Althusser on Causality in Marx

I have not posted anything for some months for two reasons.  First I had to complete a chapter on Money and Finance for the Handbook on Marxism, to be published by Sage, edited by Beverley Skeggs, Sara Farris and Alberto Toscano.

Then in November I had a meeting with Demet Dinler – unfailing source of inspiration and good advice – about what work to do next. Demet urged me to return to themes which I first explored in 2005-9 in a series of papers on Marx’s value theory and on the conceptual narrative of Capital.  (These are available on my ResearchGate website).

Roughly, what I was attempting at that time was to bring into alignment and interplay two areas of Marxist research: (1) ways of reading Marx’s text which register its metaphorical and performative dimensions; (2) the logics and selective pressures of the law of value, reconsidered in the light of recent developments in complexity theory and in ecology.

As her own outstanding research and editorial work will testify, Demet has a brilliant sense, of where in the present period, creative Marxist research can and needs to be done.  She has persuaded me that further work on the above topics, however modest, would be worthwhile.

It has taken me several months to catch up with only some of the necessary reading.  Partly this is because of the sheer volume of relevant material which has appeared over the past ten years.

But also because a further difficulty had to be faced.  In my training and approach to the reading of Marx, the central philosophical reference point was always Hegel.  But some of the most powerful strands of Marxist thought in recent years have roots less in Hegel than in Spinoza.  Think only of the many currents which derive from the autonomist project and the debates which it has provoked in areas such as: labour process, cognitive capital, social reproduction, and eco-Marxism.

There is too the literature of commentary on Althusser by scholars working in the tradition he established. When Althusser died in 1990 he left a large archive of manuscripts, many of which have now been published.  This new material, together with revised ways of reading his earlier books, have posed a radical challenge to the earlier, and widely held view, that Althusser was a doctrinaire structuralist who distorted Marx by denying the role of human agency in history.  Instead of the implacable dogmatist, Althusser now emerges as a tortured thinker, exploring conflicting positions, within and around Marxist thought, in a highly productive way.  But, on many important issues, without being able to come to a final and definitive resolution.  Warren Montag, one of the finest of recent commentators on Althusser, writes that:

In opposition to the mechanistic doctrine attributed to him by E. P. Thompson and others, Althusser worked to overcome the opposition between chance and necessity by defining historical necessity as the product of chance encounters between absolutely singular entities.[i]

The intense exploration of paradoxical propositions like this, not surprisingly, led to texts characterised by severe tensions. Montag, in the final summary of his magnificent book Althusser and His Contemporaries (2013), comments on,

the tumult of Althusser’s oeuvre, its risks, its tragedies, its exultations, the way in which he frenetically pursues a meaning that constantly eludes him, even if this meaning is none other than the pursuit itself, producing … a new way of inhabiting philosophy, that is, the philosophical conjuncture, that makes visible the lines of force that constitute it, opening the possibility of change … the shattering of obstacles that opens new perspectives.[ii]

What has been carefully studied in recent research on Althusser by Montag and others, are the implications of his characterisation of himself as a follower of Spinoza. As Althusser explained: ‘We never were structuralists … We were guilty of an equally powerful and compromising passion: we were Spinozists’[iii]

I believe that recent scholarly work on the Spinoza-Hegel connection, and on ‘the new Althusser’, can point the way to some promising developments in Marxist theory.

Here I start with the question of causality in Marx.

The year 2015 saw the publication, for the first time, of a complete English translation of Reading Capital written by Althusser and four of his students. Lire le Capital had appeared in Paris in 1965, but until three years ago the only English translation available was of the severely truncated second edition of 1968).

In the studies of Marx’s Capital which Althusser and his team summarise in this book, a huge weight is placed on the concept of structural causality.  In their view it was the central and decisive element in the theoretical revolution effected by Marx in Capital.  Here, they argued, was a new form of causality, without precedent in earlier scientific work.

They considered however that Marx did not have available to him the concepts with which to formulate explicitly and clearly the innovative form of causality which he was using in a practical way in his political economy. But were Althusser and his co-workers able to do any better?

Althusser has a chapter in Reading Capital, called ‘Marx’s Immense Revolution’, in which he explores at length the question of causality.  He explains that in the scientific and philosophical tradition which Marx inherited there were only two systems of concepts with which to think causation.

  • Mechanistic causality. This term (not a very happy one) covered the concepts and forms of causality operative both in everyday life and in scientific work.  Here particular causes were seen as having particular effects.  The link is some kind of direct transitive effectivity.  Such a model, Althusser suggests, has a serious limitation. It cannot register the effectivity of a whole – a totality – on its constituent elements.[iv]
  • Expressive causality. This second system was one conceived precisely in order to deal with the effectivity of a whole on its elements.  It was classically formulated by Leibniz in his concept of expression. The parts express the essential character of the whole. ‘This’, says Althusser, ‘is the model that dominates all Hegel’s thought. It presupposes that the whole in question be reducible to an inner essence, of which the elements of the whole are then no more than the phenomenal forms of expression’.[v]

As an example of expressive causality in Marxism, consider the influential account of Capital in History and Class Consciousness by Georg Lukacs. In this, two concepts are central – totality and commodity. What Lukacs argues can be summarised as follows:

(1) It is not the primacy of economic motives in historical explanation that constitutes the decisive difference between Marxism and bourgeois thought, but the point of view of totality. The category of totality, the all-pervasive supremacy of the whole over the parts, is the essence of the method which Marx took over from Hegel and brilliantly transformed into the foundations of a wholly new science.[vi]

(2) In the dialectical totality the individual elements incorporate the structure of the whole. This was made clear on the level of theory by the fact that e.g. it was possible to gain an understanding of the whole of bourgeois society from its commodity structure.[vii]

(3) The commodity can only be understood in its undistorted essence when it becomes the universal category of society as a whole. Only in this context does the reification produced by commodity relations assume decisive importance both for the objective evolution of society and for the stance adopted by men towards it.[viii]

Althusser and his colleagues were hostile to all variants of expressive causality in Marxist thought.[ix]  These seemed to them to represent a regression into idealism.  They accepted of course that commodity fetishism was an element in Marx’s account of capitalism, and the chapter by Pierre Macherey in Reading Capital discussed what Marx wrote about the commodity in the first section of Capital Vol. 1.  But not the commodity as some kind of essence which, once identified, allows the analyst to read off at sight the entire structure of a capitalist society.[x]

Instead their attention was focused on Marx’s account of the differing modes of production in historical development.  Here they emphasised the interrelation between forces of production and relations of production, and the patterns of uneven development which result. They saw the political, legal, religious and other major institutions as determined in the last instance by the economic structure.

Althusser asks: how is it possible to define the concept of structural causality? He comments that:

This simple theoretical question sums up Marx’s extraordinary scientific discovery: the discovery of the theory of history and political economy, the discovery of Capital. But it sums it up as an extraordinary theoretical question contained ‘in the practical state’ in Marx’s scientific discovery, the question Marx ‘practised’ in his work, in answer to which he gave his scientific work, without producing the concept of it in a philosophical opus of the same rigour…

This simple question was so new and unforeseen that it contained enough to smash all the classical theories of causality – or enough to ensure that it would be unrecognized, that it would pass unperceived and be buried even before it was born.[xi]

Althusser is arguing that Marx’s breakthrough was so revolutionary that the subsequent  commentary literature on Marx has simply overlooked that a new concept of causality is operative in Capital. They have been able to avoid this recognition because Marx himself did not have the categories to clarify the profound shift in scientific procedure which he was implementing in practice.

What we find instead in the Marxist theory of the 2nd International and in the Communist Parties is a reversion to simple transitive causality. The economic base determines the superstructure of politics, law, ideology etc.

But how could Althusser and his Reading Capital co-authors argue that it was the economic structure which was fundamentally determinative, while,at the same time, avoiding mechanistic cause-effect patterns?

Here I mention only one of the paths they tried to take through this difficulty.  This was by invoking Marx’s suggestion that economic relationships were decisive in the last instance.

Balibar notes,

the principle explicitly present in Marx of a definition of the determination in the last instance of the economy. In different structures, the economy is determinant in that it determines which of the instances of the social structure occupies the determinant place. Not a simple relation, but rather a relation between relations; not a transitive causality, but rather a structural causality.[xii]

As Balibar explains, the Marxist vision is of societies characterised by,

a certain type of complexity, the unity of a structured whole containing what can be called levels or instances which are distinct and ‘relatively autonomous’, and co-exist within this complex structural unity, articulated with one another according to specific determinations, fixed in the last instance by the level or instance of the economy.[xiii] . 

So, if we follow the contortion of this prose, does the economic structure in fact predominate?  Well yes … sort of … but only in the last instance.

But this implies that the last instance must eventually come along to exercise the causative powers of the economy on the superstructure. But such a final arrival is just what is flatly ruled out by Althusser in some memorable phrases:

In History, these instances, the superstructures, etc. — are never seen to step respectfully aside when their work is done or, when the Time comes, as his pure phenomena, to scatter before His Majesty the Economy as he strides along the royal road of the Dialectic. From the first moment to the last, the lonely hour of the ‘last instance’ never comes.[xiv]

More is involved here than simple inconsistency or confusion.[xv]  The Althusser team are wrestling with some serious difficulties in Marxist theory which are often ignored or treated evasively in the literature. I believe their difficulties about the concept of structure are illuminating and worth careful study.  In my next post will try to show why.


Althusser, Louis 1977 For Marx, (Trans. Ben Brewer), London: Verso.

Althusser, Louis, Étienne Balibar, Roger Establet, Pierre Macherey, and Jacques Rancière, 2015, Reading Capital, (Trans. Ben Brewer and David Fernbach), London: Verso.

Eliot, Gregory 1987, Althusser: The Detour of Theory, London: Verso.

Lukacs, Georg 1971, History and Class Consciousness, (Trans. Rodney Livingstone), London: Merlin Press.

Montag, Warren, 2013, Althusser and His Contemporaries, Durham NC: Duke University Press.

Sotiris, Panagiotos 2014, Rethinking Structure and Conjuncture in Althusser, Historical Materialism, 22,3: 5-51.

Thomas, Peter 2002, Philosophical Strategies: Althusser and Spinoza, Historical Materialism, 10,3: 71-113.


[i] Montag 2013, p. 10.

[ii] Montag 2013, p. 210.

[iii] Althusser 1974, p.132.

[iv] Or not at least without contortions.  Althusser here refers to mechanistic causality as theorised by Descartes.  He notes that when Descartes tried to formulate the type of causality through which a whole (e.g. the mind) controls another whole (e.g. the body), he was compelled to fall back on the famous absurdity of the pineal gland as acting as a point of transmission and control.

