Corporate finance outline

This survey of Marxian writing presents an analysis of the business cycle that involves both real developments, which determine the rate of profit, and financial factors, which have an impact through the availability of credit and the rate of interest. The paper also draws on the work of recent post-Keynesians, who have developed illuminating insights into how modern capitalist financial systems function. But in contrast to the impression created by some post-Keynesians, it argues that business cycles are not just a result of financial instability, and that while it might be possible to modify or ameliorate their effects, they cannot be eliminated.

Introduction

The end of the economic expansion that began in the us and the other advanced capitalist countries in the early 19903 presents an opportune moment to review Marxian theories of the business cycle.1 Much of the orthodox discussion about whether the end of the expansion would lead to a recession has been informed by a neo-classical approach to economics, which conceives of recessions as the result of 'shocks' or 'disturbances' which lead an economy to deviate from a normal path of steady growth. In contrast, the Marxian approach sees business cycles as an intrinsic feature of the way that growth occurs in a capitalist economy.

According to this view, economic expansion occurs in protracted spurts, which lead to an accumulation of tensions, and a downturn in the business cycle is seen as the mechanism by which such tensions are eliminated, thereby creating the basis for a new period of growth.

Marx himself was, of course, one of the first people to recognise the existence of business cycles.2 However, as has often been pointed out, there is no place in which he set out all the different elements of his approach in a consistent form. Since Marx's time, the Marxian theory of the business cycle has generated an enormous body of literature, and this received a fresh impetus in the early 19705, when the lengthy period of relatively sustained accumulation that had begun after the second World War came to an end. However, much of this literature is marked by having taken just one aspect of Marx's approach, and presented it as the over -arching explanation for business cycles. Furthermore, relatively little attention has been paid to financial aspects of the business cycle, even though Marx's own approach involved an interaction of real and financial factors. Indeed, because in Marx's time the downturn in a business cycle was usually associated with a dramatic monetary and financial crisis, he sometimes used the term 'crisis cycle', or even just 'crisis', when he was referring to the analysis of the business cycle.1

The aim of this paper is, first, to outline the basis of Marx's approach to the business cycle, and then to look at how more recent authors have attempted to use and develop this approach to understanding the modern business cycle. Marx's approach to business cycles can be viewed as consisting of three stages. The first of these is concerned to demonstrate that crises are a possibility in a monetary economy. This is considered in section 2.

The second stage is found in the course of Marx's analysis of production and circulation in a capitalist economy. Having demonstrated that a commodity economy involves the possibility of crises, Marx argues that, in a capitalist commodity economy, periods of profitable accumulation necessarily tend to undermine profitability, and that this blunts both the desire and the ability of capitalist enterprises to promote further accumulation. The different factors that Marx mentions in this connection, together with more recent interpretations by other Marxist writers, are reviewed in section 3.

The third and final stage of Marx's approach is concerned with the question of why a decline in profitability should lead not merely to a slowdown in accumulation, but to a period in which economic activity contracts. The answer has to do with the operation of the capitalist financial system, and the way it interacts with industrial and commercial capital. In order to understand this it is necessary, first, to analyse the credit system and the way the rate of interest is determined, and this is the subject of section 4. It is then necessary to examine how the availability of credit and the rate of interest impinge on the process of accumulation, and this is considered in section 5.

Marx's analysis of the financial system attaches considerable importance to institutional structures, and these have obviously changed considerably since his day. For this reason, the last part also draws on the work of recent post-Keynesian writers, who have developed illuminating insights into the way that contemporary monetary and financial systems function in the advanced capitalist countries.4 However, as stressed in the conclusion, in explaining business cycles predominantly in terms of financial instability, post-Keynesians imply that, if such instabilities could be elimi nated, it would be possible to overcome the cyclical nature of growth. In contrast, the Marxian approach argues that the business cycle is the result of the interaction of real and financial factors, and that while it might be possible to modify or even ameliorate the business cycle, it can never be completely eliminated.

1. Money and the possibility of crisis

The first steps in Marx's analysis of crises and the business cycle are established within the framework of a simple commodity economy.5 Marx first argues that a commodity economy is necessarily a monetary economy, and then points out that that after a commodity has been exchanged for money, the money that is received might not be used to purchase another commodity, or at least not immediately.6 This idea that money might be withdrawn from circulation involves money's function as a store of value. Marx refers to this as the abstract possibility of crisis, and it is the basis of his criticism of Say's Law.7

A further element of Marx's theory of the business cycle that is established at this stage concerns transactions in which commodities are exchanged, not for money, but for a promise or contract to pay at a future date.8 Money comes into play here when the contract comes to be settled, and it involves money's function as a means of payment. The introduction of contractual payments of this type can give rise to two possible consequences. First, if prices or values should decline before a contract has elapsed, the debtor might be unable to raise the amount of money required to settle the contract. second, where a contract is only one of an interlinked series of contracts, then a failure to pay by one debtor could spread rapidly, and this could give rise to forced sales of commodities, as debtors strive to obtain the money they need to meet their obligations. This is a second form of abstract possibility of crisis, and it introduces the idea that difficulties arising in one set of transactions could rapidly be transmitted to other parts of an economy.9

Having established why it is that crises are possible in a monetary economy, Marx then proceeds to show why he considers them to be a necessary result of production and exchange in a capitalist economy.

2. The falling rate of profit

The basis of the Marxian analysis of the business cycle is that periods of capitalist expansion necessarily lead to a fall in the rate of profit, and that this reduces both the desire and the ability of capitalist enterprises to accumulate. There are, however, a number of different explanations of why exactly this occurs, and these can be grouped under three main headings, as follows.10

One of the most widely discussed approaches is the one known as the profit squeeze position. This is based on the analysis of accumulation in the first volume of Capital, where Marx argues that capitalist firms are forced by competition to invest at least part of their profits in order to expand the scale of their operations, and so reduce their unit costs of production.11 To a greater or lesser extent, depending on the degree of mechanisation, however, accumulation involves an increase in the number of workers employed, and therefore a decline in the number who are unemployed. This decline in the number of unemployed strengthens the bargaining position of workers, and makes it more possible for them to push up their wages, thereby reducing the amount of added value going to profits.

The consequence of such a squeeze on profits is to undermine both the eagerness and the ability of firms to accumulate any further, thereby bringing a period of expansion to an end. A corollary of this position is that a recession, by leading to layoffs and closures, increases unemployment, and helps employers to raise profits at the expense of wages, thereby laying the foundation for a new phase of accumulation.