The Failure of Capitalist Production docx

ANDREW KLIMAN The Failure of Capitalist Production Underlying Causes of the Great Recession THE FAILURE OF CAPITALIST PRODUCTION Underlying Causes of the Great Recession A ndre w Klim a n ^fpy) PlutoPress www.plutobooks.com In memory of Ted Kliman (1929-2009) and Chris Harman (1942-2009) For Jesse For Anne Contents List o f Tables viii List o f Figures ix List o f Abbreviations xi Acknowledgments xii 1 Introduction 1 2 Profitability, the Credit System, and the “ Destruction of Capital” 13 3 Double, Double, Toil and Trouble: Dot-com Boom and Home-price Bubble 28 4 The 1970s— Not the 1980s— as Turning Point 48 5 Falling Rates of Profit and Accumulation 74 6 The Current-cost “ Rate o f Profit” 102 7 W hy the Rate of Profit Fell 123 8 The Underconsumptionist Alternative 151 9 What is to be Undone? 181 Notes 208 Bibliography 227 Index 234 List of Tables 2.1 Non-Linear Effect of Falling Profitability on Business Failures 17 4.1 Growth Rates of Real GDP Per Capita 53 4.2 Sovereign Debt Defaults and Restructurings, 1946-2005 57 4.3 Debt and GDP, U.S. 61 5.1 Rates of Profit, U.S. Corporations, Selected Trough Years 82 6.1 Rates of Profit and Equity-market Rates o f Return 117 7.1 Rapid Depreciation of Computer Equipment 142 8.1 Real Income G rowth, U.S., 1979-2007 160 8.2 The Final Part of Output and Economic Growth 163 8.3 Initial Situation 169 8.4 First Ten Periods 172 8.5 Worldwide Growth of Real GDP since 1600 174 8.6 Investment and Growth, 1965-92 Averages 176 ‘>.1 Pay, Exports, and Economic Growth in the U.S. .uul China 187 List of Figures 2.1 Distributions of Rates of Profit 18 3.1 Mortgage Borrowing and Real Home Prices, U.S. 29 3.2 Relative Increases in Liabilities and Assets, U.S. Households 30 3.3 Net Lending or Borrowing by U.S. Households 31 3.4 TED Spread, August 2008-January 2009 35 3.5 S&P 500 Index 39 3.6 Nonfarm Payroll Employment, U.S. 41 3.7 Nominal and Real Federal Funds Rates 42 3.8 Federal Funds Rate and Home Mortgage Borrowing 43 3.9 Excess Savings as Percentage of World GDP 45 4.1 Growth of World GDP Per Capita 52 4.2 Impact of China on Growth of GDP Per Capita 53 4.3 Gap between Actual and Potential Real GDP, U.S. 54 4.4 Growth Rate of Industrial Production, U.S. 55 4.5 Growth of Industrial Capacity, U.S. 56 4.6 Outstanding Debt as Percentage of GDP, U.S. 60 4.7 Change in Debt, All U.S. Domestic Nonfinancial Sectors 62 4.8 Changes in Debt of U.S. Treasury and Households 63 4.9 Individual and Corporate Income Taxes, U.S. 64 4.10 U.S. Treasury Debt as Percentage of GDP, Actual vs. Hypothetical 65 4.11 Gap between Actual and Potential Labor Force, U.S. 67 4.12 Average Duration of Unemployment, U.S. 68 4.13 Real H ourly Compensation of U.S. Employees 69 4.14 Changes in Income Inequality among U.S. Households 70 4.15 Growth of Government Structures, U.S. 71 5.1 Rates o f Profit, U.S. Corporations 76 5.2 U.S. Multinationals’ Rate of Profit on Foreign Direct Investment 79 5.3 Effect o f Inventories on Before-Tax Rate of Profit 81 5.4 Inflation-Adjusted Properry-Income Rates o f Profit 83 5.5 Inflation-Adjusted Before-Tax Profit Rates 84 5.6 Adjusted and Unadjusted Rates of Profit 85 5.7 Effect of Alternative Adjustments on Rates of Profit 87 X THE FAILURE OF CAPITALIST PRODUCTION 5.8 The Rate of Profit and the Rate of Accumulation 91 5.9 Net Investment as Percentage of Profit, U.S. Corporations 92 5.10 Net Investment as Percentage of After-Tax Profit, U.S. Corporations 93 6.1 Cherry Picking Troughs and Peaks 104 6.2 Current-Cost “ Rates of Profit,” U.S. Corporations 111 6.3 Property-Income Rates of Profit 112 6.4 Relationship between Current-Cost and Historical-Cost Rates of Profit 114 6.5 Current-Cost and “ Real” Rates of Profit, U.S. Corporations 120 6.6 Current-Cost, “ Real,” and Inflation-Adjusted Rates of Profit, U.S. Corporations 121 7.1 Net Value Added and Compensation of Employees, U.S. Corporations 125 7.2 Profit Share of U.S. Corporations’ Net Value Added 125 7.3 Actual and Constant-Profit-Share Rates of Profit 127 7.4 Standard Decomposition of the Rate of Profit 130 7.5 Compositions o f Capital, U.S. Corporations 132 7.6 Gap Between Nom inal and MELT-Adjusted Rates of Profit 134 7.7 Alternative Decomposition of the Nominal Rate of Profit 135 7.8 Rate of Depreciation, U.S. Corporations 141 7.9 Rate of Non-IPE&S Depreciation, U.S. Business Sector 143 7.10 Losses Due to Additional Moral Depreciation, U.S. Corporations 144 7.11 Variables Adjusted for Excess Depreciation 146 7.12 Adjusted and BEA-Based Rates of Profit 147 8.1 Workers’ Share of U.S. National Income, 1960-2009 154 8.2 Real H ourly Compensation, Private-Industry Workers in U.S. 157 