Debate on causes of the crisis

posted 5 Mar 2011, 03:26 by Admin uk   [ updated 5 Mar 2011, 03:27 ]

This document was written by Mick Brooks a year ago as part of a debate in the IMT which seems to have ceased following the expulsion and resignation of a number of comrades and Brooks’ own resignation as editor of Socialist Appeal. Hopefully the issues it raises will be explored more fully by Marxists who consider theoretical debates more important than the prestige of ‘leaders’.

RS’s article ‘The unfolding capitalist crisis; a nightmare for workers everywhere,’ published in Socialist Appeal and on the In Defence of Marxism website (1) purports to not only deal with the present crisis but to outline the Marxist explanation of capitalist crises in general.

In doing so, he specifically disagrees with those who emphasise the tendency for the rate of profit to fall as a central part of Marx’s analysis, including my article The Marxist theory of crisis (2).

RS’s article is unsatisfactory in a number of ways. None of the quotes from Marx are referenced, as if it were unimportant for readers who want to be able to study Marxism in more depth to be able to find them and study them in context. Likewise some of the ‘facts’ adduced in favour of RS’s interpretation are not given the source from which they have been derived and so cannot be checked. Some quotes are mangled. This is irritating for the reader and makes it quite difficult to either support or critique the article. In sum it is a lazy, sloppy, inadequate piece of work. It is also wrong in its interpretation of Marx and application of his theory to the present crisis.

RS begins his account with the origins of the past boom that has so definitively come to an end.”The Federal Reserve made three interest rate cuts to boost consumption spending in 1998, to levels not seen since the 1950s.” And that’s it. That’s the entire explanation for the boom so far as RS is concerned. In the first place RS neglects to mention that there was a milder world recession in 2000-2001 associated with the bust despite low interest rates. More importantly he attributes huge significance in government action’s ability to influence the capitalist economy without making any qualifications. If he were to take this thought seriously, the political consequences would be completely reformist.

All the government has to do to get the economy going, if we are to believe this account, is to cut interest rates. The government is an important actor in the capitalist economy today, much more so than in Marx’s time. But it is necessary for Marxists to stress the limitations of government action upon an unplanned capitalist economy with its own economic laws and with the limitations imposed by other variables, such as the exchange rate and the government budget. Interest rates are unprecedentedly low in all the major capitalist economies, but so far that hasn’t on its own stimulated a recovery.

RS seems to ascribe a magical significance in the ability of credit to overcome the contradictions, at least for a time. “Credit…allows capitalism to go beyond its limits by temporarily expanding the market.” Marx’s analysis of the function of credit is much more nuanced. Much of his work in Capital Volume II deals with the role of credit in accelerating the circulation process of capital, so enabling the capitalists to achieve a higher annual rate of profit. Credit can, for a time, increase the market. But there is consumer credit and also producer credit for the capitalists. Credit can expand the ability of capitalists to satisfy the market too. In orthodox economic terms it allows both an increase in demand and in supply.

RS then goes on to detail the severity of the present recession, comparing it with 1929-33. It is true that the collapse in production and trade in the first year of the present crisis was as severe as in 1929-30. He quotes World Perspectives 1994, “In the coming epoch a new depression on the lines of 1929-31 is inevitable.” In fact Marxists have always emphasized that in general economic events have unique features and history does not repeat itself.

But RS, whose article was published in September 2009, should have made the readers aware of the course of the recession after the shock of the first year. It has become increasingly clear that present events, serious though they are, do not constitute a re-run of the 1929-33 crisis. In failing to do this he misleads his readers on economic perspectives. Here is Paul Krugman, writing in the New York Times August 10th 2009. “For a while, key economic indicators – world trade, world industrial production, even stock prices – were falling as fast or faster than they did in 1929-30. But in the 1930s the trend line kept heading down. This time, the plunge appears to be ending after just one terrible year.”

RS then moves on to his central proposition. “While there are many secondary causes of capitalist crisis inherent in ‘the real movement of capitalist production, competition and credit,’ Marxists have always explained that in the final analysis real capitalist crisis is always a crisis of overproduction.”

(RS does not actually explain that the section within the italicized passage in quotation marks is a quote from Marx, let alone where it actually comes from.) The actual quote is as follows: “But now the further development of the potential crisis has to be traced – the real crisis can only be deduced from the real movement of capitalist production, competition and credit,” (Theories of Surplus Value Volume II p 512 Progress Publishers, 1968). Overproduction is not mentioned at this point in the manuscript, whatever the impression given by RS’s formulation.

