‘The Failure of Capitalist Production’ by Andrew Kliman — Part 1

First, I must say I liked this book. I think it is a major contribution to the debate about the nature not only of the latest crisis but of cyclical capitalist crises in general.

This book is a continuation of Kliman’s earlier book “Reclaiming Marx’s Capital” (Lexington Books, 2006), which deals with the so-called “neo-Ricardian” critique of Marx. But “The Failure of Capitalist Production” (Pluto Press, 2012) is more than that. In this book, Kliman deals with crisis theory, the main subject of this blog. He therefore casts a far wider net than he did in the earlier work.

Though Kliman builds on his earlier book, the main target of his critique shifts from “neo-Ricardians” to the “underconsumptionist” school of crisis theory and its main contemporary representative, the Monthly Review school.

Two main schools of crisis theory

I have explained that there are two main theories of the origins of capitalist crises vying with one another among present-day Marxists, both in print and online. (1) One is the theory of underconsumption. The underconsumptionists see the cause of the periodic economic crises under capitalism as lying in the “excessive” exploitation of the workers. In Marxist terms, underconsumptionism attributes crises and capitalist stagnation to a rate of surplus value that is too high.

That is, too high not only from the viewpoint of the workers but even from the standpoint of the interests of the capitalists themselves. According to the underconsumptionists, the capitalists are appropriating plenty of surplus value, but they cannot find enough buyers for the vast quantity of commodities they are capable of producing with the workers they are “excessively” exploiting.

The result is either acute economic crises at periodic intervals or long-term economic stagnation with many workers and machines lying idle, or some combination of both. The giant of underconsumption theory in the last century was the celebrated American Marxist economist Paul Sweezy. Sweezy founded and edited the socialist magazine Monthly Review, from which the Monthly Review school takes its name.

The underconsumptionist school’s main rival attributes periodic crises to Marx’s law of the tendency of the rate of profit to fall. This school sees the cause of crises as being the exact opposite of what the Monthly Review school and other underconsumptionists claim it is. The falling rate of profit school holds that it is an insufficient rate of surplus value that leads to acute capitalist economic crises and longer-term stagnation. Too little surplus value is produced, not too little from the viewpoint of the workers, of course, but too little relative to the needs of the capitalist system.

The best-known inspirer of the present-day “too little surplus value” school is the Marxist economist Henryk Grossman (1881-1950), who can be seen as the “anti-Sweezy.” The two men were opponents during their lifetimes, and they remain so after their deaths. Kliman does not mention Grossman in this book. However Kliman definitely belongs to the not-enough-surplus-value school of crisis theory. (2)

As I have explained, these two schools of crisis theory are completely opposed to one another. That is, as stated they both can’t be true. I believe that Kliman very much shares this assessment.

This is not just of academic interest, since the two theories lead to quite different political conclusions. The underconsumption theory implies that if a more equal distribution of the national income can be achieved under capitalism—in Marxist terms, a lower rate of surplus value—the problem of crises and chronic mass unemployment can be more or less overcome within the capitalist system.

Bleak prospects for bourgeois democracy

The not-enough-surplus-value school view, in contrast, implies that the only way out of a capitalist crisis is through an increase in the rate of exploitation of the workers. Here, too, the crisis problem might in theory be overcome within the framework of capitalism but only by greatly increasing the rate of surplus value. This, however, implies an explosive intensification of the class struggle with the implication that things either move towards socialist revolution or toward fascist-type dictatorships. If the falling rate of profit school of crisis theory is correct, the prospects for social reform and bourgeois democracy are bleak indeed.

Underconsumptionist theory offers hope for bourgeois democracy

In contrast, the underconsumption school implies a policy of reformism that aims not at overthrowing capitalism, at least not immediately, but rather at social reforms aimed at reducing the degree of capitalist exploitation. The underconsumption school sees a real possibility of reducing class contradictions within the framework of capitalism and therefore tends to take a far more optimistic view of the prospects of preserving bourgeois democracy for a considerable historical period to come.

Kliman versus Sweezy

In his new book, Kliman quotes from an article Paul Sweezy wrote at the very close of his long career as a Marxist economist (“Reminiscences,” Monthly Review, May 1995):

“If my analysis of the performance of the U.S. economy during the last sixty years is accepted, to what policy conclusions does it point? … public ownership of the means of production and planning to meet the needs of all the people [won't be] a serious option … any time soon. The question should therefore be reformulated: what could be done within the framework of the private-enterprise system to make it work better?” …

“The second indispensable change needed to make the private-enterprise economy work better is a redistribution of wealth and income toward greater equality. We live in a period in which an unprecedented and growing share of society’s income accrues to corporations and wealthy rentiers, while the share of the underlying population stagnates or declines. This implies a permanent imbalance between society’s potential for adding to its stock of capital and its flagging consumer power … Would the capitalist class as a whole, in extremis, be willing to give up half of what it has to save the other half? I have a feeling that the fate of the private-enterprise system may depend on the answer to this question.” (Kliman, p. 200)

This, squeezed into a couple of paragraphs, is indeed a brilliant summary by Sweezy of his entire life’s work. According to Sweezy, more and more of society’s income—in Marxist terms, surplus value plus wages—is going to the capitalists in the form of surplus value. The result is a growing gap between society’s ability to produce and its ability to consume. The inevitable outcome, according to Sweezy, is either growing economic stagnation in the form of a chronic unemployment of workers and machines or sharp periodic economic crises, or some combination of both.

This argument was developed by Sweezy in his early work “The Theory of Capitalist Development” and upheld later in “Monopoly Capital,” which he co-wrote with economist Paul Baran and defended over the decades in the many articles he wrote for Monthly Review magazine.

Sweezy’s intellectual opponent Henryk Grossman would, if he had been alive, have answered that a more equal distribution of wealth—that is, a lower rate of surplus value—will not lead to a better performance of the private-enterprise system, as Sweezy calls it, but to a far worse performance. A lower rate of surplus value will lead to acute economic crisis and soaring unemployment—that is, to a severe social crisis.

