Austerity: has it worked?

April 24, 2015

Most governments in capitalist economies have engaged in what is loosely called ‘austerity’ policies since the end of the Great Recession in 2009.  More precisely, austerity policies are those where the government aims to reduce its annual deficit on spending and revenues and shrink the overall debt burden, plus introduce ‘reforms’ to weaken the labour rights and conditions at work to keep wage costs down for the capitalist sector.  The fiscal part of these austerity measures mainly involved cutting back on government spending, both in public sector employment, wages, public services and investment projects.

Those economists and governments that advocated austerity claimed that by getting debt ‘under control’, costs would be reduced and companies would invest, consumers would spend and economies would recover quickly.  Keynesians and others who opposed these measures reckoned that austerity would drive down ‘aggregate demand’ as government spending was cut, taxes raised and wages held down.  The way out of the crisis was to borrow more, not less and spend more not less.

The debate continues.  In my view, both sides are right and wrong.  See my posts on this: and

The Austerians recognise that the key to a capitalist economy recovering is to reduce costs for the capitalist sector by cutting wages and government taxation so that profitability can rise.  Raising wages or increasing government spending, as the Keynesians advocate, would reduce profitability at a time when it needs to rise.  However, the Keynesians recognise that, once an economy is in a slump and labour incomes are falling, cutting them further can worsen the fall in consumer spending and investment demand and for some time.  It’s not quite Catch 22; but looks like it for a while.

In a recent study, the IMF considered the question of whether austerity worked.  The IMF found that if governments did not spend too much when economies were growing and spent more when economies were in a slump, then this would act as a counter-cyclical buffer to the volatility of the capitalist sector.  The IMF quantified this effect as cutting “output volatility by about 15 percent, with a growth dividend of about 0.3 percentage point annually”.  The IMF optimistically reckoned that “Stability, growth and debt sustainability could all greatly benefit if measures that destabilize output, such as spending increases in good times, were avoided”.

fiscal stabilisation

But this is the classic sort of fiscal management policy advocated by mainstream economics back in the 1960s that supposedly was the answer to controlling capitalist booms and slumps.  Governments could smooth economic fluctuations by judicious (and even automatic) fiscal ‘stabilisers’.  Yet this policy (in so far as it was even implemented) proved a total failure during the 1970s, when the major capitalist economies experienced inflation and unemployment together and government fiscal management failed.  Indeed, governments probably increased volatility by stimulating or applying austerity at the wrong times.

Anyway, has austerity worked in getting economies to recover quicker since 2009 or have austerity measures made it worse?  See the graph below covering 30 advanced capitalist economies for changes in real GDP growth and reductions in government budgets since 2010 (from .  The further to the right a country, the more austerity there has been – with Greece leading the way.  The further up the graph a country is, the more growth there has been since 2010.

austerity and growth

The graph trendline appears to show that tightening the budget by one percent of GDP cuts about half a percentage point off the growth rate, even if we omit Greece.  But the correlation is not very strong.  The US underwent more fiscal consolidation than the UK in 2010-2014, but it also had better growth. On the other hand, the countries of the Eurozone, on average, grew more slowly than the OECD average despite a similar average level of austerity.  So other factors than the fiscal policies of governments were much more important for post Great Recession growth (see my post,

As for the other arm of austerity, ‘labour market reform’ (i.e. weakening trade unions, increasing the ability of employers to hire and fire at will, deregulating contracts and hours and job qualifications), have they worked?  These measures are advocated by the IMF, the OECD and by the European institutions in their current negotiations with Greece.  Well, a new study by IMF economists found no evidence that “deregulatory labour market reforms could have a positive impact in increasing economies’ growth potential”.  What they found was that more competition among capitalists in markets and higher investment spending contributed much more to boosting productivity than squeezing the conditions for the workforce.

What the IMF did not consider was that while more investment in new technology might raise productivity per worker more, cutting wage costs and weakening labour’s bargaining power can deliver more profitability quicker.  It might be short-sighted, but the capitalist mode of production does not take the long view.

In short, austerity has not worked in restoring trend economic growth, although it has not made things much worse either.  The problem is that cutting wage costs and holding back on government investment and spending has not sufficiently restored profitability and reduced debt to allow a significant rise in new investment.  But the alternative policy of Keynesian-type government spending might have helped labour a little, but it would not have boosted investment and growth either, as it would have lowered profitability.  Governments appear helpless to change things either way.  Another recession may do the trick.

Finland’s Berlusconi proposes new bout of neoliberalism

April 20, 2015

In the general election on Sunday, Finnish voters gave most support to a former telecoms entrepreneur as prime minister. Juha Sipilä, the leader of the Centre party and a millionaire who has built his own house and gas-powered car, is set to replace Alex Stubb as Finland’s prime minister. Centre came first in the election with 21.1% of the vote (up from 15.8% in 2011). The euro-sceptic True Finns gained 17.6% (actually down from 19%). The incumbent coalition parties took a hit, with the National Coalition down to 18.2% from 20.4% and the Social Democrats 16.5% from 19.1%. Centre won 49 seats in the 200-seat parliament, with the True Finns gaining 38, the National Coalition 37, and the Social Democrats 34.

So Finland’s Berlusconi, Sipilä will try to form a coalition, probably a right-wing government consisting of Centre, True Finns and National Coalition. The True Finns refused to join a coalition in 2011 in opposition to Greece’s second bailout, but this time it seems that its leader Timo Soini is ready to join Sipila in government, significantly as foreign minister where he can exercise his party’s anti-immigration policies, just at a time when we see the terrible tragedy of migrants drowning by their thousands in the Mediterranean because Finland, among other ‘northern states’ in the EU, has insisted on cuts in EU funding for rescues as a ‘deterrent’ to those attempting to get into Europe.

Why did the conservative-social democrat ‘grand coalition’ (similar to that in Germany) lose power? Because Finnish capitalism is in a serious recession. Yes, just as we are told that the US and much of Europe is recovering from the slump of the Great Recession and the Euro depression of 2011-12, even Greece, Finland has got worse.  The economy has been contracting for three straight years in a slump that is much worse than in deep recession of the early 1990s.  “Finland is in very, very deep trouble,” says Anders Borg, the former Swedish finance minister who is conducting a review of Finland’s economy for the government. Alex Stubb, Finland’s losing prime minister, talks of a “lost decade”.

Finland recessions

Finland is one of the richest economies in the world and has one of the lowest public debt ratios. Indeed its governments used to boast of their low government debt and balanced budgets, unlike the feckless Greeks. But it seems that tight budgets and low public debt do not guarantee avoidance of slumps, contrary to the consensus view put forward by supporters of austerity in the US and the UK.

So what’s the cause of this failure of Finnish capitalism? Well, the underlying reason is the same as it is for other capitalist economies: the profitability of capital in Finland has taken a turn for the worse. The deep recession of the early 1990s, which led to high unemployment and major restructuring of industry, gave a huge boost to profitability at the expense of wages during the 1990s, similar to the recovery in profitability in Germany (see my post, But it did not last. From the early 2000s, overall profitability began to fall and then dropped horrifically in the Great Recession, with no recovery since.

The net income of Finnish technology industry firms was on average just 0.9% relative to revenues in 2013 compared to 7.3% between 2000-2005 (7.3%) and 12% in 2007 before the Great Recession.

Finland rate of profit

The problem for Finnish capitalism is that its mainstays for decades — the forestry industry and the electronics sector around Nokia — fell into sharp decline. Timber prices collapsed as demand for printed paper declined with the advent of paperless online media and the internet. Nokia failed to defend its market share against Apple and other telecom rivals. At the same time, its large trading and geopolitical neighbour, Russia, did not provide an alternative market for Finnish exports and investment. Instead, while public sector finances remained tight, the private sector went on a binge as banks lent huge amounts to companies and for the housing market.

“We have been hit by various shocks at the same time. There are few, if any, countries in Europe that have had the same shocks,” says Erkki Liikanen, the central bank governor (failing to mention Greece). It’s really yet another example, at the northern end of Europe like the southern end, where the smaller capitalist economies have taken the biggest hit from the Great Recession and subsequent miniscule recovery in world trade.

Finns are getting older and more expensive to keep alive. The proportion of Finland’s population that is of working age is due to fall from 65% in 2012 to 58% by 2030. Over the same period, the over 65s are expected to rise from 18% to 26%.

Finland working age

Unlike Germany, wage costs have spiralled higher than any other European country in recent years. As unit labour costs of Ireland and Spain have fallen because of the massive layoffs and cuts in real wages there, Finland’s has increased by about 20%. From 2007 to 2012 Finland’s unit labour costs in manufacturing rose by 6.3% a year, faster than any of the countries surveyed except Australia and Japan. At the same time, Finland’s productivity fell by 3.9%, far more than any other country.  Wages can rise if the productivity of labour does also and thus not damage profitability.  But falling productivity drove up costs for Finnish companies.

Finland unit labour costs

Of course, the answer of the mainstream is that profitability must be restored by cutting real wages and public spending. Sipila wants to cut spending by €2bn a year even though Finland’s budget deficit in 2014 is just 3.4% of GDP and public debt to GDP is around 60%, about half that of Italy’s. The bankers are screaming for cuts. And they want Finns to work harder and longer. They’ve had it too soft apparently (although Finns are continually told that the Greeks are the lazy ones in Europe). Pasi Sorjonen, an economist at Nordea, the biggest bank in the Nordic region, says the government needs to cut taxes to help healthy businesses and stop “protecting jobs in the public sector.”  Jyri Häkämies, former conservative Minister of Economic Affairs, and now head of the Confederation of Finnish Industries (EK,) would like to “freeze wages for years ahead”.

Sipilä, who made millions in telecoms and bioenergy, says he wants to run the government “more like a business”. And he means by that cutting the Finnish health system, one of the best in the world, and shrinking the public sector. The Finnish people should prepare themselves for a new bout of neoliberal solutions to the failure of Finnish capitalism.

