Is inequality the cause of capitalist crises?

Is inequality the cause of crises (slumps) under capitalism?  Well, the majority of the left seems to think so.  I have discussed this explanation several times on my blog (

US inequality

It remains the dominant view not only of left economists of the Keynesian or post-Keynesian variety (too many to mention), but also of Marxists like Richard Wolf or Costas Lapavitsas and even some mainstream Nobel prize winners like Joseph Stiglitz (in his book The price of inequality) or the current head of the Indian central bank, Raghuram Rajan (as in his book, Faultlines).  And there have been a host of books arguing that inequality is the cause of all our problems – The Spirit Level by Kate Pickett and Richard Wilkinson being one that’s very popular.  The varied views on this issue were summed up in a compendium, Income inequality as a cause of the Great Recession (

But what has really excited the inequality proponents is a new paper by the some IMF economists who purport to show that the sharp rise in inequality of income and wealth in most mature capitalist economies since the 1980s is not only a bad moral thing, it’s bad economics too.  The IMF paper (, authored by Jonathan Ostry, deputy head of the IMF’s research department, and the economists Andrew Berg and Charalambos Tsangarides, found not only that inequality is bad for economic growth but that redistribution of wealth does little to harm it.  Thus it refutes the ‘trickle-down’ theory on growth and inequality propounded by neoclassical apologists for capitalism that a free market would speed up economic growth and thus everybody would gain.  As the rich prospered, their gains would trickle down to the less rich through more jobs, more spending by the rich etc.  The IMF paper concluded: “It would… be a mistake to focus on growth and let inequality take care of itself, not only because inequality may be ethically undesirable but also because the resulting growth may be low and unsustainable,”

This is not a new conclusion because the two eminent economists on inequality in capitalist economies (as well as Anthony Atkinson – see my post,
Emmanuel Saez and Thomas Piketty explained: “countries that [have] made large cuts in top tax rates, such as the United Kingdom or the United States, have not grown significantly faster than countries that did not, such as Germany or Denmark… we have seen decades of increasing income concentration that have brought about mediocre growth since the 1970s.”

Leftist Democrat, Robert Reich wrote a book, Aftershock, which also lays the blame for crises at the door of inequality.  He blogs regularly against capitalist excesses and Republican apologia for capitalism adopted the same conclusion as The Spirit Level authors: “The rich do better with a smaller share of a rapidly-growing economy than they do with a large share of an economy that’s barely growing at all…Higher taxes on the wealthy to finance public investments improve future productivity… All of us gain from these investments, including the wealthy. Broadly-shared prosperity isn’t just compatible with a healthy economy that benefits everyone — it’s essential to it.  That isn’t crazy left-wing talk. It’s common sense. And it is shared by the great majority of people.

And behind this conclusion is a theoretical analysis that the Great Recession was ultimately the result of rising inequality in the US and elsewhere.  The argument goes that the great financial crisis was caused by debt – mostly in the private sector.  As wages were held down in the US, households were forced to borrow more to get mortgages to buy homes or loans to buy cars and maintain their standard of living.  They were encouraged to do so by reckless lending from banks even to ‘sub-prime’ borrowers.  And as we know, eventually the sheer weight of this debt could not be supported by rising home prices or by the chicken legs of average incomes and the whole house of cards eventually came tumbling down.

The credit crunch, the banking collapse and the Great Recession had nothing to do with the classic Marxist explanation of the downward pressure on profitability.  It was down to the rapacious speculative lending of the too-big-to-fail banks – the explanation that Marxist Costas Lapavitsas has expounded in his new book (Profiting without producing) – see my post ( and Tony Norfield’s devastating review of Lapavitsas’ book (

The argument that inequality causes capitalist crises has been developed more theoretically by leading post-Keynesian economist Engelbert Stockhammer from Kingston University, UK in a new paper in the Cambridge Journal of Economics entitled Rising inequality as a cause of the present crisis (Stockhammer on inequality).

For those who don’t know, ‘post-Keynesian’ economists are those who reckon that Keynes developed a really radical analysis of capitalism.   They rely on the work of Michel Kalecki, a Marxist economist who developed a Keynesaan-style analysis that ignored Marx’s law of value and profitability.  The post Keynesians look for the cause of crises under capitalism in a lack of demand arising from a squeeze on wages and a lack of investment.

