Socialism Today Debates:

The Cause of the Crisis: Rate of Profit?

Issues 156, March 2012 169, June 2013 1. Striking back in austerity Britain Peter Taaffe (Issue 156, March 2012, page 2) 2. A Crisis of Profits? John Smithee (Issue 157, April, page 6) 3. Peter Taaffe Responds PT (Issue 157, page 7) 4. The Profits Crisis Debate Bruce Wallace (Issue 159, June, page 9) 5. Peter Taaffe Responds PT ( Issue 159, page 11) 6. A Way Out of Depression? Lynn Walsh (Issue 161, September, page 13) 7. On Capital Investment BW (Issue 163, November, page 22) 8. Lynn Walsh Responds LW (Issue 163, page 23) 9. Capital Investment Debate Continues BW (Issue 164, December/January 2012/13, page 27) 10. Behind the Stock Market Surge LW (Issue 167, April, page 28) 11. Profitable Question BW (Issue 168, May, page 32) 12. A Reply to a Profitable Question Joe Foster (Issue 169, June, page 33)

1. Striking back in austerity Britain

Arrogant, out-of-touch Con-Dem politicians actually believed they had defeated trade union opposition to their savage austerity measures after last years strikes. Yet a number of key unions are poised to strike-back on 28 March and significant private-sector struggles continue. PETER TAAFFE writes. "WHILE THE POLITICIANS and their advisers give the impression of being in charge, they are not really. The financial markets and the street: when aroused, these are our masters." (Andreas Whittam Smith, founder of the Independent, 16 February) The pensions battle, which has dominated the industrial and political scene in Britain for the last year, has now entered a decisive stage. The Con-Dem government was triumphant at first when it believed that it had won the battle, with the willing compliance of right-wing trade union leaders like Dave Prentis of Unison. His union, by far the biggest involved in the present struggle, and other smaller unions capitulated by accepting the heads of agreement with the government. Yet everything that they accepted had been on the table before the magnificent 30 November strike. The government proposed that public-sector workers should work longer, pay more in pension contributions and receive less in payouts. Government hatchet men, Francis Maude and Danny Alexander, were quick to point this out. They were already basking in the afterglow of a major victory for their side a new Black Friday for the trade unions. Christina McAnea, Unisons head of health, seemed to concur when she cynically admitted that the strike action was just a "damage limitation exercise", with 30 November designed to allow workers to let off steam. But both the government and the sell-out trade union leaders have reckoned without the resistance front of other unions like PCS civil servants, NUT teachers, lecturers union UCU and the possible welcome addition of the firefighters union, FBU. The latter had not joined the 30 November strike but now, because of the employers intransigence, is ready to resist. A widespread consultation of workers in these unions and others is presently underway as we go to print. There is every likelihood that an estimated 750,000 workers will now be prepared to strike on 28 March. This would represent, in effect, last years 30 June strike, Mark 2. In terms of the numbers involved, in a sense this is a retreat on 30 November, because of the desertion of Unison and others. Yet a wholesale retreat by the unions without further resistance would have seen the worst possible outcome, a rout of the trade unions. It would encourage David Cameron and his chancellor, George Osborne, to put the boot into the unions and embolden them in the further attacks that will be launched. Endorsing economic destruction AND THIS COMES at a time when the government has been further weakened, economically, socially and politically. Indeed, Osbornes economic perspectives lie in ruins. Unemployment is at a 16-year high with female unemployment at 1.1 million, the worst in 23 years. Youth unemployment is the

"highest ever on record" (Mark Serwotka, The Guardian). Scandalously, 860,000 people have now been unemployed for more than a year. In 2011, 300,000 claimed jobseekers allowance, and this was supposed to be a temporary benefit. In reality, we now have a permanent pool of unemployed, the product of endless austerity. The TUC estimates that the real unemployment figure is 6.3 million if part-time workers and those who have dropped out of looking for work completely are included. Osborne predicted growth of 2.3% last year which turned out to be only 0.3%! This is even lower than in Italy, which is in such an economic meltdown that an unelected technocratic cabal, led by the former Goldman Sachs employee Mario Monti, rules instead of parliament. And how does the governor of the Bank of England, Mervyn King, seek to explain the situation? This year, he informs us, will be a zigzag of alternating positive and negative quarterly growth rates. In other words, Britains capitalist economy is unstable and in the grip of stagnation. There is no possibility of Osbornes private sector the famous phoenix arising from the ashes of the public sector rescuing the situation. The phoenix of a revived private manufacturing base is now reduced to ninth position in the world manufacturing league and has already flown to China and elsewhere, sadly never to return. Despite all the pain and misery resulting from the cuts already inflicted, Osborne and his government are on negative watch from the ratings agency Moodys. The cherished AAA rating is in peril because the deficit has actually grown. Why? Because the Con-Dems policies have severely contracted the economy and unemployment has begun to climb. Osborne claims that this is a ringing endorsement of his destructive deflationary programme! Moreover, the injection of a huge 325 billion of quantitative easing by the Bank of England, while preventing an outright slump, has done nothing to fundamentally change the situation. The level of national output is still 4% below where it was at the peak of the economic cycle. Larry Elliott of the Guardian writes: "At the current rate of progress it will take until the hundredth anniversary of the outbreak of the first world war before regaining the lost ground. Those seven lost years will have cost the UK economy around 200 billion in output". Truly capitalism is a progressive system! Indeed, it so progressive that it is on a strike of capital, a refusal to invest. It is resting on a mountain of cash locked up in the vaults of big companies in Britain and the US: an eye-watering 120 billion in Britain and a colossal $2 trillion in the US. Even Will Hutton in the Observer and Martin Wolf of the Financial Times, apostles of capitalism, frantically urge them to invest. In vain! The capitalists see no profitable outlets. The system is in the death grip of a huge debt overhang; zombie banks in zombie capitalism! Cold cruelty of the ruling class BUT IT IS the working class, as always, who will be called upon to pay the price for the crisis of capitalism aggravated by the ruthless policies of Osborne, a practitioner par excellence of the cold cruelty of the British ruling class. In recent months, this has been on full display. The vilification and scapegoating of the poor, those compelled to exist on benefits, including the

disabled, has reached new depths. Cameron has shamelessly presented a picture of benefit scroungers receiving as much as 26,000 a year, while hiding the fact that, in the very few cases where sums like this are paid out, 70-80% of the benefits are taken by rackrenting landlords. Some disabled people, the long-term sick, are now being forced to work unpaid for a limited amount of time or their benefits will be cut. Disabled people have been singled out in shopping malls and elsewhere for vilification, with some tipped out of wheelchairs by those whipped up by the demagogic campaign of Cameron and Osborne. The witch-hunt of the poor and defenceless is destined to go on but will be resisted. And 94% of government cuts and 88% of benefit cuts have yet to be implemented. Already there is massive social cleansing underway. Tens of thousands of families from inner-city areas have been effectively expelled to the outskirts, and there are plans for some to be relocated from London to northern cities like Hull and elsewhere. Cameron appears determined to carry through the governments pro-business NHS reforms, despite defeats in the House of Lords and opposition from some Liberal Democrats. Pushing through the legislation is one thing, however, implementing changes on the ground another. Cuts and privatisation will be resisted by the health unions rank-and-file and by a wider anti-cuts campaign. A mass political voice IT IS THESE factors which emphasise the crucial importance of the pensions struggle, which will hopefully fuse with the battle against the cuts. There has been a sharp rise in industrial action in both the public and private sectors. More days were lost in strike action in 2011 than any time since 1990 (1.39 million days compared to 365,000 in 2010). Public-sector action accounted for over 90%, but days lost in the private sector doubled between 2010 and 2011, the highest number since 1994. The victory of the Balfour Beatty electricians is proof, if proof were needed, of the effectiveness of leadership both from above and below in the class battles that impend in Britain. Such is the explosive social situation that it is inconceivable that struggle will be off the agenda. Even if generalised national strike action does not materialise on the pensions issue that will not be the end of the matter. While not the preferred option, rearguard struggles are inevitable by the PCS and others given the attacks which are planned by the government. Maude has openly threatened trade union facility time and rights gained in the past. He will be resisted ferociously, which will probably include partial and regional strike action. Industrial action will also be accompanied by a political and electoral challenge from the Trade Unionist and Socialist Coalition on 3 May beginning with the Greater London Assembly elections. Central is the need for a socialist answer to this devastating crisis of capitalism. This is cynically dismissed by Martin Kettle of The Guardian: "Socialism still has adherents, but it is a religion, not a programme The failure of socialism has a lot to do with [conceptualising a plausible alternative]". (2 February) Not true, replies former Plaid Cymru MP, Adam Price: "In December, a poll by the Pew Research Center found support

