Six crises of the world economy globalization and economic turbulence from the 1970s to the covid 19

Six Crises of

the World Economy:

Globalization and Economic Turbulence from the 1970s to the COVID-19 Pandemic José A. Tapia

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Six Crises of the World Economy Globalization and Economic Turbulence from the 1970s to the COVID-19 Pandemic

Six Crises of the World Economy

Six Crises of the World Economy

Globalization and Economic Turbulence from the 1970s to the COVID-19 Pandemic

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The function of social science is quite different from that of the natural sciences—it is to provide society with an organ of self-consciousness.

Joan Robinson, Freedom & Necessity—An Introduction to the Study of Society (1971).

A genuine economic crisis […] is a situation in which a large number of debtors find themselves unable to meet their obligations when due; accompanied, preceded, or followed by a marked falling-off in the demand for goods. Separating the financial phenomena from the industrial, for analytical purposes, a financial crisis is a situation in which a large number of debtors are unable to meet their obligations [...] An industrial crisis is a marked falling-off in demand for goods.

Minnie Throop England, “Economic crises”, Journal of Political Economy (1913).

The arrival of European capitalism in North America was accompanied first by the extermination of the indigenous Amerindian population and the theft of their lands by English emigrants, then by the establishment at the start of the 19th century of a capitalist raw-materials production for English industry, and the enslavement of four million black Africans who were sold to America by European slave-traders […] The establishment of the capitalist world economy brings in its wake […] a growing insecurity of existence across the whole globe, corresponding to the accumulation of capital in a few hands.

Rosa Luxemburg, Introduction to Political Economy (1910)

A mis profesores, Jesús Medina, El Trivial, Santiago Llanos, El Pelanas, y Don Ernesto, El Búho, que tanto me enseñaron

Preface

This book is about the crises of the world economy that have occurred from the 1970s to the present. It makes the specific case that the global economy went through six crises during this period of half a century, the first crisis occurred in the mid-1970s, and the sixth crisis occurred in 2020, at the time of the COVID-19 pandemic. Crises of the global economy are periods of substantial slowdown in world economic activity—as measured by investment, money value of the economic output, industrial production, trade, unemployment, etc.—in which many national economies, though not all, are technically in recession. To pose the existence of crises in the global economy implies that the world economy is a proper construct which has conceptual substance given by its own dynamics; it implies also that the usual view that takes national economies as units of economic analysis is an approach with major limitations. The book provides data illustrating the global and regional manifestations of these crises of the world economy, elaborates on the concepts of the world economy and economic crisis, and discusses the theories that have been used to explain them. Its general thrust is to argue that the world economy, not national economies, is the major unit to be analyzed when trying to understand the economic reality of our time, particularly the reality of crises. These crises are discrete, countable phenomena, distinct states of an entity that can be properly called the world or global economy, or world capitalism.

The book is written from a political economy perspective in which major theoretical influences are the world-system school, institutional economics, and ecological economics, with Immanuel Wallerstein, Wesley C. Mitchell, and Nicholas Georgescu-Roegen being the most representative authors of these schools. Now, the world-system school takes its inspiration largely from Marx, Wesley Mitchell was a leading author of mainstream economics, while ecological economics, which was born late in the past century, is marginal in the discipline and focuses on problems that were largely ignored by Marx, Mitchell, Keynes, and neoclassical economists. So, it could be thought that the theoretical underpinnings of this book are mostly eclectic. However, in writing it I have made a major effort to be consistent, both internally and with the facts. It is true—as Albert Einstein emphasized in physics and Tjalling Koopmans in economics—that theory guides research by focusing attention on specific issues and variables.1 However, reality is persistent and often insists on showing its true nature screaming out for those who want to understand how and why things happen that the gaze is misdirected, that the focus must be shifted. It means theory needs change. In an interview in which he was asked about the Great Recession, a recipient of the Nobel Memorial prize in economics, Eugene Fama, claimed that he had no idea about what causes recessions.2 We can be sympathetic to him; nobody can be knowledgeable about everything. However, Fama also meant that, in general, economics as a discipline has today no clue about what causes economic crises. If that is the case, what is then the relevance of the discipline to understand the major issue—crises—of economic life?

I try to provide some answers to these questions. In this book, I argue that the main feature of economic crises is a temporary interruption of capital accumulation, which is manifested as a slowdown of economic activity, almost always associated with financial turmoil which is both an effect and a cause of the malfunction of the real economy.