8.3 Real H ourly Wages and Salaries, Private-Industry Workers in U.S. 157 8.4 Shares o f Income 170 8.5 Growth o f Investment, Consumption, and GDP in U.S., 1933-2009 174 9.1 Fall in Six Largest Economies’ Real GDP G rowth, 2007-2009 188 List of Abbreviations AIG American International Group BEA Bureau of Economic Analysis BLS Bureau of Labor Statistics CBO Congressional Budget Office CPI-U consumer price index for all urban consumers CPI-U-RS CPI Research Series Using Current Methods CPI-W consumer price index for urban wage earners and clerical workers Fed Federal Reserve System GDP Gross Domestic Product IMF International Monetary Fund IPEScS information-processing equipment and software LIBOR London Inter-Bank Offered Rate LTFRP law of the tendential fall in the rate o f profit MELT monetary expression of labor-time NIPA National Income and Product Accounts OECD Organization for Economic Cooperation and Development OPEC Organization of Petroleum Exporting Countries PCE personal consumption expenditures S&Ls savings and loan associations S&P Standard and Poor’s TARP Troubled Assets Relief Program TSSI temporal single-system interpretation Acknowledgments I thank everyone who provided expert advice on technical matters and everyone who offered comments on the papers, book reviews, talks, interviews, and draft manuscript that eventually turned into this book. I have benefited enormously from their feedback. It not only improved the book significantly but guided the direction of my research in crucial ways. I would like to thank each one by name, but unfortunately I cannot. Even were they not too numerous to list, they include many audience members and reviewers whose names I do not know. If you are among them, please know that the difference between what you originally read or heard and the ideas as they appear in the final text is a sign o f my debt and gratitude to you. I thank my departmental colleagues at Pace University, who have been very supportive of my research. I also thank the university’s Dyson College of Arts and Sciences, which granted me released time to pursue my research on profitability trends and provided a research grant that enabled me to purchase a supersized computer monitor. The m onitor has made the work of data analysis much less onerous and more productive. None of the book is a republication of previously published works of mine, but I have drawn freely on those listed below. I thank the following publishers for allowing me to do so: • The Commune, which published “ The Economic Crisis: An interview w ith Andrew Kliman” as pamphlet no. 4, November 2008. • The Institute for Social Sciences of Gyeongsang National University, which published “ Masters of Words: A reply to Michel Husson on the character o f the latest economic crisis,” in Marxism 21, vol. 7, no. 2, Summer 2010. • International Socialism, which published “ A Crisis for the Centre o f the System,” in issue no. 120, October 2008, and “ Pinning the Blame on the System,” a review of Chris Harm an’s Zombie Capitalism, in issue no. 124, September 2009. • Lexington Books, w hich published Reclaiming Marx's “ Capital” : A refutation o f the myth o f inconsistency in 2007. xii ACKNOWLEDGMENTS xiii • Marxist-Humanist Initiative, which published “ The Persistent Fall in Pro fitability Underlying the C urrent Crisis: New ternporalist evidence” in M arch 2010 and, in With Sober Senses, its online publication: “ On the Roots of the Current Economic Crisis and Some Proposed Solutions,” April 17, 2009; “ How (Not) to Respond to the Economic Crisis,” May 5,2009; “ Cherry Picking Peaks and Troughs,” May 13, 2009; “ Appearance and Essence: Neoliberalism, financialization, and the underlying crisis of capitalist production,” May 17, 2010, and “ Lies, Damned Lies, and Underconsumptionist Statistics,” September 16, 2010. • Megafoni, an online journal, which published Joel Kaitila, Lauri Lahikainen, and Jukka Peltokoski’s interview, ‘“ Kukaan ei tiedá, onko kriisi ohi’— Andrew Klimanin haastattelu,” on November 23, 2009. • Palgrave M acm illan, which published “ Production and Economic Crisis: A temporal perspective,” in Richard Westra and Alan Zuege (eds), Value and the World Economy Today in 2003. • Razón y Revolución, which published Juan K o rn b lih tt’s interview, “ Entrevista al Economista Estadounidense Andrew Klim an,” in El Aromo no. 50, July 2009. • Taylor &c Francis, which published ‘“ The Destruction of Capital’ and the Current Economic Crisis,” in Socialism & Democracy, vol. 23, no. 2, July 2009. • The W orkers’ Liberty website, which published M artin Thomas’ interview, “ Andrew Kliman— The level of debt is astronomical,” on January 12, 2009. Special thanks go to Anne for her invaluable editorial advice and careful copy-editing, and for her intellectual, professional, and personal support, without which neither this nor my prior book could have been written. New York City June 2011 [...]