Crash Course

Here's an almost-unedited bit of writing I did a while ago, largely for self-clarification.  Some of you might recognise bits of it, because I used it as the basis of a little monologue that was inserted into the Wrong With Authority episode on The Big Short.  It hasn't really been edited, and was dashed off quite quickly, so you'll find it rambling, repetitious, and replete with blind alleys.  But here it is.  My attempt to put some of Marx's concepts, and some Marxist arguments, into my own words.

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Okay, here’s a little crash course in Marxist crisis theory.  Or a tiny little sliver of very basic Marxist crisis theory.  Because it’s a big topic.

First some caveats.  I am not an economist.  I’m an autodidact geek who studied this stuff in what free time he has.  And none of what I’m about to say represents my ideas or my insights.  I don’t really have those.  It all comes from other people.  Primarily, of course, from Karl Marx (who himself drew on loads of other thinkers), but also from Marxist economists I like, like (especially) Chris Harman, Andrew Kliman, Alan Freeman, and Michael Roberts.  I am drawing almost entirely from them and people like them, though my errors - of which I’m sure there will be many - are mine alone.

The second thing to say is that Marxist economics is the definition of heterodox.  It’s not widely accepted.  It isn’t taught, hardly, in economics departments in colleges and universities.  I’m not saying Marxism doesn’t get a look in in academia – it does – but in the humanities departments, generally not in the economics departments.  This is, of course, arguably, where it really matters, so it’s no mystery why this happens.  

Indirectly, it supports one of Marx’s own claims, that the ruling ideas in any society will be the idea of the ruling class.  This isn’t to say that every dominant idea is vetted or issued or decreed by Goldman Sachs and Warren Buffet.  It’s not a conspiracy, at least not all the time.  It’s just that the people who own the means by which information and ideas are disseminated will tend to disseminate ideas that make sense to them, and what makes sense to you is heavily influenced by where you are in society, and how much of it you own, how much you have in common with or owe to the people who own it, etc.  Marxist economics generally isn’t considered something worth teaching because it challenges the fundamental assumptions of the culture – capitalist culture – that we all live in.  It seems fundamentally wacky to a lot of people who are integrated in that system.  And there’s a grain of truth to this.  Marxist economists don’t get careers writing for the Wall Street Journal, or advising JP Morgan.  You just have to remember the order in which the cart and the horse arrive.

What I’m saying is: you’ll find plenty of people more educated and qualified than me who will tell you I’m talking nonsense.  And it’s true that what I’m saying is fringe, non-mainstream, etc.

Hell, even most Marxist economists wouldn’t agree with lots of what I’m about to say.  The weird thing is that loads of Marxist economists, including the highest profile ones of past and present, have abandoned key ideas of Marx in favour of revisions which, in my view, move their analyses radically – and needlessly – away from Marx’s own… with all sorts of political ramifications which gut Marxism of its radical implications.  Not that Marx doesn’t need to be added to and critiqued and brought up to date in lots of ways… it’s just that his core analysis is, in my opinion, still as right now as it was when he wrote it.  Not because he was a timeless genius, but because he was writing about the same economic system we still have now, and because he approached it with a fundamentally correct set of underlying assumptions, and based himself on evidence.  

It’s commonplace – for people who don’t really know anything about Marx beyond the page-or-two of mainstream boilerplate they read at college or uni, if that – to declare that Marx’s predictions all failed.  Well, it’s true that Marx said the revolution was imminent and socialism was inevitable… and, well, look around.  It’s just that ‘predictions’ like that tend to be found in his speeches and agitational literature.  That’s not unproblematic, but it is what it is.  But beyond that, we find key and radical claims of Marx validated – I think – by modern capitalism, or at least supported and not disproved.  He didn’t exactly make economic predictions as such – and indeed Andrew Kliman questions the very idea of using economics to make predictions, saying it’s not really what economics is for, or something it can really allow you to do, despite it being what everything thinks economists are for, and despite mainstream economists getting paid to make the educated guesses about the future behaviour of the market, by people who think those guesses can help them profit.  But Marx describes the capitalist system in ways that still, I think, hold up today.  Because, as I say, though it has changed and developed in many ways, its core features are still the same.  In fact, I think his description stands up remarkably, at times even uncannily well.  A lot of those who supposedly augment or revise his work, by contrast…

