by Andrew Kliman

Published by Pluto Press, November 2011

Paperback / 256pp. / ISBN-13: 978-0745332390

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“Clear, rigorous and combative. Kliman demonstrates that the current economic crisis is a consequence of the fundamental dynamic of capitalism, unlike the vast bulk of superficial contemporary commentary that passes for economic analysis.”
. – Rick Kuhn, Deutscher Prize winner, Reader in Politics at the Australian National University

“Among the myriad publications on the present day crisis, this work stands out as something unusual. Kliman cogently argues against the view that the crisis is ultimately rooted in financialization. He is an excellent theorist, and an equally excellent analyst of empirical data.”
, – Paresh Chattopadhyay, Université du Québec à Montréal

“One of the very best of the rapidly growing series of works seeking to explain our economic crisis. … The scholarship is exemplary and the writing is crystal clear. Highly recommended!”
. – Professor Bertell Ollman, New York University, author of Dance of the Dialectic

The Failure of Capitalist Production is essential reading for all Marxists and lefts interested in what caused the Great Recession.  It debunks the fads and fashionable arguments of neoliberalism, underconsumption and inequality with a battery of facts.  It restores Marx’s law of profitability to the centre of any explanation of capitalist crisis with compelling evidence and searching analysis.  It must be read.
. – Michael Roberts, Michael Roberts Blog (full review here)

The thesis presented in the book stands out in a number of ways from many contemporary radical interpretations (notably the financialised-underconsumptionist thesis advanced by the influential Monthly Review … and that of the Marxist political geographer David Harvey). … Kliman provides far more compelling empirical evidence that American corporations’ rate of profit did not recover in a sustained manner after the early 1980s. …  A crucial finding undermining the financialisation thesis is that Kliman demonstrates how American corporations have not, as is often claimed, invested a smaller share of their profit in production.
. – Socialist Voice (full review here)

UPCOMING EVENTS ON THE BOOK:

…..Feb. 6, 2012. NEW YORK CITY. 7 PM. Bluestockings Books, 172 Allen St., Manhattan. (212) 777-6028.

…..Feb. 10. TORONTO. 1:30 PM. York University Dept. of Political Science; Verney Room, Ross Building South, 6th Floor.

…..Week of Feb. 12. WINNIPEG. Multiple events being planned.

…..Feb. 29. TAMPERE, Finland.

…..March 1. HELSINKI, Finland.

…..March 5. LONDON. 6:30 PM. Bookmarks Bookshop. 1 Bloomsbury Street, WC1B3QE. Introduction by Joseph Choonara, talk by Kliman, discussion, wine.

…..weekend of March 17-18. NEW YORK CITY. Pace University, 1 Pace Plaza, Manhattan. Left Forum panel on book. Speakers: Brendan Cooney, Barry Finger, Alan Freeman, Anne Jaclard, and Mike West. Comments by Kliman.

Check this space again for additional events and additional details, or contact Marxist-Humanist Initiative.

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DESCRIPTION OF BOOK, AUDIO/VIDEO INTERVIEWS, AND SYNOPSIS FOLLOW.

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AUDIO and VIDEO

Audio: Kliman and host Doug Lain discuss the book (causes of the Great Recession, inequality, underconsumptionism, the #Occupy movement, and more) on Diet Soap Podcast #125: Crisis and Capitalism’s System Failure (70 mins).

Video: An interview by host Bill Weinberg on the Moorish Orthodox Radio Crusade in the World War 4 Report, “Andrew Kliman on the roots of the world financial crisis” (2 hrs 11 mins).

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The reasons behind the global financial crisis and the Great Recession are the subject of much debate. This is the first book to conclude, on the basis of in-depth analyses of official U.S. data, that Marx’s crisis theory can explain these events.

Marx believed that the rate of profit has a tendency to fall, leading to economic crises and recessions. Many economists, Marxists among them, have dismissed this theory out of hand, but Andrew Kliman’s careful data analysis shows that the rate of profit did indeed decline after the post-World War II boom. He shows that free-market policies have failed to reverse that decline. This fall in profitability led to sluggish investment and economic growth, mounting debt problems, desperate attempts of governments to fight these problems by piling up even more debt –– ultimately ending in the Great Recession.

Kliman’s conclusion is simple but shocking: short of socialist transformation, the only way to escape the “new normal” of a stagnant, crisis-prone economy is to restore profitability through full-scale destruction of the value of existing capital assets, something not seen since the Depression of the 1930s.

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Only $23.40 from MHI + $3.60 shipping in US, Canada & Mexico — below Amazon’s price (Outside North America: $11.60 shipping).

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US, Canada, Mexico – $27.00 USD Outside North America – $35.00 USD

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Chapters

1. Introduction
2. Profitability, the Credit System, and the “Destruction of Capital”
3. Double, Double, Toil and Trouble: Dot-com boom and home-price bubble
4. The 1970s––Not the 1980s––as Turning Point
5. Falling Rates of Profit and Accumulation
6. The Current-cost “Rate of Profit”
7. Why the Rate of Profit Fell
8. The Underconsumptionist Alternative
9. What Is to Be Undone?

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Synopsis

Chapter 1: Introduction.

Chapter 2: Sets out the theoretical framework that underlies the empirical analyses that follow. It discusses key components of Marx’s theory of crisis––the tendential fall in the rate of profit, the operation of credit markets, and the destruction of capital value through crises––and how they can help account for the latest crisis and Great Recession.

Chapter 3: Discusses the formation and bursting of the home-price bubble in the U.S., and the Panic of 2008 that resulted. It then discusses how Federal Reserve policy contributed to the formation of the bubble, arguing that the Fed wanted to prevent the United States from going the way of Japan. After Japan’s real-estate and stock-market bubbles burst at the start of the 1990s, it suffered a “lost decade,” and the Fed wanted to make sure that the bursting of the U.S. stock-market bubble of the 1990s did not have similar consequences. The latest crisis was therefore not caused only by problems in the financial and housing sectors. As far back as 2001, underlying weaknesses had brought the U.S. economy to the point where a stock-market crash could have led to long-term stagnation.

