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Crisis theory and modern capitalism

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As the profit system peers over the edge of the abyss Colin Lloyd and Keith Harvey explain why mainstream economics is powerless to assist

"The business cycle is one of the major unsolved mysteries of economics. One explanation of business cycles is that they result from the desire of political parties to achieve re-election."1

This passage, from a standard reference book for managers, shows a key fact about the capitalists' knowledge of their own system: it is inadequate. It also provides an example of the main assumption behind pro capitalist economics: that the profit system is god given, natural and tends towards equilibrium. Where the balance is upset it is the result of bad policy, indicating the interference of "unnatural" structures or practices, whether these are pre election booms, import controls, trade unions or insider dealing.

The economists like to present their views as objective science. But, whereas physical science can predict at least the large, easily observed movements of nature, ruling class economics cannot predict them in society. No graph of future trends ever appears without the words "barring exogenous shocks" in the small print beneath. The superb algebra that won the Nobel Prize in Economics for the managers of the Long Term Capital Management hedge fund could not prevent them losing their shirts in the wake of the Russian bond crisis of August 1998: bond crises were not in the algebra. So, as the world slides into recession, according to Paul Omerod, former director of the Henley Centre for Forecasting, "the orthodoxy of economics, trapped in an idealised, mechanistic view of the world, is powerless to assist".2

In this context, it is no surprise to see the bearded visage of Karl Marx on the front of mainstream magazines, with the ironic headline: "Was he right?" The "Marx had things to say" article has become a standard feature to accompany crashing share prices in the past twelve months.

This question was Marx right? arises for today's financial gurus precisely because all scepticism has been driven out of ruling class economics itself. The theories associated with M Keynes, which dominated capitalist theory and policy from the mid1930s to the early 1970s, were based on the belief that capitalism had a natural flaw: a tendency to stagnation due to inadequate demand. While the Keynesians believed this tendency could be permanently offset by government management of demand, the theory at least introduced an element of self doubt into capitalist thinking. Neo liberalism replaced Keynesianism as economic orthodoxy in the 1970s, when demand management ceased to work. Its solution was to let market forces rip; deregulation, privatisation and the gradual removal of barriers to international trade all intensified competition.

With neo liberalism, the capitalists set themselves up for a much bigger ideological fall. Proponents of the theory represented it as "pure" capitalism, natural and unadulterated, like bottled spring water. If even this stuff makes you sick, some economists are now reflecting, there must be poison at the source.

In this article, we attempt three things: an outline of the Marxist theory of economic crisis; a brief history of the Marxist debate on crisis; and an explanation of the long period of low growth and recurrent crises since 1973 using these ideas.

Our central theme is that there is no "crisis theory" separate from Marxist political economy as a whole. The insights provided by "crisis theory" and "theories of imperialism" artificially separated by academic Marxism since the 1950s must be synthesised into a new total theory of 21st century finance capitalism. Even bourgeois economists admit that Marx made a major contribution to understanding the cyclical, i.e. lawful, nature of economic downturn. But here lies the main challenge for Marxism: to go beyond an understanding of the correctional role of crises and situate capitalism's cyclical downturns within its progression towards selfdestruction.

Why crises can happen

The features of an economic crisis are well enough known: firms issue profit warnings, growth begins to slow and credit becomes harder to get. Unemployment rises and retail sales begin to fall. The weakest links begin to break: the least competitive firms go bust, dragging with them creditors whose firms were still profitable. Share prices fall and investors rush to put their money into "safer" havens, which then yield lower returns and thus contribute further to the slump in demand.

Of course, not all crises display all these features, and not all the elements appear in this order but the details of different crises are secondary issues. The main question is why crises happen at all. To answer that, we must start with why they can happen: we must understand what Marx called the "possibility of crisis" which is inherent in capitalism.

Bourgeois economics, which assumes that its categories have existed throughout history, only in more or less developed form, does not even recognise the question: crises have always happened. Wars, droughts and earthquakes have wreaked economic havoc for centuries and still do, as the aftermath of Hurricane Mitch in Central America (October 1998) confirms. This view ignores the fact that capitalism is the first economic system where the primary cause of crisis lies within the social structure, not the elements.

It was no earthquake that shook two million English workers out of their factories in 1842; no famine that provoked the hunger marches of the 1930s; and, contrary to appearances, no hurricane that blew billions of dollars off share prices on Monday 19 October 1987. Society before the 18th century was agrarian and relatively stable: at the mercy of unpredictable nature certainly, but with predictable forces at work within and between the village, the abbey, the castle and the market town. With industrial capitalism, the primary cause of economic crisis is the economy, not nature.3

The quest for a reason why leads us to the first major concept of Marxist political economy: the dual nature of the commodity. Commodities are things made, or services provided, for exchange. For the producer, what is important is how much a commodity will fetch when exchanged, its exchange value, whereas for the prospective purchaser the first concern is whether it fulfils some need or serves some purpose or, more technically, whether it has a use value.

A commodity's use value is not only a separate concept from its exchange value: the two properties are mutually exclusive. The more you drive a new car i.e. use it the more its exchange value declines. Nor are these mere "concepts" projected onto traded goods by theory: all commodities have a tangible use and a measurable exchange value before any economist, Marxist or otherwise, puts pen to paper.

Starting from this real unity of opposites within all commodities, Marx used the economic concepts of use value and exchange value to analyse their implications for a society in which all products are commodities, i.e. capitalism. He showed first of all that in such generalised commodity production, one commodity did not exchange directly with another, as in barter, but rather was exchanged for money, representing a universally acceptable equivalent of exchange value. Secondly, unlike in pre capitalist society where the population produced the necessities of life for their own direct consumption, in capitalism obtaining even the most fundamental use values, food, clothing, shelter, became dependent on possession of this universal equivalent, money.

In summary, the dual nature of commodities and the existence of money as the means of expressing exchange value make possible a disjuncture between production and consumption on a scale impossible in pre capitalist society. Because of this, the general form in which capitalist crises manifest themselves creates the illusion that there is simply "too much": too many cars that will not sell, too many car factories, too many investments chasing too few profits. Instead of underproduction, overproduction is the normal form of capitalist crisis. The Wall Street journal recently described the current impact of this very graphically:

"From cashmere to blue jeans, silver jewellery to aluminium cans, the world is in oversupply. True, some big industries, such as steel, autos and semiconductors, have been grappling with excess for years. But a remarkable range of others have been losing their leanness only lately, as crisis battered nations ramp manufacturing to try to earn more money, and as consumers in many lands, spooked by financial markets gyrations, slow their spending and conserve savings."4

Labour and value

Marx presented his theories by starting from the most abstract concepts and progressing towards a more concrete combination of them. He insisted that modern capitalism could not be understood if we started our analysis from the most readily given categories of economics, such as "population" or "firms". Although apparently simple and "obvious" these were, in fact, very complex and were actually composed of other, more basic categories, such as "classes" and "commodities". So, Marx's method was to break down the more concrete categories into their basic elements and study their nature first. This he called his method of abstraction; only once this had been done could one build up a picture of modern capitalism in all its richness and diversity.

Some critics have objected that Marx's concepts are simply ideas imposed on reality, whose accuracy can never be proved through the facts and figures in the financial pages. Yet the same economics professors who oppose Marxist "abstraction" are quite happy with, for example, the ISLM curves in bourgeois economics. These show how a given national income and interest rate, investment and savings, and the supply and demand for money interact to produce general equilibrium in the system. According to one textbook:

"IS LM is a pure comparative statistics model: it suppresses consideration of how the price level is determined and whether the labour market is in equilibrium. IS LM is a teaching device and not a realistic model of any actual economy. "5

The real question, therefore, is whether the abstractions made by the science aid understanding or are so arbitrary and one sided that they exclude important elements of reality from the start.

