What really causes boom and bust

[Bernie Gunther]

I thought this bit was quite interesting ...

In real capitalist practice, means of production and other income-producing assets are not valued in terms of their historic costs or in terms of their current replacement cost; they are valued as a CAPITALIZATION of an expected flow of income based on the asset. Capitalization means that in a general environment in which the rate of profit is 5%, an asset producing an annual profit of $5 will be “worth” $100. “Underneath” that surface, the distribution of the average rate of profit, plus or minus the higher or lower profits going to individual firms which are above or below the average social productivity of labor, does its work, and ultimately asserts itself in crisis and recomposition. But the capitalist class, the central bank and the capitalist state do everything in their power to preserve those capitalized—fictitious—values as long as possible, even at the price of gutting the “real” economy. The actual surplus value available to the capitalist class as a whole to support those capitalized values comes not merely from the immediate process of production but also, once again, from non-replacement: the looting of nature, primitive accumulation of petty producer populations, and sometimes non-reproduction of C and V.

Thus it is possible to refine the definition of fictitious capital offered initially; it is not merely the paper claims (stocks, bonds, income from the sale and rental of land and real property) in excess of total surplus value; it is the capitalized “current value” of total income-producing assets in excess of their value, defined as the socially necessary labor time of REproducing them today. The fundamental tendency of capitalism, through increased productivity of labor, is to cheapen all commodities, including the universal commodity labor power (the source of all value), while at the same time the capitalist class, central bank and capitalist state are mobilized to preserve existing capitalizations, at least for the class as a whole (while periodically sacrificing the weaker capitals) until they are overwhelmed by the next crisis.

We now get to the nub of the matter: has capitalism exhausted itself as a mode of production capable of expanding the material reproduction of humanity? <snip>

source above (italics mine)

 

[ItWillNeverWork]

The labour theory of value, which all of this seems to be based upon, is highly disputed though is it not?

 

[Bernie Gunther]

Well, how you assess the value of a given asset is what this is all about isn't it?

You wouldn't really expect capitalists and people who aren't capitalists to look at it the same way ...

 

[Leafster]

Well, how you assess the value of a given asset is what this is all about isn't it?

You wouldn't really expect capitalists and people who aren't capitalists to look at it the same way ...

So are you saying a capitalist would value something based on its future income stream? How would a non-capitalist value it then? Or are you suggesting that a non-capitalist would still consider the future income stream from an asset but use different criteria?

 

[danny la rouge]

The labour theory of value, which all of this seems to be based upon, is highly disputed though is it not?

Disputed by whom? Not Hume, Adam Smith or Ricardo. They unravelled it before Marx.

What is disputed is the reduction of skill to simple labour.

 

[Belushi]

The labour theory of value, which all of this seems to be based upon, is highly disputed though is it not?

IIRC most modern economists subscribe to theories of 'marginal utility'

but thats about all i remember

 

[Wolveryeti]

Its too simplistic to accuse fractional reserve banking as the root cause of the problem. And I don't think anyone really wants to live in a world where you can't get a mortgage or a personal loan (except at injurious rates) because of a lack of funds floating about.

It's a perfectly good system until the loans that are attached to this capital start performing to a sufficiently bad level. The answer is not to abolish it but to make sure that the government knows what banks are doing and regulates them sensibly.

 

[Bernie Gunther]

Well, I think there's short-term and long-term. Short term, we really don't need the sort of humanitarian disaster that might come out of uncontrolled bank runs and the like. I understood this thread to be more about causes though, and from that point of view, I find Goldner's account of the historical causes and his analysis of the potential for recomposition, whether drastic or otherwise fairly complelling.

Ever since 1973, world capitalism, without resort to full-blown depression or a Third World War, has been struggling to establish a new standard of value to supercede the exhausted one associated with the postwar boom. To do so, it must re-equilibrate the existing total paper claims on wealth (profit, interest, ground rent) with existing surplus value in a new, acceptable rate of profit, at the same time that it expands the reproduction of global society. Yet, because of the preservation of fictitious capital against devalorization, at the expense of material production, it has failed to find this new equilibrium.

