The Handbook of Karl Marx: profitability, crises and financialisation

6 August 2019 — Michael Roberts Blog

The Oxford Handbook of Karl Marx, edited by Matt Vidal, Tomas Rotta, Tony Smith and Paul Prew, brings together a series of chapters by prominent Marxist scholars covering all aspects Marxist theory, from historical materialism, dialectics, political economy, social reproduction and post-capitalist models.

The editors have done an excellent job in arranging the various contributions into sections on the foundations of Marxism, labour and class, the nature of capitalist crises, and post-capitalist alternatives.  And in an introduction, the editors offer a succinct and informative account of Marx’s life and intellectual development, as well as summaries of the chapter contributions.

It is not possible to comment on all the contributions in this 870pp handbook, so I’ll concentrate on the chapters that interest me most.  As you might expect, these are the contributions on the Marx’s theory of crises and modern developments in capitalism like so-called ‘financialisation thesis’ and the digital economy. That’s enough on its own.

I was particularly interested in the chapter on Reproduction and Crisis in Capitalist Economies by Deepankar Basu, from the University of Massachusetts, Amhurst.  In the past, Basu has done excellent empirical work on .  In this chapter Basu develops some arguments about Marx’s theory of crisis.  According to Basu, “The Marxist tradition conceptualizes two types of crisis tendencies in capitalism: a crisis of deficient surplus value and a crisis of excess surplus value. Two mechanisms that become important in crises of deficient surplus value are the rising organic composition of capital and the profit squeeze: two mechanisms that are salient in crises of excess surplus value are problems of insufficient aggregate demand and increased financial fragility. This chapter offers a synthetic and synoptic account of the Marxist literature on capitalist crisis.”

In other words, Basu seeks to reconcile Marx’s law of profitability with ‘profit squeeze’ theory, in particular with Nobuo Okishio’s theorem which disputes Marx’s law, and with the post-Keynesian ‘wage-led’ underconsumption theory of crises. In my view, this ambitious aim fails. Basu reckons that “The controversy between proponents of the “falling rate of profit” crisis tendency and the “problems of demand” crisis tendency that has raged on for decades seem, from the perspective of the analysis of this chapter, rather unproductive and even unnecessary. Capitalist economies are prone to both types of crises: the first when the system generates too little surplus value and the latter when it generates too much. There is no theoretical reason to believe that capitalist economies will be plagued by only one or only the other.”

In particular, Basu argues that “Much of this controversy also seems (with the benefit of hindsight) needless. There are no theoretical grounds to claim that due to technological change, the rate of profit will have a tendency to always fall (as Marx claimed) or that it will have a tendency to always rise (as Okishio claimed). A careful analysis shows that the impact of technological change on the rate of profit depends crucially on what happens in the labor market. If the real wage rate rises sharply during the period of technological change, then the rate of profit tends to fall; on the other hand, if the real wage rate does not rise fast enough, then the rate of profit might rise.”

In my book, Marx 200, I deal in more detail with Okishio’s refutation of Marx. But let’s dissect Basu’s argument here. There are very good theoretical grounds to claim that the average profitability of capital in a capitalist economy will tend to fall over time.  Marx held to this view and provided solid theoretical foundations for this; namely if value (and surplus value) is created only by the exploitation of labour power and if Marx’s general law of accumulation holds in that there is a tendency for the organic composition of capital to rise over time (ie capitalist invest more in machinery and technology relative to labour power); then the rate of profit will tend to fall.

Moreover, the counteracting factor of a rising rate of surplus value from the increased productivity of labour power using machinery will, over time, not match the rise in the organic composition and so the rate of profit will actually fall.  If the rate of profit does so sufficiently and for a sustained period, then eventually there will be over accumulation, a fall in the mass of profit; and a crisis in production will ensue.  The slump will devalue the value of fixed assets, liquidate uncompetitive capital and reduce labour costs through rising unemployment, thus laying the foundations for a rise in profitability.  And the whole circle will begin again.

This is Marx’s theory of crisis, of which Basu says “there are no theoretical grounds to claim”.  That conclusion was precisely the point of Okishio’s theorem, which purported to argue that capitalists would never invest in new technology unless it brought them a higher rate of profit.  Increased technology would lead to higher productivity of labour, which was immediately transformed into a higher rate of surplus value for each unit of production.  So the rate of profit would not fall but on the contrary would rise.  Only the class struggle, bringing about a rise in the real wage, would counteract that and cause the rate of profit to fall.

Okishio’s theorem has been refuted decisively by many authors – I refer you to the following, including recent authors and those in the Handbook itself
(;;;;;;;; And there is also plenty of empirical evidence showing the causal connection between a rising organic composition of capital and falling profitability.

And yet Basu claims he can reconcile Marx’s theory with Okishio’s theorem: “The idea that there is no necessary contradiction between the claims advanced by Marx and Okishio” because “the rate of profit falls or rises after the adoption of a new technique of production ultimately depends on how the real wage rate behaves”.  But the argument that the real wage decides the direction of profitability is not Marx’s.  Indeed, it is closer to Ricardo, which is why Okishio and previous theorists who argue something similar have been called ‘neo-Ricardian’.  There is no way that Marx’s theory of crisis can be reconciled with the ‘real wage’ or ‘profit squeeze’ theory of Ricardo.

