With acknowledgements to Cosmos magazine.
Ten years ago the judgement and competence of the economics profession was politely questioned by the Queen of England and thereafter fiercely attacked by civil society and ‘heterodox’ economists. Through all this, the profession has stood aloof – from both the heated debate, and indeed from much of the crisis itself.
No longer. For most of these ten years, the profession has treated its critics with some disdain. Now they’re fighting back. Establishment economists – those that enjoy university tenure, hold professorships in the best universities, win big research grants, are published in prestigious journals, have jobs in the City, Bank of England or in the financial press – have become more vocal in defence of the profession. It was the latest provocation that drew them out. In an article in Prospect magazine, the economist Howard Reed took sharp aim at the “theoretical core of modern economic theory—the so-called “neoclassical” paradigm.”
“When the great crash hit a decade ago” he wrote, “the public realised that the economics profession was clueless.”
There is a need for a new economics, he wrote and called on the profession to rip up that defined by many as economic orthodoxy, and to start again. The backbone of the orthodoxy, the neoclassical paradigm, Reed wrote:
“starts with the presumption that the individual firm or person is the best unit of analysis for making sense of a complex world. This atomism ought to be questioned—climatologists, after all, don’t make sense of the weather by thinking about individual molecules in the air.
Neoclassicism assumes, furthermore, that firms are out to get as much as they can of profit, and people are out to get as much as they can of “utility,” or well-being. This doesn’t sound like how real people, or many real companies, generally behave.
Finally, it assumes that everyone will act rationally, which implies not only a certain consistency, but also that they took full account of all available and relevant information. In a world of obsessions and wilful blindness, this seems like a simplification that needs to be questioned, but—again—that is not a challenge that economists have dedicated much time to, at least until very recently.”
Reed’s critique provoked an immediate, in some cases angry, and very public reaction from mainstream economists. This negative reaction led Prospect’s editor, Tom Clark, to add his own critique:
“The profession gets too confident about its grip on the world, and then — from what I see on social media — starts taking umbrage when awkward questions are pressed. For me, that is the clearest failing of all.” (Financial Times, 24 April 2018)
Diane Coyle, OBE, a former advisor to the UK Treasury, previously vice-chairman of the BBC Trust, a member of the UK Competition Commission and a part-time professor at the University of Manchester – responded to Reed in the columns of Prospect. She began with a defence of the excellent microeconomic work undertaken by her colleagues and outlined the beneficial impact of:
“research on the likely effects on UK obesity rates of the sugar tax on soft drinks by Rachel Griffith and two of her colleagues at the Institute for Fiscal Studies. Cameron Hepburn, an economist at Oxford, (who has worked) on policies to encourage environmentally-beneficial innovation. A study by other Oxford economists and engineers on how to design contracts to enable the growth of a peer-to-peer market for matching small-scale energy generation with demand. A working paper by Boston University, Harvard, and MIT economists, documenting a shift in the character of AI patents in the US from the automation of existing activities to general purpose deep learning.”
While there is surely much to admire in this work, none of it rises to the challenge of explaining the systemic natureof the economy: an economy that has evolved into a system of globalised markets in finance, property and labour – beyond the reach of regulatory democracy. A system that is clearly fragile, that collapsed just ten years ago, that continues to cause living standards to fall in the UK and elsewhere, and that many fear may collapse again. This globalised system, these markets, did not make themselves. They are not the products of the ‘invisible hand’. They are the outcome of established economic theory and policies, taught in all our universities, and adopted wholesale by governments and international institutions like the IMF and World Bank.
