Published by Pluto Press, November 2011

Paperback /  256pp.  / ISBN-13: 978-0745332390

“Clear, rigorous and combative. Kliman demonstrates that the current economic crisis is a consequence of the fundamental dynamic of capitalism, unlike the vast bulk of superficial contemporary commentary that passes for economic analysis.”
. – Rick Kuhn, Deutscher Prize winner, Reader in Politics at the Australian National University

“Among the myriad publications on the present day crisis, this work stands out as something unusual. Kliman cogently argues against the view that the crisis is ultimately rooted in financialization. He is an excellent theorist, and an equally excellent analyst of empirical data.”
, – Paresh Chattopadhyay, Université du Québec à Montréal

“One of the very best of the rapidly growing series of works seeking to explain our economic crisis. … The scholarship is exemplary and the writing is crystal clear. Highly recommended!”
. – Professor Bertell Ollman, New York University, author of Dance of the Dialectic

DESCRIPTION OF BOOK, AUDIO INTERVIEW, AND SYNOPSIS FOLLOW.

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AUDIO: Kliman and host Doug Lain discuss the book (causes of the Great Recession, inequality, underconsumptionism, the #Occupy movement, and more) on Diet Soap Podcast #125: Crisis and Capitalism’s System Failure (70 Mins).

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The reasons behind the global financial crisis and the Great Recession are the subject of much debate. This is the first book to conclude, on the basis of in-depth analyses of official U.S. data, that Marx’s crisis theory can explain these events.

Marx believed that the rate of profit has a tendency to fall, leading to economic crises and recessions. Many economists, Marxists among them, have dismissed this theory out of hand, but Andrew Kliman’s careful data analysis shows that the rate of profit did indeed decline after the post-World War II boom. He shows that free-market policies have failed to reverse that decline. This fall in profitability led to sluggish investment and economic growth, mounting debt problems, desperate attempts of governments to fight these problems by piling up even more debt –– ultimately ending in the Great Recession.

Kliman’s conclusion is simple but shocking: short of socialist transformation, the only way to escape the “new normal” of a stagnant, crisis-prone economy is to restore profitability through full-scale destruction of the value of existing capital assets, something not seen since the Depression of the 1930s.

Chapters

1. Introduction
2. Profitability, the Credit System, and the “Destruction of Capital”
3. Double, Double, Toil and Trouble: Dot-com boom and home-price bubble
4. The 1970s––Not the 1980s––as Turning Point
5. Falling Rates of Profit and Accumulation
6. The Current-cost “Rate of Profit”
7. Why the Rate of Profit Fell
8. The Underconsumptionist Alternative
9. What Is to Be Undone?

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Synopsis

Chapter 1: Introduction.

Chapter 2: Sets out the theoretical framework that underlies the empirical analyses that follow. It discusses key components of Marx’s theory of crisis––the tendential fall in the rate of profit, the operation of credit markets, and the destruction of capital value through crises––and how they can help account for the latest crisis and Great Recession.

Chapter 3: Discusses the formation and bursting of the home-price bubble in the U.S., and the Panic of 2008 that resulted. It then discusses how Federal Reserve policy contributed to the formation of the bubble, arguing that the Fed wanted to prevent the United States from going the way of Japan. After Japan’s real-estate and stock-market bubbles burst at the start of the 1990s, it suffered a “lost decade,” and the Fed wanted to make sure that the bursting of the U.S. stock-market bubble of the 1990s did not have similar consequences. The latest crisis was therefore not caused only by problems in the financial and housing sectors. As far back as 2001, underlying weaknesses had brought the U.S. economy to the point where a stock-market crash could have led to long-term stagnation.

Chapter 4: Examines a variety of global and U.S. economic data and argues that they indicate that the economy never fully recovered from the recession of the 1970s. Because the slowdown in economic growth, sluggishness in the labor market, increase in borrowing relative to income, and other problems began in the 1970s or earlier, prior to the rise of neoliberalism, they are not attributable to neoliberal policies.

Chapter 5: Shows that U.S. corporations’ rate of profit did not rebound after the early 1980s. It also shows that the persistent fall in the rate of profit––rather than a shift from productive investment to portfolio investment––accounts for the persistent fall in the rate of accumulation.