Chapter 4: Examines a variety of global and U.S. economic data and argues that they indicate that the economy never fully recovered from the recession of the 1970s. Because the slowdown in economic growth, sluggishness in the labor market, increase in borrowing relative to income, and other problems began in the 1970s or earlier, prior to the rise of neoliberalism, they are not attributable to neoliberal policies.

Chapter 5: Shows that U.S. corporations’ rate of profit did not rebound after the early 1980s. It also shows that the persistent fall in the rate of profit––rather than a shift from productive investment to portfolio investment––accounts for the persistent fall in the rate of accumulation.

Chapter 6: Discusses why many radical economists dismiss Marx’s law of the tendential fall in the rate of profit and contend that the rate of profit has risen. They compute “rates of profit” that value capital at its current cost (replacement cost); almost everyone else uses the term “rate of profit” to mean profit as a percentage of the actual amount of money invested in the past (net of depreciation). The current-cost “rate of profit” did indeed rebound after the early 1980s, but the author argues that it is simply not a rate of profit in any meaningful sense. In particular, although proponents of the current-cost rate have recently defended its use on the grounds that it adjusts for inflation, he argues that it mis-measures the effect of inflation and that this mis-measurement is the predominant reason why it rose.

Chapter 7: Looks at why the rate of profit fell. It shows that changes in the distribution of corporations’ output between labor and non-labor income were minor, and it decomposes movements in the rate of profit in the standard manner of the Marxian-economics literature. It then shows that an alternative decomposition analysis reveals that the rate of profit fell mainly because employment increased too slowly in relationship to the accumulation of capital. This result implies that Marx’s falling-rate-of-profit theory fits the facts remarkably well. The chapter concludes with a discussion of depreciation due to obsolescence (“moral depreciation”). It shows that the information-technology revolution has caused such depreciation to increase substantially and that this has significantly affected the measured rate of profit. The rates of profit discussed in Chapter 5 and prior sections of Chapter 7 would have fallen even more if they had employed Marx’s concept of depreciation instead of the U.S. government’s concept.

Chapter 8: Examines underconsumptionist theory, which has become increasingly popular since the recent crisis. Contrary to what underconsumptionist authors contend, U.S. workers are paid more now, in inflation-adjusted terms, than they were paid a few decades ago, and their share of the nation’s income has not fallen. The rest of this chapter criticizes the underconsumptionist theory of crisis. In particular, it argues that the underconsumptionist theory presented in Baran and Sweezy’s influential Monopoly Capital rests on an elemental logical error.

Chapter 9: Discusses what is to be undone. It argues that the U.S. government’s response to the crisis constitutes a new manifestation of state-capitalism, and it critically examines policy proposals based on the belief that greater state regulation, control, or ownership can put capitalism on a stable path. It then discusses the political implications of underconsumptionism and critique its view that redistribution of income would stabilize capitalism. Finally, it takes up the difficult question of whether a socialist alternative to capitalism is possible. Although the author does not believe that he has “the answer,” he addresses the question because he believes that the collapse of the U.S.SR. and the latest crisis have made the search for an answer our most important task. .

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Excerpts from Introduction

A tremendous amount has already been written on the financial crisis that erupted in 2007, the Panic of 2008, and the Great Recession to which they led. Many competent and insightful analyses of these events and the factors that triggered them are widely available elsewhere. Do we really need yet one more book on the subject? Probably not. This book therefore focuses more on the underlying conditions that set the stage for the crisis and recession, and less on the proximate causes of these events.

The “failure of capitalist production” in this book’s title is a reference, not to capitalism in general, but to specific and unresolved problems within the capitalist system of value production since the 1970s. I will argue that the economy never fully recovered from the recessions of the mid-1970s and early 1980s. I will put forward an explanation of why it did not. I will argue that the persistently frail condition of capitalist production was among the causes of the financial crisis. And, most importantly, I will argue that it set the stage for the Great Recession and “the new normal,” the state of not-quite-recession that we now endure. In light of the frailty of capitalist production, the recession and its consequences were waiting to happen.

Just as more lay behind the Great Depression than the stock market crash and the bubble that preceded it, more lies behind the Great Recession and “the new normal” than the financial crisis and home-price bubble of the 2000s. As Paul Krugman and Robin Wells (2010) noted in an essay published 15 months after the recession officially ended in the U.S.,

[there] hasn’t been much of a recovery. If the fundamental problem lay with a crisis of confidence in the banking system, why hasn’t a restoration of banking confidence brought a return to strong economic growth? The likely answer is that banks were only part of the problem.”

There is also reason to doubt that the financial crisis by itself––in the absence of longer-term conditions that reduced the economy’s ability to withstand shocks––would have triggered such a severe recession.The actual declines in production, employment, and income that took place, large as they were, are not true measures of the U.S. economy’s inability to absorb the shock of the financial crisis. The true measures are the declines that would have taken place if the Treasury had not borrowed madly to prop up the economy. In the first two years that followed the collapse of Lehman Brothers, it borrowed an additional $3.9 trillion, which caused its total indebtedness to rise by more than 40 percent. The additional debt was equal to 13.5 percent of the $28.6 trillion of Gross Domestic Product (GDP) that was produced during these two years. Yet despite the enormous increase in debt and the additional spending and tax cuts financed by means of it, real GDP at the end of the two years remained less than at the pre-recession peak. In contrast, the Treasury’s debt declined in the two years between mid-1929 and mid-1931, and by mid-1932 it was still only 15 percent greater than in mid-1929. It is likely that the latest recession would have been almost as bad as the Great Depression, maybe even worse, if the government had refrained from running up the public debt.

Main Thesis

The rate of profit—that is, profit as a percentage of the amount of money invested—has a persistent tendency to fall. However, this tendency is reversed by what John Fullarton, Karl Marx, and others have called the “destruction of capital”––losses caused by declining values of financial and physical capital assets or the destruction of the physical assets themselves. Paradoxically, these processes also restore profitability and thereby set the stage for a new boom, such as the boom that followed the Great Depression and World War II.

