Stock market crash: 1987, 2007 or 1937?

Yesterday, the US stock market fell by the most in one day since mid-2007, just before the credit crunch, the banking crash and the start of the Great Recession.

Is history set to repeat itself?  Well, the old saying goes that history never repeats itself but it rhymes.   In other words, there are echoes of the past in the present.  But what are the echoes this time.  There are three possibilities.

This crash will be similar to that 1987 and be followed by a quick and decisive recovery and the stock market and the US economy will resume its recent march upward.  The crash will be seen as blip in the recovery from the Long Depression of the last ten years.

Or this could be like 2007.  Then the stock market crash heralded the beginning of the mightiest collapse in global capitalist production since the 1930s and biggest collapse in the financial sector ever – to be followed by the weakest economic recovery since 1945.

Or finally it could be like 1937, when the stock market fell back as the US Fed hiked interest rates and the ‘New Deal’ Roosevelt administration stopped spending to boost the economy.  The Great Depression resumed and was only ended with the arms race and the entry of the US into the world war in 1941.

Now I have discussed the relationship between the stock market (fictitious capital as Marx called it) and the ‘real’ economy of productive capital in posts before.

On the day of the crash, a new Fed Chair Jerome Powell was sworn in to replace Janet Yellen.  Powell now faces some new dilemmas.

Marx made the key observation that what drives stock market prices is the difference between interest rates and the overall rate of profit. What has kept stock market prices rising has been the very low level of long-term interest rates, deliberately engendered by central banks like the Federal Reserve around the world, with zero short-term rates and quantitative easing (buying financial assets with credit injections).  The gap between returns on investing in the stock market and the cost of borrowing to do it has been huge.

Of course, every day, investors make ‘irrational’ decisions but, over time and, in the aggregate, investor decisions to buy or to sell stocks or bonds will be based on the return they have received (in interest or dividends) and the prices of bonds and stocks will move accordingly.  And those returns ultimately depend on the difference between the profitability of capital invested in the economy and the costs of providing finance.  If stock prices get way out of line with the profitability of capital in an economy, then eventually they will fall back.  The further out of line they are, the bigger the eventual fall.

So there are two factors that are key to judging whether this stock crash is a 1987, 2007 or 1937 situation: the profitability of productive capital (is it going up or down?); and the level of debt held by industry (will it become too expensive to service?).

In 1987, the profitability of capital was on the rise.  It was right in the middle of the neo-liberal period of rising exploitation of labour, globalisation and new tech developments, all of which were counteracting factors at play against the tendency of the rate of profit to fall.  Profitability continued to rise right up to 1997.  And interest rates, far being hiked by the Fed, were being reduced as inflation fell.

In 2007, profitability was falling (it had been declining since the end of 2005), the housing market was beginning to dive and inflation was expected to rise and along with it, the Fed planned to raise its policy rate, as it is planning now in 2018.  But there are differences from 2007 now.  The banking system is not so stretched and engaged in risky financial derivatives.  And while profitability in most major economies is still below the peak of 2007, total profits are currently rising.  It may be that wages are beginning to pick up and this could squeeze profits down the road.  Also, the Fed plans to raise interest rates and thus also squeeze profits as debt servicing costs rise.

Perhaps 1937 is much closer to where US capitalism is now.  I have written on the parallels with 1937 before.  Profitability in 1937 had recovered from the depths of 1932 but was still well below the peak of 1926.

And more worrying now is that corporate debt since the end of the Great Recession in 2009 has not been reduced.  On the contrary, it has never been higher.  Based on a global sample of 13,000 entities, the S&P agency estimates that the proportion of highly leveraged corporates — those whose debt-to-earnings exceed 5x — stood at 37 percent in 2017, compared to 32 percent in 2007 before the global financial crisis. Over 2011-2017, global non-financial corporate debt grew by 15 percentage points to 96 percent of GDP.

The stock market crash tells me two things.  First, that it is the US economy, still the largest and most important capitalist economy, leads.  It’s not Europe, not Japan, not China that will trigger a new global slump, but the US.  Second, this time any slump will not be triggered by a housing bust or a banking crash, but by a crunch in the non-financial corporate sector.  Bankruptcies and defaults will appear as weaker capitalist companies find it difficult to meet their debt burdens and produce a chain reaction.

But history does not repeat but rhymes.  The mass of profits in the major economies is still rising and interest rates, inflation and wage rises are still low relative to history.  That should ameliorate the collapse in the prices of fictitious capital (and they are still high).  But the direction of profits, interest rates and inflation could soon change.

33 thoughts on “Stock market crash: 1987, 2007 or 1937?

  1. Is there a pattern here? Does it rhyme? Yes!

    1987, 2007 and 1937 ALL end in 7.

    Whatever else was explained, I didn’t get it.

  2. Held back my next post to evaluate the next few days. Michael, you are correct to raise the three scenarios. But each period is unique. What makes this correction unique is the following. Firstly, inequality precipitates higher stock prices as a new normal making metrics which compares todays elevated levels with previous ones more complicated. Secondly, rising inequality which elevates markets also amplifies the effects any falls have on the real economy. Why, because the top 5% now consume (unproductively) as much as the bottom 90%. So any fall in their spending impacts the real economy proportionately more and the one thing that causes it to fall is falling stock prices. Thirdly the imbecilic change to the tax code in December is the real driver of interest rates. The US government needs to find a minimum of $500 billion extra to fund the ballooning 2018 fiscal year deficit at a time when foreign investors are withdrawing over $60 billion from the bond market each month (last 4 months). Hence the paradox of rising interest rates but a falling dollar. This growing deficit means a floor has been put under interest rates which cannot now fall sufficiently to act as a counter-vailing factor. In effect the price is now being paid for the corporate give-away in December. So I would propose we are definitely not in an 1987 event but closer to 1937.

    1. UCAN,

      The point you make about the withdrawal of foreign funds from US bonds is correct, and one I predicted some time ago, that because speculators are seeking capital gain/avoidance of capital loss, rather than yield, when a central bank like the Fed removes its support for asset prices by ending QE, the result is a weakened currency rather than a strengthened currency, which is the normal mantra. The speculative hot money moves to European bonds, where the ECB continues to pump out lots of QE, to put a floor under EU bonds.

