Transhumanism, malinvestment and instability

July 2, 2015

Camp Alphaville (, the FT’s one-day jamboree on all things economic and financial, had all sorts.  There was a session by Zoltan Istvan, a ‘futurist philosopher’ who has formed a party to stand in the US presidential election to promote ‘transhumanism’, using science and technology to overcome human mortality. According to Istvan, he wants to promote technologies such as bionic hearts, mind uploading, exoskeleton technology, robotics, nootropics, 3-D printed organs, and cranial implants. They also aim to use Artificial Intelligence to reach the Singularity – a point where intelligence is so advanced it becomes unrecognizable to humans. Collectively, these technologies and ambitions will forever alter the human species and make human life on Earth transhuman. Subsequently, they will also create vast amounts of new wealth, commerce, and industry.

Indeed, exotic technological developments was a theme of the FT’s day. But of course, there was a discussion of how to use AI, not in meeting the necessities of humanity but in how to make money from it: how it might soon be deployed in the financial market and how hedge funds are employing machine learning experts and neuroscientists!  AI, robots, singularity and the extension of human life is something I shall try and consider in a future (!) post.

More immediate was the question of whether the world economy, particularly its financial sector, was heading for another fall. There were two interesting points of view: that coming from the Austrian school of economics and that coming from the post-Keynesian Minsky school. Alas, yet again, no Marxist economic alternative got a hearing – perhaps not surprising in a City of London event.

The Austrian school was represented by Claudio Borio.  He is head of Monetary and Economics Department at the Bank for International Settlements (BIS). In 2003, Claudio Borio was one of the few to warn that excessive borrowing, partly encouraged by monetary policy, could lead to a devastating crisis in the rich countries. Since then, he has researched how conventional measurements of “potential” growth fail to take account of unsustainable financial risk-taking, hidden fragilities that can be spotted in the gross flows of the balance of payments, and why consumer price deflation is harmless compared to falling asset prices.

I have commented on Borio’s work before in various posts and his position is really the classic one of the Austrian school, that crises are caused by central banks artificially lowering interest rates below where they should ‘naturally’ be and by pumping in extra liquidity. This creates ‘malinvestment’ by companies and banks because projects that are not really viable become so with less than ‘natural’ costs of borrowing. This malinvestment in property and stocks etc rather than productive investment leads to low productivity growth and stagnation.

Borio presented evidence to suggest that when credit gets very high relative to trend GDP growth over a period, there was an 80% chance of financial crash (see the paper, The financial cycle and macroeconomics: What have we learnt? borio395). Borio predicted the financial crash of 2007, one of the few economists to do so. Now Borio has claimed to have identified what he calls a ‘financial credit cycle’, similar to the cycle of boom and slump in capitalist economies, or to the pr0fit cycle that I have identified (see my book, The Great Recession). Borio argues that “it is not possible to understand business fluctuations and the corresponding analytical and policy challenges without understanding the financial cycle.”

Borio points out that, as traditionally measured, the business cycle (by which he means the cycle of boom and slump in modern capitalist economies) involves frequencies from 1 to 8 years . By contrast, he finds that there is a financial cycle in seven industrialised countries since the 1960s of around 16-18 years. The length of this cycle is similar to 16-18 year profit cycle that I have identified for the US economy (with slightly different lengths for other capitalist economies), although with different times for turning points.

The BIS under Borio has been pushing the prospect of a new crash in financial markets. The unending printing of money and credit injections was creating financial and property asset ‘bubbles’ that would eventually burst and renew the financial crash of 2008 (

Jaime Caruana, head of the BIS, has said recently that the international system “is in many ways more fragile than it was in the build-up to the Lehman crisis”. Debt ratios in the developed economies have risen by 20 percentage points to 275pc of GDP since then. Credit spreads have fallen to wafer-thin levels. Companies are borrowing heavily to buy back their own shares. Caruana correctly pointed out how stock and bond markets were racing up to new highs but the ‘real economy’ of output and investment was stuck in very low rates. This suggests a dangerous bubble as higher risk corporate leverage (debt) has risen to new highs.  Indeed, in its very latest report, the BIS argues that a bursting bubble is not far away.

In a similar vein, but from the other end of the heterodox economics rainbow, post-Keynesianism, Steve Keen, head of economics at Kingston University UK, was also at Camp Alphaville. For Keen, a future financial bust would not be due to central banks and ‘malinvestment’, as Borio and the Austrians argue, but because of ‘excessive private sector debt’ which has not been deleveraged since global financial crash. This debt causes financial instability and could lead to a new crash, if not globally, but in Asia, for example.

For my take on Keen’s views, see my recent post on Rethinking Economics (, where Keen also appeared. Clearly, the Minsky (debt instability) view of crises has become popular in both heterodox and mainstream economic circles and even in the City of London.

Rethinking economics: value, irrationality and debt

June 30, 2015

I had to cut short my attendance at this year’s Rethinking Economics conference in London (  That was because of the surprise developments in Greece which required my attention under the instructions of the God Mammon.

So I was deprived the opportunity of attending a number of presentations and seminars.  Here is the agenda of the two-day conference
Also, here are my previous posts on last year’s London and New York conferences.

Rethinking Economics is an international organisation of academics and graduate students in economics seeking to develop an alternative and pluralist economics discipline beyond the stifling orthodoxy of mainstream neoclassical theory that dominates nearly all economics departments in universities and colleges.

This year’s looked well attended to me.  The opening contribution was by France Coppola, an economist from the financial sector who regularly blogs at

Coppola treated us to a short lecture on value theory.  She criticised Adam Smith’s distinction between use value and exchange value from his famous example of water having great use value but no exchange value and diamonds having low use value but high exchange value.  She pointed out that the use value of water is much lower in Scotland which is abundant with water than in the Sahara where water is scarce.  Thus the degree of scarcity will affect the level of use value and also the exchange value, as the cost of water has been rising faster than the value of gold in recent years.

Coppola sought to expose Adam Smith’s value theory in this way and thus presumably pose more heterodox alternatives.  The problem with this is that scarcity is not Adam Smith’s value theory.  Smith held to a labour theory of value, as did all the classical economists.  The diamond-water example is, in a way, exceptional to the classical or Marxist approach to value, namely that, under capitalism and market forces, the value of something depends ultimately on the labour time expended to produce it.  It was the neoclassical counter-revolution in economics that turned this objective theory of value into a subjective psychological one of marginal utility (or use value) based on individual consumer ‘preferences’.  I’m not sure Coppola was helping the audience on this question with her approach to value.

Talking of the psychological approach to economic behaviour, the conference was honoured to get Daniel Kahneman, the veteran Nobel prize winning behavioural economist, to speak at a plenary session.  Kahneman is an Israeli-American psychologist, notable for his work on the psychology of judgement and decision-making. His empirical findings challenge the assumption of human rationality prevailing in modern economic theory. In 2015, The Economist listed him as the seventh most influential economist in the world.  Thinking, Fast and Slow is his best-selling book, which summarizes research that he conducted over decades.

Kahneman developed what he called ‘prospect theory’ in criticising the traditional utility theory of value promoted in all the mainstream economics textbooks.  Kahneman’s research has shown that people do not behave as mainstream marginal utility theory suggests: namely making ‘rational’ choices.  Instead people have ‘behavioural biases’.  For example, they are more likely to act to avert a loss rather than look to achieve a gain in any investment or spending decision.  In other words, people have higher utility in avoiding losing than in winning; there is not equal utility, as marginalist theory assumes.

Kahneman argues that there is “pervasive optimistic bias” in individuals.  They have an irrational or unwarranted optimism.  This leads people to take on risky projects without considering the ultimate costs – again against rational choice assumed by mainstream theory.  In an echo of the famous saying by George W Bush’s neo-con defence secretary, Donald Rumsfeld, Kahneman reckons that people usually just make choices on what they know (known knowns), sometimes even ‘known unknowns’, but never consider unknown phenomena, ‘unknown unknowns’, like a financial crash.  People do not consider the role of chance and falsely assume that a future event will mirror a past event.

Kahneman’s work certainly exposes the unrealistic assumptions of marginal utility theory, the bedrock of mainstream economics.  But it offers as an alternative, really a theory of chaos, that we can know nothing and predict nothing.  This was a ready excuse used by the bankers and monetary policy officials to explain the global financial crash in 2008. The official leaders of capitalism and the banking ‘community’ then fell back on the argument of Nassim Taleb, an American financial analyst, that the crisis was a ‘black swan’ – something that could not have been expected or even known until it was, and then with devastating consequences: an ‘unknown unknown’.

Before Europeans ‘discovered’ Australia, it was thought that all swans were white. But the discovery in the 18th century that there were black swans in Australia dispelled that notion.  Taleb argues that many events are like that. It is assumed that something just cannot happen: it is ruled out. But Taleb says, even though the chance is small, the very unlikely can happen and when it does it will have a big impact.  The global credit crunch (and the ensuing economic crisis) has been suggested as an example of the Black Swan theory.

From a Marxist dialectical point of view, the Black Swan theory has some attraction. For example, revolution is a rare event in history. So rare that many (mainly apologists of the existing order) would rule it out as impossible.  But it can and does happen, as we know. And its impact, when it does, is profound. In that sense, revolution is a Black Swan event. But where Marxists would disagree with Taleb (and Kahneman?) is that he argues that chance is what rules history. Randomness without cause is not how to view the world. This is far too one-sided and undialectical. Sure, chance plays a role in history, but only in the context of necessity.

The credit crunch and the current economic slump could have been triggered by some unpredictable event like the collapse of some financial institution or the loss of bets on bond markets by a ‘rogue trader’ in a French bank. And the oil price explosion may have been the product of the ‘arbitrary’ decision of President Bush to attack Iraq.  But Marxists would argue that those things happened because the laws of motion of capitalism were being played out towards a crisis. Similarly, the recent spout of natural disasters like tsunamis, earthquakes, flooding etc are not an act of God.  Global warming is man-made.  The current economic crisis was no chance event that nobody could have predicted.

Kahneman’s work leads to that of behavioural economists like Nobel prize winners, Robert Shiller and George Akerlof.  This school argues that changes in a capitalist economy can be best explained by changes in the unpredictable behaviour of consumers and investors.  This is the inherent flaw in a modern economy: uncertainty and psychology.  It’s not the drive for profit versus social need, but the psychological perceptions of individuals. Thus the US home price collapse came about because consumers have a bias towards precaution and savings as debt mounted – just like that.

Shiller argues that investors and economic agents are so irrational that speculation, ‘herding’ and uncertainty can lead to instability and economic crisis. He wrote a book with George Akerlof, called Animal Spirits, the Keynesian term for investment motivations.  Akerlof is married to Janet Yellen, the successor to Ben Bernanke as head of the US Federal Reserve (see my posts

What worries me with the ‘irrational exuberance’ theory of crises is it leaves economics in a psychological purgatory, with no scientific analysis and predictive power.  Also, it leads to a utopian view of how to fix crises.  Shiller says markets can get out of line and then cause busts.  This is due to the irrational behaviour of human beings, not to the drive for profits by private capital.  The answer is to change people’s behaviour; in particular, big multinational companies and banks need to have ‘social purpose’ and not just want to increase profits.  That is really like asking a lion if he would keep his claws in while stroking the lamb (see my recent post on Inclusive capitalism,

In contrast, in another keynote session, Will we crash again?, Professor Steve Keen, now head of Kingston University economics, presented an objective and empirically testable theory of crises based on the excessive growth of private sector debt.  Keen is noted for his strong post-Keynesian critique of mainstream marginalist equilibrium economics in his excellent book, Debunking Economics and also for being one of the few economists to predict the 2008 crash (I would claim to be another – but that is another long story!).