During the global economic slumps of the mid-1970s and early 1980s, however, much less capital value was destroyed than had been destroyed during the Depression and the following World War. The difference is largely a consequence of economic policy. The amount of capital value that was destroyed during the Depression was far greater than advocates of laissez-faire policies had expected, and the persistence of severely depressed conditions led to significant radicalization of working people. Policymakers have not wanted this to happen again, so they now intervene with monetary and fiscal policies in order to prevent the full-scale destruction of capital value. This explains why subsequent downturns in the economy have not been nearly as severe as the Depression. But since so much less capital value was destroyed during the 1970s and early 1980s than was destroyed in the 1930s and early 1940s, the decline in the rate of profit was not reversed. And because it was not reversed, profitability remained at too low a level to sustain a new boom.

The chain of causation is easy to understand. The generation of profit is what makes possible the investment of profit. So, not surprisingly, the relative lack of profit led to a persistent decline in the rate of capital accumulation (new investment in productive assets as a percentage of the existing volume of capital). Sluggish investment has, in turn, resulted in sluggish growth of output and income.

All this led to ever more serious debt problems. Sluggish income growth made it more difficult for people to repay their debts. The decline in the rate of profit, together with reductions in corporate income tax rates that served to prop up corporations’ after-tax rate of profit, led to greatly reduced tax revenue and mounting government budget deficits and debt. And the government has repeatedly attempted to manage the relative stagnation of the economy by pursuing policies that encourage excessive expansion of debt. These policies have artificially boosted profitability and economic growth, but in an unsustainable manner that has repeatedly led to burst bubbles and debt crises. The latest crisis was the most serious and acute of these.

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Although the financial crisis is over, and the recession officially ended two years ago, the debt problems persist––within the European Union, they are now critical––as do massive unemployment and the severe slump in home prices. These problems seem to be the main factors that have kept the U.S. economy from growing rapidly since the end of the recession. For a long time, Americans were willing to increase their borrowing and reduce their saving, since they believed that increases in the prices of their houses and shares of stock were an adequate substitute for real cash savings. But those increases have vanished, and many people are worried about whether they will hold on to their jobs and homes, so they have begun to borrow less and save more. And because of continuing debt, unemployment, and housing-sector problems––and probably because of concerns that they will suffer additional losses on existing assets and ultimately have to report losses that they have not yet “recognized”––lenders are less willing to lend. The low level of borrowing/lending has caused spending and economic growth to be sluggish.

I certainly do not advocate full-scale destruction of capital value––or any other policies intended to make capitalism work better; it is not a system I favor. Yet the destruction of capital value would indeed be a solution to the systemic problems I have outlined––unless it led to revolution or the collapse of the system. A massive wave of business and personal bankruptcies, bank failures, and write-downs of losses would solve the debt overhang. New owners could take over businesses without assuming their debts and purchase them at fire-sale prices. This would raise the potential rate of profit, and it would therefore set the stage for a new boom. If this does not happen, I believe that the economy will continue to be relatively stagnant and prone to crisis.

The Conventional Left Account

This is not a book that I set out to write. At the start of 2009, I began the empirical research that eventually became the core of the book, but at the time I had a different, and very limited, objective in mind. However, I soon discovered things that impelled me to dig deeper and widen the scope of my research.

To understand the significance of what I gradually learned, one needs to be familiar with the conventional wisdom on the left regarding recent U.S. economic history and its relationship to the recent crisis and recession. What follows is a brief summary of the conventional account. (Later in the book, I will quote various authors and provide citations.)

According to conventional wisdom, the rate of profit fell from the start of the post-World War II boom through the downturns of the 1970s and early 1980s. But by that time, economic policy had become “neoliberal” (free-market), and this led to increased exploitation of workers. Consequently, U.S. workers are not being paid more, in real (inflation-adjusted) terms, than they were paid decades ago, and their share of income has fallen. The increase in exploitation led to a significant rebound in the rate of profit. Normally, this would have caused the rate of accumulation to rise as well, but this time it did not.

The conventional account blames the “financialization” of the economy for the failure of the rate of accumulation to rebound. It holds that financialization, another component of neoliberalism, has induced companies to invest a larger share of their profits in financial instruments, and a smaller share in the productive capital assets (factories, machinery, and so on) that make the “real” economy grow. As a result, economic growth has been weaker during the last several decades than it was in the first few decades that followed World War II, and this factor, along with additional borrowing that enabled working people to maintain their standard of living despite the drop in their share of income, has led to long-term debt problems. These debt problems, and other phenomena that also stem from financialization, are said to be the underlying causes of the latest economic crisis and slump.

This was not an interpretation of recent economic history that I found particularly appealing, and I knew that proponents of the conventional wisdom mis-measure the rate of profit. But I had no reason to believe that their measures were overstating the rise in profitability instead of understating it. Nor did I doubt that their other empirical claims were based on fact. Yet in the course of my research, I found that:

• US corporations’ rate of profit did not recover in a sustained manner after the early 1980s. Their before-tax rate of profit has been trendless since the early 1980s and a rate of profit based on a broader concept of profit, more akin to what Marx meant by “surplus-value,” continued to decline.
• Neoliberalism and financialization have not caused U.S. corporations to invest a smaller share of their profit in production. Between 1981 and 2001, they devoted a larger share of their profit to productive investment than they did between 1947 and 1980 (and the post-2001 drop in this share is a statistical fluke). What accounts for the decline in the rate of accumulation is instead the decline in the rate of profit.
• U.S. workers are not being paid less in real terms than they were paid decades ago. Their real pay has risen. And their share of the nation’s income has not fallen. It is higher now than it was in 1960, and it has been stable since 1970.

These findings do no damage to the claim that a long-term buildup of debt is an underlying cause of the recent crisis and subsequent problems. However, all of the other causal claims in the conventional leftist account fall to the ground.

The conventional wisdom implies that the latest economic crisis was an irreducibly financial one. Of course, a financial crisis triggered the recession, and phenomena specific to the financial sector (excessive leverage, risky mortgage lending, and so on) were among its important causes. But what I mean by “irreducibly financial” is that conventional wisdom on the left holds that the recent crisis and slump are ultimately rooted in the financialization of capitalism and macroeconomic difficulties resulting from financialization. The persistent frailty of capitalist production supposedly has nothing to do with these macroeconomic difficulties. Indeed, on this view, the capitalist system of production has not been frail at all, since the rate of profit, the key measure of its performance, recovered substantially after the early 1980s.