Paul Mattick writes: "The pure market theory of bourgeois economic theory is naturally also an abstract affair, since it excludes the capitalist relations of production from consideration. In this way it shuts itself off from insight into the totality of the actual state of affairs and hence also from understanding of market phenomena themselves. Value analysis, in contrast, makes possible the explanatory passage from abstract to concrete, since it can demonstrate the subordination of market relations to the production relations of modern society."6

Marx's critique of political economy, therefore, although abstract, is ultimately more realistic; for example, he starts with production not exchange (since one has to make something before it can be exchanged). His analysis leads to a model of a society that naturally and tendentially moves away from equilibrium, rather than one in which disequilibrium is excluded from the model in the first place and can only, therefore, be understood as a consequence of external, non economic factors.

As we have seen, Marx's presentation of his analytical model of capitalism began from a consideration of the dual nature of the commodity, its possession of use value and exchange value. One of his most important innovations lay in his investigation of the nature of exchange value. He concluded that the exchange value of a commodity is ultimately related to the amount of human labour expended to produce it. Marx did not invent this "labour theory of value": a flawed version of it formed the basis of the "classical" political economy of Adam Smith and David Ricardo, the two great theorists and defenders of early capitalism.

All three men recognised the superficiality of any theory that tried to explain the price of a commodity merely by reference to the level of supply and demand for it: when demand outstrips supply, prices rise, and that's all there is to it. This ignores the fact that different commodities oscillate, so to speak, around different prices. The price of a car may vary within a certain range, but it's never the same range as for a bicycle. Almost a century before Marx, Smith had already recognised that the price of a commodity in a "balanced market" must express some "value" that was intrinsic to it. But what determined that value?

Marx's solution was predicated on the fact that all commodities possess one thing in common: producing them and bringing them to market requires human labour. We can measure this in terms of human labour power, or labour time if we abstract from individual skill differences. Marx advanced the concept of "quantities of socially necessary human labour power" to measure this.

Commodities exchange in proportion to the amount of average, socially necessary labour time they embody: it may take 100 different barbers 100 different times on the stop watch to do a simple crop. But we can average their times and come up with the socially necessary labour time for the haircut. The barber who takes twice as long can't double his charge: thus the average price of a haircut will reflect the average amount of socially necessary labour taken to do it, in average conditions.

On the basis of this theory, Marx postulated the following:

• Labour power alone is the source of value.

• When the firm pays the worker's wages it is buying the right to use the worker's labour power for a given time.

• The value of the worker's labour power, like all commodities, is itself determined by the amount of socially necessary labour time expended on producing and reproducing it. Concretely, the price of everything that helps to deliver the fed, clothed, sheltered, trained, fit for work employee at the clocking in gate determines the price of the worker's labour power.

• Exploitation takes place during the production process. Its simplest form is for the firm to get workers to expend more labour power than it took to produce their labour power. Only part of the day is needed for workers to reproduce this amount of value ("necessary labour"). The rest of the day is a free gift for the boss ("surplus labour"). In early capitalism, the bosses tried to maximise this surplus labour by extending the length of the working day: but this had limits, not least the resistance of the working class. So, capitalism turned instead to increasing the productivity of labour, so that workers produced the means of their subsistence in less time thereby making them cheaper. This shortened the amount of working time needed to reproduce labour power and, thus, lengthened the amount of surplus labour time. The principal way of achieving this was, and is, by the introduction of "labour saving" machinery or techniques of production.

• At the end of a given period of production, the workers have taken raw materials, machinery and energy (each of which the capitalist bought as a commodity, and whose price therefore reflected the labour power expended in their production) and produced a new commodity that also contains their labour power: some of which the firm paid for, some it got for free. If the firm then sells all the products, provided production took place at or above average efficiency, there will be a profit. These are big ifs, of course, and can only be answered after production and during exchange.

Because of competition, capitalists always seek to outwit their rivals in the use of materials and labour power. This is the source of the drive to find ever more efficient methods of production, which result in a new standard of average socially necessary labour time.

Producing more efficiently than the rest of the market gives individual firms two options: since they have reduced the amount of socially necessary labour time in each unit of output, the firm can cut prices to gain market share, thus boosting profits or keep prices and market share stable, realising a higher than average profit on each item.

However, Marx pointed out that this whole process of competitive accumulation of capital also contained the seeds of its own downfall. Profit, the pursuit of which is the driving force of the entire capitalist economy, originates in surplus value, i.e. the difference between the total value created by the workers and the value returned to them as wages. As we shall see below, the effect of replacing workers by machinery, other things being equal, is a fall in the rate of profit.

Marx recognised, however, that other things do not remain equal. For example, if productivity increases in industries supplying the workers' consumption goods then necessary labour time can be reduced or a firm might "corner the market" and be able to maintain high profits as a result. Consequently, the fall in the rate of profit was neither immediate nor uniform. It could be delayed, offset, even negated for whole periods by other consequences of the natural operation of the capitalist system or, as he himself put it, "The same causes that bring about a fall in the general rate of profit provoke counter effects that inhibit this fall, delay it, and in part even paralyse it. These do not annul the law, but they weaken its effect... The law operates, therefore, simply as a tendency whose effect is decisive only under certain peculiar circumstances and over long periods."7

• It is a central contention of this article that this, tendency of the rate of profit to fall (TRPF) is a necessary feature of the capitalist system and that the evolution of capitalism since Marx's time has to be explained principally by the interaction of this tendency with the various "countereffects", or countervailing tendencies (CVTs) as we shall call them, which capitalism has spontaneously generated to try to maintain profit rates. Although this interaction has changed the forms of capital and ultimately led to its present globalised and financially dominated form, the underlying tendency remains and leaves capitalism still vulnerable to crises.

Why crises have to happen

To explain how something is possible is not the same as demonstrating why it is necessary. For most of this century, most Marxists have rested content with the supposition that the fundamental cause of crisis in capitalism lies in its tendencies to disproportionality or underconsumption.8 If one traces the references to these concepts in the work of Marx and Engels one can see that although they examined their effect and roots within capitalism, they never ascribed the root cause of crisis to either.9

The reason for this is twofold: first, that underconsumption and disproportionality are permanent conditions under capitalism and as such cannot explain periodic and cyclical crises; secondly, on their own they can only add to our understanding of why general crises might, or can happen, rather than why they must and do.

Disproportionality flows from the private, blind and hence anarchic, character of production for profit in which output is expanded without regard for the final demand or guarantee that the supplies of raw materials and intermediate goods can be bought and delivered in sufficient quantities at the desired price. Some sectors face a lack of goods in the right proportions while others have a surfeit; at another time it will be the reverse. Partial overproduction in one sector and then another is a given under capitalism. But this does not explain why there is a generalised overproduction of goods and capital in certain periods of the economic cycle.

Underconsumption, in the sense that the direct producers are prevented from consuming all that they produce, is not only an intrinsic feature of capitalism but of all class societies based as they are on exploitation and the appropriation of a surplus product by a ruling class. But, as Engels once noted "the underconsumption of the masses ... tells us just as little why crises exist today as why they did not exist before".10

Underconsumptionism, however, as a possible explanation of capitalist crisis says more than this. It says that it is inherently impossible for the working class to consume that part of production destined for its consumption because of the necessary limitation on working class income, wages. For Rosa Luxemburg, this could only be offset so long as there were markets for goods outside the capitalist system; for Paul Sweezy, it was the supposed inherent tendency of the production of consumer goods to outstrip their consumption; for left Keynesians, it was the lack of effective demand (i.e. workers' buying power) that deterred investment and thus prompted crisis.

All these theories of capitalist crisis place the problem squarely within the realm of circulation, that is realisation of surplus value produced. Marx rejected this and insisted that the cause had to be found not in the difficulties of realisation but rather in the inherent limitation of the method of production of surplus value. Indeed, when developing his theory of accumulation and how it leads to crisis, he went as far as to assume that a buyer could be found for every product and still showed that crisis was inherent.

