Do all leftists think that capitalism is inherently prone to "crises"?

[inyourhouse]

I think Marxists believe this, but I'm interested in whether other types of leftists do too and for what reasons. Also, if it's not too much trouble, I'd like to know what leftists think of mainstream explanations for business cycles. For example, most economists think that there's a strong link between declines in aggregate demand growth (ie. growth in total nominal spending) and declines in real output growth. The reasoning is that prices and wages are "sticky", which means that they're slow to adjust to changes in AD growth (e.g. due to multi-year contracts). Therefore, if AD growth declines there will not be enough money to pay business and workers at prevailing prices and wages (which were set in the expectation of a higher amount of AD growth). Given this stickiness, real output growth must fall (and may turn negative) and unemployment must rise in order for the market to clear. The implication is that if the central bank stabilized some measure of AD growth (e.g. nominal GDP growth) and prevented it from falling, there should be no business cycles, although recessions could still occur due to negative supply shocks. The diagram below is a good illustration:

http://themoneyillusion.com/wp-content/uploads/2009/11/New-Image.JPG

If AD growth falls, the curve will shift to the left, causing lower inflation and lower output at the point where it intersects with the short-run supply curve (which, in this example, assumes that expected inflation was 2% before the change in AD growth). To increase growth, the AD curve must shift right (meaning higher AD growth) or the short run aggregate supply curve must fall (which requires a change in inflation expectations). Generally the latter will take much longer, although it may be a better policy if inflation is considered too high (Former Fed Chariman Paul Volcker pursued a policy like this in the early 1980s in order to bring the US inflation rate down). Also note that even if the central bank stabilized AD growth, a negative shock to aggregate supply (due to OPEC pushing up oil prices, for example) could still cause a recession, but these are not really "cyclical" and tend to be one-off events (in fact, I think the OPEC oil shock is probably the only example in the last century).

Intuitively, this explanation for business cycles seems to make a lot of sense to me. It also seems to match up well with the empirical data, which makes me wonder whether leftists accept this theory and/or whether they have theories that are more empirically successful. The graph below, for example, shows growth in nominal GDP (the blue line), which is a good measure of AD growth, and growth in real GDP (the red line). The relationship between the two appears to be very strong:

http://research.stlouisfed.org/fred2/graph/fredgraph.png?bgcolor=%23B3CDE7&chart_type=line&drp=0&fo=ve&graph_bgcolor=%23FFFFFF&height=378&mode=fred&preserve_ratio=checked&recession_bars=On&txtcolor=%23000000&ts=8&width=630&id=GDP,GDPC1&scale=Left,Left&range=Custom,Custom&cosd=1984-01-01,1984-01-01&coed=2010-10-01,2010-10-01&line_color=%230000FF,%23FF0000&link_values=false,false&line_style=Solid,Solid&mark_type=NONE,NONE&mw=4,4&lw=1,1&ost=-99999,-99999&oet=99999,99999&mma=0,0&fml=a,a&fq=Quarterly,Quarterly&fam=avg,avg&fgst=lin,lin&transformation=pc1,pc1&vintage_date=2011-02-02,2011-02-02&revision_date=2011-02-02,2011-02-02

[RGacky3]

Crises happen in Capitalism for many reasons.

The underlying problem of Capitalism is that it requires growth, about 3% per year to be healthy. THAT its the underlying problem with makes crisis inevitable.

For "natural" buisiness that explination sounds reasonable, however most of that extra demand is'nt made through the Fed, its made through credit, government spending, bubbles, and speculative markets.

Low interest rates from the Fed will pump more money in, but that does not nessesarily create more demand.

THe more an economy relies on financial markets and capital markets the more bubbles will be created, ultimately each one will get worse. THe more the economy is run by for profit private companies the more reliant on growth the economy is.

The need for growth is one huge market problem for the market system, natural demand simply will not grow fast enough, take along with that the class struggle part of it, the fact that companies also need to purpetually cut cost (to compete for investment), meaning cutting pay, cutting workers, meaning less overall demand. But this problem (less overall demand) is an externality, so no firm considers it (they can't), ultimately this leads to a collapse.

