Thirty years of decline

The world recession isn’t simply a result of risky activity, it follows three decades of industrial stagnation disguised by the financialisation of Western economies.

As the numbers reveal:

Between 1975 and 1979 US annual GDP growth averaged 4.6 per cent. These were the years of president Jimmy Carter, widely ridiculed as ‘stagflationary’. Carter himself gave a speech in 1979 in response to the oil crisis saying as much, though it doesn’t actually use the word, and it went down in history as the “malaise speech”. A year later the freebooting former actor and governor of California Ronald Reagan was elected to replace Carter. Reagan, a divisive figure during his presidency, is now lauded as the man who put America back on the map with a commitment to curb public spending and deliver economic growth. Unfortunately, the numbers don’t add up. Reagan was in office from 1980 until 1988. Between 1982 and 1990, the closest comparable period covered by the Survey of Current Business US average annual GDP growth fell from the 4.6 per cent of the Carter Years to just 3.6 per cent. From 1991 until 1998, a period that saw both Reagan’s vice president George HW Bush and ‘New’ Democrat Bill Clinton in office, average annual GDP growth fell again to just 3.1 per cent.

Despite their propaganda the financial class is actually risk-averse. Instead of investing in production the business class has divested itself of assets and spent years coining-it by rent-seeking. Doug Henwood and Daniel Ben-Ami have written pretty extensively on this stuff but it doesn’t get much of a look-in over here. Why? Any thoughts?

By the way, London, the world’s centre for currency trading, saw a 25 per cent drop in trades between April 2008 and 2009. It may be a while before the fantasy economy recovers.

  • OC

    “the financialisation of Western economies”

    William H. Whyte covered this in his 1956 book Organization Man.

    Whyte documented the trend in the US whereby industry moved away from the control of engineers to financiers.


    “Rentier capitalism is a term used in Marxism and sociology which refers to a type of capitalism where a large amount of profit-income generated takes the form of property income, received as interest, rents, dividends, or capital gains.”

    Anything but actually making something.

  • OC,

    Ever read anything by Thorstein Veblen, Finance-Capital by Rudolf Hilferding or Galbraith’s American Capitalism? Some interesting comments on the changes in capitalism from the nineteenth to twentieth century, especially in terms of financial capital and organisational changes. Paul Sweezy has written many good essays too. I think Jason is referring more to post-1970s changes with the breakdown of the so-called Keynesian ‘consensus’. Definitely in the US and Britain was there a concerted policy change orientated towards growing financial services.

    Very good post, Jason. I think the trend towards financialisation is perhaps the key to understanding the current crisis and the shift in power towards the financial sector. Far-sighted commentators like [url=]David Harvey[/url], the Marxist geographer and Das Kapital scholar, have been remarking on it for years in articles and in his book on Neoliberalism. For him, as I understand it, the extension of credit to more and more people and the concomitant growth of financial services was to artificially prop up the discrepancy between the purchasing power of real wages and the massive growth in output of commodity production. He also adapts surplus value theory, arguing that financialisation acts as a repository for profits with higher returns than elsewhere eg. industry. The late Chris Harman, too, seems to have fitted financialisation into an analysis in which it was an attempt to counter-act a falling rate of profit. Either way, the result has been endless bubbles and crises in false economies built from asset values and debt.

  • heck

    probably the thing I agree most with -ever-on this web site. investment has been going into property and people hope to get rich by selling each other houses. There is no future in that.

  • frustrared democrat

    And where does the rise of China as a manufacturing power fit into all this. If free trade is the God then Western dependence on cheap manfactured imports must mean a move to service economies.

    The result is inevitably more Big Macs, a supermarket or DIY store on every corner, financial services and property development and a decline in traditional mAnufacturing.

    Did we have a right to buy cheap imported goods from the East at the expense of our Western manfacturing jobs – ask our local farmers who complain about imported foods and then buy imported vechicles and equipment for their farms.