A viable theory of crisis, then, should not ignore either underconsumption or disproportionality but should seek to show their inner connection to the tendency of the rate of profit to fall:

"Falling profits are the fundamental cause of the underconsumption by the working class, that is a level of working class consumption which excludes the realisation of the total surplus value embodied in those commodities designed for that class' consumption. This is an underconsumption of the masses which also appears as an underconsumption from the point of view of capital. Hence this underconsumption enters into the capitalist crisis as a real cause, if a subordinate one. Similarly Marxism does not deny the role of disproportions within capitalist crises but rather explains the fundamental movement of these disproportions on the basis of the tendency of the rate of profit to fall. Capitalist crises really do unfold through all kinds of gigantic disproportions: between capitalist production and consumption, between different branches of industry... Through the transition from partial overproduction in one branch to generalised overproduction a generalised slump of capitalist production takes place. This generalisation is a result of a generalised overproduction of capital. which is nonetheless relative: it is superabundance of capital at a given rate of profit; it is an expression of falling profit rates."11

The tendency of the rate of profit to fall There are many categories of capital in existence: share capital, loan capital, property, cash etc. However, within the process of production and exchange, it flows from the labour theory of value that there is one big conceptual division: capital advanced as wages, and all the rest. Since only human labour power creates surplus value, Marxists label the capital spent on labour power wages as variable capital. The rest, whether it is spent on buildings, operating costs, raw materials, distribution, etc. is labelled constant, in the sense that it adds only its already existing value to the final product.

Capitalist production, when pared down to its commercial intention which is to produce profit can be represented like this:

• In: constant+variable (c+v)

• Out: constant+variable+surplus (c+v+s)

The value embodied in the output is divided equally between the units of output. Its real world concomitant is the figure for "turnover" or "sales" in a company profit and loss account, in a situation where all products are sold, and at their true exchange value, where no wastage occurs, and where labour and machinery have been used at average efficiency.

We can quantify every cycle of expenditure and revenue in terms of c+v+s. But we need to remember that the model, at this stage, is highly abstract: no individual profit and loss account can tell us whether labour has been used efficiently, all products sold, all capacity utilised efficiently and to the full only the aggregated experience of an entire sector, and ultimately the entire economy, can give us a clue.

Taking c+v+s, and a definite quantity of products, we can describe the effect of the rising proportion of constant capital expended on machines and technique over the diminishing proportion of variable capital (that is, capital paid out as wages) a process that Marx called the rising organic composition of capital.

Since exploitation is measured by the difference between the amount of surplus labour (s) embodied in output and the value of variable capital (v) invested, the rate of exploitation can be expressed as s/v. In Table 1, the rate of exploitation remains the same but the rate of profit which is the ratio of surplus to total capital invested, constant as well as variable (c + v), declines as the value of the constant capital element increases. This is not meant to represent year on year growth but is a simple mathematical relationship between the constant/variable portions of capital and the rate of profit.

At this stage, it is important to remember that Marx is not concerned with the effect on the rate of profit of competition between different capitalists. Instead, he proves that this tendency exists outside of, and before the effect of competition is considered. 12 Indeed, as we have noted above, this law operates even on the assumption that all products that are made are sold and that there is no disproportionality between different sectors of industry.

In fact, the tendency originates in the inherent powerful impulse of every capitalist to maximise their surplus value the motor force of capitalism itself which they can only do over the long run by increasing productivity through increasing relative surplus value and by massively expanding the amount of capital they set in motion. Both in the individual firm and in society as a whole, this can lead not only to a massive increase in total output but also to an absolute increase in the number of workers employed and in the mass of profits, none of which, in itself, contradicts the tendency.

However, there is a tension between capital's drive to expansion, which implies more and more workers being drawn into production, and its search for higher productivity by replacing workers by machinery.

The tendency of the rate of profit to fall arises out of the labour process itself. Not only are there are obvious physical limits to increasing profits simply by making workers work longer or harder but the resistance of workers to such attempts also forces the employer to invest in machinery and other elements of constant capital. The drive to increase profit by increasing constant capital, therefore, exists even before we take into account the compulsion of competition with other capitalists.

Given this tendency, for the rate of profit to fall in line with the rising value of capital expenditure, why should any capitalist invest? The answer lies in the comparative advantage a firm gains over its rivals as a result of productivity gains made with new technology. This too can be expressed at the same level of abstraction the simple mathematical model as the above.

Suppose every phase of innovation doubles output, and that we treat each line in Table 2 as a year of trading for one of three competing firms, each at a different stage of technological innovation, and the unit of value as #.

In line 1, the value embodied in each unit is #1 (250/250). For Firm 2 it is (300/500) OOp. For Firm 3 it is 40p (400/1000). If the price mechanism is working without disturbance, the socially determined price will reflect the average across the three firms: 1,750 products embodying #950 of value. The price that reflects social value will be 950/1,750: each product should sell at just over 54p. The market will reward the innovator, who has the lowest rate of profit, by reallocating profit from the other two.

The revenue of Firm 1 will be #135 a loss compared to its initial outlay of #150. Firm 2's sales will net #270a realised profit of #70. Firm 3, despite having the lowest rate of profit embodied in production, will have the largest mass, with takings of #540 compared to its outlay of #300.

If we imagine a trading year before competitive innovation started, when all firms' accounts resembled Line 1, the total investment would have been #450; the total profit on top of that, #300. Once the firms are "strung out" along the line of technological competition, as above, we have a total investment of #650, total profit still #300, but the most innovative firm's mass of profits has grown from #100 to #240.

As Marx summarised this: "The law that the fall in the rate of profit occasioned by the development of productivity is accompanied by an increase in the mass of profit is also expressed in this way: the fall in the price of commodities produced by capital is accompanied by a relative rise in the amount of profit contained in them and realised by their sale. "1

The law under attack

Even at this level of analysis the tendency of the rate of profit to fall has come under repeated attack.

* The first, oldest and most common objection stems from the work of Von Bortkiewicz at the start of this century.14 He claimed that Marx's model and mathematical presentation of the dynamic of the accumulation process leading to the falling rate of profit was logically arbitrary. Marx assumed a constant rate of surplus value in his examples (see too the example given above). But, goes the criticism, the effect of increasing the amount of constant capital is to increase productivity and with it the rate of surplus value.

If this occurs then it can do so in principle at such a rate that the rate of profit does not have to fall. Moreover, it has been claimed that if the rate of surplus value were to be constant then the benefits of the rise in productivity occasioned by the increase in fixed investment would all go to the working class in the form of increased wages and none to the capitalists; a proposition that is totally unrealistic. 15

* A further criticism made of Marx here is that he neglects to consider that higher productivity also leads to the elements of constant capital (energy, raw materials, machinery) becoming cheaper containing less value than before. If this is the case, there is no need for technical innovation to lead to a rising organic composition in value terms.

The effect of these objections leads Marx's critics to argue that the direction of the rate of profit is indeterminate and the rate of profit will only fall if the rate of surplus value rises slower than the rise in the organic composition of capital.

How should we answer these objections?

The first criticism is entirely misplaced. Marx himself was aware that, in general, the rate of exploitation (i.e rate of surplus value) would rise as accumulation proceeds. One of his major criticisms of Ricardo was that he failed to distinguish between the rate of profit and the rate of surplus value and their inverse tendencies:

"The tendency of the rate of profit to fall is bound up with a tendency of the rate of surplus value to rise... The rate of profit does not fall because labour becomes less productive but because it becomes more productive." 16

Marx recognised that a rising rate of exploitation could offset the effect of a rising organic composition of capital. This was one of the CTVs to which we have already referred. However, there were limits to its efficacy in offsetting the tendency of the rate of profit to fall. The value of labour power cannot shrink to zero and the smaller it gets in relation to the surplus, the more it suffers from its own law of diminishing returns: large proportional decreases in the value of labour power are needed in order to produce minor changes in the rate of exploitation. For example, if necessary labour took up one tenth of the working day and surplus labour ninetenths then a thousand fold increase in productivity would only increase surplus value by 1%.17

The second criticism that the elements of constant capital themselves become cheaper as a result of rising productivity and so there is no tendency for it to rise relative to variable capital has proven more serious. Marx himself acknowledged, "there can be no doubt that machinery becomes cheaper" over time as do raw materials. But Marx's own conclusion was that the process of mechanisation and innovation, at a society wide level, would lead to a greater mass of instrumentation and technology being applied to the production process and a huge proportionate reduction in numbers employed per unit of output. This would ensure that the relative size of constant capital to variable capital would increase despite the cheapening of individual elements of fixed capital. Subsequent historical experience in industries which have gone through successive rounds of technological innovation suggests that his argument that once again there are limits to the efficacy of this CVT was well grounded.