But while the theory is faithfully taught, and policies implemented, the economics profession collectively still fails to understand the operation of the system – or so it seems to both outsiders and insiders. The economics profession, it would seem, has reached the stage the geology profession reached fifty years ago – before the discovery of tectonic plates. Like today’s microeconomists, geologists were fiddling about on the surface of the earth, chipping away at rocks and shells, with very little real understanding of the underlying causes of the great destructive forces – earthquakes, volcanoes, tsunamis – that periodically erupted and destroyed whole ecosystems and societies. In an article published on the BBC and titled: “Plate tectonics: When we discovered how the Earth really works” – a scientist explained how clueless they had been just over fifty years ago:
“Until that time we’d been looking down microscopes at thin sections of rock, looking at faults and outcrops on land. And every now and then we’d be lucky enough to find some component of plate tectonics, but we didn’t know it was plate tectonics because we didn’t have the oceans. Without the oceans, you have nothing” he told the BBC’s Science In Action programme.
Thanks to developments in technology, today geologists’ understanding of plate tectonics can
“tell us why the Himalayas are so tall; why Mexico experiences damaging earthquakes; why Australia developed a diverse group of marsupials; and why Antarctica went into a deep freeze.”
Given the catastrophic nature of both the 2007-9 crisis, and the many, and increasingly frequent crises that preceded it– society demands to know why economists have not “discovered how the economy really works”. We believe, perhaps vainly, that with a better understanding of the ‘tectonic plates’ that underpin the economy – we may, as a society, be able to prepare for a collapse. We might be able to protect ourselves, our families and firms from economic failure, job losses, collapses in living standards, housing insecurity and the impact of these failures on social life: divorce, depression and in some cases, suicide. Not to mention the disastrous political impact of economic failure.
We cannot be relieved of this deep anxiety by admirable research into the impact of the sugar tax on soft drinks and obesity.
It is my view that the greatest weakness of economics is the habit of drawing, or encouraging politicians to draw, macroeconomic conclusions from microeconomic reasoning (“the government budget, like a household budget, must balance”). This weakness is endemic within the profession. It is caused by the deliberate neglect of macroeconomics, including shameful neglect of Keynes’s monetary theory and policies; and by the dominance of microeconomics. Such skewed dominance is not accidental. After all, and this is something that economists must finally and honestly acknowledge: economic theorising is driven by class interests. As the liberal John Hobson (1858-1940) once wrote:
“The selection and rejection of ideas, hypotheses and formulae, the moulding of them into schools or tendencies of thought, and the propagation of them in the intellectual world, have been plainly directed by the pressure of class interests. In political economy, as we might well suspect, from its close bearing upon business and politics, we find the most incontestable example.”
The public instinctively knows this to be the case – that economics and the design of the economic system is driven by the class interests of the few, the ‘elite’. Which is why the profession is now held in low regard, and why so many have turned to populists and populism – for protection from the fragility of an unequal, polarising and unstable economy – whose underlying forces economists still do not seem to understand; are not inclined to explore, and are unwilling to explain.
14 responses
I blog in the Guardian as Barry1858 and have made hundreds of lengthy comments on economics since 2007. Ann complains about the Angela Merkel view ( after Thatcher, Reagan et al ) regarding the "schwäbische Hausfrau" and her household economics principles, as if microeconomics simply scales-up to produce macroeconomics, and I shre her frustration at the stupidity inherent 100%.
But this fundamental lack of understanding of what money actually is and the critical difference between money and wealth is ridiculously hard to correct when the ignorant are so self-sufficient.
I attended a seminar given by one of NatWest’s economists last year and his theme was the problem of UK productivity. After thirty minutes of rambling and a few property values questions from the floor ( In London, so most attendees involved in property, one way or another) I piped-up and made the simple comment that the problems with UK productivity go back to the 1950s ( post-Attlee) and are directly because of the continuously poor record of capital investment in wealth-producing businesses as what should be underpinned by capital investment by the State in infrastructure, utilities, transport, education and training and government incentives for the private sector to take a medium to long term view and invest large and continuously in real wealth creation i.e. goods ( mostly) and services. When I asked the economist to explain the difference between money and wealth he didn’t know so I uesd the old desert island example of the person with notes and coins gold as having money and the person with a banana and a penknife as having wealth.
