by Michael Roberts
June 19, 2017
I was recently interviewed on
my book, The Long Depression, and on other economic ideas, by José Carlos
Díaz Silva from the Economics Department of the National University of Mexico
(UNAM) where I have been invited next March 2018 to deliver a series of lectures.
In the first part of this
interview, Jose questions me on the basic themes of my book.
JCD: In general terms, how
could you explain the recent crisis? Can we link the United States crash in
2008 with the problems that followed in Spain, Greece and Ireland, and the
latter with the recent scenario as a unique process of crisis?
MR: In my book, The Great
Recession and my subsequent book, The Long Depression, I argue that the global
financial crash of 2008 and the ensuing deep global slump in capitalist
production were caused by a combination of the falling profitability of
productive capital (Marx’s law) and excessive borrowing to speculate in
fictitious capital (stocks, bonds and property). At a certain point, bank
lending and mortgages and their ‘diversification’ into mortgage-backed
derivatives (bought worldwide) could no longer be funded as profit in
productive sectors dropped and incomes fell back. The great Ponzi scheme
of financial speculation then collapsed and revealed the underlying failure of
capitalist production. Investment plunged and took employment, incomes
and consumption down with it.
This is the ‘normal’ process
of capitalist crisis: profitability falls to a point where profits in total
stop rising, then investment collapses and the costs of capital (means of
production and labour) are reduced violently. This particular slump was
worse because it was combined with the destruction of fictitious capital that
had reached unprecedented levels; and because it was global. Every major
economy and financial sector was affected. The banking crash and the
massive credit squeeze spread to Europe. The credit crunch hit the
property markets of Spain and Ireland; and the excessive over-leveraged
property and corporate sectors in Greece. Greece was brought to its knees
because of the previously wild borrowing at cheap rates by Greek corporations
especially in property; and the tax evasion and capital flight of those
corporates and the rich meant that the Greek government had insufficient revenues
to handle a collapse in the economy and meet the demands of its creditors, the
French and German banks.
So the Euro crisis was really
a crisis of global capitalism. But it had special features in that the
weakest parts of the Euro area were hit hardest because they were dependent on
investment from the core (Germany, France etc). And the Euro leaders were
unwilling to subsidise the weaker economies.
JCD: Why is important to build
a general theory of capitalist crisis?
MR: If we do not develop
general theories then we remain in ignorance at the level of surface
appearance. In the case of crises, every slump in capitalist production
may appear to have a different cause. The 1929 crash was caused by a
stock market collapse; the 1974-5 global slump by oil price hikes; the 2008-9
Great Recession by a property crash. And yet, crises under capitalism
occur regularly and repeatedly. That suggests that there are underlying
general causes of crises to be discovered. Capitalist slumps are not just
random events or shocks.
The scientific method is an
attempt to draw out laws that explain why things happen and thus be able to
understand how, why and when they may happen again. I reckon that the
scientific method applies to economics and political economy just as much as it
does to what are called the ‘natural sciences’. Of course, it is
difficult to get accurate scientific results when human behaviour is involved
and laboratory experiments are ruled out. But the power of the aggregate
and the multiplicity of data points help. Trends can be ascertained and
even points of reversal.
If we can develop a general
theory of crises, then we can test against the evidence to see if it is valid –
and even more, we can try and predict the likelihood and timing of the next slump.
Weather forecasting used to be unscientific and just based on the experience of
farmers over centuries (not without some validity). But scientists,
applying theory and using more data have improved forecasting so that it is
pretty accurate three days ahead and very accurate hours ahead.
Finally, a general theory of
crises also reveals that capitalism is a flawed mode of production that can
never deliver a harmonious and stable development of the productive forces to
meet people’s needs across the globe. Only its replacement by planned
production in common ownership offers that.
JCD: When talking about the
pertinence of the falling profit rate as a determinant of the crisis, it is
commonly underlined in Marx’s works as the strongest explanation. This is, if
Marx himself considered the falling profit rate as the foundation of the main
explanation of the crisis, then we should think of it as correct, but if we
find some textual evidence, in the Marx’s writings, that shows he abandoned
this thesis In his last years of work, then it will be incorrect thinking on
the falling rate of profit as the main explanation of the crisis. How fruitful
is this way of doing research? Is it possible that waiting for the “Marx
approval” is a noxious one for the possibility of constructing a theory of
crisis?
