Part 5

Part 5: Marxism and the Great Recession

Once Marx has explained how the movement in the rate of profit is the mainspring of economic crisis (Chapter 3.7), he can introduce the ancillary factors that play their role in preparing for the individuality and complexity of any particular capitalist crisis. These are discussed in Chapter 3.8. In Part 4 we have dealt with the monetary side to the crisis.

We have presented the theory. How does it stand up to the test of analysing the Great Recession?



Chapter 5.1: Rate of profit and crisis

Determinants of Investment Demand

It is widely recognised by economists and economic historians that investment is the most volatile component of national income. A collapse in investment is therefore a characteristic feature of capitalist crisis. There are two neoclassical explanations as to why investment demand should be volatile.

The first is the accelerator theory of investment, which states that the actual level of investment is related to changes in consumption. Relatively small rises in consumption can require a complete step-up in the level of investment. Likewise a small fall in consumption can cause an accelerated scrapping of investment plans. This is all very well so far as it goes, but it is a purely mechanical principle that offers no clue as to why recessions take place when they do.

The second, neoclassical explanation of investment demand is that it is said to be sensitive to changes in interest rates. If the rate of interest is higher, then capitalists are supposed to be less willing to invest since they are not sure that they will recoup their investment. (It is assumed they borrow to invest.) The level of investment in the economy will be lower as a result. We have seen earlier that there is no clear connection between interest rates and the level of investment in the economy.

If we never the less take the neoclassical theory of investment as our starting point, we may find the beginnings of an explanation for the collapse of investment in a slump. The capitalists are supposed, according to the theory, to base their investment decision on the cost of borrowing as against the potential benefits from the investment. But what are the benefits if not profits?  And what is interest but a share of the surplus value?  So, even if we accept the neoclassical theory, the investment decision is based on a comparison of the rate of profit to be gained from the investment as against the price in interest to be paid. In fact the rate of profit is the decisive determinant of investment demand.

The neoclassical theory states that the capitalist borrows at the prevailing rate of interest in order to invest. This is not what happens, at least in Britain and the USA. Most investment is from retained profits. And, of course, all investment comes in the end from profits. Without higher profits, higher investment cannot happen. If profits are not gained, they cannot be invested. So profit is the decisive indicator to capitalists as to whether to invest or not, not the rate of interest.

  • Investment is the most volatile      element of national income, soaring in a boom and collapsing in a      recession.
  • The level of investment is      determined by the rate of profit.

The role of the rate of profit

There is of course no mechanical, one to one, relationship between the rate of profit and the accumulation of capital. But the rate of profit is a forward indicator of the flow of investment. Capitalists will be stimulated by a rise in profits to invest more, investment which can only take place over time. We also assume that, until rising profits are realised, they cannot actually be reinvested. Likewise a fall in profits means that the capitalists will have less to invest in the next round of production. The drop in profits is also a warning signal to capitalists that their investment outlay is in danger and may be lost. So they start to cut back rather than reinvest. Andrew Kliman in A crisis of capitalism finds a strong link between the rate of profit this year and investment next year:

“Variations in the rate of profit account for 82% of the variations in the rate of accumulation of the next year.


In a footnote he adds:


 “This means that, if there were no actual relationship between the rates of profit and accumulation, there would be less than one chance in 400 trillion that the observed relationship between them would be as strong as the one

we see here.”

Faced with these odds, we have to ask critics of the Marxist theory of the relation between profit and accumulation, in the words of Clint Eastwood playing Dirty Harry, “Do you feel lucky, punk?”

As explained in Chapter 3.7 there is a dialectical relationship between the rate and mass of profit.

When new markets open up, capitalists will scramble at the opportunity to make a greater mass of profits even if the rate of profit remains the same. In many cases opening up new markets will enable the capitalists to make a higher rate as well as a greater mass of profit. This is what happened in the case of the conquest of global markets by cotton goods produced by British power looms, as explained by Marx in Capital.

But if the rate of profit continues to fall throughout the economy then, despite the rise in the scale and size of capital, the mass of profit must follow suit, as Marx also explained.  As we pointed out earlier, the crash does not usually have to wait for an actual fall in the mass of profit. As the economy enters the danger zone of critically low profits, any number of other factors can push the system over the edge.

So far we have presented capitalist firms as if they are a uniform pack, all sharing the same rate of profit and all accumulating at the same rate. Of course this is not the case. Any capitalist industry has leading firms, with higher profits and growth rates, and laggards. The outbreak of crisis will have the effect of driving the marginal firms to the wall.

Here is Marx describing a process that we have seen in action over recent years. After dealing with the concentration of capital that takes place in a boom, and the fact that not everyone can keep up, he continues:

“This growing concentration leads in turn, at a certain level, to a new fall in the rate of profit. The mass of small fragmented capitals are thereby forced onto adventurous paths: speculation, credit swindles, share swindles, crises. The plethora is always basically reducible to a plethora of that capital for which the fall in the profit rate is not outweighed by its mass – and this is always the case with fresh offshoots of capital that are newly formed.” (Capital Volume III, p.359)

  • The rate of profit is a      forward indicator of the flow of investment
  • As long as the rate of      profit remains the same, opening of new markets will increase the mass of      profits and raise the level of accumulation.
  • Eventually the rate of      profit will fall, endangering the mass of profits for marginal capitals.

