Michael Roberts Blog

Andrew Kliman’s (AK) new book (see my post, Andrew Kliman and The Failure of Capitalist Production, 8 December 2011) has provoked a very negative review from Bill Jefferies (BJ).  BJ has posted, as a comment to my post on AK’s book, his review.  And you can read it here http://www.permanentrevolution.net/entry/3388.  Comments have been coming into my blog from both on some of the key issues of debate.

BJ reckons that AK is a “stagnationist” because he claims that the rate of profit in the US has persistently fallen without significant rises since the second world war, when it clearly has risen since the early 1980s.   This means, according to BJ, that AK shows that the countervailing tendencies to Marx’s law of profitability ‘as such’ have not operated.  The countervailing factors would be: a rising rate of surplus value, the cheapening of constant capital, the expansion into overseas markets for higher profit etc.  BJ says that this cannot be right: wages have declined as a share of national income in the US; there was a technological revolution that cheapened the cost of investment hugely; and overseas profit rose, especially when the ex-Communist states collapsed and globalisation led to several emerging capitalist economies (BJ includes China here) became a powerful force.  Indeed, BJ appears to argue that rates of profit in most capitalist countries, especially the newly emerging ones, were rising from 1982 onwards in contrast to AK’s claims.

But the “nub of the issue” for BJ is that AK measures profits as “property income” which includes all surplus value created by corporations, namely interest, taxes and transfer payments.  BJ reckons that doing so distorts the measure of the rate of profit.  He reckons you should exclude all these parts of surplus value that do not accrue to corporations, particularly taxes that end up in government hands are used to boost the ‘social wage’ of workers.  If you take out this “government income” then the US corporate profit rate, even using AK’s method of valuing fixed capital, is much less dramatic.

Is BJ right to suggest this?  Well, you can measure profit in many ways and each way may be more useful for certain purposes.  In his book, AK discusses the merits of different ways (whole economy, business sector only, corporate sector only, non-financial sector only; or all surplus-value, before tax profit only; after-tax profit only etc).  AK uses what he call ‘property income’ because he wants to show the class-based nature of the capitalist system and that means including all the surplus value created by the workforce, even if much of it is then redistributed to banks (interest); landlords (rent) or to government (taxes).  I agree that this is the best measure of profit to understand the laws of motion of capitalism.  Indeed, I have tried to measure profits in the whole economy, and not just the corporate sector as AK does, in order to capture the whole process.  But if you want to know how profit drives new productive investment in the economy, a better indicator of profit might be after-tax profit.

The after-tax profit may show a much less dramatic fall in the rate of profit – but it still shows a fall.  BJ does not show this in his review, but I worked out the after-tax profitability based on current costs (BJ’s preferred measure) and there is still a trend decline from 1950, although from 1965 at the end of the ‘golden age’ BJ’s after-tax profitability is basically trendless.

After-tax profitability is trendless from 1965 to 2009, but the reason for this is down to how the denominator in the rate of profit is measured.  Remember that the rate of profit is measured as the mass of profit divided by the value of the stock of assets (namely the value of plant, machinery and other technology plus stocks of raw materials and other components).  You can also add the cost of employees to that denominator if you wish.   As any reader of AK’s material knows, he is vehement that, to measure profitability in any meaningful sense, capital stock must be valued in historic terms.  That measures what capitalists paid for it before production starts and not what it could pay for at the end of production.

BJ denies this is right and quotes Marx to justify his view that Marx would have valued capital stock at its current cost.  BJ argues that “Kliman is wrong to assert that the mass of the fixed capital stock must always be valued at its purchase price  .. the effect of depreciation shows that technological progress reduces the value of the fixed capital stock from its purchase price to its current price.  If Kliman were correct, capitalist crises would be impossible as the wholesale devaluation of the fixed capital stock could not take place”.

But is BJ right?  Using historic costs as the measure of fixed capital does not exclude a devaluation of these costs in a crisis – usually that would happen when capital is liquidated in bankruptcies or even physically in war.  At each new period of production, the historic cost of fixed assets would incorporate that cheapening of capital or depreciation just as it does using a current cost measure.  What the historic cost measure does is provide a more realistic measure of the value that must be reproduced in any new production period to make a profit.  Capitalists measure their profit against what the value of their fixed assets cost when they start production, not on what they might cost to replace them in the future.  As AK says in his book (p112), “what makes the current cost rate of profit bogus is ….that it is not a measure of profit as a percentage of past investment”.  Using historic costs, after-tax profitability still shows a trend decline after 1965 as well as after 1947.

Now it could be argued that the depreciation of fixed assets (not the value of the stock of assets) during the production period should be measured at current cost.  That means the fixed assets are measured in historic costs, but the depreciation is measured at current cost.  AK does this measure of profitability in his book, Figure 6.3 on p111.  That figure shows that from 1982 there was a rise in the rate of profit to 1997 of 12%.  That’s much less than the current cost measure which rose 45%, while AK’s favoured measure (historic cost assets and historic cost depreciation) fell 2% between 1982 and 1997.  I ‘cherry pick’ 1997 because any reader of my blog knows well that it is my thesis that the period of 1982 to 1997 (the so-called period of neoliberalism) does show a rise in profitability, however you measure it.  And this historic cost measure confirms that.

