You are feeling ill and you go to the doctor. The doctor says that he/she does not know why you are ill, but no matter, take this medicine anyhow you like and you should soon be better. If you don’t get better, then just wait until you do. The doctor does not know why you are ill because you have not been ill often enough in the same way for the doctor to get a theory. This, according to top Keynesian economics blogger, Noah Smith, is the state of understanding that economists have about recessions or slumps in capitalist economies
Smith says: “John Maynard Keynes, Friedrich Hayek and Irving Fisher wrestled with this question in the 1930s….but almost a century later, despite sending some of our best brains up against the problem, we’ve made frustratingly little progress.” Smith goes on: “It’s hard to overstate how few solid conclusions have emerged out of a century of macroeconomic research. We don’t even have a good grasp of what causes recessions. Robert Lucas, probably the most influential macroeconomist since Keynes, had this to say in 2012: ‘I was [initially] convinced…that all depressions are mainly monetary in origin…I now believe that the evidence on post-war recessions (up to but not including the one we are now in) overwhelmingly supports the dominant importance of real shocks. But I remain convinced of the importance of financial shocks in the 1930s and the years after 2008. Of course, this means I have to renounce the view that business cycles are all alike!’
Smith notes that neoclassical perfect market equilibrium theory has nothing to say on imperfect, highly volatile capitalist market fluctuations. Now I have quoted Lucas before and his fellow neoclassical Nobel prize winner and founder the Efficient Market Hypothesis (that i.e. markets know best and we don’t know markets) Eugene Fama, to show they don’t know what causes slumps and moreover they don’t care (see my paper, The causes of the Great Recession.). Smith goes onto to deliver a load of other quotes from leading mainstream economists, past and present, who say they don’t know what causes recessions.
What debate there is about recessions under capitalism is no more scientific, according to Smith, than “medieval doctors arguing over leeches versus bleeding… without a real understanding of what causes recessions, our medicines are largely a shot in the dark.”
But Smith says the reason why mainstream economics has no explanations is the lack of data. “Business cycles are few and far between. And business cycles that look similar to one another — the Great Depression and the Great Recession, for example — are even farther apart. … The main statistical technique we have to analyze macro data — time-series econometrics — is notoriously inconclusive and unreliable, especially with so few data points.” Smith concludes that “The uncomfortable truth is this: The reason we don’t really know why recessions happen, or how to fight them, is that we don’t have the tools to study them properly. The fact is, there are just some big problems that mankind doesn’t know how to solve yet.”
But this is nonsense. Mainstream economics has nothing to say about capitalist crises not because there is a lack of data, but because their theories are just plain wrong or do not even address the issue. Contrary to the assumptions of the mainstream, markets are not perfect; economies do not tend to equilibrium steady growth paths; and investment does not depend on ‘effective demand’ but on profit.
While mainstream economics may have nothing to say about the cycle of booms and slumps under capitalism, what about Austrian economics (too much credit and malinvestment) or heterodox economics (inherent financial instability) or Marxist economics (the law of declining profitability)? Smith ignores all these explanations completely. For him, ‘economics’ is either neoclassical or Keynesian; and he is right, they have nothing to say on the causes of crises.
Even there, Smith does not deal with the latest versions of an explanation. The Great Recession, according to Ben Bernanke, was a traditional banking crash or ‘financial panic’, caused by the lack of regulation. The alternative fashionable theory is that the Great Recession was caused by wages being held down, allowing inequality to rise, thus forcing households to accumulate too much debt that eventually came crashing down.
This latter theory is the dominant one among heterodox circles, leaning on the inequality data of Piketty and others. A new book just released (House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again, by Atif Mian and Amir Sufi), has been praised as the best explanation by Keynesian economics elitist, Larry Summers. In a review, Larry tells us that House of Debt “looks likely to be the most important economics book of 2014; it could be the most important book to come out of the 2008 financial crisis and subsequent Great Recession.” So not Piketty, then.
Summers tells us that it refutes the Bernanke thesis and “persuasively demonstrates that the conventional meta-narrative of the crisis and its aftermath, which emphasises the breakdown of financial intermediation, is inadequate.” So it was not the banks that caused the crisis but that old Keynesian cause: a lack of consumption. This is music to Summers’ ears because in the years before the Great Recession, he firmly rejected suggestions that a huge credit bubble was being fostered by the deregulation of the banking industry. He had firmly supported allowing banks to do what they liked when Treasury secretary under Clinton. He dismissed claims then that financiers were creating’financial weapons of mass destruction’.
Summers is now pleased to be told that he was not wrong then. The explanation of the Great Recession is to be found in too much mortgage debt and a lack of consumption. Summers quotes House of Debt approvingly: “spending on housing and durable goods such as furniture and cars decreased sharply in 2006 and 2007, well before any financial institution became vulnerable. Likewise, they note that the initial impetus behind recession in the US appears to have been a decline in consumer spending. Summers goes on: “They argue that, rather than failing banks, the key culprits in the financial crisis were overly indebted households. So their story of the crisis blames excessive mortgage lending, which first inflated bubbles in the housing market and then left households with unmanageable debt burdens. These burdens in turn led to spending reductions and created an adverse economic and financial spiral that ultimately led financial institutions to the brink.”
