From Recession to Slump (1992)

From the December 1992 issue of the Socialist Standard

When is a recession not a recession? Answer: when it's a slump. Up to now pro-capitalist economists, journalists and politicians have avoided this word because of its associations with 1930-like conditions which, they have proclaimed for years, could never come back. But now the taboo on using it being broken and the talk is about "the danger of sliding into slump" and how this can be avoided.

“Recession” was a word invented in America after the war by the followers of the pre-war British economist Keynes. Big slumps, they preached, could be avoided by the application of Keynesian “demand-management” techniques, but relatively minor downturns could still occur. These were “recessions" but there was no need to worry since Keynesian policies would always prevent them turning into slumps. Thus the Penguin Dictionary of Economics defines a recession as “a sharp down-turn in the rate of economic growth or a modest decline in economic activity, as distinct from a slump or depression which is a more severe and prolonged downturn".

There is even an official internationally-agreed definition of a recession: two successive quarterly falls in the total production of goods and services (“seasonably adjusted real Gross Domestic Product", to be precise). On this definition, Britain has been in a recession since the end of July 1990, GDP having fallen or been stagnant every quarter since then. It is this that has got the pro-capitalist economists worried. According to their theory no recession should have lasted this long. No “recession" has in fact ever lasted this long. Hence their doubts about whether this time it is not a slump rather than a mere recession that they are faced with.

Worried
Gavyn Davies, a City economist who is also an economic adviser to the Labour Party, is worried:

  So do we now face a "slump"? As far as 1 am aware, this word has no precise economic definition, but it is generally used to denote a state of enduring decline in activity, in which a total collapse in confidence—often associated with an overhang of excessive private sector debt— leads to permanent weakness in asset prices and capital spending. It is further associated with a decline in the general price level (negative inflation), and describes a situation in which monetary policy alone is powerless to stimulate demand. It is a word most often applied to describe the calamity of the 1930s, from which a combination of Lord Keynes and international rearmament (mainly the latter) eventually rescued the world. (Independent, 19 October).

He concludes by saying he doesn't know whether we are yet in a slump. William Rees-Mogg, former editor of the Times who now writes a regular column in the Independent, is bolder. He has frankly compared the present situation to the depression of the 1930s:

The belief that has previously restrained the Government from acting decisively is that this is an ordinary 10-year recession, like those of 1973 or 1981. The evidence is that it is a major debt deflation crisis, more like the 1930s, the 1870s or the 1820s. (26 October).

As a Monetarist Rees-Mogg has his pet theory as to what causes a depression. As he wrote in his column the week before, “each great depression is worldwide. It is set up by inflationary expansion of debt. It is produced by the painful process of liquidating that debt, which forces down asset values and destroys businesses and jobs". So, for him, a depression is a “debt deflation crisis" and the way-out lies in reducing the burden of debt by reducing interest rates. This, purely monetary, explanation is inadequate and superficial.

It ignores why at times businesses go into debt and why banks are prepared to lend them money. Businesses go into debt when they think they can invest the borrowed money in production and make sufficient profits both to pay the interest and still have plenty left for themselves. And when the prospects of profit-making by businesses are good, banks are prepared to lend them money because they can be sure that they will be paid their interest. So the key factor is the rate of profit not the rate of interest. In fact interest is a totally dependent factor: it can only be paid out of profits. As profits arise out of production it is here, in the field of production not that of money, that we must look for the explanation as to why slumps occur.

In a period of boom all the various competing businesses imagine that they will be the one to benefit from the expanding market and all plan to expand their productive capacity, generally borrowing to do so. There eventually comes a point, however, after all the planned for extra productive capacity comes on stream, when the amount produced in some key sector exceeds the amount required by the market. A crisis of overproduction then occurs. Factories cut back on production; workers are laid off; orders for supplies are reduced; all this has a knock-on effect, leading to a contraction of the total market. Then what they call a recession and we call a slump sets in.

Gavyn Davies explained the onset of the present slump well enough in an article he wrote in the Sunday Telegraph soon after it started:

  Around July [1990], companies began to complain in private that demand had suddenly fallen away without much warning . . . What we are now observing is the flip side of the boom in confidence which led to so much borrowing and investment from 1985 to 1989. In those years, output growth was persistently stronger than anyone expected . . .  As consumers threw caution to the wind, companies decided it was time to invest, and the level of capital formation rose to heights which had never been seen before, relative to GDP . . . It was not until the middle of 1990 that companies suddenly realised their expansion plans were not supported by the prospects for demand . . . [T]he main casualty over several years is likely to be capital spending, since productive capacity has run ahead of demand. (27 January 1991).

