And more than half who were asked at Davos thought that inequality of income and wealth under capitalism was damaging economic growth.  But only one in five wanted any urgent action on the issue!  It seems that greed triumphs over economic logic – or should we say, class interest rules   According to a new study by the OECD, the top 10% of income earners in the world have on average nine times as much income as the bottom 10%.   You can imagine the ratio between the top 0.1% and the bottom 10%.  One of those top 0.1%, Mitt Romney, the main contender for the Republican nomination for the US presidency,was obliged to reveal how much he earned each year and what tax he paid out.  Romney is head of one of the biggest private equity companies (Bain Capital) and one of the highest earners in the US, making over $20m a year.  But he paid only 13.9% of his declared income in tax, way less than the average earner pays as a proportion.  It’s another example of how class rules under ‘free enterprise’.

Take income inequality in the UK.  It has been growing faster than in any other rich country, according to the OECD.  And is this based on reward for successful profit-making?  No.  As Andrew Haldane of the Bank of England has pointed out, when referring to the US, if bankers’ pay were linked to return on assets (ROA) a figure based on profits, it would be much closer to median household incomes than if based on return on equity (ROE), a figure based on the stock market.  Haldane calculated that, if the CEOs of the seven largest US banks had in 1989 agreed to index their salaries not to ROE, but to ROA, by 2007, their compensation would not have grown tenfold.  Instead, it would have risen (only) from $2.8 million to $3.4 million.  Rather than rising to 500 times median US household income, it would have fallen to (only) around 68 times.

Nevertheless, the world’s second richest man in wealth (a Mexican telecoms tycoon is the richest), Bill Gates of Microsoft told the Davos faithful that capitalism was a “phenomenal system” because there is no other system that has improved humanity.  He left aside the question of whether all humanity has benefited from capitalism or the role of capitalism in wars, pollution, global warming, unemployment etc.  Despite these things, Gates supported capitalism because “it has generated so much innovation – it gave me the chance I had as a young boy to start Microsoft and hire my friends.  Other systems don’t allow that to happen”.

Thus Gates promotes the myth that innovation is only possible through the incentive of profit.  Marx too recognised that the capitalist system was a mode of production that drove technology and raised the productivity of labour more than any previous mode of human organisation.  But he reckoned that a socialist, collective mode of production that melded cooperative labour to social need would be even more productive and would not generate the huge inequalities and economic destruction.

Indeed, many, if not most, key innovations that have benefited humanity in the last hundred years were more the result of the incentive of public funding for research in genetics, satellites, health and the environment, much of it done in publicly-owned institutions where profit played no role.  The internet, after all, was invented in the military sector as a form of communication.  And many other innovations like radar came through military funding by the state.    The software basics of Microsoft were already developed in academic circles.   Gates was an entrepreneur who came up with a model to capture those innovations in a profit-making operation.  Indeed, there is much better software available free as ‘open source’ material.  But Microsoft’s monopoly in marketing and links with hardware have kept such free alternatives from being used globally.  Publicly-funded research would just as well have developed such software innovations without the need for a mega corporation that has made a few people super rich by charging for what could be free to all.

Francis Fukuyama once wrote a famous book in the 1990s called The end of history, in which he argued that Western capitalist democracy was the conclusion of all human development.   Now after the Great Recession and the revelations about the extreme inequalities that exist under ‘liberal democracy’, Fukuyama obviously  thought he should do something more.  This week he wrote another article called “The Future of History” in the current issue of Foreign Affairs.  He mused that if some “obscure scribbler … in a garret somewhere (is this him?)” would “outline an ideology of the future that could provide a realistic path toward a world with healthy middle-class societies and robust democracies“… he “could not begin with a denunciation of capitalism as such, as if old-fashioned socialism were still a viable alternative. It is more the variety of capitalism that is at stake and the degree to which governments should help societies adjust to change.  The new ideology would not see markets as an end in themselves; instead, it would value them to the extent that they contributed to a flourishing middle class, not just to greater aggregate national wealth.”   

Fukuyama uses the word ‘middle-class’ as all apologists for capital now use it, as a euphemism for ‘working-class’, a word that no longer exists to describe the majority of people.  There are either the rich, the middle-class or the poor (see my post, The working  poor, 7 June 2011).  But whatever word you use, the 99% are not flourishing under modern capitalism.   Both the IMF and the World Bank have now presented reports that show that the major capitalist economies are struggling to sustain any recovery out of the Great Recession (see my post, The world economy – where are we now?, 18 January 2012). The IMF reckons the Eurozone will contract by 0.5% in 2012, with southern Europe dropping by around 2% or more.  Emerging capitalist economies will grow at a slower pace (5.4%) than the IMF thought back last September.  American capitalism looks a little better, but only with growth at 1.8% in 2012, hardly a rate that can get unemployment down or raise real incomes.  Indeed, Christian Lagarde, the head of the IMF, commented that “It is not about saving any one country or any one region. It is about saving the world from a downward economic spiral. It is about avoiding a 1930s moment … in which a combination of inaction, insularity and rigid ideology could cause a collapse of global demand.’

The figures for the UK economy were released this week.  In the last quarter of 2011, the UK economy contracted by 0.2% qoq after growing 0.6% in Q3’2011.  For the whole of 2011, real GDP rose just 0.9%, half the already paltry rise achieved in 2010.  Another quarter of contraction and the UK economy will be back in a ‘technical recession’, two consecutive quarters of decline.  This is still way short of the slump during the Great Recession of 2008-9, when British capitalism contracted 7.1%.  But it ain’t good.  While the government sector managed a small rise in Q4 of o.4%, the private sector declined, with manufacturing down 0.9%, the biggest drop in over two years.  The recovery from the trough of the Great Recession is stuttering, with only 45% of the output lost in the slump recouped so far.

The chief economist at the IMF, Oliver Blanchard, commented that the global economy is driving “with the brakes on”.  What are those brakes?  Well, one is the draconian measures of fiscal austerity being imposed on households and the public sector across Europe, but soon in the US and Japan.  This is squeezing back the only areas of growth in the economy since the Great Recession, the public sector.  But the other brake is the size and level of debt, both private and public, that capital is burdened with.  A recent report by the McKinsey Institute shows that debt relative to GDP in the major capitalist economies rocketed prior to the credit crunch in 2007.  But since then, ‘deleveraging’ that debt has made only limited progress in the major economies (MGI_Debt_and_deleveraging_Uneven_progress_to_growth_Report).

Now there are those who argue that debt does not matter and the burden of servicing it will fall when economic growth is restored to a sufficient level or, alternatively the real burden can be reduced by higher inflation.  Well, neither of these options is happening.  So the real burden of debt servicing is high.  The other argument is that one man’s debt is another’s credit.  So the size of debt does not matter because it just means that assets are up too.  But that assumes that debts are honoured and there is no default.  If there are defaults, then the reckoning comes.  We have already seen the impact of that when the housing market in the US collapsed and defaults on mortgages rocketed.  The banks found that their assets were worth way less than they thought.  Similarly, there is every possibility that the Greek government will default on its debt to the banks in Europe.  Indeed, it is currently negotiating a 60% ‘voluntary haircut’ on the value of its bonds held by those banks.  That entails huge losses to the banks.

Debt does matter and this form of deleveraging is a severely damaging to the real economy.  In effect, as debt or credit rises, the value it represents gets out of line with real value.  Its value becomes the buyer or seller’s expectation of its real value.  The value is thus fictitious, as Marx called it, which at a certain point will be exposed as such and forced to its real value through deleverage, ie liquidation, bankruptcy and, of course, job losses.

It is not debt as such that is the issue; it is what credit is used for.  Government borrowing used to invest in new industries and employment could pay for itself.  But borrowing to bail out banks that have taken losses on fictitious capital is clearly not productive, but a deduction of resources available for productive investment.  In the 13th century,at the beginning of capitalism, it was bankers bankrupting banks. In the 21st century, in modern mature capitalism, bankers are still bankrupting banks. But it is no longer just banks. In the UK, over half a million individuals and nearly 100,000 businesses have found themselves in insolvency since 2007.

