The Causes of the Crisis 130727

7/27/2019 The Causes of the Crisis 130727

1/34

Socialism Today Debates:

The Cause of the Crisis: Rate of Profit?Issues 156, March 2012 169, June 2013

1. Striking back in austerity Britain Peter Taaffe (Issue 156, March 2012,page 2)

2. A Crisis of Profits? John Smithee (Issue 157, April, page 6)3. Peter Taaffe Responds PT (Issue 157, page 7)4. The Profits Crisis Debate Bruce Wallace (Issue 159, June, page 9)5. Peter Taaffe Responds PT ( Issue 159, page 11)6. A Way Out of Depression? Lynn Walsh (Issue 161, September, page 13)7. On Capital Investment BW (Issue 163, November, page 22)8. Lynn Walsh Responds LW (Issue 163, page 23)9. Capital Investment Debate Continues BW (Issue 164, December/January2012/13, page 27)10. Behind the Stock Market Surge LW (Issue 167, April, page 28)11. Profitable Question BW (Issue 168, May, page 32)12. A Reply to a Profitable Question Joe Foster (Issue 169, June, page 33)


2/34

1. Striking back in austerity BritainArrogant, out-of-touch Con-Dem politicians actually believed they haddefeated trade union opposition to their savage austerity measures after lastyears strikes. Yet a number of key unions are poised to strike-back on 28March and significant private-sector struggles continue. PETER TAAFFEwrites.

"WHILE THE POLITICIANS and their advisers give the impression of beingin charge, they are not really. The financial markets and the street: whenaroused, these are our masters." (Andreas Whittam Smith, founder of theIndependent, 16 February) The pensions battle, which has dominated theindustrial and political scene in Britain for the last year, has now entered adecisive stage.

The Con-Dem government was triumphant at first when it believed that it hadwon the battle, with the willing compliance of right-wing trade union leaderslike Dave Prentis of Unison. His union, by far the biggest involved in the

present struggle, and other smaller unions capitulated by accepting the headsof agreement with the government. Yet everything that they accepted had beenon the table before the magnificent 30 November strike. The government

proposed that public-sector workers should work longer, pay more in pensioncontributions and receive less in payouts. Government hatchet men, FrancisMaude and Danny Alexander, were quick to point this out.

They were already basking in the afterglow of a major victory for their side anew Black Friday for the trade unions. Christina McAnea, Unisons head ofhealth, seemed to concur when she cynically admitted that the strike action was

just a "damage limitation exercise", with 30 November designed to allowworkers to let off steam.

But both the government and the sell-out trade union leaders have reckonedwithout the resistance front of other unions like PCS civil servants, NUTteachers, lecturers union UCU and the possible welcome addition of the fire-fighters union, FBU. The latter had not joined the 30 November strike but now,

because of the employers intransigence, is ready to resist. A widespreadconsultation of workers in these unions and others is presently underway as wego to print. There is every likelihood that an estimated 750,000 workers willnow be prepared to strike on 28 March.

This would represent, in effect, last years 30 June strike, Mark 2. In terms ofthe numbers involved, in a sense this is a retreat on 30 November, because ofthe desertion of Unison and others. Yet a wholesale retreat by the unionswithout further resistance would have seen the worst possible outcome, a routof the trade unions. It would encourage David Cameron and his chancellor,George Osborne, to put the boot into the unions and embolden them in thefurther attacks that will be launched.

Endorsing economic destruction

AND THIS COMES at a time when the government has been further

weakened, economically, socially and politically. Indeed, Osbornes economicperspectives lie in ruins. Unemployment is at a 16-year high with femaleunemployment at 1.1 million, the worst in 23 years. Youth unemployment is the


3/34

"highest ever on record" (Mark Serwotka, The Guardian). Scandalously,860,000 people have now been unemployed for more than a year. In 2011,300,000 claimed jobseekers allowance, and this was supposed to be atemporary benefit. In reality, we now have a permanent pool of unemployed,the product of endless austerity. The TUC estimates that the realunemployment figure is 6.3 million if part-time workers and those who have

dropped out of looking for work completely are included. Osborne predictedgrowth of 2.3% last year which turned out to be only 0.3%!

This is even lower than in Italy, which is in such an economic meltdown that anunelected technocratic cabal, led by the former Goldman Sachs employeeMario Monti, rules instead of parliament. And how does the governor of theBank of England, Mervyn King, seek to explain the situation? This year, heinforms us, will be a zigzag of alternating positive and negative quarterlygrowth rates. In other words, Britains capitalist economy is unstable and in thegrip of stagnation. There is no possibility of Osbornes private sector thefamous phoenix arising from the ashes of the public sector rescuing the

situation. The phoenix of a revived private manufacturing base is now reducedto ninth position in the world manufacturing league and has already flown toChina and elsewhere, sadly never to return.

Despite all the pain and misery resulting from the cuts already inflicted,Osborne and his government are on negative watch from the ratings agencyMoodys. The cherished AAA rating is in peril because the deficit has actuallygrown. Why? Because the Con-Dems policies have severely contracted theeconomy and unemployment has begun to climb. Osborne claims that this is aringing endorsement of his destructive deflationary programme! Moreover, theinjection of a huge 325 billion of quantitative easing by the Bank of England,while preventing an outright slump, has done nothing to fundamentally changethe situation.

The level of national output is still 4% below where it was at the peak of theeconomic cycle. Larry Elliott of the Guardian writes: "At the current rate of

progress it will take until the hundredth anniversary of the outbreak of the firstworld war before regaining the lost ground. Those seven lost years will havecost the UK economy around 200 billion in output". Truly capitalism is aprogressive system!

Indeed, it so progressive that it is on a strike of capital, a refusal to invest. It isresting on a mountain of cash locked up in the vaults of big companies inBritain and the US: an eye-watering 120 billion in Britain and a colossal $2trillion in the US. Even Will Hutton in the Observer and Martin Wolf of theFinancial Times, apostles of capitalism, frantically urge them to invest. In vain!The capitalists see no profitable outlets. The system is in the death grip of ahuge debt overhang; zombie banks in zombie capitalism!

Cold cruelty of the ruling classBUT IT IS the working class, as always, who will be called upon to pay the

price for the crisis of capitalism aggravated by the ruthless policies of

Osborne, a practitioner par excellence of the cold cruelty of the British rulingclass. In recent months, this has been on full display. The vilification andscapegoating of the poor, those compelled to exist on benefits, including the


4/34

disabled, has reached new depths.

Cameron has shamelessly presented a picture of benefit scroungers receivingas much as 26,000 a year, while hiding the fact that, in the very few caseswhere sums like this are paid out, 70-80% of the benefits are taken by rack-renting landlords. Some disabled people, the long-term sick, are now being

forced to work unpaid for a limited amount of time or their benefits will be cut.Disabled people have been singled out in shopping malls and elsewhere forvilification, with some tipped out of wheelchairs by those whipped up by thedemagogic campaign of Cameron and Osborne.

The witch-hunt of the poor and defenceless is destined to go on but will beresisted. And 94% of government cuts and 88% of benefit cuts have yet to beimplemented. Already there is massive social cleansing underway. Tens ofthousands of families from inner-city areas have been effectively expelled tothe outskirts, and there are plans for some to be relocated from London tonorthern cities like Hull and elsewhere.

Cameron appears determined to carry through the governments pro-businessNHS reforms, despite defeats in the House of Lords and opposition fromsome Liberal Democrats. Pushing through the legislation is one thing, however,implementing changes on the ground another. Cuts and privatisation will beresisted by the health unions rank-and-file and by a wider anti-cuts campaign.

A mass political voiceIT IS THESE factors which emphasise the crucial importance of the pensionsstruggle, which will hopefully fuse with the battle against the cuts. There has

been a sharp rise in industrial action in both the public and private sectors.More days were lost in strike action in 2011 than any time since 1990 (1.39million days compared to 365,000 in 2010). Public-sector action accounted forover 90%, but days lost in the private sector doubled between 2010 and 2011,the highest number since 1994.

The victory of the Balfour Beatty electricians is proof, if proof were needed, ofthe effectiveness of leadership both from above and below in the class battlesthat impend in Britain. Such is the explosive social situation that it isinconceivable that struggle will be off the agenda. Even if generalised nationalstrike action does not materialise on the pensions issue that will not be the end

of the matter. While not the preferred option, rearguard struggles are inevitableby the PCS and others given the attacks which are planned by the government.Maude has openly threatened trade union facility time and rights gained in the

past. He will be resisted ferociously, which will probably include partial andregional strike action.

