The profitability of crises

I was recently interviewed on my book, The Long Depression, and on other economic ideas, by José Carlos Díaz Silva from the Economics Department of the National University of Mexico (UNAM) where I have been invited next March 2018 to deliver a series of lectures.

In the first part of this interview, Jose questions me on the basic themes of my book.

JCD: In general terms, how could you explain the recent crisis? Can we link the United States crash in 2008 with the problems that followed in Spain, Greece and Ireland, and the latter with the recent scenario as a unique process of crisis?

MR: In my book, The Great Recession and my subsequent book, The Long Depression, I argue that the global financial crash of 2008 and the ensuing deep global slump in capitalist production were caused by a combination of the falling profitability of productive capital (Marx’s law) and excessive borrowing to speculate in fictitious capital (stocks, bonds and property).  At a certain point, bank lending and mortgages and their ‘diversification’ into mortgage-backed derivatives (bought worldwide) could no longer be funded as profit in productive sectors dropped and incomes fell back.  The great Ponzi scheme of financial speculation then collapsed and revealed the underlying failure of capitalist production.  Investment plunged and took employment, incomes and consumption down with it.

This is the ‘normal’ process of capitalist crisis: profitability falls to a point where profits in total stop rising, then investment collapses and the costs of capital (means of production and labour) are reduced violently.  This particular slump was worse because it was combined with the destruction of fictitious capital that had reached unprecedented levels; and because it was global.  Every major economy and financial sector was affected.  The banking crash and the massive credit squeeze spread to Europe.  The credit crunch hit the property markets of Spain and Ireland; and the excessive over-leveraged property and corporate sectors in Greece.  Greece was brought to its knees because of the previously wild borrowing at cheap rates by Greek corporations especially in property; and the tax evasion and capital flight of those corporates and the rich meant that the Greek government had insufficient revenues to handle a collapse in the economy and meet the demands of its creditors, the French and German banks.

So the Euro crisis was really a crisis of global capitalism.  But it had special features in that the weakest parts of the Euro area were hit hardest because they were dependent on investment from the core (Germany, France etc).  And the Euro leaders were unwilling to subsidise the weaker economies.

JCD: Why is important to build a general theory of capitalist crisis?

MR: If we do not develop general theories then we remain in ignorance at the level of surface appearance.  In the case of crises, every slump in capitalist production may appear to have a different cause.  The 1929 crash was caused by a stock market collapse; the 1974-5 global slump by oil price hikes; the 2008-9 Great Recession by a property crash.  And yet, crises under capitalism occur regularly and repeatedly.  That suggests that there are underlying general causes of crises to be discovered.  Capitalist slumps are not just random events or shocks.

The scientific method is an attempt to draw out laws that explain why things happen and thus be able to understand how, why and when they may happen again.  I reckon that the scientific method applies to economics and political economy just as much as it does to what are called the ‘natural sciences’.  Of course, it is difficult to get accurate scientific results when human behaviour is involved and laboratory experiments are ruled out.  But the power of the aggregate and the multiplicity of data points help.  Trends can be ascertained and even points of reversal.

If we can develop a general theory of crises, then we can test against the evidence to see if it is valid – and even more, we can try and predict the likelihood and timing of the next slump.  Weather forecasting used to be unscientific and just based on the experience of farmers over centuries (not without some validity).  But scientists, applying theory and using more data have improved forecasting so that it is pretty accurate three days ahead and very accurate hours ahead.

Finally, a general theory of crises also reveals that capitalism is a flawed mode of production that can never deliver a harmonious and stable development of the productive forces to meet people’s needs across the globe.  Only its replacement by planned production in common ownership offers that.

JCD: When talking about the pertinence of the falling profit rate as a determinant of the crisis, it is commonly underlined in Marx’s works as the strongest explanation. This is, if Marx himself considered the falling profit rate as the foundation of the main explanation of the crisis, then we should think of it as correct, but if we find some textual evidence, in the Marx’s writings, that shows he abandoned this thesis In his last years of work, then it will be incorrect thinking on the falling rate of profit as the main explanation of the crisis. How fruitful is this way of doing research? Is it possible that waiting for the “Marx approval” is a noxious one for the possibility of constructing a theory of crisis?

MR: Interpreting Marx’s voluminous writings to ascertain what his theory of crises is useful, but only to some extent.  Marx’s contribution must be the foundation of any effective and relevant theory of crises under capitalism, in my view.  But as you say, there can be many interpretations and Marx’s unfinished works lead to ambiguities that can exercise academics and scholars for a lifetime!  So there are severe limits on this type of research.  Even if we were to agree on what Marx’s theory of crises is (or even that he had one – because that is disputed), what if he were just wrong?

Moreover, it is 150 years since Marx developed his analysis of capitalism based on the main example of British capital in the mid-19th century.  The world and capitalism has moved on since then – in particular, it is the US that is now the dominant hegemonic capital, capitalism is now global and controlled even more than before by finance capital.  Thus a theory of crises must take into account these new developments.  Also, we have much more data and information to work on compared to Marx’s limited access.  The task now is not to keep analyzing and re-interpreting Marx, but to stand on his shoulders and raise our understanding.

JCD: If we define the organic composition of capital as the level of the value of the means of production to the value of labor power, does this variable depend on distributional factors or the profit rate? Do you think it is important to take into account the materialized composition of capital and the organic composition of capital?

MR: The organic composition of capital is an important Marxian economic category.  It shows the social relation between human labour and machines as the means of production.  Under capitalism, individual capitalists compete to extract the maximum amount of value (and surplus value after paying for the wages of labour power) from their workforces.  That competitive drive for profit (getting the greater share of the total value produced) pushes capitalists to increase their use of machinery in order to raise the productivity of labour by shedding labour (costs).  So Marx reckoned that a rising organic composition of capital was the long-term tendency of the capitalist mode of production.  Indeed, it was the basis of the law of the tendency of the rate of profit to fall (the law as such).  The organic composition of capital is measured in money but Marx says its mirrors the technical composition of capital (machines measured in hours of labour against the amount of hours worked).  However, the increase in machinery by capitalists to replace labour will raise the productivity of labour and reduce the value of labour power if the costs of reproduction of labour fall.  And it can also reduce the costs of machinery.  So the value composition of capital can fall.  But Marx said that, as a rule, this would only slow the rise in the organic composition of capital, not cause it to fall over the long term.

All the empirical evidence shows that Marx was right.  So the basic assumption of Marx’s law of profitability, that there will be a rising organic composition of capital over time, is realistic and proven.  If there is no change in the rate of exploitation or surplus value of the workforce, then a rising organic composition will lead to a fall in the rate of profit.  However, increased mechanization will usually lead to a rise in the productivity of labour and the rate of surplus value.  This acts a counter-tendency to the rising organic composition of capital and the tendency of the rate of profit to fall.  But the tendency will override the countertendencies over time.

JCD: Is the dynamic between the falling profit rate and its counter tendencies the explanation of the economic cycles? Why is so? Which are the differences with the ideas of the Kondratiev’s long waves and the one of Schumpeter about the cycle?

Yes, in Marx’s theory, it is the dynamic between the rising organic composition of capital and the counter-tendencies of a rising rate of surplus value and a falling value composition of capital.  Marx’s law of profitability means that eventually a fall in the profit rate leads to a fall in the mass of profit or at least a fall in new value created.  This leads to a slump in new investment. Capitalists then look to reduce their costs of capital (labour power and assets). So capital values are devalued (after the bankruptcy and merger of capitals and a large increase in the reserve army of labour) to the point where the mass and rate of profit begins to rise again for the surviving capitalists and then investment resumes, and with it employment and incomes. The whole cycle commences again.

In my view, this profit (ability) cycle, as I call it, is the basis of the so-called business cycle.  But it is not the same as the business cycle.  That is affected by the turnover of capital in productive sectors and in unproductive sectors like housing, also by international trade etc.  The profit cycle from trough to trough can last 30-36 years, while the modern business cycle (Juglar) appears to be 8-10 years.  So, for example, in the period 1946-82, there were several business cycles or slumps (1958, 1970, 1974-5, 1980-2).

The Kondratiev cycle, if it exists, and I am inclined to think so, is much longer term, over 54-72 years (I think it has been getting longer).  The K-cycle is driven by the swings in world commodity prices and probably by the cluster of innovation cycles delineated by Schumpeter – but also by the direction of the profit cycle.  The K-cycle has been getting longer because people are living longer (at least in the major economies), so the generational effect is now four times 18 years, not four times 14 years, if you like.  This affects the length of the innovation cycle of discovery, development, explosion, maturity and stagnation – possibly.  In many ways, these are all hypotheses to be proven. Data points are few.  But I argue in my book, The Long Depression, that the conjunction of the downward phase of the K-cycle, the profit cycle and Juglar cycle only happens once every 60-70 years.  When it does, capitalism has a depression rather than just a ‘normal’ slump.  This was the case in the 1880s, the 1930s and now.

JCD: What are the main difficulties for calculating the profit rate? Is there some way of calculating the circulating capital turnover? If it would be possible to calculate the capital turn over, how different the calculation of the profit rate could be? This can explain the constancy of the materialized composition of capital that some have shown?