I also measured the US rate of profit measuring fixed assets in historic costs, but with depreciation in current costs.  I find that the rate rose 12.1% from 1947-65, fell 25.8% 1965-82, rose 11.9% 1982-97 and then fell 17.4% 1997-09.   The rate of profit was in trend decline 1947 to 2009, or from 1965 if you prefer, but there was a cyclical feature to US profitability.

BJ also argues that the rate of profit measure should include wages (variable capital) in the denominator as Marx did and also inventories in the measure of constant capital – in other words, circulating capital has been excluded by AK unreasonably.  AK explains why in his book that he does that – basically data on the turnover of circulating capital are unavailable and/or unreliable.  AK does try out a measure including inventories in his book (Figure 5.3).  BJ argues that this measure shows again that the rate of profit does not fall so dramatically – but it still falls.

I have done a measure of after-tax profits that includes employee compensation and inventories, in other words, circulating capital.  I’ve done it using the current costs measure to fixed assets.  In other words, I have used all the categories that BJ wants altered or added from AK’s – and ignored all AK’s caveats about using these categories.  It still shows that there was a trend decline in the rate of profit since 1950.  Moreover, the rise in the after-tax rate of profit, using BJ’s categories, peaks in 1997 and subsequent peaks do not surpass that year.

Phew! So after all this to and froing with measures of the US rate of profit, what can we conclude?  Since 1947 did the rate of profit in the US rise or fall or do nothing?  On nearly all measures of the numerator and denominator, whether by AK, myself or all the other attempts by Marxist economists in the last decade, there was trend decline to 2009.

Was there a rise in the rate of profit from 1982 to 2009, suggesting a different era for US capitalism and suggesting that the rate of profit is not a key cause of the recessions of 1990-1, 2001 or the Great Recession?  Many say yes, presumably including BJ.  AK says no (or at least he says there was not a significant rise).  I say there was a significant rise from 1982 to 1997, but since then US profitability has been in a down phase right up to now.  Both AK and I conclude that Marx’s law of profitability is the underlying (not proximate) cause of capitalist crises and I think the empirical evidence for the US economy goes a long way to confirm that.

But I’ll come back again to interpretations of the US and other countries’ profitability data in another post.

The Financial Times recently launched a series of articles on “Capitalism in Crisis”.  As we enter the fourth year of the global banking collapse and the long depression in real output for the major capitalist economies, the strategists of capital are trying to understand what went wrong with capitalism and what to do about it. They realise that confidence in the capitalist mode of production has plummeted, whether that is expressed in the global “we are the 99% campaign” or in the opposition of many Greeks to the austerity packages of the IMF – according to a recent poll, around one in three Greeks asked now want a social revolution.

So the FT decided to kick off a campaign to defend the capitalist system with articles by various apologists.  It started with Lawrence Summers (FT,8 January). Summers, is a former employee of Goldman Sachs and was US Treasury Secretary under Clinton before he became a university professor at Harvard.  Summers tells us that disillusionment with capitalism had reached highs even in the bastion of the ‘free market’: America.  A recent poll, he tells us, found that 40% of Americans asked no longer felt positive about capitalism and there was majority against capitalism among young people, ethnic minorities and the poor.  Summers asked the question: are these negative attitudes justified?  His answer was that it depends on whether the current crisis is due to the nature of capitalism and on whether there are any solutions within the capitalist system.  For Summers, the answer to the first question is no and to the  second, yes.  Surprise!

Summers admitted that the Great Recession has created such a level of unemployment that the hope of getting everybody who has lost a job or seeks one back into work over the next five years is low as “the economies of US or Europe are likely to be constrained for a long time”.   But nevertheless, having admitted that we are in a long depression, he argues that this slump is not due to an “inherent flaw in capitalism”.  It is due to what Keynes called a “magneto problem”, like a failure of a car part that can be fixed and then the car will spring back into life.  Just give the current economic policies more time and all our concerns wil soon fade.  It is unclear what these policies are that will work: is it fiscal stimulus or austerity?; printing money and bailing out the banks or not?

Summers knows that one in six Americans aged between 25 and 54 years are out of work while the top 0.1%  have been living the good life.   And, “unlike cyclical concerns (ie the recession), there is no obvious solution at hand”.  But apparently, this is nothing to do with the failure of capitalist mode of production but due to problems “deep within the evolution of technology”.  You see, agriculture gave way to industry in the 19th century and as it did so, people lost their livelihoods in the transition and inequality rose.  Then in 20th century, industry gave way to services and the same thing happened.  Now in the 21st century, all the jobs and incomes are to be found in the sectors raising the quality of human capital, namely health, education (where Summers now plies his trade) and housing and not in goods or other low-value services.   The problem is, says Summers, is that these jobs are found mainly in the public sector and are not subject to the profit motive.  Thus “in many of these new areas, the traditional case for market capitalism is weaker”.  His conclusion is that we need to “shrink or at least slow the growth of the public sector” to allow the provision of these services for profit.  Summers implies that profitability is no longer good enough in the existing private sector and so, to save capitalism, we must destroy public services and marketise them.  It’s not a good advert for the capitalist mode.

