I like lots of ideas in Marx, but I’m not a Marxist. Some people tell me I should be. So I thought maybe I’d try reading some Marxist economists. I know Marx wasn’t just writing about economics, but it seems like a decent place to start. Most of what people cite as the philosophy, or political theory, or cultural theory of Marx sounds to me like distilled frenzy. That might be my problem rather than theirs. ‘Theory’ in the broader humanities sense often leaves me baffled. I like formal or at least quasi-formal presentations; that’s one reason I like Spinoza so much. And economics at least aspires to present things formally. When I disagree I can work out precisely where I disagree without having to wave my hands and say things like ‘It fails to take adequate account of the intersubjective dimension’.
Thus I’ve been reading Andrew Kliman’s The Failure of Capitalist Production. I thought it would be good for me because it’s not too theoretical. It’s Kliman’s Marxist explanation of the Great Recession. I thought maybe seeing the theory in action would help me to understand it better than confronting it dead on. So here’s the result so far.
Kliman’s explanation of the Great Recession is quite simple. He gives it early on in the book. The rate of profit for business in general fell in the lead-up to the 2008 crash. This loaded up the whole private sector with unsustainable debt as firms tried to hold up their profits by borrowing, speculating, etc. Eventually the debt pyramid collapsed – this was the financial crisis of 2008. Because capitalism contains an inherent tendency for profits to fall, it will keep on generating crises like these unless some radical change occurs.
I’m willing to accept that the rate of profit fell; Kliman has lots of data on this, and though I question some of his techniques for measuring profit I’m happy to take this as read. Kliman tells the standard Marxist story about why profits tend to fall over the long term. It’s to do with the labour theory of value and the hypothesis that competition forces firms to employ increasing amounts of labour-saving capital, thus reducing their ‘organic composition of capital’. I’m willing to grant all this also, for the sake of argument at least.
I’m happy with Kliman for laying this out so clearly. What it allows me to ask is how this all works in terms of national income accounting. There are two claims that I think Kliman needs to have gotten right about the period leading up to the Great Recession (let’s say late 1980’s to 2008, and let’s stick with the US). These are:
A) The rate of profit fell, and
B) This forced the private sector further into a deficit position, hence the debt crisis.
In national accounting terms, then, we need a way for it to be the case that profits fall in such a way as to push the private sector (firms and households) into a deficit position.
Here I think Kalecki’s profit equation can help. This is derived from a basic national accounting identity. The sources of the whole economy’s income are: consumption, investment (broadly defined), net exports, and government spending:
C + I + NX + G.
Next, the uses of national income are on paying wages, paying dividends and the like (profits), and paying taxes:
W + P + T.
Since these two sums are just the national income viewed from two perspectives, the sources perspective and the uses perspective, they must be equal:
C + I + NX + G = W + P + T.
Now divide consumption into consumption out of wages (Cw) and consumption out of profits (Cp), and divide wages into wages saved (Sw) and wages consumed (Cw):
Cp + Cw + I + NX + G = Sw + Cw + P + T.
Subtract Cw from both sides:
Cp + I + NX + G = Sw + P + T.
Subtract T from both sides and call (G-T) ‘Gdef’ – the government’s deficit:
Cp + I + NX + Gdef = Sw + P.
Finally, subtract Sw from both sides and we get Kalecki’s profit equation, which I’ll call (1):
(1) P = Cp + I + NX + Gdef – Sw.
Now we need to represent the private sector surplus/deficit. The private sector is saving money if firms are saving their earnings and/or workers are saving their wages. Saved earnings are profits minus investment and consumption from profits. Thus (2) is the formula for the private sector financial balance – if it’s positive, it represents a surplus; if negative, a deficit:
(2) Pbal = P – I – Cp + Sw.
Now for Kliman’s story to be true, the private sector balance needs to shift towards deficit as a result of falling profits. So suppose P in (2) falls. The sum of (I + Cp – Sw) can’t fall by the same increment, otherwise there would be no shift towards deficit: P – I – Cp + Sw would have the same value as before. Thus Kliman’s story requires it to be the case that as P fell, (I + Cp – Sw) did not fall by as much. As profits fell, in other words, this was not counterbalanced by a fall in investment and/or consumption out of profits and/or an increase in savings out of wages. Indeed, Kliman’s story seems to be that as profits fell investment temporarily increased, though it was increasingly investment in what Marx called ‘fictitious capital’: borrowing to inflate asset and stock prices, not to actually increase production.
Now look at (1). If P comes down by a certain increment and (I + Cp – Sw) doesn’t come down by as much, the accounting identity can only continue to hold if either NX or Gdef also falls. This is a straightforward matter of sectoral balances: the private sector’s deficit must be somebody else’s surplus – either the government’s or the ‘rest of the world’s’.
Thus Kliman’s story, to make sense in accounting terms, cannot simply be a story about falling profits leading to a debt crisis. There must also have been a surplus somewhere. As MMTers have been arguing for a long time, the unprecedented budget surplus run by the Clinton government was behind the buildup to the debt crisis in the private sector. It’s true that the trade deficit also increased during this period. But this change was far less striking. The diagram below shows a very clear correlation between the government’s shift to surplus during the Clinton years and the private sector’s (ultimately fatal) shift to deficit:
Now government budget deficits are mostly non-discretionary; they result from the ‘automatic stabilizers’ kicking in when there’s a downturn in the economy. But the Clinton surplus was very much the result of a policy choice made by that government (as was the reduction of the deficit by Gordon Brown’s government leading up to 2008, though reading the newspapers would convince you that the opposite had happened). If the government had not made that choice there is no reason to suppose that the private sector would have mired itself in debt the way that it did; this would have required an improbably enormous increase in the trade deficit.
Falling profit, after all, doesn’t entail faster growth of private sector debt. Again, look at (2). A fall in profit can be rendered neutral, financially speaking, by a corresponding fall in investment (including investments in ‘fictitious capital’), or by a reduction in consumption out of profits, or by an increase in workers’ savings. And if no other sector increases its surplus, the private sector is simply unable to increase its deficit.
Kliman’s claim that capitalism is inherently geared towards crisis must therefore depend on the assumption that governments must act as foolishly as the Clinton government did during the late 1990’s through early 2000’s. I don’t believe that this is necessary. As people start to understand how money actually works (and I think they are), they’ll choose competent politicians. And then fewer silly mistakes will be made. That may not be enough to save capitalism, but it’s enough to prevent the sort of dynamics Kliman blames for its predicted failure.
Thus, so far through my reading of Kliman, I remain a non-Marxist.