The primary objective of Economic Growth and Long Cycles, to quote a summary from the final chapter, is ‘to construct a growth-cum-cycles model inspired by the Classical and Marxist Political Economy tradition’ (249). The authors follow Anwar Shaikh, in his magnum opus Capitalism, in locating Marx within the classical political economy tradition of Smith and Ricardo. But this book, along with Shaikh’s, should become compulsory reading for anyone engaged with the now rather unfashionable quantitative dimension of Marx’s Capital.
The model is most innovative in specifying the connections between long cycles (or ‘long waves’) and fluctuations in the general rate of profit on new capital investments. The historical data, summarized only briefly in the book, certainly suggest alternating periods of expansion and relative stagnation in the history of capitalist accumulation, stretching back at least to the industrial revolution (and further in the view of some historians).
Combinations of a down-wave and a long-wave with a periodicity of around fifty years in total were first detected by Russian economist Nikolai Kondratiev, who debated the issue with Trotsky in the early 1920s. Kondratiev relied on available data about price movements at a time when what we now know as GDP figures were scarce and unreliable. The data from 1790 to 1920 revealed an alternation of periods of rising prices of around 20-25 years with periods of deflation of a similar length of time. Trotsky did not challenge the existence of these waves but emphasized the effect of wars and revolutions on their regularity.
Schumpeter in his late 1930s massive study of business cycles, shifted the focus to patterns of technological innovation (clustered in the down-wave), and their generalization in the up-wave. He also differentiated between three types of cycles, each named after an early researcher: a very short-run Kitchen cycle over a 2-3 period linked to fluctuations in inventories; the Juglar or investment cycle over a 7 to 10 year period, discussed by Marx; and Kondratiev long cycles.
In the postwar period, the fourth Kondratiev wave began around 1940 with the Second World War and postwar boom, but signs of a subsequent down-wave appeared in the late 1960s. Mandel reignited debate over long-waves in his 1972 Late Capitalism, in which he proposed a causal connection with a widespread fall in the general rate of profit in the core economies. Mandel later maintained that, whilst the down-wave in capital accumulation was therefore ‘endogenous’, it would require an exogenous shock, such as another World War, to generate an up-wave. In reality, the fifth Kondratiev wave was in its upswing phase, with a rising rate of profit, by the mid-1980s and the crisis of 2007-8 signalled the most recent down-wave.
Surprisingly, the authors pay no attention to the ongoing debate over the historical data. Instead, they include a table summarizing the historical phases of what they term ‘idealized long cycles’ and associated rates of changes in key variables such as the number of basic innovations, growth rates of world trade, wars, sovereign defaults and GDP figures (106-107).
In a work obviously targeted, like Shaikh’s, at graduate students in economics, the authors approach their objective via a critique of orthodox growth theory and two types of growth models. One, the post-Keynesian Harrod-Domar model, is described as a knife-edge model, as any deviation from a balanced growth path sets off an inexorable process of either inflationary expansion (if investment is above the ‘warranted rate’) or deflationary contraction (if below) – unless states intervene to stabilize the system. The ‘neoclassical’ Solow model, constructed in response to the unrealistic instability of the post-Keynesian model, depended on the ludicrously unrealistic assumptions of perfect competition. It was later combined with the problematic concept of ‘total factor productivity’, and suffered from the notorious ‘aggregation problem’ of measuring the total stock of capital.
After concisely explaining the deficiencies of both models, the authors turn to classical political economy, including Marx, for an alternative. In summary, they counterpose Shaikh’s concept of ‘real competition’ to both neoclassical perfect competition theory and theories of monopoly capital. They explain how aggregation problems can be overcome using a labour theory of value, with estimates of socially-necessary labor-time for the elements of constant capital.