Compare the UK levels of capital investment over the last 50 years with that of the top 100 countries and you will be depressed at what is reavealed. And the ONLY prescription for much needed improvements in our widespread wellbeing relies on massive and continuous capital investment for as long as we can see in to the future. And borrowing by the State and private sector should be massive and continuous until, as night follows day, until it becomes self-sustaining.
And if possible, it would be nice to have intelligent financial regulation re-established because what happened in 2008 was 8 years later than I predicted, but the pass the parcel game still persists and the financial meltdown could occur again at any second of any day – there is NOTHING to stop it.
Some on the right have argued that money hasn’t been commodified – but I would simply give the London foreign exchange numbers to knock that argument out of the park – every hour of every trading day currency transactions are completed which total more than global annual GDP – that’s right, the world’s annual turnover equivalent is traded in forex every day – and if that doesn’t illustrate the commodification of money…
In response to Michael Litoris. Then why not look at the 10 years before 2007, in Britain, where it was "light touch regulation" of the banks, and financial institutions – started back in 1987, under Thatcher – which led to the explosion of private household debt, and the blowing up of huge asset price bubbles, that caused the 2008 financial meltdown, that led to the blow up of government spending to save those same banks – personally, I’d have let them collapse, and then encouraged workers to just buy up the assets for less than a penny in the Pound rather than saving rich speculators from the consequences of their own recklessness.
Moreover, any sensible person WOULD look at what the intervention consisted of for that very reason. A government like a business or individual for example can borrow money for very different reasons. Thatcher intervened considerably in the economy. But her intervention was designed to undermine workers by borrowing to support high levels of unemployment, which created the problems of today’s low wage economy. That’s why the average deficit to GDP ratio under Thatcher and Major was twice as high as under Blair/Brown, and why the rate of growth under Blair/Brown was higher than under Thatcher/Major, and up to 2008 faster than under Cameron/May. In fact, in the last quarter that Labour was responsible for in 2010 growth had already recovered to be 1%, compared with the figure for this last quarter, under the Tories, ten years after the financial crash, being just a tenth of that at 0.1%. IN fact, at no point in the last 8 years have the Tories even matched that quarterly 1% growth, instead their policies caused growth to crater, whilst debt under them has more than doubled.
The problem of the basis of both neoclassical and Keynesian theory is illustrated by the housing crisis. I head Tory Chris Philp, yesterday, on TV say that the problem of millions of people not being able to afford a house was terrible, but that the solution was to build many more houses. What he doesn’t seem to understand, and what many other MP’s, and a lot of economists don’t seem to understand, but which even Sarah Beeny seems to have grasped is that it doesn’t matter whether you build 100,000 houses, or 1 million houses, if the selling price of those houses is such that people can’t afford to buy them, people will not buy them. Unless of course, you artificially inflate the demand for that housing, by printing money to stuff into commercial banks, and then encourage those banks to lend for property speculation, and to the provision of cheap mortgages on the basis of asset price inflation. But, as 2008 showed, and as today is once again showing, that does not resolve that problem, it only defers its resolution, and makes the subsequent crash of those prices that much greater.
What they don’t seem to grasp is that if builders built a million houses tomorrow, and came to sell them at current prices, the buyers who can’t afford them today will not be able to afford them tomorrow either! The consequence would be that this excess supply of overpriced houses on the market would cause the market price of houses to crash. The builders who built the million houses would then make a loss on all those houses, and go bust – creating many Carillions – thereby throwing their workers on the dole, and probably leading to many suppliers going bust too, with their workers also being thrown on the dole.
But capitalist house builders are not stupid. They understand that f the economists and politicians don’t. That is why the big builders do not build more houses, because they know there is no point building more houses than you can sell at prices that return you a profit! That is why they build up their land banks, in an environment of rising asset prices, and land prices. It is why you will not be able to buy a new house from a big builder other than on the basis of it being off-plan, because the builders basically only build when they have sufficient orders to make it worthwhile.
