Falling profitability and the Long Depressions

“Keynes said the crisis comes about through a lack of “effective demand”: an unaccountable fall in investment and consumption, causing profits and wages to fall. In contrast, Marx suggests starting with profits. If profits fall, then capitalists would stop investing and lay off workers, wages would drop, and consumption would fall. Then there would be a lack of effective demand, but this would not be due to a drop in animal spirits or a lack of confidence (we often hear that phrase from economists), or even too high interest rates, but because profits are down. The problem lies in the nature of capitalist production, not in the finance sector.

The post-slump austerity policies of most governments are not insane, as Keynesians think. These policies follow from the need to drive down costs, particularly wage costs, but also taxation and interest costs, and the need to weaken the labor movement so that profits can be raised. It is a perfectly rational policy from the point of view of capital, which is why Keynesian policies were never introduced to any degree in the 1930s. Capitalism came out of that Great Depression only when profitability rose and that was when the United States went into a war economy mode, controlling wages and spending and driving up profits for arms manufacturers and others in the war effort. Capitalism needed war, not Keynesian policies.

The Great Recession was just the start of what has turned into a Long Depression, the third that capitalism has experienced in 135 years. You can see where this chapter and the previous ones have taken us. The long depression of 1873–97, the Great Depression of 1929–41, and the Great Recession of 2008–9 have suggested a common reason for these depressions—falling profitability. That is not to deny the important role of credit/debt in the all these crises and depressions”.

(Michael Roberts - The Long Depression)