With this issue of Solidarity we begin a series of interviews with Marxist economists on the current crisis and the current stage of capitalism. Fred Moseley is the author of a distinctive Marxist account of the decline in profit rates which brought crisis in the 1970s and 80s, one has spawned a whole series of further studies.
He is professor of economics at Mount Holyoke College in Massachusetts, USA. His books include The Falling Rate of Profit in the Postwar United States Economy (1991), and he edited the English edition of Enrique Dussel's Towards an Unknown Marx: A Commentary on the Manuscripts of 1861-3.
The rate of profit is the key barometer of a capitalist economy, and more specifically it is the main determinant of business investment.
The rate of investment is in turn a key determinant of the overall growth of the economy. So, the first main reason why the rate of profit is so significant is its impact on investment spending.
Secondly, the relative proportion of profits and debt payment is a key indicator of the financial health of corporations. If the ratio of profit to debt obligations is low, then the corporations have greater vulnerability to bankruptcy.
Both on the investment side and on the financial side, profit rates are of crucial importance.
There has not been a complete recovery of the rate of profit in recent years. I don't want to overstate it. There are different measures of profit rates, but according to my estimates, which are for the total business sector of the economy, by 2006 the rate of profit was within 10% of its earlier post-war peak.
Mid-2006 was the peak of this current profit cycle. The profit share and profit rate have declined a bit in the last year or so, and the trajectory seems to be down right now.
But there was a substantial recovery in the rate of profit. The rate of profit had declined roughly 50% from the peak of the sixties to the trough of the 80s. At least half of that previous decline - I would say, more than half of that previous decline - was reversed. Today profits are, by almost any measure, a lot better than they were in the 70s and 80s.
Bear in mind also a couple of additional considerations. One is that these estimates are for the domestic US economy. They do not include foreign profits; and foreign profits are an increasing share of total US corporate profits. 30 or 40 years they were less than 10%, today they are 30%. None of that gets counted in the official US government estimates of profit rates.
Some people argue that including those foreign profits is appropriate in terms of gauging the financial strength of corporations, but if you are talking about the impact of profits on investment in the USA, then perhaps profits made in the rest of the world do not have much impact on US investment spending.
Another additional consideration is that these estimates of profits also do not include the salaries of top executives, which are going through the roof, and could more appropriately be considered as part of profits rather than wages.
In sum, I would argue that there has been a substantial recovery of profit rates. Maybe not complete, and we may disagree a few percentage points on the extent, but a substantial recovery.
Another indication with respect to the financial aspect of profits is a substantial reduction in debt obligations in relationship to profits. Those ratios are well down from their peaks, both due to higher profits and also to lower debt, for some corporations, and lower interest rates. So there is less danger of corporate bankruptcy today than ten or twenty years ago.
Those ratios are for the economy as a whole. If you look at the distribution of debt ratios, there is a pretty fat tail at the high debt ratio end. There are a number of corporations, ten per cent maybe, which have very high debt loads, in part because of the junk-bond-financed acquisitions. And particularly in danger of bankruptcy are the home builders, the construction industry. I'm not saying there won't be bankruptcies. But it doesn't seem to be a very widespread threat yet.
Another reason why the threat of corporate bankruptcy might be more serious than it looks is that debt may be underestimated. As we learned from Enron, there are all sorts of accounting tricks to keep debt off the books. We'll find out pretty soon who's holding the debt. As Warren Buffet says, when the tide goes out, you see who's swimming naked.
The financial sector is in much greater danger than the non-financial sector.
But accepting that there has been a substantial recovery in the rate of profit, how did this happen? What were the main factors contributing to it?
I would argue that it's basically been the holding down of wages. The average real wage in the US economy is almost the same as it was in the early 1970s. For the average worker, there has been little or no increase in the real wage.
This is in striking contrast to the early post-war period, up through the 70s, when the average real wage in the US economy approximately doubled. That ended in the 70s with an all-out attempt to restore profitability, mainly at the expense of workers.
While real wages were being held constant, productivity increases continued every year - at a somewhat slower rate during the productivity slowdown of the 70s and 80s, somewhat faster since then, but they continued.
In Marxist terms, that reduced necessary labour time and increased surplus labour time, and therefore increased the rate of surplus value. Over the three decades we're talking about, the rate of surplus value has approximately doubled, from about 1.5 to around 3. Again, that is in striking contrast to the earlier post-war period, when the rate of surplus value increased a little bit, but not much.
That sharp increase in the rate of surplus value has been the main reason why the rate of profit has increased substantially.
It could be interpreted as contrary to what Marx expected: he expected that once the rate of profit had declined, it would take the devaluation of capital and widespread bankruptcies and so forth to restore it. What Marx didn't consider was the scenario we've lived in over the last decades of enough government management and government intervention to put a floor under the economy; but even so it's taken a very long time to restore the rate of profit.
A puzzle here is that what appears to be a substantial recovery in the rate of profit does not seem to have led to a strong revival of investment. The connection between profit rates and investment seems to have been weakened.
I haven't myself done a lot of work on this, but it seems like businesses are paying out a greater share of their profits as dividends, and using a greater share of profits to buy back their stock. Instead of investing in the expansion of the business, they are enriching themselves.
There's a lot of talk about stock options, and managers who have substantial stock options running the company in a way to maximise the stock price.
