Capitalist Economists Debate ‘Secular Stagnation’ (Pt 3)

Secular stagnation and the Greek crisis

Many on the left have expressed acute disappointment that the Syriza government has agreed to accept more “austerity” in the wake of the No! vote of the Greek people. We must remember that the Syriza government is not a revolutionary socialist government—a dictatorship of the proletariat—and a socialist revolution is not, or rather is not yet, unfolding in Greece or anywhere else in Europe at the moment. The logic of the class struggle does point in the direction of a European socialist revolution, but we are not yet there. This blog will not attempt to lay out strategy and tactics for Greek revolutionaries during the present acute crisis.

Instead, I am interested in another question: Why is the “troika” so unreasonable in its dealings with the Syriza government? The government leaders have made it clear that they are determined to remain within the European Union and the Eurozone. Their program has always been quite modest—an end to the relentless austerity that has led to a depression worse in terms of both the unemployment rate and duration than the early 1930s super-crisis was in the United States or in Germany.

The super-crisis proper of the early 1930s lasted “only” three and a half years in the U.S. and Germany. The Greek crisis has lasted six years. A brief rise in the Greek GDP late last year had already given way to renewed recession before the crisis that shut down the Greek banking system for two weeks. The agreement between Syriza and the troika for still more austerity in exchange for loans that will enable the gradual reopening of the Greek banks threatens to further prolong the Greek slump.

It has been almost 50 years since the May-June 1968 General Strike in France. The French government of the day, headed by General Charles de Gaulle, largely conceded the economic demands of the strikers in order for the ruling class to hold on to power. The French government was prepared to do this through civil war if necessary. De Gaulle’s willingness to wage civil war to uphold capitalist rule combined with a willingness to make concessions in the economic sphere prevented a prolonged social and political crisis in France in 1968 of the type that is now unfolding in Greece. Why isn’t the troika, the de Gaulle of today, following the same policy for Greece that worked so well for de Gaulle and the French capitalists in 1968?

Last week, in a special post on Greece, I explained that behind the hard-line policies pursued by the troika lies the current “tightening” phase of the U.S. Federal Reserve Board monetary policy. This tightening phase is, in turn, rooted in the extraordinary policy of “quantitative easing” that the Fed followed in response to the near collapse of the U.S. banking system in the fall of 2008. But they could not continue this policy indefinitely without incurring a fatal crisis of the dollar system sooner or later.

As the quantity of U.S, dollars has begun to grow relatively more scarce than in the years of quantitative easing, there have been a few shocks—for example, the recent Chinese stock market panic. But for now, the crisis in Greece is the most dramatic. So in order to understand the deep roots of the Greek crisis and the troika response to it, we have to understand the causes of the crisis of 2008 and the quantitative easing it led to. The “Great Recession” itself was embedded in a more chronic problem of prolonged slowing economic growth that economist Larry Summers calls “secular stagnation.”

It is a basic law of competition that periods of reduced economic growth cause increased competition—among individual capitalist corporations, capitalist nations and capitalist industries, and above all, between the buyers and sellers of the commodity labor power. When the pie is growing rapidly, everybody can get a bigger slice in absolute terms, even if their slice is shrinking in relative terms. But when the pie grows slowly, if at all, the weakest competitors end up with slices that are shrinking in absolute terms. This in a nutshell is the essence of the Greek crisis.

The class essence of the Greek crisis

When economic, financial and political crises grow suddenly acute, the capitalist propaganda machine directs attention away from the basic causes and on to other targets. In the current Greek crisis, the capitalist media claims the question is about whether Greece will stay in “Europe” and keep the euro or instead attempt to move away from Europe and return to its own paper drachma currency—“Grexit.”

While the perspective of Grexit has an appeal for some left radicals—and perhaps the fascists of Golden Dawn on the extreme right—a small country like Greece has little prospect of creating a viable Greek capitalist economy independent of the rest of Europe. In reality, as I explained in the special post, the real issue is not whether Greece moves away from Europe; rather, it is a class struggle involving the two chief contending classes of capitalist society, the capitalist class and the working class. The workers, though perhaps unconsciously, want to strip away the capitalist character of the productive forces and replace the current system of production for profit with a system of production for use. The capitalists, on the other side, are determined to maintain the system of capitalist production for profit at all costs. This is the real issue in the class struggle between the working class and the capitalist class.

