in which we actually live. Prices don’t adjust that easily: workers either resist wage cuts, or, more likely, even if they are willing to accept them, as many in the Depression were, they cannot coordinate any economy-wide reduction in labour costs anyway (it’s not like they have that power in capitalism). Investors won’t instantly become optimists and throw their capital into production and hiring. For any set of self-interested actors, there is a massive collective action problem. Often, he said, the only answer is for the state to step in as mediator, regulator, and coordinator of economic relationships: organizing labour and capital so as to manage consumer demand, planning investments so they are complementary, and providing stimulus in the form of government spending when consumers and investors start to feel insecure again, as they inevitably will.
According to Keynes, this suboptimal up-and-down, occasionally with really high ups and really low downs, is how capitalism works. Its volatility is not a result of mismanagement or interference or workers’ demand for “excessive” wages, but a part of how it functions “naturally.” And, if the capitalist state does not manage the ups and downs, people might become so disgruntled that all that communism and socialism stuff whispered about in field and factory starts making sense. In the middle of the Depression and then World War II, with the Russian revolution in the background, that warning made many capitalists sit up and take notice. They may not have been big fans of liberal democracy, but it beat the alternative.
More on this later (Chapter 5). But before we turn to the principle institutions of capitalism, it is worth noting that Keynesian ideas, in different forms (not all of which Keynes would have endorsed), dominated capitalist economic theorizing from World War II until the early 1970s. Explicitly Keynesian theory and policy fell with the rise of a reinvigorated, formally complex (“mathematical”), and strident form of neoclassical analysis that was the first step toward the capitalist ways of knowing and doing we live with today. The crisis that began in 2007 has certainly troubled this resurrected neoclassicism, but, despite their obvious flaws, there is no guarantee that neoclassical economics or the neoliberalism it underwrites will go the way of the dodo.
6 Some of the better-known Physiocrats include Francois Quesnay, Richard Cantillon, and Jean-Baptiste Say (of “Say’s Law,” on which more to come in the section on J. M. Keynes below).
7 “Factors of production” is still a common term in economics today (although one hears much less about land). The term “economic growth” has, however, only been in common usage since World War II.
8 Adam Smith, The Wealth of Nations (New York: Modern Library, 2000), 484–85.
9 The term “neoclassical” with respect to economics was coined in 1900 by the American economist Thorstein Veblen, the same person who first discussed “conspicuous consumption.”
10 This helps explain some interesting features of monetary history that sometimes confuse us moderns, like the enormous stone “coins” of some ancient cultures. These were not money as we understand it today; rather, in essentially non-monetary social formations, “monetary” exchange was confined to very specific exchange conditions. These involved, unsurprisingly, significant ceremony—like the movement or change in ownership of a ten-ton “coin.”
11 W-G-W, Ware-Geld-Ware, in Marx’s German.
12 One thing to keep in mind, however, is that it would have to be all workers who enjoyed this transformative wage; history suggests that if it is just a fraction of workers, then the lucky few who earn “enough” tend to become much less interested in transformation.
13 It is interesting to note that Marx argued that the “valuation” of labour’s contribution to capitalist production processes could not be called “unjust,” since the meaning of justice is determined by the social relations of production in specific historical conditions. In capitalist society, “justice” is a capitalist standard. There are no “unjust” wages in capitalism, according to Marx; what was unjust (and clearly not by capitalist standards, but by the revolutionary ethics Marx espoused) was the wage relation itself.
14 For those familiar with a little bit of economic terminology, this is the basis of what is now called “general equilibrium” theory, the hallmark of modern neoclassical analysis. The “general” part refers to the entire set (the “vector”) of prices within an economy. The idea that those relative prices can find a system-wide equilibrium is the heart of the neoclassical theory of value, a theory often called “Walrasian,” after the seminal contributions of Léon Walras, a nineteenth-century Swiss economist. Walras did more than perhaps anyone else to reshape economics along the lines of a natural science like physics. If we had to choose one text as the foundation of modern, mathematized, neoclassical economics, it would have to be his Elements of Pure Economics (1877). “Pure” presumably meant “assuming away all that complicated real-life stuff.”
15 As we will see, the end of Keynesianism, and “return” of neoclassical economics in the postwar era, has also involved the reassertion of the theory of monetary neutrality, although it is now dressed up in a range of complex conceptual costumes (e.g., money-in-the-utility-function) that obscure it.
16 It sounds crazy, but this idea still circulates in powerful circles. Not only do some modern economists still believe it—see the passages below on the Chicago School—but even those who don’t must assume that if it weren’t for “imperfections,” markets would be perfect, and there would be no idle resources, like unemployed workers, hanging around.
3. State Power and the Power of Money
This chapter and the next analyze four key components of capitalism—the state and money (Chapter 3), and markets and firms (Chapter 4)—to show their interdependence and contradictions. All are essential to capitalism’s remarkably dynamic history, and to its robustness in the face of so much change. While it is clearly important that these relations interlock effectively enough to produce a real “system,” at the same time, the ways they fall short of the dreams of orthodox economics are, in some cases, the reason the system works. Sometimes, the elements of the capitalist mode of production that fail to fully play their assigned role actually help the system reproduce itself. In fact, if capitalism worked exactly as some orthodox theories suggest, it would not have lasted very long at all.
The State
Capitalism is premised upon two kinds of power: (1) private economic power that comes from the control of property and profit-making; and (2) coercive power exercised by states in (and often beyond) bounded national territories.17 These two types of power exist side by side, but they have an inconsistent relationship, by turns complementary, conflictual, or indifferent. There are, however, a couple of things we should keep in mind about them.
First, we should be clear what power means, and how the two kinds work in practice. I am using the word “power” in the somewhat mainstream sense to describe authority or control and the way in which it is exercised, not in the “positive” or “productive” sense associated with influential French philosopher Michel Foucault. In other words, I mean both the form power takes, and the ways it is held.18 So, when we think of private economic power
