Duvinrouge: Can you tell me what the key message of your new book, The Failure of Capitalist Production, is?
Andrew Kliman: The Great Recession was waiting to happen. There were unresolved problems in the system of capitalist production that had been building up over a third of a century. The rate of profit fell and never recovered in a sustained manner, which resulted in persistently sluggish investment and economic growth, which in turn resulted in rising debt burdens. And these problems induced governments to solve them or paper them over with policies that made the debt build-up even bigger.
DVR: Your book is full of statistics and as we know interpretations of statistics can be very different. It would appear that your choice of historical cost as opposed to current cost is crucial. Please can you explain the difference?
Accountants can value assets at their current cost or at their original cost when they were acquired. The latter is usually called their “historical cost.” Both methods have their place. But one thing you can’t do is compute the rate of profit, i.e., the rate of return on investment, by dividing profit by the current cost of the capital assets. It’s not wrong to do this; it’s impossible. What you wind up with just isn’t a rate of return on investment. What the assets are currently worth is simply not the same thing as the amount of money that has actually been invested in them. To measure the latter, you have to take their historical cost and subtract depreciation.
DVR: You only look at US data, does this mean you can’t be sure that profit rates have fallen worldwide?
AK: Well, research I’ve done on rates of profit of U.S. multinationals’ foreign subsidiaries, only some of which is reported in the book, has led me to conclude that the worldwide rate of profit of all corporations, not just U.S. corporations and their subsidiaries, probably trended downward between the early 1980s and the Great Recession. U.S. subsidiaries’ rates of profit fell in the great majority of the 20 countries in which at least 1% of U.S. foreign investment is located. Also, the fall was very broad-based in terms of industrial composition—it wasn’t the case that subsidiaries’ rates of profit fell because, for instance, the manufacturing sector took an especially hard hit. I also found evidence that globally-operative forces, not only country-specific ones, tended to depress the rate of profit in a large majority of cases. When you put these facts together, it’s not easy to believe that there was something unusual about U.S. subsidiaries and corporations in the U.S. that caused their rates of profit to fall while the worldwide rate of profit was rising.
DVR: Is it your argument that the growth in debt is a consequence of the falling rate of profit?
AK: Some of it clearly is. For instance, the U.S. Treasury’s debt ratio––its debt as a percentage of Gross Domestic Product (GDP), rose by about two-thirds between 1970 and the Great Recession. I found that all of the increase is attributable to the fact that corporate income tax revenue fell as a share of GDP. It fell partly because their rates of profit fell and partly because the government reduced corporate income tax rates. But the reductions in corporate income tax rates are also a consequence of the falling rate of profit; the government tried to boost their after-tax rates of profit and thereby stimulate productive investment and economic growth. On the other hand, some of the debt build-up, particularly the explosion of home-mortgage debt during the decade, is not connected to the fall in the rate of profit in such a direct manner. I don’t think it would be fruitful to argue that it is ultimately all due to the fall in the rate of profit, or to try to attribute 29% of it or whatever to the fall in the rate of profit. I prefer to think of the debt build-up as the combined result of the fall in the rate of profit, sluggish investment and growth, and a variety of government policies that tried to stimulate the economy artificially in the face of these problems.
DVR: Could it not also be the case that a fiat money regime was a consequence of the US flooding the world with dollars and then finding that they didn’t have enough gold to maintain the value of the dollar at $35 per ounce?
AK: This seems to suggest that there couldn’t have been a massive debt build-up in the U.S. prior to the collapse of the Bretton Woods system in the late 1960s and early 1970s. But the Treasury’s debt rose more than fivefold during World War II, and more than 40-fold during and after the Civil War. There is also evidence that private debt rose rapidly in the years preceding the Great Depression. Moreover, the inflation-adjusted growth rate of private debt of U.S. households and nonfinancial businesses fell pretty consistently from the start of the postwar period through 1983, and even after that point, it was still only about half as great as it was in the late 1940s. In nominal terms, the growth rate of this debt hasn’t changed much throughout the whole postwar period, except for the first half of the 1990s, when it fell a lot. So the rise in the private sector’s debt ratio isn’t due to debt rising more quickly in the post-Bretton Woods period. It’s due to a falling rate of economic growth, and thus a falling rate of growth of income. Recall that the debt ratio is debt as a percentage of income.
