Global trade doldrums

July 21, 2014

Another indicator of the weak recovery since the end of the Great Recession is the growth of world trade. This is well down on the pre-crisis rate of growth. World trade is now growing at about 2.5% a year compared well over double that before the crisis.

World trade growth

And here is the staggering thing. For the last six months global trade growth has been below world growth in industrial output – the longest period that has happened except during the Great Recession itself.  In the graph below, the red line below shows the rate of growth in world trade and the blue line shows the growth in global industrial output.  Both are lower on average than before the Great Recession (black lines).  But the red line is now below the blue.
World trade and IP

And that’s bad news, because it means that national capitalist economies cannot expect to escape from weak domestic expansion by selling more exports if world markets are growing even slower than world industrial output.  This is a recipe for more intensive competition in those markets and probably attempts to devalue national currencies relative to others to improve exports in shrinking markets.

The Japanese are already deliberately trying to weaken the yen by pumping more yen into the domestic economy and the ECB in the Eurozone is planning the same.  The UK pound was devalued sharply during the Great Recession to give British exports an edge.  But the UK export share in global trade continued to fall and Britain’s external deficit has widened.  Now with a weakening euro and yen, and to some extent, the dollar relative to sterling, Britain’s exporters are going to lose even more share.


UK: cost of living crisis continues

July 18, 2014

The latest data on employment, earnings and prices in the UK confirm that the cost of living crisis continues, despite the claims of the Conservative-led coalition government.

By cost of living crisis, we mean that the average earnings of Britons are not rising as fast as prices in the shops, so that, on average, British households continue to suffer a fall in their standard of living (before we take into account net taxes and benefits).

The latest data for June 2014 showed an uptick in UK consumer price inflation (CPI) from 1.5% yoy in May to 1.9% yoy. This was mainly caused by a jump in food and clothing prices, which have been muted up to now. If the cost of housing is included, retail price inflation (RPI) rose from 2.4% yoy to 2.6%.


So inflation is still outstripping the rise in average earnings. That’s despite the improvement in UK employment, which supposedly suggests a tightening labour market that should help workers bargain better for wage increases. Unemployment in the three months to May fell to a new post-crisis low of 6.5%.

UK unemployment rate

But weekly earnings rose only 0.3% yoy, or 0.7% yoy excluding bonuses.

UK weekly earnings

The trend for average earnings growth is down over the last two years. Indeed, it could well turn negative in June – so wages before prices and tax will be falling compared to last year! This is partly due to a statistical effect, as last year employers postponed bonuses for 2013 into this tax year when the top rate of tax is lower. So the yoy rate will recover after the summer. But even so, it will still be below the rate of inflation.

UK cost of living

If there are more jobs and not so many people are being made redundant, why are wages not picking up? I discussed this in a previous post ( Much of the recent increase in employment is really in self-employment, not jobs in companies. Nearly one-third of the increase in jobs since 2008 has been from self-employed with a very sharp rise in the last year. The Resolution Foundation shows this well.

self employed

And these self-employed workers are not highly paid but have set up their own businesses because they cannot get a proper job. Most are struggling to make a living. Few are turning over enough to be above the VAT threshold. The growth over the past decade or so has been among low turnover businesses.

The self-employed are not very productive i.e. they don’t produce much per person. So the headline increase in overall employment has not led to a matching rise in output. Thus UK productivity growth, already one of the lowest in the OECD, continues to founder.

UK productivity 2014

Manufacturing output in the top G7 economies remains below pre-downturn levels, with Italy, France and Japan remaining more than 10% below and the UK still 7.5% below. The US has performed best, but manufacturing output is still 2.6% below its pre-downturn peak.  This weak recovery is reflected in stagnant or even declining living standards for most people in the biggest capitalist economies.

Marxism in London, socialism in Slovenia

July 13, 2014

I made a presentation to the Marxism Festival 2014 over the weekend ( The presentation was called The nature of the current Long Depression. There were three things that I wanted to argue in that presentation.

First, I argued that Marx’s law of the tendency of the rate of profit to fall was the underlying cause of the cycle of recurrent crises (booms and slumps) in modern economies, including the Great Recession. Suffice it to say that mainstream economics has no convincing explanation of recurrent crises. As Nobel economics prize winner Eugene Fama put it: “We don’t know what causes recessions. I’m not a macroeconomist so I don’t feel bad about that. We’ve never known. Debates go on to this day about what caused the Great Depression. Economics is not very good at explaining swings in economic activity….If I could have predicted the crisis, I would have. I don’t see it. I’d love to know more what causes business cycles.”

Now Thomas Piketty, author of the best-selling economics book of the 21st century, called Capital in the 21st century (see my posts, has been quick to dismiss Marx’s law as plain wrong in fact. As Piketty puts it in his book, with the same title as Marx’s 19th century version: “the rate of return on capital is a central concept in many economic theories. In particular, Marxist analysis emphasises the falling rate of profit – a historical prediction that has turned out to be quite wrong”.

Well, in my presentation, I show the work of Esteban Maito (Maito, Esteban – The historical transience of capital. The downward tren in the rate of profit since XIX century) on what has happened to the rate of profit in an amalgam of 14 countries since Marx developed his law of profitability in the mid-19th century, arguing that it was the most important law of all political economy. Here is my version of Maito’s data.

World rate of profit

Marx’s prediction has been confirmed. The global rate of profit has been in secular decline. But not straight down because there have been periods of upturn when the counteracting factors to Marx’s law dominated, if only for a while. Look at the neoliberal period from the early 1980s to the late 1990s – a period we are all familiar with. The rate of profit rose but really that rise was just a small interlude in the long decline in capitalist profitability. This persistent downward tendency in the rate of profit regularly creates conditions when capitalists stop investing with some going bankrupt and provoking financial panics and crashes and then causing a cascade into a slump of investment, output, employment and incomes.

