Louis Proyect: The Unrepentant Marxist

April 12, 2008

The End is Near?

Filed under: economics — louisproyect @ 5:19 pm

I strongly believe in Marxist education. One of my main criticisms of the “Marxist-Leninist” left has been its tendency to reduce the ranks to passivity. You have a kind of division of labor with the top leadership of the party deliberating on theoretical and strategic questions and the lower ranks acting on their deliberations. This flies in the face of Marx’s description of the task that faced the movement in his day: the ruthless criticism of the existing order, ruthless in that it will shrink neither from its own discoveries, nor from conflict with the powers that be. And, of course, in order to be able to criticize the existing order, you really need to understand it.

When I proposed an Introduction to Marxism class to the subscribers of Marxmail and the readers of this blog, I had an ulterior motive. While the class was primarily meant to explain some basic concepts such as imperialism, the national question, I wanted to educate myself on “crisis theory”, an area of Marxist economics that I was aware of for a number of years but had never really dug into. It seemed like a particularly good time to attack this subject since the bourgeois press is filled with articles now about whether we are facing “another 1929”.

I especially was looking forward to reading Henryk Grossman, the subject of a biography by Rick Kuhn that is the latest recipient of the Isaac Deutscher prize. Grossman, along with Paul Mattick, has the reputation of being associated with what some might regard as “millenarian” tendencies. They get lampooned in those cartoons with a guy in a long beard carrying a picket sign with the words: “The end is near” as in the example above.

If got the same kind of chuckle from reading “gloom and doom” predictions on the Internet for the past 20 years, even from my good friend the late Mark Jones, who bet left-liberal economist Max Sawicky a case of Lagavulin single-malt scotch in 1987 over whether the Dow-Jones industrial average would go below 3000. Mark died before he could make good on the debt, but here was one of his last words on the topic with his characteristic ability to poke fun at himself:

The sad fact is that is I who owe Max Sawicky a case of Lagavulin. I wrote to him a while ago apologising for my slowness in honouring a bet I lost. The bet was that the Dow would fall to below 3000 within a year; it didn’t. My reasoning was that at its height, the Nikkei, now down around 12k, reached over 40 000, and that the equivalent release of gas from a deflating Wall St bubble would bring the Dow down to 3k. We shall see, altho according to Julien [probably a reference to Jurriaan Bendien] I don’t know anything about the Nikkei anyway.

My secret plan is to send the Lagavulin to Max when the Dow DOES hit 3k, and then honour will have been satisfactorily served all round.

As I began to read Grossman, I wondered what kind of connection could be made with financial crises like the 1987 crash that spurred Mark to make his bet. If you read Grossman’s “Law of the Accumulation and Breakdown of the Capitalist System“, you will note that “overaccumulation” is the primary cause of breakdown. Put in the simplest terms, this means that the capitalist class runs into a brick wall eventually as it replaces workers with machines. Although machines can improve productivity, they eventually cut into the rate of profit since they are not capable of producing surplus value. Since most of the major economic crises of the past 35 years or so have involved financial institutions (Savings and Loans, LTCM and stock market bubbles of one sort or another), what is the relevance of Grossman’s theory? When I posed a question about this on Marxmail, it prompted a couple of perceptive replies from Andrew Pollack and John Imani:

Andrew Pollack wrote:

I haven’t read Grossman, or Kuhn on Grossman (and really want to thanks to Louis’ query and previous ones about him). But, unless I’m misconstruing the question, the organic composition/falling rate of profit has everything to do with crises based on fictitious capital — because capital flows into those nonmanufacturing sectors in the first place (including dot.com) for lack of profitable outlet elsewhere (by coincidence there’s a great quote in the Times yesterday expressing skepticism that the banks being bailed out would do anything with that money that would help the economy). Of course all of that just sets the stage for what happens afterward, and each financial crisis is unique, even if they all share their origins in the crisis in manufacturing. I’m sure I’m putting this way too crudely…

You can read John’s comments here.

As it turned out, Grossman had pretty much the same thing to say in chapter two of his book, titled “The Law of Capitalist Breakdown“. Considering the fact that his book was published in 1929, just before the stock market crash, he was pretty much on the money.

Grossman begins by pretty much describing what has been happening to the American economy for the past 30 years or so. He begins:

As against Bauer I have shown that the very mechanism of accumulation leads to an overaccumulation of capital and thus to crisis. Even a cut in wages can only proceed within definite insuperable limits. Thus accumulation necessarily comes to a standstill or the system collapses. At the moment of crisis capital — in the form of the portions of surplus value previously destined for accumulation — are excluded from the process of production. Absolute overproduction begins as unsold stocks accumulate. Money capital in search of investment can no longer be applied profitably in production and turns to the stock exchange.

Grossman’s observation that “money capital in search of investment can no longer be applied profitably in production and turns to the stock exchange” sounds pretty much like what has been happening, doesn’t it?

