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Secular Stagnation

Mainstream Versus Marxian Traditions

Hans G. Despain teaches political economy at Nichols College, where he is the chair of the Department of Economics.

Paul M. Sweezy wrote in 1982, “it is my impression that the economics profession has not yet begun to resume the debate over stagnation which was so abruptly interrupted by the outbreak of the Second World War.” Thirty years later things appear to have changed. Former U.S. Secretary of Treasury Larry Summers shocked economists with his remarks regarding “stagnation” at the IMF Research Conference in November 2013, and he later published these ideas in the Financial Times and Business Economics.1

Summers’s remarks and articles were followed by an explosion of debate concerning “secular stagnation”—a term commonly associated with Alvin Hansen’s work from the 1930s to ’50s, and frequently employed in Monthly Review to explain developments in the advanced economies from the 1970s to the early 2000s.2 Secular stagnation can be defined as the tendency to long-term (or secular) stagnation in the private accumulation process of the capitalist economy, manifested in rising unemployment and excess capacity and a slowdown in overall economic growth. It is often referred to simply as “stagnation.” There are numerous theories of secular stagnation but most mainstream theories hearken back to Hansen, who was Keynes’s leading early follower in the United States, and who derived the idea from various suggestions in Keynes’s General Theory of Employment, Interest and Money (1936).

Responses to Summers have been all over the map, reflecting both the fact that the capitalist economy has been slowing down, and the role in denying it by many of those seeking to legitimate the system. Stanford economist John B. Taylor contributed a stalwart denial of secular stagnation in the Wall Street Journal. In contrast, Paul Krugman, who is closely aligned with Summers, endorsed secular stagnation on several occasions in the New York Times. Other notable economists such as Brad DeLong and Michael Spence soon weighed in with their own views.3

Three prominent economists have new books directly addressing the phenomena of secular stagnation.4 It has now been formally modelled by Brown University economists Gauti Eggertsson and Neil Mehrotra, while Thomas Piketty’s high-profile book bases its theoretical argument and policy recommendations on stagnation tendencies of capitalism. This explosion of interest in the Summers/Krugman version of stagnation has also resulted in a collection of articles and debate, edited by Coen Teulings and Richard Baldwin, entitled Secular Stagnation: Facts, Causes and Cures.5

Seven years after “The Great Financial Crisis” of 2007–2008, the recovery remains sluggish. It can be argued that the length and depth of the Great Financial Crisis is a rather ordinary cyclical crisis. However, the monetary and fiscal measures to combat it were extraordinary. This has resulted in a widespread sense that there will not be a return to “normal.” Summers/Krugman’s resurrection within the mainstream of Hansen’s concept of secular stagnation is an attempt to explain how extraordinary policy measures following the 2007–2008 crisis merely led to the stabilization of a lethargic, if not comatose, economy.

But what do these economists mean by secular stagnation? If stagnation is a reality, does their conception of it make current policy tools obsolete? And what is the relationship between the Summers/Krugman notion of secular stagnation and the monopoly-finance capital theory?

Below the Mainstream Ideas of Secular Stagnation (hereafter MISS) are presented as six pillars, or six fundamental arguments, which constitute a renewed interest in secular stagnation. This is not to suggest these six arguments are all compatible with each other—indeed they are not, since they represent, as we shall see, a mainstream debate about the relative relevance of demand-side and supply-side causes of secular stagnation—but simply to help make sense of the broad parameters of MISS. We can then contrast the MISS understanding, representing the character of mainstream economic theory in this area, to monopoly-finance capital theory’s quite different understanding of the stagnation tendency.

Six Pillars of MISS

In “secular stagnation,” the term “secular” is intended to differentiate between the normal business cycle and long-term, chronic stagnation. A long-term slowdown in the economy over decades can be seen as superimposed on the regular business cycle, reflecting the trend rather than the cycle.

In the general language of economics, secular stagnation, or simply stagnation, thus implies that the long-run potential economic growth has fallen, constituting the first pillar of MISS. This has been most forcefully argued for by Robert Gordon, as well as Garry Kasparov and Peter Thiel.6 Their argument is that the cumulative growth effect of current (and future) technological changes will be far weaker than in the past. Moreover, demographic changes place limits on the development of “human capital.” The focus is on technology, which orthodox economics generally sees as a factor external to the economy and on the supply-side (i.e., in relation to cost). Gordon’s position is thus different than that of moderate Keynesians like Summers and Krugman, who focus on demand-side contradictions of the system. In Gordon’s supply-side, technocratic view, there are forces at work that will limit the growth in productive input and the efficiency of these inputs. This pillar of MISS emphasizes that it is constraints on the aggregate supply-side of the economy that have diminished absolutely the long-run potential growth.

The second pillar of MISS, also a supply-side view, goes back at least to Joseph Schumpeter. To explain the massive slump of 1937, Schumpeter maintained there had emerged a growing anti-business climate. Moreover, he contended that the rise of the modern corporation had displaced the role of the entrepreneur; the anti-business spirit had a repressive effect on entrepreneurs’ confidence and optimism.7 Today, this second pillar of MISS has been resurrected suggestively by John B. Taylor, who argues the poor recovery is best “explained by policy uncertainty” and “increased regulation” that is unfavorable to business. Likewise, Baker, Bloom, and Davis have forcefully argued that political uncertainty can hold back private investment and economic growth.8

Summers and Krugman, as Keynesians, emphasize a third MISS pillar, derived from Keynes’s famous liquidity trap theory, which contends that the “full-employment real interest rate” has declined in recent years. Indeed, both Summers and Krugman demonstrate that real interest rates have declined over recent decades, therefore moving from an exogenous explanation (as in pillars one and two) to a more endogenous explanation of secular stagnation.9 The ultimate problem here is lack of investment demand, such that, in order for net investment to occur at all, interest rates have to be driven to near zero or below. Their strong argument is that there are now times when negative real interest rates are needed to equate saving and investment with full employment.

