Crisis stories

Crisis stories

Overview and comparison of different theories about the crisis - Keynesians, stagnationists, Marxists, globalisation.

crisis stories
These notes come from the reading I've done recently trying to understand the causes of the current economic crisis. There are thousands of books, essays and articles out there now, but they all work within a few basic explanations or underlying "stories". Here I outline and compare four of the main ones.

I'm not trying to present a new "anarchist interpretation of the crisis", or to say anything particularly original. Just, hopefully, to help clarify some of the theoretical and ideological background to all the punditry, and bring some ideas and links together so that people can dig further for themselves.

Number one is the mainstream "Keynesian" story. Basically, corrupt and/or stupid politicians and regulators took the leash off greedy and/or irrational bankers. The more sophisticated version traces things back to problems of market psychology - as Keynes put it, the "animal spirits" of investors.

According to alternative left (mainly Marxist) theories, crises come from deeper "structural" flaws in capitalist production. There are two main variants to look at: underconsumptionist or "stagnation" theories (e.g., the "Monthly Review" school); and falling rate of profit theories (e.g., some Marxist academics, and basically any Trotskyist party line.)

All of these stories are about troubles in the developed markets of the US and the rest of the "first world". But could the root causes lie in global economic shifts away from US dominance to a world where production is elsewhere? This is the fourth and last story.

story 1 - keynesian revival
In March 2009 Rolling Stone Magazine named and shamed the "dirty dozen" behind the crisis: "meet the bankers and brokers responsible for the financial crisis - and the regulators who let them get away from it."(1) In the UK media, one punishment suggestion doing the rounds comes from a motion apparently debated by parliament in 1720 that bankers responsible for the South Sea bubble be tied up in sacks full of poisonous snakes and thrown into the river Thames.(2)

The idea that a gang of 12 bankers and officials is to blame is as crude an explanation of the crisis as you can find. But in essence it's not so different from more sophisticated versions of what's quickly become the "common sense" interpretation of events.

In a January 2009 article Joseph Stiglitz, Nobel prize winner and leading figure of the "Keynesian" centre-left in economics, made his list of the key "mistakes" behind the crisis.(3) Number one, in 1987, Ronald Reagan hired Alan Greenspan as head of the Federal Reserve, the US central bank. Rabid freemarketing Ayn Rand-fan Greenspan, who also topped Rolling Stone's list, is the super-villain of the crisis. “If you appoint an anti-regulator as your enforcer,” wrote Stiglitz, “you know what kind of enforcement you’ll get."(4)

One of the main charges against Greenspan is that he deliberately inflated the housing bubble to salve the slump caused by the crash. US and other world stock markets rose continually through the 1990s, then jumped at the end of the decade with frenetic investment in IT stocks. When the bubble burst in 2000-1 the Federal Reserve cut interest rates, to a low of 1% by 2003, to keep growth and credit going. This basically transferred the bubble from stocks to housing as US consumers borrowed more and more in cheap interest home-loans.

So Greenspan gets the blame for the first stage of the crisis - the housing crash. Between 2000 and 2005 US mortgage debt rose 75%; between 1995 and 2006 house prices rose 60% over inflation. The housing boom created up to $8 trillion in apparent new "wealth" for US households - until interest rates rose again (to 6.25% in 2007), the market crashed and all that wealth evaporated.(5)

Stage two in the crisis was the credit crunch: panic about bad housing debts spread through international financial markets, causing the collapse of major investment banks like Lehman's and a worldwide lending freeze. The second big mistake, according to Stiglitz, is how the US government "tore down the walls of regulation", setting financial markets free to develop the complex and opaque chains of derivatives and securitised bonds that left Swedish pension funds exposed to bad mortages in Milwaulkee.

If a scapegoat is needed for market deregulation, the man is Senator Phil Gramm, who led the repeal of the Glass-Steagal act in 1999. This was a law passed after the Great Depression, designed precisely to prevent a repeat of speculative financial practices that had caused the crash of 1929. It separated "commercial" banks, which take deposits, from riskier "investment banks".

By 1999 depression-era fears were history and depression-era regulation was anachronistic, stifling "financial innovation" - nowadays banks could be trusted to "self-regulate". The repeal of Glass-Steagal was just part of what Stiglitz calls "change in an entire culture".

A few other highlights: in 1998, after the spectacular collapse and rescue of derivative-trading hedge fund Long Term Capital Management (LTCM), there were proposals for regulation of the new derivatives markets. These proposals were just dropped. Proposals to regulate the Ratings Agencies - "independent" private companies which credit score bonds and derivatives, and get paid in commission by the investment banks - were also dropped. In 2002, after the Enron and WorldCom accounting scandals, the response was the weak Sarbanes-Oxley act. In 2004 regulation was changed to let US banks get into debt worth 30 times what they held in capital, from 12 times before.(6)

Summing up, says Stiglitz - “The truth is most of the individual mistakes boil down to just one: a belief that markets are self-adjusting and that the role of government should be minimal.”

Keynes - aggregate demand, animal spirits
Stiglitz speaks for the "left-of-centre" side of mainstream economics, broadly identified with the legacy of British economist John Maynard Keynes (1883-1946). One much noted intellectual outcome of the crisis is the resurgence of this "Keynesian" tendency in economics.(7) Keynesianism can mean a lot of things to lots of people, but the central idea is pretty easy to characterise – markets are good, but they need taming by government.

Keynes' magnum opus The General Theory of Employment, Interest and Money was published in 1936, well into the great depression.(8) The question, which baffled the previous "classical" orthodoxy, was how an economy can linger in a state of persistent unemployment.(9) For pre-Keynesian economists like Arthur Pigou, lasting "involuntary" unemployment should be impossible: competition for jobs should push wages down; firms then hire more people until the system is back in "full employment equilibrium", producing at maximum capacity.

Similarly in the capital market: after a panic like the stock market crash of 1929 or the housing pop of 2007, market interest rates jump as lenders pull out their money; but once the smoke clears those high interest rates should attract savers back into the market, bringing the supply of capital back up.

In short, markets are meant to adjust automatically, prices (wages and interest rates) move incentives to bring the system back to full capacity. Otherwise the blame probably lies with artificial "distortion" of markets by outside forces: for example, governments interfering with interest rates and capital markets; or working class militancy forcing high wages which stop the labour market moving naturally.(10)

But Keynes argued that falling wages aren't necessarily enough to encourage employers to hire more workers. If there are no buyers then there is no point producing more goods, so no point hiring more people to make stuff. The essence of Keynes' theory is that demand comes first, the level of output is determined by the total level of aggregate demand in the economy.(11) Output may or may not be as high as the economy is capable of producing in full employment - and usually it won't be.

Keynes broke aggregate demand down into three main components: consumption spending by "consumers"; (private) investment by "entrepreneurs"; and government spending. The source of the problem was usually the investment part: consumers' plans are "fairly stable"(12), but investors have to make long term decisions based on the future direction of the economy - for example what types of goods, and in what quantities, people will want to buy in the future.

Here Keynes attacked the neoclassical view of economic decisions being made by rational agents - this future is radically uncertain, our ideas about the future performance of investments are subject to "extreme precariousness".(13) That means that investment has more to do with confidence than calculation. Investors are largely guided by a convention, which is actually largely false, of "assuming that the existing state of affairs will last indefinitely". And by "spontaneous optimism", or what Keynes called investors' "animal spirits".

