The Great Financial Meltdown

The Great Financial Meltdown: systemic, conjunctural or policy created? edited by Turan Subasat.

This book started from a seminar on the causes of crises hosted by the University of Izmir, Turkey back in October 2014.  Many of the top radical and Marxist economists were present.

At that seminar, distinguished Marxist, David Harvey delivered a paper criticising those Marxist economists who support the view that Marx’s law of the tendency of the rate of profit to fall (LTRPF) is the underlying or main cause of crises in the capitalist mode of production.  In particular, Harvey singled out my work to attack.  I replied to his critique on my blog and he kindly posted that reply on his popular website.  After that, there was a further exchange of views, including a strong intervention by Andrew Kliman in support of Marx’s law.

Turan Subasat has superbly brought together all the papers submitted by leading Marxist and radical scholars at that seminar nearly two years ago in this book.  He kindly invited me to present my reply to Harvey which now also appears in the book.  But there are many other interesting and relevant papers in the book by leading Marxist economists (contributors: E. Bakir, R. Bellofiore, A. Campbell, R. Desai, B. Fine, D. Fouskas, A. Freeman, D. Harvey, A. Kaltenbrunner, E. Karacimen, D. Kotz, S. Mavroudeas, S. Mohun, O. Orhangazi, M. Roberts, T. Subasat, J. Toporowski, J. Weeks.)

Unfortunately, the book is very expensive, as is the wont of academic publishers, so that only the rich and those able to get a good library will be able to read it, so I thought I would give a flavour of the ideas presented in the book by various authors, of course, through my own particular taste buds.

Turan provides an excellent introduction and summary of the combined views of these top Marxist scholars.  He argues that the causes of crises under capitalism and, in particular, the recent global financial crash and subsequent Great Recession, can be considered from three angles: is there a systemic underlying cause of crises (the falling rate of profit or underconsumption); or is it conjunctural (each crisis has a different cause); or is it the result of policy decisions (eg the neoliberal agenda, financial deregulation etc)?

On the first theme, apart from my own paper, Alan Freeman, a longstanding supporter of the LTRPF, offers a “vigorous defence” (Subasat) of Marx’s law.  Like me, Freeman reckons that we must separate the underlying cause of crises (falling profitability) from the immediate causes (financial crash).  Some conjunctural phenomena like ‘financialisation’ in the last 30 years or neoliberal policy regimes may seem to be the cause of crises but they are not alternative causes but are “themselves explained by the LTRPF.”

In contrast, John Weeks, in his paper, reckons that the LTRPF “fails to get out to the starting gate as a candidate for generating cross-country crises”.  Weeks reckons that the organic composition of capital (OCC), argued by Marx as the main driver of the tendency of the rate of profit to fall, has not risen to critical levels to justify the LTRPF as the main cause and, anyway, falling profitability does not lead to crises but just to a slowdown in the rate of accumulation (investment).

Now I have looked at Week’s arguments before.  But actually Marx himself dealt with that argument.  For him, the fall in the rate of profit eventually leads to a fall in the mass of profit.  At that point, capitalist investment will not just slow, it will start to contract sharply, leading to job losses and income falls and the start of a slump.  The causal connection between the falling rate of profit, the mass of profit and investment has been outlined and investigated empirically by several authors, including G Carchedi, Jose Tapia and Peter Jones.

In his paper, Weeks argues that there is no precise separation by Marxist economists between mild downturns in economic growth and full-blown crises under capitalism.  For him, there have been only three crises under capitalism: in the late 19th century, the 1930s and now.  Now I agree that there is an important difference between regular and recurrent recessions every 8-10 years under capitalism and what I have called ‘depressions’ that last longer and go deeper.  Indeed, that has been the main theme of my new book, The Long Depression, now belatedly available to readers.

