Bipolar capitalism

In a recent article (, Noah Smith pointed out that “Modern macroeconomists think that recessions and booms are random fluctuations around a trend. These fluctuations tend to die out — a deep recession leads to a fast recovery, and a big expansion tends to evaporate quickly. Eventually, the trend re-establishes itself after maybe five years. No matter what happens — whether the central bank lowers interest rates, or the government spends billions on infrastructure — the bad times will be over soon enough, and the good old steady growth trend will reappear.”

“But what if it’s wrong?” says Smith, “What if recessions deal permanent injuries to an economy”. Smith pointed out that right-wing economists have criticised the idea that after every recession comes a boom. Greg Mankiw (see my post,, back in 2009, reckoned that the Great Recession would herald a lost decade of output as major economies failed to get back to the trend growth rate before the crisis.

Ironically, as Smith says, liberal Keynesian economist, Paul Krugman, was among the optimists. He was wrong and Mankiw was right. Of course, Keynesians do have an answer to why economies don’t bounce back after a deep recession. I have described their arguments in various papers and posts (

Smith brings to our attention one such Keynesian answer from Roger Farmer, Professor of Economics in Los Angeles. I have referred to his work before ( Farmer reckons that economies are driven by “animal spirits” i.e. bursts of enthusiasm and depressions by capitalists to invest or not. Apparently, all can be explained by the view that capitalists are really suffering from you could call a ‘bipolar syndrome’. As Smith puts it: “A burst of pessimism can knock the economy from a good equilibrium into a bad one and it can then stay there until a burst of optimism comes along to knock it back.” So, reckons Farmer, governments must step in to provide some stability to this fragile capitalist mentality.

Farmer’s policy prescription is for governments and central banks buy up the stock market so that capitalists will be so pleased with this that they will start investing. Well, stock markets round the major economies are at record highs, thanks to cheap money injected by central banks – and yet the world economy remains in sluggish mode and some parts, like Japan and southern Europe are in ‘permanent recession’ or depression.

Another right-wing economist has complained that the Keynesians are far too optimistic about capitalist economies recovering with a judicious bit of central bank quantitative easing and government spending. John Taylor is also a West Coast professor and makes the point that the US economic recovery has never been so weak, even worse than the recovery after the deep double dip recession of the early 1980s (see graph below) – and the US economy is doing the best out the major advanced capitalist economies ( Recoveries

As Taylor sarcastically described the US ‘recovery’: “At the time of the first anniversary of current recovery in 2010, it showed clear signs of weakness compared to the recovery from the recessions in the early. By the recovery’s second anniversary in 2011, it was weak for long enough that I called it a recovery in name only, so weak as to be nonexistent. By the recovery’s third anniversary in 2012, it was now the worst recovery from a deep recession in American history. By the recovery’s fourth anniversary in 2013, few disputed any more that it was unusually weak and disappointing. By the recovery’s fifth anniversary, we were so far away from the recession that linking the terrible performance to the recession became increasing far-fetched. With the recovery now approaching its sixth anniversary, there is more optimism that we are finally coming out the excruciating slow growth.”

The latest US GDP figures revised just yesterday for the fourth quarter of 2014 show that average growth since 2009 has been just 2.2% a year compared with 4.4% in the corresponding quarters of the 1980s recovery. And as of January 2015, the employment-to-population ratio is still lower than at the start of the recovery.

Both Mankiw and Taylor make these arguments because they want to score points against the Obama administration and the Keynesian economists who reckon that the government must intervene to help the ‘bipolar’ capitalist sector. Their argument is that ‘intervention’ just makes things worse. Better to let capitalism cleanse itself of dead capital, keep corporate taxes low and maintain ‘normal’ interest rates. But this ‘liquidationist’ approach does not work either.

In a new paper, David Papell and Ruxandra Prodan, Professor of Economics and Clinical Assistant Professor of Economics, respectively, at the University of Houston, find that deep recessions after a financial crash can take up to nine years before growth returns to trend. But this time it is different – it’s even worse ( Permanent recession

Looking at the latest projections of the US Congressional Budget Office (CBO), they reckon that US real GDP will never return to its pre-Great Recession growth path. “The projected decrease in potential GDP is unprecedented, as almost all postwar U.S. recessions, postwar European recessions, slumps associated with European financial crises, and even the Great Depression of the 1930s, were characterized by an eventual return to potential GDP.” US real GDP will permanently be 7.2% below the pre-Great Recession growth path because trend real GDP continued to rise during the recession. They call this a “purely permanent recession”.

But as readers of this blog will know, I characterise this as a Long Depression, a rare event in capitalism. The CBO reckons that the US trend growth rate will slow to just 1.7% and will never be above 2% a year for the foreseeable future! Why is capitalism locked into a depression? Well, mainstream economics has debated this, swinging between two causes for this ‘secular stagnation’: permanently lower productivity growth and innovation (Robert Gordon) or too high rate of interest or too low ‘animal spirits’ (Larry Summers) – see my post (

In another paper just out, three economists find that long-run US real GDP growth has been declining for some time and the main reason is a slowdown in the growth of the productivity of labour ( Capitalists are failing to boost productivity growth enough through new technology.

Falling productivity

And two more economists show that worker productivity in the major economies has been persistently weak since the onset of the global crisis ( “We find that persistently weak productivity is not normally a feature of financial crises in advanced economies – this time has been different. Looking sector by sector, the biggest falls in most countries have been in manufacturing. The UK stands out in having also seen a dramatic fall in service sector productivity growth, now one of the slowest in our sample of countries.”

It seems that capitalism is now in a permanent bipolar disorder – a long depression.

4 thoughts on “Bipolar capitalism

  1. looking at your second graph
    surely the interpretation is that the same trend has returned (same slope) just that the base was suddenly shifted down

    this connects to my thought that the exceptionally long slow recovery problem may be that “animal spirits” are somewhat tapped out
    in particular, the thing that is especially different this time (at least in the U$) is that the baby boom generation is tapped out
    not that we were especially gifted with “animal spirits” but simply that we are such a large portion of the population

  2. There is very little difference between neo classical synthesis and new Keynesian. They are the economic mainstream that inhabits the IMF and the banking establishment. New Keynesians and neo Keynesians are lapsed monetarists and Krugman believes in Walrasian equilibrium. Keynes rejected these ideas in the 1930s. Keynes wasn’t even particularly Keynesian in the modern sense. Most post Keynesians consider Godley, Lerner, Minsky and Kalecki to be just as important.

    All the term ‘animal spirits’ means is that human behaviour tends to be pro cyclical therefore causing economic instability. Humans are confident in good times and fearful in difficult times. Keynes was aware of the mathematics of stability theory. This was developed in the early part of the 20th century. This idea was further developed by Minsky and has been correctly adapted by Steve Keen into a mathematical model. It’s just a simplified model of flows. It’s not a complete theory.

  3. If only capitalism would hang itself in a lonely motel room somewhere. Or maybe that is what generalized imperialist war amounts to.

    In the 15 year centered moving average of annual percentage GDP growth, it appears that the US represented a minor counter-trend from 1989-99, and by more or less treading water since then, has moved from the bottom to the top of the pack. hence the US has been able to establish itself as relative more dynamic than its Triad comrades. perhaps at their expense.

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 )

Google photo

You are commenting using your Google 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: