Recessions, monetary easing and fiscal stimulus

As the stock markets of the world gyrate up and down like a yo-yo, all talk in the financial media is on whether a new global recession is coming and when.  The financial pundits search for economic or financial indicators that might guide them to tell.  The favourite one is the ‘inverted bond yield curve’.  This is the difference in the annual interest rate that you get if you buy a government bond that has a ten-year life (the maturity before you get your money repaid) and the interest rate for buying either a three-month or two-year bond.

The curve of interest rates for differently maturing bonds is usually upwards, meaning that if you lend the government your cash (ie buy a government bond) for ten years you would normally expect to get a higher interest rate (yield) than if you lent the government your money for just three months.  But sometimes, in the market for buying and selling government bonds (the ‘secondary market’), the yield on the ten-year bond falls below that of the two-year or even three-month bond.  Then you have an inverted yield curve.

Why does this happen?  What it suggests is that investors in financial assets (who are banks, pension funds, companies and investment funds) are so worried about the economy that they no longer want to hold the stocks or bonds of companies (ie invest in or lend them cash).  It’s too risky and so instead investors prefer to hold very safe assets like government bonds – as the governments of Germany, Japan, the US or the UK are not going to go bust like a company or bank.

If investors buy more government bonds, they drive the price of those bonds up in the market.  The government pays an annual fixed interest on that bond until it matures, so if the price of the bond keeps rising, then the yield on that bond (ie. interest rate/bond price) keeps falling.  And then the bond yield curve can invert. Empirical evidence shows that every time that happens for a sufficient period (some months), within a year or so, an economic recession follows.

How reliable is this indicator of a recession coming?  Two Bloomberg authors have questioned the validity of inverted yield for causation; it may be that an inverted curve correlates with recessions, but that is no confirmation that another recession is on its way because all it shows is that investors are fearful of recession and they could well be wrong.  Indeed, when you look at corporate bonds, there is no inverted curve.  Longer-term corporate bonds have a much higher yield than short-term bonds.

On the other hand, JP Morgan economists recently did some regressions on the inverted yield curve and reckoned that the very low inflation that most major economies have experienced in the post Great Recession period may have altered the reliability of the indicator to some extent because the yield curve could go flat but not really express investor fear and loathing of stocks.  Even so, JP Morgan still reckoned it was a valuable indicator.  Currently, the US bond yield curves (10yr-3m) and (10yr-2yr) have inverted.  And as you can see from the JPM graph below, that every time that has happened before, a recession has followed (the grey areas) within a year.

JP Morgan reckons on this basis the current probability of a slump in the US economy within a year is about 40-60%.

And this is the US, the capitalist economy with still the best economic performance of the G7, with real GDP growth at about 2.3%.  Everywhere else in the G7, in Europe, in Asia, and also in many large so-called emerging economies, economic growth is falling fast towards zero and below.  Look at this list:

Canada: 1.3%; France 1.3%; Japan 1.2%; UK 1.2%; Russia 0.9%; Brazil 0.5%; Germany 0.4%; Italy 0.0; Mexico -0.7%;  Turkey -2.6%; Argentina -5.8%.  Only China, India and Indonesia can record decent growth rates and even here, there is a rapid slowdown.

I have reported before on the manufacturing and industry activity indexes that show the world is already in a manufacturing sector recession and only ‘service sectors’ like health, education, tourism etc are keeping the world economy moving.  But those sectors are ultimately dependent on the health of the productive sectors of a capitalist economy for their sales and profits.

In some of the major economies, there is so-called full employment, at least on the official stats, even if it is temporary, part-time, self-employed and on basic wage levels.  This employment income helps to keep spending going, but in many countries it is not enough, so that household savings are being run down.  For example, in the UK, the household savings rate is at a 50-year low.  So people cannot keep borrowing indefinitely, even though interest rates are very low.

And are they low!  We are now in the fantasy world of negative interest rates, where borrowers get paid to borrow and lenders pay to lend. In Denmark, one mortgage lender is offering loans at -0.1%, in other words it is paying you to take out a mortgage!  Over 20% of all government and even some corporate bonds have negative interest rates. The entire spectrum of German government bonds from two-years to 30 years have negative interest rates if you buy them. So sellers of bonds (borrowers) can expect you, the lender, to pay interest to them to buy their bonds!

So why are bond investors prepared to do this? As I said, it’s because they fear a global recession that will cause a collapse in stock markets and other ‘risky’ financial assets, so the safest place to put your money is with governments (which don’t go bust) like the US, the UK, Japan, Germany and Switzerland.

If a recession is coming, what can be done to avoid it?  Mainstream and Keynesian economics has basically two policy solutions.  The first is to inject more money into the financial system in the hope that piles of dollars, euros and yen will find their way into the coffers of corporate borrowers, which will then keep investing in jobs and machines; or into households who will keep spending

The ‘conventional’ way to do this was for the central banks of the major economies to cut their ‘policy’ interest rate, which would lead to falling interest rates across the board and thus reduce the cost of borrowing.  But the experience of the last ten years of what I call the Long Depression reveals that this does not work.  Investment has remained low as a share of GDP, wages have stagnated and economic growth has been feeble.

So governments and central banks have resorted to ‘unconventional monetary policy’ where the central banks buy billions of government and corporate bonds (even company stocks) from commercial banks.  This is called quantitative easing (QE). This led to a huge boost in bank reserves.  The banks were supposed to lend that cash on to companies to invest.  But it did not work.  Companies did not borrow to invest.  They were either so cash rich like Amazon or Microsoft that they did not need to borrow or so weak that the banks would not lend to them.  So all this cash ended up being invested in stocks and bonds (what Marx called fictitious capital, ie just claims on future profits or interest, not actual profits or interest).  The financial markets rocketed up, but the ‘real’ economy stagnated.

Monetary policy has failed, whether conventional or unconventional.  Central banks have been ‘pushing on a string’.  That was something that Keynes found too during the Great Depression of the 1930s.  His policy proposal for getting full employment and ending the depression in the early 1930s was first conventional interest-rate cuts and then unconventional QE.  By 1936, when he wrote his great work, The General Theory, he announced the failure of monetary policy.

And so it has been this time.  Mainstream economists including Keynesians like Paul Krugman at first advocated massive monetary injections to boost economies.  Japan’s government even invited Krugman and others to Tokyo to advise them on QE.  The government and the Bank of Japan adopted QE with a vengeance, so much so that the BoJ has bought virtually all the available government bonds in the market – but to no avail.  Growth remains weak, inflation is near zero and wages stagnate. 

The central banks have run out of ideas. And investors know it. That is why bond yields are negative and in the US the yield curve has inverted.  But there is nothing else that the central banks can do except cut interest rates where they are not yet zero and bring back yet more QE where they are.