MR: The difficulties of measuring the rate of profit from the view of Marxian categories are manifold!  First, we must use official statistics that are not accumulated in the best way to measure Marxian categories.  Indeed, some Marxist economists reckon that trying to measure the rate of profit using official statistics in money is impossible and pointless.  Others reckon that the data are so poor we cannot do it practically.  I do not agree.  It is the job of any scientific analysis to overcome these theoretical and practical difficulties in measurement.  And many Marxist economists are doing just that.

On categories, should we measure the rate of profit of the whole economy, or just the capitalist sector, or just the corporate sector, or just the non-financial corporate sector, or just the ‘productive’ sector?  Should or can we include variable capital and circulating capital in the denominator?  Should we measure gross profit or net profit after depreciation?  Can we measure depreciation correctly?

All these various measures are useful and possible.  The data are available for many major economies and many Marxist scholars have now made such measurements.  And yes, variable capital should and can be included empirically.  And there has been work on measuring the impact of the turnover of capital too.  What increases confidence in this work is that, by and large, whatever measure is used, it shows, for most countries, over time that the rate of profit has been falling.  Of course, not in a straight line because there are periods when the counteracting factors dominate, if only for a while.  And each major slump produces a temporary recovery in profitability.  But these turning points are also broadly at the same time.  All this increases confidence that Marx’s law of profitability is valid and relevant to an explanation of recurrent crises under capitalism and also its eventual demise as a mode of production.

JCD: Which is the correct way of calculating the profit rate: historical cost or current cost? Why is so?

MR: Theoretically, capital accumulation should be seen as temporal.  By that I mean, a capitalist must pay a certain money amount for machinery and raw materials to start production.  Then the workforce is employed to produce a new commodity for sale.  It does not matter if the cost of replacing that machinery in the next production cycle has changed.  The profit for the capitalist should be based on the original (historic) cost of the machinery etc not on its current (replacement) cost.  So the rate of profit properly measured should use historic cost measures.  However, this is a matter of theoretical debate, with some scholars arguing for replacement costs and some arguing for something in between!  What is interesting is that the difference this makes to the measurement of the rate profit is greater or lesser according to the change in prices of the means of production over time.  So in the recent period where inflation has been low, particularly for capital goods, over time, the difference between the rate of profit measured on historic costs versus current costs has narrowed.

JCD: Why is the profit rate not in the core of the recent discussion about the crisis, both in the academic and journalistic field? Is it not paradoxical speaking about capital without underlining the profitability determinants?

MR: The reason that profitability is not considered in any discussion of crises is both ideological and theoretical.  Mainstream economics has no real theory of crises anyway: crises are just chance, random events or shocks to harmonious growth under capitalism; or they are the result of the interference in competition and markets by governments, or central banks; or they are result of monopoly or financial recklessness or greed.  Mainstream economics also denies any role or concept of profit in its marginalist theories of production and demand.  This is deliberate: there is no place for a theory of profit based on the exploitation of labour power (Marx’s value theory).  Diminishing returns on utility and productivity lead to no profit at the point of equilibrium.  Also heterodox/Keynesian theories also deny the role of profit, as they are also based on marginalism and (im)perfect competition.  Crises are therefore the result of a ‘lack of effective demand’ caused by an ‘irrational’ change in expectations (‘animal spirits’).  It has nothing to do with the profitability of capital, apparently – or more precisely the exploitation of labour.  And yet capitalism is a system of production for profit in competition.  So why is profit not a determinant in investment and production?  It is an ideological refusal to accept that.  Instead apparently, everybody gets their fair share according to their (marginal) contribution.  The mainstream finds no explanation of crises as a result; and the Keynesians look to ‘demand’ not profit as the driver of crises.

Taking a risk

The US Federal Reserve is taking a risk.  Yesterday the Fed’s Monetary Policy Committee raised its so-called ‘policy’ interest rate that sets the floor for all interest rates for borrowing in the US and often overseas.  This means the cost of borrowing to spend in the shops or to invest in business expansion will rise.

Sure the increase was only 25bp (0.25%), from 1% to 1.25% but the Fed clearly intends to continue with further hikes (up to a target of 3% eventually). It has already stopped its quantitative easing programme (boosting bank reserves).

and now it is raising the price of money as well as reducing the quantity available.  Money is getting ‘tighter’ to get.

The Fed is doing this because it believes (or hopes) that the US economy is now set on a sustained acceleration of real GDP growth back to the trend levels of 3%-plus seen before the Great Recession.  The Long Depression, at least in the US, is over, according to the Fed.

But there are indicators in the US economy that the Fed has got it wrong.  First, the Fed thinks that price inflation in the shops and for household services will eventually average 2%-plus a year and so it needs to raise rates to control rising inflation.  And yet the very latest figures for inflation released this week show that it is slowing down, not accelerating.  In April, US personal consumer inflation dropped back to 1.7% a year (core inflation is just 1.5%), with three months of little or no rise.  Although the labour market is ‘tight’ with the unemployment rate very low, there is little or no acceleration in wage rises and consumer spending is weak.

This is very much against the traditional Keynesian economic thinking that tight labour markets lead to rising wages and inflation, in the so-called Phillips curve. The trade-off between low unemployment and rising inflation was exposed as wrong in the 1970s when capitalist economies had both high unemployment and inflation: stagflation. Now the Fed faces low unemployment and low inflation: ’secular stagnation’The Phillips curve is not operating.

The Fed committee is ignoring the low inflation data and instead is emphasising the proposed pick-up in US economic growth that is to come.  Yet the latest real GDP data do not justify that optimism.  In the first quarter of 2017, annual real GDP growth was just 1.2%.  Most forecasts for the current quarter (April-June) suggest a annualised growth rate of 2.5%.  That means in the first half of the year, the US economy would be growing at around 1.8% a year, actually slower than in 2016.

The Fed is forecasting 2.2% for the whole of 2017 – hardly matching pre-crash growth rates.  But even reaching that would require an annual growth rate of 2.6% for the second half of 2017.  Indeed, the Fed expects a growth rate of only 2.1% next year and 1.9% in 2019, with a long-term growth rate of only 1.8%.  This is hardly Trump-type projections of 3-4% a year that Trump claims he can achieve. Indeed, as John Ross shows in an excellent post, US capitalism has consistently shown a declining trend in growth rates, particularly in the 21st century. And that is due to the slowdown in business investment.

All this assumes no new recession before 2020.  And that is the risk. Hiking the cost of borrowing when the economy is only growing moderately and inflation is low will put pressure on corporate debtors, causing a new reduction in investment and even bankruptcies. US corporate debt has never been higher as companies have piled up bonds and loans at very low rates of interest.  Rising costs of borrowing could begin to turn the boom into bust.

Some Keynesians reckon the Fed should change its target for inflation to 4% so its policy rate would not be hiked until inflation reaches that level.  Others say that letting inflation rise to that level and keeping interest rates low for much longer would create a huge financial credit bubble that could be uncontrollable as the economy accelerates.  In other words, mainstream economics is flying blind, unsure what to do.

When the Fed started its hiking plan last December, I warned that the Fed was taking a risk that, given weak business investment, hiking interest rates might push a layer of US companies into difficulty and trigger a new recession or slump.  Indeed, that was why the Fed held off further hikes for a while.  But now it is taking a further leap into the unknown.

It’s true that, after falling in most of 2016, US corporate profits recovered a little towards the end of 2017.  But corporate profits fell back again in Q1 2017, although they were up 3.7% from a year ago. But only including financial sector gains: non-financial sector profits were down on the year.

Globally, corporate profits have also picked up.  Investment bank JP Morgan now follows closely the connection between global corporate profits and business investment (at least one set of mainstream economists who recognise the importance of profit in capitalist economies!).  Readers of this blog will know that there is a close connection between profits, investment and growth in capitalist economies.  JPM finds that global profits are now rising at 5% a year and thus project a similar rise in investment and growth.  So maybe the improvement in profits, investment and growth in Japan and Europe will compensate for the continued weakness in the US.  We shall see.

Moreover, the interest rate set in the US also drives interest rates globally, given the powerful role of US capital.  There has been no real reduction in the build-up of private-sector debt in the major economies that took place in the early 2000s and culminated in the global credit crunch of 2007. That accumulated debt took place against a backdrop of favourable borrowing conditions—low interest rates and easy credit. Between 2000 and 2007, the ratio of global private-sector debt to GDP surged from about 140% to 163%, according to the IMF.

In the emerging economies, after the Great Recession the increase in private sector debt has been massive. Most of this extra debt is the result of corporations in these countries borrowing more to increase investment, but often in unproductive areas like property and finance.  And much of this extra borrowing was done in dollars.  So the Fed’s move to raise the cost of borrowing dollars will feed through to these corporate debts.   The relative recovery in global corporate profits and economic activity in the last part of 2016 may not last through 2017.

Investment, profit and growth

I’m always banging on about the close connection between the movement of investment (expenditure on the means of production) and economic growth.  In my view, the evidence is overwhelming (The profits-investment nexus) that it is investment that is the main swing factor in booms and slumps, not personal consumption as many Keynesians focus on.  And it is also a key factor in the long-term growth of labour productivity.

A new analysis by the Levy Forecasting Center, an institute that follows closely the views of Keynes, Kalecki and Hyman Minsky, also confirms this view.  The report comments that “unsurprisingly, net fixed investment is strongly related to growth.”  

