|RADICAL ECONOMIC THEORIES OF THE CURRENT ECONOMIC CRISIS
Private Debt and the Current Crisis
Underlying Causes of the Great Recession
The Current Crisis: Character, Cause, Resolution
David M. Kotz
Economic Collapse, Economic Decline: Getting to the Roots of the Crisis
Arthur MacEwan and John Miller
The Rate of Profit is the Key
Private Debt and the Current Crisis
Both the crisis and the apparent boom before it were caused by the change in private debt. Rising
aggregate private debt adds to demand, and falling debt subtracts from it. This point is
vehemently denied on conventional theoretical grounds by economists like Paul Krugman, but it
is obvious in the empirical data. The crisis itself began in 2008, precisely when the growth of
private debt plunged from its peak of almost 30% of GDP p.a. down to its depth of minus 20% in
2010. The recovery, such as it was, began when the rate of decline of debt slowed. Across
recession, boom and bust between 1990 and 2012, the correlation between the annual change in
private debt and the unemployment rate was -0.92.
The causation behind this correlation is that money is created “endogenously” when the banking
sector creates loans, and this newly created money adds to aggregate demand—as argued by
non-orthodox economists from Schumpeter through to Minsky. When this debt finances genuine
investment, it is a necessary part of a growing capitalist economy, it grows but shows no trend
relative to GDP, and leads to modest profits by the financial sector. But when it finances
speculation on asset prices, it grows faster than GDP, leads obscene profits by the financial
sector and generates Ponzi Schemes which are to sustainable economic growth as cancer is to
When those Ponzi Schemes unravel, the rate of growth of debt collapses and the boost to demand
from rising debt becomes a drag on demand as debt falls. In all other post-WWII downturns,
growth resumed when debt began to rise relative to GDP once more. However the bubble we
have just been through has pushed debt levels past anything in recorded history, triggering a
deleveraging process that is the hallmark of a Depression.
The last Depression saw debt levels fall from 240% to 45% of GDP over a 13 year period, and
the ensuing period of low debt led to the longest boom in America’s history. We commenced
deleveraging from 303% of GDP. After 3 years it is still 10% higher than the peak reached
during the Great Depression. On current trends it will take till 2027 to bring the level back to that
which applied in the early 1970s, when America had already exited what Minsky described as
the “robust financial society” that underpinned the Golden Age that ended in 1966.
While we delever, investment by American corporations will be timid, and economic growth will
be faltering at best. The stimulus imparted by government deficits will attenuate the downturn—
and the much larger scale of government spending now than in the 1930s explains why this far
greater deleveraging process has not led to as severe a Depression—but deficits alone will not be
enough. If America is to avoid two “lost decades”, the level of private debt has to be reduced by
deliberate cancellation, as well as by the slow processes of deleveraging and bankruptcy.
In ancient times, this was done by a Jubilee, but the securitization of debt since the 1980s has
complicated this enormously. Whereas only the moneylenders lost under an ancient Jubilee, debt
cancellation today would bankrupt many pension funds, municipalities and the like who
purchased securitized debt instruments from banks. I have therefore proposed that a “Modern
Debt Jubilee” should take the form of “Quantitative Easing for the Public”: monetary injections
by the Federal Reserve not into the reserve accounts of banks, but into the bank accounts of the
public—but on condition that its first function must be to pay debts down. This would reduce
debt directly, but not advantage debtors over savers, and would reduce the profitability of the
financial sector while not affecting its solvency.
Without a policy of this nature, America is destined to spend up to two decades learning the truth
of Michael Hudson’s simple aphorism that “Debts that can’t be repaid, won’t be repaid.
Underlying Causes of the Great Recession
The economy remains seriously weak, 4 1⁄2 years after the Great Recession began, and 3 1⁄2 years
after the financial crisis ended. This indicates that the economic slump is not due only to the
financial crisis. Just as more lay behind the Great Depression of the 1930s than a stock-market
crash, more lies behind the Great Recession and the persistent economic malaise than the
collapse of a home-price bubble. This idea is the starting point of my book, The Failure of
Capitalist Production: Underlying Causes of the Great Recession (Pluto Press, 2012).