What has happened to the rate of profit?

We would like to present profit figures for the world economy. After all capitalism is a global system. But no such statistics exist. We might assume that, since the search for higher profit is the very force that causes a tendency for profit rates to equalise, a global rate of profit should exist or be in the process of formation. We know that money capital is restless and mobile all over the world, ready to chase that extra buck at the drop of a hat. But capitalism is not completely footloose and fancy free. Multinationals dominate the world economy, but most remain nationally rooted. So a global rate of profit is as yet by no means an accomplished fact. National rates of profit differ from one another, no doubt about it.

According to the US Bureau of Economic Analysis (BEA) National Income and Product Accounts, the rate and even the amount of profit in the USA turned down decisively by the end of 2006. This is a year before we experienced the first shock waves of the Great Recession. The BEA website gives numerous different measures of the rate of profit, but they all point the same way and turn down at the same time. The figures are given in Bottoming out in Part 1: What happened in the Great Recession.

We use the BEA figures for the USA at this point for three reasons. First the USA remains the dominant capitalist power in the world economy. Fashionable talk about countries such as China completely ‘decoupling’ from global developments that began in the USA was definitively disproved by the downturn. No country can entirely resist the gravitational pull of the crisis emanating from the States and its effect on the world economy. Talk of a challenge to US economic hegemony remains premature and is still some way from becoming a reality. Secondly the Great Recession began in the USA. Thirdly US economic statistics are the best in the world.

The BEA figures are of course not assessed in a Marxist manner. The rate of profit calculated by the BEA is calculated as a percentage of GDP. Marxists understand that capitalists are concerned with what they get back (profit) compared with what they put in (capital), so the rate of profit should be measured against the capital invested. We shall discuss later what the correct Marxist measure of the rate of profit should be. But most Marxist attempts to measure the rate of profit show exactly the same trends over time as the BEA’s analysis and the same turning points. (The actual rate of profit shown will be different, of course.)

Once a crash has occurred as a result of a collapse in the rate and mass of profit, the economy will not recover immediately even if profit rates start to rise. The BEA records profits as recovering since the beginning of 2009. By the summer of 2011 the rate of profit had recovered substantially in some sectors, but the economic recovery remained weak and limited. The dead weight of masses of surplus capital produced in the previous phase of overaccumulation will have to be destroyed and the excess capacity done away with before a healthy upswing can begin. US industry at this time was still only working at 75% of capacity. Large chunks of capitalist industry were still flat on their backs. The revival of profits in decisive sectors of industry had not yet reached the critical mass needed to power a new boom.

  • All the evidence shows that      the rate of profit turned down decisively in 2006, before the onset of      crisis.
  • Profits have revived since      2009, but masses of capital are still being destroyed.
  • Profits have not reached the      critical mass for a healthy boom.

Chapter 5.2: Debating the rate of profit

We will try to test Marxist theory against ‘the facts’. The facts in this case are the record of economic statistics. Economic statistics are drawn up, for the most part, by honest people. With few exceptions, none are Marxists. They don’t think in Marxist categories.

For instance we saw earlier how Marx divided the value of a commodity into constant capital, variable capital and surplus value. Variable capital is outlay on wages, constant capital on all the other costs and surplus value is rent, interest and profit. These categories are needed to work out the rate of profit in Marxist terms.

This division does not concern the capitalist, or the economic statistician. The individual capitalist is more concerned as to whether he recovers his capital at the end of the production period (which is true both of wages and raw materials costs – together called circulating capital) or whether it is tied up as fixed capital (which means it can take years to get his money back). These are the concepts captured in economic statistics. Marx’s categories just disappear from the statistical record. They can be quite difficult to recover.

Profit rate and profit share

The profit share can be measured as a proportion of national income.  National income is a flow of revenues usually measured over a year. For our purposes Net National Product can be regarded as the same as National Income (though there are differences which do not concern us here).  Deduct the share of wages and other factor income flows from national income as a whole and the profit share is what is left. It can be presented as P/Y, when profit is P and national income is Y.

The rate of profit is more difficult to work out than the share. It is shown as P/K where K is the capital stock. (This is the standard notation used in National Income calculations. Marx usually uses C as a symbol for constant capital.) It is necessary to make sure the source of the stock figures for K are compatible with the flow figures for Y, and that they are compiled in the same way.

For Marx the rate of profit is calculated against the entire capital stock, whether used up over a year or not. One way to work out the rate of profit is to multiply the profit share by the output/capital ratio (Y/K). P/Y x Y/K gives you P/K (dividing both denominator and numerator by Y).

  • It is important to distinguish the rate of      profit from the share of profit in national income.

The importance of profits

The late Andrew Glyn and his fellow authors first made their names by analysing the emerging crisis of capitalism in the 1970s in terms of a profits squeeze. To identify this profits squeeze they looked at the rate of profit, but also at the share of profit in the national income. More recently Robert Brenner, though disagreeing with the profits squeeze theorists, has also made the rate of profit central to his analysis of the problems of modern capitalism.

Glyn’s detailed findings are discussed in Chapter 2.2: The rate of profit after the Second World War, as are Robert Brenner’s conclusions. Briefly both the profits squeeze theorists and Brenner see movements in the rate of profit as a crucial determinant of the accumulation of capital and of the movement of the system from boom to slump. This is common ground. Where they disagree is on what causes these movements in the rate of profit.

