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Speculation, Greed and Chart Porn for Fun and Profit

As part of my continuing occupation of the Marxist Academy, I have been looking at various Marxist theories of the crisis of neoliberalism. In this current post I will be spending some time critiquing “The Crisis of Neoliberalism” by Gerard Dumenil and Dominique Levy, first published, it appears, in 2009. I am using the 2011 version of the book. This is part two of my critique.

Dumenil and Levy open Part VIII of their book, “The Crisis of Neoliberalism” (PDF) by asserting a striking similarity between the Great Depression and the present crisis:

If there is a precedent to the contemporary crisis, it is, unquestionably, the Great Depression.

The core proposition of the book is that an historical pattern is being played out in this crisis similar to that experienced in the period beginning with the Great Depression and ending with World War II. Moreover, the writers go on to argue this pattern is part of an even larger historical pattern beginning more or less with the depression of the 1890s and ending with the emergence of neoliberalism by the end of the 1970s. The larger pattern is the emergence of a financial hegemony which dominates society until its twin social determinants — the owners of capital and their management team — bring themselves to ruin in an orgy of speculation and greed. At the end of this outbreak of license, the state is forced to step in, regulate the financial oligarchy, repair the inequalities generated by the excessive greed, and assume management of the macro-economy.

I will show in this post how Dumenil and Levy are offering an argument that is not only significantly at odds with Marx’s labor theory of value, and a mere rehash of the sort of pop culture economics you might find on CNN, FOX News and MSNBC, but also, how even by their own standards, their argument is questionable and at odds with their own data.

Of the Depression itself, the writers assert the similarities between it and the present crisis are so pronounced one could, to a large degree, simply substitute a schematic of one for the other.

The overall pattern of Diagram 2.1 could easily be adapted to the analysis of the Great Depression. For “Neoliberalism and U.S. hegemony,” one should substitute “First financial hegemony.” Inasmuch as financial expansion and innovation and the quest for high income are concerned, the upper part of the diagram would still be valid. The two crises came in the wake of decades of rapid expansion of financial mechanisms culminating, in both instances, in a final acceleration of hardly a decade. Despite the determination of monetary authorities to act since the beginning of the contemporary crisis, in sharp contrast to the more passive attitude observed between October 1929 and March 1933, the collapse of the financial sector and the contraction of activity remained unchecked for a considerable period of time in the two historical junctures.

The writers admit there are significant dissimilarities between the two crises as well:

In the case of the Depression, financial mechanisms also combined their effects to nonfinancial determinants… The exact contents of the two sets of nonfinancial developments were, however, distinct…

Despite these distinctions, however, there are enough similarities to propose the solution to the present crisis will emerge pretty much along the lines of the one that emerged between 1933 and 1945:

The comparison between the interwar years and the contemporary crisis is also revealing of the treatment of the crisis and its likely consequences… “A new New Deal” is, actually, what would be required in the United States and the world economy after 2000.

There are clues in this argument that call into question the proposed line of attack. Most important, it is not the least bit clear to me what significance Dumenil and Levy find in the “quest for high income” that allegedly characterizes the run up to both crises. Clearly we are talking about a crisis of the capitalist mode of production and this mode of production is not characterized by a “quest for high income”, but by the ceaseless self-expansion of capitals, by the production of surplus value. It is evident the writers are not talking about the mode of production at all, but are referring to the rampant speculation that preceded both crises. They are not arguing for a Marxist analysis of the crisis, but one rooted in bourgeois and petty bourgeois critiques of capitalism. The crisis occurs not because of the inherent nature of the capitalist mode of production, but because, as they put it, the “quest [for high incomes] was pushed beyond sustainable limits, to the production of a fictitious surplus, a pretext for the payment of real incomes.”

In the end it appears Dumenil and Levy are not actually providing a Marxist analysis of the present crisis at all. Instead they are providing a rather pedestrian argument, now quite popular among economic and beltway talking heads, that the current crisis was caused by a sudden and unsustainable burst of financial speculation. Someone picking up this book hoping to read a fresh Marxian take on the crisis will be disappointed to find instead a half-baked rehash of slightly “Left” of mainstream political talking points. That being said, I have to admit I spend a lot of time reading bourgeois and petty bourgeois theories of the present crisis and often find the material illuminating — the book is not to be condemned on this basis. It is enough to warn readers this is not an analysis based on Marx’s labor theory of value.

Causes of capitalist crisis

Since they are arguing the two crises were caused by an unsustainable burst of speculative activity, Dumenil and Levy must prove the Great Depression was not a crisis of overaccumulation that Marx’s labor theory of value predicts. This proof will provide them a basis for arguing the current crisis, like the 1930s, also is not a crisis of overaccumulation. In the opening lines of Chapter 21 they argue:

Despite obvious differences in historical contexts, the common aspects between the first half of the twentieth century and contemporary capitalism are striking. Eighty years later, the same stubborn logic underlying the pursuit of profit and high income led capitalism along a new unsustainable historical path, where regulation and control were sacrificed on the altar of the unbounded freedom to act of a privileged minority. Similar dynamics led to comparable outcomes.

