Following up on my post yesterday about Marxian crisis theory, that little bit about the GOD (“Grow or Die”) Principle and credit was only part of a larger discussion in Kunkel’s article about how Marxian crisis theory envisions economic crises arising naturally out of capitalism.
Below the fold I am going to explain my understanding of what it is Kunkel is saying about how such crises arise, but first I want to present a small excerpt from a recent Bloomberg News op-ed by James Livingston. Livingston is an historian teaching at Rutgers University and he makes the argument that even though economic austerity is what all the cool kidz are smoking right now, it is in fact very bad for your economic health.
I was directed to the article via Digby yesterday, shortly after posting that thing on Marx, GOD and credit, and I was struck by this statement:
In theory, the Great Depression was a financial meltdown first caused, and then cured, by central bankers. In fact, the underlying cause of this disaster wasn’t a short-term credit contraction engineered by bankers. The underlying cause of the Great Depression was a fundamental shift of income shares away from wages and consumption to corporate profits, which produced a tidal wave of surplus capital that couldn’t be profitably invested in goods production – and wasn’t invested in goods production. (emphasis added)
At no place in his op-ed does Livingston mention Marx, and there is nothing to indicate that he has any knowledge of Marxian crisis theory. However, his description of what gave rise to the Great Depression – from the point of view of an historian – mirrors exactly the kind of crisis the theory predicts capitalism will inevitably produce. It also sounds very similar to what we are going through right now.
As I mentioned previously, I don’t really have any background in this stuff, so I am just teeing off of what I’ve been able to glean from Kunkel’s article. However, as I understand it, the crisis theory works something like the following.
A crisis arises when there is an “overaccumulation of capital.” This occurs when the amount of capital that can be turned to profitable use outstrips the available opportunities that capital has to make a profit. Under such circumstances, factories and other commercial enterprises go idle because there is no demand for any more goods or services. Companies certainly don’t open new plants, invest in new machinery or technology, or hire new workers, and all for the same reason – there is no demand for any additional production.
Capitalism lends itself to this kind of crisis by its tendency to resist wage growth. By resisting wage growth
it deprives itself of the market, expanded by wage growth, it would need in order profitably to employ its swelling quantities of capital. Marx, in Volume II of Capital, is to the point: “Contradiction in the capitalist mode of production: the laborers as buyers of commodities are important for the market. But as sellers of their own commodity – labor power – capitalist society tends to keep them down to the minimum price.”
Limiting wage growth not only retards the market by denying workers sufficient money to purchase they goods they labor to produce, but it causes capital to accumulate in the hands of employers (corporations, corporate management . . . you know – the 1%) because they get to keep all the profit they make, instead of recycling it to their workers.
Eventually, a great deal of capital (money) accumulates in the hands of the very few, but there is insufficient economic opportunity for that capital to be put to use turning a profit. The market (the workers) have insufficient funds to purchase additional goods or services, and there is a natural limit to the indulgences and luxuries that the 1% can purchase for itself. The economy thus grinds to a halt.
So as it turns out, simply giving more and more money to rich people isn’t just bad for the rest of us . . . it ultimately is bad for rich people too, because they end up sitting on a lot of assets that cannot be put to any productive use.
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This brief, thumbnail description of Marx’s explanation of economic crises almost perfectly fits James Livingston’s description, above, of how the Great Depression came to be. It also tracks very well with what we are seeing in the 21st Century.
Remember the “equation” Marx used to explain the workings of the capitalist system. Constant capital (C) (i.e.,tangible assets like raw materials and factories) and Variable capital (V) (wage-labor) is transformed into a finished good that can be sold for a profit, i.e., “Surplus Value” (S). So: C + V ==> C + V + S. Of course, the very suppliers who sell C and V also constitute the only consumers capable of purchasing that surplus value S. That is, capitalism’s suppliers and employees ultimately are also capitalism’s customers.
As a result, a good deal of the surplus value generated by this process needs to be paid back to workers in the form of higher wages in order to keep the system flowing. If not, those suppliers/workers/consumers will have insufficient money with which to purchase the finished goods and services whose sale generates the profit that provides the entire system’s motive force.
And in the United States, from about WWII until around the 1970s – you remember, America’s “Golden Age” – this recycling of profit back to workers in the form of higher wages is exactly what happened. The chart below shows two lines: one is growth in total US productivity from 1947 to 2008, translated into wages (the “productivity-enhanced” line). The other is actual, real wages paid to median nonsupervisory employees during this same period.
