The Long Depression – an interview

Mark Kilian from de Socialist, a Dutch socialist journal, talked to me about my new book, the current economic stagnation, the prospects for another recession and the way out for capitalism.  Here is the English translation of the interview kindly provided by Mark and edited by me.

MK: Our government says the economy recovers. At the same time, we see that Greece continuously needs ‘rescue packages’ and there are now problems in Italy. What is the state of the world economy?

MR: The development of the world economy since 1945 has not been harmonious, not gone in a straight line upwards. There has been a series of booms and recessions. By that, I mean a decline in national income or the national output of a country for at least six months or longer, before recovery and growth resumes.

But what is different about the recent period, is that we had a very big slump in 2008-9 after the international banking crash. The Great Recession, which lasted for 18 months, was the biggest since the 1930s.  As a result, all the major economies in the world, including the Netherlands, saw a sharp decline in their national income and national output.  Every time that happens millions of people have their lives ruined, they lose their jobs and possibly their homes because they cannot pay the rent or mortgage. On top of that, governments introduced whole ranges of measures, of cuts in welfare and public services, which damaged population as well.  Also, all that period of decline is a permanent loss. If there had been no slump, output and income would have been higher, jobs would have been better. That can never be recovered.

And the difference this time compared to other crises is that the recovery from the Great Recession has been incredibly weak. It is the weakest economic recovery in these since the 1930s. From the end of the Great Recession, after seven years, most economies have hardly recovered to the level they were in 2007. That shows how slow it’s been.

Take Italy: the IMF has presented a report that is truly shocking. Not only does Italy have a major banking crisis which could come crashing around the banks’ ears fairly soon unless the government bails them out, but the IMF reckoned that Italy’s GDP and output would not get back to the level of 2007 until 2025! That’s two lost decades of output, income, jobs and better conditions for the Italian people. That’s how bad the recovery has been in Italy.

Output, employment, and people’s incomes in most economies and for most people have not recovered to the 2007 level.  According to a new report by McKinsey, the management consultants, two-thirds of households in the 26 OECD economies have lower living standards in 2015 compared to 2005!

So this is a really weak recovery and, in my view, there is every danger before we get back to the levels we have seen before, if we ever do, that the world economy will slip into yet another slump in the next year or two.

MK: In your new book you describe three depressions: that of the years 1873-1897, 1929-39 and the present one.  Is there anything we can learn from this?

MR:  In my view, this is not a normal recession, but a depression. That’s different from the normal slumps. That does not happen very often. In the history of modern capitalism, of the 19th century until now, there have only been three major depressions. In a depression, recovery is so weak that economies do not return to the same growth rates or even the level of output that previously existed, except for a very long time.

There was a big slump in 1873 in Britain, Germany and the US, the major capitalist economies then. There was no real strong recovery after that. There were a series of slumps which went on for the next 20 years.  That was a depression: a low level of growth and a series of slumps. It took a really long time before sustained recovery was possible.

The second depression is called the Great Depression. This began with the collapse of the stock markets in the US in 1929, similar to the collapse of the housing market in the US in 2007. After the crash in 1929 the US, the largest capitalist economy in the world, went into the most severe depression. There was prolonged mass unemployment, and there was no real recovery during the 1930s.  The only thing that turned it around was that the US entered the Second World War, alongside Britain, against the so-called Axis powers. Government production was increased, which led to the economic growth and recovery. So only war brought recovery in the 1930s. In my view, we are in a similar period. It’s going to take some drastic changes in order for capitalism to recover at all.

MK: Your choice of words suggests that state-led production can be different from  capitalist production?

I think there’s a distinction to be made here. Keynesian economists reckon the solution to these slumps is that the government should spend more money on welfare, or give money to business to invest, or carry out its own programs of production itself and thus get people into work. This will boost the capitalist economy and get it going again. That’s the Keynesian solution to these crises.

It was tried briefly and half-heartedly in the 1930s by Roosevelt in the US under the so-called New Deal. It wasn’t really tried in this current recovery. Most governments have operated on cutting government spending.  I am not advocating the Keynesian solution. It might help for a while, but it would also eventually cut into the profitability of the business sector and actually could, under certain circumstances, make things worse.

