American Economic Association

Long Swings and the Nonreproductive CycleAuthor(s): David M. Gordon, Thomas W. Weisskopf, Samuel BowlesSource: The American Economic Review, Vol. 73, No. 2, Papers and Proceedings of the Ninety-Fifth Annual Meeting of the American Economic Association (May, 1983), pp. 152-157Published by: American Economic AssociationStable URL: http://www.jstor.org/stable/1816831Accessed: 26/10/2010 17:13

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Long Swings and the Nonreproductive Cycle

By DAVID M. GORDON, THOMAS E. WEISSKOPF, AND SAMUEL BOWLES*

The U.S. and world capitalist economies are currently in the midst of the third long swing crisis of the past century. A notable and, we shall argue, defining characteristic of this and prior long swing crises is the failure of the business cycle, through its normal functioning, to restore conditions for rapid accumulation. We develop a theoretical mod- el of the relation of the business cycle to long swing expansions and crises, and present some evidence supporting our hypotheses about the relationship between the long swing crisis and what we term the nonreproductive cycle. Our approach implies that the most theoretically coherent basis for dating long swings in capitalist economies is not to be found in the movements of total output or investment, but rather in an investigation of what Gordon has called the social structure of accumulation and its ability to restore profitability during cyclical downturns.

This model of the relationship of cycles to swings not only helps clarify the characteris- tic patterns of long swings, but may also help resolve a number of anomalies which have occasionally puzzled economists. The consid- erable rise in real wages during the sharp cyclical downturns of the 1890's and 1930's is no longer anomalous, for example, but is rather an expected feature of business cycles in a period of long swing crisis. (This does not explain, of course, why real wages rose.) Further, the somewhat inconclusive debate in the Keynesian literature about the pro- cyclical or anticyclical behavior of real wages may potentially be clarified by our observa- tion that real wages tend to move procycli- cally during long swing expansions and anti- cyclically during long swing crises-and that for this reason the prevailing debate has been

clouded by an underspecification of the de- terminants of cyclical behavior during long swings.

These anomalies are not surprising. Most studies of the relationship of the business cycle to long swings in economic activity have failed largely because of the absence of any theory of the relationship between these two forms of economic fluctuation; the same models of investment and output determina- tion are typically applied to both. Recent Marxian analyses of the dynamics of long swings offer the possibility of overcoming this weakness. (See Gordon, Richard Ed- wards, and Michael Reich, ch. 2, for a review.) These analyses have stressed the cru- cial importance of a periodically recon- stituted set of institutions, called the social structure of accumulation (SSA), which pro- vides the economic stability and moderation of political economic conflict essential for favorable profit expectations and therefore for rapid capital accumulation. These institu- tions include, for example, systems of labor management, the international monetary sys- tem, and structures mediating raw materials supply. Their erosion sets the stage for eco- nomic crisis.

Despite the promise of this approach, however, the " normal" operations of the business cycle have not been integrated into the broader analysis of the SSA and long swings. We begin by distinguishing the re- productive (or well-behaved) cycle from the nonreproductive (or perverse) cycle. The re- productive cycle is one in which a downturn in economic activity is corrected by the func- tioning of the cycle itself. We call this cycle reproductive because it endogenously re- stores conditions for rapid accumulation without requiring fundamental changes in the structure of the accumulation process. The nonreproductive cycle, by contrast, is one in which a downturn does not correct itself endogenously, and which therefore re- quires basic changes in the institutions that

*New School for Social Research, University of Michigan, and University of Massachusetts-Amherst, respectively. The order of our names has been selected randomly. We thank Peter Alexander for research assis- tance, and Carol Heim and Robert Zevin for helpful comments and suggestions.

152

VOL. 73 NO. 2 LONG WA VES IN ECONOMIC ACTIVITY 153

regulate the accumulation process and estab- lish the conditions for profitability.

