The Great Recession

Copyright © 2009 Michael Roberts ISBN 978-1-4452-4408-2 Contents Introductioni The Great Recession — before 1 Chapter 1 Profits — the life blood of capitalism 3 Chapter 2 The property time bomb 9 The Great Recession Chapter 3 The time bomb is now ticking 15 Chapter 4 The perfect circle of successs 21 Chapter 5 Marx’s law of profitability 27 Chapter 6 Marx and the profit cycle 33 Profit cycles, economic crisis Chapter 7 The secular decline in profitability 41 A Marxist view Chapter 8 The profit cycle and the stock market 49 Chapter 9 The profit cycle and Kondratiev 55 Chapter 10 The profit cycle and business cycles 61 by Chapter 11 The profit cycle and economic recessions 69 Chapter 12 Profit cycles elsewhere 77 Michael Roberts Chapter 13 Law of profitability and 19th century Britain 87 Chapter 14 The profit cycle and politics 91 Chapter 15 Summing it up 99 Chapter 16 Dr Pangloss rules 105 Chapter 17 From boom to slump 113 Chapter 18 The economic witch-doctor of capitalism 119 Chapter 19 Gordon’s year 123 Chapter 20 Capitalism unleashed 129 Chapter 21 Equality, inequality and opportunity 135 Chapter 22 Will there be a slump? 141 Chapter 23 Reclaiming Marx’s Capital 147 Chapter 24 The mass of profit and crisis 155 The Great Recession — during 159 Chapter 25 Stock markets in turmoil 161 Chapter 26 More stock market nerves 165 Chapter 27 The rocky road to ruin 167 INTRODUCTION Chapter 28 Credit crunch! 175 The Great Recession Chapter 29 Panic! 183 Chapter 30 Capitalism beared 187 The Great Recession started at the beginning of 2008 and finished in the Chapter 31 Black swans and economic recession 193 middle of 2009. At least, that is what the US National Bureau Of Eco- Chapter 32 Credit crunch one year on 199 nomic Research (NBER) reckons. The NBER has taken on the respon- Chapter 33 Financial meltdown 207 sibility of pronouncing and measuring the start and end of each economic Chapter 34 Socialism for the rich, capitalism for the poor 215 slump in the US economy. Chapter 35 A kick in the face for capitalism 217 Chapter 36 Credit crunch — who pays 221 On its measure, the Great Recession was the longest in duration and deepest Chapter 37 All Keynesians now? 229 in contraction that the global capitalist economy has seen since 1929-32. Chapter 38 Unprecedented! 235 Indeed, it was probably worse than the Great Depression in that it had Chapter 39 The Great Recession 243 even greater global impact than the long slump of the 1930s. Capitalism has spread its tentacles to all parts of the earth in the last 80 years. The Great Recession — after 251 Chapter 40 Human nature and capitalist crisis 253 From the peak of the previous boom in capitalist growth in 2007 to the Chapter 41 Cycles and crisis 259 trough of the Great Recession in mid-2009, the world economy contracted Chapter 42 Marxist theories of crisis 261 by 6%. In the 30 most advanced capitalist economies that are members Chapter 43 The Great Recession — is it over? 265 of the Organisation of Economic Cooperation and Development, the drop Chapter 44 The bankruptcy of economics 275 in output and income was 6.5%. If you compare global output in 2009 to Chapter 45 Will there be another slump? 281 where the world economy should have reached without a slump, then the Chapter 46 A nasty Turner for the worse 287 loss of income is even greater, at 8% (see graphic). Chapter 47 Business as usual 291 Chapter 48 What next? 299 Measures of the world’s output loss by the US government and the IMF (% pts of GDP) 4.0 Appendix A Measuring the rate of profit 305 2.0 Appendix B Accumulation and capitalist consumption 311 0.0 Bibliography 315 -2.0 -4.0 Index 321 -6.0 -8.0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 US govt IMF i INTRODUCTION INTRODUCTION The Great Recession was even more damaging in its global impact. World of downturn. That will have to be liquidated in another slump, probably in trade during the slump fell by 25-30%, truly staggering. And the wealth of the next five years. the world, as expressed in the value of businesses, real estate and financial assets, like bonds and stocks and shares, plummeted by $11trn. This book aims to explain why the Great Recession happened, in what form it took and what will happen next. As such, it is divided into three The Great Recession has confirmed what those with a Marxist view of parts: before, during and after the Great Recession. It takes the form of a the world economy already knew. Capitalism, as a mode of production collection of essays, some of which have been published elsewhere and and human organisation based on