Investment not consumption; profitability not demand

Boy, are the Keynesian economists boiling mad!  Jeffrey Sachs is regarded as a ‘liberal’ or progressive economist in favour of government action to boost the economy and employment.  He came out last week with an article attacking the basic tenets of Keynesian economics and their policy prescriptions for the US economy
(http://www.huffingtonpost.com/jeffrey-sachs/professor-krugman-and-cru_b_2845773.html).  Sachs denied that there were any beneficial effects for the US economy from the short-term fiscal stimulus packages that Obama introduced.  Indeed Sachs was worried that they would only boost public debt to levels that would stop the economy getting back into long-term sustained growth.

Sachs called the doyen of Keynesianism, Paul Krugman, a ‘crude Keynesian’, for advocating just short-term fiscal stimulus rather than longer-term remedies for the current depression.   Sachs says “I have argued against short-term stimulus packages. Krugman has supported them, and indeed argued that they should have been even larger. I have been against temporary tax cuts and temporary spending programs, believing that instead we need a consistent, planned, decade-long boost in public investments in people, technology, and infrastructure.”   Thus Krugman is a crude Keynesian because, says Sachs, “he takes a simplistic and inadequate version of the Keynesian economic approach as his guide for budget policy. Keynes himself was far subtler. In 1937, with British unemployment still around 10 percent, Keynes wrote: “But I believe that we are approaching, or have reached, the point where there is not much advantage in applying a further general stimulus at the centre.” He believed, for example, that more structural policies were needed to address the continued unemployment.*”

Sachs says that crude Keynesianism has failed because “recovery is impeded by structural factors. These structural components are not susceptible to a Keynesian diagnosis or to a Keynesian remedy…and Krugman seriously and repeatedly downplays these structural changes occurring in the U.S. economy. He repeatedly emphasizes that we suffer a demand shortfall, pure and simple, one easily remedied by more stimulus. Yet it’s increasingly hard to reconcile many features of the U.S. economy with this view.”   Sachs cites the long term problems of the US economy as “large-scale offshoring of jobs, large-scale automation of jobs, decline in demand for low-skilled workers, skill mismatches, broken infrastructure, and rising global energy and food prices. These require various kinds of targeted public investment spending, not simply aggregate demand.”

For Sachs, the problem is that fiscal spending that is not aimed at getting ‘structural’ improvements and just at boosting ‘demand’ will not work and the resulting debt from extra public borrowing will damage the economy ‘down the road’ when interest rates start rising.  Sachs emphasises that “The U.S. needs productive public investments, not wasteful spending. We need to modernize our infrastructure, retool our energy system, make our cities more resilient, and help to train a new productive labor force.

With this approach, Sachs is really expressing the concerns of America’s capitalist sector that Keynesian-type fiscal stimulus will merely drive up debt servicing costs without restoring growth.  If there is to be government spending, let it be on industrial investment and not on welfare payments or public services.   So there is a vested interest behind Sachs’ criticism of Krugman.

It has produced a barrage of responses from leading Keynesian economists.  First, Krugman himself,  taking a line of the innocent victim, answered: “I don’t know what’s happened to Jeff Sachs. He’s been critical of “crude Keynesianism” throughout this crisis, without ever explaining what’s crude about viewing a huge slump in aggregate demand through a Keynesian lens. So his position has been a mystery.” (http://krugman.blogs.nytimes.com/2013/03/08/i-guess-its-a-form-of-flattery/).

Mark Thoma, a strong Krugman publicist, got really upset (http://economistsview.typepad.com/economistsview/2013/03/crude-sachsism.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+typepad%2FKupd+%28Economist%27s+View%29).
Replying to Sachs, point by point, he retorted: “Take your time, no need to hurry (other than the millions of people who are unemployed and struggling to make ends meet). Krugman and others (like me) say that yes, of course, shovel-ready infrastructure is the first choice, and of course we need to make progress on our long-run issues. But while we are getting that done, why the hell wouldn’t we want to do whatever it takes to alleviate the suffering in the shorter-run?…. because of problems that might happen “later this decade” we should let people suffer now.”  And again on Sachs’ position:  “We all agree on the need to address the long-run issues, and I have called for infrastructure spending again, and again, and again as a way to help the economy is both the short and longer runs. But that doesn’t mean we should ignore other policies — money spent on things other than infrastructure — that might help people in the short-run. Short-run multipliers are sufficiently large, there is substantial cyclical unemployment, and our debt problems are not immediate.”

Arch-Keynesian professor at Cambridge University, Simon Wren-Lewis (http://mainlymacro.blogspot.co.uk/2013/03/the-unlikely-friends-of-austerity.html) also weighed in: “perpetuating and mis-diagnosing the crisis is precisely what those who want to use debt scare stories to reduce the size of the state are trying to do.”  Sachs was really taking the old line of neoclassical economics: “More fundamentally, it is the line promoted – consciously or unconsciously – in almost every textbook that economic downturns are ultimately self correcting… what I see at the moment is very simple. We have demand deficiency, and the normal means of correcting it is broken. We luckily have a backup system, but the levers of that system are being pushed in the wrong direction.”   In other words, we need more fiscal stimulus of any sort not less, as Sachs seems to be advocating.

