Long downturn thesis

Economists of every school agree that advanced capitalism performed far better in the "golden age" of 1950–73 than after 1973. Annual rates of growth, productivity, wages, investment and profit were all cut roughly in half from one era to the next. The question is why. The historian Robert Brenner, editor of the socialist journal Against the Current, answered it in "Uneven Development and the Long Downturn", a study that filled an entire issue of New Left Review (no. 229, 1998). It was translated into Korean as Honton-ui giwon (2001), and an expanded edition covering 1945–2005, The Economics of Global Turbulence: The Advanced Capitalist Economies from Long Boom to Long Downturn, appeared in 2006.

For Brenner the key is the sharp fall in the rate of profit around 1970. In his figures the manufacturing rate of profit of the G7 economies in 1970–90 was on average 40 percent lower than in 1950–70; in 1990 it was still about 27 percent below its 1973 level and about 45 percent below its 1965 peak. Sharp recessions followed in 1973–75, 1980–82 and 1989–92, with each boom weaker and each bust bigger than the last.

Why did profitability fall? Brenner's explanation lies in competition and fixed capital. As an illustrative assumption, suppose an American steel company produces a ton of steel in its existing plant at a cost of 90 and sells it for 100, a profit of 10. A Japanese company, rebuilt after the war, now makes the same steel with new equipment at a cost of 70 and sells it for 85. The American firm must cut its price to 85, but since the money sunk in its plant cannot be recovered it does not close the plant at once; it hangs on at a lower return. The Japanese firm makes 15, the American firm minus 5, and across the world market as a whole capacity is left idle and the industry's rate of profit falls. New producers keep entering while old capital does not leave: this "failure of exit and ongoing entry" produced a quarter century of low profitability.

The historical narrative follows this mechanism. In the 1950s and 1960s Germany and Japan built up manufacturing with low wages and high rates of reinvestment and grew through exports. Between 1965 and 1973, under pressure from German and Japanese goods, the profitability of US manufacturing fell by more than 40 percent. When the high fixed dollar exchange rate of the Bretton Woods system made American goods dear, the Nixon administration cut the dollar loose from gold in 1971–73 and moved to floating rates, and as the dollar fell the burden of falling profitability shifted to Germany and Japan. From 1979 the United States and Britain tried to clear out excess capacity and discipline workers through the Volcker shock and the austerity of Thatcher and Reagan, and the Plaza Accord of 1985 pushed the yen and the mark up again, driving Japan into its bubble and the collapse of 1991. The long downturn is thus told as a process in which the United States, Germany and Japan passed the burden of cost competition back and forth.

Its opponents are also clear. Brenner's main target was the "profit squeeze" theory, which blamed falling profits on rising wages and workers' militancy, and he also took on the Keynesian account of insufficient overall demand, Monetarism's orthodoxy of financial rectitude and Schumpeterian views of technical change as the engine of growth. In a 2009 interview he noted that the failure of the rate of profit to recover was all the more remarkable given the huge drop-off in the growth of real wages.

Brenner saw the 2008 global financial crisis as an extension of the long downturn. Once the downturn had begun, states dealt with insufficient demand at first through budget deficits and, from the mid-1990s, through low interest rates that let firms and households borrow against rising asset prices. He called this "asset price Keynesianism", in which private deficits replaced public ones, and noted that the expansion of 2001–07 was by far the weakest of the post-war period.

Marxists criticised the thesis too. Writing in International Socialism in 1999, Rob Hoveman found little to disagree with in Brenner's historical account but problems in its theoretical framework. Brenner rejects Marx's law of the tendency of the rate of profit to fall, holding that rising productivity poses no problem for profitability in itself, whereas Hoveman saw Brenner's own theory as a fragment of Marx's. Brenner does not adequately explain, he argued, why the loss of older high-cost producers to new low-cost producers lowers the overall rate of profit rather than merely redistributing profit, how the level of the rate of profit is set without the labour theory of value, or why firms cannot write down old plant and restructure. Mary Malloy and Charlie Post replied that over-competition could be a temporary and sectoral cause but not a long-term, systemic one. David Harvey accepted Brenner's evidence of chronic overaccumulation since the 1970s as generally convincing but criticised him for ignoring investment in the built environment and property bubbles.

The long downturn thesis should be distinguished from the mainstream theory of "secular stagnation". First proposed by Alvin Hansen in 1938 and revived by Larry Summers in 2013, secular stagnation concerns a chronic lack of demand and a negative natural rate of interest. Magdoff and Sweezy of the Monthly Review school spoke of the tendency of monopolistic economies to stagnate. Brenner differs from both in placing the cause in manufacturing competition and profitability rather than demand.