Clinton, Atkinson, Stiglitz and reducing inequality

May 26, 2015

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

for more inequality, see my Essays on Inequality


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The two Michaels (Heinrich and Roberts) in Berlin – dogmatism versus doubt

May 19, 2015

I have just got back from Berlin where I debated with Professor Michael Heinrich (see and, hereafter called MH) at the Marx is Muss Kongress on the relevance of Marx’s law of the tendency of the rate of profit as a theory of capitalist crises (see

Readers of this blog will know that there has been a renewal of this debate in various articles and papers in the last few years. This was partly inspired by an article by MH in the American socialist journal, Monthly Review (see at end of this post) in which he presented several (old) arguments claiming that Marx’s law was: logically inconsistent or indeterminate; that it could not be validated by empirical evidence; and anyway it was irrelevant to a theory of crises under capitalism. In sum, MH concluded that there is no Marxist theory of crises.

Several of us who reckon that Marx’s law of profitability is the basis for a Marxist theory of crises and is also the best and most powerful explanation have taken MH up on these points (see papers by me, G Carchedi, Andrew Kliman, Ed George, Esteban Maito and Sam Williams at the end of this post). We reckon Marx’s law is logical and consistent based on some realistic assumptions; that it can be validated by empirical work; that there is no plausible reason to assume Marx dropped the law that he had regarded as the most important in political economy; and that Engels’ editing of the Volume3 manuscripts was perfectly reasonable.

What I said
The Berlin debate was a new opportunity to discuss the issues in front of about 150 people or more. I kicked off and basically this is what I said.
First, I raised: why do we care about the theory of crises? It may seem that there is an obvious answer to this question. But not necessarily, as indeed some in the audience wondered whether this was just an obscure academic debate, when what activists needed to know was what happening in the world economy now and how we should respond to the Great Recession and the attacks on labour globally.

Well, I said that we need to have a theory of crises under capitalism that makes sense because these crises cause huge damage to people’s livelihoods and stop human social organisation moving towards a world of abundance and not scarcity and toil. And they are indications of the contradictory and wasteful nature of the capitalist mode of production. Before capitalism, crises were products of scarcity, famine and natural disasters. Now they are products of the fetishism of a profit-making money economy: they are man-made and yet appear to be out of the control of man. Above all, crises show that capitalism is fatally faulty and they expose capitalism as a failing system despite the great strides in the productivity of labour that this mode of production has generated in the last 200 years or so. So it matters.

So did Marx have a theory of crises? Well, Marxist scholars and economists as well as activists have found several theories of crises in his works, all of which have got more support than Marx’s law of profitability, actually. There is the view that capitalism goes into slumps because of the lack of demand from workers because their wages are too low to buy the goods that capitalists sell (underconsumption). There is the view that capitalist blindly produce too much relative to potential profits or demand so there is a collapse (overproduction); and there is the view that capitalism accumulates in an imbalanced way so that sectors get out of line, leading to collapse that spreads generally (disproportion). Finally, there is the view that crises come about because profits are squeezed by too high wages (profit squeeze). But I and others who hold to a Marxist theory of crises based on the law of the tendency of the rate of profit to fall reckon that these other theories are a wrong interpretation of Marx’s view on crises and that he also dismissed them. We start from the view that in a profit-making economy, surely crises must be caused by something that goes wrong with profits, not wages, not demand and not imbalances.

Marx’s law is two-sided. There is a tendency – ‘the law as such’ – and then there are countertendencies. But the law holds that these countertendencies will not overcome the law as such (the tendency) ultimately or over time. “They do not abolish the general law. But they cause that law to act rather as a tendency, as a law whose absolute action is checked, retarded and weakened by counteracting circumstances.” – Marx.

The law as such (that the rate of profit in capital accumulation will eventually fall) is based on just two realistic assumptions. The two assumptions are: 1) the law of value operates, namely that value is only created by living labour; and 2) capitalist accumulation leads to a rising organic composition of capital. These two assumptions (or ‘priors’) are not only realistic: they are self-evident. On the first, even a child can see that nothing is produced unless living labour acts. The production of use values is necessary to create value. “Every child knows a nation which ceased to work, I will not say for a year, but even for a few weeks, would perish.” Marx to Kugelmann July 11, 1868.

A rising organic composition of capital under capitalism over time is also self-evident. The huge increase in labour productivity under capitalism is a result of mechanisation. Yes, that can create new jobs, but it is essentially labour-shedding process. And while a new means of production might contain less value that an older similar means of production, usually means of production are replaced by a new and different system of production, which contains more value than the value of the means of production they have replaced. As Marx explains in the Grundrisse: “What becomes cheaper is the individual machine and its component parts, but a system of machinery develops; the tool is not simply replaced by a single machine but by a whole system… Despite the cheapening of individual elements, the price of the whole aggregate increases enormously”. Capital needs higher productivity but gets it through new labour-shedding means of production.

Recently, Esteban Maito has shown there has been a rising organic composition in the UK economy since 1855. Labour relative to assets has fallen over this period while labour productivity (output per labourer) has risen. The result is a long-term fall in the UK rate of profit, as Marx’s law predicts.

But the rate of profit has not fallen (and does not fall) in a straight line. There are counteracting influences to the law as such. They include: a rising rate of exploitation; the cheapening of constant capital values; wages dropping below the value of labour power; foreign trade for higher profitability for national capitals etc. But Marx says these counteracting factors “do not do away with the law but impair its effect. The law acts a tendency. And it is only under certain circumstances and only after long periods that its effects become strikingly pronounced.”

The main countertendency, a rising rate of surplus value, cannot overcome the law as such indefinitely. First, there is a limit to the rate of surplus value (24 hours in a day) and there is no limit to the expansion of the organic composition of capital. Second, there is a ‘social limit’ to a rise in the rate of surplus value, namely labour and society sets a minimum ‘social’ living standard and hours of work etc.

