The future of the world economy

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By ELEUTÉRIO FS PRADO*

The long-term historical trend shows a continued decline in the rate of increase in GDP.

The economy of the world as a whole decreased -3,5% in 2020 as a result of the crisis caused by the new coronavirus; however, according to recent estimates by the OECD, it will grow 5,8% in 2021 and probably something around 4,4% in 2022. This perspective has brought hope and even a little euphoria to the economic agents that support capital and that benefit from its valuation process: the world, according to them, will recover the path of prosperity – even, however, if they rationally distrust this prediction, that is what they most want. But what can we really expect from the world economy in the next decade – and even beyond?

A first answer to this question can be found simply by examining the evolution of the world economy in recent decades. The figure below clearly shows that global GDP growth rates have tended to fall since the end of World War II. If between 1961 and 1970, this indicator advanced at an average rate of 5,4% per year, in the following decades, this rate dropped to an average of 2,2% per year between 2011 and 2020.

So there doesn't seem to be any reason for optimism at first; behold, the long-term historical trend shows a continuous decline in the rate of GDP growth. The observed euphoria therefore seems to be nothing more than an illusion produced by the V-shaped recovery from the crisis produced by the new coronavirus. In the perspective of this decaying secular evolution, only an average increase of 2,2% per year was projected for the decade starting in 2021 and ending in 2030, as shown in the graph in sequence.

Source: World Bank

However, as is known, this type of analysis is insufficient, as it is based only on statistical regularity – and on a little common sense. Anyway, before going into theoretical considerations, it is interesting to consider, still in the same perspective, that the capitalist economy has grown through long cycles since at least the last quarter of the eighteenth century.

In these cycles there is always an upward phase in which growth rates tend to rise and a downward phase in which they tend to fall. The table below shows the results obtained by Tsoulfidis and Papageorgiou through a carefully developed statistical survey based on currently available statistical series; according to this study, after the advent of the first industrial revolution, still in the eighteenth century, there were five long cycles in the capitalist economy. The beginning of the first “occurred” in 1790 because that is the earliest date for which there is reliable information.[1]

After the Second World War, there were two long cycles in the world economy: one between 1946 and 1982, a period in which Keynesianism dominated, and another one from that last date, a period in which neoliberalism prevailed. Between 1981 and 1990, the world economy grew by an average of 3,12% per year; between 1991 and 2010, this average rate dropped to 2,8%, to reach just 2,2% in the last decade. Because of this low growth, it is widely recognized that the world economy entered a period of stagnation after 1997.

Now, this result also immediately shows that neoliberalism was not capable of producing a strong recovery of the world economy, capable of taking the dispersed economies on the surface of planet Earth to the levels obtained after the end of the Second World War. In any case, as the regime of accumulation prevailing over the last 40 years, neoliberalism now seems to be in the final process of exhaustion – without knowing yet what will replace it.

To better understand these last two long cycles, that is, the 4th and 5th, it is necessary to observe what happened to the rate of profit in the period considered. To make this possible, a good approximation of it is used here; the internal rate of return for the G20 (a weighted average constructed from Penn World Table 9.1 data) is taken as representative, as the G20 includes the twenty largest economies, which account for about 70% of world GDP. The following figure presents this descriptive statistic. It clearly shows the two long cycles mentioned: the first is formed by the “golden age” and the “profitability crisis”; the second is constituted by the “neoliberal recovery” and the “long depression”.

Source: Michael Roberts

The evolution of the rate of profit allows dating the beginning and end of cycles; behold, these two limits – admittedly – ​​are crucially determined by the evolution of this variable – as well as, in a complementary way, by the ascending or descending movement of the mass of profit. The above figure unequivocally shows that the profit rate rises in the upswing and falls in the downswing of the cycles. It also shows that this up-and-down has occurred twice in the past 70 years. It is these cycles that we want to consider better here.

It is through this movement that the rate of profit commands the rate of accumulation,[2] which, in turn, consists of investment in expanding the productive capacity of the economy. In this sense, the behavior of the GDP growth rate reflects, with certain lags, the behavior of the profit rate, even if it is also influenced in other ways. Thus, the downward trend of the GDP (first graph) in the period as a whole is roughly explained by the falling trend of the profitability of capital (second graph) in the same period (70 years).

