British Labour, Marxist McDonnell and deficit-denying

September 30, 2015

The election of a new leader of the UK’s opposition Labour party has provoked a flurry of interest in the international media and among economists.  That’s because the new leader, Jeremy Corbyn and his newly appointed finance spokesman, John McDonnell, have been considered as ‘avowed Marxists’.


That is certainly the case for McDonnell.  He is an ‘avowed Marxist’ because he says he is.  On the day of his big keynote economics speech at Labour’s annual conference this week, he said that “If you look at our capitalist system, one of the definitive analysts of how it works – not whether it is condemned, or whether it is right or wrong, just the mechanics of how it works, when it was formed and how it would be developed – actually was Marx.”  He went on “If you look at most of the institutions that are teaching economics today. Marx has come back in to fashion because people have gone back to his analysis of just the basics of how the system works. People might disagree with his conclusions about what to do with the system, but actually to understand how the system works he comes up with some interesting analyses that have been built in to traditional and fairly classical economics.” 

However, note that John McDonnell makes a distinction between Marx’s ‘interesting analysis’ of the capitalist system i.e. what is wrong with it, and “his conclusions about what to do”.  Thus Marxist policies for dealing with capitalism do not necessarily flow from his analysis, it seems.

What policies do?  Well, apparently, it is Keynesian prescriptions.  Thus McDonnell has announced a panel of economic advisers, including international luminaries like Joseph Stiglitz and Thomas Piketty, to help on policy.  This committee is drawn from the Keynesian mainstream and its heterodox wings, but not Marxist.

I’m sure that it looks like a very good political ploy to involve leading economists in Labour’s economic plans. No doubt it is hoped that it will disarm criticism from the financial media and big business when a Nobel prize winner and the economist of the moment are on the committee. But this reminds me more of the approach of Greece’s Syriza, which started out with a Marxist ‘analysis’ of Greek capitalism but which, according to Yanis Varoufakis and Costas Lapavitsas, should be put aside when it comes to policy because Keynesian economics is more relevant ‘in practice’.

You see the problem is a ‘lack of demand’, not a lack of profitability. So, in a slump, Keynesian prescriptions call for more government spending or a reversal of ‘austerity’ (in the current parlance), so that spending boosts employment and incomes and restores household consumption (and investment?) as the means to recovery.  That means running budget deficits through more government borrowing (issuance of more bonds).

Keynesians generally dismiss those (Austerians and neo-liberals) who worry that, as a result, spiralling government debt will lead to a new crisis as governments find they cannot service their debt except at unaffordable interest rates (Greece and the peripheral Eurozone economies, Puerto Rico etc).  You see, for Keynesians, one man’s debt is another’s asset.  So the only problem is if it is foreigners who own the debt.  If they demand repayment, they can cripple the currency.  This is the view of Paul Krugman in the US and Simon Wren-Lewis, the British Keynesian guru, now part of McDonnell’s advisory team.

But debt does matter.  One of the features of the global financial crash was the massive rise in private sector debt (household and corporate) before the credit crunch in 2007.  That debt rose as capitalist economies tried to keep profitability of capital and economic growth up through a low interest rate, credit-fuelled bubble in unproductive sectors of finance and property.  The private credit bit (not the profitability bit) is the Minskyite view of the crisis as expounded in particular by Steve Keen and Anastasia Nesvetailova (one of the McDonnell’s new advisers).

But as I have explained on many occasions in this blog, the credit boom of the 2000s was a response to declining profitability of capital in the productive sectors of the US, UK and other major economies from the end of the 1990s.  It staved off a major slump, only to create an even larger one in 2008-9.

That’s private sector debt.  But the same issue applies to public sector debt.  If the owners of this debt (banks, hedge funds, pension funds, insurance companies) decide that they want to get their money back or demand lots more in interest to renew loans or buy government bonds, they can cripple the ability of a government to pay for welfare benefits and public services, let alone investment in roads, hospitals and schools.

Debt does matter in a capitalist economy: capitalists owe to other capitalists; households owe to finance capitalists; and governments owe to finance capitalists.  The holders of this debt expect a return and prompt repayments.  Under a predominantly state-owned and planned economy, state companies, households and governments would owe to other state companies.  So the decisions on the cost of borrowing and repayment terms could be decided as part of a national plan and not by the ‘market’ and on the profitability of (finance) capital.

Ironically, having selected Keynesians and Minskyites for his ‘team’, John McDonnell has made it clear from the start that he is not a ‘deficit denier’.  By this, he means that he does accept that running government budget deficits cannot be ignored, as the Keynesians reckon.  As McDonnell put it: We accept we are going to have to live within our means and we always will do – full stop.”  And he advocates signing up to the Conservative government’s fiscal charter that will make it a law that government’s must ‘balance the books’ over the ‘business cycle’“We will support the charter. We will support the charter on the basis we are going to want to balance the books, we do want to live within our means and we will tackle the deficit.”

This is clearly a political ploy by McDonnell to avoid the charge being made by the Conservatives that Labour ,when in government, allowed deficits to get out of control and thus caused the crisis and the Great Recession and that Labour has no regard for ‘balancing the books’. This charge, of course, is nonsense and a downright lie.  Actually, when in government, Labour generally ran lower budget deficits than the Conservatives and under ‘prudent’ finance minister and PM Gordon Brown, government spending was kept well under control, as Ann Pettifor, one of McDonnell’s new Keynesian advisers, has pointed out.

The UK’s budget deficit spiralled only when the global financial crash came and British banks had to be bailed out with taxpayer’s money (borrowing).  This prompted Gordon Brown to tell the British parliament that he had ‘saved the world’ (a slip of hubris, meaning he had saved the banks).  The current government deficit, still way higher than in other G7 economies under the Conservatives and government debt still rising towards 100% of GDP, was the product of the capitalist crisis (the financial meltdown and the ensuing Great Recession).

McDonnell says that this deficit and the government debt can be reduced not by cutting welfare and public services as the Conservatives have done and are doing.  It is a political choice.  Instead it can be done by raising taxes on the rich (reversing cuts in corporation tax and inheritance tax), reducing ‘corporate welfare’ (around £90bn a year), dealing aggressively with tax evasion and avoidance by the likes of Vodafone, Amazon, Google and Starbucks (worth up to £120bn a year).  And Labour under McDonnell would also stimulate economic growth by borrowing to invest in infrastructure projects.  McDonnell also estimates that £80-100bn could be saved (over 30 years, mind) by scrapping the Trident nuclear submarine programme due for renewal next year.

Laudable as these aims are, as I have pointed out in a previous post, much of these tax gathering measures may not deliver enough extra revenue to close the deficit – if that is the aim, apart from making inequality of income and wealth, ludicrously high, just a little less extreme.  It has been pointed out that it will be very difficult to raise the necessary extra £30bn a year in taxes without hitting middle-income earners – unless UK economic growth takes off from its current 2.0-2.5% a year expansion rate.

The circle could easily be squared if private sector incomes (wages and profits) rose substantially faster to deliver much higher tax revenues. But that is not going to happen under a predominantly capitalist economy where profitability is key to investment, employment and income growth.  British capitalism has already failed to invest, preferring to pocket its profits and/or speculate in financial assets or invest abroad.  And that’s with the lowest corporate tax rate among the major economies, as Conservative finance minister George Osborne likes to boast.  Higher taxes on the capitalist sector, namely the big companies that invest and employ the bulk of the British economy and people, will only mean a further failure to invest.

