Theory of crisis

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http://leninology.blogspot.com/2009/10/theory-of-crisis.html

Wednesday, October 21, 2009
The theory of crisis posted by lenin

We live in interesting times. The hawkish governor of the Bank of
England is railing against the City, and the government's failure to
fundamentally reform the financial system. He is railing against the
debt/speculation model of the economy that has been in place for
decades, and which both Labour and the Tories have sought to conserve.
He notes that taxpayer money is now being used to fuel another
speculation bubble, and that economic outcomes for millions of people
depend on the activities of a small, powerful group of institutions
whose profits depend on risk and instability. True, his agenda is a
conservative one that fits neatly into the coming Tory
administration's theme of an 'age of austerity'. Yet, it does express
more than that, coming as it does amid some dubious talk of 'green
shoots'. For example, last Wednesday's Evening Standard exulted, in
response to a rise in share prices, the value of Sterling, and in City
bonuses, that "Britain bounces back". That sort of short-sighted
cheerleading already looks stupid. Bear in mind that industrial
production in the advanced capitalist economies contracted at least as
rapidly in 2008-9 as it did in 1929-30. The fact that the states
governing these economies are committed to continuing with stimulus
plans for the foreseeable future is indicative of how deep they think
this crisis can go. King's warning shot suggests that he knows how
tentative any recovery signs are. Meanwhile, other forces on the right
are drawing some novel conclusions. Niall Ferguson, a neoconservative
known for his hostility to marxism, has even been bigging up Bukharin
and Lenin's critique of state monopoly capitalism, albeit in the name
of some chimerical 'free market'.

First principles

These are not the first examples of ideological disorientation that I
have had cause to comment on. Neoliberalism has not been over-ridden
as a growth strategy yet, but its intellectual sustenance is
increasingly threadbare. Perhaps it is time to go back to marxian
first principles. At least, I'd like to do that, as much as to help me
process the ideas as anything else. What does marxism tell us about
capitalist crisis? Capital enjoins us to start with the things being
bought and sold, commodities, and asks us to consider what is novel
about them. Any good that you possess, be it a DVD or your ability to
perform mental and physical labour, can become a commodity if you just
enter it into circulation as a good to be exchanged. You put the DVD
on eBay, and advertise your availability and CV on Totaljobs or
whatever, and both goods are instantly commodities. And if you do
decide to exchange a good, you want to exchange it with something of
equivalent value. Marx puts it thus: "To the owner of a commodity,
every other commodity is, in regard to his own, a particular
equivalent, and consequently his own commodity is the universal
equivalent for all the others." If you sell your DVD for a fiver, you
figure that the goods which could be bought with that fiver are in
some sense equivalent to the good you've just sold.

But this value is a mysterious kind of substance. It isn't the
subjective value that a good might have for an individual, as that can
hardly be the basis for an exchange of equivalents. It isn't 'use
value', in other words. There has to be another 'exchange value' which
all commodities have, and which render them commensurable with one
another. I was told by teachers that the value of goods traded on the
market was determined by supply and demand: a healthy supply and poor
demand would reduce prices, and vice versa. Yet, supply and demand
merely equilibriates the system: it accounts for price fluctuations
but not for the underlying value that they fluctuate around. If you
assume perfectly equivalent supply and demand, you still have to
account for why the price settles at a particular rate and not another
rate. For Marx, as for the classical political economy that he was
trying to reformulate, the source of value is in labour. The exchange
value of a commodity is determined by the "average amount of socially
necessary labour" embodied in it. That is, if a coat is of equal value
to a mobile phone, this reflects the total amount of labour that has
gone into making each good. A good can be very useful to us without
having any exchange-value. Air is obviously a use-value of supreme
importance, and it would be difficult to support a mortgage and an
average-sized family without it. But to make it saleable, you would
have to - in Lockean terms - mix your labour with it, or buy someone
else's labour to mix with it. You could, say, make 'air in a can' with
certain unique properties not found in nature, thereby producing it in
such a way that it would both have an exchange value, and a use value
for the potential market that would enable one to realise that
exchange value.

It is worth pointing out, en passant, that even at its most abstract,
Capital is always historicising. So, for example, Marx traces these
conceptual operations - use value, and exchange value - to the
historical origins of markets themselves out of barter between
different communities. As the productive capacity of each community
develops, "the need for foreign objects of utility gradually
establishes itself. The constant repetition of exchange makes it a
normal social act. In the course of time, therefore, some portion at
least of the products of labour must be produced with a special view
to exchange. From that moment the distinction becomes firmly
established between the utility of an object for the purposes of
consumption, and its utility for the purposes of exchange. Its
use-value becomes distinguished from its exchange-value."

