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.

Slaves versus Champagne: Capitalist Consumption in Marx

A central thesis of Marx is that the rate of profit is the major influence on the level of investment.  In Capital Vol. 1, throughout the chapters on the accumulation of capital it is implicit that it is competition which is driving accumulation.  The profitability achieved by a firm is the decisive test of its competitive success or failure.  Profits provide the key source of capital to finance increases in investment and accumulation.

However Marx does not see profits as determining investment in a process of mechanical causation.  He recognises that decisions about the allocation of capital take place in real time, and are made by capitalists who are making choices about their investment strategies while facing an uncertain future.  It is essential in political economy to acknowledge this moment of agency, otherwise we elide the dimension of risk in capitalist calculation and outcomes.

But of course, Marx is not an methodological individualist.  The investment decisions which capitalists take are subject to the selective processes implemented by the law of value.  This term summarises all the ways in which the competitive failure or success of companies are determined by how economically and efficiently they make use of the labour and means of production at their disposal.  And also by the balance of supply and demand in the markets in which they buy and sell.

Thus the choices of individual capitalists are subject to the discipines of technological and market competition. For example Marx documents in detail how the spread of steel spindles in textile production lowered costs of production. He sardonically notes that the capitalist does not have to use spindles made of steel just because his competitors do. But the price he gets for the product will be determined by steel spindle technology, if that has come into general use.

If the capitalist has a foible for using golden spindles instead of steel ones, the only value which counts for anything in the value of the yarn produced remains that which would be required to produce a steel spindle, because no more is necessary under the given social conditions [i.e. current technology]. (Capital Vol. 1, p. 295).

How much to invest and in what? These decisions are made in a situation of uncertainty. The laws of competition are coercive, but they are not automatic and entirely predictable.

Marx did not see a simple linear relationship of cause and effect between profit and accumulation.  Note, for example, his comment on a book by the Rev Richard Jones whom Marx considered to be less stupid than the other prominent parson economists of the period, Malthus and Chalmers.  ‘Jones is right to stress that despite the falling rate of profit, the “inducements and faculties to accumulate” increase’ (Capital Vol. 3, p. 375).  Here Marx quotes and endorses the comment by Jones that:

A low rate of profit is ordinarily accompanied by a rapid rate of accumulation, relatively to the numbers of the people, as in England … a high rate of profit by a lower rate of accumulation, relatively to the numbers of the people. Examples: Poland, Russia, India etc.

Marx emphasises that capitalists are conflicted about whether to reinvest their profits in the expansion of production, or use them to finance speculative ventures. Here again Marx stresses the moment of agency: ‘the individual capitalist … has the choice between lending his capitalist out as interest-bearing capital or valorising it himself as productive capital’ (Capital Vol. 3, p. 501, Penguin edition).

Profits can be used in luxury consumption, or to play the financial markets.

the progress of capital production not only creates a world of delights; it lays open, in the form of speculation and the credit system, a thousand sources of sudden enrichment (Capital vol. 1, p. 741).

The investment versus capitalist consumption dilemma was an important theme in the literature of political economy.  In the early phase of classical political economy, capitalists were urged to reinvest as much as possible.  In Marx’s concise summary, the message of Malthus and his contemporaries was as follows:

Accumulate, accumulate! That is Moses and the prophets … therefore save, save, i.e. reconvert the greatest possible portion of surplus-value or surplus product into capital! Accumulation for the sake of accumulation, production for the sake of production was the formula in which classical economics expressed the historical mission of the bourgeoisie in the period of its domination (p.742).

Marx notes, for example, that Thomas Malthus, recognised ‘the awful conflict between the desire for enjoyment and the desire for self-enrichment’.  Marx agrees with this: he notes that surplus value is divided into two parts: (1) revenue – used to meet the consumption needs of capitalists and their families, (2) capital – for accumulation by reinvestment.  (Capital Vol. 1 738-746).  The capitalist, says Marx, experiences all the agonies of a Faustian conflict between the passion for accumulation and the desire for enjoyment (p. 741).  (See Goethe’s Faust, lines 1112-3 – ‘Two souls, alas, do dwell within my breast; each seeks to sever from the other’. Faust is torn between the pleasures of the world and his longing to devote his life to the accumulation of knowledge and spiritual or magical power.)