The ‘new’ Labour leadership replacing the ‘old’ (‘New Labour’, neo-liberal) leadership is pledged to expand public investment in infrastructure, ‘green’ sectors and in housing and transport.  This will undoubtedly help to sustain economic activity apart from helping the majority instead of the 1%.  But Corbyn and McDonnell’s National Investment Bank will not be enough to deliver sufficiently faster growth as long as the UK economy is still dominated in its strategic sectors by capitalist profit-making companies in the City of London (privatised banking, insurance and pension funds); by large pharma and aerospace companies; telecoms (BT), house-building companies and transport (rail, bus and airlines) etc.

Along with a National Investment Bank (and fully state-owned banking), what is needed is a National Plan for investment, employment and services based on a predominantly state-owned economy, democratically controlled and operated. But that is the Marxist prescription from the ‘interesting’ Marxist analysis of the capitalist economy.  Instead, the new Labour leadership likes the Marxist ‘analysis’ but looks to Keynesian ‘solutions’.

Capitalism has regular and recurring crises – that’s one unique conclusion from the Marxist economic analysis, something not accepted or recognised by mainstream, Keynesian or Minskyite economic theory. As I argued in a previous post, British capitalism, along with global capital, is likely to enter another slump before the next British general election in 2020.  Indeed, McDonnell has also noted that many of the features that led to the last Great Recession: a credit boom, a housing bubble, bank speculation etc, have re-emerged.

Keynesians did not see the last slump (the Great Recession) coming and did not have the policies to deal with it, at least in the interests of the majority.  So relying on Keynesian policies to handle or avoid the next slump, even as a political ploy, may be a hostage to fortune for the new Labour leadership.

From crawl to crash?

September 28, 2015

The final figures for US real GDP in the second quarter of this year (April to June) were released at the end of last week.  They showed that the US economy was growing at an annual rate of nearly 4% (3.9%) in the summer after yet another poor first (winter) quarter of just 0.6% growth.  So, compared to summer 2014, the US economy has expanded by 2.7%.  Indeed, the US economy has been growing at that sort of rate for the last four quarters.

However, before the cry comes that, finally, American capitalism is back on a sustained trend in growth similar to that before the Great Recession, there are some caviats.

First, the growth in gross domestic income (as opposed to product) is much slower.  GDI slowed to just 2.1% yoy in Q2 2015.  Gross domestic income is the income received by American homes and businesses.  If gross domestic product grows more, it means more of the value of that domestic production has gone to foreign businesses and abroad.

Second, the reason that GDP growth seems to have picked up in the second quarter is that for virtually the first time since the Great Recession, the government sector expanded.  In Q2, America’s states (not the federal government) contributed 12% towards US economic growth, instead of reducing it, as healthcare spending rose.

Also, although business investment rose, it contributed a relatively smaller proportion towards GDP growth (20%) compared to previous quarters and years since the end of the Great Recession.  Growth was mainly achieved by households buying more cars, electrical goods and spending more on healthcare (Obama-care?) and taking out mortgages to buy more homes. US growth is consumer-driven and debt-financed (with interest rates at all-time lows).

But the most sobering caveat is that in the current quarter (Q3) just ending this week, US real GDP growth looks likely to have slowed down sharply from that near 4% rate to something close to 2%.  Indeed, the Atlanta Federal Reserve real GDP forecasting indicator, which has been very accurate in the recent years, forecasts just a 1.4% growth rate for Q3.

Atlanta now

And the forecast slowdown is not really surprising because economic data in this current quarter has been very weak: factory orders, retail sales, durable goods orders, industrial production etc.

Alongside this US slowdown, the major capitalist economies, both advanced and so-called ‘emerging’, have been slowing.  According to the OECD, economic growth in the 34 major advanced capitalist economies grew by only 0.4% in the second quarter of 2015 from the first quarter – a deceleration from the 0.5 per cent quarter-on-quarter growth achieved in the first three months of this year.  Year-on-year GDP growth for the OECD area remained unchanged at 2 per cent in the second quarter of 2015.


And in this quarter of the year, global growth seems to have slowed even more.  The UK economy, which was the leader in the top G7 economies, may struggle to achieve 2% growth, while Germany, France, Japan and Italy will be closer to 1%.  And the major ‘emerging’ economies are diving.  We have all heard about China slowing fast, leading to slowdowns in Australia, New Zealand and most of south-east Asia.

But on top of the ‘China crisis’, there are outright slumps in Brazil and Russia and low growth in Turkey, South Africa and Indonesia.  Even India’s real GDP growth, which has been racing along at about 7% a year, turned down this quarter.  The global crawl is turning paralytic.

World trade is heading back to the depths of the Great Recession.

World trade

Indeed, the latest update of my global business activity index (based on purchasing managers indexes around the world), shows a sharp contraction in activity among emerging markets.

business activity

So it is no wonder that the US Federal Reserve drew back from its planned hike in interest rates in September.  The Fed statement specifically highlighted the global economic slowdown as the reason for holding off (at least until December).  The Fed, along with many mainstream economists, that hiking US rates would spill over into higher cost of borrowing and debt servicing and possibly trigger a collapse in stock and bond markets globally – something I have highlighted before as another ‘1937’.

Several financial strategists are already worried that stock markets are overvalued compared to future earnings and profits. And that’s what the ‘Warren Buffet’ indicator of the value of corporate stock to GDP shows – significant over-valuation.

Buffet indicator

That’s where the latest data on corporate profits come in.  In Q2 2015, US corporate profits, after taking into account inventories and depreciation (in other words, new profits), rose just 0.6% compared with summer 2014 and, after tax, actually fell 0.6%.

corporate profits

And there was a sharp increase in dividends paid out to shareholders by corporations.  So the available profit for investment has dropped 4.6% compared to summer 2014.  Moreover, two-thirds of the rise in profits in Q2 2015 accrued to the financial sector with just one-third to productive sectors.

Globally too, corporate profit growth remains low.  Indeed, without a sharp rise in Japanese corporate profits in Q2, growth would have been a trickle.  Indeed, Chinese industrial profits fell nearly 9% in August compared to August 2014.

global profits

Looking out longer term, a new report from the management consultant, McKinsey (MGI Global Competition_Executive Summary_Sep 2015) reckons that “the world’s biggest corporations have been riding a three-decade wave of profit growth, market expansion, and declining costs. Yet this unprecedented run may be coming to an end”.  According to McKinsey, the global corporate-profit pool, which currently stands at almost 10% of world GDP, could shrink to less than 8% by 2025—undoing in a single decade nearly all of the corporate gains achieved relative to the world economy during the past 30 years.

From 1980 to 2013, vast markets opened around the world while corporate-tax rates, borrowing costs, and the price of labour, equipment, and technology all fell. The net profits posted by the world’s largest companies more than tripled in real terms from $2 trillion in 1980 to $7.2 trillion by 2013, pushing corporate profits as a share of global GDP from 7.6% to almost 10%.

