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THE WHOLE OF THE STORM
CRASHES, DEPRESSIONS AND THEIR CAUSES
© Alan Freeman
Rostov on Don May 27th 2016
Crashes, recessions, and depressions
• World economy today dominated by a complex series of
failures.
• Crashes (eg 2008) – spectacular financial failure
• Recessions – fall in so-called ‘fundamentals’ or ‘real
economy’
• Depressions – long deep recession for several cycles eg
1929-42
• Which is the cause, and which the effect?
• If we think that a storm is caused by lightning, we won’t
understand gales and floods

Cycles, crashes, recurrence and
regularity
• Before Marx, crashes seen as ‘accidental’, like a natural
event
• Marx treats crashes as part of regular cycle
• Adopted into mainstream; Juglar, Mitchell, Kitchin,
Kuznets
• ‘Long waves’ theorised by Marxists and Austrians
• Kondratieff, Schumpeter, (later) Mandel, etc
• A ‘long downturn’ is otherwise known as a depression
• Mainstream economics has reverted to the 19th Century
idea
• Crashes are ‘recurrent’
?
? ? ?
TWO DEBATES IN THE
CURRENT DISCUSSION
Was 2008 a ‘new crisis’?
What is the role of ‘institutional’ factors?
Was the crash of 2008 a ‘new’ crisis?
• Freeman, Desai, Kliman, Ming Qi Li, Shaikh, Roberts, Carchedi
• Capitalism in the industrialised world entered a ‘Great Depression’ in 1974
• It never fully recovered; neoliberalism did not ‘cure’ the problem
• Crashes of 1979, 1989, 2000, 2008 were expressions of this general malaise
• Therefore, it cannot be ‘fixed’ by minor reform such as an improved monetary system
• Dumenil & Levy, ‘Financialisation’ school, most Western Marxism
• Neoliberalism ‘fixed’ the problems of capitalism
• In the 1980s and 1990s it went through a new expansion phase
• Then a new crisis began, caused by financial and institutional problems
• (Implicitly) If the weaknesses of the financial system are fixed, capitalism will fully
recover
Endogenous or Exogenous?
• Freeman et al
• fundamental cause is internal to the capitalist economy:
• it is caused by working of commodity economy
• (my argument) central mechanism is the failure of investment caused by falling profit
rate
• All the above: this can only be ‘fixed’ if the state takes on the function of investment.
• Dumenil/Levy, Financialization School, most Western Marxism
• Fundamental causes are external – banking system, neoliberalism, inequality, etc
• (Implicit) if you fix the banking system, inequality, and so on, capitalism will recover
• Social Structures of Accumulation (SSA) (Kotz et al)
• Proximate causes are institutional – ‘regime of accumulation’
• Factors such as falling profit rate play no role
What’s actually happening?
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
US real GDP growth
Recession
Trend
Crash
Recession
The Kondratieff debate 1924
endogenous self-restoration or exogenous
action?
• Both sides: long-term historical trends repeat. BUT:
• Kondratieff, Schumpeter: ‘Restoration’. Economy fixes itself
• Trotsky: requires ‘exogenous’ action: war, fascism, revolution
• I argue: economy does not ‘fix itself’. It produces political crises
• Ukraine, Turkey Greece ….
• Back to ‘1930s’; capitalists can only ‘solve’ very destructively
• BUT Trump, Sanders, Corbyn, Syriza, Austria:
• New political forces make possible an alternative
• It depends on understanding and political will
Defining recession: not a minor
difficulty
• Neoclassicals: lots of facts but will not draw theoretical
conclusions
• Marxists: plenty of theory but will not face facts
• A common cause: unwilling to recognise contradiction
We don’t have a
definition of recession
rooted in theory
If we don’t know what
it is, how can we
discuss what causes it?
• Marx, Keynes and Say
• Crisis = withdrawal of money from production
• Idle money: the phenomenal form of
recession
• Overproduction inaccurate term
• Capitalists simply stop producing
• Idle machinery is not overproduction.
