Greece: the spectre of debt

I’ve just got back from a visit to Greece to speak at a conference on my book, Marx 200.  While I was there I talked to several left activists and academics and it seems that little has improved for the Greek people since my last visit two years ago.  Back in 2010, Greece started to sink fast under the Aegean, hitting the bottom in 2015.  But since then, the economy has remained stuck in the mud and hardly moved.

In my book, The Long Depression I characterised the difference between a ‘normal’ slump in capitalist production and a depression.  The slump takes the form of a V in investment and output, down and then back up.  But a depression is more like a square root: down, then a small recovery but not to the previous level but staying trending below.  The Greek economy since the beginning of its crisis in 2010 fits that perfectly.

Greece’s economy grew 1.4% last year, marking the first time that real GDP growth has exceeded 1% since 2007.  But national output is still down 22% from its peak, “an output collapse unprecedented in the annals of modern Europe and one that rivals the severity of the Great Depression in the United States” while average real living standards (real wages, pensions, social welfare) are down 40% from the peak. Unemployment remains over 20% and youth unemployment is closer to 40%.

More than 600,000 working age Greeks have left the country seeking work.

And Greek capital remains prostrate.  Gross investment as a share of GDP is about half of its pre-crisis value.

Moreover, part of gross investment is the replacement of depreciating capital – such as replacing worn-out machines, or renovating decaying hotels. Net investment (i.e. gross investment, minus depreciation) was about 10% of GDP before the crisis, indicating that the capital stock was increasing at that time. But net investment has fallen absolutely since 2010, so the effective capital stock of the country is decaying.

Investment by the Greek private sector is constrained by low corporate profits (limiting its own funds available for investment) and weak bank balance sheet positions, as reflected by the approximately 40% share of total loans made by Greek banks that are non-performing loans (which constrains available bank lending).  Indeed, although the profitability of Greek capital has finally recovered a little, based on the liquidation of the weak and smaller businesses, huge unemployment and a reduction in real wages, the rate of profit is still below the level of 2010.

And small businesses and workers also face the huge burden of sharply increased taxes.  This is to meet the fiscal targets set by the Troika (the ECB, the IMF and the Eurogroup) imposed in a series of ‘bailout’ programmes introduced since 2010.  Greek public debt was about 80% of GDP in 2010 as the tsunami generated by the global financial crash and the Great Recession reached weak Greek capitalism.  That public debt is now around 180% of GDP.  Why?

Because the German and French banks demanded full face value repayment of the Greek government and bank bonds that they had bought before 2010 when interest yield was so high. But Greek banks could no longer service these bonds because Greek capitalists were going bust or defaulting on their bank loans.

The Greek state was also unable to bail out its banks and meet its bond obligations as the economy collapsed.  The rising cost of unemployment and welfare and falling tax revenues drove up the government budget deficit to record levels.

Austerity was now the order of the day.  Workers, as taxpayers, had to take on the burden of servicing and repaying the capitalist sector’s debt.  First, Greek conservative governments agreed with the Troika on a series of cuts in public sector jobs and services, privatisations and pension reductions to ‘stabilise’ the debt.  But despite the sacrifices, successive bailout programs failed to restore the economy. So more loans from the official agencies were conjured up, along with yet more austerity.

Then the leftist Syriza party won the election in 2015 pledged to oppose any further austerity and called for debt repudiation.  And as we know, in July 2015 the Greek people voted 60-40 to reject the Troika measures.  But within days of that referendum, the Syriza government capitulated to the pressure of capital as the ECB withdrew credit and support for Greek banks and the banks were closed.  Syriza signed up for a new program that took the debt up to its current 180% of GDP.

That program comes to an end in August this year and in the next few days the Eurogroup and the Syriza government must decide what to do next. But, as a recent report by some top mainstream economists, put it: “A spectre continues to haunt Greece and no less its creditors. Under plausible projections for growth, interest rates and fiscal performance, the government’s debt is unsustainable, as its official creditors have effectively acknowledged.”  Despite never-ending ‘austerity’ in the form of annual budget surpluses, the debt level has remained undisturbed – because as fast as the government cuts spending, the loans keep rising – but not to fund government services but to repay previous loans to the IMF and the ECB!

The Syriza government has done everything asked of it by the Troika and now, with just a maximum of a year to go before new elections, it is desperate to get the Eurogroup to agree to some ‘debt relief’ to convince voters that things are finally going to improve.  The IMF agrees that debt relief is needed, along with a less severe trajectory for further austerity.  But the Eurogroup does not.  It refuses, so far, to reduce further the interest rate on its loans (already pretty low) or extend the time scale of the maturity of the debt repayments (already well into 2030).  And it certainly does not want any actual cut in the face value of the debt outstanding (a write-off), which it sees as setting a precedent that future debtors can get away without paying eventually.

The Eurogroup claims that the Greeks should be able to service their debt and grow now that they have met the terms of latest program and so can return to ‘normal’ by borrowing on world markets.  The IMF and most economists disagree.  The IMF reckons the burden of the debt is too high for generations of Greeks to service through taxation and cuts indefinitely.  So the IMF supports a form of debt relief (extend loan maturities and lower interest rates).  But it also wants the Syriza government to pursue a neoliberal programme of: decimating trade union rights, deregulating markets and continuing privatisations.  As the recent IMF communique put it:“Despite progress on the structural front, Greece’s overarching challenge remains the liberalization of restrictions that impair its investment climate. Thus, the authorities should reconsider their plans to reverse cornerstone collective-bargaining reforms after the end of the program, and should instead focus on redoubling efforts to open up still protected product and service markets, so as to facilitate investment and create new jobs.”

The reality is that with the Greek economy unlikely to grow at more than 2% a year after inflation for the foreseeable future and the burden of financing the debt standing at 15% of GDP each year and rising, there is no way that Greek capitalism can escape of the spectre of the debtors prison.

At the end of 2015, 75% of Greek public debt was in the form of official loans. Bond holdings of European central banks amounted to an additional 6%, while some additional percentage was held by (largely state-owned) Greek banks. Even if Greece reaches an overall budget balance this year, new borrowing will be needed in the future. The current €16bn loan from the IMF needs to be repaid by 2021, and the €20bn bond holdings of the ECB and national central banks by 2026. The current stock of €3bn pre-2012 bonds, which were not restructured in 2012, also needs to be repaid. Repayment of the remaining €31bn bonds which resulted from the 2012 debt restructuring will start in 2023. The €53bn bilateral loans from euro-area partners granted in the first financial assistance programme will have to be repaid between 2020-2041, according to current schedule.

As the economists group put it starkly: “To achieve debt sustainability without face-value debt relief, ….would imply a large increase in the total exposure to Greece of the European official sector from currently expected end-2018 levels, that is, by 50% or more. It would also mean that Greece could still be paying off debts to European official creditors well into the 22nd century.”!

As the economy crawls along the bottom, the Syriza government can offer no relief to its voters from the grinding poverty and tax burdens they now suffer.  Indeed, on 1 January 2019, pensions, already cut heavily, face another cut of up to 18%.  The government calls for debt relief from the Troika but what is really needed is debt cancellation; proper taxation of the very rich who continue to avoid any severe measures; the public ownership of the banks and big businesses that rule Greek investment and a state plan for investment.   It was what was needed at the time of 2015 referendum when the Greek people voted down the Troika measures.  Three years later, nothing has really changed and, as a result, in the next election, voter turnout will plummet and Syriza is likely to lose and be replaced by a right-wing coalition.  The spectre of debt will remain.

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Rising world inequality

There is a book sweeping the popular media at the moment.  It’s called Factfulness.  It purports to argue that, contrary to the conventional wisdom, the world is becoming a better place.  Poverty is falling, life expectancy is rising; health levels are improving; people have more things and better services.  Even violence and wars are in decline.

This is a hoary old message that has been expounded in the past by billionaire Bill Gates, among others.  Indeed, he gives this new book much praise – as it justifies his view that things are getting better for the majority and with the right policies on health, education, population, climate change etc, the world can progress without any change in its mode of production and social structure.

I have taken up this optimistic message in previous posts and my latest book, Marx 200, discusses the dialectical nature of the development of capitalism – something Marx recognised as early as 1848 in the Communist Manifesto.  Yes, capitalism has taken the productive forces forward like no other mode of production before (slave society, feudalism and Asian despotism) but it also carries with it a dark side of increased exploitation, dominance of the market and machine over people’s freedom and livelihoods; and global wars and even the destruction of the planet.

In contrast to the optimistic Factfulness, the latest World Inequality Report is a sobering analysis.  Inequality between rich and poor is widening at an increasing pace.  The authors, the most highly respected experts on inequality of income and wealth globally, conclude that the number of billionaires rose by the biggest amount ever in 2017, while over half the world’s population lives on between $2 and $10 a day. The report shows the share of wealth held by the top 1% of earners in the US doubled from 10% to 20% between 1980 and 2016, while the bottom 50% fell from 20% to 13% in the same period.

Kofi Annan, former head of the United Nations, called this scale of global economic inequality “staggering and shaming”.  The authors find that income inequality has increased in nearly all world regions in recent decades, but at different speeds.  Since 1980, income inequality has increased rapidly in North America, China, India, and Russia. Inequality has grown moderately in Europe.

At the global level, inequality has risen sharply since 1980, despite strong growth in China. The poorest half of the global population has seen its income grow significantly thanks to high growth in Asia (particularly in China and India). However, because of high and rising inequality within countries, the top 1% richest individuals in the world captured twice as much growth as the bottom 50% individuals since 1980.