It has, of course, by opening up the Soviet bloc, China, and parts of the Third World through “globalization”, increased the total volume of production; it has cheapened commodities; it has innovated new technologies and increased the productivity of labor (although more slowly than in the postwar boom). By the unceasing demand for the “reform” (the Orwellian word par excellence of our time) and “flexibilization” of the wealthy, more “mercantilist” economies of Europe and East Asia, it may succeed in extending this process. But it has not undergone the “clearing of the decks”—full-scale deflation of fictitious valuations in harmony with a prevailing rate of profit in the production of commodities which can “return” as expanded C and V. On the contrary, by the devastation it has wrought and is wreaking in Latin America, Africa, eastern Europe, Russia, Ukraine, Central Asia and rural China, not to mention austerity in the U.S. and Europe, it has compelled the world’s working population and relative surplus population to bear the brunt of the crisis. American world power today stands as much in opposition to a new “healthy” phase of global capitalist expansion, (assuming one is possible) as British world power did in 1900.

This process is essential to understanding the post-1973 period. One can, I think, “write the history” of the post-1973 era around the efforts to prop up the growing mass of “nomad dollars” or “hot air” which brought down Bretton Woods and to postpone (for over thirty years!) the inevitable deflationary crash. More specifically: the 1975 U.S. reflation (under Ford and continued by Carter) took the world into the 1979-1980 near-inflationary blowout (gold at $850 an ounce, oil at record levels after the Iranian revolution, a threatened world flight from the dollar). This was followed by the Reagan-Volcker super-austerity: U.S. interest rates hitting 20%, leading to a massive recovery of the dollar, the latter made possible by equally massive foreign lending to the U.S., particularly in the Japanese acquisition of Treasury bills. This “wringing out” of the 1970’s inflationary economy --provoking in 1981-1982 the deepest recession of the entire post-1945 period to date,-- set off the stock market boom of 1982-2000.

I contend that the U.S. stock market boom of the 80’s and 90’s was a continuation of the reflationary strategy begun in earnest with the 1968-1973 onset of crisis, a strategy which has not yet run its course (currently manifested in the mortgage refinancing boom) , and which constitutes in effect the largest “Ponzi scheme” in history. This paper boom has taken place, not in conjunction with a real global expansion as in 1945-1975 (however qualified by some of the downside mentioned earlier) but large-scale DESTRUCTION on a world scale: the deindustrialization and downsizing of the U.S., extended mass unemployment in western Europe, absolute retrogression in Latin America, Africa, much of Asia, of Eastern Europe, and of the former Soviet bloc (both in Russia and Ukraine and even more so in Central Asia), and more recently for the 900 million Chinese peasants and workers left out of the “Chinese miracle”. The social “balance sheet” of this paper boom is to be found in various phenomena of decay ranging from the destruction of the blue-collar world in many countries (even China has had a net loss of 22 million industrial jobs), the expansion of the parasitic FIRE (finance-insurance-real estate) sector (most recently in the preposterous world housing boom, centered once again in the U.S.), environmental destruction (most notably global warming), the growing role of international crime (e.g. the drug trade), ongoing economically-preventable epidemics, the disintegration of 60 economic basket cases into “failed states”, and fundamentalism (Christian, Moslem, Jewish, Hindu). Having knocked down many of the economic “great walls of China” this circulation of fictitious dollars is apparent today in the growing pressure on Japan and Germany (in particular) to “financialize” on the Anglo-American model, with the same effect of gutting the “real” economy, particularly as it affects working people. The instability of this “dollarization” and “financialization” of the world economy has been apparent in the Japanese deflation (1990-present), U.S. recession and real estate collapse (1991), Mexican crisis (1994), the Asia crisis (1997-1998), the Russian default and collapse of LTCM (1998), the Brazil crisis (1999), the U.S. dot.com collapse (March 2000) the Argentine crisis (2001) and the 35% decline of the Dow Jones Industrial average from March 2000 to September 2002. All told, roughly $3 trillion is paper wealth was destroyed in 2000-2002. Since that time, the acceleration of “financial arbitrage capitalism” (the term is from Doug Noland, expanding on ideas of Hyman Minsky), with the mortgage refinancing boom, has preserved the “U.S. consumer” as the “buyer of last resort” in the world economy. (As one wag put it recently: “I’ve finally understood supply-side economics. Other countries supply the goods, and then they supply the money to buy them”.)

