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Why economists can't explain crisis

By Paul D'Amato | December 14, 2001 | Page 9

"I DO not believe that economists understand the business cycle. I say to my mom, 'Don't worry, there will not be another Depression,' and she says, 'Why not?' And I say I don't really know why not."

This comes from an economic historian quoted in the New York Times. Economists seem unable to predict the onset of slumps, their duration, how they came about or how they will end.

In flush times, they tend to lean on "theories" that purport to prove that booms are normal and slumps are anomalies--if not obsolete from here on in. They turn to the vulgar economist JB Say, who said that "supply creates its own demand"--there can be no overproduction because everything that is produced will find a buyer.

"Nothing can be more childish," wrote Karl Marx in Capital, "than the dogma that, because every sale is a purchase and every purchase a sale, therefore the circulation of commodities necessarily implies an equilibrium of sale and purchase."

The fact is, argued Marx, that sale and purchase can be separated. Money obtained from a sale then does not have to be used to buy something else--it can be withheld from circulation.

When the economic crisis comes, economists turn to an equally facile explanation--psychology. Here is a sample from a different economist in the same New York Times article: "The problem comes if you get into a situation where expectations reverse. If companies do not believe the demand will be there, then you have to convince them it will be. That is what I believe the forecasters are doing now, trying to make everyone comfortable that demand will be there."

Here we have a non-explanation of crisis: The recession began because people lost confidence in the economy, and it will end when people regain confidence in it.

The job of the forecaster is to convince people to have a positive attitude about the economy. People are actually paid to say these things.

It's true that psychology and "herd mentality" play a role among investors. But the ultimate mental state of investors has to be explained by economic trends, not economic trends by people's mental state.

The first thing is to recognize that booms and slumps are each integral to capitalism. In The Communist Manifesto, Marx refers to the "commercial crisis that by their periodical return put the existence of the entire bourgeois society on trial."

In these crises, Marx wrote, there occurs something that would have seemed absurd in the past--"the epidemic of overproduction." Absurdly, crisis occurs because "there is too much civilization, too much means of subsistence, too much industry, too much commerce."

Capitalism is an unplanned system in which goods are produced for the market and sold to turn a profit. If capitalists cannot sell their goods, and therefore turn a profit, then they will stop producing them and stop investing in the equipment necessary to make them.

Booms run their course when, in the frenzy of investment, capitalists suddenly realize that they have created more goods than the market can bear. The crisis is then worsened by the large amounts of debt used to finance the boom that now cannot be repaid, and when masses of laid-off workers stop buying goods.

The crisis is only overcome when some businesses go to the wall and they are bought up on the cheap by the survivors, and when wages and other costs are driven down low enough to restore profits. Capitalists then become confident that it's safe to invest again and "the same cycle of errors is pursued once more."

Each crisis brings home to workers--like the laid-off workers at Enron who were driven from the front of the company headquarters by mounted police--"production comes to a standstill not at the point where needs are satisfied, but rather where the production and realization of profit impose this."

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