Cycles in capitalism – a critique of The Long Depression

In my last post, I outlined my response to the critique of my book, The Long Depression, presented by Paul Mattick jnr, discussant in the URPE panel session on my book at the Left Forum in New York last weekend.

Paul argued that it was impossible and unnecessary to try and measure the profitability of capital as I did in numerous places in the book.  It was impossible because official statistics are useless in measuring the Marxist rate of profit, which is based on labour values not prices.  And it is unnecessary because the very fact of recurring economic crises shows that Marx’s theory of crisis is valid anyway.

The other discussant at the panel session was Jose Tapia.  Tapia is professor in health economics at Drexel University, Pennsylvania and has made significant contributions in the study of mortality and global warming and its impact on economies.

But he has also presented papers showing the causal connection between profits, investment and growth (does_investment_call_the_tune_may_2012__forthcoming_rpe_) and is a contributing author to a new book, edited by me and G Carchedi, The World in Crisis, published this summer by Zero Books.  Jose wrote a book jointly with Rolando Astarita that offers a brilliant and comprehensive account of the Great Recession (from which I quote several times in my book).  Unfortunately, it is in Spanish, so it did not get the wider recognition that it deserves.  Tapia has a new book that develops the relationship between profits, investment and business cycles (again in Spanish) that provides further statistical support for the Marxist view on crises (reviewed here).

Jose is an accomplished statistician so he takes a different tack from Paul Mattick in his critique of my book.  He does not think it a waste of time to measure the rate of profit and test Marx’s theory of crises statistically.  However, he has important criticisms of my work.  He says he is unsure of the sources and methods that I use to gauge profitability (although I do have an appendix in the book on measuring the rate of profit and I have offered my workings on any graph in the book if requested).

More importantly, Jose is not convinced by one of the main themes of my book: that there are three distinct periods in capitalist accumulation which I define as depressions and not just ‘normal’ recessions: the late 19th century, the Great Depression of the 1930s and the period since 2008 that I call the Long Depression.  In a powerpoint presentation ( The Long Depression, by Michael Roberts – Comments) provided at the session, Jose reckoned that there was no discernible decline in the rate of real GDP growth for countries during the long depression of 1873-97.  Only France could be depicted as such.

Well, I don’t know why Jose chooses decades to gauge cumulative GDP growth.  Most commentators on the late 19th century depression consider that it started in 1873 and finished in 1897, or earlier depending on the country.  So it would be more appropriate to use those dates.  Andrew Tylecote did just that in his study of the period. He looked at industrial output data – and his results are cited in my book.  Tylecote shows that Britain, as the declining hegemonic power, had significantly slower industrial growth than the rising capitalist powers of the US and Germany in the second half of the 19th century.  But all the major economies had slower growth in the period 1873-90, than before 1873 or after 1890.  That seems to confirm that there was distinct depression period then.

And when you take into account the massive immigration into the US during the second half of the 19th century, real GDP growth per head in America was very slow during the depression period.

Jose reckons that UK growth was hardly different between 1850-70 and 1870-90.  Well, I looked at the GDP data and investment data for Britain provided by the Bank of England.  Using the BoE data, I found that between 1852-71, real GDP growth in Britain rose 66% or 2.7% a year, but it rose only an average 1.2% between 1872-86, or less than half the previous rate.  Investment rose 4.4% a year in the boom period of 1852-71, but it actually fell 2.1% a year in the period 1871-86.  That’s pretty conclusive evidence of a depression, it seems to me.  Indeed, the BoE data for the same period that Jose defines (1870-90) shows an accumulated GDP of only 42%, or just 1.9% a year.

The great economist J Arthur Lewis provides a very penetrating analysis of the late 19th century British economy, which I cite in my book.  Lewis found that there were several ‘Juglar’ (business cycle) recessions during the Long Depression and these recessions were clearly worse after 1873. Lewis gauged the intensity of these recessions by how long it takes for production to return to a level ‘exceeding that of the preceding peak’ growth rate. He found that between 1853 and 1873, it took about 3-4 years. But between 1873 and 1899, it took 6-7 years. He also measured the loss of output in recessions i.e. the difference between actual output and what output would have been if trend growth had been sustained. The waste of potential output was just 1.5% from 1853-73 because “recessions were short and mild”. From 1873-83, the waste was 4.4%; from 1883-99, 6.8%; and from 1899-13 5.3%, because “after 1873 recessions became quite violent and prolonged.” Wastage was thus two or three times greater in recessions during the late 19th century depression.