If you look at countries that don't crash during a crisis, its ones with a large section of the economy being public and non profit and not tied to growth, its also countries with very strong labor that keeps wages and thus demand high.

[Sinister Cultural Marxist]

Are crises of overproduction an idea which contradicts the business cycle in any way? Superficially speaking, they seem compatible. I read Marx's capital, but im not sure yet if I understand orthodox ideas regarding economic crises. Anyway, from what you're saying, it seems like a far more specific version of Marx's theory of overproduction, insofar as his theory of overproduction would seem to imply some similar conclusions but also some other ones. If I remember correctly, Marx's theory of overproduction speaks also of the accumulation of fixed value investments in the hands of capital mixed with the lowering of the value of that accumulated fixed capital.

[Palingenisis]

http://internationalist-perspective.org/IP/ip-archive/ip-archive.html

I would highly recommend the articles and essays on here on this subject which are much more nuanced than most you will find on this subject, even if a lot of their politics are utopian.

[inyourhouse]

For "natural" buisiness that explination sounds reasonable, however most of that extra demand is'nt made through the Fed, its made through credit, government spending, bubbles, and speculative markets.

I'm not sure I understand your point. Are you saying that the sectoral composition of aggregate demand (ie. the relative size of different sectors in the economy) affects real GDP growth? How does this make the explanation I suggested unreasonable? Also, how do you explain the empirical success of that explanation (ie. the very high correlation between NGDP and RGDP growth) despite large sectoral changes over the decades?


Low interest rates from the Fed will pump more money in, but that does not nessesarily create more demand.

An increase in the money supply (however measured) greater than any decrease in velocity will always increase aggregate demand. This follows from the equation of exchange: M*V = P*Q. In other words, the money supply multiplied by the velocity of money is equal to the price level multiplied by real expenditure (ie. nominal expenditure). This is true by definition. To break that equation down further, the money supply is simply equal to the monetary base (B) multiplied by the money multiplier (m), so m*B*V = P*Q. The money multiplier can only fall as low as 1 (in which case the monetary base would make up the entire money supply; that's not likely to happen, of course) and the central bank has total control over the monetary base, so it follows that it can achieve any level of aggregate demand unless velocity falls to zero. That is equivalent to nobody spending any money at all, which is never going to happen (the central bank could always spend itself in order to prevent that).


THe more an economy relies on financial markets and capital markets the more bubbles will be created, ultimately each one will get worse.

So, if I understand you correctly, you're suggesting that the greater the proportion of GDP produced by the financial sector, the greater the depth of recessions? Why would this be the case? In any case, this theory doesn't seem to bear up under empirical scrutiny. As you can see in the graph below, there appears to be no correlation between the relative size of the financial sector (shown on the x-axis and measured as net credit market assets held by the domestic financial sector) and real GDP growth (y-axis) in the US:

http://img151.imageshack.us/img151/2459/financialsectorrealgrow.png


THe more the economy is run by for profit private companies the more reliant on growth the economy is.

The need for growth is one huge market problem for the market system, natural demand simply will not grow fast enough,

What is "natural demand" and how would we measure it? Also, why does it matter? Above I argued that the central bank can achieve any level of aggregate demand, so why is there a problem?


take along with that the class struggle part of it, the fact that companies also need to purpetually cut cost (to compete for investment), meaning cutting pay, cutting workers, meaning less overall demand. But this problem (less overall demand) is an externality, so no firm considers it (they can't), ultimately this leads to a collapse.

I'm not sure that this explanation makes sense. If businesses reduce employee compensation, aggregate demand won't fall as long as the business spends the money that would otherwise have gone to those employees. Even if the business saved the money, this would lower the interest rate and increase investment spending by other businesses, so again aggregate demand would be unchanged. The only time this wouldn't be true is in the case of a liquidity trap, where interest rates are up against the zero bound, but then the central bank can just print more base money to boost aggregate demand, as I argued earlier.

