What Is The Cause of the Current Capitalist Crisis?

Theory and practice of Marxism

The development of a new workers party in the next period will almost certainly be achieved with the participation and guidance of the Socialist Party and the CWI. The last period has been extremely difficult for the ideas of Marxism but the leadership and our members have established us as the most incisive current in the workers’ movement.

Regarding both theory and practice, Lenin and Trotsky disagreed in the formative years of Russian Marxism. But the disagreements of the early Marxists created the mighty Bolshevik Party. This debate will strengthen the CWI as we move towards becoming the decisive force in world history in the next period. This document is written by comrades and friends in the same Marxist organisation. This debate will be another milestone in the great history of our Party.

This document addresses the questions which we believe are vital for comrades to grasp to further their understanding of the Marxist theory of crisis and the centrality of the Law of the Tendency of the Rate of Profit to Fall, so that comrades are theoretically and politically armed for the class struggle and challenges ahead. The intention of this document is to show that the CWI leadership have misplaced the Marxist theory of crisis and to highlight the dangers that this poses for our organisation, and the fate of the future socialist revolution.

Understanding the crisis is vital

“And even when a society has got upon the right track for the discovery of the natural laws of its movement — and it is the ultimate aim of this work, to lay bare the economic law of motion of modern society — it can neither clear by bold leaps, nor remove by legal enactments, the obstacles offered by the successive phases of its normal development. But it can shorten and lessen the birth-pangs”. (Karl Marx, 1867, Preface to the First German Edition of Capital Volume I)

Lenin (1921) wrote ‘‘Politics is a concentrated expression of economics’’ and our economic analysis inevitably translates into our political position and programme. Therefore it is a profound misunderstanding to describe the present debate in the CWI over the causes of the current capitalist crisis as being a narrowly theoretical disagreement. It is, in fact, an important question for the working class and its leadership which determines our perspectives, strategy and tactics, even if the issue appears at first glance something minor.

The current capitalist crisis is perhaps the greatest in the history of the system, or at least since the Great Depression of the 1930s. The crisis has been dubbed the ‘Long Depression’ as capitalism on a global scale is attempting to limp back to recovery after the financial and industrial crisis of 2007-8.

For the working class who are facing the brunt of this crisis and the austerity offensive of the capitalist class, the articulation of a way out of the crisis is a central question and a crucial one for the forces of Marxism. The movements in Turkey and Brazil, the Arab spring, the Eurozone conflagration and the mighty movements in South Africa are not just the indirect outcome of the current crisis, but also pre-tremors of even greater upheavals to come. Therefore, a correct short term and long term perspective, based on a thorough examination of the economic evidence, is necessary to map out a road for the working class and its leadership.

Our organisation needs an analysis of the crisis which can be used to 1) develop our cadre in the Marxist method - utilising the real living events that we are presented with, 2) provide a correct, Marxist narrative to explain the deeper fundamental reasons why workers are facing job losses, real terms pay cuts etc. (i.e. that the crisis is rooted in capitalist production) and 3) explain why only a socialist planned economy can overcome crisis.

There is general consensus that the immediate trigger of the crisis was the bursting of the housing bubble (based on ‘sub-prime’ mortgages) in the USA. This has led many people to examine the horrors of the financial and credit system and lay the blame here. An understanding of how this works is indeed important in providing a rounded out analysis. However, the Marxist method tells us that we need to dig a little deeper to find the root cause of the problem. This is where the discussion is needed within our party, because the leadership appear to be at odds with what we understand to be a genuine Marxist understanding of crisis. We view the current position as posing serious dangers for our forces in the stormy period ahead and that the juncture of the crisis has been misjudged.

Uniqueness of capitalist crisis

Before the development of capitalism, the pre-capitalist societies (slavery, feudalism etc) also experienced crises. However, unlike capitalism, production was fundamentally organised for direct use. For example, the feudal serfs worked the land directly for themselves and for their landlords. Crises occurred when they did not produce enough to meet their basic needs, such as in the case of a bad harvest or famine. These were crises of under-production, in relation to need.

Under capitalism, however, production is not organised to meet human need. As Marx explained, capitalism’s sole mission is to expand the value of capital. As capital is self-expanding value, the capitalists are the embodiment of capital and subject to its laws. They must invest their capital for the production of commodities, the realisation of the value congealed in these commodities and the subsequent reinvestment and expansion of capital value, which is the sole reason for the existence of capitalism. As a secondary outcome of this process, the capitalists are able to pocket a portion of the new value created as money profit.

This continuous expansion of capital (“economic growth”) for the sake of expansion itself inevitably leads to periodic crises. These are crises of over-production as Marx explained in The Communist Manifesto :

“In these crises, there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity — the epidemic of over-production. … Because there is too much civilisation, too much means of subsistence, too much industry, too much commerce.” Marx (1848)

Karl Marx on crisis

A capitalist crisis is always a crisis of over-production, but because capitalism is not organised to meet social need it cannot be described as over-production in relation to social demand. Instead, capitalism is organised so that capital can continuously expand in value. This has historically been the progressive aspect of capitalism in developing the productive forces. Thus, over-production is in relation to the need of capital to expand in value. Capitalist crisis occurs when capitalism can no longer fulfil its historical mission of accumulating and expanding in value through economic growth.

Marx’s Law of Value explains that only workers create new value during production. Since capitalists need to obtain new value, profit, to accumulate and expand their capital, the maximum rate of capital accumulation is therefore determined by the rate of profit. The rate of profit is the amount of surplus value obtained as a proportion to the value of capital employed in production. As the rate of profit falls, so eventually does the rate of capital accumulation. For Marx, the rate of profit was the motive force of capitalist production, the soul which animates it.

The falling rate of profit

Marx explained that the underlying cause of a crisis of over-production was the falling rate of profit in capitalist production:

“[T]he rate of profit being the goad of capitalist production…, its fall checks the formation of new independent capitals and thus appears as a threat to the development of the capitalist production process. It breeds over-production, speculation, crises, and surplus-capital alongside surplus-population.” Marx (1894)

The falling rate of profit shows capitalism meets the limits of the capitalist mode of production itself:

“The real barrier of capitalist production is capital itself. It is that capital and its self-expansion appear as the starting and the closing point, the motive and the purpose of production; that production is only production for capital and not vice versa…” Marx (1894)

The increasing productivity of capitalism manifests itself as an economy-wide average falling rate of profit. This is because more machinery and materials, ‘dead labour’, are used during production in relation to ‘living labour’. Hence the source of new value, the working class, is squeezed out of production, so that less surplus value is produced in each commodity and therefore less is realised per sale. All else remaining equal, the rate of profit falls. This is the essence of The Law of the Tendency of the Rate of Profit to Fall (subsequently referred to as The Law) and the central tenet of Marx’s theory of capitalist crisis.

Overcoming Crisis

To overcome the crisis, capital and the value of capital must be destroyed in order to restore the rate of profit. Subsequently, the rate of capital accumulation can increase and thus the economy can grow again. The rate of profit is thus temporally restored to some degree for a period, and the process repeats. This explains the regular occurrence of “boom and bust” under capitalism.

Marx held that crisis was nothing more than the destruction of capital value, whereby the weight of dead labour was purged from the system, which allowed the rate of profit to be restored so a new period of capitalist expansion could ensue. This is the underlying force that propels capitalism towards periodic crisis. The Law explains why the falling rate of profit drives the system towards crisis and also how it is to be overcome.

Intense debate

The origins and causes of the current capitalist crisis has been the subject of an intense debate on the left of the labour movement since the financial crash of 2007-8. A range of explanations have been offered, but a number of Marxist economists, not all of them pure academics, have identified the falling rate of capitalist profit as being the fundamental underlying cause of the crisis.

By underlying cause they mean that all aspects of the crisis, the financial crash or ‘’credit crunch’’, the massive fall in production throughout the capitalist world, the plunge in investment and the sluggish global recovery can be traced to the long term decline in capitalist profitability in the advanced capitalist countries (ACCs) and specifically in the USA 25% of the world economy.

Among Marxist economists and other scholars there is growing support for the falling rate of profit analysis of the crisis including; Roberts (2009), Carchedi (2012), Freeman(2009), Kliman (2012), Granados (2013), Brooks (2013), Grogan(2013), Shaikh(2008), Deepankar and Manolakos (2010), Cockshot (2012), Mattick (2011), Potts (2011), Liodakis (2012) and Wells (2011).

Julian Wells, an economist with the Open University, summed it up nicely in a letter to the Guardian in August this year in response to an article from Larry Elliot the economics editor on zero hours contracts:

‘’As Larry Elliott rightly says, the proliferation of zero-hours contracts represents an increase in the “reserve army of labour” in an attempt to reverse a long-term decline in profitability (Why stop at zero hours?) Why not revive child labour, 5 August). But neither this nor the other responses he mentions, such as financialisation, can ultimately overcome the tendency for profit rates to fall.