      However, as I wrote at the start of the year, at some point, perhaps even before the ECB stops its QE, US official rates, and/or US bond yields may rise to a point whereby the risk reward calculation is changed. In other words, as US yields rise, to absolute levels that start once again to provide a significant reason to look for revenue rather than capital gain, and as the risk of EU bonds suffering a crash/new debt crisis, or the ECB stopping QE or all of the above, that hot money could quickly rush back to the US, driving up the Dollar, and driving down the Euro, and crashing Euro bonds and equities.

      But, the reason I think that 1962 is a more appropriate comparison is, as Fred Mishkin sets out, it was a period when economic growth was rising. Indeed, 1962 is a similar point in the post war long wave cycle to the one we are at now. The reason that asset prices fell in rela terms from around the mid 1960’s, was precisely the rise in interest rates that results from the increase in economic activity, and the rise in wages that causes the demand for wage goods to rise, whilst squeezing the rate of surplus value and profit. It means that to meet the rising demand capital must accumulate at a faster pace, whilst the squeeze on profits reduces, relatively, the supply of loanable money-capital, from realised profits, so that the demand for money-capital rises relative to the supply of money-capital.

      As Marx points out, there is no reason that such a financial markets crash should affect the real economy, because it simply implies the loss of paper wealth by a section of speculators, and a transfer of that paper wealth into the hands of some other group. The 1962 stock market crash, unlike the 1987 crash, did not see interest rates fall, or share prices recover in real terms. But the continued rise in interest rates, and the steep fall in share prices did not at all prevent the continuation of the post war economic boom during the 1960’s, one bit.

      1. But profitability is not rising as fast and as much as in 1962. In 62, they could give themselves the luxury of playing cute, but not now.

        Also, we still don’t know how this QE is going to end. The Fed has trillions in rotten papers that it still hasn’t got rid of, and corporate debt didn’t lowered. The margin of maneuvre is much narrower now (not to say non-existent).

        Like Michael Roberts wrote: history may rhyme, but it doesn’t repeat. To trace parallels with ancient times might be a fun academic exercise, but it isn’t a scientific one.

      2. It is also true to say that the financial sector was more stable in the 1960’s and before. The report Boffy attached makes the point that there had been no bank failures for a decade or so. So not exactly the same as now!

      3. Virgens,

        The point is that in 1962, we had entered the phase of the long wave cycle where profits were getting squeezed, as wages rose due to existing labour supplies being used up relative to the existing technology.

        In Capital III, Chapter 15, Marx says,

        “Given the necessary means of production, i.e. , a sufficient accumulation of capital, the creation of surplus-value is only limited by the labouring population if the rate of surplus-value, i.e. , the intensity of exploitation, is given; and no other limit but the intensity of exploitation if the labouring population is given.”

        And this relates directly to his analysis later in the chapter of exactly what he means by a crisis of overproduction, being a crisis where capital has expanded to such an extent relative to the existing working population that any expansion of capital cannot produce additional surplus value. There is a profits squeeze, because it is no longer possible to produce absolute surplus value by extending the working-day further, it is impossible to produce additional surplus value by employing additional workers from the reserve army, because women, children, peasant producers, migrants etc. have already been resorted to, and it is impossible to raise relative surplus value by resort to technology, because the existing level of technology has already been rolled out extensively, and productivity is no longer rising sharply. As he says,

        “There would be absolute over-production of capital as soon as additional capital for purposes of capitalist production = 0. The purpose of capitalist production, however, is self-expansion of capital, i.e., appropriation of surplus-labour, production of surplus-value, of profit. As soon as capital would, therefore, have grown in such a ratio to the labouring population that neither the absolute working-time supplied by this population, nor the relative surplus working-time, could be expanded any further (this last would not be feasible at any rate in the case when the demand for labour were so strong that there were a tendency for wages to rise); at a point, therefore, when the increased capital produced just as much, or even less, surplus-value than it did before its increase, there would be absolute over-production of capital; i.e., the increased capital C + ΔC would produce no more, or even less, profit than capital C before its expansion by ΔC. In both cases there would be a steep and sudden fall in the general rate of profit, but this time due to a change in the composition of capital not caused by the development of the productive forces, but rather by a rise in the money-value of the variable capital (because of increased wages) and the corresponding reduction in the proportion of surplus-labour to necessary labour.”

        (Chapter 15)

        This is a classic profits squeeze of the Smithian variety, as Marx describes in Theories of Surplus Value, Chapters 12 through 17. As opposed to the basis of the long run tendency for the rate of profit to fall, due to rising productivity, and a higher rate of surplus value, it is based upon stagnant productivity, and a falling rate of surplus value, due to higher wages, as the labour supply gets used up.

        If all of the other solutions such as bringing children, women and migrants into the workforce have been exhausted, the only solution for capital, is to replace labour with technology so as to create a relative surplus population, and thereby drive down wages and raise the rate of surplus value. That prompts a drive for innovation to produce these new technologies that can then be introduced to that effect. That happened in the 1970’s, and 80’s, as this profits squeeze led to the crises of the 70’s and early 80’s.

        But, we are currently at that pre-crisis phase that similarly existed in 1962, where capital still has reserves of labour-power to draw on, so that although wages start to rise, they do not rise to a level whereby the rate of profit/profit margins starts to get squeezed to such low levels that it becomes ever more likely that produced commodities cannot be sold at prices that do not reproduce the capital consumed in their production, leading to a generalised crisis of overproduction. Of course crises of overproduction occur (partial overproduction) for individual capitals all the time, because three is necessary disproportions in the economy between different spheres of production, consumer preferences change, and so on so that demand and supply for any commodity only ever balances by accident. As Marx says, capitals account for these periods where they might sell below the price of production, and so on, due to market fluctuations, in calculating their longer term rate of profit.