Some radical economists have not given up on monetary policy.  Some are advocating ‘helicopter money’(named after right-wing monetarist economist Milton Friedman who advocated by-passing the banking system and printing cash and giving it directly to households to spend ie send helicopters over the country dropping dollars – not napalm as in Vietnam).  This ‘people’s money’ is the last resort of the monetary policy solution.

The more perceptive of mainstream economists now recognise that monetary easing will not work.  The Financial Times and even the Wall Street Journal have been trashing this policy.  And Keynesians who advocated it before now recognise its failure.  Take this example by Edward Harrison, a macro economic financial advisor.

“I think monetary policy is ineffective. We don’t even know how it works. Sure, rate policy can help at critical junctures in the business cycle by lowering interest payments when debtors are under stress. But, we’ve hit the limits of what central banks can do. As a result, we’ve resorted to quantitative easing, negative interest rates, and yield curve control. And for what? It’s crazy.   The solution is staring us in the face: help put money in the pockets of the people who are facing the most severe financial stress in our economies. Those are the people who need the money the most and are most likely to spend that money too. Until we do that, the stress on our economic and financial system will continue to grow… and political unrest will continue to grow with it.”

Harrison cites empirical work from his own college that shows monetary policy does not work – as Keynes discovered in the 1930s. “For example, economic researchers at my alma mater Dartmouth wrote this in 2013 as the abstract for an economic study:

“We study the factors that drive aggregate corporate investment from 1952–2010. Quarterly investment responds strongly to prior profits and stock returns but, contrary to standard predictions, is largely unrelated to changes in interest rates, market volatility, or the default spread on corporate bonds. At the same time, high investment is associated with low profit growth going forward and low quarterly stock returns when investment data are publicly released, suggesting that high investment signals aggregate over investment. Our analysis also shows that the investment decline following the financial crisis of 2008 represents a fairly typical response to changes in profits and GDP at the end of 2008 rather than an unusual reaction to problems in the credit markets.”

And he cites work by the US Federal Reserve that concluded that: A fundamental tenet of investment theory and the traditional theory of monetary policy transmission is that investment expenditures by businesses are negatively affected by interest rates. Yet, a large body of empirical research offer mixed evidence, at best, for a substantial interest-rate effect on investment. In this paper, we examine the sensitivity of investment plans to interest rates using a set of special questions asked of CFOs in the Global Business Outlook Survey conducted in the third quarter of 2012. Among the more than 500 responses to the special questions, we find that most firms claim to be quite insensitive to decreases in interest rates, and only mildly more responsive to interest rate increases.”

I have cited this paper that Harrison refers on many occasions in this blog before he brought it up.  But Harrison emboldens the text from the paper about how interest rates have little effect on business investment. But he ignores the other key conclusion in the paper cited.  I quote again with my emphasis now: “Quarterly investment responds strongly to prior profits and stock returns but, contrary to standard predictions…..Our analysis also shows that the investment decline following the financial crisis of 2008 represents a fairly typical response to changes in profits and GDP at the end of 2008 rather than an unusual reaction to problems in the credit markets.”

In other words, what drives capitalist economies and capital accumulation are changes in profits and profitability – indeed that is what the paper cited shows.  And there is a pile of other empirical evidence that confirms this relation, which I have covered in several papers. The profit investment nexus.  Economic growth in a capitalist economy is driven not by consumption but by business investment. That is the swing factor causing booms and slumps in capitalist economies.  And business investment is driven mainly by one thing: profits or profitability – not interest rates, not confidence and not consumer demand. It is this simple, obvious and empirically confirmed explanation of regular and recurring booms and slumps that is ignored or denied by the mainstream (including Keynesian) and heterodox post-Keynesian economics.

Take this alternative explanation of recessions recently offered by an ex-Bank of England economist Dan Davies.  Davies tells us that financial meltdowns aren’t the usual way in which recessions happen, and emergency credit lines and taxpayer bailouts aren’t the usual way that they’re prevented or managed. What normally happens is that there’s a shock of some sort to business confidence – say, political uncertainty or trade restrictions, as we’re seeing at the moment – and companies react to this by cutting back investment plans.”  According to Davies this orthodox Keynesian recession of this sort, unaccompanied by a financial market crisis, is the normal kind – and one of the best understood problems in economic policy.”  Really, best understood?

So this Keynesian explanation is that there is a sudden loss of business confidence caused by some external factor like a trade war or a government falling or a war. There is nothing endogenously wrong with the capitalist process of production and investment for profit.  The idea of ‘shocks’ to an inherently equilibrium system is the mainstream macro view, in essence.  It has bred a whole industry of empirical work based on Dynamic Stochastic General Equilibrium (DSGE) models, which is a smart word for seeing what happens to an economy when an external ‘shock’’ like a sudden loss of çonfidence’ or trade tariffs is applied.  Larry Summers, a leading Keynesian guru critiqued DSGE models“In four years of reflection and rather intense involvement with this financial crisis, not a single aspect of dynamic stochastic general equilibrium has seemed worth even a passing thought.”  He moaned: “Is macro about–as it was thought before Keynes, and came to be thought of again–cyclical fluctuations about a trend determined somewhere else, … inserting another friction in a DSGE model isn’t going to get us there. “

This orthodox Keynesian explanation of recessions explains nothing.  Why is there a sudden loss of business confidence as we are seeing now?  How does a sudden loss explain regular and recurring slumps and booms, not one-off shocks?  Davies argues that the Great Recession was exceptional in that the huge slump was caused by an extreme financial crash that won’t be repeated, as ‘normal’ slumps are just contingent ‘shocks’.

And yet the theory and the evidence is there that capitalist accumulation and production moves forward in a succession of booms and slumps of varying magnitude and length according to movement of the profitability of capital culminating on a regular basis in a collapse of profits, taking down investment, employment, incomes and consumption in that order.

In the 1930s when Keynes realised that monetary easing was not working to end the depression, he opted for government spending (investment) through running budget deficits to stimulate ‘effective demand’ and get investment and consumption on a rising trend.  This policy has become known as the Keynesian one, also adopted by more radical post-Keynesians and in their latest version, Modern Monetary Theory (MMT). The Keynesians reckon capitalist economies can be brought out of recessions by governments borrowing more than they get in tax revenues (running budget deficits).  Governments borrows by getting financial institutions to buy their bonds.

The more radical post-Keynesians and MMTers reckon that it not even necessary to issue bonds for that purpose.  Governments can just print the money and then spend it on useful projects.  But all agree that ‘fiscal easing’ is the answer to restoring growth, investment, employment and incomes in a capitalist economy.  The government borrows or prints money and the capitalists and workers spend it.  Once growth is restored and full employment and rising incomes are achieved any debt servicing can be funded and you can turn off the government money tap and moderate any possible ensuing inflation if the economy is ‘overheating’.