for socialism now outweighs support for capitalism among a younger generation of Americans". The baleful approach of Ed Miliband and New Labour has already provoked GMB members, through resolutions to their conference, to threaten to withhold 2 million from the Labour Party. Unite has also booked the biggest committee room in the Houses of Parliament for its general secretary, Lenny McCluskey, reportedly to read the riot act to Labour MPs. The necessity for a new party in this case, in the USA is conceded by former advocate of wild capitalism, Jeffrey Sachs. He writes in the Financial Times: "The poorer half of the population does not interest the Washington status quo. A third political party, occupying the vast unattended terrain of the true centre and the left, will probably be needed to break the stranglehold of big money on American politics and society". (14 February) Such a third party would have to be a new mass radical party. In Britain, this would be a new mass workers party. British society is on the edge of a volcano, of which the pensions struggle is just one expression. It can erupt at any time into a mass movement which could not only shake British capitalism but also the government itself, leading to its downfall.

2. A crisis of profits?
I WOULD like to comment on Peter Taaffes excellent article in Socialism Today No.156, March 2012, headlined: Striking back in austerity Britain. Peter mentions in his article that "[capitalism is] so progressive that it is on a strike of capital, a refusal to invest. It is resting on a mountain of cash locked up in the vaults of big companies in Britain and the US: an eye-watering 120 billion in Britain and a colossal $2 trillion in the US". Why does this strike of capital say so much about capitalism in 2012? I think the answer lies in Marxs law: the Tendency for the Rate of Profit to Fall (TRPF). In his three volume opus, Capital, Marx differentiates between constant capital (c) and variable capital (v). Constant capital being capital tied up in factories and machines etc. Variable capital being capital produced by the labour of human beings. During the Second World War both constant capital (factories, machines etc) and variable capital (soldiers, sailors, airmen, and civilians) were both destroyed. Once the war was over, this immediately led to a rise in the rate of profit, leading to the post-war capitalist economic boom of 1945-1974. However, during this period the rate of profit started to fall, especially in Britain. The response to this falling rate of profit was the destruction by the Thatcher government of constant capital, whereby 20% of manufacturing industry was destroyed. A higher percentage, incidentally, than that achieved by Hitlers Luftwaffe. However, Mrs Thatcher did not reduce the cost of variable capital. Wages for those in work held up. Hence, the Tory victory in the 1987 general election. At the same time, the cost of unemployment benefit was paid for with receipts from taxes on North Sea oil and gas. The newly-privatised industries also provided a new source of profit, leading to an overall rise in the rate of profit. Today, in 2012, British capitalism is, again, being hit by a long-term fall in the rate of profit as advanced by Marx in Capital. However, current tax receipts on North Sea oil are a fraction of those in the 1980s. There is also the debt mountain which threatens to sink British capitalism. This is the dilemma faced by the Con-Dem government. So how are the Con-Dems going to increase the rate of profit? One solution is the privatisation of the NHS, local government, the civil service etc. Another solution is to cut the cost of variable capital. Hence, the planned transfer of one million people from Incapacity Benefits onto the Job Seekers Allowance claimant count. The reason for this lies in Marxs idea of a reserve army of capital as a means of reducing the wages of those in work ie a cut in the cost of variable capital. Does Peter agree that the root cause of the Con-Dems policies, including their cuts, is an attempt to raise the rate of profit, which, as Marx pointed out, has a tendency to fall? John Smithee, Cambridgeshire

3. Peter Taaffe responds:

WE WELCOME John Smithees letter. It is true that Karl Marx argued in the third volume of Capital that capitalism did evince a tendency for the rate of profit to decline because it led ineluctably to a growth of constant capital the means of production compared to variable capital, labour power. However, he also indicated that this law would only manifest itself over time, and sometimes a considerable period. This was because capitalism, by constantly revolutionising, through technique, and therefore cheapening the elements of the means of production, etc, was able to the cut the value of constant capital. It could therefore, for a period, counteract this tendency for the rate of profit to be pushed down. In Capital, after first elaborating "The tendency of the rate of profit to decline", in a following chapter he elaborates what he calls the "counteracting causes", which check this tendency. This has led some economists even those claiming to be Marxists to conclude that these "counteracting causes" in effect nullify Marxs argument supporting the case for the tendency of the rate of profit to decline. I would not agree with this. I think the law will be manifested, but sometimes over time. However, what the capitalists are mainly interested in is not the rate but the mass of profit. Marx makes the same point a few times: "A drop in the rate was generally accompanied by an increase in the mass of profit, due to the increasing mass of total capital employed". (Capital, vol III, part III, chapter 14) They will continue to invest if the rate goes down yet the mass of profit is still greater than the capitalists outlay of capital at the beginning of the production process. In the 1970s, there was one year where the mass of profit did suddenly drop, which led to panic stations by the capitalists. It was one manifestation of the seriousness of the crisis at that stage. Since then, however, the capitalists, first through neo-liberalism, which began in the 1970s, then through the favourable position created for them by the collapse of Stalinism particularly the liquidation of the planned economy and the ideological counter-revolution which followed in its wake have been able to massively change the balance of forces in their favour. This has resulted in wage repression in the US where the average median wage has not increased for 30 years and is now at the level of the 1950s and in Europe. Together with other factors, this has led to a colossal bonanza for the bosses. Record profits accompanied by a colossal widening of the wealth gap have been made. Therefore this crisis is not primarily one of profitability, as John seems to imply. There are many and differing factors that can lead to or be the immediate cause of a capitalist crisis. The capitalists are presently swimming, literally drowning, in profits. In our Socialism Today article we underestimated the amount of unused capital, profits, stashed in the vaults of the big companies. Latest figures show that 750 billion is fallow not being invested by the capitalists in Britain alone. It is a huge $2 trillion in the US! The capitalists refuse to invest because there is no profitable outlet. In this sense, it is a crisis of profitability. Not because profits have dropped or there is a tendency for the rate of profit decline. Both the rate and the absolute amount of profit have increased, it seems, even during this terrible crisis. This is one of the manifestations of capitalist crisis Marx wrote about.

Unemployed capital exists alongside unemployed workers. They seek to overcome this problem not through investment in industry which is closed off to them in Britain because of its collapse or in China or elsewhere, but by seeking to create new fields of investment by looting the state through privatisation. It is this fact that lies behind the irrational, ruinous policies to privatise the NHS, the police, and the state sector as a whole. This is the crazy logic of modern capitalism. Marxism alone is capable of analysing the processes of capitalism and preparing a socialist future for the working class.

4. The profits crisis debate

IT WAS with regret that I read Peter Taaffes reply to John Smithee on Marxs theory of the law of the tendency of the rate of profit to fall (LTRPTF). John does not give a rounded out explanation of the law but he is certainly on the right track. Militant, forerunner of the Socialist Party, had a debate on just this issue in 1980. At that stage Militant upheld the centrality of Marxs law in its reply to the economist, the late Andrew Glyn, who argued that "the LTRPTF as formulated by Marx is theoretically incorrect". The reply concluded that Glyns view of the LTRPTF was "both scientifically incorrect and potentially politically dangerous". Between 1980 and today the LTRPTF appears to have become less important for us or even redundant. It would be interesting to know how this has come about? Peter quotes Marx to support the idea that capitalists arent interested in the rate but the mass of profit. Marx noted that when there was an increase in the extraction of surplus value from the working class that the mass of profit must increase but that the rate of profit would fall (Capital Vol III p219). However it is just untrue that capitalists are only interested in the mass of profit. That may be true during a boom, but certainly not in a slump! See Marx Capital Vol III p253. Marx was very clear about the importance of the rate of profit for capitalism and in relation to the accumulation of capital he wrote: "The specific feature about it is that it uses the existing value of capital as a means of increasing this value to the utmost. The methods by which it accomplishes this include the fall of the rate of profit, depreciation of existing capital, and development of the productive forces of labour at the expense of already created productive forces". (Capital Vol III p249) And: "The rate of profit is the motive power of capitalist production". (Capital Vol III p259) Therefore capitalist development, in all its facets, including accumulation and hence investment, is impossible without a falling rate of profit! The great recession cannot be understood unless Marxs theory of crisis, of which the LTRPTF is its most important part, is applied. The point that Peter makes about the growth in the rate and mass of profit increasing during this crisis is questionable. Prior to the great recession there was an absolute drop in the rate of profit and in the mass of profit in the USA in 2006-07 of approximately from 20% to 12% for mass and for rate, using 1980 as a baseline of 100%, from 150% to 90%! The fall in the rate of profit was the underlying, but not the proximate, cause of the capitalist crisis just as Marxs theory predicts. Profits have recovered somewhat but to nothing like previous boom levels and the economic recovery is anaemic.

There are many points made by Peter which I believe are controversial and require discussion. Perhaps a good start would be to come clean on our attitude towards the LTRPTF? Bruce Wallace, Scotland

5. Peter Taaffe responds:

BRUCE IMPLIES that in my short reply to John Smithee (Socialism Today No.157, April 2012) I have, in effect, abandoned the LTRPTF. This is not so, as I will show. But a monocausal explanation for the crisis of capitalism is wrong. Marx explained that the difficulty was not to understand the reasons for the tendency of the rate of profit to fall but for the comparative slowness of its fall. This is where the counteracting factors come in, which can temporarily arrest the decline and even increase the rate of profit. Any number of factors can be the trigger for a specific crisis. It was this question that I highlighted both in my article and reply to John Smithee. Yes, the LTRPTF forms the background, it is, as Bruce puts it, the underlying but not the proximate cause of the crisis. It is not possible here to analyse fully how this works out in the current crisis. But a few remarks are necessary. The roots of the present Great Recession undoubtedly lie in the crisis of the 1970s, which the subsequent boom never completely overcame. But to argue, as some Marxist economists have done, that nothing has fundamentally changed, that neo-liberalism did not have a significant effect in overcoming the crisis of profitability that existed then, I think is wrong. Also, the turn to investment in the financial sector an extended and extreme form of credit arose from the same causes. This created the bubbles which have now burst. The basis upon which such economists draw their evidence is new, seems to be incomplete and one-sided, and pertains to one part of the world economy, albeit the most important, the US. The assertion they make that profits dropped in 2006-07 has yet to be proved. However, even if this was correct, it does not automatically cancel out what I wrote about the colossal piling up in the banks and big business of what is now $7.5 trillion of cash reserves half the GDP of the US. It seems inconceivable that this would have been possible without a huge rise in the mass of profits and possibly their rate as well. And what are political implications of this for capitalism? With the colossal mountains of liquidity in the vaults of the banks and big business our demand for a capital levy is very apposite, in view of the zombie-like character of capitalism at the present time. We cannot just repeat what Marx said and leave it at that; we base ourselves on his method but we have to analyse each situation which will contain new features as it develops. Bruce argues we have abandoned the theory of the LTRPTF. But the reason why we do not mention the LTRPTF as regularly as he would like although it has featured in articles over the years is not because we have abandoned Marxist ideas on this issue. It is because it is a given, but we have had to take up new features, which always arise under capitalism. I made it clear in my reply that I did not agree with those who argue that this law formulated by Marx is now redundant. Moreover, in our book Marxism in Todays World, I state: "We think that Marx was correct about the tendency of the rate of profit to decline. Historically, there has been a colossal growth of constant capital, dead labour if you like, to use Marxs terminology, compared to living labour, variable capital. Consequently, capital, said Marx, has a tendency to become less and less organic, with a tendency to create relatively smaller and smaller

annual increments of surplus value. However, the capitalists express that as the technical growth of capitalism but dead labour predominates over living labour. It is generally accepted even by pre-Marxist economists as an empirical fact that, as capitalism grew, the rate of profit declined. Marx described it as tendency and analysed this in detail in part three of the third volume of Capital". (p24) There is no difference in our approach to this question now and the position of Militant in the 1980s. However, the debate on this question in the ranks of Militant then generated more heat than light. Some took up a fundamentalist position without taking into account in a serious way the counter-arguments and seeking to answer them. Mere denunciation was sufficient. No attempt was made to take account of any changes that have taken place in the structure of capitalism, new features, facts, figures, etc. Moreover, those who were most strident the late Ted Grant in particular in crudely upholding theoretically the LTRPTF, when it came to a real economic crisis in 1987 argued that we were on the verge of another 1929-type Wall Street crash. Lynn Walsh and I and others opposed them, drawing attention to the huge liquidity of Germany and Japan, which was used to prevent another 1929 and we were proved right. The analysis we have given on the current crisis illustrates the specific character at this stage of the catastrophic incapacity of capitalism to further develop the productive forces; they refuse to invest, because there are insufficient profitable outlets. And, moreover, this can go on for some time. As we pointed out this is even an expression, in a sense, "of a crisis of profitability. Not because profits have dropped or there is a tendency for the rate of profit to decline. Both the rate and the absolute amount of profit have increased, it seems, even during this terrible crisis". (Socialism Today, April 2012) There is a debate amongst academic Marxist economists on the current application of the theory of the LTRPTF. Some argue that the rate of profit has dropped continually since 1982. Andrew Kliman, for example, even says that the neo-liberal counter-revolution with its massive attack on the working class has had little effect in arresting the drop in profits. The rate of profit did increase during the 1990s but, as a harbinger of the looming crisis, may have fallen back recently. These are questions we have to look at. However, it is not sufficient to merely quote what Marx said on this question, but seek to locate an analysis in the real developments of capitalism without in any way repudiating the basically correct position of Marx on the issue.

6. A way out of depression?

Global capitalism is mired in depression. A Keynesian tract for our times proposes a way out - and is reviewed by LYNN WALSH. THE US ECONOMY, with feeble growth and persistently high unemployment, is in a state of depression, according to Paul Krugman. It is not as severe as the great depression of the 1930s, but "its nonetheless essentially the same kind of situation that John Maynard Keynes described in the 1930s: a chronic condition of subnormal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse." Krugman deplores the huge loss of economic output, the permanent undermining of manufacturing capacity, and the social catastrophe of long-term mass unemployment. The rescue of the banks through the TARP (Troubled Asset Relief Programme) after the collapse of Lehman Brothers in 2008 averted a collapse of the financial system, though on extremely favourable terms to the banks and speculators. President Barack Obamas Keynesian-type stimulus programme averted a catastrophic economic slump, but was too limited (in Krugmans view) to produce sustained growth. Political leaders, according to Krugman, have failed to learn the lessons of the 1930s. Through a combination of distorted ideology and economic self-interest they exerted pressure for a return to deficit reduction policies in 2010, undermining the fiscal stimulus policy. Obama lacked the "Rooseveltian resolve" demonstrated by president Franklin D Roosevelt during the great depression. Krugman recognises that Obama faced bitter opposition from the Republican-dominated Congress, but criticises his failure to make the case for a bigger stimulus package. Obama failed to effectively mobilise public opinion behind such an intervention. The result is the current, lamentable state of the US economy. So Krugman has written a tract for the times. Its title suggests that it is a campaigning pamphlet rather than an academic analysis. It is succinct, polemical, satirical in places, advocating unashamedly Keynesian policies which, in his view, could rapidly end the recession and produce sustained growth. Krugman is a prominent academic economist in the US, but best known for his informative and polemical columns in the New York Times. He is the most prominent of the Keynesian economists (including people like Joseph Stiglitz) who advocate more state intervention to stimulate recovery, and are severely critical of the voodoo economics of the ultra-free-marketeers, now championed by the Republican presidential candidate Mitt Romney, and especially by his vice-presidential candidate, Paul Ryan. Much of the book is an analysis of the crisis which hit the US and the world economy from the end of 2007. It is succinct and clear, jargon free, and sound, as far as it goes but ultimately superficial. It is a well-known story. The massive credit boom after 2001 (both in the US and throughout the capitalist world) led to a housing bubble, especially in those countries which followed the US/Anglo-Saxon model. Finance, particularly the shadow banking system, became even more dominant. The securitisation of debt and the vast expansion

of financial derivatives were supposed to minimise or in some peoples dreams even rule out risk. As the financier Warren Buffett (and Socialism Today) predicated, however, derivatives became instruments of mass destruction. With the collapse of the housing bubble they amplified the fallout. Without state intervention in the US and elsewhere to rescue the banks there would have been a worldwide collapse of the financial system. Krugmans explanation, however, is limited. He argues that political leaders forgot the lessons of the 1930s, cancelling out much of the regulatory limits on financial institutions (starting under Ronald Reagan but much more under Bill Clinton). Undoubtedly, the abolition of the Glass-Steagall Act (1933), which enforced the separation of deposit banks and speculative finance houses, facilitated rather than caused the acceleration of financialisation. Underlying this trend was a turn by the capitalists away from investment in manufacturing and towards ever greater investment in the financial sector. Short-term profits through financial speculation, which tended to concentrate profits increasingly in the hands of the top 1% - or, more accurately, the top 0.01% - became a dominant economic trend. Ultra-free-market ideology was promoted to legitimise the shift. Financialisation changed the structure of the US economy and other advanced capitalist countries. They concentrated more and more on services, boosted consumer demand through the expansion of cheap credit and the boom in housing and financial assets, and outsourced manufacturing to low-cost economies such as China. Krugman has little or nothing to say about these structural changes in the US and the global economy. This reflects the characteristic weakness of the Keynesian approach. He believes that the current problems could be rapidly overcome by a change in macroeconomic policy. He sees the current depression as "gratuitous" "this doesnt have to be happening". His explanation is that "weve suffered a software crash The point is that the problem isnt with the economic engine, which is as powerful as ever. Instead, we are talking about what is basically a technical problem, a problem of organisation and coordination a colossal muddle, as Keynes put it. Solve this technical problem, and the economy will roar back to life". This reflects Krugmans illusion the Keynesian illusion that the capitalist economy can be managed, that imbalances can be overcome by government intervention with the right policies, that capitalist leaders and policymakers can be persuaded to adopt the right policies through rational argument. If anything, Krugman is even more naive than Keynes himself, who recognised the difficulty of persuading capitalists to accept state intervention outside a war situation that threatened their existence. Its all about demand KRUGMAN DESCRIBES HIMSELF as "a sorta-kinda New Keynesian" who "often turn[s] to old Keynesian ideas". He follows Keynesian thinking that rejects Says law, the idea that, over time, demand will always match supply. According to the classical political economists of the early period of capitalism this reflected the fact that the market would always achieve equilibrium. This

doctrine came to the fore again in the 1990s, when free-market economists (including Alan Greenspan, one time head of the Federal Reserve bank) embraced the absurd idea of the perfectibility of markets. Some enthusiasts even claimed that booms and slumps were phenomena of the past. After the collapse of Lehman Brothers in 2008, even Greenspan had to admit that he was wrong, although he has subsequently reverted to his ultra-free-market notions. Krugman also follows Keynes in arguing that "its all about demand": the main factor in the current depression is the insufficiency of aggregate demand (that is, the total money-backed demand for goods and services, including capital goods). "In 2008 [Krugman writes] we suddenly found ourselves living in a Keynesian world by that I mean that we found ourselves in a world in which lack of sufficient demand had become the key economic problem" This situation, he argues, requires activist government policies. Clearly, the collapse of demand following the financial crisis was the immediate cause of the economic downswing. Households were massively in debt, and were hit by the collapse in house prices and the steep rise in unemployment. Many businesses (especially small and medium) were hit by the credit squeeze and the collapse of consumer demand. Big corporations, with huge cash reserves, were not prepared to invest in new capacity on the basis of shrinking markets. Both the household and the business sector were caught in a classic debt trap. They desperately struggled to reduce their debts, saving more than they invested or spent on goods and services. The Keynesian argument is that in this situation the state has to step in and stimulate demand. Lowering interest rates (even to zero) is not enough. By borrowing money to finance deficit spending or by printing money the state should inject demand into the economy. Increases in the social safety net (for instance, unemployment benefit) and job creation schemes (such as, infrastructure projects) could reduce unemployment and support increased demand. Krugman approves of the measures taken by the US government and the Federal Reserve in 2008/09. The Fed reduced interest rates to near-zero and pumped credit into the economy through the so-called quantitative easing policy. Krugman also approves the rescue under George W Bush of the banks and the shadow banking institutions through the TARP ($700bn), though he rightly comments that they were bailed out on extremely lenient terms. In contrast, the promised help for under-water mortgage holders (home buyers with negative equity) has largely failed to materialise. He particularly supports Obamas $787 billion stimulus package, but is very critical of its limited character (almost 40% of it taking the form of tax cuts rather than increased spending). Krugmans main criticism is that the programme was much too small and has been largely abandoned since 2010. This, he argues, is why the recession has continued and unemployment remains at such a high level. (Krugmans criticism of Roosevelts New Deal stimulus is also that it was too small, giving way to another recession in 1937.)

If Obama had continued the stimulus policy, particularly through public works that created millions of jobs, the US recession might not have been so severe. However, in isolating the factor of demand as the crucial factor, Krugman fails to get to the root of the problem. The Keynesian idea is that a spurt of state spending will jump-start the economy, creating jobs, stimulating investment, and so on, "until the private sector is ready to carry the economy forward again". But it is far from certain (leaving aside capitalist hostility to an increase in the economic role of the state) that a short-term stimulus of this type would actually revive investment and production by the big corporations. Capital investment has been declining as a share of GDP in the US and other advanced capitalist countries since the early 1980s, despite the increased share of profits in national income. The stagnation of capital investment continued in the US in the 1990s and the 2000s despite the high level of demand (which was sustained by credit/debt). Keynes believed that equilibrium of the market would break down at a certain point because of the capitalists so-called liquidity preference. In other words, they would save more than they invested, preferring to hoard their cash rather than invest it productively. Keynes explained this through the factor of confidence, a subjective explanation. In reality, the lack of confidence is rooted in an estimation of a much more objective factor: the prospects of making adequate profits. It is the liquidity preference of the big corporations which has been behind the turn towards speculative financial activity since the early 1980s. Krugmans analysis reflects the weakness of Keynesian theory: it focuses on empirical, macroeconomic policy, and fails to come to grips with the underlying forces, especially the trajectory of profitability. Amazingly, Krugman makes no reference to profits or profitability the word does not even appear in the index (but this is not uncommon in Keynesian textbooks). He graphically illustrates the growing inequality in the US, but makes no attempt to link this to the intensified exploitation of the working class, from whose labour power all profit is derived. A policy fix? "BY APPLYING TIME-HONOURED economic principles whose validity has only been reinforced by recent events, we could be back to more or less full employment very fast, probably in less than two years. All that is blocking recovery is a lack of intellectual clarity and political will". This is a point that Krugman repeats several times throughout the book. "Time-honoured principles" refers to Keynesian policies. Like Keynes before him, Krugman argues that his policies are moderate. He is proposing "measures that would mainly try to boost the economy rather than trying to transform it" Like Keynes, he makes it clear that he is not challenging the fundamental structure of capitalism. He is warning that a prolonged slump "poses [dangers] to democratic values and institutions" code for upheavals and class conflict. Despite his biting criticism of Republican politicians, big-business leaders and academic advocates of ultra-free-market policies, Krugman frequently appears

surprised at their posture. He sees it as a failure on their part to understand the issues and come to grips with reality. He hopes that the pressure of enlightened public opinion may change their position. "The sources of our suffering are relatively trivial in the scheme of things, and could be fixed quickly and fairly easily if enough people in positions of power understood the realities". Yet the author himself repeatedly points to the vested interests or, as Americans say, special interests of those championing free-market policies. The social weight of big business has been markedly increased in the last 30 years. There has been a huge concentration of wealth into the hands of the top 1%, or even a small fraction of the top 1%. Money, as Krugman says, buys influence, and big business has exerted enormous influence over both the Democratic and Republican parties. Why do many on the right, for instance, vehemently oppose the monetary policies of the Federal Reserve under Ben Bernanke? In effect, quantitative easing is a form of Keynesianism for bankers. Many of the major financial institutions would have collapsed but for the cheap liquidity provided by the Fed. However, the finance capitalists in particular are obsessed by the spectre of inflation, even though it is not an immediate threat. (Given that there is global overcapacity which depresses price levels and the banks are mostly sitting on the reserves rather than channelling them into circulation.) The financiers support policies that favour creditors rather than debtors. The moneylenders abhor low interest rates and inflation (which depresses real, inflation-adjusted interest rates). Krugman quotes a comment of Keynes himself. Free-market ideas, Keynes said, "[afford] a measure of justification to the free activities of the individual capitalists, [attracting] to [these ideas] the support of the dominant social force [the capitalists] behind [government] authority". In the US, big-business spokespersons and Republican politicians make no secret of the fact that they see any form of state intervention to overcome the recession as the thin end of the wedge, posing the danger of socialism. Krugman provides many of the ingredients required for an analysis of the political-economic situation in the US. But he himself fails to provide such an analysis. As a liberal, he fails to see right-wing ideology, the vested interests of big business, and the rightward moving leaders of the Republican Party as manifestations of class interests, as, in fact, ideology/policy that represents the interests of a powerful section of the capitalist class, especially finance capital.