The slowdown in real GDP growth since the end of the Great Recession is clearly connected to the slowdown in business investment growth


Business investment in the US has ground to a halt and the age of the existing means of production has risen as ageing equipment and technology is not replaced.

As Levy puts it: “In 2009, net investment as a share of the capital stock fell to its lowest level in the post-World War II era and the nominal capital stock even declined. Although net investment has rebounded somewhat in the recovery, its level as a share of the capital stock remains well below the historical average and it declined slightly in 2015.”

Levy points out that investment growth contributes to labour productivity growth most directly through capital deepening—the increase in capital services per hour worked.  “That had added nearly 1 percentage point a year to labor productivity growth in the post-war period to 2010. But since 2010, capital deepening has subtracted from productivity growth and contributed slightly more to the slowdown from 1948-2010 to 2010-15 than did the slowdown in total factor productivity growth.”  In other words, it was just the slowdown or cutback in the sheer amount of investment that did the damage, even more than any slowdown in the use of new techniques.

However, the Levy Institute then fails to explain this investment slowdown. It argues that “this broad-based investment slowdown is largely associated with the low rate of output growth both in the United States and globally”.  This is a circular argument. The slowdown in economic growth is due to the slowdown in business investment, and that in turn is due to the slowdown in growth!

This is close to the argument of the Keynes-Kalecki thesis (espoused by the Levy Institute) that it is investment that creates profit, not vice versa. This nonsensical view should be countered with the realistic one that is the movement in profitability and profits that moves business investment.  And as I and others have shown empirically, this is what happens in a capitalist economy.

For example, Andrew Kliman and Shannon Williams have shown that the fall in US corporations’ rate of profit (rate of return on investment in fixed assets) fully accounts for the fall in their rate of capital accumulation.  And they conclude that “Since a long-term slump in profitability, not diversion, is what led to the trend towards dis-accumulation, it is unlikely that the trend can be reversed in the absence of a sustained rebound of profitability”.

Indeed, if we delineate the rate of profit in the non-financial productive sectors of the economy, we find that profitability has struggled to rise since the 1980s and so along with it, business investment growth has slowed.  Anwar Shaikh, in his latest book, Capitalism, adjusts the official data for measuring the US rate of profit and shows that profitability has stagnated at best since the early 1980s, rising to a modest peak in 1997 before slipping back to a post-war low by 2008.

Similarly, Australian Marxist economist Peter Jones has shown that if the ‘fictitious’ components of profitability are removed from the calculation of the US corporate rate of profit, then the ‘underlying’ rate of profit has never been lower (  Profitability of productive capital consolidated during the 1990s but then dived to post-war lows just before the Great Recession, with little recovery since.

The US rate of profit (excluding ‘fictitious profits’) %

The Levy analysis also makes the valid argument that high corporate debt is impeding new investment.  Non-financial corporate sector debt relative to ‘value-added’ (i.e. sales revenue) is at a historically high level and this is weighing on capital spending.

US business investment in the first quarter of 2017 had a slight uptick after falling for four quarters. That followed a return to positive territory for corporate profits in the second half of 2016 after going negative in early 2016.


Does this mean that investment and economic growth is set to pick up finally?  Not according to Levy.  Levy interestingly (in opposition to its own Kalecki thesis) note that “looking back, the capex decline in 2015-16 and the subsequent rebound lagged the profits decline and recovery.”  But Levy reckons that the “corporate profits recovery is likely to stall by mid-year and capital spending will follow with a lag”.  If that happens, the US economy will be heading down, not up, by the end of the year.

UK election: British capital in disarray

The UK election result is a personal disaster for the Conservative leader Theresa May. She called the snap election to get a big majority and crush the opposition Labour party and its left-wing leadership. But instead the Conservatives lost seats and its majority in parliament and Labour under leftist Jeremy Corbyn increased its share of the vote dramatically after a vigorous campaign.

The turnout was 69%, the highest since 1997, when the figure was 71.4 per cent. It seems that young people turned out for Labour, particularly in the big cities. Labour gained 10% to reach 40%, while the Conservatives also increased their share by 5% to 42%. The big loser was the anti-EU anti-immigration party UKIP which collapsed.

There is now what is called a ‘hung parliament’ with no overall majority for one party. This makes the upcoming Brexit talks with the EU in a mess as there is no ‘strong and stable’ government to negotiate.

But more than a disaster for May and the Conservatives, this is one for the British ruling class.  The negotiations over the terms of Britain leaving the European Union are supposed to start on 19 June and now the EU negotiators will face British ones having lost their majority in the British parliament.  The terms of any deal are going to be hard on the interests of British capital: on the terms of trade, employment mobility and on capital flows for the City of London.

At the same time, the UK economy is already struggling.  In the first quarter of 2017, the UK’s real GDP grew more slowly than any other top (G7) economy. The British pound dropped sharply after the election result and it is likely to fall further as foreign investors consider their options, given the uncertainty of what will happen with Brexit and the paralysed position of a minority Conservative government unable to carry out any economic policy measures.  Sterling has already fallen by over 15% since the Brexit referendum result last year.

That has led to substantial rise in prices in the shops from higher import prices.  Inflation is likely to rise further, driving down real incomes for the average British household.

And that is after British households have suffered the longest stagnation in real incomes in the last 166 years!

The UK trade deficit with the rest of the world keeps widening as British exporters fail to take advantage of a weaker pound and import prices rise.

The reason that British capital is not gaining from the devaluation of the currency is that British manufacturing and services are still not competitive because productivity growth is virtually zero.

It’s nine years since the start of the global financial crash in 2008. Since then, real GDP per person in the major economies has risen on average at less than 1% a year. That’s well below the trend average before the global crash. Germany has done best with a cumulative rise of 8.7%, even better than the lucky country, Australia (6.8%). But the UK has managed just 2% over nine years!

The main reason is the sharp fallback in the growth of the productivity of labour. The UK economy has depended instead for its (limited) growth since the end of the Great Recession from a consumer boom and a big increase in immigration of young people from Eastern Europe and the EU.  According to the most recent ONS statistics, there has been no increase in the number of UK-born in employment over the last year. All the net increase in employment has been due to those born abroad. If the Brexit negotiations go ahead and the free movement of labour is lost, British business is going to have to use domestic labour and skills.  Employment growth will slow and national output will falter unless productivity rises.

And the main reason it won’t is the failure of British businesses to invest in productive capital ie new machinery, plant and computer software.  Business investment has hardly risen since the Great Recession even as profitability recovered.

That’s because profits were concentrated in the large companies while the small and medium sized companies made little and could not get credit. The large companies (mainly tech and finance) returned their profits to shareholders in dividends and share buybacks or held cash abroad in tax havens, rather than invest.  And business profitability in the UK started to fall back even before the Brexit vote.

The UK economy is set to enter a period of stagnation at best. The OECD’s economists are already forecasting that the UK economy will slow down to just 1% next year as Brexit bites.  And there is every likelihood of a new global recession in the next year or two.

After the 2015 election which the Conservatives won narrowly, I argued that the victory was a poisoned chalice and the Tories would not win the next election. I said that because of the likely global recession before 2020.  But Brexit cut across all that for a while.  This result was partly a follow-up from Brexit as the Conservatives did better in the areas that voted to leave the EU and Labour did better in those that voted to stay in.  But now the election also brought back the issue of living standards of the many against the wealth of the few.  That led to May’s failure.

This minority Conservative government is going to find it difficult to survive for long.  There could well be a new general election before the year is out and that could well lead to a Labour government aiming to reverse the neo-liberal policies of the last 30 years.  But if the UK capitalist economy is in dire straits, a Labour government will face an immediate challenge to the implementation of its policies.

Cycles in capitalism – a critique of The Long Depression

In my last post, I outlined my response to the critique of my book, The Long Depression, presented by Paul Mattick jnr, discussant in the URPE panel session on my book at the Left Forum in New York last weekend.

Paul argued that it was impossible and unnecessary to try and measure the profitability of capital as I did in numerous places in the book.  It was impossible because official statistics are useless in measuring the Marxist rate of profit, which is based on labour values not prices.  And it is unnecessary because the very fact of recurring economic crises shows that Marx’s theory of crisis is valid anyway.

The other discussant at the panel session was Jose Tapia.  Tapia is professor in health economics at Drexel University, Pennsylvania and has made significant contributions in the study of mortality and global warming and its impact on economies.

But he has also presented papers showing the causal connection between profits, investment and growth (does_investment_call_the_tune_may_2012__forthcoming_rpe_) and is a contributing author to a new book, edited by me and G Carchedi, The World in Crisis, published this summer by Zero Books.  Jose wrote a book jointly with Rolando Astarita that offers a brilliant and comprehensive account of the Great Recession (from which I quote several times in my book).  Unfortunately, it is in Spanish, so it did not get the wider recognition that it deserves.  Tapia has a new book that develops the relationship between profits, investment and business cycles (again in Spanish) that provides further statistical support for the Marxist view on crises (reviewed here).

Jose is an accomplished statistician so he takes a different tack from Paul Mattick in his critique of my book.  He does not think it a waste of time to measure the rate of profit and test Marx’s theory of crises statistically.  However, he has important criticisms of my work.  He says he is unsure of the sources and methods that I use to gauge profitability (although I do have an appendix in the book on measuring the rate of profit and I have offered my workings on any graph in the book if requested).

