1. Introduction

Some prominent Marxist and radical economists (e.g., Duménil and Lévy 2004, Husson 2008, Moseley 2008) have argued that “neoliberal” policies and increased exploitation have led to a substantial recovery of profitability since the early 1980s. They therefore dismiss the idea that a persistent fall in profitability is an underlying cause of capitalism’s latest economic crisis. Instead, they typically regard the crisis as an irreducibly financial one–that is, a crisis caused by the “financialization” of capitalism and macroeconomic difficulties resulting from it, as well as by more immediate financial-sector phenomena. This paper will challenge that thesis.

The political implications of this controversy are profound. If the latest economic crisis is an irreducibly financial one, then this implies that:

• 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 ofproduction- i.e., production driven by the aim of ceaselessly expanding “value,” abstract wealth.
• What the crisis has put on the agenda is the need for financial regulation, activist (”Keynesian”) fiscal and monetary policies, and perhaps nationalization of some or all of the financial sector, rather than a change in the character of the socio-economic system.

If, on the other hand, the crisis is instead a systemic crisis resulting from the underlying tendency for the rate of profit to fall, then such reforms will at best only delay the next crisis. Moreover, while the immense buildup of government debt now taking place in the United States may also delay the day of reckoning by providing temporary artificial stimulus to the economy, it promises to make the next crisis worse when it comes.

This paper will focus on the U.S., because it is the epicenter of the latest global crisis and because data for other countries are not as complete and often not as reliable.[1] It cannot be automatically assumed that the analysis of the U.S. case applies to other countries. But since the U.S. is the epicenter of the crisis–since, in other words, it erupted elsewhere because it first erupted in the U.S. and then spread–I suggest that the relative lack of discussion of other economies does not reduce the adequacy of the paper’s analysis of the long-term economic difficulties underlying the crisis.

My main thesis is that U.S. corporations’ rates of profit declined after the mid-1950s and continued to fall or failed to rebound after the recessions of the mid-1970s and early 1980s; that no new boom followed these recessions because, in contrast to what occurred in the Great Depression and World War II, the amount of capital-value that was destroyed was insufficient to restore profitability and a healthy rate of investment; that the persistent fall in profitability led to sluggish investment, slow economic growth, and a long-term explosion of debt; that the buildup of debt has led to repeated bubbles and the bursting of these bubbles; and that the latest crisis and economic slump are the consequences of the bursting of a gigantic bubble in the housing and stock markets. The continuing fall in, or non-recovery of, the rate of profit is thus a crucial, though indirect, cause of the crisis and slump.

In the next section, I will discuss the destruction of capital-value and I will argue that relative stagnation, the buildup of debt, and related problems that ultimately led to the latest crisis are rooted in the insufficient degree to which capital-value was destroyed in the slumps of the mid-1970s and early 1980s. In section 3, I will document that the rate of profit has fallen and not recovered, and that the rate of capital accumulation fell in response to the fall in the rate of profit. Section 4 will challenge the claim, made by Duménil and Lévy, Husson, and others, that the rate of accumulation instead fell because a “neoliberal” “regime of accumulation” prevailed since the 1980s that encouraged diversion of profits into financial markets and away from productive investment.

Such economists also dismiss the evidence that the rate of profit failed to recover after the slump of the early 1980s, by showing that the current-cost “rate of profit” they favor has indeed rebounded. Section 5 will argue that this contrary evidence is invalid, because the current-cost rate is not a rate of profit in the normal sense of the term. It is not what businesses and investors seek to maximize, it does not regulate their investment decisions, it does not properly measure either their actual or their expected rates of return on investment, it bear no clear relationship to the rates of capital accumulation and economic growth, and it does not properly adjust for inflation.

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2. Insufficient Destruction of Capital-Value and Relative Stagnation Since the 1970s

Karl Marx argued that there is an ever-present tendency in capitalism for labor-saving technical innovation to lower the rate of profit. Yet he also argued that this tendency is interrupted from time to time by “the destruction of capital through crises” (Marx 1989, p. 127, emphasis omitted)–the destruction of physical capital assets and, more importantly, the destruction of the value of capital assets.

In an economic slump (a recession or depression), physical capital is destroyed as machines and buildings lay idle, rust, and deteriorate. More importantly, debts go unpaid, the prices of financial assets such as mortgage loans and mortgage-backed securities fall, and other prices may also fall, so capital-value, the value of the physical capital as well as the nominal value of financial assets, is destroyed. For instance, if you had purchased shares of stock of the companies included in the Dow Jones Industrial Average for $1000 in September of 1929, the same shares of stock would have been worth only $108 by July of 1932.

Yet the destruction of capital isn’t only a main effect of serious economic crises and the slumps they trigger. It is also a main cause of the booms that follow, because it is a crucial factor that helps to restore profitability. Capitalists invest in equipment, hire workers, and produce only in order to make a profit. So if the expected rate of profit–profit as a percentage of the amount of money they’ve invested– isn’t high enough, there won’t be sufficient investment and hiring, so there won’t be a boom. But by restoring profitability, the destruction of capital sets the stage for a new boom.

Imagine, for instance, a business that can generate $3 million in profit annually. If the value of the capital invested in the business is $100 million, the owners’ rate of profit is a mere 3%. Yet if, as a result of the destruction of capital-value, new owners can acquire the business for only $10 million instead of $100 million, their rate of profit–the return they receive on their investment– is a healthy 30%. Since the purpose of engaging in capitalist production is to get as high a return on investment as possible, the destruction of capital is a tremendous spur to a new boom. Notice that this is the case even in the absence of new markets or rising demand that would lead investors to expect greater profit.

Thus the ground for the post-World War II boom was laid by the massive destruction of capital-value that took place during the Great Depression and the war. At the start of the Depression, it seems that the destruction of capital–which was called “liquidationism”–was actually advocated by conservative economists and policymakers, especially Andrew Mellon, President Hoover’s Treasury Secretary. In his memoirs, Hoover (1952, p. 30) wrote,

Mellon … felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” He held that even panic [in the financial system] was not altogether a bad thing. He said: “It will purge the rottenness out of the system. … enterprising people will pick up the wrecks from less competent people.”

However, it seems that the amount of capital-value that needed to be destroyed in order to restore healthy rates of capital accumulation and economic growth was substantially more than liquidationists had expected. Policymakers in more recent times, understandably afraid of a repeat of the Great Depression and the radicalization of working people that accompanied it, have therefore not allowed free-market forces to proceed unchecked. During the economic slumps of the mid-1970s and early 1980s, and ever since, they have attempted to retard and prevent the destruction of capital. This has “contained” the problem, while also prolonging it–and exacerbating it, since they have repeatedly prolonged the problem by papering over bad debts with ever-mounting amounts of new debt and debt guarantees.

As a result, the global economy has never fully recovered from the slump of the 1970s, certainly not in the way in which it recovered from the Great Depression and World War II. The worldwide growth rate of per capita GDP fell abruptly and sharply in the mid-1970s and it has not recovered substantially since that time (see Table 1). In the U.S., the growth rate of corporations’ output (net value added) also fell abruptly at the same time, and this caused the growth rate of corporations’ compensation of employees to fall to a similar extent. Neither of these growth rates has recovered, either. Other U.S. indicators tell a similar story. For instance, the share of GDP devoted to federal, state, and local government spending on non-military infrastructure projects began a long-term decline starting in 1969 and never rebounded substantially.

Table 1. Indicators of Incomplete Recovery from Slumps of Mid-1970s and Early 1980s

(click to view)

In order to lessen the effects of this relative stagnation, and perhaps in order to overcome it, policymakers have tried to prop up economic growth and profitability artificially throughout the last three decades. In the U.S., the sluggishness has been papered over especially by an ever-growing mountain of mortgage, consumer, business, and government debt. The increase in indebtedness is both a consequence of the relative stagnation and a factor that masks it and delays its impact. (The tactic is very similar to that of a household that can’t pay its credit-card balance. It gets a second credit card, borrows still more, and uses the borrowed funds to pay the first debt. Then it gets a third credit card, borrows, and uses the borrowed funds to service the second debt. And so on.)

As Figure 1 shows, the total debt of U.S. non-financial sectors was remarkably stable, as a share of GDP, through 1981. Since that time, it has almost doubled, as did federal government debt prior to the latest crisis. It even rose rapidly during the middle of the last decade, a period in which it might have been expected to fall, as housing- and stock-market bubbles temporarily produced rapid economic growth. This suggests that the growth of debt–especially mortgage, consumer, and federal government debt–was a crucial cause of the bubbles and economic expansion.

Figure 1. Outstanding Debt as Percentage of GDP, United States, 1950-2009

(click to view)

It needs to be stressed that the rising debt burden has been produced in part by conscious government policy. This is true now, as the government pursues the “Keynesian” policy of massive borrowing in order to try to emerge from the slump. It was also true during the preceding, supposedly “neoliberal,” era; rising indebtedness, both public and private, was a key strategy used to manage the economy in the face of long-term relative stagnation.

