The long depression and Marx’s law – a reply to Pete Green

December 2, 2016

Pete Green has now taken up the cudgels in the debate that Jim Kincaid and I have begun over the causes of regular and recurrent crises in capitalist production and in particular the Great Recession.  He makes a welcome and considered critique of my views, as expressed in my book, The Long Depression and in recent discussions at the Historical Materialism conference in London earlier this month.  I think he raises some new and important points in his critique, which, as he says, will require further debate and research.

Like Pete, I cannot deal with all arguments in this short reply on my blog but I’ll do my best to take up some key ones, but it still makes this post long enough!

Pete starts by saying he is not going to dispute the data on the rate of profit that I have presented, mainly for the US, but also for other economies.  But apparently he “shares Jim Kincaid’s scepticism about reliance on US national income accounts as source for corporate profitability”.  Actually, I am not sure Jim is sceptical of the official data.  Indeed, he has said that I have used the data accurately and as Pete says, “there is no adequate alternative available for those engaged in empirical investigation”.

And that is what the bulk of my research is: engaging in empirical investigation to verify or otherwise particular theories or laws.  In my view, too many Marxist economists have ignored empirical work and concentrated on interpreting (and re-interpreting) Marx’s writings and ‘what he meant’, rather testing his laws of motion of capitalism to see if they best fit the facts.

Luckily, I am not alone in doing empirical investigations – Andrew Kliman has done prodigious analysis, Anwar Shaikh’s new book is a gold mine of empirical studies, G Carchedi has also tested Marx’s law with the evidence.  And there is a host of new young scholars internationally doing such work.  Carchedi and I will be publishing a book of these research projects next year that empirically support Marx’s law of profitability.

But Pete wants to “step back” from any debate over the stats and consider the “theoretical framework” of my book.  He does not think that Marx’s law of the tendency of the rate of profit to fall is “sufficient for an explanation of the cyclical fluctuations that have characterised capitalism”.  Why not?  Well, it seems that, while he does not deny “the logical coherence” of Marx’s law of profitability and its relevance to “whole period since the 1960s”, using the law to explain regular crises or “fluctuations” is “over-reductionist” and “two-dimensional”, especially in reference to the latest crises (ie the Great Recession?).

So Pete reckons that Marx’s law of profitability is logically coherent but irrelevant to an understanding of crises.  It’s ‘overreductionist’ (or maybe just reductionist?) to claim its relevance to crises.  There are more dimensions than two (presumably the tendency and the counter-tendency?), he says.

This does not seem the way to approach the relevance of Marx’s law to crises.  Pete says that the law is not “sufficient” to explain crises.  But does he think it “necessary”, which is not the same thing as sufficient?  If he does; how does it fit in?  You see, I think we must start with Marx’s approach, which was to abstract from reality the underlying essential (necessary) laws of capitalist motion and then add back concrete features of capitalism to reach the immediate.  In only that way can we identify the causes of crises under capitalism.  In that sense, Marx’s law can be seen as the underlying or ‘ultimate’ cause of recurrent crises, which can be triggered by ‘proximate’ events i.e. (oil price crisis, stock market bubble, real estate crash etc).  Then we have ‘sufficient’ causes.  For more on this, see my paper, Presentation to the Third seminar of the FI on the economic crisis

This approach thus makes it transparent that a financial crash or credit crisis is not the essence of crises in capitalism, but their surface manifestation.  Jim Kincaid has done a new post in which he outlines what Marx said about the 1847 crisis in Britain making the point that the falling rate of profit plays no role in Marx’s account”, considering only the financial speculation and credit crunches.  Jim claims that for Marx, “The fall in the rate of profit of these businesses is only a transmission mechanism.  What matters are the causes of bankruptcy and business collapse.

At this point, I am reminded of what Marx said a little later in 1858 during the first great international crisis of the 19th century: “What are the social circumstances reproducing, almost regularly, these seasons of general self-delusion, of over-speculation and fictitious credit?  If they were once traced out, we should arrive at a very plain alternative.  Either they may be controlled by society, or they are inherent in the present system of production.  In the first case, society may avert crises; in the second, so long as the system lasts, they must be borne with, like the natural changes of the seasons”.   Dispatches for the New York Tribune, Penguin p201.

As Marx puts it, ‘over-speculation and fictitious credit’ arise from regular crises in the capitalist system of production.  They cannot be eradicated by social action unless the mode of production is replaced.  It is not possible to separate crises in the financial sector from what is happening in the production sector.

Pete refers to the debate between Marxist economists on the cause of crises in the 1920s and 1930s, as described in Richard Day’s excellent book, The crisis and the crash.  As Pete says, the debate was between those who explained cyclical fluctuations as due to disproportionality between departments of production and those who reckoned it was due to the ‘limited consumption of the masses’, ie underconsumption.  As Pete says, “Marx’s tendency for the rate of profit to fall, as a function of a rising organic composition of capital, plays no role at all in these debates.”  But that does that mean the law is irrelevant?  It was no accident that the law was ignored.  Most leading Marxist revolutionaries had not read or seen Volume 3 of Capital where Marx’s “most important law of political economy” is expounded.  And if they had, they were guided away from Marx’s law as a cause of crises by the likes of Kautsky, Hilferding and Luxemburg.

One Marxist economist who had read and digested Volume 3 was Henryk Grossman.  As a result, he was able to present a coherent theory of capitalist crises based on the law, showing the connection between the tendency of the rate of profit to fall and the countertendencies; the relation between the rate of profit and the mass of profit; and thus the relation between profit and crises.  But his thesis, as Rick Kuhn says in his excellent biography of Grossman, was “an economic theory without a political home”.  Grossman also shows in his work, The law of accumulation being also a theory of crises, that those who followed an ‘anarchy of production’ theory of crises could not really provide a coherent argument for regular and recurring slumps or breakdowns inherent in capitalist production.  Indeed, just remove competition and allow monopoly to regulate and the anarchy can be controlled, suggested Hilferding or Kautsky.

Pete brings to our attention the work of Pavel Maksakovsky at that time.  As Pete says, he provides us with the most sophisticated version of the anarchy of production theory of crises.  As usual, Maksakovsky refers to Marx’s law of profitability, but only to dismiss it as irrelevant to the cycles of boom and slump and instead, like those in debate of the 1920s, focuses on Volume Two of Capital with its reproduction schema.  Maksakovksy outlines his theory succinctly in pp136-9 of his book.  This is a disproportion theory but with the addition of trying to show that the disproportion between the sectors of means of production gets ‘periodically detached from consumption’.  Interestingly, Maksakovsky, correctly in my view, dismisses the idea that excessive credit and financial market busts are the cause of crises (p139), just as Marx did in 1858, but now revived by Jim.  They are only at the ‘superstructural level’ of capitalist society and can never eliminate the cyclical developments caused by the ‘anarchy of production’.  This is worth remembering in the light of the arguments now being presented by many modern Marxist economists that finance is the real cause of crises now and for the Great Recession (see below).

Does the anarchy of production or disproportion of sectors of reproduction hold up to scrutiny as an alternate theory of crises?  I don’t think so.  Grossman demolishes it in his book and in a little known essay on Marx’s reproduction schema (recently edited by Rick Kuhn).  Grossman shows that Marx’s schema do not show a “widening and deepening contradiction” (Maksakovsky) between production and consumption under capitalism and so cannot be the Marxist explanation of recurrent crises.  By assuming in the reproduction schema, accumulation and exchange between the sectors take place at the level of labour values, Maksakovsky makes the same mistake as Luxemburg and others and so finds ‘disproportion’.  But Marx’s reproduction schema are at the level of prices of production after the process of competition.  Rates of profit are averaged.  At that level, there is no inherent disproportion from the reproduction schema.

To deny disproportion as the cause of capitalist crises is not to support Say’s law (or ‘fallacy’, to be more exact) that ‘supply creates its own demand’ –as Pete suggests that I do.  Marx was fierce in his dismissal of Say’s nonsense.  The very process of exchange on the market creates the ‘possibility of crisis’.  But that does not explain the periodic and recurrent crises in capitalist production and investment.

Pete does not like the “clever” flow chart in my book that shows the different possible theories of crisis.  He says I want the readers to follow me down to Marx’s law of profitability, but he has three objections to that path.  Pete admits that in the circuit of capital “production is primary” but then goes onto say that production and circulation are in a “contradictory unity” in capitalism.  So is production not ‘primary’ after all?  Indeed, he refers us to the thesis of David Harvey who argues that capitalism has various ‘bottleneck points’ in the circuit of capital and crises can come from any one of them, not just or even mainly in the ‘primary’ production of surplus value and the accumulation of capital, but also in the ‘secondary’ circulation of capital through credit finance, households and the role of government.  So Pete says we need to have a theory of crisis that “embraces the whole circuit of capital” not just in production.

That’s fine but does this mean that the ‘bottlenecks’ in the circulation and distribution of capital are on the same level of causality as breakdowns in the ‘primary’ production process?  The Marxist answer, in my opinion, is no.  As I said before, in my view, and I think in Marx’s, circulation and distribution are at a lower plane of causal abstraction, or if you like closer to the proximate than the ultimate or underlying causes.  A collapse in the stock market or in real estate prices will not lead to a collapse in production unless there are already serious difficulties in the latter.  There have been many stock market collapses without a slump in production and employment (1987), but not vice versa.

Indeed, I agree with what Jim says summing up his post on the 1847 crisis mentioned above that The rate of profit and the forces which determine it should remain central in our analysis.  Marx’s own account of the 1847 crisis would surely have been strengthened by attention to profitability and its conflicting trends. We need to trace the many ways in which the law of value asserts itself – often in displaced and distorted forms.  But also recognise, and give due weight to, the role of contingent factors in any crisis we examine.”

Pete also wants to drag in the Keynesian “lack of effective demand” as one of the multi-dimensional causes of crises.  I have argued in many places that this ‘cause’ is no such thing.  Pete agrees that aggregate demand is endogenous to investment and profit; “Keynes himself would have agreed”.  Yes, but for the wrong reasons.  The Keynesian-Kalecki thesis puts ‘effective demand’ i.e. investment demand, as the causal factor in the movement of profits.  But Marxist economics says profits call the tune, not investment.  I and other Marxist scholars have shown that the empirical evidence for the Keynesian ‘multiplier’ (a fall in spending leads to a slump) is very weak compared to the Marxist multiplier (a fall in profits leads to a slump).

Pete says I should not ‘conflate’ the underconsumption thesis with the overproduction thesis as the cause of crises.  But then says that the “problem is a relative lack of productive consumption”.  We may be bandying with words here, but that sounds like an underconsumption thesis to me.  I presume this to refer to an excess of investment goods produced over the capitalists’ demand for them.  But crises do not happen because of a lack of “productive consumption”, but because of insufficient profits brought on by falling profitability over time.  And this can be proved empirically.

Andrew Kliman shows in his book, The failure of capitalist production (Chapter 8) that investment growth is always outstripping consumption but it does not lead to recurrent crises, as Maksakovsky ansd Sweezy argued.  The cyclical crisis of boom and slump does not flow from excessive investment over consumption but from insufficient profit from investment.  I await an empirical justification of the Maksakovksy thesis.

Pete says the proponents of Marx’s law of profitability as the underlying and ultimate causes of recurrent and regular crises are neglecting the ‘multi-dimensional’ and ‘complex’ nature of capitalism.  I ignore the uneven and combined development of the world economy as expressed in the global imbalances so “astutely” identified by Keynesian economic commentator, Martin Wolf (or for that matter, I could add Yanis Varoufakis in his book, The Global Minatour).  I also ignore the counteracting factors of globalisation in driving up the rate of profit.  I also ignore the role of finance and growth of financial profits in total corporate profits.

