Tendencies, triggers and tulips

At the 3rd seminar of the International Institute for Research and Education (IIRE) in Amsterdam, I presented a paper entitled, Tendencies, triggers and tulips, with the subtitle, The causes of the crisis: the rate of profit, overaccumulation and indebtedness. Presentation to the Third seminar of the FI on the economic crisis

The main purpose of my paper was to argue that, following Marx, we must look beneath the surface events of a slump or financial crash like that of great tulip futures contracts of 1636 in Amsterdam or the property bubble, credit crunch and global financial collapse of the Great Recession of 2008-9 to the underlying deeper causes that can explain the recurrence of crises under capitalism.  Each crisis, crash or slump may have a particular visible cause, but any proper scientific analysis of events must reveal deeper causes that best explain these recurrences and even predict future ones.

The paper briefly looks at the explanations for crises or slumps offered by mainstream economics.  Neoclassical equilibrium economics either denies there are crises, or ignores them, or explains them as random or exogenous shocks to the harmonious growth of markets.  Keynesian economics, both its more orthodox and heterodox versions, recognises that capitalism has inherent flaws.  But these are to be located in the financial sector, not the production sectors of capitalism.  And the ‘technical malfunction’ in the financial sector can be dealt with by utilising the right macro policies.  Through macromanagement, the capitalist system can avoid serious systemic crises and eventually progress to a rich and leisure-based society in the long run.

The paper dismisses these explanations and their more recent variants, namely that the Great Recession was a consequence of falling wage income and workers’ consumption leading to lack of effective demand; or that growing inequality of income and wealth in the neoliberal period led to insufficient purchasing power and/or excessive debt, creating credit bubbles that eventually burst.  These alternative explanations are not consistent theoretically in explaining recurrent crises and are not borne out by empirical evidence.

The paper argues that Marx’s own theory of crises under capitalism, embedded in his law of the tendency of the rate of profit to fall (which he considered was the most important law of political economy), provides the most compelling explanation of recurrent crises. The paper presents empirical evidence from the US, Europe and even the world, to justify the argument that it is tendential downward pressure on the rate of profit that is the underlying cause of crises.  After all, the capitalist mode of production is production for private profit, not for social need.  This is the basic contradiction that underlines crises.  Capitalist corporations produce things or services to make money; they are money-making machines, first and last. The key to recurrent crises is the recurring inability of capitalist companies to extract sufficient value and surplus value from labour to sustain further investment to make money. And Marx’s law of profitability explains why that happens.

So profit, or the lack of profit, is at the heart of an explanation of capitalist crises.  The paper presents a diagrammatic representation of the cycle of profit growth that reveals the recurrence of crises, as below.

The profit cycle

Marx’s law provides an explanation of the ultimate cause of crises.  The law is at the deepest level of abstraction, of capital in general.  At a shallower level, of capital in competition with other capitals, which depends on where capitalists are directing the surplus value that they have appropriated, the triggers for a new crisis can be very different.  In 1636 in Amsterdam it was futures contracts in tulips; in 2008, it was shadow banking, derivatives of mortgages and a property bubble.  In 1638, the crisis only affected parts of Europe; in 2008, the world crashed.

Another feature of the 2008-9 Great Recession was the prior huge expansion of fictitious capital (credit or debt), particularly in the financial sector, that made the crash even deeper than others.  The paper discusses the size of that debt, both public and private, in the major economies and the Sisyphus-like task of deleveraging that debt before capitalism can restore a level of profitability that would make it possible for capital accumulation to resume at least a trend rate.  That has not happened yet and so the major economies are really in a Long Depression similar to that of the 1880s and 1890s, or the Great Depression of the 1930s.

