Marx’s law of profitability at SOAS

Last week I gave a lecture in the seminar series on Marxist political economy organised by the Department of Development Studies at the School of Oriental and African Studies (SOAS).  The Marxist Political Economy series is a course mainly for post-graduates and has several lecturers on different aspects of Marxian economics. Course Handbook – Marxist Political Economy 2019-20 (8)

Mine was on Marx’s law of the tendency of the rate of profit to fall.  Not surprisingly, the department team has noticed that I am apparently ‘obsessed’ by this law, at least according to critics of it.

Anyway, I thought it might be useful to go through my lecture in a post, with the accompanying slides referred to.  So here goes. (Marx’s law of the tendency of the rate)

I started by saying that Marx considered the law of the tendency of the rate of profit to fall as “peculiar to the capitalist mode of production” along with “the progressive development of the social productivity of labour.”  They go together: rising productivity and falling profitability.  (Slide 2).

Indeed, Marx’s law is the direct opposite of what Thomas Piketty, author of Capital in the 21st century claimed was Marx’s view.  Piketty reckoned that “Marx’s theory implicitly relies on a strict assumption of zero productivity growth over the long run” and that “Marxist analysis emphasises the falling rate of profit – a historical prediction that has turned out to be quite wrong.”  Indeed, Marx’s law is ignored by mainstream economics (except for getting wrong like Piketty) and also is either ignored or rejected by so-called heterodox economics.

Moreover, even most Marxist economists consider it irrelevant or wrong for any critique of capitalism. I referenced top MEGA scholar, Michael Heinrich: “A few manuscripts from the late 1860s and 1870s suggest that Marx had doubts about the ‘law of the tendency of the rate of profit to fall’, which he no longer mentioned after 1868.“  And then the world’s most famous Marxist economist, David Harvey: “I find Heinrich’s account broadly consistent with my own long-standing scepticism about the general relevance of the law”.  Indeed, it is only a minority of Marxists who consider, like Alan Freeman, that “Marx’s LTRPF remains the only credible competitor left in the contest to explain what is going wrong with capitalism.” (Slide 3).

In contrast, I argued that Marx’s law of profitability is both theoretically valid, empirically supported and relevant to the critical analysis of modern capitalism.  But the law is only valid if two other laws of motion of capitalism that Marx held to are also valid. (Slide 4).

The first is the law of value.  The law of value says that the value of commodities depends on the amount of human labour exerted on producing commodities, as measured by the socially necessary labour time involved.  At one level, it is self-evident, “as any child knows” that nothing is produced to use or sell unless humans go to work to do it.  (Slide 5).

Under the capitalist mode of production, commodities are produced for sale, in a particular social relation.  The capitalist starts with money and the ownership of the means of production.  With that money he/she buys the technology and raw materials to make a new product for sale and employs the workers to do so.  Both that technology and workers are commodities to buy for the capitalist.  But only the workers produce the new commodity for sale on the market for a new amount of money.  And that end product must be worth more in labour time that invested by the capitalist and more in money than spent.  There must be a profit to make it worthwhile.  That profit comes from the surplus value appropriated by the capitalist over above the value paid for labour power.  M- C- P- C’- M’ (Slide 6)

Marx’s theory of value reveals that more value is created only by human labour power and a surplus is extracted by the capitalist because he/she owns and controls the means of production; and that value is realised by sale in markets.  The law of value is theoretically sound and indeed has been empirically supported, namely that total prices of commodities in an economy are closely correlated with total hours of labour time applied. (Slide 7)

The second law is Marx’s general law of accumulation. Competition among capitalists forces them to continue to expand their production in order to accumulate more profit or be driven out of business by others.  Competition drives each individual capitalist to increase the productivity of labour ie lower their costs of production. (Slide 8)

As capitalists spend more of their profits on means of production to boost the productivity of labour and reduce costs, the ratio of the value of means of production compared to the value of the labour power employed tends to rise.  Marx called this ratio the organic composition of capital. It is a law in capitalist economic expansion that the organic composition of capital will rise. (Slide 9)

The law is empirically valid. (Slide 10); fixed capital per worker rises over the long term.

But there is a dual nature to the accumulation process under capitalism.  On the one hand, there is a tendency to increased unemployment from technology shedding labour.  On the other hand, new technology creates new jobs.  Everything then depends on the momentum of the industrial cycle: “the general movement of wages is exclusively regulated by the expansion and contraction of the industrial reserve army and this corresponds to the periodic alternations of the industrial cycle”. Marx (Slide 11) Accumulation can drive down labour’s share in new value but also lower the price of future investment. (Slide 12).

In sum, the organic composition of capital (C/V) rises over time.  This means increased centralisation and concentration of capital. Rising C/V creates a reserve army of labour and technological unemployment. The size of reserve army will vary cyclically with the strength of accumulation.  This law can be empirically verified and has been in many studies. (Slide 13)

This brings us the main message of the lecture.  The first two laws of motion lead to the third law: the law of the tendency of the rate of profit to fall.  The first law says that only labour creates value.  The second says that capitalists will accumulate more capital over time and this will take the form of a faster rise in the value of the means of production over the value of labour power i.e. a rising organic composition of capital. (Slide 14) For Marx, the third law of profitability is “in every respect the most important law of modern political economy and the most essential for understanding the most difficult relations. It is the most important law from the historical standpoint. It is a law, which despite its simplicity, has never before been grasped and even less consciously articulated.” (Slide 15)

The law has a simple formula (Slide 16).  The capitalist starts with money to invest in:

Means of production (fixed capital) and raw materials (circulating capital) = constant capital (c)

Labour force to produce the commodities paid in wages.  But the labour force produces more value than it is paid in wages; so it is called variable capital (v).

The labour force produces commodities that contain surplus value over and above its own value in wages paid = surplus value (s)

The rate of profit is thus S/(C+V).  If we divide this formula by the value of labour power (V), we get s/v//c/v+1.  In other words, the rate of profit falls if C/V rises faster than S/V and vice versa.  (Slide 17)

Marx argues that rising C/V is the tendency which will generally rule and operate over time and rising S/V is a countertendency (induced by the tendency) that can curb, or slow or occasionally reverse the tendency.  If the tendency prevails, the rate of profit will fall  – and most of the time it does.  That is Marx’s law. (Slide 18)

This law has been subject to criticism from the start when it was first revealed in the 1890s in Volume Three of Capital.  (Slide 19)

There are two main critiques.  The first is the so-called ‘transformation problem’. In Volume Three, Marx shows how the values of commodities as expressed in socially necessary labour time are modified in competition for sale of those commodities.  There is price for the commodity in the market, but different producers have different efficiencies – some produce the commodity for sale in less labour time than others.  And they do so because they invest more in labour-saving technology as expressed in a higher organic composition of capital.  Through competition in the market, a production price is established.  At that production price, the more efficient producers make more profit.  They do so because in the market there is a transfer of value from the less efficient to the more efficient and profitability tend to an average across the economy.

Values are turned into prices of production by this competitive process.  Market prices will oscillate around production prices, which are also continually changing due to changes in technology and the organic composition of capitals.  But in Marx’s transformation, total value in the economy (in labour time) is still equal to total price of production (which is value modified by average profitability) and total surplus value is equal to total profit.  So value, the labour time exerted, is still the basis of prices in a capitalist economy. (Slide 20)

Marx’s transformation of values into prices was rejected and attacked by many Marxists.  Bortkiewicz argued that the inputs in values (c+v) on the value side of Marx’s table are really prices of production. In Marx’s formula, the value of the inputs before the equalization differ from the prices of production for the same commodities after the equalization of profit rates. But surely, says Bortkiewicz, the same commodities must be bought and sold as prices of production and not as values.  So Marx’s formula is incorrect and indeterminate. But if we ‘correct’ Marx’s transformation using simultaneous equations, total value no longer equals total price and/or total surplus value does not equal total profit.  So there is a logical inconsistency in Marx’s solution.  Value in labour time is no longer proven as the basis of prices. (Slide 21)

The reply to this critique is that Marx’s transformation is temporal.  The Bortkiewicz critique removes the temporal aspect completely.  Let us say that production starts at t1 and goes to t2.  The output produced during t1-t2 is then sold at t2, the end point of t1-t2.  Then t2 becomes also the initial point of the next production period, t2-t3. The output of t1-t2 has become the input of t2-t3. It exits one period and it enters with the same value in the next period.  Instead, the Bortkiewicz critique holds to the absurd notion that the output of one period is the input of the same period. That’s what simultaneous equations do; remove time. (Slide 22)

The second critique of Marx’s law is that is that new technology would never be introduced by a capitalist if it did not raise profitability.  Indeed, Marx says in Volume Three of Capital that “No capitalist ever voluntarily introduces a new method of production, no matter how much more productive it may be, and how much it may increase the rate of surplus-value, so long as it reduces the rate of profit.”  So Okishio says that “A profit-maximising individual capitalist will only adopt a new technique of production if it reduces the production cost per unit or increases profits per unit at going prices.  So capitalist accumulation must lead to a rise in the rate of profit, not a tendency to fall – otherwise why would any capitalist invest in new technology?” (Slide 23)

The reply to that is this argument is a fallacy of composition – to use the Keynesian term of logic.  Yes, the first capitalist to introduce a new technology will gain extra profit – at the expense of the other capitalists who have not.  The second capitalist will then introduce it and also gain some profitability (but not as much as the first did) at the expense of the other less efficient ones.  But once all capitalists adopt the technology, the extra profitability for introducing it will have dissipated.  And because the organic composition of capital (C/V) is likely to have risen, the rate of profit across all producers will have fallen compared to before.  As Marx says: ”Competition makes it general and subject to the general law. There follows a fall in the rate of profit — perhaps first in this sphere of production, and eventually it achieves a balance with the rest — which is, therefore, wholly independent of the will of the capitalist.” (Slide 24)

And there is one more retort to the critics of the law.  It is empirically supported.  Over decades, there has been a secular decline in the profitability of capital across all the major economies – if you like, the world rate of profit has fallen –  but not in a straight line, because there have been periods where the counteracting factors to the tendency have been stronger.  But over the history of modern capitalism, the rate of profit has fallen. (Slide 25)

Marx’s law is not only secular (namely a long-term tendency for profitability to fall).  The law also helps explain the cyclical recurrence of booms and slumps in capitalist production and investment. (Slide 26) The operation of counter-tendencies transforms the breakdown into a temporary crisis, so that the accumulation process is not something continuous, but takes the form of periodic cycles. (Slide 27)

The rate of profit can be falling but the total or mass of profit in the economy can be rising.  Indeed, that will be the usual situation as capitalists expand investment and production to increase profits as the profitability of each new unit of investment begins to drop.  This is what Marx called the double-edge law of profit. (Slide 28) So the mass of profit can and will rise as the rate of profit falls, keeping capitalist investment and production going. But as the rate of profit falls, eventually the increase in the mass of profit will decline to the point of what Marx called ‘absolute over-accumulation’, the tipping point for crises.

