David Harvey, Piketty and the central contradiction of capitalism

David Harvey is the well-known Marxist Professor of Anthropology and Geography at the Graduate Center of the City University of New York.  Harvey has a new book out and has also reviewed Thomas Piketty’s (http://davidharvey.org/2014/05/afterthoughts-pikettys-capital/).  Harvey is pretty critical of Piketty’s book.  Harvey recognises that Piketty provides powerful data on the inequality of wealth and income in the major capitalist economies since the capitalism became the dominant mode of production and social relations from about 1750.  “What Piketty does show statistically (and we should be indebted to him and his colleagues for this) is that capital has tended throughout its history to produce ever-greater levels of inequality. This is, for many of us, hardly news. It was, moreover, exactly Marx’s theoretical conclusion in Volume One of his version of Capital.”

But, as Harvey says, Piketty says nothing about recurrent crises of production and investment in capitalism.  Piketty “does not tell us why the crash of 2008 occurred and why it is taking so long for so many people to get out from under the dual burdens of prolonged unemployment and millions of houses lost to foreclosure. It does not help us understand why growth is currently so sluggish in the US as opposed to China and why Europe is locked down in a politics of austerity and an economy of stagnation. “

Then Harvey tells us that all Piketty had to do was read Marx (which, as I have pointed out before, he did not do –
If he had, says Harvey, he would have found in “Volume 2 of Marx’s Capital (which Piketty also has not read even as he cheerfully dismisses it) Marx pointed out that capital’s penchant for driving wages down would at some point restrict the capacity of the market to absorb capital’s product.”

So Harvey says the explanation of crises in capitalism is to be found in Marx’s Capital Volume 2 and not in Volume 1 or 3.  Actually, there is no explanation of recurrent crises of capitalism to be found in Volume 2.  It is mostly in Volume 3 with Marx’s outlining of the law of the tendency of the rate of profit to fall and its countertendencies.

Harvey’s ‘underconsumption’ alternative explanation is not new from him (see my post on Harvey back in 2011,
and also see Paul Mattick Jnr’s excellent critique of Harvey’s work, mattick on harvey).  But it is not Marx’s explanation.

In his new book, which looks well worth reading (http://davidharvey.org/2014/03/new-book-seventeen-contradictions-end-capitalism/) – I have not read it yet – Harvey outlines what he sees as “the contradictions at the heart of capitalism – its drive, for example, to accumulate capital beyond the means of investing it, its imperative to use the cheapest methods of production that leads to consumers with no means of consumption…”

Indeed, Harvey’s position is that Marx’s law of profitability is irrelevant to an explanation of crises.  It leads him to argue that the neo-liberal drive to raise profits from the 1980s was not “dictated by any mathematical law” (presumably meaning Marx’s law of profitability).  He quotes Alan Budd, an economic advisor to Margaret Thatcher who confessed in ‘an unguarded moment’ that the anti-inflation policies of the 1980s turned out to be “a very good way to raise unemployment, and raising unemployment was an extremely desirable way of reducing the strength of the working classes…what was engineered there in Marxist terms was a crisis of capitalism which recreated a reserve army of labour and has allowed capitalists to make high profits ever since.” (Budd).  This quote actually suggests to me that the neo-liberal agenda was very much to restore profitability that had reached post-war lows by the late 1970s.  But apparently, according to Harvey, the deep double-dip recession of the early 1980s that devalued and destroyed capital and restored profitability had nothing to do with it.  Instead “it was all about politics”.  

Harvey criticises Piketty for failing to observe that the squeeze on wage share and the potential ‘underconsumption’ that it could create was overcome by a massive rise in household debt: “where is the demand? Piketty systematically ignores this question. The 1990s fudged the answer by a vast expansion of credit, including the extension of mortgage finance into sub-prime markets. But the resultant asset bubble was bound to go pop as it did in 2007-8 bringing down Lehman Brothers and the credit system with it.”  Thus crises are a product of a lack of demand.  Credit bubbles can compensate, but only for a while.

Harvey makes the point that “Crises are not singular events. While they have their obvious triggers, the tectonic shifts they represent take many years to work out…With the benefit of hindsight it is not hard to spot abundant signs of problems to come well before a crisis explodes into full view.”  But for him, the signs of crises are to be found not in any movement in profitability but in credit, because “the debt-saturated and increasingly deregulated global financialisation that began in the 1980s as a way to solve conflicts with labour by facilitating geographical mobility and dispersal produced its denouement in the fall of the investment bank of Lehman Brothers on 15 September 2008”.
Harvey correctly identifies Piketty’s key failing as a “mistaken definition of capital. Capital is a process not a thing. It is a process of circulation in which money is used to make more money often, but not exclusively, through the exploitation of labor power. The whole of neo-classical economic thought (which is the basis of Piketty’s thinking) is founded on a tautology. The rate of return on capital depends crucially on the rate of growth because capital is valued by way of that which it produces and not by what went into its production.” 
This is a point that James Galbraith and others including me have made about Piketty not recognising that capital is not ‘wealth’.  And this makes a difference.  As Harvey says, if we take out housing and real estate wealth from the measure of capital, Piketty’s forecast of a stable return on ‘capital’, which is higher than the long-term trend growth rate does not stand.

