The current long depression and its nature

Economic slumps are usually preceded by a decline in profits, writes Michael Roberts. This article is based on a presentation made to the CPGB’s Communist University in August 2014

Since the end of the Great Recession - which technically ended in mid-2009, when the major capitalist economies stopped contracting - the world economy has morphed into a long depression1. There has been no ‘normal’ economic recovery that usually follows a slump in capitalist production.2 The economic recovery since mid-2009 has been weak, with below-trend real gross domestic product growth, still above-average unemployment and hardly any resumption of business investment. Inflation of prices in the shops and on household bills has been very low and in some economies there has been outright deflation.

This is the stuff of depression, as only previously seen in the 1880s-90s and the Great Depression of the 1930s. As former US Federal Reserve chair, Ben Bernanke, put it recently, September and October of 2008 saw the “worst financial crisis in global history, including the great depression”.3

This depression is puzzling mainstream economists just as much as the onset of the Great Recession did. Mainstream economics is divided into two camps. The first is the neoclassical group, which reckons that there can be no crises - or at least crises are not caused by any inherent flaws in the capitalist mode of production, but only by mistakes of governments or central banks. Back in 2003, Robert Lucas, the top Nobel prize-winning neoclassical economist from Chicago, claimed: “The central problem of depression-prevention has been solved, for all practical purposes.”4

If slumps do occur, they are caused by things exogenous to the market economy. Or, the argument goes, given ‘human nature’, capitalism has crises as a matter of course; they cannot be predicted and they must work themselves out - and they will, especially if governments do not interfere.

As Eugene Fama, the proponent of the ‘efficient markets hypothesis’ (which argues that markets will work perfectly if not interfered with - ‘what will be will be’), also commented at the depth of the Great Recession:

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.5


The second camp is broadly defined as Keynesian: in this camp, crises are indeed the product of inherent flaws or malfunctions in the modern economy. These flaws are to found in the financial sector and bred by uncertainties about the future, but they are not to be found in the capitalist mode of production as such. And something can be done about it: actions by central banks on monetary policy and governments in fiscal policy can correct the flaws and blockages in the financial sphere and get the capitalist economy going again.

Ben Bernanke reckoned that the Great Recession was really just a “financial panic” like that of 1907. In that year it was triggered by speculative activity involving “a failed effort by a group of speculators to corner the stock of the United Copper Company”. Similarly the 2008 ‘panic’ “had an identifiable trigger - in this case, the growing realisation by market participants that subprime mortgages and certain other credits were seriously deficient in their underwriting and disclosures”. In both cases, a fire sale of bank assets and a collapse in the stock market led to a run on bank deposits and liquidity:

In 1907, in the absence of deposit insurance, retail deposits were much more prone to run, whereas in 2008, most withdrawals were of uninsured wholesale funding, in the form of commercial paper, repurchase agreements and securities lending. Interestingly, a steep decline in inter-bank lending, a form of wholesale funding, was important in both episodes.6

And in both 1907 and 2008, there was insufficient regulation of financial institutions to ensure that they were not up to their necks in risky dud assets.

If the Great Recession and other slumps are just financial in origin, then they can be solved or avoided. Slumps and recessions are really just a technical problem. Keynes himself saw economists acting like dentists - it is just a question of removing any rotten teeth and moving on.

Leading Keynesian guru (and another Nobel prize-winner) Paul Krugman put it this way:

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’ - ie, 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.7

What is wrong with both Keynesian and neoclassical explanations of crises and their ‘solutions’ is a denial of any role for profit in what is, after all, a profit economy, where businesses are money-making machines - and where meeting some people’s needs for goods and services is merely a necessary, but not sufficient, side-effect. Nowhere does profit appear in the Keynesian multiplier, which has only investment and consumption as its drivers. If profit is not relevant to crises, but only ‘effective demand’ - ie, the level of investment and consumption - a theory of crisis now depends on spending: particularly consumer spending, the largest segment of effective demand.

Unfortunately, this bears no relation to reality. Consumption as a share of GDP had never been higher in 2007 in most major economies. And the subsequent fall in consumption was much milder and later than the huge collapse in investment - so a lack of consumption could hardly be the major cause of the crisis. Look at the story for the US on consumption and wage share in Fig 1.


But there is another version of crisis theory that has gained credence. In the neoliberal period, wage share fell, but spending was sustained by increased household debt and a property boom. This bred excessive debt and rising inequality of income that finally could no longer be supported. This is what caused the financial collapse - after all, profit share was rising, so that could not be the cause. So the Great Recession was the product of inequality, squeezed wages and excessive debt, not anything to do with the profitability of capital.