Thus Marx’s law of profitability provides an underlying explanation of the cycle of boom and slump that occurs periodically in capitalism. (Slide 29)

In sum:

The law of value:  only labour creates value.

The law of accumulation: the means of production will rise to drive up the productivity of labour and to dominate over labour.

The law of profitability: the first two laws create a contradiction between rising productivity of labour and falling profitability for capital. This can only be reconciled by recurring crises of production and investment; and, in the long term, by the replacement of capitalism. (Slide 30).

That was the lecture.  Questions from the seminar attendees were many and perceptive.  Here are a few.

Are there no other factors that cause crises in capitalism apart from profitability?

What is the difference between the organic composition of capital and the technical composition of capital that Marx refers to?

Does not the law suggest that there is no economic policy within capitalism that can stop recurring crises? 

If so, do the crises go on forever or will it come to a total breakdown at certain point?

I’ll leave the reader to consider these answers, if there are any answers.

G20 and COVID-19

The finance ministers and central bankers of the top 20 economies in the world met this weekend in Riyadh, Saudi Arabia.  The G20 finance summit had a lot to ponder.  First, there was the coronavirus epidemic.  Would it turn into a pandemic?  Would the impact of global growth, trade and investment be so severe as to tip the world economy into recession in 2020?  Also, what is to be done about curbing and reducing greenhouse gas emissions with the world’s temperatures continuing to rise towards an increase above that set by the last international climate change agreement?  Finally, is there nothing to be done about high and rising inequality of wealth and income and continued shift of profits by multi-nationals and rich oligarchs into ‘tax havens’?

The Saudi Arabia G20 communique provided no answers to any of these questions.  At Riyadh, IMF managing director, Kristalina Georgieva, having previously announced a reduction in IMF forecasts for global growth to just 2.9%, now added a further reduction due to COVID-19.  She reckoned that the epidemic will likely cut 0.1% from global economic growth to 2.8%, the lowest rate since the end of the Great Recession over ten years ago.  And it would drag down growth for China’s economy to 5.6% this year from 6.0% previously forecast.  “In our current baseline scenario, announced policies are implemented and China’s economy would return to normal in the second quarter. As a result, the impact on the world economy would be relatively minor and short-lived,” she said. But even that could be optimistic.  “But we are also looking at more dire scenarios where the spread of the virus continues for longer and more globally, and the growth consequences are more protracted,”

French Finance Minister Bruno Le Maire said in Riyadh. “The question remains open whether it will be a V-shape with a quick recovery of the world economy, or whether it would lead to an L-shape with a persistent slowdown in world growth.” He said the V-shaped scenario was more likely.

As the ministers met, the latest data on COVID-19 suggested that China was getting the epidemic under control.  It reported a sharp fall in new deaths and cases of the coronavirus, but world health officials warned it was too early to make predictions about the outbreak as new infections continued to rise in other countries.  “Our biggest concern continues to be the potential for COVID-19 to spread in countries with weaker health systems,” WHO chief Tedros Adhanom Ghebreyesus said.  The U.N. agency is calling for $675 million to support most vulnerable countries, he said, adding 13 countries in Africa are seen as a priority because of their links to China.

The Chinese authorities put on an optimistic air.  Chen Yulu, a deputy governor of the People’s Bank of China, said policymakers had plenty of tools to support the economy, and were confident of winning the war against the epidemic. “We believe that after this epidemic is over, pent-up demand for consumption and investment will be fully released, and China’s economy will rebound swiftly,” Chen told state TV.

Other commentators are less convinced that China can recover quickly from shutting down industry, stopping tourism and keeping millions at home.  Zhu Min, a former deputy managing director of the International Monetary Fund, reckoned that COVID-19 could slash US$185 billion off China’s economy in January and February.  Dips in tourism and consumer spending could reduce first-quarter growth by three or four percentage points, according to Zhu Min, While online spending – particularly on education and entertainment services – would offset some of the losses, the total drain on the economy over the period could be as much as 1.38 trillion yuan, said Zhu. Based on figures from China’s National Bureau of Statistics, that would represent about 3.3 per cent of the country’s total retail sales in 2019.

Car sales, fell by 20.5 per cent year on year in January, their largest monthly dip in 15 years, according to figures from the China Passenger Car Association.  And sales in the first two weeks of February fell 92 per cent from the same period of 2019, mainly due to showroom closures. Over the whole of 2020, the coronavirus epidemic could cost China 1 million car sales, or about 5 per cent of its annual total, the industry group said. “The falling consumption in the first quarter could knock down growth by three or four percentage points,” Zhu said. “We need a strong rebound, and that needs 10 times as much effort.”

Chen Wenling, chief economist at the China Centre for International Economic Exchanges, a Beijing-based think tank, said this week that even if national production returned to 80 per cent by the end of February, first-quarter growth would still be less than 4.5 per cent. By comparison, China’s economy grew by 6.4 per cent in the first three months of 2019.

What to do?  At Riyadh, Japan’s answer was to call for increased government spending.  Finance Minister Taro Aso called on G20 countries with ‘fiscal space’ (like Germany) to ramp up spending to help the global economy.  “I told the G20 ministers that the spread of the coronavirus epidemic … could have a serious effect on the global economy,”  Aso pointed out that Japan has deployed fiscal spending quite a bit, so wants other countries with fiscal room to do the same.  This is ironic when it is realised that Japan’s permanent annual budget deficits do not appear to have saved the economy from dropping into recession, even before the effects of COVID-19 epidemic hit.

But don’t worry. Aso claimed that Japan continued to recovery moderately as a tight job market and rising household income offset some of the weaknesses in exports and output. “At this stage, I don’t think risks to Japan’s economy have suddenly heightened sharply.”  That is wishful thinking.

As I have argued in many posts before, fiscal stimulus is likely to have a negligible effect on achieving economic recovery once a slump sets in and the capitalist sector stops investing and consumers stop spending (as much).  That’s because government spending outside of welfare transfers is no more than 10% of most economies’ GDP and government investment (as opposed to spending on public services) is no more than 3% of GDP compared to 15-20% of GDP invested by the capitalist sector. It will take a huge increase in government investment to have an effect.

Moreover, the ability and willingness of governments to resort to such huge fiscal injections are limited.  Gavyn Davies in the FT is sceptical: “the next global recession may result in a merging of what has traditionally been viewed as the two separate wings of macro policy, fiscal and monetary. It is a difficult question of political economy whether the central bank or the treasury is better placed to lead the design of an effective policy response in this environment. Japan has been in this position for several years and has so far failed to cut the Gordian knot.  Policymakers in the US and Europe should be thinking well in advance about how they can co-operate both internationally and domestically to produce a better outcome. There is no sign of this happening yet.”

Perhaps only one country is capable to doing that.  Given the size of the state sector and government control in China, a fiscal boost can have much more effect, as it did during the 2008-9 Great Recession, when China continued to grow while virtually every other economy went into a slump or slowed drastically.  The Chinese government is ready to spend and invest big time to turn things round once the virus epidemic fades.

Even so, if China’s growth slows sharply for a couple of quarters, that will only add to the woes of the major economies.  The latest economic activity indexes for the major advanced capitalist economies make sombre reading.  Japan’s business activity indexes in February showed a significant fall below the stasis level of 50. Japan’s manufacturing PMI dropped to 47.6 in February 2020 from 48.8 in the previous month. The latest reading was the steepest pace of contraction in the manufacturing sector since December 2012. And the services PMI declined to 46.7 in February from 51.0 in the previous month. This was the steepest contraction in the service sector since April 2014, So the overall index fell to 47.0 from 50.1 in January. Again, this was the steepest contraction in private sector activity since April 2014. Japan is clearly in a slump.

Eurozone private sector activity showed a slight improvement in February. The overall ‘composite’ PMI in the Euro Area increased to 51.6 in February from 51.3 in January. This slight improvement was due mainly to German manufacturing, which is still contracting – but at a slower pace. The Eurozone is still growing, but at a snail’s pace.

The UK’s manufacturing activity in February jumped into mildly positive territory, up to 51.9 from 50.0 in January. This was a ten-month high, which is not saying much as the index was over 55 three years ago. The services sector index weakened a little in February but still showed modest growth at 53.3. So the overall ‘composite’ index was unchanged at 53.3. That means the UK economy is growing but very modestly in the first quarter of 2020.

But the big shocker was the US.  The US economic activity indicator went below 50, signalling a contraction in the economy for the first time since the PMI survey began in 2014. The overall ‘composite’ indicator fell to 49.6 in February from 53.3 in January. The manufacturing index also fell to 50.8 from 51.5 in January. But the real bad news was the fall in the larger services sector, which dropped to 49.4 from 53.4. It seems that the US is joining Japan and the Eurozone in stagnating or even contracting in Q1 2020, and China has yet to report on the full economic impact of the coronavirus outbreak.

Other G20 economies are also on the cusp.  Australia’s index was below 50 in February; South Africa too.  We await data on the others.

In my last post on COVID-19,  I commented: “it could be a trigger for a new economic slump because the world capitalist economy has slowed to near ‘stall speed’. The US is growing at just 2% a year, Europe and Japan at just 1%; and the major so-called emerging economies of Brazil, Mexico, Turkey, Argentina, South Africa, and Russia are basically static. The huge economies of India and China have also slowed significantly in the last year and if China takes an economic hit from the disruption caused by 2019-nCoV, that could be a tipping point.”

Up to now, the world’s stock markets have ignored this risk, convinced that zero or negative interest rates for borrowing and speculating would continue, thanks to the US Federal Reserve, and also in expecting the epidemic to dissipate by the end of this current quarter, so the ‘business as usual’ can be resumed.  But with the outbreak picking up outside China and the likely slow economic recovery by China, the stock fantasists may be overoptimistic.  And remember, global corporate profits are stagnant along with business investment, the main cause of the global slowdown.

As for the other issues discussed by the G20 ministers: climate change, inequality and tax havens, forget it.  Nothing was agreed.  For the first time, the final G20 communique included a reference to climate change “to examine the implications of climate change on financial stability”.  It was ok to worry about the impact on financial assets and stock markets, but the US vetoed any mention of the impact on the world economy and people.

