. http://www.nytimes.com/2005/08/31/business/31wanniski.html.
2. ^ Wanniski, Jude (1978). The Way the World Works: How Economies Fail—and Succeed. New York: Basic Books. ISBN 0465090958.
3. ^ a b Brownlee, E. (2006). "Fiscal policy in the Reagan administration". in Kopcke, E.; Tootell, G. M. B.; Triest, R. K.. The macroeconomics of fiscal policy. Cambridge, MA: MIT Press. pp. 117–204. ISBN 0262112957.
4. ^ a b Blinder, A. S. (2006). "Can fiscal policy improve macro-stabilization". in Kopcke, E.; Tootell, G. M. B.; Triest, R. K.. The macroeconomics of fiscal policy. Cambridge, MA: MIT Press. pp. 23–62. ISBN 0262112957.
5. ^ Blanchard, O. J. (2006). "Comments of Blinder's "The case against the case against discretionary fiscal policy". in Kopcke, E.; Tootell, G. M. B.; Triest, R. K.. The macroeconomics of fiscal policy. Cambridge, MA: MIT Press. pp. 63–74. ISBN 0262112957.
6. ^ Bartlett, Bruce (2007-04-06). "How Supply-Side Economics Trickled Down". New York Times. http://www.nytimes.com/2007/04/06/opinion/06bartlett.html.
7. ^ a b Gale, W. G. & Orszag, P. R. (2003-05-09). "Bush’s Tax Plan Slashes Growth". The Brookings Institution. http://www.brookings.edu/views/op-ed/gale/20030509.htm. Retrieved on 2007-10-23.
8. ^ a b Chait, J. (2007). The Big Con: How Washington Got Hoodwinked and Hijacked by Crackpot Economics. Boston: Houghton Mifflin. ISBN 0618685405.
9. ^ Quote from Mankiw with source in Bartels, L. M. (2008). Unequal democracy: The political-economy of the new gilded age. Princeton, NJ: Princeton University Press. ISBN 9780691136639.
10. ^ Tobin, J. (1992). "Voodoo curse". Harvard International Review 14 (4): 10.
11. ^ a b Case, K. E.; Fair, R. C. (2007). Principles of Economics (8th edition ed.). Upper Saddle Rive, NJ: Prentice Hall. ISBN 0132289148.
12. ^ a b Microsoft Word - SFB DP Frontpage.doc
13. ^ a b Case, Karl E. & Fair, Ray C. (1999). Principles of Economics (5th ed.), p. 780. Prentice-Hall. ISBN 0-13-961905-4.
14. ^ Bartlett, Bruce, "Supply-Side Economics: "Voodoo Economics" or Lasting Contribution?" (PDF), Laffer Associates (November 11, 2003), http://web.uconn.edu/cunningham/econ309/lafferpdf.pdf, retrieved on 17 November 2008
15. ^ Malabre, Jr., Alfred L. (1994).Lost Prophets: An Insider's History of the Modern Economists, p. 182. Harvard Business School Press. ISBN 0-87584-441-3.
16. ^ W. H. HUTT. A Rehabilitation of Say's Law OHIO UNIVERSITY PRESS: ATHENS. 1974
17. ^ Alan Reynolds (July 1999). "Capital gains tax: Analysis of reform options for Australia" (PDF). Hudson Institute. http://www.asx.com.au/about/pdf/cgt.pdf.
18. ^ Malabre, Jr., p. 193.
19. ^ Case & Fair, p. 781, 782.
20. ^ Malabre, Jr., pp. 170–171.
21. ^ Malabre, Jr., p. 188.
22. ^ Malabre, Jr., p. 195.
23. ^ Table 1, Historical budget data - Congressional Budget Office
24. ^ Tax simplification simplified - Tax Policy Center
25. ^ Federal Government Finances and Employment 1990 - US Census Bureau
26. ^ Annual maximum taxable earnings and contribution rates - Social Security Administration
27. ^ The Reagan Tax Cuts: Lessons for Tax Reform - Joint Economic Committee
28. ^ Malabre, Jr., pp. 197–198.
29. ^ Stoking the Beast - Jonathan Rauch
30. ^ Scheiber, Noam (2004-04-08). "Can Greg Mankiw Survice Politics?". The New Republic. http://ksghome.harvard.edu/~jfrankel/TNR%20Online%20%20Mankiw%20Out%20of%20Depth.htm.
31. ^ Moore, Stephen (2003-02-28). "Think Twice About Gregory Mankiw". National Review. http://www.nationalreview.com/moore/moore022803b.asp.
32. ^ Mallaby, Sebastian (2006-05-15). "The Return Of Voodoo Economics". Washington Post. http://www.washingtonpost.com/wp-dyn/content/article/2006/05/14/AR2006051400806.html.
33. ^ Bush, George W. (2007-01-03). "What the Congress Can Do for America". Wall Street Journal. http://www.opinionjournal.com/editorial/feature.html?id=110009473.
34. ^ "Vox Baby: A New Year's Plea". http://voxbaby.blogspot.com/2007/01/new-years-plea.html.
35. ^ Analysis of President's Budget Table 1-3 Page 6
36. ^ CBO Study Grey Box Page 1
37. ^ "Back Reports: Financial Report of the United States: Publication & Guidance: Financial Management Service". http://fms.treas.gov/fr/backissues.html.
38. ^ Krugman, Paul (2005-12-23). "The Tax Cut Zombies". New York Times. http://select.nytimes.com/2005/12/23/opinion/23krugman.html.
39. ^ Galbraith, John Kenneth (1982-02-04). "Recession Economics". New York Review of Books. http://www.nybooks.com/articles/6735.
40. ^ The Education of David Stockman
41. ^ `Dynamic' Scoring Finally Ends Debate On Taxes, Revenue. By Alan Murray. Wall Street Journal. (Eastern edition). New York, N.Y.: Apr 1, 2003. pg. A.4
42. ^ Economists' statement opposing the Bush tax cuts (2003)
43. ^ http://opinionjournal.com/editorial/feature.html?id=110002933 "What Every American Wants" by Milton Friedman
44. ^ Incredible Shrinking Deficit - July 12, 2007 - The New York Sun
45. ^ Megan McArdle (October 01, 2007) - No problem here (Fiscal Policy)
46. ^ The boom that wasn't
47. ^ Fact Sheet: October 2007 Marks Record 50th Consecutive Month of Job Growth
48. ^ http://www.whitehouse.gov/omb/budget/fy2008/pdf/hist.pdf Historical Budget Tables, Budget of the United States Government, Fiscal Year 2008(page 26)
49. ^ Overview of the Tax Cut
50. ^ http://www.fairmark.com/news/egtrra/index.htm The 2001 Tax Cut
51. ^ http://usgovinfo.about.com/cs/taxes/a/bushtaxcuts.htm Details of the Bush 2003 Tax Cut Plan
52. ^ Contribution and Benefit Base
53. ^ Microsoft Word - treasury dyn anal report jul 24 10am II FINAL.doc
54. ^ a b Treasury Dynamic Scoring Analysis Refutes Claims by Supporters of the Tax Cuts, revised 8/24/06
55. ^ Greg Mankiw's Blog: CBO on Supply-side Economics
56. ^ [1]
57. ^ a b Papp, TK and Takáts, E (PDF). Tax rate cuts and tax compliance—the Laffer curve revisited. IMF Working Paper. http://www.imf.org/external/pubs/ft/wp/2008/wp0807.pdf.
58. ^ See p. 5: "Contradicting the traditional labor supply based explanation of the Laffer effect, measures of labor supply remained mostly unchanged."
[edit] Further reading
* Evans, Michael K. (1983). The Truth About Supply Side Economics. New York: Basic Books. ISBN 0465087787.
* Gilder, George (1993). Wealth and Poverty. San Francisco: ICS Press. ISBN 1558152407.
* Krugman, Paul (1995). Peddling Prosperity: Economic Sense and Nonsense in the Age of Diminished Expectations. New York: W. W. Norton. ISBN 0393312925.
* Setterfield, Mark (2002). The Economics of Demand-Led Growth: Challenging the Supply-Side Vision of the Long Run. Northampton, MA: E. Elgar. ISBN 1840641770.
* Wanniski, Jude (1978). The Way the World Works: How Economies Fail—and Succeed. New York: Basic Books. ISBN 0465090958.
[edit] External links
* American Economic Policy from 1920's to 1990's - From "Everyone is a Keynesian" to "Everyone is a Supply Sider"
* Bartlett, Bruce (April 6, 2007). "How Supply-Side Economics Trickled Down". The New York Times. http://www.nytimes.com/2007/04/06/opinion/06bartlett.html. Retrieved on 2008-02-26.
* Gwartney, James D. (2002). "Supply-Side Economics". The Concise Encyclopedia of Economics. The Liberty Fund. http://www.econlib.org/library/Enc/SupplySideEconomics.html. Retrieved on 2008-02-26.
[edit] Supply Side Proponents
* The Logic of the Laffer Curve
* http://www.robertmundell.net/NobelLecture/nobel5.asp Portion of Mundell's Nobel Prize Lecture (awarded for unrelated work in optimum currency area) claiming that Supply Side Economics was responsible for growth, price stability and the collapse of the Soviet Union.
* [4]Supply Side Library. A collection of essays and studies by Robert Mundell, Paul Craig Roberts, Stephen Entin and Alan Reynolds.
* SSU Summer Session Lesson #8 A Supply-Side History from wanniski.com
* http://www.washtimes.com/commentary/20031108-111533-9600r.htm
* http://www.polyconomics.com/searchbase/12-15-00.html
* http://www.ashbrook.org/events/lecture/2002/reynolds.html
[edit] Supply Side Critiques
* Have the Bush Tax Cuts Generated Higher Revenues? Views of Economists
* http://www.csub.edu/ssric-trd/modules/macr/macrch4.htm
* http://www.gold-eagle.com/gold_digest_02/shostak062802.html
* http://www.huppi.com/kangaroo/1THE_REAGAN_YEARs.htm#reaganpage
* Supply-side Economics Explained for k5ers
* Goolsbee, Austan (January 20, 2008). "Is the New Supply Side Better Than the Old?". The New York Times. http://www.nytimes.com/2008/01/20/business/20view.html?ex=1358485200&en=44cac96fd9342557&ei=5090&partner=rssuserland&emc=rss&pagewanted=all. Retrieved on 2008-02-26.
* "Take a Walk on the Supply Side: Tax Cuts on Profits, Savings, and the Wealthy Fail to Spur Economic Growth.". The Center for American Progress. September 2008. http://www.americanprogress.org/issues/2008/09/supply_side.html.
Macroeconomic schools of thought
Keynesian economics • Monetarism • New classical macroeconomics • New Keynesian economics • Neo-Keynesian Economics • Supply-side economics • Post-Keynesian economics
Retrieved from "http://en.wikipedia.org/wiki/Supply-side_economics"
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Karl Marx
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Karl Marx Western Philosophy
19th-century philosophy
Karl Marx
Full name Karl Heinrich Marx
Birth May 5, 1818
Trier, Prussia
Death March 14, 1883 (aged 64)
London, United Kingdom
School/tradition Hegelianism, Marxism
Main interests Politics, Economics, Philosophy, class struggle
Notable ideas Co-founder of Marxism (with Engels), alienation and exploitation of the worker, The Communist Manifesto, Das Kapital, Materialist conception of history
Influenced by
Kant, Epicurus, Hegel, Feuerbach, Stirner, Smith, Ricardo, Rousseau, Goethe, Fourier, Comte
Influenced
Bakunin, Luxemburg, Lenin, Stalin, Trotsky, Mao, Castro, Guevara, Lukács, Gramsci, Arendt, Sartre, Simone De Bouvoir, Jean Franscois Lyotard, Michel Foucault, Debord, Frankfurt School, Negri, Taussig, Kim, Roy, Bookchin and many more...
Karl Heinrich Marx (May 5, 1818 – March 14, 1883) was a German[1] philosopher, political economist, historian, sociologist, humanist, political theorist and revolutionary credited as the founder of communism.
Marx summarized his approach to history and politics in the opening line of the first chapter of The Communist Manifesto (1848): “The history of all hitherto existing society is the history of class struggles”. Marx argued that capitalism, like previous socioeconomic systems, will produce internal tensions which will lead to its destruction.[2] Just as capitalism replaced feudalism, capitalism itself will be displaced by communism, a stateless, classless society which emerges after a transitional period, the 'dictatorship of the proletariat'.[3][4][5]
On the one hand, Marx argued for a systemic understanding of socioeconomic change. He argued that the structural contradictions within capitalism necessitate its end, giving way to communism:
“ The development of Modern Industry, therefore, cuts from under its feet the very foundation on which the bourgeoisie produces and appropriates products. What the bourgeoisie, therefore, produces, above all, are its own grave-diggers. Its fall and the victory of the proletariat are equally inevitable. ”
— (The Communist Manifesto)[6]
On the other hand, Marx argued that socioeconomic change occurred through organized revolutionary action. He argued that capitalism will end through the organized actions of an international working class, led by a Communist Party: "Communism is for us not a state of affairs which is to be established, an ideal to which reality [will] have to adjust itself. We call communism the real movement which abolishes the present state of things. The conditions of this movement result from the premises now in existence." (from The German Ideology)
While Marx remained a relatively obscure figure in his own lifetime, his ideas began to exert a major influence on workers' movements shortly after his death. This influence was given added impetus by the victory of the Marxist Bolsheviks in the Russian October Revolution, and there are few parts of the world which were not significantly touched by Marxian ideas in the course of the twentieth century.