This is an inherent feature of capitalist competition, resulting not from pressure on prices but from each capitalist’s attempt to raise their individual profit rate by investing in more capital-intensive production processes. The overall capital, relative to total profit, goes up, and the profit rate goes down.

Although such things as attacks on wages can offset the basic tendency, sooner or later it results in crises such as the one in progress since 2008. Since the cause is too much capital, the only cure (within capitalism) is destruction of capital through bankruptcy of less-profitable enterprises. Palliatives such as increasing workers’ purchasing power can help the system limp along for a while but only at the cost of preparing a bigger and worse crisis.’’

Political Conclusions

Whether we see eye to eye politically with any of these economists is not the point. If we disagree with their economic arguments, we need to come up with a scientific refutation of them. It is an unacceptable method to dismiss the economic arguments of serious scientific researchers purely on the basis of what we regard as their erroneous political views.

Regrettably, the Socialist Party EC have attempted to use, to take just one prominent example, Andrew Kliman’s political conclusions to denounce his economic analysis and therefore our support for The Law as the underlying cause of crisis. This is simply not a logical argument, let alone a Marxist one. It is all the more surprising given that the Socialist Party regularly base their economics analysis on sources drawn from conservative bourgeois newspapers (e.g. The Financial Times), Keynesians (e.g. Paul Krugman), and more recently ex-Leninist Bill Jefferies and Mandelite USFI supporter Husson.

To spell it out in black and white, none of the supporters of this document endorse Kliman’s political conclusions, any more than the CWI, by upholding Ted Grant’s analysis of the Soviet Union, believe in reclaiming the Labour Party.

The Current position of the Socialist Party EC

The Socialist Party EC have made statements that would appear to contradict one of the fundamental tenets of Marxist theory. The main driver for the crisis has been described as a lack of demand and deflation (a general drop in prices). While we agree this is definitely a feature of the present crisis, it is not its cause. The cause, as predicted by Karl Marx and supported by mounting compelling evidence, is the falling rate of profit within the capitalist system.

The position of the leadership is clearly contradictory, as the Socialist Party Scotland (2013) perspectives document from this year’s Scottish conference in February stated:

“That is not to argue that the remedy to the capitalist crisis is to overcome “under-consumptionism”. In other words, to get people to spend more money and buy more commodities. Rather for Marxists the “lack of demand” is a symptom of the malaise, but it is also an exacerbating factor which is helping to deepen the crisis. In that sense austerity, currently the favoured policy of world capitalist governments and institutions is the worst option for the bourgeois.”

The Scottish section unanimously voted for a perspective in February 2013 that the lack of demand is only a symptom of the crisis, but at the party conference in England and Wales Peter Taaffe stated in March that lack of demand is the cause of the crisis and that it was completely false to blame the crisis on the fall in the rate of profit alone!

Sober assessment

Any analysis of the capitalist crisis can’t have such glaring contradictions and has to include a sober assessment of the research and literature produced from serious sources, including the work of Andrew Kliman and others. This does not mean merely criticising his conclusions, which we would say are inadequate and undeveloped, but the body of his work itself. In order for the argument of the CWI leadership to be proved valid, the arguments of the above authors and many others, their evidence and statistics, must be convincingly refuted. It is our contention that the leadership have been unable or unwilling to do this. In our view, the analysis of many leading comrades is sadly wanting and inadequate.

However, we emphatically deny that our criticism of the leadership’s position on the causes of the crisis depends upon the work of just one economist such as Andrew Kliman. Our view is that the crisis is primarily due to a persistently declining rate of profit and it is supported by a range of robust and peer reviewed research from reputable sources, but is also based on a serious study of the works of Karl Marx and the other historic figures of our movement.

Presently the intense debate on the causes of the crisis are a closed book to the SP leadership who have not taken up a serious study of those economists who agree with Marx’s most important law of political economy and those who reject it from various quarters.

Marx Vindicated

In our view, Marx’s vision of the fundamental cause of capitalist crisis has been vindicated by the course of the crisis itself. As Marx argued:

‘’But proceeding from the nature of the capitalist mode of production, it is thereby proved a logical necessity that in its development the general average rate of surplus-value must express itself in a falling general rate of profit. Since the mass of the employed living labour is continually on the decline as compared to the mass of materialised labour set in motion by it, i.e., to the productively consumed means of production, it follows that the portion of living labour, unpaid and congealed in surplus-value, must also be continually on the decrease compared to the amount of value represented by the invested total capital. Since the ratio of the mass of surplus-value to the value of the invested total capital forms the rate of profit, this rate must constantly fall.” (Marx, 1894 p213)

Moreover, it is not just Marxist economists alone who support the idea that the current capitalist crisis was caused by, and is continuing because of, the inability of the capitalists to restore the rate of profit but it is also verified by serious research undertaken by bourgeois economists.

Bourgeois evidence of the historical fall in the rate of profit in the USA

An outstanding data set identified but neglected by Marxists is from the Shift Index issued by Deloitte’s Center for The Edge in (2011). Deloitte are regularly cited in Socialism Today so are regarded as a reputable source. Their report described as “The Most Important Business Study Ever?” came up with these startling findings:

‘’These studies have followed 20,000 publicly traded firms between 1965 and 2010 to yield a comprehensive measure of profitability. All iterations (2009. 2010, 2011) shows that the rate of return on assets (not simply “fixed capital”) has been in dramatic decline for the past 45 years. It moreover demonstrates this decline both with and without integrating the banking sector. However, once the banking sector is included, which now accounts for 60% of total assets (30% in 1965), the decline has been even more pronounced.

More specifically, this comprehensive review found that ‘US companies’ return on assets (ROA) have progressively dropped 75 percent from their 1965 levels despite rising labour productivity’, a near doubling of labour productivity to be more precise.’’

Deloitte’s data valid!

Deloitte’s study came in for criticism from capitalist commentators as the right wing economists at Forbes highlighted:

‘‘One might have thought that managers would headline the report and invite discussion in order to understand what has happened and why. For the most part, however, corporate America has regarded the study with studied indifference. It’s still business as usual in the Fortune 500 and most business journals.

Yet every now and then, an intrepid critic steps up to challenge the Shift Index analysis. The most recent example is Bob Lewis’s article, Big Shift or Shifty Statistics? He writes: “On the surface, this 45-year private-sector-wide decline seems to reflect an across-the-board failure of management to do its job… Too bad it doesn’t stand up to close scrutiny… its logic is too shaky to rely on.”

However, Deloitte declared:

“After questioning and re-questioning our data and our assumptions, we came back to the same conclusions. The downward trend in company performance is accurate; the assumptions are reasonable, and further analysis confirms these persistent trends.”

Furthermore the research was compatible with the general development of the US economy as a whole:

‘‘How could there really be a decline in the rate of return on assets of 75% when the GDP grew from 1965 of around $750 billion in 1965 dollars to some $15 trillion in 2011? Are these numbers compatible? The answer is yes.

Comparing total GDP in nominal dollars doesn’t take into account population growth or inflation. When you allow for these factors, one sees that the per capita income (based on GDP) has grown about two and a half times over this 45 year period. This rate of growth implies a compound rate of growth of per capita income from 1965 to 2010 of around 1.9%, which is, as you would expect, in the middle to low end of the range of ROA during the same period (4.8-1.2%).

The decline in ROA is also consistent with the accelerating death of firms in the Fortune 500—a trend that has been under way for many decades, as described in the Richard Foster’s book, Creative Destruction’’.

Tellingly, Forbes also point out that financialisation has not helped American capitalism to restore profitability:

‘‘Equally, the massive expansion of the financial sector is not contributing to growing the real economic pie. As Gerald Epstein, an economist at the University of Massachusetts has said: “These types of things don’t add to the pie. They redistribute it—often from taxpayers to banks and other financial institutions.” Yet in the expansion of the GDP, the expansion of the financial sector counts as increase in output.

As a result of these various “overstatements” it’s hard to regard the GDP growth as a good guide to economic well-being or progress. In any event, there is nothing in the GDP numbers that would put in question the Shift Index analysis’’.

In short, this data from the US economy robustly supports Marx’s prediction that capital would become more centralised and concentrated through competition, and that the prime driver for this is the persistent falling rate of profit. While there has been a historical decline in the rate of profit in the US, this has been partially compensated for by compound economic growth. Although the rate of growth has been slow, it has nevertheless been an average year on year increase in economic output. This was maintained by massive injections of liquidity into the economies of the ACCs, but this was unable to halt the fall in the rate of profit which led to the credit crunch and financial panic of 2007-8.

It should be apparent that we are following the advice of Peter Taaffe (2012):

’’However, it is not sufficient to merely quote what Marx said on this question, but seek to locate an analysis in the real developments of capitalism without in any way repudiating the basically correct position of Marx on the issue’’.

Theoretical Confusion in the Socialist Party EC

Although not explicitly stated, certain leaders of the CWI do not accept the falling rate of profit as being relevant to economic crisis. Whether this has anything to do with the fact that the late economist Andrew Glyn rejected The Law is in question.