The rate of profit has been the heartbeat of capitalism throughout the whole period we are investigating. Generally speaking, periods when the rate of profit has been high have been periods when investment has been high (a rapid rate of capital accumulation), and periods of relatively high employment. All these generalisations refer to the advanced capitalist countries. These are the only countries with consistent and accurate statistics for the whole period. But these, after all, are the heartlands of capitalism that contribute so much to the rhythms of global capital accumulation.

Let us look first at the arguments in Capitalism since 1945 (Armstrong, Glyn and Harrison). This in turn is based on earlier, pioneering works such as British capitalism, workers and the profits squeeze (Glyn and Sutcliffe). This team of authors were important in identifying and analysing the centrality of the profit rate in the evolution of global capitalism since the Second World War. Armstrong et al. also deal with the profit share (which is easier to measure than the rate of profit).

There is a difference between the profit rate and the profit share, but one important and obvious reason the profit share might increase or decrease is because the rate of profit has gone up or down – so there is also a connection. Glyn and Armstrong’s central thesis was that the profit share was squeezed by militant workers, and that this was the basic cause of the economic breakdown of the ‘golden years’ after World War II.

We now move on to Robert Brenner’s work. Brenner affirms the importance of the rate of profit to the dynamics of capitalism but he disagrees with the profits squeeze analysis. He also dismisses Marx’s explanation of the tendential fall in the profit rate in a single footnote on pages 11 and 12 of his 1998 contribution.

 Briefly, Brenner argues that, “The fall in aggregate profitability that was responsible for the long downturn was the result of not so much an autonomous vertical squeeze by labour on capital as of the overcapacity and overproduction which resulted from intensified, horizontal inter-capitalist competition.” (The economics of global turbulence 1998, p.8)

This explanation is inadequate. It is utterly feeble to conceive of competition between capitalists as the root cause of crisis. Marx explained, “That competition which results from the overproduction of capital would not cause a fall in the rate of profit.” (This is Brenner’s argument.) “Rather the reverse. Since the reduced rate of profit and the overproduction of capital spring from the same situation, a competitive struggle would now be unleashed.” (Capital Volume III p.361)

Marx does not dismiss competition between capitalists as a factor in the unfolding of the crisis. Rather he locates the intensification of competition in the objective situation facing the capitalist system.

Brenner wrote an article entitled The economics of global turbulence, which took up the whole issue of New Left Review issue 229, May/June 1998. He effectively updated his analysis in a book The boom and the bubble, published in 2002. A second edition of The economics of global turbulence appeared in 2006. Brenner’s writings are undoubtedly the most authoritative on the world economy within the Marxist tradition published over the last ten years or so, as Armstrong, Glyn and Harrison’s were for the earlier period. The statistical analysis of both sets of writing is unassailable in their honesty and rigour, though there are problems of interpretation which we discuss later.

  • The profits squeeze theorists’ identification of the importance of the falling rate of profit since the Second World War is an important contribution to our understanding of post-War capitalism.
  • Robert Brenner has also insisted on the centrality of the declining profit rate as an explanation for the ‘long downturn’ since the end of the post-War boom

The profits squeeze theorists and Brenner’s critique

Glyn et al. suggested that the profit share was falling because of the rising share of national income that went to wages. Class struggle explained the crisis! After all, the 1970s was a decade of sharply fought class struggle. For a time their explanation seemed to fit the facts, but some Marxists remained unconvinced.

Here is Brenner’s criticism of the profits squeeze thesis:

First ‘the universality of the long downturn’. “…none of the advanced capitalist economies was able to escape the long downturn. Neither the weakest economies with the strongest labour movements, like Great Britain, nor the strongest economies with the weakest labour movements, like Japan, remained immune.” (Brenner 1998, p.22)

Second ‘the simultaneity of the onset and various phases’. “The advanced capitalist economies experienced the onset of the long downturn at the same moment – between 1965 and 1973. These economies have, moreover, experienced the successive stages of the long downturn more or less in lock step, sustaining simultaneous recessions in 1970-1, 197-75, 1979-82 and from 1990-1.” (ibid p.22) How is it possible, asks Brenner, for the different course of the class struggle in different countries to produce these global trends?

Last, ‘the length of the downturn’. “Finally, the fact that the downturn has gone on for so very long would seem to be fatal for the supply-side approach.”…”it is almost impossible to believe that the assertion of workers’ power has been both so effective and so unyielding as to have caused the downturn to continue over a period of close to a quarter century.” (ibid p.22)

These are trenchant arguments. They are arguments in the spirit of Marx himself. Marx said, “To put it mathematically: the rate of accumulation is the independent, not the dependent variable; the rate of wages is the dependent, not the independent variable.” (Capital Volume I p. 770)

Marx realised that workers were in a stronger bargaining position with relatively full employment and could push wages up. They were under the cosh in a recession, with hundreds prepared to take their job for less pay if the alternative was unemployment. But the ups and downs of wages mirror the ups and downs of capitalism, they do not cause them.

  • The profits squeeze theorists mistakenly argued that profits were falling because of a rising share of national income going to wages.
  • Brenner supports their identification of the importance of the profit rate in the accumulation of capital but disagrees with the profits squeeze theory.