The more I go down these points by Pete, the more I feel that a series of straw men have been erected for my views to be knocked down by him.  These layers of ‘multi-dimension’ have not been ignored by me.  The counteracting factors explain the up and down waves of the profitability cycle in capitalism.  In both my books, I have spent some time looking at these long waves of profitability.  And I discuss the impact of uneven and combine development of capital in the context of the euro crisis in my book.

Pete says that “Unlike some critics,  I am not rejecting the relevance of this or the equally significant role of counter-tendencies raising profitability over the long-term. Indeed I would endorse to a degree Michael’s emphasis on longer waves in profitability but link them more closely to Kondratiev waves”.  But I have done just that in both books – trying to relate these waves to Kondratiev’s!

Pete is right to say that Marx’s law of profitability appears to have different cycles than the so-called ‘business’ or Juglar cycles of boom and slump.  I could not agree more.  In my first book, The Great Recession, I spent much time trying to analyse the connections between the various cycles in ‘capital in motion’ and try to link them together.  I did the same in The Long Depression in a whole chapter.

Pete says that “What can be shown in my view is that when the underlying rate of profit is falling, the business cycle fluctuations are more severe as is evident from the late 1960s to the early 1980s, and when the underlying rate is rising, the amplitude or the severity of recessions is reduced as in the 1990s and early 2000s.”  That almost word for word what I have said in the past.

Pete is keen to tell us that what is new is the “unprecedented rise in the share of financial profits in total corporate profits”. Again this is dealt with in both my books.  Indeed, I try to integrate this new development into an analysis of unproductive investment and fictitious capital as one of the new ‘counteracting factors’ to the law as such.  I even try to measure its impact (see my paper, Debt matters).

Pete finishes by wanting to defend or promote again the Keynesian idea of “a lack of effective demand” as the cause of crises.  He rejects my claim that the Keynesian position is a tautology (‘it rains because it rains’) of a slump not a cause. In retort, he suggests that Marx’s law of profitability is as remote a cause of crises as saying storms and hurricanes are caused by global warming; only worse, the law of profitability as a proven cause is more questionable than man-made global warming.  Pete is not a global warming sceptic but he is falling profitability one.

Actually, his analogy has some merit.  Global warming is an underlying cause of increased storms, floods and extreme weather.  The science of correlations, causation and forecasts strongly supports this.  Similarly, I and others argue that capitalist crises have an underlying cause in the inability of capitalists to stop the overall rate of profit on capital falling as they accumulate and try to increase profits.  This dialectical contradiction also has increasing empirical backing with correlations, causations and forecasts.  By the way, Marx used the analogy of the law of gravity and the movement of objects to place his law of profitability in crises.

I’m afraid the thesis of Maksakovsky has not changed my view that all other theories of crises in capitalism: underconsumption, overproduction, disproportion, bottlenecks in circulation, global imbalances, financial instability, are either wrong or at a lower plane of abstraction, so that, on their own, they do not explain crises.  As Alan Freeman says, Marx’s law remains “the only credible competitor left in the contest to explain what is going wrong with capitalism”.

The long depression in Italy

November 28, 2016

Italy has a referendum this coming weekend.  Italy’s Blairite (Clintonesque) prime minister Matteo Renzi of the ruling the centre-left Democrats called a referendum, British Cameron-style, to ‘reform’ the electoral constitution.  He wants to reduce the size of the upper house of parliament, the Senate, from over 350 senators to just 100 and also have them come from the regions and cities, namely the elected mayors etc.  Most important, he wants to end the ability of the Senate to send back policies or measures passed by the lower house assembly (elected by popular vote in proportional representation – i.e. seats according to the share of the vote).  Thus, the Senate could no longer go on with ‘ping-ponging’ tactics back and forth with the lower assembly.

Renzi has staked his political reputation and his position as PM on winning this vote, like David Cameron did in the UK over the Brexit referendum.  And, according to the opinion polls, he looks as though he is heading for the same defeat as Cameron, throwing another major capitalist state into confusion, uncertainty and paralysis.

But it is all relative – after all, Italian politics and the economy have been in a state of paralysis for decades, with the situation only worsening since the end of the Great Recession.  Italy is now in a Long Depression that it seems unable to escape from.

Italy GDP

The immediate problem is Italy’s banks.  Europe’s banks currently hold €1trn of what are called ‘non-performing loans’, loans that the borrowers are no longer paying interest on and could be about to default on.  Of that €1trn, around one-third is held by Italy’s banks.  These bad debts are like a millstone around the necks of Italy’s finance sector.  The myriad of small Italian regional and large national banks have been lending to small businesses and property companies.  But thousands of these small companies are bust and cannot pay back their debts as the economy stagnates.

As I said in my book, The Long Depression, (Chapter 9) in some ways, Italy is in the most dire position of the top seven capitalist economies.  Italian capital was in the doldrums before the Great Recession.  Profitability has been falling since 2000 and is now down 30% since 2004.  Net investment has dried up and productivity of labour is not just growing slowly, as it is in other major economies, it is contracting outright.  Italy cannot recover because the Long Depression in Europe continues.

Italy ROP

And as a result, its banks are close to bankruptcy.  Banking analysts reckon that up to eight banks, led by Italy’s third largest and oldest, the infamous Monte Pachi, risk failing if Renzi loses the referendum.  That’s because potential investors in these banks, badly needed to recapitalise them if they write off these huge bad debts, won’t cough up.

I made some simple estimates of the likely losses that the Italian banks face (based on the Bank of Italy’s recent financial review).  The banks have lent up to now €2trn to Italians businesses and households.  About €330bn of these loans are ‘bad’ (i.e. won’t be paid back).  That’s about 20% of Italy’s GDP.  The banks have built up reserves to cover these potential losses of about €150bn and they could expect to sell off some of assets of bust businesses over time.  Even so, there would still be a potential loss of about €100bn on the banks’ books if they grasped the nettle and ‘wrote off’ these bad loans.  That would completely wipe out the value of the shares of the investors in many of these banks.  For example, the hit to Monte Paschi would be nine times more than the bank is worth on the stock market right now.  And Italy’s largest, Unicredit, which is supposed to helping the other smaller bust banks like Banco Veneto, would also be wiped out.  Indeed, Unicredit wants to raise €13bn for itself to shore it up.

I reckon that a bailout of the banks would cost at least €40bn, just to put the larger banks back on their feet.  Where is such a bailout to come from?  The Renzi government set up a special fund called Atlante, which was funded by the other larger banks, with a little from the state savings bank.  This raised just €4bn, most of which has already been spent on Monte Paschi to no avail.  But that is not the worst of it.  Under the new EU banking bailout rules, insisted on by Germany, state money cannot be used to bail out the banks.  The bank shareholders and bond holders must take the hit – at least first.

That sounds okay, you might say.  Let the bank shareholders pay.  But here is the rub.  The Italian banks have been engaged in crude mis-selling to all their customers with their savings.  Customers were encouraged to ‘save’ by buying the bank’s own bonds – in other words lending to the bank itself.  So hundreds of thousands of older (not so wealthy) people would now lose all their savings if the banks write off their bad debts and ‘recapitalise’ by writing down their own borrowings (bonds to zero).  This would be political dynamite, apart from causing misery to hundreds of thousands – and it has already happened to ‘savers’ with Banco Veneto and Monte Paschi.

Renzi has been pressing the Germans and EU leaders to relax the rules and allow state funds (ideally European ‘stability’ funds, which are available) to bail out his banks.  But the Germans are stubbornly holding to the rules, particularly as bailing out the Italians, after the Greeks, is anathema in Germany and fuel to fire to the Eurosceptics in the upcoming German election in 2017.

So if the vote goes against Renzi on Sunday, international and Italian investors are going to be very reluctant to stomp up funds to Italian banks when they fear the Italian government will fall and possibly be replaced in an early general election by the populist Five Star alliance, which has already won mayor’s positions in Rome and Turin and is leading in the opinion polls.  Could there be a ‘populist’ leading Italy out of control of the elite, and this time not Berlusconi?  At best, there will be a government unable to act through parliament to implement ‘reforms’ in the interest of capital, namely reducing labour rights; more privatisation and government spending cuts.

It’s possible that Renzi will win the vote against all the expectations as ‘no’ voters don’t bother to turn out.  Even if he does, the problem of the banks won’t go away.  And the problem of the banks is merely a symptom of the failure of Italian capitalism and the paralysis of its political elite.  Italy remains deep in depression and we have not even had a new slump yet.

Top 1% of adults own 51% of the world’s wealth; top 10% own 89%; and bottom 50% own only 1%.

November 24, 2016

The top 1% of the adult wealth holders in the world own 51% of all global wealth, while the bottom half of adults own only 1%.  Indeed, the top 10% of adults own 89% of all the world’s wealth!  This is the new figure reached for 2016 by the annual Credit Suisse global wealth report.  Every year, Credit Suisse presents this report, authored by Professor Tony Shorrocks, James Davies and Rodrigo Lluberas, who used to do it for the UN.  I report on the results each year and it is usually the one of the most popular posts I write.

The last time that I discussed the Credit Suisse results, the top 1% had 48% of global wealth.  So, in the last year and a half, global inequality on this measure has risen yet again.   The shares of the top 1% and top 10% in world wealth fell between 2000 and 2007: for instance, the share of the top percentile declined from 50% to 46%. However, the trend reversed after the financial crisis and the top shares have returned to the levels observed at the start of the century.

The Credit Suisse researchers reckon these changes mainly reflect the relative importance of financial assets in the household portfolio, which have risen in value since 2008, pushing up the wealth of many of the richest countries, and of many of the richest people, around the world. Although the share of financial assets fell this year, the shares of the top wealth groups continued to edge upwards.  At the other end of the global pyramid of wealth, the bottom half of adults collectively own less than 1% of total wealth.


The main reason for this huge inequality is that there are so many poor (in wealth) people in the world.  You see, it does not take that much to get into the top 1% of wealth holders.  Once debts have been subtracted, a person needs only $3,650 to be among the wealthiest half of the world’s citizens. However, about $77,000 is required to be a member of the top 10% of global wealth holders and $798,000 to belong to the top 1%.  So if you own a home in any major city in the rich North on your own and without a mortgage, you are part of the top 1%.  Do you feel rich if you do?  This just shows how poor the vast majority of people in the world are: with no property, no cash and certainly no stocks and bonds!

The research shows that 3.5 billion individuals – 73% of all adults in the world – have wealth below $10,000 in 2016. A further 900 million adults (19% of the global population) fall in the $10,000–100,000 range.   The poor in wealth are concentrated in India and Africa and the poorer Asian nations, with 73% of those in the bottom wealth holders.  But there are also significant numbers of people who are wealth poor by global standards in North America and Europe, with 9% of North Americans, most with negative net worth, in the global bottom quintile and 34% of Europeans in the global bottom half.  These people not only have no wealth, they are in debt.

And who is getting better off?  Well, it is not Indians.  India has just 3.1% of ‘middle-class’ people globally (wealth of $10-100k) and that share has hardly changed.  In contrast, China accounts for a huge 33% of middle wealth people, ten times that of India – and that proportion has doubled since 2000.  What this tells you is that China’s unprecedented economic expansion has taken hundreds of millions out of poverty, even if inequality of wealth has risen.

Indeed, the number of millionaires, which fell in 2008, showed a fast recovery after the financial crisis and is now more than double its 2000 figure.  There are now 32.9m millionaires globally i.e. adults with more than $1m in property or savings after debt.   Indeed, there are only 140,000 people in the whole world who have more than $50m in wealth.  And there are now over 2000 billionaires – these are the people that really own the world.


Assuming no change in global wealth inequality, another 945 billionaires are expected to appear in the next five years, raising the total number of billionaires to nearly 3,000. More than 300 of the new billionaires will be from North America. China is projected to add more billionaires than all of Europe combined, pushing the total from China above 420.

