Greg Mankiw is professor and chairman of the prestigious economics department of Harvard University.  He is also author of the most widely used textbook on economics by university undergraduates.  So he could not be more ‘mainstream’.  Mankiw has a blog (
http://gregmankiw.blogspot.co.uk/
) and just published a new paper entitled,
Defending the 1% (
http://scholar.harvard.edu/files/mankiw/files/defending_the_one_percent.pdf)
.

Mankiw is trying to be provocative and clever in this paper by arguing that there are perfectly good economic and even moral reasons for the top 1% of income earners in the US to have their huge share of total income.  In 2010, the top 1% had 17.4% of all income earned in the US, by any measure a very extreme level of income inequality.  As has been documented in many studies, that share of income going to the 1% has risen sharply from just (!) 7.7% in 1973.   Mankiw seeks to justify (defend) this more than doubling of the income of the 1% against the cries and protests of the Occupy movement.  He feigns to show sympathy with their ‘principles’ but his paper aims from beginning to end to refute all the arguments of ‘the left’ that this inequality is morally wrong or inefficient by using the principles of mainstream economics and a “healthy dose of political philosophy”.

His first defence is the one most used, namely that the reason the top 1% have had a rising share of income in the last 40 years has been the growing gap between the skills and education of workers.  ‘Skill-biased technical change’ has increased the demand for skilled labour and so incomes for the skilled have risen faster than the unskilled.  Mankiw quotes the usual study of his fellow Harvard economists, Claudia Goldin and Larry Katz  who have described this as a “race between education and technology.”   But there are plenty of other studies that argue something different has been going on.  In a working paper from the OECD, Kaja Bonesmo Frederiksen (Income inequality in the European Union, OECD Working paper 952, 16 April 2012), found that the reason that the top 10% did better was down to several factors: a decline in progressive taxation, rising capital gains from property and share ownership, so-called performance related pay, weaker trade unions and globalisation – indeed all the elements of the neo-liberal era – and not better technology skills (see my post,
http://thenextrecession.wordpress.com/2012/12/12/apples-robots-and-robber-barons/
).

The differences between the pay of the skilled and unskilled is not much different in the US compared to the UK or Europe.  And yet, as the OECD working paper shows, the ratio of the share of real disposable income growth going to top 10% over growth in income going to the bottom 10% averaged 2.6 times for the European Union, 9.1 times for the UK and a staggering 21.9 times for the US.  That means the top 10% of income earners in the US got 22 times more growth in income that the bottom 10% between the mid-1980s and 2008, while in France and Greece income growth for the bottom 10% was faster than for the top 10%!   So the most ‘neo-liberal’ capitalist economies saw the most unequal expansion in incomes.

Mankiw wants to dismiss the arguments of Joseph Stiglitz (The price of inequality, 2012) who argues that the top 1% have scooped the lion’s share of incomes because of ‘rent-seeking’, namely the ability to appropriate incomes produced through protectionism, cronyism and favourable regulations on tax and profits.  Mankiw says that ‘rent-seeking’ is no worse than 40 years ago, but this is an assertion without evidence in the same way that he criticises Stiglitz as making.

Mankiw insists that “the very wealthy get that way by making substantial economic contributions, not by gaming the system or taking advantage of some market failure or the political process”.  Yet it is difficult to imagine that the chief executives of top companies have done so well because they are so much more skilled than 40 years ago rather than just because they have been able to siphon off more corporate profits through their control of company boards.  Mankiw denies that is the case because non-quoted private companies pay their chief executives even more than the boards of quoted companies pay theirs.  What that proves I don’t know, except that family companies can pay the head of their tribe whatever they like without any reference to wider shareholders.  The UK’s High Pay Commission found that chief executives  of large companies are often paid 70, 80 or over 100 times the salary of their average worker, when three decades ago the ratio usually stood at 13 to 1.

According to the UK’s Financial Services Authority, 1800 bankers in the City still earn more than £1m a year after the banking collapse. So income rewards are not related to performance, but to the power of capital.   The UK’s Institute of Fiscal Studies found that bankers’ bonuses had played a large part in creating this divide. “If you look at who is racing away, then half the top 1% of high earners work in financial services,” said the IFS researcher.  Mark Stewart, a professor of economics at Warwick University, has shown that “almost all the increase in inequality has come from financial services” in the past 12 years.  But Mankiw tells us that these investment bankers are “most talented” and therefore should be “highly compensated”.   He sort of admits that the earnings of the top investment bankers might just be ‘rent-seeking’.  So what society needs is to “devise a legal and regulatory framework to ensure we get the right kind and amount of financial activity”.  But “that’s a difficult task”.  Indeed it is.

Mankiw goes on: “a well-functioning economy needs the correct allocation of talent.  The last thing we need is for the next Steve Jobs to forgo Silicon Valley in order to join the high-frequency traders in Wall Street.  So we should not be concerned about the next Steve Jobs striking it rich but we want to make sure he strikes it rich in a socially productive way”.   If Steve Jobs is so ‘socially productive’, how does Mankiw suggest that we ensure such people are paid for their value contribution rather than all the income going to ‘rent seekers’ in unproductive jobs like footballers or commodity traders?  He has no answer in this paper. But anyway, who is to say that the great ‘innovators of  technology’ must be rewarded more than those who do just as important jobs like nursing, refuse collecting, sewage etc.  And indeed, many of the great inventions, discoveries and technological advances have been the product of teamwork and cooperation and not down to some hugely talented individual.

Mankiw also seeks to defend the 1% by arguing that their skills and cleverness are inherited: “smart parents are more likely to have smart children”.   So the reason some have more income than others is that they inherit their cleverness from their parents and there is nothing we can do about it.  It is a genetic inequality.  What Mankiw mistakes here is genetic differences with inheritance.  Genes may be passed on, but there is no reason why incomes or wealth should be passed on from parent to child.  The top 1% of income earners can perpetuate their income status for their children, but not because of their genes but because of their influence.  Take the current scandal that internships in lucrative companies can be arranged by rich parents working in them or knowing the contacts, while equally clever poorer kids don’t get a look in. 

Okay, Mankiw says, let us assume that there are serious inequalities of income that are ‘unfair’.  What can be done about it?  Apparently little.  Mankiw correctly points out that the US  income tax system is already progressive.  In other words, the more income you ‘earn’, the more you pay as a percentage in income tax.  The poorest fifth pay just 1% of their income in federal taxes, the middle fifth pay 11%  and top 20% pay 23%, while the top 1% pay 29% of their income in tax.  So federal taxes are progressive.  So what’s the problem, says Mankiw.

But federal taxes are not the only taxes that people pay (see my post,
http://thenextrecession.wordpress.com/2012/09/19/romney-and-the-47/
).  People also pay sales taxes, VAT, insurance taxes, capital gains tax and payroll taxes.  And these are not progressive at all.   Then there are the subsidies, allowances and exemptions from tax usually paid to the better off.  There is every reason to conclude that the whole taxation system could be way more progressive and so bring about greater equality of incomes.