Chapter 5.3: Testing the Marxist theory of crisis

The shares of wages and profits

We disagree with Robert Brenner’s explanation for the fall in profits (see Brooks-Rate of profit and capitalist crisis). But it is his great merit that he has asked the right questions and put the problem of the rate of profit in the development of capitalism centre stage. He differentiates himself from the profits squeeze theorists and the underconsumptionist school. They both base their analysis on the share of national income going to profits.

Brenner argues in his book against the ‘profit-squeeze’ theorists who argued in the 1960s and 1970s that the share of profits was falling because it was being squeezed by the share of wages taken by a militant working class. Nobody thinks this is the cause of the present crisis. The ‘profits squeeze’ argument is the opposite of that of the underconsumptionist school (discussed later in What sort of capitalist crisis?) that wages are too low for capitalism to grow steadily. So for some theorists the workers are taking too much, leading to crisis, and for others the workers are taking too little with the same result. As we know, the response of the ruling class to the ‘restricted consumption’ of the masses in a crisis is that it is not restricted enough and it needs more restricting!

Both the underconsumptionists and the profits squeeze theorists concentrate on the share of wages and therefore of profits in national income. These are determined in part by the class struggle. Actually workers understand that they are in a more favourable bargaining position when there is relatively full employment and a boom. That is when it is easiest to fight for improved living standards and a higher share of output for the workers. In a slump struggles are more likely to be defensive.

In other words the boom-slump cycle is an important determinant of class struggle and therefore of the shares going to wages and profits. And the boom-slump cycle is determined by movements in the rate of profit. That is why Brenner makes the rate of profit, not the share of profits, central to his analysis.

The rate of profit evolves independently of the course of class struggle and partly determines its outcome. We see later that the share of wages, and therefore of profits, has been relatively stable as components of national income. In fact movements in the organic composition of capital have been the fundamental determinant of movements in the rate of profit. Brenner shows in detail, when he chronicles the course of the 1965 and 1973 recessions, that the steady fall in the rate of profit, irrespective of the share of national income going to labour and capital, caused the downturn that preceded the crisis by several years:

“Between 1965 and 1973, US manufacturers sustained a decline in the rate of return on their capital stock of over 40 per cent…the G-7 economies sustained a fall in their aggregate manufacturing profitability of about twenty-five per cent in those same years. Well before the oil crisis, then, the advanced economies as a whole were facing a significant problem of profitability.” (The Economics of Global Turbulence, p.99)

Brenner also argues against the view that ‘accidental’ factors such as the oil crisis precipitate a general crisis of capitalism. According to the logic of this argument capitalism has been afflicted by misfortunes and accidents on a regular basis for almost two hundred years. The periodicity of crisis, with or without the role of accidental factors, is something that needs to be explained, and movements in the rate of profit provide the key.

And, just to underline the point, Brenner emphasises, “The fact that the profitability crisis predates 1973 is significant, because it implies that the fall in profitability, coming as it did before the onset of the oil crisis, could not have been caused by it.” (ibid p.101)

  • Movements      in the rate of profit show the periodicity of capitalist crisis.
  • The rate of      profit is a more important explanatory variable of boom and slump than the      share of wages and profits.

Measuring the Marxist rate of profit

It should be understood from the outset that this section is by no means a definitive survey of this issue. It is intended to arm the general reader with an understanding of the problems and debates around the matter. The question is: how should the rate of profit be calculated? In particular should the costs against which profits are measured to derive the rate of profit be calculated at historic cost or current replacement cost?

Michel Husson asserts that the rate of profit has made a complete recovery from its nadir in 1982 and is now back to the levels of the post-War boom. Husson has the verbal support of Gerard Dumenil at a Research on Money and Finance Conference. Dumenil stated that the rate of profit remains high and is not the cause of the present crisis. Most other Marxist economists, including Andrew Kliman, record a sharp fall of the profit rate in 2006 immediately before the onset of crisis. Even Husson finds that, in the USA, “the rate of profit falls from 2007 onwards, and this before the crisis moreover” (Husson-The debate on the rate of profit).


How should we calculate the rate of profit? How should we calculate the cost of capital? Historic cost means calculating the costs of capital at the price originally paid for it. This is the normal procedure that has been taught to accountants for generations – costing assets at book value. After all, what matters to the capitalist is their return compared with how much they paid in the first place.

Andrew Kliman has tried to work out the rate of profit using a historic cost measure of the organic composition of capital (for instance in Kliman-The persistent fall in profitability underlying the current crisis: new temporalist evidence). Michel Husson uses current costs as the basis of his calculations (See Les coûts historiques d’Andrew Kliman).

Current cost means measuring capital at what it would cost to replace it at the moment of making the calculation. This incorporates a measure of depreciation. They come to very different conclusions. It seems that the assumptions you make to work out the rate of profit have an important impact on your findings..

Unfortunately organisations like the Bureau of Economic Analysis (BEA) mix up two things when they discuss depreciation. First there is wear and tear on capital equipment, physical depreciation. Then there is the fall in the socially necessary labour time required to produce capital goods because of rising productivity in the industries producing capital equipment. This cheapening of the elements of constant capital is one of the main counter-tendencies offsetting the tendency of the rate of profit to fall. Marx calls this process moral depreciation or devaluation, and it is obviously important to assess this correctly in working out the Marxist rate of profit.