The paper ends with a brief discussion of long waves or cycles in capitalism (a fuller account of this can be found in my paper, Cycles in capitalism).  Many dismiss the idea of long cycles because the empirical evidence is dubious and there are few data points to work on statistically.  I argue that there is merit in the concept of long cycles.  Using the profit cycle as the base, it is possible to develop an analysis that incorporates both the very short ‘working capital’ cycles (Kitchin) up to the very long waves of innovation and production first associated with the leftist Russian economist, Kondratiev in the 1920s – as the graph below tries to draw.

Cycles in capitalism

If this hypothesis is right, then I argue that the major capitalist economies are currently in a Long Depression because they are in the ‘winter’ phase of the Kondratiev cycle which exhibits both depressed or falling prices of production and a phase of falling profitability.  Some Marxists who accept the existence of long waves or cycles, like the late Ernest Mandel, reckon that this downphase is endogenous to capitalism, but there can be no recovery unless there is an exogenous event like a world war or a revolution in a major economy.  I don’t see why that should be the case.  The Long Depression of the 1880s eventually came to an end without world war or revolution; and would the Great Depression of the 1930s have gone forever if there had been no world war?

That argument was disputed at the IIRE seminar.  But the main criticism of my paper was that it was too schematic in concentrating on the rate of profit as the ‘sole’ cause of crises. What about important events like the fall of the Soviet Union in the late 1980s, the rise of China and globalisation and the qualitative change in the financial sector in the last 20 years so that the trajectory of capitalism is now set by a parasitic, unproductive financial sector in the countries of imperialism.  Marx’s law of profitability is too didactic an answer.  Well yes, but as the paper tried to argue, Marx’s law of profitability is at the ultimate level of abstraction like Newton’s law of gravity and not at the surface level like tulip contracts or financial instruments of mass destruction.

The 100th anniversary of the Great War of 1914-18 is with us.  Can we explain the cause of the war by the assassination of Arch Duke Ferdinand, the heir to Austro-Hungarian empire in Sarajevo (like the collapse of Lehmans bank in 2008); or by the accidental mistakes of foreign secretaries in their ‘peace’ negotiations (or by financial deregulation and the credit crunch in 2008); or should we look instead at the growing imperialist rivalry between the major European capitalist powers to divide and control the rest of the world as colonies after the end of the Long Depression (or in the Great Recession, to the fall in profitability and the rise in fictitious capital from 1997 onwards)?

Surely, the dialectical answer is that there are both an ultimate and proximate cause(s).  Every crisis may be different in its characteristics, but crises in capitalism are recurrent and thus need to (and can) be explained by the same underlying cause, just as the law of gravity explains why an apple falls, even though the immediate cause may be because the wind may have knocked it off the tree.

21 Responses to “Tendencies, triggers and tulips”

  1. Marko Says:

    On inequality , consumption , and debt :

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2205524

    http://ineteconomics.org/blog/inet/link-between-inequality-credit-and-macroeconomic-crises

    On the rising profit share post-1982 ( counting all the beans ) :

    http://kkalev4economy.wordpress.com/2014/01/24/supervisory-wages-as-drivers-of-income-inequality/

  2. Mike Ballard Says:

    A capitalist can’t have a rate of profit until said capitalist sells the goods and/or services issuing from the employment of wage labour. If real wages are stagnant or falling, the majority of people who form the market cannot afford to buy the increased production of commodities even though those commodities are being produced with greater productivity and thus entering the market with lower values.

    Just an observation not a criticism of your work.

  3. duvinrouge Says:

    The exogenous event required to end the current long wave is a revolution.
    Street protests require industrial action which then require political organisation.
    Genuine People’s Assemblies required!

  4. Vik Guru Says:

    I have a few bones to pick on the piece, but even more on the attached presentation (to IIRE). On the general thesis of profits necessarily coming by reducing labor share – I could see profit and wages to be in strict opposition ONLY in the absence of technological or business innovation. However, both wages and profits can grow in absolute terms as innovation grows the pie. The socio-political overlay will then decide the how the pie is distributed – fraction that goes to profits vs wages. However, profit growth need not necessarily be a zero sum game. The percentage or rate of profit the capital investment demands is more a function of interest rates and risk assumptions, than any absolute figure.