Sweezy pessimistic about prospects for socialism in advanced capitalist societies

Sweezy wrote the lines that Kliman quotes at a time of political reaction. The Soviet Union had just collapsed a few years before, and the media and mainstream bourgeois economists were glorying in the sun of the recovery—unimpressive though it was—of the U.S. economy from the crises of the 1970s and early 1980s. Though the Democrat Bill Clinton was in the White House, the Clinton administration was continuing the “neo-liberal” policies—called the “Washington Consensus”—most closely associated with the administration of Ronald Reagan. (3)

But Sweezy’s pessimism about the prospects for socialism in the United States and other highly developed capitalist countries did not simply reflect the dismal political climate of the 1980s and 1990s. At no time during his long life as a socialist economist, which began in the 1930s, had he ever seen a socialist transformation of U.S. society as a realistic possibility in the foreseeable future.

What Sweezy did hope for was a struggle for a renewal of the New Deal policies and politics that are associated with the Franklin D. Roosevelt administration. However, as the “Cold War” set in after World War II, Sweezy saw even such a renewal as increasingly unlikely. Back in the 1930s, left-wing New Dealers, who included in their ranks the young Paul Sweezy, had aimed to reduce the rate of surplus value by encouraging unionization, establishing unemployment insurance and having the government directly hire the unemployed the capitalists were unwilling to hire.

Reconciling the classes through increasing monetarily effective demand

The left-wing New Dealers believed that these measures would not only provide a way out of the Depression but would also reconcile, at least to some extent, the capitalists to the cause of New Deal-type social reform. Under the influence of Keynes, the left-wing New Dealers believed that if they achieved a fairer overall distribution of the national income by putting money into the hands of the workers and poor farmers, who would be expected to spend it rather than save it, there would be a rise in effective monetary demand.

Therefore, the social reformers believed, though the capitalists would be paying the workers higher wages, they would achieve higher rather than lower rates of profit because they would now be able to find buyers for the commodities they were capable of producing. The unemployed workers would benefit by finding jobs and the already employed workers would enjoy higher wages. Both the capitalist class and the working class would be the winners.

Rising class contradictions during the 1930s threaten bourgeois democracy

As the social crisis deepened in the 1930s, more and more people saw the choice narrowing down to either a dictatorship of the proletariat on the model of the Russian Revolution or a fascist dictatorship such as Hitler’s Germany. In contrast, the supporters of New Dealism were trying to salvage bourgeois democracy by reducing the intensity of the class struggle, thereby avoiding the extremes of either the Soviet or fascist types of dictatorship.

Though Sweezy like many other left-wing New Dealers was a supporter of the Soviet Union, he still hoped for a relatively peaceful democratic transition to socialism in the United States and other advanced capitalist countries. He believed that socialism would be the end product of a prolonged period of New Deal-type social reforms and not revolution and civil war on the Russian model.

Sweezy puts his hopes for socialism in the Soviet Union and then China

As Cold War reaction set in, Kliman explains, Sweezy put his hopes for socialism in other countries, first the Soviet Union and then Maoist China. Under the influence of Maoism in the 1960s, Sweezy became increasingly disillusioned with the Soviet Union, even calling it a new type of exploitative class society. However, Sweezy—unlike Mao and also Kliman himself (who is, however, no Maoist)—did not believe that the Soviet Union was “state capitalist.”

Sweezy lived to see the restoration of capitalism—private capitalism, not “state capitalism”—under Gorbachev and Yeltsin in the now former Soviet Union as well as China’s sharp turn toward capitalist economic development—again private capitalism and not “state capitalism”—under Deng Xiaoping and his successors. Sweezy was, of course, bitterly disappointed by these developments.

As readers of this blog or students of Sweezy himself know, Sweezy was influenced not only by Marx but also by John Maynard Keynes. From the 1930s onward, Sweezy had wrestled with the question to what extent the economic theories of Marx and Keynes are compatible.

Sweezy did not expect Depression after World War II

Unlike many members of the Communist Parties and the rival Trotskyist movement, Sweezy did not expect to see a return of the Depression after World War II. He assumed that the capitalist governments could—and in the future always would— increase government spending sufficiently to avoid that kind of debacle from ever happening again.

What disappointed Sweezy was not the absence of Depression leading to a socialist revolution but the fact that the greatly increased spending by the U.S. federal government—compared to the pre-World War II years—was not directed to New Deal- type social reforms leading to a more equal distribution of the national income but rather towards the building up of a vast permanent war machine that was used against any movement of national liberation not to speak of any attempt to build socialism.

The economic crises of the 1970s did shake Sweezy’s confidence somewhat in the ability of Keynesian policies to head off increasingly severe economic crises. In the final period of his life, Sweezy became fascinated with the phenomena of “financialization” and the related formula for interest M—M’, where money appears to increase its value without the intervention of the process of production, as opposed to the basic formula for capitalism M—C—M’, which implies the production of surplus value in the amount C’ minus C.

But Sweezy himself complained in his final years that he couldn’t quite bring it all together, something he blamed on old age. He clearly hoped that the new generation of Marxists would be able to accomplish this.

The historic events of 2008

The year 2008 is notable for two historic events. One was the election of the first African American president of the United States—an event long considered unthinkable considering the U.S.’s long history of African slavery, segregation and other forms of racism. The other event was the financial panic of that year. The two events are in fact closely connected.

In the American summer of 2008, polls indicated that the Republican candidate, John McCain, would probably be elected to succeed George W. Bush. This would confirm the continued dominance of neo-liberalism. As the 2008 presidential campaign began, the U.S. economy was mired in stagnation or mild recession, as it had been since the credit market crisis that began in August 2007.

