Brendan Cooney at kapitalism101 has posted a long but interesting interview with Andrew Kliman, author of Reclaiming Marx’s Capital and, more recently, The Failure of Capitalist Production, in which he argues that a falling rate of profit underlies the current crisis. This position is presented primarily in opposition to Marxian underconsumptionist arguments but perhaps also entails an implicit critique of other theories emphasizing demand deficiency.
Kliman stresses the role that a collapse in capital values plays in reviving the rate of profit in Marx’s analysis of capitalist crises. He largely downplays the role of deficit expenditure in the postwar recovery on the basis that the massive government spending of the war was cut back dramatically in peace time and followed by a decade of strong investment-led growth. Of course, from the perspective of modern monetary theory, the two occurrences – deficit expenditure followed by a private investment boom – are not at all inconsistent with each other. The massive wartime deficit spending – the US government took over half the economy at one stage – corresponded, as a matter of accounting, to a massive increase in non-government net financial assets, enabling strong investment demand without recourse to large private debt burdens for some time after the war.
As I’ve mentioned previously, I consider Kliman’s work important, but feel that he does not recognize that the flipside of his argument actually relates to demand. This leads him to downplay the effects of government deficit expenditure on profitability. We know from the Kalecki equation that in aggregate the budget deficit, just like net exports and private investment, adds to profit. Further, to the extent the deficit adds to autonomous expenditure without impacting on the cost of capital investment items, it will also boost the rate of profit.
In considering what might bring about a revival in profitability, Kliman seems to focus almost entirely on the cost side, specifically a destruction of capital values. A decimation in capital values would revive the rate of profit, other factors remaining equal. But other factors do not necessarily remain equal. For one thing, the level of confidence is likely to be adversely affected by such capital destruction. Devaluation of capital will do nothing to revive profitability if expected output prices are falling in line with costs. The destruction of capital values will enable further centralization of capital, but in itself this will not kick start the recovery. The kick start requires new demand, more specifically autonomous demand. The injection of autonomous demand could come from private investment, but equally it could come from government deficit expenditure (or, for an open economy, net exports). From the perspective of profitability it doesn’t matter which. What matters is the magnitude of the increase in autonomous demand relative to costs, not what is happening on the cost side per se. In the aftermath of a crisis, there is no guarantee that the Austrian remedy of liquidation will bear fruit in the form of a private investment revival any time soon, or even at all, in the absence of decisive fiscal measures.
Another limitation of Kliman’s analysis, from the perspective of modern monetary theory, is that he does not distinguish between governments who are sovereign currency issuers and those, most notably member governments of the EMU, who are not. This leads him to lump together private and public debt when analyzing what he considers to be the “papering over” of successive crises and the refusal of governments to allow capital destruction sufficient to revive profitability and underpin sustained capitalist growth.
The distinction is significant because for sovereign currency issuers public debt is not financially problematic, although clearly it can be a political issue. A government that is a sovereign currency issuer can set interest rates on its own liabilities as a matter of policy. All that matters for such a government, at a macro level, is the inflationary implications of whatever spending it undertakes and interest obligations it incurs. There is no need – other than politically – for the currency issuer to match its spending with borrowing. It could simply spend and allow reserves to mount in the banking system, earning (if the government so determined) zero or low interest. The situation is different in the EMU, where interest rates on sovereign debt are subject to market pressures.
An important implication is that sovereign currency issuers can initiate economic activity through spending that may – but need not – be in the interests of capitalists. If the activity does not add to profitability – for example, it might involve a budget-neutral provision of free goods and services – capitalists would no doubt oppose it, but they could not undermine such policies through an influence on interest rates on sovereign debt.
Whereas Kliman characterizes government demand expenditure as “artificial” – as if capitalism is somehow “natural” and anything other than private-sector activity “artificial” – I think it makes more sense, from a Marxist political perspective, to look to such measures as a means of undermining capitalism and bringing about a transition to a post-capitalist society. It seems to me that this is what would partly occur even in the event of revolution: a reassertion by society of its prerogative to determine the course of economic activity rather than being subservient to the dictates of profit and the logic of capital. But this is precisely the power at the disposal of a sovereign currency issuer. In the history of capitalism there have been numerous attempts to tie currency issuance more closely to the logic of capital – the gold standard, Bretton Woods, the EMU common currency – and they have all been unsustainable in varying degrees. My own view is that the recourse to flexible exchange-rate fiat currencies was actually a major concession on the part of those who wished to chain society to the dictates of capital. A key to greater economic democracy is in our grasp, and ultimately we can take it as far as we like.
I see policy proposals such as the basic income, or a job guarantee very broadly conceived to amount more or less to a participation income, in a similar light. I think that such policies would help to set in place a dynamic in which we can move away from the wage labor relation and the private ownership of the means of production to the extent we deem it appropriate. Under a common currency arrangement or gold standard, such policies are vulnerable to bond vigilantism, but this is not the case in a modern money system. In the latter, it becomes a question of who will apply the greatest democratic pressure on the elected government: the 1 per cent or the rest of us. Whether we demand socialism or managed capitalism, democratized money can be a mechanism to help bring it about.