For instance, easy-credit conditions, brought about by Federal Reserve policies and other means, allowed stock prices and home prices to rise. This was especially so in the period following the collapse of the dot-com bubble, the recession of 2001, the September 11 attacks, and the decline in employment that persisted into the middle of 2003. To keep the economy from sinking further, the Fed lowered short-term lending rates. For three full years, starting in October of 2002, the real (i.e., inflation-adjusted) federal funds rate was actually negative: banks borrowed funds, lent them out, and then paid back less than they borrowed, once inflation is taken into account.

As a result, borrowing rose sharply. And, as borrowed funds were spent on homes and shares of stock, their prices rose sharply as well. This allowed consumers and homeowners to borrow even more and save less. Whereas they saved almost 10% of their after-tax income from 1973 through 1984, the saving rate then fell consistently, to a low of 1.4% in 2005. As the prices of their homes and shares of stock increased, and as their retirement funds, based on stock-market prices, increased as well, consumers tended to treat these increases as if they were actual money being saving. So they tended not to save actual money.

Tax cuts financed by government borrowing were another important strategy during the “neoliberal” period. The federal government reduced corporate income taxes in the mid-1980s, which boosted corporations’ after-tax rates of profit relative to pre-tax rates. Since government spending in excess of tax receipts must be financed by borrowing, it is ultimately additional public debt that propped up after-tax rates of profit. More than three-eighths of the $8 trillion increase in U.S. Treasury debt between fiscal years 1974 and 2007 is attributable to reductions in corporate tax rates below their average level during the 1947-1973 period.

In the long run, however, debt cannot be used to “grow the economy” faster than is warranted by the underlying flow of new value (also known as income) generated in production. Efforts to make it grow faster create bubbles, but bubbles burst. Thus, in the period since the crisis of the mid-1970s, there have been recurrent economic upturns that have rested upon debt expansion. For that reason, they have been relatively short-lived and unsustainable. There was the Third World debt crisis of the 1980s, and then the partial collapse of the savings and loan industry in the U.S. at the end of that decade. Japan entered into a long period of stagnation following a very rapid boom. In the mid-1980s, Mexico experienced another debt crisis, and a few years later there was the East Asian currency crisis that spread to Russia and Latin America. The dot-com stock market bubble burst soon thereafter. And, of course, the recent bursting of the bubble in the U.S. housing and stock markets has triggered the most acute global economic crisis, and the longest slump, since the Great Depression.

Unwilling to allow capital to be destroyed to a degree that is sufficient to restore healthy accumulation of capital, policymakers have responded to the latest crisis by once again papering over bad debt with more debt, this time on a massive, unprecedented scale. In the first 19 months following the collapse of Lehman Brothers in mid-September 2008, the total debt of the U.S. Treasury has increased by more than one-third, from $9.6 trillion to $12.9 trillion. The additional borrowing amounts to more than $10,000 per person. According to projections from the Obama administration–which are far more optimistic than those contained in a recent International Monetary Fund working paper (Celasun and Keim 2010)–the Treasury’s debt will rise to $19.7 trillion by the end of fiscal year 2015, which means that it will have doubled in size in just 7 years. The $10.1 trillion increase in the debt is equal to 8.7% of projected GDP throughout the 7-year period (and, to repeat, the administration’s GDP projections are very optimistic).

If these measures succeed, full-scale destruction of capital will continue to be averted. But for the foreseeable future, the U.S. will confront a debt burden that will be difficult to manage, at best, and probably slower economic growth as interest rates rise in response to the growing debt. Moreover, the huge increase in indebtedness suggests that the next debt crisis could be much worse than the latest one, and therefore that the next wave of panic to strike the financial markets will be even more severe and have more serious consequences.

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3. Underlying Causes of the Relative Stagnation

I have argued that relative economic stagnation set the stage for the debt buildup and the latest crisis. But what caused the relative stagnation? The most obvious explanation, and therefore the explanation that is prima facie the most plausible, is this:

(1) the rate of profit fell and, because capital-value was not destroyed to an extent sufficient to restore profitability, the rate of profit failed to rebound significantly following the economic slumps of the mid-1970s and early 1980s;

(2) the persistent fall in the rate of profit produced a persistent fall in the rate of capital accumulation;[2] and

(3) the fall in the rate of accumulation led in turn to sluggish growth of per capita GDP, corporations’ output, and compensation of employees, to rising debt burdens, and so on.

Evidence for the United States suggests that this obvious and plausible explanation is in fact correct. Point (3) is not controversial–those radical and Marxist economists who contend that the latest economic crisis is an irreducibly financial one largely agree with it (see, e.g. Duménil and Lévy 2004, Husson 2008, Stockhammer 2009)–so I will limit myself to discussion of the first two points.

Figure 2 depicts movements in two measures of corporations’ rate of profit. The broader measure of profit, which I will call “property income,” is the share of corporations’ output (net value added) that their workers and other employees do not receive, and it is thus much closer to what Marx meant by “surplus-value” than is before-tax profit, the narrower measure of profit. The latter excludes the property income that corporations use to make interest payments and to pay sales tax and similar taxes.

As Figure 2 indicates, both rates of profit rebounded sharply after the Great Depression, and they remained quite high for more than a decade after the end of World War II. In contrast, no substantial rebound followed the slumps of the mid-1970s and early 1980s.

From the mid-1950s to the slump year of 1982, both rates fell substantially, and more or less continually, although the accelerating inflation of the 1970s temporarily reversed the decline. And in the period following 1982, neither rate has experienced a sustained recovery.

Figure 2. Profits as Percentage of Historical Cost of Fixed Assets, U.S. Corporations, 1929-2008

(click to view)

The property-income-based rate of profit has continued to fall; the only significant exception to the general trend is the sharp but brief rise in profitability produced by the asset-price bubble of the last decade. In contrast, the rate of profit in which before-tax profits appear in the numerator did not decline further, but neither did it rebound in a sustained manner. It recovered significantly, but temporarily, during the dot-com bubble of the 1990s. However, it then fell very sharply, so its level during the trough years of 2001-02 was no higher than its level during the 1982 trough. During the asset bubble of the last decade, it skyrocketed again, but then declined rapidly as the economy sank into recession.

The trajectories of these two rates of profit have differed because corporations’ interest payments have fallen as a share of their property income. Interest payments amounted to 20% of property income in 1982, but they then fell, almost continuously, to 0% in the mid-1990s. And they remained very low, or even negative, during much of the last decade.[3] Since corporations paid out less of their property income as interest, they retained a greater share for themselves as before-tax profits. The ratio of before-tax profits to advanced capital therefore remained roughly constant even as the ratio of property income to advanced capital continued to decline.

The relative constancy of the before-tax rate of profit since the early 1980s is therefore not an indication that “neoliberalism” succeeded in halting the fall in surplus-value per dollar of advanced capital. Since property income is a much better proxy for surplus-value than are before-tax profits, and the property-income-based rate of profit continued to fall, the evidence indicates that the fall in surplus-value per dollar of advanced capital was not halted. Corporations were simply able to keep a larger share of the relatively shrinking pool of surplus-value for themselves as the share that they turned over to their creditors declined.

Figure 3 indicates that point (2) of the obvious and plausible explanation is correct–the persistent fall in profitability led to a persistent fall in the rate of accumulation. U.S. corporations’ before-tax rate of profit fell from 24% in 1978 to 12% in 2001, and their rate of accumulation (net investment, valued at historical cost, as a percentage of the historical cost of their fixed assets) fell from 13% in 1979 to 3% in 2003. Thus the rate of accumulation tracked the rate of profit quite closely, in the sense that both rates fell and in the sense that changes in the rate of accumulation followed changes in the rate of profit.

Figure 3. Before-Tax Profits and Net Investment, as Percentages of Historical Cost of Fixed Assets, U.S. Corporations

(click to view)

However, the radical and Marxist economists who contend that the rate of profit has recovered substantially since the early 1980s do not accept point (1) of the obvious and plausible explanation. They are proponents of the so-called current-cost (or replacement-cost) “rate of profit,” profit as a percentage of the amount of money that businesses would currently need to replace their capital assets. However, what almost everyone else–businesses, investors, Marx–means by “rate of profit” is the historical-cost rate, profit as a percentage of the amount of money actually invested in the past to purchase the capital assets (their historical cost), minus depreciation. Movements in these two rates have differed substantially since the early 1980s. Whereas, as we saw above, one measure of the historical-cost rate of profit continued to decline and the other experienced no sustained recovery, analogous measures of the current-cost “rate of profit” did rebound to some degree, especially the rate based on before-tax profits (see Figure 4).

Figure 4. Profits as Percentage of Current Cost of Fixed Assets, U.S. Corporations, 1947-2008

(click to view)

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4. Was There a Specifically Neoliberal “Regime of Accumulation”?

