The debate among leftist economists has been on for some time. Can the Great Recession be described as a financial crisis – namely that it was caused by instability and collapse in the financial sector and then spread to the rest of the capitalist economy?
Or was the Great Recession caused by a crisis in the capitalist process of production (through falling profitability) that eventually triggered a banking and financial collapse?
The former explanation is being promoted by followers of the ‘financialisation’ of capitalism – where capitalism has entered a new stage totally dominated by the financial sector, which now operates under its own laws. The latter explanation remains the ‘classical’ Marxist one, in that the laws of capitalist motion are still dominant through the production for profit process.
Who’s right? Well, actually Marx distinguished between different sorts of monetary crisis: “The monetary crisis defined as a particular phase of every general industrial and commercial crisis, must clearly be distinguished from the special sort of crisis, also called a monetary crisis, which may appear independently of the rest and only affects industry and commerce by its backwash. The pivot of these crises is to be found in money capital and their immediate sphere of impact is therefore banking, the stock exchange and finance”.
So sometimes a crisis can take place because of the very instability of the financial sector. But I think Marx would have said that such ‘financial crises’ would not have the same impact as a generalised crisis across the whole spectrum of capitalist accumulation and that would require a diminution of profitability.
Yes, there has been a massive increase in the weight of the financial sector in the global capitalist economy. The share of US gross domestic income accruing to finance and insurance rose dramatically from 2.3% in 1947 to 7.9% by 2006. But can we say that the growth of the financial sector was the cause of the Great Recession if it had been expanding for six decades without a crisis of the proportions of 2008?
As Mick Brooks has put it in his excellent paper, What is financialisation?
“Movements in the rate of profit have their effect on the financial sector. This is particularly the case in the modern era when the very predominance of finance capital and the sheer scale of fictitious capital mean that bubbles are constantly being blown. Bubbles tend to begin as profits revive after a downturn. They wax fat in the good years. As crisis impends, capital panics and takes flight. The bursting of the bubbles seems an accidental affair, but accident is the manifestation of necessity. In other words, financialisation adds another complicating factor in our analysis, but does not fundamentally change the overall picture.”
In contrast, the leftist economist, Costas Lapavitsas argues in a recent paper (Financialisation and capitalist accumulation, Research on Money and Finance, February 2010), that there is no causal connection between Marx’s law of over-accumulation (as he calls it) and the financial crisis of 2007-9.
One of his main arguments is that there is no evidence that the rate of profit fell before the crisis: “no significant decline in profit rates occurred on the approach to the crisis. Profitability among manufacturing and other firms appears to have held even in the depths of the recession of 2009.” So, he argues that “the crisis of 2007-9 has little in common with a crisis of profitability as in 1973-5, as is apparent from the extraordinary role of credit and the indebtedness of poor workers” (p18).
Lapavitsas cities French Marxist economists, Dumenil and Levy as his reference for this, saying that “Dumenil has stated categorically at two RMF conferences (May 2008 and November 2009) that the crisis of 2007-9 is not due to falling profitability.”
I don’t know where D-L get their evidence for this assertion or how Lapavitsas reaches his conclusion about profits holding up. My evidence is clearly to the contrary. My measure of the Marxist rate of profit (see my book, The Great Recession) shows that the rate of profit in the US economy began to fall well before the financial crisis began in summer 2007. On a historic cost basis, the Marxist rate of profit actually peaked in 2005 at 24.84% and fell by 3% to trough in 2008-9.
These are annual figures, so they don’t reveal the story as well as quarterly ones would. But you can use the official US figures for corporate profit that are quarterly. This has the disadvantage of not following Marxist categories. But it is more frequent. On these official figures, the mass of corporate profit (pretax adjusted) peaked in Q3’06 at $1655bn, falling 32% to a trough in Q4’08 of $1124bn, before recovering. That seems pretty significant to me.
You get the same result if you break down the profits figure by non-financial and financial. On that basis, financial sector domestic profits peaked at $447bn in Q206 and dropped 73% to a trough of $122bn in Q4’08! But non-financial sector domestic profits also plummeted, peaking in Q3’06 at $988bn and then falling to $629bn in Q1’09, a drop of 36%. Only profits from the rest of the world held up, at least to the beginning of the crisis (Q4’07), before slipping 30% to a trough in Q2’09.
We can use a rough measure of the rate of profit by looking at the profit to GDP ratio. It’s the same story here. The overall profit to GDP ratio peaked in Q3’06 at 12.3% before dropping to 7.8% in Q4’08. The domestic financial sector profit to gross product ratio peaked as early as Q1’05 at 43.4%, before collapsing to 11.7% in Q4’08. The non-financial domestic profit to gross product ratio peaked later in Q3’06 at 14.5% and then fell to 9.4% in Q1’09.
Anyway you want to measure it, profitability and/or the mass of profits fell well before the financial crisis began, which at least suggests the direction of the causality is the opposite of what Dumenil and Levy claim and also puts in doubt Lapavitsas’ argument that there is no causal relation one way or the other.
The Great Recession looks more like the result of ‘classic’ Marxist crisis than the result of ‘financialisation’.