Book Review: The Return of Depression Economics

Ann Robertson
Krugman’s theory appears progressively bankrupt when we discover that he is not only prepared to abandon the majority of the world’s nations, which are struggling to survive in the capitalist system, but he is equally prepared to turn his back on the majority of the inhabitants of the wealthy nations; for he concedes that in […]

Reviewed by Ann Robertson

The Return of Depression Economics
By Paul Krugman
Norton Press, 2000, $12.95

Paul Krugman’s book, though deeply flawed, nevertheless offers some insights from his perspective into both the mechanisms and machinations of global capitalism. The author, who teaches at M.I.T., is—within ruling class circles—a highly respected pro-capitalist economist and has recently become a regular contributor to the New York Times Op Ed page.

One of the great merits of Krugman’s book is his unusual ability to translate his economic theory into easily accessible terms. And by injecting a certain dramatic dimension into his analysis, he has succeeded in rendering the book not only readable but also engaging.

Basically, Krugman offers a diagnosis of the devastating crises that have erupted throughout the global capitalist system during the past decade and provides his version of a cure. Along the way he also includes a loyal defense of the capitalist system itself, a defense he undoubtedly felt compelled to offer in light of the massive protests against the ills of capitalism that have been converging at such gatherings as the World Trade Organization, the World Bank, and the International Monetary Fund, where the ruling elite determine global economic policies.

Krugman’s examples

Reading Krugman’s book clearly gives one the sense that during the past decade it was as though a violent tornado descended on the global capitalist system, wreaking devastation wherever it touched down. Here are some examples that Krugman cites, with emphasis added:

In 1995 in Mexico, “the so-called tequila crisis caused one of the worst recessions to hit an individual country since the 1930s.”
Then, as a result of the Mexican crisis Argentina “went suddenly from euphoria to terror.”

In 1997 the devaluation of Thailand’s currency “triggered a financial avalanche that buried much of Asia.”
“Within 3 months [of Thailand’s devaluation] Indonesia was in even worse shape than the rest of Southeast Asia, indeed on its way to one of the worst economic slumps in world history….”
When neighboring countries devalued their currencies, Hong Kong suddenly became correspondingly expensive. “The result was a deepening recession, the worst in memory.”
“…Japan has spent most of the past decade in a slump, alternating brief and inadequate periods of economic growth with ever-deeper recessions.”
“In the summer of 1998 Russia’s financial situation unraveled faster than expected… Indeed, for a few weeks it looked as if Russia’s financial collapse would drag down the whole world.”
“At the time of writing [1999]…it seems clear that Brazil is now set for a crisis at least as bad as Thailand’s or Korea’s.”

When it comes to diagnosing the problem and advancing a cure, Krugman draws a sharp line between advanced industrialized countries like Japan on the one hand and Third World countries like Mexico, Indonesia, etc., on the other. One cure, in other words, does not fit all maladies. Let us look first at his prescription for Japan, which he introduces by having us consider an analogous breakdown but on a much smaller scale.

Japan and the babysitting co-op analogy

According to Krugman, there was once, in the 1970s, a babysitting co-op in Washington D.C., comprising about 150 couples who desired to exchange babysitting chores with one another. Organizing the functioning of such a large co-op was no easy task, but it was solved in this way. All members received a certain specified number of coupons when they joined the co-op. Then, if one couple babysat the children of another couple, there would be a transfer of coupons from the latter to the former. The co-op ran smoothly until a snag developed. Couples began attempting to stockpile coupons so that they would be assured of enough when they really needed a babysitter. But when a large number of the co-op’s members adopted this same strategy, a crisis developed. Opportunities to baby-sit became scarce since everyone was trying to do it, which in turn made couples even less likely to procure babysitters for fear of depleting their coupon reservoir. So the co-op went into a recession. Various solutions were attempted but the one that proved most successful was simply to increase the number of coupons issued to the members. With more coupons in reserve, couples felt that they could procure babysitters once again without jeopardizing their future prospects of doing so again.

