THE ERROR IS IN THE SYSTEM

By Volkhard Mosler

[The financial sector is denounced as “speculators,” “crisis profiteers” and “parasites.” In his eleven theses on the crisis, Volkhard Mosler explains the new power of financial capital and why the distinction between “evil banks” and the “good real economy” is not helpful. His article published in January 2012 is translated from the German on the Internet, http://marx21.de/content/view/1609/32.]


1. Among critics of capitalism, it seems almost undisputed that the prese3nt crisis results from financial capital separating itself from the real economy. Therefore it can be overcome by a reconnection of the financial sector to the real economy. However I represent the standpoint that financial capital and industrial capital cannot be separated. The independence of financial capital was only a result of an earlier over-accumulation and realization-bottleneck of capitalism.

2. The financial sector grew as never before up to the 2008/2009 economic crisis. In 2004 all the shares of the financial sector amounted to 29 percent of the stocks of the real economy, four times as much as 1979. In 2005 the financial assets worldwide amounted to 316 percent of the (annual) world social product. In 1980 they were only 109 percent. In other words, the financial sector grew three to four times as fast as the real economy since the beginning of the 1980s.


3. The growing significance of the financial sector left behind traces in the world economy. Every upswing in the economic cycles of this time was accompanied by financial speculations. They were manifest in massive “exaggerations” (or “bubbles”) on the stock markets in the US and Great Britain (middle of the 1980s and middle of the 1990s), in an enormous rise of stock- and hou9sijng prices in Japan at the end of the eighties, in the boom of the “new technologies” (“dotcom”) at the end of the nineties and finally in the huge real estate- and housing boom in the US and large parts of Europe in the first seven years of the new century. The waves of takeovers and mergers of mammoth firms were another accompaniment financed by credits of financial management.

4. At the same time the general indebtedness of the governments, large parts of the real economy and consumers grew. The credit system grew many times compared to the real economy. The credit volume doubled in the US and tripled in Japan in the 1980s. The massive boom in the home sector in the middle of the first decade of the 21st century (2006/06) was “financed” in the US, Great Britain, Spain and Ireland by enormous indebtedness of the middle class and the working class. The Italian Marxist Riccardo Bellofiore correctly described this development “privatized Keynesianism.”


5. The growth of the financial sector never happened separated from the productive sector. In the long term, this growth was the product of the internationalization of capitalism on one side and a gradual slowing down of accumulation of capital on the other side. In the first decades after the Second World War, financial capital grew in unison with the real or productive economy. The new financial sector also operated in the less industrialized states. Since the late 1970s, the loans of the IMF and the banks created an endless chain of debts, interests, interest charges and “refinancing programs.” In 2003, the debt burden of the global South was $2.5 trillion.

6. The gradual and long-term slackening of accumulation is itself the result of the decline of profit-rates from the immediate postwar era to the end of the seventies. In 1973, the profit-rates worldwide fell to such a low level that a raw material crisis (the first oil crisis) caused by a war in the Middle East with higher oil prices caused by the first world recession since 1945. In 1950, the average profit-rate of all countries (gross profit in relation to applied capital) still amounted to 22 percent. That profit-rate gradually fell to a record low of only 3 percent in 1986, rose to 14 percent by 2006 and fell again to 5 percent by 2009.


7. The causes of the falling profit-rate can only be intimated here. Karl Marx explained this phenomenon with his “law of falling profit rates” (Das Kapital, 3rd volume). Since only living labor is a source of value, machines and investments in the course of their lifetime only transfer their value to products (“writing-off” or depreciation) and because technical progress tends to go along with replacing living by “dead” labor (machines). The “organic composition” of capital grows, that is the value relation of constant to variable capital (or “fixed costs” to labor costs). That profit-rates rose again since the middle of the 1980s is a consequence of higher exploitation rates (relation of paid to unpaid labor) through wage cuts, longer working hours and deregulation measures of entrepreneurs in the time of neoliberalism.

8. The relative increase of profit-rates in the 1980s and 1990s prompted a series of critical economists (Heiner Flassbeck, Michael Houston and Michael Schlecht) to argue that “excessively high” profits in relation to wages and mass consumption led to the crisis. According to this assumption termed the under-consumption thesis, the periods with a relatively high share of employees in the national income (wage share) must also be periods with high economic growth. Conversely, periods with low wage shares are also periods with low growth or crisis setbacks. But in reality it was the other way around. In the 1950s, the wage share of Germany was 59.4 percent and the annual growth of the gross domestic product (GDP) was 8 percent. In the 1970s, the wage share rose to an average 72.2 percent and the annual GDP growth in contrast fell to 3 percent. There was no decade after the Second World War when income distribution was unequal as in the 1950s and conversely GDP growth rates were higher. Conversely the 1970s on one side were marked by the highest real wage growth and on the other side by a return of economic crisis. Thus higher wage shares were connected with lower growth.