        In fact, I would say that 2008 was probably a closer approximation to 1962, and both have similarities to the financial crisis of 1847. But, I have always argued that the next financial crisis will only really be a continuation of 2008, because 2008 was effectively cut short by state and central bank intervention that stopped it, by first reproducing the conditions that had led to 2008 in the first place, i.e. by massive money printing and flooding of financial markets with liquidity, and secondly by then acting once the credit crunch and panic had subsided, to act to undermine those factors that had provided th spark to the crisis, i.e. the economic growth that had risen sharply after 1999, which had led to a rise in global interest rates, which acts to crash capitalised asset prices, and the start of a general rise in wages, which threatens the rate of surplus value, and starts to squeeze profits. They did that by encouraging money into financial speculation, and by introducing stringent austerity as a means of slowing down economic growth.

        Its notable that the crash that started last Friday came after yet another set of strong US, EU and other global economic data, after global bond yields and other interest rates had been rising for weeks, after another strong US jobs number, and after German workers in IG Metall had just won a significant pay increase without much of a battle – similar conditions applied just before the 2008 crash. In fact, capital has to choose. Either accept a significant crash in financial asset prices and property prices, or else have to deliberately destroy the real economy to an even greater extent so as to prevent a rise in interest rates, and rises in wages. Even people like Carl Icahn are now starting to recognise this dilemma, as he set out in an interview yesterday on CNBC.

        But, I doubt that capital CAN deliberately crater the real economy further so as to save asset prices, because everywhere, populations are removing politicians that promote further austerity, whilst competition between individual capitals inevitably forces them to accumulate capital to respond to increasing demand, as more labour is employed. In fact, Elon Musk is emblematic of the condition that Marx describes, when money has flooded into financial speculation thereby depreciating money capital, and destroying yields.

        “It would be still more absurd to presume that capital would yield interest on the basis of capitalist production without performing any productive function, i.e., without creating surplus-value, of which interest is just a part; that the capitalist mode of production would run its course without capitalist production. If an untowardly large section of capitalists were to convert their capital into money-capital, the result would be a frightful depreciation of money-capital and a frightful fall in the rate of interest; many would at once face the impossibility of living on their interest, and would hence be compelled to reconvert into industrial capitalists.”

        (Capital Chapter 23)

        It is that depreciation of money-capital that caused the hyper inflation of asset prices – and as I predicted some years ago also inflated away a good part of government debt thereby – but, of which the other side is the cause of the cratering of yields on those financial assets, whilst millions of individual capitals have found that available money has been sucked into that financial speculation in search not of yield but of capital gain, which has then meant, as Michael set out back in 2014 that these small and medium sized capitals are confronted with a famine of funds, which means that they have to seek out much more expensive forms of borrowing money-capital, such as the use of personal credit cards, and increasingly a resort to peer to peer lending.

        So long as speculators feel that they can get a 20% p.a. capital gain, they will not be bothered about getting no yield, a mentality that also lies behind the idiocy of bourgeois financial pundits who see high stock and bond prices as the basis for providing pensions, when in fact they represent the exact opposite. They make it more difficult for workers pension contributions to buy shares and bonds, and it is the quantity of those shares and bonds in the fund, which is the basis of future revenues, not the current market prices of those assets.

        If you are a millionaire, and expect to get a 10% capital gain from holding shares, or owning a property you might be happy with that £100,000 a year, rather than risking your capital in productive activity, even if you get bugger all in yield from doing so. But, if asset prices appear to have reached a level where the best you can hope for is that the asset price does not fall, and you are only getting 1% yield on the asset, your calculation changes. You might not be able to live on just £10,000 a year, and so putting your £1 million to work productively, where you might earn say £75,000 p.a. as profit becomes a more attractive alternative.

        For a billionaire, even a 1% yield on their billion gives them £10 million a year revenue. So that Elon Musk has used his billions to invest productively in Spacex, Tesla etc. in actual production maybe an exception, but it is an exception that indicates underlying trends. In fact, it also indicates why the state will be hard pushed to hold back economic growth to save stock and bond prices, because even if it engages in austerity in spending itself, large private capitals may simply step into the breach, even in huge spheres such as space technology, where they see the potential for profits. The only way the state could then hold back economic growth would be if they imposed swingeing austerity along with large tax rises to take money out of consumers pockets. That would provoke a serious response, and currently, as in the US we see the opposite, a recognition of an increased need for infrastructure spending, alongside tax cuts.

        Trotsky points out that history does not exactly repeat, but that does not mean we can’t learn from past events of a similar nature, and thereby discern what is nuanced in any current situation. Whether the financial crash is like 1929, 1937, 1962 or whatever, the fact remains that the crash is coming, and it is coming not because of any global economic malaise, or tendency for the rate of profit to fall, but in fact because of the opposite, because of growing global economic strength, causing the demand for money-capital to rise relative to the supply, thereby causing interest rates to rise – and whether the Fed raises 2,3 or 4 times during the year is irrelevant because as Marx sets out in Capital III, and TOSV, Part I, central banks do not determine interest rates any more than they determine other commodity prices – and so causing capitalised asset prices to fall. The same economic strength is causing existing labour supplies to start to get used up, and wages to rise, squeezing the rate of surplus value, and thereby relatively undermining the supply of loanable money-capital from realised profits, which again acts to cause the rate of interest to rise, which further causes capitalised asset prices to fall.

        It is indicative that the period when the owners of fictitious capital were dominant over the last 30 years has come to an end, and the period ahead is one in which the interests of socialised industrial capital will dominate.

      4. VK says: “The Fed has trillions in rotten papers that it still hasn’t got rid of,”

        Not exactly. The Fed hold about 4.3 trillion in securities of which 2.5 trillion are US Tsy instruments and app 1.7 trillion are mortgages guaranteed by the various government agencies, GNMA, FNMA, FMAC. FNMA and FMAC are out of receivership and the Fed and the Tsy get paid off first.

      5. “The point is that in 1962, we had entered the phase of the long wave cycle where profits were getting squeezed, as wages rose due to existing labour supplies being used up relative to the existing technology.”

        Profits getting squeezed? In the US between 1962 and 1968, corporate profits grew 58%.

        By wages? Well for the same period, wages and salaries grew 54%.

        So where’s the squeeze? On this planet, I mean. On Planet Boffy, anything can happen.