To sum up: production and employment are determined by aggregate demand. There is no reason why aggregate demand should stay high enough to keep the economy running at full speed. And behind aggregate demand lies the non-rational pack psychology of investors.(14)

Keynesianism mark I
Keynes' theory was massively interpreted, reinterpreted, and misinterpreted, over the years. Some within the more left-wing "post-Keynesian" tradition followed up with further analyses of crises - one worth mentioning here is Hyman Minsky's "financial instability hypothesis", which claims that periods of prolonged prosperity lead to unstable financial systems.(15)

But the mainstream economics that emerged post-war, sometimes called the "neoclassical synthesis",(16) was a more conventional marriage of core elements of the old "neoclassical theory" with Keynesian insights. (For other "left-Keynesians", such as Joan Robinson, the synthesis was better described as "bastard Keynesianism"(17).)

In terms of policy rather than theory, the "Keynesian consensus" typically involved a number of common elements.(18) First, markets are volatile and sticky so they need hands-on regulation. Second, when private investment fails the government can step in via fiscal (i.e., tax and spending) policy, and if necessary with big spending programmes like the European welfare states. Third, at the international level, capital flows are stabilised with a global financial architecture: the Bretton Woods system which fixed currency exchange rates until 1971; and institutions like the World Bank and IMF.(19)

Twenty years after Keynes' death the doctrine seemed in full control. In 1965 Time magazine ran a famous cover story with the headline "We are all Keynesians now" – a quote it attributed to arch-conservative economist Milton Friedman, godfather-in-waiting of neoliberal economics. The article celebrated unparalleled growth and confidence in the US economy, the post war peak of US dominance: "Washington's economic managers scaled these heights by their adherence to Keynes's central theme: the modern capitalist economy does not automatically work at top efficiency, but can be raised to that level by the intervention and influence of the government."(20)

Two editions later Time published Friedman's letter complaining that he'd been quoted out of context.(21) Within a decade, Keynesianism was dead and Friedman was the reigning prophet of the new "monetarist" economics.

crisis of neoliberalism
In deeper versions of this story, the roots of trouble go back to the 1970s when economic orthodoxy shifted away from Keynesian management. What happened was the end of the post-war "long boom", two decades of continued post-war growth.

In 1971 the US pulled the dollar out of Bretton Woods, breaking the worldwide system of fixed currencies. In October 1973 the Organisation of Petroleum Exporting Countries (OPEC) quadrupled the price of oil - the first of the 70s "oil shocks". Stock markets collapsed, triggering recession.

The US crawled out of recession in 1975, but it failed to recover previous high growth rates, and slipped back into recession in the 1980s. The now conventional Keynesian policy techniques failed to pull developed economies out of worsening "stagflation", a combination of stagnant production and inflation. This failure created an opening for a new orthodoxy which fitted nicely with the interests of capital.

The handiest term is "neoliberalism".(22) As Stiglitz sums up in another article: "that grab-bag of ideas based on the fundamentalist notion that markets are self-correcting, allocate resources efficiently, and serve the public interest well. It was this market fundamentalism that underlay Thatcherism, Reaganomics, and the so-called 'Washington Consensus' in favor of privatization, liberalization, and independent central banks focusing single-mindedly on inflation."(23)

One element was Friedman's monetarism - or, more precisely the "new classical" economics which adapted his ideas. According to monetarism, crises are really just about the money supply - very roughly, with more cash in circulation, consumers and producers would keep on spending and producing for themselves, with no need for government prodding.(24) This was the supposed theory behind Greenspan's money management.

More generally, neoliberal economic policy effectively reversed the Keynesian compact, turning the clock back to the 1930s. Back came the Pigouvian creed that markets would run smoothly if left untouched - a handy justification for hacking away the "distortions" tying up markets: wage and price agreements; state-run industry; the dark power of trade unions; trade barriers put up by third world governments to try and protect new domestic industries; and financial regulation.

what shifted the paradigm?
All the four stories in these notes agree on some basic points. The immediate (short-term) causes of the crisis were the credit bubble and deregulated financial markets. If you look a bit further back (medium term), these can be seen as creations of "neoliberal" economic policy: monetary policy blew bubbles; deregulation, and a "culture change" in markets, unleashed volatility and complexity.

But a key question that divides the stories is just how, why, these shifts came about. Laissez-faire economics was supposedly "disproved" by the Great Depression, so how did it make a comeback in the 1980s? Is it just about intellectual fashions, memory-loss, or - to give it more theoretical sophistication - "paradigm shifts" in economics?(25)

The "Keynesian" theorists stop here. For example, another big name is Stiglitz' fellow Nobel prize winner Paul Krugman. In his book on the crisis he focuses on the run of "emerging markets" crises in the 1990s, arguing that these should have served as warning signs. But why didn't we (sic) pay attention? Effectively Krugman just complains that "we" have been myopic and forgetful - now we have to "relearn the lessons our grandfathers were taught by the Great Depression."(26)

In a way, these kinds of accounts of policy shifts mirror Keynes' own story about investment. In the short-run, crises are about psychology - the fluctuating market psychology of investors suffering radical uncertainty about the future. In the longer term they're also about psychology - shifts in the "animal spirits" of politicians and economists, suffering from short-sight and short memories.(27)

story 2 - stagnation
Next up are the "underconsumption" crisis stories, and in particular the Marxist "stagnation theory" developed by writers at the US magazine "Monthly Review"(28). The core theory was built in the 1940s by Paul Sweezy, then refined by Sweezy and Paul Baran in the 1960s classic "Monopoly Capital",(29) dedicated to Che Guevara. In a new book called "The Great Financial Crisis", John Bellamy Foster and Fred Magdoff apply these ideas to the credit crunch.(30)

We saw above how Keynesians can trace the problems back to the end of the long boom. Foster and Magdoff's story goes right back before the Great Depression. Early 20th century capitalism was sinking into a terminal decline from which it only managed to scrape thanks to World War II - the ultimate fiscal stimulus. Our new crisis is not just expected but long overdue.

whose normality
To take a step back for a minute - what are we talking about when we talk about crises?

For neoclassicals before and after Keynes it is the "natural" or "normal state" of capitalist economies to run at full speed. In the 1930s, Keynes' question was - how is it possible that the economy stays lingering in a crisis, why doesn't it pick up again? Or more generally - "why do capitalist economies sometimes break down?"

But this mainstream question still has a big implication behind it - namely that, most of the time, the system works. These days, in some parts of the world if not in others, we are used to capitalism "working": it may be unequal, alienating and unjust, but it does manage to feed, clothe, house people, keep more people alive, with material standards much higher than those of a few generations ago.(31) And it keeps itself alive. This basic idea that capitalism works, more or less efficiently, is a deeper more fundamental part of the economic common sense than doctrines like neoliberalism or Keynesianism.

But it hasn't always been that way. Not long ago, when capitalism was new, it appeared magical - a vast uncoordinated and complex system where no individual or group can control or see what's going on. Thus even Adam Smith, the first great explainer of capitalism's success, had to occasionally on the mysterious metaphor of an "invisible hand".

