Carchedi, Foster and the causes of crisis

The annual Marxism 2011 festival took place in London this weekend.  One of the sessions was on Marxist theory and the economic crisis.  The speakers were John Bellamy Foster, the editor of the American Monthly Review, Guglielmo Carchedi, the Italian Marxist economist and Joseph Choonara from the British Socialist Workers Party.

With three speakers and only a short amount of time, no speaker was able to do justice to their arguments.  But let me summarise.  I won’t comment on Choonara’s contribution, not because he did not say some excellent things, but because I have more to say about the other two speakers.

Those who have read John Bellamy Foster’s book, The Great Financial Crash: causes and consequences ( , will know that he represents that tradition of Marxist economics developed by Paul Sweezy, Paul Baran and Harry Magdoff that argues the cause of capitalist economic crisis can be found in the development of competitive, small firm capitalism of the 19th century into the monopoly, large firm capitalism of the 20th century, which has further developed structurally into a monopoly finance capitalism of the 21st century.  This monopoly capitalism breeds stagnation because competition is weak or suppressed.  Workers’ wages are held back by monopoly pricing and there is shift of profits from small firms to large ones.  But because workers cannot spend as much, monopoly surpluses build up.  They have to be realised through arms spending or a credit boom, the latest of which has seen the development of  ‘financialisation’ (see my post, Financialisation: the cause of crisis?, 19 July 2010).  Eventually the credit bubble bursts and the stagnatory nature of capitalism is revealed.  The crisis occurs not because profitability is too low but because the surplus is too high to be bought or realised.  Capitalist crises are not cyclical (boom and slump), but structural (stagnation).

The Monthly Review analysis is close to the views of those who have ‘neo-liberalism’ and underconsumptionist explanation of capitalist crisis, namely that there is not enough ‘effective demand’ from workers as their wages have been restricted and inequalities of income have grown so large that capitalists can no longer sell their goods and services to the masses in sufficiently profitable amounts.  So there is overaccumulation or overproduction and that causes the crisis. The crisis is caused by inequality and underconsumption, delayed by a credit bubble, which when it bursts, causes profits to collapse.  Low profits are the result of crisis and the lack of realisation, not vice versa (see my posts, The crisis of neoliberalism and Gerard Dumenil, 3 march 2011 and Views of the Great Recession, David Harvey and Anwar Shaikh, 3 September 2010).

In my book, The Great Recession (, I show how this explanation of capitalist crisis is both wrong and also not Marx’s view.  Suffice it to say that Foster in his brief speech presented two key facts to support his thesis: that capitalist crisis one of structural stagnation because in every decade since the 1960s, economic growth in the major capitalist countries has been slower than the previous one.  This is true.  But you can often make the stats fit any argument.  Instead of measuring growth decade by decade, if you measure it against the rise and fall in profitability in the US, you find that economic growth was faster from 1982-97, when profitability was rising, than it had been between 1965-82, when it was falling.  In other words, economic growth is faster when profitability is rising and vice versa.

His second fact was that real wages in the US have been stagnant since the 1970s and inequality has increased sharply, so workers became bereft of the incomes to buy the goods and services of monopoly capitalism without credit.  It is true that real wages have stagnated.  But it is not true that the costs of variable capital for the capitalists have stagnated and that is what matters to capitalist production.  Employee costs include not just wages but also benefits (holidays, sick pay, pensions, medical care, social security), which must be paid at least in part by employers.  When these are added in, employee costs have risen in real terms.  In the period 1982-97, employee costs rose, but profits rose faster, so the rate of exploitation (surplus value) rose in the US (and elsewhere).  The increase was so strong and when combined with a fall in the costs of production (a falling organic composition of capital), profitability rose and capitalist production grew faster and did not stagnate.  It was only when profitability peaked and began to fall that growth slowed.

Guglielmo Carchedi has been a major contributor the development of Marxist economics over the last 30 years.  He was among the first to provide a refutation of the Okishio theorem that purported  to show that Marx’s law of profitability was theoretically false or flawed and could not be used to explain crisis.  Carchedi has also shown up the fallacies of the underconsumptionist explanation of crisis that still dominates many parts of the Marxist economic spectrum (see his recent book ).

At the meeting, Carchedi outlined the main arguments in his latest book, Behind the crisis ( and paper (see his excellent two files on his thesis at  He shows that if you look at the productive sector of the capitalist economy (namely, the US) over the last 50 years, then you can see a secular fall in the rate of profit.  This secular fall has been driven by Marx’s law of profitability, namely a rise in the organic composition of capital. ie the growth of machinery and plant etc has outstripped and displaced the growth in the employment of labour power.  As Carchedi explains, labour is the only source of value, so the rising organic composition of capital may deliver faster productivity, BUT because goods get produced in less labour time, there is a slower growth in value and profitability falls.