There’s lots more to say about this, but I’ll skip it.  It’s geeky, insider stuff.  You don’t need to know, unless you desperately want to.  I just wanted to make sure you knew that what I’m about to give you is fringe even within the fringe.  Fair warning, you know.  That isn’t to say I’m wrong.  Not every idea disavowed or ignored by the mainstream is necessarily equivalent to flateartherism or Alex Jones stuff.  But nor is the academic mainstream a pure and unsullied haven of objective thinking, where the only thing an idea needs in order to be accepted is to be well-supported.  It’s connected to the rest of society, just like the media, and the government, etc, and we don’t reject ideas just because the media and the government don’t embrace them… not if we’re sensible anyway.  Most of us are fairly alive to the fact that the media and the government can be biased and compromised, directly or structurally.  It’s the same with academia.  That isn’t to say that I’ve “had enough of experts”.  Academia is full of people far better educated than me who know tonnes of shit I don’t, and that’s a valuable thing for society… or should be.  As in almost every part of capitalism, the wealth being created – in this case the intellectual wealth – is potentially usable for the betterment of all mankind, and sometimes this happens, but equally sometimes it gets hoarded and guarded by people operating according to the imperatives of private interests.  I strongly suggest that mainstream economics is in the sorry state it’s in precisely because, as a discipline, it is heavily beholden to the private interests who own and control and run the world we live in.  That’s why it’s common sense in the mainstream economics profession that capitalism is essentially rational and fair and stable, when the opposite is now obvious to millions of ordinary people who don’t get paid to advise Morgan Stanley and Warren Buffet on how best to make more millions.

So please, go ahead and leave a comment explaining to me that I’m in a minority.  Just be aware that I already know this.  I just want to humbly submit to you that the mainstream hasn’t exactly got an unblemished record.

So, why did the economic crash occur in 2007-2008?  Well, clearly, it happened because of a credit crunch when loads of financial institutions realised they were holding huge amounts of bad debt.  That whole reckless shitshow was, beyond doubt, the immediate cause, or trigger, of the crash.  It was, to use a medical term, the proximate cause.

It was the proximate cause in the same way that the proximate cause of most headaches is spasms in the muscles of the neck and jaw.  There are also distal causes, which can be to do with - say - stress.  Distal causes themselves often have distal causes of their own.  The distal cause of stress may be anxiety about work, which may itself be traced back to macroeconomics.  At that level of analysis, the state of the global economy looks like a distal cause of an individual’s job anxiety, whereas the state of the firm she works for looks like the proximate cause.  It all depends which level of the chain you are looking at.  I mention this not only to bring in the concepts of ‘proximate’ and ‘distal’, so that I can distinguish the proximate causes of the Great Recession from the distal causes, but also to make it clear that in doing so I am not collapsing anything down to a simple determinism.  That would be fundamentally alien to Marxism, which uses dialectical analysis in an attempt to grapple with such intricacies, and thus never lose sight of the fact that, when talking about economics and politics, we are dealing with the complexity of humans within societies within history, etc.  When I speak of the ‘underlying’ or ‘distal’ causes of the Great Recession, I don’t mean to imply that they are all there is to it, or that they come out of nowhere, themselves unconditioned, etc.

That throat-clearing and arse-covering having been (hopefully) achieved, I want to pose the question: Why did the Great Recession happen in the first place?  Why was there a credit crunch?  Why was the system creating and selling bad debt?  Why was the financial system doing things that could lead to such a huge crash?  Why did it crash in 07-08 instead of earlier or later?  And why has the world never really recovered?

You see, the actual crisis was cleared up pretty soon by massive government bailouts.  Initially reluctant to spend out loads of money propping up private financial institutions, the US government allowed Lehman Brothers to go under.  In the process, they very nearly triggered the complete collapse of the global financial system.

You’ve heard the phrase ‘too big to fail’?  Well, since 07-08 it applies – for the first time – to financial institutions other than public banks, and also to institutions that aren’t actually all that big in real terms, but which are incredibly highly integrated into the world economy.

Marx’s theory of capitalist crisis is complex and contains many elements.  Moreover, he died before he could complete his great critique of capitalist society, Capital.  He got volume 1 finished, edited and published, but volumes 2 and three were assembled by Engels from Marx’s notes after his death.  And Capital was, at various times, planned to comprise 4 to 6 volumes.  So, as with many elements of Marx’s great interconnected picture of capitalism as an economic and social system, his theory of crisis is incomplete.  (This is partly because, contrary to the myth of Marx as a disconnected theorist, he spent a huge amount of his time involved in activism and agitation.)  Even so, we have a description – especially in volume 3 – of what Marx called “the most important law in political economy”, his theory of the law of the tendential fall in the Rate of Profit (LTFRP).   

The LTFRP is, quite simply, one of the most reviled theories in the history of theories.  Barely anything in Marx has been as hated, as contentious, as dismissed.  It is simply written off and ignored by most mainstream economists, as are the rest of Marx’s ideas.  When Thomas Piketty’s Capital in the 21st Century came out, more than one person said to me “I should read that and find out what you think!” which hurt, because Piketty is no Marxist, despite his book’s opportunistic title, which both appropriates some of Marx’s radical reputation and implies that Marx’s Capital isn’t relevant any more.  Piketty actually specifically says at one point that the rate of profit doesn’t fall, so Marx’s LTFRP can be discarded.  But even most Marxist economists dismiss the LTFRP.  They try to get round it, and revise Marx so as to come up with different – but still ostensibly Marxist – explanations of capitalist crisis and depression, just as they mothball and try to get around Marx’s value theory.

