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.

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.

Cameron: ‘tax cuts have to be paid for’

October 2, 2014

The British prime minister David Cameron told his party conference attendees that the main aim of his government if re-elected next May is to cut the personal tax burden of upper middle income earners. He claimed he wanted reduce personal income tax for 30m people, while keeping the burden of tax for businesses, particularly big business, at the lowest rate (20% of declared profits) in the G-20 economies.

The first thing to note is that this pledge is really a con, even for those that will benefit from the tax cuts. The aim is to raise the amount of money people earn before they pay income tax from £10,000 a year now to £12,500 and to increase the level at which workers start paying the 40p rate of income tax to £50,000. But this won’t happen overnight, as soon as Cameron is back in office next year. It will only fully implemented by 2020, at the end of the next term of parliament. So the gain in income from the tax cut will be tiny compared to any further gains or losses from wage increases or falls. That remains the best way people can improve their living standards, not tax cuts.

And there are 8m people in the UK who live on welfare benefits: they gain nothing from any tax cuts. Indeed, they will lose heavily because these cuts are to be paid for by cutting their benefits. And while the very low paid will eventually gain a little from the tax cut, there is to be no change in the social security rates that they must pay, so the burden of deductions will remain heavily biased against them.

Ben Richards at the Social Market Foundation reckons that Cameron’s tax cuts are worth over £2k for most of top 10% earners, £500 for middle 50%, nothing for lowest earners. The bulk of the benefits would be skewed towards those in the top quarter of earners.

tax cuts

The Institute for Fiscal Studies, a think tank, estimated that 69% of the cost of increasing the personal allowance to £12,500 would come from cutting the taxes of workers in the top half of the income distribution. So it’s an illusion created by Cameron that ‘hard-working middle England’ would gain from his tax cut proposals. The median salary in the UK is about £27,000. So even those who earn £45,000, (some 60% more than the average) will benefit only slightly from raising the 40% tax rate threshold (currently at £42,000) to £50,000 by 2020. The average wage earner will not benefit at all from this measure, only the highest earners.

But, most important, how is even this limited largesse to be paid for? Cameron said it would not be paid for by increased government borrowing. So it could only come from extra cuts in government spending. The government already plans to cut £25bn off government spending by 2018 to ‘balance the budget’. As Cameron put it in his speech: “We want to cut more of your taxes. But we can only do that if we keep on cutting the deficit . . . Tax cuts need to be paid for.”

Most estimates put the Cameron tax pledge as costing the government budget about an extra £7bn a year by 2020, when the tax cuts are fully implemented. Given that he claims the government will increase real spending on the National Health Service at the same time, the budget can only be balanced by reducing even more (probably by 25-30%) in real terms the amount spent on public services (education included) and welfare benefits. Austerity is here to stay – indeed it will be replaced by an even more concerted effort to reduce the role of government in providing basic services for the British people.

Tax cuts, more government spending and a balanced budget (assuming you want one) could only be achieved if the British economy suddenly leapt forward and real GDP growth stayed at over 3% a year up to 2020, allowing real incomes for average households to rise accordingly through extra employment with rising wage levels. But there is no prospect of that. Even the most optimistic forecasts for average economic growth for Britain to the end of the decade are about 2.0-2.5% a year.

Even that is very unlikely. The current ‘boom’ in the UK economy is unsustainable. To achieve 3%-plus growth every year would require a sustained rise in the productivity of labour. And that can only be achieved by either making British workers do longer hours at no extra pay (to boost profitability) and/or by increased investment in new technology, probably at the expense of fewer jobs.

The reality is, however, that UK productivity growth is non-existent. UK labour productivity as measured by output per hour was unchanged in the second quarter of 2014 compared with the previous quarter and 0.3% lower than a year earlier.

UK productivity

At the same time, rising employment has only come through part-time jobs and self-employed work. This is very low productivity work. And it does not pay well. Average weekly earnings are diving.

Almost all the increase in employment since the recession has been among the more highly skilled groups. Recent figures showed a slight fall in the number of employed full-time jobs for the second month running. There are still fewer people in full-time employment than there were in 2008. There are still fewer medium and low skill employee jobs than there were six years ago. So no wonder there has been the longest decline in wages for half a century. It looks even worse if you include the self-employed (see graph).

