Marx’s explanation of the Law of the Tendency of the Rate of Profit to Fall has been all but ignored as the underlying cause of this crisis, and indeed all post-war crises, by Lynn Walsh and the Socialist Party EC. It has been side-lined, like a fifth wheel on the profit-laden wagon of capitalism. According to Lynn and the EC, it explains nothing, it influences nothing: It is the do-nothing Law of an abstract tendency that works over such long periods it never materialises in real life. By removing its relevance, we believe Lynn Walsh, through his latest document, has attacked a key foundation of Marxism. This document is a defence of that Law and its central role in Marx’s theory of capitalist crisis.
Honesty in Debate
When there are profound theoretical differences within the Marxist movement that pose sharply contending arguments, it must be remembered that the aim of these clashes of ideas is to elucidate, clarify, explain and finally raise the level of understanding of the most conscious members of the working class. The aim should never be to confuse the questions at issue and specifically to misinterpret, or worse, misrepresent the arguments of either side.
It is the duty of serious Marxists to faithfully and honestly represent the argument of their opponents as it is presented. Only then can it be methodically criticised, in an honest and comradely manner, even if those criticisms are sharp. This is the spirit and intent of Marxism.
Lynn says that our initial document, What Is the Cause of the Current Capitalist Crisis? “fails to respond to most of the criticisms we made of their ideas in our first document”. The reason for this is simple: Our document was written at around the same time and was not intended as a reply to the statement of the EC’s “Reply to Andrew Kliman” (2013). Our document stands on its own, although we did have the time to address a few relevant points made in the original EC statement. However, we feel it is also necessary to respond to the latest contribution from Lynn.
Unfortunately, Lynn’s attempted reply to our document is, in our opinion, not an effort in the spirit of Marxism to answer the criticisms that we have put forward. It is a serious document which makes a coherent argument, and in this sense we welcome its appearance. However, it is profoundly flawed on a number of levels. Given the length of Lynn’s document, we feel it is necessary to reply to him in two parts. This document, the first part, is a reply to what we consider Lynn’s economic arguments and his misinterpretation of the work of Karl Marx. In a forthcoming document we will take up the political differences and implications of Lynn’s analysis.
A New Amalgam
Lynn makes clear the method which he intends to employ by attributing false arguments to the authors of our document from the very first page. For example, Lynn states: “The Eleven distance themselves from Kliman: “… none of the supporter of this document endorse Kliman’s political conclusions”. Their document mainly reiterates and elaborates on their criticisms of our economic analysis.”
We are not “distancing ourselves” from Kliman’s political conclusions because we never agreed with them in the first place. We think his economic analysis is valuable, but even Kliman states that the differences he has with us are “huge”. In “A Reply to Andrew Kliman”, Lynn Walsh and Peter Taaffe attempted to amalgamate the political views of Andrew Kliman and a member of the Eleven comrades, Bruce Wallace. This was a complete distortion in the first instance. However, having already answered this distortion in our original document, Lynn now attempts a new and rather bizarre amalgamation of the ideas of the Eleven with somebody else:
“4. It is clear from their arguments that they regard the LTRPF as a more or less invariable ‘law’ – in fact, as ‘The Law’ – rather than a tendency. In effect they present the LTRPF as a breakdown theory (rather than a theory of recurrent crises), analogous to the idea of breakdown put forward by Heinrich Grossman in the inter-war period.”
Henryk, not Heinrich, Grossman’s 1927 “The Law of Accumulation and the Breakdown of the Capitalist System” was a valiant attempt to identify a breakdown theory in Marx, but was unconvincing. However, had we believed in Grossman’s ideas, we would have attributed him in our document! Neither a commitment to his ideas, or indeed a direct reference within the document, can be found to the theory of capitalist breakdown or the “final crisis of capitalism”, which even Grossman didn’t believe in. Why should Lynn make this assertion and on what evidence?
This is a rather strange assumption by Lynn, as in our citations and references we included the work of Grogan (2012) who reviewed all theoretical explanations available for capitalist crisis, including those of the Keynesian economists. Grogan, also referring to the Marxist economist Paul Mattick, had this to say: “At the end of the day, both Grossman and Matttick fail because they fail to integrate the financial system in its intimate and indispensable role in the reproduction of capitalist social relations.” Lynn should have checked the evidence and references we provided before he jumped to completely illogical and ludicrous conclusions about the position and beliefs of the Eleven. At no point in our document do we state, imply or describe the LTRPF as an “invariable law” that must lead to an irreversible collapse of capitalism.
All Economic Laws are Tendencies
Lynn makes an immediate mistake in suggesting that we are dealing with just a “tendency”. Marx refers to The Law of the Tendency for the Rate of Profit to Fall. It is indeed a “Law” but its manifestation is as a “tendency”. We must repeat Marx’s view of this law which is “in every respect the most fundamental law of modern economy, and the most important for understanding the most difficult relations. It is the most important law from the historical standpoint.” (Marx, Grundrisse p.800). It is the “most fundamental” Law for Karl Marx, but just a tendency for Lynn. In fact, we would go further. Lynn, if he were to be honest with the members, does not believe that the LTRPF has any significant relevance to this crisis or any other crisis. We challenge him to make that link. If Marx’s Law has no meaning in explaining this crisis, Lynn must explain to members what relation the LTRPF has to crisis. In effect, Lynn has erased this aspect of Marxism without even a discussion.
With the exception of The Law of Value, all of Marx’s laws of motion of capitalism are “tendential”, meaning they are conditional or effected by other factors and do not operate as either more, or indeed less, “invariable”. For example, Marx wrote “Such a general rate of surplus-value — viewed as a tendency, like all other economic laws — has been assumed by us for the sake of theoretical simplification.” (Capital Volume III p.275). In this context, it seems absurd for Lynn to attempt to “downgrade” the LTRPF from a Law to a tendency.
It is precisely the variability of the operation of Marx’s laws that make them complex and difficult to elaborate in practice, even when the basic concepts are relatively simple and straight forward as befits the theoretical discoveries of a genius.
Additionally, the use of the term “The Law” in our document was merely shorthand in preference for the clumsy acronym LTRPF. That Lynn should attempt, along with others, to attribute some hidden motivation or meaning in this shorthand is obtuse in the extreme.
Persistent Straw Man Argument
We do not argue for the invariability of the law, and the assertion of Lynn that; “In effect [we] present the LTRPF as a breakdown theory (rather than a theory of recurrent crises)” is utter nonsense, as we clearly stated in our previous document: “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.” In other words, we explained that The Law is a theory that explains recurrent crises within capitalism.
Has Lynn actually read our document? Where is the reference to the inexorable, invariable fall in the rate of profit? The truth is there isn’t any. Lynn cannot find one because, if he had, he would certainly have cited it. But he cannot cite it because it doesn’t exist. We further stated: “The Law explains why the falling rate of profit drives the system towards crisis and also how it is to be overcome.”
However, Lynn repeats his unsubstantiated assertion ad nauseam throughout his document; usually prior to producing a statement that disproves that there is “an inexorable, invariable fall in the rate of profit”. It is quite an achievement from Lynn to serially disprove something that doesn’t actually exist. Below is a small selection of quotations from Lynn’s document to highlight this bizarre straw man:
“6. The Eleven’s interpretation of Marxist theory is that the LTRPF is a remorseless, inexorable and irreversible trend, accompanied by the steady erosion and eventual exhaustion of the counter-tendencies outlined by Marx.”
“22. Nevertheless, Marx rejected the idea that under capitalism there would be a continuous rise in the organic composition of capital, and consequentially a continuous fall in the rate of profit…… In reality, the Eleven treat the falling rate of profit as a “permanent effect”, as ‘The Law’, as the continuous movement towards breakdown.”
In paragraph 33 Lynn refers to a report by Goldman Sachs and states; “We should, of course, treat this analysis critically, but Goldman Sachs’ picture of profitability corresponds more closely with the actual movements of the world economy than the “persistently downward trend” claimed by the Eleven.”