Stockhammer argues that the economic imbalances that caused the present crisis should be thought of as the outcome of the interaction of the effects of financial deregulation with the macroeconomic effects of rising inequality. In this sense, rising inequality should be regarded as a root cause of the present crisis. Rising inequality creates a downwards pressure on aggregate demand since poorer income groups have high marginal propensities to consume. Higher inequality has led to higher household debt as working-class families have tried to keep up with social consumption norms despite stagnating or falling real wages, while rising inequality has increased the propensity to speculate as richer households tend to hold riskier financial assets than other groups.

For Stockhammer, capitalist economies are either ‘wage-led’ or ‘profit-led’.  A wage-led demand regime is one where an increase in the wage share leads to higher aggregate demand, which will occur if the positive consumption effect is larger than the negative investment effect. A profit-led demand regime is one where an increase the wage share has a negative effect on aggregate demand.  The post-Keynesians reckon that capitalist economies are wage-led.  So when there is a decline in the wage share as there has been since the 1980s, it reduces aggregate demand in a capitalist economy and thus eventually causes a slump.  The banking sector increases the risk of this with its speculative activities

The problem I have with this post-Keynesian hypothesis is manifold.  First, surely, no one is claiming the simultaneous international slump of 1974-5 was due to a lack of wages or rising debt or banking speculation?  Or that the deep global slump of 1980-2 can be laid at the door of low wages or household debt?  Every Marxist economist reckons that the cause of those slumps can be found in the dramatic decline in the profitability of capital from the heights of the mid-1960s; and even mainstream economists look for explanations in rising oil prices or technological slowdown.  Nobody reckons the cause was low wages or rising inequality.

I suppose Stockhammer would say that in the 1970s, capitalist economies were ‘profit-led’ but now they are ‘wage-led’; so each crisis has a different cause.  As the title of his paper says “inequality as the cause of the present crisis”.  But how did a profit-led capitalist economy become a ‘wage-led’ one?  Yes, wages were held down and profits rose.  But why?  Surely the answer lies is the attempts of the strategists of capital to raise the rate of exploitation as a counteracting factor to the fall in profitability – the classic Marxist explanation.  Rising inequality is really the product of the successful attempt to raise profitability during the 1980s and 1990s by raising the rate of surplus value through unemployment, demolishing labour rights, shackling the trade unions, privatising state assets, ‘freeing’ up product markets, deregulating industry, reducing corporate tax etc – in other words, the neo-liberal agenda.  As Maria Ivanova has pointed out, rising inequalitywas really a side effect of financialisation (CONF_2011_Maria_Ivanova on Marx, Minsky and the GR).

Indeed, the empirical evidence for a causal connection between inequality and crises remains questionable. Michael Bordo and Christopher Meissner from the Bank of International Settlements analysed the data and concluded that inequality does not seem to be the reason for a crisis. Credit booms mostly lead to financial crises, but inequality does not necessarily lead to credit booms.  “Our paper looks for empirical evidence for the recent Kumhof/Rancière hypothesis attributing the US subprime mortgage crisis to rising inequality, redistributive government housing policy and a credit boom. Using data from a panel of 14 countries for over 120 years, we find strong evidence linking credit booms to banking crises, but no evidence that rising income concentration was a significant determinant of credit booms. Narrative evidence on the US experience in the 1920s, and that of other countries, casts further doubt on the role of rising inequality.

Edward Glaesar also points to research on the US economy that home prices in various parts of the US did not always increase where there was the most income inequality. That calls into question the claim that income inequality was inflating the housing bubble.  And Glaesar refers to Atkinson on this:“Professors Atkinson and Morelli’s international data also suggest little regular connection between inequality and crises. Looking at 25 countries over a century, they find ten cases where crises were preceded by rising inequality and seven where crises were preceded by declining inequality”. Inequality was higher in two of the six cases where a crisis is identified, which is exactly the same proportion as among the 15 cases where no crisis is identified.

As I have mentioned above (and in previous post (, French economist Thomas Piketty is one of the leading experts on the rise in inequality of income and wealth in the major economies.  His magisterial new book, Capital in the 21st century, describes the huge rise in the share of income and wealth held by the top 1%.