The trouble with this policy option is that we live in a capitalist economy where the investment decisions that drive any economy are made by capitalist companies. Unless government makes those investment decisions itself and rides roughshod over the capitalist sector or replaces it with state operations in a plan (as in China, for example), then investment and growth will depend on the decisions of capitalist companies.  And they only invest if they are confident of getting good profits ie the profitability of investment is high and rising.

The history of the Great Depression of the 1930s shows; and the collapse of Keynesian demand management policies in the 1970s shows; and the history of the Long Depression since 2009 shows, that if corporate profitability is low, and especially if its falling, then no amount of fiscal stimulus will deliver more investment and faster growth.

I and others have delivered a pile of empirical evidence to show that government spending has little or no impact on boosting economic growth or overall investment – the amount is either too small to have an impact (government investment averages just 2-3% of GDP in most capitalist economies compared to 15-20% of GDP for capitalist sector investment).  Or most government spending in capitalist economies are really handouts to capitalist companies or to boost welfare with little productive result.

Don’t believe me – then look at the evidence here.  Take Japan – it has run budget deficits of between 3-10% of GDP for nearly 20 years and yet its growth rate has been even lower than the US or Europe.

The Trump tax cuts have raised the US budget deficit in the last two years and going forward – Trump is following Keynesian policies in that sense – and yet the US is now slowing down fast.  The US is projected to run a primary budget deficit (that excludes the interest cost on the debt) for the foreseeable future.  Do Keynesians really expect the US economy to grow faster as a result?

US budget projections

Although the inverted yield curve can be checked daily, it may not be a useful indicator of a coming recession but falling profits are (unfortunately, profits data are mostly quarterly).  Empirical studies like the one mentioned by Harrison above and many others confirm this.  And global corporate profits are now stagnating;

while US non-financial corporate profits are falling.

Monetary and fiscal solutions to recessions that still preserve the profit-making capitalist system won’t work.  Monetary easing has failed, as it has done before.  Fiscal easing, where adopted, has also failed.  Indeed, capitalism can only get out of a recession by the recession itself.  A recession would wipe out weaker capitalist companies and lay off unproductive workers.  The cost of production then falls and those companies left after the slump have higher profitability as the incentive to invest.  That is the ‘normal’ recession.  In a depression, however, that process requires several slumps (as in the late 19th century depression) before normal service is resumed.  Another recession is on its way and neither monetary nor fiscal measures can stop it.

30 thoughts on “Recessions, monetary easing and fiscal stimulus

  1. Michael,

    Since I signed up to your blog, I look forward to receiving your occasional emails and keep being surprised on the quality insight and valuable advice of your posts. At my age, I’m getting wiser through them each time. Thank you!

    Stefanos Tefos Athens, Greece

    Στις Δευ, 19 Αυγ 2019, 10:33 ο χρήστης Michael Roberts Blog έγραψε:

    > michael roberts posted: “As the stock markets of the world gyrate up and > down like a yo-yo, all talk in the financial media is on whether a new > global recession is coming and when. The financial pundits search for > economic or financial indicators that might guide them to tell. ” >

  2. “Economic growth in a capitalist economy is driven not by consumption but by business investment. … And business investment is driven mainly by one thing: profits ….”

    But without adequate consumption there can be no profits, and if goods are overproduced there cannot be adequate consumption, so …. Isn’t pointing the finger at profitability just picking a point on the circle and calling it ‘start’?

    I just finished Brenner’s ‘Economics of Global Turbulence’, which seems to place the emphasis on overproduction, which results in lower profits, which leads to disinvestment. But again, doesn’t that mean overproduction relative to consumption capacity, and isn’t the latter ultimately restricted by increasing automation? I understand that in any case the problem will not be solved by any combination of monetary or fiscal policies, but I am still confused as to why profitability should take explanatory precedence in what looks to me to be a cyclical process. (I have read your latest book as well.)

    1. Yes I am picking a point on a circle and calling it ‘start’. But not arbitrarily. Under capitalism production is for profit and capitalists make investments on the expectation of profits, mainly based on what happened before. They may not get it of course. But consumption is not before production. Workers need to get wages to spend first. So they need to be employed by capitalists first. Profit comes from the exploitation of workers and that is key under capitalism, not what capitalists produce and what workers spend.

      Indeed, Marx shows in Volume 2 that capitalism can invest, produce and accumulate without relying on workers wages and consumption. Two-thirds of production is in intermediate goods, components for final goods and therefore is exchange between capitalists.

      And empirically we can show that 1) all recessions begin with a fall in investment not consumption 2) that just before a slump, wages are often rising not falling – as Marx pointed out.

      Overproduction is the consequence of overaccumulation of capital or lack of profitability. So the cycle does have a starting and finishing point – profitability.

      Brenner rejects the role of marx’s law of profitability and instead he adopts the Keynesian view of lack of effective demand. He is wrong. Read my posts on overproduction, underconsumption, and disproportion theories on this blog.

      1. Michael Roberts said (in a reply to Ron Rice):

        “Workers need to get wages to spend first. So they need to be employed by capitalists first”.

        …..unless they are guaranteed a *public sector* job, as a countercyclical policy to the private sector business cycle.

        You mentioned MMT previously, but you have apparently missed the significance of the MMT JG (Jobs Guarantee).

        This proposes replacing the NAIRU fiction of orthodoxy with a NAIBER, where the BER part (buffer employment ratio) is the ratio of workers in the JG scheme relative to the total of working age labour in the economy. The JG wage is a fixed above poverty wage that acts as an inflation anchor; in an upswing workers move out of the JG, and vice versa in a downturn.

        We already live in a mixed economy (public + private): it’s a matter of tweaking the ‘public sector’ part of the economy, as described by MMT. Even China would benefit.

        Hopefully universities will soon start turning out MMT graduates, whose influence will influence national central banks and international bodies such as the WTO.

        Then Marx will smile on us all.

      2. Tthe idea that MMT/JG is a viable strategy, is false. Central bankers are basically a central planning vice imbedded at the heart of a capitalist economy. Thats the problem…. the central planning

        Likewise , doing the same to the labour market will end in the same farce with MMT JG.

        The problem in modern economies is one between capitalism and CORPORATISM. The latter is the problem.

      3. Profitability is no doubt what the capitalist looks at to determine whether or not to invest. But can one not always ask: what caused profitability to decrease? Would the answer not always have something to do with the price at which goods could be sold, in comparison to the cost of capital invested?

        Why assign a single cause to economic cycles? That seems to me to be an oversimplification of the analysis. Is the rate of profit a driving factor in capitalist crises? Of course. Does failure to expand production on a global scale cause the rate of profit to fall inexorably in the long run? It seems clear to me that it does. Is overcapacity part of that failure? It certainly seems to me to be.

      4. I see the MMT debate was thoroughly explored in February.

        One point Michael Roberts made back then: “a JG is (a species of) ‘central’ control, ie an alternative to *democratic* control”.

