In an interview for New Left Project, Andrew Kliman, author of The Failure of Capitalist Production: Underlying Causes of the Great Recession discusses his book and why he believes that the theory of the falling rate of profit is a key component of the economic crisis:
Marx argues that the fall in the rate of profit, if and when it materializes, leads to a slowdown in productive investment and economic growth. He also argues that it leads indirectly to financial crises. Companies and investors engage in all manner of speculative activities and shady deals, as they try rather desperately to keep their rates of profit from falling despite the fall in the economy-wide average rate. This risky behavior, along with debt problems stemming from slow economic growth, eventually lead to a debt crisis, a situation in which a large volume of debt can’t be paid back. And this often triggers an economic downturn.
I think this theory is of some help in explaining the 2007-08 financial crisis. It’s of a lot more help in explaining the Great Recession and its aftermath in the U.S., as well as the acute debt crises in several peripheral Eurozone countries and other problems abroad that stem partly from the U.S. downturn. U.S. corporations’ rate of profit suffered a substantial fall, and never recovered in a sustained manner. This led to a persistent slowdown in productive investment––basically, the entire decline in the rate of investment is attributable to the fall in the rate of profit––which in turn led to a marked slowdown in economic growth and mounting debt problems. And the government’s response to all this delayed the outbreak of a major crisis as the cost of further exacerbating the debt problems. To take just one example, the whole rise in U.S. Treasury debt (as a percentage of Gross Domestic Product (GDP)) prior to the crisis is due to a combination of a fall in corporate profits (as a percentage of GDP) and reductions in tax rates on profits that kept the after-tax rate of profit from falling as sharply as did the before-tax rate. So the effects of the fall in the rate of profit were transferred in large part from corporations to the government.
But the real clincher, the thing that convinced me that Marx’s falling-rate-of-profit is needed in order to account for the whole mess, is the fact that it happens to account surprisingly well for why the rate of profit fell. Over the six decades that preceded the financial crisis, there was little long-run change in either the relation between profit and wages or the rate at which money prices rose in relation to commodities’ real values. When you set aside those factors, what’s left is that the rate of profit fell for the reason Marx’s theory singles out: employment grew more slowly than capital was accumulated via investment. The slow growth of employment in relation to capital accumulation accounts for almost all of the fall in the rate of profit over these six decades. That’s remarkable. I never would have thought that the theory would fit the facts so well.
Visit New Left Project to read the interview in full.
Underlying Causes of the Great Recession
Distinctive and detailed account of the current economic crisis, identifying it as a crisis of capitalism caused by long-term falling profit rates
“One of the very best of the rapidly growing series of works seeking to explain our economic crisis. … The scholarship is exemplary and the writing is crystal clear. Highly recommended! “ – Professor Bertell Ollman, New York University, author of Dance of the Dialectic
“Clear, rigorous and combative. Kliman demonstrates that the current economic crisis is a consequence of the fundamental dynamic of capitalism, unlike the vast bulk of superficial contemporary commentary that passes for economic analysis.” – Rick Kuhn, Deutscher Prize winner, Reader in Politics at the Australian National University