The second point that I made was that sometimes this regular cycle of boom and slump is interrupted and a recession or slump turns into a depression. By a depression I mean that any recovery is weak and does not re-establish the previous rate of economic growth, investment or employment. These ‘winter’ phases (see the graph above) only come around every 50-70 years. And we are now in one.

The schematic graph below shows the difference between a recession and a depression.

Recessions and depressions

A recession can take the form of a v-shape before returning to trend growth or a w-shape as in a double-dip recession. But a depression is more a square-root shape as output never gets back to trend growth. There have been three depressions: one in the late 19th century, the Great Depression of the 1930s and the current one.

Do depressions come to an end and under what circumstances? That was the third point of the presentation. Well, clearly the first two did. As Marx said “there is no permanent crisis”. If sufficient value is destroyed in a slump or series of slumps (depressions contain more than one recession), eventually the profitability of the remaining capital is restored to levels that encourage a new round of accumulation. Then, as Marx put it, the whole ‘crap’ starts again.

Does it require a world war? Would the Great Depression of the 1930s have carried on forever if there had been no world war? Well, the 19th century Long Depression came to an end without any world war. So we can expect that this current winter will come to an end – in my view – not through world war. Failing a successful revolution in a major capitalist economy, capitalism will eventually enter a new ‘spring’ with a recovery in profitability and new investment growth based on new technologies already ‘discovered’ but just waiting for development.

Of course, each time, the system finds it more difficult to develop that new technology as it becomes more and more unproductive in the capitalist sense. Unless replaced with a mode of production based on ownership in common and a democratically controlled plan for the world to meet the needs of people, capitalism will continue to engender poverty, inequality, recurrent (and ever increasingly destructive) crises in employment, income and health. And it is fast destroying nature and through global warming generating ever more extreme weather and environmental disasters.

My power point presentation is available here Marxism 2014 and my notes are available here The nature of current long depression. The meeting was recorded so there should be a ‘you tube’ thingy soon.

This brings me to my second item: socialists in Slovenia. The United Left party has apparently won 6% of the votes in Slovenia’s snap general election to gain six seats in parliament.  The United Left is a coalition of two socialist parties that includes the Initiative for Democratic Socialism, which is a party formed out of the socialist students in the Workers and Punks University and the Institute of Labour Studies in Ljubljana. As readers of this blog will know, I have been to Slovenia to present papers at the invitation of this grouping on two occasions, the second time as part of the launch of the IDS

The entry of the United Left into parliament is a great leap for Slovenia and small step for socialism.

UK economy: can it last?

July 10, 2014

It has been all good news for the UK economy over the last few months, with unemployment falling, inflation subsiding and industrial output growth accelerating (see my post, Of course, it’s not been good news for the average British household, as real incomes continue to fall, with new jobs concentrated in lower wage sectors and part-time or temporary contracts (often ‘zero hours’) –see my post,

But capitalist investors have liked the look of the recovery: house prices have boomed (but mainly in ‘international’ London) and the British pound has strengthened against the euro and the dollar.  But a strong pound and an economy recovering ‘unproductively’ is not a recipe for sustained economic growth in the productive sectors of industry. If the prices of British exports rise because of a strong pound, British manufacturing will be priced out of world markets. And they have not been doing well anyway.

This could explain why Britain’s relatively small manufacturing sector seemed to slow down in May (latest data) after its recent spurt. Manufacturing output is still well below 2008 pre-crash level.

UK manufacturing output

The underlying ‘health’ of British capitalism, at least in its productive sectors, remains frail. The latest quarterly figures (Q1 2014) for the profitability of non-financial companies, just released, although rising from lows in 2013, show that profitability is still well below pre-Great Recession levels.

Indeed, the peak in the 2000s for profitability was in 2007, at 14.2%. But even after the huge credit boom, profitability was below the 1997 peak of 14.5%. The decline from 1997 to a low in the depth of the Great Recession 2009 was 10.9%, down 21%. It’s now just 11.9%, or up 10% from that level. But it is still 18% below 1997.

If we use the long term data provided by the UK’s statistics office, we find that UK non-financial corporate profitability fell sharply in the 1960s to a low in 1975 (the 1970s profitability crisis, then recovered after the worldwide 1974-5 recession, before really taking off in the ‘neoliberal’ Thatcher era. As in the US (and elsewhere), UK profitability peaked in 1997 and has struggled since. Currently profitability is no higher than in the early 1990s and the direction is down, or flat at best.

NRR long

The story fits more or less the story of profitability and crisis that the data in other countries reveal.

I had a look at the even longer term data for the UK provided by Esteban Maito in his paper, Maito, Esteban – The historical transience of capital. The downward tren in the rate of profit since XIX century.  Maito’s data show that there has been a secular decline in the profitability of British capital since the 1850s (the apex of British imperial superiority).


But Marx’s law of the tendency of the rate of profit to fall does not operate in a straight line. The post-1945 period has been one of inexorable decline. The neoliberal period saw a relative recovery or stabilisation, which has been over since the end of the 1990s, leaving profitability still near its historic low. And the recovery in profitability since the mid-1970s was nothing like that achieved by the Great Depression and a world war. That’s the sort of thing that British capitalism needs to get the trend in profitability to reverse: Depression and war.

I am talking on this subject at the UK SWP’s Marxism Festival in central London this Friday at 3.45pm:

Slowing global growth and the capitalist future

July 8, 2014

Last weekend, in sunny Aix en Provence, IMF chief, Christine Lagarde hinted that the IMF is likely to reduce once again its forecast for global economic growth for this year and next. She said that “momentum could be weaker than expected”. Lagarde reckoned that the huge liquidity stimulus coming from the central banks (most recently a proposed $1.4trn liquidity injection by the ECB to stave off recession and deflation) would have “only limited impact on demand”.