In addition to the proportionate growth of constant capital, however, we should build into the analysis the cheapening of the cost of variable capital. That is to say, the increase in productivity in society as a whole applies equally to the production of the means of consumption. If they cheapen at the same rate as constant capital then the relationship between the two components of total capital remains the same. Of course, if they were to cheapen more quickly, then this would itself reduce the variable component and thus contribute to the rising organic composition of capital.

We conclude from this that the Law of the tendency of the rate of profit to fall, which Marx called the "most important law of modern political economy" remains central to any understanding of capitalist crisis. We understand the tendency as permanently present but that it can be offset by various countervailing tendencies. Indeed, these CTVs represent capitalism's spontaneous responses to the operation of the tendency. Nonetheless, the CVTs themselves ultimately compound the problem: they do not resolve it. Over time, their efficacy in offsetting the declining rate of profit itself declines.

Capital's whole purpose is to expand its value through investment. When profit margins fall across the board, a portion of total capital in society finds it cannot be invested at the existing average rate of profit. Thus it appears that there is an overproduction of capital, that is, the expansion of production has outrun profitability. At a certain point, capital begins to take flight from the production process. Investment dries up, credit is tightened and production grinds to a halt. As Marx says:

"The growing incompatibility between the productive development of society and its hitherto existing relations of production expresses itself in bitter contradictions, crises, spasms."18

The countervailing tendencies and the equalising tendencies Generalised crises of capitalism erupt only periodically, at their most extreme they can embrace the whole global system at the same time. Sometimes, by contrast, they are confined to regions or countries and sometimes the cycles of growth and crisis are not synchronised.

The fact that crises "break out" only periodically suggests that the effect of the tendency of the rate of profit to fall is often latent; that they break out at all indicates that it operates for sure. But how, when, in what form and how the sequence of trade, investment, currency and stock market crises unfold, is contingent and needs concrete study. As David Yaffe has noted:

"The fall in the rate of profit is not linear but in some periods is only latent, coming to the fore more or less strongly in other periods and appearing in the form of a crisis cycle." 19

But first we need to study why crises only erupt periodically and with what effect. This requires a further consideration of the countervailing tendencies to the falling rate of profit which ensure that the law only operates tendentiously and not ever presently and immediately.

In Capital Volume III, Marx attempted to construct a model of the capitalist system as it existed in the mid 19th century. Volume III contains only part of that model further volumes were to deal with the state, international trade and crisis and remains therefore "abstract" in the sense that its subject matter is a "national" economy, minus the economic impact of state spending and taxation. Nevertheless, it is at a more concrete level than the above discussion in that it attempts to test the theories outlined above in the real world of "many capitals" not just actually competing firms but also types of capita. In addition to increases in the rate of surplus value and cheapening of the elements of constant capital, Marx outlined a number of other counteracting factors to the TRPF. These are:

• paying wages below their value; for a concrete example of this process one need look no further than the decline in real wages in the USA between 1973 96 which helped ensure that all productivity gains went to the capitalists in the form of increased surplus value.

• the use of the workers discarded by high technology industries to form a low wage workforce within other sectors, thus retarding the latter sector's need for technical innovation (and thus dampening the TRPF within that sector); once again the recovery in the 1990s in the US economy is a case study in this. The historically low unemployment in the USA is due to mass job creation in the service sector over the last ten to 15 years at low wages, so low that there is no compulsion to introduce labour saving technologies and which as a result ensures that these jobs have very low productivity.2o

• the growth of share capital, where dividends are paid out of net profits and must generally therefore be lower than net profits, thus creating a section of the capitalist class that is content with a rate of return less than the average, allowing a proportion of social capital to be invested at less than the average rate of profit. Although Marx dealt with this only briefly we will see it has major implications for modern capitalism.

• a decrease in the turnover time of capital: "The more rapidly a particular capital can complete its cycle of reproduction the larger the scale of production that can be supported and the greater amount of surplus value that can be appropriated in a given time with a given capital."21

An understanding of these more concrete countervailing tendencies, fills out the discussion above of how the TRPF can be offset but not negated and thus, to repeat Marx, "is decisive only under certain peculiar circumstances and over long periods."

Indeed, the crisis itself can be seen as a countervailing tendency. The function of the crisis is to destroy all or part of the value of ailing or failing capital and thereby increase the rate of exploitation so that new expansion becomes possible. As David Yaffe noted:

"The tendency towards 'breakdown' and stagnation therefore takes the form of cycles due to the effects of the counter tendencies of which the actual crisis is the extreme case."22

But what determines the circumstances and the periods? Here we have to move away from "pure" crisis theory to attempt the fusion between our understanding of the dynamics of capitalism and our understanding of its modern structures. Imperialism, as an economic concept describing the whole system of 20th century capitalism, was derived by Lenin, Hilferding and Bukharin from the initial work of the liberal economist, Hobson. The imperialist epoch, as described by Lenin in 1916, represents the dialectical opposite of free competition capitalism of the early 19th century: in place of national economies there is the global economy; in place of private businesses, joint stock companies predominate; in place of many competing capitals there are a few, which monopolise whole sectors of the market; in place of the export of commodities to the underdeveloped world there is the export of capital both in the form of portfolio investment and foreign direct investment.

Our thesis is that "imperialism", understood as the totality of 20th century monopoly capitalism, is nothing less than the fusion of the countervailing tendencies outlined above : capitalism writhing to free itself from the law of the TRPF has created new structures, not by policy but by the spontaneous evolution of the market, which totally shape and reshape the world economy.

Controversies over crisis theory' There are several surveys of the development of the Marxist theory of crisis after Marx, which cover the following points in more detail, often in dispute with each other.23 What is undisputed is that Marx's finished work contained no elaborated crisis theory, only a method for producing one.

As a result, the Marxists of the early Second International held to a relatively vague estimation of the causes of crisis which generally relied on the anarchic nature of capitalist production, the magnifying power of money and credit and which saw the TRPF as a kind of tectonic movement of the system over decades on top of which real crises occurred. The years 18731894 became known as the Great Depression, during which the growth of world capitalism and the parallel carve up of the pre capitalist world into colonies and spheres of influence was accompanied by a 20 year tendency of prices to fall and for profits to experience convulsive falls.

The end of this period coincided with (a) a prolonged upswing in investment, (b) the so called "second technological revolution" which led to mass production, the beginnings of the replacement of steam by internal combustion etc., (c) the growth of the labour movement and the achievement of improvements in the sphere of democracy, welfare and, for some, absolute wage levels, (d) the exhaustion of "virgin" colonies and the beginnings of the inter imperialist rivalry over colonial domination that was to lead to war in 1914 and, (e) the massive centralisation of capital into large corporations, in some cases completely merged with/owned by the banks.

During this prolonged period, purely economic crises became rarer. However, this period also marked the theoretical maturity of the Social Democratic workers' movements and during it some of the main theorists of Marxism duelled over the causes of crisis. Whatever the theoretical merits of their arguments, it also has to be noted that the motor force of the argument was the debate between reform and revolution.

In essence, there are three types of crisis theory: (i) those rooted in the contradictions of the property form itself; (ii) those rooted in the vagaries of capitalist distribution and, (iii) those which identify the key breakdown within the profit production process. Historically, the first controversy over crisis within the Second International represented progress from type (i) to (ii). It was a debate between the proponents of a "disproportionality" theory of crisis and an "underconsumptionist" theory.