    In the presentation, you identify the correlation between dropping profits and downturns – but correlation, as we well know, is not causation. However, the key question is what causes the decline in profits? What causes the linked growth and employment declines? And more importantly, what can one do about it?

    Your piece seems to suggest an inevitability of the cycles that can only be addressed by either a increasing capitulation to the demands of capital (higher rate of profits and lower wage rates to labor) or by succumbing to Marxist totalitarianism. Surely, we deserve better than that. A progressive democratic state that regulates business and finance, so that it remains a means to social good, rather than an end by itself can and should intervene through monetary or fiscal means. Keynesian economics does offer a way to tackling our problems we face without giving in to the tyranny of either the profit seeking capitalist on the one hand, or the totalitarian Marxist state on the other.

  5. pebird Says:

    Couple of observations:

    I like the profit cycle chart. Might consider adding “capital destruction” as a separate box – it is hinted at in the left yellow, “capital … is written off” – may be more powerful to see it as a standalone process.

    The reason for this suggestion is that is underlines a clear contradiction in capital illustrating inherent limits.

    Capital destruction is manifest in many forms, part of which is an intense intra-class struggle within capital to determine winner/losers. Capital destruction is far from rational – it isn’t necessarily that “unproductive” capital is destroyed, it is a political course of events.

    Being a political process, destruction has been accomplished through war, prolonged deterioration, planned razing (knocking down housing, etc.), mergers plus closing down of facilities, etc. The process takes extended time due to capital control of state, reconciling claims, settling of accounts, etc.

    Also a point on fictitious capital – typically this is thought of as claims on cash streams (capitalized flows) as opposed to the “base money” used to represent productive capacity. Note that fictitious capital is absolutely required for capital to function. Of course, we see speculative forms that are clearly fraudulent; but we should note that many specific speculative forms will end up realized through a crisis while significant tangible capital will be eliminated. Again, a function of politics and inherent capital contradictions.

    We can conceive that fictitious capital along with “non-fictitious” financial forms are commingled; there is no way to pull them apart. Or we can think of fictitious capital not as a thing, but a process – basically leverage, the ability to take an existing value stream to create a temporary derivation – a timed claim on future value. This process of capitalization – at the heart of capital functioning – is absolutely necessary. During the normal/typical reproduction process, at some point additional money representation is needed to purchase the increased value output. During a overproduction crisis, many of these derivatives, based on expected future value streams at a specific point in time, become worthless – a manifestation of the realization crisis. The thought that fictitious capital is a cause implies “if we could just get rid of that ugly old fictitious capital …” Of course this is impossible under capitalism – we must stress that fictitious capital is intimately bound with all financial forms of capital.

    Side note: We can speculate that one reason for the last 20+ years growth in the financial sector is that (due to the declining rate of profit), more precise timing/control of when to “release” money representation into the market is needed – requiring ever more complex derivatives and timing. Simply speaking, if there was enough profit to go around, why would capital need this complexity? All of this convolution creates fragility – and a long time for capital to return to some type of normal reproduction after a crisis. This is why the Keynesian/MMT “if the government would just spend more” is impossible, not because it would not work, but it is unrealistic under capitalism – capital can’t allow more money representation in circulation because the increment already added prior to the crisis is still awaiting realization (of a gain or a loss).

  6. Marko Says:

    “Simply speaking, if there was enough profit to go around, why would capital need this complexity? ”

    I’m trying to imagine a capitalist – any capitalist , at any time – saying : ” There’s enough profit to go around. We’re good. ”

    I can’t do it.

  7. pebird Says:

    Apologize for the flippant language – point being that a decrease in profit rate generates more stress on capital, resulting in a desire to increase control of the value realization cycle.