Especially during periods of acute social and political crises, as well as war crises, the capitalists and their political stooges attempt to find scapegoats or demonic individuals to blame in order to direct attention away from the class roots of the crisis. For example, when the U.S. prepares to attack a country, its leader is denounced in the media as an evil dictator “like Hitler” to win over “progressive public opinion,” or “like Stalin” to win over conservative public opinion. Successively, President Milošević of Yugoslavia, Colonel Gaddafi of Libya, and President Assad of Syria have been pictured in the U.S. media as either the new “Hitler” or the new “Stalin” depending on the targeted audience.

The role of Germany in the Greek crisis

In “progressive circles,” much of the blame for the current crisis is being placed on Greece’s leading creditor, Germany. The ghost of the Third Reich and the Fuhrer destroyed 70 years ago this year—mostly by the Soviet Army—is again being channeled. Washington itself is hinting that it is the unreasonableness of Germany that is responsible for the Greek crisis. The implication is that the leaders of American imperialism—the heirs of Franklin Roosevelt and not Hitler—have only the best interests of the Greek people at heart. It is the German government—the heirs of Adolf Hitler—who are being so unreasonable. The implication, further, is that the Germans at heart are still basically “the Huns” of the “Great War” and the Nazis of World War II. (1)

It is certainly true that German imperialism has a horrendous record, especially—but not only—during the days of the Third Reich. Its record of genocide within Europe is in a class by itself. Those crimes must never be forgotten. Among those crimes was Germany’s invasion and occupation of Greece. This has certainly not been forgotten by the Greek people. Early this year, the Greek government pointed out, quite reasonably in my opinion, that in light of Germany’s invasion of Greece it should be Germany that owes money to Greece and not the other way around.

But this still doesn’t answer the question of why Germans behave the way they do, whether in the days of the Third Reich, with its military aggression and policies of genocide against the other peoples of Europe, or in their resistance to any concessions to the Greek people today. Is it perhaps in their genes? That would be a racist explanation, which though ironically well in accord with Nazi ideology has no scientific basis.

The real reason for Germany’s behavior can be found in the unevenness of capitalist development. Since the late 19th century, Germany has had the most dynamic technologically advanced industry within Europe, if not the entire world. Why hasn’t the economic rot that began to take hold in Britain at the end of the 19th century and has since spread to the United States been avoided in Germany?

I think the answer is in Germany’s defeats in the two World Wars. The outcomes of those wars prevented the rise of a lasting German empire. As a result, unlike the British capitalists and their successors the U.S. capitalists, who have ruled over empires “where the sun never sets,” the German capitalists prefer to invest closer to home.

As a result, though politically present-day Germany remains a satellite of the U.S. empire, economically German capitalism is like a compacted powerhouse that puts great pressure on other countries, especially its European neighbors. In times past –and who knows about the future—this often took the form of military pressure. Today, however, U.S. political and military domination over the country prevents Germany from carrying out an independent policy of military aggression. The aggressive military operations that the Germans have engaged in in recent years have been at the behest of the U.S. world empire, which includes Germany as a subordinate power (2). However, German economic pressure is another matter.

As long as the capitalist market is expanding, the pressure of Germany on the other capitalist countries is bearable. This was the case during the years of great capitalist prosperity that preceded World War I and again in the post-World War II period. But when the growth of the market slows down, like it began to do just before World War I and again during today’s prolonged economic secular stagnation, the pressure of Germany on the other European countries—especially the weaker ones like Greece—becomes unbearable.

When the market grows slowly, German industry reacts by taking more and more of it for itself. Even the U.S. has complained about the recent growth of German exports, which has made little Germany the largest exporting nation in the world. This leaves little space on the market for the weaker capitalist countries of Europe like Greece. The result has been the six-year-long (and counting) Greek depression.

Long-term fluctuations in growth under capitalism

But why does long-term economic growth periodically slow down under capitalism? And why has the slowdown been so persistent. The current long-term slowdown can be traced back to the collapse of the “gold pool” that kept the market price of gold at $35 per ounce that occurred in March 1968—more than 48 years ago. In order to understand this, we have to grasp how and why the capitalist economy grows and why periods of rapid growth are succeeded by long periods of much slower growth and even outright economic stagnation.

