“Economic progress in a capitalist society means turmoil” – Joseph Schumpeter

Tendencies, triggers and tulips - The causes of the crisis: the rate of profit,

overaccumulation and indebtedness

Third Economics seminar of the IRRI, 14 February 2014,

Amsterdam, Netherlands

by Michael Roberts

• “Economic progress in a capitalist society means turmoil”

– Joseph Schumpeter

The mainstream

• “The central problem of depression-prevention has been solved, for all practical purposes.” Robert Lucas, Jr, top US neoclassical economist

• “We don’t know what causes recessions. I’m not a macroeconomist so I don’t feel bad about that! We’ve never known. Debates go on to this day about what caused the Great Depression. Economics is not very good at explaining swings in economic activity….If I could have predicted the crisis, I would have. I don’t see it. I’d love to know more what causes business cycles.” Eugene Fama, Nobel prize winner

• “I think the recent global crisis is best understood as a classic financial panic transposed into the novel institutional context of the 21st century financial system.” Ben Bernanke, Fed Chair

Keynesian view

• “Keynesian economics rests fundamentally on the proposition that macroeconomics isn’t a morality play—that depressions are essentially a technical malfunction. As the Great Depression deepened, Keynes famously declared that “we have magneto trouble”—i.e., the economy’s troubles were like those of a car with a small but critical problem in its electrical system, and the job of the economist is to figure out how to repair that technical problem.” Paul Krugman

Radical Keynesian view

• “The flaw exists because the financial system necessary for capitalist vitality and vigour,

which translates entrepreneurial animal spirits into effective demand investment, contains the potential for runaway expansion, powered by

an investment boom” Hyman Minsky

It’s underconsumption!

It’s inequality!

The common factor

• “The task is complicated by the reality that every financial panic has its own unique features that depend on a particular historical context and the details of the institutional setting.” What we need to do is to “strip away the idiosyncratic aspects of individual crises, and hope to reveal the common elements” of these ‘panics’. Then we can “identify and isolate the common factors of crises, thereby allowing us to prevent crises when possible and to respond effectively when not.”

Ben Bernanke

The tendency of the rate of profit to fall

The movement in the rate

1965-82 1982-97 1997-12 1946-12 1965-12 1982-01 2001-08

CC 0.64 1.35 0.99 0.80 0.86 1.24 0.89

HC 0.86 1.12 1.00 0.71 0.96 1.02 0.94

The same story for the world

Triggers and causes

• “For historians each event is unique. Economics, however, maintains that forces in society and nature behave in repetitive ways. History is particular; economics is general.” Charles Kindleberger

• “The trigger for crisis can be any number of historical accidents such as the subprime mortgage swindle. It is necessary to deal with different levels of causation. The main point here is that capital is drawn into speculative activity when the rate of profit is low, so accident is the manifestation of necessity.” Mick Brooks

The Great Depression

The neo-liberal period

The profit cycle

Mass of profit rises as labour costs reduced and investment

Rate of profit rises as capital, both tangible and fictitious, is written off and companies and financial

institutions are liquidated

Accumulation and growthaccelerate -boom!

Rate of profit falls eventually leading to fall in mass of profit

and new value - production crisis

Collapse in investment, then employment, and consumption -

realisation crisis or "lack of effective demand"

The profit cycle - tendencies, triggers and tulips

Mass of profit rises as labour costs reduced and investment

stopped

Rate of profit rises as capital, both tangible and fictitious, is written off and companies and financial

institutions are liquidated

Accumulation and growthaccelerate -boom!

Rate of profit falls eventually leading to fall in mass of profit

and new value - production crisis

Collapse in investment, then employment, and consumption -

realisation crisis or "lack of effective demand"

Triggers financial collapse (stock market, banks, housing bubble etc) slump!

The profit cycle - tendencies, triggers and tulips

Profits call the tune

Removing the fictitious

Debt matters

It’s private debt that matters

The housing bubble

It’s corporate debt that matters

The need to deleverage

No room to lend

It’s a Long Depression

Investment slump

It’s profitability – stupid!

The UK too!

The cycles of capitalism