But this crude Keynesian view is equally false along with the lack of banking regulation argument. Throughout the period prior to the Great Recession, US consumer spending rose as a share of GDP while wages at work dropped as a share. It was not squeezed.
Yes, this was partly due to a rise in debt, but also because households were compensated for wage stagnation with better social and health benefits. Yes, consumption fell in the crisis but not before investment collapsed, as I have shown on numerous occasions in this blog. It’s investment that is the swing factor in recessions and recoveries, not consumption. Or to be more exact, it is profits that call the tune, because investment demand drops off when profits do. As profitability falls over time, eventually the mass of profit will fall and this will force weaker businesses to cut back on investment or even close down. Then there is a cascade of falling ‘effective demand’ as companies go bust or lay off labour. Then consumption falls. That is the order of events – as the graph of US profits and business investment below shows.
Of course, talk about profitability and investment as causes of recurrent crises is ignored or dismissed by mainstream economics of either wing, neoclassical or Keynesian. The mainstream does not want to focus on the exploitation of labour and profit. The neoclassical wing either denies that there are recessions or that we can forecast or explain them. They are just unknown ‘shocks’ to an otherwise great system of production (see Lucas quote above). The Keynesians talk vaguely about ‘lack of demand’, which is really a tautology because a capitalist slump is a lack of demand for goods and labour, by definition. It is no explanation.
Keynesian economics is less interested in how an economy gets into a slump and more on how to get out of it. As Keynesian guru, Paul Krugman, put it in his book on the Great Recession, End the Depression Now!: “the point is that the problem is not with the economic engine, which is as powerful as ever. Instead, we are talking about what is basically a technical problem, a problem of organisation and coordination – a ‘colossal muddle’ as Keynes described it. Solve this technical problem and the economy will roar back into life”. (https://thenextrecession.wordpress.com/2012/05/27/krugman-and-depression-economics/).
British Keynesian economist, Simon Wren-Lewis delivers the same view in response to Smith’s view that we don’t know what causes recessions (http://mainlymacro.blogspot.co.uk). SWL says that we may not know but at least we know fiscal austerity won’t help. “While the reasons for the Great Recession may still be controversial, the major factor behind the second Eurozone recession is not: contractionary fiscal policy, in the core as well as the periphery. So this is something we really do know.” (6 June). Actually, as I have argued in this blog, the main cause of the Euro recession, first or second, was not austerity but the crisis in profitability. And Wren-Lewis offers no explanation of why the Great Recession or the ‘Euro recession’ started in the first place.
Neoclassical economists may be doctors using leeches, as Smith says. But Keynesian economists are also doctors offering herbal remedies without any diagnoses. Keynes once said that economists should really become just like dentists, able to fix your teeth when there is a problem. But even dentists need to know why problems arise in order to fix them.
There is a viable explanation of recurrent and regular crises of production. Marxist crisis theory, based around Marx’s law of the tendency of the rate of profit to fall, provides a coherent one. Sure, the lack of data is an issue. But, contrary to Smith’s view, that should not hold back a scientific inquiry into these causes. G Carchedi and I, among many other Marxist economists, have published extensive empirical material that shows a convincing causal connection between profitability, investment and recurrent slumps (see our paper, The long roots of the present crisis). And I remind my readers of the excellent theoretical and empirical paper by Tapia Granados
Using regression analysis, he found that, over 251 quarters of US economic activity from 1947, profits started declining long before investment did and that pre-tax profits can explain 44% of all movement in investment, while there is no evidence that investment can explain any movement in profits.
In other words, profits lead investment and investment leads demand and employment. And that’s a lot of data points.
For a summary of the empirical evidence of the Marxist explanation of crises, see my paper presentation-to-critique-conference-11-april-2014
29 thoughts on “Doctors without diagnoses”
The argument of a falling mass of profit, is the argument put forward by Malthus, Say, Mill and Ricardo, which made them fear that this was a natural law of falling profits that must result in a catastrophic collapse of Capitalism. One reason for Marx setting out the Law of The Tendency for The Rate of Profit To Fall was to show that this argument was nonsense. Marx makes clear that apart from short term fluctuations, the very same cause of the “Law” – rising social productivity – MUST lead to the mass of profit rising!
If we look at your second graph, its hard to justify the sharp and sudden reduction in the mass of profit between July 2006 and July 2008 on the basis of some long term decline of the rate of profit, because your own chart shows that in the preceding six years, the mass of profit doubled!!! What is more, your own chart shows the mass of profit rising sharply once more after July 2008!