Kevin Drum was equally upset at Sachs, but he was also unsure what to do (http://www.motherjones.com/kevin-drum/2013/03/any-way-you-cut-it-weve-got-big-economic-problems): “our biggest problem going forward is indeed structural. Unfortunately, I have my doubts that we have any solutions for the structural problems that bedevil us. Sachs offers up a fairly conventional liberal prescription—lots of investment in infrastructure and education, paid for by carbon taxes and various taxes on the rich—and I don’t have any problem with that. I don’t think Krugman does either.  I’m all for rebuilding our infrastructure, and a strong focus on renewable energy would certainly help reduce our vulnerability to oil shocks. But it will happen only slowly, and only if the entire rest of the world does the same thing. At the same time, improvements in technology will be good for productivity, but are going to put increasing numbers of people out of work for good. Better infrastructure won’t really help that. I’m not sure what the answers are.”  Oh dear.

Dean Baker, another tireless opponent of austerity, inequality and neoliberal policies, also launched into Sachs ( http://www.cepr.net/index.php/blogs/beat-the-press/the-strange-attack-of-jeffrey-sachs-on-paul-krugman?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+beat_the_press+%28Beat+the+Press%29).

Baker dismissed the argument that fiscal stimulus will lead to a debt problem: “it is just difficult to see the case for the horror story of the debt that Sachs wants to portray. The markets clearly do not see the problem or they would not be lending the government huge amounts of debt at very low interest rates. Furthermore, we know many examples of other countries, or the U.S. at other times, that have been able to have much larger debt to GDP ratios without any notable problem borrowing money.”   And Baker made a telling point on the structural problems that Sachs promoted, claiming that Sachs missed the main one: “The main reason for the projected slowdown in potential GDP is the slowing of labor force growth. This is partly the result of the retirement of the baby boom cohort and in part the end of the period in which women were entering the labor force in large numbers.” 

But Baker then assumed that this demographic deficit poses no problem. “Neither development poses a crisis in any obvious way or suggests a structural flaw in the economy.”    Yet as Marxist economics would tell you, that should be cause for concern for the capitalist mode of production.  Only labour power can create value, so, other things being equal, a declining labour force will mean less surplus value generation.  As the employed population shrinks so does the total amount of value (unless hour of works are extended or new technology drives up the rate of exploitation).  And in the US, the ratio of employed to those not working in the total population has been falling fast.

Shedlock-130311-Fig-2

This dispute among mainstream Keynesians might seem rather arcane and irrelevant.  But I think it raises some useful pointers on the weaknesses in the Keynesian understanding of the crisis and its policy prescriptions to end the Long Depression in the major capitalist economies.  Can the slump be ended just by more government spending through more borrowing or will that merely boost debt levels and distract from dealing with ‘long term structural problems’ in capitalist economies like the US?

First, as for the efficacy of short-term fiscal stimulus, I refer to my previous post (The smugness multiplier) on the effect of Keynesian-type fiscal multipliers
(https://thenextrecession.wordpress.com/2012/10/14/the-smugness-multiplier/).

The evidence shows that the short-run approach is limited, at best.  For example, as I noted in another post, one study found that the relatively tougher fiscal adjustment in the UK compared to the US has contributed slightly less than half the 5% pt difference in real GDP growth between the two countries over the last three years (see G Davies, J Antolin-Diaz, Why is the US economic recovery stronger?, Fulcrum Research, November 2012).  So US fiscal stimulus only did so much.

Second, the Great Recession was not caused by a slump in ‘effective demand’, especially consumption demand.  It was caused by a slump in investment.   As one capitalist chief, Fred Smith, the CEO of FedEx, recently observed “The only thing that’s correlated 100% with job creation – and particularly good job creation – is business investment. It’s our reduced level of capital investment that has produced our low GDP growth rates and our high unemployment.”  And if that is the case, then monetary injections through QE or more welfare spending will do little to help drive investment up.  

Investment analyst John Hussman makes a similar point (http://www.hussmanfunds.com/wmc/wmc130304.htm): “I’ve often noted that recessions aren’t simply a time when total demand falls short. They are usually a time where the mix of goods and services that is demanded becomes out of line with the mix of goods and services supplied by the economy. In order to get that mix back in line, it’s not enough to simply “stimulate demand” – it’s important to encourage innovation and investment in areas where needs aren’t being met, and to allow the transition and reallocation of resources away from areas that are no longer in demand.”  

As Hussman points out, the correlation between 8-quarter growth in US gross domestic investment and 8-quarter growth in non-farm payroll employment is 80%, with payroll growth lagging investment growth by about 6 months. Notably, that correlation is not driven by linear trends, but instead by a close match between cyclical movements of both, with employment lagging investment activity.  But growth in gross domestic investment has turned lowerand so is moving in the wrong direction if job creation is an objective of economic policy. “All of the QE in the world will not help this situation, but will instead continue to distort investment decisions away from productive allocation of capital and toward brute speculation in financial assets”.

Hussman singles out a key flaw in the Keynesian approach: ” Because savings and investment must be equal, and Keynes has already assumed that investment is fixed, the attempt by individuals to save a greater portion of their income cannot actually result in a greater amount of total savings. Instead, other things being equal, GDP must fall. There may be a million individual private decisions that produce this result, but in the end, savings must equal investment.  The Keynesian solution to this is to offset the desired increase in private savings with a decrease in government savings. Keynesians typically want savings rates to be as low as possible, on the assumption that spending automatically generates production. Keynesian theory really doesn’t embody the notion of scarcity and economic tradeoffs very well, and both government spending and investment enter the model like any other class of spending, with little attention to the productivity of that spending over time.  