We have seen how the eminent 20th-century bourgoeis economists like John Maynard Keynes and Joseph Schumpeter explained the slowdown in economic growth that began to develop just before the outbreak of World War I. Keynes blamed this earlier slowdown on declining population growth. Schumpeter blamed the Depression of the 1930s on a cyclical ebb in entrepreneurial innovation reinforced by the growth of anti-capitalist attitudes during Roosevelt’s New Deal. Now let’s review what Marx had to say about economic growth.

Marx on economic growth

In contrast to the marginalists, Marx put economic growth and what is today called “innovation” at the very center of his analysis of capitalism. As early as the “Communist Manifesto,” Marx (and Engels wrote): “The bourgeoisie cannot exist without constantly revolutionizing the instruments of production, and thereby the relations of production, and with them the whole relations of society. Conservation of the old modes of production in unaltered form, was, on the contrary, the first condition of existence for all earlier industrial classes. Constant revolutionizing of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation distinguish the bourgeois epoch from all earlier ones.”

However, in contrast to Schumpeter, Keynes, and other marginalist economists, who treat capitalism as though it was a system of production for use, Marx emphasized that it is a system based on production for profit. And profit for Marx includes both the production of surplus value and its realization.

Without the production of surplus value, there can be no profit. But surplus value contained within unsold commodities—called by Marx commodity capital—is not yet profit. If the commodities do not find buyers, or only buyers at prices that are equal to or below their cost price, there is no profit no matter how much surplus value was produced. And where there is no profit—whether due to an insufficient production of surplus value or the inability to realize the surplus value that has been produced—there can be no capitalist production.

The conditions for the production of surplus value

The most important condition for the production of surplus value is the existence of a large class of free workers—free in the double sense of not being slaves or serfs but also free of any ownership of their own means of production, with nothing to sell but their ability to work, their labor power. There also has to be present certain natural conditions of production, food, raw and auxiliary materials, and so on.

The other crucial condition for profit, as already indicated, is the possibility of realizing surplus value after it is produced. Many of today’s Marxists, perhaps under the influence of Henryk Grossman, wrongly assume that if surplus value is produced in sufficient quantities, its realization pretty much takes care of itself. This is far from the case.

The birth of capitalism

Indeed, it took a huge expansion in the possibilities of realizing surplus value to make possible the birth of capitalism in the first place. The “discovery” of the Americas by white bourgeois Europeans in the 16th century, the hoards of gold and silver that were stolen by the Europeans, and the rich gold and silver mines of the New World meant a huge increase in the production of money material as well as its devaluation. The devaluation of the money material—gold and silver bullion—encouraged the capitalists of the time to invest or otherwise spend it before it became further devalued, accelerating the growth of the emerging world market.

In addition, the rising price of commodities in terms of devalued money material lowered real wages and increased the rate of surplus value. The gold and silver discoveries of the 16th century therefore created more favorable condition for producing as well as realizing surplus value.

The growth of the market was further accelerated by the development of the modern credit system, clearing houses and banking, built on the foundations of the greatly increased quantity of money material. As a result, for a period of centuries the existing system of production simply couldn’t keep up with the ever-expanding, rapidly growing market. The result was the transformation of the entire system of production.

Marx and Engels wrote in the “Communist Manifesto”: “The feudal system of industry, in which industrial production was monopolized by closed guilds, now no longer sufficed for the growing wants of the new markets. The manufacturing system took its place. The guild-masters were pushed on one side by the manufacturing middle class; division of labour between the different corporate guilds vanished in the face of division of labour in each single workshop.

“Meantime the markets kept ever growing, the demand ever rising. Even manufacturer no longer sufficed. Thereupon, steam and machinery revolutionised industrial production. The place of manufacture was taken by the giant, Modern Industry; the place of the industrial middle class by industrial millionaires, the leaders of whole industrial armies, the modern bourgeois.

“Modern industry has established the world market, for which the discovery of America paved the way. This market has given an immense development to commerce, to navigation, to communication by land. This development has, in its turn, reacted on the extension of industry; and in proportion as industry, commerce, navigation, railways extended, in the same proportion the bourgeoisie developed, increased its capital, and pushed into the background every class handed down from the Middle Ages.”