In fact, Andrew, when a member of our organisation in 1980, explicitly stated that Karl Marx’s formulation of The Law was theoretically incorrect and definitely never changed his mind. Although he left the CWI shortly after 1980, it is clear that Andrew’s ideas are still held or sympathised with by a number of comrades in the leadership.

So while there have been statements claiming that The Law is “totally correct” from some quarters, from others it is described as “just a tendency”. It is our contention that there is either confusion, misunderstanding or disagreement amongst the leadership in relation to Marx’s law. Some regard it as valid or formally correct without believing it has any impact on the formation of crisis (counter-tendencies have cancelled it out?) and others actually deny that it is important at all.

This is a complete reversal of the position that was held historically within our organisation and appears to have come about sometime in the early 1990’s because prior to that period our position was that capitalist crisis was fundamentally caused by the falling rate of profit. This has now radically changed.

Now we have a “one sided” explanation of capitalist crisis that it is caused by the over-accumulation of too much capital i.e. too many factories and machines and not enough customers to buy their production. This is a slightly more sophisticated explanation of workers not being able to buy back what they produce which is a false argument in any case.

Marx on over-production

For Marx, however, this was not his full explanation of the cause of crisis because the over-accumulation of capital and therefore over-production of commodities was only one side of the internal dynamic of capitalist production. As Marx clarified:

“The word over-production in itself leads to error. So long as the most urgent needs of a large part of society are not satisfied, or only the most immediate needs are satisfied, there can of course be absolutely no talk of an over-production of products— … The limits to production are set by the profit of the capitalist and in no way by the needs of the producers…. [T]he bourgeois mode of production contains within itself a barrier to the free development of the productive forces, a barrier which comes to the surface in crises and, in particular, in over-production—the basic phenomenon in crises.” (our emphasis) (Marx, 1863)

He also clarified:

“Over-production of capital, not of individual commodities — although over-production of capital always includes over-production of commodities — is therefore simply over-accumulation of capital.” (Marx, 1894)

“Different Expressions of the Same Process”

The cause of the over-accumulation wasn’t just due to investment as this was only one side of the process as he elaborated earlier:

“A fall in the rate of profit and accelerated accumulation are different expressions of the same process only in so far as both reflect the development of productiveness Accumulation, in turn, hastens the fall of the rate of profit, inasmuch as it implies concentration of labour on a large scale, and thus a higher composition of capital. On the other hand, a fall in the rate of profit again hastens the concentration of capital and its centralisation through expropriation of minor capitalists, the few direct producers who still have anything left to be expropriated. This accelerates accumulation with regard to mass, although the rate of accumulation falls with the rate of profit.” Marx (1894)

It is the falling rate of profit which directly determines investment and was responsible for the slowdown in capital accumulation in the last three decades in the ACC’s.

Further evidence to support The Law

Indeed, we feel we must include here contemporary research which completely supports our argument and which has not been acknowledged, like other evidence that flatly contradicts the leadership’s position, from Granados (2012).

In his paper ‘Does investment call the tune? Empirical evidence and endogenous theories of the business cycle’, Granados does a proper job of surveying the history of economic thought in relation to the business cycle of booms and slumps. His primary focus is on the contending theories of Marx and Keynes. The Keynesian thesis states that investment calls the tune for the economic cycle, while Marx held that it was profit.

Granados then applies both theories to the empirical evidence and he concludes:

“Though profits, investment, wages, output, and other variables swing up and down ‘together’ in expansions and recessions, observed lags and statistical analysis show that the two potential directions of causation between investment and profits are not equally likely. The hypothesis that profits determine investment is much more consistent with the empirical evidence. If investment ‘calls the tune’, then that tune is an echo of a previous melody.”

His empirical evidence is telling:

“Data on 251 quarters of the U.S. economy show that recessions are preceded by declines in profits. Profits stop growing and start falling four or five quarters before a recession. They strongly recover immediately after the recession. Since investment is to a large extent determined by profitability and investment is a major component of demand, the fall in profits leading to a fall in investment, in turn to a fall in demand, seems to be a basic mechanism in the causation of recessions.”

The fall in the rate and mass of profits is the “basic mechanism in the causation of recessions” as described by Marx, but apparently this is rejected by the Socialist Party EC.

Echos from German Social Democracy

Karl Kautsky was a leading Marxist theoretician of the German Social Democratic Party in the late 1800’s and in the first half of the twentieth century. He was famously known as the ‘Pope of Marxism’. Although latterly known as a centrist and as a renegade for his criticism of the Bolshevik revolution, Kautsky’s economic ideas about the causes of crisis are important historically.

It is our contention that the Socialist Party EC have moved backwards in their theoretical conception of crisis to adopt what is known as a multi-causal conception of crisis. This is in opposition to our contention that the fundamental driver for capitalist crisis is the falling rate of profit. It is our contention that the leadership’s conception of crisis is similar to Kautsky’s, and is therefore an outmoded theoretical conception.

“Drowning in Profits”

Kautsky’s position was explained in a book called The Class Struggle where he explained:

“The capitalist system begins to suffocate in its own surplus; it becomes constantly less able to endure the full unfolding of the productive powers which it has created. Constantly more creative forces must be idle, ever greater quantities of products be wasted, if it is not to go to pieces altogether.” (Kautsky, 1888).

This bears a strikingly similar ring to our contemporary position in for instance “The Case for Socialism” (2013):

“… the capitalists are drowning in profits. In Britain alone, the major corporations are hoarding an incredible £750 billion, which they are not investing because they do not consider they would make a sufficient profit from it.”

For some time, the Socialist Party have made the case that the crisis of capitalism is expressed as an excess of profits, not a shortage. The argument is made that even if the rate of profit has fallen, this has been more than compensated by a counteracting rise in the mass of profits.

These ideas have historical antecedents that originate with Kautsky. He, too, believed that the Law was an important factor but the mass of profit was more important than the rate of profit. He did not see profitability as the key cause of capitalist crisis.

“The decline of the rate of profit, and likewise of interest, in no way implies a reduction of the income of the capitalist class, for the mass of surplus that flows into its hands grows constantly larger…” (Kautsky, 1888)

“No Markets”

Crisis, for Kautsky, had another immediate source. It lay in the restriction of the market; that the working class would not be able to buy back what it had produced and the widening gulf between rich and poor.

As our party has recently made statements that there are “no markets” for capitalism. This is an echo from a time when Kautksy’s views were the views of German Social Democracy in the late 1800’s. As Kautsky said:

“For some time past the extension of the market has not kept pace with the requirements of capitalist production. The latter is consequently more and more hampered and finds it increasingly difficult to develop fully the productive power that it possesses. The intervals of prosperity become ever shorter; the length of the crises ever longer… “ (Kautsky, 1888)

And again:

“But there is a limit to the extension of the markets … Today there are hardly any other markets to be opened”.

The restriction of the market was a key element in his theory of crisis.

“The large majority of the capitalists have now nothing to do but consume what others produce (Kautsky, 1888).”

The idea of contracting markets, a key under-consumptionist idea was attacked at the 4^th Congress of the Communist International in 1922 (we refer to Lenin’s views later).

Our Party Manifesto again has eerie echoes of this outlook:

“The share of wealth accruing to billionaires has increased exponentially while that of the working class quite obviously has diminished. The working class cannot buy back the full product of its labour power”. (Socialist Party, 2012.)

While it is completely correct to show that inequality is built into the very fabric of capitalism, it is not correct to infer from this that this is a particular feature of this stage of capitalism. Levels of inequality were greater at the time of the robber barons like Rockefeller, Vanderbilt and Carnegie.

Similarities with Kautsky

Our official view is unnervingly similar to the position of Kautsky and his idea that markets become essentially saturated. Like our view of “no markets” for capitalism today, Kautsky’s understanding of crisis was that capitalism had exhausted its possibilities as an historical mode of production and this was leading to stagnation. Stagnation was the deciding factor in changing consciousness.

This theory is false as Marx held that capitalism tended towards period crisis and, eventually, the capitalist system would “burst asunder” leading to the expropriation of the expropriators.

Such a perspective will not educate the cadre and the class of the necessary preparations for sharp turns in class consciousness caused by a renewed major capitalist crisis which will be more severe and therefore pose the question of “who rules” in a sharper fashion.

The ‘drowning in profits’ outlook reflects the view that capitalism is sitting on an enormous pile of value. Capitalists and therefore capitalism drowns because it has created too much of the very thing that drives it. Profits drive capitalism. When capitalism is profitable it should be a sign that it is healthy. However, the sickness of the system is supposedly manifested, according to the EC, by huge profits that threaten to suffocate the capitalists themselves.

Endless Austerity?

It is also revealing how the party understand the term “stagnation”. If we mean by stagnation, a period of low growth then that is one thing. However, we think the EC means something else.