... data fo r the U.S economy The other reason w hy 1 focus on the U.S is that it was the epicenter o f the latest crisis It cannot be auto m a tically assumed that the analysis o f the U.S case applies to other countries But since the U.S was the epicenter— since, in other words, the crisis erupted elsewhere because it first erupted in the U.S and then spread— the relative lack o f discussion o f other economies... Non-Linear Effect of Falling Profitability on Business Failures Average (mean) rate of profit 30.0% 27.0% Standard deviation 15.0% 13.5% Relative dispersion (coefficient of variation) 0.5 0.5 Unviable businesses (rates of profit < 6% ) 5.5% 6.0% 15.0% 7.5% 0.5 11.5% 12.0% 6.0% 0.5 15.9% 18 T H E FAILURE OF CA P IT A LIST P R O D U C T I O N rate of profit Figure 2.1 Distributions of Rates of Profit Thus,... replacement-cost rate), and they then fin d that M a r x ’s la w does n ot survive this process o f su b stitu tio n Those w ho have accepted these proofs have also accepted the manner in which the proofs mis-measure the rate o f p ro fit Thus, when they found that the atem poral “ rate o f p ro fit” trended upw ard after the early 1980s, they to o k this as conclusive evidence that capitalist production has been... argue that the persistently fra il cond itio n o f capitalist production 1 2 T H E FAILURE OF C AP IT ALIST P R O D U C T I O N was among the causes o f the financial crisis A nd, most im portantly, I w ill argue that it set the stage fo r the Great Recession and “ the new n o rm a l,” the state o f not-quite-recession that we now endure In lig h t o f the fra ilty o f capitalist p roduction, the recession... the theoretical fra m e w o rk th a t guided the empirical analyses o f later chapters It briefly outlines the lynchpins o f M a r x ’s theory o f capitalist economic crisis— the tendential fall in the rate o f p ro fit (LTFRP); the operation o f credit markets, and the destruction o f capital value through crises— and discusses their a p p lica b ility to the latest crisis and the Great Recession The. .. up the d iffic u lt question o f whether a socialist alternative to capitalism is possible A lth ou gh I do not believe I have “ the answer,” I address the question because I believe that the collapse o f the U.S.S.R and the latest crisis have made the search fo r an answer o ur most im p o rta n t task 2 Profitability, the Credit System, and the "Destruction of Capital" T his chapter sets o u t the. .. ted to the latest crisis Financial institutions that originated mortgage loans did not anxiously weigh the risks involved because they sold o ff the 20 T H E FAILURE OF C AP IT ALIST P R O D U C T I O N loans Those w ho bought the loans in the fo rm o f mortgage-related securities bore the risks O r they to o failed to a nxiou sly weigh the risks because the risks were borne by those w ho insured these... at w hich the to ta l capital is valorized, i.e the rate o f p ro fit, is the spur to capitalist production (in the same way as the valorization o f capital is its sole purpose), P R OF ITABIL IT Y , C RED IT SYSTEM, " D E S T R U C T I O N OF CAPITAL" 21 a fall in this rate slows d ow n the fo rm a tio n o f new independent capitals and thus appears as a th re at to the developm ent o f the capitalist. .. n words SYNOPSIS OF SUBSEQUENT CHAPTERS The next chapter sets o ut the theoretical fram e w o rk that underlies the em pirical analyses th at follow It discusses key components o f M a r x ’s theory o f crisis— the tendential fall in the rate o f p ro fit, the operation o f credit markets, and the destruction o f capital value through crises— and h o w they can help account fo r the latest crisis... f discussion o f the fo rm a tio n and bursting o f the hom e-price bubble in the U.S., and the Panic o f 2008 that resulted I then discuss how Federal Reserve (Fed) policy co ntribu ted to the fo rm a tio n o f the bubble I argue that the Fed wanted to prevent the United States from going the way o f Japan After Japan’s real-estate and stock-m arket bubbles burst at the start o f the 1990s, it suffered . Rates of Profit 85 5.7 Effect of Alternative Adjustments on Rates of Profit 87 X THE FAILURE OF CAPITALIST PRODUCTION 5.8 The Rate of Profit and the Rate of. KLIMAN The Failure of Capitalist Production Underlying Causes of the Great Recession THE FAILURE OF CAPITALIST PRODUCTION Underlying Causes of the Great