As someone who defends Paul Krugman more often than not, I know I stand out from the libertarian mainstream. But given the realities of the form of state capitalism we live under — an essentially corporatist system whose resemblances to the “free market” are mostly coincidental — I find the Keynesians have it right when it comes to analyzing the causes of the Great Recession.

Those on the Right who think the problem is that the rich lack money to “invest in jobs” are living in a dream world. No, the rich invested money in Ponzi schemes like the real estate bubble precisely because they had more capital on their hands than they could find productive ways to invest. The economy was already plagued with excess industrial capacity that could barely be utilized, even with the level of demand revved up by debt on bubble-inflated equity. The rich already have more money than they’re willing to invest, because no sane person would hire people to produce more stuff in an environment where fewer employed people are out there buying stuff — and the purchasing power of the employed is no longer inflated by home equity loans from Ditech.

Simply put, it’s not the level of investment that’s the problem — it’s the level of demand.

So the Keynesians are right about the proximate cause of the problem — their analysis applies far better than that of the libertarian Right to the corporatist economy we actually live under, if not to a genuinely freed market. Their main shortcoming is an inability to penetrate beyond proximate causes and go to the root of the problem.

A good example is Krugman’s NYT column on “The Output Gap” (Jan. 19). He points to an estimated gap between actual and potential GDP, resulting from a shortfall in aggregate demand, of $903 billion for the coming year. So far, so good.

What he fails to note is that not everything that adds a dollar to GDP is good. A lot of GDP amounts, in the language of Frederic Bastiat, to the cost of replacing broken windows. A lot of GDP, at its height, resulted from subsidized waste and planned obsolescence. So, with all due respect to Krugman, most of the missing output he points to is shoddy crap designed to fall apart in order to keep the industrial capacity fully utilized, and demand for it was fueled entirely by people going into debt to keep buying that shoddy crap.

There’s no way of getting around the fact that, as our economy is currently structured under state capitalism, a large share of people are employed making stuff that’s worthless. And there’s simply no way to avoid a drastic decrease in nominal GDP and employment figures short of subsidizing pathological behavior to keep people consuming.

Krugman is entirely correct in arguing that, as the economy is currently structured, the only way to achieve full employment is government spending to make up the demand shortfall. But there’s no plausible scenario in which the economy, once kick-started by Keynesian pump-priming (excuse the mixed metaphor), gets going on a self-sustaining basis without continued government spending. There’s no plausible scenario  where the economy ever attains the levels of demand, or nominal output, that existed three years ago.

Keynesian “aggregate demand management” will work this year, if the government runs a $1 trillion deficit. But the economy will slip back into depression if the budget is balanced next year. So the old Keynesian model, in which government ran a deficit in bad times and paid it back by running a surplus in good times, is as dead as the passenger pigeon. There are no good times, as state capitalism is currently structured, without a perpetual deficit.

So count me among the “deflationists” that Krugman routinely mocks. The material reality we face is that it takes less investment in physical capital, and fewer hours of labor, to produce what most people consider a comfortable standard of living.

The agenda of both Bush and Obama was to prop up rent-inflated asset values, as a source of aggregate demand, and to inflate the dollars of investment and hours of labor required to produce a given unit of use-value. But the only way out, in the long run, is just the opposite: Eliminate the portion of the price of goods and services that results from artificial scarcity rents, so that the average person can live comfortably with a shorter work week.

In the short run, Keynesianism is the only way to prevent the collapse of state capitalism. But in the long run, state capitalism is unsustainable. The only way out is to go beyond state capitalism.

In the end, we’ve got to find some way off the hamster wheel.

Translations for this article:

• Portuguese, Para Escapar da Roda do Hamster.