> [Paul Krugman on the "hangover theory" of recessions:]
Unfortunately, this ideological confusion afflicts not only the Hayekians, who continue to have much influence in academia, Wall Street, etc. The same notion continues to grip the minds of some Marxists.
I'm referring here to the notion that, whenever (larger or smaller) sectoral disproportions emerge (and they "naturally" do, repeatedly), modern capitalism requires necessarily a massive, widespread, downward spiral of capital destruction in order to re-create conditions for growth.
The profit rate depends positively on the rate of exploitation and negatively on the stock of existing capital. So, obviously, for profitability to increase, the rate of exploitation must increase (say, under the pressure of mass unemployment) and/or capital needs to be destroyed. Indeed, but this doesn't entail that the capital needs to be destroyed at once in all sectors across the board. One thing is the average profit rate and other things are particular profit rates.
It is true that, in the U.S. and Western Europe, this was the typical way sectoral imbalances were corrected until the Great Depression or second world war. 19th-century capitalism is full of cases that illustrate this mechanism.
But this is different from the fact that, within the capitalist framework, accumulated sectoral imbalances in the reproduction of social capital must be corrected at some point, and that the corrections can be more or less disruptive. The key difference here is that these corrections as disruptive as they may be don't need to lead to generalized crises.
How is this possible? Well, capitalists -- just like any other groups of people -- may learn from their collective experience.
Keynes noticed that the operative reason why sectoral imbalances turned into widespread crises, dragging down entire economies, was a generalized expectation of doom inducing capitalists to switch to safer, more liquid assets at once, in a self-reinforcing process. This coordination failure of markets leading to the unnecessary destruction of large amounts of otherwise sound wealth could be corrected at least partially via decisive state intervention. (To happen, this requires of course certain political conditions.)
The partial socialization of ownership (understood in the broad sense, that's what state intervention in its different modalities entails) within the overall capitalist framework has its own limitations and contradictions -- a big one being that the Keynesian resolution of a crisis may wind up increasing the collective power of workers. But history shows that it can prevent at least some of the capital destruction that would ensue in the absence of state intervention. Again, at some systemic cost.