But Mankiw appears to reject the case for government applying any redistributive  policies at all.  After all, he says, if you are born with two kidneys and somebody else has two failing ones, government should not be able to enforce the removal of one of your kidneys to give it to the other person.  Mankiw equates the forcible removal of a person’s kidneys with the democratic decision of a government to make top earners pay more to help lower earners and spend of public goods!

Mankiw prefers what he calls a “just deserts” perspective – namely that a person should get an income congruent with his contribution to society.  On this perspective, there should not be higher taxation of those earning more because they are only receiving their ‘just deserts’, an income that matches their ‘marginal productivity’.  Mankiw thus presents us with the neoclassical concept of marginal productivity – a concept hugely discredited as bearing no resemblance to the reality of capitalism (see Fred Moseley’s critique of Mankiw and marginal productivity,
http://www.paecon.net/PAEReview/issue61/Moseley61.pdf
).

Mankiw discusses only the inequality of income in the US.  But global inequality is even greater (see my post,
http://thenextrecession.wordpress.com/2010/01/10/20/
) and clearly not the result of just technology and skill differences, but instead the product of trade and capital flows dominated and controlled by rich capitalist economies over weaker ones.

And Mankiw only talks of inequality of income.  But under capitalism, private (not common) ownership of financial assets, real estate and the means of global production is key.  So inequality in these ‘social’ assets is much more important and even greater than with incomes (see
http://thenextrecession.wordpress.com/2012/02/28/free-markets-and-global-wealth
).  The power of capital dominates and exploits labour and thus enables the 1%  to reap the benefits of the value created by the 99%.  Mankiw has nothing to say about this.

Marx never advocated ‘equality’, if we mean by that completely equal incomes or personal wealth for each person or household unit in a society.  But neither was the Marxist perspective one of ‘just deserts’.  Instead, it was “from each according to his/her abilities; to each according to his/her needs”.  People (Steve Jobs) may have different or ‘unequal’ abilities, but a commonwealth would provide for all according to their needs.

The Greek coalition has been pushed to breaking point over the decision of the largest party in government, the conservative New Democracy, to close down the state TV and radio broadcaster ERT without warning.  The two smaller ‘leftist’ parties in the coalition have demanded that this action be reversed and instead negotiations be started to ‘restructure’ the broadcaster without first closing it down.  There were massive protests against the government’s abrupt closure and a general strike was called by Greek unions.

According to two public opinion polls, around two-thirds of Greeks are opposed to the arbitrary closure of Greece’s state broadcaster, but a majority don’t want new elections to oust the coalition: they just want the government to resolve the economic crisis.  If there were elections, New Democracy would probably poll slightly more than the socialist opposition Syriza, as in the last election, while the fascist Golden Dawn would do even better, reducing the seats for the junior coalition partners.  That would mean that the coalition would lose its majority and the fascists would hold the balance of power.  So there is no way that coalition will be allowed to fall – a deal on the ERT closure will be worked out.   Most likely, ERT will be ‘restructured’, reducing its staff from 2600 to maybe as little as 1000.  Many Greeks see the ERT as being the former mouthpiece of the military in its coups or a tool of successive governments.  On the other hand, it is the only public broadcasting network putting on quality programming.  So Greeks are somewhat ambiguous about keeping ERT as it is.

More important, behind the unannounced move to close ERT was the pressure on the government to meet the fiscal targets of the dreaded Troika (ECB, EU, IMF) set for this summer in order to get the next tranche of EU bailout funds.  The government is committed to dismissing 4000 public servants by the end of the year and 15,000 by the end of next year.  After destroying ERT, it plans to lose another 800 jobs from various state organisations this summer by closing 17 down and merging others.

And things have not been going well for the government in meeting Troika demands.  The midnight closure of ERT came right after the government failed to privatise the natural gas firm DEPA and the Greek economy was cut to ‘emerging market status’ by equity index provider MSCI, pushing down sharply the value of Greek bonds.  A senior government official said Athens was “under pressure to show visiting EU and IMF inspectors that it had a plan to fire 2,000 state workers as required and the ERT shutdown was the only option available to meet the goal”.

The irony is that while austerity in Greece continues to be applied mercilessly, the IMF recently issued a report that concluded that the Troika’s approach was mistaken in imposing severe fiscal retrenchment back in May 2010 when Greece could no longer finance its spending through borrowing in bond markets (
http://www.imf.org/external/pubs/ft/scr/2013/cr13156.pdf
).  Back then, the Troika had three options.

First, it could have provided a massive fiscal transfer to the Greek government to tide it over without demanding massive cuts in public spending that eventually led to a fall in Greek real GDP of nearly 20%, unemployment of over 25% and government debt to GDP of 170%, with economic depression likely to continue out to the end of the decade.  Or it could have allowed the Greek government to ‘default’ on its debts to the banks, pension funds and hedge funds and negotiate an ‘orderly haircut’ on those debts.  But the Troika did neither and opted instead for a third way.  It insisted that in return for bailout funds the Greek government meet its obligations in full to all its creditors by switching all its available revenues to paying its debts at the expense of jobs, health, education and other public services.

The Troika insisted on this because it reckoned 1) that austerity would be shortlived and economic growth would quickly return and 2) if the banks and others took a huge hit on their balance sheets from a Greek default it would put European banks in danger of going bust (Greek banks first).  There could be ‘contagion’ if other distressed Eurozone governments also opted not to pay their debts, using Greece as the precedent.  Of course, economic growth has not returned and despite huge efforts on the part of Greek governments to meet fiscal targets through unprecedented austerity, government debt has increased rather than fallen and the economy has nosedived.

Eventually, the Troika had to agree that the private sector took a ‘haircut’ after all, massaged as it was with cash sweeteners and new bonds with high yields.  Now the IMF in its report admits that austerity was too severe and debt ‘restructuring’ should have happened from the beginning.  The IMF, now in its semi-Keynesian mode, tries to put the blame for the failure to do this on the EU leaders and the ECB, which has not made the latter too happy, especially as the current IMF chief, Lagarde was strongly in favour of the austerity plan when she was French finance minister in 2010.

And after all, the EU leaders and the ECB had a point.  If Greeks had defaulted back in 2010, that could have led to other defaults and Europe’s banks were in no state to absorb such losses.  As a recent study shows
http://www.voxeu.org/article/ez-banking-union-sovereign-virus)
, German banks were heavily overleveraged back in 2010 and they are not much better even now.  There was no way the German government was going to put German banks in jeopardy and allow the ‘profligate’ Greeks to get a huge handout of German taxpayers money to boot.  No, the Greeks had to pay their debts, just as the Germans had to pay their reparations to the French after 1918, even if it meant Germany was plunged into permanent depression.  Ironically, the Germans did not and have not paid promised billions in reparations to the Greeks after 1945 – something the Greeks are pursuing in negotiations!

Table 1 below shows the degree of ‘domestic leverage’ of the systemically important banks in major Eurozone countries that were subject to the EBA stress tests (and soon will be supervised by the ECB). It is apparent that in most countries the domestic banking system would not survive a Greek-style ‘haircut’ on public debt. (In the context of the PSI operation of March 2012, holders of Greek bonds had to accept a nominal haircut of over 50%, and on a mark-to-market basis the haircut was over 80%. It is apparent that no bank that has a sovereign exposure worth over 100% of its capital would survive such a loss.)

