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A Left-Keynesian Interpretation of the Crisis,
This review is from: The Global Minotaur: America, The True Origins of the Financial Crisis and the Future of the World Economy (Economic Controversies) (Paperback)
Yanis Varoufakis, Professor of Economic Theory at the National and Capodistrian University of Athens, is mainly known for his work (with Shaun Hargreaves-Heap) on critical analysis of game theory. He is however also one of the foremost currently active left-Keynesian economists. In this book, "The Global Minotaur", he sets out his analysis of the origins and nature of the current economic depression from this perspective. The book is well-written and should be generally accessible to the interested layman, but it is also rather disjointed; it has at times insufficient theoretical depth to clearly separate causes, and at the same time insufficient structuring to make it wholly work as a popular text. That said, it is highly informative, clear in the purely descriptive aspects of its content, and should make the Keynesian interpretation of the current crisis and global trade relations clear to all involved.
The first two chapters, the introduction and "Laboratories of the Future", are the most rambling and unclear, and therefore may put off readers unfairly. In it, Varoufakis discusses and then dismisses various popular explanations for the crisis and explains the Keynesian theory of capital and of crisis in general terms, but I doubt whether anyone will be much the wiser for it. The later chapters, however, are excellent. Varoufakis systematically traces the two world-systems led by the United States that have existed since WWII. First this is the gold standard convertibility system of Bretton Woods, in which the United States financed its vassals in Europe and east Asia in order to provide itself with a market for its own manufactures, in exchange for which it could rely on their political loyalty in the struggle against its rival, the Soviet Union. He clearly outlines the significance of the Marshall Plan and the creation of the European Coal and Steel Community, as well as the plans for the quick revival of Germany and Japan after being defeated in WWII, as part of the American 'global plan' to recycle its surpluses from production, so as to maintain demand for its own production. The Vietnam war and the attendant massive financing of South Korea, Singapore and Taiwan are also put into context in this manner. This is an interesting and controversial point, because generally the start of the European unification project and the revival of Japan are interpreted as developments necessarily ceded by the US against its short-term interests in order to prevent a Communist takeover; but in Varoufakis' reading, the Cold War as such does not play such a significant role, and these developments are read as actually being directly beneficial to America's global position. Although I am not so enamored of Keynesian demand theory as the author, the argument here is strong and allows for an interesting reinterpretation of these events, especially the creation of the 'unified Europe'.
The second stage of the recent world-system shows, from the moment Nixon abandons the US gold standard under the pressure of its now increasingly powerful and rivalrous allies (France, Britain, Japan), a pattern almost the reverse of the former. After the abandonment of gold standard convertibility and the introduction of the floating exchange rates, the US dollar functions as the world reserve currency almost entirely unbound by gold. It can do this thanks to the immense economic and military power of the US, which makes it a safe guarantee for all creditors. As a result, the United States has an "exorbitant privilege" in being able to print dollars pretty much ad libitum and thereby bankroll its massive trade deficits and its enormous military expansion from President Reagan onwards, at the expense of Europe and the new economic powers of East Asia, including today China, whose trade surpluses are promptly invested in US dollar bonds and assets denominated in US dollars. The United States in this way can run up almost limitless debt and can increase its world position in military and economic terms thanks to the seignorage benefits it accrues in this manner - it becomes the 'global minotaur' which receives tribute from all abroad.
But: it can do this only for as long as it is still the most trusted debtor, effectively. And this leads Varoufakis to his analysis of the crisis, which is perhaps the best part of the book. He explains in a clear and easy to understand manner how the endless flow of capital to Wall Street (and lesser gods parasitical upon it, like Iceland and Ireland) which could not be 'recycled' into productive investment led to the creation of a massive financial bubble of ever more remote derivatives and leveraging, which inevitably popped. From Varoufakis' clear overview, there can be no doubt that we haven't seen the end of the crisis yet and that the systemic responses on the part of the Obama administration as well as the European Commission are essentially just attempts to set the clock back, to return to the financialized system from before the collapse of the bubble without making the least serious effort at implementing reforms to prevent it from happening again. This is an important warning that none of the current governments are actually interested in the human consequences of the crisis or in preventing its future recurrence. Moreover, as the example of Japan discussed by Varoufakis shows, a debt-deflationary cycle can take a very long time to get out of, and may well result in a 'lost decade' or longer of nondevelopment of the economy for most people. The author ends therefore with a discussion of how the main challenge is that of the Chinese against the global minotaur and their attempt to supplant it, but this provides no solution of itself, just a change of the guard.
