The cycles of the economy

[00:00:00] It was produced, the Great Depression was produced by a failure of government, by a failure of monetary policy. It was produced by a failure of the Federal Reserve System to act in accordance with the intentions of those who established it. It was produced by a failure of the Federal Reserve System despite the presence of knowledge on the part of many of the people in the system about the right course of action.

[00:00:27] This is the Debunking Economics podcast with Steve Keen and Phil Dobbie.

[00:00:35] Well, wow, the Great Depression was caused by the wrong monetary policy. Well, that's according to Milton Friedman anyway. But what really causes recessions and then the growth back in the economy? Why do we have these cycles? And how do we get rid of them? Or is it something we just have to live with? Is it the natural order of things?

[00:00:56] We'll look at that today on the Debunking Economics podcast.

[00:01:08] So, Steve, business, what actually causes business cycles? I mean, it seems obvious in a way that when we're on the up, all is good. You know, you've got consumers are confident they're spending money, more people are being employed because businesses are expanding, there's more demand for stuff.

[00:01:23] Those businesses are confident. So, they are investing in the future for growth to sell to those confident consumers. Investors are investing because they know they're going to get returns from these businesses that they're investing in. But obviously, I mean, that's the good times. I mean, obviously, that can't go on forever. It's like a virtuous cycle that must break at some point because you're just going to reach capacity constraints at some point.

[00:03:20] So, the economy slows down and therefore, as well as the rate of growth falling, so does the bargaining power of workers.

[00:03:28] And then you get to a point where you fall back into a slump again. And he then said, and this is one of my favorite lines in Capital. I haven't got it right in front of me, but I'll get it roughly right.

[00:03:39] He says, whether the level of wages shall be equal to above or below, that which applied before the process began.

[00:03:47] So, what he was talking about is cycles in Capital is driven by struggles over the distribution of income.

[00:03:54] And that is basically, that is by far, no, not by far, but is one of the two major contributors to what gives us cycles in the first place.

[00:04:05] But that's interesting, isn't it? Because that is saying we've got growth. We've got people with money.

[00:04:10] You know, the people have got enough wages to be able to spend to buy more stuff.

[00:04:15] But the investors are saying, yeah, but even though we're seeing that growth, we're still going to cut back on our investment because we are not getting quite the same returns.

[00:04:26] Because more of the profit is being taken by these workers because they've got more bargaining power.

[00:04:32] That's a bit of a cut your nose off to spite your face sort of attitude, isn't it?

[00:04:36] Welcome to capitalism.

[00:04:38] But yeah, that is what's been happening.

[00:04:41] That's the fundamental cycle, electrical driver in capitalism.

[00:04:46] And another one is just that there's, you know, when we talk about GDP and output, I mean, I do it all the time.

[00:04:51] I do it in my own models as well.

[00:04:52] We have the single number that we use to represent a level of economic activity.

[00:04:58] And for those who know that this is a bit of an absurd abstraction, one of the terms that's used for that is widgets.

[00:05:06] You know, we eat widgets.

[00:05:08] We buy and sell widgets.

[00:05:10] We use widgets to make machines that make widgets, et cetera, et cetera.

[00:05:13] When you've eaten them, it's very difficult passing those widgets, I find.

[00:05:16] Yeah, they tend to get stuck, yeah.

[00:05:19] But that is obviously an abstraction.

[00:05:21] There are hundreds and thousands, if not millions, of different commodities produced in capitalism, all by capitalists, you know, different capitalists in different factories with different rates of growth, with different capacity, expect, et cetera.

[00:05:38] And therefore, the very multi-commodity, multi-sectoral nature of capitalism also will give you cycles.

[00:05:46] So cycles are endemic.

[00:05:47] This is something which economists should have accepted, you know, a century.

[00:05:52] Well, when Marx first came out, that was 1867.

[00:05:55] So we've been denying this for 150 years, that the system is inherently cyclical.

[00:06:02] And the cycles are driven by distribution of income and by the multi-commodity nature of production.

[00:06:09] Right.

[00:06:09] So if you hadn't followed Marx on that, and you were just thinking, you know, well, what happens in your own head?

[00:06:15] I mean, what Marx says makes perfect sense.

[00:06:18] But it means, yeah, it's the investors that are driving the downward cycle and nobody else.

[00:06:23] But you'd be – but I wonder whether the impact's the same for, you know, the other way you'd think about it, which is that if you keep on getting demand, you get rising demand, you keep on getting growth,

[00:06:32] at some point, the resources, the base resources, whether it's agriculture or whether it's, you know, base metals, whatever it might be, or labour itself, you reach a constraint on that.