As Atif Mian and Amir Sufi conclude in their recent book, House of debt, celebrated by the Keynesian camp,

Recessions are not inevitable - they are not mysterious acts of nature that we must accept. Instead recessions are a product of a financial system that fosters too much household debt … excessive reliance on debt is in fact our culprit … but it can potentially be fixed. We don’t need to view severe recessions and mass unemployment as an inevitable part of the business cycle. We can determine our own fate.8

But the empirical evidence for excessive debt being the cause of crises is weak. As Bordo and Meissner concluded,

Historical evidence from several major credit booms finds scant support for the inequality/crisis hypothesis … If income inequality drove the credit boom that preceded the subprime crisis in the US, the event was an outlier by historical standards. Comparative evidence from the last century shows little relationship between rising inequality and credit booms.9

Duménil and Lévy have also attacked the inequality argument as the cause of crises. They point out:

… the concentration of income distribution in neoliberalism to the benefit of high income did not cause sagging demand patterns. To the contrary, the period witnessed a spending spree. Lower income strata certainly suffered from ‘underconsumption’ - not that they were not spending their income, but that their consumption did not measure up to decent standards - but there was no macroeconomic lack of demand due to their low demand. This trend was much more than compensated by the spending of upper income fractiles … spending gained almost 10 percentage points of GDP between 1980 and 2006. The current crisis was rather a crisis of ‘overconsumption’, given the fraction of demand imported from foreign countries.10

Law of profitability

If none of these mainstream theories of crisis are satisfactory, should we not consider in detail whether Marx’s law of profitability might provide the most compelling explanation of capitalist crises?

Marx argued that there is a tendency for the rate of profit to fall, as capital accumulates over a long period of time. Countertendencies can rule for a while - namely a rising rate of surplus value, higher profits from overseas and the cheapening of constant capital through new technology, among others. That was the experience of the so-called neoliberal period from 1982 to the end of 20th century. But eventually the tendency will overcome any counteracting factors. Then crises become a necessary process in trying to restore profitability by devaluing existing capital.

Let us first look at the empirical evidence on the US rate of profit since 1946 and see if we can relate Marx’s law to crises. Fig 2 shows my latest calculations for the rate of profit (ROP) in the US.


What can we learn from these data? First, in the whole period from 1946 to 2012, the US ROP fell 20% in current cost terms (CC) and 29% in historic cost terms (HC).11 So there has been a secular decline in the US ROP from 1946 to 2012 or from 1965 to 2012; with the main decline between the peak of 1965 and the trough of 1982 (however you measure it). The ROP measured in current costs has risen since reaching a trough in the early 1980s, while the ROP measured in historic costs has been more or less flat (looking at the moving average in the graph).

Second, there was a rise in the ROP between 1982 and 1997 - 35% under the CC measure and 12% under the HC measure. Third, from 1997, the ROP has fallen in CC terms and been basically flat in HC terms. Fourth, the ROP at its trough during the mild recession of 2001 was still higher than at the ROP trough during the deep recession of 1980-82 (24% higher under the CC and 2% under the HC measure). However, the ROP in the trough of the 2008 Great Recession was 11% (CC) and 6% (HC) below the 2001 trough, although it was still 10% higher on the CC measure than in 1982 (5% lower on the HC measure). So there was a secular fall in the US ROP since 1945, interspersed with periods when the ROP rose, but not enough to reverse the long-term decline. Marx’s law of profitability holds good for the US.

But does it do so for the rest of the major capitalist economies? What has been happening there? Well, I have found that profitability in the main capitalist economies has acted in a similar manner to the US economy, on the whole.12 On my measure of a world rate of profit, there was a fall from the mid-1960s, a recovery to the late 1990s and then a decline again. In both the US and in the major economies, there was downward pressure on the rate of profit from the late 1990s onwards (Fig 3).


Profitability has fallen secularly and, despite the neoliberal period, it has not recovered to previous levels in the ‘golden age’. Capitalism is under the increased pressure of low profitability and so erupts into recurrent and more severe crises.

Crises and their triggers

Nobody (at least no Marxist economist) disagrees that the crisis of the 1970s was a profitability crisis. But how can the Great Recession be also due to the law of profitability when profit rates recovered right through from the 1980 and 1990s? Surely, to argue thus is to adopt some dogmatic Anglo-Saxon ‘monocausal’ explanation.13

Some Marxists prefer a more eclectic approach. Duménil and Lévy argue that capitalism “underwent four large crises, which we denote as ‘structural crises’: the crisis of the 1890s, the Great Depression, the crisis of the 1970s, and the current crisis. The first and third ones were profitability crises. The second and fourth crises followed phases of financial hegemon.”14 A similar approach is adopted by Panitch and Gindin in their new prize-winning book15. For them, each crisis is unique and depends upon the particular relationships and alliances forged between workers, business, finance and the state. There have been four major historical global crises: the Long Depression in the 1870s onwards, the Great Depression of the 1930s, the Great Recession of 1970s, and what they call the Great Financial Crisis of 2007-09. For them, each has a different cause.