Malthus’s solution to this dilemma was to advocate a division of social labour. He urged the capitalist class to live modestly and leave extravagant spending to other social groups – the landed aristocracy, the holders of sinecures, and the clergy.

But, after the 1832 July Revolution in France, and faced with a rising tide of industrial and social unrest in England, political economy altered course and began to celebrate not the acquisitive drive to accumulate of the entrepreneurial class – but rather the nobility and high moral mission of the capitalists.

As classical political economy degenerated into mere ideology, Marx notes for example how Nassau Senior begins to praise the self-sacrifice of the capitalist who, by his abstinence from consuming all of the surplus-value and surplus product, sacrifices his own consumption in order to provide workers with the machines and raw materials which they need for employment and wages. In Marx’s summary:

The capitalist robs himself whenever he ‘lends (!) the instrument of production to the worker’, in other words, whenever he valorises their value as capital by incorporating labour-power into them instead of eating them up, steam-engines, cotton, railways, manure horses and all (Capital Vol. 1, p. 745).

Surely, Marx continues, the simple dictates of humanity would enjoin the release of ‘that peculiar saint, that knight of the woeful countenance, the abstaining capitalist from his temptation and his martyrdom’ (p.746). (The knight of course is Don Quixotte – allusions to Cervantes’ novel are frequent in Marx’s writings).  And here Marx notes a new and happy development which has brought relief to one particular group of self-sacrificing capitalists.

The slave owners of Georgia U.S.A. have recently been delivered by the abolition of slavery from the painful dilemma over whether they should squander the surplus product extracted by means of the whip from their Negro slaves entirely in champagne, or whether they should reconvert part of it into more Negroes and more land’ (Capital Vol. 1,  p.745).

Consume or invest.  The capitalist dilemma remains as prevalent today as in Marx’s period.  The evidence is overwhelming that in recent years, in the high-income economies, consumption by the owners and controllers of capital has been winning out over accumulation.  As investment has lagged, an increasing proportion of the rise in the mass of profit since 2000 has been handed out to shareholders in dividends and share buy-backs, or used to pay large increases in executive salaries.

The Profits-Investment Disconnect

In the major advanced economies a large gap has now opened between profits and investment. Figure 1 shows the pattern for the United States and it is worth close study.

The data are from the Federal Bank of St Louis and derived from the US National Accounts. It may seem strange that investment, as shown here, is so much higher than profits. E.g. in 1993 when the data starts, profits are 4 per cent of GDP (left hand scale) but investment is more than 11 per cent of GDP (right hand scale).  But the figures are for net profits (after depreciation and taxation); but investment is gross (i.e. includes depreciation). Also, I use GDP here as if it were the same as gross domestic income.  Thus the comparison made here between profits and investment can only be approximate – but instructive nevertheless.

Figure 1.   Profits and Investment as a Percentage of United States GDP, 1993-2013.

US Profits and Investment - Krugman

Until the early 2000s the mass of profits and associated investment levels were closely correlated – just as Marxists would expect.  They were rising neatly in tandem in the mid-1990s.  Then there was a fall in profits in 1997, but a drop in investment duly followed a couple of years later.

However in the early 2000s, the pattern began to change.  The surge in profits in the recovery from the dotcom downturn was certainly followed two years later by a rise in investment – but one which was comparatively subdued.  The proportion of profits not reinvested was beginning to rise.  When profits crashed in the crisis of 2007, again investment tumbled two years later.  But notice, first, the remarkable fact that, though the crisis of 2007 was far more severe than the dotcom crisis of 2000, and devastated the US financial system – nevertheless the impact on the profits of the non-financial sector in the US was much less than would have been expected.