It’s true that many financial crises are not accompanied by a slump or economic recession, as in the stock market crash of 1987, cited by Weeks as an example. But in that case, profitability in the major economies including the US was on the rise. So the crash was short-lived and quickly reversed. But that was not the case in 1974-5, the first worldwide simultaneous slump, triggered by the oil price jump, but after a decade or more of a profitability slide; or in 1980-2, again triggered by energy prices, but again after another decline in profitability.

In another paper, Simon Mohun argues that when profits are measured properly according to ‘class’ i.e. profits from ownership of capital, and not by official measures, then profitability, at least in the US, did not fall until just before the Great Recession, and so the LTRPF cannot be the cause.  Again I have looked Mohun’s thesis of several occasions and I found that, even on Mohun’s own measures, corporate profitability peaked in the late 1990s and then fell.  .

Both Weeks and Mohun look for other explanations than the LTRPF.  Weeks argues that it was the breakdown in the circuit of capital and the realisation of money that was the problem and had nothing to do with the accumulation of value in the production process, as advocated by the ‘falling rate of profit’ theorists.  Similarly, Mohun in his paper concentrates on the financial aspects of the crisis, arguing that crises are the result of breakdowns in the money circuit.

Other authors in the book also downplay the role of the LTRPF because they see a rise in profitability and little or no rise in the organic composition of capital due to the devaluation effects of technical innovation in the 1990s during the neoliberal period and, in the case of Ricardo Bellofiore, argue that we should instead look for crises in the private sector explosion of debt (‘privatised Keynesianism’), similar to the position of post-Keynesian economist, Steve Keen.

Radhika Desai, in her paper, goes even further and argues that the current crisis (and all crises) is really the result of chronic underconsumption, Keynesian style.  See John Weeks for a formidable refutation of that view (

Both Subasat and Desai seem to move towards the post-Keynesian view that cause of crises is to be found in the distribution of wages and profits, Ricardo-style, and not in the production for profit, Marxist style.  Similarly, Mohun concludes that reducing the inequality of incomes and the grotesque levels of top incomes would begin to solve recurrent crises: “unless the issue of soaring top incomes is addressed, the neoliberal financial system remains crisis prone”.

As for financialisation, however defined, that was a response to the falling rate of profit in the major economies in the 1970s; a counteracting factor, as Al Campbell and Erdogan Bakir show in their paper, and also expanded on by Freeman in his. Campbell and Bakir argue that the Great Recession was not caused by Marx’s law of profitability but was caused by the collapse of the neoliberal response to the profitability crisis of the 1970s. The policies of the ruling class in the major economies to hold down wages, allow deregulation, promote privatisation and introduce financialisation, eventually turned profitability round, but only at the expense of opening up a new underconsumption or financial crisis with a falling wage share in income and reckless credit-fuelled bubbles in housing that eventually burst.  This approach is similar to the paper by David Kotz. 

In another paper, Turan Subasat himself is keen to emphasise that the actual policies adopted under the neoliberal era were an important factor in creating the financial crash of 2008 – in effect the third strand of possible causes beyond the systemic and conjunctural.  So we have alternative explanations of the Great Recession offered in the book:  from financial deregulation (Toporowski), financialisation (Orhangazi) and overaccumulation of financial assets, to neoliberal policies (Subasat, Ben Fine).

Yet, also in the book, we have the case study of Greece, the biggest victim of the current capitalist crisis.  And here Stavros Mavroudeas, convincingly in my view, shows how the LTRPF is the best explanation of the Greek tragedy. Mavroudeas: “First, it is argued that 2007-8 economic crisis is a crisis a-laM arx (i.e. stemming from the tendency of the profit rate to fall – TRPF) and not a primarily financial crisis and this represents the ‘internal’ cause of the Greek crisis. Second, it is shown that there is also an ‘external’ cause. This comes from the relations of imperialist exploitation (i.e. unequal exchange) that exist within the EU and which divide it between North (euro-core) and South (euro-periphery) economies.”

John Weeks sums up the papers in the book.  He makes the point that, while there are substantial differences about the causes and the nature of the current crisis among the authors (the LTRPF versus poor demand or low wages; neoliberal policies; instability of finance), the most common factor among the papers was an attempt to analyse theory with empirical evidence and not just quote Marx etc.