John Plender is a regular columnist in the FT (FT, 8 January).  He is worried about the growing inequality of wealth and incomes over the last three decades in the major OECD economies.  We have documented the evidence for this in many posts in this blog (see Inequality, poverty and riots, 6 December 2011 and Inequality in Britain, 28 January 2010).  But Plender cites a new book by Stewart Lansley (The cost of inequality) that reveals the fast track rise for the super-rich and the stalled track for everyone else.  Led by the financial sector, capitalism has become “a cash cow for a global super elite”.  Plender points out that this development is nothing new – indeed capitalism has an inherent tendency to increase inequality (see my post, 1% versus 99%, 21 Octovber 2011).  But Plender is optimistic – at least in this current slump, we don’t have soup queues and degradation as we did in the 1930s.  Unemployment in the US may be near 9% officially or even 15% on fairer measures, but it is nowhere near 25% as in the Great Depression.  There’s thanks for small mercies!

What’s wrong with capitalism is not the capitalist mode of production for profit, says Plender, but the particular form it has taken with the dominance of the banking sector.  The bankers have become pirates or profiteers stealing from the decent capitalists.  Thus we hear the usual argument of the Keynesians that it is the finance sector that is the problem, not capitalism.  This idea of robber barons has been taken up opportunistically by the Republican rivals to Mitt Romney, the favourite for the US presidential nomination.  Romney is accused by the likes of Newt Gingrich and Rick Perry of being such a ‘profiteer’ because he ran one of the largest private equity companies in America.  Bain Capital was engaged in buying out companies, stripping their assets, sacking much of the workforce  and then selling them on.  Apparently 22 out of the 77 companies that Romney bought were put out of business.  And yet what Bain Capital did is nothing more than capitalism at work: the strong win and the weak fail.  It is an illusion perpetuated by Keynes, echoed by Plender, that there is a capitalism that can operate without speculation and without ‘profiteering’ and thus deliver economic growth, jobs and incomes without inequality or slumps.

Plender argues that the problem with capitalism is that shareholders have lost power to the management of companies.  This is called the “agency problem”, which means that managers enrich themselves at the expense of employees and shareholders alike and productive investment.  The answer is to restore the power of the shareholders.  Unfortunately, even if this were true, Plender does not offer us any way of doing this.  He recognises that regulating the banking system has failed and the role of ‘entrepreneurs’ as opposed to ‘get-rich quick’ managers has not been restored.  But anyway, this is a myth.  Even back in the days of 19th century capitalism, when shareholders were supposedly in full charge, economic crises were just as rife and so were banking crises.   Plender ends up with an argument in favour of capitalism that is often trotted out; reformulating Winston Churchill’s aphorism on democracy, “capitalism is the worst form of economic management except for all those other forms that have been tried”.  Or as Margaret Thatcher once said, “there is no alternative”.

John Kay (FT, 10 January) is an Oxford economist who regularly writes for the FT.  He points out that Marx never used the word ‘capitalism’ and what Marx attacked as a mode of production in the 19th century has disappeared or metamorphosed into something else.  And here we go again.  The owners of the means of production (now pension funds, insurance companies, banks etc) no longer control their companies or hire or fire people.  That’s left up to the managers now. Ownership and control are now “divorced”.  So business leaders are “no longer capitalist” in the sense that Marx described them.   So the answer to the current crisis is not to end the private ownership of the means of production, as the Marxists say, but to find ways of making control of companies more democratic.

This is pretty much the same argument as Plender.  What is wrong with capitalism is that there is not enough of it.  If the owners of capital took more control, things would be better.  Apart from the fact that there is no evidence in the past that this was the case, for what purpose would owners do this but to boost profits and in particular dividends?  How would that help growth and jobs, unless you reckon that in some way owners would invest more than the managerial elite?   And anyway, that does not explain why there a regular cycles of boom and slump, whether companies are ‘controlled’ by their shareholders or not, whether they are multinational or not, or whether executives are overpaid or not.  The private ownership of the means of production matters because, in the last analysis, the owners decide investment, employment and incomes paid to the top and the bottom.  No top manager survives if he or she cannot deliver an increased dividend (or higher share price) to the shareholders and that means making higher profits.  That is literally the bottom line.

Samuel Brittan is a long-time FT columnist and closet Keynesian (FT, 13 January).  Brittan tells us that market capitalism fails to reward on “personal merit” i.e. you don’t get paid a lot of money or have a lot of wealth under capitalism because you are clever or work hard.  However, capitalism is the best system because “it promotes personal and political freedom” as the “individual is free to use his abilities in line with his own choices”.   Really!  Tell that to the majority of people toiling away in a very modestly paid jobs in an office or shop, working long hours, with limited holidays and a poor pension. Would they agree that they have plenty of life choices as a result?  What would the poor of Africa, Asia and elsewhere make of the idea that they are free to make their own choices?

Yet Brittan tells us that, under capitalism, we can choose whether to spend our incomes in “personal pleasure or social service at home or the relief of poverty abroad” as we wish.  The individual makes the decision, not the government.  Brittan quotes the liberal apologist for capitalism of the mid-19th century, John Stuart Mill, who argued that if everything was in state hands, there would be no personal freedoms. Thus Brittan invokes the alternative to capitalism with its ‘free personal choices’ against the model of stalinism and state authoritarianism.  There  are no other models, according to him. Yes, a few cooperatives might be more democratic, but that’s it.

To end his piece, Brittan tells us that he is shocked at the role of the financial sector and how its “activities could undermine the capitalist order”.  Yet again, there is nothing wrong with the capitalist mode of production in its production sphere; it’s the monetary or financial sector that is flawed and causes instability and inequality.  As if economic cycles of boom and slump and inequality did not exist before the financial sector became a hegemonic force in modern capitalism.  So the answer, for Brittan, is international regulation of the financial sector and “the retention for quite a long time in public ownership of the banks and other institutions that have had to be rescued by government”.  Thus the financial sector must remain under the ‘authoritarian’ grip of the dreaded state sector, but not the rest of ‘productive’ capitalism.