profit, is subject to periodic convulsions some unpublished. Many of these essays were written as early as 2005- of boom and slump. This is as much a fact of the capitalist system as 6 and were already starting to forecast the oncoming slump, eventually evolution is a fact of nature. with a reasonable degree of accuracy. At the end of each chapter, the date when they were written is identified. I have not updated the graphics The Great Recession was not an Act of God; it was not a bolt from the as they appear in each chapter, so the reader can see how accurate the blue; an unpredictable tsunami. It was not a random chance event in forecasts are as the years move towards 2009. In the latest chapters, human development. It was not a momentary blip of instability. It was some of the key graphics are brought up to date to show their progress. not caused by some outside shock to the stable and smooth path of capitalist production, like plague, wars or climate change may have been to The theoretical foundation of the book is based on the analysis of capital- previous systems of human organisation. ist production developed by Karl Marx over 150 years ago. In particular, it is argued that Marx’s most important law of capitalist motion — the No, the Great Recession was a product of the dynamics of the capitalist tendency of the rate of profit to fall as capitalists accumulate capital — is system and, as such, was subject to the laws of motion of capitalist pro- the most powerful cause of booms and slumps in capitalist economies. duction. Capitalist production depends on the private appropriation of value generated from human labour. Production will not be sustained if it But the book also tries to outline that there are other laws of motion con- is not profitable. This is an exceedingly wasteful and unjust way of deliv- nected with capitalism, driven by the underlying movement of profit, but ering the needs of society. nevertheless with their own cycles of development, that play a role in generating economic crises, particularly in their timing, duration and depth. Profitability is the key to capitalist health. The Great Recession came Indeed, the Great Recession was so severe precisely because the troughs about because profitability weakened in the years prior to the slump. There in all these cycles of motion coincided, a fairly rare event. were unavailing attempts to keep production going, even when profits were waning through excessive credit and borrowing. But that just made This book argues that a Marxist view can provide a scientific analysis of the eventual bust even greater. capitalist production, scientific in the best sense, in that it can provide a causal explanation with some predictive power on what will happen next The Great Recession is over. But the world capitalist system is not out of and when. As Friedrich Engels, Marx’s long-time colleague, often said, the woods. Profitability will not have been restored to sufficient levels to the proof of the pudding will be in the eating. enable capitalism to sustain healthy growth. There is still a huge overhang of dead capital weighing down the system and profitability is still in a cycle November 2009 ii iii May 2005 CHAPTER ONE Profits: the life blood Let’s keep it simple. Profits are the lifeblood of capitalism. If a capitalist The Great Recession investor or owner of a business cannot make a profit, he or she soon stops investing capital or employing workers to produce things or provide services. It’s the law of the market, say the economists of capital. — before Marxists agree with the economists. Profits are the fuel of capitalist production — without them there would be no production. But the apolo- gists of capital make two other propositions. First, they say there is no other system of human social organisation that works. So a profit-based “There are known knowns. These are things we know that we system will continue forever. Second, a profit-based system of produc- know. There are known unknowns. That is to say, there are things tion and social organisation works for the benefit of all, maybe to differing that we know we don’t know. But there are also unknown degrees, but nevertheless for all. unknowns. These are things we don’t know that we don’t know.” Donald Rumsfeld It is here that Marxists disagree. Marxists reckon that there are other systems of social organisation that have worked (in a fashion) before “We are ready for any unforeseen event that may or may not capitalism where production for profit played no role.

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