That crisis broke out when Wall Street finally began to realize that a huge amount of mortgage-backed securities was in fact backed by mortgages many of which simply could not be repaid. But it was still widely assumed the U.S. Federal Reserve System would prevent an old-fashioned panic, much like it had done during earlier financial crises such as the stock market crash in 1987 and the collapse of the Long-Term Capital Management hedge fund in 1998.

Then, in mid-September 2008, suddenly and unexpectedly talks to rescue the crisis-ridden Lehman Brothers investment bank broke down. At the same time, Merrill Lynch—run by the folks who were bullish on America—was forcibly merged with the Bank of America, and the insurance giant AIG had to be virtually nationalized as were the government-sponsored mortgage discounters Fanny Mae and Freddy Mac. Credit froze up like it hadn’t done since the banking panic of 1933 just before Roosevelt assumed office.

Despite an unprecedented bailout of the banks at the expense of the taxpayers, the U.S. economy along with the world economy as a whole promptly went into a tailspin. Under these extraordinary conditions, the tide of the election swung sharply towards the Democrats. Keynesian economics was suddenly back in fashion and the Democratic Party—the party of Roosevelt’s New Deal—found itself in control of both houses of the U.S. Congress as well as the White House. Progressives believed that the long nightmare of “neo-liberalism” was finally over.

Was the reign of neo-liberalism really over?

Monthly Review called for a revival of the economics not of Karl Marx but of John Maynard Keynes. Though the prospects of a socialist transformation of U.S. society seemed as distant as ever to the Monthly Review editors, a new New Deal appeared to be finally at hand. The years that followed have been years of bitter disappointment for both the editors of Monthly Review and anybody else who had hoped for a revival of New Deal politics in the U.S.—especially those who viewed the New Deal through rose-tinted glasses.

Since the election of Obama, there has only been the most feeble recovery of the U.S. economy—far less than the one between 1933 and 1937 in the days of Roosevelt’s original New Deal. While Obama did launch a “stimulus program,” it did not include any WPA-style direct hiring of the unemployed by the federal government. (4)

While the midterm election of 1934 under Roosevelt’s original New Deal saw historic gains for the Democratic Party, the election of 2010 put the Republicans back in control of the U.S. House of Representatives, increased their representation in the Senate, and seemed to position the GOP to take back the White House in the election to be held later this year.

Only two years into Obama’s administration, American politics seemed to be returning to the neo-liberal groove that they have been stuck in since the election of Ronald Reagan in 1980.

In response to the disappointment with both the Obama administration and the Democrats in Congress, beginning in September 2011—the third anniversary of the panic of 2008—the Occupy Wall Street movement was born. Young people particularly were disgusted that the 2008 election had apparently done nothing after all to shake the dominance of the 1 percent.

Keynesian Marxist narrative

The followers of the Monthly Review school—which I have described as Keynesian Marxist, because they combine, or attempt to combine, the ideas of Marx and Keynes—have increasingly contrasted the prosperous years after World War II with the “stagnation” of the neo-liberal years from the 1980s onward. Their story goes something like this.

The Roosevelt administration, partly under pressure from below, broke the back of Wall Street’s “finance capital” that dominated U.S. capitalism during the 1920s. Under Roosevelt, a coalition of industrial corporations, labor, and African American organizations—strongly supported by the U.S. Communist Party—saw to it that the Roosevelt administration followed a path of Keynesian demand management that made recovery from the crisis of 1929-33 possible at all.

Then the massive war spending of World War II, acting as a giant Keynesian stimulus program, finally restored genuine economic prosperity. After World War II, the above coalition—without the Communist Party—was able to keep various U.S. administrations, Democratic and Republican alike, on a path of Keynesian demand management that enabled the U.S. economy to operate at near “full employment.”

In this “golden era,” largely freed from the yoke of Wall Street and “finance capital,” the industrial corporations made the high profits that the strong demand for their products made possible, and the workers benefited from the near to full employment and a considerable rise in wages and social insurance. It wasn’t perfect—there was far too much reliance on military spending, for example—but it was a lot better than either the Depression or what was to follow the “golden era.”

Unfortunately, as this narrative goes, the forces of Wall Street “finance capital” regained control of the U.S. government, perhaps beginning in 1980 with the election of the ultra-right-wing Republican candidate Ronald Reagan, and completed their takeover with the repeal of the Glass-Steagall Act in 1999 under the Clinton administration.

Turning their backs on the Keynesian program that worked so well in reconciling the interests of the capitalist class and the working class, Keynesian “full employment” policies were ditched and “tight money” policies were imposed that enriched the financial sector at the expense of all other sectors of society, including much of the rest of the capitalist class.

The result of these policies has been growing economic stagnation and finally the “Great Recession” of 2007-09 with little real recovery since. But, the “underconsumptionists” argue, there was and is nothing economically inevitable about these policies and the resulting stagnation and financialization under present-day capitalism. If the “income redistribution” policies of the New Deal and early post-World War II period can be restored by an alliance of industrial corporations and a revived trade union movement, the African American movement and the new Occupy movement—presumably achieved in the U.S. through the Democratic Party—the economy can be restored to the “approximately” full employment of the post-World War II years.

This wouldn’t be socialism, but the “private-enterprise system” would work far better for the industrial capitalists and the workers alike than it has over the last 40 years of neo-liberalism. (5)

It is this narrative that Kliman subjects to devastating and I believe quite convincing criticism in his book. Kliman shows that the U.S. economy began to deteriorate in the 1970s before the “neo-liberals” won their decisive initial political victory with the election of Reagan in 1980. Indeed, as Kliman explains in his book, it was the failure of Keynesian-inspired policies to deal with the growing economic crisis of the 1970s that led to Reagan’s victory in the first place.

Failure of Keynesian economics

Keynesian economics is based on the claim that under capitalism you can have inflation—demand exceeding supply at full employment—or stagnation—unemployment of workers and machines—but you cannot have both at the same time. According to Keynesian theory, if you have stagnation the government and central bank should move to increase effective demand by having the central government run deliberate deficits while the central bank—or monetary authority—expands the quantity of money to lower interest rates.

