Here’s a recent talk on the GFC by Duncan Foley, who has this to say:
Moments of capitalist crisis greatly excite left critics of capitalism, but it is not clear to me why this should be so…[What] the left gets out a crisis is mostly determined by what the left brings into the crisis in terms of analysis, concrete political goals, and a vision for a transformed future…Thus a major crisis for the left is its current lack of a compelling vision of alternative institutions to organize economic production and distribution.
A while ago John Quiggin remarked, on his own blog and at Crooked Timber, that Marxist analyses of the 2007-09 global recession hadn’t ‘added much, in analytic terms, to the standard left-Keynesian analysis.’ Could someone, he asked, direct him to a worthwhile Marxist contribution to understanding the GFC?
Based on the comment threads for each entry, I’m not convinced that Quiggin wrote in good faith (for each linked suggestion, he averred either that it was insufficiently Marxist or excessively so). Nonetheless he had a point. Since the credit crunch hit in mid-2007, the explanation of events among many leftists (Foley, for one) has been broadly indistinguishable from interpretations put forward by followers of J.M. Keynes and Hyman Minsky. Minsky’s account of financial instability – the progression from hedging to speculation to Ponzi borrowing – has appeared sufficiently complete and persuasive. Marxist political economy, from this perspective, seems to offer no additional explanatory power. Despite its claims to predict the long-term trajectory of profit rates, the theory seems analytically redundant when it comes to the genesis of financial crises.
There’s a broader point here. Note that the aim is to find the most useful tools for understanding the recent economic situation. Nobody with intellectual integrity should be concerned to assert a priori the worth of any particular doctrinal perspective. The best theory explains (fits) the observed data given the least prior information input.
How do the contenders fare?
- The popular journalistic view explains the GFC as the outcome of dodgy lending practices and poor risk assessment (due to lack of transparency) of mortgage-backed derivatives. The data requirement for this theory is clearly very large: explaining the crisis basically involves describing the crisis in institutional detail (including matters, like the nature of opaque financial instruments, which should properly be regarded as epiphenomenal). The information cost isn’t worth the effort.
- Keynes-inflected behavioural economics points to the irrational ‘animal spirits’ of human psychology. In a recent book of this name by Robert Shiller and George Akerlof, the authors suggest that aggregate investment is erratic because decision-makers don’t fit orthodox microeconomic descriptions, grounded in rational choice theory. Instead, people are subject to panics and overconfidence. Market volatility like the GFC is put down to human foibles. Again, this theory has a relatively high information cost. It involves specifying the choice behaviour of individual agents (are they intertemporal optimisers with transitive preferences? or are they only boundedly rational? Do we have a representative agent or heterogeneous ones?). Given the minimal predictive value that’s produced, it’s probably not worth the effort.
- The Minsky-Keynes theory traces the recession to excess leveraging induced by a speculative bubble. A ‘euphoric economy…breeds a disregard of the possibility of failure’. This was originally a verbal model rather than a formal one, but it’s still elegant and simple. With very few assumptions it can explain higher leverage ratios, asset-price inflation in the housing and other markets, then the rise of loan defaults, sharp withdrawal of credit, reduced investment and depressed output. There’s little need to discuss the choice behaviour of agents or the features of particular debt instruments. The cycle is endogenous: it doesn’t rely on the propagation of external shocks (as in New Classical theory) or transmission via market imperfections (as in New Keynesian interpretations).
This last one is a nice explanatory fit; but we can, with equal simplicity, explain the asset-price bubble without reference to the psychology of borrowers. When the return on capital declines, the level of productive investment becomes insufficient to absorb the inflow of savings into the financial system. The book value of paper assets will rise, as will bonuses paid to workers and executives in the financial-services industry, ensuring a corresponding outflow of funds. But the process eventually runs up against the credit-worthiness of borrowers and capitalisation of banks. Adequately formalised, this model generates all the aperiodic boom-then-bust behaviour of the Minsky hypothesis. This account also has the added virtue – which the Minsky theory lacks – of dealing with global imbalances like the lending of China, Japan, Germany and the Gulf states to the US.
As for Foley’s other argument, of the need for ‘concrete political goals’ and ‘a compelling vision of alternative institutions’, it’s a point well taken, but best left to another post.