The roots of the last economic crisis

Controversies presentation given at the common public meeting held together with Internationalist Perspective (Brussels, 26 September 2009)

The subject of this public meeting (Which crisis of capitalism ?) being vast, the only aspect that will be treated here concerns the analysis of the causes of the crisis and the questions that can be posed in connection with its comprehension.

Indeed, this crisis is commonly presented as being a financial crisis, which then would have been transmitted to the real economy. In other words, the origin of the economic recession and unemployment would lie in greed, in the lack of regulation of the financial sector or its parasitism on the real economy. Our sense of the correct analysis is exactly the opposite : it is the contradictions in the real economy that have provoked the financial crisis.

Obviously, such as it unfolded through the succession of events, like the stock market crash, the bank failures, or the subprime crisis, the crisis appears above all as a financial crisis. In the same way, it also appears that the economic recession and unemployment developed after the financial crash. The facts thus seem to give credence to those who say that the current crisis is, above all, a financial crisis. This dimension of the crisis is undeniable. It would be absurd to deny it.

However, in limiting ourselves to this aspect, one cannot explain why the financial sector took on such importance in the economy, or why the financial sector could skid and also suddenly become so greedy. Limiting ourselves to the financial aspect prevents an understanding of the fundamental causes of the crisis. For Marxists, a financial crisis is only one consequence of more fundamental contradictions within the capitalist economy. It must be asked what the fundamental contradictions of the capitalist economy are ? There are essentially two :

1) The first corresponds to the difficulties of capitalism to extract sufficient profits for a given investment. In current language : it is said that investments are less and less profitable. In Marxist language, it is what we call the tendency of the rate of profit to fall.

2) The second contradiction is the one relative to the difficulties of the system to engender a demand that matches the volume of produced goods, therefore, the difficulty of disposing on the market the entirety of production.

These are the two contradictions in the real economy that have regularly generated all the crises of overproduction until now. During a little more than two centuries of existence (1780-2009), capitalism knew a little less than about thirty crises of overproduction. Thus, that makes, on average, a crisis every eight years.

However, to understand how these two contradictions function, as well as their connection with the financial crisis, it is necessary to add two other specifications :

1) In general, these two contradictions appear together and are mutually generated : indeed, not to be able to sell all its goods does not make it possible to recover the totality of its profit, and an insufficiency of profits generates an insufficiency of markets. However, it is necessary to insist on the fact that these two contradictions can also arise separately, or in a way such that one of the two contradictions prevails. This is important to understand the crises of capitalism, because all the crises do not always proceed in the same way, as we will see.

2) The second specification to make is that these two contradictions are of importance, at the same time, in the short and medium term. When one speaks about short term, one speaks about those cycles of intermediate duration of eight plus years ; and when one speaks about medium term, they are periods from 25 to 40 years of growth or less.

After this brief recalling of the framework of the Marxist analysis of crises, we will see now, in concrete reality, how these two fundamental contradictions of capitalism can explain the crisis, and what link there is with the financial crash. The three graphs below can help us there :

Graph n°1 : Stock exchange and profits in the USA (1992-2009)

Profits en % du PIB (échelle de droite) = Profits in % of the GDP (right axis)
Indice S&P500 déflaté par le prix du PIB (base 100 en 2000 – échelle de gauche)
= S&P500 index deflated by the price of the GDP (base 100 in 2000 – left axis)

The curve of the market index (in red) on the first graph shows us the two last speculative bubbles : the first is the Internet bubble at the time of the recession of 2000-01, and the second is the subprime bubble with the current recession. That is the financial shutter of the crisis. On the other hand, much more interesting is the other curve (in blue), which shows the evolution of the real economy, more precisely of the profitability of companies, i.e. the rate of profit. Why is this more interesting? For three reasons at least :

1) The first, is that we can clearly note the close link which exists between the evolution of profits and the evolution of the stock exchange.

2) The second is that this connection is not unspecified : it is the evolution of the rate of profit that determines the evolution of the market indexes. In the business cycle in the short run, it is the reversal to a fall of the rate of profit (thus the short-term insufficiency of profits) that causes the stock exchange to crash.

3) The third reason is that it is also the reversal to a fall of the rate of profit that is at the origin of the cyclical economic crises in 2000-01 and 2008-09.

In other words, in the short run, it is, indeed, the evolution of the rate of profit that is at the origin of the business cycles, of financial crashes, but also of recessions. We thus have here an initial very clear answer in relation to the question with which we began : we are not in the presence of a financial crisis which was transformed into economic recession, but in the presence of a reversal to a fall of the profitability of companies that was transformed into a financial crisis. It is an initial point that appears very important to us to emphasize, and with which to respond to the dominant ideology, and so to reaffirm the Marxist analysis of crises.

However, when we take a step back and look at the medium-term evolution, other important components appear. It is what the second graph tells us, where three phases are very clearly distinguished :

Graph n°2 : Rise of profits and fall of accumulation since 1982 (USA+EU+Japan)

Taux de profit = Profit rate (left scale)
Financiarisation = Financialisation
Taux d’accumulation = Accumulation rate

1) The first phase of the post-war period until the end of the 1960’s, is the boom period where the rate of profit and accumulation went up, and in parallel.