“The inevitable economic contraction which will arise from this will seriously impact on the British economy. This will result in a further ‘death spiral’, reflected in a plunging economy and rising unemployment, resulting in a further embittered mood with class polarisation and social turmoil… the most likely economic scenario is for continued economic stagnation, so that by 2015 the British economy will only be at the level of 2002, meaning a lost decade.” (Socialist Party 2012, Congress document)

We also state: “The G8’s austerity policies are not working. Most of Europe is in deep recession or facing economic stagnation.” (Mulholland, 2013)

And from our newspaper on 27 Feb 2013: “…the reality is that there has been no real return to growth. Prolonged stagnation - ‘bumping along the bottom’ - is the best scenario on offer.” (The Socialist 2013)

The party have acknowledged the perspective of the sober bourgeois commentators:

“A new report by the Institute of Fiscal Studies predicts that even were Britain to enter a ‘golden period of steady economic growth’ the wages of the poorest half of Britain would continue to decline in real terms until at least 2020, leaving a typical low-income family 15% worse off than they are now. Far from a ‘golden period’ the capitalist economic crisis is worsening. Cameron has told us to expect austerity to continue for the rest of the decade: growing unemployment, enforced part-time working and cuts to essential public services (Sell. 2012).”

What is being outlined here is a decade of prolonged stagnation caused by an excess of profits which are uninvestable. The perspective is one of years of austerity and a capitalism itself that grinds to a standstill.

Capitalism: Stagnant or Dynamic?

This is contrary to the theory of Marx who explained that capitalism is a dynamic system beset with contradictions and crises. It is incorrect to use the word stagnation as is has been applied. Capitalism never ceases to expand and contract. Capital expands or it dies, and capitalism is a system of disequilibrium, not stagnation, which leads to crisis, not stasis.

A sustained period of low growth for capitalism prepares it for inevitable cataclysmic convulsions. The crash of 2007-2008 was just the prelude to a much bigger potential future collapse in capital values, which even huge state intervention will be completely incapable of preventing, given the massive international debt mountain. As Nouriel Roubini, the radical Keynsian economist has pointed out, governments are “just kicking the can down the road and running out of fiscal policy bullets”.

The next period will not one of “endless austerity” but of, at some point, a deeper and more extensive crisis. It is, of course, completely correct that we expose the evils of capitalism in our publications. But a classic crisis isn’t just a long list of the excesses of the market, no matter how cruel and horrible.

The Coming Crisis

A crisis on a completely different scale than the normal boom/slump cycle has taken place. A crisis of this magnitude has been documented at least four times in the history of capitalism: 1) The Long Depression of the 1870s, 2) The Great Depression of the 1930s, 3) The Crisis of the 1970s and 4) The current Long Depression. All these crises were expressions of a falling rate of profit and a general destruction of capital value. The collapse in capital values that occurred during the 1930s gave momentum to fascism and ultimately led to world war. The current impasse is calling forth similar gloomy portents.

In our view we must prepare our ranks for the possibility of an impending capitalist collapse that will make the disgusting austerity measures pale by comparison. In our view this is a sober assessment of the long term perspective for world capitalism. We are not in a period stagnation but one of low growth, particularly in the advanced countries.

However, for the next decade, the CWI leadership appear to minimise the possibility of the scenario of a repeat of 2007-08 on a similar or even bigger scale, although accept it as a possibility.

The financial crisis was devastating for capitalism and nearly dragged the world economy into an epic depression. Alistair Darling recently said we were just 2 hours away from a complete collapse of the banking system at the height of the financial crisis. Around the same time, Gordon Brown’s aide Damian McBride has said that the Prime Minister considering deploying troops on the streets of Britain to quell anarchy, should cash-withdrawals and bank-cards fail to work. A repeat on a much larger scale is a development we must consider with the utmost seriousness.

Marx on the Counter-Tendencies

Marx was explicit that the falling rate of profit is the root cause of major capitalist crises.

Indeed, Marx’s exposition of how crises unfold can be applied directly to the Great Recession itself. Marx held that a falling rate of profit would eventually lead to a fall in the mass of profit being made by the capitalists and this is exactly what happened in the USA in 2006; a full year before the onset of the financial crisis (see the facts below under the section “Counter-tendencies exhausted, profits collapsed”).

It was Marx himself who identified the operation of counter-tendencies to the falling rate of profit. However the CWI leadership call on the mere existence of counter-tendencies as somehow negating the impact of the falling rate of profit itself. This is a downright distortion of Marx’s argument in Capital.

On the one hand, the leadership of our organisation state The Law is “absolutely correct” in the abstract, but then deny that it is responsible as the key driver for the crisis because of the counter-tendencies. This displays a misunderstanding and misrepresentation of how the law operates in conjunction with the counter-tendencies.

Marx was explicit that counter-tendencies could slow down the fall in the rate of profit but not halt it. All other influences act to “moderate” and “hamper”, “retard and partly paralyse” the fall in the general rate of profit (Marx, 1894 p239).

And:

“Thus the law acts only as a tendency. And it is only under certain circumstances and only after long periods that its effects become strikingly pronounced” (Marx, 1894 p239)(our emphasis)

Marx stipulated that the law became “strikingly pronounced” through real periodic crises in real time. As the law is an historical one, it has taken a considerable period to express itself. Yet it is expressing itself “strikingly” specifically in this real crisis and this is supported by an abundance of evidence.

“Just a Tendency”?

Meanwhile, some comrades in the leadership appear to deny the actual empirical operation of the law, stating that it is just a “tendency” and that it has no real relevance in relation to the crisis. This is in outright contradiction to the factual data, but a point needs to be made in relation to the counter-tendencies themselves?

The counter-tendencies are not a separate factor operating independently of the rate of profit. This is also a misrepresentation of how The L aw works. There are in fact six key counter-tendencies which the falling rate of profit actually brings into being and which operate as long as the rate of profit is falling. These are primarily:

1. More intense exploitation of labour (increasing productivity)
2. Reduction of wages below their value (wage cuts)
3. Cheapening of the elements of constant capital (reducing the cost of machinery)
4. The relative surplus population (using unemployment to force down wages and conditions))
5. Foreign trade (the expansion of global capitalism)
6. The increase in share capital (the growth of banking and finance/debt)

Although all of these counter-tendencies were operative during the neo-liberal period, they did not stop the persistent fall in the historic average rate of profit, as evidenced very clearly by the Shift Index data above.

Marxist economists have dissected the influences of these counter-tendencies exhaustively and have concluded that while the decline in profitability was slowed down in the 1980’s and 1990’s, some argue it was partially restored, it never recovered to the level experienced in the period of the post war boom of the 1950’s and 1960’s. In fact, the crisis of capitalist profitability can be traced to the 1970’s and capitalism has never fully overcome that crisis. Generally, however, there is unanimity amongst classical Marxist economists that the US rate of profit peaked in 1997 and then began to fall again on average until the crisis of 2007-8.

The partial recovery in profitability was due, in large part, to the increase in mechanisation and computerisation of production which boosted labour productivity or, as Marx would describe it, relative surplus value by increasing exploitation. The other was by the extension of trade through the development of capitalism in the Far East opening up new markets for capitalist commodities and investment. The development of other emerging economies was also important.

Counter-tendencies exhausted, profits collapsed

However, just as Marx predicted, eventually the counter-tendencies exhausted themselves and there was a sudden plunge in the mass of profit being made by US capitalism. In 2006 in the US, a quarter of the world economy, there was a slump in profits. In the 3rd quarter of 2006 the mass of pre-tax profits was $1,865 billion but in the 4th quarter of 2008 this had collapsed to $861 billion, a fall of more than half (see Brooks, 2012). On its own, such a catastrophic fall in the mass of profits would have caused a severe recession, but the slump in profitability and economic contraction detonated an implosion in the bloated edifice of international finance capital, resulting in an acute financial and economic disaster.

These facts appear to be ignored by the leadership of our organisation or disputed as “new” (?), and we state categorically that they must produce evidence which counters this data if their argument is to prove a valid and robust alternative. So far there has been no attempt to refute this evidence and we challenge the leadership that this is also a continued dismissal of concrete reality.

The concept that the counter-tendencies somehow negate the crisis mechanism of the falling rate of profit is a straw man argument and a sign of an unscientific approach.

Marx: lack of demand “never the cause of the crisis”

A central argument put forward in the publications of the CWI is that the crisis was caused by rampant inequality, falling wages, massive increases in consumer debt and a lack of demand for capitalist good and services.

This explanation is false from both the logical and empirical point of view. Marxists long ago rejected the idea that capitalism went into crisis because of the inability of the workers to buy back what they produced. This is, in fact, a distortion of the Marxist position. Marx rejected this explanation emphatically:

‘‘The general possibility of crisis is the formal metamorphosis of capital itself, the separation, in time and space, of purchase and sale. But this is never the cause of the crisis. For it is nothing but the most general form of crisis, i.e., the crisis itself in its most generalised expression. But it cannot be said that the abstract form of crisis is the cause of crisis. If one asks what its cause is, one wants to know why its abstract form, the form of its possibility, turns from possibility into actuality” (Marx, 1863)

So what Marx means by this is that the lack of demand for commodities, because there are not enough buyers for them, or the failure to be able to sell them, which is the same thing, is actually a description of the crisis, an observation of what is happening in the economy as it appears to us. It is the most “general expression” of crisis.

