Credit cycles: freewheeling, driving or driven?

Abstract

Purpose– The discourse on credit cycles has been reinvigorated following the global crisis. The purpose of this paper is to contrast the positions of mainstream, Marxist, Austrian and post-Keynesian (PK) schools of thought on these matters. It is posited that most notions underplay the significance of real economy factors in shaping the fluctuations of credit levels and relations. It is argued these ideas are best illustrated by Marx (as interpreted by the Temporal Single System Interpretation) and tendency for the profit rate to fall with accumulation. Empirical evidence on the UK profit rate is provided as supporting evidence.Design/methodology/approach– The paper explores the theoretical work on credit and business cycles from the relevant schools of thought and contrasts them. The aim is to consider which approach best describes the reality. Empirical work on the profit rate provides supporting evidence.Findings– It is argued that the mainstream view of monetary neutrality is an insufficient explanation of the financial reality associated with credit and business cycles. Instead, it is posited that the PK approach, which emphasizes productive and financial factors, is more preferable. This contrasts with the usual singular financialization commentary that is used to describe the financial crisis and real economy stagnation that followed. It is argued that Marx’s notion of falling profit and its ramifications best explain the reality of both the credit and business cycle. This is supported by the evidence.Research limitations/implications– It is problematic to calculate a Marxian rate of profit given the lack of suitable reported statistics. The research illustrates the significance of productive factors, especially the tendency for the profit rate to fall, in driving business cycles. There are, therefore, implications for government fiscal/monetary/industrial policies to reflect these factors when seeking to influence the business cycle.Practical implications– Policies that are designed to target levels of profitability are likely to be beneficial for capitalist sustainability.Social implications– The focus on profitability in the paper informs individuals working in business organizations of some of the imperatives facing corporations in a modern competitive environment.Originality/value– Whether financial factors drive the business cycle, or are themselves driven by it, is an important question given that policy prescriptions will differ depending on the answer. The recent financialization commentary, for instance, suggests that better regulation or reform of the financial sector will preclude unstable business cycles. The paper argues, in contrast, that the cause of the credit instability is rooted in production (following Marx) and that, therefore, a more production-focused policy response is required whilst recognizing the instabilities of the credit system. This latter point has a measure of originality in the current discourse.