So Keynesian “attempts to “stimulate” the economy by suppressing savings and increase consumption, or by pursuing “beggar thy neighbor” exchange rate policies are weak options compared to policies that encourage productive investment, research, and development. A nation’s “standard of living” is reflected by the amount of goods and services that its people can consume as a result of their efforts. A nation’s “productivity” is reflected by the amount of goods and services that its people can produce as a result of their efforts. Ultimately, one cannot increase for long without the other. Robust domestic investment provides the foundation for both.  The only sustainable course to a higher standard of living is to encourage productive investment. “

In an excellent series of articles (http://socialisteconomicbulletin.blogspot.co.uk/),
Michael Burke has shown exactly how a slump in investment has been the main reason for the failure of the UK economy to recover.  The UK government’s policies of austerity have played their role precisely because they have been mainly aimed at reducing government investment.  Unless long-term productive investment is restored, modern capitalist economies will not recover however much extra money is injected or extra government spending takes place.  This is the point behind Sachs’ criticism, however badly put.  He was more perceptive in a recent article in the FT (Today’s challenges go beyond Keynes, 17 December 2012), when he said: “Unlike the Keynesian model that assumes a stable growth path hit by temporary shocks, our real challenge is that the growth path itself needs to be very different from even the recent past.”

But what do Hussman or Sachs mean by ‘productive investment’.  Under capitalism, productive investment is not aimed at delivering extra output for an economy to use; instead productive investment must deliver more profit, with extra output as a secondary outcome.  The Marxist theory of crisis reckons that slumps or recessions are caused by a collapse of investment, an investment strike.  The investment strike happens because it has been no longer profitable for capitalist to invest and so they stop, lay off labour and reduce production and that ‘multiplies’ through the economy as workers lose their jobs and incomes.  Until sufficient profitability returns, capitalist will hoard their cash or increase dividends to their shareholders or buy back shares rather than invest in new equipment or employ more staff.

That is the missing ingredient from both the analysis of Sachs and his Keynesian opponents: profitability.  The evidence that profits drive investment is now well documented.  See the excellent analysis of Tapia Granados, often mentioned in this blog (see https://thenextrecession.wordpress.com/2012/06/26/profits-call-the-tune/).  Recognise the close connection between past profitability and future expectations of profit on investment, as analysed for the US economy in Andrew Kliman’s book, The failure of capitalist production.  See the recent paper by Andrew Kliman and Shannon Williams on US profitability and investment (http://akliman.squarespace.com/writings/).  And in my book, The Great Recession, even I managed to present evidence for profits driving investment.  This is ignored by neoclassical and Keynesian economics alike.

23 Responses to “Investment not consumption; profitability not demand”

  1. Choppa Morph Says:

    Your second-to-last paragraph makes it explicit that for Marxists (as for the real economy🙂 “productive” means “productive of profit” and nothing else. And you write: “The Marxist theory of crisis reckons that slumps or recessions are caused by a collapse of investment, an investment strike.”
    What I’d like to see is a blow-by-blow account of Marx’s argument for this from Capital. We’ve seen lots of blow-by-blows here from trivial modern econohacks (like Sachs and Krugmann), but we need to see how Marx turns from “overproduction crisis” as just being a glut of commodities (the “common sense” notion) to being a crisis of overproduction of capital.
    The political importance of this is of course that if there is too much capital, profitability won’t be restored to “acceptable” levels unless the glut of capital is wiped out by wiping out excess capital. And we need to face up to the fact that this means war (ie bugger euphemisms like Schumpeter and his creative destruction).
    And there are TWO silent alternatives competing with the bourgeois political economic proposals right now we need to face up to.
    One is the non-capitalist pursuit of societal investment in China. Infrastructure and production facilities on a grand scale, not unreminiscent of the USSR in the 30s (highlighted by Trotsky in The Revolution Betrayed). This is scorned as aberrant and suicidal by bourgeois economists and a multitude of their would-be left (even Marxist!) fellow travellers who have decided that China is capitalist, hence subject to all the pressures of the Law of Value like every other capitalist country. So China goes on growing year after year… and the doom-sayers keep hoping for the bubble to burst, year after year.
    The other is far worse for the workers’ movement in Britain, Europe and the world. It is the ABSENT alternative of revolutionary socialism. Science explains what we can’t see. Economics can’t even explain what we can see😀 just like medieval geo-centric astronomy.
    It worries me that you Mike and other serious Marxist academics fail time and again to address this missing elephant in the room and restrict yourselves to criticizing what bourgeois economists or fellow-travellers claim to be seeing.
    The geo-centric obscurantists and their paymasters wilfully blinded astronomy for centuries. Like bourgeois economists are doing today to economic theory and practice. They don’t deserve to hog the stage.

  2. Edgar Says:

    Can we just be clear in case I missed something, the fiscal stimulus etc isn’t intended to boost demand or raise workers living standards. This would require a radical re-distribution of wealth, structural changes to the economy and tax changes.

    In other words the unravelling of the whole Neo-Liberal project, rather than polices designed to keep it going!

  3. Gary Reber Says:

    The purpose of production in a market economy is the consumption of products and services by the consumers who make up the economy. But without income, the non-capital ownership class, the 99 percenters, cannot afford to purchase the products and services they desire. But when incomes rise among consumers who have the need and desire to improve their material standard of living, the market demand for products and services strengthens, which in turn increases production and results in a growth economy.

    You can’t have mass production without mass human consumption. It is the exponential disassociation of production and consumption that is the problem in the United States economy, and the reason that ordinary citizens must gain access to productive capital ownership to improve their economic well-being.

    Binary economist Louis Kelso postulated: “When consumer earning power is systematically acquired in the course of the normal operations of the economy by people who need and want more consumer goods and services, the production of goods and services should rise to unprecedented levels; the quality and craftsmanship of goods and services, freed of the cornercutting imposed by the chronic shortage of consumer purchasing power, should return to their former high levels; competition should be brisk; and the purchasing power of money should remain stable year after year.”