Marx’s law is not only logically consistent, given those realistic assumptions, it can be empirically validated. The empirical questions are: does the rate of profit fall over time as the organic composition of capital rises? Does the rate of profit rise when the organic composition falls or when the rate of surplus value rises faster than the organic composition of capital? Does the rate of profit rise, if there is sharp fall in the organic composition of capital in a slump? There is plenty of empirical evidence to show that the answer is yes to all these questions: for the US economy and, more recently, for the world economy.

Basu and Manolakos ( applied econometric analysis to the US economy between 1948 and 2007 and found that there was a secular tendency for the rate of profit to fall with a measurable decline of about 0.3 percent a year “after controlling for counter-tendencies.” In my work on the US rate of profit, I find an average decline of 0.4 percent a year through 2009 using the latest data (see The inverse correlations between a rising organic composition of capital and a falling rate of profit are high (the law as such); but they are low between the rate of surplus value and the rate of profit (the counteracting factor).

Indeed, I argue that the law leads to a clear causal connection to regular and recurrent crises (slumps). It goes from falling profitability to falling profits to falling investment to falling employment and incomes. A bottom is reached when there is sufficient destruction of capital values (writing off plant and equipment, bankruptcy of companies, reduction in wage costs) to raise profits and then profitability. Thus there is a cycle of boom and slump driven by the law of motion of profitability.

profit cycle

The evidence of this causality is available for the US. Tapia Granados (, using regression analysis, finds that, over 251 quarters of US economic activity from 1947, profits started declining long before investment did and that pre-tax profits can explain 44 percent of all movement in investment, while there is no evidence that investment can explain any movement in profits. And we can see in the graph below, that the movement in US corporate profits led the movement in investment before, during and after the Great Recession.

profits call the tune

And Marx’s law of the tendency of the rate of profit to fall makes a fundamental prediction: that, over time, there will be fall in the rate of profit globally, delivering more crises of a devastating character. And great work has been done by modern Marxist analysis that confirms that the world rate of profit has indeed fallen over the last 150 years ( Here is a graph of the work of Esteban Maito on a world rate of profit.

world rate of profit

So the law predicts that eventually the rate of profit will fall and this will lead to a series of crises. And, as the organic composition of capital rises globally, the rate of profit will fall, despite counteracting factors and despite successive crises. This shows that capital as a mode of production and social relation is transient. It has not always been here and it has ultimate limits, namely capital itself. It has a use-by date. That is the essence of the law for Marx.

That Marx’s law of profitability provides an underlying causal explanation of regular and recurring crises under capitalism, with predictive power, does not exclude other immediate causes or triggers like banking and financial crises. The role of credit is an important part of crisis theory. The tendency of the rate of profit to fall engenders countertendencies, one of which is to expand credit and switch surplus value into investment in fictitious capital rather than into lower profit productive capital, with disastrous consequences, as the Great Recession shows
( and

MH has argued in his work that Marx dropped the law as being useful in any way in the 1870s when he too found it illogical and irrelevant to crises. This seems a strange conclusion. Did Marx really change his view from a letter to Engels in 1868 that the law “was one of the greatest triumphs over the asses bridge of all previous economics”? And did Engels distort Marx’s manuscripts for the key chapters in Capital Volume 3 and turn Marx’s ideas into a theory of crisis that was not Marx’s?

Back in 1978, Jerrold Seigel (Marx’s Fate) had a look at the manuscripts. Yes, Engels made significant editorial changes to Marx’s writing on the law as in capital Volume 3. He divided it into three chapters 13- 15; 13 was the law; 14 was counteracting influences and 15 described the internal contradictions. But in doing so, Engels shifted some of the text into Chapter 13 on the law as such when in fact in Marx’s manuscript, they came after the counteracting factors in Chapter 14. In this way, Engels actually makes it appear that Marx balances the counter-tendencies in equal measure with the law as such, when the original order of the text re-emphasises the law AFTER talking about counter influences. So, as Seigel puts it: “Engels made Marx’s confidence in the actual operation of the profit law seem weaker than Marx’s manuscript indicates it to be.” Seigel p339 and note 26.

Also, Fred Moseley recently introduced a new translation into English of Marx’s four drafts for Volume 3 of Capital by Regina Roth, where Marx’s law of profitability is developed and showing how Engels edited those drafts for Capital (Moseley intro on Marx’s writings). Moseley shows that much maligned Engels did a solid job of interpreting Marx’s drafts and there was no real distortion. “One can, therefore, surmise that Engels’ interventions were made on the basis that he wished to make Marx’s statements appear sharper and thus more useful for contemporary political and societal debate, for instance, in the third chapter, on the tendency of the rate of profit to fall.

And this is not surprising, as from 1870, Engels had moved from Manchester so Marx and he met together as a matter of routine, usually daily. Discussions could go on into the small hours. Marx’s house lay little more than 10 minutes walk away … and there was always the Mother Redcap or the Grafton Arms.

What MH said
Well, enough of my arguments for the law. What did Professor Heinrich say in Berlin? In his opening remarks, MH started by saying that those who put forward the law of profitability as Marx’s own are just dogmatically following every tic and comma of his writings. Marx changed his mind about lots of ideas and theories over the decades and did not have a strict position from day one. Indeed, Marx’s slogan for life was “doubt everything”. The original manuscripts that contain Marx’s law in its fullness and as edited by Engels were written very early, as early as Volume 1 of Capital, the only volume Marx himself published. And from the end of the 1860s, Marx never refers to the law of profitability in any context to do with crises. Indeed, his mathematical writings at the time show that he struggled to make sense of the law and so dropped it.

Sure, Engels met Marx nearly every day in the 1870s, but Marx was a secretive chap and never showed those old manuscripts to Engels because he no longer believed in them. They only came to light after Marx’s death and then were published as part of Volume 3. It’s not that Engels distorted Marx; it’s that this law had been discarded by Marx, just as he had first raised the idea of underconsumption as an explanation of crises and then dismissed it.

As for the logic of the law itself, sure, the two assumptions that I posed for the law may well be realistic but so is the assumption that a rising organic composition of capital will be accompanied by a rising rate of exploitation. We cannot know which will rise more and so the law is indeterminate, as Marx himself realised later. Indeed, it is perfectly possible for a rising organic composition of capital to lead to a rise in profitability, and not a fall.