1 Heisenberg (1971), Physics and beyond , 63; Bernstein (1973), “The secrets of the old one”, New Yorker, March 10, 44–101, March 17, 44–91; Koopmans (1941), “The logic of econometric business-cycle research”, Journal of Political Economy 49(2):157–181.

2 Cassidy (2010), “Interview with Eugene Fama: After the blowup,” New Yorker Jan 11, 28 et seq..

The embryo of this book was a paper that I wrote in 2013 and presented in January 2014 at the annual meeting of ASSA/AEA in Philadelphia. I titled the paper “From the Oil Crisis to the Great Recession: Five crises of the world economy” and dated the crises in the mid-1970s, early 1980s, early 1990s, around the turn of the century, and in 2008–2009. In 2013, it was common to refer to the Great Recession as a global recession or a crisis of the world economy—the term Global Financial Crisis had been often applied to the 2008–2009 crisis—but referring to several crises of the world economy beyond the Great Recession was a rarity, indeed I thought my use was somewhat of an innovation. However, as I began to work on this book project, an IMF publication appeared in which four recessions of the world economy were identified and dated 1975, 1982, 1991, and 2009.3 Obviously, these four crises identified by IMF authors as recessions of the world economy are the same crises that I date more loosely in the mid-1970s, early 1980s, early 1990s, and 2008–2009. For the IMF authors there was not, however, a global recession around the turn of the century, though they identified “downturns of the world economy” in 1998 and 2001.4 To a large extent, this book has been written “in conversation” and often in controversy with Kose and Terrones, the speakers of the IMF in these matters.5 In the book, I discuss the criteria to justify my chronology of crises, including the theoretical reasons and empirical data which in my view provide ample support for the idea that there was a crisis of the global economy around the turn of the century.

The book is written for a public of informed readers interested in economic and social issues, undergraduate and graduate students, and

3 Kose & Terrones (2015), Collapse and revival—Understanding global recessions and recoveries

4 Kose & Terrones (2015), Collapse , 65.

5 The book by Kose and Terrones has the usual disclaimers explaining that it is not the official position of the IMF, the publishing institution. But a note in the book introduces M. Ayhan Kose as Director of the World Bank Group’s Development Prospects Group and previous Assistant to the Director of the Research Department at the IMF, and Marco E. Terrones as a Deputy Division Chief in the Research Department of the IMF.

professionals in the social sciences. Statistical analyses including some Pvalues, correlations, and regression results that require some knowledge of statistics are included very sparsely, in footnotes, and in appendices at the end of the book. The rest of the book only assumes general literacy on science and economic issues and knowledge about our modern world.

Philadelphia, USA

Abbreviations

The following list of abbreviations includes all the acronyms and abbreviations used in the text. Many of them like US, EU, USSR, OECD, IMF, ILO, or GDP refer to states, groups of states, countries, agencies of the United Nations system, or common concepts in economics, they are relatively well known for anyone who reads in English and will be used without explanation in the text. They are explained here considering that many readers of this book may not be as familiar with English. The list also includes abbreviations that will be used in the text but will be explained when they appear for the first time.

AEA American Economic Association

BIS Bank for International Settlements

ch. chapter

CO2 carbon dioxide

COMECON Council for Mutual Economic Assistance

CPI consumer price index

DSGE dynamic stochastic general equilibrium (models)

EKC environmental Kuznets curve

EU European Union

fn footnote

G20 Inter-governmental forum including a group of 20 countries—the seven G7 countries plus Argentina, Australia, Brazil, China, India, Indonesia, South Korea,

Mexico, Russia, Saudi Arabia, South Africa, Turkey, and the EU, with Spain as a permanent observer.

G7 Group of 7, inter-governmental forum including Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States

GATT General Agreement on Tariffs and Trade

GDP gross domestic product

GHG greenhouse gasses

ILO International Labor Organization

IMF International Monetary Fund

l.h.s. left-hand scale

mbpd million barrels per day

MECW Marx & Engels Collected Works

NATO North Atlantic Treaty Organization

NBER National Bureau of Economic Research (semi-official US research institute)

OECD Organization for Economic Cooperation and Development

OLS ordinary least squares

OPEC Organization of the Petroleum Exporting Countries

PPP purchasing power parities

r.h.s. right-hand scale

RBC real business cycle (theory, models)

