Today, one hundred and fifty years after the publication of the first volume of Capital, Marx remains our contemporary.
The commodification imperative (goods and services must take the form of commodities), the monetary imperative (money is required to gain access to the objective preconditions for human life – means of subsistence, means of production), and the valorization imperative (capital must be accumulated; monetary returns (M’) must exceed the initial monetary investment, M) continue to be the dominant organizing principles of social life today. Social relations continue to take the form of relations among things; it continues to be the case that each individual “carries his social power, as also his connection with society, in his pocket.”1 Human flourishing continues to be systematically subordinated to capital’s flourishing. Essential human ends continue to be systematically sacrificed to the end of capital accumulation.2 Marx’s theory helps us comprehend key features of any form of capitalism, including its contemporary variant. It remains indispensable.
It would, of course, be foolish to think a nineteenth century thinker could have anticipated what capitalism would look like in the twenty-first century. Debt levels are now unprecedented.3 An ever-increasing amount of credit is required to produce the same increment of GDP growth. Price levels of financial assets are stratospheric, with financial crises no more than momentary blips in their relentless ascent. The correlation between productivity advances and real wage growth – previously taken as a stylized fact in textbooks – has been broken. Unemployment declines and real wages (and inflation) barely budge, to the great surprise of economists. Central bank balance sheets have metastasized in ways few could have imagined, let alone anticipated, just a few years ago. Maintaining negative interest rates for extended periods of time is considered reasonable, whereas not too long ago “responsible” commentators would have dismissed the idea as mad. Respected business publications like the Financial Times and The Economist publish articles anticipate a not too distant future when “helicopter drops” of free money may have to fall on households. The “new normal” of capitalism looks decidedly abnormal, even without taking into account concerns about the environment and political derangement (topics outside our purview here).
I shall argue that Marx’s theoretical framework helps us make sense of important peculiar features of contemporary capitalism, no less than features it shares with other variants. In particular, I shall be concerned with the pattern of capitalist development Marx sketched in Capital.4
We may take investments to commercialize a cluster of radical innovations as the starting point of what can be termed a “systematic cycle of accumulation.”5 Assuming adequate labor power is available and mobilized, and sufficient efficient demand is present, the initial investments can be valorized (M&M), encouraging increased investments to commercialize the next generation of innovations. As capital is invested, the acceleration phase of the cycle takes off. The expansion of credit plays major roles here, funding new firms before they can bring innovations to market, enabling investments to increase more than would otherwise be possible, preventing production and distribution from coming to an abrupt halt when payments fall due before revenues have been received, and so on.6
At some point an overaccumulation of capital will end the acceleration phase. When this occurs, there will be “a surplus of industrial capital, but in a form in which it cannot accomplish its function. A great deal of commodity capital; but unsaleable. A great deal of fixed capital; but in large measure unemployed as a result of the stagnation in reproduction.”7 Contemporary Marxian theorists have explained why overaccumulation problems arise in detail.8 When more efficient producers enter a sector armed with product and process innovations, this typically forces the least productive units of capital out of business. But other established units of production have strong incentives to remain operating if they can. They have already invested in fixed capital (machinery, buildings, and so on). If production is shut down now, there will be nothing to show for their past investments; if they continue in operation, they may be able to win at least the average rate of profit on their circulating capital (that is, their investments in raw materials, wages, transportation costs, labor power, etc.). It is also the case that the management and work force of these firms have sector-specific skills that would be difficult to duplicate in any reasonable time period were they to shift operations to a different sector. Further, these units of capital likely have established relationships with suppliers and distributors, relationships that would again likely be difficult and costly to establish in other sectors within a reasonable timeframe. And local governments and universities may be providing important support that would be withdrawn were they to cease operating in the sector. There is, finally, always the hope that if they hold on long enough, they may be able to introduce innovations allowing them to leap-frog over their competitors at some future point.
These considerations are all rational from the perspective of individual producers. But from a collective point of view the result is irrational: entire sectors, and the economy as a whole, tend to be afflicted with excessive productive capacity relative to what markets can absorb. As long as markets grow in sync with increases in productive capacity, this tendency is held in check. Eventually, however, markets cease growing rapidly enough, and excess productive capacity accumulates.