More importantly, Jose is not convinced by one of the main themes of my book: that there are three distinct periods in capitalist accumulation which I define as depressions and not just ‘normal’ recessions: the late 19th century, the Great Depression of the 1930s and the period since 2008 that I call the Long Depression.  In a powerpoint presentation ( The Long Depression, by Michael Roberts – Comments) provided at the session, Jose reckoned that there was no discernible decline in the rate of real GDP growth for countries during the long depression of 1873-97.  Only France could be depicted as such.

Well, I don’t know why Jose chooses decades to gauge cumulative GDP growth.  Most commentators on the late 19th century depression consider that it started in 1873 and finished in 1897, or earlier depending on the country.  So it would be more appropriate to use those dates.  Andrew Tylecote did just that in his study of the period. He looked at industrial output data – and his results are cited in my book.  Tylecote shows that Britain, as the declining hegemonic power, had significantly slower industrial growth than the rising capitalist powers of the US and Germany in the second half of the 19th century.  But all the major economies had slower growth in the period 1873-90, than before 1873 or after 1890.  That seems to confirm that there was distinct depression period then.

And when you take into account the massive immigration into the US during the second half of the 19th century, real GDP growth per head in America was very slow during the depression period.

Jose reckons that UK growth was hardly different between 1850-70 and 1870-90.  Well, I looked at the GDP data and investment data for Britain provided by the Bank of England.  Using the BoE data, I found that between 1852-71, real GDP growth in Britain rose 66% or 2.7% a year, but it rose only an average 1.2% between 1872-86, or less than half the previous rate.  Investment rose 4.4% a year in the boom period of 1852-71, but it actually fell 2.1% a year in the period 1871-86.  That’s pretty conclusive evidence of a depression, it seems to me.  Indeed, the BoE data for the same period that Jose defines (1870-90) shows an accumulated GDP of only 42%, or just 1.9% a year.

The great economist J Arthur Lewis provides a very penetrating analysis of the late 19th century British economy, which I cite in my book.  Lewis found that there were several ‘Juglar’ (business cycle) recessions during the Long Depression and these recessions were clearly worse after 1873. Lewis gauged the intensity of these recessions by how long it takes for production to return to a level ‘exceeding that of the preceding peak’ growth rate. He found that between 1853 and 1873, it took about 3-4 years. But between 1873 and 1899, it took 6-7 years. He also measured the loss of output in recessions i.e. the difference between actual output and what output would have been if trend growth had been sustained. The waste of potential output was just 1.5% from 1853-73 because “recessions were short and mild”. From 1873-83, the waste was 4.4%; from 1883-99, 6.8%; and from 1899-13 5.3%, because “after 1873 recessions became quite violent and prolonged.” Wastage was thus two or three times greater in recessions during the late 19th century depression.

I also went back and looked at the US business cycles from 1854 to 1897 using the NBER data.  I found that between 1854-1873, the boom period, there were 76 months of contraction in US real GDP, or an average of four months in every year.  But between 1873-97, there were 161 months of contraction or about 6.7 months on average each year.  Again that suggests the 1873-97 period was a depression.

Jose’s main criticism of my book is his scepticism that there are ‘regular’ business cycles.  For Jose, capitalism accumulates in booms, which are interspersed with slumps. So slumps are recurring under capitalism, but they are not regular.  Using the NBER data, he shows that there is a wide dispersion in length of the each cycle from trough to trough in the US, varying between 3.8 to 9 years for the post-war period and (not so wide) 3.9 to 4.8 from 1873 to date.  his would seem to suggest that there is no regularity in booms and slumps under capitalism as I suggest.

However, again, I am not quite sure why Jose has chosen these dates.  If we go back to the NBER data and choose periods more related to the periods of changes in average profitability and exclude the specific depression periods, then I find that the business cycle is pretty regular at about 12 years from trough to trough.

Also, I think there is very good causal relation between profits and stock market performance.  When profitability is on the rise, stock prices rise and vice versa.  Yes, profitability has risen since the 2009 Great Recession ended, but it is still below the levels seen at the end of last bull market in 2000.  That is why I reckon that there is still a bear market.  Despite new highs in stock prices, in real terms and against gold and the dollar, stock prices are still below previous peaks.

For Jose, this is all too neat.  He reckons that my division of the stock market cycle in the post-war period into bull and bear markets based on the profit cycle could just easily be revised to deliver a different analysis – from four to five periods.

Jose goes onto to argue that my claim to the existence of longer cycles of 50-60 years, the so-called Kondratiev cycles, has even less validity.  Jose reckons that there is no regularity in the length of so-called K-cycles.  They vary from 14.7 to 75 years.

Again, Jose seems to choose odd dates for his K-cycle measure.  I reckon that the first K-cycle begins in about 1785, rises to a prices peak around 1818, and then goes to a trough in the early 1840s (about 54 years). The second cycle peaked in the mid-1860s and then troughed in the mid-1880s or early 1890s (again about 50 years). The third K-cycle started in the 1890s, peaked in 1920 and troughed in 1946 (another 50-60 years). The fourth K-cycle started in 1946, peaked in 1980 and will trough around 2018 (a much longer cycle of over 70 years – I explain why in the book).

However I recognise that the evidence to support the K-cycle is meagre – after all, there are only a few data points.  As I said in my book chapter on cycles (Chapter 12): “In many ways, it is really a series of propositions that are not fully confirmed by evidence. The first proposition is that crises are endemic to capitalism and continue to reoccur, the explanation for which lies in Marx’s law of profitability. That was discussed in a previous chapter. But this chapter says more than that. It argues that these crises occur in regular periods that can be measured and possibly predicted.”

So this chapter is more of a hypothesis to be tested by events. That is especially the case with my idea that the K-cycle and other cycles in capitalism can be coordinated with the profit cycle, and when all cycles are in a downward path, the capitalist economy becomes depressed.  Thus I conclude in the book that 2018 is likely to be trough of this fourth K-cycle and the bottom of the depression period.  Well, the proof of the pudding will be in the eating.

But I am not alone in my forecast.  Anwar Shaikh has put forward a similar forecast to mine, also based on the dating of the K-cycle.  In a paper that Shaikh presented in 2014 (Profitability-Long-Waves-Crises (2)), he reckons Kondratiev’s long waves have continued to operate, when measured by the gold/dollar price: the key value measure in modern capitalism.  And he also forecasts that the current downphase in the K-cycle will trough around 2018.

So watch this space.

Paul Mattick and validating Marx’s law – a critique of The Long Depression

Last weekend, at a session of the Left Forum in New York, I presented the basic theses in my book, The Long Depression.  My arguments were then subjected to critical analysis by my invited discussants, Paul Mattick Jnr and Jose Tapia.  The whole session was video recorded and will appear on You Tube – Left Forum in a few weeks.

Now, all three of us are agreed that Marx’s law of the tendency of the rate of profit to fall is the underlying foundation and main cause of crises under capitalism.  This view remains a minority one among Marxist economists, let alone other heterodox economics.  But even though we agree on this, there is still much to debate about how to explain and validate Marx’s law.  In this post, I shall respond to the profound critique of my book that Paul Mattick presented at the weekend.  In the next post, I shall look at Jose Tapia’s critique.

Paul Mattick is emeritus professor of philosophy at Adelphi University, New York and the son of that eminent contributor to Marxian economic analysis, Paul Mattick snr, who explained so well Marx’s theory of crisis in the post-war period and exposed where mainstream economics, particularly Keynesian theory and policy, fell short. Paul Mattick jnr has continued his father’s work just as successfully.  His book, Business as Usual is, in my view, the best analysis of the global financial crash and the Great Recession that is easily accessible to non-economists – essential reading.

Paul’s criticism of my book boils down to how to validate Marx’s law of profitability as the theory of crises.  As he says in his commentary paper (Roberts Panel) , he agrees that the world economy is in what could be described as a long depression and I am right that Keynesian and monetary policies of the mainstream have failed to get capitalism out of this depressed state.

However, he considers my attempt to validate Marx’s theory of crises by trying to measure the rate of profit in a Marxian way as impossible and unnecessary. “This is not possible, fundamentally because of the fact that value is represented only by prices, which move independently of values”. The Marxian rate of profit can only be measured in value terms (average labour time) and yet all official statistics are in prices; and worse, in the market prices of one currency usually.  Such price measures can and will vary well away from Marx’s modified values (prices of production), let alone value.  As such, all my (and other people’s) ‘Marxian’ measures of profitability are a waste of time.

Moreover, most of the measures of profitability made by me and other scholars are national rates of profit and usually just for the US.  Such measures, says Paul, tell us nothing about the movement of profitability in global capitalism.  And Marx’s law is one based on a world economy. But a world rate of profit with a proper calculation of total surplus value globally is impossible to measure.

Indeed, Paul argues we don’t need to ‘test’ Marx’s law and his theory of crises with such statistical measures.  We can validate Marx’s theory by the very fact that capitalist economies go into recurring slumps; that there are periods of prosperity and growth that give way to periods of depression, as now.  Capitalist accumulation cannot deliver harmonious and sustained expansion of production and, most particularly, accumulation of capital; and it cannot deliver full employment etc.  Paul says: “These are all features recognizable without a significant statistical apparatus; in Marx’s own work, historical data for the most part function to illustrate, not to test, theoretical ideas.”  There is no need to get into all the details of measuring rates of profit; that is an exercise in futility.