The political implications of this controversy are profound. If the long-term causes of the crisis and recession are irreducibly financial, we can prevent the recurrence of such crises by doing away with neoliberalism and “financialized capitalism.” It is unnecessary to do away with the capitalist system of production––that is, production driven by the aim of ceaselessly expanding “value,” or abstract wealth. Thus, what the crisis has put on the agenda is the need for policies such as financial regulation, activist (“Keynesian”) fiscal and monetary policies, and perhaps financial-sector nationalization, rather than a change in the character of the socio-economic system.

If, on the other hand, a persistent fall in the rate of profit is an important (albeit indirect) cause of the crisis and recession, as this book argues, then these policy proposals are not solutions. At best, they will delay the next crisis. And artificial government stimulus that produces unsustainable growth threatens to make the next crisis worse when it comes. The economy will remain sluggish unless and until profitability is restored, or the character of the socio-economic system changes.

How This Book Differs

Quite a few books have put forward different leftist perspectives on the recent crisis and recession. Many of them focus, as have most other books on these topics, on the proximate causes of these events. This book differs from them, as I noted above, in that it focuses on the long-term, underlying conditions that enabled the financial crisis to trigger an especially deep and long recession, and one with persistent after-effects.

Yet a fair number of other books from the left also focus on the underlying causes. Some of them––such as Foster and Magdoff (2009), Harvey (2010), Duménil and Lévy (2011), and McNally (2011)––put forward some version of the conventional leftist account discussed above. And some, like the works by Foster-Magdoff and Harvey, also stress the supposed facts that workers’ share of total income declined and that this led to a lack of demand that was covered over by rising debt. From such a perspective, the crisis appears not to be a crisis of capitalism, but a crisis of a specifically neoliberal and financialized form of capitalism. I do not think the facts are consonant with these views, and I trust that disinterested readers will find, at minimum, that this book’s empirical analyses call such views into question.

On the other hand, some other books from the left have appeared that regard the crisis as a crisis of capitalism, and that take issue with the conventional account or parts of it––including Harman (2009), Roberts (2009), Carchedi (2011), and Mattick (2011). To these can be added articles such as Desai and Freeman (2011), Onishi (2011), and Potts (2011). I do not agree with all of these works in all respects, but I am proud that this book can now be counted among them. Except for the book by Duménil and Lévy, this book contains the most in-depth and comprehensive data analyses of any of the works I have cited above, as well as most other books on the topic. And among the works that take issue with the conventional leftist account, its treatment of the underlying causes of the Great Recession is arguably the most comprehensive.

To some degree, this book’s differences with the conventional account reflect methodological and theoretical differences. Like most of its other critics cited above, I am a proponent of the temporal single-system interpretation (TSSI) of Marx’s value theory. It has long been alleged that the value theory and the most important law based upon it––the law of the tendential fall in the rate of profit (LTFRP), the core of Marx’s theory of capitalist economic crisis––are internally inconsistent and must therefore be corrected or rejected. However, TSSI research has demonstrated that the inconsistencies are not present in the original texts; they result from particular interpretations. When Marx is interpreted as the TSSI interprets him, the inconsistencies disappear (see, for example, Kliman 2007).

As Chapter 6 will discuss in more detail, the TSSI’s ability to reclaim Marx’s Capital from the myth of inconsistency impinges upon the controversy over the underlying causes of the Great Recession in the following way. In their supposed proofs that the LTFRP is internally inconsistent, his critics replace the temporally determined rate of profit to which his theory refers with an atemporal “rate of profit” (the current-cost or replacement-cost rate), and they then find that Marx’s law does not survive this process of substitution. Those who have accepted these proofs have also accepted the manner in which the proofs mis-measure the rate of profit. Thus, when they found that the atemporal “rate of profit” trended upward after the early 1980s, they took this as conclusive evidence that capitalist production has been sound, and that the true underlying causes of the Great Recession are therefore neoliberalism, financialization, and heighted exploitation. Analysis of actual rates of profit leads to quite different conclusions.

However, I do not want to overstate the role of methodological and theoretical differences. Prior to analyzing the data, I had no prior belief that actual rates of profit had failed to rebound since the early 1980s, and I even wrote that “profitability has been propped up by means of a decline in real wages for most [US] workers” (Kliman 2009: 51), which I believed to be an unambiguous fact. Methodology and theory greatly influence the kinds of questions one asks and the data one regards as significant, but they have no influence over the data themselves.

In other words, this book is an empirical analysis, not a theoretical work. Even my claim that the atemporal “rate of profit” is not a rate of profit in any normal sense of the term is an empirical claim. If it, and this book’s other claims and findings, are “true for” those who find its conclusions appealing, they are no less “true for” those who do not. Not everything is a matter of perspective. If I can now say that a persistent decline in U.S. corporations’ profitability is a significant underlying cause of the Great Recession, and that Marx’s explanation of why the rate of profit tends to decline fits the facts remarkably well, it is because I have crunched and analyzed the numbers. I could not have said these things a few years ago.

by Andrew Kliman, author of Reclaiming Marx’s “Capital”: A refutation of the myth of inconsistency.

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In a comment following another article in With Sober Senses, Mike West asked me about Nouriel Roubini’s recent, widely-publicized comment on Marx being right.  I started to reply in the comments space, but my reply became so long that I decided to turn it into a separate article, namely this one.

Mike wrote:

On or about Aug. 12, 2011, in an interview with the WSJ, N. Roubini (aka ‘Dr. Doom’) stated (beginning around 5:09/22:01) that:

“Karl Marx had it right. At some point, Capitalism can [self-] destroy itself. [That’s because] You cannot keep on shifting income from labor to Capital without having an excess capacity and a lack of aggregate demand. That’s what has happened. We thought that markets worked. They’re not working. The individual can be rational. The firm, to survive and thrive, can push labor costs more and more down, but labor costs are someone else’s income and consumption. That’s why it’s a self-destructive process.”

(rough transcription taken from:
http://www.alternet.org/newsandviews/article/649635/mainstream_economist%3A_marx_was_right._capitalism_may_be_destroying_itself/

and

http://www.etoro.net/forex-news/european-focus/eur/was-marx-right-roubini-says-yes-32286.html)

I would very much like your comments on Mr. Roubini’s remarks, including whether he has his Marx ‘right’.