UK United Kingdom

UN United Nations

US$ United States dollar

US, USA United States of America

USSR Union of Soviet Socialist Republics

WDI World Development Indicators, the database of the World Bank

WGDP world GDP

WTO World Trade Organization

List of Figures

List of Tables

Table C3 Results of models with CO2 emissions per capita (tons) as dependent variable regressed on real GDP per capita (thousand 2010 US$,

effects for country and year, and

Introduction

According to Immanuel Wallerstein,

Today we have a capitalist world-economy. It encompasses the entire globe, but there isn’t anything else […] It starts in the end of the 19th century, but it’s the first time in human history where there’s only one historical system on the planet at a given time. And that does change a lot of things.1

It was also Wallerstein who claimed that social scientists like to set turning points to clarify the story they are trying to tell. This device

becomes a basic building block of their analyses of the immediate phenomena they are studying. The choice of turning points constitutes a basic framework within which we all operate. But choosing different turning points can change entirely the logic of the analyses. What are considered to be the “turning points” can mislead as readily as they can clarify.2

1 Wallerstein (2013), “Interview with G. Williams (2013)”, Journal of World-Systems Research 19(2), 202–210.

2 Wallerstein (2011), Modern World-System III: The Second Era of Great Expansion of the Capitalist World-Economy, 1730s–1840s , xiii.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023

J. A. Tapia, Six Crises of the World Economy, https://doi.org/10.1007/978-3-031-38735-7_1

This book makes the case that there have been six crises of the world economy since the 1970s to the present. The assertion that an entity called “the world economy” had six crises since the 1970s to the start of the third decade of the twenty-first century provides key insights into the basic dynamics of economic and social conditions and into a variety of issues worthy of consideration in social science. As it will be shown in the next chapter, significant evidence of six major “slumps” of the global economy, i.e., world recessions or crises, is provided by a variety of economic indicators. These six world economic crises occurred

(i) in the mid-1970s, when most national economies went through recessions that were considered part of the so-called First Oil Crisis;

(ii) in the early 1980s, in what sometimes was called the Second Oil Crisis;

(iii) in the early 1990s, when most Western economies suffered major recessions at the same time that the USSR and the Soviet bloc crumbled;

(iv) around the turn of the century, when mild recessions affected high-income economies and major economic disturbances occurred in many Asian countries, Russia and Latin America;

(v) in the late 2000s when the Great Recession started and in many European countries extended to the early years of the 2010s; and

(vi) in 2020, when the world economy had a major contraction at the time of the COVID-19 pandemic.

Business cycle chronologies of national economies such as those produced by the NBER or other institutions are to a substantial extent consistent with these six crises of the world economy—which, obviously, had different manifestations in different nations and economic regions.

Modern discussions of economic crises often turn quickly to empirical data, focusing on national statistics on national income, unemployment, financial markets, or other economic indicators. In this way the assumption is made, often implicitly, that the discussion of crises must focus on

a unit of analysis that cannot be other than a national economy.3 Regretfully, the concept of crisis itself is often used without much definition, as if it were evident. To face this issue upfront, in this book a world economic crisis is defined as a period of at least a year and no longer than a few years in which there is a strong drop of the accumulation of capital or, in other terms, capital formation, or business investment. This concept will be discussed further in Chapter 4.

In the aftermath of the world economic crisis that erupted in 2008, there were multiple attempts to generate inventories of crises, usually focusing on finance and banking. In Misunderstanding Financial Crises , Gary Gorton explained that identifying crises or, more specifically, setting a chronology in which the start date and the end date of the crises is established, is a relatively controversial issue in mainstream economics.4 Gorton cited studies by IMF economists Laeven and Valencia, by Reinhardt and Rogoff, and by Bordo et al.5 While Laeven and Valencia referred to 124 systemic banking crises over the period 1970–2007, in This Time is Different Reinhardt and Rogoff considered a period of several centuries in which Britain, the United States, and France had, respectively, 12, 13, and 15 banking crisis episodes. But Reinhardt and Rogoff concluded that the frequency of crises declined in the period after World War II. Writing in 2001, Bordo et al. had asked themselves whether the crisis problem was growing more severe. They examined the period 1880–2000, concluding that the frequency of financial crises since 1973 had been rivaled only by the 1920s and 1930s, but in their view, there was “little evidence that crises have grown longer or output losses have

3 The idea that in studying macroeconomic issues the proper unit of analysis must be the national economy has a long tradition coming back to Simon Kuznets, who in the 1930s led with Wesley C. Mitchell the development of national income accounts at the NBER. For Kuznets (1966), “if the study of economic growth is oriented to policy problems, the study should be centered on units that possess the major policy-making power” (Modern economic growth: Rate, structure, and spread , 17). I have used national data for economic analyses for instance in Tapia (2017), Rentabilidad, inversión y crisis: Teorías económicas y datos empíricos ) and Tapia (2013), “Does investment call the tune? Empirical evidence and endogenous theories of the business cycle”, Research in Political Economy 28, 229–259.