So Marx says that lack of demand is “never the cause of the crisis” which means not ever, at no time, not in any degree and not under any condition.

The under-consumptionist tautology

Marx’s clearest condemnation of the lack of demand argument, and it’s pretty sharp, can be found in chapter 20 of Capital Volume II where he describes the argument as a tautology (in other translations he describes the argument as being a “redundancy” i.e. useless).

Tautology is a logical term which means it is a circular argument. For example if I say “it is raining” and you ask me “why is it raining”(?) to which I reply, “because it is raining”, then that is a tautology. I am saying that the rain is, in effect, causing itself. A tautology is regarded as not forming a coherent proposition and it is not a valid argument full stop. So Marx says:

‘‘It is sheer tautology to say that crises are caused by the scarcity of effective consumption, or of effective consumers. The capitalist system does not know any other modes of consumption than effective ones, except that of sub forma pauperis or of the swindler. Those commodities are unsaleable means only that no effective purchasers have been found for them, i.e., consumers (since commodities are bought in the final analysis for productive or individual consumption). But if one were to attempt to give this tautology the semblance of a profounder justification by saying that the working-class receives too small a portion of its own product and the evil would be remedied as soon as it receives a larger share of it and its wages increase in consequence, one could only remark that crises are always prepared by precisely a period in which wages rise generally and the working-class actually gets a larger share of that part of the annual product which is intended for consumption. From the point of view of these advocates of sound and “simple” (!) common sense, such a period should rather remove the crisis. It appears, then, that capitalist production comprises conditions independent of good or bad will, conditions which permit the working-class to enjoy that relative prosperity only momentarily, and at that always only as the harbinger of a coming crisis” (Marx, 1885).

Major assertions based on flimsy textual evidence

To counter this crystal clear declaration of Marx, the leadership of our organisation have produced two very obscure quotes from Marx. The first one is from Capital Volume III and is a single sentence:

“The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses, in the face of the drive of capitalist production to develop the productive forces as if only the absolute consumption capacity of society set a limit to them.” (Marx, 1894 p.615)

In fact, this sentence is actually a bracketed note that Engels included when he edited Volume III after Marx’s death. It appears in the midst of a long digression on the role of credit completely separate from his main discussions on crisis but is a hardy perennial for those who attempt to stand by what is known as the under-consumptionist theory of crisis. This is a common theme in CWI literature that simplistically argues that capitalist crises occur because workers are unable to buy back all that they produce.

For example this is from Socialism in the 21st century by Hannah Sell (2006):

‘’capitalism is incapable of fully using the capacity that has been created because, ultimately, the working class cannot afford to buy all of the goods it produces. This leads to overproduction and overcapacity. The bosses attempt to deal with this through lay-offs and downsizing, resulting in a smaller number of industrial workers producing the same amount of commodities that a larger number produced in the past’’.

Now, Marx never anywhere said that this was the concrete reason for crisis, and in fact, as quoted above, he actually poked fun at the idea as “it is sheer tautology to say that crises are caused by the scarcity of effective consumption, or of effective consumers”.

If the leadership of our organisation are relying on the much misused quote that ultimately crises are due to the restricted consumption of the masses then there is a distinct problem, as workers will never be able to buy back all that they produce under capitalism.

Engels explained the place of under-consumption in his work Anti-Dühring (1878) which had been read and approved of by Marx:

‘‘But unfortunately the under-consumption of the masses, the restriction of the consumption of the masses to what is necessary for their maintenance and reproduction, is not a new phenomenon. It has existed as long as there have been exploiting and exploited classes…. The under-consumption of the masses is a necessary condition of all forms of society based on exploitation, consequently also of the capitalist form; but it is the capitalist form of production which first gives rise to crises. The under-consumption of the masses is therefore also a prerequisite condition of crises, and plays in them a role which has long been recognised. But it tells us just as little why crises exist today as why they did not exist before.’’ (On production)

In other words, ultimately the reason for crisis may be traced to this condition of capitalism because it is a precondition or prerequisite for crisis, but it doesn’t tell us why periodic crises and crashes occur under capitalism when they do and why they do on a regular basis.

Infamous footnote

The other quote used to justify support for an under-consumptionist explanation of crisis currently being held up as conclusive theoretical support for their position is a footnote added by Engels to volume II of Capital from a fragmentary sketch by Marx which was for “further elaboration” that he did not complete and is suitably abstract:

“Contradiction in the capitalist mode of production. The workers are important for the market as buyers of commodities. But as sellers of their commodity - labour-power - capitalist society has the tendency to restrict them to their minimum price.’’

“Further contradiction: the periods in which capitalist production exerts all its forces regularly show themselves to be periods of over-production; because the limit to the application of the productive powers is not simply the production of value, but also its realisation.’’

“However, the sale of commodities, the realisation of commodity capital, and thus of surplus-value as well, is restricted not by the consumer needs of society in general, but by the consumer needs of a society in which the great majority are always poor and must always remain poor”. (Marx, 1885)

Of course comparing this “footnote” with the key passage within the full text of volume II of Capital makes Karl Marx look like a fool, who appears to be arguing for two completely contradictory things at the same time! Given that Marx did not include this in his main text and did not elaborate upon it in any detail, it hardly stands as support for anything.

This is practically the total textual support that the leadership of our organisation have been able to come up with out of three volumes of Capital. This use of selective quotations underscores the one-sided approach taken up by the Socialist Party EC.

Rejection of Under-Consumption by Lenin

Further in our support we can also draw on the economic writings of Lenin that categorically reject the idea that crises were directly due to the under-consumption of the masses or low wages (variable capital).

“As we know,” writes Lenin in his Characterisation of Economic Romanticism, 1899, “the law of capitalist production consists in the fact that the constant capital increases faster than the variable; that is, an ever greater part of the newly formed capital flows to that department of social production which turns out means of production. Consequently, this department must unconditionally grow more rapidly than the one which turns out means of consumption. Consequently, the means of consumption come to occupy a less and less prominent part in the total mass of capitalist production’’.

And:

Nothing to Lenin was “more senseless than to deduce from this contradiction between production and consumption that Marx had contested the possibilities of realising surplus value in capitalist society, or had explained crises as resulting from insufficient consumption … The different branches of industry which serve each other as a ‘market’ do not develop uniformly, they overtake each other and the more developed industry seeks foreign markets. This circumstance does not by any means indicate that it is impossible for the capitalist nation to realise surplus value … It merely points to the unproportionality in the development of the various industries. With a different distribution of the national capital, the same quantity of products could be realised within the country.”

It should be mentioned honestly that the Bolsheviks did not hold directly to the theory of the falling rate of profit being the sole driver for capitalist crisis but a full understanding of Marx’s economic work had not been fully grasped within the movement at that stage but it was taken as self-evident that under-consumption as a crisis mechanism was completely false.

For Marxists, it has never been the case that capitalism faces a persistent problem in selling its commodities except in periods of acute crisis, but what is called the over-production of commodities is normally never a generalised problem as Lenin emphasised.

Unscientific method

The reason for periodic capitalist crisis lies elsewhere, however we must draw attention to the fact that a “battle of quotations” is an unscientific method of settling a theoretical dispute particularly where quotes are used out of context. It is our contention that the citations of quotes from Marx by the leadership of the CWI are (a) selective, (b) abstract or vaguely general and (c) not properly contextualised or explained.

Any presentation of the work of Marx must represent the general arguments he put forward as a whole. We therefore contend that the method employed by the leadership in their use of selective quotes from Marx is not being used to clarify and explain their position but rather to confuse and mislead members and is not in the scientific spirit of Marx and Engels. This is not engaging in discussion in good faith but is an attempt to obscure and mystify serious investigation into the object of discussion making use of selective citations as a rhetorical device to deflect criticism from an incorrect analysis.

Workers’ Consumption

It must be bluntly stated that capitalist crisis is not caused by inequality or a reduction in worker’s wages. If this were the case, capitalism wouldn’t be able to grow at all or would just collapse. Indeed, it is contradicted by the development of capitalism itself.

An article in Global Economic Intersection (2013) summed this idea up neatly in relation to the USA:

”Let’s start with the obvious. The claim that income inequality unconditionally leads to under-consumption is untrue. In the US we’ve seen inequality accelerate since the 1980s, and until 2007 we had robust demand, decent growth.”

Indeed, it is just untrue that inequality is a cause of crisis because it is refuted by the evidence of the growth rate of the world capitalist economy in the last three decades. Most of the ACC’s experienced a period of debt fuelled boom in the 1990’s and early 2000’s, despite the rapid rise in inequality and concentration of wealth at the top. This was not a new phenomenon as we elaborated above. Growth rates were not spectacular when compared to the post war boom but is difficult to identify the difference between a weak anaemic artificial boom and a genuine one.