Weekly wages

Since the recession, pay has fallen by about 12%. The Resolution Foundation think-tank said 1.2 million British workers are on the legal minimum, compared with 600,000 when it was introduced in 1999. And the number of employees earning within 5p of the hourly rate has reached its highest level. The official minimum wage is no higher in real terms than it was almost a decade ago.

This brings us back to Cameron’s tax cuts. Income tax, VAT and National Insurance are three of the government’s biggest sources of revenue. But a low wage economy will mean lower tax receipts on income and lower VAT returns from spending. For example, in the last few quarters, when the UK economy was supposedly growing at over 3% a year, tax revenues rose only 2%, compared to the official forecast of 5%.

tax receipts

Big business is paying even less tax (even assuming they have declared all their profits!) but income tax receipts are way short; only VAT is delivering. The problem is that the increased numbers of self-employed are just not earning enough to pay more tax.

With weak tax revenues, Cameron’s pledge to cut income taxes further will make it even more difficult for the government to balance its books than it forecasts. The Conservative tax cut is really a promise to boost real incomes for the richer sections of the British people at the expense of the living standards of the poorer sections. Surprise!

Debt, deleveraging and depression

September 30, 2014

Last week the Economist magazine reiterated its view that global growth has been slowing ( This would be no revelation to readers of my blog, as I have been arguing that the world capitalist economy has failed to return to previous trend growth rates since the end of the Great Recession in 2009. And this confirmation that the world is a depression.

What is a depression and how does it differ from a ‘common or garden’ recession? Think of it schematically. A recession and the ensuing recovery can be V-shaped, as typically in 1974-5, or maybe U-shaped, or even W-shaped as in the ‘double-dip’ recession of 1980-2. But a depression is really more like a square-root sign, which starts with a trend growth rate, drops in the initial deep slump, then makes what looks initially like a V-shaped recovery, but that then levels off on a line that is below the previous trend line. In a depression, pre-crisis trend growth is never restored for anything up 10-15 or even 20 years.


In its piece, the Economist highlighted the significant slowdown in global trade growth. This is a point that I have made before (, that world trade has slowed to the to the point where the growth in trade is slower than world GDP growth – a situation that means economies with weak domestic demand cannot compensate by selling more goods in world markets.

The Economist adds that the World Trade Organisation has now cut its forecast for trade growth this year from 4.6% to 3.1% and for 2015 from 5.3% to 4%. And that is optimistic as actual trade growth in the first half of the year was just 1.8, lower than in 2012 (2.3%) and 2013 (2.2%). Economists at Citibank, the huge American bank, now reckon global real GDP growth will be just 2.8% this year rising to 3.3% in 2015, well below trend, the slowdown being led by the so-called emerging economies.

And a new report warns that this slowdown coupled with a failure to cut back the overhang of debt, both public and private, built up in the major economies, threatens to cause a new slump in the world economy. This is the so-called 16th annual Geneva report, commissioned by the International Centre for Monetary and Banking Studies and written by a panel of senior economists including three former senior central bankers (

As bankers, naturally the authors of the report are worried about the level of debt and the failure to ‘deleverage’ while the global economy struggles to recover. The report warns of a “poisonous combination of high and rising global debt and slowing nominal GDP, driven by both slowing real growth and falling inflation”.

According to the Geneva report, the total burden of world debt, private and public, rose from 160% of national income in 2001 to almost 200% in 2009 at the depth of the Great Recession. But the slump did not deliver any deleveraging and total debt rose further to 215% in 2013. “Contrary to widely held beliefs, the world has not yet begun to delever and the global debt to GDP ratio is still growing, breaking new highs,” the report said.

Global debt-to-GDP ratio, 2001-13


Debt did not fall in the developed capitalist economies because the banks were bailed out by huge dollops of public sector funding raised through government borrowing. So while financial sector debt was ‘written off’, it was replaced by public sector debt so that the banks did not lose out. But in the ‘recovery’ period since 2009, the debt build up has been more in emerging economies. The advanced capital economies have debt levels (excluding the banking sector) of around 260% of GDP in 2009 while the emerging economies had ratios half that, but now heading higher (mainly in China).

