Austerity, the hardworking and the feckless

October 30, 2014

About two years ago, the current UK finance minister George Osborne commented that ‘hard-working people’ left for work every morning while ‘behind the blinds’ of the house opposite people on benefits were sleeping in. The ‘hard-working’ person was paying for the feckless “to stay at home and not work”.

At the time, I wrote a post that attempted to analyse just how many of these feckless layabouts there were that we ‘hard-working’ people were paying for ( Apart from the official unemployed, nearly all of those not working were disabled, lone parents without childcare, retired or students. Indeed, after excluding students, there were only about 250,000 adults out of a potential workforce of 41m who were ‘refusing’ to work for ‘no good reason’, or just 0.6% of the workforce.

Well, the latest work survey has been released ( In June this year, there were 3.3 million UK households with at least one member aged 16 to 64 where no-one was currently working. This represented 15.9% of households and was a fall of 1.4 percentage points, or 271,000 households on a year earlier. This ratio is down to its lowest rate since 1996. In 2014, there were only 226,000 households (excluding students) in which no adult has ever worked, or less than 1% of all households.

workless households

That is the extent of the feckless hiding behind their blinds each morning.

The number of workless households has fallen as employment has increased since the Great Recession. But we now know that most of these new jobs are either part-time, temporary (zero hours contracts) or created by people themselves through self-employment. And these jobs pay much less that full-time employment. Indeed, in 2014, for the first time, of the 13 million Britons officially living in poverty, there are more working households than non-working ones – according to the Joseph Rowntree Trust.

While the government boasts that it is getting people back to work at record levels, it fails to mention that this work is badly paid, precarious and often created by people themselves trying to scramble together a ‘business’.

As a result, tax revenues are just not rising anywhere near enough to enable to this ‘austerity’ government to meet its targets for reducing the annual government deficit and the overall debt burden.

In March, the government predicted that the budget deficit would shrink by about £12bn in the current fiscal year. Instead, it’s widening. Government spending exceeded revenue by £10bn in September. This leaves the shortfall in the first six months of the current fiscal year at £55bn, 5% more than in the same period of 2013.

The reason is much weaker tax revenue than expected because the extra employment is in low-paying jobs, part-time work replacing some full-time jobs and above all in self-employment. Self-employment accounts for one-third of the 1.75 million jobs created since early 2010 as people hit by the recession turned to working for themselves in jobs from taxi driving to carpentry. And the proportion of self-employed workers reporting incomes below the tax-free threshold has jumped to 35% from 21% before the financial crisis.

The benefits bill is staying stubbornly high because, while people may be coming off unemployment benefits if they go into low wage work, they are likely to continue claiming some form of welfare (tax credits, child benefit, housing benefit, etc).

As nominal wages are barely growing, fewer people are moving into higher-rate tax bands. In March, the independent OBR forecast average incomes would grow 2.4% this year. Instead they rose just 0.7% in the latest quarter. Together, taxes on income and social security contributions account for almost half of government revenue. Osborne had been predicting about 7% more income tax this year. Between April and August, it fell 0.8%!

The coalition government is way short of its target to ‘balance the books’ by the end of 2018, a target that has been slipping back anyway. Meanwhile, the gross government debt ratio inexorably rises towards 100% of GDP, a level not seen since the war debt levels of 1945.

UK govt deficits

What this means that the government’s drive to reduce welfare spending on the ‘feckless’ is not even achieving the government’s own professed aim of reducing the public sector deficit – although it is reducing real wages and the cost of labour for business to make more profit.  The House of Commons briefing on social security expenditure forecasts a rise in benefit costs in real terms through the whole period of the next parliament 2015-20.

SS spending

And it’s only going to get worse, whoever wins the UK general election next May, as all three main parties are pledged to ‘balance the books’ of the government as a priority.  And yet the Conservatives have announced more tax cuts for the rich if they win the election next year. But they cannot square the circle of cutting taxes and maintaining public services, even if they reduce welfare spending to zero! Austerity is not working, except to lower real wages and keep the poor even poorer. But then that is part of the reason for austerity.

From establishment to anti-establishment

October 28, 2014

I’ve been reading a few new books recently. The first is The Establishment by Owen Jones (Allen Lane, Penguin books). I reviewed Jones’ first book, Chavs, a perceptive account of the way the media turned the concept of the working-class into a bunch of feckless, benefit-seeking layabouts or ‘chavs’ (see my post, As Jones showed, the ruling class and their lackeys in culture want to obliterate the idea of the working-class in society, in a way that reduces social strata to just the middle-class (with just the elite above and ‘chavs’ below). Jones applied to this Britain but it had gone just as far in the US, where the term ‘working-class’ has totally disappeared and every politician and pundit now refer only to existence of the ‘middle class’, when they mean working-class.

Jones’s new book is a well-written, even racy, account of how the British ruling class know each other and work together in all the ‘estates’: monarchy, capital, media and politics. What Marx used to call the ‘executive committee of the ruling class’ is not just the state or government, but all the layers of CEOs in business, newspaper moguls and editors, and government ministers and MPs. They all went to broadly the same schools and universities, belong to the same clubs and meet each other on a regular basis, both formally and informally.

Of course, as Jones says, there is nothing new in this idea of ‘the establishment’, but Jones brings it up to date with plenty of facts, observation and interviews with establishment figures and their hangers-on. He reveals the interconnected nexus at work to preserve and promote the interests of the ruling orders in Britain. Jones perceptively observes that the establishment find nothing wrong with this control of our lives and interests that bears no relation to ‘democracy’ – indeed subverts and by-passes it. Instead, our rulers feel they are ‘born to rule’ and deserve the power, privilege and wealth they accumulate. It is an exercise in unbridled hubris.

This weave of scratch-backing relationships really expresses the power of capital over the majority. ‘Follow the money’ is the cliché. And the establishment that Jones describes in shocking detail, in the final analysis, is glued together by the drive to accumulate profit and wealth for all in the hallowed groupings that constitute it. However, this is the slight weakness in the book. As one reviewer has pointed out, Jones “doesn’t say that corporate welfare is needed because of the weakness of capitalism; a falling profit rate and dearth of monetisable investment opportunities means that capitalism cannot stand on its own two feet.” But then this book is not political economy, but social investigation.

And Jones pulls his punches on what can we do about not letting the establishment “get away with it”. He calls for public ownership of the utilities and the railways, but not big business in general. He wants democratic control and planning of Britain’s state-owned banks, but not ownership of the big five. He wants all sorts of controls and taxes mainly on foreign businesses, as the radical Keynesian New Economics Foundation proposes.

Jones’ hope for a ‘democratic revolution’ along these lines would not be enough to break the establishment. That requires the end of the capitalist mode of production and the power of capital. Even so, Jones provides the reader with the most insightful dissection of Britain’s modern ruling class and all its corruption, venality and contempt for the rest of us. If every potential voter in next May’s general election were forced to read this book in order to vote, the incumbent government would lose by a landslide – and not necessarily to Labour.

Martin Wolf is definitely part of the British establishment: he was even a member of the recent UK banking commission, set up to consider how to improve the solidity of the banking system and avoid another collapse. As one reviewer put it: “Wolf has had top-level access to economic policy makers for decades now, seeing generations of finance ministers and central bank governors come and go. All of them care, deeply, about what he thinks and what he writes, and they tend to spend as much time as they can trying to persuade him of their point of view. The result is a classic virtuous cycle: He’s well informed because he’s extremely influential, and he’s influential because he’s extremely well informed.”

Wolf has a new book out, called The shifts and the shocks: What We’ve Learned — and Have Still to Learn — From the Financial Crisis. ( It has received the accolades from Krugman and others in the Keynesian stable.

Krugman in his review of Wolf ( points out that mainstream economics signally failed to forecast that a major credit and banking crisis was coming, then underestimated its depth and length in the Great Recession and since then have been unable to explain it. Krugman reckons that this was because mainstream economics was wedded to the neoclassical model of equilibrium and Says law, that supply will create its own demand, so anything that is not in equilibrium is a temporary ‘shock’.

It is rather ironic that Krugman and Wolf should paint this picture of failed neoclassical models, because neither of them forecast or predicted that a crisis was brewing from the development of capitalism in the 1990s onwards. Indeed, in 2005, before the global crash, Wolf had written a book, Why globalisation works, arguing that globalisation was beneficial to the world economy, raising living standards through the expansion of international trade and unregulated capital flows in the best of all possible worlds. Krugman won his Nobel prize for economics from expounding models of beneficient international trade.

