A Keynesian or Marxist depression?

Regular readers of this blog know that one of my main themes is that the world capitalist economy is now in a Long Depression (see my book, The Great Recession and this post from 2011,
https://thenextrecession.wordpress.com/2011/09/18/it-feels-like-a-depression/), led by the major advanced capitalist economies
(https://thenextrecession.wordpress.com/2012/10/05/the-long-and-winding-road/ and https://thenextrecession.wordpress.com/2013/02/10/why-is-there-a-long-depression/).

By a Long Depression, I mean economies growing consistently at well below their previous trend rates, with unemployment stuck at well above previous levels before the Great Recession, and disinflation (slowing inflation) turning into deflation (falling prices). Above all, it is an economic environment where investment in productive capital is way below previous average levels, with little sign of pick-up
(https://thenextrecession.wordpress.com/2011/11/25/us-investment-strike/). Indeed, this depression is now reaching the so-called emerging economies, where, even with their large supplies of cheap labour and imported new technology, real GDP growth is also slowing.

Global growth

This designation has not had a lot of support among economists of any theoretical hue until now.  But suddenly the idea of ‘permanent depression’ has surfaced from the ‘great and good’ in mainstream economics.  At the recent IMF conference on the causes of the crisis (https://thenextrecession.wordpress.com/2013/11/11/why-the-crisis-and-will-there-be-another-imf-speaks/), Larry Summers, former Goldman Sachs executive, ex-US Treasury secretary, ex-President of Harvard University and failed candidate for the head of the US Federal Reserve, pronounced that the efforts of central banks to revive the economy with low or zero interest rates, or with the ‘printing of money’ through QE-type purchases of government and private sector financial paper, was not working to return economies to ‘normal growth’. “Even a great bubble wasn’t enough to produce any excess of aggregate demand…even with artificial stimulus to demand, coming from all this financial imprudence, you wouldn’t see any excess… the underlying problem may be there forever”.  So “we may well need in the years ahead to think about how to manage an economy where the zero nominal interest rate is a chronic and systemic inhibitor of economic activity, holding our economies back below their potential.”

Apparently even ‘unconventional’ monetary policies are not doing the trick for the economy, except to drive up stock market prices in a new (non-inflationary) bubble.  Summers’ view has been echoed by a litany of Keynesian epigones like Paul Krugman, ex-Goldman Sachs chief economist and FT blogger Gavyn Davies, and FT columnist and pal of them all, Martin Wolf.  For them, it seems that capitalism is not working ‘automatically’ to return to ‘equilibrium growth’ and deflationary pressures are becoming dominant.

As Krugman put it in his blog post, called A Permanent slump? (http://www.nytimes.com/2013/11/18/opinion/krugman-a-permanent-slump.html?_r=0): “What if the world we’ve been living in for the past five years is the new normal? What if depression-like conditions are on track to persist, not for another year or two, but for decades?… so that “the case for “secular stagnation” — a persistent state in which a depressed economy is the norm, with episodes of full employment few and far between” ? Krugman goes on: “Summers’s answer is that we may be an economy that needs bubbles just to achieve something near full employment – that in the absence of bubbles, the economy has a negative natural rate of interest. And this hasn’t just been true since the 2008 financial crisis; it has arguably been true, although perhaps with increasing severity, since the 1980s.”  Yikes, so it appears that the major capitalist economies cannot grow at rates that would achieve full employment any longer even with negative real interest rates.

Does this mean that the great economics gurus now agree with me about the state of the world capitalist economy? Well, not really. Let me try to explain why I think this new love-in about depression from the likes of Summers, Krugman and Wolf differs from my view (and for that matter what I would consider is Marx’s).  First, for the Keynesians, the depression is a product of money hoarding by capitalists leading to a permanent lack of ‘effective demand’.   But what the likes of Krugman do not explain is why this hoarding suddenly happened and why it won’t end, even with negative real rates. Should we not look elsewhere from the financial sector and central bank policy towards what is going on in the real economy: and under capitalism, that means what has happened to the profitability of capital?