Marx does deal with overproduction in this section of Theories of Surplus Value – Chapter XVII ‘Ricardo’s theory of accumulation and a critique of it. (The very nature of capital leads to crises)’. As the bracketed part of the chapter title suggests, this is a critique of Say’s law, which asserts that crises of overproduction are impossible. Marx obviously needs to show that crises are in fact possible since Say’s law is wrong. Say’s law is usually spelled out as ‘every seller brings a buyer to market with him’ or ‘supply creates its own demand.’ This suggests that supply is always equal to demand so that overproduction is impossible and that the economy is always in equilibrium at full employment. The apologetic nature of this ‘law’ is obvious.

Say’s basic error is in assuming that products exchange for products, that economic exchange is conducted by barter. Since monetary exchange is the rule under capitalism there is no reason why the seller should not sit on his money after selling, leaving another potential supplier without a market. Under capitalism, where production is for profit, capitalists will always do this if they can’t see a way of making profit by going on to buy with the money they have acquired by selling.

To outline points we shall explain in more detail later, this section of ‘Theories of Surplus Value’ deals with the possibility of capitalist crisis and that this takes the form of overproduction. To explain why crises periodically break out we need an analysis of movements in the rate of profit, ultimately explainable in terms of Marx’s law for the tendency of the rate of profit to fall and its countervailing tendencies.

Ricardo adopted Say’s law, which asserts that general crises are impossible. Ricardo’s followers tied themselves up in knots, as they realised that capitalist crises do happen. So they asserted that there can be overproduction of capital, though not of commodities. Marx ridiculed this contortion, since overproduction of capital must involve overproduction of commodities.

He shares our perspective. “The overproduction of commodities is denied, but the overproduction of capital is admitted. Capital itself however consists of commodities…What then does overproduction of capital mean?…Defined more closely, this means nothing more than that too much has been produced for the purpose of enrichment, or that too great a part of the product is intended not for consumption as revenue, but for making more money, for accumulation;”(ibid. p. 532) We agree that overproduction is the form of appearance of capitalist crisis. We are striving to explain why crises of overproduction occur when they do.

Marx’s thoughts in this Chapter are interesting. They constitute an important aspect of the Marxist theory of crisis. He starts by explaining the possibility of crisis in consequence of the separation of purchase and sale in consequence of monetary circulation.

He goes on to explain: “The word overproduction in itself leads to error. So long as a large part of the needs of society are not satisfied, or only the most immediate needs are satisfied there can of course be no talk of an overproduction of products, in the sense that the amount of products is excessive in relation to the need for them…The limits to production are set by the profit of the capitalist and in no way by the needs of the producers.” (ibid. p. 527)

So Marx explains that overproduction occurs in relation to profit and on account of the profit system.

RS uses a sentence from another quote to assert that overproduction is the fundamental cause of capitalist crisis. As usual, he does not give references. “The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit.”

Here is a fuller version: “(T)he replacement of the capital invested in production depends largely upon the consuming power of the non-producing classes; while the consuming power of the workers is limited partly by the laws of wages, partly by the fact that they are used only as long as they can be profitably employed by the capitalist class. The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit.”(Capital Volume III, Penguin, 1981 p. 615)

So why do the masses suffer “poverty and restricted consumption?” It is because they toil under a system where production is for profit. Marx’s comment come as an aside in Capital Volume III in Chapter 30 on ‘Money capital and real capital:1’ (one of three chapters on the subject). Marx wants to remind us of the fundamentals in a section dealing with the intricacies of the financial form of appearance of capitalist crisis – of interest rates, balance of payments problems and many other technicalities.

The quote only speaks of the “ultimate reason” for the crisis, its sine qua non. It does not give us a causal mechanism. It does not explain to us what actually causes the onset of crisis – why there’ll be a crisis. This passage has also been discussed in The Marxist Theory of Crisis (2), so only supplementary points of interpretation are made here.

This quote has been wheeled out so many times one would think it was the only word Marx had to say on capitalist crisis. It is so buried in a technical part of his writing that one might suspect that, rather than laying out his theory in a systematic and logical manner, Marx was engaged in a light minded game of ‘hunt the thimble’ with posterity as to essential aspects of his economic theory. This passage cannot be regarded as a theory on its own. It is a mere aside.

