The Great Recession

The Great Recession Profit cycles, economic crisis A Marxist view by Michael Roberts Copyright © 2009 Michael Roberts ISBN Contents Introduction i The Great Recession — before 1 Chapter 1 Profits — the life blood of capitalism 3 Chapter 2 The property time bomb 9 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 Chapter 7 The secular decline in profitability 41 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 Chapter 11 The profit cycle and economic recessions 69 Chapter 12 Profit cycles elsewhere 77 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 Chapter 28 Credit crunch! 175 Chapter 29 Panic! 183 Chapter 30 Capitalism beared 187 Chapter 31 Black swans and economic recession 193 Chapter 32 Credit crunch one year on 199 Chapter 33 Financial meltdown 207 Chapter 34 Socialism for the rich, capitalism for the poor 215 Chapter 35 A kick in the face for capitalism 217 Chapter 36 The cycle of politics 221 Chapter 37 All Keynesians now? 229 Chapter 38 Unprecedented! 235 Chapter 39 The Great Recession 243 The Great Recession — after 251 Chapter 40 Human nature and capitalist crisis 253 Chapter 41 Cycles and crisis 259 Chapter 42 Marxist theories of crisis 261 Chapter 43 The Great Recession — is it over? 265 Chapter 44 The bankruptcy of economics 275 Chapter 45 Will there be another slump? 281 Chapter 46 A nasty Turner for the worse 287 Chapter 47 Business as usual 291 Chapter 48 What next? 299 Appendix A Measuring the rate of profit 305 Appendix B Accumulation and capitalist consumption 311 Bibliography 315 Index 321 My thanks go to Ian Ilett and Mick Brooks for their encouragement and constructive criticism. I also must thank the pioneering work of Alan Freeman and Andrew Kliman whose incisive contributions to Marxist economics inspired me to do this book. There are many others in flesh and spirit who made contributions to this book. I want to thank them too and have made every effort to credit or reference those who gave me an idea or an approach in various places. Of course, all the stupidities, errors and mistakes must be laid at my door. ‘Prediction can be very difficult, especially if it is about the future’ Neils Bohr INTRODUCTION The Great Recession The Great Recession started at the beginning of 2008 and finished in the middle of 2009. At least, that is what the US National Bureau Of Eco- nomic Research (NBER) reckons. The NBER has taken on the respon- sibility of pronouncing and measuring the start and end of each economic slump in the US economy. On its measure, the Great Recession was the longest in duration and deepest in contraction that the global capitalist economy has seen since 1929-32. Indeed, it was probably worse than the Great Depression in that it had 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. From the peak of the previous boom in capitalist growth in 2007 to the trough of the Great Recession in mid-2009, the world economy contracted by 6%. In the 30 most advanced capitalist economies that are members of the Organisation of Economic Cooperation and Development, the drop in output and income was 6.5%. If you compare global output in 2009 to where the world economy should have reached without a slump, then the loss of income is even greater, at 8% (see graphic). Measures of the world’s output loss by the US government and the IMF (% pts of GDP) 4.0 2.0 0.0 -2.0 -4.0 -6.0 -8.0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 US govt IMF i INTRODUCTION The Great Recession was even more damaging in its global impact. World trade during the slump fell by 25-30%, truly staggering. And the wealth of the world, as expressed in the value of businesses, real estate and financial assets, like bonds and stocks and shares, plummeted by $11trn. The Great Recession has confirmed what those with a Marxist view of the world economy already knew. Capitalism, as a mode of production and human organisation based on profit, is subject to periodic convulsions of boom and slump. This is as much a fact of the capitalist system as evolution is a fact of nature. The Great Recession was not an Act of God; it was not a bolt from the blue; an unpredictable tsunami. It was not a random chance event in human development. It was not a momentary blip of instability. It was 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 previous systems of human organisation. No, the Great Recession was a product of the dynamics of the capitalist system and, as such, was subject to the laws of motion of capitalist production. Capitalist production depends on the private appropriation of value generated from human labour. Production will not be sustained if it is not profitable. This is an exceedingly wasteful and unjust way of deliv- ering the needs of society. Profitability is the key to capitalist health. The Great Recession came about because profitability weakened in the years prior to the slump. There were unavailing attempts to keep production going, even when profits were waning through excessive credit and borrowing. But that just made the eventual bust even greater. The Great Recession is over. But the world capitalist system is not out of the woods. Profitability will not have been restored to sufficient levels to 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 ii INTRODUCTION of downturn. That will have to be liquidated in another slump, probably in the next five years. 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 parts: before, during and after the Great Recession. It takes the form of a collection of essays, some of which have been published elsewhere and some unpublished. Many of these essays were written as early as 2005- 6 and were already starting to forecast the oncoming slump, eventually 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 as they appear in each chapter, so the reader can see how accurate the forecasts are as the years move towards 2009. In the latest chapters, some of the key graphics are brought up to date to show their progress. The theoretical foundation of the book is based on the analysis of capitalist production developed by Karl Marx over 150 years ago. In particular, it is argued that Marx’s most important law of capitalist motion — the tendency of the rate of profit to fall as capitalists accumulate capital — is the most powerful cause of booms and slumps in capitalist economies. But the book also tries to outline that there are other laws of motion con- nected with capitalism, driven by the underlying movement of profit, but nevertheless with their own cycles of development, that play a role in generating economic crises, particularly in their timing, duration and depth. Indeed, the Great Recession was so severe precisely because the troughs in all these cycles of motion coincided, a fairly rare event. This book argues that a Marxist view can provide a scientific analysis of capitalist production, scientific in the best sense, in that it can provide a causal explanation with some predictive power on what will happen next and when. As Friedrich Engels, Marx’s long-time colleague, often said, the proof of the pudding will be in the eating. November 2009 iii iv The Great Recession — before “There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. These are things we don’t know that we don’t know.” Donald Rumsfeld “We are ready for any unforeseen event that may or may not occur” George W. Bush “The profit motive, we are constantly being told, is as old as man himself. But it is not. The profit motive as we know it is only as old as modern man”. Robert Heilbroner 1 2 May 2005 CHAPTER ONE Profits: the life blood Let’s keep it simple. Profits are the lifeblood of capitalism.

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