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“Roots of the Current Economic Crisis”
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• Fred Moseley (2008, 2009): “The main problem in the current crisis is the financial sector. … The current crisis is more of a Minsky crisis than a Marx crisis. … there has been a very substantial and probably almost complete recovery of the rate of profit in the U.S.”
• Gérard Duménil and Dominique Lévy (2005): “the recovery of the profit rate [ in the U.S.] appears nearly complete within the entire Corporate sector”
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Pre-tax Profit as % of Historical- and Current-Costs of Fixed Assets, U.S. Corporations;
1982 = 100%
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Constant-”Wage”-Share and Actual
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Theory
• The rate of profit heads toward the incremental rate of profit
• At the start of new boom, the rate of profit is well above the incremental rate of profit, so it tends to fall over time
• This situation persists unless there’s sufficient “destruction of capital”
• Destruction of capital restores profitability, ushers in a new boom
•Great Depression & WWII
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• But insufficient destruction of capital in economic crises of mid-1970s & early 1980s
• Rather than depression (& subsequent boom!), policy-makers have continually encouraged excessive expansion of debt.
• This artificially boosts profitability and economic growth, but in an unsustainable manner; it leads to repeated debt crises.
• The present crisis is the most serious and acute of these.
• Policy-makers are responding by again papering over bad debts with more debt, this time to an unprecedented degree.
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SC
S = surplus labor, surplus valueC = capital-value advanced
In the long run, the rate of profit tends toward the incremental, or long-run, rate
The labor rate of profit is S/C.
The incremental labor rate of profit is
ILR =(change in S)/(change in C).
To abstract from distributional issues, I’ve assumed that
% change in S = % change in employment.
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Devel- (ex-) World oped USSR China Rest of World Avg. West & & E. World Avg. Excluding Japan Europe China
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“[My] Secretary of the Treasury [Andrew] Mellon … had only one formula: ‘Liquidate labor, liquidate stocks, liquidate the farmers,. liquidate real estate.’ … He held that even a panic was not altogether a bad thing. He said: ‘It will purge the rottenness out of the system.’”
President Herbert Hoover
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“Roots of the Current Economic Crisis”
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Money Rate of Profit,
U.S. Corporations, 1941-2004
0%
5%
10%
15%
20%
25%
30%
35%
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
average
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P.C. Vey, The New Yorker, March 9, 2009
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• correct incentives for executives • financial product safety commission • financial systems stability commission • "speed bumps" to limit borrowing • consumer protection laws … that prevent predatory lending • better competition laws.
CNN.com Sept. 17, 2008
How to prevent the next
Wall Street crisis
by Joseph Stiglitz
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Long-Run Labor Rate of Profit, 1946-2007
LR Labor Rate = 4.009% - 0.000%(Time)
(3.710) (-0.010)
0%
4%
8%
12%
16%
20%
1946
1956
1966
1976
1986
1996
2006
average 5-yr centered moving avg.
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