[v] Althusser et al. 2015, p.342.

[vi] Lukacs 1968, p. 27.

[vii] Ibid, p.198.

[viii] Ibid, p. 86.

[ix] See Elliot 1987 for a valuable discussion of the political reasons why Althusser and co. attacked alienation centred Marxism – its adoption by the French CP as central to the theoretical justification of the pro-Stalinist position.

[x] See on this question, and on some of the other topics I discuss here, two meticulously argued articles: Thomas 2002 and Sotiris 2014.

[xi] Althusser et al. 2015, p.342.

[xii] Ibid p. 385.

[xiii] Althusser et al. 2015, p.244.

[xiv] Althusser 1977, p.113.

[xv] Though inconsistency there certainly is: see Thomas 2002 for a lucid analysis.

Value, Natural Forces, and Productivity

One of the most frequent objections to Marx’s value theory is that there are many commodities which are not produced by labour, yet can be given a price and sold. Marx writes that:

Since money is the transformed shape of the commodity, it does not reveal what has been transformed into it: whether conscience or virginity or horse dung (Capital Vol. 1, p.1073).

Or, as he says at the very beginning of Capital:

A thing can be a use-value without being a value.  This is the case whenever its utility to man is not mediated through labour.  Air, virgin soil, natural meadows, unplanted forests, etc. fall into this category (Capital Vol. 1, p.131).

And, in a later formulation,

Labour is not the source of all wealth. Nature is just as much the source of use values (and it is surely of such that material wealth consists!) as labour, which itself is only the manifestation of a force of nature, human labour power.[i]

 Marx distinguishes between the use-value of commodities as underlying what he calls wealth [Reichtum] – and value [Wert] whose substance is labour and whose measure is socially necessary labour-time.

For commodities produced by labour, labour-time determines value, but the selling price of such a commodity will usually differ from its value.  Among the reasons why exchange-value (i.e. price) differs from value, one of the most important is the operation of supply and demand.  If there is a greater demand than supply of a given commodity, its price will rise above its value.  If supply is greater than demand then price will be below value.  Marx spells out this  argument in detail in Capital Vol. 3, pp.278-96.

In the case of commodities which are not produced by labour, yet are sold for a price, it is the balance of supply and demand which determines what that price will be.  Air has no value because not produced by labour, and no price because its supply is, for most practical purposes, without limit.

When talking about prices Marx often stresses the role of rent.  If someone can establish control of the supply of a commodity for which there is a demand, then a higher price can be charged.  Thus the price of commodities is affected by property relations.  These in turn are underpinned by the power of law, and/or violence.

Marx brings great care to the analysis of means of production which have not been produced by labour-power.  One notable example he uses is – the waterfall.

Marx’s analysis runs as follows. Access to a waterfall increases the productivity of labour employed by the firm which uses the water as a source of power. Higher productivity allows a surplus profit to be achieved.  But for a firm to get such surplus profits depends on: (1) the fact that there is a limited supply of locations which have a waterfall, and (2) that the owner of any  given waterfall has monopoly control of its use a source of power in production. Marx writes:

Those manufacturers who possess waterfalls exclude those who do not possess them from employing this natural force, because land is limited, and still more so land endowed with water-power…. Possession of this natural force forms a monopoly in the hands of its owner, a condition of higher productivity for the capital invested, which cannot be produced by capital’s own production process.  The natural force that can be monopolized in this way is always chained to the earth. A natural force of this kind does not belong to the general conditions of the sphere of production in question nor to those of its conditions that are generally reproducible… a capital cannot create a waterfall from its own resources (Capital Vol. 3, p.784).

There is however another way in which a waterfall may be used to increase productivity and so get surplus profits. Technical modifications can be made to increase the efficiency of its operation.

Although the number of natural waterfalls in a country is limited, the amount of water-power that industry can use may still be increased. A waterfall can be artificially channelled to make its motive power fully useable; a water-wheel can be improved in order to use as much of this water-power as possible; where the ordinary type of wheel is not suited to the supply of water, turbines can be used, etc. (Capital Vol. 3, p.784).

Thus use of the natural power of a waterfall to increase productivity can be enhanced if technical improvements have been made to it. This higher productivity will tend to increase profits.

But who gets those profits?  Marx argues that the surplus profits which derive from the natural existence of the waterfall are realised in the particular form of rent.

Here Marx defines rent as the extraction of a flow of profit based on property ownership and monopoly control of a means of production. This is because the profitability advantage is then based on the fact that competitors can’t get access to the waterfall and use their capital to get a share in its operation.

What is impressive is the precision with which Marx analyses the difference between these two different sources of surplus profit: natural location and technical efficiency.  In turn this leads him to distinguish between two sorts of rent – he calls them Differential Rent 1 and 2. [DR1, DR2].

DR1 is based on the higher productivity and profit achieved through the use of the natural power of the waterfall.  Marx refers to, the use by capital of a monopolizable and monopolized natural force. Under these conditions, the surplus profit is transformed into ground-rent, i.e. it accrues to the owner of the waterfall (Capital Vol. 3, p.785).

DR2 arises from the investment of capital to enhance the efficiency of a natural means of production.  In the case of the waterfall, the extra profit is shared between the owner of the waterfall and the capitalist whose technical improvements increase the productivity of the labour making use of it as a power source.

If the industrial capitalist happens also to be the owner of the waterfall then he or she gets both sorts of rent.

Marx says that the natural location and power of the waterfall is only one instance of a much broader category of what he calls free gifts of nature.  When these are generally available for capital to exploit they add use-value – but no value — to the commodities being produced.

Again and again, Marx stresses that where private ownership and monopoly control has been  established over a freely available force of production, the rent extracted is not derived from value added to commodities produced by its use.  Rather, rent is money captured by landowners from the capitalists who use the land in productive operations which extract surplus-value from the workers they employ.  Rent is a transfer from the class of industrialists to the class of landowners.

The same argument about the waterfall is used by Marx when discussing agricultural land.  If a particular piece of land has a higher natural fertility, there is more use-value, but not more value, to be generated from its cultivation.   However labour employed on relatively more fertile land has higher productivity.  This allows a higher rate of surplus-value to be extracted from those workers, and it is Marx’s argument that monopoly enables the owner of the land to appropriate the extra surplus-value in the form of rent.

A similar case can be made about oil and other mineral resources.  There can be huge differences in costs of extraction or in the quality of available reserves.  The labour employed in the processes of extraction is correspondingly more or less productive. Where higher productivity generates an extra profit this is captured by the owner of the land and its mineral rights.

Why does it matter to Marx to make such an elaborate and precise distinction between the labour productivity which derives from: (1) a force of production which is a free gift of nature, as opposed to, (2) technological improvements?  Often, in practice, they are combined. Marx discusses for example how industrialisation increases the scale of the natural forces which can be deployed in production.

It is cooperation on a large scale with the employment of machines that first subjugates the forces of nature on a large scale – wind water steam electricity – to the direct production process, convert them into agents of social labour… Since these natural agents cost nothing, they enter into the labour process without entering into the valorisation process.  They make labour more productive without raising the value of the product, without adding to the value of the commodity.[ii]

What is crucial for Marx, is maximum clarity that living labour is the only source of surplus-value. We have always to distinguish clearly between the extraction of surplus-value as commodities are produced, and its subsequent redistribution in the circulation process.  As, for example, in the rent which industrial capitalists are compelled to pay to the owners of land and its resources.

As I emphasised in my last post – for Marx, a rise in labour productivity does not, in itself, increase the quantity of value produced.  But a firm is able to capture more profit at the expense of its competitors if it can improve the productivity of its labour force. However, to the extent that higher productivity is due to use of a monopolised natural force, then it’s owner of this who captures the increment in profit in the form of rent.

In the above I have spelled out an argument in rather abstract terms.  To finish I will look briefly at two examples of research which build on Marx’s analysis of the use of natural forces as means of production.

1]   Andreas Malm, in his deeply researched and vividly written book, Fossil Capital, (2016) explores the switch from water to coal power in the English textile industry in the first half of the 19th century.  Water power was cheap compared with the cost of extracting and transporting coal.  But to stabilise the supply of water via systems of reservoirs etc. would have required collaborative and collective organization which was impossible given the competitive capitalism of the period. Coal and steam won out because their use gave higher profits to individual capitalists. After Watt’s invention of the double-rotating engine in the 1770s, it required decades of technical innovation before coal-driven steam became clearly more efficient than water power.  Malm shows that what was decisive was that the portability of coal allowed capitalists to build factories in urban centres where a larger supply of labour was available, than in the upland valleys with waterfalls.  Control of labour by capital was the crucial factor in the transition from water to coal.

2]    In recent article called Value, Nature and Labor: A Defense of Marx, Matthew Huber[iii] has analysed the production of nitrogen fertiliser – a major input into the global agro-food complex:

 Take a nitrogen fertilizer factory for example…the nitrogen that these factories depend upon is freely appropriated air. The atmosphere is 79 percent nitrogen, but this nitrogen is non-reactivein forms that could be taken up by plants. The HaberBosch process of synthesizingreactive nitrogen takes freenitrogen from the atmosphere and combines it with hydrogen (along with tremendous levels of heat and pressure) to produce ammonia. Since there was no labor involved in producing the nitrogenous air,it bears no value. Yet the pernicious aspect of this free appropriationof the atmosphere is that capital also treats it as a freesink for its pollution. One of the main by-products of ammonia synthesis is carbon dioxide. The fertilizer industry is one of the major industrial emitters of carbon (p.43).

Because capital has yet found a way of enclosing the atmosphere and establishing private property rights, its use as a source of nitrogen in fertiliser production (and its abuse as a pollution sink) costs the industry nothing, but is not, in itself, a source of value, profit or rent.  However in this industry, the main economic cost is also a natural resource, but one which is monopolizable, namely natural gas.

Most estimates suggest the price of natural gas forms 7090 percent of the operating cost of nitrogen fertilizer facilities…Thus, it should be no surprise that chemical capital has substantially increased its efficiency in the use of natural gas over the last 5 decades … This is what Marx calls economy in the use of constant capital (Capital Vol. 3 Ch. 5.).

Natural gas is a cheapand not easily replaceablesource of hydrogen to combine with free atmospheric nitrogen to form ammonia. The hydrogen is extracted from natural gas through the material-energy-water intensive process of steam reformingand carbon dioxide is the primary waste product. With this cheap yet pollution-generating and finite source of hydrogen, natural gas forms the material basis of cheap fertilizer, and with it cheap grain, cheap meat and our processed food culture (p. 48).