This is geeky stuff again.  Suffice to say, most of them have been convinced of a fundamental incoherence in Marx which doesn’t actually exist.  The incoherence depends upon trying to interpret Marx’s system using the categories and assumptions of bourgeois economics, which is fundamentally wrong.  Marx is critiquing bourgeois political economy in Capital, using a dialectical method that employs dynamism and contradiction in order to reflect the fact that capitalism itself is a dynamic and contradictory system.  Marx never forgets that his categories – no matter how abstract they sometimes become for the purpose of elaboration – reflect real things that are interconnected with the rest of the system, that exist in history, and change with time.

The trouble with so many of those who reject Marx’s idea of the falling profit rate lies in how they calculate it.  They tend to calculate in ways that don’t reflect reality.  Businesses and banks, etc, and the bourgeois economists who work for them, or at least accept the fundamentals of their worldview, will have all sorts of interesting ways to calculate profit rates.  Apart from anything else, the temptation to deliberately misrepresent profit rates is huge.  You’re going to want to overestimate them for the benefit of shareholders and stock prices, etc, and to underestimate them when you report to the tax authorities.  

But most Marxist economists also calculate the rate of profit in ways that misrepresent reality.  The main example is something called ‘current cost calculation’.  

For Marx, the rate of profit is the ratio of return on actual investment.  What you get back against what you actually put in.  Which strikes me as a sensible enough definition, right?

But current cost calculation measures the ratio of what you make compared to what it would cost you to replace all your machinery, etc, at the time the profit is made.  But this is hypothetical.  The amount you would pay to replace your means of production would go down over time, which would mean that your rate of profit would not fall… but this depends upon measuring profit against compared theoretical investment costs rather than the actual costs you actually paid.  And you don’t make theoretical investments, you make real investments.

When you calculate the rate of profit Marx’s way, sticking to what has actually been spent in the real world, you find that the rate of profit does fall.

The fact is, there’s conclusive evidence that the rate of profit falls over time.  An Argentinian Marxist called Esteban Maito has analysed world industrial capitalism since almost its very beginnings and found a drastic fall in the global rate of profit over time.  It’s not a straightforward down down down.  There are ups and downs.  But the overall trajectory is emphatically downwards.

But the ups and downs are also to be expected according to Marx’s theory.  Marx didn’t even say that the rate of profit would necessarily fall over time, but rather that it had a built-in tendency to fall, which would be offset by countervailing tendencies… and that you would at least expect to see the effect of the tendencies being continually offset.

One of these tendencies was the very economic crisis which he saw the tendency causing.  For Marx, depressions are not only the result of the system’s innate contradictions, they’re also how the system clambers out of depression.  In a depression there is a lot of what Marx calls ‘destruction of capital’.  Sometimes this is literal destruction, i.e. unsold goods simply rot or depreciate into uselessness… or wars triggered by arguments over resources destroy loads of military machinery, etc… we all know that the Wall Street Crash and Great Depression had an influence on the Second World War.  Sometimes it’s the destruction of capital values.  For instance, in a depression companies go out of business because they can no longer cover their operating costs and make enough of a profit.  They often get into debts as they try to plug the gap.  When they eventually go bust they can be bought up by businesses that aren’t going under because they’re bigger and more resilient.  Those businesses will acquire the capital that went into the business – the machinery, factories, etc – at a knock down price, and will also acquire the business free of its previous debt.  They will have to invest a great deal less in the business than its previous owners to get roughly the same amount of profit.  So even if the amount of profit being made by the business remains the same after it changes hands, the rate of profit being made by the new owners has gone up.  This is how capitalism restores the rate of profit sufficiently to climb out of the depression into which the overall falling rate of profit has flung it.  Basically, depressions make the little fish fail, and the big fish come along and gobble them up, leading to a restored profit rate, which leads to re-expansion.  A side-effect of this is what Marx called the ‘concentration and centralisation of capital’ over time, another ‘prediction’ he made which has been triumphantly borne out by reality, now that a small number of mega-companies own most of all the others.  It’s also the root cause of the ‘too big to fail’ syndrome.  The bigger a company is - be it a productive company or, increasingly with neoliberalism, a financial one - the more integrated it is to a more and more centralised global economy, and thus the greater the effect if/when it fails.

But why does the falling profit rate lead to depressions?  Well, it’s important to distinguish between depressions (or slumps) and crises.  Marx almost always used the words ‘crisis’ or ‘crises’ to mean ‘financial crises’.  Credit-crunches very much like the one which nearly crippled the world economy in 2007-08.  There are various ways that the falling profit rate can lead to crisis, and Marx is very clear that it is an indirect cause.  There are other linking steps between the falling rate of profit and the crisis.  The falling profit rate is the underlying (or distal) cause, which leads to other things which act as immediate (or proximate) causes or catalysts of crisis.