  4. Choppa Morph Says:

    Gary R and a million others want to say that consumption determines production. This is nonsense. Our potential capacity for consumption is infinite. Our actual consumption is totally dependent on the development of the forces of production including the relations of production in our historical period. Today’s great problem in these terms is that the forces of production have developed so far that they are being strangled and distorted (as is the corresponding consumption) to be kept within the limits (surplus value/profit) imposed by the capitalist mode of production. This strangling and distortion is not so much an economic process as a political process with economic consequences (artificial shortages, waste, war, etc).
    An out-of-control economic system is under the control of people whose overriding objective is to prevent the people capable of controlling it from taking control of it.

  5. duvinrouge Says:

    I agree with the general thrust of your article on the importance of the rate of profit & the inability to print away the recession.

    I think you should be a little bit careful though saying “The Marxist theory of crisis reckons that slumps or recessions are caused by a collapse of investment…”

    It’s the use of ‘The’ as in the impression in creates that all crises are due to a falling rate of profit.
    Behind today’s huge debt burden (fictitious capital) may well be a falling rate of profit (at least in the US & most likely in Western Europe), but historically I think it is quite possible that the recurrent boom-bust has been due to overproduction.

    Overproduction in the sense of an excess of commodities relative to the special commodity that acts as the measure of value.
    Or in otherwords, excessive credit, when reported profit rates are good, leads to overproduction with aggregate values exceeding aggregate values. The over-issue of debt eventually results in a financial panic, credit dries up, profit rates plunge & a recession gets rid of the ‘excess’ commodities & reduces aggregate prices back in line with values (prehaps after overshooting).

    A crisis of overproduction, whilst accompanied with rising & falling profit rates, does not necessarily have to have anything to do with a falling rate of profit consequent upon a rising organic composition of capital. This is likely to be longer term.

    This is why I think we should see Marxist crisis theory as consistently of two types of crisis. Firstly, overproduction to do with excess credit/debt, & secondly the longer term falling rate of profit.

    See the facebook group ‘Marxist Crisis Theory’ for more.

  6. Jane Says:

    “What I’d like to see is a blow-by-blow account of Marx’s argument for this from Capital. We’ve seen lots of blow-by-blows here from trivial modern econohacks (like Sachs and Krugmann), but we need to see how Marx turns from “overproduction crisis” as just being a glut of commodities (the “common sense” notion) to being a crisis of overproduction of capital.”

    Actually, it’s generally called an accumulation crisis. Marx broaches it piecemeal in places in Cap 1 (most notably being the consequence of rises in OCC detailed in chap.24) but works through it in greater detail in Cap 3. That said, there is no unified exposition of this theory of crisis in Capital; the best aggregation of the theory is in Anwar Shaik’s paper, An Introduction to the History of Crisis Theories.

  7. Choppa Morph Says:

    It bears repeating that the Marxist crisis of overproduction is much more fundamentally a crisis of the overproduction of capital rather than of commodities as such.

    What Duvinrouge says is directly contradicted in Capital 3, Part 3, The Law of the Tendency of the Rate of Profit to Fall, Chapter 15, Section 3 Excess Capital and Excess Population.

    Among other things Marx subordinates the overproduction of commodities to the overproduction of capital: “Over-production of capital, not of individual commodities — although over-production of capital always includes over-production of commodities — is therefore simply over-accumulation of capital. ”
    The crisis of overproduction of capital occurs when the purpose of capitalist production, the self-expansion of capital, cannot be achieved. He writes: “There would be absolute over-production of capital as soon as additional capital for purposes of capitalist production = 0. The purpose of capitalist production, however, is self-expansion of capital, i.e., appropriation of surplus-labour, production of surplus-value, of profit.” Marginal theory, eh?

    The effects on society he describes as follows: “How is this conflict settled and the conditions restored which correspond to the “sound” operation of capitalist production? The mode of settlement is already indicated in the very emergence of the conflict whose settlement is under discussion. It implies the withdrawal and even the partial destruction of capital amounting to the full value of additional capital ΔC, or at least a part of it. Although, as the description of this conflict shows, the loss is by no means equally distributed among individual capitals, its distribution being rather decided through a competitive struggle in which the loss is distributed in very different proportions and forms, depending on special advantages or previously captured positions, so that one capital is left unused, another is destroyed, and a third suffers but a relative loss, or is just temporarily depreciated, etc.

    But the equilibrium would be restored under all circumstances through the withdrawal or even the destruction of more or less capital.”

    One last direct quote before you rush off to read the chapter for yourselves: “Part of the commodities on the market can complete their process of circulation and reproduction only through an immense contraction of their prices, hence through a depreciation of the capital which they represent. The elements of fixed capital are depreciated to a greater or lesser degree in just the same way. It must be added that definite, presupposed, price relations govern the process of reproduction, so that the latter is halted and thrown into confusion by a general drop in prices. This confusion and stagnation paralyses the function of money as a medium of payment, whose development is geared to the development of capital and is based on those presupposed price relations. The chain of payment obligations due at specific dates is broken in a hundred places. The confusion is augmented by the attendant collapse of the credit system, which develops simultaneously with capital, and leads to violent and acute crises, to sudden and forcible depreciations, to the actual stagnation and disruption of the process of reproduction, and thus to a real falling off in reproduction.”

    Hm, we’d better add the summary Marx makes of his crisis theory before we let you go…

    “Too many commodities are produced to permit of a realisation and conversion into new capital of the value and surplus-value contained in them under the conditions of distribution and consumption peculiar to capitalist production, i.e., too many to permit of the consummation of this process without constantly recurring explosions.