Yet there have always been heretics who thought they saw structural flaws in the system. The Sweezy stagnation theory is actually a more modern version, incorporating ideas from both Marx and Keynes, of "underconsumption" stories that go back at least to Malthus and Sismondi in the early 1800s.(32)

Capitalism is a vast complex system - on the one hand, millions of producers making decisions about what stuff and how much of it to produce; on the other, billions of consumers deciding what to buy. Why should we expect all these decisions to match up? Underconsumptionists think that, systematically, they don't.

The basic idea of underconsumption theory is that capitalists produce more than they can sell: production in the economy grows, but the demand for consumer goods doesn't grow fast enough to keep up.(33) For example, imagine the economy is rocketing away growing 10% every year, but everyone just keeps on consuming the same amount every year. Then all the extra stuff is unwanted. The excess of supply to demand makes prices fall. Falling prices slash into profits until companies start going bust - crisis.

This story seems to go against the fundamental consumerist intuition - that everyone all the time just wants to consume more. Why don't people consume more? The reasoning, from Malthus on, is about class. The poor will consume all they can afford, but they can't afford much - what counts is not what they want but what they can get, "effective demand".And the lion's share of production goes to capitalists who, being not just rich but thrifty protestant-ethical types, save a high proportion of their income.(34)

The idea is that these savings of the rich should get invested in new capital goods - more raw materials, new machines, that will be used to grow the economy. But if consumer demand fails to keep up, the economy builds up more and more means of production, but less and less as a proportion of its total value ever gets used by final consumers.

The underconsumptionist intuition is that this unending accumulation is unsustainable. As Rosa Luxemburg, the original Marxist underconsumptionist, put it: "who are the new consumers for whose sake production is to be ever more enlarged?"(35)

monopoly capital
Baran and Sweezy revamped the story arguing that 20th century capitalism had taken on a whole new form - Monopoly Capital. In its early stages capitalism had been highly competitive, the main danger to the system being that competitive struggle between "small, family-based firms" would push down the rate of profit (see story 3). By the early 20th century, monopolistic corporations had taken over, able to exert great power over markets and indeed states. These big businesses are highly productive and use their monopoly power to keep prices up. The result is a huge and growing profit surplus in the hands of a small number of monopolists.(36)

Baran and Sweezy also incorporated Keynesian ideas of aggregate demand. There is still a class consumption issue, but the bigger problem now is lack of investment opportunities for all this surplus. New technologies which revolutionise production - trains in the mid-19th century, cars in the mid-20th - provide serious investment outlets, but they don't come along every day.(37)

To be more precise, the problem is insufficient demand for investment in the "productive" part of the economy. Monopolists do find investment outlets for their surplus, but they are increasingly just "waste" - i.e., investment that doesn't contribute to eventual production of consumer goods.(38) A main theme of the theory is distinguishing a stagnant productive economy from a growing parallel phantom economy of "non-productive" waste.

The classic example is military expenditure. The great escape route was the Second World War, which burnt up enormous amounts of investment in armaments and then post-war reconstruction. The long boom was in no small part due to war production - Eisenhower's "military industrial complex" - keeping stagnation at bay.

Another waste outlet is the "sales effort" (e.g., advertising industries). Keynesian government spending can also provide an investment channel. But by the end of the 1960s these "countervailing tendencies" were no longer enough to contain "over-accumulation". The return of crises and recessions in the 1970s are taken to demonstrate Baran and Sweezy's claim that "the normal state of the monopoly capitalist economy is stagnation."

However, the greatest waste pipe of them all was still to come - "financialisation". The younger generation of Monthly Review writers see this as important enough to define another new stage in capitalist history - monopoly-finance capital. Foster and Magdoff use profit figures to show how capital swarmed into the financial sector: in the mid-60s, financial profits were between 15% and 20% of total profits from all US industries. In the 2000s, between 35% and 40%.(39)

This is where the stagnation story ties up with the Keynesian story. Both tell similar tales about how financial markets grew out of bounds in the last few decades. The key difference is that for mainstream Keynesianism it's a case of irrationality let loose by bad policy; for stagnation theory, financialisation is a symptom of deeper malaise. Indeed, if capitalists hadn't created financial bubbles to absorb surplus, the system would have plunged into crisis and stagnation even sooner.

credit bubble
If a big part of the problem is lack of consumption demand because workers don't get enough income, why don't capitalists just raise wages? After all, all that extra surplus is just going to waste. This is a classic case of a "collective action problem" or "social dilemma": while it makes sense for the system as a whole to increase worker income, at an individual level it's in no one's interest to go first and raise wages for their workers. Here the "invisible hand" fails to guide the uncoordinated decisions of bosses.(40)

However financialisation did provide a way to raise consumption, at least in rich countries where much of the surplus channeled into finance went into an explosion of consumer credit. Real wages barely moved in the 80s and 90s, but consumerism thrived on cheap mortgages, car loans, credit cards.(41) In 1975 US consumers borrowed a total $736.3bn, or 62% of disposable income after tax. In 2005 they borrowed $11.5 trillion, 127% of disposable income - or over 90% of US GDP.(42)

And consumer credit was part of an overall debt spree in which government and financial institutions also rapidly increased borrowing. In the 1970s total US debt was around one and a half times GDP. In the 2000s it was three times GDP. Whereas industry was a bit left out of the credit bubble - non-financial corporate borrowing grew, but fell as a proportion of total borrowing from 33% in 1975 to under 20% in 2005.(43)

testing the stories
The big question between the two stories is: which came first, stagnation or financialisation? If stagnationism is correct, there should be evidence of a long-run trend to stagnation in the "productive" economy before financialisation got underway. Is this so?

As a first clue, Foster and Magdoff point to long term decline in real growth rates. In the 1930s the US economy grew by an average of 1.3% per year. In the 40s growth ratcheted up to 5.9%, then stayed high through the long boom with 4.1% in the 50s and 4.4% in the 60s. Since then rates have been falling: 3.3% in the 70s; 3.1% in the 80s and 90s; 2.7% average between 2000 and 2007.

But growth rates don't really get to the bottom of things - national accounting figures include both "productive" and "non-productive" income, and the whole thesis is that non-productive income can step up as real production declines.

How exactly do you distinguish production from waste? Not all finance spending is simply waste - financial markets play an essential role in capitalist production, moving capital from lenders to borrowers. But Foster and Magdoff argue that much of the extra capital piled into "financial speculation" never got channeled anywhere near investment in industry.