Credit Suisse estimates that total global wealth is now $334trn, or about four times annual world GDP.  After the turn of the century, there was at first a rapid rise in global wealth, with the fastest growth in China, India, and other emerging economies, which accounted for 25% of the rise in wealth, although they owned only 12% of world wealth in the year 2000. Global wealth declined in 2008, but has trended slowly upwards since, at a significantly lower rate than before the financial crisis. In fact, wealth has fallen in dollar terms in all regions other than North America, Asia-Pacific, and China since 2010. On a per-adult basis, wealth has barely grown at all and median wealth has fallen each year since 2010.  The average adult is getting poorer.

In the past 12 months, global wealth has risen by 1.4% and has barely kept pace with population growth. As a result, in 2016, mean wealth per adult was unchanged for the first time since 2008, at approximately 52,800 dollars.  So the world’s population as a whole has not got wealthier in the last year and a half, while inequality has risen.

For more on inequality of wealth and income and what it means, see my Essays on Inequality.



A Trump boom?

November 22, 2016

The US stock market continues to jump and has now reached a record high.


Finance capital is getting very positive about Trumponomics with its plans for cutting taxes (both corporate and personal), reducing the regulation of the banks and implementing range of infrastructure projects to create jobs and boost investment.  But even assuming all this would happen under a Trump presidency, will it really get the US economy out of its depressingly slow crawl?  In my last post, I doubted it.  Now JP Morgan economists have taken a similar sceptical line.

They reckon Trump’s agenda will likely yield little impact on US employment and inflation in the next two years, while tax cuts will boost growth by only a modest 0.4 percentage points by the end of 2018 (i.e. over two years) at most.

JP Morgan thinks that Trump will introduce tax cuts worth around $200 billion per year, evenly split between personal and corporate taxes.  Interestingly, they agree with me that the so-called Keynesian ‘multiplier’ (how much rise in real GDP growth from tax cuts) is low: just 0.6 for personal taxes and 0.4 for corporate taxes — meaning for every $1 in tax breaks received by individuals and by businesses, that will likely boost aggregate demand to the tune of 60 cents and 40 cents in a given fiscal year, respectively.


As a result, JPMorgan reckons US economic growth will hardly pick up at all from its current 2% a year average and will be nowhere near the 4% annual that Trump claims he can get.  I would argue that faster growth would depend not on more spending in the shops or more house purchases but on higher business investment and that is what is missing from the equation.

Part of the Trump plan (again I hasten to add if it happens) is to cut the tax rate for companies that hold huge cash reserves overseas if they return these funds to invest at home.  Unlike other developed nations, the US taxes corporate income globally, but it allows companies to defer paying tax on offshore earnings until they decide to repatriate that income. As a result, US companies have avoided U.S. taxes by stashing roughly $2.6trn offshore, a figure cited by Congress’s Joint Committee on Taxation. The top five in order of overseas cash holdings as of Sept. 30, are Apple ($216 billion), Microsoft ($111 Billion), Cisco ($60 billion), Oracle Corp. ($51 billion) and Alphabet Inc. ($48 billion).


Such an idea was tried back in 2004 under George Bush.  But the result was not a rise in productive investment but a new bout of financial speculation.  Companies got a tax ‘amnesty’ but used the cash they brought home on buying back their own shares or pay out dividends to shareholders, driving up the stock price and then borrowing on the enhanced ‘market value’ of the company at very low rates.  In 2004, when US firms brought back $300bn in cash, S&P 500 buybacks rose by 84%.

Goldman Sachs economists reckon that this will happen again with the Trump plan.  Indeed GS reckon that next year could see buybacks take the largest share of company profits for 20 years.  They estimate that $150bn (or 20 percent of total buybacks) will be driven by repatriated overseas cash. They predict buybacks 30 percent higher than last year, compared to just 5 percent higher without the repatriation impact, while productive investment’s share will be little changed.

Asked what he would do with repatriated cash should the Trump administration slash taxes on foreign profits, Cisco Systems Inc. Chief Executive Officer Chuck Robbins said “We do have various scenarios in terms of what we’d do but you can assume we’ll focus on the obvious ones — buy-backs, dividends and M&A activities.”


Now it is argued by some that the hoard of overseas cash shows that the problem American capital has is not that its profitability is too low.  On the contrary, it is awash with profits (and profits not counted in the official stats).  But here is an interesting observation by Morgan Stanley economists.  Of the $2.6trn cash held abroad by American companies, only 40%, or roughly $1 trillion, is available in the form of cash and marketable securities. The other $1.5 trillion has been reinvested to support foreign operations and exists in the form of other operating assets, such as inventory, property, equipment, intangibles and goodwill.  So it has been invested not held in cash after all.  And the cash is not so awash.

It’s also highly unlikely that companies with factories overseas will shift meaningful production to the US. After all, labour remains significantly cheaper in nations like China. Hourly compensation costs were $36.49 per employee in the US in 2013, according to The Conference Board. The comparable cost in China was just $4.12 that year (the most recent figure), even after having increased more than six-fold over the preceding ten years.

Besides, many companies that do still make products in the US are automating production. Consider Intel Corp. The chipmaker has giant fabrication plants in Oregon, Arizona and New Mexico that employ just a handful of people to keep the machines running. Nothing the Trump administration does will stop robots from taking over large swathes of manufacturing in the long run.

Another part of Trumponomics is to implement an infrastructure program of building roads and communications.  His plan to fund this from private money in return for ownership and revenues from the projects.  This has made Keynesian economic guru, Paul Krugman apoplectic, and rightly so.

As Krugman explains “imagine a private consortium building a toll road for $1 billion. Under the Trump plan, the consortium might borrow $800 billion while putting up $200 million in equity — but it would get a tax credit of 82 percent of that sum, so that its actual outlays would only be $36 million. And any future revenue from tolls would go to the people who put up that $36 million. Crucially, it’s not a plan to borrow $1 trillion and spend it on much-needed projects — which would be the straightforward, obvious thing to do.  Instead “If the government builds it, it ends up paying interest but gets the future revenue from the tolls. But if it turns the project over to private investors, it avoids the interest cost — but also loses the future toll revenue. The government’s future cash flow is no better than it would have been if it borrowed directly, and worse if it strikes a bad deal, say because the investors have political connections.”

Second, Krugman goes on, “how is this kind of scheme supposed to finance investment that doesn’t produce a revenue stream? Toll roads are not the main thing we need right now; what about sewage systems, making up for deferred maintenance, and so on?  Third, how much of the investment thus financed would actually be investment that wouldn’t have taken place anyway? That is, how much “additionality” is there?”

Suppose that there’s a planned tunnel, which is clearly going to be built; but now it’s renamed the Trump Tunnel, the building and financing are carried out by private firms, and the future tolls and/or rent paid by the government go to those private interests. In that case we haven’t promoted investment at all, we’ve just in effect privatized a public asset — and given the buyers 82 percent of the purchase price in the form of a tax credit.”

So the Trump plans will be ineffective in getting US economic growth rates up, in delivering more jobs, real incomes and better transport; but it will boost financial markets and a speculative boom.

Testing Trumponomics

November 18, 2016

Before Donald Trump was elected, stock markets went down every time he improved in the public opinion polls.  Finance capital did not want him to win.  But since his surprise election, stock markets have not slumped.  On the contrary, they have risen substantially along with a strengthening dollar.  It seems that ‘the Donald’ could be a good thing for Capital after all.

Much of this optimism will turn out to be wishful thinking.  But wishful thinking can work the markets for a while.  The thinking is based on the policies that Trump is proposing: in particular, tax cuts for the corporate sector and personal income tax cuts that will benefit the top 1% of income earners the most.  Also, he claims that he will spend up to $1trn on new infrastructure and investment projects around the country and deregulate the banks and reduce labour rights (what’s left of them).

The stimulus measures are music to the ears of Keynesian economics, despite the general distaste that the top Keynesian gurus have had for the attitudes and rants of ‘the Donald’.  Indeed, if these policies are implemented over the next year or so, Trumponomics will be the next test of the Keynesian solution for the world economy to get out of this Long Depression.  Abenomics in Japan, following similar policies of public spending, tax cuts and quantitative easing, has miserably failed.  Japan’s GDP growth has hardly moved, while wage incomes and prices remain transfixed.


But now some Keynesians are applauding Trump’s approach as ‘a break from neoliberalism’.  The great historian and biographer of Keynes, Robert Skidelsky tells us that “Trump has also promised an $800bn-$1tn programme of infrastructure investment, to be financed by bonds, as well as a massive corporation tax cut, both aimed at creating 25m new jobs and boosting growth. This, together with a pledge to maintain welfare entitlements, amounts to a modern form of Keynesian fiscal policy”.  So Skidelsky goes on: “As Trump moves from populism to policy, liberals should not turn away in disgust and despair, but rather engage with Trumpism’s positive potential. His proposals need to be interrogated and refined, not dismissed as ignorant ravings.”  Well, liberals of the Keynesian persuasion may want to ‘engage’ with Trump and adopt Trumponomics, but those who want to improve the lot of Labour, the majority not the top 1%, will take a  different view.

Indeed, let’s look at Trumponomics.  Apparently, Skidelksy thinks that cutting corporation tax will create new jobs and raise growth.  Well, there is no evidence that previous cuts in corporation tax have done so anywhere in the major economies.  Corporate tax rates were slashed during the neoliberal period and yet economic growth has floundered.  What has happened is a rise in the share going to the profits of capital at labour’s expense and a rise in unproductive financial speculation. Officially, the US has a 35% marginal tax rate on corporations but after various exemptions, it is effectively only 23%, among the lowest in the world.


Trump’s infrastructure plan is badly needed.  In my blog, I have often shown the terrible state of the public services and communications in the US.  The average age of America’s fixed assets is 22.8 years — the oldest in data back to 1925.   Infrastructure spending is at 30-year lows and bridges, roads and railways are crumbling before our eyes. According to the 2013 report card by the American Society of Civil Engineers, the US has serious infrastructure needs of more than $3.4 trillion through 2020, including $1.7 trillion for roads, bridges and transit; $736 billion for electricity and power grids; $391 billion for schools; $134 billion for airports; and $131 billion for waterways and related projects.  But federal investment in infrastructure has dropped by half during the past three decades, from 1% to 0.5% of GDP.

Undoubtedly, public investment in infrastructure would help the US economy and raise growth a little – Goldman Sachs reckons by 0.2% pts a year.  But Trump’s proposal of $1trn spending over four years is a fake.  Most of this would not be public investment at all.  The funds would come from private sources which would get incentives to provide money: the big construction companies and developers (like Trump Inc itself) will be offered tax breaks and also the right to own the bridges, roads, etc built with toll charges to the users of these.  Direct public spending and construction will be limited.

Moreover, as I have argued in many posts, there is little evidence that Keynesian stimulus programmes work to deliver jobs and growth. Skidelsky talks about the Roosevelt era of the 1930s.  Actually, very few permanent or new jobs were created under Roosevelt.  The unemployment rate stayed right up to the start of the war.  As Paul Krugman, the American Keynesian guru, pointed out in his book, End Depression now, it took the war to deliver full employment and economic recovery.

During the period of ‘austerity’, from 2009, when governments tried to run budget surpluses and wants to cut public debt after the Great Recession – a period we are still in –  we were told by Keynesians that the ‘multiplier’ of austerity was huge (i.e. growth was being reduced drastically by more than one-to-one by cutting budget deficits or government spending).  Well, again in previous posts, I have shown that this ‘strong multiplier’ is seriously open to question.  Indeed, there is little correlation between reducing or raising government deficits or spending and growth since 2009.  The best correlation with growth is with profits, not government spending.

Recently, Nora Traum of North Carolina State University presented a paper titled Clearing Up the Fiscal Multiplier Morass.  She found that “different assumptions create different multipliers”.  She asked nine modelers, using three different kinds of models, to predict the effect on growth of three different tax reform proposals. For one reform, predictions on growth varied from –4.2 percent to 16.4 percent in the short run, and from 1.7 percent to 7.5 percent in the long run.