To focus on the crash of 07-08, the Marxist economist Andrew Kliman does not argue with the idea that it was caused by a crisis of confidence in the US financial sector, or that this crisis of confidence was itself an outgrowth of the proliferation of bad debt (excessive leverage; risky mortgage lending, etc).  The capitalist class and the politicians who ultimately serve them staved off a decade of slump - such as had been seen elsewhere - but in so doing they made it easier to borrow, and helped ultimately create the housing/mortgage bubble which underlay the 07-08 crash. But Kliman shows that the problem isn’t just in the financial sector.  This is important, given that so many leftists these days - including some who call themselves Marxists - seem to think that the problems of modern capitalism are fundamentally financial, and therefore can be cure - or at least greatly alleviated - by, say, a left-wing reformist government that institutes a rollback of neoliberal financialisation.

The bloating of the financial sector is a byproduct of the US government’s sustained effort to manage the relative stagnation of the US economy after the end of the long post-war boom.  They encouraged a huge expansion in debt.  This artificially boosted profitability and growth, but the boost was unsustainable, and it lead to repeated bubbles and crises.  The crisis of 07-08 was the most serious of these (so far) and stemmed from the government’s policy of encouraging cheap borrowing after the crises of the 90s and early aughts.  This is itself part of the overall policy, developed in response to the end of the post-war boom in the slump of the early 70s, to intervene in the economy when crisis hits to prevent destruction of capital.  Laissez faire (i.e. free trade) policies had prevented such intervention in the Wall St crash of 1929, and the resultant decade of chaos had terrified the capitalist class - something that can be seen in the work of its ideologists of the period, such as Hayek, who went on to be the closest thing neoliberalism has to a founder.  The interventions of the 70s staved off the worst, and meant capitalism didn’t slide back into depression, but it also prevented capital destruction, or at least anything like the kind of capital destruction seen in the Great Depression and World War 2.  But as Marx pointed out, capital destruction is why capitalism pulls itself out of slump… so, propped up but prevented from engaging in its painful temporary cure, capitalism never quite recovered from the early 70s.  The rate of profit stagnated.  

Most economists on the Left will tell you that neoliberalism did enable the rate of profit to rise again, because of the squeeze it put on workers.  Kliman disagrees.  According to him, profitability remained too low to sustain any new boom… hence the monetary and fiscal policies followed by the US (and other) governments to encourage bubbles based on credit and debt.

It was the persistently weak state of production which lay at the heart of it, and at the heart of that was the low rate of profit.  Making profit is, as Marx pointed out, the entire point of investing in capitalist production.  A relative lack of profit leads to a persistent decline in capital accumulation.  The element of time is important as well.  The low rate of profit makes it harder for businesses to operate because it slows down their ability to reinvest profits and service debts.

And why does the profit rate fall in the first place?  What actually is Marx’s theory of why this tends to happen?  Well, the details are complex but, as with a lot of Marxist theory, the underlying principles are surprisingly simple and easy to grasp, precisely because they’re based in observable reality.

Capitalism is a system of competition.  All capitalists have to compete against rivals.  They’re competing to make profit, to each grab a bigger share of the overall profits.  If they don’t compete effectively, they go out of business.  Capitalism doesn’t produce for need.  The people who make Lucozade don’t do it because they really like Lucozade, or because the world needs Lucozade.  Even if the world did need Lucozade especially and particularly, that still wouldn’t be why people manufactured it.  There are things the world needs, and sometimes capitalists produce them, but they don’t do it because the world needs them, except insofar as it is the need that makes it profitable.  For them, the profit is the point.  This is shown by the fact that there are other things the world needs as much that capitalism does not make, because doing so would not be profitable.  Lucozade manufacturers don’t care if Lucozade is good or bad, anymore than manufacturers of bombs, electro-shock batons, or gas-guzzling cars care.  The fact that lots of people like Lucozade is just the means by which the makers of Lucozade make profit.  If people liked drinking Pissozade, somebody would be manufacturing Pissozade.  In Marx’s terms, capitalism produces for the sake of accumulation.  (There are some industries which would not be profitable without government subsidy - such as the UK arms industry which sells bombs and electroshock batons to people like the Saudi dictatorship so as to help ensure the flow of oil for the gas-guzzling cars - but this takes us outside of our scope here; let’s just pause to note the hypocrisy of the market-enthusiasts and move on.)

In order to accumulate as much profit as possible, capitalists try to raise productivity.  There are several ways they can do this.  They can make workers work harder in an hour, what Marx calls raising the ‘relative level of exploitation’.  Or they can make the workers work longer hours, what Marx calls raising the ‘absolute level of exploitation’.  (We shall here simply assume the correctness of Marx’s argument that workers are exploited in production, and maybe come back to this another time.)  But the best way to do it is to make the productive process itself more efficient.  You do this by investing in production, in machinery and technology, in ‘means of production’ to use Marx’s phrase.  For instance, you invest in new production line machinery that works better and faster, etc.  If you do this, the cost of production goes down (after your initial outlay), so you can not only make more stuff, you can charge less for it because it is cheaper for you to make.  In most cases, you have to do this.  Any capitalist who charges way above what Marx calls ‘socially necessary labour time’ (SNLT) - the cost of paying someone to make something in the average amount of time it takes to make that thing given average levels of technology and skill, etc - is overcharging, and won’t succeed.