Industrial action will also be accompanied by a political and electoral challengefrom the Trade Unionist and Socialist Coalition on 3 May beginning with theGreater London Assembly elections. Central is the need for a socialist answerto this devastating crisis of capitalism. This is cynically dismissed by MartinKettle of The Guardian: "Socialism still has adherents, but it is a religion, not a

programme The failure of socialism has a lot to do with [conceptualising aplausible alternative]". (2 February) Not true, replies former Plaid Cymru MP,Adam Price: "In December, a poll by the Pew Research Center found support


5/34

for socialism now outweighs support for capitalism among a youngergeneration of Americans".

The baleful approach of Ed Miliband and New Labour has already provokedGMB members, through resolutions to their conference, to threaten to withhold2 million from the Labour Party. Unite has also booked the biggest committee

room in the Houses of Parliament for its general secretary, Lenny McCluskey,reportedly to read the riot act to Labour MPs.

The necessity for a new party in this case, in the USA is conceded byformer advocate of wild capitalism, Jeffrey Sachs. He writes in the FinancialTimes: "The poorer half of the population does not interest the Washingtonstatus quo. A third political party, occupying the vast unattended terrain of thetrue centre and the left, will probably be needed to break the stranglehold of bigmoney on American politics and society". (14 February) Such a third partywould have to be a new mass radical party. In Britain, this would be a new massworkers party.

British society is on the edge of a volcano, of which the pensions struggle isjust one expression. It can erupt at any time into a mass movement which couldnot only shake British capitalism but also the government itself, leading to itsdownfall.


6/34

2. A crisis of profits?I WOULD like to comment on Peter Taaffes excellent article in SocialismToday No.156, March 2012, headlined: Striking back in austerity Britain.

Peter mentions in his article that "[capitalism is] so progressive that it is on astrike of capital, a refusal to invest. It is resting on a mountain of cash locked up

in the vaults of big companies in Britain and the US: an eye-watering 120billion in Britain and a colossal $2 trillion in the US".

Why does this strike of capital say so much about capitalism in 2012? I thinkthe answer lies in Marxs law: the Tendency for the Rate of Profit to Fall(TRPF). In his three volume opus, Capital, Marx differentiates betweenconstant capital (c) and variable capital (v). Constant capital being capital tiedup in factories and machines etc. Variable capital being capital produced by thelabour of human beings.

During the Second World War both constant capital (factories, machines etc)

and variable capital (soldiers, sailors, airmen, and civilians) were bothdestroyed. Once the war was over, this immediately led to a rise in the rate of

profit, leading to the post-war capitalist economic boom of 1945-1974.

However, during this period the rate of profit started to fall, especially inBritain. The response to this falling rate of profit was the destruction by theThatcher government of constant capital, whereby 20% of manufacturingindustry was destroyed. A higher percentage, incidentally, than that achieved byHitlers Luftwaffe.

However, Mrs Thatcher did not reduce the cost of variable capital. Wages forthose in work held up. Hence, the Tory victory in the 1987 general election. Atthe same time, the cost of unemployment benefit was paid for with receiptsfrom taxes on North Sea oil and gas. The newly-privatised industries also

provided a new source of profit, leading to an overall rise in the rate of profit.

Today, in 2012, British capitalism is, again, being hit by a long-term fall in therate of profit as advanced by Marx in Capital. However, current tax receipts on

North Sea oil are a fraction of those in the 1980s. There is also the debtmountain which threatens to sink British capitalism. This is the dilemma faced

by the Con-Dem government.

So how are the Con-Dems going to increase the rate of profit? One solution isthe privatisation of the NHS, local government, the civil service etc. Anothersolution is to cut the cost of variable capital. Hence, the planned transfer of onemillion people from Incapacity Benefits onto the Job Seekers Allowanceclaimant count.

The reason for this lies in Marxs idea of a reserve army of capital as a meansof reducing the wages of those in work ie a cut in the cost of variable capital.Does Peter agree that the root cause of the Con-Dems policies, including theircuts, is an attempt to raise the rate of profit, which, as Marx pointed out, has a

tendency to fall?

John Smithee, Cambridgeshire


7/34

3. Peter Taaffe responds:WE WELCOME John Smithees letter. It is true that Karl Marx argued in thethird volume of Capital that capitalism did evince a tendency for the rate of

profit to decline because it led ineluctably to a growth of constant capital themeans of production compared to variable capital, labour power.

However, he also indicated that this law would only manifest itself over time,and sometimes a considerable period. This was because capitalism, byconstantly revolutionising, through technique, and therefore cheapening theelements of the means of production, etc, was able to the cut the value ofconstant capital. It could therefore, for a period, counteract this tendency forthe rate of profit to be pushed down. In Capital, after first elaborating "Thetendency of the rate of profit to decline", in a following chapter he elaborateswhat he calls the "counteracting causes", which check this tendency. This hasled some economists even those claiming to be Marxists to conclude thatthese "counteracting causes" in effect nullify Marxs argument supporting thecase for the tendency of the rate of profit to decline. I would not agree with this.

I think the law will be manifested, but sometimes over time.

However, what the capitalists are mainly interested in is not the rate but themass of profit. Marx makes the same point a few times: "A drop in the ratewas generally accompanied by an increase in the mass of profit, due to theincreasing mass of total capital employed". (Capital, vol III, part III, chapter14) They will continue to invest if the rate goes down yet the mass of profit isstill greater than the capitalists outlay of capital at the beginning of the

production process. In the 1970s, there was one year where the mass of profitdid suddenly drop, which led to panic stations by the capitalists. It was onemanifestation of the seriousness of the crisis at that stage.

Since then, however, the capitalists, first through neo-liberalism, which beganin the 1970s, then through the favourable position created for them by thecollapse of Stalinism particularly the liquidation of the planned economy andthe ideological counter-revolution which followed in its wake have been ableto massively change the balance of forces in their favour. This has resulted inwage repression in the US where the average median wage has not increasedfor 30 years and is now at the level of the 1950s and in Europe. Together withother factors, this has led to a colossal bonanza for the bosses. Record profits accompanied by a colossal widening of the wealth gap have been made.

Therefore this crisis is not primarily one of profitability, as John seems toimply. There are many and differing factors that can lead to or be the immediatecause of a capitalist crisis. The capitalists are presently swimming, literallydrowning, in profits. In our Socialism Today article we underestimated theamount of unused capital, profits, stashed in the vaults of the big companies.Latest figures show that 750 billion is fallow not being invested by thecapitalists in Britain alone. It is a huge $2 trillion in the US! The capitalistsrefuse to invest because there is no profitable outlet. In this sense, it is a crisisof profitability. Not because profits have dropped or there is a tendency forthe rate of profit decline. Both the rate and the absolute amount of profit have

increased, it seems, even during this terrible crisis. This is one of themanifestations of capitalist crisis Marx wrote about.


8/34

Unemployed capital exists alongside unemployed workers. They seek toovercome this problem not through investment in industry which is closed offto them in Britain because of its collapse or in China or elsewhere, but byseeking to create new fields of investment by looting the state through

privatisation. It is this fact that lies behind the irrational, ruinous policies toprivatise the NHS, the police, and the state sector as a whole.

This is the crazy logic of modern capitalism. Marxism alone is capable ofanalysing the processes of capitalism and preparing a socialist future for theworking class.


9/34

4. The profits crisis debateIT WAS with regret that I read Peter Taaffes reply to John Smithee on Marxstheory of the law of the tendency of the rate of profit to fall (LTRPTF). Johndoes not give a rounded out explanation of the law but he is certainly on theright track.

Militant, forerunner of the Socialist Party, had a debate on just this issue in1980. At that stage Militant upheld the centrality of Marxs law in its reply tothe economist, the late Andrew Glyn, who argued that "the LTRPTF asformulated by Marx is theoretically incorrect". The reply concluded that Glynsview of the LTRPTF was "both scientifically incorrect and potentially

politically dangerous".

Between 1980 and today the LTRPTF appears to have become less importantfor us or even redundant. It would be interesting to know how this has comeabout?

Peter quotes Marx to support the idea that capitalists arent interested in the ratebut the mass of profit. Marx noted that when there was an increase in theextraction of surplus value from the working class that the mass of profit mustincrease but that the rate of profit would fall (Capital Vol III p219). However itis just untrue that capitalists are only interested in the mass of profit. That may

be true during a boom, but certainly not in a slump! See Marx Capital Vol IIIp253.

