The Failure of Capitalist Production is the title of Andrew Kliman’s new book – with the subtitle, The underlying causes of the Great Recession (http://www.amazon.co.uk/Failure-Capitalist-Production-Underlying-Recession/dp/0745332390/ref=sr_1_1?ie=UTF8&qid=1323254965&sr=8-1). AK’s book is an important contribution to the debate, among Marxists in particular, over the causes of the Great Recession. Marxists are divided over this. The majority argue that the main cause was the establishment of a new structural era of capitalism that began in the early 1980s called ‘neo-liberalism’. This was based on a regime of destroying the trade unions to get a massive reduction in the share of wages in national income in the major capitalist countries that enabled profitability to rocket. Wages then had to supplemented by a huge increase in credit that fuelled economic growth, based on a growing financial sector hegemony. Neoliberalism came a cropper because the inequality of income and wealth reached such a level that it squeezed consumer demand to death, debt became excessive and the ‘financialisation’ of the economy led to renewed instability, eventually triggered by a collapse of a property bubble, resulting in the failure to ‘realise’ profitable production.
For the majority of Marxists and radical left economists, the cause of the Great Recession is thus more likely to be explained by the works of Keynes or his more radical follower Hyman Minsky, who emphasised the inherent instability of capitalism as debt levels mount. If it were to be explained by any of Marx’s ideas, the majority look to his supposed focus on the underconsumption of the masses, on the hegemony of monopoly finance capital, or on the inherent instability of markets. What the majority of Marxists do not accept is that the underlying cause of the Great Recession was what Marx called ‘the most important law of motion’ of capitalism, namely the tendency for the rate of profit to fall.
Marx’s law of profitability has generally been ruled out by most Marxists for varying reasons. First, profitability clearly rose under neoliberalism from the early 1980s, the argument goes, so that can’t be the reason. Second, wages fell as a share of income, so that is more likely the cause; namely a lack of consumption demand. Third, the growth of the financial sector in the neoliberal period was a new structural feature of capitalism and lies at the heart of the crisis. Anyway, not all crises are caused by falling profitability; they can have several causes: financial instability, low wages, uncontrolled credit – there is no one cause (see my post on The crisis of neo-liberalism and Gerard Dumenil, 3 March 2011).
AK sets out to refute these arguments and restore Marx’s law of profitability as central to the underlying cause of the Great Recession. And the word is ‘underlying’. As AK says, Marx’s theory “regards a fall in the rate of profit as an indirect cause of crises, it leads to crises only in conjunction with financial market instability and instability caused by low as distinct from falling profitability” p13 … “it certainly was not a proximate cause, but I shall argue that it was a key indirect cause.” p14.
In his book, AK’s main arguments against the ‘neo-liberal’ explanation are not theoretical, but empirical. In his view, the evidence the neo-liberal proponents present just does not hold up. Indeed, the evidence points to Marx’s law of profitability as the best explanation of the Great Recession. His evidence only refers to the US because the data are best there and the US is also the most important of the capitalist economies. First, he points out that private sector debt and inequality started to rise much earlier than the neoliberals claim, back in the 1970s when everybody agrees that US profitability was falling. But second and, most important, he argues that the US rate of profit did not rise on a trend basis after 1982 to the present, as the proponents of neoliberal explanations claim. When measured as the net value added of US corporations (what AK calls ‘property income’) minus employee compensation against the historic cost of the fixed capital stock of corporations, the US rate of profit shows a persistent fall from 1947 to 2009. And it does so, using historic costs, whether profits are measured as pretax, adjusted for inflation, or adjusted for labour values.
