Marxism vs. Keynesianism

CWI Debates Falling Rate of Profit

The following is an edited version of a presentation at an IBT fringe meeting at the Socialist Party’s “Socialism 2013” event, London, 3 November 2013.

Only a few months ago the current global economic crisis entered into its fifth—some may even say sixth—year. Yet the origins of the crisis are still being disputed amongst Marxist economists and the broader left. This is not an academic question: only by understanding the roots of the crisis can the workers’ movement successfully fight its effects.

Marx, who spent decades analysing the capitalist mode of production, concluded that the origins of capitalism’s periodic crises lie in the tendency of the rate of profit to fall. Marx observed that a capitalist economy is driven by the imperative to maximise profit—i.e., the continuous reproduction and realisation of self-expanding value. Capitalism is a system characterised by generalised commodity production in which the labour power of the working class also takes the form of a commodity. Value finds its expression in prices and money. According to Marx, only productive labour power (which is exchanged for ‘variable capital’) can create new value—while ‘constant capital’ (machinery and other overheads necessary to the production process) merely transfers value to the commodities produced. Human labour power is the only commodity that can produce more value than the cost of its own reproduction.

Under capitalism, workers do not own the means of production. Workers, who are forced to sell their labour power in order to survive, receive wages which represent only a portion of the value they produce, and the rest, after deducting the cost of replacing the constant capital consumed in the production cycle, and other necessary overheads, goes to the capitalist in the form of profit. Capitalist enterprises are constantly competing with each other for market share, i.e., to expand their share of the aggregate profit. Prices oscillate around the values of commodities, which are determined by the socially necessary cost of their reproduction—the average social labour time expended in their production. Those firms which can produce a given commodity more cheaply, i.e., with less socially necessary labour time, will tend to increase their market share (and profits) by underselling competitors, who must attempt to catch up or face bankruptcy.

Capitalist enterprises are constantly forced to improve and replace their machinery, while also pressing their workers to increase productivity. Machinery that lowers production costs by displacing human labour (the only source of new value) reduces the aggregate amount of surplus value relative to the value of total investments. Technology-based improvements in productivity therefore tend to lower the overall rate of profit—calculated as the ratio between surplus value and the mass of capital advanced. Marx described the tendency of the rate of profit to fall as ‘in every respect the most important law of modern political economy’ (Grundrisse, Notebook VII).

This tendency has been empirically documented by researchers, including Marxist economist Murray Smith, who have shown that, while productivity in the core imperialist countries rose from the 1950s onwards, the profit rate has exhibited a generally downward trajectory.

Of course there is no simple linear decline of the profit rate—it is a tendency, not a constant. Marx discussed various factors that can offset the decline at any given moment, such as investing abroad, reducing wages below the cost of reproducing labour power, increasing the exploitation of the working class, financial speculation, and so on. However, these variables can only counteract the tendency to a certain degree—they cannot permanently reverse it.

How is the Tendency of the Rate of Profit to Fall Linked to the Current Crisis?

The current crisis is far worse than a smaller cyclical one. It is of similar proportions to the one that began in 1929. Reformist ‘leftists’ push the idea that it results from the greed of the capitalist class. Had the evil Con-Dem coalition never been elected—although some consider Labour to be equally bad—there would be no austerity and working people could afford to buy more products, thus raising demand and reigniting economic growth. The underlying theoretical assumption is what Marxists have long dubbed ‘under-consumptionism’. According to this model every economic crisis is fundamentally caused by the inability of the working class to purchase what it has produced. Declining wages, pensions and benefits are often depicted as triggers.

Under-consumptionism is associated with economic theorist John Maynard Keynes, who was alarmed by what he saw as the danger of potential socialist revolution arising from the collapse in 1929. In the 1960s, some economists unsuccessfully attempted to meld Keynes’ views with those of Marx. However, unlike Marx, Keynes believed that capitalist crises could be minimalised, if not eliminated entirely, by vigorously expanding public-sector spending as soon as growth began to slow.

Let’s say for a moment that the Labour left was in power with control of state institutions and funds. Where would the money for new social reforms come from? If we exclude printing money, it would come from raising taxes either on the working class (thereby lowering demand) or on the capitalists, who would respond by shifting their enterprises to countries with lower tax rates. This is exactly what the big banks have threatened whenever the question of a transaction tax or cutting bankers’ bonuses is raised. But even if successfully implemented, increased taxes on corporations would translate into higher operating costs and further depress profitability. Since investments are made on the basis of projected future rates of return, the result would be to further exacerbate the problem.

