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Deconstructing the main thesis of Andrew Kliman’s “The Failure of Capitalist Production”

December 22, 2012 Leave a comment Go to comments

The fundamental problem of fascist state data

Interesting argument by Andrew Kliman in his book, “The Failure of Capitalist Production”: the rate of profit tends to fall; but this tendency is “reversed” by the destruction of capital. I keep looking at this statement because it seems suspiciously widely accepted by Marxists all of a sudden. Kliman states it this way:

“The rate of profit—that is, profit as a percentage of the amount of money invested—has a persistent tendency to fall. However, this tendency is reversed by what John Fullarton, Karl Marx, and others have called the “destruction of capital” —losses caused by declining values of financial and physical capital assets or the destruction of the physical assets themselves.”

I am not questioning the idea the rate of profit tends to fall nor that this fall leads to crises. The problem I have here is with destruction of capital and Kliman’s definition of profit. First, a lot of people have looked at this profit thingy, and some agree with Kliman, while others disagree. My problem is not whether one group is right and the other wrong — it is how can any of this be determined based on fascist state data on corporate profits.

If we walk away from this highly controversial category for a second and look just at employment in the United States there is the same problem. The data, as compiled by the fascist state, is absolutely worthless to address important questions of Marxist theory. The whole of government employment is unproductive labor, but bourgeois data makes no distinction between productive and unproductive employment. Profit can only be calculated on productive employment — so where does the whole of fascist state employment belong?

Second, Kliman talks about “profit as a percentage of the amount of money invested”, but in actuality he uses dollars instead of money. Everyone uses this measure, but Carchedi’s essay calls it all into question: Washington doesn’t use money to pay its debts. The dollars the fascist state uses to pay its debts are either the result of revenue raised by taxes, or dollars created out of nothing — but, as Carchedi notes:

“… one does not “create money out of nothing”, an absurd proposition. Out of nothing, one can create nothing.”

When the state was a tiny sliver of the economy, this was not a big problem — but now it is 50% of the US economy, with a deficit of between 7 and 10% of GDP. This entire mass consists of labor that is, by definition, not productive in the capitalistic sense, and is itself only a form of surplus value wrung from the productively employed workers. This must be true by definition.

Most surplus value is consumed unproductively by the fascist state

Now Marx’s formula for profit is s/(c+v); and a shit load of the “s” does not take the form of corporate profits. The greater mass of this “s” is in the form of fascist state expenditures. At least, this is what makes sense to me — I could be wrong, but this is how I read Marx.

In fact, employment in the form of government is one of the fastest growing sectors of employment in the post-war period. To be sure, by definition, this is a portion of surplus value that is not being reinvested in productive capitalization — by definition. It represents, therefore, a massive destruction of surplus value on a scale unequaled in the history of society — annually!

So far as I can tell, no Marxist scholar has tried to include the massive quantity of surplus value expended in the form of the state into the discussion of the rate of profit. How can you tell whether the rate of profit has risen or fallen without including the single largest form of surplus value in “the economy”.

The total government consumption of surplus value amounts to $6.3 trillion; by comparison consider that China’s total GDP is estimated at $7.3 trillion. The US government sector is by far, the largest consumer of surplus value on the planet, yet it appears in no Marxist estimates of the rate of profit that I have seen.

This is just another example of the resistance of the Marxist school to subjecting the fascist state to historical materialist analysis. Marxists treat the state as if it is outside the economic structure of class society and figures only as an ahistorical mechanism of class rule.

Kliman argues in the introduction to his book

“However, I do not want to overstate the role of methodological and theoretical differences Prior to analyzing the data, I had no prior belief that actual rates of profit had failed to rebound since the early 1980s, and I even wrote that “profitability has been propped up by means of a decline in real wages for most [U.S.] workers”

I take this to mean Kliman alleges those who come to conclusion other than his are engaged in wholesale distortion of the empirical data. Which is to say the differences in methodology and theoretical assumptions do not account for the different results on the rate of profit. Is there some justification for this conclusion? Perhaps.