Nothing happened on inequality because the European countries could not agree on a common tax strategy on global tax avoidance.

Japan: Abenomics revisited

The news that Japan’s real GDP dropped sharply in the last quarter of 2019 and the economy appears to be entering a new ‘technical’ recession (two consecutive quarterly contractions) in 2020 has produced a reaction from mainstream economics.

The worry is that ‘Abenomics’ – the economic policy approach of the current Liberal Democrat prime minister, Shinzo Abe – is failing.  Abenomics was introduced in 2012 after a fanfare of support and encouragement by such economic luminaries as Ben Bernanke, former head of the US Federal Reserve and now President of the American Economics Association;, and Paul Krugman, Nobel prize winner and leading Keynesian guru.  Both economists were invited by Abe to address the Japanese cabinet on the right policies to get Japan out of the stagnation that the economy had experienced through the 1990s and then after the impact of the Great Recession of 2008-9.

Bernanke, being a leading monetarist, proposed reducing interest rates and pumping huge injections of credit (quantitative easing) by the Bank of Japan into the banks –  just as he had done with the Federal Reserve in the US.  Paul Krugman supported that but also advocated increased government spending by running budget deficits in order to stimulate demand.  In essence, Abe was encouraged to adopt the two policy proposals of mainstream/Keynesian economics (monetary and fiscal) to get a capitalist economy out of stagnation and the recurrence of a slump.  Indeed, these policies are exactly what is proposed now to get the world capitalist economy out of its low growth in GDP, investment and productivity in 2019.

Abe adopted these policies as two of the three ‘arrows’ of Abenomics.  The other arrow was ‘structural reform’, a nice name for ‘neoliberal’ policies of reducing labour rights, privatisations, pensions and holding down wages so that costs of production are reduced and profitability of capital is raised.  At the time, I called Abenomics a Keynesian/neoliberal mix.  And I said Abenomics will prove to be a failure because “Keynesian policies in the 1990s did not work for Japan and they probably won’t work in this decade either.”  I concluded that “Japan now has a policy recipe that the IMF in its new anti-austerity mode would approve: fiscal and monetary stimulus along with reducing the power of labour and government regulation.  So Japan’s experiment combines all known mainstream economic potions in one bottle to take on the ‘unknown unknowns’.  Watch this space.”

Well, after watching, we find that Abenomics has not worked and Japan is heading back into another slump after a yet another lost decade of stagnation.  So what is the response of the mainstream?  The Financial Times editorial was quick to tell us. “All the elements of Abenomics needed to work together to push the economy to a new balance: monetary stimulus to weaken the yen, fiscal stimulus to jump-start demand and structural measures such as trade deals to create growth opportunities and incentives for business investment. It was never going to be easy but this combination proved its worth. 2013 brought a sharp weakening of the yen and a burst of optimism.”

But then says the FT, the government tried to reduce its budget deficits and huge government debt ratios by introducing a consumption (sales) tax that hit fragile consumer spending and demand has collapsed.  The answer is that “the only sensible action Mr Abe can take in the short-term — other than a politically impossible reversal of the tax rise — is more fiscal stimulus. The problem, as it has been throughout the past seven years, is not Abenomics. The problem is not enough of it.”  Paul Krugman was also quick to support the FT’s message “If you have zero interest rates and a weak economy nonetheless, you need fiscal stimulus, not austerity.” The IMF also echoes this view: “Japan needs to strengthen the mutually-reinforcing policies of “Abenomics”—including monetary easing, flexible fiscal policy, and structural reforms (particularly labor market reforms).”

But were a tax hike and reduced budget deficits (ie ‘austerity’) the cause of this new recession? Would more Abenomics really do the trick after failing for the last eight years?  It’s true that the annual budget deficit as a% of GDP has been falling since 2010 but throughout the period of the lost decade of the 1990s, budget deficits were widened sharply and yet Japan stagnated.  And the annual deficits have been higher since the Great Recession than in most of the 1990s.

Despite nearly three decades of government budget deficits, Japan has stagnated with an average real GDP growth rate of 1%, interspersed with recurring ‘technical’ recessions.  Indeed, Japan’s fastest growth period was from 2002-2007, when austerity was imposed by Koizumi!

So history does not support the Keynesian policy solution.  Moreover, it does not augur well for the policy conclusions of Modern Monetary Theory (MMT).  MMT exponents argue that governments should run ‘permanent’ budget deficits to boost government spending to the point where ‘full employment’ is achieved.  There would be no need to worry about the size of government debt because a country like Japan, which services that debt from Japanese citizens’ savings through the banks buying government bonds, will never default.

It’s true that Japan is unlikely to default on its debt, the highest public debt ratio in the world, particularly with interest at or near zero.  But on the other hand, Japan has done exactly what MMT suggests and has run permanent government deficits, spending it on construction and other projects and yet Japan’s economy has stagnated.

The MMT retort could be to say that the positive result of these deficits is that there is full employment in Japan.  The official unemployment rate is at a record low of 2.2%.

And employment has rocketed.

But this is a phenomenon that has been repeated in other G7 economies.  Both the UK and the US also have record low official unemployment rates and the rate in the Eurozone has also dropped sharply in the last ten years.  But in all these countries, this employment is not in well-paid, secure jobs, with training and career prospects.  Most are in ‘precarious’, low paid, low skill work.

In Japan, most of the new employees are women and older people who are taking up jobs in health and social care, temporary and part-time, the lower end of wage market. More than a third of the Japanese workforce is working in non-regular positions. Factors underlying this situation include the increasing number of older people who become contract or temporary workers after retirement.

Within the working-age population (15–64), the number of regular employees rose by 460,000 to 33.2 million, and the total for employees aged 65 and over climbed 100,000 to 1.1 million.  Meanwhile, there were 17.2 million non-regular employees aged 15 to 64 in 2017, down 30,000 on the previous year. The number of workers 65 and older with non-regular jobs rose by 150,000 to 3.2 million.

These workers are having to do two or more jobs to make ends meet.  Some people are working 70-hour weeks out of multiple jobs. According to Lancers research, some 4.5 million full-time workers in Japan have second jobs, where they work, on average, between six and 14 additional hours each week, on top of any overtime hours they clock at their primary job; a small number of them work up to 30 or 40 hours per week at their second jobs.

In the food-service industry, workers are in such short supply that McDonald’s recently resorted to an expensive advertising campaign aimed at recruiting housewives and retirees to help out with its busiest shifts. Convenience-store chains have hired more foreign workers, while small and mid-sized manufacturing companies have increasingly turned to automation.

But the one recruitment strategy that hasn’t really taken hold is increasing wages! Instead, Japan’s corporations have chosen to sit on the piles of cash they’ve earned from Abe’s fiscal policy. Each spring, over the past six years of Abenomics, the leaders of Japan’s major industries have ceded remarkably little ground to unions during the annual wage negotiations known as shuntō. Overall, workers are spending an average of 11 percent more time to earn the same salary they were bringing home about 20 years ago, and some are working unpaid overtime on top of that.

Employ, pay them little and don’t invest.  That has been the policy of the capitalist sector in most of the major economies since the Great Recession and the result is that the productivity of labour has hardly risen.  In the case of Japan, the population has been falling and ageing.  So per capita income growth has been better than total GDP growth.  Per capita Japan’s real GDP is up 10.8% since 2010 while real GDP is up 9.6%.  Even so, a Malthusian solution (reducing the population) is hardly a way of raising incomes for those still living.  And the Malthusian solution is set to worsen over the next generation as Japan ages at a fast rate.

That brings us to the third arrow of Abenomics: so-called ‘structural reforms’.  Reducing the cost of production by deregulating the labour market, privatising and cutting taxes on profits etc – these measures aim to help boost the rate of exploitation and the profitability of capital in Japan.  As I said in 2012, the real purpose of Abenomics was to raise the profitability of Japanese capitalism, at the expense of labour.  Neoliberal measures were applied under Premier Koizumi at the end of the 1990s and they had some success in raising profitability.  So Japan’s economic growth was relatively better in the 2000s up to the Great Recession and the tsunami than in the 1990s.

That was because Japan’s corporate profitability improved. It did so because the then neo-liberal government of prime minister Koizumi opted for the restructuring of the banks, privatisation of state agencies and higher taxes on consumption.  This produced a short revival in profitability, at the expense of average living standards, reduced pensions and worse work benefits.

Abe applied some more.  He cut corporate profit taxes sharply – Trump-style

while he hiked employee social security contributions to reduce the burden for employers.

The outcome was a shift in the share of labour in national income towards profit share. Real wages per employee fell and, with it, household spending.

But this has not been sufficient to restore profitability to even pre-GR levels.

*This rate of return measure is compiled from IRR series in the Penn World Tables 9.1 with an estimated update for 2018 and 2019 using the AMECO database on NRR.

After the great hi-tech expansion and credit bubble burst in Japan at the end of the 1980s, the profitability of capital plummeted in Japan, and, with it, investment and output.  The Koizumi reforms and the global credit boom after 2001 helped to restore profitability somewhat.  But then came the Great Recession and profitability dropped again. The period of Abenomics saw a small recovery up to 2017, but profitability has fallen back again and remains near Great Recession lows.

This is the underlying causal factor behind low investment rates and stagnation – as it is in many other major capitalist economies.  Neither Monetarist not Keynesian stimulation (the first two arrows of Abenomics) have done anything to reverse that.  Structural reforms to reduce labour and other production costs might help profitability but politically that would be very difficult to impose.  Abenomics continues to fail.  More Abenomics, as suggested by the mainstream/Keynesian voices, won’t change that.

The climate and the fat tail risk

Last month at the gathering of the great but not good, the rich and infamous, at the World Economic Forum in Davos, US Treasury secretary, Steven Mnuchin, formerly a hedge fund manager, was asked whether he agreed that calls by teenage climate activist Greta Thunberg for public and private-sector divestment from fossil fuel companies would threaten US growth.  He said it would and Mnuchin jibed: “Is she the chief economist? Who is she, I’m confused… After she goes and studies economics in college she can come back and explain that to us.”  Thunberg retorted: “My gap year ends in August, but it doesn’t take a college degree in economics to realise that our remaining 1,5° carbon budget and ongoing fossil fuel subsidies and investments don’t add up.”

