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# Zombie Capitalism Global Crisis and the Relevance of Marx

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That is not all. If it were, the problem would simply be a tendency towards disproportionality between the different parts of the economy.11 But there are further problems. Production will not take place at all unless capitalists think they can sustain themselves in competition with other capitalists, by getting a rate of profit at least equal to the average in the system as a whole. To guarantee this they have repeatedly to reorganise production, using more advanced techniques to increase productivity per worker. But as all the capitalists try to do this, they continually reduce the average amount of labour needed to produce goodsand therefore the value of the goods. The physical quantity of goods produced by the system will tend to rise, but the value of each individual good will tend to fall. The two things necessary for the system to function, the physical organisation of production and the flow of value through the system, both change repeatedly-but without there being any automatic compatibility between the changes taking place.

Firms undertake production by buying physical equipment (machines, buildings, computers and so on) at prices dependent on the average amount of labour needed to produce them at a particular moment in time. But even as production is taking place, increases in productivity elsewhere in the system are reducing the value of that equipment and of the goods the firm is producing with it. The firm's calculations of profitability were based on the amount it had to spend on this equipment in the past, not on what its present value is-but it is on its initial investment that the firm has to make a profit. So the rapid rate of accumulation that characterises the boom has the effect of cutting the prices of each unit of output, and this hits the profits to be made on investments made earlier in the boom.

Not only do the values of goods keep changing, but, Maksakovsky shows, the reaction of capitalists to these changes leads prices to diverge from values. As profits fall, some firms stop new investments for a period. This reduces the demand for the goods of the other firms that previously supplied them. These then try to maintain their sales by cutting their prices below the levels determined by value while they sack workers in order to try to protect their profits on the goods they are selling at reduced prices and at that same time cancel their own investments for fear they will not be profitable. A wave of contraction goes through the economy and with it a general reduction of prices below values.

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The contraction does not last forever. Some firms go bankrupt, allowing other firms to buy plant and equipment on the cheap and to cut the wages which workers are prepared to accept. Eventually, a point is reached where they can expect to get higher than average profits it they embark on a new round of investment and a new wave of expansion takes off as capitalists rush to take advantage of the better business conditions. Competition leads firms to undertake a level of investment which temporarily exceeds the existing output of new machinery, components and raw materials. The "overproduction" of the downturn is replaced by "underproduction" in the upturn, and just as prices before were below values in the slump, now they rise above values in the boom. But this only lasts until all the new plant and machinery pass into production, increasing output at the same time as reducing the value of individual goods, making some investment unprofitable and giving rise in time to yet another downturn.

The central point is that the cycle is not a result of mistaken decisions by individual capitalists or their governments, but of the very way value expresses itself in prices. This takes place through a continual oscillation with prices arising above and falling below values, not through some continuous equilibrium.

This cannot be grasped without starting with the objective contradictions expressed in the notion of value. Only by dialectically drawing out these contradictions was Marx able to provide an overview of the system's dynamic.

Credit and financial capital

The spells of expansion and contraction are modified and intensified by the role played by credit-and those who play a special part in the development of this, the bankers.

Capital passes through different forms in the course of capitalist production. 12 It begins as money. This is used to buy instruments and materials of production and labour power as commodities, which in turn are combined in the production process to produce other commodities. These are sold to get more money, which is then used to buy more means of production and labour power. In this way one cycle of production follows another endlessly, so that "every element" in it "appears as a point of departure, transit and return" . 13

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So capital takes the form of money, of commodities, of means of production and labour power, then of commodities again and finally of money. For the system to operate, all these forms have to exist simultaneously. If production is to keep going without a stop, there has to be a supply of money to buy commodities, a supply of commodities to be bought as productive capital and a supply of labour power. The cycle of capitalist production, then, is made up of three interconnected circuits-of money, of productive capital and of commodities. Each circuit fulfils a function for capital accumulation-and does so to some extent according to a dynamic of its own.

In the early stages of capitalism, when the units of production were small, the productive capitalist could operate to some degree independently. He had the possibility of financing the buying of plant and machinery and paying his workers from his own pocket. He also had the possibility of selling his output directly to those who consumed it.

But as the individual enterprises grew bigger, the capitalist often found his own resources were not enough to pay in advance for all the plant, machinery and materials he needed. He had to borrow from others. He came to rely on credit, and on special institutions, banks, ready to lend to people in return for interest on these loans.