Keen went through the conditions that led to the current crisis and showed that the conventional wisdom got the crisis back to front – in effect, they blamed the symptom for causing the disease. The real cause – the bursting of a private debt bubble – still hasn’t been addressed and lies in waiting ready to cause the next crisis in the next 2-5 years. To escape, economists need to embrace unorthodox thinking and so must policymakers, but the odds are that they will not.

I have written on Keen’s views in several places on my blog.  See

Keen’s focus on the growth of private sector debt as a key trigger of financial crashes (following the work of Hyman Minsky), is very relevant.  Take the new evidence going back to 1870 on where the dangerous concoction of excessive debt and asset price bubbles can lead (

However, both the Keen-Minsky debt school and the behaviourist ‘animal spirits’ school have one thing in common.  They see the flaws of capitalism in the financial sector only. In contrast, Marx posits the ultimate cause of capitalist crises in the capitalist production process, specifically in production for profit.  That does not mean the financial sector and, in particular, the size and movement of credit does not play any role in capitalist crises.  On the contrary, the growth of credit and fictitious capital (as Marx called speculative investment in stocks, bonds and other forms of money assets) picks up precisely in order to compensate for the downward pressure on profitability in the accumulation of real capital.

And that’s the point. Capitalism only grows if profitability is rising.  In the US, with profitability declining after 2005, the huge expansion of credit (or what Marx called fictitious capital) could not be sustained because it was not bringing enough profit from the real economy. Eventually, the housing and financial sectors (the most unproductive parts of capitalist investment) stopped booming and reversed.

Rethinking Economics is a very good development, opening the doors to more heterodox thinking in academic economics.  But all the conferences that I have attended have been dominated by the views of orthodox Keynesians (Robert Skidelsky was there this year) or post-Keynesians (Keen, Ann Pettifor etc).  The views of Marxist economics were notable by their absence.

Syriza, the Troika and the ironies

June 28, 2015

The ‘impossible triangle’ for the Syriza government was 1) reversing austerity 2) staying the Eurozone; and 3) Syriza staying in power (see my post, The Troika prepared to break that triangle. What the Troika wanted was a Greek government carrying out a full programme of austerity (running a government budget surplus in the middle of a depression) and ‘structural reforms’ (ending labour rights, deregulating services and finance and privatising state assets). The previous Samaras government got bailout funds in return for such ‘conditionalities’. When Syriza wanted to change those conditions, not only did the Troika not concede, it actually tried to impose even harsher ones on Syriza.

This is partly because the Greek economy and government revenues have deteriorated during the five-month bailout extension. But it is also because the Troika wants to break Syriza and end a government pledged to oppose fiscal austerity and neo-liberal reforms. This is to ‘encourage’ the others.

The most forceful exponents of applying these even harsher measures include the IMF (which wants its money back); the German finance minister, Schauble, some small Eurozone states which are poorer than even Greece; and conservative governments in Portugal, Ireland and Spain which have imposed severe austerity on their electorates and now face anti-austerity movements at home. All these forces outweighed any forces for compromise that came from the French, the Italians and the European Commission.

And remember the cruel irony is that all these tortuous negotiations were designed not to provide help to the Greek people, but simply to release funds so that the IMF and the ECB would be repaid without any default. Over 90% of all the loans made by the Troika in the last five years have merely been siphoned back to Greek government creditors without touching the sides of the Greek economy – see my post,
And these creditors were mainly French and German banks and hedge funds who got the value of their speculative purchases of Greek government bonds repaid with only a small ‘haircut’ in 2012. After that, the Eurozone, the IMF took on the debt while the Greek pension funds were stripped of their reserves.

The Syriza government went very far in dropping all its commitments which originally were: cancelling the debt, then halving the debt, reversing austerity, opposing privatisations etc. Eventually, to get a deal, the Syriza government even proposed a tax increase to annual incomes above $33,000 (thus suggesting that individuals in that income bracket rank among the wealthy). Basic food items and services were to carry a 23% VAT. The special VAT rate on Greek islands, which is so crucial for the tourist sector of the economy, was also to be removed. The early retirement age was to be increased as of the start of 2016 and a benefit for low-income pensioners was to be gradually substituted, beginning in 2018.

But on 25 June, the Christine Lagarde/Wolfgang Schäuble duo (IMF chief and German finance minister) wanted the benefit for low-income pensioners to be completely eliminated by 2017. If this proposal for overhauling the nation’s pension system were to be accepted by the Greek government, it would mean that a person who today receives a monthly pension for the amount of, say, 500 euros ($560) – close to 50% of Greek pensioners receive pensions below the official poverty line – would be deprived of nearly 200 euros ($223). This was one step too far for Tsipras and the Syriza leadership.

To understand why is to hear from Greeks themselves in various media reports. Here are the reactions gleaned from the media of Greeks living in Thessaloniki, Greece’s second largest city.

Michalis Nastos, 54, runs a clothing stall selling €10 jeans, €6 shirts and an array of cheap summer dresses, has seen his profits fall by more than 50% after years of crisis, unemployment and tax hikes. Nastos said his main fear was the proposed rise in VAT — an indirect sales tax that would push prices up and indiscriminately affect all shoppers, most of whom are already struggling with the effects of previous tax hikes. “Of course I’m against VAT rises, it’s already very high, it will have a knock-on effect. It’s the little details that will really affect people. The price of bread would go up — that’s important because people in Greece still eat a lot of bread, so you could see the price of a sesame-seed loaf rise from say 50 cents to 70 cents, that would really have an impact. Packaging costs will rise, energy, basics like pasta. Low-income people won’t be able to afford to buy and more and more people won’t be able to make it.”

Michalis Hadji-Athanasiadis, 84, a former police officer who had retired aged 50, said his pension had shrunk from €1,600 a month to €1,000 a month, and his extra benefits had been cut. But his pension was still far higher than the shrinking salary of his 52-year-old daughter who was a high-school teacher and who, like her brother and his wife, still lived with their parents to make ends meet. He said: “People are hungry. For five months it seems there has been no progress and business is down everywhere, a lot of shops have closed. Income is down, with VAT going up everything you need to buy becomes so much more expensive.”

Near the market, one woman in her 50s, who said her main income came from selling black market Balkan cigarettes, described how customers used to buy five or six packets but were now only buying one or two. “It feels like life is over,” she said. “We can barely manage to feed ourselves.” Her adult children, who had lost their jobs as shop-assistants during the recession both lived with her. She adds: “It feels like they’re going after the little guy, all the high-income people got away with it and got their money out of the country.”

The next irony was that the IMF knows that Greece can never repay a €300bn debt equivalent to 180% of GDP and rising. Greece asked for ‘debt relief’ in return for agreeing to more austerity. And it asked for a long-term package. The Troika refused. It refused to consider debt relief and only offered ‘bailout’ funds for another five months in dribs and drabs, thus keeping Greece in the grip of depression and poverty.

So we have a referendum. Greeks will be asked to vote on a complicated set of proposals put forward by the Troika. The question put is whether they will accept the Troika package or not. If they vote YES, then presumably the Syriza government will return to Brussels saying that they accept any terms offered. If the Greeks say NO, then the Greeks face the prospect of no more funding to pay their government debts and the cutting off of credit by the European Central Bank, which is currently financing the Greek banks to meet the increasing demands of depositors withdrawing their cash by the billions.

Greek bank deposits

The government will have to impose capital controls to stop the flight of money (most of the rich and companies have already taken theirs already); it will possibly have to issue IOUs to pay its government workers and pensioners. These ‘euro IOUs’ will quickly devalue, as ‘real’ euros become scarce.

There are two more ironies here. The first is that if the Greeks vote yes to the Troika package, there will be no package to agree to. The current bailout programme ends on 30 June. After that, a completely new package will have to be negotiated and the Troika is talking about the impossibility of working with Syriza. They are looking to remove Syriza from power so they can negotiate with an amenable government.

The second is that if the Greeks vote no and the Greek economy is then cut off from euro credit by the ECB and Greece defaults on all its debts, there is no actual procedure for removing a member state from the Eurozone. Under the rules, a member state must ask to leave; it cannot be ejected. This is clearly uncharted waters for Merkel, Hollande and the Euro leaders.

The criticism of the pro-Troika parties in Greece was that Tsipras is using the referendum to avoid taking the decision himself. He is hiding behind the electorate. There is some truth in this but it is not the whole truth because Syriza will campaign for a no vote.

But what if it gets it? Surely, the government must move to end this tortuous mess. It must refuse to recognise the ‘odious’ Troika debt.  It must impose capital controls; it must nationalise the Greek banks; and bring the commanding heights of the economy under the control of labour. The Greek people can start to turn round this depressed economy. But the Greeks cannot do this alone; it requires the combined efforts of European labour to break the grip of capitalist forces on economic policy and investment.

In another post, I shall try and analyse the state of the Greek economy and what could be done to turn it around within a plan for Europe.

Lady Rothschild, Thomas Piketty and inclusive capitalism

June 26, 2015

A curious conference took place in London today. It was called Inclusive Capitalism, the brain-child of Lady Lynn Forester de Rothschild, Chief Executive Officer, E.L. Rothschild, the exclusive London investment company with investments in media, asset management, energy, consumer goods, telecommunications, agriculture and real estate worldwide.

Lady Rothschild has been promoting Inclusive Capitalism through a series of conferences in which the great and the good present speeches to assembled groups of “world’s most influential asset owners, asset managers and corporate CEOs” in order to persuade them that capitalism must go “beyond financial performance only, in an effort to enhance the value of environmental, human, ethical and social capital”.

The London conference was ‘graced’ with the presence of Bill Clinton; Mark Carney, Governor of the Bank of England; Justin Welby, Archbishop of Canterbury, the Church of England; and, to cap it all, Prince Charles of the British monarchy. These eminences were out to tell the world that capitalism is a great and good thing and can be made even better if we can reduce inequality and poverty, end global warming and wars, and operate in a moral way.

Such an ‘inclusive capitalism’ is, of course, an oxymoron, just as previous talk of ‘responsible capitalism’ is (see my posts,

Lady Rothschild argues that “Capitalism emphasises the importance of the other forms of capital too – most particularly human, social and natural capital. This reflects the inter-dependencies and relationships both inside and outside the firm that enable it to operate and create profit. Inclusive Capitalism holds that by taking a broader view of the firm – its purpose and its stakeholders – it is more likely to prosper over the long term. But this is only possible if investors extend their investment time horizons, overcoming the myopia of short-term financial metrics.”