What is clear is that the UK economy, along with other major capitalist economies, is suffering from a long depression similar to that experienced by Japanese capitalism after the collapse of its credit bubble in the late 1980s.  During the decade of the 1990s, Japan’s economy could only grow in real terms by 0.8% a year.  The huge private sector debt mountain was only written down very slowly to avoid a major slump.  The banks were bailed out by the taxpayer and Japanese households had to take the pain in a stagnation of real living standards.  Public sector debt rocketed to over 200% of GDP and household savings fell.

Japanese capitalism did not adopt the policies of fiscal austerity that are advocated by mainstream economics and implemented now.  So Japan avoided a significant rise in unemployment, but the economy stagnated and profitability remained in the doldrums.  Japan’s example shows that the option of fiscal austerity can be avoided, but without deleveraging to cleanse the corporate books of ‘dead capital’ and restore profitability, economic recovery will be weak.  Without profitability restored, capitalism stays in depression.

According to a new report by the International Labour Organisation (ILO), the world faces a challenge of creating 600 million jobs over the next decade.  Global unemployment is now 200 million – an increase of 27 million since the start of the crisis.  In addition, more than 400 million new jobs will be needed over the next decade to avoid a further increase in unemployment.  Even if those jobs were created, it would still leave 900 million workers living with their families below the US$2 a day poverty line, largely in developing countries. Young people are nearly three times as likely as adults to be unemployed.  Even those young people who are employed are increasingly likely to find themselves in part-time employment and often on temporary contracts.

Falling labour force participation masks an even worse global unemployment situation. In the world as a whole, there were nearly 29 million fewer people in the labour force in 2011 than expected based on pre-crisis trends, with 6.4 million fewer youth and 22.3 million fewer adults. This is equal to nearly 1 per cent of the actual global labour force in 2011, and nearly 15 per cent of the total number of unemployed in the world. If all of these potential workers were available to work and sought work, the number of unemployed would swell to over 225 million, or to a rate of 6.9 per cent, versus the actual rate of 6 per cent.  Globally, the employment-to-population ratio declined sharply during the crisis, from 61.2 per cent in 2007 to 60.2 per cent in 2010. This represents the largest such decline on record (since 1991).

Those meeting at Davos who defend capitalism as the only or best system of human social organisation have no answer to this appalling mess.

SM’s presentation was similar to one that he made at the recent HM conference ( see my post, Measuring the rate of profit, up or down?, 20 November 2011).   SM looked at the data for the US rate of profit and found that the rate of profit had not fallen but risen, although punctuated by downturns leading to economic crises in 1929, 1979 and 2007-8.  How could he reach this conclusion when nearly everybody else, including me, had found a long-term trend decline in the US rate of profit, at least in the post WW2 period?

Well, the answer is that SM redefines what he calls the ‘conventional’ rate of profit into a ‘class’ rate of profit.  SM argues that the conventional measure of profits, based on net added value less employee compensation, does not express the true class relations under modern capitalism.  Modern capitalism can no longer be defined by a class that owns the means of production but must be defined by a class that ‘controls’ investment, employment and the workplace.  SM quoted John Kay, the Oxford economist, who had just written a piece on the crisis of capitalism in the FT (see my post, Capitalism in crisis – the apologia, 13 January 2012), in which Kay argued capitalism had moved on from Marx’s day and the ownership of the means of production was no longer the criterion of class.  Instead it was “control” of production.  Now managers rule and shareholders don’t in modern capitalist companies.  So the wages of managers who “control” the workers should be added to surplus value because they are “agents of capital”.

Now the current UK prime minister David Cameron has announced today that he wants no part of what he describes as the “irresponsible capitalism” that contributed to the Great Recession.   Instead, he espoused a “popular capitalism” that should allow “everyone to share in the success of the market” and criticised an “out of control” bonus culture in the City.  He wanted to encourage firms to show “social responsibility”.  ‘Popular capitalism’ was based on two principles: “The first is a vision of social responsibility, which recognises that people are not just atomised individuals, and that companies have obligations too.  And the second is a genuinely popular capitalism, which allows everyone to share in the success of the market.”  Cameron said that “where they work properly (assumption made here, I think!), open markets and free enterprise can actually promote morality” by creating “a direct link between contribution and reward; between effort and outcome”.   So we should use this crisis of capitalism to improve markets, not undermine them, because I believe that out of this current adversity we can build a better economy, one that is truly fair and worthwhile.” 

Cameron argued that social responsibility must be just an important objective of corporations as profit maximisation.  This is a step away from the statements of that hero of British conservatism and the free market, Margaret Thatcher, who infamously said that there was “no society” and therefore no social responsibility to be adopted by companies or individuals alike.  This was the ‘pure’ ideology of capital, asserted by the likes of the American philosopher, Ayn Rand.  Rand said the individual should “exist for his own sake, neither sacrificing himself to others nor sacrificing others to himself… there was virtue in selfishness rather than altruism”.  Rand’s ideas were widely acclaimed by the likes of Alan Greenspan, head of the US Fed during the great credit boom.  Then “greed is good’ was the aphorism of the fictional Gordon Gekko in the film, Wall Street.  But now, apparently, greed, huge salaries and bonuses and asset stripping are ugly, irresponsible and above all, not popular.

Ironically, the ideological father of the ‘free market’, the Scottish enlightenment figure, Adam Smith, never espoused profit maximisation alone.  On the contrary, he thought that capitalism could only flourish on moral principles.  He reckoned that both self-interest and regard for others were natural in homo sapiens.  So he had the utopian belief that a ‘free market’ for trade would generate both a profitable and moral life for all.    In this vein, 250 years later, we get the grotesque ideology of Lloyd Blankfein , the CEO of  Goldman Sachs, the great vampire squid of finance capital, who proclaims that he and his investment bank are doing “God’s work” (see my post, Doing God’s work, 19 April 2010)!  GS is a representative of God, it seems.  Unfortunately, God seems to want to have very large salaries, bonuses and pensions, while engaging in nefarious financial tricks and trying (successfully) to evade tax.

And even after the banking crash, it’s business as usual.  Goldman Sachs had a bad 2011 doing God’s work.  Profits fell sharply to $28.8bn in 2011 and ‘employee compensation’ dropped 21% to $12.2bn from $15.4bn in 2010.  But that meant employee compensation as a share of profits actually rose from 39.3% in 2010 to 42.4% in 2011, even though the workforce was 7% smaller!  More money to fewer people after making less profit.  God’s largesse.   It’s the same story with the large UK banks that are now state-owned.  The 83% taxpayer-owned RBS is set to pay its chief executive Stephen Hester a bonus of £1m on top of his £1.2m salary, while the man who brought RBS to its knees, the former chief executive, Sir Reg Goodwin (knighted for his services to the banking community) is still set to pick up his huge pension entitlements (£700,000-plus a year).

The opposition Labour party in Britain has also taken a principled stand on these issues. After the financial collapse, Peter Mandelson, then business secretary, attacked the CEO of Barclays Bank, the American Bob Diamond as the “unacceptable face of banking” for taking a huge salary and bonus at the time of crisis.  This is the same Peter Mandelson who at the height of the neo-liberal boom back in 1998, embraced ‘greed’ as a force for good, declaring he was “intensely relaxed about people getting filthy rich as long they paid their taxes”. Well, both those relaxations have not proved to be a force for good.

The current Labour leader, Ed Miliband, has joined Cameron in condemning “irresponsible capitalism”, implying, of course, that there is a responsible version.  Being responsible for capitalists means paying their taxes and not taking such big wage packets, but apparently the rest of us also have to be responsible under responsible capitalism.  That means accepting the draconian fiscal austerity being imposed by the government on public sector jobs, wages and social benefits to meet the needs of the bankers.  The Labour leader has signed up to this policy for the life of this parliament and beyond and even proposed going further in saying that perhaps those in work should take a pay cut to keep others in jobs.  Now that really is responsible capitalism.  Miliband’s finance spokesperson Ed Balls has also backed this call for workers to be responsible for the crisis caused by the bankers by accepting pay cuts and job losses.  This is the same Ed Balls who back in 2007 said that ‘light touch regulation’ of the City of Lonfon was the way forward and any attempt to curb the free activities of the likes of Lloyd Blankfein was wrong.