    If profit rates were not declining, we might see more of an expansion in the industrial sector. The assumption of course is that the financial sector does not increase value, but does redistribute (as well as extract value from other sectors, such as public assets).

  8. Charles A. Says:

    The rate of profit falls because constant capital piles up faster than surplus value increases. Is there any evidence that the Dutch economy of the 1630s had significant and increasing constant capital? If not, tulip mania would testify to the possibility of financial crashes without constant capital — or paper capital counts in the rate of profit and such capital can balloon for reasons unrelated to the labor theory of value.

  9. pebird Says:

    Sorry if I was unclear – of course, the rate of profit has a tendency to fall due to the rising organic composition of capital, associated with an inability to increase exploitation and/or find new sources of human labor time.

    But are you are saying that the production of value, circulation of value and the realization of value in capitalism are not intimately linked, such that a prolonged decline in profit rate is manifest via financial crises?

  10. matthewrusso9 Says:

    The end of the Long Depression in the 1890’s may not have been ended by the results of a world war, but part of the resolution of that depression involved a massive arms race by all of the capitalist powers that eventually led to such a war.

    The main problem with long-run cyclical theories such as those of Kondratiev or Schumpeter (creative destruction) is that they run into the reality that capitalism is a historical system, making the abstraction of long-run cycles problematic to say the least. So it is not too surprising that capitalism at an earlier date (1890’s) was able to restart accumulation without an all out war to destroy capital values, as there was relatively less to destroy, a greater non-capitalist space still to open up to future extensive accumulation, etc, in comparison to the 1930s-40’s.

    The post-WW2 “solution” was a turn towards intensive accumulation within the US led Triad, one conditioned in no small part by the revolutionary aftermath of 1917 and the collapse of the old colonial empires. That in turn has saddled us with a truly massive accumulation of “dead” capital of historic proportions, in a situation where the means of destruction have reached the point where all out war would leave no state survivors to reorganize capitalism, while the working class struggle has gone into retreat. So the problem has not been overcome with the relative ease of the 1890’s; even the destruction of once-great industrial centers such as Detroit – certainly looking as if it HAD been bombed out in a war! – has not been enough to overcome the TRPF in the long run, in the face of the rapid advance of accumulation in China, etc., that has far outstripped the devaluation process in the Triad countries, one that has had to occur over long periods of time in any case, due to the conditions mentioned above.

    So as the Detroits of the world show, it is indeed possible to conduct fairly massive devaluations without resort to all out war in the Triad – but how much time is required? Is that knowable in purely economic terms?

    Unlike the relation between the standard capitalist business cycle and the TRPF, one that is generally repeatable and predictable, long-run turns in the trajectory of capitalist accumulation cannot be abstracted from general historical events, and it cannot be determined in advance, at a high level of abstraction, how the situation of accumulation will “turn”, or even if, at this late stage in the historical existence of capitalism, *it can ever be turned* under present conditions. It has already been demonstrated on the world scale that new accumulations of capital appear faster than the old can be devalued. This has really been a new wave of *extensive* accumulation into the BRICs, former Soviet Bloc, etc., a la the 1890’s. The solution to the FROP in core countries is a higher ROP in peripheral countries – that was the role the US itself played back then. We may already be on the cusp where this current “extensive reserve” is effectively used up. The only alternative will be a turn toward a new wave of intensive accumulation in the Triad countries that expands the internal reserve labor army, including the “disguised” reserves, a process that already has been underway since the 1980’s, and that now shows signs of intensification since the process begun in the 80’s hasn’t been enough. This latter process will overtake the current wave of extensive accumulation; indeed it will take hold also in the countries of extensive accumulation such as China.

    What this analysis implies is that there are no “long wave cycles” of predictable historical duration that can be determined at any level of abstraction from a historical material analysis.