• It has already been sold. It is idle capacity
• Unemployment is also idle capacity
• Idle capacity: material expression of recession
Money capital and productive capital
not
M-C-P…C‘-M‘
but
M-C-P…C‘-M‘
Recession is idle capacity side by side with idle money
Neither gold nor paper but money-capital
To become idle, money must function as capital
M – M'
• This may be gold, paper, T-bonds, land, mortgages
• the critical point is it must expand without entering production
• The ‘material form’ of money is secondary to its function as capital
“A definite part of the total capital now separates off and becomes
autonomous in the form of money-capital, its capitalist functions
consisting exclusively in that it performs these functions for the entire
class of industrial and commercial capitalists
… The movements of this money capital are thus again simply
movements of a now independent part of the industrial capital in the
course of the reproduction process” (Marx 1992:431)
Finance capital
$ – $‘
$ – $‘
$ – $‘
$ – $‘
…
Idle production
$-C-P…C‘-$‘
$-C-P…C‘-$‘
$-C-P…C‘-$‘
…….
Result
CHART 1: US CAPACITY UTILIZATION (%)
Grey bars = Recessions
Source: Federal Reserve Board of St Louis (FRED)
website, www.research.stlouisfed.org
CHART 2: ACQUISITION OF ASSETS BY THE UK
CORPORATE SECTOR
0%
20%
40%
60%
80%
100%
120%
140%
-
100
200
300
400
500
600
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
Ratiobetweenthecumulativepurchaseof
financialandfixedassetsfrom1987
AnnualAcquisitionofFixedandFinancialAssets,
GBPmn
Financial Assets/Fixed Assets Fixed Financial
Corresponds to the facts
Money and production: a tale of two
adjustments
• Rate of profit in production equalises through the flow of capital
• Rate of profit in finance equalises through prices
• When financial profit falls, asset prices fall
• A ‘Crash’
$ $
Why crashes don’t fix the problem
•Assets were fictitious, with no intrinsic value
•No slaughter of values; underlying crisis not solved
•Underlying cause : profitability is too low
•Bank reform ‘part of the solution’ but not ‘the solution’
•The solution is to restore production
•This requires the state, because private capital will not
do it
The rate of profit: a necessary correction
CHART 3: UK PROFIT RATE MADE CONSISTENT BY INCLUDING
FINANCIAL ASSETS IN CAPITAL
CHART 4: US PROFIT RATE MADE CONSISTENT BY INCLUDING
FINANCIAL ASSETS IN CAPITAL
0%
5%
10%
15%
20%
25%
0%
20%
40%
60%
80%
100%
120%
1970
1975
1980
1985
1990
1995
2000
2005
Corporate Value Added/Corporate Capital Stock 'Denominator includes securities (right scale)
0%
2%
4%
6%
8%
10%
12%
14%
0%
5%
10%
15%
20%
25%
30%
35%
1946
1949
1952
1955
1958
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
(Unadjusted) Operating Surplusof PrivateEnterprises/Fixed Assets of PrivateEnterprises [left
scale]
(Corrected) Operating Surplusof PrivateEnterprises/(Fixed Assets of PrivateEnterprises plus
MarketableFinancial Securities owned by US agencies and persons) [right scale]
The upside-down world of crash and
recession
• The cause of the crash is the
growth in idle money-capital
• But the crash is visible first: it
‘appears’ to be the cause
• Actual cause is the withdrawal of
capital from production
Interest falls in
the runup to the
crash because
profits fall
But money-
capital also
grows when
profits fall
Assets
become
over-
valued
Postscript: Recession or Depression?