And as John Imani pointed out, this was the same point made by Karl Marx in V. 3 of Capital:

At a certain high point this increasing concentration in its turn causes a new fall in the rate of profit. The mass of small dispersed capitals is thereby driven along the adventurous road of speculation, credit frauds, stock swindles, and crises.

Grossman continues:

The activity of the stock exchange is insuperably bound up with the movement of interest on the money-market `the price of these securities rises and falls inversely as the rate of interest’ (Marx, 1959, p. 467). As the rate of interest jerks upward at the start of every crisis the price of these securities registers a precipitous fall: `when the money market is tight these securities will fall in price for two reasons: first, because the rate of interest rises, and secondly, because they are thrown on the market in large quantities in order to convert them into cash’ (p. 467).

If this doesn’t sound like it was ripped out of the business pages in the recent period, I don’t know what does. Here’s what the National Post in Canada reported on March 19:

Stock markets in the United States rang up their biggest one-day gains in more than five years yesterday, after the Fed’s deep interest-rate cut and solid results from two top investment banks reassured investors shocked by Bear Stearns’ sudden downfall.

The Fed fulfilled expectations by cutting its benchmark rate to the lowest since February 2005. Stocks rallied, with the S&P and the Nasdaq closing up more than 4%.

As you might have expected, stock prices tumbled a few days later when investors figured out that this measure would not really solve the basic economic problem facing the nation, namely the failure of the underlying economy to expand at normal rates. In other words, Grossman’s focus on the “brick and mortar” aspects of the economy was well-placed, even if the malaise was reflected in the “fictitious capital” realm.

Grossman writes, “The depreciation of securities in times of crisis initiates a massive drive for speculation which is why the end of the crisis, or the phase of depression, goes together with feverish activity on the stock exchange”, an apt description of recent activity on Wall Street and concludes:

This completes the causal chain. Starting from the sphere of production I have shown that the very laws of capitalist accumulation impart to accumulation a cyclical form and this cyclical movement impinges on the sphere of circulation (money market and stock exchange). The former is the independent variable, the latter the dependent variable. Once counteracting tendencies begin to operate and valorisation of productive capital is again restored a further period of accumulation sets in. The rate of profit climbs upwards. As soon as it exceeds the income of fixed interest securities money is again channelled from the stock exchange back into the sphere of production. The rate of interest starts rising and with the gradual fall in the price of securities they are transferred to the `public’ which only looks for a long term investment. But this `long-term’ lasts only down to the next crisis or the next wave of speculative buying. Throughout all this there is a growing centralisation of money wealth which in turn accounts for the increasing power of finance capital.

While Grossman has been depicted–unfairly–as someone who believed that breakdown will automatically usher in socialist revolution, he was really convinced that political action was required more than anything else. His main goal was to drive a stake into the heart of a theory that had been around for more than 30 years on the left, namely that capitalism was a system that had resolved its basic contradictions.

Now in face of deepening economic contradictions that George Soros has described in his most recently published book as a looming “serious recession”, American society will find itself more receptive to radical analyses. Indeed, in an article that appeared in the NY Times on the same day that Soros’s new book was profiled, the newspaper of record admitted in the article’s title: “It’s a Crisis, and Ideas Are Scarce”. It begrudgingly made the point that “the solutions being pushed would not seem unreasonable to an old-fashioned socialist.” Those solutions did not involve expropriating the expropriators but returning to New Deal type regulations.

Speaking as an old-fashioned socialist, an Unrepentant Marxist actually, I would hope that our movement has the audacity to go much further than the New Deal. If this crisis has the effect of opening up the mind’s of working people to alternative ways of producing wealth, then let’s have the courage of our convictions and propose the only solution that makes sense: socialism.

13 Comments »

  1. This is way off point, but I was wondering what you know about a travel writer named Patrick Symmes, who had an interesting (for want of a better word) article on Cuba in the current Harper’s—m. hureaux

    Comment by Michael Hureaux — April 13, 2008 @ 9:59 am

  2. It was with interest i read this article, one could be excused for just looking at the headlines in the Times newspaper for financial guidance, however a closer look at interest rate activity would note the rise and fall is not correlated inversely. during the 2000 -2003 decline interest rates were lowered successively and the market continued to move lower. Then from 2003 -2007 the market moved higher and interest rates also were moved higher. (before you dispute this fact check out the details on a chart) There is every likelihood that interest rates will be further lowered and the market still continue to decline. Markets show sentiment. Interest rate movements are a lever used for money supply.
    therefore the passage of text, reproduced here
    “: Markets operate as a function of expectation and emotion.
    The activity of the stock exchange is insuperably bound up with the movement of interest on the money-market `the price of these securities rises and falls inversely as the rate of interest’ (Marx, 1959, p. 467). As the rate of interest jerks upward at the start of every crisis the price of these securities registers a precipitous fall:”
    this is 1959 limited asset thinking

    One needs to appreciate that the Japanese have had over a decade of near ZERO interest rates and there economy is struggling to avoid its own recession now.
    IS consumption was / is the disease of excess( what also used to be known for gout) the problem or the Saviour.