To sum up, Marx was wrong.  Capitalism is the best of alternative systems of human organisation; and it has changed significantly since Marx criticised it.  Unfortunately, some of those changes are for the worse (managers stealing profits; the finance sector undermining stability).  Apparently, we can correct those flaws either by going back to 19th century capitalism where owners not managers ruled (Plender and Kay); or by having state control of the financial sector (Brittan); or by increasing the role of private sector in running public services for a profit (Summers).   Not very convincing, is it?

The emphasis of most Marxist research on the rate of profit has been on the US, partly because it is the most important and largest capitalist economy and partly because the data available are so much better than elsewhere. In a previous post, I said that I would look at what was happening to the rate of profit in the UK and also perhaps at rates of profit in the other major capitalist economies (see my post, Measuring the rate of profit: up  or down?, 20 November 2011).

The UK’s data are not too bad and we can make a stab at coming up with an account of the movement in the UK rate of profit.   I did this in my book, The Great Recession.  But I have revisited the data.  To measure the rate of profit a la Marx, to use Gerard Dumenil’s phrase, I took the net operating surplus on the UK’s non-financial corporations (if you like, that’s profit after deducting for consumption of fixed capital) and divided it by the net stock of fixed assets.  The UK statistics measure net fixed assets in current or replacement cost terms.  As you know, if you read this blog regularly, this is controversial in Marxist economic circles, as valuing fixed assets at current costs does not really provide an accurate rate of profit (indeed Andrew Kliman would argue that it is not a rate of profit in any meaningful sense – see my post, Andrew Kliman and the failure of capitalist production, 8 December 2011).   So I have attempted to adjust the current cost measure to an historic cost measure by using the equivalent ratio of depreciation between the two measures as used in the US data.  This is the best I can do to deliver a rate of profit measure based on historic costs.

The data for all this are only available in the UK going back to 1987.  What they show is that there has been an upward trend in the UK rate of profit for non-financial corporations over the period 1987-09.  The rate of profit on both measures peaked in 2007 and then fell by 25-30% through to 2009 to reach levels not seen since the big UK slump of 1990-1.

There are data that go back further to 1950, but they rely on gross operating surpluses not net figures.  But if we use these to get an idea of what was happening to the UK rate of profit in the whole post second world war period, we find the same trends, whether measured in current cost or historic cost terms.  The overall period from 1950 to 2009 shows a downward trend in the UK rate of profit.  But that is because the rate of profit was so high in the early 1950s and declined thereafter to reach a low in the first great post-war capitalist slump of 1974-5.  That seems to have been a turning point.  UK manufacturing industry was decimated and the process of transforming the UK capitalist economy fully into services-based sectors began in earnest.  This led to a gradual improvement in the rate of profit, although the rate did not get back to the levels of early 1960s (except, on some measures, in the recent credit-fuelled boom of the early 2000s).   Also, from about the mid-1980s, the rate of profit on an historic cost basis trended pretty much flat (the green line in the graphic below).

The UK authorities publish their own measure of the rate of profit in UK non-financial companies also using the net operating surplus divided by net fixed assets (but measured at replacement costs).  They have just released the latest quartely figures, for Q3 2011.  As these data are much more up to date, even if they don’t measure the rate of profit a la Marx, they are helpful in discerning trends.  They confirm my own finding that the UK non-financial corporate rate of profit peaked at the end of 2007, then slumped 30%  to Q3’2009.  Since then there has been a 21% recovery in the rate of profit, although it is still not back to the peak of end-2007.  Interestingly, the UK authorities report that the rate of profit in the manufacturing sector has continued to fall and is now at its lowest level since records were kept in 1997.  It’s the services sector that has driven the rise in the rate of profit.

Moreover, the recovery in the mass of profits has been less than in the US.  At the end of 2010, the mass of profits in the UK was still some 6% below the peak of 2007, although up from the trough of 2009.  In 2011, there has been no real further recovery (see my post, The UK: the best laid plans of mice and George Osborne, 29 November 2011).  This could inhibit a further rise in the rate of profit in 2012.

What of the rates of profit in the other major capitalist economies?  This is not easy to calculate as the data are so mixed.  But we can get some idea of trends by using the European Commission AMECO database, something used by other Marxist economists.  Using that database and making various assumptions (most significantly measuring the rate of profit in real terms), we find that all the major capitalist economies still have rates of profit below that of 2007 and some still significantly lower (France and Italy).  Nevertheless, there has been a recovery in the rate of profit since 2009.

The AMECO database is not comparable with data from national accounts, but it shows the trend  in the rate of profit since 2009 and also in the mass of profit since then.  Only in the US did the mass of corporate profit surpass the previous peak of 2007 by the end of 2011.

The overall conclusion we can make from these data is that profitability has recovered from the trough of 2009 in the major capitalist economies, but remains below the last peak of 2007.  That suggests that capitalist investment will rise from  the depths of 2009 (and it has done) but investment (and thus real GDP growth) is likely to be lower than even the relatively poor growth rates after the mild global recession of 2001.  Capitalism in the major economies remains in a relatively weak state.