Lady Rothschild was quick to tell the conference that Inclusive Capitalism would also include the interest of the ordinary workers that the assembled CEOs in the City of London Mansion House employ. “The imbalance of capital and labour” must be acted upon. How was not clear.

There a serious blast of irony here, when, as Prince Charles opened the conference, the US Economic Policy Institute announced a study that showed CEO pay at US’s largest companies was up 54% since recovery began in 2009. While America’s CEOs have seen their compensation soar in the past six years, the average annual earnings of employees haven’t budged. CEOs at the 350 largest companies in the country pocketed an average of $16.3m in compensation each last year. That’s up 3.9% from 2013, and a whopping gain of 54.3% since the recovery began in 2009.  On the other hand, the average annual earnings of employees was only $53,200. And in 2009, when the recovery began? Well, that was $53,200, too. In other words, while the CEOs have seen their compensation soar by 54%, the typical worker’s pay hasn’t budged.

Right now, the average CEO compensation package is 303 times the size of the average earnings of their employees. In 1978, when the idea of giving a CEO the majority of his compensation in the form of stock was almost non-existent, that CEO earned about 30 times what his average employee did. By 1989, when the idea of stock-based compensation was gaining traction (and activist investors and corporate raiders were taking aim at corporate managers they considered fat, lazy and unmotivated to increase returns for shareholders), the figure was closing in on 60. By 2000, getting a significant portion (or most) of one’s compensation in stock, option grants or deferred grants of equity was standard, and the gap was 376, according to the EPI.

The more affluent you are, the more likely you are to own stocks – and to have participated in the post-2009 stock market rally, and to have become wealthier from your investments, even if your salary was stagnant. Studies have shown that these phenomena have resulted in the top 1% getting richer, and doing so at the expense of the rest of us.  Prince Charles and others who addressed the 0.1% in the audience said nothing about this.

In another coincidence, the Financial Times published an interview with Thomas Piketty, the rock-star economist, whose book, Capital in the 21st century, exposed the rising inequality of wealth and incomes in modern post-war economies (see Unpicking Piketty – SASE). Piketty has done great work in exposing these inequalities, but in a sense he is also goes no further than Lady Rothschild and Prince Charles in arguing that capitalism must sort itself out. As Piketty put it in the interview: “I believe in capitalism, private property, the market” — but “how can we tackle inequality?”

Piketty’s answer is a global wealth tax which he admits is a “utopian” dream. So he says a confiscatory tax rate of more than 80 per cent on earnings exceeding $1m would work. In fact, he continues, such a rate was in place for five decades before the presidency of Ronald Reagan, and would curb exuberant executive pay without hurting productivity. “It did not kill US capitalism then — productivity grew the fastest during that time,” he notes. “This idea, according to which no one will accept to work hard for less than $10m per year . . .  It’s OK to pay someone 10, 20 times the average worker’s salary but do you really need to pay them 100 or 200 times to get their arses in gear?”

Lady Rothschild said that Inclusive Capitalism “is a journey not a destination – a set of evolving practices not an end point. It holds that with properly structured incentives, meaningful stakeholder engagement, supportive governments and effective business leadership, firms can generate broad and sustainable prosperity in a manner that respects our communities and our environment for generations to come.”

I leave the reader to decide what that guff means. But it seems that Lady Rothschild wants to get shareholders in companies to take a stand on CEO compensation and on the ethical and environmental policies of the companies they own. But all the evidence shows that this is also utopian claptrap. Unlike the employees stuck with wages that have flat-lined, stockholders are enjoying profits from soaring stock prices. As one 2005 academic study found, investors – whose representatives on the board of directors have the final say on CEO compensation – seem to become complacent during bull markets, indifferent to how rich CEOs, too, are getting, as long as they are sharing in the riches.

And this sort of ‘financial engineering’ to boost profits while holding down wages is not productive in any way. Mark Carney spoke on behalf of the City of London at the conference. But his deputy, Andy Haldane, has shown elsewhere the unproductive nature of finance capital. Finance “could [not] 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. For that reason, statisticians do not count these activities in capital markets as contributing to activity or welfare. Rightly so.”

Both Lady Rothschild and Thomas Piketty believe in capitalism. Both reckon that capitalists can be made to or persuaded to act to reduce inequality, create a better environment and adopt moral policies in investment. Piketty wants more and higher taxes to do this; Lady Rothschild wants shareholder power. But ‘responsible’ or ‘inclusive’ capitalism won’t and can’t deliver.

Nobody’s blinking

June 16, 2015

In my last post on Greece
I said it was ten minutes past midnight for the Greek government and the Eurogroup credit institutions in getting an agreement to release outstanding funds so that the Greeks can meet their obligations to repay the IMF and the ECB loans over the next few months.  Remember all these tortuous negotiations are not about ‘bailing out’ the Greek people but simply to avoid the Greeks defaulting on their government debts to the ‘Troika’ (the EU, the ECB and the IMF).  None of this money will go to improve or maintain real incomes, public services and pensions for Greeks.

As I write , with less than two weeks to go before the Greeks must make another payment to the IMF, there is a total impasse, with each side waiting for the other to blink and concede.  And nobody’s blinking.

Alexis Tsipras, the Greek prime minister, has now vowed not to give in to demands made by the Troika, accusing them of “pillaging” Greece for the past five years and insisting it was now up to them to move.  “One can only suspect political motives behind the fact that [bailout negotiators] insist on further pension cuts, despite five years of pillaging,” said Tsipras. “We are carrying our people’s dignity as well as the aspirations of all Europeans. We cannot ignore this responsibility. It is not a matter of ideological stubbornness. It has to do with democracy.”  On the other side, the IMF negotiators went home to Washington, implying that no deal was possible with the intransigent Greeks, while the Eurogroup dismissed the latest set of concessions from the Syriza government last weekend within 45 minutes

The reality is that Syriza has already dropped many of its ‘red lines’ supposedly not to be passed since the election of the new government back in January (see my post, The 47-page document sent by the Greeks to the Troika last week now includes VAT rises, phasing out of early retirement along with further pension reform, measures to further deregulate the product market, primary surplus targets reaching 3.5% of GDP from 2018 onwards, an increase in the “solidarity tax” on income, the continuation of privatisations and the ‘liberalisation’ of the energy market.

But now it seems that the Syriza leaders will go no further and have balked at two further demands from the Troika; namely further cuts in pensions that would affect many of the poorest Greeks and a 10% rise in VAT on electricity with similar results. That is just too much. After, Syriza has now agreed to austerity measures of more than €2.5bn, more than the previous Conservative government had been negotiating.  But extra measures are being demanded because the long negotiations have damaged the economy and government revenues even more.

The Troika has agreed to lower the government surplus target for this year to 1% of GDP, 2% for next year but then head back towards 3.5% by 2018.  But even this small ‘concession’ will be too much for the Greek economy to bear.  It still means €3bn of austerity measures this year alone and cuts in pensions of up to €900m (0.5% of GDP) this year and €1.8bn (1%t of GDP) next year.  Tsipras and Varoufakis would face a massive revolt within the ranks of Syriza if it concedes any further.

The callous disregard of the poverty of Greeks, particularly the old, is shown in the statement of IMF chief economist Olivier Blanchard in a blog post (  Blanchard blithely pontificates “we believe that even the lower new target cannot be credibly achieved without a comprehensive reform of the value-added tax (VAT) – involving a widening of its base – and a further adjustment of pensions.  Why insist on pensions? Pensions and wages account for about 75% of primary spending; the other 25% have already been cut to the bone.  Pension expenditures account for over 16% of GDP, and transfers from the budget to the pension system are close to 10% of GDP.  We believe a reduction of pension expenditures of 1% of GDP (out of 16%) is needed, and that it can be done while protecting the poorest pensioners”.

But Blanchard’s demand will not protect the ‘poorest’ pensioners as it involves a cut in EKAS, the pension fund for those on lower incomes. A recent poll revealed that 52% of Greek households claimed their main source of income is pensions. This is not because so many people are ‘gaming’ the system and drawing on pensions; it is more because so many Greeks are unemployed without qualifying for benefits or employed but not being paid. If pensions are cut further, a lot of Greek households will really suffer at a time when the economy will likely continue to shrink.  10,000 Greeks have taken their own lives over the past five years of crisis, according to Theodoros Giannaros, a public hospital governor, whose own son committed suicide after losing his job.

The myth that Greeks are all living off the state and sunning themselves on the beaches with their early retirement pensions – something peddled by the Troika and politicians in norther Europe to their electorates – is just that, a Greek myth.  Yes, pensions amount to 16% of GDP, making Greece appear to have the most expensive pension system in Europe.  But this is partly because Greek GDP has dropped so much in the last five years.  Moreover, Greece’s high spending is largely the result of bad demographics: 20% of Greeks are over age 65, one of the highest percentages in the Eurozone.  If you adjust for this by looking at pension spending per person over 65 , then Greek pension outlays are below the Euro average

Greek pensions

Indeed, the ‘Greek problem’ is not an extravagant public sector employment and pension system, but the failure of Greek capitalism to perform.  Greek capitalism expanded before the Great recession, not through productive investment and successful exporting, but through huge foreign borrowing for investing in property and construction (mostly corruptly) led by Greek oligarchs.  When the credit bubble burst, Greek capitalism took an almighty plunge leaving the Greek people holding a sick baby.  The Greek GDP took off in the second half of the 90s. At its peak in 2008, it had grown by 65%, cumulatively. But by 2013, GDP had fallen back to its 2000 level (see .

Real GDP, normalised to 100 in 1990

Greek real GDP

During the ‘euro-boom’ years, the growth rate averaged 4.1% per year and it was mostly explained by (non-ICT) investment. The equally dramatic fall since 2008, -4.4% per year on average, was largely due to labour shedding.  Greek workers paid for the failure of Greek capitalism with their jobs and incomes.  Because corrupt and feeble Greek capitalism just engaged in property and speculation, relative to Germany, between 1990 and 2008 Greece accumulated a 23% ‘productivity gap’ that persisted and increased in the bust period. The consequence was a huge ‘competitiveness gap’ for the Greek economy. Between 1990 and 2009 the Greek economy experienced a 35% loss in competitiveness, meaning that wage costs (and prices) rose much more rapidly than in its trading partners in the run-up to the crisis.

Total factor productivity, normalised to 100 in 1990

Greek TFP

The public sector had to ‘bail out’ the failing banks and the collapsing economy by borrowing hugely.  It could only do so by borrowing from the IMF and the EU governments.  But then it was in the grip of the devil.  The Troika demands huge cuts in public spending so that their loans could be repaid.  The level of austerity imposed was about 9 percentage points of GDP – unprecedented in the amount and and intensity (over just three years). Since 2009, government revenues have risen from 37% to 45% of GDP while public expenditures fell from above 50% to 45%.

Greek public employees (‘000).

Greek public employment


But the huge cuts in wages and employment were still not enough to turn Greek capitalism round.  Exports of goods and, in particular, services (tourism), rose by much less compared to other European countries which went through more successful ‘stabilisations’ (Ireland, Spain, Latvia, Portugal).  Following the bust in 2009 wages crashed, but prices did not. In a few years, most of the gains in real wages obtained since 1990 were gone.  Poverty and inequality rocketed.  So Greek labour has paid to re-establish the profitability of Greek capital – but to no avail.