Basu goes onto suggest that Marx’s theory of crisis can also be reconciled with the post-Keynesian theory that crises are caused by either low wages leading to a collapse in consumption or by low profits leading to a collapse in investment.  There is no space to deal with the post-Keynesian distribution of income theory here – it is yet another variant of the discredited underconsumption view of crises.  All I can add now is to note the facts.  In the US in every post-war slump, it has been investment not consumption that has led the economy into recession, and it has been a fall in profit and profitability that has led investment.  I remain puzzled why Basu deems it necessary to reconcile neo-Ricardian profit squeeze theory and post-Keynesian underconsumption theory with Marx’s theory of crisis, which in my opinion is theoretically clear and empirically supported.

At least Basu is attempting to develop a Marxist theory of crises under capitalism.  Leo Panitch and Sam Grindin, in their chapter on capitalist crises and the state, deny that there is any theory of crises at all: “the genesis, nature, and outcome of which are historically contingent and the resolution of which changes the terrain for the development of future crises. Crises are always historically specific.”  This view has been expressed before by Panitch and Gindin and by others like David Harvey.

As the P and G put it: “The weakness of a general theory that tries to encompass each of these crises lies in what is thereby obscured. As David Harvey (2008:24–25) has cautioned, “There is no singular theory of crisis formation within capitalism, just a series of barriers that throw up multiple possibilities for different kinds of crises,” each determined by a combination of specific conditions at a “particular historical moment.” This does not mean retreating to an eclectic description of conditions in those historical moments designated as crises. It rather means recognizing that capitalist development is a contradictory process prone to crises—the genesis, nature, and outcome of which are historically contingent and need to be investigated with the tools of historical materialism”.

In their view, they are taking a much more sophisticated view of capitalist crises with its layers than some crude single theory approach.  I have dealt with this argument in many places.  But let me add the simple comment of Mino Carchedi on this sophisticated approach: “if crises are recurrent and if they have all different causes, these different causes can explain the different crises, but not their recurrence. If they are recurrent, they must have a common cause that manifests itself recurrently as different causes of different crises. There is no way around the ”monocausality” of crises.”  We monocausal theorists have never denied that each crisis of capitalism does not have its own characteristics.

See my Amsterdam paper Presentation to the Third seminar of the FI on the economic crisis
and my post The trigger in 2008 was the huge expansion of fictitious capital that eventually collapsed when real value expansion could no longer sustain it, as the ratio of house prices to household income reached extremes.  I do not say that such different ‘triggers’ are not ‘causes’, but argue that behind them is a general cause of crisis: the law of the tendency of the rate of profit to fall.

But P and G go further.  They deny altogether any role in crises for Marx’s law of profitability: “there was always a basic problem with this concept; the many “counter-tendencies” that Marx himself adduced to explain why the tendency does not always manifest itself were, as often as not, the very substance of capitalism’s dynamics: that is, the development of new technologies and commodities, the emergence of new markets, international expansion, innovations in credit provision, not to mention state interventions of various kinds. Above all, it depended on whether the extraction of greater surplus value from labor could be counted on to offset falling profits. Insofar as this could not be secured, then “the falling tendency is nothing but the expression of popular struggles against exploitation.”

In other words, as with Basu, Marx’s general of law of accumulation of a rising organic composition of capital is countered by a rising rate of surplus value and the result is ‘indeterminate’ ie there is no theoretical reason that the former will overcome the latter and lead to falling profitability.  Marx was wrong.  And “mechanically” spouting on about and trying to measure the rate of profit (as some of us do) is a wasted exercise.  Again, this idea of indeterminacy, propagated by Paul Sweezy in the 1940s, by the neo-Ricardians in the 1970s and by Michael Heinrich and David Harvey currently can be refuted and has been done by many authors (as above), including me.

What matters for P and G in explaining crises is the strength of the working class not the profitability of capital: “a key factor in generating the conditions that led by 2007– 2008 to the greatest financial crisis since 1929 was the weakness of the working class. This is important for understanding why, in contrast to the other three crises, this crisis was not caused by a profit squeeze or collapse of investment due to overaccumulation as many Marxist economists have insisted    The “Great Financial Crisis” was triggered in the United States, where profits and investments had recovered by the late 1990s, and it was only after the financial meltdown of 2007–2008 that profits and investment declined.”

Here P and G argue that profitability was irrelevant to the Great Recession and only fell afterwards as a result not a cause.  This is an empirical argument and it is wrong. There is plenty of evidence that there was a fall in US profitability of capital and the mass of profits before the Great Recession started – indeed, profits led investment and investment led production and employment in and out of the Great Recession.  And see this recent analysis supporting this.

One of the Handbook’s editors, Matt Vidal, in his chapter Geriatric capital: stagnation and crisis in Western Capitalism, does use Marx’s law of profitability in his explanation of the collapse of ‘Fordism’, mass factory production from the 1970s.  But he too seems to want to reconcile Marx’s “convoluted” law of profitability with disproportion and underconsumptionist alternatives to deliver “stagnationist” tendencies in post-war capitalist economies.

