by Michael Roberts
Regular readers of this blog know that one of my main themes is that
the world capitalist economy is now in a Long Depression (see my book, The Great Recession and this post from 2011,
http://thenextrecession.wordpress.com/2011/09/18/it-feels-like-a-depression/), led by the major advanced capitalist economies (http://thenextrecession.wordpress.com/2012/10/05/the-long-and-winding-road/ and http://thenextrecession.wordpress.com/2013/02/10/why-is-there-a-long-depression/).
By a Long Depression, I mean economies growing consistently at well
below their previous trend rates, with unemployment stuck at well above
previous levels before the Great Recession, and disinflation (slowing
inflation) turning into deflation (falling prices). Above all, it is an
economic environment where investment in productive capital is way below
previous average levels, with little sign of pick-up (http://thenextrecession.wordpress.com/2011/11/25/us-investment-strike/).
Indeed, this depression is now reaching the so-called emerging
economies, where, even with their large supplies of cheap labour and
imported new technology, real GDP growth is also slowing.
This designation has not had a lot of support among economists of any
theoretical hue until now. But suddenly the idea of ‘permanent
depression’ has surfaced from the ‘great and good’ in mainstream
economics. At the recent IMF conference on the causes of the crisis (http://thenextrecession.wordpress.com/2013/11/11/why-the-crisis-and-will-there-be-another-imf-speaks/),
Larry Summers, former Goldman Sachs executive, ex-US Treasury
secretary, ex-President of Harvard University and failed candidate for
the head of the US Federal Reserve, pronounced that the efforts of
central banks to revive the economy with low or zero interest rates, or
with the ‘printing of money’ through QE-type purchases of government and
private sector financial paper, was not working to return economies to
‘normal growth’. “Even a great bubble wasn’t enough to produce any
excess of aggregate demand…even with artificial stimulus to demand,
coming from all this financial imprudence, you wouldn’t see any excess…
the underlying problem may be there forever”. So “we may well need in
the years ahead to think about how to manage an economy where the zero
nominal interest rate is a chronic and systemic inhibitor of economic
activity, holding our economies back below their potential.”
Apparently even ‘unconventional’ monetary policies are not doing the
trick for the economy, except to drive up stock market prices in a new
(non-inflationary) bubble. Summers’ view has been echoed by a litany of
Keynesian epigones like Paul Krugman, ex-Goldman Sachs chief economist
and FT blogger Gavyn Davies, and FT columnist and pal of them all,
Martin Wolf. For them, it seems that capitalism is not working
‘automatically’ to return to ‘equilibrium growth’ and deflationary
pressures are becoming dominant.
As Krugman put it in his blog post, called A Permanent slump? (http://www.nytimes.com/2013/11/18/opinion/krugman-a-permanent-slump.html?_r=0): “What
if the world we’ve been living in for the past five years is the new
normal? What if depression-like conditions are on track to persist, not
for another year or two, but for decades?… so that “the case for
“secular stagnation” — a persistent state in which a depressed economy
is the norm, with episodes of full employment few and far between“ ? Krugman goes on: ”Summers’s
answer is that we may be an economy that needs bubbles just to achieve
something near full employment – that in the absence of bubbles, the
economy has a negative natural rate of interest. And this hasn’t just
been true since the 2008 financial crisis; it has arguably been true,
although perhaps with increasing severity, since the 1980s.”
Yikes, so it appears that the major capitalist economies cannot grow at
rates that would achieve full employment any longer even with negative
real interest rates.
Does this mean that the great economics gurus now agree with me about
the state of the world capitalist economy? Well, not really. Let me try
to explain why I think this new love-in about depression from the likes
of Summers, Krugman and Wolf differs from my view (and for that matter
what I would consider is Marx’s). First, for the Keynesians, the
depression is a product of money hoarding by capitalists leading to a
permanent lack of ‘effective demand’. But what the likes of Krugman do
not explain is why this hoarding suddenly happened and why it won’t
end, even with negative real rates. Should we not look elsewhere from
the financial sector and central bank policy towards what is going on in
the real economy: and under capitalism, that means what has happened to
the profitability of capital?
Krugman now talks about ‘secular stagnation’ under capitalism since
the 1980s, echoing the arguments of the neo-Keynesian economist Alvin
Hansen in the immediate post-war period who extrapolated Keynes’ theory
to mean the gradual slowdown in growth; or the more recent ideas of
Robert Gordon about the collapse of innovation and productivity in
modern capitalist economies (see my post,
Krugman reckons this secular stagnation may be caused by ”slowing
population growth” keeping effective demand low, or it may be caused by “persistent trade deficits”, which emerged in the 1980s and “since then have fluctuated but never gone away “.
The first explanation looks outside of the motions of capitalist
accumulation to some exogenous law of nature and the second really
refers to imbalances between capitalist economies, rather than
capitalism as a world economy. Both deny any fault in the fundamental
workings of modern capitalism and neither sounds convincing.