Krugman now talks about ‘secular stagnation’ under capitalism since the 1980s, echoing the arguments of the neo-Keynesian economist Alvin Hansen in the immediate post-war period who extrapolated Keynes’ theory to mean the gradual slowdown in growth; or the more recent ideas of Robert Gordon about the collapse of innovation and productivity in modern capitalist economies (see my post,

Krugman reckons this secular stagnation may be caused by “slowing population growth” keeping effective demand low, or it may be caused by “persistent trade deficits”, which emerged in the 1980s and “since then have fluctuated but never gone away “.  The first explanation looks outside of the motions of capitalist accumulation to some exogenous law of nature and the second really refers to imbalances between capitalist economies, rather than capitalism as a world economy. Both deny any fault in the fundamental workings of modern capitalism and neither sounds convincing.

Martin Wolf also takes up the theme of ‘stagnation’ in his latest blog post in the FT, Why the future looks sluggish, (http://www.ft.com/cms/s/0/a2422ba6-5073-11e3-befe-00144feabdc0.html#axzz2l71zthLV). For Wolf, the cause of this new depression is a ‘global savings glut’ or a ‘dearth of investment’ caused by ‘excessive hoarding’ of savings by capitalists unwilling to invest: “the world economy has been generating more savings than businesses wish to use, even at very low interest rates. This is true not just in the US, but also in most significant high-income economies.”  So the problem of the long depression is a surplus of profits not low profitability.

This is a hoary old argument that originated from Ben Bernanke, the current chief of the Fed, back in the early 2000s, when he argued that the cause of the ‘persistent trade deficits’ in the US and the UK were caused by ‘too much saving’ in the ‘surplus’ countries of Asia and OPEC.  Thus the credit binge and the subsequent credit crunch was really the fault of the likes of Japan or China not spending enough on US goods!   Now it is the fault of everybody for not spending enough.  But again the question is why are people not spending enough? That’s not difficult to answer when it comes to average households, decimated by reduced incomes and unemployment, but why don’t capitalist companies in the US or the UK or Europe invest more?  Wolf thinks it may be due to ‘excessive debt’ being built up during the credit binge before the Great Recession.  So the crisis was caused by ‘excessive spending’ and now the depression is caused by ‘excessive saving’.  Capitalism just swings from one to the other!

Wolf also thinks the failure to invest may be due a change in the culture of capitalist firms, which no longer want to invest in productive capital but prefer to play the stock market or buy financial assets.  So that is what the great capitalist system has come to – a ‘rentier’ economy.  I have dealt with these arguments before in this blog
and I intend to return to them in a future post.  But once again, the idea of the profitability of capital in what is, after all, a profit economy by definition where people invest to make a profit, is totally absent from the explanations of Krugman or Wolf.

Noah Smith, a Keynesian blogger, recently considered how to get out of the depression
“The solution to lowered growth and elevated (and involuntary) unemployment is relatively simple. Eventually someone will start using up the idle resources. This will either be the private sector once it independently gets over its slump in animal spirits, or it will be the government. “  Ah, yes ‘animal spirits’ will return.  Or will they?  Smith recognises that they may not any time soon because “it is perfectly plausible that the economy — as it has done — can remain depressed even with very low rates due to deleveraging pressures, low expectations and low confidence, etc.”  So the explanation of the depression is: high debt still being deleveraged, “low expectations” (of profit?) and “low confidence” (in what?).  Again, no mention of what is happening to profitability.

Smith reckons that “if the market is ill-suited to taking up the idle resources any time soon — lying as it is in a depressive, irrational strop — the only agent that can do so is the state. The  state can borrow money (utilising idle capital) to create jobs (utilising idle labour), raising interest rates and bringing down the unemployment rate. And this approach does not require anyone to make accurate predictions about the future. It simply requires a market economy, and a state willing to employ idle resources when they are idle…and note that I favour a predominantly market-based economy. Government interventions should be kept to a necessary minimum.”   So state investment can save the day if private investment won’t – but keep it to a minimum.