When it comes to inequality of wealth as opposed to income, there are some startling findings in the report.  “Economic inequality is largely driven by the unequal ownership of capital, which can be either privately or public owned. We show that since 1980, very large transfers of public to private wealth occurred in nearly all countries, whether rich or emerging. While national wealth has substantially increased, public wealth is now negative or close to zero in rich countries.”

The authors reckon that the combination of large privatizations and increasing income inequality within countries has fuelled the rise of wealth inequality, even if it has not yet returned to its extremely high early-twentieth-century level in rich countries. The rise in wealth inequality has nonetheless been very large in the United States, where the top 1% wealth share rose from 22% in 1980 to 39% in 2014. Most of that increase in inequality was due to the rise of the top 0.1% wealth owners.

In my view, inequality of wealth and income is an inherent feature of class societies, and capitalism is no exception.  But that does not mean it would rise indefinitely, a point made by the Inequality report.  That depends on dynamics of capital accumulation and policy action by governments.

Naturally, the authors (or Kofi Annan) do not propose a radical restructuring of the capitalist system ie its replacement.  Instead, they look for progressive taxation of incomes; control of tax evasion and offshore havens for wealth; ‘more education’ and public investment.  The problem with these worthy policies is that they cannot be implemented if the interests of capital are to be protected, particularly when capitalism is struggling to sustain the profitability of capital precisely by holding down trade union strength (which is an important counter to rising inequality ignored by the authors); maintaining privatisations (not public investment) and ‘deregulating’ labour markets ie by increasing the overall exploitation of labour.

Moreover, recurring crises in capitalist production are not the result of rising inequality (although some leftists argue this); and so the real faultlines of capitalism will not be resolved by reducing inequality.

What is also missing from the report is why wealth inequality has risen – it is mainly the result of the increased concentration and centralisation of productive assets in the capitalist sector.  The real wealth concentration is expressed in the fact that big capital (finance and business) controls the investment, employment and financial decisions of the world.  A dominant core of 147 firms through interlocking stakes in others together control 40% of the wealth in the global network according to the Swiss Institute of Technology. A total of 737 companies control 80% of it all. This is the inequality that matters for the functioning of capitalism – the concentrated power of capital.

Global debt crisis ahead?

Argentina is seeking International Monetary Fund aid after a series of drastic interest rate rises failed to stop the slide in the peso, pushing the country towards a financial crisis. Mauricio Macri, Argentina’s right-wing, pro-big business president, announced the approach to the IMF in a nationally televised address, saying international assistance would enable the government to “avoid a crisis like the ones we have faced before in our history”.  Asking the IMF for funds will mean more fiscal austerity and a hit to living standards.  One foreign investor said “The most effective way would be to restrict wage hikes.”

In recent weeks, the right-wing government in Argentina has been forced to hike its policy interest rate (which sets the floor for all borrowing rates) dramatically from an already high 27% in April up to 40% last week.  In January, the Argentine central bank had been experimenting with reducing its interest rate but that came to an end very quickly.  Why? For three reasons.

First, foreign investors (who are key to the success of the austerity and pro-business policies being adopted by the Macri government) were concerned that inflation was not under control and began to withdraw their capital.  Even the government admitted that inflation was heading towards 15% this year.  The Argentine peso started to slip against the dollar.

Second, the dollar started to jump in the last month because of fears of an international trade war, which always leads to investors rushing to the ‘safe haven’ of the dollar and because the US Federal Reserve is pressing on with raising its policy rate, thus making investing in other countries’ currencies less attractive to speculators.

And third, there has been a sharp rise in the crude oil price, driven by attempts to boost it from the OPEC cartel in the Middle East and growing political tensions between the US and Iran.  That means extra costs of importing energy for many economies like Argentina, Turkey or South Africa.

Those economies with large trade deficits, high inflation and apparently little control over their government spending, and above all, high levels of debt, are the most vulnerable to foreign investors taking their money away.  And that means Argentina, Turkey, South Africa and others.

The Argentine peso has now fallen to a record low (fuelling even more inflation) and its government bond prices have plummeted.  Only last year the Macri government issued a 100-year bond, confident that enthusiasm for the ending of the left-reformist Kirchner administration after 12 years would lead to a flood of foreign demand.  The value of the bond has now dropped to 83 cents to the dollar.  With the government now offering over 6% interest on that bond, compared to just under 3% for the ‘safe’ US government bond, the government is hoping to stem the outflow of capital. The central bank in Buenos Aires has blown $5bn of foreign exchange reserves in a week and enacted three shock rate rises in an attempt to halt the slide in the value of the peso.

But rising interest rates in the US threatens to put many emerging economies, both their corporate and government sectors into new difficulties.  Many have borrowed dollars to cover their deficits, to invest or to speculate, and now the cost of that debt is going to rise.  Turkey is now seriously in trouble.  The Turkish lira sank, in spite of the central bank intervention. Dollar-denominated government bond yields jumped to new post-crisis highs and the stock market extended its decline this year to 22 per cent — the worst performance of any bourse in the world outside of Venezuela. If the central bank hikes rates, as Argentina has done, it risks inflict severe damage on the local economy.

In previous posts, I have raised the risk that the hiking of interest rates by the Fed could provoke a debt crisis, particularly in the so-called emerging economies, because debt levels have reached record high levels in those economies.  Also global debt is at a record high because governments and corporations have borrowed heavily at cheap rates in order to stabilise the banking system and boost stock markets and spending.

The Washington-based Institute for International Finance (IIF) argues that, in addition to Argentina and Turkey, Ukraine and South Africa are relatively vulnerable to a sharp shift in ‘risk appetite’ by foreign investors – see graph below.

The IIF now reckons that global debt rose another $21trn in 2017 to take the total to $237trn.  Sure much of this extra debt has been incurred by China, but that economy is much more able to manage that debt.  Most of it is in local currency not dollars and China has huge foreign currency reserves in dollars ($3trn) that provide a buffer for any debt collapses.

But other ‘emerging’ economies are not so well placed.  Dollar and euro debt now tops $8trn in these countries or 15% on average of all debt.  Argentina’s debt is over 60% owned by foreigners, while Turkey has seen one of the biggest rises in FX debt since the end of the Great Recession in 2009.

As interest rates rise on this debt, servicing it has become more difficult.  According to the IIF, ‘stressed’ firms now account for more than 20% of corporate assets in Brazil, India and Turkey and those companies where profits are greater than interest costs are shrinking fast. “Even with low global rates, many non-financial corporates are running into trouble with debt service,” the IIF added.  In Argentina, interest rates for smaller companies have moved above 15%.  “Companies have burned through their working capital since then as they can’t get rational financing,” he said. “Big corporates with access to international financing are in a better position, but medium and small companies are in trouble.”, said one analyst.

The crunch will come when corporate profits in many economies begin to fall as debt servicing costs rise.  My latest estimate of global corporate profits (based on a weighted average of profits in the US, Germany, the UK, Japan and China, showed a fall in the last quarter of 2017 for the first since mid-2016.  It remains to be seen how things went in the first quarter of 2018.

Watch this space.

Marx and Keynes in Berlin

It’s 200 years today since Karl Marx was born.  And it’s just over 100 years since the great 20th century economist John Maynard Keynes wrote about Marx’s contribution.  Keynes wrote then: “how  can I accept the (Communist) doctrine which sets up as its bible above and beyond criticism, an obsolete textbook which I know not only to be scientifically erroneous but without interest or application to modern world”.  I think we can see that Keynes had a low opinion of Marx’s ideas.

And we can see why from the following comment of Keynes.  “How can I adopt a creed which, preferring the mud to the fish, exalts the boorish proletariat above the bourgeoisie and the intelligentsia, who with all their faults, are the quality of life and surely carry the seeds of all human achievement? “

Keynes stood for the preservation of capitalism and its ruling class, for all its faults, over the ‘boorish proletariat’.  This was my opening salvo in my presentation to the Marx 200 conference in Berlin, organised by the Rosa Luxemburg Institute.  My presentation went on to cover where I thought Marx and Keynes differed and why Marx’s ideas were superior as an analysis of capitalism and as a basis for political action.  In my view, it is necessary to spell out these differences because the dominant analysis of capitalism adopted in the labour movements of the major capitalist economies, especially by the leaders of those movements, is Keynesian theory and policy, not Marx.  Marx is ignored or dismissed, on the whole.

However, at the session, Professor Radhika Desai disagreed with me.  For her, the similarities (agreements) between Keynes and Marx were greater than the differences.  It’s a debate that we could have, because in my view expunging the influence of Keynes (a supporter of the ruling class) from his dominant influence in the labour movement is an essential task.  Certainly Keynes was determined to expunge the influence of Marx from the labour movement and from his economics students –as the quotes above show.

But let’s just briefly consider the similarities and differences between these two great political economists of the last 200 years.  First, the agreements as usually presented by those who see them.  Both Marx and Keynes think there is something wrong with capitalism.  Both Marx and Keynes have a falling rate of profit theory.  Both Marx and Keynes wanted the ‘socialisation of investment’.  Both Marx and Keynes wanted and expected the ‘euthanasia of the rentier’ (Keynes’ words), namely the disappearance of finance capital.