But McKinsey reckons that profit growth is coming under pressure. This could cause the real-growth rate for the corporate-profit pool to fall from around 5% to 1%, practically the same share as in 1980, before the boom began.  So the great neo-liberal period of corporate profit recovery is over. According to McKinsey, margins are being squeezed in capital-intensive industries, where operational efficiency has become critical.  Meanwhile, some of the external factors that helped to drive profit growth in the past three decades, such as global labour arbitrage (globalisation) and falling interest rates, are reaching their limits.

As I have argued on many occasions, from the movement in profits flows the movement in investment and then to overall economic growth.  If profits, both globally and in the US, start to fall, then eventually so will investment and the slow economic growth recorded in the major capitalist economies since 2009 could turn into a new slump.

Economic recessions or slumps seem to occur about every 8-10 years in the post 1945 period (1958-60, 1970, 1974-5, 1980-2, 1990-2, 2001, 2008-9), the so-called business cycle.  If that cycle is to reoccur, then the next recession is due between 2016 and 2018 (given that the last began in 2008).

I have argued that we can discern a profit cycle as well as a business cycle (see my book, The Great Recession).  The cycle of profitability is about 32-36 years, trough to trough, in the US.  The last trough was in 1982, followed by the so-called neoliberal revival in profitability until 1997-00.  The current downwave should therefore trough no later than 2018.  If this is right – any scientific analysis worth its salt should make predictions that can be proved wrong (or right) – then profitability in the US should be heading downwards pretty soon.  All this suggests a major slump within 1-3 years.

The world economy is still crawling along, but interest rates are at all-time lows and stock markets are way overvalued.  Any shift up in the cost of borrowing and any shift down in profitability would turn that crawl into crash.

Robots and AI: utopia or dystopia? – part three

September 24, 2015

This is the third and final post on the issue of robots and artificial intelligence (AI).  In the first post, I argued that while robots and AI are a leap forward in mechanisation and automation, they will not do away with the basic contradiction within the capitalist mode of production between the drive to raise the productivity of labour and the profitability of capital over time.  As I said over time, a capital-bias or labour shedding means less new value is created (as labour is the only form of value) relative to the cost of invested capital.  There is a tendency for profitability to fall as productivity rises.  In turn, that leads eventually to a crisis in production that halts or even reverses the gain in production from the new technology.  This is solely because investment and production depend on the profitability of capital in our modern mode of production.”

In the second post, I considered in more detail how the law of value that dominates the profit-making capitalist mode of production would be affected by the hypothetical (or real?) possibility of a fully automated economy where no human labour is expended at all.  “In our hypothetical all-encompassing robot/AI world, productivity (of use values) would tend to infinity while profitability (surplus value to capital value) would tend to zero.  Human labour would no longer be employed and exploited by Capital (owners).  Instead, robots would do all.  This is no longer capitalism.”

But I argued that before this state of ‘singularity’ (as it is called) was reached, capitalism as system would have broken down.  We would never get to a robotic society; we would never get to a workless society – not under capitalism.  Crises and social explosions would intervene well before that… accumulation under capitalism would cease well before robots took over fully, because profitability would disappear under the weight of ‘capital-bias’.”

In this third post, I want to consider just how likely it is that highly intelligent robots will take over the world of work (and maybe the world) in the near future.  It’s my contention that, despite the optimism of the AI and robot drivers, it’s not going to happen soon.

What is true is that the use of robots is rising fast.  The level of robotics use has almost always doubled in the top capitalist economies in the last decade.  Japan and Korea have the most robots per manufacturing employee, over 300 per 10,000 employees, with Germany following at over 250 per 10,000 employees. The United States has less than half the robots per 10,000 employees compared to Japan and The Republic of Korea.  The adoption rate of robots increased in this period by 40% in Brazil, by 210% in China, by 11% in Germany, by 57% in The Republic of Korea, and by 41% in the United States.

This development has been called a ‘second wave of automation’, one that is centered on artificial cognition, cheap sensors, machine learning and distributed smarts. This deep automation will touch all jobs, from manual labor to knowledge work.  And it is reducing employment, just as mechanisation under previous industrial revolutions did.

Andrew McAfee, the coauthor with his MIT colleague Erik Brynjolfsson of The Second Machine Age, has been one of the most prominent figures describing the possibility of a “sci-fi economy” in which the proliferation of smart machines eliminates the need for many jobs. (see “Open Letter on the Digital Economy,” in which McAfee, Brynjolfsson, and others propose a new approach to adapting to technological changes.) Such a transformation would bring immense social and economic benefits, he says, but it could also mean a “labor-light” economy.

Hod Lipson says “More and more computer-guided automation is creeping into everything from manufacturing to decision making”. Prominent Columbia University economist Jeffrey Sachs recently predicted that robots and automation would soon take over at Starbucks.  But there are good reasons to believe that Sachs and others could be wrong. The success of Starbucks has never been about getting coffee more cheaply or efficiently. Consumers often prefer people and the services humans provide.  Take the hugely popular Apple stores, says Tim O’Reilly, the founder of O’Reilly Media. Staffed by countless swarming employees armed with iPads and iPhones, the stores provide a compelling alternative to a future of robo-retail; they suggest that automating services is not necessarily the endgame of today’s technology. “It’s really true that technology will take away a class of jobs,” says O’Reilly. “But there is a choice in how we use technology.”

And just how close are AI robots to doing all human work?  AI researchers have noted that the simplest tasks for humans, such as reaching into a pocket to retrieve a quarter, are the most challenging for machines.  For example, iRobot’s Roomba robot is autonomous, but the vacuuming task it performs by wandering around rooms is extremely simple. By contrast, the company’s Packbot is more expensive, designed for defusing bombs, but must be teleoperated or controlled wirelessly by people.

The Defense Advanced Research Projects Agency, a Pentagon research arm, held a Robotics Challenge competition in Pomona, Calif.  Theer was $2 million in prize money for the robot that performs best in a series of rescue-oriented tasks in under an hour.  In the previous contest in Florida in December 2013, the robots, which were protected from falling by tethers, were glacially slow in accomplishing tasks such as opening doors and entering rooms, clearing debris, climbing ladders and driving through an obstacle course. (The robots had to be placed in the vehicles by human minders.)  Reporters who covered the event resorted to such analogies as “watching paint dry” and “watching grass grow.”

This time, the robots had an hour to complete a set of eight tasks that would probably take a human less than 10 minutes. And the robots failed at many. Most of their robots were two-legged, but many had four legs, or wheels, or both.   But none were autonomous. Human operators guided the machines via wireless networks and were largely helpless without human supervisors.  Little headway has been made in “cognition,” the higher-level humanlike processes required for robot planning and true autonomy. As a result, any researchers have begun to think instead of creating ensembles of humans and robots, an approach they describe as co-robots or “cloud robotics.”


So there’s still a long way to go.  David Graeber has also raised other obstacles to the fast adoption of autonomous AI fully automated robots, namely the capitalist system itself.  Funding for new technology does no go into solving the needs of people and reducing human toil as such, but into what will raise profitability.  “Once upon a time, he said, “when people imagined the future, they imagined flying cars, teleportation devices and robots who would free them from the need to work. But strangely, none of these things came to pass.”

What happened, instead, was that industrialists poured research funds not into the invention of the robot factories that everyone was anticipating in the sixties, but into relocating their factories to labor-intensive, low-tech facilities in China or the Global.  And governments shifted funds into military research, to weapons projects, research in communications and surveillance technologies and similar security-related concerns. “One reason we don’t have robot factories yet is because roughly 95 percent of robotics research funding has been channeled through the Pentagon, which is more interested in developing unmanned drones than in automating paper mills.

