Value, Crisis and Marx’s Order of Operations- final draft

I significantly rushed through portions of this paper and omitted sections in my talk at the Rethinking Marxism conference. I have also added more material since posting the draft of the paper the week before the conference. So if you find my talk of interest you might want to read this later version.

Crisis, Value and Marx’s “Order of Operations”

Brendan Cooney

An economic crisis manifests itself in many different forms simultaneously: stock market crashes, housing market crashes, over capacity, unemployment, etc. For every aspect of the crisis there is some theorist who mistakes this surface appearance for the inner mechanism of crisis. But a proper analysis of crisis needs to have some reason for selecting some phenomena as causes and others as effects. There must be a proper ordering of the relations between different economic factors in order for our analysis to avoid being arbitrary and piecemeal. Marx gives us a very clear, though complex, ordering of these relations. This paper will attempt to critique credit-centered and underconsumptionist theories of crisis from the perspective of Marx’s “order of operations”. It will close with some brief remarks about the Falling Rate of Profit.

The Prophet Elijah

Marx was not averse to using all sorts of biblical analogies to illustrate his points and so neither should we be averse to appropriating from “the good book” when it suits our purposes.

The prophet Elijah is having a bad day because everybody wants to kill him. He goes into the desert looking for Yahweh, walks for 40 days and 40 nights, crawls into a cave and waits there for Yahweh to appear to him. The Bible says, “A mighty hurricane shattered the mountain and split the rocks before Yahweh. But Yahweh was not in the hurricane. And after the hurricane, an earthquake. But Yahweh was not in the earthquake. And after the earthquake, a fire. But Yahweh, was not in the fire.” Finally Elijah hears a light murmuring sound, goes out of the cave and encounters Yahweh himself who reveals a prophecy to him. (1)

And why do I bring up this old-testament acid-trip? Because it is a great distillation of early human ontology. We know from the old-testament that “God created all heaven and earth,” that he “Laveth the thirsty land…” that biblical man interpreted the phenomenological world around him as having a common, divine creator. Yet here, in the book of Kings, we get this crucial ontological distinction: God may create hurricanes, earthquakes and fires but God is not in the hurricane, earthquake and fire. To mistake one of these forms of appearance for God himself would be the most gauche of religious fetishism.

Now, perhaps, you see where I am going with my analogy. Here in 2009, peering out from our caves at a world of destruction and crisis raging all around us we too must remember this same lesson. “There was a great crisis in the housing market. But the fundamental social antagonism of capital was not in the housing market. After the housing bubble there was a collapse of the financial system, but the fundamental social antagonism of capital was not in the financial system. After the collapse of the financial system overcapacity, overproduction and underconsumption were revealed, but the fundamental social antagonism of capital was not in overcapacity, overproduction or underconsumption.”

The prophet Elijah had a luxury that we do not have. After the forms of appearance pass by, the creator himself appears before Elijah. (The old testament could even be read as a history of humans trying to see God in this pure form through trances, drugs, divination, etc. and learning to live with this lack of direct revelation.) But Marx’s fundamental starting point is the idea that in a capitalist society we don’t see these antagonisms in some pure form. They can only be expressed through various forms of appearance: through money, commodities and capital. A crisis is the closest we come to seeing these social antagonisms laid bare, yet here in this current crisis its obvious how easy it still is to mistake credit bubbles and the like for root causes. For our present purposes there are two lessons to learn from Marx’s fetishism argument. 1. We cannot expect to witness the social antagonisms in their pure form. Thus we must avoid mistaking a form of appearance for the thing in itself. (2)  2. We mustn’t err too far in the opposite direction. We cannot dismiss this world of appearance as a completely uninteresting world of illusion. The manner in which these social antagonisms are expressed are crucial to our understanding of them. I think that in some of the erroneous theories of crisis I talk about here there is still a kernel of truth. Here I want to extract what is important about the phenomenal forms of the expression of crisis as well as to critique those theories which dwell too long on the phenomenal form without identifying the root causes of crisis.

order of operations

Peering out of our caves in 2009 we are confronted with a variety of phenomenon, all which express the social antagonisms of capital: housing bubble, predatory banks, decline of the dollar, competition, competitive devaluation, excess capacity, stagnant wages, etc. How do we discover what is fundamental about these? What is the relation of all of these different phenomenon to each other? Marx gives us a logical structure with which to understand the inter-relations of these phenomenon. It is not like a mess of billiard balls all colliding with one another with equal force and mass. It is not like that obnoxious string-of-causes so popular in postmodern theory, “race, class, gender, sexual-orientation, ethnicity, religion…”, where all things are given equal weight and no attempt is made to actually understand the relations between different elements. There is a priority of relations in Marx. The question is always, “What proceeds what logically?” (3) So, for instance, we can’t understand the relations between capitalists until we first understand what it means to be a capitalist in the first place. Thus the labor-capital relation logically proceeds the relations between capitalists. This is why Marx said that one of the two most important discoveries of Capital was his treatment of surplus value independent of its division between different factions of the capitalist class.(4) The other important point involves the relation of the labor-capital relation to the value relation. The labor-capital relation presupposes commodity production, the sale of the products of labor in the marketplace which forms the law of value. Since all of the interactions between actors in a capitalist society take the form of commodity exchange, the law of value is the fundamental relation.