Debt dynamics for a selection of advanced and emerging economies

Debt EM and DM

Note: DM = developed markets, EMU = Eurozone; EM = Emerging Markets.

Excluding the public sector, only the US and the UK have seen a reduction in private sector debt, (mainly household debt and households defaulted on their mortgages or paid them down. But corporate debt has stayed high and with pitiful levels of growth in real GDP, if interest rates were to start rising significantly, then the corporate sector could find itself in trouble.

That is what happened in 1937 during the Great Depression, when the Federal Reserve decided that it could safely hike interest rates again and the government could stop running budget deficits as the US economy had recovered. That proved badly wrong (see my post,

The continual optimism about a ‘return to normal’ has been dashed again and again since 2008. Another figure from the Geneva report shows the slowdown in growth forecasts for both advanced and emerging economies, as captured by the progressive reduction in output projections in the different vintages of the IMF’s World Economic Outlook since 2008. Global growth is now way off trend and well below where it was expected to be in 2008 and every year since.

GDP forecasts

Behind the failure of the world economy to get back on track is the failure to restore the profitability of capital in nearly all economies from the peak of 2006 and certainly from the peak of 1997. In addition, given that the burden of debt on capital remains so high, it is no wonder that smaller companies are unwilling to invest in new technology in any significant way, while larger companies prefer to hold cash, buy up their own shares or issue higher dividends to their shareholders rather than expand productive capacity.

The irony is that if companies do start to expand capacity they will eventually drive profitability down further and so lay the basis for a new slump that would be triggered by any significant rise in the cost of borrowing. That is what the Geneva report’s debt analysis is telling us. And they are worried.

Solving crises – it’s easy!

September 27, 2014

You see the cause of slumps under capitalism is easy to discern and, as a result, what to do to avoid them is also straightforward. John Maynard Keynes sorted this out nearly 70 years ago – and without any reference to Marx or any other theorist of crises.

So says Philip Pilkington in a recent post on his blog (Keynes’ Theory of the Business Cycle as Measured Against the 2008 Recession). Pilkington is a research assistant at Kingston University and member of the Political Economy Research Group (PERG) at Kingston University, a UK centre of radical post-Keynesian economists, with its economics department now headed by the brilliant Steve Keen (see my post, Pilkington blogs at

Pilkington tells us that Keynes sorted all this out in Chapter 22 of the General Theory when he discussed the nature of the ‘business cycle’ and Pilkington concludes that of Keynes’ explanations: “I think they hold up pretty well today”. Pilkington says that Keynes makes clear what the “key determinate” of slumps in production and investment under capitalism: (Keynes quote): “The Trade Cycle is best regarded, I think, as being occasioned by a cyclical change in the marginal efficiency of capital, though complicated, and often aggravated by associated changes in the other significant short-period variables of the economic system.”

As Pilkington says, Keynes’ category of the marginal efficiency of capital (MEC) is “basically the expected profitability that investors think they will receive on their investments measured against the present cost of these investments.” Keynes’ concept of MEC is his version of Marx’s rate of profit. But it is different in some very important ways. First, Keynes is wedded to the neoclassical concept of marginalism. This is the idea, as things (supply or demand) grow, they rise, at the margin, at a slower rate; so there is a diminishing return on each new unit added. Marginalism is not justified in reality: indeed, there is plenty of evidence that there are economies of scale i.e. returns can increase not fall i.e. MEC can rise with expansion. But Keynes joins the neoclassicals in reckoning that, as capital gets larger, the MEC will fall. Indeed this is the basis of his view that capitalism will eventually move to some ‘stationary state’ of nirvana, leisure and prosperity. But that’s another story.

The other aspect of Keynes MEC is that his definition of capital is full of as many holes as Piketty’s (see my post, and others). Is capital just new investment of the stock of capital; is that investment just in tangible structures, equipment and technology, or does it include financial assets like bonds, stocks etc? It is not clear. Also, like all mainstream economics, capital is a ‘thing’ for Keynes, namely it is either tangible equipment or claims of ownership on companies like stocks.

For Marx, capital is a social relation: it is about the way the ownership of things by capitalists enables them to exploit the labour power of those who own nothing but the ability to work. In practical economic terms, that means Marx’s rate of profit includes the cost for capitalists in employing the workforce, as well as purchasing raw materials or factories. So you cannot work out what is happening to the rate of return on capital without including the value creating role of labour. Keynes and all mainstream economists since Smith and Ricardo carefully ignore the value of labour power in their definition of capital.