It must also be mentioned that this circulation of fictititous capital has brought into existence new productive forces as companies compete in ever-tighter markets, expressing the pull of devalorization. In sum, on a world scale, a smaller percentage of production workers in the work force as a whole is producing a larger volume of goods, goods that have been cheapened by technological innovation. This is, as noted earlier, part of a classic pattern of capitalist crisis and recomposition. But it must equally be stressed that, in contrast to the 1945-1975 period, where expansion of the productive forces was driving the creation of fictitious capital (on a small scale compared to the present), today it is the necessity of circulating fictitious capital which is driving the development of production. The total deficits of the U.S. state from American independence to 1980 totaled $1 trillion; since 1980, that total has increased to $4 trillion. (That total does not include the “off-balance” sheet sums transferred through internal accounting from the Social Security system to smooth out the reported Federal deficit.) (It is also interesting that the post-1980 U.S. government debt is almost exactly equal to the $3 trillion net indebtedness of the U.S. The U.S. government debt is the “totem” of the world system. This difference from the historical character of earlier capitalist expansions will matter terribly when the “debt-deflation” phase hits, and capital (not to mention debt-strapped workers and other “consumers”) will have to pay off enormous debts (at historic cost) with the greatly depressed current prices and wages expressing current costs of reproduction (and in reality well below the latter).

source above

 

[Leafster]

Er... can someone explain what devalorization is or point me in the direction of a link with a simple definition? Thanks!

 

[Knotted]

The labour theory of value, which all of this seems to be based upon, is highly disputed though is it not?

I think the LTV should be regarded as a definition rather than a theory. Its questionable whether it is a useful definition.

There is a flaw in Marx's reasoning on the tendency for the profit rates to fall. If I remember rightly he demonstrates that the rate of the extraction of surplus value drops however this does not necessarily translate into a falling rate of profit. Although the reasoning is subtly flawed it does not necessarily follow that the conclusion is flawed. I'm not sure what the state of play is on this one.

If I remember rightly, Piero Sraffa and Joan Robinson showed that the marginal utility theory was fundamentally flawed as well. But again its not necessarily true that neo-classical conclusions are incorrect.

Its all very technical stuff and I don't really understand it but I think it is valid to say that capitalism has a productive limit which is eventually breeched when the economy expands.

 

[Bernie Gunther]

Er... can someone explain what devalorization is or point me in the direction of a link with a simple definition? Thanks!

The opposite process is devalorisation ("Entwertung") which refers to the process whereby production capital invested loses part or all of its value, because labour is withdrawn, or because output cannot be sold, or sold at the intended price, or because more modern production techniques devalue older equipment.

Typically what happens in a severe economic crisis is that the real cost structure of production is realigned with market prices. In Marx's terms, productivity growth has changed product-values in different sectors, but it is only after quite some time that prices adjust to changed underlying values. In that case, devalorisation may occur quite rapidly: capital assets are suddenly worth less, and as soon as capital assets are no longer utilised and maintained by living human labour (because of unemployment), the value of those capital assets begins to deteriorate. In the end, the withdrawal of human labour leaves nothing but a ghost town.

Devalorisation is not the same as devaluation of capital, because the term "devalorisation" applies specifically only to assets which function as production capital, whereas "devaluation" of capital could refer to the loss in value of any capital asset in any particular form.

source

 

[danny la rouge]

IIRC most modern economists subscribe to theories of 'marginal utility'

but thats about all i remember

Well, neo-classicists.

 

[Leafster]

Thanks Bernie. It's clearer now.

 

[Demosthenes]

I suspect it might be really simple.

