by Michael Roberts
In the first part of this double post,
I dealt with whether Marx had a coherent theory of crises or not. I
reckoned that Marx’s theory was based on his law of the tendency of the
rate of profit to fall and that this law was realistic and coherent. I
also argued that Marx did not dispense with this law in his later works
that some have claimed and it remains the best and most compelling
theory of regular and recurrent economic crises in capitalism. In this
second part, I shall provide some empirical evidence from modern
capitalist economies to support this view. This completes what is
really just a short essay on Marxist economic crisis theory – as I see
it – with much left out.
Does Marx’s law fit the facts?
Some Marxist critics of Marx’s law of profitability reckon that the
law cannot be empirically proven or refuted because official statistics
cannot be used to show Marx’s law in operation. But there are plenty of
studies by Marxist economists that show otherwise. The key tests of
the validity of the law in modern capitalist economies would be to show
whether 1) the rate of profit falls over time as the organic composition
of capital rises; 2) the rate of profit rises when the organic
composition falls or when the rate of surplus value rises faster than
the organic composition of capital; 3) the rate of profit rises, if
there is sharp fall in the organic composition of capital as in a
slump. These would be the empirical tests and there is plenty of
empirical evidence for the US and world economy to show that the answer
is yes to all these questions.
For example, Basu and Manolakos applied
econometric analysis to the US economy between 1948 and 2007 and found
that there was a secular tendency for the rate of profit to fall with a
measurable decline of about 0.3 percent a year “after controlling for counter-tendencies.” In my work on the US rate of profit,
I also found an average decline of 0.4 percent a year through 2009. And
here is a figure by G Carchedi for the rise in the organic composition
of capital (OCC) in the industrial sector of the US since 1947 versus
the average rate of profit (ARP). It tells the same story.
US ARP and OCC (i.e. C/V)
There is a clear inverse correlation between a rising organic composition of capital and a falling rate of profit.
Can Marx’s law explain crises?
How does Marx’s law of profitability work as an explanation and
forecast of slumps in capitalist economies? The law leads to a clear
causal connection to regular and recurrent crises (slumps). It runs
from falling profitability to falling profits to falling investment to
falling employment and incomes. A bottom is reached when there is
sufficient destruction of capital values (the writing off technology,
the bankruptcy of companies, a reduction in wage costs) to raise profits
and then profitability. Then rising profitability leads to rising
investment again. The cycle of boom recommences and the whole ‘crap’
starts again, to use Marx’s colourful phrase. There is a cycle of profit alongside the long-term tendency for the rate of profit to fall.
The evidence of this causality between profit and investment is available. Jose Tapia Granados, using regression analysis,
finds that, over 251 quarters of US economic activity from 1947,
profits started declining long before investment did and that pre-tax
profits can explain 44% of all movement in investment, while there is no
evidence that investment can explain any movement in profits. I
find a higher ‘Granger causality’ of 60% from annual changes in profit
and investment (unpublished) and a correlation of 0.67 for the period
since 2000. And see this by G Carchedi (Carchedi Presentation).
In the period leading up to the Great Recession 2008-9, we can see
the causality visually for US profits, investment and real GDP in the
graphic below. The mass of US corporate profit peaks in mid-2006,
investment and GDP follows two years later. Profits turn back up in
late 2008 and investment follows one year later.
There are two basic regularities shown by the data: that a change in
profits tends to be followed next year by a change in investment in the
same direction; and that a change in investment is usually followed in a
few years by changes in profits in the opposite direction. Thus we
have a cycle. From these results, the “regularity” of the business
cycle, and the fact that profitability stagnated in 2013 and declined in
2014 (and now the mass of profits in 2015) after growing between 2008
and 2012, it can be concluded with some confidence that a recession of
the US economy, which will be also part of a world economic crisis like
the Great Recession, will occur again in the next few years.
And Marx’s law of the tendency of the rate of profit to fall makes an
even more fundamental prediction: that the capitalist mode of
production will not be eternal, that it is transitory in the history of
human social organisation. The law of the tendency predicts that, over
time, there will be a fall in the rate of profit globally, delivering
more crises of a devastating character. Work has been done by modern
Marxist analysis that confirms that the world rate of profit has fallen
over the last 150 years. See the graph below (data from Esteban Maito and ‘doctored’ by me).
