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June 15, 2011 by michael roberts There is much talk in the financial press and among economists of the risk that the major capitalist economies could be slipping back into recession. Economic data for the US and Europe are indicating a significant slowdown in economic growth and a weak recovery in employment and investment. Is this just a temporary blip or does it represent a significant downturn? I would like to answer that by returning to the long view.
Which way are the major capitalist economies going? Are they set for a long period of economic growth and rising profitability? Has the Great Recession ‘cleansed’ the capitalist system of production sufficiently of ‘dead capital’ to allow renewed accumulation? Well, I’ve looked at the data for the US economy and measured the overall rate of profit in Marxist terms to make a judgement.
In my book, The Great Recession, I argued that you can identify a cycle of profitability in the US capitalist economy using Marxist categories for profitability. Just taking the post-war period, there was a Golden Age of profitability from 1946 to 1965 when the rate of profit (ROP) was high and even rising. During this period, economic recessions were few and relatively shallow. Then there was a period of crisis when profitability fell steadily until it reached a nadir in 1982. During this period, economic recessions were more frequent, violent and deep i.e. 1969-70, 1974-5 (the first simultaneous post-war economic recession) and 1980-2 (the deepest recession since the 1930s). After 1982 there was a recovery in profitability right up to 1997. This was the period of so-called neoliberalism that many have argued constitutes a completely new structure of capitalism based on ‘financialisation’ and neoliberal policies of privatisation and weakening of the labour movement (see my post, Gerard Dumenil and the crisis of neo-liberalism, 3 March 2011). There was only one significant economic slump in 1990-1.
But in 1997, profitability peaked according to my calculations (this is denied by many others but also confirmed by others – more on this on another occasion). Since 1997, despite two economic recessions in 2001 and 2008-9 and two subsequent recoveries (2002-7 and 2009-??), profitability has still not recovered to the level of 1997. This suggests that we are still in a downphase for US profitability and a new bottom has still to be reached over the next few years. If the cycle is to be repeated that bottom should happen around 2014. To achieve that, another econ0mic recession would be needed.
See my graphic here. The purple line shows the Marxist or value rate of profit (VROP) for the US on the right-hand scale and the left-hand scale shows the organic composition of capital (OCC) as a red line. The OCC is the main driver of VROP , operating in inverse relation, and is heading towards levels last reached when the rate of profit was at its nadir back in 1982. The cycle of profitability is revealed and the hypothesis that the rate of profit is still in a downward phase.
After the recovery in ROP since mid-2009, is profitability heading down again? Well, a Marxist measure of US profitability in not available beyond 2009 – we just don’t have the data. But we can make some reasonable guesses for 2010 and 2011 based on the likely change in economic growth, workers wages and the accumulation of capital. On those assumptions, it would appear that the ROP jumped back from its low in 2009 and rose in 2010. However, my forecasts suggest that in 2011 the ROP will fall back – the beginning of its slide to a new low by 2014. The graph incorporates those forecasts.
But this is guesswork. We can use a mainstream measure of profitability (profits as a share of GDP) to provide a more up to date guide to the direction of the ROP. This is only a crude proxy for a proper Marxist measure but it does show that the ROP recovered after reaching a bottom in 2009 that was lower that in the recession of 2001 but not as low as in 1982. We now have figures for the first quarter of 2011 and they show that the ROP still rose but at a slower pace, suggesting that it is about to peak. This could soon confirm my forecast of a fall in ROP in 2011.
What next? Once the ROP starts falling, it takes a few years before an economy moves into recession. The ROP has usually been falling for three to four years before that happens. On that basis, the US economy will not drop into a new recession until about 2014 onwards. The debate continues among Marxist economists, but if the underlying cause of capitalist crisis is a falling ROP, then a new slump is unlikely to develop until 2014. But it confirms that even the Great Recession of 2008-9 was not big enough to restore a sustained rise in the ROP. That is because it has not destroyed enough value in accumulated capital or in the excessive build-up of debt (fictitious capital) before 2007. More destruction of value is necessary to do that.
That there is still much fictitious capital in the system is revealed by the value of the stock market relative to a measure of the real value of the companies the stock prices represent. James Tobin, the leftist economist, developed a measure to tell if the stock market was overvalued or not and whether it would be heading down. It is called Tobin’s Q, measuring the stock market’s value against the replacement value of all the assets of the companies in a stock market index – in other words, the real value of the accumulated corporate assets. Tobin’s Q for the US S&P-500 stock index (the top 500 companies by market value in the US) currently looks like this.