They then devote a chapter to Marx’s reproduction schemas. These specify the conditions necessary for an ‘equilibrium’ between the two departments producing means of production and consumption goods (labelled departments 1 and 2). Debates among earlier Marxists, including Tugan-Baranovsky, Lenin, Luxemburg, Bauer and Grossman, are outlined a little too briefly but the essential point is the high level of abstraction of Marx’s analysis (95). While this establishes the possibility of what can be termed ‘balanced growth’, he does not conclude that this is normally the case. Marx is consistent when he states in volume 3 of Capital that in reality, supply and demand never coincide, except by accident, but it was necessary to assume that they do in order ‘to study phenomena in their fundamental relations’ (86).
The next chapter concerns ‘economic fluctuations and the dynamics of profitability’. In contrast to other approaches, including Schumpeter, they emphasize the dynamics of a falling rate of profit in halting an up-wave in the system. The down-wave is accompanied by counter-tendencies to that fall, especially a devaluation of constant capital and an increase in the rate of exploitation. They demolish the Okishio theorem which supposedly proves that capitals will never introduce technology which results in a fall of their rate of profit, and that such a fall can only result from a rise in real wages ( a profit-squeeze theory). This presupposes that individual capitals can always anticipate the collective consequences of their actions. But with real competition, ‘individual rationality’ can result in ‘collective irrationality’ (123).
This leads into three chapters which anyone unfamiliar with linear algebra and differential equations will find heavy going. One of these is devoted to establishing the relevance of a labor theory of value for explaining the long-run dynamics of a system in which changes in labor values (as a result of changes in the productivity of labor) act as ‘long-run attractors’ for the movements of prices and the quantities produced. The results of this analysis are fed into a computerized model to generate simulated data. These rely on what they term ‘realistic’ (234) estimates of the value of parameters such as the rate of increase of labor productivity and the size of the capital stock, and variables such as rates of surplus-value and profit. Such computer simulations are not within this reviewer’s areas of expertise, but it can be confirmed that their results are supportive of their most significant claim: their model integrates a theory of long-cycles with a Marxist theory of economic growth and profit-rates.
One question concerns how they explain the transition from the up-wave to the down-wave. The authors acknowledge that a slow fall in the rate of profit will not necessarily reduce the rate of capital accumulation if the mass of profit continues to rise (126). They then cite a passage in volume 3 of Capital which discusses a possible state of ‘absolute overproduction’, when a rise in the total mass of surplus-value hits a limit, and any new investment will fail to generate any addition to profits. For Marx, however, this is an extreme case which presupposes an exhaustion of the reserve army of labor, and/or effective resistance to cuts in real wages. This could plausibly fit some of the core national economies in the late 1960s, but not the turning point after the First World War, nor the phase transition within the fifth Kondratiev cycle marked by the financial crisis of 2007-8.
This raises another question. How do the turning points in either direction connect to the shorter cycles the authors have left aside for the purposes of their model? The authors positively reference Maksakovsky’s work in the 1920s, which contains a disproportionality theory of the Juglar cycle, but fail to relate this to their model. An alternative connection between a long-wave falling rate of profit and those cyclical fluctuations could be that the system becomes more sensitive to the impact of other variables, such as a rise in the rate of interest, or overproduction in key sectors, especially in department 1. A revival in profit rates makes the system more resilient, and underpins an up-wave with shorter or less severe recessions and stronger bouts of capital accumulation.
Finally, the authors claim, following a sentence inserted by Engels into volume 3, that the rate of profit will necessarily fall ‘in the end’. Engels may well have reached this conclusion in the 1880s on the basis of a long-term fall in profitability in the cotton textile industry of Britain. But the general data before 1914 is very limited in scope. Moreover, the data for the US since 1945 so often cited here is distorted by the fact that much of the wartime increase in the stock of capital was financed by the state, retained by private corporations and not counted in their accounts (Gordon 2016). The authors’ model is impressive and their conclusions about the relation of long cycles to fluctuations in the general rate of profit are persuasive. But it is doubtful whether any model can prove that the tendency of the rate of profit to fall due to a rising organic composition of capital will necessarily prevail over the counter-tendencies in the very long-run – although climate change will have a significant impact in the future.
Reviewed by Peter Green