“56. The surge in corporate profits goes against the Eleven’s preconceived conception of a persistent fall in the rate of profit. They are unable to accept the reality, consistently reported in the financial press.”
“62. The problem for the Eleven is they have a schema that does not match reality. They say there is a continuous decline in the rate of profit: so how can there be a surge in corporate profits?”
Having dreamed up an imaginary conception in his own mind that has absolutely no bearing on what we argue in our document, Lynn seems to think that if he remorselessly and invariably repeats the same incantation ad nauseam it proves that something is true, thus allowing him to triumphantly declare:
“79. The Eleven claim they are defending the Marxist category of the LTRPF. However, they have turned it into
a rigid, categorical imperative, with more in common with Kant than Marx. Their doctrinaire method has nothing in common with the Marxist method. If Marx were still around to see this ‘orthodoxy’, he would once again comment: “All I know is that I am not a Marxist.”
We ask comrades to consider whether this is either a misinterpretation or a misrepresentation of our position.
Failure to Understand Basic Categories of Arithmetic
We feel we must draw attention to Lynn’s failure to actually understand basic arithmetical categories that distinguish between the “average rate” of profit and its “trend”. The “average rate” of profit is measured by Marxists as a return on invested capital over time, expressed as a percentage. Here, for example, is the rate of profit of US capitalism since records began:
(Source: M. Roberts)
As can be noted, the actual rate of profit goes up and down during specific historical periods, and this is precisely why The Law is the “most important from the historical point of view”. There are long periods where the rate of profit rises and others where it falls. Within distinct shorter periods, there are oscillations in the rate of profit, with uneven temporary ups and downs.
However, the trend in the average rate of profit is measured during specific historical periods which calculate the average between peaks and troughs to determine the overall trend in the rate of profit over that specific historical period. So the trend in the rate of profit isn’t an actual rate of profit as such, but merely tracks the average rate upwards or downwards over a lengthy period of, say, fifty years, which is independent of the actual rate of profit over shorter periods.
What we know from economic research is that the average trend rate appears to be cyclical and can be upwards or downwards, sometimes for decades; hence Marx’s reference to “long periods” of time. This is what economists call the “secular” period and hence the secular trend in the rate of profit. Just to show how simple this is we will draw on work done by Guglielmo Carchedi for the US economy:
US average rate of profit (ARP) and the organic composition of capital (C/V) for the productive sectors, 1948-2009 Source Guglielmo Carchedi ‘Behind and beyond the crisis’ (2012)
The secular period measured is 60 years. The grey upward line represents capital accumulation, the piling up of more means of production. The black downward line is the average rate of profit in the US economy. The dotted line represents the mean average trend in the rate of profit. That trend is in constant fall over the entire period measured, despite frequent upward surges in the rate of profit. As Carchedi explains:
“[The data] shows the ultimate cause of crisis, i.e. the tendency of the organic composition [of capital] to rise and thus the tendency of the average rate of profit to fall over the whole secular period. The two trends move necessarily in the opposite direction, as in Marx’s theory. But at each moment and for shorter periods the organic composition of capital [of capital] determines the movement of the average rate of profit through its interaction with the countertendencies.
(1)There is not a mechanical, inverse relation at each point in time between the organic composition [of capital] and the average rate of profit.
(2) The secular downward tendency keeps driving the economy towards crisis even when in the shorter period its effect is temporarily suspended and reversed by the countertendencies.”
In other words, during short periods of a few years there can be an upsurge in the average rate of profit, despite the long term trend being downwards. Lynn either fails to understand the difference between the actual average rate of profit and its trend, or he is wilfully misrepresenting it. This is a fatal, basic mistake and is instructive of Lynn’s confusion and misunderstanding as to what the Eleven comrades are presenting.
During short periods there are surges in profitability, but they are not sustained for extended periods. Hence the evidence that Lynn produces which shows short term increases in the rate of profit, or more likely the gross mass of profit made by the capitalists, is completely invalid and utterly irrelevant in relation to the long term operation of The LTRPF.
Prior to the period measured by Carchedi, there was an extended period of an upward trend in profitability during the war and the first part of the post-war boom. Initially, the decline in profitability was gradual until the crisis of the 1970’s, but the rate of profit has since never recovered to anything like those levels.
Lynn has ignored all of the sources from the economists we cited in our document who all confirm this analysis, and instead has concentrated on “refuting” our subsidiary supportive evidence from Deloitte which we will address later. To conclude on Lynn’s basic misunderstanding on the issue of our alleged adherence to a “remorseless, inexorable and irreversible trend” and our inability to “accept the reality, consistently reported in the financial press”, what exactly is Lynn referring to?
The financial press are reporting on the current state of the economy, and in the US there has indeed been short term recovery in the rate of profit, or as Lynn likes to constantly refer to it as, a “surge”. Far from failing to accept reality as reported in the Financial Times, or other serious economic journals of the bourgeoisie, we fully recognise this “reality”. As Michael Roberts, one of the economists we originally cited reported on his blog in March 2013:
“The latest data released just before Easter show that US corporate profits reached a record high in 2012. Since the trough of 2008 they are up over 40% and are now 7% above the previous peak in nominal terms set in 2006. Indeed, profits per employee have rocketed to near $16,000, doubling the ratio since 2000.” The temporary recovery in the rate of profit can be seen in the graph below.
(Source: M Roberts)
Profits, that is the gross mass of profit of the US capitalists, is indeed at a record high in “nominal” terms i.e. unadjusted for inflation. Is Lynn seriously trying to suggest that we deny these economic facts? There is a temporary short term “surge” in the mass of profit being made by the US capitalists, although such short term data doesn’t tell us much about long term trends as Roberts clarifies:
“While the mass of profits in nominal terms and as a share of GDP has reached a new peak in the US, profitability (i.e. profits measured against the stock of capital advanced for machinery, plant, labour and raw materials) has not returned to the previous peak of 2005 and certainly not back to 1997 for the whole economy.1997 is the date that I argue we entered a down phase for US profitability that eventually undermined the dot.com boom in the 1990s and the property/shadow banking boom of the 2000s. By my estimate (still to be confirmed by more data), corporate profits may have hit a new high, but that has not restored either corporate profitability or overall economy profitability to a new high.”
The increase in the mass of profits, unadjusted for inflation, of the US capitalists can be seen in the graph below:
(Source: US Bureau of Economic Analysis)
That is why in Marxist terms there must be a strict division between the “rate” of profit and the “mass” of profit as they are distinctly different things and that is why the falling rate of profit must be considered within the historical long term perspective. What Lynn (incorrectly) seems to think is that we believe the actual average rate of profit just drops continuously like a downward ski slope for all time, and has no periods of upturn until capitalism collapses. This is just nonsense, as the rate of profit temporarily recovers as counter-tendencies kick in. Without the counter-tendencies, capitalism would indeed have collapsed a very long time ago, but then that isn’t the real world.
We can assure Lynn that nobody believes this preposterously absurd notion that he has invented. If this is how Lynn attempts to establish the credibility of his counter critique of our document, then frankly it suggests he has a completely skewed and biased view of the content of our arguments and distorts them accordingly to fit his erroneous analysis or, perhaps, he misunderstands the basic concepts of Marxist economics?
This “method” isn’t good enough, even from a purely academic point of view, let alone from the viewpoint of the self-testing, self-critical method of Marxism. On this ground alone, a lot of Lynn’s counter criticism is meaningless invective which spends most its content knocking down straw men.
Lynn’s “Evidence”
Unfortunately, Lynn never quite tells us what his views are on the actual operation of the falling rate of profit in capitalist production, despite admitting it was so “fundamental” for Marx. Indeed, Lynn quotes Marx extensively on the importance of The Law:
“21. However, as we have shown, Marx recognised that “the same causes that bring about a fall in the general rate of profit provoke counter-effects that inhibit this fall, delay it in part even paralyse it. These do not annul the law, but they weaken its effects. If this were not the case, it would not be the fall in the general rate of profit that was incomprehensible, but rather the relative slowness of this fall. The law operates therefore simply as the tendency, whose effect is decisive only under certain particular circumstances and over long periods.” (Vol 3, Ch 14, p346)
We agree that its “effect is decisive only under certain particular circumstances and over long periods.” Indeed it is “decisive”! However Lynn can’t, or won’t, produce a single example of when the fall in the rate of profit has been decisive. Lynn banishes the operation of The Law into a never-never land where it becomes an abstraction that never interacts with the real world. When it comes to answering our criticisms, he says: “There is no point in repeating our comments on the rate of profit statistics given in our previous document.”