Table 1. Domestic sovereign debt leverage (sovereign exposure/capital)

Bank of England monetary policy committee member, Paul Fisher summed up the state of the UK economy this week: “At the moment, the macroeconomic outlook here is not as bright as in the US, therefore we are some way behind them in terms of return to anything like trend growth.  Output has stayed lower for longer than in any previous recession: in 2013, real national income is still lower than it was in 2007.”

The Institute of Fiscal Studies (IFS) in a special issue of its Fiscal Studies reckons that what is going on in the UK economy is without precedent.  The current UK recession since 2008 is the longest and deepest in over a century.   As the head of the IFS put it: “It is usually dangerous to proclaim “this time is different”. But actually this time really is different. We are in uncharted territory. The long-term consequences of all this are likely to be quite profound. The recovery may look as different from previous recoveries as this period of weak growth and recession does from its predecessors.”

The biggest losers in the last five years since the slump began have been average British households.  Wages have fallen by more in real terms during the current economic downturn than ever previously recorded, according to the IFS.    One-third of workers who stayed in the same post following the recession suffered a cut or freeze in their wages in cash terms up to 2010-11.  Once inflation is taken into account, real-terms pay has fallen by more since the recession began in 2008 than in any comparable five-year period.  Workers have taken the equivalent of a 15% real wage cut over the period 2007 and 2012.

The latest employment figures for the period Jan-April 2013 have been released and they show a marginal improvement over the previous quarter.  The UK is experiencing what’s known as a productivity puzzle, whereby a relative recovery in employment and working hours has been accompanied by a fall in output, as measured by GDP.

I dealt with this apparent conundrum in previous posts (
http://thenextrecession.wordpress.com/2013/01/25/britain-deep-down/
) and (
http://thenextrecession.wordpress.com/2013/01/28/the-rentier-economy/
).  In these, I argued that employment has not fallen as much and the unemployment rate did not rise as much as in the US, Spain etc because, while the absolute number of people in full-time employment has fallen by 341,000 and the number of unemployed people is up by 854,000, the number of people in part-time employment increased by 660,000.  In the last year, of those net extra 552,000 jobs, 43.2 % were part-time and much of the rest were in low-paid occupations.   This explains why the UK has avoided a bigger fall in employment.

The IFS study now confirms that analysis. The IFS found that many UK companies, particularly smaller businesses, have cut wages rather than lay off staff.  Workers have been willing to accept pay reductions because of the fierce competition for those jobs which are available.   Competition for jobs has in part been driven by the fact that lone parents and older workers have not withdrawn from the labour market to the extent they did in previous downturns, possibly because welfare reforms make it more difficult for them to do so, the report found.  Fewer workers are unionised than in the past and those who are not protected by collective wage agreements are more likely to have seen their pay cut or frozen.  Smaller firms, which have tended to respond to the tighter economic conditions by cutting wages, have seen productivity fall by an average 7% while firms with more than 250 employees, which were more likely to lay off staff, have seen no change in productivity.

Even so, UK employment as a percentage of those who could work is still well below the peak level achieved before the slump of 2008.

And the overall unemployment rate is still well above pre-slump levels.

Despite the rise in the last quarter, average earnings growth for UK workers remains at very low levels.

The unprecedented decline in real wages seems to be partly associated with long-term changes in welfare benefits policy.   Lone parents and older workers – in part associated with increasing pension age for women and the fall in the value of pensions and annuities for those approaching retirement – have been forced to look for work.  So the ‘reserve army of labour’ has risen and competition for jobs has been intense.  As a result, employers have been able to cut wages, especially in non-union sectors.  As a result, the majority are taking the pain through lower real incomes rather than job losses, as price inflation outstrips pay rises.

Unemployment rates may be higher in Europe and the US than in the UK, but a broader stretch of British workers are taking a significant and lengthening hit to their living standards than those workers in northern Europe or Americans.

Productivity puzzle a result of greater supply of labour, fall in union activity and lower wages, say IFS

         

June 12, 2013, 11:34am

by Chris Harlow

Leading think tank the Institute of Fiscal Studies has released a report showing that the current recession since 2008 is the longest and deepest in over a century.

The UK is experiencing what’s known as a productivity puzzle, whereby a relative recovery in employment and working hours has been accompanied by a fall in output, as measured by GDP.

Source: IFS, ONS data

This has some real consequences for British workers. The IFS shows how real hourly wages across income levels (deflated using the Retail Prices Index) were four per cent lower in April 2011 than they were in April 2008, compared to five per cent higher in the early 1980s and ten per cent higher in the early 1990s.

The IFS finds that wages are positively correlated with productivity, but can’t explain definitely whether there is any causal relationship between the two.

As welfare cuts hit (particularly the elderly and single parents) and the value of household wealth falls, more are pushed back into work. The increasing labour supply has created a greater competition for jobs, and moved workers’ priorities towards stability over than pay. This has pushed wages down and, between 2010 and 2011, 70 per cent of those staying in the same job faced a reduction in real wages.

The decline in trade union membership, meanwhile, has contributed to a more flexible workforce, meaning employers are more able to reduce wages or make job cuts to save on costs. Greater freedom to hire and fire, combined with low pay, the IFS say, may explain the productivity puzzle.

Policymakers are unlikely to be comforted then by the news yesterday that Britain’s manufacturing output fell by 0.2 per cent in April 2013, following encouraging increases of 1.1 per cent in March and 0.7 per cent in February.

However, the wrong thing to do at this point would be to increase welfare spending and employment regulation to take the least productive back out of the workforce and hamper small businesses’ ability to hire through regulation and a higher minimum wage, as the TUC are currently campaigning for. The recovery may be taking longer this time, but the UK could emerge stronger than ever and it’s important we don’t become impatient.

- See more at: http://www.cityam.com/live-blog#sthash.3LRR6IK1.dpuf

Leading think tank the Institute of Fiscal Studies has released a report showing that the current recession since 2008 is the longest and deepest in over a century.

The UK is experiencing what’s known as a productivity puzzle, whereby a relative recovery in employment and working hours has been accompanied by a fall in output, as measured by GDP.

Source: IFS, ONS data

This has some real consequences for British workers. The IFS shows how real hourly wages across income levels (deflated using the Retail Prices Index) were four per cent lower in April 2011 than they were in April 2008, compared to five per cent higher in the early 1980s and ten per cent higher in the early 1990s.

The IFS finds that wages are positively correlated with productivity, but can’t explain definitely whether there is any causal relationship between the two.

As welfare cuts hit (particularly the elderly and single parents) and the value of household wealth falls, more are pushed back into work. The increasing labour supply has created a greater competition for jobs, and moved workers’ priorities towards stability over than pay. This has pushed wages down and, between 2010 and 2011, 70 per cent of those staying in the same job faced a reduction in real wages.

The decline in trade union membership, meanwhile, has contributed to a more flexible workforce, meaning employers are more able to reduce wages or make job cuts to save on costs. Greater freedom to hire and fire, combined with low pay, the IFS say, may explain the productivity puzzle.

