The first Historical Materialism conference held in Athens was very well attended – making it the biggest of such events in southern Europe and with mostly younger attendees. As is usual with HM conferences, there was a plethora of papers and sessions on all sorts of subjects around the theme of the conference, Rethinking Crisis, Resistance and Strategy. It is not possible to review these in this post. Indeed, I am not even able to consider some very interesting papers in the political economy sessions in this review.
I am going to concentrate on the issues raised in the plenary session where I spoke on the subject of Marx’s relevance to contemporary capitalism. I was on the platform along with John Milios, Professor of Political Economy at the Technical University of Athens and the author of many books on Marxist economy theory; and Costas Lapavitsas, professor of political economy at SOAS, London. Both John and Costas were also former Syriza MPs during the Greek debt crisis but broke with the Syriza leadership when the latter capitulated to the Troika.
The contributions from the platform and the floor emerged as a debate on the causes of crises in capitalism in the 21st century. John Milios’ subject was Marx’s theory of finance in the light of the ‘financialisation’ of capitalism in the neoliberal period. Costas Lapavitsas’ address was similar. Both considered financialisation as the key to current crises in capitalism. In contrast, I argued that the Marx’s law of the tendency of the rate of profit to fall lay at the heart of crises in capitalism and the new developments in finance capital and the global financial crash and the ensuing Great Recession were reactions to that law.
In my presentation (powerpoint here), I argued, in contrast to some Marxists, that Marx did have a coherent theory of crises under capitalism (by that I mean recurrent and regular collapses in investment, production and employment). It was based on Marx’s law of the tendency of the rate of profit to fall. Moreover, I argued that it was not just enough to interpret Marx’s theory of crisis from his writings and ascertain their relevance; we had to be scientific and test the theory empirically. I claimed that Marx’s law of profitability was empirically valid, with a host of statistical studies showing this to be the case. The evidence from many authors showed that the profitability of capital did fall over time (not in a straight line as there were periods of rising profitability after major depressions or wars which had destroyed the value and use of ‘dead’ capital). Indeed, this is what the recent book, World in Crisis, co-edited with G Carchedi, and containing the empirical work of authors from Europe, North and Latin America and Japan, shows.
Actually, Greek political economy has offered the most important gifts in this empirical confirmation of Marx’s law of profitability and theory of crises. In World in Crisis, Maniatas and Passas conclude that: “the claims of certain Marxists that the present crisis is not a crisis of profitability seem to be unfounded.” Also, Economakis and Markaki: “The Greek crisis resurfaced due to the low profitability of capital, a result of a rising OCC.” (from Mavroudeas); Mavroudeas and Paitaridis: “the 2007-8 economic crisis is a crisis a-la Marx (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.”. And even more recently, Tsoulfidis and Paitaridis: “The falling net rate of profit is responsible for this new phase change, the Great Recession.”
From the floor, Professor Michael Heinrich criticised my support for all these empirical gifts that show falling profitability of capital over time. He reckoned that official statistics were so dubious that the results of these many authors could not be relied on. Indeed, it may be impossible to use official statistics at all. Professor Heinrich then argued, as he has done before, that Marx probably dropped his law of profitability in his later years as he never mentioned it in relation to the contradictions in capitalism after 1875. Readers will know I dispute this claim here. Heinrich also reckoned that just showing profitability falling did not prove that such a fall was based on Marx’s law (ie through a rising organic composition of capital overcoming any counteracting factors that might raise profitability like a rising rate of exploitation or a cheapening of machinery etc).
But anybody who has read my book, The Long Depression or my more recent book, Marx 200 will see that decomposing the causes of the fall in profitability is carried out in detail. And in World in Crisis, there is a host of analyses doing the same for different countries. And what is the conclusion: that the rate of profit falls because, over time, the organic composition of capital rises more than the rate of exploitation or the fall in the value of constant capital. In a new book, the young Australian Marxist economist, Peter Jones, decomposes very carefully the forces affecting the rate of the profit in the US since the 1930s. As the graph below from his book shows, it is the organic composition of capital (green bars) that is the main cause of falling profitability.
