Methodology
Mathematical foundations, economic theory, and data verification behind each module of the Economic Crisis Prediction Model.
What is ECPM?
The Economic Crisis Prediction Model(ECPM) is a quantitative research platform that operationalises classical Marxist political economy with modern econometric methods. It translates the US National Income and Product Accounts (NIPA) into Marxian value categories—constant capital, variable capital, and surplus value—to compute time-series of key profitability and financial-fragility indicators from 1947 to the present.
These indicators are then synthesised into a Composite Crisis Probability Index and fed into a Vector Error Correction Model (VECM) for multi-step-ahead forecasting. A separate structural analysis module uses Leontief input-output matrices to map inter-industry shock propagation, and a concentration module tracks monopolisation trends using SEC EDGAR and Census Bureau data.
Theoretical Foundations
ECPM rests on three interlocking crisis mechanisms derived from Marx's critique of political economy:
Tendency of the Rate of Profit to Fall (TRPF)
As capital accumulates, the organic composition of capital (C/V) rises faster than the rate of exploitation (S/V), compressing the general rate of profit r = S/(C+V). Falling profitability undermines investment incentives and triggers periodic crises of overaccumulation.
Realization Crisis
When productivity gains outstrip wage growth, aggregate demand cannot absorb the value produced. The widening gap between what workers produce and what they receive in compensation creates conditions for demand-deficiency crises.
Financial Fragility
Falling profit rates in the real economy push capital into financial speculation (fictitious capital). Credit bubbles, rising corporate leverage, and financialisation create fragility that amplifies underlying profitability crises.
Dual Methodology Approach
The four core indicators (rate of profit, organic composition, rate of surplus value, mass of profit) are computed under two independent methodologies. This dual-methodology design guards against results that are artefacts of a single accounting convention:
Shaikh & Tonak (1994)
Follows the framework in Measuring the Wealth of Nations. Surplus value is derived as national income minus employee compensation. Constant capital uses the current-cost net stock of fixed assets. Variable capital equals total employee compensation. This approach adheres to a simultaneous valuation framework.
Shaikh, A. & Tonak, E.A. (1994). Measuring the Wealth of Nations. Cambridge University Press.
Kliman TSSI (2012)
Follows the Temporal Single-System Interpretation outlined in The Failure of Capitalist Production. Uses historical-cost net stock for constant capital to preserve the temporal dimension of value. This captures how capital advanced at one period's prices generates surplus realised at another period's prices, consistent with Marx's distinction between value and price of production.
Kliman, A. (2012). The Failure of Capitalist Production. Pluto Press.
Data Sources
ECPM draws from five principal US federal statistical agencies and regulatory bodies:
Macroeconomic time series: GDP, compensation, labour productivity, corporate income, interest payments. Quarterly and monthly frequencies.
NIPA tables (national income, corporate profits) and Fixed Assets tables (current-cost and historical-cost net stock of private fixed assets).
Flow of Funds data: nonfinancial corporate financial assets (TFAABSNNCB), corporate debt (BOGZ1FL073164003Q), interest payments.
10-K annual filings for firm-level revenue extraction. Used to compute concentration ratios (CR4, CR8) and HHI by NAICS sector.
Economic Census establishment counts and revenue totals by NAICS code. Provides benchmark concentration data every 5 years.
USREC recession indicator (binary monthly series). Used to construct the continuous crisis proximity target for supervised weight learning.