The Myth of Secular Stagnation, Part One

by Jehu

What is behind the concern over secular stagnation? Is it possible to understand this concern within the context of the labor theory of value? I ask that because almost all discussion of secular stagnation takes place in the context of neoclassical/Keynesian theory. To answer the question, I will look at several papers and article on the subject summers-blanchard-bernankewritten from within neoclassical/Keynesian theory that attempt to make sense of the problem.

My perspective, however, will be unique in relation to the writers, because I will argue that stagnation is not a symptom of capitalist crisis per se, but a symptom of increasingly ineffective fascist state management of national capitals. In my perspective, capital has already suffered the breakdown of production on the basis of exchange value. This occurred in the Great Depression and was irreversible. However, after that breakdown, the fascist state stepped in and assumed management of the production of surplus value. The subject of the discussion of secular stagnation is the increasingly ineffective system of state management of capitalist production, not the operation of national capitals, per se.

1. Secular stagnation: Real or Imagined?

Here is a definition of secular stagnation provided by the Financial Times of London:

“Secular stagnation is a condition of negligible or no economic growth in a market-based economy. When per capita income stays at relatively high levels, the percentage of savings is likely to start exceeding the percentage of longer-term investments in, for example, infrastructure and education, that are necessary to sustain future economic growth. The absence of such investments (and consequently of the economic growth) leads to declining levels of per capita income (and consequently of per capita savings). With the reduced percentage savings rate converging with the reduced investment rate, economic growth comes to a standstill – ie, it stagnates.”

First, we are told, “Secular stagnation is a condition of negligible or no economic growth in a market-based economy.” This, the Times tells us, occurs because savings begins to exceed investment. Why would savings exceed investment? Because per capita income has reached a very high level. The definition is self-serving: ‘per capita income’ is a meaningless term in this situation, deliberately chosen because of this. It is possible for most of a society to be living in abject poverty, yet for the per capita income of that society to be extremely high. All that is required for this to happen is for wealth to be extremely concentrated in the hands of a very small number of persons in the society. In such a situation, the need for investment in new production would be very high, yet very little savings would find their way into additional investment.

In fact, if we accept the above definition, the real situation is worse than this: in the capitalist mode of production, investment itself is aimed only to increase savings (or, as labor theory calls it, accumulation). The aim of production is the accumulation of capital. As is typical of bourgeois simpletons, they get everything backwards: In the capitalist mode of production savings are always supposed to exceed investment. No capitalist invests with the aim that his savings at the end of the production process is less than his initial investment. If secular stagnation occurs when “the percentage of savings is likely to start exceeding the percentage of longer-term investments”, then stagnation is the basic premise of capitalist relations of production from its very beginning. Instead of explaining why stagnation occurs when savings exceeds investment, we have to explain why it did not occur before now.

The FT explains stagnation only occurs to the extent savings exceeds investment in infrastructure and education. The writer is very careful to insert the conjunctive adverb, “for example”. Infrastructure and education are not a complete list of areas where savings might exceed investment, but illustration of two specific cases. However, the two examples are inserted not because they are the exclusive forms of investment, but because they reflect a current political debate about the role of and size state deficit spending. If investment in infrastructure and education are typical of anything, it can be said they represent so-called public investment — not really investment in any meaningful sense, but absorption of excess capital. The two are chosen, in other words, because they admit a role for state intervention in “the economy”.

Thus qualified, secular stagnation is said to result when savings (i.e., excess surplus value that cannot find profitable outlets for investment) exceed the deficit spending of the fascist state. Thus, while in the capitalist mode of production accumulation always exceeds the initial capital investment, stagnation itself is a malady that sets in only when the fascist state does not undertake sufficient unproductive spending to consume excess surplus value in, “for example, infrastructure and education.”

According to the FT, then, secular stagnation is caused, at least in part, by a breakdown in fascist state economic management, due to insufficient deficit spending leading to “declining levels of per capita income”. As the deficits of the fascist state fall, income falls and thus capitalist accumulation fall — eventually bringing economic growth to a halt. Although the debate over secular stagnation purports to be about how a capitalist economy works, in reality, it is a debate over the role the state plays in maintaining capitalist accumulation; without deficit spending, accumulation collapses.

Or, perhaps not.

What happens if the fascist state does not maintain sufficient deficit spending? According to the FT:

“In a free economy, consumers anticipating secular stagnation, might transfer their savings to more attractive-looking foreign countries. This would lead to a devaluation of their domestic currency, which would potentially boost their exports, assuming that the country did have goods or services that could be exported.”

In other words, if the fascist state does not absorb the excess surplus value, it will be exported. The export of surplus capital would lead to devaluation of the national currency. The devaluation of the currency would lead to greater commodity exports by the capital exporting country.

