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.