In other words, it has all the hallmarks of a sudden shock to profits, not some slowly operating long term trend, which is how Marx describes the way the average rte of profit is formed, and how it moves. That sudden shock to profits is consistent with 2008 being a financial panic, much as Marx and Engels described the financial panic of 1847. They describe the panic of 1847 as being caused by the preceding period of low interest rates, cheap credit caused by a rapidly rising rate and mass of profit, and which led to massive levels of speculation in railway shares, in other forms of financial swindling and fraud relating to the discounting of Bills of exchange to obtain cash for such speculation, and also led to businesses diverting their profits to such speculation, and thereby being forced to cover their business investment and working capital via debt.
When the financial panic broke out as the demand for money-capital rose due to crop failures, interest rates rose exposing the fraud, swindling and speculation, causing a further rise in the demand for money-capital, which the 1844 Bank Act prevented from being made available, thereby causing a credit crunch. The subsequent economic contraction according to Marx amounted to a reduction of 37%. He and Engels go on to describe how after the suspension of the Bank Act, the panic was ended, and the boom continued the following year.
Moreover, given that as Andrew Kliman and others have pointed out, today’s huge companies plan their massive investments for many years in advance, its hard to see how this sudden, short-lived fall in the mass of profit could have caused a reduction in investment for these companies, other than possibly for it to be delayed, because that investment would have been planned long in advance, on the basis of the how they saw demand for their products developing, and the potential profits from it. Moreover, as Marx sets out in Capital III, Chapter 14 and later, with the development even of Joint Stock Companies, let alone today’s huge corporations, investment decisions become less dependent on the rate of profit, because the owners of these companies – the shareholders – in any case receive only a low rate of interest on their money-capital, in the form of dividends, whilst the professional managers of the company are led to try to boost their wages by growing the company. Companies like Amazon for example, have grown by focussing on developing their revenues rather than their profits.
Marx also quotes Richard Jones to the effect that companies may well increase their investment rather than reduce it when they see their profits falling, because they want to capture a larger share of the market to boost their profits against their competitors.
Surely if your thesis were correct, what has to be explained is why, even according to your chart, US profit mass doubled between 2001 and 2006, and yet the level of investment remained muted. In fact, according to your graph between 2001 and 2003, the mass of profit grew by around 20%, but during the same period investment fell by around 16%. That can’t be explained by a lag between profits and investment, because profits were increasing in the period before too.
“In fact, according to your graph between 2001 and 2003, the mass of profit grew by around 20%, but during the same period investment fell by around 16%. ”
Perhaps it can be explained by an increasing use of infra-utilized capacity. So to speak …
In the US it can be explained by the reaction to the recession beginning in 2000-2001. After the real increases in capital investment, and resulting overproduction, US industry imposed severe controls on capital spending (so much for the “planning” that supposedly is made for long periods of time), driving the rate of replacement for fixed assets below the 1 (or 1:1) level. At the same time wages were driven back below their previous highs in 2000.
Capital spending in the US does not exceed the 2000 level, if I recall correctly, until late 2005, early 2006.
The point is that there is a lag between the movement in profits and investment – this is what the Tapia Granados paper cited shows. So profits rose after the mild slump of 2001 from mid-2001 while investment continued to fall for another year before recovering. The same thing happened in 2008-9. Investment did not respond as capitalists used up existing capacity and even closed it down or ‘rationalised’ it through mergers.
The problem with that is, as I said, that the mass of profits was rising prior to 2001 too. In which case, that still leaves a problem explaining the 16% drop when before it profits were rising.
Your point about “infra-utilized capacity” is part of the explanation. In that account has to be taken of the changing nature of production and consumption in the modern economy.
Productivity has slashed the cost of a lot of capital, which is Marx’s point that what is required to boost profits is not a destruction of physical capital – which is destructive of value creation and, also of surplus value creation – but a destruction of capital value. A lot of the physical capital used in today’s production, is therefore, much lower value related to the value of the output than was the case in the past.
Take one of the industries that has grown most rapidly in the last ten years or so – the computer games industry. It requires fixed capital in the form of computers on which the games are produced, but the value of computers has fallen massively, whilst the power of those computers has grown astronomically in line with Moore’s Law.
The basis of the Falling Rate of Profit is that as the technology of the fixed capital improves, relatively less labour power is required to process a much larger quantity of material. But with computer games production, no material as such is processed. The programmer simply uses the fixed capital of produce the output. Today no material is even required as the material form of the product, because it is simply downloaded from the Internet.
The real value of the commodity here comes not from the value transferred from the constant capital, but comes from the highly complex labour of the computer games programmer.
Moreover, the reduction in investment is consistent with that same rise in productivity bringing about a significant rise in the rate of turnover of capital, and thereby both reducing the quantity of advanced capital required, whilst also bringing about a release of capital.
Take one of the other forms of rapidly growing industries of more recent times. A restaurant or coffee shop turns over its capital every day. The capital it advances, therefore, is turned over 365 times a year, so is just a 365th of its laid out capital (more or less if account for the different treatment of fixed capital is taken into account). But, an old manufacturing industry may turn over its capital only 10 times a year, so its advanced capital is a tenth of its laid out capital.