Recent research has shown that the best news for capital is cutting government spending rather than raising taxes to apply austerity.  Reducing government spending gives more room for private capital than raising taxes like corporate taxes, which is much more damaging to capital and thus to growth.  If we are now to expect fiscal expansion not austerity from Trump (we shall see), then capital will like the tax cut but will not want government spending (except for those developers which get the contracts) especially if it directly interferes or replaces private investment.  Such was the point against Keynesian stimulus made by post-Keynesian Michal Kalecki himself.

Marxist economics explains why.  What really drives investment and in modern capitalist economies, where private capital investment dominates, is the profitability of projects.  Private investment has failed to deliver because the profitability is too low, but even so the public sector must not interfere.


That’s the difference between Trump’s plan and that of the Chinese government in its massive infrastructure and urbanisation investment since 2009.  China has spent about $11 trillion on infrastructure in the last decade — more than 10 times what Trump is proposing.  This public investment, bankrolled by state banks and carried out by state companies, has weakened the private sector’s growth in China.  But as the Chinese state controls the economy, not domestic or foreign big business (much to the chagrin of the World Bank), such investment can go ahead and deliver 6-7% annual real growth during this Long Depression.


So the likelihood that Trumponomics will work and take economic growth up to 4% a year, as Trump claims, is very low.  It is ironic that when Bernie Sanders’ advisers suggested that a program similar to Trump’s be adopted and would achieve 4% or more real GDP growth, mainstream economists (romer-and-romer-evaluation-of-friedman1), jumped all over them, saying it was a pipe dream – correctly, in my view.  But now Trump advocates it, financial markets and Keynesians find it attractive and even possible.

Like Abenomics, Trumponomics is really a combination of Keynesianism and neoliberalism. The new spending and tax cuts are to be paid for, apparently, by more deregulation of markets and labour conditions to boost profits.   This is supposed to boost the growth rate in a ‘dynamic model’, or what used to be called ‘trickle-down economics’, where the rich get tax cuts and spend it on the goods and services so that the rest of us get some more income and jobs.  The main incentive according to Trump’s own economic expert is not from reductions in the personal or corporate tax rate, but from allowing businesses to write off their investments immediately instead of over time.

What Skidelsky ignores in his paeon of praise for Trump’s policies is the hallmark of Trumponomics: trade protectionism and restrictions on immigration.  These policies are much more likely to be imposed than his Keynesian-style stimulus.  Trump plans to drop TTP (the regional trade deal with Japan and Asia) and TTIP (with Europe) and ‘renegotiate’ NAFTA, the regional trade pact with Mexico and Canada.  The aim is to ‘protect’ American jobs and end cheap Mexican labour.

As the Donald said last March: “I’m going to get Apple to start making their computers and their iPhones on our land, not in China.”  And he wants to impose a 45% tariff on Chinese imports.  It’s been estimated this could drag down China’s GDP by 4.8% and Chinese exports to the US by 87% in three years, according to Daiwa Capital Markets.  Even if Apple finds enough workers to assemble in the US, the cost of making an Apple iPhone 7 could increase $30-40, estimates Jason Dedrick, a professor at the School of Information Studies at Syracuse University. Since labour accounts for only a small part of an electronic device’s overall costs, most of these higher expenses would come from shipping parts to the US.  If the iPhone components were also made in the US, the device’s costs could climb up to $90. That means that, if Apple chose to pass along all these costs to consumers, the device’s retail price could climb about 14%. So Trump’s trade policies would mean a sharp rise in prices of goods in the US for a start, even assuming there is no retaliation by China.


As John Smith has shown in his powerful book, Imperialism in the Twenty-First Century: Globalization, Super-Exploitation, and Capitalism’s Final Crisis :“about 80 percent of global trade (in terms of gross exports) is linked to the international production networks of TNCs.”  UNCTAD estimates that “about 60 percent of global trade . . . consists of trade in intermediate goods and services that are incorporated at various stages in the production process of goods and services for final consumption.”.  A striking feature of contemporary globalization is that a very large and growing proportion of the workforce in many global value chains is now located in developing economies. In a phrase, the centre of gravity of much of the world’s industrial production has shifted from the North to the South of the global economy.”, as Smith quotes Gary Gereffi.

Reversing this key feature of what has been called ‘globalisation’ can only be damaging to American corporations, while at the same time shifting the burden of any cost and prices rises onto average American households.

Globalisation – the cross-border expansion of world trade and capital flows and the development of value-added chains internationally – has been an important counteracting factor to the falling rate of profit experienced after the mid-1960s up to the early 1980s in the major advanced economies.  Deregulating labour rights, crushing trade union power, privatising public sector assets domestically went with global expansion by multinationals.  Trump now talks about reversing this counteracting factor to benefit his supposed electoral support in the ‘rust-belt’ of mid-West America that has suffered the most from the movement of American multinationals to exploit cheaper labour in Mexico, Asia and Latin America.

The irony (and the worry for capital) is that the Great Recession and the ensuing Long Depression seems to be ending globalisation anyway.  Globalisation was already in trouble before Trump and Brexit.  The global financial crash, the Great Recession and ensuing Long Depression (similar to that of the 1930s) since 2009 had brought the expansion of world trade to a grinding halt.


On a standard measure of participation in global value chains produced by the IMF, the rise in profitability for the major multi-nationals is now stalling.


Sure, information flows (internet traffic and telephone calls, mainly) have exploded, but trade and capital flows are still below their pre-recession peaks.  Global foreign direct investment as share of GDP is now falling.


And capital flows to the so-called emerging economies have plummeted.


The G20 leaders met recently before the Trump victory and they could already see the writing on the wall for globalisation.  They said they were opposed to trade protectionism “in all its forms”.  As Deutsche Bank economists put it:  “It feels like we’re coming towards the end of an economic era… and time is running out to prevent economic and political regime change given the existing stresses in the system.”

The strategists of capital are worried that Trumponomics will only makes things worse for profitability globally.  Bin Smaghi, ex member of the ECB and leading strategist of finance capital, commented: “Trying to reverse globalisation can be damaging, particularly for the country that takes the first step. It is the advanced economies that are facing the greatest challenges in its most recent wave, which is why anti-globalisation movements are gaining support and governments are tempted to become inward looking. However, because their economies are so large, and so bound by the web of globalisation, they cannot reverse its course, unless emerging markets also retreat.”

And the risk is that the emerging economies could be driven into a slump as trade falls further and capital inflows dry up. Emerging economies have been building up large amounts of debt (credit) raised from US and European banks to invest, not always in productive sectors.  This has not caused any problem up to now because interest rates globally have been very low and the US dollar has been weak so that borrowing in dollars has not been a problem.

But this is beginning to change, partly due to Trumponomics.  Moody’s Investors Service has issued 35 credit downgrades this year in countries including Austria, Turkey, and Saudi Arabia, while only issuing five upgrades. And 35 of the 134 countries assessed by the ratings firm currently have a negative outlook hanging over them.  That puts at least $7 trillion of government debt at risk of a downgrade, according to data from the Bank of International Settlements for the end of last year.  This proportion of countries with a negative outlook from Moody’s is the largest it has been since 2012, and it couldn’t come at a worse time. Interest rates on bonds, especially ones with longer maturities, are now rising sharply. If this is the end of a 35-year bull run in the bond market, governments, after years of low interest rates, might have to prepare for significantly higher borrowing costs.

At the same time, the US dollar has spiralled upwards in strength compared to other major trading currencies.


Global debt relative to productive investment has been sharply increasing.


And emerging economies’ corporate sector debt to capital ratio has also risen sharply.


Low and slowing economic growth globally along with a rising cost of borrowing and stagnant trade, now threatened by Trumponomics, will increase the risk of a global slump, not avoid it.

Transformation and realisation – no problem

November 14, 2016

The annual London Historical Materialism conference is not just or even mostly about Marxist economics.  As its name suggests, the sessions are about Marxist analyses of all social phenomena.  But obviously for me, the issues in Marxist economics are what matters.  And there are two issues or themes (for me) that arose at this year’s conference.

They are not new and have been debated and discussed for over a hundred years.  But old issues die hard (as do older Marxists).  The first is the so-called transformation problem, namely, can Marx’s theory of labour value explain or be consistent with actual market prices in a capitalist economy?  The second is whether crises, slumps in production in the capitalist mode of production, can be explained or are caused by a problem in the production for profit (as per Marx’s law of profitability) or whether crises emerge because capital cannot ‘realise’ its production of surplus value in the market place through sales.  In other words, are capitalist crises due to insufficient surplus value or  too much surplus value that cannot be ‘realised’ in the market, i.e. ‘disproportion’ or ‘overproduction’?

This year’s HM continued yet again the debate on these issues.  On the first issue, Fred Moseley presented his new book, Money and Totality, which I have reviewed before on this blog.

In his book, Fred aims to put to bed the ‘transformation problem’.  And he succeeds.  He shows that Marx solved Ricardo’s problem: namely that market prices of individual commodities do not reflect their value measured in labour time.  The discrepancy is solved through the competition between individual capitals that leads to an equalisation of profit rates and an average rate of profit for the whole system.  Market prices fluctuate around prices of production measured in money, based on the cost of capital invested in money terms and the average rate of profit.  So capitalists start with money and invest in labour and means of production measured in market prices (which revolve around prices of production).  In the circuit of capital and the accumulation process, it is prices of production that rule, not individual labour values for commodities.  So no ‘transformation’ of values into prices is necessary.  Prices are given in money.

Moseley’s book refutes the critique of mainstream economics and what are called the ‘neo-Ricardians’ like Piero Sraffa who either say that the labour theory of value is irrelevant to market prices or that Marx’s solution needs correcting for logical inconsistency.  Moseley is not the first to do this, but his book provides a clear and comprehensive defence of Marx’s value theory.  The debate at the HM session was partly around some ‘Marxist’ solutions that Moseley rejects and about whether Marx’s prices of production can be considered ‘long-term equilibrium’ prices or not.  I won’t go into those controversies here, because I want to discuss that other non-problem, realisation.

I presented the basic ideas of my book, The Long Depression, in one HM session.  One of the discussants, Jim Kincaid, then presented his critique of my work, the substance of which was outlined in a previous post.  But Jim’s underlying criticism, and that was repeated by several senior Marxist economists from the floor, is that Marx’s law of the tendency of the rate of profit to fall cannot be considered the sole underlying cause of crises under capitalism, and in the case of the Great Recession was not the cause at all.  In particular, it is charged that I ignore the ‘problem of realisation’ of surplus value in the market and see the cause of crises only in the drive for profit in production – and yet there are two sides to the circuit of capital: production and realisation.

Jim Kincaid made this part of his critique and, in his new and excellent book, Francois Chesnais, the eminent French Marxist economist, also chided me for failing to recognise in any meaningful way the ‘realisation’ problem. I quote Chesnais from his book: “macroeconomic conditions shaping the capital-labour relations of power prevent the whole of the surplus value produced globally from being realised. Capital is faced by a roadblock at C′ of the complete accumulation process  (M-C . . . P . . . C′-M′)” …The fact that a ‘realisation problem’ exists alongside the insufficient rate of profit is now recognised somewhat reluctantly by Michael Roberts”.   

Actually, I am not sure that I do recognise, even reluctantly, that there is a realisation problem as posed by Chesnais and others.  Let me explain. I also participated in a session at HM on a critique of Keynesian policies like quantitative easing and fiscal stimulus to overcome the Long Depression.  There was an excellent paper on the failure of QE by Maria Ivanova and Tony Norfield presented a lucid account of the continued build-up of global debt that threatens a new financial crash that Keynesians ignore or dismiss.