This distinction allows us to define the difference between long swing expansions and crises in a particularly simple manner. Long swing expansions are characterized by reproductive cycles, sustaining the effective- ness of the SSA in promoting profitability, investment, and growth. Long swing crises are characterized by nonreproductive cycles, leading to prolonged periods of economic stagnation or disaccumulation and eventu- ally, if capitalism is to continue, to the con- struction of a new SSA capable of rekindling profitability, investment, and growth. The theoretical distinction between long swing expansions and crises thus resides in the reproductive or nonreproductive nature of the business cycle; slower economic growth or reduced accumulation are therefore a probable consequence of a long swing crisis rather than its defining characteristic.

These definitions presuppose a specific set of interconnections among the SSA, the ex- pected profit rate, the cycle, and investment activity. The expected profit rate depends on the effectiveness of those institutions which make up a given SSA. The level and pattern of investment depends upon the SSA and the expected profit rate. Cyclical downturns are induced by a decline in the expected rate of profit. Reproductive cyclical downturns re- store the expected rate of profit, and thus investment activity, while nonreproductive cyclical downturns do not. (We provide some econometric evidence for these propositions in our 1983 book, and in Weisskopf's 1979 article. One effort at explaining the emer- gence of the nonreproductive cycle in the post-World War II period is found in Bowles and Herbert Gintis.)

Why would a reproductive cycle become nonreproductive? We may examine the func- tioning of the reproductive cycle through an analysis of the determinants of the profit rate. Abstracting from taxes, we may repre- sent the profit rate of the individual firm, r, as the product of the share of profits in firm value-added SrI the ratio of output to utilized capital stock yu, and the ratio of utilized to owned capital stock k*, or

(1) r-sryuk*,

where

(2) r- II/Ko; sr -I / Y; Yu Y/Ku;

k*-KJIKo;

and II is firm profits, Ko is the value of the firm's owned capital stock, Y is firm value- added, and KU is the portion of the owned capital stock which is currently utilized.

The expected profit rate re will by parallel reasoning depend on the "full capacity profit rate" srYu, and expected capacity utilization k*, or

(3) re- SrYuk*e

The expression in (3) suggests that a cycli- cal downturn may restore expected profits in either of two principal ways, by raising the profit share, Sr, or by raising the ratio of output to utilized capital, yu. (Downturns do not generally raise expected capacity utiliza- tion.) The cyclical downturn may raise yu by eliminating high-cost firms and by inducing the nonuse of high-cost processes within surviving firms. The effect of the cycle on yu is closely associated with the effect of the cycle on competitive pressures among busi- ness and, by implication, with the business failure rate.

The effect of a cyclical downturn on the profit share involves a somewhat more com- plicated set of connections. It may be in- vestigated by representing the profit share as unity minus what we call real unit labor costs, or

(4) Sr- [(wlp)lqe] ,

where w is the nominal wage, p is the price of output, q is output per unit of labor effort, and e is labor effort input per hour.

A cyclical downturn may lower the prod- uct wage (w/p), raise output per unit of effort (q), or raise labor effort per hour (e). The effects on w/p and e are derived from the increased power of capital over labor associated with an increase in the size of the reserve army of the unemployed and the consequent increase in the cost to the worker of losing his or her job. (These effects are estimated econometrically in our 1983 paper, and in Juliet B. Schor and Bowles.) The

154 AEA PAPERS AND PROCEEDINGS MA Y 1983

effect of the downturn upon q may arise because of the firm elimination and competi- tive pressure effects outlined above, or be- cause of increased power of capital in de- termining work rules and technical changes, or for other reasons.

The nonreproductive cycle is one in which these restorative effects of the downturn on the profit share and the ratio of output to utilized capital fail to operate. The failure of these effects signals an erosion of the ef- fectiveness of the institutions of the SSA and therefore the onset of a long swing crisis. Under what conditions might they fail to operate?

The cyclical downturn might not raise the ratio of output to utilized capital stock if high-cost firms and high-cost operations were not eliminated, or if the downturn was char- acterized by an especially severe contraction in sectors with relatively high output/capital ratios, or if the reserve army effects failed to raise output per effort unit or effort per hour, or for other reasons.