[00:06:44] You reach the maximum level.

[00:06:46] And that means all of a sudden those resources, including labour, become more expensive.

[00:06:51] It sort of amounts to almost the same thing, doesn't it?

[00:06:54] The investors – but it's investors are making that decision.

[00:06:57] But the net effect is if there's a shortage of resources, then you get inflation.

[00:07:03] If you get investors pulling back, there's less produced, and yet there's still the demand because people have still got those jobs for that interim period, you get inflation.

[00:07:12] Either way, inflation becomes a consequence of this, doesn't it?

[00:07:15] It becomes a – but funnily enough, the normal effect of rising economic activity on inflation is to reduce it, not to increase it.

[00:07:23] This is another one of these little curly elements of reality that conventional theory tends to miss because most corporations have excess capacity.

[00:07:34] And as you increase economic activity in general, then the level of excess capacity falls.

[00:07:40] And now because that capacity reflects very high levels of overheads and fairly constant variable costs, the opposite of the fantasy that economists have of rising marginal cost, you have a falling per unit cost of production.

[00:07:55] And it's actually possible for capitalists to cut margins without cutting the total level of profit because the fall and overhead cost compensates for any fall in the market.

[00:08:06] So ironically, most of the time – and this is actually found by a couple of arch-reactionary economists.

[00:08:13] It doesn't do them justice to call them conservative.

[00:08:15] Arch-reactionary economists called Kiddleton and Prescott who used some statistical techniques that they developed to analyze the business cycle.

[00:08:25] And they came out with a paper called – I think it was called Business Cycles, Real Facts and a Monetary Myth.

[00:08:32] And everything they concluded contradicted their basic theory.

[00:08:35] But they found that, generally speaking, an increase in economic activity went with a fall in the rate of inflation.

[00:08:41] But the point you're talking about, the point which does make sense is that there are some things which we don't produce.

[00:08:48] We simply grab them out of the ground.

[00:08:50] I think they're called fossil fuels.

[00:08:53] And for things like coal, I mean –

[00:08:55] Or food as well.

[00:08:58] Food.

[00:08:59] Yeah, well, you can't dramatically increase the amount of food in the same way you can increase the output of a manufacturing firm.

[00:09:06] That's true.

[00:09:07] But it's mainly oil because oil is something which – in the old days, when you – the old Beverly Hillbillies day, fire a shotgun at a rabbit and you manage to get oil coming out of the ground.

[00:09:21] You didn't have great energy inputs necessary to pull that oil out of the ground.

[00:09:27] But now you do because we've got to go down, you know, two and three kilometers.

[00:09:32] And you're still trying to control the stuff from blowing up your rig.

[00:09:35] I mean, that's – it gushes out.

[00:09:38] They call them gushers for a reason or they're used to.

[00:09:40] But you've still got to put more energy in to get the fuel across.

[00:09:44] You can't change the available supply that radically.

[00:09:49] So those commodities tend to be hit by supply and demand.

[00:09:53] And they – the conventional way people think about it.

[00:09:56] And that will cause you increasing costs as well.

[00:09:58] What it fundamentally means is that when you have rising economic activity, it's both workers and raw material producers who get the upper hand compared to manufacturing capitalists.

[00:10:07] And that will – that increase in prices will also bring the – shift the distribution of income and bring the berm to an end.

[00:10:14] So – and how often does that happen?

[00:10:16] I mean, because that is very different to Marxist theory, isn't it?

[00:10:18] I'm just wondering how many times actually we've had a recession which has been brought about because that, you know, that resource that you're talking about, oil, the price of that just becomes too high.

[00:10:27] Supply becomes restrained.

[00:10:29] Maybe actually also, you know, it's not the cycle itself.

[00:10:33] It is the behaviour of wars in the Middle East or the threats of – you know, how much has oil had a part to play in all of this?

[00:10:41] I think it turned up in the 1973 experience.

[00:10:45] Yeah.

[00:10:45] Okay.

[00:10:45] And we also confined it to some extent in 2007.

[00:10:51] So, you know, and it will be – largely it'll be a capacity whether you have the buffers who are able to absorb more oil output and transmit that through to the production line.

[00:11:01] But fundamentally, the point that Marx made about income economic activity changing the bargaining power over the distribution of income and then enabling that to shift in such a way that capitalists have less profit than they expected.