But actually, Piketty’s explanation for this does not fit in with the post-Keynesian inequality theory.  Piketty shows that the main reason for the huge increase in the incomes and wealth of the top 1% is not higher incomes from wages or work as such, but huge increases in capital income, namely rising dividends from shares, capital gains from buying and selling shares, rents from property and capital gains from buying and selling property and interest from loans and bond holdings etc.  In other words, rising inequality is the result of rising exploitation of labour’s creation of value that has been appropriated by the top bankers, corporate chief executives and the shareholders of capital.  Rising inequality is a product of capitalist exploitation.

In his book, Piketty promotes a bastardised neoclassical version of Marx’s profitability law by suggesting that this rise in capital income has diminishing returns and will eventually push capitalism into stagnation.  That’s because the owners of capital will consume more and more of a declining rate of growth so that investment and technology will stagnate.  So capitalism will have to reduce inequality to survive.  This ought to appeal to the inequality proponents because it suggests that reducing inequality is in the interests of capitalism itself.  Blogger Steve Roth concludes that Keynes had found the answer to the pessimism of Piketty.  Keynes’s great contribution was to ‘save capitalism from the capitalists’ by explaining that with some judicious government policy and more equality of incomes, capitalism would perform better and all would be well.

The reformist critics of Piketty make the point that “a majority, of corporate profit hinges on rules and regulations that could in principle be altered”.  After all “progressive change advanced by getting some segment of capitalists to side with progressives against retrograde sectors. In the current context this likely means getting large segments of the business community to beat up on financial capital”.   Dean Baker, who is a regular speaker at trade union seminars in the UK and the US and is seen as a leading exponent of the alternative to neoliberal policies of austerity by left leaders, reckons that Piketty gets this wrong in the same way as Marx did (points out where Marx got it wrong).  Baker says: “By changing our institutions, laws, and regulations — the rules of the capitalist game — we can head off that seemingly inevitable downward spiral.”

There are so many objections to this line of thinking that it is difficult to know where to start.  But let’s go back to the IMF paper.  It argued that inequality could be damaging the capitalist economy and moreover more equality would not worsen things.  But the paper’s evidence did not show that more equality under capitalism would speed up economic growth or even make the average household better off.  You see, redistributing the income captured by the owners of capital from the sellers of labour power through more taxes and/or higher benefit etc may make little difference to improving investment, getting more jobs or developing new technology.

And would it in any way start to deal with the impending disaster that is global warming as capitalism accumulates rapaciously without any regard for the planet’s resources and viability?  Programmes of redistribution do little for this.  And what if an economy is made more equal?  Would it stop future slumps under capitalism or future Great Recessions.  More equal economies in the past did not avoid these slumps.

Then there is the political issue:  what on earth would make the top 1% and the very rich owners of capital agree to reduce their gains in order to get a more equal and successful economy? Stockhammer says that “a broad consensus exists that financial reform is necessary to avert similar crises in the future (even if little has yet changed in the regulation of financial markets). The analysis here highlights that income distribution will have to be a central consideration in policies dealing with domestic and international macroeconomic stabilisation. The avoidance of crises similar to the recent one and the generation of stable growth regimes will involve simultaneous consideration of income and wealth distribution, financial regulation and aggregate demand” But what political chance is there of that?

As arch-Keynesian economist Simon Wren-Lewis recognised on his blog: “reversing inequality directly threatens the interests of most of those who wield political influence, so it is much less clear how you overcome this political hurdle to reverse the growth in inequality”.
(  For example, what chance is there, short of revolution, that Greek capitalists, desperate to raise profitability and reduce the costs of welfare and wages, would see the light and ‘save themselves’ by reducing, rather than increasing inequality?  More inequality is a rational response to capitalist crisis.

But it is not just the political obstacle that makes the inequality theory the wrong way to approach a critique of capitalism.  It is not a coherent explanation.  It appears to apply to just the current crisis and not to previous ones.  It appears to apply to just some capitalist economies, like the US and the UK and not to Europe or Japan, where inequality is less but the global crisis is worse.