We’re not surprised Lynn doesn’t see any point in repeating his comments because the counter evidence to Andrew Kliman had already been scientifically dismantled in a paper by Kliman in 2010, and the ham fisted “Reply to Andrew Kliman” [a reply to a non-existent critique!] has already provoked a detailed refutation from the Marxist economist (Kliman, 2013), where he points out that “Peter Taaffe and Lynn Walsh’s “The Causes of Capitalist Crisis; Reply to Andrew Kliman” is riddled with mistakes—factual, logical, political, philosophical, you name it.”
Reference to this “evidence” is buried deeper in Lynn’s document. Stating that our evidence is wrong, Lynn says: “They claim there is solid factual evidence for their view, but (as we have shown in our earlier document) the available data overwhelmingly show a partial recovery of profits after the early 1980s trough.”
Lynn and Peter’s “available data” is one graph from a Mandelite economist in France, “backed up by a half dozen” other economists (who Lynn and Peter fail to name), which has been comprehensively challenged, as previously mentioned, and not just by Andrew Kliman, but by the other economists we also cited. Lynn’s technique is as follows: If the Eleven produce evidence it is wrong because it doesn’t coincide with Lynn’s view of what constitutes “real world trends”, but when Lynn produces any evidence it is automatically correct because it supports his arguments. Even if it’s just one graph (which isn’t cited in Lynn’s document or elaborated upon or supported by more evidence), this is transformed into “overwhelming” evidence. One swallow doesn’t make a summer, but for Lynn one Mandelite graph takes him into the land of the midnight sun. This attitude is reminiscent of US imperialism’s “overwhelming evidence” that Saddam Hussein had weapons of mass destruction. Fortunately, we don’t need UN weapon inspectors to prove Lynn’s “overwhelming evidence” is sheer bunkum.
Deloitte’s “Smoothed Out” Trend
Lynn’s approach is again sharply shown up in his “debunking” of the Deloitte Shift Index data. Lynn dismisses this secondary supporting source with a few highly “scientific” remarks: “30.There is no explanation of the statistical methods by which Deloitte have produced this smoothed-out trend.” Here is Deloitte’s “smoothed out” trend:
“Smoothed out”? This graph shows every oscillation in the rate of return in the US economy for the past forty-five years. It shows a saw-toothed decline in the rate of return on assets. Independent commentators describe the Shift Index report as “magisterial”, meaning “showing impressive knowledge”, but Lynn says Deloitte themselves admit that their findings have been widely challenged. Have they? This is what was said about the report by Forbes:
“For the most part, however, corporate America has regarded the report with “studied indifference but every now and then, an intrepid critic steps up to challenge the Shift Index analysis.” Deloitte stood by their data: “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.” (Shift Index 2010,p10)
Lynn declares, “in other words, they have boldly validated their own conclusions!” Of course, we should remind Lynn that the economists and accountants at Deloitte are professionals and that’s what professionals do! They aren’t necessarily trying to defend dodgy data, but have re-examined their own study in the light of criticism, and in their view it remains robust. It’s a pity Lynn doesn’t apply the same approach of critical reflection to his own position.
However, it isn’t just Deloitte who agree with themselves as they were also supported by Forbes, who we cited: “The decline in ROA (return on assets) 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’’. This isn’t mentioned by Lynn, and his view is that, “The Shift Index reports undoubtedly give the strong impression of a glorified sales pitch for Deloitte’s consultancy services.” Fortunately, impressions don’t carry much scientific weight in professional economics.
So Deloitte are obviously massaging the figures and defending their data to pitch for clients, despite corporate America treating the Shift Index with “studied indifference”(?), unless of course Deloitte happen to agree with any of Lynn’s analysis? When it comes to citing evidence for corporate cash hordes, Lynn cites the very same “discredited” Deloitte: “52. In the UK, non-financial companies are estimated (by accountants Deloitte) to be holding £731.4 billion (Q3 2011), the highest level on record. (Press release, 7 February 2012) As with other countries, this figure does not include cash held in offshore accounts to avoid taxation at home.” Deloitte accountants are obviously more trustworthy, in Lynn’s view, when it comes to their research into corporate cash hordes, but not in relation to a fall in profitability.
Goldman Sachs: Vampire Squid
Lynn’s bias is evident from the citation of a report from the capitalist “vampire squid” Goldman Sachs “The Savings Glut, the Return on Capital and the Rise in Risk Aversion”, by Kevin Daley and Ben Broadbent, 27 May 2009 to counter Deloitte’s “dodgy” data.
Lynn argues, “35. The Goldman Sachs paper shows (figure 3) a strong recovery of profits from the mid-1980s. Thereafter there is a decline down to the mid-1990s, with an oscillation of profits during the subsequent business cycle, but again a strong recovery after 2000 to a peak in 2006. They give more importance in explaining the crisis which broke out in 2007 to the “global current account imbalances [which] increase sharply from the turn of the century until the onset of the credit crunch” and to the crisis within the financial system. We should, of course, treat this analysis critically, but Goldman Sachs’ picture of profitability corresponds more closely with the actual movements of the world economy than the “persistently downward trend” claimed by the Eleven.”
We agree with Lynn here: The GS report should definitely be treated critically, but then of course it already has been by Marxist economists. The report claims: “[F]ar from declining…the global return on capital…has trended up over the past decade or so. Even in 2008, by which stage the financial crisis had begun to hit profits materially, the global [return on capital] remained above its long-term average.”
Michael Roberts pointed out the how the GS study differed with a measure of Marxist profitability in his paper “A world rate of profit: Globalisation and the world economy” (2011):
“Investment bank Goldman Sachs analysts, Kevin Daly and Ben Broadbent developed a global rate of profit based on data from the ten largest capitalist economies including China and Korea. Using national sources, they measured the return on physical capital. They found a sharp rise in the global rate of profit from 1982 to 2006. However, this measure included capital gains or losses from holding an investment and then selling it. This latter is a financial concept; so, in my opinion, not close to the rate of profit, a la Marx.
But the Daly-Broadbent study also used a net yield of capital measure, which excludes capital gains. On this measure, they found that the global rate of profit also rose from 1982, but was only a little higher at the peak of the boom in the last decade compared to the trough in 1982. Interestingly, they also show that US profitability followed the same trajectory that I and others have found, namely that the US rate of profit peaked in 1997 and has not been surpassed since. Daly-Broadbent also concluded that a rising rate of profit in the so-called emerging economies was the key driver of the global rate of profit.”
Unlike Deloitte’s data, which measured the rate of return on assets in the US (not the entire world) over forty-five years, the GS average was only from 1982 to 2006 i.e. twenty four years. Kliman’s measures, for example, are from 1947 and only consider the US; a discussion would be highly technical but GS calculated two measures of the return on capital, one of which is vaguely similar to a Marxist measure of profitability and another which isn’t. Their data is highly suspect from a Marxist point of view and doesn’t tell us much in relation to the US, which was the epicentre of the crisis.
Delusional Comparisons
In order to dismiss our evidence from Granados’ “Does Investment Call the Tune?, Research in Political Economy, May 2012”, Lynn says it is “ironic” because it “includes a table (p18) for US corporate profits 1950-2010 which shows broadly the same trends as the chart given by Michel Husson in his paper, La Hausse Tendencielle du Taux de Profit (The Tendential Rise of the Rate of Profit, January 2010). [See: The Causes of Capitalist Crisis: A Reply to Andrew Kliman, paragraphs 35-46.]”