The builders are caught by the costs of building the new houses, because they are not in business out of altruism. They do not build houses, for the love of it, but to make profits, and that requires that the cost of building the houses is sufficiently below the price they can sell them, so as to make an average profit.
But, a major cause of the high cost of building houses is the cost of building land, which by some estimates is around 7 times what it would be, if it had not been inflated due to the bubble in property prices. Landowners also benefiting from the ridiculous Green Belt policy, which imposes an unnatural monopoly, which has restricted residential property to just 1% of the land area, compared to even 2% for Golf Courses, and vast unused estates in the hands of the old landed aristocracy remaining, are able to turn to builders and say, if you build houses on my land, you will sell them for £x, whilst the cost of construction is £x – y, which gives you a large profit, so, I want £y – z, as the price of the land, as a capitalised rent.
So, long as those high costs of building exist, sustained by the current astronomically high existing house prices, it will be impossible to build new houses on a large scale that can be sold at prices which provide the builder with a profit, and that same problem applies to houses built for rent. Only when the current house price, and other asset price bubbles are burst, will it be possible to reduce building land prices, and thereby reduce the cost of building new homes to a level, whereby it becomes profitable to do so, and where buyers will be able to afford to buy those homes.
So, yes, I can agree that some intervention, and some regulation has negative consequences. As a Marxist rather than a Keynesian I am not in favour of regulation by the capitalist state as a solution, because as with the intervention by Thatcher in the 1980’s it is designed against workers interests, and the same applies to the bailing out of banks and property speculators by Brown, Cameron and May. My point was that your argument against intervention and regulation in favour of free markets was equally fallacious.
The charge of the wrong kind of intervention and regulation is facile. I am ill I am quite happy to receive an intervention by a doctor using the latest benefits of medical science, an intervention by a doctor using voodoo, not so much! I prefer Marx’s statement that whilst bad Bank legislation can create a crisis, no amount of bank legislation can prevent a crisis.
In response to Boffy, you have listed some countries that you think have done well in large part because of government involvement.
Well why don’t you try to measure that ?( obviously not using neo-classical tools, that would be too easy ).
My neo-classical measure of government involvement include, spending, investment, and regulation. In the UK all of those were higher in the 10 year bloc commencing in 2007 than in the preceding period, and this is the period that our host is claiming things have gone wrong.
So you have to adopt an anti-neo classical approach that it was the ‘wrong kind of interventionism’ that has done bad things to the UK over that period. If you were to make that claim then you’d be setting yourself up for the ‘the wrong kind of socialism’ mockery that the excellent Kristian Niemietz dishes out on people when their favourite non-market economy du jour turns south.
Hence in some circles, classical economists are held akin to the priestly class of Tikal, or any other such doomed empire, if less colorful and without the flair of the show of cutting off of heads.
The least they could do is to leave behind something as impressive as the moas on Easter Island, the supreme monument to the mindless iteration of established policies in the face of declining resources.
Of course, the reality is that the Keynesian paradigm is no better than the neo-classical paradigm, because in all important aspects it accepts the same false assumptions, about the nature of value, about the purpose of production being consumption rather than profit, and similarly accepts Adam Smith’s absurd dogma that the value of commodities, and thereby also of national output is resolvable into revenues – wages, profit, interest, rent (and taxes).
The only significant improvement of the Keynesian paradigm over the neoclassical paradigm is the rejection of Say’s Law. But, in equally seeing the purpose of production being consumption, it essentially replaces Say’s assertion that there can be no overproduction, because supply creates its own demand with Malthus’ critique of Smith and RIcardo, and his assertion that the inevitable underconsumption can only be resolved by having some section of society that are consumers without being producers. For Malthus that is the landed aristocracy, the clergy like himself, or their lackeys within the state. Keynes merely omits the landed aristocracy and clergy from this solution, and hands it straight to the capitalist state to act as consumer of last resort.