However, “interest rates are not fully flexible in modern economies”—in other words, market-determined interest rate adjustments chronically fail to achieve full employment. Summers contends there are financial forces that prohibit the real interest rate from becoming negative; hence, full employment cannot be realized.10

Some theorists contend that there has been demographic structural shifts increasing the supply of saving, thus decreasing interest rates. These shifts include an increase in life expectancy, a decrease in retirement age, and a decline in the growth rate of population.

Others, including Summers, point out that stagnation in capital formation (or accumulation) can be attributed to a decrease in the demand for loanable funds for investment. One mainstream explanation offered for this is that today’s new technologies and companies, such as Google, Microsoft, Amazon, and Facebook, require far less capital investment. Another hypothesis is that there has been an important decrease in the demand for loanable funds, although they argue this is due to a preference for safe assets. These factors can function together to keep the real interest rate very low. The policy implication of secular low interest rates is that monetary policy is more difficult to implement effectually; during a recession, it is weakened and can even become ineffectual.

Edward Glaeser, focusing on “secular joblessness,” places severe doubt on the first pillar of MISS, but then makes a very important additional argument. Glaeser rejects the notion that there has been a slowdown in technological innovation; innovation is simply “unrelenting.” Likewise, he is far less concerned with secular low real interest rates, which may be far more cyclical. “Therefore,” contends Glaeser, “stagnation is likely to be temporary.”

Nonetheless, Glaeser underscores secular joblessness, and thus the dysfunction of U.S. labor markets constitutes a fourth pillar of MISS: “The dysfunction in the labour market is real and serious, and seems unlikely to be solved by any obvious economic trend.” Somehow, then, the problem is due to a misfit of skills or “human capital” on the side of workers, who thus need retraining. “The massive secular trend in joblessness is a terrible social problem for the US, and one that the country must try to address” with targeted policy.11 Glaeser’s argument for the dysfunction of U.S. labor markets is based on recession-generated shocks to employment, specifically of less-skilled U.S. workers. After 1970, when workers lost their job, the damage to human capital became permanent. In short, when human capital depreciates due to unemployment, overall abilities and “talent” are “lost” permanently. This may be because the skills required in today’s economy need to be constantly practiced to be retained. Thus, there is a ratchet-like effect in joblessness caused by recessions, whereby recession-linked joblessness is not fully reversed during recoveries—and all this is related to skills (the human capital of the workers), and not to capital itself. According to Glaeser, the ratchet-like effect of recession-linked joblessness is further exacerbated by the U.S. social-safety net, which has “made joblessness less painful and increased the incentives to stay out of work.”12

Glaeser contends that, if his secular joblessness argument is correct, the macroeconomic fiscal interventions argued for by Summers and Krugman are off-base.13 Instead, the safety net should be redesigned in order to encourage rather than discourage people from working. Additionally, incentives to work need to be radically improved through targeted investments in education and workforce training.14 Such views within the mainstream debate, emphasizing exogenous factors, are generally promoted by freshwater (conservative) rather than saltwater (liberal) economists. Thus, they tend to emphasize supply-side or cost factors.

The fifth pillar of MISS contends that output and productivity growth are stagnant due to a failure to invest in infrastructure, education, and training. Nearly all versions of MISS subscribe to some version of this, although there are both conservative and liberal variations. Barry Eichengreen underscores this pillar and condemns recent U.S. fiscal developments that have “cut to the bone” federal government spending devoted to infrastructure, education, and training.

The fifth pillar of MISS necessarily reflects an imbalance between public and private investment spending. Many theorists maintain that the imbalance between public and private investment spending, hence secular stagnation, “is not inevitable.” For example, Eichengreen contends if “the US experiences secular stagnation, the condition will be self-inflicted. It will reflect the country’s failure to address its infrastructure, education and training needs. It will reflect its failure to…support aggregate demand in an effort to bring the long-term unemployed back into the labour market.”15

The sixth pillar of MISS argues that the “debt overhang” from the overleveraging of financial firms and households, as well as private and public indebtedness, are a serious drag on the economy. This position has been argued for most forcefully by several colleagues of Summers at Harvard, most notably Carmen Reinhart and Kenneth Rogoff.16 Atif Mian and Amir Sufi also argue that household indebtedness was the primary culprit causing the economic collapse of 2007–2008. Their policy recommendation is that the risk to mortgage borrowers must be reduced to avoid future calamities.17

As noted, the defenders of MISS do not necessarily support a compatibility between the above six pillars: those favored by conservatives are supply-side and exogenous in emphasis, while liberals tend towards demand-side and endogenous ones. Instead, most often these pillars are developed as competing theories to explain the warrant of some aspect of secular stagnation, and/or to defend particular policy positions while criticizing alternative policy positions. However, the concern here is not whether there is the possibility for a synthesis of mainstream views. Rather, the emphasis is on how partial and separate such explanations are, both individually and in combination.

The resurgence of interest in secular stagnation is greatly welcomed. Each of the pillars of the mainstream idea of secular stagnation brings a (hazy) focus toward the contradictions of capitalism. None of them, however, get at the essence of the matter—since they specifically avoid the issue of contradictions in the accumulation process itself. The mainstream definition of secular stagnation proclaims an actual decrease in growth rates, GDP, and/or employment, rather than seeing the problem more broadly as a tendency embedded in the logic of the system. This is precisely where MISS misses the mark. It is doubtful that a higher synthesis of the six pillars of MISS can be achieved on grounds that forces and mechanisms of history and society exist such that GDP, growth rates, and employment will necessarily secularly stagnate. Additionally, the various MISS policy proposals will prove inadequate, which is illustrated by a fuller understanding of how the Marxian tradition sees secular stagnation.