The “same stubborn logic” causing both crises then consists of the sacrifice of regulation and control in the interest of a privileged minority. Dumenil and Levy admit there’s no general agreement on this view of the Great Depression because it was a “multifaceted phenomenon”. They offer as alternatives to their explanation for the Great Depression: too much or too little competition, insufficient demand resulting from inequality, policy error, and asset depreciation. These bizarre bourgeois theories are offered in turn by Burns, Moulton, “the Left Academy”, Friedman and Schwartz, Temin and Kindleberger. However, the writers single out Marx’s labor theory, noting,

As in the Great Depression, the crisis of neoliberalism occurred during a period of restoration of the profit rate, not declining profitability trends.

Although they do not state it directly, they subtly acknowledge this argument differs substantially from Marx. The acknowledgment comes in the form of restating Marx’s labor theory of value in a fashion they believe is compatible with their argument:

In the third volume of Capital, Marx analyzed the propensity of capitalism to undergo phases of diminishing profit rates. He contended that such phases lead to situations of slow accumulation, increased instability, and financial turmoil. Although Marx does not use the phrase, these situations can be denoted as “structural crises.” This theoretical framework is highly relevant to the analysis of the history of modern capitalism .

In a novel argument (at least, to me), Dumenil and Levy argue both the Great Depression and the current crisis are “structural crises” that did not result from a falling rate of profit, but actually occurred when the profit rate was rising:

A sharp decline of the profit rate occurred in the late nineteenth century, introducing the depression of the 1890s and the three revolutions of the late nineteenth and early twentieth centuries (the corporate, financial, and managerial revolutions). The first symptoms of a recovery of the profit rate became rapidly apparent from the early twentieth century, initiating a new trend upward. Through two major perturbations (the Depression and World War II), this upward trend culminated during the 1960s. About eighty years after the first downward trend, a new such tendency prevailed, leading to the structural crisis of the 1970s, the second major crisis since the Civil War resulting from a decline of the profit rate and diminished profitability levels. One can finally observe a moderate upward movement during the neoliberal decades…

The Depression occurred in a period of comparatively low profitability by historical standards, but in the initial steps of a recovery, an intermediate period between two downward trends. The Great Depression can be labeled a “structural crisis,” but unlike the crises of the 1890s and 1970s, it was not the outcome of a fall of the profit rate.

… The detailed investigation of profit rates in Chapter 4 shows that the crisis of neoliberalism, as the Great Depression, cannot be interpreted as a profitability crisis.

It is quite an astonishing argument that is well worth the time and effort it takes to steal this book from your local bookstore. Not only do the writers introduce a new definition of capitalist crisis to Marxian literature by “broadening” Marx labor theory of value to include “structural crises” of capitalism, they then assert of the three crises that have occurred since the beginning of the 20th Century, two occur under conditions an orthodox reading of Capital suggests is impossible — during periods of economic expansion!

A new theory of crisis?

In a sidebar, Dumenil and Levy argue their case for this new kind of crisis:

The two downward trends of the profit rate in Figure 21.1 refer to distinct technical and organizational paradigms as analyzed by Marx. Marx imputed the tendency of the profit rate to fall to the historical features of technical change. The main such feature is the large cost of the mechanization required to enhance the productivity of labor.

The intermediate period can be interpreted as a gradual transition between two such paradigms, as the new, more efficient sector of large corporations (bolstered by the financial sector and efficiently managed) emerged and gradually outgrew the traditional sector. The new pattern of relations of production — in its two facets, ownership (as in the holding of corporate shares) and control (as in management) — allowed for a significant acceleration in the progress of labor productivity without excessive additional costly investment in fixed capital in comparison to the increase in output. This favorable configuration of technical change in a broad sense (machinery and organization) came to an end when the new technology had been generalized to the sectors of the economy where it could be more efficiently implemented.

I am not sure what to make of this argument — it simply is astonishing. According to the writers, Marx argued the profit rate tends to fall (at least in part) owing to the cost associated with investment in constant capital designed to improve the productivity of labor power. However, these large costs, they argue, were overcome by changes in forms of ownership and management that allowed for improvements in the productivity of labor power to be achieved without excessive additional costly investment in fixed capital. The fruits of these improvements in the productive capacity of labor power were entirely captured by the high income earners.

At least I think that is what they are saying — it is truly a novel argument to me.