Measuring capital stock by historic costs is crucial, AK argues, and indeed is the only correct or meaningful way. Marx’s law of profitability is consistent with his law of value if capitalist accumulation is explained as capitalists advancing capital at already paid-for prices in order to generate new value out of the labour force, with the resulting goods sold at new prices. It is wrong to reprice the capital first advanced to match the replacement or current cost of that capital at the end of the production process. That makes the cost of capital lose its temporal quality; both past and future prices are then determined simultaneously. This flies in the face of reality (capitalists measure profit against the cost of advanced capital at the beginning not at the price of that capital at the end) and contradicts Marx’s law too.
In this argument, AK reminds readers that he is one of the founding proponents of the temporal single system interpretation (TSSI) of Marx’s value and profitability laws as against the ‘neo-Ricardian’ (or physicalist) interpretation of Marx (http://en.wikipedia.org/wiki/Temporal_single-system_interpretation). For more on this, read AK’s brilliant exposition of this debate in his earlier book of 2007, Reclaiming Marx’s Capital (http://www.amazon.co.uk/Reclaiming-Marxs-Capital-Inconsistency-Dunayevskaya/dp/0739118528/ref=sr_1_1?ie=UTF8&qid=1323255230&sr=8-1) or my review of that book in chapter 23 of my book, The Great Recession (http://www.amazon.co.uk/Great-Recession-Michael-Roberts/dp/144524408X/ref=sr_1_1?s=books&ie=UTF8&qid=1323255509&sr=1-1).
All the proponents of neoliberalism ignore this measurement issue and value corporate capital in current cost terms. Doing this shows the rate of profit rising significantly from 1982 to the present, thus suggesting that Marx’s law is irrelevant as the cause of the current crisis. But AK argues that current costs measures are inadmissible if Marx’s law is correctly interpreted. Also, they distort the results because they do not measure anything that could be considered a rate of profit and they bias profitability upward due to the impact of inflation and misleading measures of the depreciation of capital stock.
By measuring profitability on historic costs of capital, the explanation of the crisis becomes clear, says AK. US profitability falls and capital accumulation is resultingly weak. It is not slowing because profits are being switched into unproductive financial sectors, but simply because profitability is falling. Eventually, the crisis is reached when profitability falls so low as to provoke a major investment crisis, enhanced by overextended debt and unregulated financial sector speculation. This can only be resolved by a major destruction of capital values i.e. a slump. Also AK argues that the evidence does not justify a sharp fall in wage share in the US economy after 1982. If you measure income going to labour properly, there has been no significant decline in employee income (wages plus other benefits). Thus the underconsumptionist view that the Great Recession is the product of a collapse of consumer demand is not justified by the wage share argument or by that of growing inequality. AK then provides a devastating rebuttal of the underconsumptionist alternative (chapter 8).
I stand with AK on many of these points of division among Marxist explanations of the Great Recession. My own data, first compiled in 2006, confirm that of AK in showing that there has been a secular decline in the US rate of profit since 1947 (see my book, The Great Recession and my paper, The causes of the Great Recession). Also I agree that it must be right to use historic costs to value correctly the fixed assets of the capitalist sector in measuring the rate of profit. This is consistent with Marx’s analysis of capital and is what capitalists do anyway in gauging profits. On this basis, I’m entirely in agreement that the ultimate cause of the Great Recession must lie with Marx’s law of profitability and not with the alternative explanations of inequality and declining wage share (Husson, Reich, Wolff), or underconsumption or ‘over-accumulation’ (Harvey – see my post David Harvey, Marx’s method and the enigma of surplus, 13 November 2011) or excessive or uncontrolled debt (Keen – see my post, Bellofiore, Steve Keen and the delusions of debt, 7 october 2011 – or Dumenil, op cit) or financial instability (Lapavitsas). In that sense, the Great Recession was a failure of capitalist production, not a financial crisis (Minsky), nor one of the lack of effective demand (Keynes), nor the end of some special neo-liberal structural order of capitalism (Husson, Dumenil) .
Moreover, if it were one of the latter causes, that would imply that the solution for the crisis could be found by sorting out the financial sector, or boosting wages or reverting to less globalisation or more regulation. It would not be necessary to replace the capitalist mode of production, namely in the production sphere. And yet this is precisely the difference between Marxist and other left policy prescriptions to end crises.