Imagine the total amount of money in the world is 100M, and fifty percent of that's in circulation, and fifty percent is in deposit accounts making 10 percent every two years, then, after two years, there'd be fifty-five M in accounts, and 45M in circulation, after six years, it'd be roughly seventy-thirty, and before long there'd be a shortage of money in circulation. If that continued long enough there'd be no money in circulation, and it would be impossible to pay the interest on the deposit accounts any longer. Of course, the money in accounts could be re-circulated, but if most of the money in the world happens to be owned by the stupendously rich, and the general tendency of money is to go to the richest, then, it may not get circulated, it may just pile up in bank accounts, unused and unspent, because there's nothing the owners need to do with this money.

The banks may try to circulate it, e.g. lend it to people to buy mortgages, or to dodgy dictators to buy weapons with. But if they can't pay their debts, then that's problematic to the banks and the rich people with the money in deposit accounts.

The solution is of course to print more money. Which is a huge advance on sending slaves down mines to get some more gold. Printing new money, which is euphemistically called increasing the public borrowing, or running a deficit, I think> ? is a necessary part of the system, - without it the system simply can't continue. The current request for a bailout is just the necessary logic of the system requiring some more money to be created.

But although, so long as we have lending money at interest, we'll always have to print money, there's still a big political issue over who gets to spend the newly created money, and on what, or on who?

 

[darkfibre]

I suspect it might be really simple.

Imagine the total amount of money in the world is 100M, and fifty percent of that's in circulation, and fifty percent is in deposit accounts making 10 percent every two years, then, after two years, there'd be fifty-five M in accounts, and 45M in circulation, after six years, it'd be roughly seventy-thirty, and before long there'd be a shortage of money in circulation. If that continued long enough there'd be no money in circulation, and it would be impossible to pay the interest on the deposit accounts any longer. Of course, the money in accounts could be re-circulated, but if most of the money in the world happens to be owned by the stupendously rich, and the general tendency of money is to go to the richest, then, it may not get circulated, it may just pile up in bank accounts, unused and unspent, because there's nothing the owners need to do with this money.

That's one of the most straightforward descriptions of one of the mechanisms at play I've read lately.

How can the mechanism be broken, though? You'd have to somehow remove 'liquidity premium' --Negative interest?

 

[Demosthenes]

That's one of the most straightforward descriptions of one of the mechanisms at play I've read lately.

How can the mechanism be broken, though? You'd have to somehow remove 'liquidity premium' --Negative interest?

Short of stopping people from lending money at interest, there isn't any way of changing it.

Unless, perhaps by confiscating the assets of the superrich, and recirculating their cash, or the income from their confiscated assets.

 

[gorski]

One can do all sorts of things to improve the system, make it sustainable, more controlled - sacrificing a rate of growth, at times, of course.

From not being able to lend over a certain amount in relation to one's assets, to redistribution by fairer progressive taxation [the less well off would plough it all back into economy, more or less, whereas the super rich can't really spend it] etc.

Legislation is necessary! It's a part of the equation. As a mater of fact, there is a really strong role for the state, as we can see, once again, past the market fundamentalist neo-lib dogma, that is now utterly discredited.

Supra-nationalist, supra-governmental organisations/agencies are another part of the equation that we must start thinking about seriously, if the system is to survive - beyond what the market fundamentalist are bullshitting! They caused it, the state allowed it. Causality and complicity.

From Tobin Tax to different WB and IMF, from nationalised Central Banks throughout the world to seriously well policed capital - the system has not exhausted its potential by far. And given the alternative it will learn. Perhaps not as fast as many of us would have liked but learn it will!

Or else!!!

 

[darkfibre]

One can do all sorts of things to improve the system, make it sustainable, more controlled - sacrificing a rate of growth, at times, of course.

I'm not sure it can be fixed.

I reckon the emergent behaviour we're seeing is inherent to linear, hierarchical systems. We've got to move it toward a more 'rhizome' or symbiotic model - perhaps all this is an opportunity?

This is worth checking out if you've got a couple of hours:

http://video.google.com/videoplay?docid=7065205277695921912

Its a sequel to that 'Zeitgeist' thing. (As a technohippy fearing for his job, I find it's message appealing).