In a new paper, Esteban Maito shows just that.  Using Piketty’s own data, he finds that it is Marx’s law of the tendency of the rate of profit to fall over time that is confirmed by the evidence, not Piketty’s stable return on capital
Maito explains that “in Piketty´s perspective, capital is not related to the production or valorization process. As a synonym for the word “wealth”, any good or service exchangeable in the market is capital. But the trends described by Marx refer to capitalist production. In this respect, any assessment of Marxian theory, even its empirical validation, has to consider this basic aspect in its analysis. In such a way, “dwellings” should not be considered part of the capital, as particular consumer goods rather than means of production. Similar considerations may be stated in other cases like “financial assets” (a pure circuit M-M´) or “land”.

Indeed, over the recent period (since the mid-1960s peak), even Piketty’s return on capital has tended to fall in line with the Marxian rate of profit because land and residential property have become less significant as a share of wealth compared to machinery and non-residential property.

Marx’s law of profitability explains the central contradiction of capitalism, not Piketty’s r, nor Harvey’s ‘no means of consumption’.



25 thoughts on “David Harvey, Piketty and the central contradiction of capitalism

  1. Did you understand Harvey’s, ” it was political”. By that did he mean it was through the political that capital hammered labor? Yes, thee was a falling rate of profit, but how do you restore it ( through the political?) Also where is the falling rate of profit now? Corporations have record profits, but how much from production, how much from financial assets. Why invest when they do not have to, but wouldn’t other companies invest to be more competitive? And how investment is there overseas compared to domestic.

  2. “So Harvey says the explanation of crises in capitalism is to be found in Marx’s Capital Volume 2 and not in Volume 1 or 3. Actually, there is no explanation of recurrent crises of capitalism to be found in Volume 2.”

    That’s not true. In his analysis of the circulation of Capital in Capital II, Marx sets out that crises can arise from a break down at any of the stages of the circuit of industrial capital, and then describes what the causes of such break downs might be. He also describes the conditions for a crisis which naturally flow from a disproportion between Department I and II, a disproportion, which he says is not confined to capitalism, but which would exist under Socialism too.

    It arises because fixed capital does not wear out at a uniform rate. The consequence is that Department II producers recover the value of the wear and tear of their fixed capital in the value of their production, but this value is hoarded as money-capital, until it is required. At the same time, some Department II capitalists are using previously hoarded money-capital to buy large amounts of fixed capital without putting an equivalent amount of value of commodities into circulation. Some are buyers but not sellers, whilst others are sellers but not buyers. Provided the two balance out every thing is fine, but the chances that happens is remote.

    Marx specifically says, that the cycle for the replacement of such increasing quantities of fixed capital is the basis of the business cycle. He also says that, if in the situation described above, Department II capitalists simply do not replace all of the fixed capital they should have been doing and which Department I anticipated in its production, in other words, he says if Department II capitalists underconsume, then this will inevitably cause a crisis of overproduction to arise in Department I. Moreover, he even emphasises that this crisis of overproduction caused by the under consumption of Department II capitalists, can arise even under Simple Reproduction.

    To those who argued that the difference could simply have been made up by the capitalists consume a greater portion of the unconsumed surplus, Marx has basically two responses. Firstly, the point is to invest the surplus to create more surplus, not to consume it. Secondly, there is only a point consuming the surplus productively, if there is a potential to be able to sell the ultimate product of that additional productive investment. If the surplus can’t be realised now, then producing an even greater quantity will only exacerbate that problem, and so there is no reason capitalists will productively consume more when they can’t profitably sell what they are already producing.

    Indeed, as he sets out in Theories of Surplus Value, and in Capital III, the reason that the overproduction arises in the first place, is because high rates and masses of profit encourage existing capitalists to relatively reduce their unproductive consumption, and increase their productive consumption, so the mass of use values dumped on the market increases at precisely the time when the capitalists own unproductive consumptive demand is relatively declining.

    In addition, spurred on by these high rates and masses of profit, some workers, former managers etc. chance their are at grabbing some of it. So is created the plethora of small capital that is the first to be destroyed when the resultant over production manifests itself in a crisis. Again these former workers have reduced their own final consumption in order to increase their productive consumption.

  3. ” Instead “it was all about politics”. ”

    The problem with the its all about politics approach is that it doesn’t address the question of why the politics could work then particularly. Wilson tried to introduce “In Place of Strife” and failed, Heath tried the IRC and failed, and failed even more disastrously in taking on the miners. The Social Contract worked only for a time, and then failed disastrously in 1979.

    Why did these fail? The working-class was too strong. Why was the working-class too strong? The underlying economics meant that despite low rates of profit, it was still worth while bosses conceding to workers. By the 1980’s that was no longer true. Fewer new capitals were being formed, existing capitals were not growing, and some were shrinking. Strikes are bad solutions to factory closures, and lack of growth, and the Left had no real strategy other than the “more militancy” that it had built itself on for the previous 30 years.

    There were the ridiculous calls for the capitalist state to “nationalise the 200 top monopolies”, but those making them didn’t seem to have noticed that this was a capitalist state that had no reason to undertake such actions in the interests of workers, and that workers of such nationalised industries both as workers and consumers was not endearing them to such an alternative. Often the state capitalist employer was much worse than large private employers.

    Thatcher became possible because workers were given no plausible political alternative. Thatcher’s attacks on the working-class was successful because the class had already been materially weakened by rising unemployment, and an inability of capital to concede and stay in business. It had been politically and ideologically weakened by 30 years of miseducation by its leaders who were thoroughly imbued with a bourgeois, reformist, statist ideology that offered workers no solution to the new conditions.

