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 19^th 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 19^th 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 19^th 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 19^th 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 19^th 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.