The ratio is still relatively high and not near the trough reached in 1982 which created the conditions for a bull market rally. You can see that the value of the stock market follows closely the movement of the Marxist rate of profit with a lag of about three years. For example, when the rate of profit peaked in 1997 and started to contract, the US stock market went on rising until 2000 before entering its current period of contraction, or ‘bear market’ as it is called. It still has some way to go before reaching a trough, probably about 2016-18.
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In my book, The Great Recession, I argued that you can identify a cycle of profitability in the US capitalist economy using Marxist categories for profitability. Just taking the post-war period, there was a Golden Age of profitability from 1946 to 1965 when the rate of profit (ROP) was high and even rising. During this period, economic recessions were few and relatively shallow. Then there was a period of crisis when profitability fell steadily until it reached a nadir in 1982. During this period, economic recessions were more frequent, violent and deep i.e. 1969-70, 1974-5 (the first simultaneous post-war economic recession) and 1980-2 (the deepest recession since the 1930s). After 1982 there was a recovery in profitability right up to 1997. This was the period of so-called neoliberalism that many have argued constitutes a completely new structure of capitalism based on ‘financialisation’ and neoliberal policies of privatisation and weakening of the labour movement (see my post, Gerard Dumenil and the crisis of neo-liberalism, 3 March 2011). There was only one significant economic slump in 1990-1.
But in 1997, profitability peaked according to my calculations (this is denied by many others but also confirmed by others – more on this on another occasion). Since 1997, despite two economic recessions in 2001 and 2008-9 and two subsequent recoveries (2002-7 and 2009-??), profitability has still not recovered to the level of 1997. This suggests that we are still in a downphase for US profitability and a new bottom has still to be reached over the next few years. If the cycle is to be repeated that bottom should happen around 2014. To achieve that, another econ0mic recession would be needed.
See my graphic here. The purple line shows the Marxist or value rate of profit (VROP) for the US on the right-hand scale and the left-hand scale shows the organic composition of capital (OCC) as a red line. The OCC is the main driver of VROP , operating in inverse relation, and is heading towards levels last reached when the rate of profit was at its nadir back in 1982. The cycle of profitability is revealed and the hypothesis that the rate of profit is still in a downward phase.
After the recovery in ROP since mid-2009, is profitability heading down again? Well, a Marxist measure of US profitability in not available beyond 2009 – we just don’t have the data. But we can make some reasonable guesses for 2010 and 2011 based on the likely change in economic growth, workers wages and the accumulation of capital. On those assumptions, it would appear that the ROP jumped back from its low in 2009 and rose in 2010. However, my forecasts suggest that in 2011 the ROP will fall back – the beginning of its slide to a new low by 2014. The graph incorporates those forecasts.
But this is guesswork. We can use a mainstream measure of profitability (profits as a share of GDP) to provide a more up to date guide to the direction of the ROP. This is only a crude proxy for a proper Marxist measure but it does show that the ROP recovered after reaching a bottom in 2009 that was lower that in the recession of 2001 but not as low as in 1982. We now have figures for the first quarter of 2011 and they show that the ROP still rose but at a slower pace, suggesting that it is about to peak. This could soon confirm my forecast of a fall in ROP in 2011.
What next? Once the ROP starts falling, it takes a few years before an economy moves into recession. The ROP has usually been falling for three to four years before that happens. On that basis, the US economy will not drop into a new recession until about 2014 onwards. The debate continues among Marxist economists, but if the underlying cause of capitalist crisis is a falling ROP, then a new slump is unlikely to develop until 2014. But it confirms that even the Great Recession of 2008-9 was not big enough to restore a sustained rise in the ROP. That is because it has not destroyed enough value in accumulated capital or in the excessive build-up of debt (fictitious capital) before 2007. More destruction of value is necessary to do that.
That there is still much fictitious capital in the system is revealed by the value of the stock market relative to a measure of the real value of the companies the stock prices represent. James Tobin, the leftist economist, developed a measure to tell if the stock market was overvalued or not and whether it would be heading down. It is called Tobin’s Q, measuring the stock market’s value against the replacement value of all the assets of the companies in a stock market index – in other words, the real value of the accumulated corporate assets. Tobin’s Q for the US S&P-500 stock index (the top 500 companies by market value in the US) currently looks like this.
The ratio is still relatively high and not near the trough reached in 1982 which created the conditions for a bull market rally. You can see that the value of the stock market follows closely the movement of the Marxist rate of profit with a lag of about three years. For example, when the rate of profit peaked in 1997 and started to contract, the US stock market went on rising until 2000 before entering its current period of contraction, or ‘bear market’ as it is called. It still has some way to go before reaching a trough, probably about 2016-18.
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