Well, I don’t agree.  Using general events or trends to ‘illustrate’ the validity of a law can help.  But that is not enough.  Slumps in capitalism could be explained by other theories like Keynesian ‘lack of demand,’ or from ‘underconsumption’ through low wages and rising inequality etc (post-Keynesian); or by the failure of consumer sectors to grow in line with capital goods sectors (disproportion theory); or by excessive debt (Minsky) or ‘too much profit’ that cannot be absorbed (Monthly Review).  The ‘features’ of capitalist crises can be used just as well to ‘illustrate’ these alternative theories.  Indeed, they are the more  dominant explanations in the labour movement and the same illustrative events are used to validate them.

To justify Marx’s law of profitability, I reckon we need to go further scientifically.  That means measuring profitability and connecting it causally with business investment and growth and slumps. Then we can even make predictions or forecasts of future crises.  And only then can other theories be dismissed by using a body of empirical evidence that backs Marx’s law.

Such an approach may be ambitious, but it is not impossible.  First, Marx’s law may be based on labour values, but it is expressed in prices.  Capitalists start with money capital and finish with more money capital in the capitalist mode of production for profit.  Money is the nexus between value and price.  Yes, market prices can and will necessarily vary from prices of production and from commodity values.  But they are still tied like an anchor or a yo-yo to value over time, even as value incessantly changes due to changes in the productivity of labour.  Total value still equals total prices.

Several scholars have shown empirically the close connection between market prices and value in production.  And money prices can be checked empirically against value in labour time.  For example, Cockshott and Cottrell broke down the economy into a large number of sectors to show that the monetary value of the gross output of these sectors correlates closely with the labour concurrently expended to produce that gross output: Anwar Shaikh did something similar.  He compared market prices, labour values and standard prices of production calculated from US input-output tables and found that, on average, labour values deviate from market prices by only 9.2 per cent and that prices of production (calculated at observed rates of profit) deviate from market prices by only 8.2 per cent.

And G Carchedi in a recent paper showed that the validity of Marx’s law of value can be tested using official US data, which are deflated money prices of use values.  He found that money and value rates of profit moved in the same direction (tendentially downward) and tracked each other very closely.  Carchedi and I used this in a joint paper to show how the rate of profit in the sectors that create value and surplus value in the US economy is not so far out of line with the overall rate of profit in the ‘whole economy’.

That brings me to another criticism of my approach by Paul.  He says that the Marxian rate of profit is the total surplus produced by productive labour in an economy and unproductive labour should be measured as part of total surplus value.  But, says Paul, many measures of the rate of profit by scholars fail to take account of interest, rent and financial profit which are also parts of total surplus value. In Marxian terms, the rate of profit should be a measure of total surplus value against capital advanced, not profit as defined in capitalist statistics.

Paul is right.  Indeed that is why I use what I call a ‘whole economy’ measure.  This defines surplus value (for a national economy) as annual gross national income (less the annual depreciation of the means of production) less the cost of wages and benefits.  Then, to get the rate of profit, this surplus value is divided by the total capital advanced for means of production (fixed assets) and circulating capital (raw materials or inventories) in the productive sectors and variable capital (labour) in the productive sectors.  This then encompasses Paul’s critique of some measures that exclude rent, interest and financial profits.  In my view, all these moving parts can be measured to deliver a meaningful rate of profit using official statistics.  We can measure ‘productive’ capital and we can incorporate all forms of surplus value.  And several scholars have done so for different countries.  If you read this blog regularly, you know who they are.

What gives support to these attempts to do the impossible (in Paul’s view) are the results.  However the rate of profit is measured, the general trend is the same. Take the post-war period, using official statistics for the US, you can measure the rate of profit for the ‘whole economy’, for the corporate sector alone, for the non-financial corporate sector or even for a more accurately defined ‘productive’sector’ and the general trend is the same.  There was a high rate of profit immediately after 1945, which holds up to the mid-1960s.  Then there is a profitability crisis that lasts until the early 1980s.  Then there is a ‘neo-liberal’ recovery in profitability that comes to an end about the late 1990s or by 2001.  After that, the rate of profit does not return to the level of the 1990s and certainly not to that in the 1960s. I think these measures are robust (because they are similar) and thus provide powerful validations of Marx’s law of profitability.  So they are not to be dismissed, as they help to refute alternative theories of crises.

Yes, these measures are just national and do not show the ‘world rate of profit’, which would be necessary to support Marx’s law fully.  As Paul says: “An increase in the profitability of American capital tells us nothing determinate about the Marxian rate of profit”.  But attempts there are being made to measure such a ‘world rate’ by various scholars, including me.  They are by averaging national rates, not an ideal solution theoretically, but nevertheless, again they deliver similar results to the US measures as described above.

Paul says that you cannot get a direct connection between profitability and investment in a capitalist economy, because returns on investment in the stock market are really reflections of fictitious capital, not the rate of profit on productive capital.  As Paul quotes a securities analyst: “the security’s price does not have a direct relationship to the surplus value currently being exploited from the productive workforce”.

Clearly stock market returns can and do vary sharply from the return on productive capital.  In The Long Depression, and in my previous book, The Great Recession, I make this point as well.  Dividends and capital gains from stock market purchases are not the Marxian measure of profit as they are distorted by the fictitious nature of financial capital – much of profits accumulated in the financial sector are fictitious, particularly gains from the purchases of government bonds.  Government borrowing and the printing of money deliver a continual stream of fictitious profits.

But this can be accounted for and several scholars have done so.  We can delve into the data and begin to show the clear causal connection between the movement in the profitability of capital in the productive sectors, investment in productive capital and economic growth – indeed, the movement in the mass of profit in an economy is a very good guide to the likelihood of a change in business investment and a slump in capitalist production (The profit investment nexus Michael Roberts HMNY April 2017).  The other discussant at Left Forum, Jose Tapia, has shown just that for the US economy  (does_investment_call_the_tune_may_2012__forthcoming_rpe_), as has a recent and comprehensive paper by G Carchedi on Marx’s law and crises.

So I think we can go further than just use anecdotal evidence to ‘illustrate’ Marx’s law of crises. We can provide hard evidence based on robust empirical data to support Marx’s law of profitability and its relation to recurrent crises under capitalism.  Yes, the task of defining our categories and massaging the data so that we measure things accurately is formidable.  But nobody is arguing that science is easy (and we often get it wrong), but I am arguing that it is not impossible.

Moreover, it is necessary.  Otherwise, alternative theories to Marx’s theory will continue to claim validity and hold sway.  And that is bad news because these alternative theories deliver policies that look to ‘manage’ or ‘correct’ capitalism rather than replace it. And these policies don’t work and will not work in the interests of the majority (the working class) and will instead perpetuate the iniquities and horrors of capitalism.

Paul is also sceptical of my proposition that there are discernible cycles or regularities in capitalist accumulation, although he reckons that whether there are or not does “not matter very much from a Marxian point of view.”  In the next post, I shall deal with the critique of my view on cycles in capitalism as presented by Jose Tapia, the other discussant at the Left Forum panel on my book.

Excessive credit, rentier capital and crises

Steve Keen has a new book out.  It’s called: Can We Avoid Another Financial Crisis? Steve Keen is professor of economics at Kingston University in the UK.  His earlier book (Debunking economics) is a brilliant expose of the fallacious assumptions and conclusions of mainstream economics, i.e. ‘perfect competition; general equilibrium and ‘rational expectations’ of economic ‘agents’.

The failure of mainstream economics to see the coming of the global financial crash and the ensuing Great Recession is now well documented – see my own coverage here.  This failure has led several mainstream economists to disavow its usefulness.  One such recently was Paul Romer, a former New York university professor and now the chief economist of the World Bank.  Last fall, before taking up his appointment at the World Bank, Romer wrote a paper accusing his fellow macroeconomists of forming a monolithic intellectual community, which deferred to authority, disregarded the opinions of those outside of their group and ignored unwelcome facts. They behaved more like cult members than genuine scientists. Romer compared modern macroeconomics to string theory, famously described as “not even wrong.”

This did not go down well.  And now there has been a rebellion among his 600 economists (yes, 600!) at the World Bank.  They have insisted that he no longer be in charge of managing them, after he demanded that they drop their long-winded economic jargon and adopted a simpler style of prose.  Romer responded ironically to this demotion of his power at the World Bank, “Apparently the word is out that when I asked people to write more clearly, I wasn’t nice. And that I slaughter kittens in my office.”

But I digress.  The point of this Romer story is to show that those who dispute the assumptions and conclusions of mainstream economic apologia are not likely to get much of a hearing.  As I said in my post on Romer’s critique, that he won’t succeed in getting “mainstream economics yanked back into reality”. And so it has proved.

Steve Keen, however, continues his attempt to provide an alternative closer to economic reality.  And his new book also makes a prediction: that another crash is coming and even picks out some likely candidates where it is likely to kick off.  Now readers of this blog know that I think it is the job of economics, if it really sees itself as a science, to not only present theories and test them empirically, but also to make predictions.  That is part of the scientific method.  So Keen’s approach sounds promising.

