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.

Marxist Theory and the Long Depression A Guest Post by Pete Green

The panel discussion of The Long Depression, the recent book by Michael Roberts, was one of the highlights of this year’s 2016 Historical Materialism conference in London. Michael himself opened the session with a summary of the core arguments of the book, focusing on what he describes as the third great depression in the history of capitalism, triggered but not fundamentally caused by, the financial crisis of 2007-8. Jim Kincaid responded with some of the questions he has already raised on this blog about Michael’s use of data. Al Campbell, the final speaker on the panel, provided some alternative charts, based on his work with Erdogan Bakir, suggesting that the rate of profit in the US economy had been on a rising curve in the period before the financial crisis exploded in 2007. For Al this was a crisis of the neo-liberal  regime which emerged in response to the crisis of profitability of the 1970s and early 1980s, but it could not be a function of a recent fall in the US rate of profit as that is not supported by the evidence.

In this ‘guest blog’ I am not going to engage with the data, not least because I share Jim Kincaid’s skepticism about the reliance on US national income accounts as a source for corporate profitability – whilst acknowledging that there is no adequate alternative available for those engaged in empirical investigation.  Instead I want to step back a little from the immediacies of that argument and consider the theoretical framework of Roberts’ book. Critically, I want to question the assumption that reliance on Marx’s analysis of the tendency of the rate of profit to fall, and the counter-tendencies to that process over the long-term, is sufficient for an explanation of the cyclical fluctuations which have characterised capitalism since the early 19th century.  Please note that I am not denying the logical coherence or the relevance of Marx’s Volume 3 analysis of tendency and counter-tendency to analyzing the whole period since the 1960s.  I am challenging what I consider to be over-reductionist and two-dimensional applications of Marxist theory to the latest phase of global crises.

In my own paper for the HM conference which Michael Roberts mentions in passing in his recent blogTransformation and Realisation – No Problem”, I began by recommending Richard B. Day’s book The Crisis and the Crash (published by Verso back in 1981) which surveys the debates in the USSR in the 1920s and 30s over Marxist analysis of Western capitalism in that epoch. Two debates are highlighted. The first focused on Kondratiev’s theory of long-waves and featured Trotsky’s critical response of 1923. The second on Day’s account derived from the respective legacies of Hilferding and Rosa Luxemburg and came to a head in the late 1920s as a cyclical upturn in Western capitalism reached its limit with the Wall Street crash.  On the one side were those, such as Maksakovsky (who died at an early age in 1928) and Preobrazhensky, for whom imbalances  between departments of reproduction (of which more below) were critical to explaining cyclical fluctuations and who are now categorized as ‘disproportionality’ theorists. On the other side, which eventually prevailed as Stalinist orthodoxy, were those led by Varga, who emphasized the limited consumption of the masses and can be labelled as ‘underconsumptionist’.

One significant difference was that the former school consistently located crises as only one phase in a cyclical process which could change in character and amplitude (as Preobazhensky emphasized in his 1931 book The Decline of Capitalism, translated into English by Richard B. Day himself) but would not disappear as long as capitalism survived. The Varga school by comparison, especially in the 1930s, was stagnationist, denying the very  possibility of any sustained recovery of capitalism.    Marx’s tendency for the rate of profit to fall, as a function of a rising organic composition of capital, plays no role at all in these debates. The rate of profit features as a variable, especially for Maksakovsky, but the determinants of fluctuations in profitability over the cycle are rather different. The disproportionality theorists focused on Volume 2 of Marx’s Capital and in the Russian debates this emphasis derived from Lenin’s debates with the Narodniks (who denied the possibility of capitalist development in Russia) in the 1890s. They certainly did not rely, as Michael Roberts mistakenly suggests in his blog comment, on another Russian theorist, who also criticized the Narodniks for underconsumptionism, the  notorious ‘harmonist’ Tugan-Baranovsky.

What’s curious about contemporary Marxist debates, stretching back to the first serious crisis of the postwar period in the mid 1970s, is that we have a comparable polarization but now its the ‘disproportionality’ theories that have disappeared from view. Although this is to oversimplify a many-sided debate, the dominant currents evident in Marxist writing on the crisis of 2007-8 are both two-dimensional. On the one hand, there are those such as Michael Roberts, and Robert Brenner, who despite certain differences, emphasise a long-term decline in the rate of profit since the late 1960s combined with a financial system characterized by excessive debt levels. On the other there are those such as the Monthly Review current of Foster and Magdoff, and for the 2007-8 crisis at least, Dumenil and Levy, who emphasise growing inequality, with underconsumption accompanied by excessive levels of debt. Michael Roberts is quite correct to note the similarities of the latter position with that of certain left Keynesians such as Joseph Stiglitz. He is incorrect in his frequent suggestion that his own approach is the only other viable Marxist theoretical framework available.