Marx was very clear about the importance of the rate of profit for capitalismand in relation to the accumulation of capital he wrote: "The specific featureabout it is that it uses the existing value of capital as a means of increasing thisvalue to the utmost. The methods by which it accomplishes this include the fallof the rate of profit, depreciation of existing capital, and development of the

productive forces of labour at the expense of already created productiveforces". (Capital Vol III p249) And: "The rate of profit is the motive power ofcapitalist production". (Capital Vol III p259)

Therefore capitalist development, in all its facets, including accumulation andhence investment, is impossible without a falling rate of profit!

The great recession cannot be understood unless Marxs theory of crisis, of

which the LTRPTF is its most important part, is applied.

The point that Peter makes about the growth in the rate and mass of profitincreasing during this crisis is questionable. Prior to the great recession therewas an absolute drop in the rate of profit and in the mass of profit in the USA in2006-07 of approximately from 20% to 12% for mass and for rate, using 1980as a baseline of 100%, from 150% to 90%!

The fall in the rate of profit was the underlying, but not the proximate, cause ofthe capitalist crisis just as Marxs theory predicts. Profits have recoveredsomewhat but to nothing like previous boom levels and the economic

recovery is anaemic.


10/34

There are many points made by Peter which I believe are controversial andrequire discussion. Perhaps a good start would be to come clean on our attitudetowards the LTRPTF?

Bruce Wallace, Scotland


11/34

5. Peter Taaffe responds:BRUCE IMPLIES that in my short reply to John Smithee (Socialism Today

No.157, April 2012) I have, in effect, abandoned the LTRPTF. This is not so, asI will show. But a monocausal explanation for the crisis of capitalism is wrong.Marx explained that the difficulty was not to understand the reasons for thetendency of the rate of profit to fall but for the comparative slowness of its fall.

This is where the counteracting factors come in, which can temporarily arrestthe decline and even increase the rate of profit. Any number of factors can bethe trigger for a specific crisis.

It was this question that I highlighted both in my article and reply to JohnSmithee. Yes, the LTRPTF forms the background, it is, as Bruce puts it, theunderlying but not the proximate cause of the crisis. It is not possible here toanalyse fully how this works out in the current crisis. But a few remarks arenecessary.

The roots of the present Great Recession undoubtedly lie in the crisis of the

1970s, which the subsequent boom never completely overcame. But to argue,as some Marxist economists have done, that nothing has fundamentallychanged, that neo-liberalism did not have a significant effect in overcoming thecrisis of profitability that existed then, I think is wrong. Also, the turn toinvestment in the financial sector an extended and extreme form of credit arose from the same causes. This created the bubbles which have now burst.

The basis upon which such economists draw their evidence is new, seems to beincomplete and one-sided, and pertains to one part of the world economy, albeitthe most important, the US. The assertion they make that profits dropped in2006-07 has yet to be proved. However, even if this was correct, it does notautomatically cancel out what I wrote about the colossal piling up in the banksand big business of what is now $7.5 trillion of cash reserves half the GDP ofthe US. It seems inconceivable that this would have been possible without ahuge rise in the mass of profits and possibly their rate as well.

And what are political implications of this for capitalism? With the colossalmountains of liquidity in the vaults of the banks and big business our demandfor a capital levy is very apposite, in view of the zombie-like character ofcapitalism at the present time. We cannot just repeat what Marx said and leaveit at that; we base ourselves on his method but we have to analyse each

situation which will contain new features as it develops.

Bruce argues we have abandoned the theory of the LTRPTF. But the reasonwhy we do not mention the LTRPTF as regularly as he would like although ithas featured in articles over the years is not because we have abandonedMarxist ideas on this issue. It is because it is a given, but we have had to takeup new features, which always arise under capitalism. I made it clear in myreply that I did not agree with those who argue that this law formulated byMarx is now redundant. Moreover, in our book Marxism in Todays World, Istate: "We think that Marx was correct about the tendency of the rate of profitto decline. Historically, there has been a colossal growth of constant capital,

dead labour if you like, to use Marxs terminology, compared to living labour,variable capital. Consequently, capital, said Marx, has a tendency to becomeless and less organic, with a tendency to create relatively smaller and smaller


12/34

annual increments of surplus value. However, the capitalists express that as thetechnical growth of capitalism but dead labour predominates over living labour.It is generally accepted even by pre-Marxist economists as an empirical factthat, as capitalism grew, the rate of profit declined. Marx described it astendency and analysed this in detail in part three of the third volume ofCapital". (p24) There is no difference in our approach to this question now and

the position of Militant in the 1980s.

However, the debate on this question in the ranks of Militant then generatedmore heat than light. Some took up a fundamentalist position without takinginto account in a serious way the counter-arguments and seeking to answerthem. Mere denunciation was sufficient. No attempt was made to take accountof any changes that have taken place in the structure of capitalism, newfeatures, facts, figures, etc. Moreover, those who were most strident the lateTed Grant in particular in crudely upholding theoretically the LTRPTF,when it came to a real economic crisis in 1987 argued that we were on theverge of another 1929-type Wall Street crash. Lynn Walsh and I and others

opposed them, drawing attention to the huge liquidity of Germany and Japan,which was used to prevent another 1929 and we were proved right.

The analysis we have given on the current crisis illustrates the specificcharacter at this stage of the catastrophic incapacity of capitalism to furtherdevelop the productive forces; they refuse to invest, because there areinsufficient profitable outlets. And, moreover, this can go on for some time. Aswe pointed out this is even an expression, in a sense, "of a crisis ofprofitability. Not because profits have dropped or there is a tendency for therate of profit to decline. Both the rate and the absolute amount of profit haveincreased, it seems, even during this terrible crisis". (Socialism Today, April2012)

There is a debate amongst academic Marxist economists on the currentapplication of the theory of the LTRPTF. Some argue that the rate of profit hasdropped continually since 1982. Andrew Kliman, for example, even says thatthe neo-liberal counter-revolution with its massive attack on the working class

has had little effect in arresting the drop in profits. The rate of profit didincrease during the 1990s but, as a harbinger of the looming crisis, may havefallen back recently. These are questions we have to look at.

However, it is not sufficient to merely quote what Marx said on this question,but seek to locate an analysis in the real developments of capitalism without inany way repudiating the basically correct position of Marx on the issue.


13/34

6. A way out of depression?Global capitalism is mired in depression. A Keynesian tract for our times

proposes a way out - and is reviewed by LYNN WALSH.

THE US ECONOMY, with feeble growth and persistently high unemployment,is in a state of depression, according to Paul Krugman. It is not as severe as the

great depression of the 1930s, but "its nonetheless essentially the same kind ofsituation that John Maynard Keynes described in the 1930s: a chroniccondition of subnormal activity for a considerable period without any markedtendency either towards recovery or towards complete collapse."

Krugman deplores the huge loss of economic output, the permanentundermining of manufacturing capacity, and the social catastrophe of long-termmass unemployment. The rescue of the banks through the TARP (TroubledAsset Relief Programme) after the collapse of Lehman Brothers in 2008 averteda collapse of the financial system, though on extremely favourable terms to the

banks and speculators. President Barack Obamas Keynesian-type stimulus

programme averted a catastrophic economic slump, but was too limited (inKrugmans view) to produce sustained growth.

Political leaders, according to Krugman, have failed to learn the lessons of the1930s. Through a combination of distorted ideology and economic self-interestthey exerted pressure for a return to deficit reduction policies in 2010,undermining the fiscal stimulus policy. Obama lacked the "Rooseveltianresolve" demonstrated by president Franklin D Roosevelt during the greatdepression. Krugman recognises that Obama faced bitter opposition from theRepublican-dominated Congress, but criticises his failure to make the case for a

bigger stimulus package. Obama failed to effectively mobilise public opinionbehind such an intervention. The result is the current, lamentable state of theUS economy.

So Krugman has written a tract for the times. Its title suggests that it is acampaigning pamphlet rather than an academic analysis. It is succinct,

polemical, satirical in places, advocating unashamedly Keynesian policieswhich, in his view, could rapidly end the recession and produce sustainedgrowth.

Krugman is a prominent academic economist in the US, but best known for his

informative and polemical columns in the New York Times. He is the mostprominent of the Keynesian economists (including people like Joseph Stiglitz)who advocate more state intervention to stimulate recovery, and are severelycritical of the voodoo economics of the ultra-free-marketeers, now championed

by the Republican presidential candidate Mitt Romney, and especially by hisvice-presidential candidate, Paul Ryan.

Much of the book is an analysis of the crisis which hit the US and the worldeconomy from the end of 2007. It is succinct and clear, jargon free, and sound,as far as it goes but ultimately superficial. It is a well-known story. Themassive credit boom after 2001 (both in the US and throughout the capitalist

world) led to a housing bubble, especially in those countries which followed theUS/Anglo-Saxon model. Finance, particularly the shadow banking system,

became even more dominant. The securitisation of debt and the vast expansion


14/34

of financial derivatives were supposed to minimise or in some peoplesdreams even rule out risk.