The advocates of disproportionality held that crises were caused by the desynchronisation of the production cycles of industrial and consumer goods, under the "free competition" capitalism of the 19th century. However, as capitalism was moving spontaneously away from "free competition" to a new mode, within which large monopolies and state intervention controlled the market, allowing rudimentary capitalist "planning", it was possible to envisage crisis free capitalism. It was no accident that one of the main proponents of this early disproportionality theory was Eduard Bernstein, the main advocate of reformist practice within the Second International.

Foremost among the Left of Social Democracy who argued against Bernstein was Rosa Luxemburg, who propounded an underconsumptionist theory of crisis. Put crudely, she argued that the main barrier to the eternal expansion of capitalism was the purchasing power of the masses: productive capacity was unlimited, but consumption was limited by the property form. She recognised that imperialist capitalism had begun to lift barriers to growth with the creation of new colonial markets but believed that, since these were finite, once all markets had been conquered, capitalism's underconsumption problem would be posed even more sharply.

Into this debate stepped Rudolf Hilferding with a more "revolutionary" version of disproportionality theory based not on free competition capitalism but its opposite. He argued, against Bernstein, that the monopolised, cartelised, state controlled, finance dominated capitalism of the early 20th century could not overcome disproportionality between the sectors because of the technical requirement of heavy industry (chemicals, metallurgy, engineering, arms) for high value fixed capital. This created limits to capital's ability to flow between high and low profit sectors, and thus prevented the equalisation of the rate of profit between sectors. In the process, it guaranteed crisis forming disproportionalities between, for example, prices in the raw materials industries and the industrial production industries. As Simon Clarke points out, while Hilferding's revolutionary disproportionality theory suggested that only planning and public ownership could iron out the problems created by the heavy industrybanking fusion, like previous forms of disproportionality it ultimately targeted anomalies in the distribution process (of profit in this case) rather than the production process as the cause of crisis.

Strikingly, the TRPF played no part in the explanation of crisis for either school, other than as an invisible backdrop to the phenomena under dispute.

In 1913, a new downturn began. In 1914, the world exploded into war. In 1917, capitalism was overthrown in Russia and came perilously near to overthrow across Europe. By the time revolutionary socialists returned to the debate on crisis theory, the pernicious influence of Stalinism was at work. Stalinism at first distorted attempts to go beyond Hilferding theoretically and then put a stop to the debate by declaring a version of Rosa Luxemburg's underconsumption theory as the orthodoxy of the Comintern. Simultaneously the focus of Marxist theory of the 20th century economy shifted decisively from the "dynamics" of the system to its "structure": the theory of crisis was elbowed from pride of place by the debate on the nature of the imperialist economy because orthodoxy, in the form of Varga and Leontiev, now held that (a) crises were crises of underconsumption and (b) state monopoly capitalism possessed the means to overcome crisis.

Capitalism's second great depression 1929 37 formed the backdrop to this ossification of theory. After the 1939 45 war, Stalinist underconsumption theorists again stepped forward, this time to explain the boom. They argued that, using Keynesian demand management techniques, monopoly capitalism, now increasingly multinational in its reach, could overcome the barriers to consumption specifically through state spending, including "waste" spending on armaments. Thus, as Clarke points out, there was a symmetry between "crisis theories" and the positions of Keynesianism and Stalinism after 1945.

The baseline implication was that capitalism could overcome underconsumption crises (but the narrow interests of the capitalist class prevent this) and that the new kind of state monopoly capitalism could plan and spend its way out of crisis, with arms spending thus providing a "leak" from the system, allowing capital that would otherwise appear as "overproduced" to escape from the cycle that caused the TRPF.

The third phase in the development of crisis theory after Marx began in the late 1960s as profit rates across the western world began an unusual fact compared to previous crises to fall in advance of a collapse in prices or a rise in unemployment. Although Marxist economic theory had by then become thoroughly academicised, the radicalised generation of the 1970s was able to draw on new scholarship about Marx's own work, which would have been unknown to the pre 1914 revolutionaries and which were partially suppressed under Stalinism. State capitalist theories, postulating the absence of profit crises, were being proved wrong before their eyes and with them, underconsumptionism itself. And, since underconsumptionism was generally associated with Stalinism, the revolutionary generation after 1968 was spontaneously drawn to reformulate crisis theory directly in terms of the TRPF.

As Itch writes: "The prestige of Marxist underconsumption theory grew during the long boom of the world economy after the second world war because of its affinity with Keynesianism. After the early 1970s, the failure of Keynesianism and the protracted difficulties of the world economy propelled overaccumulation theory to prominence."

However, proponents of overaccumulation divided into two "schools": fundamentalist and neo-Ricardian. The neo Ricardian school, exemplified by the then followers of the Miiitant/CWI tradition, Glyn and Sutcliffe, argued that the TRPF in itself could be permanently outweighed by the countervailing tendencies, and that the tangible "profit squeeze" of the 1960s was primarily the result of the class struggle. Working class victories in wage struggles during the boom created the conditions where the capitalist could not increase the rate of exploitation as the profit rate fell, thus ensuring the onset of "stagflation" inflation plus recession in the early 1970s.24 Indeed, its main proponents argued that, without wage pressure, there was no automatic tendency of the rate of profit to fall.
It was out of these debates that the so called "fundamentalist" school emerged. Its main theorists, in the early 1970s, were Mario Cogoy, David Yaffe and Paul Mattick who came from the anti Stalinist (and in Mattick's case anti Bolshevik) revolutionary left. Working separately, they presented theories of crisis based on the TRPF. Their theoretical contributions essentially amounted to four ideas:

(i) Orthodox Stalinist underconsumption theories of crisis were firmly linked to Stalinism and left reformism's acceptance of a Keynsian programme for regulating capitalism.

(ii) Classic bourgeois and Stalinist objections to the law of the TRPF, formulated at an abstract level, were based on the idea that capitalism could indefinitely and spontaneously offset the effect of the rising organic composition through raising the rate of exploitation. These could be proved wrong mathematically25 and in any case were being disproved by the concrete re emergence of falling profit rates.

(iii) All other theories claiming provenance from Marxism (disproportionality, underconsumption, state capitalism, neo-Ricardian profit squeeze theories) were being thrown into crisis.

(iv) A rigorous distinction had to be maintained between the abstract level, at which the TRPF operates, and the concrete reality of falling profit rates. Mattick, for example, in polemic with Ernest Mandel, wrote:

"Mandel attacks all those who think that the capitalist mode of production stands in the way of empirical verification of the Marxian theory, and who therefore restrict themselves to the abstract analysis of developmental "tendencies". In opposition to them he wants to describe not only the "tendencies" discovered by the abstract analysis but also the development of capitalism as a concrete historical process, since Marx 'categorically and resolutely rejected this quasi total rift between theoretical analysis and empirical data'. "26

Mattick, contra Mandel, remained a resolute defender of the idea that 11 one cannot speak of quantitative and empirical proof of the validity of Marx's developmental theory, since the data necessary for such a proof are in capitalism neither available nor to be expected.

This addiction to abstraction was the Achilles' heel of the fundamentalist school: since the TRPF could be proved capable of conquering its countervailing factors even at the most abstract level, all arguments pitched at lower levels of abstraction and all countervailing tendencies at the concrete level could be discounted. This left the theories of the fundamentalist school open to degeneration into one sided catastrophism. Paradoxically, having reclaimed the decisive theoretical tool,' the TRPF fundamentalists proved incapable of using it to analyse the concrete factors contributing to the long period of depressed accumulation that opened in 1973 and which persists to this day. All those who attempted to trace the line from the TRPF, through mediating levels of abstraction to the concrete, were accused of eclecticism.

Prime among the culprits was Ernest Mandel. Mandel, the pope of post 1945 Trotskyism, was indeed guilty of profound eclecticism: his theoretical evolution passed through or less every trend within post war Marxist political economy, including theories of unequal exchange and even crisis free "Late Capitalism". However, the recession of the early 1970s brought Mandel, formally at least, closer to identifying the TRPF as the fundamental feature of capitalist development. He joined with the fundamentalists in their critique of pure disproportionality and underconsumption theories, and in their attack on the neo Ricardians who located the cause of crisis in the distribution process (of surplus value) rather than in its production.