At the same time, as the scale of the market grew, he could only sell his goods by relying upon specialists in the wholesale and retail trades, who would not be able to pay him for all those goods until they had, in turn, sold them to the final consumers. The productive capitalist borrowed on the one hand and lent on the other. Credit became an indispensable part of capitalist production. And the greater the extent of capitalist production within a particular economy, the longer and more complex became the chains of credit, of borrowing and lending.

The productive capitalist could also become a large scale lender. His fixed capital-his factory building and machinery-was only renewed every few years. But production provided a more or less constant flow of profits. He could lend these profits to others in the interim before renewing his own fixed capital-and would do so in return for the payment of interest.

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Once capitalism is fully developed as the dominant way of producing in a particular economy, the lending of past profits by those productive capitalists who do not wish to immediately reinvest becomes the chief source of the funds for those capitalists who do wish to invest but lack suficient past profits to do so. The financial system emerges as a network of institutions that mediate between different productive capitalists (and the state, insofar as discrepancies that exist between its immediate tax income and its immediate expenditure lead it to also borrow and lend).

Those who run the financial institutions are out to make profits just as much as the productive capitalists are. They have funds of their own (their banking capitals) which pay for the expense of their operations and bridge any gap that might open up between their lending and borrowing (or, at least, are meant to bridge the gap-all too often in the history of the system they have not), and they expect to earn a profit on them, just as the productive capitalists do on their capitals. There is a difference, however. The financial capitalists' profits do not come directly from production, but from a share they get of the productive capitalists' profits in return for lending to them-that is, interest payments.

The rate of interest has often been confused in mainstream economic writings with the rate of profit. But in fact the level and direction of movement of the two are quite diferent. The rate of profit, as we have seen, is determined by the ratio of surplus value to investment in the production process. By contrast, the rate of interest depends solely upon the supply and demand for loanable funds. If there is more money available for lending in an economy, then the rate of interest will tend to fall; if there is an increased demand for borrowing it will tend to rise.

Since the profits of productive capitalists are the major source of the funds for lending, a high rate of profit will encourage a lower rate of interest. On the other hand, if profits are low, more productive capitalists will themselves want to borrow and this will exert a pressure for interest rates to rise. How these contradictory pressures on interest rates work themselves out depends on other factors, particularly borrowing and lending by the state and the movement of funds in and out of a national economy. But these other factors cannot do away with the pressures of real production on the financial sector.

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Other complications arise out of this state of affairs. The lending that financial institutions make is not necessarily restricted to the amount they actually have at their disposal as a result of their own investment and borrowing. The financial institutions can assume that what they have borrowed will not have to be paid back immediately. Therefore they can extend their lending beyond their immediate means, trusting that enough of it will be paid back for them to meet their own debts as they become due.

This makes sense so long as the productive sector of the system is expanding its output; increased lending today can be paid back out of increased output and surplus value in the not too distant future.

Such prophecies about increased lending being recoverable are self-fulfilling up to a degree, since the increased lending to productive capital encourages it in turn to increase its own levels of investment, and to produce more profits from which to repay the bankers. But invariably a point is eventually reached when the drive for financial profits leads to levels of lending above what can be paid back out of the expansion of real output, producing financial crises on the one hand and attempts to escape their impact through fraud on the other. As Marx puts it, "The credit system accelerates the material development of the productive forces and the world market", but does this through developing "the incentive to capitalist production, enrichment through exploitation of the labour of others, to the most pure form of gambling and swindling" .14 Finance drives "the process [of production] beyond its capitalist limits" resulting in "overtrade, overproduction and excessive credit"15 in ways that rebound on production itself.

Marx's view of this process foreshadowed by a century the currently fashionable account of Hyman Minsky, 16 according to which financial operations invariably move on from a stage of normal profitable business ( "hedging") to one of speculation which culminates at a point (a "Minsky moment") when all of what is lent cannot be recovered-and encourages Ponzi 17 or pyramid schemes whereby money from new investors is simply used to pay high interest rates to old investors.

The final complication is that financial institutions do not only use their funds to lend to productive capital. They also lend to individuals for their own requirements (notably for buying property), or to buy shares in already existing companies through the stock exchange. Such use of funds is expected to earn the going rate of interest, just as lending to productive concerns does, and for this reason is regarded by the financial institutions as an "investment" of "capital". Yet it in no way contributes to the process of capital accumulation, and the interest earned is parasitic on what is taking place in the productive sector of the economy. For this reason Marx calls it "fictitious capital", describing it as "the most fetish like form of the relations of capital'',18 since "capital appears as a mysterious and self-creating source of interest" and "it becomes the property of money to generate value and yield interest, much as it is an attribute of pear trees to bear pears" .19

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Finance, speculation and the crisis

We have seen that the profits of productive capital are the main source of the funds that the banks have at their disposal for lending, and that the productive capitalists' need for funds for accumulation is a major source of borrowing from the banks. This means that the cycle of expansion and contraction of new investment is accompanied by a cycle of expansion and contraction of lending. But the two cycles are not fully in phase with each other.