Thunberg may not be an economist (which may be to her advantage), but the economics of global warming and climate change is concentrating the minds of many economists, if not Mnuchin.  JP Morgan economists recently considered the issue of the “financial stability and economic risks from fossil fuel stranded assets: oil, coal and gas reserves that cannot be exploited due to the transition to a low-carbon economy.”  They reckon that up to US$20tn could be wiped from stock market values if it is realised by investors that reducing fossil fuel use would mean a sizeable portion of proved reserves held by energy companies may never be used. These ‘transition risks’ to the profits of the energy companies would be equivalent to 17% of the US$119tn global fixed income and equity markets.

So JP Morgan economists tried to work out what could be the minimum reduction in fossil fuel use to avoid losses for the energy companies and financial markets. The lower the target limit on greenhouse gas emissions, the greater the risk of ‘stranded assets’ (unused) on the books of the companies.  The size of stranded assets would depend of the temperature target, which in turn would depend on government policy decisions and on technology innovations to reduce energy use and carbon emissions over the next generation.

The International Energy Agency (IEA) has a ‘Sustainable Development Scenario’ which it claims to limit the global warming increase to 1.8⁰C relative to pre-industrial times, with a 66% likelihood.  In this scenario, energy-related CO2 emissions are assumed to peak immediately (yes, right now!) and then fall to reach zero in 2070.  If that actually happened, then, according to JPM, 87% of the current proved coal reserves, 42% of current proved oil reserves and 26% of current proved natural gas reserves would need to be left in the ground if the temperature gain were to be limited to 1.8⁰C.

The IEA also has a ‘Stated Policies Scenario’, which is intended to reflect the effects of policies that governments have already implemented with an assessment of the likely consequences of policies that governments have announced but not yet implemented. Finally, there is the ‘Current Policies Scenario’ which is where governments ignore or do not implement all stated current climate policies. What the IEA finds is that the Stated Policies Scenario shows some relative improvement in reducing carbon emissions compared to the Current Policies Scenario, but it is a long way short of the Paris 2⁰C objective.  Indeed, the Stated Policies Scenario would be consistent with an increase in the global temperature of around 3⁰C!  That would have devastating effects on the climate.

The difference between the temperature increases in the Sustainable Development Scenario (around 1.8⁰C), the Stated Policies Scenario (around 3⁰C) and the Current Policies Scenario (around 3.5⁰C) may not seem very large.  But they are for the world economy, human society and ecosystems.  Climate change is about much more than an increase in the temperature. It is also about the frequency and intensity of extreme weather events (such as heatwaves, droughts, flooding, storms, and tropical cyclones), shifts in atmospheric and oceanic circulations, declines in ice cover and sea level increases.

But here is the crunch for the energy companies and financial markets.  Even in the IEA Stated Policies Scenario, the stranded assets for coal are still large, at 67% of the proved reserves. But there are no stranded assets for either oil or natural gas. Indeed, the cumulative extraction of oil from 2019 to 2070 exceeds the level of proved reserves in 2018 by 215.7 billion barrels (12%of proved reserves in 2018), while the cumulative extraction of natural gas from 2019 to 2070 exceeds the level of proved reserves in 2018 by 68,525 billions of cubic meters (35%of proved reserves in 2018). JPM comments: “These calculations help to explain why companies are still exploring for new oil and gas deposits, despite some dire warnings about stranded assets.”  In other words, existing government agreements to reduce fossil fuel use and carbon emissions will not damage the profits of the oil and gas multinationals at all, but also will fail to stop the inexorable rise in global warming to increasingly destructive levels.

JPM economists pin their hopes on squaring the circle through the development of carbon capture and storage (CCS) technology, which aims either to prevent CO2 emissions from energy production and industrial processes that use fossil fuels from entering the atmosphere or to remove CO2 from the atmosphere completely (see graph above). The CO2 captured would then need to be stored underground. The more effective the CCS technology, the less pressure on stranded assets; and the less the loss of profits for energy companies.

At the moment, there are three technologies in theory that could do this. First, carbon capture and storage (CCS), where the emissions from power plants and industrial processes are captured before they enter the atmosphere. Second, biomass energy carbon capture and storage (BECCS) where energy is produced by plant material (which has absorbed CO2 while growing) and the emissions are captured before they enter the atmosphere. This generates negative emissions. And third, direct air capture and carbon storage (DACCS) where CO2 is extracted from the atmosphere directly. This also creates negative emissions.

In reality, these technologies are not going to do the job.  Currently, there are 19 operational CCS facilities, with 32 under construction or development. These facilities have the capacity to capture around 40Mt of CO2 per year. This is just 0.1% of the current energy-related CO2 emissions of around 33Gtper year.

Then there is the Nightmare Scenario.  Some recent scientific projections suggest that a ‘business-as-usual climate policy scenario’, as promoted by the likes of Mnuchin, is expected to deliver a temperature increase of around 3.5⁰C; dangerous enough.  But the impact of climate change is likely to come just as much from an increase in the variance as from an increase in the mean.  Up to now scientists concur that the Earth could warm 3°C if CO2 doubles. But the latest models suggest even faster warming — recent model projections on global warming from various sources are suggesting a rise in global temperature in excess of 5°C.

Indeed, a Pareto probability distribution function of the current projections have ‘fat tails’ that suggest there is a 1% likelihood of a 12⁰C increase in temperature.  Weitzman:“the most striking feature of the economics of climate change is that its extreme downside is non-negligible. Deep structural uncertainty about the unknown unknowns of what might go very wrong is coupled with essentially unlimited downside liability on possible planetary damages.”   

With that kind of temperature increase, human life would probably not survive. But even worse, says JPM economists, “in such a catastrophic outcome, all financial and real assets would likely be worthless.”!

And yet governments continue to allow energy companies to search for and develop more fossil fuel resources.  And this is not just in so-called emerging economies which need growth.  Canada’s Liberal government claims to be a leader in fighting global warming.  But the government has still agreed to allow the development of the biggest tar sands mine yet: 113 square miles of petroleum mining. A federal panel approved the mine despite conceding that it would likely be harmful to the environment and to the land culture of indigenous people.

These giant tar sands mines (easily visible on Google Earth) are already among the biggest scars humans have ever carved on the planet’s surface. But Canadian authorities ruled that the mine was nonetheless in the “public interest”.  Justin Trudeau, recently re-elected as Canada’s prime minister, put it in a speech to cheering Texas oilmen a couple of years ago: “No country would find 173 billion barrels of oil in the ground and leave them there.” So Canada, which is 0.5% of the planet’s population, plans to use up nearly a third of the planet’s remaining carbon budget.  There’s oil in the ground and it must come out.

It’s the future of the planet and its species versus the profits of the multinationals.

Trump’s trickle dries up

“The economy now has hit 3 percent. Nobody thought we’d be anywhere close. I think we can go to 4, 5, and maybe even 6 percent.” – Donald Trump, Dec. 16, 2017

Well, Trump’s boast turned to dust in 2019. US GDP grew by 2.3% in 2019, well below President Trump’s promise of 3%+ growth. The most recent GDP number proved that the tax cuts championed by Trump had no sustained impact on US growth.  Indeed , even the most optimistic forecasts see growth to stay well below 3% for the next few years. Of course, that won’t stop Trump in his State of the Union speech today in Congress proclaiming a huge rise in the living standards of working people under his reign.  Actually, cumulative growth under Trump has been lower than under both Obama and Bush Jnr.

US real GDP growth yoy (%)

Leading mainstream economist Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, used to serve as the chief economist and economic adviser to Vice President Joe Biden.  He points out that the Trump administration’s bullish forecast was based on the belief that the tax cut developed and passed by Trump and the Republicans at the end of 2017 would increase the economy’s trend growth rate. “Trump and his economic team have long argued that the tax cuts — especially the big drop in the corporate rate from 35% to 21% would kick off a virtuous cycle delivering lasting growth above the roughly 2 percent that has prevailed for the past two decades. The idea was that lower corporate rates would incentivize more capital investment in things like factories or large equipment and that this added capital stock would permanently boost the economy’s productive capacity.”

As Bernstein says, this is ‘trickle-down’ economics as popularized by economists like Art Laffer and Rober Mundell, wherein tax cuts targeted at investors trickle down through the broader economy, lifting growth, wages, and spinning off more tax revenue to help offset the tax cut’s initial cost.  But this has turned out to be nonsense.  On the contrary, real business investment has declined for three quarters in a row, the worst such stretch since the last recession.

Why did Trump’s trickle-down economics not work?  Bernstein answers that Keynes explains all.  You see, there is a lack of effective demand in the private sector.  And “Keynesian economics, in this context, argues that in periods when private sector demand is inadequate to achieve full employment, the government should step in and temporarily make up for the lost demand through deficit spending.” 

So it’s a lack of demand in the private sector.  It’s clearly not household consumption or demand, which continues to rise.  Indeed, Trump can boast that hourly wages (but not weekly earnings) are rising at nearly the same pace as they were just before the Great Recession in 2008 under Obama.

But it is business investment that is falling.  So, according to Bernstein, the capitalist economy needs “Keynesian fiscal jolts give economies a temporary boost by using, for a limited time, public-sector demand to offset lagging private-sector demand.”  Just for a limited time, mind; once capitalist investment is back on its feet, we can curb public investment and spending.  Although Bernstein notices that it may be necessary to “relentlessly go back to the Keynesian fiscal well year-after-year” or “we should expect such benefits to fade, as they have.”  Bernstein decides that “given the corporate sector’s unwillingness to invest their elevated after-tax earnings…we should consider a large public investment program” to boost productivity and ‘human capital’ (skills and education) and also to mitigate the effects of global warming.

Yes, capitalist investment ‘demand’ is too low.  But what Bernstein, and for that matter Keynesians in general, never explain is why the capitalist economy gets into this state of a lack of demand.  Private sector demand is too weak, ie businesses are not investing enough in productive activities.   But why?  There is no answer from Bernstein – it seems it just happens every so often.  And when it does, government must intervene to “make up for the lost demand”.

Keynesian guru Paul Krugman wrote a short book in the depth of Great Recession.  It was entitled End this depression now! – with the exclamation mark prominent.  In it he said, it matters less why there was a slump (in demand); more important was to take action to boost government spending to end the slump (in demand).

But surely unless we know why such recessions (or for that matter slowdowns in investment growth) take place at recurring intervals, we shall be trying to judge forever the amount of ‘limited time’ that governments need to run budget deficits and spend more or less.  And such macro-management of capitalist economies has never been successful.

Actually, there is plenty of evidence that can explain the ups and downs of business investment.  It is not changes in interest rates; and it is not sudden changes in ‘business confidence’, as many mainstream economists argue.  Those are usually the consequence, not the cause of low demand.  The fundamental cause under capitalism is profitability and the movement of corporate profits.  The evidence for that is in abundance.