From a previous peak of 6.5 per cent of GDP in 2006, profits in the non-financial sector fell only by 2.5 per cent of GDP to 4 per cent in the 2008 downturn.  Compare that with the deeper fall to 3.5 per cent of GDP in the downturn of 2000.  What everyone rightly refers to as the deepest economic crisis since 1929 had actually a relatively limited impact on the profitability of the US industrial sector.

In addition, the recovery in the mass of profits after 2007 was speedy and dramatic.  By 2010 the proportion of profits in GDP was back to the peak figures reached in 1997 and 2006.  This rise then continued on to a new peak of over 7 per cent of GDP in 2014 – in many estimates, the highest level reached since 1945.  Profits remained at about that level through 2015.  There are signs that a fall is beginning in 2016 – but 1st quarter earnings of US non-financial companies were still not much less than an annualised 7 per cent of  GDP.

However the profits surge after 2007 was followed two years later by only a limited recovery in investment.  By 2013 it was still less than 12.5 per cent of GDP compare a peak of 14.7  per cent in 2000, and 13.5 per cent in 2007.  A very large disconnect between profits and investment had developed.

To show more clearly what has happened, in Figure 2 I have recalculated US National Accounts data – setting the 1998 figures for profits and investment at 100 – and comparing the investment figures for each year with the profits total for two years earlier.

Figure 2.  Profits and Lagged Investment in the US, 1998-2013.

Test wed 15th

Investment began to lag profits in 2001.  The size of the lag remained quite large through to 2009 – and then widened enormously as investment lagged the rise in the mass of profits over the past seven years.

The data above confirm the Marxist proposition that there is a clear connection between profitability and subsequent investment.  In a future post I will review a number of recent empirical studies which show that realised profits are a major causal influence on investment. However, there are other forces and factors which have an influence on investment levels.  It is also the case that the correlation between profits and investment is not fixed, but varies over time – as is evident over the 20 year period we have been looking at.

Too many Marxist economists have had an oversimplified view of the profits-investment connection.  Michael Roberts for example argues that,

There cannot be a closer connection in the capitalist system of production and exchange than that between profits and investment. The rise and fall in profits and profitability drives the rise and fall in investment.

There is an essential truth here, but the point is greatly overstated.  It is not because profits have fallen that investment levels have been lagging since 2001 – and increasingly so.  Apart from the temporary downturn of 2007, profits have been on the rise as a proportion of GDP since 2001, until the stabilisation in 2015, and (so far) a marginal fall in 2016.

Roberts and others will point out that in this post I have been dealing with the mass of profits as compared with the mass of investment.  Their argument is that it is the rate of profit (not the mass) which determines investment.

But the rate of profit also rose in the US in 2009-15.  The large rise in the mass of profit which occurred would only have produced a fall in the rate of profit if the total stock of capital advanced had been increasing even faster.  But it is precisely the lagging level of investment in this period which has made a large enough rise in the stock of capital highly implausible as a matter of simple arithmetic. A slow-down in investment means a lower rate of capital accumulation.

Past profitability is the most influential of the elements which enter into the current investment decisions of companies.  But apart from investment in new productive capacity, there are many other ways in which companies can use available capital to increase future profitability.  To take only one example, companies may choose to use profits to build-up cash reserves in order to increase their firepower in the highly competitive market for corporate control.  Mergers and acquisitions [M&A] have continued to run at high levels in recent years. Companies are spending large proportions of their profits in buying up their competitors and seeking profits through rationalisation to cut costs and limit competition by an increase in their control of markets.

There are increasing calls in the business press for governments in the high-income economies to strengthen anti-monopoly regulation as one means of combating the general stagnation in new investment. As a recent article in the Financial Times put it, the aim of such regulation would be:

to reorient the prioriies of large companies, to force them to expand the hard way by hiring staff, taking new premises, advertising and buying equipment, rather than buying a competitor and doing the opposite in the name of cost-cutting and greater efficiency… Restricting takeovers might also prompt a resurgence for stock-picking, forcing shareholders to search for the real operators and innovators.  Activist investors would have to do more than just champion M&A deal making.