Krugmans solution KRUGMAN HAS LITTLE difficulty in showing that deficit reduction policies, to which capitalist governments turned as soon as there was a limited revival in 2010, have made the situation worse. His comments in the chapter on Europe, Eurodmmerung (Europes twilight, after Wagner), have been further confirmed by the continuing recession throughout the EU and eurozone. He shows that the policy of expansionary austerity based on the idea that deficit reduction will promote confidence in the economy and thereby encourage investment and growth, is so much hocus-pocus. Krugman wittily refers to the Austerians, the leaders and economists who advocate austerity, strongly influenced by the ultra-free-market economics of the Austrian school like Friedrich Hayek and Ludwig von Mises. Krugman argues that the additional $5 trillion of debt accumulated by the federal government since 2007 need not be an excessive burden on the economy. This requires about $125 billion in interest payments, around 1% of GDP. Plausibly, US capitalism could sustain a significantly higher level of debt provided there was GDP growth that allowed it to be steadily reduced over a period (even a long period). The problem politically is that the capitalist class in the US, having enjoyed a steady reduction in its tax liabilities since the 1980s, is intransigently opposed to paying higher taxes in order to finance public investment. Krugman justifiably criticises Obamas stimulus (including the very limited second package) as too little, too late. But, given the clarion call of this books title, Krugmans proposals are surprisingly limited and vague. He advocates a big extension of quantitative easing, with the Fed buying up a much wider range of assets (including company bonds and home mortgages) to inject more money into the economy. He argues that the restoration of federal support to states and cities could create three million jobs over the next two or three years. Effective mortgage relief, promised by Obama but never delivered, could stimulate consumer spending. Krugman calls for more public spending and public works (repair and renewal of infrastructure), but is surprisingly vague. He recognises that Obama faced massive political opposition in Congress, even from sections of the Democratic Party, and perhaps Krugman himself wants to avoid giving a hostage to fortune by proposing specific measures. No historical perspective KRUGMANS ANALYSIS LACKS historical perspective. He recognises that Roosevelts New Deal was not entirely successful, giving way to a new recession in 1937. In his view, it was not big enough or sustained long enough. However, he argues that the huge increase of public spending in a response to the opening of the second world war in 1939 pulled the US out of recession. Even before the US entered the war, rearmament and the increased global demand for US goods boosted its economy. The war was financed by borrowing, but the national debt was paid down quite rapidly during the post-war economic upswing. According to Krugman, this shows that historically high levels of debt need not be a problem, so long as there is sustained GDP growth. "What the threat of war did was to finally silence the voices of fiscal conservatism, opening the door for recovery" Liberal Keynesians, however, can hardly advocate a war to resolve economic

problems! Jokingly, Krugman suggests that "what we really need right now is a fake threat of alien invasion that leads to massive spending on anti-alien defences". This is revealing. The joke highlights Krugmans failure to grasp the unique historical character of the second world war and the post-war upswing or of the current historical conjuncture. "The fact is that we had almost two generations of more or less adequate employment and tolerable levels of inequality after world war two, and we can do it again". But Keynesian policies cannot recreate the conditions required for a prolonged economic upswing. The structure of capitalism (though not its essential character) has changed, as have global economic relations. The collapse after 1989 of the Soviet Union and the other Stalinist states (planned economies ruled by bureaucratic regimes) removed a counterweight to capitalism. There was a weakening and political disorientation of the trade unions and traditional workers organisations. This emboldened the capitalists, led by the US ruling class, to launch an assault on working-class living standards and rights, and to push for the perfection of the market. Finance became the dominant force in the advanced capitalist countries. The situation is entirely different from the post-second world war period. A programme of public works? ARE KEYNESIAN POLICIES now ruled out? Some people undoubtedly think so. "In the current market environment", says a Deutsche Bank analyst, "there is no room for using a Keynesian-type expansionary fiscal policy to boost demand in countries with low growth the markets will simply not accept such a strategy". (International Herald Tribune, 10 January) Global financial markets are now far bigger than they were in Keyness time, or even before the 1980 neo-liberal revolution. In 1980 financial assets (in reality, credit/debt securities) were equal to one years output of the global economy. By 2006 such assets amounted to four times global output. This scale gives speculators the so-called bond-market vigilantes the power to speculate against any governments that carry out policies of which they disapprove. The bond traders, moreover, are reinforced by ultra-free-market ideology, which now dominates the thinking of capitalist governments and international agencies such as the OECD. Despite the deepening of the current world recession, they really believe that unfettered markets will produce growth and mass unemployment and impoverishment of sections of the working class will not dent this growth. The kind of policies advocated by Krugman, if effectively implemented, could cushion the downswing in the US and elsewhere. But they would not overcome the underlying problems of capitalist accumulation. In any case, many Keynesians feel that it is already too late. For instance, Keyness biographer, Robert Skidelsky, writes: "At last, opinion is starting to shift [in favour of Keynesian policies] but too slowly and too late to save the world from years of stagnation". (The New Republic, 12 July) Yet things can change. The capitalist crisis will produce social explosions and eruptions of class conflict. In the US, for instance, in the event of Romney

winning the presidency and implementing the policies advocated by Ryan, they are likely to provoke an even worse slump. (It is possible that even a RomneyRyan presidency would be forced more by pressure from big business to temper its crazy ideas with more pragmatic policies.) Explosive movements of the working class and deep social crisis will, under certain conditions, push capitalist governments into adopting Keynesian-type measures to avoid a mortal threat to their system. Keynes himself said that his policies were designed to avoid revolution. When it is a question of saving their system, the capitalist class will, at least temporarily, make concessions to the working class. To reduce mass unemployment they may well adopt public works programmes. They will be forced to repair the social safety net. But such policies will be a temporary expedient. They will not be a return to the longterm, sustained Keynesian policies of the post-war upswing, when the state increased its intervention in the economy and developed an extensive social welfare infrastructure. Keynesian policies may buy time for the ruling class but they cannot resolve the crisis of capitalism. How, as socialists, should we regard a stimulus package or programme of public works? In the face of mass unemployment and the prospect of prolonged economic stagnation, the leaders of workers organisations should indeed be calling for a massive programme of public works to provide jobs and stimulate growth. To be effective, a public works programme would have to be on a much bigger scale than that proposed by Krugman. It would mean the refurbishment and addition of new infrastructure, especially homes, schools, hospitals, community facilities, etc. Workers should be employed on a living wage with full trade union rights. Effective economic stimulus would require a big increase in social spending, increasing pensions and other benefits. Tax rates for the wealthy and big corporations should be substantially increased, with a levy on the uninvested cash piles of big companies. Effective measures should be taken against tax evasion and avoidance. It has to be recognised in advance, however, that the capitalists will vehemently resist a bigger role for the state and increased taxation. A programme to provide jobs and stimulate growth would require the mobilisation of the working class. Moreover, increased taxation in itself will not be sufficient to develop the economy. The dramatic raising of the living standards of the majority of the population would require the resources (additional real wealth) created by increased production. The banks and finance houses would have to be nationalised (not bailed out and propped up at public expense), and run under democratic workers control and management. This would ensure the credit required to develop all sectors of the economy. There would also have to be capital controls to prevent any flight of capital. Such measures would undoubtedly meet the entrenched resistance of the capitalist class. State intervention in favour of the working class would unavoidably pose the question of the takeover of the commanding heights of the economy, to form the basis of a democratic plan of production (run by elected representatives of the workers and the wider community).

