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Sunday, June 12, 2016

Sorry, There is No Fix

Lawrence Summers is a super-star of bourgeois economics. He has held leading positions at the World Bank, the US Treasury Department, and most recently in the Obama Administration. Besides teaching and administrative posts, he has consulted and worked for financial institutions. His advice has been sought by governments and corporations. And he doesn’t shy away from contrarian positions.

Since the 2008 crash, mainstream economists have retracted their worst fears to now characterize the event as an unusually sharp downswing in the business cycle. Of course economists were then scrambling to explain the virtual collapse of the financial sector, the panic, and the evaporation of trillions of nominal dollars.

At the time, there was a general despair, a widespread sense of impending doom. But with fading memory, economists have reconstructed the event as a severe, but manageable (and managed) periodic adjustment to the normal course of capitalism.

In the wake of the crash, commentators have acknowledged a slow “recovery,” but nonetheless concur that the global economy is back on course.

Summers dissents from this view, as he should.

For Summers, stubbornly weak productivity, long-term low, negative interest rates, sluggish growth, deflationary episodes and other economic shortcomings are signs of something chronically wrong with the global economy, something more systemic than the ordinary business cycle. He sees the economy caught in a rut (to borrow an expression from a Bloomberg Businessweek article), a rut of “secular stagnation.” Now “secular stagnation” is an old term Summers appropriates from Great Depression era economist Alvin Hansen, who saw the period after the 1929 crash as one of chronic economic malaise.

In a period of serious intellectual denial, injecting Hansen’s observation into the current discussion is a radical move. It challenges the notion that the economy is healthy; it challenges the notion that the economy is self-correcting (given a little tune up!); and it challenges the notion that the current course of monetary manipulation (ultra-low interest rates) will be sufficient stimulus to overcome the inertia of eight years of low, faltering growth.  

Summers, instead, argues that “secular stagnation” is the new normal-- a kind of stunted-growth equilibrium. For the world economy, this means insufficient growth to raise living standards, attack inequality, support investment, and maintain and improve infrastructure. As for capturing and describing the current state of the global economy, Summers’ snapshot is not too far off the mark: global economic activity has been tepid since the twenty-first century crash.

But as it stands, it’s just a snapshot-- a perhaps accurate observation-- and not a theory. Of course it’s a far more accurate depiction of the world economy than that of most of his colleagues who see recovery unfolding. To assert a theory, Summers needs an independent variable-- a cause or set of causes-- that account for the prevalence of “secular stagnation.” He needs an explanatory account that reveals how “secular stagnation” came to plague the global economy.

He believes he has located that independent variable, the cause of “secular stagnation,” in an insufficient demand for goods and services and an accompanying propensity to save rather than invest.  

Explanations of this sort are not new, either. They became common after the Great Depression and under the influence of John Maynard Keynes’ work. Since that time, Say’s Law, the purported universal law that the supply of all goods and services will find a market-clearing level of demand, has been discarded by nearly all economists (of course Marx challenged Say’s Law nearly a century before! And Malthus before him!). Academic economists, as well as many latter-day Marxists, fell under the spell of “underconsumptionism”-- the view that capitalist crises are generated by an imbalance between what the economy produces and what its consumers want or can afford. Accordingly, they attributed economic downturns to the lack of sufficient demand to support existing supply or the growth of supply.

Further, adherents to this theory attributed the post-World War II decades of relative economic stability to capitalist managers “solving” the problem of imbalance through various mechanisms: the welfare state, military spending, a contract between capital and labor, capitalist planning, state intervention, etc. All of these presumptive solutions to economic disruptions (or capitalist crisis) pre-suppose that the problem to be solved is insufficient demand.

This theory is attractive on several accounts. First, it is easy to understand: it recognizes a potential disparity within capitalism between the productive potential of the economy and the purchasing potential of consumers who are also exploited workers, a disparity that intuitively looks like a plausible problem for capitalism’s smooth operation.

Secondly, it is agreeable to all those who defend capitalism: for every shortfall in demand, there is a potential policy prescription that can inject demand into the economy in keeping with any and every political stripe. From war and military spending to massive government welfare or infrastructure spending, for fascism to left social democracy, there exists a remedy to insufficient demand. Until the stubborn “stagflation” of the 1970s, nearly all the politico-economic/ideological wars were fought over the best, most efficient, or socially just solutions to the problem of demand (including, I repeat, among many Marxists).

Thirdly, the “underconsumptionist” theory locates dysfunction-- crisis-- on the surface of the capitalist system and not in its deep structure. The analytic tools of bourgeois economics frame the dynamics of the system strictly in terms of the interaction of supply and demand. And these tools are most convenient and self-assuredly orthodox.  

