‘The Failure of Capitalist Production’ by Andrew Kliman — Part 3

The evolution of the rate of surplus value

Kliman’s discussion of the evolution of the rate of surplus value over the last 40 years is, in my opinion, the weakest part of his book. Most Marxists—and non-Marxists, including the great bulk of U.S. workers—would agree that the portion of income going to the rich—the capitalist class—has risen considerably in the U.S. since the early 1970s. This widespread popular belief is clearly reflected in the rise of the Occupy movement.

Kliman strongly disagrees with this. Using U.S. government statistics, he attempts to demonstrate that the share of the U.S. national income going to the workers has risen at the expense of the share going to the capitalists. Or in Marxist terms, the rate of surplus value has actually fallen. A falling rate of surplus value, even if the organic composition of capital remains unchanged, implies a fall in the rate of profit. If a fall in the rate of surplus value is accompanied by a rise in the organic composition of capital, the result will be a marked fall in the general rate of profit.

Which is right: the general popular perception and the view of the Occupy movement that American capitalism and world capitalism is growing more exploitative, or Kliman’s contrary view?

Kliman quotes John Bellamy Foster and Fred Magdoff—leaders of the Monthly Review school: “…wages of private non-agricultural workers in the United States (in 1982 dollars) peaked in 1972 at $8.99 per hour, and by 2006 had fallen to $8.24 (equivalent to the real hourly wage rate in 1967), despite the enormous growth in productivity and profits over the past few decades.” (p. 155)

These figures would seem to clinch the case for a considerable rise in the rate of surplus value in the decades preceding the “Great Recession.” It would seem that on the eve of the Great Recession in 2006, a typical U.S. worker got less in use value terms for each hour of labor power she sold to the capitalists than her mother earned for similar work 34 years earlier. Furthermore, the productivity of human labor has hardly stood still over the last 34 years. This means that the commodities that a worker consumed in 2006 embodied a considerably smaller amount of human labor value than was the case in 1972.

This is true for two reasons. First, the worker in 2006 received less use value  for every hour of labor power she sold to the capitalists. Second, each unit of use value she did receive in exchange for her sold labor power represented less embodied abstract human labor—value—than it did in 1972.

This would mean that there has been a marked growth in what Marx called relative surplus value when if the total work day remains unchanged workers will be working a smaller amount of time for themselves and a greater amount of time for the capitalists. This can be the case even if the standard of living of the workers actually increases, if the increased number or quantity of commodities  the workers get to consume in exchange for their sold labor power represents a smaller quantity of value.

Kliman disagrees. He thinks that if anything the rate of surplus value, at least in the U.S., has fallen over the last 40 years. In attempting to prove this, he quotes economist Martin Feldstein as an authority. Feldstein wrote that it is a “measurement mistake” to “focus on wages rather than total compensation.” Feldstein complains that this has “led some analysts to conclude that the rise in labor income has not kept up with the growth in productivity.” (p. 153)

Kliman doesn’t inform his readers that Martin Feldstein is an extremely reactionary economist who has dedicated his life to defending and prettifying U.S. capitalism, though he does mention that he was the head of the National Bureau for Economic Research.

Marxists, beginning with Marx, have often quoted bourgeois economists when these economists’ research exposes some of the truths about capitalism and its exploitation of the workers. When the hired apologists for capitalism are obliged to admit a portion of the truth about the exploitative nature of capitalism, it is especially telling. The more reactionary the particular apologetic economist is the better.

But for a Marxist to quote reactionary economists when they use statistical data in a way that actually strengthens their apologetic views of capitalism is rather unusual, to say the least. While we can’t prove that American capitalism has grown more exploitative simply because Feldstein claims it hasn’t, Kliman’s conclusion is strongly in line with Feldstein’s natural ideological bias.

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‘The Failure of Capitalist Production’ by Andrew Kliman — Part 2

Measuring the mass and rate of profit

As Andrew Kliman correctly emphasizes, the rate of profit is the most important economic variable under the capitalist mode of production. Capitalist production is production for profit and only for profit.

But exactly how do we define profit, and in what medium is profit measured? As we will see, there is no general agreement among present-day Marxists on exactly what profit is and how it should be measured. And if we lack a precise definition of profit, we will obviously have difficulties in understanding the significance of the law of the tendency of the rate of profit to fall and the role that this historical tendency plays in real-world capitalist economic crises.

Should we use historical or current prices in calculating the rate and mass of profit?

Kliman strongly supports the use of historical prices rather than current prices to measure the rate of profit. But other Marxists believe that profits are more meaningfully measured in terms of current prices, or what comes to the same thing, replacement costs.