If you have inflation, the government and central bank should do the opposite. That is, the government should move to reduce the extra demand that is driving inflation by running budgetary surpluses, and the central bank should raise the rate of interest by reducing the rate of growth of the quantity of money.

During the post-World War II “boom”—or more strictly series of booms—the Keynesian economists “explained” that while there had been “great” economic booms under capitalism, this “boom” was different because it had not emerged from the natural operations of the “business cycle”—what Marx called the industrial cycle. Unlike in the past, the new prosperity came about because the capitalist governments had finally learned from Keynes how to control, and just maybe eliminate, the “business cycle” altogether.

Marxism ‘refuted’ by postwar boom

Therefore, the Keynesian economists claimed, unlike past booms the post-World War II boom could be expected to last effectively forever—and so would capitalism. Through the work of Keynes, the Keynesian economists argued, Marxism had finally been refuted. The author of “Capital,” the Keynesians claimed, had overlooked or simply not foreseen the possibilities of Keynesian “demand management.” This was indeed the prevailing “orthodoxy” by the 1960s, the years of my own youth.

A gentler and kinder capitalism?

As we saw above and elsewhere in this blog, Sweezy did not really challenge this view. Indeed, he accepted its basic assumptions. He claimed, however, that government spending was being directed toward war—like the war against Vietnam in the 1960s—and other forms of “waste” rather than constructive New Deal-type social programs that would benefit the working-class majority.

Not only Sweezy but many other Marxist economists accepted to varying degrees the basic validity of Keynesian economics. Yes, Keynesian capitalism was still capitalism and it was still at the end of the day based on the extraction of unpaid labor—surplus value—from the working class. But it was a kinder and gentler form of capitalism compared to the capitalism of the pre-Keynes era.

In the future, these types of post-World War II Marxists explained, capitalism would still experience “recessions,” since “demand management” wasn’t perfect and government and central banks would still make “mistakes” and fail to create sufficient demand.

This would be especially likely if the voters made the mistake of electing right-wing rather than liberal or social-democratic governments. But even the most right-wing government, these Marxists assured us, would turn to the anti-crisis Keynesian demand-management “tool chest” and see to it that no really “grave” economic crisis would occur.

Then, in the years after the collapse of the Bretton Woods international monetary system, starting with collapse of the “Gold Pool” in 1968, came accelerating inflation, declining rates of growth, and severe recessions with their associated mass unemployment. The combination of soaring inflation and mass unemployment—held impossible in Keynesian theory—led to the first fall in real wages in the United States since the “bad old days” before World War II.

Right wing blames ‘government central planning’ not capitalism for the crisis

In light of what the post-World War II Marxists like Paul Sweezy were writing, Marxism appeared to many as simply the left wing of the dominant Keynesian school. The political and economic right wing saw its chance. It proclaimed that “government planning” inspired by Keynes—and Marx—rather than any internal contradictions of the capitalist economy had caused the 1970s economic crisis. Or as Ronald Reagan put it, “government is not the solution to our problem; government is the problem.”

The followers of Milton Friedman explained away the Great Depression by claiming that this earlier capitalist crisis had also been caused by “government central planning”—in the form of the blundering policy of the U.S. Federal Reserve Board—a government agency. If only “the Fed” had not stupidly reduced the money supply by one-third—but then what can you expect from government “bureaucrats”—there would have been no Depression, the right wing claimed.

The Friedmanites argued that in the 1920s the U.S. economy had been in great shape with low unemployment, no inflation and strong productivity growth. Minus the government interference in the form of the Federal Reserve Board, the “neo-liberals” claimed, there would have been no Depression, and prosperity would have continued.

The Keynesians—and Keynesian Marxists—had trouble answering these arguments. Friedman gained great authority by pointing out the obvious fact that the soaring inflation was caused by the inflationary policy of the Federal Reserve Board, while the Keynesians either claimed that inflation was caused by “strong trade unions” that were driving up money wages, or tried to explain it away by special factors such as the rise in oil prices brought on by the “OPEC cartel.” [see posts on Keynes]

Voters, seeing that the Keynesian-inspired “left” had no solution to the crisis, turned instead to the right, which claimed that it had a solution. As a result, politics swung far to the right and the world entered a period of prolonged reaction that it is struggling to emerge from today.

Kliman fears that if the left once again puts forward a program that amounts to little more than warmed over New Dealism and Keynesianism, the way will be opened to a new era of extreme reaction. This time, Kliman warns, it might not take the form of “Reaganism” but something more like the European fascism of the 1930s.

The influence that the ultra-right followers of Texas Republican congressman Ron Paul—a man who rejects all forms of democracy including bourgeois democracy— have gained in some sections of the Occupy movement illustrates Kliman’s point. We can ignore Kliman’s warnings only at our extreme peril.

Today, Keynesians, including many Keynesian Marxists, seem to have forgotten that there even was an economic crisis in the 1970s. Instead, they pretend—or perhaps even believe—that the crisis of 2007-09 was the first real economic crisis since the Great Depression. Unlike the 1970s, the latest crisis was not accompanied by the soaring inflation rates of the 1970s—that may yet come at the next stage—and the Keynesians feel they are back on familiar ground.

Left Keynesians, backed up by Keynesian Marxists, are saying that governments should step up their spending and borrowing and the central banks should further expand the money supply until something like “full employment” returns. Until that point is reached, Keynesians and Keynesian Marxists argue, there is no real danger of inflation.

Kliman’s alternative explanation of the recent crisis

According to Kliman, it was a falling rate of profit bought on by a rise in the organic composition of capital that brought the postwar boom to an end in the 1970s. However, Kliman does agree that Keynesian economic policies did manage to prevent a full-scale repeat of the 1930s Depression in the 1970s and early 1980s and again during the recent “Great Recession.” Now, that is better than nothing, isn’t it?