At least, Vidal shows that Marx’s law of falling profitability is supported by empirical evidence. As he says: “Evidence demonstrates that the profit rate decline was driven in part by a rising organic composition of capital in the United States (Shaikh 1987), Germany, the United Kingdom, and France (Duménil and Lévy 2004). The evidence also indicates that a profit squeeze due to an increasing labor share of income also contributed to the profit rate decline in the United States (Wolff 2003), Germany, the United Kingdom, France, Italy, and Japan (Glyn et al. 2007).”

Vidal argues (correctly in my view) that the reason economies have not restored real GDP, investment and productivity growth rates since the ‘golden age’ of ‘Fordism’ in the 1960s is because profitability of capital remains low.  So credit injections and monetary easing may have kept capitalism from collapsing but essentially stagnation is the main theme – expressing the “structural problems of an ageing capitalism”.

And then there is the brave attempt of Jeff Powell in his chapter to reconcile the ‘financialisation thesis’ with Marxian economic theory.  Readers of this blog will know that the ‘financialisation thesis is that capitalism has changed from the days of ‘Fordism’ when investment in productive assets was the driving force of capitalist accumulation for profit.  Now in the ‘neo-liberal’ era, capitalists no longer invest so much in productive assets and or exploit labour in the production process, but instead seek to speculate and profit in the financial sector and exploit working people through ‘usury’, ie mortgages, savings instruments, rents and taxes.

The financial sector now dominates and is the real enemy of working people and the productive sectors of the capitalist have been relegated by the power of finance capital.  Thus, crises in capitalism are now to be found not in the falling profitability of capitalism but in the ‘fragility’ of the reckless, debt ridden financial institutions that suffer ’Minsky moments’ not ‘Marx moments.’

Thus Powell says “Falling profitability can, at best, be a contributing but far from a driving factor of financialization. Indeed, the overriding concern of the TRPF advocates themselves seems to be less about asserting that falling profits cause financialization than arguing against the diametrically opposed post-Keynesian narrative that financialization causes falling profits.”  I think we should argue both.

Powell reckons that “there has been a secular shift in the role of finance in the period of late neoliberalism. This shift marks the emergence of a new stage of what can be called financialized capitalism, distinct (but intertwined with) processes of financialization. While the speculative excesses of finance that have accompanied this transformation abound, the key point here is that those excesses are by their very nature short-lived, while the emergence of a qualitatively different role for finance represents a structural shift emblematic of a new stage. Finance is providing a system of discipline and control necessary for capital accumulation in an era of globalized production networks.”  So, in this analysis, financialisation is indeed more than just the increase in the size of the financial sector and financial sector profits in neoliberal capitalism.  It is a new stage of capitalism, particularly expressed in international financial flows and production networks.

I am not convinced by Powell’s attempt to distinguish between financialisation as cyclical process (meaning it has older historical roots) and financialised capitalism as secular stage (meaning the contemporary capitalism with its supposedly new features).

I still prefer Marx’s explanation.  Capitalists need finance and credit to invest in and exploit labour; it is more efficient to have specialised credit players then raise finance internally or just use previous profits.  But when profitability falls, capitalists try to switch into financial speculation and investment to sustain profitability (as in the 1980s onwards).  But this leads to an explosion of ‘fictitious capital’, the buying and selling of bonds and stocks that are merely titles to the ownership of potential profits in production.  Fictitious capital can extend the financial market boom and give the appearance that finance is all powerful.  But the collapse of profitability and profits in the productive sectors will soon end that myth.

As Guglielmo Carchedi, in his excellent, but often ignored Behind the Crisis puts it: “The basic point is that financial crises are caused by the shrinking productive base of the economy. A point is thus reached at which there has to be a sudden and massive deflation in the financial and speculative sectors. Even though it looks as though the crisis has been generated in these sectors, the ultimate cause resides in the productive sphere and the attendant falling rate of profit in this sphere.”

In every slump in the US in the post-war period, a slump in profits in the productive sectors has brought about a slump in profits in finance and a recession.  If finance rules crises now, why have the major economies not recovered to previous growth rates in production, investment and wages post the Great Recession?  Because the financial sector has certainly recovered, with stock and bond markets at record highs.  No, productive sectors rule over finance in crises, not vice versa.

There are defenders of Marx’s value theory and his law of profitability in the Handbook, namely Andrew Kliman, Alan Freeman and Fred Moseley, but their chapters are on more fundamental explanations of Marx’s theory of value and the nature of capital.  But it seems that all the Marxist authors discussing crises under capitalism in the Handbook are determined to trash Marx’s law of profitability as an explanation, in favour of others or deny that there is any general theory of crises at all.

That will do for now, but I plan to return to the Handbook to consider the arguments presented in a chapter by Tomas Rotta on the nature of profits and the ‘commodification of knowledge’ in the digital economy.  Is Marx’s value theory still relevant when the knowledge is ‘costless’ and how does knowledge enter the capitalist accumulation process?

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