But all depends, of course, on whether your theory is right.  Keen reiterates his main thesis from his previous work: that, in a modern capitalist economy credit is necessary to ensure investment and growth.  But once credit is in the economic process, there is nothing to stop it mismatching demand and supply.  Crises of excessive credit will appear and we can predict when by adding the level of credit to national income.  In the major capitalist economies leading up to the crisis of 2007, private sector credit reached record levels, over 300% of GDP in the US. That credit bubble was bound to burst and thus caused the Great Recession.  And this will happen again.  “A capitalist economy can no better avoid another financial crisis than a dog can avoid picking up fleas – it’s only a matter of time.”

So what of the next crisis? With his eye on credit growth, Keen sees China as a terminal case. China has expanded credit at an annualized rate of around 25 per cent for years on end. Private-sector debt there exceeds 200% of GDP, making China resemble the over-indebted economies of Ireland and Spain prior to 2008, but obviously far more significant to the global economy. “This bubble has to burst,” writes Keen.

Nor does he have much hope for his native Australia, whose credit and housing bubbles failed to burst in 2008, thanks in part to government measures to support the housing market, lower interest rates and massive mining investment to meet China’s insatiable demand for raw materials. Last year, Australian private-sector credit also nudged above 200% of GDP, up more than 20 percentage points since the global financial crisis. Australia shows, says Keen, that “you can avoid a debt crisis today only by putting it off till later.”

This idea that it is the level of credit and the pace of its rise that is the main criterion for gauging the likelihood of a slump in capitalist production also lies behind the view of another heterodox economist, Michael Hudson in his book Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy. Hudson’s main contention that the FIRE economy – finance, insurance, and real estate – cripples the “real” economy and is slowly reducing most of us to debt bondage.

Hudson goes further.  For him, the old system of industrial capitalism – hiring labor, investing in plants and equipment and creating real wealth backed by tangible goods and services – has been eclipsed by the re-emerging dominance of a parasitic neo-feudal class.   It is this elite, not industrial capitalists, who are the foundation of most of our economic woes.  The 2008 crisis was not a typical boom and bust housing crash of capitalism but the logical conclusion of financial parasites slowly bleeding most of us dry. “Today’s neoliberalism turns the [free market’s] original meaning on its head. Neoliberals have redefined ‘free markets’ to mean an economy free for rent-seekers, that is, ‘free’ of government regulation or taxation of unearned rentier income (rents and financial returns).”

I read this to mean that it is not capitalism of the past, competition and the accumulation of capital for investment, that is the problem and cause of crises, but the ‘neoliberal’ world of ‘rentier’ capital, ‘feudal’ parasites and ‘financialisation’.  This would suggest that crises could be solved if capitalism returned to its previous role, as Adam Smith envisaged it, as expanding production through division of labour and competition.

Also, for Hudson, the problem of capitalism is not one of profitability and the striving to extract surplus-value out of the productive labour force but one the extraction of ‘rents’ out of industry by landowners and financiers.  “Labor (‘consumers’) and industry are obliged to pay a rising proportion of their income in the form of rent and interest to the Financial and Property sector for access to property rights, savings and credit. This leaves insufficient wages and profits to sustain market demand for consumer goods and investment in the new means of production (capital goods). The main causes of economic austerity and polarization are rent deflation (payments to landlords and monopolists) and debt deflation (payments to banks, bondholders and other creditors).”  (Hudson)

Thus we have a model of capitalism where crises result from ‘imperfections’ in the capitalist model, either due to a lack of competition and the growth of financial rentiers (Hudson) or due to excessive credit (Keen).  Moreover, crises are the result of a chronic lack of demand caused by squeezing down wages and raising the level of debt for households. The latter thesis is not new – as many mainstream economists have argued similarly and it dominates as the cause of crises on the left.  As Mian and Sufi put it, “Recessions are not inevitable – they are not mysterious acts of nature that we must accept. Instead recessions are a product of a financial system that fosters too much household debt”.

The key omission in this view of crises is any role for profit and profitability – which is after all the core of Marx’s analysis of capitalism – a mode of production for profit not need.  Profit is missing from Keen’s analysis.  Indeed, Keen considers Marx’s theory of value to be wrong or illogical, accepting the standard neo-Ricardian interpretation and Marx’s law of the tendency of the rate of profit to fall as being irrelevant to a theory of crises.  Hudson has nothing to say about Marx’s key insights.

The post-Keynesians rely on the Keynes-Kalecki equation, namely that profits = investment, but it is investment that drives or creates profits, not vice versa, as Marx would have it.  This view recently reached its extreme in another relatively new book, Capitalism as Oligarchy, by Jim O’Reilly, where, similar to the view of leading post-Keynesian, Engelbert Stockhammer, that is rising inequality that is decisive to crises rather than profitability of capital, O’Reilly argues that “inequality isn’t a side-effect of something we happen to call ‘capitalism’ but is rather the core of what the system is”.

According to O’Reilly, profits does not come from the unpaid labour of the working class but are ‘created’ for capitalists by the sale of goods and services to the consumer.  Profits come from exploiting the consumer, not the worker.  “where does profit come from? It can’t be from workers since they can spend no more than the wage received (!! – MR).  Wages are a source of revenue through sales, but they’re also a cost. For the system as a whole, they must net to zero—workers are simply not profitable.”  Only capitalists have more income than they spend, so they create their own profits (hmm… MR).

Apparently, Rosa Luxemburg was on the case… “Her insight that profit had to come from a source beyond the worker was correct but she erred in accepting the conventional monetary wisdom that capitalism’s “aim and goal in life is profit in the form of money and accumulation of capital.”   In this theory, profits are not the driver of capitalism but the result of investment and consumption.

The argument that credit plays a key role in capitalism; and ‘excessive credit’ does so in crises was first explained by Marx.  As Marx wrote in Volume 3 of Capital, “in a system of production where the entire interconnection of reproduction process rests on credit, a crisis must inevitably break out if credit is suddenly withdrawn and only cash payment is accepted…at first glance, therefore the entire crisis presents itself as simply a credit and monetary crisis”.  (p621) But that’s at “first glance”.  Behind the financial crisis lies the law of profitability: “the real crisis can only be deduced from the real movement of capitalist production” (TSV2, p512).

Looking for a cause is scientific. But dialectically there can be causes at different levels, the ultimate (essence) and the proximate (appearance). The ultimate is found from the real events and then provides an explanation for the proximate. The crisis of 2008-9, like other crises, had an underlying cause based on the contradictions between accumulation of capital and the tendency of the rate of profit to fall under capitalism. That contradiction arose because the capitalist mode of production is production for value not for use. Profit is the aim, not production or consumption. Value is created only by the exertion of labour (by brain and brawn). Profit comes from the unpaid value created by labour and appropriated by private owners of the means of production.

The underlying contradiction between the accumulation of capital and falling rate of profit (and then a falling mass of profit) is resolved by crisis, which takes the form of collapse in value, both real value and fictitious. Indeed, wherever the fictitious expansion of capital has developed most is where the crisis begins e.g. tulips, stock markets, housing debt, corporate debt, banking debt, public debt etc. The financial sector is often where the crisis starts; but a problem in the production sector is the cause.

Undoubtedly the rise of excessive credit in the major capitalist economies was a feature of the period before the crisis.  And its very size meant that the crunch would be correspondingly more severe as capitalist sector saw the value of this fictitious capital destroyed.

But is it really right to say that excessive credit is the cause of capitalist crises?  Marx argued that credit gets out of hand because capitalists find that profitability is falling and they look to boost the mass of profits by extending credit.

It is a delusion or a fetish to look at credit as the main or only cause of crisis.  In a capitalist economy, profit rules.  If you deny that, you are denying that capitalism is the right term to describe the modern economy.   Maybe it would be better to talk about a credit economy, and credit providers or creators and not capitalists.  Thinking of credit only, as Keen does, leads him to conclude that China is the most likely trigger of the next global crisis.  But that has already been refuted by the experience of the last year.

We must start with profit, which leads to money, investment and capital accumulation and then to employment and incomes.   And there is a mass of empirical evidence that profitability and profits lead investment, not vice versa.

Moreover, why did debt and financial rents become ‘excessive’ in the so-called neoliberal period?  The Marxist explanation is that the profitability of productive capital declined in most modern economies between the mid-1960s and the early 1980s, and so there was a rise of investment in finance, property and insurance (FIRE), along with other neo-liberal counter measures like anti-trade union legislation, labour laws, privatisation and globalisation.  The aim was to raise profitability of capital, which succeeded to a limited extent up to late 1990s.

But as profitability began to fall back, the credit boom was accelerated in the early 2000s, leading eventually to the global financial crash, credit crunch and the Great Recession.  As profitability in most top capitalist economies has not returned to the levels of the early 2000s, investment in productive sectors and productivity growth remains depressed.  The boom in credit and stock markets has returned instead.  Fictitious capital has expanded again – as Keen shows.  And rentier capital dominates – as Hudson shows.

If excessive credit alone is to blame for capitalist crises and not any flaws in the profit mode of production, then the answer is the control of credit.  If rentier capital is to blame for the poverty of labour and crises, then the answer is to control finance.  Indeed, Keen argues that the best policy prescription is to keep private sector credit at about 50% of GDP in capitalist economies.   Then financial crises could be avoided.  Hudson recommends annulling unpayable debts of households. And Hudson recommends a nationalized banking system that provides basic credit.