Thanks.

Mike West

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My reply:

Hi Mike,

Unfortunately, I don’t think Roubini is right, either on the economics or on Marx. More recently, George Magnus, an economic adviser or consultant to UBS, a big investment firm, got a lot of play for saying the same thing:

“The more people are relegated to poverty, the less they will be able to consume all the goods and services companies produce.

“When one company cuts costs to boost earnings, it’s smart, but when they all do, they undermine the income formation and effective demand on which they rely for revenues and profits. …

“As Marx put it in Kapital: ‘The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses.’”

On the economics: if profits rise at the expense of wages, there will be a drop in demand for goods and services IF the extra spending due to the extra profit–extra productive  investment spending by businesses, extra personal consumption of dividend recipients, extra government spending funded by extra business taxes–isn’t big enough to offset the loss in spending due to the fall in wages. But if the extra spending due to extra profit IS big enough, there won’t be a drop in overall demand. So it’s wrong to say that demand has to drop.

Now, underconsumptionists typically contend that the volume of productive investment spending is restricted by the demand for consumption goods, since “ultimately” the productive investments (in equipment, factories, office buildings, etc.) produce more consumer goods. So if consumption demand is depressed because wages are low, this must–they claim–eventually lead to depressed investment spending.

This is just incorrect–both theoretically and empirically.

Theoretically, as Marx’s schemes of reproduction in Capital, vol. 2 were the first to show, it isn’t the case that all productive investment results in more consumer goods, not even “ultimately.” Some iron is used to produce steel that is used to produce mining equipment that is used to excavate iron, etc., etc.

iron –> steel –> mining equipment –> iron …

So limited growth of consumption demand doesn’t set any insurmountable limit to the growth of productive investment demand. A company can demand more steel because it correctly anticipates bigger demand for mining equipment, and another company can demand more mining equipment because it correctly anticipates bigger demand for iron, and a third company can demand more iron because it correctly anticipates steel, etc., etc.

And because productive investment demand isn’t “ultimately” restricted  by the volume of personal consumption demand, total demand in the economy is likewise not “ultimately” restricted by it.

Empirically, as I’ve shown in an article in With Sober Senses, businesses’ productive investment demand has increased almost five time as fast as consumption demand in the U.S. over the last three-quarters of a century. If there were something keeping it from growing faster “ultimately,” it surely would have kicked in by now.

On the interpretive issue, Magnus’ quote from Marx–which is also what Roubini seems to have in mind–is very famous, but it’s taken totally out of context. (The full passage is here.)  Let me quote from my book on the underlying causes of the Great Recession that will be coming out in a few months:

Although underconsumptionists dismiss the implications of Marx’s reproduction schemes, many of them nonetheless argue that their theory is rooted in his work. They (for example, Sweezy 1970: 177; Desai 2010: 115) are particularly fond of taking out of context a sentence in which Marx (1991a: 615) writes, “The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses.” Let us put this sentence back in the context of the paragraph in which it appears.

Marx notes that if “the whole society [were] composed simply of industrial capitalists and wage-labourers,” total income (= net output) would be divided between the profits of the former and the wages of the latter. If we assume that workers spend their whole income on consumption goods and services, then a lack of demand, and hence “a crisis[,] would be explicable only in terms of” two things. First, all income might be spent on goods and services, but there could be a lack of demand in some branches of production (and too much demand in others)—“a disproportion in production between different branches.” Secondly, industrial capitalists’ demand might be less than their accumulated profit; in this case, there would be “a disproportion between the consumption of the capitalists themselves and their accumulation.” [Marx seems to be referring here to the sum of their personal consumption demand and their productive consumption demand (investment demand). Their personal consumption demand is always less than their accumulated profit, but a crisis would occur only if their investment demand were not great enough to offset this gap.] “But as things actually are, [demand] depends to a large extent on the consumption capacity of non-productive classes; while the consumption capacity of the workers is restricted” (Marx 1991a: 614–15). In other words, workers receive only part of the income that isn’t profit, while third parties who are neither capitalists nor workers but instead belong to “non-productive classes,” receive the rest, and there would be a crisis if the consumption demand of the latter were significantly less than their income.

Thus, “The ultimate reason for all real crises”—besides the two reasons that Marx referred to in the same paragraph, only two sentences earlier—“always remains the poverty and restricted consumption of the masses” in the sense that this creates the possibility that third parties, who receive income that the workers would otherwise receive, might not spend it all on goods and services. Or, if we set aside, as something other than “real crises,” those caused by the first kind of disproportionality, then the workers’ restricted consumption is the ultimate reason in the sense that this creates the possibility that industrial capitalists and third parties receive some income that they might not spend on goods and services. And these possibilities in turn “imply the possibility of crises, though no more than the possibility. For the development of this possibility into a reality a whole series of conditions is required” (Marx 1990a: 209, emphasis added).

Nothing in these passages even hints at the idea that crises are caused by chronic structural problems in capitalism that result from persistently inadequate personal consumption demand. And nothing in them even hints at a denial that investment demand can grow more quickly than consumption demand, even in the long run. Marx is certainly not* “frontally challenging any idea that the ‘fundamental’ cause of capitalist crises lay in some separate sphere of production” (Desai 2010: 115), since the passages only discuss factors that make crises possible; they do not discuss the fundamental conditions that turn “this possibility into a reality.”

The leading underconsumptionist of the twentieth century noted that the “ultimate reason” sentence—a single out-of-context sentence in a somewhat opaque paragraph of a manuscript that Marx did not prepare for publication!—“appears to be Marx’s most clear-cut statement in favor of an underconsumption theory of crises” (Sweezy 1970: 177). If that is the best evidence that Marx was an underconsumptionist—and it is—I would hate to see the other evidence.

References

Desai, Radhika. 2010. “Consumption Demand in Marx and in the Current Crisis,” Research in Political Economy 26 [The National Question and the Question of Crisis], 101–43.
Marx, Karl. 1990a. Capital: A critique of political economy,Vol. I. London: Penguin.
—— 1991a. Capital: A critique of political economy, Vol. III. London: Penguin.
Sweezy, Paul M. 1970. The Theory of Capitalist Development: Principles of Marxian political economy. New York: Modern Reader Paperbacks.