This explanation doesn't seem to make sense empirically either. You're saying that we should see a fall in employment and employee compensation, which is then followed by a recession. However, the reverse seems to be true. That is, we generally see a recession and then we see a fall in employment and employee compensation, as shown in these graphs (the second graph shows the most recent recession):

http://research.stlouisfed.org/fred2/graph/fredgraph.png?bgcolor=%23B3CDE7&chart_type=line&drp=0&fo=ve&graph_bgcolor=%23FFFFFF&height=378&mode=fred&preserve_ratio=checked&recession_bars=On&txtcolor=%23000000&ts=8&width=630&id=COE_GDPDEF,PAYEMS&scale=Left,Right&range=Custom,Custom&cosd=1947-01-01,1947-01-01&coed=2010-10-01,2010-10-01&line_color=%230000FF,%23009900&link_values=false,false&line_style=Solid,Solid&mark_type=NONE,NONE&mw=4,4&lw=1,1&ost=-99999,-99999&oet=99999,99999&mma=0,0&fml=%28a%2A100%29%2Fb,a&fq=Quarterly,Monthly&fam=avg,avg&fgst=lin,lin&transformation=lin_lin,lin&vintage_date=2011-02-03_2011-02-03,2011-02-03&revision_date=2011-02-03_2011-02-03,2011-02-03&relative_vintage=_,&nd=_,

http://research.stlouisfed.org/fred2/graph/fredgraph.png?bgcolor=%23B3CDE7&chart_type=line&drp=0&fo=ve&graph_bgcolor=%23FFFFFF&height=378&mode=fred&preserve_ratio=checked&recession_bars=On&txtcolor=%23000000&ts=8&width=630&id=COE_GDPDEF,PAYEMS&scale=Left,Right&range=Custom,Custom&cosd=2002-01-01,2002-01-01&coed=2010-10-01,2010-10-01&line_color=%230000FF,%23009900&link_values=false,false&line_style=Solid,Solid&mark_type=NONE,NONE&mw=4,4&lw=1,1&ost=-99999,-99999&oet=99999,99999&mma=0,0&fml=%28a%2A100%29%2Fb,a&fq=Quarterly,Monthly&fam=avg,avg&fgst=lin,lin&transformation=lin_lin,lin&vintage_date=2011-02-03_2011-02-03,2011-02-03&revision_date=2011-02-03_2011-02-03,2011-02-03&relative_vintage=_,&nd=_,

As you can see, real employee compensation and employment tend to fall after recessions (shown by the grey vertical bars) begin. How could these factors have caused recessions if they came after the recessions had already begun?


If you look at countries that don't crash during a crisis, its ones with a large section of the economy being public and non profit and not tied to growth, its also countries with very strong labor that keeps wages and thus demand high.

I don't think this is true. As a simple empirical test, I looked at the correlation between the average annualized percentage change in real GDP and average total government expenditure as a percentage of GDP over the period 2006 Q1 to 2009 Q4 (the latest quarter for which data from all countries was available on Eurostat). If what you say is true, countries with lower government spending generally should have seen higher average RGDP growth, but in fact the reverse is true. That is, countries with lower government spending generally saw higher average RGDP growth:

http://img706.imageshack.us/img706/7272/govspendgrowth.png


Are crises of overproduction an idea which contradicts the business cycle in any way? Superficially speaking, they seem compatible.

A business cycle is a fluctuation of output over time, so it is identical to the concept of overproduction in a tautological sense. The explanation for the phenomenon is the key issue. As far as I know, Marx held that these business cycles were inherent in capitalism and impossible to avoid, but mainstream economists are more likely to view them as failures of monetary policy.


If I remember correctly, Marx's theory of overproduction speaks also of the accumulation of fixed value investments in the hands of capital mixed with the lowering of the value of that accumulated fixed capital.

I don't think I understand the Marxist theory enough to comment on this. I would like to do some empirical testing of the theory.


I would highly recommend the articles and essays on here on this subject which are much more nuanced than most you will find on this subject, even if a lot of their politics are utopian.

Wow, that is quite a selection of articles. Is there any article in particular that best succinctly summaries a leftist view of business cycles?