    Japanese companies diversified the capital equation, reducing labor components and repatriating the profits. With a present birthrate of 1.24 they hardly can have an excess consumption problem. But they have Many other problems.

    The selection of an asset vehicle is determined by the desire for a rate of return. The personal observation is one of weighing the return against the risk involved. Where the risk is known, and this is the critical component when looking at fraction reserve banking, the individual makes an informed decision. Money could be seen as a broad term for asset ownership. cash being a component as well as equity and bonds. When currency fluctuations are entered into the mix, cash can devalue as an asset class due to negative currency movements, however an opposing asset class can appreciate at the same time. This change in asset values can occur within the same economy or may be the result of asset transfer out of an economy into a different currency and be used in the same asset class.

    The steep downward movements in 1987 were sparked by the change in world sentiment to accumulation US gov treasuries. Foreign banks stopped buying the bedt notes and started to selling treasuries. Putting pressure on currencies and asset pricing.

    The world has moved a long way from the old gold standard and fixed exchange rates days when much of this article was written, Presently with global commodity trading and foreign exchange mechanisms asset movements are rapid and diverse. The risks however are relying on flawed information.

    The mobility of capital and the choice of asset class is not limited to American stocks or government treasuries.
    As interest rates fall the value of gov, bonds increase, but do they always. Consider the demand for a government bond worth less through foreign exchange. it would not seem attractive, However the purchase of US government bonds by foreign countries shows no sign of slowing over the last few years. Do they see an appreciating US dollar on the horizon. After falling 40 percent over the last few years. Or as before in 87 are they going to be selling these instruments.

    Markets operate as a function of expectation and emotion. There is an expectation built into the human system. As in the environment ;growth follows winter, a downturn will not be the end, for some the lazy ones who rely on others to manage their assets they will have a winter of sorts, however that too will end. The cause of asset bubbles and their corrective actions will be fluid in the coming periods.
    Each slightly different form of greed, with a response thought to be more innovative than the last time to preserve the notion of a soft landing.
    To look at Marx and hail a socialist answer is to say radio was all we needed, then came B&W tv, then came Colour TV then digital and the internet. Did we want to stop at radio.
    Manufacturing assets, the movement to tertiary service industries. The application of capital to transnational companies whose exposure and capital movements to political stable from perceived unstable zones all take place based on information and perception.

    Many an economy has failed, and repricing of assets is a fluid process. Because an institution has the title bank in its name doesn’t make it immune to the greed of ownership and those who invest in it. Nor does it imply it should not be allowed to fail, those who get caught cannot hide behind simplistic socialist nanny states, Will the government bail them out; but need to assess the information with relation to risk ;greed;asset class and vehicle chosen.

    Thankfully we don’t live in a centralised system devoid of personal aspiration. Sure there is greed and problems of distribution but hold off on the knife and look towards the moral values behind the problems. and seek some more equitable moral solutions, not a nanny state.

    There are many opportunities in the markets to benefit and prosper in these times, it takes education and application to disseminate information, those too lazy will always cry foul. Fools and their money are soon parted.

    Comment by ray — April 13, 2008 @ 1:51 pm

  3. Upsurge of radical socialist solutions would necessitate upsurge of radical fascist solutions congruent to the good ol’ dialectic.

    Comment by Marc — April 13, 2008 @ 7:55 pm

  4. Grossman’s “The Law of Capitalist Breakdown” is a fundamental and very neglected work of Marxist theory and, along with Lenin’s Imperialism and Kilferding’s Finanze-Kapital, its is a key work do understand Capital. However, it is NOT a complete theory of crisis and breakdown – as Grossman himself states. That is found, as an sketch, in other works. It is an initial exposition of the basic mechanism, just as Volume 1 of Capital is only an exposition of capitalism in its essence. If you try to develop an analysis of the current crisis on the basis of Grossman you will fail by distortion.

    There is an additional problem. Because of globalization, the empirical and quantitive argument in Grossmann can no longer be verified.

    Susil Gupta lozellslaw@btinternet.com

    Comment by Susil Gupta — April 13, 2008 @ 10:12 pm

  5. simplistic socialist nanny state? Im reminded of a cartoon I saw about Hurricane Katrina in which people in a drowned New Orleans are told they don’t live in no nanny state. Personally I find the whole nanny state thing a cliche and its ignorant to state that that is what a real marxist wants, marxists look forward to the withering away of the state. Although from time to time I am moved to say, as anarchist Noam Chomsky would agree, that a nanny state is better then a dead beat dad state.