Policymakers are unlikely to be comforted then by the news yesterday that Britain’s manufacturing output fell by 0.2 per cent in April 2013, following encouraging increases of 1.1 per cent in March and 0.7 per cent in February.

However, the wrong thing to do at this point would be to increase welfare spending and employment regulation to take the least productive back out of the workforce and hamper small businesses’ ability to hire through regulation and a higher minimum wage, as the TUC are currently campaigning for. The recovery may be taking longer this time, but the UK could emerge stronger than ever and it’s important we don’t become impatient

- See more at: http://www.cityam.com/live-blog#sthash.3LRR6IK1.dpuf

eading think tank the Institute of Fiscal Studies has released a report showing that the current recession since 2008 is the longest and deepest in over a century.

The UK is experiencing what’s known as a productivity puzzle, whereby a relative recovery in employment and working hours has been accompanied by a fall in output, as measured by GDP.

Source: IFS, ONS data

This has some real consequences for British workers. The IFS shows how real hourly wages across income levels (deflated using the Retail Prices Index) were four per cent lower in April 2011 than they were in April 2008, compared to five per cent higher in the early 1980s and ten per cent higher in the early 1990s.

The IFS finds that wages are positively correlated with productivity, but can’t explain definitely whether there is any causal relationship between the two.

As welfare cuts hit (particularly the elderly and single parents) and the value of household wealth falls, more are pushed back into work. The increasing labour supply has created a greater competition for jobs, and moved workers’ priorities towards stability over than pay. This has pushed wages down and, between 2010 and 2011, 70 per cent of those staying in the same job faced a reduction in real wages.

The decline in trade union membership, meanwhile, has contributed to a more flexible workforce, meaning employers are more able to reduce wages or make job cuts to save on costs. Greater freedom to hire and fire, combined with low pay, the IFS say, may explain the productivity puzzle.

Policymakers are unlikely to be comforted then by the news yesterday that Britain’s manufacturing output fell by 0.2 per cent in April 2013, following encouraging increases of 1.1 per cent in March and 0.7 per cent in February.

However, the wrong thing to do at this point would be to increase welfare spending and employment regulation to take the least productive back out of the workforce and hamper small businesses’ ability to hire through regulation and a higher minimum wage, as the TUC are currently campaigning for. The recovery may be taking longer this time, but the UK could emerge stronger than ever and it’s important we don’t become impatient.

- See more at: http://www.cityam.com/live-blog#sthash.Uwpv0ACG.dpuf

The explosion of protest over the last week in Turkey began when people tried to stop the pulling down of trees in Gezi Park as part of a government plan to replace the park with yet another shopping centre that would include yet another mosque, the demolition of the secular Ataturk cultural centre and its replacement with an Ottoman-era military barracks.   This was no accident of history really, because the loss of green spaces to development has been increasingly objected to by wide layers of Turks – working class and middle class.  According to the OECD,  33% of Turks feel they lack access to green spaces, much more than the 12% average of OECD European countries and the highest level of dissatisfaction in the region.

But Turkish capitalism has been on the move and, as far as the ruling AK party and domestic and foreign capital is concerned, nothing must stand in its way (including trees).  Turkey wants to move up the ladder of the rich club of the OECD and is still vying to join the EU by the end of decade.  At the same time, the government is autocratically trying to impose an Islamic style state superstructure onto this capitalist expansion, with strict rules on alcohol, religious observance, dress and the subjugation of women, Iran-style.  Up to now, the AK party has been riding high, winning election after election, enabling it to cut the former Ataturk secular military down to size and disperse the secular opposition of corrupt middle-class parties.  The AK was backed in this by the huge urban poor of the cities where it had carefully built a base over a decade or more.  But, of course, on obtaining unchallenged power, it has now become the tool of big business and foreign capital (despite the occasional rift over policy).  The government increasingly sees itself as a regional power able and willing to intervene in the various clashes of the region: Iran. Palestine and more recently, Syria.

On the surface, it would appear that Turkish capital is moving on and up without much problem.  And it is true that economic growth has accelerated in recent years while foreign investment has flooded in to exploit a labour force coming into the urban areas from the impoverished countryside – a classic emerging capitalist development.   But this apparent economic success is still founded on the shaky young legs of a weak capitalism and is also weighed down by corruption, religious backwardness and scant regard for human rights and laws.  Inequality of income, as measured by the gini coefficient, according to the IMF, is around 40, making it higher than the US, the most unequal of the advanced capitalist economies and the highest in emerging Europe, apart from Russia.

It’s no surprise that Turkey is ranked 154th in Reporters Without Borders’ Press Freedom Index. Not only is the country “currently the world’s biggest prison for journalists”, media bosses fire journalists because of pressure from the government.  And prosperity is a relative thing and of course, not for all.  More than 48% of the working-age population aged 15 to 64 has a paid job, a figure much lower than the OECD employment average of 66% and the lowest rate in the OECD.   People in Turkey work 1 877 hours a year, more than the OECD average of 1 776 hours.  In Turkey, however, 46% of employees work very long hours, by far the highest rate in the OECD where the average is 9%.

Around 67% of people say they are satisfied with their current housing situation, much less than the OECD average of 87% and the lowest level amongst OECD countries. On Turkey, the average home contains 0.9 rooms per person, less than the OECD average of 1.6 rooms per person and one of the lowest rates across the OECD. In terms of basic facilities, 87.3% of people in Turkey live in dwellings with private access to an indoor flushing toilet, less than the OECD average of 97.8% and the lowest rate across OECD countries.

The best-performing school systems manage to provide high-quality education to all students. In Turkey, the average difference in results, between the 20% with the highest socio-economic background and the 20% with the lowest socio-economic background is 106 points, higher than the OECD average of 99 points. This suggests the school system in Turkey mainly provides higher quality education for the better off.

Total health spending accounts for 6.1% of GDP in Turkey, more than three points below the average of 9.5% across OECD countries. At $913 in 2008, Turkey’s level of health spending per person is the lowest in the OECD, where the average is of $3268.   In Turkey, only 61% of people say they are satisfied with water quality. This figure is the lowest in the OECD, where the average satisfaction level is 84%, and suggests Turkey still faces difficulties in providing good quality water to its inhabitants.

The Great Recession hit Turkish capitalism just as hard as elsewhere.  The answer of the government (against IMF advice) was to let loose a huge credit boom to fuel domestic demand.  This pushed the inflation rate to double digits and widened the current account deficit to 10% of GDP (the second largest in the world in dollar terms) in 2011, exposing Turkey to the risks of capital flow reversal at a time of continued global uncertainty.  External financing needs are around 25% of GDP so that Turkish banks rely on short-term foreign borrowing. Turkey has jumped from an agricultural to services economy within two decades and the recession weakened the manufacturing base.  Conglomerates like Eczacibasi and Zorlu have built huge shopping malls in the past few years rather than investing in their core businesses.