The Marxian Tradition: Michał Kalecki and Josef Steindl

A higher synthesis, which explains secular stagnation, exists in monopoly-finance capital theory. The inspiration of this theory can be said to begin with Michał Kalecki’s ideas, first developed in the 1930s and rooted in a Marxian class composition conception of output and the monopolization tendencies of capitalism. The Kaleckian view emphasized that the process of free competition generates a tendency for capital to become more concentrated and centralized, whereby individual giant firms emerge.18

Kaleckian theory contends that the competition between large firms, and the consequences of the ubiquitous presence of giant firms for medium and small firms, generates tendencies in modern capitalism towards intensified exploitation, over-savings, and under-investment. These are related to the cost, price, output, and investment strategies of individual giant firms to retain market dominance.

Josef Steindl would develop the secular stagnation implications of the Kaleckian general theory in his Maturity and Stagnation in American Capitalism.19 In the Steindlian view of secular stagnation, there are “endogenous factors inherent in the development of capitalism—primarily the development of imperfect competition, monopoly and oligopoly,” such that stagnation can be seen as emerging from the tendencies of modern capital accumulation.20 The essence of Steindl’s theory is that the capital accumulation process under the ubiquitous presence of the strategies of giant firms give rise to an increase in profit margins and a decline in the rate of utilization of capital stock, or an increase in “excess capacity.” Importantly, this need not necessarily result in an increase in income for capitalists (although it may). Instead, as Steindl emphasized:

The tendency for the capitalists’ share of the product to increase does, after all, exist potentially. It is a consequence of the growth of oligopoly. The expression of this tendency can only be an increase in the gross profit margins. That means that the actual share of net income of capitalists need not increase at all. The increased gross profit margins may be compensated by a reduced degree of utilization, so that there is not a shift of actual income from wages to profits, but a shift of potential income of workers to wastage in excess capacity.21

Elsewhere in the same book, Steindl says:

The conclusion is that with the pattern of adjustment of the profit margin to be expected in modern times (owing to the predominance of oligopoly) a primary decline of capital accumulation will—via a reduced degree of utilisation—lead with a certain time lag to a further reduction in accumulation. This cannot easily lead to an equilibrium. The individual entrepreneur may think that by reducing investment he will cure his excess capacity, but in fact for industry as a whole this strategy has only the effect of making excess capacity even greater.22

Thus, according to Steindl the rate of surplus value and the gross profit margin increase, while net realized profit rates may stagnate or fall due to excess capacity. For example, if a large firm experiences a decrease in demand, they have the power to resist price reductions, and instead decrease capacity utilization. It is the decrease in capacity utilization that tends to put a damper on investment demand, and the likelihood of secular stagnation emerges.

Steindl’s endogenous theory of capitalist development as the basis of secular stagnation was a massive step forward in understanding the macrodynamics and processes of capitalist accumulation under the regime of oligopolization of key industries. Steindl was able to place the emphasis squarely on the development of imperfect competition, the monopoly power of oligopolies, and their ability to resist price competition, while simultaneously germinating the new nemesis of excess capacity and the tendencies toward secular stagnation. The basic problems remained the remarkably Kaleckian ones—intensified exploitation, over-savings, and under-investment.

Both Sweezy and Hansen were quick to point out that the problem with Steindl’s theory was that it failed to take into account important exogenous factors such as innovation and new industries that could forestall decline and crisis.23 Steindl would himself embrace the criticism that he had “been wrong, however, to disregard the economic function of innovation in capitalism.” Steindl also believed he had underestimated the ability of oligopolies to move their investment activity into other industrial branches. In other words, he had failed to anticipate the tendency toward and process of corporate conglomeration, which has proven a popular form of company growth since the 1960s. Nonetheless, Steindl contended that there is massive evidence that big firms prioritize safe investments above a mere profit motive.24 Thus, the primary problems of mature capitalism become intensified exploitation, underemployment, high gross profits, over-savings, excess capacity, and under-investment.

The Marxian Tradition: Monopoly Capital Theory

Sweezy, along with Paul A. Baran, would provide a more complete theory of investment of giant firms. They theoretically confronted the political and historical responses to the strong and systematic tendency for the surplus to rise and the problems of excess capacity and surplus absorption. In this sense they represented further theoretical advancements in understanding secular stagnation and the contradictions of monopoly capital. The root of the contradictions is not the failure of the system, but its success. The giant firms of monopoly capitalism increase productivity and profit margins, while the abundant productive capacity and high savings potential tends to cut off investment before full employment is achieved.

The motor force of any expansion is the creation of new productive capacity, and monopoly capital accomplishes this brilliantly. The problem is that the rapid rise in the actual and potential surplus during an expansion generates an increasing investment-seeking portion. Monopoly capitalism has a self-contradictory dynamic; put simply, the system has a “chronic inability to absorb as much surplus as it is capable of producing.” The impressive productive capacity increases steadily augment both the surplus itself and the “supply of investment-seeking surplus,” but simultaneously fail to “generate a corresponding rise in the magnitude of investment outlets.”25

In terms of Marxian reproduction schemes, for the investment-seeking surplus to be reinvested successfully and rapid growth to occur, the means of production (Department I) would need to outpace the expansion of consumption goods and services (Department II). Eventually, the means of production become so built up that a social disproportionality manifests between productive capacity and corresponding consumer demand.26 Baran and Sweezy said, “Twist and turn as one will, there is no way to avoid the conclusion that monopoly capitalism is a self-contradictory system.”27 Under the conditions of overexploitation and underemployment of the working class, excess capacity continually tends to cut off potential net investment by lowering expected profits on new investment. The system fails to generate both the capitalist-consumption and investment outlets necessary to absorb the rapid rise in surplus produced by giant firms and their impressive productive capacity.

