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The Bifurcation of Marxist Economic Analysis
Abstract
Contemporary mainstream economics, in both its Keynesian and New Classicalist perspectives, failed to predict not only the eruption of the recent economic crisis circa 2007-08, but also the historically weak and uneven recovery of the global economy, 2008-12. The article argues the basic reason for the failure is a deficient conceptual apparatus that fails to account for the role of credit, debt, asset prices, the growing weight of speculative investment, and financial variables in general. Leaving this theme for subsequent further development, the article maintains that a similar conceptual deficiency has prevented Marxist economists in recent years from adequately understanding and predicting the continuing global economic crisis. By focusing primarily on Marx's triad of production of value concepts (rate of exploitation, organic composition of capital, and falling rate of profit) as the core conceptual apparatus for explaining the crisis, Marxist economists have been unable to adequately account for the destabilizing role of finance capital in the 21st century. Financial instability is viewed as a second derivative of real economic instability—the latter represented and measured quantitatively by the tendency of the overall rate of profit to fall. The disruptive impact of finance capital on the realization of value, the full circuit of capital, and capital accumulation is largely de-emphasized. In contrast, the article argues that changes in global financial structure, financial institutions, and financial markets in 21st-century global Capitalism have rendered Marx's 19th-century view of money, credit and banking insufficient. Marxist economic analysis thus needs to develop a more complete conceptual apparatus, beyond the production of value conceptual “triad” and addressing more directly the realization of value processes, if it is to more adequately account for the disruptive role of finance capital in the 21st century. Only by so doing can Marxist analysis de-emphasize its excessive and misdirected reliance on the falling rate of profit as the key predictive variable for understanding the current crisis of Capital. Suggestions for a new conceptual apparatus focusing on value realization, the full circuit of Capital, and thus finance capital, are offered.
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This writer's two recently published books, Epic Recession: Prelude to Global Depression (Pluto Press, 2010) and Obama's Economy: Recovery for the Few (Pluto Press, 2012), provide a critique in part of contemporary mainstream economics' failure to predict and accurately describe the trajectory of the current crisis of global capital. Epic Recession predicted in late 2009 that there would be no sustained economic recovery, contrary to that predicted by mainstream economics' two wings. Obama's Economy in particular argued that the fiscal-monetary policy recommendations of both wings would fail to generate a sustained economic recovery because the fiscal multipliers would collapse and the immense monetary stimulus by central banks would be either hoarded by corporations or diverted to speculative investing in financial instruments once again or to emerging markets. Thus neither fiscal stimulus nor money supply injections would produce the predictions of either wing's main theoretical assumptions and models.
For a more accurate understanding of the relationship between depreciation and profits, see Greta Krippner, Capitalizing on Crisis ( Harvard University Press, 2011). Krippner correctly notes that the massive increase in depreciation allowances since 1981 result in a gross understating of profits, especially for the manufacturing sector and its industries with high capital intensive operations.
For a discussion of portfolio profits in general see ibid., pp. 34– 40.
K. Marx, Capital , Vol. 3 ( International Publishers, 1967), p. 609.
Ibid., pp. 391– 392, 393.
A variant on this is corporations' dumping their union negotiated health benefit funds on their unions, such as occurred in the case of General Motors VEBA fund. Instead of paying benefits based on past deferred wage contributions, GM gave the fund to the auto workers' union to reduce the benefits instead of taking the heat by reducing benefits itself. Workers ended up with less health care coverage. Thus the unions, the UAW in this case, served the function similar to the quasi-State agency, the PBGC, for pensions.
This growing interdependency between household debt and income creates a condition this writer has termed “consumption fragility,” one of the three forms of fragility driving aggregate “systemic fragility” today. The other two are financial fragility and public balance sheet fragility. It is interesting to note that while debt has a negative impact on household income, debt is a means by which financial securities investment rates are increased. Thus debt serves to drive a growing income inequality between worker-households and a growing segment of finance capital.