I also went back and looked at the US business cycles from 1854 to 1897 using the NBER data.  I found that between 1854-1873, the boom period, there were 76 months of contraction in US real GDP, or an average of four months in every year.  But between 1873-97, there were 161 months of contraction or about 6.7 months on average each year.  Again that suggests the 1873-97 period was a depression.

Jose’s main criticism of my book is his scepticism that there are ‘regular’ business cycles.  For Jose, capitalism accumulates in booms, which are interspersed with slumps. So slumps are recurring under capitalism, but they are not regular.  Using the NBER data, he shows that there is a wide dispersion in length of the each cycle from trough to trough in the US, varying between 3.8 to 9 years for the post-war period and (not so wide) 3.9 to 4.8 from 1873 to date.  his would seem to suggest that there is no regularity in booms and slumps under capitalism as I suggest.

However, again, I am not quite sure why Jose has chosen these dates.  If we go back to the NBER data and choose periods more related to the periods of changes in average profitability and exclude the specific depression periods, then I find that the business cycle is pretty regular at about 12 years from trough to trough.

Also, I think there is very good causal relation between profits and stock market performance.  When profitability is on the rise, stock prices rise and vice versa.  Yes, profitability has risen since the 2009 Great Recession ended, but it is still below the levels seen at the end of last bull market in 2000.  That is why I reckon that there is still a bear market.  Despite new highs in stock prices, in real terms and against gold and the dollar, stock prices are still below previous peaks.

For Jose, this is all too neat.  He reckons that my division of the stock market cycle in the post-war period into bull and bear markets based on the profit cycle could just easily be revised to deliver a different analysis – from four to five periods.

Jose goes onto to argue that my claim to the existence of longer cycles of 50-60 years, the so-called Kondratiev cycles, has even less validity.  Jose reckons that there is no regularity in the length of so-called K-cycles.  They vary from 14.7 to 75 years.

Again, Jose seems to choose odd dates for his K-cycle measure.  I reckon that the first K-cycle begins in about 1785, rises to a prices peak around 1818, and then goes to a trough in the early 1840s (about 54 years). The second cycle peaked in the mid-1860s and then troughed in the mid-1880s or early 1890s (again about 50 years). The third K-cycle started in the 1890s, peaked in 1920 and troughed in 1946 (another 50-60 years). The fourth K-cycle started in 1946, peaked in 1980 and will trough around 2018 (a much longer cycle of over 70 years – I explain why in the book).

However I recognise that the evidence to support the K-cycle is meagre – after all, there are only a few data points.  As I said in my book chapter on cycles (Chapter 12): “In many ways, it is really a series of propositions that are not fully confirmed by evidence. The first proposition is that crises are endemic to capitalism and continue to reoccur, the explanation for which lies in Marx’s law of profitability. That was discussed in a previous chapter. But this chapter says more than that. It argues that these crises occur in regular periods that can be measured and possibly predicted.”

So this chapter is more of a hypothesis to be tested by events. That is especially the case with my idea that the K-cycle and other cycles in capitalism can be coordinated with the profit cycle, and when all cycles are in a downward path, the capitalist economy becomes depressed.  Thus I conclude in the book that 2018 is likely to be trough of this fourth K-cycle and the bottom of the depression period.  Well, the proof of the pudding will be in the eating.

But I am not alone in my forecast.  Anwar Shaikh has put forward a similar forecast to mine, also based on the dating of the K-cycle.  In a paper that Shaikh presented in 2014 (Profitability-Long-Waves-Crises (2)), he reckons Kondratiev’s long waves have continued to operate, when measured by the gold/dollar price: the key value measure in modern capitalism.  And he also forecasts that the current downphase in the K-cycle will trough around 2018.

So watch this space.

20 thoughts on “Cycles in capitalism – a critique of The Long Depression

  1. The reason why the current K Wave is so long has been explained by Ernest Mandel. While every Long Expansionary Wave eventually comes to an end there is no automatic upturn for a Long Depressionary Wave. Last time it took Bretton Woods and America’s unchallengeable domination over the capitalist world to make the upturn happen, nothing equal to that has occurred in recent years, on the contrary the unipolar world as crumbled and power blocs conflict more and more.

