Andrew Kliman, The Failure of Capitalist Production (Pluto Press, 2011), £16
The debate on the underlying causes of the Great Recession has divided Marxist and radical economists. Conventional left accounts of the crisis are rooted in the idea of a new phase of capitalism: neoliberalism. This phase is generally defined by two mechanisms: a squeeze of the share of wages in national income and the subsequent increase of income inequality; a dramatic increase in credit to fuel economic growth that enhanced the role of the financial sector in the economy. The most popular explanations on the left emphasise one mechanism or the other. Costas Lapavitsas and Gérard Duménil and Domique Lévy argue that the hegemony of finance capital and instability of the markets can explain the Great Recession.
Others like John Bellamy Foster and Harry Magdoff, David Harvey and Richard Wolff argue that the underconsumption of the masses and the consequent fall in demand are the underlying causes of the crisis. All these analyses deny that the underlying cause of the Great Recession is the tendency of the rate of profit to fall, what Marx called “the most important law of motion” of capitalism. As the argument goes, the rate of profit has restored fully or partially during neoliberalism thanks to the two mechanisms mentioned above.
The aim of Kliman’s book is to restore Marx’s law of profitability as central to the underlying causes of the Great Recession. The book focuses on the US economy. The decision to concentrate on the US is dictated by two factors: first, the availability of data; second, it was in the US that the crisis erupted.
Kliman’s main argument is that the fall in the rate of profit is an indirect cause of the crisis. He argues that the economy failed to recover fully from the slumps of the 1970s and early 1980s and that this problem, and policymakers’ response to it, set the stage for the latest crisis.
Kliman claims that neoliberalism can be a helpful term when used to describe the dominant politics and ideology of a particular period, but not very useful when explaining the trajectory of the economy. With the use of a large amount of empirical evidence, Kliman shows how some of the trends that are commonly attached to the rise of neoliberalism in the 1980s—the rise in inequality, the deterioration of labour market conditions, the increase in the debt burdens of governments and households—started in the 1970s and some even before. This long period of stagnation was kept under control by injecting more and more debt into the system, creating some artificial booms in the 1990s and 2000s.
Kliman rejects the arguments put forward by Michel Husson, Fred Moseley, and Duménil and Lévy that after 1982 the rate of profit has restored. According to the author, Moseley and Duménil and Lévy fail to distinguish between cyclical variations and longer-term trends in profitability and end up cherry-picking peak points for their calculation of the rate of profit. Kliman argues that the main reasons why the fall of the rate of profit is dismissed as an explanation of the recent economic crisis is a logical one, rather than empirical. The logical objection is known as “Okishio’s theorem”. According to this, changes in technique cannot produce a fall in the rate of profit since capitalists will only introduce techniques that raise the rate of profit and a rise in the profit rate of one capitalist will raise the economy-wide rate of profit.
But Marx argues that, while the first capitalist to introduce a new technique will get a comparative advantage and gain extra profits, these disappear when other capitalists adopt that technique. Commodities change in proportion to the socially necessary labour time they contain, which usually reflects the average conditions of production in the sector. When a capitalist introduces a more productive technique, he is producing goods requiring less labour than the average: therefore, his profits rise. However, as soon as the other capitalists introduce the new technique, the price of goods falls until it corresponds to the socially necessary labour time needed to produce them using the new techniques.
Okishio and his followers argue against this that any rise in productivity and the consequent use of more means of production will cause a fall in the price of its output, so reducing prices throughout the economy—and thereby the cost of paying for the means of production. This will raise the rate of profit. This seems to be logical, but it is not. In fact, investment in a process of production takes place at one point, whereas the cheapening occurs at a later stage. Therefore, the fact that a rise in productivity will reduce the cost of machinery in the future does not reduce what the capitalist has to spend on getting it in the present. Consequently, Kliman argues that the only meaningful way to calculate profitability is in historical terms.
When the rate of profit is calculated as the property income minus employee compensation against the historic cost of the fixed capital stock of corporations, the US rate of profit shows a continuous downward trend from 1947. The majority of those who reject the validity of the fall of profit tend to measure capital stocks in current price valuations. The “current-cost” rate of profit shows a rise from 1982 and this has been used to dismiss the fall in the rate of profit as an underlying cause. As explained above, it is illogical to estimate the rate of profit in this way since present and future prices are calculated simultaneously. As Chris Harman put it, “You cannot build the house of today with the bricks of tomorrow.”
Kliman shows that is inaccurate to argue that the rate of accumulation is slowing because more profits are used to purchase unproductive financial instruments. According to the data he provides, US corporations’ net investment in fixed productive assets constituted a larger percentage of their profit during the
1981-2001 period than it did in the 1947-1980 period. Instead, the low level of capital accumulation is due to the low rate of profit and, in consequence, sluggish investment and growth. Eventually the crisis is reached when profitability becomes so low that an investment crisis occurs, exacerbated by excessive expansions of debt and by financial speculation.
Kliman argues that the underconsumptionist theory cannot explain the crisis. According to underconsumptionist writers like Foster, Magdoff and Wolff, the build-up of debt was rooted in the falling pay for workers and/or a fall in their share of income, which would have led to a fall in consumption, if consumption had not been propped up by debt. This has become a common view on the left and the fall in wages is normally linked to the assault on trade unions in Britain and the US.
This would be accurate if one only looked at wages and salaries. But working people also receive social benefits; and if these are included in the calculation, as Harman and Anwar Shaikh1 have argued elsewhere, workers’ share of national income in the last decades did not decline but actually rose. This does not mean that working people are living well—moreover, many mechanisms in the last decades have depoliticised the process of social provision. But the evidence shows that the crisis was not caused by a collapse of consumer demand and increasing inequality.
Underconsumptionists and left Keynesians argue that slumps can be avoided by increasing the workers’ share of wealth, implying that what is good for working people is good for capitalists. However, in this case, socialism would not be necessary, at least for economic reasons. Kliman argues that his analysis does not imply that working people should not struggle for redistribution and reforms. But these will not deliver a stable and flourishing future. The interests of the capitalist are always in conflict with those of working people. Higher pay for workers or higher corporate taxation eat profits, the raison d’être of the system. Only a sufficient destruction of capital can restore profits and stabilise the system, but policymakers have shown their reluctance to it.
It is clear that the purpose of Kliman’s analysis is to debunk explanations of the crisis that dismiss the centrality of Marx’s law of profitability. Consequently, he mostly emphasises secular trends. But for those who largely agree with his arguments, a greater focus on the changes in the profit rate would have been more beneficial to understand the timing and depth of crises.
This book is a major contribution to the debate on the recent economic crisis. It exposes the flaws of some of the most popular arguments on the left and reinstates the centrality of Marx’s law of profitability in explaining the crisis. This is done using plentiful empirical evidence and through a series of logical steps. Everyone who is interested in understanding the roots of the crisis must read it