The cyclical downturn might not raise the profit share if producer price cutting out- weighed wage cutting, giving rise to an in- crease in the product wage, or if the contrac- tion failed to have positive effects on output per unit of effort or effort per labor hour.

We do not have space to present a model of price determination over the cycle which incorporates both mark-up and limit-pricing behavior: our model suggests, in brief, that the negative effects of economic downturns on product prices are likely to be limited.

The effect of the contraction on the other components of real unit labor costs-the nominal wage rate, output per effort unit, and effort per labor hour-may be derived from a microeconomic analysis of the capi- tal-labor conflict over wage setting and work intensity as modeled in Bowles. For our pur- poses here, it is sufficient to observe that the effects of the cyclical downturn on the above determinants of real unit labor costs will be more favorable to capital, the more the con- traction increases the expected duration of unemployment and the greater is the dif- ference between the worker's current after-tax wage and the worker's expected level of un- employment insurance and other income- replacing payments from the government.

In an accounting sense, the effect of a cyclical downturn on the expected profit rate will obviously depend on the sum of the above contradictory effects. More substan- tively, the overall effect will depend on the manner in which the social structure of accu- mulation regulates product markets, labor markets, the labor process, international ex- changes, state expenditures, and so forth. Elaboration of an adequate model of these relations cannot be pursued in such a short essay. (Gordon, Edwards, and Reich provide this kind of analysis for the labor process and labor market.)

We confine ourselves, much more simply, to a brief empirical demonstration that our hypothesized relationships between the busi- ness cycle and long swings are at least partly confirmed by the historical data. Because data on the capital stock and its utilization are inadequate for cyclical analysis until rela- tively recent years, we cannot explore the effects of cyclical downturns on the level of output per utilized unit of capital stock y, But available data do permit investigation of the movements of real unit labor costs in the U.S. economy for the period from 1890 to 1982. (Our pre-1948 data refer to the manu- facturing sector alone; data for 1948 and later years are for the private business sector. Sources and methods are fully described in a data appendix, available from the authors.)

We use these data to classify cycles as reproductive or nonreproductive. A nonre- productive cycle is defined as one in which the ratio of the product wage to output per hour, or real unit labor costs [(w/p)/qel rises rather than falls between the business cycle peak and the year following the trough. (We measure changes from peak to one year after the trough to allow time for the full restorative impact of the downturns.)

Our results in column (3) of Table 1 indi- cate alternating periods of nonreproductive and reproductive cycles, with the nonre- productive or crisis periods spanning the years 1890-1903, 1926-37, and 1969 to the present- the cycles numbered 1-4, 11-12, and 19-21, respectively. There is also a noticeable long swing pattern in the data in column (3), as one can see by graphing its cycle values against time. (We omit the graph for reasons of space.) This impression is sus-

VOL. 73 NO. 2 LONG WA VES IN ECONOMIC ACTIVITY 155

TABLE 1-THE RESTORATION OF PROFITABILITY IN CYCLICAL DOWNTURNS, 1890-1981

Percentage Average Annual Change

Change in Product Output Real Unit Unemployment

Cyclical Downturn Wages per hour Labor Costs Rate

Cycle Peak Trough (1) (2) (3) (4)

1 1890 1891 0.78 0.00 0.78 1.4 2 1892 1894 3.84 -0.70 4.54 15.4 3 1895 1897 1.63 -0.67 2.30 0.8 4 1899 1901 2.03 1.45 0.58 - 2.5 5 1903 1905 -0.93 2.55 - 3.48 0.4 6 1907 1909 - 3.24 2.67 - 5.91 2.3 7 1910 1912 3.05 4.66 - 1.61 - 1.3 8 1913 1915 - 1.69 6.28 -7.97 4.2 9 1919 1922 5.87 10.83 -4.96 5.3