Roman capitalism aborted

Without this vast expansion of the market from the 16th century onward, the rise of the capitalist world that we know today would have been impossible. To illustrate this, let’s look at the evolution of ancient Rome, the pre-modern society that most resembled today’s capitalist society. By late republican times, the increasing centralization of landed property had transformed the Italian peasantry into a “free proletariat.” This created the possibility of Roman capital producing huge amounts of surplus value through the employment of free wage labor and not just confining itself to exploiting the existing pre-capitalist modes of production.

Indeed, “proletariat” is derived from the Latin word proletariatus meaning the free poor. But the other pre-condition, the rise of a world market that would make it possible to realize the surplus value that could have been produced by this growing proletariat was absent.

In the absence of a sufficient market, the owners of capital of that time could not make enough profits to justify the setting up of large workshops employing wage labor—the forerunners of modern large-scale capitalist industry. There simply were not enough markets for the commodities that could have been produced by wage labor if the ancient proletariat had been employed on a large scale in such workshops. Contrary to Keynes, investments themselves do not automatically produce profits.

As a result, Italian proletarians of the Roman epoch were not transformed on a large scale into an industrial—surplus value-producing—proletariat. As the productive possibilities inherent in the chattel slavery system of production dominating Roman society reached its limit, that society instead of being revolutionized along capitalist lines suffered “secular stagnation.” This led in the words of the “Communist Manifesto,” to the mutual ruin of the contending classes of Roman society and the end of Western classical civilization.

Beginning in the 16th century, however, the market for a period of centuries grew faster than society was able to increase its forces of production. The expansion of the market meant that, unlike during the Roman epoch, large-scale workshops with an ever-deeper division labor and then steam-powered enterprises could be set up on a profitable basis. This, in turn, created growing pressure to create an ever-larger free proletariat so that even more surplus value could be produced to meet the demands of the ever-growing markets. The emerging capitalist class turned to the power of the state to accelerate the transformation of the peasantry more or less attached to its means of production into a free proletariat. Feudal relations in land and later the slave system in the southern U.S. gave way to modern capitalist landed property, though not without considerable resistance, violence and bloodshed.

All the old monopolistic restrictions of the guild system, as well as all the feudal restrictions or chattel slave restrictions on the free movement of labor that was handed down from Middle Ages or had grown up like modern slavery during the first stage of the “commercial revolution” itself, had to be smashed in favor of free labor and free competition. Industry based on steam power demanded no less.

But then came a new turning point. The year 1825 brought an economic crisis and financial panic and widespread unemployment in the world’s industrial centers—still mostly located in Britain. There had been financial panics and economic crises before, but this one was different. It was the first global crisis of generalized overproduction. Even more important, it was the first in a series of such crises that have continued to the present, most recently in 2007-2009.

Capitalist production from 1825 onward had gained the ability to expand more rapidly than the market. This was perhaps the most important turning point in the history of capitalist production. While before 1825 the development of industry meant the growth of ever more free competition, after 1825 it meant the decline of free competition. Within 75 years—a human lifetime—industrial capitalism based on free competition had given way to that unstable combination of both free competition and monopoly that we call monopoly capitalism, or imperialism.

The conditions for realizing surplus value

In analyzing capitalism, Marx had first to explain the nature and production of surplus value. In Volume I of “Capital,” Marx explained that surplus value is the unpaid labor of the working class and analyzed the conditions under which it was produced. He showed that unpaid labor—surplus value—arises not in contradiction to the law of equal exchanges of equal quantities of labor but in full accord with it.

This is the revolutionary essence of Marx’s theory of surplus value. This was the central subject of Volume I of “Capital,” the only part published in Marx’s lifetime. And it was Volume I of “Capital” that formed the theoretical foundation of the classical workers’ movement—the eras of the Second and Third Internationals.

But it was in the notebooks that were to become Volume II of “Capital” that Marx began to develop his theory on how the market actually grows. While Volume I deals with the production of surplus value and its transformation into capital, Volume II deals with the circulation of capital. Circulation is the process in which commodities that have already been produced are sold for money, while money is used to purchase commodities. Circulation is a series of successive C—M—C cycles.

Capitalist reproduction is therefore a combination of the process of production of surplus value and the circulation of commodities containing surplus value. If the production of surplus value does not proceed smoothly, neither will the process of capitalist circulation—the realization of surplus value. Surplus value that has not been produced cannot be realized. But if capitalist circulation—the market—does not proceed smoothly, neither can capitalist (re)production.