The US rate of profit on productive capital remains well below where it was in the late 1990s.  It was hardly boosted by the depreciation of assets in the 2008-9 recession.

Source: Penn World Tables 9.1 IIR series

And this applies to the current real GDP growth in the US.  Growth is much lower than Trump hoped for because businesses have not invested productively but used the extra cash from tax cuts to pay larger dividends to shareholders; or buy back their own shares to boost the price; or to shift profits abroad into tax havens.  They have not invested as much in new structures, equipment etc in the US because the profitability of such investments is still too low historically; and especially relative to investment in the ‘fictitious capital’ of the stock and bond markets, where prices have reached all-time highs.

Indeed, non-financial sector profits have fallen 25% since 2014!  Trump’s corporate tax cuts helped post-tax profits for a while, but pre-tax profits have continued to fall.

Source: US BEA NIPA tables

The bulk of productive investment decisions remain in the hands of big business.  Out of the 20% of US GDP in investment, only 3% is public investment and much of that is military spending.  Until that ratio is reversed, “relentless Keynesian” fiscal spending will no more boost growth than ‘trickle-down’ economics.  Only a good, deep recession can restore profitability by sharply reducing the costs of fixed assets and new investments for those businesses that survive.

Coronavirus: nature fights back

As I write, the new deadly coronavirus 2019-nCoV, related to SARS and MERS, and apparently originating in live animal markets in Wuhan, China, is starting to spread worldwide. According to the latest data as of today, there are just under 10,000 cases globally with just 130 or so outside China.  So far, there have been 230 fatalities, none outside China, or about a 2% death ratio, compared to 10% with the SARS virus back in 2009.  The rate of spread is about 1.5, a figure that appears to slowing, although it may be too early to say.

This infection is characterized by human-to-human transmission and an apparent two-week incubation period before the sickness hits, so the infection will likely continue to spread across the globe.

As epidemiologist Rob Wallace from the Institute for Global Studies, University of Minnesota says in Climate and Capitalism, “Outbreaks are dynamic. Yes, some burn out, including, maybe, 2019-nCoV. It takes the right evolutionary draw and a little luck to beat out chance extirpation. Sometimes enough hosts don’t line up to keep transmission going. Other outbreaks explode. Those that make it on the world stage can be game changers, even if they eventually die out. They upend the everyday routines of even a world already in tumult or at war.”

Wallace adds: “The SARS outbreak proved less virulent than it first seemed. But it still quietly killed patients, at magnitudes far beyond these first follow-up dismissals. H1N1 (2009) killed as many as 579,000 people its first year, producing complications in fifteen times more cases than initially projected from lab tests alone.  Under such widespread percolation, low mortality for a large number of infections can still cause a large number of deaths. If four billion people are infected at a mortality rate of only 2%, a death rate less than half that of the 1918 influenza pandemic, eighty million people are killed.”

But unlike for seasonal influenza, there is neither ‘herd immunity’, nor a vaccine to slow it down. Even speeded-up development will at best take three months to produce a vaccine for 2019-nCoV, assuming it even works. Scientists successfully produced a vaccine for the H5N2 avian influenza only after the U.S. outbreak ended.  These unknowns—the exact source, infectivity, penetrance, and possible treatments—together explain why epidemiologists and public health officials are worried about 2019-nCoV.

But whatever the specific source of 2019-noV, there appears to be an underlying structural cause: the pressure of the law of value through industrial farming and the commodification of natural resources.  Commoditizing the forest may have lowered the ecosystemic threshold to such a point that no emergency intervention can drive any outbreak low enough to burn out.  For example, in relation to the Ebola outbreak in the Congo (which is also happening again), “Deforestation and intensive agriculture may strip out traditional agroforestry’s stochastic friction, which typically keeps the virus from lining up enough transmission.” 

The blame for the 2019-nCoV outbreak is supposedly open markets for exotic animals in Wuhan, but it could also be due to the industrial farming of hogs across China.  And anyway, “even the wildest subsistence species are being roped into ag value chains: among them ostriches, porcupine, crocodiles, fruit bats, and the palm civet, whose partially digested berries now supply the world’s most expensive coffee bean. Some wild species are making it onto forks before they are even scientifically identified, including one new short-nosed dogfish found in a Taiwanese market.”

All are increasingly treated as food commodities. As nature is stripped place-by-place, species-by-species, what’s left over becomes that much more valuable. Spreading factory farms meanwhile may force increasingly corporatized wild foods companies to trawl deeper into the forest, increasing the likelihood of picking up a new pathogen, while reducing the kind of environmental complexity with which the forest disrupts transmission chains.

There has been much academic discussion among Marxists and ‘green ecologists’ recently on the relation of humans to nature.  The argument is around whether capitalism has caused a ‘metabolic rift’ between homo sapiens and the planet ie disrupting the precious balance among species and the planet, and thus generating dangerous viruses and, of course, potentially uncontrollable global warming and climate change that could destroy the planet.

The debate is round whether using the term ‘metabolic rift’ is useful because it suggests that at some time in the past before capitalism there was some metabolic balance or harmony between humans on the one hand and ‘nature’ on the other.  But nature has never been in some state of equilibrium.  It has always been changing and evolving, with species going extinct and emerging well before homo sapiens (a la Darwin).  And humans have never been in a position to dictate conditions in the planet or with other species without repercussions. ‘Nature’ lays down the environment for humans and humans act on nature.  To quote Marx: “Men make their own history but they do not make it just as they please; they do not make it under circumstances chosen by themselves, but under circumstances directly encountered and inherited from the past.”

What is clear is that the endless drive for profit by capital and the law of value exert a destructive power not just through the exploitation of labour, but also through the degradation of nature.  But nature reacts periodically in a deadly manner.

The coronavirus outbreak may fade like others before it, but it is very likely that there will be more and possible even deadlier pathogens ahead.  And the outbreak may have only a limited effect on capitalism, through a fall in the stock market and perhaps a slowdown in global growth and investment.

On the other hand, it could be a trigger for a new economic slump because the world capitalist economy has slowed to near ‘stall speed’.  The US is growing at just 2% a year, Europe and Japan at just 1%; and the major so-called emerging economies of Brazil, Mexico, Turkey, Argentina, South Africa,and Russia are basically static.  The huge economies of India and China have also slowed significantly in the last year and if China takes an economic hit from the disruption caused by 2019-nCoV, that could be a tipping point.

Eurozone slows to 1% a year in 2019.

The value in GDP

At the recent ASSA 2020 conference there was a session on whether Gross Domestic Product (GDP), the ubiquitous measure of national output, was adequate as a gauge of “well-being or social welfare”. Various proposals have been put forward for attempting to measure social welfare, including “dashboards” of economic and social indicators as well as approaches that are more explicitly tied to economic theory.  The US Bureau of Economic Analysis (BEA) initiated a discussion at ASSA to consider the pros and cons of alternative approaches.

Gross domestic product (GDP) is the basic mainstream measure of a country’s level of output and even prosperity.  It is a monetary measure of the market value of all the final goods and services produced in a specific time period. The measure goes back to the earliest of days of classical political economy, with William Petty developing the basic concept in the 17th century.  The modern concept was first developed by Simon Kuznets in 1934 to measure the national output of the US.

There are three ways to measure GDP.  The first is the production approach, which sums up the outputs of every enterprise.  The second is the expenditure approach which sums up all the purchases made; and third is the income approach which sums up all the incomes received by producers.

These three different approaches broadly match the three main schools of economic thought.  The production approach has an affinity with neoclassical school, which sees national output as the sum of all micro-agents’ production. The expenditure approach has been adopted by the Keynesian school, which looks at investment, consumption and saving at a ‘macro level’ to measure “effective demand”. The income approach has the closest connection with Marxist and classical political economy, because it distinguishes wages and profits as the main categories of national income and thus exposes the class divisions in the distribution of GDP; and the driving force for investment and production in capitalism ie profit.

Ever since the development of GDP, multiple observers have pointed out limitations of using GDP as the overarching measure of economic and social progress. GDP does not account for the distribution of income among the residents of a country, because GDP is merely an aggregate measure.  Neither does it measure unpaid housework, the level of happiness or well-being.  That is why there have been various attempts to replace GDP with other ‘broader’ measures.

One recent attack on GDP as a measure of national ‘wealth’ or well-being has come from Vint Cerf via this Wired article. Cerf makes the usual complaint that “the measure does not capture the level of pro bono work that pervades many societies, by homemakers whose unpaid labour is an integral part of most functional societies, and non-profit organisations whose work also contributes to the benefit of society.”  He goes on “Moreover, GDP does not capture the many negative effects of some economic activities such as pollution, including carbon dioxide and other greenhouse gases. Their consequences should be factored into any measure of economic well-being if we are to accurately assess the state of the planet and its population.”  And finally,“As an average measure, GDP also fails to capture wealth and income disparities within a society, often negatively correlated with the health of that society.”

All this is true.  But is that the purpose of GDP as a measure?  At the time of its launch, Kuznets specifically warned against considering GDP as a measure of ‘welfare’ in a society.  Vint’s critique, echoed by others, fails to recognise that the value (or wealth) that modern economics wants to measure is the ‘market value’ of national output not the welfare of labour, women and children.  Capitalism has no direct interest in measuring that.  GDP has a specific purpose for capital not labour.

Household work provides a massive contribution to the welfare of communities.  And it delivers unpaid labour to sustain labour power in work for capitalist enterprises.  But because it is not a cost for capital, it does not need to be included in GDP.  Similarly, the grotesque (and rising) inequalities of income and wealth that exist within most countries is not a relevant factor for capitalist investment and production and so again does not need to be included in GDP.  Finally, the ‘externalities’ of capitalist production: eg, diseases, industrial accidents, pollution and climate change are not immediate costs to the profitability of capital (private ownership of production).  Indeed, if these ingredients were included in a revised measure of national ‘value’ they would become confusing obstacles to measuring properly the ‘health’ of capitalist production in a country.  And that is what matters in capitalism: having good measures of capitalist accumulation for policy decisions by capitalist enterprises and government and monetary authorities.

Of course, even within that paradigm, the GDP measure has its faults.  Diane Coyle is one economist that has criticised strongly GDP as a sufficiently accurate measure of production and investment.  She argues that GDP does not capture changes in investment that involve ‘intangibles’ and innovation.  In other words, national output and productivity growth may be much higher than GDP exposes.  However, even here, the argument that the failure to measure intangibles explains the productivity puzzle (low productivity growth) is not convincing.