In case you missed it: In theory at least, according to the Financial Times, secular stagnation is impossible. If the state fails to provide sufficient “public investment”, savings and commodities are simply exported. One country might have more saving than can be reinvested, but it appears the world market is always in need of additional investment. If this is true, why have a discussion about secular stagnation in the first place?

2. Larry Summer’s case for Secular Stagnation

Well, Larry Summers thinks this might be the reason:


According to Summers, the sort of argument made by the Financial time “presumes that with or without policy intervention the workings of the market will eventually restore full employment and eliminate output gaps.” In fact, according to Summers, since 2007, at least, the US economy has failed to reach any credible estimate for “economic growth”. Bourgeois economists have made multiple and declining estimates for growth of the US economy and the economy has consistently failed to achieve any of them, no matter how low the estimates go. And, mind you, it is not as though the Obama administration did not intervene aggressively in the economy when the financial crisis hit. The administration ran multiple trillion dollar deficits, the Treasury and the Fed literally printed money and bought up every asset they could and the Fed reduced the policy rate to zero. Obama’s response to the crisis was a Keynesian wet dream of “public investment”.

In fact, argues Summers, even prior to the financial crisis monetary policy has proven inadequate for the last 20 years at least. Between 2003-2007, for example, growth might be said to have been satisfactory, but to achieve even this mediocre rate of growth required policies that may have set the stage for huge crisis that followed.

“It is certainly fair to say that growth was adequate perhaps even good during the 2003-2007 period. It would not be right to say either that growth was spectacular or that the economy was overheating during this period. And yet this was the time of vast erosion of credit standards, the biggest housing bubble in a century, the emergence of substantial budget deficits and what many criticize as lax monetary and regulatory policies.”

What would growth have looked like for the period before the financial crisis if rampant speculation, bubbles, deficits and financial deregulation had not been in place?

So, is secular stagnation a real malady? Or is Larry Summer just trying to position Democrats on economic issues for the 2016 elections? To get a better perspective on the problem of secular stagnation, it might help if we went back to the original discussion of secular stagnation, which begins, not with Alvin Hansen as most writers seem to think, but with John Maynard Keynes.

3. Keynes and the origins of the stagnation hypothesis

In 1930, in his article, Economic Possibilities for our Grandchildren, John Keynes characterized the problem of the Great Depression as “technological unemployment”. The source of the technological unemployment was the improvement in the productivity of labor, the industrial revolution wrought by capital. For Keynes, this was not a malady in and of itself, in fact it promised a future where labor itself would be abolished. The transition, however, was very painful; but, argued Keynes, the distress was only temporary.

“For the moment the very rapidity of these changes is hurting us and bringing difficult problems to solve. Those countries are suffering relatively which are not in the vanguard of progress. We are being afflicted with a new disease of which some readers may not yet have heard the name, but of which they will hear a great deal in the years to come – namely, technological unemployment. This means unemployment due to our discovery of means of economising the use of labour outrunning the pace at which we can find new uses for labour.”

The changes wrought by capitalistic accumulation would ultimately lead to a world with very little labor. The process was disruptive, but, promised Keynes, this would only be “a temporary phase of maladjustment.”

“[We] shall endeavour to spread the bread thin on the butter – to make what work there is still to be done to be as widely shared as possible. Three-hour shifts or a fifteen-hour week may put off the problem for a great while. For three hours a day is quite enough to satisfy the old Adam in most of us!

But not only was labor going away, it would carry much of existing culture with it

“There are changes in other spheres too which we must expect to come. When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. … All kinds of social customs and economic practices, affecting the distribution of wealth and of economic rewards and penalties, which we now maintain at all costs, however distasteful and unjust they may be in themselves, because they are tremendously useful in promoting the accumulation of capital, we shall then be free, at last, to discard.”

According to Keynes, then, what is now referred to as secular stagnation begins with the tendency within the capitalist mode of production to constantly reduce the labor necessary for the production of commodities. Eventually the improvement in the productivity of labor in existing production outpaces new need for labor. Once this occurred, society would be compelled to reduce hours of labor and the whole of the existing culture founded on labor — which we now maintain at all costs, because it promotes accumulation of capital — would be discarded.

This is how Keynes posed the problem in 1930, but it is notable for the fact that it is only a way station in his evolution as an economist. As we will see, Keynes ultimately arrives at a conclusion that significantly diverges from his initial assessment of the problem.