“By lowering unemployment and using up idle capital (preferably in a mix of state-run infrastructure and technology projects, and lending to new businesses) more businesses can be born into existence”.  Once the state has done its lifesaving role, we can return to normal: “Sooner or later, of course, the private sector will come back and begin to use up resources.”  The trouble is that the normal “could be a very, very, very long way away. If we want the structure of production to adjust to the new world and to continue adjusting as the world continues to change, letting huge quantities of resources sitting idle seems like a bad way to do it.” So we need “targeted fiscal policy”.  Government to the rescue.

Again, there is no explanation why capital is idle – could it be that it is not sufficiently profitable?  The only way to revive that profitability is through slumps that destroy the value of accumulated unproductive capital, so that profitability (relative to remaining value) will then rise and allow the process of accumulation to resume.  After a period of a huge buildup of both tangible and fictitious capital over the last 20 years, capitalism went into a Great Recession.  But, as in the Great Depression of the 1930s, it cannot get out of this long slump without a massive destruction of dead capital.  World War 2 eventually managed to do that.  In the 1880s and 1890s, it took a series of major slumps before sustained growth resumed.  That is similar to now.  Just more government spending designed to ‘stimulate’ or even replace (temporarily) the private sector will not do the trick.  Only the replacement of capitalist accumulation with state-planned investment as the dominant mode of production would do so.  Otherwise, we can expect yet another slump down the road, before ‘secular’ stagnation will cease.

21 thoughts on “A Keynesian or Marxist depression?

  1. A lecturer told us last week that Marx was “a Real Business Cycle guy”, to quiet amusement. Obviously that’s not true (and the lecturer probably knows it), but does point up an important difference – that Marx, unlike Keynes, looks for root explanations in real variables rather than nominal ones.

  2. Michael,

    I think you were right on the Long Depression which has a lot to do with the overaccumulation in different sectors of the real economy (i.e. ICT, Cars, Housing) and as in the Great Depression, because of the very big companies it will not be easy to get ride of the overaccumulated capital, I fully agree that without state-planned investment, the next slump is around the corner….

  3. I’m not an economist and I’ve recognized for some time that the crisis of capitalism is a crisis of profit, that the profit rate is the problem. Yet major economists cannot figure this out. What bars their grasp of this basic fact? Ideology, I believe.

  4. It seems that both marxists and non marxists are asking for the same thing here. More state investment. Krugman is in favour of infrastructure investment by the state as one way of solving the dearth of investment problem and even Ambrose Pritchard Evans has advocated QE for infrastructure rather than banks. So Keynesians,monetarists and Marxists are all on the same page… just that Marxists want to carry on indefinitely.

  5. You say that the profit rate is too low. But what about increasing the rate of profit by increasing household demand which requires secular increase of household income and income expectations?

  6. Oh dear Michael Roberts, a correct basic analysis of capitalism’s impasse (the variable, but incessant fall in the rate of profit amongst global production, within the capitalist mode of production) – leads to, but a whimper, as in this political conclusion! – “..Only the replacement of capitalist accumulation with state-planned investment as the dominant mode of production would do so. Otherwise, we can expect yet another slump down the road, before ‘secular’ stagnation will cease.” – Only a workers state (essentially the dictatorship of the proletariat) can begin to initiate a ‘planned economy’ programme – all else is obfuscation on the true essence and form of the abstraction that is given the name of ‘the state’. Consider this: “..The disintegration of capitalism has reached extreme limits, likewise the disintegration of the old ruling class. The further existence of this system is impossible. The productive forces must be organized in accordance with a plan. But who will accomplish this task – the proletariat, or a new ruling class of “commissars” – politicians, administrators and technicians? Historical experience bears witness, in the opinion of certain rationalizers that one cannot entertain hope in the proletariat. The proletariat proved “incapable” of averting the last imperialist war although the material prerequisites for a socialist revolution already existed at that time. The successes of Fascism after the war were once again the consequence of the “incapacity” of the proletariat to lead capitalist society out of the blind alley. The bureaucratization of the Soviet State was in its turn the consequence of the “incapacity” of the proletariat itself to regulate society through the democratic mechanism. The Spanish revolution was strangled by the Fascist and Stalinist bureaucracies before the very eyes of the world proletariat. Finally, last link in this chain is the new imperialist war, the preparation of which took place quite openly, with complete impotence on the part of the world proletariat. If this conception is adopted, that is, if it is acknowledged that the proletariat does not have the forces to accomplish the socialist revolution, then the urgent task of the statification of the productive forces will obviously be accomplished by somebody else. By whom? By a new bureaucracy, which will replace the decayed bourgeoisie as a new ruling class on a world scale. That is how the question is beginning to be posed by those “leftists” who do not rest content with debating over words… …By the very march of events this question is now posed very concretely. The second world war has begun. It attests incontrovertibly to the fact that society can no longer live on the basis of capitalism. Thereby it subjects the proletariat to a new and perhaps decisive test.