The problem, however, is exactly the same as that which Marx indicated with Malthus elaboration of that "Keynesian" theory 150 years ago. That is, under capitalism, as opposed to previous modes of production, the purpose of production is NOT consumption. The crisis does not arise because consumption is too low, or production is too high in absolute terms. Far from it, both for the vast bulk of society continue to be way too low for what a civilised society should aspire to. The problem is that production is too high, in purely capitalist terms, i.e. too much has been produced to be able to be sold at prices that reproduce the capital consumed in their production, and provide a profit for the capitals that produce them. Too little is consumed at prices that would enable the capital to be reproduced, and provide a profit. Firms do not stop or reduce their production, because too much has been produced relative to consumption, but because too much has been produced to be able to be sold profitably.
The problem of the profitability strikes from two different angles. On the one hand, the more capital expands, the more the demand for labour-power rises, and wages rise reducing the amount of surplus value produced, so that a profits squeeze hits capitals, as happened in the 1960’s/70’s, described by Glyn and Sutcliffe in Britain, and others in the US etc. But, firms are led by competition to continue to expand output as this increased mass of wage workers, and wage workers with higher wages create a growing demand for wage goods (particularly as the marginal propensity to consume of these workers tends to be higher with these wages, than is that of capitalists with profits, rentiers with interest, or landlords with rent). Each firm must produce more even with squeezed profit margins, so as to not lose market share to its rivals.
On the one hand, therefore, higher wages create a problem of creating surplus value, but they make it easier to realise as profit the surplus value that has been produced. At least up to a point, i.e. the point where an increasing group of those workers can only be persuaded to buy more at much lower prices, and require a range of other commodities to be able to buy instead.
So, the second angle from which the profits squeeze strikes is from the perspective of the realisation of the surplus value as profit. If the demand for material inputs rises significantly, material prices will rise, and may not be able to be passed on in final output prices, because the higher price will reduce demand. Firms have to absorb it from profit, in the same way that they have to absorb higher wages.
This is also where the other false assumption of Keynes, following Smith comes in, because as the price of materials rises, it does not represent higher revenues for anyone, but simply represents a greater proportion of social labour-time that must be devoted only to the reproduction of existing capital.
For capitalist production the fact that consumption has risen, because wages have risen is a problem, because it is simply a reflection that as wages have risen, surplus value has fallen, and as the cost of producing that surplus value, by the advance of capital both for wages, and for materials, machines etc. has risen, means that the rate of profit has fallen, due to a profits squeeze.
Capital responds, by trying to reduce wages, by increasing the supply of labour-power. It encourages women and children into the workforce, it encourages migrants to enter the workforce, it encourages peasants to leave the countryside to come to the towns, because with any rate of surplus value the mass of surplus value is determined by this total mass of simultaneously exploited labour.
By these means it increases the size of the social working-day, and therefore, the amount of surplus value. When these methods are exhausted, it extends the social working-day by other means. It lengthens the working-day, where possible – or as seen more recently, extends workers working life, by delaying state retirement age. It may do this even if it involves paying some premium overtime rate, because it still means that the mass of surplus value is increased.
But, this extension of absolute surplus value is also limited. The main way of increasing surplus value is to raise productivity, which reduces the value of labour-power, which means a greater portion of the working day, is surplus labour. By these means capital creates a relative surplus population so that the relative shortage of labour comes to an end, unemployment rises, wages fall, and produced surplus value rises. But, now, as labour is increasingly thrown out of employment by this labour-saving technology, the problem of producing surplus value is replaced with the problem of realising it.
There really is no such thing as economy. Political economy yes. Economy, no. There’s an old canard about an Arab who loses his key outside the tent during the day. The Arab searches and searches but finds no keys. When the sun goes down, the search is moved inside the tent, which is well lit with lanterns, even though the keys were lost outside the tent. How absurd is that? Why would a tent dweller have keys?
Perhaps you economists aren’t a fan of absurdity. You should be. Political Economy is reality. Economics is the tent in which you dwell, with the doors to the tent firmly locked.