What are the conditions that enable capitalist reproduction, the combination of both production and circulation, to proceed smoothly? That is the problem Marx set out to solve in the notebooks that became Volume II of “Capital.”

First, Marx explained, for capitalist reproduction to proceed, there have to be certain physical proportions of production. For simple reproduction—Marx explained in Volume II of “Capital” that expanded reproduction always includes simple reproduction within it—when a machine wears out, a replacement machine must be produced. If it is not produced or is not produced in adequate amounts, simple reproduction, not to speak of expanded reproduction, breaks down, and eventually production itself comes to a halt. This rule is true of all modes of (re)production. There is nothing especially capitalist about it.

Second, in order to realize value and surplus value, production must be proportionate not only in a physical sense but in a value sense. In Volume II, just like he did in Volume I, Marx assumes that commodities exchange at their values. Therefore, when an industrial capitalist replaces a machine, another value of equal magnitude must be provided in exchange.

If we bring in the equalization of the rate of profit and the consequent transformation of values and their value form of direct prices into prices of production, this will be somewhat modified. But the essence will not be changed. For capitalist reproduction—both simple and expanded—there have to be certain proportions in terms of use values, which is true for all modes of production, but also in terms of value.

Capitalist-produced commodities must be sold for money. This is where circulation comes in. What are the conditions that enable circulation to proceed smoothly?

Many expositions of Marx’s theories of both simple and expanded reproduction abstract money as an unnecessary detail. What is pictured in this vulgarized version of Marx’s theory of capitalist reproduction is a vast barter exchange in which commodities are exchanged for commodities. What is left unstated is that if we assume barter we also assume Say’s law. With barter, there can be partial crises of overproduction backed by partial crises of underproduction—disproportionate production—but no general crises of overproduction.

But in the real world, commodities are not directly exchanged for commodities. They are sold for money. The money, in turn, is used to purchase additional commodities. Value and surplus value are not realized in the use value of commodities in general but in the use value of a special money commodity—money material. And like all commodities, the money commodity must be produced. If the commodity money material is not produced in sufficient quantities, the circulation of commodities breaks down, and capitalist reproduction and production experiences a crisis—a crisis of the generalized overproduction of commodities.

True, the development of the modern currency systems, clearing houses, banks and credit, allows the economizing of money material. (3) By making currency tokens out of materials other than money material, the quantity of money material needed for a given level of capitalist reproduction is reduced. For example, if the monetary tokens—gold coins—are replaced by coins made of base metals and paper money, then the reserve fund of money material needed to support circulation is decreased, all else remaining equal. Also, the maximizing of the velocity of circulation of currency plus the development of clearing houses greatly reduces the quantity of money material necessary to support a given mass of transactions.

Under capitalist production, the development of a vast clearing organization in which the vast majority of payments offset one another is an important function of the banking system. Since the 16th century, the development of modern currency and banking systems that economize on money material has played a major role in the development of the market.

But at the end of the day, the quantity of money material necessary to support the circulation of commodities can never be reduced to zero. The quantity of money material measured in terms of both its value and its use value must with the progress of capitalist expanded reproduction grow. This requires, in turn, a certain—and growing—level of the production of the commodity that serves as money—gold bullion.

Money material, however, has certain peculiarities that set it apart from other commodities. Unlike other commodities, money material is not consumed. True, when monetary tokens are made of money material itself—gold coins—the coins lose weight in circulation. However, gold coins have not circulated in European countries since 1914 and in the United States since 1933. The retirement of gold coins from circulation means that there is more money material available to form hoards, whether by the government—for example, the hoard at Fort Knox or in vaults of the Federal Reserve Bank in New York—or by private individuals. Gold in the form of bars or hoarded coins that do not circulate can effectively last forever. Thereby throughout the lifetime of the capitalist system in addition to an accumulation of real—productive—capital, including commodity capital and the labor power of workers productive of surplus value—there must be a parallel accumulation of hoards of gold bullion.

The capitalists measure their wealth in terms of money. Everything has a price. We know that money must take the form of money material—for example, gold bullion measured in terms of some unit of weight. Behind this physical substance, there lies the social substance of money, abstract human labor—value—that differs from the value embedded in other commodities in only in one respect—it is directly social.

