Some thoughts on Michael Roberts’ North Star essay on the crisis

by Jehu

I have been trying to understand Michael Roberts recent essay on the present crisis and its causes, “From Global Slump to Long Depression”.

In the essay, Roberts tries to present evidence for the case that the 2008 financial crisis was caused by a fall in the rate of profit. Roberts is part of the school that argues the law of the tendency of the rate of profit to fall (FROP) is source of crises n the mode of production. It is the smaller of the two main schools among labor theorists, but fiercely defended by its advocates as an orthodox Marxist approach.

The other approach — the underconsumptionists — to the present crisis, championed by Dumenil and Levy, is summarized by Roberts this way:

“Some Marxists have argued that the credit crunch of 2007 and the ensuing Great Recession is not a classical Marxist crisis  of profitability and that Marx would have also seen the crisis as financial in cause.”

The underconsumptionist school sees the cause of the present crisis as fundamentally rooted in the increase in profits at the expense of wages. This increase in profits is said to have led to speculative excesses and bubbles that eventually led to the crash. Roberts essay is an attempt both to refute the arguments of the “underconsumptionist” school and to account for the speculative bubble.

According to Roberts,

“Marx posits the ultimate cause of capitalist crises in the capitalist production process, specifically in  production for profit. He developed a theory of crises based on his law of the tendency of the rate of profit to fall over time   as capitalists accumulate.”

This law does not rule out speculative bubbles like the one seen in the run up to the present crisis, however, Roberts argues, the cause of the crisis is the falling rate of profit. not the speculative bubble. Most of the back and forth between the two schools consists of publishing data pointing to evidence for or against the idea the rate of profit is falling. Depending on how the relevant data is defined and how it is measured, it seems one can arrive at either position.

To an extent, the problem here is not the one both schools point to — the cause of the 2008 crisis — but another question altogether: Why hasn’t there been a repeat of what society experienced during the Great Depression 80 years ago.

gdpdollars19202010 (2)

In fact, until 2008, GDP has never fallen year over year even once since the Great Depression. Just to be clear of what a Great Depression scale economic collapse means: between 1929 and 1934 US GDP fell more than 60%


What happened between 1929 and 1934 was a depression; what happened between 2007 and 2010 was, by comparison, a mild flattening of the rate of economic growth.


What happened between 2007 and 2010 was a severe recession — not a depression by any means. Which raises a really big question neither school can actually explain: where the fuck did the cycle of depressions go? Roberts can present all the evidence he wants about the trajectory of corporate profits, using any measure he likes, but what he can’t do is explain where the fucking depressions went for last 80 fucking years — and, frankly, neither can Dumenil and Levy for that matter. What labor theorists need to explain is not a major, but still inconsequential, financial crisis, but the long absence of depressions.

Roberts claims the 2008 crisis was much more than a mere financial crisis:

“the empirical evidence supports the view that it was a profitability crisis a la Marx’s law. The rate of profit in the US economy  began to fall well before the financial crisis began in summer 2007.  Any way you want to measure it, profitability and/or the mass  of profits fell well before the financial crisis began. So “excessive credit”, stock market speculation and the expansion of  fictitious capital in all its new and exotic forms were a response to falling profitability in the productive sectors of the economy It delayed the inevitable, but eventually made the crisis deeper and longer as a result.”

Delayed it how? And for how long? 80 years? So the financial crisis is the best capitalism can do after having “delayed” depressions for 80 years? If the capitalist have to undergo a major financial crisis every 80 years or so to keep capitalism intact, why wouldn’t they?

The problem here is that Roberts, like almost all labor theorists, is using the wrong measure of GDP. If we use what Marx defined as money, rather than what the fascist define as “money”,  we get altogether different results:


That thin yellow line at the bottom of the chart is US GDP if it was measured in what served as money in 1929-1933. The vast expanse of green on top of it is what we now call nominal GDP — i.e., GDP measured in valueless fiat dollars. Roberts employs dollars in his analysis and  thus gets his entirely erroneous results.

According to Roberts, there has been no depression in the past 80 years, but gold suggests this is not true.


Gold suggests there has been not one, but two depressions since 1929-1933 — each many times larger than the Great depression. The question raised by my charts is how despite two real depressions, nominal GDP has an unbroken rise for 80 years. Moreover, how is it we suffered no massive chain of bankruptcies and unemployment as occurred in the Great Depression? Neither the analytical work of the FROP school nor the underconsumptionist school can explain this apparent anomaly — and they can’t explain it mostly because they don’t even realize the anomaly exists.