Anyway, the law is not a theory of crises; after all, a falling rate of profit was recognised by the classical economists, Adam Smith and David Ricardo, but it was seen as a long-term gradual decline. not an explanation of cyclical crises.

As for the empirical evidence that I presented, MH reckoned that statistics can show anything – it all depends on where you start your time series. Then you can get any result you want. Anyway, the data used by me and others are bourgeois official data and not useful for Marxist value measures and so prove nothing.

A study of Marx’s manuscripts, as he has done, said MH, shows that Marx did not really have a crisis theory of any clear description. Indeed, it was not his intention in writing Capital. In a way, crisis theory based on Marx’s law of profitability is an invention or misinterpretation by Engels.

Summing up the debate
Comments from the floor in the debate were varied. Some supported MH in that there is no evidence of a rising organic composition of capital; indeed the opposite, as we can see by the falling value of hi-tech computers. Others supported me in arguing that we can use modern statistics to validate the law.

The debate could be summed up as one between dogmatism and doubt. The ‘dogmatic’ view is mine in that I and others who support the law as the underlying causal explanation of crises are just following words in a book slavishly because Marx wrote them. It is better to doubt all things as Marx did. We should doubt the logical and empirical validity of the law; we should doubt statistics; we should doubt that Marx stuck to every idea he ever expressed.

The other way of summing up the debate is that MH is the great ‘doubter’.  We don’t know if Marx dropped the law; we don’t have any useful data to validate it and we don’t know if Engels distorted it or not.  We know nothing.  We don’t have a theory of crisis or a Marxist one.

Having trashed Marx’s law and denied that he had any theory of crisis, MH was asked if he had an alternative theory of crises. In a recent interview in Slovenia at the Institute of Labour Studies, he did offer one ( There MH reckoned (as I understand him) that capital accumulates blindly so that production gets out of line with consumption or demand from workers. So a ‘gap’ develops that has to be filled by credit, but this credit bubble cannot hold up things indefinitely and it eventually bursts and then production collapses. Well, this is a sort of a theory, but pretty much the same as the underconsumption (overproduction) theory that MH dismisses himself.

In Berlin, he presented another: that crises take place despite the claims of harmonious equilibrium in market economies by mainstream economics. I take this to mean the very existence of crises under capitalism is the theory or explanation.

These alternatives seem way less convincing or empirically supported than Marx’s own theory of crisis based on the law. No other theory, whether from mainstream economics or from heterodox economics, can explain recurrent and regular (every 8-10 years) crises and offer a clear objective foundation for the transience of the capitalist system. You could even argue that if Marx did drop it, he should not have changed his mind!

Professor Heinrich says he plans a reply to the various critics of his arguments when he gets time. I look forward to that contribution. In the meantime, if you want to follow the arguments in more detail, here are some of the relevant papers and articles on the subject published in the last few years.

Heinrich M. (2013), Crisis Theory, the Law of the Tendency of the Profit Rate to Fall, and Marx’s Studies in the 1870s Monthly Review, Volume 64, Issue 11, April  heinrich13Roberts M.(2013), Michael Roberts and Guglielmo Carchedi on Heinrich

Roberts M.(2013), Michael Roberts and Guglielmo Carchedi on Heinrich robcarch13
Kliman A. (2013), The Unmaking of Marx’s Capital Heinrich’s Attempt to Eliminate Marx’s Crisis Theory with Alan Freeman, Nick Potts, Alexey Gusev, and Brendan Cooney, July 22, 2013 klimanh13
Williams S. (2013), Michael Heinrich’s ‘New Reading’ of Marx—A Critique July-August samh13
Miller J. (1995), Must The Profit Rate Really Fall? – A defense of Marx against Paul Sweezy April miller95
George E. (2013), But Still It Falls: On the Rate of Profit July, 4 stillitf
Maito E.E. (2014), The downward trend in the rate of profit since XIX century Maito, Esteban – The historical transience of capital. The downward tren in the rate of profit since XIX century

Ben Bernanke and the decline of the middle-class

May 12, 2015

Ex-Federal Reserve Chair Ben Bernanke has recently become an adviser to Citadel, a hedge fund management company and to PIMCO, the world’s largest bond fund.  This will make Ben Bernanke a very rich man, instead of just a rich one.  Up to now he has been perhaps earning a mere $1m a year in base salary, plus income from book rights and even more from speaking fees. But now he will be into hundreds of millions.

The revolving door between public office and working for large financial institutions is the way of the world under modern global capitalism.  No wonder, the Fed, the IMF, the World Bank, the ECB etc, supposedly independent institutions, operate to ensure the well-being of the top financial firms and continually forecast the success of capitalist economies.  Actually, strictly speaking, the US Federal Reserve is not independent as it was set up and is still ‘owned’ by the major Wall Street banks.

So along with the money, the likes of Ben Bernanke, Hank Paulson, Tim Geithner, Alan Greenspan flit between Wall Street and Washington DC seamlessly because it puts them at the centre of the action: setting the financial strategy of the largest imperial power and influencing the course of world financial markets.

Thus finance capital sucks into its grasp all the bright and clever people, not to do ‘public service’ for the majority of Americans or elsewhere, but to deliver the objectives of capital, with rich reward in doing so.

American politicians and media continually refer to the “middle-class” in their comments and reports when they really mean what we used to call the “working-class”.  The working class ‘were’ people who worked in factories, offices and stores and did not have professional qualifications to become lawyers, doctors, managers and other business people – the latter being the original term for the middle-class.  The dropping of the term, ‘working-class’, was deliberate.  It was to hide the class nature of modern capitalism between those who own the means of production or who plan the strategy of capital like Ben Bernanke and those who sell their labour for a living with no power over their own destiny.  It was also to convince working people that there was no longer any inequality or class division in modern society.  We are all middle class now.

