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On the crisis
international | economy | non-anarchist press Thursday February 23, 2012 15:57 by Paul Mattick, Jr. pmattick at gmail dot com
How are we to describe the events that have convulsed the global economy over the last three years? Most economic commentators agree that there was a financial crisis, which gave rise to a recession, but that swift governmental action to bail out financial corporations and "stimulate" the economy averted the threat of a full-scale depression. Some economists do not expect full economic bloom for another year or two, while almost all agree that even an improved economy will be a "jobless recovery," but the consensus view, at least for the moment, is that the worst is behind us. But, with whatever variations, the basic idea is that the root cause of the world's economic troubles was the collapse of the American finance industry, brought on by unparalleled financial risk-taking, stimulated by the fantastic profits achieved by this sector in the 1990s and helped along by lax governmental regulation. [Italiano]
While mainstream economists, having exulted for decades over the self-regulating market system, have had little of interest to say about current events, with the notable exception of Paul Krugman's denunciation of his profession as a failure at analysis, prediction, and explanation, heterodox thinkers have had a better time of it. But even most of them have focused on the financial crisis as the heart of the matter. Thus writers as different as financier-turned-author George Cooper and Marxist economist Fred Moseley — he has since changed his view -- joined in on Nation writer Robert Pollin's update of Nixon's cave-in to Keynes, "We're all Minskyites now."
Minsky, Keynes-style, pointed to a psychological source of financial crisis, in his case an over-readiness for speculative risk generated by a run of good profits. But more fundamentally, all explanations of the recession as a spillover from a financial crisis are based on the distinction, now commonplace in economic writing of all ideological colors, between finance and the so-called real economy. In Cooper's version of Minsky's theory, while the "markets for goods and service" are, as orthodox economics has always held, characterized by "stability," this does "not hold for asset markets, credit markets, and the capital market system in general," which once disequilibrated have no tendency to return to an equilibrium state.(1) The problem, that is, is from this point of view not the capitalist economy as such, the production and distribution for profit of goods and services, but the financial superstructure erected on its basis which, allowed to get out of control, can unravel with consequences for the underlying structure.
Capitalism is indeed, as Marx pointed out long ago, a dual system, in which physical production processes are simultaneously processes of value production and circulation. Since these processes follow different imperatives, conflicts easily arise between them. There is, however, only one economy. It is not only that finance and production are intimately interrelated, because capitalism operates on the basis of credit. The fictitious capital, as Marx called it, that develops on the basis of the credit system is from the capitalist point of view as real as the capital invested in actual means of production and labor power. In this social system, let us recall, the value aspect, as the dominant social form of productive activity, regulates the use-value aspect; production of goods serves the production of profit. If goods cannot be sold at adequate rates of profit, they will not be produced. If higher rates of return are to be found in speculation, money will move from production to asset markets. It is for this reason that, as Henryk Grossmann observed, periods of impaired profitability tend to be periods of increased speculative activity. Speculation, he argued with the support of numerous empirical examples, "serves necessary functions. ... It makes possible a profitable 'investment' of over-accumulated capitals," though these profits are not produced by capital but are transfers of capital from one hand to another. Thus "speculation is a means to replace the lacking valorization achieved by productive activity with gains derived from the asset-market losses of the masses of minor capitalists ... and is thereby a powerful means to the concentration of money capital."(2)
If what happened in late 2007 was basically a financial crisis, why does the curve tracing the decline of global industrial production so closely follow the pattern set by the 1929 collapse, quite unlike the shallower dips that characterized the recessions of 1957, 1973, 1981, 1990, and 2000? Why will the recovery supposedly already underway be a jobless one? The remaining investment houses are making excellent profits on financial trades, but banks remain largely unwilling to offer credit to businesses that need it to survive, let alone expand. General Motors, last year near bankruptcy, has been saved, apparently, by government action, at the cost of huge numbers of jobs, while those still on the payroll have had to accept lower wage, health, and pension terms. But the corporation's home state of Michigan — along with California, the largest state in the Union — is sliding into fiscal collapse, closing universities, schools, and libraries, while cutting basic services like health care. Meanwhile, the European economy continues to slow, with rising unemployment, while Japan remains mired in stagnation. China reports growth, but this seems due in part to the vast sums pumped into the economy by the state, along with the ability of Chinese industry to take market share from producers in other countries, thanks to a mixture of government subsidies, continued maintenance of a cheap renminbi, and the ability of a police state to impose low wages and harsh working conditions. Furthermore, if we look back over the decades preceding the debacle, the view is not one of the straightforward prosperity touted at the time by the propagandists of the Efficient Market Hypothesis but of what was, in historical terms, a relatively stagnant world economy, moving through recessions of various degrees of severity punctuated by stock-market collapses and banking, debt, and currency crises, and sustained only by constantly growing quantities of public, corporate, and personal debt.