I agree with AK that the underlying (or indirect) cause of the Great Recession was not financialisation, or a financial sector cause, but is to be found in Marx’s most important law of motion, the tendency of the rate of profit to fall, and the data confirm this. My measurements differ from AK’s to some extent. I have used what I call a ‘whole economy’ measure i.e. using the net national product of the whole economy measured against private fixed assets. Also I have measured the rate of profit in both current cost and historic costs. I have found that, anyway you measure it, the underlying trend in the rate of profit from 1946 to 2009, namely from trough to trough, was downwards. In that sense, this particular result is not dependent on using historic costs (see my paper The profit cycle and economic recession for more on this).
In Guglielmo Carchedi’s paper, Behind and Beyond the Crisis (Behind and beyond), he measures the US rate of profit using the historic cost measure of the fixed assets of private goods producing industries and their pretax corporate profits. He finds the same result as AK and I do: a trend decline in the ROP from 1947 (Chart 1), but he also finds a similar result to me, a sharp rise in ROP from 1986 to 1997. Carchedi also concludes that the main reason for the secular fall is Marx’s ‘law as such’, i.e. the secular rise in the organic composition of capital. But when counteracting factors come into play, the rate can rise either because the organic composition falls or the rate of surplus value rises significantly, or both. This is the basis of the cycle. Carchedi concludes that an upturn can happen again and is perfectly consistent with Marx’s explanation of capitalist crisis (see my post, Carchedi, Foster and the causes of crisis, 3 July 2011).
This is the interpretation that I reached in my book, The Great Recession, back in 2006. And it led me to go where AK does not go in his book, namely to distinguish a cyclical movement as well as a secular trend in the US rate of profit, driven by the tension between Marx’s ‘law as such’ and the counteracting influences that can produce an upturn around the long-term trend, of between 16-18 years. The uptrend must give way to the ‘law as such’ eventually and a downturn comes into play that generates a much higher probability of crises and deeper and more frequent recessions. I think this interpretation is important, as it helps to guide us in whether capitalism is in immediate crisis or not. It can’t all be in a straight line down. It may not be that the period of the Golden Age for capitalism (1948-65) was unique and exceptional and can never be repeated. AK emphasises the downward secular trend because he wishes to refute the alternative explanation of capitalist crises that deny a role for Marx’s law. But I want to highlight as well the cyclical movement of profitability because I think it helps explain why crises recur and why they are more frequent and deeper some times or not. Just looking at the secular trend cannot do that.
AK is highly sceptical that any cyclical movement can be interpreted from the US data on profitability (in correspondence with me). But my cyclical view does not just depend on the movement of US profits but also on accompanying cyclical movements in economic growth, investment and prices in US capitalism. The US stock market cycle follows closely the cyclical movement in profitability – a boom in the stock market from 1947-65, then a bear market until 1982, then a new bull market until 2000, and subsequently a bear market that we are still in. Also, the growth rate of US capitalism varies in the same way. Average real GDP growth was fast from 1947-65 (4%), slower from 1965-82 (2.9%), picked up again from 1982 to 1997 (3.6%), although slower than in the 1950s and since then has been very slow (2.2%). It’s the same story with investment. And inflation accelerated between 1950 and 1982 and decelerated afterwards. So it is conceivable that we can have faster growth, rising profitability and disinflation, as in 1982 to 1997, when the downward phase of Kondratiev prices cycle coincided with an upward phase in profitability (see my book).
The Failure of Capitalist Production is essential reading for all Marxists and lefts interested in what caused the Great Recession. It debunks the fads and fashionable arguments of neoliberalism, underconsumption and inequality with a battery of facts. It restores Marx’s law of profitability to the centre of any explanation of capitalist crisis with compelling evidence and searching analysis. It must be read.