Adopting an inaccurate measure of costs is likely to produce a difference in the magnitude and rate of profit declared during a bubble, such as the enormous one we experienced in the past boom. In such a case the whole system will be afflicted with fictitious asset prices and fictitious profits. That is surely what we saw when the assets of the banks and their profits melted away in the course of the Great Recession. Historic cost calculation should strip out the illusory effects of the bubble on the rate of profit. That is why we stress that this is in principle the right procedure to adopt. In practice though there are difficulties in measurement whichever method we adopt.

In fact Michael Roberts explains that, despite the technical difficulties, the same trend in profits is observable whatever method of cost calculation is used. So Husson is just plain wrong to argue that profits have undergone a complete recovery in the period since 1982. We marshal the evidence against his case in the next section. Roberts painstakingly and transparently presents the methods that lead to his conclusions. He sums up: “Fortunately, whether you use net or gross measures, it does not really change the trends and turning-points shown in graphic.” (The Great Recession 2009, p.35) Here net measures of costs means ‘after deducting depreciation’.

The obvious question to ask Husson is: if the rate of profit has been fully restored, why hasn’t the rate of accumulation also recovered to post-War boom levels? Why has the world economy only grown half as fast since the 1970s as it did before? Why has the basic driving wheel of capitalism ceased to work? As we saw in the section on Financialisation, Husson presents an ingenious but unconvincing explanation.

Other economists such as Fred Moseley, who also uses current replacement cost calculation, have not produced the same extraordinary results as Michel Husson. They do not accept that profit rates have been restored to those of the immediate post-War period. Apart from Andrew Kliman and Fred Moseley, Robert Brenner, Graham Turner, Alan Freeman, Michael Roberts and many others have charted movements in the rate of profit that are similar to the one we have outlined (see The Rate of Profit in the New Millennium below).

The Bureau of Economic Analysis figures on the trajectory of the profit rate in the USA also show a similar picture on their website to the movements we have portrayed. Their calculations, of course, assess the profit rate as a percentage of GDP, rather than against the capital stock invested. This is not a Marxist method, but it yields similar results to those like Roberts and Kliman who try to apply Marxist categories to economic statistics in analysing economic trends. There is a thicket of problems in doing this, and we do not intend to divert the reader away from the big picture.

Most results confirm the principle that the movement in profit rates is the main regulator of the accumulation of capital; and that the dramatic fall in profits is the harbinger and root cause of the capitalist crisis.

  • In      principle historic costs should be used to calculate the rate of profit.      There are all sorts of technical problems in working out the Marxist      profit rate.
  • In      practice, whichever method is used to assess costs, the vast majority of      researchers find that the rate of profit is generally much lower than      during the post-War boom.

The Rate of Profit in the New Millennium

Overproduction in a crisis is a fact. That fact can only be explained by reference to movements in the rate of profit. What really happened to the rate of profit in the twenty-first century?

Robert Brenner and authors attempting to use Marxist analysis (such as Andrew Kliman and Michael Roberts) have all come to similar conclusions. There was a collapse in profits associated with the 2001 recession. The rate of profit recovered in the subsequent boom until it collapsed in 2006. Never again did profits reach the recent high point of 1997.

Not a single authority can be found to suggest that profits fell on account of the crisis and after its onset.


  • Brenner himself in his ‘Afterword’ to the second edition of The Economics of Global Turbulence emphasises that 1997 was the peak year for profits in the era since the golden age of capitalism that ended in the recession of 1973-4.


  • Kliman (The persistent fall in profitability      underlying the current crisis: new temporalist evidence, pp. 23-4)    explains, “Finally there was a sharp      rise in profitability in the middle years of this decade. As we now know,      however, it was driven by an asset bubble and was not a sustained      recovery. Revised and updated BEA data indicate that the rate of profit      fell from a peak of 25% in 2006 to 17.9% in 2008.”
  • Kliman and      Roberts both emphasise that the staggering fall in the rate of profit preceded the onset of recession in      2007. Roberts backs up Kliman’s point. “The rate of profit rose from 2001      to 2005.  So does that mean the      Great Recession was not caused by declining profitability?  The answer is that by 2005, the value      rate of profit began to fall again.” (The      Great Recession 2009, p.264.)


  • Brenner also points out that boom turned into bust in the third quarter of 2006 as profit rates went on the turn. (What is good for Goldman Sachs is good for America, May 2009. Prologue to the Spanish edition of the Economics of Global Turbulence, p.71.):


“It is crucial to emphasise that the descent into recession was already well in progress before the outbreak of the financial crisis in July-August 2007. Nonfinancial profits peaked with housing prices in the middle of 2006 and then declined 10 per cent by the third quarter of 2007.”


  • We get the same view from George Economakis, Alexis Anastasiadis and Maria Markaki in An empirical investigation on the US economic performance from 1929 to 2008: They see US profits peaking in 2006 and conclude, “The recent financial crisis is a possible result of a ‘plethora’ of the profit seeking capitals in the financial sector” (in other words overaccumulation).


  • Fred Moseley too asserts that, “Mid 2006 was the peak of this current profit cycle.” (The long trend of profit p.1)


  • Michael Roberts (The Great Recession) records the rate of profit turning down decisively in 2005 rather than 2006, but that is a detail.


