A review of Michael Roberts, The Long Depression, Haymarket (2016), £14.99
Can the man who predicted the start of the economic crisis say how it will end? That’s the bold ambition of Michael Roberts’s book The Long Depression. It combines the strengths that make his blog essential reading for many activists—the insights of Marxist economics, a wealth of empirical data and a clear accessible style. Roberts dissects the current crisis and compares it to historical precedents to expose the processes behind them, and points towards a data-driven model of long-term trends.
Roberts draws a distinction between ordinary recessions and outright depressions. A recession is part of the regular “business cycle” of boom and bust—a dip in growth followed by a rapid recovery, a V-shape on the graph. A depression is more like a square root sign, taking a decade or more to return to the pre-crisis trend. The 2008-9 recession lasted 18 months. The depression drags on after eight years. The biggest economies have lost more output relative to the pre-crisis trend during the “recovery” than during the recession and the United States Congressional Budget Office believes growth will never return to trend, making a “permanent recession”.
Roberts shows how a variety of mainstream approaches fail to explain this. Alan Greenspan, then chair of the US Federal Reserve, responded to the crash with “shocked disbelief”. Financial analyst Nassim Taleb called it a “Black Swan”—not impossible, but not predictable if you’ve only ever seen white swans. Nobel laureate George Akerlof raised the animal stakes. Akerlof, co-author of a book arguing that the crisis was due to unpredictable movements in “animal spirits”, said: “It’s as if a cat has climbed a huge tree… The cat, of course, is this huge crisis. And everybody at the conference has been commenting about what we should do about this stupid cat and how do we get it down.” Previous depressions fare little better. Greenspan’s successor Ben Bernanke said explaining the 1930s crisis was the “holy grail”.
Most economists assume that capitalism basically works and look for factors that disrupt its smooth running. Roberts is scathing of such explanations of each crisis as a unique external shock, saying that “‘triggers’ are not causes. Behind them is a general cause of crisis”. The Austrian economists considered the 1930s depression a necessary “correction” of failed investments. In contrast, monetarist Milton Friedman blamed Federal Reserve inaction in the face of a banking crisis. Another US economist, Irving Fisher, blamed rocketing debt made worse by deflation. But Roberts points out that both the number of banks in the US and their assets were declining well before 1929. He finds Thomas Picketty’s claim that rising inequality drove the 2008 crisis equally lacking in evidence.
Capitalism’s critical defender John Maynard Keynes comes under particular scrutiny. Keynesians explain crisis through a fall in aggregate demand. Such a fall could explain factors such as the shrinking money supply. But it raises the question of what causes crises—why do what Keynes called investors’ “animal spirits” come over suddenly timid? What’s missing is profit.
Keynes showed that total investment generally matches total profit, but not which explains which. If profit follows investment, then the explanation comes down to investors’ subjective decisions. If investment follows profit, it offers a way out of investors’ heads into the real conditions of production. Keynes got closer to seeing profit as the explanatory factor than is generally remembered, writing that a “typical, and often the predominant, explanation of the crisis” is “a sudden collapse in the marginal efficiency of capital”.
Karl Marx recognised such “collapse” as fundamental to the system. Individual capitalists’ short-term search for profits saps the rate of profit for capitalism as a whole. Roberts calls this Marx’s law, derived from the “drive to increase the productivity of labour”. Capitalists invest in new technologies to undercut rivals, pushing down the value of their product while increasing their fixed capital costs. This Marxist explanation fits the facts better. Roberts finds the ratio of fixed capital costs to new value produced rising, and the rate of profit falling, in the US from as early as 1924. The rate of profit didn’t fully recover until the Second World War, when “consumption did not restore economic growth as Keynesians…should expect; instead it was investment, mainly in weapons of destruction.”
Today’s left Keynesians have rediscovered Hyman Minsky’s theory that capitalism is unstable because allocating capital to profitable production is impossible without volatile financial markets that inflate speculative bubbles until they burst. But Marx’s concept of “fictitious capital” allows Roberts to explain financial chaos in terms of the “real” economy. Capital is fictitious if it is not engaged in production, but merely offers a claim on value produced elsewhere. Marx wrote that most of a banker’s capital is “purely fictitious” and offered several examples—stocks, government bonds and exchange bills. Today the possible examples are legion. Prices of such assets, Roberts writes, “anticipate future returns on investment in real and financial assets. But the realisation of these returns ultimately depends on the creation of new value and surplus value in the productive capitalist sector.”
One reason firms put money in financial products is if they don’t see enough potential profit to justify the risk of investing it in new production. This “hoarding” has been growing among US firms—since before the Great Recession—to a record level of almost $2 trillion.
With Marx’s law as his compass, Roberts maps the economic situation across the world. In a crawling US, rising inequality is “raising the stakes in the class struggle”. Unless “economic growth returns big time”, the eurozone can only survive by closer integration than is feasible—or messily fall apart. Japan’s renewed stagnation exposes the failure of all the “tools of capitalist economic policy”—fiscal and monetary, austerian and Keynesian. These developed economies can no longer easily draw more workers into the workforce, so they can only extract more value from workers by squeezing them harder. Having a population that isn’t yet fully exploited gives many emerging economies “latent potential to expand”, but a global crisis that hits their trade and foreign investment hard is an obstacle to realising it.