Greek export recovery

The problem is that Greek capitalism is just too feeble to recover on its own.  Most Greek firms are very small (well below 10 employees) and their size makes them unable to access foreign markets.  This lends the lie to those in Syriza who argue that help to small businesses is the way out for Greek capitalism.  What is really needed is the development of high productivity,  innovatory sectors  – and that will only be possible through the state.   Greek exports are concentrated in low and medium-tech goods, such as fuels, metals, food products and chemicals.  According to the Atlas of Economic Complexity, developed at Harvard University, the 2008 gap between Greece’s income and the knowledge content of its exports was the largest in a sample of 128 countries. By 2013, Greece ranked 48th in the Atlas’s index of complexity of exports – by far the lowest of any developed country in Europe.

The Troika has spent its time trying to squeeze labour even more through ‘labour market reforms’ (freezing minimum wages, ending collective bargaining, having part-time contracts, easy dismissals etc) when the the reforms that are really needed are with Greek companies themselves.  What should be done is to break the corrupt grip of the oligarchs in the major corporate sectors who monopolise the economy and control investment and prices.  This concentration of power in the hands of a few has blocked innovation and growth.  In Greece, the power of these ‘insiders’, the oligarchs, have stopped proper tax collection or investment.

The terrible irony is that more fiscal austerity measures will only result in a deeper depression and an even higher public debt ratio (probably going above 200% of GDP).  Syriza accepted the 1% primary surplus target for this year.  That is likely to require fiscal measures three times as large to reduce the debt ratio, as the economy could be 5% smaller as a result of the austerity measures and the debt to GDP ratio would jump 9% pts!  That’s why the IMF may want more austerity but recognises that it will only work if it is accompanied by the writing off of some of the existing debt (as long as they get paid first!).

As Blanchard put it: “the European creditors would have to agree to significant additional financing, and to debt relief sufficient to maintain debt sustainability. We believe that, under the existing proposal, debt relief can be achieved through a long rescheduling of debt payments at low interest rates.  Any further decrease in the primary surplus target, now or later, would probably require, however, haircuts.”  But the Eurogroup won’t countenance that, as it would be ‘letting the Greeks off’ when others like Ireland or Portugal got no such help.

What is clear now is that if no agreement is found by 30 June, Greece will default on its IMF repayments.  This has already been announced by some Syriza ministers.  It would be followed by a default on ECB repayments in July.  The negotiations over existing ‘bailout’ package would be over as the four-month extension would pass.  With default, even if only ‘technical’ as the IMF would allow ‘30 days grace’ to pay, the ECB would consider the Greek banks insolvent and so end its emergency liquidity assistance.  With deposits disappearing out of the banks, the government would have to introduce capital controls to stop the flow.  Within a few weeks, the government would not be able to pay its workers their wages or meet the pensions outgoings.  That would force the government to introduce a ‘parallel’ currency, namely IOUs to pay, which would soon be worth less than a euro by some margin. The impossible triangle will prove impossible: Greece in the euro; a reversal of austerity and Syriza united in government.  One or more of these corners will fold.

The Left inside Syriza consider this the opportunity to take over the banks, reverse the privatisations agreed to and to exit the euro forthwith.  It may well be.  But 80% of Greeks want to stay in the euro and they will need a lot of persuading that Grexit is the right way forward.  If Grexit just means a currency devaluation without moves to end the control of the economy by the oligarchs and foreign multinationals, then it can only mean bankruptcy for many small businesses, huge inflation and deeper depression for some time.

The path of default and devaluation by Iceland did not end austerity.  On the contrary (and against the impression given by Keynesian Paul Krugman), Iceland is second only to Greece in the world in the size of its fiscal austerity measures since 2009.  In Iceland, real primary expenditures fell by 12.7% between 2009 and 2012 by slashing current expenditures, transfers, maintenance and investment, and by freezing public sector wages and benefits for a period of four years, during a time when inflation soared due to the 50% depreciation of the króna. VAT was raised to 25.5%, which at that time was the highest in the world!

Iceland austerity

Would Greece outside the euro recover eventually?  It depends on what happens to the economy inside Greece: does it stay in the hands of Greek capitalists or can labour take over; and also it depends on whether the rest of European labour can mount a successful campaign for a pan-Europe plan for growth.  Under capitalism, the dark cloud of a new recession is on the horizon.  If that materialises, the very existence of the Eurozone is threatened.

Are the Keynesian academics right about Osborne?

June 13, 2015

The announcement by the British finance minister, George Osborne that the Conservative government will legislate to force governments to run annual surpluses on their budgets has provoked an explosion of debate among economists, particularly the Keynesian school.

Outlining plans for a law that forces the Treasury to run a surplus in “normal times”, Osborne said: “With our national debt unsustainably high, and with the uncertainty about what the world economy will throw at us in the coming years, we must now fix the roof while the sun is shining.” The chancellor also argued that the discipline imposed by a new law would support future generations who faced being saddled with sky-high debts.

Now Thomas Piketty, David Blanchflower and 75 other economists signed an open letter that was published in the British newspaper, the Guardian, to condemn this proposal ( According to these economists, such a measure was ignoring ‘basic economics’ and was ‘not fit for the complexity of a modern 21st-century economy and, as such, risks a liquidity crisis that could also trigger banking problems, a fall in GDP, a crash, or all three‘.

The academics said Osborne was shifting the burden of debt from the government to ordinary households because “surpluses and debts must arithmetically balance out in monetary terms.” The economists summarised their position in this way: “Economies rely on the principle of sectoral balancing, which states that sectors of the economy borrow and lend from and to each other, and their surpluses and debts must arithmetically balance out in monetary terms, because every debit has a corresponding credit. In other words, if one sector of the economy lends to another, it must be in debt by the same amount as the borrower is in credit. The economy is always in balance as a result, if just not at the right place. The government’s budget position is not independent of the rest of the economy, and if it chooses to try to inflexibly run surpluses, and therefore no longer borrow, the knock-on effect to the rest of the economy will be significant. Households, consumers and businesses may have to borrow more overall, and the risk of a personal-debt crisis to rival 2008 could be very real indeed.

They added: “These plans tie the government’s hands, meaning it won’t be able to respond appropriately to constantly evolving economic circumstances, good or bad. The plan actually takes away one of the central purposes of modern government: to deliver a stable economy in which all can prosper. It is irresponsible for the chancellor to take such risky experiments with the economy to score political points. This policy requires an urgent rethink.”

Now I was asked to sign this letter and/or support it and several economists who would consider themselves Marxist did sign. But I stood back. This was not because I thought Osborne was right. Clearly, his aim of forcing governments by law to run ‘surpluses’ of tax revenues over spending every year was ludicrous. It was really aimed at reducing the size and role of government in the capitalist economy.

Also Osborne intends to achieve this ‘permanent surplus’ over the life of the current parliament to 2020 by the most vicious reductions in social welfare spending and public services, involving up to a 30% real reduction. He could have achieved the same result by increasing taxation on the richest earners and holders of wealth, by ending tax evasion and avoidance on an industrial scale and by reducing the ludicrous spending on arms and defence.

Indeed, if his aim was simply to reduce the public sector debt burden, then that could be achieved, assuming the UK economy continues to expand (a big assumption) and still run a small annual budget deficit. As one of signatories, Simon Wren-Lewis, has put it: “This question is really the same as asking what the long run target for government debt should be. I recently discussed an IMF paper which suggested that, as long as the market was happy buying the debt, there was no need for the government to reduce the level of debt from current levels (around 80% of GDP). That policy would imply running deficits of around 3% of GDP, which is a long way from a surplus. I also said that might be an extreme position. In this post I gave various paths for deficits and debt, where the other extreme was balancing the budget. A balanced budget could involve debt falling rapidly to around 40% of GDP by 2035, and by 2080 the debt to GDP ratio would be close to zero. I also gave various paths in between these two extremes.

But the real problem with Osborne’s position is that he actually believes that if government is small and plays no role in the savings and investment flows of an economy, then the ‘private sector’, or more particularly the capitalist sector, can flourish and grow without hindrance. Just the experience of the Great Recession and the global banking crash shows that belief is unreal. Capitalist accumulation is chronically subject to regular and recurrent crises, leading to collapse and the need for government to intervene to bail out banks, corporations and subsidise investment and employment as best it can. And anyway, there is absolutely no chance of Osborne achieving regular budget surpluses, given the weak and low growth in GDP and, above all, in investment by the capitalist sector. That sector is not going to spend more as the government saves.

So growth and employment will only be supported by rising household debt to buy ever more expensive housing and through injections of fictitious capital. It is this scenario that the signatories highlight when they say “Households, consumers and businesses may have to borrow more overall, and the risk of a personal-debt crisis to rival 2008 could be very real indeed.”

But this is where I stand back from the signatories of the letter. Is Osborne’s position ‘bad economics’? A future crisis in British capitalism will not be caused by Osborne trying to run annual surpluses on the government budget. Crises will occur in the private sector (more specifically in the capitalist business sector) whatever Osborne does. Osborne’s policy is just unreal but not necessarily ‘ignoring basic economics’.

After all, even Osborne realises that in an economic recession, governments are forced to run deficits and borrow more by issuing debt to help correct a collapse in ‘effective demand’ in the private sector (profits and wages). And Martin Wolf makes the point ( that there is “the time to reduce public debt comes when “economies boom and interest rates are far from the floor”.

The problem with the ‘economics’ of the letter signatories is that they assume that running a ‘permanent’ annual government surplus must necessarily lead to excessive borrowing in the private sector and crises. That’s because they have signed up to a back-to-front view of the Keynesian macro identities, or the ‘sectoral balances’ that they refer to.

Consider the Keynesian identities. Overall, what is invested in an economy must have been saved (we are excluding money printing here), so total investment must equal total savings (I=S). Sectors within an economy can run surpluses or deficits of savings over investment. But overall, I=S.

There are four sectors in the economy in the Keynesian macro model. They are Consumers = C; Government = G; Business investment = I and net trade with the rest of the world = E. Now if G runs a permanent surplus (savings over investment), then the other three sectors must run a combined deficit, so that C + G + I + E = 0. But the deficits to balance the government surplus (G) could be businesses investing more (borrowing over and above their profits) and/or households borrowing more than their wages and/or the economy exporting more than it imports and so borrowing from foreigners. The Keynesian model makes no distinction, even if the signatories suggest there is one (“The economy is always in balance as a result, if just not at the right place”).

Now the signatories say that “The government’s budget position is not independent of the rest of the economy, and if it chooses to try to inflexibly run surpluses, and therefore no longer borrow, the knock-on effect to the rest of the economy will be significant.” But that is the point. The government sector is not independent. In a capitalist economy, whether the government sector is in surplus or deficit will depend on what is happening in the private sector. If a capitalist economy is booming, incomes will rise along with increased investment and borrowing. So a government will be able to run an annual surplus. But if an economy is in a recession, companies will stop investing (increase net savings) and households will have stopped spending (increase net saving) and so the government will become a net borrower (assuming a zero balance on trade).