Any government carrying out such a policy would need an international perspective, collaborating with the workers movement in other countries to develop socialist planning at an international level.

7. On capital investment
I VERY much enjoyed the excellent in-depth review by Lynn Walsh of the new book by the Keynesian economist Paul Krugman. Lynn clearly shows that, despite the author having a Nobel Prize in economics, he only has a superficial grasp as to the nature of the current capitalist crisis. I think Lynns analysis is spot on that Keynesian proposals for addressing the crisis are an absolute pipedream. However there were aspects of the review that have left me scratching my head, in relation to the points Lynn makes about capitalist investment. I quote: "Capital investment has been declining as a share of GDP in the US and other advanced capitalist countries since the early 1980s, despite the increased share of profits in national income. The stagnation of capital investment continued in the US in the 1990s and the 2000s despite the high level of demand (which was sustained by credit/debt)". Did US capital investment decline as a share of GDP despite the share of profits from the early 1980s on through the rest of the century and beyond? When I look at the historical data the evidence clearly contradicts this statement. Here is the history of investment based on data from the US Bureau of Economic Analysis (graph 1). This graphic representation shows crystal clearly that the level of US capital investment in the 1980s was actually the highest ever recorded in the history of US capitalism. At the turn of the century, despite a gradual decline, it had recovered to a higher level than the 1960s or 1970s. It did decline rapidly prior to the 2007 financial crisis not surprisingly, along with a decline in the rate of profit naturally. Just to provide some figures to support the graphic evidence, between 2003 and 2007, while profits only increased by 35%, investment increased by 151%. During that period capitalist net profits increased by $222 billion but net investment increased by $280 billion. In other words, the US capitalists were investing all of their profits and then an additional amount. Not to labour a point but is our analysis sticking to a proper interrogation of the data or are these facts regarded as some sort of neoliberal con trick manufactured to hoodwink the working class? Are they impossible to prove? Any analysis should surely begin by critically assessing the empirical data rather than issuing sweeping statements which are clearly contradicted by the available evidence. Where is our evidence that all of the capitalists profits disappeared into the financial sector for instance? Or am I barking up the wrong tree? Bruce Wallace, Scotland

8. Lynn Walsh responds:

THANKS, BRUCE, for your comments. Regarding your query about declining capital investment, I agree that our analysis of trends within capitalism should be based on critical analysis of the appropriate empirical data. Your chart shows one measure of US investment: private (non-residential) investment as a percentage of corporate profits, which are a relatively volatile indicator. More revealing measures of investment are the growth of fixed capital stock (effectively, growth of the means of production) and private investment as a share of gross domestic product (GDP). GDP is the total spending on goods and services in the national economy, of which investment is one component. Investment as a share of GDP shows the weight of investment in the national economy. Even the data for investment in your chart, however, suggests a long-run decline in investment as a percentage of profits. There were sharp (but shortlived) rises after 1980 (when the ultra-free-market, neoliberal revolution began under Reagan), between 1995-2001 (during the dot.com bubble), and during 2005-07 (when there was an explosive credit boom and housing bubble). Between 1980 and 2007 a growing share of investment was in information and communications equipment, a significant share of which was linked to the financial sector. There is clear evidence of a long-term decline in capital investment. Capital accumulation is the key to economic growth. Increased capital stock is required to increase capacity and output, and investment is also the key to incorporating new technology in production. Capital expenditure, moreover, is a key source of demand, together with consumer demand. Figures for the growth rates of capital stock 1960-2004 (net growth after depreciation for worn-out or retired capacity) show that the pace of global capital accumulation slowed, especially in the advanced capitalist countries (see Andrew Glyn, Capitalism Unleashed [2006], p86). Table 2 shows that the growth rate for world fixed capital stock declined, despite the faster growth in China, South Korea, and some other semideveloped economies. For the industrial (advanced capitalist) countries as a whole, the growth rate declined from 5% in the 1960s to 3.3% in the 1990s. In the US, the growth rate declined from 4% to 2% during 2000-04. The main point is that, despite the implementation of neoliberal policies, the decline in the rate of investment was not halted. Glyn further notes that private investment did increase rapidly in the 1990s in the US. However, this "did not drive the growth rate of the capital stock to unprecedented highs. This is because capital stock growth started from an exceptionally low point in the early 1990s. The investment boom of the later 1990s halted the seemingly inexorable downward trend in the growth rate of the capital stock which had begun in the late 1960s. Moreover, when the boom came to an end in 2000 capital stock growth plummeted more steeply than ever before". (Glyn, p134) Another more recent study analyses the "poor rates of private investment", despite the favourable conditions for big business and the super-rich created by neoliberal policies. (JG Palma, The Revenge of the Market on the Rentiers

Why Neoliberal Reports of the End of History Turned Out to be Premature, Cambridge Journal of Economics, 2009, 33/4 p853): "It is still truly remarkable to see how private investment failed to respond positively to the combined incentives of huge income polarisation cum political stability and dynamic growth of personal consumption, high profit rates and overabundance of finance. Private investment [in the US] instead actually declined as a share of GDP, falling cyclically from its peak of 18.5% of GDP in 1979, to just 15.5% in 2007". (Chart 3) Despite the staggering increase in the share of income taken by the top 1% in the US, investment declined. The chart, says Palma, shows "the changing relationship between what top income earners take away from the economy, and what they put back into it in terms of improved productive capacity. In fact, towards the end of the period this relationship had changed so much that even the income share of the top 0.5% (ie only 700,000 families earning 18.6% of the total in 2006) ended up well above the share of all private investment in GDP (15.5%)". The decline in investment has also been analysed by Ha-Joon Chang (23 Things They Dont Tell You About Capitalism, 2010). "The immediate income redistribution into profits was bad enough, but the ever increasing share of profits in national income since the 1980s has not been translated into higher investment either. Investment as a share of US national output has actually fallen, rather than risen, from 20.5% in the 1980s to 18.7% since then (19902009). It may have been acceptable if this lower investment rate had been compensated by more efficient use of capital, generating higher growth, however, the growth rates of per capita income in the US fell from around 2.6% per year in the 1960s and 1970s to 1.6% during 1990-2009, the heyday of shareholder capitalism". (p19) Even Alan Greenspan, when head of the Federal Reserve Bank, admitted there was an alarming softness of capital investment, despite the abundance of cheap credit. In his testimony to Congress (House Committee on Financial Services, 20 July 2005), Greenspan acknowledged that "on average, countries investment propensities had been declining". Moreover, "softness in intended investment is also evident in corporate behaviour. Although corporate capital investment in the major industrial countries rose in recent years, it apparently failed to match increases in corporate cash flows. In the United States, for example, capital expenditures were below the very substantial level of corporate cash flow in 2003, the first shortfall since the severe recession of 1975". Greenspan noted that Japanese investment "exhibited prolonged restraint" following the speculative bubble of the 1990s, while investment in the developing Asian economies (apart from China) "fell appreciably after the Asian financial crisis Moreover, only a modest part of the large revenue surpluses of oil-producing nations has been reinvested in physical assets". Greenspan (and subsequently Ben Bernanke) tried to blame the shortfall of investment on the excessive savings of countries such as China. However, their global saving glut (GSG) theory was sharply rejected by two economists working for the French central bank (Gelles Moc and Laure Frey: Global