Actually, the book isn’t something I set out to write. At the start of 2009, I was researching a
rather narrow topic, and discovered something surprising. So I began to dig deeper. The more I
dug, the more I found that was surprising. Eventually, I had material for a whole book.
What I uncovered was surprising because it contradicts key pillars of the conventional left
account of the economic history of the last several decades. According to the conventional left
account, the turning-point was the early 1980s, the start of a new stage of capitalist expansion
brought about by neoliberalism. The neoliberals succeeded in increasing the degree of
exploitation. Workers’ share of income and real (inflation-adjusted) pay declined, and this
caused the rate of profit to rebound. So the economy could have grown rapidly, if this extra
profit had been invested in production. But that didn’t happen, because of financialization: profit
was diverted from productive investment toward financial uses. The slowdown in investment led
to a slowdown in economic growth, which in turn led to a slowdown in income growth of
income. And since the slowdown in income growth made it harder to repay debt, it led to rising
debt burdens. This chain of events set the stage for the financial crisis and the Great Recession.
However, I uncovered several facts (from U.S. government and other official data) that
contradict the conventional left account. First, the turning-point of recent U.S. economic history
was the 1970s – before the rise of neoliberalism. Many important trends that continued began in
the 1970s or before. And the neoliberal period wasn’t really a new expansionary stage, but a
period of relative stagnation. The economy never fully recovered from the recession of the mid-
1970s. The long-term rise in income inequality and the long-term fall in the growth rate of public
infrastructure spending began in 1969. The long-term rise in government and household
borrowing/GDP ratios began in 1970. The Bretton Woods gold-exchange system collapsed in
1971, and this led to the 3d World sovereign-debt crisis and a marked increase in financial
instability ever since. The serious and long-term fall in the growth rate of GDP, here and
globally, began with the recession of the mid-1970s, as did other long-term trends: the fall in the
growth of industrial production, the slowdown in the growth of employees’ pay, a more-serious
labor-force-dropout problem, and the rise in the average duration of unemployment started.
Since all these things began during “Keynesianism,” they aren’t merely effects of neoliberalism.
Second, U.S. corporations’ rate of profit (rate of return on the actual amount of money invested
in fixed capital, minus depreciation), never recovered in a sustained manner during the neoliberal
period. When profit is defined broadly, as all of the output (net value added) of corporations that
their employees’ don’t receive, the rate of profit continued to trend markedly downward, while
the narrower before-tax rate of profit stagnated. The former rate of profit continued to trend after
we remove the effect of inflation. Moreover, U.S. multinational corporations’ rate of return on
their foreign direct investment also trended markedly downward.
Third, the cause of the slowdown in productive investment was the fall in the (actual) rate of
profit, not financialization or neoliberalism. Between 1970 and 2009, variations in the rate of
profit (based on the broad definition) account for 83% of the variations in the rate of
accumulation fall in the rate of accumulation, and changes in the rate of profit preceded changes
in the rate of accumulation, so it’s clear what caused what. Almost all of the fall in the rate of
accumulation that took place during the neoliberal period occurred between 1981 (the start of the
Reagan presidency) and 2001, and during this period there was certainly no diversion of profit
from productive investment to finance. A greater share of profit was invested in production
during this period than was invested between 1947 and 1980, no matter how one defines profit.
Finally, and to me, most surprisingly, the neoliberals did not succeed in reducing working
people’s pay or their share of national income. Compensation of employees, as a share of
corporate output, has been trendless since 1970. Compensation of managers has increased only
modestly faster than average since the mid-1980s, so non-managerial workers’ share of corporate
output fell by roughly one-half percentage point, not much. The income of the working class—
total compensation plus government-provided social benefits (minus workers’ and employers’
Social Security and Medicare tax contributions)—has been basically constant for 40 years. It was
just as great in 2007 as it was in 1970, and it was much greater than in the early 1960s. (So
claims that the Great Recession is an underconsumption crisis are wrong).