How does a commodity show that the labor used to produced it is not wasted labor but part of social labor? It shows this by being sold for money. But the money commodity—gold bullion—is the necessary physical representative of the social substance money—private labor that has shown itself to be also social labor. The quantum of labor represented by a quantity of money material does not have to be sold to prove itself to be social labor. Unlike the labor employed by other industrial capitalists, the private labor carried out for the account of an individual capitalist engaged in the production of money material for profit is therefore directly social labor.

This gives gold under the capitalist mode of production what appears to be an almost supernatural power. An insufficient quantity of gold, though it plays only a very limited role in production, can bring the entire process of capitalist expanded reproduction to a halt by creating a crisis in circulation. And unlike the commodities that directly enter production, there is no substitute commodity for it. Whether we measure wealth in its external form of gold bullion—money of account—or whether we measure it in terms of hours of abstract human labor, wealth loses all its particular characteristics and becomes an abstraction.

As long as the above conditions are maintained, capitalist expanded reproduction can go on on an ever-larger scale. It can proceed either on the existing technical basis—no innovation—or a changing technical basis—innovation.

In his Volume II exposition, Marx abstracts technological change completely. There is no rise in the productivity of labor, no introduction of new products, no growth in the organic composition of capital, no fall in the rate of profit. Schumpeter’s innovation is therefore not necessary for economic growth.

How competition between buyers and sellers of labor power leads to growth in the productivity of labor

In the real world, the combination of the progress of science and technology with the competition among individual capitalists, and even more importantly the competition among the buyers and sellers of labor power, leads to a progressive rise in the productivity of labor. (4) If the productivity of labor, the organic composition of capital, and the rise in the demand for labor power are all constant, the rate of growth of constant capital will match the rate of growth of variable capital. Sooner or later, the labor market will tighten and the rate of surplus value will be undermined.

The industrial capitalists respond by replacing living labor with machinery. The demand for labor power starts to decline relatively as constant capital grows faster than variable capital. The rate of surplus value starts to rise. The ability of the industrial capitalists to do this means that as long as the class struggle remains within the bounds of capitalism, the working class is in the long run the weaker party. This has once again been illustrated by the outcome of the Greek crisis. Eventually, the rate of surplus value rises so much that the industrial capitalists slow down the rate at which they are replacing workers with machinery and the demand for labor power increases once again.

In this way, once the conditions for the production of surplus value were established during the transition from feudalism and other pre-capitalist forms of production, they were maintained and reproduced on an ever-larger scale.

The growth in labor productivity disrupts capitalist expanded reproduction

The growth of labor productivity, however, potentially disrupts the smooth flow of capitalist expanded reproduction. The reason is that capitalist expanded reproduction is above all the reproduction of values. As the productivity of labor rises, the existing means of production—fixed capital—are progressively devalued. Existing machines lose value not only through wear and tear but by the ability to produce comparable machines with less labor than before, or more powerful machines with the same quantity of labor. As a result, a portion of the capital is not reproduced as it would be if labor productivity were constant but instead is destroyed. The faster the growth in labor productivity the more this will be the case. This leads to sharper crises, more unemployment, and a higher rate of surplus value that will again check the further growth of labor productivity.

The production of money material and the condition for realizing the value of commodities

In order for capitalist expanded reproduction to function smoothly, there must be an adequate reserve fund of money, just like there must be an industrial reserve army of labor, if the conditions for the production of surplus value are to be maintained. If there isn’t, any increase in production will bring the economic growth to a stop, either due to a shortage of labor power or a shortage of loan money and effective monetary demand, or both.

To maintain the reserve fund, a certain amount of money material must be produced. But how does capitalism see to it that a sufficient amount of money is maintained? It does so through the fluctuation of relative and absolute rates of profits between the industry that produces money material and the rest of the economy. And this leads to fluctuations in rates of economic growth.

Cycles of faster and slow growth of markets

Suppose there is a huge hoard of idle money and the production of money material is higher than the growth of the economy as a whole—the situation in a “liquidity trap.” What will happen? Assuming that the conditions are favorable for the production of surplus value—and this will generally be the case because liquidity traps are accompanied by high unemployment and consequently a strongly rising tendency of the rate of surplus value—sooner or later the capitalists will step up their investments and begin to realize surplus value. The higher profits then lead to still more investment. The pace of expanded reproduction after a more or less prolonged period of stagnation suddenly accelerates. This is what gives rise to the notion among the Keynesian economists that rising investment will always increase profits up to “full employment.” If only the capitalists start spending money—or if the capitalists refuse, the government steps in—profits will always rise.