What we  need, as an alternative to both, is a more complex multi-dimensional theory of crisis as I suggested in my paper at the HM conference and which I will seek to develop at more length in an article to be submitted to the HM journal. Here, I  will focus on what I think is missing from  Michael’s theoretical framework, at least in his latest book  and recent blogs.  One way of doing that is to consider the flow-chart which appears on page 15 of the book,  borrowed  from a San Francisco Marxist study group and described by Michael as ‘clever’:   [you may need to click on the chart to enlarge it]


I’ve omitted some of the options on the right hand side of the original chart (indicated by the …) in order to highlight the critical binaries from a Marxist perspective. Michael obviously wants readers to follow him down the left hand side of the chart with a YES, YES, YES, YES . But I’ve added in three question-marks to register my objection to the choices as presented in the chart. The first (?) arises in response to the second question and its reference to a kernel of crisis. What this fails to register is that capitalism as a system is a contradictory unity of both production and circulation. Production of value and surplus-value is primary but the process of circulation is still necessary to the ‘realisation’ of value, with the sale of commodities in the market. Volume 1 of Capital comes first with its detailed exploration of the capitalist production/labour process which, Michael correctly observes, is ignored  in the Keynesian/Kaleckian tradition. But the widely neglected, comparatively arid, Volume 2 of Capital which focuses on the  circuit of capital through its different phases (M…C…P…C…M´) is essential to understanding Marx’s analysis of the cyclical fluctuations of the system. All the participants in the Soviet debates summarized by Richard B Day understood that. In recent debates, by contrast, David Harvey and Ernest Mandel  (not least in his introductions to the Penguin volumes of Capital ) are exceptional in their attention to Volume 2.

For Michael Roberts, David Harvey can be dismissed  as just another underconsumptionist. My second smaller (?) on the chart puts in question that labelling of both Harvey and Rosa Luxemburg. Leaving Luxemburg to one side, I simply recommend Harvey’s A Companion to Marx’s Capital Volume 2 as a corrective to that oversimplistic reading and as a more innovative text than the title might suggest. I disagree with Harvey’s critique  of Marx’s ordering of the texts of Capital and his interpretation of Marx’s dialectical method. Harvey is certainly wrong, for example, to suggest that Marx assumed ‘perfect competition’ ( a theoretical construction of neoclassical economics which postdates Marx) in Volume 1, and would benefit from reading up on the theory of ‘real competition’ in Anwar Shaikh’s recent magnum opus Capitalism. But that raises another set of issues I cannot address here. What matters in this context is Harvey’s vital emphasis on capital as always in motion, across time and space. But this process through the phases of the circuit can be blocked at any point and even a slowdown in the process of circulation can precipitate a crisis. This in turn enables Harvey to locate the centrality of the credit system and banking to overcoming these blockages – and justifies his inclusion of a lengthy section on credit and the banking system in Volume 3 of Capital in a commentary on Volume 2.

My third (?) on the chart refers to “Marx’ law of profitability” as a response to the question “Are crises integral to the accumulation process?”. For any Marxist the question obviously demands an affirmative response. But there are at least three further questions that need to be posed. Firstly, the accumulation process as I’ve just suggested embraces the whole circuit of capital. It requires the concentration of money capital and the availability for purchase of the necessary means of production and labour-power. Nor, rather obviously, does investment in production guarantee success in the market-place. Secondly the so-called law is actually a law of a ‘tendency’ subject to counter-tendencies, and I would argue that these unfold over a longer time-period, and thus have a different temporality, to the regular business cycle which lasts from 7 to 10 years and is sometimes known as the Juglar cycle. Thirdly, the actual rate of profit received by individual capitals is subject to a variety of determinants, including the level of effective demand, and these can fluctuate over the cycle as a result of factors which are not directly a result of changes on the organic composition of capital but will influence expectations of future profitability.

Michael Roberts will respond as he does in his recent blog that “the so-called realization problem is the result of the production problem. Falling profitability and falling mass of profits lead to collapsing investment, wages and employment and then swathes of companies cannot sell their goods or services at existing prices and workers cannot buy them. This is a crisis of overproduction and underconsumption”. Indeed he seems to have his own version of Say’ law (supply creates its own demand), which Marx dismissed as nonsense, when he claims that “…investment creates its own demand”. It is certainly true that Marx at one point in Volume 2 (p486 of the Penguin edition) states, in a sentence that Michael frequently invokes,

“It is a pure tautology to say that crises are provoked by a lack of effective demand or effective consumption”.

But for Marx this sentence is prefatory to a critique of the ‘underconsumptionists’ of his time who argued that raising wages would somehow “avert the crisis”. Marx’s objective at this point is to show how  a balance of demand between Departments 1 and 2 is possible and the system can therefore reproduce itself. But as he goes on to indicate the conditions for equilibrium between the two departments are such that systemic disproportionalities will inevitably arise which may only be rectified by “ a major crash” (p596).

Michael is of course right to say that changes in aggregate levels of investment and employment are critical factors  determining changes in levels of aggregate demand. Keynes himself would have agreed. However, there appears to be one error here and a significant omission. The error lies in the conflation of overproduction and underconsumption as ‘two sides of the same coin’, when underconsumption is equated with a lack of consumer spending by workers. For Marx overproduction normally arises, in the first instance, in what he calls Department 1, producing means of production, including both machinery and raw materials.  The problem is a relative lack of ‘productive consumption’ as Marx sometimes describes it. The fall in demand, or more commonly a slowdown in expansion of demand relative to an expansion of  capacity in Department 1,  stems from other capitals in both Departments whose capacity has also grown too fast relative to demand. The omission relates to the relationship between the lifetime of fixed capital and the temporality of the cycle, which is curious because Michael Roberts does mention this at one point in his book on page 220 in the chapter on cycles. Yet it fails to play any role in the earlier analysis.

