by Michael Roberts
There are two new mainstream papers out that offer some
interesting analysis on the reasons behind the Long Depression that the
major economies (or at least, the US) have suffered since the end of the
Great Recession in 2009 – in the growth of real GDP, productivity,
investment and employment.
First, there is a paper by economists at the San Francisco Federal Reserve.
The Disappointing Recovery in U.S. Output after 2009 by John Fernald,
Robert E. Hall, James H. Stock, and Mark W. Watson. They consider the
well-known evidence that US real GDP growth has expanded only slowly
since the recession trough in 2009, counter to normal expectations of a
rapid cyclical recovery. In the paper, they remove the “cyclical
effects” of the Great Recession and find that there was already a
sharply slowing trend in underlying growth before the global financial
crash in 2008. The Fed economists conclude that the slowing trend
reflected two factors: slow growth of innovation and declining labour
Figure 1 shows business-sector output per person in recent decades.
The green line shows that output per person fell sharply during the
recession and remains below any reasonable linear trend line extending
its pre-recession trajectory. The figure shows one such trend line
(yellow line), based on a simple linear extrapolation from 2003 to 2007.
Output per capita: Deep recession plus a sharp slowing trend
The blue line in Figure 1 shows the resulting estimate of trend
output per capita after removing the cyclical effects associated with
the deep recession. As expected, the cyclical adjustment removes the
sharp drop in actual output associated with the recession. But since
then, the trajectory of the blue line is nowhere close to a straight
line projection from the 2007 peak. Rather, cyclically adjusted output
per person rose slowly after 2007 and then plateaued in recent years.
The Fed economists reckon that the slow growth has been due to a
slowdown in the productivity of labour, which in turn has been caused by
a reduction in investment in innovation and new technology. In
mainstream economics, this is measured by the residual of output per
person left over after increases in employment (labor input) and means
of production (capital input) are accounted for. The residual is called
total factor productivity (TFP), to designate the increased
productivity per unit of total input. TFP supposedly captures the
productivity benefits from formal and informal research and development,
improvements in management practices, reallocation of production toward
high productivity firms, and other efficiency gains.
The Fed economists, using this factor accounting, find that TFP
growth slowed significantly even before the Great Recession. It picked
up in the mid-1990s and slowed in the mid-2000s—before the recession—and then was flat or even falling going into the recession.
Pre-recession slowdown in quarterly TFP growth
The economists dismiss the arguments that it was the Great Recession
that caused the productivity slowdown or that productivity growth from
info tech is being mismeasured: “such mismeasurement has long been present and there’s no evidence it has worsened over time.” They also dismiss the idea common from right-wing neoclassical economists that “increased regulatory burdens have reduced the economy’s dynamism.” They find no link between regulation changes and TFP growth.
The explanation they fall back on is the one presented by Robert J Gordon in many papers and books:
that TFP growth is really just back to normal and what was abnormal was
the burst in innovation in the 1990s with the hi-tech and dot.com
boom. That ended in 2000 and won’t be repeated. “Every
story in the late 1990s and early 2000s emphasized the transformative
role of IT, often suggesting a sequence of one-off gains—reorganizing
retailing, say. Plausibly, businesses plucked the low-hanging fruit;
afterward, the exceptional growth rate came to an end.”
The other factor in the slowdown was the decline in employment growth
of those of working age. Yes, there is supposed to be near ‘full
employment’ now in the US and the UK etc. But participation in
employment by working age adults has fallen sharply. That’s because
populations are getting older and the ‘baby boomers’ who started worked
in the 1960s and 1970s are now retiring and not being replaced.
Sharp declines in labor force participation rate
What the Fed economists want to tell us is that the Long Depression
is not just the leftover of the Great Recession but reflects some
deep-seated underlying slowdown in the dynamism of the US economy that
is not going to correct through the current small economic upturn. The
US economy is just growing more slowly over the long term.
What the Fed economists don’t explain is why the US economy
has been slowing in productivity growth and innovation since 2000. What
is missing from the analysis is what drives the adoption of new
techniques and labour-saving equipment. Gordon and others just accept
the current slowdown as a ‘return to normal’ from the exceptional
What is missing is the driver of investment under capitalism:
profitability. Marxian studies that concentrate on this aspect reveal
that the profitability of US capital stock and new investment peaked
around 1997 and then turned down. It was this fall in profitability
that eventually provoked the collapse in the dot.com bubble in 2000.
The subsequent recovery in profitability did not achieve anything better
than 1997 and indeed profits growth was mainly confined to the
financial sector and increasingly to a small sector of top companies.
Average profitability remained flat or even down and the growth in
profit was mainly fictitious (‘capital gains’ from real estate, bond and
stock markets) and fuelled by easy credit and low interest rates. That
house of cards collapsed in the Great Recession.
Profitability peaked in the late 1990s in the US (and elsewhere for
that matter) because the counteracting factors to Marx’s law of the
tendency of the rate of profit to fall (a rising rate of exploitation in
the neoliberal period) and increased employment to boost total new
value were no longer sufficient to overcome a rising organic composition
of capital from the tech boom of the 1990s.
In contrast to this scenario, the Keynesians/post Keynesians have
been pushing a different explanation for the fallback in productive
investment since 2000 – it’s the growth of ‘monopoly power’. There have
been several studies arguing this in recent years. Now a brand new paper by Keynesian economists at Brown University
seeks to do the same. Gauti Eggertsson, Ella Getz Wold etc claim that
the puzzle of the huge rise in profits for the top US companies
alongside slowing investment in productive sectors can be explained by
an increase in monopoly power and falling interest rates.
The Brown University economists argue that an increase in firms’ market power leads to an increase in monopoly rents;
economic parlance for profits in excess of competitive market
conditions-and thus an increase in the market value of stocks (which
hold the rights to these rents). This leads to an increase in financial
wealth and to what’s known as Tobin’s Q, the ratio of a firm’s financial value (market capitalization) to the value of its assets (book value).
With an increase in market power, the share of income consisting of
pure rents increases, while the labour and capital shares both decrease.
Finally, the greater monopoly power of firms leads them to restrict
output. In restricting their output, firms decrease their investment in
productive capital, even in spite of low interest rates.
Now I have dealt previously in detail with this argument
that it is increased monopoly power that explains the gap between
profits and investment in the US since 2000 or so. It is really a
modification of neoclassical theory. Neoclassical theory argues that if
there is perfect competition and free movement of capital, then there
will be no profit at all; just interest on capital advanced and wages on
labour’s productivity. Profit can only be ‘rent’ caused by
imperfections in markets. The Brown professors, in effect, accept this
theory. They just consider that, currently, ‘monopoly power’ is
distorting it. This implies that if there was competition or monopolies
were regulated’ all would be well. That
solution ignores the Marxist view that profits are not just ‘rents’ or
‘interest’ but surplus value from the exploitation of labour.
The Brown University professors reckon that average profitability was
constant from 1980 onwards, so increased profits must have come from
the gap between profitability and the fall in the cost of borrowing
(interest rates). But actually, you can see from their graph that
average profitability rose from about 10% in 1980 to a peak in the late
1990s of 14% – that’s a 40% rise and is entirely compatible with
estimates by me and other Marxist economists. Average profitability was
then flat from 200 or so.
Indeed, average profitability fell in the non-financial productive
sectors of the economy, which is probably the reason for the gap that
developed between overall profitability including financial profits
(which rocketed between 2002 and 2007) and net investment in productive
The jump in corporate profits (yes, mainly concentrated in the
banks and big tech companies) was increasingly fictitious, based on
rising stock and bond market prices and low interest rates. The rise of fictitious capital and profits seems to be the key factor after the end of dot.com boom and bust in 2000.
As I showed in a previous post,
these mainstream analyses use Tobin’s Q as the measure of accumulated
profit to compare against investment. But Tobin’s Q is the market value
of a firm’s assets (typically measured by its equity price) divided by
its accounting value or replacement costs. This is really a measure of
fictitious profits. Given the credit-fuelled financial explosion of the
2000s, it is no wonder that net investment in productive assets looks
lower when compared with Tobin Q profits. This is not the right
comparison. Where the financial credit and stock market boom was much less, as in the Eurozone, profits and investment movements match.
It may well be right that, in the neo-liberal era, monopoly power of
the new technology megalith companies drove up profit margins or
markups. The neo-liberal era saw a driving down of labour’s share
through the ending of trade union power, deregulation and
privatisation. Also, labour’s share was held down by increased
automation (and manufacturing employment plummeted) and by globalisation
as industry and jobs shifted to so-called emerging economies with cheap
labour. And the rise of new technology companies that could dominate
their markets and drive out competitors, increasing concentration of
capital, is undoubtedly another factor.
But the recent fall back in profit share and the modest rise in
labour share since 2014 also suggests that it is a fall in the overall
profitability of US capital that is driving things rather than any
change in monopoly ‘market power’. Undoubtedly, much of the mega
profits of the likes of Apple, Microsoft, Netflix, Amazon, Facebook are
due to their control over patents, financial strength (cheap credit) and
buying up potential competitors. But the mainstream explanations go
too far. Technological innovations also explain the success of these
Moreover, by its very nature, capitalism, based on ‘many capitals’ in
competition, cannot tolerate indefinitely any ‘eternal’ monopoly; a
‘permanent’ surplus profit deducted from the sum total of profits which
is divided among the capitalist class as a whole. The battle to
increase profit and the share of the market means monopolies are
continually under threat from new rivals, new technologies and
The history of capitalism is one where the concentration and
centralisation of capital increases, but competition continues to bring
about the movement of surplus value between capitals (within a national
economy and globally). The substitution of new products for old ones
will in the long run reduce or eliminate monopoly advantage. The
monopolistic world of GE and the motor manufacturers in post-war US did
not last once new technology bred new sectors for capital accumulation.
The world of Apple will not last forever.
‘Market power’ may have delivered ‘rental’ profits to some very large
companies in the US over the last decade (and just that short period it
seems), but Marx’s law of profitability still holds as the best
explanation of the accumulation process. Rents to the few are a
deduction from the profits of the many. Monopolies redistribute profit
to themselves in the form of ‘rent’, but do not create profit.
Profits are not the result of the degree of monopoly or rent seeking,
as neo-classical and Keynesian/Kalecki theories argue, but the result
of the exploitation of labour. The key to understanding the movement in
productive investment remains in its underlying profitability, not the
extraction of rents by a few market leaders.
The Long Depression is a product of low investment and low
productivity growth, which in turn is a product of lower profitability
of investment in productive sectors and a switch to unproductive
financial speculation (and yes, partly a product of oligopolistic power
boosting the big at the expense of the small).
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