    Not too much wealth is produced. But at times too much wealth is produced in its capitalistic, self-contradictory forms.”

    (The MIA Capital reference is: http://www.marxists.org/archive/marx/works/1894-c3/ch15.htm)

    • Jane Says:

      “Too many commodities are produced to permit of a realisation and conversion into new capital of the value and surplus-value contained in them under the conditions of distribution and consumption peculiar to capitalist production, i.e., too many to permit of the consummation of this process without constantly recurring explosions.

      Not too much wealth is produced. But at times too much wealth is produced in its capitalistic, self-contradictory forms.”

      — Hmm. That is a version of the crisis of overproduction. But arguably that is not the primary form of crisis for Marx; not the kind he refers to as “the moving contradiction” in The Grundrisse. For Marx, the primary (and entirely endogenous) form of crisis is that of accumulation, which proceeds as follows:
      1) the limits of the working day and thus of the appropriation of absolute surplus value having been reached,
      2) capital turns to struggles for relative surplus value, in the form of increasing productivity,
      3) achieved largely by automation which replaces living labor (variable capital) with dead labor (constant capital), a changing ration of v/c named perversely as a rise in organic composition of capital (OCC) but,
      4) as exploitation of v is the source of surplus value, and the relative presence of v is falling, there is a decline in the capital’s ability to appropriate surplus value in adequate magnitude,
      5) a fact appearing as a decrease in profitability for capital as a whole, that is to say, a failure of accumulation,
      6) ineluctably producing a decrease in capital investment in real economy enterprises,
      7) this decrease appearing as crisis until either
      8) a bunch of c is destroyed, revising downward the OCC and restoring profitability, or
      9) capital relocates to a region with a more advantageous OCC (this last not being a Marxian but an Arrighian account).

      • Choppa Morph Says:

        Jane takes one of the quotes from Capital III,3.15.3 and then writes: “That is a version of the crisis of overproduction. But arguably that is not the primary form of crisis for Marx; not the kind he refers to as “the moving contradiction” in The Grundrisse.”
        And then proceeds to focus on accumulation and relative surplus value and The Grundrisse.
        This misunderstands the whole chapter, and my presentation of it. Marx’s focus is not on the commodities being overproduced, or on the mechanism of extracting surplus value, both of which are absolutely necessary to crises of course, but on what happens to the process of capital production and circulation when the accumulation of capital reaches an intolerable limit. An earlier quote I give from the chapter makes the clear enough: “Over-production of capital, not of individual commodities — although over-production of capital always includes over-production of commodities — is therefore simply over-accumulation of capital.”
        This is no case at all of Marx vs Marx, of fresh young pre-Capital Marx vs rigid dogmatic Capital Marx, but of Marx agreeing with Marx and stating very very clearly that the regular explosive crises of capitalism are rooted in the over-production of capital itself which causes the rate of profit to fall and leads to the annihilation of the superfluous capital(s) in various ways, all of which are extremely harmful to production and circulation (eg withdrawal from investment (hoarding as cash), bankruptcy and physical destruction.
        There is no question as to what Marx sees as the fundamental form of economic crisis in capitalism. The problem for us is not to cudgel our brains discovering what he thought about crises, because he makes this crystal clear in the relevant chapter(s) of Capital. Our problem is how to explain to the working class and poor people of the world what this means for them in relation to what the ruling classes (governments and financiers and their armies) are doing to them each and every day, and how it can be ended.

    • duvinrouge Says:

      Choppa,

      I don’t disagree that the overproduction of commodities is subordinate to the overproduction of capital.

      Even what you quote notes the overproduction of commodities occurs.

      I could equally quote from the same section, “Moreover, capital consists of commodities, & hence overproduction of capital involves overproduction of commodities”.

      You shouldn’t try & score points by inferring I’m contradicting anything that Marx says.

      Section 3 of Capital III is rich, complex & open to interpretation.

      I don’t think we can infer that Marx is explaining THE cause of crises, in the sense of the regular boom & busts.
      Marx wasn’t addressing the theory of crises directly in Capital, as I presume you agree, but obviously it’s hard to ignore crises completely when describing how capitalism works.

      Marx’s comments on overproduction are within the context of the law of the tendential fall in the rate of profit.
      He may or may not have thought that the falling rate of profit caused by capital accumulation itself (the increase in the organic composition of capital) was responsible for the regular cycle boom & bust.
      There is a lot in section 3 that suggests he did think this was ONE likely cause, but the evidence that ALL crises are caused by increases in the organic composition of capital is far from conclusive.

      As Marx acknowledges, there can be problems realising surplus value as well as producing it.
      An increase in credit/debt (claims on future labour time) can surely allow production to get ahead of what the market can realised in the longer run, without necessarily resulting from increases in the organic composition of capital.

      This is the original point I was trying to make – that we shouldn’t give the impression that ALL historical crises can be explained by the falling rate of profit, even if behind the current crisis of overproduction lies the falling rate of profit.

      • Choppa Morph Says:

        @duvinrouge: You say: “I don’t think we can infer that Marx is explaining THE cause of crises, in the sense of the regular boom & busts.”

        But this is EXACTLY what he is doing. He even indicates a difference between minor and major crises when he uses the qualifiers “absolute” and “relative”. The closer the crisis to the absolute limit (contribution of added capital to profit equal zero) the worse and more all-embracing it is. That more localized problems of realization occasionally cause crises on their own is as true on the macro (national and international) level as it is on the micro, but cash flow is technical and manageable in a way that the falling rate of profit isn’t. The driving force behind capitalist crises and the blindingly obvious fact that bourgeois economists and politicians can’t handle them let alone explain them is the tendency of the average rate of profit to fall, which is a purely historical phenomenon limited to the capitalist mode of production.