The global crawl and taking up the challenge of prediction

April 18, 2015

Readers of this blog will know that from its very beginning over five years ago, I have argued, ad nauseam, that after the end of the Great Recession in mid-2009, the world capitalist economy entered what I have called a long depression, see

What I meant by this was that the trajectory of the world real GDP growth and investment took what I described as a square-root shape. A relatively high trend growth rate was interrupted by a sharp drop, then a sharpish recovery before growth resumed but this time at a much lower level than before.

Schematically, it would look like this – and in reality.


This view, that capitalism is in a Long Depression, will be the main message of my upcoming book to be published (I hope) this summer.

However, there are many voices who do not agree that world capitalism is in a downward phase or wave or in a depression. Some, indeed, reckon that capitalism is in an upward wave of growth and investment and there has been no ‘stagnation’ or depression. I won’t deal with these arguments in this post. Instead, I shall add to the data supporting my view that the trajectory of depression is still in place.

As I write, the world’s leading central bankers and economists are in Washington for semi-annual meeting of the International Monetary Fund and World Bank. And in its latest World Economic Outlook report (, IMF economists explain that the global economy continues to crawl along at well below the post-war average trend growth rate, with little sign of improvement.

The IMF argues that the ‘potential output’ of the world economy is growing more slowly than before. In the advanced countries, the decline began in the early 2000s; in emerging economies, after 2009. The concern is that the world economy is now characterised by chronic weak investment, low real and nominal interest rates, credit bubbles and unmanageable debt. Christine Lagarde, head of the IMF, described the world’s current economic performance as “just not good enough”.

The IMF expects real GDP growth in the advanced capitalist economies to pick up from 1.8% in 2014 to 2.4% this year. It needs to see that acceleration to achieve its forecast of world growth at 3.5% this year because growth in emerging markets, particularly in China and Russia, is slowing or even falling, so that growth there will be only 4.3% in 2015 down from 5% in 2013.

IMF projections

There are other forecasts and indexes less followed than that of the IMF that also show that the world economy is still crawling along. The global economy is mired in a “stop and go” recovery “at risk of stalling again”, according to the latest Brookings Institution-Financial Times tracking index. This ‘Tiger index’ shows measures of real activity, financial markets and investor confidence compared with their historical averages in the global economy and within each country. The Tiger index graph for global growth looks like the ‘square-root’ trajectory that I forecast back in 2009 for the world economy during and after the Great Recession.

Tiger index

Even more telling is the annual report of the World Trade Organisation just out. Global trade is poised for at least two more years of disappointing growth, according to the WTO. The WTO reckons world trade will grow just 3.3% this year, below the rate of world GDP growth expected by the IMF. It’s bad news whenever trade grows more slowly than GDP because it means the economies cannot get out a depression (Greece) or slow growth by exporting as external demand is even weaker than domestic demand.

WTO trade

You see, for at least three decades before the 2008 financial crisis, in the era of ‘globalisation’, world trade regularly grew at twice the rate of the world GDP. With last year’s growth of 2.8%, global trade has now expanded at, or below, the rate of the broader global economy for three straight years.

Roberto Azevedo, WTO director-general, blamed disappointing trade growth in recent years on the sluggish recovery from the financial crisis. He also warned that economic growth around the world remained “fragile” and vulnerable to geopolitical tensions.

And then there is the high frequency measure of the US economy provided by the Atlanta Federal Reserve Bank. Its latest estimate is that the US economy has slowed to just a 0.2% annual rate as of 14 April. The apparent significant slowdown in the first quarter (blamed by the mainstream on a ‘bad winter’) is now carrying into the second quarter of 2015.

Atlanta Fed GDP now 14 April

So 2015 has not made a good start in meeting the forecasts of the IMF for faster US growth of over 3% this year – by the way, the IMF has made such a forecast and got it wrong for the last four years.

Now Chris Dillon runs an excellent and interesting blog called, Stumbling and mumbling. In a recent post, he argued that economists could not be expected to forecast anything, only to try and explain what is happening in the here and now,

He went on to point out, as I have just done above, that the IMF and the other leading official institutes had miserably failed to forecast the Great Recession or the subsequent slow recovery, being perennially optimistic about how things would pan out.

But Dillon reckoned that heterodox economists were little better in their forecasting, although he was wrong to say that Steve Keen did not forecast a credit crunch for the US economy in 2007-8 (see my paper, The causes of the Great Recession).

Like so many others, Dillon reckons the Great Recession was just a financial crisis caused by the collapse of the banks, which is really a description of the crash not an explanation. But he then put out a challenge: “Many of macro’s critics are begging the question: they are assuming that the economy could be predictable, if only we had a good enough theory. I doubt this. Now, this is just a hypothesis – albeit one consistent with lots of evidence. If you want to show I’m wrong, point me to some forecaster who foresaw both the recession of 2008-09 and the growth either side thereof. Or, failing that, show me forecasts for future years which successfully predict both growth and recessions.”

Well, as the quantum physicist, Niels Bohr once said, “Prediction can be very difficult, especially if it is about the future”. But I might be able to take up that challenge by Dillon. This is what I said back in 2005 in my book, The Great Recession, eventually published in 2009. “There has not been such a coincidence of cycles since 1991. And this time (unlike 1991), it will be accompanied by the downwave in profitability within the downwave in Kondratiev prices cycle. It is all at the bottom of the hill in 2009-2010! That suggests we can expect a very severe economic slump of a degree not seen since 1980-2 or more”.

As for the second part of Dillon’s challenge (how would the world economy grow after the end of the Great Recession?), then readers can consider what I predicted five years ago and mentioned at the start of this post (and for that matter also in my book, The Great Recession, back in 2009). So far, that prediction – for a long depression – has broadly worked out. In addition. I have argued in many posts that this depression will end but probably not before another severe economic slump, which is likely to begin within the next 12-18 months and last for a similar period through to 2018 or so. That’s a prediction.

And I think part of any scientific analysis is to make such forecasts or predictions to test a theory and its real outcomes. It is not good enough to just explain in hindsight (see my posts, and

For that matter, Marx himself made predictions arising from his theoretical analysis. He did not have sufficient data to make accurate predictions about oncoming slumps and recoveries, although he continually tried to find such data to do so. But his law of the tendency of the rate of profit to fall does make a fundamental prediction: that the capitalist mode of production will not be eternal, that it is transitory in the history of human social organisation, because it has a use-by date. The law of the tendency predicts that over time there will be an actual fall in the rate of profit globally, delivering more crises of a devastating character. And what work has been done by modern Marxist analysis confirms that the world rate of profit has fallen over the last 150 years (see Maito, Esteban – The historical transience of capital. The downward tren in the rate of profit since XIX century and Long-Term Movement of the Profit Rate in the Capitalist World-Economy).

Obviously, sucking a forecast out of the air is no better than choosing a number in a lottery. A forecast is only as good as the theory behind it. I reckon Marx’s theory of crisis provides the best explanation of the Great Recession in 2008-9 and also allows us to discern the stage through which capitalism is going and where it is going. So I based my forecasts back in 2005, in 2009, and now, on that theory and the law of profitability (as developed by others and me). But, as Engels often said: the proof of the goodness of a pudding is in the eating.

Will the real Keynes please stand up?

April 14, 2015

An argument has broken out among top Keynesian economists about what is the Keynesian theory on economic fluctuations in capitalist economies (i.e, crises and slumps).  The debate has taken the usual form of arguing about what Keynes ‘really meant’, whether he was really a radical that dispensed with neoclassical equilibrium theory or whether followers and supporters of Keynesian economic theory have distorted the master’s ideas so much as to reduce their insights to nothing.

This argument reminds me of the unending one within Marxian economics that some of us have been engaging in yet again recently. Did Marx have a clear theory of crises under capitalism in his works that he stuck to consistently; or were his ideas so sketchy that followers like Friedrich Engels distorted them (see my posts on the debate with Michael Heinrich, And is the theory of value as the basis of Marxian economics founded on realistic premises and logically consistent as a fundamental explanation of accumulation and social relations in the capitalist mode of production? Moreover, does the theory fit the facts (see my posts on the debate with Professor David Harvey,

Well, this sort of debate also takes place with Keynesians. What did Keynes really mean? What is his theory of macroeconomic fluctuations in modern economies?

There are two running debates within mainstream macroeconomics at the moment. The first is that between former Fed chief Ben Bernanke (in his new blog site at the prestigious Brookings Institution, and Larry Summers, the Keynesian reviver of what he calls the theory of ‘secular stagnation’, the situation he fears that capitalist economies are currently in (see my post,

Bernanke dismisses secular stagnation, saying that global capitalism is just having a temporary weak recovery (probably caused by deflationary over-saving by China, Germany and other countries) but it will soon pick up as the ‘natural rate of interest’ rises to provide more profitable opportunities to invest and grow. Summers doubts this and reckons that because ‘demand’ is so low and interest rates are locked into zero (‘zero bound’), economies are stuck in a low investment-low growth trajectory that requires government investment to get it out, or a series of monetary infusions that lead to successive stock market and property bubbles. For more on this, see my post,

The other debate is, as I say, about whether Keynes had an answer both to the cause of slumps like the Great Recession and how to get out of them. And flowing from that, just what Keynes did stand for.

As usual the doyen of modern Keynesianism, Paul Krugman, kicked off the latter debate off when he claimed that the John Hicks ‘revision’ of Keynes’ theory of ‘economic fluctuations’ was realistic and worked ( I have commented on Krugman’s claims for the (limited) success of this version of a Keynesian explanation of the Great Recession here ( But what upset more radical Keynesians was that Krugman should claim that the ‘general equilibrium’ version of Keynes as expounded by Hicks should be accepted as that of the master.

