This article provides two views of productive and unproductive consumption (investment) as the driver of the economy. The one view is taken from Gross Output and the other from Gross Value Added (GDP). Without spoiling the plot, the contrast in views shows how important adopting the correct method is.

The article is the first download.


  1. Anti-Capital says:

    “It is in the realm of circulating capital that capitalists meet their nemesis in the form of insolvency or illiquidity. Both are the result of fixed asset investment decisions, the one within the firm the other without. In the case of insolvency this tends to follow from a failure to invest internally resulting in uncompetitive cost prices eroding or even eliminating profit margins. In the case of illiquidity this tends to result from a fall in investment in the rest of the economy weakening demand, thereby delaying or cancelling sales and depreciating prices.”

    This doesn’t seem to be supported by the recent history of the “tight oil” (shale) industry, not the natural gas extraction sector, where investment, and “overinvestment” in advanced techniques has created oversupply and precipitated increased bankruptcy.

    Nor does the longer history of semiconductor fabrication with its acute expansion and contraction phases, follow that explanation.

    • If you are referring to current conditions you are citing two tainted commodities. With regard to oil, Saudi Arabia and Russia had sought to manage the oil price to prevent the expansion of US shale prior to the pandemic preventing the industry from recouping the $300 billion in bad debts since 2010 of which half since 2015. Shale’s Bust Shows Basis of Boom: Debt, Debt and Debt: QuickTake – Bloomberg With regard to Chips the current market conditions have been set by China hoovering up all the available chips when the US deployed its trade embargoes.

      However, if you go back to end 2015 and beginning 2016 when global production and trade began to contract then yes, the article is accurate because there is no tainting. The oil price fell to $32 in Feb 2016 and the Philadelphia production index, a proxy for the Chip industry in the USA fell to -9.0 in Dec 2015. Predictably their was a spike in delinquencies of Commercial and Industrial loans which are associated with circulating capital at this time. It was these conditions that forced the FED and the PBOC to loosen financial conditions in response. Finally between Q3 and Q4 2015 the rate of profit fell from 6.3% to 5.6% and the quarterly rate of turnover fell 3%. All in conformity with the statement you quote from the article.

      Hope this answer addresses your concerns.

      • Anti-Capital says:

        As usual, we disagree; the Saudis are no exogenous force impacting the price of oil; moreover the price of oil declined based on overall overproduction which the Saudis, at times, tried to offset by production agreements with other countries. The shale producers in the Bakken and Permian basins led the overproduction.

        As for chips, I’m not talking about the current shortage which is based more upon uneven growth, the imbalance in supply chains brought about by the pandemic, or China “hoovering” anything. I’m talking about the 50 year history of expansion and contraction brought about by intensive and extensive capital investments, producing shake outs in the industry, or boom times, that do not correspond to those forces you say account for the difference between insolvency and illiquidity,

        The problem with your analysis is that it does not, and cannot, account for overproduction which is not the same thing as underconsumption.

  2. Of course it deals with overproduction. Overproduction is only relative, relative to profits. But if profits are falling so too productive consumption. This the dialectic, the unity of opposites. The final phase of the industrial cycle which Marx refers to as forced production is all about momentum and cannot be taken on its own. It is the one and only time that capitalism comes close to producing for productions own sake, hence the piling up of inventory that has no profitable outlet.

    If you say that Chips are overproduced, then so too ships or anything that takes years to gestate because you know quite well that FAB units takes years to set up and there are many many industries whose technical gestation periods do not coincide with the industrial cycle. All this means is that as capitalism develops the discord between the product cycle and the industrial cycle grows making capitalism increasingly obsolete.

    This does not alter the fact that there is an industrial cycle which is what I was addressing in the general case, and further, that it is the industrial cycle that overwhelms the product cycle which is why I pointed to 2015-6.

  3. Anti-Capital says:

    We can talk about any and everything. But so what? The issue is your claim that the distinction between insolvency or illiquidity is whether there is a failure to invest “internally,” within the firm or corporation, or whether the failure or constraint is “external” –in the “rest of” the economy causing a failure in “demand.”

    When I point out two instances, and I can point out many more in iron ore mining, aluminum processing, flat-screen displays, one short term (shale oil and gas) and one long term (semi-cond fab) you respond with the usual “exception” plea– the Saudis, the Chinese, the whatever.

    You are incorrect in your attribution of the distress in the shale oil sector to the Saudis in that Saudi actions are caused by the condition of capitalist accumulation and are not external to that. In the short term, and the longer term, going back to 2007, the problem in shale petroleum has not been the actions of the Saudis, but the dramatic increase in US production by the shale producers themselves, with the insolvency brought about as a result of increases in capital spending, not the lack thereof.