  11. Boffy Says:

    Its impossible for this to be a Kondratiev Winter, because the the K-Wave last for a minimum of 40 years, and maximum of sixty, with the average wave being around 50-54. Kondratiev’s analysis was validated by the Long Wave that began in 1949, and ended in 1974. The next upswing began on schedule in 1999, as the data on global trade and growth from that time on demonstrate.

    The current period is one of Kondratiev boom. The Spring Phase ended around 2012, and we are now in the Summer Phase, represented by continuing strong growth, but a slowing or declining rate of profit, as the benefits of productivity growth that fuelled the massive rise in the rate and volume of profit of the last 30 years, unwind.

    That falling rate of profit, whilst capital is led to invest more – for example in China, in Africa etc. is why global interest rates have begun to rise as the supply of potential money capital (profits) decline relative to the demand for that money capital.

  12. Boffy Says:

    “Being a political process, destruction has been accomplished through war, prolonged deterioration, planned razing (knocking down housing, etc.), mergers plus closing down of facilities, etc. The process takes extended time due to capital control of state, reconciling claims, settling of accounts, etc.”

    Besides the fact that houses are mere commodities not capital, Marx makes clear that the physical destruction of capital, by wars etc. plays no beneficial role in raising the rate of profit. How could it. If it no longer exists, the surplus value it would otherwise have helped produce is no longer produced!

    Marx makes clear in his analysis of the causes of crisis – and again in none of that analysis does Marx say that the tendency for the rate of profit to fall plays any part – that it is the destruction of capital value NOT the physical destruction of capital that facilitates the rise in the rate of profit.

    He says,

    “When speaking of the destruction of capital through crises, one must distinguish between two factors.” (TOSV2 p 495)

    One is the form of physical destruction described above, and Marx goes on to say that this is not beneficial, because having been physically destroyed, it can no longer act as capital, can no longer, therefore, extract surplus value from labour, but it is the second form, the destruction of its value that is beneficial for capital.

    “A large part of the nominal capital of the society, i.e., of the exchange-value of the existing capital, is once for all destroyed, although this very destruction, since it does not affect the use-value, may very much expedite the new reproduction.” (TOSV2 p 496)

    In other words its precisely because it is the value not the USE VALUE that is destroyed that facilitates the rise in the rate of profit.

  13. sartesian Says:

    As in his earlier claim that “value” is “eternal” or exists as the governing principle for social production, pre and post capitalism, or in his “welcoming of capitalist growth” or in his claim that the Eurozone prior to 2013 was experiencing strong growth, Boffy once again creates a fantasy capitalism where accumulation is the best of all possible worlds, and the nasty bits.. well those are the result of misguided political programs.

    Sure thing, Boffy argues– destroying the means of production– as values can’t possibly assist the process of accumulation because all the surplus value that those means WOULD aggrandize won’t be aggrandized.. Sure thing except what matters is the relations, the ratio, the proportions involved in the exchange between the means of production as values, as commodities, as value aggrandizing, and wage labor as valule producing. So…if destroying the means of production, and the living labor engaged in the recapturing and expansion of those values restores the ability of capital to exploit labor at an intensity sufficient to increase the rate of profitability………guess what? Capital is destroyed.

    So…….when those means of production are overproduced NOT as use values but AS COMMODITIES– as value aggrandizing– yes indeed it is A NECESSITY for capital to devalue the already existing accumulated values in order to pursue accumulation. Hence the cycle of expansion and contraction.

    The thing, or relation, in this trick bag is that the bourgeoisie cannot destroy or devalue the accumulated values, the means of production as values, without destroying also their use value– hence farmers dump milk in the gutters; airplanes get parked in the desert; crude oil tankers are used as floating warehouses; factories are mothballed and scrapped… or asset-stripped and liquidated through leveraged buy outs– and when all that proves inadequate– well there’s the ever popular use of arson– torch the building to get the insurance money. On a grand scale, war is just that social arson.

