Surplus Money Capital as a Crisis Mechanism

Profits are at the heart of the chain of crises which started in 2007.  But this is not because the rate of profit has fallen in the major economies.  Rather, a combination of a rising mass and rate of profit and lagging rates of investment has led to a global surplus of money capital. Levels of surplus value extraction have been higher than the capacity of the system to absorb them.

As surplus money capital piles up, it is transferred to the financial system which captures its share of surplus-value via the interest and fees it charges for lending out money entrusted to it. The rapid surge in flows of surplus money capital into the financial circuits in the years 2000-7, meant bonanza profits for the banks. In the US, for example, by 2006 the financial sector was absorbing more than 40 per cent of total profits.

But as became evident in the financial crisis which started in 2007, the banks in the US and Europe responded to the money surge in ways which threatened the very survival of the system.  The logics of profitability and competition within the financial sector, have:

(a) intensified pressures to maximise surplus-value extraction in the productive sector, and this has helped drive still faster the accumulation of surplus money capital;

(b) encouraged high risk levels of leverage and speculative instability within the financial system itself. The banks have lurched violently between lending too much up until 2007, and not enough since then.  Debt levels have increased worldwide to unprecedented levels.  But there is not a large enough supply of safe borrowers to lend to, or safe financial assets in which to invest.

To explain this, we have to consider the many reasons why the system is now plagued by a combination of high profits and relative stagnation in investment.  The processes involved are located deep within the system of production and exploitation; in the structure of interconnections between the productive and the financial circuits in neoliberal capitalism; and in the dangerous speculative pressures within the financial system.

The major crises of the post-2000 period have been – in the classic terminology of the Marxist tradition – crises of disproportionality.  The form taken is a disproportionate expansion of the financial circuits as compared with the productive circuits. This is not a falling rate of profit crisis as in the 1970s.  A crisis of excess money capital tends to arise if, and when, rates of average profit are on the rise.  Such crises may lead to a fall in profitability, but if that happens, it would be as a consequence of the hit to the productive system which can result from financial crises.  The system is distorted by a disproportion between high average profits and relative levels of reinvestment of those profits.  Stagnationary influences are then transmitted to the productive economy.  The impact on the labour markets means increasing job insecurity, and the creation of large numbers of low paid jobs.

That such a crisis is possible – and in certain circumstances likely – is implicit in Marx’s analysis of the unstable dynamics of a capitalist economy.  He has a long section in Capital Vol. 3 (chapters 30-32) on the relationship between money capital and real capital. The reserve  funds of industrial companies are passed to the banks and lent out by them in the form of what Marx variously refers to as interest-bearing capital, loanable capital or money capital.  Marx notes the possibly that what he calls a plethora of money capital might arise – i.e. an excess of money capital relative to the demand for loans from the banks. He asks: ‘Is the phenomenon of a plethora of capital, an expression used only of interest-bearing capital, i.e. money capital, simply an expression of industrial over-production, or does it form a separate phenomenon alongside this?’ (p. 607 Penguin Edition). Marx’s answer is that there are two phases of the business cycle in which a surplus money capital situation can arise independently and in which ‘loan capital lies idle on a massive scale’ (p. 616)  (1) In the aftermath of a large large contraction in production. This was the case, he says, after the crisis of 1847 in which production in the English industrialist districts was cut by a third.  Commodity prices and interest rates were low and there was a surplus of loanable capital.  (2) During the upturn phase of prosperity in the business cycle. Here Marx lists a number of processes which would reduce the amount of money capital needed to operate the productive circuits.  Wages have fallen, and, because business is brisk, the demand for an injection of extra working capital by industry and commerce is still relatively low (p.627).  Also, a favourable balance of payments would add to the total of available loanable capital.

Of course static pools of money in the industrial circuits are not the only source of loanable capital. There are also flows of money into the banks from other sectors of the economy.  Marx notes, for example, that there would be an increase in the supply of money capital in the system if there is a rise in saving by ‘the unproductive classes and those who live on fixed incomes’ (p. 622).