In his new book, Wolf grudgingly admits that he was wrong about globalisation and the Great Moderation, as Ben Bernanke termed those years of ‘equilibrium’ and growth in the 1990s. It was merely disguising terrible imbalances and inequalities that eventually broke the bank, or banks.  But still, in the title of his new book, Wolf talks of the global financial crisis in terms of a ‘shock’, (a surprise), just as neoclassical economic models do.

Krugman said in his own book on the crisis (End depression now! –see my post, that anyway it does not matter what caused the crisis, let’s get on with fixing it. And he reckons that mainstream (Keynesian) economics has a Standard Model that does just that. Wolf’s book is “best viewed as an extended, learned, and well-informed exposition of this Standard Model and what it implies about where we should go from here.”

What is this Standard Model to which Krugman and Wolf subscribe? Well there was “a long period of relative economic stability which fueled complacency in both the private and public sectors, leading to an unsustainable rise in debt. Meanwhile, free-market ideology blinded policymakers to the dangers of growing financial debt, as with the vast number of underfunded mortgages, and in fact led them to dismantle many of the protections we had. And there was, inevitably in retrospect, a day of reckoning, in which the bubble of complacency burst and the fragility of our financial system turned that bursting bubble into catastrophe.” (Wolf).

So there it is again. There is nothing wrong with the process of capital accumulation and a profit-making economy. What is wrong is distribution of those profits. Rising inequality led to a lack of demand among consumers and imbalances in a globalising world. This led to an excessive expansion of debt that eventually burst. But the real problem was the fragility and weakness of the banking system to cope. Krugman comments: “Wolf’s essential story remains that of Minsky’s financial instability hypothesis: stability begets complacency, complacency begets carelessness and hence fragility, and fragility sets the stage for crisis. It’s a good story. But is it good enough?”

No, it is not. Wolf ignores the failure of productive sectors of the capitalist economy and so rests his explanation purely on the financial sector, for which the policy solution is ‘more regulation’. For him, even Thomas Piketty’s recommendation of a global wealth tax to deal with the cause of the crisis, inequality, “is unquestionably too ambitious.” Instead, he wants all kinds of regulatory measures, including equity-like mortgage contracts so that borrowers and creditors bear equal risk on loans, something advocated by Mian and Sufi in their celebrated book, House of Debt (see my post,

Above all, for Wolf, any policy changes will have to be made “without eliminating those aspects of an open world economy and integrated finance that are of benefit.” So reform will have to done without affecting the banking system too much – so no real reform then.

James Galbraith is altogether more radical because he is not part of the American establishment. Indeed, he has been confined to the ‘backwater’ (as he puts it) of economic thought and policy by the established mainstream. Son of the famous JK Galbraith of the New Deal and 1960s institutional radical economics, who was also consigned to the economic rubbish bin by dominant neoclassical economics, son James also has a new book on the crisis called The End of Normal (

Galbraith’s main argument is that after the Great Recession, there will be no ‘return to normal’ – a theme that I have also pushed in this blog (see my post, For Galbraith, the ‘market system’ does not tend naturally toward a state of full production and high employment. That’s because there is no free market, but really a series of oligopolies.

Galbraith is convinced that the crisis of capitalism lies in the fast exhaustion of natural resources by rapacious multi-nationals. Large companies have stopped investing in technology etc because of the lack of good growth opportunities, caused by scarce or expensive resources. The crisis came about because capitalists speculated and fraud took over because it was expedient to allow the financial system to make up for lack of growth opportunities elsewhere. He concludes that “fixed capital and embedded technology are essential for efficient productive operations, but that resource costs can render any fixed system fragile, and that corruption can destroy any human institution.”

Following his father, Galbraith reckons that it is not some law of falling profitability that pushes capitalism into crisis, but that large monopoly organisations are not only not efficient but also rigid and so destabilise when conditions become adverse. This theory suggests that a freely competitive economy without monopolies would be stable or that it is not the exhaustion of profit that causes an investment strike, but the exhaustion of natural resources, Ricardian or Malthusian style.  But has capitalism collapsed because populations have rocketed or oil has disappeared? No, oil production has rocketed with the expansion of shale in North America and population growth has slowed in most major capitalist economies. Capitalism continues to exploit resources successfully (and rapaciously) at the cost of planet and climate.

Galbraith really denies that there are any laws of motion in capitalism; it is all a question of institutions. Get rid of ‘cronyism’ and get more democracy in industry and commerce and all will be well?  Recently Galbraith spoke at the Rethinking Economics conference in New York (see my post, in which he argued that economic theory was too embedded in models and not in the history of institutions. Look at correcting institutions and not at models of economies, says Galbraith. But in doing so, Galbraith seems to reduce recurrent economic crises to just the ‘fragility of complexity’. What about the contradiction between private profit and social need under the capitalist mode of production? In another place, Galbraith has dismissed the Marxist view (see his paper, as one that “lacks interest in policy: at the heart of things, they (the radicals/Marxists) don’t believe that the existing system can made to work”. Indeed, but it seems Galbraith does.

This brings me to the only new book with a Marxist perspective and by definition part of the backwater and anti-establishment. In Deciphering Capital (, Alex Callinicos analyses Marx’s method in reaching an understanding of the laws of motion of capitalism. And such laws do exist.

It is said that everybody reckons that they have a novel in them waiting to come out. It is also said that is just as well that most people don’t get round to writing it. Unfortunately some do. Near the beginning of his new book, Callinicos refers to a comment by David Harvey, who in the preface of his book, The limits of capital, says “Everyone who studies Marx, it is said, feels compelled to write a book about the experience”. Somehow I doubt that is true, but certainly Callinicos has wanted to complete such a book, particularly on Marx’s Capital. And on this occasion, it was worth doing.

Callinicos aims to identify the purpose and structure of Marx’s Capital with the central idea of capital as a social relation. In particular, he cites early on the confusions created by Michael Heinrich, an eminent scholar of Marx’s writings, about Capital. This is a critique that I can chime with as I (with G Carchedi) only last year spent some time dealing Heinrich’s attempts to rubbish Marx’s law of profitability and its relevance to crises of capitalism (see my posts, and our paper,

Callinicos correctly isolates the key double relation of capital as a mode of production. It is first the exploitation of wage labour by the owners of capital; and at the same time, a competitive battle among capitals. The first is an analysis of ‘capital in general’ and the second is one of ‘many capitals’. Both are necessary to a clear understanding of capitalism’s laws of motion.

In trying to explain how this double relation works, Callinicos seeks to dissect the structure of Capital, the book. His first insight is to argue that, while Marx owes a huge debt to Hegel, the philosopher of dialectical thought who brings out the contradictions in society, Marx transcends and leaves Hegel behind, both in his materialist conclusions and in the structure of Capital, the book. Callinocos takes some space to explain the connection between Marx’s method and that of Hegel. These can be difficult chapters for the uninitiated but worth pursuing. Callinocos reaches the original conclusion that Marx transcends Hegel not just in ‘turning him upside down’ from idealism to materialism, a well-known insight, but in the dialectical structure of Capital itself.

As Callinicos perceptively points out, Marx dealt with problems by working them out as he went along. Indeed, Marx forges his own ideas ‘in dialogue’ with Hegel on the one hand and economist David Ricardo on the other. For example, it is not just noting that value is to be found in the substance of labour as Ricardo had realised. For Marx, it was that the capitalist mode of production had become the driver of all human labour power.

The biggest problem for anybody trying to grasp where Marx is going is that his work is so vast and often just sheafs of notes not worked out in a final text. Marx never seemed to finish anything before he was onto to the next subject or sidetracked into a different path, apart from facing permanent problems of money, living and health for him and his family. As a result, even Capital is unfinished and left for Engels and others after him to edit and interpret. Engels comes in for a lot of stick for ‘editing’ Marx into distortion – a charge Heinrich and others have levelled. But as Callinicos points out, Engels did the best he could and in reality he was the only one who could read and edit Marx’s manuscripts. Later editors like Kautsky have much more to be criticised for.

Whatever the failure of editors, it is clear that a reading of Capital in its three volumes and the Theories of Surplus value provide an overall theory of the capitalist mode of production, which “had taken definite shape in the course of the 1860s that Marx does not seem to have subsequently abandoned”. Thus Callinicos confirms the conclusions of Henryk Grossman and Rodolsky before.

Marx’s method is to proceed from the abstract to the concrete, from commodity to value and surplus value and then to capital, and from production to distribution. In other words, the essence of capitalism is then added to with “increasingly complex determinations”. Or as Henryk Grossman argued back in 1929, ‘[t]he construction of all three volumes of Capital was carried out methodologically on the basis of the meticulously thought-out and actually implemented procedure of successive approximation [Annäherungsverfahren]…. Each provisional simplification correlates with a later, corresponding concretisation.’ So the initial abstract treatment of capitalism is made progressively more concrete. Or as Callinicos puts it, Capital is structured like a “chain of problems, the solution to each of which drives us onto the next”.

Why is this method so important? It avoids crass empiricism by providing a theoretical framework for analysing data or phenomena (it sets up some ‘priors’ if you like), but it also avoids arid theory by connecting all the surface appearances of Capital. Thus a stock market crash can be seen in the context of the law of value and Marx’s law of profitability. Callinicos brings that home in an excellent chapter on Marx’s theory and explanation of crises.

Callinicos accepts that Marx does not present “an articulated and finished theory of crisis” but cleverly identifies six ‘determinations’ of crisis in Marx’s writings. There is the formal possibility (or enabling factors) of crisis in commodity exchange and the credit system (the area so beloved by Keynes and Minsky). Then there are the conditioning factors of the accumulation of capital and the generation of the reserve army of labour. And finally there are the contradictory conditions invoked by the law of the tendency of the rate of profit to fall and the profit and credit cycle.

In his early works, Marx had really only conceived of the enabling factors in crises: the separation of purchase and sale in commodity transactions and the disruption of money’s role through credit. It was only from Grundrisse onwards that he develops his fully fledged theory of crises based on the law of the tendency of the rate of profit to fall as the “most important law of political economy”.

Callinicos deals well with the alternatives to his interpretation of Marx’s crisis theory that are based on underconsumption (overproduction), disproportion of sectors, or intense competition or stagnating monopoly. In contrast, for Marx, crises are a “necessary violent means” for a “restoration of a sound rate of profit” and because the tendency is for that to fall over time, crises continually reoccur. And thus there is no way out of exploitation and continual, and ever more devastating, slumps in the employment and incomes of the majority except through the replacement of the capitalist mode of production – contrary to the views of Wolf, Krugman or even Galbraith.

De-industrialisation and socialism

October 21, 2014

Last week I spoke on a panel that debated De-industrialisation and socialism.  The panel was organised by Spring, a Manchester-based group in England that has become a forum for the discussion of developments in capitalism and their implications for the prospects for socialism (

The main theme for this panel discussion was the evident fact that the industrial sector (manufacturing, mining, energy etc) has declined sharply as share of the output and employment in the mature capitalist economies during the 20th century.  The question for debate  was: does this mean that the working class has also declined and is no longer the main force of change in capitalism; and also that a socialist or post-capitalist society will be a world without industry or employment of industrial workers?

The first point I made in the discussion was that the world is not de-industrialising.  Globally, there were 2.2bn people at work and producing value back in 1991.  Now there are 3.2bn.  The global workforce has risen by 1bn in the last 20 years.  But there has been no de-industrialisation globally.  De-industrialisation is a phenomenon of the mature capitalist economies.  It is not one of the ‘emerging’ less developed capitalist economies.

Using the figures provided by the International Labour Organisation (ILO) we can see what is happening globally, with the caveat that there is a serious underestimate of industrial workers in these figures and such transport, communication and many hi-tech workers are put in the services sector.

Globally, the industrial workforce has risen by 46% since 1991 from 490m to 715m in 2012 and will reach well over 800m before the end of the decade.  Indeed, the industrial workforce has grown by 1.8% a year since 1991 and since 2004 by 2.7% a year (up to 2012), which is now a faster rate of growth than the services sector (2.6% a year)!  Globally, the share of industrial workers in the total workforce has risen slightly from 22% to 23%.  It is in the so-called mature developed capitalist economies where there has been de-industrialisation.  The industrial workforce there has fallen from 130m in 1991 by 18% to 107m in 2012.

Global workforce

The big fall has not been in industrial workers globally but in agricultural workers.  The process of capitalism sucking up peasants and agro labourers from the rural areas and turning them into industrial workers in the cities is not over.  The share of agricultural labour force in the total global workforce has fallen from 44% to 32%.  So should we not really talk about de-ruralisation, as Marx did in the mid-1800s?  That is the great global phenemonon of the last 150 years.

Of course, most workers globally work in the services sector.  This sector is badly defined, as I say, and is really anybody not clearly an industrial or agricultural worker.  This sector was smaller than agriculture in 1991 (34% to 44%) but now it is biggest at 45% compared to 32% for agriculture.

As I was speaking in Manchester, the centre of the industrial revolution in Britain in the early 19th century, I was reminded of the work of Friedrich Engels, Marx’s partner in crime, who was managing his uncle’s German firm in the city at the time.  As a young man (24 years), Engels wrote The condition of the working-class in England (published in 1845)
and described the horrendous conditions of squalor, disease, sweat shop conditions, injury and poverty that rural men, women and children were subjected to as they came to work in the fast industrialising and urbanising cities of northern England.  It’s the same story now in the likes of India, China, south-east Asia and Latin America.  Engels concentrated on the conditions for labour, but in a preface to a new edition of his book in 1892, he commented that Britain was fast being replaced as the major industrial capitalist power by France, Germany and the US.  “Their manufactures are young as compared with those of England, but increasing at a far more rapid rate than the latter.  They have reached the same phase of development as English manufacture in 1844”.  And so it is now for the so-called emerging economies of Asia, Latin America and Africa compared to the mature capitalist economies of Europe, Japan and North America.

But it’s true that the share of industrial workers in the mature economies has fallen from 31% in 1991 to 22% now.  Indeed, according to McKinsey, manufacturing employment fell 24% in the advanced economies between 1995 and 2005.

US manuf emp

So does this mean that the future of capitalism without an industrial proletariat capable of being an agency for change and, for that matter, ‘post-capitalism’ will a society without industry, where people can expect to reduce their hours of work for a living and have increased periods of ‘leisure’?

This was the theme that my fellow panellist Nick Srnicek posed.  Nick is a Fellow in Globalisation and Geopolitics at UCL. He is the author with Alex Williams of Inventing the Future (Verso, 2015) and the editor with Levi Bryant and Graham Harman of The Speculative Turn (, 2010) – see
Nick explained that, while new economies were being industrialised, their peak of industrialisation came earlier than for economies like Britain in the 19th century.  Indeed, no economy had achieved more than a 45% share for industrial employment.  So the future is not industry and an industrial working-class.  And it was no good advocating a return to manufacturing and industry as the way forward for a better society.

I am sure that Nick is right in these points. Where I differed was that he was not clear if a post-capitalist, non-industrial society would be achieved gradually as capitalism expanded globally and technology replaced heavy industrial work and people worked less hours and could use their time for themselves.  The idea of a steady move to a post-industrial, leisure society was the concept of Keynes back in the 1930s, arguing for capitalism as the way forward to his students at the height of the Great Depression in the 1930s, when many of his students had started to look to Marxism as the explanation for crises and the alternative of socialism (see my post, ).

Keynes reckoned the capitalist world would achieve huge per capita GDP growth and enter a ‘post-capitalist’ leisure economy without poverty.  Well, this blog has regularly revealed data that show poverty remains a terrible spectre over the globe, an inherent feature of capitalism, and that far from moving to a leisure society, working hours have hardly fallen much in the mature economies and remain very high in industrial sectors of the emerging economies.  We are all still ‘toiling’ for a living (apart from the 1%), in increasingly precarious jobs.

I don’t think we can get a ‘post-capitalist’ leisure society through gradual change.  It will require a revolutionary upsurge to change the mode of production and social relations globally, even if the potential productivity of labour through new technology and robots etc  is already there globally to deliver such a transition to freedom from toil.  Capitalism remains in the way as a fetter on production, with capitalists as a class force opposed to freedom.

The reason that the mature capitalist economies have lost their industrial base is that it was no longer profitable for capital to invest in British industry in the late 19th century or OECD industry in the late 20th century. So capital counteracted this falling profitability by ‘globalising’ and searching for more labour to exploit.

