I’ve been reading “Value and the World Economy Today” recently and came across a very interesting article by Andrew J. Kliman that critiques two popular theories of crisis: the well-known Keynesian-like “underconsumption” theory and the physicalist argument. What follows are just my thoughts on some key elements of the article. This book is very good so this probably wont be the only post like this.

One widely held view on the Left attributes economic crises to the anarchic and competitive nature of private capitalism, which causes firms systematically to expand faster than demand will permit in the long run. Periodically, this results in excess capacity and overproduction, that is, production in excess of demand. This account is actually a tautology, not an explanation. As Marx (1978: 486) noted, ’[i]t is a pure tautology to say that crises are provoked by a lack of effective demand or effective consumption… The fact that commodities are unsaleable means no more than that no effective buyers have been found for them.’ (Kliman, pp. 120)

This, Kliman argues, does not explain ‘why the volume of output has proven to be excessive - why, that is, demand has been too sluggish to enable everything to be sold at existing prices.’

The argument made by other Marxists (including Harvey), that suppressed wages in the first world led to excessive borrowing, is convincing. Harvey attributes this suppression to the third wave of globalization and relentless attacks on labor that really kicked off in the 80’s. While this may be the case, and it seems likely, it does not explain how the resulting indebtedness became excessive. Kliman asks: “Why is the economy unable to absorb credit at the same pace as it is created?” (pp. 121)

Is it the case that all production, and as a result all demand for investment, is determined by aggregate demand, ie. the rate of consumption? Many demand-side theorists have argued this, and Kilman targets Sweezy as among them. He quotes Sweezy as saying that, 'the process of production is and must remain, regardless of its historical form, a process of producing goods for human consumption’ (Sweezy 1970:172).

The “regardless of its historical form” bit should make every reader cringe. It is also a fundamental mistake to assume that production is completely constrained by consumer demand. As Kliman points out, Marx showed in Volume 2 of Capital that production occurs under two main departments:

One part of output consists of consumer goods. Another consists of means of production that are used, directly or indirectly, to produce new consumer goods. Consumer demand sets a limit to the expansion of these parts of output. Yet Marx’s schemes demonstrated that there exists a final part of output that does not enter into consumption either directly or indirectly. Iron is used to produce steel, which is used to produce mining equipment, which is used to produce iron, and so on. The growth of this part of output is not constrained by 'human consumption,’ since its demanders are not humans, but capitals. The schemes also demonstrated that growth under capitalism generally requires that this final part of output grow faster than the others. Thus, rather than being a system that produces for consumptions sake, capitalism increasingly becomes a system of production for production’s sake. (pp. 122)

Thus, Kliman argues, the demand for investment and new production can rise independently of limits to consumer demand. I tend to agree with this conclusion, and the general thrust of his argument that underconsumptionists place too much emphasis on the consumer as the motor of value expansion.

I do, however, object to the claim that there is a portion of output with no connection to consumption, even indirectly. This strikes me as wholly un-dialectical. Making this claim assumes that one portion of capital can be neatly segmented and isolated from the rest. Consumption is a key element of the logic of capital. After all, how would the M-C-M’ circuit continue expanding without the corresponding C-M-C circuit? Demand-side theorists, however, go too far in suggesting that all production is directly tied to consumption. There are important time-lags, between investment in new production and output, that necessarily imply a lose connection between investment and consumption. Kliman could have made his point by asserting that many investment and production decisions are made only with indirect consideration for consumption (the bolt-maker does not worry about every one of the myriad ways his bolts will be used in the production of cars, machines, etc. way down the production chain).

Nonetheless, Kliman is right to criticize demand-side theorists for not explaining where the ultimate breakdown occurs or by what mechanisms. To do this, he argues we need to take a closer look at the relationship between the rate of profit and the rate of indebtedness.

First, we take a look at the rate of profit. Marx famously claimed that the rate of profit has the tendency to fall as the rate of exploitation (S/V) falls. This can be due to a number of factors, including the growing replacement of living for dead labor (a rising organic composition of value). It also has a number of countervailing tendencies, such as increasing productivity in the sector for wage-goods, thus reducing V.

Increasing productivity, as Kliman argues, can also work both ways. Increasing productivity means that a particular capitalist can lower the price of their product below the social average, thus increasing market share and raising profits. However, as more capitalists lower prices and attempt to increase productivity, total profit rates tend to fall. Kliman argues that this is not a “secular” decline in profit rates, but a 'tendency of the profit rate to adjust downward toward rLR’. (pp. 126) He defines rLR as the 'long-run profit rate’ or the convergence between the rate of profit ® and percentage growth in surplus value (S’) over the share of profit reinvested (I/S) . (pp. 125)

He then argues that there are “strong theoretical and empirical arguments” to suggest that “profit will be a more or less constant share of the aggregate price of output over the long haul, since wage-increases that threaten profitability will be temporary and self-negating. Thus S will grow at a rate close to the same rate as P [the aggregate money-price of commodities] and there is little, if any, reason to presume any particular trend in the latter’s growth rate.”