To put it in a nutshell, the crisis appeared as a financial crisis, not because the rest of the economy was healthy, but because finance was the most dynamic sector of the economy, and therefore the one in which the underlying weakness could make its most dramatic appearance.
What was this underlying weakness? Robert Brenner gives a good description of the course of events leading up to the current depression in "The Origins of the Present Crisis," written to introduce the Spanish translation (2009) of his Economics of Global Turbulence (Verso, 2006). In his new text as in the volume it updates, Brenner explains the end of the economic boom that followed the Second World War as due to a decline in the profit rate for the G-7 economies (the United States, Germany, Japan, the United Kingdom, France, Italy, and Canada), which in turn has caused a decline in the rate of growth of investment. The increase in debt levels facilitated by monetary authorities and the surge of speculation encouraged by deregulation served to maintain something like boom times in a process Brenner names well as "asset bubble Keynesianism." Eventually, however, the insufficient profitability of capital undermined this artificial prosperity.
This diagnosis is certainly correct, as far as it goes. It accords with the analysis of the business cycle worked out long ago by Wesley C. Mitchell on the basis of decades of empirical study at the NBER. As "the making of profits is of necessity the controlling aim of business management," Mitchell concluded, fluctuating profitability is "the clue to business fluctuations." As Pepe Tapia demonstrates in the paper he will be presenting, it remains true that profits is "the leading factor taking the economy to a boom when they grow and pushing the economy to a bust when they stagnate or fall, as can be seen, for the most recent examples, in statistical data relative to the 1990, 2001, and 2007 recessions, in all of which "profits stagnated or even began to decline several quarters before the recession started."
Unlike Mitchell, Brenner is reckoned a Marxist economist, though his Marxism, in the words of the editors of New Left Review, where his book was first published, "has little in common with what has often passed for orthodox deductions from Capital. No axioms of crisis based on a rising organic composition, and therewith falling profitability of capitalist investment, are to be found here."(3) Instead, Brenner utilizes statistics drawn from a wide range of official and unofficial studies as the basis for an analysis framed in terms of concepts taken over from economics and business journalism without any conceptual criticism, such as "profitability," "productivity of labor," "productivity of capital," etc. His argument differs radically from Marx's in making no reference to the theory of value and surplus-value. Brenner makes no distinction between the profits produced by manufacturing and nonmanufacturing capital, in which labor produces neither commodities nor, therefore, surplus value; accordingly, he also treats taxes and interest as costs of business without investigating the relations among what from a Marxian point of view are forms of surplus value.(4) In Brenner's view, profit is a manufacturer's mark-up over costs, limited by the pressure of market competition. Thus he explains the post-1965 fall of manufacturing profitability in the G-7 countries as determined by "the inability of manufacturers to mark up sufficiently over costs due to international manufacturing over-capacity and over-production."(5) This is profit as it appears, in Marx's words, "in the everyday consciousness of the agents of production themselves,"(6) as an addition to the cost of production of a commodity, coming into existence when the commodity is sold. The question as to the possibility of this addition as an increase in social wealth — the topic of Marx's argument in Chapter 5 of the first volume of Capital — is one that Brenner raises no more than does the ordinary capitalist. He discusses only the limit set to any individual capital's share of it by competition.
