What is an Economic Crisis?

Marx’s Contemporary Challenges

Marx’s commitment to the “labour theory of value” is viewed today as methodologically unsuited to contemporary economics, if not empirically wrong. If the system is founded upon a labour theory of value, his critics argue, the whole edifice must tumble when that theory is disproved. But Marx’s point remains broadly valid: value is not produced by the spontaneous effect of markets. In a capitalist economy market value (what Marx called “exchange value”) comes from some process of utilizing and incorporating (in Marxist terms “exploiting”) use value-producing labour. The Marxist theory of declining profit rates does not rest on labour being the only source of value in the system, merely the central one.

The fact remains, however, that capitalist crises come and go, with the system “recovering”, in popular euphemism, each time. It would also seem difficult to prove that successive crises have exhibited any tendency to intensify. Indeed, as discrete events taking place in very different historical contexts, comparisons of any quantitative kind have to be highly speculative. It would seem mechanistic and ahistorical to describe different capitalist crises as emanating from a single structural mechanism. Crises are, after all, historical events. Profit rates (or more broadly, rates of return) can decline (the labour theory of value isn’t essential here: in Robert Brenner’s influential account, this process is described with reference to inter-capitalist competition and over-capacity) but declines aren’t automatic.

Not all mainstream economists regard Marx’s profit theory as incoherent or implausible. As Thomas Pikkety observes in his recent book Capital in the Twenty-First Century, according to the formula β = s/g,when growth (g) is zero and the savings rate (s) is high, the long term capital/income ratio (β) “tends towards infinity.” According to a marginal productivity theory of capital what this in turn means is that, as capital’s share of national wealth rises, the rate of return on new capital invested must decline. Capital’s share of income, Pikkety says, “will ultimately devour all of national income.” (164) The reality, however, is that structural growth – through long-term productivity and population growth – stabilizes the relationship between savings and the breakdown of national wealth. Marx, like other economists of his day, had no coherent picture of long-term productivity growth (though he does talk about “intensification of production” per labourer and the creation of “relative surplus value” in Capital). Therefore, this capacity for capital to innovate away its own impasses escaped him. (In Pikkety’s theory rates of return to capitalists almost always outpace growth, a source of rising inequality, and itself a kind of mechanism for explaining the instabilities of capitalism). Then again, it could be argued that marginal productivity theory is itself a deeply politicized theory of value.

Marginal productivity, as Pikkety says, assumes that wages are determined according to supply and demand, and how they can be productively utilized in a given economy. “The main problem with marginal productivity theory,” he says, “is quite simply that it fails to explain the diversity of the wage distributions we observe in different countries at different times.” (220) When the top wage earning managers can take home hundreds of times the salary of the lowest-paid workers, something besides rational productivity calculations is happening. In Marxist terms (terms with which Pikkety would surely not agree), a struggle between the social forces ignored by marginal productivity theory is inherent in the wage distribution system.

However, Marx’s method for calculating profit declines has also been seriously challenged. In the 1970s the “Okishio theorem” was roundly claimed to have disproved Marx. This theorem specified that only cost-saving techniques would be adopted across the board by capitalists and that profits after implementation would be either higher or the same. Thus Marx’s logic was internally inconsistent – profits simply wouldn’t decline in the way he predicted. The theorem itself has been refuted on the grounds that it tacitly posits that prices of inputs and outputs within a given production process will be the same over time. Whatever the merits of such a refutation in theory, there are still many prominent Marxist economists who have distanced themselves from the centrality of a declining-profit-rate theory of capitalist crises. Whether or not the “Okishio theorem” undermines the internal consistency of Marx’s whole argument or merely challenges one of its guiding assumptions, Marxists today cannot afford complacency in their descriptions of crisis.

What Marxists Argue Today

Debate among prominent Marxists is still shaped by either modification of the falling profit rate theory or something approaching rejection. Though polemical, the part played by the falling rate of profit in an ongoing debate between Sam Gindin and Andrew Kliman is instructive. Framed as a struggle between a critique of neoliberalism and a more thoroughgoing critique of capitalism, Gindin claimed that the underlying conditions of capital accumulation have been strong for quite some time, whereas Kliman argued that secular (long-term) stagnation has gripped the global economy since the 1970s.

In Gindin’s view the crisis of 2007-8 was “primarily a financial one” brought on by attacks on working class consumption by a volatile financial system. The era leading up to the crisis was one of capital’s “most dynamic” and the reasons for its failure to return to its pre-crisis state do not run deeper than a “trauma” inflicted on consumers and investors. On the contrary, argues Kliman, capital is stagnating because of long term declines in profit resulting from the crisis of the 1970s. The only increase in profits since the 1980s came in the form of a “phony boom” based around property speculation. Kliman sets out to debunk the widely-accepted Left account that the 2008-9 crisis was the result of squeezed wages, with the attendant conclusion that renewed union activism can combat financial neoliberalism, by stressing that there have been no declines in total remuneration and no major credit expansion to the working class. His explanation centres on the long-term structural weakness of capital as evidenced by lows rates of investment and an inability to overcome declining profits. For Kliman and other orthodox Marxists, financialization is a relatively minor symptom in an ongoing and longstanding battle of capitalists with their own falling profits.