So the signatories have the argument the wrong way round. Osborne can get government surpluses if he wants to in a boom but not in a recession (something which he actually recognises). The government will not be able to run annual surpluses if corporations stack up profits, pay down their debt and don’t invest; and households don’t spend but just pay down their debts (ie in a recession or very weak recovery). So Osborne won’t cause a “knock-on effect to the rest of the economy that forces households, consumers and businesses to borrow more overall.” Governments react to a boom or recession in the capitalist sector, not vice versa. The Keynesians argue that “the government’s budget position is not independent of the rest of the economy” and then go onto warn of dire consequences if Osborne opts for government surpluses as though he could make the government’s budget position “independent of the economy”.

Martin Wolf is right when he says that “it would have made little difference to the outcome of the crisis if Labour had run a balanced budget before the Great Recession. Consider Ireland and Spain. Both started with fiscal surpluses and very modest levels of public debt. Yet the financial crisis devastated both these economies.” Exactly: running government deficits or surpluses ‘makes little difference’. That’s because, under capitalism, whether a government runs a deficit or a surplus will depend on the growth of savings and investment in the private sector, not vice versa.

Let’s consider the Keynesian sectoral balances with some real figures. As of the beginning of 2015, this is how the sectors line up, according to the data from the Office for Budget Responsibility (OBR) ( The government is still running an annual budget deficit (net borrowing) of 4.4% of GDP and the UK economy is running a huge payments deficit with the rest of the world of 5.3% of GDP. Households are running a tiny net borrowing deficit of 0.1% of GDP and the capitalist business sector is running a deficit of 1.5% of GDP i.e. it is actually investing more than it has in annual profits by borrowing (of course, this investing may not be in productive assets).

The graph below shows the UK sectoral balances now; where the OBR reckons they will be in 2020; what happens with a government surplus delivered first by a consumer boom and then by an investment boom.

UK sectoral balances

The OBR reckons that the government can run a small annual surplus by 2020 because households will have increased their net borrowing to 0.8% of GDP (green) and businesses will have raised their net borrowing to 2.4% of GDP (blue), while there will have been a massive reduction in the net trade deficit to just 2.3% of GDP (grey). The OBR’s forecast implies a consumer-led boom because net household borrowing is usually only at that forecast level during the height of booms, while business net borrowing (investment) is usually much higher. How the trade deficit would narrow so much is not explained or credible. Indeed, if the net trade deficit were to stay at around 5% of GDP and there was no change in business investment, then the UK economy would eventually experience a massive credit-led consumer boom (as shown in the graph) that was liable to lead to a ‘personal debt crisis to rival 2008’, as the signatories forecast.

But there is nothing to suggest from the ‘sectoral balances’ as such that we could not produce a different result. Assuming the government is running an annual surplus of 1% of GDP; this could be ‘balanced’ not by a consumer-led boom but by an investment-led one in the capitalist sector. If the household sector were to be in balance and the net trade deficit were to fall to 3% of GDP (likely in an investment boom), then net borrowing (investment) by the capitalist sector of just 4% of GDP would do the trick (as shown in the graph). That is not inconceivable if capitalists are keen enough to raise investment (although the OBR does not think such a level of investment is likely). The point is that if capitalists are making good profits, they could step up investment, while households still do not borrow ‘too much’ and the government would get its annual surplus.

Wolf says that Osborne’s “policy would take economics back to the logic of the Victorian era, and is not achievable in the 21st century”. If he means by that Osborne’s drive to reduce the public debt burden at all costs, that might be true. But if he means that governments should run surpluses in times of boom “to deliver a stable economy in which all can prosper”, to use the phrase of the signatories, that is pure Keynesian counter-cyclical policy and not ‘bad economics’ in Keynesian eyes.

Keynes too wanted ‘balanced budgets’ over the ‘business cycle’, running surpluses in times of boom and deficits in times of recession or depressions. His difference with the ‘classical economists’ was that they thought there could be no recessions except through temporary shocks while Keynes thought there could be long-lasting depressions that required government deficit spending to get out of them. But once things were okay in the capitalist sector, then surpluses would be prudent to avoid inflation and overheating.

What decides the issue is not whether the government runs a ‘permanent surplus’ or not, but what is happening in the capitalist sector. Under capitalism, the level of ‘net saving’ in the business sector depends on profit generation. And from capitalist investment, there are flows to employment and wages and thus the net savings-investment position of households – and government balances. This is the Marxist view of macro balances (see my post,

The forecast about a future private sector debt crisis being ‘caused’ by running a permanent government surplus is not from Keynes, but comes from Hyman Minsky, namely the view that crises comes from excessive private debt and inherent financial instability leading to a consumer crash (see Steve Keen for the modern version of this, and;_ylt=AjV1fCzZun3gvtsluPIupMabvZx4?p=steve+keen+on+runnings+government+surplus&toggle=1&cop=mss&ei=UTF-8&fr=yfp-t-700&fp=1).

The signatories implicitly assume that this is the main cause of crises and ignore the possibility that crises can happen in the capitalist investment sector through a lack of profitability.  The signatories also assume that a ‘stable economy’ is one of the ‘central purposes’ of government policy as if it were possible to stabilise capitalism with government fiscal policy. This post-Keynesian view is an illusion. Why do the signatories think that this is possible when the post-war history of macro management of capitalist economies has been a dismal failure?

Martin Wolf comments that “Osborne thinks he can cut to a surplus when the reality is that the only way to a surplus is to get consumers to borrow more, business to invest more and overseas to buy more of what we make. These options of cut or promote activity are not alternatives, as the basic formula shows. If you want to cut the deficit you cannot cut to achieve that goal: you can only stimulate what is not happening [you can’t do that either – MR]. Osborne has simply got his logic wrong.” Exactly, but then so have the signatories in thinking that government surpluses will cause the deficits in other sectors. The reverse is the reality.

This is what the signatories of the letter ignore. “George Osborne does not know that C + G + I + E = 0,” says Wolf. But the signatories do not seem to accept that the balance of G depends on the balances of C+I+E under capitalism (and in particular, I). The latter decide the former. Government budget surpluses or deficits cannot alter the ultimate course of a capitalist economy and neither can government fiscal policy, whatever the signatories think.

Ten minutes past midnight

June 6, 2015

In the early hours of Friday morning, according to the British paper, the Daily Telegraph (DT), five key players in the Syriza government, meeting in the Maximus Mansion in Athens, took an important decision. They decided that the government would not pay the IMF its debt repayment instalment due that day. Apparently, the IMF’s Christine Lagarde was caught badly off guard. IMF officials in Washington were stunned.

The Syriza leaders had the money to pay: it had been raked up from various sources and they had told Lagarde that they would pay. But at the late hour, they decided not to pay but instead ‘bundle’ all the repayments scheduled for June into one payment at the end of June – or €1.6bn. This was allowable under IMF rules but had only happened once before – by Zambia in the 1980s.

The reason that PM Tsipras, finance minister Varoufakis and the other Greek government leaders decided to hold back payment was two-fold. First, they were really angry that the IMF and the Eurogroup had completely refused to make any serious compromises on the terms of an agreement to release outstanding funds under the existing ‘bailout’ package, despite the Greeks making huge concessions in the negotiations over the last few months since an extension was agreed last February.  Also, the leaders knew that their Syriza party members and MPs were incandescent with rage at the attitude of the Troika (IMF, EU, ECB). There was no way that they were going to support any deal along the lines of yet further austerity and neoliberal measures demanded by the Troika. So the Greeks have fired a warning shot across the bows of the IMF and the Eurogroup, hinting that they may prefer to default rather than be forced into further concessions.

According to sources for the DT, the IMF representative in the negotiations, Poul Thomsen, has “pushed the austerity agenda with a curious passion that shocks even officials in the European Commission, pussy cats by comparison” (here are the latest demands of the Troika Greece – Policy Commitments Demanded By EU etc Jun 2015). The IMF is demanding further sweeping measures of austerity at a time when the Greek government debt burden stands at 180% of GDP, when the Greeks have already applied the biggest swing in budget deficit to surplus by any government since the 1930s and when further austerity would only drive the Greek capitalist economy even deeper into its depression. As the DT summed it up: “six years of depression, a deflationary spiral, a 26pc fall GDP, 60pc youth unemployment, mass exodus of the young and the brightest, chronic hysteresis that will blight Greece’s prospects for a decade to come”.

The Syriza government has already made many and significant retreats from its election promises and wishes (see Syriza’s latest proposals here (Greece Debt Proposals (47 Pager) Jun 2015).  Many ‘red lines’ have been crossed already (see my post, It has dropped the demand for the cancellation of all or part of the government debt; it has agreed to carry through most of the privatisations imposed under the agreement reached with the previous conservative New Democracy government; it has agreed to increased taxation in various areas; it is willing to introduce ‘labour reforms’ and it has postponed the implementation of a higher minimum wage and the re-employment of thousands of sacked staff.

But the IMF and Eurogroup wanted even more. The Troika has agreed that the original targets for a budget surplus (before interest payments on debt) could be reduced from 3-4% of GDP a year up to 2020 to 1% this year, rising to 2% next etc. But this is no real concession because government tax revenues have collapsed during the negotiation period. At the end of 2014, the New Democracy government said that it would end the bailout package and take no more money because it could repay its debt obligations from then on as the government was running a primary surplus sufficient to do so. But that surplus has now disappeared as rich Greeks continue to hide their money and avoid tax payments and small businesses and employees hold back on paying in the uncertainty of what is going to happen. The general government primary cash surplus has narrowed by more than 59 percent to 651 million euros in the 4-month period of 2015 from 1.6 billion in the corresponding period last year

The Syriza government has only been able to pay its government employees their wages and meet state pension outgoings by stopping all payments of bills to suppliers in the health service, schools and other public services. The result is that the government has managed to scrape together just enough funds to meet IMF and ECB repayments in the last few months, while hospitals have no medicines and equipment and schools have no books and materials; and doctors and teachers leave the country.

Even Ashoka Mody, former chief of the IMF’s bail-out in Ireland, has criticised the attitude of his successor in the Greek negotiations: “Everything that we have learned over the last five years is that it is stunningly bad economics to enforce austerity on a country when it is in a deflationary cycle. Trauma patients have to heal their wounds before they can train for the 10K.”

The final red lines have been reached. What the Syriza leaders finally balked at was the demand by the IMF and the Eurogroup that the government raise VAT on electricity by 10 percentage points, directly hitting the fuel payments of the poorest; and also that the poorest state pensioners should have their pensions cuts so that the social security system could balance its books. Further down the road, the Troika wants major cuts in the pensions system by raising the retirement ages and increasing contributions. The Syriza leaders were even prepared to agree to some VAT rises and pension ‘reforms’, but the two specific demands of the Troika appear to have been just too much.

As Mody put it: “I am frankly shocked that we are even having a discussion about raising VAT at all in these circumstances. We have just seen a premature rise in VAT knock the wind out of a country as strong as Japan.”   As for pensions, they have already been slashed under previous bailout agreements with the Troika. Main pensions have been slashed 44-48 per cent since 2010, reducing the average pension to €700 a month. Contributors to a supplementary scheme receive a top-up averaging €170 a month. About 45 per cent of Greek pensioners receive less than €665 monthly — below the official poverty threshold.

