Readers of The New York Review are familiar with Professor Heilbroner’s style—the wide sweep, the eloquence, the sharp, original observations. This little book, enlarged from an article in The New Yorker, should spread his influence further.

“Another worldwide crisis of capitalism is upon us,” he begins. “From its earliest days, capitalism has always been as critically ill as it has been intensely alive. ‘Convulsions’ and ‘revulsions,’ as the older political economists called them, ‘crises,’ as Marx identified them, ‘recessions’ and ‘depressions,’ in modern economic language, have been as prominent features of capitalist development as its dizzying succession of technical advances, its enormous material productivity, its irresistible global expansion.”

Marx saw both the growth and the instability of capitalism as rooted in its central mechanism—the process by which businessmen use money to hire labor and buy materials, organize production of commodities to sell for more money, and then use more money to hire more labor and organize more production. At each stage in the threefold circuit there may be a breakdown. Perpetual, smooth growth is found only in economic textbooks, not in historical experience.

Here Heilbroner’s exposition is rather vague and loosely argued. He naturally has not much use for Keynes’s theory of “effective demand,” especially as he must have encountered it in the emasculated version taught in North America, but he might have profited by the insight of Michal Kalecki,1 himself a Marxist, who discovered the same theory independently and used it to make the Marxian concept of the “realization of the surplus” more precise.

When the dust of controversy has settled, the principle of effective demand is seen to be simple and obvious. In a modern economy, there is very little activity, except housework, for our own consumption. Everyone depends on money income in order to live, and money income depends upon the money expenditure of other people. For ordinary households, expenditure (say, over a month) cannot exceed income but it may fall short of it—there may be saving to provide for future contingencies or to add permanently to wealth.

Similarly, a business does not immediately expend the whole of its gross profits (the excess of receipts over current costs) but uses part to pay off debts or to amass reserves. Thus for the overall flow of income to expand, or even to be maintained, there must be some expenditure this month that is not derived from last month’s income. The booster to expenditure comes from loans (from banks or from issues of securities) or from activating balances saved in the past.

For national income as a whole, the main boosters are (1) the deficits of government and local authorities (that is, excess of current expenditure over receipts from taxation, rents, etc.); (2) the investment that industry makes to enlarge future productive capacity over and above what is financed out of retained profits; (3) consumers’ investment, especially in housing, financed by loans or hire purchase; and (4) finally, the balance of trade, which is a booster when the value of exports exceeds payments for imports and a damper in the contrary case.

The operation of the first three boosters is liable to be damped by the fourth through an increase in imports relative to exports when home consumption expands. For this reason, an increase in exports is the most reliable booster of effective demand, but unfortunately export-led growth for the most successful countries imposes import-led stagnation on others.

The net effect of the boosters is, so to speak, to pull out income laterally by increasing purchases of goods and services, increasing employment and profits. Absolute full employment is never reached, but a rapid boost is liable to run into bottlenecks of limited capacity of equipment or of special types of skill.

A rapid boost may lead to some rise of prices, but this is not “inflation.” Inflation is, so to say, a vertical rise in national money income that comes about through increasing rates of pay for the same real activity. Successful corporations that have been making high profits in a boom pay out more dividends, raise salaries of the managerial staff, and are not much averse to meeting the demands of organized workers for a share of the swag. A rise in wages and salaries spreads from the most successful businesses to the rest and forces them to raise prices; the consequent rise in the “cost of living” leads to a further rise of rates of pay to compensate, and soon a general scramble sets in from which even the most high-minded professionals, such as physicians and judges, cannot afford to refrain. The government is obliged to join in; as expenses rise, tax rates are increased, but whatever form they take, taxes are treated by businesses as costs to be covered by prices and so add fuel to the fire of inflation.


Where does “money” come into the argument? The relation between national income and the stock of money (notes and bank deposits) is essentially asymmetrical. A lateral increase in income, associated with higher employment and all round prosperity, requires some increase in money supply, and the vertical increase due to inflation requires all the more. Increasing the quantity of money permits inflation rather than causes it, but preventing the increase does not stop it. A check to the increase in money supply means a credit squeeze, rising interest rates and difficulty in borrowing. This acts upon the lateral movement of national income, impeding plans for investment, so reducing employment and the sale of commodities; its effect, in short, is to reduce real income and the growth of real productive capacity. It cannot have any direct effect on rates of pay. Once inflation has taken root, the scramble is bound to go on. Monetary control is the recipe for stagflation—a sluggish growth of real income combined with a continued rise in prices.

In the slump of the 1930s, the orthodox economists preached that the remedy was to cut wages. Keynes pointed out that cutting wage rates lowers prices as much as costs, so that it does not boost employment, while it enhances the burden of debt so as to embarrass the banking system. This time, the orthodox doctrine is that if there was sufficient unemployment, the bargaining power of the trade unions would be broken and the rise in money-wage rates brought under control.