[00:11:15] And despite the fact that demand is still there, the returns they were expecting aren't turning up and they can invest less than you have a downturn.

[00:11:23] Now, that's leaving out the financial system, of course, which we haven't spoken about yet.

[00:11:27] Yeah, which obviously we'll get on to that.

[00:11:29] And, you know, the role of monetary policy, I would delight that will be.

[00:11:33] But this idea that Marx is putting there, it still seems very strange to me that a – because businesses obviously will always want more demand for their goods.

[00:11:45] So although they may not want to pay more money to people, they do want people to have money to be able to buy the goods that they produce.

[00:11:53] So their return, their rate of return might slow.

[00:11:56] But if the demand is growing, surely they'll be there saying, well, okay, we're making less pair widget we sell.

[00:12:03] But, hey, look at the demand for widgets.

[00:12:05] Let's keep on investing.

[00:12:07] For them to actually say, well, no, let's do the whole power play thing here.

[00:12:10] Let's show who's in charge.

[00:12:12] Let's get these workers back in their box.

[00:12:14] Let's get them buying less.

[00:12:17] Let's give them lower wages so we can get our returns up.

[00:12:21] It doesn't necessarily mean their profits are going to be better, though, does it?

[00:12:24] Well, it's cutting – it does mean their profits fall.

[00:12:28] If you have the increase – you know, if you break society down to a set of social classes, and this is what Marx did in that particular chapter,

[00:12:35] anybody looking for a buy, it's on page 431 of the Progress Press version of Capital.

[00:12:44] I love this.

[00:12:45] We've become a podcast with footnotes now.

[00:12:47] Yeah, you go.

[00:12:48] I can't help it.

[00:12:48] Sorry, I'm an academic.

[00:12:50] But the basic point you made was that it's an investment-driven system.

[00:12:54] The motive for pre-investment is the rate of profit.

[00:12:57] And if you have things which change the distribution so the rate of profit falls, even though you're in a boom,

[00:13:04] then that will mean there's less investment and the system falls down.

[00:13:08] And I'll read a bit of Carl Adler.

[00:13:11] Let's even get worse and put some of these actual quoted systems in the podcast.

[00:13:15] It is these absolute movements of the accumulation of capital,

[00:13:19] which are reflected as relative movements of the massive exploitable labor power – there's an obvious Marx term for you –

[00:13:24] and therefore seem produced by the latter's own independent movement.

[00:13:28] And this is the point I love.

[00:13:29] To put it mathematically, the rate of accumulation is the independent, not the dependent variable.

[00:13:35] The rate of wages, the dependent, not the independent variable.

[00:13:39] In other words, investment and the decisions of capitalists to invest are in the driving seat of capitalism.

[00:13:46] And if they go up, wages will fall.

[00:13:48] And if they go down, wages will – pardon me.

[00:13:51] If they go up, wages rise.

[00:13:53] If they go down, wages fall.

[00:13:54] So what's in the driving seat is the desire to invest.

[00:13:58] And if that gets cut back by a change in the distribution of income caused by excessive growth,

[00:14:05] or rather growth, growth that leads to the bargaining power of workers rising

[00:14:10] or raw material producers rising or bankers rising,

[00:14:14] then the amount left over for capitalists who invest will fall and the system will flow down.

[00:14:18] And that is the endogenous reason, isn't it?

[00:14:21] What about exogenous reasons?

[00:14:23] It still obviously becomes the investor's decision, doesn't it?

[00:14:26] If there's some sort of exogenous shock.

[00:14:28] I'm not sure if there ever are, but we can talk about that.

[00:14:30] But if there are, then it becomes the investor's decision.

[00:14:34] So you get the same result.

[00:14:35] It's just the cause is from outside the system.

[00:14:38] Well, that's actually – that's where economic went wrong because what Marx was talking about

[00:14:42] was an endogenous cause of cycles.

[00:14:45] And eminent sense – and it sits up in the data – and I can actually generate those cycles

[00:14:49] in my Ravel software by working from strictly true economic definitions.

[00:14:55] In fact, I'm taking that through in this set of lectures I'm giving at the moment.

[00:14:59] So that is saying the system is inherently cyclical.

[00:15:02] Now, the obsession with neoclassical economists is, oh, no, it inherently says there was equilibrium.

[00:15:08] Now, that's garbage.

[00:15:09] But that hang-up means the only explanation they've got left is exogenous shocks.

[00:15:15] And that's what the whole basis of conventional economic theory is about at the moment,

[00:15:20] all the mathematical models.