Krugman retorted that “Keynes said a lot of things, not all consistent with each other. (The same is true for all of us.)”. That’s true – see my paper on Keynes’ inconsistencies (Contributions of Keynes and Marx). Krugman went to claim that Keynes was a neoclassical general equilibrium man – namely that “the ups and downs in a capitalist economy are really movements towards restoring the equilibrium between aggregate supply and demand and there is no permanent instability in the Keynesian model. Right at the beginning of the General Theory, Keynes explains the “principle of effective demand” with a little model of temporary equilibrium that takes expectations as given. If that kind of modeling is anti-Keynesian, the man himself must be excommunicated.” (

And anyway, who cares, because as long as modern Keynesian theory works as an explanation, it does not matter what Keynes actually said or thought. And as Krugman says, “surely we don’t want to do economics via textual analysis of the masters. The questions one should ask about any economic approach are whether it helps us understand what’s going on, and whether it provides useful guidance for decisions. So I don’t care whether Hicksian IS-LM is Keynesian in the sense that Keynes himself would have approved of it, and neither should you. What you should ask is whether that approach has proved useful — and whether the critics have something better to offer.”

Krugman goes on to dismiss those Keynesians who reckon that economic crises are all about ‘irrational expectations’ or ‘uncertainty’ when the Hicksian IS-LM model (investment and savings moves into equilibrium with liquidity preference-money supply) works just fine (

But is Krugman right to say that it does not matter what Keynes said as long as we have workable model; and perhaps even more important, does he really have one that explains economic crises and the Great Recession? On the first point, as Krugman’s radical critics say, you can learn important insights from reading in detail the masters of any school of thought or theory in science and that can lead to better understanding. On the second point, does the Hicksian equilibrium model really start from realistic assumptions about modern economies and logically lead to an explanation that can be tested in reality?

As I said in a previous post on modern Keynesian macroeconomics (, “Keynesian insights were reduced the infamous IS-LM curve that argued an unemployment equilibrium would not occur under capitalism unless there was ‘stickiness’ in wages or other ‘shocks’ to the market system. In other words, market capitalism would not have slumps if labour did not resist wage cuts and governments did not interfere.”

This reduces Keynesian insights to developing Dynamic Stochastic General Equilibrium (DSGE) models. These models assumed equilibrium because they started from the premise that supply would equal demand ideally; they were dynamic because the models incorporated changing behaviour by individuals or firms (agents); and they were stochastic as ‘shocks’ to the system (trade union wage push, government spending action) were considered as random with a range of outcomes, unless confirmed otherwise). Sticky prices (or wages) – the cause of the Great Recession? So it would seem from the Krugman-Hicks-Keynesian school.

Another Keynesian economics blogger with many interesting ideas, Noah Smith, recently wrote in Bloomberg view (, called What causes recessions? He recalled that “One time, at a dinner, I asked a famous macroeconomist: “So, what really causes recessions?” His reply came immediately: “Unexplained shocks to investment.” Smith comments so “we really just don’t know the answer”.

But Smith goes on to say that we do have an answer: sticky prices/wages. “The market adjusts by the price mechanism. If the cost of something goes up, the price goes up to match. If demand falls, the price drops until the market clears. So if you want to show that the market doesn’t naturally self-regulate, the simplest and easiest way is just to show that prices themselves can’t adjust in response to events. This phenomenon is called “sticky prices.” If prices are sticky, then someone — the Federal Reserve, or perhaps Congress and the Treasury — needs to nudge markets back into their long-run equilibrium after a big shock.”

Smith cites various papers from macroeconomists that purport to ‘prove’ that sticky prices (wages) are the grit in the wheel of the natural movement of capitalist economies towards equilibrium: “sticky prices are enjoying a hard-fought place in the sun. The moral of the story is that if you just keep pounding away with theory and evidence, even the toughest orthodoxy in a mean, confrontational field like macroeconomics will eventually have to give you some respect”.

However, Larry Summers, that other prominent Keynesian, would not agree with Krugman and Smith that the Hicksian and DSGE models along with ‘sticky prices’ have provided an explanation of crises. He recently commented: “In four years of reflection and rather intense involvement with this financial crisis, not a single aspect of dynamic stochastic general equilibrium has seemed worth even a passing thought. Is macro about–as it was thought before Keynes, and came to be thought of again–cyclical fluctuations about a trend determined somewhere else, or about tragic accidents with millions of people unemployed for years in ways avoidable by better policies? If we don’t think in the second way, we are missing our major opportunity to engage in human betterment. And inserting another friction in a DSGE model isn’t going to get us there.”

Krugman is right in one aspect: the real Keynes is inconsistent and you can find several theories of slumps under capitalism. You can find in Keynes a theory of crises based on sticky wages causing an economic slump or at least sustaining it. But you can also find a theory of the ‘trade cycle’ that “the predominant, explanation of the crisis is… a sudden collapse in the marginal efficiency of capital”.

The marginal efficiency of capital is Keynes’ term for the rate of profit on capital and the nearest to Marx’s definition. In Chapter 22, of Keynes famous book, The General Theory, he goes on that “the collapse in the marginal efficiency of capital may be so complete that no practicable reduction in the rate of interest will be enough…. The interval of time, which will have to elapse before the shortage of capital through use, decay and obsolescence causes a sufficiently obvious scarcity to increase the marginal efficiency, may be a somewhat stable function of the average durability of capital…. When once the recovery has been started, the manner in which it feeds on itself and cumulates is obvious….”

Thus slumps or depressions are the consequence of a “sudden” drop in the profitability of capital (unexplained by Keynes, except as a psychological change in ‘animal spirits’) that no amount of cuts in interest rates can restore. What must happen is the destruction of obsolescent capital over time (and cuts in real wages) in order to restore profitability before capitalism can accumulate under its own steam again – shades of Marx’s profitability theory!

What is interesting about this version of Keynesian crisis theory is that has nothing to do with sticky prices or with some ‘shock’ to ‘effective demand’ as mainstream Keynesian economists all look to. It depends on a drop in profitability (if unexplained).  But you hear nothing of this ‘profitability model’ from modern Keynesian economists as they argue about whether it is ‘sticky wages’ or uncertainty and instability in financial markets that cause crises.

Even radical economists with an allegiance to both Marxian and Keynesian models do not refer to Keynes’ ‘profitability’ model. Recently, radical economists Lance Taylor and Duncan Foley of the New School received the Leontief Prize for Advancing the Frontiers of Economic Thought at Tufts University’s Global Development and Environment Institute. In an interview for the prize (, Foley and Taylor attacked Krugman’s model for its equilibrium assumptions. For them, full employment is not an equilibrium outcome under capitalism and not Keynesian: “Keynes saw capitalism’s general state as allowing almost arbitrary unemployment: hence his “General Theory.” Full employment was a lucky exception… calling full employment the general state and allowing one unlucky exception turns Keynes upside down.”

But does that mean we should look in Keynes for the profitability model as an alternative? Well, no. For Taylor, the problem of slumps lies with “weak demand”. Taylor says “he follows Keynes in insisting that the first is demand. He treats demand as generally driving long-run growth, not just the ups and downs of business cycles.” And he reckons that Keynes really saw crises as being due “the distribution of income between profits and wages, and between high-earners and low-earners.”

However, Taylor reckons that the US economy is “profit-led” i.e. it grows if profit share grows. A higher profit share boosts growth. So if wage share rises, the US capitalist economy will suffer. This is the opposite of the current radical ‘post-Keynesian’ view that higher wages would improve the capitalist economy that Foley seems to support. According to this view, the Great Recession was caused not by a ‘sudden fall in profitability’ but by low wage share from high inequality so that consumer demand was too low (see my post,

So is it sticky wages or prices?; uncertainty and instability in financial markets?; or weak demand and low wages?; or sudden drops in profitability? Will the real Keynes stand up?

Low investment is the cause of low growth – surprise!

April 8, 2015

In its latest economic report, the IMF came to two important conclusions about the state of world capitalism in 2015 (…/…/ft/survey/so/2015/NEW040715A.htm).

First, it reckons that global capitalism will remain in a depression. The IMF says that “a large share of the output loss since the crisis can now be seen as permanent, and policies are thus unlikely to return investment fully to its pre-crisis trend”. While potential growth in advanced economies will tick up in the next five years, it will remain well below levels before the financial crisis. Emerging nations will see their potential growth decline over the same period.


In advanced economies, real GDP growth that maximises potential capacity will ‘accelerate’ to an average of just 1.6% over the next five years, compared with 1.3% from 2008 to 2014. But this growth will remain weaker than the 2.3% pace from 2001 to 2007. The IMF economists failed to mention that this 1.6% a year growth was about half the post-war 20th century average. Growth in so-called emerging economies will also drop down.

The second conclusion was that the reason for this slower and crawling growth rate was that there had been a collapse in investment and this collapse was concentrated in the capitalist business sector. Yes, the collapse in the housing bubble in many advanced economies was one reason for the drop in private sector investment, but the collapse in business investment was much greater and long lasting.


The IMF found that business investment in the advanced economies was 13% lower in from 2008-2014 than it expected back in spring 2007 before the Great Recession. For the US, the gap was even bigger at 16% and 18% for Japan. How wrong can you get?

Recently, the Bank for International Settlements (BIS) latched onto the same point – that the Great Recession and the subsequent weak and slow recovery in the major economies was a product of the collapse in business investment, i.e. the fault of capitalism,

As the BIS put it: “Business investment is not just a key determinant of long-term growth, but also a highly cyclical component of aggregate demand. It is therefore a major contributor to business cycle fluctuations. This has been in evidence over the past decade. The collapse in investment in 2008 accounted for a large part of the contraction in aggregate demand that led many advanced economies to experience their worst recession in decades. Across advanced economies, private non-residential investment fell by 10-25%”.


But what caused this fall in investment and why is it not recovering sufficiently to restore trend real GDP growth in the major economies? Well, the IMF comes up with a brilliant answer: it’s lack of demand. Capitalist companies are not investing enough because there is a lack of demand for their products. But this answer begs the question: why is there a lack of demand? And it also fails to recognise that the biggest component in the fluctuation in aggregate demand since 2007 has been investment. After all, investment is part of aggregate demand, as the BIS points out.