The Troika wants more. It is pressing for across-the-board cuts in both main and supplementary pensions; the abolition of a special monthly stipend for pensioners receiving the lowest benefits; an increase in the retirement age to 67; the ending of special arrangements that allow working mothers and people in so-called “dangerous” occupations to retire early on full pensions; and the merger of dozens of sectoral pension funds into three main funds.

The horrible truth is that none of these further cuts would be necessary if the Troika had just cancelled some of Greece’s public sector debt back in 2012 when the debt was ‘restructured’. Instead, the banks of Germany and France were paid off for their holdings of Greek government bonds with just a small haircut and the burden of the debt then fell on the shoulders of the new Eurozone bailout institutions and Greece’s own pension funds. Greece’s pension funds lost an estimated €25bn of reserves that were held in government bonds as a result of the debt restructuring. They have been unable to replenish them. Meanwhile, contributions to the system fell sharply as unemployment soared above 25 per cent and outlays rose sharply as more than 60,000 public sector workers opted for early retirement, fearing their jobs would soon be eliminated.

The reality is that Greece can never pay back these loans. Greek capitalism is in a deep depression and in deflation.  The OECD has just slashed its Greek GDP estimates to 0.1 percent in 2015 from 2.3 percent in its previous forecast published last November. So the debt burden is rising not falling despite (and partly because of) austerity. The IMF recognises this and suggests that the Eurogroup agree to a haircut on its loans (while the IMF still expects full repayment of its loans!). The Eurogroup has already agreed that no repayments on its debt need be made until 2020, but won’t agree to a debt haircut (yet). And both the IMF and the Eurogroup want to cut the debt in the meantime and thus are demanding more austerity measures. Syriza has made a very modest proposal to cut the debt burden in the future (see here ENDING-THE-GREEK-CRISIS-short), but this proposal has been ignored by the Troika, at least until Greece capitulates on the current bailout terms.

greek debt

The Greek government is running out of cash to pay back the IMF and the ECB and very big repayments are scheduled for July and August. It will definitely run out of money by the end of this month, when the choice will be between paying the IMF the bundled-up debt or paying government workers their wages.

The cruel irony is that if Syriza agrees to the demands of the Troika on VAT, pensions and other austerity measures, the money it receives under the existing bailout agreement of €7.2bn and some €1.9bn in held back ECB profits on Greek bonds would just be immediately transferred back to the IMF and the ECB (see my post,! Nothing would touch the sides of the Greek government to pay its employees or suppliers.

So even if a deal ensues in the next fortnight (and it will have to be done probably by 18 June when the next Euro summit takes place so that the German and Greek parliaments have time to endorse the deal), almost immediately negotiations will have to be concluded on a new package so the Greeks can meet repayments to the IMF scheduled up to April 2016 and to finance any deficits and interest payments down the road. Greece will tied into another five years of austerity.

The late night decision of the Syriza leaders shows that they have reached the end of their tether and it will not be possible to persuade their own party to accept Troika demands which would mean accepting in full everything that the previous New Democracy government agreed to. If that happened, what would be the point of a Syriza government, supposedly elected to reverse austerity?

According to opinion polls, the Greek people still overwhelmingly want to stay in the Eurozone and they still give strong support to Syriza in polls, but support for the government’s negotiations with the Troika has been fading. The people want a deal but they don’t want austerity. This appears to be an unresolvable conundrum.

What next then? Well, assuming that the Troika does not blink and drops it latest demands and assuming that the Syriza leaders do not capitulate, then default on the debt will take place at the end of this month. The government will have to take steps to introduce capital controls to stop the flow of funds out of the banks and abroad, already sizeable in the last few months.

Greek bank deposits

In my view, Syriza would finally have to grasp the nettle and take over the banks; reverse all austerity measures agreed to; launch a programme for state investment and jobs and appeal directly to labour movements in Europe for a Europe-wide programme of action over the heads of the Euro leaders. Up to now, Syriza has failed to do this, but it is not too late to start at ten minutes past midnight.

As I said in a post last March
“the issue for Syriza and the Greek labour movement in June is not whether to break with the euro as such, but whether to break with capitalist policies and implement socialist measures to reverse austerity and launch a pan-European campaign for change. Greece cannot succeed on its own in overcoming the rule of the law of value.”

Bubbles, profits and debt – look out!

June 4, 2015

Stock markets in the major economies continue to hit new highs. At the same time, economic growth in the major economies is either slowing down or already at a relatively low level. The UN now forecasts that the global economy, including fast-growing India and high rate China, will expand in real terms (after inflation) by just 2.8% this year. Thus the UN joins the IMF and the World Bank in reducing its growth forecast for this year to around 3% for the world.

And in its semi-annual economic outlook released this week (, the OECD has also reduced its forecast for global economic growth.  It warned that weak investment and disappointing productivity growth risk keeping the world economy stuck in a “low-level” equilibrium. The OECD now expects the global economy to expand this year by 3.1%, a sharp downgrade from last November’s forecast of 3.7%. The revision follows a weak first quarter of 2015 for the global economy, the softest since the crisis, led by a sharp decline in the US. “The world economy is muddling through with a B-minus average, but if homework is not done . . . a failing grade is all too possible,” said Catherine Mann, chief economist.

OECD growth

In another sign of a slowdown in US economic growth in the first half of 2015, US factory orders tumbled in April. Orders fell 0.4%, marking the eighth decline in nine months. The key category that tracks business investment plans — non-military capital goods excluding aircraft — slipped 0.3%.

US factory orders

So global economic growth continues to fall well short of the trend rate before the Great Recession began in 2008. The world capitalist economy is unable to return to ‘normal’. This is six years since the trough of the Great Recession.

US weak recovery

The OECD is now forecasting just 2% growth in the US this year, a very sharp downward revision from the November 2014 forecast of 3.1% this year. It also lowered its forecast for Japanese growth to 0.7% (compared with 0.8% in the previous forecast). It has raised its forecast for the Euro area to 1.4% from 1.1%. But most worrying for global growth is the expectation that China will grow even more slowly than previously expected, just 6.8%.

China accounted for 85% of all global growth in 2012, 54% in 2013 and 30% in 2014. This is now likely to fall to just 24% this year, according to the UK bank, RBS. This is pushing the rest of Asia into recession.

China's contribution

Russia, Brazil, Argentina, and Venezuela are all contracting sharply, casualties of the China-driven commodity bust. The UN says the growth rate for the emerging market nexus (ex-China) has dropped to 2.3% from an average of 6.5% in the glory years of 2004-2007.

China is suffering from debt bubble where credit has been ploughed into property and the stock market (in a huge stock market bubble) and less into productive investment. Now there is a vast inventory of unsold property. The country produced more cement between 2011 and 2013 than the US in the 20th century.

China's credit bubble

In my opinion, China is not heading for a big bust, Western capitalist style (see my article in Weekly Worker (, but a slowdown in economic growth is certainly in the cards for this year.

Overall, the basic thesis on the global economy made in this blog on numerous occasions is being confirmed. Global capitalism is not returning to the rate of growth it achieved before the Great Recession. It is now locked into a slow crawl of below-trend growth, because of the failure of investment in particular to recover. And investment has not recovered because profitability in the major economies remains poor and the level of debt built up before the Great Recession, and the ‘trigger’ to the slump, has still not been fully ‘deleveraged’ (

In its latest Financial Stability Report (, the ECB took a relatively pessimistic view about the future: “The highly accommodative monetary policy stance in advanced economies – though showing potential for increased divergence – has continued to provide vital support to the global recovery. While global growth is expected to recover gradually further on the back of lower oil prices and continued policy support, risks to the global outlook remain tilted to the downside. In particular, a sharp repricing of risk with ensuing corrections in asset prices, a potential disorderly unwinding of capital flows and sharp exchange rate movements along the path to normalisation of macroeconomic policies in key advanced economies remain causes for concern.”

In effect, the ECB was suggesting that the policy of ‘quantitative easing’ adopted by the major central banks of the world may have ‘saved capitalism’ from a continued deep slump, but it came with huge risks for the future. The major central banks have been engaged in a massive and unprecedented injection of credit into the banks and corporate sector in order to reverse the slump and restore growth. The balance sheets of the central banks have doubled as a share of GDP and, in the case of Bank of Japan, will have reached near 100% of GDP, when the current round of ‘quantitative easing’ ends.

Yet, as I expected (, this monetary injection has failed to revive investment or growth. Instead, this credit has just fuelled a new bubble in stock and bond markets round the world.  According to Doug Short, however you measure it, the US stock market is 81% above the mean average, over two standard deviations above the mean (

US stock market overvalued

It’s bit less over the top for European stock markets, but the reality of corporate profits in Europe is way out of line with the expectation that investors have, as this graph shows.

Eurozone corporate earnings

Eurozone company (operating) profits (per share) over the past 12 months have just fallen below the bottom reached after Lehman’s failure brought down the global economy!  This tells you that global stock markets are so far out of line with global growth and profits that they are heading for a big fall.

I have compiled a measure of global corporate profits for five economies: the US, the UK, Germany, Japan and China. Annualised corporate profit growth on this measure has dropped to just 2% in the first quarter of 2015. Indeed, in the last four years, annual growth in the mass of profits in these five economies has averaged under 5% compared to 14% in the five years before the Great Recession struck.

Global corporate profits

Corporate profits figures for the US in the first quarter of 2015 were released last week. They showed a mild improvement over the previous quarter, with a 3.7% year-on-year rise. But the average yoy growth for the last four quarters has been just 0.5%.

US corporate profits

It is my thesis that changes in the profitability of capital lead to changes in the mass of profit, which in turn leads to changes in investment, which as the OECD points out, is the key factor in the slow crawl of the global economy (see my post, There is a high correlation between the mass of profit and investment, (at around 76% since 2000 in the US). So as the mass of profits slows and starts falling, then within a year or less, so will investment.

US corporate profits and investment

And great minds think alike. British Marxist economist, Michael Burke has just done a great piece that makes exactly the same point as I have namely that “The Great Recession was preceded by a decline in profits and the fall in fixed investment followed with a time lag. This was a classic profits-led recession, which was partly obscured by the speculative frenzy that continued until 2007 (but which is a recurring end-of-cycle phenomenon)”

At the same time, debt in the corporate sectors of the main economies remains high and deleveraging has been non-existent or minimal since the Great Recession. To quote the ECB from its report: “The pace of deleveraging has been slow and indebtedness has been hovering well above the levels of past episodes of recession.”

US NFC debt

Up to now, because of central bank QE and very low interest rates, corporations have been able to service their debts with ease. Indeed, low interest rates have encouraged the larger companies to borrow more and use the cash to buy back their own shares or increase dividends to their shareholders. Thus the stock markets have been fuelled with demand.

But US companies are borrowing money faster than they’re earning it — and they’re doing it at the quickest pace since the aftermath of the financial crisis. Stock buybacks reached an all-time high last year and the volume of global mergers and acquisitions announced so far this year would make it the second-busiest ever, according to data compiled by Bloomberg.

