By Michael Roberts
On his blog, Steve Keen announced that the Union for Radical
Political Economics is holding a Summer School for the Occupy movement,
and as part of that, the URPE invited papers that explained the crisis
in 1000 words or less. Keen’s effort is presented on his blog
As it happens, I was also invited by the URPE summer school to do
the same trick. Below is my version – somewhat different from Keen’s
as you will see.
The Rate of Profit is the Key
The modern world economy is dominated by the capitalist mode of
production. Under capitalism, money is used to make more money. Profit
drives production, not social need. And capitalist production does not
proceed in a straight line upwards. It is subject to recurrent crises of
‘booms and slumps’ that destroy and waste much of the value previously
created by society (workers). The 1880s and 1890s saw a massive
destruction of US production and wealth; the Great Depression of the
1930s also. Now we have suffered the first Great Recession and are still
in the Long Depression of the 21st century.
The capitalist mode of production has recurrent crises because it has
two major fault-lines. First, in a monetary economy, of which
capitalism is the epitome, there is always the possibility of crisis.
Holders of money may not always spend it or invest it, but hoard it. If
they do so for whatever reason, it can cause a dislocation of the
exchange process and create a crisis in buying and selling.
Second, the capitalist system of production for profit will falter if
not enough profit is created to satisfy the owners of the means of
production. And there is an inherent tendency for the rate of profit to
fall. This is the underlying cause of all slumps.
Individual capitalist businesses do not cooperate to produce the things
and services that society needs. On the contrary, they compete with each
other to sustain and increase their profit. To do so, they make workers
work longer or harder, but they also increasingly use new technology
to boost the productivity of labour to get more value. But this is
capitalism’s Achilles heel. The accumulated cost of investing in new
plant, equipment etc inexorably rises compared to the size and cost of
the labour force. As only labour can create new value (machines on their
own cannot do it), the profitability of each new unit of investment
begins to fall. If profitability falls consistently, eventually it will
cause a fall in the mass of profit. Then capitalists stop investing and
‘go on strike’. A crisis of production ensues.
Capitalists try to avoid this crisis in various ways: by trying to
exploit workers more; by looking for cheaper forms of new technology;
and by speculating in unproductive areas of the economy i.e. the stock
market, banking and finance, where they gamble for gain. But these
things can only work for a while. Eventually, the law of falling
profitability will operate.
The rate of profit in the US is well below where it was in 1948. But
it has not moved in a straight line. After the war, it was high in the
so-called Golden Age from 1948-65. This was also the fastest period of
economic growth in American history.
Then profitability fell consistently from 1965 to 1982. GDP growth
was much slower and American capitalism (like elsewhere) suffered severe
slumps in 1974-5 and 1980-2.
Then in the era of what is called ‘neoliberalism’, from1982 to 1997,
profitability rose. Capitalism managed to get counteracting factors to
falling profitability into play i.e. greater exploitation of the
American workforce (falling wage share); wider exploitation of the
labour force elsewhere (globalisation) and ‘speculation’ in unproductive
sectors (real estate and the rise of finance capital). This ‘neoliberal
period’ had less severe slumps, although economic growth was still
slower than in the Golden Age because much of the profit was diverted
away from real investment.
Profitability peaked in 1997 and began to decline. This laid the
basis for the Great Recession of 2008-9. That slump and the ensuing Long
Depression that we are still in was more severe than anything seen
since the 1930s, because of the huge build-up of debt and financial
assets in the previous two decades that did not create real value.
Instead, there were credit-fuelled bubbles first in hi-tech stocks
(crash in 2000) and then in housing (crash 2007). The unproductive
financial sector contributed 40% of all capitalist profit.
Finally, this credit bubble burst, bringing down the banking sector
and the economy. The high level of private sector debt was compounded by
the state having to bail out the banks. Until this overhang of debt is
cleared (deleveraged), profitability cannot be restored sufficiently to
get investment and economic growth going again. Indeed, it is likely
that another huge slump will be necessary to ‘cleanse’ the system of
this ‘dead (toxic) capital’. The Long Depression will continue until
Ending the Long Depression will not be possible by more government
spending through increased borrowing and/or taxes, as this eats into the
profitability of the capitalist sector. While that sector remains
dominant, lower profitability means that new investment will not take
place to restore lost jobs and incomes. The New Deal in the 1930s did
not succeed in ending the Great Depression, even though it was much more
radical than any measures now proposed by Obama. It was watered down by
capitalist opposition. But also it did not work because it could not
restore profitability – on the contrary. In the end, only a World War
that put the labour force onto a military footing (while killing
millions globally) did the trick.
Under capitalism, terrible slumps will reoccur and inequality will
remain. The end of poverty and prosperity for the majority can only come
through replacing private production for profit with
democratically-planned production for social need.
URPE summer school MR
- AFSCME Local 444 negotiations assesment 1997
- Preparing for Revolution: A discussion document
- The Internal lives of Revolutionary Organizations
- Socialist Alternative members: Questions and Answers
- Sanders: Our Alternative
- The Nature of the New European Left
- Catastrophic Climate Change: Caused by Capitalism
- University of California workers and Unions
- An Invitation to Our Readers
- Facts For Working People Weekly Phone Conferences and Discussions