[Proukunin]

capitalism will always create exploitation of the working class and profit for the rich. so yes. besides liberals most leftists are against capitalism.

[inyourhouse]

capitalism will always create exploitation of the working class and profit for the rich. so yes. besides liberals most leftists are against capitalism.

In what way does this make capitalism inherently prone to business cycles?

[Proukunin]

i was in the wrong actually, i thought you meant crisis as in economic crisis.

[Amphictyonis]

Bourgeois economists are like cliche's of old gypsies who try to tell your future. They fail.

http://www.isreview.org/issues/73/int-harvey.shtml

They lack a proper understanding of their own system. Read the above interview with David Harvey and save me some typing :)

All i have the energy to say now is the various crisis capitalism produces will be key in ending it and in the past a crisis could develop in, lets say, Germany, but wouldn't effect the USA. As the capitalist system has become more integrated (globalized) the crisis now and the ones in the future will be more severe. With the integrated global economy a crisis in France will trickle over to Spain and to England and to the US and vice versa. Capitalism 'sews it's own seeds of destruction' but this doesnt mean we just sit on our hands and wait for it to implode. That would be a tragedy of the likes we've never seen.

[RGacky3]

How does this make the explanation I suggested unreasonable? Also, how do you explain the empirical success of that explanation (ie. the very high correlation between NGDP and RGDP growth) despite large sectoral changes over the decades?


No no no, I don't disagree with your explination, it looks pretty solid, I'm saying its just one piece of the problem and is'nt really the underlying cause of the problem.


Are you saying that the sectoral composition of aggregate demand (ie. the relative size of different sectors in the economy) affects real GDP growth?

Not really, what I'm saying is that purpedial growth, requires new markets, those new markets are generally bubbles.


That is equivalent to nobody spending any money at all, which is never going to happen (the central bank could always spend itself in order to prevent that).


Its the government that does that spending not the central bank


An increase in the money supply (however measured) greater than any decrease in velocity will always increase aggregate demand. This follows from the equation of exchange: M*V = P*Q. In other words, the money supply multiplied by the velocity of money is equal to the price level multiplied by real expenditure (ie. nominal expenditure). This is true by definition. To break that equation down further, the money supply is simply equal to the monetary base (B) multiplied by the money multiplier (m), so m*B*V = P*Q. The money multiplier can only fall as low as 1 (in which case the monetary base would make up the entire money supply; that's not likely to happen, of course)

Remember the Fed only loans money to banks, so the Fed pumping out money will not nessesarily increase the actual flow of money unless banks are issuing credit. Even if the money does get circulated, it could very well go to people that will not spend it.

You essencially have a problem like you have in the US, interest rates extremely low, but real wages are not going up, which means that non-credit based demand does not go up.

So although your equasion works apriori, when other factorrs come in you see that although demand is always going to rise somewhat, its not a constant.


So, if I understand you correctly, you're suggesting that the greater the proportion of GDP produced by the financial sector, the greater the depth of recessions?

Pretty much.


Why would this be the case? In any case, this theory doesn't seem to bear up under empirical scrutiny. As you can see in the graph below, there appears to be no correlation between the relative size of the financial sector (shown on the x-axis and measured as net credit market assets held by the domestic financial sector) and real GDP growth (y-axis) in the US:


Bubbles, an economy reliant on finance will grow the GDP a lot, because it creates speculative bubbles. Your essencially inflating the value of something which of coarse will, on paper, look like growth is happening, but its inflated value.

Look at the tech bubble, the savings and loans, the mortgage, and even deeper now with derivatives and credit default swaps.


What is "natural demand" and how would we measure it? Also, why does it matter? Above I argued that the central bank can achieve any level of aggregate demand, so why is there a problem?


What I mean by that is people with wages, with cash buying things, not on credit, not just people with their money buying things they need and want (not investmets, I'll explain why).

It matters because as soon as you start making fake demand (mortgages is a good example of this, your adding value to a market where there was none, security speculation is another example, people who buy securities with the aim of making a profit are not adding any value to it, but inflating the price so as to make a profit, this happens regularly in financial markets) your creating bubbles.