    Comment by SGuy — April 13, 2008 @ 11:35 pm

  6. @Ray – “With a present birthrate of 1.24 they hardly can have an excess consumption problem.”, “There is an expectation built into the human system.” – vacuous cliches from a perplexed closet free-marketeer?

    Comment by Avent — April 14, 2008 @ 5:51 am

  7. perplexed closet free-marketeer, i enjoyed that, no closet here i work in the dynamic real world. One would never hope for the return of the depression days, the food queues, the reliance on all things government. No embrace the dynamic of the individual, that individual who with a conscience and moral compass sees opportunity and is able to without the baggage of state or structure as a barrier moves forth and seizes the opportunity. The conflict between class and money is often touted as the barrier of the working class. Well wake up and use the system, its there to be used.
    The effect of relinquishing ones life to a struggle of subsistence is to forever limit those that follow to the same. What parent doesn’t want their child to achieve at least as much and hopefully better. Yet the defeated socialist would have one believe that the system is stopping all that follow, because they were not born before it ?. We have moved on just as the photocopier has from the carbon paper and colour from black and white. Stop looking at a black and white system and look with all your energy at a new system, It is easy to find faults with a product so complex, however it is our collective responsibilities to seek a better solution with more fair and equitable outcomes. Do not look for a collective state of a conflicted economy battling itself. educate and empower the individual.
    cheers

    Comment by ray — April 14, 2008 @ 7:52 am

  8. who bet left-liberal economist Max Sawicky a case of Lagavulin single-malt scotch in 1987

    ^^^^
    FYI It was more like 2000

    Comment by Charles — April 14, 2008 @ 5:36 pm

  9. For SGuy:
    As a former New Orleanian, who saw the city multi-angled by being a white boy married to a Creole, I find your cartoon reference to N.O. conversely apropos. One of the ongoing problems in New Orleans is that many lower class blacks, working and not, have inappropriate expectations regarding their life situation in many ways, inappropriate because it perpetuates the ongoing downward spiral.

    Comment by Marc — April 14, 2008 @ 7:49 pm

  10. Marc Im not really sure what your saying but it sounds like Bill Cosby blame the victim. As for the personal insight part, I have a friend who almost died during Katrina, I try to make arguments here beyond the personal.
    As for Ray, your individualist exhorts are non-sequitors, the real world marketplace is dominated by corporations that rely upon substantial state support. Your philosophy predates Marx, so even if we are pushing the radio to use your metaphor, you’re pushing street theatre.

    Comment by SGuy — April 15, 2008 @ 12:53 am

  11. Side note: I agree that socioeconomic conditions are ripe for the socialist argument. Between the American recession, the rampant, revolution-producing rise in the cost of food prices, and the effects of job-loss, rising oil prices, rising food prices, and home-losses of the American proletariat, we are at a situation where we are increasingly seeing the need for an alternate explanatory framework. For the first time in a long time, the majority of Americans are beginning to see the evidence of Marxist class analysis as their debts get called in and their artificial welfare level goes down. One practical consideration, however, is this.

    This system, obviously, is designed such that the poor proletariat class is the first to lose jobs and wealth in a business crisis. Consequently, they will be the first to suffer until the establishment of a new system, i.e. they will suffer until a successful revolution. It is a matter of practical necessity for us socialists to work towards the contemporary establishment of communities or communes that are relatively self-sufficient and immune from economic crises so as to provide save havens for the poor and the dispossessed. Just a thought.

    Comment by sharkofgod — April 15, 2008 @ 3:06 am

  12. The problem with believing that economic crisis is good for leftism, is that economic crisis has actually always been good for capitalism. It keeps the workers down, it facilitates radical right-wing approaches (as someone earlier said) and so forth.

    Of course, if an economic crisis coincides with the development of a strong left-wing political movement, that strong left-wing political movement can take advantage of the crisis to make the point that its policies will be more effective at resolving the crisis than any other.

    Is there now such a strong left-wing political movement in the West?

    Comment by MFB — April 15, 2008 @ 6:42 am

  13. The reference by Mark Jones was not to me (Jurriaan Bendien) but presumably to “Julien Pierrehumbert”. I was not a subscriber of Crashlist at that time, either under my own name or a pseudonym. I do not pretend to make a lot of predictions, but my own analysis of various events and trends is publicly accessible from the mailing list archives, and thus can be checked retrospectively for their quality. Mark was a good communist, but qua theoretical approach we had very little in common. I do not believe “the end is near” and I think Henryk Grossman’s theory is so abstract that it is either true by definition, or empirically counterfactual. My main criticisms of Henryk Grossmann’s theory as explanation of capital accumulation are available on OPE-L list.

    Comment by Jurriaan Bendien — May 15, 2008 @ 10:05 pm


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