[OPE] defining 'recession'

Paul A. is correct - there is a sense in which "recession" and "depression" are not just conventional empirical descriptions, but also ideological concepts - with economic or econometric portrayals one ought always to ask, "for whose benefit is this?" and "In whose interest is this?" - as political economists usually do. A concept like GDP tells us little about income distribution, and depending on whether you are rich or poor, the concepts do not have the same meaning or implications.

Nevertheless there is also at least two methodogical/technical problems in defining these phenomena.

 - Firstly, the original idea behind gross product accounts was that the value of the net national product equals the new gross incomes generated by production (suitably grossed and netted with the aid of a series of conventions). But in practice gross product is often falsely equated with total national income flows, or GDP is taken to refer to "the whole economy". The more that income takes the form of non-production income (property income, including capital gains, and so-called transfers), however, the less a GDP measure tells us about true national income flows. There are, if you like, a lot of "off-balancesheet items" which must be considered.

- Secondly, if we examine the historical series, we find that there exists empirically no invariant correlation between the rate of GDP growth, investment, wage and profit shares, and employment. GDP may rise, while employment stays constant or even falls. The profit share may rise although GDP stagnates or even falls and production investment stagnates as well. And, although a recession occurs, the drop in employment may be significantly greater or smaller, depending on the situation and the social set-up. So there is no mechanical correlation between these variables, and therefore, establishing the exact timing of upturns and downturns is to a certain extent also a subjective judgement, or at least a convention or consensus view, based on an array of economic indicators. At a deeper level, "economic activity" is defined essentially as "trading activity", but the level of trading activity doesn't necessarily tell us much about the level of real output growth or utilisation of labour.

One way you could read the NBER analysis is, that in reality the beginning of the economic downturn preceded the financial crisis. That is what began to pop the bubble. Thus, in this view, precisely because a huge amount of current income receipts and asset values were staked on hypothetical future yields, probabilistically extrapolated from trend analysis, then when the economic indicators showed an economic slowdown was really beginning, there was an immediate reaction from the financial markets, causing effectively a fairly panicky divestment, which exascerbated the downturn more and more.

Superficially, it seemed that the financial crisis "triggered" the downturn, but arguably the financial crisis just made the downturn which was already happening a lot worse, and accelerated it. A system based on "debt-driven accumulation" is extremely sensitive to cashflows (the ability to pay off creditors from current revenue receipts) and to expectations of future yields, and thus any clear signals of economic contraction have very immediate effects, even before they fully take shape. Typically the movement of market activity overreacts to the downturn, and responds to the upturn only with a lag in time.

Marx remarked that the ultimate barrier to capital was capital itself. It is not that the resources are not there, but that they cannot be bought or sold. This means, most generally - contrary to equilibrium theory - that capitalist development is unable to maintain the economic proportions necessary for balanced development in space and time, so that endogenously too much capital and income entitlement end up in the "wrong" place. As long as everybody can make gains, it doesn't matter, you can to an extent be generous and individual interests appear to match social interests seamlessly and effortlessly; equilibrium seems to have been achieved - but in a serious economic breakdown, there is nothing much left anymore of the equilibrium theory and the previous generosity or social solidarity, people stick to their own kind.

The root cause of that uneven development is competition between many different private interests, which the state tries to mediate between. It is therefore not accidental that Martin Wolf suddenly begins to talk cooperation: "creditworthy surplus countries must expand domestic demand relative to potential output. How they achieve this outcome is up to them. But only in this way can the deficit countries realistically hope to avoid spending themselves into bankruptcy. (...) We are all in the world economy together." ("Global imbalances threaten the survival of liberal trade", FT 2 dec 2008).

Unfortunately, capitalism being what it is, the problem is precisely that in an economic crisis, competition intensifies across the board, making cooperation more difficult. If the total economic cake shrinks, the gains of some portend the losses of others, and if the total profit volume shrinks, you can only obtain more profit by taking it from somebody else, by some route. Throughout the neoliberal era, the argument was that the state's financial role in the economy should be reduced, although its social-policing role increased - but this policy often makes the state less able to secure the kind of broad economic cooperation that is necessary now, because effectively it requires that enemies are seen as friends and vice versa.

In the end, what is the logical outcome? Well, Marx's famous class struggles and national struggles. Such struggles are probably the last thing that most people want, but at a certain point life does become a struggle and they will rebel against being fleeced of the chance to some kind of decent life. If they don't, others will walk all over them, and who wants a foot in their face?

Jurriaan

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Received on Wed Dec 3 10:16:40 2008