And profitability fell because capitalist accumulation is labour-shedding.  Capitalists compete against each other to get more profit.  Those capitalists with better technology can steal a march on others by boosting labour productivity and reducing labour costs by cutting the workforce.  So the drive is always for reducing the amount of labour power to boost profits.  The central contradiction here, as explained by Marx’s law of profitability, is that the reduction in labour power relative to mechanisation leads to an eventual fall in profitability.  This reduces the industrial workforce in the mature economies and leads to expansion of industry globally. Capitalism is a mode of production for mechanisation, but mechanisation will also lead to its demise as it is a mode of production for profit not social need and more mechanisation eventually means less profitability.  That shows that as we move towards a robot economy: profit for capital and meeting social needs will become more incompatible.  And the leisure society just an impossible dream.

Employment growth is falling in the advanced capitalist eocnomies. Employment growth is way less than 1% a year in the 21st century.

AD emp

Computer engineer and Silicon Valley software entrepreneur, Martin Ford puts it this way: “over time, as technology advances, industries become more capital intensive and less labour intensive.  And technology can create new industries and these are nearly always capital intensive”.  The struggle between capital and labour is thus intensified.

It does depend on the class struggle between labour and capital over the appropriation of the value created by the productivity of labour.  And clearly labour has been losing that battle, particularly in recent decades, under the pressure of anti-trade union laws, ending of employment protection and tenure, the reduction of benefits, a growing reserve army of unemployed and underemployed and through the globalisation of manufacturing.

According to the ILO report, in 16 developed economies, labour took a 75% share of national income in the mid-1970s, but this dropped to 65% in the years just before the economic crisis. It rose in 2008 and 2009 – but only because national income itself shrank in those years – before resuming its downward course. Even in China, where wages have tripled over the past decade, workers’ share of the national income has gone down. Indeed, this is exactly what Marx meant by the ‘immiseration of the working class’.

Will it be different with robots? Marxist economics would say no: for two key reasons.  First, Marxist economic theory starts from the undeniable fact that only when human beings do any work or perform labour is anything or service produced, apart from that provided by natural resources (and even then that has to be found and used).  So, crucially, only labour can create value under capitalism.  And value is specific to capitalism.  Sure, living labour can create things and do services (what Marx called use values).  But value is the substance of the capitalist mode of producing things.  Capital (the owners) controls the means of production created by labour and will only put them to use in order to appropriate value created by labour.  Capital does not create value itself.

Now if the whole world of technology, consumer products and services could reproduce itself without living labour going to work and could do so through robots, then things and services would be produced, but the creation of value (in particular, profit or surplus value) would not.  As Martin Ford puts it: the more machines begin to run themselves, the value that the average worker adds begins to decline.” So accumulation under capitalism would cease well before that robots took over fully, because profitability would disappear under the weight of ‘capital-bias’. This contradiction cannot be resolved under capitalism.

We would never get to a robotic society; we would never get to a workless leisure society – not under capitalism.  Crises and social explosions would intervene well before that.

UK: the agony and the ecstasy

October 18, 2014

The Bank of England chief economist certainly put the cat among the pigeons with his speech on the British economy on Friday ( Andy Haldane was ‘off message’ from the story painted by his boss, the useless, confusing and grotesquely overpaid Mark Carney (see my post For months Carney has been going around hinting that the BoE would hike interest rates soon because the UK economy was booming and he wanted to control the racy property market and avoid rising inflation (instead inflation is now slowing fast!).

In contrast, Haldane says that he is “gloomier” about the prospects for the economy than he was a few months ago and thinks that rates will have to stay lower for longer. Now Haldane has ‘form’ in being off message and not following the banker’s line. He even spoke to the Occupy movement in the days of the crisis, suggesting that they had plenty of things to complain about and that the banking system was to blame and needed radical reform (see my post

A little bit more on message was Haldane’s warning that Britain was vulnerable to another round of the Eurozone crisis. This is the line adopted by the UK’s conservative finance minister, George Osborne, who has already suggested any slump in Europe would be the excuse for the downturn in the so-called boom in the UK economy – forecast to be the fastest growing in the G7 this year (see my post,

However, Haldane went off message again in his so-called Twin Peaks speech, when he outlined the fault-lines in the UK economy: falling real-wage growth and flat-lining productivity. On wages, Haldane was brutal: “Growth in real wages has been negative for all bar three of the past 74 months. The cumulative fall in real wages since their pre-recession peak is around 10%. As best we can tell, the length and depth of this fall is unprecedented since at least the mid-1800s!  This has been a jobs-rich, but pay-poor, recovery.”

UK real wages

Haldane has constructed what he called his ‘agony index': a simple index of real wages, real interest rates and productivity growth. In this blog, I have referred to a ‘misery index’, the sum of the unemployment rate and inflation, as an indicator of misery for the average household ( But in an economy like the UK or the US, where unemployment and inflation have been falling but real wages have collapsed along with productivity and pension returns, Haldane’s agony index is way better.  Haldane’s index shows that the British people and the economy have been in ‘agony’ for the longest time since the 1800s, with the exception of world wars and the early 1970s.

agony index

This is not the sort of thing that the government and Haldane’s boss, Carney, want to hear. But as Haldane said: “The BoE, in common with every other mainstream forecaster, has been forecasting sunshine tomorrow in every year since 2008 – that is, rising real wages, productivity and real interest rates. The heatwave has failed to materialise. The timing of the upturn has been repeatedly put back.” Instead it was a mixed picture of ‘twin peaks’ of agony for average households and ecstasy for richer ones.

To add to Haldane’s argument and refuting the line of the government that the British economy is on the road to sustained recovery and fast growth, official figures on productivity growth in the major economies since the Great Recession have been released. Output per hour in the UK was 17% below the average for the rest of the major G7 industrialised economies in 2013, the widest productivity gap since 1992. On an output per worker basis, UK productivity was 19% below the average for the rest of the G7 in 2013.

productivity compared

And it is getting worse. UK output per hour fell slightly in 2013 compared with 2012, contrasting with an increase of 1.0% across the rest of the G7. UK productivity levels are about the same as in 2007, but 15% below where they ought to be if pre-crisis productivity growth had continued.

And productivity growth matters if overall economic growth is to be sustained. Real GDP growth is a combination of employment growth and productivity growth (output per worker). Employment growth in the UK even with wholesale immigration (and that is going to stopped by a re-elected Tory government) is unlikely to be higher than 1% a year. So to achieve sustained 3% real GDP growth, the minimum necessary to get unemployment down further, reduce the budget deficit and government debt and start to raise real incomes, productivity growth must be at least 2% a year. But instead it is falling.

I have discussed the reason for these chronically bad productivity figures in previous posts ( It’s been a combination of the growth of low value-added self-employment (taxi drivers, cleaners, odd jobbers etc), low skilled part-time, temporary and full-time jobs (Asda, McDonalds, Starbucks etc) and, above all, the lack of new investment in technology to boost the productivity of those working. UK business investment remains in the doldrums, while public sector investment has collapsed (see my post,

UK business investment as % of GDP

What Haldane did not say was why there had been such the fall in real wages and a rise in his agony index. It’s because rather than investment to raise productivity, British capital has opted to squeeze wages and cut costs to try and restore profitability. You see, contrary to the view of neoclassical and Keynesian economics alike, productivity and profitability are not the same thing – indeed they are often contradictory.

Squeezing wages has boosted the rate of exploitation (and raised levels of inequality). But this has failed to raise UK profitability much.

UK rate of profit

The way to raise profits is by new labour-shedding technology that increases productivity and lowers costs. But British capital is reluctant to invest when it is still burdened with spare capacity in old technology and corporate debt. That needs to be liquidated first – in another slump. There is more agony to come yet.

PS a fuller version of this piece has just appeared in the Weekly Worker,

October is a volatile month

October 17, 2014

October is the most volatile month in the stock market calendar.  The price of shares in world stock markets rise and fall like a yo yo in October compared to other months.  I don’t know why, but maybe October is when investors realise that their expectations of corporate profits are not going to be met by year-end and they react accordingly.  Anyway, the great stock market crash of 1929 which kicked off the Great Depression of the 1930s started in October. The huge crash in stock prices in 1987 was in October and the crash of October 2007 heralded the ensuing banking meltdown and the Great Recession of 2008-9.

But usually, any October ‘correction’ is followed by a rally from November  to Xmas, the so-called Santa Claus rally.  That’s what happened in 1987.  So what will happen this time?  Well, so far, stock markets have fallen from their peak by 10%.


The media is screaming, but a 10% fall is not really a crash.  On the other hand, there is a big difference between 1987 and 2014.