The specific mechanisms that underlie a surplus of money capital today are of course rather different from those operating in Marx’s period.  But a key piece of evidence in support of the excess money capital explanation for the current crisis is that, over the past 15 years, global rates of interest have fallen steeply, and to a much lower level than governments and central banks wanted, and tried to achieve by monetary policy. Demand for loans in the credit markets of the world has tended to be lower than the supply of money looking for borrowers.

The overall result is that the banks and financial markets have found themselves – in the commonly used phrase – awash with liquidity.  There are enormous pressures on the managers of these large flows of money capital to find secure ways of investing the money and at an acceptable rate of return.

Marx noted that when there is a bonanza of money in the financial system all kinds of swindles are able to flourish: ‘extraordinary swindling can very often go together with a low rate of interest’ (p. 484). The immediate trigger of the 2007 crisis was that $1 trillion had been handed out by the US banks to subprime house purchasers, many of whom had insufficient income to sustain their mortgage payments as their interest payments soared when the scam of an initial low interest rate (the so-called ‘teaser rate’) came to an end.  Securities based on the future flow of subprime mortgage payments had been widely sold to banks in Europe or retained in the shadow banking system of the US.  When the value of these securities was undermined by subprime default – major banks in the US and Europe were threatened with collapse.  In a similar way, the Eurozone crisis was triggered because the money capital surpluses of the North European economies were used to finance unsustainable land, housing, and property booms in the peripheral Europe economies.

The thesis I am proposing needs to be developed in detail and tested in number of ways which will be explored in future posts.  I am arguing for a quite specific form and timing of disproportion crisis – not a general tendency of the system towards overcapacity as in the many variants of under-consumption theory – that of Baran and Sweezy for example. My account has elements in common with what David Harvey calls a capital surplus absorption problem­. But my stress is on excess capital in the money form, and especially in the post-2000 period, not, as in Harvey, a general excess of productive capacity as recurrent throughout the history of capitalism.

At an empirical level many of the processes I emphasise are of course ones which policy makers in the major economies have been struggling with.  In these circles, the view that the international economy has, since 2000, been thrown into a deep maladjustment by a global savings glut has been widely accepted.  A particularly influential version was proposed by Ben Bernanke in 2006.

But from a Marxist point of view, the way in which mainstream economics conflates flows of productive capital and of money capital into a single amorphous category of ‘savings’ is a recipe for fundamental incoherence and lack of explanatory rigour.  It is essential to start from the clear distinction between productive and financial circuits which is at the core of Marxist political economy.

Which Profit Rate for the United States: Domestic or National?

The Marxist debate about profit trends in the US has focused mainly on data in the National Income and Product Accounts [NIPA] produced by the Bureau of Economic  Analysis, a government agency in Washington.  In this debate, what often gets overlooked is that NIPA uses two quite different ways of defining and measuring profits – and the differences between them are important. This is explained in the Handbook about Concepts and Methods in NIPA.  

NIPA publishes separate tabulations for national and for domestic profits.  National profits include the foreign earnings of US companies (i.e. those with headquarters in the US) as well as their domestic profits. The profits made in the US by foreign companies are deducted from the national total.  Domestic profits include all profits made by companies from operations in the United States as a geographical territory, irrespective of the nationality of the comp any. (i.e. where its headquarters are located)  Crucially, as the Handbook explains, “The profits component of domestic income excludes the income earned abroad by US corporations”. (Section 13 – 5).