[00:15:21] The only cause of cycles from their point of view are exogenous shocks.

[00:15:26] And the only exogenous shock of any significance that's come through it in the last one and a half centuries was COVID.

[00:15:34] They didn't handle that one all that well, did they?

[00:15:36] No, they didn't.

[00:15:36] And actually – but they would also call oil prices an exogenous shock, which obviously they're not

[00:15:43] because the price is determined –

[00:15:44] They're part of the system.

[00:15:45] Yeah, exactly.

[00:15:47] But, I mean, that would be their terminology for it, wouldn't it, as the get-out clause?

[00:15:51] Yeah, I mean – and this is why macroeconomic theory is so deficient.

[00:15:56] And this is a wonderful paper by Paul Romer, who got the Nobel Prize in the same year that

[00:16:02] bloody William Waterhouse got it for his garbage on climate change.

[00:16:05] But just before he got the Nobel Prize, he published a paper called The Trouble with Macroeconomics.

[00:16:10] It's still online.

[00:16:10] If you search for Romer, Trouble with Macroeconomics, you can still find it.

[00:16:14] And he goes through saying what it was like trying to deal with these people to believe

[00:16:18] the cycles were archived by exogenous shocks.

[00:16:21] And he said it was like – he actually sent them up and talked about them having views

[00:16:26] about phlogiston and trolls, and it's a wonderful satirical paper, because they can never actually

[00:16:33] explain what causes the exogenous shocks.

[00:16:35] And the reason is they don't define the boundaries of the system properly, so they define oil price

[00:16:41] rises as exogenous shocks when they're clearly part of the capitalist system.

[00:16:46] So, yeah, you have to have an endogenous explanation of cycles, or you haven't got one at all.

[00:16:51] And, yeah, I mean, it's hard to explain – well, I mean, you could explain COVID.

[00:16:54] You know, the economy has drawn us too close to animals, and so in a way maybe that's a bit

[00:16:59] endogenous as well.

[00:17:00] But similarly with wars seen as exogenous shocks.

[00:17:02] But really, wars very often have an economic story behind them.

[00:17:06] It's distribution of wealth and the consequences of it, which, you know, creates politics,

[00:17:12] you know, creates vacuums that these dictators managed to fill, which creates wars.

[00:17:17] So, yeah, it all becomes endogenous if you want to look deep enough, doesn't it?

[00:17:21] Yeah.

[00:17:21] I mean, you know, if we had a medial strike, we could actually – I think we can call that

[00:17:25] exogenous.

[00:17:25] But, you know, most of the stuff are going to end up being endogenous.

[00:17:29] But unless you have an endogenous explanation, you haven't got an explanation at all.

[00:17:33] And unfortunately, because conventional economics works with the assumption that the system has

[00:17:39] towards equilibrium, then the other explanation they've got for sustained cycles are exogenous

[00:17:44] shocks.

[00:17:45] And economics went wrong in that particular point right back in the 1930s during the Great

[00:17:49] Depression, when that was the choice that economists faced.

[00:17:53] And one of the – the guy who actually founded the Journal of Econometrics, one of the – Ragnar

[00:18:00] Frisch, one of the first winners of the Nobel Prize as well, he went the exogenous shock

[00:18:05] route.

[00:18:06] And then ever since then, economists have been trying to get models that – mainstream economists

[00:18:10] have been trying to get models involving exogenous shocks to reproduce the cyclicality of capitalism.

[00:18:15] They can fit all the numbers to make it fit the past data.

[00:18:19] But they're never able to handle it when there's a change in something like, for example, the

[00:18:25] level of credit, which is what caused the 2007 crisis.

[00:18:29] They can't see it coming because it's not in their models.

[00:18:31] It's endogenous, but they assume equilibrium.

[00:18:35] And bang, they get completely flummoxed and taken by surprise.

[00:18:38] With an endogenous explanation, you can nail it.

[00:18:41] And unfortunately, those morons are in charge of policy.

[00:18:45] And critics like myself are sitting on the outside watching them stuff up all the time.

[00:18:50] Well, let's – when we come back, let's look at how you get out of the situation.

[00:18:54] Once you're at the trough, what makes you climb back out of it?

[00:18:58] Is it again investors all of a sudden leap interaction or is there something – or is

[00:19:01] it the government or – or is it central banks, Steve?

[00:19:04] Are they the ones – are they the saviors?

[00:19:06] We'll look at that when we come back on the Debunking Economics Podcast.

[00:19:09] This is the Debunking Economics Podcast with Steve Keane and Phil Dobby.