In 1987, the major economies were experiencing rising profitability in the corporate sector that began in 1982 and global investment and growth was accelerating.  In 2014, it’s different.  Global profitability is static and, as this blog has argued incessantly, global real GDP growth and investment is way below trend – an indicator of a Long Depression.  And the Eurozone and Japan are close to a new recession (see my posts,

Indeed, profits for US top companies, shortly to be announced for the last quarter, are expected to show the weakest growth since 2009.

The world’s major central banks have been pumping credit into their economies by ‘printing’ money like there was no tomorrow.  Only last month Draghi at the ECB announced a new round of credit injections.  But these huge injections have turned out to be just more fictitious capital.  The money has ended up in the banking system and then been used to lend to banks, hedge funds, pension funds, asset managers and corporate treasurers at very low rates and they have speculated with the credit in stocks and bonds.  Thus there has been a huge rally since 2009 in the world’s stock markets and in government bonds, even of those governments with huge debts and no economic recovery like Greece, Portugal, Spain and Italy.

None of this credit has reached the so-called ‘real’ economy, or the productive sectors, for investment in new technology and skilled employment.  The money has been hoarded and speculated with. So stock and bond prices have increasingly got out of line with real economic growth based on value created by labour power globally, as this graph of Tobin’s Q, a measure of stock prices against the real stock of capital, shows (i.e. the blue line is well above average, if not as high as in 2000).


This is unsustainable.  Indeed, unlike 1987, this is a bear market for stocks that began back in 2000 (see my post  In that post, I pointed out that the huge boom in the stock markets in the last four years is way above even the substantial rise in the mass of profits in many major economies since the trough of 2009.  The return (in corporate earnings) against investing in the stock market rose to highs by late 2011.  But since then it has been falling back as stock prices rose much faster than earnings could keep up.


The graph was done before this October ‘correction’ so the blue line (the return on investing in stocks) has dropped back further.  But there is still plenty of room for further downside.

What has triggered this October crash is the fear among investors that economic growth and profitability is starting to drop and central banks’ injections of credit have stopped propping things up.  Indeed, the US Federal Reserve has an economy that is doing better (a bit) than others and ended its ‘quantitative easing’ this October and has been talking about hiking interest rates some time next year.  So the cheap money ‘gravy train’ appeared to be coming to an end.  This is the contradiction that I raised in another recent post (

Now it may be that this October stock market ‘correction’ will be reversed by a Santa Claus rally in November, especially if the Fed lets markets know that it will delay its planned rate hike and the ECB decides to extend its credit injections to ‘full’ QE by buying the bonds of distressed Eurozone governments like Italy, Spain or Greece.  But the Germans are vehemently opposed to such ECB bond purchases and the Fed is still looking at its overblown balance sheet and any sign of wage inflation in the US economy.  So neither the Fed nor the ECB may go for any more injections of fictitious capital, especially as they are not working to boost the economy.

The stock markets are rallying today as I write this.  It remains to be seen if this is just a short period of relief or the end of the ‘correction’ and investors recover their nerve and start a new round of bets with our money.

Global wealth: 1% own 48%; 10% own 87% and bottom 50% own less than 1%

October 15, 2014

This time last year, I outlined the results of the Global Wealth report published by Credit Suisse Bank (see my post,  Compiled by Tony Shorrocks and Jim Davies, formerly at the UN, the report last year showed that the top 1% owned 41% of all the personal wealth in the world; the top 10% owned 86% and the bottom 50% of owned less than 1% of all the wealth.  This staggering level of inequality certainly attracted interest and my post on this was the most popularly viewed one on my blog ever.

Now Credit Suisse have published its 2014 report (cs_global_wealth_report_2014_vF) compiled by the same academics.  According to the latest calculations, global wealth inequality has got even worse.  Taken together, the bottom half of the global population still own less than 1% of total wealth.  And the richest 10% still own more or less the same, now 87%.  But the top 1% now own 48% of all global personal wealth!  If you like a soundbite: the top 1% of adults in the world own nearly half of all personal wealth.  There seems to be no stopping the growing inequality of wealth in the world.

global wealth pyramid

The latest analysis comprises the wealth holdings of 4.7 billion adults across more than 200 countries – from billionaires in the top echelon to the middle and bottom sections of the wealth pyramid, which other studies often overlook.  It really is the most comprehensive and revealing account of global personal wealth.

The funny thing is that it does not take all that much wealth to get into the top 1% or top 10%,  Once debts have been subtracted, a person needs only $3,650 to be among the wealthiest half of the world’s citizens. However, about $77,000 is required to be a member of the top 10% of global wealth holders and $798,000 to belong to the top 1%.  So if you own a home in London (average value now $750,000) on your own and without a mortgage, you are part of the top 1% and many people can claim to have $77,000 worth of property after the mortgage in the US and Europe.  Do you feel rich if you do?  This just shows how poor the vast majority of people in the world are: with no property, no cash and certainly no stocks and bonds!

Global household wealth has now reached $263 trillion, or about four times the annual product of the world’s working population.  The average wealth per adult is now $56,000, a jump of $3,450, or the biggest annual increase since the global financial crisis.  Global wealth now stands 20% above its pre-crisis peak and 39% above its 2008 low.  On a regional basis, North America and Europe led the gains with increases of about 11%. In contrast, aggregate wealth in Latin America was largely unchanged, whereas Asia-Pacific (including China and India) recorded a small rise of around 3%. Excluding Japan, the region recorded a gain of about 4%, with Chinese wealth rising by 3.5% and Indian wealth falling  1%.

The number of dollar millionaires has increased significantly since 2000, rising by 164% over the period, to 34.8 million. The US has 41% of all global millionaires.  According to the report, the number of global millionaires could exceed 53 million in 2019, a rise of more than 18 million. China could see its number nearly doubling by 2019, to 2.3 million adults. Brazil and Mexico will underpin the number of millionaires in Latin America, which could reach 921,000 in five years.

What is also valuable in this year’s report is a measure of median wealth (the 50% point in wealth distribution) as well as mean average wealth.  Global median wealth has been falling every year since 2010, while mean wealth has been rising. The poor are getting poorer and rich are getting richer.  And the top 1% are getting further away from the top 10%.

The report also shows that wealth inequality is much higher than income inequality and this is a worldwide phenomenon. This is important because there is always much talk about income inequality and this being due to people having better education and skills etc.  But it is wealth that really matters and that is down more to inheritance and luck rather than skill, something the report discusses.

The report finds that inequality in both wealth and income trended downward globally from the late 1920s to the 1970s and then started rising.   This U-shape in the 20th century confirms the findings of Thomas Piketty in his now famous book on inequality, Capital in the 21st century (see my post

That brings me to a brand new study by Emmanuel Saez and Gabriel Zucman, close colleagues of Piketty, on the wealth inequality in the US since 1913 (SaezZucman2014Slides).  The study combines income tax returns with Flow of Funds data to estimate the distribution of household wealth.  Again they confirm the Credit Suisse study and Pilketty’s work (which uses the same data) that wealth concentration has followed a U-shaped evolution over the last 100 years: it was high in the beginning of the 20th century, fell from 1929 to 1978 and has continuously increased since then.

Saez and Zucman make the point that the rise of wealth inequality is almost entirely due to the rise of the top 0.1% wealth (the uber-rich) share, from 7% in 1979 to 22% in 2012, a level almost as high as in 1929. The bottom 90% wealth share increased up to the mid-1980s and then steadily declined (see graph below).

Saez and Zucman


And the main reason that happened is that the 90% are now not earning enough to save anything at all, especially to buy property and so build up wealth.  The poor (that’s 90% of us) are getting poorer and the super-rich (0.1%) who rule the world are getting very much richer.

PS. I’ll be meeting Tony Shorrocks, one of the authors of the Credit Suisse report, in a week or so; if you have any questions for him, let me know.


Japan: the failure of Abenomics

October 13, 2014

The talk over the weekend at the IMF-World Bank meeting in Washington was of the global economic slowdown as both international agencies reduced their forecasts for real GDP growth in 2015, yet again. In particular, the IMF warned of a serious risk of a renewed recession in the Eurozone (see my post, The IMF reported that there is a 40% probability of a recession in the euro area within 12 months, along with a 30% chance of outright deflation. This caused a sell-off in financial markets.