However, the proponents of the current-cost “rate of profit” are left with a serious problem. Because they do not accept point (1) of the obvious and plausible explanation, they also cannot accept point (2). They then have to try to account, somehow, for the extremely curious fact that nothing else–the rate of accumulation, GDP growth, corporate output, compensation of employees, etc.–rebounded in response to the recovery in the “rate of profit.”

Now the most obvious–and, prima facie, the most plausible–way to account for this curious fact is that the current-cost “rate of profit” is just a theoretical construct, a figment of the physicalist imagination.[4] It is not something that capitalists try to maximize nor is it the rate of profit that regulates their investment behavior. (I will return to this issue in the next section of this paper.) It is then no longer surprising that the rate of accumulation has declined even as the current-cost “rate of profit” has risen.

Instead of embracing this obvious and plausible explanation, proponents of the current-cost “rate of profit” imagine that a distinct “neoliberal” “regime of accumulation” emerged in the early 1980s (Husson 2008, Stockhammer 2009). They argue that the rate of accumulation fell, not because of a lack of profit, but because this new regime of accumulation was one in which profits were diverted away from productive investment and into financial markets. And this is the reason why they contend that the latest crisis of capitalism is an irreducibly financial one, rather than a crisis rooted in underlying profitability problems.

For instance, Duménil and Lévy (2004, p. 65) write,

Why was the restoration of the rate of profit not coupled with a parallel resumption of growth …? The key to this enigma may be found in the monetary and financial mechanisms …. [T]he continuing poor performance of the American and European economies with respect to capital accumulation are actually the effect of the specific dynamics of neoliberalism. One can, therefore, assert that the structural crisis is over and blame neoliberalism for poor accumulation rates.

Similarly, Husson (2008) contends that

[the] decrease of the wage-share has allowed a spectacular recovery of the average rate of profit from the mid 1980s.

But … the rate of accumulation has continued to fluctuate around a level lower than that before the crisis. In other words, the drain on wages has not been used to invest more.

… The growing mass of surplus value which has not been accumulated has [to] mainly be distributed in the form of financial revenues, and that is where the source of the process of financialisation is to be found. The difference between the rate of profit and the rate of investment is a good indicator of the degree of financialisation.

If it were in fact true that, during an entire quarter-century of capitalism, the rate of productive accumulation has failed to respond to substantial rise in the rate of profit, it would be extremely peculiar. As Husson (2008) acknowledges, such a disconnect between the rates of profit and accumulation is “more or less unprecedented in the history of capitalism.”

But it just isn’t true. At least, it isn’t true of the last quarter-century of capitalism in the U.S. As Figure 3 showed, the fall in the rate of accumulation closely tracked the fall in the rate of profit from the late 1970s through the early 2000s. As the gaps between the two rates suggest, the average share of before-tax profits devoted to net investment between 1965 and 1978, 44.2%, and the average share devoted to net investment between 1987 and 2001, 43.5%, were very similar. Moreover, if we consider the whole post-World War II period, the average share of before-tax profits devoted to net investment between 1987 and 2008, 37.4%, was slightly greater than the average share devoted to net investment between 1947 and 1978, 36.4%.

The reason why I find no long-term decline in the fraction of profit devoted to productive investment, while proponents of the current-cost “rate of profit” contend that such a decline has occurred, is not that I consider investment figures in which depreciation is valued at historical cost while they consider figures in which it is valued at current cost. When depreciation is valued at current cost, the average shares of before-tax profits devoted to net investment are again quite similar in the 1965-1978 and 1987-2001 periods, 32.7% and 31.6%, respectively. And, just as before, the average share of before-tax profits devoted to net investment between 1987 and 2008, 26.9%, was slightly greater than the average share devoted to net investment between 1947 and 1978, 25.9%. Thus, as Figure 5 shows, the gaps between the current-cost “rate of profit” and the associated rate of accumulation before and after the early 1980s are similar to one another.

Figure 5. Before-Tax Profits and Net Investment, as Percentages of Current Cost of Fixed Assets, U.S. Corporations

(click to view)

It is true that, if one examines only the period since 1980, as Husson does in a recent critique of my empirical work on the rate of profit, one finds a growing gap between the rates of profit and accumulation (see Husson 2009, Graphique 7A, “Taux de profit et taux d’accumulation: Etats-Unis 1980-2008″). As Figures 3 and 5 show, the gap between the rates of profit and accumulation has indeed risen since the early 1980s. But that is only because the gap that existed at that time was abnormally and unsustainably small. It has nothing to do with any distinctive and unprecedented neoliberal “regime of accumulation.”

What happened is this: The rate of profit fell sharply beginning in 1980, while the decline in the rate of accumulation was at first slower and more modest. Consequently, net investment as a percentage of after-tax profits shot up to an average of 117% between 1980 and 1986. Thus, U.S. corporations were investing 17% more of their after-tax profits than the after-tax profits they actually had! That situation clearly could not persist. So the gap between the rates of profit and accumulation that had existed earlier was gradually restored. But through 2001, at least, there was no long-term widening of the gap (see Kliman 2010, part VI for further discussion).[5]

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5. Why the Current-Cost “Rate of Profit” Isn’t One

In the preceding section of this paper, I rebutted the challenge to point (2) of the obvious and plausible explanation of the relative stagnation and rising indebtedness that set the stage for the latest economic crisis. But what about point (1)? Is it indeed the case that a persistent fall in the rate of profit was an indirect cause of the crisis? After all, the current-cost “rate of profit” has risen, and it is this rate that mainstream Marxist and Sraffian economists have used in order to assess movements in profitability for at least a half-century. It is not merely something that a few of them recently pulled out of the hat in order to justify their claim that the crisis is an irreducibly financial crisis rather than a crisis rooted in profitability problems. Is it really the case that they have all been guilty of an outright error for a half-century or longer?

My answer is an unqualified “yes.” The current-cost rate of profit is simply not a rate of profit in the normal sense of the term.[6]

First of all, the current-cost “rate of profit” is not what businesses and investors seek to maximize. They base their investment decisions on measures of profitability such as net present value (NPV) and internal rates of return (IRR). Whereas the current-cost “rate of profit” values current investment expenditures and future receipts simultaneously, using a single set of prices, NPV and IRR measures use current prices to value current investment expenditures, but use expected future prices to compute future receipts.

Secondly, the current-cost “rate of profit” fails to accurately measure businesses’ and investors’actual rates of return, their profits as a percentage of the original amount invested. Since it uses a single set of prices to current investment expenditures and future receipts, it assumes, in effect, that prices do not change. Thus, if prices rise or fall, the actual rate of return will be higher or lower than the current-cost rate. The discrepancy can be very large even if the change in prices is small.[7]

Thirdly, contrary to what it proponents (e.g., Laibman 1999, p. 223) often claim, the current-cost “rate of profit” fails to accurately measure businesses’ and investors’ expected future rates of return. Imagine a that firm which produces computers invests in new equipment that costs $100,000 at today’s prices, and that the resulting increase in its output of computers, if they are also valued at today’s prices–is $30,000 per annum. The current-cost “rate of profit” on this investment is 30%. But computer prices fall rapidly year after year, so only the most naïve firm would overlook this information and expect a 30% rate of return on its investment instead of something far smaller.

Fourthly, the current-cost “rate of profit” bears no clear relationship to the rate of capital accumulation.[8] Yet this relationship is perhaps the main reason why the rate of profit is of economic importance. It is well known, for instance, that the rate of profit is the maximum rate of accumulation. However, if prices are falling, the current-cost “rate of profit” can exceed the maximum rate of accumulation by a considerable amount (see Kliman 2007, pp. 85-87).

Finally, although Husson (2009) and Duménil (quoted in Kliman 2010a) have recently defended the use of the current-cost rate on the ground that the historical-cost rate of profit is affected by inflation, while the current-cost rate eliminates that effect, the problem is that the current-cost rate adjusts for inflation in an improper manner. What it adjusts for is actually not inflation–a general, economy-wide increase in the price level–but rather increases in the prices of each type of capital asset.

It might make sense to adjust for inflation in this manner if there were no changes in the composition of capital assets over time. In that case, changes in the prices of capital assets acquired in the past would accurately reflect the changes in capital-asset costs that businesses currently face. But when, for instance, businesses were in the process of buying computers instead of replacing their worn-out typewriters, changes in the replacement cost of typewriters became an ever-less meaningful measure of the inflation (or deflation) they experienced. The replacement cost of typewriters became ever-less meaningful even for businesses that continued to use typewriters, because they did not replace the typewriters when they wore out, but bought computers instead. But current-cost measures are, precisely, replacement-cost measures. They measure changes in the cost of replacing the entire current stock of capital assets, which contained a relatively large number of typewriters, not changes in the cost of the capital assets that businesses are actually acquiring currently. The latter contained a relatively large number of computers and relatively few typewriters.

