Tendencies, triggers and tulips - The causes of the crisis: the rate of profit, overaccumulation and indebtedness Third Economics seminar of the IRRI, 14 February 2014, Amsterdam, Netherlands by Michael Roberts

“Economic progress in a capitalist society means turmoil” – Joseph Schumpeter

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 Mainstream either denies there are crises or claims that they cannot be explained; or that they are the result of panics

Keynesian view “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 Keynesian view is that capitalism is fine in the production sphere but has technical malfunctions in the financial sphere

Radical Keynesian view “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 Radical view is that finance capital is inherently unstable

It’s underconsumption! Underconsumption is the cause say most Marxists – yet the evidence is against it.

It’s inequality! In a variant of the underconsumption thesis, tThe flavour of the month view is that inequality cause crises – either by reducing worker’s purchasing power or by generating a debt explosion – or both

The common factor “The task is complicated by the reality that every financial panic has its own unique features that depend on a particular historical context and the details of the institutional setting.”   What we need to do is to “strip away the idiosyncratic aspects of individual crises, and hope to reveal the common elements” of these ‘panics’.  Then we can “identify and isolate the common factors of crises, thereby allowing us to prevent crises when possible and to respond effectively when not.” Ben Bernanke Economists must look for a common factor

The tendency of the rate of profit to fall Let’s start with Marx’s law of profitability – there has been a secular decline and more recently a peaking of profitability from the late 1990s

The movement in the rate 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 1.12 1.00 0.71 0.96 1.02 0.94 Secular fall from 1946 of 20%-plus in the rate; a rise after 1982 to 1997 and then flat or falling in the last decade

The same story for the world This story can be repeated for the major economies

Triggers and causes “For historians each event is unique. Economics, however, maintains that forces in society and nature behave in repetitive ways. History is particular; economics is general.” Charles Kindleberger “The trigger for crisis can be any number of historical accidents such as the subprime mortgage swindle. It is necessary to deal with different levels of causation. The main point here is that capital is drawn into speculative activity when the rate of profit is low, so accident is the manifestation of necessity.” Mick Brooks We must distinguish between causes and triggers

The Great Depression The Great Depression confirms the role of Marx’s law as the cause with the stock market crash as the trigger

The neo-liberal period The law operates in the neoliberal period too as the counteracting factors dominate for a while

The profit cycle The cycle of profit reveals causal process from the law to profits to investment and slump and then back

Profits call the tune Profits lead investment not vice versa

Removing the fictitious The last decade was of booming profits but they were fictitious

Debt matters Those profits came from a huge expansion of credit that delayed the crunch

It’s private debt that matters Not just in the US

The housing bubble That credit went into property investment and unproductive capital

It’s corporate debt that matters Corporate debt expanded to do this – not just household

The need to deleverage The weak recovery is partly due to the need to deleverage this fictitious capital

No room to lend Banks cannot lend

It’s a Long Depression Thus the recovery is weak and growth is below trend

Investment slump Profits have returned boosted by yet more credit and low interest rates but capital will not invest

It’s profitability – stupid! The underlying profitability of capital remains too low

The UK too! And not just in the Eurozone

The cycles of capitalism We are now in a Long Depression as in the 1880s within the last stage of the K-cycle, the profit cycle.