Carchedi also shows that within the secular decline in profitability, there are shorter cycles when profitability can rise, in particular a rise from 1986 to date.  This rise is due to the counteracting influences on profitability that are also part of Marx’s law of the tendency of the rate of profit to fall.  From 1986, capitalists drove up the rate of exploitation or surplus value by vicious attacks on working conditions etc to counteract the effect of the rising organic composition of capital.  But eventually, the law of profitability will overcome the counteracting influences and the crisis will ensue.

This is a powerful argument.  But where I have some doubts about Carchedi’s approach is in his measure of profitability.  Carchedi’s data show that US profitability has risen from 1986 to 2009.  So how can the Great Recession be a result of falling profitability?  Carchedi measures only the profitability of the productive sectors of the capitalism, indeed just the goods producing sector.  He excludes services and the finance sector.  This may be justifiable if you want to see the working out of Marx’s law of profitability over a secular period.  But I think it then confuses and obscures what is going on cyclically and thus does not help to explain booms and slumps.  Marx did not exclude from his general rate of profit the financial sector or the unproductive sectors of capitalism.  These sectors do not create surplus value, but they appropriate it from the productive sector (by interest, rent and other charges) and so must be included in the overall rate of profit and considered in the cyclical explanation of crisis.

If you look at the profitability of the whole capitalist economy, as I did in my book and others have done as well (see my upcoming paper!), then we can see that US profitability peaked in 1997 not 2009 and has still not returned to that level (see my recent post, Returning to the long view and others on this).  Indeed, I have argued that after the slump of 2001, US profitability again peaked in 2005-6 (below the level fo 1997) and began to fall well before the credit crunch of 2007 and the recession of 2008-9.   This falling profitability(in the context of the general downphase of profitability from 1997) eventually triggered the credit crunch of 2007 when credit could no longer support profits.   This restores Marx’s law as the underlying (but not proximate) cause of the crisis.

12 thoughts on “Carchedi, Foster and the causes of crisis

  1. Interesting analysis. Thanks. What is your view of the increased money supply in the system due to low interest rates? Greenspan’s easing of lending to the banks gave them access to cash and they invested in speculative assets as opposed to assets which had value. This, I believe, is Foster’s argument. And, if there is a lot of cash sloshing around in the system which represents nothing but speculative activity, does that explain at least in part, the decline in the value of the USD?

  2. There was a huge rise in credit or liquidity before the onset of the Great Recession. This credit boosted property and stock prices creating fictitious capital, as Marx called it, and led to a sharp rise in profitability from 2002-6. But the bubble burst – indeed the devaluation of this fictitious capital on top of the real or tangible capital (deleveraging they call it) was that much greater as a result. And yes, as most of this fictititous capital was in the US, the dollar suffered the most. There is more deleveraging to go.

  3. Two random thoughts.

    –In terms of the fall in profitability, this can also be seen in looking at residential real estate investment which started declining (I believe) in QIII of 2006 if one looks at NIPA. A decline in investment means business doesn’t see profit opportunities and private housing was the leading driver of growth at that point.

    Marx does said that increases in productivity can counteract the ‘law’ of falling profit, that is, they can increase profitability. But it is short term, to paraphrase (Book 3 of Capital has chapters on this ). The problem is, what is short-term ? The drive for technological innovation that is fundamental in capitalism can push off the realization of that ‘law’ to the point where it becomes spiritual , not physical.

    1. Residential investment means the buying of houses and flats by American households and that did peak in early 2006. The price of homes had gone beyond the means of those who had to borrow to buy, relative to their incomes. It started with these sub-prime buyers. The property market did not collapse until early 2007 and was followed by the credit crunch in summer 2007. The US rate of profit also peaked at the same time as residential investment. And profitability fell so much that the absolute level of profit started to fall in 2007 with the ensuing Great Recession.

      Sure, increased productivity can counteract the impact of the tendency of the rate of profit to fall if it cheapens the cost of technology (falling constant capital) and the cost of goods purchased by workers (variable capital). BUT it is also reduces profitability because increased productivity means more things produced at a lower price. Less labour being used for each unit of output means less value, as labour is the only source of value, So there are more things, but with less value. Thus, contrary to the views of mainstream economics, higher productivity will eventually mean lower profitability. It’s a basic contradiction of capitalism: the greatest barrier to capital is capital itself.