Kalecki said, “The tragedy of investment is that it causes crisis because it is useful. Doubtless many people will consider this theory paradoxical. But it is not the theory which is paradoxical, but its subject—the capitalist economy.”28 The tragedy underscores the fact that surplus that cannot be absorbed will not be produced. Thus, “it follows that the normal state of the monopoly capitalist economy is stagnation.”29

However, Baran and Sweezy contended that capitalist consumption and investment are not the only two outlets for the absorption of surplus: it can also be wasted.30 Since the absorption of the surplus by means of consumption and investment are endogenously circumvented, the issue of economic waste would form “the pivotal element around which Baran and Sweezy’s Monopoly Capital was organized” and constituted the bulk of their theoretical consideration for understanding the macroeconomic dynamic of contemporary monopoly capitalism.31

In brief, according to Baran and Sweezy the capitalist system increasingly relies on “waste.”32 It includes: (1) the sales effort, consisting of advertising, market research, sales outlets, various sales personnel expenses, public relations, lobbying, conspicuous or “showy” business space, product appearance, packaging, planned obsolescence, model changes, etc.; (2) war, militarism, imperialism, and other non-defense public spending; and (3) “diversion of potential surplus into the financial sector (listed as ‘finance, insurance, and real estate’ in the national account).”33 With the system’s increasing reliance on economic waste, real human needs become more and more remote within the logic and macroeconomic dynamic of the monopoly capitalistic system.

An important point must be underscored: the potential surplus can be absorbed by the financial sector. Later on, Sweezy contended that the increasing role of finance had been under-theorized in Monopoly Capital—a shortcoming he and Harry Magdoff quickly remedied.34

The Marxian Tradition: Monopoly-Finance Capital Theory

Costas Lapavitsas correctly identifies monopoly capital theorists as among the first to appreciate the importance of the developments within the financial sector. Early on it was monopoly capital theorists who understood the importance of the process of financialization. They must be praised for both anticipating the collapse of 2007–2008 and explaining the crisis and the durability of stagnation into the future.35 Lapavitsas further points out too many political economists fail to “realize their affinities with”—and, we could add, their theoretical debt to—”the tradition of Monthly Review.”36

Monopoly capital theory contends that it is all but impossible to understand the political economy of the twentieth and twenty-first centuries without appreciating how the “financial explosion” reconfigured contemporary capitalism. For Baran and Sweezy, the development of monopoly capital was not the bastardization of pure capitalism, but the “legitimate” or evolutionary outcome of capitalist “laws” of development. Similarly for Magdoff and Sweezy, financialization is not merely parasitic upon “functioning capitalists,” but is the logical and necessary development from the laws of capitalist development.37 In 1966, Baran and Sweezy contended that the private sales effort and public spending were the most important forms of waste. Today, the excess surplus is primarily absorbed through the financial sector, as Magdoff and Sweezy argued in the 1980s, and more recently, Foster, Fred Magdoff, and Robert McChesney. They underscore the importance of finance in their conception of monopoly-finance capital, which places the proper emphasis on the structural necessity of finance within monopoly capital.38

This terminology is consistent with Sweezy’s insistence that the full “triumph of financial capital” had become the axis of both economic and political power.39 This triumph would temporarily stabilize the macroeconomic variables and generate economic growth—but above all is a resplendent expression of stagnation. The basic stagnation problem of monopoly capitalism has never subsided, but in fact worsened.40 Stagnation itself is a function of the surplus generated by monopoly capital, which becomes increasingly difficult to absorb. It is in this sense that the financial explosion and triumph of financial capital was a most dazzling illustration of the “fundamental contradiction of capitalist society.” Namely, the “contradiction between the ends of production regarded as a natural-technical process of creating use values, and the ends of capitalism regarded as a historical system of expanding exchange value.”41

In other words, the financial activity of monopoly-finance capital is significantly a process of systemic waste. Of course, financial expansion can have a limited stimulative effect on production, directly by increasing employment somewhat, and indirectly through what is known as the “wealth effect.” This means that a certain portion of capital gains (growth in financial assets) expands overall economic growth through enhanced spending on capitalist consumption. In this way, financial gains contribute in a roundabout way to surplus absorption. But the contemporary ballooning of finance and speculation nonetheless represents a considerable waste (and indeed a loss) of much of the surplus potentially available to society. The financialization process generates new, long-term contradictions, notably in the form of financial bubbles that threaten to burst. At the same time it has a huge redistributive effect, enhancing the amassing of wealth out of all proportion to income and leading to greater polarization of income and wealth, as dramatically illustrated by Piketty’s Capital in the TwentyFirst Century. Moreover, it creates a whole new financial power elite with a vested interest in the constant growth of the casino economy.42

Key here is that the financialization process, while leading in limited ways to an increase in production, does not do so in an equivalent way to the financial gains being amassed, creating a growing discrepancy between finance and production. It is thus unable to overcome the stagnation problem and indeed serves to deepen it over the long-run. All of this is captured in the title of Lapavitsas’s recent book: Profiting Without Producing.

