Capitalism is stagnant because, rather than unprofitable firms going bust to create space for new upstarts, debt is being used to keep ‘zombie’ companies alive and maintain political stability.
Michael Roberts is an Economist in the City of London and a prolific blogger.
Cross-posted from Michael Roberts’ blog
The latest economic activity indicators called purchasing managers indexes (PMIs) confirm that the major economies are still crawling along – neither slipping into slump nor picking up pace. The global PMI stands at 52.4 in September (any score above 50.0 means expansion, any score below means contraction).
Source: JPM
In effect, the major economies remain in what I call a Long Depression that started after the Great Recession of 2008-9. In the last 17 years, economic expansion (as measured by real GDP, investment and productivity growth) has been well below the pre-2008 rate, with no sign of any step change. Indeed, after the pandemic slump of 2020, the rate of growth in all these indicators has slowed further. Whereas world real GDP growth averaged an annual 4.4% before the Great Recession of 2008-9, in the 2010s, it managed only 3% and since the 2020 pandemic slump, annual average growth has slowed to 2.7% a year. And remember, this rate includes the fast-growing economies of China and India. And also, in some key countries (the US, Canada, the UK) it has (until recently) been net immigration boosting the labour force that supported real GDP growth; per capita GDP growth has been much lower.
Source: IMF, World Bank
Above all, the profitability of capital in the major economies remains near a historic low and well below the level before the Great Recession.
Source: EWPT 7.0 series, AMECO, author’s calculation
In its latest economic forecast released last week, the IMF improved its forecast for global growth slightly, but still predicted a slowdown. “We now project global growth at 3.2 percent this year and 3.1 percent next year, a cumulative downgrade of 0.2 percentage point since our forecast a year earlier.” The IMF economists reckon US real GDP will rise just 2.0% this year, down from 2.8% in 2024, and then increase by just 2.1% next year. And that’s the best performance expected in the top G7 capitalist economies, with Germany, France, Italy and Japan likely to record less than a 1% increase this year and next. Canada will also slow to well under 2% – only the UK will improve (to a very modest 1.3% this year and next). But even these forecasts are in doubt as the outlook “remains fragile, and risks remain tilted to the downside”. The IMF is worried about: 1) a burst in the AI bubble; 2) a productivity slowdown in China; and 3) rising government debt and servicing.
The OECD economists are just as pessimistic. In its September Interim report on the world economy, the OECD expects global economic growth to slow to 3.2% in 2025 and 2.9% in 2026, down from 3.3% in 2024. Indeed, the OECD economists reckon that US real GDP growth will be at its slowest since the pandemic and so will China’s. And the euro area, Japan and the UK will grow just 1% or less. Growth in the US is expected at 1.8% in 2025 and 1.5% in 2026. China’s growth is seen easing to 4.9% in 2025 and 4.4% in 2026 – although that rate is still nearly three times as fast as the US and four times as fast as the euro area, which is projected to expand 1.2% in 2025 and 1.1% in 2026. Unlike the IMF, the OECD expects the UK to slow to just 1% a year in 2026, while Japan is forecast at 1.1% and 0.5% over the same period.
The UN’s trade and development agency (UNCTAD) has also released an advanced preview of its Trade and Development Report 2025. It makes for sober reading on the prospects for global growth and trade. UNCTAD economists see “faltering global growth which shows no signs of picking up in the near term. Global output growth continues to lag behind pre-pandemic trends. Momentum remains fragile and clouded by uncertainty. Investor anxiety has boosted financial markets, but not productive investment.”
Nevertheless, the major economies have not slipped into a new slump as experienced in 2008-9 and in the 2020 pandemic slump. Instead, the crawl has resumed. But neither does capitalism show any signs of leaping forward: the major economies are increasingly stuck in a period of ‘stagflation’ ie stagnating growth alongside rising inflation.
Why is this? In the Marxist theory of crises, a long boom would only be possible if there was a significant destruction of capital values, either physically or through price devaluation, or both. Joseph Schumpeter, the Austrian economist of the 1920s, taking Marx’s cue, called this ‘creative destruction’. By cleansing the accumulation process of obsolete technology and failing and unprofitable capital, new innovatory firms would prosper, boosting the productivity of labour and delivering more value. Schumpeter saw this process as breaking up stagnating monopolies and replacing them with smaller innovating firms. In contrast, Marx saw creative destruction as raising the rate of profitability as the small and weak were eaten up by the large and strong.
For Marx, there were two parts to ‘creative destruction’. There was the destruction of real capital “in so far as the process of reproduction is arrested, the labour process is limited or even entirely arrested and real capital is destroyed” because the “existing conditions of production …are not put into action”, ie firms close down plant and equipment, lay off workers and/or go bust. The value of capital is ‘written off’ because labour and equipment etc are no longer used.
