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Marx and other classical economic thinkers speculatively connected the fall in the rate of profit to increases in inequality and long-run economic cycles [1].

Essentially, the idea is that since the rate of profit exceeds the rate of growth, rent seekers (capital holders) tend to get richer and richer and own more and more of the wealth. This impoverishes all other parts of the economy and starves it of resources, causing the rate of profit (return on capital) to start declining.

The end result is usually a prolonged crisis of some sort which causes the destruction of large amounts of capital, 'resetting' the economy again so the cycle can repeat anew.

For some reason this idea has been rejected by the mainstream for the last 70 years or so, but I think some people are starting to take it up again.

[1] https://en.wikipedia.org/wiki/Tendency_of_the_rate_of_profit...




The standard view of the business cycle is that the capital gets invested somewhere. When all the good places are gone, what's left gets invested in marginal places, and then in bad ones. That capital gets destroyed, because the bad ideas can't pay it back. That can result in a crisis, but more often in merely results in a recession.

So that's somewhat similar to Marx's idea, with two key differences:

1. Capital only grows by getting returns on previous investment. If capital "starves all other parts of the economy of resources", that means that capital is wasting the resources, which means that the capital is not earning a return, which means that it stops growing.

2. The end of the cycle doesn't have to be horrible. Marx hadn't seen much in the way of soft landings, but the Fed has gotten fairly good at them. (1929 and 2008 are exceptions, not the rule.)


>That capital gets destroyed, because the bad ideas can't pay it back

But isn't that the crux of the problem. At some point those with capital accrue enough power that they don't allow capital to be destroyed?

Instead of taking a loss they lobby for laws and institutions that allow them to socialize their losses. For example laws that prevent student loans from being discharged in bankruptcy; Federal guarantees on loans; the asymmetric response of the Federal Reserve with interest rates (slow up, fast down); suspending of mark-to-market accounting rules; inflation targets that paper over bad investments; and rigged markets (i.e. prescription drugs).

The result is a subsidy from labor to capital and from new capital to old capital, increasing wealth inequality and lower social mobility.

For example assume that electric cars are the way of the future and that companies like Tesla will dominate. In that case anyone who invested in internal combustion engines invested wrong and should lose their money. That is capitalism.

Instead what do we see? Thickets of laws to protect the business models of dealers of ICE cars and a market with thinner profit margins because companies were repeatedly bailed out rather then be forced to shrink or die.


> that means that capital is wasting the resources, which means that the capital is not earning a return, _which means that it stops growing_.

What's interesting is that people might not notice for awhile that the capital isn't earning a proper return, and the realization can be in the form of a sudden price adjustment + crash (think tech bubble burst or housing bubble).

I think even standard economics is starting recognize this, even though the serious study of severe crashes has been somewhat neglected between WW2 and 2008. One problem is that data is hard to come by, given the rarity of the event. Another is that it's hard to come up with a good theoretical reason why asset prices can be persistently wrong for so long.

> (1929 and 2008 are exceptions, not the rule.)

What if it turns out that severe crashes to the tune of 1-2 a century are a rule? How many data points would we need to see before economists would be convinced?


> Another is that it's hard to come up with a good theoretical reason why asset prices can be persistently wrong for so long.

The reason is well understood, but not by mainstream economists. I suggest reading about Hyman Minsky and Steve Keen's research. To summarize, increases in total debt (private or public) contribute to demand, while decreases in total debt subtract from demand. This results in a financial instability. More demand => more debt-fueled investment => more demand. Eventually, businesses that could never have survived at the bottom of the cycle can get huge loans; they might not even seem speculative, because demand is so high and keeps growing. However total debt rises too quickly, due to speculation and Ponzi financiers, and it can't rise at such rates indefinitely. Once debt growth begins to slow, businesses financed primarily by debt begin to fail, because demand slows and they can't convince anyone to give them more loans to cover interest. This triggers runaway deleveraging and fall in demand. In such a down-turn, even businesses that could have survived at the bottom of the cycle have trouble because they've taken out loans or sold shares to invest in growth, since they expected demand to continue to rise. Instead, demand shrinks, because much of it was debt-fueled and unsustainable.