As the financier Warren Buffett (and Socialism Today) predicated, however,derivatives became instruments of mass destruction. With the collapse of thehousing bubble they amplified the fallout. Without state intervention in the US

and elsewhere to rescue the banks there would have been a worldwide collapseof the financial system.

Krugmans explanation, however, is limited. He argues that political leadersforgot the lessons of the 1930s, cancelling out much of the regulatory limitson financial institutions (starting under Ronald Reagan but much more underBill Clinton). Undoubtedly, the abolition of the Glass-Steagall Act (1933),which enforced the separation of deposit banks and speculative finance houses,facilitated rather than caused the acceleration of financialisation. Underlyingthis trend was a turn by the capitalists away from investment in manufacturingand towards ever greater investment in the financial sector. Short-term profits

through financial speculation, which tended to concentrate profits increasinglyin the hands of the top 1% - or, more accurately, the top 0.01% - became adominant economic trend. Ultra-free-market ideology was promoted tolegitimise the shift.

Financialisation changed the structure of the US economy and other advancedcapitalist countries. They concentrated more and more on services, boostedconsumer demand through the expansion of cheap credit and the boom inhousing and financial assets, and outsourced manufacturing to low-costeconomies such as China. Krugman has little or nothing to say about thesestructural changes in the US and the global economy. This reflects thecharacteristic weakness of the Keynesian approach. He believes that the current

problems could be rapidly overcome by a change in macroeconomic policy.

He sees the current depression as "gratuitous" "this doesnt have to behappening". His explanation is that "weve suffered a software crash The

point is that the problem isnt with the economic engine, which is as powerfulas ever. Instead, we are talking about what is basically a technical problem, a

problem of organisation and coordination a colossal muddle, as Keynes putit. Solve this technical problem, and the economy will roar back to life".

This reflects Krugmans illusion the Keynesian illusion that the capitalisteconomy can be managed, that imbalances can be overcome by governmentintervention with the right policies, that capitalist leaders and policymakers can

be persuaded to adopt the right policies through rational argument. If anything,Krugman is even more naive than Keynes himself, who recognised thedifficulty of persuading capitalists to accept state intervention outside a warsituation that threatened their existence.

Its all about demand

KRUGMAN DESCRIBES HIMSELF as "a sorta-kinda New Keynesian" who"often turn[s] to old Keynesian ideas". He follows Keynesian thinking that

rejects Says law, the idea that, over time, demand will always match supply.According to the classical political economists of the early period of capitalismthis reflected the fact that the market would always achieve equilibrium. This


15/34

doctrine came to the fore again in the 1990s, when free-market economists(including Alan Greenspan, one time head of the Federal Reserve bank)embraced the absurd idea of the perfectibility of markets. Some enthusiastseven claimed that booms and slumps were phenomena of the past. After thecollapse of Lehman Brothers in 2008, even Greenspan had to admit that he waswrong, although he has subsequently reverted to his ultra-free-market notions.

Krugman also follows Keynes in arguing that "its all about demand": the mainfactor in the current depression is the insufficiency of aggregate demand (thatis, the total money-backed demand for goods and services, including capitalgoods). "In 2008 [Krugman writes] we suddenly found ourselves living in aKeynesian world by that I mean that we found ourselves in a world in whichlack of sufficient demand had become the key economic problem" Thissituation, he argues, requires activist government policies.

Clearly, the collapse of demand following the financial crisis was theimmediate cause of the economic downswing. Households were massively in

debt, and were hit by the collapse in house prices and the steep rise inunemployment. Many businesses (especially small and medium) were hit bythe credit squeeze and the collapse of consumer demand. Big corporations, withhuge cash reserves, were not prepared to invest in new capacity on the basis ofshrinking markets. Both the household and the business sector were caught in aclassic debt trap. They desperately struggled to reduce their debts, savingmore than they invested or spent on goods and services.

The Keynesian argument is that in this situation the state has to step in andstimulate demand. Lowering interest rates (even to zero) is not enough. By

borrowing money to finance deficit spending or by printing money the stateshould inject demand into the economy. Increases in the social safety net (forinstance, unemployment benefit) and job creation schemes (such as,infrastructure projects) could reduce unemployment and support increaseddemand.

Krugman approves of the measures taken by the US government and theFederal Reserve in 2008/09. The Fed reduced interest rates to near-zero and

pumped credit into the economy through the so-called quantitative easingpolicy. Krugman also approves the rescue under George W Bush of the banksand the shadow banking institutions through the TARP ($700bn), though he

rightly comments that they were bailed out on extremely lenient terms. Incontrast, the promised help for under-water mortgage holders (home buyerswith negative equity) has largely failed to materialise. He particularly supportsObamas $787 billion stimulus package, but is very critical of its limitedcharacter (almost 40% of it taking the form of tax cuts rather than increasedspending).

Krugmans main criticism is that the programme was much too small and hasbeen largely abandoned since 2010. This, he argues, is why the recession hascontinued and unemployment remains at such a high level. (Krugmanscriticism of Roosevelts New Deal stimulus is also that it was too small, giving

way to another recession in 1937.)


16/34

If Obama had continued the stimulus policy, particularly through public worksthat created millions of jobs, the US recession might not have been so severe.However, in isolating the factor of demand as the crucial factor, Krugman failsto get to the root of the problem. The Keynesian idea is that a spurt of statespending will jump-start the economy, creating jobs, stimulating investment,and so on, "until the private sector is ready to carry the economy forward

again". But it is far from certain (leaving aside capitalist hostility to an increasein the economic role of the state) that a short-term stimulus of this type wouldactually revive investment and production by the big corporations.

Capital investment has been declining as a share of GDP in the US and otheradvanced capitalist countries since the early 1980s, despite the increased shareof profits in national income. The stagnation of capital investment continued inthe US in the 1990s and the 2000s despite the high level of demand (which wassustained by credit/debt).

Keynes believed that equilibrium of the market would break down at a certain

point because of the capitalists so-called liquidity preference. In other words,they would save more than they invested, preferring to hoard their cash ratherthan invest it productively. Keynes explained this through the factor ofconfidence, a subjective explanation. In reality, the lack of confidence isrooted in an estimation of a much more objective factor: the prospects ofmaking adequate profits.

It is the liquidity preference of the big corporations which has been behind theturn towards speculative financial activity since the early 1980s. Krugmansanalysis reflects the weakness of Keynesian theory: it focuses on empirical,macroeconomic policy, and fails to come to grips with the underlying forces,especially the trajectory of profitability. Amazingly, Krugman makes noreference to profits or profitability the word does not even appear in the index(but this is not uncommon in Keynesian textbooks). He graphically illustratesthe growing inequality in the US, but makes no attempt to link this to theintensified exploitation of the working class, from whose labour power all

profit is derived.

A policy fix?

"BY APPLYING TIME-HONOURED economic principles whose validity hasonly been reinforced by recent events, we could be back to more or less full

employment very fast, probably in less than two years. All that is blockingrecovery is a lack of intellectual clarity and political will". This is a point thatKrugman repeats several times throughout the book. "Time-honoured

principles" refers to Keynesian policies.

Like Keynes before him, Krugman argues that his policies are moderate. He isproposing "measures that would mainly try to boost the economy rather thantrying to transform it" Like Keynes, he makes it clear that he is notchallenging the fundamental structure of capitalism. He is warning that a

prolonged slump "poses [dangers] to democratic values and institutions" codefor upheavals and class conflict.

Despite his biting criticism of Republican politicians, big-business leaders andacademic advocates of ultra-free-market policies, Krugman frequently appears


17/34

surprised at their posture. He sees it as a failure on their part to understand theissues and come to grips with reality. He hopes that the pressure of enlightened

public opinion may change their position. "The sources of our suffering arerelatively trivial in the scheme of things, and could be fixed quickly and fairlyeasily if enough people in positions of power understood the realities".

Yet the author himself repeatedly points to the vested interests or, asAmericans say, special interests of those championing free-market policies.The social weight of big business has been markedly increased in the last 30years. There has been a huge concentration of wealth into the hands of the top1%, or even a small fraction of the top 1%. Money, as Krugman says, buysinfluence, and big business has exerted enormous influence over both theDemocratic and Republican parties.