Thus, in order to properly adjust rates of profit so as to remove the effects of inflation, one needs to control for changes in the general price level, not compute the current-cost “rate of profit.” My estimates of inflation-adjusted rates of profit indicate that the movements in such rates since the early 1980s did not diverge substantially from the movements in the unadjusted historical-cost rates of profit that I discussed above. When before-tax profits serve as the numerator of the rate of profit, the inflation-adjusted rate rises only slightly, by about one percentage point, between the trough of 1982 and the trough of the early 2000s. And when property income appears in the numerator, the inflation-adjusted rate of profit continues to decline (see Kliman 2010b, part II, section E, and part V, section D).[9]

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6. Conclusions

My findings disconfirm the claims that the latest economic crisis is rooted in nothing deeper than financial-sector phenomena that are essentially unrelated to movements in profitability. They therefore fail to lend support to the now-fashionable belief that greater state control over the financial sector will suffice to prevent the recurrence of similar crises in the future.

The mainstream “Marxian economics” tradition is founded on the myth, which has been refuted (see, e.g., Kliman 2007), that Marx’s own value theory is internally inconsistent. Yet the use of current-cost “rates of profit,” a direct consequence of the myth of inconsistency, remains pervasive. Hence this myth lies at the root of the implausible claims that the rate of profit has been heading ever-upward while the economy goes down the tubes, and the fashionable theories that take surface financial-sector phenomena to be essential causes of the latest economic crisis. The record needs to be set straight; the alleged proofs of Marx’s inconsistencies and the “Marxian economics” tradition need to be repudiated.

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References

Celasun, Oya, and Keim, Geoffrey. 2010. The U.S. Federal Debt Outlook: Reading the Tea Leaves. IMF Working Paper WP/10/62, Washington, DC: International Monetary Fund.

Duménil, Gérard and Lévy, Dominique. 2004. Capital Resurgent: Roots of the Neoliberal Revolution. Cambridge, MA: Harvard University Press.

Herman, Shelby W. et al. 2003. Fixed Assets and Consumer Durable Goods in the United States, 1925-97. U.S. Department of Commerce, Bureau of Economic Analysis. Washington, DC: U.S. Government Printing Office.

Hoover, Herbert. 1952. The Memoirs of Herbert Hoover, Vol. 3: The Great Depression, 1929-1941. New York: Macmillan.

Husson, Michel. 2008. A Systemic Crisis, Both Global and Long-Lasting, Workers’ Liberty website, www.workersliberty.org/story/2008/07/21/marxists-capitalist-crisis-7-michel-husson-systemic-crisis-both-global-and-long-las.

Husson, Michel. 2009. Les Coûts Historiques d’Andrew Kliman. www.npa2009.org/content/les-coûts-historiques-d’Andrew-Kliman-par-michel-husson-décembre-2009; also at hussonet.free.fr/histokli.pdf.

Kliman, Andrew. 2007. Reclaiming Marx’s “Capital”: A refutation of the myth of inconsistency. Lanham, MD: Lexington Books.

Kliman, Andrew. 2010a. Masters of Words: A reply to Michel Husson on the character of the latest economic crisis. Marxism 21, vol. 7, no. 2, Summer 2010 pp. 39-80.

Kliman, Andrew. 2010b. The Persistent Fall in Profitability Underlying the Current Crisis: New temporalist evidence. New York: Marxist-Humanist Initiative. Available from marxist-humanist-initiative.org.

Laibman, David. 1999. Okishio and His Critics: Historical cost versus replacement cost, Research in Political Economy vol. 17, pp. 207-27.

Marx, Karl. 1989. Karl Marx, Frederick Engels: Collected Works, vol. 32. New York: International Publishers.

Moseley, Fred. 2008. Some Notes on the Crunch and the Crisis, International Socialism no. 119. Available at www.isj.org.uk/index.php4?id=463&issue=119.

Stockhammer, Engelbert. 2009. The Finance-Dominated Accumulation Regime, Income Distribution and the Present Crisis. Department of Economics Working Paper no. 127. Wien, Austria: Vienna University of Economics & Business Administration.

.

Notes

1. Almost all of my data come from official U.S. government sources, especially the Bureau of Economic Analysis, www.bea.gov, and the Federal Reserve System, www.federalreserve.org. Detailed discussions of the sources of most of the data I will present, and my estimation procedures, are provided in Kliman (2010a and 2010b). Additional information will be provided upon request; please write to me, care of mhi@marxisthumanistinitiative.org.

2. The rate of accumulation is the growth rate of the capital that is advanced, i.e., net investment (investment minus depreciation) as a percentage of advanced capital. Since the rate of profit is profit as a percentage of advanced capital, the rate of accumulation is equal, by definition, to the rate of profit times the fraction of profit that is invested. The rate of profit is therefore a key determinant of the rate of accumulation. If the fraction of profit used for investment is roughly constant, the rate of accumulation will rise and fall by roughly the same percentage as the rate of profit. It is therefore reasonable to expect the rate of accumulation to track the rate of profit.

3. These interest-payment figures can be negative because they are “net interest” figures, i.e., interest paid minus interest received.

4. The term physicalism refers to any approach according to which “physical quantities” (technology and real wages) are the sole proximate determinants of relative prices, profits, and the rate of profit. The replacement-cost “rate of profit” is a physically determined rate (see Kliman 2007, chap. 7).

5. Owing to the very sharp increase in before-tax profits in the middle of the last decade, net investment as a percentage of before-tax profits fell markedly. The percentage has since risen, although the severe financial crisis and recession have tended to reduce the magnitude of the rise. It is too early to tell whether a long-term change has taken place in the relationship between net investment and before-tax profits.

6. The U.S. government publishes data for capital stocks in terms of current costs, but its concept of “capital stock” was not developed in order to measure profitability. The measures of net investment upon which it is based are intended to be “rough indicators of whether the corresponding capital stocks have been maintained intact” (Herman et al. 2003, p. M-2).

7. In Kliman (2010b, part V, section B), I work out an example in which an investment project has a very long life and the price of the business’ product falls by 2% per year. If the current-cost “rate of profit” is 10%, the actual rate of return is only 7.8%.

8. I am referring here to the actual accumulation of capital, the increase in advanced capital as measured at historical cost, not the increase in the current cost of capital assets. There is indeed a strict relationship between the current-cost “rate of profit” and net investment as a percentage of the current cost of capital assets.

9. The procedures I used to adjust for inflation were criticized by Husson (2009). In Kliman (2010a), I show that an alternative adjustment procedure of the type he recommends yields empirical results that scarcely differ from those I reported originally.

The panel featured Andrew Kliman on the “Roots of the Economic Crisis: The Persistent Fall in Profitability and Debt Financing,” Brendan Cooney on “Value, Crisis, and Marx’s ‘Order of Operations,’” and Anne Jaclard on “Do We Have an Uncoupled Economy?”

View the video here

Special thanks to Brendan Cooney for the recording.

In late December, Michel Husson, a Marxist economist, published a critique of my study of U.S. corporations’ profitability. His critique, “Les Coûts Historiques d’Andrew Kliman,” appears on the website of the Nouveau Parti Anticapitaliste.

I have just completed a response to him, entitled “Masters of Words: A reply to Michel Husson on the character of the latest economic crisis.”

For the full text, click here.  Below are the start of the paper, the first two sections, and the final section.

Masters of Words

A reply to Michel Husson on the character of the latest economic crisis

“I don’t know what you mean by ‘glory,’” Alice said.

Humpty Dumpty smiled contemptuously. “Of course you don’t–till I tell you. I meant ‘there’s a nice knock-down argument for you!’”

“But ‘glory’ doesn’t mean ‘a nice knock-down argument,’” Alice objected.

“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean–neither more nor less.”

“The question is,” said Alice, “whether you can make words mean so many different things.”

“The question is,” said Humpty Dumpty, “which is to be master–that’s all.”

–Lewis Carroll, Through the Looking Glass

1. Introduction

This paper replies to Michel Husson’s (2009a; also Husson 2010) critique of my study of movements in the rates of profit of U.S. corporations (Kliman 2009). I showed that rates of profit fell markedly, beginning in the late 1950s and continuing through the early 1980s, and that no sustainable rebound in profitability took place between the trough year of 1982 and the trough year of 2001. Depending upon the particular measure of the rate of profit one considers, the rate of profit during that period either continued to decline, or stagnated, or increased extremely modestly.  I argued that this persistent fall in profitability is an underlying cause of the latest economic crisis, since it led to sluggish accumulation of capital, sluggish economic growth, instability, and, above all, mounting debt problems.

I also argued that, while some leftist economists–Husson is one of them–claim that “the rate of profit” did rebound substantially, and thus that profitability problems are not an underlying cause of the economic crisis, their conclusions are based partly upon cherry picking of the data and partly upon the use of current-cost “rates of profit” that are simply not rates of profit in the normal sense of the term. Although the latter practice is sometimes defended on the ground that it is a way of producing inflation-adjusted estimates, I argued that current-cost “rates of profit” do not adjust for inflation in a proper manner, and I went on to report on my own estimates of movements in inflation-adjusted rates of profit. I found that their trends in the period since 1982 differed very little from trends in un-adjusted rates of profit.