When I’m talking about government production, I mean government taking over control of the major part of the investment program of the economy. So the big companies would become part of a state-led, ideally state owned, operation. In World War II, in effect, that’s what happened. The big companies were told: ‘You cannot produce cars any more, you’ve now got to build tanks.’  That was direct government control for the war effort. In a way, it ended capitalist production for profit and replaced it with government-led production. The capitalists still made money and profits, but they were completely controlled and directed by the military state in order to carry out a war.  The analogy here is that capitalism no longer operates on the basis of the interests of the capitalist sector, but what was regarded as in the interests of society at that time.

Now a socialist answer, rather than a Keynesian one, is that we need governments to take over the major sectors of the economy to produce for social needs rather that for profit. That means controlling the investment and ownership of all the major banks and other big companies. That is drastically different from what the Keynesians propose now and goes even further than in wartime.

MK: Many people see the long boom after 1945 as a ‘normal’ situation. But how do we explain the boom?

That is an important part of my book; why there are booms and slumps. The period from 1945 to the mid-60s was an exceptional period; it is called the ‘golden age’ of capitalism. There was quite good growth, more or less full employment, many countries developed a better welfare state, free education even to university level, free health services, state housing programs; better pensions etc.

But that was an exceptional period. Why? What drives growth under capitalism is the ability to make profits. The health of the capitalist economy depends on what happens to the profitability of capital, the rate of profit on every investment made by capitalists.  At the end of World War II, as the result of the physical destruction in Europe, of most of the machinery, factories, etc., and a massive amount of labour available at cheap rates, profitability rocketed in Europe for the capitalist combines as they restarted. And they got cheap (even free) credit from the US.  In the US there had been a devaluation of old capital, so new capital came up with new technology that was extremely profitable, and there was a huge expansion of labour force. The same applied to Japan. Across the board world capitalism had a high level of profitability for investment.

But in the mid-60s profitability began to fall quite sharply up to the early 1980s. This period is called the profitability crisis. Marx’s theory of crises under capitalism is that, if profitability is the driving force behind growth, it can’t keep on rising. As capitalism expands and accumulates capital, there is a tendency for profitability to fall. This is a key law in the political economy that Marx discerned. And in that process of the falling rate of profit capitalism gets into in trouble and crises develop more frequently.

The ‘golden age’ of the 1950s and 1960s gave way to crises. I was young then and I remember that this time was a period of big struggles by the labour movement as profitability fell and capitalism tried to drive the workers down. Workers fought because they had a lot of gains that they did not want to give up and trade unions were relatively strong.  Eventually the unions were crushed in the recessions of the early 1980s and the labour movement was shackled and defeated in many battles. Capitalism then tried to raise profitability through cuts in public spending, privatizations, the exploitation of the labour force, removing all the protections of the labour force, globalisation etc. This neoliberal period was the last 20 years of the 20th century.

So the ‘golden age’, was a special period when profitability was very high because of a world war, then followed by a large decline in profitability, and then up to the end of the century big efforts of capitalism – with some success – to increase profit rates again.

MK: So what you’re actually saying is that the crisis of the mid-60s validated Marx’s theory of the falling rate of profit and then neoliberalism mobilized some of the counteracting tendencies that Marx also described, in order to restore profit rates?

That’s a good way to put it. Marx’s law of profitability says that as capitalism expands, there is a tendency of the rate of profit to fall. But there are ways to counteract that, for a time. Under a capitalist society value comes only from the exploitation of labour, people who work under the control of capitalist owners so that they can sell the commodities on the market, and they can make a profit. They will use more machinery and plant, and new technology to keep the down the cost of labour, but in so doing they reduce the amount of profit per investment. Profit, and value in general, according to Marx comes only from people working, it does not come from machines. Machines produce no value unless you put them to work. That requires human labour unless you have a society with only robots – but that’s another story.

So there is a contradiction between raising productivity of labour through more investment in technology and sustaining profitability. This can be overcome for a while by exploiting workers harder, for longer hours, making them work more intensely, introducing new technology, expanding trade, trying to occupy poorer countries, and use their resources – there are various ways in which the counteraction can take place. These counteracting factors operated strongly during the 1980s and 1990s, to reverse the very low rate of profit that capitalism had reached.