It is interesting to compare the collection of radical economic explanations of the current crisis in this book with the explanations on the causes of the Great Recession offered by leading mainstream economists at an IMF conference more or less at the same time.

Back in 2013, at the IMF conference on the crisis, Christine Romer, head of Obama’s economic council, concluded that I think the right conclusion to draw is that financial shocks are likely to be both frequent and hard to predict – not just in their timing but in their form.”  Very little empirical evidence at the IMF conference was presented to explain the global financial crash and the subsequent slump.  It apparently remained a mystery.

Later this year, G Carchedi and I will publish a book (The World in Crisis) similar to Subasat’s, a collection of papers by young Marxist economists internationally, that will provide more comprehensive evidence to back the view that Marx’s LTRPF remains, as Alan Freeman says, “the only credible competitor left in the contest to explain what is going wrong with capitalism”.

20 thoughts on “The Great Financial Meltdown

  1. Karl Marx‘ law of the tendential fall in the rate of profit is not only indispensable for explaining the Great Recession, without this explanation, it remains a mystery that large companies and major powers lose their “comparative advantage” and new companies and new great powers rise. In short: Capitalism remains a mystery.

  2. I do not see how this question can even be conceived without factoring in imperialism, the changes in where production is located and productive and unproductive workers, and probably a lot more besides.

    Those that argue purely for the LTRTF seem to be going from the abstract to the abstract.

    1. Imperialism is only essential if we do a historical materialist analysis of contemporary capitalism (i.e. if we are in the History field of study). But imperialism is not essential if the field of study is strictly Marxist economic theory. The LTRPF is immanent to the inner movement of capital, acts upon capitalism during its imperialist phase or not; i.e. the LTRPF comes before imperialism, not after; put it another way, imperialism is a capitalist answer to capital’s LTRPF, but the contrary is not true.

      1. It is the extent to which each affect the other, or how these qualitative changes impact the theory. Surely this is a principle of dialectics?

  3. Sorry for the rudeness, but there are a lot of imposters in this book (not everyone, but a good number), that is, a lot of closeted post-keynesians (the ones mr. Roberts highlighted) and sraffians (e.g. Bellofiore). Those are not marxists:

    1) they are either cowards (because the fish post-keynesianism tries to sell you is a pacific, tranquil way out of all of capital’s brutal contradictions: good governance by notable and capable politicians and other technocrats and a little bit more empathy from the capitalist class – it is like the Economics version of Habermas);

    2) they are effectively double agents, paid to try to destroy Marx’s legacy from within; or

    3) they are both, i.e. They are cowards that at one point of their lives received the opportunity to be coopted and accepted the offer, and then interiorized this corruption in order to sleep well at night. Those we call “visionaries”: people that are paid to think they think, when in reality they are not thinking (in a scientific way).

    1. …or maybe they’re sincere revolutionary socialists who are simply mistaken? Isn’t that also possible? Is everyone who gets it wrong — and I agree that they get it wrong — necessarily a traitor?

      This sort of thinking would’ve had Rosa Luxemburg, PhD, “expelled” from Marxism because she wrote The Accumulation of Capital.

  4. Regarding the “plurarity of thought”, I think it is time for the Economics field to stop with this fetichism of academicism. I know there are a lot of “schools” in the field of economics, but, concerning science as a tool of understanding reality, it’s unbelieveable orthodox marxism is still not considered the field of economics itself – the rest being relegated to the status of religous mysticism or simply ideological doctrines/beliefs.

    To study capitalist economy without adopting Marx’s theory of value is like adopting Lamarck or creationism (intelligent design) in biology: in strict academic terms, it’s possible (because of the corporatist structure of the academy system) – but it’s still not science.

    Marx’s theory of value is the equivalent in Economics of Darwin’s theory of evolution in biology: both are still theories strictly speaking, but deep down everybody knows both are true.