Suppose after an industrial capitalist has purchased the means of production that are necessary for him to carry out the production of his commodity, a sharp fall in prices of the means of production occurs. If we measure profits in terms of historical prices, we may find that our industrial capitalist has not made a profit at all but rather a loss.

However, since the purchasing power of money has risen relative to the means of production used by our capitalist, he will be able to purchase a greater quantity of the means of production than before. Therefore, in real terms he will be able to carry out production on an expanded scale. In that case, hasn’t our capitalist made a profit after all?

Suppose the fall in the level of prices reflects a fall in labor values of the commodities that make up the means of production. In terms of value—abstract human labor embodied in commodities measured in terms of time—he will be in possession of less value than when he started. In value terms, he will have made a loss, but in terms of material use values he will have made a profit.

As we know, capitalists are forced under the pressure of competition among themselves to maximize their accumulation of capital and not means of personal consumption, nor in terms of means of production used to produce means of personal consumption. Instead, each individual capitalist, according to Marx, is forced to maximize the accumulation of capital in terms of value.

Therefore, if an industrial capitalist is losing wealth as measured in value terms, won’t he be losing capital, not accumulating it? And if this continues, won’t he lose all his capital? That is, at a certain point won’t he cease to be a capitalist? Kliman, if I understand him correctly, would strongly agree with this argument.

However, not all economists would agree. For example, the “neo-Ricardians”—or “physicalists” as Kliman likes to call them—claim that labor values have no relationship to prices. The physicalist economists therefore deny that labor value has any importance at all to the capitalist economy. According to these economists, the accumulation of capital cannot therefore be measured in terms of labor values; it must be measured in terms of the accumulation of material use values.

Our physicalists would argue—and the physicalists here include not only “neo-Ricardians” but economists of the neo-classical and Austrian persuasions—that once the effects of deflation—falling prices—have been taken into account, our industrial capitalist has indeed made a profit.

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‘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. 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.

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.

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Europe’s Decline and Its Sovereign Debt and Currency Crisis

Reader Jon B writes that I should build on my “analysis of the U.S. empire and the dollar-centered international monetary system by writing on the European debt/euro crisis, the possible outcomes for the world economy, and whether U.S. global domination is likely to be boosted or undercut.”

On November 30, it was announced that the world’s major central banks were extending their “swap agreements” in an attempt to control the growing European credit crisis centered on the “sovereign debts” of European governments. The announcement indicated that the crisis may be coming to a head, and that the U.S. Federal Reserve System stands ready to pump U.S. dollars into Europe in a bid to stave off a full-scale financial panic such as occurred when the Lehman Brothers investment bank collapsed in September 2008.

A few weeks earlier, the Greek government had agreed to a vicious austerity package. The government of Prime Minister George Papandreou, which had briefly threatened to hold a referendum on the austerity package, instead meekly resigned in favor of a so-called “technocratic government” headed by Lucas Papademos a former vice president of the European Central Bank. The new Greek bankers’ government, in order to broaden its base beyond the bankers, includes the racist LAOS party.

The European leaders, finally admitting that the Greek government couldn’t possibly pay its debts, agreed to a 50 percent write-down of Greece’s bonded debt.

This is similar to what happens when a U.S. corporation goes bankrupt under Chapter 11 of the bankruptcy law. In addition to the corporation getting out of any contracts it has signed with its workers, a portion of its bonded debt is written down. The “reorganized corporation” is then given another shot at making profits for its stockholders and bondholders.

The U.S. media proclaimed that this “agreement” indicated that the European crisis was finally on its way to being resolved—as the media have repeatedly done whenever top European leaders get together and announce “agreements.” They do add, just to cover themselves, that “much still has to be done” to fully resolve the crisis. Nor did the U.S. media—who pretend to support democracy all over the world—hide their delight that a government of unelected bankers had replaced the elected government of Greece.

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The Federal Reserve System, Its History and Function, Part 2

This is the concluding part of a special post on the U.S. Federal Reserve System. It is written in response to the rise of the Occupy Wall Street movement. Part 1 was published on October 30. The next regularly scheduled reply on the crisis of the dollar system will be published on November 20.

Monetary policy under the New Deal

With the rise of Adolf Hitler to power in Germany in 1933, it was clear that a new European war was inevitable within a few years. Therefore, as soon as Roosevelt stabilized the price of gold—or more accurately the gold value of the dollar—in 1934, many wealthy Europeans, fearing that they could lose their gold due to the war and the revolutions that might result from the war, sold their gold hoards to the U.S. Treasury at the new official price of $35 an ounce. They reasoned that their money was much safer in the form of dollar deposits in the U.S. banking system than it was in the form of gold bars or coins in Europe.