William Nordhaus from Yale University’s department of economics, has tried to estimate the future economic impact of AI and robots (SSRN-id2658259).  Nordhaus reckons ‘singularity’and its impact is still a long way away.  Consumers may love their iPhones, but they cannot eat the electronic output. Similarly, at least with today’s technologies, production requires scarce inputs (“stuff”) in the form of labour, energy, and natural resources, as well as information for most goods and services.  Nordhaus says projecting the trends of the last decade or more, it would be in the order of a century before growth variables would reach the level associated with a growth-focused singularity.

Nordhaus also raises the issue of robots out of control – robots rule the world including us.  “The development of superintelligence raises a new concern not contemplated before in the development of political and military spying and weapons. We must be concerned that to the list of adversaries will be added the superintelligent machines themselves…. Will the superintelligent treat us as flies to wonton boys?”  So there’s one job category for humans that won’t be easily eliminated: defending our interests from the all-encompassing power of the AI: “We routinely spend 5% of output on defense, and this might rise to a much larger number when faced with a more powerful enemies like superintelligent machines. So one occupation at least would survive into the Era of Singularity.”

But let’s not throw the baby out with the bathwater.  Technical advances to meet the needs of people, to help end poverty and create a society if superabundance without damaging the environment and the ecology of the planet is what we want.  If AI/robotic technology can bring us closer to that, all the better.

But the obstacle to a harmonious superabundant society based on robots reducing human toil to a minimum is Capital.  In its Future of Work report last year, UKCES came up with a number of scenarios which included both the possibility of a long period of stagnation and of a technology-driven productivity leap. One thing all the scenarios had in common, though, was that, for those without good skills, powerful connections or inherited wealth, the future looks extremely bleak. The Economist concluded, at the end of a long piece on technology and work last year:  “S]ociety may find itself sorely tested if, as seems possible, growth and innovation deliver handsome gains to the skilled, while the rest cling to dwindling employment opportunities at stagnant wages.” Or, as John Naughton put it, “a concierge economy [with] legions of network co-ordinated serfs.”

While the means of production (and that will include robots) are owned by a few, the benefits of a robot society will accrue to the few.  Whoever owns the capital will benefit as robots and AI inevitably replace many jobs. If the rewards of new technologies go largely to the very richest, as has been the trend in recent decades, then dystopian visions could become reality.  I quote again from John Lanchester: “It seems to me that the only way that world would work is with alternative forms of ownership. The reason, the only reason, for thinking this better world is possible is that the dystopian future of capitalism-plus-robots may prove just too grim to be politically viable. This alternative future would be the kind of world dreamed of by William Morris, full of humans engaged in meaningful and sanely remunerated labour. Except with added robots. It says a lot about the current moment that as we stand facing a future which might resemble either a hyper-capitalist dystopia or a socialist paradise, the second option doesn’t get a mention.”

Let me sum up the conclusions of my posts on robots and AI.

  • The new technology of robots and AI is coming fast. As in all technology under capitalism, it has a ‘capital-bias’; it will replace human labour.  But under capitalism, that capital bias is applied to reduce costs and boost profitability not meet people’s needs.
  • Robots and AI will intensify the contradiction under capitalism between the drive by capitalists to raise the productivity of labour through ‘mechanisation’ (robots) and the resulting tendency for the profitability in this investment for the owners of capital to fall. This is Marx’s most important law in political economy – and it becomes even more relevant in the world of robots.  Indeed, the biggest obstacle to a world of super-abundance is capital itself.  Well before we get to ‘singularity’ (if we ever do) and human labour is totally replaced, capitalism will experience an increasingly deeper series of man-made economic crises.
  • Robot technology will reduce many existing jobs (and create some new jobs) and is doing so already. But singularity and a robot world is still a long way away.  That is because the AI technology is not being directed by capital into the most productive areas but into the most profitable (not the same thing).  And the costs of ‘controlling’ AI robots will increase.
  • A super-abundant society where human toil is reduced to a minimum and poverty is eliminated won’t happen unless the ownership of the means of production changes from private control (capitalist oligarchy) to ownership in common (democratic socialism). That’s the choice between utopia and dystopia.

QE, negative rates and helicopters

September 21, 2015

The Bank of England chief economist, Andy Haldane, has often been ‘off message’ when it comes to an analysis of the global financial crash, the banking system and economic policy. Back in 2013, he argued that about the value of the financial sector to an economy. “In what sense is increased risk-taking by banks a value-added service for the economy at large?” He answers, “In short, it is not.”  And this is the chief economist of the Bank of England speaking.

Now he has stepped out of line with the prevailing view that the BoE should be hiking rates to follow any move by the Fed. Indeed he reckons the Bank of England should consider cutting rates to the bone and doing even more than applying quantitative easing (QE) ie printing money to increase the amount of credit in banks.

Why? Well, Haldane says that the crises in Greece and now China are not chance events or “lightning bolts from the blue. Rather, they are part of a connected sequence of financial disturbances that have hit the global economic and financial system over the past decade..” Indeed, “recent events form the latest leg of what might be called a three-part crisis trilogy. Part one of that trilogy was the ‘Anglo-Saxon’ crisis of 2008-09. Part two was the ‘euro-area’ crisis of 2011-12. And we may now be entering the early stages of part three of the trilogy, the ‘emerging market’ crisis of 2015 onwards.”

Haldane throws some doubt about the efficacy of QE in restoring the progress of the major capitalist economies since 2009. It may have worked for the UK, he says: “QE appears to have had a reasonably powerful and timely”. However, “existing empirical studies point to wide margins of error around QE ready-reckoners ..The key micro-economic point is that these uncertainties are inherently greater for QE than interest rates.”  In other words, we don’t really know if QE works; cutting interest rates works better.

That doubt was reinforced recently by  Stephen Williamson,vice-president of the Federal Reserve Bank of St Louis and the US top expert on monetary policy.  He has just issued a study in which he concludes : “There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed – inflation and real economic activity. Indeed casual evidence suggests that QE has been ineffective.”

The problem is that interest rates are already close to zero and are going to stay there, ‘zero bound’, to use the jargon.

negative rate

So Haldane proposes that central banks needed to apply even more innovative techniques to support the weak global capitalist economy. “If global real interest rates are persistently lower, central banks may then need to think imaginatively about how to deal on a more durable basis with the technological constraint imposed by the zero lower bound on interest rates.”  Haldane proposes that perhaps governments should consider abolishing cash (notes and coins).  This would stop people putting money under mattresses.  Then central banks could adopt ‘negative’ interest rates.  In other words, people would be charged for holding deposits in banks.  With these measures, people would be forced to spend, invest or speculate, so boosting ‘demand’ in the ‘real economy’.  In a way, this would a ‘permanent QE’: “part of the monetary policy armoury during normal as well as crisis times – a monetary instrument for all seasons.”

One problem with all these ‘innovations’ is that ‘conventional QE’ has proved not only ineffective in boosting the ‘real economy’, it is also downright biased towards more inequality of wealth and income.  As Frances Coppola pointed out in a recent blog post: “In 2013, the Bank of England admitted that the principal beneficiaries were asset holders, particularly those in the top 5% of the income distribution.  By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth held outside pension funds, but holdings are heavily skewed with the top 5% of households holding 40% of these assets. Rich people, in other words.”

