Financialisation – the cause of the crisis?

I have to return to this issue that I raised in a previous blog (A financial or economic crisis?, 15 June 2010), because there are so many radical economists who are arguing that the causes of the Great Recession do not fit a ‘classical Marxist’ explanation based on a decline in profitability.

No, according to these economists, the Great Recession is really a product of a new development in capitalism, the growing dominance and ‘autonomy’ of the financial sector from the rest of capitalism.  This process of financialisation has been operating with increasing intensity over the last 30 years and culminated in the collapse of the financial sector in 2007 that triggered the recession.  A Marxist explanation of the crisis is wrong for at least several reasons.

First, the rate of profit was not falling before the crisis and indeed has not been falling but rising since the early 1980s .  See the assertions of Lapatvitsas among others in my previous blog (Costas Lapavitsas, Financialisation and capitalist accumulation, Research on Money and Finance, February 2010).

Second, the rise in profitability was mainly due to the exploitation of the labour force under what is called ‘neoliberalism’, a new regimen of capitalism that began in the early 1980s as the political response of the strategists of capital the growing militancy of the labour force.  A series of economic recessions, state measures against the trade unions, the breaking-up of the state by privatisation and deregulation all laid the ground for a ne0liberal supremacy.  This was exhibited in the fall in the share of value going to the labour force compared to the capitalist class.  The share of profit rose and that’s why the rate of profit did too – not because of Marx’s classic law of a rising organic composition of capital.

At the recent Marxism 2010 conference in London in early July, this view was expressed verbally by Alfredo Saad-Filho who argued that the Great Recession was a ‘bubble-like crisis’ centred in the financial sector.  Indeed, all recessions since the 1980s have been caused by excessive credit bursting and not by a crisis in accumulation due to a falling rate of profit, said Saad-Filho.

Each crisis is special and unique, claimed Saad-Filho and there is no overriding or underlying cause of capitalist crisis as proponents of Marx’s law of profitability have argued.  Indeed, Marx never really had a theory of crisis anyway.

Those of us who have tried to defend Marx’s law of profitability have responded forcefully to these arguments.  Andrew Kliman has argued in his paper, The persistent fall in profitability underlying the current crisis: new temporalist evidence (http://akliman.squarespace.com/persistent-fall) that the US corporate rate of profit did fall throughout the period of ‘neo-liberalism’ in the 1980s and 1990s.  Andrew also took to task the financialisation theorists in his paper, Masters of words, (http://akliman.squarespace.com/storage/Masters%20of%20Words%20pdf%202.20.10.pdf)

I have taken a different tack in my book, The Great Recession, and in my recent paper to the Annual Conference of Heterodox Economists that took place in Bordeaux, France in mid-July called The causes of the Great Recession: mainstream and heterodox interpretations and the cherry pickers, July 2010 (The Great Recession paper for Bordeaux).

I calculate that the rate of profit, however you measure it, did rise after 1982.  But when it peaked in 1997, it was still way below the levels of the previous peak of 1964.   See the data in my book (http://www.lulu.com/product/paperback/the-great-recession/6079458).  So there is both a cyclical and a secular trend in the rate of profit.

Second, the rise in the rate of profit from 1982 to 1997 cannot be explained solely by a rise in the exploitation of labour, as the ‘financialisation’ proponents argue.  Indeed, according to my calculations, at the very lowest, at least 40% of the rise in this period was due to a fall in the organic composition of capital, as capitalist accumulation grew more slowly than labour compensation.

Third, the US rate of profit had been falling from 2005, as against the arguments of ‘neo-liberals’ (see my previous blog above).

So the Great Recession is just as much a classic Marxist crisis as that of 1974-5.  It is true that the financial sector has been bloated in the period leading up to the Great Recession by a huge injection of ‘fictitious capital’ especially after 2002, when new forms of  credit  took  off (credit derivatives and CDOs) and the US property bubble exploded.  As a result, the crisis was triggered in the financial sector and was much larger than in previous recessions.

But it is my contention that the US was in a downward phase for profitability from 1997, as well as in a downward phase in the longer cycle of prices of production (the Kondratiev cycle) since 1982.  When combined, that ensured more and deeper economic recessions and weaker economic recoveries.  That downward phase still has some way to  go, to 2015 or so.

Saad-Filho told us at the Marxism conference that such is the strength of the ‘neo-liberal’ order that even the Great Recession will not fundamentally threaten the capitalist system because the workers are too weak or too politically divided to fight back.

That may be the case but it is not an economic argument.  What the Great Recession showed was that the classical Marxist theory of crisis is the best explanation of what happened.  Capitalism is inherently unstable and moves in cycles of boom and slump.  As former Fed chairman and symbol of  neo-liberalism, Alan Greenspan said, “unless there is a societal choice to abandon dynamic markets and leverage for some form of central planning, I fear that preventing bubbles will in the end turn out to be infeasible.  Assuaging the aftermath is all we can hope for.” (The Crisis, March 2010)

Sure, each crisis has its own particular features and the Great Recession had that with its ‘shadow banking’, Special Investment Vehicles, credit derivatives and the rest.  But the underlying cause remained the profit nature of the production system.  If financialisation means the finance sector has divorced itself from the wider capitalist system, that is clearly wrong.