        Rosdolsky in The Making of Marx’s Capital is very good on the absolute limits constraining capitalist accumulation as explained by Marx. So is the whole of Book 2 dealing with circulation and factors that promote and hinder it, and with the absolute impossibility of any more than instantaneous equilibrium in a capitalist economy. But all this is in the perspective of the overriding importance of the Falling Rate of Profit.

        You also say: “Marx wasn’t addressing the theory of crises directly in Capital, as I presume you agree”. Well, in fact, I don’t agree. I fail to see how you can say that he doesn’t address the theory of crisis directly in this chapter and in the other relevant parts of Capital and elsewhere. Crisis is an immanent phenomenon of the capitalist mode of production, and his theory of the processes of capitalist production and circulation as formulated in Capital includes direct reference and explanation of crisis as and when it is relevant, as in this chapter on the falling rate of profit and in the section on the organic composition of capital.

        And you continue: “but obviously it’s hard to ignore crises completely when describing how capitalism works.” Well, Marx doesn’t, of course. And perhaps more to the point he had no intention of devoting a whole book to Crises. He did have such an intention when it came to the State and World Trade, but as we know we had to wait for Lenin to sketch an outline of the book on the state in The State and Revolution, and the potential book on world trade is still spread piecemeal in his other work, like fragments of Terminator 2 that haven’t got back together again yet.

      • Jane Says:

        I’m a little perplexed by all of this. I think there is fairly broad agreement that actually existing crises lack a single cause, and that one might be nontrivially different from the next. I also think it is fairly clear in Marx that the mode of crisis internal to capital has as a central element the contradiction between on the one hand living labor as the source of value, and on the other hand capital’s need to expel living labor from the production process under duress of competition for productivity. One might argue this isn’t empirically true (a la Brenner in one direction, Harvey and the underconsumptionists in the other) but it’s very hard to argue that this is not what Marx says.

        But the more perplexing thing is why we are working through in somewhat awkward and polemical form what is better worked through already, elsewhere: http://www.contra-versus.net/uploads/6/7/3/6/6736569/crisis_theories.pdf

      • Choppa Morph Says:

        Jane, when you say there is “fairly broad agreement that actually existing crises lack a single cause, and that one might be nontrivially different from the next”, you point to two things underlying our present “awkward and polemical” discussion. Namely first, “fairly broad agreement”, which being interpreted means nothing at all, since everything depends on what you mean by “single cause”, and there is no agreement on this. And second “nontrivially different”, which is a can of worms since we have to agree on what is non-trivial and how the trivial and the non-trivial interact, and “we” don’t. Especially not when it comes to the all-important political consequences of the positions we take.
        What you say about a central element of capitalist crisis might be moving us closer to agreement on what Marx is saying. But I’d like you to develop it and bring in profit explicitly before I can be sure.

      • Jane Says:

        If you’ll see my summary, above, of the crisis theory that Marx actually develops over the duration of K1 (and is centered but not at all complete in K1ch24), it hinges entirely on rates of profitability. I’d rather not participate in a conversation where some parties don’t read the fucking contents.

      • Choppa Morph Says:

        Temper!

        That summary does hinge on profitability, which is fine, but I was reacting to your second briefer summary which appeared hinge on “productivity”. Which isn’t half as clear.

        The first summary seems however to conflate single capitals (point 4, “there is a decline in the capital’s ability to appropriate surplus value in adequate magnitude”) with all capital (point 5, “appearing as a decrease in profitability for capital as a whole”). Now this is a real problem, because the relationship between a single capital’s drive for productivity and its ability to appropriate a greater (disproportionate) share of aggregate surplus value when it rakes in its average rate of profit is complex and mediated by the whole economic system. It isn’t a matter of the single capital-intensive capital producing less surplus value and therefore generating less profit for itself. As we all know, I hope.

        What happens is that the commodities produced by the more competitive capital attract, suck, syphon off, surplus value to themselves away from less competitive labour-intensive capitals. This process — that I like to call the Value Pump — is completely hidden from the individual capitalists behind the screen of the general rate of profit.

        So the measures taken by individual capitals to increase their share of surplus value, given the mechanisms of competition and equalization of the rate of profit operating under capitalism, actually act to reduce the aggregate amount of surplus value (hence aggregate profit) in the system as a whole.

        They are forced to do things to obtain profit that ultimately destroy their own prospects of obtaining this profit. And neither they, their politicians, or their economists can do a damn thing to stop it. In fact, the harder they try to crush the competition, the worse things get for them.

        If we can agree on this, then we are faced with a different problem. If Marx saw the process so clearly in the mid-1860s, and explained it correctly, which he did, why hasn’t the system collapsed already?

      • Jane Says:

        Nah, that’s a typo: it shouldn’t say “the capital” (though that is a legit translation of the book’s title!). A crisis of accumulation is in part engendered by the fact not that some capitals appropriate the surplus value of others so much as the fact that individual capitals don’t pursue value/accumulation but price/revenue, and the logic of pursuing price/revenue hollows out the possibility of appropriating value/accumulation form living labor. It also allows individual capitals, seeking revenue in circulation for example, to register huge revenue while capital as a whole suffers an inability to accumulate (hence the spate of recent reports about “record-setting profits” which supposedly testify to a recovery when there is no necessary connection, and thus mislead reformists about the position of global capital and the possibility of levying it for social-democratic wage supplements…)

      • Choppa Morph Says:

        Hm, a typo it was then. But it allowed a valuable point to be made, which you developed by bringing in the role of finance capital (operating on the assumption of M-M’, ie money begetting more money without the intermediary of “real capital” ie variable and fixed capital in a real process of capital valorization).