Would the plan of the economic advisers to Britain’s new Labour opposition leader, Jeremy Corbyn, be any better?  This is the idea of a People’s ‘Quantitative Easing’ (QE) programme.  Instead of the Bank of England buying government and corporate bonds and printing money to do so (the current QE), the Corbyn proposal is that the BoE would buy bonds and other assets directly from local councils, regional agencies etc so that they can invest the money in projects for more housing, schools and services. “People’s QE is fundamentally different. [It] does have the Bank of England print new money, which is identical to the process that is used by ordinary banks when they lend to business, but it gives that money to people like housing authorities, to local councils, to a green investment bank to build houses, to schools, to build hospitals.” says Richard Murphy, Corbyn’s adviser.

But, as others have pointed out, ‘People’s QE’ is really no more than what the European Central Bank is doing now in its QE programme, namely buying the bonds issued by the European Investment Bank which will invest money in long-term projects (as it sees fit) around Europe.  This will have limited and very slow effect.

Haldane, Corbyn and other QE exponents do not mention what has come to be called ‘helicopter money’.  This was the idea of former Federal Reserve chair, Ben Bernanke, when he raised the idea that his mentor, the right-wing pro-market economist Milton Friedman, proposed for dealing with recessions.  Central banks should just drop printed money from helicopters over the cities of America to boost directly the demand for goods and services, thus by-passing the banks. Bernanke never applied this idea when Fed Chair, but it is occasionally it is raised by various economists only to be put back in its box.  It just sounds too radical and wild.

Actually, it is not. As Keynesian Simon Wren-Lewis points out, helicopter money is really another form of government spending.  If the central banks prints cheques and/or puts a monthly sum into the bank accounts of everybody, in effect, it is boosting bank deposits of households and companies in just the same way as if the government cut taxes or handed out increased benefits.  The government would eventually have to foot the bill for the central bank largesse.  And again, ‘helicopter money’ would probably add to inequality of incomes and wealth as it would indiscriminately go to the rich as well as poor.  Indeed, as Wren-Lewis says, “If governments undertake fiscal stimulus in a recession such that helicopter money is no longer necessary”

All these schemes and ideas are really a (desperate) response to the failure of ‘unconventional’ monetary policy practised by central banks and governments, namely QE.  And they are a reaction to the unwillingness of neo-liberal governments to run budget deficits, Keynesian style, to stimulate economic activity.  Of course, as I have argued, fiscal stimulation would also be pretty ineffective as long as the dominant capitalist sector is unwilling to invest more despite tax cuts or ‘corporate welfare’ subsidies.  And that remains the case in most top capitalist economies.

China: a weird beast

September 17, 2015

In the light of all the controversy over whether the Chinese economy was about to collapse or suffer such a ‘hard landing’ that it would spill over into causing a new global recession, the recent conference of the International Initiative for Promoting Political Economy (IIPPE) was very apposite.

In this year’s conference in Leeds, England, one of the themes was the nature of China, its economic development and its future.  China has been ignored in many heterodox or Marxist political economy academic conferences, so the flourishing of new papers by young scholars with first-hand experience of China is to be welcomed.  It was these papers that I concentrated on at the conference and left the usual (and yet endless) number of papers on ‘financialisation’ in post-war capitalist economies that still dominate such conferences.

Is China capitalist? What is the nature of China’s development?  Is it going to crash as in the West and if so why?  These are the questions that many of the papers in Leeds addressed.  I can only give readers a flavour of the discussions from the various abstracts, as well as describing in more detail my own paper on China presented there.

Robert Pauls, a young German scholar, presented a paper called, Capitalist Accumulation and a Conjunction of Two Crises in China, in which he argued that China had developed contradictions (disproportionality and overaccumulation) as well as a declining profit rate in just the same way as modern capitalist economies.  For him, Chinese capitalism showed the generic features of capitalism and was not ‘different’ in any substantial way.

In his paper, Rebalancing or unravelling? Contradictions in China’s system of accumulation, Steven Rolf looked at the political economy of Maoism and its transformation under Dengism, pinpointing its characteristics as: low wage, low skill production for export, and the formation of a migrant labour regime. He argued that the Dengist goals of higher productivity and consumption had not successfully ‘upgraded’ the economy, but rather deepened marketisation and financialisation.  China was not developing a high-productivity socialist economy, but a typical low-grade emerging capitalist economy.

In another session, Jo Michell disagreed with this line of argument in a paper called, Is China the next victim of ‘financialisation’.  Michell argued that, while true that the recent developments in China resembled destabilisation and disfunctionality phenomena of more financially advanced economies, it is premature to declare China the victim of financialisation.  In Rethinking neoliberal processes in China- is there the “China model”?, Jana Mudronova also reckoned that it was too simplistic to talk about a ‘China model’ of development as economic processes varied sharply between the more capitalistic Guangdong and more ‘statist’ Chongqing.

These more measured analyses contrasted with that of Sheng Wu in his paper, Improving the Economical Growth Model with Chinese Characteristics, which seemed to me nothing more an uncritical apologia for the position of the Chinese government and Communist leaders calling for “the necessity that China accelerate improvement of the Economical Growth Model with Chinese Characteristics. … We must unwaveringly adhere to the strategic thinking that only development counts.”

The idea that China is allowing local democracy was questioned by Alexandre Gomes in a paper entitled, China’s Developmental Path and Scales of GovernanceGomes pointed out that the Chinese national state remains a dominant agent in decision-making, especially when it comes to industrial (technological) upgrading  The party and Beijing government remains in charge. Indeed, China’s development has remained based on a dominant state sector.  So even though foreign companies were invited into the Chinese economy from the 1990s, they were forced to play a subordinate role.  Thus argued Rubens Sawaya (China and its strategy of insertion in world capitalism)As a result, virtually every major multi-national is tied to Chinese interests and territorially rooted in the country. This means that China is catching up quickly on average and high technology industries, a view contrasting with Rolf above.

As a result, China has been able to maintain its independence from US imperialism and global capitalism like no other.  Lorenzo Fusaro (Why China is Different: Hegemony, Revolutions and the Rise of Contender States) rejects the Panitch-Gindin view that China has fallen within the US hegemony. Instead, China has been able to gain relative geopolitical autonomy as a result of the revolutionary processes it went through and eventually assert itself as a ‘Contender State’ now in the process of challenging US hegemony. Adrian Budd (The geopolitical economy of China’s rise) took up the same question.

Does this overseas expansion mean that China is just another imperialist power like the US or Russia?  Sam-Kee Chang (ChinasGo Global in the age of new imperialism) reckons not. China’s market reform has to be understood in the context of a non-capitalist state struggling to preserve its command economy under US imperialism. China’s economic expansion cannot be explained solely as capitalist accumulation.

Indeed, China has begun to build rival alliances to the ‘international community’ of major imperialist states. Rhys Jenkins (The Political Economy of China’s Economic Expansion in Sub-Saharan Africa) explained the rapid expansion of its involvement in Sub-Saharan Africa and Latin America over the past decade, while Ben Reid (China, Trade and Uneven Development in Southeast Asia) discussed the emergence of China as an economic and regional political power for neighbouring, semi-industrialised and developing economies in Southeast Asia.