    1. Why does every Long Expansionary Wave automatically come to an end, but there is no eventual or automatic upturn for the Depression wave? Population growth? Lack of innovation?

      1. Neither population growth nor lack of innovation, on the contrary Ernest pointed out that during the down part of a Long Wave many innovations are developed but don’t see full application. For example look at the automobile or aircraft, it wasn’t until the last Long Expansionary Wave that these really came in to major use. He judges Long Waves ultimately on the rate of profit, so the automatic downturn is based on the eventual downturn of the rate of profit. Why no automatic upturn, probably because we’re talking about increasing the rate of a profit for a period of about a quarter of a century or so (over all the business cycle still continues of course). Have we not seen this since the downturn of the 1970’s? Every attempt to raise the rate of the profit for a significant period of time has ultimately failed. According to Boffy we should currently be in the equivalent of the mid 1960’s, it doesn’t feel like it does it? This is all very short strokes mind you. Ernest Mandel has written a book about it which I recommend you read if you can find it.

  2. Although I generally agree with your approach to economics, I would tend to be very suspicious of K-cycles – they appear a classical attempt to retrofit periodicity in a neat way – the human tendency to see patterns where there are none. What is the material basis for such cycles? I’ve seen some good attempts to explain the undeniable short-cycles in terms of periods of investment, etc.
    This is not to deny that upturns and downturns exist just to suggest that they are probably related to conjunctive factors – rather than any underlying economic cycle. For example if WWII had have lasted more 15 years – it’s likely the upturn wouldn’t have started until 1960…
    I imagine a good statistician could produce a measure of the probability that there is an underlying long-term cycle.

    1. I agree with Donal. It’s one thing to argue that profitability drives investment, and that leads to cycles of expansion and contraction of capital. Even that doesn’t get at the core — after all, arguing that profit drives investment and leads to economic expansion and then contraction is more or less a tautology: capital as self-expanding value/

      But it’s another thing to argue that there are meta-cycles that are driven by….? Exactly what?

      K cycles seems to have secured a totem-like status, similar to that once afforded “equilibrium” theories.

      Calling the 1873-1897 period the “Long Depression” because overall rates of growth slowed, or that there were periods of severe recession, refutes the argument from the getgo. Slow growth is not depression.

      Compare the growth in fixed assets in the US 1873-1897, to that of the negative growth of fixed assets in the US during the Great Depression; or compare either to the inability to reduce the fixed assets in the US since 2008. The reason for the “slow recovery” from the 2007-2009 recession is that the devaluation of fixed assets has not been drastic enough.

      1873-1897 was the period of the Long Deflation. The 30s were the Great Depression. We can call this period what it is: the most severe recession since WW2 followed by the weakest recovery, a recovery built entirely upon the attacks on labor, but not, as of yet, sufficient liquidation of fixed capital.

  3. “Despite new highs in stock prices, in real terms and against gold and the dollar, stock prices are still below previous peaks.”
    Gold when it was around 250 USD/oz or 1900 USD/oz?
    I’m baffled by the methodology. Why gold and not oil?
    Also, does it imply gold is money? Anyone?

    1. Precious metals is money. Gold I think. Marx also includes Silver among precious metal. I think says in volume 1 there are times when more than one precious metal is worth the money, for example, when there was exchange with India and East Asia. Silver there was far more common, thus it was used as money. Nowadays, with computer systems, it can be averaged among many minerals, I think. And even oil is stored like gold. But, in any case, all stored quantity is vastly smaller than the actual amount of credit in circulation, and their values.

      The prices of precious metals are more or less correlated. See here: Palladium has a peak in the early 2000s, unlike the others. Overall, though there is a correlation. It also correlates with the price of oil too

      1. Daniel, thank you but I think we may differ on the theory of money. In other words, what is money and what does it function as.
        Money IS universal equivalent.
        Money functions as:
        Means of payment
        Means of purchase
        Store of value
        Credit money
        Money of account
        Measure of value
        International money

        Gold is not money based on the definition above.
        Try purchasing something with gold or silver without first converting to local currency.

      2. Gold does all those functions. When you have a bill, you give a very small fraction quantity of money contained in some part of the world plus some credit, that is debt to sum 0. The bank of Scotland did this around when Marx wrote volume1 and this is the standard way gold is traded when you do commerce.