    If this war provokes, as we firmly believe, a proletarian revolution, it must inevitably lead to the overthrow of the bureaucracy in the USSR and regeneration of Soviet democracy on a far higher economic and cultural basis than in 1918. In that case the question as to whether the Stalinist bureaucracy was a “class” or a growth on the workers’ state will be automatically solved. To every single person it will become clear that in the process of the development of the world revolution the Soviet bureaucracy was only an episodic relapse.

    If, however, it is conceded that the present war will provoke not revolution but a decline of the proletariat, then there remains another alternative: the further decay of monopoly capitalism, its further fusion with the state and the replacement of democracy wherever it still remained by a totalitarian regime. The inability of the proletariat to take into its hands the leadership of society could actually lead under these conditions to the growth of a new exploiting class from the Bonapartist fascist bureaucracy. This would be, according to all indications, a regime of decline, signalizing the eclipse of civilization…” – http://marxists.org/archive/trotsky/1939/09/ussr-war.htm

  7. I do not know if a quote from Trotsky, as a kind of magic formula, will solve this worldwide crisis of transnational monopoly capitalism, which did not exist, when Trotsky was still alive….

  8. Dear Michael, is your “long depression” theory (2011) consistent with your previous “square root” pattern of recovery (2009)?

      1. Kostas

        I think GDP indexed is best to show it. See a great piece by Michael Burke and his graphs, http://socialisteconomicbulletin.blogspot.co.uk/2013/11/britains-economic-boom.html,
        In particular, his 4th graph shows the ‘square root’ in context (blue lines). I have also just done a quick measure of the OECD GDP indexed from 2006 and compared it with GDP if it had continued on trend growth. I cannot show it in this comment section – it seems – but it does show a sort of square root (actually one that is sloping a little downwards out to 2014 (OECD forecast used), suggesting that even a strict square root is not being achieved. I haven’t tried it for global growth yet. Interesting exercise!

  9. rayrising,

    The conclusion that we need state directed investment is revolutionary, in that the only parties calling for this are on the radical left, e.g. Socialist Party of GB. So, Michael’s call for this is a statement of solidarity with such radical groups.

    Whether we think this is the route to progressive advancement is another question. I think it is a necessary part of it. Co-operatives on their own are likely to sink on the World market, or be compelled to play by the rules of capitalism. So Co-operatives can only flourish, in the true sense of the word, with assistance from a worker led state.

    For me capitalism in the West is becoming more and more totalitarian, we already effectively have a police state, ready to be put to action if there is a threat to ‘keeping the show on the road’. The power to spy, as revealed by Snowden ,shows that we are approaching a society not that dissimilar from the 1960’s TV show, the Prisoner. We may already be there. I see nothing to challenge this depressing development in the short term.

    The working classes of the West will be absolutely impoverished, with the capitalist state playing a crucial, oppressive role. Capitalism can be a fetter for as long as people decide to accept the system. This is why falling profit is a supplementary issue to the class struggle. Only the class struggle can bring capitalism to an end.

    Welcome to the brave new world.