This is where a careful reading of Pavel Maksakovsky’s The Capitalist Cycle (originally published posthumously in 1928, translated into English by Richard Day and  published in the HM book series by Brill in 2004) would be helpful. This book reveals someone with a sophisticated grasp of Marx’s method and there are some fascinating passages in the opening chapter on the process of abstraction in Marx’s work. But the core of the book concerns, as the title suggests, the regular business or Juglar cycle and Maksakovsky offers only a cursory dismissal of Kondratiev’s long waves, which is regrettable. That said, the author proceeds from Marx’s emphasis on fixed capital formation as critical to explaining the cycle.

Maksakovsky moves beyond Marx, however, by dropping the assumption which Marx retains in his analysis of the relationship between Departments 1 and 2, namely that market prices always correspond to values (or indeed to the prices of production introduced in Volume 3). As Maksakovsky shows, starting from the ‘depression phase’ of the cycle, demand for investment goods will revive with the need for replacement of existing fixed capital which is worn out or has become obsolescent with technical change. If the available capacity in Department 1 has been reduced during the previous crisis with the shutdown of mines, oil wells or steel plants etc., the revival in demand will tend to raise prices above values in those sectors. Whilst the supply of such products takes time to come on stream, employment increases immediately generating an expansion of demand for consumer products. Profits will tend to rise with rising prices encouraging even more expansion in both Departments.

But towards the peak of the expansion phase the new investment begins to result in extra supply being thrown into the circulation process. Now just a slowdown in demand for additional machinery from Department 2 will generate excess capacity in Department 1 (here Maksakovsky anticipates the accelerator  of Keynesian business-cycle theory without the rigid formalism). Prices and profits will fall and the process goes into reverse. The law of value begins to prevail (i.e. relative prices fall to the new lower values set by socially-necessary labour-time) but only after a “prolonged interval of time”. The cyclical fluctuations Maksakovsky suggests will occur independently of what happens in the world of finance and are driven by changes in investment, as the evidence stressed by Michael Roberts confirms and which is not in dispute. But only when the overaccumulation of capital is fuelled by an overextension of the credit mechanism and fictitious capital does the turning-point from boom to depression take the form of a crisis or a financial crash.

The previous two paragraphs provide only a brief sketch of a sophisticated but  highly abstract analysis of the cyclical pattern which has characterized capitalism since the early 19th century when fixed capital became a significant component of the production process. Preobrazhensky in his Decline of Capitalism of 1931 develops this type of analysis more concretely in the context of the post-crash depression.  He stresses the impact of monopolization and international cartels and the creation of excess reserves of fixed capital in the 1920s, making the recovery from the crisis after 1929 much slower than in the classic cycle of earlier periods. Comparable work is needed on the changing cyclical patterns of recent decades. But it is not difficult to extend the analysis to, for example, the patterns of overinvestment in the telecommunications/IT sector in the late 1990s, or in the oil and mining sectors globally in the second half of the 2000s. That last example should also remind us of the need to consider the uneven and combined development of the system globally and the  global imbalances emphasized by astute mainstream commentators such as Martin Wolf. A fully-developed multi-dimensional theory of crisis also needs to take into account the uneven capacities of nation-states for intervention and the impact of class struggle, including the sustained drive of international capital to raise rates of exploitation through outsourcing and global restructuring.

But what of the longer-term tendency of the rate of profit to fall as a function of the rise in the organic composition of capital (the ratio of dead to living labour in the system)? Unlike some critics  I am not rejecting the relevance of this or the equally significant role of counter-tendencies raising profitability over the long-term. Indeed I would endorse to a degree Michael’s emphasis on longer waves in profitability (pp225-6 of his book) but link them more closely to Kondratiev waves (which is how I interpret Shaikh’s sketchy remarks on this question at the end of his book). But these longer waves, which underlie the 7 to 10 year Juglar business cycle, lack the regularity imputed to them by Michael. What can be shown in my view is that when the underlying rate of profit is falling the business cycle fluctuations are more severe as is evident from the late 1960s to the early 1980s, and when the underlying rate is rising, the amplitude or the severity of recessions is reduced as in the 1990s and early 2000s. What’s new in the 2000s however is the unprecedented rise in the share of financial profits in total corporate profits as Lapavitsas and Mendieta-Munoz explore in a recent article in Monthly Review (July-August 2016). But that is yet another story.

One final point.  Michael is fond of suggesting that to say crises are a result of a lack of effective demand is like saying the weather is wet because it’s raining. What I’m suggesting here is that to claim crises like those of 2007-8 are a result of a long-term tendency of the rate of profit to fall is like saying storms and hurricanes are simply a result of global warming – there are a lot of mediations or causal links missing from the analysis, even if the data on the underlying trend confirm the thesis, which on the plane of global capitalism is much more questionable than for climate change.

