It’s not the 30s all over again – it’s far worse

Fawzi Ibrahim argues that the present crisis demonstrates that global capitalism has for the first time reached the “critical zone” – the point of “capital deficiency”.

Comparisons between previous economic recessions, including the Great Depression and the current financial/economic meltdown are highly misleading. Blaming the bankers, speculators or the lack of regulation and the bonus culture is another dead end. The current crisis can only be understood if we look at the combined effect of capital accumulation and the tendency of the rate of profit to fall.  

While the tendency of capital to accumulate and grow is not disputed, the same cannot be said of the tendency of the rate of profit to fall. Karl Marx singled out the theory of the falling tendency of the rate of profit as his most important contribution to political economy, but he never investigated the actual consequences of his theory.

Superficially, if the rate of profit continues to decline, then there will come a time when the rate of profit is so low that production-for-profit comes to an end. Because this point has not been reached, the theory has been derided by some and ridiculed by others. However, the effect of the tendency of the rate of profit to fall is far more subtle than both its few supporters and its many detractors predicted. The tendency of the rate of profit to fall is conditioned by capital accumulation, of which, it is but an offspring. Thus, it is the combined effect of these two tendencies that must be investigated.

In a boom, profits are high; capital accumulates, yielding even more profits which are then invested to produce more profits and so on. However, if for any reason the rate of profit falls, then profits would follow suit unless more capital is invested to counterbalance the fall in the rate of profit. The amount of additional investment necessary to compensate for a fall in the rate of profit would depend on the original or baseline investment. 

For instance, a small initial capital of £10m at an annual rate of profit of say 5% would yield a profit of £500,000. If the rate of profit fell by 1%, to 4%, the profit would drop to £400,000. To compensate for this drop and keep profit at the same level of £500,000, investment must go up to £12.5m, a rise of £2.5m, and a relatively small amount which may not be too excessive for the market to provide. However, if the baseline investment was £10bn instead of £10m, then the additional investment necessary to maintain profits for the same drop in the rate of profit would be 1,000 times greater at £2,500m. If the rate of profit fell by more than 1%, an even greater additional investment would be necessary.

In a highly developed economies such as those of the USA and the UK in which the baseline capital investment is in trillions, even a relatively small drop in the rate of profit would necessitate additional investment in billions if profits are to be maintained. If profits are to increase, as it is the aim of all corporations, the additional investment would have been even greater. 

In general, therefore, as capitalism develops and capital accumulates, the baseline investment increases and with it the additional investment necessary to counteract a fall in the rate of profit. At some time, when capital accumulation reaches the astronomical levels we have today, a tipping point is reached at which the increase in investment necessary to counterbalance a drop in the rate of profit becomes prohibitively high, greater than the amount the market can provide. This is the “critical zone”, the zone of capital deficiency.

While the outward symptoms of the great depression of the ‘30s and the present financial/economic meltdown are very similar – bank failures, economic downturn, unemployment, hardship and near-collapse of the system – the underlying terrains are anything but; in fact they are polar opposites. The 30s’ depression was one of abundance, capital abundance; that of 2008-09 is one of deficiency, capital deficiency.  

Kenneth Galbraith in his book The Great Crash wrote: “The causes of the Depression are still far from certain.” That may or may not be true, but its terrain is well known. It is what John Maynard Keynes and others refer to as “over-investment” or what Marx calls “over-production”. Keynes, echoing Marx a century earlier, describes it as “a condition where there is a shortage of houses, but where nonetheless no one can afford to live in the houses that there are” 1. Galbraith prefers to talk of “insufficient investment – investment that failed to keep pace with the steady increase in profits”. According to Galbraith, in the years leading to the 1930s’ depression, there was too much capital around that could not be invested. Compare this with today’s Credit Crunch.

When the crisis of 1973-74 was upon us, Anthony Crosland, the then Labour secretary of state for the environment, told local authority representatives that “the party’s over”. Glossing over the fact that most people weren’t aware of there ever having been a party, let alone that it was over, Crosland was right in that the crisis of 1973-74 was an important watershed. 

The following two decades witnessed a “reconfiguration of the capitalist system” 2, culminating in what is variously described as “the crisis decades” 3, “the age of insecurity” 4, “the new economy” 5 and “the long downturn” 6. But what was so special about that crisis? After all, cycles of boom and bust are normal; so normal, they are dubbed “the business cycle”.

What was special about the 1970s? Was it the oil crisis, the breakdown of international monetary system (Bretton Woods), the onset of globalisation, deregulation, the Winter of Discontent, the “crisis of Fordism”, new management techniques, computerisation? Or was it the election of Thatcher and Reagan, the impending collapse of the Soviet Union and the rise of “neo-liberalism”? All of these and other external factors have been cited to explain the peculiarity of the 1970s and the period that followed. But looking at external factors for an explanation confuses cause and effect.