In my paper (the-crisis-and-keynesian-policies) dealing comparing the efficacy of Keynesian fiscal stimulus solutions to a slump with the Marxist explanation (the Keynesian multiplier versus the Marxist one), I likened the Keynesian explanation of crises as due to “a lack of effective demand” as really like a weather man telling us that it is raining because there is water coming down from the sky.  The ‘lack of demand’ explanation is no explanation at all but merely a description of slump (falling investment and consumption).  For this analogy, I was picked up Pete Green for, again, not recognising the ‘realisation problem’ – namely the cause of crises is not (just) to be found in the capitalist mode of production but also in the distribution of surplus value and thus in an inability to ‘realise’ all the surplus value produced.

So it seems many wish to continue to reject Marx’s law of profitability as the main or ultimate cause of crises and seek alternative or eclectic explanations.  Chesnais reckons crises have multi-causes, following the views of David Harvey (see my debate with Harvey on this here).  “Marx discusses a range of issues, not simply the LTRPF but also the over-accumulation of capital and the accompanying overproduction of commodities, as well as raising the hypothesis of the ‘absolute over-production of capital’ which is hardly ever mentioned in today’s debates. So I agree with Harvey that there is no single causal theory of crisis formation”, p23 Finance Capital Today.

Pete Green apparently (at least according to the title of his HM paper) looks to ‘long forgotten’ theories of disproportionality between accumulation and consumption (due to the anarchy of capitalist production); between the expansion of capitalist production and the ‘limits of the market’ for a crisis theory.  This is an idea that comes originally from the 19th century Russian economist, Tugan Baranovsky (who actually argued that there was no ‘realisation problem’) and Marxist Rosa Luxemburg (who did think there was one). Jim Kincaid looks to the idea of too much surplus being created to be absorbed and a lack of ‘profitable investment opportunities’ (akin to the position of Sweezy and Baran).  Chesnais wants to combine Marx’s law with the idea of a crisis of ‘overproduction’, suggesting that falling profitability and overproduction are not connected but are separate (and combined?) causes of crises. “the financial events of 2007–8 were typically an integral part of a crisis ‘in the sphere of money and credit’, the underlying causes of which are overproduction and over-accumulation at a world level along with (my emphases) an effective play of the tendency of the rate of profit to fall.”

None of these alternative explanations or eclectic melanges is new and in my opinion has been dealt with effectively by a succession of Marxist economists.  G Carchedi looked at all these alternative explanations in his seminal work of 1990s (now apparently ‘long forgotten’), Frontiers of Political Economy. Carchedi comments: “The disproportionality thesis submits that the root of crises lies in the difference between the technologically determined demand for specific use values as inputs of some branches and the technologically determined supply of the same use values as outputs of other branches. Marx’s answer is that those “ price fluctuations, which prevent large portions of the total capital from replacing themselves in their average proportions … must always call forth general stoppages”, due to “ the general interrelations of the entire reproduction process as developed in particular by credit” . However, these are only “ of a transient nature”.  (Marx, 1967c, pp. 483-4).  Thus disproportions can either be determined by price fluctuations, and in this case they are self-correcting and cannot explain crises, or by lack of purchasing power, and in this case it is the latter, rather than disproportions, which explain crises. The disproportionality and underconsumption theories cannot account for the inevitability of crises; but, as we have seen, these theories do account for the inevitability of temporary and self-correcting disturbances. Only the approach linking insufficient production of (surplus) value with technological innovations can provide such an explanation.”

It is no accident that ‘underconsumption’ as such has not been revived as an alternative theory to Marx’s law of profitability.  That’s because the idea that crises are caused by the inability of workers to pay for the goods they have produced has been so thoroughly discredited both theoretically and empirically.  But the theory of ‘overproduction’ beyond ‘the limits of the market’ is really just the other side of the coin of underconsumption.  Overproduction is when capitalists produce too much compared to the demand for things or services.  Suddenly capitalists build up stocks of things they cannot sell, they have factories with too much capacity compared to demand and they have too many workers than they need.  So they close down plant, slash the workforce and even just liquidate the whole business.  That is a capitalist crisis.

Overproduction is the very expression of a capitalist crisis.  Before capitalism, crises were ones of underproduction (namely famine or scarcity).  But to say overproduction is the form that a capitalist crisis takes is not to say it is the cause of the crisis.  To say that crises are like a thunderstorm does not explain why we are wet.  If it were the cause, then capitalism would be in permanent slump because workers can never buy back all the goods they produce.   After all, the difference between what the workers get in wages and the price of the goods or services they produce that are sold by the capitalists are the profits.  By definition, that value is not available to workers to spend, but is in the hands of the capitalist owners.

Marx devastatingly criticised those capitalist economists who claimed that there could never be a crisis of overproduction because every sale that a capitalist makes means that there will be purchaser.  As Marx said, that there is purchaser for every seller is a tautology, the very definition of exchange. Sure, “no one can sell unless someone else purchases.  But no one is forthwith bound to purchase just because he has sold”. The money from a sale can be hoarded (saved) and not used to buy.  That alone raises the possibility of overproduction and crisis.

But the possibility of crisis in the process of capitalist exchange using money does not mean it will happen and provides no explanation of when or how.  So Marx went further and explained that what will decide whether capitalists make purchases for investing in plant or new technology and to buy labour power to produce is the profitability of doing so.  “The rate of profit is the motive power of capitalist production.  Things are produced only so long as they can be produced with a profit”.

And this is where Marx’s law of the tendency of the rate of profit to fall comes in. Marx shows that the profitability of capitalist production does not stay stable, but is subject to an inexorable downward pressure (or tendency).  That eventually leads to capitalists overinvesting (overaccumulating) relative to the profits they get out of the workers.  At a certain point, overaccumulation relative to profit (ie a falling rate of profit) leads to the total or mass of profit no longer rising.  Then capitalists stop investing and producing and we have overproduction, or a capitalist crisis.  So the falling rate of profit (and falling profits) causes overproduction, not vice versa.

As Henryk Grossman explained so well, a falling rate of profit does not directly lead to a crisis as long as the mass of profit can rise.  When a falling rate of profit eventually leads to a fall in the mass of profit and thus overaccumulation of investment and overproduction of goods and services (that are profitable), then the crisis ensues.

As Marx put it: “the so-called plethora (overaccumulation) of capital always applies to a plethora of capital for which the fall in the rate of profit is not compensated by the mass of profit… and “overproduction of commodities is simply overaccumulation of capital”.  It is precisely when the mass of profit stopped rising that the Great Recession ensued.

Thus the so-called realisation problem is the result of the production problem.  Falling profitability and falling mass of profits lead to collapsing investment, wages and employment and then swathes of companies cannot sell their goods or services at existing prices and workers cannot buy them.  This is a crisis of overproduction and underconsumption.

Indeed, only Marx’s law of profitability can explain the cycle of boom and slump, while overproduction or disproportion cannot do so.  See Paul Mattick Jnr’s excellent account of Marx’s law and the business cycle pp48-51 in the best short account of the Great Recession so far, Business as usual.

And there is a political implication from the discussion of alternative theories of capitalist crises.  For example, if we think capitalist crisis is caused by overproduction (or underconsumption) relative to the ability of workers to buy the goods produced, as Keynesians do, then the policy answer may be just to boost spending by government or make tax cuts (as Donald Trump plans now, it seems).  Problem solved.  Only, as our session at HM showed – the ‘problem of realisation’ is not solved by these measures, as Trump and the American people will find out precisely because it is not a problem of realisation but of profitability.

On the other hand, if we think it is caused by lack of profit, then there is only one solution for capitalism: destroying the value of existing capital (plant, machines and employees) in order to cut costs and so restore profitability.  Only that will get capitalism going again (for a while), but at the expense of the rest of us.  Thus the inherent contradiction of capitalism is exposed.  Only its abolition will stop the cycle of boom and slump.  The problem of production for profit is a real problem that cannot be resolved.

In my view, ‘too much surplus’, ‘disproportion’, ‘overproduction’ or ‘underconsumption’ are not Marx’s theory of crises.  But more important, they are very weak alternatives to Marx’s law of profitability as an explanation.  They are weak theoretically and even worse, empirically unverifiable.  What are we measuring when we look at ‘disproportionality’ or ‘underconsumption’?  Does consumption fall before a slump?  No, the evidence is clearly to the contrary, unlike profits and investment.  Will disproportionate investment growth compared to consumption lead to overproduction and periodic crises?  Well no, as Andrew Kliman has shown for the US in his book, The failure of capitalist production, chapter 8.  Historically, business investment always grows faster than workers’ consumption – that is the result of capitalist accumulation.  But this does not create a chronic slump or permanent stagnation because investment creates its own demand (capitalist demand).  Indeed, investment drives the productivity of labour and thus drives economic growth.  The problem is when investment collapses, not when it grows ‘too fast’.

Everybody in Marxist economic circles seems to agree that the crises of the 1970s and early 1980s were the result of falling profitability rather than overproduction or underconsumption.  But you see, the argument now goes, each crisis can have a different cause because capitalism metamorphoses into new forms or structures (neoliberalism or financialisation) that change the causal contradictions.  So we are now being told that, because profitability rose after 2001 up to the Great Recession, Marx’s law does not apply and we need to consider that the GR was the result of either financial instability, excessive credit, rising inequality and falling wage share, or weak demand and secular stagnation.

Well, none of these alternatives seems convincing to me.  As Alan Freeman recently said in his paper in the book on the crisis, The Great Financial Meltdown: Marx’s law remains “the only credible competitor left in the contest to explain what is going wrong with capitalism”.


Francois Chesnais has kindly sent me a rejoinder to my comments on his view of the current Long Depression and its causes:

“One is faced with a situation where has been a continuous drive by capital to raise the rate of exploitation in the course of the crisis yet the conditions of profitability and new investment have not been restored.

In the explanation offered the starting notion is that of “fresh fields of accumulation” (Luxemburg) as necessary to end a long recession, a further one the function of crisis in capitalism and the key central one that of “dearth of actual surplus value”.

One must start by looking at were the “fresh fields” that ended the two previous world long recessions or depressions. In the case of the 1880s it was a combination of an extension of the world market, a reach out to the many regions not properly include or not included at all, and of the opening for profitable investment over a long time span of the major industries of the “Second industrial revolution”. In the case of the 1930s it was as you said very clearly in one of your talks it was the Second war world.

Then one must look at whether a crisis is allowed to play its function of destroying existing productive and fictitious capital, of clearing the deck for new investment. This was the case in 1929 and the 1930s.

So what is the picture today? We have a situation which combines the fact that the crisis was not allowed to play its function of destroying existing productive and fictitious capital, of clearing the deck for new investment on any significant scale and that since a World war is not in preparation the only candidate as a “fresh field” would have to be new technologies associated with the emergence of whole new industrial sectors with strong new employment creation effects. The ones there are do not have this quality, on the contrary.

A low level of investment means a low creation of surplus value.  “Virtuous cumulative accumulation process” are one where profit expectation drives investment of a strong enough employment effect as to generate both surplus creation and demand permitting the completion of the accumulation cycle M-C-P-C’-M’.

Today not enough surplus value is being produced to re-launch the accumulation process and the amount that is serves to consolidate the accumulation of dividend and interest bearing assets by banks, funds and individuals (financial accumulation) and so the claims on this already very insufficient amount of surplus value. This has led both to the dead-end of the quasi-zero long term interest rate regime, which not simply the outcome of quantitative-easing and to the endless small shocks in the global financial system.

Of course government debt and the resulting pro-rentier, pro-cyclical austerity policies only aggravate this situation but they do not explain it and their reversal would not solve capitalism’s basic problem.”