4 Gorton (2012), Misunderstanding financial crises: Why we don’t see them coming.

5 Laeven & Valencia (2008), “Systemic banking crises: A new database,” IMF Working Paper No. 08/224; Reinhart & Rogoff (2009), This time is different: Eight centuries of financial folly ; Bordo et al. (2001), “Is the crisis problem growing more severe?”, Economic Policy 16(32), 51–82.

become larger.” This conclusion, as we will see in the next chapter, is untenable considering the contractions of WGDP in 2009 and 2020.

In an update of their inventory of crises, Luc Laeven and Fabián Valencia estimated in 2012 that during the period 1970–2011, there were worldwide 146 banking crises, 218 currency crises, and 66 episodes of sovereign debt crisis and debt restructuring.6 The authors provided careful formal definitions of each type of crisis. A common fundamental feature of these three types of crises as defined by Laeven and Valencia is financial stress due to the inability of private financial enterprises or government institutions to face due payments. This leads to bank runs and liquidations (banking crisis ), devaluation of the national currency (currency crisis ), or sovereign debt defaults (sovereign debt crisis ). Laeven and Valencia maintained that these three types of crises often overlap in a “twin” or “triplet” crisis, i.e., a period in which two or three of these types of financial crisis occurs at the same time.

Many countries experienced banking crises in 2008, but for Laeven and Valencia, problems in the financial sector were severe enough to classify them as systemic banking crises only in later years, specifically 2009 for Denmark, Germany, Greece, Ireland, Mongolia, and Ukraine; 2010 for Kazakhstan; and 2011 for Nigeria and Spain. Though obviously Laeven and Valencia focused on national economies as the units in which crises can occur, they accepted that some banking crises “do not originate domestically but are imported from abroad when foreign subsidiaries of domestic banks get in trouble.”

Reinhart and Rogoff saw financial crises occurring in waves, and Laeven and Valencia agreed with that view. When Laeven and Valencia examined the distribution of banking crises since the 1970s to 2012 (Fig. 1.1), they found a large peak of “crisis activity” in 2008, but the rest of the crises are loosely spread out: in the 1980s and 1990s there were many financial crises, with only the mid-1980s and the last two years of the century showing financial calm. Clear peaks of crisis activity can be observed in the mid-1970s and the early 1980s, and in three clusters during the 1990s, corresponding to the crises of the transition economies of Eastern Europe, of Latin American countries during the socalled tequila crisis in the mid-1990s, and of East Asian countries during the so-called Asian financial crisis around 1998. For Laeven and Valencia

6 Laeven & Valencia (2012), “Systemic banking crises database: An update,” IMF Working Paper 12/163.

Fig. 1.1 Number of national economies undergoing a systemic banking crisis each year (Reproduced from Laeven & Valencia (2012), Systemic banking crises database: An update)

there are “crisis cycles,” that “frequently coincide with credit cycles” and considering 129 banking crises episodes for which credit data are available, they found that 45 episodes were preceded by a credit boom.7

As obvious intellectual derivatives of the Great Recession, two outstanding studies on financial crises in advanced economies were published in the past ten years in the American Economic Review.Inthe first one, Schularick and Taylor (2012) analyzed the factors contributing to 79 major banking crises, each one dated in a unique year in a panel of 14 advanced economies in the 138 year period 1870–2008.8 In the second one, Romer and Romer (2017) examined 24 countries of the OECD in the period 1967–2012.9 Starting from the narrative OECD reports on the national economies of the organization and coming from the idea that financial problems fall along a continuum, Romer and Romer attributed in a remarkable exercise of eyeballing a value between 0 and 15

7 Laeven & Valencia (2012), “Systemic banking crises”.

8 Schularick & Taylor (2012), “Credit booms gone bust: Monetary policy, leverage cycles, and financial crises, 1870–2008”, American Economic Review 102(2), 1029–1061.