[00:19:15] All right.

[00:19:20] So we are at the bottom of the business cycle.

[00:19:23] We are at the trough.

[00:19:24] How do we come out of it?

[00:19:25] Consumers aren't confident, so they're not spending money.

[00:19:28] People are getting laid off, so there's less demand.

[00:19:31] Businesses don't have the confidence and they'd rather cut costs rather than invest.

[00:19:36] So that just makes things worse.

[00:19:37] I don't know what investors are doing.

[00:19:39] I guess they're looking at other things to do with their money.

[00:19:41] They'll just sit on the cash and sort of wait it out.

[00:19:43] How do you get out of this downward cycle?

[00:19:46] Is – does the government have to be part of the answers?

[00:19:50] Obviously, central banks would say, well, you know what?

[00:19:52] We lower interest rates at this point and that means that people are more prepared to invest.

[00:19:58] But as we've said before, that is pointless, isn't it?

[00:20:00] Who's going to invest in a market which is stagnant irrespective of what the interest rates are?

[00:20:06] So maybe we can dismiss central banks as being the saviors in this case.

[00:20:09] This is the fact that systems cycles have turning points.

[00:20:14] There's something which, you know, anybody who works in biological mathematics has awareness of that.

[00:20:20] You're going to get cycles in predator and prey and cycles in, you know, your heart rhythms and everything else.

[00:20:26] In the biological orientation, you expect cycles.

[00:20:29] Anything without cycles is already dead.

[00:20:32] But it's very hard for economists to get their head around it.

[00:20:35] So I'm going to start with my favorite explanation as to why we can get into and out of a slump.

[00:20:41] But sometimes that goes wrong.

[00:20:43] And that's from Hyman Minsky.

[00:20:45] And his starting – and this is just a quote from the Financial Instability Apothesis,

[00:20:51] an Interpretation of Keynes and Alternative Standard Theory.

[00:20:56] And what he says is the natural starting point for analyzing – and this itself is an exception to usual thinking –

[00:21:05] the relation between debt and income is to take an economy with a cyclical past that is now doing well.

[00:21:13] The inherited debt structure reflects a period when the not-too-distant past when the economy did not do so well.

[00:21:20] But as the period over which the economy does well lengthens, two things become evident in boardrooms.

[00:21:26] Existing debts are easily validated and units that were heavily in debt prospered.

[00:21:30] It paid to lever.

[00:21:32] After the event, it becomes apparent the margins of safety were too great.

[00:21:36] As a result, over a period in which the economy does well, views about acceptable debt structure change.

[00:21:41] The acceptable amount of debt to be used in financing rises.

[00:21:45] This increase in the weight of debt financing raises the market price of capital assets, increases investment.

[00:21:51] And the economy is trending and transformed into a boom.

[00:21:54] That's all somewhat jargonistic perhaps.

[00:21:58] But this is something which I think most people have heard from Minsky.

[00:22:01] It's his most famous stage.

[00:22:03] It follows that the fundamental instability of a capitalist economy is upward.

[00:22:07] The tendency to transform doing well into a speculative investment boom is the basic instability in a capitalist economy.

[00:22:14] So what you get is finance being laid on top of that cycle between workers and capitalists.

[00:22:20] When you have a period of – you have a crisis, what we used to call a recession, the downturn makes – it leads to some companies being unable to pay their debts so they go bankrupt.

[00:22:32] That makes everybody cautious.

[00:22:37] The expectations become depressed to some extent.

[00:22:41] But then because you have depressed expectations, only investments which are very conservatively estimated are put forward for financing.

[00:22:51] And the banks are equally unwilling to extend their finance creating capabilities.

[00:23:00] So only investments which are conservative are put forward.

[00:23:05] Because the economy has recovered, they succeed.

[00:23:08] And because they succeed, that causes rising expectations again.

[00:23:13] So you go – and the breaking point, and this is where Irving Fisher's work comes in, is where you have such a level of private debt accumulated that you get to a point where even cutting the interest rate, even wages falling as the downturn begins, isn't enough to enable capitalists to finance their way out of the slump.

[00:23:36] And you go from a standard up a boom and bust cycle into a depression.

[00:23:41] And that was Irving Fisher's explanation for the Great Depression.

[00:23:44] So you can have these cycles which you go on indefinitely.

[00:23:48] But if you accumulate too much debt, then there will be a break and then down you go.

[00:23:53] And that's – having an understanding of that, having built mathematical models of it is why I came out and predicted that the financial crisis was going to happen back in 2006.

