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.
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.
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.