Financial Tsunami in US: 
Investigating the Root Causes and Broader Implications

Part - II

Arindam Sen

“The contradictions inherent in the movement of capitalist society
impress themselves upon the practical bourgeois most strikingly in the
changes of the periodic cycle, through which modern industry runs, and
whose crowning point is the universal crisis. That crisis is once again
approaching, although as yet but in its preliminary stage; and by the
universality of its theatre and the intensity of its action will drum
dialectics even into the heads of the mushroom-upstarts of the new, holy
Prusso-German empire.”

-- Karl Marx, 18731
In our last issue we discussed late capitalism’s strategic response
to the stagnation that reappeared in the early 1970s after roughly a
quarter century of post-war prosperity. This escape route allowed the
system to limp forward in the usual uneven fashion, but the resultant
bubbles in the FIRE sectors (finance, insurance and real estate) failed
to reinvigorate the real economy.
Thus it was only in 1 among 20 years between 1986 and 2006 that private
non-residential (i.e., non-business) fixed investment in the US measured
as percentage of GDP reached 4.2 per cent -- the average for the nearly
20-year period between 1960 and 1979. According to economist Philip
O’Hara, the profit rate of the Fortune 500 corporations went down
and down: from 7.15 in 1960-69 to 5.30 in 1980-90 to 2.29 in 1990-99 to
1.32 in 2000-02. Real GDP figures released by the US Bureau of Economic
Analysis (BEA) on October 30, 2008 indicated that the US economy was in
the midst of a slowdown even before the financial storm hit the world
economy in the middle of September. Real GDP in the US contracted at an
annual rate of 0.3 percent for the third quarter (i.e., for the months
of July, August and September), led by a sharp fall in consumer
If this was the pre-crash situation, now with the financial tsunami
unequivocally announcing the failure of the grand strategy of
liberalisation-globalisation-financialisation, the entire system
encompassing the global Wall Street and Main Street is in for a
prolonged recession and probably a veritable depression. The US is deep
in recession and the Euro-zone’s expected 2009 growth rate has been
revised down from 1.9 to 0.1 percent. The latest IMF forecast for world
economic growth, released early November, has cut world growth by 0.75
percentage point to 2.2 per cent with output in advanced economies
forecast to contract on a full-year basis for the first time since World
War II. A number of countries have already seen capital flight and
currency depreciation of such severity that they have been forced to
turn to the IMF (Iceland, Ukraine, Pakistan) or enter into emergency
financial arrangements (Hungary, South Korea).
This reciprocal relation between the surface froth of financial turmoil
and fundamental problems in the real economy shows that it is necessary
(a) to comprehend the financial crisis on its own terms in the
historical context of the evolution of the credit system and the
increasingly dominant  role of finance, (b) to move on  from the
particular to the general -- i.e., to equip ourselves with the
theoretical wherewithal needed for understanding the deeper currents of
crisis formation in the overall process of capitalist accumulation, so
that (c) we can then return to the current crisis to grasp its broader
implications. Having attempted (a) in the first part of this article, we
should now try and tackle (b) and conclude our investigation with (c) in
the next issue.
But before we proceed, we should recall that Karl Marx had to take
leave of the international proletariat before he could systematically
work up a comprehensive theory of capitalist crisis. Capital Volumes II
and III, the Theories of Surplus Value and the Grundrisse were not made
ready for publication in his lifetime; nor could he take up his plans
for investigating various other facets of capitalist economy and polity.
Naturally there is a wide array of differing interpretations of Marx’s
theory, with Luxembourg for example differing with Lenin, and Ernest
Mandel arguing against Paul Sweezy and others. Available space does not
permit us to review the rich and continuing debate among these schools;
we can only present here in barest outline the basic Marxian approach
towards understanding capitalist crises. 
The Tendential Fall in the Average Rate of Profit
Take a look at the quotation from the Communist Manifesto placed at the