]]> http://www.marxisthumanistinitiative.org/economic-crisis/roubini-and-magnus-on-underconsumption-and-marx.html/feed 1 http://www.marxisthumanistinitiative.org/economic-crisis/no-increase-in-employment-in-august.html http://www.marxisthumanistinitiative.org/economic-crisis/no-increase-in-employment-in-august.html#comments Fri, 02 Sep 2011 20:24:58 +0000 MHI http://www.marxisthumanistinitiative.org/?p=1656 The U.S. Department of Labor reported today that nonfarm payroll employment failed to increase in August (see graph).

During the June-August period, employment growth averaged 35,000 jobs per month, only one-fourth of the number that is needed to prevent continued decline in employment as a percentage of the population.

On August 5, Standard & Poor’s (S&P), one of the three main credit-rating agencies in the U.S., downgraded Treasury debt from AAA to AA+, and it noted that a further downgrade could occur within the next two years. The unprecedented downgrade of the world’s only military and economic superpower certainly made for dramatic news. Yet it is not clear that its significance is more than symbolic.

The factors that S&P cited as reasons for the downgrade are hardly news. It said that the “political brinksmanship” that led up to the recent increase in the government’s debt ceiling indicates that “America’s governance and policymaking [are] becoming less stable, less effective, and less predictable than what we previously believed.” It also commented that “elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden.” This assessment of the asinine debt-ceiling game of chicken and the budget-cutting deal that does next to nothing to solve the government’s rapidly worsening debt problems is very widely shared and difficult to disagree with.

And the downgrade doesn’t reflect any concern that the government is, or will be, unable to repay its debt. The absolute worst-case scenario is that, at some future point, it won’t be able to repay its existing debt by borrowing new funds in the bond market; but in that case it could still create new dollars out of nothing and use them to repay its debt. How many euros or renminbi, or how much gold, those dollars would be worth is another matter. S&P’s downgrade seems to reflect concern with the worth of the dollar rather than default on debt, and/or concern that future Republican shenanigans could cause the government to miss some debt payments even though it has the ability to make them.

There are reasons to doubt that the latest decline in stock prices has anything to do with the downgrading of Treasury debt or the events behind it. The stock-price decline has been worldwide, not confined to the U.S., and market participants had known for some time before S&P’s announcement that it and other rating agencies were considering reductions in the government’s rating. Moreover, participants in the bond market are not acting as if the U.S. government is a greater default risk than before. On the contrary, as the economic news has worsened, demand for Treasury securities has increased even though yields have fallen, which reflects a belief that U.S. government debt is a relatively safer investment than the alternatives.

But economic analyst David Rosenberg did recently put forward a plausible link between the downgrade and lower stock prices: “history shows that downgrades light a fire under policymakers and the belt-tightening budget cuts ensue, taking a big chunk out of demand growth and hence profits.” And reduced expectations of future profits are among the main reasons why stock prices fall.

Other Forces at Work

Other forces have also been at work in recent weeks that have reduced expectations of future profits.  On July 29, the U.S. government released its initial estimate that real Gross Domestic Product increased at an annual rate of only 1.3% in the 2^nd quarter of this year, which is only about two-fifths the average rate. But what was more shocking were the revisions to earlier figures, which indicate that the decline in production and income during the Great Recession was about 25% more than earlier figures suggested, and that the post-Recession recovery has been a good deal weaker. It is now three and a half years after the Recession officially began, and two full years after it officially ended, and the country’s production and income have still not recovered to their pre-Recession level.

The revised figures also indicate that while real GDP grew by 3.3% during the first 4 quarters of recovery—which is only average growth and below the average for recovery periods—the growth rate dropped in half, to 1.6%, during the latest 4 quarters. GDP growth during the past two quarters has been particularly week. This has caused productivity—output per labor-hour— to decline in both the first and second quarters, and growth of productivity compared to that of a year earlier has declined for 5 straight quarters, from 6.2% in the 1^st quarter of 2010 to 0.8% in the 2^nd quarter of this year. Negative productivity growth is especially troubling, because it means that output has not been increasing as fast as employment, and that a new upsurge of layoffs may begin to redress the imbalance if growth of output does not soon improve.

Economic news that came out after the GDP report also suggests that the recovery is stalling and that the U.S. economy is in danger of descending into a double-dip recession. For instance, the Institute for Supply Management announced that its manufacturing index has fallen from more than 61 a few months ago to less than 51 in July, barely more than the 50 benchmark level which would indicate that the manufacturing sector is no longer expanding. A couple of days later, the ISM reported that its non-manufacturing index stood at 52.7 in July, seven points lower than in February. This suggests that service sector activity is still expanding, but a good deal more slowly than before.

Sandwiched in between these two reports was the government’s latest estimate of consumer spending, which indicates that it has failed to increase, once inflation is taken into account, over the past 4 months. And the National Federation of Independent Business reported last week that its index of sentiment among small businesses had fallen in July for the fifth month in a row. The main reason for the decline is undoubtedly that, despite all we have read about US companies being in great financial shape, 46% of 350,000 small businesses that were recently surveyed reported that their profits were still falling while only 18% reported that their profits were rising.

The latest employment figures were not as bad as had been feared, but the 117,000 increase in payroll employment in July was only average for this recovery. At the current rate of employment growth, the unemployment problem will not go away; it will only get worse. Owing to population growth, somewhat more than 117,000 additional jobs are needed each month just to prevent a decline in the percentage of the population that has jobs. Indeed, that percentage fell to 58.1% last month, about 5 percentage point less than it stood prior to the start of the recession. The 58.1% employment-rate figure is the lowest in 28 years––though this is a misleading comparison, since the figure was generally a lot lower in the past because relatively fewer women were in the paid labor force.

This spate of bad news has caused economic forecasters to lower their projections for U.S. economic growth and increase their estimates of the risk that the economic will descend into another recession. The average estimate is that the probability of a double-dip recession is now about one in three. Martin Feldstein, former president of the National Bureau of Economic Research, who understands short-term economic data about as well as anyone, puts the probability at one in two. He has long argued that the government economic stimulus would pump up the economy temporarily, but be without lasting effects once the stimulus came to an end.