Errors can be made here. This “order of operations” is not an historical ordering. For instance, we know that money existed before capital. Yet with the historical appearance of capital money becomes subservient to capital. Usury becomes transformed into a credit system which serves capital’s needs. Fred Moseley might be reproached here for claiming that “this is not a Marx crisis but a Minsky crisis”, as if the various historical phenomenal forms of crisis somehow erased this subservience of money to capital. (5)

We could mention other instances of confusion of historical with logical ordering. Engels himself (as well as other great Marxists like Hilferding and Mandel) insisted that the law of value existed historically in the form of simple commodity production prior to capitalist production. I sympathize with Rubin’s critique of this notion. (6) The primacy of the law of value can be understood purely as a logical primacy, not an historical precedent. Clearly we need to understand the history of trade in an analysis of the evolution of capital. But this doesn’t mean that the law of value functioned in some pure form, that commodities traded at their socially necessary labor time, prior to capitalist social relations.

In the same way that this order of operations is not historical, it also isn’t a simple logic of cause-and-effect. It’s not that value causes capitalism and capitalism causes relations between capitalists. The operation of the law of value can only take hold once capital has cleared away barriers to free exchange. The law of value is dialectically wedded to the laws of capital. We cannot have C-M-C without M-C-M. These two things, the value relation and the labor-capital relation, both merely inversions of one another, subjugate all other forces to their power. As much as we may make powerful insights into the ruthless antagonisms expressed in various parts of the economy they can only be forms of appearance of the basic antagonisms of capital.

Credit theories

With this being said we are already half-way done critiquing the credit-centered theories of crisis of Duncan Foley, Fred Moseley and the host of bourgeois pundits who also take this route. (7) (At the Rethinking Marxism conference I jokingly called these “stock-jock theories” of crisis: that stock jocks flapping their wings on Wall Street cause factories to close in Shanghai.) What does it mean to say there is a credit bubble? It means that the size of the paper-symbols of value that are floating around on Wall Street have grown larger than the actual amount of real value produced in the economy. But why did so much investment flow into speculative investments instead of flowing into the production of real profits in the “real economy”? And why couldn’t enough value be created to realize the value of this bubble? Why must assets be written down? Obviously theories of finance always beg other questions about the production of real value. Thus we can’t understand investments and bubbles in the financial world without a theory of capital accumulation.

This is why credit/finance/financial theories of crisis rely on theoretical attempts to uncouple the financial system from capital. It is argued that developments in the world of finance have created an independent internal logic which can create a crisis independent of the logic of capital. Some credit-crisis theorists, in an effort to clearly separate theories of capital from theoreis of credit, even argue that capital is not in a crisis. This is Moseley’s approach. It is beyond the scope of this paper to critique these theories of “uncoupling”. Rather I want to make it clear how they relate to the structure of Marx’s argument.

Yet the financial world is not entirely a realm of illusion. Real changes have taken place in the form of world money and these are important for Marxists to include in their analysis. In the 1970’s when Nixon took the dollar off the gold standard he severed the link between world money and its basis in real value. (There is actually a lot of debate about whether or not the US dollar has a de facto commodity basis. Is the dollar based on the value of oil? of the mass of commodities?) This liberated world money allowing it to become incredibly good at being a medium of circulation, of lubricating exchange. Problems in production and demand could all be easily papered over with a rapidly expanding flow of credit. Fortunes could be made just through the manipulation of currency exchange rates, bypassing the world of production altogether. Yet as world money became better and better at lubricating exchange it became worse and worse at measuring value. It has become increasingly unclear what the real value of a mortgage-backed security, a pension, or even a dollar is. (8)

This phenomenon is exactly what Marx was talking about in those difficult, highly abstract opening chapters to Kapital. When Marx says that the contradiction between a commodity’s use-value and value is resolved in the money form only for money to internalize this contradiction as a contradiction between the measure of value and the medium of exchange…. Marx is giving us the theoretical framework to understand real phenomenon like the current contradictory nature of world money. Yet these opening chapters on money are directly followed by the chapters on capital. This is because capital effectively resolves the problems of money. It constantly throws more and more value into the economy, subordinating all production and exchange to its rhythms. When credit is advanced, capital creates the value to pay back this loan.