But this ideological smokescreen is starting to work less effectively in masking reality.  While the financial elite in America and Europe continue to prosper in this post-Great Recession world, the average American or European households are struggling.  In the last 25 years, the annual income of the median US household is still just under $52,000.  And since the financial crisis hit six years ago, the economic ‘recovery’ has yet to translate into higher incomes for this ‘typical’ American family. After adjusting for inflation, US median household income is still 8% lower than it was before the recession, 9% lower than at its peak in 1999 and essentially unchanged since the end of the Reagan administration in 1992.

Take the generation born in 1970. In early adulthood, these Americans out-earned their parents, those born in 1950. But their gains stalled in the 2000s, when they were in their 30s. Now in their 40s, their earnings have fallen behind those of their parents at the same stage in their lives

And focusing on median income does not show the wide disparity in incomes that produces that median.  In 1970, 55% of US income was earned by households in the middle 60% of the income distribution. More than half of households were in the “middle tier” of households (those earning between two-thirds and twice the median income). In 2013, both numbers had fallen to about 45%. In a 2012 report, Pew researchers called the 2000s “the lost decade of the middle class.”

declining middle class

US society, after the short period of equality from the 1950s to the 1970s, has been polarising in just the way that Marx envisaged between an extreme rich elite, centred around the ownership and management of large corporations, mainly in finance, and the rest of us.

In a recent unpublished paper, Simon Mohun, emeritus professor at QMC, London, carefully analysed US personal income data on a class basis (ClassStructure1918to2011wmf (1)).  Mohun found that managers who have sufficient non-labour income that they do not need to work were no more than 2% of income earners, having shrunk from 4% in the 1920s.  This is the real capitalist-managerial class.  The 1%, or even more accurately, the top 0.1% of households, rule.  The next layer, like Ben Bernanke, live off them and plan strategy for them (just 2% now).  The next layer work for and support them (this is about 14% – the real middle class and this section has been declining).  Then there is the rest of us.

For more on the nature of inequality in modern capitalist economies, see my book, Essays on Inequality,


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UK election: a poisoned chalice?

May 8, 2015

As I write on Friday morning after the 2015 general election, the incumbent Conservative party is heading for an outright majority in the new parliament.  As I keep saying ad nauseam, this is what I predicted back in 2009 before the Tories (Conservatives) won the 2010 election and formed a coalition with the Liberal Democrats.  The main reason for the victory , I think, was as I pointed out in a recent post (, that the economic recovery since the Great Recession has reached a peak in the last year, with UK real GDP growth picking up from near zero in 2012 to 2.5%-plus in 2014 and with real income per head finally turning up.

The exit poll immediately after the close of the vote last night turned up to be very accurate.  It predicted that the Conservatives would be the largest party by some way and there would be a meltdown of the Liberal Democrat vote, while the Scottish Nationalists (SNP) would wipe the floor with Labour in Scotland.  And so it turned out.  It now seems that the Conservative share of the vote in the UK election will be around 36% (the same as in 2010) and Labour’s share is just 31% (up from 29% in 2010). So the Conservative share is a little higher than the polls reckoned but Labour did much worse than forecast. Labour were wiped out in Scotland and it appears that the UKIP share was lower than forecast (with its leader, Nigel Farage failing to win a seat) and those votes went to the Conservatives. And the Liberal meltdown also helped the Conservatives.

UK election

The voter turnout seems to be about 65.7%, almost exactly the same as in 2010.  But as the turnout was much higher in Scotland, that means voter turnout in England and Wales fell compared to 2010.  Also, the share of the two major parties has fallen again, a little.  So the fragmentation of politics that we have seen across Europe continues.

But, in many ways, this victory for the Conservatives may turn out to be a poisoned chalice. They will have at best a small majority (as the Liberals are unlikely to join a new coalition).  The right-wing of the Conservatives (pressured by UKIP) will be baying for the promised referendum on leaving the EU.  This may take place within a year or so and not wait until 2017.  The City of London and big business is firmly opposed to leaving the EU and all the major parties will call for staying in.  The British public has shown in all polls that it is opposed to leaving.  So my third prediction (after forecasting a no vote on Scottish independence and on the Tories winning in 2015) remains that the British people will vote to stay in the EU.  By the way, there is no majority in Scotland for another independence vote (only 36% in favour according the latest poll).  No wonder, the SNP leader, Nicola Sturgeon, called the huge SNP victory in Scotland as a vote for ‘anti-austerity’, not independence.

Just as the Conservatives won because of an improving economy, the poison in the cup of victory is the economy over the next few years.  The government is still running a sizeable budget deficit which is not expected to disappear on the most optimistic forecasts of economic growth until 2019.  Public sector debt to GDP is still rising.  Even more worrying, private sector debt is still at record highs, with the property bubble.  Above all, business investment is very weak and corporate profitability is still below the levels of 15 years ago.  UK capitalism is running a large external deficit on trade and depends on an influx of finance capital (‘hot money’) to pay its way.  And a global recession is due probably right in the middle of this term of parliament.  Then the poison will have to be taken.   The Tories won’t win the next election.


Business cycles, unit roots and animal spirits

May 6, 2015

The Golden Age of capitalism, when the major economies grew at over 4% real GDP a year and there was relatively moderate inflation and no significant fluctuation in employment i.e slumps, lasted just a short time – from about the late 1950s to the early 1970s.

After that, the major capitalist economies experienced a series of regular and recurrent slumps starting with the first simultaneous post-war international recession in 1974-5, the deep ‘double-dip’ recession of 1980-2, the industrial slump of 1990-2, the mild but global recession of 2001 and finally the Great Recession of 2008-9, the deepest and longest lasting slump since the 1930s Great Depression.

Mainstream macroeconomics did not see these recessions coming and even after they arrived, economists failed to consider their causes or even accept that what mainstream economics used to call ‘business cycles’ were back.

The Great Recession has forced the mainstream to consider causes and explanations more carefully. Keynesians continue to revive the view that slumps are due to sudden collapses in ‘effective demand’ and/or changes in ‘animal spirits’ (the psychological temper or confidence of entrepreneurs about the future). As the Great Recession has morphed into a Long Depression, where there is no recovery to previous trend growth in output, investment or incomes, Keynesian theory has dredged up the ideas of the pre-war Keynesian Alvin Hansen who proposed that the immediate post-war capitalist economies would enter ‘secular stagnation’ due to a slowdown in population growth and chronic weak demand (he was wrong).