  • And Graham Turner (who we think does not regard himself as a Marxist) chips in, “Data published by the Bureau of Economic Analysis strongly supports the argument by those who claim the economic crisis of 2008 was attributable to a declining profit rate” – though his own position is more nuanced. (No way to run an economy, pp.130-1).


  • The official US BEA does indeed indicate on their website that the US rate of profit peaked in the third quarter of 2006 at 17.8% of GDP. By the second quarter of 2007 it was 15.9% and by the first quarter of 2009 it bottomed at 11.1%.


It is true that all these authors use different methods to calculate movements in the rate of profit. But they all show the same trend and the same turning point. It is also true that we are dealing with complex chains of causation in the economy.  The falling rate of profit cannot be seen as an immediate, but as an underlying cause of the Great Recession. All the same the evidence suggests quite strongly that the recession was caused at bottom by the fall in the rate of profit.

  • Most      economists agree that the rate of profit turned down decisively before the      crisis. This can therefore be seen as the underlying cause of the crisis.

It’s the organic composition of capital, stupid

The question of questions is, of course, why has the rate of profit fallen? We recorded in What happened in the Great Recession that there was a massive counter-offensive against the working class after the post-War rate of profit bottomed in 1982. This raised the rate of exploitation and thereby the rate of profit. We reported the findings of Michael Roberts that, as a result in the UK, “The lowest rate of surplus value was 55% in 1975. The rate of exploitation peaked in 1997 at 93%.”

Though this is quite a turnaround, and we believe the same drive to raise the rate of exploitation can be seen in other countries, this cannot be a solution to the ruling class for the inexorable tendency of the rate of profit to fall.

Marx was quite clear that, if the mass of machinery behind the elbow of each worker, the technical composition of capital, continued to rise then the organic composition, the value of constant capital compared with the outlay on variable capital, was bound to follow suit. The fall in the price of units of the elements of constant capital could not therefore indefinitely offset the tendential fall in the profit rate

“If one worker is in charge of 1,800 spindles instead of driving a spinning wheel, it would be quite ridiculous to ask why these 1,800 spindles are not as cheap as the single spinning wheel…Each individual machine confronting the worker is itself a colossal assembly of instruments which he formerly used singly, e.g. 1,800 spindles instead of one. But in addition the machine contains elements which the old instrument did not have. Despite the cheapening of individual elements, the price of the whole aggregate increase enormously and the {increase in] productivity consists in the continuous expansion of the machinery.” (Theories of Surplus Value Volume III pp.365-6)

As we had occasion to point out in Chapter 3.7, so long as the organic composition of capital continues to rise then the rate of profit must fall. Alan Freeman has confirmed this in What makes the US profit rate fall?

As we know for Marx the rate of profit is calculated by profit divided by costs. This is S/(C + V), where S is surplus value, V is variable capital and C is constant capital. The two main factors that may cause the rate of profit to change are changes in the rate of surplus value (S/V) and changes in the organic composition of capital (C/V)

Here are the notations and formulae we shall use:

  • P is profit
  • K is      capital
  • Y is output

The output-capital ratio (Y/K) is a proxy for the rate of profit. Freeman declares that the output-capital ratio corresponds to the maximum rate of profit when wages = 0 (workers are living on air), so all output goes to profit.

The other determinant of the rate of profit is the share of profits in output (P/Y). The wages share is inversely related to that of profits if the income in society is just divided into those two classes of revenue. So the profits share is a proxy for the rate of exploitation.

The rate of profit can be derived from the profit share and the output-capital ratio:

  • Rate of      profit is profit share times output-capital ratio
  • P/K = P/Y x      Y/K
  • If wages =      0, P/K = Y/K

Freeman shows that the share of national income going to profit is unimportant in practice. He begins by pointing out that, “The evidence overwhelmingly shows the output-capital ratio is a dominant cause of postwar movements in the US profit rate.” (p.2)

This is because:

“The long term rise in the organic composition of capital – to which the output capital ratio bears a simple and direct relation – is the most significant cause of the long term fall in the profit rate. The empirically dominant cause of all long term movements in the US profit rate between 1929 and 2000…is the ratio between output and capital stock.” (ibid p.9)

He goes on to prove it:

“The output-capital ratio…on its own accounts for 91.9 per cent in the variation in the profit rate between 1929 and 1965, and 75.7 per cent of the variation in the profit rate between 1929 and 1996. With the sole exception of the five years of decline from 1965 to 1970, it accounts for almost the whole variation in the profit rate since 1929.” (ibid p.8)

The output-capital ratio rises with a rising rate of profit and falls when profits fall. It shadows the rate of profit closely. As Freeman says, “The cause of the decline in the profit rate is technical progress,” depreciating the value of commodities through rising productivity (ibid p.14).

Why should the output-capital ratio fall?

“Empirically, capital stock is rarely less than eight times bigger than output. But it follows that even a one per cent reduction in the value of investments will result in an eight per cent loss of output.” (ibid p.15)

If the share of profits is unimportant and the output-capital ratio is the main determinant of the profit rate, then that is equivalent to saying that the rising organic composition of capital is decisive in determining variations in the rate of profit.

This is a striking confirmation of Marx’s analysis.

  • The reason for the fall in the rate of profit is overwhelmingly on account of the increasing organic composition of capital

Chapter 5.4: What sort of capitalist crisis?