DVR: The underconsumptionists argue that there is a realisation problem. That the circuit of capital (M-C-M’) requires not only more labour time, but more effective monetary demand. Some, such as Rosa Luxemburg, say that this can come about through imperialism, which creates new markets in the non-capitalist parts of the world. But now that capitalism is so pervasive, the underconsumptionists claim that this realisation problem is being temporarily solved by debt, and that this is what really lies behind the mountain of debts. What do you think of the unconsumptionist argument?
AK: It’s going to take a good deal of unpacking for me to deal with all of the problems here. Let me say, first, that the solution to the alleged sales problem actually can’t come from sales to non-capitalist parts of the world. You can only sell to them if you buy from them; if you don’t buy from them, they don’t have the funds to buy from you. The notion that the alleged sales problem is solved by an outside group continually buying more than it sells is absurd.
I want to divide the expression “monetary demand” in two. The question of “where does the extra demand come from that allows the increase in capital, the difference between M’ and M, to be sold?” is important and interesting. But the question of “where does the extra money come from that allows the increase in capital to take the form of extra money?” is boring and unimportant.
First of all, you don’t necessarily need extra money; it’s often possible to have a bigger volume of sales with the same stock of money; the money just needs to change hands more rapidly. But if you actually need more money, Marx solved the problem of where it comes from in volume 2 of Capital, under the assumption that there’s a money commodity, gold. Where does the extra gold come from? The ground. It enters circulation when the gold producers exchange it for stuff. End of story. You don’t need a genius like Marx to figure it out. But you need someone like him to realize that “where does the extra money come from” has nothing whatever to do with the question of “where does the extra value (profit) come from?,” which he solves in volume 1, or “where does the extra demand come from?,” which he solves elsewhere in volume 2.
In our day, the extra money comes from sales of securities. But isn’t the amount of money in circulation after securities are exchanged with money just the same as it was before? Generally, yes, but not when central banks or depository institutions buy securities. They buy them with “reserves,” cash that wasn’t in circulation before.
As for the alleged sales problem, i.e., the alleged demand problem, Marx’s schemes of reproduction solved it. Let’s assume that there’s no borrowing or tapping into savings, because the solution doesn’t rely on such things, and because I want to show that the answer to your question is no. It’s not the case that this alleged problem is solved by increasing the volume of debt, and so it’s not the case that this alleged problem is what really lies behind the mountain of debt.
Given our assumption, the demand for the output of this period comes––or, more precisely, can come––from the sales of the output of this period. If the total value of the output is $30 trillion, and it’s all sold for $30 trillion, it’s also all bought for $30 trillion. End of story. In this particular sense, it’s completely correct to say that every sale is a purchase and every purchase is a sale. Additional debt isn’t ever needed in order to sell everything that’s been produced. Additional debt is generally needed in order to boost economic growth, i.e., to make the amount that gets produced grow faster in the future––and U.S. government policies encouraged the debt build-up in order to try to achieve faster growth––but that’s a completely different matter. What we’re dealing with here is a single period.
Of course, the output might not all be bought and sold. So we have a temporary slump, a recession. What generally happens is that, at first, there’s a decline in investment demand, demand for additional means of production, not a decline in personal consumption demand. So there’s a slump in the equipment-producing and construction industries. But if businesses are investing less, and stuff isn’t selling, workers get laid off and so personal consumption may eventually decline as well. This isn’t that common, though. In the U.S. between 1943 and 2007, there were only two years, 1974 and 1980, in which inflation-adjusted personal consumption demand was less than in the year before.
In any case, these shortfalls in demand are always temporary, despite what underconsumptionists of the Monthly Review school claim. They say that there would have been a chronic lack of demand if there hadn’t been a debt build-up. Why? Because there are limits to personal consumption demand in capitalism (wages are low, etc.), and because investment demand supposedly can’t grow faster than personal consumption demand in the long run. I demonstrate in my book, on both factual and theoretical grounds, that this last part is simply false. Investment demand can grow a whole lot faster, and it has in fact grown a whole lot faster in the U.S.––about four or five times as fast––for three-quarters of a century. (I invite anyone who doesn’t accept these demonstrations to try and disprove them.) So there doesn’t need to be a debt build-up to solve a chronic problem of insufficient demand, because no such chronic problem exists.