The main strength of "The Global Minotaur" is in its descriptive clarity, explaining the processes through which the two different postwar systems operated with the United States at the helm, and how the era of neoliberal policy is directly linked to the changes in the kind of economic hegemony the US exercises. However, from my point of view, the book's weakness lies in its inability to more systematically analyze the causal sequences in production and crisis, which is a problem with Keynesian economics generally. Where it comes to understanding actual production, the creation and flow of value and its relationship to crisis, the left-Keynesian theory has very little to say. Keynesian economics relies purely on psychological explanations in the last instance, and these often beg the question. This is shown in this book by the small segments on Wal-Mart and how it supposedly lured Americans into a psychology of wanting to buy for cheap; these and similar passages are superficial, and do not go into for example the relationship between lowering the cost of the reproduction of labor and the ability of capitalists to subsequently lower the wage rate. Similarly, Varoufakis takes the underconsumptionist paradigm, i.e. the explanation of economic crisis by the inability of capitalists to create sufficient demand for their products, as a given and takes no time to defend it as against those Marxist interpretations that locate crisis in the sphere of production, with a declining rate of profit. For example, the author points to great increases in the volume of profit for American companies since the 1980s neoliberal era; but given the massive flows of capital from everywhere else to the United States, this tells us very little about the rate of profit. Without a meaningful value theory, Varoufakis can explain how the crisis came about, but not why it came about. Similarly, he can explain very well through which processes the US managed to exercise its economic power, but not how this relates to wages, class struggle, or political and technological changes (although he does note how Mao's victory in China sabotaged the American plan to make China the dominant market in Asia rather than Japan). It also makes it difficult for him to discuss in-depth the problems with the economic theories underlying the neoliberal order, other than complaining about their mathematical abstruseness.
None of that is to say this is not a good book, however. When taken descriptively and read as a history of the current global financial situation and the history of high finance in the postwar period, it is probably the best book at this theoretical level one can find, and it is readable and concise. In particular the clear explanation of the role of the United States in creating two different world orders since WWII is highly suggestive for understanding many political developments in the postwar period as well, and should clarify much of the issues around the ability of the US to maintain its power (which of course have nothing to do with the ideology of 'free markets' touted by its politicians). For a more in-depth causal approach to economic crisis in general and this one in particular, the really interested academic might do better to read the works of modern Marxist economists on the crisis, for example Andrew Kliman's recent works.
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Showing 1-4 of 4 posts in this discussion
Initial post: Feb 10, 2012 11:30:48 AM PST
Last edited by the author on Feb 12, 2012 12:37:19 AM PST
Luke D. Bagwell says:
Just an FYI, Prof Varoufakis IS a Marxist. But it's important to keep in Mind he is theorist so he draws on a lot, Read his text book modern political economics(which I HIGHLY recommend for anyone interested in economic theory and it's history, as well on more in depth explanation of work done for Minotaur) and it's quite clear his affinity for both Marx and Keynes. but if you ask him, he will identify himself as a Marxist... :)
Posted on Feb 10, 2012 12:08:36 PM PST
[Deleted by the author on Feb 12, 2012 12:35:39 AM PST]
In reply to an earlier post on Feb 17, 2012 3:03:25 PM PST
M. A. Krul says:
That's fair enough; I'm just not so convinced myself as to the possibility of reconciling both theories within Marxism. I don't mean to make any political insinuations towards him though.
In reply to an earlier post on Jul 6, 2012 2:58:38 PM PDT
Last edited by the author on Jul 6, 2012 6:24:48 PM PDT
If someone can reconcile Marx and Keynes here for me, please...? Also can someone recommend what of Kliman to read for a "beginner" (lack of a better term" Thnx I am not sure that Krul checks here very often, will try to send it in a message
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