Capitalist enterprises are driven to reinvest, rather than hoard, their wealth. If capital cannot be thrown back into the cycle of production and distribution because of a lack of profitable investment opportunities, the economy seizes up. A lot of businesses in the EU modernise by borrowing from financial markets in hope that profits from the expanded production cycle will cover repayments. But if markets become saturated, sales slump and profits are not realised. Corporations that cannot service their debt are forced out of business. The money lent to them is gone, and the bank has to assume responsibility for the defaulted debt. If bankers begin to fear that loans to manufacturers may not be repaid, they tighten credit and call in outstanding loans, which can force many companies out of business. This chain of events, which has occurred in many countries during the last few years, is typical of capitalist crises. According to Marx, such crises, which are caused by the falling rate of profit, can only be overcome by the destruction of a sufficient quantity of capital to restore the conditions of profitable accumulation.

Socialist Party Debates the Tendency of the Rate of Profit to Fall

This brings me to the current debate within the Committee for a Workers’ International (CWI). The leadership, represented by Peter Taaffe and Lynn Walsh, hold that the tendency of the rate of profit to fall is only one of many factors explaining the current crisis. They cite data provided by a French supporter of the United Secretariat of the Fourth International indicating that the rate of profit rose beginning in 1983. It is true that there was a moderate improvement between 1983 and 2005 in the United States, resulting from neo-liberal attacks on working-class living standards and opening the former deformed workers’ states in Eastern Europe for capitalist exploitation. But profitability never returned to the levels seen during the post-war boom, and from 2005 it turned sharply downward. Taaffe explains the crisis as one of over-accumulation, by which he means that the redistribution of wealth from workers to capitalists obstructed further investment opportunities. Taaffe imagines that the fact that corporations are sitting on profits accumulated in the past somehow demonstrates that there is no problem with profitability today. He suggests that stagnation under capitalism could be overcome if socialists took over, nationalised all banks and invested the vast funds that are lying fallow.

The CWI opposition, led by Bruce Wallace, points to the centrality of falling rates of return on investment, and correctly asserts that capitalist crises are only resolved by massive destruction of capital. They agree that the banks are holding a lot of nominal assets, but argue that these are balanced by high levels of outstanding bank and consumer debt. Wallace and his comrades do not deny that counter-tendencies, largely due to the neo-liberal offensive, buoyed profitability for a time. And they correctly note that downplaying the tendency of the rate of profit to fall leads to neo-Keynesian conclusions like Taaffe’s notion that the nationalisation of the banks could potentially resolve the crisis without breaking the capitalist framework. As the opposition aptly observes, ‘The idea proposed by the CWI leadership, that it is just a question of seizing control of this mythical reservoir of capital and investing it is, in our opinion, politically dangerous’.

Transitional Demands and the Fight Against the Bourgeois State

In ‘The Causes of Capitalist Crisis: Reply to Andrew Kliman’ (20 September 2013) Taaffe asserts that the ‘Socialist Party … has consistently argued against Keynesian ideas as a long-term solution to the problems of capitalism’. However, in the near to medium-term, Taaffe proposes to dress up Keynesian policies with snippets from Trotsky’s Transitional Programme: ‘We have argued in a transitional manner for an increase in government expenditure in order to boost housing, education, workers’ share of income, etc. We have also demanded nationalisation of the banks and the finance sector’.

Taaffe attempts to give his Keynesian approach a radical spin:

“A programme to provide jobs and stimulate growth would require the mobilisation of the working class.

Moreover, increased taxation in itself will not be sufficient to develop the economy…. The banks and finance houses would have to be nationalised (not bailed out and propped up at public expense), and run under democratic workers’ control and management.”
—citing Socialism Today, No.161, September 2012

He also claims:

“When transitional demands are put forward and particularly when they are adopted by a mass movement—of which we have some experience in the poll tax struggle and in the mighty battle in Liverpool between 1983 and 1987—they can act as a bridge from the present level of consciousness and lead, hopefully, to a socialist consciousness.”

It is instructive to look at the ‘mighty battle in Liverpool’ that the CWI leadership considers to have been such an exemplary application of transitional demands. In reality, Militant, the SP’s forerunner, did more to demoralise than mobilise the working class, by failing to advance policies that could act as a bridge, not simply to an abstract socialist consciousness, but to the realisation through struggle that the capitalist system itself is an obstacle to meeting the essential material needs of the working class, and must therefore be destroyed.

Militant, buried within the Labour Party, won a majority on Liverpool City Council in the mid-1980s. They used this position to launch a massive programme of building public housing at a time when the reactionary Thatcher government was intent on containing public debt on a national level. Thatcher’s policies, like those being pursued by the capitalist class today, were aimed at increasing profitability. Taaffe acknowledges that British capitalists had experienced a sharp decline in the rate of profit from the late 1960s. When Thatcher threatened to stop funding the Council, Militant countered by sending redundancy letters to thousands of public-sector workers, hoping that this would increase class consciousness by showing that building more public housing was not compatible with capitalism. Instead of raising the level of class consciousness among public-sector workers, Militant’s tactic alienated them, because they believed that redundancy notices meant what they usually mean. Some leading Militant supporters have admitted that it was a ‘miscalculation’ to play games with workers’ jobs and lives—but apparently Taaffe takes the view that this debacle should be held up as a model. In fact, the net effect of Militant’s fake ‘transitional’ action was to lower the level of political consciousness and discredit the ‘far left’.