MR: Interpreting Marx’s
voluminous writings to ascertain what his theory of crises is useful, but only
to some extent. Marx’s contribution must be the foundation of any
effective and relevant theory of crises under capitalism, in my view. But
as you say, there can be many interpretations and Marx’s unfinished works lead
to ambiguities that can exercise academics and scholars for a lifetime!
So there are severe limits on this type of research. Even if we were to
agree on what Marx’s theory of crises is (or even that he had one – because
that is disputed), what if he were just wrong?
Moreover, it is 150 years
since Marx developed his analysis of capitalism based on the main example of
British capital in the mid-19th century. The world and capitalism has
moved on since then – in particular, it is the US that is now the dominant
hegemonic capital, capitalism is now global and controlled even more than
before by finance capital. Thus a theory of crises must take into account
these new developments. Also, we have much more data and information to
work on compared to Marx’s limited access. The task now is not to keep
analyzing and re-interpreting Marx, but to stand on his shoulders and raise our
understanding.
JCD: If we define the organic
composition of capital as the level of the value of the means of production to
the value of labor power, does this variable depend on distributional factors
or the profit rate? Do you think it is important to take into account the materialized
composition of capital and the organic composition of capital?
MR: The organic composition of
capital is an important Marxian economic category. It shows the social
relation between human labour and machines as the means of production.
Under capitalism, individual capitalists compete to extract the maximum amount
of value (and surplus value after paying for the wages of labour power) from
their workforces. That competitive drive for profit (getting the greater
share of the total value produced) pushes capitalists to increase their use of
machinery in order to raise the productivity of labour by shedding labour
(costs). So Marx reckoned that a rising organic composition of capital
was the long-term tendency of the capitalist mode of production. Indeed,
it was the basis of the law of the tendency of the rate of profit to fall (the
law as such). The organic composition of capital is measured in money but
Marx says its mirrors the technical composition of capital (machines measured
in hours of labour against the amount of hours worked). However, the
increase in machinery by capitalists to replace labour will raise the
productivity of labour and reduce the value of labour power if the costs of
reproduction of labour fall. And it can also reduce the costs of
machinery. So the value composition of capital can fall. But Marx
said that, as a rule, this would only slow the rise in the organic composition
of capital, not cause it to fall over the long term.
All the empirical evidence
shows that Marx was right. So the basic assumption of Marx’s law of
profitability, that there will be a rising organic composition of capital over
time, is realistic and proven. If there is no change in the rate of
exploitation or surplus value of the workforce, then a rising organic
composition will lead to a fall in the rate of profit. However, increased
mechanization will usually lead to a rise in the productivity of labour and the
rate of surplus value. This acts a counter-tendency to the rising organic
composition of capital and the tendency of the rate of profit to fall.
But the tendency will override the countertendencies over time.
JCD: Is the dynamic between
the falling profit rate and its counter tendencies the explanation of the
economic cycles? Why is so? Which are the differences with the ideas of the
Kondratiev’s long waves and the one of Schumpeter about the cycle?
Yes, in Marx’s theory, it is
the dynamic between the rising organic composition of capital and the
counter-tendencies of a rising rate of surplus value and a falling value
composition of capital. Marx’s law of profitability means that eventually
a fall in the profit rate leads to a fall in the mass of profit or at least a
fall in new value created. This leads to a slump in new investment.
Capitalists then look to reduce their costs of capital (labour power and
assets). So capital values are devalued (after the bankruptcy and merger of
capitals and a large increase in the reserve army of labour) to the point where
the mass and rate of profit begins to rise again for the surviving capitalists
and then investment resumes, and with it employment and incomes. The whole
cycle commences again.
In my view, this profit
(ability) cycle, as I call it, is the basis of the so-called business
cycle. But it is not the same as the business cycle. That is
affected by the turnover of capital in productive sectors and in unproductive
sectors like housing, also by international trade etc. The profit cycle
from trough to trough can last 30-36 years, while the modern business cycle
(Juglar) appears to be 8-10 years. So, for example, in the period
1946-82, there were several business cycles or slumps (1958, 1970, 1974-5,
1980-2).
The Kondratiev cycle, if it
exists, and I am inclined to think so, is much longer term, over 54-72 years (I
think it has been getting longer). The K-cycle is driven by the swings in
world commodity prices and probably by the cluster of innovation cycles
delineated by Schumpeter – but also by the direction of the profit cycle.