But, there are clearly other reasons for the reduction in investment in 2000-2001, related to the collapse of the financial bubble, particularly in technology, 9/11 etc.
The fact remains that according to Marx, the Falling Rate of Profit is a function of previous investment, which brings about a rise in social productivity, thereby reducing the relative quantity of labour exploited relative to the material processed. This process operating through the development of a general rate of profit can only operate over a prolonged period. So, it cannot explain the sharp drop in profits between 2006 to 2008, especially as take out that downward spike in the mass of profits, and the rise in the mass of profits forms a fairly steady upward curve.
If you are going to say as Michael does above, that there is no evidence that profits move in response to previous investment then what you are saying is that there is no evidence to support Marx’s Law of Falling Profit, because according to Marx, the fall in the rate of profits is precisely a function of previous investment!
Some of the fall in the mass of profits could have been a lagged effect of the physical destruction of capital from 9/11. In 1920, and after one of the problems the Bolsheviks faced was that the destruction of capital resulting from the First World War, and the Civil War, meant that large amounts of surplus value that could have gone to accumulation and growth went simply to rebuild the capital that had been destroyed. It meant that in order to put labour to work, that labour had to work less productively because the physical capital required to raise their productivity was simply no longer available, so relative surplus value is reduced, and along with it the rate of profit and accumulation.
That is why Marx says that it is the destruction of capital value not its physical destruction that capital requires. Capital gets physically destroyed during crises and at other times, but it is no way beneficial to capital other than in the minds of Keynesians. For example, if you read Capital II, Marx sets this out clearly in relation to the way the physical destruction of capital represents a cost for capital, and deduction from surplus value.
Take a farmer producing corn. Marx describes the way that unless the corn is stored effectively, it will be destroyed by mice, the weather and so on. That would represent a direct reduction in the profits of the farmer, and of the social capital. the farmer, therefore, has to spend money to build grain silos etc. But, Marx points out that the cost of these silos adds no additional value to the grain, it is a deduction also from the surplus value created. Yet, because it is a necessary cost, to avoid the greater destruction of the physical capital, it is added to the price of the corn. Thereby it does not diminish the share of total social profits obtained by the farmer, but does represent a reduction in the total social surplus.
The same thing applies to insurance. As Marx points out in the section on “Grounds for Compensating” in capital III, some businesses such as shipping are more risky than others. If physical capital in the form of a ship is destroyed, because it sinks, this is a cost to capital. The ship has to be built again. It is a specific cost to the individual capital, and so to avoid it, shipping companies take out insurance, and as Marx describes because of the riskiness of the business, this insurance is more expensive than for other businesses.
Again, because it is a necessary cost, although the insurance adds nothing to the value of the product of the shipping business, shippers have to recover this higher insurance cost in their prices or else they would obtain below average profits. But, as Marx sets out, therefore, the insurance is a necessary cost, which is then shared by the total social capital, even though it is the individual business that pays the insurance premiums.
If capital can avoid the physical destruction of fixed and circulating capital, it can avoid these costs that are a deduction from surplus value, and thereby increases the mass of profits. If it can also reduce the value of that capital, it can raise the rate of profit produced by it.
“Take a farmer producing corn. Marx describes the way that unless the corn is stored effectively, it will be destroyed by mice, the weather and so on. That would represent a direct reduction in the profits of the farmer, and of the social capital. the farmer, therefore, has to spend money to build grain silos etc. But, Marx points out that the cost of these silos adds no additional value to the grain, it is a deduction also from the surplus value created. Yet, because it is a necessary cost, to avoid the greater destruction of the physical capital, it is added to the price of the corn. Thereby it does not diminish the share of total social profits obtained by the farmer, but does represent a reduction in the total social surplus.”
None of which explains why farmers dump milk into gutters; why barrels of wine are destroyed (actually, the barrels are saved, it’s the wine that is dumped), tomatoes are destroyed, corn is left to rot on the ground, all those things that amount to……..well, they amount to the physical destruction of the commodity, and the last time I checked, commodity was one of the manifestations of capital.
As for that nice little bit of pastoralism; the charming fantasy about grain silos not reducing the share of total social profits obtained by the farmer……….when’s the last time anyone ever saw a farmer build a commercial grain silo?
Personal silos certainly do diminish from the profit garnered by the individual farmer as clearly the cost of the silos is only transferred piecemeal in the price of the grain and that price is subject to intense competition from bigger farmers, more efficient farmers, corporate farmers, farmers who in fact sell their grain to a commercial silo.
If the farmer rents the space in the commercial silo, that rent is a deduction from the total surplus value and directly reduces the receipts to the farmer, no less than renting a tractor, or an irrigation system diminishes those receipts.
As for the 2000-2001 period, once again Boffy comes up with his only and future explanation– financial bubble, which financial bubble came at the very end to 7-8 years of real capital investment in new technologies, and real overproduction in these areas– like fiber optic cable; like high performance glass for special lenses for transmitting optical data, like………semiconductors with the entry of 300mm wafer fabrication plants.