But the present M&A system is highly profitable for the investment banks which set up and implement takeover deals.  They, and the companies directly active in the takeover market in corporate control, are able to deploy their immense political lobbying power to block such regulation.

So far I have looked only at US data.  The profits-investment disconnect, and the consequent accumulation of corporate reserves, has developed in several other major economies in the post-2000 period. Figure 3 below is drawn from a useful study by Gruber and Kamin of what they call the current corporate saving glut.  They show that three other G7 economies share the US pattern of exceptionally high levels of build-up of cash reserves.  Since 2000 the corporate sectors in Japan, the Canada and the United Kingdom have been net lenders to the rest of the economy on a very large scale.  In most years since 2000 by between 2 and 5 per cent of GDP.  Germany has also switched to being a net lender, though later and to a more modest extent.  Only France and Italy still conform to what historically has been the norm – the corporate sector drawing on net capital supplied by other sectors.

It is sometimes argued by Marxist economists that, apart from a general fall in the rate of profits, other diagnoses of the nature of the current crisis are amenable to reformist solutions.  This is not the case. The crisis of accumulation which confronts the system today is profound and intractable. In summary: a severe structural problem of lagging investment in new capacity, despite adequate profitability and the very low cost of capital, given that basic interest rates are near zero in many countries.

Figure 3.  G-7 Countries: Net Lending of Non-Financial Companies


Sources of Surplus Money Capital

Marx stressed the role of banks in collecting together money lying idle in the economy and converting it into active capital available to be lent out – loanable capital is one term he uses, interest-bearing capital is another.  He notes that this process involves a centralisation of available money capital.

The business of banking consists … in concentrating money capital for loan in large masses in the bank’s hands, so that, instead of the individual lender of money, it is the bankers as representatives of all lenders of money who confront the industrial and commercial capitalists.  The bankers become the general managers of money capital… they concentrate the borrowers vis-à-vis all the lenders. (Capital Vol. 3, Penguin, p. 528)

Marx adds that the cash reserves of industry and commerce are amalgamated with money saved, ‘by workers (by means of savings banks) as well as landlords and other unproductive classes‘ (p. 618).

A global surplus of money capital, relative to the level of demand by borrowers, was one of the main underlying causes of the financial crisis of 2007 and its lingering aftermath.  World  long-term interest rates have been falling over the past two decade, and in the advanced economies are currently even lower than the previous record set 5000 years ago in Babylon.

Such low rates are, in themselves, a strong indicator of a relative surplus of loanable capital. Of course loose monetary policy by central banks has also made a contribution to the fall in interest rates.  But central banks would certainly not have wanted the zero interest rates of the current period.  To stimulate their economies they have been forced to give additional impetus to a trend which was already happening as a result of market forces – a greater supply of money capital relative to the demand for loans.

The post-2000 build-up of excess money capital in the system had three main sources.

1] the corporate sector

After the short downturn of 2000-1, profitability in the corporate sector in the major economies recovered rapidly but investment lagged – and this remains the case in 2016. In identifying situations of excess money capital it is essential to consider not just the rate, but also the mass of profit.  In 2015, the influential Toronto-based research organization, the McKinsey Global Institute [MGI], published convincing evidence that the build-up of cash reserves in the corporate sector was only the latest phase of a trend which started in the 1990s.

In a comprehensive study, MGI analysed the accounts of 28,250 companies which had more than $200 million ( or equivalent) in annual revenue. The study covered private as well as listed public companies in 42 countries and 18 industrial sectors.

In the United States, Western Europe, Japan, and South Korea, the corporate sector’s share of national income had increased by 1.5 to 2 times since 1980. Corporate profits, before tax and interest payments, had risen from 7.9 per cent of world GDP in 1980 to almost 10 per cent  in 2013. Thus an enormous rise in the mass of profits extracted.

