Pluto is fortunate enough to have amongst its authors Andrew Kliman and Jack Rasmus; both economists who have demonstrated their prescience and keenness of analysis in their written work. As great contemporary thinkers on the Left they have each published differing critiques of capitalism. This debate aims to highlight the areas in which they disagree, as well as agree. Over three stages of contributions, Kliman and Rasmus will consider the causes and consequences of the economic crisis, and make suggestions for the Left’s strategy.
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More than five years have elapsed since the Great Recession began, and more than four years have elapsed since the U.S. government saved the financial sector from near-meltdown. Yet the U.S. and global economies remain quite weak, to put it mildly. This indicates that the recession and persistent malaise are not due only to the financial crisis. They also have longer-term, underlying causes.
On the left, there is a conventional account of these underlying causes. Before analyzing the facts myself, I had no reason to doubt most of that account, and I definitely believed part of it (the part about stagnation of U.S. workers’ pay). However, I discovered that most of it is either incorrect or very misleading, at least in the case of the U.S. These discoveries became the core of The Failure of Capitalist Production.
According to the conventional account, the turn to neoliberalism in the early 1980s brought about a new stage of capitalist expansion. The neoliberals succeeded in increasing the degree of exploitation. Working people’s share of income declined and their real (inflation-adjusted) pay stagnated, and this caused the rate of profit to rebound. If companies had invested their extra profits in production, the economy would have grown rapidly. But instead, capitalism became “financialized”: profit was diverted from productive investment toward financial uses. The slowdown in investment led to a slowdown in economic growth, which in turn led to a slowdown in income growth, which in turn made it harder to repay debt and led to rising debt burdens. This chain of events set the stage for the financial crisis and the Great Recession.
However, when I dug into the data (published by various U.S. government bureaus), I found that:
- The turning-point of recent U.S. economic history was the 1970s – before the rise of neoliberalism. Many important trends commonly associated with neoliberalism began in the 1970s or before. And the neoliberal period wasn’t a new expansionary stage, but a period of relative stagnation.
- U.S. corporations’ rate of profit – their rate of return on the amount of money they invested in fixed capital (minus depreciation) – never recovered in a sustained manner under neoliberalism. When profit is defined broadly, the rate of profit continued to trend markedly downward, while the narrower before-tax rate of profit stagnated. U.S. multinational corporations’ rate of profit on foreign direct investment also trended downward.
- What caused productive investment to slow down was the fall in the rate of profit, not financialization or neoliberalism. Between 1970 and 2007, there was a very tight relationship between the rate of profit and the rate of productive capital accumulation (investment), and changes in the rate of profit preceded changes in the rate of accumulation, which indicates that the former caused the latter. Moreover, almost all of the fall in the rate of accumulation occurred between 1981 and 2001, and during this period, at least, no diversion of profit from productive investment to finance took place. The share of profit invested in production was greater than the share that had been invested before the rise of neoliberalism (1947–80).
- The neoliberals did not succeed in reducing working people’s pay or their share of national income. Real hourly compensation rose. As a share of corporate output, compensation of employees was trendless between 1970 and 2007. And the income of the working class (total compensation plus government-provided social benefits) was stable as a percentage of U.S. national income during the same period. This means that working people could buy a bigger share of the product – out of their income, without going more deeply into debt. (Thus, the claim that the Great Recession was an underconsumption crisis is incorrect.)
In my book, I discussed these surprising discoveries in much more detail and put them together as follows. Beginning in the mid-1950s, U.S. corporations’ rate of profit began to fall, and it never recovered in a sustained manner. When less profit is generated, there’s less profit to invest, so the fall in the rate of profit led to a long-term slowdown in productive investment, which in turn led to a slowdown in growth of output and income. And the growth slowdown, as well as government policies that tried to manage and maybe reverse the relative stagnation, led to a long-term buildup of debt, and ultimately to the Great Recession and the current economic malaise.
The profitability and debt problems, which remain largely unresolved – and the political consequences of the debt problems, especially for the future of the Eurozone – seem to be main factors that are keeping the economy from rebounding strongly. It is difficult to see how it can experience a new boom, or even move from “the new normal” back to “the old normal,” unless and until these problems are resolved. The best-case scenario is probably a very slow resolution of these problems and thus a prolonged period of very slow growth punctuated by financial crises.
I don’t think the crisis can be solved in a progressive manner as long as we remain within the confines of this system . Profit is the fuel on which capitalism runs. It will extricate itself from the malaise (if it does so) by solving the profitability and debt problems. So I’d like to suggest that we stop trying to find “progressive” solutions to the ongoing crisis of capitalism.
Instead, we should assist people’s ongoing struggles to protect their incomes and jobs and homes. Concessions were won during the Great Depression and they can be won again. They won’t solve capitalism’s problems — they’ll destabilize it further — but they’re worth fighting for and supporting. Class struggles have been accelerating around the world, and participants in various struggles have been learning from and solidarizing with one another. They deserve our staunch support. And they deserve access to the idea that the crisis is rooted in capitalist production (not just in particular political policies and markets) and the idea that there is a socialist pathway out.
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