So why have many on the left reached contrary conclusions? Actually, they haven’t done so.
They say things that seem to contradict the above findings, but actually don’t, things that are
technically correct but extremely misleading (e.g., “wages” have fallen as a share of GDP). I
don’t have space here to discuss this further, but it’s documented in detail in my book.
Thus, what the facts suggest is that the underlying causes of the Great Recession and the
continuing malaise are rooted in capitalist production. The rate of profit fell from the mid-1950s
onward and never recovered in a sustained manner. This led to a long-term slowdown in
productive investment (when less profit is generated, there’s less profit that can be invested), and
the slowdown in investment in turn led to a slowdown in economic growth. And the growth
slowdown—plus artificially stimulative government policies that were pursued in an effort to
manage and maybe reverse the profitability, investment, and growth problems—led to a long-
term buildup of debt, and ultimately to the Great Recession and current malaise.
The political implications of this controversy are profound. The conventional left account
implies that the only causes of the crisis are neoliberalism policies and financialization; it’s
supposedly a “crisis of neoliberalism,” not capitalism. To prevent such crises from recurring, all
just need to end neoliberalism and “financialized capitalism”—perhaps by means of the class
collaboration that some Marxist economists call for! A change in the character of the socio-
economic system is not necessary. However, if the crisis is a crisis of capitalism, rooted in its
system of value production, we need to change the character of the socio-economic system; we
need to end value production. Financial reform, activist fiscal and monetary polies, and
nationalization will, at best, only delay the next crisis. And as long as the underlying problems
plaguing capitalist production that led to this crisis persist, artificial stimulus of the economy
through even more debt build-up threatens to make the next crisis worse when it comes.
The Current Crisis: Character, Cause, Resolution
David M. Kotz
I view the crisis that began in 2008 as a structural crisis of capitalism. It is not a business cycle
recession that happens to be particularly severe, which could be corrected by expansionary fiscal
and monetary policies. It is not essentially a financial crisis, which had secondary effects on the
real sector. It is rather a crisis of the structural form that capitalism has taken since around 1980
in much, although not all, of the world.
The best, most comprehensive characterization of this form of capitalism is neoliberal capitalism,
not "globalization" or "financialization" which, although both are important features of this form
of capitalism, fail to capture the full range of inter-related institutions that constitute neoliberal
capitalism. The main features of neoliberal capitalism are the following: 1) a particular form of
the capital-labor relation, entailing extreme capitalist domination of labor; 2) a particular state
role in the economy based on deregulation of business and markets, privatization, and attacks on
social programs; 3) a capital-capital relation of unrestrained competition; and 4) a new relation
between financial and productive capital, known as financialization.
At the most abstract level, the cause of the current crisis is the exhaustion of neoliberal
capitalism, which means that it can no longer promote high profits and relatively stable
accumulation over the long run. As the social structure of accumulation (SSA) theory argues,
every institutional form of capitalism, or SSA, has contradictions that eventually render it unfit
for the role of promoting high profits and stable accumulation.
At a more concrete level, neoliberal capitalism was able to bring a long period of high profit and
stable accumulation only by giving rise to unsustainable trends, which were leading to a financial
and real sector collapse at some point. All of the institutions of neoliberal capitalism contributed
to high and growing inequality -- a rising gap between profits and wages and between rich
households and the rest. This encouraged accumulation but simultaneously produced a problem
of realization -- who could buy the growing output of an expanding economy? In neoliberal
capitalism this problem was resolved by growing consumer spending financed by household
borrowing. Despite stagnating or falling real wages, consumer spending rose from 62% to 70%
of GDP from 1979 to 2007.
Such borrowing was made possible by the asset bubbles of increasing size produced by
neoliberal capitalism and by a financial sector willing and eager to lend to households, in
increasingly "creative" (and profitable) ways, with the growing asset bubble wealth serving as
security for the loans. This process occurred in the second half of the 1990s, during the stock
market bubble, and on a larger scale in the 2000s during the real estate bubble. From 1980 to
2007 household debt more than doubled relative to disposable income. Once the real estate
bubble burst, as all bubbles eventually must, the high level of household debt was rendered
unsustainable. This led to a crash of both the real and the financial sectors, made more severe by
the collapse of the high-risk derivatives created by financial institutions.