Mariana Mazzucato got a lot of traction out of her recent book, The value of everything, where she complains that in GDP, finance is regarded as productive when it is really an ‘extractive’ sector and government investment is not given the ‘utility’ it deserves in GDP.  But this is to misunderstand the law of value under capitalism.  Under capitalism, production of commodities (things and services) are for sale to obtain profit.  Commodities must have use value (be useful to someone), but they must also have exchange value (make a sale for profit).  GDP is biased as a measure of value created in an economy for that good reason.

For Marxist analysis, there are many issues with using GDP.  National output in Marxist terms is c+v+s.  C is ‘constant capital’ (raw materials, intermediate products used up in production plus the depreciation of machinery etc). V is wages spent on the labour force + S (profits made on sales of the commodities produced).  In theory, GDP data can be converted into these Marxist categories because in an economy total prices of all goods in aggregate must equal total values in labour time, even though that equality will not exist in sectors of the economy.

The practical complexities of turning GDP as measured by government statistics in national accounts into the Marxist formulae have been comprehensively explained in works like that of Shaikh and Tonak. But when it comes to the world economy and the transfer of value between countries and companies globally, GDP is inadequate and misleading. As John Smith has pointed out, “it is impossible to analyse the global economy without using data on GDP and trade, yet every time we uncritically cite this data we open the door to the core fallacies of neoclassical economics which these data project.” The key concept within GDP is ‘value added’ by ‘agents of production’, but that means GDP does not expose value that is transferred or redistributed between countries or companies as a result of competition in markets.

Just as more technologically advanced companies get a transfer of value from less advanced companies through competition on the market (Marx’s transformation of values into prices of production), so imperialist countries get a transfer of value from peripheral countries through the unequal exchange of value in international trade and through transfer pricing within companies.  GDP does not capture that.  However, recent Marxist research has made progress in measuring this transfer in  the imperialist countries (see Carchedi and Roberts, Ricci and URPE_CHN_2019). These suggest that the GDP of the major capitalist economies is exaggerated by transfers of value through international trade and multi-national pricing equivalent to 3-5% of GDP every year.

Then there is the issue of productive and unproductive labour, something that Mazzucato took up but in a misleading way.  Mazzucato argues that the government sector creates value, but that is because she considers only use-value and does not recognise the dual character of value under capitalism, where profit through exploitation is value.  Marxist value theory maintains that many sectors and people are supposedly generating value-added but are really engaged in non-productive activities like finance and administration that produce no value at all.  And for capital, that includes the government sector: it may be necessary, but it is not value-creating for capital.

As Marx put it: “Only the narrow-minded bourgeois, who regards the capitalist form of production as its absolute form, hence as the sole natural form of production, can confuse the question of what are productive labour and productive workers from the standpoint of capital with the question of what productive labour is in general, and can therefore be satisfied with the tautological answer that all that labour is productive which produces, which results in a product, or any kind of use value, which has any result at all.”

For the neoclassical theory, any labour whose outcome can secure remuneration in the market is considered productive and contributes to the creation of new value. Thus, not only activities in the sphere of commodity circulation, but also those aimed at maintaining and reproducing the social order, are considered to produce new values and increase the level of prosperity and wealth of an economy

In contrast, as Shaikh and Tonak explain: “Economists of the classical political economy tradition pay particular attention to the fact that the non-production sectors of trade and finance as well as government in order to perform their socially useful functions employ labour and other inputs while at the same time their capital  stock depreciates; such expenses are drawn out from the surplus generated by the productive sectors of the economy.” (Shaikh and Tonak 1994, p61).

As Tsoulfidis and Tsaliki put it: “The main problem with orthodox national accounts is that they present many activities as ‘production’ while they should be portrayed as ‘social consumption’. As the ‘personal consumption’ sphere contributes to the reproduction of individuals in a capitalist society, the non-productive activities, such as trade, financial services or private security, in turn contribute to the reproduction and development of the capitalist system; however, their necessity does not negate the fact that as the total consumption (personal and social) increases, the part of surplus destined for the accumulation of capital is reduced and by extent the social wealth diminishes.”

So measuring the relative expansion of productive and unproductive activities is crucial to gauging the growth potential of capitalist economy, because only investment in productive sectors can sustain expansion under capitalism.  Indeed, a rising share of unproductive activity will exert a downward effect on the profitability of capital over time.

Again, this is an area where Marxist research has made strides in measurement: (Moseley; Roberts; Paitaridis, Tsoulfidis and Tsaliki, Peter Jones and others).  In this way, we can obtain the value in GDP.

 

Stakeholder capitalism in Davos

Stakeholder capitalism – that’s the way to ‘shape’ capitalism into something inclusive of all.  That was the message of Klaus Schwab, the co-founder of the World Economics Forum (WEF), now in its 50th year with its annual jamboree in Davos, Switzerland.

Schwab was professor of business policy at the University of Geneva from 1972 to 2002. Since 1979, he has published the Global Competitiveness Report, an annual report assessing the potential for increasing productivity and economic growth of countries around the world, written by a team of economists.  During the earlier years of his career, he was on many company boards, such as Swatch Group, Daily Mail Group, and Vontobel Holdings. He is a former member of the steering committee of the notorious Bilderberg group.  This group has an annual conference established in 1954 to bolster a consensus among elites to support “free market Western capitalism” and its interests around the globe. These meetings are private and attended by the big players in the world.

Schwab now runs the WEF as a meeting place and think-tank for the global elite in business, government and academia to develop ideas to make capitalism work.  New EU Commission President Ursula von der Leyen nipped over to Davos this year to tell the gathering that “Davos is the place where conflicts are averted, business is started, disputes are finished. Thank you to Klaus Schwab for bringing together bright people and for his vision on how to shape a better future for the world.”

And what does Schwab think we want now?  Stakeholder capitalism. “Generally speaking, we have three models to choose from. The first is “shareholder capitalism,” embraced by most Western corporations, which holds that a corporation’s primary goal should be to maximize its profits. The second model is “state capitalism,” which entrusts the government with setting the direction of the economy, and has risen to prominence in many emerging markets, not least China. But, compared to these two options, the third has the most to recommend it. “Stakeholder capitalism,” a model I first proposed a half-century ago, positions private corporations as trustees of society and is clearly the best response to today’s social and environmental challenges.”

So the big corporations should be ‘trustees of society’ and the main force in solving “today’s social and environmental challenges”.  We need to replace ‘shareholder capitalism’ which is the dominant model right now.  That’s because “the single-minded focus on profits caused shareholder capitalism to become increasingly disconnected from the real economy. Many realize this form of capitalism is no longer sustainable.”  Also there is a popular reaction to the failure of ‘shareholder capitalism’ to deal with rising inequality of income and wealth, climate change and environmental disasters and the impact of new technology.  Stakeholder capitalism instead, according to Schwab, can “bring the world closer to achieving shared goals”.

But what is this stakeholder capitalism?  Schwab offers what he calls a Davos Manifesto. This calls for “corporations to treat customers with dignity and respect, to respect human rights throughout their supply chains, to act as a steward of the environment for future generations and, most significantly, to measure performance ‘not only on the return to shareholders, but also on how it achieves its environmental, social and good governance objectives.”  In effect, then capitalism as a system of production for profit must be transformed into a system that involves other sectors of society being part of a corporate-led system of ‘shared goals’.

This smacks of the same themes presented by more radical economists and politicians who seek to modify capitalism in order to make it work for more people.  There is Nobel prize winner in economics, Joseph Stiglitz, with his ‘progressive capitalism’   and then there is the Democrat presidential hopeful Elizabeth Warren with her ‘accountable capitalism’. The aim in all is to find a way to ‘shape’ capitalist corporations so that they take into account all ‘stakeholders’, ie workers, customers, local councils etc – all working together.  All hope that capitalists can be made to or persuaded to act to reduce inequality, create a better environment and adopt moral policies in investment.  As Schwab puts it: “Business leaders now have an incredible opportunity. By giving stakeholder capitalism concrete meaning, they can move beyond their legal obligations and uphold their duty to society.”

Of course, this is disingenuous nonsense. Indeed, as Nick Buxton points out, “the profit motive will always win out.”  He argues “nowhere is there a mention of enforcement mechanisms, legislation or regulation to ensure companies abide by their commitments. It is an entirely voluntary process that is completely dependent on self-regulation, which does not challenge the overriding profit-making purpose of corporations.”

At the same time as Schwab and others at Davos were talking about the mega corporations taking a lead in solving the world social problems and not just making money, US president Donald Trump turned up to tell the elite gathered there that it was great news that stock markets were hitting new highs, that capitalism was doing very well thank you, and there is no need for pessimism or talk about environmental crises or rising inequality.

At the same time that Schwab issued his Davos Manifesto, Oxfam released its annual report on global inequality.  According to Oxfam, the world’s 2153 billionaires now have more wealth than 4.6bn people who make up 60% of the world’s population.  The 22 richest men in the world now have more wealth than all the women in Africa. Women and girls put in 12.5 billion hours of unpaid care work each and every day —a contribution to the global economy of at least $10.8 trillion a year, more than three times the size of the global tech industry. Getting the richest one percent to pay just 0.5 percent extra tax on their wealth over the next 10 years would equal the investment needed to create 117 million jobs in sectors such as elderly and childcare, education and health.

So much for corporate leadership in reducing inequality.  And it’s same story with climate change.  Average world temperatures were at record levels in 2019; and bush fires raged in extreme heat in Australia, while floods enveloped Indonesia.  But the United Nations report on the current emissions gap concluded that “there is no sign of GHG emissions peaking in the next few years; every year of postponed peaking means that deeper and faster cuts will be required. By 2030, emissions would need to be 25 per cent and 55 per cent lower than in 2018 to put the world on the least-cost pathway to limiting global warming to below 2˚C and 1.5°C respectively.”  As Greta Thunberg said at Davos, there is a lot of talk about dealing with climate change but little effective action.

And then there is the state of the world economy itself.  While ‘shareholder capitalism’ booms, with stock markets at record highs, ‘stakeholder capitalism’ is struggling.  At Davos, the IMF delivered its report on the prospects for the world economy in 2020.  Chief economist IMF chief economist Gita Gopinath announced a reduction in its growth forecasts for 2020 and 2021 from the previous October estimate, while IMF boss Kristalina Georgieva warned that the global economy is at risk of a return to the Great Depression of the 1930s.  Georgieva said the current world economy could be likened to the “roaring 1920s” that culminated in the great market crash of 1929.  “Rising inequality and ‘increased uncertainty’ caused by the climate emergency and trade wars was “reminiscent of the early part of the 20th century – when the twin forces of technology and integration led to the first gilded age, the roaring 20s, and, ultimately, financial disaster.”