And let’s not leave out oil, where applications of new technologies beginning in the late 1980s served to drive the price of oil below $10 per barrel by 1998, causing anguished howls, and curses against Iraq which had ramped up its production to around 3 million barrels per day.
The rate of profit had actually peaked around 1997, declined a bit, and then “recovered” as part of the spectacular, and speculative, blowout.
The driver however was the decline in the rate of profit brought about by real increases in capital investment, driving overproduction forward.
“while there is no evidence that investment can explain any movement in profits.”
But, in that case, doesn’t that mean you have to abandon the Law of Falling Profits? According to Marx the fall in the rate of profit is caused by rising social productivity, which is a function of investment, i.e. as investment grows it tends to cause social productivity to rise, both because of economies of scale, and because the new investment tends to be in more technologically advanced fixed capital, which enables a greater quantity of circulating constant capital to be processed by the same quantity of labour.
If there is no evidence that investment causes a movement in profits then that is to say that Marx’s fundamental argument as to why the rate of profit moves is without empirical justification!
Boffy, I am really startled on how you reach such conclusions, really. Capitalism indeed caused almost a cataclysm of itself: both World Wars. But as things works in dialectical ways, it was the destruction that led to its rebuilt. Well, we won’t have another chance now because of nukes, which is also due to the increase of applied science.
Not really sure what point you are trying to make here. The argument is about whether the Law of Falling profits leads to a systemic economic collapse, not whether Capitalism tends to create conditions for war and destruction.
According to Marx, the answer to the question at issue is a clear No.
Moreover, the comment about destruction leading to rebuilding also reflects a serious misunderstanding of Marx’s theory. The idea that Capitalism benefits from the physical destruction of Capital is ridiculous. The argument upon which it rests is Keynesian not Marxist.
The argument is basically that if capital is physically destroyed, it then causes economic growth because resources have to be used for its reconstruction. That is nothing more than the Keynesian argument that to deal with unemployment you should pay people to dig holes, and then pay them to fill them in again!
Marx’s argument as set out in Theories of Surplus Value makes a clear distinction between the physical destruction of capital, and the destruction of capital VALUE. In relation to the former Marx makes clear that this is of no advantage to capital. How could it be, it is the physical capital, which capital seeks to accumulate, because as he sets out in Capital 1, the expansion of capital is the expansion of the working-class, and given any particular technical composition of capital, the quantity of labour-power to be employed, or thereby to be additionally employed, depends not on the value of constant capital in existence, but on its physical quantity. As Marx puts it the workers in production “have to do with the use value, not the value of capital”.
If the quantity of physical capital is reduced, by its physical destruction, that means that less labour-power can be employed by it, which means less surplus value can be extracted from that labour-power. If the surplus labour-time has to be utilised to restore the destroyed constant capital, it means it is a reduced amount of surplus labour-time that can be appropriated by capital. This is a basic point which is not understood by the Keynesians when they put forward this nonsense about unproductive expenditure, such as the Permanent Arms Economy.
What capital seeks in order to raise the rate of profit is not the physical destruction of capital, but the destruction of capital value, i.e. to have to devote a smaller, not a larger proportion of current production to its replacement and extension!
That is why Marx says,
“When speaking of the destruction of capital through crises, one must distinguish between two factors.” (TOSV2 p 495)
One is the form of physical destruction described above, but it is the second form that is beneficial for capital.
“A large part of the nominal capital of the society, i.e., of the exchange-value of the existing capital, is once for all destroyed, although this very destruction, since it does not affect the use-value, may very much expedite the new reproduction. This is also the period during which moneyed interest enriches itself at the cost of industrial interest. As regards the fall in the purely nominal capital, State bonds, shares etc.—in so far as it does not lead to the bankruptcy of the state or of the share company, or to the complete stoppage of reproduction through undermining the credit of the industrial capitalists who hold such securities—it amounts only to the transfer of wealth from one hand to another and will, on the whole, act favourably upon reproduction, since the parvenus into whose hands these stocks or shares fall cheaply, are mostly more enterprising than their former owners.” (TOSV2 p 496)
Boffy: ” The argument is about whether the Law of Falling profits leads to a systemic economic collapse”
Uhh…….no, that’s not the argument, and that’s not the question. The issues at hand are 1) does capitalism exhibit a tendency for the rate of profit to decline 2) if yes, is there a cause for this tendency inherent in capital’s organization of wage labor; in its need to extract surplus value 3) does this tendency for decline lead to disruptions, contractions, crises in the capitalist economy 4) does this tendency compel the bourgeoisie to (a) change the relation between the living and “dead” components of capital (b) alter the relation between the necessary and surplus labor time (on which, in Marx’s words, “everything depends) (c) attack the wage level and attempt to drive the wage below the cost of the reproduction of labor-power (5) does the law of the tendency of the rate of profit to decline signal a limit to capital accumulation, that the bourgeoisie must attempt to overcome (6) does the law define the historical specificity of capitalism
And for Marx, the answers to all is YES.
