Michael Roberts takes issue with my blog post “Why Stagnation,” which presented the analysis in a recent article I coauthored with Deepankar Basu. We argued that social structure of accumulation (SSA) theory can explain the current stagnation in the U.S. economy.

According to this analysis, the financial crisis and Great Recession of 2008-09 marked the beginning of a structural crisis of the current institutional form of capitalism, the neoliberal SSA. Unlike a business cycle recession, a structural crisis can be resolved only by the emergence of a new institutional form of capitalism according to SSA theory. The current structural crisis has taken the form of prolonged stagnation. Despite the quick recovery of the rate of profit after 2009, capital accumulation has remained sluggish.

Sluggish capital accumulation stems primarily from the inability of the neoliberal SSA to promote rising debt-fueled consumer spending, which dampens the incentive to expand productive capacity. Solving the stagnation problem requires the emergence of a new institutional structure. The current political polarization, with growing support for right-wing nationalism as well as for progressive reform of capitalism, can be interpreted as promoting alternative modes of restructuring that can potentially restore normal economic expansion.

Roberts makes three main claims: 1) The profit rate in the U.S. has not significantly recovered but remains low, which explains sluggish accumulation. 2) Investment, not consumer spending, drives the ups and downs of the capitalist economy. 3) A restoration of normal expansion requires, not a new institutional structure, but a severe recession/depression to clear the way for a new period of rising profitability. I’ll respond to each claim in turn.

There are various ways to measure the rate of profit. We employed a standard method for studies of profitability and investment. We used the rate of profit for the nonfinancial corporate business sector with data from the U.S. Government’s Bureau of Economic Analysis. There has been much comment from both heterodox and mainstream economists about lackluster investment despite what is widely believed to be high profitability in the U.S. economy. This observation gave rise to a large literature on “secular stagnation” whose participants have included Harvard economist and former Treasury Secretary Lawrence Summers and the renowned economic historian Robert Gordon.

Roberts states that he has a profit rate series that shows low profitability since the financial crisis. This swims against the tide of the economic literature on this subject. There is ample evidence of a puzzle in need of resolution, sluggish investment despite high profitability. When a great deal of empirical evidence shows a development that would not be expected based on the Marxist theory of the “normal” relationships of a capitalist economy, it is better to try to find the reasons for the departure from expectation, rather than looking for alternative empirical data that would make the problem go away.

I agree with Roberts that investment, not consumer spending, drives the business cycle. Investment is relatively unstable, subject to large jumps and collapses. Consumer spending, although much larger than investment spending, is much more stable. However, the problem of stagnation is about the long-run path of the economy, not the short-run ups and downs of the business cycle.

A long period (5 to 10 years or more) of “normal” expansion has requirements both for the profit rate and total demand. A high profit rate promotes investment which drives economic growth, but a long period of vigorous economic expansion will not occur without a vigorous growth of final demand. Rising investment itself cannot generate sufficient rising demand in the long-run.

From 1980 to 2007 a series of huge asset bubbles combined with speculatively-oriented banks promoted rising debt-fueled consumer spending. In the face of declining real wages (which propelled the rising rate of profit), this provided the growing demand necessary for a long period of normal economic expansion. The debt-fueled consumer spending mechanism stopped working after 2008-09, as we showed in our article.

Some Marxist economists believe that to admit that demand problems can afflict a capitalist economy is somehow contrary to Marxism. They claim that only the profit rate matters for the course of a capitalist economy. Yet a study of Marx’s writings about obstacles to economic expansion does not support such a conclusion. While Marx frequently mentions the role of profitability in setting off an economic crisis, consider the following passage from volume III of Marx’s Capital: “The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit.”

Marx sprinkled comments about the potential obstacles to economic expansion in several of his works, particularly in volume III of Capital and Theories of Surplus Value. The main conclusion from examining those works is that Marx thought capitalism has multiple contradictions, any one of which can lead to a crisis of accumulation. Some are contradictions in production, some in the circulation of commodities, and some in the credit mechanism.

Roberts argued that the only path to overcoming the current stagnation “will not be some as yet unclear new ‘institutional change’” but “another slump in investment and production.” The idea is that a sufficiently severe depression will destroy the value of the existing capital stock, leading to a rising profit rate that demands new investment again. Thus, a great depression, despite the great suffering it inflicts, is necessary for capitalism to cleanse itself.

This old idea was largely buried by the Great Depression of the 1930s. That event did indeed devalue the capital stock around the world in a few short years. However, what followed was not a period of expansion. Instead, the U.S. economy along with the rest of developed capitalism was stuck in stagnation for a decade, a stagnation that brought fascist regimes to power in several countries. That stagnation was finally resolved only when a new institutional form of capitalism emerged in the late 1940s. The regulated capitalism of the post-World War II era finally ended the long stagnation, which had been only briefly interrupted by the war, and the result was a quarter-century of vigorous economic expansion.

It was that experience, followed by the sudden failure of regulated capitalism to any longer promote normal macroeconomic conditions in the 1970s, that led to the development of SSA theory by Marxist economists in the 1980s. In my view Marxism has a future only if its practitioners confront unexpected developments with a determination to find their roots using the methodology and concepts of Marxism, not by trying to show that the evidence is wrong out of a misplaced fear that any unexpected development threatens to undermine Marxism.

David M. Kotz is Professor Emeritus of Economics and Sheridan Scholar at the University of Massachusetts Amherst and Distinguished Professor in the School of Economics at the Shanghai University of Finance and Economics. He is the author of The Rise and Fall of Neoliberal Capitalism, Harvard University Press, 2015 (paperback edition 2017).