Debating the rate of profit

November 10, 2016

At the 13th annual HM Conference in London hm-13-16, I am participating in a session where I shall present the key ideas in my new book, The Long Depression. You can get a gist of those themes from a previous post.  Also participating are Jim Kincaid, Al Campbell and Erdogan Bakir who will offer some short comments on my book and its conclusions.

For some time, Jim has wanted to present a critique of my empirical work on Marx’s law of the tendency of the rate of profit and my thesis that Marx’s law can be seen as the underlying cause of crises in modern capitalism and, in particular, of the Great Recession of 2008-9.  “I have been able to assess more closely a dimension of Michael’s work which I believe is open to question.  A central theme in much of his analysis is that it is a declining rate of profit which is the underlying cause of the sequence of crisis which has afflicted the major industrial economies since the late 1990s.”

Al Campbell will deliver his comments at the session, but before the session, Jim has posted on his own (very interesting) blog, an opening critique of my empirical work along with an alternative approach to the current crisis.

His alternative explanation runs along these lines (as in his post): That the mass of profit has been relatively high in the last 10 years gives some support to the broader argument I have been developing that in this period the system has been contending, not with falling rates of realised profit, but rather with an excess of profit relative to the levels of investment which have been lagging.”

And thus Jim argues against my view that: “the crucial underlying cause of the crises of the post-2000 period is that the rate of profit peaked in 1997 and has not recovered since.  Behind this is a logically questionable assumption, that if crises are recurrent (even though different in form) there must be a single and common cause.”

Jim goes on: “as Michael’s own empirical work makes evident, there has not been, over the past 20 years, a simple linear fall in the US rate of profit.  Rather what we see are cyclical patterns of oscillation.  Falling rate of profit tendencies are battling it out against counter-tendencies, with complex results which have to be explained dialectically and not by looking for a single unilinear cause.”

You can read Jim’s full critique, which is just an opening shot, on his blog.  But the essence of my reply follows below.  I apologise for the length of this post in advance, but both Jim and I thought it would be useful to post our opening thoughts before the HM session so others could consider the arguments.

Jim is very kind in praising much of my efforts on my blog and in the book to develop Marxist economic theory with empirical evidence. But I’ll concentrate on dealing with Jim’s critique of my work on the post-war profitability of capital in the US, its relation to Marx’s law of the tendency of the rate of profit to fall and the causes of crises under capitalism, particularly the cause of the Great Recession of 2008-9.

Jim first says that “I do not think that Roberts’ data about US profit rates actually support some of the conclusions he draws about trends over the past 20 years”. He hints that, when I say there has been a secular decline in the US rate of profit in the post-war period, I might be misleading readers into thinking that this has been “a continuous fall”, when instead there have been “two periods of recovery” with the rise after 2000 being “the most significant”.  Well, I have to plead not guilty here. Nowhere, I have stated or implied in any of my papers or work that there was a ‘continuous fall’ in the US ROP.  On the contrary, I have made much of the recovery in profitability since the early 1980s as revealing the impact of the counteracting factors that Marx outlined in his law of profitability.  So this is a straw man on Jim’s part to knock down.

There has been a secular fall and, as Jim says, “this is clearly correct”. But as Jim says, “Michael Roberts’ own empirical work makes evident, there has not been, over the past 20 years, a simple linear fall in the US rate of profit.  Rather what we see are cyclical patterns of oscillation.  Falling rate of profit tendencies are battling it out against counter-tendencies”.

Another red herring, in my view, is Jim’s claim that I reckon changes in the organic composition of capital cause changes in the short-term business cycle.  As Jim says, “Marx himself saw the organic composition of capital as changing over longer periods of time, not as the cause of short-run movements in the business cycle.”  I agree.  And I don’t think that I have argued that it explains ‘short-term’ movements.  But it is essential to explaining why the rate of profit will fall over time, namely because of a rise in the organic composition of capital, unless counteracting factors (like a faster rise in the rate of surplus value) dominate.  Indeed, this explains the movement in the US rate of profit in the post-war period.


The organic composition of capital rises secularly but with a fall from the mid-1960s to the end of the 1970s.  It rises in the neo-liberal period from the early 1980s, but the rate of exploitation rises faster.  In the 2000s, the rise in the organic composition accelerates to match the rise in the rate of surplus value and so the rate of profit stops rising.

More specifically, Jim reckons that I cannot draw the conclusions from my own data that: 1) that the US rate of profit peaked in 1997 and has been static or falling since then: 2) the US rate of profit started to fall again from 2010 or 2012 (depending on the measure used): and 3) the fall in the rate of profit has now given way to a fall in the mass of profits.  Instead Jim reckons that my data show no such fall after 1997 and indeed the rate was higher in 2007 and “profitability fell in 2008 and after as a result of the financial crisis rather than as its cause”.

Well, two things here.  Jim uses the Kliman measure of the rate of profit in his Figure 2.  That does show a rise in the rate of profit from a low in 2001 to a high in 2006 that is higher than in 1997.  But there is a clear fall from 2006, a good two years before the Great Recession began in 2008.  So, even on these data, the rate of profit did not fall “after” the financial crisis but before.

Annual figures for the rate of profit are not very helpful on the timing here.  In my original work that Jim is quoting from, I also used the quarterly figures provided by the US Federal Reserve Bank.  The Fed data can give us the non-financial corporate sector rate of profit by the quarter.  According to that data, the US NFC rate of profit started falling in Q3-2006.  Indeed, by the time of the credit crunch in mid-2007 (before the start of the Great Recession, the NFC ROP had fallen 20%). Interestingly, the Fed data also show that the NFC rate of profit at that time was well below the peak reached in 1997 (10% lower).  It is currently more than 10% below 2006.


Jim says my data show a fall in the US ROP only in 2015, so my claim of a fall earlier is incorrect.  Well, as Jim says, on the annual measures, the peak in ROP since the end of the Great Recession was in 2014, not 2012, although the difference here is tiny.  And in 2015, the ROP fell.  But if we look at the Fed’s quarterly data, we find that the peak was as early as Q3 2010 and is now some 20% below that peak.

Now Jim says that I argue that a fall in the rate of profit is “normally followed by a rise in the mass of profit which is only a temporary phase”.  He then measures the mass of profit against gross domestic income (his Figure 3) which shows that the mass of profit has risen ‘permanently’ up to 2015.  Well, I don’t think Jim has properly presented what I do say.  What I argue, a la Marx, is that a fall in the rate of profit will eventually affect the mass of profit and lead to its fall – and this is usually a key indicator of a subsequent fall in business investment and a slump in capitalist production. Indeed, this is the cyclical process of a recession.

We can see the process leading up to the Great Recession in this graph of US business profits, investment and GDP.


The point that I am making is that the mass of profit will only start falling after the rate of profit has begun to decline.  If the US rate of profit started falling, say in 2012, or at least stopped rising, then we can expect the mass of profit to do so later.  Indeed, as Jim shows with his profit margin figure (profits as share of GDI), that happened in 2015. This suggests that a fall in US business investment will follow and eventually bring a new slump in GDP.  Indeed, US business investment has been falling for five quarters.

We can get quarterly figures for profit margins in the non-financial corporate sector (profits as a share of real gross value added) from the BEA NIPA.  This is what they show in the figure below.


Again, the mass of profit in non-financial corporations began to fall well before the credit crunch of 2007 and the Great Recession of 2008-9.  Then it recovered hugely before peaking in fall 2014 (earlier than 2015 on the annual data provided by Jim).  Profit margins are now back to 2006 levels.

Now, as Jim makes clear, the purpose of his critique of my data and conclusions on the US rate of profit is to “support to the broader argument I have been developing that in this period the system has been contending, not with falling rates of realised profit, but rather with an excess of profit relative to the levels of investment which have been lagging”.

As Jim says, he has been developing this view of the cause of the Great Recession for a while.  I think he presented it back in 2014 at HM.  In an abstract then, Jim said that “(1) empirically, the thesis of falling rates of profit in the major economies is based on an uncritical use of not always reliable government data; (2) Harvey and other sceptics are correct to stress that central to the present crisis is the inability of the global system to absorb large quantities of surplus money capital derived from high rates of surplus-value extraction (profits included)”.

Jim argues that it was not, as I argue, a falling rate of profit, or too little profit that caused the Great Recession and subsequent weak recovery, but too much.  Capitalist firms have built up huge cash reserves from profits that they are not investing productively.  So the problem is one of how to ‘absorb’ these surpluses, not how to get enough profit.  This also shows, according to Jim, that the causal sequence for crises, is not, as I argue (as above), falling profits leading to falling investment to falling income and employment because we have rising profits and falling investment.

Jim says, that “The operation of these forces has generated a global surplus of capital in the money form which is too large to be recycled back into productive investment.  Thus what we have is, not a crisis of Keynesian lack of consumer demand, nor a Monthly Review crisis of monopoly profits.  But, instead, a crisis of a particular sort of disproportionality – between available accumulations of money capital and the capacity of the system to absorb them.

Well, I have to say, despite Jim’s denials, his thesis sounds pretty close to that of Paul Sweezy and Paul Baran of the Monthly Review ‘school’ that monopoly capitalism has sunk into stagnation because it cannot dispense with ever-increasing surpluses of profit.

But let us consider this argument.  The idea of a global savings glut has become popular among mainstream economics, both monetarist like Ben Bernanke, the former US Fed chief and Keynesian like Martin Wolf, the FT journalist.  Both Wolf and Jim (on his blog) have presented evidence of this corporate savings gap.


This gap, technically called ‘net lending’ by corporations, Wolf describes as a global ‘savings glut’.  The notion of a “savings glut” was first mooted by former Federal Reserve chief, Ben Bernanke, back in 2005.  He argued that economies like China, Japan and the oil producers had built up big surpluses on their trade accounts and these ‘excess savings’ flooded into the US to buy US government bonds, so keeping interest rates low.

Martin Wolf and other Keynesians have liked this notion because it suggests that what is wrong with the world economy is that there is too much saving going on, causing a ‘lack of demand’.  This is the proposition that Wolf recently pushed in his latest book.  In his book, Wolf concludes that the cause of the Great Recession “was a savings glut (or rather investment dearth); global imbalances; rising inequality and correspondingly weak growth of consumption; low real interest rates on safe assets; a search for yield; and fabrication of notionally safe, but relatively high-yielding, financial assets.”

But is the gap between corporate savings and investment caused by a ‘glut of savings’?  Well, look at the graph provided by Wolf, taken from the OECD.


With the exception of Japan, since 1998, corporate savings to GDP have been broadly flat.   And for Japan, the ratio has been flat since 2004.  So the gap between savings and investment cannot have been caused by rising savings.  The second graph shows what has happened.


We can see that there has been a fall in the investment to GDP ratio in the major economies, with the exception of Japan, where it has been broadly flat.  So the conclusion is clear: there has NOT been a global corporate savings (or profits) ‘glut’ but a dearth of investment.  There is not too much profit, but too little investment.

But what about the issue of cash mountains in major non-financial companies?    It is true that cash reserves in US companies have reached record levels, at just under $2trn – see graph below.  (All figures come from the US Federal Reserve’s flow of funds data.)  The rise in cash looks dramatic.  But also note that this cash story did not really start until the mid-1990s. In the glorious days of the 1950s and 1960s when profitability was much higher, there was no cash build-up.


But the graph is misleading.  It is just measuring  liquid assets (cash and those assets that can be quickly converted into cash).  Companies were also expanding all their financial assets (stocks, bonds, insurance etc).  When we compare the ratio of liquid assets to total financial assets, we see a different story.


US companies reduced their liquidity ratios in the Golden Age of the 1950s and 1960 to invest more.  That stopped in the neoliberal period but there was still no big rise in cash reserves compared to other financial holdings.  And that includes the apparent recent burst in cash.  The ratio of liquid assets to total financial assets is about the same as it was in the early 1980s.  That tells us that corporate profits may have been diverted from real investment into financial assets, but not particularly into cash.