In the last two years, the economy slowed, driven by weakening domestic demand.  Turkey remains prone to boom-bust cycles driven by foreign capital flows.  The health of global imperialism is still the overriding factor in Turkey’s own growth.  The national saving rate has fallen dramatically over the last 15 years, from 25% of  GDP in the late 1990s to less than 15% now. This decline has been larger than in any G-20 country over this period and stands in stark contrast to the experience in peer emerging economies.  So Turkey is forced into making its labour force competitive to attract more FDI flows into the tradable sector. At around 2.0% of GDP, FDI inflows are still below the G–20 EM average , with most flows tilted toward unproductive sectors such as banking and  real estate.

Between 2003 and 2011, real GDP growth averaged 5.3% a year, but the unemployment rate remained in double-digits, thus creating a reserve army of labour to exploit.  The deficit on trade and income with other countries was over 5% of GDP on average.  But these were the good years for Turkish capitalism.  Economic growth is expected to slow to less than 4% a year for the rest of this decade, at best, while the external deficit will widen to 7.5% of GDP.   The boom of the last decade was partly based on real estate, credit and services and construction and less and less on manufacturing, exports and investment.

That’s because the profitability of Turkish capital has declined as the expansion of the labour force began to slow.  The decline was visible during the 1990s. It was no accident that the AKP won landslide victory with the backing of big business in the 2002 elections  just one year after its foundation.  Under the AKP, profitability made a dramatic recovery (albeit based partly on unproductive investment).  The Great Recession brought a new reversal and this time the recovery in profitability has faltered.  Although profitability recovered to the previous peak by early 2010, since then it has taken a tumble and is still below the peak before the Great Recession.

The green shoots in the woods of Turkish capitalism are not so healthy that the government can continue to pull up the trees.

The OECD has just issued its half-yearly forecast for economic growth.  It reckons that world real gross domestic product (GDP) will increase by just 3.1% this year and by 4% in 2014. Across the OECD countries, GDP is projected to rise by a meagre 1.2% this year and by 2.3% in 2014, while growth in non-OECD countries will rise by 5.5% this year and 6.2% in 2014.    In the US, activity is projected to rise by 1.9% this year and by a further 2.8% in 2014.  However, GDP in the euro area is expected to decline by 0.6% this year and then turn up just 1.1% in 2014, while in Japan GDP is expected to grow by 1.6% in 2013 and 1.4% in 2014.

These forecasts are more or less repeated by the IMF in its spring estimates. What stands out is that the mature capitalist economies are crawling along while the developing capitalist economies are growing at a reasonable lick.  But the Eurozone area of 18 nations shows no sign of recovery from the Great Recession, with southern Europe deep in depression.   The Euro leaders met last Monday and agreed that France, Spain, Greece etc could have more time to meet their fiscal targets on government budgets and debt because economic recovery was non-existent.  So the pace of austerity was eased by the Euro leaders.  But it’s still the message.  As ECB President Mario Draghi recently maintained: “There was no alternative to fiscal consolidation, even though, we should not deny that this is contractionary in the short term. In the future there will be the so-called confidence channel, which will reactivate growth; but it’s not something that happens immediately”.   Clearly not!

Christian Noyer, governor of the Bank of France, also echoed Draghi in saying that austerity was necessary to encourage the ‘confidence fairy’ to make an appearance: “Over a certain threshold, which our country has probably crossed, any increase in public spending and debt has extremely negative effects on confidence.”  In other words, recovery is possible only if capitalists become confident that it will happen and that apparently depends on getting budget deficits and debt down.  Why? Well, because “the old model doesn’t work any more”, namely traditional Keynesian efforts to boost demand by encouraging spending.  Noyer added that France had to move away from public policies “overly concerned with preserving the jobs of the past” and allow for ‘liberalisation’ that could help future job creation.

And there we have it.  As I have argued many times in this blog, the aim of austerity is not just to reduce public debt and government spending as such, but to restore the profitability of the capitalist sector.  As Draghi puts it, “that’s why structural reforms are so important, because the short-term contraction will be succeeded by long-term sustainable growth only if these reforms are in place.”  And that’s why when the Euro leaders relaxed the pace of austerity for several governments, they did so on the condition that ‘supply-side reform’ was stepped up, namely cuts in job security,wage levels and ‘protected’ industries along with more privatisation.  That is the real aim of austerity: more neoliberal policies to restore the capitalist sector.

But is austerity working to achieve this?   Well recently, JP Morgan economists put together some measures of progress: the amount of deleveraging achieved in public and private sector debt; more competitive prices for trade by the distressed states; making it easier to hire and fire employees; opening up ‘markets’, more privatisations and interestingly, progress on reducing democratic and constitutional obstacles in various states to imposing neoliberal policies.

JPM concluded that the Eurozone was only halfway there in this neoliberal recovery programme (The Euro area adjustment: about halfway there, 28 May 2013).  For example, on the fiscal austerity targets, Italy was 75% on the way, Spain just 38%, Greece 97%, Ireland just 26% and Portugal 55%.  Longer term austerity targets (meeting the Fiscal Compact in 2030) were more or less along the same distance.

Wage cuts and reductions in labour costs had gone further, with Ireland and Portugal having done enough, Greece a little further to go (after a 30% cut in living standards!) and Spain still another 25% to go.

But when it came to ‘structural reform’ i.e. reducing the size of the public sector, selling off state assets, reducing labour and pension rights, lower corporate taxes etc, progress had been much slower.  Apparently, Italy, Greece, Spain and Portugal were still way less oriented to allowing the capitalist sector free rein than the likes of the Netherlands or Ireland.

JPM’s estimate of progress on the neoliberal programme is more realistic than the talk in financial markets that the likes of Greece or Ireland have ‘turned the corner’.  Take Greece.  The three parties in the coalition over the last year have stuck rigidly to the EU-IMF fiscal adjustment program. They have been awarded with an upgrade in the evaluation of Greek sovereign debt as a result by financial markets.  Greece’s upgrade to B- comes almost a year to the day from the downgrade Greek sovereign debt to CCC, i.e. junk.  So the ‘confidence fairy’ has shown itself from the undergrowth.  But it is nowhere near enough to talk about the Greek crisis being over.

All the Euro bailout funds to Greece have gone on paying off Greece’s creditors, namely other European banks, pension funds and speculative hedge funds, the latter have made a killing as Greek debt interest rates have fallen as a result.  But the real economy remains in a mess.  The economy has had 19 consecutive quarters of contractions.

About 1.3 million Greeks are out of work, some 400,000 families have nobody earning an income, about 300,000 workers have employers who have not paid them for months and thousands have left the country to seek work, while the forces of neo-Nazism grow stronger. About 800,000 or so long-term unemployed have lost any access to benefits and free healthcare.  Public services, such as health, have been ravaged, while the incessant rise in taxes has put terrible pressure on even the healthiest of businesses.

People in Greece worked 2,032 hours a year in 2011, considerably higher than the OECD average of 1,776 hours.  By contrast, the Germans, clocked in on average 1,413 hours a year.  Yet the average annual disposable household income in Greece is €15,800, way less than the OECD average of €17,820 a year.  On indicators used of the OECD’s better life index, Greece ranks 30^th out of 36 countries. In the EU, only crisis-ridden Slovenia ranks worse. Portugal came in at 28.