Although this is not shown in the last graph, the crisis produced by the coronavirus pandemic produced a drop in the profit rate observed in 2020. In any case, the recovery that took place in 2015-16 was not sustained in the following years. Although it does not appear on the graph either, it is known that the persistent fall in the rate of profit ends up also producing a fall in the mass of profit. And when that happens there is that moment when a crisis of overaccumulation of great proportions is somehow precipitated.

The question now is whether there will be a new long cycle in the world economy or whether the stagnation trend will remain or even deepen? Will the dynamics observed in the past be repeated or will the deterioration of the disruptive force of capitalism no longer allow the advent of a sixth long cycle of accumulation? What can be expected from the future development of the now strongly globalized capitalist economy? To try to answer this question, one must begin by remembering that crises are endogenously necessary for the development of capitalism.[3]

Consider the entire period of a long cycle. At first, the rate of profit rises and with it the investment grows. The volume of production increases rapidly. The evolution of the productive force of labor generates an increase in the organic composition of capital, that is, in the ratio between constant capital (machines, equipment, raw materials, etc.) and variable capital (wages). The delay in this process ends up inverting the trend of growth in the rate of profit into a downward trend. The rate of accumulation then begins to fall, and thus the rate of growth.

At a certain point in this process, the mass of profits also starts to reduce. It is at this moment that a crisis of overaccumulation arises and it comes to reduce the tensions accumulated by the evolution of the contradictions inherent to capitalism. That is why, “periodically” – says Marx – “the conflict between antagonistic agents [productive forces and relations of production] breaks out in crises. And crises are always violent momentary solutions to existing contradictions”.

Now, for crises to fulfill their role in accumulation, there must be a significant destruction of industrial capital and financial capital. Now, this occurred spontaneously in capitalism until approximately the 1920s. After the great crisis of 1929, the capitalist State began to act, more and more heavily, in the evolution of accumulation and in the occurrence of crises.[4] In the 2007-08 crisis, the States, especially in the developed countries, avoided a brutal destruction of the productive forces – as this became politically unacceptable – through the massive issue of money to prevent the failure of the big banks and, thus, consequently, of large industrial corporations.

The consequence of this saving intervention is that the contradictions were not neutralized and, therefore, the conditions for a quick recovery and for the beginning of a new long cycle of capital accumulation were not created. In particular, the huge mass of fictitious capital created in the recent past has not been reduced, but has, on the contrary, continued to grow in an increasingly threatening manner. In any case, the long depression undermined the legitimacy of neoliberalism.

Now, the history of capitalism shows that there is “neither perpetual prosperity nor permanent stagnation”. It is therefore necessary to admit that during the period of the long depression certain transformations have been taking place which act to raise profitability. It should be noted, however, that they do not and cannot happen without the economic action of the State.

Along with an endogenous liquidation of less efficient companies and a lowering of the real wages of the workforce, which occurs due to stagnation itself, new institutional arrangements and new modes of regulation have been created by the administration of the economic system. It must be seen that economic policies are never absent from the effort to create conditions for raising the rate of accumulation. Moreover, subsidies for the creation and adoption of new technologies are never lacking in core countries that compete with each other internationally for the primacy of advancing productive forces – which does not generally occur in peripheral countries.

Now, the introduction of such institutional changes and technological innovations are not finding an easy path precisely because there has not been a destruction of capital accumulated in the past. Furthermore, this destruction is necessary so that the rate of profit can recover: the stock of capital must fall so that this rate, given a certain mass of profit, can rise. In any case, one can synthetically review those changes that are in the process of becoming reality.

It is known, on the one hand, that the launching of a new long cycle depends on the existence of a “wave of innovations” that will scrap the old productive structures, opening spaces for large volumes of investments. In this sense, there is currently much talk about the coming of the fourth technological revolution, which would be characterized by the spread of artificial intelligence, machine learning, robotics and industrial automation, with a view to revolutionizing production processes.