Why do many on the right, for instance, vehemently oppose the monetarypolicies of the Federal Reserve under Ben Bernanke? In effect, quantitativeeasing is a form of Keynesianism for bankers. Many of the major financial

institutions would have collapsed but for the cheap liquidity provided by theFed. However, the finance capitalists in particular are obsessed by the spectre ofinflation, even though it is not an immediate threat. (Given that there is globalovercapacity which depresses price levels and the banks are mostly sitting onthe reserves rather than channelling them into circulation.) The financierssupport policies that favour creditors rather than debtors. The moneylendersabhor low interest rates and inflation (which depresses real, inflation-adjustedinterest rates).

Krugman quotes a comment of Keynes himself. Free-market ideas, Keynessaid, "[afford] a measure of justification to the free activities of the individualcapitalists, [attracting] to [these ideas] the support of the dominant social force[the capitalists] behind [government] authority". In the US, big-businessspokespersons and Republican politicians make no secret of the fact that theysee any form of state intervention to overcome the recession as the thin end ofthe wedge, posing the danger of socialism.

Krugman provides many of the ingredients required for an analysis of thepolitical-economic situation in the US. But he himself fails to provide such ananalysis. As a liberal, he fails to see right-wing ideology, the vested interests of

big business, and the rightward moving leaders of the Republican Party as

manifestations of class interests, as, in fact, ideology/policy that represents theinterests of a powerful section of the capitalist class, especially finance capital.


18/34

Krugmans solutionKRUGMAN HAS LITTLE difficulty in showing that deficit reduction policies,to which capitalist governments turned as soon as there was a limited revival in2010, have made the situation worse. His comments in the chapter on Europe,Eurodmmerung (Europes twilight, after Wagner), have been furtherconfirmed by the continuing recession throughout the EU and eurozone. He

shows that the policy of expansionary austerity based on the idea that deficitreduction will promote confidence in the economy and thereby encourageinvestment and growth, is so much hocus-pocus. Krugman wittily refers to theAusterians, the leaders and economists who advocate austerity, stronglyinfluenced by the ultra-free-market economics of the Austrian school likeFriedrich Hayek and Ludwig von Mises.

Krugman argues that the additional $5 trillion of debt accumulated by thefederal government since 2007 need not be an excessive burden on theeconomy. This requires about $125 billion in interest payments, around 1% ofGDP. Plausibly, US capitalism could sustain a significantly higher level of debt

provided there was GDP growth that allowed it to be steadily reduced over aperiod (even a long period). The problem politically is that the capitalist class inthe US, having enjoyed a steady reduction in its tax liabilities since the 1980s,is intransigently opposed to paying higher taxes in order to finance publicinvestment.

Krugman justifiably criticises Obamas stimulus (including the very limitedsecond package) as too little, too late. But, given the clarion call of this bookstitle, Krugmans proposals are surprisingly limited and vague. He advocates a

big extension of quantitative easing, with the Fed buying up a much widerrange of assets (including company bonds and home mortgages) to inject moremoney into the economy. He argues that the restoration of federal support tostates and cities could create three million jobs over the next two or three years.Effective mortgage relief, promised by Obama but never delivered, couldstimulate consumer spending. Krugman calls for more public spending and

public works (repair and renewal of infrastructure), but is surprisingly vague.He recognises that Obama faced massive political opposition in Congress, evenfrom sections of the Democratic Party, and perhaps Krugman himself wants toavoid giving a hostage to fortune by proposing specific measures.

No historical perspective

KRUGMANS ANALYSIS LACKS historical perspective. He recognises thatRoosevelts New Deal was not entirely successful, giving way to a newrecession in 1937. In his view, it was not big enough or sustained long enough.However, he argues that the huge increase of public spending in a response tothe opening of the second world war in 1939 pulled the US out of recession.Even before the US entered the war, rearmament and the increased globaldemand for US goods boosted its economy.

The war was financed by borrowing, but the national debt was paid down quiterapidly during the post-war economic upswing. According to Krugman, thisshows that historically high levels of debt need not be a problem, so long as

there is sustained GDP growth. "What the threat of war did was to finallysilence the voices of fiscal conservatism, opening the door for recovery"Liberal Keynesians, however, can hardly advocate a war to resolve economic


19/34

problems!

Jokingly, Krugman suggests that "what we really need right now is a fake threatof alien invasion that leads to massive spending on anti-alien defences". This isrevealing. The joke highlights Krugmans failure to grasp the unique historicalcharacter of the second world war and the post-war upswing or of the current

historical conjuncture.

"The fact is that we had almost two generations of more or less adequateemployment and tolerable levels of inequality after world war two, and we cando it again". But Keynesian policies cannot recreate the conditions required fora prolonged economic upswing. The structure of capitalism (though not itsessential character) has changed, as have global economic relations. Thecollapse after 1989 of the Soviet Union and the other Stalinist states (plannedeconomies ruled by bureaucratic regimes) removed a counterweight tocapitalism. There was a weakening and political disorientation of the tradeunions and traditional workers organisations. This emboldened the capitalists,

led by the US ruling class, to launch an assault on working-class livingstandards and rights, and to push for the perfection of the market. Finance

became the dominant force in the advanced capitalist countries. The situation isentirely different from the post-second world war period.

A programme of public works?

ARE KEYNESIAN POLICIES now ruled out? Some people undoubtedly thinkso. "In the current market environment", says a Deutsche Bank analyst, "thereis no room for using a Keynesian-type expansionary fiscal policy to boostdemand in countries with low growth the markets will simply not accept sucha strategy". (International Herald Tribune, 10 January) Global financial marketsare now far bigger than they were in Keyness time, or even before the 1980neo-liberal revolution. In 1980 financial assets (in reality, credit/debtsecurities) were equal to one years output of the global economy. By 2006such assets amounted to four times global output. This scale gives speculators the so-called bond-market vigilantes the power to speculate against anygovernments that carry out policies of which they disapprove.

The bond traders, moreover, are reinforced by ultra-free-market ideology,which now dominates the thinking of capitalist governments and internationalagencies such as the OECD. Despite the deepening of the current world

recession, they really believe that unfettered markets will produce growth andmass unemployment and impoverishment of sections of the working class willnot dent this growth.

The kind of policies advocated by Krugman, if effectively implemented, couldcushion the downswing in the US and elsewhere. But they would not overcomethe underlying problems of capitalist accumulation. In any case, manyKeynesians feel that it is already too late. For instance, Keyness biographer,Robert Skidelsky, writes: "At last, opinion is starting to shift [in favour ofKeynesian policies] but too slowly and too late to save the world from yearsof stagnation". (The New Republic, 12 July)

Yet things can change. The capitalist crisis will produce social explosions anderuptions of class conflict. In the US, for instance, in the event of Romney


20/34

winning the presidency and implementing the policies advocated by Ryan, theyare likely to provoke an even worse slump. (It is possible that even a Romney-Ryan presidency would be forced more by pressure from big business to temperits crazy ideas with more pragmatic policies.)

Explosive movements of the working class and deep social crisis will, under

certain conditions, push capitalist governments into adopting Keynesian-typemeasures to avoid a mortal threat to their system. Keynes himself said that his

policies were designed to avoid revolution. When it is a question of saving theirsystem, the capitalist class will, at least temporarily, make concessions to theworking class. To reduce mass unemployment they may well adopt publicworks programmes. They will be forced to repair the social safety net. But such

policies will be a temporary expedient. They will not be a return to the long-term, sustained Keynesian policies of the post-war upswing, when the stateincreased its intervention in the economy and developed an extensive socialwelfare infrastructure. Keynesian policies may buy time for the ruling class butthey cannot resolve the crisis of capitalism.

How, as socialists, should we regard a stimulus package or programme ofpublic works? In the face of mass unemployment and the prospect of prolongedeconomic stagnation, the leaders of workers organisations should indeed becalling for a massive programme of public works to provide jobs and stimulategrowth.

To be effective, a public works programme would have to be on a much biggerscale than that proposed by Krugman. It would mean the refurbishment andaddition of new infrastructure, especially homes, schools, hospitals, communityfacilities, etc. Workers should be employed on a living wage with full tradeunion rights.

Effective economic stimulus would require a big increase in social spending,increasing pensions and other benefits. Tax rates for the wealthy and bigcorporations should be substantially increased, with a levy on the uninvestedcash piles of big companies. Effective measures should be taken against taxevasion and avoidance.