head of the article in our last issue. Marx and Engels talk of an
“epidemic of overproduction”. This is overproduction of
commodities relative to effective demand: more is produced than can be
sold. Thanks to inadequate purchasing power of the masses, a big chunk
of commodities remain unsaleable and drag their owners
(producers/traders) down to ruin. This characteristic feature of
capitalism led Marx to remark, “The ultimate reason for all real
crises always remains the poverty and restricted consumption of the
masses as opposed to the drive of capitalist production to develop the
productive forces as though only the absolute consuming power of society
constituted their limit.” (Capital Volume III p. 484) 
The problem thus appears simply as a realisation crisis and prompts one
to ask: why on earth do practical men of business commit the folly of
producing more than they can sell?  Don’t they, or their associations,
make proper market surveys? 
Going deeper, we find that crises are not caused by capitalists’
callousness, nor do they fall from the blue. They are produced in course
of trade/business cycles resulting from a complex interplay of several
partially independent variables, the most important being movements in
the average rate of profit. As Marx showed in Part Three of Volume III
of Capital, over a period of time and in the economy as a whole, this
rate tends to fall. Here is how, in brief.
We all know that capitalists are prone to use more and better machinery
to boost production and save on labour costs. In Marxist economic theory
this is known as increasing the ratio of constant capital (plant and
machinery, raw materials, various fixed assets, etc) to variable capital
(capital expended on purchasing labour power -- “variable” because
this part, unlike the “constant” part, grows beyond its own value,
i.e., creates surplus value in the process of production) -- a ratio
which is called the organic composition of capital. Since living labour
is the source of surplus value or profit, replacing labour by machinery
means a proportionate decrease in the rate of profit for every unit of
total (constant plus variable) capital employed. Suppose a capital worth
100 crore comprised 60 crore in constant and 40 crore in variable
capital and the rate of surplus value was 50%. The amount of surplus
value was therefore 20 crore (50% of 40 crore expended on variable
capital) and the rate of profit (calculated on total capital of 100
crore) was 20%. After say 10 years, the organic composition is increased
-- constant capital is raised to 80 crore and variable capital slashed
to 20 crore. The rate of surplus value remaining the same, the amount of
surplus value would be 10 crore (50% of 20 crore) and the rate of profit
The illustration is deliberately simplified, but the fact remains that
increase in the organic composition of capital and a downward tendency
of the average rate of profit, conditioned by the former, are the
general laws of development of the capitalist mode of production.
However, reduced rate of profit can go hand in hand with increased mass
of profit if the total magnitude of capital on which profit is earned is
sufficiently increased. And that is what usually happens in real life.
As Marx puts it,
“…the same development of the social productiveness of labour2 
expresses itself … on the one hand in a tendency of the rate of profit
to fall progressively and, on the other, in a progressive growth of the
absolute mass of the appropriated surplus-value, or profit; so that on
the whole a relative decrease of variable capital and profit is
accompanied by an absolute increase of both. This two-fold effect… can
express itself only in a growth of the total capital at a pace more
rapid than that at which the rate of profit falls.” [Capital, Volume
III, p 223]
This has another consequence that has acquired much practical-
political importance in the current context of development debate:
“… as the capitalist mode of production develops, an ever larger
quantity of capital is required to employ the same, let alone an
increased, amount of labour-power. Thus, on a capitalist foundation,the
increasing productiveness of labour necessarily and permanently creates
a seeming over-population of labouring people. If the variable capital
forms just 1/6 of the total capital instead of the former 1/2, the total
capital must be trebled to employ the same amount of labour-power. And
if twice as much labour-power is to be employed, the total capital must
increase six-fold. [ibid, emphasis added]