In this sense leftist credit-based theories of the crisis make the same mistake that Austrian conspiracy crisis-theories do with their obsessive paranoia about central banking. They neglect to mention that the amazing powers of world money to lubricate exchange only come into conflict with money as a measure of value when capital is not able to generate enough value to pay back those loans. This is because money is absorbed into the circuit of capital and subordinated to the rhythm of capital. Financial bubbles do not arise because of some fluke in state regulation. They arise as an attempt to compensate for the contradictions of capital.


Underconsumption theories have become very popular now-a-days amongst Marxists and non-Marxists. For those unfamiliar with the argument or with the term “underconsumptionist”, the idea is that the drive by capitalists to suppress wages ends up coming back to kick them in the butt because low-wages means there isn’t enough demand in the economy to buy back all the commodities workers are producing.

Underconsumption does appear to veer closer to Marx’s logic in that it stresses the antagonism between labor and capital. It also considers the process of reproduction as a whole. It acknowledges that crisis is not a question of just the financial sector but of the ability of the antagonistic social relations of capitalism to reproduce themselves through this same antagonistic logic. Yet for a lot of Marxists the term “underconsumptionist” has always been an insult directed at theories that claim capitalism can avoid crisis by raising wages a little bit. The critics claim that underconsumptionists unjustly privilege problems of exchange instead of looking to production for the true source of the social antagonisms of capital. In the debates between the underconsumptionists and the falling rate of profit theorists one can sometimes feel caught in a dialectical chicken and egg argument: which has primacy production or exchange?

Rather than providing a full-scale critique of the underconsumptionist position, I want to offer two points which I think help to situation problems of consumption/demand/realization within the logical structure of Marx’s argument.

Point 1: The difference between the potential for crisis and the “cause” of crisis.

I will use a slightly awkward and simplistic analogy to illustrate my point.

A bicycle has the potential to crash. It is narrow, hard to balance and is beset on all sides by the forces of gravity. Yet a bicycle has a means of overcoming this potential: a rider who propels the bike forward. This forward momentum overcomes the forces of gravity, actually using gravity to its own purpose in moving the bike forward. If the bike crashes we will see the forces of gravity kicking in, pulling it to the ground. Yet if it crashes we don’t say that the bike crashed because of gravity. We instead try to explain why the forward momentum of the rider failed to overcome gravity: ie. it was hit by a car, or hit a pothole, etc.

In Marx’s  understanding of the circulation of capital there is also a similar logical distinction between the possibility for a crisis and those forces that actually move capitalism into a crisis. The fact that production only becomes social in exchange, the fact that money must serve as a mediating link in the organization of the labor process means that the potential for crisis exists. Money separates production and exchange. It separates a purchase and a sale. It makes it theoretically possible that the social product might not be bought or that demand might not be met. Even with the evolution of money into credit, money can’t necessarily resolve all of the difficulties of exchange which require money to be thrown into and withdrawn from circulation to adjust to changing masses of commodities entering and exiting the market.

But as we have already seen, capital provides a forward momentum that overcomes these problems. Capital takes the potential instability of C-M-C and inverts it into M-C-M. If a crisis erupts it is because something has gone wrong with the capital’s ability to provide this forward motion. Yet, this crisis will appear as the separation of a purchase and sale. The circuit of capital will freeze in all of its stages and we will see unsold products, unused capital and unemployed workers. It will look like the problem is in the exchange of these things in the market. But just like we don’t say gravity is the cause of bike accidents, we also don’t say a separation of purchase and sale is the cause of crisis. The underconsumptionist gaze is too fixated on the market when the real determination of market phenomenon comes from production. (9)

Sometimes it is argued that that this idea of a “forward momentum” provided by capital which overcomes the potential for purchase and sale to create a crisis is a version of Say’s Law. (For a Marxist “them’s fightin’ words.” J.B Say had argued that sellers bring their own buyers to the market, that supplies are always sold, that the possibility of a general glut of commodities didn’t exist. Marx hated Say. Marx really hated Say. Marx really really hated Say. Really.) I think it is unfair to characterize my above argument as a version of Say’s Law. In fact the distinction is a really crucial one which gets to the heart of the underconsumptionist debate.

Products go unsold all the time in a capitalist society. This is the way supply and demand works. If there is a shortage of goods prices and profits rise and capital rushes in. If there is a glut of commodities in a sector prices and profits fall and capital rushes out. This is the mechanism whereby labor is reapportioned. This is the mechanism by which prices coordinate the division of labor. The labor theory of value requires that there be constant disproportions, unsold commodities, reallocation of labor between sectors, etc. if price is to serve its role of reallocating labor. As productivity changes, as demand changes, the disproportions of the market constantly fluctuate to reapportion labor. But labor is reapportioned. It continues to move in and out of sectors in search of the highest profit for capital. This is part of the “forward motion” of capital which overcomes the possibility that the separation of purchase and sale can create a crisis.