Engels, in his chapter on ‘Production’ in Anti-Duhring (Lawrence & Wishart, 1959), points out that the restricted consumption of the masses is a permanent feature of capitalism: “But unfortunately the underconsumption of the masses, the restriction of the consumption of the masses to what is necessary for their maintenance and reproduction, is not a new phenomenon. It has existed as long as there have been exploiting and exploited classes. Even in those periods of history when the situation of the masses was particularly favourable, as for example in England in the fifteenth century, they underconsumed. They were very far from having their own annual total product at their disposal to be consumed by them. Therefore, while underconsumptionism has been a constant feature in history for thousands of years, the general shrinkage of the market which breaks out in crises as a result of a surplus of production is a phenomenon only of the last fifty years;” (pp. 395-396).

We commented on this passage in ‘The Marxist theory of crisis’:

”If the crisis were really caused by the ‘restricted consumption of the masses’ we would expect it to be manifested by an overproduction of consumer goods relative to capital goods. In fact this is by no means the usual case in actual capitalist crises. Most crises have actually begun in the capital goods sector. If the crisis were caused by under-consumption we would expect the workers to suddenly cease providing an adequate market for the capitalists, so triggering the crisis.

“Actually workers’ consumption usually falls as they are laid off as a result of the crisis, further shrinking markets. Their restricted consumption is thus a symptom of the crisis, not its cause. If capitalists generally accumulate a great part of their surplus, then we can expect the capital goods sector to grow relative to consumer goods in the economy. But the effect of this accumulation of capital is to make the workers more productive and therefore make the problem of over-production potentially more severe in the future.”

But the most severe stricture that the restricted consumption of the masses can be regarded as a cause of crisis comes from Marx himself:

“It is sheer tautology to say that crises are caused by the scarcity of effective consumption, or of effective consumers. The capitalist system does not know any other modes of consumption than effective ones, except that of sub forma pauperis or of the swindler. That commodities are unsaleable means only that no effective purchasers have been found for them, i.e., consumers (since commodities are bought in the final analysis for productive or individual consumption). But if one were to attempt to give this tautology the semblance of a profounder justification by saying that the working-class receives too small a portion of its own product and the evil would be remedied as soon as it receives a larger share of it and its wages increase in consequence, one could only remark that crises are always prepared by precisely a period in which wages rise generally and the working-class actually gets a larger share of that part of the annual product which is intended for consumption. From the point of view of these advocates of sound and ‘simple’ (!) common sense, such a period should rather remove the crisis. It appears, then, that capitalist production comprises conditions independent of good or bad will, conditions which permit the working-class to enjoy that relative prosperity only momentarily, and at that always only as the harbinger of a coming crisis. [Ad notam for possible followers of the Rodbertian theory of crises.— F.E.]” Capital Volume II pp. 486-7, Penguin 1978)

This passage is from Volume II, which deals with the circulation process of capital. Marx is explaining that production generates revenues that are spent by the economic actors. As wages rise because there are more workers or they are paid more, more wage goods are produced. Capitalists gain profits, which they can either spend on themselves or invest. Corresponding quantities of investment goods or luxury items appear on the market. Since capitalism is unplanned, this process is not automatic, but that is how the reproduction of the capitalist system proceeds. “The limits of the market” that RS mentions are evidently quite elastic.
A tautology, let us remind ourselves, is a way of saying the same thing twice in different words. It is not an explanation, but a way of trying to conceal the fact that you have no explanation. How does RS deal with this forceful critique of his ‘crisis theory’ provided in this quote? Why, he ignores it.

As we see, underconsumptionist theories were identified by Marx and Engels with Rodbertus and Duhring and contrasted to their own theory.

RS makes it clear that he regards overproduction as the fundamental cause of capitalist crisis. He provides long quotes from Newsweek and Business Week. “Capitalist economists do not like referring to ‘over-production’, but prefer the term ‘over-capacity’, which is basically the same thing and expresses the limits of the market. “The world is awash with goods…” explained Newsweek. “For economists, over-capacity is a tricky concept. Human wants are unlimited, so how could the world ever produce too much of a good thing? The key is what people can pay: In many goods sectors, prices still aren’t low enough to bring forth enough buyers. There will have to be some combination of falling prices and destruction of productive capacity before supply and demand come back into balance.” (Newsweek, 4/2/09)

“This crisis of over-production has been unfolding on a world scale. As the Newsweek article continues, ‘That’s not to say the Obama Administration is on the wrong track with its nearly $900 billion-plus stimulus plan. But it’s important to have realistic expectations. The stimulus can ameliorate the downturn, but not prevent continued contractions in the sectors of the economy where global over-capacity is the most extreme. The world is able to make 90 million vehicles a year, but at the current rate of production, it’s making only about 66 million, according to estimates from market researcher CSM Worldwide. Global production of semiconductor wafers is running at only about 62% of capacity, estimates market researcher iSuppli.”