2011 was a pretty awful year for the major capitalist economies.  At the beginning of the year, most mainstream economic forecasts asserted that the major capitalist economies would continue to accelerate their recovery from the Great Recession of 2008-9 through 2011, with real GDP growth rising to about 3% on average.  However, by the end of the year, we now know that the US economy will achieve little more than 2% real growth (the OECD says 1.7%); the core of Europe around Germany did better; but the UK will fail to grow even by 1% and southern Europe has slid back into a contraction of anything between -1% (Spain and Italy) to -6% (Greece) – as the euro debt crisis and fiscal austerity destroyed economic activity. Japan, after an earthquake, a tsunami and the consequent nuclear disaster, has sunk back (down 0.3% in 2011).

The large emerging economies of India, Brazil, South Africa and China are also slowing fast.  India is now growing at only 5% a year, down from 9% at the beginning of 2011, China is slipping towards 7% from 10%, while Brazil has dropped back under 4%.  These growth rates are still much higher than the mature capitalist economies, but given that the emerging economies need to absorb a massive influx of agricultural peasants into the cities for urban employment, the emerging economies need to grow fast in order to create sufficient jobs.

The picture for 2012 looks little better, except maybe for the US and Japan – relatively.  The OECD forecasts that the Eurozone will stagnate at best, but even the US and Japan will grow at below average trend rates.

And the overall employment of the labour force in the advanced capitalist economies is worsening, not improving, despite the limited recovery of those economies since the Great Recession.  The unemployment rate is still near 9% in the US on official figures, but in reality is much higher if those who have given up looking for work are included (25m Americans are out of work or are unable to find it).  In the UK, unemployment rises by the month, as it does in the main European economies, with the exception of Germany.   The OECD predicts that unemployment in the advanced capitalist economies will rise in 2012 to reach nearly 50m, a near 50% rise over 2007 before the Great Recession.

But the biggest sore is the level of youth unemployment.  Never since the Great Depression has the unemployment rate in the OECD economies among those aged 15-24 years been so high.  The data are truly appalling, with youth unemployment rates varying from a minimum of 20% up to 40% plus in Greece and Spain.

‘Normally’, after a generalised slump in the major capitalist economies, as in 1974-5, or 1980-2 or 1991-2, or 2001, there is an accelerated recovery in economic activity, usually well above the long-term average growth rate set by the rise in labour productivity and employment growth.  That’s because there is a large ‘reserve army of labour’ available to work at low wage rates and there is plenty of ‘spare capacity’ to put into motion in machinery and plant, with less competitors in the market place after bankruptcies and closures.

But since the trough of 2009, the major capitalist economies have generally failed to achieve even their former long-term average growth rates and some of them are still contracting.  Why is that?  What is different this time? I outlined what these differences were when reviewing the prospects for 2011 (see my post, Profits and investment in the economic recovery, 29 December 2010).

There are two differences.  The first is that the rate of profit in the largest and most important capitalist economy, the US, is still in its downward phase that, I assert, began in 1997 (see my various posts).  Since US profitability peaked in 1997, that rate has not been surpassed and the subsequent peak in  2006, even after a massive credit boom, was still lower than in 1997.  That has reduced the incentive of the productive sectors of capitalism (manufacturing, transport and services), at least in the advanced capitalist economies, to make new investments and employ more labour over the period since 1997 compared to the period 1982-97.  Indeed, it is my view that the declining trend in the US rate of profit since 1997 was the underlying or ultimate cause of the Great Recession in 2008-9 (see my book, The Great Recession and subsequent papers).

However, US corporate profits have now surpassed the level of the previous peak in 2006-7 in absolute terms, so investment has been recovering from the depths that it fell to in the trough of 2009.  Indeed, by the end of 2011, business investment was rising at a 14% annual rate and had provided one-third of the recovery in real GDP in the US economy since the Great Recession ended.  Even so, business investment growth is still weak compared to the huge rise in corporate cash flow and profits.  Most cash-rich US corporations are hoarding their money – indeed corporate investment as a ratio of corporate profits has not been as low in over 60 years.

The massive rise in US corporate profits since mid-2009 has been achieved by reducing the wage bill and other payments to the labour force (health insurance and pensions). Labour ‘compensation’ as a share of GDP has fallen to a 50-year low.  Labour incomes have been partially supported by government transfer payments (public benefits), now accounting for 12% of aggregate labour income compared with just 7% in 2007.  Households have also been running down what savings they have and borrowing more (if they can) to support necessary spending.

But even so, the recovery is very weak compared to previous cycles because the rate of profit, although it has recovered too, remains relatively low historically. In 2012, we can expect US corporate profits to rise further in nominal and even real terms, but at a slower pace than in 2011 and for the rate of profit to start to drop.  That does not mean a new economic slump in 2012.  The history of US capitalism since 1945 suggests that, as the corporate rate of profit falls, eventually the overall mass of profit will peak and fall back, but it can take a lag of some three years or so.  That suggests a new crisis of production in the US around 2014 onwards – but not yet.  Nevertheless, 2011 has confirmed that capitalism is really in a long depression similar to that of the 1880s and 1890s that is different from the ‘normal’ cycle of slump and recovery experienced in the crisis period of 1965-82 or the ‘boom’ period of so-called neo-liberalism of 1982-97.

In the other major capitalist economies, profitability also slumped in the Great Recession, but it seems that the recovery in profits has been weaker than in the US corporate sector.  In the UK, corporate profits are still not back to their peak of 2007 (see my post, UK: the best laid plans of mice and George Osborne, 29 November 2011).  The same probably applies to most of the European economies and to Japan (I shall provide some data in a future post).

