Andrew Kliman is a professor of economics at Pace University and the author, most recently, of The Failure of Capitalist Production: Underlying Causes of the Great Recession. In discussion with Jonathan Maunder he argues that the economic crisis results from the fundamental logic of capitalism and cannot be solved by pro-growth reform measures. Only a more radical response is adequate to the task.
In your book ‘The Failure of Capitalist Production’ you argue that Karl Marx’s theory of the tendency of the rate of profit to fall, which he outlines in volume 3 of ‘Capital’, is crucial in understanding the current economic crisis. Could you explain this theory for people who may not be familiar with it and why you think it is relevant to the current crisis?
To avoid jargon, I’ll explain Marx’s theory in a somewhat atypical way. Capitalist companies adopt labor-saving technologies that boost productivity. Because the productivity increases lower the cost of producing the companies’ products, the products’ prices also tend to fall, partly because competition between companies drives down the prices and partly because they find it advantageous to cut their prices in order to sell more stuff when their costs of production fall. But the price cutting tends to lower the companies’ average rate of profit.
More precisely, if there’s no change in the relation between profit and wages, and no change in the relation between physical output and the physical capital that is invested––both of which are quite reasonable assumptions––then the rate of profit will fall if prices tend to decline as productivity increases. I say “tend to decline” because nowadays, unlike when Marx wrote, prices typically rise even in the face of rising productivity. But that actually doesn’t matter. As long as prices rise more slowly than they would if productivity didn’t increase, the rate of profit will still fall under these conditions.
Marx argues that the fall in the rate of profit, if and when it materializes, leads to a slowdown in productive investment and economic growth. He also argues that it leads indirectly to financial crises. Companies and investors engage in all manner of speculative activities and shady deals, as they try rather desperately to keep their rates of profit from falling despite the fall in the economy-wide average rate. This risky behavior, along with debt problems stemming from slow economic growth, eventually lead to a debt crisis, a situation in which a large volume of debt can’t be paid back. And this often triggers an economic downturn.
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