This brings us to the question of whether China is a capitalist state or not?   I think the majority of Marxist political economists agree with mainstream economics in assuming or accepting that China is.  However, there are some who do not.  In an illuminating paper, Jonathan Clyne (Is China a developmental state?) argued that while China had many features of a ‘developmental state’ like Japan, Korea and Taiwan (i.e. an economy characterised by oligopolies pushed and enticed into developing the economy by the state), the mixture of state intervention and market in China was of a fundamentally different, and previously unseen, character.

Heiko Khoo was clear (Marxist Analysis of China’s Social System).  For him, China is not capitalist. Commodity production for profit, based on spontaneous market relations, governs capitalism. The rate of profit determines its investment cycles and generates periodic economic crises. In China, public ownership of the means of production and state planning remain dominant and the CPC’s power base is rooted in public ownership. The balance of class forces helps to explain this. The transition from capitalism to socialism means that public ownership replaces private ownership in the commanding heights. Profits and markets are replaced by economic planning. In the transitional era, planning battles against and coexists with markets. Public ownership of the commanding heights provides the foundation for planning but it is not socialism. China operates a system dominated by public ownership and state planning and it defies the laws governing capitalism.

My own view has been expressed in various posts on my blog.  I presented a paper that tried to delineate three different models of China’s economic development (China: three models of development)In the past 30 years, China’s growth has been phenomenal.  And since the global financial crisis and the Great Recession in the major capitalist economies, China has continued to close the output gap with the leading capitalist economies.  What explains this Chinese economic miracle?  There are possible three economic models of explanation: the neoclassical ‘comparative advantage’ model; the Keynesian ‘heavy investment’ explanation; and the Marxist ‘law of value’ explanation.The argument of my paper was that neither the neoclassical nor the Keynesian model of development was accurate or most relevant to understanding China’s economic miracle.  The Marxist model of rising productivity through investment and innovation to replace labour and the accompanying contradiction with the dominant law of value in the world economy provides the best explanation of where China has come from and where it is going.  My paper is here CHINA PAPER July 2015.

As for the immediate picture, in this Long Depression, global growth has been low and slow. At first, China avoided this slowdown and the effects of the great recession in the major capitalist countries. That’s because its large state sector could be directed and funded to invest by the government, unlike in Europe or the US. But the trade impact of a slowing world eventually began to affect Chinese exports (which are dropping) and, as the government had allowed the expansion of capitalism into a stock market and real estate sector, it fomented a credit bubble that it is finding difficult to control. It’s the orientation towards the capitalist sector within China that is making it weaker. China can still avoid a hard landing if the state seizes proper control of productive investment and raises wages to expand consumption. But that would damage the capitalist sector of the economy and the Communist elite appears unsure of which way to go.


Corbynomics – extreme or moderate?

September 11, 2015

This post may not interest many of my blog readers as it relates to politics in the UK, not a very important capitalist state these days.  In the UK, after the election defeat of May 2015 for the opposition Labour Party, an election for a new leader has been under way.  The previous leader, Ed Miliband, resigned within minutes of losing.  The ‘neo-liberal’ right-wing dominates the parliamentary group of the Labour Party.  But they made a big mistake.  They allowed onto the ballot paper a left-wing MP, Jeremy Corbyn, as a ‘gesture’.  He was expected to get a derisory vote.  But the right-wing made another mistake: they decided to adopt an American-style ‘primary’ that allowed non-Labour party members to vote if they paid a small fee.  Within weeks thousands signed up and most were backing Corbyn.


As I write, with just a day to go before the result is announced, all the polls show that Corbyn is heading for a surprise win.  This has produced a barrage of media and right-wing attacks.  In particular, the capitalist media and the other Labour candidates have attacked Corbyn’s economic policies.

During the campaign 40 economists (mainly Keynesians and heterodox leftist economists) signed a letter to the British Guardian newspaper stating that ‘Corbynomics’ was not extreme. 

“The accusation is widely made that Jeremy Corbyn and his supporters have moved to the extreme left on economic policy. But this is not supported by the candidate’s statements or policies. His opposition to austerity is actually mainstream economics, even backed by the conservative IMF.”

And the signatories are right: the Corbyn programme is not extreme – except for the supporters of Capital.  The Corbyn campaign for Labour leader is one that should be supported by all those wanting a better life for the majority and an end to the ‘austerity’ still being imposed by the recently victorious Conservative with ever-increasing gusto.  The recent Conservative Welfare Bill to cut public services to the most vulnerable and weak in British society is particularly vicious and should have been opposed by the Labour party.  But it was not by any of the four candidates for the leadership, except Corbyn, a longstanding fighter for labour causes and for socialism.

Corbyn’s economic policy did not only stimulate support from leftist and heterodox economists, it also provoked opposition from right-wing mainstream economists.  Professors Tony Yates of Birmingham University and Paul Levine of Surrey University rustled up a letter from 55 economists ‘from across the political spectrum’ who agreed that Corbyn’s economic plans are “likely to be highly damaging” and represent thinking that is far from mainstream economics.  “It is hard to think where mainstream economics and Corbynism sit together at all,” said Yates.  Most of these signatories were on the pro-austerity wing of the ‘mainstream’ like Patrick Minford of Cardiff Business School, or hedge fund advisor George Magnus, the former chief economist of UBS and Kitty Ussher, a former Treasury minister.

Their criticisms were as limited in their explanation as the supporters of the letter backing Corbynomics were.  Apparently, Corbyn’s popular plan to renationalise the railways would a ‘waste of public money’ and ‘make things worse’. And the idea that the Bank of England could print money to fund public infrastructure at all times, whether the economy was in recession or not, was “highly damaging” and “unnecessary” since public investment could be financed conventionally, the letter said.

David Smith, the right-wing economics pundit for the Murdoch-owned Times newspaper praised the 55 mainstream economists for exposing Corbyn’s ‘incoherent’ economic policies.  Renationalising the energy sector would be “a hugely expensive folly”, Smith said “The privatized utilities have not been perfect but they have been infinitely better than what went before.”  Really? Smith quietly forgets the disastrous franchising and fragmenting of the rail network under successive governments, creating high prices (highest in Europe), big profits, low investment and still large taxpayer subsidies to private monopolies.  The privatised utilities (gas, electricity, water, telecoms) have also delivered high prices and huge profits; but low investment and massive manager bonuses.

Martin Wolf, leading Keynesian guru in the FT, reckons that “Mr Corbyn’s economic ideas are also muddled.”… Some proposals — notably higher public investment at a time of low interest rates — make sense. Some, such as letting the Bank of England inject the money it creates directly into the economy, make sense in quite restricted circumstances. Some — such as nostalgia for nationalisation and the idea that £120bn a year in lost tax revenues can be readily found — make no sense at all.

Presumably, the signatories of the ‘mainstream’ letter consider their approach to be ‘rational’ and based on ‘good economics’  But as Steve Keen, the head of Kingston University economics and a prominent heterodox economist, points out, these neoclassical orthodox economists work from an economic model of equilibrium, free markets and marginalism that has no basis in reality, in the same way that the Ptolemaic system of the universe seemed perfectly constructed but “the model appeared to fit the data (except for comets, which it dismissed as “atmospheric phenomena”), but it was completely wrong about the structure of the Universe.”