Keynesianism lost out to neo-liberalism in the aftermath of the 1973-4 crisis because the former outlived its usefulness in the same way as neo-liberalism is losing out today. The much neglected and maligned theory of the tendency of the rate of profit to fall is now beginning to come into its own. So far, economists have looked at this tendency in isolation and dismissed it either as irrelevant or as altogether false. Far from being false or irrelevant, it is very much central to the development of the capitalist mode of production over the past few decades.

Along with this tendency, capital has a tendency to expand and accumulate and, that these two tendencies give rise to a third, the tendency for capital to move towards what I call the “critical zone” in which capital accumulation has reached such high levels that any further expansion, an expansion that is necessary to counter-balance the fall in profit caused by a fall in the rate of profit, becomes difficult if not impossible.

Capitalism faces a new crisis, a crisis that was never foreseen, not even by Marx, a crisis of capital deficiency, the credit crunch.  In the past, economists, from the right and the left, were preoccupied with the large amount of surplus or profit that may have nowhere to go, of too much capital. Marx talked of over-production 7, Keynes believed ‘that the demand for capital is strictly limited’ 8 and Robert Brenner wrote of “over-capacity”.  Paul Baran and Paul Sweezy wrote a whole book, Monopoly Capital, on “one central theme: the generation and absorption of the surplus under conditions of monopoly capitalism” 9.

The UK economy crossed the critical zone threshold in the 1973-74 crisis. From that point onwards, measures that were taken by various governments were just one giant rescue plan:  Healey’s IMF loan and the subsequent public expenditure cuts (1973-79), Thatcher’s privatisation (£60bn worth), deregulation, anti-trade union legislation, wage cuts and de-industrialisation (1979-1997) and Blair/Brown’s Public Private Partnership (£51bn worth), further deregulation, and today’s blatant multi-trillion bail-outs, soon to be followed by “quantative easing”, the printing of money.  

To treat the 2008-09 financial/economic crisis the same as all other crises from the bulb mania in the 1630s, through the South Sea bubble of the early 1700s to the stock market crash of 1929, as so many do, is a mistake; it is fundamentally different and far worse.  Capital has a tendency of capitalism to move towards the critical zone as a result of the combined effect of two other tendencies: the falling rate of profit and capital accumulation. Capitalism at the critical zone is in an entirely different phase. 

In the pre-critical zone, the pressure for capital accumulation comes from the surplus value created that must be re-invested for profit; there is plenty of capital looking for investment. In the critical zone, a new and opposite pressure comes into play, the pressure for an ever increasing amounts of new capital required to keep profit steady. This was the purpose of rampant privatisation, the sale of council houses and New Labour PFI/PPP schemes and why it was necessary for governments today to inject huge government-guaranteed funds into the system in the form of bail-outs and rescue plans. 

For a number of years, banks and financial corporations managed to mitigate against capital deficiency by measures designed to accelerate the circulation of capital with short-term capital whizzing around the world taking advantage of miniscule variations between countries, new complex derivative products, toxic financial packages and financial engineering. It is argued that these practices caused the financial meltdown. On the contrary, by increasing capital circulation, these practices ensured, for a time, that capital continued to be available, thus mitigating against the tendency for the economy to move towards the critical zone and capital deficiency. However, this could not go on for ever as these opportunities dried out and the economy could no longer be held back from diving into the critical zone.

Fawzi Ibrahim

1. The General Theory of Employment, Interest and Money, JM Keynes, HBJ, 1964, p322

2. Globalisation and the Postcolonial World, Ankie Hoogvelt, 2001, p216

3. The Age of Extremes, Eric Hobsbawm, 1994, p403

4. The Age of Insecurity, Larry Elliot  and Dan Atkinson

5. Ibid

6. The Economics of Global Turbulence, Robert Brenner, 2006

7. ‘In these crises, there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity -- the epidemic of over-production. Society suddenly finds itself put back into a state of momentary barbarism; it appears as if a famine, a universal war of devastation, had cut off the supply of every means of subsistence; industry and commerce seem to be destroyed. And why? Because there is too much civilization, too much means of subsistence, too much industry, too much commerce.’ Manifesto of the Communist party, Marx and Engels.

8. ‘I feel sure that the demand for capital is strictly limited, ..’ Keynes, General Theory, HBJ, 1964, p375

9. Monopoly Capital, Paul Baran and Paul Sweezy, Penguin, 1966, p21

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