The basic results of monopoly-finance capital can be summarized in nine points. First, the high productive capacity of monopoly-finance capital generates an enormous surplus. This actual and potential surplus generates excess saving and excess capacity. Second, there are not adequate profitable investment opportunities for the system fully to absorb the excess surplus in productive investment activity; thus, systemic reproduction requires waste. The normal state of monopoly capitalism is stagnation. Third, monopoly capital organization gives political advantage to capital over labor in the class struggle, increasing the rate of exploitation, and establishing superexploitation of the most vulnerable workers worldwide. Fourth, the control over price decisions by large corporations generates a hierarchy of profit rates (rather than any tendency toward an average rate of profit), roughly hierarchically ordered based on size of firm and relative degree of market and political power. Fifth, monopoly capital regulates industries by means of quantity adjustments, rather than price, by manipulating their excess productive capacity depending on the degree of competition. Sixth, the second through fifth basic results above generate an increase in the potential rate of capital accumulation. In turn this generates a gap (or fundamental contradiction) between potential output (exchange value) and surplus absorption (use value); this fundamental contradiction manifests stagnation. Seventh, the primary mechanism to overcome the fundamental contradiction is economic “waste.” Eighth, various forms of waste can generate growth and employment, and the appearance that all is well. Ninth, financialization, itself a form of waste, can stave off stagnation for a time, but ultimately intensifies the overall contradictions of monopoly-finance capital, which run deep.

Stagnation: A Symbiotic Relationship of Politics, Sociology, and Economics

Secular stagnation, as an underlying tendency complete with countervailing factors, should not be expected always to take this form directly, although it periodically surfaces as slow GDP growth and high unemployment. Rather, the various types of waste that pervade the economy are attempts to avoid these results and are just as much a part of the overall dynamic. The contradictions run deep and persist. Stagnation is reflected in financial euphoria, financial over-leveraging, financial instability, underemployment, stagnant or declining real income, household indebtedness, indebtedness of firms, public indebtedness, and inequality.

We must always remember Kalecki’s warning that there is a lack of profitable investment opportunities—and we can add, that the sales effort, public spending, and financial activity—are forms of waste, even though this will doubtless be considered “paradoxical. But it is not the theory which is paradoxical, but its subject: the capitalist economy.”43

This paradox requires great patience and persistence. Many of the MISS theorists point to important considerations. Summers and Krugman “discovered” that real interest rates fail to equilibrate savings and investment, wherefore full-employment is not achieved. Taylor, Baker, and others rightly point out that “policy uncertainty” holds back private investment. Gordon and others are correct to worry that various demographic changes place limits on productive efficiency of inputs and cause “headwinds” for economic growth. Glaeser is on the right track in his treatment of the dysfunctions of U.S. labor markets. Likewise Eichengreen and others ask crucial questions in addressing the continual imbalances and contradictions between the roles of private and public investment. No one could fault Reinhardt and Rogoff these days for worry about the increasing over-leveraging of financial firms creating systemic instability.

However, the piecemeal approach to secular stagnation in the six pillars of MISS is at best highly incomplete. MISS fails to understand the contradictions of contemporary capitalism and the tendencies of stagnation as a totality. They are too reductionist with respect to systemic problems, and fail to understand stagnation in its full historical, political, social, and economic context. The theory of monopoly-finance capital is far more capable of explaining the contradictions of contemporary capitalism and realizing capitalism is no alternative.

The system of monopoly-finance capitalism is economically institutionalized stagnation and waste. Politically it is what István Mészáros calls “institutionalized irresponsibility.” Magdoff and Foster have argued that normal (or even progressive) fiscal and monetary policies are not capable of overcoming the contradictions caused by the tendency toward stagnation and financialization. However, there are several impressive alternative practical social arrangements to contemporary social relations. Magdoff and Foster approvingly outline an “economic bill of rights” or Freedom Budget for All Americans from the work of Paul Le Blanc and Michael Yates.44

To create an economic bill of rights or any alternative radical reform will necessitate intellectual leadership. As Georg Lukács concluded, “‘Intellectual leadership’ can only be one thing: the process of making social development conscious.”45 Stagnation, waste, and crises are the dysfunction of both social development and well-being more generally. As Thomas I. Palley says, stagnation and financialization are not “just a matter of formal macroeconomic analysis, but also [involve] understanding the political and sociological dynamics” of society.46

Intellectual leadership then means that we are to not only make conscious the causes of economic dysfunction (as MISS is groping towards, and the monopoly-finance capital theory has already achieved to a greater extent), but also the political and sociological dysfunctions, along with the psychological and personal hardships. The most urgent responsibility is for intellectuals to theorize the depth of the contradictions of monopoly-finance capitalism. To echo Wolfgang Streeck, it is wrong to demand that those who theorize paradoxical contradictions also offer immediate solutions. Current contradictions may not have immediate solutions “achievable here and now.”47

Intellectual leadership is also important; as Palley says, “it is not just ideas that matter. It is the combination of ideas and power.”48 The economic power of giant firms has allowed them the ability to gain political power and influence. Mészáros says, “The institutionalized irresponsibility” of stagnation and waste “cannot be overcome without the establishment of a substantively democratic decision making process.” It requires “a radical emancipation of politics from the power of capital.”49

But democratic institutions are in serious peril and deterioration. Evidence is mounting that political leaders are responding significantly to the policy preferences of corporations and the wealthy. In turn this increased political power has allowed giant firms to increase their economic wealth and power. Rent-seeking activity is arguably more important to giant firms than is profit-seeking.50 The result is a U.S.-style oligarchy, whereby corporate influence (especially corporate financial influence) in the political realm is massive, weakening democratic institutions.51

Streeck says there is a “very old tension between democracy and capitalism.” Indeed, it can be argued that, in the words of Samuel Bowles and Herbert Gintis, “capitalism and democracy are not complementary systems. Rather they are sharply contrasting” and antagonistic social orders. Baran and Sweezy say “Votes are the nominal source of political power, and money the real source: the system, in other words, is democratic in form and plutocratic in content.”52

Today what has emerged from this tension is a coalition formed around the economic power of massive firms and the wealthy. This coalition has specialized in the practice of political predation. James Galbraith calls this a “Predator State,” the toleration of which “is a formula for eventual national economic failure.” The corporate coalition forming the Predator State seeks “to control the state partly in order to prevent the assertion of public purpose and partly to poach on the lines of activity that past public purpose has established.” In the private sector itself, bad and predatory rent-seeking business practices are driving out good business practices.53