This example captures the essence of Krugman’s advice to Japan, which has been unable to stimulate production even after dropping interest rates almost to zero. Japan should simply print more money and introduce it into circulation through governmental spending; by doing so demand will increase which in turn will cause the wheels of production to roll again.

We will return to the merits of this solution, or lack thereof, shortly, but it is instructive to contemplate Krugman’s response to the economic crises of Third World countries where global capitalism has inflicted its most painful economic disruptions. One can only recoil in horror upon discovering that Krugman in fact has no specific remedy at all to offer these countries, which are the most desperate for a cure. It is as though Krugman, riding high on his economic theory after addressing Japan’s problems, suddenly crashed into a brick wall. Here is how he puts it:

“Perhaps a quick way to summarize this advice is with the old injunction to go to the church of your choice, but go, dammit. In a financial crisis a government must do something decisive. Institute a currency board if that seems feasible…or let the currency float if you think that can work in your country; or impose emergency capital controls quickly. Whatever you do, don’t dither.”

Danger for the developing countries

So while Krugman has a quick prescription for Japan’s ailing economy, whose woes he indicates “are not as acute as those of other nations,” when it comes to places where millions of people have been thrown out of work and into life-threatening poverty, he has basically nothing to offer except to say, “Try something,” which surely they could have stumbled upon themselves. He concludes this part of his analysis with the rather sober reflection: “…the world remains a very dangerous place for developing countries….”

Krugman, by the way, does not seem to regard this paralysis of his theory in the face of so much suffering as some fatal flaw, either in his theory or in the capitalist system itself, perhaps because of his somewhat religious-metaphysical view of the universe. “The world is an unfair place,” he informs us. “Wealthy countries tend to be blessed on all counts. Not only are they rich, but they generally have stable and effective governments.” Krugman would have us think that the “blessed” wealthy nations acquired their riches as a gift from the gods rather than through a process of colonization in which they employed such morally questionable tactics as slavery, genocide and plunder in order to seize the natural and human wealth of other countries for themselves and leave their victims destitute.

Krugman’s theory appears progressively bankrupt when we discover that he is not only prepared to abandon the majority of the world’s nations, which are struggling to survive in the capitalist system, but he is equally prepared to turn his back on the majority of the inhabitants of the wealthy nations; for he concedes that in the U.S. during the recent period of prosperity, “Inequality of both wealth and income had increased to levels not seen since Great Gatsby days, and by official measures real wages had actually declined for many workers.”

Returning to Krugman’s co-op analogy, while it might help solve a liquidity crisis, it actually masks a much deeper and insurmountable crack in the foundation of capitalism. In the co-op, all the participants stand on an equal footing; all are paid exactly the same amount for equal amounts of labor performed; and the system guarantees that all members will alternate between babysitting for others and benefiting from others babysitting for them. But in these respects Krugman’s co-op more closely resembles a miniature socialist society where equality prevails and exploitation is entirely absent.

The co-op analogy vs. the real situation

So if the co-op analogy is really going to help illuminate capitalist economic relations, it will have to undergo a few changes in order to provide a more accurate model for the system it purports to reflect. For example, we would have to stipulate that a small minority of the co-op members, through some accident of history, controls almost all the coupons. And because of their vast fortune, the members of this minority actually rule the “co-op” and operate it in their own interests. Other members of the co-op are transformed into mere means to enhance the status of the minority, but they are assured that this system is operating equally in everyone’s interests. Members of the wealthy minority never baby-sit, of course, but enjoy watching the other couples, the vast majority, who are in desperate need of coupons, compete against one another for babysitting positions for the minority. Finally, members of the wealthy minority offer weekly lectures to the other members of the co-op in which they explain in pompous and ponderous tones that the disparity of wealth in the co-op community is entirely a function of each individual’s personal intelligence, industry, and moral fiber.

But even this altered version of the co-op analogy does not do justice to the profound contradiction underlying capitalism. As a system of individual competition, capitalism requires that capitalists compete against one another to survive as capitalists. In order to ensure success, they must all attempt to maximize profits, which can then be employed to undersell their competitors, increase advertising or employ any other promising weapon in this life and death struggle.

