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Falling profit rates in Marxist Crisis Theory

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Observations on the dynamics and meaning of the global economic crisis, by Richard Brenner, who also below takes a critical look at David Harvey's theory of crisis.


Marx observes in Volume One of Capital that the potential for crisis is immanent in the money form itself, in the separation of purchase and sale of a commodity introduced through the intermediation of the universal equivalent. And indeed breaks can and do occur in many nodal points of the circuit of capital.

As David Harvey observes in the last of his recent online lectures on Capital,1 this allows for an integral view of crisis formation and causation which absorbs many different stands of thinking on Marxist crisis theory within a common framework. So a collapse in effective demand in a recessionary phase can cause a decline in markets which feeds back into a collapse of production in key sectors producing both capital and wage goods (a crisis of underconsumption). Unbalanced and inaccurate market signals can give rise to a crisis of overproduction of goods, services and capital giving rise to a collapse of profitability (a crisis of overproduction). Fictitious capital can be forced violently to adjust to underlying values (a credit crunch). Class struggle and political resistance can prevent capital reducing wage costs and deductions from profit such as tax, forcing destruction of unprofitable capital (a profit squeeze). Exhaustion of natural resources or ecological destruction can render previous lines of development unsustainable (an environmental crisis). Such an approach can have a certain - strictly limited - value in helping us to identify elements of the crisis, and to locate the formation and unfolding of the crisis in space and time. But alone this approach is eclectic and fails to identify the underlying cause of crisis, and the factors that determine and integrate these elements as aspects of the crisis as totality.

The present crisis encourages us to revive Marx's theory of the tendency of the rate of profit to fall as the key factor that provides us with an integrated theory of the crisis as a dynamic totality.

It is true that the crisis emerged through the collapse of demand for US housing. Should this lead us to an underconsumptionist conception of the cause of the crisis? The actual history of how the crisis emerged shows that this would be a wrong conclusion to draw, and reveals how Marx's theory augments our understanding of what happened.

The sub-prime crisis arose from overvalued loans, leading to mass repossessions in America: the dream of the home owning democracy ended in mass homelessness, poverty and devastation of the US urban environment. The implication of an overvalued loan is of a value based on the assumption of a return to the lender that it transpires will not be realised. Similarly an overvalued equity (a share) assumes that the holder will receive a proportion of a profit that is not realised. In a modern capitalist economy, debts and equities are crystallised into claims on future unrealised profits that trade as commodities. This is what Marx called fictitious capital.

For Marx, finance creates a market in capital itself: this capital market creates an average rate of profit and "pure" capital. Collateralised debt (like the sub -prime loans that were packaged up and lent on causing the credit crunch of 2007) and derivatives markets (selling claims on profits from the movements of debts, shares and so on) constitute fictitious capital par excellence.

The bubble burst when it became clear that the underlying profits they were relying on were not going to be realised. But how does it happen that the anticipated return is not achieved and the loan capital is shown to be fictitious? Any coherent answer must focus on how the average rate of return on investment (rate of profit) sometimes declines and what the drivers are for this.

Bourgeois theory contains an instructive silence: banks lent to people who couldn't pay it back. But why? Official theory can describe the cycle in land values (and indeed the business cycle) but can't explain it.

Here we need to take a (very) quick detour through Marx's theory of rent. Land values are securitised rents - the price of a piece of land is just an assessment of how much rent the owner will be able to earn from it over a fixed period, and the interest charged changes depending on the period.

Commercial rents are therefore deductions from the profit of the business tenant. Similarly domestic rents are deductions from wages. Domestic mortgage repayments are financialised rents.

As real wages fall, land values fall. If these are financialised this raises instability to systemic levels.2

The Reagan-Thatcher "home owning democracies" was a key policy of neoliberalism. This was one of the factors supposed to herald a "goodbye" to the working class; now this policy is itself in ruins. In Marx's day there was no mass home ownership or domestic mortgage market on this scale; but Marx did observe that financialisation of land ownership increases instability of finance system.

