Pearls and Irritations

“Secular stagnation” refers to the long-run (or secular) tendency for growth rates to stagnate in advanced capitalist economies – associated with high unemployment and excess capacity.

It has been a major feature of the contributions of the classical, Marxist and heterodox economists especially Adam Smith and David Ricardo, Karl Marx, Maynard Keynes, Michal Kalecki, Kurt Rothschild, Stephen Hymer, Joseph Steindl, John Kenneth Galbraith, Paul Baran and Paul Sweezy and Alvin Hansen.

The American economist, Larry Somers, has recently brought a mainstream analysis of the ancient concept of secular stagnation back to centre stage. While we agree with him that secular stagnation now characterises the dominant process at work in the economies of much of the world, we do not agree with his analysis of its causes.

The characteristics/symptoms of contemporary secular stagnation include low, sometimes non-existent real wage growth, low levels of accumulation (investment), especially in physical capital goods, high rates of unemployment, under-employment and part-time employment, a high and increasing share of profits at the expense of wages in the pre-tax distribution of income, a rise in the inequality of wealth, great decline in union membership, especially in the private sectors of economies and the spread of globalisation throughout the world economy combined with deregulated capital markets and floating exchange rates.

The classical political economists and Marx identified a number of tendencies in capitalist economies associated with falling growth. These became particularly important in the analysis of Kalecki and Keynes who both stressed the role of effective demand in determining output, employment and growth. They both predicted the increased likelihood of stagnation as national income rose, due to declining average consumption levels associated with higher income, and falling investment due to lack of opportunities. These could be postponed by technological advances, wars or government expenditure.

Since the 1970s stagnationist tendencies have been reinforced by the poor performance of wages – at first in America and more recently in Australia. Real wages have not kept in touch with productivity growth, which has reduced the ability of wages earners to afford previous consumption levels. A corrupt financial system provided temporary solutions by allowing increased household debt – which is at record levels in both countries – reinforced by increased housing prices. In Australia this continues while it was brought to a halt in most of America by the GFC. While this debt prevented consumption from falling as much as it would have as a result of the stagnant wages, it currently inhibits household consumption from growing

This is reinforced by a world environment increasingly dominated by large multinational oligopolies, which influences both production and exchange. Effective demand, in turn, is the outcome of interrelationship between aggregate supply, what decision makers concerning employment and output require in order to establish different levels of the two, and aggregate demand. The latter depends on how the private sector divides its income between consumption and saving, and how much investment it plans to do. In an open economy with a government further components of aggregate demand are the levels of net exports (exports minus imports) and government spending on current goods and services and public capital formation less taxation.

A prominent feature of the modern world is the increasing dominance of finance capital over commercial and industrial capital. Much of financial capital consists of the purchase of financial assets, often as takeovers. Despite the rising share of profits in the national income, incentives to accumulate in new objects have become more sluggish. Because of rising inequality of income and wealth, consumption spending has failed to take up the slack so that the constraints on realising the potential surplus are rarely or ever operative. All these factors combine to result in the secular stagnation that is increasingly observed and will continue in more and more parts of our interrelated world.

Geoffrey Harcourt is Honorary Professor,School of Economics ,UNSW. Peter Kriesler is from the School Economics UNSW

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