Tuesday 13 March 2012

The Number of the Beast

Andrew Kliman, The Failure of Capitalist Production: Underlying Causes of the Great Recession, London: Pluto Press, 2012, 240 pages

Andrew Kliman’s book is a valuable addition to the many things written on the crisis, and well worth reading. It is probably the most detailed, and effective, assessment of the economic statistics behind what happened that is available, with his analysis interpreting the data from the perspective of Marx’s theory of value and capital accumulation. He makes very clear what he is arguing and gives full references for anyone who may wish to check his sources. This can make the book a little hard going in places, but this is a text for those who want to explore the real origins of the crisis, not one for those who are satisfied with populist attacks on corrupt politicians or greedy bankers. My principal criticism of his book is that it does not address the question of US imperialism, but first I will note the book’s strengths.

The Failure of Capitalist Production has two main theses. Firstly, it argues that the major post-war crisis of the 1970s did not result in enough destruction of capital values to provide the basis for sustained accumulation thereafter. This meant that profitability showed little, if any, sign of recovery and economic growth remained weak. This, in turn, set the stage for credit-driven, speculative bubbles, not least the biggest and most recent one that has burst with such intractable consequences. Secondly, and following from this analysis, it argues that the common radical arguments about the nature of the crisis are myths. ‘Neoliberal’ economic policies did not cut real wages and did not divert resources into finance and away from production. A close look at the data for the US finds no evidence for these assertions. Instead, the slow growth of incomes and investment is shown to be a consequence of problems with capital accumulation, problems that resulted from inadequate profitability.

In order to substantiate his points, Kliman conducts a thorough review of how to measure the rate of profit on capital investment. He focuses on the US, not only because America is the biggest capitalist power, but also because US data are the most comprehensive. However, he does not claim to come up with the ‘Marxist rate of profit’ for the US, thinking that there is no unambiguous way in which to derive such a thing from official statistics. Instead, he builds a clear case for using a number of profitability measures that reflect the pressures capitalist business is under. He makes a strong point about how commonly used measures of profit rates (using ‘current cost accounting’) give the impression that the US profit rate rose, but that these are not meaningful reflections of the rate of return earned by capitalist businesses.

Kliman notes that almost all measures of profit rates ‘rose sharply in the years immediately preceding the latest crisis’. Yet while a fall in the rate of profit may not have been a proximate cause of the crisis, it was a key indirect cause:

‘The rate of profit was low at the start of the 1980s and it never recovered in a sustained fashion. This led to a marked decline in the rates of capital accumulation and economic growth. Government policies kept this problem from getting out of hand, but also prolonged and exacerbated it.’ (p14)

His case is well made, and is convincing. These are critical points for an attack on the notion that mistaken government policies – or a ‘neoliberal coup’, as some writers suggest - are the root cause of the crisis. Kliman shows that the deterioration in profitability, investment, growth, etc, began in the late 1960s or in the 1970s, prior to the beginnings of the ‘neoliberal’ era that is usually dated from 1979-81 with the Reagan (US) and Thatcher (UK) political regimes.

He also argues that there has been no rise in the share of US national income going to corporations (pp124-128), a measure that he uses as a proxy for the rate of exploitation. The counterpart to this is that the share of workers’ incomes has not fallen, contrary to many reports. Kliman shows that although the wage share did decline, this was offset by a rise in medical, retirement and unemployment benefits, so that the total compensation of workers as a share of national income has not fallen (pp152-160). Real wage growth (including benefits) for US workers has also been positive. While this growth was slow, this was based on the slowdown of accumulation deriving from the low rate of profit (a chart illustrates this relationship on p91).

Weak profits and sluggish accumulation of capital were also the reasons behind the low interest rate regime that the US Fed implemented from the early 2000s. The Fed feared a ‘lost decade’ of growth (pages 38-47) as had already happened in Japan. These developments set the scene for the rise in consumer credit, subprime mortgages, the boom in derivatives trading and so forth. ‘Neoliberalism’ played no part in these events. Alongside this analysis, Kliman gives a critique of ‘under-consumption’ theories of crisis (Chapter 8) that divert attention away from profitability as the cause of the crisis and promote government spending plans as a solution.