But in order to maximize profits, capitalists must minimize their production costs and, most importantly this includes paying the work force as little as possible. Hence capitalists routinely replace full-time workers with lower paid part-time workers who receive no benefits, etc.; or capitalists will introduce technology into the work process, especially when workers are relatively well paid, so that fewer workers are able to produce more, etc. At the same time these capitalists, who are continually producing more with less labor, in the final analysis must sell their products in order to realize a profit. But with wages in a state of relative decline, who is in a position to purchase this constantly expanding supply of products? Therefore, as Marx argued in the “Communist Manifesto,” capitalism is plagued by crises of overproduction; there is insufficient demand for the vast amount of goods that have been produced, and factories come to a grinding halt. Krugman’s co-op example not only fails to address this problem but also obfuscates it.

What about planning?

Krugman himself reluctantly concedes that at times the capitalist free market system must be restrained if the system itself is to survive: “I don’t like the idea that countries will need to interfere with markets—that they will have to limit the free market in order to save it. But it is hard to see how anyone who has been paying attention can still insist that nothing of the kind needs to be done, that financial markets will always reward virtue and punish only vice.” And while this advice represents a step in the direction of a planned economy, he is quick to reject anything that would significantly resemble socialism: “But who can now use the word socialism with a straight face? … Now it is a sick joke; after all the purges and gulags, Russia is as corrupt as ever; after all the Great Leaps and Cultural Revolutions, China has decided that making money is the highest good. There are still radical leftists out there who stubbornly claim that true socialism has not yet been tried…. But the truth is that the heart has gone out of the opposition to capitalism.”

So instead of trying to create a society in which injustice has been eradicated, Krugman leaves us with a rather grim picture to gnash our teeth on, although he seems almost euphoric at the prospect: “…we live in a world in which property rights and free markets are viewed as fundamental principles, not grudging expedients; where the unpleasant aspects of the market system—inequality, unemployment, injustice—are accepted as facts of life.”

The system sacrifices the needs of the majority so that a tiny minority can become wealthier.

As we have noted, Krugman’s theory is incapable of offering Third World countries any respite from the horrifying effects of global capitalism. His theory casts a blind eye on the fundamental contradiction of the capitalist system which condemns it to ever-greater economic convulsions and thus to a historical dead end. But still, like a captain clinging to his sinking ship, Krugman is prepared to doggedly defend a system that is no longer serving the interests of humanity. This is a system that sacrifices the needs of the majority so that a tiny minority can become progressively wealthier on an unprecedented scale. Working people, the vast majority, can look forward to working more but receiving less or being thrown out of work altogether at the bosses convenience. People are encouraged to purchase products, even when it is known that they will harm the consumer. The environment and the planet itself are being destroyed at an accelerating rate because it is less profitable to dispose of toxic wastes properly, or refrain from clear-cutting our forests, or refrain from transforming every available space into a new shopping mall. Young men and women are routinely sent off to war to defend corporate profits. And democracy itself degenerates into a “sick joke.” Does anyone really believe that the rich don’t control the politicians? One feels compelled to ask Krugman how he can defend capitalism “with a straight face.” Finally, can one really believe that after all these centuries where humanity has existed in a variety of social systems—tribal communities, slave societies, feudalism—that history is going to execute an about-face, come to an abrupt halt, and remain permanently fixed on capitalism?

Producing for humanity, not for profit

There are indeed radical leftists out here “who stubbornly claim that true socialism has not yet been tried,” but our heart has NOT gone out of our opposition to capitalism. Surely, society can be organized according to more rational and moral principles, where everyone is guaranteed a job, paid well, and where we produce for the good of humanity, not for private profit at the expense of humanity; a society in which every child is guaranteed a home, enough to eat, quality education, and free health care; a society in which all members of the community can participate in rationally determining social policy. This kind of vision might not move Krugman, but because we have routinely been denied these basic rights, such a vision strikes a deep chord in the hearts of working people all over the world and therefore is not a simple utopian dream but a historical imperative.

Originally published July/August 2001 
in Socialist Viewpoint.

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