From this, it sounds that, despite Keynes’ crude dismissal of Marx, he had a lot in common with Marx’s analysis.  But that would be looking at it very superficially, in my opinion.  In my paper to the conference session, I make a lot of points about how Keynes rejected the labour theory of value (both classical and Marx’s) and stood by marginalist and utility theory.  Berlin 2018  For Keynes, there was no theory of exploitation of labour power that extracted profit from the unpaid labour of the working class.  Profit came from ‘capital’ investing.  Workers got wages for working; bankers got interest from lending and capitalists got profit from investing; each according to his or her own.  This is the standard mainstream ‘factors of production’ theory.  So from the start, Keynes denies that there is exploitation in the capitalist mode of production; the market decides and there is free and fair exchange: profit for capital, wages for workers.

Of course, if you have followed this blog and read Marx’s ideas, you would know that this is nonsense and a mere apologia for the rule of capital.  Where does profit come from in this mainstream theory?  There is no explanation.  Somebody must pay for it and yet there is free and fair exchange of commodities in the market –so there can be no profit in the market, merely an exchange of value (money).  Keynes’ and the mainstream approach really justifies the rule of capital and, for that matter, inequality of income and wealth by denying the reality that a small group controls of the means of production and forces the rest of us to work for a living.  Indeed, Keynes said that: “For my own part, I believe that there is social and psychological justification for significant inequalities of incomes and wealth, but not for such large disparities as exist today. There are valuable human activities which require the motive of money-making and the environment of private wealth-ownership for their full fruition.“

Then there is the rate of profit theory.  Those who reckon Marx and Keynes are allies in their critique of capitalism like to point out that Keynes had a theory of a falling rate of profit as well as Marx.  Indeed, they were the same.  But Keynes’ theory has little to do with Marx’s.  Keynes did see the fluctuation of the rate of profit—or the marginal efficiency of capital (MEC), to use Keynes’s terminology—as the main factor that determines the changes in the phases of industrial cycle: “Now, we have been accustomed in explaining the ‘crisis’ to lay stress on the rising tendency of the rate of interest under the influence of the increased demand for money both for trade and speculative purposes. At times this factor may certainly play an aggravating and, occasionally perhaps, an initiating part. But I suggest that a more typical, and often the predominant, explanation of the crisis is, not primarily a rise in the rate of interest, but a sudden collapse in the marginal efficiency of capital.

But Keynes’ theory of MEC is based on falling ‘marginal productivity’ due to the growing ‘abundance of capital’ and on the psychological expectations of capitalists about the future.  The rate of profit will gradually fall as more and more technology is produced; the more abundant is capital, the less it is wanted and so its marginal value falls.  This is not Marx’s theory.  His depends on the continual drive by capital to replace labour in production with machines.  Individual capitalists compete with each other to drive down costs and in so doing that pushes up the organic composition of capital by shedding labour.  As labour is the only source of profit, not capital (as in Keynes’ theory), the rate of profit tends to fall.  And it is a tendency.

For Keynes, however, the MEC will fall not because insufficient value is being extracted from labour but because capitalists ‘suddenly’ lose their appetite for investment: “that marginal efficiency of capital depends, not only on the existing abundance or scarcity of capital-goods and the current cost of production of capital-goods, but also on current expectations as to the future yield of capital-goods. In the case of durable assets it is, therefore, natural and reasonable that expectations of the future should play a dominant part in determining the scale on which new investment is deemed advisable. But, as we have seen, the basis for such expectations is very precarious. Being based on shifting and unreliable evidence, they are subject to sudden and violent changes.”

So the fall in Keynes’ rate of profit is due to individual capitalists’ subjective views about the future (‘confidence’) not because of an objective change in the conditions of accumulation of capital and production (Marx’s view).  As Paul Mattick Snr commented 50 years ago, “what are we to make of an economic theory, which after all claimed to explain some of the fundamental problems of twentieth-century capitalism, which could declare: ‘In estimating the prospects of investment, we must have regard, therefore, to the nerves and hysteria and even the digestions and reactions to the weather of those upon whose spontaneous activity it largely depends’?

The ‘sudden collapse’ in MEC has caused the slump (because interest rates are now too high compared to profitability and people ‘hoard’ money instead of investing or consuming).  But once that is overcome, we can return to the ‘normal’ capitalist mode of production.  “Economic prosperity is…dependent on a political and social atmosphere which is congenial to the average businessman.”  Unemployment, I must repeat, exists because employers have been deprived of profit. The loss of profit may be due to all sorts of causes. But, short of going over to Communism, there is no possible means of curing unemployment except by restoring to employers a proper margin of profit.”

Then there is this ‘socialisation of investment’.  Keynes called for this (a vague phrase) as a ‘final solution’ to the problem of depression in a capitalist economy.  If monetary easing (cutting interest rates and pumping in money by central banks) or fiscal stimulus (tax cuts and government spending) did not work in reviving the capitalist economy and getting capitalist to invest more, then maybe it would be necessary for the government to step in directly and take over the show. It is not clear, however, that Keynes meant any expropriation of capitalist industry and companies – something he would hate.  He probably meant that state operations and even some plan should be introduced – something similar to Roosevelt’s New Deal projects in the 1930s in the US.  And anyway, it is clear that Keynes saw ‘socialisation of investment’ as just a temporary measure to get capitalism going again (perhaps like the war economy 1940-45 eventually did).  Once the ‘technical malfunction’ (lack of demand) in the capitalist mode of production had been overcome, then we could revert to free markets and investment for profit and end ‘socialised investment’.

In one of his last articles on the capitalist economy as the Great Depression ended and the second world war began, Keynes remarked that “Our criticism of the accepted classical theory of economics has consisted not so much in finding logical flaws in its analysis as in pointing out that its tacit assumptions are seldom or never satisfied, with the result that it cannot solve the economic problems of the actual world. But if our central controls succeed in establishing an aggregate volume of output corresponding to full employment as nearly as is practicable, the classical theory comes into its own again from this point onwards.”

So once full employment is achieved, we can dispense with planning and ‘socialised investment’ and return to free markets and mainstream neoclassical economics and policy: “the result of filling in the gaps in the classical theory is not to dispose of the ‘Manchester System’ (‘free’ markets – MR), but to indicate the nature of the environment which the free play of economic forces requires if it is to realise the full potentialities of production.”

Keynes saw all his policies as designed to save capitalism from itself and to avoid the dreaded alternative of socialism.  “For the most part, I think that Capitalism, wisely managed, can probably be made more efficient for attaining economic ends than any alternative system yet in sight, but that in itself it is in many ways extremely objectionable. Our problem is to work out a social organisation which shall be as efficient as possible without offending our notions of a satisfactory way of life.”  So “the class war will find me on the side of the educated bourgeoisie.”  Fear of revolution was central to Keynes’ policies.  I don’t need to explain that Marx did not see this way at all.

As for the ‘euthanasia of the rentier’, Keynes reckoned that as capitalism expanded, it would, through more technology, create a world of abundance and leisure.  Because of that abundance, the return on lending money to invest would fall as the MEC fell.  So bankers and financiers would no longer be necessary; they could be phased out.  Well, that does not seem to be happening.  Indeed, the very people who claim that Keynes is a ‘progressive’ economist with great similarities to Marx now argue that capitalism is being distorted by ‘financialisation’ and finance capital – and that is the real enemy.  What happened to the gradual phasing out of finance in late capitalism a la Keynes?

In contrast, Marx’s theory of finance capital did not foresee a gradual removal of finance; on the contrary, he describes the increased role of credit and finance in the concentration and centralisation of capital in late capitalism.  Yes, the functions of management and investment become more separated from the shareholders in the big companies, but as I have argued in a previous post, this does not alter the essential nature of the capitalist mode of production – and certainly does not imply that coupon clippers or speculators in financial investment will gradually disappear.

So I reckon that the differences (and there are others in my paper) between Keynes and Marx are fundamental and any superficial similarities pale in comparison.  That is important because it is Keynesian ideas that dominate in the labour movement, not Marx 200 years since his birth.

More on other things at the Berlin conference in another post.

Managers rule, not capitalists?

The capitalist mode of production is coming to an end.  But it is not being replaced by socialism. Instead, there is a new mode of production, based on a managerial class that has been forming in the last hundred years.  This managerial class does not exploit the working class for surplus value and its accumulation as capital.  The managers instead use power and control which they exercise through the management of transnationals and finance.  The working class will not be the ‘gravediggers’ of capitalism, as Marx expected.  The ‘popular classes’ instead must press the managerial class to be progressive and modern; and eliminate the vestiges of the capitalist class in order to develop a new meritocratic society. Such is the thesis of a new book, Managerial Capitalism, by Gerard Dumenil and Dominique Levy (D-L), two longstanding and eminent French Marxist economists.

I participated in the launch of the book in London this week.  At the launch, Gerard Dumenil argued that capitalist class (i.e those who own the means of production) have been replaced by managers who control the big companies and take all the decisions that matter.  The capitalist class now is like the fading old feudal class in the early 19th century when Marx came on the scene.  The capitalist class took over then and the feudal class converted themselves into capitalists eventually as well.  Now the managerial class has taken over and the traditional capitalists are increasingly converting themselves into the new managerial class.

