The Great Financial Meltdown
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The Great Financial Meltdown

Systemic, Conjunctural or Policy Created?

  • New Directions in Modern Economics series

Edited by Turan Subasat

The Great Financial Meltdown reviews, advocates and critiques the systemic, conjunctural and policy-based explanations for the 2008 crisis. The book expertly examines these explanations to assess their analytical and empirical validity. Comprehensive yet accessible chapters, written by a collection of prominent authors, cover a wide range of political economy approaches to the crisis, from Marxian through to Post Keynesian and other heterodox schools.
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Chapter 5: Booms, depressions and the rate of profit: a pluralist, inductive guide

Alan Freeman

Abstract

The economic crash of 2007–08 and subsequent prolonged stagnation has revived interest in the way investment, and the profit rate, affect economic performance. Data quality has improved significantly, permitting a broader study of the empirical background than was previously possible. The issue is a minefield of controversies. The classicals recognized the empirical reality of a long-term decline in the rate of return on capital, and Karl Marx set out a rigorous explanation for it rooted in capitalist accumulation itself. Since that time interest has waxed and waned, rising sharply in times of prolonged depression such as now and in the Great Depression of 1929, whilst in easier times, the main effort of economic theory is devoted to proving that a falling profit rate is either impossible or irrelevant. The empirical course of the profit rate is also disputed, some arguing that it fully recovered in the 1980s as part of a more general recovery headed up by neoliberalism. Disputes concern both the measurement of the mass of profit, branching out into the role of unproductive sectors such as finance; and the denominator, which if calculated using historical instead of current costs, or if financial assets are included, produces results which contradict the claimed revival of the 1980s. This chapter presents a pluralist guide, for new readers, to the principal positions in the debate, leaving out no major position, paying full attention to the theoretical issues involved in constructing empirical measures of the profit rate, connecting the economic and political aspects of the phenomenon, and establishing a reference source for future discussion. The treatment is designed to be fully accessible to non-mathematical readers.

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