Michael Roberts on US Profit Rates: A Critique and an Alternative View

Michael Roberts has emerged as one of the leading Marxist analysts of current economic developments.  For many of us, his blog, The Next Recession, has become an indispensable and challenging resource. He has also recently published his second book, The Long Depression, a lively summary of his current research which also extends the arguments of his blog in some important and interesting ways.  For example, detailed accounts of the Long Depression of the late 19th century and the Great Depression of the 1930s.

Some of Michael’s recent posts show him at his formidable best.  To take just one of many examples, on 9 Oct 2016, a discussion of the anxieties being expressed in recent reports by bodies like the IMF and BIS about the growing problem of high debt levels.  In a brief, but notably clear and well documented account, Michael surveys some of the main vulnerabilities in the system today – the fragility of corporate balance-sheets in many emerging economies, the dangerous levels of non-performing loans which threaten leading banks in major economies such as China, Germany and Italy, the general failure of monetary policy and zero interest rates to generate adequate levels of investment and growth in production, productivity and trade.  Here also there are calculations by Michael which show that that the latest policy nostrum being advocated by the IMF and in many other quarters – i.e. big increases in state spending on infrastructure – can’t realistically be nearly large enough to revive a serious increase in overall rates of growth.

Michael believes that there is now, ‘the prospect of a new global slump on a fast approaching horizon’.  I think it is quite possible that he will be proved right about this.

One of the signal virtues of Michael’s work that he is committed to norms of scientific practice and tries wherever possible to back up his analysis and conclusions with evidence.  He is resourceful in ferreting out relevant data from official statistical sources, and in finding vivid ways of presenting his results graphically. In addition, Michael is willing to make his working spread-sheets available to other researchers.  Earlier this year when I was working on profit trends in the US economy I took up a general invitation which Michael had made in a footnote – and he immediately sent me a pile of relevant work sheets and explained detail in a covering letter. Many thanks for this.

I have been able to assess more closely a dimension of Michael’s work which I believe is open to question.  A central theme in much of his analysis is that it is a declining rate of profit which is the underlying cause of the sequence of crisis which has afflicted the major industrial economies since the late 1990s.  As the biggest by far of the industrial economies, the US has been the main battleground in the debate about this thesis.

Using the same definition of the profit rate as does Michael, I have checked his spread-sheets against the original sources in the US official statistics, and redone the calculations.  I get the same results – as did a Swedish researcher, Anders Axelsson,  who had made an earlier check of  the material.

However, there is a problem.  I do not think that Michael’s data about US profit rates actually support some of the conclusions he draws about trends over the past 20 years.

In his Post of 4 Oct 2016, Michael once again summarises the findings of the analysis of US profit rates from 1946-2014 which he published in December 2015.  Here in Figure 1 is the graph which he published in his December post in support of his conclusions.  Note that the definition of profits used in Figure 1, is the same as the one chosen by Andrew Kliman in his book-length study of US profit rates, The Failure of Capitalist Production (2011 pp.99-101). Profits of the financial as well as the non-financial sector are included in the corporate total. All figures are for the US domestic economy only – overseas investment, production and profitability of US firms are excluded. (Kliman p.75).


From the data in Figure 1, Michael draws four conclusions in his Post of 4 Oct 2016 [  ].

  • The secular decline in the US rate of profit since 1945 is confirmed … the US corporate profit rate is some 30 per cent below where it was after World War 2 and 20 per cent below the 60s’. This is clearly correct, but we should be careful about how we use the term ‘secular’. If a direct trend line is drawn between the 1950s and 2015 it certainly slopes downward.  But Michael is sometimes assumed by his less critical readers to be saying that there has been an continuous fall in US rates of profit over the past 60 years.  However the trend line which he has calculated in Table 1 shows a cyclical pattern – two periods of fall, followed by two periods of recovery, though on a dampened scale. The post-2000 recovery is especially significant given that it preceded, in 2008, the most severe crisis of the post-war period. The causality here has to be more complex and dialectical and needs to focus on cyclical patterns, not a unilinear and continuous trend.

Michael next argues that:

  • Profitability … peaked in the late 1990s after the neoliberal recovery. Since then the US rate of profit has been static or falling’.
  • Since about 2010-12, profitability has started to fall again’.
  • Finally, the fall in the rate of profit in the US economy has now given way to a fall in the mass of profits’.

To test the latter three propositions we need to look more closely at rates of profit in the past 20 years. In Figure 2 I have used Michael’s own data for this period with only two changes: adding in the 2015 figures which have since been published, and a revision upwards of his 2014 rate of profit (because the figure for Gross Value Added in that year has since been raised in the on-line data source by about $90 billion.

Apart from these, Figures 2, 3 and 4 are based on Michael’s own spreadsheet (No. 9)


Source: Profit = net GVA = Gross Value Added MINUS Annual Depreciation MINUS Employee Compensation.

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

GVA Domestic Corporate Business – BEA NIPA 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.


On my reading, the data in Figure 2 do not support conclusions (2) and (3).