Marx was well aware to the separation of functions in capitalism between the owner of capital and the managers of corporate capital.  As he put it in Capital Vol 3: “Joint-stock companies in general (developed with the credit system) have the tendency to separate this function of managerial work more and more from the possession of capital, whether it is owned or borrowed … But since on the one hand the functioning capitalist confronts the mere owner of capital, the money capitalist, and with the development of credit this money capital itself assumes a social character, being concentrated in banks and loaned out by these, no longer by its direct proprietors; and since on the other hand the mere manager, who does not possess capital under any title, neither by loan nor in any other way, takes care of all real functions that fall to the functioning capitalist as such, there remains only the functionary, and the capitalist vanishes from the production process as someone superfluous.”(ibid. p. 512).

D-L spend some time in their book reminding us that Marx was aware of this division.  But Marx did not see this as leading to a new managerial class. The division was merely of appearance. The system had not altered: “producing surplus-value, i.e. unpaid labour, and in the most economical conditions at that, is completely forgotten in the face of the antithesis that interest accrues to the capitalist even if he does not perform any function as capitalist, but is simply the owner of capital; while profit of enterprise, on the other hand, accrues to the functioning capitalist even if he is not the owner of the capital with which he functions. In the face of the antithetical form of the two parts into which pro.t and thus surplus-value divides, it is forgotten that both are simply parts of surplus-value and that such a division can in no way change its nature, its origin and its conditions of existence” (p. 504).

D-L reckon that this view of the relation between outright capitalist families and their managers is out of date.  Managers, not capitalist families, now rule. In the book, D-L back up their thesis with empirical evidence on rising income inequality in the US and other major economies.  The top 1% of income earners in the US, who would usually be regarded as part of the capitalist class, now get 80% of their income as salaries from working as managers and top executives, not from capital income (dividends, interest and profit).  So these top people are managers, not capitalists.  This is why, D-L argue, we must revise the traditional Marxist view that top managers are merely functionaries of the capitalist class.

But the data could be interpreted in another way.  Simon Mohun has done similar empirical work (ClassStructure1918to2011wmf) on where the income of the top layers comes from.  He found that the working class – those who depend on wages alone for their living – still constitute 84% of the working population.  Managers constitute the rest, but only 2% (Qc in graph below) can actually live off rent, interest, capital gains and dividends alone.  They are the real capitalist class.  And that ratio has little changed in 100 years, even if their direct source of income has.

Moreover, this is the group that has gained most during the last 30 years of rising inequality.  The income of this capitalist class (Qc) has risen from about 9 times the average income of the working class to 22 times while managers’ incomes (Lpd in graphs) have risen from 2.5 times to 3.5 times workers income.  So rising inequality is primarily the result of increased exploitation (a rising rate of surplus value) in Marxist terms.

Yes, for the top 1%, since 1980, their ‘labour’ source of income has fluctuated around 60% of total average income (around double what it was in the 1920s). But this top 1% of managers includes investment bankers, corporate lawyers, hedge fund and private equity managers and corporate executives. Moreover, two-thirds of the top 1% are managers only in name, as an increasing proportion of these executive occupations are in so-called ‘closely held businesses’. That means they own their own businesses but pay wages to themselves as the main source of income.  This blurs the distinction between labour and non-labour income.  So the top 1-3%, according to Mohun, are still capitalists as Marx understood it, even if they pay themselves huge salaries and bonuses.

Moreover, as one study shows: “The incomes of executives, managers, financial professionals, and technology professionals who are in the top 0.1% of the income distribution are found to be very sensitive to stock market fluctuations. Most of our evidence points towards a particularly important role for financial market asset prices, shifting of income between the corporate and personal tax bases, and possibly corporate governance and entrepreneurship, in explaining the dramatic rise in top income shares.”  So their labour income depends on capitalist stock markets and financial assets.

As for managers in general, by most definitions, they constitute about 17-20% of the workforce, but it seems a jump to suggest that these constitute a new managerial class, when they can vary from Jeff Bezos at Amazon to a supervisor in Walmarts. “While managers supervise, most of them are also supervised, and splitting the distribution into working class and non-working class does not address the question of who has to sell their labour-power and who does not. That is, in no way can managers be considered a homogeneous group, because they are fundamentally divided into those who might sell their labour-power but do not have to do so, and those who do sell their labour-power because they have to do so.” Mohun.

Erik Olin Wright looked the class structure of six advanced capitalist economies and showed that ‘managers’ are a curate’s egg of a group in modern capitalism.  By breaking down the skill factors of managers, he reckoned that most managers are really workers with skills.  The working class proper was still over 70% of the labour force.  Mohun’s tax calculation method finds that the working class is more like 80-85%.

Surely, the real question is: in whose class interest do managers carry out their managerial labour? The very nature of the capitalist economy obliges the managers to manage in the interest of the 1%.  Their jobs depend on the decisions of the shareholders, the company share price and its earnings performance, however highly paid they are.

Moreover, as Marx predicted, the main feature of modern capitalism is a growing concentration and centralisation of wealth (not income).  And that means wealth held in the means of production and not just household wealth.  In 2016, the top 1% of the US population held 40% of total net wealth, while the bottom 80% held just 10%. On the basis of Wright’s class structure analysis, this suggests that the top 1% is a combination of capitalists and expert managers. The next 20% by wealth consists of the remaining capitalists and the top two thirds of the managers. The bottom 80% by wealth consists of the bottom third of the managers and the entire working class (wage workers and supervisors).

Modern capitalism has developed into a huge network of interlocking companies with cross-shareholdings.  Three systems theorists at the Swiss Federal Institute of Technology in Zurich developed a database listing 37 million companies and investors worldwide and analysed all 43,060 transnational corporations and share ownerships linking them.  They discovered that a dominant core of 147 firms through interlocking stakes in others together control 40% of the wealth in the network.  A total of 737 companies control 80% of it all.   This is the concentrated power of capital.  147 control)

At the launch, Gerard Dumenil argued that this concentration of ownership among a small number of global companies, particularly banks, actually proved D-L’s thesis.  It was managers and finance directors who ran these companies and made decisions on mergers etc while the shareholders followed like sheep.  This was proof of ‘managerial capitalism’.  Instead, I would argue that it was proof that, since Marx wrote about joint stock companies 150 years ago,the capitalist mode of production has dominated even more over investment, employment and production globally.

One of the inherent features of the capitalist mode of production is that it generates crises of production, investment and employment at regular and recurring intervals.  This is the consequence of production for profit by individual private owners on a market which runs in contradiction to the needs of society.  This is a unique feature of capitalism. Has this disappeared?  Was Marx not proved right in expecting crises to become more global and damaging?

Dumenil seemed to be suggesting that Marx was wrong about growing crises.  At the launch he claimed that the recent Great Recession had avoided a major depression because of ‘managerialism’.  The crisis had been managed.  Well, the evidence is surely to the contrary –as I have argued at length on this blog and in my book, The Long Depression.

Dumenil, however, was insistent that those of us who stick to Marx’s old analysis and predictions needed to break with dogma and recognise the new mode of production that was upon us.  The political strategy that flowed from this was for the ‘popular classes’ (working classes) to reinvigorate the class struggle – but not for the replacement of capitalism with socialism.  That was not going to happen.  But instead the aim must be to push the ruling (progressive?) managerial class to the left to introduce pro-labour reforms and isolate the small and fading capitalist class.  Well, if the working class is still 80% of the adult population in most advanced economies (let alone elsewhere) and capital is even more concentrated and centralised than ever before, why not overthrow ‘managerial capitalism’ too?

The value (price and profit) of everything

Mariana Mazzucato’s new book, The value of everything, seems to have caught the imagination of the liberal wing of mainstream economics.  It has even won the accolade of a review in the UK’s Financial Times by top mainstream Keynesian economic journalist, Martin Wolf and was launched at an event at the London School of Economics.

Mazzucato previously wrote an important book, The Entrepreneurial State, that ‘debunked’ the myth that only the capitalist sector contributes to innovation while the state sector is a burden and cost to growth.  On the contrary, Mazzucato showed that “From the internet to nanotech, most of the fundamental advances – in both basic research but also downstream commercialisation – were funded by government, with businesses moving into the game only once the returns were in clear sight. All the radical technologies behind the iPhone were government-funded: the internet, GPS, touchscreen display, and even the voice-activated Siri personal assistant.”

In that book, she continued: “Apple initially received $500,000 from the Small Business Investment Corporation, a public financing arm of the government. Likewise, Compaq and Intel received early-stage grants, not from venture capital, but via public capital through the Small Business Innovation Research program (SBIR). As venture capital has become increasingly short-termist, SBIR loans and grants have had to increase their role in early-stage seed financing the US Department of Health and the Department of Energy. Indeed, it turns out that 75 per cent of the most innovative drugs owe their funding not to pharmaceutical giants or to venture capital but to that of the National Institutes of Health (NIH). The NIH has, over the past decade, invested $600 billion in the biotech-pharma knowledge base; $32 billion in 2012 alone.”  Mazzucato showed that taxpayer enabled these tech companies to become ‘uber’ rich.

Since then, Mazzucato’s powerful arguments in favour of government investment and the role of the state have led to her becoming an adviser to the UK’s Corbyn Labour leadership and also joint winner of the Leontief prize for advancing the frontiers of economic thought, with inequality expert Branco Milanovic, formerly chief economist at the World Bank.

Now in her new book, she takes on a bigger task: trying to define who (what) creates value in our economies, a subject that has been debated by the greatest economists of capitalism from Adam Smith onwards.  “Who really creates wealth in our world? And how do we decide the value of what they do?”