        I think you are missing a fundamental point – which is one of the reasons ‘Communism’ failed, namely, we all have different strengths and abilities to bring to society.

        eg, the special character that profit seeking entrepreneurs/inventors bring to an economy ought not be necessarily spurned, as some contributions will be uniquely valuable to the entire economy. (Of course the idea that profit is the *only* thing that motivates humans is also wrong)

        I notice Peter K above also has a similar proposition with this remark:

        “Central bankers are basically a central planning vice imbedded at the heart of a capitalist economy. That’s the problem…. the central planning”

        CB’s, far from being “a central planning vice”, are actually a method of denying democratic governments a means of democratic policy implementation. MMT sees a different role for CB’s, namely (at base) an agency facilitating maximum sustainable utilisation of a nation’s resources, including working age labour, on the understanding that real resources are the actual constraints that nations face, not ‘money’.

        eg, public education itself is a “renewable” resource that might be funded by CB account creation. But there is not (currently) a CB that does this – hence the idiocy of governments insisting that students must begin their careers burdened with debt.

        As for large international *corporations*: if producing/marketing certain goods is most efficiently achieved within such structures, then so be it. (Wages are anoher matter).

      5. Michael,

        I think your position is rather like that of the Narodniks, and Krasin, in “The Market Qustin”, which was criticised by Lenin in, “On The So Called Market Question”.

        Capitalists do not seek profits for the sake of profits, as Marx sets out in Capital II. They seek profits only in order to be able to accumulate additional capital, which they are driven to do by competition. That is also why, as Marx points out, it is not the rate of profit that is determinant in that regard, but the mass of profit, and the value of commodities.

        As Marx sets out, even with a lower rate of profit, so long sa the mass of profit is greater, the amount of accumulation is greater. As he also, sets out, if the value of commodities fall that also enables greater accumulation, because a) commodities comprise the constant and variable capital, so a given amount of profit will buy a greater quantity of them, and b) commodities are also unproductively consumed by capitalists and other parasitic elements, so that a smaller proportion of their money revenues has to go to buy those commodities leaving a greater proportion of revenue for accumulation.

        As Lenin sets out what drives accumulation is competition. That is true in relation to both primary and secondary accumulation. Its true, as Lenin sets out in that essay an expansion of the market is possible alongside an impoverishment of the peasantry, as they lose their means of production and become wage workers, and that itself is a consequence of competition too, as those that cannot compete, and cannot accumulate capital so as to better compete, go under.

        But, it is that same competition that drives accumulation, because as the market expands, each capital must accumulate so as to grab its share of the market, or face going under. As Marx sets out in TOSV, Malthus and others were not wrong in suggesting that capital cannot simply use surplus production to invest in additional productive capacity, irrespective of whether the existing productive capacity is producing end products that cannot be sold. He was wrong in thinking that the market itself cannot expand via expanded accumulation, so that the demand for these end products grows, other than by the landlord class or the state intervening to soak up the surplus product.

        Ultimately, as Lenin describes there can be no continued accumulation of means of production, irrespective of demand for Department II production. Similarly, if demand for consumption goods grows, because more workers are employed, who demand more wage goods, this expansion of the market will prompt Department II capitals to meet that demand, which means they must employ more workers, and more means of production, which in turn requires more Department I workers and capital to be employed, and that continues to be the case whether the rate of profit is falling, rising or stationary, and indeed whether the mass of profit is rising, falling or stationary.

        If the mass of profit is falling, firms still need to accumulate when the market is expanding, it simply means as Marx describes in Capital III, in relation to the interest rate cycle, that it must finance more of this accumulation via borrowed money-capital, which then causes interest rates to rise.

      6. “Workers need to get wages to spend first. So they need to be employed by capitalists first. ”

        That is not what Marx says. According to Marx, workers wages are only the capitalist paying back to the worker a portion of what the worker has already produced, but the worker must have been able to consume during all of the time they were producing, before being paid that wage. That means the worker must consume, and have means of consumption, prior to being paid their wages.

        Indeed, today, workers are generally paid wages a month in arrears. That means that the worker works for a month, and is then paid, but the worker does not abstain from consumption during all of that time they are producing for the capitalist! As Marx describes in Capital II, and Lenin gives a similar picture in his analysis of the development of Capitalism in Russia, wage workers do not simply appear as wage workers out of thin air. In the process of primary accumulation, workers are themselves direct producers, over the whole period of human history, the producer consumes before they produce.

        The first humans, like the animals they separate from first consumes by utilising the free products of Nature. Indeed, even today, most of the animal kingdom does not engage in any production at all, but merely consumes what is freely available. Humans first consumed, then produced, and having produced, they were then able to consume more, and to accumulate.

        Direct peasant producers as a stage in this process of human development had already produced, and had means of consumption, and it is these means of consumption from their own production that enables them to then be able to work for capitalist producers, before being paid any wages from the capitalist.

      7. ” They seek profits only in order to be able to accumulate additional capital, which they are driven to do by competition.”

        Only Boffy, (maybe not only, but definitely Boffy) could produce the above sentence and think he has made an argument rather than demolish his own claim.

        Only Boffy would write…..”which they are driven to do by competition” without ever asking what is the purpose of that competition, how does the success or failure in that competition manifest itself, how do the capitalists measure that success or failure?

        And of course, the three answers are: to distribute, to allocate, the total social profit among the competitors; success or failure is manifested in the profit allotted to each capitalist; the capitalist measure success or failure in profit; not in the value of the means of production accumulated, but in the profit that value of the accumulated means of production can generate, which is precisely the “self-expansion” of capital, and which explains the willingness of the capitalist to physically obliterate means of production, not just “depreciate value,” when profits disappear..

      8. This bit is also wrong:

        “Two-thirds of production is in intermediate goods, components for final goods and therefore is exchange between capitalists.”

        Intermediate goods are what Marx defines in his schemas of reproduction as Department I (v + s). In other words, they are the equivalent of the new value created in Department I, but labour. Under simple reproduction, they constitute Department II (c). This intermediate production is deducted from calculation of GDP total output to avoid double counting for that reason, i.e. this value is included in the value of total final output, which is actually the value of Department II (c + v + s).

        But, Marx in his schemas of reproduction shows that this intermediate production does NOT constitute two-thirds. In his schema, Department I output is 4000 c + 1000 v + 1000 s. In other words, two-thirds of Department I’s output value comprises the value of existing constant capital – and so not new value creation – which is reproduced “on a like for like basis”, s Marx puts it in Capital III, Chapter 49, i.e. the use values are physically reproduced – directly from current production. Indeed, its precisely for that reason, as Marx demonstrates that this process of reproduction and expansion of capital, i.e. the rate of profit, has to be calculated on the basis of current reproduction costs not historic prices.

