The year 2007 began what became known as “the greatest recession since the Great Depression.” A highly speculative market for bonds backed by bad mortgages crashed due to widespread defaults. Banks in the U.S. and around the world began to fail due to the fact that they had borrowed heavily to buy these speculative bonds. Recessions, defined as two consecutive quarters (six months) of negative economic growth, occurred in many parts of the world between 2008-2012. Some European countries had two recessions during that period. The formal recession in the U.S. ran from December 2007 to June 2009 when positive economic growth resumed. In addition, the U.S. Government used taxpayer dollars to bail out failing banks. Since 2009 President Obama has been saying we are in a period of “recovery” although he has admitted that it is not happening a rapidly as he (and all the unemployed, homeless, and people living in a state of poverty) would like.
This highlights the fact that the formal definition of recession does not begin to capture what the present crisis means to ordinary people. The reality for millions of people around the world includes losing homes, long-term unemployment, poverty, hunger, untreated illness, the break up of families and even suicides. And it includes war because an economic crisis is also a political crisis and a period of great social instability.
My use of the term crisis to label the period from 2007 to the present is different from its use by economists, journalists and the various talking heads that appear on TV and the inter net blogs. In my book New World Disorder, I call what we are experiencing a crisis of value, and I argue that it is likely to be with us for some time. I also refer to the ongoing persistence of the crisis as a period of churning and flailing as ordinary people, politicians and “experts” blindly seek an end to the crisis. If I am correct in my characterization of the present period as a crisis of value that now includes churning and flailing, the solutions proposed in the U.S. and throughout the world by both conservatives and liberals are really not solutions at all. Let me explain.
The purpose of the present essay is to explain what I mean by crisis of value. The full analysis of its implications is included in the book. A summary definition of a crisis of value is this: Capitalism has an inherent tendency to produce greater claims on the value generated by the global capitalist system than the system is capable of generating, given the state of technology and production know-how. When this happens, profit rates begin to fall and the system is no longer able to reproduce itself and the people who participate in it. What follows is a period of crisis that includes widespread unemployment, declining living standards, social upheaval and even war. Various actions on the part of ordinary people, the owners of capitalist enterprise, and the governments that are dedicated to keeping the system intact enter a period of churning and flailing as they attempt to find a way out the crisis.
Crisis of value includes two key concepts that are important to understand: capitalism and value. As you will soon see, I define these concepts differently from most analysts and commentators. Most people equate capitalism with private markets and label economies with a relatively large public sector as “socialist.” This is not the way I use the terms capitalism or socialism. The largest capitalist nations today vary considerably in the relative importance of private markets. Despite all the political banter about “big government,” U.S. private enterprise accounts for about 77% of the entire economy. Relative to other nations, this is a large portion. Among European nations, Germany is closest to the U.S. at 72%. Sweden is 68%, England 58%, and France 55%. (These figures are calculated using World Bank statistics on Gross Domestic Product.) It is possible to function as a capitalist system without any private enterprise at all. The former Soviet Union was, in my opinion, a type of capitalism called state capitalism. So what do I mean by the term capitalism? And what is it that makes capitalism…capitalism?
What is unique about a capitalist system is the nature of value and the way value is created and distributed. The secret to the workings of the capitalist system is that workers produce more value (which I’ll define in a moment) than they get back in the form of wages and salaries. Business owners accumulate some of the value produced by their workers. They use it to meet their own needs and to invest in their businesses in order to keep the system and their businesses going and growing. They play a vital role in reproducing the system. Reproducing the capitalist system includes investing in technology and equipment that workers use to produce value. But in a capitalist economy everyone needs to get some of the value produced by workers whether they directly produce this value or not. Everyone living in a capitalist system needs some of the value generated by the system in order to live a decent life and reproduce the next generation. The very survival of the capitalist system depends it.
So what is value? Common sense and Economics 101 courses equate value with money and use the prices of goods and services produced by the capitalist system as a measure of their value. This is not the way I use the term value. I define value in a capitalist system as the necessary labor time needed to produce a good or a service. A labor theory of value is an old idea going back to classical economists like Adam Smith, David Ricardo, and Karl Marx. This is still an important theory for today.