Her main line in this new book is that 1) government is not recognised in national accounts as adding to value through its contribution to investment and innovation; 2) finance has sneaked into accounts as productive and value-creating when in reality it ‘extracts’ value from productive sectors and breeds speculation and short-termism etc.; and 3) there has been the growth of a monopoly sector in modern capitalism that is ‘rent-seeking’ rather than ‘value-creating’.

Mazzucato argues that “until the 1960s, finance was not widely considered a ‘productive’ part of the economy. It was viewed as important for transferring existing wealth, not creating new wealth. Indeed, economists were so convinced about the purely facilitating role of finance that they did not even include most of the services that banks performed, such as taking in deposits and giving out loans, in their calculations of how many goods and services are produced by the economy. Finance sneaked into their measurements of Gross Domestic Product (GDP) only as an ‘intermediate input’ – a service contributing to the functioning of other industries that were the real value creators.  In around 1970, however, things started to change. The national accounts – which provide a statistical picture of the size, composition and direction of an economy – began to include the financial sector in their calculations of GDP, the total value of the goods and services produced by the economy in question.”

So that today “the issue is not just the size of the financial sector, and how it has outpaced the growth of the non-financial economy (e.g. industry), but its effect on the behaviour of the rest of the economy, large parts of which have been ‘financialized’. Financial operations and the mentality they breed pervade industry, as can be seen when managers choose to spend a greater proportion of profits on share buy-backs – which in turn boost stock prices, stock options and the pay of top executives – than on investing in the long-term future of the business.”

Investment is now based on short-term returns which results in less reinvestment of profits and rising burdens of debt which, in a vicious cycle, makes industry even more driven by short-term considerations. “In modern capitalism, ‘value-extraction’ is rewarded more highly than value-creation: the productive process that drives a healthy economy and society. From companies driven solely to maximize shareholder value to astronomically high prices of medicines justified through big pharma’s ‘value pricing’, we misidentify taking with making, and have lost sight of what value really means”.

Now there are many powerful truths in Mazzucato’s theses, and they are very much the kernel of modern post-Keynesian and heterodox economics.  But as such, there are also serious weaknesses with her view of value.  To argue that government ‘creates’ value is to misunderstand the law of value under capitalism.  Under capitalism, production of commodities (things and services) are for sale to obtain profit.  Commodities must have use value (be useful to someone) but they must also have exchange value (make a sale for profit).  From that capitalist perspective, government does not create value – indeed, it can be seen as a (necessary) cost that reduces the profitability of capitalist production and accumulation.  GDP is biased as a measure of value created in an economy for that good reason. It measures much more closely exchange value not the production of all use values, which would include government investment and housework (perhaps even happiness, welfare and trust).

Sure, government creates use value (although it is often use values found in weaponry, nuclear arms, chemicals etc and security forces to protect the interests of capital). But it is not productive of value and surplus value for capital.  For capital, there is not ‘value in everything’.  For capital, it is (exchange) value, not use value that matters in the last analysis.

Mazzucato is right that the finance sector does not create value. Marxist economics says it only circulates value created by labour power in productive sectors (those sectors that increase the productivity of labour power and thus the accumulation of more capital).  Banks and the credit system contribute to reduce the costs of transferring money (taking deposits and making loans) so that businesses can borrow efficiently and keep capital circulating.

Finance and credit is necessary for capital to accumulate, but does not add value itself.  But even this contribution to the circulation of capital has increasingly taken a back seat to the risk-taking role of investing in ‘fictitious capital’ (bonds and stocks trading). In her book, Mazzucato quotes the work of Andy Haldane, now chief economist at the Bank of England.  He estimated what extra value in GDP terms the financial sector actually adds to the wider economy.

He found that in the US, the value-added of financial intermediaries was about $1.2 trillion in 2010 – equivalent to 8% of total GDP. In the UK, the value-added of finance was around 10% of GDP in 2009.  In the US, the share of finance in GDP has increased almost fourfold since the Second World War. But Haldane reckons these contributions really express high risk-taking in lending and investment by banks that eventually come a cropper when a financial or property bubble bursts, as they do periodically.  Echoing Marx’s value theory, Haldane concludes: “The act of investing capital in a risky asset is a fundamental feature of capital markets. For example, a retail investor that purchases bonds issued by a company is bearing risk, but not contributing so much as a cent to measured economic activity. Similarly, a household that decides to use all of its liquid deposits to purchase a house, instead of borrowing some money from the bank and keeping some of its deposits with the bank, is bearing liquidity risk. Neither of these acts could be said to boost overall economic activity or productivity in the economy. They re-allocate risk in the system but do not fundamentally change its size or shape.”  Indeed, an IMF paper has shown that it is not just that banks trigger regular financial collapses, the finance sector has a generally negative (parasitic?) effect on the productive sectors of the capitalist economy over time.

Finance is clearly unproductive.  But it is not just finance that is unproductive.  Real estate, commercial advertising and media and many other sectors are not ‘productive’ because the labour employed does not create new value but instead just circulates and redistributes value and surplus value created.  And it is the profitability of the productive sectors that is key to a capitalist economy, not the overall amount of use values produced.

Moreover, was there nothing wrong with capitalism before finance (and ‘financialisation’) emerged after the 1970s?  Were there no crises of overproduction and investment, no monopolies and rent-seeking before the 1970s?  Was there a wonderful productive, competitive, equal capitalist mode of production existing in the 1890s, 1930s or even in the 1960s? And why did finance suddenly emerge in the 1970s, leading to the GDP measure being altered to account for it?

Mazzucato offers no explanation of why capitalism became increasingly ‘unproductive’ and ‘rent-seeking’.  But Marx’s value theory does.  From the mid-1960s to the early 1980s, there was a sharp fall in the profitability of the productive sectors of all the major capitalist economies.  Capitalism entered the so-called neoliberal period of the destruction of the welfare state, restriction of trade unions, privatisation, globalisation – and financialisation.  Financialisation (looking to make profit from the purchase and sale of financial assets using new forms of financial derivatives) became a major counteracting factor to this fall in profitability.  For capital, it was not a matter of ‘choice’ but necessity to reduce the cost of government and raise profitability, partly through financial speculation and monopoly rent-seeking.

In a Bloomberg TV interview on her new book, Mazzucato was asked by the presenter how she could persuade chief executives of large multinationals to invest productively and innovate rather than buy back their shares to boost their share prices and pay higher dividends to shareholders (ie financial speculation).  Mazzucato replied that it was a matter of choice: some companies were investing more productively and others were not.  So apparently, we have to make these companies see the error of their ways.

Mazzucato argues that government should be “tilting the field in the favour of innovators and true value creators.”  But is that really possible where capital (and monopolies) dominate?  Mainstream economics remains highly unpersuaded that government can add value for capitalism.  In his review of the book, Martin Wolf in the FT commented that: “What I would have liked to see far more of, however, is a probing investigation of when and how governments add value. …How can one ensure that governments do add value rather than merely extract and waste it? In her enthusiasm for the potential role of the state, the author significantly underplays the significant dangers of governmental incompetence and corruption.”

In the launch of her book at the London School of Economics, Mazzucato presented the example of Brazil, where during the global financial crisis under the Lula government, the state banks were directed to invest in projects that would help boost employment and technology even if they were not profitable (at least not in the medium term).  But what happened?  Big business and finance (domestic and international) bitterly attacked this policy and its implementation through the Brazilian state development bank as reducing the profits of the finance sector.  When Lula was gone, the policy was reversed.

Mariana Mazzucato does not call for the replacement of capitalism or even the rent-seeking monopolies but “how we might reform it” in order “to replace the current parasitic system with a type of capitalism that is more sustainable, more symbiotic – that works for us all.”  In her TV interview she talked of a “partnership between government, multi-nationals and a ‘third sector’ (presumably social non-profit coops etc).” She made no mention of bringing the ‘parasitic’ finance sector into public ownership, let alone the ‘short-termist’, ‘rent-seeking’ monopolies.  Instead, she seeks a ‘partnership’ of government, finance and monopolies.

It seems to me a utopian illusion to imagine that monopolies can be persuaded to stop being ‘short termist’ and invest for higher productivity and innovation for the long term, if profitability in such productive pursuits seems to them too low compared to finance or real estate (if profitability was higher in productive investment, they would do it anyway).  Surely, a left government must instead look to replace big capital with democratically-run state enterprises in the ‘commanding heights’ of an economy.  This would lay the proper foundation for innovation and enterprise and thus put use-value before value, price and profit.

Marx 200: Carney, Bowles and Varoufakis

As the 200^th anniversary of Marx’s birth gets closer, a host of conferences, articles and books on the legacy of Marx and his relevance today are emerging – including my own contribution.  The most interesting was a speech last week by the governor of the Bank of England, Mark Carney in his homeland of Canada.

In his speech at a ‘Growth Summit’ to the Public Policy Forum in Toronto, Carney set out to be provocative and headline catching with a statement that Marxism could once again become a prominent political force in the West.  “The benefits, from a worker’s perspective, from the first industrial revolution, which began in the latter half of the 18th century, were not felt fully in productivity and wages until the latter half of the 19th century. If you substitute platforms for textile mills, machine learning for steam engines, Twitter for the telegraph, you have exactly the same dynamics as existed 150 years ago (actually 170 years ago –MR )– when Karl Marx was scribbling the Communist Manifesto.”

Just as the first industrial revolution in early 19th century Britain led to the collapse of traditional jobs and held down real wages for a generation in the first two decades of the 19th century, so in this current Long Depression globally, with the advent of robots and AI, a new industrial revolution threatens to destroy human labour and livelihoods.