“In relation to car production, Business Week makes the following observation: ‘Having indulged in a global orgy of factory-building in recent years, the industry has the capacity to make an astounding 94 million vehicles each year. That’s about 34 million too many based on current sales, according to researcher CSM Worldwide, or the output of about 100 plants.’ The article continues, ‘To become profitable, according to Michelle Hill of consulting firm Oliver Wyman, U.S. automakers will need to close at least a dozen of their 53 factories in North America in the next few years’.” (Business Week, 31/12/08)

It is refreshing to find proper citations to be given as to the sources of the evidence, though it is odd for a supposed work of Marxist theory to be culled from airport magazines. But the passages cited do not explain why overproduction occurred when it did. They are purely descriptive as to the state of the world economy

RS then moves on to discuss the role of the tendency for the rate of profit to fall in the current capitalist crisis. The passage seems to be an interpolation in his account, as in RS’s view the rate of profit is unimportant in the present crisis. “Between 1989 and 1997, US corporate profits increased by about 82% and the corporate rate of profit by 27.8%. By 1997 profitability in the corporate had returned to within 15%of its 1960’s high. The non-manufacturing sector had recovered to above its 1969 level to within 15-20% of its heights in the post-war boom.”

This all seems very authoritative. The reader may well wonder where this information comes from. RS does not tell us. It is in fact a quote, or concoction of quotes, from Robert Brenner’s 1998 Verso book ‘The economics of global turbulence.’ The confection of quotes is extraordinary. The first sentence is from page 246 and the next two from page 252, though they are separated by other text. On the same page 252 Brenner opens his discussion on the US profit rate with the words, “In the US, in sharp contrast, profitability has rebounded significantly” in bold type. The USA, in other words, provides an exception to the general processes. So naturally that is the example RS provides. The section beginning on page 251 is titled ‘A new Global boom?’ Brenner’s reply to the question, reiterated in all his writings since 1998, is a firm ‘no.’ He regards the secular fall in the rate of profit as the most important development since the War, one causing what he calls ‘the long downturn.’ This is not the impression the reader would get from RS’s selective quotation from Brenner’s work.

Brenner is a scrupulous and honest commentator. He does not use Marxist categories in working out the rate of profit. For instance he thinks the organic composition of capital is unimportant in movements in the profit rate, citing Okishio’s theorem. But both Brenner, in subsequent writings, and authors attempting to use Marxist analysis such as Andrew Kliman and Michael Roberts have all come to similar conclusions. There was a collapse in profits associated with the 2000-2001 recession (After the 1998 work cited by RS). The rate of profit recovered in the subsequent boom until it collapsed in 2006. Never again did profits reach the high point of 1997 in the meantime. All this is unknown to RS’s readers, since he chooses to use a book written in 1998 to outline the processes that led up to the crash of 2007.

RS goes on, “Despite a dip in profitability during the recession of 2001, profits went on rising until the financial crisis hit in 2007.” No authority is cited for this assertion and I cannot trace one. Clearly it is quite central to his thesis that the rate of profit fell as a result of the recession, which was already in process. “Today, with the world slump, the rate and mass of profit have collapsed. This is directly linked to the collapse of markets and the emergence of overcapacity and overproduction.”

Andrew Kliman explains, “Finally there was a sharp rise in profitability in the middle years of this decade. As we now know, however, it was driven by an asset bubble and was not a sustained recovery. Revised and updated BEA data indicate that the rate of profit fell from a peak of 25% in 2006 to 17.9% in 2008.” (The persistent fall in profitability underlying the current crisis: new temporalist evidence, 2009, pp. 23-24 ) (3)

The trouble for RS is that Kliman and Michael Roberts emphasise that the staggering fall in the rate of profit preceded the onset of recession in 2007. Roberts backs up Kliman’s point. “The rate of profit rose from 2001 to 2005. So does that mean the Great Recession was not caused by declining profitability? The answer is that by 2005, the value rate of profit began to fall again.” (‘The great recession’2009,p. 264.)

