Last week we saw how neoclassical economists argued that “free markets” would lead to a stable situation where everything was shared out as fairly as possible.
For a while in the early 20th century this seemed to work. Capitalism expanded across the globe, aided by states and their national armies.
This combination led to the brutal slaughter of the First World War, followed by the boom of the 1920s. But in 1929 the Wall Street Crash heralded the start of the Great Depression, the biggest crisis capitalism had faced.
The neoclassical economists could offer no solution. For them such protracted periods of unemployment and stagnation simply shouldn’t occur – the market should heal itself.
But it soon became clear that the market would do nothing of the sort. The ruling class began to turn the new theories being put forward by the Cambridge economist John Maynard Keynes.
Keynes argued that the only way out of the depression was a massive investment programme led by the state. He recommended that governments take action to stimulate demand by creating jobs and raising wages.
His theories opposed neoclassical policy conclusions, but they were built on the same foundations.
Keynes thought the neoclassical approach was essentially correct, but only explained how individual economic actors made their decisions. However, this “microeconomic” approach could not explain the capitalist system as a whole.
That required a new set of theories – “macroeconomics” – that could deal with the big picture and advise governments on how to stave off capitalist crisis by intervening in the economy.
Although it was the vast military spending of the Second World War that eventually ended the Great Depression, a macroeconomic “Keynesian” framework dominated the policy of Western governments after the Second World War. This was bolstered by the longest uninterrupted period of capitalist growth in history.
Governments were convinced that they had finally banished the spectre of economic crisis. But in the early 1970s the system broke down once more.
A hike in the price of oil heralded a period of combined stagnation and inflation – so called “stagflation” – that the Keynesian remedies were incapable of solving.
The pendulum swung back once more towards neoclassical theories. A new school of economists led by Friedrich von Hayek called for a return to “free market” fundamentalism.
His followers, known as the neoliberals, were viciously opposed to all state intervention in the economy, which they denounced as “socialism”.
Their methods were first tried out in practice in Chile, when economists from the “Chicago school” collaborated with the murderous regime of General Pinochet to implement a programme of rampant privatisation and deregulation.
The neoliberals saw this as a great success, despite its terrible toll on workers.
During the 1980s Margaret Thatcher in Britain and Ronald Reagan in the US also attacked the trade union movement and drove through neoliberal policies. Keynes fell out of fashion, remaining in the doghouse until recently.
In the current crisis mainstream debate is dominated by the rivalry between Keynesian and neoliberal approaches – but the two philosophies have more in common than is generally credited.
They are built on the same economic foundations. And in practice, governments blur the two approaches.
Reagan, for instance, oversaw a massive increase in US government spending on the arms industry – despite all his rhetoric about “small government”.
Neither school of thought has ever got to grips with how the capitalist economy works, as the current crisis makes all too clear.
The Great Depression discredited neoclassical theories, but the ruling class had Keynes to turn to. Keynesian economics was in turn discredited, but the ruling class had the neoliberals to turn to.
Today the ideological cupboard lies bare. None of the apologists for capitalism has a credible strategy for how to get the global economy out of the mess it has got itself into.
Now more than ever, it is time to reassert the Marxist critique of capitalism – and its vision of the working class rising up to construct a socialist society.
For more on Keynesian theories see » Can state intervention solve the crisis?