      6. “Not exactly. The Fed hold about 4.3 trillion in securities of which 2.5 trillion are US Tsy instruments and app 1.7 trillion are mortgages guaranteed by the various government agencies, GNMA, FNMA, FMAC. FNMA and FMAC are out of receivership and the Fed and the Tsy get paid off first.”

        Like I said, rotten papers.

  3. You talk of investors making irrational decisions but many of these decisions are based on pre programmed algorithms. I guess an algorithm is only as good as the variables!

    I think you are correct to make the point that if the US sneezes everyone catches a cold but what if China were to sneeze? Is the fact that China is a more planned economy a determinant in the affect it has on the rest of world? Does it produce less anarchy? I don’t see the Chinese planning department, for all its powers, having that much oversight. The beast is still out of control.

    1. Algorithms are not AI. They are just very sophisticated levers and pulleys.The reasoning behind algorithms is still that of who created it.

      We must separate what is what in China. One thing is its stock market, another thing is its planned economy. We do not live in a socialist world: we are still living in a capitalist world, with some pockets of socialism.

      1. I think I agree with you on China. I do not automatically equate planning with socialism btw. I think it is true that in the capitalist world planning is done to a greater degree than the Soviets ever managed. of course its the natire of the planning that is important.

        But the question was why doesn’t the world catch a cold when China sneezes, is it that China doesn’t sneeze or is China not yet important enough?

      2. China is a socialist country by all accounts: it considers itself socialist and it is considered by its main enemies as socialist (or communist, in liberal vocabulary) and, until socialism becomes the dominant mode of production, nobody can prove otherwise.

        But China exists in a capitalist world. It has to submit itself to certain capitalist rules. The financial market being one of them.

        The USA controls the financial system mainy for two reasons: 1) it owns SWIFT (the dominant financial infrastructure used in the world) and 2) it is the dominant maritime power (it controls the commercial routes, therefore the flow of merchandise).

        That’s why the American Dollar is the standard fiat currency: investors know that, ultimately, no other country has the means to knock on America’s door and force it to pay back its debt. That’s why, e.g. the American Dollar rose after the 2008 crisis — they went to the safe haven in order to protect wealth.

      3. So a general crisis is really only ever a financial crisis? And because the US dollar dominates and the USA dominate financial infrastructure (So SWIFT is a nationalised company?) only a crisis there can cause a general crisis elsewhere? And because China is not dominant in finance a general crisis can not result from a crisis in China?

        If you can’t prove China is socialist until everywhere becomes socialist how do you know if socialism has become the dominant mode if you can only prove it by its actual existence? If we can’t say what socialism is now how are we to recognise it when it arrives?

        I would have thought some degree of socialist could be objectively judged against certain criteria, i.e. it can be defined in some way and something can be evaluated against that definition?

      4. One thing is the theory. There isn’t space here to rediscuss what constitutes socialism as a general theory, so I’m not entering there.

        Another thing is how this theory materializes in practice (remember what Marx once stated: better one step forward in the real world than one dozen of programmes).

        Hodiernal China was the fruit of a socialist revolution, initially inspired in our holotype — the Russian Revolution.

        After 1978, there was a major reform, which deviated China from the USSR (which is the consensus holotype of socialism today, or, as is pejoratively called, real socialism).

        But in no moment did Deng Xiaoping stated he was ending socialism in China, nor did the CCP as a whole. There was a debate about what was going on at the USSR at the time, since there were already clear signs what was happening in the USSR would not result in communism not even in one million years. The conclusion was that, in order to save the Chinese Socialist Revolution, it would be necessary to acess reality and bend the system so it doesn’t break. Thus “market socialism” was born.

        It is important to state that Marx never stated market was only a capitalist feature. Trade and commerce don’t equal capitalism. Capitalism is process that envolves both production and circulation, but it doesn’t own monopoly over commerce (which already existed since ancient times), let alone trade (which will continue to exist forever in human history). The term “market socialism” is not a contradiction of terms. It isn’t an absurd propaganda either. It is just being realist: it is what China is, it is what it is. The Chinese quickly learned about the Soviet propaganda failures (and the capitalist success in it), and they opted to be simply sincere about it.

        I agree with the CCP’s official definition of what system China has: China is a market socialist country, market socialism here being the most primitive form of socialism, the transition of the transition (since socialism is, by definition, a transition system), with two capitalist provinces: Hong Kong and Taiwan (hence the “one country, two systems” motto).

  4. What’s the line about generals always prepared to fight the last war….. something like that. 1937, 1962, 1987, 2008, 1929. No reason that any of those “financial crises” should have any impact on the “real” economy. But of course they do. Just as 1990-1991 had a real impact.

    Praise the once-upon- a-time Lord, and pass the out-of-date ammunition.

  5. Virgens,

    The data relating to the profits squeeze, due to rising wages during the period in the UK can be found in Andrew Glynn and Bob Sutcliffe’s “British Capitalism, Workers and the Profits Squeeze.” In relation to the US, of which I am less familiar, however, a similar pattern seems to apply.

    Tha data for wages can be found here, showing that according to the BEA, in 1960 average wages stood at $4817, and rose to $7711 in 1970, a rise of 60%.

    The same site, also provides data for profits which rose from $48.5 billion in 1960 to $71.5 billion in 1970, a rise of 47%. However, the point here as I have set out previously, and is what Marx also sets out in TOSV Chapters 12-17, is not the absolute levels of profits, and their percentage increase.

    I have described that error made by the bourgeois economists and financial pundits, who see a rise in absolute profits as being the basis of rising share prices in a growing economy. The point is not just that the mass of profit rises, but how much capital has to be advanced to produce that profit. The value of commodities is not resolvable simply into wages and profits (or rents and interest etc) as Adam Smith, Keynes et al believed, but into c + v + s.

    The mass of profit can continue to rise, even as it gets squeezed by wages, causing a fall in the rate of surplus value, if the total capital itself expands. So, as Marx describes in TOSV, if the value composition of capital changes, as opposed to the organic composition, and if more capital in total is employed that can be because more is paid out in wages, or it can be because more is paid out in materials, or a combination of the two.

