Re: RE: Re: the profit rate & recession

["Fred B. Moseley" <fmoseley@xxxxxxxxxxxxx>]

Jim, thanks very much for your response to my comments on your explanation
of the causes of the current recession.  Below are a few replies.

1.  You said:

> (I should acknowledge that if I recalculate the trend profit rate in a few
> years, the trend will probably be different, maybe even falling down in 1997
> or so. That would change my view. But I'm trying to give the best
> interpretation I can given the information I have.)

We already have a good idea of what the rate of profit will be in 2001
(based on the first three quarters) and even a pretty good idea for
2002.  So we don't have to wait for two years to do at least a preliminary
reexamination of the data.

Assuming that the share of profit falls from 0.17 in 2000 to 0.14 in 2001
(as discussed in my last post) and that the capital-output ratio remains
the same (a conservative assumption, since the capital-output ratio
usually increases in a recession, which would further depress the rate of
profit), then the rate of profit will decline from 0.086 in 2000 to 0.071
in 2001.

For 2002, since the rate of profit will almost certainly continue to
decline in the first half of the year, it is unlikely that the rate of
profit will increase for the year as a whole, and more likely that the it
will fall further in 2002.  But assume that the rate of profit in 2002
stays the same as in 2001.

Jim, would you please add these two additional data points to your
regression equations, in order to see what is left of the "upward
trend" in the rate of profit from 1980 to the present.  Adding these two
years is also a more appropriate way to estimate the trend, because the
beginning and end points of the time period are at roughly the same point
in the cycle - the bottom.  Your estimates through 2000 compare the bottom
of the cycle with a mid-point between the peak and the bottom, which
biases the estimates upward.  No matter what the regressions say, the fact
remains that the rate of profit today is only slightly higher (at
best) than it was in the trough of the early 1980s (0.071 compared to
0.062).

Attached to this message is a graph of the rate of profit, extended
through 2002.  This doesn't look like a "sustained upward trend" to
me.  Rather, this looks to me like cyclical ups and downs, up from the
bottom of the early 1980s and then almost back down to the same bottom.

It is even clearer that there has been no sustainable increase in the
share of profit since 1980. As already mentioned, the share of profit is
even lower today than it was in 1980.   Also attached to this message is a
graph of the share of profit, with the assumption that the share of profit
will = 0.14 in both 2001 and 2002 (as above).  The share of profit seems
to be especially relevant to your underconsumption thesis, which argues
that consumer demand is insufficient because wages have increased slower
than value added, which implies an increase in the share of profit.  But
there has been no lasting increase in the share of profit since 1980.


2.  Furthermore, the long-run trend in the rate of profit should be
considered in terms of the ENTIRE POSTWAR PERIOD, not just the last two
decades since 1980.  As is well known, the rate of profit declined
significantly in the 1960s and early 1970s (roughly 50%).  Jim and I have
both argued that this significant decline in the rate of profit was the
main cause of the "stagflation" of recent decades - resulting in both
higher unemployment and higher inflation.

I would argue, from this perspective of the entire postwar period, that
the very small increase (at best) in the rate of profit since 1980, is
only a VERY INCOMPLETE RECOVERY of the prior decline in the rate of profit
in the early postwar decades.  The problem which caused stagflation - low
rate of profit - has not yet been solved!  The overall trend of the rate
of profit for the entire postwar period is clearly negative.  The rate of
profit today remains about 30% below its early postwar peak.  The decline
in the rate of profit is not just a "short-run phenomenon", but is instead
a very long-run phenomenon, beginning in the 1960s.  The recent cyclical
decline since 1997 is only the latest phase of this long-run phenomenon,
which demonstrates vividly that the long-run problem of insufficient
profitability has not been solved.

The "triumph of neoliberalism" (the "weak labor regime"), as Jim calls it,
has indeed reduced wage growth, but it has not succeeded in restoring the
rate of profit. The "triumph" in the end is no triumph at all.  Therefore,
stagflation is likely to continue, most likely in the form of stagnation
(deeper recessions and higher unemployment).


