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The ‘Long Cycle’—Summary and Conclusions

November 1, 2009

In this series of posts, I have examined the question of whether the capitalist economy experiences cycles that are considerably longer than the industrial cycles of approximately 10 years. It’s been proposed by various economists over the last hundred years that in addition to 10-year industrial cycles and shorter “inventory cycles,” there also exists a “long cycle” of approximately 50 years’ duration.

Over the last several months, I have examined the concrete history of the cycles and crises that have occurred in the global capitalist economy from the crisis of 1847 to the crisis of 2007-09. Over these 161 years, we have seen decades when economic growth surged ahead, and other periods dominated by prolonged depression or stagnation.

Changing patterns of cycles and crises

While industrial cycles of approximately 10 years have been a remarkably persistent feature of capitalism, there have been periods when these cycles have been suppressed by world wars and other periods when we have had only partial cycles.

For example, the two world wars of the 20th century suppressed to a considerable degree the entire process of expanded capitalist reproduction. Since industrial cycles arise within the broader process of the expanded reproduction of capital, wartime suppression of expanded capitalist reproduction suppressed the industrial cycle.

After the super-crisis of 1929-33—itself part of the aftermath of the World War I war economy—there was no complete industrial cycle. The brutal deflationary policy of the Roosevelt administration in 1936-37 prevented the cyclical recovery of 1933-37 developing into a real boom. The war economy of World War II replaced the recovery that followed the 1937-38 recession before it could develop into a boom. Therefore, in the years from the super-crisis of 1929-33 until after World War II we saw only partial industrial cycles.

No full industrial cycle between 1968 and 1982

There was also no complete industrial cycle between 1968 and the beginning of the “Volcker shock” in 1982. During the recessions of 1970 and 1974-75, governments and central banks attempted to force recoveries through deficit spending and monetary expansion. Under the conditions prevailing at that time, these repeated attempts to force a recovery simply led to panicky flights from the dollar and paper currencies in general, causing the recoveries to abort. Full industrial cycles of more or less 10-year duration only reappeared after the Volcker shock of 1979-82.

The U.S. Economy in the Wake of the Economic Crisis of 1957-61

September 20, 2009

Thanks to the economic crisis of 1957-61, the U.S. economy entered the decade of the 1960s with high levels of unemployment and excess capacity. The millions of unemployed workers and idle plants and machines meant that industrial production could increase rapidly in response to rising demand.

Since supply was increasing almost as fast as demand, prices rose very slowly. At least according to the official U.S. producer price index, prices hardly changed between 1960 and 1964.

As is typical of the phase of average prosperity of the industrial cycle, long-term interest rates rose very slowly. Still, at around 4 percent or slightly higher they had risen significantly since the Korean War days. Back then, the Truman administration still expected to borrow money long term at less than 2.5 percent. Slowly but surely long-term interest rates were eating into the profit of enterprise.

The 1960s economic boom begins

During most of the early 1960s, the U.S. economy was passing through the phase of average prosperity that precedes the boom. But starting in 1965, the industrial cycle entered the boom phase proper.

The transition from average prosperity to boom is part of the industrial cycle. However, in the mid-1960s this transition was helped along by government economic policies. These were, first, the Kennedy-Johnson tax cut of 1964 combined with the rapid escalation the war against Vietnam. After remaining virtually unchanged through 1964, the official U.S. producer price index suddenly surged 3.5 percent in 1965. That was the year the escalation of the Vietnam War began in earnest.

The Five Industrial Cycles Since 1945

September 13, 2009

About five industrial cycles have occurred on the world market since 1945. The first industrial cycle that can be traced after 1945 is the cycle of 1948-1957. The second extends from 1957 to 1968. When we speak of the post-World War II economic “boom,” we really mean the first two full industrial cycles after World War II, which were characterized by great capitalist prosperity.

Between 1968 and 1982, there were no complete industrial cycles. Indeed, the entire period from 1968 to the end of 1982 can arguably be seen as one drawn-out crisis with fluctuations or sub-cycles within it. The normal 10-year cycle resumed in the 1980s, peaking around 1990.

The industrial cycle that began with the 1990 recession peaked between 1997 and 2000. The crisis that ended that industrial cycle actually began with the run on the Thai baht in July 1997, though the U.S. economy didn’t enter recession until 2000. The industrial cycle that began with with the July 1997 run on the Thai currency ended 10 years later with the August 2007 global credit panic, which began in the United States and then spread around the world.

These cycles do not correspond to the National Bureau of Economic Research dates. The NBER is a group of bourgeois economists who decide the “official” periods of what they call “expansions” and “contractions.”

Does Capitalist Production Have a Long Cycle? (pt 4)

July 24, 2009

The Great Depression that began in 1929 and lasted until World War II holds a unique place in economic history.

“The Great Depression,” wrote bourgeois economist J. Bradford DeLong, “has central place in 20th century economic history.” He explained: “In its shadow, all other depressions are insignificant. Whether assessed by the relative shortfall of production from trend, by the duration of slack production, or by the product—depth times duration—of these two measures, the Great Depression is an order of magnitude larger than other depressions: it is off the scale. All other depressions and recessions are from an aggregate perspective (although not from the perspective of those left unemployed or bankrupt) little more than ripples on the tide of ongoing economic growth. The Great Depression cast the survival of the economic system, and the political order, into serious doubt.”

The economic crisis of 1929-33 though it was in some ways just another cyclical crisis of overproduction clearly involved other factors that converted a “normal” cyclical economic crisis into something quite different. What was it? In order to distinguish the crisis of 1929-33 from normal capitalist cyclical crises, I will call it the super-crisis.

The Great Depression of the 20th century

The Great Depression that began in 1929 and lasted until World War II holds a unique place in economic history.