The mass of profits after payment of taxes and interest had risen even faster – from 4.4 per cent  of world GDP in 1980 to 7.6 per cent in 2013.

MGI estimates that the real growth rate for the total pool of global corporate profits was an average of 5 per cent a year from 1980 through to the present. It forecasts that this may now begin to slow, though only to a still respectable average real growth of 1 per cent a year.  But for the 1980-2013 period it concludes that, ‘the world’s biggest corporations have been riding a three-decade wave of profit growth, market expansion and declining costs’ (p. 3).

The MGI study also showed that investment lagged increasingly behind this profits surge. After the East Asian crisis of 1997, investment dropped by 10 per cent in South Korea and the South- East Asian economies affected.  In the US and Europe a similar fall took place after the dotcom crisis of 2000.  Profits recovered rapidly from the downturn of 2000. But investment in the productive sector did not revive to the same extent and has remained subdued right through to the present time.

The mass of uninvested cash built-up rapidly.  Much of it was handed out to shareholders in dividends and share buy-backs, and in pay increases to executives.  But despite this, in the major economies, the corporate sector quickly accumulated large reserves of unused money capital.  Here the MGI data is astonishing:

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. (p. 3).

These cash piles have mostly been lodged in banks or invested in the short-term money markets – often after having been passed through a tax haven to evade corporate taxation.

In Marxist commentary there has been a widely accepted belief that the level of the profit rate is virtually the only determinant of the level of investment that needs consideration. But in fact the relationship between profits and investment is quite variable over time. For example James Crotty in an important paper has shown that in the US, in the early 1980s when profit rates were low, the pressures of competition and rationalisation dictated that if companies were to survive and flourish they had to invest heavily.  This was what happened (Crotty calls it coerced investment), and where necessary, companies borrowed the extra capital required.  Thus, a combination of low profits and high investment.

But the reverse is also possible, and this has been the case over the past 15 years.From the 1990s onwards, as investment lagged and profits rose (though with periodic setbacks), the corporate sector in the major economies became a net financial lender to other  sectors of the economy.

2] The foreign currency reserves of governments

In the world economy after 2000 there was a rapid build-up of trade imbalances. The US was the major country which ran a trade deficit. This by 2006 had grown to equal no less than 6 per cent of US GDP.  The surplus countries included Germany, Japan, the oil-producers, and a number of low-wage manufacturing countries led by China.  In the Asian economies especially, resistance to a rising exchange rate became a major policy objective.  China itself had not been devastated by a crash in its exchange rate, as had South Korea and the other economies directly hit by the crisis of 1997.  But the message of 1997 was assimilated by China as well as other countries in Asia: build large stocks of international currency reserves; don’t let a trade surplus cause a rise in the exchange rate of your currency. Thus to stop their currencies rising against the dollar, the central banks of the Asian surplus countries used the surplus dollars earned by their exports to buy financial assets in the US. Treasury bonds were a favorite purchase, but also bonds issued by the quasi-government agencies (such as Fanny Mae and Freddie Mac) supplying mortgages in the vast US housing market.

Chinese international currency reserves which were tiny in 2000, had risen by 2014 to the equivalent of over $4 trillion (compare US GDP in that year – about $15 trillion). The combined reserves of the surplus countries, including China, rose from $2 trillion in 2002 to $12 trillion by 2014.  These large official reserves made a major contribution to the oversupply of money capital in the world’s credit markets.

3] the personal sector

A third channel for money capital accumulation is the personal sector.  Here the picture is complex.  There has been a huge rise in the overall levels of household debt in the world economy. Mortgage debt especially, but also hire purchase, credit card, and student loans. As is often noted, in the high-income economies, led by the US, it is borrowing by households which has been crucial in maintaining the level of consumer demand, given that for more than two decade, average real wages have scarcely increased.  Apart from government borrowing, the rise in household debt has been the major source of demand for loanable capital.

But there have been two ways in which the personal sector has added to the pool of loanable capital, rather than helped in its absorption by increases in borrowing.