Last April, the IMF forecast global output would grow by 3.6% in 2014 and 3.9% in 2015, down from previous forecasts. Now it appears that these will be lowered again later this month.  So what was the answer to improving this growth, which will be way too low to get profitability of capital on a sustained upward path globally, let alone get global unemployment down and get real incomes per household up?  Lagarde said the answer was “more public investment”!   Pretty ironic as everywhere, governments are slashing public investment in order to meet fiscal austerity targets and ‘make room’ for private investment.  Now the IMF says that countries should boost growth by governments investing in infrastructure, education and health, provided their debt stays sustainable. That’s because capitalist investment “remains subdued,”

It sure does. US business investment has been the strongest in the current ‘recovery’ from the Great Recession (see my post,

Business investment since December 2007 (indexed Dec’07=100)

Business investment

But even with some bounce-back since 2009, the level of US private investment remains low by historical levels.  US GDP is now 13% below where it would be if it had remained on the average trend path from 1990-2007, with 3.9% points of that gap to a shortfall in business capital.

I have discussed in detail the reasons for low investment growth since the Great Recession despite apparently huge cash reserves and record profits being recorded by large US and European companies (see my posts, and

Basically, it’s due to relatively low rates of profitability on new productive investment, especially compared to returns on financial speculation; low rates of interest allowing companies to stack up cash and take out more debt to finance share buybacks and financial asset purchases (the stock market is booming!); and still large accumulations of old capital and debt that must be deleveraged.

So it’s no surprise that Standard & Poor’s has issued a report in which it says that, although companies continue to have historically high levels of gross cash – $4.5tn at the top 2,000 capital investment spenders in 2013….

global cash

…. global capital expenditure this year is likely to fall 0.5% in real terms in 2014, having fallen by 1% in 2013. Capital expenditure by emerging market companies, having fallen by 4% in 2013, now seems likely to fall by a similar amount this year – the first significant reversal in the long-term upward-trend since the various emerging market crises of the 1990s. The decline in spending by emerging market companies is broad-based and has affected companies in Brazil, Russia, India and China.

global corporate investment

One argument against the idea that capitalists are failing to invest enough has emerged. It is suggested that actually businesses are doing a lot of investment, but it’s often a form of investment that involves reorganizing their firm around new information and communications technology–whether in terms of design, business operation, or far-flung global production networks. And this does not cost very much and so does not show up in increased investment. Larry Summers (see my post, argues that “Cheaper capital goods mean that investment goods can be achieved with less borrowing and spending, reducing the propensity for investment.” In other words, the price of each unit of constant capital (Marx’s term for assets and technology) is falling, so the real cost of investment is stable.

price of capital

Well, if that is so, it does not explain why global growth is slowing and well below the rate pre the Great Recession. Certainly, the IMF does not accept this benign idea that actually investment is rising sufficiently but we just can’t see it in the data.

That brings me to discuss the very important report that economists at the OECD released last week. Called, “Policy challenges for the next 50 years”, the OECD looked at where the capitalist world was going over the long term. And it’s truly scary for capitalism and truly awful for those generations who will live under capitalism up to 2060. To quote the OECD report: “In the period to 2060, global growth prospects seem mediocre compared with the past, with GDP in the OECD and the emerging G20-countries. The world is “likely to grow by 2.7% in 2010-2060, compared to 3.4% in 1996-2010. Global GDP is expected to grow by 3.0% per annum 2010-2060, leading to an increase in global GDP of 350%.” So a slowing capitalist growth rate, but still higher global GDP by 2060.

The OECD goes on: “While growth will be more sustained in emerging economies than in the OECD, it will still slow due to a gradual exhaustion of the catch up process and less favourable demographics in almost all countries. Population ageing will result in a decline in the potential labour force which can only partially be offset through increases in labour force participation and employment rates. Against this backdrop, future gains in GDP per capita will become more dependent on accumulation of skills and, especially, gains in multifactor productivity driven by innovation and knowledge based capita.”  In other words, the capitalist world will slow fast and will be unable to meet the needs of 8 billion people unless it can get the productivity of labour up sharply through “innovation and knowledge-based” investment.

Well, as Paul Mason outlined in his excellent Guardian article on the OECD predictions (, the OECD is really saying that “growth will slow to around two-thirds its current rate; that inequality will increase massively; and that there is a big risk that climate change will make things worse.” And “the growth of high-skilled jobs and the automation of medium-skilled jobs means, on the central projection, that inequality will rise by 30%. By 2060 countries such as Sweden will have levels of inequality currently seen in the US”. Also “the whole projection is overlaid by the risk that the economic effects of climate change begin to destroy capital, coastal land and agriculture in the first half of the century, shaving up to 2.5% off world GDP and 6% in south-east Asia.” (Mason).

Mason points out that the OECD’s assumption is that there will be a rapid rise in productivity, due to information technology. Three-quarters of all the growth expected comes from this. However, that assumption is “high compared with recent history”.

As I have discussed before, there are several studies that argue capitalism has exhausted its potential to develop the productive forces of human endeavour through innovation (see my post, As Mason says “The OECD has a clear message for the world: for the rich countries, the best of capitalism is over. For the poor ones – now experiencing the glitter and haze of industrialisation – it will be over by 2060. If you want higher growth, says the OECD, you must accept higher inequality. And vice versa.” 

Finally, let me bring to your attention on the question of rising inequality globally that Thomas Piketty has predicted in his now famous book, Capital in the 21st Century, Mick Brooks’s excellent review of Piketty’s work in The Project online journal ( It’s the best Marxist account that I have read – much better than mine in the Weekly Worker ( It’s simplifying, clear and concise.


My review of Piketty’s book has no been published in Spanish.

Rethinking economics

June 30, 2014

I was at the London conference of Rethinking Economics over the weekend. Rethinking Economics is an international network of economics students calling for changes in the curriculum of university departments and in the economics discipline in general ( It was formed in 2012 in disgust at the failures of mainstream economics after the Great Recession and against the unwillingness of university economics departments to allow alternative courses or even pluralist critiques of the prevailing neoclassical mainstream. It is financed by George Soros’ Institute for New Economic Thinking among others.

The London conference drew a range of academics and other speakers, first, to explain why mainstream economics is unchanged, despite its failure to forecast, explain or even accept the failure of modern market economies in the light of the Great Recession. Second, the conference had speakers to discuss different strands of alternative or heterodox economics.