Curiously, Husson’s critique of my work does not defend the manner in which current-cost rates adjust for inflation, and I am not aware of anyone else who has done so, either. He ignores that issue and instead sets out to turn the tables. He criticizes my use of unadjusted (historical-cost) rates of profit. His major argument, however, is that the alternative procedure I used to adjust for inflation is “incorrect” and that my “error” results in the elimination of the substantial rebound in inflation-adjusted profitability that actually occurred.

Let me note that even if everything he says against the unadjusted rates of profit and my inflation-adjusted rates were correct, it would not constitute a defense of the use of the current-cost “rate of profit.” Such a defense has evidently not yet been produced.

The next section of this reply discusses what is ethically at stake in this debate, and the final section discusses what is politically at stake.  In between, I respond to the particulars of Husson’s critique. Section 3 defends the use of unadjusted historical-cost rates of profit (alongside inflation-adjusted ones). Section 4 argues that Husson’s critique of my inflation-adjustment procedure is much ado about nothing, since an alternative adjustment procedure along the lines he recommends yields results that are almost identical to those I reported originally. Section 5 argues that the failure of current-cost “rate of profits” to adjust for inflation in a proper manner is responsible for almost all the rise, since 1980, in a key current-cost rate (the ratio of U.S. corporations’ property income to the current cost of their fixed assets).

Husson argues that the low rate of accumulation we have experienced since the 1980s is not due to a failure of the rate of profit to rebound. Rather, he claims, it is due to a neoliberal “regime of accumulation” that has encouraged diversion of profits away from productive investment and into financial speculation. In Section 6, I briefly recapitulate the counter-argument I provided in Kliman (2009), which Husson has not addressed. And Section 7 briefly clarifies a point that Husson (2010) seems not to have understood: the current-cost “rate of profit” conjures away a portion of advanced capital, and this leads to a spurious rise in the rate of profit, when prices or the rate of inflation are falling.

2. What is at Stake Ethically?

This reply’s title and epigraph are directed at the work of physicalist-Marxist and Sraffian economists generally, not that of Husson in particular. They refer to an ethical matter, one that concerns the responsibility of intellectuals when communicating with the public.

Physicalist-Marxist and Sraffian economists use the terms rate of profit or profit rate to refer to profit as a percentage of the amount of money that would currently be needed to replace the capital assets, i.e., the assets’ replacement cost, also known as their current cost. To almost everyone else, however, what these terms mean is profit as a percentage of the book value of the capital assets. The book value is the amount of money that was actually advanced (i.e., invested) in the past the order to purchase the capital assets–their historical cost –minus depreciation and similar charges. For instance, this is how the term is defined in the MIT Dictionary of Modern Economics (1992):

profit rate. profit expressed as a proportion of the book value of capital assets.

This is how it is defined in the Encyclopedia of Small Business (http://www.enotes.com/small-business-encyclopedia/profit-margin):

the rate of profit (sometimes called the rate of return) …comprises various measures of the amount of profit earned relative to the total amount of capital invested …. [T]he profit rate measures the amount of profit per unit of capital advanced ….

And this is how Marx (1991a, p. 133, emphasis in original; 1991b, p. 91) defined it:

The surplus-value [s] or profit … is consequently an excess over and above the total capital advanced. This excess then stands in a certain ratio to the total capital, as expressed by the fraction s/C, where C stands for the total capital. We thus obtain the rate of profit[,] s/C ….

Profit . . . expresses in fact the increment of value which the total capital receives at the end of the processes of production and circulation, over and above the value it possessed before this process of production, when it entered into it.

Because this is what rate of profit means to almost everyone, when they read or hear that “the rate of profit” has consistently risen since the early 1980s, they are seriously misled into thinking that there has been a recovery in what businesses, investors, Marx, and they themselves mean by the rate of profit.

However, no such recovery has taken place. So physicalist-Marxist and Sraffian economists have a responsibility, when engaging in public communication, to avoid saying things that will inevitably be understood as statements that there has been such a recovery. Ideally, they should avoid trying to make rate of profit mean just what they choose it to mean–neither more nor less–and find a different term for what they now insist upon calling “the rate of profit.” But if this is somehow too much to ask for, they should at the very least let the public know that “what we mean by ‘the rate of profit’–which is not what businesses and investors mean, or that Marx meant, but is instead the ratio of profit to the replacement cost of capital–has consistently risen since the 1980s.”

Definitions of one’s variables that are buried in the middle of technical papers are not adequate substitutes for such clarifications. Most people who hear talks or read interviews will not read the technical papers. Even those who do read them will frequently not realize that “fixed assets valued at current cost” differs from “the amount of money actually spent to acquire fixed assets, minus depreciation” unless this is pointed out explicitly. But intellectuals–especially radical intellectuals–have a responsibility to promote understanding, not misunderstanding, among the public. If they instead become the masters of words, they likewise become the masters of public discourse rather than its servants.

8. What is at Stake Politically?

Husson (2009a) concludes his critique of my work by quoting, and taking issue with, my response to a question during the discussion period that followed a talk I recently gave on the latest economic crisis:[1]

The first question I was asked was regarding my criticisms of the claims made by Marxist economists such as Gérard Duménil and Dominique Lévy, Fred Moseley, and Michel Husson who have said that the rate of profit, especially of corporations in the US, ha[s] almost completely recovered from the low point in the early 1980s. It is an extremely important issue because it affects how we view the character of the present crisis. If there is a huge crisis in the midst of an almost complete recovery of the rate of profit, that suggests that it is purely a financial crisis that we are experiencing rather than a crisis of capitalist production as such. And it suggests therefore that what needs to be fixed is the financial system: we need regulation, we need, maybe, nationalization of banks, but a change in the character of the socio-economic system is not on the agenda. So a lot of people are moving into the camp of Keynesianism and calling for fights against financial capitalism rather than against capitalism. [emphasis added]

In response to the sentences I have italicized, Husson objects that each link of my syllogism is false. If the rate of profit is high, it is still possible that the crisis is not only a financial one, and even if the crisis is only a financial one, it is still possible that it calls into question the underlying logic of the system. But the term “syllogism” is his, not mine. When one is giving an impromptu verbal response to a question, it is not the time to try to formulate a watertight syllogism. I therefore said “that suggests” and “it suggests,” not “that implies,” or “it follows inevitably that,” or some similar expression that announces the conclusion of a syllogism.

Yet there is indeed a precise logical connection that can be drawn between the notions that profitability has rebounded, that the latest economic crisis has an irreducibly financial character, and that changes to the financial system could in principle prevent such crises in the future. That connection was spelled out admirably by Chris Harman (2009, p. 299, emphasis added) a few months before his tragic and untimely death last fall:

Those radical economists who put the stress on financialisation in creating the crisis [... characteristically] claim that profit rates had recovered in the 1980s and 1990s sufficiently to have brought about a revival of productive investment were it not for the power of financial interests. Such was the argument of the French Marxist Michel Husson, when he claimed in 1999 that there were ‘high levels of profitability”, and [Engelbert] Stockhammer and [Gérard] Duménil were saying much the same thing in the summer and autumn of 2008. If they were right, the crises that broke out in 2001 and on a much bigger scale in 2007-8 would indeed have had causes very different to previous ones, including the inter-war slump [i.e., the Great Depression--AJK], and greater control by the existing state over the behaviour of the financial sector would in the 21st century be sufficient to stop such crises. In accordance with such an approach, Duménil and [Dominique] Lévy described the “Keynesian view” as “very sensible” and looked to “social alliances” to “stop the neoliberal offensive and put to work alternative policies–a different way of managing the crisis.”

If the sentence of Harman’s I have italicized still does not qualify as a fully-articulated syllogism, it comes damned close.

Unfortunately, Husson chooses not to respond to the substantive issues at stake here. Instead, he changes the subject. The error upon which my “false syllogism” rests, he writes, is my inability to understand that “capitalism may be in crisis even as it enjoys a high rate of profit. … [T]he crisis is that capitalism is incapable of responding, and indeed refuses to respond, in a rational manner to the needs of humankind, whether these be social needs or the struggle against climate change” (emphases added).

Husson’s use of the word “crisis” here is a bad pun. My talk–entitled “La Crisis Económica, sus Raíces y Perspectivas”–was wholly about the economic crisis, Thus, when I used the word “crisis” in my “syllogism,” it was the economic crisis to which I was referring. I do not mean to suggest that social needs and climate change are “non-economic” matters. My point is rather that economic crisisis a technical term that has long had a specific and precise meaning: “A situation in which the economy of a country experiences a sudden downturn brought on by a financial crisis” (http://www.businessdictionary.com/definition/ economic-crisis.html). So when Husson answers me by employing the word “crisis” in a different sense, he is just changing the subject.

In other words, the question is not whether capitalism is experiencing some sort of crisis. Nor is the question whether there is some justification for fighting against capitalism. Rather, the questions that are at issue–and in need of a full debate–are these:

• Is the latest economic crisis a crisis of a specific form of capitalism, rather than a crisis of capitalism itself, such that a change in the form of the system can in principle prevent the recurrence of economic crises of the same sort?