Biography
Karl Marx as a teenager
Karl Heinrich Marx was born in Trier, in the Kingdom of Prussia's Province of the Lower Rhine as the third of his parents' seven children. His father, Heinrich Marx (1777–1838), born Herschel Mordechai, the son of Levy Mordechai (1743-1804) and Eva Lwow (1753-1823), descended from a long line of rabbis but converted to Lutheran Christianity, despite his many deistic tendencies and his admiration of such Enlightenment figures as Voltaire and Rousseau, in order to be allowed to practice Law. Marx's mother was Henriette née Pressburg (1788–1863). His siblings were Sophie (d. 1883) (m. Wilhelm Robert Schmalhausen), Hermann (1819-1842), Henriette (1820-1856), Louise (1821-1893) (m. Johann Carel Juta), Emilie, Caroline (1824-1847) and Eduard (1834-1837). His mother was the grand-aunt of industrialists Gerard Philips and Anton Philips and a maternal descendant of the Barent-Cohen family through her parents Isaac Heijmans Presburg (Presburg, c. 1747 – Nijmegen, May 3, 1832) and wife Nanette Salomon Barent-Cohen (Amsterdam, c. 1764 – Nijmegen, April 7, 1833), the daughter of Salomon David Barent-Cohen (d. 1807) and wife Sara Brandes, in turn the uncle and aunt by marriage of Nathan Mayer Rothschild's wife.
Marx in 1882
Soon after losing his job as editor of Rheinische Zeitung, a Cologne newspaper,[7] Karl Marx married Jenny von Westphalen, the educated daughter of a Prussian baron, on June 19, 1843 in Kreuznacher Pauluskirche, Bad Kreuznach. Their engagement was kept secret at first, and for several years was opposed by both the Marxes and Westphalens. From 1844 to 1848, Marx enjoyed a very comfortable lifestyle, with income derived from the sale of his works, his salary, gifts from friends and allies; a large inheritance from his father's death, long delayed, also became available in March 1848.[8] During the first half of the 1850s the Marx family lived in poverty and constant fear of creditors in a three room flat on Dean Street in Soho, London. Marx and Jenny already had four children and three more were to follow. Of these only three survived to adulthood. Marx's major source of income at this time was Engels, who was drawing a steadily increasing income from the family business in Manchester. This was supplemented by weekly articles written as a foreign correspondent for the New York Daily Tribune. Inheritances from one of Jenny's uncles and her mother who died in 1856 allowed the family to move to somewhat more salubrious lodgings at 9 Grafton Terrace, Kentish Town a new suburb on the then-outskirts of London. Marx generally lived a hand-to-mouth existence, forever at the limits of his resources, although this did to some extent depend upon his spending on relatively bourgeois luxuries, which he felt were necessities for his wife and children given their social status and the mores of the time.
Marx had the following children by his wife: Jenny Caroline (m. Longuet; 1844–1883); Jenny Laura (m. Lafargue; 1845–1911); Edgar (1847–1855); Henry Edward Guy ("Guido"; 1849–1850); Jenny Eveline Frances ("Franziska"; 1851–1852); Jenny Julia Eleanor (1855–1898); and one more who died before being named (July 1857).
Karl Marx's Tomb at Highgate Cemetery London
Following the death of his wife Jenny in December 1881, Marx developed a catarrh that kept him in ill health for the last fifteen months of his life. It eventually brought on the bronchitis and pleurisy that killed him in London on March 14, 1883. He died a stateless person[9] and was buried in Highgate Cemetery, London, on March 17, 1883. The messages carved on Marx's tombstone are: “WORKERS OF ALL LANDS UNITE”, the final line of The Communist Manifesto, and Engels' version of the 11th Thesis on Feuerbach:[10]
“ The philosophers have only interpreted the world in various ways - the point however is to change it ”
The Communist Party of Great Britain had the monumental tombstone built in 1954 with a portrait bust by Laurence Bradshaw; Marx's original tomb had been humbly adorned.[11] In 1970, there was an unsuccessful attempt to destroy the monument, with a homemade bomb.[12][13]
Several of Marx's closest friends spoke at his funeral, including Wilhelm Liebknecht and Friedrich Engels. Engels' speech included the words:
“ On the 14th of March, at a quarter to three in the afternoon, the greatest living thinker ceased to think. He had been left alone for scarcely two minutes, and when we came back we found him in his armchair, peacefully gone to sleep — but forever.[1] ”
In addition to Engels and Liebknecht, Marx's daughter Eleanor and Charles Longuet and Paul Lafargue, Marx's two French socialist sons-in-law, also attended his funeral. Liebknecht, a founder and leader of the German Social-Democratic Party, gave a speech in German, and Longuet, a prominent figure in the French working-class movement, gave a short statement in French. Two telegrams from workers' parties in France and Spain were also read out. Together with Engels' speech, this was the entire programme of the funeral. Those attending the funeral included Friedrich Lessner, who had been sentenced to three years in prison at the Cologne communist trial of 1852; G. Lochner, who was described by Engels as "an old member of the Communist League" and Carl Schorlemmer, a professor of chemistry in Manchester, a member of the Royal Society, but also an old communist associate of Marx and Engels. Three others attended the funeral — Ray Lankester, Sir John Noe and Leonard Church — making eleven in all.
Marx's daughter Eleanor became a socialist like her father and helped edit his works.
Karl Marx was known to become the first major social theorist to form a series of concepts within the break between modern and premodern societies. [14]
Career
Education
Marx's parents had him educated at home until the age of thirteen. After graduating from the Trier Gymnasium, Marx enrolled in the University of Bonn in 1835 at the age of seventeen; he wished to study philosophy and literature, but his father insisted that it was more practical to study law. At Bonn he joined the Trier Tavern Club drinking society and at one point served as its president. Because of Marx's poor grades, his father forced him to transfer to the far more serious and academically oriented Humboldt-Universität in Berlin. During this period, Marx wrote many poems and essays concerning life, using the theological language acquired from his liberal, deistic father, such as "the Deity," but also absorbed the atheistic philosophy of the Young Hegelians who were prominent in Berlin at the time. Marx earned a doctorate in 1841 with a thesis titled The Difference Between the Democritean and Epicurean Philosophy of Nature, but he had to submit his dissertation to the University of Jena as he was warned that his reputation among the faculty as a Young Hegelian radical would lead to a poor reception in Berlin.