The problem, according to Kliman, is that it is exactly through the destruction of capital that the rate of profit is restored after a prolonged period of a declining rate of profit brought on by a rise in the organic composition of capital preceding the crisis. Kliman indeed does not believe that the long-term trend in the rate of profit is downward and even claims that this was also Marx’s view.

According to Kliman, if I understand him correctly, the specific function of crises is to restore the rate of profit through the destruction of capital and therefore to prevent the rate of profit from falling over the long run. Therefore, if Keynesian-type economic measures succeed in limiting the amount of capital that is destroyed during a crisis, the economy will fail to fully recover from the crisis.

I believe, contrary to Kliman, that Marx did indeed believe that the rate of profit would fall—and indeed already had fallen compared to what it had been in early capitalism before his own day—but that this fall manifested itself only over long periods.

A weakness in Kliman’s book, in my opinion, is that he makes no attempt to examine the pre-1929 crises. Kliman is correct to point out that no crisis since World War II has been as severe as what I call the super-crisis of 1929-33. But it is also true that no crisis before that crisis came close to equaling the crisis of 1929-33. Kliman seems to think that 1929-33 was a typical capitalist crisis. But if it wasn’t—and virtually all statistical analysis of pre-1929 capitalism indicates that it wasn’t—how did capitalism stave off the fall in the rate of profit before the crisis of 1929?

Kliman’s analysis

Returning to Kliman’s analysis, Keynesian policies both in the 1970s and during the most recent crisis prevented the destruction of capital on a scale such as to restore the rate of profit sufficient to make possible a return to full-blooded capitalist prosperity. The result, he argues, has been, in effect, to transform the law of the tendency of the rate of profit to fall into the law of the falling rate of profit—at least for a certain historical period beginning in the 1970s. This is the nub of Kliman’s analysis of the current long-term crisis of capitalism. (6)

Kliman believes that from the 1970s onward, there have only been very slight and short-lived recoveries in the rate of profit and provides statistical data that he believes proves this. As a result, there has been no return to post-World War II-style capitalist prosperity. Until there is a destruction of capital on a scale comparable to that of the 1930s—or even the 1930s plus the additional destruction of capital during World War II—there will be no real capitalist prosperity.

Future prospects

Kliman believes that there are two possibilities for capitalism’s future. One is that Keynesian policies continue to prevent a full-scale repeat of the Depression. The rate of profit fails to recover and low growth continues, interrupted from time to time by severe recessions.

Or, eventually, there will be a crisis on the scale of the Depression of 1930s or maybe even worse that finally destroys capital on a sufficient scale followed by a recovery in the rate of profit. In that case, a new era of capitalist economic prosperity will set in, a new rise in the organic composition of capital will occur and the rate of profit will again fall leading to a new crisis sometime in the future.

However, Kliman fears that before such a crisis, through the mass destruction of capital and consequent recovery in the rate of profit, leads to a new prosperity, the crisis in the absence of a socialist transformation will likely lead to an extreme political reaction that might resemble 1930s-type European fascism more than it resembles the policies of Ronald Reagan and Margaret Thatcher, bad as they were.

The only way out of this impasse is to replace capitalism with socialism. Therefore, “capitalist production has failed.” Monthly Review-style Keynesian Marxism with its false perspective of a new New Deal to once again save bourgeois democracy is a dangerous diversion.

Unlike the Monthly Review’s hopes, Kliman’s analysis provides no hope Keynesian demand management will be able to restore the prosperity of the post-World War II period—or other periods of great capitalist prosperity—and on that basis reconcile the conflicting interests of the working class and the capitalist class. The only real way out is to replace capitalism with socialism.

Marx’s law of the tendency of the rate of profit to fall

Marx’s law of the tendency of the rate of profit to fall is therefore at the center of Kliman’s analysis. This would explain why before he wrote the current book he devoted a separate volume to refuting the “neo-Ricardian” claim that Marx’s law of the tendency of the rate of profit to fall was invalid. Kliman’s current book on crises can therefore be seen as Volume II of a single work.

Let’s briefly review Marx’s law of the tendency of the rate of profit to fall. Marx called it the most important law of political economy. In Volume III of “Capital,” Marx showed that assuming the rate of surplus value—the ratio between paid and unpaid labor—remains unchanged, the rate of profit will fall as the organic composition of capital rises. Marx assumed that workers work half of the work day for themselves—reproducing the value of their labor power—and the other half free of charge producing surplus value for the capitalists.

Marx showed that a rate of surplus value of 100 percent can express itself in many different rates of profit depending on what Marx called the organic composition of capital. The organic composition of capital is the ratio of what Marx called constant capital, which includes all the productive capital except for the purchased labor power of the workers. The purchased labor power of the workers is the variable capital that actually produces the surplus value.

Marx made several assumptions for reasons of simplification—not because he believed that this was true in reality: that all commodities find buyers (there are no realization problems), the rate of turnover of (variable) capital is fixed, and all commodities sell at their prices of production. The sum total of the prices of production is assumed to be identical to the sum total of their direct prices. The rate of profit measured in terms of value—or what comes to exactly the same thing, in terms of embodied abstract human labor—is assumed to be identical to the rate of profit in terms of prices of production.

Marx demonstrated that assuming the ratio of constant capital to the variable capital rises—every other variable remaining unchanged—the rate of profit will decline. Marx then explored various forces that counteract the fall in the rate of profit. The most important of these are a rise in the rate of surplus value and the cheapening of the elements of constant capital—auxiliary and raw materials plus fixed capital such as buildings and machines. These and other offsetting factors transform the law of the falling rate of profit into the law of the tendency of the rate of profit to fall.