    So don’t blame the financial class blame the free traders who made much of Western industry uneconomic and therefore uninvestible.

    So I am interested to hear why overall Free Tade has been good for the UK or even the EU and the US when the result has been a massive increase in the import surplus in manfacturing with the East?

  • slug

    Face it guys – living standards have never been better.

  • Mack

    Frustrated Democrat

    And where does the rise of China as a manufacturing power fit into all this

    Missing from the Marxist analysis I would guess, for the past decade China’s mercantilist trade policies have resulted in the decimation of US industry rather than the US financial sector or Ronald Regan. At some point this trend has to end. China is reliant on the US as a market, they produce while the US consumes. Production without consumption is what slaves do.

    I’d imagine that sooner rather than later China will have to allow it’s workers to enjoy the fruits of their labour – creating domestic demand and allowing the Renmimbi to rise. This should create a (large) market in China for Western products. As the dollar and Euro fall relative to the Renimbi Western companies should become more competitive too.


    The purpose of the post is to subtly attack Monetarism, and to infer that the Keynesian 1970’s were an economic Nirvana?

    I don’t buy it.

    In 1979 inflation was at around 8% having from around 6% the year before. In 1980 it peaked at 10.36% thanks to Paul Volckers tough medicine.

    Had they not pursued monetarist policies and continued on the same path hyperinflation could well have been the result.

    Sure the financial sector is too large, but as pointed out above industrial decline is as a result of competition from cheaper / less developed economies entering & participating in the global economy. By selling their labour at a discount, they keep prices much lower for American consumers to enjoy. By reinvesting the Dollar’s they earn from their production they keep US interest rates low and facilitate the funding of huge deficits by the US government. It’s unsustainable – but when the trend reverses US / Western manufacturing and industry will benefit..

  • Mack

    Incidentally, lest anyone think it’s only lefties who see a problem with the growth in power of the financial services industry, have a look –

  • Mack

    By the way your title is a misnomer.

    Thirty years of real growth

    Inflation adjusted

    1979 Q1 $5,147.4 bn

    2009 Q3 $12,990.3 bn

    So in real terms the economy more than doubled in size in the last 30 years.

  • Mack

    Should have read inflation adjusted GDP growth.

  • slug

    Thanks Mack – that is EXACTLY my point put more factually!

    (Is that the US economy?)

  • Mack




    Despite their propaganda the financial class is actually risk-averse.

    Yes. Sort of. The banks are – boring utilities. Do Venture Capitalists and Angel Investors count as part of the financial class? Do you seriously think they are risk-averse?

    Instead of investing in production the business class has divested itself of assets

    Aren’t you conflating the ‘business class’ and ‘financial class’ here? What about entreprenuers (the risk bearers)? How does this analysis explain the growth of both Microsoft and Google (and countless other huge US companies) in that period?

  • DC

    £5.80 minimum (maximum) wage and 13-14% GDP deficit.

    Growth we can believe in.

    Germany 3% GDP deficit.

    Why so – well because it has a more balanced economy. Now I know that perfect is the enemy of good but such a deficit is not good and things need looked at in terms of long-term investment or perhaps decent re-regulation from which society can benefit from when in those bubble highs, not just bailing out the lows???

    Keynesian economics is not the nirvana, never was, can’t turn clock back nor should that happen; but we should not be forced to live in a society that only primes the pumps of financial services while eveything else, so it would seem, is given up to the sweat of an immigrants back, or indeed mass-sweat off a developing country’s back.

  • kensei

    Should have read inflation adjusted GDP growth.

    I don’t udnerstand the chart. It’s useless for comparisons.

  • Mack

    Kensei –

    I don’t udnerstand the chart.

    It’s showing the size of the US economy in each quarter from 1947 to the present day measured at a normalised dollar value (the value of the dollar in the year 2000).

    It’s useless for comparisons.


  • Jason Walsh

    Face it guys – living standards have never been better.