But most important, Marx’s law of profitability is not just a secular or long-term gradual thing that has no relevance to the cycle of crises in capitalism. The law is both secular and cyclical. When profitability falls to such a point that the mass of profit and even total new value stops rising, a collapse in investment and output ensues. When capital has been reduced (closures, mergers, layoff of labour) sufficiently to restore profitability, then production recovers and the whole cycle begins again. This is the cycle of profitability that explains regular booms and slumps in modern capitalist economies.
Capitalism is a profit-making economy so it is profit and profitability that decides investment, then output and employment. The Keynesians say it is the other way round; investment leads profits. But this is back to front. In my presentation, I offered causal empirical evidence (not just correlations) that profits lead investment, not vice versa.
I argued that Marx’s law of profitability is the underlying cause of recurrent and regular crises. In his summary, Costa Lapavitsas exclaimed that how could anyone justify that “all the features of capitalist crises can be attributed causally to changes in the rate of profits with just 70 years of changes in profitability stats?” This accusation of ‘monocausality’ has been levied before at the law of profitability as the foundation of crises – see my debate with Professor David Harvey here. But this accusation does not recognise that there are different levels of abstraction in any scientific analysis of empirical events.
There are proximate causes (at the surface, contingent at the time); but beneath that are ultimate causes (laws) that explain the recurrence of similar events. Weather can vary from place to place, even within a few kilometres, but the recurrence of rain in an area can be explained by its longitude, the season, and whether it is near the sea or up a mountain. There are laws for weather. Weather varies but it keeps coming back!
Each crisis in capitalism may have a different trigger; eg the 1929 crisis was triggered by a stock market crash; 1974 by a hike in energy prices; the same with 1980-2; and of course, the Great Recession was triggered by the bursting of the housing bubble in the US and a credit crunch spread by the use of credit derivatives and other exotic instruments of financial mass destruction (Warren Buffet). But the regularity and recurrence of these crises requires a more general explanation, a theory or law.
Indeed, it was the profitability crisis of the 1970s in all the major capitalist economies that led to the neoliberal period of deregulation of finance and cheap money to enable banks, financial institutions and non-financial companies to engage in speculation in financial assets so that profits from speculation in the stock and bond markets (what Marx called fictitious capital) was a counteracting factor to the low profitability in the productive (value-creating) sectors of the capitalist economies. And as profitability still remains low despite the Great Recession, the advanced capitalist economies are now locked into a Long Depression of low investment, productivity and trade, while debt, particularly corporate debt, keeps mounting.
Such was my thesis in a nutshell. But this was disputed by Milios and Lapavitsas. John Milios argued that finance had always been at the centre of the circuit of capital. Capital has a Janus head, namely one side was the capitalist as a functioning productive investor extracting value from labour power; and on the other side was the capitalist as a lender of money for investment. But in the neoliberal period, the latter half of Janus had now become dominant or both sides had merged. This has bred an instability, inherent in finance. ‘Financialisation’ of capitalism in the neoliberal period since the early 1980s now creates the conditions for crises. Indeed, “it was the financial crisis in the Great Recession that led to the fall in profitability”, not vice versa.
Costas Lapavitsas seemed to offer a similar conclusion. For Costas, capitalism was now in a second phase of financialisation. The first was in the late 19th century when German and Austrian banks provided the finance for Austro-German capitalist industry to emerge. Then it was a capitalism dominated by the finance capital of the banks, as the Marxist Hilferding explained. But now capitalism is in a second phase of financialisation, where non-financial corporations and non-bank institutions provide credit or raise debt through bond and equity issuance.
Costas showed that financial profits as a share of total profits (at least in the US) had rocketed to over 40% by 2007 and remained much higher than in the 1970s. Debt had also risen dramatically, particularly public debt. This had happened because of the deregulation of finance and the switch by banks and other entities from providing funding for productive capital to ‘secondary exploitation’ of the working class through loans and mortgages and control of workers’ savings in pension funds. This secondary exploitation, if not the major, was the “crucial” form of profit now. It was this financialisation and secondary exploitation that explains the global financial crash and Great Recession, not Marx’s law of profitability.
Now I have discussed both the theses of ‘financialisation’ and ‘secondary exploitation’ in several previous posts which I cite here. Please read these. But the gist of my argument against the theses of Milios and Lapavitsas is that they have been mesmerised by the appearance of things on the surface and have ignored the underlying causes beneath. Yes, there has been a significant rise in financial profits and debt, not just public debt, but more important, corporate debt.