The money fawcet

If, for the sake of this argument, we accept this account of value,
then the mystery only deepens. For we are constantly exhorted to
believe in another account of value which clashes with it: the 'golden
egg' theory. Save your money, you are told, or invest it, and it will
just magically increase in value. Buy a private pension scheme for a
fraction of your weekly earnings, and when you retire you can have a
lavish, hedonistic lifestyle that would make Jan Moir choke with fury.
Better yet, save enough money to use as start-up capital, become a
capitalist and one can, with sufficient nous, acquire enough dough to
get Lord Mandelson's telephone number. Something very nebulous and
mystical about the process of abstaining from immediate consumption,
and entering this money into circulation as money-capital, causes it
to produce a 'surplus value', above and beyond what was originally
invested. In neoclassical accounts, this added value is a reward for
abstinence. That might serve as a moral-religious justification for
profit, but unless we just assume that God, or Providence, or the
Geist actually intervened to produce this bonus, it doesn't actually
work as an analysis. The added value must come from somewhere, and we
have already accepted that the source of value is labour.

Yet, we have also said that exchanges in the market take place as an
exchange between equivalents. If that's true, no one should end up
with more value than they started with. We can't have it both ways.
So, if a capitalist employs labour, he buys a person's labour power
for eight hours a day for precisely its exchange value (setting aside
odd examples of de facto slavery, partially voluntary wage systems
involving tips, etc.), no more and no less. But what is the exchange
value of labour power? On the basis of what we have said, it must be
the amount of labour required to reproduce it, ie the socially
necessary labour embodied in that combination of goods and services
that will enable a worker to return to work the next day and perform
her duties in a normal way. So, where does this surplus value come
from? How does one extract value from the consumption of a commodity?

Marx's answer, of course, is that labour is a unique kind of commodity
in that it has the capacity to produce more value than it is actually
worth on the market. You know how that goes. If you're employed in
medium-sized service sector company that supplies goods, say market
research, to other companies, they typically include the cost of your
labour in the bill. If you ever see this bill, and the breakdown,
you're likely to find that the cost of your labour is substantially
higher than your wages. Merely as an anecdotal example, in a firm I
worked for some years ago I discovered that when I was seconded to a
sister organisation for a week or so, they charged that sister
organisation £40 an hour for my services. I wasn't being paid £40 an
hour, though I was being paid the correct market rate for my labour
power (which was less than £10 an hour). So, there was a gap between
the exchange value of my labour power and the value produced by my labour.

Class struggle, and the composition of capital

This distinction between labour-power, the "aggregate of those mental
and physical capabilities existing in a human being", and labour,
which is the exercise of those capacities, is clear enough. It is the
former which the capitalist purchases, and the latter which produces
his surplus value. That is the exploitative basis of the
labour-capital relationship, the main axis of class relations in a
capitalist society, and of course the basis for constant struggle.
This struggle isn't just collective, in the sense of trade union
bargaining over wages, or left-wing political struggle for reform or
revolution. It is more often than not individual, in the sense of
cutting off work early, taking long breaks, arriving late, throwing
sickies, working slow, wasting time on the internet, etc.
Parenthetically, the latter comes with a certain kind of shifty,
guilt-ridden disavowal. I recall at a previous workplace, where
individualism and competitiveness predominated, if someone was caught
skiving by the boss they would always try to rationalise it to the
rest of us. They either didn't understand that everyone but the most
deluded and dedicated workhorse was doing exactly the same things, or
they maintained the pretence of being part of a 'team' because they
were careerists. Anyway, the basis of surplus value and thus of
profits is labour. The largely notional values that circulate in the
stock market, are all derivative of values produced by labour.