    I don’t disagree. I’ve never been one to pretend markets have no progressive qualities.

    The purpose of the post is to subtly attack Monetarism, and to infer that the Keynesian 1970’s were an economic Nirvana?

    No, not at all. I have critiqued Keynsianism also.

    The purpose of the post is to indicate that the financialisation of the economy masks a retreat fron productive activity.

  • DC

    Eggs in one basket, Jason?

    Perhaps if so then wouldn’t it best to accept the ups and down of financial services with a tad better regulation and public control; control that ensures the highs hold better social returns and favours less those individuals who game the system for short-term gains and get out quick when there’s no skin in the game?

  • Jason Walsh

    I can’t answer that DC, I simply don’t know.

    Finance is what it is and I could happily ignore it if it didn’t represent such a large chunk of the economy.

  • DC

    If money weren’t legal tender i’d agree with you Jason too.

  • Mack

    Paul Volcker to the rescue, yet again?

    Wake up gentlemen. I can only say that your response is inadequate.

    From Simon Johnson’s blog –

    Volcker has three main points, with which we whole-heartedly agree:

    1. “[Financial engineering] moves around the rents in the financial system, but not only this, as it seems to have vastly increased them.”
    2. “I have found very little evidence that vast amounts of innovation in financial markets in recent years have had a visible effect on the productivity of the economy”

    and most important:

    3. “I am probably going to win in the end”.

  • Turtl

    The decline in manufacturing is an entirely natural phenomenon in an advanced economy, in the same way that a decline in % of GDP or % of workforce employed in agriculture declines as an economy advances. This happens in EVERY country after a certain stage is reached.

    An item that would have taken 10 skilled men to make in one day can now be made by 1 skilled man and advanced machinery / production systems in an hour. One can see this most clearly in the US in items that are not permitted to be outsourced to foreign countries where labour is cheaper, e.g. cruise missile production. The Chinese factory worker isn’t so much competing with a western factory worker as he is competing with a western robot or CNC machine. Just as thirty poor rice farmers in Thailand aren’t competing against thirty wheat farmers in Canada but rather one Canadian farmer with a combine harvester.

  • Greenflag

    jason walsh ,

    ‘Finance is what it is and I could happily ignore it if it didn’t represent such a large chunk of the economy.’

    That’s precisely the issue . Finance passed manufacturing in the USA economy in the mid 1980’s and has passed it even more since .

    The ‘financial services ‘ sector does not stream the blue collar/working classes into the ‘middle class’ .It concentrates ‘wealth’ at the top in any society in which it becomes dominant . Financial services which includes banking , insurance , credit card services , hedge funds etc plus the public sector i.e government employees and the state sector together make up the an increasing bulk of western economies in particular the USA , UK and indeed Ireland (Republic).

    Whats left of any western economy minus the above two major players is or has been outsourced to Asia .

    Track down the below named ‘interpreter ‘ on google videos -sorry I can’t link . Probably the best summary of where we are -have been and probably will be . This was made before Obama’s election and his political prognostications are interesting .

    It’s all there and not restricted to just the USA but covers worldwide inter economic relations . For Ireland and the UK as we are both ‘derivatives’ of the American economic breakdown If you haven’t time to read his book the above is a good summary . He also allows questions from the floor which reveals more of his views ..

    Kevin Phillips – Bad Money: the Global Crisis of American Capitalism
    1:24:45 – 1 year ago
    Author and columnist, Kevin Phillips, talks about his newest book, BAD MONEY: RECKLESS FINANCE, FAILED POLITICS, AND THE GLOBAL CRISIS OF AMERICAN CAPITALISM.

  • Jason Walsh

    “The decline in manufacturing is an entirely natural phenomenon in an advanced economy”

    Not true. From 2003-2006 Germany was the world’s largest exporter and may well still be today, I don’t have the figures. Germany has high-value exports.