Boffy’s next mis-understanding is
“Moreover, the comment about destruction leading to rebuilding also reflects a serious misunderstanding of Marx’s theory. The idea that Capitalism benefits from the physical destruction of Capital is ridiculous. The argument upon which it rests is Keynesian not Marxist.
The argument is basically that if capital is physically destroyed, it then causes economic growth because resources have to be used for its reconstruction. That is nothing more than the Keynesian argument that to deal with unemployment you should pay people to dig holes, and then pay them to fill them in again!”
Uhh… no, it’s not a Keynesian argument because the argument is NOT that capital benefits because of the need for reconstruction. Capital benefits because it liquidates the value of the physical assets (the instruments of production), realizing some bit of value in the accelerated destruction of use value.
Physical assets can only realize their exchange value, their value, to the extent that their use value is consumed in the extraction of surplus value. If these assets cannot achieve the necessary rate of extraction, they cannot pass on their value to the commodities. So… up pops the liquidation, the physical destruction of physical assets.
The whole conundrum for capital is that it cannot disentangle, as much as it strives to, its physical assets from the valuation of those physical assets. So auto plants close and get scrapped– literally as GM has done at Tarrytown, NY and other locations. Ships get sent to break-up on the beaches of Bangladesh. Locomotives, freight cars, etc. get shredded and resold as scrap. Airplanes get buried in deserts.
This is all part of the alteration of the components of capital which is part of changing the proportions of necessary to surplus labor, on which everything depends.
“If the quantity of physical capital is reduced, by its physical destruction, that means that less labour-power can be employed by it, which means less surplus value can be extracted from that labour-power. If the surplus labour-time has to be utilised to restore the destroyed constant capital, it means it is a reduced amount of surplus labour-time that can be appropriated by capital. This is a basic point which is not understood by the Keynesians when they put forward this nonsense about unproductive expenditure, such as the Permanent Arms Economy.”
Uhh……no, that’s not the issue. The issue is the proportion, the relation between the values of the dead capital and the value-production of the living component of capital, wage labor.
“If the quantity of physical capital is reduced by physical destruction….” that says NOTHING about the relation between the dead and living components, nor does it say anything about proportion of surplus value being extracted in relation to the total capital.
The argument that the destruction of physical capital means less labour power can be employed by capital is completely irrelevant. That’s like saying there can be no such thing as contraction, recession, downsizing, asset stripping, layoffs, unemployment because after all unemployment means less labour power is employed, and therefore less surplus value is being expropriated.
Sure thing, Marx says:
“When speaking of the destruction of capital through crises, one must distinguish between two factors.”
And sure thing… sometimes capital can make that distinction, like when bankruptcy forces the sale of assets to another company. Even then, there’s always the arson option– torch it and get the insurance money. And of course arson can get out of control and burn down whole blocks. Sometimes capital simply cannot make the distinction and needs to burn everything. That social arson is what we call war.
“US consumer spending rose as a share of GDP while wages at work dropped as a share. … this was partly due to a rise in debt, but also because households were compensated for wage stagnation with better social and health benefits.”
Perhaps more important, do we know whether spending by the rich increased in the early 00’s?
The other question is who paid for the better social and health benefits. Capital is not stupid. It created the welfare state to provide it with the kind of labour-power it required in the 20th century, and did so by ensuring that workers paid for it via their taxes and social insurance payments.
In Britain it created a Pension Scheme that it ensured workers paid into, but from which the vast majority would never live long enough to draw out of. Now they are having the audacity to live longer, the capitalist state rips up the original contract it made with them, and demands they work an extra 5 years before they are entitled to draw the pension they and their predecessors have paid for. A private pension company would be dragged through the courts if it did the same thing.
But all of these benefits are paid out of workers wages as taxes. Some years ago, Alan Freeman calculated that there had not been a single year, when British workers got more value out of the welfare state than they had paid into it in taxes and insurance. In other words, it was another source of surplus value extraction for capital.
The social benefits provided by the US capitalist state will be no different. The expansion of the state simply reflects additional taxes deducted from workers wages and paid back to them after the deductions for bureaucracy, in another form. It does not by any means signify an increase in wages.
The welfare state was in large maintained by unequal exchanges between central countries and periphery. For example, ~70% of US GDP is generated by import of abstract labor.
Michael my question is why do prices rise when demand and consumption falls? On the surface one would think that prices would fall with consumption but consumption and prices move in opposite directions. And also how does too much inventory or too little inventory fit in the equation? Thanx Michael for writing a blog that with access to Wikipedia , is easy to follow.
Chris Dillow directs us to the case where higher ‘real’ interest rates encourage firms to increase their prices to raise immediate cash rather than pursue growth.
Click to access naturalrate.pdf
High ‘real’ interest rates are also associated with less bank lending, which diminishes new company formation and existing company expansion and hence lowers productivity ergo increasing prices. Additionally, higher ‘real’ interest rates are a cost of production and will tend to increase prices to some extent. That said, we have seen much talk of low inflation and even negative inflation in the post crash period. That makes sense in that ‘real’ rates of interest and nominal ones have both been low of late. The poor productivity here as well as some earlier falls in sterling have contributed to somewhat higher inflation than in the eurozone .. That’s my tuppence worth anyhow.
