The return of depression economics book review

Marxist Analysis · 2026-05-13

Core Argument¶

This review argues that Paul Krugman's The Return of Depression Economics correctly identifies the danger of a new global depression but fundamentally misdiagnoses its cause and therefore proposes an inadequate cure. Krugman sees the problem as a shortfall in demand that can be managed through a return to Keynesian deficit financing and managed inflation. The review counters that this analysis stops at the surface level of circulation and exchange, never grasping that the root cause of crisis lies in capitalism's internal contradictions — specifically the tendency toward overproduction rooted in the exploitation of labour. Krugman's Keynesianism is not a solution but an attempt to manage the symptoms of a system whose fundamental crisis is insoluble within its own framework. The real obstacle to prosperity is not obsolete doctrines cluttering the minds of men, but an obsolete economic and political system: capitalism itself.

Theoretical Grounding¶

The review draws on Marx's theory of crisis, particularly the underconsumptionist strand within Marxist political economy. It deploys the distinction between Departments I and II (means of production and means of consumption) to explain why the system is not in permanent crisis despite the inherent gap between wages and the value workers produce. Capitalist investment in capital goods temporarily absorbs surplus, but this only postpones the inevitable overproduction crisis when those capital goods eventually feed back into expanded consumer goods production. This is a classical Marxist explanation of the business cycle rooted in the contradiction between production for profit and the limited consuming power of the working class.

The review situates itself within the Marxist tradition's long-standing critique of Keynesianism as a reformist doctrine that treats crisis as a technical malfunction of demand management rather than an expression of capitalism's fundamental contradictions. It rejects the Keynesian premise that the state can stabilise capitalism through fiscal and monetary intervention, pointing to the crisis of Keynesianism in the 1970s as evidence that such policies generate their own contradictions — inflation, falling profitability — which then give way to monetarism. The argument is not that Keynesianism is worse than neoliberalism, but that both are expressions of the same system's inability to resolve its internal tensions.

Conjunctural Relevance¶

The review was published in 2005, three years before the global financial crisis of 2008. This timing is significant. The article reads the Asian financial crisis of 1997-98, the Russian default of 1998, and Japan's lost decade of deflation as warning signs of a deeper systemic crisis that mainstream economics had declared impossible. Krugman's book itself was a sign that even establishment economists were becoming uneasy with the triumphalism of the "Great Moderation" and the myth of a permanent boom.

The review's relevance has been borne out by subsequent events. The 2008 crash saw a dramatic return of Keynesian-style stimulus, quantitative easing, and near-zero interest rates across the advanced economies — precisely the toolkit Krugman advocated. Yet the recovery was anaemic, inequality widened, and the underlying contradictions of overaccumulation and falling profitability were not resolved. The COVID-19 pandemic saw an even more dramatic state intervention, yet inflation returned with a vengeance, forcing central banks into the very tightening cycle that Krugman warned against. The review's core point — that Keynesianism can manage symptoms but cannot cure the disease — has been vindicated by the pattern of crisis, intervention, and renewed crisis that has characterised the last two decades.

Where the Argument Continues¶

This review is a relatively early IDOM piece on the crisis tendency within contemporary capitalism. The argument is developed and deepened in later articles that engage more directly with the Marxist theory of crisis, particularly the tendency of the rate of profit to fall as the primary driver of systemic breakdown. Readers should look to IDOM articles on the 2008 crash, the Eurozone crisis, and the COVID-19 economic response for a fuller treatment. The review's critique of Keynesianism as a managerial doctrine is elaborated in theoretical pieces on reformism and the state. Against the Stream episodes covering economic crises and the limitations of state intervention provide the political-strategic dimension that this book review only gestures toward.

Connections¶

Marx, Capital Volumes I and II — the theoretical foundation for the distinction between Departments I and II and the analysis of underconsumption and overproduction.
Marx, Theories of Surplus Value — for the critique of underconsumptionist theories of crisis and the development of the tendency of the rate of profit to fall.
Ernest Mandel, Late Capitalism — a key Marxist analysis of the long waves of capitalist development and the structural crisis of the 1970s that Keynesianism could not resolve.
John Gray, False Dawn and George Soros, The Crisis of Global Capitalism — the other contemporary analyses the review groups with Krugman's as diagnosing the crisis but offering inadequate solutions.
IDOM articles on the 2008 financial crisis — for the application of Marxist crisis theory to the most dramatic expression of the tendencies Krugman identified.
IDOM theoretical pieces on reformism — for the political critique of Keynesianism as a strategy for managing capitalism rather than overthrowing it.

Key Quotes¶

"It is true that there is always a shortfall in consumption. Marx explained that underconsumption is a major problem for capitalism since the whole system is based on paying workers less in wages than the value they produce, the surplus being the source of the capitalists' profits. Inevitably since the workers are also the consumers they can't buy back all the goods they produce."
"What the proponents of demand management cannot explain is why more goods are produced than there is demand for, ie why there is overproduction. It is this overproduction, inherent in capitalism, which lies at the heart of capitalism's crisis, and therein lies the nub of the problem and the insoluble nature of the system's crisis."
"Economists today, no matter how honest, do not really seek a cure to capitalism's fundamental crisis. They accept tacitly that there isn't one. Instead they look for ways to limit the crisis and thereby limit the political repercussions. In other words their real purpose is to defend the system, not cure the economy."
"Amongst many motoring analogies, Krugman compares the recent series of economic crashes with a series of road accidents which happen along one stretch of highway. In each case something can be found to be flawed in the actions of the driver, or the performance of the car. Surely he reflects one is entitled to ask whether there is something wrong with the stretch of road? This is part of his impassioned plea to reject monetarism and return to the old god Keynes. We would simply stretch his analogy to question the entire road network."
"In the book's final lines Krugman appeals again that the 'only important structural obstacles to world prosperity are the obsolete doctrines that clutter the minds of men.' The tried and failed prescriptions of Keynes are just such an obsolete doctrine. What stands in the way of world prosperity, and threatens the return of depression economics, is an obsolete economic and political system - capitalism."