    2. “That’s almost surely false: the evidence strongly
      says that the real reason businesses are sitting on cash is lack of consumer demand.” from Krugman’s musings this week. The private housing market as another 10 or 15% slide to incur, according to Dean Baker. Our ruling class seems to be waiting for more of the old ‘creative destruction’ to take its toll before employing more workers to produce commodities for them to sell. Anyway, profits are up and our rulers have enjoyed a real uptick in their share of the collective product of labour and of nature. I think the top one percent is raking in 40% of the wealth now. According to Stiglitz a decade ago, it was more like 33%.

      1. Krugman, Dean Baker, Stiglitz????
        Mike, do you subscribe to Marxian political economy or cherry picking economy? I’m very disappointed when Marxists quote vulgar economists like Krugmand and Stiglitz. The problem has always been that those who do quote vulgar economists have never understood or read Marx’s Capital.
        Michael keeps referring to labor as the only source of wealth. Does that ring the bell? Foster, unfortunately doesn’t see it that way. The MR school’s source of wealth is the Economic Surplus.


      2. Like Marx, I think there are two sources of wealth: nature and human labour, Cameron.

        As for liberals like Krugman, they beg the question when they point their economic fingers at the problem of ‘insufficient demand’. The wage system is inherently at system of exploitation–workers are ‘insufficiently compensated’. Workers are paid according to what skills they bring to an employer looking to fill a job. The wealth they produce as a class is not connected with the wage they receive and their productivity has gone through the roof as their real wages have stagnated. Granted, their real wages are also feathered by social benefits which come out of the surplus value they create i.e. Social Security and Medicare. However, ‘insufficient demand’ still exists and gets worse as the cries for ‘austerity’ come from the wolves in the capitalist class and their lickspittles in the media. No wonder there’s ‘insufficient demand’ in the marketplace. And the idiot capos are waiting for Godot if they think that sufficient demand is going to appear after they creatively destruct working class cash flow for the working class ARE the market they await in order to employ more workers to produce more commodities aka goods and services.

        Now personally, I’m trying to get my head around a multi-trillion dollar economy in which value is way out of kilter with price because price has been blown into so and so many ‘asset bubbles’ over the post WWII years.

      3. Mike, thanks for taking the time to respond in details.
        I stand corrected. I should have said source of wealth “creation”.
        To me underconsumption is a symptom of the fall in rate of profits where consumption in dept I falls and spreads.
        Workers wages definitely have not kept up with productivity and have fallen lately which exacerbates the demand problem you refer to. But the price of labor power, just like any other commodity, is subject to supply and demand but over a period of time it will correlate with its value.
        Thanks again for your kind reply and apologies if I were out of line.

  4. By the way, I agree the crash of the late 90’s was far more significant than has been acknowledged in orthodox circles. The decline in durable goods orders from ’99-2003 rival anything from this Great Recession, for instance.

    The panicked and reckless state of U.S. geopolitical activity since that time seems to suggest that elite layers of Washington would also agree.

  5. BTW, how much of an effect has the export of fixed capital/manufacturing off shore had on real wages being flat or below what they were 30-40 years ago? Obviously, if you have a job building cars, it’ll pay more than a job opening boxes from China at Wall Mart.

  6. there is too much emphasis on the tendency of profits to fall. i’m not sure that marx put to much into it, it is almost a foot note in Capital. but carchedi turned it into a gospel. If we go back to see where this emphasis took its flight, it is from grossman argument with otto bauer. i don’t think that grossman put too much into it himself, except of pissing off bauer, since he latter refused (according to rick kahn awfully written biography) to be associated with that, and his unwillingness to respond to sweezy criticism.
    anyway, this tendency to show that capital is doomed by counting, has two sources. a. to show, in a very vulgar way – to my opinion, in an historical periods of low class struggle, that capitalism is going to be doomed anyway (a “marxist” apocalypse) and b. envy in the bourgeoisie mathematical models.
    last point, it does not make sense. if the tendency of profits to fall was a such dominance as carchedi puts into it, than capital wouldn’t have survived his 1st century. on the other, if capitalism *always* succeeding in mitigate it impact, then whats the use? maybe its better to take the einstein’s way? if it has no impact then it has no practical use.

  7. Ron
    I’m not sure the law of profitability in Marx’s Capital was just a footnote. It seems to me that it took a few chapters at least! See Volume 3.

    Again I dont think Henryk Grossman just wanted to piss off Bauer. I’m sure his thesis had more purpose than that.

    I agree that the law of profitability should not be viewed as a ‘breakdown theory’ of capitalism that does come out of Grossman’s analysis. There is no final collapse or countdown. Anyway the speed of any secular fall in the rate of profit so far in the US would suggest at least another century or more before we get to the bottom!

    That’s why the law should be seen really as explaining the cyclical process of capitalist as I attempt to develop. In my book, I use the law to explain why we are in a low class struggle period.

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