 

[gorski]

I must disagree: as we have seen time and time again, the capacity for the system to absorb such "shocks" is great and it hadn't yet reacted in a systemic manner to the obvious stupidity in some of its parts. When it does, I am sure, we will see it strengthen itself on the systemic level, to prevent this particular flaw from reoccurring, at least at this intensity...

Btw, I expect the EU to have a thoughtful, systematic, far-reaching response to improve the system much sooner than the US!

Now, I'd love to change it radically but...

 

[darkfibre]

make it sustainable, more controlled - sacrificing a rate of growth, at times

Any system predicated on 'Growth' is the antithesis of 'Sustainability'.

as we have seen time and time again, the capacity for the system to absorb such "shocks" is great and it hadn't yet reacted in a systemic manner to the obvious stupidity in some of its parts.

Isn't that 'stupidity' inherent to hierarchical systems? What I mean is, the capacity to absorb shocks (resilience) is greater in rhizome. The current system is in crisis because it is unable to react effectively.

Jeff Vail argues this point quite well in his Theory of Power.

John Robb today put it thus:

The global financial and economic system is in broad failure. Hoarding, at least among the wealthy and the corporate, is rampant. Trust has evaporated. Worse, western nation-states (from the US to Ireland to Russia) are following historical patterns of response -- massive bail-outs of the financial sector. Unfortunately, this crisis is ahistorical (a black swan).

Why? The global financial system is much LARGER, FASTER, and COMPLEX than the nation-states that are trying to bail them out. As a result, nation-state intervention won't return things to the status quo. What it will do, however, is tightly couple western nation-states to the now inevitable failure in the financial system (this is akin to lashing a dingy to the Titanic to prevent it from sinking). The rampant proliferation of bankrupt and hollow states is now likely inevitable.

http://globalguerrillas.typepad.com/globalguerrillas/

We're riding the mother of all metasystem transitions.

 

[gorski]

As a frustraed utopian myself, I must say though...

No, that's wrong on all counts and badly so - completely off the mark, not seeing woods for the trees. Must give credit where credit is due. Capitalism's capacity to invest and invent is unsurpassed.

It's not like all the hierarchical systems were without any merit, to be sure. It is conceivable that some are better than others. Especially if they'd be based in merit itself, work, talent, that sort of thing...

The system survived for a long time now, improving itself along the way, beating all others hands down, as it were, as fundamentally flawed as it is.

Introducing new sub-systems to the system [NHS for instance] it has the capacity to "learn" and step over its present limitations.

Moreover, in Modernity it all depends on the interested and intellectually and morally competent subject, i.e. us.

That means we can change it. In this regard the system is based on growth.

Remains to be seen re. the sustainability. Nowt a priori, deterministic about it!

P.S. The financial system was invented, framed and legislated upon, then helped along the way - by the state, better not forget! We can change that, too and for the beter... and that's being worked on as we speak. But how will it be done - remains to be seen, too...

 

[darkfibre]

Introducing new sub-systems to the system [NHS for instance] it has the capacity to "learn" and step over its present limitations.

Swap 'NHS' for 'SIV', 'CDO' or 'CDS' and I'm with you.

'Improving'? By which measure? Changing, definitely - but what are it's 'goals'?

It's structure makes it susceptible to collapse when the aspect that is 'supposed' to effect control (state) is neither big, quick or smart enough to do so effectively. It becomes overwhelmed - look at Iceland.

You can't just say 'No, that's all wrong' and not explain yourself.

 

[gorski]

No, you explain yourself: how can you deny the obvious? If you wanna defeat the enemy you must recognise his strengths first and NOT underestimate him! Besides, I did explain! You, on the other hand, explain nothing, just pose many prejudices, even if they are based on good values!!!

Defeat of its enemies and survival is its immediate goal, of course. It hurts to point the bleedin' obvious but here it is...

It's by far the most productive and most successful epoch: from satisfying the needs of many, and much more than any other epoch - onwards...

Iceland's woes are forged elsewhere. Not really applicable in this story. Besides, in a year or three time it'll bounce back and then, what will you say?

 

[darkfibre]

I'll say 'Jolly Good, I was wrong', assuming I'm still around.