We recommend readers compare the tabulated data of Granados and Husson to disprove Lynn’s assertion. The problem, of course, is that Granados is measuring a completely different thing from Husson! Granados is measuring “corporate profits” not, as Husson allegedly measures, “the rate of profit”. Husson’s widely disputed data measures the “rate of profit” in the USA 1950-2008:
Rate of profit in the United States 1950 – 2008 (Husson)
Meanwhile this is what Granados measures:
Figure 2. Corporate profits (before and after taxes) and fixed investment as a share of gross domestic income, quarterly data since 1947 to the Great Recession (Granados)
We find it “ironic” that Lynn apparently can’t tell the difference between the “rate of profit” and “corporate profits” (i.e. the “mass” of profits). This would be a schoolboy error in and of itself, except for the fact that Granados’ graph, while being completely beyond comparison with that of Husson for the reason that they are different sets of data, doesn’t even look like Husson’s! We think such statements from Lynn, suggesting that Grandos’ data sets show “broadly the same trends as the chart given by Michel Husson” is pure invention without properly analysing the data.
Selective Blindness
Lynn doesn’t produce much by way of evidence, aside from clippings from the bourgeois financial press. He proceeds to state:
“The Eleven argue that, at the onset of the great recession in 2007, the law became “strikingly pronounced” and that “the counter-tendencies exhausted themselves and there was a sudden plunge in the mass of profit being made by US capitalism”. Nowhere do they attempt to analyse the counter-tendencies and the way they have been operating in the world economy during the last few decades.”
Here Lynn displays his complete disdain for the black and white evidence in our document. Why should we “analyse the counter tendencies” when the evidence was precisely of a sudden plunge in the mass and the rate of profit being made by US capitalism in 2006 and not in 2007?!
What is missing throughout Lynn’s document is an attempt to grapple with the facts, or even a mention of the sudden and pronounced fall in the mass of profits in the US economy prior to the 2007-2008 crisis, almost as if these facts do not exist? The reason for this is obvious. Lynn doesn’t believe The Law has anything to do with the current crisis and is just a “tendency”, hence his blindness to certain economic facts that don’t fit this schema. As we stated in our document:
“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 2006 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 investment detonated an implosion in the bloated edifice of international finance capital, resulting in an acute financial and economic disaster.”
Prior to this, we addressed the counter-tendencies and their influence in being unable to significantly restore the rate of profit in the US economy. Yet Lynn can state that “nowhere do they attempt to analyse the counter-tendencies and the way they have been operating in the world economy during the last few decades”. What Lynn finds discomforting is mentally edited out and he moves onto a subsidiary point to state we have failed to address it. We would refer the serious reader to our document for comparison (paragraphs 91-98 on both the counter-tendencies and their effect) that Lynn says we “nowhere” attempt to analyse!
Misinterpreting Karl Marx a la Lynn Walsh
Lynn quotes extensively from Marx in the first and latter parts of his document and Marx is liberally (mis)interpreted to suit Lynn’s own position, as we shall show below.
Lynn argues: “13. The Eleven reject any role for the restricted consumption of the working class, dismissing this as an “underconsumptionist” approach. [The Eleven’s] favourite quotation is from Capital Volume 2, Chapter 20, page 486, where Marx says: “It is a pure tautology to say that crises are provoked by a lack of effective demand or effective consumption.” However, it is clear that Marx is arguing against the simplistic idea that a deficiency of demand or consumer goods could easily be overcome simply by paying workers higher wages. He was answering those who at that time put forward that argument, like many contemporary Keynesians (e.g. Paul Krugman). It is quite clear that Marx was answering the simplistic idea that “the working class receives too small a portion of its own product, and that the evil would be remedied if it received a bigger share, i.e if its wages rose…”
Lynn appears to think that if he prefaces his explanation of the meaning of a Marx quote with the phrase “it is clear” or “it is quite clear”, this means his following interpretation is the correct one. Unfortunately, this is a rhetorical device. It is true that Marx does indeed go on to criticise those who argue that higher wages could avoid crisis, but what is absolutely clear beyond question is what Marx states in black and white at the very beginning of his logical proposition:
“It is a pure tautology” (a meaningless circular argument) “to say that crises are provoked by a lack of effective demand or effective consumption.”
In the view of Marx, crises are not caused by a lack of effective demand. It therefore cannot be remedied by increasing wages, but neither can crises be caused by low wages. However Lynn’s interpretation is that, while he rejects the simplistic idea that wage increases can avoid crisis (which the Keynesians argue would), he does believe in the inversely simplistic idea that low wages, a lack of effective money-backed demand and thus lack of workers’ consumption causes crisis, exactly as the Keynesian economists argue!
Lynn effectively attempts to turn Karl Marx into a Keynesian throughout his analysis of the texts. For example, in our previous document we cited a famous quote from Marx on the falling rate of profit: “[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)
At the hands of Lynn, this is interpreted in true Keynesian fashion: “10. In other words, long-term problems of profitability give rise to overproduction (a deficiency of money backed demand for goods), speculation (the housing bubble, speculation on commodity markets, etc.), and crises (giving rise to mass unemployment).”
This is truly amazing. The falling rate of profit (which according to Lynn hasn’t actually fallen) causes, in his version, “a deficiency of money-backed demand for goods”. Yet nowhere in any of Marx’s writings does he make this point. This is pure invention by Lynn and is a spin on Marx’s ideas that lays the basis for him later to argue that the crisis was mainly caused by the inability of workers to buy back what they produce, which as we previously showed, Marx emphatically rejected as vulgar economics or worse.
Lack of Consumption: “never the cause of crisis”
Just to re-emphasise Marx’s position, in our previous document we quoted from “Theories of Surplus Value”: “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)
We find it necessary to repeat this quote because Marx completely rejected the idea that causation of crises had anything at all to do with purchase and sale i.e. “effective money-backed demand” in Lynn’s parlance. It is, in the words of Marx “never the cause of crisis”, but Lynn thinks it is! Lynn is, of course, entitled to his own opinion, but it certainly does not correspond to that held by Marx.
Biased Reading and Editing
Straying into the chapters on the Law of the Tendency for the Rate of Profit to Fall in Capital has some inherent dangers for those who believe, contrary to Marx, that a lack of consumption causes crisis. Lynn alights on a lengthy quote from Marx stating:
“16. Moreover, in Volume 3, Chapter 15, Development of the Law’s Internal Contradictions, Marx explicitly points to the importance of consumption. “The conditions for immediate exploitation [the extraction of surplus value from workers in the production process] and for the realisation of that exploitation [the conversion of surplus value into money-profit through the sale of commodities] are not identical. Not only are they separate in time and space, they are also separate in theory. The former [the extraction of surplus value] is restricted only by the society’s productive forces, the latter [the realisation of profits] by the proportionality between the different branches of production and by the society’s power of consumption… And this is determined… by the power of consumption within a given framework of antagonistic conditions of distribution, which reduces the consumption of the vast majority of society to a minimum level, only capable of varying within more or less narrow limits.” (p352)”
We would note that the parenthetical remarks in brackets have been added by Lynn to the text and aren’t in the passage in the Penguin edition. Also, Lynn doctors the quote to suit his underconsumptionist position. We prefer the quote and nothing but the quote. What does Lynn miss out? After the line “And this is determined”, he goes on to give a truncated part of the quote which Lynn edits in his true one-sided approach. This is what Marx wrote in full: “And this is determined neither by the absolute power of production nor by the absolute power of consumption but rather by the power of consumption within a framework of conditions of distribution which reduces the consumption of the vast majority of society to a minimum level, only capable of varying within more or less narrow limits”. (p352)
In short, Marx sees consumption playing a subsidiary role, but by no means the decisive one in terms of the formation of crisis. This type of editing out of “unpalatable” qualifications (from Lynn’s underconsumptionist point of view) and nuance by Marx in order to bolster his own view is unforgivable in terms of presenting the ideas of Marx in an honest fashion. Lynn then argues:
“17. In the US and other advanced capitalist countries since 1980, workers suffered not only from stagnant wage levels, the result of direct exploitation at work, but their “power of consumption” was restricted by the neoliberal political framework – regressive taxation which exacerbated extreme income inequality, rising costs for education, health and insurance, and more recently the mortgage scams associated with the housing bubble which burst in 2007-08.”