Not all the gold that was flowing into the U.S. Treasury came from wealthy Europeans. A lot came out of gold mines as well. The collapse in commodity prices during the Depression and subsequent devaluations meant that, unlike the 1920s, commodity prices, when calculated in terms of gold, were now below their real values. This is shown by the record levels of gold production that occurred in the 1930s.

Therefore, the Roosevelt administration did not finance the New Deal by “running the printing presses.” The considerable expansion in the U.S. money supply reflected the growth in the quantity of gold in the United States, even if this gold was no longer circulated in the form of gold coin but stored instead in the vaults of the U.S. Treasury. Though prices rose in 1933-34 due to the dollar’s devaluation, thereafter prices stabilized at dollar levels that were still below the prices that prevailed during the 1920s.

These prices were even lower when calculated directly in gold. Therefore, despite the government deficit spending and the dire prophecies of right-wingers and Republicans that Roosevelt was bankrupting the United States, the U.S. was in reality awash in cash. This was in sharp contrast to the house of cards credit system that had marked the 1920s. The foundation for the post-World War II prosperity as well as the means to finance the war were being established not by the policies of the New Deal but by the effects of the Depression itself.

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Crises Real and Artificial, and Why a New ‘New Deal’ is Not Feasible

I had originally planned to answer questions by Mike on exchange rates, which were partially taken up in my critique of an article by Dean Baker. While the factors that determine exchange rates are an important question in economics, especially for the theory of world trade, events over the last few weeks dictate that my reply to Mike’s questions be postponed.

These events include the threatened default of the U.S. government on its debt payments, the decision of the Obama administration to accept a compromise that includes no tax increases for the rich, a wave of panic selling on Wall Street and other world stock exchanges, a new plunge of the dollar against gold, the downgrading of the U.S. debt from AAA to AA+ by Standard and Poor’s, and a rare split vote by the Federal Reserve’s Open Market Committee on what to do next concerning the Federal Reserve’s monetary policy.

Any one of these events would probably have necessitated the decision to postpone the reply to Mike’s questions on exchange rates. However, the events of the last few weeks are closely intertwined with and relate to questions that this blog has been examining since its inception in the January following the late 2008 panic. In order to keep this reply within reasonable limits, I will concentrate on the question of the debt of the U.S. federal government and the threatened default by that government.

Debt default crisis a political and not a true financial crisis

Since World War I, the maximum debt that the U.S. government could carry has been determined by law. Every so often as the maximum debt limit was approached, Congress routinely voted to raise the debt limit. But this year the Republican-controlled House balked. The Republican majority threatened to refuse to raise the debt ceiling unless the Obama administration agreed not to raise taxes on the rich and corporations or even close tax loopholes that have often enabled the rich and corporations to pay no taxes at all.

The U.S. Treasury warned that if the debt limit was not raised by August 2, it would not have enough cash on hand to pay all its bills coming due, forcing it to default. The crisis was purely a legal and political one, since the U.S. government has been having no trouble recently selling its notes and bonds. Indeed, the federal government was able to sell them at prices that yielded some of the lowest interest rates it has ever had to pay. This would hardly be the case if there was a real threat of a federal default.

The media were taking the default threat seriously, but the markets—the capitalists in the know—were not. The markets were right. Over the weekend of July 30-August 1, the Democratic and Republican parties came up with a deal that raised the debt limit and averted the “danger” that the U.S. government would run out of money and default on payments on its huge debt.

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The Oil Reserve Sales and Stagflation

Reader Jon B asks, what in my opinion are the reasons behind the decision of the U.S. to sell some 30 million barrels of oil from the U.S. strategic petroleum reserve? Could it reflect the cutoff of Libyan oi production and plans for increased warfare by the U.S. government in the Middle East and Africa over the coming months?

The unexpected failure of the Libyan government to quickly collapse before the combined U.S.-NATO-rebel assault means that disruption of Libya’s oil production and exports is likely to last longer than the U.S. government planners expected back in March when the U.S.-NATO war against Libya began. U.S. military activity against Yemen also appears to be increasing. There is also a growing danger of a U.S.-NATO war against Syria. This danger will increase if Libya’s resistance finally crumbles before the overwhelming firepower of the U.S-NATO assault.

It seems likely now, however, that the motive for the sale of oil reserves is largely economic. By driving down the price of crude oil and gasoline, the U.S. and other capitalist governments are attempting to boost purchasing power and thus pump some life into the faltering economic recovery from the “Great Recession.”

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