It has to be recognised in advance, however, that the capitalists will vehementlyresist a bigger role for the state and increased taxation. A programme to provide

jobs and stimulate growth would require the mobilisation of the working class.Moreover, increased taxation in itself will not be sufficient to develop theeconomy. The dramatic raising of the living standards of the majority of the

population would require the resources (additional real wealth) created byincreased production. The banks and finance houses would have to benationalised (not bailed out and propped up at public expense), and run underdemocratic workers control and management. This would ensure the creditrequired to develop all sectors of the economy. There would also have to becapital controls to prevent any flight of capital. Such measures wouldundoubtedly meet the entrenched resistance of the capitalist class. Stateintervention in favour of the working class would unavoidably pose the

question of the takeover of the commanding heights of the economy, to formthe basis of a democratic plan of production (run by elected representatives ofthe workers and the wider community).


21/34

Any government carrying out such a policy would need an internationalperspective, collaborating with the workers movement in other countries todevelop socialist planning at an international level.


22/34

7. On capital investmentI VERY much enjoyed the excellent in-depth review by Lynn Walsh of the new

book by the Keynesian economist Paul Krugman. Lynn clearly shows that,despite the author having a Nobel Prize in economics, he only has a superficialgrasp as to the nature of the current capitalist crisis. I think Lynns analysis isspot on that Keynesian proposals for addressing the crisis are an absolute

pipedream.

However there were aspects of the review that have left me scratching my head,in relation to the points Lynn makes about capitalist investment. I quote:"Capital investment has been declining as a share of GDP in the US and otheradvanced capitalist countries since the early 1980s, despite the increased shareof profits in national income. The stagnation of capital investment continued inthe US in the 1990s and the 2000s despite the high level of demand (which wassustained by credit/debt)".

Did US capital investment decline as a share of GDP despite the share of profits

from the early 1980s on through the rest of the century and beyond? When Ilook at the historical data the evidence clearly contradicts this statement. Hereis the history of investment based on data from the US Bureau of EconomicAnalysis (graph 1).

This graphic representation shows crystal clearly that the level of US capitalinvestment in the 1980s was actually the highest ever recorded in the history ofUS capitalism. At the turn of the century, despite a gradual decline, it hadrecovered to a higher level than the 1960s or 1970s. It did decline rapidly priorto the 2007 financial crisis not surprisingly, along with a decline in the rate of

profit naturally.

Just to provide some figures to support the graphic evidence, between 2003 and2007, while profits only increased by 35%, investment increased by 151%.During that period capitalist net profits increased by $222 billion but netinvestment increased by $280 billion. In other words, the US capitalists wereinvesting all of their profits and then an additional amount.

Not to labour a point but is our analysis sticking to a proper interrogation of thedata or are these facts regarded as some sort of neoliberal con trickmanufactured to hoodwink the working class? Are they impossible to prove?

Any analysis should surely begin by critically assessing the empirical datarather than issuing sweeping statements which are clearly contradicted by theavailable evidence. Where is our evidence that all of the capitalists profitsdisappeared into the financial sector for instance? Or am I barking up the wrongtree?

Bruce Wallace,

Scotland


23/34

8. Lynn Walsh responds:THANKS, BRUCE, for your comments. Regarding your query about decliningcapital investment, I agree that our analysis of trends within capitalism should

be based on critical analysis of the appropriate empirical data. Your chart showsone measure of US investment: private (non-residential) investment as a

percentage of corporate profits, which are a relatively volatile indicator. More

revealing measures of investment are the growth of fixed capital stock(effectively, growth of the means of production) and private investment as ashare of gross domestic product (GDP). GDP is the total spending on goods andservices in the national economy, of which investment is one component.Investment as a share of GDP shows the weight of investment in the nationaleconomy.

Even the data for investment in your chart, however, suggests a long-rundecline in investment as a percentage of profits. There were sharp (but short-lived) rises after 1980 (when the ultra-free-market, neoliberal revolution beganunder Reagan), between 1995-2001 (during the dot.com bubble), and during

2005-07 (when there was an explosive credit boom and housing bubble).Between 1980 and 2007 a growing share of investment was in information andcommunications equipment, a significant share of which was linked to thefinancial sector.

There is clear evidence of a long-term decline in capital investment. Capitalaccumulation is the key to economic growth. Increased capital stock is requiredto increase capacity and output, and investment is also the key to incorporatingnew technology in production. Capital expenditure, moreover, is a key sourceof demand, together with consumer demand. Figures for the growth rates ofcapital stock 1960-2004 (net growth after depreciation for worn-out or retiredcapacity) show that the pace of global capital accumulation slowed, especiallyin the advanced capitalist countries (see Andrew Glyn, Capitalism Unleashed[2006], p86).

Table 2 shows that the growth rate for world fixed capital stock declined,despite the faster growth in China, South Korea, and some other semi-developed economies. For the industrial (advanced capitalist) countries as awhole, the growth rate declined from 5% in the 1960s to 3.3% in the 1990s. Inthe US, the growth rate declined from 4% to 2% during 2000-04. The main

point is that, despite the implementation of neoliberal policies, the decline in

the rate of investment was not halted.

Glyn further notes that private investment did increase rapidly in the 1990s inthe US. However, this "did not drive the growth rate of the capital stock tounprecedented highs. This is because capital stock growth started from anexceptionally low point in the early 1990s. The investment boom of the later1990s halted the seemingly inexorable downward trend in the growth rate of thecapital stock which had begun in the late 1960s. Moreover, when the boomcame to an end in 2000 capital stock growth plummeted more steeply than ever

before". (Glyn, p134)

Another more recent study analyses the "poor rates of private investment",despite the favourable conditions for big business and the super-rich created byneoliberal policies. (JG Palma, The Revenge of the Market on the Rentiers


24/34

Why Neoliberal Reports of the End of History Turned Out to be Premature,Cambridge Journal of Economics, 2009, 33/4 p853): "It is still truly remarkableto see how private investment failed to respond positively to the combinedincentives of huge income polarisation cum political stability and dynamicgrowth of personal consumption, high profit rates and overabundance offinance. Private investment [in the US] instead actually declined as a share of

GDP, falling cyclically from its peak of 18.5% of GDP in 1979, to just 15.5% in2007". (Chart 3)

Despite the staggering increase in the share of income taken by the top 1% inthe US, investment declined. The chart, says Palma, shows "the changingrelationship between what top income earners take away from the economy,and what they put back into it in terms of improved productive capacity. In fact,towards the end of the period this relationship had changed so much that eventhe income share of the top 0.5% (ie only 700,000 families earning 18.6% ofthe total in 2006) ended up well above the share of all private investment inGDP (15.5%)".

The decline in investment has also been analysed by Ha-Joon Chang (23 ThingsThey Dont Tell You About Capitalism, 2010). "The immediate incomeredistribution into profits was bad enough, but the ever increasing share of

profits in national income since the 1980s has not been translated into higherinvestment either. Investment as a share of US national output has actuallyfallen, rather than risen, from 20.5% in the 1980s to 18.7% since then (1990-2009). It may have been acceptable if this lower investment rate had beencompensated by more efficient use of capital, generating higher growth,however, the growth rates of per capita income in the US fell from around 2.6%

per year in the 1960s and 1970s to 1.6% during 1990-2009, the heyday ofshareholder capitalism". (p19)

Even Alan Greenspan, when head of the Federal Reserve Bank, admitted therewas an alarming softness of capital investment, despite the abundance ofcheap credit. In his testimony to Congress (House Committee on FinancialServices, 20 July 2005), Greenspan acknowledged that "on average, countriesinvestment propensities had been declining". Moreover, "softness in intendedinvestment is also evident in corporate behaviour. Although corporate capitalinvestment in the major industrial countries rose in recent years, it apparentlyfailed to match increases in corporate cash flows. In the United States, for

example, capital expenditures were below the very substantial level ofcorporate cash flow in 2003, the first shortfall since the severe recession of1975".

Greenspan noted that Japanese investment "exhibited prolonged restraint"following the speculative bubble of the 1990s, while investment in thedeveloping Asian economies (apart from China) "fell appreciably after theAsian financial crisis Moreover, only a modest part of the large revenuesurpluses of oil-producing nations has been reinvested in physical assets".

Greenspan (and subsequently Ben Bernanke) tried to blame the shortfall of

investment on the excessive savings of countries such as China. However,their global saving glut (GSG) theory was sharply rejected by two economistsworking for the French central bank (Gelles Moc and Laure Frey: Global


25/34

Imbalances, Saving Glut and Investment Strike, Occasional Paper, Banque deFrance, February 2006): "The most striking feature of the present state of theglobal economy is not so much a saving glut as an investment strike, in spite oflow long-term interest rates". "This also affects the US economy wherecorporate investment remains subdued relative to profits, adding to the gradualloss in its tradable productive capacity".

Moc and Frey accept that global savings rose in the 1990s, "but the level seenin 2004 is by no means an unprecedented level. Contrary to the GSGassumption, an unprecedented low level of investment outside the US explainsthe bulk of the increase in global net lending".