One might argue as well that the shift in taxation policies by the State represents a kind of price manipulation as well. Raising or lowering tax rates (i.e. the price) for the different State tax products—i.e. income tax, capital gains tax, dividend tax, estate tax, excise tax, corporate tax, payroll tax, etc.—may be interpreted as a price manipulation of the various “tax products” offered by the State. The State here would also represent a kind of monopoly involved in price manipulation, the products of which must be purchased by tax payers, worker and capitalist. Capitalists are offered preferential discounts to the price, while workers must be the full required price, and so on.
Note that “fetish capital” is not the same as Marx's notion of “fictitious capital,” although the two ideas overlap.
Marx, Capital , Vol. 3, p. 393.
We are referring here not simply to fetish capital per Marx, in the sense of stocks and bonds, but to various asset back securities, derivatives like MBS, RMBS, CMBS, interest rate and currency swaps, collateralized debt obligations, credit default swaps, and the myriad forms of securitized assets of all kinds which amount to tens of trillions of dollars, at minimum, of highly liquid assets—a total of investible, liquid assets that now far exceed the price value of real physical assets such as capitalist structures, equipment, inventories, software and the like.
This is the fundamental theoretical basis for contemporary “efficient markets theory” of mainstream economics and modern financial analysis, which is largely economic ideology.
The severe cyclical contractions, which differ from “normal” recessions, this writer has called “epic” recessions, which are potentially preludes to bona fide global depressions. See chapters 1-3, on the theory of epic recessions, in Rasmus, Epic Recession: Prelude to Global Depression ( Pluto Books, May 2010). How asset price crashes set off a transmission mechanism causing a deeper, more rapid, and more protracted contraction of the real economy is also explained in this book.
Chapter 7 of Epic Recession provides data illustrating the shift of investment by Capitalists—both individual and institutionals—toward financial securities and assets and the corresponding slowing of investing into physical assets in the case of the US since 2000.
Marx, Capital , Vol. 3, p. 439.
See Rasmus, Epic Recession , and in particular the tables on pp. 218– 219.
It was this last group in particular that in 2011 played a key role in convincing Washington politicians in both parties to exempt non-financial corporations from Dodd-Frank financial regulation of derivatives trading.
It is interesting to note that more than half a century after Marx commented on the growing role of speculative investing with the advent of joint stock companies, among the best of bourgeois economists, John Keynes, very similarly noted the rise of the professional speculator and his role in provoking financial crises. In his somewhat out of place chapter 12 of his General Theory , Keynes discussed how the separation of investor from owner-capitalists to the professional speculator caused greater instability in the traditional investment process. Keynes' analysis lacked, however, any institutional or class basis for his view and he never developed it further, leaving chapter 12 as something of an aberration in the otherwise flow of his analysis in the General Theory .
These figures are from the US Federal Reserve Bank's “Flow of Funds” Reports, which in fact understates the totals for US financial companies' debt. Global financial institution debt issued was likely about 2.5 times that of the US, which is typically about 40 percent of global totals.
See Marx's discussion in chapter 25 of Capital , Vol. 3, where Marx quotes the work of the banker, J. W. Gilbert. Engels followed with his own comments on railroad and textiles speculation in England during the 1837-43 global depression. See also this writer's chapters 4 and 5 in Epic Recession on the speculative investing roots of the financial crashes and subsequent depressions in the US that occurred in 183 7-44, 1872-78, 1892-98, and 1907-14. All these depressions were global and were precipitated by financial crashes that were preceded by runaway financial asset speculation.
Mainstream economists refer to this incorrectly as a “global savings glut.” But it has nothing to do with “savings.” Their insistence on viewing the process in terms of “savings = ‘investment’” reveals once again their ideological limits that prevents them from understanding the significance of this fundamental development.
K. Marx, Theories of Surplus Value , II ( Moscow: Progress Publishers, 1968), p. 293.
A more complete critique of Hilferding's approach for reasons of length of this article is not undertaken at this point.
This hypothesis, by the way, is fundamentally different from the view of disproportionality proposed a century ago by the Russian economist, Tugan-Baranofsky, which Sweezy critiqued in his Theory of Capitalist Development (Monthly Review, 1964 edition), pp. 156– 162.
This is the thesis of this writer's latest book, Obama's Economy .