The IMF’s Keynesian answer is no answer at all but simply a tautology: there is no growth because there is no demand! As usual, the Keynesians have got their causal sequence back to front, see my post,

At least the BIS attempts to look for a cause that is not circular reasoning. The BIS found that “the uncertainty about the economic outlook and expected profits play a key role in driving investment, while the effect of financing conditions is apparently small.”  The BIS dismisses the consensus idea that the cause of low growth and poor investment is the lack of cheap financing from the banks or the lack of central bank injections of credit. We have quantitative easing coming out of ears, with the latest burst coming from the ECB bond purchasing plan worth €1.8trn, or 3% of global GDP over the next 18 months.

Instead, the BIS looks for what it calls “seemingly more plausible, explanation for slow growth in capital formation”, namely “a lack of profitable investment opportunities”. According to the BIS, companies are finding that the returns from expanding their capital stock “won’t exceed the risk-adjusted cost of capital or the returns they may get from more liquid financial assets.” So they won’t commit the bulk of their profits into tangible productive investment. “Even if they are relatively confident about future demand conditions, firms may be reluctant to invest if they believe that the returns on additional capital will be low.” Exactly.

Ironically, the BIS reckons that, whereas investment in the stock market was more profitable for companies than investing in productive assets in the period before the Great Recession, the reverse is the case now. The profitability of capital stock has not risen, it’s just that the stock market is now so expensive that the likely return against stock prices has fallen. And returns on bonds have slumped.


Even so, it seems that companies and financial institutions prefer to hold ‘safe assets’ like government bonds rather than invest in production. So we now have the ridiculous phenomenon of government bonds being bought in the bond market at negative yields i.e’.bought at prices so high that the interest paid on the bond will not match the extra cost of the bond during its lifetime. And this applies now not just to very safe German bonds but even to Spanish and Irish bonds, economies just coming out of major debt crises.

I have attempted to explain before why companies in the major economies are not raising their capital expenditures to levels and growth rates seen before the Great Recession, let alone in the 1990s, see

The profitability of capital has got to be high enough both to justify riskier hi-tech investment and to cover a much higher debt burden (even if current servicing costs are low).  As I said in my previous post: “The capitalist sector of the major economies has been increasingly hoarding cash rather than investing over the last 20 years or so. It is not investing so much because profitability is perceived as being too low to justify investment in riskier hi-tech and R&D projects, and because there are better and safer returns to be had in buying shares, taking dividends or even just holding cash. Also many companies are still burdened by high debt even if the cost of servicing it remains low; the worry is that if interest rates rise or companies take on more debt, it will become unserviceable.”

The impact of high debt (especially corporate debt) on investment and growth has a long literature and remains controversial (see my many posts on this,  But it seems that increasingly confirmed that “high debt levels, whether in the public or private sector, have historically placed a drag on growth and raised the risk of financial crises that spark deep economic recessions.” (The McKinsey Institute, “Debt and (not much) Deleveraging”).  As McKinsey put it in their latest debt report: “Seven years after the bursting of a global credit bubble resulted in the worst financial crisis since the Great Depression, debt continues to grow. In fact, rather than reducing indebtedness, or deleveraging, all major economies today have higher levels of borrowing relative to GDP than they did in 2007. Global debt in these years has grown by $57 trillion, raising the ratio of debt to GDP by 17 percentage points (see chart below). That poses new risks to financial stability and may undermine global economic growth.”  (


By the way, my emphasis on the role of credit, debt or ‘fictitious capital’ in the current crisis lends the lie to charges of being a ‘mono-causal’ law of profitability Marxist that I am currently accused of (see

Now even Paul Krugman, who in the past has reckoned that rising debt is not a problem is prepared to admit its role only today  When arch-Keynesian Brad de Long reckoned that what the US economy needs is not less debt but more debt, Krugman noted that “Unfortunately, the biggest debt accumulations have come in economies that have much lower growth — mainly demography in Japan, productivity collapse in Italy.” , although Krugman reckons that low growth leads to high debt, not vice versa.

Moreover, it is an illusion that corporations are awash with cash at least in relation to their debts, see

If it is the case that the reason for the continuing Long Depression in the major economies (defined as below trend growth and below trend investment) is low profitability and still excessive debt, then the situation does not look set to improve. According to JP Morgan the investment bank, usually a super optimist about capitalist economic recovery, US corporate profit margins, i.e. the share going to profit for each unit of production, have been at a record highs, but now they are beginning to fall. “The share of business net value added going to capital, or net operating surplus, has edged down modestly since peaking in 2012. However, the share going to profits, which is essentially net operating surplus less interest payments, has been about unchanged since 2012. Adjusted corporate profits declined at a 5.5% annual rate in 4Q14, the latest available data point. However…we believe the natural progression of the business cycle will begin gradually squeezing business (and profit) margins.”

The recent fall in oil prices and the strengthening of the dollar is really hitting US corporate profits.  Bank America now reckons that average earnings per share for S&P 500 companies will fall this year for the first time since 2009.  And readers of my blog will know that GLOBAL corporate profits are now in negative territory.

But low profitability as a major cause of low investment is studiously ignored by the IMF in its report.

David Harvey on monocauses, multicauses and metaphors

April 2, 2015

Back last October, Professor David Harvey, presented an essay to the University of Izmir, Turkey in October. You can see a You tube screening of that presentation at

Professor Harvey then drafted a paper sent to me called David Harvey, Crisis theory and the falling rate of profit; to be published in 2015 in The Great Meltdown of 2008: Systemic, Conjunctural or Policy-created?, edited by Turan Subasat (Izmir University of Economics) and John Weeks (SOAS, University of London); Publisher: Edward Elgar Publishing Limited. Here is the draft, Harvey on LTRPF.

Last December I did a reply on my blog,
and presented my response in more depth in a paper reply-to-harvey, that Professor Harvey (from now on DH) kindly posted on his own website,

I won’t repeat the arguments presented in DH’s paper and my reply – you can read them yourself. Suffice it to say that DH was arguing that in essence, that Marx’s law of the tendency of the rate of profit to fall (LTRPF) is not the only or even the principal cause of crises. Thus it cannot be the basis of a Marxist theory of crisis. Indeed, “there is, I believe, no single causal theory of crisis formation as many Marxists like to assert”.

It’s not monocausal
Harvey argues that we proponents of Marx’s law as the basis of a theory of crises are one-sided and monocausal in our approach because: “proponents of the law typically play down the countervailing tendencies”.  Moreover, Professor Harvey pours cold water over the “array of graphs and statistical data on falling rates of profit as proof of the validity of the law”. He doubts their validity because there is plenty of evidence in the ‘business press’ that the rate of profit, or at least the mass of profit, in the US has been rising, not falling.

Professor Harvey prefers other reasons for capitalist crises than Marx’s law. There is the effect of credit, financialisation and financial markets; the devaluation of fixed constant capital in the form of obsolescence; and, above all, the limits on consumer demand imposed by the holding down of real wages relative to capitalist investment and profits. He wants us to consider alternative theories based on the “secondary circuit of capital” i.e. outside that part of the circuit to do with the production of value and surplus value and instead look at that part concerned with the distribution of that value, in particular ‘speculative overproduction’.

As I say, my reply to these arguments is outlined in my post and in my longer paper. But more recently, Professor Andrew Kliman (from here called AK), Marxist economist and author of two great books, Reclaiming Marx’s Capital and The failure of capitalist production (see my post,, has entered the fray. In a two-part reply to Harvey published in the New Left Project
AK has delivered an effective and enlightening rebuttal of DH’s arguments.

As AK says “The real issue is not that anyone has advocated a mono-causal theory, but that Harvey is campaigning for what we might call an apousa-causal theory, one in which the LTFRP plays no role at all (apousa is Greek for ‘absent’). He is the one who is trying to exclude something from consideration. In light of his emphasis on capitalism’s ‘maelstrom of conflicting forces’ and its ‘multiple contradictions and crisis tendencies’, one might expect that he would urge us to consider all potential causes of crisis, excluding nothing. However, Harvey is not merely suggesting that other potential causes of crisis be considered alongside the LTFRP. He seems determined to consign it and the theory of crisis based on it to the dustbin of history.”

AK quotes Harvey “those who attribute the difficulties of contemporary capitalism to the tendency of the profit rate to fall are, judging by this evidence of labour participation, seriously mistaken. The conditions point to a vast increase and not a constriction in surplus value production and extraction.”

Then AK makes the point that I also make in my reply that “the data do indeed suggest that the mass—the absolute amount—of surplus-value or profit increased. But the issue here is what happened to the rate of profit, the amount of surplus-value or profit as a percentage of the volume of invested capital. An increase in the numerator of a ratio (rate) is not evidence that the ratio as a whole has increased. If the percentage increase in the denominator of the rate of profit, the invested capital, was greater than the percentage increase in the numerator, then the rate of profit fell. Given that Harvey does not show, and does not even suggest, that the denominator failed to increase by a greater percentage, the statistic he cites is just not evidence that the rate of profit rose”.

And as I said in my reply to DH (and DH is open about this), AK points out that DH is really just backing the view of Michael Heinrich that Marx’s law is not a law at all; that any way it is ‘indeterminate’ and was eventually dropped by Marx as the ‘most important law’ in political economy because it did not work (see my post,

Both G Carchedi and I ( and AK in recent papers ( have dealt with Heinrich’s arguments. But of course, that has not ended that attack on the relevance of the LTRPF as the underlying causal explanation of recurrent crises under capitalism. Indeed, only recently, Saso Furlan, a Marxist student from the Slovenian Institute of Labour Studies and a prominent member of the Initiative for Democratic Socialism party that recently won seats in the Slovenian parliament, has written an article accepting Heinrich’s position in full (

The battle of metaphors
DH has now replied to AK’s rebuttal of his arguments in a new paper, Capital’s Nature: A Response To Andrew Kliman

In a very eloquent response, full of interesting observations, DH takes up the metaphor used by AK and, of course, used by Marx himself on several occasions, that the Marxist theory of value and the LTRPF is really like Newton’s law of gravity. The law of gravity means that on earth objects will tend to fall to the ground. Of course, such a fall can be delayed by wind, or by constructions, etc, but the tendency is there and explains the ultimate movement of objects.