One indicator they use to show that is the level of net private non-residential investment: from over 4% of GDP in the 1970s, to under 2% by 2006. And this investment declined even as profits were going up - which stagnationists see as a telling sign of the lack of productive investment outlets. Foster and Magdoff also use statistics on utilisation of industrial capacity: from around 85% at the start of the 70s, to 78% in 2007.(44)

My personal conclusion? I don't see any very clear piece of evidence to swing it for me either way. I also have one big caveat - all the Monthly Review analysis is centred on the US. It seems quite plausible that in the US growth, profits, and investment have shifted from "productive" industry into financial services. But isn't this largely because production has been off-shored to where labour is cheaper? How do global shifts in poduction affect the stagnation thesis? As Foster and Magdoff themselves recognise, really we need a global analysis.(45) (See story 4).

story 3 - the law (or, alternatively, tendency) of the rate of profit to fall
Marx's idea on falling profit rates and crisis was only published after his death with the third volume of Capital in 1894. Its initial reception amongst his followers was not overwhelming, and its importance within the master's own work is another big factional debate involving frantic exegesis of posthumously published notebooks. Adherents point to one famous note where Marx calls it "in every respect the most important law of modern political economy". It causes "explosions, cataclysms, crises" until eventually "these regularly recurring catastrophes lead to their repetition on a higher scale and finally to [capital's] violent overthrow."(46)

In this section I look at just a few applications of the idea to the current crisis - quite likely there are more interesting ones out there I've missed. First though we have to try and grasp the underlying theory. I use Anwar Shaikh as my main guide.(47)

la ley, tu ley
In a production process, workers use "means of production" - raw materials, equipment and machines - to create a finished product. Marx breaks down the value of the total product into three parts: "constant capital" is the value of the means of production used up in the process; "variable capital" is the value of the goods workers need to sustain themselves; while "surplus value" is the value of the surplus product - what's left over and kept by capitalists.

In Marx's theory, all value comes from human labour, and the value of a commodity is a measure of the time required to produce it.(48) Means of production are commodities produced by human labour in previous production processes, so "constant capital" is the value of "dead labour" from the past. Variable capital and surplus value together make up the new "living labour" added in this production process.

Marx's capitalists, rather like the Malthusian ones, are not much bothered about consumption - they are intent on chasing profits. One way they can get profit (effectively, surplus value) up is by increasing working hours (total living labour); another is by cutting labour costs (variable capital) so they can take more of the living labour as surplus.(49)

There is fierce competition. One main way capitalists compete is by expanding their production. There is a basic upper limit on living labour - only so many workers and so many hours in the day - so once this limit is reached the only way to expand production is by investing surplus in increased means of production to increase the productivity of labour. In Marx's day, this meant above all the "mechanisation" of industry: while the labour force stays more or less constant, more and more machines are involved in production. This is the driving tragic force of the story - competition pushes capitalists into an arms race of capital accumulation.(50)

But if mechanisation, or more generally accumulation of means of production, is about increased productivity, how does it lead to lower profits? The core argument is this: first, increasing the quantity of means of production used in the system means increasing the total cost of means of production. Thus, in value terms, increasing constant capital, and so what Marx calls the "organic composition" of capital - the ratio of constant capital to living labour.(51) The extra machines do increase productivity, there is more output for the same number of workers. Total production goes up, and so does the surplus product. But mechanisation can't increase the surplus value - only increasing human labour, working hours, could do that. There is more stuff produced, but that is cancelled out by the fact that the value of commodities actually goes down - i.e., it simply takes less time to make them.

The all important "rate of profit" is the ratio of surplus value to total capital, constant and variable.(52) Variable capital has already been pushed down to the minimum, surplus value doesn't change, and now constant capital is rising - so the rate of profit has to fall.

Thus the competitive pressure on capitalists drives them to increase their capital costs and reduce their profit rates, until eventually some weaker capitalists' profits are pushed all the way down to zero, and they go bust. Or else, seeing low profit rates, they hold off from investing, hoping for better times which will never come.

holes in the theory
I think there are two big gaps in the theory. This doesn't necessarily mean it's wrong, just that the gaps need filling in.

First, there is an analysis of competition missing. In real markets there are monopolies, oligopolies, cartels, barriers to new capitalists entering markets, whether because of fixed start-up costs, legal or political obstacles, corruption, etc. All these imperfect market realities give capitalists breathing room to keep profits up. This is what led Sweezy and the stagnationists away from falling profit theory.

Second, there is a big unjustified jump in the accumulation argument. Marx's point is that surplus value doesn't rise even though there is more surplus product, because the values of commodities go down across the economy as new technologies make production quicker. But the fall in values also affects means of production, so raw materials and machines get cheaper too. If the productivity gain is big enough it can outweigh the accumulation effect - even though the quantity of means of production goes up, the cost actually falls and the organic composition of capital goes down.

Marx is basically assuming that when capitalists invest in new machines and technologies all they do is add bulk to the system. Is that right, or on the other hand does capital investment involve major productivity advances that actually increase profitability? I doubt there is a general abstract answer to this question - it really should depend on the specifics of a given economy, at a given time.

Marx himself, in his notes on this question, is sure that the rising organic composition of capital is "self-evident" or even "tautological".(53) But plenty of economists, even Marxist ones, haven't managed to follow his self-evident reasoning.(54)

law/tendency, secular/cyclical
Marx didn't develop his theory into a systematic account of how crises actually develop - leaving plenty of room for his followers to fill in the details.(55) In fact falling rate of profit theory hardly appeared in late 19th century and early 20th century Marxism, where the main camps were refomers who downplayed crisis theory altogether vs. underconsumptionists like Luxemburg. The Polish-Austrian economist Henryk Grossman is widely attributed with reviving it on the eve of depression in 1929.(56) Left communist Paul Mattick (1904-1981) became the leading interpreter and populariser in the US, arguing during the height of the long boom that Keynesianism had not resolved capitalism's troubles.(57) Currently the "law" is the official orthodoxy for many Trotskyist parties.

Amongst all these positions, there are a couple of key points of contention. Is it an iron law that rates of profit must fall, or is it just one "tendency" amongst others? And is the law/tendency about boom-bust business cycles or something more? On the one hand, it can be used to explain boomand bust cycles: rates of profit fall until capitals get busted or withdraw from investment; then in the ensuing slump capital accumulation stops, unused machines rust, and bankrupcies ease competition; so rates of profits rise again and the cycle starts back up.

But for most Marxist theorists there is also a deeper"secular" trend behind the cycles - temporary shake-outs are a countervailing force, but capital accumulation still builds up over the long term, and profit rates trend down. Crises repeat "on a higher scale" until the whole system shakes apart.

So to look at how some contemporary Marxists interpret the crisis today ...

Robert Brenner
The economic historian Robert Brenner is probably the biggest name amongst Anglophone Marxist academics to take a falling rate of profit line.(58) Actually Brenner doesn't follow Marx's "organic composition" argument, instead he develops an alternative based on "overcapacity" and price competition. From the late 1960s, new producers - Germany, Japan, the "Asian Tigers" - entered world markets for manufactured goods with new low cost production techniques, competing with established leaders like the US, causing price drops and lower profits all round. (59)

But all the same Brenner's work is widely used by more "orthodox" falling rate theorists - they disagree with his explanation of the root cause, but a lot of them rely on his profit rate statistics, and have very similar analyses of how the falling rate of profit goes on to cause crisis.

On Brenner's figures, profits rates were basically steady through the 40s, 50s, and 60s, then suddenly began to drop dramatically from 1973. There have been temporary pick-ups since then, but rates have never recovered to their post-war levels. Brenner calls this period the "long decline".

The basic transmission channel through which falling profit rates cause crashes is, for Brenner and most others, under-investment. The key function of the rate of profit is directing investment - capitalists invest in ventures where there are high returns. When profit rates fall capitalists cut back investments - even if they do have accumulated capital to invest, they may hold off waiting for profit rates to decline.