DVR: Is it possible that there is an element of both, excessive debt to deal with the fall in profit rates and growing debt due to gold production falling behind commodity production?
AK: No, because gold doesn’t serve as a means of payment or means of circulation nowadays. The need for additional money, if there is such a need, is a need for extra amounts of instruments that can be used to settle debts and to buy commodities and assets. It has nothing to do with what things, if any, adequately measure value or what things act as stores of value.
DVR: On page 130 of your book you produce a chart that shows how increases in the value composition of capital reflect the falls in profit rates, and that although the rate of exploitation can account for short-term variations in profit rates, the rate of exploitation hasn’t changed much over the post-war period. Given that the data used is based upon exchange-values (prices) [my assumption] and so includes debt (claims on future labour time), how different do you think the chart would look based upon values (labour time, but without claims on future labour time)?
AK: The most important result shown in that graph is that 89% of the fall in U.S. corporations’ rate of profit between 1947 and 2007 is attributable to a rise in what you call the value composition of capital. Only a little bit of the fall in the rate of profit is attributable to a decline (almost all of it between 1965 and 1970) in what you call the rate of exploitation. Using my proxy for the monetary expression of labor-time to convert nominal figures into labor-time figures, I obtained a similar result: 97% of the fall in the labor-time rate of profit is attributable to a rise in the labor-time measure of the value composition of capital. But the percentage decline in the rate of is much greater, as is the percentage increase in the value composition of capital, after the conversion than before, while what you call the rate of exploitation isn’t affected by the conversion. I can explain why all this is the case, if you wish, but the explanation is very technical.
DVR: What do you expect to happen to capitalism in the next decade or so?
AK: First, let me stress that anything anyone says about this is no more than an educated guess. Lots of economists provide forecasts, because they are paid good money to do so, but nothing in the whole body of economic theory, or anything else, gives anyone the ability to forecast reliably beyond a few months, maybe a year or so. Theory can allow us to speak knowledgeably about trends and about how various things interrelate, but not about things like what will happen to capitalism in the next decade.
My educated guess is that the world economy will not start expanding rapidly. There’s too much uncollectable debt, and there’s little prospect that profitability will rebound in a sustainable way, because accumulated investment is too great in relation to the profit it can generate. And artificial government stimulus of the economy has basically reached its limits. So we’re likely to have more of the same: high unemployment, foreclosed homes, bankruptcies, debt and banking crises, etc. I don’t think there will be a new boom under capitalism without large-scale destruction of value (including write-downs of uncollectable debt and other forms of fictitious value) that sets the stage for a restoration of profitability.
The main question is then whether policymakers in the major countries will be able to engineer a very long soft landing, in which the destruction of value occurs gradually, without truly major crises and/or social upheavals and/or wars. They’ve been pretty successful for decades, and recently, at kicking the can down the road by papering over bad debt with even more debt. But this strategy might well be approaching its limit as government debt ratios mount. And the persistent economic malaise, rising debt, and the 70%-plus “haircut” that some of Greece’s creditors recently had to take have to be eroding creditors’ confidence that monies owed to them will in fact be repaid. This makes financial crises on the scale of the 2007–2008 crisis, or even worse ones, more likely.
The most hopeful things happening are the acceleration of class struggles taking place in various forms throughout the world, and the fact that they’re learning from and solidarizing with one another. I think a socialist way out of the crisis is a real historical possibility now, but only if these struggles are met halfway with a very sober, very rationalist politics that says, “the solutions that have been tried to fix capitalism aren’t working, but we don’t really know yet what must be changed in order to transcend the system. So the only solution is you. It’s up to you to take control of the process of figuring this out. Once you know what you’re doing, you’ll be able to do more than express your anger and appeal to leaders to help you. You can take charge.”