        The Department I production is not intermediate production, because as Marx sets out in Capital, not one penny of the value of Department I (c) is transferred to the value of Department II, i.e. final output. In Marx’s example, if we take a farmer, they take seed, say with a value of £10. £20 of new value is created by labour, which is divided into £10 wages, and £10 surplus value, producing output with a value of £30. If productivity remains constant, the quantity of seed consumed is replaced directly from the farmer’s output. It is thereby not traded, and as Marx shows, contrary to Adam Smith’s “absurd dogma” that the value of commodities resolves entirely into revenues, does not thereby form a revenue for anyone.

        The £10 of constant capital is capital not revenue, and is reproduced from production as capital. It is not traded. Only the £20 of new value created is traded, and represents revenues as wages and profits. If the grain is bought by a miller, it constitutes intermediate production as far as society is concerned, because for the miller, although the grain they buy represents purely the new value created by the farmer, and contains none of he value of the farmer’s constant capital, it constitutes the miller’s constant capital.

        Similarly, the miller adds new value by heir labour, and this new value contained in the flour constitutes intermediate production for the baker. If the miller adds £20 of new value by their labour to the £20 value of grain they process, they sell intermediate production of £40 to the baker, in the form of flour, which constitutes the baker’s constant capital, yet, in reality none of this flour contains one penny of value of constant capital from the farmer or miller. The baker adds a further £20 of new value, so that the value of total final output is £60, but in reality this £60 of total output comprises only revenues – which as Marx shows is partly what causes Smith’s confusion. The £60 of total final output value of Department, is consumed by the £20 of revenues of the farmer, the miller, and the baker.

        But total social output value is £70, because the farmer Department I, produced output with a value of £30, not £20. It is just that only £20 of that output is traded, the other £10 being reproduced by the farmer on a like for like basis, and replaced in kind from their physical production. It does not constitute intermediate production, precisely because not one penny of its value is passed through into the value of final output of Department II.

        The important point is that it is not intermediate production that constitutes two-thirds of output value, but the value of constant capital. For Department I that value is directly reproduced from its own production, and not traded, For Department II, it constitutes only the value of intermediate production, which is equal to Department I (v + s).

        The relevance here is that it is also not intermediate production that grows at the fastest rate according to Marx and Lenin. On the contrary, assuming that rising social productivity goes along with capital accumulation – which is the fundamental assumption of Marx, and the basis of his law of the tendency for the rate of profit to fall – what grows fastest is Department I (c), i.e. the part of total output that is not traded, and forms no part of the total final output value (GDP)/consumption fund/National Income, but which is simply reproduced as capital, on a like for like basis out of current production.

        If intermediate production constitutes two-thirds of total output value, then because it comprises the new value created by labour in Department I, the law of falling profits could never exist, particularly if that part of total output were to grow fastest. But, Marx and Lenin point out that, in fact, as a result of rising social productivity what grows fastest is Department I (c), i.e. means of production for the purpose of producing means of production, then Department I (v + s = Department II (c)), i.e. means of production for the purpose of producing means of consumption, and finally Department II (v + s), i.e. the new value created by labour in Department II.

        See Lenin “On the So Called Market Question) Collected Works p 87, and on p 89, where Lenin quotes Marx.

        “Capitalist society employs more of its available annual labour in the production of means of production (ergo of constant capital), which are not resolvable into revenue in the form of wages or surplus value, but can function only as capital.” (Capital II)

        In fact, as I have written previously, I don’t think this situation actually holds today. Accumulation no longer implies that Department I (c) grows fastest, certainly in terms of value. Intermediate production (Department I (v + s) may grow fastest, which in itself means that the proportion of labour (and thereby of surplus value) grows at a faster rate than that of constant capital in final output, which puts the fundamental requirements for the law of falling profits in reverse. And, on the same basis it may be that Department II (v + s) grows faster than Department I (c) too.

        Both of those conditions apply because 80% of new value and surplus value creation comes from service industry, where the most important component is labour, and thereby new value creation. I think it was Byron Wien, who pointed out on CNBC yesterday that a large part of the new value being created in many companies, is coming not from them buying new fixed capital in the form of new computers and hardware, but from the use of existing fixed capital, in the form of existing computers and hardware – which are daily being depreciated by moral depreciation, as well as being amortised via wear and tear, which itself causes the rate of profit to rise, as Marx sets out in TOSV, Chapter 23 – and the development of new software by programmers on that existing fixed capital.

        So, on the one hand the constant capital is constantly devalued, whilst the new value as intermediate production (Department I (v + s), and final output value (Department II (v + s), is increasing in relation to it. So, even if the rate of surplus value is falling, the rate of profit could still thereby rise, just as Marx sets out in his law that the rate of surplus value would be rising due to rising productivity, whilst the rate of profit would be falling because the same rise in productivity causes more material (Department I (c) to be processed.

      9. This bit is definitely wrong, as I partly explained above:

        “But consumption is not before production. Workers need to get wages to spend first. So they need to be employed by capitalists first.”

        It is in fact the argument put by capital and its apologists for the existence of capital, and justification of exploitation. As Marx discusses in TOSV, Chapter 21, looking at the work of Ravenstone, Hodgskin, Bray and others, even they understood that the claim of capital and its apologists, which you reproduce here, “Workers need to get wages to spend first. So they need to be employed by capitalists first.” is bogus.

        It is the idea that the capitalists have somehow “saved up” those wages to be handed to the workers ahead of them producing. It fails to answer the question of who it was exactly that had produced those wage goods that the capitalist is supposed to have saved up to hand to the workers as wages in the first place!

        In fact looking at matters in terms of money wages simply disguises the underlying realities as a result of commodity fetishism. It appears that the capitalist gives money wages, and the worker then simply uses the money wages to buy the necessaries they require. But, looking at in that way avoids the basic question, who produced the wage goods that the worker then buys with those money wages, and when? Unless those wage goods were already in existence, in other words unless they had already been produced the worker could not buy them. It can’t be answered that the capitalists have produced those wage goods, by employing labour to produce them, because here, it has been stated that the capitalists first employ workers, and give them wages so as to consume, and only then do the workers engage in production!

        And, viewed in this way, it becomes obvious that nor can a solution be found in the idea that the workers might be able to rely on welfare payments, or credit (pay day loans e.g) in the intervening period before the capitalist pays them their money wages, because wherever the worker were to obtain he money required to fund their consumption, the question remains where did the actual wage goods come from, who produced them, and when?

        Once capitalist production is underway, of course, all of these options become possible, but they only become possible, because the workers have already produced the wage goods they require for consumption in the previous period. But that simply demonstrates Marx’s point that the capitalist does not pay the worker wages so that the worker can consume, but that the worker produces commodities, first, and from this production, the capitalist then hands part of the worker’s production back to them as wages, retaining the other portion of surplus product as profit.