4. Deflation and the state debt

By 1933, when he wrote The Means to Prosperity, Keynes’ argument had undergone a subtle change: The problem to be solved now was no longer the transition of society toward less labor, but the need for state intervention to avoid deflation. Although he continued to insist that, technically, the “economic problem” had been solved, the problem now was posed as how to raise prices and, therefore, profits. Here, argued Keynes, the need for state intervention was urgent:

“[Our] problem is not a human problem of muscles and endurance. It is not an engineering problem or an agricultural problem. It is not even a business problem, if we mean by business those calculations and dispositions and organising acts by which individual entrepreneurs can better themselves. Nor is it a banking problem, if we mean by banking those principles and methods of shrewd judgement by which lasting connections are fostered and unfortunate commitments avoided. On the contrary, it is, in the strictest sense, an economic problem, or, to express it better, as suggesting a blend of economic theory with the art of statesmanship, a problem of Political Economy.”

According to Keynes, the crisis demonstrated the need for state intervention in the economy, but this posed a political problem because the only “respectable” reason for state intervention in the economy, according to the prejudices of the period, was to organize the national economy to facilitate the war effort. So long as the state was conducting a war against rival national capitals, the capitalists freely accepted state intervention to organize production efficiently with that aim in mind. It was quite another thing, however, for the state to direct production in peacetime and even on a permanent basis as things now appeared was necessary. Yet, by 1933, Keynes had already accepted in principle that the bourgeois state must seize and manage the productive forces.

Keynes answer to the problem was for the state to increase demand for the commodities produced by private capital at a rate that was faster than the rate at which supply was rising. He drew a clear distinction between his solution and the dominant idea of the period that the best way to maintain prices in a crisis was to reduce supply by shutting down unprofitable operations. Reducing production of use values in a crisis, warned Keynes, only reduced demand by reducing the income of the monopolies into which hands the vast majority of production had fallen, thus adding to economic contractions. According to Keynes, the only rational way to raise the prices of commodities in a crisis was to increase expenditures during the crisis faster than the productivity of labor increased, i.e., faster than the rate at which economizing on the use of labor exceeded the pace at which capitals could find new uses for labor.

In the capitalist mode of production the productivity of labor — i.e., the mass of commodities produced — always tended to increase faster than the consumption power of society. The mode of production operated in such a way as to restrict the consumption power of the working class majority of society to a bare minimum even as it multiplied the productivity of their labor. If the system of production for profit was to be maintained, some method had to be discovered to substitute for the restricted consumption power of the working class, but this method had to be consistent with production for profit itself. Which is to say, you could not very well simply take money from the capitalists and give it to the workers, because this would defeat the aim of production for profit, which is to constantly reduce the labor time required for production of commodities, including labor power. If the capitalists could not use the excess capital and the mode of production constantly restrained the consumption of the working class there had to be a third party who could absorb the excess capital to maintain monopoly prices without monopoly limits on production.

This is quite possibly the dumbest idea ever advanced in political-economy, since, by definition, the additional consumption power could not itself be productive. And the reason is simple: If the additional demand was itself productive, it would only add to the problem of absolute overaccumulation of capital. But, despite its apparent stupidity, the argument revealed Keynes’ genius. Keynes knew (at least he seems to realize) that the limits on production for profit were in no way a limit on production of material wealth — factories, machines and workers did not disappear in a crisis simply because they could not employed profitably. Even if 100,000 houses could not be built at a profit, they could still be built. The limits imposed on the production of material wealth in a crisis had nothing to do with technical capacity of society to produced, but arose from limits on production for profit. As long as a way could be found to satisfy capitalism need for profit, there was no technical reason the houses could not be built. The “problem of political economy” was to facilitate the production not of material wealth, but capitalist profit.

Since, in the capitalist mode of production, the production of material wealth is subordinated to the production of surplus value, a way had to be found to subsidize the production of surplus value. Thus in 1933, Keynes turns away from his 1930 argument that the improvement in the productivity of labor required a reduction in hours of labor. Keynes proposed instead that the state undertake to borrow the excess capital and spend it. Deflation could be eliminated if the state ensured that demand for commodities constantly exceeded improvements in labor productivity:

“For commodities as a whole there can be no possible means of raising their prices except by increasing expenditure upon them more rapidly than their supply comes upon the market.”

And this is where Keynes proved to be too clever by half: Yes. It is possible for the state to spend at a deficit and thus absorb some portion of excess capital and labor power in a crisis. But state deficit spending only facilitates the further accumulation of surplus value in that portion of the total capital that was productively employed. Which means, on the one hand, the profit rate is restored and capitalistic expansion returns to trend more rapidly; but, on the other hand, the conditions that led to the last crisis accumulate still more rapidly, laying the basis for a new crisis. It follows from this that state deficit spending could not be a one off policy: it must be continuous and on an ever increasing scale. The conditions that gave rise to the Great Depression in the 1930s must return with a vengeance once state deficit spending ends.