However, the lowering of the value of constant capital due to a fall in the labor value of the constant capital—called moral depreciation by Marx—is a double-edged sword. To the extent that the constant capital experiences a moral depreciation, a portion of the value of the constant capital will not be transferred to the final commodity product but is destroyed. These losses must be taken into account when calculating the actual rate of profit.

Marx separated these contradictory effects by assuming that after the organic composition has risen, it then stops rising. He shows that once the organic composition has risen and all the transitional effects brought on by the moral depreciation of capital have been fully absorbed—assuming that the rate of surplus value is still 100 percent—the rate of profit will be lower than before. It is important to realize that Marx is assuming a constant rate of surplus value—or value of the commodity labor power—and not a constant real wage like the authors of the neo-Ricardian Okishio’s theorem do.

The naive falling rate of profit crisis theory

The most naive form of the falling rate of profit crisis theory is that the rate of profit progressively falls within each industrial cycle as the organic composition of capital rises until the rate of profit has fallen so low that the capitalists cut back their rate of investment, since the low rate of profit no longer justifies the risk and bother of investing in new factories and equipment and hiring more workers. The period leading up to a crisis, according to the supporters of the naive falling rate of profit school, is therefore not a period of the overproduction of commodities but rather a period of falling rates of profit.

Eventually, as the rate of profit keeps falling, there are fewer fields of investment that yield the minimum rate of profit that the capitalists are willing to accept. Hence, there is an overaccumlation of capital relative to the fields of available investment that yield the minimal acceptable rate of profit. Once investment starts to fall, an overproduction of commodities does appear, but according to the naive falling rate of profit school this overproduction of commodities is the result, not the cause, of the crisis.

Kliman does not hold to the naive version of the theory. He notes that the rate of profit actually rose just before the crisis of 2007-09 broke out, for example, something it should not have done according to the naive falling rate of profit theory. What Kliman believes happens is that as the rate of profit falls within a particular industrial cycle, the economy becomes more vulnerable to crisis. More and more businesses are operating at the edge, making barely enough profit to survive. These growing difficulties are papered over by the growing inflation of credit.

But the inflation of credit can only go so far. Eventually, the bubble bursts and the crisis is on. The immediate cause of the crisis, therefore, is a crisis in the credit system. Of course, the chain of payments, like any chain, will break at its weakest link. In the crisis of 2007-09, the weakest link was in the area of residential mortgage credit.

But according to Kliman, the crisis of the credit system was not the real cause of the crisis, nor was the overproduction of commodities the real cause. The real cause of the crisis was the relentless fall in the rate of profit brought on by the rise in the organic composition of capital during the preceding boom.

This, by the way, if I understand him correctly, is why Kliman does not believe the rate of profit has actually fallen over the history of capitalism. If it had, capitalism, according to his logic, would have never fully recovered from its very first crisis. If we apply Kliman’s falling rate of profit theory to the first modern capitalist crisis—the crisis of 1825—in the period preceding that crisis, the rate of profit was already so low that capitalism could barely function.

As a result, in 1825 all it took were some problems involving gold drains and the credit system to trigger capitalism’s first modern economic crisis. If the rate of profit had drifted even lower in the coming decades, capitalism would have effectively been crippled. But as Kliman demonstrates, capitalism continued to develop with great vigor—despite its periodic crises—in the years after 1825, only showing signs of getting bogged down from the 1970s onward. Therefore, Kliman quite logically draws the conclusion that there is no actual lasting downward movement of the rate of profit—at least before the 1970s.

How should we measure the rate of profit?

In Kliman’s analysis, the rate of profit is therefore the crucial variable that determines the fate of capitalist production. But how exactly should we measure the rate and mass of profit? The answer to this question, as Kliman explains, is not as straightforward as it may seem. Here Kliman’s latest book represents a continuation of his earlier book against the “neo-Ricardians.”

If you ask an ordinary businessman how he measures his profit, he will answer that this is very easy to explain. Why we businessmen measure profit in terms of money. At the beginning of the year, I know my total capital is a certain value measured in terms of money. By value I mean my estimate of the amount of money I would get if I decided to sell all my assets—factories, machines, stocks of raw materials, and inventories—for money and decided to lay off all my workers rather than spend the money I lay aside for payment of wages to provide employment for my workers. My accountants then come up with a monetary figure that represents the value of my capital at the beginning of the year.

At the end of the year, our businessman explains, I have used up a portion of the value of my capital. This includes the wages I have paid my workers, the raw materials I have used to make my products, plus my electricity expenses, and so forth. In addition, I have to make allowances for depreciation on my fixed assets— factory buildings, machines and so on. My accountants will estimate for me the amount of capital I use up in a year including the amount of money I spend on labor. When I sell my products, their prices must cover these expenses plus an additional sum that I must add on that represents a reasonable profit. If I don’t make such a profit, I won’t be able to stay in business and provide continued employment for my workers.

So, we ask our businessman, you measure profits in terms of money. Yes, that is exactly what I do, he answers. But what exactly is the money that you measure your profits in terms of? Well, our businessman scratches his head, isn’t it that stuff produced by the Federal Reserve System—it’s green with pictures of dead presidents on it. Or maybe it is also the bank accounts. Yes, I think the economists say money is also the accounts created by the commercial banks through their loans.

Frankly, our businessman continues, I never really did understand that economic stuff. I am only a practical man. The only thing I know is that I must make money or go out of business. That is something that those who complain about the “greed” of us businessmen refuse to understand. Running a business is hard enough without having to worry about philosophical questions such as what the nature of money is. I leave that to the economists whose job it is to concern themselves about such matters.

The naive Marxist

Now let’s ask a naive Marxist. You know the type, a young person who has joined a socialist group, attended a few classes in Marxist economic theory and assumes that he or she has now fully mastered the subject. (7)

Our young socialist explains that Marx said labor alone creates value. Therefore, profit is simply the unpaid labor produced by the working class. Since prices are determined by value, money merely reflects the values of commodities. Therefore, when your businessman—I would call him a capitalist exploiter—explained that he measures profits in terms of money, what he is really saying is that profits are measured in terms of labor, which is measured in terms of time. Your businessman is really measuring profit in terms of the unpaid labor that he has forced his workers to perform, whether he knows it or not.