• Has this economic crisis put a change in the character of the socio-economic system on the agenda, in the sense that, in order to prevent the recurrence of economic crises of the same sort, capitalism itself must be transcended?

My answer to the first question is “no” and my answer to the second one is “yes.”

To the best of my knowledge, Husson has not explicitly answered these questions. But he has characterized the latest economic crisis as one that is “shaking the foundations of neo-liberalcapitalism,” not “shaking the foundations of capitalism” sans phrase. He has written that “[t]he crisis is a glaring confirmation of the criticisms addressed to financialised capitalism,” not “criticisms addressed to capitalism” sans phrase. In the same piece, he wrote that “we have to take strength from the rout of the advocates of neo-liberalism” but he did not also warn us of the dangers we face now that the crisis has given new life to Keynesianism, social democracy, and “leftist” visions of statist capitalism.[2]

Such statements seem to suggest that Husson’s answer to the first question is “yes” and his answer to the second question is “no.” If that is not the case, it would be helpful if he would clarify his views.

[2] The quotations from Husson in this paragraph are from the first paragraph, and the first paragraph of the final section, of Husson (2008b). Emphases are mine.

One Comment on “Reply to Michel Husson on the character of the latest economic crisis”

1. 1m said at 9:44 am on February 24th, 2010:great stuff, thank you.

On Duménil and Lévy’s Cherry Picking of the Data

At last month’s Historical Materialism conference, Duménil denied that they cherry picked the data.  I replied. Then we showed what the facts of the matter are.

In these pages and elsewhere, I’ve cited Gérard Duménil and Dominique Lévy’s cherry picking of the data as one reason why they contend that the rate of profit of U.S. corporations experienced an almost complete recovery since the early 1980s. This claim is crucial to their argument that the current economic crisis began as a financial crisis that was not itself rooted in a long-term fall in the rate of profit.

I discussed this issue during a January 15 presentation at the Historical Materialism 2010 NYC Conference last month. Duménil responded vociferously that they did not cherry pick the data. I replied. The following day, members of Marxist-Humanist Initiative distributed an informational flier at the conference that documented the relevant facts. It includes screen shots of the paper in question.

The transcript of the exchange between Duménil and me, and the informational flier, are in a PDF file you can download from the “Crisis Intervention” page of my website. The file is in the “Ethics” section, and it has a “New!” bug next to it.

Listen to the panel

Listen to q&a

Another recording of this panel is available at the Radical Perspectives on the Crisis website:

http://sites.google.com/site/radicalperspectivesonthecrisis/audio-video/audiohistoricalmaterialism2010nyc-originsofthecrisis-moseleyklimanmohun

(The audio quality may be better here. The Radical Perspectives on the Crisis website also features recordings of a number of other panels at the conference.)

One Comment on “Audio: “Roots of the Economic Crisis” @ Historical Materialism 2010 in NYC”

1. 1vincent mclean said at 5:42 am on February 13th, 2010:warm greetings comrades of the marxist humanist initiative. i’ve been wanting to reach your group ever since i’ve read what had happend to the news and letters committee political event that took placed resulted in the split between you. i’m an advocate of marx’s socialism with a human face, bannered by the marxist humanist groupings in the world. i’m a revolutionary activist from the philippines whose roots stems from the marxist humanist perspective, although it did not take root in the movement, with a leninist majority advocates, which i’m also a part of. i’m a popular educator and whenever i do pop ed all of my political and capability modules can be found traces of luxemburg, dunayevskaya’s tenents. i hope to have a grasp regarding whats the trend now on the marxist humanist arena. with warm wishes and solidarity to you comrades..

Kliman will be speaking on a panel with Fred Moseley and Simon Mohun entitled “Origins of the Current Crisis.” He will present a challenge to common left views of the crisis:

Various leftists are trying to have working people march behind the banner of some statist version of capitalism, as a supposed solution to the economic crisis and/or a way of preventing a recurrence of crisis. Frequently the turn to statism is justified on the basis of the claim that the current crisis is a purely financial one, caused by free financial markets, unrelated to and distinct from profitability problems within capitalist production. This paper will show that the claim is incorrect. Properly measured and assessed, there has been a persistent fall in U.S. corporations’ rate of profit and declining GDP growth, the effects of which have been continually papered over with ever-growing mountains of debt. But the excessive indebtedness leads to bubbles and the bursting of the bubbles. The latest crisis is the most severe yet. A further rise in debt is not a genuine solution to the crisis; only a new human society is. In the meantime, working people should fight for concessions without subsuming their self-activity under the agenda of some section of the ruling class.

*           *          *

Be sure to visit MHI’s book table at the Historical Materialism Conference.

For information about the conference, which takes place Thurs. Jan. 14 through Sat. Jan. 16, visit http://www.hm2010nyc.org/

Pedagogical Workshop

November 7, 2009. A workshop on the Temporal Single System Interpretation (TSSI) of Marx’s value theory with Alan Freeman and Andrew Kliman.

Watch the video.

Dialogue on the Economic Crisis

November 7, 2009. A roundtable on the economic crisis featuring David Calnitsky (Sociology, University of Wisconsin-Madison) on “Capitalist Competition, Self-Organization, and Crisis”; Brendan Cooney (Kapitalism 101 video blogger) on “Crisis, Value, and Marx’s “Order of Operations”; Radhika Desai (Political Studies, University of Manitoba) on “The Demand Problem in the Current Crisis: Marxist and Keynesian Reflections”; Alan Freeman (Visiting Scholar, University of Manitoba) on “How did 1929 end?”; and Andrew Kliman (Department of Economics, Pace University - Pleasantville) on “Contradictions of Capitalism’s Value Production: Internal, Inevitable, Insuperable.”

Watch the video.

Listen to Daniel Ankarloo’s Presentation

Listen to Q&A

View the original announcement of Daniel Ankarloo’s Nov. 4 talk and reader comments

In an October 16 article, “ISJ 124: Kliman and Choonara review” published on the website of the Permanent Revolution organization, Bill Jefferies criticizes my recent review of Chris Harman’s new book, Zombie Capitalism. Key points of contention have to do with the current economic crisis and its causes, so my response to Jefferies may be of general interest, and of interest to those who’ve read my new study of movements of profitability in the U.S. corporate sector.

I was very pleased to read Jefferies’ critique, because it was comradely (though in a comment following it that I will discuss below, he made an unsubstantiated and false charge of scholarly misconduct against me), and because he engaged with what I actually wrote. That’s something I’m not used to. I’m used to simultaneist-Marxist and Sraffian critics of Marx who lie about what I write, intentionally distort it, engage in diversionary ploys, and take actions that have threatened to deprive me of my means of earning a living. And I’m used to “Marxist-Humanist” critics who set up strawpeople and knock them down while assidously avoiding the words I’ve actually written.  So a critique like the one that Jefferies wrote is quite refreshing as well as quite commendable.

Also, here’s a big h/t to “mne.”  I’m not aware of whom s/he is, but s/he has said many good and important things about Jefferies’ critique in the comments section following it, though s/he is outnumbered there. S/he is probably the “m” that let me know about the critique by posting a comment on the MHI website yesterday. If not, an h/t to “m” as well.

1.  On my relationship to Harman, the International Socialism journal, and all that

a. Jefferies writes that “Kliman shares the Harman, Choonara and the ISJ’s view that capitalism already existed in the former centrally planned economies of China, Russia and Central Europe.”  Yes, but only in the same sense as I share “their” view that the Sun is the center of the solar system. In both cases, I arrived at my view independently of them. I am a Marxist-Humanist. To borrow a phrase that Marx used to describe his relationship to Hegel, I am a pupil of that mighty thinker, Raya Dunayevskaya, and I am politically active with Marxist-Humanist Initiative, which is endeavoring to renew Marxist-Humanism organizationally in the wake of the disintegration and retrogression of prior Marxist-Humanist organizations. Thus, when Jefferies writes that “Kliman is … from a broadly speaking similar theoretical tradition to that of the ISJ,” he is speaking very broadly.

b. Jefferies seriously misrepresents my review when he alleges that

Kliman claims that the basic problem with those who disagree with Harman is they have not broken completely with capitalist ideology and that therefore they “must always try, as Harman puts it, ‘to pin the blame on something other than capitalism as such”. Some might think that this was an attempt to shut down the debate ….

Nowhere did I say or suggest that those who disagree with Harman haven’t broken completely with capitalist ideology. I wasn’t even referring to his views at that point in the review, but to the fact that the economic crisis has not impelled many on the Left to engage in serious rethinking:

On the left there has been even less rethinking than on the right. This is because the crisis has the “form of appearance”-to use an apt Hegelian-Marxian expression-of being a crisis of free-market, deregulated capitalism and specifically a crisis emanating from the financial sector. In other words, it appears to be a crisis of things the left never celebrated (though those who spoke of a new long upturn tended to regard them as successful), and thus an ideological predicament only for the other guys.