A Marxist Alternative

Marxism searches deeper into the structure of capitalism for its well spring; Marxism rejects the tools of bourgeois economics; Marxism understands capitalism, not as a system that might suffer disruptions, but one that must encounter crisis.

Thus, Marx and subsequent Marxist thinkers probed deeper into the capitalist mechanism to locate the fundamental process that powers capitalist production and reproduction. He discovered that fundamental process in accumulation, the socially and legally sanctioned distribution of a growing quantity of society’s wealth into the hands of those possessing or controlling the material means of production. Capitalism runs smoothly if and only if the process of accumulation functions well. Essential to its function is a robust exploitation of workers, the creators of society’s wealth; that is the “how” of accumulation. And, of course, the “what” of accumulation is profit or surplus value; that portion of society’s expanding wealth that ends up in the hands of the capitalists.  

Thus, in our necessarily simplified account of accumulation and its central role in Marx’s theory of crisis, the harbingers of crisis are to be found in weak profits or impediments to exploitation. Unlike the episodic, periodic, and random economic disruptions caused by economic “overheating,” imbalances, corruption, or non-economic factors, systemic crises originate in the accumulation process. The necessity of capitalist crisis springs from the limitless acquisition of profits invariably outstripping the limited opportunities for investment and the further generation of profits. As Maurice Dobb explained, paraphrasing Marx: “...precisely because capitalist production is production for profit, 'overproduction of capital' becomes possible in the sense of a volume of capital accumulation which is inconsistent with the maintenance of the former level of profit.”

Systemic crises (e.g. 1929, 2008) usually arrive at a time of hyper-accumulation, with demand and investment bolstered by heightened borrowing. To accommodate a growing mass of capital (accumulated profits) in a context of limited or lower-yielding investment opportunities, greater risk is taken on. Excessive debt, precarious risk, and the prospect of even more debt and risk, is the recipe for a crash, a feature of systemic capitalist crisis. Either risk aversion sets in, leading to stagnation or economic retreat, or debt and risk continue growing toward unsustainable heights.

In the historic instances of systemic crisis, there is no evidence that a crash-- a severe economic decline-- is consistently preceded by or concurrent with a similar marked decline in demand. If the “underconsumptionist” theory were credible, a persistent or sharp decline in demand would be a causal antecedent of the crisis.

There was, however, an oversupply of capital seeking dwindling yield opportunities in the 2007-2008 bust. Many mainstream commentators noted the “search for yield” in the preceding period. It is this pressure on the rate of profit that signals the danger and potential for crisis. Of course the crisis-- the downturn-- reduces demand as a result of declining activity and unemployment; insufficient demand ensues, but does not cause a crisis. Summers’s demand-based causal explanation of what he calls “secular stagnation” fails to fit the facts.

That is not to deny, however, that generating new and greater demand-- stimulus-- plays a role in arresting the worst effects of economic decline. The 2009 stimulus packages (especially the massive investment programs in the PRC) generated enough activity to halt the further decline of global capitalism. However, it failed to correct the flaws in the accumulation process, flaws that are again coming into deepening crisis mode today: declining rates of productivity and profits, negative interest rates driving investors from safe havens, bloated debt (automobiles, student loans), and risky investment.

The history of the New Deal taught that public investment, as a remedy for private sector stagnation, can only substitute for the accumulation process and not restart it. The unexpected downturn of 1937-38 demonstrated that earlier public sector stimulation did not put capitalism back on its feet and, without further public investment, the system would again falter. And only war preparation and the turn to a form of wartime state capitalism absorbed the unemployed and revitalized the accumulation process by war’s end.

Lawrence Summers stands apart from his colleagues who promote a pollyanna-ish story of economic recovery and prosperity. They tout an artificially ginned up stock market and a debt-inflated automobile bubble as signs of success, when the signs indicate the opposite. Mainstream economists hold their breath as profit rates, productivity gains, and employment growth steadily decline.

Summers, the alarmist, knows better. He sees a faltering economy, but his analysis, and prescriptions are faulty. The bromides sidestep the fundamental failure of the global economy, a failure embedded within the system and not resolvable short of replacing the system. Summers’ proposal of massive public investments in US infrastructure, green energy, and education are worthy demands. Rousing a political movement to fight for these demands would be a welcome development. It would take some of the sting out of capital’s imposed hardships as well. But it would not repair the accumulation process. It would not “fix” capitalism.

Zoltan Zigedy