The thing to do is to lower the amount of time it takes your workers to do it.  To undercut SNLT.  If you do this by investing in machinery, etc, and making your workers more productive, then, all else being equal, your market share will go up.  Hence, more profit.  Capitalists are compelled to do this.  The logic of the system forces this on them.  Remember – capitalism is for accumulation, nothing else.

Now, once one capitalist does this (and we’re being very schematic about this for the purpose of illustration.. I know reality isn’t this neat) then others have to do it.  They literally have to, in order to survive in the competitive market place.  They need to get their workers producing more efficiently.

This is actually a key part of how and why capitalism has been, and still is, the most productive form of society yet seen on Earth.  Capitalism was lavishly (albeit not simplistically) praised by Marx for raising humanity’s level of productivity to previously undreamt of levels.  

But it’s also capitalism’s Achilles heel.  

Because, over time, once everyone has invested in production and adopted new techniques, machines, etc, - as competition forces them to do – so prices will go down across the board; the average price of a given commodity will go down.  

Lots of individual capitalists might be making more profit.  But overall, the rate of profit falls.

This is why capitalists do the seemingly absurd, and invest in production despite this ultimately leading to a fall in the rate of profit.  They do this because they’re not concerned with the system as a whole, but rather with their own profits… and investment does initially lead to more profits for individual businesses.

But the rate of profit – returns relative to investments – will tend to fall overall.  

What’s good for one capitalist in the short to medium term, certainly the first capitalist to invest in production, turns out to be bad for the system as a whole.

There are theoretical arguments which claim to show why this won’t happen… but they’re either overstated versions of things Marx himself acknowledged as countervailing tendencies, and/or they’re not strong enough to cancel out the falling rate of profit, or frankly they’re bunk.

In Marx’s terms, when you raise the productivity of labour by joining labour with more and more machinery, you are changing the ‘organic composition of capital’, which is what Marx called the ratio of investment in wages (what Marx referred to here as ‘variable capital’, because human labour produces and increases value) to investment in machinery (what Marx called ‘constant capital’, because machines can only transmit the value that is already in them because of the labour that went into producing them).  

(By the way, the seemingly obvious fact that machines and materials used in production are themselves the products of workers’ labour is the answer to one of the common objections to Marx’s claim that workers are exploited… y’know, the one where someone says “Ah yes, the worker provides the labour but the capitalist provides something too: the machinery and the materials!”  Believe it or not, this objection isn’t confined to YouTube comment sections but is also routinely found in newspaper columns, learned debates, and the economic theories of great bourgeois intellectuals.  The correct response is “But where did they come from?”  The working class isn’t just individually exploited, it is collectively and historically exploited.  Ultimately, everything the capitalist ‘provides’ to the production process derives from the labour of previous workers, and you can trace all capitalist private property back to the seizure of wealth that Marx called ‘primitive accumulation’, the period during which capitalism was emerging from feudalism.)

For Marx, capitalism’s central contradiction is that production is for exchange rather than for use.  It’s for profit not need.  This is the basis of the divided nature Marx sees in the commodity, the split between its ‘use value’ (what its for, what need or want it satisfies) and its ‘exchange value’ (its value on the marketplace).  It’s the old Lucozade paradox again.  Lucozade has a use value - its drinkability - and an exchange value - the price it fetches.  And it is the profit made from the exchange value which makes capitalism produce it.  Its use value is, as we saw above, secondary.  This is the fundamental reason why capitalism, having brought about a world in which we can in principle satisfy all human needs, fails to do so.  That is fundamentally not what it is for.

In capitalism, our individual labours are geared to a social production rather than to our own needs, which is all very well in principle except that the kind of social production in question is production for profit, for the market.  Next to nothing is made by capitalism for need rather than for profit, and the only reason any capitalist produces anything is for profit.  

Commodities are made for social distribution and are socially distributed via market exchange.  They get exchanged on the market because they sell, and they sell because they satisfy some want or need.  Consequently, commodities have what Marx calls a ‘use value’, which is the material reality of their usefulness.  A sandwich has the material reality of being usable to satisfy hunger and desire for pleasure.  A chair can be sat on, and can look nice.  Etc.  But they don’t exchange at a value determined by their uses.  You can’t compare the use of a chair to the usefulness of a sandwich (except in extremis, i.e. when you’re starving to death a sandwich is more useful than a chair).  Instead, commodities exchange according to the relative amounts of exchange value they ‘contain’.  The relative price of a commodity isn’t a physical property of a commodity.  It isn’t a thing inside the commodity.  You can’t crack the commodity open and find its price inside.  What commodities do have, however, is exchange value which is determined by how much labour went into them.