    So, if the total capital advanced rises, a rise in the mass of profit is still consistent with a squeeze on profits,a nd with a squeeze on the rate of suroplus value.

    1. Virgen,

      John King and Philip Regan, in their 1976 book “Relative Income Shares” also set out income shares on the basis of “Labour ” and “Property” for the UK. In their table 2 on p 20, they show for the period 1960-3 Labour with a 73.6% share and property with a 26.4% share. By 1969-73 that changes to 75.6% for Labour and 24.4 for for property. I would also disagree with some of the definitions, and the way that the social wage is dealt with.

      On page 26 K&R say, that glynn & Sutcliffe show the profits share falling gradually through the 1950’s and 60’s, and then rapidly after 1964. K & R continue,

      “Their conclusions are supported by a careful reworking of the data by Burgess & Webb.”

      They go on to cite further confirmation in the work of Thirlwall, Heidensohn, and Zygmant, “according to whom “a steady rise om the wage income ratio since 1950 appears to accelerate in the 1960’s.”.

      K & R conclude the chapter by saying,

      “Glyn and Sutcliffe suggest that the profits squeeze is an international phenomenon, although some of their evidence for other Western economies is rather weak… Convincing evidence of a recent shift to labour in the United States is provided by Thirlwall, and also by Nordhaus. For Germany, on the other hand, Heidensohn and Zygmant show that the wage income ratio has been constant, with perhaps a slight downward tendency since 1956.” (p 27)

      As with all things relating to National Income data, I think it has to be taken with a pinch of salt. The fact remains that Marx set out the logical basis for these shifts at different periods of the cycle, and if the big picture variables of shifts in interest rates seem to confirm Marx’s analysis of what should be happening as a result of the underlying logic of the system and its cycles that would seem to me to be a confirmation of Marx’s theory, whatever bourgeois statistics, not designed to facilitate Marxists analysis might say, on the surface.

    2. You got to love Boffy, or not. He quotes, as evidence of a wage squeeze, a table on average annual wages AND SALARIES INCLUDING EXECUTIVE COMPENSATION, while studiously ignoring ON THE SAME PAGE the table of hourly wage for production and non supervisory workers which shows an increase of 45% 1960-1969; and 24% 1965-1969.

      My data comes from the BEA Interactive tables available at

      “But in particular I absolutely LOVE this by Boffy: “I have described that error made by the bourgeois economists and financial pundits, who see a rise in absolute profits as being the basis of rising share prices in a growing economy. The point is not just that the mass of profit rises, but how much capital has to be advanced to produce that profit. The value of commodities is not resolvable simply into wages and profits (or rents and interest etc) as Adam Smith, Keynes et al believed, but into c + v + s

      The mass of profit can continue to rise, even as it gets squeezed by wages, causing a fall in the rate of surplus value, if the total capital itself expands. So, as Marx describes in TOSV, if the value composition of capital changes, as opposed to the organic composition, and if more capital in total is employed that can be because more is paid out in wages, or it can be because more is paid out in materials, or a combination of the two.”

      First, what is this but an iteration of Marx’s rate of profit argument, since Marx’s rate of profit is calculated on the total capital advanced, not just the constant capital?

      Secondly, go ahead there Boffy show us where and how the rate of surplus value declined in the US. And after you’ve done thatshow us how the decline in the rate of surplus value is a scenario that does not involve a decline in the rate of profit.

      Next Boffy will tell us how the 2001 recession was a wage induced profit squeeze; and so was 2007-2009, because after all, wages advanced off their lows in the periods leading up to the recessions.

      BTW I’m so glad Boffy doesn’t bother answering me.

  6. Hence my preoccupation with determining whether we are in the “rising animation” phase since end 2015 or the “prosperity phase” which Marx defined, inter alia, as one in which the demand for money capital finally caused interest rates to rise.

    1. How about we continue to be in secular decline phase, where rates of overall economic growth, capital investment, and profitability remain below previously established highs, in conjunction with ongoing overproduction of the means of production as capital to which the bourgeoisie have responded by transferring wealth up the ladder and reducing the funding level of social reproduction–i.e. public schooling; medical care; transportation etc, and reducing production workers and production worker hours?

    2. UCan,

      “Hence my preoccupation with determining whether we are in the “rising animation” phase since end 2015 or the “prosperity phase” which Marx defined, inter alia, as one in which the demand for money capital finally caused interest rates to rise.”

      I have previously thought that the “prosperity” phase, or Spring Phase of the long wave ended around 2012. That would be consistent with the usual periodisation of the long wave cycle, with each phase last between 10-15 years. However, I have come tho think more recently that all of the actions of governments and central banks after 2008 to hold back economic growth, have prolonged the Spring Phase, or perhaps more accurately caused a hiatus in the period of transition from one phase to another.

      As I set out in reply to Virgens, there is clear evidence that towards the end of the post-war Spring phase,but more markedly in the Summer Phase, wages start to rise, and this causes a squeeze profits. In the Summer Phase the mass of profits can rise even faster than in the Spring Phase, despite this squeeze on the rate of surplus value, because the the total capital advanced increases by a larger amount so that more labour in total is employed. As Marx describes in Capital III, Chapter 6, and in TOSV Chapters 12 -17, this can also arise due to rises in other input costs, i.e. a change in the value composition of capital, as opposed to the organic composition.

      In other words this is a squeeze on profits that arises from the opposite causes of the law of the tendency for the rate of profit to fall. The latter Marx sets out arises from a condition of rising productivity that is driven by technological changes that result in a saving of labour that creates a relative surplus population, that relieves the previous pressures caused by the using up of labour supplies, which in turn led to the fall in the rate of surplus value, and squeeze on profits. The same technological developments cause the value of constant capital to fall (both fixed and circulating), however, the rise in productivity, is manifest precisely in a rise in the quantity of material processed by a given mass labour, or that the same mass of labour requires less labour to process it. The classic manifestation of this latter effect is during the stagnation phase, where intensive accumulation results in slower growth, and more persistent unemployment, as a new reserve army is created, on low wages ready for the next upturn. It results in a higher rate of profit, as the rate of surplus value rises, whilst the value of constant capital falls, and this is what also thereby creates the excess supply of loanable money-capital over its demand, which leads to falling interest rates, and the steep rises in asset prices, as was seen in the 1980’s, and 90’s, in global bond and stock markets.