However, Gavyn Davies, ex-chief economist at the giant vampire squid, Goldman Sachs, but now a columnist for the FT, dismissed the fear that a new recession in the Eurozone would cause a global slump ( He pointed out that the US economy was still growing relatively strongly and that the recent fall in oil prices would actually help to boost consumer spending by as much 1% of GDP if it holds.  He reckoned that a slump in the Eurozone would only lower global economic growth by about 1% next year. So there would be no global slump.


Well, 1% point off a global growth rate optimistically forecast at a relatively poor 3.8% in 2015 would be pretty damaging, it seems to me.  And data from 19 large emerging economies collated by research firm Capital Economics show that industrial output in August and consumer spending in the second quarter fell to their lowest levels since 2009. Export growth in August also plunged.  The Capital Economics’ model, which makes projections for overall EM GDP growth based on published official and private data, shows an aggregate growth rate of 4.3% in July, down from 4.5% in June and preliminary numbers for August suggest a further slowdown.

Capital economics
And there is another factor. Davies and others seem to have failed to notice that the third-largest national economy in the world, Japan, is also in deep trouble.

Some Japanese analysts have noticed. “People should seriously consider that Japan’s economy may have fallen into recession despite the weaker yen and a stock rally from the BOJ’s easing and the flexible fiscal policy by Abe’s administration,” said Maiko Noguchi, senior economist at Daiwa Securities. “Initial expectations that the economy could withstand the negative effects of a sales tax hike through a virtuous circle seem to be collapsing.” And Yuji Shimanaka, chief economist at Mitsubishi UFJ Morgan Stanley Securities, also commented “the risks are rising that the economy will later be determined to be in recession.

The economy fell between April and June by an annualised 7.1% and even though the rate of decline will have been much slower from July to September, all the indications seem to point towards the possibility that growth was negative, which would mean that at least technically Japan is back in recession.

Industrial output was down 1.5% between July and August (and down 2.9% over August 2013) and has fallen in three of the past five months. Household spending was down 4.7% year on year in August, and the coincident composite index, which consists of 11 key indicators, including retail sales and industrial production, fell 1.4 points to 108.5, the first fall since June.

And just as in the Eurozone, inflation is dropping fast towards deflation again. The hiking of the sales tax last April as part of the government’s attempt to control rising debt and huge budget deficits drove up headline inflation to over 3% a year, but if you strip out the effects of that tax, then inflation rose only 1.3% and the Tokyo University frequently purchased items index (obtained from supermarket scanner data) shows underlying inflation continuing to slow.

The tax hike has really hit living standards in Japan. Average real wages are falling (as they are in the UK, the Eurozone and even the US).

Japan real wages

In an obscure report, Goldman Sachs found that “while employment improved in all income brackets, overall livelihood and income growth have worsened in some brackets, particularly in the under ¥3 mn low-income bracket. A noteworthy point is that this began to worsen from early autumn 2013, not after the consumption tax hike in April 2014.”

All this exposes the sham of so-called Abenomics and support for the government’s policies that has come from various Keynesian economists. As long ago as February 2013, (, I discussed the great experiment of the Abe government in trying to restore economic growth by applying all Keynesian remedies at once – monetary and fiscal stimulus along with a very sharp depreciation of the currency against its major trading rivals.

Back then Paul Krugman and Dean Baker reckoned that the Japanese ‘experiment’ must be supported as it is going to prove that Keynesian-style policies of monetary injections and fiscal stimulus will work. I argued that Keynesian policies in the 1990s did not work for Japan and they probably won’t work in this decade either. I posed the question: “will I be proved wrong?” And I answered : “I doubt it.”

Well, the Japanese economy has not recovered and appears to slipping back into recession. The government’s targets of boosting inflation to over 2% a year, reducing the fiscal deficit and raising productivity are further away than ever.

Of course, as I said two years ago, the real purpose of Abenomics was to raise the profitability of Japanese capitalism, at the expense of labour ( Japan’s citizens have paid the price of higher taxation and inflation and a slowdown in employment growth. And that is helping to get profitability back up, as the data from the AMECO database on Japan’s net return to capital suggest.

Japan NRC

Profitability appears to have recovered somewhat although the level is still below the peak in 2007. But this still has not led to a significant rise in business investment that could really get the economy going.

Japan Investment

And PM Abe is supposed to hiking the sales tax again next April. A decision on that is due in December. If both the Eurozone and Japan are in a slump in 2015, that does not bode well for the world economy.

Media mud over UKIP

October 10, 2014

I don’t usually comment on political events as this blog is for economics.  But I just could not stop myself responding the British media’s distorted account of the recent by-elections (i.e. elections between the general election) for two MPs.

The British media is engaged in talking up a petty-bourgeois right-wing Eurosceptic party, UKIP, at every opportunity. UKIP has just got its first MP in a by-election in Clacton. But not really. The UKIP candidate was the sitting Conservative MP who defected to UKIP, so he was ahead from the beginning.

There was another by-election at the same time in central Manchester because the sitting Labour MP had died. This was a relatively safe Labour seat and in the by-election Labour held the seat narrowly by just over 600 votes from the UKIP candidate, from a 6000 majority in the general election in 2010. Apparently there was swing from Labour to UKIP of 17.5%.

The media reported that this showed Labour too was in trouble from surging UKIP support, just as much as the incumbent Conservative party was. But if we analyse the result properly, this is nonsense.

First, the turnout for the Manchester by-election was hugely down. It was only 57.5% in May 2010. Now it was just 40%. But this is the rub. Labour’s share of the vote actually ROSE from 40.1% of the turnout in May 2010 to 40.9% in the by-election. The Labour vote was not affected by UKIP.

What happened was that the non-Labour vote all went to the UKIP (apart from a small vote for the ecological Green party). The Conservative vote collapsed from 27.2% share to 12.3% and the junior partner in the current government, the Liberal Democrats, saw their vote disappear from 22.7% in May 2010 to just 5.1%. Actually, if you add up the combined voting share for the Conservatives, Liberal Democrats and UKIP, it was 52.5% in May 2010 and in the by-election it was 56%. That’s hardly a surge. Indeed, if you include the vote for the fascist BNP in May 2010, the share going to the anti-Labour vote FELL from 59.5% to 56%.

The media does not want to report the facts because it is determined to weaken the popularity of the Labour party and ensure its defeat next May. It may succeed, given the craven and pathetic leadership of the Labour elite. The Labour party has failed to galvanise the British people’s undoubted disgust and disappointment with the policies of the Conservative-Liberal government. So any electoral opposition has gone to a Eurosceptic, anti-immigration party, as it has in many European countries and did in the recent Euro elections.

So Labour has not ‘lost’ any share of its vote to UKIP. For this reason, the chairman of Conservative party is right. A vote for UKIP increases the chances that the Conservatives will lose seats to Labour in the general election, given the British ‘first-past-the-post’ system. That is why I expect the UKIP ‘surge’ to melt away next May.

Draghi’s answer to Euro depression

October 10, 2014

Mario Draghi, the head of the European Central Bank (ECB), spoke to the Brookings Institution in Washington this week (

He was very keen to emphasise that the ECB would ‘do what it takes’ to avoid the Eurozone economies sliding into deflation and another slump.

And financial markets and the international economic agencies of world capitalism are worried. At 0.3% yoy, Eurozone inflation is now at a five-year low, far from the ECB’s mandate of keeping the inflation rate ‘below but close to’ 2%. At the same time, inflation expectations, i.e. how much households expect prices to rise, has also been falling. When expectations fall, people tend to wait for prices to fall before buying and prices stop rising as a result. It’s self-fulfilling.

There is a real risk that the Eurozone economy will stop growing at all and enter a deflationary spiral. Indeed, the IMF in its latest economic outlook reckons that the Eurozone now faces a four in ten chance of re-entering recession.  Eurozone real GDP is stagnating and still below the peak of 2008 across the zone.

Euro GDP

Even more serious, there is little sign of any recovery in investment and in the profitability of private capital in the Eurozone. Investment is still some 20% below the pre-crisis peak.

Euro investment

The lack of investment reflects the failure of profitability among Eurozone companies to recover. Indeed, according to my own calculations, taken from the Eurostat AMECO database, the net return on capital in the Eurozone is down at levels not seen since the early 1990s.

Euro ROP

Low investment means that Eurozone companies are still not re-employing staff that they got rid of during the Great Recession. The official unemployment rate is stuck at well over 11%, a 20-year high.

Euro unemployment

On the broader measure of unemployment, which includes those in part-time work or who have given up looking for work, one in five workers in the Eurozone who want a job cannot get one. And of course, youth unemployment is huge, at well over 22%.