Imbalances, Saving Glut and Investment Strike, Occasional Paper, Banque de France, February 2006): "The most striking feature of the present state of the global economy is not so much a saving glut as an investment strike, in spite of low long-term interest rates". "This also affects the US economy where corporate investment remains subdued relative to profits, adding to the gradual loss in its tradable productive capacity". Moc and Frey accept that global savings rose in the 1990s, "but the level seen in 2004 is by no means an unprecedented level. Contrary to the GSG assumption, an unprecedented low level of investment outside the US explains the bulk of the increase in global net lending". Drawing on IMF data shown in their tables and charts, these economists show a worldwide decline in capital investment: "Japan and the euro area have displayed a clear pattern of investment strike since the mid-1990s in Japan and since 2001 in the euro area. But emerging Asia excluding China has also displayed a sharp decrease in the investment rate. In the latter area, even if the investment rate has lately recovered, it still remains in 2005 almost ten GDP points below the 1995 level". " Faced with financial imbalances which built up during the bubble years", Moc and Frey continue, "US firms quickly managed to record high levels of profitability, thanks to aggressive action on labour costs. Nevertheless, business investment has not yet picked up as rapidly as profits. Consequently, the US non-financial corporate sector has recently displayed an unprecedented net lending capacity". Finally, where is the evidence that a lions share (not "all") of the capitalists profits disappeared into the financial sector? The brief answer is that the ratio of financial assets to GDP in the US was between 400% and 500% in 1950-70. From the early 1980s, with the implementation of neoliberal policies, it shot up to around 900% by the early 2000s (Ha-Joon Chang, p238). Moreover, in the last three decades, the profits of the financial sector have been higher than the profits of the non-financial sector. In an article published in 2009, Simon Johnson, a former chief economist to the IMF (2007-08), gave figures for the share of corporate profits taken by the financial sector in the US: "From 1973 to 1985, the financial sector never earned more than 16% of domestic corporate profits. In 1986, that figure reached 19%. In the early 1990s, it oscillated between 21% and 30%, higher than it had ever been in the post-war period. This decade, it reached 41%". (Simon Johnson, The Quiet Coup, The Atlantic Monthly, May 2009) This factual data (most of which has been referred to in previous articles), in our view, confirms the analysis of a crisis in capital accumulation put forward in Socialism Today over many years.

Pictures of chart 1-3

9. Capital investment debate continues

Thanks, Lynn, for your extensive reply to my letter in Socialism Today No.163. Unfortunately I think the serious point I made has been avoided. My point was simple and clear; that your suggestion that US capital investment had been on the decline since the early 1980s was factually incorrect. It isnt true. The data I cited was US non-residential private investment (NRPI). You suggest NRPI is an inappropriate measure of investment and dismiss it as a relatively volatile indicator. Growth of capital stock, in your view, is the more revealing and correct indicator. NRPI isnt an indicator of anything, it is the rate of US capitalist investment for that economy measured in dollar terms and is accepted by every Marxist economist I know of. You remark there were sharp (but short lived) rises in investment after 1980 without elaboration and that can be misleading. Readers should examine the graph I supplied closely as one of the sharp rises (in the early 1980s when you claim they were declining) was, I repeat, the highest ever recorded in the history of US capitalism. Investment declined gradually towards the end of the 1980s, recovered strongly in the late 1990s to 2000, before falling sharply due to recession. It was very low on average in 2002-2007. It recovered sharply prior to the 2007 crisis, tracking a spurt in the rate of profit which had been declining after peaking in 1997. My subsidiary point about the falling rate of profit was totally avoided. The rate of net US capital investment 1983-2001 was 64% of after tax profits, above the average of 61% for 1947-1978. There wasnt a historical decline in average investment for nearly two decades prior to 2001. There was an explosion of speculative financial investment at the turn of the century precisely because capital investment was so low in the first decade of the 2000s. There has been low capital accumulation over the whole period but why? Falling investment for periods after the 1980s is the formal reason for it but what caused this? You suggested fixed capital formation (see chart) has been in progressive decline since 1980 but it mirrors investment closely. It actually increased in the mid-1980s. The growth rate of US capital stock declines at the end of the 1980s as neoliberal policies began to bite. So I think my critical point holds on the evidence of both sets of data. Could you explain what you mean by a crisis in capitalist accumulation? I havent come across a rounded out explanation in previous issues. What role does the historic fall in the rate of profit play in this process? Bruce Wallace, Scotland

10. Behind the stock market surge

In the first week of March share prices surged on the New York Stock Exchange followed by other major exchanges. Does this signify a revival of the global capitalist economy? The Financial Times was quick to note that "little of investors exuberance is reflected in core economic data The US and the UK ended the year stagnant; the eurozone and Japan in renewed recession; the emerging world slowing down". (Stock Markets Defy Economic Woes, 6 March) "Asias economic recovery is losing momentum and Europes slump is proving deeper than expected, raising concerns that soaring stock markets globally have jumped ahead of economic reality". (Evans-Pritchard, Booming Stock Markets Belie World Economy, Daily Telegraph, 12 March) There is a glaring contradiction between soaring shares and the real economy, a symptom of the peculiar conjuncture of world capitalism. The Dow Jones Industrial Average (DJIA), an index of 30 blue-chip corporations, reached a record high on 4 March, following a 54% fall during the 2007-09 slump. When adjusted for inflation, however, the DJIA is still 10% below its 2007 peak. Nevertheless, this is still an amazing recovery given the stagnation of the world economy. Writing in the Financial Times, Chris Giles refers to "persistent weak growth" of the advanced capitalist economies. "While International Monetary Fund data show advanced economies grew only 1.3% in the five years between 2007 and 2012, the degree to which economies are pulling themselves out of their woes is much harder to discern amid often conflicting data". (Little Recovery in Advanced Economies, 5 March) Giles refers to a new statistical technique of combining various types of data to provide a composite index of economic progress. "The research suggests that US economic news has been no better than normal and the countrys recovery has been characterised by mini-cycles of moderately good, then bad, data since 2010". He quotes a professor Beber of Cass Business School as saying "since the crisis, the US has been chugging along around zero. Each time the recovery looks like its picking up, it then falls back". Referring to the eurozone, Giles comments that "around 2010, indicators of growth were strong in the single currency area [following big stimulus packages by the major EU economies] but the positive data fell away in 2011 and is now significantly worse than historic norms". "The UK is still marred in the weak economic data it has become used to since 2011, with the index remaining reasonably stable at subpar levels". This describes a depression, not as deep as the 1930s but a period of weak cyclical growth in which capitalism fails to overcome the obstacles to growth and rise decisively above its previous peaks. But why, in this dismal situation, have share prices shot up? The immediate trigger seems to have been the US employment figures for February, which showed an increase of 236,000 jobs, higher than the expected 165,000. A big factor in this was the increase in construction jobs, due to more favourable

weather. The unemployment rate fell to 7.7%. This was taken by financial markets as indicating a continuation, if not a pick-up, in the painfully slow recovery of the US economy. However, while the unemployment rate fell (based on the number of workers seeking jobs), the labour force participation rate actually fell. The employment-to-population ratio (EPOP) has fallen from 63% in 2007 to 58.6% currently. There are still fewer workers in employment than there were before the great recession. Also driving the surge in share prices is the continuation of low interest rate policies and massive liquidity creation by major central banks. The US Federal Reserve has pumped around $3 trillion into the economy since 2007, and has made it clear that it will carry on creating credit until there is sustained growth. The Bank of England has pumped in 375 billion of quantitative easing. China has expanded total domestic credit from $9 trillion to $23 trillion over the last four years, while Japan is about to embark on another programme of state stimulus and credit expansion. The expanded credit is meant to feed into the economy to stimulate investment, increase production and consumption. In reality, the continued flood of credit has had a perverse effect. The credit squeeze for small businesses, home-buyers and consumers has continued as banks rebuild their capital reserves. Meanwhile, most of the additional liquidity has flowed into financial markets. The sharp rise in share prices, in fact, is an indication that the ultra-cheap credit is creating a new share-price bubble. This could pop at any time. Even before March is out, the Cyprus crisis is causing renewed jitters on world stock exchanges. The yields from government bonds are currently extremely low, in fact negative in inflation-adjusted terms. This is also one of the effects of increased central bank liquidity, which allows governments to borrow at near-zero rates. Investors flush with cash, therefore, have turned to company shares in search of higher returns. Wealthy investors are also encouraged by the prospect of increased returns from profitable companies (from dividend payments or capital gains on selling shares at higher prices). The higher corporate profits come from the intensified exploitation of workers. "With millions still out of work, companies face little pressure to raise salaries, while productivity gains allow them to increase sales without adding workers. So far in this recovery, corporations have captured an unusually high share of the income gains, said Ethan Harris, co-head of global economics at Bank of America Merrill Lynch". (Nelson Schwarz, Recovery in US Lifting Profits, New York Times, 3 March) "As a percentage of national income, corporate profits stood at 14.2% in the third quarter of 2012, the largest share at any time since 1950, while the portion of income that went to employees was 61.7%, near its lowest point since 1966. In recent years the shift has accelerated during the slow recovery that followed the financial crisis and ensuing recession of 2008/09". (Schwarz) The big corporations continue to apply new technology to reduce their need for labour, as well as relying on cheaper labour in low-cost countries. The big corporations are also following a policy of pushing up their share prices by buying back their own shares. This amounts to a cash hand-out to their shareholders, which artificially raises share prices by increasing the profit-