  4. The theory of kondratiev cycles has certain serious deficiencies. For example how does the theory of cycles k fit with the vision of the mode of capitalist production as a mode of production with a tendency towards historical obsolecence? Can the laws of the movement of capital be reduced to a mere periodic oscillation of 50 years? The mechanism that produces the descending part of the curve seems to be based on the tendency law of the fall of profit. Yes, but under what conditions is the upstream part produced? Does it correspond simply to a revertion of the conditions that produce the depressive phase? Under what mechanisms? They all have the same character? It is possible to fit the class struggle, the conquering of new markets, territories, resources and competition on the part of imperialist nation states in the model of kondratiev cycles (things that are less deterministic in character than the theory of cycles K seems to suggest)?

    1. “It is possible to fit the class struggle, the conquering of new markets, territories, resources and competition on the part of imperialist nation states in the model of kondratiev cycles ”

      This is an argument used against a Labour Theory of Value in general.

      If we assume economic models where certain variables are held constant then theory can proceed from there.The problem then becomes how to find the empirical evidence, similar to problems in cosmology, where the evidence is not done by looking at the thing directly but its affect on the things around it.

  5. Simon H is right, it all depends on the long term rate of profit. The rate of profit is however an elusive beast because it demands to be treated concretely or not at all. Michael is always right in the abstract. However what is needed is a rate of profit with all its facets polished. Firstly, Michael does not adjust annual compensation by removing the top 1% (at least) of wage earners who are in fact profit takers not wage makers. With the rise in inequality this 1% share of compensation has jumped from 3.3% to 14.7% of all compensation between 1962 and 2015. This has had a significant effect on the rate of profit. Secondly there is no factoring for the annual rate of turnover of circulating capital. Thirdly there is no factoring for the appreciation of depreciation caused by the 2012 conversion of R&D and in-house software from a cost into capital. Finally, none of us can calculate the distortions to national rates of profit because of input-output anomalies in the world economy. However, taking into account the first three factors, the adjusted rate of profit, having sharply recovered in 2010, has only been in sustained fall since 2014. Michael is aware of this but it does not sit easily with his theory of the long recession which allegedly began in 2007. What really needs to be explained is this: how was it possible for the rate of profit to reverse its fall in 2008/9 so abruptly thereafter, rising to new heights, if we were now in a long term slump. It has little to do with QE but with the actual underlying relations of production and to the exact nature of the banking crisis of 2008 which was not fundamental.

    1. This is true, I agree. Specially with USA an UK, the top 1% or better, the top 0.01%, is responsible for a large part of the total wages. I think even creditsuisse includes the profits of CEOs and billionaires in the wages.

  6. I agree. We are in store for an upswing in the Kondratiev cycle. Note that this upswing can still be interrupted by “recessions” as defined by the NBER, but these recessions will tend to be “comparatively” mild affairs. And by “comparatively,” I don’t meant “in comparisons to recessions of the past.” In all likelihood, the recessions during this upswing will be severe compared to those recessions thanks to the tendency for the rate of profit to fall. By contrast, the recessions during this upswing will be mild compared to those that will come during the next downward phase of the Kondratiev cycle, assuming capitalism is still around then.

    As for the mechanism that causes Kondratiev cycles, Sam Williams at his “Critique of Crisis Theory” blog puts forward a compelling case that it has to do with a long-term tendency for commodity prices to cyclically rise above and fall below their labor-values, which becomes reflected in gold production’s rate of profit falling below average (when other commodity prices have risen above their values) or rising above average (when other commodity prices have fallen below their values).

    As for why commodity prices would do this, I have a theory that this is causes by expansion and contraction of credit. Waves of credit expansion increase commodity prices above what would be supported by commodity-money or its token equivalent. This makes commodity-money production less comparatively profitable and exacerbates the crisis (because the credit must ultimately be repaid by commodity-money or its token equivalent, while the very expansion of credit disincentivizes the production of commodity-money and blocks the creation of the equivalent in token money, unless a monetary authority wants to tolerate depreciation of token money versus gold, which will tend to cause a “boldholders’ strike” and raise interest rates to stratospheric levels, as in the 1970s. The crisis can, ultimately, only be corrected by capitalist economic activity contracting down to a level more readily supported by the base of commodity-money or its token equivalent, which in the process brings unemployment and falling commodity prices, which then makes commodity-money production more profitable than average, setting the stage for an accelerated expansion in the supply of commodity-money, the supply of token money that can be supported without depreciation, and thus the effective purchasing power or apparent “market” for commodities.

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