Indeed, in my earlier book, The Great Recession, I highlighted these very facts (rising financial profits) as indicators of the coming crash and slump (in 2006, I forecast a crash for 2009-10 – but I was wrong, it came in 2008-9).
Where I disagree with the financialisation thesis is when it wants to replace Marx’s law of profitability with the post-Keynesian theory of financial instability as the cause of crises. But crises in capitalism predate the 1980s: was the late 19th century depression a result of financial instability for excessive speculation in financial assets? No. Was the Great Depression of the 1930s also? No. In a chapter in World in Crisis, G Carchedi shows that there have been increasing financial crises since the 1980s, but they did not lead to an investment and production collapse, unless they were accompanied by a fall in productive profits too. It was the latter (still 60% of all profits at the height of the financial boom of the early 2000s) that was “crucial”, not vice versa.
As Carchedi points out, “the first 30 years of post WW2 Us capitalist development were free from financial crises”. Only when profitability in the productive sector fell in the 1970s, was there a migration of capital to the financial unproductive sphere that during the neo-liberal period delivered more financial crises. “The deterioration of the productive sector in the pre-crisis years is thus the common cause of both financial and non-financial crises… it follows that the productive sector determines the financial sector, contrary to the financialisation thesis.”
Marx’s law of profitability explains the role of credit and debt in a capitalist economy. Credit is clearly essential to investment and the accumulation of capital but, if expanded to compensate for falling profitability and to postpone a slump in production, it becomes a monster that can magnify the eventual collapse. Yes, financial fragility has increased in the last 30 years, but precisely because of the difficulties for global capital to sustain profitability in the productive sectors in the latter part of the 20th century.
Indeed, much of the rise in financial profits and credit in the period leading up to the global financial crash was based on fictitious capital and thus fictitious profits. When Costas said in the plenary that “what was capital gains if it was not profit”, he breaks from Marx’s view that such gains are fictitious as they are really based on speculation, not exploitation. And in the Great Recession, these gains disappeared like water in the desert of the collapse in the profits of productive capital.
Marx talked about ‘secondary exploitation’, namely the extraction from the value of labour power by gouging workers’ wages, through interest on loans, various commissions on savings etc. But the key point is that this was not an alternative form of surplus value. Value can only be created by labour power and surplus value (overall profit) can only be extracted from the labour power of workers in those sectors that add new value. If then bankers and others extract for profit a portion of workers earnings by loans etc, or take a portion of capitalist profits through interest and speculation, that is not an extra creation of value, but a redistribution of value. At least, that is Marx’s law of value.
For me, that banks and other financial institutions have got profits from this ‘secondary exploitation’ does not mean that there is some new stage in capitalism where profit from productive investment has been replaced as “crucial”. Similarly, the increase in financial profits as a share of total profits and the rise of corporate debt and speculation in fictitious capital does not mean that capitalism is in new stage of ‘financialisation’, replacing ‘old-style’ 19th century industrial capitalism. As I said in summarising my presentation: “‘Financialisation’ and/or rising inequality and/or debt are not alternative causes of crises but are themselves explained by Marx’s law of profitability. The Great Recession was a Marx, not a Minsky moment.”
In that sense, my Greek friends on the plenary platform were not delivering new gifts but a Trojan horse to Marxist economic theory. By reckoning that it is the finance sector that causes instability and crises, and not the capitalist sector as a whole, particularly the productive value-creating sectors, supporters of ‘financialisation’ open the door to reformist policy solutions along Keynesian lines. This version of Rethinking the Crisis leads to the wrong strategy, in my view.
Costas Lapavitsas courageously offered the meeting some policy solutions for ending financial crashes and ‘secondary exploitation’. He said we needed to start at the level of ‘national state intervention’ through ‘popular sovereignty’ based on ‘democracy’. Then we should introduce capital controls to stop the flight of capital and protect the value of the currency. Then we should set up public banks and a national investment bank.
For me, this programme falls well short of taking control of any capitalist economy so that we can plan production and investment and reduce the power of the market and the law of value. Ending or curbing ‘secondary exploitation’ and ‘financialisation’ by regulating capital flows and the finance sector is not going to be enough. A socialist policy must go further than ‘popular sovereignty’ and ‘democracy’. It means taking over the productive sectors of a capitalist economy from the owners of capital and breaking the law of profitability. That would be real popular sovereignty.