Chapter 6: Discusses why many radical economists dismiss Marx’s law of the tendential fall in the rate of profit and contend that the rate of profit has risen. They compute “rates of profit” that value capital at its current cost (replacement cost); almost everyone else uses the term “rate of profit” to mean profit as a percentage of the actual amount of money invested in the past (net of depreciation). The current-cost “rate of profit” did indeed rebound after the early 1980s, but the author argues that it is simply not a rate of profit in any meaningful sense. In particular, although proponents of the current-cost rate have recently defended its use on the grounds that it adjusts for inflation, he argues that it mis-measures the effect of inflation and that this mis-measurement is the predominant reason why it rose.

Chapter 7: Looks at why the rate of profit fell. It shows that changes in the distribution of corporations’ output between labor and non-labor income were minor, and it decomposes movements in the rate of profit in the standard manner of the Marxian-economics literature. It then shows that an alternative decomposition analysis reveals that the rate of profit fell mainly because employment increased too slowly in relationship to the accumulation of capital. This result implies that Marx’s falling-rate-of-profit theory fits the facts remarkably well. The chapter concludes with a discussion of depreciation due to obsolescence (“moral depreciation”). It shows that the information-technology revolution has caused such depreciation to increase substantially and that this has significantly affected the measured rate of profit. The rates of profit discussed in Chapter 5 and prior sections of Chapter 7 would have fallen even more if they had employed Marx’s concept of depreciation instead of the U.S. government’s concept.

Chapter 8: Examines underconsumptionist theory, which has become increasingly popular since the recent crisis. Contrary to what underconsumptionist authors contend, U.S. workers are paid more now, in inflation-adjusted terms, than they were paid a few decades ago, and their share of the nation’s income has not fallen. The rest of this chapter criticizes the underconsumptionist theory of crisis. In particular, it argues that the underconsumptionist theory presented in Baran and Sweezy’s influential Monopoly Capital rests on an elemental logical error.

Chapter 9: Discusses what is to be undone. It argues that the U.S. government’s response to the crisis constitutes a new manifestation of state-capitalism, and it critically examines policy proposals based on the belief that greater state regulation, control, or ownership can put capitalism on a stable path. It then discusses the political implications of underconsumptionism and critique its view that redistribution of income would stabilize capitalism. Finally, it takes up the difficult question of whether a socialist alternative to capitalism is possible. Although the author does not believe that he has “the answer,” he addresses the question because he believes that the collapse of the U.S.SR. and the latest crisis have made the search for an answer our most important task. .

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Excerpts from Introduction

A tremendous amount has already been written on the financial crisis that erupted in 2007, the Panic of 2008, and the Great Recession to which they led. Many competent and insightful analyses of these events and the factors that triggered them are widely available elsewhere. Do we really need yet one more book on the subject? Probably not. This book therefore focuses more on the underlying conditions that set the stage for the crisis and recession, and less on the proximate causes of these events.

The “failure of capitalist production” in this book’s title is a reference, not to capitalism in general, but to specific and unresolved problems within the capitalist system of value production since the 1970s. I will argue that the economy never fully recovered from the recessions of the mid-1970s and early 1980s. I will put forward an explanation of why it did not. I will argue that the persistently frail condition of capitalist production was among the causes of the financial crisis. And, most importantly, I will argue that it set the stage for the Great Recession and “the new normal,” the state of not-quite-recession that we now endure. In light of the frailty of capitalist production, the recession and its consequences were waiting to happen.

Just as more lay behind the Great Depression than the stock market crash and the bubble that preceded it, more lies behind the Great Recession and “the new normal” than the financial crisis and home-price bubble of the 2000s. As Paul Krugman and Robin Wells (2010) noted in an essay published 15 months after the recession officially ended in the U.S.,

[there] hasn’t been much of a recovery. If the fundamental problem lay with a crisis of confidence in the banking system, why hasn’t a restoration of banking confidence brought a return to strong economic growth? The likely answer is that banks were only part of the problem.”