The second channel, notes Brenner, is to do with consumption. Capitalists responded to falling profit rates in the 70s by upping class conflict - i.e., the politics of neoliberalism. Wage cuts; cuts to the welfare state "social wage"; extended working hours. These assaults on labour explain the temporary raises in profit rates, e.g., from the end of the recession in 1982. But they didn't solve the problem, and in fact in the long run they made things worse by pushing down workers' consumption demand.

These two effects - on investment and consumption - add up to a general long-term drop in aggregate demand. "The persistent weakness of aggregate demand has been the immediate source of the economy’s long-term weakness." From here the story is virtually identical to the stagnationist tale. The symptoms of under-consumption and under-investment are the same, only in this story they are caused by falling profitability rather than monopoly power.

Then it is the same story of financial bubbles filling the demand gap. If anything, what differentiates Brenner from Foster and Magdoff in the final part of the argument is how much responsibility he loads on the state: "the continuation of capital accumulation has come literally to depend upon historic waves of speculation, carefully nurtured and rationalized by state policy makers — and regulators! — first the historic stock market bubble of the later 1990s, then the housing and credit market bubbles from the early 2000s."

Chris Harman
In the UK, Chris Harman of the SWP is the main Trotskyist proponent of the theory.(60) Harman upholds the "orthodox" organic composition line but uses Brenner's figures for recent profit rates. His analysis from then on is fundamentally the same - investment gap; attack on labour; consumption boosted with credit bubbles. Harman's emphasises the role of state expenditures - the SWP's "state capitalism" thesis - in supporting the post-war system.

He also has a special place for "monopoly capital" - or the "concentration and centralisation" of capitals. Unlike in Sweezy, this doesn't relieve the competitive pressure that drives accumulation. What it does do is push the secular decline. In the old days crises acted as "purges" by wiping out weak capitals. Now if big corporations fall they tear "black holes" at the heart of the system - they are "too big to fail", so they get bailed out. State capitalism delays the crisis - but that only makes the inevitable much worse when it comes.

Fred Moseley
A dissenting voice within the same tradition, Fred Moseley is a Marxist economist who accepts the falling rate theory but thinks that the current crisis doesn't fit the pattern.(61) Moseley agrees with Brenner that profit rates halved from the 60s to the 80s, but estimates that by 2006 they had recovered to within 10% of the post-war peak. The current crash was immediately preceded by years of rising profits. The wage squeeze was one main cause, but also productivity has picked up since the '80s.

In fact, as Moseley points out, even on Brenner's estimates profits have recovered more than half of their "long decline". So why should the crisis come now in a profitability upturn? Moseley concludes that this is a "Minsky crisis" rather than a Marx crisis - the issue is accumulation of debt not capital.

More Marxists...
There are plenty more variants. To start with, here are interviews with nine Marxist economists (including Brenner and Moseley) with different views:

... and the evidence
Have profit rates been falling? Is there a general correlation between profit rates and crises? Is there a correlation between profit rates and the "organic composition of capital"?

There is a range of Marxist studies on profit rates in the run up to the Great Depression, and post-war.(63) For very recent history - the run up to this crisis - Brenner seems to be the main source for proponents. I don't have any conclusions, just a few methodological points:(64)

1) For at least some Marxist theorists, it is integral to the theory that it work in labour value terms. But all the statistics on profit and capital are in money prices, so there is a fundamental translation question.

2) As with stagnationism, many think the issue of productive / non-productive labour is central. Marxist scholars can get very different results depending on how they define "productiveness" in their calculations.

3) Once again, all the studies use only statistics from the big industrialised countries, or in some cases just the US.

story 4 - global shift
All the stories so far have been about the first world, and above all the US. For mainstream Keynesianism it's a tale of animal investing and careless deregulating in the financial markets of New York and London; for the Marxists it's about structural weaknesses in over-mature first world capitalism.

My impression is that the common sense on the crisis has developed quite differently in Latin America than in the North. Here crisis stories commonly mention something to do with shifts in world power, often some spin on the theme of the US' declining "hegemony".(65)

At first it was just something happening somewhere else. Latin politicians were still happily gloating at yankee suffering as recently as September 2008 when, asked by reporters for a comment on the crisis, Brazil's president Lula replied - "what crisis? Go ask George Bush."(66)

The theoretical crutch for complacency was the "decoupling thesis": "developing economies" in general, Latin America in particular, were stronger and more independent than ever before. Growth was rapid; governments had big currency reserves; local financial markets made countries less dependent on international capital; the US was deep in debt and stuck in money-burning wars. China was the ascendant power (increasingly trading directly with South America, bypassing US control), the other BRIC countries (Brazil, Russia and India) rising behind it.

But that was false optimism: Latin America is also now sinking into recession(67); Asia still grows but much slower; Eastern Europe looks like a train wreck; the hated IMF is back.(68)

It is true that the importance of the US in global production is diminishing, but it isn't happening overnight. In 1970-5, according to IMF statistics, US GDP was 22.5% of the world's total output; in 2001-5 it was 20.5%. China's rise is more obvious than the US fall: in 1976-80 the world's most populous country only produced 3% of the world's income, in 2001-5 it was 14%, and expanding rapidly with annual growth of 13% in 2007.(69)

And while the US produces less (relatively), it actually consumes more - the difference is made up in imports. The US is world "consumer of last resort", and production elsewhere is seriously dependent on US import demand. In the same period 1970-5 the US exported 15.7% of all world exports and imported 15.6% - balanced trade. In 2001-5 it exported 11.6%, but imported 19.7%.(70)

Thus the main route of contagion for the crisis is the drop in US demand, which hits exports from manufacturers like China and India. In turn this lowers their demand for "commodities" - raw materials, oil and other fuels; which then hurts the economies of commodity exporters like Russia and Latin America.(71)

But although decoupling proved false, there are still good reasons for looking at whether the causes of the crisis are not just internal to the US. And while US hegemony isn't over just yet, recent events could well precipitate it.(72)

One crude global crisis story came from Lula, again, at the G20 in March - the slump was "caused and encouraged by the irrational behaviour of white people with blue eyes"(73) - a kind of racial twist on the "animal spirits" idea. Yet it's not hard to tell deeper stories about geo-economic shifts since WW2, which have been accelerating in recent decades.

But looking at the English language literature, including Marxists and other radicals like Brenner or the stagnationists, it's remarkable how little attention they give to the world outside. I've only found one analysis in English, by Graham Turner, which really takes a global perspective.(74)

Though Turner's economics is Keynesian, his story uses a lot of the familiar elements from the Marxist and stagnationist theories in explaining the "middle-term" of the causal run-up to crisis - i.e., what led to loose markets and credit bubbles?

labour shift
The basic issue here is globalisation of labour. Towards the end of the long boom production started moving out of high-wage first world countries into low-wage third world countries. US corporations led the process by off-shoring industrial jobs from the 1960s. In the US and UK, the process accelerated in the 1980s under Reagan/Thatcher - but even more so in the late 90s and early 2000s. The UK still had 4.2 million manufacturing jobs in 1997; 1.3 million of these went in the next ten years. The US lost over a fifth of its manufacturing workforce post-1997.

In the last section we saw how Robert Brenner traces the entry of Germany and then Japan into post-war markets previously dominated by US manufacturing. But this was nothing compared with the scale in which China and India are now doing the same.(75)

The shift in labour has two main components: first world corporations offshoring their own operations; and new third world corporations entering global markets with a competitive advantage from low labour costs.