For non-financial companies with top credit ratings which have issued debt, the median net leverage in the first quarter of 1.267 was the highest since 2010 and up from 0.927 in the first quarter of 2014. The leverage figure means companies owe $1.267 for every dollar of earnings after subtracting cash on hand. Companies in the S&P 500 will dole out more than $1 trillion, or two-thirds of their cash, buying back stocks and repaying dividends this year, according to Goldman Sachs. That eclipses the $921 billion the firms will spend running their businesses and on research and development, Goldman Sachs wrote.

But global growth remains low and profits, the lifeblood of capitalism, are getting harder to increase. Fictitious capital is facing the real possibility of being found out as just that, fictitious, if the cost of debt rises or the real returns on stock market investment are exposed.

In a previous post, I raised the danger that an end to QE and low interest rates in an environment of weak growth and stagnant profits could provoke a stock market crash and with it a new slump, as happened in 1937 after the brief recovery from the great slump of 1929-32 (see my post,  The US Fed is pledged to hike interest rates later this year. That could be the catalyst. Maybe the Fed will desist because of the very risks being posed by the likes of the ECB in its report. But the end of this stock market boom cannot be far away.

It’s a long-term decline in the rate of profit – and I am not joking!

June 1, 2015

I have been attending a two-day workshop on the current state of capitalism from a Marxist view point. This was organised by Alex Callinicos at King’s College, London University who managed to collect a number of Marxist scholars from the UK and Europe to come and present some papers to be followed by discussion and debate among participants.

The first day started with a discussion on whether Marx himself had a theory of crises under capitalism and, if so, what was it? Readers of my blog will know that this is a controversial issue and scholars like Michael Heinrich consider that Marx never really developed a clear theory of crises and also that Marx’s law of the tendency of the rate of profit to fall had nothing to do with crisis theory (see my posts,

Professor Michael Kratke kicked off this discussion with a paper entitled “Marx’s theory of theories of crisis” (Kraetke Marx’s theory or theories of crisis). As an eminent scholar on Marx’s writings in their original manuscripts and on the history of Marxist crisis theory, MK adopted what you might call a ‘middle way’. According to MK, Marx did not stop trying to develop a theory of crisis and he made progress on it; but on the other hand, MK reckons that Marx did not consider his law of the tendency of the rate of profit to fall as part of that theory. You could find several different versions of crisis theory in Marx, but not the LTRPF.

MK says that, for Marx: “The tendency of the rate of profit to fall does not matter at all! On the contrary, Marx is explicitly criticizing the view, as he finds it in Adam Smith, that a fall in the ‚general rate of profit would lead to crises (hence, the often quoted statement that there are no permanent crises”. In my view, however, Marx was really criticising Smith’s description of the falling rate of profit as being a long-term gradual fall, in contrast to his own view based on his law which led to cyclical convulsions in capitalist production as the rate of profit fell. Moreover, his own explanation of the falling profit rate was entirely different from Smith‘s.

Anyway, in MK’s view, the LTRPF was irrelevant to Marx’s theory(theories?) of crisis. And he never mentioned it in any of his studies of capitalist crises in the 1860s, 1870s or at the start of the Long Depression of the 1880s. I have dealt before with this argument about Marx not mentioning the law in previous posts dealing with Michael Heinrich‘s view (see above). But what MK did say was that he did not agree with Heinrich that Engels had distorted or misrepresented Marx’s view on the LTRPF as propounded in Chapters 13-15 of Volume 3. MK reckoned Engels had indeed made a faithful job of editing. Also MK mentioned that Marx had begun to work on understanding the nature of depressions rather than just slumps in his last studies in the 1880s. As for this increasingly stale controversy on whether Marx changed his view on the relevance of the law on profitability and did not tell Engels; and what happened with all the drafts of Marx’s manuscripts, I can only refer you to the excellent scholarship by Fred Moseley here (Introduction3 and FRP-FRL).

Lucia Pradella dealt with a different issue in Marx’s theory of crisis and took a different angle (Pradella Workshop Abstract). She had looked closely at Marx’s writings in the 1850s on colonial expansion into India etc and found that Marx’s theoretical model was to consider captialism as one world economy and not a series of national capitals in order to understand how the capitalist mode of production led to colonial/imperialist expansion. And at this level of abstraction, Marx appeared to conclude that colonial expansion was part of the tendency under capitalism for the organic composition of capital to rise in the mature economies (its mirror image being a fall in profitability under the LTRPF) and thus colonial expansion was a counteracting tendency to the law of falling profitability.

Gomes de Deux presented a paper on Marx’s Notebooks (Leonardo G Deus Et Al Marx Notebooks) prepared in 1868 and 1869 that revealed that after Marx finished the manuscripts that became Capital, he continued a broad study of crises, highlighting an emerging transformation of capitalism through leading industrial sectors (railways), financial innovations (such as limited liability firms and new types of shares and titles). Sparked by the crisis of 1866, Marx’s investigations on stock exchanges and related structural changes seem to have given him a new perspective from which to investigate changes in capitalism. But again, there was no evidence (either way, if you like) that Marx changed his view on the law of profitability.

In the next session, we had papers on the nature of crises from a Marxist point of view. Alex Callinicos and Joseph Choonara presented a searching critique of the views of Professor David Harvey on Marx’s theory of crises (Callinicos & Choonara How Not to Write about the Rate of Profit). Readers of this blog will know the debate that has taken place between Harvey and myself and others like Andrew Kliman on (yet again) whether Marx’s law of profitability is logical and empirically proven and relevant as a theory of crises (see my posts,reply-to-harvey). Callinicos and Choonara showed that Harvey used to have a more open-minded view on these issues in his earlier work but now he has hardened his rejection of the law and looks instead to various and vague ‘multicauses’ for crises, to the detriment of his analysis, in their view.

Guiglemo Carchedi presented a paper that sought to show that Marx’s law of profitability was relevant to crises, and in particular to the Great Recession (Carchedi Presentation). This was an empirical analysis and revealed that post-war crises in the US occurred when there was a fall in new value created (profits and wages combined). This can happen even if the rate of profit had been rising before. As soon as the organic composition of capital starts rising more than the rate of surplus value, profitability will fall and so will new value. This conformed to Marx’s law and shows a causal connection between the law and slumps under capitalism, in Carchedi’s view.

Jan Toporowksi presented a paper in which he argued that the real cause of the Great Recession was not a credit-driven housing bubble as most think, but actually the financialisation of the non-financial corporate sector through bond issuance (Toporowski THE CRISIS OF FINANCE King’s May 2015). This had led to over-indebtedness that, at a certain point, could not be serviced. So the hidden cause of the Great Recession was excessive corporate debt, not the sub-prime mortgage ‘house of cards’. This is an interesting idea, if not entirely convincing at least for the GR. I actually think that this could be the Achilles heel of the next slump, as evidence shows that corporate sector debt has not shrunk in any way since the end of the GR, on the contrary. So the build-up of corporate debt could be a trigger for a new slump in both advanced and emerging economies.

The final day brought to a head the divergent views within the workshop on the nature of capitalist crises and their cause. Gerard Dumenil, the well-known economist of XX in France and joint author of many books and papers with Dominique Levy, had already expounded his view on the previous day that capitalism is in a ‘neo-liberal crisis’, a new structural stage in capitalism since the 1970s (Dumenil Neoliberalism). While the great crisis and depression of the 1880s and 1890s could be attributed to one of falling profitability (a classic crisis, if you like) and so could the ‘crisis of the 1970s’ (whatever that was), neither the Great Depression of the 1930s nor the Great Recession could be. They were a product of the establishment of ‘financial hegemony’, or if you like the dominance of the financial sector over the productive sector in capitalism. The neoliberal period is characterised by a sharp increase in the inequality of wealth and income, as the very rich (the top 0.1%) engaged in a “crazy chase to become rich” at the expense of the rest of us and eventually of capitalism itself. Dumenil illustrated this for the 20th century in the US with an excellent graph (see below).

US average income per household in seven fractiles – inequality in 1920s and 1930s, equality in post-war period; then inequality again

US Average yearly income per household in seven fractiles

In the neoliberal period, we have a new exploitation of the poor through deregulation of mortgages, the expansion of derivatives, leading to the super bonuses of the top executives.  In Dumenil’s view, the neoliberal crisis comes about when this crazy venture can no longer be sustained. So the neoliberal crisis and that of the Great Depression in the 1930s were really ones of greed and class exploitation and had nothing to with falling profitability, which was rising not falling.

What worries me about this analysis is several. First, why did the crazy drive for money start just after the ‘classical crisis’ of falling profitability in the 1970s? Was not this neoliberal period a reaction by capitalism in trying to reverse falling profitability through the classic counteracting factors that Marx had outlined in the law: rising rate of exploitation, cheapening of constant capital through new technology, or by just slowing new investment and above all by a switch to investing in fictitious capital rather than in the productive sectors, as Carchedi had shown the day before?

Second, I have considered these arguments of Dumenil before (see my post of over four years ago
and I have also looked at the rate of profit using Dumenil’s own data for the Great Depression and it looks like a ‘classic’ profitability crisis to me – profitability had peaked in 1924 in the US, well before the 1929 crash (see my post). As for the neoliberal period, I have argued that profitability rose from the 1980s too, but it stopped rising in all the major economies in the late 1990s (see my paper) and entered a downphase that laid the basis for the Great Recession later, as in the Great Depression. And Dumenil’s own figures confirm that for the US too.

Behind Dumenil’s neoliberal crisis theory is his view that, in effect, that there are now three classes in captialism: workers, capitalists and managers. And it is the managers who now hold the ‘balance of power’. In the neoliberal period they have taken the big bonuses and supported finance capital against labour. No change is possible until the managers come over to the side of labour. So we have a political theory of crises rather than an economic one. And it seems to call for class collaboration as a way out of this crisis. I doubt Marx would have agreed.

In my own paper (Capitalism workshop presentation), I tried to identify that the neoliberal period had really been a very weak recovery within the long-term decline of the profitability of capital in the major economies. Using the work of Esteban Maito, I showed that there has been a secular decline in profitability over the lifetime of capitalism, interspersed with upturns, either caused by crises reducing the value of capital, or by periods of counteracting factors, as in the neoliberal period. But these upturns come to an end then the law works to drive down profitability and create new slumps. Crises occur, I argued (in a similar vein to Carchedi) when falling profitability leads to a fall in the mass of profit and it is not long after that investment and GDP also slumps. Contrary to Keynesian/Kalecki theory, profits lead investment and investment leads employment and consumption – something that Dumenil confirmed in his own data that showed consumption was not a factor in the Great Recession; it was the slump in investment.

My data on the changes in US profits leading to changes in investment were challenged by Jim Kincaid and Pete Green in the discussion. They argued that how could the mass of profits rise and the rate of profit be falling – this must be contradictory. Also the causal correlation between profits and investment found by Tapia Granados, that I always quote (Does investment call the tune – RPE), was only 44%. And that’s hardly conclusive of a causal connection.