Credit expands as the boom begins to take off, with some capitalists keen to lend rising profits and other capitalists keen to borrow, all convinced that there will be no problems of repayment with interest. But eventually a point is reached where the frenzy of investment begins to exceed the funds coming from pools of previous profits. Firms outbid one another as they try to get access to these pools, raising the level of interest they are prepared to pay to get credit. Rising interest rates cut into profits just as rising raw material prices and money wages do so as well. They add to the pressures tipping the system from expansion into crisis. The contraction that follows makes firms and banks much less willing to lend-they fear they may need every penny themselves as their revenue from sales threatens to decline. But contraction also increases the need for many firms to borrow if they are going to make up the shortfall in their sales incomes and not be forced into bankruptcy by unpaid bills. Interest rates continue to rise for a time, despite the shortage of profits to pay them, and add to the downward forces in the system.

Fluctuations are intensified because of something else that happens at the height of the boom. Firms and banks see that lending is a quick way to boost their profits. They offer credit through "financial paper" (in effect promises to pay) of various sorts far in excess of their cash reserves on the assumption that other people and institutions will trust in such "paper" and accept it as payment for commodities without trying immediately to turn it into cash. In effect, credit created by the banks comes to be treated as a form of money-and as "credit money" is counted in certain measures of the money supply.

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Such easy credit encourages each firm to undertake massive productive investments as it competes to get a bigger slice of the expanding market than its rivals, even though this causes their combined output to far exceed the capacity of the market to absorb it. Easy credit also enables those on friendly terms with the banks to embark on an orgy of luxury spending, and all sorts of crooks and fraudsters to join in the very profitable business of borrowing in order to lend and lending in order to borrow. The real, underlying processes of production, exploitation and creation of surplus value get completely hidden from view-until the economy suddenly starts turning down and all the bits of paper which represent credit have to be repaid from profits which are too small to do so. At this point firms and banks come to distrust the ability of each other to pay back what has been borrowed, and lending can grind to a virtual stop in what is today called a "credit crunch":

The chain of payment obligations due at specific dates is broken in a hundred places. The confusion is augmented by the attendant collapse of the credit system . . . and leads to violent and acute crises, to sudden and forcible depreciations, to the actual stagnation and disruption of the process of reproduction, and thus to a real falling of in reproduction.20

The behaviour of "fictitious capital" serves further to intensify the general boom-recession cycle of capitalism. Despite its nonproductive nature, the monetary value of fictitious capital at any point in time represents a claim on real resources that can be converted into cash and from cash into commodities. When, say, share prices are rising during a boom, they add to the capacity of their owners to buy goods and tend to intensify the boom; when they fall with a recession, this adds to the pressure, reducing expenditure through the economy as a whole. The inevitably unstable, suddenly fluctuating, prices of the various sorts of fictitious capital add to the general instability of the system as a whole. They intensify the swings from boom to recession and back, and they also play havoc with the capacity of money to provide a fixed measuring rod for value.

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Major economic crises almost invariably involve crashes of banks and other financial institutions as well as the bankruptcy of productive firms and rising unemployment for workers. It is easy then for people to misunderstand what is happening and to blame finance, the banks or money for the crisis, rather than the capitalist basis of production.

The modernity of Marx

Marx's picture of crisis was far ahead of his contemporary mainstream economists. It was not until the 1 930s that study of crises began to be taken seriously by the mainstream. Even the archpriest of free market economics, Friedrich August von Hayek, could admit in one passage that Marx was responsible for introducing, in Germany at least, ideas that could explain the trade cycle, while "the only satisfactory theory of capital we yet possess, that of Bohm-Bawerk", had "not helped us much further with the problems of the trade cycle" .2<sup>1</sup>

Recurrent economic crises are as much a part of our world as of Marx's. Some at least of the ideological heirs of John Stuart Mill, Jevons and Bohm-Bawerk do not try to conceal the fact-at least when they are writing for an elite upper class audience in the Financial Times or the Economist, rather than propagandising to the masses. So the long-time Conservative chancellor of the exchequer in Britain, Nigel Lawson, who once embraced the "monetarist" doctrine that crises were an accidental result of central bankers allowing the money supply to go wrong,22 was eventually arguing that he was not responsible for the slump which followed the implementation of his policies because the "business cycle" is inevitable. They see the crisis as "creative destruction" without making clear that the creative element consists of wealth for one class, while the destruction is of the livelihoods of others.