The conference themes of ‘alternative economics’ was dominated by the Keynesian view. In my view, Keynesian economics is mainstream, even it is not dominant. By that I mean that Keynesians accept the existing mode of production, capitalism, as eternal and the only one possible. They differ from the neoclassical school in recognising that there are booms and slumps due to a lack of effective demand that has to be dealt with. For example, Paul Krugman, the leading Keynesian, reckons the problem of a ‘lack of effective demand’ recurring in capitalism is just a ‘technical malfunction’ that can be corrected with judicious use of monetary and fiscal policy. For Keynesians, it is frustrating that mainstream economics does not recognise that this problem exists and can be fixed. Paul Krugman complained recently that “anti-Keynesian views, indeed real business cycle theory asserting that inadequate demand can never be a problem, retains a firm grip on much of the profession.”

There are Keynesians who go further than arguing that there is just a ‘technical malfunction’ in the capitalist economy. They reckon that capitalism is ‘inherently unstable’, or at least its financial or monetary sector is; and that there is no perfect market or steady equilibrium growth for capitalism. The ‘market economy’ is imperfect, unstable and the future is uncertain. Indeed, that was the message of many of the speakers at Rethinking Economics.

Indeed, some post-Keynesians, as the more radical heterodox wing of Keynesians are called, reckon the main message that Keynes brings to the understanding of economies is uncertainty. In a monetary economy, in a complex modern economy, with so many variables and human beings often acting ‘irrationally’, everything is uncertain and above all unpredictable.

Professors Victoria Chick ( and Sheila Dow ( presented a session on the methodology of economics in which they argued that mainstream neoclassical economics was based on a ‘mode of thought’ called logical positivism that argued that facts were pure, that theories were socially or psychologically unbiased and that the nature of the scientific method was clear. Dow and Chick reckoned that this was rubbish: facts, theories and method are value laden. Mainstream economists have been ‘socialised’ into a mode of thought that markets are perfect and that self-interest and rational choices are the way humans act. These economists have closed minds to anything else.

I’m sure this is right but what worried me was that Chick and Dow seemed to argue that we could not really do any economic research as they do in the natural sciences because facts and theories cannot be considered objectively in a world of human irrationality and biased ‘modes of thought’. Indeed, we can’t know what is fact or fake, science or not science, because it is all relative. When a questioner asked the professors does that mean “anything goes”, they replied: oh no! But it seemed to me that their level of relativism implied just that.

Now maybe I am naïve, but I reckon that applying the scientific method to issues and problems is not useless. You draw up a set of realistic assumptions about the economy, you develop a theory from it and then you test it with the evidence and facts available. This evidence confirms or refutes the theory. You even make predictions or forecasts based on your theory and results – indeed you should. Others can argue against your theory, evidence and conclusions. Others must try to replicate your work to see if it holds. This is the scientific method and it still seems the way to work, even in a world of uncertainty, imperfection and human or social bias. Otherwise you can do nothing.

In economics, I reckon the right assumptions, theory and empirical study can help us to predict or forecast booms and slumps, or at least explain why they reoccur regularly. It seemed that Chick and Dow thought this was impossible or unwise, even for heterodox economics. But it is one thing to say that neoclassical economics is too certain, dogmatic and has a closed mind; it is another to say that everything is so uncertain, unpredictable and complex that we can do nothing, predict nothing, forecast nothing. In contrast, elsewhere in the conference, Julian Wells of Kingston University ( showed that good work can be done by using the scientific method of the natural sciences in economics (economics can learn from the physical sciences).

Uncertainty, unrealistic assumptions and scant evidence are just as much problems in natural sciences as in economics, but that does not stop physics, chemistry etc from making huge advances in human knowledge. I quote from Bill Bryson’s popular book (A short history of nearly everything): “astronomers have sometimes been compelled to base conclusions on scanty evidence, and there is a mountain of theory built on a molehill of evidence … the upshot is that computations are necessarily based on a series of nested assumptions, any of which could be a source of contention.” But still scientists plough on. Meteorologists face a complexity of ‘weather’ but scientific work has increased the success of forecasting weather dramatically: three-day forecasts are pretty good now.

Anyway, the conference rolled on with one speaker after another basically telling the 300 strong attendees that uncertainty and complexity made making any predictions or forecasts about the economy impossible. Paul Ormerod (, author of Butterfly Economics, told us that human behaviour ‘defies economic theory’; human society is not predictable or controllable; business cycles are natural and normal and cannot be avoided, and that it is better for government not to intervene. “Business cycles are an inherent feature of market economics”, but governments should not attempt to control unemployment, and recessions are “not really a concern”. Economies are so complex, all we can do is just try and improve long term growth through recognising complex problems, not short-term problems of inadequate effective demand. Not very Keynesian really.

Marxian economics got a small mention. Michael Burke (see my recent post, explained the basics of the Marxian approach to an audience of about 10% of all the attendees, probably a fair reflection of the support for the Marxist alternative relative to the Keynesian in among the rebellious Rethinking Economics.

The dominant view of the conference speakers (if not the audience) was summed up by the speech of Will Hutton ( Hutton is a well-known pundit on the economic state of Britain and former editor of a liberal British newspaper. He has written a number of books attacking the neoliberal policies of various UK governments but from a Keynesian view. He started by saying how shocked he has been on the impact of the Great Recession and the growth of inequality in Britain. It’s been way worse than he ever imagined. The problem was that unregulated markets have failed. However, for Hutton, ‘socialised production’ or ‘socialism’ as an alternative would be “a mistake”. It would mean ‘monopoly control’ of the economy and that would deter innovation and technological progress. We need a ‘pluralist’ economy. Hutton said we had to recognise that capitalism is the best system and over the last century it had delivered huge increases in wealth per capita through the exploitation of technology and science.