  4. I started Harvey’s recent book but couldn’t finish it. It is abominably bad… rambling and incoherent and full of errors. He for instance, lists a contradiction between use-value and exchange-value which he illustrates with examples from real estate rather than use-value and value and examples of commodities. He also thinks that oxidize-able money will help solve the problems of capital.

    One of the ironies of Harvey’s frequent contemporary appeal to underconsumption arguments is that in some of his earlier books he makes a decent critique of Rosa Luxemburg’s underconsumptionism and of underconsumptionism in general. In Enigma he repeats these critiques while at the same time, in other chapters, advancing an underconsumptionist thesis. I have not figured out how he reconciles these two ideas. He definitely has not addressed the contradiction directly in anything I’ve read of his. But I’m not sure anymore if it is important for Harvey to have consistent argumentation in his work.

    What struck me about his piece on Piketty was how much he agreed with Piketty in terms of the data and in terms of the narrative about wage repression and inequality. It seems a very weak retort.

  5. Marx says lots of things about overproduction in the Grundrisse, in volume 3, in almost all his writings about capitalism, and I don’t recall him ever arguing that “in the first place” overproduction occurs “precisely” at a time of, or because of, relatively declining unproductive consumption demand by the bourgeoisie.

    Overproduction certainly does occur with the overproduction of the means of production as capital, as the value extracting condition of labor.

    The level of unproductive consumption of capital by the bourgeoisie is basically irrelevant as that consumption, by definition, is not the reproduction of capital. Marx makes this clear in exploding the capitalist mythology re the original accumulation of capital being in the hard work, self-denial, etc. etc. of the would-be capitalist.

    We have to distinguish among overproduction, crises, and the structural decline in profitability. Overproduction is inherent in capital; is continuous, and does not become “critical” immediately. Crisis is a short term process– so while it’s accurate to describe a crisis in 2008-2009, it is not accurate to speak of a crisis existing from 1970, when the rate of profit peaked in the US, through 2014.

    It is accurate to point out that within the structural decline of profitability, there remains the cyclical movement; so that the recoveries in the rate of profit in the US for example– 1993-2000, and again 2003-2007 did not exceed the peak of 1969-1970.

    Disruptions can occur in the reproduction process for any number of reasons– including disproportion– but such disruptions are really ancillary to the real conflict at the core of capital– which is the organization of labor as value producing.

    The linkage between overproduction, crisis, and the long and the short term movement in profitability is what amounts to the immanent critique of capital

  6. Yes, Piketty ignores the way that capital squeezes the share which goes to labour. But both Harvey and Piketty ignore the share which goes to land. Have you not noticed the relentless increase in land values – mainly as a result of the increase in credit secured on land values.?

  7. “With the development of the process, which expresses itself in a drop in the rate of profit, the mass of surplus-value thus produced swells to immense dimensions. Now comes the second act of the process. The entire mass of commodities, i.e. , the total product, including the portion which replaces the constant and variable capital, and that representing surplus-value, must be sold. If this is not done, or done only in part, or only at prices below the prices of production, the labourer has been indeed exploited, but his exploitation is not realised as such for the capitalist, and this can be bound up with a total or partial failure to realise the surplus-value pressed out of him, indeed even with the partial or total loss of the capital. The conditions of direct exploitation, and those of realising it, are not identical. They diverge not only in place and time, but also logically. The first are only limited by the productive power of society, the latter by the proportional relation of the various branches of production and the consumer power of society. But this last-named is not determined either by the absolute productive power, or by the absolute consumer power, but by the consumer power based on antagonistic conditions of distribution, which reduce the consumption of the bulk of society to a minimum varying within more or less narrow limits. It is furthermore restricted by the tendency to accumulate, the drive to expand capital and produce surplus-value on an extended scale.”

    Capital III, Chapter 15

  8. ““Since (IIb)v is realised in an equivalent part of (IIa)s, it follows that in proportion as the luxury part of the annual product grows, as therefore an increasing share of the labour-power is absorbed in the production of luxuries, the reconversion of the variable capital advanced in (IIb)v into money-capital functioning anew as the money-form of the variable capital, and thereby the existence and reproduction of the part of the working-class employed in IIb — the supply to them of consumer necessities — depends upon the prodigality of the capitalist class, upon the exchange of a considerable portion of their surplus-value for articles of luxury.

    Every crisis at once lessens the consumption of luxuries. It retards, delays the reconversion of (IIb)v into money-capital, permitting it only partially and thus throwing a certain number of the labourers employed in the production of luxuries out of work, while on the other hand it thus clogs the sale of consumer necessities and reduces it. And this without mentioning the unproductive labourers who are dismissed at the same time, labourers who receive for their services a portion of the capitalists’ luxury expense fund (these labourers are themselves pro tanto luxuries), and who take part to a very considerable extent in the consumption of the necessities of life, etc. The reverse takes place in periods of prosperity, particularly during the times of bogus prosperity, in which the relative value of money, expressed in commodities, decreases also for other reasons (without any actual revolution in values), so that the prices of commodities rise independently of their own values. It is not alone the consumption of necessities of life which increases. The working-class (now actively reinforced by its entire reserve army) also enjoys momentarily articles of luxury ordinarily beyond its reach, and those articles which at other times constitute for the greater part consumer “necessities” only for the capitalist class. This on its part calls forth a rise in prices.