• All trends we observe date back to the 1970s and even late
1960s
• The fundamental cause has never been overcome
• There is no ‘long cycle’
• There has been no ‘recovery’
• We now see the ‘morbid symptoms’ of a protracted Depression
Postscript and example: the US addiction to
finance
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
$USMillion
US outward Foreign Direct
Investment
-$2
$0
$2
$4
$6
$8
$10
$12
$14
1948
1952
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
Billions
Total Investment Outflows
China
The Rest
Industrialised

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The Whole of the Storm

  • 1. THE WHOLE OF THE STORM CRASHES, DEPRESSIONS AND THEIR CAUSES © Alan Freeman Rostov on Don May 27th 2016
  • 2. Crashes, recessions, and depressions • World economy today dominated by a complex series of failures. • Crashes (eg 2008) – spectacular financial failure • Recessions – fall in so-called ‘fundamentals’ or ‘real economy’ • Depressions – long deep recession for several cycles eg 1929-42 • Which is the cause, and which the effect? • If we think that a storm is caused by lightning, we won’t understand gales and floods 
  • 3. Cycles, crashes, recurrence and regularity • Before Marx, crashes seen as ‘accidental’, like a natural event • Marx treats crashes as part of regular cycle • Adopted into mainstream; Juglar, Mitchell, Kitchin, Kuznets • ‘Long waves’ theorised by Marxists and Austrians • Kondratieff, Schumpeter, (later) Mandel, etc • A ‘long downturn’ is otherwise known as a depression • Mainstream economics has reverted to the 19th Century idea • Crashes are ‘recurrent’ ? ? ? ?
  • 4. TWO DEBATES IN THE CURRENT DISCUSSION Was 2008 a ‘new crisis’? What is the role of ‘institutional’ factors?
  • 5. Was the crash of 2008 a ‘new’ crisis? • Freeman, Desai, Kliman, Ming Qi Li, Shaikh, Roberts, Carchedi • Capitalism in the industrialised world entered a ‘Great Depression’ in 1974 • It never fully recovered; neoliberalism did not ‘cure’ the problem • Crashes of 1979, 1989, 2000, 2008 were expressions of this general malaise • Therefore, it cannot be ‘fixed’ by minor reform such as an improved monetary system • Dumenil & Levy, ‘Financialisation’ school, most Western Marxism • Neoliberalism ‘fixed’ the problems of capitalism • In the 1980s and 1990s it went through a new expansion phase • Then a new crisis began, caused by financial and institutional problems • (Implicitly) If the weaknesses of the financial system are fixed, capitalism will fully recover
  • 6. Endogenous or Exogenous? • Freeman et al • fundamental cause is internal to the capitalist economy: • it is caused by working of commodity economy • (my argument) central mechanism is the failure of investment caused by falling profit rate • All the above: this can only be ‘fixed’ if the state takes on the function of investment. • Dumenil/Levy, Financialization School, most Western Marxism • Fundamental causes are external – banking system, neoliberalism, inequality, etc • (Implicit) if you fix the banking system, inequality, and so on, capitalism will recover • Social Structures of Accumulation (SSA) (Kotz et al) • Proximate causes are institutional – ‘regime of accumulation’ • Factors such as falling profit rate play no role
  • 8. The Kondratieff debate 1924 endogenous self-restoration or exogenous action? • Both sides: long-term historical trends repeat. BUT: • Kondratieff, Schumpeter: ‘Restoration’. Economy fixes itself • Trotsky: requires ‘exogenous’ action: war, fascism, revolution • I argue: economy does not ‘fix itself’. It produces political crises • Ukraine, Turkey Greece …. • Back to ‘1930s’; capitalists can only ‘solve’ very destructively • BUT Trump, Sanders, Corbyn, Syriza, Austria: • New political forces make possible an alternative • It depends on understanding and political will
  • 9. Defining recession: not a minor difficulty • Neoclassicals: lots of facts but will not draw theoretical conclusions • Marxists: plenty of theory but will not face facts • A common cause: unwilling to recognise contradiction We don’t have a definition of recession rooted in theory If we don’t know what it is, how can we discuss what causes it?