For most Marxists, our concept of ‘the US profit rate’ would surely include the foreign earnings of US companies.  Thus the national definition of profits should be the key focus in Marxist research.  This would especially be the case given that the proportion of their profits which US companies make abroad has been increasing rapidly in recent years. In the 1990s it was about 15 per cent and now hovers around 33 per cent. Nevertheless in discussing the rate of profit in the US, and whether it’s going up or down, Marxist analysts  usually use the data for profits for the domestic economy only.  Sometimes this is not explicitly noted by authors. And it can be hard for readers to check, since it is quite common for profit rate data to be published and analysed without any indication of which section (and line!) of the many tables in NIPA is being used as source, and thus what precise definition of profits is being used.

This criticism, however, does not apply to Andrew Kliman.  His book-length study of profits in the US, The Failure of Capitalist Production (2012), is based almost entirely on NIPA data.  He explicitly notes that, throughout the book, his research is almost exclusively focused on domestic rather than national rates of profit. Kliman writes:

unless otherwise indicated, my analysis pertains to what the Bureau of Economic  Analysis [in NIPA] calls “domestic” corporations…. The domestic data include foreign-based corporations’ profits from their US operations and their fixed assets located in the US, but exclude US-based corporations’ profits from abroad and their fixed assets located abroad (p. 75).

Using this domestic evidence alone, Kliman reaches the main conclusion of the book , namely that, ‘a long decline in profitability in the US began in the later half of the 1950s’ (p. 77).

But can it be valid to give no attention to the one third of their profits which US companies have in recent years been making from their operations abroad?

There is a good reason why Kliman, and many others, base their analysis of US profit rates solely on activity within the domestic economy of the United States, and exclude the foreign earnings of US corporations. To calculate a profit rate you need a measure of capital advanced – the value of the capital stock used in production.  The Bureau of Economic Analysis [BEA] helpfully publishes estimates of the value of the total stock of productive assets in use in any given year. But figures are provided only for the stock of capital being employed within the US.  Data on the value of the capital stock operated abroad by US multinationals is simply not available.  And clearly the difficulties of providing a valuation of capital assets deployed abroad would be formidable, given the complex entanglement of US multinationals with networks of local subsidiaries and foreign affiliates.

To calculate his domestic rate of profit Kliman uses the data published by the BEA in its Fixed Asset tables.  The BEA makes it clear that this data refers to productive assets in the narrow means of production sense.  What is certainly not included in this definition is capital tied up in any holdings which companies may have of shares in other companies.  . Physical means of production – fixed machinery, buildings etc. software,  patents, intellectual productive capital are what the BEA domestic data refers to.  Financial claims – what Marxists call fictitious capital – are not included in the stock of capital advanced when US domestic profit rates are calculated

Kliman has a defence for his exclusive reliance on domestic profit rates to establish what he believes to be a declining rate of profit for US corporate capital as a whole.  He argues that the foreign operations of US based companies were less profitable than their domestic activities.  But to calculate a rate of profit for US investment abroad, Kliman uses data on foreign direct investment [FDI].  The term ‘direct’ is misleading.  This is not investment in the sense of money used to buy what are called ‘fixed assets’ in the domestic data – machinery and other means of production. Foreign direct investment means the purchase of shares in foreign companies in order to give the US purchaser a controlling interest in those companies.  FDI refers to financial operations which lead to the creation or control of foreign affiliates and subsidiaries – so is quite different from the stock of direct means of production which Kliman uses as the profit rate denominator for the domestic economy.

The BEA provides data on US FDI – i.e. the accumulated stock of equities in foreign affiliates held by US companies.  Also the annual flow of dividends and similar types of income derived from ownership of foreign companies.  For example the stock of US FDI was just under $4.9 trillion in 2014, nearly all of it in the form of equities ($4.7 trillion). The income derived by US companies from these holdings was $449 billion.  Thus a rate of return of 9.5 per cent.

It is this rate of return which Kliman calls a ‘rate of profit’, and says is lower than the rate of profit derived from the operation of fixed assets in the domestic economy of the US.

To measure the profit of US multinationals’ foreign investment, I computed their income from direct investment abroad as a percentage of their direct investment abroad (p.79).