But I digress.  In my view, the problem with Corbynomics is that opposing austerity is not enough.  The question is whether Corbyn’s main economic policies, as he has been advised to adopt, would work to transform the British economy, if he ever gets the chance to implement them, and deliver an irreversible change for the better in the lives and conditions of the majority of British people.

And there I have my doubts.  The main planks of the Corbynomics are:  ending the tax gap; providing cheap money for investment through what is called a ‘People’s QE’; an investment bank for funding infrastructure projects; renationalising the railway network, returning the postal service to majority public ownership and keeping  the majority stake in the main British bank, RBS.

With these economic measures, Corbyn would scrap tuition fees and restore maintenance grants for students to be funded by higher taxes on richer earners and a higher corporation tax rate.  He would also create a “national education service”, offering free universal childcare — which the IPPR think-tank estimates would cost about £6.7bn — paid for again by some of the money from raising corporation tax.  And Corbyn proposes building 240,000 new homes a year and changing the “right to buy” so it applies to the private sector but not council houses or housing association properties. The new homes could be built through higher borrowing or funded by imposing higher taxes on unused land with planning permission and unoccupied properties.  Corbyn also plans to end ‘the market’ in the health service, outsourcing of public services and costly funding through private finance initiatives.

All this is good news for the interests of the majority and Labour.  But let’s consider the efficacy of these policy measures in achieving these aims.  First, the tax gap.  The failure of the UK inland revenue services to collect tax from those companies that should pay it; the huge evasion and avoidance of tax by companies using corporate accountants, often previously employed as tax inspectors, is a major scandal.  Richard Murphy, who has been a tireless campaigner for ‘tax justice’ and is now Corbyn’s main economic adviser, has calculated that up to £120bn a year in tax revenues has gone missing because of tax avoidance, evasion and non-collection.  If a Labour government had that sort of annual extra revenue in its hands, it could transform public finances and services.

I have reported on this potential source of government revenue before .  But could it be collected while corporations remain in private hands?  Even Richard Murphy reckons it would be difficult to extract and thinks £20bn would be the most likely pick-up.  Keynesian economist, Jonathan Portes, director of the National Institute of Economic and Social Research, said: “Any government expecting to fund a significant proportion of its extra spending plans on the basis of closing the tax gap would find itself with a large hole.”

But that does not mean a Labour government should not try with new tax laws and anti-evasion measures.  But the problem remains that as long as corporations are private entities beholden to their shareholders, both domestic and foreign, and are not publicly owned, they will seek to maximise their profits.  Avoiding and evading tax is a big part of doing that.  Indeed, evidence shows that if it were not for governments continually lowering corporate taxes (not raising them as Corbyn plans) and turning a blind eye to abuses, then corporate profitability would be seriously impaired and would thus reduce even the level of investment that is currently taking place.

The same concern applies to the idea of closing down the £93bn a year of corporate tax reliefs and subsidies that Kevin Farnsworth at the University of York has identified  – way more than the social welfare bill that the Conservative government aims to cut.  Farnsworth has shown that corporations get £44bn in tax breaks for buying equipment etc and £16bn of working tax credits.  This corporate welfare shows that British capitalism has to be subsidised to boost its profitability and encourage it to invest productively.  But if these reliefs were to be cut, would that not just reduce profitability and lower investment further?  Would there be sufficient public investment to replace lower private sector investment?

Then there is the idea of a People’s ‘Quantitative Easing’ (QE) programme.  Instead of the Bank of England buying government and corporate bonds and printing money to do so (the current QE), the Corbyn proposal is that the BoE would buy bonds and other assets directly from local councils, regional agencies etc so that they can invest the money in projects for more housing, schools and services.  “People’s QE is fundamentally different. [It] does have the Bank of England print new money, which is identical to the process that is used by ordinary banks when they lend to business, but it gives that money to people like housing authorities, to local councils, to a green investment bank to build houses, to schools, to build hospitals.” Richard Murphy.

This has been attacked by the right-wing of the Labour party and by mainstream economists as likely to fuel inflation.  This is nonsense in an economy which has only just got back to the level of 2007 and where investment to GDP is near a 50-year low.

UK business investment

There is plenty of room to boost productive investment and GDP.  Indeed, inflation is currently zero.  The only ‘inflation’ around is in stock and bond prices, fuelled by the BoE’s QE funding of the banks.  “Any system of people’s QE would be turned off if we got to a situation of high wages and full employment, but we are so far from that at the moment that we have to tackle the low-wage economy and the lack of productivity in the UK by creating new investment, which is the foundation for new prosperity.” (Murphy).

The other argument against People’s QE has come from mainstream economists, including Keynesians, who argue that it would mean ending the ‘independence’ of the Bank of England.  Apparently, this independence from government control introduced by then Labour PM Gordon Brown, is such a good thing that it needs to be preserved at all costs.

This again is nonsense.  First, the ‘independent’ BoE does not have a good record in helping the economy and/or avoiding financial crashes.  The BoE failed to spot the global financial crash and the ensuing Great Recession.  It panicked when it came along and did nothing to sort out the banks out.  Its independence was a fake: it really means the BoE is at the beck and call of the major banks and financial institutions in the City of London rather than to the government, parliament and the electorate.  We now know that the BoE failed to impose recapitalisation and restructuring of the foreign-owned HSBC and Barclays Bank during the financial crash.  As a result, the British taxpayer will never see back all the money invested in the banking system. The BoE decides its interest rate policy and its financial supervision in the interests of the City of London not the wider economy.  It only has an inflation target (which it seldom meets) and no growth or employment target that would be in the interests of the people.

What is worrying about People’s QE is none of this.  It is whether it can do the trick.  Can it help deliver more growth, employment and incomes any more than the traditional mainstream funding governments issue bonds for investment?  That depends on whether the Corbyn-proposed National Investment Bank (NIB) can change things.  People’s QE would be used to buy NIB bonds to fund investment.  A state investment bank is certainly not extreme, as Keynesian biographer Robert Skidelsky has pointed out, it “is neither extreme nor new. There is a European Investment Bank, a Nordic Investment Bank and many others, all capitalised by states or groups of states for the purpose of financing mandated projects by borrowing in the capital markets”.  And as Corbyn himself puts it:  “If I was putting forward these ideas in Germany I’d be called depressingly moderate, depressingly old fashioned as they have a national investment bank already and they invest in public services.”

I would add the NIB looks very much like Brazil’s BNDES, which has been mightily successful in driving investment projects at lower borrowing costs during the Great Recession so that Brazil got some investment.  Indeed, during the Great Recession, those countries that suffered least were precisely those countries that were bolstered by state-owned investment banks that supported infrastructure projects to keep jobs and create investment.  Brazil’s INDES investment bank was very successful in doing that, despite the cries of foul by the privately-owned and foreign banks operating in Brazil.  It is no accident, for example, that Brazil had a very mild recession because the government there plunged huge resources through its state-owned development bank for infrastructure spending.

But the experience of the Brazilian investment bank also shows the problems.  The BNDES has taken most of the investment business away from Brazil’s private banks, both domestic and foreign.  So they have concentrated on mortgage loans and speculation in commodities and financial assets, spawning a property and credit bubble.  Their huge asset power has not been used for developing the economy because there is no profit in it for them.  This is the risk in the UK too.  The NIB will do projects for productive investment while the ‘big five’ multinational banks will sit on the sidelines.  They are already failing to lend to small businesses and for investment (only 3% of all assets are in manufacturing sectors).  So I’m afraid  that Skidelsky’s claim that “a state-led investment programme offers a way to rebalance the British economy away from private speculative activity to long-term investment in sustainable growth” won’t happen if the only instrument is the NIB.