        However, you stipulate an opposition in that crises of accumulation are caused (“in part”) by “the fact not that some capitals appropriate the surplus value of others so much as the fact that individual capitals don’t pursue value/accumulation but price/revenue”. This, however, is NOT an opposition, rather the pursuit of price/revenue to the exclusion and obliteration from consciousness of all else is the ultimate consequence of the capitalist mode of production as typified by the domination of the credit system and the rule of finance capital. This is extremely important.

        It’s important because the naked pursuit of revenue is the naked pursuit of profit, and the pursuit of profit by the most powerful and attractive capitals involves the appropriation of the surplus value of others to the highest extent. To put it simply, in terms of the Value Pump, bank and finance capital sucks even more than the most high-tech commodity-producing capital.

        Since the blindness of finance capital to the real process of value creation is so total (as the stupid and numbed expressions on the faces of pure finance capitals reveals when they are pole-axed by the biggest crises) it is not in the least surprising that these capitals take front stage in the unfolding of these crises, as their fall is the most dramatic and their reality distortion field is most spectacular. But the actual cause of the crisis remains precisely what Marx describes in Book 3 ch 15 section 3: additional capital no longer generates viable profit, in some cases reaching the absolute limit where it generates zero surplus value (ie its production of surplus value is zero. There is too much capital, there is over-production of capital, and the crisis won’t be resolved until the superfluous capital is removed from the process, by hoarding, bankruptcy or war.

        The character of the capitals appropriating surplus value in the form of profit is strictly irrelevant to the cause of the crisis. Aggregating all surplus value and all profit within the system to its totality (as Marx does from time to time to make his point), then over a given period while the surplus value and profit stagnate the total capital against which profit is calculated will continue growing. Given an average equalized rate of profit, this inevitably means the rate of profit falls. This means a growing portion of the total capital is failing to do its duty by its owners – it’s failing to generate the expected profit. So it has to go. By hook or by crook.

        Each capital fights to the death to save its own life, in accordance with its own strengths and weaknesses, but the poison in its veins, the cancer devouring its marrow, is the same. The cause of this mortal crisis is the same for all capitals.

        There are differences in the palliatives available and the care given to stricken capitals, but these have nothing to do with the cause of the disease, which is incurable for the capitalist mode of production. It hasn’t discovered the secret of eternal life, and since it is a mode of production with a clearly defined beginning and end (scientifically demonstrated to us by Marx) it is mortal. Like some opera characters it is taking an inordinate time to die, but that, scientifically speaking, is neither here nor there. It is dying. Following Marx, Lenin characterized the imperialist epoch of capitalism, dominated by finance capital and the credit system, as the ultimate stage of capitalism, beyond which it can develop no further. It has reached the full extent of its growth as a bearer of the economic processes of human society, and these will only develop further in a completely different form. In the same way as a caterpillar only develops further in the completely different form of a butterfly.

        Trotsky characterized the imperialism of the late 1930s as beyond overripe, as rotten and decaying. The title of the Transitional Programme he was mainly responsible for highlighted this condition in the most dramatic way possible: “The Death Agony of Capitalism”.

        A more urgent problem for us than determining the cause of overproduction crises is determining the reasons for the survival of capitalism as a flailing Life-in-Death zombie leviathan. Marx — as I have argued here — has shown quite conclusively what the cause of overproduction crises is. We don’t have to determine it a second time over. We have to understand and use what Marx has already done for us. Mike is doing his bit by insisting on the primacy of the falling rate of profit for making sense of what is going on in the capitalist economy.

        The cause of the interminable death agony of capitalism has not been determined as conclusively. I accept Trotsky’s explanation in the opening words of the Transitional Programme — it’s the crisis in the revolutionary leadership of the world proletariat. But we have a lot of work left until this is demonstrated as clearly and as incontrovertibly as the part played by the falling rate of profit in the life cycle of capital.

        Beyond this we have the even knottier problem of what we need to do to put capitalism out of its misery and usher in the socialist epoch in the history of human society.

      • Jane Says:

        That’s very long, but mistaken. I will clarify the mistake and bow out, since I have no interest in continue to muddy the waters of what is a relatively clear (while not superficial) matter handled clearly elsewhere.

        You write: “This, however, is NOT an opposition, rather the pursuit of price/revenue to the exclusion and obliteration from consciousness of all else is the ultimate consequence of the capitalist mode of production as typified by the domination of the credit system and the rule of finance capital. This is extremely important.”

        This is mistaken. There is no logical relation between the pursuit of revenue and “finance capital.” Nor is it an ultimate consequence. It is entirely immanent to capitalism as such. Just as the compulsion to sell one’s own labor power dominates the proletariat, the compulsion to outcompete other capitals dominates capitalists. This competition in not — ever — measured in value/accumulation but in price/revenue. The novel motion of capitalism is such that the competition for price/revenue for a period realizes surplus value and thus features systemic accumulation. But the continued drive for price/revenue drives down profitability and thus brings the phase of accumulation to an end. This fact is entirely independent from finance capital, which can intensify this process but is not a logically necessary component.