    What is important is not that the decline of (some) manufacturing industries is natural, but that many productive industries (both manufacturing and service) have been rotting from the top down due to a lack of capital investment as money is instead diverted into finance.

  • Jason Walsh

    I should point out that what I am saying here has no left-right significance. It’s simply an empirical matter. What one thinks should be done about it, if anything, is where the politics comes in but in this Slugger post I’m simply asking for opinions on why industry’s decline has been passed-off as natural when in fact it was a clear decision. Some industries wouldn’t be able to compete with cheap imports, true, but that’s not the whole story.

  • OC

    “The central problem of every society is to define appropriate roles for it’s men.” – Margaret Mead

    Up until now, it’s been having a job and supporting a family. Having made this increasingly impossible, the West risks much.

  • Turtl

    @Jason Walsh

    “The decline in manufacturing is an entirely natural phenomenon in an advanced economy”

    Not true. From 2003-2006 Germany was the world’s largest exporter and may well still be today, I don’t have the figures. Germany has high-value exports.

    We have to define our terms here. You are talking absolutes and I am talking relatives.

    In your (absolute) terms UK manufacturing has increased. The UK produces more manufactured goods today than it did 10, 20 or 30 years ago, in terms of value.

    What has decreased is the amount those manufactured goods make up as a % of the total GDP and the % of the workforce utilised to make them.

    The proportion of the workforce in manufacturing is shrinking everywhere, as is the proportion of the GDP made up by manufacturing. That includes China and most certainly includes Germany. This is an inevitable result of technological advancement, which pushes labour into those areas that can only be performed by humans.

  • Jocky

    @ Jason Walsh and Turtl.

    Manufacturing is an all encompassing term. There is a massive difference within the sector.

    If you look at something like Shipbuilding, it’s gone to low cost centres, because all you need is a load of guys to weld a load of sheet metal together and that’s it. Note the design still is done in the west but the fabrication is done on the cheap.

    If your taking something more hi tech, say cars, that’s mainly in europe and Japan. Why because it’s all about the design.

    Advanced economies like Japan and Germany still do manufacturing. Even Italy who recently leapfrogged the UK does a lot of manufacturing too. to say an advanced economy doens’t need to manufacture is fanciful.

    Another apsect is even though ipods are made in Taiwain the vast majority of the cost works it way back to the US. Though it doesn’t show up on it’s balance of trade. You need to retain the deisgn capability and technology even if your not assbeling it, like Dysons.

    Look at the UK nuclear industry, once worldleading, now were giving the French economy a £18bn stimulus package to build us some power stations. That’s very reall money going out of the UK.

    The major advantage of a half decent manufacturing sector is that it provides a socially useful function, a larger number of well paid, middle income, long term jobs. Opposed to a small number of very highly paid jobs that the financial sector provides.

    We’ve been a sold a pup. The problem being if your not making it there is a big risk that you can no longer design it. Then your fcuked. Unfortunately most of our politicians, economic commentators have no experience of manufacturing industry or the potential it has. Far easier to look at some big numbers the financial sector can pull in and not worry about the rest.

  • Jocky

    Also notice how the big manufacturing economies came out of recession before we did.

    Despite all the bluster about how we were best placed going into the reccession being a service / financial based economy? Darling himself just admitted that our supposed “position of strength” turned out to be a lead ballon holding us back.

    Strange that?

  • kensei


    It doesn’t appear to show growth per quarter, but some kind of odd cumulative measure. Or I’m going nuts

  • Suilven

    “many productive industries (both manufacturing and service) have been rotting from the top down due to a lack of capital investment as money is instead diverted into finance.”

    I honestly think that’s a ridiculous assertion. I challenge you to say, Jason, precisely what are these mystery productive industries that have ‘rotted’ through lack of capex rather than the rough market realities of a globalised world?

  • Mack

    Kensei –

    Yep it’s not GDP growth, but actual total GDP.

