The nature of current long depression
Marxism 2014
11 July 2014
by Michael Roberts
Capitalist growth
• “Economic progress in a capitalist society
means turmoil”
– Joseph Schumpeter
• What this presentation covers
• 1. The causes of the Great Recession: Marx’s
law explains it best
• 2. The Great Recession has become a Long
Depression
• 3. Will the Long Depression end and how
The mainstream
• “The central problem of depression-prevention has been solved, for all
practical purposes.”
Robert Lucas, Jr, top US neoclassical economist
• “We don’t know what causes recessions. I’m not a macroeconomist so I
don’t feel bad about that! We’ve never known. Debates go on to this day
about what caused the Great Depression. Economics is not very good at
explaining swings in economic activity….If I could have predicted the crisis,
I would have. I don’t see it. I’d love to know more what causes business
cycles.”
Eugene Fama, Nobel prize winner
• “I think the recent global crisis is best understood as a classic financial
panic transposed into the novel institutional context of the 21st century
financial system.”
Ben Bernanke, Fed Chair
Keynesian view:
it’s a technical malfunction
• “Keynesian economics rests fundamentally on the
proposition that macroeconomics isn’t a morality
play—that depressions are essentially a technical
malfunction. As the Great Depression deepened,
Keynes famously declared that “we have magneto
trouble”—i.e., the economy’s troubles were like
those of a car with a small but critical problem in
its electrical system, and the job of the economist
is to figure out how to repair that technical
problem.”
Paul Krugman
Radical Keynesian view:
inherent financial instability
• “The flaw exists because the financial system necessary
for capitalist vitality and vigour, which translates
entrepreneurial animal spirits into effective demand
investment, contains the potential for runaway
expansion, powered by an investment boom”
Hyman Minsky
• “Capitalism is inherently flawed, being prone to booms,
crises and depressions. This instability, in my view, is
due to characteristics that the financial system must
possess if it is to be consistent with full blown
capitalism.”
Steve Keen: Minsky Journal of Finance, Vol 24 1969
Where does profit fit in?
• This is a profit economy where businesses are moneymaking machines – and where meeting some people’s
needs for goods and services is merely a necessary, but
not sufficient, side-effect.
• But nowhere does profit appear in the Keynesian
multiplier, which has only investment and consumption
as its drivers. If profit is not relevant to crises but only
‘effective demand’ i.e. the level of investment and
consumption, a theory of crisis now depends on what
happens to spending, particularly consumer spending,
as the largest segment of effective demand.
It’s inequality!
No, it’s not
• “the concentration of income distribution in
neoliberalism to the benefit of high income earners did
not cause sagging demand patterns. On the contrary,
the period witnessed a spending spree. Lower income
strata certainly suffered from “underconsumption”—
This trend was much more than compensated by the
spending of upper income fractiles. …. spending gained
almost 10 percentage points of GDP between 1980 and
2006.”
Dumenil and Levy, The Crisis of the Early 21st Century:
A Critical Review of Alternative Interpretations
Inequality and debt
• “Historical evidence from several major credit
booms finds scant support for the inequality/crisis
hypothesis…. If income inequality drove the credit
boom that preceded the subprime crisis in the US,
the event was an outlier by historical standards.
Comparative evidence from the last century
shows little relationship between rising inequality
and credit booms” Bordo, MD and CM Meissner,
“Does Inequality Lead to a Financial Crisis?”,
No underconsumption
It’s debt
• “Recessions are not inevitable – they are not
mysterious acts of nature that we must accept.
Instead recessions are a product of a financial
system that fosters too much household debt
…excessive reliance on debt is in fact our culprit…
but it can potentially be fixed. We don’t need to
view severe recessions and mass unemployment
as an inevitable part of the business cycle. We can
determine our own fate.”
Atif Mian and Amir Sufi, House of Debt
The law
• “The most important law of political economy
is the tendency of the rate of profit to fall. “
Karl Marx
Marx’s law explained
1)
2)
3)
4)
5)
6)
7)
The Law:
Capitalists must compete for market share to make profits, so they must become more efficient
and raise the productivity of labour
They can only do so by investing in new technology that saves on labour
So there is a long-term secular tendency for the value of the means of production (technology) to
outstrip the value of labour power (wages)
The organic composition of capital rises. If the rate of exploitation profit over wages is
unchanged, then the profitability of capital will fall. This is the tendency.
There are counteracting tendencies: the rate of exploitation can rise from new technology
improving the productivity of labour and any new value not being captured by labour in the same
proportion – the class struggle. But labour-shedding technology reduces the value of labour
power and eventually any increase in the rate of exploitation will not keep up with the rise in the
organic composition of capital. The rate of profit will fall.
Constant capital will be cheapened by increased productivity in the making of new technology.
But the aim of introducing new technology under capitalism is to reduce the cost of labour and
raise profit. So the value of labour power will fall too and as a rule, it will fall more than the value
of constant capital. The rate of profit will fall.
