The profitability of crises

by Michael Roberts

June 19, 2017

https://thenextrecession.wordpress.com/

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.

We Can’t Fight Climate Change if We Keep Lying to Ourselves

posted on Jun 18, 2017

By Chris Hedges

http://www.truthdig.com/report/item/we_cant_fight_climate_change_if_we_keep_lying_to_ourselves_20170618

We must embrace a despair that unflinchingly acknowledges the bleak future that will be created by climate change. We must see in any act of resistance, even if it appears futile, a moral victory. African-Americans understand, in a way perhaps only the oppressed can grasp, that our character and dignity will be measured by our ability to name and resist the malignant forces that seem to hold us in a death grip. Catastrophic climate change is inevitable. Our technology and science will not save us. The future of humanity is now in peril. At best, we can mitigate the crisis. We cannot avert it. We are fighting for our lives. If we do not rapidly build militant movements of sustained revolt, movements willing to break the law and attack the structures of the corporate state, we will join the 99.9 percent of species that have vanished since life first appeared on earth.

“In these circumstances refusing to accept that we face a very unpleasant future becomes perverse,” Clive Hamilton writes in “Requiem for a Species.” “Denial requires a willful misreading of the science, a romantic view of the ability of political institutions to respond, or faith in divine intervention.”

Tens of millions of human beings, especially in the global south, are being herded into the climate furnaces for immolation. And we in the north are soon to follow. The earth’s temperature has already risen by more than 1 degree Celsius since the late 19th century. And it is almost certain to rise a few more degrees—even if we stop all carbon emissions today. The last time the earth’s temperature rose 4 degrees, the polar ice caps disappeared and the seas were hundreds of feet above their current levels.

“[Climate change] is interacting with two previously existing crises,” Christian Parenti, author of “Tropic of Chaos: Climate Change and the New Geography of Violence,” told me in an interview. “On the one hand, the legacy of neoliberal economic restructuring has weakened states in the global south so they don’t have the capacity to pave the roads, educate the population, to help farmers who are in distress. On the other hand, much of the global south is littered with cheap weapons and veterans of previous conflicts who know how to use those cheap weapons. In this comes the extreme weather of climate change. [In] states that have been systematically reduced to the point where they can’t respond even if they wanted to, how do people adapt to climate change? How do they adapt to the drought and floods? Very often, you pick up surplus weaponry. You go after your neighbor’s cattle. Or you blame it on your neighbor’s ideology or ethnicity. Underneath a lot of these ethnic and religious conflicts we see there is a climate element.”

“The great danger in climate change is that at a certain point [you will see] the collapse of natural ecosystems, the dying of tropical forests, which are currently carbon sinks—they pull CO2 out of the atmosphere,” Parenti said. “But if they die and all that wood burns or rots, they can become net emitters of greenhouse gases. There are the huge deposits of methane, frozen methane in the Arctic. These are already beginning to come out.”

“The fear is that at a certain point we cross the line and there’s a tipping point,” he said.

“The primary cause of greenhouse gas emissions will become the breakdown of these natural systems, and then it really is out of our control.”

We have the technology to build alternative energy and food systems, but the fossil fuel industry, the most powerful industry in the world, has blocked all meaningful attempts to curb fossil fuel extraction and reduce energy consumption. And meat, dairy and egg producers, responding to consumer demand, are responsible for the emission of more greenhouse gases than the entire global transportation sector. Livestock generates enormous amounts of methane, which is 86 times more destructive than CO2. Livestock also produces 65 percent of nitrous oxide resulting from human activity, a gas that has 296 times the “Global Warming Potential” of carbon dioxide. The massive animal agriculture industry, like the fossil fuel industry, receives billions of dollars in subsidies from the U.S. government. And corrupt and pliant politicians who do the bidding of these industries receive millions in return from lobbyists. It is legalized bribery. And it won’t stop until this political system is destroyed.