In 1845, Engels wrote, The condition of the working class in England, which exposed the misery and poverty engendered by the replacement of manual skills with machines and kept real incomes stagnant.  Now, says Carney, Marxism might again be relevant with a new burst of ‘capital bias’ (ie a rise in machines relative to human labour power).

Automation may not just destroy millions of jobs.  For all except a privileged minority of high tech workers, the collapse in the demand for labour could hold down living standards for decades.

In such a climate, “Marx and Engels may again become relevant”, said Carney.

Without realising it, Carney was reiterating Marx’s general law of capitalist accumulation outlined in Volume One of Capital (Chapter 25), written some 160 years ago, that capitalist accumulation will expand and promote machines to replace human labour but this will not lead automatically to higher living standards, less toil and more freedom for the individual, but mostly to downward pressure on real incomes, not only of those losing their jobs to machines, but in general.  It would also lead to more not less toil for those with jobs, while leaving millions in a state of ‘precarious labour’ – a reserve army for capital to exploit or dispense with as the cycle of accumulation demands. (see Capital Volume One p782-3 and my new book, pp32-37).

Carney’s view of the robot revolution leading to massive job losses has much empirical backing.  However, as Marx pointed out in Capital, it is not a one-sided collapse in jobs.  Technology also creates new jobs and raises the productivity of labour and, depending on the balance of forces in the class struggle between capital and labour over the value created, real incomes can also rise.  This happens in periods when profitability is improving and more labour comes into the market.

Of course, this ‘happy’ side of capitalist accumulation is the one that mainstream economics likes to promote, contrary to Carney’s worries.  For example, Paul Ormerod, commented on Carney’s view of the relevance of Marx. You see, Marx “was completely wrong on a fundamental issue.  Marx thought, correctly, that the build up of capital and the advance of technology would create long term growth in the economy.  However, he believed that the capitalist class would expropriate all the gains.  Wages would remain close to subsistence levels – the “immiseration of the working class” as he called it.”

In fact, says Ormerod, “living standards have boomed for everyone in the West since the middle of the 19th century.  Leisure hours have increased dramatically and, far from being sent up chimneys at the age of three, young people today do not enter the labour force until at least 18.”  Apparently prosperity is the order of the day: “every single instance of an economy which enters into the sustained economic growth of the market-oriented capitalist economies, from early 19th century England to late 20th century China.  Once this is over, the fruits of growth become widely shared.”

There are several points here that I have taken up in many previous posts.  First, Marx did not hold to a theory of ‘subsistence wage levels’.  As for the argument that capitalism has taken everybody out of poverty and reduced toil and misery, it is full of holes.  Note that Ormerod talks of “everyone in the West”, thus giving the lie to billions outside ‘the West’ that remain in poverty by any definitions.  See my detailed posts on the level of poverty globally here.

And contrary to Ormerod’s view (as that of Keynes before him), the rise of technology under capitalism has not led to much reduction in toil.  I have shown that most people in “the West” continue to have working lives (in hours per year) much as they did in 1880s or the 1930s; they may work less hours per day on average and get Saturdays and Sundays off (for some), but they still put in over 1800 hours a year and work longer overall (50 years or so).

Ormerod also argues that inequality of incomes and wealth is not getting worse and labour’s share in national income has stopped falling, contrary to Carney.  Well, there is a wealth of evidence that wealth and income inequality is not improving, both globally between nations and within national economies.

Ormerod is right, however, to question Carney’s one-sided model of capitalism.  Labour’s share of total value created can rise and fall in different periods depending on the balance of class forces and impact of accumulation; and Carney’s own graph shows that real wages did not just stagnate in the first industrial revolution or now, but also in the 1850s and 1860s; and in the first quarter of the 20^th century.  So there is more to this issue than technology.  The current stagnation in real wages in the UK and the US is more a product of the Long Depression of the last ten years than robots or AI, which have hardly started to have an impact yet (labour productivity growth is low or slowing in most economies).  The profitability of capital itself and the strength of labour in the battle over value created are more relevant.

Unfortunately it is not just mainstream economists who either distort or dismiss Marx’s economic theory.  In an article for Vox, eminent and longstanding Marxist economist Sam Bowles writes on the legacy of Marx’s economic ideas in order to dismiss them.  He agrees with Keynes’ view that Capital is “an obsolete economic textbook [that is] not only scientifically erroneous but without interest or application to the modern world” (Keynes 1925). And he agrees with 1960s mainstream economic guru, Paul Samuelson’s judgement that “From the viewpoint of pure economic theory, Karl Marx can be regarded as a minor post-Ricardian…and who in turn was “the most overrated of economists” (Samuelson 1962).

Bowles considers that Marx’s labour theory of value was “pioneering, but inconsistent and outdated”. According to Bowles, Marx’s labour theory of value as a representation of a general system of exchange and his theory of the tendency of the profit rate to fall “did not resolve the outstanding theoretical problems of his day, but rather anticipated problems that would later be addressed mathematically.”  Bowles reckons that mainstream economics, in particular neoclassical marginalism, went on to sort out Marx’s failures by replacing his value theory.  And this has also led to dropping the idea of social ownership of the means of production to replace the capitalist mode. “Modern public economics, mechanism design and public choice theory has also challenged the notion – common among many latter-day Marxists, though not originating with Marx himself – that economic governance without private property and markets could be a viable system of economic governance.”

Apparently, all that is left of Marx’s legacy is what Bowles calls “despotism in the workplace”, the exploitive nature of capitalist production; which is not due to the exploitation of labour power for surplus value; but the ‘power structure’ where moguls and managers rule the roost over the worker serfs.  Thus we are reduced to a political theory (and even that is not much in common with Marx’s political theory for that matter) as Marx’s economic ideas are ‘outdated’ or false.

Well, all Bowles arguments (and those of Keynes and Samuelson) have been taken up by me in various posts in the past, and more thoroughly in my new book, Marx 200.  In short, we can show that Marx’s value theory is logical, consistent and backed empirically.  It even provides a compelling explanation of relative price movements in capitalism, though that is not its main aim.  Its main aim is to show the particular form that the capitalist mode of production takes in exploiting human labour for profit;  and why that system of exploitation has inherent contradictions that cannot be resolved without its abolition.

Moreover, the Marxist critique of capitalism is based on economics and leads to revolutionary political action; so it is not (just) a moral critique of ‘despotism’ in the workplace or anywhere else.  The market economy (capitalism) cannot deliver the full development of human potential because despotism in the workplace is a product of the exploitation of labour by capital.

Yanis Varoufakis recognises this in his long article on Marx and Engels’ Manifesto of the Communist Party to promote his new introduction to that masterpiece.  Varoufakis writes a colourful, if over flowery, article emphasising one great message of Marx and Engels’ CM: that capitalism is the first mode of production that has become global.  Varoufakis sees this process as only being completed with the fall of the Soviet Union and other ‘communist’ states that blocked globalisation until then. That is probably an exaggeration.  Capitalism from the start aimed to expand globally (as Marx and Engels explain in the CM).  After the end of the depression of the 1870 and 1880s, there was startling expansion of capital worldwide, now named imperialism, based on flows of capital and trade.

While correctly recognising the powerful (happy?) effect of capitalism globally, Varoufakis also emphasises the dark side: of alienation, exploitation, imperialism and despotism: “While celebrating how globalisation has shifted billions from abject poverty to relative poverty, venerable western newspapers, Hollywood personalities, Silicon Valley entrepreneurs, bishops and even multibillionaire financiers all lament some of its less desirable ramifications: unbearable inequality, brazen greed, climate change, and the hijacking of our parliamentary democracies by bankers and the ultra-rich.”

And, contrary to the conventional mainstream view, Varoufakis argues that Marx and Engels were right that class struggle under capitalism can be boiled down to a battle between capital and labour.  “Society as a whole,” it argues, “is more and more splitting up into two great hostile camps, into two great classes directly facing each other.” As production is mechanised, and the profit margin of the machine-owners becomes our civilisation’s driving motive, society splits between non-working shareholders and non-owner wage-workers. As for the middle class, it is the dinosaur in the room, set for extinction.”

And he sees that capitalism must be replaced, not modified or corrected for its faults.  “It is our duty to tear away at the old notion of privately owned means of production and force a metamorphosis, which must involve the social ownership of machinery, land and resources.   Only by abolishing private ownership of the instruments of mass production and replacing it with a new type of common ownership that works in sync with new technologies, will we lessen inequality and find collective happiness.”

Varoufakis recognises the ‘irrationality’ of capitalism as a system for human progress and freedom, but this self-confessed ‘erratic Marxist’ does not present the material explanation for this irrationality, apart from growing inequality and inability to use new technology to benefit all.  Capitalism also suffers from regular and recurrent crises of production that destroy and waste value created by human labour.  These crises are of ‘overproduction’, unique to capitalism and regularly throw human development backwards.  This aspect of capitalism’s irrationality is missing from Varoufakis’ article, although it was expressed vividly by Marx and Engels in the CM.  See the striking passage in CM where Marx and Engels start by explaining “the need of a constantly expanding market for its products chases the bourgeoisie over the entire surface of the globe” and finishes with “paving the way for more extensive and more destructive crises and diminishing the means whereby crises are prevented”.