      The period after 1962, was similar to the period from around 1849, which Marx describes in Value, Price and Profit, whereby the prosperity phase caused the demand for labour to rise, and wages rose squeezing profits. As marx describes, it was precisely that squeeze on profits due to a fall in the rate of surplus value, which led capital then to look for new technological solutions to replace labour.

      In 1962, in Britain, we had had during the 1950’s, a response to this kind of massive additional demand for labour a resort to immigration, as new migrants from the Caribbean were encouraged to come to Britain by the then Tory government, and we had had an encouragement of married women workers into the workforce, made possible as their domestic labour was increasingly replaced by the introduction of domestic appliances such as vacuum cleaners, electric washing machines, various electronic gizmos for assistance with cooking and so on, which raised the productivity of domestic labour. In addition, the expansion of the welfare state, removed what had previously been a task of domestic labour into being a commodity provided by the state, and paid for collectively out of wages. In fact, this latter increase in the social wage was another aspect of the rise in wages, not shown in National Income data, and a similar thing applies to the US where The Great Society measures introduced by Johnson which increased the social wage are also not reflected in pure wage data.

      In other words, by the early 1960’s, we had exactly the kind of situation that Marx describes in the quote I gave above from Chapter 15, that it had started to become impossible to increase the rate of surplus value by extending the working-day, and the measures to expand the social working-day, by increasing the mass of labour employed (immigration, women workers), had also reached its limit, and so the further rises in employment caused wages to rise, and profits to get squeezed.

      As Marx describes in TOSV Chapter 12-17, this squeeze on profits, and the rate of profit is the exact opposite of the conditions that apply with the law of falling profits. It is a squeeze on profits of the type that Adam Smith proposed, and in part that Ricardo describes (in relation to rising material costs, rents etc.) In other words it is a rise in the value composition of capital, not in the technical and thereby organic composition. As Marx sets out in TOSV it is a completely different matter if the rate of profit falls from one cause as opposed to the other.

      In other words, if capital is comprised

      c 100 + v 100 + s 100 = 300, s’ = 100%, r’ = 50%.

      This may be because a unit of c and v costs £1, so that 100 units of each are employed. The 100 units of labour produce £200 of new value, half of which goes to reproduce the value of labour-power, and the other half constitutes surplus value.

      However, suppose the price of c rises to £2. If only £200 of capital exists, its then clear that it could not continue on the same basis. The technical composition of capital requires that 1 unit of labour be employed to process 1 unit of material. So, at £2, 66.6 units of material would be bought, the workforce would be reduced to 66.6 units to process it, leaving 33.3 units of labour unemployed. The value composition of capital would have risen from 1:1 to 2:1, even though the technical, composition of capital would have remained constant at 1:1. The consequence would be that the price of each unit of output would rise, whilst total output would fall, because less material is processed.

      Moreover, because only 66.6 units of labour are employed, the amount of new value produced falls to £133.3, so that although the rate of surplus value remains 100%, the amount of surplus value produced falls to £66.6. Now although the rate of surplus value remains constant, the mass of surplus value falls, and with it, the rate of profit falls so that it is now only 33.3%.

      Now, Marx says, suppose that as well as this drop in social productivity, or rise in prices due to increased demand, causing material prices to rise, it causes wage goods to rise, leading to a higher value of labour-power, or he says, assume the higher demand for labour-power simply causes money wages to rise. If the price of c and v rises to £2 per unit, the same £200 of capital would now buy only 50 units of c, and 50 units of v to process it. The technical composition of capital remains constant, and the value composition of capital also remains constant, and the organic composition of capital remains constant, all at 1:1.

      Marx’s law of the tendency of the rate of profit to fall tells us that the rate of profit falls as a consequence of rising productivity that causes the technical and thereby organic composition to rise. There is no basis in accordance with that Law for the rate of profit to fall. But, Marx explains in TOSV, precisely why it does fall in the conditions described here. 50 units of c are employed and 50 units of labour are employed to process it. The 50 units of labour create £100 of new value, just as previously 100 unit produced £200 of new value. But, now the cost of employing these 50 units of labour is £100, so that all of the new value created by this labour is required just to reproduce the labour-power, so the surplus value, and rate of surplus value falls to zero, and so does the rate of profit along with it.

      In his further example of this kind of squeeze on profits, as the exact opposite of the law of falling profits, Marx says assume that the price of units of c remains constant, but the price of wage goods rises, causing the value of labour-power to rise, or else, he says, assume the demand for labour-power rises, causing simply a rise in money wages. The same £200 of capital would then buy 66.6 units of c, and 66.6 units of labour to process it. The value of c is £66.6, whilst the value of wages is now £133.3. So, now the technical composition of capital is still 1:1, but the organic composition has fallen so that it is 1:2. According to the law of falling profits, this lower organic composition of capital should result in a higher rate of profit than previously. In fact the exact opposite occurs, as Marx sets out. Now, the 66.6 units of labour creates £133.3 of new value, but all of this is required to reproduce the labour-power. The rate and mass of surplus value falls to zero, and so does the rate of profit. The unit price of output remains constant, because there has been no change in the unit price of c, whilst the total value of output falls from £300 to £200, because the volume of output has fallen by a third.

      This is completely opposite Marx says to the conditions that exist with the law of falling profits. There it is technologically driven rising productivity that leads to a rise in the mass of surplus value, and a fall in the rate of profit. So, if the technical composition of capital rises to 2:1, we might then have the capital of £200 expended as
      c 133.3 + v 66.6 + s 66.6.

      So that now 133.3 units of c at a unit price of £1 are processed by only 66.6 units of labour at a unit price of £1. Now this small mass of labour processes a greater mass of material and produces a greater mass of output. But, because a third less labour is employed, it creates a third less new value, i.e. only £133.3 rather than £200, and this is the basis for the fall in the rate of profit, whilst the rate of surplus value remains constant.