Comparing corporate cash holdings to investment in the real economy, we find that there has been a rise in the ratio of cash to investment.  But that ratio is still below where it was at the beginning of the 1950s.


And remember within these aggregate averages lies the reality that just a few mega companies hold most of the cash while thousands of small and medium enterprises (SMEs) hold little cash and much more debt.  Indeed, a minority are really ‘zombie’ firms just raising enough profit to service their debt.

Why does that cash to investment ratio rise after the 1980s?  Well, it is not because of a fast rise in cash holdings but because the growth of investment in the real economy slowed in the neoliberal period.  The average growth in cash reserves from the 1980s to now has been 7.8% a year, which is actually slower than the growth rate of all financial assets at 8.6% a year.  But business investment has increased at only 5.3% a year in the same period, so the ratio of cash to investment has risen.


Interestingly, if we compare the growth rates since the start of the Great Recession in 2008, we find that corporate cash has risen at a much slower pace (because there ain’t so much cash around!) at 3.9% yoy.  That’s slightly faster than the rise in total financial assets at 3.3% yoy.  But investment has risen at just 1.5% a year.  So consequently, the ratio of investment to cash has slumped from an average of two-thirds since the 1980s to just 40% now.

So companies are not really ‘awash with cash’ any more than they were 30 years ago.  What has happened is that US corporations have used more and more of their profits to invest in financial assets rather than in productive investment.  Their cash ratios are pretty much unchanged, suggesting that there is not a ‘wall of money’ out there waiting to be invested in the real economy.

This brings me back to the point I left earlier when I showed that the profitability of non-financial corporations did fall after 1997 and remains well below.  What that tells me is that after 2000 the corporate profitability measure (Kliman) or the ‘whole economy’ measure (Roberts) express the rise in the profitability of the finance and other unproductive sectors of the US economy, while the productive sector ROP continued to fall.  In other words, much of the rise in profitability and profits after 2000 was fictitious.  Can I justify that conclusion?

Well, work by Peter Jones in Australia has done just that. Peter Jones argues that “fictitious profits can also hide the consequences of a falling rate of profit for a time. Government borrowing can ‘artificially’ inflate the after-tax rate of profit on production (and the same effect applies to after-tax rates of profit from secondary exploitation); and fictitious profits can ‘artificially’ inflate investors’ wealth and rates of return.”

Jones[i] adjusted the official US figures for profit for fictitious profits, namely those made by banks from lending to government (bond purchases) and from utilising the savings of workers (mortgages etc) to come up with a measure of profit that best represents surplus value created in production and realised by the productive corporate sector. When he puts this against net fixed assets, the result looks like this.


So the post-2000 divergence between corporate profits and capex disappears and can be explained by a rise in investment in financial assets or what Marx called ‘fictitious capital’.

Yes, large firms in the capitalist sector of the major economies have been hoarding more cash rather than investing over the last 20 years or so.  But they are not investing so much because profitability is perceived as being too low to justify investment in riskier hi-tech and R&D projects, and because there are better returns to be had in buying shares, taking dividends or even just holding cash.

Also many companies are still burdened by high debt even if the cost of servicing it remains low.  The high leveraging of debt by corporations before the crisis started now acts as a disincentive to invest.  Corporations have used their cash to pay down debt, buy back their shares and boost share prices, or increase dividends and continue to pay large bonuses (in the financial sector) rather than invest in productive equipment, structures or innovations.

I conclude that the cash reserves of major companies is not an indication that the cause of crises is due to inability to absorb ‘surplus profit’ but due to an unwillingness to invest when profitability remains low and corporate debt is relatively high.  That is the cause of this Long Depression.

And here is the rub.  Just at this time when Jim raises the issue of huge cash reserves and suggests that the cause of crises is due the difficulty of ‘absorbing’ profits, US corporate earnings are falling and profit growth has ground to a halt.  Cash reserves are set to fall from here too.

US corporate profits(adjusted for depreciation) % yoy


This brings me to Jim’s final point.  Jim questions my “constant theme – that the crucial underlying cause of the crises of the post-2000 period is that the rate of profit peaked in 1997 and has not recovered since.”  He says it is “logically questionable” assumption, that if crises are recurrent (even though different in form) there must be a single and common cause. Jim says, the empirical evidence for Marx’s law has “complex results which have to be explained dialectically and not by looking for a single unilinear cause”.

Well, I don’t think it is ‘logically questionable’ to argue that recurrent and regular crises may have a common underlying cause.  On the contrary, the regular and re-occurring crises make it logically questionable to look for different causes for each crisis, as many have done, from David Harvey, Panitch and Gindin, Dumenil and Levy etc.

Jim says that the contradictions within capitalism can “change the current configuration of the system. The tendency of profit rates to fall is not in itself a contradiction.”  Well, I thought it was “the most important law in political economy” (Marx) precisely because it showed the main contradiction in the capitalist mode of production ie. between developing the productive forces (raising the productivity of labour) and the profitability of capital; between the drive to raise profits for individual capitals and the unintended consequence of falling profitability in the whole system.

The real question is whether the claim that the Marx’s law of profitability as the underlying cause of crises under capitalism can be empirically validated.  That is what my work and the work of many others attempts to do.  And I think we are achieving that.

[i] Peter Jones, The falling rate of profit explains falling growth, paper for the 12th Australian Society of Heterodox Economists Conference, November 2013

Donald Trump and the poisoned chalice of the US economy

November 9, 2016

The ironic thing about the (narrow) victory of Donald Trump in the US presidential election is that their ‘safe’ candidate has lost it for the Democrats, Wall Street and the strategists of capital.  Now they are lumbered with a loose cannon that they must try to rope in.

Trump has won because a (just) sufficient number of people are fed up with the status quo.  Apparently 60% of voters asked at the polling booths reckon that the country “is on the wrong track” and two-thirds were fed up and angry with the Washington government – something Clinton personifies.

Like the vote of the Brits for Brexit, against all expectations, a sufficient number of voters in America (mainly white, older and in small businesses or working in failing industries in smaller central US states) have overcome the vote of the youth, the more educated and better-off in the big cities.  But remember hardly more than 50% or so of eligible voters turned out to vote.  A huge swathe of people never vote in American elections and they constitute a sizeable part of the working class.

Most significant, the most important issue (52%) for voters, when asked at the booths, was the state of the US economy, with terrorism next (but well down at 18%) and immigration (the Trump card) even lower.  Trump won because he claimed he could improve the conditions of those ‘who have been left behind’ by globalisation, failing domestic industries and crushed small businesses.  Of course, Trump is a billionaire and has no real interest or idea about improving the lot of the majority.  But anger at the establishment was sufficient (just) for this egoistic, misogynist, sexual predator, rich man’s son to win.

But it is still the economy, stupid.  Trump has been handed a poisoned chalice that he will have to drink from: the state of the US economy.   The US economy is the largest and most important capitalist economy.  It has performed the best of the largest economies since the end of the Great Recession in 2009. But its economic performance has still been dismal. Real GDP growth per person has been only 1.4% a year, well below levels before the global financial crash in 2008. It’s a story of the weakest economic recovery after a slump since the 1930s.

The IMF now expects the US economy to expand at only 1.6% this year.  And the US Federal Reserve bank economists are now forecasting just 1.8% a year expansion for the foreseeable future.   And all this assumes no new economic recession.

The majority view of economists is that a US recession is unlikely and that the economy will pick up again next year.   Indeed, US Federal Reserve chair Janet Yellen (whose job is now in jeopardy), reckons that the US economy “is on a path of sustainable improvement.”  The argument goes that the cost of borrowing is near zero, the American consumer is still spending robustly, the housing market is picking up and retail sales are still motoring.

But what is important for the health of a modern capitalist economy is not the ease or cost of borrowing, it is the level and direction of the profitability of capital, total business profits and the impact on business investment.  When profitability falls, eventually total corporate profits fall and then some time later, business investment will contract.  When that happens, an economic recession soon follows. In the post-war period, a sustained fall in business investment has led the economy into slump on every occasion, while personal consumption stays more or less stable, the latter only falling once the slump is underway.

And US corporate profits are falling.  According to economists at investment bank JP Morgan, US corporate profits declined 7% over year-ago levels.  On that basis, they reckon, “the probability of a recession starting within three years at a startling 92%, and the probability within two years at 67%”.  Moreover, the Federal Reserve is planning to hike its policy interest rate right after the election, because it claims the economy is returning to ‘normal’, increasing the risk of triggering a slump – although a Trump victory will put that off as stock markets plunge.

What is Trump’s solution to all this?  His economic proposals boil down to cutting taxes, reducing government spending and taxing imports to ‘protect’ American jobs.  The main beneficiaries of his tax cuts would be the very rich.  Under Trump, most people would see their income tax bill reduced by about 7%, but savings for the top 1% would be 19% of their income.  To balance the federal budget, government spending would have to be cut by about 20%, hitting welfare, education and health.  Raising tariffs on foreign goods and imposing punitive sanctions on China and Mexico, America’s two largest trading partners, would drive up prices and provoke retaliation.

In one way, the next US president faces a worse situation than Obama did in 2009 at the depth of the global financial crash.  This time there is no way to avoid a slump by printing money or cutting interest rates; or by increasing government spending when public sector debt has already doubled to 100% of GDP.  Those economic policy tools have been used up.  The chalice will have to be sipped.

Will capitalism end or can it be reformed?

November 8, 2016

Two new books on capitalism have arrived this month.  The first is by Wolfgang Streeck and called, How will capitalism end?  Wolfgang Streeck is the Emeritus Director of the Max Planck Institute for Social Research in Cologne and Professor of Sociology at the University of Cologne. He is an Honorary Fellow of the Society for the Advancement of Socio-Economics and a member of the Berlin Brandenburg Academy of Sciences as well as the Academia European.  Streeck’s views carry some weight, indeed sufficiently to be reviewed by Martin Wolf in the Financial Times.

Streeck’s thesis, as the title implies, is that capitalism is a system that is going to end and its demise is not so far away. He opens by reprising another book that covered the views of five other social scientists, called Does capitalism have a future? That contains contributions by the likes of Immanuel Wallenstein, Randall Collins, Michael Mann, Georg Derluguian and Craig Calhoun.  As Streeck says, all these scholars agree that capitalism is heading for an ultimate crisis, although each has different reasons why.

Wallenstein reckons that capitalism is at the bottom of a Kondratiev cycle from which it cannot recover (for a multitude of reasons, mainly to do with the decline of the world order under US hegemony).  Craig Calhoun, on the other hand, reckons capitalism will give way to state-directed economies that might restore capitalism but in a new ‘non-market’ form.  Michael Mann reckons also that US hegemony is over and capitalism will become an unpredictable platform for struggle among various capitalist rivals, while working class struggle is splintered.  The only hope is that social-democratic forces of compromise will triumph.  Randall Collins offers the closest to a Marxist perspective, according to Streeck.  Capitalism will increasingly resort to dispensing with human labour and replacing it with robots and AI.  This will create severe class conflict and underconsumption, because most workers will not have enough income to buy the products of robotisation.  Although Collins’ analysis is not Marxist (in my opinion), he does conclude that the only hope is a socialist transformation.  Finally, Derluguian argues that the demise and collapse of the Soviet Union suggests that capitalism will not give way to socialism, but instead to a post-capitalist fragmentation.

After this account, where does Streeck stand?  He thinks that capitalism will die “from a thousand cuts” and will not be saved by Mann and Calhoun’s alternatives.  With no proletariat as a force for taking society forward under socialism, capitalism will collapse under “its own contradictions” to be followed, not by socialism, but by “a lasting interregnum”, a “prolonged period of entropy” where ‘collectivism’ does not emerge but instead there is a disparate ‘individualism’.