The shale gas boom based on hydro-fracking has created a renaissance of cheap natural gas-based fertilizer. The plant I visited was in the middle of a $2.1-billion dollar expansion, and the company had made investments in new fertilizer plants throughout the United States. All this expansion is made possible by the fracking that has produced cheap natural gas. A Marxian value perspective should seek to understand how the technical transformations of hydraulic fracturing have reshaped the socially necessary labor time it takes to produce natural gas across the industryand how those value shifts have also reshaped geographies of the chemical industry, electric utilities, and household heating fuel (p. 49).

The fertiliser industry is pollution-intensive and reliant on two natural resources, nitrogen and hydrogen. However, the hydrogen is not a free gift of nature like the nitrogen, but is produced by industrial processes from natural gas.  As Huber explains, It is the huge advance in labour productivity in the production of natural gas – most recently via fracking – which  has underpinned the drop in fertiliser prices, kept costs of production down, and supported profitability right across the world-wide agro-food industrial complex.

[i] Critique of the Gotha Programme, in, Marx and Engels Collected Works, Lawrence and Wishart, Vol. 24, p.81.

[ii] Marx and Engels Collected Works, Lawrence and Wishart, Vol. 34, p.32.

[iii] Published in, Capitalism Nature Socialism, Vol. 28, 1, pp. 39-52. Huber is also the author of an excellent Marxist analysis of the linkages between cheap oil, the politics of neoliberalism, and the construction of a certain ‘American way of life’ based on suburbanisation, and mass availability of cars, roads and retail petrol stations. See Huber 2013, Lifeblood: Oil, Freedom, and the Forces of Capital, Minneapolis: University of Minnesota Press.

Value Theory and the Schism in Eco-Marxism

In the eco-socialist movement there have been frequent complaints that Marx’s value theory, with its central emphasis on labour-time, is fatally flawed and irrelevant. It seems to discount the exploitation of nature in the pursuit of profit. Students of Marx have responded by tracing the close attention which Marx and Engels gave to ecological research and debate in their period.  Crucially, it has been argued that it is precisely its central focus on labour productivity which enables Marx’s value theory to generate a unique and powerful account of the environmental destructiveness of capital.

Here, two writers associated with the New York journal Monthly Review have produced an outstanding body of work. John Bellamy Foster’s brilliant book, Marx’s Ecology (2000) is now an established classic, and Paul Burkett’s Marx and Nature (1999) not far behind as a standard reference. Since then, both writers have produced further influential work in eco-Marxism, most recently the jointly authored Marx and the Earth, which has just come out in paperback. What they have emphasised above all is Marx’s thesis that capitalism tends to use natural resources without concern for sustainability.  He uses the term Stoffwechsel ­ for the metabolic exchange of matter and energy between humans and nature, and notes, for example, how capitalist industrialisation,

produces conditions that provoke an irreparable rift [Riss] in the interdependent process of social metabolism, a metabolism prescribed by the natural laws of life itself. The result of this is a squandering of the vitality of the soil. (Capital Vol. 3, p.949).

Recently however, the Monthly Review account of the ecological dimension in Marx has been challenged by a new kid on the block.  Jason Moore’s Capitalism and the Web of Life (2015), [Web] accuses the Monthly Review team of failing to develop a properly dialectical account of Marx’s ecology.  They remain mired in Cartesian dualism. They counterpose two separate and opposed entities: Society vs. Nature. Thus their focus is too confined to a one-way account of the damage which capitalism is currently inflicting on the environment.

Moore is not denying that we may be currently heading towards environmental disaster.  But he argues that the stark Monthly Review conclusion – abolition of capitalism or planetary destruction – can lead to fatalism rather than creative political responses. Moore writes that:  A dual systems approach to metabolism gives us only one flavor of crisis —the apocalypse (Web p.8o). But the combination of economic and environmental crisis which we face may take many forms in the coming period, and all sorts of technological and political action will be needed in response.

Much of Moore’s book is an exploration of the historical background to the present situation.  From its inception in the long 16th century, capitalism has been hit by successive waves of crisis as it came up against limits in the availability of necessary means of production such as raw materials, energy, and land.  Moore traces major turning points over the past 500 years as capitalism has reacted to resource limits by expanding geographically and technically to absorb new and cheap supplies of necessary means of production and labour. What is distinctive in this approach is Moore’s enormous stress on appropriation as opposed to exploitation.  In discussing the historical evolution of capitalism, he talks, for example, about islands of exploitation in oceans of appropriation.

As originators and guardians of the reigning paradigm in eco-Marxism, the Monthly Review writers have responded aggressively to Moore’s accusation that their work is not dialectical. According to Foster, for example, Jason Moore,

abandons value theory … and has joined the long line of scholars who have set out to update or deepen Marxism in various ways, but have ended up by abandoning Marxism’s revolutionary essence and adapting to capitalist ideologies’.  See interview.

My own view is that, despite many criticisms which can be made of Moore’s work, he has identified some dimensions of Marx’s value theory, which have not had the attention they deserve, not just by eco-Marxists, but more generally across the spectrum of mainstream Marxist political economy. He is asking us to look again at a fundamental question: the relationship between use-value and value in the productive process – and how they intersect when labour productivity rises.  His thinking, for example, has implications for current debates about trends in profitability.

What is striking in the dispute between Moore and the Monthly Review writers is that both sides start out from the same reading of Marx’s value theory. They both strongly defend its central emphasis on socially necessary labour, against the view, widely shared among radical critics, that Marxist doctrine is complicit in a devaluation of nature.

Competition forces capitalists to reduce prices by increasing labour productivity.  This is achieved mainly by mechanisation and by advances in the organization of production.  As Marx pointed out, an increase in productivity will generally require an input of larger quantities of means of production, such as e.g. raw materials and energy.  To sustain the rate of profit these should be obtained as cheaply as possible.

From this starting point, Moore develops a less orthodox line of argument: that the advance of labour productivity can take place without a hit to profits if capital can tap into what he calls a rising “ecological surplus” of Cheap Nature – especially in the form of low cost energy, land, and raw materials.  Also labour-power, kept cheap because its reproduction is not paid for by capital – but secured, for example, by enslavement or domestic labour.

But where capital appropriates means of production cheaply and without paying the full costs of their reproduction, it tends to exhaust its own social-ecological conditions. Moore thus posits a general tendency for the ecological surplus to fall, and for cheap nature to become less cheap. Hence recurrent crises as capital runs up against limits in available resources. If the ecological surplus falls – as Moore argues is happening in the current period – then inputs into production rise in price. Capital must absorb an increasing share of the costs of reproduction.  As costs rise, productivity and profits are threatened with stagnation. Thus Moore traces linkages between environmental devastation and the current economic crisis.

Let’s look more closely at the theoretical underpinning of these conclusions. Central to value theory is that the pressures of competition require firms to lower prices – and the major way in which this is done is by increasing productivity.  At the centre of Marx’s law of value is labour productivity.

Marx’s basic propositions about productivity are formulated as follows:

  • a working day of a given length always creates the same amount of value, no matter how the productivity of labour may vary ­(Capital 1, p.656). If productivity rises, more commodities are produced in a given time period, but the average value of each commodity – and therefore its selling price – will fall correspondingly.
  • However, as productivity rises there tends to be an increase in the rate of surplus-value. As Marx puts it,

an increase in the productivity of labour causes a fall in the value of labour-power and a consequent rise in surplus-valuethe value of labour-power is determined  by the value of the means of subsistence habitually required of the average worker (Capital Vol. 1, pp.655-7).

There are some complications here: Marx accepts that more value can be produced in a given time period if there is an intensification of labour (working harder) or an increase in the skill level of workers. But these qualifications can be initially set aside in order to clarify the fundamental issue.  The source of surplus-value is unpaid labour-time.  An increase in productivity does not increase the total value produced in a given time, but it does increase the rate of surplus-value.

But does it also increase the rate of profit?  Here the key issue is that a rise in productivity, for example via mechanisation, tends to increase the amount of constant capital which capitalists need to use in order to stay competitive.  A rise in the ratio of constant capital to labour will tend to reduce the rate of profit. More capital has been advanced relative to the unpaid labour which is the basis of profit.

As productivity advances there is likely to be a rise in the mass of means of production (machinery, raw materials, energy etc.) required in production.  As Marx notes,

the consequence of …the  application of machinery is that more raw material is worked up in the same time, and therefore a greater mass of raw material and auxiliary substances enters into the labour process…  [An increase in] the mass of machinery, beasts of burden, mineral manures, drain-pipes, etc. is a condition of the increasing productivity of labour… [For example] the mass of raw material, instruments of labour, etc. that a certain quantity of spinning labour consumes productively today is many hundred times greater than at the beginning of the 18th century. (Capital Vol. 1, p.774).

A rise in the ratio of constant to variable capital threatens to lower the rate of profit. A given rate of surplus-value has then to be divided by a larger amount of capital advanced when calculating the rate of profit.

But there is a counteracting tendency.  If the advance in productivity is general, then it will apply in the sector of the economy which produces means of production.  The value of a given unit of constant capital will be reduced. This fall in the cost of producing the means of production required will thus limit, or even reverse, the decline in the rate of profit as more constant capital is used.

Thus Marx emphases that as labour productivity rises, this also lowers the value and therefore the price of the constant capital required for production.  The result is what Marx calls a cheapening of the elements of constant capital.  The value of means of production rises, as productivity advances, but at a lower rate than the mass of means of production being used.

For example, the quantity of cotton that a single European spinning operative works up in a modern factory has grown to a most colossal extent in comparison with that which a European spinner used to process with the spinning wheel. But the value of the cotton processed has not grown in the same proportion as its mass.

 It is the same with machines and other fixed capital. In other words, the same development that raises the mass of constant capital in comparison with variable reduces the value of its elements, as a result of the higher productivity of labour, and hence prevents the value of the constant capital, even though this grows steadily, from growing in the same degree as its material volume, i.e. the material volume of the means of production that are set in motion by the same amount of labour-power… In certain cases, the mass of the constant capital elements may increase while their total value remains the same or even falls. (Capital Vol. 3, p.342).

Thus, in summary, as productivity rises, there is likely to be an increase in the mass of means of production in use.  But the value – and thus the price – of those means of production will tend not to rise to a corresponding extent. A general rise in productivity will also reduce the cost of means of production and so slow down the fall in the rate of profit.

In clarifying this analysis, Marx introduces an important distinction: between the technical composition of capital and the organic composition of capital.