Marx’ thesis is that rising wages (in relation to business profits) are historically confirmed as “storm birds of crisis” or harbingers of crisis. High profit-rates drive the accumulation of capital; low profit rates paralyze that accumulation. The busine4ssman’s thesis was the inspiration for Schroeder’s Agenda 2010 that lower wages and piece-work costs are keys to overcoming crises. Conversely, Marx’ crisis theory starts from the assumption that fixed or capital costs are a long-term cause, not rising or falling wage costs. In the long-term, the increase of applied aggregate capital leads to falling profit rates and the systems’ proneness to crises.


9. One consequence of falling profit raters was that corporations and enterprises saw no or trifling profit chances and therefore tended to invest less in the real economy. Instead they sought “other” forms of investment in the financial sector where higher profits beckon. The sociologist and money-theoretician Christoph Deutschmann writes: “Because the profitability of businesses stagnated, there was no growth of real investments that could exploit the growing financial assets and direct them back to the macro- economic cycle” (Kapitalistische Dynamik, Wiesbaden 2008, p.164). Since the 1980s, Volkswagen, General Motors, Siemens and many other world corporations invested an increasing part of their profits in the financial sector. The arising profits are only paper profits that do not correspond to any real assets. This first came to light when the financial- (for example derivatives), real estate- and other speculation bubbles (dotcom) burst. These bubbles originated in expectation of endless prices increases through the high demand for such “assets” and caused the destruction of such promises for higher future prices of the real economy.

10. Separating “good” and “bad” capital, the productive real economy and the unproductive financial sector, makes no sense when the growth of financial management is only the consequence of a crisis of the real economy. Conversely, the growth of the financial sector and the allied speculative demand for certain investment assets (gold, works of art, food, real estate or new technologies) helped delay the crisis of the real economy. The shares increase from time to time along with the risks and losses as with drug addicts. Correspondingly crises cannot be overcome with wage increases and increased mass consumption as desirable as these measures are. The battle for higher wages can be carried out from two opposite perspectives. From the under-consumption or Keynesian perspective, it is not only waged to raise salaries and improve the living standard of the working class. It also represents the way out of crisis by increasing mass purchasing power. However this perspective ultimately starts from a common interest of labor and capital. On the other hand, the Marxist perspective supports the struggle for higher wages amid an irreconcilable opposition between the two central classes. The battle for higher wages and social reforms weakens the capitalist class and strengthens the working class.

11. Capitalism is the increase of investments and consumption by means of profit on the market. This system has run into the ground. [Translators note: capitalism with its inbuilt insatiability pressure makes people anxious, not happy.] Refusal of investment faces deficiency, hunger and distress worldwide. Therefore production must be oriented in need instead of profit. A progressive millionaires’ tax (“tax on the rich”) and a democratic decision about financing state investments would be first steps in this direction.


RELATED LINKS:

“Final Report of the Inquiry Commission on the Financial Crisis,” February 24, 2011, 576 pages

http://www.gpo.gov/fdsys/pkg/GPO-FCIC/content-detail.html


Video: “Final Report of the Inquiry Commission on the Financial Crisis,” January 27, 2011, CSpan. 1 hr 10 min

http://www.c-spanvideo.org/program/297723-1


Video: John Kenneth Galbraith, 2008, 52 min
http://www.youtube.com/watch?v=jNgfIH5pyxg


Hild, Thorsten, "The Rule of Supply-Side Economists," January 2012
http://portland.indymedia.org/en/2012/02/413887.shtml


Konicz, Tomasz, "The Crisis Explained," December 2011
http://portland.indymedia.org/en/2012/01/413591.shtml


Lansley, Stewart, "Managed v. Market Capitalism," January 2012
http://www.eurozine.com/articles/2011-12-07-lansley-en.html


Mosler, Volkhart, "Capitalism Criticism 2.0," November 2008
http://portland.indymedia.org/en/2009/10/394496.shtml


Reuter, Norbert, "Stagnation as a Trend," 2009
http://nyc.indymedia.org/en/2011/09/116251.shtml


Schulze, Ingo, "Capitalism Doesn't Need Democracy," January 2012
http://portland.indymedia.org/en/2012/02/413795.shtml

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