Kalecki expected that full-employment policy would be frustrated because business leaders do not really want it. High profits are associated with high employment, but it is dangerous for them because it undermines the authority of capital over labor. Nowadays full employment policy is being denigrated by the professional economists, who argue that it is to be blamed for inflation.

In the United States, “Keynesian” policy was reduced to the idea that when the investment booster failed to keep national income growing, it should be supplemented by the budget-deficit booster. This played some part in preventing the relatively shallow recessions experienced during the 1960s from precipitating a serious crisis but it did not work out at all as Keynes intended. After showing how paying men to build pyramids or to dig holes in the ground would reduce unemployment and increase real income, he added: “It is not reasonable, however, that a sensible community should be content to remain dependent on such fortuitous and often wasteful mitigations when once we understand the influences upon which effective demand depends.”2

In practice, the benefits of deficit finance accrued mainly to the military-industrial complex. Sensible uses of public expenditure were considered socialistic but it was always possible to get a vote for “defense.” Whether it was their main purpose or not, the atomic bombs on Japan certainly terrified Stalin, but his proposals for peaceful co-existence were brushed aside. Now the Soviet Union also has a military-industrial complex and both parties, as Alva Myrdal shows, play the Game of Disarmament3 in such a way as to ensure that their respective governments keep up expenditure in their mutual interest.

Kalecki explained the mechanism underlying the Marxian theory of crisis. While the investment booster is working, it feeds upon itself. High investment causes high profits, and high prospective profits provide the motive to expand investment. At the same time, high realized profits both provide finance and make borrowing easy. New inventions and new commodities constantly open up further investment opportunities. But all the while, the stock of capital equipment is growing. Sooner or later a time will come when the expansion of the stock overtakes the growth of the rate of output. Then surplus capacity emerges, prospective profits cease to grow while accumulated debt becomes oppressive. Investment ceases to grow and a slump sets in. Investment in this half century, for one example, was largely devoted to substituting mechanical “horse-power” for actual horses 4 and now there is a world-wide overexpansion of the motor industry.

Furthermore, a point which Marx did not foresee, a long run of rapid growth begins to exhaust sources of raw materials so that scarcities develop of animal, vegetable, and mineral requirements. The sudden assertion of monopoly power by OPEC and the oil companies was the shock that brought on the crisis of 1974 but it would not have had such a sharp and prolonged effect if the long boom had not already begun to exhaust itself.

There is one point in the Marxian theory (supported by Heilbroner) which I have never been able to understand. The crisis is said to destroy capital and so to prepare the way for a revival of investment. What does this mean? Financial capital is destroyed by bank-ruptcies. This helps the great corporations to grow by making smaller businesses an easy prey. Sometimes great corporations also are seriously shaken and a failure, particularly of a great bank, spreads devastation. But this only kills off finance. It does not reduce the now redundant surplus capacity of equipment. Financial losses make it more difficult to get loans for new ventures and the experience of losses and low profits discourages expectations for the future. In what sense does this prepare the way for a revival?


Heilbroner interprets the long boom and the present crisis in terms of the rise and fall of the hegemony of the US. The American Century lasted only twenty-five years. He gives a telling account of the despair that overtakes business executives and financiers in a crisis. He connects this with the bad conscience that plagues capitalism because of the contrast between the rhetoric of freedom and democracy and the obvious facts of inequality and the oppressive power of wealth.

The book is called “Beyond Boom and Crash (my italics) and the moral is that we really cannot go on like this and something is bound to be done about it, but I find the prognosis much weaker than the powerful diagnosis. Heilbroner has abandoned the Marxist conception of a revolution led by the oppressed working class. The WASP workers have been bought off by capitalist affluence and by their position of superiority to blacks and immigrants. But the problem of the economic and psychological relations between employers and employed in modern industry remains to be solved. Heilbroner writes:

All these new realities point in the same direction. They indicate the need for an unprecedented degree of monitoring, control, supervision, and precaution over the economic process.

He might have considered two alternative models: fascist oppression as in Chile or social-democratic reforms as in Sweden. Toward which pole is American industry moving?

A second great question which Heilbroner mentions only in passing is: At the Western level of consumption, what is growth for? What is employment for? As things are, the corporations need a growing economy for otherwise they cannot make profits; they must continue to use ever more deleterious means for ever more trivial ends. Ordinary people need employment because otherwise they cannot make a living, so they must submit to ever more boring occupations.

But from the point of view of society, what do we want? How could it be possible to turn the prodigious productive power of modern scientific technology to repairing, rather than increasing, the damage to earth, sea, and atmosphere that it has already made? How could the ever-rising productivity of workers in modern industry be used to spread leisure and education throughout the population instead of increasing unemployment and so spreading misery from which the only escape is through crime?

Heilbroner’s message should stir complacent readers to think what capitalism really is and stir dogmatists to think what Marxism really means, but the great questions of today cannot be solved just by thinking.

This Issue

December 21, 1978