    1. Edgar,

      Indeed I do see a lot of authoritarian tendencies, to me this already started with the slump of the 70/80s, best examples were in Latin America, i.e. Chile and Argentina, it seems that neolberalism/monetarism under, the conditions of the Long Depression, is moving even further in extreme right wing direction, this time also in the socalled centre of the capitalist world economy…

  10. Kostas,

    Michael did refer to important additional information on the website of the socialist economic bulletin in regard to the Long Depression. Because of the overaccumulation/ overinvestment of capital in sectors such as ICT, Cars, Housing, dominated by globally operating large companies, (big banks included) which do block important counter- tendencies to the declining or falling rate of profit in these sectors, it will take a long time for restoring their rate of profit, and without an increasing role of state (as i.e. in China), it will be very long or chronic….

  11. It’s all overproduction to me. I don’t know how we can talk about overaccumulation/overinvestment without talking about overproduction since the whole point of capitalist production is accumulation, and to do that the means of production must be produced as commodities as values.

    The task/trick/problem then becomes one of realizing that value embodied in the means of production through increased production of commodities.

    1. Yes, but overprodction is the result of overaccumulation i.e. in the globally operating car industry in which the capacity utilisation ratio is 43% on average, which means a lot of overproduction contributing to the Long Depression….

      1. The point I’m trying to make is that Marx fact criticizes the notion that overaccumulation is separate and apart from overproduction to the point that some political economists acknowledge the former, but use that to deny the latter.

        Overproduction is what capitalism is about, in good times and bad. The transformation of good to bad……that’s the important part, and that’s why I don’t think the LTFROP is quite so “indirect” a cause or a problem for capital as others suggest.

        I think money as a derivative, is a derivative, of exchange value doesn’t become a cause through losing, somehow, its ability to measure value.

        The immediate and long-term problem is value production; the relation between the components of value production, technical and living; between the ratios of necessary and surplus labor times.

  12. I tend to agree with Andrew Kliman’s view that the FROP is an *indirect* cause of crises. In the era of heavily state-managed money a la Keynes, the *proximate* cause will always be at bottom, a crisis in money itself (via its derivative forms) as the measure of value. As the standard of price, the financial crisis takes the form of relative indeterminacy in the value of circulating commodity capital ( CPI inflation, as in the 1970’s), directly threatening the coherence of the currency itself. As the measure of the value of capital in its (money) commodity form (“assets”), it takes the explosive bubble form we saw in 2000 & 2008, this having the virtue (for the capitalists) of not posing a direct threat to currency money (money as simple means of circulation), hence the policy preference for this, including Keynesians, since all know now that messing with currency money it the third rail of capitalist economics – as in the Great Depression.

    1. Matt,

      In general I agree, to me Keynesian economics is meant to increase the mass of profit of the big capitals, using the kind of financial instruments you are mentioning, this is indeed contradictory, as you showed, and it is not reducing the enormous amount of overproduction in different sectors of the global economy, for the moment it is financing the further concentration and centralisation of capital, which according to Marx, is something which helps to prolong the actual Long Depression….

  13. “the economy has a negative natural rate of interest”
    Paul Krugman

    Austrians and monetarists believe in a natural rate of interest. Post Keynesians don’t.

    “First, for the Keynesians, the depression is a product of money hoarding by capitalists leading to a permanent lack of ‘effective demand’.”
    Michael Roberts

    Post Keynesians believe in endogenous money. Currency issuing governments can create money and spend it, thereby creating aggregate demand. The reason they don’t is due to the monopolisation of politics. The Cambridge Keynesians tried to prevent this in the early 70s and lost. The Harvard elite are not Keynesians. Please refer to Cambridge’s victory in the 60s (capital controversies) and defeat in the 70s (monetarist conversion of UK Labour via Dennis Healey). The new Cambridge school are based on Kaldor’s attempts to understand what went wrong. His conclusion was that government attempts to create aggregate demand using fiscal policy are constrained by the trade balance.

    Prohibition of government powers to control trade flows (European Union) and to create money (Eurozone) has been the main political project in Europe since 1970. This happened simultaneously with the infestation of American policy with Harvard economics (trickle down). These policy ideas emerged from right wing think tanks and successfully circumscribed the mechanisms that governments have to control their economies. This has been a class war on western society by the western elite; a stealth counter revolution to reverse post war gains by labour. The fraudulent monopolisation of power by elites sounds more like an institutionalist depression to me.

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