The underconsumptionst must therefore always argue that there is an absolute limit to how much capital can flow out of the consumer goods sector. If wages are falling and there is therefore less and less demand for consumer goods, then capital will constantly flow into the producer goods sector- the sector which produces machines and other inputs for other capitalists. Critics of underconsumption argue that producer goods sector can continue to grow and grow, furnishing all of the demand needed for accumulation to move forward. Capitalists can sell to each other as the consumer goods sector shrinks.

Underconsumptionists respond by arguing that there is some absolute limit to how much the consumer goods sector can shrink. Sometimes it is even argued that all production is ultimately production for consumer goods. This usually gets underconsumptionists in trouble for falling for the bourgeois idea that demand, not capital accumulation, drives the economy. But isn’t there a limit to how small the consumer goods sector can shrink? I actually think there is, but that the limit is not set by problems of demand. Imagine an economy in which there were no consumer goods and therefore no workers. Production is totally automated. requiring no workers, and capitalists produce for each other. In such a hypothetical world there would be no law of value and exchange would breakdown. But the lack of consumer demand would not be the problem. It would be the lack of labor which forms the basis of value. This leads naturally to my second theoretical point…

Point 2: The difference between the total value and the distribution of value in the determination of prices and profit.

When productivity rises why do the prices of individual commodities fall? Because less labor is contained in them. But what is the mechanism which actually forces these prices to fall? There is only so much value in the economy at a given time with which to purchase the mass of use-values created. Capitalists are not free to set any price they like. They are constrained by the amount of value in the form of purchasing power which they confront in the market. (10) When the products of labor meet in the market, when the commodities that make up the entire social product are exchanged with each other, the social relations between producers take on the form of relative prices between their products. In this way the total amount of value constrains the total price. The process of exchange, of realization, is essential to establishing prices and profits. That’s why as productivity increases prices must fall. When these falling prices correspond to a rising cost of production then we get a falling rate of profit.

But underconsumption theory does not focus on the total value, or the cost of producing this value. Instead it focuses on the distribution of value between workers and capitalists. The distribution of value between wages and profits does effect the profit rate in the sense that less wages mean higher profits. But the distribution of purchasing power between wages and profits does nothing to alter the total amount of value that acts as a constraint on prices and profits. This distribution of consumptive power could effect the prices of commodities in the consumer goods sector, but not the profit rate. If wages fall then there is less value in the economy with which to buy back consumer goods (that is, if the capitalist cannot absorb these goods.) This could cause consumer goods to go unsold or for prices to fall below their value as capitalists compete to sell off this excess of commodities. But this can’t actually cause the profit rate to fall. This is because the unpaid labor of the worker costs the capitalist nothing. If $100 in lower wages means that $100 of toothbrushes aren’t sold to workers then the profit rate is exactly where it was before the wage cuts. (11) Furthermore, as pointed out above, a glut of toothbrushes would signal capital to leave this sector and move to another sector where potential profits are higher.

It is not the distribution of purchasing power between labor and capital which is crucial for crisis theory. It is the total mass of value, the total mass of surplus value and the cost of producing this surplus value. This, of course, is the theory of the falling rate of profit.

Falling Rate of Profit

The theory of the tendency of the falling rate of profit succeeds where these other theories fail. It correctly identifies the central dynamics of a capitalist society in the dialectical interrelation between value and capital, the mutual interdependence of C-M-C and M-C-M. Capital contains a contradiction: it incorporates the the body of the worker into its cold, machine-like logic. The worker becomes a commodity, embodying the contradiction of all commodities: that commodities are both use-values and exchange values. The contradiction of the commodity form becomes the contradiction of capital.

Capital plays out this contradiction through the commodity form. It raises the social productivity of labor, thus increasing the mass of use-values produced and increasing the mass of use-values that the worker confronts on the shopfloor. But as it develops the social productivity of labor, the efficiency with which use-values are produced, it undermines its ability to produce surplus value- its own social basis. The production of use-value and exchange value come into conflict.