Well, since the workshop, I went back to look at my data. I found that if I measured the correlations between the rate of profit, the mass of profit and investment using official US data for the years 2000 to 2013, that there were very high correlations between profitability, profits and investment. First, the correlation between changes in the rate of profit and investment was 64%; second, the correlation between the mass of profit and investment was 76%; and third, the correlation between the rate of profit (lagged one year) and the mass of profit was also 76%. It was necessary to lag the rate of profit as the data are annual for that not quarterly.

Anyway, that provides some more support for the Carchedi/Roberts papers. Tapia Granados has a new paper out that also provides increased statistical support for these causal connections. His new data show that (a) investment is not autonomous, profits raise future investment; (b) investment tend to decrease future profits; and (c) little evidence is found that government spending may stimulate future investment and in this way may pump-prime the economy. Now that the latest data on US corporate profits are out for Q1 2015, I shall return to these issues in a new post.

The main attack on my view of the causes of crises, as based on the LTRPF and its counteracting factors, was delivered by Professor Kratke in the summary of this session and by Professor Dumenil in his comments. Dumenil attempted to rubbish Esteban Maito’s work (Maito, Esteban – The historical transience of capital. The downward trend in the rate of profit since XIX century). “It was a joke!” Dumenil said he and his colleague Levy were world experts on data; they looked at hundreds of bits of data every day (apparently unlike the rest of us). And so he knew it was impossible to get an ROP for the world going back to 1850s as Maito has done. He tried it for just France and could not do it. So the data “from this Argentinian” were a joke, or a concoction. We cannot prove there is a long term secular decline.


I replied that Maito’s data for the US were based on Dumenil’s own (very accurate!) data and so presumably that was not a joke. Using national statistics, surely you could do that for other countries with the usual caveats and gaps? Anyway, the data all showed the same trend direction as Dumenil’s US data. By the way, Maito does not do France as well; so presumably he had the same problem as Dumenil on that country. Indeed, Maito provides a detailed explanation of his sources and methods in his paper including excel files and he intends to publish even more detail on his statistics for scholars to consider (according to a recent email that I have had from him). So that will be more data for Professor Dumenil to absorb in his expert way.

Again, I found the argument against the role of profitability in crises presented by Professor Kratke and others somewhat weird. Dumenil at least recognised that the “crisis of the 1970s” was a ‘profitability crisis’. At the workshop I asked: was anybody in the room that thought that the ‘1970s crisis’ (whatever that was) was not due to falling profitability? And nobody said anything.

The debate seemed to end in a separation between those who reckon that Marx did have a theory of crises and those who say he did not. And between those who consider Marx’s theory of crises was not something as ‘crude and fundamentalist’ as Marx’s law of profitability but was much more ‘complex, multicausal (even Keynesian)’ and those who remain ‘dogmatically’ committed to the law. I think this was an artificial divide. After all, Professor Dumenil did support the view that falling profitability was the cause of the depression of the 1880s, when Marx was alive; and the crisis of the 1970s. And those of us who support the law of profitability also recognise the role of credit/debt (fictitious capital) in triggering crises (see my papers, Amsterdam and Debt matters.Amsterdam presentation 140314 and Debt matters)

There was an interesting and innovative paper presented at the end by Eduardo Alberquerque that may be sets the scene for future capitalism (Albuquerque Workshop Paper). Alberquerque, using new sources, showed that there were new leading technology-driven sectors in capitalism that could eventually lead the next stage of capitalist development. In my view, there is no permanent crisis of capitalism. It moves in cycles, as my paper argued. So at a certain point, a revival in capital accumulation will begin. Profitability will recover and these new technologies will be utilised. But that probably won’t happen without another huge slump before the end of this decade. I say that because profitability is still too low in most economies and debt deleveraging has still some way to go from the build-up prior to the Great Recession, (I’ll be coming back to this issue in a future post). If capitalism does enter a revival in the 2020s, it will do so on the basis of robots and AI. And that poses a whole new stage in capitalism and in the nature of crises. Again I shall take up the issue of robots and AI in a future post – if I ever get to it!

Clinton, Atkinson, Stiglitz and reducing inequality

May 26, 2015

Apparently Hilary Clinton, the Democratic dynasty front- runner for the US presidency in 2016 is worried about rising inequality of income and wealth in America. She has recently consulted Joseph Stiglitz, Nobel prize winner in economics, and author of now two books on the issue of inequality.

However, don’t get your hopes up too high that a US president might take action on the extremes of wealth and poverty in America. Among the top ten contributors to her campaign are JPMorgan Chase, Goldman Sachs, CitiGroup and Morgan Stanley. As secretary of state under Obama, she pressured governments to change policies and sign deals that would benefit US corporations like General Electric, Exxon Mobil, Microsoft, and Boeing. Clinton served on WaltMarts board of directors from 1986 to 1992 and the law firm she worked for, Rose Law Firm, represented the corporation. During her three trips to India as secretary of state, she tried to convince the government to reverse its law aimed at keeping out big-box retailers like WalMart.

So anything that Stiglitz might have said will not gain any traction if Clinton becomes president in 2017. But it shows that inequality is still THE issue in the minds of the ‘liberal left’ and among mainstream ‘liberal’ economists. Both Stiglitz and Tony Atkinson have new books out on the subject, while the OECD has a new report out arguing that rising inequality is damaging economic recovery (


The OECD sifts through 30 years of data from its predominantly rich member countries and finds that, when the Gini coefficient, a popular measure of inequality (a Gini of 0 means everyone has exactly the same income; a Gini of 1 means one person gets all the income) goes up, growth declines. But is that because inequality hurts growth, or vice versa?

The OECD uses a statistical test to conclude it’s the former. The OECD finds that higher inequality has a significant impact on relative educational attainment among different income classes. As inequality goes up, the poorest 40% of the population get fewer skills and lower quality education. The OECD then estimates how much more education the poor may have had if inequality had not increased and plug that into a growth model that includes components such as human capital. From this, the study concludes cumulative economic growth was 4.7 percentage points lower for the average OECD country between 1990 and 2010 (that’s about $2,500 for the average American).

So the OECD suggests that rising inequality causes slower growth because the poor get worse education for better skills at work.  This is the cause that is always brought up by mainstream economics (see my post,  That rising inequality might be a result of the concentration and centralisation of capital ownership and the application of neo-liberal policies to increase the rate of surplus value is ignored.

And yet economic inequality has reached extreme levels. From Ghana to Germany, Italy to Indonesia, the gap between rich and poor is widening. In 2013, seven out of 10 people lived in countries where economic inequality was worse than 30 years ago, and in 2014 Oxfam calculated that just 85 people owned as much wealth as the poorest half of humanity.  In Even it up: time to end extreme inequality (cr-even-it-up-extreme-inequality-291014-en[1]), Oxfam reckoned that the gap between rich and poor is growing ever wider and is undermining poverty eradication. If India stopped inequality from rising, 90 million more men and women could be lifted out of extreme poverty by 2019.

Tony Atkinson is the father of modern inequality research (see my post,, providing the data and evidence on inequality of incomes in the major economies well before Emmanuel Saez or economics rock star, Thomas Piketty (see
Atkinson’s latest book, Inequality what is to be done
aims to look at what should be done to reduce inequality.

As well as diagnosing the problem of economic inequality (especially inequality of income)—showing why it matters in advanced societies (“It does matter that some people can buy tickets for space travel when others are queuing for food banks”) and how it has changed over time, Atkinson presents a series of policy proposals for doing something about it.

Rising inequality is not some inexorable long-term process in capitalism (namely a larger rate of return on wealth over the growth in national income) as Thomas Piketty has argued. Atkinson reckons rising inequality is directly the result of neo-liberal policies introduced from the late 1970s onwards. Cuts in the welfare state probably accounted for a substantial part of that [rise in the gini inequality number].  And these could be reversed.

Atkinson makes the valuable point that what matters for inequality is who controls the levers of capital. “In the old days, the mill owner owned the mill and decided what went on [there]. Today, you and I own the mill. But who decides what goes on? It’s not us. That’s the important difference. And it doesn’t really appear in Piketty’s book, which is actually more about wealth than it is about capital.”

Yes it is capital not wealth (as Piketty thinks) that matters – but is Atkinson right to think that the owners of capital have in some way relinquished control to pension funds? The owners of capital – the billionaires – still control the means of production ( and make the decisions on wages, bonuses, shareholdings and government policy on corporate taxes and welfare benefits (see my post, ).

Atkinson seems to accept neoclassical welfare economics, namely that an economy will run efficiently and that any intervention like redistribution will make it less efficient, so there’s a trade-off. But he says this only applies to perfect competition whereas economies are really dominated by monopolies. “In that less perfect world, it’s not clear that there is any such trade-off.” But there is no trade-off in the world of perfect competition either because that is an imaginary construct of mainstream economics.

Atkinson calls for a living wage, guaranteed government employment for 35 hours, works councils to give people a say in their jobs; investment in technology for jobs, higher marginal income tax rates (up to 65%, he says); a wealth and inheritance tax with the revenues to be used to invest in pensions. All this sounds fine, although it does not deal with the very issue that Atkinson poses in his book, namely the control of the levers of capital. So his excellent reforms to reduce inequality will just bounce off the deaf ears of the likes of Hilary Clinton.

As I said earlier, Joseph Stiglitz apparently does have the ears of Clinton – for the moment. Stiglitz has just published his second book on inequality called The Great Divide,

In it, he stresses a range of economic and institutional changes weakening ordinary workers that serve to benefit the wealthiest in society. For example, the bonuses that Wall Street executives received in 2014 was roughly twice the total annual earnings of all Americans working full time at the federal minimum wage. Stiglitz rages at the callous ignorance of the rich: “I overheard one billionaire — who had gotten his start in life by inheriting a fortune — discuss with another the problem of lazy Americans who were trying to free ride on the rest,” Stiglitz writes. “Soon thereafter, they seamlessly transitioned into a discussion of tax shelters.”

For him, however, reducing inequality does not depend on controlling the levers of capital but on ‘more democracy’. As Stiglitz notes: “Inequality is a matter not so much of capitalism in the 20th century as of democracy in the 20th century.”

Whereas Piketty believes that extreme inequality is inherent to capitalism, Stiglitz argues that it’s a function of faulty rules and regulation. While he admires Marx’s critiques of exploitation and imperialism, he has little time for his analysis of economics. Stiglitz’s positions are essentially Keynesian and would have been viewed as fairly conventional in the pre-Thatcher and pre-Reagan era.

“My argument is that these guys – the bankers and monopoly corporations – have destroyed capitalism in some sense,” he says. “There are certain rules which are required to make a market economy work. And these guys are really undermining these rules. My book is really about trying to get markets to act like markets. That’s hardly radical, at one level. But at another level it is radical because the corporations don’t want markets to look like markets.”

Atkinson’s answer is a radical redistribution of income and wealth through tax, employment and welfare measures. Stiglitz’s solution is more regulation of the banks and monopolies by democratic governments. Don’t hold your breath waiting for a Democratic Clinton to do either or both.

for more inequality, see my Essays on Inequality


or Kindle version for US:
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