Capitalism: stagnation or hypochondria?

Are the major capitalist economies now stuck in a state of long-term stagnation? The idea that capitalism has been in a ‘secular stagnation’ since the end of the Great Recession was first raised by Larry Summers, the former Treasury secretary under President Clinton, ex Goldman Sachs economist, then Harvard University scholar and general all-round super star mainstream economics expert. And Summers’ idea has been enthusiastically adopted by Paul Krugman, doyen of Keynesian economics.

The term ‘secular stagnation’ was first coined by the Keynesian economist, Alvin Hansen, in 1938, when he predicted that after the war, modern economies would stagnate because of a crisis of underinvestment and deficient aggregate demand. Investment opportunities had significantly diminished in the face of the closing of the frontier for new waves of immigration and declining population growth. So, according to Hansen, the US was faced with a lower natural rate of growth to which the rate of growth of the capital stock would adjust through a permanently lower rate of investment.

This turned out to be wrong, as in the post-war period, the major capitalist economies experienced a ‘golden age’ of relatively fast real GDP growth, rising employment and incomes as the teeming population of emerging economies were sucked into the capitalist mode of production, the unemployed of Europe were put to work and American capital was used to finance investment globally. And all this was possible because of the record level of profitability for capital in the US during the war.

I criticised this idea of secular stagnation in a post last year ( Hansen was wrong and his idea of secular stagnation has recently been described by leading neoliberal Chicago economist Steve Williamson as “the delusions of a hypochondriac rather than the insightful diagnosis of a celebrated economist.” Nevertheless, the idea has been revived by Summers and now various strands of argument around this theme have been published in an e-book called, Secular stagnation: facts, causes and cures ( with all the leading proponents of the idea contributing.

The reason that Hansen’s idea of ‘secular stagnation’ and its revival by Summers has gained new traction is because it is obvious to all observers that, since the end of the Great Recession, the world capitalist economy is struggling at below trend growth and employment and, above all, with very low investment levels, keeping ‘effective demand’ inadequate just as Hansen predicted would happen in the post-war period.

So maybe Hansen’s idea is right now? As the editors of the e-book put it: “Six years after the Global Crisis exploded and the recovery is still not going well. Pre-Crisis GDP levels have been surpassed, but few advanced economies have returned to pre-Crisis growth rates despite years of near-zero interest rates. Worryingly, the recent growth is fragranced with hints of new financial bubbles.”

There are two basic arguments for secular stagnation in the e-book. There is the argument that what drives economic growth are the factor inputs for production i.e. more and higher quality labour, more and better technology and that unfathomable extra factor of innovation and human ingenuity. Back in the 1960s, Robert Solow developed a factor model of economic growth that concluded that the main driver of growth was this last factor, called total factor productivity (TFP), which was measured as the residue in the contribution to growth after taking into account the impact of capital and labour inputs. Solow reckoned that 80% of growth was accounted for by ‘human ingenuity’ or TFP. A modern study by Hsieh and Klenow found that we can account for 10-30% in income differences across countries by differences in human capital, about 20% by differences in physical capital, and 50-70% by differences in TFP.

Now, according to Robert Gordon (in the e-book), TFP growth has been in long term decline since the 1970s in the major capitalist economies – they are just getting more unproductive and unable to take the productive forces forward at the same pace in the past. “US real GDP has grown at a turtle-like pace of only 2.1% per year in the last four years, despite a rapid decline in the unemployment rate from 10% to 6%.”

I have discussed Gordon’s thesis before ( and it remains a worrying one for the future of the capitalist mode of production. Gordon is at pains to say that he is not expecting future TFP growth to drop away post the Great Recession, but simply return to the slow rate of TFP growth experienced after the end of golden age between 1950-70. That’s enough to keep economic growth low, along with other factors. “US economic growth will continue to be slow for the next 25 to 40 years – not because of a slowdown in technological growth, but rather because of four ‘headwinds’: demographics, education, inequality, and government debt.” The population is stagnant, life expectancy is increasing rapidly. The mass education revolution is complete, no further increase in the average US education level is to be expected. The rising share of the top 10% of the income distribution has deprived the middle class of income growth since 1980 and the gloomy outlook for public debt makes current public services unsustainable.