This sounded much like the famous lecture by Keynes back in 1930 (The economic possibilities of our grandchildren) which aimed to convince his Cambridge students, also engaged at the time in Rethinking Economics in the depth of Great Depression. Keynes was concerned that students would migrate to Marxian economics (which he thought was rubbish) and to communism (which he thought was Stalinist dictatorship). He told his audience that within 100 years, all the world would be rich, people would be working only 15 hour weeks and would have to worry about what to with their leisure time (see my post,
Just like Hutton, Keynes ignored the inequality of wealth and income under capitalism (the issue recently raised by Thomas Piketty and others – see my various posts). Keynes ignored globalisation, wars (a big one was still to come) and poverty for the majority of the world under capitalism. Keynes just talked about the advanced capitalist economies. And he never considered that depressions would be repeated even if governments adopted his ‘technical solutions’ to the recurrent lack of effective demand and monetary crises under capitalism.

Hutton and the dominant Keynesians at this conference left out these things from the nature of capitalism. For them it was simply a problem of uncertainty and imperfection. What capitalism needs is better management and regulation to end myopia (short-sighted investment), better control of credit and stock market speculation and a fairer labour market to boost wages.

If only capitalists could recognise what would be good for them or their system. Chick and Dow suggested that reform would be impossible until we can change the closed mind-set of mainstream economics. As if the issue was a psychological one. Mainstream economics is closed to alternatives because there a material interest involved. The ruling ideology of a society is that of the ruling class, in this case, the capitalist class.

Chick and Dow seem to think that it’s just a question changing the mind-set of those economists that support the market – for their own good because austerity and neoliberal policies are actually bad for capitalism itself. Keynes too thought that the problem was one of ‘old ideas’ hanging around in the heads of economists and governments. But ideas come from social experience and material class interests. It will take more than just ‘rethinking economics’ to change that.

It’s debt, stupid!

June 28, 2014

“Recessions are not inevitable – they are not mysterious acts of nature that we must accept. Instead recessions are a product of a financial system that fosters too much household debt”. So say Atif Mian and Amir Sufi, two leading mainstream economists at Princeton and Chicago universities in their book, House of Debt, recently described by the ‘official’ proponent of Keynesian policies, Larry Summers, as the best book this century!
See my post (

The two economists then make a very bold claim: “excessive reliance on debt is in fact our culprit… but it can potentially be fixed. We don’t need to view severe recessions and mass unemployment as an inevitable part of the business cycle. We can determine our own fate.”   We Marxists would also like to claim that we can fix recurrent slumps and mass unemployment by the replacement of the capitalist mode of production. But Mina and Sufi reckon it can be done by just dealing with debt.

The good thing about this book, apart from its excellent simple prose style, is that the authors deny the usual mainstream position that “severe economic contractions are in many ways a mystery. They are almost never instigated by any obvious destruction of the economy’s capacity to produce….The economy spluttered, spending collapsed and millions of jobs were lost. The human costs of severe economic contractions are undoubtedly immense. But there is no obvious reason why they happen.”

Instead, they reckon they have discovered the secret of the cause of the Great Recession and the Great Depression on the 1930s: “One important fact jumps out: the dramatic rise in household debt. Both the Great Recession and Great Depression were preceded by a large run-up in household debt… And these depressions both started with a large drop in household spending.”

Mian and Sufi make the valid observation that the Great Recession was not caused by excessive government spending or debt. It was the sharp rise in private sector debt that was the feature prior to the crash – a point made by Steve Keen in his work (see my post, But for Mian and Sufi, it is not the build-up in corporate debt that was the problem, but household debt i.e. mortgage debt to buy homes, ‘residential investment’.

The authors dismiss the neoclassical and macro consensus that recessions are just unpredictable ‘shocks’ to an otherwise steady equilibrium growth path as fantasised by all those neoclassical DSGE models (see my post, And recessions are not just the result of some ‘financial panic’ or banking crash, as argued by former Fed chief and depression expert, Ben Bernanke (see my post,

Instead, the authors lay the blame fair and square with ‘too much debt’, in particular, the debt built up by relatively poor households in trying to buy homes during the great housing bubble of the early 2000s. What caused the Great Recession was a collapse in house prices leading to defaults by the poorer homeowners. As these people spend more and save little, this led to a collapse in consumer spending.

Mian and Sufi argue that the recession of 2001 after the hi-tech stock market bubble burst was very mild because it mainly affected rich stock market investors who still have plenty of wealth to spend. The Great Recession was way bigger because it hit those who had little wealth but their houses and the housing bust wiped out what little ‘equity’ they had. In mortgage contracts, debt losses are concentrated on the debtors; they take the primary hit any house price collapse, not creditors.

Mian and Sufi show with a range of empirical studies that the bigger the debt rises in an economy, the harder the fall in consumer spending in the slump. So for them, the best predictor of a coming slump is a fast rise in household debt and the best forecast of imminent recession is a fall in household spending, which usually precedes the rise in unemployment.

This is all well and good. The authors are not the first to show that ‘excessive debt’ is a factor in the magnitude and duration of any slump. They mention themselves the work of the Bank of England and Charles Kindleberger. More recently, Claudio Borio has shown that debt moves in cycles so that points can be identified when the risk of slump is high ( I have covered much of these studies and offered a Marxist analysis of the role of debt in crises in my paper, Debt matters.

But the issue here is what Mian and Sufi do not address. Credit is necessary to lubricate the wheels of capitalist commerce. But why does debt build up so much that it becomes ‘excessive’ and what does it mean to be ‘excessive’? The authors only hint at the reason. They talk about the Asian financial and debt crisis of 1998 when huge credit was ploughed into ‘unproductive’ assets like property which then went bust. This was caused by a ‘savings glut’. In other words, there savers (capitalist companies and rich people) did not invest in new infrastructure, plant or technology, but instead in property or financial assets.