And if Marx is right, then capitalism is stuck with a low and/or falling rate of return on capital over time, so crises under capitalism will reoccur even if inequality is reduced.  So maybe the inequality theorists need to look elsewhere for the cause of capitalist crises – and look at the ownership of production, not the distribution of the value created.

I ask the question to the proponents of inequality: do they think that redistributing income or wealth is sufficient to put capitalism on the road to growth without catastrophic slumps?  Or do they agree that only replacing the capitalist mode of production through the expropriation of the owners of capital and the establishment of a planned economy based on ownership in common can do the trick?

I think I know their answers.


There is a very interesting interview with Thomas Piketty at Economix  (, the New York Times blog in which he clarifies his arguments on inequality and growth.   In particular, he differs from Marx’s view that there is a tendency for the rate of return on capital to decline over time.  Instead, he reckons that the return on capital will stay high and outstrip growth and this cause even more inequality.  “rates of return on capital can be 4 to 5 percent over centuries, or even higher for risky assets and high wealth portfolios. Contrarily to what Karl Marx and other believed, there is no natural reason why rates of return should fall in the long run. According to Forbes’s global billionaires list, very top wealth holders have risen at 6 to 7 percent per year over the 1987-2013 period, i.e. more than three times faster than per capita wealth and income at the world level. Wealth concentration will probably stabilize at some point, but this can happen at a very high level.”

And it could all end in tears: “The experience of Europe in the early 20th century does not lead to optimism: The democratic systems did not respond peacefully to rising inequality, which was halted only by wars and violent social conflicts. But hopefully we can do better next time. At the end of the day, it is in the common interest to find peaceful solutions. Otherwise there is a serious risk that growing parts of the public opinion turn against globalization.”

24 thoughts on “Is inequality the cause of capitalist crises?

  1. Did this current ‘crisis’ start in the US housing market? If so why did it start there?

    It isn’t reformist to suggest rising inequality results in all sorts of negative outcomes, unless you stop at that. People like Wolff most certainly do not, and suggest revolutionary ideas such as Worker Directed Enterprises etc. Wolff also discusses Piketty in a recent economic update, where he makes his position clear. I think your opening paragraphs are a bit of a distortion/caricature to be honest.

    Your last paragraph shows that you don’t really listen carefully enough to what other leftists are actually saying.

    I also think inequality is a perfectly reasonable way to discuss capitalism for anyone on the left.

    The way to overcome inequality is to build a strong labour movement, not appeal to the better nature of the global rich.

  2. Just finishing Piketty’s new book. I certainly agree with your assessment that this book is “magisterial.” He doesn’t really state in so many words why inequality might be bad for us, but I think he shares Marx’s (and your and my) disgust at the exploitation that it represents. He clearly shows how our current world is evolving back to a capital-dominated economy. His hope is for a progressive tax on capital to bring us back from this outcome. One can’t but agree with your guess that the 0.1 percent are not going to do this voluntarily.

    He briefly discusses climate change towards the end of the book and favors Lord Stern’s approach of an immediate expenditure of 5 percent of world GDP on sustainable energy production. But again, there is no practical advice on how to do this. You are totally right that climate disaster seems to be a logical outcome of continuing capitalistic exploitation of our global commons. There is no institution keeping capitalists from making profits out of discharging pollution (CO2 and other forms) into our commons. Until there is, they will continue to pursue their private profit (and fund propaganda to fool the publc). And Adam Smith was wrong here. This isn’t good for us. The elites really don’t care about the long-term and they really are taking us down paths that lead to climate disaster.

    But isn’t your prescription of public ownership and global planning equally empty? What is to be done? We on the left seem to dissolve into silence in the face of Lenin’s question. What possible sequence of actions could cause this to take place? Piketty shows that it took revolution and war to cause a collapse of capital and deliver a more equitable society for a brief period up to 1980. Piketty shows that as long as the return on capital (r) is greater than the productivity growth rate (g), capital will accumulate and inequality will grow. Not exactly the same prescription as Marx, but similar. So exactly how do we make sure that r comes back to the rest of us? How do we institute that public ownership and global planning today?

    1. “Piketty shows that it took revolution and war to cause a collapse of capital and deliver a more equitable society for a brief period up to 1980.”