As AK puts it “If I appeal to the universal law of gravitation in order to explain why apples have a tendency to fall off trees, without mentioning other factors that can make them fall, like the blowing of the wind, or counteracting factors like air resistance, I am not assuming that these other things do not exist. Much less am I constructing a mono-causal model that excludes them and which is therefore severely restricted in applicability.”

Marx’s metaphor is, DH admits, a “clever and beguiling metaphor”. The metaphor shows that “capital can never escape the tendency for profit rates to fall. It is inherent in capital’s nature, even as the conditions under which the law operates vary widely. The competitive search for relative surplus value ultimately undermines and destroys the capacity to produce and realize that surplus value. This is the primary contradiction of capital around which a host of secondary contradictions (e.g. those embedded in the credit system or deriving from insufficient aggregate demand) cluster. No amount of tinkering with the secondary contradictions (e.g. financial reform or basic income redistributions) can abolish the tendency for profit rates to fall and crises to form. Only a revolutionary politics that addresses this primary contradiction will suffice.”

Indeed. But DH does not like this Marxist metaphor. After all, metaphors have their limitations and often are exhausted by reality. He wants us to consider others, some of which Marx also used. DH reckons the one that impresses him most is “that of capital as an organic whole sustained by the internally differentiated circulatory flows of value that absorb from capital’s milieu the energies of human labor as well as the raw materials to be found in capital’s social and natural environment.”

DH quotes from the introduction to the Grundrisse to support his alternative metaphor: “The conclusion we reach is not that production, distribution, exchange and consumption are identical, but that they all form the members of a totality, distinctions within a unity….A definite production thus determines a definite consumption, distribution and exchange as well as definite relations between these different moments. Admittedly, however, in its one-sided form, production is itself determined by the other moments. For example if the market, i.e. the sphere of exchange, expands, the production grows in quantity and the divisions between its different branches becomes deeper. A change in distribution changes production, e.g. concentration of capital, different distribution of the population between town and country, etc. Finally, the needs of consumption determine production. Mutual interaction takes place between the different moments. This is the case with every organic whole.

Using this quote, DH wants us to think that Marx saw crises as a result of ‘mutual interaction’ between different parts of the circuit of capital: production is determined by ‘other moments’. Thus the causal sequence is not ‘mono-causal’ or one-way: from the profitability of capital to investment and production and then consumption, but is one of ‘mutual interaction’.

But if we look closely at the quote, we can see that this is not the correct interpretation. Marx says “a definite production thus determines a definite consumption, distribution and exchange as well as definite relations between these different moments”. Only in a “one-sided form” is production determined by other moments. Production leads and sets off a chain reaction that feeds back on production in a crisis.

But DH likes the ‘organic whole’ metaphor because he reckons it shows that crises under capitalism are multi-causal: “In the same way that the human body can fall sick and die for all sorts of different reasons other than sheer old age, so there are multiple points of stress and potential failure within the organic whole of capital. A failure at one point, moreover, typically engenders a failure elsewhere.”

The trouble with his metaphor of a human body that gets sick, in contrast with Marx’s metaphor of gravity, is that DH replaces a clear causal sequence from profitability to crises that can be tested and measured with a view of a vague variety of contingent forces within the organic whole that move one way or another depending on the interplay of multiple but correlated contradictions. There is no explanation of where these crises come from.

DH tries to contrast his metaphor of a “chaotic mishmash of possible causes for breakdown and crises that I typically invoke without any necessary directionality of change with the mechanical certainties of that Newtonian world in which the clock was wound up at the outset through the extractions of absolute surplus value only to gradually be wound down under the competitive impetus to create relative surplus value. As the ratio of capital to labour employed shifts ineluctably in the former’s favor so the profit rate trends down. To me, this mechanical model appears too deterministic, too unidirectional and too teleological to fit how I see and experience capital evolving as an organic whole”.

But DH invokes chaos because he does not see Marx’s law as a dialectical law, i.e. because he does not see the tendency and the countertendencies. Thus he cannot discern any theory of crisis. So we have no idea what is going on. Every crisis is different with different causes and so “the job of the Marxist diagnostician is to figure out what ails capital this time around” – without reference to any previous crisis. And we can’t do any better than this because what causes illness in a human body can change with time e.g. genes mutate, environments change and diets and healthcare vary etc

Not in my lifetime!
DH also resurrects the old argument that even if the LTRPF is relevant to crises under capitalism, it is really only relevant to a long term apocalyptic end or breakdown. “Yes indeed the sun will eventually run out of gas and given the second law of thermodynamics energy will dissipate. But there is nothing to stop the increasing concentration and, in the earth’s case, storing of energies in one part of the universe for a time so that species as well as whole civilizations can be constructed through increasing order.” But “in the here and now the second law of thermodynamics means very little to us at the macro-level struggling to reproduce in our little corner of the universe, even as it is a universal feature of the world in which we live (and has lots of localized uses in closed systems such as in steam engines)”.

This metaphor that Marx’s law only operates at the same level as the laws of physics that predict that the sun (like other stars) will eventually burnt out in a billion or more years, so that it is irrelevant to crises in human life times is pinched from Rosa Luxemburg, who adopted an underconsumptionist theory of crises (as does DH in some places – see mattick on harvey).

Luxemburg addressed a ‘mono-causal’ LTRPF supporter of her day in ironic tone, as follows “there is still some time to pass before capitalism collapses because of the falling rate of profit, roughly until the sun burns out!” Rosa Luxemburg Anti-Critique, p. 76n.

In quoting Luxemburg’s remark in his book, Imperialism and the accumulation of capital, M Bukharin commented “It would be ridiculous to demand that the process should reach its logical conclusion. The objective tendency of capitalist development towards this end is quite sufficient. Long before the ‘end’, this tendency (LTRPF – MR) will sharpen the struggle for any possibility to gain an additional profit to such an extent, and will be accompanied by such a centralization of capital and sharpening of social relations, that the epoch of a low rate of profit will become the epoch of catastrophes.”

Bukharin goes on to point out that Luxemburg’s alternative theory of crisis based on too much surplus value that cannot be realized except through expansion into the third world also meant that “not only can one not draw any revolutionary conclusions from Rosa’s theory but, on the contrary, conclusions that make revolution appear impossible for a long time.”

Where’s the evidence?
DH offers no evidence to test his ‘multi-causal chaos’ theory of crises while proponents of the LTRPF as the underlying causal driver of recurrent crises can and do just that. AK provides powerful evidence in the second part of his reply to DH. And I and others like G Carchedi, Esteban Maito, Alan Freeman, Tapia Granados and more have also generated empirical evidence to test and confirm or falsify Marx’s law. The result is that Marx’s LTRPF does fit the facts as the best explanation of recurrent crises.

As AK explains in his second part, we can decompose the movement in the rate of profit to see if it matches the assumptions of the law in reality. Thus Marx’s law says that the rate of profit will fall if the organic composition of capital rises faster than the rate of surplus value. Marx’s law says that if the rate of surplus value rises faster than the organic composition of capital, then the rate of profit will rise. But this latter countertendency is just that – it will be weaker than the tendency for the organic composition of capital (OCC) to rise. So over time (and not time as long as it takes the sun to burn out!), the rate of profit will fall.

The evidence presented by AK and others for the US is conclusive on this. Here is some more evidence from my calculations on the latest data on the US rate of profit (see my post,

US rate of profit decomp

So there is a secular decline in the US rate of profit from 1946 to 2014. The rate of profit did fall well before the sun burnt out. The reason is clear. Between 1946 and 2014, the organic composition of capital rose 47%, while the rate of surplus value actually fell 8%, so the rate of profit fell 29%. In the neo-liberal period after 1982, the rate of profit fell only very slightly, because the ‘countertendency’ of a rising rate of surplus value was nearly enough to match the rise in the organic composition of capital.

G Carchedi in an unpublished paper looked at just the productive sector of the US economy. He found that, from 1947 to 2010, the rate of exploitation actually fell, which shows the limits of growing exploitation as a counter-tendency.  And the rate of profit (ARP) fell.  In the graph below, the wages to profits ratio (W/P) – the opposite of the rate of surplus value – rises up to 1985 and then reverses (modestly).   And the rate of profit consolidates.

The rate of profit and ratio of wages to profits (W/P)


The increase in the rate of profit from the mid-1980s was really just a slowing down of its secular fall. And the decrease in W/P since the mid-1980s (increase in the rate of exploitation) is actually a slowing down of its secular increase, i.e. of a decrease in the rate of exploitation. This shows that, given the persistent increase in the OCC, (i.e. given the persistent fall in surplus value relative to the capital invested) over the long run, the rate of exploitation cannot but decrease.

LTRPF and crises
But does a falling rate of profit lead to crises as Marx argued and we mono-causals also reckon? Well, again the evidence is strong. Indeed, I know of no Marxist economist, except perhaps DH, who does not doubt that it was a crisis of profitability in the 1970s in the major economies that led to the first simultaneous international slump in 1974-5 and the double-dip recession of 1980-2. And that includes those economists like Gerard Dumenil, Michel Husson, Sam Gindin etc who reckon that the LTRPF had nothing to do with the Great Recession. It even includes the so-called post-Keynesian economists who reckon that the slumps of the 1970s and 1980s were ‘profit-led’ (ie wage share rose and drove down profits), although this school now reckons the current crisis is ‘wage-led’ (i.e. wages are too low for effective demand). See my post,

And we can refute the argument that the ‘underlying’ cause of the Great Recession was not a crisis in profitability but something else. Tapia Granados has shown that profits have led investment and thus growth up and down: “available empirical data for 251 quarters of the U.S. economy… supports the hypothesis of causality in the direction of profits determining investment and, in this way, leading the economy toward boom or bust.”

And I have also shown how changes in the mass of profit will be followed (not led) by changes in investment.