There are two ways of looking at the capital / labour ratio.  As a relation between two values – constant and variable capital. Or as a ratio between a mass of physical means of production and a mass of labour-power.

The organic composition of capital is determined by the ratio of the value of the means of production, as compared with wages. I.e. the value ratio between constant capital and variable capital

 The technical composition of capital refers to material use-values- here capital is divided into means of production and living labour-power. Marx writes that:

the technical composition is determined by the relation between the mass of the means of production employed on the one hand, and the mass of labour necessary for their employment on the other. (Capital Vol. 1, p.762) [i]

It is here that Moore’s account moves in a distinctive direction.  Mechanisation and improved organization of production are not the only ways in which cheaper means of production may be secured.  If means of production can be appropriated – at low cost, or, better still, at zero cost – then the hit to profits because of rising organic composition of capital can be reduced or nullified.  This is Moore’s central argument, one which is directly founded on Marx’s value theory.  By seeking geographical or technological frontiers where the four Cheaps (raw materials, food, land and labour) can be appropriated, capital can raise productivity while protecting the rate of profit.  Recurrently in the history of capital, the appropriation of new forms of cheap inputs has,

allowed capital to advance labour productivity while reducing (or checking) the tendentially rising value composition of production. The technical composition of production—the mass of machinery and raw materials relative to labour-power— could rise without undermining the rate of profit. Capitalism, we have seen, is a frontier process (Web, p.107).

Cheap Nature, as an accumulation strategy, works by reducing the value composition—but increasing the technical composition—of capital as a whole; by opening new opportunities for the investment; and, in its qualitative dimension, by allowing technologies and new kinds of nature to transform extant structures of capital accumulation and world power. In all this, commodity frontiers – frontiers of appropriation – are central. (Web, p.53).

Here Moore is challenging the analysis in Burkett’s Marx and Nature. Although Burkett – like Moore – starts out from the basics of value theory, his treatment of the mass and value of constant capital employed in production remains at a rather elementary level. I can find no reference to the organic composition of capital in either of Burkett two ecological books.  There are many general comments on profit as driving the system. But no discussion of the counter-tendencies which operate to limit or reverse the downward pressure on the rate of profit as productivity rises. No attention is given to the increase in the capital/labour ratio, which Marx calls the technical composition of capital.

The monopoly capitalist tradition of Monthly Review is flawed precisely in its relative lack of interest in competition and price movements, and in Marx’s account of the determinants of rates of profit.  The monopoly capitalist thesis is that, because of the concentration of capital, companies are now able to evade competition by cartels, and determine prices by fiat.

There is one moment in Burkett’s Nature book where he does discuss one of the examples of appropriation which preoccupy Moore.  Burkett has a section discussing ‘child rearing labour’ and the ‘natural force of household labour power’. He writes that,

The exploitable [sic] labour power associated with domestic activities is freely appropriated by capital. It is a use value, not a value.

Burkett then notes that the appropriation by capital of this use value has implications for surplus-value.

Capital’s free appropriation of the domestic enhancement of labour power increases the rate of surplus value in so far as domestic activities lower the value of labour power (by raising the productivity of wage-labour or reducing workers’ commodified causation requirements).  (Marx and Nature, p.105).

So appropriation of unpaid domestic labour by capital does not increase the total value produced, but does increase the rate of surplus-value.  Capital gets its labour cheaper, and retains more of the value produced.

What Moore is proposing is a generalisation of this account of domestic labour – extending it to capital’s appropriation of natural resources.

But is it right to assimilate domestic labour, as Moore does, into a wider category of work/energy?  This leads him to talk, for example, about how natural resources are kept cheap because they ‘do unpaid work for capital’. However, Moore is clear that this kind of ‘work’ has nothing in common with the abstract labour which creates value.  ‘Work’ here is a use-value concept – but one which follows capital in treating use-value abstractly.  The objective here is to trace capital’s abstractification of nature and its consequences.

Meticulous research by Burkett and Foster has clarified the engagement of Marx and Engels with the thermodynamic and energetics debates of their period. In their Marx and the Earth book, they trace how Marx used energy concepts to think through the use-value dimension of the labour process.  There is, of course, no suggestion that the creation of value and surplus-value in the labour process is in any way determined by concrete labour. But the creation of value is also a physical metabolic process which can be studied in terms of amounts and transfers of abstract energy.  In words which resonate with Moore’s work/energy concept, Burkett and Foster summarise Marx’s thinking about this as follows:

In energy terms, ‘What the free worker sells is always nothing more than a specific, particular measure of force-expenditure’; but ‘labour capacity as a totality is greater than every particular expenditure’ (Grundrisse p.464). ‘In this exchange, then, the worker … sells himself as an effect’, and ‘is absorbed into the body of capital as a cause, as activity’ (Grundrisse p.674). The result is an energy subsidy for the capitalist who appropriates and sells the commodities produced during the portion of the workday over and above that required to produce the means of subsistence represented by the wage (Marx and the Earth, p.145).

There certainly are some major criticisms to be made of Moore’s work and I’ll look at these in a future post. Some valuable commentaries on Moore’s work have already been published. [ii].  Some valid objections have come from the Monthly Review camp. For example, Foster is right to say (in the Climate and Capitalism blog cited above) that Moore neglects the question of rent.  There is too little in his Web book about how private property control gets established over raw material and energy sources. The theme of enclosure, so strongly emphasised in Marx’s account of primitive accumulation, is under-weight in Moore.  Often industrial capitals find that the so-called Cheap inputs are not actually so cheap  – after rent is extracted by the monopoly owners of oil wells and mineral resources.

The strength of Moore’s book is the way it traces, from the long 16th century onwards, how the abstract logics of labour productivity are implemented and play out concretely – as crises of resource limits are encountered and overcome by the violence of capital, science, and state power. His focus on appropriation may at time be over-pitched, but Moore consistently directs much needed attention on the necessary conditions for the operation of the law of value.  How the economic and technical requirements that make possible exploitation and value creation are established and maintained.

An addendum on profit.

Marx used the term circulating capital to refer to raw material and energy inputs.  Moore’s  focus on these highlights the neglect of circulating capital in current Marxist debates about trends in profits. For example, profit rates are generally calculated solely on a denominator of fixed capital (machinery etc.).  This fact is rarely even mentioned in current work using National Accounts data.  An exception is Andrew Kliman who mentions casually in his Failure of Capitalist Production book (pp.80-82) that:  ‘My rate of profit measures … exclude circulating capital … expenditures for inventories of raw materials and the like – because information on the turnover of circulating capital is not available’.  One of many instances in which the easily available National Accounts data are used and their limitations ignored.  Company account based data is more difficult to obtain and use, but can be a more accurate corrective to national account based data.

[i] For a lucid  account of the TCC/OCC distinction, see: Ben Fine and Alfredo Saad-Filho 2010, Marx’s Capital, Ch. 8.

[ii] See, for example, an excellent critique of Moore by the radical geographer Sara Nelson, on the Antipode website February 2016.  Benjamin Kunkel has produced an outstanding account of debates around the anthropocene / capitalocene concepts – and the disagreements between Moore and the Monthly Review team.  See London Review of Books 2 March 2017.

Crisis Theory Needs a Demand Story

In an essay dated June 2005 (and republished in 2009 as Chapter 2 of The Great Recession) Michael Roberts has a perceptive account of what he calls ‘the property time bomb’.  He notes that never before had real house prices risen so fast for so long in so many countries, and quotes an Economist article of June 2005 which called it, ‘the biggest bubble in history’.

The total value of residential property in the OECD had more than doubled from $30bn to $70bn in the previous five years.  House values had never been higher in America, Britain, Australia, New Zealand, France, Spain, Holland, and Ireland. This was a bigger bubble bigger than the stock market boom of the 1990s that collapsed in 2000, or the great boom of the 1920s which ended in the Great Depression of 1929-33.  In The Great Recession [TGR]  Michael writes that:

World capitalist growth now depends on US household spending and US spending depends on housing prices in the US rising forever.  This is a pyramid scheme that will topple over eventually… the US housing bubble is set to burst …the US economy will drop like a stone, as many Americans face bankruptcy when they cannot make their mortgage payments, while others will have to pull in their spending horns … this year the UK and Australian housing markets have slumped.  With that economic growth has slowed to under 2 per cent a year. Spending in the shops has stopped growing altogether (TGR p.10).

Here Michael’s line of causation directly accords with the analysis which Atif Mian and Amir Sufi were to elaborate in their 2014 book, House of Debt which has attracted much attention.  In Michael’s 2005 discussion, a fall in profits is mentioned only in passing, and as a  consequence of a fall in consumer demand, not as a cause of the crisis – ‘if the housing market collapses that will make a huge hit on the profits of big business’ (p.12).

In Feb 2006 Michael published another accurate and well-documented analysis of the growing crisis caused by falling house prices in the UK, Australia and the US.

The downturn in the US housing market has now started … housing affordability, particularly in the coastal cities is stretched to the limits. America’s households are leveraged up to their eyeballs and now rely on rising housing prices to supplement their incomes … so even just a slowdown in house price rises would hit consumption (TGR p.17).

What has already happened in the UK and Australia, he suggests, shows what lies in store for the US.

The collapse of a house price boom in the UK (and in Australia) last year is the future for US homeowners.  The price fall deducted something like 2-3 per cent from real spending growth in these economies.… UK retail sales are now growing at their weakest rate for 20 years and recorded the worst figures for January sales since 1945 … and unemployment is steadily rising. (TGR p.17).

This fall in demand – and the reasons for it – is a major dimension of the 2007 -09 crisis in the US and in the way in which the crisis unfolded in other countries, notably Ireland and Spain.  It is essential that the house price / housing debt / demand story be incorporated into any fully developed Marxist account of the crisis.

Yet in recent years Michael’s thinking about the 2007-09 crisis has taken a radically different direction.  His new book The Long Depression is to be welcomed as currently the most thorough exploration of the crisis from a falling profits standpoint.  It contains a wealth of indispensable empirical material, the analysis covers the major sectors of the global economy, and it is a lively read. Here I focus only on Michael’s account of the US phase of the crisis.

In arguing for the tendency of the rate of profit to fall as the crucial underlying cause of the 2007-09, Michael has given far too little weight to other causal forces which were in play.  The house price/consumer demand dimension of the crisis is mentioned only occasionally and briefly. In his main discussion of the 2007-09 US crisis (Chapter 5), housing as such is not discussed.  There is only a passing mention that:

investment in real-estate took an almighty plunge after the credit-fuelled boom up to 2007, but investment in productive assets also tumbled.  The mass of profits dropped like a stone, especially for the financial sector (TLD p. 67).