Thus the theory of the falling rate of profit properly situates Marx’s crisis theory within Marx’s larger historical analysis of the evolution of the forces and relations of production. Capital develops the forces of production beyond the point at which they can continue to support the relations of production. This is why Marx says that the FRP exposes the historical limit to capitalist social relations. (12) Of course capitalist crisis is cyclical. The falling rate of profit is not a theory of some terminal stage of crisis. But it does relate the theory of crisis to Marx’s larger project of identifying the historical nature of capitalism. Other crisis theories do not do this. (13) We will not see the emergence of some new historical form of derivatives that harkens the coming revolution. We will not see some new development of wages that paves the road for socialism. But in the evolution of the forces of production we can see the historical limits to capital. I think that these historical limits are worth thinking about when we analyze the evolution of value, especially now-a-days in the realm of information production. (14)


(1) Bible. 1 Kings 19:11

(2) I haven’t read enough Autonomist Marxist literature to put forth a criticism of their ideas on crisis here. When surveying the autonomist literature I would keep this aspect of fetishism in mind. To what extent does the focus on the autonomy of the worker in autonomist thinking represent a desire to see the social antagonism of capital in some pure form, free from forms of appearance?

(3) This notion of logical priority is articulated well in I.I. Rubin’s “Essays on Marx’s Theory of Value”. This is a great book, with an extremely careful and detailed analysis of the logical structure of Marx’s argument.

(4) Marx and Engels, “Selected Correspondence”, from a letter from Marx to Engels, August 24th 1867. Marx writes, “The best points in my book are: 1) the two-fold character of labor, according to whether it is expressed in use-value or exchange value. (All understanding of the facts depend upon this.) It is emphasized immediately in the first chapter; 2) the treatment of surplus value independently of its particular forms as profit, interest, ground rent, etc.”

(5) See Fred Moseley’s piece June 08 in the journal International Socialism.; For a more detailed piece by Moseley see
For more criticism of Moseley see Andrew Kliman’s “On the Roots of the Financial Crisis and some Proposed Solutions”

(6) See Hilferding’s “Response to Bohm-Bawerk” for the classic defense of this theory of the historical precedence of simple commodity production. Also see Ernest Mandel’s introduction to Vo. 1 of Capital. I am convinced by Rubin’ s criticism of this theory in “Essays on Marx’s Theory of Value.” Also see the brief criticism in David Harvey’s “Limits to Capital.”

(7) See Duncan Foley’s trippy graphs in his paper “The Anatomy of Financial and Economic Crisis”:
While I have a deal of respect for a lot of the other theorists I critique in this paper, Foley’s paper does not garnish one iota of respect outside of the trippy graphs.

(8) See David McNally’s great 2008 paper on this subject: “From Financial Crisis to World Slump”

(9) Anwar Shaikh’s criticism of underconsumption as lacking a theory of the rate of accumulation is what I had in mind when constructing this argument. See his “And Introduction to the History of Crisis Theories” on his homepage:

Also useful is Harvey’s discussion of the way capital solves the effective demand problem at the end of chapter 3 of his “Limits to Capital.

(10) Here, actually, I feel ambivalent. Is it the total value or the total value in the form of purchasing power that sets the limit on prices? Is there a difference?

(11) see G. Carchedi “Return from the Grave”

(12) Das Kapital, Vol. 3. Chapter 15

(13) Much has already been written by falling rate of profit theorists about the problematic “solutions” recommended by proponents of erroneous crisis theories. The financial-centered theorists call for nationalization of finance or closer regulation. This makes sense because they see the problem emanating from a faction of the capitalist class, or from the money form, but not from capital and the value form. It thus seems logical from their perspective for the capitalist state to solve the problem. Rick Wolf, representing the underconsumption school, advocates a worker-owned factory, market-socialism type of society to replace capitalism. This makes sense coming from the perspective that the chief antagonism is in the distribution of wages and profits. Because the dialectical relation between C-M-C and M-C-M is not present in Wolfe’s theory there would be no reason for him to question commodity production0 to ask to what extent commodity production eventually reproduces the capital relation.

(14) Here is theoretical terrain that is in desperate need of more theorizing. Marx’s optimism for a post-capitalist future came from his analysis of the development of the forces of production under capitalism. He writes about the way in which the centralization of means of production leads to a truly social labor process, and how abstract labor creates a truly universal class. In our lifetime we have seen the stagnation and death of many industries whose ownership of the means of production have been eroded by the evolution of digital information technologies- technologies which have eliminated productive labor from the task of duplicating and distributing information. This has created an under-theorized collective commons of information creation that has struggled to find a stable commodity basis. The open-source software movement is perhaps the best example of this emerging terrain of conflict. Capital’s response is increasingly reactionary. Rather than establish a new basis in real value production it relies on narrow legal enclosures, threatening to turn the information age into a new period of primitive accumulation. But can capitalist production be anything but reactionary and parasitic in the realm of information production? What does this mean for theories of revolution? I don’t know. I am influenced by Tessa-Morris-Suzuki’s writing on this topic. See her essays in the book “Cutting Edge” edited by Jim Davis.