Both Kliman’s data and Dumenil and Levy’s data depend not on Marx’s definition of surplus value, which must include the surplus consumed by the fascist state, but only various measures of reported profits assuming an economy solely composed of productive capitals. Since both begin not with Marx’s definition of surplus value but with the reported profits of private capitals they are both fundamentally flawed. The minor difference in their data at the end of this process conceals that both Kliman and Dumenil and Levy’s work are fatally flawed. For Dumenil and Levy this negates their conclusion entirely; however this is also true for Kliman’s conclusion — although he at least get the direction of the rate of profit correct.

In Kliman’s thesis, the rate of surplus value — not the rate of reported profits — is key to his argument. And his argument is that the fascist state is preventing the destruction of value, giving rise to stagnation and slow growth. In fact, it appears most surplus produced by the productive capitals is being destroyed by the fascist state but even this is not sufficient as the crisis demonstrates.

The rate of profit is indeed falling as Kliman alleges, and to a far greater extent than he even imagines. An ever increasing quantity of surplus must be absorbed by the fascist state solely to maintain capitalist relations of production. His theoretical assumptions led him to compile empirical data that actually weakens his argument. Moreover, Kliman misses the most important point buried in the data: the rate of profit is negative and has been negative since the 1970s!

A negative rate of profit?

As Kliman argues about growth generally,

“The generation of profit is what makes possible the investment of profit. So, not surprisingly, the relative lack of profit led to a persistent decline in the rate of capital accumulation (new investment in productive assets as a percentage of the existing volume of capital). Sluggish investment has, in turn, resulted in sluggish growth of output and income.”

This is the only conclusion to be drawn by the collapse of industrial employment since 1979. As can be seen in the BLS data below, employment in the goods producing sector of the economy (which I am treating as a proxy for productive investment in this note) peaked in 1979 and has been declining since:

Goods Producing employment 1939 to 2012 (Source: BLS)

Goods Producing employment 1939 to 2012 (Source: BLS)

Moreover, as is clear from the chart above, since 2000 this decline has become abrupt — which is also the time during which all the talk of deflation began. Kliman is likely not only correct in relation to Dumenil and Levy, he is likely more right than his pitiful charts on corporate profits demonstrate. Industrial employment has not been at this level since 1950 before the Cold War build out began. By the end of 2011, industrial employment has fallen 30 percent since its post-war peak.

During this period we see four things:

  1. despite the fall in goods producing employment, the rate of profit as measure by both Kliman and Dumenil and Levy and a host of others remains positive;
  2. US trade deficits open up and widen;
  3. the US federal budget deficits also widen;
  4. the world market is struck by a series of financial crises.

How in Marx’s theory can we explain the fact that the profit rate, as different theorists measure it, remain positive despite the fall in goods producing employment? One possible explanation is to discount entirely the collapse of goods producing employment over the past 30 years. As Kurz demonstrates an increasing mass of productive capital itself is financed by fictitious capital and is itself fictitious. For instance, 8 aircraft carriers have been produced on orders by Washington since 1980 and three more are under construction, this completely wasteful expenditure is embedded in the data on goods producing employment. Although this employment produced a commodity (of sorts) it represented a subtraction from the mass of capital.

But this fact only adds to the problem: even employment that might be considered productive turns out to be unproductive. The decline of productive employment is actually greater than the data implies, and thus greater is the negative value of the rate of profit. This further conflicts with the positive measure of corporate profits as measured by a host of different scholars. And this difference cannot be blamed on their different methodologies, but on their basic theoretical assumptions regarding the fascist state.

Can the rate of profit be reversed?

This raises an additional question about Kliman’s thesis: How is the fall in the rate of profit “reversed” by the destruction of capital? If profit = s/(c+v), how does the destruction of capital lead to an increase in the profit rate? If I am wrong in this, please correct me, but I read chapter 15 as stating the fall in the rate of profit leads to a wash out in those capital not able to offset the fall in the rate of profit by an increase in the mass of profits — it does not lead to a recovery in the rate of profit. Is Kliman’s thesis just badly worded or does he read Marx as stating the fall in the rate of profit can be reversed?