The labour shift is also mirrored in a capital shift from the first to the third world. Again this is twofold: "direct investment" in physical capital by first world firms; and "portfolio investment" of global finance in third world corporates.

In terms of goods markets, the result can be seen in drastic changes in trade balances. In 1989 the trade balance between the US and China was close to zero. In 2007 the US had a trade deficit with China of $256 billion.(76) US trade with Mexico was balanced when the North Atlantic Free Trade Agreement (NAFTA) was signed in 1993. In 2007 it was $74bn in deficit.

And there is a double hit to first world trade - first world industry loses out in competition for its own local consumers; but also for growing third world markets as Southern countries build trade links with each other.

Note that this story could once again be seen as involving a kind of collective action problem. Perhaps many first world capitalists don't actually want to see the long-term decline of production in the lands where they were born; but following individual profit motives by globalising production leads there all the same.

vendor financing
Meanwhile, these deficits are funded by borrowing. This is what is sometimes called the "vendor financing" model. China does not have a strong local consumption demand for its goods - in simple terms, Chinese people are too poor, so it's more profitable for Chinese companies to sell their products to the first world at higher prices than local consumers could afford.

But if the US is not producing stuff to trade, how can US consumers pay for these extra imports? By getting into debt. Most of the US credit bubble is domestic - e.g., borrowing to buy houses. But a significant part is borrowing to pay for imported goods.

What this means is that, strange as it may seem, poor countries are lending money to rich countries to finance their lavish lifestyles. Chinese corporates, backed by the Chinese state accumulating its huge reserves of dollar bonds, are buying up US assets to keep US consumption rolling.(77) Meanwhile, though the crisis is likely to cause some rebalancing of all this, local consumption stays low: the incomes of the poor don't increase fast enough to boost consumption, while the rich save a larger proportion of their new booty. Private savings rates in "emerging and developing economies" have in fact risen from 23.5% of income in 1991 to 33.5% in 2007.(78)

Here is a key distinction between the global shift theory and the first world-centred stagnationist and profit rate stories we looked at before. In those stories, production - or real "productive" production - just disappears. There's no profit in it anymore, so capitalists simply hoard their savings or burn them in phantasmal waste production. Whereas in the global shift story production hasn't vanished - it's still happening, only it's gone to China (and Russia and India and Brasil, etc.)

A few of the main effects of this on the first world: first, wage competition from cheap third world labour creates unemployment and helps force first world wages down in what productive jobs are left - the neoliberal wage squeeze. Second, as in the other stories, credit bubbles grow as a way to keep consumption up even as wages drop.

Like other Keynesians, Turner sees this second step as largely about deliberate bubble-pumping by governments and regulators.(79) Corporates cause first world demand drop by shifting jobs and capital away; friends in officialdom try to mop up after them with low interest rates.

Third, the other thing the housing and credit bubbles did to fill the gap in manufacturing income was boost a whole new "service" sector, largely linked to "financialisation". To put it in Marxist terms, the first world shifts production to the third world; but helps make up for it by boosting "non-productive" employment at home.

The UK is the prime example of this: employment rose despite manufacturing decline, on the back of the City's positioning as low-tax low-regulation "financial hub" of Europe. According to Office of National Statistics (ONS) figures cited by Turner, in 1997 there were 4.9 million jobs in "business service, finance and insurance", and the same number again in "distribution (retail), hotels and restaurants" (growth in these other service sectors in the UK being largely parasitic on spillover from the financial boom). In 2007 there were 7.15 million finance jobs, 7.1 million in retail and entertainment.

It needs some work, but I think there could be another link to add to Turner's version. In his story financialisation (though he doesn't use the term) was policy-driven from central banks. But it could also be a "spontaneous" response from capital: as in Brenner's story, increased manufacturing competition pushes down profits in "productive" industry; first world capitals cede some of this ground to new industrialists but redirect their funds into finance, which offers better profit opportunities.

The point is that, although the US and other developed economies are losing their grip on productive capital, they still hold the reins of finance. The investment funding third world expansion still largely flows through New York, London, Tokyo. Financialisation is the way first world capitalists can still cream off surplus from global production even as they lose direct control of industry.

Thus, if we were to incorporate profit rate - or stagnationist investment gap - analysis into a global shift story, the starting point is to look at movements between at least three global "mega-sectors". First world productive industry loses profitability and investment in competition with third world productive industry. But the first world "non-productive" sector is also there grabbing for those profits and investment.

does it stack up?
To re-cap, in this story the opening of global labour markets does the job that capital accumulation did in stagnationist and Marxist theories: it causes the decline of first world industry; so prompting a shift into financialisation with all its bubbly instability. Turner tells it within a mainstream Keynesian framework, but equally you could bring this global analysis together with underconsumptionist or profit rate theories. You would then have to look at how these alleged structural forces play out in the whole shifting world system, not just the US and other industrialised powers.

I think the shifts mentioned here are undoubtable. The question (which I don't have an answer for right now) is the magnitude - are they big enough to explain what's happened? All of it, or maybe at least some of it?

not really a conclusion
I set out not to make any clear conclusions. Does there have to be one master theory beneath it all? Maybe there are suggestions to take up from all the different stories. Just a few personal observations:

If you're not a Marxist you don't need to believe in principle that economic explanations must derive from laws of production. Both production and market distribution systems are complexes of social relations embedded in deeper webs of power, custom, and indeed "psychology". Facts about any of these interlaced systems could be involved in explanations of economic events. "Psychological", or "group psychological" phenomena - e.g., culture shifts in markets, trader herd dynamics, social memory loss in Minsky's "periods of prolonged prosperity" - are almost certainly very important.

I started out very sceptical about Marxist falling rate of profit theory. I still think Marx's own "organic composition" argument is dubious; but reading this stuff has made me very interested in the role profit rates can play.

I have to say the last story fits my "intuitions" best of all, and that it is really striking how few first world commentators work global themes into their stories. Though it could be that I've got carried away by my personal impressions of being a European living in South America for the last few years.

The most obvious thing I've noticed crossing over is certainly the massive gap in income and consumption levels; and in comparison the sheer scale of credit bubble consumerism in Europe. But the other thing is how you see real productive, industrial, activity going on in a country like Brazil, the kind of activity that died out in western europe decades ago.(80) In Brazilian cities people all around are working making and fixing actual stuff, the same stuff that's bought and used in Brazil everyday.

Maybe these global changes aren't so big yet that they rock the system and cause real power shifts, but if trends continue in the same direction they will become so. The only foreseeable exit routes from globalisation are either a major return of protectionist politics in response to this crisis; or maybe the end of cheap fuel finally brings global trade to a halt.

Where will it all lead? In many contexts I like Minsky's way of talking about "capitalisms", plural, rather than "capitalism" as a monolithic singular: "Whereas all capitalisms are flawed, not all capitalisms are equally flawed." In many respects the global economic system we have now is not the same capitalism of 1914 or 1848 - capitalist systems are a family of adaptations not a monolith. I'd be amazed and surprised if this crisis led to the end of capitalist markets and property relations forever, but maybe it will precipitate changes that mean that the system we have to contend with in a few years' time is a quite different capitalism to the one we've known in recent decades.