So there we have it.  What we need is beautiful or pleasant (not ugly or unpleasant) capitalism; or moral (not immoral) capitalism; or godly (not ungodly) capitalism; fair (not predatory or crony) capitalism; and now responsible (not irresponsible) capitalism.  But apparently, we still need capitalism.

When you break down the growth forecasts by region, the bank expects that the advanced capitalist economies of the OECD will grow just 1.3% this year, down from a poor 1.4% in 2011 and 2.8% in 2010.  There will be a small pick-up to 1.9% in 2013.   So by the end of 2013, the advanced capitalist economies will have grown by less than 2% a year in real terms on average since 2009, a rate that cannot restore jobs or losses in living standards from the Great Recession.  Indeed, in 2012, the bank predicts that the Eurozone will fall into recession, while Japan will make a mild recovery from the damage caused by the earthquake and tsunami of 2011.  Only the US economy will achieve a higher growth rate this year (2.2%) than last year, but even so, its average growth rate of about 2.3% for the four years from 2010-13 is way lower than in previous recoveries from capitalist slumps.

Even more worrying is that growth in the developing capitalist economies, the so-called emerging markets, will drop to just 5.4% this year, down from 7.3% in 2010. That means that unemployment in the poor capitalist economies will rise because these economies need at least 6% real growth a year to absorb the growth in the workforce and the influx into the cities of rural workers.  The World Bank also expects world trade growth to slow sharply to 4.7% this year from 12.4% in 2010, forcing exporters to cut their prices by up to 4.5% on average.  At the same time, international capital flows will rise only 3.3% , one of the lowest rates on record.  All this means is that globalisation of capital has been paralysed.  Profitability for capitalist investment abroad will fall, squeezing overall profitability.

Indeed, if we look at corporate profit growth in the major capitalist economies, we can see that it has slowed sharply from the high rates achieved in the immediate recovery from the Great Recession.  US corporate profit growth has slowed to 7.5% a year rate, while corporate profits in the UK, Germany and Japan are contracting.    This suggests that investment growth will stay weak and employment will hardly recover over the next year or so.

The latest unemployment data for the UK confirm that prospect.  Unemployment has reached its highest level in 17 years and it’s going to get worse this year.  As well as the Eurozone, the UK economy is contracting again. This may not last more than a couple of quarters, but the downward pressure of fiscal austerity, weak corporate profit growth and poor export growth has pushed the UK economy down (see my post, The best laid plans of mice and George Osborne, 29 November 2011).  And the UK economy was weakened by the Great Recession more than most.  On  his blog, John Ross(http://ablog.typepad.com/keytrendsinglobalisation/2012/01/the-incredible-shrinking-uk-economy.html) shows the UK nominal GDP (measured in dollars) has fallen more than any other European economy up to 2010 except Iceland, as a contraction in real national output was combined with a very sharp fall in the value of sterling.

So the UK’s standing in the capitalist world (as measured in market dollars) dropped the most.  Indeed, as I have mentioned before in this blog (The weakest recovery since 1918, 18 October 2011), the UK’s recovery from the slump of 2008-9 has been the weakest in over 100 years.  The UK’s NIESR think-tank produces a nice graphic showing the weakness of the UK recovery since 2009.

Having said all this, we must not go too far in the direction of expecting a new slump now.  The world economy may be growing very slowly, but it is growing.  Indeed, if we look at the indicators of activity in the US,  the US economy has marginally improved from last summer.  The combined ISM index of manufacturing and services activity (my invention) shows that the US economy is well above recession levels, but not in the boom area.

The highest frequency indicator of the state of the US economy is the ECRI’s weekly leading indicator.  This is a useful forecaster of future growth by about six months or so.  It shows that the US financial conditoons have slipped from the end of 2010, but they are still well above the depths reached at the end of 2008.  So it seems to confirm the World Bank’s forecasts for US economic growth.

Capitalism is weak, but the patient is not having a relapse and going back into intensive care.

BJ reckons that AK is a “stagnationist” because he claims that the rate of profit in the US has persistently fallen without significant rises since the second world war, when it clearly has risen since the early 1980s.   This means, according to BJ, that AK shows that the countervailing tendencies to Marx’s law of profitability ‘as such’ have not operated.  The countervailing factors would be: a rising rate of surplus value, the cheapening of constant capital, the expansion into overseas markets for higher profit etc.  BJ says that this cannot be right: wages have declined as a share of national income in the US; there was a technological revolution that cheapened the cost of investment hugely; and overseas profit rose, especially when the ex-Communist states collapsed and globalisation led to several emerging capitalist economies (BJ includes China here) became a powerful force.  Indeed, BJ appears to argue that rates of profit in most capitalist countries, especially the newly emerging ones, were rising from 1982 onwards in contrast to AK’s claims.

But the “nub of the issue” for BJ is that AK measures profits as “property income” which includes all surplus value created by corporations, namely interest, taxes and transfer payments.  BJ reckons that doing so distorts the measure of the rate of profit.  He reckons you should exclude all these parts of surplus value that do not accrue to corporations, particularly taxes that end up in government hands are used to boost the ‘social wage’ of workers.  If you take out this “government income” then the US corporate profit rate, even using AK’s method of valuing fixed capital, is much less dramatic.

Is BJ right to suggest this?  Well, you can measure profit in many ways and each way may be more useful for certain purposes.  In his book, AK discusses the merits of different ways (whole economy, business sector only, corporate sector only, non-financial sector only; or all surplus-value, before tax profit only; after-tax profit only etc).  AK uses what he call ‘property income’ because he wants to show the class-based nature of the capitalist system and that means including all the surplus value created by the workforce, even if much of it is then redistributed to banks (interest); landlords (rent) or to government (taxes).  I agree that this is the best measure of profit to understand the laws of motion of capitalism.  Indeed, I have tried to measure profits in the whole economy, and not just the corporate sector as AK does, in order to capture the whole process.  But if you want to know how profit drives new productive investment in the economy, a better indicator of profit might be after-tax profit.

The after-tax profit may show a much less dramatic fall in the rate of profit – but it still shows a fall.  BJ does not show this in his review, but I worked out the after-tax profitability based on current costs (BJ’s preferred measure) and there is still a trend decline from 1950, although from 1965 at the end of the ‘golden age’ BJ’s after-tax profitability is basically trendless.

After-tax profitability is trendless from 1965 to 2009, but the reason for this is down to how the denominator in the rate of profit is measured.  Remember that the rate of profit is measured as the mass of profit divided by the value of the stock of assets (namely the value of plant, machinery and other technology plus stocks of raw materials and other components).  You can also add the cost of employees to that denominator if you wish.   As any reader of AK’s material knows, he is vehement that, to measure profitability in any meaningful sense, capital stock must be valued in historic terms.  That measures what capitalists paid for it before production starts and not what it could pay for at the end of production.

BJ denies this is right and quotes Marx to justify his view that Marx would have valued capital stock at its current cost.  BJ argues that “Kliman is wrong to assert that the mass of the fixed capital stock must always be valued at its purchase price  .. the effect of depreciation shows that technological progress reduces the value of the fixed capital stock from its purchase price to its current price.  If Kliman were correct, capitalist crises would be impossible as the wholesale devaluation of the fixed capital stock could not take place”.

But is BJ right?  Using historic costs as the measure of fixed capital does not exclude a devaluation of these costs in a crisis – usually that would happen when capital is liquidated in bankruptcies or even physically in war.  At each new period of production, the historic cost of fixed assets would incorporate that cheapening of capital or depreciation just as it does using a current cost measure.  What the historic cost measure does is provide a more realistic measure of the value that must be reproduced in any new production period to make a profit.  Capitalists measure their profit against what the value of their fixed assets cost when they start production, not on what they might cost to replace them in the future.  As AK says in his book (p112), “what makes the current cost rate of profit bogus is ….that it is not a measure of profit as a percentage of past investment”.  Using historic costs, after-tax profitability still shows a trend decline after 1965 as well as after 1947.