Small businesses in Greece are paying an interest rate of around 7% for credit assuming they can even get a loan from the country’s semi-comatose banking system.  In contrast, similar firms in Germany borrow at half that rate.  The current account deficit may have shrunk by about 7% pts of GDP but this been achieved largely on the back of a substantial fall in imports rather than a significant rise in exports.  Even the dreaded Troika  admitted in analysing the impact of its austerity programme that: “The rich and self-employed are simply not paying their fair share, which has forced an excessive reliance on across-the-board expenditure cuts and higher taxes on those earning a salary or a pension.”

Recovery in Greece depends on a return of investment in industry and key services.  But there is little sign of that.  In 2012 investment fell by 20% from the already ridiculously low levels of 2011. And the government is predicting a further fall in investment in 2013.

So if austerity is only half working at best to restore capitalism in the Eurozone, what is the alternative?  Well, there is another that is gaining prominence, especially within the distressed Euro states like Portugal, Greece and Italy.  It is the Keynesian alternative of leaving the euro and restoring a devalued national currency. For example, in Portugal, economist Joao Ferreira do Amaral has published a book urging Portugal to exit the euro.  This has become a best seller and is backed not just by the Communist Party but also endorsed by the Supreme Court President!  The book argues that austerity won’t work and the divergence between rich Germany and poor Portugal will only get wider if the current government’s policy is maintained.  The only answer is to exit the Eurozone and for Portugal to restore its escudo as in the 1990s.

The claim of these ‘exit’ supporters is that the cost of exiting the euro to the economy will be much less than the continuing cost of austerity imposed by the Euro leaders on the likes of Portugal or Greece.  These arguments are presented more theoretically by a new paper from Heiner Flassbeck and Costas Lapavitsas (Systemic_Crisis).  Flassbeck is  a former Vice Minister of Finance under left Social Democrat Oskar Lafontaine and seems to have formed an alliance with ostensible Marxist economist Lapavitsas to argue the case for exiting the euro as the only solution.  In doing so, they seem to have arguments very similar to those of many neoliberals like Dr Werner Sinn, now a leader of the new ‘exit party’ in Germany that calls for a return to the mark.  Lafontaine has also moved to this viewpoint.  So there is an alliance between some nationalist neoliberals and Keynesians for an exit policy.

The problem that I have with this exit policy is that it is a bit like the position of  the Irish Republican Army (IRA) on the issue of Irish unity.  The IRA argued that first we must end ‘the border’ that divided north and south Ireland and then we can adopt socialist policies.  Yet Ireland is still divided and still capitalist and the former leaders of the IRA now work within the existing two regimes for social change – a reversal of their old position.  The euro exit is also a ‘two-stage’  theory: first, we must exit the euro as the top priority and then we can talk about socialist policies to end the crisis.  I am sure that Lapavitsas and Amaral want to adopt policies for public ownership of the banks and major industrial sectors, public investment and a plan for Europe, but I think they obscure the battle against austerity by emphasising euro exit and devaluation as the major cure.  Surely, this is a diversion.

Why? Well,as I said in a  previous post
(
http://thenextrecession.wordpress.com/2013/03/16/workers-punks-and-the-euro-crisis/
), it is because the euro crisis is a crisis of capitalism and not a crisis of the euro. In other words, even if  the euro were to collapse and EMU states returned to running their own monetary and currency policies, the crisis would not go away and may even get worse.  That’s because the euro crisis is the product of the failure of the capitalist mode of production globally.  It has had the worst impact on the weaker capitalist economists like Greece, Portugal or Slovenia, but it has hit all economies.  The crisis is only partly a result of the policies of austerity being pursued, not only by the EU institutions, but also by states outside the Eurozone like the UK.  If that is right, then alternative Keynesian policies of fiscal stimulus and/or devaluation where possible, will do little to end the slump and will still make households suffer income losses.  Austerity means a loss of jobs and services and thus income.  Keynesian policies also mean a loss of real income through higher prices, a falling currency and eventually rising interest rates.

Take Iceland, a country outside the EU, let alone the Eurozone.  Devaluation, or Keynesian-style ‘beggar-thy-neighbour policies, have still meant a 40% decline in average real incomes in dollar terms and nearly 20% in krona terms since 2007 (see my post,
http://thenextrecession.wordpress.com/2013/03/27/profitability-the-euro-crisis-and-icelandic-myths/
).  If not Iceland, then Argentina in 2001 is dug up as a successful ‘exit’ strategy.  Argentina ended the peso’s peg with the dollar and devalued, apparently escaping its depression.  But for Greece it is not just a question of breaking a peg with the euro.  It will have to introduce a new drachma.  Would this new currency issued by an effectively bankrupt state have any exchange value whatsoever? Will the Russians accept a Cypriot pound in exchange for oil, and the Americans drachma in exchange for medicines?  Greece, which, unlike Argentina, is not a net exporter of raw materials with rising prices and so has little to support any new currency. Greeks can print as much as they like of it, but will they be able to buy electrical appliances, cars or even foods produced abroad with it?

And anyway, Argentina did not escape its crisis by breaking the peg with dollar.  Guglielmo Carchedi and I are just about to publish a paper (The long roots of the present crisis: Keynesians, Austerians and Marx’s law) that will show that it was not competitive devaluation that restored Argentina’s growth after the 2001 crisis, but default on state debt caused by the previous destruction of productive capital.  Argentina’s recovery was fuelled neither by devaluation nor by redistribution policies, but by the re-creation of previously destroyed private capital in the private sector with a low organic composition; a rising rate of exploitation; and improved efficiency. This is the cause—rather than Keynesian policies—of Argentina’s economic revival.

The euro project was unique in one way.  It was designed to achieve integration and convergence among various European capitalist states but without establishing a full federal union of Europe, with one government, one budget, one set of tax laws and one banking system. For a while, it seemed to work until the crisis came, although even in the boom years, there was more divergence than convergence.

Can the euro’s halfway house now survive?  It is clearly not going towards some federal union of European states, whatever the claims of the nationalist sceptics of UKIP or Front National.  A united states of Europe under capitalism is not on the agenda.  But the halfway house could lumber on if economic growth returns.  But growth depends on investment.  And investment has collapsed and not just in the weaker capitalist economies of the Eurozone.

The figure above is from Greek Default Watch (
http://www.greekdefaultwatch.com/2013/05/the-eurozone-since-2007-in-one-image.html
).  The first column shows real GDP indexed at 100 in 2007.  The Eurozone as a whole by 2012 remained below the level of 2007.  And most Eurozone economies are still well below their 2007 levels – Greece is down 21%.  The next columns show the changes in GDP since 2007 by expenditure sectors.  The drop in GDP is really a factor of Germany growing (+€85 billion) but without a supporting cast to offset the declines in Italy (-€102 billion), Spain (-€40 billion) and Greece (€42 billion). On a net basis, Italy’s decline accounts for the bulk of the decline in the overall Eurozone, while Germany’s gain offsets the decline in Greece and Spain and the rest of the union is more or less even.