In the second case, it is the value of capital that is destroyed. In this case “no use value is destroyed.” … instead, “a great part of the nominal capital of society ie of exchange value of the existing capital, is completely destroyed.” And there is a fall in the value of state bonds and other forms of ‘fictitious capital’. The latter leads to a “simple transfer of wealth from one hand to another” (those who gain from falling bond and stock prices from those who lose).
Marx argued that there is no permanent slump in capitalism that cannot be overcome by capital itself. Capitalism has an economic way out if the mass of working people do not gain political power to replace the system. Eventually, through a series of slumps, the profitability of capital could be restored sufficiently to start to make use of any new technical advances and innovation. That happened after the end of WW2, when the profitability of capital was very high and companies could thus confidently invest in the new technologies developed during the depression of the 1930s and the war. If profitability could be raised sharply now in 2025, then the diffusion of new technologies like AI that are already ‘clustering’ in the current depression could possibly take off and create a step change in the productivity of labour in the major economies.
This theory of creative destruction has been taken up by mainstream economists. Recent Nobel (Riksbank) prize winners for economics, Philippe Aghion and Peter Howitt noted that the speed of the rise of new firms with new technology and the fall of old firms with old technology is positively correlated with labour productivity growth.“This could reflect the direct contribution of creative destruction and possibly also an indirect effect of creative destruction on incumbent efforts to improve their own products.” But there is no role for profitability in this mainstream theory of creative destruction. Aghion and Howett stick closely to the Schumpeter view of innovation by small firms. However, Aghion and Howett do note that firm exit and entry rates into sectors have both fallen in the US in recent decades. The employment share of new entrants (firms less than five years old) fell from 24% to 15%. In other words, the main form of reviving capitalist investment and production has dissipated. As ‘creative destruction’ is an essential contributor to growth, “this declining ‘business dynamism’ has contributed to the slow and disappointing US productivity growth”.
AI and other new technologies, even if they are effective (and that is in doubt), will not deliver sustained and higher growth because there has been no ‘creative destruction’ since 2008. Instead, there has been an unprecedented expansion of cheap credit money to support businesses, large and small, in an attempt to avoid slumps. There has been no collapse in stock and bond prices or massive corporate bankruptcies – on the contrary, new record highs in financial and property assets are continually reached. Instead of liquidation, there have been a growing number of corporate ‘living dead’ or zombie capitals, which do not make enough profit to service their debts and so just borrow more. There is also a sizeable layer of ‘fallen angels’, ie corporations with mounting debts that could soon make them zombies too.
Back at the start of the Great Depression of the 1930s, there was a division of opinion among the strategists of capital on what to do. The then Treasury Secretary Andrew Mellon told the then President Hoover to ‘Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.’ He said: ‘It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.’ But just as now, the liquidation policy was rejected by the rest of administration, not because it was wrong economically, but for fear of the political repercussions. Hoover was nevertheless opposed to planning or government spending to mitigate the slump. “I refused national plans to put the government into business in competition with its citizens. That was born of Karl Marx. I vetoed the idea of recovery through stupendous spending to prime the pump. That was born of a British professor. I threw out attempts to centralize relief in Washington for politics and social experimentation.”
Perhaps the only recent policy example of ‘liquidation’ is the attempt of President Milei in Argentina. But his drastic cuts in the public sector, while sustaining high interest rates and restricting the money supply, have not produced any ‘creative’ outcome. Instead, his attempt to ‘cleanse’ the system of Argentina’s ‘unnecessary’ spending, unproductive workers and weak firms, to make the economy ‘leaner and fitter’, has pushed the Argentine peso currency to the edge of collapse, as foreign exchange reserves run out and facing huge FX debts soon needing to be paid back. So Trump and his Treasury Secretary Bessent have come to Milei’s aid with a bailout, just as the US banks got in 2008. Again, fear of the fall of Milei has led to the opposite of liquidation.
And the result is more debt. In trying to avoid slumps, governments and central banks have pumped in money and allowed companies and governments to build up debt. Global debt has reached nearly $340trn, up a massive $21 trillion so far this year, as much as the rise during the pandemic. Emerging markets accounted for $3.4 trillion of the increase in Q2, pushing their total debt to $109 trillion, an all-time high. The total debt-to-GDP ratio now stands at 324%, down from the peak in the pandemic slump, but still above pre-pandemic levels.
To solve the growth and debt problem, the IMF calls for cuts in public spending (“governments must not delay further. Improving the efficiency of public spending is an important way to encourage private investment.”) ie destruction; while pushing for increased support to the capitalist sector (“Governments should empower private entrepreneurs to innovate and thrive.”) ie creation. The destruction here is only in public services and welfare, while the private sector can expect more of the same: low interest rates, tax cuts and subsidies to ‘empower private entrepreneurs’.
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