9 Romer & Romer (2017), “New evidence on the aftermath of financial crises in advanced countries”, American Economic Review 107(10): 3072–3118.

(with 0 for no distress, 1 for disruption of minimal importance, and 15 for extreme crisis with maximum distress) to an index of financial distress severity for each half year in the sample they analyzed. This 16-point scale was so wide that the value 15 was not attributed to any period of the sample (the highest value of severity of financial stress assessed by Romer and Romer was 14 points for the first half of 2009 in Iceland, followed by 13 points for the second half of 1998 in Japan). Other aspects of these two studies will be discussed in subsequent chapters of this book.

The aforementioned analyses were focused on the financial sector, with the real economy considered mostly as the outcome variable of the disturbances in money markets and credit activities. However, in Misunderstanding Financial Crises Gary Gorton affirmed that financial crises “are an integral part of business cycles”. Gorton, for whom the 2008 financial crisis in the United States was to a large extent a bank panic on the market of sale-and-repurchase securities (the REPO market), bank runs and panics “are not irrational events. Panics happen when information arrives about a coming recession. It is the fact that there are potential problems with banks that causes a run”.10 This observation points to a more fundamental underlying dynamic: that as a rule financial crises are preceded by disturbances in the real economy in which goods and services are produced and sold. This fact was noted more than a century ago by Wesley C. Mitchell, and half a century before Mitchell by Karl Marx.11

In this book, it is argued that the dozens of financial crises counted by different observers in the past half century are just the national manifestations of six large downturns in world economic activity. These crises of the real economy of the world system had different manifestations in the financial sphere.

To assert that there have been six crises in the world economy since 1970 to the present implies that these crises are discrete, countable phenomena, representing distinct states of an entity that can be properly called world or global economy. In the same way that a human body is not just an aggregate of four limbs, a trunk, and a head, the global economy is not only the aggregation of the two-hundred-andsome national economies, but an integrated unity of a higher order. To

10 Gorton (2012), Misunderstanding , 5, 74.

11 Mitchell (1913), Business cycles , 576–579; Marx (1981), Capital: A critique of political economy—Volume 3 [1894], Parts 4 & 5.

count and to measure are two basic endeavors of science. But to count something, first it is necessary to clarify what is to be counted to avoid getting entangled in fuzzy reasoning and logical contradictions. The Sokal affair demonstrated that unfortunately these are not rare in the social sciences.12

The remainder of this book discusses empirical and theoretical issues related to the crises of the world economy, including their characteristics, causes, and implications. It presents an alternative view to understanding these crises emphasizing empirical data but also taking a historical and global perspective. Chapter 2 provides evidence on the six crises of the global economy in the past half century. Data on capital formation, output growth, unemployment rates, monetary aggregates, industrial activity, and rates of return on capital show that in the mid-1970s, in the early years of the three following decades, in 2008–2009 and in 2020 there were significant stoppages of capital accumulation and slowdowns of world economic activity. Chapter 3 on globalization, national economies, and global crises provides an outline of economic history as well as some major historical developments linked to each one of the crises posed in the book. Chapter 4 discusses how “economic crisis”, “recession”, and other terms related to the recurrent fluctuations of modern economies are understood by different authors and schools of thought. The view of some authors in the world-system school according to which crises are economic circumstances that can last even decades is critiqued based on both theoretical and empirical reasons. Chapter 5 focuses on the evidence that a world economy exists, justifying an economic analysis at this level, and discusses how old is the “world economy”. Chapter 6 on causal theories of the business cycle is a general review of theories explaining why economic crises occur. In mainstream economics, economic crises are mostly viewed as anomalies of the economic system, departures from the equilibrium that is essential to the system, therefore they can only occur in response to exogenous factors. The general view adopted in this book and developed in more detail in Chapter 6 is that the reduction of profitability before crises, explained both by long-run and short-run processes, reduces investment thus leading to a drop of demand that appears as a recession and is often associated with financial turmoil. Chapter 7 on nature, oil, profits, and crises discusses the