    It is sheer tautology to say that crises are caused by the scarcity of effective consumption, or of effective consumers. The capitalist system does not know any other modes of consumption than effective ones, except that of sub forma pauperis or of the swindler. That commodities are unsaleable means only that no effective purchasers have been found for them, i.e., consumers (since commodities are bought in the final analysis for productive or individual consumption). But if one were to attempt to give this tautology the semblance of a profounder justification by saying that the working-class receives too small a portion of its own product and the evil would be remedied as soon as it receives a larger share of it and its wages increase in consequence, one could only remark that crises are always prepared by precisely a period in which wages rise generally and the working-class actually gets a larger share of that part of the annual product which is intended for consumption.”

    Capital II, pp 414-5

    “We saw a while ago that the proportion between the production of consumer necessities and that of luxuries requires the division of II(v + s) between IIa and IIb, and thus of IIc between (IIa)c and (IIb)c. Hence this division affects the character and the quantitative relations of production to their very roots, and is an essential determining factor of its general structure.

    Simple reproduction is essentially directed toward consumption as an end, although the grabbing of surplus-value appears as the compelling motive of the individual capitalists; but surplus-value, whatever its relative magnitude may be, is after all supposed to serve here only for the individual consumption of the capitalist.
    As simple reproduction is a part, and the most important one at that, of all annual reproduction on an extended scale, this motive remains as an accompaniment of and contrast to the self-enrichment motive as such. In reality the matter is more complicated, because partners in the loot — the surplus-value of the capitalist — figure as consumers independent of him.”

    Capital II, Chapter 20

    “One may assume that in the essential branches of modern industry this life-cycle now averages ten years. However we are not concerned here with the exact figure. This much is evident: the cycle of interconnected turnovers embracing a number of years, in which capital is held fast by its fixed constituent part, furnishes a material basis for the periodic crises. During this cycle business undergoes successive periods of depression, medium activity, precipitancy, crisis. True, periods in which capital is invested differ greatly and far from coincide in time. But a crisis always forms the starting-point of large new investments. Therefore, from the point of view of society as a whole, more or less, a new material basis for the next turnover cycle.”

    Capital II, Chapter 9

    ““In the manuscript, the following note is here inserted for future amplification: “Contradiction in the capitalist mode of production: the labourers as buyers of commodities are important for the market. But as sellers of their own commodity — labour-power — capitalist society tends to keep them down to the minimum price.
    —Further contradiction: the periods in which capitalist production exerts all its forces regularly turn out to be periods of over-production, because production potentials can never be utilised to such an extent that more value may not only be produced but also realised; but the sale of commodities, the realisation of commodity-capital and thus of surplus-value, is limited, not by the consumer requirements of society in general, but by the consumer requirements of a society in which the vast majority are always poor and must always remain poor. However, this pertains to the next part.”

    Capital II, (Note 32, p 320)

    “The opposite case, in which the reproduction of demises of fixed capital II in a certain year is less and on the contrary the depreciation part greater, needs no further discussion.

    There would be a crisis — a crisis of over-production — in spite of reproduction on an unchanging scale.”

    Capital II, p 471

    “This illustration of fixed capital, on the basis of an unchanged scale of reproduction, is striking. A disproportion of the production of fixed and circulating capital is one of the favourite arguments of the economists in explaining crises. That such a disproportion can and must arise even when the fixed capital is merely preserved, that it can and must do so on the assumption of ideal normal production on the basis of simple reproduction of the already functioning social capital is something new to them.”

    Capital II, Chapter 20

  9. I think we have seen a change in the politics. In that the response to a failure of neo liberalism has been an intensifying of neo liberalism! In the past we would have had a reaction with more ‘social democratic’ clothing.

    It seems that ‘social democracy’ no longer works in a globalised capitalist world. The tendency will be toward authoritarianism (a reality already), and those in power have the technology and means to enforce it.

    And so what if ‘social democracy’ no longer works, most people don’t seem to mind and carry on regardless, and when we are talking about the West Marx was plain wrong to say that “which reduce the consumption of the bulk of society to a minimum varying within more or less narrow limits”

    People are consuming like effing crazy, my girlfriend’s family have 8 TV’s in the house and they are solidly working class folk! The problem of capitalism is too much bloody consumption, not too little. Marx clearly has nothing to explain that.

    Who can deny that the left (I won’t say working class) have been thoroughly and soundly beaten?

    I ask as a communist, what good is Marx now?

    1. Herbie,

      Yes. But the argument is more complicated also referring to the wage share in GDP, if we look at the lowest layers of society, then more and more people are really suffering even in the rich countries, so underconsumption amongst overconsumption by the other classes and look at regions in countries i.e. in Europe (i.e. in Eastern Europe, Spain, Portugal) where people really suffer, not to mention Africa. Marx is good if you look at the global picture! Overproduction in the North and suffering and severe underconsumption/hunger in the South.

    2. I don’t think its true that social democracy doesn’t work in a globalised environment. In fact, the opposite seems true. The economy where “social-democratic” policies have been adopted in the sense of fiscal stimulus was, for example the US. Similar measures were adopted in China, Japan and so on.

      The development of many newly industrialised economies like Brazil and so on went along with the replacement of former Bonapartist and militarist regimes. In the Asian Tigers something similar happened, and even their authoritarian regimes followed a social-democratic strategy of developing welfare states, promoting higher wage strategies to move production up the value chain and so on.