In doing so, we expose the real difference between Keynes explanation of crises and that of Marx – and which is closer to reality. What happens to cause a slump (recession or depression) in an economy, according to Keynes/Pilkington, is that there is “a sudden collapse in the marginal efficiency of capital.” Pilkington is keen to show that, as against the more ‘orthodox’ Keynesians, the “predominant explanation of the crisis is, not primarily a rise in the rate of interest”.

Pilkington expounds the thesis in relation to the US property slump in 2006-7 that triggered the Great Recession: “Keynes would argue that the causal chain went as follows: interest rates began to rise => the MEC of investors began to fall => eventually the MEC reached a threshold point at which investors stopped building houses. A recession ensued”. Who these ‘investors’ are that stopped building houses is not clear, but leave that aside. The question that flows from this ‘causal chain’ is: why did the MEC fall at some ‘threshold point’? According to Pilkington/Keynes: “The key component in the MEC is, of course, investor expectations. Keynes is clear on this and distinguishes himself from those who claim that a rise in the rate of interest is the cause of the crisis.”

So there is a ‘sudden collapse’ in the MEC of ‘investors’ because they change their ‘expectations’ on the future return of their investments. The cause of crises is thus reduced to the unpredictable (and possibly irrational) psychology of capitalists (investors). This is a subjective, ‘individual agency’ theory of slumps. In contrast, Marx looks at the aggregate accumulation of value and surplus value by the capitalist economy and develops a law of profitability based on the exploitation of labour that explains objectively why capitalists ‘suddenly’ stop investing and a slump ensues.

Moreover, Marx’s theory of crises can explain their regularity; Keynes/Pilkington’s cannot. In the latter, slumps are unpredictable and cannot be regular because they depend on ‘expectations’. Indeed, as Pilkington points out, Keynes denies that there is any ‘business cycle’ at all. And yet when Keynes wrote the General Theory, the evidence of cycles of boom and slump in capitalist economies had been well documented by the likes Wesley Mitchell, Burns and Schumpeter (see Jose A Tapia Granados entitled Does investment call the tune? Empirical evidence and endogenous theories of the business cycle, to be found in Research in Political Economy, May 2012,

Anyway, with MEC as the cause of crises, Pilkington argues that the cure for crises follows. If the MEC falls ‘suddenly’, then the authorities must cut interest rates to the bone, below the MEC, to restore investment and growth. The problem is that in a depression even that may not be enough and liquidity preference (the desire to hold cash) turns into a ‘liquidity trap’ that an economy cannot get out of even when interest rates are ‘zero-bound’ as they have been since 2008. So Pilkington/Keynes says the authorities must resort to fiscal expansion to ‘pump-prime’ the economy i.e. increase government spending and/or cut taxes. Again to quote Keynes: “the collapse in the marginal efficiency of capital may be so complete that no practicable reduction in the rate of interest will be enough” especially “as it is not so easy to revive the marginal efficiency of capital, determined, as it is, by the uncontrollable and disobedient psychology of the business world. It is the return of confidence, to speak in ordinary language, which is so insusceptible to control in an economy of individualistic capitalism.”

So you see, crises are down to ‘confidence’ and ‘business psychology’ and we must turn these around for the better. Government spending and tax cuts for capitalist companies can do this. Thus the Keynesian answer is not to replace the failed capitalist sector with a planned economy owned in common (heaven forbid!), but to restore the ‘confidence’ of capitalists.

Now I and others have discussed in detail why fiscal spending, whether to raise consumption or boost investment, in a capitalist economy is no guarantee that it will recover (see my posts and papers, The Keynesian multiplier won’t work unless the profitability of capital rises (the Marxist multiplier). Indeed, increased government spending in a depression can lower profitability further and extend a slump. Even more important, Marx’s law of profitability will eventually return and the boom will turn into another slump in due course.