12 Sokal (2010), Beyond the hoax: Science, philosophy and culture

links between natural resources, economic activities, and the crises of the world economy. Oil price “shocks” that would have been exogenously caused by OPEC manipulations, wars or revolutions have been often mentioned as exogenous causes of economic crises. Versus this idea, the evidence presented in Chapter 7 shows that prices of mineral raw materials peaking immediately before each crisis and quickly falling in its aftermath are endogenously determined phenomena. Raw materials rise in price under conditions of strong demand and their prices drop when the demand quickly drops because of a recession. Chapter 8 discusses and rejects the notion of long waves (Kondratieff waves), often defended by authors who are favorable to the idea of the world economy as an appropriate unit for economic, social, and historical analysis. The chapter also discusses the notion of social structures of accumulation. Chapter 9 considers the crisis that started in 2020 and was obviously triggered by the COVID-19 pandemic. The procedures and actions to fight the pandemic, which implied an almost total interruption of business activity in major sectors of the economy, triggered an economic depression that otherwise could have had quite different characteristics, as for many observers a crisis was developing in the underground and was ready to erupt in 2020, when governments began to implement isolation policies to strangle the dissemination of the virus. Chapter 10 closes the book by presenting some general conclusions and discussing the prospects for the world economy after many months of Russian invasion of Ukraine and new alignments in the world economy to a large extent because of that war. The appendices present technical issues and models some of which require knowledge of statistical methods. Appendix A presents some monetary issues. Milton Friedman showed that in national economies “money leads,” i.e., that changes in the volume of the monetary mass predict the evolution of the real economy. That seems to be also true in the global economy. Reasons are given to explain the phenomena using a conceptual scheme that largely differs from Friedman’s monetarism. Appendix B discusses data concerning monetary aggregates and credit, as reported for the world economy and several national economies in the WDI database of the World Bank. Appendix C presents statistical models that justify the assertion that economic growth is the main cause of greenhouse emissions and therefore climate change. Appendix D is a technical note on the profit rate and its evolution in time. Appendix E includes a numerical table with the data used in the most important analyses of the book.

Evidence of Six Crises

A variety of economic indicators provide consistent evidence that the global economy went through a crisis six times in the past five decades. As proposed in this book, these six crises occurred in the mid-1970s, in the early years of the next three decades, around 2000, at the end of the first decade of the present century, and in 2020. If more precision is required, the six crises in the world economy can be dated—somewhat arbitrarily, as it will be explained later in this chapter—in the years 1975, 1980–1982, 1991–1993, 2001–2002, 2008–2009, and 2020, so that the world economy was in crisis for a total of 12 years in a period of half a century. This chronology of six crises of the global economy is to a large extent consistent with business cycle chronologies for national economies. This chapter provides evidence to sustain this chronology of six world economic crises.

According to the NBER, since the mid-1970s there were seven US recessions dated (i ) Fall 1973 to Winter 1975; (ii ) Winter to Summer 1980; (iii ) Summer 1981 to Fall 1982; (iv ) Summer 1990 to Winter 1991; (v ) Winter to Fall 2001; (vi ) Fall 2007 to Summer 2009); and (vii ) Winter 2019 to Spring 2020. Putting together the two contiguous recessions of 1980 and 1981, the six periods in which, as it will be shown, data show significant downturns of the global economy coincide with the dates in which according to the chronology of the NBER there were recessions in the United States. This is not surprising, considering that the

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J. A. Tapia, Six Crises of the World Economy, https://doi.org/10.1007/978-3-031-38735-7_2

US economy is still the main national component in the world economy in value terms.1

Many other economies, though of course, not all, conform quite well to the chronology of crises of the global economy proposed in this book. That is the case for instance of Germany where, according to Beate Schirwitz, between 1970 and 2006, recessions ocurred from (i ) Winter 1974 to Spring 1975, (ii ) Winter 1980 to Fall 1983, (iii ) Winter 1992 to Winter 1993, (iv ) Fall 1995 to Winter 1996, and (v ) Fall 2002 to Fall 2003.2 Excepting the recession of the mid-1990s that seems to be a specifically German recession, all others fit the pattern of crises of the world economy proposed here. For Portugal in the period 1978–2010 recessions were dated October 1983 to June 1984, March 1991 to November 1993, May 2001 to February 2006, and May 2007 to November 2009 in a chronology of the Portuguese business cycle authored by Vitor Castro, who wrote that “[t]hese contractions coincide quite remarkably with world crises.”3 In Colombia, as reported by Carlos Alberto Duque, in the period 1967–2019 there were major economic downturns with economic growth about zero or negative in 1975, 1982–1983, 1990, 1998–2000, and 2009, and “the Colombian economy followed a similar pattern to other Latin American countries like Brazil, México, and Argentina.”4 In Spain, according to the Business Cycle Dating Committee of the Spanish Economic Association, there were recessions from (i ) Fall 1974 to Spring 1975, (ii ) Summer 1978 to Spring 1979, (iii ) Winter 1992 to Summer 1993, (iv ) Spring 2008 to Fall 2009, and (v ) Fall 2010 to Spring 2013. These recessions conform quite well to the chronology of world economic crises proposed here,