The term ‘savings glut’ is popular with the likes of Ben Bernanke and Larry Summers because it hides what is really going on. Prior to the Asian crisis, savings as a share of national output had not risen hugely; what happened was that investment in productive assets as a share of GDP fell. Capitalists stopped investing in value-creating sectors and instead looked for better profits in financial and property speculation. And they lent huge amounts of savings to do so. Borrowers got cheap credit and debt rose ‘excessively’. The assets purchased were ‘fictitious’. They represented titles of ownership to houses, golf courses and companies that eventually did not deliver real returns and could not be sold on for more cash.

So the ‘savings glut’ was really just a failure to invest in the real economy. Why was there a failure to invest? The profitability of the productive sectors was too low. In the US, profitability of the non-financial sector began to fall back after the last 1990s (see my many posts on this), generating the hi-tech bust and forcing investors to switch to property investment, generating the housing bubble. Investors bought new-fangled financial instruments that packaged-up mortgages, ostensibly to reduce risk, but in reality to pass off risky investments as safe. And the rest is history. Behind the rise in debt and the subsequent collapse is a crisis in the profitability of capitalist production. None of this explained, naturally, in House of Debt.

Mian and Sufi reckon that the Great Recession was immediately caused by a collapse in consumption. This is the traditional Keynesian explanation, usually without any explanation of why consumption collapsed. At least, the authors bring debt into the equation. But behind debt lies profit, which the authors ignore. Sure, consumption falls in recessions, but investment falls even more. The Great Recession and the subsequent weak recovery is not the result of consumption contracting, but investment virtually stopping (see my post, And behind investment (whether in productive or unproductive sectors) lies profitability.

As Mian and Sufi just consider debt is the problem, their recipe for solving avoiding all future recessions and getting out of any quickly becomes wonderfully simple. When households have too much debt and cannot recover, the government should write it off. And all mortgage contracts in the future should share the burden of risk between creditors and debtors. Any loss in the sale of a house should be shared with the bank, but so should any profit from sale.  “The culprit is debt and the solution is straightforward: the financial system should adopt more equity-like contracts.” 

Unfortunately, the likelihood of banks and governments agreeing to share losses with mortgage borrowers or allowing debts to be written off and taking the hit is as low as Thomas Piketty getting governments to agree to imposing a wealth tax or raising tax rates for the rich to reduce inequality, the other fashionable cause of crises (see my posts on Piketty).

Nevertheless, Mian and Sufi tell us that recessions are easy to solve. Why did we not think of it before?  We’ve not been smart enough up to now.  It’s debt – stupid!

Investing in finance, but not in people

June 22, 2014

The world’s stock markets continue to make new all-time high index levels as central banks continue to pronounce that they will not push up interest rates for investing any time soon. The ECB has cut interest rates and is planning further credit easing measures. So is the Bank of Japan. And last week, the US Federal Reserve policy committee unanimously voted to hold off raising interest rates until late 2015 at the earliest. Only the Bank of England has hinted at raising its rate some time in 2015.

But while the world’s stock and bond markets are booming, the ‘real’ economy of output and incomes shows little sign of getting a proper head of steam. Last week, the International Monetary Fund (IMF) slashed its US growth forecast for 2014 from 2.8% it predicted at the beginning of this year to just 2% after a “harsh winter” led to a weak first quarter. It continued to forecast 3% real GDP growth in 2015, but given that it has now lowered its annual forecast for six times in row, that 3% may not survive.  And also last week, the US Fed reduced its forecasts for real GDP growth this year from 2.8-3.0% to 2.1-2.3%. Again, like the IMF, it kept its forecast for 2015 intact at about 3.1-3.2%.

World stock investors may be doing well, but the majority of people are not. The IMF agreed that the US recovery from the Great Recession had been better than in many other developed economies. But it noted that the productivity growth was poor and reckoned that the labour market was weaker than suggested by the headline numbers for people out of work. Long-term unemployment was still high and many people are not even seeking work, which means they don’t register in the official jobless numbers. Real wages are stagnant (see graph below) and poverty is stuck at more than 15%. It even called for a hike in the US minimum wage to help boost spending!

Real US wages

In the UK, real wages are still falling. And a new report from the High Pay Centre found that the UK’s lowest average disposable income is amongst the worst in the whole EU even though Britain’s richest people enjoy some of the highest salaries. The top 20% of UK households have an average disposable income of £31,670 (€39,662, $53,785) a year, which puts them behind only Germany and France. However, the lowest 20% in this country have an average disposable income of just £5,506 – the poorest in western Europe!

“Simply, for the millions of people comprising the poorest fifth of our population, life is much worse here than it is for the poorest fifth in virtually every other north-west European country – countries we would like to think of as our equals,” stated the study. And this Piketty-style level of inequality is not going to be reduced. The UK’s Institute for Fiscal Studies predicts that, as the economy recovers, inequality will be ‘about the same’ as pre-recession levels by 2015-16.

Also, the Poverty and Social Exclusion project has found that the number of British households falling below minimum living standards has more than doubled in the past 30 years, despite the size of the economy increasing two-fold. Now 33% of households endure below-par living standards – defined as going without three or more “basic necessities of life”, such as being able to adequately feed and clothe themselves and their children, and to heat and insure their homes. In the early 1980s, the comparable figure was 14%.

Almost 18 million Britons live in inadequate housing conditions and that 12 million are too poor to take part in all the basic social activities – such as entertaining friends or attending all the family occasions they would wish to. It suggests that one in three people cannot afford to heat their homes properly, while 4 million adults and children are not able to eat healthily. 5.5 million adults go without essential clothing; 2.5 million children live in damp homes; that 1.5 million children live in households that cannot afford to heat them; that one in four adults have incomes below what they themselves consider is needed to avoid poverty and that more than one in five adults have to borrow to pay for day-to-day needs. 21% of households are behind with household bills against 14% in the late 1990s. More than one in four adults (28%) have skimped on their own food so that others in the household might eat.

Behind the failure to restore reasonable levels of economic growth since the Great Recession is a failure to invest by the capitalist sector, while public sector investment has been slashed in austerity measures (see my post,  Capitalists are investing in the stock market but not in building homes for people.  In the UK, housing starts have failed to keep up with population growth for the most part of two decades and is currently falling further behind.