It is a completely false argument that inequality or lack of consumption by workers leads to crisis precisely as Lenin cautioned, because the demand for means of production outstrips that of consumer goods. Therefore, arguments that the crisis was caused by the concentration of wealth at the top are equally erroneous.

Profits and investment not consumption

Workers consume food and consumer goods like TV’s and iPods and not industrial robots or super tankers. Why should a crisis all of a sudden be caused by a reduction in the consumption of TV’s and iPods? In any case, production and consumption of consumer goods continued to grow right up to the crisis, and crises usually originate, not in the consumer goods industries, but in the producer goods industries that make robots and super tankers. There were specific features in the US crisis of 2007-8 as it began in the housing market, which is both partly a part of consumption, but also major fixed capital assets.

It was the collapse in the sub-prime mortgage market that was the proximate cause or trigger for the crisis. The key to any crisis, however, is a reduction in investment in production (including areas like housing) and that depends, intimately, upon profitability (see Granados, 2012).

This is also supported by the actual statistics for the outstripping of consumption demand by production or investment demand (factories, raw materials, means of production) in the USA historically, for example. These figures draw on the work of Andrew Kliman but, as far as we are aware, they have not been successfully challenged or refuted.

In 2008, investment demand in the US was 77.2 times bigger than in 1933 while GDP was only 18.5 times as large and personal consumption demand was only 15.4 times as large. Productive investment demand grew nearly four times faster than GDP and nearly five times faster than consumption demand. Over this extended period investment quadrupled while consumption only increased by 16%!

This is compelling evidence against the idea that capitalism is a system existing for the production of consumer goods. Capitalism only exists for the accumulation of more and more capital for accumulation’s sake, and the motive force for this accumulation is the rate of profit. It is also false that capitalist investment in production ultimately has to mean a commensurate increase in the production of consumer goods. This is contradicted by the facts above as well as the theoretical position of Marx, Engels and Lenin.

The idea that under-consumption was a cause of the crisis is also contradicted by the facts as consumption in all branches of the ACC’s was at record levels when the financial crisis struck and, even as the crisis deepened, consumption continued. “Lack of demand” has only been a feature since the economies of the ACC’s entered the depression phase from which they are now slowly emerging.

The origin of the crisis lies in production just as Marx held, as crises do not originate anywhere in the market.

“The general conditions of crises, in so far as they are independent of price fluctuations (whether these are linked with the credit system or not) as distinct from fluctuations in value, must be explicable from the general conditions of capitalist production” (Marx 1863).

The source of major generalised crisis is to be found in production and only in production. It cannot be found in the market at all (distribution and exchange). Neither can it be found in the financial/credit system although Marx did accept the possibility of limited monetary crises. To argue, as the leadership does, that crises originate in consumption is not a Marxist argument at all and is something else alien to Marxism.

Neo-liberalism: The highest stage of capitalism?

A distinct feature of this period was the use of finance as a counter-tendency to the falling rate of profit, often based on government fiscal policy and recourse to debt, or what Marx called fictitious capital. Although this has now been termed financialisation, we challenge the idea that there was anything specifically “new” in this phenomenon despite its rampant growth.

The rise of finance and its penetration of the productive sectors has been a long term trend in capitalism that is continuing. It is not a new fundamental feature of capitalism. Capitalism, despite tremendous changes, has not fundamentally changed. We categorically reject the idea that neo-liberalism is a new stage in the development of capitalism as some authors have proposed , but merely expresses a continuation of developmental trends within the system that existed prior to the period.

The leadership of the CWI, whilst denying that they have described neo-liberalism as a new phase of capitalism, or that it has fundamentally changed, nevertheless echo many of the arguments of those that do. Specifically they maintain holding onto the idea that the rate of profit has not fallen significantly, in fact claiming that capitalism restored “profits” to the levels of the 1950’s and 1960’s, when this is broadly challenged by numerous Marxist economists and is contradicted by solid factual evidence that the leadership do not acknowledge.

‘Financialisation’ and Keynesian theory

We must also point out that the economists who propose the financialisation hypothesis of the crisis are left bourgeois or radical economists who may resort to using some Marxist terminology, but are actually deeply infected by the ideas of Keynes such as Stockhammer , Lapavitsas, Dumenil and Levy , and Husson of the Unified Secretariat of the Fourth International et al .

The financialistion concept straddles the ideological divide from post -Keynesians to old Keynesians and even to some who claim a certain adherence to Marxism. The arguments of this group of thinkers do not offer a Marxist explanation of the crisis, and tend to see it as primarily due to inequality and out of control finance which, while a surface feature of the period, was not the underlying cause of the crisis.

The debt fuelled artificial booms of the neo-liberals, however, merely displaced the core contradictions of the system in time and space onto the financial superstructure, stocking up combustible fictitious financial material for a renewed major crisis of epic proportions.

The recourse to financialisation under the neo-liberals clearly failed, and it is no coincidence that the nature of the credit crunch and financial panic was so severe. However, its root cause lay in the productive sector and the persistent decline in profitability in the US and other ACC’s.

More debt was piled on top of existing mountains of bad debt by capitalist corporations, governments and consumers in order to avoid a slump until the slowdown in investment and production, caused by the falling rate of profit, could not sustain the burgeoning swindle based financial edifice and the crash was inevitable.

Vulgar economic ideas

The leadership offer an explanation of the crisis on a number of levels. In general material we refer to the cause of the crisis in very simplistic or vulgar terms as a crisis of overproduction but basically repeating the idea that overproduction is caused by the inability of workers to buy back all that they produce. This propagandistic explanation is inherently false but on a deeper level the crisis is described as a crisis of over-accumulation.

In short, this is also a vulgar explanation that holds that capitalism has accumulated too much capital and that it has no “outlet” in which to invest the vast surplus profits that the capitalists have amassed. We have already demonstrated that the idea of the capitalist class drowning in profits or being awash with capital is totally contradicted by the facts in relation to the debt mountain (see section below “Drowning in Debt, not Profits”).

Mirror image of US under-consumptionists

The current position is almost a carbon copy of the argument put forward by the Monthly Review in the United States, the main advocate of an under-consumptionist theory of capitalist crisis, supposedly based on Marxism. The main theorists of this school are are Fred Madgoff and John Bellamy Foster. Their position is summed up in a book written by Foster and Robert W. McChesney in 2012 “The Endless Crisis”

“Capitalism, throughout its history, is characterized by an incessant drive to accumulate …. But this inevitably runs up against the relative deprivation of the underlying population …. Hence, the system is confronted with insufficient effective demand––with barriers to consumption leading eventually to barriers to investment.” (Our emphasis pp. 33–4)

This is completely contrary to Marx’s explanation for capitalist crisis as he regarded capitalism as a dynamic mode of production which tended towards crisis and not, as our authors above suggest, long term stagnation. It is also contrary to the facts but this type of explanation is repeated in the material of the CWI ad nauseam.

As was made clear by Lynn Walsh in a reply to a letter in Socialism Today in 2012:

“This factual data (most of which has been referred to in previous articles), in our view, confirms the analysis of a crisis in capital accumulation put forward in Socialism Today over many years.” Walsh (2012) (our emphasis)

This argument is also that put forward by the late Andrew Glyn in his book Capitalism Unleashed (2006) which is still quoted in our economic material:

“There is clear evidence of a long-term decline in capital investment. Capital accumulation is the key to economic growth. Increased capital stock is required to increase capacity and output, and investment is also the key to incorporating new technology in production. Capital expenditure, moreover, is a key source of demand, together with consumer demand. Figures for the growth rates of capital stock 1960-2004 (net growth after depreciation for worn-out or retired capacity) show that the pace of global capital accumulation slowed, especially in the advanced capitalist countries.” (Glyn, 2006 p86)

The key argument proposed is that there is too much excess capacity within capitalism for the capitalists to be attracted to invest but this is caused by a lack of, specifically, too little consumer demand.

This argument has far more in common with Keynes and has got nothing to do with Karl Marx. In this argument the influence of the rate of profit is completely absent, as it is in the material of the Monthly Review and the material of the CWI.

In fact, in the public material of the CWI, even a mention of the Marxist category of “the rate of profit” is generally absent and we will examine the reason for this below.

British Economic Disaster

The CWI leadership’s “crisis of over-accumulation” is also rooted in the ideas of Andrew Glyn, an academic Marxist and former supporter of Militant who we have already referred to above.