Streeck’s account of the current state of capitalism follows in the book and provides an excellent narrative, particularly his critique of Keynesian and reformist responses (although chapters are somewhat repetitive).  He sees a systemic disorder revealed by first, rising inequality (where the top 400 taxpayers in the US get over 10,000 times more income than the bottom 90% and the top 100 American households have 100 times more wealth!).  Then there is the rife corruption by the rich and powerful, as exhibited in the role of the banks.  And the growing power of finance capital, a totally unproductive and damaging sector of capitalism.

All this has been described by many, including by me in this blog.  But Streeck sees these forces as the ones that will end capitalism, rather than as part of reoccurring crises of slumps in capitalist production.  Capitalism is more unfair and corrupt than incapable of meeting people’s needs.   But because there is no positive force in society that can replace capital, capitalism “will go to hell but for the foreseeable future will hang in limbo, dead or about to die from an overdose of itself.”

For Streeck, it is a “Marxist prejudice that capitalism as an historical epoch will end only when a new or better society is in sight and a revolutionary subject ready to implement it for the advancement of mankind”.  In a way, Streeck predicts a new stage of barbarism after capitalism collapses, similar to what happened to the Roman Empire after its collapse in the 5th century.  Then a sophisticated slave-owning economy gave way to tribal states; cities gave way to small villages; landed estates gave way to small groups; technology was left idle and forgotten.

In my view, Marx did and would recognise that barbarism could supersede capitalism.  There is no guarantee that capitalism is followed by socialism. He would also argue that without a “revolutionary subject” (i.e. the working class) carrying through political action to end the capitalist mode of production, it can stagger on.  Streeck’s is right that capitalism has no long-term future, but is he right that there is nothing to replace it to take human society forward?

Streeck’s view is the cynicism of the academic divorced from the working class and seeped in the experience of the reactionary neo-liberal period (a very short time in human existence and capitalism).  In my view, the (Kondratiev and profit) cycles of capitalism will eventually create new forces for change – a new more confident working class as the agent for change.  But if not, … then.

Naturally, Martin Wolf’s critique of Streeck is different, coming as it does as a defender of capitalism.  Sure, says Wolf, Streeck is right that no stable equilibrium exists in any society. “Both the economy and the polity must adapt and change.”  But only a market economy can deliver “democracy”.  The danger now is not the end of capitalism but the end of democracy.  So Wolf says, that democratic governments must cooperate to ensure that they “manage the tensions between the democratic nation state and the market economy”“Is the task possible?, Wolf asks and answers “Absolutely, yes” – although he does not really say how.

This optimism and wishful thinking of ‘social-democratic’ solutions to capitalism’s ills remains dominant in leftist media.  It is again revealed in another new book by Dean Baker.  Baker is co-director of the American Center for Economic Policy Research in Washington and a regular broadcaster and writer on economics and economic policy, often speaking at labour movement meetings and writing for the likes of the Guardian newspaper in the UK.  Baker was one of those few economists cited as forecasting the global financial collapse, basing his view on the credit-fuelled housing bubble in America, creating financial instability a la Minsky.

His latest book is Rigged: how globalisation and the rules of the modern economy were structured to make the rich richer (the book is available in pdf here rigged).  The title has now become a familiar theme among leftist, (post?) Keynesian economists.  Namely, it is not capitalism or the market economy that is the problem, but the way the modern economy is structured, particularly since in the neo-liberal period after the 1980s, i.e. rigged to change ‘the rules of the game’ in favour of the rich and away from the majority.  This is the theme presented to us by Joseph Stiglitz, that other economist and hero of the left and the labour movement, in his latest book.

Baker shows how the distribution of income in our society has little to do with merit and how the postulates of neoclassical economics are selectively invoked to prevent any actions that do not benefit elites. Interventions that promote upward distribution of incomes are never criticized, while inequality and unemployment are left for the invisible hand to fix.

Baker points out that “neither God nor nature hands us a worked-out set of rules determining the way property relations are defined, contracts are enforced, or macroeconomic policy is implemented. These matters are determined by policy choices.”  In the modern economy, banks are bailed out in crises but people are not.  Trade deals are imposed that lead to the loss of jobs for the majority but more profit for corporations.  Full employment could be achieved but it is against the interest of the big corporations because it would mean rising wages and labour costs that squeeze profits.  So what Marx called “a reserve army of labour” is maintained as a matter of policy.

He identifies five areas in which the “upward distribution” induced by policies should be reversed: macroeconomics that focus on low inflation only; asymmetric treatment of privatized gains and socialized losses in the finance industry; heavy protection of patent rights at home and abroad; protection of high-skill occupations from foreign competition; and out-of-bounds CEO pay.

Baker says this policy ‘rigging’ of the economy shows that the ‘free market’ does not operate.  Here he seems to be implying that, if it did, then all would be well and fair.  Because the market is ‘rigged’, not because a market economy exists, we need government to intervene to correct inequalities, injustices and apply policies for the majority not for the few.

Baker fails to explain how the market got ‘rigged’.  Did this just happen? Why was the policy choice for the rich not the majority?  Was it not ever thus?  Baker is looking at the symptoms not the causes.

Marxists like me would say the policies that led to rising inequality and the growth of finance capital came about because the Golden Age of capitalism, with its decent pensions, public services and benefits and full employment, could no longer be afforded by market capitalism as profitability of capital plunged.  So the ‘rigging of the rules’ was necessary for the saving of the capitalist market system.

Extreme inequality of wealth and income has always been the norm for capitalism, not just a product of the ‘modern economy’.  It was the short Golden Age after 1945 that was special, not the neoliberal period since the 1970s.  If that is right, then Bakers’ demand that ‘progressive governments’ intervene to create a level playing field and end ‘upward distribution’’ is just wishful thinking.  The social democratic compromise of the 1960s is not going to return in the capitalism of the 21st century.  Streeck is closer to the truth than Baker.

Britain at the crossroads: the Class conference

November 5, 2016

Class, the left-wing British think-tank, funded by the trade unions, held its second major meeting to discuss the state of the British economy and society and the policies to deal with it.  The theme title was ‘Britain at the Crossroads’ and, naturally, the issue of Brexit dominated the sessions.

But the conference was kicked off with a keynote speech by the leftist leader of the opposition Labour Party, Jeremy Corbyn.  His speech covered a lot of ground: the lost decade for the majority of Brits since the global financial crash and Great Recession, which has seen real incomes fall for the majority, six million working at below a ‘living wage’, one million on ‘zero hours’ contracts and another million on temporary contracts with few rights, as well as millions of self-employed earning even less.  As Corbyn said, back in 2010, 40,000 people took food parcels, now it was one million.

Corbyn pointed out how the welfare state had been decimated, finance and industry had been ‘deregulated’ and state services had been privatised for profit, while education and health services had been hollowed out.  Research and development had been stunted. His aim was to reverse this and begin a programme of investment in industry, education, communications and housing.

But how was this to be done?  Through a National Investment Bank and a £500bn programme of investment; the raising of corporation tax and closing the tax gap of avoidance and evasion of tax by companies and rich individuals.  “Business must contribute”, Corbyn said.

Other main speakers welcomed this approach. Paul Mason, the now famous broadcaster and author of Post-Capitalism, told us that ‘free market capitalism’ had failed and neo-liberal globalisation had ground to a halt.  But there was no New Deal a la Roosevelt of the 1930s available this time.  Mason said we needed “to defend globalisation” and build a “new form of capitalism that can work for poor people”.  As for Brexit, it would be possible to get through a ‘Brexit-lite’ where free access to Europe’s markets and the free movement of people could be preserved, but it would require sensible appreciation of people’s genuine fears of immigration and “alliance of all progressive forces with Labour like the SNP and the Liberal Democrats” (and perhaps even the pro-EU Tory wing) to defeat the reactionary ‘hard Brexit’ Tory government.

Now I have discussed the economic analysis and policies of Class in a previous post. And for that matter, the policies advocated by Corbyn and McDonnell, the new leftist leadership of the Labour party.  They want to change things for the better for the majority.  But are their policies up to the task?  They are clearly sold on the ideas of the Keynesians: more public spending and investment funded by borrowing and ‘monetary financing’ by the central bank of government spending, along with higher taxes on the corporations.  I have dealt with this approach in previous posts. 

The problem is that the dominant capitalist sector in the British economy is to be left untouched and yet it is the failure of the capitalist sector that led to the Great Recession and the subsequent ‘lost decade’ of the Long Depression.  If all Labour is going to do is tax the corporations more (making business ‘contribute’) and fund the banks and industry by printing money, then this will only lower profitability further while encouraging another credit boom.  An investment strike by capitalism will not be compensated for by a government-led investment programme that just adds 1-2% of GDP in investment when the capitalist sector invests over 15% of GDP.  And the latter will not be touched.

Although John McDonnell has recently hinted at a more radical approach, just as it was in the last Class conference, in this conference, public ownership of the banks and the ‘commanding heights’ of the economy as a basis for investment and planning is still a ‘no, no’ among those at Class and their advisers.

This was again revealed at the session on banking reform.  All the speakers were excellent and clear in what they had to say.  Steve Keen, head of economics at Kingston University and renowned heterodox author of ‘Debunking Economics’ that demolishes the tenets of mainstream neo-classical economics, told us that the global financial crash was the product of excessive private debt and credit bubbles, not public debt.  Others like Sarah Jane Clifton of the Jubilee Debt campaign and Fran Boait of Positive Money said we should write off this debt that weighs down the economy so that households can spend and small businesses invest again.

Tony Greenham, ex banker and now director at the RSA told us that, since the end of the crash, banking regulation had still failed. The big banks were just ‘unregulatable’; and the culture of the banks had hardly changed with their ‘get rich’ quick actions, the misselling of assets, frauds and grotesque salaries and bonuses.  The big five UK banks continued to control the market and small and local banks had no role.  The banking system remained unfit for purpose to help the public.

Despite this clear analysis, the solutions proposed by the platform specifically excluded the obvious: the taking over of the big five banks by the state under democratic accountability to turn them into a public service for households and business and end their speculative adventures.  This was rejected in favour of the “BBC approach”, namely you have one public sector company that competes with the private sector (ITV, Sky) and forces them to toe the line (that’s working well in media!).  In banking, that would mean using the still majority public owned RBS and turning it into a series of regional banks, as in Germany.

The example of Germany was a little ironic given the current demise of Germany’s biggest bank, Deutsche, regarded by the IMF as having the most ‘systemic’ risk in the whole banking world.  Germany’s local banks would go down with Deutsche if it collapsed.

It seemed that the Class guest speakers had not read the short ‘think piece’ on the banks, published under the Class banner and on the conference stalls, written by Costas Lapavitsas, financial economics professor at SOAS, London.  In that paper, Lapavitsas is clear: “regulation alone will not be enough….The question of public ownership…must also be placed on the agenda.. re-establishing public ownership over key areas of the economy would … provide a broader basis for public investment and the systematic creation of employment”.  Lapavitsas went on: “if the public interest was fully represented and democratically expressed within finance, it could re-establish public service as a superior motive to private gain across the economy”.  This sentiment was by-passed by the Class guest speakers.

When asked what we could do about the big investment banks that dominated the City of London; and what we could do about reducing regular private sector debt bubbles globally, neither Tony nor Steve had an answer (Keen: “I don’t know”).  So, for a start, I refer you to the pamphlet by the FBU.

So there it is; Britain is at a crossroads.  The Conservative government is careering towards a ‘hard Brexit’ where British capital loses its European free market access and where 3m immigrants in Britain face an uncertain future and where even the City of London’s banks are thinking of moving out.  Sterling has plummeted and will drive inflation of prices in the shops well above any wage increases over the next year.  The British people are going to get poorer, even if there is no new global slump.

The left Labour leaders and their Class advisers can see this clearly and are dedicated to defend and improve the interests of the majority over the 1%.  But their policies, for me, still seem inadequate for the task ahead.