Now it could be argued that the depreciation of fixed assets (not the value of the stock of assets) during the production period should be measured at current cost.  That means the fixed assets are measured in historic costs, but the depreciation is measured at current cost.  AK does this measure of profitability in his book, Figure 6.3 on p111.  That figure shows that from 1982 there was a rise in the rate of profit to 1997 of 12%.  That’s much less than the current cost measure which rose 45%, while AK’s favoured measure (historic cost assets and historic cost depreciation) fell 2% between 1982 and 1997.  I ‘cherry pick’ 1997 because any reader of my blog knows well that it is my thesis that the period of 1982 to 1997 (the so-called period of neoliberalism) does show a rise in profitability, however you measure it.  And this historic cost measure confirms that.

I also measured the US rate of profit measuring fixed assets in historic costs, but with depreciation in current costs.  I find that the rate rose 12.1% from 1947-65, fell 25.8% 1965-82, rose 11.9% 1982-97 and then fell 17.4% 1997-09.   The rate of profit was in trend decline 1947 to 2009, or from 1965 if you prefer, but there was a cyclical feature to US profitability.

BJ also argues that the rate of profit measure should include wages (variable capital) in the denominator as Marx did and also inventories in the measure of constant capital – in other words, circulating capital has been excluded by AK unreasonably.  AK explains why in his book that he does that – basically data on the turnover of circulating capital are unavailable and/or unreliable.  AK does try out a measure including inventories in his book (Figure 5.3).  BJ argues that this measure shows again that the rate of profit does not fall so dramatically – but it still falls.

I have done a measure of after-tax profits that includes employee compensation and inventories, in other words, circulating capital.  I’ve done it using the current costs measure to fixed assets.  In other words, I have used all the categories that BJ wants altered or added from AK’s – and ignored all AK’s caveats about using these categories.  It still shows that there was a trend decline in the rate of profit since 1950.  Moreover, the rise in the after-tax rate of profit, using BJ’s categories, peaks in 1997 and subsequent peaks do not surpass that year.

Phew! So after all this to and froing with measures of the US rate of profit, what can we conclude?  Since 1947 did the rate of profit in the US rise or fall or do nothing?  On nearly all measures of the numerator and denominator, whether by AK, myself or all the other attempts by Marxist economists in the last decade, there was trend decline to 2009.

Was there a rise in the rate of profit from 1982 to 2009, suggesting a different era for US capitalism and suggesting that the rate of profit is not a key cause of the recessions of 1990-1, 2001 or the Great Recession?  Many say yes, presumably including BJ.  AK says no (or at least he says there was not a significant rise).  I say there was a significant rise from 1982 to 1997, but since then US profitability has been in a down phase right up to now.  Both AK and I conclude that Marx’s law of profitability is the underlying (not proximate) cause of capitalist crises and I think the empirical evidence for the US economy goes a long way to confirm that.

But I’ll come back again to interpretations of the US and other countries’ profitability data in another post.

Usually, the bonds of governments in the major capitalist economies are regarded as ultra-safe and get a triple A rating.  But now French government bonds have been downgraded to a lower level than Triple A and Italian and Spanish bonds to one grade above what is called ‘junk’, a level which means you should not buy them if you are sane.  Only Germany, the Netherlands, Finland and tiny Luxembourg are now Triple-A.

The S&P is saying that it does not think the Eurozone governments’ current policies of fiscal austerity are working to get the level of government debt down.  The S&P says that just imposing public spending cuts and raising taxes is not enough.  Indeed, it is making things worse, because it is contributing to driving many Eurozone economies into a new recession.  Indeed, if we look at the forecasts for economic growth in 2012 in the region, it makes dismal reading.  Greece is declining at a 7% rate: Italy and Spain are contracting at least at a 1% rate; while Portugal is falling faster.  Even Ireland of the three ‘bailout states’, which has been held up a success model for fiscal austerity policies, is being dragged down by the rest of region.  As a result, budget deficit targets set by the IMF and by governments are not being met in Greece, Portugal, Spain and Italy.  And without economic growth, the denominator in the debt to GDP ratio will just make the task of reducing public sector debt more difficult.  More fiscal austerity causes economic recession. Economic recession raises debt levels.  It’s a Catch 22 situation.

What is the S&P’s answer?: more policies to encourage economic growth.  And what are they?  According to the S&P, the IMF, the EU and the bankers who are now in the political leadership of government in Greece and Italy (see my post, Italy and Greece, rule by the bankers, 10 November 2011); and the right-wing leaders in Portugal, Spain and Ireland, it is ‘liberalisation’ of the economy to improve ‘competitiveness’.  By that, they mean ending workers and trade union rights to protect jobs; ending ‘restrictive practices’ in various professions that apparently stop people getting into a sector; deregulation of ‘red tape’ and the privatisation of the remaining public sector assets to boost profits.  In other words, it is more of the same ‘neo-liberal’ policies that have been put in play by successive governments across the major economies for the last 30 years and got these economies into this mess in the first place!  The IMF, the S&P, various right-wing and social democratic governments and all the rest of the mainstream parrot on that you can’t solve the debt problem by taking on more debt.  But they don’t say also that you can’t solve the problem of the lack of economic growth by more of the same neo-liberal policies that contributed to the Great Recession in 2008-9.  Moreover, if everybody is trying to raise their competitiveness and sell more exports, then nobody gets an edge!

So what is going to happen?  Well, the downgrading of the bonds also means the downgrading of the bonds of the EU’s emergency fund, the EFSF.  That means it won’t have enough money to fund anything more than the bailouts it is already committed to for Ireland, Portugal and Greece (twice).  But it didn’t have enough money guaranteed by the likes of ‘safe’ Germany and France anyway.  The new permanent funding mechanism, the ESM, is due to take over in the summer, but that’s six months away at least and even then it too won’t have enough money.

So either the likes of Greece, Portugal, Italy and Spain will have to convince bond investors that they can finance what they need to borrow over the next year, or credit will dry up and the cost of borrowing will become prohibitive.  It is increasingly becoming clear that Greece cannot do this.  Its public debt to GDP level is already 160%.  So bad is this that the EU and the IMF agreed that private sector bond investors (mainly European banks and hedge funds) would have to accept a 50% ‘haircut’ on their holdings of Greek debt to get that debt level down.  The banks and hedge funds have been very reluctant to do this without huge ‘sweeteners’ in cash payouts and new Greek bonds guaranteed by the EFSF with a high rate of interest.

Even with a deal on this, the Greek public sector debt would still be at 120% of GDP in 2020, assuming that the Greek people is prepared to put up with crippling cuts in their living standards for the rest of the decade.  Given that most historical studies show that debt levels over 90% of GDP are not sustainable without default or an economic slump, Greece’s debt maths just don’t add up, even after the sacrifices of the people.  Default on its debt is the only way out for Greece, something I have advocated in this blog on many occasions.  But it won’t be a default negotiated by a government looking to defend the living standards of the majority, but a ‘disorderly default’ that pushes Greek capitalism into a pit.  If Greece goes down, the focus will turn to Portugal and then Italy and Spain.  Bond investors will fear that they too will default and the cost of credit will rocket, pushing these economies further downwards.

Is there any way out of this?  Well, there is one entity that can provide the necessary funding to pick up the bonds of these distressed Eurozone governments: the European Central Bank (ECB).  As a central bank, the ECB can print as much money as it needs to fund anything it wants.  However, under the statutes of the ECB, it is not allowed to print money to fund government debt. That’s because there was a fear such ‘monetisation’ of government debt would eventually lead to raging inflation.  The Germans are adamantly against monetisation, partly because it was the policy of Hitler in the 1930s and it caused hyperinflation in the 1920s.  Indeed, such monetisation can only meet the debt commitments of governments by cutting the real value of that credit for the investors.  It is in effect another haircut on the value of the debt.