(h/t Reality Sandwich)
As you can see, wage growth in the US tracked productivity growth very closely from 1947 until around 1967, and even then the divergence was fairly minimal. However, beginning roughly around 1973 the divergence picked up steam and since then the divergence between productivity growth and wage growth has only grown. As the author who created this chart explains: “Had wages increased along with productivity [as they had for decades before], the current average real wage for nonsupervisory workers would be $1,171 per week - $60,892 per year instead of today’s average of $31,824.”
That is . . . almost everybody – maybe 99% of us – would be a whole lot better off.
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As has been frequently discussed on this blog (and so I’m not going to repeat myself here) we know where all the additional growth in productivity went to when it stopped being paid over to average workers. It first went into the coffers of corporate America, and from there it was poured into the pockets of America’s executive class. That is why corporate CEOs who used to receive compensation roughly 40 times greater than that paid to the average worker now receive compensation roughly 400 times greater than that paid to the average worker.
But it didn’t stop there.
Money – excess capital – needs to be put to work; it needs to earn profit, or else it is just useless. And it is true that, for a while, at least some of that excess capital could be invested in growing the real economy, producing goods, opening factories, hiring workers. As I’ve discussed in detail here that was because the working and middle classes were flooded with cheap credit, which operated as a substitute for increases in real wages and allowed private consumption to continue growing. And so still all that lovely, lovely capital could continue accumulating in the hands of the 1%.
But there is, at last, a limit to the aggregate debt that any nation can take on. As we entered the 21st century it became no longer particularly profitable for the 1% to plow their accumulated capital back into the real economy – the American worker was getting very close to reaching that final private credit limit. And the 1% couldn’t possibly spend all that accumulated capital on themselves – seriously, how many body-temperature champagne bidets can one home contain?
So they did exactly what – according to Kunkel and David Harvey – Marxian crisis theory predicts they would do. They started buying financial products:
If capital has been overaccumulated, this means by definition that it can’t easily find a profitable outlet in increased production. The resulting temptation, Harvey suggests, with his emphasis on finance, will be for capital to sidestep production altogether and attempt to increase itself through the multiplication of paper (or digital assets) alone.
In this way, growth and productivity in the financial system can substitute for the impaired growth and profitability of the class-ridden system of actual production. By adding over-financialization, as it were, to his model of overaccumulation, Harvey means to show how an initial contradiction between production and realization later “becomes, via the agency of the credit system, an outright antagonism” between the financial system of fictitious values [credit advanced against future production] and its monetary base, founded on commodity values. This antagonism then “forms the rock on which accumulation ultimately founders.” In social terms, this will take the form of a contest between creditors and debtors over who is to suffer more devaluation.
And I have to admit . . . that does sound to me like a pretty fair description of what we’re looking at today.
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We’ve seen an absolute explosion in the amount of money sloshing around in the global financial markets over the past few decades. I recall listening to a report on NPR describing how at any given time something like $60 trillion is available to be invested, and everybody is trying to find the most profitable financial investment possible and nobody is thinking that they should be investing in actual economic productivity.
This is what Ben Benanke referred to as the “global savings glut” at the heart of the current financial crisis, an assessment with which both Paul Krugman and Nouriel Roubini have concurred. It is also what Joseph Stiglitz suggested could just as accurately be described as an “investment dearth.” In short, it seems to nothing less than “an outstripping of the profitable economic opportunities available for investment by the actual amount of accumulated capital available for use,” i.e., it seems to be precisely the “overaccumulation of capital” about which Marx warned.
And just as David Harvey predicted, the owners of all this surplus capital gave into the temptation to try to multiply it by purchasing paper/digital assets. Thus the increase not only in stocks and bonds but also the detonation of derivatives – credit default swaps, for example, issued in multiples many times greater than the value of the underlying financial assets on which they were based . . . suddenly there was a market for all this stuff.
And finally, again as explained by Harvey and Kunkel, now that the financial house of cards resulting from this overaccumulation of capital has collapsed, where do we find ourselves? Arguing over how much of a revaluation will have to be suffered by the debtors and the creditors. How much of a “haircut” will owners of Greek debt have to take? How much “austerity” will Greek citizens have to endure in order to pay back their debt? How many trillions will the US government guarantee private investment banks? How hard will those banks fight to prevent US homeowners from obtaining a “mortgage cramdown?”
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I have to admit, the more I learn about this new (to me) way of viewing economic relations, the more intrigued I become. Perhaps Marxian economic theory isn’t particularly useful for proposing an alternative system for how people should relate to each other, but it does seem – so far, at least – to be fairly spot on when it comes to identifying and explaining problems with the way people do relate to each other under our current system.
And, as it turns out, somebody was quite kind enough to let me know that Harvey has made his semester-long CUNY course Reading Marx’s Capital available to view on-line. So, if anybody reading this is interested, just click on that link to go and watch the lectures.
Me, I’m looking forward to it.