If businesses reduce employee compensation, aggregate demand won't fall as long as the business spends the money that would otherwise have gone to those employees.

That money more likely goes to executive compensation, which is'nt really spent, or to profit, which goes to investors, which again, is'nt nessesarily spent, meaning less demand, capital investment is another thing.


Even if the business saved the money, this would lower the interest rate and increase investment spending by other businesses, so again aggregate demand would be unchanged.

Again not nessesarily, buisinesses do not create demand ultimately, they meet demand. When you raise the interest rates, but people with wages don't have money to by commodities and the such, those investments need to either be saved, or invested in something with a return, so they look for new markets, which many times end up being bubbles, I mean look at how huge the derivative market is.


This explanation doesn't seem to make sense empirically either. You're saying that we should see a fall in employment and employee compensation, which is then followed by a recession. However, the reverse seems to be true. That is, we generally see a recession and then we see a fall in employment and employee compensation, as shown in these graphs (the second graph shows the most recent recession):


Relative to growth wages are stagnent, real wages hav'nt gone up since the 70s (if you want I'll source that), so what you have is corporate profits going way way up, while wages stay the same, that means growth without a raise in what I call "natural demand," which creates a bubble, which creates a crash.

When a crash happens many jobs get lost and many jobs which were tied in with the bubble.

I'm not saying that a dip in wages and employment is the cause, I'm saying purpetual growth without growth of wages and actual tangable wealth (non speculative) causes crisis.


As you can see, real employee compensation and employment tend to fall after recessions (shown by the grey vertical bars) begin. How could these factors have caused recessions if they came after the recessions had already begun?


The growth itself causes the recession, the fact that growth goes way faster than an economy can actually handle.


If what you say is true, countries with lower government spending generally should have seen higher average RGDP growth, but in fact the reverse is true. That is, countries with lower government spending generally saw higher average RGDP growth:


GDP growth is not the way to measure the success of an economy, the crash in the US was mass unemployment, poverty, huge debt and so on.

it fact it makes sense that countries with lower government spending would grow faster (more of their economy is based on profit), but it also means they will crash more often and harder.

I'm saying that purpetual high growth is unhealthy, and will cause crisis.

Its like 2 guys at the gym, one is a competative bodybuilder, the other is juts staying in shape, the former uses steroids eats 8 meals a day and simply lives unhealthy, he grows fast, but dies at 40 because he's growing at an unnatural rate that his body cannot keep up with nor is it natural growth, the latter is doing it just for health so he does't have competative pressure, so he grows slower, but at a rate that is sustainable and his body can keep up with and he lives till he's 90.

Socialism WILL have a slower growth rate than Capitalism, its almost inevitable, but it will be a much healthier economy (rated by poverty rates, employment, standard of living, efficiency and so on).


As far as I know, Marx held that these business cycles were inherent in capitalism and impossible to avoid, but mainstream economists are more likely to view them as failures of monetary policy.


Well Feds poured money in, it did'nt stop the crash. Most mainstream economists blame lack of regulation, and international financial markets. Monetary policy was the monetarists, the Alan greenspans, those guys arn't to popular today.

I think that these are inherent, and ultimately unsustanable and will destroy the economy beyond repair.

Monetary policy will increase demand slightly, but not beyond the need for growth, and not beyond inflation. Monetary policyc an increase the monetary supply, not grow markets, not create new ones, not force banks to issure credit, not force people to invest in productive industry, not stop speculative investment that creates bubbles.


In what way does this make capitalism inherently prone to business cycles?

I would argue that its not just buisiness cycles, that its inherently prone to collapse, and that its a downward spiral (markets by themselves).

[Revolution starts with U]

Do all leftists believe
No

[Revolution starts with U]

(Meaning, stop treating leftists as one homogenous block)

All systems are prone to crises. The difference with pre-socialist systems (and to a limited extenta workers democracy would suffer this problem too) is that they are prone to artificial crises where the nature of resource hasn't fundamentally changed.... it's just that profits cannot be made so investment is halted.