It is also said that the replacement of “dirty” energy generation with “clean” one, an imperative posed by the climate emergency, could open up a large space for capital accumulation. The coronavirus pandemic itself has accelerated the adoption of new work organization practices, which may have some impact. However, its most important effect has been to reveal certain weaknesses of neoliberalism in its current phase as a mode of regulation aimed at promoting economic growth. In fact, it should be noted that his economic policy recommendations, in particular the principle of fiscal austerity, were abandoned in the face of this XNUMXst century plague.

It is known, on the other hand, that the beginning of a new long cycle of accumulation needs to find adequate institutional conditions. The observation of what happened in the last decades clearly showed that the beginning and the maintenance of a new stage in the process of development of capitalism depend on the existence of a new regime of accumulation. It is also known that this new institutional configuration must be characterized by an entire structure of incentives, regulation and macroeconomic coordination.

Proponents of the “social structure of accumulation” theoretical current consider that a “structural crisis” like the current one cannot be resolved without a major structural reform. They mention, for example, that a new cycle will not begin without a deepening of the State's role in promoting sustainable economic growth. Thus, they foresee as possible – and perhaps necessary – the emergence of a form of “regulated capitalism” that is based on a deeper combination of state initiative and private initiative.

As capitalism is a system that aims at corporate profit – and not the well-being of the population in general – this new regulation could be as exclusionary as neoliberalism. Some maintenance and even some possible renewal of the “capital-labour compromise” characteristic of social democracy will depend on the sharpness of social struggles.

In any case, even if a new “accumulation social structure” is institutionalized, especially in the richest countries, one will not see global capitalism go through a new golden period, as it did after the Second World War. There is a certain consensus that that surge of accumulation was possible due to the great destruction of productive forces in all countries whose territories were affected by war activity. Now, this should not happen again, since if it happens, as a catastrophic event of great proportions, it will not fail to destroy humanity.

The continuous operation of the downward trend in the rate of profit, which has been observed over the last 70 years, will certainly not allow this new cycle to present itself with great dynamism and practical euphoria. As the global economy will increasingly suffer the impacts of global warming, the destruction of forests, the lack of drinking water and various forms of pollution, it is to be expected that the economic results of a new cycle will be very moderate. , insufficient even to generate a wave of optimism about the future of the system.

Thus, if the fifth cycle was not able to recover the profit rate levels observed in the fourth cycle, it is reasonable to expect that a sixth cycle will not be able to obtain the results of the fifth. Global capitalism, then, can be predicted, at best, to move from stagnant to semi-stagnate with some burst or two of higher growth. Moreover, it is not to be expected that the concentration of income and wealth that occurred in the neoliberal period will be reversed in a major way. As a consequence, it is to be expected that the world in the coming decades will be configured, not by a prosperity that spreads through society as a whole, but by means of successive conjunctures that are economically, socially and politically unstable.

In fact – believes the economist who writes here – it is in the presence of the sunset of capitalism, even if one cannot be certain about the possible advent of a renewed, profoundly democratic socialism. You can only be sure that you have to fight for it.

* Eleutério FS Prado is a full and senior professor at the Department of Economics at USP. Author, among other books, of Complexity and praxis (Pleiad).

Notes


[1] See Tsoulfidis, Lefteris; Papageorgiou, Aris – The Recurrence of Long Cycles: Theories, Stylized Facts and Figures. World Review of Political Economy, 2019, Vol. 10(4), p. 1-36.

[2] In fact, what determines investment is the future rate of profit. But, as this is always shrouded by a shadow of uncertainty, capitalists use present results to think about the future. Moreover, the magnitude of this rate also indirectly indicates the availability of funds (retained earnings) to support investment.

[3] The considerations that follow are, in part, based on an article by Tsoulfidis, Lefteris; Tsaliki, Persefoni – “The long recession and economic consequences of the covid-19 pandemic”, which can be found on the internet.

[4] The exteriority of the State in relation to the economic system, as is known, is a necessary appearance of the capitalist mode of production.

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