Part of the Marxism conference in London that finished last weekend was a panel on: “Are we heading for another slump?” The speakers were myself, Joseph Choonara, author of Unravelling Capitalism and John Bellamy Foster (JBF), the editor of the US Monthly Review a longstanding journal of Marxist thought founded by Marxist economists Paul Sweezy and Paul Baran.
The answer to the question for the panel was obvious. There is going to be another slump or recession. That is nearly as certain as death. For the capitalist mode of production, once it became the dominant mode of social organisation in the early part of the 19th century, has since experienced regular and recurring recessions in a cycle of booms and slumps.
Marxist economics argues that this is an inevitable feature of the capitalist accumulation process because the drive to increase the productivity of labour and boost profit among competing capitalists faces the contradiction of the tendency of the profitability of overall capital to fall. So production for people’s needs comes into conflict with production for profit at regular and recurring intervals. Indeed, according to the US Bureau of National Research, since 1857, the US economy has suffered 33 such recessions or slumps where national output has fallen for at least six months. Other capitalist economies have experienced more or less the same.
While the speakers all agreed that capitalism is heading for another slump, the question is when, what will cause it to happen and how deep would it be? I won’t go into my explanation of why and when there will be another slump here. I have done so ad nauseam in this blog. Instead, I want to consider the explanation offered by JBF.
JBF is now the main driver of the Monthly Review ‘school’ of Marxism and Marxist economics. If you want a very good in-depth account of the history of the Monthly Review school and its proponents, read this.
As I understand it, the Monthly Review school reckons that ‘competitive’ capitalism in the 19th century eventually morphed into ‘monopoly capitalism’. According to Sweezy and Baran, this meant that capitalism also entered into a state of ‘permanent stagnation’ where economic growth was much lower than in the 19th century, along with employment and investment.
As JBH put it at the conference, the issue was no longer to explain recurring slumps in capitalism but to show why there are booms at all. The answer, as I understood it, was that, were it not for regular monetary injections by central banks and speculative credit bubbles engineered by the financial sector, along with public spending stimulus by governments, then capitalism would be in permanent stagnation. At this point, the question might be asked that, given there have been nearly 20 booms and slumps since 1945, how has capitalism has found so many ways of avoiding stagnation at regular intervals?
The MR perspective is very similar to that of the ‘secular stagnation’ thesis first promoted by Keynesian economist, Alvin Hansen, just after the end of the second world war, when he forecast that the major economies would stagnate due to weak population growth and too much saving rather than spending.
The secular stagnation argument was revived recently by Keynesian economist, Larry Summers and also promoted by Martin Wolf, the Financial Times columnist. Summers reckons that economies are caught in a sort of a ‘liquidity trap’ (see Keynes), where real interest rates (after inflation) are too high so that companies and households hoard cash and won’t spend. So the only way an economy grows now is by a series of credit bubbles that will keep bursting. Wolf argues that savings are too high globally and a ‘global savings glut’ means weak global demand and thus permanently low growth. Again, I have dealt with these arguments in other blog posts.
JBF’s explanation for capitalist ‘stagnation’ is that monopoly firms now make the bulk of investment and glean the bulk of profits. As a result, they have too much capacity and too much profit which they cannot find profitable outlets for or enough demand from households. So there is too much surplus (or savings in Keynesian terms), the very opposite of what Marx argued under the ‘competitive capitalism’ of the 19th century. The problem of monopoly capitalism is ‘too much profit’ that has to be ‘absorbed’ by speculation in financial markets, arms spending and other wasteful activities to keep up demand.
As far as I could understand, JBF dismisses Marx’s law of profitability as relevant to crises under capitalism, partly because capitalism is in ‘permanent crisis’ so the law of profitability does not apply. Also as JBF put it at the meeting, “it is a chicken and egg issue”. How can we know if low profitability is caused by low investment and low income rather than vice versa? Presumably JBF and the Monthly Review School think that it is the former: namely, investment falls and profits then fall.