per-share. This is carried out partly by using their huge cash reserves and partly through borrowing cheap money in order to subsidise the buy-backs. Historically, stock markets were a source of funds for investment in companies. Such is the irrationality of present-day capitalism, that the opposite is the case: there is a massive transfer of funds from profitable companies to shareholders. The Financial Times Lex column explains: "Companies have been enjoying record profitability. But they are using it on dividends and share buy-backs, which last year reached a combined level surpassed only in 2007. S&P 500 companies paid out slightly less than 90% of net income on dividends and buybacks last year, S&Ps data show. They are spending to keep per-share earnings and dividends rising. Investors are happy. But it is not easy to see how companies can accelerate the pace at which they return cash. Unlike consumers, they are as leveraged [indebted] as ever". (13 March) Steve Rothwell (Associated Press) writes: "Companies have also been hoarding cash. The amount of cash and cash-equivalents being held by companies listed in the S&P 500 climbed to an all-time high $1 trillion at the end of September, 65% more than five years ago, according to S&P Dow Jones indices". (AP, Housing and Jobs Key to Lifting S&P to Record, 28 December 2012) Moreover, a large chunk of US corporations record profits are hidden away in offshore tax havens (like Bermuda and the Cayman Islands). The Wall Street Journal found that the 60 largest companies moved $166 billion offshore in 2012, shielding 40% of their earnings [profits] from American taxes and costing the US billions in lost revenue. Just 19 of the 60 companies disclosed their potential tax liability which totalled $98 billion more than the $85 billion in the automatic, across-the-board spending cuts triggered recently following the US Congresss failure to agree a budget. Capitalists invest and produce goods and services to make profits. But it is clear from the current situation that short-term profits are in themselves not sufficient to bring about increased investment. How has this come about? In the closing phase of the post-war upswing after 1968 capitalists of the advanced countries were hit by a decline in profitability. After a period of stagflation (low growth, high unemployment, but high inflation), they turned after 1980 to the unprecedented expansion of credit and financial speculation. The neo-liberal policies accompanying this turn helped create the conditions for super-profits and the extreme polarisation of wealth throughout the capitalist world. Now, most of the big corporations are reaping huge profits. But because of overcapacity in many industries and weak consumer demand (because of reduced incomes and public spending cuts), corporations and their financial masters see insufficient openings for profitable investments. Paul Krugman sums it up: "Not only are workers failing to share in the fruits of their own rising productivity, hundreds of billions of dollars are piling up in the treasuries of corporations that, facing weak consumer demand, see no reason to put those dollars to work". (The Market Speaks, New York Times, 7 March) Krugman calls for a massive increase in public spending to stimulate demand. While this would give a temporary boost to the economy, it would not necessarily create

the conditions for profitable investment by the capitalists, the precondition for sustained growth within capitalism. Meanwhile, as one commentator puts it, corporate profits continue to "eat" the economy. (Derek Thompson, Corporate Profits are Eating the Economy, New Atlantic, 4 March) The chart (based on US data) shows that, from 1970 to the mid-1990s, the growth of corporate profits approximately followed the growth of GDP and workers income. Then "corporate profits began to take off, relative to GDP growth, in the 1990s, before exploding in the last decade". Profits plunged during the 2008 crisis, but have since recovered to new heights (the finance sector now accounts for roughly half of US corporate profits). "When the economy crashes [says Thompson], we all crash together: corporate profits, employment, and growth. But when the economy recovers, we dont recover together" Lynn Walsh

11. Profitable question

As always I really enjoyed Lynn Walshs recent article, Behind the Stock Market Surge, (Socialism Today No.167, April 2013). Lynns expert grasp of the dynamics of finance and the stock market is excellent and very informative, and I fully agree that the present share bubble could pop at any time. However, I am left scratching my head about some things he says about the economy in general because it is contradictory. For example, Lynn says the following: "Now, most of the big corporations are reaping huge profits. But because of overcapacity in many industries and weak consumer demand (because of reduced incomes and public spending cuts), corporations and their financial masters see insufficient openings for profitable investments". Leaving aside the issue of investment, the problem I have is in understanding how it is possible for big corporations to be reaping huge profits but for consumer demand to be weak at the same time? US gross profits are indeed booming. Since the trough of 2008 they are up over 40% and are now 7% above the previous peak in nominal terms set in 2006. There are suggestions that this means that the US economy is moving into recovery mode. My point is very simple. If the profits of US capitalism have recovered that means they must be selling their output. It isnt possible to make profit out of thin air (unless its imaginary as in parts of the financial system). As profit is surplus value congealed within the material packet of the commodity, in order to realise this surplus value as profit, in money form, the commodity must be sold through market exchange. Therefore the capitalists have to be selling their goods otherwise profits couldnt be made. So could Lynn clarify exactly how it is possible for profits to be increasing to record levels when the demand for output, in Lynns explanation, is decreasing at the same time? In line with what the Keynesian economist Paul Krugman argues, and who Lynn appears to agree with? Doesnt this violate the laws of physics? Bruce Wallace, Scotland

12. A reply to a profitable question

I can understand Bruce Wallaces scepticism about how profits can be rising yet demand declining. (Socialism Today No.168, May 2013) Capitalists can increase their profits without increasing their sales in terms of value or volume. Their profit is made from sales less their costs, which can be things like loan interest, rent, depreciation on capital machinery, wages and a number of other things. In fact, any bookkeeper worth their salt (which is the limit of understanding of most capitalist economists) could probably tell us that, by reducing costs in wages and other costs (assuming sales are not cut by the same ratio), a bigger share goes to profits. So, despite weaker demand there can still be an absolute and relative increase in profits. As Bruce rightly says, for Marxists, the struggle is over the share of surplus value created by workers and profit for the capitalists. As Lynn Walsh wrote (Behind the Stock Market Surge, Socialism Today No.167, April 2013), another way is through investment capital or new technology to reduce the number of workers, thereby increasing productivity. Even without necessarily increasing sales, employing fewer workers has cut their labour costs leaving more profit for them. Even without investing in new capital machinery or technology, the share going to profits has increased by a combination of workers taking actual cuts in wages, speeding up production lines, the intensification of work, fewer paid holidays, pay rises less than inflation, etc. Wages as a share of GDP are at their lowest at 61.7% and profits at their highest at 14.2%. In addition, investing in cheap labour economies increases the share going to profits. Because of the lack of demand and overcapacity, the capitalists cannot fully utilise their current machinery. So why invest in new machinery to expand sales in volume when long-term demand for their goods is in decline? Therefore, only by reducing the share going to wages, or through minimal investment to reduce the number of workers, can they increase their profit without necessarily expanding sales. I believe there are figures showing that capital investment has declined, relatively, for decades. Bruce is quite right to state that profits dont come from thin air. It is surplus value or the unpaid labour of the working class, which is how Karl Marx explains the mystery whereby the daylight robbery of workers takes place. The labour time taken to earn enough to provide for the workers needs (socially useful labour time) has fallen, and the unpaid time that goes to the capitalist (the surplus value) has increased. Therefore, the increase in profits is at the expense of workers. Even in Marxs day he described how capitalists had become mere coupon clippers in purchasing stocks and shares, increasingly divorced from real production. The nature of capitalism today is ever more parasitical. It is difficult to explain all these processes, especially for first-time readers. There is more that can be said on the question of surplus value and capital, etc.

I would recommend that readers of Socialism Today refer to articles on Marxism on the website and arrange discussions on the questions raised by Bruce. Joe Foster, Birmingham