And a theory of crises is important.  People can live with rising inequality, with relative poverty even, even wars etc, as long as, for them, things improve gradually each year without break.  But gradual improvement in living standards is not possible because capitalism has regular and recurrent slumps in production, investment and employment built into its system, which can last for a generation in depressions – as Carney’s graphs show.  That is a fundamental character of capitalism’s irrationality.

Marx’s economic theories are often trashed or disputed – fair enough in a debate for truth.  But when each critical argument is analysed, it can be found to be weak, in my view.  Marx’s laws of motion of capitalism: the law of value; the law of accumulation and the law of profitability still provide the best and most compelling explanation of capitalism and its inherent contradictions.  And I am leaving out the great contribution that Marx and Engels made to the understanding of human historical development – the materialist conception and the history of class struggle – that lie at the basis of human actions. “Men make their own history, but they do not make it as they please; they do not make it under self-selected circumstances, but under circumstances existing already, given and transmitted from the past.”

As the Manifesto says (and Varoufakis echoes in his article), capitalism has taken the productive forces of human labour to unprecedented heights, but dialectically it has also brought new depths of depravity, exploitation and wars on a global scale.  Marx’s legacy is to show why that is and why capitalism cannot last if human society is to go forward to the “free development of each” as the “condition for the free development of all”.  Marx’s ideas remain even more relevant in the 21st century than the 19th.  But understanding is not enough.  As the epitaph on Marx’s tomb in Highgate cemetery, London inscribes from Marx’s Theses on Feuerbach: “The philosophers have only interpreted the world, in various ways; the point is to change it”.

Global economy peaked?

Optimism for global economic growth remains.  But the acceleration in 2017 from the low growth rates experienced in 2015-6 now seems to have paused in the first quarter of 2018. To greet the semi-annual meeting of the IMF and the World Bank in Washington to discuss latest economic developments, Maurice Obstfeld, the IMF’s chief economist, stated that “the world economy continues to show broad-based momentum.”   But “against that positive backdrop, the prospect of a similarly broad-based conflict over trade presents a jarring picture.”

The IMF hiked its forecast for global real GDP growth to 3.9% for this year and in 2019.  This improvement from the poor levels of 2015 and 2016 is based on rising investment and a recovery in world trade (which now seems to be threatened).  The major economies of world capitalism are doing better but the idiocies of protectionism in trade by the likes of Donald Trump are threatening that recovery.  That seems to be the main worry.

But Obstfeld is worried about the high levels of global debt, in households, corporations and governments.  With interest rates set to rise, as the US Fed and possibly other major central banks start to raise their policy rates, the cost of servicing record-high debt will rise.  That threatens further investment in productive (value-creating) assets and also instability in financial markets.

There has already been a ‘correction’ in world stock markets of about 13% since the beginning of the year as financial speculators begin to worry about an international trade war and rising costs of debt.  And that is despite the huge handouts in tax cuts for US corporations introduced by Trump. Those tax cuts have sharply increased (temporarily) the profits of the largest US corporations, especially the banks.  But that extra money (paid for by further cuts in US federal public services and a big increase in government borrowing) is not going mainly into extra productive investment.  It is being used to buy back corporate shares to boost the share price of companies and into extra dividend payments to shareholders.

S&P 500 companies have already announced about $167bn of new buyback authorisations this year, and analysts at JPMorgan predict that trend will accelerate this quarter as boardrooms digest the full scale of the tax cuts passed in December. Overall, US companies will buy back about $800bn of their stock this year, up from $525bn in 2017, and boost dividend payouts by about 10 per cent to a record $500bn.  While US companies will lift their spending on investments, research and development by 11 per cent to more than $1tn this year, shareholder returns in the form of buybacks and dividends will grow by 21.6 per cent to nearly $1.2tn. The buyback spree will also lift the amount of profit companies make per share. S&P 500 companies are expected to report earnings growth of 17.1 per cent in the first quarter, which would the highest growth since the start of 2011, according to FactSet. That is up sharply from the rate of 11.3 per cent that was projected at the start of the year.

In contrast, US business investment in new plant, machinery and technology, while rising in gross amounts, is barely keeping pace with depreciation (wearing out) of existing fixed assets. Despite the recent acceleration in investment, net business investment has not re-attained levels achieved in 2014Q3 (let alone on the eve of the last recession).

I have argued before that business investment, not just in the US, but in most major economies remains low relative to before the Great Recession, ten years ago, for two main reasons: relatively low profitability and record high levels of debt.  In a previous post, using data from the EU’s AMECO database, I showed that the rate of profit in most major economies remains below that of 2007 and even 1999, at least up to 2016.

There was a small recovery in profitability in Europe in 2017, but a further fall in the US, despite rising total profits.

In its latest reports, the IMF has pointed out that global debt has now reached record highs as central banks pumped credit into banks and financial institutions and households and corporations borrowed more at very low interest rates to either speculate in stock and bond markets or real estate.  Governments also continued to rack up higher levels of public debt to fund bailouts to the financial institutions and cover rising budget deficits created by tax cuts and extra defence spending.

According to the IMF, global debt hit a new record high of $164 trillion in 2016, the equivalent of 225% of global GDP. Both private and public debt surged over the past decade. Of the $164 trillion, 63% is non-financial private sector debt (owed by households in mortgages and companies in bonds and loans), and 37% is public sector debt. Advanced economies have the most global debt. But, in the last ten years, emerging market economies have been responsible for most of the increase.

Debt-to-GDP ratios in advanced economies are at levels not seen since World War II. Public debt ratios have been increasing persistently over the past 50 years. In emerging market economies, public debt is at levels seen only during the 1980s’ debt crisis.

The US is still the largest and most important capitalist economy in the world.  But it is steadily losing out relatively to the rising economic powers of Asia, particularly China.  That is the driving force behind Trump’s protectionist crusade on trade and his huge cuts in corporate tax for American business.  The tax cuts will lead to a significant rise in US federal debt over the coming years and that means higher interest costs that will suck up funding that could have been used to maintain public services and expand badly needed infrastructure.  The IMF reckons that the annual US government deficit will go above $1trn in the next three years to reach 5% of GDP, taking the government debt level to 117% of US GDP then.  According to the IMF, the US will be the only economy with a rising government debt ratio to GDP in that period.

Indeed, US imperialism continues to reveal its long-term vulnerability.  The US now has a net investment liability with other economies in the world to the tune of 9.8% of world GDP.  This compares with countries which are net creditors: Japan (3.9%), Northern Europe (6.4%) and China (2.3%).  This US net liability measures the stock of investment and the amount of credit made by other countries into the US after deducting US investment and loans abroad.  US imperialism is extracting more net value from other economies to fund its growth, but at the expense of becoming more dependent on ‘tribute’ rather than trade.  The IMF forecasts that the US net liability to foreigners will reach 50% of its GDP by 2023, or 10.7% of world GDP.  That compares with the combined liability of the exploited peripheral economies of the world of 7.8%.  US imperialism gets away this because it is still the world’s largest economy, with the biggest financial sector, with the dollar as the world reserve currency and is the policeman of the world for imperialism.

As for the so-called emerging capitalist economies, the IMF points out that while foreign capital flows have remained robust in recent years, as the ‘global liquidity tide’ recedes with central banks raising interest rates, flows to emerging markets could decline by as much as $60 billion a year, equal to about a quarter of annual totals in 2010-17. “In such a scenario, less creditworthy borrowers may experience relatively larger outflows. Low-income countries may be affected, because more than 40 percent of them are at a high risk of debt distress.”

Falling profitability and rising debt (fictitious capital, to use Marx’s term) is a recipe for a nasty fall in global capitalism.  As the IMF admitted “Looking ahead, the odds of a downturn remain elevated, and there’s even a small chance of a global economic contraction over the medium-term.”

At the end of last year, I made my annual forecast for the world economy in 2018.  In that post, I recognised that I had not expected the relative pick-up in global growth in 2017 after the ‘bad years’ of 2015 and 2016.  But I was not convinced that this ‘recovery’ meant that the Long Depression of low growth, investment and profitability (along with stagnant average household incomes) was over.  I pointed out that IMF’s then projection global GDP growth was still less than the post-1965 trend of 3.8% growth and the expected gains over 2017-2018 followed an exceptionally weak recovery in the aftermath of the Great Recession.  The IMF has raised its forecast to 3.9% for this year and next but it does not seem too confident that it will be achieved and after 2019, it expects a significant slowdown again.

Nevertheless, I had been forecasting a new global recession in 2018.  I said then that “What seems to have happened is that there has been a short-term cyclical recovery from mid-2016, after a near global recession from the end of 2014-mid 2016.  If the trough of this Kitchin (short-term) cycle was in mid-2016, the peak should be in 2018, with a swing down again after that.”  The latest economic data in Q1 2018 suggest that growth has peaked globally.  High debt and low profitability remain.  Those fundamentals do not suggest any further upside – on the contrary.

Inequality and exploitation

I recently came across an interesting piece by Ian Wright of the Open University, UK.  Written in November 2016, Wright considers the cause of rising economic inequality, so evident over the last 30 years or more in most major and smaller economies.  Wright dismisses the mainstream causes of rising inequality: namely, unequal distribution of profits and wages or lower taxes on the rich; or automation driving down wages relatively for those not working in ‘knowledge-based’ industries.  Instead, the causes of rising inequality must be found in the very nature of the capitalist mode of production.  As Wright puts it, “capitalism is a system in which one economic class systematically exploits another. And its economic exploitation — not housing, tax policies or low wages — that is the root cause of the economic inequality we see all around us.”

