Keynesian versus Marxian Explanations of the Financial Crisis

ABSTRACT

Many Keynesian economists envisioned a new dawn of Keynesianism in the 2007–8 financial meltdown in the United States. Nearly seven years later, it is clear that the much-hoped-for Keynesian prescriptions are completely ignored. Why? Keynesian economists’ answer: “neoliberal ideology,” which they trace back to President Reagan. This study argues, by contrast, that the rise of neoliberalism has much deeper roots than pure ideology, that the transition from Keynesian to neoliberal economics started long before Reagan was elected president, and that the Keynesian reliance on the ability of the government to regulate and revive the economy through policies of demand management rests on a wishful/optimistic perception that the state can control capitalism. The study further argues that the Marxian theory of unemployment, based on his theory of the reserve army of labor, provides a much more robust explanation of the protracted high levels of unemployment than the Keynesian view, which attributes the plague of unemployment to the “misguided policies of neoliberalism.” Likewise, the Marxian theory of subsistence or near-poverty wages provides a more cogent account of how or why such poverty levels of wages, as well as a generalized predominance of misery, can go hand-in-hand with high levels of profits and concentrated wealth than the Keynesian perceptions, which view high levels of employment and wages as necessary conditions for an expansionary economic cycle.

Keywords:

• Reserve army of labor
• demand management
• capital and exchange rate controls
• New Deal economics
• reform vs. revolution

Acknowledgements

This paper draws extensively upon the author's recently published book, Beyond Mainstream Explanations of the Financial Crisis: Parasitic Finance Capital, published by Routledge in 2014.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes on contributor

An Iranian-born Kurd, Ismael Hossein-zadeh is Professor Emeritus of Economics at the Drake University (Des Moines, Iowa, USA). He is the author of Beyond Mainstream Explanations of the Financial Crisis (Routledge, 2014), The Political Economy of US Militarism (Palgrave–Macmillan, 2007), and Soviet Non-capitalist Development: The Case of Nasser's Egypt (Praeger Publishers, 1989). He has also published many scholarly articles on topics such as financial instability, economic crisis and restructuring policies, currency-trade relations, globalization and labor, economics of war and military spending, roots of conflict between the Muslim world and the West, long waves of economic expansion and decline, and more. Additional information on Professor Hossein-zadeh can be viewed on his website: www.ismaelhossein-zadeh.com.