  • OC

    “Quality is dead.” – Friedrich Nietzsche

  • Dave

    It must be something about a Catholic education that avoids all mention of business and economics since you would be hard-pressed to find a nation more ignorant of their doctrines than the Irish. Even our own minister for finance – by far the best-educated of Dial members – had to canter to a journalist (McWiliams) under the cover of darkness for a primer in bank guarantee and liquidity restoration models but still managed to make an absolute balls-up of it, guaranteeing not only new bondholders but every existing bond and ad-hoc creditor into the bargain.

    They see this ignorance of economic doctrine as a positive advantage for if they have no principles and no ideology then they are free to be pragmatic – and it is this self-defeating pragmatism that has duly defeated them. Even the late CJH (another educated man) was at pains to point out that his economic policies in 1987 (credited with creating the Celtic Tiger) were not rooted in ideology but were purely expedient: “The policies which we have adopted are dictated entirely by the fiscal and economic realities. I wish to state categorically that they are not being undertaken for any ideological reason”. Ignorance, alas, is only bliss for a short while.

    The doctrine of moral hazard is very simple: a business that is exposed to the consequences of a risk will take greater precautions aimed at minimising that risk than a business that is protected from the consequences. When the state underwrites the risk for specific businesses it protects them from the consequences and thereby encourages them to be more reckless than they would otherwise be. Remember that the Irish state bailed-out AIB bank in 1984 with the taxpayers picking up the tab after AIB declared that accepting the consequences for its own risk-taking would bankrupt it. At this point, the moral hazard is so pronounced that it is no longer possible for states to pretend that they won’t underwrite their bad investment decisions. What we need to do is separate the depositors from the risk and make it illegal for a government to bail-out any private business – and to amend the constitution to that effect.

  • DC


    Smart guy.

  • [/i]By the way your title is a misnomer.

    Thirty years of real growth

    Inflation adjusted

    1979 Q1 $5,147.4 bn

    2009 Q3 $12,990.3 bn

    So in real terms the economy more than doubled in size in the last 30 years.[/i]

    That’s a bit like meeting someone for the first time since 1979 who was then only a child and remarking that they have grown taller. Absolute growth; yes. Fall in annual rates of growth, also yes. No contradiction at all.

  • Mack


    Rates of change are the first derivative of the concept being measured.

    Rates of changes in the rates of change (i.e. a “Fall in annual rates of growth”) are the second derivative of the concept being measured.

    The concept in this case in the economy.

    If we were measuring the speed of an accelerating space craft – as it sped up from 20,000mph, 40,000mph, 55,000mph, 69,000mph, 80,000mph, 90,000mph etc..

    It would be curlish to describe the journey as a decline, solely because the rate of acceleration was decreasing.

    I’m sure we can agree everyone on board would primarily experience a fast vehicle getting faster..

  • [i]It would be curlish to describe the journey as a decline, solely because the rate of acceleration was decreasing.[/i]

    I don’t agree. There is a whole declinist historiography of the British economy by people like Supple, Feinstein and Rubinstein so it has precedent in economic history as a term meaning slowing rates of growth. I agree that in absolute terms there is of course ever-increasing growth but the ‘decline’ becomes increasingly marked when you throw in the growth rates of other countries, which is why Britain felt so insecure throughout most of the last century.

  • Mack


    I think that’s a much stronger point, but think it’s valid for different reasons. Britain went from being the world’s strongest power – politically, militarily, economically – to a medium sized player very quickly after WWII. If you limit your analysis only to the island, then Britain suffered a marked relative decline.

    If you don’t and you take into account the size of the empire before and after, Britain suffered a massive absolute decline.

    After 30 years the USA is still #1, although the position of all Western countries relative to the East is declining (or put the other way around, the East is getting stronger faster). I don’t think we’re seeing anything yet on the scale of the decline of the British empire. Although the decline of the British empire, or any other, is not something I’d mourn.