Carchedi, Foster and the causes of crisis

posted 22 Jul 2011, 02:20 by Admin uk   [ updated 22 Jul 2011, 02:23 ]

By Michael Roberts     

The annual Marxism 2011 festival took place in London this weekend.  One of the sessions was on Marxist theory and the economic crisis.  The speakers were John Bellamy Foster, the editor of the American Monthly Review, Guglielmo Carchedi, the Italian Marxist economist and Joseph Choonara from the British Socialist Workers Party.  

With three speakers and only a short amount of time, no speaker was able to do justice to their arguments.  But let me summarise.  I won’t comment on Choonara’s contribution, not because he did not say some excellent things, but because I have more to say about the other two speakers.  

Those who have read John Bellamy Foster’s book, The Great Financial Crash: causes and consequences ( , will know that he represents that tradition of Marxist economics developed by Paul Sweezy, Paul Baran and Harry Magdoff that argues the cause of capitalist economic crisis can be found in the development of competitive, small firm capitalism of the 19th century into the monopoly, large firm capitalism of the 20th century, which has further developed structurally into a monopoly finance capitalism of the 21st century.  This monopoly capitalism breeds stagnation because competition is weak or suppressed.  Workers’ wages are held back by monopoly pricing and there is shift of profits from small firms to large ones.  But because workers cannot spend as much, monopoly surpluses build up.  They have to be realised through arms spending or a credit boom, the latest of which has seen the development of  ‘financialisation’ (see my post, Financialisation: the cause of crisis?, 19 July 2010).  Eventually the credit bubble bursts and the stagnatory nature of capitalism is revealed.  The crisis occurs not because profitability is too low but because the surplus is too high to be bought or realised.  Capitalist crises are not cyclical (boom and slump), but structural (stagnation).

The Monthly Review analysis is close to the views of those who have ‘neo-liberalism’ and underconsumptionist explanation of capitalist crisis, namely that there is not enough ‘effective demand’ from workers as their wages have been restricted and inequalities of income have grown so large that capitalists can no longer sell their goods and services to the masses in sufficiently profitable amounts.  So there is overaccumulation or overproduction and that causes the crisis. The crisis is caused by inequality and underconsumption, delayed by a credit bubble, which when it bursts, causes profits to collapse.  Low profits are the result of crisis and the lack of realisation, not vice versa (see my posts, The crisis of neoliberalismand Gerard Dumenil, 3 march 2011 and Views of the Great Recession, David Harvey and Anwar Shaikh, 3 September 2010).

In my book, The Great Recession (, I show how this explanation of capitalist crisis is both wrong and also not Marx’s view.  Suffice it to say that Foster in his brief speech presented two key facts to support his thesis: that capitalist crisis one of structural stagnation because in every decade since the 1960s, economic growth in the major capitalist countries has been slower than the previous one.  This is true.  But you can often make the stats fit any argument.  Instead of measuring growth decade by decade, if you measure it against the rise and fall in profitability in the US, you find that economic growth was faster from 1982-97, when profitability was rising, than it had been between 1965-82, when it was falling.  In other words, economic growth is faster when profitability is rising and vice versa.

His second fact was that real wages in the US have been stagnant since the 1970s and inequality has increased sharply, so workers became bereft of the incomes to buy the goods and services of monopoly capitalism without credit.  It is true that real wages have stagnated.  But it is not true that the costs of variable capital for the capitalists have stagnated and that is what matters to capitalist production.  Employee costs include not just wages but also benefits (holidays, sick pay, pensions, medical care, social security), which must be paid at least in part by employers.  When these are added in, employee costs have risen in real terms.  In the period 1982-97, employee costs rose, but profits rose faster, so the rate of exploitation (surplus value) rose in the US (and elsewhere).  The increase was so strong and when combined with a fall in the costs of production (a falling organic composition of capital), profitability rose and capitalist production grew faster and did not stagnate.  It was only when profitability peaked and began to fall that growth slowed.

Guglielmo Carchedi has been a major contributor the development of Marxist economics over the last 30 years.  He was among the first to provide a refutation of the Okishio theorem that purported  to show that Marx’s law of profitability was theoretically false or flawed and could not be used to explain crisis.  Carchedi has also shown up the fallacies of the underconsumptionist explanation of crisis that still dominates many parts of the Marxist economic spectrum (see his recent book ).

At the meeting, Carchedi outlined the main arguments in his latest book, Behind the crisis ( and paper (see his excellent two files on his thesis at  He shows that if you look at the productive sector of the capitalist economy (namely, the US) over the last 50 years, then you can see a secular fall in the rate of profit.  This secular fall has been driven by Marx’s law of profitability, namely a rise in the organic composition of capital. ie the growth of machinery and plant etc has outstripped and displaced the growth in the employment of labour power.  As Carchedi explains, labour is the only source of value, so the rising organic composition of capital may deliver faster productivity, BUT because goods get produced in less labour time, there is a slower growth in value and profitability falls.

Carchedi also shows that within the secular decline in profitability, there are shorter cycles when profitability can rise, in particular a rise from 1986 to date.  This rise is due to the counteracting influences on profitability that are also part of Marx’s law of the tendency of the rate of profit to fall.  From 1986, capitalists drove up the rate of exploitation or surplus value by vicious attacks on working conditions etc to counteract the effect of the rising organic composition of capital.  But eventually, the law of profitability will overcome the counteracting influences and the crisis will ensue.

This is a powerful argument.  But where I have some doubts about Carchedi’s approach is in his measure of profitability.  Carchedi’s data show that US profitability has risen from 1986 to 2009.  So how can the Great Recession be a result of falling profitability?  Carchedi measures only the profitability of the productive sectors of the capitalism, indeed just the goods producing sector.  He excludes services and the finance sector.  This may be justifiable if you want to see the working out of Marx’s law of profitability over a secular period.  But I think it then confuses and obscures what is going on cyclically and thus does not help to explain booms and slumps.  Marx did not exclude from his general rate of profit the financial sector or the unproductive sectors of capitalism.  These sectors do not create surplus value, but they appropriate it from the productive sector (by interest, rent and other charges) and so must be included in the overall rate of profit and considered in the cyclical explanation of crisis.

If you look at the profitability of the whole capitalist economy, as I did in my book and others have done as well (see my upcoming paper!), then we can see that US profitability peaked in 1997 not 2009 and has still not returned to that level (see my recent post, Returning to the long view and others on this).  Indeed, I have argued that after the slump of 2001, US profitability again peaked in 2005-6 (below the level fo 1997) and began to fall well before the credit crunch of 2007 and the recession of 2008-9.   This falling profitability(in the context of the general downphase of profitability from 1997) eventually triggered the credit crunch of 2007 when credit could no longer support profits.   This restores Marx’s law as the underlying (but not proximate) cause of the crisis.