      Huh? What collapse of capital? There was no collapse of capital after WW2; there was a recovering in profit rates (eminently capitalist, no?) higher rates of capital growth (note the word “capital”), wage increases (wage is another eminently capitalist category). What collapse of capital between 1945 and 1980?

      You think that because there was a labor government in the UK, there was a collapse of capital? Because social democrats were in power somewhere(s) in Europe capital collapsed?

      Think you got your eras mixed up– the period before WW2, the Great Depression comes closest to a description that includes the “collapse of capital.”

      Inequality grows, faster or slower, even shrinks; the industrial work force shrinks, faster or slower, might even grow– so what?

      What was it Marx says (in the Grundrisse, I think)–“the price of beef be it high or low always involves the same sacrifice for the ox.” Something like that.

      How do we make sure that “r comes back to the rest of us?” We don’t, we can’t. “R” is the organization of inequality. It is the expression of the social organization of labor, the relations between classes the inequality of which in the configuration of the means of production and subsistence is source of “r.”

      The whole point is that capital, that specific social organization of labor, living and accumulated, has to be abolished.

      1. Sartesian,

        The collapse of capital took place in Britain and France during the interwar years, from roughly 1910 to 1950. The capital / income ratio went from over 700 percent of national income in 1910 to 250 percent in 1950. See Figures 3.1 and 3.2 in Piketty’s Capital. Since then it has been coming back like gangbusters. The acceleration of growth in the capital / income ratio really started in the 1970s. In the United States, the picture is a little different.The capital / income ratio actually peaked at just over 500 percent of annual income in 1930, fell to under 400 percent during the WWII years, and has been gradually rising since to almost 500 percent by 2010. The US avoided the destruction that accompanied the first world war and ended the ninteenth century with a slightly less capital-dominated world that in Europe (about 500 percent of national income by Piketty’s estimate.)

        Piketty’s (surely pretty loose) estimate of r (before tax) is that it has remained in the neighborhood of 4 to 5 percent over the last two thousand years. See Figure 10.9 in the book. Surely you don’t mean that capital needs to be abolished. Should we go back to grubbing in the woods for food? Will you throw away your internet access and return to a capital free world. The Bolshevik Revolution didn’t abolish capital, it made it public. The question, it seems, is not abolishing capital, but who owns it, no?

      2. yes, I mean exactly that– that capital, which is a specific social relation with historical limits and inadequacies is to be abolished, as is wage-labor. That’s the whole point of Marx’s critique. Less Piketty, more Marx.. but only if you want to understand capital and the necessary abolition thereof– if you want to regulate way to equality, and a kinder gentler capitalism, keep on keepin’ on.

        Oh.. point of fact: the “interwar years” are NOT 1910-1950. Interwar years would be after WW1 and before WW2– like 1918 to 1939, more or less, but that’s only for picky types who think a bit of precision is necessary in our categories.

    2. And PS: The Bolshevik revolution failed, in that it was confined to a national scale. It failed because the German revolution failed to overthrow capital, thus leaving the Russian Revolution, the product of uneven and combined development between, literally, the rock and the hard place– all dressed up with nowhere to go other than to mimic capitalism.

      We’re supposed to learn from failures not deify them.

    3. Dear Sartesian,

      It seems we need to get straight some definitions. Marx, in Chapter IV of Volume I of Capital says, “As a matter of history, capital, as opposed to landed property, invariably takes the form at first of money; it appears as moneyed wealth, as the capital of the merchant and of the userer. But we have no need to refer to the origin of capital in order to discover that the first form of appearance of capital is money. We can see it daily under our very eyes. All new capital, to commence with, comes on the stage, that is, on the market, whether of commodities, labour, or money, even in our days, in the shape of money that by a definite process has to be transformed into capital. The first distinction we notice between money that is money only, and money that is capital, is nothing more than a difference in their form of circulation.” He then goes on to the famous C-M-C and its evil siblings, M-C-M and M-C-M’. So, capital (as developed further on in Marx’s discussion) is a social relation representing the accumulation of past labor. Marx says that “the modern history of capital dates from the creation in the 16th century of a world-embracing commerce and a world-embracing market.”

      Piketty doesn’t actually seem to define capital at all. And his goal is to “regain control over capitalism” by reversing what he sees as the “arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.” I take it that these are not goals that you share.