Maito’s data for the 19th century have recently been questioned (DUMENIL-LEVY on MAITO), but in a recent work using different sources and countries, I find a similar trend for the post-1945 period globally (Revisiting a world rate of profit June 2015). And earlier groundbreaking work by Minqi Li and colleagues, as well as by Dave Zachariah, show a similar trend.
As Maito concludes: “The tendency of the rate of profit to fall
and its empirical confirmation highlights the historically limited
nature of capitalist production. If the rate of profit measures the
vitality of the capitalist system, the logical conclusion is that it is
getting closer to its endpoint. There are many ways that capital can
attempt to overcome crises and regenerate constantly. Periodic crises
are specific to the capitalist mode of production and allow, ultimately,
a partial recovery of profitability. This is a characteristic aspect of
capital and the cyclical nature of the capitalist economy. But the
periodic nature of these crises has not stopped the downward trend of
the rate of profit over the long term. So the arguments claiming that
there is an inexhaustible capacity of capital to restore the rate of
profit and its own vitality and which therefore considers the capitalist
mode of production as a natural and a-historical phenomenon, are
refuted by the empirical evidence.”
So the law predicts that, as the organic composition of capital rises
globally, the rate of profit will fall despite counteracting factors
and despite successive crises (which temporarily help to restore
profitability). This shows that capital as a mode of production and
social relations is transient. Capitalism has not always been here and
it has ultimate limits, namely capital itself. It has a ‘use-by-date’.
That is the essence of the law of profitability for Marx.
This is not to deny other factors in capitalist crises. The role of
credit is an important part of Marxist crisis theory and indeed, as the
tendency of the rate of profit to fall engenders countertendencies, one
of increasing importance is the expansion of credit and the switching of
surplus value into investment in fictitious capital rather than
productive capital to raise profitability temporarily, but with
eventually disastrous consequences, as The Great Recession shows (The Great Recession; Debt matters).
Alternative theories of crisis like underconsumption, or the lack of
effective demand, are taken from theories from the reactionary Thomas
Malthus and the radical Sismondi in the early 19th century and then
taken up by Keynes in the 1930s and by modern inequality theorists like
Stiglitz and post-Keynesian economists.
But lack of demand and rising inequality cannot explain the regularity
of crises or predict the next one. These theories do not have strong
empirical backing either (Does inequality causes crises).
Professor Heinrich, after concluding that Marx did not have a theory of crisis and dropped the law of profitability, does offer a vague one of his own:
namely capital accumulates and produces more means of production
blindly. This gets out of line with consumption demand from workers.
So a ‘gap’ develops that has to be filled by credit, but somehow this
cannot hold up things indefinitely and production then collapses. Well,
it is a sort of a theory, but pretty much the same as the
underconsumption (overproduction) theory that Heinrich himself dismisses
and Marx dismissed 150 years ago. It seems way less convincing or empirically supported that Marx’s own theory of crisis based on the law of profitability.
No other theory, whether from mainstream economics or from heterodox
economics, can explain recurrent and regular crises and offer a clear
objective foundation for the transience of the capitalist system.
Why not Marx’s law of profitability?
Finally, why do Professor Heinrich and others like Professors David Harvey, Dumenil and Levy and many other Marxist economists, want to dish Marx’s law of profitability as a theory of crises?
Obviously, they think it is wrong. But all these alternative
theories have one thing in common. They suggest a way out of crises within
the capitalist system. If it’s due to underconsumption, then spend more
by government; if it’s due to rising inequality; then correct that with
taxation; if it’s too much credit or instability in the financial
sector, then regulate it. None of these leads to policies or actions to
replace the capitalist mode of production at all but merely to correct
or improve it. They lead to reformist strategies i.e. there no need to
replace the capitalist mode of production with common ownership of the
means of production and democratically controlled planning for need
Then socialism becomes a moral issue to end poverty and inequality
not an objective necessity if human society is to achieve freedom from
toil. That’s a reformist view, but not Marx’s. Actually even these
small changes that preserve capitalism might still require revolutionary
action in the face of fierce opposition by capital – so why stop at
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