The other reason for the relatively slow and weak recovery from the Great Recession (with growth rates so low that they do not increase employment in any appreciable way) is to be found in the proximate cause of the Great Recession, namely the huge rise in debt or credit (or what Marx called fictitious capital) that delayed the underlying crisis in capitalist production and stimulated the unprecedented bubble in housing and property in the US and elsewhere.  Household debt rose to record levels relative to income and the real value of property – indeed in the US it rose 50% as a share of GDP from 1997 to 2007.   In the top seven capitalist economies, total non-financial sector debt has doubled to 300% of GDP from 1980.  In the US, the debt ratio reached 250% in 2007 from 190% in 1997, now a debt burden of $120,000 for every American.

The Great Recession was a necessary process under capitalism, first to restore the rate of profit in the productive sectors by reducing the cost of real capital (plant, machinery and wages) through company collapse, unemployment and a stoppage of investment; and also to liquidate the cost of debt or fictitious capital through bankruptcy or default. Corporations have stabilised or ‘deleveraged’ (reduced) their debt, while also boosting profitability in production.  Households find deleveraging much more difficult – because reducing debt means defaulting on their mortgages and losing their homes or being unable to meet bills because they can no longer borrow.  US household debt has fallen only a little (5%), while household wealth in the form of home values and cash, bonds and stocks has plummeted.  US net household wealth to income is down 20% from its peak in 2006.

Overall debt including that run up by governments has hardly moved. That’s because when corporations and households deleverage, they stop investing or consuming as much.  That stops an economy from growing as fast.  The banking collapse forced governments to bail out the financial sector and the ensuing economic slump forced governments to support the unemployed and provide other limited social transfers.  So governments had to borrow more because tax revenues slumped in the recession. Government debt rose as the private sector deleveraged, leaving the overall debt level pretty much unchanged.  In the US, overall debt is still rising.  Since peaking in 2007, US household debt to GDP has fallen 7%, corporate debt is static, but government debt to GDP has jumped 50%.  Foreign debt has also risen, so overall debt has actually risen by 9%.

This burden of debt weighs down on the productive sector of the capitalist economy in two ways.  First, the cost of servicing the debt (paying interest and any principal repayments) increases as a share of corporate or household income, even though interest rates are at rock bottom levels – at least for those who can borrow.  But many smaller companies and households cannot because they have no assets to borrow against and banks have sharply tightened their criteria for credit. For governments, it means that the servicing of debt, i.e paying the bondholders (the banks and other rich investors) their interest, eats into available money for health, education and other government spending designed to raise the productivity of the workforce.  Over 20% of US federal government spending goes on servicing federal debt.

And second, the increase in government spending begins to encroach on the private sector’s ability to make profit, both through increased taxation and also through competing with the private sector in various areas of investment. Of course, pro-capitalist governments bend over backwards to reduce that burden through cutting corporate taxes (and shifting the burden of taxation onto households and to any spending by households).  Indeed, during the Great Recession, most large corporations paid little tax as they claimed their losses against future tax charges.  But even so, over the long term, if government debt keeps rising or does not fall, it will become an albatross around the capitalist sector, reducing its ability or willingness to invest.  That is why debt matters, contrary to the view of the Keynesians, who see government spending (through borrowing or not) as the way out of recession.

Indeed, the history of capitalism shows that if debt reaches high levels, the burden of this debt, because it cannot create new value but instead sucks away new value that is created in the productive sectors of capitalism, will cause a reduction in economic growth over the long term and as we have seen, even provoke a financial crash.  Sure, debt can be financed through new growth and new profits, or by ‘cheating’ the creditors through rising inflation, so that the real value of the debt falls.  But it will be at the cost of faster economic growth.  I shall return to this issue in more detail in a future post.

So 2012 is likely to be another year of very weak economic growth in the major capitalist economies.  But it is not likely to see a return of a big slump in capitalism.  The US capitalist economy will rise on some further increase in profits and investment, but probably by no more than 2%.  Europe will struggle to grow much more than 1% in real terms, as Germany expands by 2% but southern Europe contracts, at least in the first half of the year.  Asia will grow, but below previous long-term average rates.  Unemployment will stay near its recession highs.

More struggle to make ends meet for the majority, with average real incomes likely to decline for another year and small businesses struggling to make much profit; more misery for the unemployed and those on benefits,; but continued slow recovery for the larger capitalist businesses – that’s the prospects for 2012.

The Failure of Capitalist Production is the title of Andrew Kliman’s new book – with the subtitle, The underlying causes of the Great Recession (http://www.amazon.co.uk/Failure-Capitalist-Production-Underlying-Recession/dp/0745332390/ref=sr_1_1?ie=UTF8&qid=1323254965&sr=8-1). AK’s book is an important contribution to the debate, among Marxists in particular, over the causes of the Great Recession.  Marxists are divided over this. The majority argue that the main cause was the establishment of a new structural era of capitalism that began in the early 1980s called ‘neo-liberalism’. This was based on  a regime of destroying the trade unions to get a massive reduction in the share of wages in national income in the major capitalist countries that enabled profitability to rocket.  Wages then had to supplemented by a huge increase in credit that fuelled economic growth, based on a growing financial sector hegemony.  Neoliberalism came a cropper because the inequality of income and wealth reached such a level that it squeezed consumer demand to death, debt became excessive and the ‘financialisation’ of the economy led to renewed instability, eventually triggered by a collapse of a property bubble, resulting in the failure to ‘realise’ profitable production.