Factually this is not correct.  The general category of real-estate includes the vast sector of commercial property and this did not collapse in 2007.  The initial crash was in residential house prices and it started at the beginning of 2007, well before the banking crisis became serious. Certainly investment in the house construction sector fell, but overall investment levels in the non-financial sector did not fall until 2009. (See my earlier post  for a summary of the evidence).  The effect of a fall in investment by firms in the residential housing sector was more than counterbalanced by an increase in investment in other sectors. The Economic Report of the President for 2008 says that:

In contrast to residential investment, real business investment in non-residential structures grew at a strong 16 per cent annual rate over the four quarters of 2007… investment in equipment and software grew 3.7 per cent, a bit faster than the 2006  pace. (ERP 2008 p.32).

It was in late 2008 and early 2009 that ‘investment spending (other than structures) plummeted’ (ERP 2010 p.126).  But by the fourth quarter of 2008 well over than a million jobs had been lost as a consequence of the fall in household demand which happened as a reaction to the collapse of house prices from the beginning of 2007 onward. (See Table 5 in my recent post.)

Michael does discuss debt, but now sees it as a secondary question – a trigger of crises, rather than a cause.  In his book, Chapter 6 is called Debt Matters and it contains much material of great interest.  But the analysis is focused almost exclusively on corporate debt.  There is a section on housing but it is very brief.

By mid-2006 the residential boom in the United States had reached mega proportions.  Household debt expanded rapidly during the so-called neoliberal era As a result of falling interest rates that reduced the cost of borrowing and created the ensuing property boom in many advanced capitalist economies in the past fifteen years.  The creditors were the banks and other money lenders. The assets (home values) eventually collapsed, placing a severe burden of deleveraging on the financial sector (TLD p.99).

The discussion that follows concentrates only on debt in the corporate sector.  Astonishingly there is no mention of the collapse in consumer demand as millions of households across America had began to deleveraging following the drop in house prices at the start of 2007.  No note is taken here of the mass of evidence, painstakingly presented in Mian and Sufi’s House of Debt book, that before the banking crisis went critical (when  Lehman folded in September 2008) jobs and businesses in large parts of the US had already been severely hit as a result of the contraction in consumer demand from the start of 2007 as household borrowing began to fall, and income was switched to debt repayment. See my recent post.

Michael had already dismissed the analysis in the House of Debt when it was published in 2014. Rightly he criticises its authors for lack of discussion of profit. But he then argues:

Sure consumption falls in recessions, but investment falls even more. The Great Recession and the subsequent weak recovery is not the result of consumption contracting. But investment virtually stopped (see my post ) And behind investment (whether in productive or unproductive sectors) lies profitability.

Certainly there is much to criticise in Mian and Sufi’s book, not least their failure to discuss profitability. The surplus money capital which poured into the financial systems of the US and other countries – and which fuelled the expansion of mortgage lending and housing prices was not just based, as they suggest, on East Asian trade surpluses.  As I have shown, there were two other major sources: (1) accumulations of money wealth in the hands of the rich as inequality increased, and (2) the swelling cash reserves of the corporate sector, as profits recovered faster than investment after the 2000 downturn.  Mian and Sufi also play down the impact of the banking crisis on the continuing rise in unemployment at the end of 2008 and in 2009.

But it is not convincing to say simply that a Marxist analysis must entirely reject their convincing analysis that the 2007 crash in house prices and fall in consumer demand directly led to large increases in unemployment before the banking crisis went critical. Marxism needs a demand story.

There are sections of Michael’s book which show a commendable alertness to the complex forces which determine a major crisis.  The analysis of five inter-twinned cycles in the history of capitalist development is a promising line of theoretical and empirical advance which needs to be followed. Three of the cycles are clearly evident in the 2007-09 crisis. A construction cycle (housing) was interconnected with credit processes (mortgage financing) and with the profitability for the banks of mortgage-based securities.

But Michael’s way of tracing the linkages between these dimensions of crisis runs into difficulties He creates difficulties for his account by misreading some basic elements in Marx’s value theory.

In my view, and I think in Marx’s, circulation and distribution are at a lower plane of causal abstraction, or if you like, closer to the proximate than the ultimate or underlying causes. A collapse in the stock market or in real-estate prices will not lead to a collapse in production unless there are already serious difficulties in the latter. There have been many stock market collapses without a slump in production (1987) but not vice versa.

But the stock market deals with fictitious capital, in which contractual claims on the flow of surplus-value are traded.  It is external to the circuit of productive capital. As Marx says at the start of Capital Vol. 3, ‘the capitalist production process, taken as a whole, is a unity of the production and circulation processes (p.117).  Capital in the money form is both the starting point and the necessary terminus of the social reproduction sequence. Only to the extent that demand is available at each stage in the circulation process can value and surplus-value be realised in the money form.

Levels of abstraction are not the same as a hierarchy of causal processes.  Michael is right to say that a large-scale collapse of demand needs explanation and that Keynesian accounts are inadequate.

To say the cause of the Great Recession was due to a lack of demand is bit like saying that that the cause of the streets being wet today is because it is raining today. That tells us nothing about why it is raining today and/or what causes rain to happen. Describing the Great Recession as a lack of demand is just that, a description, not an explanation.

The critique of Keynesian demand management in this article is well argued and deserves careful study. But in his insistence that demand is simply and directly determined by the level of productive investment, Michael seriously weakens the explanatory power of Marxist political economy. In his review of the Mian and Sufi  book he writes:

It’s investment that is the swing factor in recessions and recoveries, not consumption. Or to be more exact, it is profits that call the tune, because investment demand drops off when profits do. As profitability falls over time, eventually the mass of profit will fall and this will force weaker businesses to cut back on investment or even close down. Then there is a cascade of falling ‘effective demand’ as companies go bust or lay off labour.

Here some of the tendencies identified in Marxist analysis are treated as direct causal determinations operating automatically.  Both factually and theoretically the explanation of the 2007-09 crisis which results is seriously flawed, given that overall investment levels in the US non-financial sector did not fall until 2009.

House Prices and Consumer Demand in the 2007-9 US Crisis

In Marxist debate about the causes of the 2007-9 crisis in the US it is often assumed that we must choose between seeing it as either simply a financial crisis, or as one whose basic cause was a failure of profitability in the productive sector. Many believe that the fundamental primacy of production in Marxist theory must mean that a crisis of such enormous proportions can only have been the result of the tendency of the rate of profit to fall.

In fact the crisis had two quite different, though connected, dimensions and neither was based on a fall in the average profitability of non-financial companies. Both then and since, it was the near collapse of the US banking system which has attracted most attention. But the troubles in Wall Street did not become serious until March 2008, when Bear Stearns, one of largest investment banks in the US had to be saved from bankruptcy by the Federal Reserve.  Banking troubles had limited effect on the wider economy until September 2008 when Lehman Brothers folded, and a systemic collapse suddenly became a possibility.

A broader economic crisis had begun early in 2007, and at its centre was a rapidly spreading contraction in consumer demand. House prices in the US had been rising with increasing speed since about 1995.  On the strength of the increase in the value of their homes, households had built up high levels of mortgage and other forms of debt. At the end of 2006, the bubble reached its limits.  House prices began to fall, first in California, Arizona and Florida, but soon across the entire country. Faced with an erosion in the value of their homes, millions of households reacted by cutting back on borrowing, and starting  to pay off debt.  Consumer demand was compressed, the rate of increase in GDP began to fall, and by the start of 2008 unemployment was starting to rise rapidly.  The first phase of the crisis in the US actually began in 2007, and in the housing sector.

Housing was also to play a key role in the financial crisis which followed in 2008.  The banks had lent over $1 trillion in mortgages to subprime borrowers, many of whom were unable to sustain the level of payments required   In addition, the banks had created a vast number of securities, which were based on bundles of these mortgage contracts. These had been widely sold, in enormous quantities, to banks in the US and Europe, or retained on the books of the banks which had originated them.  The spreading tide of defaults on mortgage payments made many of these securities worthless, and trashed the balance-sheets of the major banks which had purchased them.

Across the political spectrum it has been widely assumed by commentators and researchers that the key mechanism which undermined production and jobs was the freeze-up of the banking system. A focus on the mesmerising drama of the possible collapse of the financial system has led to a general acceptance of the banking channel explanation for the huge rise in unemployment in the crisis.  The conventional narrative runs as follows. Hit by severe losses, and threatened with collapse, in the 2008-9 period the banks drastically reduced their lending.  Unable to borrow working capital from the banks, industrial and commercial companies were forced to cut investment.  There was a multiplier effect as falling investment led to loss of jobs, and the contraction of growth and demand.

It was just this view of the results of the crisis which in 2008 was used to justify, the expenditure of large sums of public money on rescuing the banks, and restoring their capacity to keep lending to business.

The banking explanation of the crisis has been strongly challenged in a book called House of Debt (2014).[i] Its authors, Atif Mian and Amir Sufi [M&S], are established academic economists at Princeton and Chicago respectively. Despite this disadvantage, their book can be recommended: it is short, simply written, and its results are based on a great deal of elegant empirical research which is explained with clarity.

Mian and Sufi argue that the banking crisis did not become critical until Lehman collapsed in September 2008.  They also show that, as a result of vast state subsidies, the banking system had been restored to reasonable health by 2009.  The reduction in industrial investment in the later stages of the crisis happened less because banks were unwilling to lend to industry than because industry responded to a prior fall in consumer demand by cutting investment.  The productive sector of the economy (apart from the auto industry) was generally in a strong enough financial position to survive the downturn without recourse to large amounts of extra bank finance.

So if the banks were not the primary cause of the contraction in customer demand – then what was?  Mian and Sufi focus on the fact that house prices in the US had risen with exceptional speed in the 2000-06 period.  Mortgage borrowing by US households had increased at a corresponding rate, and other forms of consumer debt as well. Mian and Sufi argue that it was the sharp fall in house prices from the start of 2007 which led to a massive contraction in consumer demand as households began to cut their current spending and run down debt. Mian and Sufi are able to show the close connection between demand contraction and the subsequent loss of jobs by making a very detailed comparison of geographical areas (pp.62-4). Their conclusion was that the drop in demand as households reduced their net indebtedness (leverage) was a direct and huge cause of the rise in unemployment in the crisis.

We estimate that 4 million jobs were lost between March 2007 and March 2008 because of household levered losses, which represents 65 per cent of all jobs lost in our sample (p.66).