Against all of them, Mandel wanted to create a multicausal theory of crisis, a goal which fitted well with his simultaneous adoption of Althusser's structuralist Marxism, with its insistence on "autonomous mediating factors" between the fundamental causal forces of society and their effects. However, Mandel's eclecticism and insistence on abstraction "aiming" towards the concrete, enabled him to write, if not the best, then the least worst appraisals of the crisis as it unfolded.

In The Second Slump, an account of the 1973 recession, Mandel attempted to incorporate political factors (inflation as a result of the USA's rising costs in Vietnam, which in turn undermined the system of exchange rates fixed to the dollar); exogenous shocks (the tripling in price of oil, the industrial world's most basic commodity); and the effects of class struggle (workers' militancy imposing a floor on capital's attempts to solve the crisis through wage cuts) all within a general framework that recognised the validity of the TRPF as the force behind the nosedive in investment.

All this was sacrilege to fundamentalism and neo-Ricardianism. Makato Itoh, a key figure within the Japanese neo-Ricardian "Uno" school, recently offered the following implied critique of Mandel. In the face of flawed monocausal theories, he writes, there are two possible analytical approaches:

"The first is to treat the various strands of crisis theory... as a toolbox from which concepts can be selectively employed to analyse historically specific instances of capitalist economic crisis. This approach is certainly appealing, since it can deal flexibly with the historically specific features and immediate causes of capitalist economic crisis. It could also be useful for the historical study of economic crisis in the course of capitalist development... The weakness of this approach, however, is that it is essentially eclectic and cannot lead to a coherent theory of the capitalist business cycle that is fully articulated with an analysis of credit and finance... Without an underlying theory of the business cycle the study of the historical transformation of crises during the course of capitalist development is essentially arbitrary."27

However, in the best exposition of Mandel's "multicausal" theory (his Introduction to K Marx Capital Volume III Penguin 1981) Mandel provides the starting point for a more coherent theory, which situates the "multicauses" whether they be at the level of generalisation of underconsumption and disproportionality, or at the level of the class struggle, like workers' wage militancy or oil price hikes, within a theory that identifies the TRPF as the basic retardant of untrammelled growth:

"The law of the tendency of the rate of profit to decline is less a direct explanation for crises of overproduction properly speaking, than a revelation of the basic mechanism of the industrial cycle as such: in other words an uncovering of the specifically capitalist, i.e. uneven; disharmonious mode of economic growth which unavoidably leads to successive phases of declining rates of profit, and recuperation of the rate of profit as a result, precisely, of the consequences of the previous decline. This is true at least of the way in which the law operates over the seven ten year time span leaving aside for the moment the memento mori it implies for capitalism as a secular perspective. "28

Itch's preferred "second approach" is to "adopt one of the strands of Marxist crisis theory and use it to develop a fundamental theory of the business cycle". Paradoxically, Itch's most recent attempt to do just that follows a very similar pattern to an attempt by Mandel to give a general description of the business cycle essentially by categorising the stages of the "ideal" business cycle and explaining which "factor" is predominant at each individual stage. While Itoh and Lapavitsas' attempt to do this in Political Economy of Money and Finance is unobjectionable, even in the importance it ascribes to the rising value of wages during the late phase of the boom before the crash, neither this "business cycle step by step" nor Mandel's own attempt in the Penguin introduction, can really be called theoretical.

Apart from the later Mandel, it is the works of the Japanese Uno school which are seen within academic Marxism as the only significant additions to Marxist crisis theory since the schema bound demise of fundamentalism. For example, Robert Brenner's recent blockbuster "The Economics of Global Turbulence 29, contains a masterly empirical account of the end of the long boom and the resulting 30 years of depressed accumulation.

Brenner writes: "The radical decline in the profit rate has been the basic cause of the parallel, major decline in the rate of growth of investment, and with it the growth of output, especially in manufacturing over the same period." However, Brenner relies on the work of the Uno school to rubbish the TRPF, quoting the "Okishio theorem" (see below) to the effect that, mathematically, the rising organic composition cannot itself account for falling real profits.

Likewise, Simon Clarke, in his account of the evolution of Marx's own crisis theories, gives credence to the Okishio theorem: "The generalisation of innovation (leading to the rise in the organic composition of capital) is a matter of redistributing the additional profit among the capitalists and so it cannot reduce the rate of profit. This result was proved formally by Okishio (l96l)."*

Okishio's theorem basically seeks to prove that, in our abstract model of the effects of the rising organic composition of capital, it is the cost reduction produced by innovations that are decisive. This higher spending on more productive technologies will raise profits across the board "if the newly introduced technique satisfies the cost criterion and the rate of real wage growth remains constant".31

However Clarke32 and Carchedi have both pointed to the weaknesses of Okishio's theorem. Clarke accepts the theorem's validity but points out that, because of its extreme detachment from the actual dynamics of capitalism, it is weak:

"The theorem does not prove that the rate of profit cannot fall, but at most that the proximate cause of a fall in the rate of profit must be something other than the increase in the [organic] composition of capital."

This gives too much to Okishio. A more decisive refutation is contained in Carchedi's Frontiers of Political Economy.

"[Okishioj only sees the reduction in costs, not the reduction in value produced. Thus he does not see that, if less value is produced, the increase in the realised rate of profit of the innovative capitalists must apply to both appropriation of value from other capitals (branches) [as demonstrated in the Table 2 above PM] and a decrease in the average rate of profit."33

Carchedi points to Okishio's basically neo Ricardian view of distribution, which cannot see how the price mechanism redistributes profit to the high cost innovator, as the source of confusion.34

This brings us finally to Itoh's reworking of neo Ricardianism, which, based on a fundamental agreement with Clarke's statement about Okishio above, attempts to combine a "background" theory of the TRPF with a neo Ricardian "wages squeeze" and rigidities in monopolised markets (insights based on Hilferding) as the actual factors which trip recovery into recession. Clarke himself has described the allure and the inadequacies of Itoh's work:

"Itoh's development of the theory is a complex synthesis of neo Ricardian, falling rate of profit and disproportionality theories, each pertaining to a different phase of the cycle. The importance of Itoh's work is that, unlike almost all other falling rate of profit theorists, he does try to show how the fall in the rate of profit leads to crisis. However, in doing so he effectively undermines his own theory, because in his account the cause of crisis is not the fall in the rate of profit, but the failure of fiscal and monetary authorities to check the inflationary over expansion of the boom, which leads to an erosion of profit, a failure which arises because his theory abstracts entirely from the role of the state."

From this survey, it is clear that if there is a "zeitgeist" among Marxist economic theorists in the 1990s, it is the desire for a synthetic theory, going beyond the monocausal dead ends of pure disproportionality, underconsumption or overproduction, and desiring to link the abstract tendencies outlined in Capital to the actual trip wires of crisis. It is equally clear that there is no consensus and no synthetic theory. Mandel and Itoh's schematic accounts of the business cycle are not really "theory"; Brenner falls back on a vague disproportionality theory, ascribing falling profit rates primarily to uneven global competition; Clarke falls back on history, preferring to chronicle Marx's lack of a unified theory rather than pursue a modern synthesis. Carchedi, whose 1991 work contained a highly concrete defence of the TRPF, nevertheless fails to go beyond a "flexible fundamentalism" in which consideration of the mediating factors and the concrete crises is minimal.

Is Marxist economic theory, therefore, in a dead end? Have its lines of inquiry petered out into schools mutually admiring each others' insights, mutually desirous of a synthetic account of crisis from abstract to concrete, but equally incapable of producing one?

The answer must be no. What follows is an attempt to outline the main elements of such a theory, as a prelude to the further work needed to elaborate a more thoroughly evidenced and tested version.