Let’s suppose for the sake of argument that there was not just economic theory but an actual ‘proof’ of how the economy worked, scientifically rigorous in nature, systemically repeatable and verifiable and thus completely predictable (at least in regards to recessions). Given this wonderful system, at some point the various economic input measures will cause the system to conclude not only that a recession is coming, but also exactly when it will start (to the millisecond, no doubt). So that everyone can be ready for this unfortunate impending event, this information is broadcast immediately globally. But of course by doing so, many people will take immediate action to preserve their individual positions that they would not have otherwise done without this information, which in turn would almost certainly accelerate the time of the recession, meaning that the original recession date prediction was incorrect, which of course means that the system did not actually include all factors. All of this of course proves that there can be no such perfectly predictable system (or if there is, you could not use it to actually help anyone without ruining the prediction, which makes it useless).
Well said. Although the fact that macro is in a dire state has been recognised many times, opportunities to deal with it have been repeatedly missed. Keynesian economics (that is the economics of Keynes) was rejected by universities and governments in the 1970s with unfortunate results. But for some reason economists refuse to recognise that. They resist bringing it back into the mainstream. Instead as you say they insist on treating everything as microeconomics. The economy is seen as a single representative agent and and ‘macro’ is taught as if it is all about intertemporal behaviour. This is often called ‘Keynesian’ (new or neo Keynesian) but misses the essence of the Keynesian approach which is the circular flow of spending and income. Behaviour is described by empirically observed simple rules but the essence of the model is that spending by one agent is income by another. The principle of effective demand which is central to Keynesian macro is lost in the representative agent approach.
In response to Michael Litoris. I was bringing it up long before 2008, and I did predict the financial crisis of that year was about to break out, and correctly described the form of it.
But, using the same non method of argument you have used here, I might say to you that some of the most successful economies in the last century (and in fact if you examine the reality of the 19th century, the same was true of its most successful economies) have been those that used state intervention, and regulation. The most obvious example has been China, but the same is true of Japan, Korea, Singapore, Malaysia all of whom used intervention not only to encourage investment in high value, growth areas, but also geared their policies to encourage higher wages, so as to encourage capital to introduce new labour-saving technologies, and thereby move labour up the value chain along with production.
It might be asked why you have not noticed that for all this time the tenets of neo-classical economics were already being shredded in the real world. But, a look at the 19th century shows the same thing. Bohm-Bawerk himself of course warned that the free market left to itself would result in anarchy. But, Britain engaged in primary capital accumulation fuelled by things such as state sponsored piracy, as well as the slave trade. A large part of the industrial revolution was financed by the running up of government deficits and debt, with the debt to GDP ratio rising to 250%, way above today’s 70% level.
The US developed in the mid 19th century behind a huge tariff wall, Germany and France industrialised on the basis of Bonapartist, state capitalist regimes of Bismark and Louis Bonaparte. So, the question is why anyone actually gave any credence to the dogmas of neo-classical theory to begin with.
To explain further: https://thelastwhy.ca/poems/2012/12/13/economy.html
Life is a reaction to the void which was discovered when an ancestor first asked "Why am I?" Unbelievably we still try to fill it with religions. Among other ways, we try to fill the void with money, the activity which has created and sustains economics.
Why now. Why wasn’t this written in 2009? After all, the headline piece of evidence you’ve got is that mainstream economists, the BoE, the Treasury and the ECB all failed to predict the GFC. And you’re using that as evidence that neoclassical economics needs shredding.
Something has happened between 2009 and now to make you say this Ms Pettifor, but what. My guess is that you’ve not been getting your way, a useful target to rant at the injustices of the system has emerged and you’ve decided to latch on. It must be hard to look at the numbers, see that growth has been anaemic, look at overall government expenditure ( the highest on record of any 10 year bloc ), and say that amount was insufficient, and shriek ‘austerity doesn’t work’. Or look at themost restrictive planning system we’ve ever had, the interventions in the energy market, or childcare , or the one-size fits all national minimum wage when there is such regional disparities and try to square this with your anti – neo-classical world view that interventionist economies do better than mostly free market ones.