        Moreover, of course, as Marx is at INCREDIBLE PAINS TO POINT OUT and I certainly have never suggested otherwise, there is no such thing as M-M’. That is a form of appearance. Finance capital is always M-M’-[C], deferring but not doing away with the moment of exploitation of the direct labor process. The inability to summon forth the C (to set in motion the labor-power commodity in production) is the core of crisis. NOT OVERPRODUCTION.

        Once again, the crisis we confront is not an overproduction crisis. It is an accumulation crisis; capital being unable to accumulate new value, capitals in competition for price/revenue, finance regnant. This is simple and clear. You are now free to add interminable hooey. Since you cannot get the economics right, you will surely turn to declaiming how it is more important to talk about the form of proletarian struggle — as if these things were not dialectically conjoined, and as if the struggle for revenue in circulation was not itself a prescription for what an attack on capital would look like. Good day sir or madam.

      • Choppa Morph Says:

        Jane’s bilious parting shot is dead set on removing “overproduction crisis” from our discussion of capitalist crisis. “It is an accumulation crisis; capital being unable to accumulate new value”. But if I ask why, the answer has to be “because there’s too much of it”. Duh.

        She tells us that “the core of the crisis” is “the inability to summon forth the C (to set in motion the labor-power commodity in production)” And insists that the core is “NOT OVERPRODUCTION”.

        But this is not the core. At least it’s not what Marx says. The inability to mobilize labour power in production comes late in crises. It’s the valorization of commodities including labour power, the realization of the value of labour, that stops dead in a capitalist crisis. And the reason that the value can’t be realized is that there are too many commodities for the market to swallow, and too much capital producing them. Which means overproduction of capital bringing with it a fall in the rate of profit and regular and catastrophic crises within the capitalist mode of production.

        A bigger problem is that despite all her arm-waving and the hissy fits we are still completely in the dark as to why Jane is so aereated about the issue.

        Why is it so important to her that overproduction ISN’T the core of the crisis?

        Surely she can’t mean that it’s all about “the struggle for revenue in circulation”? Or if she does, she doesn’t tell us
        what this struggle involves or who the actors are and why it has anything to do with Marxism, socialism, or bringing about any change at all in the capitalist mode of production.

        I’d be grateful if someone could shed some light on what she’s getting at and why it matters. She herself certainly hasn’t.

      • michael roberts Says:

        Guys (Choppa, Jane)

        I’ve been away so could not add my two cents on the debate. It’s been interesting if occasionally unnecessarily abusive, but there you go. The issue debated between crisis as overaccumulation of capital versus overproduction of commodities is a longstanding dsipute among Marxists. If I have time, I’ll try and return to it in a future post. In the meantime, my view has been outlined in my book, The Great Recession, chapter 42.

  8. Choppa Morph Says:

    Among the things that bear repeating here is what Marx is doing when he writes: “Not too much wealth is produced. But at times too much wealth is produced in its capitalistic, self-contradictory forms.” He is moving on from his analysis of the crises to a political evaluation of the symptoms. Society is NOT producing too many goods or too much productive capacity in absolute terms, but in terms that are historically and politically relative and rooted in the social relations of the capitalist mode of production as it develops historically, out of feudalism and towards socialism.

    Capital doesn’t just reach the limit of its own capacity to add value to itself, but it reaches the limits of its viability as a mode of production for humanity. Precisely because its capacity to expand production for use is indissolubly fused with its character of dead labour, dead human productive capacity, (commodities, money, capital), and not with the living concrete reality of human productive power, that is people and the environment they adapt to their own needs with their labour.

    Hegel didn’t study Logic to elucidate a myriad brain-numbing syllogistic patterns but to discover the vital force driving Thought and our living consciousness. Just as little did Marx study economics to elucidate the intricacies of financial derivatives. He did it NOT to separate the concepts of commodity, credit, or profit into discrete little bits each fenced in in their own safe patch, but to discover the vital force driving Society and our everyday lives in it.

    Hegel’s work revolutionized Thought – Marx is the best example of that. Marx’s work, in the teeth of extreme hostility from the bourgeoisie and despite the worst efforts of un- and anti-Marxist Marxologists (let’s just use Kautsky and Althusser as “safe” examples here) is revolutionizing Society.

  9. henry Says:

    Michael,

    Thanks for this. It reminds me of the debat on the fiscal crisis of the state. James O’connor and Ian Gough showed how longterm ‘public investment’ or ‘social constant capital (SCC)’ and ‘public consumption’ or ‘social variable capital’ (SVC) contribute to a rising rate of profit and a declining OCC, and increasing ‘social costs’ or ‘unproductive public expenditures’ have the opposite effect and contribute to crisis and stagnation. Paul Mattick and others pointed to this last aspect and condemned ‘Keynesianism’. Sachs could be right in his critique of Krugman, it all concentrates on what they mean with ‘fiscal stimulus’, throwing money at big banks and multinationals called “quantative easing” could be hardly called a ‘fiscal stimulus’ and more a ‘social cost’ as this stimulates financial speculation/crisis, inflation, and food crises….

  10. Tornike Chivadze Says:

    Reblogged this on Ghostishynting and commented:
    But what do Hussman or Sachs mean by ‘productive investment’. Under capitalism, productive investment is not aimed at delivering extra output for an economy to use; instead productive investment must deliver more profit, with extra output as a secondary outcome. The Marxist theory of crisis reckons that slumps or recessions are caused by a collapse of investment, an investment strike. The investment strike happens because it has been no longer profitable for capitalist to invest and so they stop, lay off labour and reduce production and that ‘multiplies’ through the economy as workers lose their jobs and incomes. Until sufficient profitability returns, capitalist will hoard their cash or increase dividends to their shareholders or buy back shares rather than invest in new equipment or employ more staff.

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