In Chapter 7, Kliman demonstrates that a rising ‘organic composition of capital’ was the main driver of the downtrend in profitability. I would agree with this point, except that Kliman’s explanation looks odd. His argument is that the organic composition was very low in 1945, resulting in a high rate of profit. After 1945, the organic composition for new capital investments was much higher, and the rate of profit on new investments was much lower. But he claims that the organic composition did not rise on these new investments after 1945. Instead, in his view, the overall rate of profit fell because, over time, the total stock of capital was made up by a higher proportion of the newer, higher organic composition, lower profit rate investments (pages 134-137). This argument is made in a chapter that is full of technical detail, and is one of the few in his book that I find implausible. Although it is difficult to find a good proxy for the organic composition of capital with official statistics, my reading of reports on business investments would suggest that there has indeed been a rise in the organic composition on new investments in the post-war period.[1]

Kliman’s book is a detailed discussion of the causes behind the current crisis, with the specific aim of focusing on US data and countering some common beliefs about trends in the US economy. To that extent, it is perhaps unfair to ask for a wider perspective. However, I think that his analysis is weakened by the absence of any discussion of imperialism, or even the key features of US imperialism.

His book has nothing on the role of the dollar, nor on the global domination of US finance that acts as a support for US capital.[2] Neither does he take account of the benefits the US has gained from its exploitation of other countries in trade and investment. His argument, made to me in response to my questions on these points, and in this book, is that such benefits would have appeared in the figures for US corporate profitability. His conclusion remains that the US corporate rate of profit fell despite whatever the size of these benefits may have been.

However, while that is a fair point, to ignore America’s status as an imperialist power means that some important countervailing tendencies to declining profitability are set aside. It would have been a stronger point for him to argue that, despite US imperialism’s attempts to appropriate profits from other countries, and despite its success in doing so, this did not avert the crisis.

Kliman dismisses the impact of the earnings on US foreign direct investment by noting that the rate of return on these investments has also fallen over time (pages 78-80). This is true, but it ignores the fact that the rates of return on investment in oppressed countries are several times the rate earned in other imperialist powers! It is also worth recognising that in recent decades a large share of productive investments has been in oppressed, low wage countries, despite the fact that recorded FDI figures show the bulk of total assets and new investments as being in rich countries. Furthermore, in addition to FDI, many low wage countries, not least China, have been brought into imperialist companies’ value chains via trade relationships. This allows the benefits of cheap supplies of goods to be enjoyed by consumers, governments and businesses in the imperialist countries.[3]

It would be tricky to put a value on these imperial benefits, and Kliman understandably focuses on data that he can more readily incorporate into his analysis. However, these points still deserve recognition. I would suspect that an important reason why US working class living standards have risen in recent decades, despite the onslaught of a capitalist class that has had a free hand to attack workers, is due to such benefits.[4]

The absence of imperialism from Kliman’s analysis also leads him to conceive of the crisis as setting the ground for a struggle between capitalists and workers (Chapter 9). In the abstract this is true, but the more important reality is that workers in the imperialist powers usually support their states in any international conflict over economic privileges, and especially in war. Even opposition to the Iraq war in 2003, a war that was widely seen as criminal aggression, basically stopped once the troops had been sent in. Kliman’s book is a valuable attack on mistaken views of the crisis, and on calls for state regulation or spending as the solution. However, it elucidates neither the economics nor the politics of imperialism.