So the ECB has not acted. Instead it has decided to provide unlimited funds to Europe’s banks through unprecedented three-year loans on the grounds that it must support the stability of the financial sector.  And Eurozone banks are really squeezed of liquidity because no good bank wants to lend to a bad one.  The ECB loans will help keep the banks afloat but the banks won’t use this ‘free cash’ to buy government bonds, especially if the likes of the S&P now considers them highly risky.  Instead the banks are cutting back on their lending both to governments and industry in order to make their balance sheets look better to regulators and shareholders.

In the meantime, the ECB plans to sit on its hands and expect that Eurozone governments can resolve the crisis by just imposing their policies of fiscal austerity.  That is why it welcomed the decision of last December’s EU summit to sign up to a new treaty that committed governments to balance their budgets and reduce their debt levels under automatic threat of penalties and court action.  Now the ECB is worried that the final treaty terms, due to be agreed at the next EU summit at the end of this month, have been so watered down as to be useless in that task.

So we have an impasse. The ECB will not provide funds to bail out governments; and governments are refusing to introduce draconian fiscal penalties that might convince markets that the debt problem can be solved.  That’s why the S&P has acted as it has.  If this impasse continues and European economies go deeper into recession, their fiscal targets won’t be met and the risk of default will reach tipping point.  It is possible that the Eurozone leaders can engineer an ‘orderly’ default by Greece, perhaps with that country leaving the euro and yet convince markets that nobody else will follow.  But that will require more official funding.  If not, then Greece will default and perhaps be followed by others, leading to chaos and the eventual establishment of a euro just based on the stronger northern European economies.

There is an alternative to this.  Elections in Greece are planned for April. If the Greek people elected a government dedicated to negotiating a writing off of its debt with the bankers and hedge funds; and launched a programme for growth and jobs based on public sector investment, funded by proper taxation of the rich and public ownership of the major profitable industries, then there would be a possibility of turning things round in Greece.  Such a government could campaign for similar pan-European policies for growth aimed at cutting unilaterally the debt to the bankers and investing in public programmes for jobs and growth, rather than adopting neo-liberal measures of privatisation and deregulation.

According to recent polls, 56% of Greeks who were asked want radical change and 33% want a revolution.  There is a body of support for an alternative policy.  However, the leaders of the major parties in Greece are following the dictates of Greece’s banker prime minister and the demands of the dreaded troika of the EU Commission, the IMF and the ECB.  That leads to a generation of misery and probable exit from the Eurozone.  The choice is stark.

So the FT decided to kick off a campaign to defend the capitalist system with articles by various apologists.  It started with Lawrence Summers (FT,8 January). Summers, is a former employee of Goldman Sachs and was US Treasury Secretary under Clinton before he became a university professor at Harvard.  Summers tells us that disillusionment with capitalism had reached highs even in the bastion of the ‘free market’: America.  A recent poll, he tells us, found that 40% of Americans asked no longer felt positive about capitalism and there was majority against capitalism among young people, ethnic minorities and the poor.  Summers asked the question: are these negative attitudes justified?  His answer was that it depends on whether the current crisis is due to the nature of capitalism and on whether there are any solutions within the capitalist system.  For Summers, the answer to the first question is no and to the  second, yes.  Surprise!

Summers admitted that the Great Recession has created such a level of unemployment that the hope of getting everybody who has lost a job or seeks one back into work over the next five years is low as “the economies of US or Europe are likely to be constrained for a long time”.   But nevertheless, having admitted that we are in a long depression, he argues that this slump is not due to an “inherent flaw in capitalism”.  It is due to what Keynes called a “magneto problem”, like a failure of a car part that can be fixed and then the car will spring back into life.  Just give the current economic policies more time and all our concerns wil soon fade.  It is unclear what these policies are that will work: is it fiscal stimulus or austerity?; printing money and bailing out the banks or not?

Summers knows that one in six Americans aged between 25 and 54 years are out of work while the top 0.1%  have been living the good life.   And, “unlike cyclical concerns (ie the recession), there is no obvious solution at hand”.  But apparently, this is nothing to do with the failure of capitalist mode of production but due to problems “deep within the evolution of technology”.  You see, agriculture gave way to industry in the 19th century and as it did so, people lost their livelihoods in the transition and inequality rose.  Then in 20th century, industry gave way to services and the same thing happened.  Now in the 21st century, all the jobs and incomes are to be found in the sectors raising the quality of human capital, namely health, education (where Summers now plies his trade) and housing and not in goods or other low-value services.   The problem is, says Summers, is that these jobs are found mainly in the public sector and are not subject to the profit motive.  Thus “in many of these new areas, the traditional case for market capitalism is weaker”.  His conclusion is that we need to “shrink or at least slow the growth of the public sector” to allow the provision of these services for profit.  Summers implies that profitability is no longer good enough in the existing private sector and so, to save capitalism, we must destroy public services and marketise them.  It’s not a good advert for the capitalist mode.

John Plender is a regular columnist in the FT (FT, 8 January).  He is worried about the growing inequality of wealth and incomes over the last three decades in the major OECD economies.  We have documented the evidence for this in many posts in this blog (see Inequality, poverty and riots, 6 December 2011 and Inequality in Britain, 28 January 2010).  But Plender cites a new book by Stewart Lansley (The cost of inequality) that reveals the fast track rise for the super-rich and the stalled track for everyone else.  Led by the financial sector, capitalism has become “a cash cow for a global super elite”.  Plender points out that this development is nothing new – indeed capitalism has an inherent tendency to increase inequality (see my post, 1% versus 99%, 21 Octovber 2011).  But Plender is optimistic – at least in this current slump, we don’t have soup queues and degradation as we did in the 1930s.  Unemployment in the US may be near 9% officially or even 15% on fairer measures, but it is nowhere near 25% as in the Great Depression.  There’s thanks for small mercies!

What’s wrong with capitalism is not the capitalist mode of production for profit, says Plender, but the particular form it has taken with the dominance of the banking sector.  The bankers have become pirates or profiteers stealing from the decent capitalists.  Thus we hear the usual argument of the Keynesians that it is the finance sector that is the problem, not capitalism.  This idea of robber barons has been taken up opportunistically by the Republican rivals to Mitt Romney, the favourite for the US presidential nomination.  Romney is accused by the likes of Newt Gingrich and Rick Perry of being such a ‘profiteer’ because he ran one of the largest private equity companies in America.  Bain Capital was engaged in buying out companies, stripping their assets, sacking much of the workforce  and then selling them on.  Apparently 22 out of the 77 companies that Romney bought were put out of business.  And yet what Bain Capital did is nothing more than capitalism at work: the strong win and the weak fail.  It is an illusion perpetuated by Keynes, echoed by Plender, that there is a capitalism that can operate without speculation and without ‘profiteering’ and thus deliver economic growth, jobs and incomes without inequality or slumps.

Plender argues that the problem with capitalism is that shareholders have lost power to the management of companies.  This is called the “agency problem”, which means that managers enrich themselves at the expense of employees and shareholders alike and productive investment.  The answer is to restore the power of the shareholders.  Unfortunately, even if this were true, Plender does not offer us any way of doing this.  He recognises that regulating the banking system has failed and the role of ‘entrepreneurs’ as opposed to ‘get-rich quick’ managers has not been restored.  But anyway, this is a myth.  Even back in the days of 19th century capitalism, when shareholders were supposedly in full charge, economic crises were just as rife and so were banking crises.   Plender ends up with an argument in favour of capitalism that is often trotted out; reformulating Winston Churchill’s aphorism on democracy, “capitalism is the worst form of economic management except for all those other forms that have been tried”.  Or as Margaret Thatcher once said, “there is no alternative”.

John Kay (FT, 10 January) is an Oxford economist who regularly writes for the FT.  He points out that Marx never used the word ‘capitalism’ and what Marx attacked as a mode of production in the 19th century has disappeared or metamorphosed into something else.  And here we go again.  The owners of the means of production (now pension funds, insurance companies, banks etc) no longer control their companies or hire or fire people.  That’s left up to the managers now. Ownership and control are now “divorced”.  So business leaders are “no longer capitalist” in the sense that Marx described them.   So the answer to the current crisis is not to end the private ownership of the means of production, as the Marxists say, but to find ways of making control of companies more democratic.