Profitability did recover, but not anywhere near to the level of the ‘golden age’. From the late 1990s the Marxist law of profitability began to operate again, and despite all attempts of the capitalists, it began to slip back in the major economies. That created the conditions for further crises and slumps of the 21^st century. The capitalists tried to avoid that by a huge credit boom, by pumping loads of credit, inventing new ways to speculate in the financial markets and keeping profits up for a section of the capitalists. But underlying profitability did not recover. You can speculate on stock markets but you don’t create anything. You just try to pinch money off others, so to speak, and create an apparent improvement.

Take today. The US stock market has reached an all-time high (in nominal terms). At yet we look at the state of growth and production in the major economies and that’s really slowing down. Profits are stagnating and yet the stock market is booming. That shows the division between what Marx called ‘fictitious capital’ and what is really going on in the capitalist process.  That division reached an extreme in 2007, a gap between stock market prices, house prices, speculation in financial markets and what was actually happening with the profitability of capital.  Then came the crash.

This is the process that I try to describe in the book. The book tries to provide some indicators for readers to look at.  Some economists focus on the financialisation: the increase in that sector relative to the productive sectors. A popular argument is that the financial sector and the banks should be regulated or curtailed.  But that’s not enough, that’s a bit like trying to control a tiger in a cage with only a piece of paper. There is no surety that the banks will behave with regulation. Only recently, the US financial regulators investigated the activities of HSBC, the big UK bank, which laundered money for Mexican drug cartels for years. They made billions of pounds out of this. It was discovered, but the authorities were told not to intervene and not to fine HSBC because it might bring the banking system down. That shows that regulating the banks is totally useless. It changes nothing, so they will continue in the same way.

The only way to deal with that is to take over the banks, to bring them into public ownership through control by the bank workers and by wider democratic control of society as a whole, so that banks become a service: providing people loans for what they need, for small businesses, and to lend to improve the productive potential of the economy, not to speculate in financial markets and assets, or to engage in tax haven scandals and money laundering, as they have been doing in recent decades – and will continue to do, even with regulators around.

The other point about this is that the financial crash wasn’t just a banking crisis. A financial crisis is not isolated from what is happening in the productive sector of the economy: manufacturing, technology, places actually making things that circulate, on which banks then speculate. Banks do not make money except between themselves, value must come from somewhere else. The banking crash was really a symptom of the fact that the productive sectors of the capitalist economy were no longer profitable enough to support this house of cards. Those who argue that it was only a financial crisis and that the solution lies in controlling the financial sector, ignore the true nature of the crisis and so can’t actually solve it.

MK: Can you say that the financial sector adds to the instability of the system?

Clearly, for it has become larger and more important. As profitability fell in the 1960s and 1970s and remained relatively low in the productive sectors in the neoliberal period, one of the counteracting factors was to shift investment into the financial sector, banks and other institutions, to make profits at the expense of investment in the productive sector. Productive investment as a percentage of output declined in most economies in the 1980s and 1990s. That is an indication of the weakness of the capitalist economy towards the end of the 20th century, the need to divert to finance and elsewhere. So yes, it is an important part of the process of the crisis. But at the same time, it’s a symptom of the inability to get profitability up.

MK: The Great Recession of 2007-2009 was not foreseen by economists?

The book has a section that would be funny if it were not so tragic. The economics profession, the economic institutions and other ‘experts’ did not see the Great Recession coming, quite the reverse. Central banks and governments were convinced that everything was fine, and if there was a problem that could be solved easily.

When the crash came, they were unable to explain why it had happened. They remained in denial and thought it would end quickly, which it did not. They were unable to explain why that was, and even now they cannot really know what to do to get things going again. The institutions, central banks and governments are still struggling to get this recovery up above the weak level where it is, because they do not understand what happened and what to do about it.

There were one or two people who did recognise the dangers in the early 2000s. They saw the huge housing bubble in the US and that that could not possibly last; some who saw a huge increase in private credits, a financial sector which they also saw as dangerous. So one or two radical economists outside the consensus, recognised the real dangers.  And a one or two Marxists, raised the idea that, despite the huge boom in house prices and credit, beneath it the profitability situation was worsening and there were contradictions that would produce a crash.