The rise of excess capacity does not immediately lead to an economic crisis, since lending doesn’t automatically halt when rapid expansion ceases. Loans continue to be made in the belief that the slowdown is merely temporary. Lenders continue lending because they do not want to write off previous loans, and hope that enough borrowers tied to other lenders will fail so that borrowers tied to them won’t. Also, when previous paths of accumulation are becoming exhausted, the promise of new possibilities is especially alluring to both borrowers and lenders. As increasingly desperate investors begin to borrow increasing amounts to chase the “next big thing,” speculative frenzy plays a bigger and bigger role pushing the economy forward. Amidst the resulting speculative bubbles financial fraud thrives like bacteria in a kiddy pool. Marx termed this period, when easily available credit allows an upswing to continue despite growing excess productive capacity, the “overexertion” phase of the cycle. 9
In Marx’s view, the end of the overexertion phase is preordained, even if its precise timing is indeterminate. Loans made to borrowers at a given moment generally can only be repaid if other lenders roll over loans and expand lending at later moments. When the belief that lenders will lend at the required levels in the future is called into question (often by some event trivial in itself), lending ceases to expand in the present. Loans cease being automatically rolled over, debts begin to be called in. A sharp rise in demand from borrowers, now needing hard cash to meet pressing debt obligations, pushes interest rates sharply higher, making it yet more difficult for others to roll over their debts. A panicked rush to sell off financial assets forces a correspondingly sharp decline in their prices. The balance sheets of those still holding those assets rapidly erode, condemning many of them to insolvency. A generalized credit crunch, in brief, sets off an extended economic downswing.
If a recession or depression is sufficiently severe, overaccumulation can be overcome through some combination of outright physical destruction of past capital investments and the devaluation (lower market value) of what remains. The social costs may be horrific. But from capital’s standpoint the destruction and devaluation of excess productive capacity on a massive scale sets the stage for a new systematic cycle.
Two developments must be noted to update this account. 1. The tendency to overaccumulation difficulties has greatly intensified since Marx’s day. 2. The overexertion phase can persist far longer than Marx foresaw.
1. In the nineteenth century innovation was far less institutionalized than it is today. The basic social unit of innovation is now the national innovation system, including publicly funded federal labs, university labs, a variety of private/public R&D partnerships, public support for start-ups, venture capital funding after “proof of concept” has been established, privately funded R&D undertaken in corporate labs, the system of public and private education that produces new knowledge workers, the infrastructure for storing and distributing scientific-technological knowledge, the legal and marketing firms aiding the commercialization of innovations, tax policies and subsidies provided by the state as incentives to encourage innovation, and so on.10
Only a relatively small number of regions have been sufficiently wealthy to establish a national innovation system.11 Nonetheless, there are now more effective systems in place than in other any period of world history. The U.S. continues to be the biggest investor in research and development, funding a bit over a quarter of the global total. Asian countries (including Japan, South Korea, China, and India) now fund over 40% of global research and development expenditures. The European share is over 20%. There are now 18 countries devoting two percent or more of their GDP to R&D.12 This is a positive development, at least as far as the rate of the rate of innovation goes.13 That, however, is not what ultimately matters in capitalism, where use value considerations are subordinated to monetary imperatives. What matters to units of capital is the period of time high profits can be won from a competitive advantage due to innovations.
Whenever an innovation is commercialized in some region that promises to be especially profitable, national innovation systems in other regions across the globe will kick into high gear more or less instantaneously. As a result, other units of capital tend to catch up to the initially innovating firms within a relatively brief period. The mad rush of these other capitals to capture some of the profits appropriated by the initial innovators necessarily tends to lead productive capacity in the given sector as a whole to grow at a faster rate than the market for the innovative good in question. In other words, the most innovative sectors in the world market now tend to be plagued by excess productive capacity more quickly than in previous periods. With the spread of effective national innovation systems, the period initial innovators enjoy a competitive advantage from innovations necessarily tends to shrink. The time high profits can be won from innovations tends to be significantly compressed as a result.
2. If the spread of national innovation systems leads to excessive productive capacity in the world market, making it difficult for investment to be valorized with a “normal” amount of credit creation, accumulation can still occur if credit money is created beyond the “normal” range. Productive capacity that would otherwise be socially wasted can then be absorbed, thanks to the artificial expansion of markets fueled by the expansion of credit money. As long as the credit creation continues on a sufficient scale, the severe downswing that is the “default option” of capitalism in periods of global overaccumulation can be deferred. In principle, at least, what Marx termed the “overexertion” phase can be extended indefinitely.