Drawing on IMF data shown in their tables and charts, these economists show aworldwide decline in capital investment: "Japan and the euro area havedisplayed a clear pattern of investment strike since the mid-1990s in Japanand since 2001 in the euro area. But emerging Asia excluding China has alsodisplayed a sharp decrease in the investment rate. In the latter area, even if the

investment rate has lately recovered, it still remains in 2005 almost ten GDPpoints below the 1995 level". "

Faced with financial imbalances which built up during the bubble years", Mocand Frey continue, "US firms quickly managed to record high levels of

profitability, thanks to aggressive action on labour costs. Nevertheless, businessinvestment has not yet picked up as rapidly as profits. Consequently, the USnon-financial corporate sector has recently displayed an unprecedented netlending capacity".

Finally, where is the evidence that a lions share (not "all") of the capitalistsprofits disappeared into the financial sector? The brief answer is that the ratio offinancial assets to GDP in the US was between 400% and 500% in 1950-70.From the early 1980s, with the implementation of neoliberal policies, it shot upto around 900% by the early 2000s (Ha-Joon Chang, p238). Moreover, in thelast three decades, the profits of the financial sector have been higher than the

profits of the non-financial sector. In an article published in 2009, SimonJohnson, a former chief economist to the IMF (2007-08), gave figures for theshare of corporate profits taken by the financial sector in the US: "From 1973 to1985, the financial sector never earned more than 16% of domestic corporate

profits. In 1986, that figure reached 19%. In the early 1990s, it oscillated

between 21% and 30%, higher than it had ever been in the post-war period.This decade, it reached 41%". (Simon Johnson, The Quiet Coup, The AtlanticMonthly, May 2009)

This factual data (most of which has been referred to in previous articles), inour view, confirms the analysis of a crisis in capital accumulation put forwardin Socialism Today over many years.


26/34

Pictures of chart 1-3


27/34

9. Capital investment debate continuesThanks, Lynn, for your extensive reply to my letter in Socialism Today No.163.Unfortunately I think the serious point I made has been avoided.

My point was simple and clear; that your suggestion that US capital investmenthad been on the decline since the early 1980s was factually incorrect. It isnt

true. The data I cited was US non-residential private investment (NRPI).

You suggest NRPI is an inappropriate measure of investment and dismiss it asa relatively volatile indicator. Growth of capital stock, in your view, is themore revealing and correct indicator. NRPI isnt an indicator of anything, itis the rate of US capitalist investment for that economy measured in dollarterms and is accepted by every Marxist economist I know of.

You remark there were sharp (but short lived) rises in investment after 1980without elaboration and that can be misleading. Readers should examine thegraph I supplied closely as one of the sharp rises (in the early 1980s when you

claim they were declining) was, I repeat, the highest ever recorded in thehistory of US capitalism.

Investment declined gradually towards the end of the 1980s, recovered stronglyin the late 1990s to 2000, before falling sharply due to recession. It was verylow on average in 2002-2007. It recovered sharply prior to the 2007 crisis,tracking a spurt in the rate of profit which had been declining after peaking in1997. My subsidiary point about the falling rate of profit was totally avoided.

The rate of net US capital investment 1983-2001 was 64% of after tax profits,above the average of 61% for 1947-1978. There wasnt a historical decline inaverage investment for nearly two decades prior to 2001.

There was an explosion of speculative financial investment at the turn of thecentury precisely because capital investment was so low in the first decade ofthe 2000s.

There has been low capital accumulation over the whole period but why?Falling investment for periods after the 1980s is the formal reason for it butwhat caused this?

You suggested fixed capital formation (see chart) has been in progressivedecline since 1980 but it mirrors investment closely. It actually increased in themid-1980s. The growth rate of US capital stock declines at the end of the 1980sas neoliberal policies began to bite. So I think my critical point holds on theevidence of both sets of data.

Could you explain what you mean by a crisis in capitalist accumulation? Ihavent come across a rounded out explanation in previous issues. What roledoes the historic fall in the rate of profit play in this process?



28/34

10. Behind the stock market surgeIn the first week of March share prices surged on the New York StockExchange followed by other major exchanges. Does this signify a revival of theglobal capitalist economy? The Financial Times was quick to note that "little ofinvestors exuberance is reflected in core economic data The US and the UKended the year stagnant; the eurozone and Japan in renewed recession; the

emerging world slowing down". (Stock Markets Defy Economic Woes, 6March)

"Asias economic recovery is losing momentum and Europes slump is provingdeeper than expected, raising concerns that soaring stock markets globally have

jumped ahead of economic reality". (Evans-Pritchard, Booming Stock MarketsBelie World Economy, Daily Telegraph, 12 March) There is a glaringcontradiction between soaring shares and the real economy, a symptom of the

peculiar conjuncture of world capitalism.

The Dow Jones Industrial Average (DJIA), an index of 30 blue-chip

corporations, reached a record high on 4 March, following a 54% fall duringthe 2007-09 slump. When adjusted for inflation, however, the DJIA is still 10%

below its 2007 peak. Nevertheless, this is still an amazing recovery given thestagnation of the world economy.

Writing in the Financial Times, Chris Giles refers to "persistent weak growth"of the advanced capitalist economies. "While International Monetary Fund datashow advanced economies grew only 1.3% in the five years between 2007 and2012, the degree to which economies are pulling themselves out of their woes ismuch harder to discern amid often conflicting data". (Little Recovery inAdvanced Economies, 5 March)

Giles refers to a new statistical technique of combining various types of data toprovide a composite index of economic progress. "The research suggests thatUS economic news has been no better than normal and the countrys recoveryhas been characterised by mini-cycles of moderately good, then bad, data since2010". He quotes a professor Beber of Cass Business School as saying "sincethe crisis, the US has been chugging along around zero. Each time the recoverylooks like its picking up, it then falls back".

Referring to the eurozone, Giles comments that "around 2010, indicators of

growth were strong in the single currency area [following big stimuluspackages by the major EU economies] but the positive data fell away in 2011and is now significantly worse than historic norms".

"The UK is still marred in the weak economic data it has become used to since2011, with the index remaining reasonably stable at subpar levels". Thisdescribes a depression, not as deep as the 1930s but a period of weak cyclicalgrowth in which capitalism fails to overcome the obstacles to growth and risedecisively above its previous peaks.

But why, in this dismal situation, have share prices shot up? The immediate

trigger seems to have been the US employment figures for February, whichshowed an increase of 236,000 jobs, higher than the expected 165,000. A bigfactor in this was the increase in construction jobs, due to more favourable


29/34

weather. The unemployment rate fell to 7.7%. This was taken by financialmarkets as indicating a continuation, if not a pick-up, in the painfully slowrecovery of the US economy. However, while the unemployment rate fell(based on the number of workers seeking jobs), the labour force participationrate actually fell. The employment-to-population ratio (EPOP) has fallen from63% in 2007 to 58.6% currently. There are still fewer workers in employment

than there were before the great recession.

Also driving the surge in share prices is the continuation of low interest ratepolicies and massive liquidity creation by major central banks. The US FederalReserve has pumped around $3 trillion into the economy since 2007, and hasmade it clear that it will carry on creating credit until there is sustained growth.The Bank of England has pumped in 375 billion of quantitative easing. Chinahas expanded total domestic credit from $9 trillion to $23 trillion over the lastfour years, while Japan is about to embark on another programme of statestimulus and credit expansion.

The expanded credit is meant to feed into the economy to stimulate investment,increase production and consumption. In reality, the continued flood of credithas had a perverse effect. The credit squeeze for small businesses, home-buyersand consumers has continued as banks rebuild their capital reserves.Meanwhile, most of the additional liquidity has flowed into financial markets.The sharp rise in share prices, in fact, is an indication that the ultra-cheap creditis creating a new share-price bubble. This could pop at any time. Even beforeMarch is out, the Cyprus crisis is causing renewed jitters on world stockexchanges.

The yields from government bonds are currently extremely low, in fact negativein inflation-adjusted terms. This is also one of the effects of increased central

bank liquidity, which allows governments to borrow at near-zero rates.Investors flush with cash, therefore, have turned to company shares in search ofhigher returns. Wealthy investors are also encouraged by the prospect ofincreased returns from profitable companies (from dividend payments or capitalgains on selling shares at higher prices). The higher corporate profits comefrom the intensified exploitation of workers. "With millions still out of work,companies face little pressure to raise salaries, while productivity gains allowthem to increase sales without adding workers. So far in this recovery,corporations have captured an unusually high share of the income gains, said

Ethan Harris, co-head of global economics at Bank of America Merrill Lynch".(Nelson Schwarz, Recovery in US Lifting Profits, New York Times, 3 March)

"As a percentage of national income, corporate profits stood at 14.2% in thethird quarter of 2012, the largest share at any time since 1950, while the portionof income that went to employees was 61.7%, near its lowest point since 1966.In recent years the shift has accelerated during the slow recovery that followedthe financial crisis and ensuing recession of 2008/09". (Schwarz) The bigcorporations continue to apply new technology to reduce their need for labour,as well as relying on cheaper labour in low-cost countries.