This is pretty much the same argument as Plender.  What is wrong with capitalism is that there is not enough of it.  If the owners of capital took more control, things would be better.  Apart from the fact that there is no evidence in the past that this was the case, for what purpose would owners do this but to boost profits and in particular dividends?  How would that help growth and jobs, unless you reckon that in some way owners would invest more than the managerial elite?   And anyway, that does not explain why there a regular cycles of boom and slump, whether companies are ‘controlled’ by their shareholders or not, whether they are multinational or not, or whether executives are overpaid or not.  The private ownership of the means of production matters because, in the last analysis, the owners decide investment, employment and incomes paid to the top and the bottom.  No top manager survives if he or she cannot deliver an increased dividend (or higher share price) to the shareholders and that means making higher profits.  That is literally the bottom line.

Samuel Brittan is a long-time FT columnist and closet Keynesian (FT, 13 January).  Brittan tells us that market capitalism fails to reward on “personal merit” i.e. you don’t get paid a lot of money or have a lot of wealth under capitalism because you are clever or work hard.  However, capitalism is the best system because “it promotes personal and political freedom” as the “individual is free to use his abilities in line with his own choices”.   Really!  Tell that to the majority of people toiling away in a very modestly paid jobs in an office or shop, working long hours, with limited holidays and a poor pension. Would they agree that they have plenty of life choices as a result?  What would the poor of Africa, Asia and elsewhere make of the idea that they are free to make their own choices?

Yet Brittan tells us that, under capitalism, we can choose whether to spend our incomes in “personal pleasure or social service at home or the relief of poverty abroad” as we wish.  The individual makes the decision, not the government.  Brittan quotes the liberal apologist for capitalism of the mid-19th century, John Stuart Mill, who argued that if everything was in state hands, there would be no personal freedoms. Thus Brittan invokes the alternative to capitalism with its ‘free personal choices’ against the model of stalinism and state authoritarianism.  There  are no other models, according to him. Yes, a few cooperatives might be more democratic, but that’s it.

To end his piece, Brittan tells us that he is shocked at the role of the financial sector and how its “activities could undermine the capitalist order”.  Yet again, there is nothing wrong with the capitalist mode of production in its production sphere; it’s the monetary or financial sector that is flawed and causes instability and inequality.  As if economic cycles of boom and slump and inequality did not exist before the financial sector became a hegemonic force in modern capitalism.  So the answer, for Brittan, is international regulation of the financial sector and “the retention for quite a long time in public ownership of the banks and other institutions that have had to be rescued by government”.  Thus the financial sector must remain under the ‘authoritarian’ grip of the dreaded state sector, but not the rest of ‘productive’ capitalism.

To sum up, Marx was wrong.  Capitalism is the best of alternative systems of human organisation; and it has changed significantly since Marx criticised it.  Unfortunately, some of those changes are for the worse (managers stealing profits; the finance sector undermining stability).  Apparently, we can correct those flaws either by going back to 19th century capitalism where owners not managers ruled (Plender and Kay); or by having state control of the financial sector (Brittan); or by increasing the role of private sector in running public services for a profit (Summers).   Not very convincing, is it?

The UK’s data are not too bad and we can make a stab at coming up with an account of the movement in the UK rate of profit.   I did this in my book, The Great Recession.  But I have revisited the data.  To measure the rate of profit a la Marx, to use Gerard Dumenil’s phrase, I took the net operating surplus on the UK’s non-financial corporations (if you like, that’s profit after deducting for consumption of fixed capital) and divided it by the net stock of fixed assets.  The UK statistics measure net fixed assets in current or replacement cost terms.  As you know, if you read this blog regularly, this is controversial in Marxist economic circles, as valuing fixed assets at current costs does not really provide an accurate rate of profit (indeed Andrew Kliman would argue that it is not a rate of profit in any meaningful sense – see my post, Andrew Kliman and the failure of capitalist production, 8 December 2011).   So I have attempted to adjust the current cost measure to an historic cost measure by using the equivalent ratio of depreciation between the two measures as used in the US data.  This is the best I can do to deliver a rate of profit measure based on historic costs.

The data for all this are only available in the UK going back to 1987.  What they show is that there has been an upward trend in the UK rate of profit for non-financial corporations over the period 1987-09.  The rate of profit on both measures peaked in 2007 and then fell by 25-30% through to 2009 to reach levels not seen since the big UK slump of 1990-1.

There are data that go back further to 1950, but they rely on gross operating surpluses not net figures.  But if we use these to get an idea of what was happening to the UK rate of profit in the whole post second world war period, we find the same trends, whether measured in current cost or historic cost terms.  The overall period from 1950 to 2009 shows a downward trend in the UK rate of profit.  But that is because the rate of profit was so high in the early 1950s and declined thereafter to reach a low in the first great post-war capitalist slump of 1974-5.  That seems to have been a turning point.  UK manufacturing industry was decimated and the process of transforming the UK capitalist economy fully into services-based sectors began in earnest.  This led to a gradual improvement in the rate of profit, although the rate did not get back to the levels of early 1960s (except, on some measures, in the recent credit-fuelled boom of the early 2000s).   Also, from about the mid-1980s, the rate of profit on an historic cost basis trended pretty much flat (the green line in the graphic below).

The UK authorities publish their own measure of the rate of profit in UK non-financial companies also using the net operating surplus divided by net fixed assets (but measured at replacement costs).  They have just released the latest quartely figures, for Q3 2011.  As these data are much more up to date, even if they don’t measure the rate of profit a la Marx, they are helpful in discerning trends.  They confirm my own finding that the UK non-financial corporate rate of profit peaked at the end of 2007, then slumped 30%  to Q3’2009.  Since then there has been a 21% recovery in the rate of profit, although it is still not back to the peak of end-2007.  Interestingly, the UK authorities report that the rate of profit in the manufacturing sector has continued to fall and is now at its lowest level since records were kept in 1997.  It’s the services sector that has driven the rise in the rate of profit.

Moreover, the recovery in the mass of profits has been less than in the US.  At the end of 2010, the mass of profits in the UK was still some 6% below the peak of 2007, although up from the trough of 2009.  In 2011, there has been no real further recovery (see my post, The UK: the best laid plans of mice and George Osborne, 29 November 2011).  This could inhibit a further rise in the rate of profit in 2012.

What of the rates of profit in the other major capitalist economies?  This is not easy to calculate as the data are so mixed.  But we can get some idea of trends by using the European Commission AMECO database, something used by other Marxist economists.  Using that database and making various assumptions (most significantly measuring the rate of profit in real terms), we find that all the major capitalist economies still have rates of profit below that of 2007 and some still significantly lower (France and Italy).  Nevertheless, there has been a recovery in the rate of profit since 2009.

The AMECO database is not comparable with data from national accounts, but it shows the trend  in the rate of profit since 2009 and also in the mass of profit since then.  Only in the US did the mass of corporate profit surpass the previous peak of 2007 by the end of 2011.

The overall conclusion we can make from these data is that profitability has recovered from the trough of 2009 in the major capitalist economies, but remains below the last peak of 2007.  That suggests that capitalist investment will rise from  the depths of 2009 (and it has done) but investment (and thus real GDP growth) is likely to be lower than even the relatively poor growth rates after the mild global recession of 2001.  Capitalism in the major economies remains in a relatively weak state.

The large emerging economies of India, Brazil, South Africa and China are also slowing fast.  India is now growing at only 5% a year, down from 9% at the beginning of 2011, China is slipping towards 7% from 10%, while Brazil has dropped back under 4%.  These growth rates are still much higher than the mature capitalist economies, but given that the emerging economies need to absorb a massive influx of agricultural peasants into the cities for urban employment, the emerging economies need to grow fast in order to create sufficient jobs.