For the majority of Marxists and radical left economists, the cause of the Great Recession is thus more likely to be explained by the works of Keynes or his more radical follower Hyman Minsky, who emphasised the inherent instability of capitalism as debt levels mount.  If it were to be explained by any of Marx’s ideas, the majority look to his supposed focus on the underconsumption of the masses, on the hegemony of monopoly finance capital, or on the inherent instability of markets.  What the majority of Marxists do not accept is that the underlying cause of the Great Recession was what Marx called ‘the most important law of motion’ of capitalism, namely the tendency for the rate of profit to fall.

Marx’s law of profitability has generally been ruled out by most Marxists for varying reasons.  First, profitability clearly rose under neoliberalism from the early 1980s, the argument goes, so that can’t be the reason.  Second, wages fell as a share of income, so that is more likely the cause; namely a lack of consumption demand.  Third, the growth of the financial sector in the neoliberal period was a new structural feature of capitalism and lies at the heart of the crisis.  Anyway, not all crises are caused by falling profitability; they can have several causes: financial instability, low wages, uncontrolled credit – there is no one cause (see my post on The crisis of neo-liberalism and Gerard Dumenil, 3 March 2011).

AK sets out to refute these arguments and restore Marx’s law of profitability as central to the underlying cause of the Great Recession.  And the word is ‘underlying’.  As AK says, Marx’s theory “regards a fall in the rate of profit as an indirect cause of crises, it leads to crises only in conjunction with financial market instability and instability caused by low as distinct from falling profitability” p13 … “it certainly was not a proximate cause, but I shall argue that it was a key indirect cause.” p14.

In his book, AK’s main arguments against the ‘neo-liberal’ explanation are not theoretical, but empirical.  In his view, the evidence the neo-liberal proponents present just does not hold up.  Indeed, the evidence points to Marx’s law of profitability as the best explanation of the Great Recession.   His evidence only refers to the US because the data are best there and the US is also the most important of the capitalist economies.  First, he points out that private sector debt and inequality started to rise much earlier than the neoliberals claim, back in the 1970s when everybody agrees that US profitability was falling.  But second and, most important, he argues that the US rate of profit did not rise on a trend basis after 1982 to the present, as the proponents of neoliberal explanations claim.  When measured as the net value added of US corporations (what AK calls ‘property income’) minus employee compensation against the historic cost of the fixed capital stock of corporations, the US rate of profit shows a persistent fall from 1947 to 2009.  And it does so, using historic costs, whether profits are measured as pretax, adjusted for inflation, or adjusted for labour values.

Measuring capital stock by historic costs is crucial, AK argues, and indeed is the only correct or meaningful way.  Marx’s law of profitability is consistent with his law of value if capitalist accumulation is explained as capitalists advancing capital at already paid-for prices in order to generate new value out of the labour force, with the resulting goods sold at new prices.  It is wrong to reprice the capital first advanced to match the replacement or current cost of that capital at the end of the production process.  That makes the cost of capital lose its temporal quality; both past and future prices are then determined simultaneously.  This flies in the face of reality (capitalists measure profit against the cost of advanced capital at the beginning not at the price of that capital at the end) and contradicts Marx’s law too.

In this argument, AK reminds readers that he is one of the founding proponents of the temporal single system interpretation (TSSI) of Marx’s value and profitability laws as against the ‘neo-Ricardian’ (or physicalist) interpretation of Marx (http://en.wikipedia.org/wiki/Temporal_single-system_interpretation).   For more on this, read AK’s brilliant exposition of this debate in his earlier book of 2007, Reclaiming Marx’s Capital (http://www.amazon.co.uk/Reclaiming-Marxs-Capital-Inconsistency-Dunayevskaya/dp/0739118528/ref=sr_1_1?ie=UTF8&qid=1323255230&sr=8-1) or my review of that book in chapter 23 of my book, The Great Recession (http://www.amazon.co.uk/Great-Recession-Michael-Roberts/dp/144524408X/ref=sr_1_1?s=books&ie=UTF8&qid=1323255509&sr=1-1).

All the proponents of neoliberalism ignore this measurement issue and value corporate capital in current cost terms.  Doing this shows the rate of profit rising significantly from 1982 to the present, thus suggesting that Marx’s law is irrelevant as the cause of the current crisis.  But AK argues that current costs measures are inadmissible if Marx’s law is correctly interpreted.  Also, they distort the results because they do not measure anything that could be considered a rate of profit and they bias profitability upward due to the impact of inflation and misleading measures of the depreciation of capital stock.

By measuring profitability on historic costs of capital, the explanation of the crisis becomes clear, says AK.  US profitability falls and capital accumulation is resultingly weak.  It is not slowing because profits are being switched into unproductive financial sectors, but simply because profitability is falling.  Eventually, the crisis is reached when profitability falls so low as to provoke a major investment crisis, enhanced by overextended debt and unregulated financial sector speculation.  This can only be resolved by a major destruction of capital values i.e. a slump.  Also AK argues that the evidence does not justify a sharp fall in wage share in the US economy after 1982. If you measure income going to labour properly, there has been no significant decline in employee income (wages plus other benefits).  Thus the underconsumptionist view that the Great Recession is the product of a collapse of consumer demand is not justified by the wage share argument or by that of growing inequality.  AK then provides a devastating rebuttal of the underconsumptionist alternative (chapter 8).