We thus see that the tendential law of falling rate of average profit
does not operate in a simple, linear fashion. It is realised only in
course of cyclical movements of capital, through breakdowns and
restorations of equilibriums. It has its own “internal
contradictions” and unleashes a slew of countervailing forces or
“counteracting influences”, such as more intense exploitation of
labour, depression of wages below value, cheapening of the elements of
constant capital, relative over-population (the “reserve army” of
unemployed), foreign trade (skewed terms of trade and imperialist super
profits), expansion of share capital -- and to this list prepared by
Marx we must add more modern techniques like monopoly pricing. We should
therefore view the law “rather as a tendency, i.e., as a law whose
absolute action is checked, retarded and weakened by counteracting
circumstances” (ibid, pp 234-35). 

Falling Profit Rate, Concentration and Centralisation of Capital

 “A fall in the rate of profit and accelerated accumulation are
different expressions of the same process only in so far as both reflect
the development of productiveness. Accumulation, in turn, hastens the
fall of the rate of profit, inasmuch as it implies concentration of
labour on a large scale, and thus a higher composition of capital. On
the other band, a fall in the rate of profit again hastens the
concentration of capital and its centralisation through expropriation of
minor capitalists, the few direct producers who still have anything left
to be expropriated. This accelerates accumulation with regard to mass,
although the rate of accumulation falls with the rate of profit.
“On the other hand, …the rate of profit being the goad of capitalist
production..., its fall checks the formation of new independent capitals
and thus appears as a threat to the development of the capitalist
production process. It breeds over-production, speculation, crises, and
surplus-capital alongside surplus-population. (Capital, Volume III, p
Our stress on the tendency of the average rate of profit to fall --
which Marx regarded as “in every respect the most important law of
modern economy and the most essential for understanding the most
difficult relations” (Grundrisse, p 748) -- should not lead one
towards a monocausal understanding of economic crises and business
cycles. Crucial other causes are also there, such as anarchy of the
capitalist mode of production which, inter alia, periodically upsets the
conditions of equilibrium between the two main sectors -- one producing
consumer goods and the other producing capital goods -- of capitalist
economy. Marx also discussed several auxiliary factors which influence
the specific courses and peculiar features of particular crises. More
important among them are: movements in wage levels, competition among
capitalist concerns, fluctuations in raw material prices, expectations
(or “confidence”, to use a more modern term), movements in interest
rates and financial turmoil, trends in international trade, and so on. A
composite study of all these, and of other factors discovered in
post-Marxian experience and research, is needed for seeking out the
truth from the mountains of facts and data that are easily available;
what we are attempting here is only an initiation.
Barriers on Capitalist Production and their Removal
The exposition of “the internal contradictions of the law” takes
Marx to a discussion of certain “contradictory tendencies and
phenomena” which “counteract each other simultaneously”. He
mentions a number of such contradictory features -- such as falling rate
of profit alongside the growing mass of capital, enhanced productivity
alongside higher composition of capital -- and declares,
“These different influences may at one time operate predominantly
side by side in space, and at another succeed each other in time. From
time to time the conflict of antagonistic agencies finds vent in crises.
The crises are always but momentary and forcible solutions of the
existing contradictions. They are violent eruptions which for a time
restore the disturbed equilibrium. …”
Here we have the most concise description of the essential role of
crises as an inbuilt mechanism of capitalism that, up to a point,
prepares the way for a new upturn, just as a forest fire can prepare the
woodland for a new period of growth. To explain how, Marx makes another
move ahead in his exposition. 
Over-accumulation and Depreciation/Destruction of Capital
Where bourgeois economists see the surface phenomenon of commodity glut
during depression, Marx lays bare the deeper substance of
overproduction/over-accumulation of capital and shows how this comes
“A drop in the rate of profit is attended by a rise in the minimum
capital required by an individual capitalist for the productive
employment of labour… Concentration increases simultaneously, because
beyond certain limits a large capital with a small rate of profit
accumulates faster than a small capital with a large rate of profit. 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. The so-called plethora of capital always
applies essentially to a plethora of the capital for which the fall in
the rate of profit is not compensated through the mass of profit —
this is always true of newly developing fresh offshoots of capital —
or to a plethora which places capitals incapable of action on their own
at the disposal of the managers of large enterprises in the form of
credit. This plethora of capital arises from the same causes as those
which call forth relative over-population, and is, therefore, a
phenomenon supplementing the latter, although they stand at opposite
poles — unemployed capital at one pole, and unemployed worker
population at the other.
“Over-production of capital, not of individual commodities —
although over-production of capital always includes over-production of
commodities — is therefore simply over-accumulation of
capital.”(ibid, p 250-51)
Such a situation naturally leads to an unseemly scramble among
“So long as things go well, competition effects an operating
fraternity of the capitalist class … so that each shares in the common
loot in proportion to the size of his respective investment. But as soon
as it no longer is a question of sharing profits, but of sharing losses,
everyone tries to reduce his own share to a minimum and to shove it off
upon another. The class, as such, must inevitably lose. How much the
individual capitalist must bear of the loss, i.e., to what extent he
must share in it at all, is decided by strength and cunning, and
competition then becomes a fight among hostile brothers. The antagonism
between each individual capitalist’s interests and those of the
capitalist class as a whole, then comes to the surface … [ibid, p 253]
In the age of imperialism this is replicated on an international scale,