Overproduction: a fact to be explained

The reason that overproduction seems to be a sufficient explanation for the crisis is because many capitalists experience its onset as a drying up of markets, as a realisation problem. They can’t sell their goods.

Marx explained that the equalisation of the rate of profit under capitalism is only ever a tendency, an approximation. Under capitalist competition there are leading firms within an industry making higher profits and laggards who are struggling. As the rate of profit declines generally throughout the system, the weakest firms face a collapse in their own profits. They stumble and fall. Other factors, such as movements in interest rates or raw materials prices, mentioned as ancillary factors earlier, may in practice push them over the edge.

When the weakest firms trip and fall, they can drag others down with them. This is because they provide a market for these other firms. In other words there is an unconscious division of labour imposed by the market, and the capitalists are mutually interdependent. The workers in the weaker firms find themselves unemployed. They too are a market for other capitalist firms.

The firms who supply those who have just collapsed do not have the option of selling their raw materials etc. at a loss or of giving commodities away to the newly unemployed workers, because they too are on the edge and they are after all in business to make a profit.

Overproduction seems, above all to the working class, to be a force of nature that just sweeps them up and dumps them on the dole. Many capitalists too perceive the crisis as an inability to sell their products. But, as Marx makes clear, overproduction is meaningless unless we realise that production is for profit. It provides no explanation as to why the crisis should break out when it does.

To return once more to Theories of Surplus Value Volume II, Marx explains:

“What then does overproduction of capital mean? Overproduction of value destined to produce surplus value… is the same as overproduction pure and simple…“Defined more closely, this means nothing more than that too much has been produced for the purpose of enrichment, or that too great a part of the product is intended not for consumption as revenue, but for making more money (for accumulation): ” (ibid p.533).

Marx makes it clear that he regards overproduction as the form of appearance of capitalist crisis, a type of crisis unique to the capitalist system. This was definitely the case in the depths of the Great Recession. Here is the evidence from 2008 and 2009:

“The world is awash with goods…For economists, over-capacity is a tricky concept. Human wants are unlimited, so how could the world ever produce too much of a good thing? The key is what people can pay: In many goods sectors, prices still aren’t low enough to bring forth enough buyers. There will have to be some combination of falling prices and destruction of productive capacity before supply and demand come back into balance.” (Newsweek, 04.02.09)

Why don’t the capitalists reduce the prices of their unsold goods so that the people can afford to pay for them? Marx had already answered that question long ago when he observed that production is for the sake of profit, not for the production of use values that people actually want. That is the reason for the paradox of poverty amid plenty.

The Newsweek article continues:

“That’s not to say the Obama Administration is on the wrong track with its nearly $900 billion-plus stimulus plan. But it’s important to have realistic expectations. The stimulus can ameliorate the downturn, but not prevent continued contractions in the sectors of the economy where global over-capacity is the most extreme. The world is able to make 90 million vehicles a year, but at the current rate of production, it’s making only about 66 million, according to estimates from market researcher CSM Worldwide. Global production of semiconductor wafers is running at only about 62% of capacity, estimates market researcher iSuppli.”

Business Week reports on the car industry:

“Having indulged in a global orgy of factory-building in recent years, the industry has the capacity to make an astounding 94 million vehicles each year. That’s about 34 million too many based on current sales, according to researcher CSM Worldwide, or the output of about 100 plants.” The article continues, “To become profitable, according to Michelle Hill of consulting firm Oliver Wyman, U.S. automakers will need to close at least a dozen of their 53 factories in North America in the next few years.” (Business Week, 31.12.08)

The excerpts from these articles provide us with no explanation whatsoever for why the crisis broke out when it did. All we are being presented with here is the facts of the crisis. At the time these articles were written, the situation was exactly as described. But why did this overproduction manifest itself in 2008 and 2009 rather than in 2003 or 2005? Why were they suddenly producing 34 million cars too many in 2008 and not in 2003? Why was it not obvious that too many car-making factories were being built while they were building them?  

What are the underlying dynamics of the movement from boom to slump? We are not told. Instead we are offered a snapshot of a sudden and unexpected irruption of overproduction, without any causal explanation.

The assertion that the crisis is caused by overproduction (overcapacity) offers no explanatory power at all. To declare that overproduction has occurred is like a detective finding a body in the library and exclaiming that the victim is dead. This may well be true – there is blood all over the floor and the victim has stopped breathing – but we expect more of the detective.  ‘She’s dead, she’s dead. I’ve solved it. She’s been murdered.’ should not exhaust his analytical powers. We expect him to tell us if she was killed by Colonel Mustard with the candle stick, or whatever – the cause of death.

Newsweek and Businessweek are here referring to overcapacity, the overproduction of capital goods. As we pointed out in Chapter 3.7 the crisis very often does break out first in the capital goods sector. Marx called the overproduction of capital overaccumulation. Whereas it is indeed a paradox that working people in a crisis cannot afford to buy things they want and need, the origin of the problem is much clearer in the case of capital goods. Who buys them? Capitalists, of course. Why should anyone want to buy an assembly line, a fork lift truck or a turret lathe? The only conceivable reason is to make money out of the unpaid labour of workers.

Overaccumulation exists because profit making opportunities have, for the time being, dried up. The capitalists are not buying capital goods, and not using the industrial capacity they have already bought, because they cannot turn a dollar out of it. Overproduction is only overproduction in relation to profit.