In the current economic climate, it is certainly true that a working-class mobilisation on a significant scale would be required to win a meaningful expansion of public works. The capitalists would have to fear they were losing control before they would consider any such measures. Yet Taaffe isn’t even serious about a militant mobilisation to win concessions—he only proposes a 24-hour general strike, a symbolic action rather than a real bid to assert the ability of the working class to bring the economy to a screeching halt. A token, time-limited strike would be guaranteed to win nothing from the bosses and do nothing to bridge the chasm separating workers’ current reformist illusions from the historic necessity for a social revolution to expropriate the capitalists and seize state power.

In 1983, while still deep within the Labour Party, Taaffe spun a utopian fantasy of a ‘socialist and democratic’ reform of British capitalism:

“If the next Labour government introduced an Enabling Bill into Parliament to nationalise the 200 monopolies, banks and insurance companies which control 80 to 85 per cent of the economy, a decisive blow would be struck against the 196 directors of these firms who are the real government of Britain. By the economic power they wield, they dictate the course to be followed by both Tory and Labour governments. They would be compensated for the nationalisation of their assets on the basis of “proven need.” Such a step, backed up by the power of the labour movement outside parliament, would allow the introduction of a socialist and democratic plan of production to be worked out and implemented by committees of trade unions, the shop stewards, housewives and small businessmen.”
—“The state: a warning to the Labour movement”, 1983

The CWI leadership no longer pretends that the Labour Party is capable of carrying out such measures, but it still pushes the absurd notion that as soon as a socialist party—or should I say The Socialist Party?—wins a general election, a socialist transformation can be carried out through parliamentary reforms.

In his 1983 document, Taaffe did stipulate that workers would have to support such a government with constant mobilisations—but workers’ mobilisations have their limits when confronted by the repressive state apparatus sworn to protect the system of capitalist exploitation and its beneficiaries. Taaffe mentioned the brutal repression unleashed by the Chilean military’s 1973 coup that overthrew Salvador Allende’s popular-front government, but entirely sidestepped the whole issue of preparing the workers’ movement to counter the violence of the exploiters.

Trotsky could have been talking about the CWI leaders when, in his 1925 book, Where is Britain Going?, he warned that:

“It is futile to lull the masses to sleep from day to day with prattling about peaceful, painless, parliamentary, democratic transitions to socialism and then, at the first serious punch delivered at one’s nose, to call upon the masses for armed resistance. This is the best method for facilitating the destruction of the proletariat by the powers of reaction. In order to be capable of offering revolutionary resistance, the masses must be prepared for such action mentally, materially and by organisation. They must understand the inevitability of a more and more savage class struggle, and its transformation, at a certain stage, into civil war.”

Marx, Lenin and Trotsky were very clear that an egalitarian, democratically-planned economy could only be created by a successful socialist revolution which destroyed the capitalist state apparatus and replaced it by the rule of workers’ councils. Trotsky, in sharp contrast to Taaffe, argued that ‘we cannot adapt the program to the backward mentality of the workers, the mentality, the mood is a secondary factor—the prime factor is the objective situation’ (‘Discussions With Trotsky: On the Transitional Program’, 7 June 1938). Many of the best trade-union militants in Britain today are paralysed by parliamentary illusions—the idea that a ‘socialist’ government that won a parliamentary majority could legislate an end to capitalist oppression, eradicate poverty and inequality and ensure a jolly life for all. Trotsky refused to pander to such illusions and instead insisted that the duty of revolutionaries is to find ways to show workers engaged in limited defensive struggles that the only way they can guarantee a secure and comfortable future for themselves and their children is through overthrowing capitalism and establishing in its place a new social system based on collective social ownership and rational planning.

Marx’s insight regarding the social implications of the tendency of the rate of profit to fall illuminates the roots of the current economic crisis and the endless human tragedies it generates. While we largely agree with Bruce Wallace’s observations regarding the shortcomings of the economic analysis of the SP leadership, we note that a mere critique of the CWI leadership’s current economic analysis hardly explains why Taaffe considers Wallace et al to be ‘ultra-lefts’. On some level Taaffe appears to grasp that a serious critique of his Keynesian conceptions implies a break with the CWI’s fundamentally social-democratic attitude to the essential question of state and revolution. CWI supporters who are serious about building a genuinely revolutionary workers’ international must prepare to broaden their critique of the mistaken economic analysis of Taaffe and Co. to include a rejection of the reformist political programme that underlies it.