So you have a bigger proportion of surplus value going to capitalist consumption rather than investment.
A slower rate of investment spending has meant a slower rate of growth, compared to earlier periods, and that the growth of the economy has become more and more dependent on consumer spending - in part the luxury consumption of capitalists,.
But it's hard for workers to increase their consumption with stagnant wages. There have been different ways round that. The first was to have more family members working, and longer hours. But more recently the big one is the expansion of consumer debt - an explosion of consumer debt.
Now that debt has to be paid, and we have a debt crisis on our hands.
The numbers would suggest that the corporations should be more resilient in face of the crises in the financial sector. However, the housing sector and the construction industry will certainly not be resilient. The debt ratios could be understated, due to Enron-type tricks. And there is that "fat tail" of heavily indebted corporations..
The aggregate official numbers which show a healthier financial situation might be at least somewhat exaggerated. And the financial crisis is shaping up every day to look more and more serious.
The banks have responded by greatly restricting lending. If there are corporations out there that are heavily dependent on banks to refinance debt, there could be substantial effects.
The shock that they're going to experience is certainly shaping up to be more serious than what occurred 20 years ago [in the Savings and Loans crisis]. Maybe the sounder financial figures for corporations will not be enough.
As regards estimating profit, the main difference between my estimates and Robert Brenner's, for example, is that mine are for the total economy and his are for the non-financial sector only. The recovery of profits in the non-financial sector is less than for the total economy. Even for the non-financial sector, I'd say it has been substantial - but not as close to full recovery as for the total economy.
Which measure is more relevant and important? An argument could be made that in terms of investment spending the non-financial sector profit rate is the more crucial determinant. I wouldn't argue too strongly for the preferability of the total-economy measure.
And part of the financial profits may turn out to be fictitious - paper profits based on anticipated revenue from financial assets a lot of which are now having to be written down. The recovery of financial profits in the boom time could turn out to have been grossly overestimated.
But even if we accept Robert Brenner's estimates - and I think foreign profits and executive salaries are important corrections to those - there has still been a substantial recovery of profit rates. As yet no large revival of investment spending, so the economy has become more dependent on consumer spending.
Why are there unequal profit rates in the financial and non-financial sectors?
Part of it may also be that the financial profits are partly paper profits, as just mentioned.
It's surprising that financial sector profits should rise as a share of the whole, for a couple of reasons. One is that interest rates are low. You would think that would contribute to a smaller financial share. Secondly, if you look at the figures for debt for non-financial corporations, with less debt there should be lower debt payments from the non-financial to the financial sector.
Financial profits have been more and more coming from the consumer sector - from credit cards and from mortgages and so on. That expansion has now turned into sharp contraction, and financial profits will follow accordingly.
In terms of the long decline in the rate of profit, before the recent recovery, my emphasis has been on Marx's distinction between productive labour and unproductive labour. Productive labour is labour which produces value and surplus-value. According to Marxist theory, that is a fairly broad category, but it does not include two main types of unproductive labour - labour involved in various sales and circulation and exchange activities, including finance, and management or boss labour.
The relative proportions of unproductive labour and productive labour changed dramatically in the US economy in the early post-war period, up to the 70s. The ratio of unproductive to productive approximately doubled over that period; and, from the perspective of Marxist theory, that means a smaller share of the surplus value produced is left over for profits. An increasing share of the surplus value produced by productive labour has to go to pay the wages and other costs of unproductive labour.
When we talk about the rate of profit, in my estimates or in Brenner's estimates, this is always a net figure, only part of the total surplus value produced by productive labour..
The doubling of the relative proportion of unproductive labour to productive labour had a negative impact on the rate of profit and was, best I can tell, the main cause of the substantial decline in the rate of profit in that period. The composition of capital also increased and also contributed, in part, to the long-term decline in the rate of profit, but the increase in unproductive labour seems to have been a more significant cause.
What has happened since then? The ratio of unproductive to productive labour has continued to increase, but at a much slower rate than earlier, and so that factor has had less of a negative impact on the rate of profit. The small continuing negative impact has been more than overcome by the very strong increases in the rate of surplus value.
The financial sector, in the US anyway, is still only a small percentage of the economy. It has increased. How is that consistent with the overall proportion of unproductive labour levelling off?
Most of the levelling off has been in the supervisory element of unproductive labour, which the majority of it. The financial sector is catching up now, but on the supervisory side, downsizing and eliminating layers of middle management have been a big factor.
Also, on the circulation side, the computer has greatly reduced circulation labour. Computer technology has perhaps been the main reason for the slowing down of the increase of unproductive labour, both in circulation and in supervision. You need fewer supervisors when you have computers. You could almost argue that the computer technology was developed to solve the problem of expanding unproductive labour.
In the end, I would say that the current crisis is more of a Minsky crisis than a Marx crisis. The main cause of the current crisis is not insufficient surplus labour in production, but rather excessive risk-taking by financial capitalists in search of higher returns, which was based on the erroneous assumption that housing prices would continue to rise forever.
The solution to this crisis has more to do with wiping out a large portion of the accumulated debt of households (and the corresponding assets of financial institutions) rather than the devaluation of production capital and the reduction of wages (although these latter will also happen to some extent). But that is a topic for another discussion.