With these two adjustments, the general pattern of capitalist development sketched by Marx in Volume 3 allows us to comprehend how we have arrived at where we are today. In the decades immediately following World War Two there was an acceleration phase in the world market led by the US. It enjoyed a “golden age” due in good measure to a significant competitive advantage in the technologies of mass production. By the late 1960s-early 1970s Japan and Europe had rebuilt their industrial base and had developed effective national innovation systems. Many Japanese and European capitals were more efficient producers of higher quality products than established U.S. firms in crucial sectors (consumer electronics, autos, motorcycles, chemicals, business machines, steel, etc.). U.S. producers, however, did not withdraw from these sectors in the face of more efficient competitors, leading to significant excess productive capacity in the major sectors of the world market. An overaccumulation of capital investment in those sectors ended the acceleration phase of the global post WWII upswing, lowering the rate of profit.14
Given the pattern outlined in Part Five of Volume 3, a period of excessive credit could be expected to allow a brief “overexertion” phase, followed relatively soon by a massive devaluation or physical destruction of excess capacity. Given the level of overaccumulation in the world market, the scale of the devaluation and destruction required to remove it was truly enormous. Members of the ruling circles in the U.S. had a strong incentive to avoid the massive harm that would have been inflicted on U.S. capitals, given their relatively weak competitive position in key sectors. Nixon’s unilateral decision to cut the tie between gold and the dollar offered an alternative path forward for capital by allowing historically unprecedented amount of credit to be created. The credit explosion allowed productive capacity to be absorbed that would otherwise have gone unused (and, more importantly for capital, allowed profits to recover from the global downturn of the 1970s).15
The recovery of profits justified replacing productive capacity as it became worn out or outdated. It also justified the commercialization of promising paths of innovation. It even justified some regions (like China) increasing investment at an unprecedented rate. What it could not justify was the major increase in the rate of investment required to set off a new “acceleration” phase. Established sectors of the world market either continued to suffer from excess productive capacity, or soon would if the rate of investment spiked upward. If anything, difficulties of excess productive capacity in the major sectors of the world market have intensified with the rapid industrialization of China and other regions in East Asia. Dynamic emerging new sectors experience overaccumulation difficulties quicker than has ever been the case before. National innovation systems across the global are now mobilized to catch up to any innovation shows promise of being profitable. As investment flows into the new sector, too much productive capacity is accumulated too quickly, leading rates of investment to fall.
The newly “normal” features of capitalism that are so profoundly abnormal relative to earlier periods of its history begin to make sense in light of Marx’s categories of “overaccumulation” and “overexertion.”
- The unprecedented explosion of credit money has been needed to avoid a severe global depression on a scale that would make the Great Depression of the 1930s seem mild. Credit expansion has generated “less bang for the buck” over time because with the expansion of productive capacity over time, more and more credit is required to simply keep more and more zombie capitals roaming the planet.
- For the overexertion phase to be extended, it is not enough that markets expand on credit steroids to absorb more of the output of the growing productive capacity. It must be absorbed profitably. At first the sharp rise in credit money did not do this. Capital, and the capitalist state, then declared a war on labor, with capital flight from high wage regions, automation, and anti-worker public policies their main weapons. The previous correlation between productivity advances and real wage increases (and the relative stability of labor’s share of national income), was broken. As the massive expansion of credit continued without inflation in wage or consumer markets, commentators praised Central Banks for having engineered a “Great Moderation,” willfully blind to the underlying shift in social relations. In a rare moment of lucidity Alan Greenspan, then head of the U.S. Federal Reserve, confessed that the moderation of inflation rested on “the traumatized worker,” incapable of winning wage increases due to the threat of downsizing and capital flight.16
- The insane inflation of financial assets makes sense too from this perspective. If the creation of credit money is exploding, and profits are being appropriated, but only a portion of credit money and retained profits are invested in expanding industrial and commercial capitals, then over time an increasingly large pool of idle money capital will be amassed seeking some other form of profitable investment. In periods of excess productive capacity in the major non-financial sectors, credit flows for the speculative purchase of financial assets provides an attractive alternative outlet for valorization. As investment in these assets increases, their prices become inflated. The inflation of financial assets is further reinforced when the retained profits of non-financial firms, and credit flows to them, are used for stock buy-backs and for mergers and acquisitions. The expansion of credit that has enabled capital to avoid a major global depression has simultaneously generated a bloated financial sector, increasingly decoupled from the rest of the economy.
The explosion of Central Bank balance sheets follows more or less automatically. When credit money created by the financial sector stays within the financial sector, speculative bubbles will invariably form, and just as invariably burst. At that point Central Banks face a stark dilemma: bail out the financial sector through injecting yet more liquidity that will fuel yet more inflation of financial assets, or risk a financial crisis that could well mutate into a severe global depression. The former path has been chosen, expanding their balance sheets to barely imaginable magnitudes. Negative interest rates are simply a means of encouraging yet further growth in credit for a yet further extension of the “overexertion phase.” And embracing “helicopter drops” as a possible policy option is a sign of desperation among the more far-seeing organic intellectuals of capital, who realize that when the next recession comes, as it surely will, Central Banks may not be able to stimulate the economy through lower interest rates when they are already at historic lows.
Understanding our present moment in world history demands understanding both the systematic tendency to overaccumulation in capitalism, and how credit expansion (in combination with a war on labor and financialization) can enable the destruction and devaluation of overaccumulated capital to be deferred. Together with many other core ideas not considered in this paper, these concepts from Capital make Marx our contemporary in a way that simply is not the case for other social theorists of the last one hundred and fifty years.