Yeah that's a reasonable model that links the debt and business cycles together, but it makes a key assumption: that investors only depend on lagging metrics of credit quality (business defaults), so fail to stop the bubble from inflating.

What is required is a good theoretical explanation for why investors fail to predict the point they are in the bubble and rein in speculation, since obviously this cycle has happened many times in the past.


> What is required is a good theoretical explanation for why investors fail to predict the point they are in the bubble and rein in speculation, since obviously this cycle has happened many times in the past.

I think the problem is human nature. People forget. Sure, this has happened many times before, but the most recent time was, say, eight years ago. That's a long time in peoples' memories.

And, while there may be this nagging memory of trouble, right now there's money to be made...


Lenders can't predict the future any better than creditors. There's nothing mysterious about that.

If you want a theory for _why_ the future is unpredictable, read up on chaos theory.


> What if it turns out that severe crashes to the tune of 1-2 a century are a rule?

During the 1800s, it was more like 5-10 severe crashes a century. Add in the crash of 1907, as well.

What changed? The Federal Reserve, created in 1913.


Considering that all developed economies are deep in the liquidity trap and therefore unresponsive to marginal changes in monetary policy, looks like we will be in for some tough times.


> For some reason this idea has been rejected by the mainstream for the last 70 years or so

The reason is obvious: it was Marx's idea. Even today many people in the U.S. have visceral negative reactions to the mere mention of Marx. Marxism is not just viewed as wrong, it is viewed as evil. And not just evil, but the ultimate evil (at least until Islamic extremism stole the limelight), an existential threat to God, motherhood, apple pie and capitalism, all of which have similar moral standing in the hearts and minds of many Americans, facts be damned.


The great unanswered question is: what happened to growth?

You've outlined exactly one dimension of why we need it - without it, it's rent-seeking all the way down.

I am concerned that the emerging "Greatest Generation/Silent Generation/Baby Boom used up all the growth and now we're ... messsed up." becomes a self-fullfilling prophecy, aided by the cumulative nature of assets.

I am loath to call rent seekers "capitalists". Perhaps that's an error, but it make sense to me.


> The great unanswered question is: what happened to growth?

What I've heard others say is that the internal combustion engine, railroad, electricity, the telephone, indoor lighting, assembly line, the airplane were all huge things. Half of those things our grandparents didn't have growing up. The Internet is more recent and has definitely allowed growth, but not quite has much as the others had and other significant things haven't shown up.

We're still growing just not at the scale as we previously had. Also, there could be some new big discovery that could let us return to previous growth...it's hard to anticipate these things.


Well, the internet is one tremendous piece of infrastructure, but that's not just it. Moore's law and the growth in computing power, the solid state of research universities around the world etc. is all contributing to the growing corpus of knowledge, fueling innovation.

Now, growth like what America saw post WW2 was definetly a one off thing: the rest of the world was in ruins, and there was great demand for manufactured goods and services from Western Europe and the rest of the world. Today, many more countries are stable and have the infrastructure to manufacture and provide goods and services. So its quite unreasonable to expect that kind of growth anymore in the US.

Where the US has excelled is in innovation and first comer advantage. e.g. Advanced computing systems, electronics manufacturing, automation, advanced weapon systems, space exploration etc. So, as the rest of the world catches up, the US economy moves on to create new markets where they have the first mover advantage. The only way to make this happen is through innovation.


Growth in any finite system is inherently unsustainable.


It's sustainable when you keep changing what growth is - and we do. I used to have a TV/stereo cabinet modeled on a 19" rack ( head high, six or eight feet across ) ; now some people substitute for that with a phone.

Example: Can you even build a boat out of mahogany any more?

The only things that got bigger - universities, McMansions, and medical centers - appear to be subsidized. Everything else is smaller.


Exponential growth is unsustainable.


Sounds right... Not sure Marx imagined what that process would look like alongside the emergence of a new species through (autonomous corporations).

I expect the details of solvency for funds, pensioners, etc, will fade away into history as we move away from the large institutions and individual risk that necessitate them.

What happens when every citizen controls thousands of autonomous corporations, each with perfect credit (if limited means)? Many rules of economics will no longer apply.




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