1 Using market exchange rates for computing national GDPs in US dollars and the WGDP in real terms, the size of the US economy in 2019 was 18.3 trillion in 2010 US dollars, versus 11.5 trillion for China and 84.9 trillion for the world economy. However, with GDPs computed using PPP rather than exchange rates, China is since 2017 the biggest economy of the world, with a GDP for the year 2019 of 22.5 trillion international dollars of 2017, compared with 20.5 trillion for the United States and 130.0 trillion for the world (as reported in the WDI database in November 2020).

2 Schirwitz (2009), “A comprehensive German business cycle chronology”, Empirical Economics 37(2), 287–301.

3 Castro (2015), “The Portuguese business cycle: Chronology and duration dependence”, Empirical Economics 49(1), 325–342.

4 Duque (2022), “Economic growth and the rate of profit in Colombia 1967–2019: A VAR time-series analysis”, Review of Radical Political Economics 54(3), 1–19, Figure 2.

but furthermore, as I have argued elsewhere,5 the increase of the unemployment rate from 10.6% in 2001 to 11.5% in 2002 is quite substantive evidence that at that time there was a recession in the Spanish economy, in which case the Spanish business cycle is fully consistent with the chronology of crises of the world economy proposed in this book.

Since the 1970s to the present, the Japanese economy had recessions in (i ) Fall 1973 to Spring 1975, (ii ) Winter 1977 to Fall 1977, (iii ) Winter 1980 to Winter 1983, (iv ) Spring 1985 to Fall 1986, (v )Winter 1991 to Fall 1993, (vi ) Spring 1997 to Winter 1999, (vii ) Fall 2000 to Winter 2002, (viii ) Winter 2008 to Winter 2009, and (ix ) Fall 2018 to Spring 2020.6 Out of these nine Japanese recessions, six are fully consistent with the six crises of the world economy proposed here, while the three recessions of 1977, 1985–1986, and 1997–1998 are superimposed on that pattern.

The crises of the global economy in past decades can be identified using a variety of economic indicators. In the classical descriptions of the business cycle, that is, the recurrent alternation of periods of expansion and contraction in the market economy, drops in investment are a major characteristic of what have variously been called economic crises, downturns, slumps, recessions, or depressions.7 In what follows, levels of capital formation, rates of output growth, unemployment rates, monetary aggregates, and industrial activity as measured by a chemical index will be used to support an annual chronology of crises of the world economy. During years identified as crisis years, a large proportion of the national economies of the world were in economic recession as defined by the usual criteria.

5 Tapia (2017), Rentabilidad, inversión y crisis—Teorías económicas y datos empíricos , 18–22.

6 Government of Japan, Cabinet Office (2013), “The provisional determination of business-cycle peak and trough”, August 21, 2013, www.esri.cao.go.jp/en/stat/ di/130821rdates.html, accessed September 2022; Anonimous (2021), “Japan recession lasted for 19 months through May 2020, government panel says”, The Japan Times , December 1, www.japantimes.co.jp/news/2021/12/01/business/economy-bus iness/japan-recession, accessed September 2022.

7 Mitchell (1913), Business cycles ; England (1913), “Economic crises”, Journal of Political Economy 21(4), 345–354 are outstanding examples of the old literature on business cycles and economic crises. For modern reviews see Zarnowitz (1985), “Recent work on business cycles in historical perspective”, Journal of Economic Literature 23(2), 523–580; Knoop (2004), Recessions and depressions: Understanding business cycles ; Glasner & Cooley (1997), Business cycles and depressions: An encyclopedia

Most of the indicators of the world economy used in what follows are available from the generally trusted source of the World Bank. When comparisons are possible, these data are generally consistent with those of other economic institutions such as the Organization for Economic Cooperation and Development (OECD), the International Monetary Fund (IMF), the Bank for International Settlements, or Eurostat. The Bank for International Settlements (BIS), based in Basel, Switzerland is an international financial institution owned by central banks that promotes international monetary cooperation and serves as a bank for central banks. Eurostat is the statistical branch of the European Commission.