(1) In China, although investment levels in the post-2000 period have soared to very high levels, the rate of saving by Chinese households has risen even higher. China is exceptional, but average household savings are relatively high in many other countries in the global South.  The much higher growth rate of the Southern economies in recent years has increased their relative weight in the world economy, and therefore the size of their contribution to the oversupply of loanable capital.

(2) There has been an enormous surge in the level of personal income and wealth secured by those in a position to capture large amounts of the rising surplus-value extracted directly or indirectly from the productive sector. Average levels of dividend payments have continued to rise in the high-income economies.  Extensive share buybacks have allowed shareholders to sell some of their shares at elevated prices.  There has been an enormous, and much discussed, increase in the salaries, and stock options which executives pay themselves.  In this period there has been a continuing acceleration in the numbers and average wealth of the rich. and the trend is as evident in the emerging as in the high-income economies.  According to the latest Credit Suisse Global Wealth Report the number of dollar millionaires worldwide grew from less than 13 million at the turn of the century to over 36 million in 2014. There are now over 1,800 billionaires.

Obviously the rich spend much of this extra money on luxury consumption.  But large quantities of their wealth are kept in liquid form and are saved rather than spent.  Growing amounts are passed over to the financial sector to be lent out or invested. A recent Oxfam Report quotes estimates that at least 8 percent of individual financial wealth is tax laundered through offshore tax havens, that’s a total of $7.6 trillion (compare world GDP in 2015 of just $78 trillion).

Corporate cash piles, plus official reserves of international currencies, plus personal wealth held in liquid money form – these are three of the major channels through which exceptional quantities of loanable capital have been accumulated in the period since around 2000.

A Marxist account of the current crisis has to trace the impact of this tide of money on the financial system, as it struggles to balance the seduction of possible large profits against the dangers and strains posed by ultra-low interest rates and an insufficient supply of creditworthy borrowers and safe financial investments in the global economy.

Falling Interest Rates and the Weakening of Central Bank Control

One of the major developments in the world economy over the past 15 years has been the extraordinary fall in average real interest rates. (after allowing for inflation.) As the graph below shows, the world average fell from 4 per cent in the 1990s, to 2 per cent in the period just before the financial crisis of 2007. There was then a further steep fall to the near zero real rates of the present time – the lowest in recorded history.  Interest rates have generally been lower in the high-income than in the emerging economies, but in both regions real rates have plummeted.

world interest rates dec 15

Part of the explanation is that in most of the major economies, governments have been encouraging their central banks to implement low interest rate policies. For example programs of quantitative easing [QE] have involved the large-scale purchase by central banks of bonds in the financial markets. This is often called printing money, but the term is misleading. It is not that governments have been financing their expenditure by getting the central banks to print money. More accurately, what is increased by QE is not the money supply, but the level of reserves in the banks. As Mian and Sufi explain in their outstanding book House of Debt, p. 154,

an increase in bank reserves leads to an increase in currency in circulation only if banks increase lend in response to the increase in reserves … bank lending plummeted during the Great Recession (2008-10) just as bank reserves skyrocketed.

QE and similar policies are part of the falling interest rate story. But other forces have been at work in lowering rates. These are set in the financial markets by the balance between the demand for money to borrow and the supply of money available to lend. The major central banks intervene powerfully in these markets. Despite the huge deregulation of finance – one of the central objectives of the post-1980 neoliberal agenda – until the early 2000s, the central banks in the big countries seemed still to have the power to determine short-term interest rates in their domestic economies, and also to exercise considerable influence on long-term rates.

But the fundamental reason for the fall in long-term real interest rates since 2000 is a global surplus of money capital. There has been a larger supply of money capital available to be lent out, than the demand for credit by borrowers. During the recent period in which central banks have been trying to lower the interest rate, they have been only adding a further impetus to processes that were happening anyway.

The strongest evidence in support of the surplus money capital thesis is that when, in 2004, the US central bank, the Fed, tried to raise long-term interest rates, it found itself unable to do so.