The doyens of modern Keynesian economics, Paul Krugman and Larry Summers, now hold that the major economies (or at least the US) are in a permanent liquidity trap, where even with interest rates near zero, business investment won’t pick up enough to restore full employment (not that capitalism has ever achieved that except maybe in those few ‘golden’ years of the 1960s). This stagnation can only be broken by government intervention and/or investment.

The still dominant neoclassical school of economics denies that such stagnation exists or is endogenous to the capitalist economic system. For this school, the Great Recession was a particularly large ‘shock’ to an otherwise steady development of output, investment and employment. But it was temporary – Ben Bernanke in his new blog is determined to provide the reasons why it is temporary (see my post, These economists reckon the issue is due to either bad monetary policy (Bernanke) or the lack of control over banks and credit, causing financial crises (Rogoff, – not a problem of the lack of demand or ‘secular stagnation’. So the answer is not more government investment and government borrowing but financial stability and solid monetary policy.

As Brad de Long put it in a recent post (, “Summers and Krugman now believe that more expansionary fiscal policies could accomplish a great deal of good. In contrast, Rogoff still believes that attempting to cure an overhang of bad underwater private debt via issuing mountains of government debt currently judged safe is too dangerous–for when the private debt was issued it too was regarded as safe.”

The concept of the nature of modern capitalist economies as ones that have an equilibrium growth path that sometimes is knocked off kilter by random events and then returns to equilibrium has led to a whole research programme on ‘business cycles’ based on dynamic stochastic general equilibrium (DSGE) models that purport to consider the impact of various ‘shocks’ on a model capitalist economy – shocks like changes in the attitudes of investors or consumers and policies of governments (‘representative agents’).

Unfortunately, DSGE models have signally failed to offer any clear explanation of what is happening in modern capitalist economies, let along provide a guide to predicting future downturns in the ‘business cycle’ – see my post,

Recently, two top-line economists, Roger Farmer (Keynesian) and John Cochrane (neoclassical) have tried to feel their way to a compromise position between whether capitalist economies can stay locked in below-trend growth after a slump or not.

And it’s all about what is called unit roots. Unit roots are a statistical phenomenon where, say, when there is a collapse in output or unemployment, this may be only temporary and output or unemployment will start to return towards its previous trend, but not all the way. This contrasts with ‘stationary’ phenomena where the shock is eventually corrected and the previous trend is re-established and a ‘random walk’ where the trend remains at a new (lower) level permanently. The graph is from John Cochrane’s blog post (

unit roots

Roger Farmer has been arguing that economies can suffer a slump in demand and thus in output, investment and employment that can move an economy from one equilibrium trend to another lower one which is where it settles – and this change is due to a chronic weakness in demand not to changes in long-term supply-side factors like productivity or population growth, as neoclassical growth theory reckons (

Farmer reckons that there are both transitory and permanent elements in the business cycle, so output or unemployment can exhibit movements close to unit roots. Actually, a unit root description of a business cycle that does not return to the previous trend is very close to my own schematic characterisation of a depression as taking the form of a square root – see my post,

Farmer reckons that business cycles are caused by changes in ‘animal spirits’: “My answer is that aggregate demand, driven by animal spirits, is pulling the economy from one inefficient equilibrium to another.” So “If permanent movements in the unemployment rate are caused by shifts in aggregate demand, as I believe, we can and should be reacting against these shifts by steering the economy back to the socially optimal unemployment rate.”

So Farmer reckons, as the business cycle is a unit root, it does not self-correct and governments must intervene to smooth out the fluctuations and get unemployment down. John Cochrane is not convinced of the need for government intervention, of course, but he does recognise that there can be a chronic or permanent element in changes in unemployment and it may not be totally self-correcting. A unit root is a good compromise, it seems.

Good news, eh! Keynesian and neoclassical economics have moved to a compromise in theory that capitalist economies do fluctuate (due to ‘shocks’ in demand or supply) and may not always return to previous trends. And something exogenous (government) may have to act to correct it.

The fact that neither neoclassical non-intervention policies nor Keynesian policies of macro-management had any effect in stopping the reappearance of the ‘business cycle’ from the 1970s onwards or controlling them appears to have escaped both Farmer and Cochrane. Instead, they continue to debate the nature of the ‘shocks’ to the system.

There is little doubt that capitalist economies are not ‘self-correcting’ and a level of unemployment or real GDP growth that existed before a major slump may well not return after the recession ends – indeed the current slow crawl of ‘recovery’ since the trough of the Great Recession in 2009 proves that with a vengeance.

And there is new evidence of that theoretically. A new working paper by Daron Acemoglu, Ufuk Akcigit, and William Kerr looks at the pattern of how economic disturbances propagate throughout the industrial and regional network ( They examine several types of disturbances such as changes in Chinese imports, government spending and productivity. Some of these ‘shocks’ propagate upstream through the value chain, from retailers to suppliers. They call these demand shocks. Others move in the opposite direction, and they call these supply shocks.

Keynesian blogger, Noah Smith is very excited at this research. As he puts it: “the implication is that the rosy picture of the economy as a smoothly functioning machine isn’t necessarily an accurate one. The tinker-toy web of suppliers and customers and regional economies in Acemoglu et al.’s paper is a fragile thing, easily disturbed by the winds of randomness”.

The authors of the paper conclude: “Quantitatively, the network-based propagation is larger than the direct e§ects of the shocks, sometimes by several-fold. We also show quantitatively large effects from the geographic network, capturing the fact that the local propagation of a shock to an industry will fall more heavily on other industries that tend to collocate with it across local markets. Our results suggest that the transmission of various different types of shocks through economic networks and industry interlinkages could have Örst-order implications for the macroeconomy.”

Also, Smith concludes that “one of the biggest and longest-lasting economic debates is whether government spending can affect the real economy. Lucas and others (the neoclassicals) have claimed that it can’t. But in Acemoglu et al.’s model, it absolutely can, since the government is part — a very big, very important part — of the network of buyers and sellers.”