Gordon’s pessimism about capitalism is attacked in the e-book by Joel Mokyr who reckons that Gordon underestimates human ingenuity and the impact of technology. After all, modern capitalism since the ‘industrial revolution’ has dramatically expanded the productivity of labour, as Marx recognised as early as 1848 in the Communist Manifesto. Indeed, capitalism is growth driven by technological progress. Right now, says Mokyr, there is much important scientific advance happening right under our noses and much of the effects of current and future innovations on economic welfare may not be measured well. For example, information has become much more accessible in myriad ways that make us better off, but not all of that is captured in GDP. The contribution of IT to our wellbeing is not evident from the productivity statistics because the way “we measure GDP and productivity growth is well designed for the wheat-and-steel economy. It works when pure quantities matter; it does not for measuring the fruits of the IT revolution.” The key is that the development of high value-added services by Google, Microsoft, Amazon, Facebook and the like require relatively little investment. Summers makes a similar point in noting that WhatsApp has a greater market value than Sony but required next to no capital investment to achieve it.

This is the optimistic view that capitalism will come through with a new burst of innovation that will boost TFP growth as it has done in the past, at least in the post-war golden age. Gordon retorts sarcastically that “techno-optimists” like Mokyr “are whistling in the dark, ignoring the rise and fall of TFP growth over the past 120 years. The techno-optimists ignore the headwinds, seeming ostrich-like in their refusal to face reality. ”  They claim that GDP is fundamentally flawed because it does not include the fact that information is now free due to the growth in internet sources such as Google and Wikipedia. But says, Gordon, TFP growth sagged decades before the popularisation of smart phones and the internet.  And GDP has always been understated. Henry Ford reduced the price of his Model T from $900 in 1910 to $265 in 1923 while improving its quality. Yet autos were not included in the CPI until 1935.  Indeed, the most important omission from real GDP was the conquest of infant mortality, which by one estimate added more unmeasured value to GDP in the 20th century, particularly in its first half, than all measured consumption.

No says, Gordon, “Future generations of Americans who by then will have become accustomed to turtle-like growth may marvel in retrospect that there was so much growth in the 200 years before 2007, especially in the core half century between 1920 and 1970 when the US created the modern age.”  For Gordon, the golden age of American imperialism in the mid-20th century is over and will not return.

This particular debate about long-term economic growth has little to with the original theory behind ‘secular stagnation’ proposed by Hansen and taken up again by Summers and Krugman. The issue for them is a permanent lack of ‘effective demand’, not the failure of capitalism to innovate. Capitalism can grow faster if only investment and consumption rise faster. But capitalism is stuck below its true potential because, despite interest rates being reduced to near zero, the real rate necessary to boost demand is still too high. As Krugman puts it: “Secular stagnation is the proposition that periods like the last five-plus years, when even zero policy interest rates aren’t enough to restore full employment, are going to be much more common in the future…And Summers adds: “We may well need, in the years ahead, to think about how we manage an economy in which the zero nominal interest rate is a chronic and systemic inhibitor of economic activity, holding our economies back below their potential.”

So what’s the answer? Increase government spending and print money. This may create credit ‘bubbles’. But “bubbles are an alternative way for society to deal with excess saving when fiscal policy does not take up the challenge. Buying bubbly assets with the intention of selling them at a later date is an alternative route of saving for future consumption. When nobody wants to invest because r is below g, and hence buys bubbly assets, the price of these assets goes up, yielding windfall profits to their sellers who are therefore able to increase their consumption. This additional consumption restores the balance between supply and demand for loanable funds on the capital market”.

So we need to print money, give it to speculators in financial assets and when they make profits from speculation, they will spend. In other words, give the already rich even more money to spend! Summers recognises that this could produce a new contradiction. If we deliberately create bubbles “this might involve substantial financial instability.” But the choice is between the risk of financial instability or having permanently high unemployment. Great!

Summers’ argument came under deflected criticism from the current governor of the Reserve Bank of India and former IMF chief economist, Raghuram Rajan. He criticised the idea of more quantitative easing or ‘unconventional’ monetary boost as endangering the capitalist economy: “We are taking a greater chance of having another crash at a time when the world is less capable of bearing the cost,” Rajan told the Central Banking Journal. “Investors are counting on “easy money” being available for the foreseeable future and thinking they can sell before everyone else does; They put the trades on even though they know what will happen as everyone attempts to exit positions at the same time,” he said. “There will be major market volatility if that occurs.”