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9 Responses to Value, Crisis and Marx’s Order of Operations- final draft

  1. Pingback: Rethinking Marxism: Temporal Value Theory in a Moment of Crisis; Roundtable on the Economic Crisis « Kapitalism101

  2. alienated says:

    First, I want to say I really appreciate your blog. I think it provides a fantastic service to anyone (such as myself) who wishes to self-educate themselves on Marx. Second, I find the TSSI convincing, and I very much enjoyed the roundtable talks. Thanks for making them available.

    A point on which I am not so convinced is the relationship between distribution and demand, although it may just be a misinterpretation of your argument (and Kliman’s argument) on my part. You seem to be saying that the output produced in a period is always accompanied by sufficient purchasing power to absorb it, irrespective of distribution. I agree with this. But this still seems to leave open the possibility that distribution affects the level of output that was produced in the first place. If the propensity to consume of the general population is higher than the propensity to invest plus the propensity to consume of capitalists, it seems possible that a reduction in real wages might result in lower effective demand and the production of less output.

    Kliman appears to argue that this is not the case because whatever income is subtracted from wages (workers’ consumption demand) will be added to profit and revenue (investment demand and capitalists’ consumption demand). If workers’ consumption demand falls, this will be offset by capitalists’ consumption demand and, if necessary, production of investment goods without any reference to consumption demand (through circuits involving only the production of raw materials and investment goods, entirely independently of consumption demand).

    I have some difficulties with the argument that capitalists could resort to producing investment goods solely for the further production of investment goods:

    (1) Subsistence requirements

    Not all production can be dedicated to investment goods (or capitalists’ consumption), because without consumption goods for workers, there can be no reproduction of the working class, and so no capitalism. Once it is accepted that there must be at least some consumption-goods production for workers, this implies some investment-goods production will be undertaken to facilitate the production of consumption goods. This point, in itself, does not preclude the possibility that demand may be invariant to distributional changes within certain (perhaps wide) limits, but I think it does make clear that there is a limit to how far investment-goods production can go on independently of consumption-goods production. There is a limit.

    (2) Political constraints

    Notwithstanding (1), suppose capitalists attempted to produce investment goods and capitalists’ consumption goods exclusively, trading among themselves. Suppose they did this by employing workers, paying them nothing, and hoping they could live off thin air. Even supposing workers could live off thin air, how long could this situation persist before capitalists were met with resistance? Further, there would be no reason for workers to enter the “voluntary” labor exchange if they were to receive no more than they receive outside it – i.e. nothing. In fact, if workers really could live off nothing, the “voluntary” labor exchange would really be voluntary, and capitalists would find no one willing to sell them their labor power. Capitalists might have sufficient military or police muscle on their side to compel workers to participate, but in that case they cease to be capitalists and the system ceases to be capitalism.

    (3) Hoarding

    Unlike workers, capitalists are not living at cultural subsistence levels, and so can consume a lower proportion of their income than workers. The resulting savings will not automatically translate into investment demand. Hoarding may occur.

    (4) Dynamism

    The notion that demand is invariant to distribution seems to be based on static equilibrium type reasoning (although I presume I am misinterpreting given the TSSI emphasis on dynamism and non-equilibrium processes). For example, neoclassical economists claimed that investment would always adjust through real interest-rate adjustments to match any gap between consumption and output (saving). My understanding is that this static argument was shown to be invalid in the capital debates. I don’t think Marx would have attempted to argue that capitalists’ consumption and investment behavior would always offset any variation in workers’ consumption. At the aggregate level, I don’t think there is any foundation for such a claim.

    (5) Government

    Once we recognize that there is a government sector, the private sector as a whole can decide to net save. In trade-deficit economies, this will result in unemployment unless the government net spends an amount sufficient to sustain both full-employment output and the private sector’s intended level of net saving. If the government undertakes austerity measures at the same time as the private sector net saves, output will be low. If distribution affects private-sector saving behavior, it will affect demand, unless the government conducts policies to offset the changes in saving behavior.

    Having said all this, I am convinced by Marx’s and Kliman’s argument that the fundamental cause of capitalist crises is the tendency for the rate of profit to fall, rather than demand per se. I just don’t think the relationship between the rate of profit and demand is straightforward. For instance, lower real wages will not necessarily result in a higher rate of profit (and have not, as Kliman’s recent study of the postwar US corporate rate of profit demonstrates), because profit depends on both the revenue and cost sides. Lower real wages can affect the relative cost structure across the economy, as well as prices, in unpredictable ways, and will not necessarily provide an impetus for investment to flow more into investment-goods production and less into consumer-goods production.