Communism portal
v • d • e
The Left, or Young Hegelians, consisted of a group of philosophers and journalists circling around Ludwig Feuerbach and Bruno Bauer, and opposing their teacher Hegel. Despite their criticism of Hegel's metaphysical assumptions, they made use of Hegel's dialectical method as a powerful weapon for the critique of established religion and politics. One of them, Max Stirner, turned critically against both Feuerbach and Bauer in his book "Der Einzige und sein Eigenthum" (1845, The Ego and Its Own), calling these atheists "pious people" for their reification of abstract concepts. Marx, at that time a follower of Feuerbach, was deeply impressed by the work and abandoned Feuerbachian materialism and accomplished what recent authors have denoted as an "epistemological break." He developed the basic concept of historical materialism against Stirner in his book, "Die Deutsche Ideologie" (1846, The German Ideology), which he did not publish.[15] Another link to the Young Hegelians was Moses Hess, with whom Marx eventually disagreed, yet to whom he owed many of his insights into the relationship between state, society and religion.
Marx in Paris and Brussels
Towards the end of October 1843, Marx arrived in Paris, France. Paris at this time served as the home and headquarters of armies of German, British, Polish, and Italian revolutionaries. Marx, for his part, had come to Paris to work with Arnold Ruge, another revolutionary from Germany, on the Deutsch-Französische Jahrbücher.[16] There, on August 28, 1844, at the Café de la Régence on the Place du Palais he met Friedrich Engels, who was to become his most important friend and life-long collaborator. Engels had met Marx only once before and briefly at the office of the Rheinische Zeitung in 1842;[17] he went to Paris to show Marx his recently published book, The Condition of the Working Class in England in 1844.[18] It was this book that convinced Marx that the working class would be the agent and instrument of the final revolution in history.
After the failure of the Deutsch-Französische Jahrbücher, Marx, living on the rue Vaneau, wrote for the most radical of all German newspapers in Paris, indeed in Europe, the Vorwärts, established and run by the secret society called League of the Just. When not writing, Marx studied the history of the French Revolution and read Proudhon.[19] He also spent considerable time studying a side of life he had never been acquainted with before—a large urban proletariat.
“ [Hitherto exposed mainly to university towns...] Marx's sudden espousal of the proletarian cause can be directly attributed (as can that of other early German communists such as Weitling[20]) to his first hand contacts with socialist intellectuals [and books] in France.[21] ”
He re-evaluated his relationship with the Young Hegelians, and as a reply to Bauer's atheism wrote On the Jewish Question. This essay consisted mostly of a critique of current notions of civil and human rights and political emancipation; it also included several critical references to Judaism as well as Christianity from a standpoint of social emancipation. Engels, a committed communist, kindled Marx's interest in the situation of the working class and guided Marx's interest in economics. Marx became a communist and set down his views in a series of writings known as the Economic and Philosophical Manuscripts of 1844, which remained unpublished until the 1930s. In the Manuscripts, Marx outlined a humanist conception of communism, influenced by the philosophy of Ludwig Feuerbach and based on a contrast between the alienated nature of labor under capitalism and a communist society in which human beings freely developed their nature in cooperative production.
In January 1845, after Vorwärts expressed its hearty approval of the assassination attempt on Frederick William IV, King of Prussia, the French authorities ordered Marx, among many others, to leave Paris. He and Engels moved on to Brussels, Belgium.
Marx devoted himself to an intensive study of history, and in collaboration with Engels elaborated on his idea of historical materialism, particularly in a manuscript (published posthumously as The German Ideology), the basic thesis of which was that "the nature of individuals depends on the material conditions determining their production." Marx traced the history of the various modes of production and predicted the collapse of the present one—industrial capitalism—and its replacement by communism. This was the first major work of what scholars consider to be his later phase, abandoning the Feuerbach-influenced humanism of his earlier work.
Next, Marx wrote The Poverty of Philosophy (1847), a response to Pierre-Joseph Proudhon's The Philosophy of Poverty and a critique of French socialist thought. These works laid the foundation for Marx and Engels' most famous work, The Communist Manifesto, first published on February 21, 1848, as the manifesto of the Communist League, a small group of European communists who had come to be influenced by Marx and Engels. Later that year, Europe experienced a series of protests, rebellions, and often violent upheavals known as the Revolutions of 1848. Marx was arrested and expelled from Belgium.
In February 1848 a radical movement had seized power from King Louis-Philippe in France, and invited Marx to return to Paris, where he witnessed the revolutionary June Days Uprising first hand. When this collapsed in 1849, Marx moved back to Cologne and started the Neue Rheinische Zeitung ("New Rhenish Newspaper"). During its existence he was put on trial twice, on February 7, 1849 because of a press misdemeanor, and on the 8th charged with incitement to armed rebellion. Both times he was acquitted. The paper was soon suppressed and Marx returned to Paris, but was forced out again. This time he sought refuge in London.
London
Marx moved to London in May 1849 and remained there for the rest of his life. For the first few years there, he and his family lived in extreme poverty, which is believed to have acutely damaged Marx's health and shortened his life. He briefly worked as correspondent for the New York Tribune in 1851.[22] In London Marx devoted himself to two activities: revolutionary organizing, and an attempt to understand political economy and capitalism. Having read Engels' study of the working class, Marx turned away from philosophy and devoted himself to the First International, to whose General Council he was elected at its inception in 1864. He was particularly active in preparing for the annual Congresses of the International and leading the struggle against the anarchist wing led by Mikhail Bakunin (1814–1876). Although Marx won this contest, the transfer of the seat of the General Council from London to New York in 1872, which Marx supported, led to the decline of the International. The most important political event during the existence of the International was the Paris Commune of 1871 when the citizens of Paris rebelled against their government and held the city for two months. On the bloody suppression of this rebellion, Marx wrote one of his most famous pamphlets, The Civil War in France, an enthusiastic defense of the Commune.