The fact that the World Bank is a generally trusted source does not mean however that there are no problems with the statistics in its WDI database, which are obtained from a laborious and complex process of aggregation of national statistics. These in turn are produced by national economic and statistical agencies which must use the available data on production and consumption, coming usually from tax records and little else. It is obvious that the resulting statistics must be plagued by major errors. This makes economic statistics “soft” numbers which have to be taken with “many grains” of salt as it was noted, perhaps with too much emphasis, by Oskar Morgenstern.8 During the writing of this book, I had the opportunity to notice how the World Bank changes the reported data from time to time. For instance, according to the WDI database of the World Bank, accessed in 2014, the rate of growth of Japan’s GDP in the year 1970 had been 1.0%, while the same rate had been estimated by the same source as 0.4% in 2020 and 2.5% in September 2022. These values imply significant differences in economic terms. Despite these and other problems, it is my view that the World Bank’s statistics for national economies and for the global economy are useful, when used with the proper care, to learn about the economic realities of our time. Indeed, it is based on these statistics that I claim in this book that the crises of the world economy occurred in specific years. But let us look at the data.

8 Morgenstern (1950), On the accuracy of economic observations ; Bagus (2011), “Morgenstern’s forgotten contribution: A stab to the heart of modern economics”, American Journal of Economics and Sociology 70(2), 540–562 is an exaggerated attack on economic statistics based on Morgenstern ideas.

Capital Formation and Output of the Global Economy

Since the 1930s when Wesley Mitchell and Jan Tinbergen produced the early empirical analyses of the business cycle, it is accepted that drops in investment are the key component of recessions.9 World Bank investment data from the global economy are available for the period since 1969, as data on gross capital formation and gross fixed capital formation.10 These data can be used as quantifiers of the rate at which capital accumulation proceeds. A rising formation of capital means acceleration of capital accumulation and economic expansion; a decline in the formation of capital means a stoppage of the accumulation of capital, that is, an economic crisis.

Figure 2.1 shows gross capital formation and gross fixed capital formation as shares of world GDP (WGDP), as reported by the World Bank in its WDI database in 2013 and in 2022. The figures reported in 2013 and 2022 differ by several percentage points, revealing how largely uncertain are these global indicators, and how large can be the differences between revisions of the statistical estimates. Nevertheless, the 2013 and 2022 series are largely consistent in terms of upward and downward oscillations. Gross capital formation shows somewhat sharper oscillations than gross fixed capital formation. According to the definitions provided in the metadata of the WDI database, gross fixed capital formation includes purchases of plant, machinery, and equipment; land improvements such as fences, ditches, and drains; construction of roads, railways, schools, offices, hospitals, private residential dwellings, and commercial and industrial buildings; it also includes the net acquisitions of valuables; gross capital formation consists of gross fixed capital formation plus net changes in the level of inventories. Both indicators are rough measures of investment in the economy, and it would be arguable which one of the two could or should be considered a more proper index of total investment as a key component of effective demand in a Keynesian or neoclassical framework, or capital accumulation in the Marxian sense. At any rate, the series of gross total

9 Mitchell (1927), Business cycles: The problem and its setting ; Tinbergen (1939), Statistical testing of business-cycle theories .

10 The World Development Indicators (WDI) database is available at https://www.dat abank.worldbank.org/source/world-development-indicators. Most data used in this book are from this source.

and gross fixed capital formation in Fig. 2.1 reveal sharp drops of investment in 1974–1975, 1979–1983, 1989–1993, 2000–2002, 2008–2009, and 2019–2020. Overall, the measures of gross capital formation for total capital and fixed capital show that investment substantially declined in the mid-1970s, in the early years of the three following decades, in 2009, and in 2020. These are the six crises of the world economy proposed in this book.

Figure 2.2 shows together the most recent series of capital formation and the annual rate of growth of WGDP. The six crises of the world economy are marked by obvious drops of WGDP growth in 1975, 1982, 2009, and 2020, and substantive declines in the early 1990s and the years around the turn of the century. In all cases, the drop in the growth of the world economy coincides with a drop in capital formation. Considering the size of the contraction of the world economy as gauged by the rate of growth of WGDP, the crisis of 2020 associated with the COVID-19

Fig. 2.1 Gross capital formation (dots) and gross fixed capital formation (squares) as percent of WGDP (as reported by the WDI database in 2022 [upper lines] and 2013 [lower lines])