The basic problem is that those who have not broken completely with capitalist ideology must always try, as Harman puts it, “to pin the blame on something other than capitalism as such”.

What is at issue is the lack of rethinking, not “disagreement with Harman.” There is a world beyond the shores of the UK. Thus, consider the views of the US Stalinist economist David Laibman, who I quote in my review. Not long ago, he wrote stuff like

Capitalism … maintains a certain coherence over time. The homeostatic aspects must be balanced against the transformative, crisis-provoking ones. The term “equilibrium” … has different meanings … and some of them are crucial to the Marxist enterprise.

Has there been any serious rethinking of this on Laibman’s part. No. Instead, true to tradition, the only thing that’s happened is that his line’s been changed again:

“the Marxist understanding of the inherent instability and progressive unworkability of capitalism has been vindicated!”

(The first quote is from David Laibman, 2004, “Rhetoric and Substance in Value Theory: An Appraisal of the New Orthodox Marxism.” In Alan Freeman, Andrew Kliman and Julian Wells (eds), The New Value Controversy and the Foundations of Economics (Edward Elgar), p. 15. The second is from David Laibman, 2009, “The Onset of Great Depression II: Conceptualising the Crisis,” emphasis in original.)

Of course, some people aren’t even changing their line, since the specific form of appearance of this crisis permits them to continue to think that they can properly pin the blame on “neoliberalism” or “financial capitalism” or “deregulation” or “corporate greed” or anything and everything but capitalism itself. So that’s why, far from trying to “shut down the debate,” I’ve been trying to get one going. But I can count on the fingers of zero hands the number of times I’ve been invited, here in New York or elsewhere in the US, to debate a simultaneist-Marxist economist or any other proponent of the view that the current crisis is purely a financial crisis unconnected to a persistent profitability problem.

2. On the crisis and the persistent fall in profitability

a. Jefferies writes that my review of Harman’s book “re-treads” a “well worn road” according to which

capitalism is stagnant and has been for nearly four decades now. Throughout the period of globalisation …, capitalism has seen declining production and investment, overcapacity and low, stagnant or falling profit rates. The digital age, internet revolution and Nintendo Wii Fit are all manifestations of capital’s inability to revolutionise the productive resources.

Almost all of this is simply false. Neither in my review nor elsewhere do I claim that capitalism is stagnant, that is it unable to revolutionize the productive resources, or that there have been declining production and investment throughout the period of globalization. And “overcapacity” as such is an obvious fact (does Jefferies wish to argue that the capacity utilization rate has been 100%?).

For the same reason, it is also simply false to claim, as he does, that my review “mount[s] a standard defence of the stagnation school” or that it is “a thinly veiled polemic against those Marxists specifically including ourselves in Permanent Revolution (PR), who have demonstrated that the period of capitalist globalisation has been anything but stagnant.”

To his claim that my review is a polemic specifically against Permanent Revolution, he adds the further claim that “Kliman … goes on ‘Even some Marxists spoke of a “new long upturn”‘. Kliman is referring to PR’s 2006 article ‘Capitalism’s Long Upturn.’  Of course he does not admit it.”

Neither of these claims is true. I did not have the views of Permanent Revolution-with which I am familiar only in passing–in mind when I read Harman’s book or when I wrote my review. What was on my mind was the pervasive myth of “capital resurgent” put forward by some academic Marxist economists and, unfortunately, parroted by many on the US left. (Capital Resurgent is the title of a 2004 book by Gérard Duménil and Dominique Lévy, two people who are genuinely “academic Marxist[s]“; I am a Marxist-Humanist who happens to teach for a living.) For example, even well into the current crisis, late last year, after the collapse of Lehman Brothers and all that, the US “radical” economic “journalist” Doug Henwood spoke of the period since the early 1980s as a new long boom, or words to that effect.

And I did not refer to “PR’s 2006 article ‘Capitalism’s Long Upturn,’ which I do not recall having read and doubt that I read. I was quoting the author of the book I was reviewing. The words “Even some Marxists spoke of a ‘new long upturn’” are his, as I indicated in a footnote, though Jefferies does not bother to inform the reader of that fact.

b. Jefferies complains that

Kliman tries to prove too much. By wanting to demonstrate that profit rates have not recovered with globalisation, he actually shows that they rose in the 1970s compared with their levels in the 1960s boom, particularly after the oil crisis of 1973. It effectively destroys profit rates as a guide to the health of the capitalist economy or otherwise.

I have anticipated and responded to this argument in “The Persistent Fall in Profitability Underlying the Current Crisis: New Temporalist Evidence.” See part II, section C. The extremely short version is that the rate of profit and “the health of the capitalist economy” are different things and shouldn’t be conflated.

I also made adjustments for inflation (in the general price level and in the monetary expression of value) in part V, section D of the same paper. Nominal rates of profit did of course rise sharply in the 1970s. That’s exactly what should be expected in a period of rapidly accelerating inflation. But (as I noted in my review of Zombie Capitalism) the rise is entirely or almost entirely attributable to the inflation. The adjusted historical-cost rates of profit did not rise sharply. When a broad measure of “profit” is used in the numerator, my results indicate that the inflation-adjusted historical rates of profit fell during the 1970s.

However, in the period between the trough of 1982 and the last trough before the current crisis, 2001, there was little or no difference between the trends in the nominal rates of profit and the trends in the inflation-adjusted rates.  Depending on the particular measure of profitability, there was a very slight rise in the rate of profit, or a complete failure of the profit rate to recover, or a continuing fall in the rate of profit.

c. Jefferies contends that my way of measuring the rate of profit “is not a Marxist theory of the rate of profit” because I “exclude[ ] wages and circulating constant capital” from the denominator.

I have anticipated and responded to the “Marxist theory” bit in part II, section D of “Persistent Fall.” I do not exclude circulating constant capital, though I didn’t think a review of Zombie Capitalism was the place to go into a long discussion of the various measures of profitability I have looked at. Measures that include circulating constant capital (which are quite unsatisfactory, because they also count output that hasn’t yet been sold as advanced capital) are reported in “Persistent Fall.” One historical-cost rate of profit that includes it rose just a tad between the 1982 and 2001 troughs, while the other continued to fall.

I did not include wages, because data on the turnover time of wage payments are unavailable. The turnover time is important because, although the total wage bill is large, the turnover of wage payments is rapid, so little capital is advanced in the form of wages. As an exercise, I have just assumed that wages turn over twice a month on average and have thus included 1/24 of the annual wage bill in the denominators of the rates of profit. The trends in the rate of profit are scarcely altered. (My data are in a spreadsheet available to all on my website, in the same location as “Persistent Fall,” so you don’t have to take my word for it.)

d. Jefferies writes, “leaving [circulating constant capital and wages] out of the equation means that an accurate measure of profit rates cannot be established.” I have anticipated and responded to this argument in part II, section C of “Persistent Fall.”

e. Jefferies also objects to my use of historical-cost rates of profit (the only genuine rates of profit there are):

There is also a debate amongst Marxists economists, as to whether to use historical or current cost of fixed assets when determining the value of assets in the calculation of the rate of profit. Kliman thinks it is correct to use historical cost. Marx on the other hand explained that as the socially necessary labour time required for the cost of capital production changed so would the value of fixed assets. If a capitalist buys an expensive machine it may be working fine, but if a new cheaper machine is invented that is no consolation to him (probably it’s a bloke). He cannot insist that his machine cost him hard money and he wants it back. The capitalist will simply be unable to sell his now expensive and out of date product. Instead the cost of the capitalists historic investment will be devalued immediately to the level of the most efficient competitor i.e. its current replacement cost. Historic investments will be written down to their present cost of reproduction, i.e. the socially necessary labour time they cost now.

Yeah, I know. I’ve read Marx, too, and well enough to know that this is irrelevant at best. (Actually, the devaluation of the capital causes the rate of profit to fall, not rise, when the loss is written down, which is a hugely important phenomenon in this crisis.) Jefferies is simply confusing the value (or price) of means of production with the capital that was advanced to acquire them. A rate of profit is the ratio of profit to advanced capital, not the ratio of profit to the value or price of means of production. [Two irrelevant sentences in original post removed by me on 10/24/09--AJK]

A fuller critique of current-cost “rates of profit” can be found in “Persistent Fall,” especially part V, and in my 2007 book, Reclaiming Marx’s “Capital”: A refutation of the myth of inconsistency.

… Speaking of which-and speaking of inconsistency-I believe that it was Bill Jefferies who not only published a favorable review of the book on the Permanent Revolution site, but also specifically endorsed its repudiation of physicalism and simultaneous valuation:

Marx’s critics assert that it is the physical quantities of things, the amount of useful things produced in excess of the initial quantity of inputs that create exchange value.

This is known as “physicalism” and it runs alongside two other key propositions, “simultaneism” … and the idea of a “dual system”….

Physicalism could only be correct in a static world, where production does not take place in time, i.e. it is not temporal, and where inputs and output are priced simultaneously.