And if the profit rate cannot be reversed, as my reading of Marx suggests, it must go to zero at some point, without more involved. At some point the rate of profit must equal zero; or as Marx puts it:

“… the increased capital C + ΔC would produce no more, or even less, profit than capital C before its expansion by ΔC.”

In other words, my interpretation necessarily leads to absolute overaccumulation of capital. Kliman’s and Simon Clarke’s arguments against absolute overaccumulation of capital requires the fall in the rate of profit can be reversed. The profit rate can never go to zero and the demise of capitalism is not inevitable.

In addition, if Kliman and Clarke are correct the very idea the profit rate is negative at this point is not only wrong, but absurd. And this means there has to be some other explanation than the one proposed by Kliman for the decline of goods producing employment investment. I would very much like to hear that other explanation by anyone in the Marxist academy.

A negative rate of profit is important because it means the total mass of employed capital has been shrinking since the 1970s. Once the rate of profit goes negative, the mass of productively employed capital must eventually reach zero. This calls into question another facet of Kliman’s thesis. According to Kliman the capital destruction necessary to “restore the rate of profit” during the depression of the 1930s was very large and the process very traumatic to society. Based on this Kliman argues:

“Policymakers have not wanted this to happen again, so they now intervene with monetary and fiscal policies in order to prevent the full-scale destruction of capital value. This explains why subsequent downturns in the economy have not been nearly as severe as the Depression. But since so much less capital value was destroyed during the 1970s and early 1980s than was destroyed in the 1930s and early 1940s, the decline in the rate of profit was not reversed. And because it was not reversed, profitability remained at too low a level to sustain a new boom.”

Based on Kliman’s view that Marx’s theory allows for restoration of the rate of profit, this is a convincing argument. However, if the opposite holds, no restoration of profits rates is possible, the argument collapses in on itself. In the latter case, if the fascist state does not prevent the destruction of capital, but facilitates it, this would as well explain why there has been no replay of the Great Depression. Since the destruction of capital is necessary to begin a new expansion phase, and since this destruction cannot be prevented, it is entirely possible that Keynesian policies work by accelerating the destruction of capital, not preventing it.

And how might this destruction be facilitated? Simply by lending it to the fascist state, which — according to Carchedi’s essay — does not produce value but only consumes it.

This would also explain why the rate of growth of the economy has slowed: since an increasing portion of the produced capital is being destroyed by fascist state expenditures, a declining portion newly produced surplus value is actually reentering capital reproduction.

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  1. December 27, 2012 at 2:11 am

    Interesting argument. I tend to agree that a reading of Capital III, chapter 13 would imply that the “natural” rate of profit would tend to fall with the development of the means of production. Nothing could bring that back up because capitalist society isn’t going to go back to an earlier mode of production.
    But similarly, that basic rate couldn’t go to zero because it’s a ratio of two positive, finite quantities. The rate goes down through the increase in the relative mass of fixed capital but that relative mass is not going to go to infinity. Individual enterprises may see a zero profit rate but that would be from market fluctuations and other factors.
    Now, the thing with the destruction of capital is that this can be used to bring the structure of capitalist markets inline with a reduced rate of profit. Capital can reproduce itself at any given rate of profit. The problem is that when the rate of profit declines, some enterprises need to go to allow a stable market structure allowing further reproduction. So I would see the vast destruction which followed 1929 as being that kind of adjustment.
    And the thing with the recent financial collapse is that you could see something of the opposite situation. The vast mass of bankrupt enterprises were supported and kept afloat. Thus I would say, assuring that the basic bubble, market structure and crisis dynamic was maintained to reappear when-ever Ben Bernanke or the ECB takes their finger out of the dyke for a second.

    Also, I think I can see where you’re going in talking about the Fascist state – a centralized totalitarian bureaucracy which more or less infects all the modern capitalist societies. I feel some sympathy towards seeing the modern world this way. Still, I think avoiding the term “fascist” would make your discussion clearer and avoid all the overwrought emotionalism and chest thumping that usually accompanies the term.

  1. December 28, 2012 at 5:23 pm
  2. January 5, 2013 at 12:31 am

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