Many smaller companies are not making a profit or are heavily in debt. The Bank of England has found that the percentage of companies that don’t make a profit reached 35% in 2011, the last year for which figures were available. This figure of loss-making firms has been steadily rising since 1998 when it was 23%. These are ‘zombie’ companies, just making enough to service their debts but having nothing to pay workers more or invest in new technology. No wonder UK productivity levels continue to slip (see my post,

UK productivity

And in a great new paper to be delivered to the upcoming Rethinking Economics conference in London next weekend
Michael Burke shows that this failure to invest is endemic to the major capitalist economies (The Great Stagnation as the Crisis of Investment). Burke shows that gross investment (both business and government and before depreciation) experienced the sharpest decline of all main components of GDP during the Great Recession. Such gross investment is down 5.2% in the OECD since 2008 and as a proportion of GDP it is down from 22% to 20%, reaching a new low since 1960.

Burke finds that real GDP growth in the OECD has been in a secular slowdown over a very prolonged period. Every successive decade has seen slower growth than the preceding one. But the slowdown in investment has been even more pronounced. While OECD GDP growth in the most recent decade to 2010 was little more than a quarter of the rate in the 1960s, gross investment growth is little more than one-twentieth of the 1960s. Indeed, in the top seven capitalist economies (G7), gross investment fell in absolute terms in the final decade to 2010.

cumulative investment growth

Yet since 1960, consumption has risen as a proportion of GDP. So it has not been a Keynesian ‘lack of demand’ from consumers that has caused the slowdown in economic growth for the major economies, but capitalist sector investment. 21st century capitalists are good at speculating in financial assets and the stock market with cheap money, but are failing to accumulate in productive sectors where profitability just ain’t good enough for them.

Doctors without diagnoses

June 14, 2014

You are feeling ill and you go to the doctor.  The doctor says that he/she does not know why you are ill, but no matter, take this medicine anyhow you like and you should soon be better.  If you don’t get better, then just wait until you do.  The doctor does not know why you are ill because you have not been ill often enough in the same way for the doctor to get a theory.  This, according to top Keynesian economics blogger, Noah Smith, is the state of understanding that economists have about recessions or slumps in capitalist economies

Smith says: “John Maynard Keynes, Friedrich Hayek and Irving Fisher wrestled with this question in the 1930s….but almost a century later, despite sending some of our best brains up against the problem, we’ve made frustratingly little progress.”  Smith goes on: “It’s hard to overstate how few solid conclusions have emerged out of a century of macroeconomic research. We don’t even have a good grasp of what causes recessions. Robert Lucas, probably the most influential macroeconomist since Keynes, had this to say in 2012: ‘I was [initially] convinced…that all depressions are mainly monetary in origin…I now believe that the evidence on post-war recessions (up to but not including the one we are now in) overwhelmingly supports the dominant importance of real shocks. But I remain convinced of the importance of financial shocks in the 1930s and the years after 2008. Of course, this means I have to renounce the view that business cycles are all alike!’

Smith notes that neoclassical perfect market equilibrium theory has nothing to say on imperfect, highly volatile capitalist market fluctuations. Now I have quoted Lucas before and his fellow neoclassical Nobel prize winner and founder the Efficient Market Hypothesis (that i.e. markets know best and we don’t know markets) Eugene Fama, to show they don’t know what causes slumps and moreover they don’t care (see my paper, The causes of the Great Recession.).  Smith goes onto to deliver a load of other quotes from leading mainstream economists, past and present, who say they don’t know what causes recessions.

What debate there is about recessions under capitalism is no more scientific, according to Smith, than “medieval doctors arguing over leeches versus bleeding… without a real understanding of what causes recessions, our medicines are largely a shot in the dark.”

But Smith says the reason why mainstream economics has no explanations is the lack of data. “Business cycles are few and far between. And business cycles that look similar to one another — the Great Depression and the Great Recession, for example — are even farther apart. … The main statistical technique we have to analyze macro data — time-series econometrics — is notoriously inconclusive and unreliable, especially with so few data points.”  Smith concludes that “The uncomfortable truth is this: The reason we don’t really know why recessions happen, or how to fight them, is that we don’t have the tools to study them properly. The fact is, there are just some big problems that mankind doesn’t know how to solve yet.”

But this is nonsense. Mainstream economics has nothing to say about capitalist crises not because there is a lack of data, but because their theories are just plain wrong or do not even address the issue. Contrary to the assumptions of the mainstream, markets are not perfect; economies do not tend to equilibrium steady growth paths; and investment does not depend on ‘effective demand’ but on profit.

While mainstream economics may have nothing to say about the cycle of booms and slumps under capitalism, what about Austrian economics (too much credit and malinvestment) or heterodox economics (inherent financial instability) or Marxist economics (the law of declining profitability)? Smith ignores all these explanations completely. For him, ‘economics’ is either neoclassical or Keynesian; and he is right, they have nothing to say on the causes of crises.

Even there, Smith does not deal with the latest versions of an explanation. The Great Recession, according to Ben Bernanke, was a traditional banking crash or ‘financial panic’, caused by the lack of regulation. The alternative fashionable theory is that the Great Recession was caused by wages being held down, allowing inequality to rise, thus forcing households to accumulate too much debt that eventually came crashing down.

This latter theory is the dominant one among heterodox circles, leaning on the inequality data of Piketty and others. A new book just released (House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again, by Atif Mian and Amir Sufi), has been praised as the best explanation by Keynesian economics elitist, Larry Summers. In a review, Larry tells us that House of Debt “looks likely to be the most important economics book of 2014; it could be the most important book to come out of the 2008 financial crisis and subsequent Great Recession.” So not Piketty, then.

Summers tells us that it refutes the Bernanke thesis and “persuasively demonstrates that the conventional meta-narrative of the crisis and its aftermath, which emphasises the breakdown of financial intermediation, is inadequate.” So it was not the banks that caused the crisis but that old Keynesian cause: a lack of consumption. This is music to Summers’ ears because in the years before the Great Recession, he firmly rejected suggestions that a huge credit bubble was being fostered by the deregulation of the banking industry.  He had firmly supported allowing banks to do what they liked when Treasury secretary under Clinton. He dismissed claims then that financiers were creating’financial weapons of mass destruction’.