2) The second phase starts at the end of the 1960’s with the reversal to a fall of the rate of profit. It is also seen that this fall of the rate of profit involves the rate of accumulation until 1982. Consequently, it is noted again that it is the dynamics of the rate of profit which puts an end to the prosperity of the post-war period and which inaugurates the long period of crises of the last forty years.

3) The third phase starts in 1982. There, on the other hand, the two evolutions diverge : the rate of profit goes up strongly, but not the rate of accumulation, which continues to decline (NB : the calculation of the rates of profit obviously does not include here the speculative rise of the value of stocks and bonds).

We can then put forth the four following questions regarding these evolutions :

1) Why do profits increase from 1982 after having dropped for a long time ?
2) If profits increase, why doesn’t accumulation re-establish itself, and why does the crisis persist ?
3) Since profits go up drastically, can we still say today that it is the fall of the rate of profit that is the cause of the crisis ?
4) What is the connection between the financial economy and the speculative bubbles ?

1) A response to the first question appears immediately : profits could be restored because wages were compressed. It is what one clearly sees on the 3rd graph : wages represented two thirds of final demand until 1982, whereas 25 years afterwards, they represent only a little more than half. The principal consequence which results from this is a drastic contraction of the solvent markets, a formidable restriction of the capacity to sell the produced goods, because neither is compensated by the consumption of the capitalists (which, in addition, is unproductive by definition), nor by investments and the sales in emerging countries.

Graph n°3 : The fall of the wage-share since 1982 has re-established the rate of profit (UE)

Observée = Observed
Simulée = Simulated

2) We can then easily respond to the 2nd question : why does accumulation not start again and thus why does the crisis endure in spite of the rise of the rate of profit ? Quite simply, and mainly, because of this drastic contraction of the markets : there are, indeed, still investments today, but they are primarily investments of rationalization and merger, not of expansion as during the period of prosperity after the war.

3) To answer the 3rd question is also easy : can one still say that it is the fall of the rate of profit that is the cause of the crisis inasmuch as it increases drastically ? Yes, as one saw on the first graph, the short-term evolutions of the rate of profit are always the motor of the business cycles and the crises. However, since 1982, we have no longer been in the presence of a general tendency to a fall of the rate of profit, but of a medium-term upward trend.

Consequently, and this is important, the essential economic problems since the 1980’s are not related to a lack of profitability of companies, but an insufficiency of solvent markets to which production can flow. In other words, since the 1980’s, capitalism is again profitable, but that has happened through a low level of accumulation and growth, a significant level of unemployment, and an increasing misery for the large majority of workers, since this re-established profitability of companies is made by lowering wages, while laying off, and by intensifying work conditions, and not, as in the post-war period, by an increase of productivity. These increases have not ceased to diminish since the end of the 1960s and they are still weak as we can see it on the fourth graph :

Graph n°4 : Evolution of the productivity of labour

Moyenne des gains de productivité = Mean of the productivity increases
Moyenne du taux de croissance du PIB = Mean of the GDP growth rate
Gain de productivité par emploi = Productivity increases per employment

4) With respect to the 4th question, that relating to the origin of the importance taken by the financial sector in the economy since the 1980’s, the response is also easy to understand. We can read it on the second graph : it is all the space represented between the two curves, this space growing during time represents the mass of the profits not used for investment and which fed finance. In other words, it is the absence of sufficient markets that did not allow the mass of profit to be invested to widen production. Consequently, profits then moved towards finance.

This is very important to understand, because it is generally affirmed in the revolutionary press that the rise of finance since the 1980’s, and the repetitive bursting of the speculative bubbles would be the consequence of the fall of the rate of profit ; i.e. the capitalists would take their money out of circulation as a consequence of the low profitability of productive investments. However, all the graphs here show that this reasoning is false in the medium-term : productive investments are profitable and the profits are ever greater. It is logical : speculation is all the more strong as the profits are high. In the medium term, it is thus completely false to say that capital runs out of money because profits are weak ! It is not this phenomenon (the weakness of the profits) that can explain the rise of the importance of the financial sector in the economy. It is precisely the reverse : it is the superabundance of profits that do not find outlets for expansion investments that feeds finance.

The consequence of all that, and it is the 2nd important point of our presentation, is that the essential aspect of the economic dysfunctions since 1982 is related to the weakness of solvent markets, and no longer to the fall of the rate of profit as in the 1970’s. The best proof is the configuration which led to the last stock market crash : as wage demands were drastically compressed (graphic 3 and 5), growth was obtained only by boosting consumption (graphic 5) by a flight to debt which began in 1982 (graph 6) and a reduction in the rate of saving which also began in 1982 (graph 7).

Graph n°5 : Diminishment of the wage-share, but with a rise of consumption since 1982 (USA)

Consommation en % du PIB = Consumption in % of the GDP
Part salariale = Wage share

Graph n°6 : The rise of debt since 1982

Graph n°7 : Diminishment of savings since 1982 (USA)

And tomorrow ? Tomorrow, this perverse dynamic of the capitalist economy will continue all the more, because nothing has been resolved ; worse, the patches applied to re-establish the machine will worsen the medium-term difficulty, even if it will make it possible to push back the short-term recession. If nothing changes, we run into a stone-wall in a couple of years; that much is assured. And, here it is the workers who will feel it, initially at the level of jobs, by an explosion of unemployment. It is what is already at hand today and which is announced even more massively for the months to come.

C.Mcl, 09/2009, Controversies.