David Harvey and Anwar Shaikh are two leading and well-respected Marxist economists, who have published a number of well-received books and papers over the years. Now both have just published their more considered views of the causes of the financial collapse and the ensuing Great Recession of 2008-9.
In his piece, The enigma of capital and the crisis this time (see http://davidharvey.org/2010/08/the-enigma-of-capital-and-the-crisis-this-time/), David Harvey has written some very interesting stuff on how capitalism is engaged in an incessant and unrelenting drive to accumulate capital in contradiction to the limits in finding ‘ profitable investment opportunities’.
But Harvey argues that the limits to profitable investment do not lie in Marx’s law of the tendency of the rate of profit to fall (LRTPF). Marx argued that LRTPF was caused by an eventually irresistible rise in the organic composition of capital. But Harvey specifically rejects the LRTPF as having any role in causing crises, particularly in the recent Great Recession.
He sees the limits to profitability as being caused by the neoliberal policies of the last 25 years that have suppressed wages and promoted fictitious capital (see my post, The overhang of debt, 1 March 2010 for a an explanation of this term). That eventually created a lack of ‘effective demand’, Keynesian-style, which then leads to a collapse in profitability (see my post, The Keynesian answer, 2 February 2010). So for Harvey, the crisis is caused by a lack of effective demand that leads to a fall in profitability, not the opposite as Marx would have it.
As Harvey states: “There is, therefore, no single causal theory of crisis formation as many Marxist economists like to assert. There is, for example, no point in trying to cram all of this fluidity and complexity into some unitary theory of, say, a falling rate of profit. In fact profit rates can fall because of the inability to overcome any one of the blockages identified here. It is the task of historical materialist analysis to wrestle with the question as to where the primary blockages are this time around. But solutions at one point have implications for what happens elsewhere. The labor problem (both in the market and on the shop floor) that was central in the late 1960s in the core regions, could not be overcome except by opening up the coercive laws of competition across a global space. This required a revolution in the architecture of the world’s financial system which increased the likelihood of “irrational exuberance” within the financial system. The consequent wage repression depressed effective demand which could be overcome only by resort to the credit system. And so on.
Harvey joins the supporters of the neoliberalist theory in arguing that the crisis had nothing to do with a fall in the rate of profit and all to do with low wages and ‘financialisation’. In my book, The Great Recession (see http://www.lulu.com/product/paperback/the-great-recession/6079458.) and in various posts on this blog, I have presented a lot of evidence to show that this thesis is wrong (see Financialisation – the cause of crisis?, 19 July 2010 and A financial or economic crisis?, 15 June 2010).
Anwar Shaikh on the other hand has published a much more convincing explanation that is pretty close to my own, called The First Great Depression of the 21st century, (see http://homepage.newschool.edu/~AShaikh/).
In his new paper, Shaikh produces data on the rate of profit that shows the cyclical movement of what he calls ‘long booms and long downturns’ in capitalism. This is an approach that I adopted in my book. Both my data and Shaikh’s are very similar with peak and trough points that match, although I believe that the turning point from the long boom to the latest long downturn was in 1997 when the rate of profit peaked. Shaikh seems to place it arbitrarily later in 2007.
In my view, capitalism has been in a profitability downturn for 13 years now, leading to the mild recession in 2001 and then the Great Recession of 2008-9, once capitalism could no longer use the growth of fictitious capital to delay the crisis. I think we still have further to go in the current long downturn (to about 2015-18) before there is sufficient destruction of capital values to restore the economic basis for a new long boom. In my book, I argue that long booms and downturns average about 16-18 years each.
Shaikh’s explanation for the long boom of 1982-07 (97?) is that wages were suppressed by neoliberalism and there was sharp fall in interest rates allowing the ‘profits of enterprise’ to rise. I think the first factor is very important. But my calculations show that we cannot ignore the sharp fall in the organic composition of capital in that period as new technology cheapened the value of constant capital. Both a rising rate of exploitation (s/v) and a falling organic composition of capital (c/v) were relevant – indeed they are Marx’s key ‘counteracting influences’ to the LRTPF. I shall return to this theme is a future post.
The problem with Shaikh’s piece is that he is not clear why the long boom came to an end. I think it was due to a peaking in profitability caused by limits being reached on the ability of the ‘counteracting influences’ to resist any longer the downward pressure of Marx’s ‘law as such’ (ie the LTRPF).
According to my data, profitability in the US peaked in 1997 and, although there was recovery after the recession of 2001, the rate of profit did not return to its 1997 level. From 2005, it fell back again, creating the environment for the crash. The power of fictitious capital to extend the boom of 2002-7 was finally exhausted and the Great Recession ensued. Shaikh’s view is unclear.