What was her answer? A more inclusive financial sector! “Financial services are primarily a good thing. Developing economies need more finance to give everyone a chance to succeed. While fiscal policy remains a potent tool, we cannot overlook financial sector policies. If we do, we may find that the 2020s are all too similar to the 1920s.”  But, “It’s just that too much of a good thing can turn into a bad thing. Excessive financial deepening and financial crisis can fuel inequality. So we need to find the right balance between too much and too little.”

None of this inspires confidence in the likely success of ‘stakeholder capitalism’.  No wonder a global survey released just before Davos found that over half of respondents believe capitalism in its current form does “more harm than good.”  That belief was expressed by a majority across age group, gender, and income level divides. In fact, there were just six markets where the majority did not agree—Australia, Canada, the U.S., South Korea, Hong Kong, and Japan.  Strongest support for the statement was found in Thailand (75 percent) and the lowest level in Japan (35 percent). In the U.S., just 47 percent agreed with the statement.

The survey also found that 48 percent of respondents believe the system is failing them, while just 18 percent believe it is working for them.  Seventy-eight percent agree that “elites are getting richer while regular people struggle to pay their bills.” And in 15 of 28 markets, the majority are pessimistic about their financial future, with most believing they will not be better off in five years’ time than they are today.

Not much support for capitalism, whether shareholder or stakeholder.

Minsky and socialism

Recently, the Levy Institute, the think-tank centre for post-Keynesian economics (and in particular the theories of Hyman Minsky, the radical Keynesian economist of the 1980s), published a short video that that shows Minsky explaining his theory of crises under capitalism in his own words at an event in Colombia, November 1987. It is a very clear account of his theory of crises based on ‘financial fragility’’.

When the Great Recession hit the world capitalist economy, many radical and Marxist economists, and even some mainstream economists, called the GR a ‘Minsky moment’.  In other words, the cause of the Great Recession was a financial crash resulting from excessive debt that eventually could not be serviced.  Minsky’s key contention, that financial instability is endogenously generated, implies that not only financial but also ‘real’ crises arise as a result of the inner workings of the financial system: ‘History shows that every deep and long depression in the United States has been associated with a financial crisis, although, especially in recent history, we have had financial crises that have not led to a deep and long depression’ (Minsky*).

In my view, this is an accurate statement.  A financial crash occurs in every capitalist slump, but financial crashes can occur without a slump.  But this suggests that what is going on in the ‘real economy’ is what decides a financial crash, not vice versa.  Indeed, as G Carchedi has shown (see graph below), when both financial profits and profits in the productive sector start to fall, an economic slump ensues. That’s the evidence from the post-war slumps in the US.  But a financial crisis on its own (as measured by falling financial profits) does not lead to a slump if productive sector profits are still rising.

Indeed, if you listen closely to Minsky’s account (above) of his crisis theory, he recognises that excessive debt in the form of Ponzi finance only leads to a crash when the profits engendered in business and in banking are no longer sufficient to sustain debt expansion.  As Minsky puts it, “borrowers are myopic to the past and blind to the future.’’

At the recent ASSA 2020 conference, the annual meeting of mainstream economists organised by the American Economic Association, there were also sessions by the more radical wings of economics: post-Keynesians and Marxists. Riccardo Bellofiore, the erudite scholar of Marxist, Sraffian and Keynesian economic theory, presented two papers that offered interesting insights on Minsky’s theories.  In his first paper, Bellofiore argues that “the current crisis is the outcome of money manager capitalism stage of capitalism – the real subsumption of labour to finance, in Marxian terms. The most promising starting points are the structural dimensions of Minsky’s analysis and the monetary circuit approach.” Minsky’sSocializationOfInvestment__preview (6)
In his second paper, he argues that “Minsky’s contributions are major necessary ingredients to a rethinking of Marxian theory of capitalist dynamics and crises.”
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I beg to differ.  I do not think that Minsky’s theories dovetail with Marx’s theory of crises or that they provide a better explanation of booms and slumps than that of Marx. Marx not Minsky  As Maria Ivanova from Goldsmiths University, London has argued effectively (in a paper of a few years ago comparing Minsky and Marx’s theories of crises), Marx was firmly opposed to blaming crises on financial speculation, or on the recklessness of single individuals (Marx and Engels, Collected Works, 1975, p. 401). “Speculation and panic may trigger crises, but to trigger something does not mean to cause it. For Marx, the ultimate origins of all crises lie in the ‘real’ economy of production and exchange.” (Ivanova conf_2011_maria_ivanova-on-marx-minsky-and-the-gr)

Ivanova argues that Marx’s concept of money could not be more different from Minsky’s. Marx saw money as the social expression of value – the amount of socially necessary labour time embodied in a commodity. Money thus expresses the deepest contradiction of the capitalist production relations in ‘a palpable form’. The Minskyan perspective prides itself on its Keynesian origins. “In contradistinction to Marx, Keynes accorded primary importance to interest-bearing capital where capital appears as property and not as function.  And since capital in that form does not function (i.e. does not engage in immediate production), it does not directly exploit labour; class conflict appears obliterated since the rate of profit now forms an antithesis not with wage labor but with the rate of interest” .

Ivanova reckons that implicit in the Keynesian-Minskyan perspective is the insight that finance can repress production, overpower it, and ‘decouple’ from it (at least temporarily) to the detriment of the wider economy – this is what Bellofiore argues is its major insight. But it follows from this that Minsky reckons that if finance were controlled, regulated, restrained, some of the worst ills of capitalism could be kept at bay.  This view is in sharp contrast to Marx, who reckoned that the inherent contradictions of capitalism were beyond human control.

Minsky believed, in line with the Keynesian tradition, that the crises arising from the permanent disequilibrium of the capitalist system could be contained by the concerted effort of ‘Big Government and Big Finance (‘monetary authorities). As Ivanova puts it: “the popular tale of the purely financial origins of the recent crisis dovetails nicely with the belief that financial instability and crises, albeit tragically unavoidable and potentially devastating, can be managed by means of money artistry”  No wonder many mainstream economists in the depths of the global financial crash, like Paul Krugman, reckoned that ‘’we are all Minskyans now”.

But the belief that social problems have monetary/financial origins and could be resolved by tinkering with money and financial institutions, is fundamentally flawed. “For the very recurrence of crises attests to the limits of fiscal and monetary policies as means to ensure ‘balanced’ accumulation.”” (Ivanova). Minsky** considered the dependence of non-financial businesses on ‘external funds to finance the long-term capital development of the economy’ a key source of instability. This provided an important rationale for government intervention. In his famous book, Minsky, Stabilizing an Unstable Economy (1986), he wrote ‘Once Big Government stabilizes aggregate profits, the banker’s reason for market power loses its force’.

So the job of the radical economist was to restore the profitability of capital by the intervention of the monetary and fiscal authorities, according to Minsky. This was more important that shifting the burden of any financial crisis off the backs of the many. As Minsky said in the 1980s: “It may also be maintained that capitalist societies are inequitable and inefficient. But the flaws of poverty, corruption, uneven distribution of amenities and private power, and monopoly-induced inefficiency (which can be summarized in the assertion that capitalism is unfair) are not inconsistent with the survival of a capitalist economic system. Distasteful as inequality and inefficiency may be, there is no scientific law or historical evidence that says that, to survive, an economic order must meet some standard of efficiency and equity (fairness) .”

Riccardo Bellofiore in his ASSA paper is keen to tell us that, in his book on Keynes (1975), Minsky adopted a more radical position than Keynes on the need for the “socialization of investment’’ as the solution to crises.  Riccardo reckons that “Minsky’s socialization of investment, thanks to his reference to the New Deal, is not far from a socialization in the use of productive capacity: it is a “command” over the utilization of resources; its output very much looks like Marx’s “immediately social” use values. It is complementary to a socialization of banking and finance, and to a socialization of employment. Minsky goes further that a “Keynesian” welfare state and argues for a full employment policy led by the government as direct employer, through extra-market, extra-private enterprise and employment schemes.”

But this was in 1975. Mike Beggs, a lecturer in political economy at the University of Sydney  in a recent article, shows that, while that Minsky started off as a socialist, at least in following the ideas of ‘market socialism’ by Oscar Lange, he eventually retreated from seeing the need to replace capitalism with a new social organisation (or ‘socialised investment’), to trying to resolve the contradictions of finance capital within capitalism, as his eventual financial fragility theory of crises shows.

As Bellofiore says, in the 1970s, Minsky contrasted his position from Keynes.  Keynes had called for the “somewhat comprehensive socialization of investment” but went onto to modify that with the statement that “it is not the ownership of the instruments of production which it is important for the State to assume” — it was enough to “determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them.” But Minsky went further and called for the taking over of the “towering heights” of industry and, in this way, Keynesianism could be integrated with the ‘market socialism’ of Lange and Abba Lerner.

But by the 1980s, Minsky’s aim was not to expose the failings of capitalism, but to explain how an unstable capitalism could be ‘stabilised’. Biggs: “His proposals are aimed, then, at the stability problem. ….The expansion of collective consumption is dropped entirely. Minsky supports what he calls “Big Government” mainly as a stabilizing macroeconomic force. The federal budget should be at least of the same order of magnitude as private investment, so that it can pick up the slack when the latter recedes — but it need be no bigger.”

Indeed, Minsky’s policy approach is not dissimilar from that of today’s Modern Monetary Theory supporters.  Minsky even proposed a sort of MMT job guarantee policy. The government would maintain an employment safety net, promising jobs to anyone who would otherwise be unemployed. But these must be sufficiently low-paid to restrain market wages at the bottom end. The low pay is regrettably necessary, said Minsky, because “constraints upon money wages and labor costs are corollaries of the commitment to maintain full employment.” The discipline of the labour market must remain: working people may not fear unemployment, but would surely still fear a reduction to the minimum wage (Beggs). Thus, by the 1980s, Minsky saw government policy as aiming to establish financial stability, in order to support profitability and sustain private expenditure. “Once we achieve an institutional structure in which upward explosions from full employment are constrained even as profits are stabilised, then the details of the economy can be left to market processes.” (Minsky).

Minsky’s journey from socialism to stability for capitalist profitability comes about because he and the post-Keynesians deny and/or ignore Marx’s law of value, just as the ‘market socialists’, Lange and Lerner, did.  The post-Keynesians and MMTers deny/ignore that profit comes from surplus value extracted by exploitation in the capitalist production process and it is this that is the driving force for investment and employment. They ignore the origin and role of profit, except as a residual of investment and consumer spending. Instead they all have a money fetish. With the money fetish, money replaces value, rather than representing it. They all see money (finance) as both causing crises and, also as solving them by creating value!