As investment rises, a huge amount of money is dumped on the commodity market driving up the prices of commodities, which are and must be measured in terms of money. This duel function of money—as a means of accumulation and as the use value in which prices must be measured—means that the rate of profit of producing money material will decline as the process of expanded capitalist reproduction accelerates, first relatively and then absolutely. The longer the period of accelerated capitalist reproduction lasts, the more the growth in the total quantity of money material will decline relative to the growth of all other commodities.

In other words, overproduction occurs. Overproduction means that the reserve fund of idle money has been absorbed into circulation and credit money starts to grow more rapidly than the “monetary base.” (5) In plain language, the banking system creates more and more imaginary deposits on a relatively shrinking quantity of reserves.

Sooner or later a crisis—or series of crises—of overproduction break out and the economy returns to stagnation and the liquidity trap. The liquidity trap means that the capitalist reserve fund is being rebuilt, and eventually the pace of capitalist expanded reproduction can for a time accelerate once more. It is only in this way that the capitalists in the long run produce money material in the correct proportions to keep the process of expanded capitalist production going.

However, the very nature of the value of commodities and its independent value form make it impossible for this process to proceed smoothly. Periodic liquidity traps are therefore not a technical problem that can be avoided, as Keynes believed, but are absolutely necessary if capitalist expanded reproduction is to continue. The more that capitalism develops the more stubborn and prolonged the successive liquidity traps—secular stagnation—become. And the greater and longer the periods of secular stagnation, the more the power of monopoly devours “free competition.”

Three periods of exceptionally vigorous expanded capitalist reproduction

Since the industrial revolution, we have seen three periods of exceptionally vigorous expanded capitalist reproduction that stand out from the long-term cyclical trend.

The first occurred between 1849 and 1873. Its cause can be traced back to a vast increase in the production of money material, not due to any cyclical mechanism but to the discovery of gold in California in 1848 and then in Australia in 1851. Marx called this period of capitalism the “second 16th century,” which put an end to young Marx and Engels’ hopes for an early socialist revolution developing out of the 1848 revolutions.

The second period of exceptionally vigorous capitalist expanded reproduction occurred between 1896 and 1913. It can also be traced to a rise in the production of money material. Again, geographical discoveries played a significant role. These discoveries occurred in South Africa, Alaska and the Yukon.

In addition, a major technical revolution in gold production, the cyanide process, enabled gold to be extracted from ores that were previously too poor to mine. This led to both a major expansion of gold production and the lowering of the value of gold bullion relative to most other commodities. Not surprisingly, the years after 1896 saw both accelerated economic growth, a rapid growth in the demand for labor power, and a rising cost of living, which encouraged workers to band together in trade unions.

The last major acceleration of capitalist expanded reproduction had a very different origin. It had nothing to do with major new gold discoveries or technological revolutions in gold production. Instead, it was rooted in the unprecedented breakdown of expanded capitalist reproduction that preceded it. The “Great War” that began in 1914 interrupted capitalist expanded reproduction. More importantly, the rise in market prices of commodities far above the prices of production—an expression of severe disruption caused by the war—led to a “great depression” of gold production that then led to the super-crisis and Great Depression in the production of commodities and in the demand for labor power.

The Depression, in its turn, played no small role in the outbreak of World War II, which extended the suspension of expanded reproduction for another five years. The result was that for 15 years, between 1929 and 1945, capitalist expanded reproduction ceased. But the production of money material did not cease. On the contrary, it was stimulated by the super-crisis and Depression. The rise in gold production was only partially reversed by World War II and the rise of prices in terms of gold that World War II caused.

Not only the production of gold but the purchasing power of gold was greatly increased as well due to the lower prices that prevailed during the Depression. The resulting unprecedented liquidity trap meant that a huge hoard of idle money began burning holes in the collective pockets of the capitalists—especially the U.S. capitalist class. This led to an explosion of expanded capitalist reproduction that was to dominate the decades of the 1950s and 1960s.

The implication is that unless there is some huge technological revolution in gold production that increases the production of gold bullion and perhaps lowers its value relative to other commodities without lowering it so much that gold becomes de-monetized, or there is another suspension of capitalist expanded reproduction such as we last saw between 1929-1945, it will be hard to accelerate the pace of capitalist expanded reproduction sufficiently to leave the current period of secular stagnation behind.