  • Since the late 1990s the rate of profit has not been ‘static or falling’. The rate was higher in 2005 and 2006 than in the 1997-8 peak. It seems unlikely that that the financial crisis which started in 2007, and went critical in 2008  was caused by a profit rate in 2007 at the same level as the late 1990s. The 2008 crisis was far more severe in its impact on jobs, wages, growth and trade than the dotcom downturn of around 2000.  Yet the impact on profitability was considerably briefer and more limited.  Profitability fell in 2008 and after as a result of the financial crisis rather than as its cause.
  • Profitability did not ‘start to fall after 2010-12’. After rising sharply from the 2010 low point, profit rates stayed level in 2013, rose fractionally in 2014, and only in 2015 was there the beginnings of a fall.
  • Michael also holds that a drop in the rate of profit is normally followed by a rise in the mass of profit which is only a temporary phase. Figure 3 shows that this was not the case in the recent period.


Source: As for Table 2.  Gross Domestic Income – BEA NIPA Table 1.10, line 1.

In Figure 3 the mass of profit is measured as a proportion of Gross Domestic Income to eliminate the effect of inflation. When a comparison is made with Figure 2, it is evident that the two downturns in the rate of profit were not followed by a rise in the mass of profit which was only temporary.  The mass of profit recovered more quickly from the downturn of 2008, and that rise was sustained right through to 2014.  The rate and mass of profit track each other quite closely until 2006 when both rates were exceptionally high.  But the recovery after 2008 was more rapid for the mass than for the rate, and was not temporary, but continued through until the 2015 drop.


An alternative explanation

That the mass of profit has been relatively high in the last 10 years gives some support to the broader argument I have been developing that in this period the system has been contending, not with falling rates of realised profit, but rather with an excess of profit relative to the levels of investment which have been lagging.

I have spelt out the arguments in an article which is in the latest issue of HM (24.3).  Also I have added further evidence in a series of posts on my website. See especially the posts of May 15 and April 26 2016.

The system is being wracked and distorted by the malignant consequences of the effectiveness of neoliberal profit raising counter-tendencies. Profit rates have been driven up, and investment constricted, by a potent combination of market forces, aggressive campaigns by capital to raise the rate of exploitation, financialisation, state policies, and a deep change in the mode of regulation of the corporate sector (shareholder value etc.).  The operation of these forces has generated a global surplus of capital in the money form which is too large to be completely recycled back into productive investment.  Thus what we have is not a crisis of Keynesian lack of consumer demand, nor a Monthly Review crisis of monopoly profits.  But instead, a crisis of a particular sort of disproportionality – between available accumulations of money capital and the capacity of the system to absorb them.

Official statistics are not the only source of support for this thesis.  See, for example, an authoritative study by the Toronto based McKinsey Global Institute Global Competition (2015). The data in this research covered about 28,000 large firms from 42 countries  (i.e. companies with turnover equivalent to over $200 million per annum). MGI found that: since 1980 corporate cash holdings have ballooned to 10 per cent of GDP in the US, 22 per cent in Western Europe, 34 per cent in South Korea and 47 per cent in Japan.

Corporate accumulation of cash reserves is only one source of an overall excess of liquid capital in the system.  Other major channels are: (1) the investible capital piling up in the global economy as the numbers and average wealth of the ultra-rich continue to rise; (2) international current account imbalances. In the pre-2008 period the US current-account deficit was a huge 5.6 per cent of GDP in 2006; China’s current account surplus was 10 per cent of GDP in 2007 – the counterpart flows of capital from China for lending and investment in the US were thus enormous.

The tendency of the rate of profit to fall, which Marx correctly identified, has been reversed in the recent period by the strength of a range of countertendencies. The rate of exploitation has been driven up, the turnover of capital has accelerated, the expansion of labour-intensive service sectors has slowed the rise in the organic composition of capital.

Investment levels in the major economies have lagged in money terms, as the value and price of investment goods has fallen in relative terms.  Corporate strategies in the productive and financial sectors have shifted over the past three decades to defensive and aggressive operations in the mergers and acquisitions market for corporate control, and to the maintenance of high share-prices.  These objectives require large war-chests of money capital, and a careful rationing of investment expenditure. Corporate tax evasion has soared, based on the holding of profits in money form, and laundered through tax havens rather than reinvested in production. Generous payments to executives and shareholders have also been a priority in surplus-value allocation.

From these various sources, from around 2000 a  rising surge of surplus loanable capital was being transferred into the banks and financial markets to be lent out and invested by them. The consequences were contradictory.  Large profits, initially, in the financial sector, but then increasing difficulty in finding a large enough supply of safe assets and reliable borrowers.  Disaster hit in 2007 after more than $1 trillion dollars had been lent in unsustainable subprime mortgages in the US, and securities based on these mortgages had been sold on a huge scale to banks in the US and Europe.  Severe strains also arose in Europe because banks in the Northern countries had lent lavishly to finance unsustainable booms in the peripheral economies of the EU.

