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Why recession and depression policies differ

Stravelakis, Nikos (2012): Why recession and depression policies differ.

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Abstract

This draft presents a model of internally generated growth and effective demand. It is constructed with the rationale of separating fast and slow variables. Slow variables appear as parameters. We show the reaction of profit growth to different rates of profit (slow variable) through the variation of the rate of interest and the price level (fast variables). The model is within the classical / Marxist tradition in the sense that profitability is the driving force of capital accumulation and the Marxist / post Keynesian tradition in the sense that the rate of interest is a purely monetary phenomenon depending on the competition between borrowers and lenders. Although we let prices and the rate of savings adjust to the rate of capital accumulation and the rate of interest respectively the prevailing rate of profit is the dominant force of accumulation giving insights on the characteristics of depressions and the effectiveness of various policies in that context. More specifically, the model shows the difference between fluctuations in profitability and production which characterize a recession to a standstill in profit growth which is the mark of a depression. As we will show savings adjustments are sufficient to bring an economy out of recession but are totally ineffective in depressions. Therefore, recession and depression policies should differ significantly not only quantitatively but also qualitatively. In a depression increasing, bank liquidity, trough governments and central banks, will not drive the system out of stagnation because profits are too low and outstanding debt is too high for banks to extend credit and corporations to invest. Furthermore, major restructuring involving real wage reductions, mergers and acquisitions of corporations and banks, includes the impairment of the weaker capital which will take a long undefined period of time with persistent high unemployment. Direct state investment, on the other hand, will reduce unemployment and create adequate demand to eventually drive the economy out of stagnation.

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