Mian and Sufi argue that the widespread view that the crisis was caused by the banks was ideological special pleading to justify the fact that large sums of public money were used to rescue the banks and protect their shareholders from losses. Very little state money was made available to assist households threatened by loss of their home.

Let’s look at some of the detail. House prices in the US (in real terms) had remained basically unchanged since the end of World War 2 until the dramatic rise which started in 1995.  By 2002 average prices had risen by 30 per cent, and then accelerated even faster – over the 4 years ending in 2006, prices rose by a further 32 per cent. In many regions of the US, especially along the coasts, the rate of increase was much faster

There was a corresponding boom in the house construction industry. Output of houses rose by 50 per cent to a peak of 2.1 million in 2005 as the bubble in prices built up. But in 2005 the market was clearly over-supplied, and the number of housing starts went into decline. House construction is a quite large sector of the industrial economy and, as Mian and Sufi explain:

The collapse in residential investment was already in full swing two years before Lehman imploded. Residential investment (i.e. construction and maintenance of houses) fell by 17 per cent (on annualised basis) in Q2 of 2006. From then until the Q2 of 2009 residential investment declined by at least 12 per cent in every quarter, and reaching negative 30 per cent in Q4 of 2007 and Q1 of 2008. The decline in residential investment alone knocked off 1.1 to 1.4 per cent of GDP growth in the last three quarters of 2006 (p.32).

Obviously the profits of companies in this branch of the economy must have been hit. But as I showed in my last post other sectors more than compensated and, for non-financial companies, the average national rate of profit did not fall in a sustained way until mid-2007. (See Figure 2 in my last post More important, the evidence is conclusive that total investment did not decline in the non-financial sector until towards the end of 2008.  Thus average industrial investment levels in this crisis responded to a fall in growth, and were not its cause.. As the Economic Report of the President (2009) explained:

Real consumer spending stagnated in the first half of 2008 and then fell sharply in the third quarter in what was the largest quarterly decline since 1980. This was a major deceleration after the 2.8 per cent average annual rate of increase  during the 2001-07 expansion (p.33).

Apart from house construction, the other major sector to be hit was auto. As would be expected in a contraction of consumer debt, car purchase (so heavily dependent on instalment credit) was severely affected. ‘During the first three quarters of 2008 motor vehicle purchases fell to 12.9 million units at an annual rate, having fluctuated around 16-7 million annual pace during the expansion’. (ERP 2009 p.33).

But a fall in the investment levels of the house construction and auto industries does not show up in the aggregate national figures Marxists use in the debate about profitability.  What happened was that falling investment in these sectors was more than compensated for by a rise in other major sectors.  The Economic Report of the President (2009) notes that:

The reorientation of the US economy – which had been underway in 2006 and 2007 – away from housing investment and customer spending and towards exports and investment in business structures [factories, offices etc.] continued through the first three quarters of 2008 … In contrast to residential investment, real business investment in non-residential structures grew at a strong 12 per cent annual rate through the third quarter of 2008. The gains during 2008 made it the third consecutive year of strong growth (ERP pp.31 and.41).

The boom in mortgage finance

What underlay the boom in house prices was a huge increase in the availability of mortgage finance.  (See M&S p.85 for convincing arguments against those who believe the line of causation was the reverse).  Mortgage lending in the US rose to a peak in 2005. Behind this surge in lending lay the global surplus of money capital which I have emphasised in a previous post as due to high profits and a lag in industrial investment in many countries, plus increasing inequality in wealth ownership. Mian and Sufi themselves emphasise the third channel through which excess stocks of money capital accumulated. The exchange rate crisis which devastated a number of East Asian countries in 1997, convinced a large number of emerging economies – including crucially China – that it was vital to convert export surpluses into large reserve holdings of dollar.  ‘As foreign central banks built up their dollar war chests, money poured into the US economy … there was a breathtaking demand for new safe assets’ ( M&S p.93).

Mortgage lending and securities based on these loans were assumed to be safe investments. The effect of a surplus in what Marx called loanable capital was the huge fall in interest rates which took effect across the global economy from about 2000 onward. In the US this fall was amplified as the Fed implemented a relaxed monetary policy to pull the economy out of the dotcom recession of 2000-1.  But, as I have recounted in an earlier post when Greenspan began to increase short-term interest rates starting in April 2004, he found to his dismay that, the supply of loanable capital was too great, and there was not the usual corresponding rise in long-term rates – such as crucially the mortgage rate.

The deeper roots of the crisis lie here.  Profit rates rose in the post-1980 neo-liberal era because of the power of the counter-tendencies.  Rates of surplus-value and profitability  accelerated to levels well beyond the capacity of the system to absorb them in productive accumulation and reinvestment. The tide of interest-bearing capital meant high profits for the banking system – but as interest rates fell, huge pressures for the banks to seek yield by in increasingly risky ways – hence the surge in subprime lending.

As surplus money capital piled up in the global system, mortgage lending and house prices rose fast in the US and other major countries. The US stock market crash of 2000 took the glitter out of equities and added to the attractiveness of housing as a safe investment.  Mortgage and other forms of household debt soared as financial companies competed to find borrowers for an ample of surplus money capital.

Housing and consumer debt doubled in the six years after 2000 and the ratio of household debt to annual income rose by 50 per cent, from 1.4 to 2.1. Mian and Sufi draw a parallel with what happened in the nine years leading up to the crash of 1929 – a huge increase in mortgage and instalment debt (p.4).

But, largely unobserved at the time, a highly dangerous situation was building up.  During 2004-6 there was a rapid increase in the proportion of new mortgages which were subprime.  Subprime mortgage lending had been especially directed to black and Latino households, previously excluded by red-lining policies by the mortgage companies. By 2006 25 per cent of new mortgages originated in the US were subprime.  The reason? Same as for payday loans – lending to poor people can be highly profitable.  The securitisation of debt allowed the risk involved to be passed on to the banks and pension funds which eagerly bought up the mortgage-based securities

A useful summary of the rip-offs involved is by Randall Wray.

New and risky types of mortgages that offered low teaser rates for two or three years, with very high reset rates were pushed. As originators would not hold the mortgages, there was little reason to worry about ability to pay. Indeed, since banks, thrifts, and mortgage brokers relied on fee income, rather than interest, their incentive was to increase through-put, originating as many mortgages as possible. By design, these “affordability products” were not affordable—at the time of reset, the homeowner would need to refinance, generating early payment penalties and more fees for originators, securitizers, holders of securities, and all others in the home finance food chain.

The flow of predatory profits through chain, depended to the complicity of a series of agents.  Brokers who sold the mortgages, and made the credit checks on borrowers.  Appraisers who valued the houses.  Banks who lent the money, and converted bundles of mortgages into risk classified securities.  The ratings agencies who issued the AAA grades which allowed mortgage-backed securities to be sold to pension funds and the like.  And insurance companies, who reassured investors that they were insured against the risk of default.

Chairman Greenspan gave the maestro seal of approval to these practices, urging homebuyers to take on adjustable rate debt.(p.9).[ii]

The crash in house prices

Between 2006 and 2009, house prices fell by an average of 30 per cent nationally, and by much more in the worst-hit regions.  By 2009 11 million houses – 23 per cent of houses with mortgages – had negative equity.  They were underwater: their estimated selling price was less than the size of the outstanding mortgage.  The total number of foreclosures reached 4 million.

It is right that so much of the commentary on the crisis has focused on the foreclosure of houses. People losing their home was one of cruellest ways in which the crisis damaged individual lives – and it happened to 1 in 25 America households.  Also, it was lending of billions of dollars to households unable to sustain repayment which brought the financial system to the edge of collapse.

But Mian and Sufi direct our attention to ways in which foreclosure led to another sort of social damage – the loss of jobs as consumer demand contracted on a national scale. They emphasise that the effect of foreclosures is to hit all house prices in the areas affected.  Even householders with no debt are caught up in a wider fall in house prices.

The key problem is debt. Debt amplifies the decline in asset prices due to foreclosures and by concentrating losses on the indebted, who are almost always households with the lowest net worth in the economy… This is especially dangerous because the spending of indebted households is extremely sensitive to shock to their net worth – when their net worth is decimated, they sharply pull back on spending.  The demand shock overwhelms the economy, and the result is economic catastrophe’ (M&S p.70).

The previous peak for foreclosures was in the recession of 2001 when about 1.5 per cent of all mortgages were in foreclosure.  In 2009 the total reached was 5 per cent.

The effect of the fall of house prices on demand was not just confined to the crisis as it evolved up to the Lehman moment.  It continued to operate through to the start of post-crisis stabilisation in 2009.

In Q4 of 2007 business investment was a positive source of growth in GDP, and was pretty much neutral till the middle of 2008.  In Q3 of 2008 business investment fell by enough to bring down GDP by 1 per cent, but in the same quarter the drop in consumption reduced GDP by nearly 3 per cent. (M&S p.35).

Mian and Sufi were able to access official data about consumer spending levels by zip code.  They were thus able to make fine-grained geographical analysis of the levels and timing of changes in demand.  They find that it was in the counties with the largest drop in house prices from 2006 to 2009 that consumption was cut back by the largest amounts – 20 per cent as compared with a national average of 5 per cent. (M&S p.36).

Job losses materialised because households stopped buying, not because businesses stopped investing. In fact the evidence indicates that the decline in business investment was a reaction to the massive decline in household spending (M&S p.34).

It was the post-Lehman financial crisis which threatened the international system as the interbank markets stopped functioning and trade credit froze.  But, especially in its early stages, and in its direct effect on US employment levels, the crisis was driven by the fall in household demand as housing prices tumbled.

[i] Mian, Arif and Amir Sufi 2014, House of Debt, Chicago: University of Chicago Press.

[ii] Wray, Randal 2007, Lessons from the Subprime Meltdown, Working Paper No. 522,  New York: Levy Institute.

What Caused the 2007 Crisis in the US?

At the Historical Materialism conference in London on 14 November there was a session, organized by Al Campbell, on the Marxist debate about the 2007-09 crisis and since – with papers by Michael Roberts, Al and myself.  I posted an extended version of my paper in which I argued that a global surplus of money capital was a crucial underlying factor in the crisis, and criticised Michael’s falling rate of profit explanation.  Michael made a strong defence of his position in his post of 12 November.  However I believe that his case is flawed and that some of the evidence he has presented supports my reading of the crisis rather than his.

We are in agreement that underlying the 2007-9 crisis in the US were the conflicting forces which determine the rate of profit, as explained in Marxist theory. Michael argues that the empirical evidence, backed by theoretical analysis, indicates that it is the tendency for the rate of profit to fall which has been the decisive trend. I consider that the empirical evidence shows that it is the profit-raising countertendencies which have been dominant since the start of the neoliberal period in the early 1980s.

