ABSTRACT
We present in this book an analysis of systemic trends in the US and other major OECD countries leading to the Great Recession, based on insights drawn from the conceptual framework of such classical economists as Adam Smith, David Ricardo, John Stuart Mill, and Karl Marx. We also provide extensive empirical evidence in support of the significance we attach to the structural determination of these trends. Thus, in line with the fundamental assumption of classical political economy, our approach highlights the link between profitability and capital accumulation trends. We argue that declining trends of US nonfinancial corporate capital accumulation from the mid-1960s to the present were caused by profit rates falling in that sector from their postwar highs to a 1982 trough, and, following a rebound extending to 1987, remaining lower and never recovering the high levels achieved in the postwar period. By contrast, the significant recovery of profitability in the financial sector from its 1982 trough outpaced the partial improvement of nonfinancial corporate profitability. We assume that businesses facing uncertain prospects regarding their new investments rely heavily on past profitability trends as a guide to the future. We argue that the bifurcation of financial from nonfinancial capital accumulation paths after the mid-1980s mirrored the growing gap between profitability paths in those two sectors. Rising profitability in financial sectors attracted growing capital flows into financial markets, including mortgage-backed securities. In the event, the formation of stock market and housing bubbles goaded the build-up of global investors' euphoria. Driven by competitive pressures and blinded by overconfidence in their chosen strategy, banks pushed the frontiers of profitable investments to perilous grounds that eventually triggered the system's crisis. In our view, however, weak accumulation trends in the nonfinancial corporate sector, the result of the inadequate restoration of profitability outside finance, transformed the financial crisis into a full-fledged Great Recession.