Given the repeated failures and frustrations of worker's revolutions and movements, Marx also sought to understand capitalism, and spent a great deal of time in the British Library studying and reflecting on the works of political economists and on economic data. By 1857 he had accumulated over 800 pages of notes and short essays on capital, landed property, wage labour, the state, foreign trade and the world market; this work however did not appear in print until 1941, under the title Grundrisse. In 1859, Marx was able to publish Contribution to the Critique of Political Economy, his first serious economic work. In the early 1860s he worked on composing three large volumes, the Theories of Surplus Value, which discussed the theoreticians of political economy, particularly Adam Smith and David Ricardo. This work, that was published posthumously under the editorship of Karl Kautsky is often seen as the Fourth book of Capital, and constitutes one of the first comprehensive treatises on the history of economic thought. In 1867, well behind schedule, the first volume of Capital was published, a work which analyzed the capitalist process of production. Here, Marx elaborated his labor theory of value and his conception of surplus value and exploitation which he argued would ultimately lead to a falling rate of profit and the collapse of industrial capitalism. Volumes II and III remained mere manuscripts upon which Marx continued to work for the rest of his life and were published posthumously by Engels.
During the last decade of his life, Marx's health declined and he became incapable of the sustained effort that had characterized his previous work. He did manage to comment substantially on contemporary politics, particularly in Germany and Russia. His Critique of the Gotha Programme, opposed the tendency of his followers Wilhelm Liebknecht (1826–1900) and August Bebel (1840–1913) to compromise with the state socialism of Ferdinand Lassalle in the interests of a united socialist party. In his correspondence with Vera Zasulich, Marx contemplated the possibility of Russia's bypassing the capitalist stage of development and building communism on the basis of the common ownership of land characteristic of the village Mir.
Marx's thought
Main article: Marxism
A Karl Marx monument in the German city Chemnitz, formerly the East German city Karl-Marx-Stadt (Karl Marx City).
The American Marx scholar Hal Draper once remarked, "there are few thinkers in modern history whose thought has been so badly misrepresented, by Marxists and anti-Marxists alike." The legacy of Marx's thought has become bitterly contested between numerous tendencies which each see themselves as Marx's most accurate interpreters, including but not exclusively Marxist-Leninism, Trotskyism, Maoism, and libertarian Marxism.
Influences on Marx's thought
Main article: Influences on Karl Marx
Marx's thought was strongly influenced by:
* Hegel's dialectical method and historical orientation;
* the classical political economy of Adam Smith and David Ricardo;
* French socialist and sociological thought, in particular the thought of Jean-Jacques Rousseau, Henri de Saint-Simon and Charles Fourier;
* earlier German philosophical materialism, particularly Ludwig Feuerbach
* the solidarity with the working class of Friedrich Engels
G.W.F. Hegel
Marx's view of history, which came to be called historical materialism (controversially adapted as the philosophy of dialectical materialism by Engels and Lenin) certainly shows the influence of Hegel's claim that reality (and history) should be viewed dialectically. Hegel believed that human history is characterized by the movement from the fragmentary toward the complete and the real (which was also a movement towards greater and greater rationality). Sometimes, Hegel explained, this progressive unfolding of the Absolute involves gradual, evolutionary accretion but at other times requires discontinuous, revolutionary leaps — episodal upheavals against the existing status quo. For example, Hegel strongly opposed slavery in the United States during his lifetime, and he envisioned a time when Christian nations would eliminate it from their civilization.
Marx's critiques of German philosophical idealism, British political-economy, and French socialism depended heavily on the influence of Feuerbach and Engels. Hegel had thought in an idealist terms, and Marx sought to rewrite dialectics in materialist terms. He wrote that Hegelianism stood the movement of reality on its head, and that it was necessary to set it upon its feet. Marx's acceptance of this notion of materialist dialectics which rejected Hegel's idealism was greatly influenced by Ludwig Feuerbach. In The Essence of Christianity, Feuerbach argued that God is really a creation of man and that the qualities people attribute to God are really qualities of humanity. Accordingly, Marx argued that it is the material world that is real and that our ideas of it are consequences, not causes, of the world. Thus, like Hegel and other philosophers, Marx distinguished between appearances and reality. But he did not believe that the material world hides from us the "real" world of the ideal; on the contrary, he thought that historically and socially specific ideology prevented people from seeing the material conditions of their lives clearly.
The other important contribution to Marx's revision of Hegelianism came from Engels' book, The Condition of the Working Class in England in 1844, which led Marx to conceive of the historical dialectic in terms of class conflict and to see the modern working class as the most progressive force for revolution. Engels' article "Outlines of Political Economy" in Deutsch-Französische Jahrbücher also had a great influence in directing him towards the study of the workings of the capitalist economy.
Marx believed that he could study history and society scientifically and discern tendencies of history and the resulting outcome of social conflicts. Some followers of Marx concluded, therefore, that a communist revolution will inevitably occur. However, Marx famously asserted in the eleventh of his Theses on Feuerbach that "philosophers have only interpreted the world, in various ways; the point however is to change it", and he clearly dedicated himself to trying to alter the world. Consequently, most followers of Marx are not fatalists, but activists who believe that revolutionaries must organize social change.
Philosophy
Main articles: On the Jewish Question and The Poverty of Philosophy
Marx's philosophy hinges[citation needed] on his view of human nature. Fundamentally, Marx assumed that it is human nature to transform nature, and he calls this process of transformation "labour" and the capacity to transform nature "labour power." For Marx, this is simultaneously a physical and a mental act:
“ A spider conducts operations that resemble those of a weaver, and a bee puts to shame many an architect in the construction of her cells. But what distinguishes the worst architect from the best of bees is this, that the architect raises his structure in imagination before he erects it in reality. ”
— (Capital, Vol. I, Chap. 7, Pt. 1)
Marx did not believe that all people worked the same way, or that one works in an entirely personal and individual way. Instead, he argued that work is a social activity and that the conditions and forms under and through which people work are socially determined and change over time. Beyond these basic points, Marx made no claims about human nature.
Marx's analysis of history focuses on the organization of labor and is based on his distinction between the means / forces of production, literally those things such as land, natural resources, and technology, that are necessary for the production of material goods, and the relations of production, in other words, the social relationships people enter into as they acquire and use the means of production. Together these compose the mode of production, and Marx distinguished historical eras in terms of distinct modes of production. For example, Marx observed that European societies had progressed from a feudal mode of production to a capitalist mode of production. Marx believed that under capitalism, the means of production change more rapidly than the relations of production (for example, we develop a new technology, such as the Internet, and only later do we develop laws to regulate that technology). For Marx this mismatch between (economic) base and (social) superstructure is a major source of social disruption and conflict.
