Profit cycles – do they exist?

Nobody agrees with me, whether they are Marxist or non-Marxist economists, but I reckon that profitability of capitalism moves in cycles.  The profit cycle is about 32-36 years, with an up phase of 16-18 years followed by a down phase of similar length.

In my book, The Great Recession, ( or at Amazon, I provide the empirical evidence for such a cycle for the US economy in the main, but also for other capitalist economies and even historical evidence for the UK back in the 1850s, when it was the leading capitalist economy.

Marx focused his analysis of capitalism on Britain just as we do now on the US because he was living there and because capitalism was most advanced in Britain in the period 1850-83 (“Of all countries England again furnishes the classical example, because it holds the foremost place in the world-market, because capitalist production is here alone completely developed”, Marx, Capital Volume 1, Chapter 25).  And Marx too identified the cyclical motion of capitalist production.

He made various reckonings of the duration of the cycle of boom and slump.  In 1858, he reckoned that “the figure of 13 years corresponds closely enough to the theory, since it establishes a unit for one epocjh of industrial production, which plus ou moins coincides with the period in which major crises recur” (Marx to Engels letter, 5 March 1858) .  Later he thought it seemed to be taking about ten years and it might be due to turnover and depreciation of fixed capital used in production.

Marx did not directly tie this cyclical movement to his own law of profitability.  But I think that the movement of profitability is probably a better causal driver of the capitalist investment cycle and as such the connection to the cycle of boom and slump is more complicated.

The profit cycle of 32-36 years as evidenced connects into the other cycles of motion under capitalism and in my view is the lynchpin for the others.  If you double the length of the profit cycle, you get the Kondratiev cycle of 64-72 years, which shows the movement of what Marx called the prices of production (as opposed to profitability).

If you halve the profit cycle to 16-18 years, you find the cycle of building construction (the so-called Kuznets cycle) that delineates the movement of prices for residential and commercial building.  As we have seen and described in my book, house prices have boomed and bust over an 18-year period.  If we look at the post-war troughs for house prices, we find the dates 1954, 1974, 1991 and 2009.  The Kuznets cycle does not usually coincide with the profitability cycle because its driver tends to be based on national capital flows and not international capital flows like profitability or production prices.

And of course, as I explained in an earlier blog (see  The stock market cycle – still in a bear market, 12 January 2010), stock market prices follow the profitability cycle with 16-18 years of a bull market of rising share prices and 16-18 years of a bear market of falling or stagnant share prices – although there will be a few years lag from the profitability cycle.

The cycle of boom and slump in economic growth then seems to be one-quarter of the profitability cycle, namely 8-9 years.  Each economic downturn or recession (mostly) comes along every 8-9 years (1946, 1954, 1960, 1970-1, 1974-5, 1980-2, 1991-2, 2001, 2008-9).

Finally, there is an even shorter cycle of about 4-5 years (called the Kitchin cycle) that seems to be caused by the movement of working capital or inventories in capitalist production.  When stocks get low, capitalists start to build up more commodity capital.  When they are high, capitalists stop production for a while.  This ebb and flow seems to take about 4-5 years.

The depth, shallowness and sometimes frequency of these economic slumps under capitalism will vary depending on the conjunction of these different cycles of motion under capitalism.  When profitability is in an up phase (as from 1946-64) and so are some of the other cycles (Kuznets 1958-74), slumps will be shallow and short-lived.  But when there is a conjunction of down phases for all or most cycles of motion (profitability 1997-08, Kuznets 2006-8, Kondratiev 1982-08), the slumps can be deep and long-lasting a la The Great Recession of 2008-9.

There are several questions that worry my critics.

First, does the evidence of such cycles really stand up to analysis?  Am I and others who have discerned such cycles just imagining them?

Second, if they do exist, why 18 years of up and then down for profitability; or why 18 years from trough to trough for the building cycle?  What decides the length of these cycles?

Third, are these cycles exogenous or endogenous?  Namely, are they just the result of the process of capitalist accumulation and not affected by any outside forces like political events (wars) or social upheavals (revolutions)?  This worries many critics who suggest that talking about cycles of profitability (Marxist) or prices of production (Kondratiev) or even cycles in general is just too ‘determinist’ and does not allow for the role of human action?

Finally, if capitalist production is a cyclical process, does this mean it can just go on forever (assuming it is allowed to by politics) and there is no process of decline or decay as Marx certainly argued in his analysis?

These are difficult and complex questions that I shall try and answer in my next few blogs.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: