Are we in a ‘long depression?’ If so, what can be done?

Roberts long depressionMichael Roberts, author of the recently published The Long Depression, is a Marxist economist working in the City of London, and he blogs here. Much of his economic analysis draws on Marx’s ‘tendency of the rate of profit to fall’ (TRPF) and its importance in his explanation of booms and slumps under capitalism.

The rate of profit so described is the average or economy-wide rate, so there is necessarily some debate when it comes to measuring and drawing implications from it, which I will not go into here.

This particular Marxist viewpoint holds that profit is vital to growth under capitalism since it provides the main source of funds for investment in productivity-enhancing capital. Without a sufficient rate of profit, investment will be weak, and hence growth in output, employment and productivity will be weak.

According to Roberts, over lengthy periods, there are upswings and downswings in the rate of profit. Upswings will typically be associated with booms, above average growth and shallow recessions, while downswings will be associated with deeper and longer recessions, and slower growth. What he has termed the current ‘long depression’, which began in 2008, and whose effects are still with us, has been associated with a downswing in the rate of profit, which began in 1997. Profitability has not recovered to its pre-recession level, despite several years elapsing, with a weak recovery the result. The accumulation of private debt on the part of households and firms before the recession is also holding back investment. Substantial deleveraging (the reduction of debt liabilities relative to assets) is also necessary to any sustained recovery.

The rate of profit will only be restored with a restructuring of capital involving the reduction in value and writing off of older, less profitable, vintages of capital assets used in production and the elimination of weaker capitals (less successful private firms going bankrupt or being taken over by more successful ones). It may also require a similar process to take place with regards to employment, so that unemployment will rise when firms restructure, and real wages fall or stagnate to some degree. It should be noted that some of this has already happened since 2008. What Roberts is arguing is that a further recession is needed to encourage a much more extensive restructuring by the private sector in order to restore profitability and reduce debt to more sustainable levels.

This line of argument is in contrast to the Keynesian one, in which recessions are the result of insufficient aggregate demand. Although Roberts does not deny this, he disputes the Keynesian solution: expansionary monetary and fiscal policies. The Marxist viewpoint is that it is weak profitability, and the resultant weak investment, which are the drivers of weakening demand leading to recession. So profits are key, and if they are not restored, then no amount of demand management by the state will help. Note that this does not rule out such policies, but it is the effect on profits that determines the outcome. For example, state investment in infrastructure could play a part in boosting firms’ profit expectations and encouraging private investment, although there will be limits to this.

Richard Koo, originator of the term ‘balance sheet recession’, suggests that the accumulation of private sector debt before the crisis, and the attempts by firms and households to pay it down since then are driving a weakness in demand across the rich economies which can only be countered by fiscal deficits, which will absorb private sector saving and prevent another 1930s-style Great Depression. Again this may be quite true, but once more the success of such a policy depends on the restoration of profits. If it prevents private sector restructuring to this end, then it will be unsuccessful however much a succession of severe downturns are avoided and long term stagnation and debt accumulation could be the result.

It seems that we are in some sort of Long Depression, given the deep crisis of 2008-9, and the weak recovery in output and productivity that has followed. In European countries such as Greece, the outcomes have been disastrous. Roberts is consistent throughout his book in showing how economic weakness flows from a failure of the rate of profit rate to recover to a level sufficient to encourage private investment and recovery. It is rather monomaniacal, but it does seem fairly convincing, and offers an explanation for long run trends under capitalism. Similar ideas covered in more detail can also be found in Anwar Shaikh’s magnum opus Capitalism, also published this year.

Roberts’ solution to the problems of capitalism is, like many but not all Marxists, to replace it with planned production under socialism. Here I part company with him. Like many Marxist analyses of capitalism, his is more convincing than mainstream interpretations, such as they are, but the solutions may lead to an even worse outcome. ‘Actually existing socialisms’ around the world have had many if not more problems than the capitalisms they have sought to replace, especially in terms of political repression and delivery of the goods and services that richer capitalist nations have managed to provide to much of their populations. Capitalism may be flawed, and it may not last forever, but it should not be up to a few intellectuals to determine its future, whether that evolves gradual change or occasional revolution.

As already discussed, Roberts admits that recession and ‘creative destruction’ are necessary under capitalism to restore the rate of profit in order to permit a new round of growth to begin. And as John Weeks of SOAS has argued, crises and recessions are actually a strength of capitalism, as they promote renewal and lay the foundations for a new period of expansion. For me, a reformed capitalism can, at least for the moment and within limits, deliver the goods. Indeed, it has delivered unparalleled prosperity to a huge number. If it is to be succeeded by an alternative system, which cannot be ruled out, then this kind of change should include the many, driven from below as much as from above.

I am happy to admit that my reading of Marxist political economy has made me less sympathetic towards Keynesian economics, although the two share some of the same ideas, even if Marxism is more ambitious in its scope. Keynesianism purports to offer technical solutions to problems that may be inherent and somewhat unavoidable under the current capitalist order.

The general lesson from Keynes himself is that the state plays an important role in encouraging investment, and this could involve all manner of public-private initiative, not simply demand management. Public investment can ‘crowd in’ private investment, and policies which affect industry and technological progress play a vital role in long run economic success. Cycles and crises may well be unavoidable over the long term, but to the extent that they are an opportunity for renewal, they do have a positive aspect, however controversial or insensitive that might sound. After all they often involve much social and economic pain.

The current crisis may have some way to go before the rate of profit is restored, but beyond this somewhat pessimistic conclusion I remain optimistic about humanity’s longer term collective capacities for overcoming problems and making progress in all its forms.

I end this post with a helpful flowchart from the San Francisco Area Marxist study group on capitalist crisis theory and its many interpretations. A version of this is contained in Roberts’ book. Click on the image to see it at a readable size.

crisis-theory chart

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