        Moreover, as Marx and Hogskin demonstrate, the idea that the workers consume only because he capitalist saves up the wages that are paid to the worker so that the worker can consume is bogus for another reason, because Hodgskin points out that the bread that workers consume in the day, has not been saved up by capital, but is the product of contemporaneous labour, i.e. of the labour of bakers that very morning who baked the bread that the workers consume. And Marx adds that Hodgskin should have gone on to say not just in relation to the variable-capital but also to the circulating constant capital, because that too is largely the product of contemporaneous labour, or as Marx puts it outputs from one sphere are simultaneously being consumed as the inputs of another sphere.

      10. Returning to this point,

        “Indeed, Marx shows in Volume 2 that capitalism can invest, produce and accumulate without relying on workers wages and consumption. Two-thirds of production is in intermediate goods, components for final goods and therefore is exchange between capitalists.”

        In TOSV, Marx demonstrates following Ravenstone and Hodgskin that there are other alternatives. For example, surplus Department II(a) output can be exported and exchanged for Department II(b) luxuries. It could indeed be simply exported and the resultant money hoarded. Marx points out that this should not be ignored, because what this foreign trade also does it to expand the market by introducing a wider range of use values into consumption.

        However, no ultimate solution to overproduction can be found on this basis, because it ultimately just expands the sphere of the overproduction. So, the answer cannot be to simply divert an ever increasing proportion of output into the accumulation of fixed capital, which raises productivity, and then simply results in even more final output being produced that cannot be consumed profitably.

        Nor is the answer that the capitalists can simply increase their own consumption. As Marx puts it in Capital III, Chapter 15,

        “And the capitalist process of production consists essentially of the production of surplus-value, represented in the surplus-product or that aliquot portion of the produced commodities materialising unpaid labour. It must never be forgotten that the production of this surplus-value — and the reconversion of a portion of it into capital, or the accumulation, forms an integrate part of this production of surplus-value — is the immediate purpose and compelling motive of capitalist production. It will never do, therefore, to represent capitalist production as something which it is not, namely as production whose immediate purpose is enjoyment or the manufacture of the means of enjoyment for the capitalist. This would be overlooking its specific character, which is revealed in all its inner essence.”

        The point of capitalist production is capitalist production and its reproduction on an expanded scale. It is not the production of profit for the sake of profit, but only profit for the sake of expanding production, so as to produce more profit so as to accumulate even more. As Marx says, in Capital II, and Capital III, the manifestation of the profit, as money, is not the termination point for the circuit of capital, but only a moment within that circuit, prior to its accumulation as additional physical capital.

        ““In the reproduction process of capital, the money-form is but transient – a mere point of transit.”

        (Capital III, Chapter 24)

        The whole purpose of capitalist production is to be able to accumulate additional physical capital so as to produce on a larger scale, and in particular to expand capital as a social relation, i.e. to employ additional labour as the source of new value, and thereby of surplus value. If the technical composition of capital is given, then the expansion of the capital relation, i.e. the expansion in the quantity of labour employed, and so exploited, as Marx sets out depends not on the value of the constant capital, but on the quantity of the constant capital, i.e. it depends upon the constant capital as use value, not as exchange value.

        If the technical composition of capital determines that 100 kilos of cotton requires 10 hours of labour to process into yarn, then the labour employed depends upon how much cotton the capital can buy. And, so as Marx describes in TOSV examining the different consequence arising from changes in values and prices of constant and variable capital, the capital relation expands when the values of commodities declines. If a capital of £100 buys 100 kilos of cotton and 10 hours of labour, then if the value of cotton halves, more than 100 kilos of cotton can be bought, and so more labour is employed to process it.

        So, as Marx points out even if the mass of profit remains constant, or even falls, capital can still expand, and accumulation increase, if the value of constant or variable-capital falls. £100 of profit may currently buy 10 kilos of cotton, but if the value of cotton halves, it will now buy 20 kilos of cotton,so that the same mass of profit now enables a greater accumulation of capital, which again is precisely why Marx calculates the rate of profit on the basis of current reproduction costs not historic prices, because the extent to which accumulation occurs is a function of current reproduction costs not historic prices. As Marx points out what has to be replaced for reproduction to occur, as the foundation of expanded reproduction, is the reproduction of the consumed use values, not their values. If social productivity rises, those use values can be reproduced with the expenditure of less current social labour-time so that there is both a release of capital as revenue (which can itself be used for additional accumulation), and a rise in the rate of profit.

        “The circuit of productive capital has the general formula P … C’ — M’ — C … P. It signifies the periodical renewal of the functioning of productive capital, hence its reproduction, or its process of production as a process of reproduction aiming at the self-expansion of value; not only production but a periodical reproduction of surplus-value; the function of industrial capital in its productive form, and this function performed not once but periodically repeated, so that the renewal is determined by the starting-point.”

        (Capital II, Chapter 2)


        “If the productiveness of labour remains the same, then this replacement in kind implies replacing the same value which the constant capital had in its old form. But should the productiveness of labour increase, so that the same material elements may be reproduced with less labour, then a smaller portion of the value of the product can completely replace the constant part in kind.”

        It is this expansion in the physical capital set in motion, which means that for any given technical composition of capital existing at the time, means that more labour is set in motion, i.e. the capital relation is expanded that is the purpose of capitalist production. But, as Marx says in Capital III, simply producing surplus value is not the whole of the story, because the surplus value must be realised as profit, and ultimately that requires that what is produced is consumed, which is a function of demand.

        As Lenin says the expansion of Department I cannot be divorced from the expansion of Department II

      11. Boffy has a knack for transforming solid abstract historical materialist categories in to fetishes. He does this in numerous ways. Here, somewhere in the wealth of marxist knowledge he contributes to the debate, he makes a fetish of the abstract proposition that laboring people produce the goods that produce their lives. Of course, labor in the abstract reproduces itself.That is what primal accumulation and the labor theory of value is all about–but that broad generality has to take into account its contradictory development: slavery and colonial expropriation, as well as key negative moments in the transformation of non-alienated peasant farm and artisan labor in northwestern Europe into alienated proletarian labor: moments featuring uprooted, staving populations, religious wars, poor laws, the workhouse, the hangman, transportation–and the up to date semi-homeless multiple-gig workers wondering where their (or their family’s) next meal is coming from.

        What’s the point of all this? To prove that just as workers do not need wages (at least for a while) capitalists are not driven by profitability, but by competing for the socially produced mass of profit at the expense of loser capitalists. But what capitalist wants to be a profit-donor loser by investing in a losing proposition? What unemployed worker, especially one who is class conscious, doesn’t fear penury? Especially when one is surrounded by it.

        Social democratic reformers have used “marxism” to save capitalism from the capitalists by giving some of it to workers. However, so long as there is capitalism, capitalists, will tend to follow their own, collective and individual interests, and have succeeded, at inestimable human cost, to save themselves from socialism, so far.

      12. “Overproduction is the consequence of overaccumulation of capital or lack of profitability. So the cycle does have a starting and finishing point – profitability.”