In relation to Marxist crisis theory, this crisis can be understood as an asset-bubble induced over-
investment crisis. Neoliberal capitalism promoted three long expansions, one in each decade of
the neoliberal era, by driving consumption upward relative to disposable income. Business
responded by creating the necessary productive capacity to satisfy the elevated level of consumer
demand. In addition, the asset bubbles instilled a sense of euphoria among corporate decision-
makers, leading to over-optimistic expectations of future profits, which promoted excessive
investment. The latter effect showed up in a long-run downward trend in capacity utilization in
industry. Once the last big asset bubble burst, consumer spending fell sharply relative to
disposable income while profit expectations reversed, leading to a very rapid fall in business
fixed investment that started one quarter after consumer spending began to decline.
The above interpretation of the crisis suggests that policy changes alone, such as fiscal stimulus
or tighter regulation of the banks, cannot resolve it. If the crisis is to be resolved within
capitalism, a new institutional structure must be created that will again promote long-run profit-
making and stable accumulation. Both historical precedent and theoretical considerations suggest
that such a new SSA would be of the interventionist variety rather than another liberal SSA.
However, any new SSA emerges from complex struggles among various classes and groups,
influenced by the character of the crisis during which the new SSA is constructed. It is
impossible to predict in advance the details of a new SSA, but one can identify two broad types
of capitalist SSA that might emerge.
First, if popular movements remain relatively weak, we may see the emergence of a "corporatist"
SSA -- that is, a capitalist-dominated statist form. This would continue a neoliberal labor market
but resolve the demand problem through rising state spending for military-national security
purposes along with rebuilding of infrastructure (transportation, power). Such a corporatist SSA
would be both repressive and militarily aggressive.
Second, if popular movements grow in strength, a social-democratic SSA based on compromise
between capital and labor might arise. This would allow wages to rise in step with labor
productivity, while state spending for social purposes also rose. However, social democratic
capitalism requires a continuing increase in commodity output, since rising profits and wages
under capitalism require rising output. This would face severe environmental and natural
If popular movements become strong enough, and radical enough, to force capital to compromise
with labor, that suggests the socialist movement would also revive. This holds out the possibility
of transcending capitalism entirely by replacing it with socialism. Socialism can bring rapid
growth in output, but it has no such internal compulsion, and in developed countries a socialist
planned economy could bring a constant or declining level of output, a declining workweek, a
shift from private to public goods and services, and technological change directed at making
work a more satisfying experience. Thus, human development without economic growth in a
sustainable relation to the natural environment would become possible.
Economic Collapse, Economic Decline: Getting to the Roots of the Crisis
Arthur MacEwan and John Miller
The Occupy Movement has thrust the great economic inequalities of our society to the center of
public attention. The inequalities are not new, but they have gotten much more extreme over the
last several decades. After an era of relatively less income inequality in the middle of the last
century, we have returned to conditions of the late 1920s. Now, as then, the highest income 1%
of the population is getting more than 20% of all income. For the Occupy Movement and for
many of the rest of us, there is something fundamentally unfair about this situation.
More than unfair, great economic inequality in the United States has been a root cause of the
economic crisis that emerged in 2007 and 2008, generating high unemployment, continuing
economic instability, and severe hardship for many, many people. Inequality has been part of a
vicious circle, generating extreme concentration of political power and a perverse leave-it-to-the-
market ideology that has been used to justify that concentration of power. In turn, the political
power of the very rich and this perverse ideology, as well as reinforcing each other, have been
used to reshape government policies that have made the inequality worse. Truly a vicious circle.
Our book, Economic Collapse, Economic Decline: Getting to the Roots of the Crisis (M.E.
Sharpe, Armonk, NY, 2011) explains, in a step-by-step manner, how this inequality-power-
ideology nexus lies at its foundation of the crisis. Following from this analysis, we argue that
fundamentally altering this nexus would not only create an equitable U.S. economy but would
also create the conditions for a return to sustained economic growth.