The nonprofit Project Drawdown, which compiles research from an international coalition of scientists, says that “a plant-based diet may be the most effective way an individual can stop climate change.” Adopting such a diet should be our first act of revolt. The second should be carrying out civil disobedience to disrupt the extraction of fossil fuels, along with massively reducing our consumption of those fuels. The third, through mass mobilization, should be to overthrow the corporate state and nationalize the energy sector, the banking industry, utilities and public transportation in addition to dismantling a war machine that in waging futile and unwinnable wars consumes nearly half of all government expenditures. It is a lot to demand. But if we do not succeed, the human race will disappear.

Governments, if they were instruments of the common good, would end subsidies to the fossil fuel and animal agriculture industries, retrofit government vehicles and buildings to use clean energy, ban the fossil fuel and animal agriculture industries from public lands, end the externalization of the true costs of these industries, and impose taxes so heavy that extraction of fossil fuels would be unprofitable and the purchase of animal food products economically unsustainable—just as those foods are environmentally unsustainable. But with state power being held captive by corporations, short-term profit takes precedence over human health and even human survival.

“The technology exists to strip CO2 out of the atmosphere,” Parenti said. “The problem is it’s extremely expensive. And how do you store it? As a gas, it can leak out. But it can also be turned into basically baking soda. But the costs are so expensive. So this technology currently exists. It’s proprietary. Private companies are using it to facilitate further oil extraction. If civilization was serious about survival, governments will seize or buy that technology. Make it open source. And invest in whatever was necessary to strip CO2 out of the atmosphere artificially, along with [extraction by] plants and forests etcetera.”

Parenti stressed that collapse will be defined not only by rising temperatures but a series of social and infrastructure failures. It will be nonlinear. He noted that food prices, including the prices for basic grains, surged shortly before the 2010-2013 uprisings known as the Arab Spring.

“You had the Black Sea drought, affecting grain harvest in Russia, Ukraine and Kazakhstan,” he said. “This ripples through world markets. Bread prices spike in Tunisia and Egypt. People are out in the street protesting this mukhabarat [secret police] state they’ve lived in for 30 years. But it’s also about the price of bread. That’s one way that a climate crisis appears. It doesn’t appear like a climate crisis at first. You have to think about the interconnections of the world economy.”

The civil war in Syria was preceded in 2006 by the worst drought in 900 years, as well as an austerity program that weakened government support systems. Farmlands were transformed into arid dust bowls. Livestock perished. Food prices skyrocketed. Over 1.5 million desperate people from the countryside fled to urban areas, many packing themselves into the shantytowns and slums set up by refugees during the war in Iraq. And into the chaos walked Islamic State. The war, which has taken half a million lives, created 4.8 million refugees and internally displaced 7 million people in Syria. The refugee crisis that resulted in Europe is the worst since the end of World War II. The influx to Europe has empowered nationalist and protofascist movements and touched off a rise in hate crimes. Climate change is the unseen hand in unrest, social disintegration, chaos and war. 

“At one level, this is a war about ethnicity and religion and opposing the foreign occupation,” Parenti said of the war in Afghanistan. “But on another level, this is about farmers who are dealing with the worst drought in living memory, which is occasionally punctuated by extreme flooding, growing the only crop they can grow in those conditions—[heroin] poppies. The poppy happens to use about one-fifth or one-sixth the amount of water that wheat and other traditional Afghan crops use. So farmers have to grow poppy if they’re going to survive. Which side of the conflict will help them do that? The Taliban. There are subtle and important interconnections to all ongoing conflicts.”

“In India, you have the Naxalites, a Maoist guerrilla movement that has been going for over 40 years,” he said. “It progresses with the drought. District by district, where there is drought, there are Naxalites. The key there is the state has withdrawn from the credit markets. Farmers have to go to moneylenders. The moneylenders will only lend them money to grow cotton because they can’t eat cotton. The more money they borrow, the worst the drought, the more the cotton is produced, and the lower the cotton price will go. You have mass suicides. You can imagine if you’re a farmer on the verge of drinking poison to kill yourself, and the Naxalites come along and say, ‘Hey look, we have a short-term and a long-term solution for your problems. The short-term is when the moneylender comes to town you stop his car and we kill him. When the cops come, we ambush them. In the long term, it will be better.’ ”

Failed states, proliferating in Latin America, Asia, Africa and the Middle East, are ruled by phantom governments.