3.  Jim also argued:

> E. I wasn't arguing that stagnant consumption was the proximate or efficient
> cause of the recession. Instead, we might see stagnant _wages_ (relative to
> productivity) as the structural cause (or what Aristotle called material and
> formal causes).  Stagnant wages might be seen as being like the termites
> eating the house. Other factors, such as gravity, bring the house down.

Jim, you agree that the "proximate" cause of the recession was a decline
in investment spending, not a decline in consumer spending (indeed C has
not declined).  But you argue that stagnant wages leading to an
"underconsumption undertow" is a "structural cause" of the recession.
I don't understand how this "underconsumption undertow", which doesn't
manifest itself in a decline of consumer spending, could have caused the
recession.

You suggest that one way the "underconsumption undertow" has caused the
recession is the following:

> G. My point is that the underconsumption undertow (or termites) made the
> U.S. economy excessively dependent on business fixed investment (and rich
> folks' consumption). In a different conjuncture, a fall of investment of the
> sort you describe would have had a smaller effect. BTW, I doubt that we've
> seen anywhere near the full effects of this investment fall yet.

I do not understand how a decline in investment spending under different
circumstances would have a smaller effect than it has had so far in the
current recession.  As discussed in my last post, consumer spending has
remained strong in recent quarters, with a savings rate almost zero, so
that the multiplier effect of the decline in investment spending so far
has been SMALLER than usual, not bigger than usual.

Or perhaps you are arguing that the EVENTUAL RETRENCHMENT of consumer
spending, that will be necessary because of the high level of household
debt (itself the result of stagnant wages), when it comes, will MAKE THE
RECESSION WORSE.  The reduced consumption spending will result in a higher
multiplier effect of the decline in investment spending.  I agree that
this is a strong possibility.  But it hasn't happened yet.  It seems to me
that your argument confuses the initial cause of the recession with its
subsequent propagation.  The initial cause of the recession was the sharp
decline of investment spending, which itself was caused by the even
sharper decline in the rate of profit.

Jim, you seem to say that the initial cause of the recession was exogenous
"shocks", such as the bursting of the stock market bubble or
Sept. 11.  But I argue that the recession was not caused by such exogenous
shocks, but was instead caused by a key internal dynamic of capitalist
economies:  a falling rate of profit leading to a decline of investment
spending.


4.  The difference between our two explanations of the current recession
can be further clarified by examining the question:  would a significant
increase of wages end the recession?  Your underconsumption explanation
would seem to imply that such an increase of wages would end the
recession, because it would reduce or eliminate the "underconsumption
undertow" that caused the recession.

By sharp contrast, the classical Marxian explanation that I have presented
(based on the falling rate of profit) implies that an increase of wages
would NOT end the recession.  Such an increase of wages would perhaps
boost consumption in the short-run, and thus would lessen the multiplier
effect of the decline of investment spending.  However, such an increase
of wages would exacerbate the problem that caused the recession in the
first place - "rapidly deteriorating profits" that led to a sharp decline
in investment spending - and thus would make a sustainable recovery from
the recession less likely.

According to this classical Marxian explanation, a recovery of the economy
requires a revival of investment spending, which in turn requires a
restoration of the rate of profit.  One of the main ways to increase the
rate of profit is to cut wages, not increase wages.

I am not of course suggesting that wages be cut.  I am just pointing out
that Marx's falling rate of profit theory - which seems to explain the
current recession - implies that the way out of the recession (cutting
wages) will be painful for workers.  Profits will be recovered off the
backs (or out of the pocketbooks) of workers.  Your underconsumption
explanation, on the other hand, implies that the way out of the recession
(increasing wages) would benefit workers, if only capitalists would
recognize that such an increase of wages is also in their interests.  I
wish it were true, but I don't think it is.


Jim, thanks again for the discussion.  I look forward to your reply.  I
also wish others would join the discussion as well.

Comradely,
Fred

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