Since the two writers are arguing for a position in direct contrast to Marx’s, where a depression occurs in the absence of overaccumulation, you would expect them to state this openly at this point. They do not. Instead, they attempt to redefine Marx’s theory of capitalist crisis from one of overaccumulation of capital to what they call “structural crises”. Then they state ambiguously this theoretical framework is highly relevant to the analysis of the history of modern capitalism. There is in the concept of “structural crisis” not a single idea consistent with Marx’s argument on the causes of capitalist crises — not a single thing imputed to Marx appears in his argument. Which is set out pretty clearly in Volume Three of Capital:

A drop in the rate of profit is attended by a rise in the minimum capital required by an individual capitalist for the productive employment of labour; required both for its exploitation generally, and for making the consumed labour-time suffice as the labour-time necessary for the production of the commodities, so that it does not exceed the average social labour-time required for the production of the commodities. Concentration increases simultaneously, because beyond certain limits a large capital with a small rate of profit accumulates faster than a small capital with a large rate of profit. At a certain high point this increasing concentration in its turn causes a new fall in the rate of profit.

As can be seen from this quote from Capital, the tendency toward the profit rate to fall results from the rising organic composition of capital and is not a “phase”. Rather, this tendency operates over the whole life of capital. Over the life of capitalism there is a continuous diminution of the quantity of living labor expended on production of a commodity. Hand in hand with this is the relative growth of previously expended labor, in the form of machines, etc., which enter into each commodity. Since living labor is the source of surplus value, and since it is continually falling over the life of capital, the profit rate falls. But, as Marx argued, this is accompanied not by a slowing accumulation of capital but an actual increase in the accumulation of capital. The rate of profit falls, but the mass of profit, and, therefore, accumulation, increases.

Moreover, as Marx argued both the rampant speculative activities of individual capitals, and the increasing socialization of the management of capital characteristic of the mode of production is produced precisely by the growing mass of capitals no longer able to function on their own as productive capitals under the new demands of accumulation:

The mass of small dispersed capitals is thereby driven along the adventurous road of speculation, credit frauds, stock swindles, and crises. The so-called plethora of capital always applies essentially to a plethora of the capital for which the fall in the rate of profit is not compensated through the mass of profit — this is always true of newly developing fresh offshoots of capital — or to a plethora which places capitals incapable of action on their own at the disposal of the managers of large enterprises in the form of credit. This plethora of capital arises from the same causes as those which call forth relative over-population, and is, therefore, a phenomenon supplementing the latter, although they stand at opposite poles — unemployed capital at one pole, and unemployed worker population at the other.

Perhaps I am missing something here, but so far as I can tell there is nothing in this argument by Marx about “the large cost of mechanization”. Marx is talking about precisely the opposite phenomenon. With the adoption of new technical processes reducing the use of labor in production of goods, it gradually becomes necessary for all capitals to adopt these new techniques. Concentration of capital increases with this as bigger capitals accumulate faster than smaller capitals. This concentration in turn provokes a new fall in the rate of profit. This argument has everything to do with the increasing minimum size of capitals and nothing to do with the cost of adopting improved means of production. The smaller capital that are rendered superfluous by this process are the social basis of financialization and speculative capital. Contrary to Dumenil and Levy, none of this involved any “new pattern of relations of production” until, at the end the process, the state is forced by events to assume management of the economy, but by this time the capitalist class has already been rendered entirely superfluous to the production process.

Moreover, clearly the capitalist no more pays for constant capital than he pays for variable capital. The costs of his constant capital enters into the value of his product, and is realized with the realization of his produced commodities. Its additional incremental growth is made possible by the mass of surplus value squeezed from the working class. Marx’s argument has nothing to do with a rising cost of constant capital, but with diminishing socially necessary labor time for production of commodities.

How Dumenil and Levy prove their case against Marx

As proof for their argument on the similarities between the Great Depression and the current crisis, Dumenil and Levy offer this chart on page 270 of their book purporting to show the profit rate of American capital between 1870 and 2008:

Note the authors add a trend line to the data purporting to show how the profit rate was rising when the Great Depression exploded on the scene in 1929. However, if we eliminate Dumenil’s and Levy’s silly distracting trend line, we see the profit rate shows a sharp contraction between the mid-1920s and the early 1930s — approximately over the same period as a similar contraction registered in the Long Depression between 1880 and 1890.

Further, the trend line created by the writers only obscures the overall general down-slope of the rate of profit between 1880 and 1933. The rate of profit fall to nine percent in 1890, and more significantly, by 1933 the profit rate plunges to approximately 2%.

Frankly, it appears the authors’ introduction of the trend line is necessary to sustain their untenable argument that the Great Depression occurred amidst a rising profit rate. Once the trend line is ignored, Dumenil and Levy’s argument evaporates. But, as you can see from the chart, the Great Depression is clearly preceded by a catastrophic slide in the rate of profit to the lowest point recorded in the data series going back to 1870. That drop — no mere “perturbation” of the profit rate as alleged by Dumenil and Levy — actually took the profit rate from above 15% mid-decade in the 1920s to 2% in 1933. The profit rate bottoms somewhere in the vicinity of 2%. As is also clear from the chart, over the next 12 years or so, the chart shows the profit rate jumped to the highest recorded on the chart since 1870 — a staggering 34%.

Chapter 22 deals with the period during which this absolutely astonishing turnaround in the US profit rate occurred. As we shall see, Marx and Engels predict this restoration of the profit rate as well.

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  1. May 2, 2012 at 9:25 am

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