US corporate profit and investment

DH recognizes the need to look for empirical evidence that might lead to an alternative explanation for crises than that of the LTRPF. He notes that “One of my favorites, for example, is to look carefully at how investments in the fixed capital and consumption fund of the built environment both absorb surplus capital and ultimately become the locus of a crash (as happened in 2008 and as is now threatened in China). This corresponds, as I pointed out, to Marx’s comment that “the cycle of interconnected turnovers embracing a number of years, in which capital is held fast by its fixed constituent part, furnishes a material basis for the periodic crises.” And he goes on to say: “Why, then, are we not investigating this with the same intensity and tenacity as is devoted to the falling rate of profit?”

Well. some of us have done just that. In various papers I have looked at the connection between the time of the turnover of fixed capital and the regularity of cyclical crises. I argued in my book, The Great Recession, that the 13-16 year period for a change in the direction of the rate of profit does correlate with the age of US fixed assets. Esteban Maito and Peter Jones have also considered in detail the role of the turnover of capital in recent papers.

It’s a pinball wizard!
DH concludes that “I would claim my organic metaphor for understanding capital’s nature works far better for understanding what is happening to us in the here and now.” Well, let’s raise another metaphor: that of a pinball machine. The ball could represent the accumulation of capital. It whizzes round hitting various obstacles in a chain reaction. They light up, representing various crises, each slightly different. One crisis bounces onto another (from housing to stocks to banks etc), as in Harvey’s metaphor. But the pinball machine’s raison d’etre is that its level slopes down so that gravity takes over; that is the essence of its working. The ball is always tending to drop to the bottom and even intervention by levers from the outside (government action) cannot stop that tendency which eventually overrides the obstacles and levers and the ball drops into the hole at the bottom. Accumulation stops.

Of course, metaphors have their limits but, I think, this one works well to understand the ‘here and now’ of capitalism.

Ben Bernanke and the ‘natural’ rate of return

March 30, 2015

Today, former head of the US Federal Reserve, Ben Bernanke launched his own economics blog through the Brookings Institution (  As Ben put it, “Now that I’m a civilian again, I can once more comment on economic and financial issues without my words being put under the microscope by Fed watchers. I look forward to doing that—periodically, when the spirit moves me—in this blog. I hope to educate, and I hope to learn something as well”.

Well, can we learn something from Ben’s blog?  After all, this is the economist who is supposedly an expert on the Great Depression of the 1930s and its causes; and vowed back in 2002, when addressing a celebration of Milton Friedman, the great exponent of monetarism, that he and the Fed had learned the lesson that by judicious use of monetary policy (lowering interest rates and boosting money supply through ‘quantitative easing’ or even through cash handouts to the banks), depressions could be avoided.

“We won’t let it happen again” said Ben at the time.  And ‘helicopter Ben’, as he became known, for advocating monetary largesse on an industrial scale dropped from helicopters on the countryside if necessary in times of slump, duly applied Friedman’s monetary injections during the Global Financial Crash and the Great Recession.

But did such policies of low interest rates and helicopter money work?  Well, you can read my many posts on that for the efficacy of QE and Bernanke-style monetary policy.

But the outcome is clear: the weakest recovery from a slump in the post-war period and forecast for future growth have been steadily downgraded, as this graph shows.

Economic recoveries

Current US real GDP is some 12% below where it would have been now without the Great Recession and subsequent weak recovery..

Trend US growth

It would seem that monetary policy is not anywhere near enough to get even the US capitalist economy going and ‘return to normal’.

And it seems that Bernanke in his first blog post today agrees.  Ben tells us that low interest rates are here to stay, but not because of lax monetary policy but because the real rate of return on assets (both tangible and financial) are staying low

Ben points out that interest rates along with inflation have been in a downward trend since the early 1980s.  Indeed, real rates (after inflation) are actually negative now.

Interest rates and inflation

And this is a “not a short-term aberration, but part of a long-term trend.”  Now this may be a revelation to Ben, the former Fed Chairman, but it is not to readers of my blog or my book, The Great Recession, where I point out in some detail that capitalism in its long-term downward phase in production prices (in what has been called the Kondratiev cycle, after the Russian economist who first identified this cycle) –

But Bernanke asks the question: “Why are interest rates so low? Will they remain low? What are the implications for the economy of low interest rates?”  Well, they are low not because the Fed and other central banks have pumped too much money into the economy – although that used to be what Ben said he wanted to do.  No, the reason for low interest rates is the low rate of return on capital investment.  Well, well.  “The real interest rate is most relevant for capital investment decisions, for example. The Fed’s ability to affect real rates of return, especially longer-term real rates, is transitory and limited. Except in the short run, real interest rates are determined by a wide range of economic factors, including prospects for economic growth—not by the Fed.”

Ben invokes the work of Knut Wicksell, the pre 1914 Swedish economist who introduced the concept of the equilibrium real interest rate. This equilibrium interest rate is the real interest rate consistent with full employment of labour and capital resources. And the problem is that the equilibrium real rate is low because “investment opportunities are limited and relatively unprofitable.”

What this tells you is that monetary policy is restricted in its impact by what is going on in the ‘real’ economy, more specifically, the dominant capitalist sector.  “The bottom line is that the state of the economy, not the Fed, ultimately determines the real rate of return attainable by savers and investors.”

So Ben’s argument that it is the underlying real rate of return on investment that decides things, not Federal Reserve monetary policy, is really to justify and defend his actions as Fed chair against criticism from the Austrian school and the neoliberal camp that he kept interest rates artificially too low; and from Keynesian camp that he did not intervene enough.  You see, the critics are wrong about Fed policy because the Fed has little say in the underlying growth or otherwise of the US capitalist economy.  That depends on its underlying profitability, or in Wicksell’s language the ‘equilibrium ‘natural rate of return’.

“The state of the economy, not the Fed, is the ultimate determinant of the sustainable level of real returns. This helps explain why real interest rates are low throughout the industrialized world, not just in the United States.”   By why is the real rate of return so low?  Ben will tell us in future posts.  Don’t hold your breath.


Actually, we did not have to hold our breath for very long.  Ben did his second part on why interest rates are low today.

In this part he slammed into the ‘secular stagnation’ thesis propounded by Larry Summers (see my posts, and  Ben does not think that the US economy is in stagnation, at least not permanently.  That’s because with interest rates so low, there cannot be a “permanent dearth of profitable investment projects.”  Ben agrees with some other economists that US economic growth over the past few decades is not just a product of ‘credit bubbles’ as Summers claimed, but came from genuine real improvements.  So there is nothing wrong with the US economy and the ‘headwinds’ created by the Great Recession are now dissipating.  And anyway, higher profits from investing overseas should help bolster the US economy.

Hardly a convincing case for the end of this Long Depression.  After all, the latest figures on corporate profits show a contraction, led by a sharp fall in overseas profits! (see my post,  It’s true that economic growth was higher decades ago because the profitability of investment was higher, but if profitability is now in trouble, then the converse outcome is likely.


Profit warning

March 27, 2015

The final estimate of US GDP in the fourth quarter of 2014 came out today. US real GDP growth was left unrevised at 2.2% year-on-year in the final three months of the year and the figure for the whole of 2014 was unrevised at 2.4%. Mainstream economists were keen to suggest that the current quarter in 2015 ending this week could show a pick-up.

But none mentioned the really important development – that corporate profits fell in the fourth quarter, increasing the risk of a new slump in investment in 2015-16. Profits fell $30.4 billion in the fourth quarter, in contrast to an increase of $64.5 billion in the third. This seems mainly due to a fall in profits from overseas as the dollar’s strength drove income gathered in other currencies down. This meant that corporate profits are lower by 0.2% from this time last year and are down 0.8% in 2014 compared to 2013.

In previous posts, I have argued that profits drive investment; and investment leads real GDP growth in capitalist economies – the opposite, by the way, of the causal sequence claimed by the Keynesians, who see it as consumer spending and investment leading to income and thus to profits (see my many posts on this issue,
and the excellent paper by Tapia Granados

In 2014, there were clear signs that US corporate profit growth was slowing, see my post…/us-gdp-up-but-pro…/.
I argued that, when corporate profits slow, some six months to year later, so will business investment. Well in Q4 2014, profits went negative for the first time since the beginning of the Great Recession in January 2008. The time before that was at the beginning of the mild recession of 2001. Now as the graph below shows, that would suggest a new investment slump before the year is out.

US corporate profit and investment

And it is not just US corporate profits. I have been tracking corporate profits in some of the major capitalist economies, namely, the US, UK, Japan, China and Germany. Combined corporate profits growth has been slowing sharply, from 11% yoy this time last year to just 3.2% at the end of 2014. Indeed, corporate profits growth has been very weak since the end of the Great Recession compared to before and now appears to be running out of steam.

Global corporate profits

This was mirrored by the figures for China’s industrial profits, also out today for the first two months of this year. Profits fell 4.2% from the same period in 2014, the biggest drop since early 2012.

The latest updated figures for the US mean that I can also make a pretty good stab at the movement in the US rate of profit right up to 2014. I have updated the estimate using the same sources, categories and methods adopted in my paper for a ‘whole economy’ rate of profit (see my paper, The profit cycle and economic recession).

For those of you who like to know how I get my results in detail (and there are many of you!), suffice it to say, that I have used the US Bureau of Economic Analysis NIPA accounts. I get the US net domestic income (GDP less capital consumption) and employee compensation from NIPA Table 1.10 and capital stock from the NIPA fixed asset tables 6.1 (for current cost measures) and 6.3 (for historic cost measures). Also, in my rate of profit measure, I include variable capital (employee compensation) in the denominator – something nearly all other analysts do not do. I won’t explain why I differ from others on this now (there is unpublished paper on this by myself and G Carchedi); again suffice it to say that if the rate of profit is measured with just fixed assets as the denominator, it does not make a decisive difference.

US rate of profit 2014

My results show that the US rate of profit fell in 2014, whether measured on a current cost or historic cost basis for fixed assets and depreciation, for the first time since the start of the Great Depression.