Michael believes that it was an actual fall in the rate of profit in the US after 1997 which was the crucial factor underlying the financial crisis in 2007-9.  I argue that the rate of profit in the US, and in some other large economies (plus also the rate of surplus-value) has been tending upwards from the late 1990s, through to 2015, though with cyclical downturns around 2000 and 2008.  This surge in profits, in combination with a sizable lag in investment, contributed to a global surplus of capital (in the money form) which the financial system has found great difficulty in on-lending or investing safely.

In the US the financial crisis of 2008 happened because more than $1 trillion of money capital had been lent out by the banks in high-risk subprime mortgages.  Default on these mortgages, and on the vast number of securities based on those mortgages which the banks had created, was the central immediate cause of the 2nd phase of the crisis – which went critical when Lehman folded in the autumn of 2008. But the 1st phase of the crisis had started to unfold early in 2007 as the crash in house prices led to a steep fall in consumer demand.

Using Michael’s own data, I showed that the US corporate profit rate did not, as he had argued, ‘reach a peak in 1997, which has not been since surpassed’.  Figure 1 summarises the results I reported.


As Figure 1 shows, the rate of profit was just under 27 per cent in 1997, but after a dip during the dotcom crisis of 2000-1, recovered strongly to reach 27 per cent in 2005, and 29 per cent in 2006.  Also there was a rapid recovery starting in 2010: in 2012 and the two following years the corporate rate of profit hovered around 27 per cent.

Michael in his reply did not question my data in Figure 1.  But he suggested that his argument would still stand if we looked not at annual data but at the quarterly breakdown of profits which the Fed publishes.  And we should look specifically at the non-financial industrial sector and not, as in Figure 1, at the whole corporate sector (which includes banks and other financial companies). Michael writes:

Annual figures from the rate of profit are not very helpful on the timing here.  In my original work which Jim is quoting from, I also used the quarterly figures provided by the US Federal Reserve. The Fed data can give us the non-financial corporate sector rate of profit by the quarter.  According to that data the US NFC rate of profit started  falling in Q3-2006.  Indeed by the time of the credit crunch in mid-2007 (before the start of the Great Recession) the NFC rate of profit had fallen 20 per cent.

Before looking at the quarterly data, as Michael recommends, I should mention that he and I are also in dispute about the trend of profits since the crisis period of 2007-9. Michael had said, as I noted above, that the US rate of profit ‘reached a peak in 1997, which has not been since surpassed’.  But, as Figure 1 indicates, the 1997 peak was under 27 per cent, and the profit rate made a rapid and sustained recovery from a low of 22 per cent in 2009 to slightly higher than 27 per cent in 2012 and 2014.  Michael suggests that, ‘if we look at the Fed’s quarterly data for the non-financial sector we find that the [post-crisis] peak was as early as Q3 2010 and is now [2016] some 20 per cent below that peak’.

I have recalculated profit trends for the non-financial sector from 2002, using the same Federal Reserve quarterly data on which Michael bases his conclusions. Figure 2 summarises my results and they do not support his case.   


[Note that rates in Figure 2 cannot be directly compared with those in Figure 1 as the definitions which Michael Roberts uses are quite different. But trends within each Table are consistent. For a clear explanation of the quarterly Fed data which Michael recommends, and which I have tracked in Figure 2 – see a paper by the Swedish researcher Anders Axelsson

There was no appreciable fall in the non-financial rate of profit in 2006. There was a drop in Q1 of 2007, but a recovery in Q2. Only from Q3 was there a fall through until the beginning of 2009, though with a mini recovery in the middle of 2008.  It is really not plausible that these not very sizeable variations in profit rates can have played much direct role in the economic cataclysms of this period.  Also, though it is useful to look at quarterly rates, we have to recognize that profit estimates in any given quarter can be distorted by variations in the timing of profit declarations.

It is the case that the rate reached a temporary peak in Q3 of 1997 of 9.6 per cent.  It is true that this was not surpassed in the recovery of 2005 and 2006, but did reach 9.8 per cent in Q3 of 2010.  The average rate in the 4 quarters of 1997 was 9.3 per cent – but 9.5 in 2010.

Apart from a glitch in Q1 of 2011, a rate of profit of over 9 per cent was maintained right through to the start of 2013. A definite downward trend began in mid-2014 and continued until nearly the end of 2016. Since Figure 2 was prepared, it has been reported that in Q3 of 2016 there was a small recovery in the rate of profit, from 7.1 to 7.4 per cent. It in possible that this is the start of a more sustained upswing. The financial markets certainly think it is, and equity prices have soared, especially since the advent of Trump.

Could the quite sharp fall in the profit rates of non-financial companies in the Q2 and Q3 of 2007 be in any way responsible for initiating the financial crisis that began to unfold in the autumn of 2007?  In Michael’s view the mechanism involved would be that non-financial companies respond to a fall in the average rate (and mass) of profit by cutting investment, which in turn leads to reductions in employment, wages and consumer demand. He writes:

I have argued ad nauseam that it is the profitability of the capitalist sector of economies that is the driver of investment and thus employment and incomes.  A sustained fall in profitability and in the mass of profits will eventually lead to a fall in investment after a year or so and then deliver a slump in the productive sectors of a capitalist economy, triggering in turn, a financial (credit) crisis.

The difficulty with this line of argument is that there is simply not enough time for such a causal sequence to take effect in 2007-8 – and Michael only claims here that the reaction of investment to a fall in profits will only happen ‘eventually’.  As I show below unemployment was rising sharply from the start of 2008.

In any case the factual evidence about investment in this period does not support his analysis. Figure 3 shows how investment levels evolved between 1998 and 2015 (annual data only, quarterly figures are not available).


What Figure 3 shows is that in the recovery from the downturn of 2000-1, investment climbed steeply right through until 2007, rising by 45 per cent, from $900 billion to $1.3 trillion.  Even in 2008 investment was slightly higher than in the previous year.  Not until 2009 did investment fall, and it then quickly rose once again from 2010 through to 2015.  To control for the effects of inflation and of growth, in Figure 4 the same data for investment in fixed assets by non-financial companies are shown as a percentage of GDP.


Figure 4 shows the exceptionally high investment levels in the late 1990s in the lead-up to the dotcom crisis of 2000-2, generally recognised as having been caused by over-investment. But, again, there no evidence that a fall in average investment was one of the causes of the 2007-9 crisis.  Investment climbed from 2004 through to 2007, and levelled out in 2008. The fall came in 2009.

We can be confident that the fall in the rate of profit and investment by non-financial companies which eventually came in 2009 did play a part in deepening and generalising the crisis in its later stages. But the evidence suggests that until 2009 US the non-financial rate of profit could not have been in any sense a direct cause of the US financial crisis which started in a rather mild form in the autumn of 2007, became more serious when Bear Stearns had to be rescued in March 2008, but did not become critical till mid-September 2008 when Lehman Brothers collapsed and major banks had to be saved by state intervention.

But as Figure 5 shows, large numbers of jobs were being lost right from the start of 2008, though with a huge acceleration after September.  But if falling investment is the mechanism which translates a decline in profits into a rise in unemployment – then it cannot be a lower rate (or mass) of profits which caused the loss of jobs in 2008.  As I have noted, it is true that profits were lowish in 3 of the 4 quarters in 2007.  The crucial point however is that, investment was rising in 2007, then again in 2008 and only started to fall in 2009.

In my next post I will argue that the 2007-9 crisis in the US had two phases. (1) A collapse in house prices which started early in 2007 and led to a sharp contraction in consumer demand, as households reacted by cutting back on borrowing and began to repay debt.  (2) A separate, though connected, crisis in the banking system which did not have a major impact on productive economy until the autumn of 2008.

Figure 5 was published in the Economic Report of the President 2010, p. 28.



Figure 1 – Definitions and Sources:

Profit = Net Gross Value Added MINUS Annual Depreciation MINUS Employee Compensation.

Corporate sector (Financial and Non-Financial Companies, Domestic Economy only).

GVA Domestic Corporate Business – BEA Table 1.14. line 1.

Employee compensation – BEA NIPA Table 1.14, line 4.

Fixed asset annual depreciation (historical cost) – BEA Fixed Assets Table 4.6, line 17.

Marx on the 1847 Crisis

It is instructive to follow Marx as he makes a close analysis of the commercial crisis of 1847 in a text written in 1850 with Engels as co-author.[i]  The later sections of this account deal with the 1847 crisis in Europe as a trigger for the revolutions of 1848. Here I focus on the discussion of the economic collapse of 1847, which it seems was written by Marx himself.

What is striking in his account is its complexity. In Marx’s explanation of the causes and evolution of  the crisis in England, there is an interplay between many dimensions: crop failure, industrial over-production, swings in international demand for British goods, over-stretched credit both in industry and finance, the collapse of speculative booms, and a strong emphasis on the monetary policy of the Bank of England which initially deepened and generalised the crisis, but eventually helped to alleviate it. He also emphasises the mechanisms of trade and finance through which the crisis was transmitted between England and a number of countries in Europe, North America and Asia.  It should be noted, however, that the falling rate of profit plays no role in Marx’s account.

His narrative can be summarised as follows.  (Unless indicated, all quotations are from Marx and Engels Collected Works Vol. 10). Marx starts by stressing that the crisis of 1847 was the latest phase in a recurrent pattern of boom and slump in the first half of the 19th century.  There had been an industrial depression in England in the period after 1837, which came to an end toward the end of 1842 when a sharp boom began. This was driven by a large increase in foreign demand for English industrial goods (especially textiles). Here a particular factor was that in 1842 victory in the Opium War had prised open markets in China.  In Lancashire the result was a surge in investment in the spinning and weaving industries.

At the same time, an ongoing and already large boom in railway investment rose to even greater heights.  In 1845 alone, 1,035 new railway companies were registered in London, to operate either in Britain or Europe.  On the stock exchange, railway share prices soared in response to heavy speculative demand.[ii] A vast number of shares in the railway companies were sold to the public on margin – usually 10 per cent.

Share prices rose continuously, and the speculators’ profits soon drew every class of society into the whirlpool … Anyone who had a penny in savings, or who had the merest glimmer of credit to dispose of, speculated in railway shares. (p.491).