That there is something like this at play can be seen in the fact that there are poles around which the prices of things fluctuate.  Marx didn’t deny the reality that supply and demand can make prices go up or down, but they go up or down in relation to something.  A toy car will never cost as much as a real car.  It’s all very well for mainstream economics (i.e marginalism, in which - broadly - value is determined by consumer preferences) to declare that it is subjective evaluations that determine price, but in the real world having a car but not having a toy car doesn’t make a toy car sell for more than another real one.  This is just an attenuated and personal expression of the same dynamic at work in supply and demand, as is the sandwich example from before.  Subjective desire or need certainly plays a role, but it doesn’t objectively alter the price of something.  Price ultimately derives from exchange value (in fact it basically is exchange value, or a social expression of exchange value), which ultimately derives from the amount of labour which goes into something.  It’s true that machinery employed in production helps to create the value of what is ultimately produced, but it does this by being set into motion, by being used, by human labour.  And, of course, it is human labour which ultimately created the machine.  To the extent that the machine transmits value to the product, this is itself value which is ‘in’ the machine because of the human labour which created it.  Machines do not create themselves, and do nothing by themselves, without being operated and controlled by humans.  This is itself a form of labour.  Marx called the labour in machines ‘dead labour’.  It is one of the reasons why, from a certain point of view, capitalism is so spectral and gothic.  As Marx puts it, dead labour dominates the living.  It is this which lies at the root of capitalist culture’s obsession with ghosts and the undead.

If, at this point, you’re thinking that Marx is working from an a priori (or pre-conceived) assertion of the existence of something called ‘value’, which seems to be a kind of metaphysical substance or essence which is magically imparted into material things by human labour… well, I get where you’re coming from because that held me up for a while too.  But that was before I grasped the incredible dynamism, subtlety and sheer penetration of Marx’s dialectical method of analysis.

The opening chapter of Capital volume 1 is very abstract, which leads many people to a) give up in bewilderment, and/or b) conclude that Marx is deriving his entire system of analysing capitalism from a priori concepts that are metaphysical in nature.  In fact, Marx is building a description of the system, not deducing its existence.  He’s not elaborating truth via rationalist chains of inference, in the manner of Descartes building up a view of the universe from a criterion of a priori truth (for Descartes ‘I think therefore I am’).  Marx is building his description dialectically, from the most basic and abstract level of description up to the most complex and concrete description.  This is not, however, a reflection of his reasoning process.  He reasons from empirical realities into abstract categories (which is something scientists do all the time), and keeps going until he has broken them down to what he sees as their most basic levels.  And then he starts describing the system backwards, from the abstractions upwards.  The reason he starts with his abstract discussion of the commodity is because he sees this abstraction as capable of expressing the fundamental contradiction at the heart of capitalism: the contradiction inherent in all capitalist wealth between use and exchange.  He has arrived at this insight by noticing that capitalism creates for exchange rather than for need, and tracing this back to its most basic social expression, using abstraction to express this.

There is no sense in which Marx’s abstract concept of value is metaphysical.  It is rather, a description of a tangible, material social reality.  Exchange value, or value, is not a spiritual substance or essence which is invisibly imbued in commodities by man’s creative spark, or whatever.  Rather, it is an abstract expression of a material, social reality about commodities (i.e. most of what is produced) in capitalist society.  There’s nothing illegitimate about abstractions expressing social realities.  A lot of people try to explain the problem with capitalism in terms of ‘greed’… and what’s that if not an abstract category expressing a social reality?  The difference is that Marx can show you exactly where value is ‘created’ (to use an inexact word) in the social system, and how, and why, and where it goes, and exactly what it means, scientifically, in terms of the real and quantifiable effects it has on people’s lives.  His abstractions are analytical categories that allow us to get a real and powerful handle on how the world works, in ways that vague and fuzzy concepts like ‘greed’ (or ‘liberty’ for that matter, if you’re on the other side) simply don’t.  It might help if I say that human labour would not create value (in Marx’s terms) in a society which did not produce for market exchange.  Yes, the use value of a table would be, in a sense, created by the human labour that fashioned it from wood.  But that isn’t what Marx is talking about when he says that labour creates value.  He’s saying that, in our system, exchange value is that quality of a commodity which makes it exchangeable on the market, and thus makes it profitable to sell.  And this quality is produced by labour in the production process.  And this isn’t a case of the process harnessing something that was already there.  Exchange value has no existence outside of the capitalist production process.  If I take a piece of wood from my garden and whittle it into a sculpture, I haven’t created any exchange value, because it is only the social process of production for exchange – for profit, for the market – which means that a produced thing is a commodity, and that it thus has exchange value that has been produced by my labour.  It is this very process (production for market exchange) which creates the social reality of exchange value.  Value, for Marx, is thus a social relation… and, like all social relations, it is the product of the kind of society which gave rise to it.  This does not make it any less real.  Social relations may not be tangible in the same way as bottles of Lucozade, but they are no less real.  Indeed, Marx would say that – at least in a sense – the bottle of Lucozade is a material expression or ‘crystallisation’ of the social relations which went into its production… the most fundamental of these being, of course, production for market exchange.  

(By the way, a common misconception - again, shared by many ‘Marxists’ - which arises from this is the idea that Marx thinks it is the exchange which produces the value.  But Marx is clear that the value originates in production, not in exchange.  Exchange is where the value is realised.  It originates in production because production is disciplined according to SNLT - see above - so that workers have to produce within the socially necessary labour time.  The production process contains the creation of value, and has to, or value would not be realisable, precisely because the products of labour would not be profitable.)