In the graph, the data confirm yet again what I and many other Marxist economists have argued (contrary to Thomas Piketty, among others) that the US rate of profit has been in secular decline since the end of the second world war. There was a ‘golden age’ from 1946 to 1965, when profitability held up (at least on the current cost measure) but then there was a period of sharply falling profitability (the crisis period) from 1965 to 1980-2. From 1982 to 1997 there was a significant revival in profitability (on a current cost basis) and a small pick-up, or end to the decline (on a historic cost basis) – the neo-liberal period, if you like. From 1997, US rate of profit entered a downward phase. Since the end of the Great Recession, profitability revived from lows in 2009 but is still below the level reached in 1997. And it fell in 2014.

From the data, we can see in more detail how profitability has changed. Between 1946 and 2014, US profitability in the capitalist sector fell 21% on a current cost basis and 29% on an historic cost basis. Most of the fall in the HC profit rate took place between 1946 and 1965, whereas on a current cost basis it dropped hugely between 1965 and 1982. There was a revival between 1982 and 1997, the neoliberal era, greater on a current cost basis. Since 1997, profitability has declined.

changes in us rate of profit

As I have explained before, the closest measure to the Marxian rate of profit requires the use of historic cost measures for fixed assets and depreciation. There is an exaggerated fall and rise in the current cost measure compared to the historic cost measure, due to the current cost inflation of fixed asset prices and depreciation. But the long-term story is the same (see Basu on RC versus HC for the argument that, over a long time, the current costs and historic measures can converge.)

Marx’s law of the tendency of the rate of profit to fall is just that. The rate of profit in a capitalist economy will tend to fall over time and will do just that. BUT there are periods when counteracting factors come into play, so the tendency to fall does not materialise in an actual fall for a period of time. Thus you can get a profit cycle of falling profitability followed by a period of rising profitability and then a new fall, all within a secular process of decline. The US rate of profit in the post-war period exhibits just that with a 32-36 year cycle from trough to trough (for more on this, see my book, The Great Recession).

Marx’s law says that the rate of profit will fall because there will be a rising organic composition of capital (the value of constant capital – machinery, plant and raw materials – will rise faster than variable capital – wages and benefits paid to the employed workforce). The US data confirm that. There is strong inverse correlation (-0.67) between the organic composition of capital and the rate of profit. The organic composition of capital rose 20% from 1946 to 2014 and the rate of profit fell 20%. In the period when profitability rose, from 1982 to 1997, counteracting factors came into play, in particular, a rising rate of exploitation (surplus value) and a cheapening of the value of constant capital that led to a fall in the organic composition. In that period, the rate of surplus value rose 13% and the organic composition of capital fell 16%. I calculate that the rise in the rate of profit from 1980 to 2014 was two-thirds due to a rise in exploitation of labour during the neo-liberal period and only one-third due to cheaper technology. Again this supports Marx’s law.

So in sum, the US rate of profit fell in 2014 for the first time since 2008 and the mass of corporate profits fell in 2014 and went negative in the last quarter. Global corporate profit growth is also slowing significantly. All this suggests that the days (years?) of the economic recovery, such as it is, may be coming to an end. The current economic cycle of boom and slump seems to be about 8-9 years. The trough of the last slump was mid-2009. That would suggest that the next trough would be about 2017-2018. And the peak before the slump is usually 12-18 months before – so about 2016-17.

Piketty update: graduate takes on a super star and comes up with a comforting conclusion

March 23, 2015

The work of Thomas Piketty is back in the spotlight among mainstream economists (see my post,

After Piketty’s book, Capital in the 21st century, won the business book Oscars as a best seller in America last year, discussion of the book quietened after the American Economics Association’s annual jamboree came to an end in January (see my post,

But debate has been revived by the work of 26-year graduate student, Matthew Rognlie. Rognlie’s recent work on the Marginal Revolution blog run by neoclassical economist, Tyler Cowen, from George Mason University (, has revived discussion of Piketty, prompting the man himself to reply.

Contrary to Piketty’s view that the inequality of wealth in the major capitalist economies was set to rise over this century unless action was taken, Rognlie disputes this. Rognlie wrote in his blog post that the French economist’s argument “misses a subtle but absolutely crucial point.” Piketty, he said, might have got the pattern in reverse. Instead of the returns to capital increasing in perpetuity, Rognlie said, they might be poised to decline.

So popular and startling was this post that Rognlie became an instant success and was promoted as a panelist at the esteemed Brookings Institution in Washington, where he presented a paper last weekend before many legendary mainstream economists, including Nobel Prize winner, Robert Solow. It’s the first time a mere graduate student has presented a sole-authored paper since 1979 (see and

So what are the great revelations of this economics prodigy? Well, Piketty argues that inequality of wealth has risen in the last 30 years because the returns to capital were increasing or at least rising faster than national income.  However, Rognlie found the trend to be almost entirely isolated to the housing sector. Yes, some investments with a high level of intellectual property, like computer software, had become extremely valuable in the hands of the wealthy. But some of those assets were unlikely to remain valuable for very long, like a software program that needs to be replaced in a few years with a new version. When adjusting for that depreciation, most of the rest of the increase in capital came in housing, a single sector that, while important, might not shape the entire future of inequality as Piketty assumed.

The second finding was that Piketty overestimates how high the returns to capital would be in the future. For his fears to come true, wealthy people who amass more and more capital would need to keep earning a high return on that capital. But Rognlie’s research suggests that the returns to capital will decline over. “Piketty’s story has multiple steps to it. I’m sort of showing that one of the steps does the reverse of what he says it does,” Rognlie said in an interview. Those findings, he added, suggest “there doesn’t seem to be a big need for panic” over Piketty’s predictions.  In other words, forget worsening inequality – it ain’t going to happen. This conclusion is music to the ears of mainstream economics, especially its neoclassical wing.

Piketty has responded to Rognlie’s criticism. Piketty said “there is some misunderstanding” about his book and Rognlie’s critique of it. He said he never predicted inequality would “rise forever” — only that it could reach “higher levels than what we have today, and that this is sufficiently important to be concerned.”

He also said Rognlie could be underestimating the ease of substitutions, because technology is making it easier for companies to switch from workers to machines. (As an example, he cited drones potentially replacing delivery workers at Amazon.) This reduces the demand for labour and increases the income from capital, Piketty would argue.

What can we make of this? Well, the first thing to say is that Rognlie’s point that the most of the rise in inequality of wealth in the last 30 years can be explained by the property boom is not new at all. When Piketty’s book first came out in France in early 2014, several French economists were quick to latch onto this. In particular, there was a paper by Bonnet, Bono, Chapelle and Wasmer (wp-25-bonnet-et-al-liepp), which concentrates on Piketty’s data. The paper points out that valuing housing by movements in property prices rather than in rental equivalents exaggerates the rise in capital share of national income significantly. As I commented in a post at the time, valuing ‘housing services’ as Piketty does, in some synthetic concoction does not work at all (

And several heterodox economists (see James Galbraith) showed that Piketty’s conflation of wealth with capital (in Marx’s sense) meant that the rate of return on ‘capital’ could rise even though there could be a fall in the rate of profit on productive capital. All these points were made by French Marxist economist, Michel Husson and in more detail by Esteban Maito and myself in recent papers (see  But of course, heterodox economics, let alone Marxist economics, get knows no airing or voice among mainstream economics. Instead, we have to wait for a graduate student at MIT to point these things out to Piketty and his supporters.

What Rognlie shows is that the share of capital income has increased since 1948, but when disaggregated this increase comes entirely from the housing sector: the contribution to net capital income from all other sectors has been zero or slightly negative, as the fall and rise have offset each other.

Capital income

A rising capital-to-GDP ratio is most likely to result in a fall in capital’s share of income, since the net rate of return on capital will fall by an even larger proportion than the capital-to-GDP ratio rises. In other words, or in Marxist ones, the rate of profit on capital excluding property, or more exactly residential housing, has been falling not rising. Rognlie comments on his data for the corporate rate of return: “The most striking feature of these plots is the general downward trend in r(t): according to this procedure, the required return on capital for the US corporate sector has fallen over the postwar era.”  So mainstream economist prodigy Rognlie confirms what we Marxist economists have been arguing for over a decade or more.

The other main criticism by Rognlie of Piketty is his use of gross capital shares and not net of depreciation. Again, this is not a new criticism but has been aired many other economists over the last year. You see, when we deduct the depreciation in the stock of capital over the last 30 years, because of the hi-tech nature of much modern equipment, it becomes obsolete and unprofitable very quickly. So the net stock of capital does not rise that much. This is another way of saying, as Marxist economics does, that the ‘moral depreciation’ of capital has been high, keeping profitability down. As a result, capitalists turned to speculative investment in financial products and property. So much of the apparent rise in income going to capital is fictitious or unproductive. Sure, that boosts the wealth of the rich, but it does not raise the ‘productivity of capital’, namely the rate of return on productive capital; on the contrary.

This is appealing even to Keynesian economists like Brad de Long, who was also a ‘discussant’ of Rognlie’s work and was lavish in his praise. “It is truly excellent that Matt Rognlie brings well-ordered and insightfully-organized data to these questions.” For de Long, Rognlie has shown that Piketty’s explanation for the variation in the post-war capital share of income does not hold up. “Let me end by strongly endorsing what I take to be Matt Rognlie’s bottom line. I take it to be that post-WWII variation in the observed net capital share is not explainable via returns on the underlying assets. Instead, the decomposition attributes most of the variation to pure profits, or markups (i.e. monopoly rent extraction by the financial sector and property owners – MR comment).

De Long goes on: “Accumulation and returns play, outside of housing, a distinctly secondary role, if they play any role at all. But it is equally hard to find any role for the race between education and technology, and there should be if we think the factors of production are labour, education skills, and machines. Likewise, variation in income inequality is hard to attribute to wealth ownership or to human capital investment or to differential shifts in rewards to factors like raw labour, experience-skills, education-skills, and machines. Matt thus concludes that: concern about inequality should be shifted away from the split between capital and labour, and toward other aspects of distribution, such as the within-labor distribution of income.”