Economic crisis in the imperialist epoch

The tendency of the rate of profit to fall is fundamental to capitalism. It is the ever present concomitant of capitalism's dynamic transformation of the productive forces. Wherever growth takes place, the tendency is activated and so, too, are its countervailing factors. But the TRPF cannot be neutralised forever, the various countervailing tendencies lose their efficacy over time.

Traditionally, it could be said, the question has been posed "What mediates between the abstract tendency and the concrete crisis of overproduction?" But it would be better to ask: "What removes or limits the functioning of the countervailing tendencies?"

To answer this we need to look at how the CVTs functioned and developed in the 20th century. Crucially, we need to learn to see how financial instruments and monopoly structures can act not only as countervailing tendencies but also as crisis "trip wires", and crisis amplifiers.

Writing before the onset of the imperialist epoch, Marx in Capital Volume III nevertheless anticipated its key features, the most important one of which is the domination of productive industry by finance.

The role of credit

Today, managers learn about the "maximum internally financeable rate of growth" (MIFROG) as a concept that generally relates to small private businesses; it is assumed that growth will not be internally financed for mainstream companies, but instead will be fuelled by credit.

Credit is essential to capital's expansion. The rate of expansion of industry differs according to firm and sector. Their needs for an infusion of capital to finance their growth, therefore, varies in time and place. From very early in capitalism's development, capitalists set aside capital to cover depreciation of their plant and equipment and to finance further expansion. This earned interest when deposited in banks until they needed it. Therefore, a functional division of labour emerged between industrial and financial capital; the latter aggregated capital that was not immediately to be used as commodity capital and made it available to those sectors that did need it for expansion. Marx noted that credit was decisive for allowing the expansion of accumulation of those sectors needing huge capital outlays:

"Production in these branches is therefore dependent on the extent of money capital which the individual capitalist has at his disposal. This limit is overcome by the credit system and the forms of association related to it, e.g. joint stock companies."35

In its earliest stages, industrialists could extend each other credit in the form of "promissory notes" which involved no "intermediation". Then, step by step, banks began to play the role of providing investment capital on credit on a scale that went far beyond the need to help cover a firm's operating costs (e.g. wage bill, suppliers' bills).

In the 20th century, the process of credit expansion reaches such a level of development that it is possible to speak of a new stage of capitalism imperialism. This is because the major form of credit is the development of share capital (the "joint stock company" of Marx's day). Marx called the raising of money for capital investment through the issuing of shares to the public or other capitalists a form of "fictitious capital". His argument has been summarised thus:

"Capital in this form is fictitious in that it is a mere representation of a generalised claim on surplus value, rather than a direct claim of ownership on any material object. In consequence, the market value of these paper assets may only be loosely related to the market value of the means of production they nominally stand for. "36

By dint of the massive expansion of share capital in the 20th century, ownership becomes detached from the physical unit of production itself and is replaced by a claim on part of future profits. Marx called this "the abolition of capital as private property within the framework of capitalist production itself."37

Ownership becomes socialised, the money capitalist becomes dominant, thereby "transforming the actual functioning capitalist into a mere manager".38

This process arises out of the need to centralise and expand credit in order to assist the accumulation process beyond its "natural" internal limits. In the imperialist epoch, financial capital completes its ascendancy over industrial capital. While the institutional form it takes can vary (e.g. banks' dominance over industry in Germany, shareholders in the US) what is important is the relationship.

In fact, over time, the process of centralisation and concentration of monopoly capital requires such huge amounts of credit capital that share issues become the "normal" form because they allow for greater sums to be raised even beyond the resources of powerful banks. For industry, the advantage of attracting share capital over bank loans is also manifest; banks demand their interest and even capital in times of crisis whereas shareholders have to accept that when profits collapse they have to forego their claim on surplus value and dividends dry up.

The huge expansion in equities (and corporate bonds) in the last 25 years is both a function of the relatively depressed level of retained profits and the need for massive capital injections to finance takeovers and expansion, the latter imposed upon the modern multinationals as a way of increasing the mass of surplus value that they can get in compensation for the fall in the rate.

The massive expansion of the credit system was vital in enabling capitalism to stave off the commercial crises and short term glitches that plagued it in the 19th century. But credit is the expansion of commodity production alongside, and by means of the expansion of debt and naturally this ensures that any cessation or major disruption in output and sales can and does result in debts being called in with no profits with which to pay them off.

All crises appear as crises of money, credit and liquidity even though the cause lies within the production of too little profit to valorise the capital advanced. But the fact that credit expansion allows accumulation to proceed beyond its "normal" limits allows for the generalisation and amplification of crisis under certain conditions.

Credit expansion increases the chances of overproduction since, by its nature, it allows more factories to be built, more speculative property ventures to spring into life, before any of the last round of offices and plant have been sold or even offered to market.

At the end of the day, the real limit on this expansion is set by the market for final individual consumption. While industry producing for other industries can maintain the dynamic growth for so long, ultimately the semi conductor factories, new car plants and mega office complexes are built to produce goods for the high street or car show room. The available profit from this market at a certain point gets so low compared to the outlays that profit projections are radically revised.

The crisis of the East Asian "tigers" in mid 1997 was precipitated by an over accumulation of loan capital in 1990 96; eventually growing overcapacity met the rate of profit moving in the other direction.

Once it became clear to the financial markets that the rate of interest on the foreign (dollar denominated) money capital advanced was not covered by the rate of industrial profit at the given fixed exchange rates, then the crisis erupted as short term capital flooded out of the countries concerned and new loans dried up. This "credit crunch" forced firm after firm into default and bankruptcy. The course of the crisis then functions to devalue much of the surplus capital and property, so eventually creating a restoration in the rate of profit.

The role of the state

State spending and borrowing play a major economic role in imperialist capitalism. While not all state spending is "unproductive" spending, as argued by fundamentalist underconsumption theorists39, a certain part of state spending does bypass the valorisation process and thus contributes to offsetting overaccumulation for a time. State spending plays several vital roles for modern capitalism.

• To ensure the continued operation of the law of value in the greater part of the national economy by operating state owned industries, or extending a state subsidy, where vital services (e.g. railways, air transport) are unable to operate at a profit.

• To reduce the cost of reproduction of labour power through collective provision of health, welfare, education, emergency services etc.

• To fund a repressive state apparatus.

• To fund powerful armed forces and a national arms industry large enough to allow strategic independence of action.

• To maintain large enough reserves of gold (until 1971) or foreign currencies to defend the national economy's currency against speculation and devaluation.

• To guarantee healthy profits to important industrial sectors through government contracts to, for example, aerospace, defence or nuclear energy industries.

Because state revenue from taxation is insufficient, all of this requires long term borrowing. Since it is low risk (backed by sovereign government with the power of money creation) it is also at a low rate of interest.

Government stocks or bonds have been around as long as capitalism itself, but their importance grew massively in the late 19th century with the onset of the imperialist transformation of capitalism. Government bonds, issued over long periods at a fixed rate of return, became not only the investment of choice of the conservative middle classes (low risk, low returns); they grew to function as a floor for the rate of profit. Today, ten year government bonds, current interest rates and the rate of inflation form a kind of triangulation point for the minimum rate of return on capital within a given national economy.

Bonds, like bank loans and shares, allow a proportion of total social capital to be invested at a lower rate of profit than average industrial profits. Considered together, the basic financial instruments (loans, bonds, equities) develop capitalism far beyond its collective "MIFROG" but, at the same time, contribute to deeper crises of overaccumulation. Marx wrote that "the valorisation of capital founded on the antithetical character of capitalist production permits actual free development only up to a certain point, which is constantly broken through by the credit system... At the same time, credit accelerates the violent outbreaks of this contradiction crises and with these the elements of dissolution of the old mode of production."40

Thus, the state plays a major role in creating and equalising profit rates and (through social provision which effects the value of labour power) raising the rate of exploitation.

However, since the state must operate within its national economy using its national currency, both the world value of that currency and the national rate of inflation must be factored into both analysis and policy, and have in the 20th century, a major impact on the direction of the whole economy.