PaulC156, the Fed has lowered interests rates and students, workers, municipalities, and corporations are refinancing and restructuring debt and still consumption is relatively flat, new investment remains non.existent. Individuals are stashing cash; corporations are paying down debt, buying back.stock, and or paying a dividend to preferred shareholders if not common shareholders. The majority of employment growth is in low wage services industries. The economy is still in the toilet overall. What nobody seems to be mentioning, maybe Michael or Boffy has, is that there is a mass of accumulated profits that multinationals have sitting in tax havens. How does this non productive use of hoarded profits affects recovery and recession?
“Additionally, higher ‘real’ interest rates are a cost of production and will tend to increase prices to some extent.”
This is not true. It is a fallacy that was argued by Proudhon, and soundly refuted by Marx in Capital III, in discussing interest bearing capital. Interest is a deduction from surplus value, it is not an additional cost adding to prices.
“the Fed has lowered interests rates”. The fed has not lowered interest rates. In Capital III, in discussing interest-bearing capital, and setting out a critique of the Currency School, who confused money and money-capital, Marx shows why its impossible to reduce interest rates by central bank diktat or by printing money.
The state can no more dictate the price of money-capital (which is what Marx says the rate of interest is, i.e. the price of being able to use its use-value, of being able to create profits) than it can the price of any other commodity.
The interest rate, Marx sets out, is determined by the demand and supply of money-capital. The proponents of the Currency School, like the proponents of QE confused money as currency with money-capital. So, they thought that by putting more currency into circulation this was the equivalent of putting more capital into circulation (they were also confused about the nature of capital, and believed that only money-capital was capital, and only money-capitalists capitalists, productive-capitalists they beleived were simply entrepreneurs, whose return (profit) was a special form of wage, it was only interest that was the specific form of return to capital). They believed, therefore, that by increasing the supply of “capital” its value would fall, and so interest rates would fall, and vice versa.
Marx shows in Capital III that this is nonsense. All putting more money into circulation does is to either cause that money to be hoarded (in the case of gold and silver), for the velocity of circulation to slow down, or else if it does circulate in the form of money tokens (fiat money and credit) to devalue it relative to the value of commodities, i.e. inflation.
It is only an increase in the supply of money-capital relative to its demand that can cause interest rates to fall. That means essentially that the mass of realised profits must rise, faster than the demand for the money form of those profits for accumulation rises. On that basis interest rates can rise when the demand for money-capital is falling, if the supply of potential money-capital falls more, because profits are falling, for example.
Similarly, the rate of interest can fall when the demand for money-capital is rising sharply, if the supply of money-capital from sharply rising masses of profit is increasing faster. That was the case Marx and Engels describe in relation to the period ahead of 1847. Sharply rising profits and a boom caused the demand for money-capital to rise sharply, but the supply of potential money capital arising from the rapid growth in the rate and mass of profit, was even faster. So interest rates fell, which in turn caused speculation etc.
We have seen the same thing as a result of the massive rise in the rate and mass of profit over the last 30 years, which caused interest rates to fall in a secular trend from 1982 to 2012.
In the short run, market prices do fall when demand and consumption falls, because there will be an overhang of commodities on the market. They will have been overproduced. In Marx’s terms the labour expended on their production was not socially necessary, and therefore did not create additional value. That is why, as Marx says whenever there is such an overproduction, market prices fall, and may fall below the cost of production, thereby causing a crisis.
But, in the longer term, prices do not fall simply because consumption and demand has fallen, because the fall in demand does not directly affect the price of production of the commodity. The price of production is equal to the cost of production plus the average profit. All that demand can affect directly is the quantity of the particular commodity to be produced, i.e. what proportion of the total social labour-time is devoted to it.
If the cost of producing motor cars is $1,000, and the average rate of profit is 20%, then motor car makers will need to sell cars for $1,200. Anything less than that, and they will not make average profits, so they will use their capital in some other way where they can make average profits or better. If cars sell for more than $1,200 dollars, their producers will make more than average profits, so capital from elsewhere will come in to produce cars, or existing producers will invest more capital to take advantage of the higher profits.
In the first case, too much capital was invested in car production in relation to the demand for cars. So prices were below the figure necessary to produce average profits. That is resolved by moving capital out of car production and into something else where higher profits are available. The opposite is the case in the second instance.
In fact, the fall in demand can cause prices to be higher not lower. Suppose the demand for some commodity falls, and so the capital used in its production is reduced. But a fundamental aspect of capitalist development is that as production expands, there are economies of scale, which reduce unit prices and unit costs. If production is curtailed substantially, then those economies of scale are lost, unit costs rise, and so the price of production of the commodity rises.
The demand for buggy whips has fallen substantially since the advent of the motor car. But, where buggy whips could be mass produced and the cost of production slashed, if there were sufficient demand to justify it, instead, buggy whips tend to be a sort of luxury production, produced by almost handicraft methods, and so the price of buggy whips is quite high by comparison.