This view is entirely in line with the schema proposed by post-Keynesian economist Michal Kalecki, and JBF referred to Kalecki approvingly. I have dealt with the argument of Kalecki before. The post-Keynesian approach starts with the Keynesian identity: total savings equals total investment. But this is an identity – what is the causal direction? Is it from savings to investment or vice versa? The Keynesians reckon it is from investment to savings. The Marxists reckon it is from profits (the ‘savings of the capitalist sector’) to investment.
I think both theory and empirical evidence are with the Marxist view and not that of Kalecki and the Monthly Review. Above all, capitalism is a money-making economy, not a production economy. So we must start with the generation of profit to judge how a capitalist economy is doing. Yes, there will be no growth without investment, but there will be no investment without profit. And that is the main contradiction of the capitalist mode of production revealed by Marx. Over time, as capital accumulates, there is a tendency for the rate of profit to fall and thus create the conditions for a collapse in investment and recurrent crises. Profits call the tune.
Yet JBF went on to argue that it was not. First, he said that the rate of profit in the major economies had not been falling since the early 1980s, it mainly fell in the 1960s and 1970s. That suggested that the recent Great Recession could not have falling profitability as the cause (instead, we should look at financial speculation amid ‘financialisation’). At best, we could talk about low profitability rather than falling profitability.
Well, this blog, over the years, and many other Marxist economists too, have presented evidence that stands against JBF’s conclusions. Actually, after the neoliberal revival in profitability (weak as it was) from the early 1980s, profitability in the major economies began to fall again in the late 1990s and the credit boom of the 2000s provided only a small respite. Indeed, from 2006, total profits began to fall in the US well before the financial crash, or investment dived and the Great Recession began.
“Data from 251 quarters of the US economy show that recessions are preceded by declines in profits. Profits stop growing and start falling four or five quarters before a recession. They strongly recover immediately after the recession. Since investment is to a large extent determined by profitability and investment is a major component of demand, the fall in profits leading to a fall in investment, in turn leading to a fall in demand, seems to be a basic mechanism in the causation of recessions.” (Jose Tapia “Does Investment Call the Tune?).
In the same way as Professor David Harvey has done recently, JBF suggested that there could be other causes of low profitability rather than Marx’s law – only to dismiss them. Could it be a profits squeeze caused by rising wages? Clearly not, as the wage share has fallen. Could it be rising costs of production from rising raw material prices? No, he correctly dismissed that too.
But it could not be the Marxist explanation of the costs of investment in fixed capital rising faster than the rate of exploitation of the workforce, because hi-tech equipment prices have been plummeting. It’s true that the relative price of equipment has been falling, but it is still the case that the organic composition of capital has risen in the post-war period and especially since 2000. The difference between the organic composition and the ‘value composition’ of capital is not recognised by JBF.
The MR thesis denies that there are booms and slumps inherent in the modern capitalist mode of production, because, under monopoly capital, there is only permanent stagnation interspersed with periods of speculative boom from credit bubbles. The Keynesians with a similar view reckon the answer is public spending and investment to restore demand and investment. I am not sure if JBF agrees with that. At the meeting, he was vehement in saying that there was no way out for capitalism (“Revolt or ruin”).
In a way, JBF is too pessimistic about capitalism. There is no permanent crisis. Another slump will help to destroy capital values and liquidate inefficient (zombie) firms in order to restore profitability. That will be at the expense of millions of jobs and livelihoods. In the late 19th century depression, it took six slumps to do that between 1873 and 1897. But eventually, capitalism did revive and globalised further.
That could happen again if the working classes in the major economies fail to replace the capitalist mode of production in political struggle. Capitalism could then begin a new lease of life, exploiting yet more millions in ‘emerging economies’ as cheap labour and introducing new technologies that shed labour. And, as JBF said, that will mean even more destruction of the natural world, its ecology and possibly its very existence, as the world heats up.