However, this argument by Keynes raises a big question that must be answered: If capitalism now required continuous state intervention why didn’t stagnation emerge after the end of the huge stimulating impact of World War II, as Alvin Hansen predicted so famously? Many economists argue the 1950s golden age of fascism refutes Keynes argument and this view is largely echoed even among some Marxist writers, like Michael Roberts, who writes that the fantastic profit made in war-profiteering generated the golden age of fascism:

“[Alvin Hansen’s prediction] turned out to be wrong, as in the post-war period, the major capitalist economies experienced a ‘golden age’ of relatively fast real GDP growth, rising employment and incomes as the teeming population of emerging economies were sucked into the capitalist mode of production, the unemployed of Europe were put to work and American capital was used to finance investment globally.”

In fact, the rapid growth of investment following WWII is in large part explained not by the massive war-profiteering of the war itself, but by the wholesale destruction of the productive capacity of Europe and Asia in the war. The war itself solved the problem of overaccumulation of capital and the surplus population of workers simply by destroying both surpluses. To paraphrase Keynes from a memo in 1943, “War is a wonderful way to get rid of excess capital and workers.” Indeed, Keynes made this rather prophetic observation as early as 1933 in The Means to Prosperity:

“Some cynics, who have followed the argument thus far, conclude that nothing except a war can bring a major slump to its conclusion. For hitherto war has been the only object of governmental loan-expenditure on a large scale which governments have considered respectable. In all the issues of peace they are timid, over-cautious, half-hearted, without perseverance or determination, thinking of a loan as a liability and not as a link in the transformation of the community’s surplus resources, which will otherwise be wasted, into useful capital assets.”

The employment of the term “useful capital assets” is, of course, peculiar. State debt, as Keynes considered it, was only useful insofar as it could be used to raise the prices of commodities and maintain the profitability of capitalist firms — it added nothing to the actual production of material wealth. And even to perform this modest feat, the state was required to waste its own capital assets on destruction of the capital assets of its rivals within the world market.

5. Keynes’ Argument and Labor Theory

If this is all I could get from Keynes argument in 1930, the essay would not even amount to a minor footnote in economic history. However, interesting enough, by 1933, Keynes had reached the same conclusion Engels predicted in his 1880 pamphlet, Socialism, Utopian and Scientific. According to Engels, even if the proletariat did not take control of the productive forces created by capital, the existing (bourgeois) state would find it necessary to do just that.

“In the trusts, freedom of competition changes into its very opposite — into monopoly; and the production without any definite plan of capitalistic society capitulates to the production upon a definite plan of the invading socialistic society. Certainly, this is so far still to the benefit and advantage of the capitalists. But, in this case, the exploitation is so palpable, that it must break down. No nation will put up with production conducted by trusts, with so barefaced an exploitation of the community by a small band of dividend-mongers.

In any case, with trusts or without, the official representative of capitalist society — the state — will ultimately have to undertake the direction of production. This necessity for conversion into State property is felt first in the great institutions for intercourse and communication — the post office, the telegraphs, the railways.

If the crises demonstrate the incapacity of the bourgeoisie for managing any longer modern productive forces, the transformation of the great establishments for production and distribution into joint-stock companies, trusts, and State property, show how unnecessary the bourgeoisie are for that purpose. All the social functions of the capitalist has no further social function than that of pocketing dividends, tearing off coupons, and gambling on the Stock Exchange, where the different capitalists despoil one another of their capital. At first, the capitalistic mode of production forces out the workers. Now, it forces out the capitalists, and reduces them, just as it reduced the workers, to the ranks of the surplus-population, although not immediately into those of the industrial reserve army. “

In short, even if the proletarian revolution failed, the expropriators would be expropriated. The capitalists would be reduced to the ranks of the surplus population — entirely superfluous to the production of surplus value, to capital itself. According to Engels, this act by the existing state would constitute an “economic advance”.

“I say “have to”. For only when the means of production and distribution have actually outgrown the form of management by joint-stock companies, and when, therefore, the taking them over by the State has become economically inevitable, only then — even if it is the State of today that effects this — is there an economic advance, the attainment of another step preliminary to the taking over of all productive forces by society itself.”

To be clear, Engels did not think this effective nationalization of the productive forces constituted socialism, i.e. the lower stage of communism, but it nevertheless signaled society had been forced to recognized the social character of the mode of production. Keynes argument is very much along the lines of Engels, in the sense that Keynes did not see the problem as one of producing material wealth, but that the productive capacity of society had outgrown the control of private capitals.