Meanwhile, concerns have been mounting that major French banks are in trouble and that the governments of Spain and Italy might be unable to repay their debts. Up until now, the European debt problems have reached critical levels only in smaller economies such as Greece, Portugal, and Ireland. The causes of the government debt problems vary from country to country, but one factor that cuts across the board is the Great Recession, and the weakness of the subsequent recovery, which have reduced tax revenues and triggered additional social service spending.

The European Central Bank has been reluctant to do much about the growing problem. But recent sharp increases in the rates that Spain and Italy must pay in order to borrow eventually impelled the ECB to start buying these countries’ bonds in order to bring the rates down. This action has been successful, but many economic analysts believe that the crisis will end only when these countries’ creditors are bailed out, in a manner similar to the bailout of creditors that took place in the U.S. during the last couple of years under the Troubled Assets Relief Program (TARP).

That is easier said than done. Much of the bailout money may have to come from Germany, and just as the American public did not want to foot the bill to bail out creditors, neither does the German public. At their joint press conference today, French President Nicolas Sarkozy and German Chancellor Angela Merkel rejected the idea of raising the needed funds by issuing Eurozone bonds. And in light of data released today which indicate that the quarterly growth rates of the German and the Eurozone economies were a paltry 0.1% and 0.2% in the second quarter of this year, doubts are increasing as to whether Germany and France have the financial ability to solve the looming crisis.

The Future

Persistent debt problems, combined with massive unemployment and the severe slump in home prices seem to be the main factors that are keeping the economy from growing rapidly since the end of the recession. For a long time, Americans were willing to increase their borrowing and reduce their saving, since they believed that increases in the prices of their houses and shares of stock were an adequate substitute for real cash savings. But those increases have vanished, and many people are worried about whether they will hold on to their jobs and homes, so they have begun to borrow less and save more. And because of continuing debt, unemployment, and housing-sector problems––and probably because of concerns that they will suffer additional losses on existing assets and ultimately have to report losses that they have not yet “recognized”––lenders are less willing to lend. The low level of borrowing/lending has caused spending and economic growth to be sluggish.

The persistent debt problem in this country is largely the result of a slowdown in economic growth that began in the mid-1970s and never improved in a sustained manner thereafter. Existing dollar levels of debt would not present the problems they now present if there were sufficient income to service them, but owing to the slowdown in the growth of income and output since 1973, the income to service them is not sufficient.  The slowdown in growth is, in turn, largely due to a long-term slowdown in the rate of investment, or capital accumulation. And since the generation of profit is what makes possible the investment of profit, the dominant cause of the slowdown in investment is the long-term fall in U.S. corporations’ rate of profit, as I have discussed previously in these pages.

Since the collapse of Lehman Brothers in mid –September 2008, the U.S. Treasury’s debt has increased by more than 50%. This increase propped up the economy for a time, but it seems that Feldstein was correct when he argued that it would do so only temporarily. The effects of the Fed’s quantitative easing also seem to have run their course. It seems that policymakers have reached the bottom of their bag of tricks. Given the complex of long-term problems that persist well after the financial crisis and Great Recession have ended, it is hard to see how a sustained boom might begin any time soon. If the U.S. economy manages to avoid a double-dip recession, the most likely outcome seems to be a Japanese-style “lost decade.” We are a third of the way through such a decade already.

But if there is not a brisk turnaround, hundreds of millions of people here and abroad will long remain without jobs, burdened with unsustainable debt, and faced with worsening conditions as more and more austerity policies are imposed upon them. In response, struggles that are unmistakably class struggles have broken out in country after country, and they will undoubtedly continue.

For a quarter century or more, dominant tendencies in Marxist and radical thought have been preoccupied by the power of capital and the apparent totality and stability of the capitalist system. The class struggle has been ridiculed as a thing of the past, if not a myth. This way of thinking reflected the world of a particular moment. But we are now living in a very different moment.

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This is rather shocking news, since we were told six months ago that real GDP had surpassed the pre-recession peak in the last quarter of 2010. But the revised data released today indicate that the recovery that has taken place since the recession “officially” ended two years ago has been much weaker than the unrevised figures had led us to believe.

During the March–June quarter, real GDP grew at an annual rate of just 1.3%. That is only about two-fifths of its average growth rate, 3.4%, during the six decades prior to the Great Recession. For the January–March quarter, the Bureau originally reported that real GDP grew at an annual rate of 1.9%, but the revised numbers indicate that it grew by just 0.4%. During the past year, real GDP has grown by just 1.6%, less than half of its average growth rate.

In the first couple of years after a recession, GDP typically grows faster than average, so the fact that growth has been much slower than average confirms that this expansion has been much weaker than normal. And it seems to be running out of steam; during the first year after the recession, mid-2009 to mid-2010, real GDP grew by 3.3%.

Because the expansion has been so weak, the size of the U.S. economy has shrunk by 11.3% “relative to trend.” In other words, actual real GDP is 11.3% less than what real GDP would have been if it had grown at the average 3.4% rate since the end of 2007 (see graph). The latest figures indicate that this gap has consistently increased for four quarters in a row.

The meager growth that has occurred is far too little to put a dent in the country’s massive unemployment problem. As of June, the number of people employed on nonfarm payrolls was still seven million less than at the start of 2008. And more than twelve million extra people would need to be employed today–an additional 9.2%–in order to bring the percentage of people employed back to its pre-recession level.

The main immediate causes of the slowdown in the recovery seem to be a slowdown in the growth of business investment and the decline in state and local government spending that has occurred as a result of fiscal crises in many municipalities throughout the country. The longer-term reasons why the recovery wasn’t much of a recovery to begin with have to do with the massive overhang of debt and a persistent decline in U.S. corporations’ rate of profit.

PDF of “Value and Crisis: Bichler & Nitzan versus Marx,” by Andrew Kliman

“This paper has shown that Bichler and Nitzan have not provided us with good reasons to accept that belief in capitalism’s eternality is crucial to its continued existence, or that capitalists do normally believe that the system is eternal, or that they have come to fear its demise. The paper has also sketched out an alternative approach to questions of economic crisis and the future of capitalism rooted in Marx’s value theory, in the course of defending that theory against their charges that it is logically unsound and that the development of capitalism since Marx’s death has undermined his logic. By showing that none of Bichler and Nitzan’s charges holds water, it has eliminated their main justifications for their claim that their “capital as power” theory is needed as an alternative to Marx’s theory.