        In Capital II, Marx shows that is not necessarily the case. The obvious example is that he gives in relation to the replacement cycle of fixed capital. Production and profitability can be exactly the same as in the previous year, he shows, but if more fixed capital simply lasts for longer, then the same level of production of fixed capital by Department I producers results in their being overproduction, as a consequence of the “underconsumption” of fixed capital. The overproduction in Department I, will then mean that other producers will have similarly overproduced, even though their level of production and profitability will have remained exactly the same.

        Marx says,

        “This illustration of fixed capital, on the basis of an unchanged scale of reproduction, is striking. A disproportion of the production of fixed and circulating capital is one of the favourite arguments of the economists in explaining crises. That such a disproportion can and must arise even when the fixed capital is merely preserved, that it can and must do so on the assumption of ideal normal production on the basis of simple reproduction of the already functioning social capital is something new to them.”

        (Capital II, Chapter 20)

        And, as he says in TOSV, the fact that commodities are produced, and surplus value is produced, does not at all mean that demand for the actual use values produced follows naturally, so that what is produced can be sold, or at least not sold at prices that reproduce the value of the consumed capital. On paper, I’m sure Sinclair thought that the C-5 would be a profitable venture, but the fact that no one wanted to buy them at prices that reproduced the consumed capital, proved to be a rather major drawback for him!

        And, a Marx points out, in that regard this can apply not to just one commodity but commodities in general.

        ““At a given moment, the supply of all commodities can be greater than the demand for all commodities, since the demand for the general commodity, money, exchange-value, is greater than the demand for all particular commodities, in other words the motive to turn the commodity into money, to realise its exchange-value, prevails over the motive to transform the commodity again into use-value.”

        (TOSV2 p 505)

        That, of course, does not preclude that demand for all these commodities may be rising. Indeed that is generally the case before a crisis. Marx sets out a number of scenarios where a crisis of overproduction may occur at different phrases of the cycle. For example, in a boom period, especially where new technologies have been introduced, such as spinning machines, it may be the case that demand for cotton then rises so fast that supply can’t keep up. The market price of cotton rises, or cotton simply is not physically available to meet demand, so that the circuit of capital breaks down. Or he price of cotton may rise to a level where, it cannot be passed on into final output causing the spinner to have to absorb the higher price out of their produced surplus value.

        Or from the other direction, it could simply be that the supply of yarn rises so quickly that even with lower yarn prices, and a greater mass of produced surplus value, the surplus value cannot be realised, because although demand for yarn rises, it does not rise enough to meet the increased supply, and so market prices for yarn fall sharply, until such time as new power looms are introduced that can absorb the supply of yarn.

        ““When spinning-machines were invented, there was over-production of yarn in relation to weaving. This disproportion disappeared when mechanical looms were introduced into weaving.”

        (TOSV2 Note p 521)

        But, as Marx sets out in C3, Ch15, the crisis of overproduction is mostly clearly seen, when existing mature technologies have simply been employed on a more extensive basis, and so towards the end of the cycle, with the consequence that productivity gains tend to be slight, whilst the supplies of exploitable labour have started to run out, causing a problem not just in producing additional absolute surplus value, because the social working-day cannot be expanded, but also causing relative surplus value to actually fall, because wages rise squeezing surplus value.

        Its in precisely those conditions of higher wages, and living standards for workers, that demand for wage goods rises, and prices tend to rise along with it, but also as Marx describes in Capital II, workers as a result of higher living standards, begin to have their fill of some of the necessities, and begin to consume some commodities that were previously considered luxuries. But, their capacity to consume these luxuries is still limited, because workers still can’t afford many of them.

        As Marx describes in Value, price and Profit. Squeezed profits means demand for luxury goods from parasitic layers is reduced, but that is not compensated by additional workers consumption in those spheres. Even with constant production of luxury goods, therefore, there would be overproduction in that sector.

        The rising living standard of workers at this point means that their marginal propensity to consume a range of necessities declines, so that in order to expand the market, for the growing output of these commodities, prices for them have to fall by increasing amounts, so that not only do producers face a squeeze on profits, because of rising wages, but they face an increasing problem in realising even these squeezed profits, because workers will not increase their demand proportionate to the output without ever larger proportional falls in prices.

        As Marx puts it,

        “The same value can be embodied in very different quantities [of commodities]. But the use-value—consumption—depends not on value, but on the quantity. It is quite unintelligible why I should buy six knives because I can get them for the same price that I previously paid for one.”

        (TOSV Ch 20)

        Crises of overproduction of this type occur at this stage of the cycle, because a) existing labour supplies have been used up leading to b) a constraint on the extension of the social working-day, which leads to c) a constraint on the growth of absolute surplus value, and b) a rise in wages, which squeezes surplus value. But also because the rise in wages raises workers living standards so they can consume more necessaries, leading to them only increasing demand for them if prices fall to a level where capital cannot produce them profitably. Workers begin to consume some formerly luxury commodities, but not on a scale to compensate for the loss of demand for those commodities from capitalists who reduce their demand due to falling profits, as Marx sets out in Capital II, Chapter 20. This means that workers whilst consuming more consume proportionally less, whilst increasing their savings ratio.

        This can only be resolved if either a) productivity rises to a significant degree that a relative surplus population is created, and wages are reduced, so that the rate of surplus value rises substantially, and the price of commodities falls sufficiently to stimulate the additional demand at prices that realise profits, or b) whole new ranges of commodities are introduced, so as to widen the market, and thereby be able to utilise freed capital and labour in these spheres where not only can surplus value be produced, but it can be realised as profits.

        That in fact, is the way Marx explains that all such crises are in fact resolved, resulting in a widening of the market as well as a deepening of the market, and an expansion of capital.

      13. Mandm has a knack for always failing to address any questions of theory, and instead simply providing a rambling, vague dialogue that takes the state of understanding further by not one jot.

      14. First we get Boffy telling Michael he (Michael) is wrong in stating that profit determines the decisions of capitalists to invest (and to produce): “Capitalists do not seek profits for the sake of profits, as Marx sets out in Capital II. ”

        Then we get Boffy quoting Marx, again to prove Michael wrong, “It must never be forgotten that the production of this surplus-value — and the reconversion of a portion of it into capital, or the accumulation, forms an integrate part of this production of surplus-value — is the immediate purpose and compelling motive of capitalist production”…

        …as if that doesn’t refute Boffy’s claim that profits don’t determine the trajectory, and the itinerary of capitalist production.

        Marx, however, provides a bit of clarification, although Boffy might think Marx got that bit wrong too: “It is the rate of profit that is the driving force in capitalist production, and nothing is produced save what can be produced at a profit.” Capital Vol 3 “Development of the Law’s Internal Contradictions.”