Financial markets have sold off in the last week because investors are now worried that the Eurozone’s stagnation and potential to slip back into slump could drag down the rest of the world economy. After all, Eurozone GDP is the same size as that of the US. The news that the German economy, the only one in the Eurozone that has been motoring, has taken a turn for the worse, was the trigger for the sell-off.

German exports plunged in August by their largest amount since the height of the financial crisis. German industrial production contracted 4% in August, the biggest decline in over five years. “The economy seems to need a small miracle in September to avoid a recession in the third quarter,” said Carsten Brzeski, an economist at ING.

This fear prompted Britain’s finance minister George Osborne to warn that: “the Eurozone risks slipping back into crisis, and Britain cannot be immune from that – it’s already having an impact on our manufacturing and exports,” he said. Osborne correctly pointed out that the world economy is just that: no country can escape from each other. “We are not immune from what’s going on in the rest of the world”. Of course, Osborne also has a political agenda. He is concerned to argue that, if the UK economy starts to falter after its recent ‘burst’ of growth (something I expect given the artificial nature of the current ‘boom’ – see my post,, people can blame ‘Europe’ and not the policies of his government, with an election looming next May.

Draghi in his Washington speech reiterated the measures that the ECB is taking to avoid deflation and boost the Eurozone economy. The ECB has offered to lend to the banks credit at very low rates of interest for up to three years without much collateral as long as the banks lend this onto industry. These Targeted Long Term Refinancing Operations (TLTROs) started last month but the take-up by the banks was very low.  So now Draghi plans for the ECB to buy outright batches of loans made to companies and mortgages by the banks, called Asset Backed Securities, and the banks’ own bonds (covered bonds) as a new way of getting credit into the ‘real’ economy.  This will inject up to €1trn in new credit over the next two years.

The problem is that the banks don’t want to borrow money and certainly not lend it on to companies that might not pay it back. The banks are still struggling to get their own balance sheets in order (and they are about to face a ‘stress test’ of their viability by the ECB). The last thing they want to do is lend more on risky investments. Indeed, the Germans are opposed to Draghi’s new monetary measures because they will put the ECB on the hook to loads of loans that may not be paid back in a new slump.

The other problem is that there is no demand for credit. The large companies have plenty of cash and don’t need to borrow and the small companies have plenty of debt and little sales and so cannot get the banks to lend to them. You can lead a horse to water (credit) but you cannot make it drink (invest).

‘Unconventional’ monetary policy, or quantitative easing as it is called (huge dollops of low-cost credit printed up by central banks), has been the approach of the Federal Reserve, the Bank of England, the Bank of Japan and the ECB over the last few years. But it has visibly failed to boost the ‘real’ economy with companies investing more. Instead, this easy money has just inflated stock and government bond prices, enabling investors to make money speculating rather than companies investing in jobs and new technology.

The ‘monetary’ solution is not working, particularly in the Eurozone. That’s why the likes of Draghi and IMF chief Lagarde have called for fiscal action from governments. Having spent the past few years demanding fiscal austerity (balanced budgets, welfare cuts and debt reduction), now they want fiscal stimulus (public infrastructure investment), especially from Germany. “We’re not suggesting that the Eurozone is heading toward recession, but we’re saying there is a serious risk that happens if nothing is done. But we are saying also that if the right policies are decided, if both surplus and deficit countries do what they have to do, it is avoidable,” said Lagarde. Draghi hinted at the same thing: “For governments that have fiscal space, then of course it makes sense to use it. You decide to which country this sentence applies,” Draghi said (meaning Germany).  Of course, the Germans have no intention of complying with these pleas for more government spending by them, having spent years trying to get the likes of Greece, Spain, Portugal, Italy and France to control their spending.

So the two arms of Keynesian macro policy, cheap money and fiscal spending, either don’t work or won’t be used, or both. The third arrow of policy action, to use the phrase of Japan’s Abenomics, is what is euphemistically called ‘structural reform’. “I am uncertain there will be very good times ahead if we do not reform now,” said Draghi. “Potential growth is too low to lift our economies out of high unemployment. Thus, while stabilisation policies that raise output towards potential are necessary, they are not enough. We need to urgently raise that potential.”

What Draghi means by ‘structural reform’ is ‘deregulating’ labour markets, removing labour rights, increasing the power of employers to sack workers, to impose new technology that loses jobs; to remove restrictions on shop hours, rent and price controls – indeed anything to allow market forces complete reign over all. This neoliberal policy is supposed to boost productivity, but in reality aims at raising profitability (which is not the same thing).

Keynesians like Martin Wolf (in a recent blog in the FT, reckon the Eurozone is close to another recession because of the lack of effective demand: “How are we to make sense of this predicament? The answer is that it reflects a prolonged slump in aggregate demand to which policy makers have failed to craft an adequate response.”

Draghi begs to differ. In his Washington speech, he referred to a letter by Keynes to President Roosevelt in December 1933. In it, Keynes tells President Roosevelt that the administration is engaged simultaneously in recovery and reform, and identifies a tension between the two. He worries especially about the risk that over-hasty reform impedes recovery. Draghi comments: “There are some parallels here for Europe: we are also engaged in reform and recovery. But in fact we face the opposite concern to that expressed by Keynes. Without reform, there can be no recovery.” Unlike Keynes, Draghi reckons that it is not more ‘demand’ that is needed to get the Eurozone economy going, but more profitability.

In a sense, Draghi is right. The problem of the Eurozone depression is not that it has been wrongly ‘managed’ by governments applying fiscal austerity, as Wolf claims. The long depression experienced by the world economy, particularly in the Eurozone, is a product not of ‘bad management’ but of the failure of the capitalist mode of production, as expressed in the collapse of profitability. The Eurozone may well need another slump to turn that around.

PS for my latest view on the Long Depression, an article in a recent issue of the Weekly Worker can be found here:

The Waltons, John Cochrane and the road to serfdom

October 7, 2014

As the World Bank and the IMF meet for their semi-annual meeting this weekend, in a speech, World Bank Group President Jim Yong Kim underlined the importance of “addressing inequality” in the world. Kim told students and faculty at Howard University that a recent Oxfam International report had found the world’s richest 85 people have as much combined wealth as the poorest 3.6 billion. And this compared to around a billion people who still live on $2 a day, have no electricity, drinking water, or even latrines.

The evidence of growing inequality of wealth and income globally is now overwhelming. In a new report, the OECD finds that global income inequality is now back at 1820 levels ( OECD researchers studied income levels in 25 different countries, charted them back in time to 1820 and then collated them as if the world were a single country. “The enormous increase of income inequality on a global scale is one of the most significant -– and worrying -– features of the development of the world economy in the past 200 years,” concluded the OECD in its 269-page report. Interestingly, the OECD noted that global inequality rose once globalisation took root after the 1980s.

And within the US alone, the latest triennial Survey of Consumer Finances (SCF) from the Federal Reserve (, reveals how the rich have got richer compared to the rest of us, even after the Great Recession. In the Great Recession, net wealth for the average American household fell 39%, but just 16% for the top 400 American families (as measured by Forbes magazine), while net wealth actually rose for the Walton family (who are part of the 85 Oxfam people), the owners of the cut-price, anti-labour American retailer, WalMart (up 45%!). Recession was good for the Waltons.

The Waltons

It was the collapse of home prices that hit the average American household the most, while the fall in stock priced affected the richest 400 more. In the ‘recovery’ since 2010, the average household has experienced a further fall in wealth (-2%), but the top 400 have gained an extra 45%, while the Waltons have added another 50%! Typical US family wealth in 2013 was $81,200 — which is about the same as it was in 1992 at $80,200 (in real terms). The cumulative wealth of the Forbes 400 was about $2.1 trillion, or roughly the same as that held by the entire bottom 60% of American families. The combined worth of the Walton Six was $145 billion in 2013, which equalled the total wealth of the bottom 43%!

The Fed and OECD studies confirm a myriad of others, including the most comprehensive by Anthony Atkinson (see my post, and, of course, the best-selling book on the rising inequality of wealth in the major economies by French economist Thomas Piketty, “Capital in the Twenty-First Century” (see my posts,

FT columnist Martin Wolf in his latest book (The shifts and the shocks) also launches the idea that inequality is the main problem of capitalism. “It is increasingly recognised that, beyond a certain point, inequality will be a source of significant economic ills.” Wolf cites the Federal Reserve study above on inequality of income where the top 3% income earners got 30.5% of total incomes in 2013. The next 7% received just 16.8% and this left barely over half of total incomes to the remaining 90%. The upper 3% was also the only group to have enjoyed a rising share in incomes since the early 1990s. So inequality keeps rising.