There is logic behind the idea that the value of goods and services is determined by the labor time required to produce them. All goods and services are produced by labor. Some require more labor time than others. The amount of labor time that goes into producing a house is far greater than the labor time spent producing a pair of shoes. This difference may or may not be reflected in their prices. But this is why a house has more value than a pair of shoes even though both are essential to meet basic human needs. (Note that in order to clarify the concept of value, I am considering here only the house—the value of the land it sits on is a more complex matter. Also, I compare a house to a pair of shoes because both meet fundamental human needs and thus have similar use values yet different prices that reflect exchange values.)
The labor theory of value helps explain why there is a contradiction inherent in the capitalist system itself. Competition among individual capitalists requires individual business owners and the system as a whole to lower costs for each item produced each day or each hour. This is done in a variety of ways:
- investing in labor-saving machinery
- moving production to places where business owners can get a higher share of the value produced by paying lower wages
- offering fewer benefits, or making workers work faster and longer
However, since the value of goods and services is the labor time required to produce them, many of these measures actually lower the value of what is being produced. Meanwhile, it is important to understand that even when someone is unemployed or being paid below the cost of living and reproducing, they still have the same basic needs. They still need a home and shoes as well as food, health care and education. People all over the world therefore have a claim on the value generated by the system as a whole no matter what their economic circumstances are. If basic human needs are not met, the system can’t continue because people simply can’t reproduce themselves. If people are unable to reproduce themselves for lack of human needs, the system will fail.
There are other kinds of claims on value, which also explain the basic contradiction in the capitalist system that generates crises of value. As capitalists invest in technology and equipment to increase the production of value, they need the participation of a variety of businesses that don’t produce value themselves. These businesses have a claim on value without producing value and that claim eventually becomes greater than the value generated by the new technology and equipment.
These businesses include the so-called FIRE industries: finance, insurance and real estate, and legal services. Stock and bondholders also have a claim on value. The purchase of a stock or bond enables corporations to meet expenses, purchase new machinery or make other investments in their businesses before value is even created. This gives the purchaser of the stocks and bonds a claim on future values—values that haven’t even been created yet.
There are also social claims on value that include environmental cleanup, and social services like Medicare, Social Security, Medicaid, Food Stamps and public housing, which maintain a basic standard of living for those who are unable to work or unable to find work. There are public claims on value for public health and safety (police and fire). And there are claims generated by the cost of military forces and weapons. Claims on value by government include services required to manage the capitalist system as a whole, such as printing and managing the supply of money, economic policy and government regulation of business.
As economic development in a capitalist system proceeds, basic human needs, the needs of business and the population for services, and the drive to reduce costs tend to reach a state where claims on value exceed the amount of value the system as a whole can generate. This is a crisis of value.
During a crisis, the conflict between all of these claims and the need to accumulate surplus value becomes very great. Profit rates begin to fall. They fall because the capacity of the system to produce value is not adequate to meet the growing claims on value. For the capitalist system, the only way out of this is to destroy some of these claims and change the way capitalism functions.
As I write this, some destruction of claims on value is underway. When private corporations cancel or reduce pension payouts it is an example of the destruction of claims on value. State public employees are seeing some of their pension benefits cut. The entire City of Detroit is filing for bankruptcy. This will mean that pensions of city workers, including police and firemen, will be cut. City workers will be laid off and the residents of Detroit will experience many reduced or eliminated public services.
Historically, there have been a number of lengthy periods of crises of value. During these periods, there has been immense destruction of claims on value through wars that physically destroy value-producing factories and human lives. The destruction of claims on value also occurs with business closings and disinvestment.
During crises of value, there have been severe recessions, when the economy ceases to grow. As profit rates fall, unemployment rises and wages stagnate. Businesses collapse or relocate, creating human misery and civil unrest within nations. And since the crises have not been confined to single nations, tensions between nations and among national blocs have increased as each nation-state attempts to recover at the expense of others. The result has been war. Both war and sharp economic downturns destroy claims on value and create the basis for a temporary resolution to the crisis. But all this churning and flailing exacts a heavy burden on ordinary people. Lives are lost, homes and property taken or destroyed, living standards are demolished and masses of people displaced.
The conflict each period has generated has raised the question of whether the outcome of each crisis will be a radically restructured form of capitalism, or something else. In past crises, destruction of some claims on value and a radical restructuring of the system have temporarily resolved the crisis. While this temporary solution allowed the system to grow and brought relief and even prosperity to some, the contradictions remained. And those contradictions generated new crises with all the attendant churning and flailing: war, destruction of claims on value and destruction of human lives. Since we are presently living with yet another crisis of value, the question of a direction forward is on the table. We all have an opportunity to help shape the outcome.