        And then we get this bit, by Boffy:

        “a large part of the new value being created in many companies, is coming not from them buying new fixed capital in the form of new computers and hardware, but from the use of existing fixed capital, in the form of existing computers and hardware –…..”

        which really puts the truth to and against Boffy’s so called deep grasp, insight, and knowledge of Marx’s method and critique. Marx makes it painfully clear to even the most casual observer that fixed capital, new or old, new AND old, creates no NEW VALUE, but merely transmits the value already embedded in its production gradually, piecemeal, over numerous production cycles to the “final” commodities. But maybe CNBC knows better.

        And then we get all the bits about overproduction which appear to be intended to make Marx’s discussion of OP opaque rather than transparent. Well let me try and provide some transparency from the same chapter of Vol 3 of Capital:

        “Overproduction of capital never means anything other than overproduction of means of production– means of labour and means of subsistence– that can function as capital, i.e. can be applied to exploiting labour at a given level of exploitation; a given level, because a fall in the level of exploitation below a certain point produces disruption and stagnation in the capitalist production process, crisis, and the destruction of capital.”

      15. Hi Michael. I read your presentation-to-the-third-seminar-of-the-fi-on-the-economic-crisis.pdf per your recommendation. I found it interesting and informative, don’t disagree with it, but do have one comment: In the diagram “The Profit Cycle” you show “Accumulation and growth accelerate” followed by “Rate of profit falls”. Given that, it still seems to me one could argue that the rate of profit falls *as a result of* accumulation — specifically an over-accumulation of plant and equipment. Would that not contribute to an increase in the “organic composition” of capital, and is that not exactly why Marx thought the rate of profit would tend to fall in the long run? (You don’t need to answer here, I know you explain this all the time in your work, perhaps I am just being dense!)

    2. Excuse me for answering this, but I think I can complement mr. Roberts’ answer from a more philosophical approach:

      The answer to both your question is a definite “no”.

      There is no overproduction and “adequate production” in capitalism. The capitalist simply has to realize the value he already has in order to profit. This phase (realization) is capital’s “somersault”: the capitalist already exploited his labor force and already has value in his hands — but, if not at least the correspondent to his initial capital investment is not exchanged for money, he will lose capital, and the unrealized value is destroyed.

      What happens is that, in any capitalist crisis, there’s a corruption of the capitalist cycle. Well, a corruption of the cycle of (social) capital inevitably leads to overaccumulation of stuff somewhere and underconsumption somewhere — this is a tautology. From the point of view of the person who overaccumulated (inevitably, will be a capitalist), there’s a “crisis of overaccumulation” and, from the point of view of the vagrant, there’s a “crisis of underconsumption”.

      But the important thing is that the system was corrupted, not that there was overaccumulation and underconsumption. Marx uses the term “overaccumulation” in book II, but in the coloquial sense. He’s not a theoritician of overaccumulation, as many post-war Westerners vulgarly claim him to be.

      That overaccumulation and underconsumption are not really a thing in capitalism we can observe empirically when times are “good” for the system: there’s still inequality, there’s still poverty, there’s still very rich people. From the point of view of capital, you only demand for something if you have the money to pay for it: people without money don’t have demand — hence hunger in Africa during the “golden years of capitalism” (1945-1970).

  3. “Indeed, capitalism can only get out of a recession by the recession itself. A recession would wipe out weaker capitalist companies and lay off unproductive workers. The cost of production then falls and those companies left after the slump have higher profitability as the incentive to invest. That is the ‘normal’ recession. In a depression, however, that process requires several slumps (as in the late 19th century depression) before normal service is resumed. Another recession is on its way and neither monetary nor fiscal measures can stop it.”

    Yes, but even if the system gets out of this depression, it still will exist over a superior material base (i.e. a more advanced stage of development of the productive forces). That is because only the smaller, “zombie” individual capitals will be wiped out: the big corporations will still exist and be more important than ever.

    That means the organic composition of capital will rise, not fall, in the long term, since it requires more value relative to overall production to merely reproduce the status quo (since big business will represent an even larger proportion of total/social capital). General profit rates will continue to (secularly) fall.

    The only long term solution for capitalism is a WWIII that, somehow, avoids a nuclear winter. Big business will be destroyed and overall organic composition of capital will lower. Thing will go back three centuries in terms of development of productive forces. This is the closest thing capitalism has of a time machine — because that’s what it needs now.

    And this hypothetical WWIII cannot be against any enemy. This enemy has a name, and is China.If the West to manage to destroy socialist China, it would expand its “Lebensraum”. When the USSR fell, capitalism gained 15 years of “pax” (the golden years of neoliberalism, 1992-2000 & 2001-2008); China’s carcass can give it 30-40 more, give or take 10.

    That’s why the USA, under Trump, is preparing the Prompt Global Strike (PGS), a doctrine that the American elite hopes can break up MAD; plus the employment of the so-called “tactical nukes”, which are alrady employed in Icirlik (Turkey), but which they also plan to employ in SE Asia against China (under the disguise of liberating the peoples of the South China Sea).

    1. Yes, that’s broadly right. Falling population has helped to drive up the per capita growth rate in Japan. Indeed, as the FT graph you cite shows, Japan’s productivity growth (real GDP growth divided by working popn) has been better than elsewhere in the G7. However, per capital GDP growth (real GDP divided by total popn) since 2009 ha snot been so impressive. According to the IMF, since the end of the GR in 2009 real per capita GDP (in PPP terms) has risen 1.8% a year in Japan, compared to 2% in Germany, 1.9% in the US, 1.6% in the UK and 1.5% in France.

  4. The key here is the rate of profit. Last month the tables for fixed investment covering 2018 were released by the BEA. With the expected fall in the mass of profits in Q2, the rate of profit is now below 5%. The same rate that prevailed in 2009 at the depths of the financial crisis. Such a low rate cannot support investment nor interest rates. For a deeper analysis visit

  5. It seems to me that the long depression in the end of the 19:th century was not solved by recession itself but by what could (somewhat anachronistically) be called military keynesianism or welfare warfare state. The big arms-race started by Germany.1890 by ordering four new battleships. And only the year before, 1889 Germany was the very first to start paying old age pensions. A curve comparing worked hours per employed to working hours divided by inhabitants illustrates the break.

  6. Thankyou for a great article. I apperciate your detailed analysis and explanations.

    I wonder, though, as your graph shows profits are declining softly now. Does this slow decline mean we are in a different climate and the old boom bust cycles will reduce.

    We also seem to have excessive profiting by only a select few companies. Is this having an effect of concentrating investment to just a select few people? The rest are just making headway with little investment?


  7. I agree with basically everything you said.

    However I think there is something missing on your explanation of inverted yield curves.

    According to your argument it results from changes on risk perception. However you don’t elucidate how this translates to short and long bonds markets. If short and long run bonds were equally demanded, shouldn’t relative yelds be constant?

    What I assume it is implicit is that short term bonds are relatively less demanded than long run bonds. So that its yield doesn’t falls in the same magnitude of long run. What is not the expected result, since long run bonds carry more risk.

    Can you weigh in on this?

    Thank you.

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