Marxist economics put to the test

The 2007–2008 financial crisis was the most severe crisis since the Great Depression. The crisis was global and its consequences destructive for the international working class. Neoclassical economists found themselves in an embarrassing situation. They had neither foreseen, nor even suspected, the crisis. Anwar Shaikh reports that Robert Lucas, a leading proponent of neoclassical orthodoxy, stated in 2003 “that the central problem of depression prevention has been solved.”

Against the confusion of the mainstream, a few radical economists did notice signs of things to come. Anwar Shaikh, professor at the New School, provided a classical Marxist explanationof crisis, and on that basis predicted the timing of the 2007–2008 recession, stating that it occurred “quite on schedule.” Capitalist accumulation is a turbulent process which exhibits patterns of boom and slump. But there is a long-term dynamic underlying these cycles. As Carchedi and Roberts write in their opening chapter, it is the Marxist hypothesis that “the key to understanding the sequence of booms and busts is the movement of . . . profit rates.” In fact, it is the long-term, seculartendency of the rate of profit to fall that was the most important cause of the financial crisis of 2007–2008.

In the war against labor and market competitors, capitalist firms increasingly invest more in means of production relative to labor. Automation becomes a critical weapon in the drive for profit. Increased labor productivity (roughly volume of output produced in a given amount of labor time), decreases the amount of value created per unit of output, and hence decreases profitability. The basis of capitalist accumulation is undermined, and crisis ensues. Capitalist crisis is a recurrent outcome of the constant imperative for profit. Counteracting factors can cancel the effect of rising labor productivity on profitability. Yet over the long term, given an increase in the productivity of labor, the rate of profit will fall.

World in Crisis is an ambitious series of essays, with contributions from economists around the globe, dedicated to providing empirical support for the hypothesis that the tendency of the rate of profit to fall is behind the global financial crisis of 2007–2008. The authors also intervene in the much-debated issue of “financialization” in order to articulate how this phenomenon contributed to the financial crisis.

The destruction of World War II made possible the economic expansion known as the Golden Age of capitalism. The evidence suggests that overall, on a global scale, profitability was at its highest after the war. Then from 1965 to 1982 profitability fell. In the middle of this period was a severe recession that began in 1973. From 1982 to 1997, capitalist firms and states responded to the crisis of profitability by changing the terms of production and reorienting investment towards nonproductive sectors. This ad hoc strategy and outcome was retrospectively named “neoliberalism.”

At the level of production, neoliberalism meant activating a series of countertendencies against falling profitability. Technical change and “new” methods of pumping out surplus labor, like lean production, increased the rate of exploitation and cheapened means of production. One also cannot underestimate the effect of “globalization.” Capitalist investment in the Global South and the incorporation of populations of noncapitalist laborers into the labor market allowed for a situation of “super-exploitation.”

However, given the malaise of productive capital, investment shifted to unproductive sectors (e.g. real estate, finance). In other words, “if the capitalists cannot make enough profit producing commodities, they will try making money by betting on the stock exchange or . . . buying . . . other financial instruments.” Financialization—substitution of credit for money and increased investment in fictitious as opposed to productive capital—promoted by a history of low interest rates and deregulation, is a strategy of capital to boost profits. Hence, in the past thirty-five years, “the expansion of global liquidity in all its forms (bank loans, securitized debt, and derivatives) . . . has been unprecedented.”

Credit and debt can be used as instruments to counteract decreasing profitability. That is why “before the crash of 2008 there [was] a massive buildup of private sector credit in the United States reaching over 300% of GDP.” As expected, the largest component is for productive capital. Non-financial corporate debt in 2011 for the advanced capitalist economies was at 113 percent of GDP. In the same vein, investment in fictitious capital, such as derivatives and the famous sub-prime mortgages, allowed capitalist firms to deploy speculative and hedging tools to deal with uncertainty of exchange and weak profitability.

Credit and fictitious capital can and will get out of line with capitalist production. Given declining profitability, capital tends to speculate, a fact that explains sharp increases in profitability immediately before a crash. Divergence of the nominal value of fictitious capital from the value of fundamentals leads to artificial inflation in price assets. When the weakness is exposed, there is a massive crash across asset prices. This triggers problems of payment, investment, and effective demand that result in recession.

There is agreement amongst the authors that neoliberalism was sucessful in the medium-term because it arrested the fall of profit rates. However, contingent measures, though important, lose out in the long-term. For all the nations studied, there is a fall in profitability and an inverse correlation between labor productivity and profitability. This fall suggests that the 2007–2008 financial crisis represents the end of the “success” of neoliberalism against predominating structural forces. Change in terms of production and the financialization of the macroeconomy could not cancel out the tendency of the rate of profit to fall, and in fact contributed to the weak fundamentals and market uncertainty that formed the background to the financial crisis.

This collection represents a much-needed effort to determine empirical estimatesof Marxist categories and trends in order to evaluate the hypothesis. Contributions, such as those by Tony Norfield, also provide original insights into the connection of finance to the long-term trends. Another strength of the work is to provide support for the Marxist explanation against competing hypotheses. For instance, the work of José A. Tapia deploys a test called “Granger-causality” to determine if patterns in profitability precedepatterns in investment. If such is the case, this fact weakens the Keynesian hypothesis that “investment, generally, causes profit.”

The Marxist explanation is causal, but there is a daunting art to drawing causal inferences from correlation and/or prediction. The difficulty can be put in terms of the “bias-variance” trade-off. We are trying to use increasing productivity as a “predictor” of falling profitability. If bias refers to error determined by simplifying assumptions, and variance refers to error from sensitivity of the model to small fluctuations in the record, then is our predictor a “simplifier,” or “overly-sensitive” to noise and outliers? Machine learning provides a practical means to approach such problems.

We are at a critical moment for neoliberalism. The recovery has been anemic at best, and reports proliferate of an oncoming crisis. The “impersonal” problems mentioned have contributed to a wider host of evils. We live in a world of increasing inequality, militarization, and police rule, where in the not too distant future the migration and climate crises will take on genocidal proportions. But despite all its ills, capitalism will not self-destruct. There exists an opening for capital to use the most desperate means to restore its dynamism. The far right promises to intensify the neoliberal project and do away with the hard-won limits of so-called “representative democracy” and “green capitalism.”

Now, more than ever, political economy compels revolutionary action.

 

Issue #74

November 2010

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