Thus, no one has taken the time to answer the real question: namely, How have we avoided a replay of the Great Depression for 80 years? Which brings me to this chart showing the secular rise of the state expenditures as a share of total GDP


As the chart shows, state spending as a share of GDP was rising more or less smoothly since the Great Depression until 1990. Beginning with around 1990, suddenly the state’s share of GDP began falling and continued to fall until 2001.

One possible cause of the fall in the state’s share of GDP was that, faced with Reagan era deficits, multiple attempts are being made in Washington to balance the federal budget. This effort culminated with the Clinton-Gingrich balanced budget amendment of 1997. Growth of the state’s share of GDP reverses around 1990 and falls throughout the 90s, triggering the present depression that began in 2001. The attempt to constrain the rising state share of GDP actually plunges the economy into a depression.

Indeed, according to Roberts we find this:

“Profitability peaked in 1997 and in that sense the neoliberal era came to an end in the late 1990s …”

The profitability peak coincides almost exactly with the Clinton-Gingrich agreement. So does a series of closely bunched financial crises that shake the world market: Asia, Russia, Long Term Capital Management, Argentina, etc. Finally, gold went into backwardation in 1998 — this last event thanks to our good friend, the simpleton economist and former Treasury Secretary, Larry Summers, who tried to forcibly keep gold price from rising.

So we have two pieces of evidence regarding the long term tendency of the share of fascist state spending to rise as a percentage of GDP. First, the long term trend itself in which the state’s share of GDP rises over a period of six decades. And, second, the attempt to constrain the growth of the state’s share is correlated with the peak in profits in 1997 and a subsequent onset of depression.

The attempt to constrain the state’s share of GDP produces the second depression since the 1930s. But, more important, the depression precedes right into the complete collapse of fascist state monetary policy on the shoals of the zero lower bound. Ultimately the cause of the financial crisis of 2008 was attempts to constrain the expansion of the state’s share of GDP.

However, while this may explain the immediate precursors to the collapse of fascist state economic policy, but it doesn’t explain what is driving the ever increasing state share of GDP or why this share must increase. The FROP school fails to provide adequate answer to the underconsumptionist school because it insists on ignoring the state. In Roberts essay, the fascist state makes an appearance this way:

“The financial sector was on its knees and rolling over. Because it had become such an important part of the capitalist system, it now threatened to bring down the productive sector of capitalism through a string of bankruptcies and closures. Governments had to act.”

Later, Roberts explains:

“A higher rate of profit can be generated for a while in these unproductive sectors, helped by the monetary authorities keeping the basic rate of interest low and stimulating credit.”

In Roberts essay, therefore, the state merely steps in to rescue capitals from destruction and to facilitate their speculation by keeping interest rates low. One would never know the state is far more implicated in the proceeds than this, nor would we know that the state’s role explains why there has been no depression for 80 years. Which bring us to this chart: The Federal Reserves’ effective funds rate (EFF):


As can be seen, the EFF interest rate on overnight loans peaks in 1980 and then shows long slow decline to almost zero in the present crisis. Multiple attempts are made by the Fed to prevent or stall the decline, but the Fed is forced to continuously reduce interest rates. The EFF rate is important because it is the basis for all other interest rates. Since the US controls the world reserve currency, the risk of default by Washington is negligible. In relation to US treasuries, all other forms of credit carry significant risk of default. All forms of credit, whether the debt is productively employed or purely speculative is measured in terms of the risk it poses. At the base of this pyramid of risk are treasuries.

The chart shows that, between 1980 or so and 2008 — when Roberts argues the profit rate was generally rising — the EFF was falling. Nowhere in Roberts’ analysis does the EFF appear as part of his data, although it is this rate that he suggests influences speculation. It would appear that rather than determining speculative employment of capital, the EFF itself is determined by the falling rate of profit.

Additionally, during the 1970s, Roberts explains, “the US economy entered a down phase in profitability, a period of crisis, eventually to hit a low in the deep recession of the early 1980s.” This period of falling profitability indicated by Roberts coincides with my own chart as the depression of the 1970s:


As can be seen in the chart, a pronounced contraction of GDP in the 1970s is graphically expressed when GDP is measured in terms of gold. Roberts gives independent confirmation of my own findings on this question. The EFF appears to be inversely correlated with Robert’s own empirical data on the rate of profit of private firms.

This inverse correlation might be expected if the fascist state is playing the role of BORROWER OF LAST RESORT of the excess capital within the world market. As borrower of last resort, the fascist state plays the role of absorbing the superfluous capital within the world market. This is capital that cannot find a place in productive employment of capital, i.e., it cannot find a place for its own self-expansion. Without the fascist state, this rising mass of superfluous capital would suffer a severe devaluation in a crisis.