Deregulation and the Financial Crisis. One of the center pieces in the reshaping of
government policy has been deregulation, deregulation of financial activity in particular. Starting
in the 1980s and reaching its apex in the late 1990s, many of the rules that had been introduced
to bring stability to banking after the Great Depression of the 1930s were removed. We were
told that if things were left to “The Market,” the economy would work better for all of us.
But here’s what happened: As the economy expanded, almost all the increased income went to
the very rich. Trying to keep up, most other people reduced their saving and took on more and
more debt, especially debt for housing. The government—that is the Federal Reserve Bank (the
Fed)—recognized that with the incomes of most people stagnant or near stagnant, buying power
would weaken and threaten economic growth. So the Fed did what it could to keep interest rates
low, encourage debt build up, and thus keep people buying. It worked, for a while, especially
with housing debt (mortgages). During the 1990s, mortgage debt outstanding on 1 to 4 family
houses rose from 61% to 69% of after-tax personal income, then ballooned to 107% by 2007.
This rising level of debt and the rising housing prices were unsustainable. Debt and housing
prices can rise faster than income only so long. In 2007, crunch time came and housing prices
began to fall. Still the story is not complete without the role of deregulation. Because financial
firms—banks and also mortgage companies—were not being sufficiently regulated, they were
both charging excessive prices (high interest rates) for loans and making loans that they knew
could not be repaid. The makers of the loans didn’t worry about the fact that they couldn’t be
repaid because they sold these loans to others, pocketing hefty fees in the process. Without
proper oversight by regulators, buyers of these loans thought they were good investments.
Then, when housing prices started falling, everything came apart. Some big financial firms
failed. Others were saved by billions of dollars of support from the government—i.e., from the
public. The financial firms stopped making loans, and other firms, without financing from the
banks, got in trouble. Layoffs and lack of new investment followed. The crisis took hold, and
in the summer of 2012 we still have not recovered.
So the parallel to the situation of the late 1920s in terms of income inequality has a good deal of
significance. As the great inequality then led into the Great Depression, the inequality of recent
years led us into the Great Recession.
Moving in a Better Direction.
Because a nexus of inequality, elite power, and leave-it-to-the-
market ideology formed a vicious circle that lies behind the financial and economic crisis,
effective reform depends on breaking that nexus. The last section of our book addresses the
possibilities and limits of reform. We look closely at three foundations for reforms: expanding
universal social programs, redeveloping the labor movement, and changes in the global
economy. Each of these reforms can contribute to transforming the inequality-power-ideology
nexus into a virtuous circle of progressive change.
Health care provides an example of how universal social programs could change the inequality-
power-ideology nexus. Universal health care (“Medicare for all”) would be a good thing in
itself. Also, providing everyone with healthcare in a public program would have a profound
impact on the distribution of income, directly assuring people of this real benefit and indirectly
protecting people from the huge income losses that can accompany serious illness. Such a
universal program would also redistribute power in society because it would provide people with
options—for example, the option of switching jobs without risking the loss of healthcare. And it
would shift ideology from an each-on-their-own outlook toward mutual responsibility for one
We also assess the ways that “re-creating” the labor movement offers substantial possibilities for
improvement. Finally we explore the interdependence of national reform and global reform, the
need to redefine globalization, and the continuing constraint of global inequality.
We hope that readers of our book are convinced that the inequality-power-ideology nexus we
describe is indeed at the center for the economic crisis, and that changes in income and wealth
distribution, in who has power in our society, and in the ideology of how we view the operation
of the economy are at the center of a lasting solution to the problems of our economic lives.
The Rate of Profit is the Key
The modern world economy is dominated by the capitalist mode of production. Under
capitalism, money is used to make more money. Profit drives production, not social need. And
capitalist production does not proceed in a straight line upwards. It is subject to recurrent crises
of ‘booms and slumps’ that destroy and waste much of the value previously created by society
(workers). The 1880s and 1890s saw a massive destruction of US production and wealth; the
Great Depression of the 1930s also. Now we have suffered the first Great Recession and are still
in the Long Depression of the 21st century.