The neo-Ricardian professor of economics

Now let’s introduce into the discussion a radical professor of economics of the neo-Ricardian—or “physicalist,” as Kliman calls them—school. Our “physicalist” says to our young socialist, you know I am very much in favor of socialism just like you are. But is your socialist organization still teaching you the labor theory of value? Don’t they know that Marx’s—and Ricardo’s—theory of labor value has long since been refuted by us radical economists. We have shown that the rate of profit in terms of labor is not the same as it is in terms of money.

These results have been mathematically proven beyond all doubt. The rate of profit is not determined by the surplus value divided by the total value of capital times the turnover period of variable capital, as Marx believed, but by the real wage plus the physical conditions of production. Therefore, profits are really measured in terms of the physical product that is produced by capitalist industry.

You will understand this, our neo-Ricardian professor of economics explains to our young socialist, when you master mathematics rather than waste your time with an introduction to Marxist economics class taught by well-meaning but ignorant socialist organizers. Math, our young socialist answers, why I hate math and anyway I am far too busy organizing!

Next month, how should we measure the rate of profit?

_______

1 Historically, there was one other school of crisis theory, the school that claims that crises are brought on by disproportionate production. At present, the disproportionality theory of crises appears to have little support.

2 Kliman is a follower of the American Marxist Raya Dunayevskaya (1910-1987). Dunayevskaya was born in the Ukraine of Jewish parents and was brought to the United States by her parents as a young girl in 1920. During her teenage years, she became an enthusiastic supporter of the Russian Revolution, the Third International and the American Communist Party. In 1928, however, she broke with the leadership of the Comintern and the U.S. Communist Party and became one the first Americans to take up the cause of Leon Trotsky.

A Trotskyist during the 1930s, Dunayevskaya broke with Trotsky in 1939 over his support of the Soviet Union in the Soviet-Finnish winter war of 1939-40. She supported a breakaway group from the Trotskyist movement that refused to support the Soviet Union in any way whatsoever. The majority of these breakaway “Trotskyists”—Trotsky himself disowned them—claimed that the Soviet Union represented a new kind of class society unforeseen in Marxist theory, which they dubbed “bureaucratic collectivism.” However, Dunayevskaya, working with the far better-known West Indian Marxist CLR James, developed a theory that the Soviet Union represented “state capitalism.”

Dunayevskaya argued that since the Soviet state was engaged in competition with other capitals on the world market, it represented a single capital that brutally exploited the Soviet workers. Therefore, she reasoned, though there was little private ownership, the Soviet economy was fully subject to the operations of the law of value, and the Soviet economy was a capitalist economy in the full sense of the word.

But because the Soviet state owned most of the means of production, Dunayevskaya called the Soviet economy “state capitalism” to distinguish it from traditional capitalism where private ownership of the means of production predominates. Dunayevskaya believed that the Soviet economy was simply the most extreme example of a general evolution of capitalism from private capitalism to “state capitalism.”

Dunayevskaya, along with CLR James, briefly rejoined the main wing of the U.S. Trotskyist movement—the one that had been supported, though not without some friction, by Trotsky himself—but then split with it a second time forming their own group. Shortly thereafter, James and Dunayevskaya split and Dunayevskaya formed what she called the Marxist-Humanist current. She became increasingly critical of not only Trotsky but Lenin as well, coming to reject Lenin’s idea of a vanguard party of the working class that leads the working class to power.

Over the years, Dunayevskaya wrote many articles on politics, philosophy, problems of women’s liberation and economics including on crisis theory. Dunayevskaya like the far better-known Grossman strongly defended the view that crises stem from the tendency of the rate of profit to fall due to the rising organic composition of capital. Kliman’s views, though similar to Grossman’s, draw their immediate inspiration from Dunayevskaya, not Grossman.

3 Reagan, a professional movie actor with a political bent was himself a strong supporter of FDR’s New Deal and his Democratic Party. However, during the witch hunt in the late 1940s, Reagan “named names” in order to save his acting career. Having thus burned his bridges with the “progressive wing” of U.S. politics, Reagan then quickly evolved to the right and became a supporter of the extreme right wing of American capitalist politics. Reagan, who had been a strong “liberal” in the American sense of the world, ended up an extreme “neo-liberal,” or in American parlance an extreme conservative.

4 The WPA—short for Work Projects Administration—was a New Deal program that hired the unemployed directly and put them to work on many useful public works projects, many of them still in use today.

5 In its December 2011 issue, Monthly Review published an article by Richard Preet, professor of geography at Clark University, Worcester, Massachusetts, along these lines. “Resolving finance capitalism’s dilemmas,” Preet concludes, “would require state redirection of income distribution, investment, and economic development.”

While Preet calls this a “stronger version of democratic socialism,” he means a stronger form of New Deal or Popular Front-type reformism designed to break the power of finance capital over the U.S. and world capitalist economy and not a socialist revolution in the traditional Marxist sense of the world.

The now very small U.S. Communist Party is also strongly committed to achieving a new New Deal through electing as many Democrats as possible, which is seen as a step towards a gradual democratic evolution toward socialism in the U.S. The party has long since repudiated the idea of leading a Russian-type revolution in the United States.

The U.S. Communist Party shares Professor Preet’s view that finance capital lost power under Roosevelt but regained power under Reagan and used its regained power to ditch Keynesian-type economics in favor of the neo-liberal policies that led to the recent crisis.

6 By long-term crisis of capitalism, I mean that long-term period of reduced growth that began in the 1970s and not short-term periods of absolutely falling production and employment such as occurred in 2007-09 that represent short-term cyclical crises or “recessions” in the industrial cycle. Still, even Kliman makes some distinction between the “Great Recession” proper and what he calls the “failure” of capitalist production that began in the 1970s.