Tony Norfield, 13 March 2012



[1] For a recent example, see the article ‘Foxconn and the Organic Composition of Capital’ on this blog, 2 August 2011.
[2] See ‘Dimensions of Dollar Imperialism’ on this blog, 5 October 2011.
[3] For these points, see John Smith’s analysis in a PhD thesis entitled ‘Imperialism & the Globalisation of Production’. The pdf (1.5MB) can be downloaded here.
[4] See ‘What the “China Price” Really Means’ on this blog (4 June 2011) for data on wage and compensation levels of workers showing a dramatic gap between wages earned by workers in imperialist and in oppressed countries. This article spells out the benefits of cheap imports for the general population in imperialist countries.

9 comments:

Anonymous said...

Thanks Tony, I hope you'll be writing more articles like this. This blog is one of my favourites and is a welcome addition to my increasingly radical list of blogs.
I agree that to include a discussion of "the dollar" and "US Finance" is essential in developing a better understanding of imperialism and also the effect it has on workers privilages (e.g. cheap commodities) and related struggles, or lack of.

Anonymous said...

The claim about the rate of exploitation clashes with U.S. trends from the 1970s to now: more working hours per year and stagnant or falling real wages per hour and even per year with those extra hours.

Workers suffered these trends but got it all back in retirement, health, and unemployment benefits? Private retirement pensions have largely switched from defined benefit to defined contribution; perhaps Kliman goes into the consequences. Meanwhile, government Social Security has been indexed to inflation but not made more generous, and the retirement age was raised. Health coverage has become more insecure, whatever the money figure attached to it in the statistics.

Kliman's claim is remarkable. A comparison between his assertions and those from the Economic Policy Institute, which publishes a statistical review of workers' economic situation every two years or so, would be instructive.

Tony Norfield said...

I too was surprised by Kliman’s argument on US incomes. In the introduction to the book, he notes that until he examined the data (in 2009-2010) he too believed the standard argument that neoliberalism led to a drop in real worker incomes! However, his investigation of the evidence led to a different conclusion. He reviews in detail a number of the sources and the commentaries on the data. In some cases, he notes that economists have used the wrong figures for incomes, or they compare wage data with the wrong deflator. Overall, his figures show that the share of income for workers has not fallen when one takes account of both wages and benefits. Your points on the continued attack on living standards are valid, but Kliman’s argument is based on the data up to 2010 and that was the situation up to that time.

Tony Norfield

Anonymous said...

Haven't seen the book, but Kliman issued a paper, "A Crisis of Capitalism." The Oct. 27, 2010 revised version has a figure 6 that displays three series of compensation as a percentage of GDP:

1) Wages and salaries peaked in 1970 and mostly fell since then.
2) Wages, salaries and other compensation (presumably including employee health and retirement benefits) peaked in 1973 and mostly fell since then.
3) Wages, salaries, other compensation and net social benefits rose dramatically from 1965 to 1982, then bounced around below the 1982 peak until reaching it again in 2010.

All the series understate the worsening situation for workers, because salaries and benefits for the top one, five, and ten percent increased much more than for the great majority of wage and salary recipients.

Kliman's point depends on the third series. Given the declining effective corporate tax rate and anecdotal perception of increasingly sophisticated tax evasion by top income recipients, examination is needed to verify that net social benefits really reflect a net accounting.

Tony Norfield said...

Kliman (page 154) measures wages + salaries + non-wage compensation + net govt social benefits and takes this as a share of national income, not GDP. Except for the NI denominator, that is your third series. National income is the more relevant denominator for this exercise. His chart 8.1 shows the worker total rising sharply from the 1960s into the early 1980s, then it bounces around in a modest downtrend before rising back to the peaks in 2007-09. His point is that this contrasts with the usual charts of a strong downtrend in the share of wages & salaries since the 1970s.

Anonymous said...

Another post that may be of interest to you and other readers
‘The Failure of Capitalist Production’ by Andrew Kliman — Part 1
http://critiqueofcrisistheory.wordpress.com/2012/02/19/the-failure-of-capitalist-production-by-andrew-kliman-part-1/

Andrew Kliman said...