Marx understood the "social relations of production" to comprise not only relations among individuals, but between or among groups of people, or classes. As a scientist and materialist, Marx did not understand classes as purely subjective (in other words, groups of people who consciously identified with one another). He sought to define classes in terms of objective criteria, such as their access to resources. For Marx, different classes have divergent interests, which provides another source of social disruption and conflict. Conflict between social classes he regards as something inherent in all human history:
“ The history of all hitherto existing society is the history of class struggles. ”
— (The Communist Manifesto, Chapter 1)
Marx had a special concern with how people relate to that most fundamental resource of all, their own labor power. Marx wrote extensively about this in terms of the problem of alienation. As with the dialectic, Marx began with a Hegelian notion of alienation but developed a more materialist conception. Under capitalism, social relationships of production, such as among workers or between workers and capitalists, are mediated through commodities, including labor, that are bought and sold on the market. For Marx, the possibility that one may give up ownership of one's own labor — one's capacity to transform the world — is tantamount to being alienated from one's own nature; it is a spiritual loss. Marx described this loss in terms of commodity fetishism, in which the things that people produce, commodities, appear to have a life and movement of their own to which humans and their behavior merely adapt. This disguises the fact that the exchange and circulation of commodities really are the product and reflection of social relationships among people. Marx called this reversal "commodity fetishism" (at the time Marx wrote, historians of religion used the word fetish to describe something made by people, which people believed had power over them).
Commodity fetishism provides an example of what Engels called false consciousness, which is closely related to the understanding of ideology. By ideology they meant ideas that reflect the interests of a particular class at a particular time in history, but which are presented as universal and eternal. Marx and Engels' point was not only that such beliefs are at best half-truths; they serve an important political function. Put another way, the control that one class exercises over the means of production includes not only the production of food or manufactured goods; it includes the production of ideas as well (this provides one possible explanation for why members of a subordinate class may hold ideas contrary to their own interests). Thus, while such ideas may be false, they also reveal in coded form some truth about political relations. For example, although the belief that the things people produce are actually more productive than the people who produce them is literally absurd, it does reflect (according to Marx and Engels) that people under capitalism are alienated from their own labor-power. Another example of this sort of analysis is Marx's understanding of religion, summed up in a passage from the preface[23] to his 1843 Contribution to the Critique of Hegel's Philosophy of Right:
“ Religious suffering is, at one and the same time, the expression of real suffering and a protest against real suffering. Religion is the sigh of the oppressed creature, the heart of a heartless world, and the soul of soulless conditions. It is the opium of the people. ”
— (Contribution to the Critique of Hegel's Philosophy of Right)
Whereas his Gymnasium senior thesis argued that the primary social function of religion was to promote solidarity, here Marx sees the social function in terms of political and economic inequality. Moreover, he provides an analysis of the ideological functions of religion: to reveal “an inverted consciousness of the world.” He continues: “It is the immediate task of philosophy, which is in the service of history, to unmask self-estrangement in its unholy forms, once [religion,] the holy form of human self-estrangement has been unmasked”. For Marx, this unholy self-estrangement, the “loss of man,” is complete for the sphere of the proletariat. His final conclusion is that for Germany, general human emancipation is only possible as a suspension of private property by the proletariat.
Political economy
Main article: Das Kapital
Memorial to Karl Marx in Moscow. The inscription reads "?????????? ???? ?????, ????????????!" (Proletarians of all countries, unite!)
Marx argued that this alienation of human work (and resulting commodity fetishism) functions precisely as the defining feature of capitalism. Prior to capitalism, markets existed in Europe where producers and merchants bought and sold commodities. According to Marx, a capitalist mode of production developed in Europe when labor itself became a commodity—when peasants became free to sell their own labor-power, and needed to do so because they no longer possessed their own land. People sell their labor-power when they accept compensation in return for whatever work they do in a given period of time (in other words, they are not selling the product of their labor, but their capacity to work). In return for selling their labor power they receive money, which allows them to survive. Those who must sell their labor power are "proletarians". The person who buys the labor power, generally someone who does own the land and technology to produce, is a "capitalist" or "bourgeois". The proletarians inevitably outnumber the capitalists.
Marx distinguished industrial capitalists from merchant capitalists. Merchants buy goods in one market and sell them in another. Since the laws of supply and demand operate within given markets, a difference often exists between the price of a commodity in one market and another. Merchants, then, practise arbitrage, and hope to capture the difference between these two markets. According to Marx, capitalists, on the other hand, take advantage of the difference between the labor market and the market for whatever commodity is produced by the capitalist. Marx observed that in practically every successful industry input unit-costs are lower than output unit-prices. Marx called the difference "surplus value" and argued that this surplus value had its source in surplus labour, the difference between what it costs to keep workers alive and what they can produce.
Capitalism is capable of tremendous growth because the capitalist can, and has an incentive to, reinvest profits in new technologies and capital equipment. Marx considered the capitalist class to be the most revolutionary in history, because it constantly improved the means of production. But Marx argued that capitalism was prone to periodic crises. He suggested that over time, capitalists would invest more and more in new technologies, and less and less in labor. Since Marx believed that surplus value appropriated from labor is the source of profits, he concluded that the rate of profit would fall even as the economy grew. When the rate of profit falls below a certain point, the result would be a recession or depression in which certain sectors of the economy would collapse. Marx thought that during such a crisis the price of labor would also fall, and eventually make possible the investment in new technologies and the growth of new sectors of the economy.
Marx believed that increasingly severe crises would punctuate this cycle of growth, collapse, and more growth. Moreover, he believed that the long-term consequence of this process was necessarily the enrichment and empowerment of the capitalist class and the impoverishment of the proletariat. He believed that were the proletariat to seize the means of production, they would encourage social relations that would benefit everyone equally, and a system of production less vulnerable to periodic crises. In general, Marx thought that peaceful negotiation of this problem was impracticable, and that a massive well-organized violent revolution would be required, because the ruling class would not give up power without struggle. He theorized that to establish the socialist system, a dictatorship of the proletariat - a period where the needs of the working-class, not of capital, will be the common deciding factor - must be created on a temporary basis. As he wrote in his "Critique of the Gotha Program", "between capitalist and communist society there lies the period of the revolutionary transformation of the one into the other. Corresponding to this is also a political transition period in which the state can be nothing but the revolutionary dictatorship of the proletariat."[24] While he allowed for the possibility of peaceful transition in some countries with strong democratic institutional structures (such as Britain, the US and the Netherlands), he suggested that in other countries with strong centralized state-oriented traditions, like France and Germany, the "lever of our revolution must be force."[25]
Marx's influence
See also: Marxism
“ The merit of Marx is that he suddenly produces a qualitative change in the history of social thought. He interprets history, understands its dynamic, predicts the future, but in addition to predicting it, he expresses a revolutionary concept: the world must not only be interpreted, it must be transformed. ”
— Che Guevara, Marxist revolutionary [26]
Karl Marx and Friedrich Engels monument in Marx-Engels-Forum, Berlin-Mitte
The work of Marx and Engels covers a wide range of topics and presents a complex analysis of history and society in terms of class relations. Followers of Marx and Engels have drawn on this work to propose a grand, cohesive theoretical outlook dubbed Marxism. Nevertheless, Marxists have frequently debated amongst themselves over how to interpret Marx's writings and how to apply his concepts to their contemporary events and conditions. Moreover, it is important to distinguish between "Marxism" and "what Marx believed"; for example, shortly before he died in 1883, Marx wrote a letter to the French workers' leader Jules Guesde, and to his own son-in-law Paul Lafargue, accusing them of "revolutionary phrase-mongering" and of lack of faith in the working class. After the French party split into a reformist and revolutionary party, some accused Guesde (leader of the latter) of taking orders from Marx; Marx remarked to Lafargue, "if that is Marxism, then I am not a Marxist" (in a letter to Engels, Marx later accused Guesde of being a "Bakuninist").[27]
Essentially, people use the word "Marxist" in one of two ways:
1. to describe those who rely on Marx's conceptual language (e.g. "mode of production", "class", "commodity fetishism") to understand capitalist and other societies; or:
2. to describe those who believe that a workers' revolution is the only means to a communist society.
