Hobgoblin Journal

The Crisis, the Debt and the Law of Value

By Andrew Kliman

Hobgoblin No. 3 Winter 2000/2001
This is a presentation given to Students for Solidarity and Empowerment, IMF–World Bank Teach-in in New York in March 2000.
The main point I want to emphasize is this: What controls the world economy is not the IMF or the WB or the US Treasury or Wall Street. What controls the capitalist world economy is rather an impersonal law, the law of value. It is impersonal in much the way that the law of gravitation is: it works independently of anyone’s will or intention. The roof of your house collapses not because anyone planned it that way, but due to the law of gravitation.
Likewise, capitalists and their agencies do not plan for there to be crises. Rather, the law of value is inherently self-contradictory, self-negating, and this gives rise to the crises of the capitalist system.
And this is where the international lending agencies come into the picture. In recent years, the IMF in particular has assumed a new role, different from what it did during its first 30 years, and different even from its role in managing the Third World debt crises of the 1980s. Its new role is that of managing global economic crisis, trying to patch up the world economy and keep it from collapsing. What it does, essentially, is to try to paper over bad debt with new debt, and to turn the countries that take on the new debt into debt-repayment machines. The polite word for that is “structural adjustment.”
The key aim is to restore investors’ confidence –– confidence that they’ll indeed be getting their money back, with interest. It is this alone that will keep credit flowing and allow bad debt to be papered over with new debt.
Restoration of confidence is such a crucial goal not because the IMF or the Treasury Department is out to satisfy the greed of investors. It is rather that, by triggering crises of confidence, economic crises threaten to cause a collapse of the whole world economy. What holds capitalism together on a day-to-day basis, what allows it to get from today to tomorrow, are promises and faith, particularly promises that debts incurred today will be paid back tomorrow, and faith that these promises will be fulfilled. This is of course a very insecure foundation, so the financial system is inherently fragile and prone to collapse whenever confidence is shaken.
As the Asian crisis of 1997-99 showed, crises of confidence can spread very rapidly, and throughout the world, from Thailand to as far away as Russia and Brazil. And today, debt burdens in the world’s two biggest economies, the US and Japan, are at record levels that are probably unsustainable. Many analysts are consequently warning that that the next crisis might make what has come thus far look like very small potatoes. And in the event of a serious slump in either of the US or Japan, the IMF certainly could not piece together a bail-out anywhere near big enough to put Humpty-Dumpty back together again.
Whether or not that scenario comes to pass, the debt crises and the consequent crises of confidence seem bound to recur. This is because, as I suggested before, they are part of the working of the law of value that governs the capitalist system. This law governs not only what is being called “corporate capitalism” or “globalization,” but also the state-capitalism that existed in Russia and China and indeed capitalism in all of its various forms.
What is this law of value and how does it give rise to the crises? As Karl Marx discussed in his book Capital, there are two aspects to the production process under capitalism. It is the production of material goods and services, but also the production of value. ­­ The purpose of production isn’t just to produce more stuff, but to produce more value. But there’s a continual contradiction between these purposes, between the expansion of physical productivity and expansion of value. As productivity rises, commodities’ values fall. (That’s the most concise definition of the law of value I can give.) In other words, costs of production fall and prices tend to fall as a result. This failure of value to “self-expand” sufficiently in turn leads to slumps in physical production, precisely because physical production under capitalism is always tied to value production and engaged in only insofar as it is value-producing.
Nowadays, we hear a lot of talk about a “New Economy” in which rising productivity due to information technology will supposedly be the panacea for all of capitalism’s problems –– poverty, unemployment, and so forth. What this view overlooks is that capitalist production isn’t just a system of producing material things, but a system of producing values. High-tech makes all kinds of things cheaper –– information processing, telecommunications, transportation, etc. These cost reductions would seem to suggest that capitalists can continually increase their profitability, until one realizes a simple thing: one firm’s cost is another’s sales revenue. If costs are falling, then so are revenues.
It is a peculiar fact that many Marxist economists (Anwar Shaikh, etc.) also think that productivity increases are a blessing to capital because they supposedly boost profitability. But on the basis of what I’ve just said, it is easy to see that rising productivity can lower profitability and lead to crises. Imagine a capitalist who invests in a machine today, and uses it up during the next year, in order to produce two new machines. In physical terms, the expansion is stupendous, 100%. But what if, due to rising productivity, the two new machines are worth no more than the original one? All else being equal, the sales revenue next year is no greater than the value the firm invested today. Profit is zero. Value has not expanded. And if the poor capitalist borrowed the funds to get the original machine, he cannot pay the interest he owes. A debt crisis and a crisis of confidence are in the making.
In reality things are of course somewhat more complex, but I do think this example sheds some light on the crises that have wracked the global economy. For instance, the recent Asian crisis took the form of a debt crisis and a lack of demand. It became very popular to say that what “caused” the crisis was overexpansion of debt. This statement, however, explains nothing. That a sudden outflow of capital occurred means precisely that the prior inflow had, in retrospect, proven to be excessive. Yet with reference to whathad it become excessive? Why couldn’t the economies’ ability to absorb credit keep pace with its creation?
What my homely little example suggests as an answer is that, due to the law of value, the rising productivity and declining values, not enough new value was being produced. Whenever the rate of growth of value falls short of the interest rates, a debt crisis is in the making. New debt must be incurred, not to acquire additional assets or expand production, but simply in order to pay interest on outstanding debt. But even more interest must now be paid, so debt burdens accelerate and the financial structure becomes unstable, increasingly prone to crisis when confronted with a “shock.” And thus we get the attempts to delay the day of reckoning by papering over bad debt with new debt, as well as other manifestations such as the massive increases in government and private debt in the U.S., Japan, and indeed in virtually every developed country, that may well prove to be unsustainable.
There is much more that could be said by way of economic analysis, but I hope the essential point is clear: capitalism’s crises are necessary to it, and recurrent, because the system is founded on an unsolvable contradiction between the expansion of physical production and the expansion of value. As Marx put it, “The true barrier to capitalist production is capital itself. It is that capital and its self-[expansion] appear as the motive and purpose of production … and not the reverse, i.e., the means of production are not simply means for a steadily expanding pattern of life for the society of producers.” This conclusion, which I think is correct, indicates that what we need to struggle against is not just this or that manifestation of capital, such as globalization or the IMF. We need to struggle against –– and abolish –– is capital itself, value production itself. We need to work out new relations, human relations, new ways of living and working, founded on a new motive and purpose, not the expansion of value but the development of each individual person as an end in her- or himself.
This is certainly a daunting task. But I think it needs to be part of our our perspectives. We need always to keep our eyes on the prize. The failures of the movements of the 1960s to remake society, and the the dismal history of Stalinism and social democracy, can teach us an important lesson. If we end up misidentifying the enemy, mistaking one or another manifestation of capital for capital itself, we’ll just allow the real enemy to come back even stronger, to take back the gains and send things reeling backward.
Hobgoblin No. 3 Winter 2000/2001