The result of corporate domination in the political and economic realm has been the deterioration of democracy, economic instability, financial crises, massive inequality, and, in the words of Colin Mayer, “serious deficiencies in both the efficient delivery of public goods and services, and the effective adherence of corporations to responsible conduct.” Larry Bartels says the political and economic trends raise serious questions regarding “whether democracy can flourish in the midst of great concentrated wealth.” Galbraith says the tendency within U.S. politics is “to run the state as though it were, in fact, just a corporation, with the rules that govern companies displacing the rules that govern republics. And so today we live in a corporate republic.”54

The essential problem is analogous to that of the colonial United States. It is no longer a despotic King George, but the activities of giant corporations maximizing both rents and profits, that are generating systemic oppression and crisis. As C.S. Lewis brilliantly illuminates, we:

live in the Managerial Age, in a world of “Admin.” The greatest evil is not now done in those sordid “dens of crime” that Dickens loved to paint. It is not done even in concentration camps and labour camps. In those we see its final result. But it is conceived and ordered (moved, seconded, carried, and minuted) in clean, carpeted, warmed and well-lighted offices, by quiet men with white collars and cut fingernails and smooth-shaven cheeks who do not need to raise their voices. Hence, naturally enough, my symbol for Hell is something like the bureaucracy of a police state or the [corporate] offices of a thoroughly nasty business concern.55


Monopoly-finance capital theory is a far more advantageous theoretical position than MISS to explain the dysfunctions of social development. One way to think about the contrast is to recall that Baran and Sweezy argue that the excess surplus can be absorbed in three basic ways: (1) consumed, (2) invested, and (3) wasted. MISS has various theories and policies recommendations, but they all pivot upon an attempt to use fiscal policy to stimulate private investment, and in some cases expand public investment.

The logic of monopoly-finance capital theory shows that such attempts to stimulate private and public investment fail to address the deeper political, sociological, and economic causes of the problem. The excess capacity theory suggests in concert with Summers and Krugman, that lower real interest rates would be necessary to spur autonomous investment. However, in monopoly-finance capital theory lower real interest rates are not a solution. Low real interest rates would most likely lead not far down the road to further overaccumulation and stagnation and added financialization.

What of public investment in infrastructure and non-defense spending more generally, and progressive job creation policy? I believe this is capable of successfully absorbing excess surplus without increasing excess capacity of giant firms.56 The problem here, as enunciated above, is that the political power structure of the monopoly-finance capitalistic system quickly builds opposition to any increase in fiscal spending, such as health care, housing, poverty relief, or job programs.57 It is the logic of monopoly-finance capitalism itself that circumvents and prohibits it.58 Hence, fiscal spending becomes more and more irrational and destructive by means of military spending, war, and imperialism.59

Thus, I believe all the policy recommendations of MISS will fall short. The collection Secular Stagnation: Facts, Causes and Cures simply demonstrates how ill-equipped neoclassical economics is to understand the systemic tendencies towards secular stagnation and the waste that is generated, causing additional political, sociological, and economic contradictions.60

The surplus absorption will continue through the avenues of the systems of waste—primarily finance. This means that we can expect low GDP, weak growth, and high unemployment as predicted in MISS. However, it does not mean that financial instability and socioeconomic crises are imminent. The social power relations are likely to continue patterns of stagnant incomes for working Americans, persistent underemployment, and worsening income and wealth inequality.

Fighting for an “economic bill of rights,” and public fiscal spending aimed at augmenting human well-being, requires “historical perspective, courage to face the facts, and faith in mankind and its future. Having these, we can recognize our moral obligation to devote ourselves to fighting against an evil and destructive system which maims, oppresses, and dishonors those who live under it, and which threatens devastation and death to millions of others around the globe.”61