As Marx asked, however, if competition imposes an average rate of profit across the economy, why is that rate "now 10 per cent or 20 per cent or 100 per cent?"(7) Contesting explanations of the decline of profitability by reference to increased wages, Brenner asserts that it is due to "a system-wide problem of over-capacity and over-production, resulting from intensified international competition,"(8) which forced rival manufacturers to increase productivity while limiting the extent of possible mark-up. But "over-capacity" has meaning only in relation to a given level of effective demand; as Marx observed in the course of a critique of post-Ricardo explanations of crisis, references to a "plethora of capital" are only a disguised way of talking about over-production, which itself can mean only a shortage of effective demand, since there is clearly no over-production of goods relative to human needs.(9) Brenner himself furnishes the solution to this riddle, though he is unaware of it, when he observes that "with the growth of profits — and thus of investment and wages — suppressed, aggregate demand grew more slowly" after 1973.(10) That is to say, it is not that over-capacity limited profitability, but that the decline in profit rates, leading (as Brenner says) to a declining rate of accumulation, set limits to demand which appeared to manufacturers in the form of over-capacity. To explain declining profitability requires a theory of profit — as opposed to a description of it as an addition to cost-price — and so a theory of value.
Of course, the theory I have in mind is Marx's, with its deduction of the law of the tendency of the rate of profit to fall and its explanation of the crisis cycle as a mechanism for counteracting this tendency by lowering constant-capital costs (along with the cost of labor power). So I find myself in agreement with Andrew Kliman's declaration in his recent draft of a paper on "The Persistent fall in Profitability Underlying the Current Crisis," that "it is time to reclaim this law [of falling profitability] and the value theory on which it is grounded." Kliman's paper itself directly concerns not what Marx calls the rate of profit, but various phenomena that can go by this name in data drawn from current U.S. business statistics, like the data cited by Mitchell and Tapia. This is, to begin with, because, as Kliman says, "the task of theory is to account for observed phenomena. Thus the purpose of a study of profitability should be to account for movements in what businesses and investors mean when they talk about the rate of profit or rate of return, rather than to account for movements in a theoretical construct." In any case, as Kliman also correctly points out, the data needed to estimate Marx's rate of profit — which would today require measurement in relation to "the capital of the world economy as a whole" — "are not available." His solution is to substitute phenomenological categories bearing on one national economy for Marx's abstractions, claiming that an analysis "conducted in terms of the processes actually" causing changes in profit rates can be one in which "the causal processes are those of Marx's theory ..."
This is not, however, so easily accomplished. To take only one example, Kliman attempts to link national income accounts data to Marxian theory through what he calls the Monetary Expression of Labor Time, calculated by dividing nominal GDP by employment, multiplied by 1000 to yield thousands of dollars per worker-year. Aside from the fact that, on Kliman's own account, the relevant labor time is a global rather than a national matter, for Marx only workers employed in productive occupations perform the abstract labor time represented by money prices. To take another example, Kliman argues that a theoretical construct like "a rise in the technical composition of capital," held by Marx to explain declining profitability, plays "a role in analysis but not a causal role in the real world." It therefore should be replaced by a (supposedly) non-theoretical category like "the process of technical innovation." But Kliman does not explain the relation between theoretical "analysis" and "real-world causal determination"; it is difficult to see how "the causal processes [appealed to in Kliman's analysis] are those of Marx's theory" when in fact the Marxian theoretical constructs, from "rising organic capital" to "(Marxian) rate of profit" have been abandoned. But whatever my disagreements with Kliman's theorizing, the issue he has raised, of the relation between theoretical constructs, causal description, and observable phenomena, is of crucial importance.