[00:24:03] Because of the private debt.

[00:24:04] But if you also – I mean, if you pay off that private debt, then you're paying it back to the – you know, if you're paying it back to banks – well, if it's debt, it's – you know, debt is debt.

[00:24:14] It's money that didn't exist before.

[00:24:16] You're paying back that money.

[00:24:18] That money is disappearing.

[00:24:19] It's harder to – harder to grow an economy in that situation, is it?

[00:24:23] Because there's money to be spent.

[00:24:24] And that's, again, Fisher's point.

[00:24:26] He said the more debtors pay, the more they owe.

[00:24:28] When you have a combination of too high level of private debt and inflation being too low, then as capitalists pay off the debt trying to get out of debt, they reduce the level of economic activity.

[00:24:41] And even though the level of debt itself can fall, the ratio of private debt to GDP rises.

[00:24:47] And that turns up in the American data as well.

[00:24:49] Well, you'll see a rising ratio of private debt to GDP in America from 1930 to 1933.

[00:24:55] But if you look at the debt data, debt was actually falling at the time.

[00:24:59] It was just falling more slowly than GDP itself was falling.

[00:25:02] Debt was falling at about 10% per annum.

[00:25:05] And GDP was falling at 25% per annum.

[00:25:07] So does that mean if you need more money to grow out of an economy?

[00:25:10] Well, I mean, two questions.

[00:25:11] One, I mean, investors – I mean, apart from the debt, people with money have still got that money.

[00:25:16] What are they doing with it?

[00:25:18] Are they just – which is, as you were saying, putting it into safer investments, things that seem like a better bet.

[00:25:26] So there's less risky investment but still the potential for some growth.

[00:25:30] And you can look at the companies that have sort of emerged out of a recession.

[00:25:34] Perhaps because the idea was just so good, I mean, you know, investors couldn't ignore it.

[00:25:38] So is it – are they the sort of green shoots that helps an economy grow?

[00:25:42] Or is it the case that, well, there's just not enough money around because this debt's been repaid?

[00:25:47] So you do need the government.

[00:25:49] You know, you can start to get into Keynes' argument about the government sector's got to step in.

[00:25:54] And is that essential for you getting out of a downturn?

[00:25:58] It's essentially getting out of a complete collapse.

[00:26:00] So this has been the work that I've been doing for 30-something years now.

[00:26:06] I've now got mathematicians working with me as well, Matthias Grisele in particular in Canada.

[00:26:11] And what we found was that if you have a system which just includes workers and capitalists and you don't have bankers in it, you get permanent cycles.

[00:26:22] That's what Richard Goodwin discovered back in the 1960s.

[00:26:24] And the system is cyclical and that was the income profit versus wages stuff that Marx first theorized about in 1867.

[00:26:36] Goodwin proved in 1967 he was actually mathematically correct that cycle would go on indefinitely.

[00:26:41] Then you throw in private debt.

[00:26:43] And that will give you amplified upswings.

[00:26:47] But also when you have a downturn, it means that because you have debt outstanding, unless the rate of interest falls to zero, which of course it won't do in commercial loans,

[00:26:56] then you are going to have that.

[00:26:58] The extent to which you can reduce your debt servicing is undermined by the fact you're actually paying interest on the existing debt.

[00:27:05] And then you can have a set of combinations, which I first modeled in 1992 before what's called the Great Moderation started,

[00:27:16] that if you have capitalists investing more in booms than they can repay during slumps,

[00:27:22] the level of private debt ratchets up to a point at which the next downturn is insufficient for the fall in wages alone to compensate the problem you're in.

[00:27:31] And the debt can continue compounding.

[00:27:33] You go off to an infinite private debt ratio and the economy collapses.

[00:27:37] And that's the basic definition of a debt deflation.

[00:27:40] Well, all the companies collapse.

[00:27:42] Does the economy collapse?

[00:27:43] Oh, yeah.

[00:27:44] The companies go under – don't new companies come and replace them?

[00:27:47] Isn't that why we –

[00:27:48] That didn't happen particularly well during the 1930s.

[00:27:52] This is why it's so important to look at events like the Great Depression and what's called the Panic of 1837,

[00:27:59] almost a century beforehand.

[00:28:02] These major crises, what gets you out of them?

[00:28:07] And it tends to be government spending because the government is an exogenous source of money in a capitalist economy.

[00:28:14] And this is – again, when I included that in my modeling, I had three models.