Keeping in mind that Marx had denied that crisis is caused by lack of consumption, Lynn interprets Marx here as pointing to the lack of the “power of consumption” of US workers, but this is only one part of consumption in society as a whole, as Marx states: “….The latter by the proportionality between the different branches of production and by the society’s power of consumption”.
Lynn then argues with another added parenthesis in brackets: “18. Marx continues: “It [realisation] is further restricted by the drive for accumulation, the drive to expand capital and produce surplus value on a larger scale.” There is, says Marx, a competitive struggle among capitalists to improve production and extend its scale, as a means of self-preservation. “The market, therefore, must be continually extended, so that its relationship and the conditions governing them assume ever more the form of a natural law independent of the producers and become ever more uncontrollable. The internal contradiction seeks resolution by extending the external field of production. But the more productivity develops, the more it comes into conflict with the narrow basis on which the relations of consumption rests.” (p353) These comments by Marx, in one of the three chapters in Volume 3 dealing with the LTRPF, make it absolutely clear that he regarded the demand for consumer goods as an integral part of the process of reproduction and expansion of capital.”
Marx does indeed regard the demand for consumer goods as an integral part of the process of reproduction and expansion of capital. However, it is only one part of the integral reproduction of capital and an increasingly smaller part as capital expands. What Lynn’s use of this lengthy quote does not “clearly” support is the idea that crises are caused by a lack of effective worker consumption, as this contradicts Marx’s emphatic rejection of the idea.
Similarities to Sweezy
Ironically, the above quotation from Marx was used by the late American economist Paul Sweezy as his major supporting evidence to back up his idea that crises were caused by the lack of consumption of consumer goods in his 1942 book “The Theory of Capitalist Development”, the founding theoretical work of the underconsumptionist Monthly Review School.
This interpretation has come in for sharp criticism in terms of the ambiguity and actual meaning of the passage, which depends on your underlying theoretical assumptions. In Lynn’s case, he believes that crises can be caused by a lack of effective demand, just like the Keynesians, so he interprets the passage through this lens.
In fact, this passage, as interpreted by Lynn and Sweezy, is directly contradicted by Marx’s introductory remarks on crisis in “Theories of Surplus Value” (1861-63), which are actually clearer than the above passage, an unpolished manuscript edited by Engels. “Clearly” Karl Marx totally rejected the notion that crises had anything to do with the consumption of the working class, even though Marx recognised this was an integral part of the reproduction of capital:
“But the whole process of accumulation in the first place resolves itself into production on an expanding scale, which on the one hand corresponds to the natural growth of the population, and on the other hand, forms an inherent basis for the phenomena which appear during crises. The criterion of this expansion of production is capital itself, the existing level of the conditions of production and the unlimited desire of the capitalists to enrich themselves and to enlarge their capital, but by no means consumption, which from the outset is inhibited, since the majority of the population, the working people, can only expand their consumption within very narrow limits, whereas the demand for labour, although it grows absolutely, decreases relatively, to the same extent as capitalism develops. Moreover, all equalisations are accidental and although the proportion of capital employed in individual spheres is equalised by a continuous process, the continuity of this process itself equally presupposes the constant disproportion which it has continuously, often violently, to even out (Theories of surplus value: On the forms of crisis. Chapter 17. 6. Crisis ‘Introductory remarks’ paragraph 2).”
Paul Sweezy suggested that interruptions in the production process were due to a restriction on the volume of consumer demand, which in turn was restricted by the capitalists ‘’tendency to accumulate’’. However, this was a sweeping assumption. If consumer demand is restricted by the tendency to accumulate, this can be compensated by demand for production goods (factories, raw material, and machinery). Problems of realisation (sale) may only happen (the main assumption) if accumulation does not happen. Yet in the passage cited and interpreted by Lynn (and completely clarified by the quote above), there is nothing to suggest this, and in fact the opposite is the case; capital accumulation (economic growth), through the coercive force of competition, leads to consumption being squeezed by capital accumulation (more means of production). So even if workers consumption is declining relative to the expansion of the economy, there is no reason why this should lead to crisis which is, in fact, the case, as we cited in our document from Global Economic Intersection (2013):
”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.” Laying the blame for the crisis on a lack of worker’s consumption is just contrary to the facts and obviously false for cast iron logical reasons.”
Let us repeat this point just to emphasise it for Lynn… “The claim that income inequality unconditionally leads to under-consumption is untrue.” It is ironic that Lynn consistently accuses the Eleven of not acknowledging the real world, when he cannot accept this real world fact!
Neither can it be claimed that one extract from Lynn’s quote; “But the more productiveness develops’’, suggests that this means a lack of or reduction of demand for consumption goods means that growth will be limited by consumption. As Sweezy put it, “demand for the final fruit of this production, namely, consumption goods’’. Of course, Marx denied that this was the aim of capitalist production as it was production for profit alone, not to meet consumer demand, and capital was self-expanding value or “accumulation for accumulation’s sake”.
As Marx was at pains to stress: “It should never be forgotten that the production of this surplus value- and the transformation of it back into capital, or accumulation, forms an integral part of surplus-value production- is the immediate purpose and determining motive of capitalist production. Capitalist production, therefore, should never be depicted as something that it is not, i.e. as production whose immediate purpose is consumption or the production of means of enjoyment for the capitalist. This would be to ignore its specific character, as this would ignore its basic inner pattern.” (Capital, Vol III, pp. 351-352)
Thus Lynn’s interpretation is pure spin and is completely unconvincing if a critical approach is adopted. He accepts the false notion that capitalist production is for consumption and completely misses its “inner pattern”.
Straying into Dangerous Territory
Later, Lynn cites another passage from the chapters on The Law of the Tendency for the Rate of Profit to Fall: “110. In Volume 3 (Ch 15, p363) Marx describes the effect of a breakdown in the credit system: “This disturbance and stagnation paralyses the function of money as a means of payment, which is given along with the development of capital and depends on those presupposed price relationships. The chain of payment obligations at specific dates is broken in a hundred places, and this is still further intensified by an accompanying breakdown of the credit system, which had developed alongside capital. All this therefore leads to violent and acute crises, sudden forcible devaluations, an actual stagnation and disruption in the reproduction process, and hence to an actual decline in reproduction.”
111. This passage clearly applies to the crisis of 2007/08, when the chain of payment obligations broke in a hundred places, accompanied by the breakdown of the credit system, leading to violent and acute crises, and actual stagnation and disruption of the reproduction process…”
Indeed the quote does clearly apply to the credit crunch, but in what context does Marx write these words? Marx is explaining the “The Internal Contradictions of the Law” and this quote comes from a section titled “Surplus Capital alongside Surplus Population”. Here Marx is drawing out how the falling rate of profit leads indirectly to major financial crises.
Lynn, however, doesn’t believe the rate of profit fell historically in the 1980’s, 1990’s and 2000’s. In Lynn’s view, the rate of profit (and definitely the mass of profit) was restored, and the capitalists were making super profits. For him, “real world trends”, supported by his “overwhelming evidence” (i.e. one discredited graph and some bourgeois press clippings), showed that profits were expanding enormously, and the underlying “tendency” in the economy was the lack of money-backed consumer demand, despite Marx’s emphatic views to the contrary. Yes we agree “[t]his passage clearly applies to the crisis of 2007/08” because, taken in context, the beginning of the section starts with the words: “As the profit rate falls…”!!! (p359)
Lynn’s document merely confirms our original point, but also that specific passages are torn out of context, selectively edited on occasion and not fully explained. Sometimes ambiguity is applied to specific quotes to distort their meaning. In cases where there is some ambiguity, Lynn interprets them with bias towards his own underconsumptionist position. We repeat that this method is unscientific and a fundamentally dishonest approach for any serious Marxist.
Lynn on Financialisation
Lynn claims that “[o]n the issue of financialisation and neoliberalism, the Eleven say there is “nothing new”, “despite the rampant growth” of finance. Financialisation is merely the continuation of a long-term trend, not in any way a new phase or stage in the development of capitalism.”