    Similarly, problems in the semicond fab industry are not imposed upon it by an external failure of the rest of capitalism to increase investment. China “hoovering” “everything” is a specious claim and has no historical relevance to the course the industry has taken.

    But again, you’ll find another excuse rather than deal with the actual circumstances– kind of like you do with India and Covid 19.

  4. Anti-Capital says:

    Thanks for the advice. It would be helpful if you could apply your economic arguments, i.e. the internal vs external driver between insolvency and illiquidity to an actual industrial sector, just to correlate the abstract with the concrete; the particular with the general, that sort of stuff.

    So pick, say semiconductor fab, look at the boom-bust cycle, set up a filter for whether the sector experienced insolvency or illiquidity– say number and devaluation lost to bankruptcy, and compare that with the level of sector capital spending vs. overall capital spending. See if there is a concrete manifestation of what you abstractly claim. Might as well use the US semiconductor sector since (as of 2019), it still accounts for 44% of global production.

    Maybe we’ll find a boomerang. Quite OK with me.

    • I am more concerned with what is to come in the second half of the year. There is interesting data from the Bank of International Settlements on the solvency crisis to come. They are quite clear. Just as in 2008, now with Covid, relief funds can address the temporary liquidity crisis but not the looming solvency crisis. Hence my comment about the boomerang. Insolvency is a structural issue. At its simplest it means liabilities far exceed assets. In its more complex form it is about cash flow, the inability of companies to generate sufficient free cash to service there debts which means also paring them down. But this begs the question, why is cash flow deficient. In most, not all cases, this is because these companies are uncompetitive, their cost prices are too high, and that is a function of investment within the company. As you know, since 2014 the rate of profit has been falling quite precipitously. As this is a measure of the return against assets, it means more companies will find it difficult to meet their commitments, particularly if they have acquired these assets by means of debt (loans). So yes, look out for a future article on insolvent companies or Zombie companies which may or may not include specific industries. I will end off on this, in those industries where the rate of profit is lowest, there will be found the highest density of insolvent companies pro rata.

  5. Anti-Capital says:

    I’ll just end off on this: if there’s a “coming’ generalized occurrence then it seems the determining variable is not the failure of a or any specific company to invest “internally.” And if it’s an “external” result, it doesn’t seem to fit your model for illiquidity. Telling us that where profits are lowest, insolvencies tend to cluster isn’t really telling us anything, is it? I thought the issue to be attacked was a material critique of underconsumption explanations for impaired capital accumulation.

    But thanks for your time

    • This explains a lot. The ending of the industrial cycle is primarily a liquidity crisis in the general sense. What my article sought to explain, is that this crisis is caused by a specific form of underconsumption, productive underconsumption which is not visible when looking at GVA in isolation. It is you who has raised concerns about insolvency vs liquidity. Not me. Anyway, I do believe on balance that this discussion has actually led to a further elaboration of these issues.

      • Anti-Capital says:

        Uhh……..think you wrote this, which started the whole chain.

        “It is in the realm of circulating capital that capitalists meet their nemesis in the form of insolvency or illiquidity. Both are the result of fixed asset investment decisions, the one within the firm the other without. In the case of insolvency this tends to follow from a failure to invest internally resulting in uncompetitive cost prices eroding or even eliminating profit margins. In the case of illiquidity this tends to result from a fall in investment in the rest of the economy weakening demand, thereby delaying or cancelling sales and depreciating prices.”

        What gets misappropriated as “underconsumption” is in fact overproduction, the overproduction of capital, which as Marx notes in Volume 3–

        “…never means anything other than the overproduction of the means of production, means of labor and means of subsistence, that can function as capital, i.e. can be applied to exploiting labour at a given level of exploitation;….a fall in the level of exploitation below a certain point produces disruption and stagnation in the capitalist production process, crisis, and the destruction of capital.”

        And therefore capitalism at its most “advanced,” has to drive down the cost of labor below its value, reduce the wage absolutely .

        At a certain point, and this is it, economics gives way, is superseded by class struggle over the relations of production.

      • Both solvency and liquidity are an issue found only in circulating capital which is why both had to be included. Insolvent companies are those who suffer an excess of current liabilities compared to current assets. A solvent company has an excess of current assets over current liabilities. An insolvent company suffers a permanent liquidity crisis which requires it taking on more debt to survive. A solvent company suffers a temporary liquidity crisis when it is unable to convert some of its current assets into cash due to changed market conditions. True, if these negative market conditions endure, then illiquid companies can become insolvent as well, hence the actions of central banks heading this off.

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