Even though the crisis deepens in Europe as the ‘bailout’ of Spain fails to stop the negative reaction of financial markets and Italy shows every sign of slipping into a depression along with the rest of southern Europe, I must return to my current hobby horse, the Keynesian theory of capitalist crisis and the policies to resolve it. Usually I am obsessed with supporting Marx’s rate of profit theory as an explanation for capitalist crisis. But once again, recent comments by the great Keynesian guru, Paul Krugman in his blog (http://krugman.blogs.nytimes.com/) stimulates me into returning to Keynes (see recent previous posts on various aspects of Keynesianism, Paul Krugman, Steve Keen and mysticism of Keynesian economics, 21 April 2012 and Liquidity traps, effective demand and debt deflation, 27 April 2012).
In a recent post (1937, 3 June 2012), Krugman brought up the question of the renewed capitalist slump of 1937-8 during the Great Depression of the 1930s. In the post, Krugman suggested that current government policies in Europe and the US reminded him of the mistake of President Roosevelt in 1937 when he adopted fiscal austerity and pulled back on government spending programmes he had adopted after 1932, which, according to Krugman, pulled America out of the Great Depression (see graph below). According to Krugman, the subsequent austerity caused the slump of 1937-8. Just as then, the answer now should have been more government spending through borrowing and not fiscal austerity. This is the dominant refrain of the Keynesian alternative to official economic policy in the US and Europe.