Panitch and Gindin prefer to explain the Great Recession as a result of stagnating wages, rising mortgage debt and then collapsing housing prices, causing “a dramatic fall in consumer spending”. But, as we have seen, the idea that the Great Recession was the product of a collapse in consumption as a result of falling wages does not hold up.

Each crisis can have its own trigger: the 1974-75 slump was triggered by high oil prices; the slump in 1980-82 triggered again by high energy prices; in 1991 by a property slump; in 2001 by stock market hi-tech crash; and 2008-09 was preceded by a credit-fuelled bonanza in property, diversified through financial instruments of mass destruction (collateral debt obligations).

But the Great Recession of 2008-09, like other crises, had an underlying cause based on the contradiction between the accumulation of capital and the tendency of the rate of profit to fall under capitalism. That contradiction arises because under capitalism production is for value, not for use. Profit is the aim, not production or consumption. The underlying contradiction between the accumulation of capital and the falling rate of profit (and then a falling mass of profit) is resolved by crisis, which takes the form of collapse in value - both real value and fictitious. The financial sector is often where the crisis starts; but a problem in the production sector is the cause.

In a recent paper, Guglielmo Carchedi and I found that there is a lagged correlation between a fall in the overall rate of profit and capitalist slumps.16 If we look at the UK economy, since 1963 there have been four major economic recessions or slumps: 1974-75, 1980-82, 1990-92 and 2008-09. In each recession, the rate of profit peaked and started to decline at least one year before the slump began. And each recession was accompanied by (coincided with) a fall in the mass of profit for successive years.

Similarly, if we look at the US economy, there were five recessions or slumps after 1963: 1974-75, 1980-82, 1990-92, 2001 and 2008-09. In each case, the rate of profit peaked at least one year before, but on most occasions up to three years before. And on each occasion (with the exception of the very mild 2001 recession), a fall in the mass of profit led to, or coincided with, a slump.

Contrary to Panitch’s and Gindin’s account of the years before the credit crunch of 2007 and the Great Recession of 2008-09 above, US corporate profits were falling some two years before the recession began, and investment dropped as a result before GDP contracted. And, in the recovery, again it was profits that led investment and GDP up.

US corporate profits went negative some six to nine months before the credit crunch in mid-2007 that kicked off the global financial collapse in 2008 and the Great Recession. Indeed, US real GDP did not contract until mid-2008. In reverse, corporate profits began to rise in mid-2009 well ahead of investment (some nine months later) and GDP (Fig 4). Profits lead to investment.


These conclusions are confirmed by other authors. For example, Tapia Granados has found:

… data from 251 quarters of the US economy show that recessions are preceded by declines in profits. Profits stop growing and start falling four or five quarters before a recession. They strongly recover immediately after the recession. Since investment is to a large extent determined by profitability and investment is a major component of demand, the fall in profits leading to a fall in investment, in turn leading to a fall in demand, seems to be a basic mechanism in the causation of recessions.17

Sergio Cámara Izquierdo also finds that “a significant cyclical decline of the profit rate has substantially preceded the last two recessions … the cyclical slump in the rate of profit must be seen as an important precipitating factor in the deepest economic downturn since the 1930s.”18

Yes, there was rise in the rate of profit and the mass of profits from 2002 to 2006. But profitability was still in a downward cycle from 1997 and the rate and the mass of profits did start to fall from 2006 onwards. Much of these profits were fictitious in nature. The credit and property boom from 2002 generated profits that could not eventually be realised, creating the conditions for a huge collapse in values. The trigger for the collapse was a fall in the mass of profits and the fictitious nature of those profits.

This current recovery is more like a long depression similar to the 1873-97 or 1929-42. By a long depression, I mean economies growing consistently at well below their previous trend rates, with unemployment stuck at well above previous levels before the Great Recession, and disinflation (slowing inflation) turning into deflation (falling prices). Above all, it is an economic environment where investment in productive capital is way below previous average levels, with little sign of pick-up.19 Indeed, this depression is now reaching the so-called emerging economies, where, even with their large supplies of cheap labour and imported new technology, real GDP growth is also slowing.