  5. Virgens, Marx’s labor theory of value is historical materialism– applied to classical political economy’s (i.e. Smith and Ricardo’s) labor theories of value. Yes, Marx’s theory of value and ltrpf are fundamental, but they operate dialectically in history, not absolutely in abstract time. Marxism is the antithesis of orthodoxy. The point is to change history.

  6. Michael Roberts,

    You write,

    ‘’But actually Marx himself dealt with that argument. For him, the fall in the rate of profit eventually leads to a fall in the mass of profit. At that point, capitalist investment will not just slow, it will start to contract sharply, leading to job losses and income falls and the start of a slump.’’

    The quote is a little deceptive because you start out with claiming that this is from Marx, but link to John Weeks for the consequences of what you formulate pretty much as a law, namely that a slump occurs at the point when a fall in the rate of profit leads to a fall in the mass of profit. You don’t say that it is the only cause of a slump, but you strongly suggest that for the fall in the rate of profit to be the primary cause of a slump, it must first lead to a fall in the mass of profit.

    Thereby you actually rescue David Harvey from complete humiliation by Kliman. Discussing Harvey’s Labour Force Data argument, Kliman writes,

    “The data do indeed suggest that the mass—the absolute amount—of surplus-value or profit increased. But the issue here is what happened to the rate of profit, the amount of surplus-value or profit as a percentage of the volume of invested capital … Harvey contends that the increase in employment is, by itself––irrespective of any increase in invested capital––crucial evidence that Marx’s LTFRP has not been operative since the early 1980s. ‘If the general theory of the tendency for profit rates to fall is correct, then the spread of labour-saving technological changes … should mean a tendency for the number of waged workers employed by capital to decrease’.”

    Kliman goes on to show that the rate of profit can fall even if the mass of profit doesn’t, so Harvey’s argument is false the LTFRP could have been operative all along. However, according to you, the LTFRP could not have been operative in the sense of being the primary cause of a slump. So, Harvey is right we must look elsewhere to explain the crises of the last 30 years and consign the LTFRP to at best a very minor role.

    Or what?

    1. There is no contradiction here. Kliman is correct. The mass of profit can be rising while the rate of profit falls. The point of crisis is reached when the falling rate of profit finally induces a fall in the mass of profit. This has been shown in several papers empirically.

      Carchedi has also shown in a recent paper that when total new value (s+v) falls, then a crises usually ensues.
      Carchedi: “The crisis emerges when the fall in profitability causes a negative growth of new value. This is how falling profitability determines crises….not all periods of falling profitability result in a crisis. It is only when the new value reaches a negative percentage growth that the crisis ensues.”

      1. Kliman explicitly concedes that,

        “The (labour force) data do indeed suggest that the mass—the absolute amount—of surplus-value or profit increased”

        How can that not be contradictory to the claim that a fall in the mass of profit is an underlying cause of a given crisis in the period in question? It seems Kliman needs to identify a point where that trend was reversed, and he doesn’t in the exchange with Harvey.

        He successfully shows that the LFTRP remained ‘operative’, but not to the point of causing a crisis – the point where the falling rate resulted in fall in the mass of profit..

        I am aware that various people have shown that a fall in the mass of profit has happened at times, and that it is a good predictor of crises, the problem is that Kliman very clearly concedes the point: the mass of profit increased in the period in question.

        There must be something left out here, maybe because Kliman focused narrowly on the rebuttal of a single point.

