The Great Recession and Marx's Crisis Theory

• Published date: 01 March 2015
• DOI: http://doi.org/10.1111/ajes.12094
• Author: Andrew Kliman
• Date: 01 March 2015

The Great Recession and

Marx’s Crisis Theory

By ANDREW KLIMAN*

ABSTRACT. To help understand why the Great Recession occurred, this

article focuses on its underlying causes and employs Karl Marx’s theory

of capitalist economic crisis. It shows that U.S. corporations’ rate of

return on fixed asset investment fell throughout the half-century

preceding the recession, and that this fall accounts for the entire decline

in their rate of capital accumulation (productive investment). The

investment slowdown led to a decline in the rate of economic growth,

which was a maincause of rising debt burdens, as werestimulative fiscal

and monetary policies that delayed but exacerbated the effects of the

underlying economic problems. The article also refutes the claim that

the rate of profit could not really have fallen because massive

redistribution of income from wages to profits took place, and it argues

that it is unlikelythat major crises of capitalism can be eliminated.

Introduction

Why did the Great Recession occur? What—if anything—can prevent

the outbreak of major capitalist economic crises in the future?

My answer to the first question is simple and rather prosaic. It high-

lights several long-term weaknesses that allowed the financial crisis of

2007–2008 to trigger a deep downturn in the “real” economy and pro-

longed sluggishness once the Great Recession officially ended.

The rate of profit of U.S. corporations trended downward throughout

almost all of the post-World War II period. The persistent fall in profit-

ability led to a persistent fall in their rate of capital accumulation (rate

of growth of investment in production). This is not surprising; the

genera tion of profit i s what makes possible the productive investment

*Professor Emeritus, Pace University, E-mail: akliman@pace.edu. This article is dedi-

cated to the memory of A. J. Jaffe, who was my father-in-law and an associate editor

of this journal.

American Journal of Economics and Sociology, Vol. 74, No. 2 (March, 2015).

DOI: 10.1111/ajes.12094

V

C2015 American Journal of Economics and Sociology, Inc.

of profit, and the inducement to invest is blunted if profitability has

fallen and businesses do not anticipate a rosier future. The decline in the

rate of accumulation led, in turn, to a decline in the rate of growth of

output and income, and the slowdown in growth was a main cause of

rising private and public debt burdens (i.e., debt as a percentage of

income).

Another main cause of the Great Recession was that the U.S. govern-

ment and the Federal Reserve repeatedly tried to manage or reverse the

fall in profitability,investment, and growth by means of stimulative fiscal

and monetarypolicies that were successful in the shortterm but that exa-

cerbated the debt problems by adding to the debt build-up. The result

was a series of debt crises and bubbles that burst. This helps to explain

why the financial crisis erupted, though several other important factors

were also at work,and I suggest thatthis complex of long-term and unre-

solved structural problems explains why the financial crisis triggered

such a deep downturn inthe non-financial economy and why the econ-

omy failedto rebound once the financial crisiswas resolved.

Many points in this account are not controversial, so I will not dwell

on them. Instead, I will focus on the points that the rate of profit fell

and never recovered in a sustained manner and that this accounts for

the fall in the rate of capital accumulation. Also, in the next section, I

will briefly discuss one key instance in which government policy man-

aged structural problems in the short term at the cost of exacerbating

them in the long term—the Fed’s response to the collapse of the dot-

com bubble of the 1990s, which contributed to and prolonged the

home-price bubble of the period that followed. The government’s

long-standing implicit guarantee that it would, if necessary, repay debts

incurred by Fannie Mae and Freddie Mac, the giant mortgage lenders

and mortgage-loan guarantors, is another obvious example ofits role in

the debt buildup.Other government actions also ledto the Great Reces-

sion, but I mention therole of government here only to make one point

clear: the fall in the rate of profit was an important cause of the Great

Recession, but not the sole cause.

The next section of the article will elaborate on my view that, if we

wish to understand why the recession and its prolonged

aftermath occurred, it is insufficient to focus on the financial crisis and

its causes.

The Great Recession and Marx’s Crisis Theory 237

In the third section, I will survey Karl Marx’s falling-rate-of-profit

theory, and the links between it and his theory of capitalist crisis, in

order to help explain why the rate of profit fell and the role this played

in the buildup to the crisis and recession. I make no claim that all, or

even any, of capitalism’s large-scale economic crises prior to the 1970s

can be properly understood in terms of this theory; the available data

are too sparse and inadequate to test that hypothesis. However, U.S.

corporations’ rate of profit did fall throughout the half-century that pre-

ceded the Great Recession. I will document and defend this finding in

the fourth section of the article, where I will also argue that, in this

instance, Marx’stheory of why the rate of profit tends to fall fits the facts

remarkably well.

The fifth section will show that the entire fall in U.S. corporations’

rate of accumulation of fixed assets between 1948 and 2007 is attribut-

able to the fall in the corporations’ rate of profit. This finding runs coun-

ter to the rather common belief that the fall in the rate of accumulation

during the “neoliberal” era was due to “financialization”—specifically,

the diversion of profit from investment in production toward financial

uses—so the fifth section will also explain whythat belief is mistaken.

In the sixth section, I will address what has proven to be the main

source of resistance to serious consideration of evidence that the rate of

profit fell—a gamutof alleged facts that supposedly implythat a massive

redistribution ofincome from wages to profits took place under neolib-

eralism andthat the rate of profit thereforecould not really have fallen.

Finally, I will take up the second question posed at the start of the

article: What—if anything—can prevent the outbreak of major capitalist

economic crises in the future? I will explain why theory and my reading

of the historical record make me extremely doubtful that major crises of

capitalism like the Great Recession can be eliminated.

Digging Beneath the Financial Crisis

The proximate cause of the recession was, of course, the bursting of

the home-price bubble in the United States, which ultimately led to the

financial crisis of 2007–2008. It seems that manyfactors caused the bub-

ble to form and persist, and that both private-sector practices and gov-

ernment monetary and regulatory policies areto blame.

The American Journal of Economics and Sociology238