This is in fact a misquote, as we actually wrote “we challenge the idea that there was anything specifically “new” in this phenomenon despite its rampant growth.” We hold by this position and Lynn appears to agree with us partially:
“92. The Eleven are correct, of course, in saying that financialisation and neoliberal trends have not fundamentally changed the character of capitalism” but he then suggests that…“However, they are incorrect in dismissing these trends as merely “surface features”, merely the stocking up of “fictitious” capital.” Again, Lynn is a master of putting words into our mouths because, whilst the growth of finance was definitely a surface feature, we certainly did not dismiss this trend because it was a decisive factor in the unfolding of the crisis as we emphasised in our original document:
“139. 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.” So much for “dismissing” the growth of finance as merely fictitious capital” and we stated that… “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.”
“Quantity Changed into Quality”?
We have dismissed nothing on finance, which is another invention by Lynn. We must draw attention to the contradictions in Lynn’s document. Lynn says that: “93. The sheer scale of the growth of finance capital indicates there has been a change in the form of capitalism.” However, Lynn had stated just a paragraph before that the Eleven were correct that the growth of finance had “not fundamentally changed the character of capitalism”!
Which version is to be believed? Lynn appeals to the very size of the financial sector as somehow proving his point and suggests this is a dialectical argument: “94. This is more than just a “surface feature”. Quantity changed into quality. Moreover, the global money supply also increased exponentially from the beginning of the 1980s to the present time.”
Of course, the quantity of finance in all its forms has increased exponentially as Lynn explains, but that is all that is explained. He doesn’t tell us about how it has qualitatively changed capitalism. Lynn holds a completely contradictory position. According to Lynn, the “form” of capitalism has changed, but not its “character”, yet “quantity [has] changed into quality”. So which is it? Lynn must answer this question.
We are informed that “these trends were massively reinforced by the collapse of the Soviet Union and other Stalinist states after 1989”. We agree that the growth of finance is a “trend” but not a new “form” of capitalism. Lynn gives a potted history of the response of the capitalists to the crisis of the 1970’s and specifically the Volker Shock that increased interest rates to squeeze out inflation, coupled with monetarist policies. This was a necessary antidote for the US capitalists to the failure of Keynesian policies, but it was forced on them because of the crisis of profitability of US and world capitalism.
The underlying economic problem for capitalism had been the falling rate of profit and that was due to the exhaustion of the post war boom. Monetarist policies averted a 1930’s style crash but did not, just as in the 2007-2009 crisis, overcome the underlying cause of capitalism’s inability to expand capital accumulation; falling profitability. The roots of the current crisis lie in the 1970’s yet Lynn attempts to argue that 1980 somehow represents an epoch making change? Lynn must answer this question- is there a fundamental change?
This is the real position of the radical left Keynesians and even some avowed Marxists like Husson et al. Their argument is that financialisation and globalisation did indeed lead to a new “form” of capitalism, a capitalism where the problem of capitalist profitability (i.e. The Law) had been overcome, although with increased dangers of financial crashes. In their view, potential crises took on a specific character of a crisis of financialised capitalism.
The difficulty with this explanation is that the problem of profitability was not overcome at all. The rate of profit never recovered to the pre-1970s highs. Lynn, however, consistently argues otherwise, and one reason why evidence is desperately being sought to prove that there was a restoration of profitability in the 1980s and 1990s is in order to counter the evidence that the underlying cause of the current crisis was the continued, persistent long term decline in the trend rate of profit in the US, that originated from the crisis of the 1970s.
A Semantic Straw Man Argument
A new straw man is created in the shape of Lenin’s book “Imperialism: the Highest Stage of Capitalism”. Lynn indulges in some semantics to try and catch out the Eleven.
“The Eleven categorically reject the idea of “a new stage in the development of capitalism”. Does that mean that they reject Lenin’s characterisation of imperialism at the time of the First World War as a new stage in the development of capitalism? Lenin did not see the development of capitalism purely as the secular (long term) unfolding of abstract economic trends.” Lynn throws different terminology around like confetti at a wedding, where words like “stage”, “form”, “trends” and “features” are used without ever actually defining what they mean.
No, Lenin didn’t just consider capitalism developing as a series of abstract secular trends and neither do we. That’s because Imperialism is the highest stage of capitalism and we are still in this stage. Imperialism has, of course, changed in that it now rarely resorts to direct control of the neo-colonial world and prefers indirect control through economic exploitation. However, financialisation and globalisation hardly constitute a “new form” of capitalism. Both Kautsky before the First World War, and Bukharin after, tried to argue that capitalism had actually moved to a new stage of ultra-imperialism. Lenin was scathing on this point but his remarks could equally be applied to the apostles of financialisation: echoing Karl Kautsky, Lynn argues in reality for a new stage of capitalism that transcends imperialism.
“If Marx said of manufacture that it was a superstructure on mass small production, imperialism and finance capitalism are a superstructure on the old capitalism. If its top is destroyed, the old capitalism is exposed. To maintain that there is such a thing as integral imperialism without the old capitalism is merely making the wish father to the thought. … Imperialism is a superstructure on capitalism. When it collapses, we find ourselves dealing with the destruction of the top and the exposure of the foundation. (Lenin 1919 cited in by Grogan 2012)”
The capitalist class are still bound within their own nation states and therefore the basis for imperialism is still in existence. Financialisation has not decisively altered the relations between the classes or between bourgeois nation states. It has, of course, made capitalism more complex and difficult to fathom but, as Lenin emphasised above, “imperialism and finance capital are a superstructure on the old capitalism” and we still face the old capitalism, the exploitation of the working class for profit, in the foundations underneath.
Once Again on Financialisation
Financialisation merely represents the bloated and obscene growth of that superstructure, and even Engels noted this phenomenon in a supplement to the third volume of Capital in 1894:
“1. The position of the stock exchange in capitalist production in general is clear from Vol. III, Part 5, especially Chapter [27]. But since 1865, when the book was written, a change has taken place which today assigns a considerably increased and constantly growing role to the stock exchange, and which, as it develops, tends to concentrate all production, industrial as well as agricultural, and all commerce, the means of communication as well as the functions of exchange, in the hands of stock exchange operators, so that the stock exchange becomes the most prominent representative of capitalist production itself.” (p.1045)
The finance sector is a representation of capitalist production, but it is not capitalist production itself and never will be. The basic mistake of the financialisation theorists is that they make a distinction between the financial sector and what is called the “real economy”. However, this presumption is false. There is no disconnect between finance and production, but rather an integration or penetration into the productive sectors itself. The capitalist system is not separated into different spheres, but is merely alternative expressions of forms of capital as part of a total system.
As Lynn correctly explains; “But whether the assets of the financial sector are derived from the profits of production or profits made purely through financial speculation, they all represent a potential claim on the wealth produced.”
Indeed, the growth of financial assets is a future claim on value, but it depends ultimately upon one thing: the production of surplus value created by workers’ labour-power which is the only true wealth. Money made from money is not a representative of real wealth. As Karl Marx explained, the capitalists attempt to make money without the annoying intermediary process of actually producing things and “all connection with the actual expansion process of capital is thus completely lost, right down to the last trace, confirming the notion that capital is automatically valorised by its own powers” (Marx Capital Vol II p137).
Yet this is not a separate process cut off from production, but is an integral part of the circuit of capital and how capitalism has always worked. The fact that speculation has reached new dizzying heights with the explosion of mortgage backed securities, credit default swaps and other exotic financial derivatives is due to a diminution in the production of surplus value, as the capitalists, unable to make a decent profit in production, turn to speculation in order to turn a higher rate of profit.
Similarly, the policies of the central banks in increasing the money supply without limit has been intended to lubricate this frenzy of speculation, and subsequently bubbles are inevitable. However, the crash of 2007-2009 wasn’t fundamentally caused by this speculation, but rather by the major problem faced in the production of actual wealth, capital accumulation and the falling rate of profit. The speculative housing bubble and overleveraged financial institutions were an outcrop of the underlying fall in the trend rate of profit and merely gave the crisis its expansive character.