Some, particularly in academic circles, who accept much of Marx's theory, but not all its implications, call themselves "Marxian" instead.
Six years after Marx's death, Engels and others founded the "Second International" as a base for continued political activism. This organization proved far more successful than the First International, containing mass workers' parties, particularly the large and successful Social Democratic Party of Germany, which was predominantly Marxist in outlook. This international collapsed in 1914, however, in part because some members turned to Edward Bernstein's "evolutionary socialism", and in part because of divisions precipitated by World War I.
World War I also led to the Russian Revolution of 1917, in which a left splinter of the Second International, the Bolsheviks, led by Vladimir Lenin, took power. The revolution dynamized workers around the world into setting up their own section of the Bolsheviks' "Third International". Lenin presented himself as both the philosophical and the political heir to Marx, and developed a political program, called "Leninism" or "Bolshevism", which called for revolution organized and led by a centrally organized vanguard "Communist Party".
Marx believed that the communist revolution would take place in advanced industrial societies such as France, Germany and England, but Lenin argued that in the age of imperialism, and due to the "law of uneven development", where Russia had on the one hand, an antiquated agricultural society, but on the other hand, some of the most up-to-date industrial concerns, the "chain" might break at its weakest points, that is, in the so-called "backward" countries, and ignite revolution in the advanced industrial societies of Europe, where society is ready for socialism, and which could then come to the aid of the workers state in Russia.[28]
Marx and Engels make a very significant comment in the preface to the Russian edition of the Communist Manifesto:
“ Now the question is: can the Russian obshchina, though greatly undermined, yet a form of primeval common ownership of land, pass directly to the higher form of Communist common ownership? Or, on the contrary, must it first pass through the same process of dissolution such as constitutes the historical evolution of the West?
The only answer to that possible today is this: If the Russian Revolution becomes the signal for a proletarian revolution in the West, so that both complement each other, the present Russian common ownership of land may serve as the starting point for a communist development.
”
— (Marx and Engels, Preface to the Russian edition of the Communist Manifesto)
Marx's words served as a starting point for Lenin,[29] who, together with Trotsky, always believed that the Russian revolution must become a "signal for a proletarian revolution in the West". Supporters of Trotsky argue that the failure of revolution in the West (along the lines envisaged by Marx) to come to the aid of the Russian revolution after 1917 led to the rise of Stalinism[30] and set the cast of human history for seventy years. This is termed the theory of the Permanent Revolution, which became official policy in Russia until Lenin's death in 1924 and the subsequent development of the concept of "Socialism in one country" by Stalin.
100 Mark der DDR note used in the German Democratic Republic. 100 Mark banknotes with Marx's portrait were current from 1964 until monetary union with West Germany in July 1990.
In China Mao Zedong also claimed to be an heir to Marx, but argued that peasants and not just workers could play leading roles in a Communist revolution, even in third world countries marked by peasant feudalism in the absence of industrial workers. Mao termed this the New Democratic Revolution. It was a departure from Marx, who had stated that the revolutionary transformation of society could take place only in countries that have achieved a capitalist stage of development with a proletarian majority. Marxism-Leninism as espoused by Mao came to be internationally known as Maoism.
Under Lenin, and particularly under Joseph Stalin, Soviet suppression of the rights of individuals in the name of the struggle against capitalism, as well as Stalinist purges themselves, came in the minds of many
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http://www.latimes.com/news/opinion/commentary/la-oe-ferg6-2009feb06,0,6972232.column
Keynes can't help us now
Governments cling to the delusion that a crisis of excess debt can be solved by creating more debt.
Niall Ferguson
February 6, 2009
» Discuss Article (137 Comments)
It began as a subprime surprise, became a credit crunch and then a global financial crisis. At last week's World Economic Forum in Davos, Switzerland, Russia and China blamed America, everyone blamed the bankers, and the bankers blamed you and me. From where I sat, the majority of the attendees were stuck in the Great Repression: deeply anxious but fundamentally in denial about the nature and magnitude of the problem.
Some foretold the bottom of the recession by the middle of this year. Others claimed that India and China would be the engines of recovery. But mostly the wise and powerful had decided to trust that John Maynard Keynes would save us all.
I heard almost no criticism of the $819-billion stimulus package making its way through Congress. The general assumption seemed to be that practically any kind of government expenditure would be beneficial -- and the bigger the resulting deficit the better.
There is something desperate about the way economists are clinging to their dogeared copies of Keynes' "General Theory." Uneasily aware that their discipline almost entirely failed to anticipate the current crisis, they seem to be regressing to macroeconomic childhood, clutching the Keynesian "multiplier effect" -- which holds that a dollar spent by the government begets more than a dollar's worth of additional economic output -- like an old teddy bear.
They need to grow up and face the harsh reality: The Western world is suffering a crisis of excessive indebtedness. Governments, corporations and households are groaning under unprecedented debt burdens. Average household debt has reached 141% of disposable income in the United States and 177% in Britain. Worst of all are the banks. Some of the best-known names in American and European finance have liabilities 40, 60 or even 100 times the amount of their capital.
The delusion that a crisis of excess debt can be solved by creating more debt is at the heart of the Great Repression. Yet that is precisely what most governments propose to do.
The United States could end up running a deficit of more than 10% of GDP this year (adding the cost of the stimulus package to the Congressional Budget Office's optimistic 8.3% forecast). Nor is that all. Last year, the Bush administration committed $7.8 trillion to bailout schemes, in the form of loans, investments and guarantees.