In his 1980 book “The British Economic Disaster”, Andrew mounted his first major assault on Marxist theory and emphatically rejected The Law, notably in the Appendix:

“Advocates of the LTRPF mistakenly assume that an increase in the physical mass of capital operated by each worker (the technical composition of capital) necessarily implies a rise in its value relative to the value of either output or surplus… [T]he explanation for the general fall in the rate of profit from the mid-60’s cannot therefore be the operation of the LTRPF”. (Glyn and Harrison 1980)

Andrew was confident he could disprove Marx’s “most important law of political economy”, which also brings into question the validity of The Law of Value itself. However, Andrew’s calculations were based on the false assumption that increases in labour productivity not only devalued newly produced commodities, but also devalued the existing capital employed in production! This led him to falsely conclude that “The explanation [of crisis] based on the LTRPF is … wrong”. (Glyn and Harrison 1980)

New (old) theory to replace Marx

To substitute for Marx’s theory of crisis based on The Law, Andrew proposed his own theory of over-accumulation in relation to the labour supply. Put very simply, he believed that, since employment had been relatively high for the previous two decades, it was not possible for the capitalists to use unemployment as a weapon to drive down wages and raise the rate of profit. He thought that the wage rises since the mid 60’s in the UK were the sole reason for the falling rate of profit. Yet, his own statistics (Glyn and Sutcliffe 1972, p66) show that the pre-tax rate of profit had started to fall since the early 1950’s, at a time of relative wage restraint!

Andrew believed if the profit share was low, capitalists wouldn’t invest, leading to economic crisis. Conversely, those who hold an under-consumptionist position believe that crises are caused by a high profit share because it reduces workers’ wages and thus lowers consumer demand. The Socialist Party EC maintain a multi-casual approach to crisis and believe that crises can be brought on when wages are either too high or too low.

Does the Socialist Party EC therefore believe there is a ‘goldilocks’ level of wages (not too high, not too low) that would avoid crises altogether? Logic dictates that this is what their current position implies. In fact, the primary method of economic analysis employed by the CWI leadership is to measure the wage/profit share and to ignore the Marxist category of the rate of profit, the same method employed by Andrew.

The contradictions in Socialist Party Analysis

This puts the Socialist Party EC in an obvious contradiction. On the one hand, they formally claim to accept The Law (in the abstract, of course). Yet, as part of their “multi-casual” approach to crisis, they adhere to Andrew Glyn’s “crisis of over-accumulation in relation to the labour supply” which was developed as a rejection of the very same Law! How can the EC advance two completely contradictory theories? Either Marx was right, or Andrew was right, but not both? It requires little effort to deduce who we believe to be correct on this matter.

EC member Lynn Walsh claims that the current crisis is one rooted in over-accumulation of capital and draws on Andrews’s ‘Capitalism Unleashed’ as evidence:

“There is clear evidence of a long-term decline in capital investment… Figures for the growth rates of capital stock 1960-2004 (net growth after depreciation for worn-out or retired capacity) show that the pace of global capital accumulation slowed, especially in the advanced capitalist countries (see Andrew Glyn, Capitalism Unleashed [2006], p86)…” (Walsh 2012)

However, Lynn fails to mention that the very same book also shows a long term decline in the UK pre-tax rate of profit since 1965, from 14% to 8% and a massive collapse in the rate of profit in Japan since 1970, from 24% to 8% (Glyn 2006).

So Even by Lynn’s own sources, the rate of profit has fallen! Why do the CWI leadership choose to ignore this and deny the empirical validity of The Law?

Two-stage nationalisation

The abandonment of The Law and his departure from Marxist theory led Andrew to reject not only Marxism, but also the basic tenants of socialism such as the nationalisation of the economy.

In 1985, he wrote a pamphlet for the reformist-left Campaign Group of Labour MP’s called “A Million Jobs a year” – a programme for a Labour government to restore full employment. In this, he rejected socialist nationalisation of the economy and instead put forward a programme of public control over private capitalist industry rather than public ownership. Amazingly, this contradicts a pamphlet he wrote for Militant only 8 years previously “Capitalist Crisis: Alternative Economic Strategy or Socialist Plan?” (Glyn 1977) where he attacks the very ideas he later presented!

He does decisively call for the immediate nationalisation of the banks:

“The major financial institutions are capitalism’s nerve centre, with a dense web of links to industry, and capable of causing financial chaos in a matter of minutes by moving out of sterling or away from lending to the government. Taking them into immediate public ownership seems absolutely indispensible if a Labour Government is to prevent financial crisis and be enabled to use the credit system as part of planning for full employment.” (Glyn 1985, p31)

Of course, the nationalisation of the banks is something that all members of the Socialist Party would support without question. What is significant is his approach to the rest of the economy:

“It can be argued that such approaches to the control of [private capitalist] industry would have the advantage of demonstrating, through the process of struggling to shape the development of the economy, the justification and eventual necessity for the full implementation of Clause IV [i.e. nationalisation of the commanding heights]. Discussion and evaluation of these various approaches to controlling industry… is an absolute priority if a convincing Full Plan for Full Employment is to be constructed.” (Our emphasis Glyn 1985, p34)

In other words, once the banks have been nationalised, a socialist government would have to somehow demonstrate the need for the nationalisation of private industry, which would take place over an indefinite amount of time.

CWI adopts two-stage “socialism”

Unfortunately, Andrews’s ideas, fine economist though he was, seem to have been partially adopted by our organisation. In Socialism Today, Lynn Walsh reviewed the book of Keynsian economist Paul Krugman “End This Depression Now” and explains the “socialist” solution:

“The banks and finance houses would have to be nationalised (not bailed out and propped up at public expense), and run under democratic workers’ control and management… Such measures would undoubtedly meet the entrenched resistance of the capitalist class. State intervention in favour of the working class would unavoidably pose the question of the takeover of the commanding heights of the economy, to form the basis of a democratic plan of production” Walsh (2012b).

Lynn believes that the banks should be nationalised first, and this would “unavoidably pose the question” of nationalisation of the rest of economy after an undefined amount of time.

Another example from Lynn, this time from our newspaper:

“Workers are questioning the legitimacy of the capitalist system. What is required is a clear alternative. This means for a start, taking over the banks, not merely to subsidise their losses but to reorganise the banking system to act in the interests of society. This would be the first step towards a socialist planned economy, run under workers’ democracy.” (Our emphasis Walsh, 2012c)

A similar position is also put across in the Party’s latest pamphlet “The case for Socialism” (2012), published this year:

“So what is the alternative to dictatorship of the markets? As a start we call for the nationalisation of the big banking and finance companies…That is why a crucial step towards solving the economic crisis would be to take into democratic public ownership the 125 or so big corporations that control around 80% of Britain’s economy.” (Our emphasis)

Again, the Socialist Party EC presents the case that the banks should be nationalised first, and then the next “step” would be to nationalise the economy, after an undefined amount of time. The Socialist Party EC justify this position because they claim it is in line with the transitional programme and the transitional method. However, in our view, this shows a failure to understand the transitional method itself.

Historically, this two-stage approach has never been the position of the party. Partial nationalisation leading to further nationalisation was the position of Tribune, the left-reformist grouping in the Labour Party in the 70s/80s whom Militant so successfully defeated in debate after debate in the Labour Party. For a Tribunite idea such as this to enter the lexicon of our party stretches the idea of transitional demands to breaking point. We have to ask ourselves: when does a transitional demand transform itself into a reformist one? We believe the answer is when it is underpinned by an incorrect interpretation of Marx’s political economy, namely, Marx’s laws of motion of capitalism and his most important one on the rate of profit to fall.

Militant Tendency attacks two-stage socialist programme

In the 1977 Militant pamphlet “Capitalist Crisis: Alternative Economic Strategy or Socialist Plan”, the very same Andrew Glyn sharply criticised those who failed to put across a clear socialist programme of simultaneous nationalisation of the economy:

“By attempting to go part of the way towards a socialist programme, this strategy is not “transitional” to such a programme, but is transitional to a tremendous disaster. An attempt simply to implement such a programme would be met by the capitalists using the enormous power left in their hands to sabotage the government’s plans. The danger is not just that the ideas of socialism would be discredited in such a way, but that the economic chaos which would result would pave the way for a reactionary takeover on the basis of crushing the organisations of the working class, as the Chilean experience makes clear.” (our emphasis Glyn , 1977)

In Militant International Review 34 (1987), Bob McKee wrote a scathing review of Glyn’s “A Million Jobs a Year” and the idea of a two-stage approach to socialism after Andrew had theoretically retreated:

“A socialist leadership must explain to the working class clearly and from the beginning what is necessary in order to give them the most direct way of controlling the economy. That can only be a programme of public ownership, under workers’ control and management, of the financial institutions and major industrial and commercial monopolies. If a [socialist] government was to follow the policies [outlined by Glyn] and decide it was not necessary ‘immediately’ … to take over the commanding heights, then it cannot succeed in really controlling the economy. It will also confuse and weaken the workers’ resolve if it changes its programme midstream after the capitalists have been able to sabotage the economy and prepare for political reaction. In such a situation, the advantage is with the capitalist class while they continue to hold the levers of economic and political power.” (our emphasis)

Our organisation in 1987 correctly pointed out the pit-falls of presenting a misleading and ambiguous two-stage socialist programme to the working class. But it is exactly this muddle of a programme that the Socialist Party EC are advancing in our current material.