And since then, a seemingly intractable combination of ultra-low interest rates, stressed banking systems, demand deficiency, faltering growth in key sectors of the world economy – and, since mid-2015, indications that profit rates may be starting to fall. Governments and markets have been testing new ways of coping with the problem of excess money capital.  The  patterns of stress in the system have altered.  Large sums of money have been absorbed by the major banks in the reconstruction of their balance-sheets. Leverage ratios have been driven down and their reserves in the central banks hugely increased.  In the short run this is a safer (if much less profitable) way of dealing with surplus liquidity in the financial circuits than handing it out in subprime mortgages or as loans to Spanish property developers.  But the crisis then takes the form of stagnating growth in investment and trade.

Since 2008 one of the three channels through which excess money capital is being transferred into the financial system has diminished. The US current-account deficit fell from 5.8 per cent of GDP in 2006 to 2.7 per cent in 2014  However, the numbers and net worth of the global wealthy keep rising.  And the continuing build-up of corporate cash piles remains a further and potent source of excess money capital in the system.

We have to remember the scale of the trends being summarised in the US in Figures 1-3 above.  For example, from its low point in 2008, the mass of profit in the US (using Michael’s definition) rose from about $2 trillion to over $3 trillion. This is a very sizable increase, given that Gross Domestic Income in the US was just over $18 trillion in 2015.  Since investment levels were relatively static in this period the result was a rapid rate of accumulation of corporate cash reserves. Notoriously, much of this flow is booked through tax havens to evade US taxation of profits.

The question of tax evasion leads us back to the definition of profits which Michael and Andrew Kliman use in their work. Here I stress that none of the ways in which Marxist researchers define profit rates and use official statistics are entirely satisfactory. Mine own included.  However if we want to do science rather than peddle myths we have to use the data available, but, obviously, with critical care and caution about their limitations. In all the sciences, research at the edge of knowledge is endemically plagued with problems and controversies about the meaning and validity of the data being used.

Marx defined the rate of profit as follows: s/ C + v.  I.e. surplus-value divided by capital advanced (constant capital + wages). But this can be construed in two ways:  either (1) as the capital advanced and surplus value extracted by companies – the corporate rate of profit; or, (2) a social rate of profit, which Michael calls a whole economy rate of profit.  The latter is a measure of the surplus generated within the whole economy in a given year, after deducting, (a) the amount of productive capital consumed in the private capitalist sector and, (b) total wages of all employees (not just those employed in the capitalist sector).

In the work which is summarised in Figures 1 to 3 above, and in common with Kliman, Michael used the corporate definition of profit.  He now prefers, he says, a whole economy rate of profit and this is what he employs in his latest book, The Long Depression.  I’ll discuss this, and the problems it poses, another time. But Figure 4 shows much the same pattern as the corporate profit rates in Figures 2 and 3 – a higher rate in 2005-6 than in the late 1990s, a sustained, if unspectacular, recovery after 2008, and a small drop in 2015.


Gross Domestic Income NIPA, Table 1.10, line 1.

Employee Compensation  NIPA Table 1.10, line 2.

Consumption of Fixed Capital  Fixed Assets, Table  1.10, line 23.

Private Non-Residential Fixed Assets  –  Table  4.3, line 1. (hist cost).

These differing definitions raise questions about Michael’s claim that the cause of a fall in the rate of profit is a rise in the organic composition of capital which is faster than any rise which has taken place in the rate of exploitation.  This is certainly a crucial mechanism.  But it does seem unlikely that in the cyclical variations in recent profit rates, a rise in the organic composition of capital plays a significant role.  Marx himself saw the organic composition of capital as changing over longer  periods of time, not as the cause of short-run movements in the business cycle.

It needs emphasise that both the corporate and the whole economy rate of profit in US official statistics have one large limitation. They cover the domestic economy only. The source for corporate value added figure is: NIPA Table 1.14 Gross Value Added of Domestic Corporate Business; for the whole economy rate of profit the source is NIPA Table 1.10 Gross Domestic Income by type of income. See for more discussion, my Post of April 13.

The Methodological Handbook for the US National Accounts explains that:

Domestic profits include all profits made by companies from operations in the United States as a geographical territory, irrespective of the nationality of the company. (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).

We need not assume that all profits booked through tax havens are necessarily missing from the profits figures in the National Accounts: there are many loopholes which allow profits to escape taxation and to be reported in the corporate tax returns and company accounts which the Washington statisticians rely on.  But the balance of probability is that the exclusion of foreign-sourced profits from the National Accounts must mean a large underestimate of actual profit rates in the current period.  Thus it is by no means certain that US profit rates have in fact been 20 per cent lower than in the 1960s. For example, in the business press, in recent years, it is usually assumed by journalists, without any question, that profit rates in countries like the US have been at their highest in the post-war period, both before the downturn of 2008, and in the recovery since 2010.

There are of course other problems with the concept of domestic profits as used in the National Accounts of the US and other high-income economies.  As John Smith and Tony Norfield have explained in their recent and valuable books, much of the surplus-value which appears to be generated in the domestic economy is derived from the exploitation of labour in the low-wage economies. Here there are fundamental questions to be further explored.

 Some conclusions

Michael Roberts’ overall argument has many dimensions.  He acknowledges that different crises are sparked by different triggers. Due recognition is given, for example, to financialisation, and the instabilities generated by increasingly levels of debt in the major economies.  There are interesting sections on these aspects of the crisis in his book on The Long Depression  But in his work there is an constant theme – namely that the crucial underlying cause of the crises of the post-2000 period is that the rate of profit peaked in 1997 and has not recovered since.  Behind this is a logically questionable assumption, that if crises are recurrent (even though different in form) there must be a single and common cause.