But all the paper confirms, by using bottom-up input-output connections, is that the collapse or bankruptcy of a large firm or bank or sharp change in trade can trigger a crisis by cascading through an economy. This shows how slumps can start but suggests that they are due to random events. That does not explain the recurrent nature of slumps and so explains nothing.

Smith claims that the paper “would solve the problem of what causes recessions. Currently, we have very little idea of what tips economies from boom over to bust — there is usually no big obvious change in productivity, technology or government policy at the beginning of a recession. If the economy is a fragile complex system, it might only take a small shock to send the whole thing into convulsions.”

So the cause of recessions is random shocks that multiply. That is no more an explanation than that proffered by Nassim Taleb in his book, Black Swan, or by the heads of the American banks during the financial crisis, that it was a chance in a billion (

In none of these current debates is there any mention of the role of profit in the ‘business cycle’ in what is essentially a profit-making system of production. Business cycles are back according to macroeconomics – rather belatedly. But it’s random or it’s not random; it’s demand or it’s not demand; it’s monetary or it’s not monetary. Mainstream theory remains in a fog of confusion.


Economic well-being and the UK election

April 30, 2015

Who will win the UK general election next week? The short answer is that nobody really knows. This is not just because you can never be sure of a result in an election until the votes are in, but because in this particular general election for a new government in the UK, to be held in just one week on 7 May, the polls suggest that the result is really is too close to call (see

According the latest polls, the two main parties in British politics, the ruling Conservatives and the opposition Labour party, are neck and neck, with about 33% of the share of likely vote. What is also complicating matters in making a prediction is that the vote for the smaller parties could make the difference.

First, the junior partner in the current coalition, the Liberal Democrats, which got 23% of the vote back in 2010, is polling only 8-10% now. Nobody is quite sure where disillusioned Liberals have shifted their vote. Second, the United Kingdom Independence Party (UKIP), a Eurosceptic, anti-immigration party, is polling about 12-15%. UKIP was the largest party in the European Union elections last year and then won a by-election where a sitting Conservative defected. This led to media frenzy that this party would hold the balance of power in the next UK parliament. At the time, I wrote a rare political post saying that this was nonsense (see I forecast that the UKIP vote would dissipate in a national election and so it is proving. Current polls suggest it will get only one seat and even its colourful leader, Nigel Farage, may fail to enter parliament. Even so, UKIP could get enough votes to affect the results of some key marginal seats between the Conservatives and Labour in England.

But the real joker in the pack is the rise of the Scottish National Party (SNP). The referendum on independence for Scotland was eventually defeated last September (again as I predicted). However, the aftermath has been a massive turn against the Labour party, the traditional majority party in Scotland, because of its support of austerity and neoliberal politics over the last 15 years. The vote for independence was 45% last September and that is the share of the vote that the SNP appears to be polling (possibly even more), while the 55% that voted against independence are distributing their vote among three parties: Labour, Conservative and Liberal.

The SNP has cleverly positioned itself as a more radical, anti-austerity party (although this is an illusion – there is no difference between the fiscal austerity plans of the SNP and Labour) and on current polling could take the vast bulk of seats in Scotland. That would be enough to deny Labour a majority in the UK parliament. The current seat projections by top psephologists like Nate Silver (see post, suggest that neither the Conservatives nor Labour would be able to form a workable coalition in the next parliament, let alone a majority. So a ‘hung parliament’ and a minority government is the forecast right now.

But will that turn out to be the case? Well, although 326 seats is required for a majority officially, given that there will be a Speaker who does not vote and one independent, plus no turn-up by the Irish Sinn Fein MPs, actually a government could be formed if it commands 324 votes. That may be possible for one of the potential coalitions.

Back in 2009, before the last election, I made a rash prediction: that the economic cycle of boom and slump may turn out to be lucky for the Conservatives if they won the 2010 election (which they did narrowly to form a coalition with the Liberals). The Great Recession had just ended and so economic recovery could then last through to 2015 to allow the Conservatives to win a new term.

Labour stayed ahead in the polls from 2010 but then things began to turn in 2013 as the UK economy at last showed some signs of life and the government eased austerity measures just a little. Meanwhile UKIP and the SNP continued to gain.

UK voting intentions

So things have evened up. What will decide the election? Well, in my view, it is hardly ever the campaign itself. Usually, the poll share before a campaign is close to the result on the day, although this time, there are so many moving parts it might make a difference. Yet the polls have shown so far a great stability: the share of vote to the competing parties has hardly budged with just one week of the campaign left.

Also, I think there is fairly good evidence, despite the continual navel gazing of the media, that the personalities of the leaders do not make much difference (after all, the most grey and uninteresting leader ever of the Conservatives, John Major, won in 1992 over a charismatic opposition Labour candidate. Back in the 1920s, Stanley Baldwin, another non-personality, won successive elections.  It’s not even the specific issues that decide the result: immigration controls, NHS, Trident, austerity etc.

What really decides things is the state of material well-being of the majority. Are things getting better on the whole?  There’s been some research on this for US presidential elections. There is a good correlation between growth in real disposable income per head one year prior to an election and the margin of victory for the incumbent.

Incumbent voting

In 2012, Obama’s popular vote margin was 3.8%, while his expected margin (based on the real disposable income data at the time) was 4.6%. The 2008 election outcome (near the lower-left corner of the figure) was also quite consistent with the historical pattern; McCain trailed Obama in the popular vote by 7.3 percentage points—slightly better than expected, given the dismally low −0.8% mid-year income growth rate.

As for Britain, Paul Krugman recently made a similar observation to the one I made back in 2009: “the truth is that what’s happening in British politics is what almost always happens, there and everywhere else: Voters have fairly short memories, and they judge economic policy not by long-term results but by recent growth. Over five years, the coalition’s record looks terrible. But over the past couple of quarters it looks pretty good and that’s what matters politically.

He continues “research debunks almost all the horse-race narratives beloved by political pundits — never mind who wins the news cycle, or who appeals to the supposed concerns of independent voters. What mainly matters is income growth immediately before the election. And I mean immediately: we’re talking about something less than a year, maybe less than half a year.”