The turn to finance was driven, not just by the creation of fictitious capital on the stock market and in the banking system, but also by recourse to massive borrowing, especially by US corporations, in order to speculate and to invest. Falling profitability led to sluggish capital accumulation and the slowing of wage growth. There was less to go round not more. We can see the process clearly from a graph which charts the gradual decline in capitalist accumulation (investment) and the growth of fictitious capital in the US:
(Source: M. Roberts)
The growth in fictitious capital is certainly unprecedented and it has exacerbated the contradictions in the system, but is fundamentally a direct result of the long term historic decline in profitability. This is shown by the evidence of the decline in the extraction of surplus-value, the source of profit, in the US economy:
(Source: M. Roberts)
Nevertheless, the rise of fictitious capital has been remorseless and, far from it being dismissed, it is the very expression of the failure of capitalist production to extract enough surplus value. As Forbes commented in January this year in an article titled “Big Banks and Derivatives: Why another financial Crisis is Inevitable”: “the lack of transparency in derivative trading that now totals in notional amount more than $700 trillion. That is more than ten times the size of the entire world economy”. The continued growth of this fictitious capital means that a future crisis will take on even more frightful and violent financial forms.
Profits Squeeze Dogmatism
Lynn, again, misrepresents the Eleven’s position in relation to our criticism of the profits squeeze analysis, originally advanced by the late academic Andrew Glyn. Nowhere do we state that the falling rate of profit is the cause of every crisis under capitalism. It is, in our view, and that of Marx, the underlying cause of all major generalised downturns on a global scale and the causation of the cyclical periodic recessions.
Lynn tries to suggest that: “For the Eleven, the LTRPF – narrowly interpreted by them as ‘The Law’ – is the fundamental cause of capitalist crisis. Other possible causes are dismissed as merely “proximate” (immediate) causes. Thus they scornfully dismiss restricted demand, that is, insufficient money-backed demand to valorise existing capital or to realise the surplus value created in production, as “under-consumptionism”, which is like a dirty word in their dictionary.”
However, it isn’t just us who “scornfully reject” the idea of insufficient money-backed demand as being a cause of crisis, but Karl Marx himself (see our earlier section ‘Misinterpreting Karl Marx a la Lynn Walsh’) who does so.
Lynn now attempts to defend the profits squeeze theory as an explanation of the crisis of the 1970’s. This theory proposes that the crisis was one of falling profitability, but it was caused, not by The Law, but by high wages of the working class brought on by militant trade unions! In this endeavour, Lynn is one singleton thinker of a dwindling band of academic economists who tried to stick by this idea in the most dogmatic fashion. Attempting to rest on the authority of Marx Lynn cites him to justify the position: “66. Marx, however, was much less dogmatic than the Eleven. He recognised that even the most fundamental theory, when applied to reality, is bound to have variants. He recognised (Capital, Vol 1, Ch 25, The General Law of Capitalist Accumulation, and in Vol 3) that, under certain conditions, the strength of the workers could produce a profits squeeze. Drawing theoretical conclusions from the capitalism of his own time, Marx did not consider such a development to be the most likely course of events.”
Marx was indeed less dogmatic and viewed each capitalist crisis as having unique features, and that is why he argued in Theories of surplus value that; “The real crisis can only be deduced from the real movement of capitalist production, competition and credit.” Lynn is correct in saying that Marx definitely didn’t think that high wages could cause the rate of profit to fall or that this was the likely course of events. Marx wrote “nothing is more absurd then, than to explain the fall in the rate of profit in terms of a rise in wage rates, even though this too may be an exceptional case.” (Capital, Vol III, Ch 14, section 5)
Moreover, even in the section on The General Law of Capitalist Accumulation, Marx makes the point that is missed by Lynn: “To put it mathematically: the rate of accumulation is the independent, not the dependent, variable; the rate of wages, the dependent, not the independent, variable.” (Capital, Vol 1, Ch 25). We could expound our position in a long theoretical digression, but there is now growing evidence that the profits squeeze analysis was a historical curiosity and is an absurd minority viewpoint nowadays primarily held just by Lynn.
The Marxist economic historian Robert Brenner makes trenchant criticisms of the profits squeeze explanation in his “Economics of Global Turbulence” (2006). Brenner points out that the determination of wage rates certainly does have a political and social aspect. However it is “one thing to assert that socio-political actions always plays a part in determining the wage, quite another to argue that such action can so squeeze profits as to cause a long-term, system-wide downturn”. The basic evidence against the profits squeezers, including the late Andrew Glyn and now Lynn Walsh, is completely compelling and amounts to the following points:
Profits Squeeze does not explain the universality of the 1970’s Long Downturn. None of the economies of the advanced capitalist countries escaped the crisis. Neither the UK, with a weak economy and strong labour movement, nor the strongest like Japan with a very weak labour movement, avoided the downturn. Brenner asked “is it plausible that what explains the downturn is that workers everywhere accumulated sufficient power to squeeze profits?” (p24)
Secondly, what about the simultaneity of the onset and different phases of the crisis? All advanced capitalist countries experience the onset of the crisis at the more or less the same moment as he explains…. “These economies have, moreover, experienced the successive stages of the long downturn more or less in lock step, sustaining simultaneous recessions in 1974-75, 1979-82 and from 1990-91” (p24).
Brenner continues that it is one thing to claim that political and economic policy was rather similar, but another “…to contend that the paths of institutional development and policy formation, the experience of capital accumulation and technological change, and the evolution of capital-labour relations─and politics more generally─could have been so similar in the major capitalist economies as to have brought about, at the same moment, virtually identical shifts in the labour market situation and the balance of class forces so as to determine the same evolution of profitability in those economies.” (p24)
The argument that strong labour movements gaining high wages could be responsible for a global downturn in the capitalist economy is farfetched in the extreme, and it also does not explain the length or the depth of the 1970s crisis. Given that workers’ wages and conditions have been under attack for nearly forty years and that wage growth has stagnated over that period, linked to permanent structural unemployment, this fact knocks the supports away from the profits squeeze theory completely. If high wages were supposed to have caused the crisis of the 1970s, how come the effects of the crisis continued for over a quarter of a century and there was no sustained recovery in the underlying reason for the crisis; capitalist profitability?
The historical evidence raises too many challenges to Andrew Glyn’s theory for it to be a serious contender to a genuine Marxist explanation for the 1970s crisis. We contend that the profits squeeze theory is a busted flush and that the real reason for the 1970s crisis can only be explained by recourse to the Law of the Tendency of the Rate of Profit to Fall; an explanation that Lynn does not even entertain as relevant to that crisis, from which world capitalism has not even fully recovered in the sense of a rebound in the rate of profit to the heady days of the post war boom of the 1950’s and 1960’s.
Intriguingly, in the 1980 debate within Militant on this question, our organisation rejected the profits squeeze theory as “politically dangerous”, given that it coincided with the views of our class enemies that wages needed to be reduced and trade union rights curtailed. At that time we were not aware that Lynn sided with Andrew Glyn on the profits squeeze analysis. Apparently Lynn has smuggled this erroneous, un-Marxist, and still politically dangerous theory back into the Party by the back door.
That Lynn continues to advocate this false theory in the face of a raft of contradictory theoretical and historical evidence is, in our view, sheer dogmatism, and has nothing in common with the scientific approach of Marxism. See Walsh 1998 (A Theoretical Exchange: What Are the Causes of the Current World Capitalist Crisis? Capitalism’s Economic and Political Crisis). Do we really want our Trade Union comrades to have to argue this line, absent from any work of Marx, Engels, Lenin or Trotsky: “If you fight for higher wages, you’ll cause a crisis!” This is the logic of the profits squeeze dogma.
Invisible Debts versus Corporate Cash Piles
In reference to our point about the corporate cash hordes, Lynn retorts; “They “don’t reject” our figures, but say the “idea that the capitalists are sitting on cash piles doesn’t match up with the facts”. Corporate cash reserves, they claim, are outweighed by piles of debt.” We don’t “claim” anything because corporate debts are a matter of public record, as we have already demonstrated and will emphasise again below.
