Paul Sweezy in 1982 on secular stagnation

‘Secular stagnation’ is the talk of the town at the moment. It was one of the mayor interests of Paul Sweezy. Here, part of a 1982 lecture with a rather concise conclusion.

Let me digress for a moment to point out that the fact that the overall performance of the economy in recent years has not been much worse than it actually has been, or as bad as it was in the 1930s, is largely owing to three causes: (1) the much greater role of government spending and government deficits; (2) the enormous growth of consumer debt, including residential mortgage debt, especially during the 1970s; and (3) the ballooning of the financial sector of the economy which, apart from the growth of debt as such, includes an explosion of all kinds of speculation, old and new, which in turn generates more than a mere trickledown of purchasing power into the “real” economy, mostly in the form of increased demand for luxury goods. These are important forces counteracting stagnation as long as they last, but there is always the danger that if carried too far they will erupt in an old-fashioned panic of a kind we haven’t seen since the 1929–33 period.

So at bottom we are back where the debate of the 1930s left off: Why is the incentive to invest so weak? Hansen’s answers are, I think, a good deal less, not more, persuasive today than they were when he first advanced them. And surely no one can follow the Schumpeter line of blaming anti-business policies for discouraging capitalists from investing in the years since the Second World War, least of all with an administration in power like the one we now have in Washington. We must look elsewhere.

I suggest that the answer is to be found in analyzing the long period—twenty-five years or so—which followed the Second World War, during which we did not have a problem of stagnation. In fact during that time the incentive to invest was strong and sustained, and the growth record of the economy was perhaps the best for any comparable period in the history of capitalism. Why?

The reason, I think, is that the war altered the givens of the world economic situation in ways that enormously strengthened the incentive to invest. I list in very summary form the main factors: (1) the need to make good wartime damage; (2) the existence of a vast potential demand for goods and services the production of which had been eliminated or greatly reduced during the war (houses, automobiles, appliances, etc.): a huge pool of purchasing power accumulated during the war by firms and individuals which could be used to transform potential demand into effective demand; (3) the establishment of U.S. global hegemony as a result of the war: the U.S. dollar became the basis of the international monetary system, prewar trade and currency blocs were dismantled, and the conditions for relatively free capital movements were created—all of which served to fuel an enormous expansion of international trade; (4) civilian spin-offs from military technology, especially electronics and jet planes; and (5) the building up by the United States of a huge peacetime armaments industry, spurred on by major regional wars in Korea and Indochina. Very important but often overlooked is the fact that these changes were in due course reflected in a fundamental change in the business climate. The pessimism and caution left over from the 1930s were not dissipated immediately, but when it became clear that the postwar boom had much deeper roots than merely repairing the damages and losses of the war itself, the mood changed into one of long-term optimism. A great investment boom in all the essential industries of a modern capitalist society was triggered: steel, autos, energy, ship-building, heavy chemicals, and many more. Capacity was built up rapidly in all the leading capitalist countries and in a few of the more advanced countries of the third world like Mexico, Brazil, India, and South Korea.

In tracing the causes of the re-emergence of stagnation in the 1970s, the crucial point to keep in mind is that every one of the forces which powered the long postwar expansion was, and was bound to be, self-limiting. This indeed is part of the very nature of investment: it not only responds to a demand, it also satisfies the demand. Wartime damage was repaired. Demand deferred during the war was satisfied. The process of building up new industries (including a peacetime arms industry) requires a lot more investment than maintaining them. Expanding industrial capacity always ends up by creating overcapacity.

To put the point differently: a strong incentive to invest produces a burst of investment which in turn undermines the incentive to invest. This is the secret of the long postwar boom and of the return of stagnation in the 1970s. As the boom began to peter out, stagnation was fought off for some years by more and more debt creation, both national and international, more and more frantic speculation, more and more inflation. By now these palliatives have become more harmful than helpful, and to the problem of stagnation has been added that of a rapidly deteriorating financial situation.

Does this mean that I am arguing or implying that stagnation has become a permanent state of affairs? Not at all. Some people—I think it would be fair to include Hansen in this category—thought that the stagnation of the 1930s was here to stay and that it could be overcome only by basic changes in the structure of the advanced capitalist economies. But, as experience demonstrated, they were wrong, and a similar argument today could also prove wrong. I do not myself believe that a new war could have the same consequences as it did last time (or as it did on a lesser scale after the First World War). If a new war were big enough to have a major impact on the economy, it would probably become a nuclear war, after which there might be little left to rebuild. But no one can say for sure that there will never be other new powerful stimuli to investment, such, for example, as were provided by the industrial revolution, the railroad, and the automobile in earlier times. What one can say, I think, is that nothing like that is visible on the horizon now. For those who understand this, the lesson is clear enough: rather than wait around for a miracle (or an irretrievable disaster), it is high time to dedicate our thoughts and energies to replacing the present economic system with one which operates to satisfy human needs and not as a mere byproduct of the presence or absence of investment opportunities attractive to a relative handful of socially irresponsible capitalists.

Let me close with a few remarks about the relevance of the foregoing analysis to a subject to which economists have been devoting increasing attention in the last few years, i.e., whether or not the history of capitalism has been characterized by a long cycle of some fifty years’ duration (what Schumpeter called the Kondratieff cycle). First, we should be clear that the issue here is not whether capitalist development takes place in an uneven fashion with periods of rapid expansion being succeeded by periods of slow (or even no) expansion and vice versa—what have often been referred to as long waves. The empirical existence of long waves in this sense is undeniable, and the ingenuity of statisticians operating with an almost infinite variety of possible statistical sources can be counted on to make out a case for a time sequence of accelerated and retarded growth rates compatible with the existence of an underlying cyclical mechanism.

But compatibility with the existence of a cyclical mechanism is entirely different from proof of the existence of such a mechanism. The reason for our acceptance of the idea that relatively short cycles exist (i.e., cycles of less than ten years’ duration, Schumpeter’s Kitchin and Juglar cycles) is that the mechanisms at work can be elucidated analytically as well as verified empirically. The important point is to be able to demonstrate that the two basic phases of the cycle, expansion and contraction, can each be shown to contain the seeds of its opposite. This principle lies at the core of all modern business-cycle theories. To quote what was long a standard textbook on the subject:

Business cycles consist of recurring alternations of expansion and contraction in aggregate economic activity….The economy seems to be incapable of remaining on an even keel, and periods of expanding activity always and all too soon give way to declining production and employment. Further, and this is the essence of the problem, each upswing or downswing is self-reinforcing. It feeds on itself and creates further movement in the same direction; once begun, it persists in a given direction until forces accumulate to reverse the direction. (Robert A. Gordon, Business Fluctuations, New York, 1952, 214)

The key phrase is “until forces accumulate to reverse the direction.” This occurs in both the expansion and the contraction phases of the normal business cycle, but the symmetry breaks down when it comes to long waves. As we have already noted in the case of the long expansion following the Second World War, the reversal does indeed take place: it is the nature of an investment boom to exhaust itself. But it is equally clear from the experiences of the 1930s and the 1970s that the stagnation phase of a long wave does not generate any “forces of reversal.” If and when such forces do emerge, they originate not in the internal logic of the economy but in the larger historical context within which the economy functions. It was the Second World War that brought the stagnation of the 1930s to an end. We still do not know what will bring the stagnation of the 1970s and 1980s to an end—or what kind of an end it will be.