      The UK was promoting a social-democratic strategy until the Liberal-Tories took over. In Europe, the imposition of austerity on the periphery is more to do with the political crisis in Europe, due to the failure at that level of social democracy to push forward the creation of a single European state that could adopt such a strategy, and which enhances the political position of conservative forces whose policies are geared to the interests of their small capital base, and the landed and financial oligarchies they have traditionally been linked to, as opposed to the big industrial capital that is the foundation of social-democracy.

      As Marx puts it, wherever, this kind of merchant capital or financial capital is dominant, it leads to political backwardness, compared to where industrial capital predominates.

    3. The other interesting example is China. The chinese Stalinists have recently been supporting demands for higher wages as part of moving production up the value chain, as happened in Singapore and other places, and as a means of developing the domestic market. But, also the Chinese Stalinists are looking at developing a Welfare State, because a Welfare State is vital to a modern industrial economy for several reasons.

      Firstly, to produce educated workers on a mass production basis. Secondly, to ensure they devote a sufficient part of their means of subsistence to providing for their healthcare so that the resources spent on education are not wasted because of early deaths, or incapacity to work. Thirdly, to socialise the workers into acceptance of their conditions. Fourthly, to regulate the labour supply, and provide automatic stabilisers for the economy. Fifthly, to reduce the amount of savings, in an economy that relies on high levels of consumption. Chinese savings are so high, because workers have to over compensate for the risk that they may be ill, unemployed and so on. By establishing social insurance schemes, as happened in other developed economies from the start of the last century, the state prevents workers providing such insurance via their own collective actions, which would make them a powerful economic force; it secures their savings for its own purposes; and by reducing the need for such savings, encourages additional consumption to keep the level of aggregate demand up so as to facilitate the realisation of produced surplus value.

  10. In such a way, “dwellings” should not be considered part of the capital, as particular consumer goods rather than means of production. Similar considerations may be stated in other cases like “financial assets” (a pure circuit M-M´) or “land”.

    But housing *is* part of the total social capital as the finished circulating (in situ) commodity capital of the housing developer. It is a commodity capital within “Dept II”.

    Hence the case of housing is not at all “similar” to the cases of financial assets or land, the first because it short-circuits the commodity capital form, the second because it is not the result of any human production process, much less capitalist production.

    1. Houses that have been sold are not part of the commodity-capital of property developers, they are merely commodities that have been bought. They are no more capital than is a chocolate bar at that point.

      The capital-value of the house by that point has already been reproduced as money-capital or productive-capital, or has left the circuit of capital as money to form revenue for exploiters.

      1. But doesn’t the financial mortgage capital represent a continuing stream of surplus value appropriation by banks and mortgage investment companies?

        The same dwelling gets traded multiple times for profit AFTER it is initially produced. It is durable, not like a chocolate bar, so the profit taking continues long after the thing gets produced.

        In contrast with the sites where SV actually gets produced, realization of SV occurs in the moments of circulation. Thus, capital migrates between the places where surplus gets produced and other locations where profit is taken.

        Financial and mercantile capital seeks a profit gain through appropriation of SV, whereas industrial capital is a gain directly from exploitation, which in the Marxian theory is the place where SV actually gets created, the workplace where productive labor is directly engaged.

        Capital as a whole gets more and more creative about seeking additional outlets for its realization. To take any of it, the producing capitalist must share surplus value with the merchant, the banker, and the landlord. It constantly moves between all of these different economic actors.

        The ultimate source of the surplus is work, to be sure, but profit taking enterprises might not have a proportional commitment of labor at each location. Some of the most profitable sites for capital have the least measurable labor input.

        This is what gets so distant and abstract about determining that the ultimate source of all profit is after all from uncompensated labor power — exactly as Marx says. It may not by itself refute the labor theory of value, but it makes it much more complicated to show.

        Hence a housing industry produces a consumer good and makes profit for its builders, but then that profit potential also gets split with all of the financiers and middlemen, etc. that trade the produced commodity, housing, multiple times over many decades.

        Speculation also steps in to the picture with housing values, because there are now fewer good investment opportunities existing for capitalists seeking gain and liquidity coming from new industrial production — and more to be had from buying and selling already produced commodities, i.e., the dwellings. Hence, capital gets over-invested in housing.

        Real estate starts out seeming less risky at the beginning of a business cycle, and then winds up being wrecked and value lost by too much “hot money” in the housing markets.

  11. Boffy produces some very complex ruminations of Marx on the nature of consumption, none of which point out the overproduction occurs because of, precisely at the moment, when the bourgeoisie reduce their unproductive consumption– their absorption of revenue. It is the “crisis” as Marx points out that reduces the production, and the consumption of luxuries– and even then, AND NOW, not always– as the “high end” of niche markets have rebounded quite nicely, as far as the bourgeoisie are concerned. In any case the consumption of the bourgeoisie is but a redistribution of expropriated value, and not its expanded reproduction.

    1. Marx is not focused on this though. Das Kapital is not concerned about consumption or getting the workers more money or redistribution. For Marx, these are reformist liberal ideas.

      Marx wants to show, regardless of distribution or reformist ideas, that capitalism will eventually have problems with profitability due to constantly increasing mechanization (constant capital) as a share of investment. Incidentally this lines up pretty well with some neo-classical theories.