One of those was Anwar Shaikh. He predicted a big crash and a depression as a result. I made a similar forecast in 2005-6. I argued that there was a conjunction of cycles coming together: declining profits, a peak of the housing market, and a general depressionary cycle which was named after the Russian economist Kondratieff.  All those cycles were coming together in a depressive downturn. That suggested to me that there could be a quite serious slump, I thought in 2009-10. I was a little late because it came earlier. So a handful of people saw this crisis coming, 99 percent of the economists did not.

MK: You compare the position of the US today to that of Great Britain during the last crisis of the 1930s: holding on to hegemony while simultaneously being undermined economically. How does that work out for the coming period, for example could China take over that role?

The US, the biggest economy, has had a slightly better recovery than Europe or Japan, which have been struggling, and many of the emerging economies like Brazil, Russia, South Africa. They are in recession and have not recovered at all. The US is doing slightly better, but still growing only at about 2 percent per year since 2009. It used to be 3.5 percent on average in the period since 1945, and sometimes faster in the golden age.

This is a very weak recovery and it seems to be petering out. While the depression continues, rivals which do better get into in a position to challenge the hegemony that the US has had economically. The US economy has declined relatively economically anyway over the last 30 years.  It no longer has the same share of manufacturing output in the world, compared to Germany or Japan, and of course China, which has been the fastest growing economy for the last 20 years, and what has become a great economic power now.

Even in other parts of the economic spectrum – services, technology – the US has got rivals as well. The US is still superior because it has a massive financial sector, which controls and supplies capital around the world. That gives it, along with Britain – another big finance capital centre – control, despite its weaker productive position, through the expansion of the credit realm.  And it is by far the biggest military power, bigger than all the other military powers put together, which gives it, again, a strong position. You can use the analogy of the Roman Empire, which also began a relative decline compared to its rivals outside the empire, but continued to have hegemony for hundreds of years because it had a Roman army and huge financial resources. America is in a similar position, but it is getting rivals.

Capitalism faces some key challenges over the next 20 years. The first is climate change and global warming, which is a serious problem which capitalism is not doing anything about. This really threatens the future of the human race and the planet, unless something is done.

Also there are huge inequalities in wealth and income in the world which create enormous social tensions. Over the past 25 years, the inequality in income and wealth globally has reached a level that we have not seen for probably 150 years.

And there is also the slowdown in productivity: the failure of capitalism to expand the productive forces to provide what people need. Technology has not expanded to the level of what is possible, and productivity growth is very weak.

All these factors threaten the future of capitalism to meet the needs of people and the ability of the US to maintain its hegemonic position. So the rivalries between the big capitalist powers will increase and also between the US and China, because China is a major threat in trade and production, and probably in finance and technology in the future. These are the increasing contradictions that exist in capitalism, even threatening the existence of the planet.

MK: You devote a separate chapter to the eurozone. That is particularly relevant since the Brexit. Over the past 15 years we saw a sharpening of the contradiction between North and South, in particular Germany on the one hand and Greece, Spain and Ireland on the other. How would you extrapolate that?

The project of the European Union was a plan of the leading strategists of the European capital after 1945. They did not want another war, no more division of Europe. They wanted to develop the capitalist base within Europe, as one united force that could rival on a world scale with the US and Asia, particularly Japan at that time.  They wanted to end petty wars between nations that became world wars, and to unite, to use the resources of labour and capital across Europe and develop a European-wide capital to rival the rest of the world. That was the plan.

They first introduced the customs union, breaking down the tariffs between the three or four biggest economies, including the Netherlands, later developed the Common Market (EEC),, so that trade was expanded in all other areas, not only tariffs but common regulations, rates and conditions for trade within Europe. And then the European Union itself, which meant political institutions were set up to integrate Europe into one force.

The biggest step forward was to introduce a single currency for at least those core parts of the EU prepared and able to join. The Germans agreed that the powerful D-Mark would be integrated into a euro currency, with France, Italy and other economies, including the Netherlands. It was seen as a necessary step to integrate Europe further as a force in the world.

