One of the many contradictions explored by Marx in his major work, Capital, was that between what he called ‘the production of surplus value’ and ‘the realization of surplus value’. Surplus value, in Marx’s schema, is produced through the exploitation of labour forcing the labourer to work longer than necessary for his own survival and to produce value greater than that which he receives in wages. The surplus value produced in the labour process flows to the capitalist, who owns and controls the means of production. It is distributed across the economy in the forms of profit, interest, and rent. Profits can potentially be reinvested in expanding production and output, by purchasing more advanced technology and often employing more labour to work that technology. The production and expansion of value and surplus value are in the Marxist view, essential to ‘accumulation’ or growth under capitalism. But if the new production and output cannot be sold, then surplus value cannot be realised. This is the problem of effective demand which is often associated with Keynes. In short, effective demand is represented by spending flows in the economy such as consumption and investment, which create the demand for output and allow profits (part of surplus value for Marx) to be realised for firms. For Keynes, falling wages for the economy as a whole can limit consumption spending and reduce the need for firms to invest in new productive capacity and therefore limit overall economic growth. Therefore, in a recession, firms incentive to restore profits by cutting wages can actually limit any recovery in consumption and from there investment.
Here Marx’s model of capitalist growth differs from Keynes, in that there is a contradiction and tension between the production and realisation of surplus value and profits. A falling rate of profit, a tendency of capitalist production suggested by Marx, can lead to falling investment, as firms have reduced funds to spend on new equipment and expanding employment, and a growth slowdown or even negative growth and recession. Recession can lead some weaker firms to go bust, and others to reduce employment and wages in a process of ‘restructuring’ which restores profitability. Once profits have reached a satisfactory level across the economy, investment spending can start to rise, driving a recovery. The Marxist economist Michael Roberts, whose blog can be found here, places a great emphasis on the rate of profit as determining recession and recovery under capitalism, through its effects on the rate of investment. His analysis is compelling, but rejects the importance of consumption to the realisation of profits and with it the Keynesian analysis. The latter, in its more radical and heterodox post-Keynesian form, lays the blame of the Great Recession at the door of increased inequality and reduced consumption, as the rich tend to save a greater proportion of their income than the poor. Hence a key part of sustained recovery is a reduction in inequality through raising redistribution via the tax system and stronger trade unions to press for a greater share of wages in economic output. This should lead to a growth in consumption without the concomitant rise in household debt seen in the run-up to the Great Recession, stimulating investment and sustaining growth, at least until the next crisis! Is this post-Keynesian analysis sound? I have not yet reached a firm conclusion, but will try to sort through my thoughts in the rest of this post.
Michael Roberts’ analysis suggests that variations in profitability under capitalism are the key determinant of economic fluctuations. How does this square with Marx’s contradiction between firms desire at the individual level to cut costs and restore profits in the face of falling output and the necessity at the level of the overall economy for consumption and thus the mass of wages to grow in order for profits to be realised? The answer to this question is vital for any consideration of the mechanisms which determine overall economic performance and what policies should be used to sustain growth and rising prosperity.
Roberts does not in his blog posts appear to have much discussion of Marx’s analysis of simple and expanded economic reproduction set out in Volume II of Capital. This model is Marx’s attempt to represent the capitalist economy’s ability to sustain itself, simple reproduction involving zero growth, and expanded reproduction positive growth through the reinvestment of the surplus in new production capacity and employment. This is not the place to go into the entire model, but it does contain a distinction between two sectors in the economy, one producing investment or capital goods (sector I), and the other producing consumption or wage goods (sector II). If investment expands, spending on investment goods produced by the first sector will rise, and hence the output of sector I. If sector I reaches full capacity output and firms within it expect the rise in demand for output to continue, they will themselves increase investment in new capacity and possibly employment and/or higher wages as productivity rises. Workers’ higher wages can be spent on consumption goods, increasing the output of sector II, the consumption goods sector, and potentially stimulating investment and higher employment and/or wages in this sector. This latter rise in investment further increases demand and output in sector I, and production in both sectors and in the overall economy can continue to rise. This would appear to lend support to the possibility of investment rates driving spending in the economy, rather than consumption being the more important determinant. If overall consumption in the economy rises via the effect of higher average wages, and the latter reduce profit rates, any expansion cannot be sustained, as lower profits will prevent investment being funded except through borrowing, although Roberts’ analysis appears to show that profits remain the key driver of investment cycles over long periods of time.
Thus, working the above Marxist analysis of capitalist production through, and drawing on Roberts’ analysis, confirms to me its essentially correct nature. Rising consumption is essential for sustained growth, but it is in the last instance driven by investment spending which is in turn led by profit cycles. Some evidence for this can be found in the superior performance and recovery of the US economy over more egalitarian economies in the EU. Greater equality did not prevent rapid growth in household debt in Denmark in the period before the Great Recession, although this growth was arguably the result of their house price boom. Households in the US have made greater progress in deleveraging (paying down debt) than in many European countries including the UK. Despite all this, growth in the US remains below-trend and would need to be much more rapid to restore full employment, including a huge reduction in disguised unemployment as many workers have simply given up looking for work, significantly reducing the labour force participation rate. US economic performance, though superior to the EU and Eurozone overall, could have been held back by stagnant growth in median or average wages and the consequent sluggish growth in consumption, and maybe this remains true. But without deleveraging and the restoration of high profits, recovery would have been impossible, so these latter processes are the more essential ones.
So what of the policy implications of this analysis? Realised profits are vital to capitalist prosperity, and through the consequent rising investment, productivity and output, higher real wages are possible although not guaranteed as has been seen in the UK especially where productivity and real wages have mostly fallen since the Great Recession and eventual ‘recovery’. So although we may not like the consequences of firms’ restructuring, during periods of both growth and recession, which often although not always involves job cuts to restore profits, we have to live with and even encourage it through industrial policy, finding ways of mitigating the harmful effects of this process through a strong welfare state which promotes labour reallocation with support for re-training and using trade unions as social partners. Wage growth in line with productivity should be promoted so that consumption is sustained without unsustainable rises in household debt, alongside a growth in profits which can provide the funds for investment. Public sector investment in infrastructure and education should also not be neglected, as this is often a vital lifeblood which encourages positive expectations of profits for firms not only through the initial public spending, but also through the longer-term improved capacity of the economy to generate higher productivity and growth.
This is not to say that greater equality is not a worthwhile goal, even under capitalism whose cycles cannot be abolished even with the best economic policies. I do remain unconvinced that socialism and the dominance of centrally planned production is the answer to this problem, and so in this sense I am somewhat pessimistic about how ‘nice’ society can become if all we have for now is capitalism. But it remains the best known way of increasing material prosperity and advancing human progress, despite its faults.