Martin Wolf also takes up the theme of ‘stagnation’ in his latest blog post in the FT, Why the future looks sluggish, (http://www.ft.com/cms/s/0/a2422ba6-5073-11e3-befe-00144feabdc0.html#axzz2l71zthLV).
For Wolf, the cause of this new depression is a ‘global savings glut’
or a ‘dearth of investment’ caused by ‘excessive hoarding’ of savings by
capitalists unwilling to invest: “the world economy has been
generating more savings than businesses wish to use, even at very low
interest rates. This is true not just in the US, but also in most
significant high-income economies.” So the problem of the long depression is a surplus of profits not low profitability.
This is a hoary old argument that originated from Ben Bernanke, the
current chief of the Fed, back in the early 2000s, when he argued that
the cause of the ‘persistent trade deficits’ in the US and the UK were
caused by ‘too much saving’ in the ‘surplus’ countries of Asia and OPEC.
Thus the credit binge and the subsequent credit crunch was really the
fault of the likes of Japan or China not spending enough on US goods!
Now it is the fault of everybody for not spending enough. But again the
question is why are people not spending enough? That’s not difficult to
answer when it comes to average households, decimated by reduced
incomes and unemployment, but why don’t capitalist companies in the US
or the UK or Europe invest more? Wolf thinks it may be due to
‘excessive debt’ being built up during the credit binge before the Great
Recession. So the crisis was caused by ‘excessive spending’ and now
the depression is caused by ‘excessive saving’. Capitalism just swings
from one to the other!
Wolf also thinks the failure to invest may be due a change in the
culture of capitalist firms, which no longer want to invest in
productive capital but prefer to play the stock market or buy financial
assets. So that is what the great capitalist system has come to – a
‘rentier’ economy. I have dealt with these arguments before in this
and I intend to return to them in a future post. But once again, the
idea of the profitability of capital in what is, after all, a profit
economy by definition where people invest to make a profit, is totally
absent from the explanations of Krugman or Wolf.
Noah Smith, a Keynesian blogger, recently considered how to get out of the depression
“The solution to lowered growth and elevated (and involuntary) unemployment is relatively simple. Eventually someone will start using up the idle resources.
This will either be the private sector once it independently gets over
its slump in animal spirits, or it will be the government. ” Ah, yes ‘animal spirits’ will return. Or will they? Smith recognises that they may not any time soon because “it
is perfectly plausible that the economy — as it has done — can remain
depressed even with very low rates due to deleveraging pressures, low
expectations and low confidence, etc.” So the explanation of the
depression is: high debt still being deleveraged, “low expectations” (of
profit?) and “low confidence” (in what?). Again, no mention of what is
happening to profitability.
Smith reckons that “if the market is ill-suited to taking up the
idle resources any time soon — lying as it is in a depressive,
irrational strop — the only agent that can do so is the state. The
state can borrow money (utilising idle capital) to create jobs
(utilising idle labour), raising interest rates and bringing down the
unemployment rate. And this approach does not require anyone to make
accurate predictions about the future. It simply requires a market
economy, and a state willing to employ idle resources when they are
idle…and note that I favour a predominantly market-based economy.
Government interventions should be kept to a necessary minimum.” So state investment can save the day if private investment won’t – but keep it to a minimum.
“By lowering unemployment and using up idle capital (preferably
in a mix of state-run infrastructure and technology projects, and
lending to new businesses) more businesses can be born into existence”. Once the state has done its lifesaving role, we can return to normal: “Sooner or later, of course, the private sector will come back and begin to use up resources.” The trouble is that the normal “could
be a very, very, very long way away. If we want the structure of
production to adjust to the new world and to continue adjusting as the
world continues to change, letting huge quantities of resources sitting
idle seems like a bad way to do it.” So we need “targeted fiscal policy”. Government to the rescue.
Again, there is no explanation why capital is idle – could it be that
it is not sufficiently profitable? The only way to revive that
profitability is through slumps that destroy the value of accumulated
unproductive capital, so that profitability (relative to remaining
value) will then rise and allow the process of accumulation to resume.
After a period of a huge buildup of both tangible and fictitious capital
over the last 20 years, capitalism went into a Great Recession. But,
as in the Great Depression of the 1930s, it cannot get out of this long
slump without a massive destruction of dead capital.
World War 2
eventually managed to do that. In the 1880s and 1890s, it took a series
of major slumps before sustained growth resumed. That is similar to
now. Just more government spending designed to ‘stimulate’ or even
replace (temporarily) the private sector will not do the trick. Only
the replacement of capitalist accumulation with state-planned investment
as the dominant mode of production would do so. Otherwise, we can
expect yet another slump down the road, before ‘secular’ stagnation will
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