Marxist economics: A Reply to Giussani

by Michael Roberts

Last April, G Carchedi and I published a paper in the World Review of Political Economy called The long roots of the present crisis.  We presented this paper in November at the Historical Materialism Conference (see my post, http://thenextrecession.wordpress.com/2013/11/12/the-informal-empire-finance-and-the-mono-cause-of-the-anglo-saxons/).  The gist of our paper was that the ultimate cause of crises in capitalism is the lack of profitability. The Keynesian and Austerians (the supporters of "austerity" measures) deny this. So their solutions to crises do not work. Keynesian state-induced stimulus programs (redistributive, monetary, and fiscal) cannot overcome the underlying tendency for profitability to fall. The same holds for the policies of austerity, which are designed to reduce debt. These conclusions are particularly relevant for the weaker Eurozone economies in the midst of the euro crisis. In a case study of Argentina in the paper, we argued that it was not Keynesian-style competitive devaluation that restored growth after the 2001 crisis, but the default on state debt and the 'creative' destruction of productive capital.

Following the HM conference, Paolo Giussani, an Italian Marxist economist, wrote a paper criticising our account of the post-war period in the US and elsewhere and in particular, arguing that, as the US rate of profit rose from the early 1980s and also from 2002, the conclusion that a falling rate of profit was the cause of the Great Recession in 2008-9 is faulty.  Giussani suggested that we failed to take into account the empirical evidence because we are blinded a 'mono-causal' theory of crises, based on Marx's law of profitability.  Instead, each crisis has its own characteristics and causes,.  You can read Giussani's critique at the Italian Marxist blogsite, http://www.countdowninfo.net/ and the paper (in Italian) is here, la_great_recession_e_il_saggio_del_profitto_verfin.  Carchedi and I decided to reply to Giussani's points.  Our reply is also on the countdown website and can be found here (reply_to_giussani_10-1).

In our reply, we argue that the 2002-2006 rise in profitability before the recession of 2007-9, far from proving Marx’s law wrong, actually substantiates it.  Crises emerge within the context of a downward profitability cycle, but only when the new value generated and total profits have a negative rate of growth i.e. they contract. Just as recoveries require not only rising profitability but also an expansion of new value, so crises arise not only when profitability falls but also when, within a downward profitability cycle, there is a contraction in absolute new value.  The 2002-2006 recovery period in profitability was part of a whole downward cycle (in my view, starting in 1997) and the 2007-2009 crisis emerges within this downward cycle. Falling profitability sets the stage for the crisis, which is preceded (and indicated) by a fall in new value and total profits.  In the 2006-2010 downward profitability cycle, new value and total profits fell 26.7% and 63.7% respectively, by far the deepest of all the post-WWII crises.  So the 2007-2009 Great Recession does fall into line with Marx’s theory of crisis.

Looking at the period that concerned Giussani, since the early 1980s, in the case of the US economy, the rate of profit fell 24% from 1963 to a trough in 1982, while the organic composition of capital rose 16% and the rate of surplus value fell 16%.  Then the rate of profit rose 15% to a peak in 1997, while the organic composition of capital rose 9% but was outstripped by the rise in the rate of surplus value of 22%.  From 1997 to 2008, the rate of profit fell 12% while the organic composition of capital rose 22%, outstripping the rate of surplus value, up only 2%.  All three phases fit Marx’s law: when the organic composition of capital rose faster than the rate of surplus value, the rate of profit fell.  Over the 45 years to 2008, the US rate of profit fell secularly by 21% because the organic composition of capital rose 51% while the rate of surplus value rose just 5%.

There were five recessions or slumps after 1963: 1974-5, 1980-2, 1990-2, 2001 and 2008-9.  In each case, the rate of profit peaked at least one year before, but on most occasions up to three years before. And on each occasion (with the exception of the very mild 2001 recession), a fall in the mass of profit led or coincided with a slump.  This is shown clearly for the Great Recession. And these conclusions are confirmed by other authors.

We think that Giussani misunderstands us.  We were not arguing that each crisis of capitalism does not have its own characteristics.  The trigger in 2008 was the huge expansion of fictitious capital that eventually collapsed when real value expansion could no longer sustain it, as the ratio of house prices to household income reached extremes.  We do not say that such triggers are not ‘causes’, but argue that behind them is a general cause of crisis: the law of the tendency of the rate of profit to fall.

‘Mono-causal’ should not be interpreted as if there were no other causes.  There are many causes (actually, there is the tendency and the several counter-tendencies). With this in mind, perhaps we should not have used this term.  But we used it against those who deny the basic role of Marx’s law and who argue that each crisis has its own independent causes.  The debate continues - see my recent post, http://thenextrecession.wordpress.com/2013/12/19/the-us-rate-of-profit-extending-the-debate/.