To make this clear, consider a society in transition to socialism and communism, where the main means of production have been expropriated and are in the hands of the working class, but where commodity production is still widespread. That was the situation outlined by Preobrazhensky in From N.E.P. to Socialism. [N.E.P. was the New Economic Policy adopted by the Soviet Union in the 1920s.] Overproduction remains a possibility, but production is no longer for profit. In such a case the Soviet government could abort the potential crisis by distributing the overproduced commodities free to the population:

“When overproduction occurred, say, in manufacturing industry, the state could distribute what ever could not be sold on the free market among the working class as a whole, crediting these goods to wages” (p.38). The capitalists could also eliminate a crisis of overproduction overnight by giving away unsaleable goods, if their system were not geared solely for profit.

  • Overaccumulation,      called overcapacity in the financial press, means the overproduction of      capital. This means that more capital has been produced than can be used      to make a profit.
  • To simply      attribute the crisis to overproduction gives no explanation as to why the      crisis breaks out when it does.
  • At the      critical moment a catastrophic fall in the profits of marginal firms can      produce a general crisis of the system.


Marx said, in Capital Volume III, “The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses.” (Capital Volume III, p. 615) This quote is the foundation for the underconsumptionist school of crisis theory. We have already (Chapter 3.7) shown that this was not regarded as an adequate explanation of the occurrence of crisis by Marx and Engels.

There is no doubt that the working class can’t buy back all the goods they produce in a crisis. They can’t buy them all back in a boom either. The “restricted consumption of the masses” is actually a permanent characteristic of capitalism and a necessary feature of its development. For, if the workers were paid ‘the full fruits of their labour’, there would be no profit. What happens to this profit? Some is spent on personal consumption by the capitalist class, but the lion’s share is accumulated. That means that the money is spent on capital goods.

There is a longstanding and well established underconsumptionist school of capitalist crisis within the Marxist tradition. Husson, as we saw earlier, fell back on this explanation. Though working class poverty is definitely a reality, the view that the crisis is caused by the poverty of the working class is at odds with the facts. Consumption (which is mainly working class consumption) has shown a secular rise as a proportion of gross domestic product (GDP) over recent decades. In the USA it has hit 70% of national income (NI). [GDP and NI are used as equivalent terms here.] At first sight this is strange, since the general perception is that the American working class has seen only a halting and feeble rise in its real wages over the past two decades. (See for instance Philip Stevens’ article in the Financial Times (05.11.10) cited in Chapter 1.2.)

But the rise in consumption as a proportion of GDP is mainly on account of the relative decline in the proportion of national income going to investment, because of slower rate of accumulation in recent years. Consumption has been propped up by the growth in consumer debt. As we point out in Chapter 6.1 on National income and the crisis, consumption as a proportion of GDP tends to adapt passively to the more volatile elements of NI.

The key factor of recent decades has been a fall in investment as a proportion of GDP. The present crisis has actually seen consumption rise still further as a proportion of GDP. Of course consumption has fallen in absolute terms. But the main components of NI that have crashed in the Great Recession have been investment and, to a lesser extent, exports. This is the identical process that we saw in 1929-33. Consumption then fell dramatically and horribly, but rose as a percentage of the collapsing GDP.

The same processes can be seen at work once again in the Great Recession. Here are extracts from Michael Roberts’ blog (29.10.10)):

“In 2009, the US economy contracted by 2.6%.  Household consumption contributed 0.8% pts of that 2.6% decline, or about one-third, but private sector investment dragged down growth by 3.2% pts, more than four times the impact of private consumption.  It was only US net exports and government consumption and investment that reduced the decline in US real GDP to 2.6%.”

Roberts concludes, “So it is investment (and that means private investment under capitalism) that drives economic growth not consumption.”

This can be seen in reverse in the recovery. John Ross in the Guardian (14.10.10) explained that the reason for the snail’s pace in economic recovery since the Great Recession finished in 2009 is one of underinvestment, not underconsumption. Ross goes on:

“At the recession’s core is a US investment collapse.  Since it began, household and government consumption has risen by $504bn, while private fixed investment has fallen by $483bn: the US economy remains in recession solely due to this investment decline.”

Roberts concludes in an earlier blog (08.10.10):

“Don’t believe as the underconsumptionists do, that booms and slumps are due to the up and downs in workers’ spending.  Recessions are never triggered by a collapse in consumer spending, even though such expenditure accounts for the bulk of GDP and it often looks like that.  Rather, it is investment which plummets, dragging down overall activity and jobs (and eventually feeding into consumer spending).

“Robert Higgs, of the Independent Institute in California… makes the valid point that US consumer spending as a share of GDP actually increased during the Great Recession, going up from 69.2% in Q4’07 to 71% in Q2’09.  In contrast, private domestic US investment peaked in Q1’06 when $2.3trn (in 2005 dollars) were spent by firms, worth 17.5% of GDP; it troughed in Q2’09, having collapsed 36% to $1.45trn, 11.3% of US GDP.”

  • The      underconsumption of the masses is a permanent feature of capitalism. It      cannot be used to explain the onset of crisis.
  • The key feature of the downturn in      the Great Recession, as it was in the Great Depression, is a collapse of      investment, not of consumption.








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