Yes, behind the Rognlie critique and what appeals to mainstream economists are the conclusions that 1) inequality of wealth will not continue to rise and 2) that the inequality currently evident is not due the capital accumulation or the ownership of property but more to do with inequality of income within the labour force. You see, if the share going to ‘capital’ has not really risen, then the problem must be one of too highly paid footballers and graduate professionals and too lowly paid shopworkers. So it’s not the fault of the capitalist mode of production as such but the distribution of the incomes going the labour.

As David Ruccio has pointed out (, Rognlie attempts to define away the problem of the class nature of the struggle between capital and labour. By reducing corporate profits by the amount of depreciation of capital, it appears that capital is not really extracting any value from labour.

But that is putting the cart before horse. The first process in the capitalist mode of production is the extraction of surplus value from labour. The second process is the investment of that surplus value in the stock of fixed assets to compete and raise or maintain profitability. As Marx explained, this is where an important contradiction arises; between a rising rate of surplus value and a falling rate of profit. Both Piketty and Rognlie ignore or deny this contradiction. For Piketty, there is a rising share of income going to capital (a rising rate of surplus value) and so no falling rate of profit. For Rognlie, there is no rising rate of surplus value, so there is a falling rate of profit). Both are wrong.

Actually, whether net of depreciation or not, the share of income going to capital (the rate of surplus value if you like) in the G7 economies has been rising, if you include housing. On a net basis it has risen since the mid-1970s, even if the share is not much higher than in the mid-1960s. And yet the rate of profit on productive capital has fallen in G7 economies since 1950 (see the joint paper Carchedi and Roberts The long roots of the present crisis and see Maito, Maito__Esteban_Ezequiel_-_Piketty_against_Piketty_(on_evaluation_on_Review_of_Political_Economy)-libre).

capital share

So the Rognlie papers have not really brought up anything new in the debate about Piketty’s work and his conclusions. There is no dispute that the inequality of wealth and income in the main capitalist economies had risen to 19th century heights by the end of the 20th century. Rognlie merely follows previous work by heterodox and Marxist economists to show that this is mainly due to the explosion in the value of housing in the last 30 years. So Piketty’s ‘fundamental laws of capitalism’ that Piketty contrasts to that of Marx, namely that the rate of return on capital is and will be higher than the growth of income; and that savings rates will rise to benefit the owners of ‘wealth’, are not correct explanations of rising inequality (see my review of Piketty and the search for r, upcoming in Historical Materialism and my Essays on Inequality).

Essays on inequality (Essays on modern economies Book 1)

Essays on inequality (Essays on modern economies Book 1)

Buy from Amazon

What Rognlie adds for the benefit of mainstream economics is the conclusion that this means that inequality of wealth and income could fall from hereon if the bubble in housing and financial products does not resurface and that the real cause of inequality is within workers’ incomes and not between capital and labour. It is a comforting and well-lauded conclusion for the ruling consensus.

Keynesian economics – a spectacular success

March 20, 2015

Recently, Paul Krugman, Nobel prize winner, doyen of Keynesian economics and the world’s leading economic blogger, attacked yet again the monetarist-Austerian wing of mainstream economics for claiming the Keynesian macroeconomics theory had been proved wrong.  On the contrary, according to Krugman, Keynesian theory and its policy prescriptions had been triumphantly right,

“When I tell people that macroeconomic analysis has been triumphantly successful in recent years, I tend to get strange looks. …I stand by my claim, however. The basic macroeconomic framework that we all should have turned to, the framework that is still there in most textbooks, performed spectacularly well: it made strong predictions that people who didn’t know that framework found completely implausible, and those predictions were vindicated.”

What does Krugman mean by this framework?  Well, he says, it is the version of Keynes’ monetary theory developed by John Hicks back in 1937.  According to Krugman, Hicks’s book Value and Capital  “was a seminal work on the economics of general equilibrium – that is, getting past one-market-at-a-time supply and demand to the interactions among markets. Hicks didn’t invent general equilibrium, of course, but he sought to turn it into a useful tool of analysis.”  Hicks realized that a minimal model of macro issues involves three markets: the markets for goods, bonds, and money (or, better, monetary base) and as Krugman puts it, “What we already have here is an understanding that there isn’t that kind of clean separation, that money can affect interest rates and spending affect output.”

The monetarist theory (as best expressed by Milton Friedman’s quantity theory of money) is that, if changes in the money supply exceed real output growth, inflation will follow as ‘too much money chases too few goods’.  Well, the revelation from the Hick-Keynes model is that when interest rates get close to zero, “the rules change… Even huge increases in the monetary base won’t be inflationary. Large budget deficits won’t raise rates. However, changes in spending, positive or negative – e.g., harsh austerity — will have an unusually large effect on output, because they can’t be offset by changes in interest rates.”

And so, according to Krugman, it has proved.  In this current depression, interest rates are near zero and there has been a huge increase in credit injected by central banks but there is no inflation, indeed even deflation and government bond yields are at all-time lows.  “All of this was predicted in advance by those of us who understood and appreciated Hicksian analysis. And so it turned out. I call this a huge success story – one of the best examples in the history of economics of getting things right in an unprecedented environment.”  Thus the Hicks-Keynes money and income model remains secure in every macroeconomic textbook.

There are a few things to say here on this great success of macroeconomics, Hicks-Keynes style.  The first is that, contrary to Krugman’s history, the idea that in a capitalist monetary economy, money, in particular the hoarding of money in a depression, can play a significant role in explaining a slump, did not first come from Hicks.  As Fred Moseley has pointed out,,
“Keynes was given the credit of having demolished the theories of 19th century economists who had taught that, if left to its own devices, capitalism would always and of its own accord tend towards full employment. What was little noticed was that most of the ground covered by him had been treated in detail by Marx three-quarters of a century earlier.  While Marx dealt with this reluctance to spend to expand production, under the heading of “hoarding” ; Keynes coined the term “liquidity preference”, meaning that the capitalist prefers in that situation to keep his money in cash.”

Here is what Marx said in Volume one of Capital, “Whenever these hoards are strikingly above their average level, it is, with some exceptions, an indication of stagnation in the circulation of commodities, of an interruption in the even flow of their metamorphoses. Whenever there is a general and extensive disturbance of this mechanism, no matter what its cause, money becomes suddenly and immediately transformed, from its merely ideal shape of money of account, into hard cash. Profane commodities can no longer replace it. The use-value of commodities becomes valueless, and their value vanishes in the presence of its own independent form. On the eve of the crisis, the bourgeois, with the self-sufficiency that springs from intoxicating prosperity, declares money to be a vain imagination. Commodities alone are money. But now the cry is everywhere: money alone is a commodity! As the hart pants after fresh water, so pants his soul after money, the only wealth. “

To me, there are two big differences between Marx’s view of money’s role in crises and Keynes-Hicks.  First, in the latter’s model of liquidity preference (the desire to hold cash rather than spend it), an economy enters a ‘liquidity trap’ in the form of a new equilibrium of supply and demand (investment and saving) at less than ‘full employment’.  It is an underemployment equilibrium, which in some interpretations (New Classical) of Hicks-Keynes is due to ‘sticky wages’ i.e. workers keep wages up so that they price themselves out of jobs.  The Hick-Keynes model still assumes all the fallacies of neoclassical economics that the capitalist economy, if left to its own devices, will find an ‘equilibrium’.

In contrast, as Moseley puts it, in Marx’s conception capital is nothing other than value in motion, and capitalism only exists in and through constant movement to accumulate, any stock of money is nothing other than a hoard waiting to be thrown into circulation at a convenient time, i.e. as capital; and equally, any expenditure of money as capital is nothing else but a dishoarding of money, whether in cash or in credit, for the purpose of accumulation. As a result, money’s potential role as capital makes it contradictory in nature: it is always “held in order to be spent, and spent in order to be held by another”. Since there exists uncertainty about future investment and future circumstances in the market, the hoarding-dishoarding role of money necessarily implies the possibility of disequilibrium; it is subject to changes in the expectations about future investment.”  There is no equilibrium, except by accident.

The other difference is even more significant.  For Keynes-Hicks-Krugman, there is no explanation of why a capitalist economy gets into a ‘liquidity trap’ in the first place.  It just does; it does so because a change in ‘animal spirits’ or business ‘confidence’ about the future.  See my posts on Krugman’s explanations of crisis here, and  

In contrast, Marx stressed that the credit crunch is actually a symptom of problems in the underlying productive economy. “What appears as a crisis on the money-market is in reality an expression of abnormal conditions in the very process of production and reproduction.”

The monetarists may have got the causality backwards. They think that lower rates are what’s messing up the economy, rather than reflecting the fact that it’s already messed up.  But the Keynesians are little better when they say an economic slump is the result of a liquidity trap.  They have no causal explanation for this.  As such, they are merely describing a slump in monetary terms (hoarding of money and avoiding spending even at zero borrowing rates), not explaining it.  And if you cannot explain something, you cannot expect to find the right solutions to changing it.  Krugman may argue that the Keynes-Hicks model has been vindicated because increasing the money supply has not led to inflation as the monetarists expected.  But then neither has central bank quantitative easing led to a ‘return to normal’, or a new equilibrium of growth and ‘full employment’.  All it has done is fuel yet another credit bubble in the stock and bond markets for the rich.

Sure, Krugman would retort that this is why governments must adopt the second weapon in the Keynesian armoury, government spending.  End austerity and spend.  I have argued in previous posts why even Keynesian-style fiscal injections won’t restore growth and employment if profitability in the capitalist sector remains low or starts falling, or if the debt burden remains high (see my posts,

The example of Japan is confirmation of that, where monetary easing, fiscal stimulus and neo-liberal structural reforms have been applied under Abenomics (see my posts, and, with miserable results.

So it’s a very small victory to claim for mainstream Keynesian macroeconomics that inflation has not returned when interest rates are low and credit expansion is high.


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