Marx uses ‘real abstractions’.  He describes reality using abstractions which allow him to get at the dynamic, contingent, paradoxical, contradictory nature of real phenomena which exist in the real world.  This is entirely different from the kinds of abstractions backhandedly sneaked into bourgeois economics, which is almost entirely based on unreal abstractions like ‘utility’, which is just an unwarranted and purblind hyper-expansion of the concept of demand.

You can see the real, concrete, material, social effects of value all around you.  And some of the key social effects are inequality, the wastage of lives, alienation… all of which are caused by exploitation, by the fact that most people in capitalist society have to spend their lives being exploited by a minority.  Most people own comparatively very little, and certainly not enough to live off.  For Marx, you’re a member of the working class if you have to sell your labour power in order to make a living.  If you basically own nothing more than your own body and your ability to work, then you’re in the proletariat.  Today a great many members of the working class, especially in the Western world, own a lot compared to workers of previous ages.  They own houses and cars, etc.  But you can’t feed yourself and your family with a car.  You generally can’t use your house to make a living.  Not even if you really own both outright, rather than as part of loan and credit agreements, which is comparatively rare.  Generally, if you want to make a living, and live at what society now considers a decent standard, you have to go out and get a job, which means who have to – in Marx’s terms – sell your labour power to a capitalist.

(Another ‘by the way’... Marx knew perfectly well that workers might get wealthier in relative terms.  True, he sometimes used rhetoric about the progressive ‘immiseration’ of the working class.  And the fact that workers in some parts of the world have generally gotten more prosperous over time has often been used to claim that his predictions failed.  But the fact is that Marx talks about the relative growth of prosperity within capitalist societies, remembering that a more well-off worker might still be poor in terms of his or her overall society, even if he/she is rich compared to his/her ancestors, or workers in other countries.  And when we look at capitalism we see that relative prosperity for some populations of workers is always based on the ruthless exploitation of others, usually via imperialism - direct or otherwise.  ‘Immiseration’ isn’t a bad word to describe what capitalism has done to billions of the poorest people in the world today, even as I enjoy wealth that my milkman grandad couldn’t ever have dreamt of.  Marx would not have been surprised by the offloading of poverty from the ‘first world’ to the ‘third world’.  This, by the way, is why racism is and always has been both a product and an organising logic of capital: it cannot exist without imperialism.  Similarly, even within one capitalist society, there are always similar logics organising and justifying similar imbalances; patriarchy for instance.  But again, we’ve drifting far from our scope.  But it should be stressed: even a relatively prosperous worker in the global North has far more in common with a poor worker in the global South, precisely because they are both forced by their (relative) lack of property to sell their labour power to capitalists in order to live.)

Little side note.  Why does Marx say we sell our ‘labour power’ rather than our labour?  Well, it doesn’t really mean anything to say that we sell our labour.  ‘labour’ is actually a false or unreal abstraction.  So Marx refuses to use it.  It’s too fuzzy and inexact.  He says we sell our labour power, or our ability to do work, to a capitalist.  He says this because it gets at a couple of things that are very important.  Firstly, we don’t do stuff and then sell the capitalist the result of what we’ve done… unless we’re ourselves capitalists who are selling materials to other capitalists, i.e. businesses that produce for capital demand, like steel manufacturers selling to mining corporations.  Rather, if you’re a worker, you sell the capitalist your ability to do what they tell you to do, and then they appropriate the end result of the labour they’ve put you to.  Secondly, when you are employed you have to sell your entire self to the capitalist for a certain period of time.  Yes, your private thoughts and hopes and dreams may not be actually employed in riveting car chassis together, or serving drinks to the guests in the corporate hospitality lounge, but you can’t do anything else with them while you’re doing those tasks for your boss.  Your entire ability to think and create, to alter the world through your intervention, is slaved to one task – the task dictated by your employer, the task that will make him money.  (Also, stating that it is our labour power that we sell allows Marx to measure it in time using both absolute terms – literally how many hours we work – and in terms of average productive capacity – i.e. how long it takes, on average, for a given task to be fulfilled.  Once again we see that the deployment of another layer of abstraction allows us to measure a real and observable phenomenon at greater levels of subtlety and exactness.)

The thing about the law of the tendential fall in the rate of profit is that, if it’s true – and I think the evidence supports it incredibly well, i.e. way better than a lot of better accepted things in the social sciences – then it means that boom and slump is endogenous to capitalism, which is just a fancy way of saying that boom and slump comes from within the system.  And because it’s a by-product of a central and inescapable dynamic within capitalism, a dynamic that simply can’t be removed, that means that capitalism is unreformable.  The problem can’t be legislated away.  It can’t be cured or solved.  