2 according to UK Liberal Democrat party shadow chancellor Vincent Cable in this article in the New Statesman:


4 Greenspan has gone rapidly from near-deity of the markets to ultimate bogeyman. One finance bestseller now is William Fleckenstein, Greenspan's Bubbles, McGrawHill, 2008.

5 for US housing bubble figures and analysis see Center for Economic and Policy Research (CEPR):

6 One regulatory highlight that Stiglitz doesn't mention - even as the crisis was spreading in 2008 governments were implementing the Basle II international capital accord, meant to globally agree the capital requirements banks have to hold against their assets. For securitised bonds, regulators gave up altogether trying to independently assess the risks of securitisations and allowed banks to work out their own capital requirements, based on models from the Rating Agencies - which are paid by the same banks.

7 wikipedia article on "Keynesian resurgence", with tons more links: Though for a left view critical of the idea see John Bellamy Foster in this interview:

8 Online copies here: and here:

9 Keynes labels the predecessors he is attacking the "classics". Most historians of economics use a different terminology - Smith, Ricardo and other early economists are "classical"; economists after the "marginalist revolution" of the 1870s are "neoclassical".

10 "With perfectly free competition among work-people and labour perfectly mobile, the nature of the relationship [between wages and labor demand] will be very simple. There will always be at work a strong tendency for wage rates to be so related to demand that everybody is employed. Hence, in stable conditions every one will actually be employed. The implication is that such unemployment as exists at any time is due wholly to the fact that changes in demand conditions are continually taking place and that frictional resistances prevent the appropriate wage adjustment from being made instantaneously." A.C. Pigou, Theory of Unemployment (1933)

11 The "classics" tended to think the contrary - that "supply creates its own demand" - known as Say's Law. Across the economy as a whole, the more stuff that gets produced, the more stuff there is to sell to buy the stuff, so there is always enough demand to meet the total supply. See:

12 General Theory part III

13 General Theory chap 12 - this is one of the most famous and also best written chapters in the book, and worth reading:

14 Yes this is a vast oversimplification. One good starting point for more secondary reading on General Theory is this essay from the New School: Keynes made his own simplification of his crisis theory (though in an earlier stage) in his article on The Great Slump of 1930:

15 a pdf summary of Minsky's theory:

16 First labeled that by Paul Samuelson in his super-influential textbook "Economics", 1955. For a run-through of developments in mainstream macroeconomics after Keynes see Concise Encyclopedia of Economics:

17 for Robinson and the debates over interpreting Keynes see J.E. King "A History of Post-Keynesian Economics since 1936"

18 The details of how Keynes' theory relates to "Keynesian" policy is another fertile area for debate - see:

19 How close the actual international financial institutions are to Keynes' own proposals is another topic, e.g.:


21 What he said he really said was -"In one sense, we are all Keynesians now; in another, nobody is any longer a Keynesian." He added that maybe the second half of that sentence was the more important.

22 There are plenty of debates about what neoliberalism means. One of the best known references is Marxist geography professor David Harvey's A Brief History of Neoliberalism (OUP 2005). Here's a 2008 article by Harvey on neoliberalism and the crisis: For a Trotskyist criticism that the term is given too much weight see Chris Harman: The term itself originated in Latin America where it was (pretty literally) kickstarted by the Pinochet dictatorship (1973-1990) in Chile - famously, in 1975 the US-backed junta handed over economic policy to a bunch of Friedman students called the "Chicago Boys". Naomi Klein's book Shock Doctrine has made this story fashionable again. See also this article in Dollars and Sense 2004 - One good book on Latin American neoliberalism in English is Duncan Green's Silent Revolution.


24 A key part of the theoretical argument was Friedman and Anna Schwartz's analysis of the Great Depression in their book "A Monetary history of the United States, 1867-1960" (1963), which largely blamed monetary policy errors by the Federal Reserve.

25 Many writers apply Thomas Kuhn's idea of "paradigm shifts" to keynesianism/monetarism. Though note Kuhn himself was writing about natural sciences not economics, and not this area which is particularly heavily tied up with political interests. ;

26 The Return of Depression Economics (2nd edn. 2008), Penguin. see p189.

27 As far as I know, no one's developed an explicit "animal spirits" theory of economic policy paradigms yet.


29 see also this 2000 Monthly Review essay for a summary and reassessment -

30 The Great Financial Crisis, Monthly Review Press. Apart form the introduction, the book basically reprints essays which you can read on the MR website for free: (ch1 - the household debt bubble), (ch2 - the explosion of debt and speculation), (ch3 - monopoly-finance capital), (ch4 - the financialization of capital, (ch5 - the financialization of capital and the crisis) (ch6 - back to the real economy)

31 Maybe the biggest problem is that it works too well - at increasing growth and consumption year after year without regard for environmental constraints that could bring the whole thing to an end very soon.

32 A very good run-through of crisis theories including undeconsumption is Anwar Shaikh's 1978 "An Introduction to the history of crisis theories": Shaikh is a Marxist economist of the falling rate of profit tendency, but without dogmatism. Also this New School essay on the Malthus-Ricardo debate about underconsumption , Say's Law and "general gluts": There is a much-cited book by Micheal Bleaney called Underconsumption Theories (New York : International Publishers, 1976) but I haven't read it - may be out of print.

33 Underconsumption means exactly the same as overproduction - more stuff is produced than is consumed.

34 Malthus used this story not to argue for socialism or higher wages but in favour of a spendthrift landlord class.

35 Rosa Luxemburg The Accumulation of Capital ch. 25- Here Luxemburg is arguing against Marx, who was arguing against earlier forms of underconsumption theory. As Anwar Shaikh puts it, for Luxemburg, Marx had demonstrated that extended reproduction without corresponding increased consumption is "algebraically possible", but she felt it was not "socially possible".

36 Actually the 19th century had more and worse crises than the 20th. There was only one "depression" in the last century - in the 19th there were three in the US (1807-12, 1937-42, and the "long depression" from 1873.) Also see: Geoffrey H. Moore - "Recessions", in Concise Encyclopedia of Economics: ; and NBER statistics on length of recessions 1854-2001:

37 The MR writers don't see the "IT revolution" as a force on the scale of post-war "automobilisation".

38 Defining "non-productive" investment is a very big topic for Marxist economics - pretty much all writers agree that war production and advertising are included, but disagree over e.g., luxury consumer goods.

39 The Great Financial Crisis p.93, also here:

40 on collective action theory see:

41 Is this correct about wage movements? Report by Paul Mason (BBC Newsnight economics correspondent, and certainly one of the most interesting economics journalists around) on his blog:

42 ch1 - the household debt bubble: ,

43 ch2 - the explosion of debt and speculation: ()

44 ibid pp131-3, and

45 ibid pp21-2

46 Grundrisse (notebook 7) Penguin 1973 p750

47 "An Introduction to the history of crisis theories": Shaikh also discusses the earlier falling rate theories of Smith and Ricardo.

48 More accurately - the "socially necessary labour time" associated with the commodity. I.e., it isn't the actual amount of labour that went into any particular commodity that determines its value, but the time that would be necessary to produce that good using the standard technologies available.