The Eurozone has a clear investment problem: investment rose in only one of the 17 countries (Luxembourg).  The issue of external competitiveness that the Keynesian exit economists emphasise, just like the neoclassical neoliberals is less important.  For the seven countries whose 2012 GDP was higher than in 2007, net exports made a big difference in only three cases; of the ten countries where GDP declined, net trade made a material contribution in seven, but this was not enough to offset the decline in investment. In other words, the problem for the weaker Euro capitalist states is not external competitiveness, but investment— it’s a very conventional capitalist crisis.

And as I have shown in previous posts, investment under capitalism depends on restoring profitability.  Yet, with the exception of Ireland, all the peripheral EMU economies still have much lower rates of profit than their peaks before the global crisis of capitalism hit. With the exception of Italy, profitability did recover in 2012, while in the case of Ireland, profitability turned round as early as 2010.

It’s a halfway house.  Austerity is working but very slowly.  Last Monday, ECB Board member Jörg Asmussen denied that there is a “Euro Crisis”, though he admitted Europe has ‘a decade of “adjustments” ahead.  Can the euro project survive another five or more years of austerity?  Is it half full of success or half empty?

I thought this diagram from the Louis-Auguste Blanqui Facebook site was a pretty good description of the various strands of economic thought on crisis theory.  Marx is put bottom left and I would put myself there too.

It is an interesting course that this American anti-capitalist group is doing:  http://crisistheory4anticaps.wordpress.com/

Michael Heinrich is an exponent of what is known as the ‘New German Reading of Marx’, which interprets the theory of value that Marx presents in Capital as a socially specific theory of  ‘impersonal social domination’. He is a collaborator on the MEGA edition of Marx and Engel’s complete works and has published several philological studies of Capital. He has also authored a work on Marx’s theory of value, The Science of Value, which is forthcoming in the Historical Materialism book series. And recently he has published An Introduction to all Three Volumes of Capital as his first full-length work to appear in English.

I am not going to do a critique of Heinrich’s views on the theory of value, as this has been done by Guglielmo Carchedi in his book, Behind the Crisis (see chapter 2).  But I am moved to respond to a recent article of Heinrich’s in the American Monthly Review, entitled Crisis theory, the law of the tendency of the rate of profit to fall and Marx’s studies in the 1870s (monthlyreview.org-Crisis_Theory_the_Law_of_the_Tendency_of_the_Profit_Rate_to_Fall_and_Marxs_Studies_in_the_1870s__Mont).

In this article, Heinrich makes the following points: 1) Marx’s law is inconsistent because its categories are indeterminate; 2) it is empirically unproven and even unjustifiable on any measure of verification; 3) Engels badly edited Marx’s works to distort his view on the law in Capital Vol 3; 4) Marx himself in his later works of the 1870s began to have doubts about the law as the cause of crises and started to abandon it in favour of some theory that took into account credit, interest rates and the problem of realisation (similar to Keynesian theory); 5) Marx died before he could present these revisions of his crisis theory, so there is no coherent Marxist theory of crisis.

I am working with G Carchedi on a more thorough response to Heinrich’s arguments, so I shall deal with just some of these points in this post – and more briefly.  First is Heinrich’s claim that Marx’s law of the tendency of the rate of profit to fall (LTRPF) is illogical and inconsistent.  In other words, the conclusions that Marx draws do not lead logically from his assumptions.  The LTPRF, the ‘law as such’, says that the rate of profit will tend to fall over time because the organic composition of capital (the ratio of the value of constant capital to variable capital) will tend to rise faster than the rate of surplus value (the ratio of surplus value to variable capital). This flows from the basic equation of profitability, s/c+v, where c/v rises faster than s/v because Marx’s value theory argues that only labour power creates value. So if the value of constant capital (machinery, plant, raw materials etc) rises faster than the value of variable capital (the value of labour power and the only creator of value), then the rate of profit will fall, other things being equal. 

But other things are not always equal.  Marx allowed for counteracting factors to offset the impact of a rising organic composition of capital on the rate of profit.  First, a rise in the rate of exploitation could overcome the effect on the rate of profit of a rising organic composition of capital; and second, the ‘cheapening of the elements of constant capital’ (due, for instance, to technical advances lowering the costs of reproducing labour power) would tend to retard the growth of the organic composition itself.

Now Heinrich says that “Marx assumes that the fall in the rate of profit derived as a law in the long-term outweighs all counteracting factors. Yet Marx does not offer a reason for this.” And Heinrich says the ‘law as such’ is unsubstantiated because“contrary to a widespread notion, the increase in the rate of surplus value as a result of the increase in the productivity (of labour) is not one of the counteracting factors but rather one of the conditions under which the law as such is supposed to be derived, the increase in c occurring precisely in the course of the production of relative surplus value that leads to an increasing rate of surplus value”. The rate of surplus value could rise faster than the organic composition of capital and so the law as such does not prove that the rate of profit will tend to fall over time.  The law is thus ‘indeterminate’. 

Heinrich reaches this conclusion because he does not accept the method by which Marx focuses on the relation between the organic composition and the average rate of profit (ARP) to show that, if the former rises, the latter falls.  In the ‘law as such’, Marx holds the rate of surplus value constant.  But this is a common scientific procedure. First, we must establish the inverse relation between the capital composition and the ARP.  Then we can let the rate of exploitation fluctuate.  So the rate of exploitation becomes one of the counter-tendencies.

And, contrary to Heinrich’s claim, Marx does explain why the rate of surplus value cannot permanently outstrip the rise in the organic composition of capital.  If two workers can be substituted for 24 workers through mechanisation, total surplus value will eventually be less than the capital advanced, despite the sharp rise in the rate of surplus value from the increase in productivity of the two workers compared the 24 workers.  That’s because “the same influences which raise the rate of surplus value (even a lengthening of the working time is the result of a large-scale industry) tend to decrease the labour power employed by a certain capital, it follows that they also tend reduce the rate of profit”.  (Marx).

Heinrich rejects this argument:“we cannot exclude the possibility that the capital used to employ the two workers is smaller than that required to employ twenty-four” Heinrich says the numerator (surplus value) in the rate of profit formula may well fall because the variable capital that creates value has shrunk, but so will variable capital in the denominator.  Constant capital may have increased due to mechanisation, but the rate of profit only falls if the rise in constant capital is greater than the fall in variable capital in the denominator It depends on “Whichever of the two quantities changes more rapidly – and we do not know that.” 

The first thing to say here is that if constant capital rises to at least match the fall in variable capital, then the denominator will not fall.  And this will usually be the case in the process of capital accumulation. That’s because increasing the rate of surplus value can only be achieved by methods that also increase the value of the constant capital employed in relation to the number of workers engaged in the production process.  So the organic composition of capital will increase.  And it will increase faster than the rate of surplus value, the larger that rate of surplus value becomes.  So even if the rate of surplus value rises faster than constant capital to begin with, eventually it will increase more slowly as variable capital shrinks as a share of new value. If the capital composition rises, while the variable capital falls by the same amount as the constant capital rises, then the rate of surplus value must rise much more percentage-wise for the rate of profit to remain the same (or to rise). Whether the capital composition grows at an increasing or at a decreasing rate, the rate of surplus value must grow at an increasing rate to keep the rate of profit from falling.  This is the reason why, at a certain point, the counter-tendency (the rise in the rate of surplus value) cannot overcome the tendency (the increase in the rate of growth of the capital composition).

