Secular Stagnation

At the end of 1937 when the US economy fell into a short & sharp recession, US economist Alvin Hansen (1887-1975) wondered whether capitalism was facing the possibility of permanent or secular stagnation.

The basic economic problem facing capitalism is its ability to increase production far exceeds its ability to expand the market.

How do markets grow?
Why was there a post-war boom?
Why has performance been relatively poor since 1968?

What is the cause of the business cycle?
Policy mistakes by central banks?
Periods of excessive optimism, followed by periods of excessive pessimism (Keynesian subjective ‘animal spirits’)?

Marginalist economists argue that goods have a value/price due to their scarcity.
Without scarcity goods have no value.
But if capitalism keeps growing – producing more – how does scarcity continue?
Two reasons are argued: population growth & innovation
Keynes emphasised the former, Schumpeter the later.

Keynes thought economic growth, dependent upon population growth, would eventually come to a halt.
In Britain in the 1930’s population growth slowed.
This risked involuntary unemployment.
For Keynes, if the marginal efficiency of capital (rate of profit) was equal to the rate of interest, there would be no incentive to invest & so no economic growth.
Keynes saw the interest on money capital as arising from the scarcity of money, while the rate of profit arises from the scarcity of “capital goods.”
If there is a growing population then the rate of interest needs to be below the rate of profit to prevent unemployment.
Therefore, it may be necessary for the money supply to be increased to lower the rate of interest.
If the money supply was increased too quickly then there would be inflation.
If interest rates & profit rates were low & there was still mass unemployment this was a ‘liquidity trap’.
If this became permanent then it could be termed ‘secular stagnation’.
The solution would be large-scale government deficit spending & public works programmes that would increase demand & therefore profits.

It is worth remembering that it was the discovery, or rather plunder, of the gold & silver of the New World that improved the conditions for both producing & realising surplus value.
Producing, because the devaluation of the money material lowered real wages.
Realising, simply because there was more money material, which also permitted the growth of the credit system.
There was a vast expansion of the market that laid the foundation for capitalism.

Did the Roman Empire suffer ‘secular stagnation’ & eventually collapse without the discovery of new markets?

As the productivity of labour rises, the existing means of production (fixed capital) are progressively devalued. Existing machines lose value not only through wear & tear but by the ability to produce comparable machines with less labour than before, or more powerful machines with the same quantity of labour.
As a result, a portion of the capital is not reproduced as it would be if labour productivity were constant but instead is destroyed.
The faster the growth in labour productivity the more this will be the case.

Three periods of exceptionally fast growth:
1849-1873 – the discovery of gold in California in 1848 & then in Australia in 1851
1896-1913 – gold discoveries in South Africa, Alaska & the Yukon, plus the new cyanide extraction process
Post-war boom – the breakdown of expanded capitalist reproduction due to two world wars & the depression

Unless there is some huge technological revolution in gold production that increases the production of gold bullion, or there is another suspension of capitalist expanded reproduction such as we last saw between 1929-1945, it will be hard to accelerate the pace of capitalist expanded reproduction sufficiently to leave the current period of secular stagnation behind.

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