“Charges that his value theory is logically unsound serve to disqualify it at the starting gate, depriving it of the opportunity to demonstrate its explanatory power empirically. In contrast, my response to Bichler and Nitzan’s work, while quite critical, has not tried to disqualify their theory at the starting gate, on a priori logical grounds, irrespective of empirical evidence. They are entitled to their theory. Marx is also entitled to his.”

PDF of “Marx, Systemic Fear, and Capitalists’ Convictions: A reply to Bichler and Nitzan,” by Andrew Kliman

“My paper … demonstrated, painstakingly and point by point, that none of [Bichler and Nitzan's] specific charges holds water. Their rejoinder … does not refute, or even try to refute, any of these demonstrations. They have proved unable to defend the charges they leveled against Marx’s value theory.”

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The following interesting comment on Bichler & Nitzan’s response to the beginning of “Value and Crisis,” by Peter Fay, first appeared on the “lbo-talk” e-mail list, on February 24:

[lbo-talk] Reflections on crisis, fear and behavioural Marxism

Peter Fay

Very interesting defense by the author of the paper that was presented to Harvard Law and Kennedy schools.

Kliman’s criticism <http://www.marxisthumanistinitiative.org/economic-crisis/value-and-crisis-bichler-nitzan-versus-marx.html>of the author’s hypothesis is truly devastating. One wonders how such a hypothesis based on obviously erroneous evidence could ever get published, let alone presented to Harvard Law and Business schools… no, scratch that.

Let’s just say it couldn’t possibly have been peer reviewed prior to publication… no, scratch that also. One could say, though, that the empirical evidence for the hypothesis was, well, shockingly absent.

The apologia of their error by the authors is somewhat laughable, comparing their errors in their investigations to those of Pythagoras, Kepler and yes, even Einstein. I’m not sure Einstein would have presented “evidence” without examining the data first. Likewise, not to be outdone by those giants of science, the authors create their own words – “creorder” (‘creates the order’) and terms “capitalist mode of power” (‘capitalist mode of production’) – which I assume is a necessary prerequisite to being invited to Harvard.

After a long-winded effort to patch together some revised semblance of a hypothesis, they then turn their sites on the real enemy: Marxism, all Marxists and most importantly, Marx’s labor theory of value. They state,

“At the analytical heart of these specialized endeavours [to defend Marx] stand the experts on Marx’s labour theory of value and surplus value. Most Marxists are unfamiliar with the intricacies of this theory, and most ‘productive labourers’, however defined, would probably find it impossible to understand – that is, assuming they even tried.”

This is a curious statement from a professor – that he believes workers would find the labor theory of value impossible to understand, or even that they would try. My experience, and that of most others that I know, is the opposite: workers the world over are drawn to this explanation of labor and value by Marx, and quite naturally understand what they have intuitively experienced their whole lives on the shop floor. On the other hand, it is true that professors or other intellectuals may have a harder time understanding such a concept.

Next, “Marx wrote somewhere that value is revealed by price (or vice versa), and Kliman insists that reiterating this claim not only renders it true, but also cures Marxism of many of the chronic illness that have weakened it for years.” Again, this is a strange statement from someone who knows Marxism well enough to attack it for a living. I don’t believe Marx anywhere wrote that value is “revealed by price”, but everywhere that the reverse relationship is true, for example,

“Price, like relative value in general, expresses the value of a commodity” which in no way implies that price “reveals” value.

Finally, we read that, “[Marxists] offer no serious challenge, let alone an alternative, to the current capitalist mode of power.”

If Marxism offers no serious challenge to capitalism, why is capital, 140 years later, still so obsessed by Marx’s Capital? Why is it still paying people to spend their lives trying to discredit Marxism? One wonders whether in 140 years future generations will be spending their hours debating instead of Marx, the finer points of those titans who discovered “creorder”, and “capitalist mode of power”.

-PF

Click here to view the video.

Please click here for the original announcement of this panel.

Since only two papers were presented, the discussion period lasted more than an hour. The bulk of it concerned Kliman’s presentation. During his replies to questions and comments, he displayed a quotation, several graphs, and a table from his forthcoming book. The discussion period begins approximately fifty minutes after the start of the recording.

Click here to listen to the audio recording.

McDonald’s presentation was entitled “The Cry for Jobs: An Absurd and Brutal Affirmation of Labor’s Subordination to Capital.” Kliman’s presentation was entitled “The ‘Stagnant Pay’ Myth and the Persistent Frailty of Capitalist Production.” For video recordings of similar presentations by Kliman, click here or here.

Recorded March 19, 2011 at the Left Forum at Pace University in lower Manhattan. Featuring Alan Freeman on “Waking from the Dream: Europe in the Great Recession,” Andrew Kliman on ”The Great Recession and the Persistent Frailty of Capitalist Production,” David McNally on “Global Slump, Age of Austerity, and the Growing Resistance,” and Fred Moseley on “A Lost Decade for Jobs in the U.S., Unless…”

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In the spring and summer of 2010, crisis gripped Europe, highlighting the continued instability of the capitalist system across the globe. Financial meltdown was averted only by means of a massive bailout package, totaling as much as €750 billion, and the European Central Bank’s move to begin purchasing sovereign debt of the weaker Euro zone countries to prevent a breakup of the zone. Will the patch hold?

Antti Ronkainen will give special attention to the European Financial Stability Facility (EFSF), established last summer to help safeguard financial stability in the Euro zone. He will argue that the EFSF is not designed to solve the Euro crisis, but rather allows the European Central Bank to engage in potentially risky lending and provides a mechanism for redistributing income from taxpayers to banks. Ronkainen will also discuss the European workers and students’ demonstrations and strikes against new austerity programs, especially the current situation in Finland. Will the resistance succeed in saving the unions and government benefits?

Antti Ronkainen is a student of social sciences in Finland. He is an editor of and writer for Megafoni, a Finnish autonomist web journal (http://megafoni.org).

Presented by Marxist-Humanist Initiative & the New SPACE (http://new-space-nyc.org).