1. The nature of current long depression Marxism 2014 11 July 2014 by Michael Roberts

2. 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

3. 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
The mainstream either denies there are crises or claims that they cannot be explained; or that they are the result of panics

4. 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
The Keynesian view is that capitalism is fine in the production sphere but has technical malfunctions in the financial sphere

5. 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
The more radical view is that capitalism (particularly finance capital) is inherently unstable

6. 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.
But there’s no mention of profit and its role in crises from the mainstream

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

8. 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
But rising inequality did not lead to a lack of consumption: the rich spent more and worker’s incomes including net social benefits did not fall as a share of national income

9. 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?”,
There is little evidence of a connection between inequality and rising debt

10. No underconsumption
Underconsumption is the cause, say most Marxists – yet the evidence is against it.

11. 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 financial system engenders too much debt, and in the latest crisis this was in household debt – if so, it can be fixed with regulation of credit institutions and spreading the responsibility

12. The law
“The most important law of political economy is the tendency of the rate of profit to fall. “
Karl Marx
So what about the Marxist explanation of recurrent crises, cycles of boom and slumps? Marx’s law

13. Marx’s law explained 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
Marx’s law is logical, realistic and backed by good evidence

14. 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
Piketty claims Marx’s law has proved to be empirically wrong

15. The story of global capitalism
Esteban Maito’s world rate of profit series confirms Marx’s law and the transience of capitalism

16. The tendency of the rate of profit to fall
In the US there has been a secular decline in the rate of profit, but with a rise from early 1980s to the late 1990s and then a fall or flattening out still at a lower level than in the 1950s.

17. The profitability crisis 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
There has been a secular fall from 1946 of 20%-plus in the US rate of profit; a rise after 1982 to 1997 and then flat or falling in the last decade

18. The neo-liberal period
The law is not refuted by the rise in profitability in the so-called neoliberal period. Then the counteracting factors to the law dominated for a while: the rate of exploitation rose but the main thing was a fall in the organic composition of capital. This was reversed after the late 1990s but the rate of profit did not fall much because the rate of exploitation increased further

19. The world since the 1960s
My own work on a world rate of profit shows the crisis of profitability in the 1970s, the neoliberal recovery and its peak in the late 1990s

20. Crisis of 1970s, neoliberal recovery, ends in late 1990s, new crisis
Work by Esteban Maito confirms the same trends in global ROP since the war: a downward trend in profitability eventually leads to major slumps

21. The Great Depression
The Great Depression also confirms the role of Marx’s law. The rate of profit started falling in 1924 well before the crash of The rate of profit started falling because the OCC began to rise.

22. Can we predict?
“There has not been such a coincidence of cycles since 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 ! That suggests we can expect a very severe economic slump of a degree not seen since or more”
Michael Roberts written in 2005.
It’s a Long Depression this time because there was a conjunction of down phases in all the cyclical motions of capitalism: in the profit cycle (1997 onwards); in housing ( ); in global production prices and interest rates (Kondratiev) and in the shorter national cycles of employment (Juglar). So the depression could be predicted.

23. 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 growth
accelerate -
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
of profit rises
as labour
stopped
Rate of profit rises
as capital, both
profit falls
eventually
leading to
fall in mass of profit
Triggers financial
collapse (stock market,
banks, housing bubble etc) slump!
The cycle of profit reveals causal process from the law to explain booms and slumps. It starts with the rate of profit, goes to the mass of profit and then to investment, employment and incomes and slump and then back to rising profit.

24. Profits call the tune
In the US, the mass of profit fell well before investment and national income did (not vice versa as Keynesians claim). And profits led the recovery.

25. 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.
The Great Recession has submerged into a Long Depression

26. Recessions and depressions-
a schematic view
Recession
1974
5 typical
Double
dip recession
1980
2 typical
Depression
Trend growth
Late 19th century
depression
Great Depression
1930s
Long Depression
so far
1873
1879
1880s
1929
1932
1937
1941
WAR!
2007
2009
2012
What is the difference between a recession or slump that comes along every 8-9 years in modern capitalist economies and a depression? There is no return to previous trend growth. Trend growth was never restored after the late 19th century depression. It took a world war to achieve it after the Great Depression of the 1930s.

27. It’s a Long Depression
Thus the recovery since the Great Recession has been weak and global growth is below trend

28. The depth and duration
The loss of potential output from the Great Recession and the ensuing below-trend growth has been 22% this time, double that of the double dip recesssion.

29. The weakest recovery
Indeed, the recovery in capitalist investment has never been so weak (OECD)

30. Investment has collapsed
Investment in the major advanced economies has been negative in this century compared an accumulated 85% rise in the 1960s!

31. It’s profitability – stupid!
Why are we in a long depression?: two reasons; profitability has not recovered (mainly in Europe) and debt is still being deleveraged (mainly in Europe)

32. The UK too!
And not just in the Eurozone

33. Debt matters
The second reason for the Long Depression is debt. Before the Great Recession there was an unprecedented expansion of credit – private sector credit

34. The housing bubble
That credit went mainly into property investment and unproductive or fictitious capital (bonds, stocks etc)

35. It’s corporate debt that matters
Corporate debt expanded to do this and was used to invest not in productive sectors but in financial assets. This was a counteracting factor to the low profitability reached in the 1980s

36. Removing the fictitious
Indeed, if you exclude profits from fictitious capital, profitability from the productive (value creating) sectors of the US economy has not stopped falling

37. The need to deleverage
Even five years after the Great Recession, debt in the major economies is higher. This curbs the willingness of companies to invest and households to spend.

38. No room to lend
And banks cannot or won’t lend, especially to small businesses

39. Investment slump
As a result, although the mass of profit have recovered in the US to record levels, helped by yet more credit and low interest rates, still capital will not invest

40. 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.