49 This can also be expressed as increasing the rate of exploitation - the ratio of surplus value (S) to variable capital (V) E = S / V.

50 This is another "collective action problem" - see note 40. It would be better for capitalists if they could get together in a cartel and agree to stick with a certain level of investment. But competition forces capitalists into a vicious cycle that hurts them all.

51 The "organic composition" is Q = C / (S + V), where C is constant capital. Also sometimes written Q = C / L, where L+ S + V is living labour value. There is a distinction between the "organic composition" and the "technical composition of capital" - which is the ratio of the quantity of means of production to the quantity of the goods produced by living labour in the new production process. That is - organic composition is in terms of values, technical composition in terms of physical quantities.

52 The rate of profit is R = S / (V + C).

53 Theories of Surplus Value, Part III, ch23, section 2:

54 Including Shaikh himself (op. cit.) Also analytical Marxist economist Erik Olin Wright, who has a thorough seven page (pp131-8) discussion of this question in his 1978 book Class, Crisis and the State, available free on his website: (see chap 3).

Note - this criticism is not the same as the "Okishio Theorem", which Shaikh (and others) refute.

55 Here's a note (from Socialist Party of Great Britain) on Marx's published newspaper articles on financial crises:

56 Henryk Grossman "Law of the Accumulation and Collapse of the Capitalist System" (1929): Also Rick Kuhn's biography "Henryk Grossman and the recovery of Marxism": And here's a short interview with the biographer:

57 Mattick's archive page at

58 here's his website: Brenner was widely known for his work on the theory of the origins of capitalism (the "Brenner debate"). His books on recent economic history are "The Economics of Global Turbulence" (2006) and "The Boom and the Bubble" (2002). Here's a recent interview (March 2009):

59 Anwar Shaikh critiques Brenner's price competition argument from the standard Marxist perspective here (pdf): And here is John Bellamy Foster's critique for the stagnationists:

60 The rate of profit and the world today (July 2007) :; and "The slump of the 1930s and the crisis today" (Jan 2009):; and for a simpler version this article (Feb 2008):

61 The AWL Interview here is a very clear summary: His main work is: "The Falling Rate of Profit in the Postwar United States Economy" (1991); also this later paper "The Rate of Profit and the Future of Capitalism": Another summary article: A reply to Harman:

62 Thanks to "Alliance for Workers Liberty" - Star of Lenin to them for being the only Marxist groupuscule website I found that gave juxtaposed a wide range of Marxist opinions not just their own party line.

63 Joseph Gillman - "The falling rate of profit" (1956) was one of the first studies. Apart from Brenner and Moseley, see: Gerard Duménil and Dominique Lévy, The Economics of the Profit Rate: Competition, Crises, and Historical Tendencies in Capitalism. (1993) and "The Profit Rate: Where and how much did it fall? Did it recover? USA 1948-1997" (2002): ; Anwar Shaikh's major empirical work (with Ertugrul Ahmet Tonak) is "Measuring the Wealth of Nations" (1996). First chapter online here: There are some other empirical papers on Shaikh's website too: Harman gives more references in his papers cited above which I haven't checked out yet.

64 Also Moseley sets out the methodological differences between him and Brenner very clearly in the AWL interview referenced above. See Shaikh reference above for a detailed discussion of some of the methodological questions in estimating Marxian quantities.

65 To get a rough idea of the differences in left-leaning discourse in Brasil and US/UK, if you read Portuguese you could look at the contributions on the crisis to leftie intellectual magazine Le Monde Diplomatique Brasil ( They either feature some thesis on shifting global "hegemony" (perhaps as one amongst others): e.g., Ignacy Sachs on "the crisis: window of opportunity for tropical countries?",a2762 ; this account of the crisis influenced by Sachs along with Magdoff and Foster:,a2772 ; or alternatively, like "global power" theorist Jose Luis Fiori, they see it it as a necessary target of critique:,a2313

66 Or Argentina's president Cristina Kirchner's rousing speech, also in September: "the first world, which has been presented to us as something to aspire to, is collapsing like a bubble while we the Argentinians, modest and humble, hold firm with our national project."

67 World Bank forecasts (probably overestimates) from April 2009: world growth for 2009 -1.7% (first global slump since WW2); Latin America -0.6%; China +6.5% (down from 9% 2008??); South Asia +3.7% (down from 5.6%).

68 In November 2008 it made its first crisis loan to Ukraine, followed by Iceland - the first IMF loan to a west euopean state since 1976, and Pakistan. So far no loans to Latin America, but is early days.

69 IMF World Economic Outlook report 2007, especially ch4 (Decoupling the train? Spillovers and cycles in the global economy):

India went from 3.5% to 5.7%, while Brazil actually stayed constant at 2.7% - faster Latin American growth in the 2000s is only now making up for the crises of the 80s and 90s.

That IMF report has lots more empirical research on "decoupling" - i.e., to what degree the economies of other countries, and the world in general, are effected by US recessions, and how.

70 Ibid. European exports 28.1% to 23.2%; China 1.2% to 7.2%; India 0.7% to 1%. European imports 29.1% to 22.5%; China 1.3% to 6.2%; India 0.8% to 1.2%.

71 Other links include falling remittances from migrant workers; and the effect through the financial markets of the global credit crunch - even though the crisis this time didn't come from the "emerging markets", scared international lenders pull out capital from "riskier" markets.

72 Of course things still have a way to play out, but this year's IMF World Economic Report (April 2009) shows how growth falls so far from this crisis have mainly hit the US and other rich countries:

And the enormous borrowing increases to fund bail-out plans should in the long term weaken the US and other rich states. One piece of data that can look like it contradicts this is the fall in US treasury bond rates even as the US increases borrowing - but this is explained by the short term phenomenon of investor "flight to safety" in a crisis. Over the longer term the US state can only become less "safe" as it heaps on more debt.


74 Graham Turner - The Credit Crunch, Pluto Press 2008. See especially chs 4 and 6. I think Turner's political slant - it seems advocating protectionist social capitalism against "free trade" - is dodgy, and lots of the book appears hurriedly written - but all the same it's the only one out there with good global analysis and data. His economics is basically mainstream Keynesian, he's part of the "Left Economic Advisory Panel" (LEAP) associated with the left of the UK Labour party.

75 Japans movement into export markets was phenomenal - from 1950-65 it expanded exports by over 14% a year on average; and by 21% a year in 1965-71. (Robert Brenner - The Boom and the Bubble, p. 98). It's share of world GDP in 1971-75 had reached 8%, and world exports 8.5%. But China's production now is 14%+ of world GDP, and that could just be the beginning for the much larger country.

76 I.e., the US imported $256 billion worth of stuff more from China than it exported to China.

77 The full picture of how this works also involves international currency markets: net exporters like China generally try to keep their currencies down, which involves central banks buying up dollar assets and building reserves. See Turner chap.4 for lots more detail; and here is a quick beginner's guide to US trade deficit finance from Dollars & Sense magazine:

78 see IMF World Economic Outlook April 2009

79 "But the cost of this economic strategy [globalisation of labour], largely endorsed by Western governments and embraced by developing economies, has been higher debt levels in the West, as central banks seek to offset the downward pressure on wages back home." pp80-81

80 Though there is a credit bubble too ... see Turner chap. 6 on credit bubbles also developing in developing countries.