This is what happened in 2006-07. As Robert Brenner has shown, even in the years of the credit fuelled boom in the US of 2003-06, there was a sharp decline in employment in core manufacturing and productive industries and an attack on pay in the US.3 This undermined real wages and disposable income in huge sectors of the US economy. This eventually drove down house values, busting out the US mortgage market, and bringing down the banks that had packaged these mortgages up and lent them on to other banks as collateralised debt obligations (CDOs).

The cause of this decline in employment and real wages in US manufacturing was the falling rate of profit in core productive sectors.4 This factor had three effects:
1. Over many years it drove surplus capital away from production into expanded financialised and ultimately fictitious forms.

2. Ultimately it reduced the spending power of mortgage borrowers, lowering land values and causing defaults, lowering the value to lenders of mortgage loan books causing the sub-prime and CDO crisis.

3. Most important of all, it reduced profit in large scale industry, reducing the value of commercial loans extended to non-financial enterprises by investment and retail banks

A classic banking crisis ensued, and brought down core elements of the global banking system.5 The credit crunch was only the first stage of a general crisis, one that was to affect not just banks and stock markets, but industry, retail and state finances, and which would focus on devaluation/destruction of capital including not just finance but assets, homes, money, wages, and jobs.

Declining profit rates and overaccumulation of capital are thus core to any coherent explanation of the underlying causes of the current crisis. To describe the circuit of capital as a whole and point to its nodal pressure points as diverse sources of crisis without identifying the coordinating and determining role of the tendency of the rate of profit to fall is eclectic and unscientific: it describes the phenomena of crisis without identifying their determining essence.

Crisis takes many forms and has many "moments" as it unfolds: global capitalism is much more extensive and complex than in Marx's day. Today we see numerous apparent opposites at work in crisis formation on a global scale: powerful global inflationary and deflationary impulses; overproduction with full employment, underconsumption with mass unemployment; uneven development causing global disequilibria, globalisation causing synchronised recession. Yet trace each of these back to their core drivers and we encounter the phenomenon of profit rate movements.

Engels once said the class struggle takes place in three spheres: the economic, the political and the theoretical. In the sphere of theory, the present crisis demands of Marxists the rediscovery and application of Marx's analysis of capitalist crisis, and a sustained struggle against revisionist re-interpretations of Marx that suggest that capital can be reformed to establish lasting equilibrium. In the economic sphere the task is to support, extend and deepen the resistance of the working class to capital's attempt to make us pay the cost of the crisis. In the political sphere the task is to challenge the hold of the trade union, social democratic and refomist leaders of the mass working class organisations who restrain the resistance and direct the workers' movement into a strategic accommodation with capital - to establish new political parties of the working class that aim to direct the resistance towards the forcible overthrow of capitalist governments and the establishment of working class state power able to effect the transition to socialism.

1 See
2 This often overlooked aspect of Marx's theory is the conclusion of the final volume of Capital and was regarded by Lenin as its most important section. Over recent years western Marxists have often disregarded it believing that the land question is resolved in non-agricultural economies, but it transpires that the rise of mass working class land ownership and the financialisation of domestic rents has generalised crisis to an unprecedented degree, refocusing attention on this key aspect of Marx's theory.
3 See The Economics of Global Turbulence.
4 "In large part because the Federal Reserve pursued a "cheap-money, easy-credit" strategy in order to prop up the economy in the wake of the collapse of the dot-com boom, 9/11, the recession of 2001, and the drop in employment that continued into mid-2003, home mortgage borrowing as a percentage of after-tax income more than doubled from 2000 to 2005, rising to levels far in excess of those seen previously. This caused home prices to skyrocket. Mortgage debt and home prices both doubled between start of 2000 and the end of 2005. But the rise in home prices was far greater than the growth of value from new production that alone could guarantee repayment of the mortgages in the long run. New value created in production is ultimately the sole source of all income, including homeowners' wages and salaries, and therefore it is the sole basis upon which the repayment of mortgages ultimately rests. Between 2000 and 2005, total after-tax income rose by just 35 per cent, barely one-third of the increase in home prices. This is precisely why the real-estate bubble proved to be a bubble." A. Kliman, 'The Destruction of Capital' and the Current Economic Crisis" (January 15, 2009)
5 The Credit Crunch - a Marxist Analysis, Richard Brenner (July 2008)