I have shown above, that as Michael’s own empirical work makes evident, there has not been, over the past 20 years, a simple linear fall in the US rate of profit.  Rather what we see are cyclical patterns of oscillation.  Falling rate of profit tendencies are battling it out against counter-tendencies, with complex results which have to be explained dialectically and not by looking for a single unilnear cause.

We should always be searching for causality of course.  But capitalism is a complex adaptive system.  The contradictions as they evolve (‘find room to move’ in Marx’s phrase) change the immediate configuration of the system. The tendency of profit rates to fall is not in itself a contradiction.  Michael’s own work on cycles (see the chapter in his Long Depression book on cycles within cycles) has taken promising directions, and resumes themes explored by some of the great Marxist economists of the interwar period (e.g. Preobrazhensky, Maksakovsky) If the research programme of cycles within cycles is to advance, as I hope it will, its creative implementation will require the sort of exceptional statistical and analytical skills which Michael possesses.


Corporate Cash Piles

I’ve been looking at some OECD data on net savings by the corporate sector in six major economies.  With the exception of France, the general pattern is one of a shift in the corporate sector from being a net borrower of capital from other sectors of the economy – to one in which the corporate sector is a net lender.  Obviously within each country there will be large differences between the more successful companies and those which are struggling.  But the overall pattern, especially in the period since the 2008 crisis, is that companies in the US, Japan, the UK, Germany and Italy have been building up cash piles at a rapid rate.

Presentation1 tuesday 22 dec

The situation in Japan is particularly startling.  For the 12 years up to 2014 its corporate sector was piling up savings at the enormous rate of 5 to 8 per cent of GDP.  But in the US the UK and Germany, from 2009 onward, net corporate savings were also large, at 1 to 3 per cent of GDP each year.

Commenting on this OECD data in the Financial Times, Martin Wolf wrote.

In a dynamic economy, one would expect corporations in aggregate to use the excess savings of other sectors, notably households – thereby generating both buoyant demand and growing supply.  If investment is weak and profits are strong, however, the corporate sector will, weirdly, become a net financier of the economy.

For most companies, the money is kept available as a cash reserve, and is lent out on the short-term money markets.  Notoriously, the larger companies now channel much of their reserve money capital through subsidiaries based in tax havens. But of course the money does not just sit in places like Bermuda, Luxemburg or Ireland. After tax sanitisation, it is transferred back to be lent out in big financial centres such as New York, London or Tokyo.

Here we are looking at one of the key mechanisms which is causing lack of growth in output and productivity – the much discussed pattern of relative stagnation in the advanced countries.

An increase in corporate reserves suggests that either profits are rising, or investment is falling – or some combination of both. A number of influential Marxists argue that it is basically because profits have fallen that investment is stagnant. Thus the reserve cash pile-up is happening because though investment is low, profits are even lower still.

This view is not correct.  To take the US example, investment has not been rising by much in recent years, but neither has it collapsed. For example total investment in equipment by the non-financial companies was $246bn in 2010, and by 2015 was 45 per cent higher at $358bn in 2015. (In nominal terms. Source: BEA Fixed Assets, Table 4.7, line 39.)

In the US profits have certainly fallen in the 12 months to mid-2016 – but 2015 profits were 84 per cent higher than the 2008 level.  After 2009, US profits recovered rapidly to reach over 5 per cent of GDP, and stayed above 5 per cent up to and including 2015, despite the slowing in that year.


In the US at least, profits were rising faster than investment in the years covered by the OECD data above.  Thus, net savings have risen because investment has lagged the increase in profits

However there are further puzzles – the size of corporate reserves has risen despite continued rapid increase in executive salaries, and large handouts to shareholders. There is clear evidence that companies have been taking advantage of ultra-low interest rates, to borrow and pass the money on to their shareholders.

Profitability has recently taken a hit in a number of sectors, such as oil production, energy and shipping. But overall, the evidence in Table 1 indicates that, apart from in France, the total amount of debt being held by companies in the other five economies has recently been in decline.

Table 1.  Core Debt of Non-Financial Companies as % GDP

Debt in Q1 2015 as % GDP Change since 2009 as % GDP
United States      69      -1
Japan     104      -6
UK      74     -21
Germany      55      -3
Italy      78      -3
France     126     +14


Source: BIS Quarterly Report, September 2015, Table F4.1.


There are big national differences in the debt/equity split, and thus in overall corporate debt levels.  But between 2007 and 2014, company debt declined in Japan, Italy, the US and Germany, and by a large margin, in the UK.

It is the case that, with the exception of Japan, companies, in aggregate, have maintained quite impressive levels of dividend payments.  In the US and Europe there have been large programmes of share repurchase. The City analyst, Andrew Smithers, notes that in the US, for example, since 2009, companies have been net buyers of equity at an average rate of 2 per cent of GDP a year.