      These latter are the kinds of condition that arises in the stagnation phase, as new labour saving technologies, during a period of intensive accumulation slow the growth in labour demand relative to output.

      The former conditions, however, are those that arise in the latter Spring, Summer and most acutely Autumn or crisis phase of the cycle. They are what arose in 1962, and deepened through the 1960’s, 70’s, and early 80’s, until the new range of labour saving technologies developed as part of the Innovation Cycle that peaked in 1985, begins to replace labour, to undermine its bargaining position, reduce wages, and raise the rate of surplus value.
      For the same reason that I believe that the coming Financial Crisis will really be just the continuation and completion of the 2008 Financial Crisis, I think that the period after 2009 has been a hiatus in the long wave cycle, brought about by all of those measures of QE and austerity that sought to hold back economic growth so as to divert potential money-capital into financial speculation to reflate asset prices, and to prevent rising economic growth causing a rise in interest rates an wages that would have squeezed the rate of surplus value, and pushed interest rates higher still leading to a huge crash in asset prices.

      So, to answer your question, I think we are now on the cusp between the Spring and Summer phase, but with the dynamic now clearly pushing into the latter. But, for the same reason, I now expect this delayed onset of the Summer Phase, to be marked either by a more intensified period of growth, to compensate for the delay, or more likely that the Summer Phase is similarly extended, running through to 2031-5, rather than ending in 2025, before the onset of the next crisis phase.

      1. Ucan,

        There were a couple of other points I forgot to include in the above, but I will come to shortly. I was just watching Mark Carney’s Press Conference, and it was interesting that he more or less confirmed the points I have been making.

        Firstly, global growth is not just rising but rising much more strongly than had even recently been forecast. 90% of global economies are now growing at rates above trend he said, and that is currently being led by investment. You might remember that over the last three or four years, whilst Michael and others have been forecasting that lower rates of profit were going to result in lower investment, and so the onset of a new recession, I argued that that was not going to be the case.

        And, indeed, no global recession did arise in any of those years as had been predicted, and now instead of a major new recession let alone Depression, we have this strong pick up on global growth on a pretty much synchronised basis, and that is despite all of the measures of austerity to try to hold back economic growth, and despite all of the money printing and other measures by government to encourage money capital into financial and property speculation and away from real capital accumulation.

        Carney made the point that UK interest rates were likely to rise sooner and faster than previously expected because although Brexit uncertainty was holding back UK investment, global growth would pass through to the UK, at a time when low levels of productivity in the UK meant that the economy was already coming up against capacity constraints, which means that additional labour demand is likely to cause wages to rise, and other capacity constraints are likely to cause domestic input costs to rise.

        Of course, bourgeois economists always refer to rises in wages of this nature as leading to wage or cost push inflation. But, as Marx points out rising money wages only results in such price inflation if the monetary authorities monetise the wage rises by a corresponding increase in money printing. Other wise, as Marx sets out in Value, price and Profit, as against Weston, the rise in money wages instead causes a fall in surplus value, and profit share, of the type I have been describing. That is what happened in the 1960’s, and is recurring now, and is what gives the central banks and governments a quandary in trying to hold back growth so as to stop interest rates rising, and causing a collapse in asset prices.

        On CNBC yesterday, Carl Icahn made an almost identical point. He said he sees a 1929 style asset price crash as more or less inevitable, and for the very reasons I have been setting out.

        Now to come back to those points I referred to at the start. In the examples I gave reflecting the examples that Marx gives in TOSV of rises in the value composition of capital resulting in a squeeze on profits, as the exact opposite condition he describes as applying as a result of the law of falling profits, I set out the scenario where a rise in the money price of materials or of wages results in a given size of capital being able to buy fewer units of those inputs, which results in a fall in the mass of surplus value, and squeeze on profits.

        But, Marx also in those examples sets out the extension of that. In the case of rising money prices for materials or labour-power, as a result of rising demand for those inputs, that logically means that demand for the end product is also rising – there may be variations as Marx says such as where a new machine such as a spinning machine capable of processing a much larger mass of cotton brings about a large rise in demand for cotton, causing cotton prices to rise sharply etc.

        But, the relevant point is that if final demand is rising sharply, which is the basis for the rise in demand for these inputs, which causes the money price of those inputs to rise, its unlikely that the response of capital will be to reduce the scale of reproduction. Instead, as Marx says, in response to a rise in the price of material more capital will be mobilised so as to continue production on at least the same scale. So, say the price of materials rises from £1 to £2 per unit, instead of reducing production, additional capital will be mobilised to be able to buy the same quantity of material.

        So, where we had c 100 + v 100 + s 100 = 300, s’ = 100%, r’ = 50%. And, this equalled 100 units of c and 100 units of v, we would have

        c 200 + v 100 + s 100 = 400, s’ = 100%, r’ = 33.3%.

        But, this fall in the rate of profit is not the result of the law of falling profits, which is based upon rising productivity and a rise in the technical composition, and thereby organic composition of capital, it is based purely on a rise in the money prices of c, which brings about a rise in the value composition of capital, whilst the technical composition remains unchanged. This is actually the explanation for the tendency of profits to fall set out by Ricardo and Malthus, based on falling productivity, and which Marx takes apart.

        However, the important point in relation to the discussion of interest rates and financial asset prices is this. In order to be able to maintain reproduction on the same scale, additional capital has to be mobilised. So, the demand for money-capital thereby rises. Either the additional capital is derived from the flow resulting from realised money profits, so that the capitalists must reduce their unproductive consumption, or in each individual case, each capital throws less of its realised profits into the money market as it uses those profits to provide the additional capital it requires itself, or it must itself dip into the money market to a greater extent to borrow money-capital to make up its own deficiency.

        Those additional funds from the money market can only come from the flow of realised profits into the money market, or from the stock of existing money-capital arising from accumulated savings, and reserve funds for things like depreciation funds. It cannot, as Marx sets out in TOSV come from a central bank printing additional money tokens, because if that happens and the additional liquidity goes into general circulation, it simply depreciates the currency, depreciates existing money-capital, increases the money prices of commodities, and thereby causes the prices of the commodities that comprise the productive-capital to rise. It would then cancel out the nominal rise in the supply of loanable money-capital by causing the nominal demand for money-capital to rise by an equal amount.