  7. I wish to consider further the law of gravity, but instead of apples use the example of planes. Whether they are taking off, crashing to the ground or indeed stationary there, the force of gravity is the ultimate explanation. In order to fly the downward force of gravity must be overcome. Gravity posits a barrier to flying( the other is drag). This barrier is overcome by upward lift,which must be greater than the downward force of gravity. With lift and and gravity in opposition to each other, increased lift and decreased weight are objects of aircraft design.Consequently the centre of gravity of a plane must be carefully determined. Otherwise lift can be destroyed, the plane stall and the force of gravity assert itself. Only the most powerful of jet fighters can fly straight up and even they will eventually meet a barrier.
    We see then that the physics of aerodynamics do not annul the law of gravity, but ultimately express it, in that in the formulations of their theories they have constantly to take into account its effect.
    I feel we should understand the TRPTF somewhat analogously. It cannot be equated with a secular fall in the rate of profit, as Samuelson does: as if in, say, around 1750 the rate of profit had been very high and has been declining since. Rather the existence of this law obliges capitalism to take countervailing measures. ”the development of labour productivity involves a law, in the form of the falling rate of profit, that at a certain point confronts this development itself in a most hostile way and has constantly to be overcome by way of crises” (Vol. 3 p367). The TRPTF posits barriers to the accumulation of capital that capital is forced to overcome, thereby again accelerating the accumulation of capital.
    ”We have shown in general, therefore, how the SAME causes that bring about a fall in the general rate of profit provoke counter-effects that inhibit this fall, delay it and in part even paralyse it.” ”These do not annul the law…..the law operates therefore simply as a tendency, whose effect is decisive only under certain circumstances and over long periods” (Ibid. p346 ).

  8. Heinrich and others are of course not the first Marxists to cast doubt on the TRPTD. For example Meek (Economics and Ideology 1967 p126) states that Marx’s laws of motion of capitalism may be summarised as:
    1. the law of the falling rate of profit
    2. the law of the increasing severity of cyclical crisis
    3.the law of concentration and centralisation of capital
    4. the law of increasing misery of the working class

    According to Meek only the third law ”has manifested itself on the surface of reality in a reasonably unambiguous manner.”

    Here Meek takes leave of dialectics : if 3. is true, so is 1.; if 1. is false so is 3.
    Marx explains:
    “A fall in the profit rate, and accelerated accumulation, are simply different expressions of the same process,in so far as both express the development of productivity.Accumulation in turn accelerates the fall in the profit rate…. the fall in the profit rate again accelerates the concentration of capital, and its centralisation.” (Vol.3 p349)
    As for 4. the increasing misery of the working class does not mean that it is getting progressively poorer. It means rather that as capital accumulates at one pole, at the other the labouring class is denuded of all objective wealth, ”Labour as absolute poverty: poverty not as shortage, but as total exclusion of objective wealth”(Grundrisse P296).
    As for 2. Meek’s assertion of its falsity seems to smack of a certain antiquated naiveté concerning the ability of capitalism to overcome its contradictions.
    I would suggest that part of the misunderstanding of Marx’s argument lies with his Ch 14 ”Counteracting Factors” where these are not dialectically integrated as his logic suggests they really are. This is due I would reckon not only to the unfinished nature of the work but also that such an integration could only be manifestly effected at the level of the world market,with an analysis of which I believe Marx meant to crown his investigations.( the 1857 plan cf Rosdolsky p12). “the expansion of foreign trade…..becomes the specific product of the capitalist mode of production as this progresses, through the inner necessity of this mode of production and its need for an ever extended market” (VOL3 p344).

  9. Marx argues (Capital Vol.3 p349-350),
    ” A fall in the profit rate, and accelerated accumulation, are simply different expressions of the same process, in so far as both express the development of productivity. Accumulation in turn accelerates the fall in the profit rate……on the other hand the fall in the profit rate again accelerates the concentration of capital, and its centralisation, by dispossessing the smaller capitalists and expropriating the final residue of direct producers.” Detroit and the immiseration of the Chinese peasant readily spring to mind as illustrations. A hundred years ago my home town had several car companies! Now none.
    Marx continues, “a fall in this rate slows down the formation of new, independent capitals….it promotes overproduction, speculation and crises, and leads to the existence of excess capital…”
    Further,” this gradual growth in the constant capital, in relation to the variable, must necessarily result in a GRADUAL FALL IN THE GENERAL RATE OF PROFIT, given that the rate of surplus-value …. remains the same.”(Marx’s emphasis, Ibid. p318) This follows on from “this gradual change in the composition of capital does not just characterise certain individual spheres of production, but occurs in more or less all spheres, or at least the decisive ones, and that it therefore involves changes in the average organic composition of the total capital belonging to a given society…”
    Further, ‘the development of labour productivity involves a law, in the form of the falling rate of profit, that at a certain point confronts this development itself in a most hostile way and has CONSTANTLY to be overcome by way of crisis.” (Ibid. p367, my emphasis).