I wish I had your faith and optimism.

So who or what are it's 'enemies'?

I'm not planning on fighting it - I don't need to - it's doing fine by itself.

Everyones 'problems' are 'elsewhere', that's the problem. That 'elsewhere' is now beyond the scope and control of 'states', one or all of them.

We're off the chart.

 

[gorski]

Forget optimism and faith: let's see the development of Humanity...

Feudalism and Socialism are its enemies, of course. Pre-Modern and by definition the next Epoch. No that "real-Socialism" was "it" by far, of course - it was still pre-Modern!

No, there is no determinism in any of it. So, you're dead wrong again - without you and the others like you - it won't just go away... It deffo needs a helping hand, as it were...

No, it's not beyond the state - as it invented it, it can stop it. Look at Mahateer Mohammed and the SE Asian crisis at the end of 90's - he just pulled the plug on the hot speculative money and - won! Now, they are doing the same in many places, temporarily suspending the markets... Because they are not exactly very rational, are they...?

And what exactly is the state in the US doing now, what do you think? Precisely as needed: legislation is following, together with the necessary institutions and agencies needed for the system to function better, without the huge cyclical crisis. We have improved on that one, quite a bit, overall. As I said, there is still some room for manoeuvre for Capitalism, worry not! [Sadly... *sigh* No proper Socialism any time soon... No revolutionary subject, you see, as you just demonstrated...]

 

[darkfibre]

No, there is no determinism in any of it.

No, it's not beyond the state - as it invented it, it can stop it.

And what exactly is the state in he US doing now, what do you think? Precisely as needed:

It sure looks like faith.

Jakarta in 97/98 was bad enough, the problem is bigger and more widespread now. Nobody on Wall Street listened to Mahateer back then, did they? How many dead before Megawati? The feedback loops are stronger. Since then, we've continued on a path of seeking more growth at the expense of stability and resilience.

Think of an F1 car - you can always make it a little lighter and a little faster, but eventually you get to a point where a slight bump in the road will cause a catastrophic failure. Everything looks great up to that point.

You're not making a very logically convincing argument if all you can say is that it's been ok in the past and that the state has it under control.

 

[gorski]

I didn't say that, sorry, that's all you...

 

[darkfibre]

I didn't say that, sorry, that's all you...

Well, if you didn't say that, what exactly are you saying?

I've read you posts several times and I don't see anything in what you've said other than you suggesting that the system can absorb the shock, simply because it has in the past - you cite the example of the SE Asia crisis, where liability-to-GDP ratios never exceeded ~200%, whereas now we're looking at a much more widespread and synchronous problem on a much larger scale (~400% in US?).

You then suggest that 'The State' can solve the problem, despite the scale of the problem being of such a magnitude that the resources of the state are completely dwarfed by it, leaving 'The State' completely powerless.

It's this sort of 'institutionalised' thinking that's going to make it much, much worse for the people on the ground in my view.

 

[gorski]

This is ridiculous: the system is and can produce a lot more than any other system we have seen hitherto and that's the real power behind the power, as it were. Produce, save, invest, invent, integrate and move on to new pastures. The bull on top of that can be nasty at times for most people at the bottom of the scale but you do not get to defeat the enemy by not recognising his/her strength. Just silly, plain silly...

Moreover, there is no real agent [revolutionary subject if you will] of essential, epochal change that I can see, so we're stuck with it for the time being.

And Capitalism won't exhaust its potential any time soon, mark my words!

[Sadly!!!!!!!!!!!!!]

 

[gorski]

Btw, the scale of the problem is not beyond the state. In fact, it can resolve it fairly easily, if it wanted to. But is there enough pressure from below and sideways etc. to do it? Is there enough political will to nationalise the central banks around the world, enact legislation which would bring in Reason, sustainability and responsibility into it etc.?

Then, all that on Nth power if/when states start co-operating and regulate the world markets, start taxing the speculative capital movements and so on and on...

You are talking from the deep seated "veil of hatred", which brings a very narrow image on, clouds the judgement, now based in the worst possible scenario only.

But there are many others. Which one will prevail, though?

Remains to be seen.