The picture for 2012 looks little better, except maybe for the US and Japan – relatively.  The OECD forecasts that the Eurozone will stagnate at best, but even the US and Japan will grow at below average trend rates.

And the overall employment of the labour force in the advanced capitalist economies is worsening, not improving, despite the limited recovery of those economies since the Great Recession.  The unemployment rate is still near 9% in the US on official figures, but in reality is much higher if those who have given up looking for work are included (25m Americans are out of work or are unable to find it).  In the UK, unemployment rises by the month, as it does in the main European economies, with the exception of Germany.   The OECD predicts that unemployment in the advanced capitalist economies will rise in 2012 to reach nearly 50m, a near 50% rise over 2007 before the Great Recession.

But the biggest sore is the level of youth unemployment.  Never since the Great Depression has the unemployment rate in the OECD economies among those aged 15-24 years been so high.  The data are truly appalling, with youth unemployment rates varying from a minimum of 20% up to 40% plus in Greece and Spain.

‘Normally’, after a generalised slump in the major capitalist economies, as in 1974-5, or 1980-2 or 1991-2, or 2001, there is an accelerated recovery in economic activity, usually well above the long-term average growth rate set by the rise in labour productivity and employment growth.  That’s because there is a large ‘reserve army of labour’ available to work at low wage rates and there is plenty of ‘spare capacity’ to put into motion in machinery and plant, with less competitors in the market place after bankruptcies and closures.

But since the trough of 2009, the major capitalist economies have generally failed to achieve even their former long-term average growth rates and some of them are still contracting.  Why is that?  What is different this time? I outlined what these differences were when reviewing the prospects for 2011 (see my post, Profits and investment in the economic recovery, 29 December 2010).

There are two differences.  The first is that the rate of profit in the largest and most important capitalist economy, the US, is still in its downward phase that, I assert, began in 1997 (see my various posts).  Since US profitability peaked in 1997, that rate has not been surpassed and the subsequent peak in  2006, even after a massive credit boom, was still lower than in 1997.  That has reduced the incentive of the productive sectors of capitalism (manufacturing, transport and services), at least in the advanced capitalist economies, to make new investments and employ more labour over the period since 1997 compared to the period 1982-97.  Indeed, it is my view that the declining trend in the US rate of profit since 1997 was the underlying or ultimate cause of the Great Recession in 2008-9 (see my book, The Great Recession and subsequent papers).

However, US corporate profits have now surpassed the level of the previous peak in 2006-7 in absolute terms, so investment has been recovering from the depths that it fell to in the trough of 2009.  Indeed, by the end of 2011, business investment was rising at a 14% annual rate and had provided one-third of the recovery in real GDP in the US economy since the Great Recession ended.  Even so, business investment growth is still weak compared to the huge rise in corporate cash flow and profits.  Most cash-rich US corporations are hoarding their money – indeed corporate investment as a ratio of corporate profits has not been as low in over 60 years.

The massive rise in US corporate profits since mid-2009 has been achieved by reducing the wage bill and other payments to the labour force (health insurance and pensions). Labour ‘compensation’ as a share of GDP has fallen to a 50-year low.  Labour incomes have been partially supported by government transfer payments (public benefits), now accounting for 12% of aggregate labour income compared with just 7% in 2007.  Households have also been running down what savings they have and borrowing more (if they can) to support necessary spending.

But even so, the recovery is very weak compared to previous cycles because the rate of profit, although it has recovered too, remains relatively low historically. In 2012, we can expect US corporate profits to rise further in nominal and even real terms, but at a slower pace than in 2011 and for the rate of profit to start to drop.  That does not mean a new economic slump in 2012.  The history of US capitalism since 1945 suggests that, as the corporate rate of profit falls, eventually the overall mass of profit will peak and fall back, but it can take a lag of some three years or so.  That suggests a new crisis of production in the US around 2014 onwards – but not yet.  Nevertheless, 2011 has confirmed that capitalism is really in a long depression similar to that of the 1880s and 1890s that is different from the ‘normal’ cycle of slump and recovery experienced in the crisis period of 1965-82 or the ‘boom’ period of so-called neo-liberalism of 1982-97.

In the other major capitalist economies, profitability also slumped in the Great Recession, but it seems that the recovery in profits has been weaker than in the US corporate sector.  In the UK, corporate profits are still not back to their peak of 2007 (see my post, UK: the best laid plans of mice and George Osborne, 29 November 2011).  The same probably applies to most of the European economies and to Japan (I shall provide some data in a future post).

The other reason for the relatively slow and weak recovery from the Great Recession (with growth rates so low that they do not increase employment in any appreciable way) is to be found in the proximate cause of the Great Recession, namely the huge rise in debt or credit (or what Marx called fictitious capital) that delayed the underlying crisis in capitalist production and stimulated the unprecedented bubble in housing and property in the US and elsewhere.  Household debt rose to record levels relative to income and the real value of property – indeed in the US it rose 50% as a share of GDP from 1997 to 2007.   In the top seven capitalist economies, total non-financial sector debt has doubled to 300% of GDP from 1980.  In the US, the debt ratio reached 250% in 2007 from 190% in 1997, now a debt burden of $120,000 for every American.

The Great Recession was a necessary process under capitalism, first to restore the rate of profit in the productive sectors by reducing the cost of real capital (plant, machinery and wages) through company collapse, unemployment and a stoppage of investment; and also to liquidate the cost of debt or fictitious capital through bankruptcy or default. Corporations have stabilised or ‘deleveraged’ (reduced) their debt, while also boosting profitability in production.  Households find deleveraging much more difficult – because reducing debt means defaulting on their mortgages and losing their homes or being unable to meet bills because they can no longer borrow.  US household debt has fallen only a little (5%), while household wealth in the form of home values and cash, bonds and stocks has plummeted.  US net household wealth to income is down 20% from its peak in 2006.

Overall debt including that run up by governments has hardly moved. That’s because when corporations and households deleverage, they stop investing or consuming as much.  That stops an economy from growing as fast.  The banking collapse forced governments to bail out the financial sector and the ensuing economic slump forced governments to support the unemployed and provide other limited social transfers.  So governments had to borrow more because tax revenues slumped in the recession. Government debt rose as the private sector deleveraged, leaving the overall debt level pretty much unchanged.  In the US, overall debt is still rising.  Since peaking in 2007, US household debt to GDP has fallen 7%, corporate debt is static, but government debt to GDP has jumped 50%.  Foreign debt has also risen, so overall debt has actually risen by 9%.

This burden of debt weighs down on the productive sector of the capitalist economy in two ways.  First, the cost of servicing the debt (paying interest and any principal repayments) increases as a share of corporate or household income, even though interest rates are at rock bottom levels – at least for those who can borrow.  But many smaller companies and households cannot because they have no assets to borrow against and banks have sharply tightened their criteria for credit. For governments, it means that the servicing of debt, i.e paying the bondholders (the banks and other rich investors) their interest, eats into available money for health, education and other government spending designed to raise the productivity of the workforce.  Over 20% of US federal government spending goes on servicing federal debt.

And second, the increase in government spending begins to encroach on the private sector’s ability to make profit, both through increased taxation and also through competing with the private sector in various areas of investment. Of course, pro-capitalist governments bend over backwards to reduce that burden through cutting corporate taxes (and shifting the burden of taxation onto households and to any spending by households).  Indeed, during the Great Recession, most large corporations paid little tax as they claimed their losses against future tax charges.  But even so, over the long term, if government debt keeps rising or does not fall, it will become an albatross around the capitalist sector, reducing its ability or willingness to invest.  That is why debt matters, contrary to the view of the Keynesians, who see government spending (through borrowing or not) as the way out of recession.

Indeed, the history of capitalism shows that if debt reaches high levels, the burden of this debt, because it cannot create new value but instead sucks away new value that is created in the productive sectors of capitalism, will cause a reduction in economic growth over the long term and as we have seen, even provoke a financial crash.  Sure, debt can be financed through new growth and new profits, or by ‘cheating’ the creditors through rising inflation, so that the real value of the debt falls.  But it will be at the cost of faster economic growth.  I shall return to this issue in more detail in a future post.