No one can say how long Central Banks will be able to prolong the “overexertion phase.” If they can continue things a bit longer, it will be at the cost of a host of social pathologies continuing, including:
- increasingly severe inequality;
- an increasing gap between the level of social needs that could in principle be met with existing technologies and the actual level attained;
- the growing power of oligopolies possessing intellectual property rights;17
- deep structural constraints continued to be imposed by the intellectual property rights system on “open source” innovation;
- recurrent financial crises, as credit money fuels the inflation of speculative bubbles in various classes of financial assets; reinforced by the extreme monetary policies required to prevent the collapse of severe speculative bubbles from setting off a global depression;
- the continuing erosion of (all too limited to begin with) “democratic capitalism”; and
- a continuing failure to respond adequately to the horrific environmental costs of capitalism’s ‘grow or die” imperative.
If the long-deferred eradication of excess productive capacity in the world market cannot be deferred, all those pathologies will be combined with a global depression of unimaginable brutality.
Both of those alternatives are barbaric. “Socialism or barbarism” is our real choice, as Marx clearly saw 150 years ago.
- ↩ Karl Marx, “Outlines of the Critique of Political Economy” [Grundrisse, beginning], Marx and Engels Collected Works, Volume 28, (New York: International Publishers, 1986 ), 94.
- ↩ These claims are elaborated and defended at length in Tony Smith, Beyond Liberal Egalitarianism, (Leiden: Brill, 2017).
- ↩ In 1945 total debt in the U.S. economy was $355b. By 2007 the figure had skyrocketed to an astounding $50 trillion. Richard Duncan, The New Depression, (Hoboken: Wiley, 2012), 2.
- ↩ See especially Karl Marx, Capital, Volume 3, (New York: Penguin, 1981 ), Chapter 30.
- ↩ The term is taken from Giovanni Arrighi, The Long Twentieth Century, (New York: Verso, 1994).
- ↩ “Credit is thus indispensable here, a credit that grows in volume with the growing value of production and grows in duration with the increasing distance of the markets. A reciprocal effect takes place here. The development of the production process expands credit, while credit in turn lead to an expansion of industrial and commercial operations.” Marx, Capital, Volume 3, 612.
- ↩ Ibid., 614.
- ↩ See Geert Reuten, “Accumulation of Capital and the Foundation of the Tendency of the Rate of Profit to Fall,” Cambridge Journal of Economics, (15, no. 1), 79–93.
- ↩ Karl Marx, Capital, Volume 3, 619. “(T)he appearance of very solid business with brisk returns can merrily persist even when returns have in actual fact long since been made only at the cost of swindled money-lenders and swindled producers. This is why business always seems almost exaggeratedly heathy immediately before a collapse.” Ibid., 615-16.
- ↩ Francesco Ramella, Sociology of Economic Innovation, (New York, NY: Routledge Press, 2016).
- ↩ This is a major cause of uneven development in the world market, where wealthy regions, able to establish effective national innovation systems, enjoy cumulative advantages, while poorer regions suffer cumulative disadvantages. See Tony Smith, “Piketty On the World Market and Inequality Within Nations,” Critical Sociology, (Vol. 41, No. 2, 2015), 401-10.
- ↩ R&D Magazine, “2016 Global R&D Funding Forecast,” R&D Magazine, (Winter 2016), 3-4.
- ↩ When we consider environmental costs of technological change in capitalism, however, it is not such a positive matter.
- ↩ Robert Brenner, The Economics of Global Turbulence, (New York: Verso, 2006).
- ↩ I do not want to downplay the devaluation of capital that did occur in response to the global slowdown of the 1970s. But there was no “’slaughter of capital values’ on a scale sufficient to end [overcapacity and overproduction]” Radhika Desai 2013, Geopolitical Economy: After U.S. Hegemony, Globalization and Empire, (London: Pluto, 2013), 24-5.
- ↩ Bob Woodward, Maestro: Greenspan’s Fed and the American Boom, (New York: Simon and Schuster Woodward, 2000), 168.
- ↩ The rise of a new intellectual property rights regime in response to the global slowdown of the 1970s is perfectly intelligible from this point of view. If the time any unit of capital can enjoy a competitive advantage from an innovation necessarily tends to be compressed, it would seem that extending the intellectual property rights system in scope and enforcement can put this tendency out of play. But the intellectual property rights system has not eliminated the relentless threat of overaccumulation. It has simply meant that more resources have been devoted duplicating innovations in ways that avoid patent infringement (and to legal efforts to defend firms’ own claims and attack the claims of others). And it has consolidated oligopolistic power.