Defining a recession is easy. 2 successive quarters of negative growth and bobs your uncle you're in a recession and if you want to argue the point there’s even a National Bureau of Economic Research in the US to tell you where you are in the economic cycle.
A depression is different because there is no agreed, formal definition. There’s the “Great Depression” of course and as few would disagree with the notion that it was anything other than a depression we could be all empirical and say that when economic growth is as bad as the 1930s then we’re in a depression. Except, calling the depression “great” implies there have also been average ones and mebbe even quite good ones i.e. lesser events still bigger than a recession.
Rather than debating some arbitrary cut off point based on national accounting statistics I would define a depression as a sustained economic recession accompanied by a broader shift in the common sense of how an economy works (1). So a depression differs from a recession in that it is both an economic AND cultural phenomenon.
The great depression had this combination in spades. Besides negative growth the US New Deal redefined the role of the state in the economy while in Britain the depression provided the cultural context for Keynes General Theory and the subsequent creation of the welfare state after WWII.
So far we’ve seen nothing remotely comparable despite the fundamental redrawing of the lines between the public and private sectors that’s currently going on. Whereas in the past the debate was on striking a new balance between the public and private sectors, now the focus is on what precise shade of pragmatism to adopt; banks have been nationalised not to take control of the commanding heights of industry, but as a last resort to be reversed when they are eventually sold back to the private sector as lean, mean, lending machines.
Similarly, my guess is that the credit crunch’s planned legacy is a muted technocratic response of more (and more and more) financial regulation informed by primarily technical rather than social, political or moral concerns. Hence we are set to see detailed regulation that will establish more conservative bank liquidity reserves, the global adoption of counter-cyclical capital provisioning, greater cross-border collaboration between financial regulators and closer scrutiny of asset backed securities, matters so complex, esoteric and frankly dull as to be happily ignored by the vast majority.
I think this is a bad thing. I think that as the current crisis reflects deep failings in the common sense of how a financial system works, then that common sense needs to change. I also think that we are only at the beginning of what will be a sustained recession. Alongside this events like the revulsion prompted by the John Thain debacle, the public outbursts already seen in Russia, Latvia and France and the British wildcat strikes all signal a broader if diffuse challenge to the status quo, enough perhaps to see the common sense of the economy being at least called into question.
So by my criteria we could well be entering a depression.
(1) Common sense here essentially rips off Gramsci, the dead Italian Marxist “Common sense' is the folklore of philosophy and always stands midway between folklore proper (folklore as it is normally understood) and the philosophy, science, and economics of the scientists. Common sense creates the folklore of the future, a relatively rigidified phase of popular knowledge in a given time and place.” And “a general form of thought common to a particular period and a particular popular environment"