For example, if the rate of interest in government bonds were 10% and the rate of inflation 8%, the real rate of interest would be 2%. Now, if the investor is foreign and wishes to change the profit into his own currency, exchange rates become vital. It only needs the national currency to be devalued by 2% against the investor's currency for the rate of return to become zero.

Hence, modern capitalist economics is rightly obsessed with the great levers of economic policy: interest rates, rates of inflation, tax rates, money supply and exchange rates. These appear to be major subjective factors under human control, but in fact are only partially under human control. It is often pointed out that the Great Depression of the 1930s was made worse by the pro cyclical policy of tight money introduced by the US government. The great splurge of ready money encouraged by the US Federal Reserve after the 1987 stock market crash was testimony to the imperialists' determination to learn the lessons of the 1930s.

However, since the world economy entered its prolonged period of depressed accumulation and low profit rates in the early 1970s, capitalist policy in general has aspired to the neo liberal nirvana of low inflation, low government spending and low taxes, relying on tight money supply, high interest rates and various forms of exchange rate competition to ensure that the social costs of depressed accumulation are borne mainly by the workers and peasants.41

Painting with a broad brush we can say that the 20 year policy of imperialist governments has itself been procyclical. The strategic aims of most governments are to pare back state spending, privatise welfare provision, reduce taxes, depress real wages and thus the spending power of the workers and keep a tight lid on inflation.

The reason for this is the historically low profit rates achievable in the G7 countries, now also impacting on the Asian tigers. Inflation must be low in order that profit rates remain healthy. Hence a deflationary pressure must be maintained on the economy and the currency. To offset this during the last 10 15 years, the state has attempted to ease overaccumulation by opening up monopolised, formerly state owned, industries to joint stock capital and the banks for high profit investment opportunities. Clearly, however, the analogy with "selling the family silver" is apposite. In disposing of revenue generating industries the state makes itself more reliant on taxation and borrowing.

From all this it is clear that the state as economic agent has enormous power to exacerbate the crisis, very little power to stave it off (even the Greenspan boom of the late 1980s triggered recession) and has, over the last 25 years, brought itself to the precipice of a deflationary catastrophe not seen in the history of the system.

Conclusion

A correct theory orients the working class towards the necessary action it must take to end its exploitation. It must serve to explain the (hidden) root cause and day by day expression of capitalism in boom and slump. Theory necessarily lags behind practice but the major elements of a theory that explains the long period of depressed accumulation and the more dramatic instability of the last two years, can already be assembled.

A general, indeed global crisis of capitalist production and exchange such as has been underway since mid1997 is a process with devastating consequences for the jobs and welfare of tens if not hundreds of millions of workers. The flight of short term loan capital from the most dynamic region of capitalist accumulation in the 1990s precipitated a liquidity crisis in which thousands of firms went bust and their workers were sacked.

This credit crisis was in turn provoked by the massive overaccumulation of capital in all major lines of industry and property which could no longer generate anticipated levels of profit to cover the interest payments on loan capital to which they and their governments were committed.

The devastation in output occasioned by the withdrawal of credit caused a domestic slump. The crisis was generalised beyond the region immediately. First in the form of a collapse in demand for the products of overseas firms. Secondly, through currency devaluations, the export industries of the stricken countries found competitive advantage in western markets but, thereby, created a crisis of overproduction and profitability in their industries.

Thirdly, the collapse in production in East Asia provoked a collapse in the price of raw material and energy, precipitating a crisis of profitability for major commodity producers in Russia, the Middle East and Latin America. This in turn reproduced the credit crisis for these countries as short term capital sought a fast exit.

Fourthly, many banks and institutional shareholders saw their investments devalued or destroyed in East Asia, prompting a further inability or unwillingness to extend credit, or increasing the rate of interest demanded on new borrowing. This in turn contributed to a generalisation of the contraction in demand.

Finally, the withdrawal of loan and share capital from previously dynamic "emerging economies" led directly to a "flight to quality" in European and US stock and bond markets leading to a frenzy of speculative buying and the preparation of a new financial crash.

Millions are in hunger and out of work for no other reason than the fact that employers do not find it profitable to produce what they need. Based on their suffering, the capitalists aim to restore the conditions for profitable exploitation. But the crisis is simultaneously a warning and an opportunity:

"From the process of accumulation itself there is no reason to predict or expect a final crisis that because of its severity will for economic reasons alone result in the collapse of the capitalist system and the automatic emergence of socialist society. This conclusion was clearly recognised by Lenin and because of it he argued that the end of capitalism in any country would come about as a violent political confrontation between the bourgeoisie and the proletariat. 42

Footnotes

1 Pallister and A Isaacs. A Dictionary of Business Oxford 1996
2 P Omerod The Death of Economics London, 1994
3 See I Rubin, History of Economic Thought, London 1977
4 M Brauchli "Manufacturers in race to survive as excess hits the industrial world", Wall Street Journal November 30, 1998
5 J Black A Dictionary of Economics Oxford 1997
6 P Mattick Economic Crisis and Crisis Theory, Merlin 1981
7 K Marx, Capital Vol III, op cit
8. See Keith Hassell "Revolutionary Theory and Imperialism" in Permanent Revolution 7 1987
9 See S Clarke, Marx's Theory of Crisis, London 1994
10 F Engels, 1962 p393 94
11 Rudland, Marxist Theory and Imperialism, Workers Power, 1982
12 Many "Marxists" in fact believe that it is competition itself which leads to the falling rate of profit (and by implication can be mitigated by measures to offset competition). Marx made it abundantly clear by contrast that far from competition causing the rate of profit to fall it was the other way around: "A fall in the rate of profit connected with accumulation necessarily calls forth a competitive struggle. Compensation of a fall in the rate of profit by a rise in the mass of profit applies only to the total social capital and to the big, firmly placed capitalists. The new additional capital operating independently does not enjoy such compensating conditions. It must still win them and so it is that a fall in the rate of profit calls forth a competitive struggle amongst capitalists, not vice versa."
13K Marx Capital Vol III Penguin 1981
14 It was repeated by loan Robinson in the 1930s and Paul Sweezy in the 1940s and 1950s.
15 See P Sweezy Theory of Capitalist Development, pp I00.101
16K Marx Capital Vol III p240
17 See R Rosdolsky, The Making of Marx's Capital,London, 1978, for some numerical examples of this fact drawn from Marx.
18 K Marx Grundrisae pp749 5O
19 D Yaffe, "Marxist theory of crisis", Economy and Society, 1971, p203
20 R Brenner, "The Economics of Global Turbulence" New Left Review 229 May 1998
21 S Clarke,op cit, p262
22 D Yaffe "Marxist theory of crisis", Economy and Society, I 971, p207
23 S Clarke op cit, E Mandel "Introduction" in K Marx op cit, P Mattick Economic Crisis and Crisis Theory, ME Sharpe, 1981, M Itoh and C Lapavitsas, Political Economy of Money and Finance, Macmillan, 1999
24 A Glyn and B Sutcliffe, British Capitalism, Workers and the Profit Squeeze, Penguin 1972
25 DYaffeopcit
26 P Mattick Economic Crisis and Crisis Theory London 1981
27 M Itoh and C Lapavitsas Political Economy of Money and Finance, London, 1991
28 E Mandel, "Introduction" in K Marx, op cit
29 R Brenner, "The Economics of Global Turbulence" New Left Review 229, London, May/June 1998
30 S Clarke,op cit
31 N Okishio "Technical Change in the Rate of Profit" Kobe University Economic Review,.1961
32 5 Clarke, op cit
33 G Carchedi Frontiers of Political Economy, London, 1991
34 ibid pp 140 141
35 K Marx Capital Vol II p433
36 J Weeks, Capital and Exploitation London 1981 p125 26
37 K Marx Capital Vol 111 p436
38 ibid
39 See M Kidron, "Imperilaism: highest stage but one", in International Socialism Journal 61 (first series)
40 K Marx, Capital Volume III op cit (p572)
41 For exceptions see articles on USA and Asia in this issue)
42 J Weeks op cit, p214

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