Now Rajan has ‘form’. This week, the annual Jackson Hole economic symposium in the US is taking place with all the world’s leading central bankers and other top economic strategists meeting to discuss how to handle the faults of capitalism. Back at the 2005 symposium, two years before the global financial crash began, Rajan presented a paper warning of the coming crisis. ( Rajan argued that the structure of financial-sector compensation, in combination with complex financial products, gave bankers huge cash incentives to take risks with other people’s money, while imposing no penalties for any subsequent losses. Rajan warned that this bonus culture rewarded bankers for actions that could destroy their own institutions, or even the entire system, and that this could generate a “full-blown financial crisis” and a “catastrophic meltdown.” When Rajan finished speaking, Summers rose up from the audience and attacked him, calling him a “Luddite,” dismissing his concerns, and warning that increased regulation would reduce the productivity of the financial sector. (Ben Bernanke, Tim Geithner, and Alan Greenspan were also in the audience.)

It seems that the debate has not moved on between those Keynesians who prefer the risk of another financial crash in trying to avoid high unemployment and those mainstream economists who want ‘financial stability’ over more jobs. That’s Rajan’s position (see my post

Neoliberal economist Steve Williamson dismisses the Summers’ thesis and solution as so much hot air. He reckons that, far from getting the government to print money indefinitely to raise inflation (Summers wants a 4% inflation rate target compared to the usual 2%) and so get the real rate interests down to achieve lower unemployment, all that will do is lead to financial ‘moral hazard’ and the same financial bust that the major economies have just come out of. For Williamson, it is would be better to restore interest rates to ‘normal’ levels and let the market economy do its good work. Secular stagnation is just hypochondria: capitalism is fine.

This sums up the essence of the division among mainstream economics about the future of capitalism. Most think that capitalism will eventually ‘return to normal’ (see my post,
without ‘unconventional policies’ and new technology will drive things forward. Summer and Krugman reckon that cannot be done without permanent government intervention to drive down real interest rates through more inflation and speculation. Gordon thinks the productive powers of capitalism are exhausted and only permanent government intervention to foster human ingenuity through education and research can help. Not a pretty picture on the whole.

The problem with the thesis of secular stagnation is that it does not address the heart of the issue. It either considers the problem for capitalism to be one of lower productivity growth (supply) or one of the wrong monetary policy and too high interest rates (demand). But the heart of the issue is the capitalist mode of production: production for profit by the private owners of the means of production. Profitability and its potential lies at the heart of whether capitalism will go into new crises or stay stagnating.

At a presentation to the Communist University summer school in London this week (, I raised the issue of whether capitalism would eventually come out of the current Long Depression and so avoid ‘secular stagnation’. I argued that it could do so if profitability could be restored to levels not seen the late 1990s at the very least (see my paper, A world rate of profit (roberts_michael-a_world_rate_of_profit). That would require major deleveraging of private sector debt (still not completed) and probably another slump or two to liquidate and devalue costly unproductive assets. It’s not so much ‘stagnation’ that capitalism faces, but yet more violent economic upheavals that will destroy capital values and, of course, the lives and livelihoods of millions across the globe.

7 thoughts on “Capitalism: stagnation or hypochondria?

  1. “That would require major deleveraging of private sector debt (still not completed) and probably another slump or two to liquidate and devalue costly unproductive assets. It’s not so much ‘stagnation’ that capitalism faces, but yet more violent economic upheavals that will destroy capital values and, of course, the lives and livelihoods of millions across the globe.”

    I agree with that almost entirely, though I believe we are entering a period when the annual rate of profit will actually be falling as we transit to the summer phase of the long wave. The only bit I disagree with, is that this “deleveraging” need destroy livelihoods etc.

    As Marx points out, these kinds of purely financial crisis need have little real economic consequence, because they represent only the destruction of fictitious capital. The growth of that fictitious capital created not one jot of actual value, surplus value or wealth, and so there is no reason why its destruction need have the opposite effect. It represents the transfer of wealth from one set of hands to another as he puts it, and as these new sets of hands are usually more enterprising etc. it should represent a step forward.

    Of course, in practice, such events DO cause large scale economic chaos. The point is how do Marxists relate to that. My suggestion has been that the state NOT rescue the banks as it did in 2008, but allow their share and bondolders to go bust. We should demand only that the state guarantee the deposits of ordinary savers – I think I would go beyond the current €100,000 limit in that regard. In the meantime, the workers of those banks should occupy them, and as in Argentina, demand the state rubber stamp their de facto ownership, as the workers create worker owned co-operative banks and financial institutions across Europe, combined into a single European co-operative bank, as part of a European co-operative federation.