“There’s a mythology of the central state that operates when the police stop you and demand some paperwork,” Parenti said of failed states. “But really, there is no central database. [These are the] twitching limbs severed from a spider. These offices are used for basic survival. They can hold up travelers and demand a $50, $100 bribe from them in the name of some centralized state that did, in fact, exist 10, 20, 30 years ago. That’s a part of how states fail—the corruption and re-privatization of the means of administration and the means of repression. [Max] Weber’s argument is [that] the modern state is about detaching the leader of a bureaucracy from the ownership of a bureaucracy. State failure begins with the re-privatization of the bureaucracies, particularly the repressive bureaucracies of the police and military.”

“In a place like Afghanistan, cops pay to have those jobs,” he said. “They pay the head cops. They pay the dues so they can shake down traffic on the roads. That’s spreading all over the world. Its uniforms, insignia, paperwork, ministries and officialdom all exist, but exist for the personal gain of whoever is wearing that uniform.”

“The possibility of a progressive, civil, left politics is curtailed in a world where drug-addled teenagers run the checkpoints,” he said. “That’s really important to keep in mind. Then the immediate response in the West is to justify further military intervention, which in every case is the immediate cause, or trigger, of state collapse. Of course, there are older, deeper problems that set it up. Libya is a perfect example. The NATO bombing campaign created that failed state. Iraq is a semi-failed state. Yemen is a semi-failed state. Half of Syria is a failed state. U.S. and Western intervention has been pretty instrumental in a lot of that. The great irony is there’s further justification for an overdeveloped military. That’s bad for democratic politics here.”

“In the long run, it won’t work,” he warned. “The process of state failure spreads and spreads. What we see in response is also a hardening of democratic regimes in the north. We’ve got xenophobic politics in the U.S. Southwest in response to a migration crisis [and that kind of politics also] is happening in Europe across the Mediterranean. There are all sorts of great humanitarian responses. But there’s also a very clear shift to the right. France has this state of emergency that’s still in effect. Right-wing politics are doing well all across Europe. One of the great dangers of state failure in the global south in the short term is the hardening and drift towards increasingly authoritarian, xenophobic, quasi-fascist type of politics in the global north and developing states.”

On one July night in 1977 the power went out in New York City. There were citywide riots. Arsonists started 1,037 fires. Looters smashed their way into 1,616 stores. There was over $300 million in damage. This Hobbesian nightmare will become normal in more and more parts of the globe as we traverse the sixth great mass extinction, brought on by the activity of human beings.

The greatest existential crisis of our time is to at once accept the tragic reality before us and find the courage to resist. It is to acknowledge that the world as we know it will become harsher and more difficult, that human suffering will expand, but that we can, if we fight back, perhaps reconfigure our lives and our society to mitigate the worst savagery, dramatically reduce our carbon footprint and save ourselves from complete annihilation. The power elites will do nothing to save us. 

“To be hopeful in bad times is not just foolishly romantic,” historian Howard Zinn wrote.

“It is based on the fact that human history is a history not only of cruelty but also of compassion, sacrifice, courage, kindness. What we choose to emphasize in this complex history will determine our lives. If we see only the worst, it destroys our capacity to do something. If we remember those times and places—and there are so many—where people have behaved magnificently, this gives us the energy to act, and at least the possibility of sending this spinning top of a world in a different direction. And if we do act, in however small a way, we don’t have to wait for some grand utopian future. The future is an infinite succession of presents, and to live now as we think human beings should live, in defiance of all that is bad around us, is itself a marvelous victory.”

The inability to see what is in front of our eyes replicates the blindness of all past civilizations that celebrated their eternal glory at moments of precipitous decline. The difference is that life across the whole planet will go down this time. It is comforting to pretend this is not happening, to foster false hopes and fool ourselves with the myth of human progress, but these illusions only tranquilize us at a moment when we should be rising in collective fury against those who are orchestrating our doom.