  1. Harry Magdoff and Paul M. Sweezy, Stagnation and the Financial Explosion (New York: Monthly Review Press, 1987), 33; Lawrence Summers, “Why Stagnation Might Prove to be the New Normal,” Financial Times, December 15, 2013,; Lawrence Summers, “U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound,” Business Economics 49, no. 2 (2014),
  2. Hansen more frequently referred to “stagnation” than “secular stagnation,” though his theory became associated with the latter term, perhaps because of a famous essay by Harvard economist Alan Sweezy. In Monthly Review the terms were used interchangeably for decades, though usually, as in the stagnation theory of the 1930s–’50s, focusing on “stagnation” alone without the adjective. See Alvin H. Hansen, Full Recovery or Stagnation (New York: W.W. Norton, 1938); Alan Sweezy, “Secular Stagnation?,” in Seymour Harris, ed., Postwar Economic Problems (New York: McGraw Hill, 1943), 67–82; Paul M. Sweezy, “Why Stagnation?,” Monthly Review 34, no. 2 (June 1982): 1–10; John Bellamy Foster, “Is Monopoly Capitalism An Illusion?,” Monthly Review 31, no. 4 (September 1981): 36.
  3. John B. Taylor, “The Economic Hokum of ‘Secular Stagnation’,” Wall Street Journal, January 1, 2014,; Paul Krugman, “Secular Stagnation, Coalmines, Bubbles, and Larry Summers,” New York Times, November 13, 2013,; Michael Spence, “The Real Challenges to Growth,” Project Syndicate, January 23, 2014,
  4. Robert J. Gordon, Beyond the Rainbow (Princeton: Princeton University Press, 2015); Barry Eichengreen, Hall of Mirrors (Oxford: Oxford University Press, 2015); James K. Galbraith, The End of Normal (New York: Simon and Schuster, 2014).
  5. Gauti B. Eggertsson and Neil R. Mehrotra, “A Model of Secular Stagnation,” NBER Working Paper No. 20574, October 2014,; Thomas Piketty, Capital in the Twenty-First Century (Cambridge: Harvard University Press, 2014); John Bellamy Foster and Michael D. Yates, “Piketty and the Crisis of Neoclassical Economics,” Monthly Review 66, no. 6 (November 2014): 1–24; Coen Teulings and Richard Baldwin, ed., Secular Stagnation: Facts, Causes and Cures (London: Center for Economic Policy Research Press, 2014),
  6. Robert J. Gordon, “Is U. S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds,” NBER Working Paper 18315, August 2012,; Robert J. Gordon, “The Demise of U. S. Economic Growth: Restatement, Rebuttal, and Reflections,” NBER Working Paper No. 19895, 2014,; Robert J. Gordon, Beyond the Rainbow (Princeton NJ: Princeton University Press, 2015); Garry Kasparov and Peter Thiel, “Our Dangerous Delusion of Tech Progress,” Financial Times, November 2012, 8,
  7. Joseph A. Schumpeter, Capitalism, Socialism and Democracy, (New York: Harper and Brothers, 1950, originally 1942), 111–21.
  8. John B. Taylor, “The Economic Hokum of ‘Secular Stagnation'”; Scott R. Baker, Nicholas Bloom, and Steven J. Davis, “Measuring Economic Policy Uncertainty,” Chicago Booth Research Paper No. 13-02, January 1, 2013,; Scott Baker, Nicholas Bloom, and Steven Davis, “Economic Policy Uncertainty Index,”, January 15, 2015.
  9. Summers in Teulings and Baldwin, eds., Secular Stagnation, 35; Krugman, in Teulings and Baldwin, ed., Secular Stagnation, 63.
  10. Summers in Teulings and Baldwin, eds. Secular Stagnation, 32; Summers, somewhat distinct from Krugman, argues the primary financial forces prohibiting negative real interest rates are currency substitution and financial instability. But this merely begs the question: What has lowered the real rate of interest?
  11. Glaeser, in Teulings and Baldwin, eds., Secular Stagnation, 74, 73.
  12. Ibid, 74, 78, 75, 76.
  13. Ibid, 76.
  14. Ibid, 69–78.
  15. Eichengreen, in Teulings and Baldwin, eds., Secular Stagnation, 44–45.
  16. Carmen M. Reinhart and Kenneth Rogoff, “Growth in a Time of Debt,” National Bureau of Economic Research, Working Paper 15639, 2010, For a devastating critique of Reinhart and Rogoff, see Thomas Herndon, Michael Ash, and Robert Pollin, “Does High Public Debt Consistently Stifle Economic Growth?,” Political Economy Research Institute, Working Paper Series 322, December 2013,; Carmen M. Reinhart, Vincent Reinhar, and Kenneth Rogoff, “Dealing with Debt,” paper presented at the NBER International Seminar on Macroeconomics, Riga, Latvia, June 27–28, 2014 (revised August 2014),; Stephanie Lo and Kenneth Rogoff, “Secular Stagnation, Debt Overhang and Other Rationales for Sluggish Growth, Six Years On,” June 27, 2014,; Jeffry Frieden, “The Political Economy of Adjustment and Rebalancing,” April 2014,; Ana Fostel and John Geanakoplos, “Reviewing the Leverage Cycle,” Cowles Foundation Working Paper 1918, September 24, 2013,; John Geanakoplos and Felix Kubler, “Why is Too Much Leverage Bad for the Economy?,” Cowles Foundation Working Paper, October 17, 2013,; Carmen M. Reinhart, Vincent Reinhart, and Kenneth Rogoff, “Public Debt Overhangs: Advanced-Economy Episodes Since 1800,” Journal of Economic Perspectives 26, no. 3 (2012): 69–86; Carmen M. Reinhart and Kenneth Rogoff, “The Aftermath of Financial Crises,” American Economic Review 99 (May, 2009): 466–72, and This Time Is Different (Princeton: Princeton University Press, 2009).
  17. Atif Mian and Amir Sufi, House of Debt (University of Chicago Press, 2014).
  18. Michał Kalecki, Theory of Economic Dynamics (New York: Monthly Review Press, 2008, originally 1954).
  19. Josef Steindl, Maturity and Stagnation in American Capitalism (New York: Monthly Review Press, 1976, originally 1952).
  20. Alvin Hansen, “The Stagnation Thesis,” in Readings in Fiscal Policy, eds., Arthur Smithies and J. Keith Butters (Homewood, IL: Richard D. Irwin, 1955), 540–57.
  21. Steindl, Maturity and Stagnation in American Capitalism, 245.
  22. Ibid, 123.