Jim Brash. I believe that Michael has written on here about the so called cash mountain. Pointing out that there’s a debt mountain that needs servicing too. Also noting that much of the cash hoarding is being done by firms who are not paying dividends. Higher risk environment and the attraction of financial assets being contributory factors. Seems pretty straightforward to posit that such hoarding [investment strike] limits the recovery and lengthens the recession. As one would expect.
Re: Profits as possible leading indicator (your second graph): Comparing several measures for Investment: “Private Domestic Investment, Billions of Dollars” did peak coincidentally with profits. In the lower turn around in 2008 profits were leading, in 2001 it was coincidental.
Profits are pretty clearly linked to consumption. You can’t have profits if no one is buying anything. Yes, it’s true you also can’t have profits without labor to squeeze (organic composition), technological innovation, expanding markets, and so on.
This just seems like chicken or egg; the economy is complex. But profits come from a variety of means, as anyone runs a business can say.
Profits are simply a form of surplus value. But surplus value is created in production, by workers. However, in a sense you are right, for reasons that Marx sets out. That is that profits are the phenomenal form of surplus – that is the form they take on the surface, or to appearance as opposed to their underlying reality.
But, Marx agrees with you that for the capitalist it is this phenomenal form that is important. That is what they see and respond to. So, as Marx sets out in Capital III, Chapter 15, you can produce all of the surplus value you like in production by exploiting labour, but unless you can sell the commodities in which that surplus value is contained, it doesn’t mean squat, because you cannot realise profits, and capitalists are only interested in the profits they can realise, and take to the bank.
Moreover, as he sets out in that Chapter, the conditions for producing the surplus value are not the same as the conditions for realising it, and indeed the one may be contradictory to the other. For example, if you cut wages, you may increase produced surplus value, but because you thereby reduce the capacity of the largest proportion of consumers (workers) you thereby limit the possibility of being able to realise the surplus value you have produced, as profits.
Moreover, many Marxists concentrate on this production of surplus value, and forget about demand, i.e. about the possibility of realisation. So, for example, merchant capital and money-dealing capital does not create any surplus value, but both facilitate its realisation, and reduce the costs of circulation involved in its realisation. So, although neither increases the production of surplus value, both do increase the production of realised profits, and thereby increase the rate of realised profits.
Boffy “Interest is a deduction from surplus value, it is not an additional cost adding to prices.”
Wouldn’t that depend on the level of competition in any market and the the overall level of demand in the economy at the time of the higher rates? After all we did see rising interest rates and prices in the late 80’s and early 2000-08. Additionally it might depend on whether less productive firms are shut due to the higher interest rates. If they are then productivity increases, if not it doesn’t and prices rise?
If you look at charts comparing interest rates with CPI over decades its far from clear that high prices aren’t a response to higher interest rates.
The value of commodities is determined by the labour-time required for production. If we take the total capital, then, the total price of the commodities produced is equal to this value. So, its impossible for interest to be an additional cost, it must be a deduction from one of these other elements.
The value of the constant capital is given again by the labour-time required for its production, whilst the value of the labour-power is given by the value of the commodities required for its reproduction. It is only the surplus value, from which interest can be deducted.
As Marx sets out, it is the price of the money-capital loaned to productive-capitals, as capital itself becomes a commodity, whose use value is the potential to self-expand, to create profits.
“Proudhon has obviously failed to grasp the secret of how the productive capitalist can sell commodities at their value (equalisation through prices of production is here immaterial to his conception) and receive a profit over and above the capital he flings into exchange. Suppose the price of production of 100 hats = £115, and that this price of production happens to coincide with the value of the hats, which means that the capital producing the hats is of the same composition as the average social capital. Should the profit = 15%, the hatter makes a profit of £15 by selling his commodities at their value of £115. They cost him only £100. If he produced them with his own capital, he pockets the entire surplus of £15 but if with borrowed capital, he may have to give up £5 as interest. This alters nothing in the value of the hats, only in the distribution among different persons of the surplus-value already contained in this value.”
(Marx Capital III, Chapter 21)
“Additionally it might depend on whether less productive firms are shut due to the higher interest rates. If they are then productivity increases, if not it doesn’t and prices rise?”
Firstly, for the reasons set out above that would not be interest rates being an added charge on top of the costs, it would be the costs themselves rising due to lower productivity, but secondly, it assumes that the closing down of firms etc. is a function of the change in interest rates and not vice versa.
As Marx sets out, interest rates are a function of the demand and supply for money-capital, so if interest rates are rising this may be because there is general prosperity, and the demand for money-capital is rising faster than the supply of money-capital, but also it could be because there is a period of crisis, and the supply of money-capital itself has been seriously reduced, whilst firms demand money-capital to try to stay afloat. In either case, it is the economic conditions that determine the interest rate not vice versa.
Please, Michael, authorize my comment.
Apologies. Just a little inefficiency!