      By the end of Book 3 he’s shown a lot of ways capitalism can get around this problem.

      Marxists support reformist movements because they increase working class confidence, solidarity and they alter the perceived ‘socially necessary’ time expected to create a product. They don’t support them to avoid recessions or ‘fix’ capitalism.

      1. But that’s not really the issue under discussion. There are several issues under discussion 1) does volume 2 contain elaborations of Marx’s notions of the (various) causes for capitalist crisis– and I think it does 2) does crisis conform to some sort of changes in the proportion of the bourgeoisie’s claims on revenue, on “unproductive consumption– I think it doesn’t 3) is the inherent, necessary expropriation of surplus value– which means of course, under no circumstances can the working class as a class receive the equivalent for their entire labor time, and therefore must always under-consume– the real limit to capitalist expansion– I think the answer to that is no; and 4) from this general discussion is there such a thing as either a permanent crisis to capital, or indeed, a crisis that is the “death-knell” for capitalism– and I think the answer to both of those is no.

        Certainly Marx attacks “under-consumptionist” arguments in the Grundrisse and other works; Just as clearly at several places in volume 3 and other works he talks about the inherent conflict between capital’s need to develop the means of production without restriction when the very condition for that development is a society where consumption is determined and limited by the capital relation.

        I think, however, that Marx’s Economic Manuscripts–1857-1864, and volume 3 really make it clear that crisis is inherent to capitalism, and necessary to accumulation. Most importantly, those works confirm that Marx sees tendency for the rate of profit to decline as the necessary outcome of increased productivity of labor and that specifically represents the real limit to capital– to its mode of organization of social labor. The labor process stands in opposition to the value process (usually translated as valorization process)

        The last time I heard Harvey speak, he was babbling about “oxidizable money,” and if I had had a dollar bill and a pack of matches on me, I would have set the dollar on fire as what “oxidizable money” means.

  12. Recessions and crises are just not central to Capital, they are usually asides or often footnotes. Under consumption theory is about explaining recessions and not something Marx is overly concerned about.

    Capital is a critique of capitalism when it is running smoothly.

    1. Jeff,

      I don’t think that is correct. Marx’s analysis certainly is about explaining the mechanics of Capital on the basis of “ideal types”. The circuits of reproduction assume that what is produced finds willing consumers, i.e. they focus on showing that the value equations work, that sufficient revenue is created to consume final production.

      But, its not true to say that Marx is not focussed on crisis. Having set out why these value calculations work, he then focusses on showing that the assumption that the fact that these result in sufficient revenue being created to demand final production, as well as the constant capital being exchanged without the creation of revenue, does not hold.

      His argument against under consumption, is in fact a different argument than that against modern under consumptionists such as Keynes. What Marx was arguing against in arguing against under consumption, was Say’s Law. Mill, Ricardo, and Say argued that there could be no general overproduction because supply creates its own demand. If I take a commodity to market, I sell it, in order to be able to obtain another commodity in exchange for it of equal value, thereby creating a demand for this other commodity.

      Those who today want to deny the possibility of under consumption, or a failure for supply to find demand, ironically adopt exactly this same position. But, its precisely against this proposition that Marx argues, in his argument against under consumption and Say’s Law!

      In Theories of Surplus Value II, Marx gives his definitive analysis of crises, and their causes. Its clearly not true to say that he’s not concerned with it, because he spends nearly 50 pages setting it out clearly! In that analysis, he says, that Say’s Law is wrong, because it only applies to a situation of barter. As soon as money intervenes, the potential arises, that I may take a commodity to market, and obtain money in exchange for it. But, having obtained the money, there is then no reason why I will spend it, so some other commodity owner who bought my commodity is left with their own production unsold.

      Mill, Ricardo etc. used this argument to say that it as not Britain that was over producing that was causing a glut of textiles on markets, but China, India etc, who were under consuming. If China would engage in more production, thereby employing more people, producing commodities that Britain wanted to buy, they would then be able to absorb all of the commodities that Britain wanted to dump on them. This was the under consumptionist argument that Marx was arguing against.

      In fact, under consumptionists like Keynes accept Marx’s argument that Say’s law does not apply. Keynes’ arguments in relation to the savings rate, and the marginal propensity to consume are simply restatements of Marx’s arguments in Theories of Surplus Value against Say’s Law, where for example Marx argues that all that is required for overproduction of all commodities is for their to be a preference for money over all other commodities, for example, or his statement that as production increases, or incomes rise, the elasticity of demand rises. So, as Marx says, just because the production of knives expands massively due to technological advances, which also reduce the value of knives, this is no reason why the demand for knives will rise in the same proportion. Just because I can buy 6 knives for the same price I previously had to pay for 1, is no reason why I will then buy 6 he says.

      As he sets out in the Grundrisse, and in TOSV, supply is a function of value, whereas demand is a function of use value. People increase or reduce their demand for things because of the use value they obtain from them he says.

      That is why, as he says, crises of overproduction occur when the rate of profit and volume of profit is high, not vice versa. The high rates and volume of profit cause exuberance and over investment. They go along with periods of high levels of productivity that cause the profit margin to be lower as he explains in Chapter 13 on the the falling rate of profit; they cause the demand for inputs to rise sharply pushing up input costs and squeezing profits further; they cause the demand for labour-power to rise, so that as he explains in Capital II, and in III Chapter 6 and 15, wages rise, reducing the rate of surplus value, but also as he sets out there, these higher wages for workers mean that more of their consumption needs are met, so their elasticity of demand for many commodities falls, to persuade them to buy more, the market price must fall by increasing amounts, sending it below the cost of production given the falling rate of profit margins. Its why he says such crises are usually preceded by higher than normal consumption by workers.