… of course Marx’s account does produce a difference between input and output prices, but far from this being an inconsistency in his account, it is absolutely consistent with his explanation of the derivation of prices from values.

In other words Marx had a temporal, single system method.

Was the author of these excellent passages unaware at the time that current-cost “rate of profit” is inherently physicalist, or that it is an inevitable by-product of simultaneous valuation?  Hardly. I repeatedly stressed this in my book. Also, at the end of the review of the book in Permanent Revolution, we find the following:

profit rates are measured against the actual cost [historical cost] of fixed capital … rather than its notional cost [current cost or replacement cost]. … If the rate … of profit is measured against the new notional value i.e. its value if it had to be paid for at present prices [i.e., at the current cost of fixed capital], then it is possible to show that rates of profit are low or falling, even when they are high and rising. [Bracketed material inserted by me-AJK]

So why has Jefferies now defected to the side of the physicalist-simultaneist academic-Marxist critics of Marx-basically the same people who use their simultaneous-valuation model to “prove” that Marx’s value theory and law of the tendential fall in the rate of profit are internally inconsistent and therefore false?  Why does he no longer understand that a rate of profit is the ratio of the profit of one moment to the sum of capital that was actually advanced at earlier moments, not the amount that would have been advanced if the means of production “had to be paid for at present prices”?  Might it have something to do with the fact that he suddenly doesn’t like the conclusions that flow from temporalism?

Ironically, it is “bill j” who accuses me of choosing a particular concept of profitability in order to get the conclusions I want! “The reason Kliman prefers the historic fixed cost measure is because it reduces profit rates now” (22 Oct, 2009, comment on his article). He does not substantiate this extremely serious allegation of gross scholarly misconduct.

The allegation is completely false. I first criticized current-cost “rates of profit” publicly more than two decades ago, in a 1988 conference paper that was then published in a journal (”The Profit Rate Under Continuous Technological Change,” Review of Radical Political Economics 20:2, Summer 1988). This is publicly available proof.

I of course had no way of knowing way back in the 1980s that current-cost “rates of profit” would rise while historical-cost rates of profit would level off or continue to fall into the current decade. And I’veconsistently (a term I use advisedly here) put forward and developed my critique of current-cost “rates of profit” over two decades.

In “Permanent Revolution - our way forward,” Permanent Revolution says that “Our starting point is that we are an organisation that tells the truth.” But their “bill j” has not done so.

f. Jefferies does not like the fact that I assess trends in profitability by means of trough-to-trough comparisons:

Kliman would claim that he ends his series in 2001 as this was the trough of the last recession. The problem with that is we are attempting to establish the reasons for the recession in 2008 not 2001. If we want to know why there was a recession in 2008 we need to know the direction of profit rates then not seven years before.

… [We need to know about] the period after 2001 … The period which preceded the present crash and which explains it …

First, I do not “end the series.” I make trough-to-trough comparisons when assessing trends in profitability, but I provide all of the data through 2007 and do not ignore it (though again, my review of Zombie Capitalism didn’t go into all the details of my study of profitability). Second, Jefferies is guilty here of cherry picking peaks and troughs, a procedure I criticize in Persistent Fall, part IV, section B. To avoid such cherry-picking of the years one prefers, one must look at comparable points in any series of data, such as profit-rate data, that exhibit pronounced short-run cyclical fluctuations. Third, “I measure trends in the rate of profit by comparing one trough to another … in order to ascertain whether a sustainable recovery in profitability took place” (”Persistent Fall,” p. 4, emphasis in original). A short-term cyclical spike in profitability, driven by a huge asset bubble, that ends in the worst crash since the Great Depression (or worse-time will tell) is not a sustainable recovery.

As for Jefferies’ belief that what occurs immediately prior to an event is what explains the event, I wonder whether he would maintain that when a chronically and terminally ill person is taken to the hospital and then dies, the cause of death is that she was cared for by the medical staff? Let me also note that I anticipated and responded to this line of reasoning in “Persistent Fall,” part III, section B, where I discuss intermediate links between falling profitability and crisis, and I explain why time lags are to be expected and why they pose no problem for Marx’s law of the tendential fall in the rate of profit but are, instead, part and parcel of it.

3.  Other points

a. Jefferies quotes the following passage in my review of Harman’s book:

The title Zombie Capitalism reflects Harman’s focus on capitalism itself. Taking seriously Marx’s theory of the “fetishism of the commodity”, he characterises the system as a zombie, an undead creature[,]

He then comments that the relationship between “Return of the Living Dead” and “Marx’s theory of alienation has been until now an undiscovered quality.”

Maybe it hasn’t been discovered by Jefferies, but it was Marx himself who wrote, in an essay that–significantly–bears the title “Alienated Labour,”

The worker puts his life into the object, and his life no longer belongs to himself but to the object . . . . The alienation of the worker in his product means not only that his labour becomes an object, assumes an external existence, but that it exists independently,outside himself, and alien to him, and that it stands opposed to him as an autonomous power.  The life which he has given to the object sets itself against him as an alien and hostile force.

Nor was this only the view of the “young Marx,” the “philosopher” rather than the “mature” “economist.” In Capital, Volume I, Chap. 25, which deals with capitalist accumulation, he wrote,

Just as man is governed, in religion, by the products of his own brain, so, in capitalist production, he is governed by the products of his own hand. [end of section 1]

Is Jefferies really unaware of this?

b. My review noted that when Harman started work on Zombie Capitalism, well before the current crisis erupted, he wanted “to criticise … the belief that ‘capi talism had found a new way of expanding without crisis.” Later I noted that he “was convinced, before the crisis erupted, that another capitalist crisis was inevitable.” In a third reference to this point, I wrote that “he predicted the current crisis.” Jefferies takes the last phrase out of the above context in order to argue that “Harman did not predict the crisis.” What he apparently means is that that Harman didn’t predict the timing of another crisis, but “only” the fact that there would be yet another capitalist crisis–as if that were somehow an insignificant matter! In any case, I said nothing about him predicting the timing of the crisis, and what I meant  should have been clear from the context.

c. I also wrote that Zombie Capitalism endeavors to “account for the major economic events and trends of the past 90 years, booms as well as busts.” Jefferies responds: “As for Harman explaining booms and busts from the last century on in his little book, well he does not do that either.” But he provides no evidence or argument in support of this claim, so there is nothing of substance here for me to address.

[the above is the revised version of Oct. 24]

2 Comments on “Reply to Bill Jefferies and the Permanent Revolution organization”

1. 1bill j said at 6:56 am on October 24th, 2009:Hi Andrew

   we are going to do a more thorough review of your longer piece in our next journal. Hope that’s ok?

   cheers
   Bill

2. 2Richard Brenner said at 5:39 pm on January 5th, 2010:My critique of Bill Jefferies and the PR group’s position from July 2008 is here:

   http://www.fifthinternational.org/content/globalisation-and-myth-new-long-wave

I’m surprised at how many self-professed Marxists say that the LTRPF [law of the tendency of the rate of profit to fall] is somehow flawed, or cannot explain the current outbreak of crises. Marx himself described it as central to his critique of political economy. I can see no other alternate explanations coming forward that even begin to approach an adequate explanation. I’ve seen plenty of Keynesian explanations that blame the lack of regulation, or neo-con orthodoxy.

The advent of the microprocessor showed the world that technology in late capitalism was now wiping out more jobs than it would ever create as opposed to earlier technological innovations of capitalist society that caused more new jobs to be created than they eliminated. That is to say, the weight of the constant element of capital hangs so heavily on capitalist production that the only thing a sensible capitalist can do currently is to entirely remove his capital from the messy productive process altogether and achieve profits through what could be called fictitious or speculative capital.

Even in my high school when I asked my leftist teacher about the falling rate of profit, which even in the eighties made a great deal of sense in explaining the crisis, the only answer I got was that rates of profit don’t fall, they go up. The trouble with this was that this only took into account the years of post-war prosperity, and conflated this forty year period of relative prosperity in a handful of imperialist powers to a universal constant that “disproved” the Law of Falling Rates of Profit.

A machine will consistently depreciate in value as soon as it is put into production. A commercial CNC board cutting machine, in order to pay for itself must produce a maximum amount of product in order to realize its value. This too causes the value of the machine to depreciate at an even faster rate. A worker can be laid off and rehired at a lower wage. The value of the machine starts to deteriorate through wear and tear from the day it first is put into use in production. I can see this tendency at work, where I work. It isn’t an abstraction. I would argue that it is an observable phenomenon that workers see and experience.

In light of this current outbreak of open crisis within capitalism that the detractors on the left were spectacularly wrong. The collapse of the USSR and the collapse of the US dollar today are a part of the same process in capitalist society, a tendency which has been at work and observable since the early seventies. Having global currency allowed US capital to have what is in essence the largest corporate welfare scam in history-the US dollar itself. This situation is coming to an end as are the post-Marxian certainties of bourgeois economic thought. I’ll never again be able to do anything other than laugh at those who used to tell me that the working class no longer existed or that rates of profit do not fall.