      You say you mean exactly “that capital, which is a specific social relation with historical limits and inadequacies is to be abolished, as is wage-labor.” You say that you envision a world without wages and without capital. My definition of capital is as the natural capital and accumulated labor of the many used for production of the commodities of our world. I don’t fear a world in which some human needs are satisfied by this accumulation. The question for me (and for Piketty) is who owns the robots. I take you to be saying that the world that you envision is one without accumulation. Without accumulation of wealth, without accumulation of inequalities, but how about accumulation of wisdom, accumulation of knowledge, accumulation of tools which permit better production, communication, learning, etc? Will these be also abolished? It seems that you would be pretty alone out there in the forest defending your grub from your peers without any of these.

      Best regards,


      1. So ultimately you think the source of the 2008 contraction was that the working class couldn’t buy any more homes; take out any more loans; pay down any more mortgages?

        So again the question: if working class wages have stagnated for decades, why is capitalism cyclical? Why have there been periods of expansion and contraction during a period of overall secular decline in the rate of growth in the US economy?

        As for:
        “when the price of the commodity is held above its value for long periods of time, emptiness, the bubble occurs”— uh… not exactly and certainly not necessarily.

        When the price of the commodity holds above its value, commanding what some like to call “rent”– it can mean many different things, and not all of those things lead to a bubble or a bubble bursting– take for example oil. The last time oil’s price was actually at its “value”– its production cost was………1998 when the price dropped to $10 per barrel. Production of oil for Shell, Exxon etc. was reported in 2013 at about $9 per barrel, a mere 9% of the Brent North Sea index price.

        My only point here is that overproduction is not underconsumption; the overproduction of capital is not identical with, translatable into, or even co-incident with working class “under consumption.” If that were the case we, for one, would never be able to explain capital’s cyclicality; and for two, would never explain how capital ever got off the ground since it requires, its very basis is that the workers are not paid enough to buy back all their product.

      2. Randal,

        You need to distinguish between “historical form” i.e. appearance, and definition or essence, or not to put too fine a point on it– the determinant of capital.

        As Marx makes clear from page 1 of volume 1 of Capital, as he made clear in the Grundrisse, and the entire Economic Manuscripts 1857-1864, capital is but a specific social relation, a product of certain class relations, of labor organized and forced to present itself as a commodity, as value producing values.

        Historical appearances are not determinants, and for Marx, the determinant of capital is its negation, which is wage-labor. The very configuration of labor power as and for value production is what leads to the breakdown of capital accumulation.

        There is no such thing as “natural capital.” What would make anything natural a “capital”– it’s ability to command the labor of others, the labor power of others, and abrogate the product of that labor power through private ownership and exchange.

        A waterfall isn’t capital– somebody owning a waterfall, and using it to run a mill to employ the labor of others to grind grain, is engaged in a social relation that makes a natural resource appear as capital.

        Nobody said anything against accumulated wealth– but capital is only wealth under definite conditions, with definite limitations to the expansion of wealth.

        As for wealth itself– Marx has two critical definitions of wealth, and he does not conflate them with capital. One definition is the expansion of material goods to satisfy human needs. The other is “the disposition over time”– the ability to organize social labor time.

        All societies do both, but capitalism does it according to laws of value production.

        Marx remarks that all economy is the economy of time. Indeed that’s correct. But not all economy of time is the economy of value accumulation.

  3. “Did this current ‘crisis’ start in the US housing market?”

    Short answer: While the current predicament appears to start in the housing markets, appearance is not cause.

    Longer answer

    You need to ask, why did US banks shift their portfolios from the previous long running mix of 50% commercial/industrial loans 50% consumer loans to the a mix of more than 70% consumer loans, less than 30% commercial/loans.

    You need to look at the “recovery” of 2004-2007 and see what volumes and rates profits were being generated by industry, how they were generated by industry, and how they were distributed among the capitalists. I believe in 2007 (or maybe 2006), the oil majors participating in the US Federal Reporting System alone accounted for 35% of the total profit of the companies in the S&P non-financial index.