Lynn sidesteps the issue of the corporate cash piles having to be balanced against their debts using the handy device of vaporising this debt in his document with a quick reference to where debt is allegedly held: “However, the main burden of debt in the US and other ACCs is carried by the public sector and the household sector. The commercial property sector and the small and medium business sector both carry a burden of debt.”
One would get the idea from this sentence that only fish and chip shops carry debt but big capitalist corporations don’t carry any major debts at all! Lynn cites the example of Apple; “Moreover, some of the big corporations, while they are hoarding cash, are also borrowing money at cheap rates in order to pay for investment and particularly for hand-outs to their shareholders (through dividends and share buybacks). Apple is a prominent example.”
The idea that big corporations can just borrow today without worrying about tomorrow is a fallacy as we shall examine. Throughout his document, Lynn suggests the Eleven can’t recognise real world trends, even with a “cursory reading of capitalist media, such as the Financial Times, New York Times, Reuters, Bloomberg, etc.” but corporate debt is a category that Lynn refuses to acknowledge. US non-financial corporate debt is larger than US government debt, and the US capitalists are leveraged up to their eyeballs.
We cited a report in our document by McKinsey Global in January 2012 entitled “Debt and deleveraging: uneven progress on the path to growth”. Lynn ignores this report and its content, and then goes on to quote numerous clippings from the financial media to highlight humongous cash piles. This isn’t taking our criticism seriously, as obviously this report can’t just be dismissed as spurious or for having methodological faults. Therefore it is simply ignored by Lynn.
In 2011, the US debt, which is made up of household, financial institutions, non-financial corporations and government debt, stood at 279% of GDP. Household debt made up the largest component at 87%, financial institutions 40%, non-financial corporations 72% and government 80%. The entire US capitalist sector on its own therefore out leveraged the government debt by 112% to 80%!
Apple is also a case in point. Its operating cash flow was $53.67bn but its leverage free cash flow (debt free) was $31.42bn (Yahoo Finance 2013). USA Today noted in May 2013: “Apple is selling $17 billion in bonds in what’s expected to be the largest corporate bond sale in history, as the cash-rich tech company uses financial engineering to return money to shareholders while avoiding paying taxes.”
This increase in Apple’s debt is possible because of near zero interest rates, which allows Apple to sit on its, mostly oversees, cash hoard and pay off shareholder dividends with the bond sale, but it is, nevertheless, debt. This problem is not stated by Lynn. This debt needs to be serviced i.e. interest has to be paid. Things are fine when government bonds have a higher interest rate when compared with ordinary borrowing rates. However, should interest rates rise, the debt becomes a very big problem indeed.
Apple is actually lower down the debt league and most US corporations are drowning in debt. The scale of corporate borrowing in the US is staggering, as the Financial Times reported in October 2013: “This month’s US government shutdown also furloughed corporate debt issuance and now bankers expect a rebound in bond sales by companies. Sales of US investment grade bonds have totalled $30.1bn so far this month, after a record breaking $149bn in September, according to Dealogic.”
A prominent contemporary example of just how fragile capitalist finance can be is Ineos, who own the Grangemouth oil refinery. The owner of Ineos, Jim Ratcliffe, is still being described by the Socialist Party as a billionaire. This is not a true reflection of his current position as the Guardian reported on 17 October 2013: “By 2007, after snapping up a string of unwanted chemical businesses, his personal fortune was put at £3.3bn by the Sunday Times Rich List. But by 2010, after the financial crisis, Ratcliffe’s estimated wealth had plunged to £150m. At the heart of Ineos’s troubles was its biggest deal ever – the £6bn purchase of BP’s Grangemouth refinery in 2006….. [T]he banks charged Ineos £680m in fees and Ratcliffe, who is said to own 70% of the company, nearly lost control. “What caused Ineos stress was that the banks took all that cash out of Ineos at its moment of need,” he said.”
As early as 2009, Reuters were warning of the toxicity of Ineos describing the company: “The business may be a sprawling ragbag of chemical plants which (literally) produce toxic assets like chlorine, but it’s a profitable ragbag, and the new buyers of the debt can afford to take a more pragmatic view of the company’s five-year recovery plan than those banks which have yet to admit they have lost much of their money.”
And: “Earlier this month Ineos revealed that it was budgeting for revenues of 15.2 billion euros, to generate 1.1 billion euros of EBITDA (earnings before interest, tax, depreciation and amortisation) on current cost accounting. This is nothing like enough to support 7.5 billion of debt. However, if enough of the debt-holders have bought their stock cheaply, a reconstruction might cut that in half, and leave them with better-rated paper which could stand closer to par. As for Ratcliffe himself, he has managed to retain a majority stake in the huge group he has built in just 11 years. He will need all his well-honed negotiating skills to hang onto it.” Ratcliffe did indeed hang on, but only after the debacle (for the labour movement) of the Grangemouth defeat in October 2013.
In relation to big business in the US, Andrew Kliman noted in 2010: “But businesses are typically net debtors, not net creditors, and U.S. corporations taken as a whole carry a massive load of debt. In the third quarter of 2009, for instance, their outstanding bond-market debt ― which does not include such debts as commercial paper and bank loans ― was $6.9 trillion, an amount equal to 100% of domestic corporations’ annual net value added and to 79% of the historical cost of U.S. corporations’ fixed assets at the end of 2008.”
Currently (2013 second quarter) the US Federal Reserve calculations in their Nonfinancial Corporate Business; Credit Market Instruments; Liability stands at a staggering $9 trillion or more than half of the US GDP of approximately $16 trillion. Presently non-financial corporations Credit Market Debt as a Percentage of Net Worth (Market Value) stands at 46.36%.
Here is a graphic representation of Lynn’s non-existent US corporate debt from the US Federal reserve:
Lynn comes up with some big numbers (including from the “suspect” source of Deloitte) of monster cash piles.
“52. In the UK, non-financial companies are estimated (by accountants Deloitte) to be holding £731.4 billion
(Q3 2011), the highest level on record. (Press release, 7 February 2012) As with other countries, this figure does not include cash held in offshore accounts to avoid taxation at home. This hoard is six times bigger than total UK business investment for 2011 (£118 billion). One example is Rolls Royce, one of British capitalism’s most successful companies. ‘Like much of corporate Britain, Rolls Royce has been piling up money for a rainy day. At the end of 2010 it had £2.9 billion in cash stashed away. Its net cash (i.e. excluding debt) rose to £1.5 billion last year, equivalent to around 15% of revenues.’ (The Economist, 19 May 2011).”
This seems like a lot of cash, but UK non-financial debt made up 109% of the incredible 507% debt to GDP ratio. The financial sector was 219%! A UK Economic Outlook’ report for 2010 called “Red ink rising” ( by untrustworthy for profits and debt, but not cash piles, Deloitte accountants) noted that actual nonfinancial corporate debt was £1.7trillion when GDP was only £1.4trillion. Net debt is total debt minus money holdings and bank deposits (the famous cash hordes). Net holdings peaked at three times income in 2008. In other words, non-financial corporations had three times as much debt, minus monetary assets, as income. The cash hoard of the British capitalists sounds huge, but it is only about half of GDP, whilst the debt mountain is nearly ten times as large!
We claim that Lynn has failed to take account of this “real trend” in world capitalism i.e. the debt mountain, whereas the Eleven’s “abstract schema” has definitely not “rendered [us] incapable of analysing economic reality and its political repercussions”!
Conclusion
We have shown that the method of Lynn Walsh with regards to economic analysis has more in common with contemporary bourgeois vulgar economics than Marxism. Lynn’s position is primarily based on distorting our arguments and quoting Marx out of context to fit his underconsumptionist position, as well as selectively ignoring the empirical evidence on the rate of profit since World War 2 and the growth of corporate debt. Lynn’s document is full of so many basic mistakes and contradictions that it is difficult to deduce any meaningful conclusions from it. We hope that this document has clarified the scientific method of Marxism and we will investigate the political implications of Lynn’s erroneous economic analysis in our next forthcoming document.
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