So 2012 is likely to be another year of very weak economic growth in the major capitalist economies.  But it is not likely to see a return of a big slump in capitalism.  The US capitalist economy will rise on some further increase in profits and investment, but probably by no more than 2%.  Europe will struggle to grow much more than 1% in real terms, as Germany expands by 2% but southern Europe contracts, at least in the first half of the year.  Asia will grow, but below previous long-term average rates.  Unemployment will stay near its recession highs.

More struggle to make ends meet for the majority, with average real incomes likely to decline for another year and small businesses struggling to make much profit; more misery for the unemployed and those on benefits,; but continued slow recovery for the larger capitalist businesses – that’s the prospects for 2012.

Actually, such an EU tax cannot be imposed on Britain as it has a veto over such measures.  But on many other EU decisions and policies, the European leaders have agreed to what is called a ‘qualified majority’ vote.  This would mean that one country alone could not block a new measure.  The Brits wanted to restore its veto powers and reverse the move towards qualified majority voting.  That the EU leaders were not prepared to agree to and so Britain refused to sign up to the fiscal compact.

The British ruling groups have been split on whether it is good for British capitalism to be a member of the EU ever since the UK joined what was then called the European Economic Community back in 1973.  The large corporations and big banks have generally been in favour of being in the EU, and even in joining the euro area when it looked like being a stronger currency than the UK’s pound.  Small businesses have remained resolutely sceptical or antagonistic, as they gain little from exporting to Europe, relying mainly on domestic markets.  Indeed, free trade with Europe threatened their markets at home.

Also, there is still a section of the British ruling class that hankers after its long-lost empire that British imperialism enjoyed during the 19th century.  That finally disappeared after World War Two but many remain committed to the idea that British capitalism should look to its empire and is still a ‘world power’, if a junior partner to US imperialsm, in an Anglo-Saxon axis against European and Asian interests.

That old empire idea had little support in ruling circles after the 1950s and even following slavishly the policy of the Americans also lost favour in the decades of the 1970s onwards when Europe grew fast and the continent’s share of British trade rose to nearly 50%. However, once globalisation began in the mid-1900s onwards and China and then India came onto the world market stage, Europe’s dominance of British trade and investment began to decline. Europe was not the only focus for British capitalist interests any longer.  Indeed, the European Union, with regulations and laws like a maximum 48-hour week (honoured only its failure to be applied) or a minimum weekly wage etc, began to be seen as a hindrance, increasing the price to a point that may not be worth paying for the benefits of free trade, movement of labour and capital on the Continent.

The euro crisis has brought this to a head. It now seems that the single currency area that the British decided not to join back in the 1990s is a failing project and likely to break up.  Its value for British capitalism is beginning to look very tarnished.  That’s why the mood among the ruling circles in Britain has altered.  The supposed threat to the important financial sector in an increasingly ‘rentier’ economy (and by that we mean surplus-value garnered in the form of interest, dividends and rent) was the final trigger for this move away from Europe.

What would happen if the UK decides to leave the European Union?  Would it benefit or suffer?   For British capitalism, what have been the main benefits?  Well, supposedly the EU-wide single market brings economies of scale in production, allows trade specialisation within a market and increases technological spillovers.  That should raise productivity growth and eventually real incomes and GDP.  Such is the mainstream economics argument for being in a ‘free trade’ area.  The EU estimates, however, that this has helped boost UK economic growth by no more than 0.1-0.2% a year on average.

Supposedly being a member of the euro area itself should deliver even more gains from trade, as transaction costs of exchanging currencies are removed and interest rates fall to the lowest common denominator i.e. that of Germany (UK interest rates have usually averaged more than 3% pts above the Eurozone).  However, the UK stayed outside the euro area, and when we look at growth in similar countries outside, like Norway or Switzerland, there would appear to be no particular advantage in being in the euro.  Both those countries have high standards of living and have outpaced growth in many eurozone economies since 1999.

So leaving the EU wouldn’t appear to make much difference to British capitalism.  But the key question is whether global free trade agreements like those made through the World Trade Organisation would be enough to ensure that British exports would not be damaged by losing membership of the EU free trade area. That depends on whether the UK can negotiate a free trade agreement in the European Economic Association as Switzerland and Norway have done.  Switzerland enjoys all the free trade rights of an EU member and also the right of movement of capital and labour without the obligations of keeping to EU directives and regulations (although in practice it follows many of them closely). Can the UK negotiate similar favourable terms with France and Germany after snubbing them over the fiscal integration of Europe? – it’s a moot point.

As for fiscal costs, the UK contributes a net 0.5% of its GDP towards the EU budget, which is equivalent to about 1% of EU GDP.  That’s about £7bn a year, after a special rebate that the UK negotiated back in the 1990s.  It’s not a lot of money, but it still counts.  The main spending component of the EU budget is the Common Agricultural Policy (CAP), which uses 40% of the EU budget to subsidise farmers in the EU who would not survive if they sold their produce at world market prices.  The CAP is usually condemned in Britain as wasteful and profligate.  No doubt it does benefit farmers in southern and core Europe more than others.  But leaving the EU would mean the end of CAP support for British farmers as well.  That would decimate what is left of the British farming industry.  Food imports would become an even more dominant part of UK dependence on world trade.

But perhaps the most important issue for British capitalism is not trade within the EU.  Trade with China, India and other ex-EU countries is now growing faster than trade to other EU countries, although the EU is still the biggest trade partner for the UK.  The real problem is inward investment.  The UK is a rentier economy, based on banking, commerce, professional and business services and real estate. Look at this measure of foreign assets and liabilities for different countries.  The UK is the most dependent on foreign capital flows.

What industry remains depends on high levels of inward investment by US, European and Asian corporate looking for a base to export within the EU.  If the UK were no longer seen as such a base, compared to say, France or Ireland, then it could lose a significant driver for profits and GDP growth.  That is what worries the capitalist elite the most.

Financial services contribute about 10% of annual GDP and the City of London provides specialist services and a base for financial transactions second to none.  This parasitic sector is a powerful lever within British capitalism as its manufacturing base has been allowed to die or be annexed by foreign investment.  Along with creative services (advertising, film, graphics, media etc) and a few strategic industries (pharma, aerospace and armaments), the financial sector is now the biggest contributor to British capital – a real problem when global crises start in that sector!

The City of London is vehemently opposed to any financial tax and what they want is what the British politicians will back.  Whereas up to now the City of London has been in favour of EU membership, and in some parts even euro membership, to increase the City’s role in Europe, the moves by the European leaders to tax the City just at a time when European capitalism seems to be heading into another economic slump have changed that opinion.  The City would be prepared to see the UK leave the EU if that was necessary to protect the financial sector from reduced profitability.

That is where the capitalist class is at right now. But what would be best for we 99%?  British public opinion is strongly against the euro and now probably in favour of leaving the EU.  That’s partly because of a nationalist leftover in the minds of a proportion of people.  But it’s also because the EU and the Eurozone are now seen as failing to deliver better standards of living.  Indeed, it is the contrary, if you look Greece or Ireland.  And yet, the idea that the UK, dependent as it is so much on finance rather than productive investment, is likely to deliver better standards of living for its people than Europe is an illusion

Also the electorate quite rightly see that democracy is badly missing in the European project.  Decisions in the EU are taken by government ministers in long secret meetings or by unelected bureaucrats in Brussels.  The EU parliament is a toothless assembly with no powers to sack EU commissioners or ministers.  Elections to the EU parliament are poorly participated in. Of course, the idea of the right-wing nationalists that if all powers ‘were returned’ to the UK parliament, then all would be much better is also a jingoistic illusion.  The current British parliament is imposing the toughest programme of fiscal austerity (excepting Greece) without a mandate from the people. In the last election, less than 25% of those eligible to vote supported the Conservative  government’s fiscal plan.

What is needed is democratic control of the finance sector and the strategic industries, whether it is Europe-wide or in the UK.  Leaving the EU and returning all ‘powers’ to the British capitalist elite will not improve much of anything for the average British household.