    Again, I may well be misinterpreting the TSSI argument on these matters. Or my own arguments may be faulty. If so, I will be more than happy to be set straight.

    • I think these are all good questions. I cannot promise that my answers will be sufficient.
      A few preliminary points before I address you individual points: Capitalists already produce capital goods for each other. There are large sectors of the economy which produce products solely designed for what Marx called “productive consumption”. It is the nature of markets that when demand falls for one type of good investment flows out of that sector and into another. If wages fall this is good for capitalism- it increases the rate of surplus value. If some of this surplus value is unrealized in exchange then profits are merely the same as they were before the wage cut. In other words, the profit rate has not fallen. As I point out in my paper, this doesn’t mean that aggregate demand doesn’t play an important role in signaling investment or in constraining prices and profits. It just means that this demand comes from value created in production and can’t be understood outside of a theory of accumulation.

      1. The question as to whether or not a drop in wages and thus a fall in demand for consumer goods can be offset by a redistribution of production to capital goods is not a question of eliminating consumer goods from the economy altogether. The fact that consumer goods must always make up a part of the economy, that labor power must be reproduced, is crucial to understanding the way capitalism reproduces itself. But this is a different matter than the argument that a fall in demand for consumption goods would cause the profit rate to fall. For one, wages can fall below the value of labor power creating a more immiserated working class, which is good for capitalism. Also, as the prices of subsistence goods fall, the value of labor power falls and surplus value rises. You are right that there is a limit to the extent to which wages can fall without endangering the reproduction of capital. But this is not a limit within the sphere of realization of surplus value. In other words, there will always be wages, and thus there will always be a market for consumer goods. If the wages are driven below the price of labor power this could create a political crisis, but not a crisis of realization of surplus value.

      2. If workers were all slaves or all replaced with machines we wouldn’t have capitalism, but some other system.

      3 and 5. Capitalists, acting as capitalists, tend to invest not save. Capital must be reinvested in the expansion of capital or it will be devalued. Profits always go looking for more profits. Capitalists tend to do the same with their income: they either spend it on luxury goods or they invest it in assets that create a profit. Even money in a bank receives interest which implies that banks are investing savings- in other words, that savings are actually functioning as money capital. There is a problem for capitalists of not having enough places to invest their surplus at a good rate of return. But this is caused by the falling rate of profit, not a problem of realization in one sector.

      4. There is no automatic redistribution of production. But it is changes in demand that redirect investment to other spheres, thus reapportioning labor. This is a basic function of the law of value.

      Let me know what you think…

      • alienated says:

        Thanks for your in-depth reply. I think it has cleared things up for me a lot.

        I agree that production will always generate enough purchasing power in aggregate to buy back the value that is created, and that any mismatches in individual sectors will be due to mistakes in the allocation of investment, which price signals will tend to correct.

        In thinking about the effects of demand, I was getting thrown by the fact that since the 1970s falling real wages have been accompanied by a fall in the rate of profit. I was forgetting that the fall in the rate of profit is due to a rising c/v, and that without the fall in real wages the rate of profit would have fallen even further.

        I still think hoarding occurs, although on reflection I think it is a reaction to crisis rather than a cause. For instance, at the moment there are trillions of dollars sitting in the banks, not being lent out. I think this is because demand for loans (from credit-worthy borrowers) drives lending behavior. When there are credit-worthy borrowers (in the banks’ estimation), lending occurs even without a prior build-up of reserves. The lending creates new deposits, and new reserves come at the end of the process. I don’t think the money multiplier of orthodox economics works. An increase in reserves does not cause a multiplied increase in deposits. That’s why loose monetary policy isn’t doing anything to increase lending and investment, whereas fiscal stimulus, by adding directly to aggregate demand, props up economic activity more effectively.

        You point out that the banks pay interest and suggest that this implies the savings must be getting invested, but I think this only applies to the funds that are actually lent out. The banks don’t pay interest on funds not lent out. They receive an interest return on these funds, but the interest return is paid by the Fed with created money.

        However, I think you are right that hoarding is not a cause of crisis, because it is probably not an issue during the expansionary phase, and this is when capitalists are compelled to reinvest profits. Hoarding probably only becomes a big factor with the onset of the crisis.

        Thanks again.

  3. alienated says:

    Correction: In the third last paragraph of my reply, the sentence “The banks don’t pay interest on funds not lent out” is obviously incorrect. I mean funds not lent out to the private sector will not earn interest from the private sector — though they will earn interest on government securities or on reserves from the Fed.