Based on the real expansion of the British and Continental railway system and the speculation which was bound up with it, there gradually arose in this period a superstructure reminiscent of the time of Law and of the South Sea Company [in the 1720s ]. There were projects for hundreds of railway lines which had not the slightest chance of success, which their authors never had any intention of carrying out, and whose sole purpose was to enable the directors to squander the deposits and to make fraudulent profits from the sale of the shares.[iii]

In Marx’s account it was the end of the bubble in railway shares which was the immediate trigger of the 1847 crisis. This collapse started in October 1845, and deepened through the following year.  As the prices of railway stock tumbled, speculators who had bought shares with a down-payment of only 10 per cent found themselves facing margin calls forcing them to come up with more cash. Hundreds of railway companies folded, and bankruptcy spread among thousands of people who had borrowed to invest in railway shares, sometimes using their own businesses as collateral.

The railway crisis dragged on into the autumn of 1848, prolonged by successive bankruptcies, even of less unsound projects, as these were gradually affected by a general pressure and as invested money was gradually called in, and accentuated by the spreading of the crisis to other areas of speculation, trade and industry (p.492).

The fall in real investment in railways had a large knock-on effect on the iron industries. ‘Iron production, inflated to an enormous degree by the railway bubble of 1845, naturally suffered in proportion as the outlets diminished for the excess quantity of iron produced’. (p.493).

The cotton industry – another key sector – was badly hit by over-optimism about demand in major markets such as India and China, and by the poor cotton harvest in 1846 which raised cotton  prices and reduced domestic demand. Marx notes also that raw cotton prices were distorted by speculation. In the early months of 1847 production was cut back considerably in Lancashire and unemployment rose.

Behind the 1847 crisis lay other crop failures.  There was a devastating blight of potatoes in Ireland in 1845. In the same year, the corn harvest in England was poor, and was followed by an even more serious harvest failure in 1846.[iv]  English imports of corn rose, but because the countries exporting the corn could absorb English industrial exports only to a limited degree, settlement was made in gold to those countries.  As the gold reserves fell in the Bank of England, a wider shortage of credit ensued.  This, superimposed on the railway crisis, resulted in a financial panic which went critical in the spring of 1847.  The bank rate soared to an excruciating level of 7 per cent.  ‘Businesses survived by enormous interest payments and forced sales of stocks, government securities etc. at ruinous prices’.[v]  The shortage of credit was intensified by the operation of the Bank Act which had been passed in 1844 and which limited the issue of notes by the Bank of England to a ceiling set by the size of the gold reserve.

Some temporary relief came during the summer of 1847 as the rise in interest rates led to an inflow of gold from abroad and a limited recovery in the size of the gold reserve of the Bank of England.  This, in turn, allowed interest rates to fall and the credit famine eased.  But in the autumn, ‘the crisis broke out with redoubled fury throughout commerce’ and there was a series of bankruptcies affecting major mercantile companies which had made excessive imports of colonial products, and had been weakened during the earlier phase of crisis.  In October came a further and deeper phase of general financial crisis.  Insolvency now began to threaten the commercial banks.  By November the bank rate had soared to 10 per cent.  Bankruptcies in commerce and in the banking system, and the contraction of credit, undermined demand for industrial goods, and Marx noted, in a later text,  that, ‘after the crisis of 1847 production in the English industrial districts was cut by one third’ (Capital Vol. 3  p.616).

In another later passage, in which he considers some of the ways in which the development of the crisis reflected the interaction of industrial and financial factors, Marx writes:

The increased demand for money capital had its origins in the course of the production process itself – overproduction in industry, as well as underproduction in agriculture…  There was a dearth of money capital brought about by the excessive size of operations in relation to the means available and brought to a head by a disturbance in the reproduction  process that resulted  from the harvest failure, the over-investment in railways, over-production particularly in cotton goods, [based on the false hope that India and China could absorb all of the extra produced] swindling in the Indian and Chinese trade, speculation, excessive imports of sugar, and so on (Capital Vol. 3, p.550). 

The October phase of the crisis was overcome when the government suspended the Bank Act, and by assurances that the Bank of England would discount [lend] freely, though at a penal discount rate of 8 per cent.  Confidence began to return to the credit system, and businesses stopped stock-piling banknotes.

In Britain, there was a cyclical upturn in industrial production in 1848-50.  There were good harvests in those three years.  An abundant cotton harvest in the United States allowed a large increase in cotton manufacturing in Britain.  Recovery was helped, Marx writes, by the fact that the three main outlets for speculation were blocked – railway construction by the earlier crash, grain by the good harvests, and, ‘the revolutions [of 1848] which had deprived government stock of its characteristic reliability, which is a prerequisite for the large-scale speculative turnover of stock.[vi] Marx suggests that the additional capital, left free by the absence of outlets for speculation, was injected into industry, and thus increased production even more rapidly.

But as confidence returned to financial markets in England, combined with a high interest rate attracts an inflow of gold from Russia, America and Europe to England. This exported the crisis by raising interest rates, undermining commerce and the banking system in the countries from which the gold came.

In the 1850 account there is no mention of falling rates of profit.  It might be claimed however that in that year Marx was only beginning his intensive studies in political economy and had not yet realised the fundamental importance of the falling profits law.  But there are many comments on  the 1847 crisis scattered in the 1864-5 Economic Manuscripts from which Engels carved out the falling rate of profit sections in his edition of Capital Vol. 3.  There is no reference to a falling rate of profit tendency in any of these discussions of the 1847 crisis. Obviously profits would have fallen in the businesses undermined during the commercial and financial crisis.  But Marx has no interest in making this obvious point.  His attention is focused on explaining the economic dynamics which cause businesses to fail in a crisis.  The fall in the rate of profit of these businesses is only a transmission mechanism.  What matters are the causes of bankruptcy and business collapse.

Marx wrote a summary account of the 1847 crisis, in his 1864-5 manuscript (p.576), and this was published as follows, in a tidied-up form, by Engels in his edition of Capital Vol. 3:

As long as the reproduction process is fluid, so that returns remain assured, credit persists and extends, and its extension is based on the extension of the reproduction process itself. As soon as any stagnation occurs, as a result of delayed returns, overstocked markets, or fallen prices, there is a surplus of industrial capital, but in a form in which it cannot accomplish its functions.  A great deal of commodity capital; but unsaleable. A great deal of fixed capital; but in large measure unemployed as a result of the stagnation in reproduction. Credit contracts, (1) because this capital is unoccupied, i.e. congealed in one of its phases of reproduction because it cannot complete its metamorphosis; (2) because confidence in the fluidity of the reproduction process is broken; (3) because the demand for this commercial credit declines.  The spinner who restricts his production and has a lot of unsold yarn in store does not need to buy cotton on credit … Capital already invested is in fact massively unemployed since the reproduction process is stagnant.  Factories stand idle, raw materials pile up, finished products flood the market as commodities (Capital Vol. 3, p. 614).

What can we learn from Marx’s account of the 1847 crisis?

Marx’s analysis is of course open to criticism.  For example, given the level of widespread bankruptcy which he describes, the recovery process appears to follow rather magically from nothing more than a suspension of the Bank Act of 1844, and a resumption of Bank of England lending, though still at very high rates of interest. Modern historians would probably question much in his explanation. But there are lessons to be learnt from Marx’s discussion – which, by the way, should be better known.  It is a lively read, with lots of fascinating detail.

Marx spends no time in debating whether crises are caused by developments in the productive sector or in the financial system.  Because by necessity they involve credit, industrial enterprises are seen as inherently financial as well as productive operations. Fragility in the financial system impacts on industry via a  credit famine and high interest rates. Marx’s argument is that a major crisis, such as that of 1847, would involve a combination of over-capacity in the productive circuits, together with fragility in both the industrial and the financial sectors, and an unfolding pattern of destabilising feedback between finance and industry. The drastic crop failures in potatoes, corn and cotton deepened the dislocation.

The specifics of 1847 are very different from those which operated in the 2008 crisis. This was not a crisis of potato blight or over-speculation in railway equities.  However the point is that, in all crises, historical specificity matters.   The 2008 debacle started as a crisis of housing and the construction industries, and of mortgage indebtedness in the US. It did not morph into a ‘financial crisis’ in some vague and general way – but into a banking crisis with specific dynamics arising from the vast and dangerous creation by the banks of securities based on household mortgages in the US.  Crises in mortgage finance and in banking were not just triggers, but causal in their own right. They should not be set aside as secondary, in some quest for a simple general cause of all capitalist crises

Note how Marx’s analysis of 1847 has an exemplary richness of international reference, combined with close attention to the linkages between sectors of the domestic economy. Lancashire as affected by raw cotton production in America, or by market demand in China and India. English industry as exposed to the effects of financial speculation in the City, or of gold flows between London and St Petersburg. In a previous post I showed that much of the recent debate about the US rate of profit has been based on data for the American domestic economy only.

In a recent guest post on this blog, Pete Green urges us to rethink the discussions of the rate of profit and of finance in Capital Vol. 3 in the light of the concept of capital as value in motion through time and space.  It is this vision of capital which is central to the argument of Capital Vol. 2 and Pete rightly commends David Harvey’s perceptive commentary on this often neglected book.

Harvey’s own substantive work has, with good reason, been criticised as over-pluralistic in its explanatory frameworks.  The rate of profit and the forces which determine it should remain central in our analysis.  Marx’s own account of the 1847 crisis would surely have been strengthened by attention to profitability and its conflicting trends. We need to trace the many ways in which the law of value asserts itself – often in displaced and distorted forms.  But also recognise, and give due weight to, the role of contingent factors in any crisis we examine.


Bryer, R. A. 1991, ‘Accounting for the “Railway Mania” of 1845 – a great railway swindle?’ Accounting, Organisations and Society, 16: 439-486.

Harvey, David 2013, A Companion to Marx’s Capital Volume 2, London: Verso.

Kindleberger, Charles B. 1978, Manias, Panics and Crashes, London: Macmillan.

Marx, Karl and Frederick Engels 1978, Collected Works Vol. 10, London: Lawrence and Wishart. [MECW]

Marx, Karl 2016, Economic Manuscripts of 1864-1865, edited by Fred Moseley, Chicago: Haymarket Books.

Perelman, Michael 1987, Marx’s Crisis Theory: Scarcity, Labour and Finance, New York: Praeger.

[i] For the history of this 1850 text, see MECW Vol. 10, p. 695.

[ii] Capital Vol. 3, pp.538, 550.  See also the vivid and meticulously researched account in Bryer 1991.

[iii] MECW Vol. 10, p.492. Kindleberger 1978, p.91 comments on the railway swindles of George Hudson and others.

[iv] Perelman 1987, Ch. 2 has a useful summary of Marx’s various accounts of this crop failure.

[v] MECW Vol. 10, p.494.

[vi] MECW vol. 10, p.498.