But it is very difficult to develop one currency under capitalism, one union, when capitalism, while it expands its productive forces, also drives things apart. So the weaker economies in a capitalist union actually get weaker relative to the stronger ones. That’s how capitalism works. It doesn’t actually help the weak to come towards the strong. So the weaker economies within that bloc, especially in the euro bloc, were even worse off relatively after the formation of the euro than before. They went backwards relatively while the main gainer of the euro was the core, Germany in particular.

The Great Recession exposed these fissures in the eurozone.  The euro project was like a train that is shoved off the track by the economic crisis.  It’s very difficult to put the train back on the track again because so many of the weaker countries fell off and the stronger countries were not prepared to bail them out.

The euro project would only work if you had a full fiscal union, a full federal union, as in the US. But remember, the US achieved that only after a terrible civil war that crushed opposition in the slave-owning South. The idea of a full fiscal union where everyone pays the same taxes, where there is one government, one currency applied across the board: that is not possible in Europe at the moment, particularly after the Great Recession. In fact, the opposite is the case: the risk is that the euro project and the EU project could break up, particularly if there is another slump in the future.

Brexit is an example of that tension. British capitalist strategists had never been fully keen on the idea of European integration. It still had illusions that Britain was powerful enough to go on its own, or it could be a junior partner of American capitalism and so didn’t need to be integrated in Europe to progress. The British ruling class was divided between those who thought that Europe was the answer and those who thought it was better to be on their own or with the US.

That division came to a head with the Great Recession, when Europe had a huge euro debt crisis, Greece, Spain and Italy fell into deep depression and the Franco-German leadership failed to provide support for these countries as part of the EU project. So some British capitalists said: ‘Well, Europe’s not really where we can make a profit; we’re better off on our own.’ This political split came to a head with the referendum.  In many ways, this will be a complete disaster for British capitalism; with its strategists not knowing which way it’s going to go.

MK: In the book you suggest that no depression is permanent. So is there a way out for capitalism?

Some Marxists say that we are in a permanent stagnation or depression. I don’t agree. In the past, capitalism has shown it can find a way out, if it can restore the conditions for a higher rate of profit, as it did after World War II and at the end of the 19th century depression.

How do you do that?  The only way is to restore profitability.  That means destroying the value of old capital which is no longer productive. It means getting ‘lean and mean’, cutting off the old bad plants in your garden and allowing new ones to grow. Of course, this will be at the expense of everybody’s jobs and livelihoods, because we’re talking about human beings losing their jobs as a result of closing down factories and businesses, mergers, selling off the assets, displacing workers and reducing the overall level of production to reach higher profitability. A slump, maybe a series of slumps, can do that.  Until then we’ll continue with this depression. The system needs to get rid of a lot of debt, smash a lot of banks, close a lot of old industries and companies. That’s horrible, but that’s what capitalism does to revive itself.

Then capitalism could get a new lease of life and use all the new technologies that everyone is talking about – robots, automation, the Internet of things; all these kinds of technology that can be expanded – and also exploit new areas of the world which still have large amounts of cheap labour which can be used in conjunction with this technology.

Maybe the political and economic conditions for such a new lease of life for capitalism could happen in, say, the next decade as a result of further slumps, but only if working people in the countries which will suffer from this, are unable to change the situation in any way, and the capitalists and their strategists and political representatives remain in power.

But even if that happens, capitalism is not going to solve its problems indefinitely. In fact, it is getting more and more difficult for them to have a new lease of life and expand, with global warming, low productivity, rising inequality, and with less and less areas in the world to exploit that aren’t already proletarianised, urbanized and part of the global capitalist system. There’s less room for capitalism to expand. It is getting close to its use-by date in historical terms.  But it could have another period of expansion in the next 20 years even so.

Michael Roberts’ new book, The Long Depression, is available

on Amazon US at:

https://www.amazon.com/Long-Depression-Marxism-Global-Capitalism/dp/1608464687/ref=sr_1_1?ie=UTF8&qid=1470050664&sr=8-1&keywords=the+long+depression

And on Amazon UK at:

https://www.amazon.co.uk/Long-Depression-Michael-Roberts/dp/1608464687/ref=sr_1_1?ie=UTF8&qid=1470050707&sr=8-1&keywords=the+long+depression

And if you don’t want to buy it from Amazon, then you can get it from Haymarket Books, the publisher, direct at:

http://www.haymarketbooks.org/pb/The-Long-Depression