There is also reason to doubt that the financial crisis by itself––in the absence of longer-term conditions that reduced the economy’s ability to withstand shocks––would have triggered such a severe recession.The actual declines in production, employment, and income that took place, large as they were, are not true measures of the U.S. economy’s inability to absorb the shock of the financial crisis. The true measures are the declines that would have taken place if the Treasury had not borrowed madly to prop up the economy. In the first two years that followed the collapse of Lehman Brothers, it borrowed an additional $3.9 trillion, which caused its total indebtedness to rise by more than 40 percent. The additional debt was equal to 13.5 percent of the $28.6 trillion of Gross Domestic Product (GDP) that was produced during these two years. Yet despite the enormous increase in debt and the additional spending and tax cuts financed by means of it, real GDP at the end of the two years remained less than at the pre-recession peak. In contrast, the Treasury’s debt declined in the two years between mid-1929 and mid-1931, and by mid-1932 it was still only 15 percent greater than in mid-1929. It is likely that the latest recession would have been almost as bad as the Great Depression, maybe even worse, if the government had refrained from running up the public debt.

Main Thesis

The rate of profit—that is, profit as a percentage of the amount of money invested—has a persistent tendency to fall. However, this tendency is reversed by what John Fullarton, Karl Marx, and others have called the “destruction of capital”––losses caused by declining values of financial and physical capital assets or the destruction of the physical assets themselves. Paradoxically, these processes also restore profitability and thereby set the stage for a new boom, such as the boom that followed the Great Depression and World War II.

During the global economic slumps of the mid-1970s and early 1980s, however, much less capital value was destroyed than had been destroyed during the Depression and the following World War. The difference is largely a consequence of economic policy. The amount of capital value that was destroyed during the Depression was far greater than advocates of laissez-faire policies had expected, and the persistence of severely depressed conditions led to significant radicalization of working people. Policymakers have not wanted this to happen again, so they now intervene with monetary and fiscal policies in order to prevent the full-scale destruction of capital value. This explains why subsequent downturns in the economy have not been nearly as severe as the Depression. But since so much less capital value was destroyed during the 1970s and early 1980s than was destroyed in the 1930s and early 1940s, the decline in the rate of profit was not reversed. And because it was not reversed, profitability remained at too low a level to sustain a new boom.

The chain of causation is easy to understand. The generation of profit is what makes possible the investment of profit. So, not surprisingly, the relative lack of profit led to a persistent decline in the rate of capital accumulation (new investment in productive assets as a percentage of the existing volume of capital). Sluggish investment has, in turn, resulted in sluggish growth of output and income.

All this led to ever more serious debt problems. Sluggish income growth made it more difficult for people to repay their debts. The decline in the rate of profit, together with reductions in corporate income tax rates that served to prop up corporations’ after-tax rate of profit, led to greatly reduced tax revenue and mounting government budget deficits and debt. And the government has repeatedly attempted to manage the relative stagnation of the economy by pursuing policies that encourage excessive expansion of debt. These policies have artificially boosted profitability and economic growth, but in an unsustainable manner that has repeatedly led to burst bubbles and debt crises. The latest crisis was the most serious and acute of these.

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Although the financial crisis is over, and the recession officially ended two years ago, the debt problems persist––within the European Union, they are now critical––as do massive unemployment and the severe slump in home prices. These problems seem to be the main factors that have kept the U.S. economy from growing rapidly since the end of the recession. For a long time, Americans were willing to increase their borrowing and reduce their saving, since they believed that increases in the prices of their houses and shares of stock were an adequate substitute for real cash savings. But those increases have vanished, and many people are worried about whether they will hold on to their jobs and homes, so they have begun to borrow less and save more. And because of continuing debt, unemployment, and housing-sector problems––and probably because of concerns that they will suffer additional losses on existing assets and ultimately have to report losses that they have not yet “recognized”––lenders are less willing to lend. The low level of borrowing/lending has caused spending and economic growth to be sluggish.

I certainly do not advocate full-scale destruction of capital value––or any other policies intended to make capitalism work better; it is not a system I favor. Yet the destruction of capital value would indeed be a solution to the systemic problems I have outlined––unless it led to revolution or the collapse of the system. A massive wave of business and personal bankruptcies, bank failures, and write-downs of losses would solve the debt overhang. New owners could take over businesses without assuming their debts and purchase them at fire-sale prices. This would raise the potential rate of profit, and it would therefore set the stage for a new boom. If this does not happen, I believe that the economy will continue to be relatively stagnant and prone to crisis.