[00:28:20] I had the basic cyclical model that Goodwin gave us.

[00:28:22] I added in private debt and I got the possibility for a complete collapse of the economy, a debt deflation.

[00:28:30] I added in government spending.

[00:28:31] And I didn't get that.

[00:28:32] What I got was the permanently cyclical system.

[00:28:35] And that is the – if you look at modern monetary theory now, it's the same argument they make but from a complex system's point of view.

[00:28:45] That the government – if the government spending is related to the level of unemployment, government spending rises when unemployment rises,

[00:28:52] and the government has a limitless capacity to create money, which it does,

[00:28:57] then that extra monetary demand during a slump can stop you falling into a debt deflation.

[00:29:03] And that, in my opinion, is the fundamental reason you want government spending,

[00:29:06] that it's going to prevent a terminal collapse in capitalism, which we almost experienced during the Great Depression and the panic of 1837.

[00:29:18] And in both cases, the government at the time said, oh, look at this.

[00:29:20] Aren't we great?

[00:29:21] We're earning a surplus.

[00:29:22] That's partly why the crisis occurred.

[00:29:25] So you want the government to be the exogenous source of monetary demand during a downturn.

[00:29:31] But if it's a less significant downturn, can you get by without it?

[00:29:36] Yeah, you can.

[00:29:36] And with companies replacing companies.

[00:29:38] Because you've got a company – companies that – and, you know, I mean, this is a – I'm sure this is why investors start to back away.

[00:29:43] They'll be looking at – well, we know companies look at – investors look at companies that are carrying too much debt for precisely this reason, don't they?

[00:29:50] It's like if there's a downturn, what are they going to do with that debt?

[00:29:52] Are they going to find that all of a sudden their revenue falls and they're still servicing that debt so their profits absolutely fall to the bottom

[00:30:01] and perhaps makes the company go under?

[00:30:04] But companies that have emerged in a recession – so when you've got this downturn, it seems to me there's two ways you can make money.

[00:30:12] One is you can come up with a great idea during a period of growth.

[00:30:16] So people have got money and, you know, you give them new and exciting ways to spend their money.

[00:30:20] Another one is during a downturn and you come out with an answer which saves people money in a more efficient way, like, you know, sort of like discount food chains and all that sort of stuff.

[00:30:29] So companies that have – so both are opportunities, aren't they?

[00:30:32] And it's just at different times for different economies.

[00:30:34] So companies that have emerged in a recession – FedEx, UPS, Walt Disney Company, stuck at home, you need a bit of entertainment to take you through dark times.

[00:30:42] Hewlett-Packard, Costco, obviously cutting prices.

[00:30:46] General Motors, Procter & Gamble, United Airlines, Microsoft, LinkedIn, Revlon, all of these companies.

[00:30:53] They would be, you know, looking for investors.

[00:30:55] If they had a good business case, they'd be the saviors for the investors, wouldn't they?

[00:30:58] Be going, well, this is our way out.

[00:31:00] This is our way back up again.

[00:31:01] So all those country companies were established during recessions, were they?

[00:31:05] Yeah.

[00:31:06] Ah, good.

[00:31:06] Nice one, Matt.

[00:31:08] Okay.

[00:31:08] Yeah.

[00:31:09] I like the example of Microsoft is a good example in that sense because their initial debt levels are quite low.

[00:31:15] And you look at them and think they're unleavered.

[00:31:16] Maybe they're a particular prospect.

[00:31:18] And then you get the technological transformation coming through as well.

[00:31:21] And this is one more area where, again, don't bother looking at mainstream economists for guidance here.

[00:31:26] Look at the weirdos.

[00:31:27] And Joseph Schumpeter made this case in one of the great books to explain why cycles occur in capitalism.

[00:31:35] And that was called The Theory of Economic Development.

[00:31:38] And in that, he made an argument that when I first read it, I sort of thought this can't be right.

[00:31:43] But I then took a look at the data and, in fact, he was correct.

[00:31:45] And that was to say that most of the technological innovations that occurred during a boom were actually implemented during a slump.

[00:31:54] So, for example, if you think about the 90s bubble and the amount of optical fiber that was laid to enable data transfers across the United States,

[00:32:05] a huge part of that ended up never having any signal sent down at the time.

[00:32:11] And it was called dark fiber for that reason.

[00:32:13] Remember that term?

[00:32:14] Mm-hmm.

[00:32:15] Yeah.

[00:32:15] Okay.

[00:32:16] Now, the thing is that dark fiber was then lying there.