China is “not far away” from the tipping point. But despite a property price bubble bursting and an explosion of debt, Roberts is sceptical of predictions of a sharp slowdown there. What China’s rulers call “Socialism with Chinese characteristics”, Roberts describes as a “weird beast”—it’s not socialism, but nor is capitalism “dominant”. Through state ownership, capital controls and Communist Party cells, the regime can overpower bank runs and “bear any conceivable losses”. This faith is unfounded. As Roberts concedes, Marx’s law “does operate in China, mainly through foreign trade and capital inflows, as well as through domestic markets”.
Even the state capitalist Soviet Union buckled partly under the weight of an economic crisis. Its regime controlled production directly and should have soared above the laws of the market. Yet international trade and, to a greater degree, military competition with other superpowers brought those laws into play. Why should China—far more integrated into the global economy and saturated by internal markets—be immune?
Roberts successfully shows that trying to explain capitalism’s crises without Marx’s law is like trying to design aircraft without acknowledging gravitation. But predicting them mathematically proves as frustrating as predicting the aircraft’s trajectory based on gravitation alone. “Marx’s law is framed in terms of tendencies and counter-tendencies,” he writes. A long-term decline in the rate of profit can be temporarily reversed, for example by attacks on workers’ living standards, a fall in the prices of productive technology or, most importantly, devaluation or destruction that wipes out the cost of old investments. So when does tendency override counter-tendency? Roberts argues that the challenge of finding a predictable pattern “must not be shied away from” if we are to follow Marx in using a scientific approach. So, standing on his own 2005 prediction that a historic downturn would come in 2009-10, he uses “the power of data”. It’s unfortunate that the authority he cites is Nate Silver, who accurately predicted Barack Obama’s 2008 election win. Since then a new election has thwarted forecasters, prompting Silver’s website FiveThirtyEight to explain that data is only as good as an understanding of its uncertainties and limits.
Calculating the rate of profit is complex and different measures give different values, but it can show trends. The US, and to an extent the world, since 1945, has seen four broad phases—a post-war Golden Age, crisis-wracked 1970s, a neoliberal recovery then a return to stagnation. For Roberts, this suggests a 32-36 year “cycle of profitability” where counter-tendencies dominate for 16-18 years of high or rising profit rates, then the tendency reasserts itself for another 16-18 years of decline. He slots this into a dizzying array of “cycles within cycles”. Within the profitability cycle is a four-year “Kitchin cycle” of inventory, an eight to ten-year “Juglar cycle” of investment, employment and output and an 18-year “Kuznets cycle” of construction. Beyond these is the “controversial” 50 to 70 year “Kondratiev cycle”. Roberts proposes that depression occurs when all the cycles align—making the longest cycle, Kondratiev’s, the bottom line. But observing a 70-year cycle in a system just a few centuries old is a tall order.
Roberts offers two examples, 19th century Britain and 1945 to present. This means that the mid-cycle 1970s crisis must be fundamentally unlike the end of cycle depressions. Yet a “classic profitability crisis” generated “the first simultaneous international slump since the 1930s” followed by years of slow growth and a further recession. By contrast, 1870s Britain must have seen a true depression. But far from restarting the cycle with a new Golden Age, it left Britain’s growth sluggish for decades.
Leon Trotsky responded to Kondratiev by acknowledging “upturns” and “downturns” in capitalism’s long-term growth—but not their adherence to a “wave”-like pattern. For Kondratiev, whatever turbulence the system undergoes is balanced out by long-term stability. For Trotsky the system’s chaos threatens ultimately to engulf it. Despite Roberts’s stress on the tendency for the rate of profit to fall, his description of cycles suggests that in the long run the tendency and its counter-tendencies balance out. But another reading of the data would be that decline in profitability has generally been the rule, with the periods of sustained increase being the exceptions.
Despite this echo of Kondratiev, Roberts’s view overall is closer to Trotsky. He devotes a chapter to how and when capitalism could end. And he is clear that outcomes depend on more than data. The Second World War whose destruction wiped the slate clean was, he writes, “an exogenous event” that proved to “sharply interfere” in any mechanical cycles. Similarly, the defeats inflicted on the working class to allow the neoliberal recovery weren’t decided in advance but hung on struggle.
Roberts’s prediction of an imminent recession followed by a real recovery from 2018 probably isn’t something to set your watch by. He leaves open the possibility for capitalism instead to be mired in long-term secular decline. Either way, the book shows clearly the economic pressure bearing down on the ruling class across the world—and the limits of the options open to them. It exposes the hopelessness of their system, and serves as a valuable guide to the terrain on which the struggles against them will be fought.
Dave Sewell is a journalist for Socialist Worker.