So let’s look at the evidence on income growth and the feeling of well-being for the average British voter. The fall in real weekly earnings since the last election has been the worst sustained fall since the 1930s. But in the last year, there has been a turning.

UK real weekly earnings

If we look at real household disposable income per head and a measure of the perception that people have of the financial situation, we find something similar. In Q4 2014, real household disposable income increased 1.9% compared to the same quarter a year ago and 2.2% above the level before the Great Recession started.  Most important, people’s perception of their own financial situation is now above where it was at the time of the last election, although it is still below the level before the global financial crash began back in 2008.

UK real household disposable income

Another measure of economic well-being that is often used is the so-called misery index: the unemployment rate plus the inflation rate  If that is in double figures, then ‘misery’ is high and governments will lose popularity heavily – as it was in 2010. Currently, with the unemployment rate at 5.5% and inflation at zero, this measure suggests that misery has declined.

UK misery index

But there are some new measures where things do not look so rosy. The Keynesian economist, David Blanchflower, prefers what he calls a misery ratio, which argues that the unemployment rate should be weighted more than the inflation rate in any misery estimate, Even on his measure, things have been improving recently.

Andy Haldane, chief economist at the Bank of England, has developed what he calls an agony and ecstasy index, Haldane’s ‘agony index’ is a simple index of real wages, real interest rates and productivity growth (

Haldane’s index shows that the British people and the economy have been in increasing ‘agony’ for the longest time since the 1800s, with the exception of world wars and the early 1970s. And the agony measure is still increasing as productivity continues to slow, but the pace of increase is now slowing. For more on this, see my article in Weekly Worker,

UK agony index

I have developed my own simpler version of ‘economic well-being’ as growth in real income per head LESS the unemployment rate. This measure reveals that for one year before the 2010 election economic well-being was below par. No wonder Labour lost. And it has remained below par in nearly every quarter up to the middle of 2014. But in the last three quarters, the index has moved above par.

UK economic well-being

All these measures show the level of misery or agony or lack well-being for the average household experienced since 2010, but they also show a change for the better in the last year and in the perception that things are getting better.

Is this enough for the Conservatives to pull off a victory next week as I forecast back in 2010? It should be, but the economic recovery under the Conservatives has been way weaker and taken longer than even I expected back in 2010. And all these measures hide the disparities in well-being between the professional classes particularly in London and the rest of the population. The economic recovery has been uneven in region and sectors. Just take Wales. The Welsh GDP per head is 72% of the UK average. It would take 20 years of growth at 4% a year to close that gap with England. Wales is one of the poorest parts of Europe: on a level with Hungary and the other EU accession countries.

So the recovery may not be enough to return the Tories to office. Indeed, its very weakness may explain why Labour would be ahead in the polls were it not for their apparent huge losses to the SNP in Scotland. On that aspect, this election will confirm with a vengeance that the dominance of the two-party system in Britain, partly reinforced by a first past the post electoral method, has crumbled.

In 1951, the Conservative and Labour parties between them got 97% of the votes cast. By the last election, their share was down to 65%.

UK two party

It is very possible that the largest party in this election will be The No Vote party, if the turnout is below 65% and Labour and the Tories cannot get 35% of the vote. The rise of UKIP and the SNP, the first a party of English nationalism and the latter of Scotland, is set to weaken the major parties even more than before. In 1950, Scotland was more Tory than the rest of the UK. Nowadays, the Scottish Tory is on the verge of extinction. In 2010, Scotland was more Labour than the rest of the UK; but it looks as though Labour will be decimated there next week.

UK conservative share in Scotland

The projections for seats won next week suggest that neither the Conservatives nor Labour will be able to form a viable coalition, let alone win outright. However, that may change. My favourite result, based on the indicators of economic well-being, is for another Tory-Liberal coalition, with perhaps backing by the Unionists in Northern Ireland. What that means for the economy and the British people, I’ll discuss after the election.

You can get my latest thoughts at:

Greece: crossing the red lines

April 28, 2015

News that Greek prime minister Tsipras had moved his finance minister Yanis Varoufakis from direct negotiations with the Eurogroup suggests that the Syriza government is preparing to make more concessions to the Troika to reach agreement on the terms of the release of outstanding funds from the EU and the ECB under the four-extension of the second bailout package. Varoufakis has been replaced by Euclid Tsakalatos, the Oxford-educated economist and previously shadow finance minister when Syriza were in opposition (see my post,
Tsakalatos is possibly more ‘moderate’ and certainly more acceptable for the Eurogroup finance ministers to deal with than the ‘charismatic’ Varoufakis, whom they all seem to hate.

Tsipras’ move towards making more concessions and perhaps dropping the non-negotiable ‘red lines’ that Syriza won’t allow to be breached would probably get support from the Greek people, at least if the current opinion polls are correct. One poll found that 79% of Greeks want to stay in euro and 50% want to reach a compromise rather than a rupture (36%). Around 63% of Greeks want to avoid a default on the Greek government’s debts. And if there is a deal that breaks the red lines, then Greeks would prefer a national unity government (44%) rather than a referendum (32%) or new elections (19%) to confirm it. Syriza still leads in the polls with 36% of the potential vote compared to 22% for the right-wing New Democracy; 5% for the social democrat Potami, 3% for the bankrupt PASOK and now just 5% for the fascist Golden Dawn and the Communists.

Time is running out to reach any sort of deal that might pass muster with the Greek people and avoid default on debts and possible exit from the Eurozone. The government has managed to scrape together enough cash by appropriating reserves from local authorities and other government agencies so that it can pay upcoming debt obligations to the IMF during May. But it is unlikely to have enough to repay the IMF in June and certainly not enough to meet €3.5bn bill to the ECB in July – unless it does not pay its workers their wages and pay out state pensions.