Now the talk is of a new "bad bank" to buy the toxic assets that the Troubled Asset Relief Program couldn't cure. No one seems to have noticed that there already is a "bad bank." It is called the Federal Reserve System, and its balance sheet has grown from just over $900 billion to more than $2 trillion since this crisis began, partly as a result of purchases of undisclosed assets from banks.
Just how much more toxic waste is out there? New York University economist Nouriel Roubini puts U.S. banks' projected losses from (DEMOCRAT DEMANDED FOR MINORITIES)bad loans and securities at $1.8 trillion. Even if that estimate is 40% too high, the banks' capital will still be wiped out. And all this is before any account is taken of the unfunded liabilities of the Medicare and Social Security systems (WHICH FUND LBJ AND GORE MADE AVILABLE TO CONGRESS TO SPEND AS THEY WISH0. With the economy contracting at a fast clip, we are on the eve of a public-debt explosion. And similar measures are being taken around the world.
The born-again Keynesians seem to have forgotten that their prescription stood the best chance of working in a more or less closed economy. But this is a globalized world, where uncoordinated profligacy by national governments is more likely to generate bond-market and currency-market volatility than a return to growth.
There is a better way to go: in the opposite direction. The aim must be not to increase debt but to reduce it. TAKE NOTES CONGRESSIONAL DEMOCRATS, TAX INCREASES DO NOT HELP THE ECONOMY
This used to happen in one of two ways. If, say, Argentina had an excessively large domestic debt, denominated in Argentine currency, it could be inflated away -- Argentina just printed more money. If it were an external debt, the government defaulted and forced the creditors to accept less.
Today, America is Argentina. Europe is Argentina. Former investment banks and ordinary households are Argentina. But it will not be so easy for us to inflate away our debts. The deflationary pressures unleashed by the financial crisis are too strong -- consumer prices in the U.S. have been falling for three consecutive months. Nor is default quite the same for banks and households as it is for governments. Understandably, monetary authorities are anxious to avoid mass bankruptcies of banks and households, not least because of the downward spiral caused by distress sales.
So what can we do? First, banks that are de facto insolvent need to be restructured, not nationalized.DUHH, GIVE CONGRESS AN IQ TEST.(The last thing the U.S. needs is to have all of its banks run like Amtrak or, worse, the IRS.) Bank shareholders will have to face that they have lost their money. Too bad; they should have kept a more vigilant eye on the people running their banks. Government will take control (ALSO CALLED COMMUNISM, HILLARY, OBAMA, CHOMSKY APOSTLES, AND NFL HALFTIMER SPRINGSTEEN) in return for a substantial recapitalization, but only after losses have been meaningfully written down. Those who hold the banks' debt, the bondholders, may have to accept a debt-for-equity swap or a 20% "haircut" -- a disappointment, but nothing compared with the losses suffered when Lehman Bros. went under.
LIKE I BEEN SAYING, BUY LOCAL, BANK LOCAL, NO CITIBANK MASTERCARDS.
State life-support for dinosaur banks should not and must not impede the formation of new banks by the private sector. It is vital that state control does not give the old, moribund banks an unfair advantage. So recapitalization must be a once-only event, with no enduring government guarantees or subsidies. And there should be a clear timetable for "re-privatization" -- within, say, 10 years.
The second step we must take is a generalized conversion of American mortgages to lower interest rates and longer maturities. About 2.3 million U.S. households face foreclosure. That number is certain to rise as more adjustable-rate mortgages reset, driving perhaps 8 million more households into foreclosure and causing home prices to drop further. Few of those affected have any realistic prospect of refinancing at more affordable rates. So, once again, what is needed is state intervention.
Purists say this would violate the sanctity of the contract. But there are times when the public interest requires us to honor the rule of law in the breach. Repeatedly in the course of the 19th century, governments changed the terms of bonds that they issued through a process known as "conversion." A bond with a 5% return was simply exchanged for one with a 3% return, to take account of falling market rates and prices. Such procedures were seldom stigmatized as default.
Another objection to such a procedure is that it would reward the imprudent. But moral hazard only really matters if bad behavior is likely to be repeated, and risky adjustable-rate mortgages aren't coming back soon.
The issue, then, becomes one of fairness: Why help the imprudent when the prudent are struggling too?
One solution would be for the government-controlled mortgage lenders and guarantors, Fannie Mae and Freddie Mac, to offer all borrowers -- including those with fixed rates -- the same deal. Permanently lower monthly payments for a majority of U.S. households almost certainly would do more to stimulate consumer confidence than all the provisions of the stimulus package, including tax cuts.
No doubt those who lost by such measures would not suffer in silence. But the benefits would surely outweigh the costs to bank shareholders, bank bondholders and the owners of mortgage-backed securities.
Americans, Winston Churchill once remarked, will always do the right thing -- after they have exhausted all other alternatives. If we are still waiting for Keynes to save us when Davos comes around next year, it may well be too late. Only a Great Restructuring can end the Great Repression. It needs to happen soon. NOT OBAMA'S 819 BILLION TAX INCREASE.
Niall Ferguson is a professor at Harvard University and Harvard Business School, a Fellow of Jesus College, Oxford, and a senior fellow of the Hoover Institution. His latest book is "The Ascent of Money: A Financial History of the World."
1. I think we would be pretty well off if the banks were run like Amtrak. Typical argument that Gov't sucks compared to the free-market, until the free-market fails and they run to the Gov't. Let's understand one vital point. Gov't and Business have different goals and roles in society. Trying to have one act like the other will cause problems.
Submitted by: RJ
5:19 PM PST, Feb 6, 2009
2. Cutting mortgage rates and letting more companies fail is great in theory, but who is financing the lives of all the people going on unemployment, food stamps and welfare? Taxpayers. There must be job creation. It would be nice to let shareholders bite the bullet and take the losses, I agree, but on the same token, we as Americans as much as we hate to hear are just like those shareholders. We have not watched OUR CEOS (Congress and the Previous President). So if shareholders bite the bullet, this stimulus is biting it. However, we can turn a bad situation around by NOT giving more tax cuts, but use that bullet to create jobs!
Submitted by: Scoggins
5:09 PM PST, Feb 6, 2009
3. My daughter purchased a home for $480 thousand. Her down payment lowered the balance to $331 thousand. She cannot refinance because the house is worth only $290 thousand in two years time. Wouldn't it be better to lower rates by %1 and not go into foreclosure? I agree with Mr. Niall in all that he said. It is not Republican or Democratic thinking. It is concerned and knowledgeable thoughts for our country.
Submitted by: Lucille Cordova
5:00 PM PST, Feb 6, 2009
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