  23. Paul M. Sweezy, “Maturity and Stagnation in American Capitalism,” Econometrica 22, no. 4 (October 1954): 531–33; Alvin H. Hansen, “Growth or Stagnation in the American Economy,” Review of Economics and Statistics 36, no. 4 (November 1954): 409–14.
  24. Josef Steindl, “On Maturity in Capitalist Economics,” in John Bellamy Foster and Henryk Szlajfer, eds., The Faltering Economy (New York: Monthly Review Press, 1948), 174–75.
  25. Paul A. Baran and Paul M. Sweezy, Monopoly Capital (New York: Monthly Review Press, 1966), 109, 88.
  26. John Bellamy Foster, “What is Stagnation?” in Robert Cherry, et al., The Imperiled Economy (New York: Union for Radical Political Economics, 1987), 61.
  27. Baran and Sweezy, Monopoly Capital, 108.
  28. Michał Kalecki, Essays in the Theory of Economic Fluctuations (New York: Russell and Russell, 1939), 149.
  29. Baran and Sweezy, Monopoly Capital, 108.
  30. Ibid, 78.
  31. John Bellamy Foster, The Theory of Monopoly Capitalism, new edition (New York: Monthly Review Press, 2014), 94, 89.
  32. Ibid, 12.
  33. Baran and Sweezy, Monopoly Capital, 115–41; 151–217; 139–41.
  34. Paul M. Sweezy, “Monopoly Capital After Twenty-Five Years,” Monthly Review 43, no. 7 (1991): 52–57; “Investment Banking Revisited,” Monthly Review 33, no. 10 (1982): 1–12; Paul M. Sweezy and Harry Magdoff, The Dynamics of U.S. Capitalism (New York: Monthly Review Press, 1972); Harry Magdoff and Paul Sweezy, “Production and Finance,” Monthly Review 35, no. 1 (1983): 1–13, and Stagnation and the Financial Explosion.
  35. Costas Lapavitsas, Profiting Without Producing (London: Verso, 2013): 15–20; John Bellamy Foster and Fred Magdoff, The Great Financial Crisis (New York: Monthly Review Press, 2009); John Bellamy Foster and Robert W. McChesney, The Endless Crisis (New York: Monthly Review Press, 2012). See also references in note 34.
  36. Lapavitsas, Profiting Without Producing, 23.
  37. Sweezy and Magdoff, The Dynamics of U.S. Capitalism, 7–29; Foster and McChesney, The Endless Crisis, 29–64; Baran and Sweezy, Monopoly Capital, 14–51; Magdoff and Sweezy, “Production and Finance,” 1–13.
  38. Magdoff and Sweezy, Stagnation and the Financial Explosion; Foster and Magdoff, The Great Financial Crisis; Foster and McChesney, The Endless Crisis.
  39. Paul M. Sweezy, “The Triumph of Financial Capital,” Monthly Review 46, no. 2 (1994): 1–11.
  40. Foster and Magdoff, The Great Financial Crisis, 5–6.
  41. Paul M. Sweezy, The Theory of Capitalist Development (New York: Monthly Review Press, 1970, originally 1942).
  42. John Bellamy Foster and Hannah Holleman, “The Financial Power Elite,” Monthly Review vol. 62, no. 1 (May 2010): 1–19.
  43. Kalecki, Essays in the Theory of Economic Fluctuations, 149.
  44. István Mészáros, Beyond Capital (London: Merlin Press, 1995), 844; Fred Magdoff and John Bellamy Foster, “Stagnation and Financialization,” Monthly Review 66, no. 1 (May 2014): 1–24; Hans G. Despain, “It’s the System Stupid,” Monthly Review 65, no. 6 (2013): 39–44; Paul Le Blanc and Michael D. Yates, A Freedom Budget for All Americans (New York: Monthly Review Press, 2013).
  45. György Lukács, Political Writings, 1919–1929 (London: NLB, 1972), 15.
  46. Thomas I. Palley, Financialization: The Economics of Finance Capital Domination (New York: Palgrave MacMillan, 2014), 201.
  47. Wolfgang Streeck, Buying Time: The Delayed Crisis of Democratic Capitalism (London and New York: Verso, 2014), viii.
  48. Palley, Financialization, 212.
  49. Mészáros, Beyond Capital, 844, 893.
  50. Larry M. Bartels, Unequal Democracy (Princeton and Oxford: Princeton University Press, 2008), 286; James K. Galbraith, The Predator State (New York: Free Press, 2008); Joseph E. Stiglitz, The Price of Inequality (New York: W.W. Norton, 2012): 28–51.
  51. Adam Bonica, “Avenue of Influence,” June 20, 2014,; Bartels, Unequal Democracy, 283–302; Robert A.G. Monks, Citizens DisUnited (New York: Miniver Press, 2013), and Corpocracy (New York: Wiley, 2007).
  52. Streeck, Buying Time, 57; Samuel Bowles and Herbert Gintis, Democracy and Capitalism (New York: Basic Books, 1986): 3–26; Baran and Sweezy, Monopoly Capital, 155.
  53. Galbraith, The Predator State, 131–48.
  54. Colin Mayer, Firm Commitment (Oxford: Oxford University Press, 2013), 9; Bartels, Unequal Democracy, 284; Galbraith, The Predator State, 144.
  55. C.S. Lewis, “Preface to the 1961 edition,” in Screwtape Letters (New York: HarperCollins Publishers, 2013), xxxvii.
  56. Hans G. Despain, “Pragmatic Employment Policy,” Post Keynesian Economics Forum, November 2012, The issue here is that the institutional historical development of monopoly-finance capital will either necessarily: (1) become less and less capitalistic, or (2) become more and more wasteful, irrational and destructive. On the absorption of excess surplus, see John K. Galbraith, Economics and the Public Purpose ((Boston: Houghton Mifflin Company, 1973); Baran and Sweezy, Monopoly Capital, 154; Mariana Mazzucato, The Entrepreneurial State (London and New York: Anthem Press, 2013).
  57. John K. Galbraith comes to understand and begins advocating a simultaneous revolution in sociological relations, political order, and the economic physiology of society, see John K. Galbraith, Economics and the Public Purpose, 134–45, 215–324, and The Anatomy of Power (Boston: Houghton Mifflin Company, 1983). Baran and Sweezy dubbed Galbraith, “The prophet of prosperity without war orders”; see Monopoly Capital, 160.
  58. Baran and Sweezy, Monopoly Capital, 164–65, 155–77.
  59. Ibid, 336–67, 142, 178–217.
  60. John Bellamy Foster made this point in private correspondence, September 2014.
  61. Baran and Sweezy, Monopoly Capital, 367.
2015, Volume 67, Issue 04 (September)
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