In my view, far from Minsky providing the “necessary ingredients to a to a rethinking of Marxian theory of capitalist dynamics and crises”, as Bellofiore argues, Minsky’s theory of crises, like all those emanating from the post-Keynesian think tank of the Levy Institute, falls well short of delivering a comprehensive causal explanation of regular and recurring booms and slumps in capitalist production.  By limiting the searchlight of analysis to money, finance and debt, Minsky and the P-Ks ignore the exploitation of labour by capital (terms not even used).  They fail to recognise that financial fragility and collapse are triggered by the recurring insufficiency of value creation in capitalist accumulation and production.

Moreover, by claiming that capitalism’s problem lies in the finance sector, the policy solutions offered are the regulation and control of that sector, rather than the replacement of the capitalist mode of production.  Indeed, that is the very path that Minsky took: from his socialism and ‘’socialisation of investment’’ in the 1970s to ‘stabilising finance’ in the 1990s.

* Minsky, H. P. (1992a) Reconstituting the United States financial structure: some fundamental issues, Working Paper No. 69, Levy Economics Institute of Bard College.

** Minsky, H. P. (1996) Uncertainty and the institutional structure of capitalist economies: remarks upon receiving the Veblen-Commons award, Journal of Economic Issues, 30, pp. 357-368.

ASSA 2020 – part three: currencies, climate, china and crises

In this last part of my review of ASSA 2020, I want to cover some other issues discussed at ASSA, especially one big issue: the economics of climate change; and finally, look at the papers in the sessions organised by the Union for Radical Political Economics (URPE) – the main association covering Marxist economics.

One populist subject over the last few years has been the role and value of cryptocurrencies.  I have discussed these privatised digital currencies on my blog here. The debate continues on how well a cryptocurrency can serve as a means of payment. One paper argued that cryptocurrencies need to overcome double spending by using costly mining and by delaying settlement. Indeed, the authors reckon that bitcoin “generates a welfare loss that is about 500 times larger than a monetary economy with 2% inflation” because it is so costly to ‘mine’ and because of slow settlement.  Only if an economy had 50% inflation would the loss to users be higher than bitcoin.  Clearly, these cryptocurrencies are never going to replace state fiat currencies as a means of payment. TheEconomicsOfCryptocurrencies_Bitco_preview t

Bill Nordhaus was awarded the Nobel (Riksbank) prize for pioneering work on using an integrated climate-economy assessment model (IAM) to study when and how the tipping point affects the social cost of carbon dioxide. While the mainstream has lauded Nordhaus, the reality is that IAMs have proved to be mostly useless.  Most IAMs struggle to incorporate the scale of the scientific risks, such as the thawing of permafrost, release of methane, and other potential tipping points. Furthermore, many of the largest potential impacts are omitted, such as widespread conflict as a result of large-scale human migration to escape the worst-affected areas.

The IPCC’s mitigation assessment concluded from its review of IAM outputs that the reduction in emissions needed to provide a 66% chance of achieving the 2°C goal would cut overall global consumption by between 2.9% and 11.4% in 2100. This was measured relative to a ‘business as usual’ scenario. But growth itself can be derailed by climate change from business-as-usual emissions. So the business-as-usual baseline, against which costs of action are measured, conveys a misleading message to policymakers that fossil fuels can be consumed in ever greater quantities without any negative consequences to growth itself. And heterodox economist Steve Keen has debunked Nordhaus’ calculations, which suggest that even a 4C rise global temparatures would have only a limited effect on growth and welfare over the rest of this century and in effect there was no tipping point when global warming would get out of control.

Based on this relatively benign view, mainstream economics concentrates on carbon pricing and taxes to mitigate global warming, rather than radical action to end fossil fuel production through control of the major energy companies. This is why the mainstream session on climate change was entitled Carbon Tax Policy with the discussion around whether carbon taxes would slow economic growth and whether carbon taxes would add to fiscal costs or not.  You will be pleased to hear that the presenters concluded that carbon taxes will not slow economic growth and there could actually be fiscal gains through reducing the cost of dealing with floods, droughts hurricanes. MeasuringTheMacroeconomicImpactOfC_preview (2)

So that’s all right then.  Only it isn’t.  All the latest climate science suggests that the tipping points are approaching fast and allowing fossil fuel production to continue while trying to reduce its use by ‘market’ solutions’ like carbon pricing and taxes will not be enough.TippingPointsInTheClimateSystemAnd_preview

In the URPE sessions, Ron Baiman of Benedictine University pointed out that the money created by the Fed for the three-year 2008-2011 financial bailout would have paid for almost thirty years 2020-2050 of global climate crisis mitigation through a Global Green New Deal (GGND). FinancialBailoutSpendingWouldHave_preview Mathew Forstater et al reckoned that the transition to a sustainable economy and just society required a transformation in the technological structure of production away from fossil fuel-based and toward renewable energy-based technologies.  Peter Dorman reckoned that the GND-type policies won’t be enough. It required structural change in the economy.  TheClimateCrisisAndTheGreenNewDea_preview (2)

Another big issue at ASSA is what is happening in China and what will happen in the continuing trade and technology war with the US.  There were dozens of mainstream sessions that covered or referred to China from all sorts of angles.  Clearly China dominates much of mainstream research.

There is the question of China’s fast growth and pollution. According to Bharati et al, China has not achieved the turning point of where pollution and emission no longer positively relate to the economic growth. But that would happen in 2036 or so.  According, to NAME, both countries lose from the Trump tariffs, where high-tech industries are disproportionately affected. China mainly loses from the decline in the production scale of its high-tech industries, while the US mainly lose from the increasing input prices used in its high-tech industries. In addition, Japan also loses from the Trump tariff due to higher input prices. FuelingTheEnginesOfLiberationWithC_preview

Most interestingly, Chang-tai Hsieh points out that the largest Chinese firms are conglomerates, where the largest 500 conglomerates in 2015 had an average of 17 thousand firms, and collectively account for almost half of all registered capital of all Chinese firms. Conglomerates are typically partnerships between private firms and state owned firms, where state owned firms are typically at the center of the conglomerates; 6) The number and size of Chinese conglomerates increased from 1995 to 2015.

Suprabha Baniya et al conclude that China’s Belt and Road Initiative increases trade flows among participating countries by up to 4.1 percent; (ii) these effects would be three times as large on average if trade reforms complemented the upgrading in transport infrastructure; and (iii) products that use time sensitive inputs and countries that are highly exposed to the new infrastructure and integrated in global value chains have larger trade gains. TradeEffectsOfTheNewSilkRoad_preview (1)

An URPE session also covered China.  Brian Chi-ang Lin, National Chengchi University reckoned that If China keeps growing (even at a slower rate), China could eventually regain the global economic power she once had in the seventeenth and eighteenth centuries, under its current model. “Under Chinese President Xi Jinping, China has recently initiated a series of important policies such as the domestic nationalization of private corporations and the international One Belt One Road (OBOR) initiative to promote the national economy and, accordingly, to sustain the CCP’s authoritative regime.”

Finally, let me look at some of the interesting papers on Marxist theory presented in the URPE sessions. Carolina Alves from Girton College, University of Cambridge developed some new ideas on Marx’s concept of fictitious capital in relation to government bonds. “Fictitious capital does not represent real capital but it is increasingly the channel through which the dominance of interest bearing capital over other capitals occurs. Government bonds are the most important tools whereby the state is able to intervene in the financial market. the backbone of operations in the secondary market, and a source for financial accumulation, rather than as a fortuitous aspect of state finance. So public debt can neither be avoided nor paid off in capitalist economies, and government bonds now offer an unparalleled scope for purely financial accumulation.”
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Sergio Camara Izquierdo from the Metropolitan Autonomous University (UAM)-Azcapotzalco, and one of the authors in our book, World in Crisis, analysed the trends in profitability and accumulation in Mexico in the postwar period. with new estimations that includes intangible assets and geometric patterns of depreciation. Camara reveals expansive (1939-1982) and contractive (1983-2018) long waves in capital accumulation within which there us ae neoliberal contractive wave.  And note the collapse in profitability of capital in Mexico from the 1990s with the formation of NAFTA.

Baris Guven from the University of Massachusetts-Amherst attacked the idea of Marxian political economy that places great emphasis on the nexus between technological change and capital accumulation, based on the profit-motive and competition.  For Guven, on the contrary, the profit-motive is the reason why capitalist economies are prone to underproduce technical (and scientific) knowledge. It is the state that does the technological fix, and this fix, in addition to others, supports reproduction of capital accumulation at extended scale.  In other words, no innovation without state intervention.  While there is some truth in the argument that the state has played a crucial role in boosting technology, as Mariana Mazzucato has shown, profitability remains the key driver.  When profitability is low, then investment and productivity growth will slow.

There was a whole session on post-Keynesian theory, with the usual theme of financialisation there.  And there was a session developing the ideas of Hyman Minsky alongside those from a Marxist perspective.  I particularly liked the paper by Masahiro Yoshida of Komazawa University who provided some emphatic data on the extreme ‘rentier’ nature of the UK economy, with the highest services value-added share and the largest finance services share in the g20. As UK financial services are more important than the US for minimising the current account deficit and the majority of the UK’s financial services are exported to the EU, the impact of Brexit is yet to be felt. TheDevelopmentOfCapitalAccumulation_powerpoint (2)

And Jan Toporowski’s paper made some telling points against the ‘free lunch’ perspective of Modern Monetary Theory. “This economical, apparently free, method of financing government expenditure is of course attractive when public services, welfare and infrastructure are deteriorating in the face of austerity. But this low cost is only the case at the time of the expenditure. To understand the true efficiency of this kind of financing, it is necessary also to consider the consequences of such financing. In particular, it is necessary to understand how that money would be absorbed by the economy.”

Finally, Riccardo Bellofiore straddled both the post-Keynesian and Marxist theory (as Riccardo usually does!) – with two papers.
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I’ll refer to Riccardo’s discussion of the relation between the ideas of Minsky and Marx in a future post.  But for now, that’s enough.

In sum, ASSA 2020 confirmed my view that: 1) mainstream economics still does not know why there was a Great Recession and why there is now stagnation; 2) mainstream economics is still convinced of market solutions to climate change; and 3) how could it not be otherwise when mainstream economics starts from the premise that there is no other mode of production but capitalism – which may be imperfect, but must be made to work at best as it can.