In 1987, in the introduction to their Stagnation and Financial Explosion, Monthly Review editors Harry Magdoff and Paul Sweezy wrote:
We both reached adulthood during the 1930s, and it was then that we received our initiation into the realities of capitalist economics and politics. For us economic stagnation in its most agonizing and pervasive form, including its far-reaching ramifications in every aspect of social life, was an overwhelming personal experience. We know what it is and what it can mean; we do not need elaborate definitions or explanations. But we have gradually learned, not altogether to our surprise of course, that younger people who grew up in the 1940s or later not only do not share but also do not understand these perceptions. The economic environment of the war and postwar periods that played such an important part in shaping their experiences was very different. For them stagnation tends to be a rather vague term, equivalent perhaps to a longer-than-usual recession but with no implication of possible grave political and international repercussions. Under these circumstances, they find it hard to relate to what they are likely to regard as our obsession with the problem of stagnation. They are not quite sure what we are talking about or what all the fuss is over.
There is a temptation to say: just wait and see, you’ll find out soon enough. Indeed, this may be the only really satisfactory answer. Unless backed up by actual experience, explanations often mean little. And there is no doubt that what we see as indications of stagnation in the 1970s and 1980s are still a long way from the realities of half a century ago. But it would be a cop-out to leave it at that. We owe it to our readers at least to make clearer what we mean by stagnation and why we think it is so important.
This statement was followed by a detailed examination of the conditions of stagnation emerging in what economists call the “real economy” of production, and the fact that the main counterforce, somewhat masking the underlying disease, was to be found in a secular financial explosion—a vast speculative increase in debt over a period of decades. Magdoff and Sweezy argued that such a financial explosion might continue for a protracted period, artificially lifting the economy, with central banks pouring liquidity into the system at the least sign of a bursting bubble. But this just meant that the problem would get worse over time, leading in all likelihood eventually to a stupendous financial crash, a massive devalorization of capital (as Marx was the first to analyze), and the emergence of a deep and persistent stagnation. In other words, there would be some kind of repetition (though not necessarily at the same deep level) of the outright stagnation of the 1930s.
This condition of severe stagnation following a stupendous financial crash (a dynamic which first resurfaced in the Japanese stagnation of the 1990s) is in fact exactly the situation in which we find ourselves now. Thus David Rosenberg, Merrill Lynch’s chief U.S. economist, recently stated: “We expect the recession to last through to the end of 2009/early 2010 before an L-shaped recovery takes hold in 2010” (David A. Rosenberg, “The Frugal Future,” Economic Analysis, Merrill Lynch, December 16, 2008). The words “L-shaped recovery” are the key, suggesting that the most likely course after economic recovery begins is a period of continuing stagnation, as in Japan in the 1990s or even the depression decade of the 1930s. Those who believe that an economic stimulus package will simply restore growth and get it up to its previous level are, according to Rosenberg, engaged in wishful thinking. “The Japanese government,” he notes, faced with similar deflationary conditions, “unveiled no fewer than 10 fiscal stimulus packages in the 1990s, many of them directed at infrastructure [with little effect on growth]. In fact, the New Deal in the 1930s, coexisted with the Great Depression.” Japan is now right back in the stagnation trap from which it never quite fully recovered, while it was the Second World War that pulled capitalism (first Germany and then the other leading capitalist states) out of the 1930s slump.
Paul Krugman, who we once called in these pages “A Prizefighter for Capitalism” (MR,June 2001), insisted, in his introduction to a new edition of Keynes’s General Theory of Employment, Interest and Money (published by Palgrave Macmillan in 2007), that even if monetary policy failed to avert the reemergence of “mass unemployment” on the level of the 1930s, which he thought unlikely, there was always “an easy solution, expansionary fiscal policy.” Krugman’s proof: “the giant public works program that restored full employment, otherwise known as the Second World War.” This, however, was the worst single catastrophe ever experienced by humanity. The world cannot afford a repetition of that kind (and to call it a “giant public works program” is to remove some of our humanity). What is crucial to understand is that there is no possibility of an expansion of civilian government spending on anything remotely like this scale, even in the face of a depression, under the current structure of monopoly-finance capitalism. (See the Review of the Month for this issue.)
Hence, Krugman’s “easy solution” to stagnation is hardly that. Indeed, “stagnation theory, in short,” Magdoff and Sweezy wrote in closing their introduction to Stagnation and the Financial Explosion,
teaches us that what we need is not the reform of monopoly capitalism but its replacement by a system that organizes economic activity not for the greater glory of capital but to meet the needs of people to lead decent, secure, and, to the extent possible, creative lives. Once this lesson has been well and truly learned, we can give up the absurd fantasy of making a rotten system work for us, and buckle down to the increasingly urgent tasks of directly fighting for what ought to be the birthright of every member of a society that has any claim to consider itself free and democratic—a job, a steady income, a home, health care, and security in old age. If our ruling class and the government it controls cannot meet these elementary human demands, they should be thrown out and make way for another system that can and will. It is of course bound to be a long and difficult struggle, but it is the only one that makes sense.
For a treatment of the present economic crisis, in line with Magdoff and Sweezy’s earlier argument, see John Bellamy Foster and Fred Magdoff, The Great Financial Crisis: Causes and Consequences (New York: Monthly Review Press, 2009). It can be ordered online or by calling 1-800-670-9499.