The nature of current long depressionMarxism 201411 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 money-

making 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 explainedThe Law:

1) Capitalists must compete for market share to make profits, so they must become more efficient and raise the productivity of labour

2) They can only do so by investing in new technology that saves on labour 3) 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)4) 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.5) 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.

6) 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.

7) 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

15%

20%

25%

30%

35%

40%

45%

1869

1875

1881

1887

1893

1899

1905

1911

1917

1923

1929

1935

1941

1947

1953

1959

1965

1971

1977

1983

1989

1995

2001

2007

World rate of profit (simple mean) %

LONG DEPRESSION

Recovery

GREAT DEPRESSION

GOLDEN AGE

CRISISNeoliberal recovery

CRISIS/NEW DEPRESSIONWAR

winterspring/summer/autumn

winter spring summer autumn winter

WAR

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

14%

16%

18%

20%

22%

24%

26%World rate of profit (exc China), %

CRISIS OF 1970s

NEOLIBERALRECOVERY

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

Mass of profit rises as labour costs reduced and investment

Rate of profit rises as capital, both tangible and fictitious, is written

off and companies and financial institutions are liquidated

Accumulation and growthaccelerate - boom!

Rate of profit falls eventually leading to fall in mass of profit

and new value - production crisis

Collapse in investment, then employment, and consumption -

realisation crisis or "lack of effective demand"

The profit cycle - tendencies, triggers and tulips

Mass of profit rises as labour costs reduced and investment

stopped

Rate of profit rises as capital, both tangible and fictitious, is written

off and companies and financial institutions are liquidated

Accumulation and growthaccelerate - boom!

Rate of profit falls eventually leading to fall in mass of 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!

The profit cycle - tendencies, triggers and tulips

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 depressionsRecessions and depressions - a schematic view

Recession1974- 5 typical

Double - dip recession1980- 2 typical

Depression

Trend growth Trend growth Trend growth

Trend growth Trend growth Trend growth

Late 19th century depression

Great Depression 1930s

Long Depressionso far

1873

18791880s

1929

1932

19371941WAR!

2007

2009

2012

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.