The big corporations are also following a policy of pushing up their shareprices by buying back their own shares. This amounts to a cash hand-out totheir shareholders, which artificially raises share prices by increasing the profit-


30/34

per-share. This is carried out partly by using their huge cash reserves and partlythrough borrowing cheap money in order to subsidise the buy-backs.Historically, stock markets were a source of funds for investment in companies.Such is the irrationality of present-day capitalism, that the opposite is the case:there is a massive transfer of funds from profitable companies to shareholders.

The Financial Times Lex column explains: "Companies have been enjoyingrecord profitability. But they are using it on dividends and share buy-backs,which last year reached a combined level surpassed only in 2007. S&P 500companies paid out slightly less than 90% of net income on dividends and buy-

backs last year, S&Ps data show. They are spending to keep per-share earningsand dividends rising. Investors are happy. But it is not easy to see howcompanies can accelerate the pace at which they return cash. Unlike consumers,they are as leveraged [indebted] as ever". (13 March)

Steve Rothwell (Associated Press) writes: "Companies have also been hoardingcash. The amount of cash and cash-equivalents being held by companies listed

in the S&P 500 climbed to an all-time high $1 trillion at the end of September,65% more than five years ago, according to S&P Dow Jones indices". (AP,Housing and Jobs Key to Lifting S&P to Record, 28 December 2012)

Moreover, a large chunk of US corporations record profits are hidden away inoffshore tax havens (like Bermuda and the Cayman Islands). The Wall StreetJournal found that the 60 largest companies moved $166 billion offshore in2012, shielding 40% of their earnings [profits] from American taxes and costingthe US billions in lost revenue.

Just 19 of the 60 companies disclosed their potential tax liability which totalled$98 billion more than the $85 billion in the automatic, across-the-boardspending cuts triggered recently following the US Congresss failure to agree a

budget.

Capitalists invest and produce goods and services to make profits. But it is clearfrom the current situation that short-term profits are in themselves not sufficientto bring about increased investment. How has this come about? In the closing

phase of the post-war upswing after 1968 capitalists of the advanced countrieswere hit by a decline in profitability. After a period of stagflation (low growth,high unemployment, but high inflation), they turned after 1980 to the

unprecedented expansion of credit and financial speculation. The neo-liberalpolicies accompanying this turn helped create the conditions for super-profitsand the extreme polarisation of wealth throughout the capitalist world.

Now, most of the big corporations are reaping huge profits. But because ofovercapacity in many industries and weak consumer demand (because ofreduced incomes and public spending cuts), corporations and their financialmasters see insufficient openings for profitable investments. Paul Krugmansums it up: "Not only are workers failing to share in the fruits of their ownrising productivity, hundreds of billions of dollars are piling up in the treasuriesof corporations that, facing weak consumer demand, see no reason to put those

dollars to work". (The Market Speaks, New York Times, 7 March) Krugmancalls for a massive increase in public spending to stimulate demand. While thiswould give a temporary boost to the economy, it would not necessarily create


31/34

the conditions for profitable investment by the capitalists, the precondition forsustained growth within capitalism.

Meanwhile, as one commentator puts it, corporate profits continue to "eat" theeconomy. (Derek Thompson, Corporate Profits are Eating the Economy, NewAtlantic, 4 March) The chart (based on US data) shows that, from 1970 to the

mid-1990s, the growth of corporate profits approximately followed the growthof GDP and workers income. Then "corporate profits began to take off, relativeto GDP growth, in the 1990s, before exploding in the last decade". Profits

plunged during the 2008 crisis, but have since recovered to new heights (thefinance sector now accounts for roughly half of US corporate profits).

"When the economy crashes [says Thompson], we all crash together: corporateprofits, employment, and growth. But when the economy recovers, we dontrecover together"

Lynn Walsh


32/34

11. Profitable questionAs always I really enjoyed Lynn Walshs recent article, Behind the StockMarket Surge, (Socialism Today No.167, April 2013). Lynns expert grasp ofthe dynamics of finance and the stock market is excellent and very informative,and I fully agree that the present share bubble could pop at any time.

However, I am left scratching my head about some things he says about theeconomy in general because it is contradictory. For example, Lynn says thefollowing: "Now, most of the big corporations are reaping huge profits. But

because of overcapacity in many industries and weak consumer demand(because of reduced incomes and public spending cuts), corporations and theirfinancial masters see insufficient openings for profitable investments".

Leaving aside the issue of investment, the problem I have is in understandinghow it is possible for big corporations to be reaping huge profits but forconsumer demand to be weak at the same time?

US gross profits are indeed booming. Since the trough of 2008 they are up over40% and are now 7% above the previous peak in nominal terms set in 2006.There are suggestions that this means that the US economy is moving intorecovery mode. My point is very simple. If the profits of US capitalism haverecovered that means they must be selling their output.

It isnt possible to make profit out of thin air (unless its imaginary as in parts ofthe financial system). As profit is surplus value congealed within the material

packet of the commodity, in order to realise this surplus value as profit, inmoney form, the commodity must be sold through market exchange. Thereforethe capitalists have to be selling their goods otherwise profits couldnt be made.

So could Lynn clarify exactly how it is possible for profits to be increasing torecord levels when the demand for output, in Lynns explanation, is decreasingat the same time? In line with what the Keynesian economist Paul Krugmanargues, and who Lynn appears to agree with? Doesnt this violate the laws of

physics?



33/34

12. A reply to a profitable questionI can understand Bruce Wallaces scepticism about how profits can be rising yetdemand declining. (Socialism Today No.168, May 2013)

Capitalists can increase their profits without increasing their sales in terms ofvalue or volume. Their profit is made from sales less their costs, which can be

things like loan interest, rent, depreciation on capital machinery, wages and anumber of other things.

In fact, any bookkeeper worth their salt (which is the limit of understanding ofmost capitalist economists) could probably tell us that, by reducing costs inwages and other costs (assuming sales are not cut by the same ratio), a biggershare goes to profits. So, despite weaker demand there can still be an absoluteand relative increase in profits. As Bruce rightly says, for Marxists, the struggleis over the share of surplus value created by workers and profit for thecapitalists.

As Lynn Walsh wrote (Behind the Stock Market Surge, Socialism TodayNo.167, April 2013), another way is through investment capital or newtechnology to reduce the number of workers, thereby increasing productivity.Even without necessarily increasing sales, employing fewer workers has cuttheir labour costs leaving more profit for them.

Even without investing in new capital machinery or technology, the share goingto profits has increased by a combination of workers taking actual cuts inwages, speeding up production lines, the intensification of work, fewer paidholidays, pay rises less than inflation, etc. Wages as a share of GDP are at theirlowest at 61.7% and profits at their highest at 14.2%. In addition, investing incheap labour economies increases the share going to profits.

Because of the lack of demand and overcapacity, the capitalists cannot fullyutilise their current machinery. So why invest in new machinery to expand salesin volume when long-term demand for their goods is in decline? Therefore,only by reducing the share going to wages, or through minimal investment toreduce the number of workers, can they increase their profit without necessarilyexpanding sales. I believe there are figures showing that capital investment hasdeclined, relatively, for decades.

Bruce is quite right to state that profits dont come from thin air. It is surplusvalue or the unpaid labour of the working class, which is how Karl Marxexplains the mystery whereby the daylight robbery of workers takes place.The labour time taken to earn enough to provide for the workers needs(socially useful labour time) has fallen, and the unpaid time that goes to thecapitalist (the surplus value) has increased. Therefore, the increase in profits isat the expense of workers.

Even in Marxs day he described how capitalists had become mere couponclippers in purchasing stocks and shares, increasingly divorced from real

production. The nature of capitalism today is ever more parasitical.

It is difficult to explain all these processes, especially for first-time readers.There is more that can be said on the question of surplus value and capital, etc.


34/34

I would recommend that readers of Socialism Today refer to articles onMarxism on the website and arrange discussions on the questions raised byBruce.Joe Foster, Birmingham

The Causes of the Crisis 130727

Documents

Transcript of The Causes of the Crisis 130727