Fiscal austerity will make the crisis worse or prolong it, according to Keynesians. This is the line of Simon Wren-Lewis, the arch Keynesian who blogs at In a recent post (The entirely predictable recession), he argues that the ‘second Euro crisis’ of 2010 onwards was caused by Euro governments trying to reduce government spending at a time when private investment had collapsed. Instead there was a need for ‘countercyclical’ fiscal stimulus to the economy. So the second recession was entirely predictable under Keynesian theory, he says.

Actually, just how much fiscal austerity was applied by Eurozone governments is a matter of debate, but what Wren-Lewis does not explain is: why the crisis started in the first place back in 2008 – a global crisis clearly nothing to do with fiscal policy and more to do with a collapse in capitalist sector investment. Why was that not predictable from Keynesian theory?

Anyway, Pilkington continues. Keynes’ explanation of ‘sudden’ slumps provides a model for avoiding slumps, you see. “Thus the remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the so-called boom to last. The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom.”

So we need to maintain very low rates of interest ‘permanently’ so that the MEC (hopefully) is always higher and an economic boom can go on forever. If this sometimes generates ‘credit bubbles’ and dangerous artificial booms in property or stock prices, then that is where we use fiscal policy and tax those bubbles away. As Pilkington concluded “I think that this is overly simplistic but certainly on the right track….In this scheme the central bank controls overactive investment markets but does not really hold responsibility for ensuring that economic growth be maintained continuously. That is the role of fiscal policy.” By this judicious macroeconomic management, we can avoid crises forever!

Pilkington, however, is reluctant to allow the people and politicians to have a say in this brave new world of Keynesian policy. “Personally I think that democracies are seriously flawed and politicians generally stupid and short-sighted. For this reason I would recommend building institutions that automatically open up the fiscal deficit”. So fiscal action will become outside democratic control, just as finance capital has managed to get monetary policy out of democratic control with ‘independent’ central banks. The more you consider the Pilkington/Keynes causal chain of slump and the policy solutions of macroeconomic management divorced from democracy, the less it is convincing and the more it is distasteful. Keynes, the patrician, the Platonian philosopher king, knows best.

But would such macro-management of a capitalist economy work? Well, we have had the experience of such attempts in the post-war period when governments attempted to use fiscal policy ‘countercyclically’ to keep the economy on even keel. For a while, it seemed to work and in the Golden Age, investment and GDP growth was strong. But then it all went ‘pear-shaped’ in the 1970s, with the first simultaneous international slump in 1974-5 since the Great Depression and the emergence of ‘stagflation’ (low growth and high inflation) – the opposite of what Keynesian economics predicted. Why did this change take place?

Marxist theory explained it best. The Golden Age was nothing to do with successful Keynesian macromanagement and the subsequent crisis was nothing to do with it being dropped. It was down to the profitability of capital. This fell from the mid-1960s onwards through the 1970s and no matter how much fiscal management or interest rate juggling governments engaged in, governments could not avoid slumps and slower growth. It was not the ‘psychology’ of investors that changed the economy; it was the objective change in profitability that changed ‘investor expectations’.

It also changed bourgeois economic theory. Keynesian economics gave way to monetarism and neoclassical equilibrium theory. The more radical aspects of Keynesian theory (uncertainty, irrational expectations, the marginal efficiency of capital) were dropped for more orthodox theories of supply and demand for money.

Simon Wren-Lewis, has been lamenting the failure to maintain Keynesian economics as providing the best explanation of capitalist economies and the best prescription for avoiding slumps. In Where macroeconomics went wrong, he comments “Why did we have a revolution which overturned an existing methodology and temporarily banished Keynesian theory,… I would love to know the answer to these questions.”

I think the answer is obvious: the Keynesian approach in its most radical form (“the socialisation of investment”) was unacceptable to the strategists of capital anyway; and even its more moderate approach was a failure in explaining the crises of the 1970s and 1980s. So mainstream economics returned to the theory of ‘free markets’ untouched by expensive government taxation and spending, and to a forthright attack on wages, regulations and employment. This was necessary to restore the profitability of capital. This became the neoclassical, neoliberal mainstream (for more on this, see the draft of an appendix on Keynesianism for my forthcoming book, The Long Depression, APPENDIX TWO). Keynesian economics had no answer to ending crises while preserving capitalism, so it was dropped or merged into the mainstream. It still does not provide an explanation for the current slump and depression or a way out.


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