I will return to the question of crises in the 21st century later in this book. All that needs to be said for the moment is that there is no problem accounting for them by starting with Marx. Indeed, the only serious question confronting Marx's crisis theory does not arise from the occurrence of crises today, but rather from the fact that for three and a half decades, from 1939 to 1974, a major capitalist country like Britain did not experience a recession in which economic output fell, while the biggest economy, the US, only experienced one very brief such recession (that of 1948-9). The absence of such crises became a major element in economic discussion in the decades of the 1950s, 1960s and early 1970s. And without coming to terms with it, one cannot grasp the intractability of the boom-recession cycle today.

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However, if crises were an inevitable feature of capitalism for Marx, they were not in themselves the central point in his analysis of its long-term dynamic. They were a cyclical feature of the system which it had managed to cope with several times by the time Capital was published, however great the hardship they had caused to the mass of the population, the distress to those capitalists who went bust, or the occasional outburst of popular discontent. They were not in themselves going to bring the system to an end. As the Russian revolutionary Leon Trotsky put it nearly 40 years after Marx's death, "capitalism does live by crises and booms, just as a human being lives by inhaling and exhaling" .23 The long-term dynamic came from elsewhere than the crisisfrom two long-term processes at work in the system, processes that were a product of its ageing as it went through each repetition of the cycle of expansion and contraction.

The tendency of the rate of profit to fall

The theory

The first of these processes is what Marx called "the law of the tendency of the rate of profit to fall" (sometimes called, for short, by Marxists since, "the falling rate of profit"-the phrase I will often use here).

This is one of the most difficult parts of Marx's theory for newcomers to his ideas to understand, and also one of the most contentious. Non-Marxist economists reject it. So the often perceptive Observer economic columnist William Keegan has denounced Marx's account as "an obsolete economic textbook which was itself written during the early, faltering phase of unreformed capitalism" quoting the French economist Marjolin to the effect that, "A modicum of experience and some knowledge of history was enough to cast doubt on the [Marxist] theory of an inevitable decline of capitalism owing to a falling rate of profit". 24 Many Marxists who accept the theory of value and the main contours of Marx's account of the crisis are just as dismissive of it.25 Others hedge round their support for it with so many provisos as to effectively cut it out of any account of the system's long-term development.

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Yet Marx himself regarded it as absolutely central. It enabled him to assert that capitalism is doomed by the very forces of production which it itself unleashes:

The rate of self-expansion of capitalism, or the rate of profit, being the goal of capitalist production, its fall . . . appears as a threat to the capitalist production process.26

This "testifies to the merely historical, transitory character of the capitalist mode of production" and to the way that "at a certain stage it conflicts with its own further development". 27 It showed that "the real barrier of capitalist production was capital itself" .28

Marx did not pick the idea that profit rates fall out of thin air. It was common among economists who preceded him.29 As Eric Hobsbawm has said, "Two things worried the early 1 9th century businessmen and economists: the rate of their profits and the rate of expansion of their industries. " Adam Smith had believed profit rates must fall as a result of increased competition and Ricardo because of supposed "diminishing returns" in agriculture.30 Marx provided an explanation which did not depend on such questionable assumptions,31 but upon grasping that the dynamic of capitalist accumulation contains within it an irresolvable contradiction.

Each individual capitalist can increase his own competitiveness through increasing the productivity of his workers. The way to do this is for each worker to use more and more "means of production"-tools, machinery and so on-in his or her work. That involves the means of production expanding more rapidly than the workforce. There is a growth in the ratio of the physical extent of the means of production to the amount of labour power working on them-a ratio that Marx calls the "technical composition of capital" .32 But other things being equal, a growth in the physical extent of the means of production will also be a growth in the level of investment needed to buy them. So there will also be an expansion in the ratio of investment to the workforce, in the value of the means of production compared with wages (or, to use Marx's terminology, of "constant capital" to "variable capital" ) . This ratio is Marx's "organic composition of capital" (as explained in Chapter One).33 Its growth, for Marx, is a logical corollary of capital accumulation.

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