  • 10. • Marx, Keynes and Say • Crisis = withdrawal of money from production • Idle money: the phenomenal form of recession • Overproduction inaccurate term • Capitalists simply stop producing • Idle machinery is not overproduction. • It has already been sold. It is idle capacity • Unemployment is also idle capacity • Idle capacity: material expression of recession Money capital and productive capital not M-C-P…C‘-M‘ but M-C-P…C‘-M‘ Recession is idle capacity side by side with idle money
  • 11. Neither gold nor paper but money-capital To become idle, money must function as capital M – M' • This may be gold, paper, T-bonds, land, mortgages • the critical point is it must expand without entering production • The ‘material form’ of money is secondary to its function as capital “A definite part of the total capital now separates off and becomes autonomous in the form of money-capital, its capitalist functions consisting exclusively in that it performs these functions for the entire class of industrial and commercial capitalists … The movements of this money capital are thus again simply movements of a now independent part of the industrial capital in the course of the reproduction process” (Marx 1992:431)
  • 12. Finance capital $ – $‘ $ – $‘ $ – $‘ $ – $‘ … Idle production $-C-P…C‘-$‘ $-C-P…C‘-$‘ $-C-P…C‘-$‘ ……. Result
  • 13. CHART 1: US CAPACITY UTILIZATION (%) Grey bars = Recessions Source: Federal Reserve Board of St Louis (FRED) website, www.research.stlouisfed.org CHART 2: ACQUISITION OF ASSETS BY THE UK CORPORATE SECTOR 0% 20% 40% 60% 80% 100% 120% 140% - 100 200 300 400 500 600 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Ratiobetweenthecumulativepurchaseof financialandfixedassetsfrom1987 AnnualAcquisitionofFixedandFinancialAssets, GBPmn Financial Assets/Fixed Assets Fixed Financial Corresponds to the facts
  • 14. Money and production: a tale of two adjustments • Rate of profit in production equalises through the flow of capital • Rate of profit in finance equalises through prices • When financial profit falls, asset prices fall • A ‘Crash’ $ $
  • 15. Why crashes don’t fix the problem •Assets were fictitious, with no intrinsic value •No slaughter of values; underlying crisis not solved •Underlying cause : profitability is too low •Bank reform ‘part of the solution’ but not ‘the solution’ •The solution is to restore production •This requires the state, because private capital will not do it
  • 16. The rate of profit: a necessary correction CHART 3: UK PROFIT RATE MADE CONSISTENT BY INCLUDING FINANCIAL ASSETS IN CAPITAL CHART 4: US PROFIT RATE MADE CONSISTENT BY INCLUDING FINANCIAL ASSETS IN CAPITAL 0% 5% 10% 15% 20% 25% 0% 20% 40% 60% 80% 100% 120% 1970 1975 1980 1985 1990 1995 2000 2005 Corporate Value Added/Corporate Capital Stock 'Denominator includes securities (right scale) 0% 2% 4% 6% 8% 10% 12% 14% 0% 5% 10% 15% 20% 25% 30% 35% 1946 1949 1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 (Unadjusted) Operating Surplusof PrivateEnterprises/Fixed Assets of PrivateEnterprises [left scale] (Corrected) Operating Surplusof PrivateEnterprises/(Fixed Assets of PrivateEnterprises plus MarketableFinancial Securities owned by US agencies and persons) [right scale]
  • 17. The upside-down world of crash and recession • The cause of the crash is the growth in idle money-capital • But the crash is visible first: it ‘appears’ to be the cause • Actual cause is the withdrawal of capital from production Interest falls in the runup to the crash because profits fall But money- capital also grows when profits fall Assets become over- valued
  • 18. Postscript: Recession or Depression? • All trends we observe date back to the 1970s and even late 1960s • The fundamental cause has never been overcome • There is no ‘long cycle’ • There has been no ‘recovery’ • We now see the ‘morbid symptoms’ of a protracted Depression
  • 19. Postscript and example: the US addiction to finance $0 $50 $100 $150 $200 $250 $300 $350 $400 $450 $500 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 $USMillion US outward Foreign Direct Investment -$2 $0 $2 $4 $6 $8 $10 $12 $14 1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 Billions Total Investment Outflows China The Rest Industrialised