Japan has been in a deep state of stagnation in investment and output.  But this is not because profits have been low.  The data below show that profits recovered rapidly from the collapse of 2008 to return to pre-crash levels. Only in the last 2 years have profits declined in Japan.  But growth has remained in the doldrums throughout the post 2008 period.  The trend lines in the figure show that since the late 1990s, profits have rise by 108 per cent and GDP has fallen by over 8 per cent.

Japan GDP and Corporate Profits, 1994-2013
Japan GDP and Corporate Profits, 1994-2013

In Japan companies have been exceptionally cash retentive.  This is in part because shareholder activism has so far been quite limited, though the present government is trying to encourage shareholders to be more aggressive and put corporations under pressure either to invest their spare capital productively, or allow it to be returned to shareholders. What is certainly the case in Japan is that the relatively low investment levels are not due to lack of profitability in the central core of heavyweight companies.

A further reason why build-up of corporate cash reserve has been so unusually rapid in Japan, is that much recent investment by Japanese industrial companies has taken place in low-wage, low-cost locations, in China especially, but also throughout South East Asia. The real level of Japanese industrial investment has been quite high, but not as measured in Yen.  Smithers in the article quoted above reports that foreign direct investment by Japanese companies was nearly 6 per cent of GDP in 2013.

Elsewhere in the US and Europe the maintenance of a high share price has become a central objective of corporate strategy.  The rise of shareholder value has effected a deep shift in the mode of corporate regulation, away from the pre-1990s system in which managerial strategies were more focused on the long-term growth of the company and prioritised the ploughing back of capital into productive capacity.

The advent of shareholder regulation does not mean a reduction in control by executives.  Rather powerful incentives are now used to draw executives into giving priority to high share price targets.  Large bonuses are linked to the share price, and often take the direct form of stock option handouts.

Shareholder value does not mean that pressures for high profitability are anything but unrelenting. Profit levels provide the capital needed to keep share prices high by financing lavish dividend handouts and share buyback strategies. But the effect of targeting high share valuations, is that companies are cautious about investing in an expansion of capacity unless there seems to be a fairly secure prospect of getting a substantial rate of return.

Michael Roberts noted recently a report from the US Fed of research which found that CEOs of a non-financial companies insist on an average expected profit rate of 14 per cent before they decide on a new investment project.  For large companies (above $100 million in annual sales) the profit hurdle rate was even higher, at 15 per cent.  As the Fed study emphasises, it is striking that these hurdle rates on new investment have not been reduced since the 1990s despite the enormous drop in the cost of capital after around 2000, as interest rates tumbled. In real terms, the required hurdle rate on new investment has risen sharply as interest rates have fallen.

That such demanding rates can be maintained is of course testimony to the impressive average rates of profit which the average US company has been able to achieve in recent years.  Companies are cautious about investing in projects which are judged to produce a lower rate of profit than is already being attained.  Available money capital is used to try to enhance profitability in other ways than in the direct expansion of productive capacity.  Notably in three ways.

  • Profits are used to finance the costs of downsizing, rationalisation, and the elimination of less profitable capacity.
  • Mergers and acquisition activity continues at a high rate in the US and Europe, as companies play the market in corporate control to increase their competitive capacity via economies of scale, monopolisation, and increased market share. Takeover strategies require, above all, a large war-chest of available cash reserves.  So also do operations to resist and defeat hostile takeovers.  The building of financial firepower for the M&A battlefield is a major motivation behind the current drive to accumulate cash piles.
  • Evasion of corporate profit tax which is levied at over 20 per cent in most of the high income economies, and, famously, at 35 per cent in the US. Profits from productive investment are more difficult to shelter from taxation, as compared with the financial engineering of cash piles being shifted around between tax havens.

So what we see in the high-income economies is the following: quite high profits, a lag in investment, and – despite generous handouts to shareholders, and lavish executive salaries and stock options – the continuing build-up of large corporate cash reserves.

It is important to note that this pattern, though it has been reinforced since the 2008 crisis, was nevertheless well established in the US and Europe in the years before the crisis.  Indeed it played a part in the causation of the crisis.  Corporate cash reserves have been one of the sources of a general surplus of money capital in the post-2000 period.  This surplus was transferred to the financial system to be lent-out or invested.  Under pressure to find borrowers for large  inflows of large quantities of surplus capital, and greedy for the potential profits to be made, the banks dropped their prudential standards and engaged in a bonanza of high risk lending. This included, in the US, large scale mortgage lending to households not in a position to maintain repayments. For the Northern European banks, the financing of unsustainable booms in housing and commercial property in the peripheral countries of Europe.

Since 2008 the pressures of surplus capital have remained strong, but have morphed into other forms. Notably the present acute dependence of the financial system on central bank purchases of bonds on a mammoth scale.  Also the testing to dangerous limits of the capacity of the emerging economies to provide a sufficient supply of safe and profitable investment and lending opportunities.

The profit-investment gap in the advanced economies remains one of the major sources of a worldwide excess of what Marx called interest-bearing capital. Central to the current stagnation in growth is the disproportionality between the levels of profits being generated by the system, and its more limited capacity to absorb available capital productively.

I shall return to these themes when I get back from holiday in two weeks time.