And companies will not invest. This is not just due to the need to liquidate fictitious capital, but also to the fact that profitability is still too low. Take a recent International Monetary Fund study.20 The analysis finds that corporate profitability in five countries remains well below the peak levels of 2007. French corporate profitability was 18% below its 2007 level in 2011, Spain’s was 30% below and Italy and Portugal was 22% below. Given that 2012 was a year of recession or even depression for most euro zone economies, profitability is unlikely to have recovered in 2013. Only German companies have done better since the trough of the Great Recession in 2009, but even so profitability there is still 8% below the 2007 peak.

The UK is similar. Figures for the first quarter of 2014 show that the profitability of UK non-financial companies is still well below pre-Great Recession levels (Fig 5). Indeed, the peak in the 2000s for profitability was in 2007, at 14.2%. But even after the huge credit boom, profitability was below the 1997 peak of 14.5%. The decline from 1997 to a low in the depth of the Great Recession in 2009 was 10.9% - down 21%. It is now just 11.9% - or up 10% from that level. But it is still 18% below 1997.


If we use the long-term data provided by the UK’s statistics office, we find that UK non-financial corporate profitability fell sharply in the 1960s to a low in 1975 (the 1970s profitability crisis), then recovered after the worldwide 1974-75 recession, before really taking off in the ‘neoliberal’ Thatcher era. As in the US (and elsewhere), UK profitability peaked in 1997 and has struggled since. Currently profitability is no higher than in the early 1990s and the direction is down, or flat at best (Fig 6). This more or less fits the story of profitability and crisis that the data in other countries reveal.


In my view, this Long Depression is thus caused by excessive debt that must be deleveraged and insufficient profitability in value-creating sectors that must be raised before global capitalism can set off on a new cycle of prosperity. This is the real meaning of ‘secular stagnation’ that some Keynesian economists have recently latched onto.21

Profit cycles and long waves

We should see the current period as a downward depressionary wave in the cyclical motion of capitalist production. It is a conjunction of various economic cycles in capitalism, with the profit cycle at its heart.

Any support for cycles in capitalism usually gets dismissed for two main reasons. The first is that statistics or data showing cycles are spurious and really just an expression of random shocks; or by extension, there are so few turning points in the longer cycles that no statistical significance can be applied. The second is that there is no theoretical model that can explain apparent economic cycles and, without that, the search for cycles is pointless. I think we can go some way to overcome these criticisms.

Marx thought there were cycles: “All of you know that, from reasons I have not now to explain, capitalistic production moves through certain periodical cycles.”22 And Marx tried to estimate how long that cycle of accumulation was.23 The key point for Marx was that

… the cycle of related turnovers, extending over a number of years, within which the capital is confined by its fixed component, is one of the material foundations for the periodic cycle [crisis] … But a crisis is always the starting point of a large volume of new investment. It is also, therefore, if we consider the society as a whole, more or less a new material basis for the next turnover cycle.24

The idea of profit cycles is supported by clear evidence of a stock market cycle in all the leading financial centres. The US stock market cycle appears pretty much the same as the US profit cycle. Indeed, the stock market seems to peak in value a couple of years after the rate of profit does. This is really what we would expect, because the stock market is closely connected to the profitability of companies, much more than bank loans or bonds. When the rate of profit enters its downwave, the stock market soon follows, if with a short lag.

Just as the capitalist profit cycle (in the US and possibly the other major economies) appears to be spread over approximately 32-36 years from trough to trough, so does the stock market cycle. There also appears to be a cycle in prices that is about double that size, or around 64-72 years. This is the famous Kondratiev cycle. It is usually recorded with a length of about 50-55 years, but I reckon it has lengthened. The K-cycle now follows much more closely the cycle in profitability, as the capitalist mode of production has become dominant globally.

In my view, we are now in the winter phase within the downward section of the fourth Kondratiev cycle. In each winter phase of the K-cycle, we get a depressionary environment for capitalism: Winter 1800-15; Winter 1873-97; Winter 1929-46. Winter 1997-2018?

Marx said there is no permanent crisis. By this he meant that if capital values were sufficiently destroyed in a slump, the profitability of capital could be restored and accumulation would resume. If the working class was unable to take the levers of power and replace the capitalist mode of production with planned production owned in common, then the whole “crap” (to use Marx’s word) would start again.

This current winter will come to an end - in my view, not through world war. Failing a successful revolution in a major capitalist economy, capitalism will eventually enter a new spring with a recovery in profitability and new growth based on new technologies already ‘discovered’ and just waiting for development. Of course, each time, the capitalist mode of production finds it more difficult to develop new technology, as it becomes more and more unproductive in the capitalist sense, and more value is used up in wasteful consumption rather than invested in new capital. But that is another story.