Alan Greenspan was Fed Chairman from 1987 to 2006. In his memoirs The Age of Turbulence (2007) he recounts his traumatic encounter with the limitations of central bank power in the epoch of deregulated neoliberal finance. After a three year policy of low interest rates to lift the economy from the downturn caused by the crisis of 2000, starting in Feb 2004, the Fed implemented a series of increases in short-term interest rates.

Normally the financial markets would respond in ways which caused long-term interest rates to rise as well. The Fed had decided that a increase in long-term rates, and notably the mortgage rate, was urgently required to cool out fast-rising prices in many sectors of the US housing market. (They sensed trouble ahead … though nothing remotely on the scale of the 2007 crash.) But in June 2004 Greenspan and his colleagues were shaken by the refusal of long-term rates to rise:

We had increased the [short-term] Federal funds rate, and not only had yields on ten-year Treasury bonds failed to rise, they’d actually declined … this was extremely unusual … market pressures seemingly coming out of nowhere drove long-term rates down instead of up … What were these market forces? They were surely global, because the declines in long-term interest rates during that period were at least as pronounced in major foreign financial markets as they were in the United States  (p.378).

Greenspan recognized that there were now forces at play in the world economy which were acting to lower interest rates. However, he was still taken aback by the inability of the world’s most powerful central bank to effect even the smallest rise  in long-term interest rates in the US economy. He continues:

Even though globalisation had reduced long-term interest rates, we had no reason to expect, in the summer of 2004, that Fed tightening would not carry long-term rates up with it… The unprecedented response to the Fed money tightening suggested that in addition to globalisation profoundly important forces had developed whose full significance was only now emerging. I was stumped. I called this historically unprecedented state of affairs a conundrum.

Looking back to this moment of revelation, Greenspan, in his memoirs, meditates on the deeper forces which have been influencing the global supply and demand for credit. He touches on a number of themes which need to be addressed in any Marxist account of the crisis. Because inflation had fallen worldwide since the early 1990s, lenders were willing to accept a lower rate of interest. This fall in price inflation owed much to the fact that more than a billion low-wage workers had joined the world industrial labour force after the integration of China, Russia and other centrally planned economies into the international production and trading system.

So – that’s one factor, says Greenspan. But connected with this, he says, is:

a worldwide increase in the supply of loanable capital, relative to the investment of those savings in productive activity. Excess potential savings flooded global financial markets, driving interest rates lower… during the past five years developing country growth has been twice that of developed countries. Their savings rates, led by China, rose from 24 per cent in 2002 to 32per cent in 2006 as consumption lagged and investment fell far short of the rise in savings (pp. 285-7).

The Fed found that it had no alternative but to go with the flow of market processes – to accept that monetary policy was now more limited in its capacity to control interest rates. Thus we find Greenspan writing that:

this decade’s decline in long-term interest rates, both nominal and real, is mainly a result of geopolitical forces, rather than the normal play of market forces … I very much doubt that either policy actions or central bank anti-inflationary credibility played a leading role in the fall of long-term interest rates in the past one to two decades… I doubt that we had the resources to counter the downward pressures on real long term interest rates which were becoming increasingly global. Certainly Japan did not. (pp.387-391).

In 2016 the major central banks are struggling to counter the global forces that are lowering interest rates, and also causing growth to falter. And they find themselves compelled to try and achieve this …by pushing interest rates even lower! Yet the prevalence of zero (and negative) interest rates in many sectors of world credit markets poses serious dangers for the system. Profitability in the banking sector is badly hit. Cheap borrowing provides the fuel for speculative booms in financial markets. General levels of debt tend to increase because the cost of servicing debt is low. Debt overstretch makes the weaker sectors in the world economy vulnerable to small increases in interest rates, or to whatever undermines their capacity to service debt – hazards such as a fall in the rate of growth, an increase in unemployment, or a decline in profitability.

Surplus Money Capital as a Crisis Mechanism

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Table 1.  Average annual rate of return on US FDI

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

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

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

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

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

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

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

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

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