Wolf also cites the Morgan Stanley study which lists among causes of the rise in inequality: the growing proportion of poorly paid and insecure low-paid jobs; the rising wage premium for educated people; and the fact that tax and spending policies are less redistributive than they used to be a few decades ago. According to the OECD, the US ranked highest among the high-income countries in the share of relatively low-paying jobs. Moreover, the bottom quintile of the income distribution received only 36% of federal transfer payments in 2010, down from 54% in 1979. The poorest are getting a smaller share of available welfare benefits.

Wolf then trots out the argument still dominant among leftist and Keynesian economists that rising inequality is not only unjust but that it is the principal cause of crises and stagnation under capitalism. The argument goes: “up to the time of the crisis, many of those who were not enjoying rising real incomes borrowed instead. Rising house prices made this possible. By late 2007, debt peaked at 135 per cent of disposable incomes. Then came the crash. Left with huge debts and unable to borrow more, people on low incomes have been forced to spend less. Withdrawal of mortgage equity, financed by borrowing, has collapsed. The result has been an exceptionally weak recovery of consumption.”

The argument that the Great Recession and the weak recovery were due to a collapse in consumption just does not hold up – see my post, But Wolf’s propositions are now the conventional wisdom of the left or liberal wing of mainstream economics.

I have argued before that there are two reasons for this. First, the powers that be (IMF, OECD, World Bank etc) are genuinely worried that growing inequality could lead to a political and social backlash by the poor against the rich that could threaten the capitalist system itself.  Second, claiming that growing inequality is the real cause of slumps in capitalist production is a comforting theory because it suggests that, with a judicious policy of redistribution of wealth and incomes, crises could be eliminated without the need to replace the capitalist mode of production. So nobody on the left (let alone the mainstream) pays any attention to the causal explanation of crises provided by Marxist economics.

Inequality may be seen as the issue by the liberal left and Keynesians, but it is certainly not by the hardline neoclassical mainstream. John Cochrane is a leading University of Chicago neoclassical economist ( He is a strong critic of all this liberal ‘fuss’ about inequality. At a recent panel on inequality organised by the Hoover Institution in memory of another neoclassical great, Gary Becker, Cochrane commented that asking for the redistribution of wealth and income was pointless because “we all know there isn’t enough money, especially to address real global poverty” and yet the ‘liberals’ keep insisting on trying to. “I think it is a mistake to accept the premise that inequality, per se, is a “problem” needing to be solved and to craft alternative solutions. Inequality is a symptom of other problems.”

Cochrane starts with the argument that the top wealth owners, like the Waltons or the Steve Jobs at Apple, have ‘earned’ their wealth. It’s the same view expressed by Greg Mankiw, the doyen of economics textbooks, in his (indefensible) defence of the top 1% (see my post, You see, some people are more skilled than others or luckier than others and so get better-off. It is nothing to do with ‘cronyism’, or ‘rent-seeking’ i.e. the ownership of capital. The answer to inequality is thus more education for the unskilled, not more taxation of the rich.

But be careful, says Cochrane, state funded education would be a bad idea as people will train up as art historians or such rather than in skills useful for jobs in the capitalist economy and we cannot have that. And education must be directed to those where it will work. At the lower end, we just have single mothers, criminals, druggies and other ‘low lifes’ and no amount of education or redistribution of income in benefits etc will change them. After all, “70% of male black high school dropouts will end up in prison, hence essentially unemployable and poor marriage prospects. Less than half are even looking for legal work.”  Thus Cochrane drags up the old argument that ‘incentives’ (money, status etc) really only works for those who are already rich to make them do productive things, while ‘incentives’ like benefits or free education and health etc are useless for the poor.

Anyway, Cochrane goes on “as rich people mostly give away or reinvest their wealth. It’s hard to see just how this is a problem”. So that’s all right then. But it is also not true. There are many studies that show poorer people give more to charities as a percentage of their income that the richest. And most of the giving by the rich ‘philanthropists’ is for tax avoiding purposes and the kudos of supporting ‘the arts’ or universities like Cochrane’s Chicago. The Waltons are noted for their lack of philanthropy.

Cochrane then comes up with the well-versed argument that actually global inequality has been declining, not rising. This proposition is based on looking at inequality between nations not within nations, as the OECD or Fed studies above do. Branco Mankovic, formerly of the World Bank, has done the work and shown that the gap between an average household in the emerging economies and those in the rich countries has narrowed over the last few decades (see my post, But this is only for one reason: China. The huge growth in the Chinese economy and the rise in living standards there explain nearly all of this improvement – strip that out and it is the same old story – no change. Cochrane has to admit that China is the reason but argues that China succeeded by not taxing its rich people but by growing. Yes, fast growth is the factor, but it is also the case China’s inequality ratios have rocketed so that inequality of income there now matches the levels in the US.

Nevertheless, Cochrane tells us that Bill Gates being a super-rich billionaire is hardly a problem for the body politic of human civilisation compared to murderous dictators who killed millions like Mao Tse-Tung or Joseph Stalin. Poor people don’t worry about rich people getting richer as long as their own living improves “just what problem does top 1% inequality really represent to them?” Well, as the global financial crash has exposed, it is the greed of the bankers, hedge fund speculators making their billions that eventually caused the huge loss in wealth for the average American recorded by the Fed above. So just letting the rich do what they want with our money is a problem.

And as for the poor revolting against capitalism because of rising inequality, don’t worry, “Maybe the poor should rise up and overthrow the rich, but they never have. Inequality was pretty bad on Thomas Jefferson’s farm. But he started a revolution, not his slaves.” Perhaps Cochrane ought to be more cautious: the poor have not always docilely accepted the extravagances of the rich. History is the history of class struggle as just three examples show: the Peasants Revolt of 1381 in England; the French revolution of the late 18th century and the Russian revolution of the early 20th century. Indeed, if the Waltons and the super rich have nothing to fear from the rest of us, why do they spend so much effort stopping trade unions, using police and other forces to crush any protests and intervening around the world against regimes and people who appear to object to their rule? The rich appear more worried than Cochrane.

Finally, we get the Hayek argument to defend inequality. Just after 1945, Friedrich Hayek, a right-wing market economist and main protagonist in opposition to Keynesian views, argued that more regulation and redistribution would put everybody on the ‘road to serfdom under an all-powerful state, Orwellian-style. Cochrane says that ‘liberals’ that advocate higher taxes and regulation on the rich would so the same.

The problem with this argument is that Hayek was wrong. Tax rates on the top 1% reached 90% under Eisenhower in the 1950s but the economy kept on growing fast by historic standards and dictatorship medieval style did not appear. The golden age of the US economy was in the 1960s when economic growth was 4%-plus a year, inequality declined (according to Piketty) and living standards of the poor rose sharply. Growth was much lower when corporate taxation and income tax for the rich was cut in the 1980s onwards, inequality grew and living standards stagnated.

So let’s sum up. The ‘liberal’ Keynesian wing of mainstream economics is pushing the argument that rising inequality of wealth and income is the issue for capitalism and the globe. It is generating social instability and is the main cause of crises under capitalism. The neoclassical right-wing of mainstream economics dismisses this as rubbish. Inequality is part of capitalism, sure, but is not a social or economic problem and indeed any attempt to correct the market forces at work that have created will make things worse by helping state-run dictatorships to develop. It’s the road to serfdom.

In my view, both sides are right and wrong. Yes, inequality appears to be getting worse as a result of the neoliberal counterrevolution and it is not a product of better skilled or educated workers ‘earning’ more, but because those who own or control capital have been taking more. But inequality is not the cause of crises but a consequence of them as the latest evidence of the Fed shows. Yes, redistributing wealth and income through heavier taxation etc may make things worse for capitalism as Cochrane suggests, but only because it would lower profitability at a time when it is near its historic post-war lows. It would not if profitability was high and rising as it was in the 1950s and 1960s.

The idea that inequality is a fact of life that cannot be changed is just apologia for the rich. Serfdom would not follow from the ending of the capitalist mode of production and the expropriation of the super-rich and their capital. We are already serfs compared to the Waltons. With ownership in common, we could plan for need not profit – the best ‘incentive’ of all.


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