Greek payments

Ironically, the Syriza government is still running a budget surplus of €1.7bn in the first quarter of this year. It has managed this by just not paying its bills to government suppliers or to the health service and schools. In doing this, it can meet the wages of public sector workers and pensions.  The problem is that unpaid taxes are rising steadily, reaching €3.5bn in Q1, although the growth in this deficit has been slowing. People, especially rich people and businesses, are unwilling to pay their tax bills if they think that Greece will soon be thrown out of the Eurozone and the government will default on its debts and devalue Greek euros. They want to hold onto all the euros they have got.

So far, the ECB has been bankrolling the Greek banks as deposits there keep falling. But Greek banks are beginning to run out of suitable ‘collateral’ for ECB funding, namely Euro bonds from the Euro institution, EFSF, that the banks hold from the recapitalisation carried out in 2013. And the ECB will stop credit altogether if the Greek government defaults on its debts.

When the negotiations began on a four-month extension to the existing ‘bailout’ package last February, I reckoned that a deal was likely but that negotiations would be long and tortuous, and so it has turned out. Even if there is a deal to release the €7.2bn still available under the old bailout package, a new package to fund the Greek banks and meet further IMF debt repayments through to April 2016 will be slow to reach.

There is a possibility that if Syriza makes enough concessions on: reducing pensions; raising VAT; allowing privatisations and introducing ‘reforms’ in labour markets, then it could get the €7.2bn and also negotiate a third package for after end-June that would meet future ECB and IMF repayments and yet not impose too heavy an austerity package. Apparently, Tsipras, Merkel and the Eurogroup have agreed that the primary budget surplus target will be reduced from 3-4% of GDP a year to around 1.5%. And if the Eurozone economy starts to recover, that could also pull up the Greek economy through higher exports and more inward investment. That is the scenario that Tsipras and the Syriza leaders are looking to.

Indeed, Varoufakis spelt out how such a scenario might just work if the Euro leaders were just a little more amenable (see Varoufakis has previously said that the aim should be to convince the Euro leaders and the financial markets that giving the Greeks some ‘breathing space’ would allow the economy to recover and this will help European capitalism. And the aim right now is “to save capitalism from itself”, and not launch ridiculous socialist measures as “we are just not ready to plug the chasm that a collapsing European capitalism will open up with a functioning socialist system” (see my post,

Of course, this ‘way out’ means that Syriza will still be conducting (if ‘lighter’) fiscal austerity by running a surplus on the government budget at a time when Greek unemployment remains at over 25% and the economy is still contracting in real and nominal terms. Indeed, Greeks have already suffered a fiscal austerity adjustment equivalent to 20% of potential GDP since 2009.

Greece primary balance

And Greek workers have taken a huge hit in order to restore Greek corporate profitability: a 25% cut nominal private-sector labour costs, or more than 30% relative to the euro average.

Greece unit labour costs

But all these cuts have failed to reduce the government debt ratio one iota. On the contrary, the government debt ratio is now at 175% of GDP, way higher than in 2010. Under any deal with the Troika, this debt burden would not be reduced as there would be no cancellation of the debt with the EU ‘institutions’. The Greeks can never pay back this debt and it is ludicrous to expect them to do so. And as we know, around 90% of these Troika loans did not ‘bail out’ Greeks but were used to repay French and German banks and American hedge funds who held Greek bonds and were demanding their money back. The monies owed to these finance capitalists was merely transferred to the official sector (the EU ‘institutions’ and the IMF) – see my post,

It’s true that the EU loans do not start to be paid back until 2020, but the Eurogroup is insisting that the Greeks begin the process of debt reduction in advance through higher taxes and controls on spending, even though Greek households are still in a mire of poverty and public services in health, education and housing are in chaos. For the Euro leaders, it is better to preserve the illusion that member states must pay their debts, in order to ‘encourage’ the others and maintain the EU’s fiscal pact.  Also, they aim to restore Greek capitalism by raising profitability, not to restore Greek household incomes.

Back in February, I posed the issue as an impossible triangle. Syriza could not reverse austerity, stay in the euro and remain united as one party in government. One or more of these aims would have to go. It seems that the Tsipras will opt for staying in the euro, even if he cannot reverse austerity or write off Greek government debt. The question then becomes a political one: what will the left within Syriza do? Will they too swallow any deal, especially if Tsipras puts it to a referendum of the people and wins the vote? Or will they split the party and force Tsipras into an alliance with the opposition (national unity) to get any deal approved by parliament?

There is still the possibility that the austerity terms demanded by the Troika are just too much for the Syriza leadership to accept and the Greeks will opt to default on the repayments in June. The IMF allows a 30-day ‘grace period’ to meet overdue debts, so default is not technically immediate, although there would probably be a run on the Greek banks. The government would have to impose capital controls to stop money leaving the country or even just under the mattresses. Introducing capital controls is not breaking any Eurozone rules, so technically, Greece would still be a member of the Eurozone. But the run on the banks would mean that the ECB would either have to step in fund the gap or the banks would go bust. The question of Greek membership of the Eurozone would then be posed.

The government could continue to claim that the euro was the Greek currency and not introduce any new drachma. But euros would soon become scarce to pay government workers and for businesses to pay for imports and their workers wages. The Greek economy would head into an even deeper slump down the road. So devaluation and a new Greek currency would not be long in coming, to try to avoid a meltdown. But devaluation would mean that Greek businesses would find it even more difficult to pay their euro bills and many would go bust. Inflation would rocket and the new drachma would plunge in value. It would be another form of meltdown. These are the outcomes for the Greek people, deal or no deal, under capitalism.

The alternative to grasp the nettle: demand the cancellation of the euro and IMF loans (the original demand of Syriza) or default; impose capital controls, take over the Greek banks and appeal to the Greek people for support and the European labour movement. Let the Euro leaders make the move on Eurozone membership, not Syriza. The problem is that now the Greek people have been led to believe that there is only one way out: a deal with the Eurogroup on increasingly bad terms. The alternative of a socialist plan for investment and a Europe-wide appeal is not before them. (see my post,

The Tsipras-Varoufakis approach of concessions now and hope for a better capitalist economy down the road could work for a short while. But it won’t reverse the terrible losses in incomes, jobs, education and health that those Greeks who have not been able or willing to leave the country have suffered. And what happens when the next slump in the world economy comes along?

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.


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