Not a single authority that I can find buttresses RS’s assertion that profits fell on account of the crisis and after its onset, Brenner himself in his ‘Afterword’ to the second edition of ‘The economics of global turbulence’ (Verso 2006) emphasises that 1997 was the peak year for profits in the era since the ‘Golden Age’ of capitalism that ended in the recession of 1973-74. Brenner also points out that boom turned into bust in the third quarter of 2006 as profit rates went on the turn. (‘What is good for Goldman Sachs is good for America;’ the May 2009 Prologue to the Spanish edition of the ‘Economics of global turbulence’p.71. (4)) “It is crucial to emphasise that the descent into recession was already well in progress before the outbreak of the financial crisis in July-August 2007. Nonfinancial profits peaked with housing prices in the middle of 2006 and then declined 10 per cent by the third quarter of 2007.”

Fred Moseley too asserts that, “Mid 2006 was the peak of this current profit cycle.” (‘The long trend of profit’ p. 1 (5) ) And Graham Turner (who I think does not regard himself as a Marxist) chips in, “Data published by the Bureau of Economic Analysis strongly supports the argument by those who claim the economic crisis of 2008 was attributable to a declining profit rate” – though his own position is more nuanced. (No way to run an economy, Pluto 2009 pp. 130-131) The official US Bureau of Economic Analysis does indeed indicate that the US rate of profit peaked in the third quarter of 2006 at 17.8% of GDP. By the second quarter of 2007 it was 15.9% and by the first quarter of 2009 it bottomed at 11.1%. This is also the view of a recent paper published by Goldman Sachs and written by Daly and Broadbent, entitled, “The savings glut, the return on capital and the rise in risk aversion”. (6)

It is true that all these authors use different methods to calculate movements in the rate of profit. But they all show the same trend. The evidence suggests quite strongly that the recession was caused by the fall in the rate of profit. This is not a conclusion RS wants to countenance.

RS is guilty not only of playing fast and loose with the facts regarding the rate of profit but also of failing to understand the theory. One of the countervailing factors mentioned by Marx to offset the tendency for the rate of profit to fall is raising the rate of exploitation. RS explains that “The rate of profit began to fall steeply by the mid-1960s. This decline carried on until the 1980s when, after a series of defeats for the working class, the capitalists began an all-out offensive to drive up profitability.” It is quite correct that the working class internationally in the past period has experienced a one-sided civil war on the shop floor to restore the capitalists’ rate of profit. This hardly suggests that the bosses regard the rate of profit as unimportant.

Significant as this is to the class struggle and the life of the workers, one important point is evaded by RS. In the debate between AG and MB and the leadership of our tendency in 1980 it was clearly established that raising the rate of exploitation cannot indefinitely offset the tendency for the rate of profit to fall. Capitalism is inherently crisis-ridden. Crisis is not simply caused by class struggle over the surplus. Even if the workers live on air, as long as the organic composition of capital rises, then eventually the rate of profit must fall. Even AG admitted this at one point in the debate. This view was supported by EG and became the official position of the tendency. RS is in effect putting an opposite view to that defended by AG 30 years ago. He believes that successful class struggle by the bosses has substantially restored the rate of exploitation and therefore the rate of profit.

Likewise the tendency for the rate of profit to fall was an important part of our tendency’s analysis of the crisis of capitalism. “ In all capitalist countries the tendency of the rate of profit to fall has manifested itself in a steep decline. Hence the preoccupation of the ruling classes to increase the rate of profit.” (EG World perspectives 1977 in The Unbroken Thread p. 416)

In a crisis there is a massive destruction of capital, not just physical destruction, but also the destruction of the value of capital. RS mentions this, and quotes Marx approvingly. The role of this destruction is to reduce the organic composition of capital and thus raise the rate of profit to prepare for a new cycle of boom and bust. AG had argued that the reason the rate of profit was threatened in the 1970s was because of rising real wages, which bit into the rate of exploitation. RS is arguing that the rate of profit has been substantially restored (using partial and inaccurate figures) by a bosses’ counter-offensive. Both analyses were and are wrong and contrary to the longstanding tradition of our tendency.

We are not explained why or how the restricted consumption of the masses, which is a permanent condition of capitalism, causes cycles of boom and bust. Then in addition to the cyclical crisis of capitalism, RS introduces us to the organic crisis of capitalism. He never explains or defines this term. We know what organic fertiliser is, but not an organic crisis of capitalism! “This organic crisis, which emerged with a vengeance during the inter-war period, was temporarily overcome by the massive development of world trade following the Second World War.” It seems the organic crisis can come and go as it pleases. It sounds rather like the ‘final crisis of capitalism’, but RS knows that Lenin and Trotsky angrily repudiated the concept at the First Four Congresses of the Communist International. No crisis is final, since the capitalist system will not collapse of its own accord. It must be overthrown. So the organic crisis of capitalism remains a mystery.