The original mathematical analysis developed by Wright describes capitalism as an anarchic system that generates what physics calls entropy: “the activity of market exchange is acting just like the cocktail shaker: its mixing everything up, randomising things, and maximising the entropy of the system.”  As a result, “we might think that differences in wealth must arise from accidents of birth or personal virtue. But the principle of entropy maximisation tells us there’s a much more important causal factor at work. We quickly get extreme income inequality even in an economy with identical individuals with identical initial endowments of money.”

Wright develops a model of capitalism that is based on this principle of entropy in a market economy, but more than that.  “Maximising entropy under the single constraint of conservation of money yields an exponential distribution of wealth. That’s quite unequal. So the first cause of inequality is what Adam Smith called the higgling and haggling of the market. Since people are free to trade then entropy increases and the distribution of money becomes unequal.” But Wright argues that “we don’t find an exponential distribution in actual capitalist economies. We find something more complex. That’s because capitalist economies obey additional constraints on how money moves between individuals. Markets are not the only cause of the inequality we see in capitalism.”

The other aspect is exploitation of labour for a profit. Capitalists accumulate profits as capital. “Firms follow a power­ law distribution in size. And capital concentrates in the same way. A large number of small capitals exploit a small group of workers, and a small number of big capitals exploit a large group of workers. Profits are roughly proportional to the number of workers employed. So, capitalist income also follows a power­ law.  The more workers you exploit the more profit you make. The more profit you make the more workers you can exploit.”  This is the reason for rising inequality when there are no checks on capital accumulation.  As Wright sums it: “the fundamental social architecture of capitalism is the main cause of economic inequality. We can’t have capitalism without inequality: it’s an inescapable and necessary consequence of the economic rules of the game.”

This mathematical analysis accords nicely with the empirical evidence.  For example, Simon Mohun, Emeritus Professor of Economics, ClassStructure1918to2011wmf has published a paper that showed that Marx’s class analysis, which rests on the ownership of the means of production (between the owner of the means of production and who exploits those who own nothing but their labour power), remains broadly correct, even in modern capitalist economies like the US.  He found that the working class – those who depend on wages alone for their living – still constitute 84% of the working population.  Managers constitute the rest, but only 2% (Qc in graph) can actually live off rent, interest, capital gains and dividends alone.  They are the real capitalist class.  And that ratio has little changed in 100 years.

Moreover, this is the group that has gained most during the last 30 years of rising inequality.  The income of this capitalist class (Qc) has risen from about 9 times the average income of the working class to 22 times while managers incomes (Lpd) have risen from 2.5 times to 3.5 times workers income.  So rising inequality is primarily the result of increased exploitation, a rising rate of surplus value, in Marxist terms.

I commented back in 2013 on the work by the father of inequality research, Sir Anthony Atkinson, now sadly deceased, who showed that it was not new technology and globalisation led to a rise in the demand for skilled workers over unskilled and so drove up their earnings relatively as mainstream economics likes to argue.  Atkinson dismissed this neoclassical apologia.  The biggest rises in inequality took place before globalisation and the dot.com revolution got underway in the 1990s.

What is decisive for capitalism is surplus value (profit, interest and rent), not differences in wage income or spending.  The main feature of the last 100 years of capitalism has not been growing inequality of income – indeed, as Atkinson shows, inequality has not always risen.  The main feature has been a growing concentration and centralisation of wealth, not income.  And it has been in the wealth held in means of production and not just household wealth.  That has generated a power law in inequality at the top.

One study shows how far that has gone in the recent period.  Three systems theorists at the Swiss Federal Institute of Technology in Zurich developed a database listing 37 million companies and investors worldwide and analysed all 43,060 transnational corporations and share ownerships linking them (147 control). They built a model of who owns what and what their revenues are, mapping out the whole edifice of economic power.  They discovered that a dominant core of 147 firms through interlocking stakes in others together control 40% of the wealth in the network.  A total of 737 companies control 80% of it all.   This is the inequality that matters for the functioning of capitalism – the concentrated power of capital.

The policy implication of this analysis follows.  Yes, increasing taxes on the richest 2%, particularly on capital gains and ‘earnings’ from capital, would make some difference.  Atkinson showed this in a study.  But the extreme levels of inequality that most capitalist economies have now reached would only be dented a little.  What is required is to end exploitation (of labour) for surplus value.  That’s where the power law operates.  And that means ending the capitalist mode of production.

Trump, trade and the tech war

President Trump has now moved on from steel tariffs (with exemptions for some allies) to the real battle: stopping China from gaining market share in America’s key industries: technology, pharma and other knowledge-based sectors. Can China make further inroads globally or will Trump’s policies stop them?

The first thing to note is where things are right now.  Economists at Goldman Sachs, the US investment bank, have looked at the data.  They find that “the US position as a global technological leader remains strong. The US’s economy-wide productivity remains high compared to other advanced economies, and its shares of global R&D, patents and IP royalties remain impressive.”  China has been catching up though, but in medium value-added goods sectors and hardly at all in knowledge-based tech.  So, while overall, the US share of global high-tech goods exports has declined as China’s share has grown, the US trade sector deficits have been concentrated in medium-high-tech goods rather than in the most advanced categories. Indeed, the US share of global knowledge-intensive service exports has held up, contributing to a rising trade surplus and higher employment in those sectors.

Take overall productivity, as measured by output per hour worked.  On this broad measure of the productivity of labour, the US remains ahead, even compared to other advanced economies in Europe and Japan.  China’s labour productivity level is just 20% of the US, although that is a quadrupling since 2000.

The US continues to invest a relatively large share of its GDP in research and development. While the US share of global R&D has declined, in part due to a rapid increase in China’s share, the US remains the global R&D leader, accounting for nearly 30% of the world total, about 1.5-2 times the US share of world GDP.

Total patents granted for new inventions show that the US share has held roughly steady at around 20%. China’s share of total patents granted has risen very rapidly over the last decade to over 20%, but most patents granted to Chinese innovators have come from its own domestic patent office, with far fewer granted abroad. The US share of the world total of royalties on intellectual property has declined somewhat as the EU’s has grown, but it remains very large. China’s share remains negligible.  That means US capital is still taking the lion’s share of global profits in technology.

The modern 21^st century US economy relies increasingly on advanced knowledge and technology sectors for its growth.  The share of US GDP for these sectors is now 38%, the highest of any major economy. But China is not far behind with 35% of its GDP in these sectors, amazingly high for a ‘developing’ economy.

Where Trump is now concentrating his ire on China is on the share of hi-tech goods sales in world markets.  While the US is the largest producer of high-tech goods, its share of world exports has shrunk considerably while China’s share has grown.  This rising Chinese competition has caused US manufacturing firms to reduce their patent production, which has been accompanied by reduced global sales, profits, and employment.

But on the services side, the US is the largest global producer of commercial knowledge-intensive services and second only to the EU in exports. China’s share remains quite small.  If China gains market share in this area, it will really hurt US capital.

That’s because, although the US runs a deficit on trade in tech and knowledge industries, that deficit has shrunk from the early 2000s.  The US is more than holding its own in this area even since China joined the World Trade Organisation. Indeed, it runs a surplus in knowledge-intensive services, which has grown over the last decade.  It is this that Trump seeks to protect.

While jobs have been lost to technology replacing labour (capital-bias) and the shift of US industry to China in manufacturing, the employment share of hi-tech and knowledge sectors has risen to about one-third of all US jobs.  Trump claims to be restoring the ‘smoke-stack’ sectors where he won some votes, but in reality that battle for jobs is already lost, thanks to US industry shifting out.  The real battle is now over profits and jobs in the knowledge-based sectors where the US still rules.

But these sectors are highly concentrated in just a few firms, the technology leaders.  There are wide swathes of American industry, including tech, which benefits little from this US superiority.  Just five firms have over 60% of sales in biotechnology, pharma, software, internet and comms equipment.  The top five in each sector are taking the lion’s share of profits too.

What this shows is that, contrary to the mainstream economic idea that international ‘free trade’ will benefit all, the gains from trade are concentrated in just the leading firms which take advantage of network, scale, and experience and gain larger market share.  The rising industry concentration has in turn boosted their corporate profit margins.  As Goldman Sachs puts it: “global trade is particularly concentrated, with “export superstars” accounting for a very large share of exports in many industries and countries.”

Contrary to the Ricardian theory of comparative advantage, international trade is transacted by companies not countries and, as such, value (profit) gets transferred to those with technological advantage and they gain at the expense of others.  Trade represents a form of combined development, but capitalism delivers this unevenly.

As I argued in a previous post, over the last 30 years or so, the world capitalist economies had moved closer to ‘free trade’ with sharp reductions in tariffs, quotas and other restrictions – and many international trade deals.  But since the Great Recession and in the current Long Depression, globalisation has paused or even stopped.  World trade ‘openness’ (the share of world trade in global GDP) has been declining since the end of the Great Recession.

It is this decline in globalisation as world economic growth stays low and the profitability of capital remains squeezed that lies behind this new trade war.  Trump’s blundering blows on trade have an objective reason: to preserve US profits and capital in the key growing tech sectors of the world economy from the rising force of Chinese industry.  So far, the US is still holding a strong lead in hi-tech and intellectual property sectors, while China’s growth has been mainly in taking market share at home from American companies, not yet globally. But China is gaining.