    To the extent that other companies are taken down by the fact that their balance sheets have been stuffed with this fictitious capital, rather than having invested in real productive-capital, we should, recommend similar occupations and conversion into worker owned, co-operative property.

  2. There seems here (in the book and the discussion of it) to be total indifference to the central problem underlying the Depression: the climate crisis. Environmental pressures of all sorts are THE great “headwind” depressing productivity; and the humungous capital values ascribed to rents, expected but-never-to-be-realized from the actual and potential hydrocarbon reserves owned by the Oil Corporations and kleptocratic States, are the explosives underlying the catastrophic financial collapse inevitable the moment (whether in time or too late) that the world’s people wake up and effectively impose a rapid total switch to non-carbon energy sources.

  3. The increases in productivity of goods and services has been met the decrease in the share of wealth enjoyed by the producers. Real wages have stagnated, even declined since 1964 and that leads to the stagnation of investment in the means of producing more goods and services. Granted, many of these goods and services are being produced with less value embodied in them because productivity increases mean that there is less socially necessary labour time per good or service. This means that fewer workers are needed to carry out that increase in wealth production.

    An easy way to solve this contradiction would be for politicians to legislate shorter work time, say a 20 hour week with no cut in wages. But this isn’t going to happen until and unless workers get politically smart enough to organise for it to happen. Then and only then would politicians respond positively…well, as long as we lived in a bourgeois democracy.

    So, finance speculation seems a wiser course for those who own the lion’s share of what the other 90% produce for wages. And so we go on to the next round where much of the money commodity represents nothing more than the hot breath of speculative investment.

  4. Michael,

    Perhaps it would be wise to show that there is a marxist tradition which claims that ‘chronic stagnation’ can happen i.e. Paul Mattick in his article The Permanent Crisis, 1934. The parallell with the Great Recession or Crash is that many countervailing tendencies to the falling rate of profit are also used up or blocked because of multinational capitalism as mentioned in the article of Mattick…..

  5. Michael,

    Let us be very clear under monopoly capitalism during the Great Depression, the countervailing forces were blocked or used up and than the law of the falling rate of profit creates a kind of chronic stagnation of breakdown, let us quote Mattick who explains what is at stake (,,) We have previously shown that the Marxist theory of accumulation is the law of the collapse of the capitalist system. We have further demonstrated that this law is overcome by counter-tendencies for certain periods. But these counter-tendencies are themselves overcome in the course of development or lose their effect through overaccumulation. Rationalisation becomes failing rationalisation. Amalgamation, or merging of industrial units, is made unfavourable by the dead weight of closed-down units. Wage-cutting and intensified exploitation also have their limits. The workers cannot permanently be paid below their cost of reproduction. Dead and starving workers produce no surplus value. The shortening of the time of capital turn-over has its limits beyond which it breaks the continuity of production and circulation. Even if commercial profits were eliminated altogether, the sinking of the rate of profit would still continue. Foreign trade as a counter-tendency eliminates itself by turning capital-importing countries into capital exporting countries by forcing their industrial development through a hot house growth. As the force of the counter-tendencies is stopped, the tendency of capitalist collapse is left in control. Then we have the permanent crisis, or the death-crisis of capitalism..(…)..

    With a bit imagination we will recognize that during 1984-2007 all the countervaling forces to the falling rate of profit were used (up) creating a rising rate of profit and …..huge overaccumulation under a regime of multinational capitalism in which giant companies and banks are too big too fail…..

    1. I like to mention that we used all the methods which the Keynesians adviced us to increase the mass of profits which compensate for the falling of the rate of profit. Using the financial sector in all its different forms in the last 50 years. Still there is a Great Recession or should we call it a Great and Long depression in the remembrance of Paul Mattick sr….

  6. Boffy writes: “The only bit I disagree with, is that this “deleveraging” need destroy livelihoods etc.” Right. Let’s try that out in Greece, or the US, or Ireland maybe? Portugal anyone? Or Cyprus..

    Since capital is but an organization of labor as value producing, destruction of “fictitious” capital cannot be separated from destruction of “actual” capital.

    As a matter of fact the collapse of “fictitious capital” is usually preceded by real devaluations in “real” capital– not that there is any point to distinguishing “actual” from “fictitious” capital. It’s all about the expropriation of value.

    Sure there can be “safe” destruction of “fictitious” capital; just like the Israelis can conduct surgical strikes against “terrorists” in Gaza.

    The devaluation of capital involves the devaluation of both its dead and living components.

    Ask anyone who works for wages.

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