Were the requisite statistics for the world economy to exist, they could not settle the question of the correctness of Marx's law of the tendential fall in the profit rate. First of all, Marx's "profit" is surplus value produced by industrial capital as measured against invested constant and variable capital. In the real world, however, this surplus value exists in such distinct forms as profit on all types of investment, interest, rent, property income, and taxes. In addition, value relations are obscured by the florescence of credit instruments, and by the tendency of investment to expand beyond demand in prosperous times and to shrink below social requirements in periods of depression. As a result, it would be impossible to say, if the statistics existed, how much of what is counted at any given moment in actual price terms as the value of total capital, variable capital, and surplus value is real, meaning by "real" corresponding to the constructs of Marx's theory.(11) (A striking recent example was the disappearance in the course of three months, at the start of the current recession, of the profits earned over the previous three years by the top five American banks.) It is for this reason that Marx frames his analysis not in price terms but in value terms, and it is why he says that the law of value operates "in the same way that the law of gravity asserts itself when a person's house collapses on top of him."(12) At a time of crisis, when prices are brought forcefully into closer accord with the underlying — and momentarily changing — value structure, the fact that price is a representation of the actual social labor process becomes visible. Even then, however, the terms of the representation remain uncalculable.
Most fundamentally, values are in principle unobservable. What is observable are commodity prices and the concrete labor performed in commodity production. The theory mediates these, defining value as labor-time as abstracted in the process of market exchange by its representation in the form of money prices, Because the process of representation is determined by a multitude of factors, ranging from the competition of capitals for shares of surplus value to governmental manipulation of currency exchanges, the so-called law of value is not a quantitative law of the natural-scientific kind, but an explanation of the way in which market exchanges link productive activities performed for wages into a unified system of production and distribution that yields a surplus (in the money form) appropriated by a ruling class. It is in this that its causal significance resides, since what is organized by the movement of money is the actual labor process. Whatever the short-run possibilities for monetary misrepresentation of the physical production system, in the long run — in practice, this may mean decades — the extraction of surplus value, in all of its empirical forms, is limited by the actual amount of labor performed in addition to that required to reproduce the labor force and renew or expand the means of production. The labor required for goods that are not produced, or that cannot be sold at profit-yielding prices, will have no representation by the money-quantities required to meet claims generated by the credit system. To take a particularly pertinent example, stagnant real wages, the result of declining profitability, made it impossible for many holders of subprime mortgages to meet their obligations once the housing-price bubble was popped by the limits of credit expansion, setting off the general financial collapse of 2007.Thus the value categories, while useless for static analysis of the kind standard in economics, can be employed to predict and explain historical tendencies of the capitalist system.
The Marxian theory cannot provide specific time-governed predictions or explain individual events other than by providing a general pattern in which they may be situated. (Of course, other theoretical approaches can't do this either.) Thus Marx's theory provides a general explanation for the link between declining profitability and recession noted by Mitchell and other observers, though each recession has individual features explainable only by reference to specific historical conditions. It was such particular phenomena as the post-1980 deregulation of finance and the development of collateralized debt obligations that made possible the forms of speculation that led to the current financial debacle; what Marx's theory explains is the imperative to increased speculation during this period.
Similarly, it was the analysis of the postwar "mixed economy" on the assumption of the correctness of Marx's critique of political economy that made possible Paul Mattick's demonstration that since government spending, as a nonproductive use of surplus value, could not provide a new counterforce to the tendency of the rate of profit to fall, future manifestations of that tendency would transform state spending itself into a new source of difficulties for the global economy, which would now have to deal with expanding debt while profitability remained low Far from overcoming the fundamental dynamics of capitalism diagnosed by Marx, Mattick showed, "government-induced production is ... limited by the limitations of private profit production itself."(13) This limitation would show up in the continual growth of government debt, in such phenomena as the combination of inflation with economic stagnation, and ultimately in a return to crisis conditions due to the limits set on capital accumulation by an insufficient mass of profits. Though it is seldom cited at the present time, the apparent correctness of Mattick's argument, and so of the Marxian theory on which it was based, represents an unusually successful predictive effort in the domain of social science. It would not even, to my mind, be wrong to say that what was accomplished was an explanation of the current crisis.
1. G. Cooper, The Origin of Financial Crises (New York: Vintage, 2008), p. 93.
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