These are undoubtedly important reforms that a pro-labour government or administration should implement if it had such power to do so.  But that alone would not stop crises under capitalism, if the majority of the productive sectors remained privately owned and investing only for profit not need.  As Hudson says himself: “Just to be clear, ridding ourselves of financial and rentier parasites will not usher in an economic utopia. Even under a purely industrial system, economic problems will abound. Giants such as Apple will continue to offshore profits, companies like Chipotle will keep stealing their workers’ wages, and other big businesses will still gobble up subsidies while fulminating against any kind of government regulation. Class divisions will remain a serious issue.”

Trump’s budget balls-up

President Trump’s economic team have release their plans for the federal budget over the next ten years.  It is a combination of wildly optimistic economic growth forecasts, vicious cutbacks in public services and environmental measures; and significant cuts in corporate taxes and personal taxes for the rich.

But what is exercising mainstream economists are the schoolboy errors in the budget logic.  The budget assumes a $2trn increase in revenue coming from fast economic growth to balance the budget by 2027.  But at the same time this economic growth is supposed to pay for $2trn in tax cuts so that there is no loss in revenue.  But if you cut revenue with tax cuts of $2trn, you cannot restore the revenue by growth AND also balance the budget with another $2trn by 2027.  That is double-counting.  One ludicrous part of this calculation is that the budget aims to cut $300bn in estate taxes over the next decade and yet forecasts a rise in estate tax revenue from faster economic growth.  So will estate tax revenue rise or fall? – it cannot be both!

This is an interesting quirk for mainstream economists to mull over, but what those who look to the interests of working people should note in the budget are the huge hits to federal public services (while increasing military and national security spending).  In the so-called ‘Taxpayer First Budget’, the plan is to strip down expenditure on all sorts of civil services by $3.6trn over ten years.  Funding for Medicaid, the health-care program for low-income Americans will be cut by $800bn.  The federal nutrition program (food stamps) that benefits 44m of the poorest Americans (yes, it is that many on food stamps) would be cut by nearly 30%.  The budget director said that too many of these programs “spend other people’s money” and that we should have “compassion for folks who are paying for it”.  So much for the concept of ‘society’.

At the same time, corporate tax rates will be slashed from 35% to 15%; foreign aid grants (outside of military spending) will be eliminated and $1.6bn will be allocated for building the wall on the Mexican border.  Consumer finance protection measures will be removed and financial regulations relaxed.

As for personal taxation, the top income tax rate is to be cut to 33 percent from 39.6 percent.  There will be a cut in taxes on capital gains, 70 percent of which flow to the top 1 percent.  The  estate tax will be eliminated.  This applies to a tiny number of people, couples that have estates bigger than $10.8 million.   The 3.8 percent surtax on high earners’ investment income that has been used to subsidize health care for poorer Americans will be stopped.  And the alternative minimum tax, which currently limits deductions for high earners, will also go.  And there will be lower taxes on cash flow and income that passes from small businesses to their owners, which also primarily benefits wealthier America

The nonpartisan Tax Policy Center, a joint project of the Urban Institute and Brookings Institution, found “high-income taxpayers would receive the biggest cuts, both in dollar terms and as a percentage of income… Three-quarters of the tax cuts would benefit the top 1 percent of taxpayers,” if the plan were put into effect this year, it said. The highest-income households — the top 0.1 percent — would get “an average tax cut of about $1.3 million, 16.9 percent of after-tax income.” Those in the middle fifth of incomes would get a tax cut of almost $260, or 0.5 percent, while the poorest would get about $50. That split would worsen down the road, the Tax Policy Center says: “In 2025 the top 1 percent of households would receive nearly 100 percent of the total tax reduction.”  Even the conservative-leaning Tax Foundation concluded that those in the top 1 percent of the income scale would save at least 10 times as much, or 5.3 percent. That’s nearly $40,000 extra for those at the top, compared to $67 for those smack dab in the middle of the income scale.

But leaving aside the inequities of the Trump administration’s budget plan and its basic accounting errors, the biggest flaw is in its forecast of average 3% real GDP growth in the US economy over the next ten years.  This forecast is essential in justifying the ‘dynamic scoring’ of the budget revenue projections.  But it is fairyland.  Jason Furman at the Petersen Institute points out that the divergence between this forecast (3%) and the consensus forecast of mainstream economists (2%) is the widest in half a century.  And 1% point of growth each year makes a huge difference.

Furman ran 10m simulations (yes 10m) of the likely possibility that 3% growth could be achieved as a random possibility from the median forecast of economic growth of 1.8% a year.  The odds of getting 3% were 4%.

The real problem is that across the advanced capitalist economies, productivity growth has plummeted in the last ten years of the Long Depression…..

while employment and population growth has slowed.

Thus, the potential growth rates of the top capitalist economies have dropped away. The Trump target of 3% (it used to be 4%) is just not going to happen.  And all this assumes that there is no new major economic slump in capitalist production, employment and investment in the next ten years.  If the history of capitalist economic cycles are to be relied upon, then that is almost ruled out, even if my own forecast of a new slump by 2018 turns out to be wrong.

Brazil: at the end of its Temer?

The news that Brazil’s right-wing President Temer has been caught trying to bribe politicians to keep quiet about corruption allegations increases the likelihood that he will be impeached by Brazil’s Congress this year.  Temer is already the most unpopular president in Brazil’s democratic history.  He only got into office by organising a ‘constitutional coup’ that ousted elected centre-left President Dilma Rousseff on the grounds of so-called ‘budgetary violations’.  An alliance of parties in favour of pro-capitalist measures to cut wages, social benefits and pensions took over Congress to back Temer.  Brazil’s stock markets and currency boomed and international capital returned to invest.

But now all these ‘reforms’ in the interests of profitability are in jeopardy.  Even though the neo-liberal policies adopted by the previous Workers Party presidents Lula and Dilma led to a loss of support among Brazil’s working class and their eventual demise, the Temer-led alliance has never commanded majority support and the latest scandal could see its end.

Where this will leave Brazilian economy and its people is difficult to judge – I look to my Brazilian readers to explain.  But here I can add that the Temer administration’s aim has been clear: to drive up the low profitability of Brazilian industry and capital by reducing the share going to labour; destroying trade union and other opposition trends; and turning to foreign capital for support.

The big reason that the Dilma government fell was the economy.  After the collapse of commodity prices from about 2011, Brazil’s economy dived into a delayed but deep slump.  And it is still in this economic recession.

But Temer and Brazilian capital, after ousting Dilma, were hoping that a general recovery in the world economy would spread to Brazil.  Things would turn around and enable them to cement their rule.  And there have been some signs of such a recovery.  Brazilian business has shown signs of more confidence.

Although commodity prices have not returned to the heady heights of before 2010, they have at least reversed a little from their deep collapse in the period up to the end of 2015.  Moreover, in the last year, it seems that the prognosis of a collapse in China and a slowdown in the US has not materialised.  And China and the US are by far Brazil’s biggest export markets.

Also, the economic recession has led to a large drop in imports of foreign goods.  So Brazil’s trade balance has improved.

And after significant ‘capital flight’ by rich Brazilians under Dilma, foreign investment has started to return to Brazil, given its pro-capitalist government.

One of the results of the deep depression was sharply falling inflation.  So, although wages for the average Brazilian family have stagnated or even fallen, in real terms (after inflation) they have risen, if only to the level of two years ago.

But unemployment continues to spiral as Brazil’s companies cut back on staff and public sector jobs are decimated.

The medium-term future for Brazil’s economy does not look bright, despite the recent optimism of mainstream economists and pro-capitalist politicians in Brazil.  It was a commodities boom that fuelled much of Brazil’s GDP growth prior to 2010.  The country’s share of global non-oil resource exports rose from 5 percent in 2002 to 9 percent in 2012.  Today commodity prices remain high compared with their historic averages, but the exceptional surge in both demand and prices has levelled off.

At the same time, both households and corporations remained burdened with significant debt.  Household debt has grown from 20 percent of income in 2005 to 43 percent of income in 2012, and high real interest rates (averaging 145 percent on credit cards) make this a heavy burden for consumers. On the government side, federal expenses increased from 15.7 percent of GDP in 2002 to 18.9 percent in 2013, mainly due to interest payments on debt. As a result, taxes have already climbed from 29 percent of GDP in 1995 to 36 percent in 2013, the highest level among Brazil’s emerging market peers. As a share of GDP, Brazil’s gross public sector debt is less than a third that of Japan, but its debt service costs are almost 15 times as high.

Above all, there is little sign that Brazilian capital can really develop the productive forces of the economy and its people.  Resource exports and credit-fuelled consumption have not translated into higher investment or productivity. Between 2000 and 2011, Brazil’s overall investment rate averaged 18 percent of GDP, below that of other developing economies such as Chile (23 percent) or Mexico (25 percent), and much below those of China (42 percent) and India (31 percent).

Brazil’s productivity has been almost stagnant since 2000; today it is just over half the level achieved in Mexico.


According to McKinsey, the global management consultants, more than half of Brazil’s population remain below a monthly income per head of R$560.  To cut this level of poverty to under 25% would require productivity four times as fast as the current rate. And there is no prospect of that under capitalism in Brazil.  That’s because the profitability of Brazilian capital is low and continues to stay low.

The profitability of Brazil’s dominant capitalist sector had been in secular decline, imposing continual downward pressure on investment and growth.  Sure, the overthrow of the military regimes and the rise in commodity prices turned round the fall in profitability for a while. But profitability now is still well below its best years in the early 2000s.

The graph below shows three indexed (1963=100) measures (M= Maito; Mar = Marquetti; P = mine based on Penn World tables and poly = smoothed average).

Even if Temer survives, Brazil’s ruling elite face a difficult task in imposing control over its working class and cutting public spending and wages, and thus attracting significant foreign capital.  The ruling elite is more likely to flee with its capital at every sign of difficulty.  So Brazil capitalism will be stuck in a low growth, low profitability future with continuing political and economic paralysis.  And that is without a new global recession coming over the horizon.

Reading Capital Today

As we approach the exact date of the publication of Marx’s Capital Volume One 150 years ago (14 September), a host of conferences and books are coming out in the small world of Marxist study on the relevance of Capital today.  The symposium that I am organising with King’s College London will be on 19-20 September, just around the corner from the British Library where Marx did the research for his opus magnum.  But already there have been conferences in Greece on Capital; a conference in New York at Hofstra University, and next week, York University, Toronto.  All have a large participation by leading Marxist scholars.

And the books are also coming out. The first is aptly entitled Reading Capital Today edited by Ingo Schmidt and Carl Fanelli from two Canadian universities and includes contributions from various activists and academics covering the issues of class struggle, internationalism and the Bolshevik revolution, imperialism, social reproduction and the environment. But I’ll only comment on the specifically economic subject: the labour theory of value.

Prabhat Patnaik is emeritus professor of economics at the Jawaharlal Nehru University in Kerala, India.  In his chapter, Patnaik argues that Marx’s value theory is not meant to explain relative prices between commodities.  The real purpose is to show that commodities priced in money reflect the socially necessary labour time involved in the whole economy.  However, that is as far as I can agree with Patnaik’s interpretation of Marx’s theory.

Patnaik seems to accept that there are two systems, one of value and one of price and that Marx’s transformation of value into prices leads to the total surplus value in an economy being different than the total profit.  This is clearly wrong as the work of scholars like Carchedi, Freeman, Kliman and Moseley have shown.  He also seems to think that Marx’s theory depends solely on commodity money (gold) and does not work or apply to fiat money (notes and reserves not backed by gold) – again a wrong interpretation.

It is true, as Patnaik says, that Marx argued that a rise in wages does not lead to inflation of prices as such, but instead to a fall in the share going to profit (see Marx’s famous debate with Weston, a British trade unionist, in Value, Price and Profit).  But from this, Patnaik seems to conclude that the fundamental contradiction in capitalism revealed by Marx’s law of value is that rising wages will squeeze profits (a profit squeeze theory).  There is no mention of how Marx’s value theory leads onto his law of the tendency of the rate of profit to fall.  For Patnaik, Marx’s value theory appears to differ little from that of Ricardo (two systems of value and prices and the distribution of wages and profits as key to crises).  With this interpretation, Marx’s famous formula for the rate of profit (s/c+v) becomes irrelevant.

A more useful exercise for those interested in studying Capital today is to read the book itself.  And some great Marxist scholars have developed reading courses that can be followed to do so.  The most comprehensive is that by David Harvey, probably the most well-known scholar on Marxist economics in the world today – and one of our speakers at Capital.150 this September in London.   Indeed, David Harvey debated only this month with Patnaik on the latter’s current take on imperialism.

Harvey covers Volume One of Capital in detail here, as well as Volume Two and a recent set of lectures on his take on Capital today.  These lectures are compiled in written form in: A Companion to Marx’s Capital (Verso, 2010) and A Companion to Marx’s Capital Volume 2 (Verso, 2013).

Over the next few months, I shall try to critique Harvey’s and other scholars’ analysis as we head towards the Capital.150 symposium.  But you can see some of the differences that I and other scholars have already raised with Harvey’s views, particularly on the causes of crises here.

David Harvey’s contribution to understanding Marx’s great work has been invaluable.  But there are other readings that have also made an important contribution, if less well known.  For example, out in Los Angeles, Frieda Afary, a philosophy MA and librarian, has been conducting community-based readings of Capital throughout this year.

But perhaps, the most useful guide in reading Capital today is a new book by Joseph Choonara, A Reader’s Guide to Marx’s Capital (not published until July).  Choonara takes the reader through each chapter of Volume One with some clarifying analysis and relevant comment to help.  Choonara says that “It is designed to be read in parallel with Capital itself, with each chapter of this book consulted either before or after digesting the relevant sections of Marx’s work.”  The aim, unlike that of Harvey’s more comprehensive approach in his video lectures, is “instead to dwell on those areas that are the most vital to an overall understanding of the work and those that most often confuse, drawing on my own experience teaching Capital to left-wing audiences of students and workers over the past decade”.  For, in Choonara’s view, Marx attempted in Capital to see capitalism from the point of view of labour and aimed for a working-class audience.  Capital clearly does the former, but whether it achieved its aim of reaching working class readers is more doubtful.  Choonara’s guide can help here.

Choonara says that “Marx focuses on production in the first volume. The second deals with the circulation process, which is the way that capital passes through its various phases (production, but also purchase and sale). The third volume integrates both aspects of capitalism and so deals with the process as a whole, allowing Marx to explore some of the most complex aspects of the system.”  This is important, because the full story of capitalism as Marx sees it requires the reading of all three volumes (and what is often called the fourth – Theories of Surplus Value) as well as Marx’s earlier research notes compiled in what is called the Grundrisse.

This is important, Choonara comments, because “the interlinked nature of the project causes problems for those who just read volume one. This can potentially lead to a crude focus on production, in which issues related to the circulation of capital or questions such as finance and credit that are discussed mainly in volume three are overlooked. That said, it is helpful to see production as forming the foundation for circulation, and so Marx’s ordering of volumes makes sense.”  This contrasts with Harvey’s interpretation: “In this I take issue with David Harvey’s very influential reading of Capital, which tends to flatten down these different levels of analysis, treating them all as equally fundamental.”   Choonara goes on: Harvey’s “idea is that production and circulation should be considered as having the same explanatory priority in the analysis of capitalism, whereas Marx clearly feels that production is in some sense more basic than circulation.”

Choonara is not afraid to take a view on what Marx means, particularly in the more difficult early chapters on value.  In particular, he varies from Patnaik’s view on Marx’s view of money: “there is nothing in this analysis that precludes the replacement of the money commodity with symbolic representations or electronically created credit (the form taken by most money today). To understand this requires going much further into Capital, and in particular the sections on finance and credit in the third volume.”  This follows from Marx’s endogenous theory of money, namely that “more or less money would circulate according to the needs of circulation …. Marx’s argument is that the amount of money simply reflects the total price that has to be circulated and the speed with which it circulates.”

Choonara’s reading also shows that Marx did not have some ‘iron law of wages’, as argued by the classical economists Ricardo and Malthus, leading to the view that it was impossible to raise the real wages of workers by their own efforts as wages were determined by the value of the means of subsistence and the effect of productivity and capital accumulation on that.

Choonara comments: “One peculiarity of the subsequent attacks on Marxist theory is that this iron law is often attributed to Marx himself. The vehemence of Marx’s attack (on the iron law) reflects the fact that if the “iron law” were correct, then struggles over wages, and indeed the formation of trade unions, would be pointless, leading the socialist movement into a dogmatic cul-de-sac by isolating it from the real movement of workers.”

Recently, the eminent Marxist professor Michael Lebowitz seems to claim Marx did fall into this fallacy.  Lebowitz implies that Marx’s accumulation theory that workers cannot raise their living standards through struggle as the gains from productivity growth will all go to capital.  In Lebowitz’s words, Marx accepts the ‘Ricardian default’.

Yes, for Marx, “the rate of accumulation is the independent, not the dependent variable; the rate of wages is the dependent, not the independent variable”. In other words, the pattern of accumulation tends to drive the shifts in wages, not the other way round.  But changes to wages, emerging out of accumulation, can still react back onto the patterns of accumulation (Choonara).

And that perceptive mainstream economist, William Baumol, long ago showed that for Marx “wages need not be equal to the value of labour power… and the omission of any fixed equilibrium was deliberate because Marx wanted to show that workers have the power to raise wages substantially even under capitalism”.  Indeed, they could do so and actually alter “the historical and social element that enters into the value of labour power”, which is not determined by the iron law of nature or ‘subsistence’.

Indeed, that is the lesson of the struggle to lower the working day so comprehensively described in Capital.  As Marx put it: “The Ten Hours’ Bill was not only a great practical success; it was the victory of a principle; it was the first time that in broad daylight the political economy of the middle class [ie the capitalists] succumbed to the political economy of the working class.”  This was a gain for the value of labour power that was permanent, as is the 8 hour day in the 20th century – although only continual class struggle can preserve such gains.

There are many other useful commentaries by Choonara on aspects of Capital: on the nature of alienation, productive and unproductive labour, mental and material labour, complex and simple labour, on accumulation etc. But enough for now, for there will be more to follow over the coming months, as we consider the relevance of Capital, now 150 years old.