        The consequence of the rise in demand for money-capital, thereby is to cause interest rates to rise, in the way Marx describes in Capital III, in setting out the dynamics of this phase of the cycle. As interest rates rise, it thereby causes a fall in the capitalised value of revenue producing assets, which causes the fall in stock and bond markets, and fall in land and property prices.

        I have set that out, in my post here. In a previous post, I have also set out the graph showing the inflation adjusted falls in the Dow Jones Index that arose in the 1960’s, as this process of rising interest rates took place, even as the mass of profits rose significantly. To avoid posting problems I will give the link for that post separately.

  7. Boffy, thank you for your detailed reply and I presume by spring you refer to rising animation and summer to prosperity. I take a divergent view. I held back my posting waiting for the 10-year bond auction by the US treasury yesterday. It had great significance, because being nor well subscribed, interest rates went back up to 2.85% the level which triggered the mini-crash on the markets last Friday. This uptick in interest rates led to a roller coaster day ending with the markets falling at the close. I note that today the market are down as a result. This is significant because it shows how sensitive the economy is to interest rates. Clearly the 2.85% ceiling is the trigger not the 3.5 to 4.0% projected by Wall Street. This enduring fall out means what is happening may amount to more than a mere correction. One of us will be right and we should know within a couple of months. Anyway I argue the case more forcefully in my new posting It may turn out that Michael is right, the economic knot could be undone in the US rather than China after all.

    1. UCan.

      Marx normally starts the cycle with the stagnation phase, I seemed to recall he then refers to the prosperity phase, then to boom, then to crisis, before the return to stagnation.

      Starting again from the stagnation phase, my long wave pases, following on from the general convention is Winter, Spring, Summer, Autumn.

      I don’t think its the economy that is sensitive to interest rates. For goodness sake if they are sensitive to a rate hike at these levels, then the system must be really about to collapse! On the contrary, it is the strength of the global economy that is driving rates higher, and by rates I do not just mean the ridiculously rigged rates for government bonds, and for the major corporate bonds, but real market rates of interest that real productive capitalists are having to pay to borrow. What is sensitive to those rate rises, is the financial markets, because rising rates mean lower capitalised values for revenues.

      A collapse in asset prices may spill over into the real economy as a result of a credit crunch, or because some capitals with large amounts of financial assets on their own balance sheets run into problems, but as Marx sets out there is no necessary reason why it should, because the day to day prices of those assets has nothing to do with the day to ability of the corresponding productive-capitals to produce commodities, or to produce profits. It merely represents a transfer of paper wealth from the hands of one set of speculators into the hands of another.

      The 1962 Crash, like the 1847 crash is informative, because in both cases, there is very strong economic growth. The main reason the 1847 crash had an impact on the real economy was only because of the mistaken Bank regulation brought in with the 1844 and 1845 Bank Acts, which created a credit crunch. Once the Acts were suspended, the credit crunch was brought to ahalt, and the economic boom continued.

      In 1962, again there was strong economic growth, and although the S&P dropped by 23%, it did not have any impact on the real economy. In fact, as I’ve set out elsewhere, its interesting to note the difference between the period 1950-1980, as compared to 1980-2000. In the period 1950-1980, which covers a period somewhat beyond where I would count the boom period of the post-war boom ending, around 1974, US GDP rose by around 850%, whereas the Dow Jones rose by only 312% (both nominal).

      In other words, the stock market rose by less than half the rise in GDP.

      Between 1980 and 2000, the Dow Jones rose 1322%, whilst US GDP rose by only 257%. So here the situation is reversed that the stock market rose by around 6 times the growth of GDP!

      As I believe that conjuncturally we are in a similar period of long wave expansion as we were between 1949 to 1974, I expect that this same correlation between economic growth and asset price growth to reassert itself via the role of interest rates. We are in a peculiar situation as a result of two factor. Firstly, the technological changes brought about in the 1980’s led to such a dramatic rise in productivity, and cheapening of constant capital that it caused a larger than normal rise in the average annual rate of profit, which translated into a large rise in the supply of money-capital relative to its demand, which caused the reduction of interest rates to very low levels that fuelled the initial rise in asset prices. Secondly, central banks have been prepared to destroy the real economy to an unprecedented extent in the last twenty years so as to prevent interest rates rising, and keep asset prices inflated.

      But, it can’t change the fundamental laws of economics. It will only result in the financial crash being that much larger when it asserts itself. About 8 years ago I wrote that the consequence might indeed be that it also impacts the real economy, but if this time it is allowed to run its course (unlike in 2008), then I expect that the impact on the real economy might be sharp but short, leading to an incredibly powerful economic recovery.

      Watching that Falcon heavy rocket soar into the sky, and then the two booster return back to their launch pads, a look at the extent to which robot technology offers a whole range of new consumer durable products, in networked homes, along with DNA sequencing that enables flexible specialisation in healthcare, with domestic robots in every home administering health and social care on demand, I think indicates the vast areas of new markets that are ready to be opened up.

  8. Boffy’s argument re the wage-push/profit squeeze depends upon a reduction in the rate of surplus value. So can Boffy provide any data showing the changes in the rate of surplus value between 1962 and 1970? Or any period post WW2? For any advanced capitalist country? And can he show us, with the data, the methodology used for making the determinations? I bet not. It’s just Boffy using whatever he finds convenient for his fantasy world of spring-summer-fall capitalism.

  9. While we’re discussing this, What Wage Squeeze. The recent reported acceleration in wage growth for Jan 2018 reported in the US at 2.9% is not an increase in the rate of growth of wages to PRODUCTION and non-supervisory workers. For those workers, wages were up only 2.4% from January 2017 levels, the same rate of increase achieved for the last several years.. Supervisory workers had gains of 5% in the year to year period.

    Moreover, the average length of the work week for production workers declined in January 2018. The actual rate of change for the single month January 2018 for production and non-supervisory workers was LOWER than the rate of change for November and December 2017.

    What is beginning to tick up are……layoffs.

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