  10. ”We have shown in general, therefore, how the SAME causes that bring about a fall in the general rate of profit provoke counter-effects that inhibit this fall, delay it and in part even paralyse it.” Might one not add ”even reverse it”? ”These do not annul the law…..the law operates therefore simply as a tendency, whose effect is decisive only under certain circumstances and over long periods” (Ibid. p346 ).
    ”Decisive… over long periods” is what exercises us all. We might query with Meek whether the TRPTF ”has manifested itself on the surface of reality in a reasonably unambiguous way”? But why do we formulate the question in this manner? Why do we not then also ask if accumulation has accelerated, if productivity has risen, if the concentration and centralisation of capital has occurred, these being according to Marx different expressions of the same process? And I would add ”the immiseration of the working class”, this being understood in the meaning I have argued for above. Clearly in the contemporary world these processes have manifested themselves only too unambiguously, so much so that one can only marvel at Marx’s amazing prescience! If the latter are true, then so is the TRPTF, all being moments in the same dialectical development.
    In fact as one surveys contemporary capitalism one can only wonder in embarrassment that Meek, who never became a reactionary ( unlike say Ian Steedman who gravitated from the CP to being an economic adviser to some religious foundation, no doubt to warn them off designating as value ”their blessed labours in the vineyard of the Lord”),could be so limited as to pen such!

  11. We are still left with the question of what causes crises in capitalism, where we have considerable disagreement. Here we might gain some insight from a consideration of the problems faced by Marxist biologists( I strongly recommend Lewontin and Levins’ “The Dialectical Biologist”, even if you never read any other book on biology!)
    Steven Rose in his ”Lifelines”(2005 p10 to 14) presents the following fascinating puzzle: What causes a frog to jump into a nearby pond on catching sight of a snake?
    The physiologist says, ”The frog jumps because the muscles of its legs contract; in turn these contract because of impulses in the motor nerves arriving at the muscles from the frog’s brain… arriving at the brain from the frog’s retina.”
    The ethologist says, ”The physiologist ….has told us how the frog jumped but not why it jumped. The reason why is because it sees the snake and in order to avoid it.”
    The developmental biologist says, ” The only reason the frog can jump at all is because during its development, from single fertilised egg… to mature adult, its nerves, brain and muscles have be come wired up in such away that such a sequence of activity is inevitable or at least most probable given the starting conditions.”
    The evolutionary biologist says, ”The frog jumps because during its evolutionary history it was adaptive for its ancestors to do so to the sight of a snake; those that failed to do were eaten, and hence their progeny failed to be selected.”
    The molecular biologist says,”The frog jumps because of the biochemical properties of its muscles…. and hence because of chemical properties, and hence of physical properties.” Rose describes this as reductionist, and remarks ”that this is not a causal chain in the sense the physiologist uses the phrase. It is not a question of first one thing happening.., then another. If the word ’cause’ is used at all here, it must mean something quite different from how it is used in physiology. The confusion about the several ways in which ’cause’ is used has bedevilled scientific thinking since the days of Aristotle.”
    Rose observes that biology needs all five types of explanation. It all depends on our purpose in asking the question.” Excessive deference should not be paid to more reductionist type of explanations.”( e.g it’s all in the genes, it’s all in the commodity.)
    He further observes that the sciences, and he includes the social sciences, deal with different levels of organisation of matter. The divisions between levels are confused.”In part they are ontological and relate to scale and complexity, in which successive levels are nested one within another.”(p304)
    I cautiously suggest that we need to look for explanations of economic crises at multifarious levels.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: