By Halevi, Joseph; Varoufakis, Yanis
Monthly Review , Vol. 55, No. 7
Al Goldberg, an MR reader, sent us five questions regarding our article, "The Global Minotaur" (MR July-August 2003). Answering them may help clarify a number of important issues brought to light by our article as well as issues which are always current in the wider debates within contemporary political economy. We answer his questions one by one but sometimes digress to cover other potentially interesting topics.
Q: What is "deflation"? How is "deflation" different from "recession" or "depression"?
A: The conventional definition of deflation refers to a situation of actually falling prices. Such periods were quite common in the earlier, competitive, phase of capitalism during the nineteenth century. The 1920s were also made famous by falling prices while Japan offers the latest such example. However, it must be said that conventionally defined deflation is quite a rare phenomenon under late capitalism. The main reason is the power of corporations to prevent prices from falling, or at least to ensure that they do not fall consistently and across the board.
Under the influence of corporate power (or monopoly capital), prices may fall in certain sectors where technological innovations are particularly rapid, but this process is kept in check and translates into a fall in average prices very, very rarely. The main mechanism by which corporations maintain prices, during periods of reduced demand, is through reductions of output. Hence instead of falling prices (i.e., price deflation) we observe what is called "real deflation"; that is, reductions mostly in output and employment. When such a state of affairs materializes the economy is said to be in a recession.
In the United States the economy is officially declared to be in a recession when output fans during two consecutive quarters. But this is a silly definition since it is quite clear that we are in the throes of recession even if, following one quarter of fallen output, output fails to pick up and instead remains fluctuating around that low level.
When recession proceeds for a while, with output falling in successive quarters, and then gets stuck at a low level without a visible tendency to rise again, we say that we are in a depression. This is usually associated with large loss of output, idle factories, a high bankruptcy rate, and also with a fall in prices. Although the most famous world depression occurred in the 1930s, the United States had already experienced two earlier depressions, one in the 1870s and one in the 1890s, which have received much attention from economic historians. It is indeed interesting to compare the depression of the 1870s with the Great Depression of the 1930s. While the former manifested itself in terms of falling prices, the latter was characterized by a catastrophic fall in output and employment. It is for this reason that many of us think of the Great Depression as the first significant crisis of the era of monopoly capital (recall how the latter manages to shield prices from falling while diverting the crisis onto output).
An excellent study undertaken by Congress in the late 1930s showed the extent of the catastrophe that was the Great Depression (U.S. National Resources Committee, The Structure of the American Economy, 1939). Prices in the most concentrated sectors fell only slightly, between 10 percent and 15 percent, while output collapsed by 60 percent to 75 percent, thereby making it nearly impossible for industry to continue producing at a profit. By contrast, in the less concentrated sectors (such as footwear and apparel), while output still fell by 25 percent to 30 percent, prices declined by an equally significant percentage. The depression of the 1930s also highlighted the crucial divide between raw materials and food producing areas and industrial centers. This divide operated both within the United States and globally. As the depression started to bite, American agricultural output was basically stable, even moderately expanding. …