He finds for example that the after-tax domestic rate of profit was 28 per cent lower in 2001 than in 1982, and the before-tax domestic rate  was 25 per cent lower – while the rate of return on foreign investments, over the same period, was 37 per cent lower.  He also finds that the foreign rate of return continued to be lower through to 2007.  Thus he concludes that:

Even though my analysis of declining profitability elsewhere in this book relies on data for domestic corporations only, the above comparisons suggest that this is not a serious limitation (p.80).

What is missed in Kliman’s approach is the huge surge in US FDI.  Certainly he exaggerates the downward trend in the rate of return on US FDI by a cherry picking procedure. He compares the 11.9 per cent rate in 1982 with the exceptionally low point of 7.5 per cent in 2001.  But after 2001 the rate recovered and in 2005-08 averaged over 12.0 per cent each year. However as Table 1 shows, he is right to identify a somewhat lower average rate of return for FDI profitability between the 80s and now.

Table 1.  Average annual rate of return on US FDI

1982-89 12.8
1990-97 12.7
1998-06 10.2
2006-14 10.4

Note:  Withholding taxes are paid by US corporations in countries where they have investments. Rates up to 2006 are after-tax, from 2007 rates are before-tax.

Source: BEA Direct Investment Position, Table 2.1 (historical cost basis).

Kliman is thus correct in his contention that the rate of return on US FDI has been somewhat lower since 1998 than in the 16 years before.  But 10 per cent on capital invested is still quite a high rate of return.  It is only slightly less than the average after-tax rate of domestic profit in the US which, on Kliman’s figures, was around 11 per cent from the early 1980s till 2006.  This difference is surely not large enough to justify Kliman’s decision to base his analysis of US profitability on domestic profits alone.  The effect is that over the period he covers in his book the rate of profit he is studying becomes increasingly detached from the realities of US capitalist accumulation.

In 1982 US domestic corporate Fixed Assets totaled $2,009 billion (at historical cost ). The stock of FDI was $208 billion – i.e. equal to 10 per cent of domestic fixed capital. In 2013 domestic fixed capital was $10,737 billion and the stock of FDI was $4,693 billion – nearly 44 per cent of the domestic capital stock. Thus there was a much more rapid build-up of foreign than domestic investment over the 50 year period.

Kliman builds too much on a comparison which it is not at all clear can be meaningfully made.  That is – between the corporate rate of profit in the domestic economy and the rate of return on corporate holdings of equities in their foreign affiliates. When mainstream economists confuse the rate of profit on productive capital with the rate of return on financial assets (as Thomas Piketty does for example) Marxists are rightly scornful.  In any case, to avoid corporate tax US companies routinely and covertly transfer domestic profits to their foreign subsidiaries. In 2014 of total US FDI of $4,900 billion, more than 20% was located in the tax havens of Luxembourg, Bermuda and the UK Caribbean islands.  Kliman mentions FDI in tax havens in an obscure footnote (p. 215) but does not comment on whether tax evasion might raise questions about his main argument.

It may be that Kliman is right to argue that the profit rate for US foreign direct investment is not as high as it was in the 1980s.  But in a book with the ambitious title of The Failure of Capitalist Production it seems a damaging restriction to omit any treatment of the processes of US capitalist accumulation abroad. There is after all another way of looking at the export of American capital over the past three decades.  US corporations have been able to effect a vast expansion in their productive activities abroad and in their presence in world markets.  The importance of this development should not be set aside just because it is believed to have been at the cost of a small reduction in their overall rate of profit.

Profit rates on capital advanced are, and should remain, central in Marxist analysis.  But the rate of profit should not be studied, in a mechanistic way, as an isolated statistical variable.  But rather as embedded in a political economy in which questions of the scale of accumulation, and presence of the world market, are never ignored.

We need to use National Accounts data as an empirical source in Marxist analysis.  But we should try to get beyond the methodological nationalism which is built into such data.