[00:32:19] You know, companies that put it out had gone bankrupt.

[00:32:23] But then, I mean, of course, there's no need and enough capacity to support all the routers and the signal boosters and so on that were necessary to turn that dark fiber on.

[00:32:34] But when the next boom began, hey, there's a cheap bargain here.

[00:32:37] You can get all these cheap inputs that were produced during the previous boom.

[00:32:42] And then that's what goes on.

[00:32:44] So, sometimes the technological aftermath of a boom becomes something which is valuable during a slump.

[00:32:52] And then that enables the next boom to take off.

[00:32:55] So, we're running out of time.

[00:32:57] And I suspect I might be getting and venturing into an area here, which perhaps is another podcast.

[00:33:02] But the idea that you can try and reduce these peaks and troughs, I'm not sure you want to do that.

[00:33:10] But that's what a central bank would say it's doing because of this, you know, equilibrium idea.

[00:33:14] But if you said, well, okay, yeah, you know, why have peaks and troughs when we could just sort of like have a happy medium?

[00:33:20] That's a bit like saying someone who's on, you know, ecstatically happy and then has depression.

[00:33:25] Let's medicate them so that all the time they're just a bit meh and they don't enjoy those happy times.

[00:33:31] I mean, it's like doing the same for the economy, isn't it?

[00:33:35] Why hamper those periods of growth when a lot of good comes out of it just to try and create this supposed equilibrium?

[00:33:43] And yet that's what central banks would say.

[00:33:45] That's our job.

[00:33:46] We try and stop this.

[00:33:47] We try and fight against the business cycle.

[00:33:49] I mean, that's what they'd say their role is.

[00:33:51] Yeah, and I mean, I'm also in favor of fighting against the business cycle to some extent.

[00:33:57] But that is basically saying don't let people who were basically bystanders in the whole thing suffer

[00:34:03] and don't let your social fabric unravel because of it, which, of course, is what happened during the Great Depression

[00:34:07] when workers were the ones who suffered the most during the crisis.

[00:34:11] So that's why I'm in favor of things like a universal basic income to some extent, a job guarantee

[00:34:17] to mean that the people who generate and both benefit and suffer from the cycles are the ones causing it in the first place.

[00:34:26] And it's capitalists with excessive expectations leading to a boom, the bankers benefiting off that.

[00:34:34] You want to temper that to some extent, but you don't want to eliminate the cyclicality

[00:34:39] because any living system has cycles.

[00:34:42] And this is partly the obsession with having a cycle-free version of capitalism come from this myth

[00:34:47] that you can have a system as complex as capitalism and it can be an equilibrium.

[00:34:51] Uh-uh.

[00:34:52] If it's an equilibrium, it's dead.

[00:34:53] Yeah.

[00:34:54] And this idea about exogenous shocks, I wonder whether, you know, they're what is actually creating these cycles.

[00:35:01] I wonder whether that really is related to a long time ago when we were in agriculturally-based economies

[00:35:07] where you saw cycles.

[00:35:11] You know, you saw failures in crops, for example, and some of that was cyclical.

[00:35:15] You had Jevons back in the late 1800s saying it was all related to sunspot activity.

[00:35:20] So business cycles are all related to sunspot activity.

[00:35:23] And that's, you know, you hear people going, well, that's obviously still the case now

[00:35:26] because that was the case then.

[00:35:28] But, I mean, that was just a – I mean, that was agriculture you can imagine would be cyclical.

[00:35:32] The fact that that was driven perhaps by exogenous factors such as the weather,

[00:35:38] I mean, that doesn't mean you can apply that and stack everything that's happened subsequent to that

[00:35:44] on top of those cycles that we're seeing in agriculture.

[00:35:47] Although I think that is still an argument that's used, isn't it?

[00:35:49] It is.

[00:35:50] I think you've got a good point there.

[00:35:51] I mean, if you go back to our, you know, ancient nasopoptomia and stuff like that,

[00:35:55] the cycles were mainly caused by weather cycles about which for that time we knew absolutely nothing

[00:36:02] and contributed nothing to.

[00:36:04] So, yeah, the reasons for thinking in exogenous shocks go back to when we were mainly an agrarian society,

[00:36:10] not a modern industrial capitalist economy.

[00:36:13] Well, next week, cooperatives, why aren't there more of them?

[00:36:17] And, you know, isn't it a better way of running an economy?

[00:36:20] We'll look at that next week.

[00:36:21] Been good this week.

[00:36:22] Catch you next week, Steve.

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