Summers is now pleased to be told that he was not wrong then. The explanation of the Great Recession is to be found in too much mortgage debt and a lack of consumption.  Summers quotes House of Debt approvingly: “spending on housing and durable goods such as furniture and cars decreased sharply in 2006 and 2007, well before any financial institution became vulnerable. Likewise, they note that the initial impetus behind recession in the US appears to have been a decline in consumer spending. Summers goes on: “They argue that, rather than failing banks, the key culprits in the financial crisis were overly indebted households. So their story of the crisis blames excessive mortgage lending, which first inflated bubbles in the housing market and then left households with unmanageable debt burdens. These burdens in turn led to spending reductions and created an adverse economic and financial spiral that ultimately led financial institutions to the brink.”

But this crude Keynesian view is equally false along with the lack of banking regulation argument. Throughout the period prior to the Great Recession, US consumer spending rose as a share of GDP while wages at work dropped as a share.  It was not squeezed.

US labour share and consumption

Yes, this was partly due to a rise in debt, but also because households were compensated for wage stagnation with better social and health benefits. Yes, consumption fell in the crisis but not before investment collapsed, as I have shown on numerous occasions in this blog. It’s investment that is the swing factor in recessions and recoveries, not consumption. Or to be more exact, it is profits that call the tune, because investment demand drops off when profits do. As profitability falls over time, eventually the mass of profit will fall and this will force weaker businesses to cut back on investment or even close down. Then there is a cascade of falling ‘effective demand’ as companies go bust or lay off labour. Then consumption falls. That is the order of events – as the graph of US profits and business investment below shows.

US profits and investment

Of course, talk about profitability and investment as causes of recurrent crises is ignored or dismissed by mainstream economics of either wing, neoclassical or Keynesian. The mainstream does not want to focus on the exploitation of labour and profit.  The neoclassical wing either denies that there are recessions or that we can forecast or explain them. They are just unknown ‘shocks’ to an otherwise great system of production (see Lucas quote above). The Keynesians talk vaguely about ‘lack of demand’, which is really a tautology because a capitalist slump is a lack of demand for goods and labour, by definition. It is no explanation.

Keynesian economics is less interested in how an economy gets into a slump and more on how to get out of it. As Keynesian guru, Paul Krugman, put it in his book on the Great Recession, End the Depression Now!: “the point is that the problem is not with the economic engine, which is as powerful as ever. Instead, we are talking about what is basically a technical problem, a problem of organisation and coordination – a ‘colossal muddle’ as Keynes described it. Solve this technical problem and the economy will roar back into life”. (

British Keynesian economist, Simon Wren-Lewis delivers the same view in response to Smith’s view that we don’t know what causes recessions ( SWL says that we may not know but at least we know fiscal austerity won’t help. “While the reasons for the Great Recession may still be controversial, the major factor behind the second Eurozone recession is not: contractionary fiscal policy, in the core as well as the periphery. So this is something we really do know.” (6 June). Actually, as I have argued in this blog, the main cause of the Euro recession, first or second, was not austerity but the crisis in profitability. And Wren-Lewis offers no explanation of why the Great Recession or the ‘Euro recession’ started in the first place.

Neoclassical economists may be doctors using leeches, as Smith says. But Keynesian economists are also doctors offering herbal remedies without any diagnoses. Keynes once said that economists should really become just like dentists, able to fix your teeth when there is a problem. But even dentists need to know why problems arise in order to fix them.

There is a viable explanation of recurrent and regular crises of production. Marxist crisis theory, based around Marx’s law of the tendency of the rate of profit to fall, provides a coherent one.  Sure, the lack of data is an issue. But, contrary to Smith’s view, that should not hold back a scientific inquiry into these causes. G Carchedi and I, among many other Marxist economists, have published extensive empirical material that shows a convincing causal connection between profitability, investment and recurrent slumps (see our paper, The long roots of the present crisis).  And I remind my readers of the excellent theoretical and empirical paper by Tapia Granados
Using regression analysis, he found that, over 251 quarters of US economic activity from 1947, profits started declining long before investment did and that pre-tax profits can explain 44% of all movement in investment, while there is no evidence that investment can explain any movement in profits.

In other words, profits lead investment and investment leads demand and employment. And that’s a lot of data points.

For a summary of the empirical evidence of the Marxist explanation of crises, see my paper presentation-to-critique-conference-11-april-2014

Real incomes in the UK still falling; global growth slows

June 11, 2014

The latest data on unemployment rate in the UK show a fall in the official rate to 6.6% in the three months through April, down from the 6.8% recorded in the first quarter, and the lowest level in more than five years. That sounds good but at the same time, average weekly earnings rose just 0.7%, including bonuses, significantly lower than the pace of inflation. So the real income for the average British worker is still falling, as it has done since the Great Recession began in 2008, or for over six years. And for the last four years, the trend in pay rises has been down, not up.

UK pay and prices (yoy %)

UK pay

The reason is clear: people in relatively better paid jobs in finance and in the public sector have lost their jobs and those getting jobs since have mainly done so in much lower paid sectors like retail, tourism etc. And we also know that there has been a very large increase in ‘zero hours contracts’, casual labour and self-employment (15% of the workforce now) where incomes are generally lower than paid employment.

UK self employed

The other bad piece of economic news for the prospects of the capitalist economy was global. The World Bank substantially reduced its forecast for global real GDP growth this year from 3.2% to just 2.8%. If that turns out right, for the fourth year running, the world economy will have expanded at less than 3% a year and the world economy is growing way below the trend rate before the Great Recession. Aside from the financial-crisis bounce-back in 2010, it will be the sixth sub-3% rate in the past seven years.

World bank GDP


Get every new post delivered to your Inbox.

Join 1,394 other followers