Yet, there's another problem right away. Capitalists wouldn't be
capitalists if they didn't want to augment that value as much as
possible. They operate in a competitive system, and they have to
invest some of their profits in new means of increasing their surplus
value throughout each cycle of production. They can find ways to make
the workers go faster, labour harder, and so on, though always at the
risk that some of them might get truculent. Here, another distinction
is of use: between constant capital (machines, equipment etc used in
the production process) and variable capital, which is the human
input. If investment in a labour-saving device will enable a
capitalist to produce more goods and vie for a greater market share,
while expending less on that variable capital (labour power), then
this is the sensible thing to do. This drives technological
innovation, though it also drives job losses - eg, while American
commentators have been given to blaming job cuts on international
competition and outsourcing to China and Mexico, the major source of
job losses in recent years has been downsizing by American companies.
Yet, if every capitalist acts in this way, as it seems to be sensible
for them to do, then the aggregate amount of socially necessary labour
embodied in the goods they produce is depressed, thus depressing their
exchange value. This means that there will be a tendency for
capitalists to find it increasingly difficult to realise their
original investment plus surplus. In the long term, profits are likely
to decline as the ratio of constant to variable capital (which Marx
calls "the organic composition of capital") increases. This can be
offset by various factors. Among these are the opening up of new
avenues for investment and thus new deployment for labour, and
financialisation, which can equilibriate the system by redistributing
investment and supporting consumption. Financial innovation also opens
up new investment opportunities, with speculation on future profits,
speculation on that speculation, the sale of debt, speculation on the
profits from the sale of debt, speculation on that speculation, etc.
Yet, if these countervailing tendencies prove insufficient to offset
the overall tendency of the rate of profit to fall, then investment
will decrease, employment will fall, consumption of all goods will
decline, and the economy will cease to grow. Without growth,
capitalism is in crisis. The only way to restore growth is to destroy
capital - through war or protracted depression - and resume the whole
process of accumulation.

Destruction of capital

So, here we are in this disastrous consummation of neoliberalism,
which itself was negotiated and imposed as a solution to a crisis of
profitability that emerged in the 1970s. Profitability throughout the
neoliberal era has been sustained by repressing real wages (in the
leading industrial economy, they didn't rise in real terms for thirty
years), breaking down the bargaining power of labour, increasing the
crude rate of exploitation (longer working hours, productivity deals,
etc.), and financialisation. Lower wages meant consumption had to be
supported through debt, and financialisation meant that investment was
increasingly dependent on Wall Street. That debt/speculation
arrangement is what has just collapsed. According to Andrew Kliman
(paper with detailed empirical evidence here [pdf], some further
arguments here), the underlying problem that arose in the 1970s was
not resolved. Insufficient capital was destroyed in the recessions of
the 1970s and 1980s, in contrast to the immense destruction of the
Depression and WWII which resulted in the prolonged post-war boom. In
that sense, the current crisis was merely deferred for a generation.

Kliman is interesting on the theory of crisis for a whole number of
reasons, but mainly because he is one of the few economists to defend
the labour theory of value in its marxian variant. I said earlier
that, for the sake of argument, we would accept that Marx's theory of
value was correct and proceed from there. One outstanding problem with
the theory, though, has always been the 'transformation problem'. How
do we get from exchange values, which we don't see on a daily basis,
to prices, which we do? This is a crucial question. Bear in mind that
the account of crisis that I have just sketched, with a pained and
slightly comical expression on my face, depends on the idea that the
prices of the goods sold on the market will not be sufficient to
recoup the original investment, as the 'organic composition of
capital' rises. To establish this, we need an account of how exchange
values become prices. Many economists argue that no function can be
established that will transform exchange values into prices. If that
is the case, then Marx's crisis theory is presented with a serious
problem. Prices may be decoupled from values in such a way as to
render the latter a merely metaphysical construct with no relation to
the real economy.

Marx's answer was presented in Capital Volume III, chapter 9. In it,
he dealt with an issue arising from his previous analysis: if the
organic rate of capital differs from industry to industry, the profit
rates should vary considerably Yet, the observable tendency is for
profits to equalise across economies. Marx argues that this is because
investment flows between capital sectors to the most profitable areas
- thus increasing the amont of goods produced, reducing prices, and
lowering the overall profit rate - and away from the less profitable
areas - thus decreasing the amounts of goods produced, raising prices
and profits. While surplus value is redistributed through market
transactions and realised in different ways, a 'general rate of
profit' is formed. Thus, capitalists determine the price of their
goods by looking at their input costs and adding a mark-up based on
the general rate of profit obtained in that economy. In aggregate,
then, the total price of commodities produced will equal their total
value; the total profits will equal the total amount of surplus value
produced. Thus, a wholistic view of the economy gives us the basis for
transforming exchange values into prices. This account has been
subject to numerous criticisms, mainly on the grounds that Marx
inconsistently applies the transformation, failing to transform the
values of inputs (constant and variable capital) into prices. Kliman
defends Marx's account against these charges, though, arguing for what
he maintains is an internally consistent picture of Capital that also
conserves the argument concerning profit rates.

I raise all that, aware that Kliman's account remains controversial.
Resolving such issues is far from my competence, but it's worth being
acquainted with these arguments because if we are going to account for
this 'age of austerity' that we face (actually an age of naked class
war in which the rich are trying to place the burden of this crisis on
us), we have to develop a consistent and viable theory of capitalist
crisis. Despite the aporiae of marxian political economy, no other
competing theory has come close to accounting for the empirical
evidence of the crisis-ridden nature of capitalism.

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