To repeat: a rising organic composition of capital will eventually produce a downward move in the rate of profit even when the rate of surplus value is rising faster to begin with.  The rate of surplus value rises over time if wages do not rise as fast as the productivity of labour.  But as the rate of surplus value rises, it rises at an ever slower rate as it approaches its limit which is the full appropriation of the product of living labour (wages plus surplus value).  So no matter how fast the rate of surplus value rises, the rate of profit will eventually fall at a rate asymptotic to the fall in the ratio of the product of living labour (wages plus surplus value) to total constant capital (fixed and circulating).  And that is because, as the organic composition of capital rises over time, it reduces the relative amount of living labour produced.  So even if surplus value moves towards one and wages move towards zero, the rate of profit will eventually fall. 

Now this is not some mathematical trick, although the argument can be spelled out more elegantly using maths. Maths is only as good as the assumptions that you begin with.  Maths can take you logically to any conclusions or outcomes that flow from the assumptions. And Marx’s law has two key assumptions: 1) that only labour (or labour power) can create value and 2) as a general rule the value of mechanisation will outstrip growth in the cost of the labour force i.e. the organic composition will rise.  Marx draws these assumptions from the reality of the capitalist process of accumulation. So, as long as we assume that the basic trend in capitalist accumulation is for the organic composition of capital to rise, then a rising rate of surplus value cannot permanently counteract any tendency for the rate of profit to fall.  If Marx’s two assumptions about the mode of capitalist production are wrong, then Marx’s law is wrong.  But starting from these two assumptions, Marx’s law is determinate. 

As for Heinrich’s argument that Marx’s law cannot be empirically proved or refuted, this is bizarre.  We can measure the rate of profit in capitalist economy using Marxist categories and test the law against its components. I and a host of other scholars have done just that for various national economies and even for the world capitalist economy (see lots of my posts).  And that includes Marx himself.  He looked for empirical verification for his law. Marx’s law, just like any other scientific law, can be refuted and empirical analysis is necessary to confirm or refute it. Does the rate of profit fall over a long period as the organic composition rises?  Does the rate of profit rise when the organic composition falls or the rate of surplus value rises more than the organic composition increases?  Does the rate of profit recover if there is sharp fall in the organic composition of capital through the destruction of value of capital?  The answers to each of these empirical questions is yes. The statistical correlations and measures of significance between Marx’s variables (organic composition and the rate of exploitation etc) and the outcome (the rate of profit) have been shown to be high and significant.

Here are some examples for the UK and the US economies that I analysed quickly for this post. Between 1963 and 1975, the UK rate of profit fell 28%, while the organic composition of capital rose 20% and the rate of surplus value fell 19%.  Between 1975 (when the UK rate of profit troughed) and 1996, the UK rate of profit rose 50%, while the organic composition of capital rose 17%. The rate of profit rose because the rate of surplus value rose 66%, faster than the rise in the organic composition of capital.  Finally, from 1996 to 2008, the rate of profit fell 11%, as the organic composition of capital rose 16% but the rate of surplus value was flat.  All these three phases are compatible with Marx’s LTRPF.  Indeed, over the whole period, 1963 to 2008, the organic composition of capital rose 63%, while the rate of surplus value rose 33%, so the rate of profit fell on a secular trend.

In the case of the US economy, the rate of profit fell 24% from 1963 to a trough in 1982, because the organic composition of capital rose 16% and the rate of surplus value fell 16%.  Then the rate of profit rose 15% to a peak in 1997, because although the organic composition of capital rose 9%, it was outstripped by a rise in the rate of surplus value of 22%.  From 1997 to 2008, the rate of profit fell 12%, because the organic composition of capital rose 22%, outstripping the rate of surplus value, up only 2%.  Again, all three phases fit Marx’s law, when the organic composition of capital rose faster than the rate of surplus value, the rate of profit fell and vice versa.  Over the 45 years to 2008, the US rate of profit fell secularly by 21% because the organic composition of capital rose 51% while the rate of surplus value rose just 5%.  The rate of profit was negatively correlated with the organic composition at -62%, while there was no significant correlation with the rise in the rate of surplus value.

Second, there are empirical studies of Marx’s law that show that it is a reasonable predictor of future events, including the recent Great Recession of 2008-9. These studies show that when the rate of profit starts to fall, a crisis or economic slump will occur some time thereafter and, even more specifically, the recession begins when the mass of profit falls as a result of the falling rate of profit.  This is predictive value is more than we can say about any studies that aim to justify empirically alternative explanations of crises based on the ‘problem of realisation’ (consumption or investment) or on high interest-rates or lack of credit, Keynesian-style.

Again, I looked at the UK economy. Since 1963 there have been four major economic recessions of slumps: 1974-5, 1980-2, 1990-2 and 2008-9.  In each recession, the rate of profit peaked and started to decline at least one year before the slump began.  And each recession was accompanied by (or coincided with) a fall in the mass of profit in successive years.  Similarly, if we look at the US economy, there were five recessions or slumps after 1963: 1974-5, 1980-2, 1990-2, 2001 and 2008-9.  In each case, the rate of profit peaked at least one year before, but on most occasions up to three years before. And on each occasion (with the exception of the very mild 2001 recession), a fall in the mass of profit coincided with the slump, with the biggest fall (over 7%) in the Great Recession. So there is a body of evidence to support the view that Marx’s law does operate in a capitalist economy and that it is the key (underlying) factor in booms and busts. 

We can derive a coherent theory of crisis from Marx’s works based on his LTRPF, his views on credit and banking (fictitious capital) and on world markets and imperialism.  Of course, there is plenty of work to be done in developing Marx’s theory of crisis in relation to modern developments and, as Marx did, we are learning more each day.  But Marx’s LTRPF remains the most robust explanation of capitalist crises and something way superior to alternative Keynesian and other mainstream economic explanations, which signally failed to explain the Great Recession.

]]> http://thenextrecession.wordpress.com/2013/05/19/michael-heinrich-marxs-law-and-crisis-theory/feed/ 83 michael roberts http://thenextrecession.wordpress.com/2013/05/17/inequality-theres-no-stopping-it/ http://thenextrecession.wordpress.com/2013/05/17/inequality-theres-no-stopping-it/#comments Fri, 17 May 2013 10:20:54 +0000 michael roberts http://thenextrecession.wordpress.com/?p=8054 ]]>

As the rich have gotten richer, people across Europe have noticed and they do not like it. A strong majority (a median of 77%) of Europeans surveyed think that the current economic system generally favours the wealthy. This includes an overwhelming 95% of the Greeks, 89% of the Spanish and 86% of the Italians. Even seven-in-ten (72%) Germans, who have fared economically better than other European, think so.  The vast majority of all Europeans (85%) surveyed overwhelmingly agree that the gap between the rich and the poor has increased in the past five years.  And they are right.