The K-cycle has been getting longer because people are living longer (at least
in the major economies), so the generational effect is now four times 18 years,
not four times 14 years, if you like. This affects the length of the
innovation cycle of discovery, development, explosion, maturity and stagnation
– possibly. In many ways, these are all hypotheses to be proven. Data
points are few. But I argue in my book, The Long Depression, that the
conjunction of the downward phase of the K-cycle, the profit cycle and Juglar
cycle only happens once every 60-70 years. When it does, capitalism has a
depression rather than just a ‘normal’ slump. This was the case in the
1880s, the 1930s and now.
JCD: What are the main
difficulties for calculating the profit rate? Is there some way of calculating
the circulating capital turnover? If it would be possible to calculate the
capital turn over, how different the calculation of the profit rate could be?
This can explain the constancy of the materialized composition of capital that
some have shown?
MR: The difficulties of
measuring the rate of profit from the view of Marxian categories are
manifold! First, we must use official statistics that are not accumulated
in the best way to measure Marxian categories. Indeed, some Marxist
economists reckon that trying to measure the rate of profit using official
statistics in money is impossible and pointless. Others reckon that the
data are so poor we cannot do it practically. I do not agree. It is
the job of any scientific analysis to overcome these theoretical and practical
difficulties in measurement. And many Marxist economists are doing just
that.
On categories, should we
measure the rate of profit of the whole economy, or just the capitalist sector,
or just the corporate sector, or just the non-financial corporate sector, or
just the ‘productive’ sector? Should or can we include variable capital
and circulating capital in the denominator? Should we measure gross
profit or net profit after depreciation? Can we measure depreciation
correctly?
All these various measures are
useful and possible. The data are available for many major economies and
many Marxist scholars have now made such measurements. And yes, variable
capital should and can be included empirically. And there has been work on
measuring the impact of the turnover of capital too. What increases
confidence in this work is that, by and large, whatever measure is used, it
shows, for most countries, over time that the rate of profit has been
falling. Of course, not in a straight line because there are periods when
the counteracting factors dominate, if only for a while. And each major
slump produces a temporary recovery in profitability. But these turning
points are also broadly at the same time. All this increases confidence that
Marx’s law of profitability is valid and relevant to an explanation of
recurrent crises under capitalism and also its eventual demise as a mode of
production.
JCD: Which is the correct way
of calculating the profit rate: historical cost or current cost? Why is so?
MR: Theoretically, capital
accumulation should be seen as temporal. By that I mean, a capitalist
must pay a certain money amount for machinery and raw materials to start
production. Then the workforce is employed to produce a new commodity for
sale. It does not matter if the cost of replacing that machinery in the
next production cycle has changed. The profit for the capitalist should
be based on the original (historic) cost of the machinery etc not on its
current (replacement) cost. So the rate of profit properly measured
should use historic cost measures. However, this is a matter of
theoretical debate, with some scholars arguing for replacement costs and some
arguing for something in between! What is interesting is that the
difference this makes to the measurement of the rate profit is greater or
lesser according to the change in prices of the means of production over
time. So in the recent period where inflation has been low, particularly
for capital goods, over time, the difference between the rate of profit
measured on historic costs versus current costs has narrowed.
JCD: Why is the profit rate
not in the core of the recent discussion about the crisis, both in the academic
and journalistic field? Is it not paradoxical speaking about capital without
underlining the profitability determinants?
MR: The reason that
profitability is not considered in any discussion of crises is both ideological
and theoretical. Mainstream economics has no real theory of crises
anyway: crises are just chance, random events or shocks to harmonious growth
under capitalism; or they are the result of the interference in competition and
markets by governments, or central banks; or they are result of monopoly or
financial recklessness or greed. Mainstream economics also denies any
role or concept of profit in its marginalist theories of production and
demand. This is deliberate: there is no place for a theory of profit
based on the exploitation of labour power (Marx’s value theory).
Diminishing returns on utility and productivity lead to no profit at the point
of equilibrium. Also heterodox/Keynesian theories also deny the role of
profit, as they are also based on marginalism and (im)perfect
competition. Crises are therefore the result of a ‘lack of effective
demand’ caused by an ‘irrational’ change in expectations (‘animal
spirits’). It has nothing to do with the profitability of capital,
apparently – or more precisely the exploitation of labour. And yet capitalism
is a system of production for profit in competition. So why is profit not
a determinant in investment and production? It is an ideological refusal
to accept that. Instead apparently, everybody gets their fair share
according to their (marginal) contribution. The mainstream finds no
explanation of crises as a result; and the Keynesians look to ‘demand’ not
profit as the driver of crises.
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