I’m genuinely interested. Why bring this up now when you could have made the same claims 8 years ago?
Is it all the years of hurt.
The metaphor with plate tectonics is one I referred to inthe Introduction my 2014 book "Marx and Engels’ Theories of Crisis – https://www.amazon.co.uk/gp/product/B00MNHZCLU?*Version*=1&*entries*=0.
I wrote that in the natural world, crises such as earthquakes are not a sign that something has gone wrong, but are a normal part of the functioning of the Earth’s geology. Indeed, if we did not have plate tectonics, earthquakes subduction all of which are necessary for the carbon cycle, the Earth would be as much a dead planet as Mars. The same is true of the way capitalism works. Crises are not a sign that something has gone wrong with the way Capitalism works, but are fundamental to the way it DOES work, as Marx and Engels both set out 170 years ago.
The potential for crises arises with any system of commodity production and exchange, where production and consumption are separate acts, but which form a contradictory unity, i.e. where the purpose of production is consumption. That potential is heightened where money acts to mediate such exchanges, because contrary to Say’s Law, those who sell commodities, including labour-power, do not then have to buy other commodities with that money, in the way every sale is a purchase under barter. As Marx puts it, as soon as money intervenes, sellers can simply hold on to the money they obtain.
Capitalism makes this potential for crisis into an inevitability because it is forced to produce on a massive scale without regard to whether the market for what it produces can absorb the production at prices that reproduce the consumed capital. Each capital is forced by competition to produce at its maximum, so as to produce at the lowest unit cost. It assumes that there will be a market for the vast increase in output it has produced. But, as Marx pointed out, predating the marginalist theory of marginal utility by several decades – just because I can buy six knives for the price I previously paid for one, it is unintelligible why I would do so, when I only have a need for one (Theories of Surplus Value, Part III). So, market prices for these commodities crash, because they have been overproduced, and when those producers go bust or lay off workers, the demand from those workers for other commodities falls, so that even if those other commodities they previously bought were not overproduced, now they become relatively overproduced, because aggregate demand has fallen as a result of the workers being laid off.
And, as Marx describes, contrary to the explanation of those like Malthus, Mill and Ricardo who could not accept the idea of overproduction, and who explained it on the basis of underconsumption – the Malthusian theory and solution (of having the underconsumption filled by a class of people [landlords or their lackeys in the state] who consume without producing) which was taken up by Keynes – also fails to account for the fact that such crises generally occur not during periods of underconsumption, but increasing consumption.
During periods of boom, more workers get taken on, and as this starts to push up wages, profits get squeezed, but the additional workers taken on who now have wages to spend, and those workers whose wages have risen consume more wage goods, not less. Capital rushes into the production of wage goods to meet that demand. And, as this headlong rush to production then results in a flood of commodities to the market, whilst the workers have begun to sate their demand for some of them, as their wages have risen, so the lower profit margins caused by the higher wages, meet a limit to demand, at prices that will reproduce the costs of production.
But, its also important to realise that the 2008 crisis was NOT an economic crisis, of this sort anyway. It was a financial crisis of the kind Marx also discusses, for example in relation to the crisis of 1848, which was the result of widespread financial speculation in shares, at that time in Railway shares, which as now, also diverted potential money-capital away from real capital accumulation. In 1848, as now the financial speculation was actually fuelled by low interest rates that inflated capitalised asset prices. Then it was worsened by the Ricardian inspired 1844 Bank Act, that created a credit crunch. Today it has been worsened by the fact that central banks have gone beyond what was required to prevent a credit crunch so as to enable the circulation of commodities and capital to circulate, and have printed money tokens, and inflated credit even further, simply to keep asset prices massively inflated, and because capitalist states have supported them, by introducing measures of fiscal austerity to limit economic growth, and the demand for money-capital, and so as to bail out the money capitalists with taxpayers funds.