The capitalist mode of production has recurrent crises because it has two major fault-lines. First,
in a monetary economy, of which capitalism is the epitome, there is always the possibility of
crisis. Holders of money may not always spend it or invest it, but hoard it. If they do so for
whatever reason, it can cause a dislocation of the exchange process and create a crisis in buying
Second, the capitalist system of production for profit will falter if not enough profit is created to
satisfy the owners of the means of production. And there is an inherent tendency for the rate of
profit to fall. This is the underlying cause of all slumps.
Individual capitalist businesses do not cooperate to produce the things and services that society
needs. On the contrary, they compete with each other to sustain and increase their profit. To do
so, they make workers worker longer or harder, but they also increasingly use new technology to
boost the productivity of labour to get more value. But this is capitalism’s Achilles heel. The
accumulated cost of investing in new plant, equipment etc inexorably rises compared to the size
and cost of the labour force. As only labour can create new value (machines on their own cannot
do it), the profitability of each new unit of investment begins to fall. If profitability falls
consistently, eventually it will cause a fall in the mass of profit. Then capitalists stop investing
and ‘go on strike’. A crisis of production ensues.
Capitalists try to avoid this crisis in various ways: by trying to exploit workers more; by looking
for cheaper forms of new technology; and by speculating in unproductive areas of the economy
i.e. the stock market, banking and finance, where they gamble for gain. But these things can
only work for a while. Eventually, the law of falling profitability will operate.
Which way profitability goes tells you which way capitalism goes.
The rate of profit in the US is well below where it was in 1948. But it has not moved in a
straight line. After the war, it was high in the so-called Golden Age from 1948-65. This was
also the fastest period of economic growth in American history.
Then profitability fell consistently from 1965 to 1982. GDP growth was much slower and
American capitalism (like elsewhere) suffered severe slumps in 1974-5 and 1980-2.
Then in the era of what is called ‘neoliberalism’, from1982 to 1997, profitability rose.
Capitalism managed to get counteracting factors to falling profitability into play i.e. greater
exploitation of the American workforce (falling wage share); wider exploitation of the labour
force elsewhere (globalisation) and ‘speculation’ in unproductive sectors (real estate and the rise
of finance capital). This ‘neoliberal period’ had less severe slumps, although economic growth
was still slower than in the Golden Age because much of the profit was diverted away from real
Profitability peaked in 1997 and began to decline. This laid the basis for the Great Recession of
2008-9. That slump and the ensuing Long Depression that we are still in was more severe than
anything seen since the 1930s, because of the huge build-up of debt and financial assets in the
previous two decades that did not create real value. Instead, there were credit-fuelled bubbles
first in hi-tech stocks (crash in 2000) and then in housing (crash 2007). The unproductive
financial sector contributed 40% of all capitalist profit. Finally, this credit bubble burst, bringing
down the banking sector and the economy.
The high level of private sector debt was compounded by the state having to bail out the banks.
Until this overhang of debt is cleared (deleveraged), profitability cannot be restored sufficiently
to get investment and economic growth going again. Indeed, it is likely that another huge slump
will be necessary to ‘cleanse’ the system of this ‘dead (toxic) capital’. The Long Depression will
continue until then.
Ending the Long Depression will not be possible by more government spending through
increased borrowing and/or taxes, as this eats into the profitability of the capitalist sector. While
that sector remains dominant, lower profitability means that new investment will not take place
to restore lost jobs and incomes. The New Deal in the 1930s did not succeed in ending the Great
Depression, even though it was much more radical than any measures now proposed by Obama.
It was watered down by capitalist opposition. But also it did not work because it could not
restore profitability - on the contrary. In the end, only a World War that put the labour force
onto a military footing (while killing millions globally) did the trick.
Under capitalism, terrible slumps will reoccur and inequality will remain. The end of poverty
and prosperity for the majority can only come through replacing private production for profit
with democratically-planned production for social need.