How, then ,can we say that the rate of profit will have a falling tendency? It is precisely the necessity for profit rates to adjust towards rLR.

Put differently, the profit rate will decline if rLR is too low to allow the current rate to be sustained. But what makes rLR too low? It is limited by the growth rate of profit, which in turn is held in check by sluggish employment growth and reduced by productivity growth. (pp. 126)

He also notes that:

any reduction in the percent growth of prices - any disinflation - will tend to reduce profitability. Outright deflation … is not necessary. Nor is the supposed distinction between 'bad’ deflation, 'caused’ by inadequate demand, and 'good’ deflation, caused by technological progress, relevant here. 'Good’ deflation depresses profitability no less than does 'bad’ deflation, because it, too, reduces revenues today in relation to costs incurred in the past. … The tendential fall in the profit rate therefore expresses itself not through a secular decline in profitability, but through recurrent crises. This was Marx’s (1981: 367) view as well: 'the falling rate of profit… has constantly to be overcome by way of crises.’ The destruction of value 'overcomes’ the falling tendency and sets the stage for renewed expansion. And since profitability can always be restored if enough capital-value is destroyed (which requires only a sufficiently long and severe crisis), no crisis is permanent. (pp. 126)

The last sentence is crucial for Marxists to remember, especially today. No crisis permanent. We often succumb to the bearish news out of the financial press as signs of the end-times. Capital is resilient and will be to the bitter end.

Kliman goes on to use this framework to describe how Minsky’s concept of “ponzi finance” can help establish a line at which indebtedness reaches unsustainable levels. If S’ is the growth of surplus-value, i is the rate of interest and b is the ratio of net borrowing to existing debt, then the debt/profit ratio will rise as long as

S’ < i + b

He explains that if the rate of interest is higher than the rate of growth of surplus value, the debt level is not sustainable. This debt to profit ratio will “rise indefinitely and without limit, even if b = 0” (pp. 127). And “even when S’ > i, businesses still have to reduce their rate of net borrowing. In either case, the drop in b causes a drop in investment spending, which in turn causes S’ to fall, making yet another decline in b necessary, and so on.”

Thus, we can establish a line at which the system reaches a financial point of no return. There are, as always, some countervailing tendencies. If, as happens during the expansionary phase, nominal prices of aggregate output grow faster than real value, nominal profit rates will rise and temporarily relieve this tendency (pp. 127). It is also possible for easy government lending to raise aggregate demand past the total real value of output which has the same effect of raising nominal prices past their values. This, however, “exacerbates the debt problem, precisely because excessive debt buildup - a buildup of debt in excess of the underlying values - is the very mechanism that is propping up prices”.

As Kliman then concludes, “Keynesian policies do not negate, but only displace, the system’s crisis tendencies”. (pp. 128)

To finish the article, Kliman does a demolition job on the theory known as “Physicalism”. This argument runs as follows: the profit rate is positively, not negatively, tied to productivity in the long-run. Thus, the only way for the profit-rate to follow, assuming wages are constant, is for productivity to fall as well. This is, as we have seen, entirely contrary to Marx’s theory. They argue that, although technological changes can cause prices to fall, they deny that this has an effect on profitability because:

A. technology may have reduced prices in the past, but this cannot continue indefinitely. This is wrong for obvious reasons, and I’m not sure why anyone would believe this in the first place.

B. some really confusing distinction between the rate of output and the rate of profit that really makes no sense. The argument appears to be that raising total output determines the rate of profit, even if price is not a factor.

C. that absolute prices are irrelevant. This is shockingly silly and breaks down the moment debt relations over time become involved.

D. the use of replacement cost valuation. Physicalists calculate profit rates based on the replacement cost of capital, not the actual price paid in the past. This is, again, entirely counter to the most basic notion of capital: that value is expanded through the process of production. Marxists are concerned with how value enters and exits the production process, and to do that requires looking at the initial costs incurred and how value expands over time. The physicalist model denies this and as such their “'profit’ is simply not surplus-value; it is the difference between the value of output and the inputs’ replacement costs at a single moment in time” (pp. 131)

Overall, I think this was a very interesting article and although I have some problems with it, I think the notion of contradiction between short and long-run profit rates is very telling. It allows us to think more clearly about relative declines in profit and how crisis can restore the system. The practical implications of this concept, including the ineffectiveness of Keynesianism, need to be explored more fully.