  4. There seems to be two schools of thought among Marxists about the causes of the Great Recession. One group reckons that the rate of profit rose from about the early 1980s to reach levels that matched or surpassed the level of the rate of profit of the Golden Age in the 1960s. So the slump of 2008-9 could not have been caused by Marx’s law of the tendency of the rate of profit to fall. Instead, a better explanation is that it was the huge growth of financial sector in the capitalist economy that did it. Profitability rose, but the financial sector got out of hand and lent excessively and eventually this Ponzi-like expansion of credit burst.

    This is a theory of crisis more popularly associated with Hyman Minsky, the Keynesian economist of the 1990s, who reckoned that capitalism was subject to booms and slumps because of the inherent instability and volatility of financial markets. The economic crisis of 2008 was a ‘Minsky moment’ and not due to a crisis of profitability.

    The other school of thought is more classically Marxist. It argues that the Great Recession was the result of falling profitability – indeed figures showing that the rate of profit rose from 1982 are misleading because they mismeasure the rate of profit. On the contrary, the rate of profit has stayed down, laying the basis for economic slumps.

    This is an important debate. If it is right that the Marxist law of profitability did not cause the recession and it was a result of ‘financialisation’, or too much economic power in the hands of bankers, then the policy solutions will be vastly different. The crisis could be avoided by reining in the power of the bankers and stimulating the non-financial sector through tax cuts etc – Keynesian policies as such. Alternatively, if the crisis was due to Marxist law of falling profitability, only a complete replacement of the capitalist system of production would enable such crises to be avoided in the future.

    Both sides of the argument are right and wrong. The ‘financial crisis’ boys and girls are right to argue that the rate of profit did rise from its lows in the early 1980s, but they are not right to conclude that the crisis was the result of wicked bankers alone. The ‘profitability’ boys and girls are right to see that as the ultimate cause of the Great Recession, but wrong to try and prove this by arguing that there has been no rise in the profitability of capitalism since the 1980s.

    Andrew Kliman published a detailed analysis of the movement of the rate of profit in the US onhis website. He argued that if you measured the rate of profit properly, you would find hardly any rise in the period 1982-08. If he is right, then the ‘Minsky guys’ would be in trouble.

    The main criticism levelled against Andrew’s measures is rather technical. Andrew measures the rate of profit using the historic cost of fixed assets. Others, including myself, would use the current or replacement cost measure of fixed assets. Andrew argues that historic cost is better because it measures what capitalists actually spent on their capital assets, not the price or cost of replacing those assets which can easily be inflated or deflated over time by market prices. He shows that by removing the impact of falling prices during the 1982-08 period virtually removes all the increase in profitability recorded by using the current cost measure.

    I have criticisms of Andrew’s methods of measurement; in particular, his odd omission of any cost of ‘variable capital’ (employee costs). Suffice it to say that there are good arguments for using the current cost measure and, as Andrew explains in the technical appendix of his latest paper, Marx also followed a current cost measure.

    But even if Andrew is right about what is the correct measure for fixed assets, his figures show that the rate of profit did stop falling after 1982, having dropped sharply from 1964-82. So the period after 1982 up to 1997 was clearly a different phase for profitability, whatever the measure used.

    That does not mean that we must accept the view that falling profitability was not the cause of crisis in 2001 or 2008. My own calculations the rate of profit moves in a cycle of about 32-36, with an up phase of 16-18 years followed by a down phase of similar length. Profitability rose from 1982 to 1997 in an up phase and then entered a down phase. The rate of profit, despite rallying from 2001 to 2005, did not return to the level seen in 1997. And after 2005, it began to fall, eventually leading to a drop in total profits and the economic crisis of 2008. If that is right, then the Great Recession came about because of Marx’s, not Minsky’s, law.

    This approach is not ‘catastrophist’, as the ‘profitability’ boys and girls have been accused of, namely that they want a permanently falling rate of profit. On the contrary, it is a ‘two-wheeler cyclist’ view. And a cyclical view of Marx’s law of profitability and crisis is, I think, the essence of Marx’s own view of capitalist boom and slump.

    No doubt the huge expansion of fictitious capital or credit that took place between 2001 and 2007 contributed to the size of the eventual bust and slump of 2008. But the seeds of the slump were set by falling profitability (indeed, that is why credit was expanded to try and overcome of delay its impact). And the bust came when the mass of profits began to fall in 2007.

    The current down phase in profitability has some more years to run. Another big slump will be necessary before the new up phase can begin.

  5. Pingback: Left Forum 2010 « Kapitalism101

  6. xgenx says:

    Gravity. Bicycles do not overcome gravity by moving. They would not move as the do without gravity. It is ever-present.

    Bicycles are not beset on the sides by gravity. It is pretty much straight down.

    • Please excuse the lose, poetic license with which I use the bike analogy here. The point is this: without forward motion a bike would fall over. Thus we don’t blame gravity for bike accidents- we blame whatever stops the forward motion.

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