with nation states engaged in fierce battles over who is to bear the
brunt of the huge losses. Costs of crises are spread differentially
according to the economic (including financial), political and military
prowess of rival states. Imperialist war – war being the fastest
method of this destruction – appears on the horizon as a real or
potential ‘solution’ to capitalist crisis.
In whatever manner and through however fierce a struggle the losses
maybe distributed among individual concerns (and among different states
or trade-and-currency blocs on the international plane), the overriding
need for returning the system to some kind of equilibrium has to be
fulfilled. And that is fulfilled through destruction of part of capital
“…the equilibrium would be restored under all circumstances through
the withdrawal or even the destruction of more or less capital. This
would extend partly to the material substance of capital, i.e., a part
of the means of production, of fixed and circulating capital, would not
operate, not act as capital… The main damage, and that of the most acute
nature, would occur … in respect to the values of capitals. That portion
of the value of a capital which exists only in the form of claims on
prospective shares of surplus-value, i.e., profit, in fact in the form
of promissory notes … is immediately depreciated by the reduction of the
receipts on which it is calculated. … Part of the commodities on the
market can complete their process of circulation and reproduction only
through an immense contraction of their prices, hence through a
depreciation of the capital which they represent. The elements of fixed
capital are depreciated to a greater or lesser degree in just the same
way. … definite, presupposed, price relations govern the process of
reproduction, so that the latter is halted and thrown into confusion by
a general drop in prices. This confusion and stagnation paralyses the
function of money as a medium of payment, whose development is geared to
the development of capital and is based on those presupposed price
relations. The chain of payment obligations due at specific dates is
broken in a hundred places. The confusion is augmented by the attendant
collapse of the credit system, which develops simultaneously with
capital, and leads to violent and acute crises, to sudden and forcible
depreciations, to the actual stagnation and disruption of the process of
reproduction, and thus to a real falling off in reproduction.”  (ibid,
pp 253-54)
But all this does not, by itself, mean the end of the world. Once the
necessary devaluation has been accomplished and over-accumulation
eliminated, ‘normal’ accumulation can go on:
“…the cycle would run its course anew. Part of the capital,
depreciated by its functional stagnation, would recover its old value.
For the rest, the same vicious circle would be described once more under
expanded conditions of production, with an expanded market and increased
productive forces.”  (ibid, p 255)
But what is normal need not be permanent. Expanded capitalist
reproduction is intensified reproduction of all its contradictions and
within the recurring cycles reside the seeds of violent destruction of
the system: 
“The highest development of productive power together with the
greatest expansion of existing wealth will coincide with depreciation
[devaluation] of capital, degradation of the labourer, and a most
strained exhaustion of his vital powers. These contradictions lead to
explosions, cataclysms, crises, in which by momentous suspension of
labour and annihilation of a great portion of the capital, the latter is
violently reduced to the point where it can go on.... Yet these
regularly recurring catastrophes lead to their repetition on a higher
scale, and finally to its violent overthrow” (Grundrisse, p 750).
Credit and Crisis 
As noted in the first instalment of this article, credit plays a dual
role in the process of production and circulation. Drawing attention to
a basic contradiction of capitalist accumulation, Marx observed: “the
self-expansion of capital …in fact constitutes an immanent fetter and
barrier to production, which are continually broken through by the
credit system. Hence, the credit system accelerates the material
development of the productive forces and the establishment of the
world-market. …At the same time credit accelerates the violent eruptions
of this contradiction — crises — and thereby the elements of
disintegration of the old mode of production.” (ibid, p 441)
Is not the correctness of Marx’s observation self-evident? As recent
experience especially in the US has demonstrated, expended credit can,
for a period, enable the system to sell more commodities than the sum of
real incomes created in current production plus past savings could buy
and also to invest more capital than really accumulated surplus value
would have permitted. But this could not be continued ad infinitum. The
working people of America kept up their consumption levels with easy
credit made available through aggressive credit card promotions, new and
reckless mortgage practices, and other means. The US economy as a whole
kept running with astronomical current account and fiscal deficits --
with borrowed money, that is. The collapse into recession was thus
delayed no doubt, but at the same time and in the same measure the
latter was made more inevitable and more intense. By the beginning of
2008, total debt in the US economy was touching 350 percent of GDP. The
catastrophe had to strike, and did strike, first Wall Street and then
Main Street, just as it did way back in 1929 and thereafter.

“The US will lose its status as the superpower of the world economic
system. The world will become multipolar”, German finance minister
Peer Steinbrück famously said when the “made in US” crisis began to
invade Europe. More recently, he has discovered that “generally we
have to admit that parts of Marx’s theory are not so bad”. Once
again the crisis, even at this early stage, seems to be drumming
dialectics -- not only of boom and slump, but also of the transient
character of bourgeoisdom -- into the heads of the descendants of “the
mushroom-upstarts of the new, holy Prusso-German empire” and of the
arrogant international bourgeoisie in general. 

(To be concluded)


1. Afterword to the second German edition of Capital Volume III

2. Increased organic composition of capital entails higher productivity
of labour insofar as the same number of workers in the same time period
“convert an ever-increasing quantity of raw and auxiliary materials
into products thanks to the growing application of machinery and fixed
capital in general."  (ibid, p 212) It should be noted that this also
means greater intensity of exploitation, i.e., increased rate of surplus

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