I stand with AK on many of these points of division among Marxist explanations of the Great Recession. My own data, first compiled in 2006, confirm that of AK in showing that there has been a secular decline in the US rate of profit since 1947 (see my book, The Great Recession and my paper, The causes of the Great Recession).  Also I agree that it must be right to use historic costs to value correctly the fixed assets of the capitalist sector in measuring the rate of profit.  This is consistent with Marx’s analysis of capital and is what capitalists do anyway in gauging profits.  On this basis, I’m entirely in agreement that the ultimate cause of the Great Recession must lie with Marx’s law of profitability and not with the alternative explanations of inequality and declining wage share (Husson, Reich, Wolff), or underconsumption or ‘over-accumulation’ (Harvey – see my post David Harvey, Marx’s method and the enigma of surplus, 13 November 2011) or excessive or uncontrolled debt (Keen – see my post, Bellofiore, Steve Keen and the delusions of debt, 7 october 2011 – or Dumenil, op cit) or financial instability (Lapavitsas).  In that sense, the Great Recession was a failure of capitalist production, not a financial crisis (Minsky), nor one of the lack of effective demand (Keynes), nor the end of some special neo-liberal structural order of capitalism (Husson, Dumenil) .

Moreover, if it were one of the latter causes, that would imply that the solution for the crisis could be found by sorting out the financial sector, or boosting wages or reverting to less globalisation or more regulation.  It would not be necessary to replace the capitalist mode of production, namely in the production sphere.  And yet this is precisely the difference between Marxist and other left policy prescriptions to end crises.

I agree with AK that the underlying (or indirect) cause of the Great Recession was not financialisation, or a financial sector cause, but is to be found in Marx’s most important law of motion, the tendency of the rate of profit to fall, and the data confirm this.  My measurements differ from AK’s to some extent.  I have used what I call a ‘whole economy’ measure i.e. using the net national product of the whole economy measured against private fixed assets.  Also I have measured the rate of profit in both current cost and historic costs. I have found that, anyway you measure it, the underlying trend in the rate of profit from 1946 to 2009, namely from trough to trough, was  downwards.  In that sense, this particular result is not dependent on using historic costs (see my paper The profit cycle and economic recession for more on this).

In Guglielmo Carchedi’s paper, Behind and Beyond the Crisis (Behind and beyond), he measures the US rate of profit using the historic cost measure of the fixed assets of private goods producing industries and their pretax corporate profits.  He finds the same result as AK and I do: a trend decline in the ROP from 1947 (Chart 1), but he also finds a similar result to me, a sharp rise in ROP from 1986 to 1997.  Carchedi also concludes that the main reason for the secular fall is Marx’s ‘law as such’, i.e. the secular rise in the organic composition of capital.  But when counteracting factors come into play, the rate can rise either because the organic composition falls or the rate of surplus value rises significantly, or both.  This is the basis of the cycle.  Carchedi concludes that an upturn can happen again and is perfectly consistent with Marx’s explanation of capitalist crisis (see my post, Carchedi, Foster and the causes of crisis, 3 July 2011).

This is the interpretation that I reached in my book, The Great Recession, back in 2006.  And it led me to go where AK does not go in his book, namely to distinguish a cyclical movement as well as a secular trend in the US rate of profit, driven by the tension between Marx’s ‘law as such’ and the counteracting influences that can produce an upturn around the long-term trend, of between 16-18 years.  The uptrend must give way to the ‘law as such’ eventually and a downturn comes into play that generates a much higher probability of crises and deeper and more frequent recessions.  I think this interpretation is important, as it helps to guide us in whether capitalism is in immediate crisis or not.  It can’t all be in a straight line down.  It may not be that the period of the Golden Age for capitalism (1948-65) was unique and exceptional and can never be repeated.  AK emphasises the downward secular trend because he wishes to refute the alternative explanation of capitalist crises that deny a role for Marx’s law.  But I want to highlight as well the cyclical movement of profitability because I think it helps explain why crises recur and why they are more frequent and deeper some times or not.  Just looking at the secular trend cannot do that.

AK is highly sceptical that any cyclical movement can be interpreted from the US data on profitability (in correspondence with me).  But my cyclical view does not just depend on the movement of US profits but also on accompanying cyclical movements in economic growth, investment and prices in US capitalism.  The US stock market cycle follows closely the cyclical movement in profitability – a boom in the stock market from 1947-65, then a bear market until 1982, then a new bull market until 2000, and subsequently a bear market that we are still in.  Also, the growth rate of US capitalism varies in the same way.  Average real GDP growth was fast from 1947-65 (4%), slower from 1965-82 (2.9%), picked  up again from 1982 to 1997 (3.6%), although slower than in the 1950s and since then has been very slow (2.2%).   It’s the same story with investment.  And inflation accelerated between 1950 and 1982 and decelerated afterwards.  So it is conceivable that we can have faster growth, rising profitability and disinflation, as in 1982 to 1997, when the downward phase of Kondratiev prices cycle coincided with an upward phase in profitability (see my book).

The Failure of Capitalist Production is essential reading for all Marxists and lefts interested in what caused the Great Recession.  It debunks the fads and fashionable arguments of neoliberalism, underconsumption and inequality with a battery of facts.  It restores Marx’s law of profitability to the centre of any explanation of capitalist crisis with compelling evidence and searching analysis.  It must be read.