The worldwide increase in the rate of exploitation cuts the proportion of total output that workers can afford to buy as consumption goods.

From the credit crunch to the spectre of global crisis : Information Clearing House - ICH By Chris Harman |

There is a hierarchy of precedents for financial crises. In August, as things began to unravel, the initial comparisons were with the 1998 collapse of Long Term Capital Management. That is, a freak event in which the sins of a few egg-heads temporarily hit confidence. Then, as it became clear that banks were in pain, the comparator became the 1980s and 1990s Savings and Loan crisis that saw bank losses worth 3 percent of US economic output. Now, after a very nasty week in markets, the whispers are that it might even be the big one: the worst crisis since the 1930s.
The Lex Column, Financial Times, 7 March 2008

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Blaming the bankers

The easiest explanation for the crisis is to blame the bankers. The crisis “follows a well-trodden path laid down by centuries of financial folly”, says Ken Rogoff, former chief economist at the International Monetary Fund.¹ Raghuram Rajan, another former IMF chief economist, thinks the problem is the vast bonuses bankers receive when they lend and borrow.² Billionaire financier George Soros blames “the financial authorities” for “injecting liquidity…to stimulate the economy”. This “encouraged ever greater credit expansion”.³ Even the French president, Nicolas Sarkozy, has joined the chorus, declaring that “something seems out of control” with the financial system.⁴ He should know, since his half-brother heads the European wing of the Carlisle Group, whose hedge fund has gone bust.

For supporters of capitalism to heap blame on the financial system is not as strange as it may seem. In so far as mainstream neoclassical economists have explanations for the slump of the 1930s, they are in terms of the operations of the money markets. The same is true of most mainstream Keynesian economists, who now believe their chance has arrived to come in out of the cold after three decades. So the Guardian’s Larry Elliot argues:

This is a chance, perhaps a once in a lifetime chance, to break the dependency culture by forcing big finance to be more transparent, having a clearly defined separation between commercial and investment banking, and by banning some of the more toxic products.⁵

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... The head of the US Federal Reserve, Ben Bernanke, has cursed this “saving glut in the rest of world” for feeding the upsurge of lending to the US.⁷ But surpluses have also been generated nearer to home: “Investment rates have fallen across virtually all industrial country regions”.⁸ According to one report:

The real driver of this saving glut has been the corporate sector. Between 2000 and 2004, the switch from corporate dis-saving to net saving across the G6 [France, Germany, the US, Japan, Britain and Italy] economies amounted to over $1 trillion… The rise in corporate saving has been truly global, spanning the three major regions—North America, Europe, and Japan.⁹

In other words, “Instead of spending their past profits, [US] businesses are now accumulating them as cash”.¹⁰

Such an excess of saving has an effect noted by John Maynard Keynes in the 1930s—and by Karl Marx 60 years earlier. It creates recessionary pressures. The capitalist economy can only function normally if everything produced is sold. This will only happen if people spend all the income from producing goods—the wages of workers, the profits of the capitalists—on buying those goods. But if the capitalists do not spend all their profits (either on their own consumption or, more importantly, on investment) then a general crisis of overproduction can spread through the system. Firms that cannot sell their goods react by sacking workers and cancelling orders, and this in turn causes further contractions in the market. What begins as an excess of saving over investment ends up as a recession that can turn into a slump.
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As I have argued in this journal in the past, the partial recovery that did occur was based on three things. The lower rate of profit caused a slowdown in investment, which did not rise as rapidly in relation to new profit as previously. Some firms went bust, particularly during and after the recession of the early 1990s, allowing the remainder to benefit at their expense. Most importantly, there was a general increase in the share of output going to capital as opposed to labour—in Marx’s terms an increase in the rate of exploitation (figure 1).²⁰

Figure 1: Wage share of national income (percent)
Source: OECD

The increased rate of exploitation is not confined to the advanced industrial counties. It is also a feature of the “newly industrialising” countries of East Asia. In China, for instance, real wages have not nearly kept up with rising output, while big sections of the peasantry have probably suffered falling living standards over the last decade.²¹ As in the industrial countries, much of the saving in recent years has come from enterprises,²² although people still have to save an average of about 16 percent of their income if they are going to be able to pay bills for healthcare or to provide for their old age.

The worldwide increase in the rate of exploitation cuts the proportion of total output that workers can afford to buy as consumption goods. The economy is therefore dependent on investment if all the goods produced are to be sold, and the failure of capital to invest creates a potentially recessionary situation that may be hidden by financial and other bubbles.

Such bubbles arise because profits are not invested productively and instead flow, via the financial system, from one speculative venture to another. Each venture seems for a time to offer above average profits—the stock exchange and property booms of the late 1980s, the dotcom boom of the late 1990s, the subprime mortgage boom of 2002-6. Although none of these are directly productive, they can, for a period, provide a boost to spending (through outlay on office buildings, spending by those managing the speculation, the conspicuous consumption needed to attract speculative funds, and so on). That leads to a short term increase in real economic output.

As the economists Boyer and Aglietta have explained, the US boom of the second half of the 1990s rested on “a growth regime whereby overall demand and supply are driven by asset price expectations, which create the possibility of a self-fulfilling virtuous circle. In the global economy, high expectations of profits trigger an increase in asset prices which foster a boost in consumer demand, which in turn validates the profit expectations… One is left with the impression that the wealth-induced growth regime rests upon the expectation of an endless asset price appreciation”.²³
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Some commentators hold a different view on trends in long term profit rates. They believe that profit rates have been completely restored by increasing exploitation. This is held to be particularly true in the US, where increased productivity over the past seven years has been accompanied by stagnating wages and the loss of one in six manufacturing jobs. ...
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The mainstream economist Andrew Smithers has drawn attention to the way the profitability figures provided by companies give an exaggerated picture of what is really happening. He points out that the US’s official figures shown in the “Flow of Funds” accounts involve adjustments that have the effect of “massively boosting US net worth by the addition of ‘statistical discontinuities’ and rising property values”.³¹ In fact, the Flow of Funds accounts showed increases in “real estate worth” alone accounting for $757 billion out of the $1,239 billion increase in “net worth” of the whole of the non-farm, non-financial corporate sector in 2005 (while “discontinuities” accounted for another $506 billion).³² According to Samuel DiPiazza, chief executive of PwC, one of the US’s four big accounting firms, many industrial concerns in the US have looked to finance to augment their profits in recent years and have “invested in the asset-backed and mortgage-backed securities”.³³

In other words, much of the apparent profitability of US corporations has depended upon the way the bubble increased the paper value of their financial and real estate assets well above their underlying real value.
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Two nightmares haunt defenders of the system. One is the great slump of 1929-33. This is not completely off key. There are similarities between what happened in the 1920s and what has happened in recent years. In both cases profit rates were stopped from falling from previously fairly low levels by increased exploitation, creating underlying imbalances between production and consumption that were bridged, for a period, by speculation, unproductive use of resources, and lending to finance consumption.⁴² Then, as now, it only required the bubble to deflate for the underlying imbalance to make itself felt.
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The second, slightly less frightening, scenario is what happened to Japan in the early 1990s. The collapse of a boom based on a real estate bubble resulted in a long period of near stagnation that has not yet come to an end 16 years later. The losses incurred by the Japanese banks were around the same level as those incurred so far in the US (losses that could well double in the months ahead). ...