The Conventional Left Account

This is not a book that I set out to write. At the start of 2009, I began the empirical research that eventually became the core of the book, but at the time I had a different, and very limited, objective in mind. However, I soon discovered things that impelled me to dig deeper and widen the scope of my research.

To understand the significance of what I gradually learned, one needs to be familiar with the conventional wisdom on the left regarding recent U.S. economic history and its relationship to the recent crisis and recession. What follows is a brief summary of the conventional account. (Later in the book, I will quote various authors and provide citations.)

According to conventional wisdom, the rate of profit fell from the start of the post-World War II boom through the downturns of the 1970s and early 1980s. But by that time, economic policy had become “neoliberal” (free-market), and this led to increased exploitation of workers. Consequently, U.S. workers are not being paid more, in real (inflation-adjusted) terms, than they were paid decades ago, and their share of income has fallen. The increase in exploitation led to a significant rebound in the rate of profit. Normally, this would have caused the rate of accumulation to rise as well, but this time it did not.

The conventional account blames the “financialization” of the economy for the failure of the rate of accumulation to rebound. It holds that financialization, another component of neoliberalism, has induced companies to invest a larger share of their profits in financial instruments, and a smaller share in the productive capital assets (factories, machinery, and so on) that make the “real” economy grow. As a result, economic growth has been weaker during the last several decades than it was in the first few decades that followed World War II, and this factor, along with additional borrowing that enabled working people to maintain their standard of living despite the drop in their share of income, has led to long-term debt problems. These debt problems, and other phenomena that also stem from financialization, are said to be the underlying causes of the latest economic crisis and slump.

This was not an interpretation of recent economic history that I found particularly appealing, and I knew that proponents of the conventional wisdom mis-measure the rate of profit. But I had no reason to believe that their measures were overstating the rise in profitability instead of understating it. Nor did I doubt that their other empirical claims were based on fact. Yet in the course of my research, I found that:

• US corporations’ rate of profit did not recover in a sustained manner after the early 1980s. Their before-tax rate of profit has been trendless since the early 1980s and a rate of profit based on a broader concept of profit, more akin to what Marx meant by “surplus-value,” continued to decline.
• Neoliberalism and financialization have not caused U.S. corporations to invest a smaller share of their profit in production. Between 1981 and 2001, they devoted a larger share of their profit to productive investment than they did between 1947 and 1980 (and the post-2001 drop in this share is a statistical fluke). What accounts for the decline in the rate of accumulation is instead the decline in the rate of profit.
• U.S. workers are not being paid less in real terms than they were paid decades ago. Their real pay has risen. And their share of the nation’s income has not fallen. It is higher now than it was in 1960, and it has been stable since 1970.

These findings do no damage to the claim that a long-term buildup of debt is an underlying cause of the recent crisis and subsequent problems. However, all of the other causal claims in the conventional leftist account fall to the ground.

The conventional wisdom implies that the latest economic crisis was an irreducibly financial one. Of course, a financial crisis triggered the recession, and phenomena specific to the financial sector (excessive leverage, risky mortgage lending, and so on) were among its important causes. But what I mean by “irreducibly financial” is that conventional wisdom on the left holds that the recent crisis and slump are ultimately rooted in the financialization of capitalism and macroeconomic difficulties resulting from financialization. The persistent frailty of capitalist production supposedly has nothing to do with these macroeconomic difficulties. Indeed, on this view, the capitalist system of production has not been frail at all, since the rate of profit, the key measure of its performance, recovered substantially after the early 1980s.

The political implications of this controversy are profound. If the long-term causes of the crisis and recession are irreducibly financial, we can prevent the recurrence of such crises by doing away with neoliberalism and “financialized capitalism.” It is unnecessary to do away with the capitalist system of production––that is, production driven by the aim of ceaselessly expanding “value,” or abstract wealth. Thus, what the crisis has put on the agenda is the need for policies such as financial regulation, activist (“Keynesian”) fiscal and monetary policies, and perhaps financial-sector nationalization, rather than a change in the character of the socio-economic system.

If, on the other hand, a persistent fall in the rate of profit is an important (albeit indirect) cause of the crisis and recession, as this book argues, then these policy proposals are not solutions. At best, they will delay the next crisis. And artificial government stimulus that produces unsustainable growth threatens to make the next crisis worse when it comes. The economy will remain sluggish unless and until profitability is restored, or the character of the socio-economic system changes.

