“Roots of the Current Economic Crisis”

www.akliman.squarespace.com

• Fred Moseley (2008, 2009): “The main problem in the current crisis is the financial sector. … The current crisis is more of a Minsky crisis than a Marx crisis. … there has been a very substantial and probably almost complete recovery of the rate of profit in the U.S.”

• Gérard Duménil and Dominique Lévy (2005): “the recovery of the profit rate [ in the U.S.] appears nearly complete within the entire Corporate sector”

Pre-tax Profit as % of Historical- and Current-Costs of Fixed Assets, U.S. Corporations;

1982 = 100%

-

Constant-”Wage”-Share and Actual

Theory

• The rate of profit heads toward the incremental rate of profit

• At the start of new boom, the rate of profit is well above the incremental rate of profit, so it tends to fall over time

• This situation persists unless there’s sufficient “destruction of capital”

• Destruction of capital restores profitability, ushers in a new boom

•Great Depression & WWII

• But insufficient destruction of capital in economic crises of mid-1970s & early 1980s

• Rather than depression (& subsequent boom!), policy-makers have continually encouraged excessive expansion of debt.

• This artificially boosts profitability and economic growth, but in an unsustainable manner; it leads to repeated debt crises.

• The present crisis is the most serious and acute of these.

• Policy-makers are responding by again papering over bad debts with more debt, this time to an unprecedented degree.

SC

S = surplus labor, surplus valueC = capital-value advanced

In the long run, the rate of profit tends toward the incremental, or long-run, rate

The labor rate of profit is S/C.

The incremental labor rate of profit is

ILR =(change in S)/(change in C).

To abstract from distributional issues, I’ve assumed that

% change in S = % change in employment.

Devel- (ex-) World oped USSR China Rest of World Avg. West & & E. World Avg. Excluding Japan Europe China

“[My] Secretary of the Treasury [Andrew] Mellon … had only one formula: ‘Liquidate labor, liquidate stocks, liquidate the farmers,. liquidate real estate.’ … He held that even a panic was not altogether a bad thing. He said: ‘It will purge the rottenness out of the system.’”

President Herbert Hoover

“Roots of the Current Economic Crisis”

www.akliman.squarespace.com

Money Rate of Profit,

U.S. Corporations, 1941-2004

0%

5%

10%

15%

20%

25%

30%

35%

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

average

P.C. Vey, The New Yorker, March 9, 2009

• correct incentives for executives • financial product safety commission • financial systems stability commission • "speed bumps" to limit borrowing • consumer protection laws … that prevent predatory lending • better competition laws.

CNN.com Sept. 17, 2008

How to prevent the next

Wall Street crisis

by Joseph Stiglitz

Long-Run Labor Rate of Profit, 1946-2007

LR Labor Rate = 4.009% - 0.000%(Time)

(3.710) (-0.010)

0%

4%

8%

12%

16%

20%

1946

1956

1966

1976

1986

1996

2006

average 5-yr centered moving avg.