    The ground of “equality” has been covered before; this nonsense of “good” capital vs. “bad” capital; of “productive” capital vs. financial “parasitic” capital gets trotted out as part of the “left’s” frantic efforts to recuperate for capitalism what capitalism is busy demolishing– the nostalgia for “re-regulation;” which of course replaces and competes with the other wing of capitalist recuperation– the nostalgia for the “golden age” of laissez-faire.

    Real life, and real anti-capitalist struggle is elsewhere.

    1. “You need to ask, why did US banks shift their portfolios from the previous long running mix of 50% commercial/industrial loans 50% consumer loans to the a mix of more than 70% consumer loans, less than 30% commercial/loans.”

      I bow to your greater knowledge here but if that was the case then didn’t this shift make inequality a potential source of crisis?

  4. I agree that the rate of profit problem was dealt with by holding real U.S. wages at the level they were in ’72. Profits went up as real productivity increased. While real productivity increased, sales increased to the mass market especially in the housing market was manipulated by the real estate industry to decrease needed market supply in certain areas, e.g. the SF Bay Area, as demand increased with population increase. And that led to empty profits based on speculative credit bubble blowing. The mass market, the public, the working class bought more FIRE commodities than their real wages could sustain. These empty FIRE profits collapsed in the GFC bubble burst and are now being recouped via austerity measures meant to pay back FIRE bond holders i.e. the banks in real value i.e. out the workers’ standard of living.

    At least, that’s how I see it.

    1. So if the profits were empty, and were always empty, why is capital cyclical? Why do the bubbles burst when they do, in 2008 as opposed to 2006, or 2005?

      Not big enough? OK, how do we know when they are big enough, and stating we know that when the burst won’t exactly shed any light on the problem.

      Others to the contrary notwithstanding, 1848, 1857, 2008 were not caused by financial crises, “bursting bubbles,” were not a a product of excessive exuberance, or working class overbuying or underbuying of commodities.

      1. Sartesian,

        I confess that your 1:52 am reply above doesn’t mean very much to me, although I appreciate the somewhat less hyperventilated tone. You had said earlier that “capital . . . is to be abolished.” As I have tried to explain, I understand capital as accumulated labor used for production of commodities. I think of it as the same as “infrastructure”: houses, factories, and public and privately owned and durable things like libraries, universities, and public meeting halls as well as money, of course, which could be used to build or purchase more of the same. I think it is absurd to say that this “is to be abolished.” In your recent reply, I don’t see how you return to this. Aside from Marxian exegisis, what are you saying on this topic?

        By the way, in answer to Michael’s blog post question, I certainly don’t think that inequality is the cause of capitalist crises. Capitalism is the cause of capitalist crises.

        It seems that, based on the definitions that I have tried to lay out, you are talking about “capitalism” and I am talking about capital infrastructure. You want to abolish capitalism. Fine, I wonder how you will do that. But if you really want to abolish capital infrastructure, I could never agree.

        I accept your point about “natural capital”, by the way. Not well thought out.



      2. The totality of profits are not empty, just the bubble part. BTW, with regard to the price of oil, there you had another example of price being shoved way up over value but the circumstances were different in that the supply of the natural resource was being controlled by a group called OPEC.

        All this price over value shows up in currencies and in fact, the purported exchange-value of the USD was at the root of the 70s energy crisis as oil producing States were demanding the actual gold (pegged at $32 an ounce) the USD’s exchange-value was officially tied to. When Nixon closed the gold window and floated the USD, gold’s price in USD shot up more accurately reflecting the value of the USD.

        Capitalist cycles of boom and bust still happened in any event, as you point out.

  5. The exchange-value of a commodity is based on the amount of socially necessary labour time embodied within it whether it be a good or a service. The price of a commodity usually fluctuates with supply and demand around its exchange-value. When the price of a commodity is held above its value for long periods of time, emptiness, the bubble occurs. The ‘excessive exuberance’ of the capitalist class for quick profit is excited and the working class, whose real wages have stagnated for decades, take out loans to pay for commodities which have prices that do not reflect their exchange-values.

  6. In addition to artificial restriction of housing supply, a more important factor was the banking con game of luring long-time renters to purchase houses they could not afford. Far beyond the number-crunching of bookkeepers was the essential component of fraud that economists don’t like to examine.

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