Over the long run, the OCC tends to grow and thus profitability tends to fall and capitalism tends
towards crises, a movement interrupted only by short periods of growth
Piketty says Marx’s law proved wrong
• “the rate of return on capital is a central
concept in many economic theories. In
particular, Marxist analysis emphasises the
falling rate of profit – a historical prediction
that has turned out to be quite wrong”.
Thomas Piketty, Capital in the 21st Century
The story of global capitalism
World rate of profit (simple mean) %
45%
GOLDEN
AGE
40%
CRISIS
35%
Neoliberal
recovery
WAR
30%
25%
LONG
DEPRESSION
Recovery
CRISIS
/NEW
DEPRE
SSION
GREAT
DEPRESSION
WAR
20%
spring/summer
/autumn
winter
spring
summer
autumn
winter
1869
1875
1881
1887
1893
1899
1905
1911
1917
1923
1929
1935
1941
1947
1953
1959
1965
1971
1977
1983
1989
1995
2001
2007
15%
winter
The tendency of the rate of profit to fall
The profitability crisis
1965-82
1982-97
1997-12
1946-12
1965-12
1982-01
2001-08
CC
0.64
1.35
0.99
0.80
0.86
1.24
0.89
HC
0.86
1.12
1.00
0.71
0.96
1.02
0.94
The neo-liberal period
The world since the 1960s
Crisis of 1970s, neoliberal recovery,
ends in late 1990s, new crisis
World rate of profit (exc China), %
26%
24%
22%
20%
18%
16%
14%
CRISIS OF 1970s
NEOLIBERAL
RECOVERY
NEW CRISIS
The Great Depression
Can we predict?
• “There has not been such a coincidence of
cycles since 1991. And this time (unlike 1991),
it will be accompanied by the downwave in
profitability within the downwave in
Kondratiev prices cycle. It is all at the bottom
of the hill in 2009-2010! That suggests we can
expect a very severe economic slump of a
degree not seen since 1980-2 or more”
• Michael Roberts written in 2005.
The profit cycle
The profit cycle - tendencies, triggers and tulips
Accumulation and growth
accelerate -boom!
Rate of profit rises asas
capital,
capital,
both
both
tangible and fictitious, is written
off and companies and financial
institutions are liquidated
Mass of profit rises asaslabour
labour
costs reduced and investment
stopped
Rate of profit falls eventually
eventually
leading to fall
fallininmass
massofofprofit
profit
and new value - production crisis
Collapse in investment, then
employment, and consumption
realisation crisis or "lack of
effective demand"
Triggers financial collapse (stock market,
banks, housing bubble etc) slump!
Profits call the tune
It’s a Long Depression
• “The general economic crisis that was unleashed
across the world in 2008 is a Great Depression. It
was triggered by a financial crisis in the US, but
that was not its cause. This crisis is an absolutely
normal phase of a long-standing recurrent
pattern of capitalist accumulation in which long
booms eventually give way to long downturns.”
Anwar Shaikh, The first Great Depression of the
21st century.
Recessions and depressions
Trend growth
Recessions and depressions - a schematic view
Trend growth
Recession
1974 -5 typical
Double -dip recession
1980 -2 typical
Trend growth
1873
Trend growth
Late 19th century
depression
2007
1937
1879
1880s
Depression
Trend growth
1929
Trend growth
1932
Great Depression
1930s
1941
WAR!
2012
2009
Long Depression
so far
It’s a Long Depression
The depth and duration
The weakest recovery
Investment has collapsed
It’s profitability – stupid!
The UK too!
Debt matters
The housing bubble
It’s corporate debt that matters
Removing the fictitious
The need to deleverage
No room to lend
Investment slump
Can capitalism come out of the
depression?
•
•
•
•
“There is no permanent crisis” – Marx If values were sufficiently destroyed in a slump, profitability
of capital would be restored and accumulation would resume. If the working class was unable to
take the levers of power and replace the capitalist mode of production with planned production
owned in common, then the whole ‘crap’ would start again.
Does it require a world war? Would the Great Depression of the 1930s have carried on forever if
there had been no world war? And did not the 19th century Long Depression come to an end
without any visible world war or revolutionary wave? And can we expect this current depression to
last forever unless we have a major war?
This current winter will come to an end – in my view, not through world war. Failing a successful
revolution in a major capitalist economy, capitalism will eventually enter a new spring with a
recovery in profitability and new investment growth based on new technologies already
‘discovered’ but just waiting for development. Of course, each time, the system finds it more
difficult to develop that new technology as it becomes more and more unproductive in the
capitalist sense.
Unless replaced with a mode of production based on ownership in common and a democratic
controlled plan for the world, capitalism will continue to engender poverty, inequality, recurrent
crises in employment, income and health. And it is fast destroying nature and through global
warming generating ever more extreme weather and environmental disasters.