Michael Roberts blogs at thenextrecession.wordpress.com


1. In 2010 Anwar Shaikh termed the current economic environment the “first great depression of the 21st century” (see www.levyinstitute.org/pubs/GEM-Workshop-2009/presentations/Day_6_Session_Lunch_Shaikh.pdf). Brad de Long, the Keynesian economist, recently commented: “At some point we will have to stop calling this thing ‘the great recession’ and start calling it ‘the greater depression’” (http://equitablegrowth.org/2014/08/28/start-calling-greater-depression-early-friday-focus-august-29-2014).

2. See http://thenextrecession.wordpress.com/2014/08/14/the-myth-of-the-return-to-normal.

3. In evidence to the US Court of Federal Claims, August 22 2014.

4. Addressing the American Economics Association annual meeting, 2003.

5. Interview in New Yorker January 21 2010.

6. www.federalreserve.gov/newsevents/speech/bernanke20131108a.htm.

7. www.nybooks.com/articles/archives/2013/jun/06/how-case-austerity-has-crumbled/?page=3.

8. A Mian and A Sufi House of debt: how they (and you) caused the great recession, and how we can prevent it from happening again Chicago 2014.

9. MD Bordo and CM Meissner, ‘Does inequality lead to a financial crisis?’ Journal of International Money and Finance, 2013. See also O Coibion, Y Gorodnichenko, M Kudlyak and J Mondragon, ‘Does greater inequality lead to more household borrowing? New evidence from household data’, NBER Working Paper 19850 (2014).

10. G Duménil and D Lévy The crisis of the early 21st century: Marxian perspectives: www.jourdan.ens.fr/levy/dle2012f.pdf.

110. I shall not discuss the relative merits of using historic cost or replacement cost for measuring fixed assets in the denominator of the rate of profit. See my paper Measuring the rate of profit: http://thenextrecession.files.wordpress.com/2011/11/the-profit-cycle-and-economic-recession.pdf.

12. M Roberts A world rate of profit 2011: http://thenextrecession.files.wordpress.com/2012/07/roberts_michael-a_world_rate_of_profit.pdf.

13. According to Costas Lapavitsas, the idea that the tendency of the rate of profit to fall is the cause of capitalist crises is really a fairly new idea - one that has arisen only post-war and mainly comes from Anglo-Saxon sources. Sure, it might have fitted the facts in the 1970s, but not after. “Classical continental European Marxists” of the pre-war era never proposed profitability as the cause of crisis.In response to this Guglielmo Carchedi commented: “If crises are recurrent and if they have all different causes, these different causes can explain the different crises, but not their recurrence. If they are recurrent, they must have a common cause that manifests itself recurrently as different causes of different crises. There is no way around the ‘monocausality’ of crises.” See www.isj.org.uk/index.php4?id=614&issue=125.

14. G Duménil and D Lévy op cit.

15. L Panitch and S Gindin The making of global capitalism: the political economy of the American empire London 2013.

16. G Carchedi and M Roberts The long roots of the present crisis: http://gesd.free.fr/robcarch13.pdf.

17. José A Tapia Granados Does investment call the tune? Empirical evidence and endogenous theories of the business cycle May 2012: http://sitemaker.umich.edu/tapia_granados/files/does_investment_call_the_tune_may_2012__forthcoming_rpe_.pdf.

18. http://thenextrecession.files.wordpress.com/2012/11/izquierdo-rate-of-profit.pdf.

19. http://thenextrecession.wordpress.com/2011/11/25/us-investment-strike.

20. IMF report on global financial stability: www.imf.org/External/Pubs/FT/GFSR/2013/02/pdf/text.pdf. The IMF aggregated corporate earnings before tax and interest payments against assets based on firm-level annual data from the Bureau van Dijk’s Amadeus database. The sample includes more than three million non-financial firms, both publicly traded and private, from France, Germany, Italy, Portugal and Spain.

21. See Secular stagnation: facts, causes and cures: www.voxeu.org/article/secular-stagnation-facts-causes-and-cures-new-vox-ebook.

22. www.marxists.org/archive/marx/works/1865/value-price-profit/ch03.htm.

23. “The figure of 13 years corresponds closely enough to the theory, since it establishes a unit for one epoch of industrial reproduction which plus ou moins coincides with the period in which major crises recur; needless to say, their course is also determined by factors of a quite different kind, depending on their period ofreproduction. For me the important thing is to discover, in the immediate material postulates of big industry, one factor that determines cycles” (K Marx CW Vol 40, p282).

24. K Marx Capital Vol 2, p264.