How This Book Differs

Quite a few books have put forward different leftist perspectives on the recent crisis and recession. Many of them focus, as have most other books on these topics, on the proximate causes of these events. This book differs from them, as I noted above, in that it focuses on the long-term, underlying conditions that enabled the financial crisis to trigger an especially deep and long recession, and one with persistent after-effects.

Yet a fair number of other books from the left also focus on the underlying causes. Some of them––such as Foster and Magdoff (2009), Harvey (2010), Duménil and Lévy (2011), and McNally (2011)––put forward some version of the conventional leftist account discussed above. And some, like the works by Foster-Magdoff and Harvey, also stress the supposed facts that workers’ share of total income declined and that this led to a lack of demand that was covered over by rising debt. From such a perspective, the crisis appears not to be a crisis of capitalism, but a crisis of a specifically neoliberal and financialized form of capitalism. I do not think the facts are consonant with these views, and I trust that disinterested readers will find, at minimum, that this book’s empirical analyses call such views into question.

On the other hand, some other books from the left have appeared that regard the crisis as a crisis of capitalism, and that take issue with the conventional account or parts of it––including Harman (2009), Roberts (2009), Carchedi (2011), and Mattick (2011). To these can be added articles such as Desai and Freeman (2011), Onishi (2011), and Potts (2011). I do not agree with all of these works in all respects, but I am proud that this book can now be counted among them. Except for the book by Duménil and Lévy, this book contains the most in-depth and comprehensive data analyses of any of the works I have cited above, as well as most other books on the topic. And among the works that take issue with the conventional leftist account, its treatment of the underlying causes of the Great Recession is arguably the most comprehensive.

To some degree, this book’s differences with the conventional account reflect methodological and theoretical differences. Like most of its other critics cited above, I am a proponent of the temporal single-system interpretation (TSSI) of Marx’s value theory. It has long been alleged that the value theory and the most important law based upon it––the law of the tendential fall in the rate of profit (LTFRP), the core of Marx’s theory of capitalist economic crisis––are internally inconsistent and must therefore be corrected or rejected. However, TSSI research has demonstrated that the inconsistencies are not present in the original texts; they result from particular interpretations. When Marx is interpreted as the TSSI interprets him, the inconsistencies disappear (see, for example, Kliman 2007).

As Chapter 6 will discuss in more detail, the TSSI’s ability to reclaim Marx’s Capital from the myth of inconsistency impinges upon the controversy over the underlying causes of the Great Recession in the following way. In their supposed proofs that the LTFRP is internally inconsistent, his critics replace the temporally determined rate of profit to which his theory refers with an atemporal “rate of profit” (the current-cost or replacement-cost rate), and they then find that Marx’s law does not survive this process of substitution. Those who have accepted these proofs have also accepted the manner in which the proofs mis-measure the rate of profit. Thus, when they found that the atemporal “rate of profit” trended upward after the early 1980s, they took this as conclusive evidence that capitalist production has been sound, and that the true underlying causes of the Great Recession are therefore neoliberalism, financialization, and heighted exploitation. Analysis of actual rates of profit leads to quite different conclusions.

However, I do not want to overstate the role of methodological and theoretical differences. Prior to analyzing the data, I had no prior belief that actual rates of profit had failed to rebound since the early 1980s, and I even wrote that “profitability has been propped up by means of a decline in real wages for most [US] workers” (Kliman 2009: 51), which I believed to be an unambiguous fact. Methodology and theory greatly influence the kinds of questions one asks and the data one regards as significant, but they have no influence over the data themselves.

In other words, this book is an empirical analysis, not a theoretical work. Even my claim that the atemporal “rate of profit” is not a rate of profit in any normal sense of the term is an empirical claim. If it, and this book’s other claims and findings, are “true for” those who find its conclusions appealing, they are no less “true for” those who do not. Not everything is a matter of perspective. If I can now say that a persistent decline in U.S. corporations’ profitability is a significant underlying cause of the Great Recession, and that Marx’s explanation of why the rate of profit tends to decline fits the facts remarkably well, it is because I have crunched and analyzed the numbers. I could not have said these things a few years ago.

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