    Arguing that destroying capital is not beneficial because it no longer aggrandize surplus value is like arguing that unemployment is not beneficial because those non-workers don’t produce surplus value– ignoring the fact, the relation, that unemployment is essential to the organization of labor power as wage-labor, as a commodity in the first place.

    • Boffy Says:

      You can of course argue those positions if you like, though much of it is just waffle. What you can’t do is pass it off as in any way Marxist, or based on what Marx and Engels write.

      • sartesian Says:

        The question is not if it is what Marx and Engels wrote. This issue if this is actually how capital functions.

        You, on the other hand, are The Great Pretender about capitalism– like the eurozone was experiencing strong growth, like the EU has a trade surplus with China, like 2008 was simply a financial crisis exacerbated by wrong political policies. Care to comment on the factual nature of those assertions which you deploy to bolster your nonsense theories of capitalist growth?

        You keep pretending that destruction of the means of production can’t be of inherent, or essential, or necessary, to capitalist accumulation, because look at all the surplus value that won’t be extracted. As I said, you might as well argue the same thing about unemployment.

        That’s what you call verbatim Marxism. In reality, you just make these things up to support your cheerleading for “capitalist growth.”

  14. duvinrouge Says:

    I think the best comment here is made by ‘Charles A’.
    If Tulip Mania isn’t explained by an increase in the organic composition of capital, then the religious adherents of the falling rate of profit theory need to acknowledge something else is going on.

    That financial speculation (based upon credit money/leverage) can occur without increases in the organic composition of capital.

    The theory of overproduction, whereby aggregate prices exceed aggregate values due to excessive credit money. Profit rates are artifically boosted only to collapse once the financial panic turns into recession.
    The falling rate of profit is much more likely to operate on a longer time scale & an upturn isn’t guaranteed as it relies upon science & technology finding a more productive basis for production.

  15. Boffy Says:

    You can only believe that “aggregate prices exceed aggregate values”, if you reject the Labour Theory of Value, because both values and market prices are measured by the equivalent form of value “money”, and all that money tokens do, as Marx sets out – whether those tokens are paper notes, coins or credit money, is to change the nominal measurement.

    If credit money devalues the rate of exchange by creating more money tokens in circulation than the money it represents, then this affects the monetary expression of values in equal measure to the monetary expression of values.

    Marx deals in Theories of Value 2, with this false notion credit money can be a cause of crisis at the same time as dealing with the false notion that credit money or money tokens can in any way change the real value relations, and their extension into prices of production compared to simply conducting that analysis on the basis of a money commodity. It simply mystifies the actual relations, and thereby acts as a convenient method for bourgeois economists to deny overproduction as a natural consequence of capitalist production.

  16. Luka Astral Lujan Says:

    Marx’s law of profitability and all ideas about falling profit rates are just fine.

    BUT… Why profit rates are falling ? We got no answer here😉.
    There is an answer why profit rates falling. Reason for that are two main variables; demographics and energy.

    Demographics ; average people on the western world are getting older and older. That means that we will have increased costs of pensions, health care, social security and in the same time less workers to cover all those costs. If the government want to sustain standard of living they have to borrow money (deficit, debt) or raise the taxes. In both ways we can not stop inevitable – falling profit rates and potential recession ;

    And energy – or resources;

    Energy Return on Energy Invested(EREI) -energy extracted versus the energy consumed in the extraction process. EREI is falling too – to extract one barrel of oil we have to invest more and more energy.

    Also raising of global powers like China and rest of Asia (about 3.5 billion of people – much more than 300 million people in USA +700 million of people in Europe and Russia) -when they grow – they consume more and more resources – oil, coal, food, concrete, iron, steel, water – just name it.

    Combine those two variables and you will get an answer why we have recession; – or we don’t have space and resources to sustain our growth rates.

    We need new technological threshold;

  17. Mike Ballard Says:

    A communist State is a contradiction in terms.

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