      But, as he says, the high profits cause capital to switch its own consumption patterns. The prospect of bigger profits means capital invests more. In order to invest more, as he says, in his detailed analysis of reproduction in Capital II, some of which I have cited above, capitalists have to shift their consumption from unproductive consumption – be it luxuries or necessities – to productive consumption. So, more value is put into increasing production, whilst the demand for unproductive consumption by capitalists is thereby, at least relatively reduced, whilst this increased supply of final products, already being sold at low profit margins because of the law of falling profit margins, faces increasing problems in expanding demand from workers who are already consuming more than normal, and looking for other types of commodities to buy, looking to rebuild their domestic balance sheets by saving, or simply requiring much lower prices to entice them to spend more on the existing range of commodities.

      This is also what Marx is referring to in the Grundrisse in the section on The Civilising Mission of Capital, when he talks about these conditions forcing Capital to continually develop new use values, to persuade consumers, including workers to open their wallets to spend money rather than save it, to be prepared to pay higher prices for these new commodities and so on.

      But, in Capital II, in explaining why you cannot simply assume that supply creates its own demand, and that crises arise precisely because this does not happen, and under the extended scale of operation of Capitalism compared with previous modes of commodity production and exchange, must result in crises, sets out a number of reasons why it will break down at various points of the circuit of capital. he also sets out some of these explanations in his Theory of Crises in TOSV2.

      For example, a crisis can arise simply because commodities are not sold in some specified time. Because money comes to act increasingly as means of payment rather than means of circulation, if A does not sell their commodities by some given date, when they expected to have sold them, it does not matter if they sell all of these commodities by the following week. The fact remains that they will not have reproduced their capital in the required time period. They may have to lay off their workers, for lack of funds to pay them wages, more specifically, they may be unable to pay their suppliers who supplied on credit, and this in turn sparks a series of payments failures, which causes what he calls a crisis of the second form – a money crisis (as distinct from what he calls a financial crisis arising solely in the money markets) – which is a feature of all crises, but arises because of a failure of payments.

      The other cause might be that I referred to earlier, which is a mismatch between supply and demand of fixed capital. As Marx points out it would be a miracle if out of all the millions of individual transactions of the replacement of fixed capital, the value Department II, demand for replacement fixed capital where there is buying without selling, matched that where there was selling without buying. All it takes is for the fixed capital to be a bit more durable than in the past etc. and it will last that many more months, until a demand arises for its replacement, leaving Department I capitals in a condition of overproduction.

      This has absolutely nothing to do with the falling rate of profit, whose fundamental basis is technological change bringing about a rising composition of capital, because, as Marx sets out, this kind of crisis can occur even if there is simple reproduction! And, as he says, the basis of periodic crises is established from this cause, because fixed capital does get replaced at fairly regular periods. For example, there has been a three year cycle for about the last 30 years that seems to be tied to the technology upgrade cycle.

      Marx also sets out why it is that supply and demand will not except by accident coincide so causing crises, not just because of changing preferences of consumers, rising demand elasticity, payments crisis and so on, but simply due to different levels of productivity in different sectors, and different rates of turnover of capital.

      For example, in Capital II, Chapter 16, Marx sets out that if there are two sectors with different rates of capital turnover, one sector will be producing value that is pumped into the market as commodities that can be bought by the workers and capitalists of both sectors. But, the other sector whose turnover requires more than a year, will be paying out revenues – wages to workers – who will be coming in to the market with that revenue and buying the commodities of the first sector. The workers of the first sector, however, will then come in to the market with their revenues, only to find that their are no sector 2 commodities to buy, because they will not be sent into the market for another year! Unless sufficient hoards are available this must lead to a disjunction between supply and demand.

      But, also he sets out in TOSV2 that where there are 2 sectors with very different levels of productivity, such a situation will arise. Both sectors may have capital of the same value, and may expand this capital by the same proportion he says, but if capital 1 has a much higher level of productivity than capital 2, it may increase its production of use values by say 20%, whereas capital 2 may expand its production of use values by only 5%.

      The workers, and exploiters of capital 1, may well be able to absorb the additional 5% of use values produced by capital 2, by increasing their demand, but Marx says, there is absolutely no reason why the workers and exploiters of Capital 2 will similarly increase their demand for capital 1’s commodities, by the same 20%, its supply has increased by. The increase in value of both capitals has been the same, in purely value terms, there is sufficient value as revenue in the hands of capital 2 to absorb all of capital 1’s output, but Marx says there demand is based on use value, on their preferences, on how much of their physical requirement for capital 1’s commodity has already been sated.

      If Capital 1 wants to sell all of this additional 20% of additional output, therefore, Marx says, they will have to reduce the market price below the price of production, and depending upon the extent to which Capital 2’s workers and exploiters resist buying Capital 1’s commodity, the market price may fall below the cost of production. The lower the profit margin, as a result of the law of falling profit margins, the more likely it is that this lower market price will be beneath the cost price, resulting in losses, and crisis.