If capitalism goes into crisis because of greed then there’s nothing we can ever do.  If humans are just greedy, and that’s just what we are, and its independent of the kind of society we have, to the point where our greed can send our society into near-disastrous tailspin… then we’re fucked.  By this view, we’re probably just stuck with greed, because genes or original sin or something, and there’s no point trying to change society to make it better.  Why bother?  It’ll never work.  (This is why capitalist society selects both certain kinds of religion and certain kinds of scientism - sociobiology for instance - as useful.)  On the other hand, if everything’s basically fine already apart from some element or other that’s out of balance, then in principle we can end crisis and slump by just fine-tuning the system we already have.  We can purge the system of extrinsic problems that have crept in and destabilised it.  We can redistribute wealth a bit, and regulate a bit more, and maybe nationalise the financial system if we’re feeling really daring… but we don’t have to get rid of capitalism because capitalism isn’t fundamentally at fault.  Its dials can be twiddled a bit and it’ll work fine from then on.  This seems to be the majority opinion on the Left nowadays, from weaksauce reformists to even quite strong radical voices.  At best, the Left have an idea that we need to replace capitalism, but no clear understanding of what that means, of the need to change to a completely different kind of society with a completely different economic base; that we need to eradicate the entire system of production for market exchange.

The conventional Left account of the 07-08 crisis and resultant slump states, in one form or another, that neoliberalism got the rate of profit back up, and that financialisation is to blame for the stagnation of accumulation.  People invested in finance rather than in production, hence growth slows in the ‘real’ economy.  Hence, workers – who were so squeezed by neoliberalism that their greater exploitation pushed the profit rate back up – had to borrow more and more to keep up their standard of living.  Their consumption of goods went down, or would’ve done were it not for personal credit and debt.  Hence, a huge bubble.

Andrew Kliman, however, finds that US corporate profits did not achieve a sustained revival in the neoliberal period, and the rate of profit (if measured the way Marx measured it) kept declining.  He finds that financialisation simply did not cause less reinvestment of profits into production.  And he finds that, before the crisis, US workers were not getting less, in real terms, than they had been decades before.  In fact, real pay rose and the share of national income going to workers remained more or less stable since the 70s.  

By the way, Kliman isn’t claiming American workers have it great.  Apart from anything else, he’s talking about American workers rather than workers globally (because he’s studying America, the biggest and most crucial economy on Earth, the economy where the crisis started).  US workers’ overall compensation never recovered from the low levels of the 70s.  And yes, wages are down in many sectors, but Kliman counts the overall compensation workers receive, including employee benefits, payments employers make towards medical care, etc, and government provision (after workers tax contributions have been deducted).  He finds that the amount of state compensation of workers has risen enormously – not least because of the need to provide for an ever-aging population.  More people to care for, for longer, after retirement.  The capitalist state in the age of neoliberalism has cut back direct benefits to workers... especially poorer workers and workers it finds useful to keep in an underclass, i.e. disproportionately workers of colour because… well, because America.  But it has also had to subsidise the overall welfare of workers in order to cover the shortfall from what workers used to receive (in real terms) via direct compensation.  In effect: the neoliberal state has tried to subsidise the workers’ continued existence (and spending power) so that private capitalists can attempt to re-raise the rate of profit by gobbling a greater share of it.

The conventional Left account sees the rise of debt and financialisation stemming from squeezed workers’ lack of ability to consume the products of society.  This theory is called ‘underconsumptionism’.  It’s an intuitively plausible idea.  But Kliman – to his own surprise – found it unsupported by evidence.  

It’s an interesting side issue that one reason we might think of the ‘working class’ doing worse and worse is because we tend to see the working class as being white male manual workers in industrial production… and it’s true that workers like that have been doing badly in recent decades.  But the working class, as Marx said, comprises anyone who has to sell their labour power to survive, and there are a lot of different types of people in that category.  More and more women are entering the workforce, for instance.  And it’s well known that service and managerial jobs have grown in the West at the expense of old-style heavy industrial production jobs. 

So yes, a build-up of debt was the proximate trigger for the panic in the financial sector, but the distal reason for this was the underlying weak state of production, and especially the rate of profit.  The build-up was caused by an attempt to reinvigorate capital accumulation.  But the stagnation in accumulation wasn’t owing to workers not spending enough because their wages were too low.  Overall, the shortfall had been covered.  Rather, the data shows that the rate of profit fell for just the reason Marx said it would: employment rose too slowly in relation to the investment in production and the accumulation of capital.  Yet another empirical confirmation of Marx.  So this problem isn’t one that can just be solved by paying workers more, or increasing state subsidy (not that I’d be against either of those proposals).  It can only be solved by moving away from an economy based on capital accumulation, on production for profit.

If Marx is right, and crisis and slump are baked-into capitalism, into its very DNA, because there is something intrinsic to the system’s most basic functioning that inevitably drives it towards periodic explosions of chaos and instability… then the system can’t be regulated into safety, it can’t be reformed into rationality, it can’t be twiddled into eternal equilibrium, the way so many snakeoil salesmen have promised in the past.  On the contrary, if Marx is right, the system is morbid, inherently irrational and destructive, incurable.  And we need rid of it.