7 These are the kind of people for whom the expression a little knowledge is a dangerous thing was invented.

12 Responses to “‘The Failure of Capitalist Production’ by Andrew Kliman — Part 1”

  1. Nathan Tankus Says:

    “Keynesian economics is based on the claim that under capitalism you can have inflation—demand exceeding supply at full employment—or stagnation—unemployment of workers and machines—but you cannot have both at the same time. According to Keynesian theory, if you have stagnation the government and central bank should move to increase effective demand by having the central government run deliberate deficits while the central bank—or monetary authority—expands the quantity of money to lower interest rates.”

    are you talking about keynesian economics or the economics of keynes? for the former this may be true but i don’t think this is true of the latter.

  2. duvinrouge Says:

    A brilliant example of the importance of crisis theory & political strategy.

  3. don Says:

    Very well written, in a non-academic style.

    I’d like to hear your thoughts on the latest wave of neo-Keynesian thinking: Modern Monetary Theory.

  4. Ross Wolfe Says:

    Dear Mr. Williams (the author of this blog),

    My name is Ross Wolfe and I am a member of the Platypus Affiliated Society. Our organization, established December 2006, arranges reading groups, public fora, research, and journalism focused on problems and tasks inherited from the “Old” (1920s-30s), “New” (1960s-70s), and post-political (1980s-90s) Left for the possibilities of emancipatory politics today.

    As part of our organization’s upcoming International Convention in Chicago this year, we are planning to host a panel on Marxist interpretations of the present world crisis in capitalism. I am writing to invite you to serve as a panelist in this discussion, as we feel that you provide a valuable perspective within this debate, given your work on both the crises of capitalism and the various Marxist attempts to theorize them. The panel is scheduled for Saturday, March 31st. Other invitees for this discussion include:

    1. Gugliemo Carchedi, 2. David Harvey, 3. Andrew Kliman, 4. Bertell Ollman, 5. Nicole Pepperell, 6. Moishe Postone, 7. Anwar Shaikh, 8. Immanuel Wallerstein, 9. Yourself (Sam Williams), and 10. Richard Wolff

    We can provide arrangements to pay for your transport to and from and lodging during the convention. Would this work, and do you think you might be interested?

    Best,
    Ross

    P.S.: You can e-mail me at rosslaurencewolfe@gmail.com if you would rather respond in that way.

  5. Forget “Going for growth” neither Hayek nor Keynes can save Capitalism | The Multicultural Politic Says:

    [...] ‘anti-capitalists’ advance essentially such ‘trickle-up’ theories of economic growth (see this review of Kilman’s book ‘The Failure of Capitalist Production). To do so is to admit that [...]

  6. Tom Says:

    Kliman states “…U.S. workers are paid more now, in inflation-adjusted terms than they were paid a few decades ago and their share of the nation’s income has not fallen,” (p. 12).

    This is true if you use the average level of wages or compensation. But this is true because of increasing skewness of a positively skewed distribution (which is what income is). The rise of executive compensation and high income “workers” (capitalists, lawyers, hedge fund managers) who receive a “wage income” (in the $millions) could result in an apparent rising level of wages and a stable capital/labor income share.

    I don’t have it handy, but I’ve run models of revolving credit/GDP and earnings inequality and shifts in earnings inequality precede positive shifts in revolving credit/GDP. Anecdotal evidence from credit card offers I received pre-2008 often contained appeals to unstable income in the marketing materials. Thus, the potential underconsumption before 2008 was likely solved by the expansion of revolving credit (credit cards) and the expansion of 2nd mortgages. This collapsed in after the crisis.

    I find Kliman’s book (thus far) to be fascinating though. However, I think what happened is that the non-financial sector rate of profit used to move in sync with the financial sector and by 1980 they diverged where the non-financial sector saw a recovery of its rate of profit after the 1974-5 “wealth crash” (as Harvey calls it) while the non-financial sector did not (and I am working off the current-cost and not the historical that Kliman suggests) I believe that neoliberalism was mostly an ideology that fed policies aimed at restoring the economic enrichment of the capitalist class under a state capitalism. The unique mixture of Vietnam defense spending —-> inflation —-> blame working class —–> punish working-class (Volcker’s FED) combined with supply-side tax cuts led to the rise of the Wall Street financial sector. Seymour Melman’s work on how Pentagon spending ultimately “depleted” U.S. mfg. infrastructure could be responsible for the falling rate of (current-cost) non-financial sector rate of profit by the late 1960s (I think it was 1966 q2 or 3 that it peaked). The tax cuts provided the opening for Wall Street bond traders to make massive “capital gains” by the mid-1980s (in addition to the influx of foreign capital–Japan–purchasing Treasuries) that allowed Reagan to continue the Pentagon Capitalism while empowering Wall Street on the other hand.

  7. allan harris Says:

    The “naive” Marxist says, “Our young socialist explains that Marx said labor alone creates value. Therefore, profit is simply the unpaid labor produced by the working class.” Well, didn’t the original Marx say that profit is the unpaid value produced by the labor of the working class?

  8. Allan Miller Says:

    Small question: shouldn’t the reference to C’ – C below be in fact C – C’ ? Or am I misunderstanding something? Thanks for the outstanding blog.

    The economic crises of the 1970s did shake Sweezy’s confidence somewhat in the ability of Keynesian policies to head off increasingly severe economic crises. In the final period of his life, Sweezy became fascinated with the phenomena of “financialization” and the related formula for interest M—M’, where money appears to increase its value without the intervention of the process of production, as opposed to the basic formula for capitalism M—C—M’, which implies the production of surplus value in the form of C’– C.

  9. Jon B Says:

    The sentence Allan Miller quotes was easy to misread and has been revised. The phrase should be: “…which implies the production of surplus value in the amount C’ minus C.”

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