@ Anonymous Mar 17, 2012 07:27 PM
@ Tony Norfield Mar 18, 2012 09:10 AM

Tony is right. And I think it's bad procedure--cherry picking--to use 1982 as a basis for comparison. This was a very atypical year, a year of deep recession in the U.S. And that's *precisely* why the working people's share of national income was so high then.

1980 was another recession year, the year when the Fed started to attack inflation strongly.

Here are the percentages for those and surrounding years:

1978 69.4%
1979 70.0%
1980 72.0%
1981 70.7%
1982 72.0%
1983 71.0%
1984 68.4%

The percentage in 1970, which is year Foster and Magdoff chose as the starting point (the year in which the wage & salary share in the *narrow* sense peaked)was 69.1%. Between 1985 and 2007, the percentage was greater than or equal to 69.1% in 11 of the 23 years.

If you want to use deep recession periods bases for comparison, you should compare them to other deep recession periods:

1980 72.0%
1981 70.7%
1982 72.0%
1983 71.0%

2008 70.8%
2009 73.6%
2010 71.9%

Andrew Kliman said...

Since a comrade has just written to me about the following paragraph of Tony's review, I think I should say something to clarify things:

"In Chapter 7, Kliman demonstrates that a rising ‘organic composition of capital’ was the main driver of the downtrend in profitability. I would agree with this point, except that Kliman’s explanation looks odd. His argument is that the organic composition was very low in 1945, resulting in a high rate of profit. After 1945, the organic composition for new capital investments was much higher, and the rate of profit on new investments was much lower. But he claims that the organic composition did not rise on these new investments after 1945. Instead, in his view, the overall rate of profit fell because, over time, the total stock of capital was made up by a higher proportion of the newer, higher organic composition, lower profit rate investments (pages 134-137). This argument is made in a chapter that is full of technical detail, and is one of the few in his book that I find implausible. Although it is difficult to find a good proxy for the organic composition of capital with official statistics, my reading of reports on business investments would suggest that there has indeed been a rise in the organic composition on new investments in the post-war period."

I do TWO DIFFERENT decompositions of the data. ONE shows that the fall in the nominal rate of profit is almost entirely attributable to a rise in the ratio of the historical cost of fixed assets to compensation of employees. Some people may wish to construe this ratio as a proxy for the *nominal value* composition of capital.

The OTHER decomposition, which I think is much more informative, does not refer to any composition of capital. And I'd prefer not to interpret it terms of any composition of capital.

This latter decomposition shows that almost all of the fall in the nominal rate of profit since 1947 persists even after we hold the profit share (or corporate output) constant and also hold constant my proxy for the monetary expression of labor time (MELT), which measures the relationship between money prices and labor-time values. In other words, those factors have very little to do with the fall over the long haul.

Why did this hypothetical constant-profit-share and constant-MELT rate of profit fall? Because the rate of profit on new investments (also in constant-profit-share and constant-MELT terms) was consistently *less* than the existing overall rate. So the overall rate fell. This is so even though there wasn't much *fall* in the rate of profit on new investments.

Tony seems to interpret the rate of profit on new investments (in constant-profit-share and constant-MELT terms) as the reciprocal of what he calls the "organic composition for new capital investments." Then he questions something about my results--exactly what, I'm not sure--on the grounds that external evidence seems to him to "suggest that there has indeed been a rise in the organic composition on new investments in the post-war period." For the sake of argument, I'll accept that such evidence exists and that this is what it suggests.

But let me ask: is this actually evidence about the reciprocal of the rate of profit on new investments (in constant-profit-share and constant-MELT terms), in the U.S. corporate sector? If it isn't, but is instead evidence about something else that might be called "the organic composition on new investments" (in the U.S. corporate sector?), it doesn't call my findings or computations into question.

In particular, I'm concerned about the possibility that evidence about the technical composition of capital (and thus the organic composition in the strict sense) is being construed as evidence about the value composition that more directly affects movements in the rate of profit.

Andrew Kliman said...

In the 5th para., I meant OF corporate output.