However, financialization has accompanied the entire history of the postwar order (the argument Leo Panitch and Sam Gindin make in their book The Making of Global Capitalism). Indeed, financialization accelerated – in fact becoming public policy where once governments had pledged to slow it – during and after the crisis of the 1970s. Had existing levels of deregulation and market integration been enough to guarantee growing markets as well as general stability for the US capitalist class, the US government would not have been under so much pressure to go further faster. This is a crucial point because, as Joseph Stiglitz has argued in The Price of Inequality, this policy-driven process played a major part in making the conditions of the 2007-08 crisis. What was the impetus towards this extraordinary level of under-regulation? Even if profits rates were not falling (or at least not falling in ways that couldn’t be offset by public policy), it could be argued that in order to maintain US global dominance, financialization of the global economy had to be continuously deepened. Much as Britain in the 19th century used the “imperialism of free trade” to sustain its global hegemony, the US had to continue to pry further open world markets in order to maintain its centrality. Only in this way could it successfully combat etatisme, national liberation movements,and the constant spectre of so called “currency manipulation” by rival powers. The drive to deregulate international capital markets was also a means for the re-consolidation of US hegemony, regardless of profits.

The crisis of the 1970s and the subsequent decades of market liberalization represented the end of one systemic cycle of accumulation (led by the US state) but not quite the beginning of another. In the meantime increasingly liquid capital was seeking a new home. After the 1970s crisis, capitalism really was doing its job. However, underlying this success – which was making a lot of people rich and producing a lot of cheap goods – was a stark reality. Capital could not return to the levels of fixed stability of the immediate postwar era (a period of unique “catch-up” by Europe and Japan according to Pikkety). In Giovnni Arrighi’s cyclical sketch of capital accumulation, the right state-capital configurations (or relations of capital flows to territorialization) had to be found for this accumulated capital to find a stable, long-term home. There simply wasn’t enough demand in the economy to put the vast amount of accumulated financial capital to work. To do this, social conditions would have to be radically transformed.

In his book The Long Twentieth-Century Arrighi elegantly adapted Marx’s formula for the circulation of a single capital – M-C-M’ (in which the capitalist starts with money, invests it in commodity production and then exchanges it for more money before reinvesting) – into a two-stage model of a systemic cycle. The first stage, M-C, accorded with capital’s ability to find rich, stable, long-term returns simply by recycling itself into production. The second stage, C-M’, accorded with the point at which the additional capital accrued in circulation started to overwhelm the absorptive investment capacities of production in a given territory. At this point financialization was like a necessary safety valve. Yet despite providing a direction for ever increasing amounts of pressure, it could not ultimately guarantee those funds stable realization. Eventually it would be necessary for capital to return from its speculative financial state and find productive reinvestment. However, the intervening years of volatility, as the great capitalist economist Joseph Schumpeter pointed out, would mean the destruction of many of the social institutions, means of production, and the global division of labour, which had previously sustained and structured capitalist accumulation (the famous process of “creative destruction”). Schumpeter pictured capitalism as alternating between periods of flexibility and inflexibility which were integral to its renewal. Yet discovering the conditions – indeed, violently constructing the conditions – of each would prove difficult to say the least (see Schumpeter’s book Capitalism, Socialism and Democracy, especially the famous chapter on ‘Creative Destruction’).

Profits Aren’t the Half of It

Marxists were always naive in thinking that declining profit rates could and would implode the system from within. While profits can decline, those declines can be offset or avoided altogether. We need to give up the idea of a single “scientifically” demonstrable mechanism by which economic and social change comes about. More pressing than whether capitalists can sustain high rates of return has been the ability of capitalism to survive the repeated destruction of the social bases which form its foundation. This question involves raising our eyes from the seemingly determinist world of market exchanges and looking at the wider socio-historical contradictions that form a part of capitalism. While Panitch and Gindin are keen to stress to durability of the American state, it is clear that US hegemony has experienced a knock. Not only this but, since the 1970s, the global state system has become less coordinated, with the US finding it increasingly difficult simply to govern world markets. Vast flows of financial capital are seeking a new home and have already wreaked an extraordinary amount of havoc in the process. The question remains as to whether new conditions of accumulation can be conjured up by governments on a scale big enough to stabilize the system as a whole. Profits are not even the half of it.

It is Joseph Schumpeter, a capitalist true believer if ever there was one, to whom anti-capitalists should turn today. Schumpeter stressed not only the creative and destructive tendencies of capitalism, but conceived the two as different moments of a single dynamic process (working in a very Marxist theoretical framework). Thus the different moments of the capitalist dialectic – from fixed to flexible; from stable to volatile – were crucial if capitalism was to reproduce itself on an expanded scale. Yet as a capitalist Schumpeter was also unafraid to ask whether or not capitalism could survive the destruction necessary for its future success. It was, in the end, this contradiction that produced something more than mere recessions – the regular economic cycle of boom and bust – but actually necessitated the wider social concept of crisis.

The evidence suggests that crises are the expression of more than just limited cyclical downturns. They amount to a need to reconstruct the very bases on which capital accumulates. Thriving on destruction, engendering volatility in order to survive, capital must repeatedly remake the social order with which it is bound up and of which it forms an integral part. This brings in to play not only economic contradictions but wider social, geographical and political contradictions. In order to continue expanding capital will destroy, and require that governments also destroy, pre-existing relations of production, material forces, state-finance institutions, communities, businesses, systems for the exploitation of natural resources and countless human lives. It will require in turn the creation of new, equally destructive and exploitative versions of all of those things. The successful reproduction of capital – currently locked into a desperate search for a state or compendium of states able to secure its return to an expanded productive cycle – may yet come up against geopolitical and social deadlocks which it simply cannot overcome. Creating the conditions for successful future accumulation, as governments across the world are dedicated to doing, could yet cost the earth.