I will continue the examination of these questions next month.


1 Increasingly, U.S. imperialism has been attempting to revive its “anti-fascist” image. More and more articles attempt to paint Putin’s Russia as an emerging new “Third Reich,” even though the forces in Ukraine that are being supported by the U.S. world empire are largely the heirs of those who collaborated with the real Third Reich both before and during World War II. The Islamic State, which is not supported by any imperialist power or Putin’s Russia, or Iran for that matter, is also being falsely equated with fascism. To call the Islamic state fascist ignores the fact that fascism is based on monopoly capitalism. No matter how retrograde its religious fundamentalist ideology is, there is simply no monopoly capitalism behind the Islamic State.

And not so long ago, President Assad of Syria was being compared falsely to Hitler, though Assad’s reputation as the “new Hitler” has died down a bit since the rise of the Islamic State, the present preferred candidate for the title, along with President Putin of Russia. Previously, President Saddam Hussein of Iraq was the “new Hitler.”

For decades, the Empire has justified its support for apartheid Israel by the genocide against the European Jewish people, a crime we should never forget, carried out not by Muslims, Iranians, not to speak of Palestinians or any other Arabs, but by the West, namely the Germans.

In reality, from 1945 onward the real allies of German imperialism during its Nazi phase, such as Ukrainian “nationalists,” the Franco regime in Spain, “anti-Communist east Europeans,” and indeed many veterans of the SS and the Gestapo, not to speak of Hitler’s former generals, passed directly into the service of U.S. imperialism. And many, perhaps most of, the politicians who led the Federal Republic of Germany-West Germany until 1990—the satellite imperialist state set up by the U.S. occupiers after World War II—were former members of the Nazi Party. (back)

2 NATO was created in part to keep defeated Germany under U.S. military control as well as to menace the Soviet Union. Since the 1990s, NATO has emerged as the most important military arm of the U.S. world empire. For example, it was used in the war against Afghanistan that began in October 2001. NATO’s air power was also used to overthrow the government of Libya in 2011 after a pro-imperialist racist uprising based on the Libyan merchant (comprador) bourgeoisie was defeated at the hands of nationalist forces loyal to Colonel Qaddafi. If further events in Greece lead to a full-scale popular uprising of the Greek people, it is quite likely that NATO will be used to attempt to crush it by force. Anti-war forces must remain alert to this possibility. Behind the financial blackmail of the troika is the mailed fist of NATO. (back)

3 This also creates the possibility of violent breakdowns or crises in the process of capitalist reproduction, as the events of the last few weeks in Greece illustrate. (back)

4 It is interesting that the two times over the last 40 years when productivity growth slowed down—the 1970s and the recent period since the “Great Recession”—have seen stagnant or falling real wages and sharply rising rates of surplus value. Our economists like to say that productivity is the key to economic growth and prosperity. Strangely enough, they never propose measures that would really encourage an accelerated growth of labor productivity, namely pro-trade union polices such as repealing all anti-labor legislation and policies that would encourage unionization.

Most professional economists support the demand that the Greek government make it easier for the bosses to fire workers, which will tend to make Greek labor power even cheaper, thereby reducing the pressure on the capitalists to economize on it and increase the productivity of labor. Why doesn’t the troika in the name of encouraging a higher productivity of labor in Greece demand reforms that would make Greek labor market less “flexible.” The fact that they don’t, of course illustrates the class interest that both our economists and the troika serve. (back)

5 Every economic boom leads to a decline in the relative size of the reserve fund
of idle money. The result is a sharp rise in interest rates and a recession. Over a series of “expansionary cycles,” the relative size of the reserve fund shrinks, causing more and more of the surplus value to go to interest and less and less to the profit of enterprise. Eventually, this leads to a far deeper crisis—or series of crises—and a new liquidity trap. (back)

One Response to “Capitalist Economists Debate ‘Secular Stagnation’ (Pt 3)”

  1. China, Greece and NZ property market – dangers and illusions « The Daily Blog Says:

    […] But every time the Fed takes any action to reduce the hoards of accumulated money their system threatens to seize up again. That in essence is what is behind the Chinese stock market crash and the crisis in Greece. The chain of payments that is the international credit system breaks at its weakest points. As Sam Williams writes at Critique of Crisis Theory: […]

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