In a slump businesses are left with the problem of paying from their reduced profits the interest on the loans they contracted to expand productive capacity during the boom period. Rees-Mogg wants to help them by reducing interest rates. This would certainly reduce the money they have to pay the banks and to that extent increase their retained profits, but there is no reason to suppose that in itself this would be enough to lead them to invest in expanding production again, as the example of the US shows were interest rates are as low as 3 percent yet the slump there persists.

Recovery after a slump only begins when the prospects for profit-making revive. This is sometimes called "confidence” and in a sense it is: businesses have to be "confident" that if they invest in increasing production they will be able to sell what they produce and make a profit. This is not a question, as Major and Lamont evidently believe, of just talking about things getting better and giving the impression you really believe this (even if you don't). Something concrete is required and that can only be a real change in the opportunities for profit-making.

Falling asset values

Ironically perhaps—since what is involved is a capital loss for businesses—the main factor bringing this about is the decline in “asset values” that both Rees-Mogg and Davies highlight. In a slump the value of the capital invested in buildings, factories, plant, machinery, raw materials and stocks falls in real terms. Marx called this “the devaluation of the elements of constant capital” and it comes about either through firms writing off the previous value of their assets or through them going bankrupt and their assets being bought up by other firms at a lower price. Either way the rate of profit is increased, as this is calculated as the ratio of the amount of profits to the total capital invested. If the latter falls in value the rate of profit increases even if the amount of profit remains unchanged.

This fall in asset values is a key element in the Marxian explanation of the function of slumps under capitalism: to clear away deadwood and allow capitalist production to resume on a fitter, leaner basis. It works by raising the rate of profit, so eventually making the businesses that survive ready to invest in production again in response to the only incentive they know—profit.

Contradiction

The present slump has led to a revival of Keynes' discredited ideas. The Independent, in a ten-point plan it has launched to “save Britain from slump”, declares “as Keynes pointed out, if the private sector will not spend, the public sector must” (22 October). The Guardian is even more enthusiastic. The front page of its magazine section (3 November) featured a full page photo of Keynes with the caption “Is this the only man who can save us now?”. The opening words of the main article, by Robert Skidelsky, author of a new book on Keynes entitled The Economist as Saviour set the tone: “the search for a saviour to lift us out of the slump has led us back, not unnaturally, to John Maynard Keynes”.

However, it is not the “spending your way out of a depression" aspect of Keynes' policies that Skidelsky emphasises, but rather his clever little scheme to decrease real wages in a slump. Keynes argued that workers would offer less resistance to their real wages being reduced by rising prices than by a direct cut in their money wages and so advocated a policy of (mild) inflation as the best way to bring about the necessary reduction in working class living standards. He was, in other words, just as much an enemy of the working class as any callous Free Marketeer. The “us" he wanted to save was not us but the ruling class of which he was himself a well-heeled member.

“Spending your way out of a slump” seems to be the common-sense solution. The only problem is where is the government to get the extra money to spend from. There are three possibilities. One is to raise it through taxes. Another is to borrow it. And the third is to print it. All have their drawbacks. Printing the money will simply lead to double-figure inflation which will eventually adversely affect the balance of payments. Borrowing it will tend to push up interest rates, increasing the debt burden on productive industry. Taxes, like interest, can only come in the end from the profit-making sector of the economy, and increasing taxes on businesses which are already suffering from a fall in profits is clearly no way to encourage them to increase production again.

The last Labour government tried to apply Keynes' policy of “if the private sector won't spend, the public sector must” during the 1973/4 slump. In the end Callaghan had to confess to the 1976 Labour Party Conference:

  We used to think that you could just spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you, in all candour, that that option no longer exists and that in so far as it ever did exist, it only worked on each occasion since the war by injecting bigger doses of inflation into the economy, followed by higher levels of unemployment. (Times, 29 September 1976).

There is a fundamental contradiction here which no government can overcome. Capitalist businesses have cut back on production because the market for their goods has shrunk and they can't make the same amount of profits as before; the government can't spend what the businesses aren't investing, because all the possible ways of financing this will further undermine the profitability of industry. The plain fact is that in a slump there is virtually nothing any government can do to speed recovery. All they can do is to wait for the slump to run its course—to wait for asset values or real wages to fall sufficiently to restore the prospects for profit-making— while refraining from doing anything to make matters worse.

Adam Buick