  13. “It arises because fixed capital does not wear out at a uniform rate. The consequence is that Department II producers recover the value of the wear and tear of their fixed capital in the value of their production, but this value is hoarded as money-capital, until it is required. At the same time, some Department II capitalists are using previously hoarded money-capital to buy large amounts of fixed capital without putting an equivalent amount of value of commodities into circulation. Some are buyers but not sellers, whilst others are sellers but not buyers. Provided the two balance out every thing is fine, but the chances that happens is remote.

    Marx specifically says, that the cycle for the replacement of such increasing quantities of fixed capital is the basis of the business cycle.”

    Here is one of the problems I have with “disproportion theory.” Supposedly, at one and the same time, a “crisis” is created in the different rates of devaluation of the fixed assets, which devaluation occurs as the fixed assets transfer their value to commodities through the consumption of their use value in the production process. At the same time, apparently, the wear rate is uniform enough to become the basis for the business cycle.

    I think “capital” itself “resolves” this issue through 2 mechanisms: 1) credit– Marx notes that the origin of credit is in the different circulation times of capital, and the need of the capitalists to reduce that time to as near zero as possible 2) prices of production– where, in agriculture for example, the price of fertilizer, seeds, pesticides, machinery increases faster than the price of agricultural commodities.

    Anyway, the best book on the “business cycle” is Maksakovky’s The Capitalist Cycle– and he does hold to a theory of disproportion. At core, though, disproportion really is another theory of under-consumption, something that comes through Maksakovsky’s brilliant exposition of the business cycle. What you are left with at the conclusion of disproportion theory is “supply and demand,” and the so-called “laws of supply and demand.”

    Capitalism is always a system that is “overproducing” and “underconsuming.” The key to the barrier capital creates for itself in its need for accumulation is in the changing proportion between the components, the exchange, that is indeed capital– that is labor power configured as wage-labor, and the means of production configured as capital– as a CONDITION of labor opposed to the laborers themselves.

  14. Piketty findings undercut by errors
    By Chris Giles in London
    May 23, 2014 7:00 pm


    Thomas Piketty’s book, ‘Capital in the Twenty-First Century’, has been the publishing sensation of the year. Its thesis of rising inequality tapped into the zeitgeist and electrified the post-financial crisis public policy debate.

    But, according to a Financial Times investigation, the rock-star French economist appears to have got his sums wrong.

    The data underpinning Professor Piketty’s 577-page tome, which has dominated best-seller lists in recent weeks, contain a series of errors that skew his findings. The FT found mistakes and unexplained entries in his spreadsheets, similar to those which last year undermined the work on public debt and growth of Carmen Reinhart and Kenneth Rogoff.

    The central theme of Prof Piketty’s work is that wealth inequalities are heading back up to levels last seen before the first world war. The investigation undercuts this claim, indicating there is little evidence in Prof Piketty’s original sources to bear out the thesis that an increasing share of total wealth is held by the richest few.

    Prof Piketty, 43, provides detailed sourcing for his estimates of wealth inequality in Europe and the US over the past 200 years. In his spreadsheets, however, there are transcription errors from the original sources and incorrect formulas. It also appears that some of the data are cherry-picked or constructed without an original source.

    For example, once the FT cleaned up and simplified the data, the European numbers do not show any tendency towards rising wealth inequality after 1970. An independent specialist in measuring inequality shared the FT’s concerns.

    Contacted by the FT, Prof Piketty said he had used “a very diverse and heterogeneous set of data sources … [on which] one needs to make a number of adjustments to the raw data sources.

    “I have no doubt that my historical data series can be improved and will be improved in the future … but I would be very surprised if any of the substantive conclusion about the long-run evolution of wealth distributions was much affected by these improvements,” he said.

    His contention to have found a “central contradiction of capitalism” has in recent months made him a hero of the left. Although his conclusions have stirred controversy, there has, until now, been near unanimous praise for the quality of his statistical work.

    On a tour of the US last month, Prof Piketty met Jacob Lew, US Treasury secretary, gave a presentation to the White House Council of Economic Advisers and lectured at the International Monetary Fund and the UN.

    Nobel prize-winning economists have heaped praised on Mr Piketty’s work. Professor Paul Krugman of Princeton University, said it was safe to say the book “will be the most important economics book of the year – and maybe of the decade”.

    Professor Joseph Stiglitz of Columbia University said Prof Piketty’s “fundamental contribution” was the provision of data on the distribution of wealth. It was the subject of laudatory reviews in the Financial Times and other publications.

    In Britain, Ed Miliband, Labour leader, told the Evening Standard: “I’m in the early stages of the book. In a way, he is symptomatic of what people are actually feeling”.

    In his response to the FT, Prof Piketty said that more recent data not in his work showed “the rise in top wealth shares in the US in recent decades has been even larger than what I show in my book”.

  15. Excellent Michael. Poor old Picketty explains his rather weak politics on page 31 and ultimately is ignorant of the labour theory of value and argues inequality is necessary and therefore exploitation is ok

    Sent from my iPhone

  16. Hi Michael, couldn’t find your mail, so I decided to write you on the blog´s coments.
    Im from argentina and, at the moment, im working in a small book, to be publish in september or october, by an little independent editorial, summing up part of the so call “pikkety debate” (in spanish, of course). The content is essentially based in different articles and interventions related to Piketty´s “best seller”.
    We would like to include two of your articles: this one, and “Unpicking Piketty”. Both are already translated to spanish by other blogs, like http://www.marxismocritico.com

    If you agree, please let me know

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