Does Capitalist Production Have a Long Cycle? (pt 2)

July 10, 2009

The long semi-cycles of Ernest Mandel

We saw in earlier posts that most economic historians and economists, both bourgeois and Marxist, agree that the concrete history of the capitalist mode of production shows alternating periods of rapid expansion lasting for several decades followed by periods of much slower growth or semi-stagnation of varying lengths. There has been much dispute about whether these alternations represent cyclical forces operating from within the capitalist economy or are caused by changes of a non-cyclical nature in the “external” environment.

Among the Marxists, we saw that men as different as the U.S. socialist economist Paul Sweezy and Leon Trotsky agreed that the alternations between rapid growth and semi-stagnation are non-cyclical. If these alternations in long-term growth are non-cyclical, this would be in contrast to the the 10-year industrial cycle and the shorter, less-well-defined “Kitchin cycle,” where each stage in the cycle necessarily leads to the next stage.

The Ideas of John Maynard Keynes (pt 6)

June 25, 2009

Keynes and the falling rate of profit

Keynes, along with Adam Smith, Ricardo, Marx and even the “classical” marginalists, believed that the long-term trend of the rate of profit—marginal efficiency of capital in Keynes’s language—was downward. However, Keynes—and other marginalists—gave very different explanations than Marx for this tendency.

Marx applied his perfected law of labor value, which unlike the Ricardian version distinguished between (abstract) labor, the social substance of value, and the labor power purchased by the industrial capitalists. He showed how the tendency of the ratio of constant capital—fixed capital plus raw and auxiliary materials—to rise with capitalist development relative to variable capital would mean a fall in the rate of profit if the rate of surplus value—the ratio of unpaid to paid labor—remained unchanged.

Marx also demonstrated that even if the rate of surplus value increases, the rate of profit can still fall if the ratio of constant to variable capital—the organic composition of capital—rises sufficiently. In analyzing the effects on the rate of profit of a rising organic composition of capital, Marx abstracted a fall in the rate and mass of profit associated with problems of the realization of surplus value.

An inability to realize surplus value—either fully or at all—will cause a temporary fall in the rate and even mass of profit. In contrast, the long-term rise in the organic composition of capital will cause a permanent fall in the rate of profit.

Keynes, as we have seen, had no notion that surplus value is even produced in the production process, let alone that surplus value is produced by variable capital alone. Keynes, in the manner of vulgar economics, simply assumed that profits arise in the sphere of circulation due to the scarcity of capital.

The Rate of Interest and the Profit of Enterprise

April 3, 2009

The development of the credit system splits profit—total surplus value—less rent into two parts, interest and profit of enterprise. What determines the division of the relative shares of interest and profit of enterprise?

Suppose the rate of profit is 10 percent. Unless all the profit goes to interest, the rate of interest cannot be higher than 10 percent. Indeed, the rate of interest in the long run cannot be as high as 10 percent, because at a 10 percent rate of interest there will be no additional profit from carrying out an industrial or commercial enterprise. Therefore, an interest rate of 10 percent, assuming a rate of profit of 10 percent, will destroy the incentive to *produce* surplus value. And without production of surplus value, there is neither ground rent, interest nor profit of enterprise.

Therefore, the rate of profit establishes an *upper* limit to the rate of interest. But what then determines the lower limit? The rate of interest cannot fall to zero, because if it did the money capitalist would turn miser. There would be no advantage in loaning money. Why take a risk of not being paid back, or being paid back in devalued currency, for no “reward” whatsoever?

At an interest rate of zero, the money capitalist will simply hoard money in the form of bullion and gold coins. Therefore, the rate of interest must be somewhere above zero but below the the total rate of profit. It is quite possible to have a low rate of interest with a high rate of profit, though it is not possible to have a high rate of interest with a low rate of profit.

Crisis Theories: Falling Rate of Profit (cont’d)

February 13, 2009

Is the falling rate of profit the key to periodic economic crises?

Perhaps among Marxists today, the tendency of the rate of profit to fall is the most popular explanation for capitalism’s cyclical economic crises, with underconsumption a distant second.

This theory, which naively leaves out the question of *realizing* surplus value, goes something like this: During the boom, the combination of technological progress, competition of the industrial capitalists among themselves, and, especially, competition between the industrial capitalists and the working class forces the industrial capitalists to increasingly substitute machinery—dead labor—for living labor. This is especially true near the peak of the boom, when conditions are most favorable for the working class on the labor market.

More and more of the surplus value that is consumed *productively* is transformed into constant capital, and less and less is transformed into variable capital. The result is a rise in the organic composition of capital and a fall in the rate of profit.

Crisis Theories: Falling Rate of Profit

February 6, 2009

I mentioned earlier that the insufficient surplus value family of crisis theories can be divided into two sub-families: the profit squeeze school and the falling rate of profit school.

The profit squeeze school sees the cause of crises as rooted in the fall in the rate of surplus value that develops as the demand for labor power rises during a boom, creating more favorable opportunities for the workers to struggle against capitalist exploitation. The fall in the rate of exploitation eventually reduces the rate of profit so much that a crisis results.

But there is another version of the insufficient surplus value school. This school traces the cause of crises to the fall in the rate of profit brought on by the rise in the organic composition of capital. This is the famous law of the tendency of the rate of profit to fall.

These crisis theories are not mutually exclusive, because boom conditions not only put downward pressure on the rate of surplus value but at the same time encourage a growth in the organic composition of capital. The lower the rate of surplus value, the more the industrial capitalists will attempt to economize on labor power, or what comes to exactly the same thing, the more they will substitute constant capital—or dead labor—for variable capital—or living labor.

A Critique of Crisis Theory