Drowning in Debt, not Profits

The leadership’s apparent enthusiasm for the expropriation of the UK banks stems from the idea that they contain £850 billion locked away in the vaults. They have equally extravagant notions corpulent US banks. However, the idea that the capitalists are sitting on massive cash piles doesn’t match up with the facts.

Now, of course we don’t reject this figure necessarily, but what does it really mean? Fundamentally the cash assets in the vaults of the banks have to be balanced against capitalist debt. Just as in a household you may have £1,000 under the mattress, but if you owe your creditors £10,000, your actual real assets are minus £9,000.

Have the capitalists in the UK reduced their debt burden massively since the financial crisis? Hardly as the McKinsey Global Institute pointed out in a report in January 2012 called ‘’Debt and deleveraging: uneven progress on the path to growth”:

“The United Kingdom: Deleveraging has only just begun. Total UK public- and private-sector debt has risen slightly, reaching 507 percent of GDP in mid-2011, compared with 487 percent at the end of 2008 and 310 percent in 2000, before the bubble…”

UK banks have managed to recapitalize somewhat, but financial companies have increased debt outlays since the Great Recession and total UK debt stands at an amazing 507% of GDP! UK Non-financial corporations have more than twice as much debt as monetary assets. Far from drowning in profits, the capitalists are drowning in debt!

Fictitious Capital

The idea proposed by the CWI leadership, that it is just a question of seizing control of this mythical reservoir of capital and investing it is, in our opinion, politically dangerous. The current economic policy of the CWI leaders is based on a false notion of cash fat capitalist banks, when in fact the financial resources of international capitalism are deeply in the red and comprised primarily of fictitious capital.

Why are the CWI leaders clinging to this false analysis i.e. that there is sufficient capital available to re-energise the economy but only if the banks were brought under state control?

The Socialist Party EC is attempting to argue that this is the application of transitional demands, but you cannot base transitional demands on a skewed version of the facts. The working class must be told the truth and it is pure utopianism and dangerously misleading to suggest that seizure of the phantom bank reserves can be regarded as a “first step” towards achieving socialism.

Conclusion

We submit that the leadership of the Socialist Party and CWI are in gross error in relation to their interpretation of the causes of the crisis in Marxist terms and that this is infecting our strategy and tactics accordingly.

In our view, this has potential explicit dangers for our forces now, but even more so in the medium to long term.

This document is an initial contribution to the debate and we have concentrated more on explaining our criticisms of the leadership’s analysis of the crisis but also on some of the potential dangers involved.

We welcome this debate and will strive to engage in it in the spirit of our great teachers Marx, Engels, Lenin and Trotsky. We also pledge our complete loyalty and commitment to the CWI and it is, in our opinion, in the best interests of our movement that we are raising these principled Marxist disagreements. For us, in the words of Trotsky, from In Defence of Marxism: in 1939:

“It is absolutely unthinkable that this old society can be overthrown and a new one constructed without first critically analyzing the current methods. If the party errs in the very foundations of its thinking it is your elementary duty to point out the correct road.”

Build the CWI, build the forces of Marxism!

References

Brooks, M (2013) Capitalist Crisis Theory and Practice: A Marxist analysis of the Great Recession eXpedia

Carchedi, G. (2012) Behind the Crisis: Marx’s Dialectic of Value and Knowledge Historical Materialism books

Cockshott, W.P. (2012) Is the theory of the falling rate of profit valid. World Association of Political Economy Conference, 20-25 May 2012, Mexico City. http://eprints.gla.ac.uk/66937/1/66937.pdf

Deepankar, B. and Manolakos, T. (2010) Is There a Tendency for the Rate of Profit to Fall? Econometric Evidence for the U.S. Economy, 1948-2007 University of Massachusetts – Amherst http://scholarworks.umass.edu/econ_workingpaper/99/

Denning, S (2011) The Big Shift or Shifty Statistics? Forbes http://www.forbes.com/sites/stevedenning/2011/10/19/the-big-shift-or-shifty-statistics/2/

Deloitte (2011) The Shift Index http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/TMT_us_tmt/us_tmt_shiftindex_revised_120512.pdf

Engels, F. (1887) Anti-Dühring http://www.marxists.org/archive/marx/works/cw/volume25/index.htm

Foster, J. B and McChesney, R. W.. (2012) The Endless Crisis: How Monopoly-Finance Capital Produces Stagnation and Upheaval from the USA to China. New York: Monthly Review Press.

Freeman, Alan (2009): What makes the US Profit Rate Fall? MPRA http://mpra.ub.uni-muenchen.de/14147/

Global Economic Intersection (2013) Is Consumption Distorted by Income Inequality? http://econintersect.com/b2evolution/blog2.php/2013/02/14/is-consumption-distorted-by-income-inequality

Glyn. A, Sutcliffe. B, (1972) British Capitalism, Workers and the Profits Squeeze Penguin Books

Glyn. A (1977) Capitalist Crisis: Tribune’s Alternative Economic Strategy or Socialist Plan Militant

Glyn. A. Harrison. J, (1980) The British Economic Disaster Pluto Press

Glyn. A (1985) A Million Jobs a Year Verso Editions

Glyn, A. (2006) Capitalism Unleashed: Finance, Globalisation, and Welfare Oxford University Press

Granados, J. A. P. (2013), Does Investment Call the Tune? Empirical Evidence and Endogenous Theories of the Business Cycle, in Paul Zarembka (ed.) Contradictions: Finance, Greed, and Labor Unequally Paid (Research in Political Economy, Volume 28), Emerald

Grogan,B. (2013) From accumulation to dis-accumulation paper for the Heterodox conference of economists http://www.hetecon.net/documents/ConferencePapers/2011Refereed/Grogan_AHE2011039R.pdf

Kautsky,K. (188) The Class Struggle http://www.marxists.org/archive/kautsky/1892/erfurt/

Kliman, A. (2012) The Failure of Capitalist Production Pluto press

Lenin,V. I. (1899) The Characterisation of Economic Romanticism https://www.marxists.org/archive/lenin/works/1897/econroman/index.htm

Lenin. V, I (1921) Once Again on the Trade Unions http://www.marxists.org/archive/lenin/works/1921/jan/25.htm

Liodakis, G. (2012) Transformation and Crisis of World Capitalism: Long-run Trends and Prospects

Paper for the Joint Conference “Political Economy and the Outlook for Capitalism”

Mattick, P. (jnr) (2011) Business as Usual: The economic Crisis and the Failure of Capitalism Reaktion books

Marx. K (1848) Manifesto of the Communist Party http://www.marxists.org/archive/marx/works/1848/communist-manifesto/

Marx. K (1863) Theories of surplus value http://www.marxists.org/archive/marx/works/1863/theories-surplus-value/ch17.htm

Marx, K. (1867) Capital Volume I Marxist internet archive http://www.marxists.org/

Marx, K. (1885) Capital Volume II Marxist internet archive http://www.marxists.org/

Marx. K (1894) Capital Volume III Marxist internet archive http://www.marxists.org/archive/marx/works/1894-c3/ch15.htm

McKee, B. (1987) A Million Jobs A Year - Reviving the AES Militant International Review number 34

McKinsey Global Institute (2012) Debt and deleveraging: uneven progress on the path to growth

Mulholland, N (2013) No to G8 austerity The Socialist, 12 June 2013

Potts, N. (2011) Marx and the Crisis Capital & Class October 2011 vol. 35 no. 3 455-473

Roberts, M (2009) The Great Recession: Profit cycles, economic crisis A Marxist view Michael Roberts

Sell,H (2012) Action against austeritym The Socialist 26th September

Sell, H. (2006) Socialism in the 21^st Century http://www.socialistparty.org.uk/socialism21/

Shaikh, A. (2008) The Deepening Economic Disaster, speech, available from
http://nyusociology.org/blogs/radical/2008/12/08/the-deepening-economic-disaster/

Socialist Party (Scotland) (2013) Perspectives for Scotland

Socialist Party (2012) British Perspectives

Socialist Party (2012) Election Manifesto

Socialist Party (2013) The Case for Socialism

Taaffe, P. (2012) The profits crisis debate Socialism Today letter by Wallace. B and reply by Taaffe, P. Issue 159 http://www.socialismtoday.org/159/profit.html

The Socialist (2013) .Austerity… Anger… Action! The Socialist, 27 Feb

Trotsky, L. (1939) In Defence of Marxism Pathfinder Books

Wells, J. (2013) The rate of profit as a random variable PhD thesis http://eprints.kingston.ac.uk/9490/

Walsh, L. (2012) On Capital Investment Socialism Today letter by Wallace B. and reply by Walsh L. Issue 163 http://www.socialismtoday.org/163/capital.html

Walsh, L. (2012b) A Way Out of depression? Socialism Today Issue 161 http://www.socialismtoday.org/161/krugman.html

Walsh, L. (2012c) Spain: bank bailout can’t stop Euro death-spiral The Socialist, 13th June