10 1923 1925 2.28 6.30 -4.02 0.8 11 1926 1928 4.29 3.32 0.97 2.4 12 1929 1933 1.50 1.35 0.15 21.7 13 1937 1939 2.40 3.72 - 1.32 2.9 14 1944 1947 -2.94 - 1.34 - 1.60 2.7 15 1948 1950 3.92 4.46 - 0.54 1.5 16 1953 1955 0.96 2.73 - 1.77 1.5 17 1957 1959 2.57 3.13 -0.56 1.2 18 1960 1962 3.14 3.48 -0.34 0.0 19 1969 1971 2.33 2.17 0.16 2.4 20 1973 1976 1.17 1.07 0.10 2.8 21 1979 1981 0.85 0.45 0.39 1.8

Notes: The NBER peak-trough-peak cycle of 1918-1919-1920 was ignored as a cycle, since the respective unemploy- ment rates for these years were 1.4, 1.4, and 5.2 percent; we designate 1919 as the peak instead. Cycle peaks are those identified by the NBER; troughs are one year after the NBER trough, except that if this is another peak year, the NBER trough itself is used.

tained by evidence of autocorrelation when the data in column (3) are tested against the null hypothesis of constancy over time. The Durbin-Watson statistic for such a test is 0.90, significant at 5 percent and substan- tially lower than for comparable tests on the between-cycle movements of data on pro- ducers' prices, aggregate output, or aggregate investment.' Our model of the effects of cycles on expected profits, in short, reveals clearer evidence of long swing behavior than other macroeconomic indicators on which economists have previously concentrated.

Additional analysis supports our hypothe- ses about the differences between repro- ductive and nonreproductive cycles. In the

reproductive cycle, we would expect a sys- tematic inverse relationship between the peak-to-trough changes in unemployment and real unit labor costs: the greater the reserve army jolt, the larger the reduction in real unit labor costs during the downturn. In the nonreproductive cycle, given our hy- pothesized erosion of the SSA, we would expect a breakdown of this effect; we should therefore find no evidence of any systematic statistical relationship between the move- ments in unemployment and real unit labor costs. We have combined the reproductive cycles (5-10 and 13-18) in one group, and the nonreproductive cycles (1-4, 11-12, and 19-21) in another. Regressing the data in column (3) on the data in column (4), we find a negative and statistically significant coefficient for the group of reproductive cycles and accept the hypothesis of statistical independence for the nonreproductive group.

'We performed these tests on data for the wholesale price index, gross private domestic product, and gross private domestic investment. The Durbin-Watson statis- tics for these tests were 1.28, 1.37, and 1. 12, respectively.

156 AEA PAPERS AND PROCEEDINGS MA Y 1983

TABLE 2-GROWTH OF OUTPUT AND INVESTMENT IN THE U.S. ECONOMY, 1860's- 1979 a

Boom Crisis Boom Crisis Boom Crisis

1860's 1892 1899 1929 1937 1973 to to to to to to Averages

1892 1899 1929 1937 1973 1979 Boom Crisis

Gross Domestic Nonfarm Product 6.6 2.9 3.7 -0.8 4.2 2.9 4.8 1.8

Industrial Production 5.1 3.4 4.5 0.4 4.9 2.7 4.8 2.2 Gross Domestic Private

Fixed Nonres. Investment 8.0 1.3 2.4 -4.7 4.7 2.8 5.0 -0.2

aAll entries are percentage average annual changes in constant dollars.

TABLE 3-AVERAGE EFFECTS OF CYCLICAL DOWNTURNSa

Real Unit Unemployment Labor Costs Rate

Cycles (1) (2)

Crises: b 1-3 2.54 5.9 11-12 0.56 12.0 19-21 0.22 2.3

Average 1.18 6.1 Expansions: 4-10 - 3.91 1.3

13-18 - 1.02 1.6 Average - 2.58 1.4

aColumns (1) (shown in percent) and (2) represent the averages for the respective cycle groups of the data presented in columns (3) and (4) in Table 1.

bWe include for this comparison the cycle identified as the onset of the crisis, or the first nonreproductive crisis, whereas we excluded this cycle in our presentation of the data in Table 2.

Covariance analysis further confirms the hy- pothesis of differences in both intercepts and slopes between the two groups.

We can next explore the relationship be- tween the data in Table 1 and conventional hypotheses about long swings in economic activity. The first nonreproductive cycle in each sequence in column (3) (cycles 1, 11, and 19) appears to precede by one cycle those periods which are generally char- acterized as crises or depressions.2 We pre- sent in Table 2 the results of dating eco- nomic crises proper, as opposed to their onsets, as commencing after one nonrepro- ductive cycle. (We have dated the end of the 1890's crisis at the NBER peak of 1899,

discounting the nonreproductive nature of the 1899-1903 downturn, since the un- employment rate actually fell during this "contraction.") Data for aggregate output, industrial production, and aggregate invest- ment all demarcate distinct epochs of relative growth and stagnation.

Table 3 presents the average effects of cyclical downturns, averaging the data from columns (3) and (4) in Table 1, for crisis and expansion periods defined by this dating sys- tem. There are sharp and consistent dif- ferences between the crisis and expansion periods by these measures as well.3

2Since we do not have comparable data for the years before 1890, we cannot be certain, of course, that the cycle beginning with the peak in 1890 was the first nonreproductive cycle in this particular sequence.

3Some readers may question our use of the NBER dating of peaks and troughs rather than a cycle dating by peaks and troughs in the unemployment rate. We prefer our choice since we are concerned with the effects of downturns in business activity in general, not simply with movements in unemployment; there are two

VOL. 73 NO. 2 LONG WA VES IN ECONOMIC A CTI VITY 157

We note, finally, that our dating identifies crisis periods which correspond to eras in which historians have identified intense in- stitutional conflict and innovation. What have been termed "key" presidential elec- tions, those of 1892 and 1896, and of 1932 and 1936, fall within our first two crisis periods. All three crisis periods, defined by our method, have witnessed intensified class conflict and sharp debates over major eco- nomic policy issues.

We conclude that this empirical evidence, however provisional, establishes strong initial support for our model of the relationship between the business cycle and long swings.

"perverse" business cycle downturns, indeed, which did not result in increases in the unemployment rate. Our results are robust if we use an analogous unemployment dating scheme, in any case: the numbers corresponding to the averages in column (I) of Table 3 are + 2.66, + 0.94, + 1.23, + 1.55, - 1.93, -0.98, and - 1.49 per- cent, respectively.

REFERENCES

Bowles, Samuel, " Competitive Wage De- termination and Involuntary Unemploy- ment," mimeo., University of Massachu- setts-Amherst, 1981.

and Gintis, Herbert, " The Crisis of Liberal Democratic Capitalism: The Case of the United States," Politics and Society, Winter 1982, 11, 51-92.

, Gordon, David M., and Weisskopf, Thomas E., Beyond the Waste Land: A Democratic Alternative to Economic De- cline, New York: Doubleday Books, 1983.

Gordon, David M., "Stages of Accumulation and Long Economic Cycles," in T. Hopkins and I. Wallerstein, eds., Processes of the World-System, Beverly Hills: Sage Publications, 1980.

, Edwards, Richard, and Reich, Michael, Segmented Work, Divided Workers: The Historical Transformation of Labor in the United States, New York: Cambridge Uni- versity Press, 1982.

Schor, Juliet B., and Bowles, Samuel, "The So- cial Wage and the Labor Process: Measur- ing Some Influences on Worker Resis- tance," mimeo., Williams College, 1982.

Weisskopf, Thomas E., " Marxian Crisis Theory and the Rate of Profit in the Postwar U.S. Economy," Cambridge Journal of Econom- ics, December 1979, 3, 341-78.

, Bowles, Samuel, and Gordon, David M., "Hearts and Minds: A Social Model of Aggregate Productivity Growth in the United States, 1948-1979," mimeo., Eco- nomics Institute of the Center for Dem- ocratic Alternatives, 1983.