Surely, just using the NIB and perhaps the state-owned RBS alone cannot turn the credit institutions into vehicles for funding faster investment and employment?  There is crying need to take over the big five UK banks and use their financial resources in a national plan for investment and growth.  This is actually Trade Union Congress official policy (although that is ignored by the trade union leaders).  The case for public ownership is overwhelming. Moreover, how can Corbyn’s plan to end the grotesque salaries and bonuses paid to top executives and bankers be implemented without proper public control and ownership of the banks?

Then, as Marxist economist, Chris Dillon recently put it: “who will do the actual investing? There’s a case for the state to invest in infrastructure. But we also need corporate investment, to raise private sector productivity.”  I don’t think we need corporate investment, if that means relying on private companies for profit to deliver the investment that the NIB offers to fund.  Take a major project just announced for London.  The London ‘super sewer is set to begin next year.  Bazalgette Tunnel Limited, a special purpose company has been formed to lead the project.  Balfour Beatty, the UK construction company, has been awarded a £416m contract to build part of London’s new “super sewer.”  This is a private company with shareholders and private investors.  Surely this is a project for a publicly owned and controlled entity, not for profit?

It brings us back to the need for any effective (if extreme) economic policy to include as one of its main planks public ownership under democratic control of strategic industries, or what used to be called in Old Labour parlance, the ‘commanding heights’ of the economy.  Corbynomics includes the vital measure of renationalising the railways after the disgraceful and incompetent breaking up of the state rail system into private monopolies with franchises, and now asking the highest rail prices in Europe and yet still subsidised by the taxpayer.  It has taken the British railways back to the 1830s.

The most pathetic argument against renationalisation has come from Kate Hoey, the maverick ex-Labour MP.  You see it can’t be done because it is against EU directives!  “It would be hyperbole to say that all efforts to renationalise the railways would be blocked by the EU, but it would be equally naïve to dismiss the problem”.   But EU directives are not law but guidelines and can be interpreted or applied as member states wish.

Corbyn apparently also is considering restoring the state majority stake in the Royal Mail postal service, after its recent privatisation at a ludicrously low price by the current government.  This is good but that still leaves swathes of key British economic operations in the hands of profit-seeking companies.  What about the rest of transport: deregulated buses in the big cities; and all the British companies that used to be part of the public sector?  What about British Petroleum, British Airways; British Telecom; British Gas; British Aerospace; the electricity and water boards; Transco; Rolls Royce, British Steel, let alone British Coal?  And there are the major strategic sectors that should be part of what is called in Labour parlance “the commanding heights of the economy”: the major pharma and auto companies, now mostly in foreign hands where any profits for end up overseas.  Public ownership of the key national and regional airports would ensure a proper service that did not cause environmental pain from noise and pollution . “I think the third runway is a problem for noise pollution and so on across west London . . . I also think there is an under-usage of the other airports around London.”  (Corbyn).

Of course, such a programme would be extreme, not just for the capitalist media, mainstream economists and the Labour leadership, but also in the minds of many of the signatories to the leftist letter.  But without these measures, in my view, there will not be a “rebalancing of the British economy away from private speculative activity to long-term investment in sustainable growth” (Skidelsky).

The key is investment.  As Marxist economist, Mick Burke has pointed in a series of excellent posts, the capitalist sector has failed to deliver decent incomes and sustained growth because it had failed to invest. It seems that the private sector cannot deliver decent incomes and employment for all.  Burke points out that “per capita GDP is still below where it was before the crisis began in 2008. This remains the weakest recovery on record and the year-on-year growth rate has slowed from 3% to 2.6%. This follows a period from the end of 2012 onwards when no new austerity measures were imposed. Renewed austerity on the same scale as in 2010 to 2012 means there is likely to be a similar slowdown.”

He goes on: “The level of investment in the British economy was £295 billion in 2014, exactly the same as the pre-crisis level of 2007. But the economy is actually larger 4.2% larger (keeping pace with population growth, but no more than that). Therefore investment is declining as a proportion of GDP. Consumption, not investment is leading very weak growth and this is not sustainable.” The profit rate has only barely returned to its pre-crisis level and is well below profitability prior to this century. The same is true for business investment. Both of these are a recipe for continued slow growth.

Uk profitability

A Corbyn-led Labour government (in 2020?) would be a step forward for the majority.  And it would be necessary because, by then, capitalism, and British capital, would probably have entered yet another major slump and crisis.  But that prospect alone shows that Corbynomics is just not extreme enough in reversing the failure of British capitalist production.  For 30 years, British Labour leaders have been firmly in the camp of Capital on one bank of the river in the class struggle.  Now Corbynomics looks to leave the camp of capital and cross over to the camp of Labour.  Thus it is too extreme for the interests of Capital but too moderate for the interests of Labour. Being caught in the middle of a fast stream (capitalist crisis) can be dangerous.

PS: see the rabid attack on Corbyn in the FT by Philip Stephens.

From value and profit to crisis and back

September 9, 2015

I’ve just attended a one-day workshop on the rate of profit and crisis organised by Simon Mohun, Al Campbell and other Marxist economists as a prequel to the annual IIPPE conference taking place in Leeds over the next few days.  And an excellent initiative it was too.

Simon Mohun, emeritus professor of economics at Queen Mary College, London, opened the first session with a presentation on Marx’s value theory and its relation to the capitalist accumulation process and Marx’s law of the tendency of the rate of profit to fall.  Mohun started by making the key point that values equal prices in the aggregate.  This is the ‘conservation principle’ that labour value equals prices in the whole economy, although at the level of individual commodities, price can vary from value.  Indeed, the value of labour power (the socially necessary labour time taken to produce the commodities that workers consume in order to work) will not match the real wage (the price of labour).  Prices of production of commodities vary from their value through competition among capitalists, leading to an equalisation of the rate of profit across an economy.

Under capitalism, the accumulation process is designed to increase the level of technique and the productivity of labour so that ‘relative’ surplus value rises (surplus value as a share of total new value).  Increased productivity will lower the value of commodities as measured in labour time as the number produced rises in a fixed time period.  So there are more use values and less exchange value – the great contradiction.

Mohun summed up Marx’s main assumptions or postulates as 1) capitalist accumulation leads to rising labour productivity; 2) real wages rise as the value of labour power cheapens; and 3) and there is usually a rising capital-labour composition.  According to Mohun, these postulates may lead to a fall in the rate of profit but it is indeterminate (shades of Heinrich here).

Having previously pointed out that an explanation of a falling rate of profit based on rising wages was originally that of the classical economist David Ricardo and effectively refuted by Marx, Mohun seemed to accept that if real wages stay constant, then the rate of profit must rise.  This latter point is the conclusion drawn from the so-called Okishio theorem that no capitalist would voluntarily introduce a new machine or technique unless it reduced the cost of production (labour costs) and raised profitability.  So, according to Okishio, wages must rise before the rate of profit can fall.  Mohun seemed to accept the theorem but argued that Okishio was refuted because, in reality, real wages have risen as the value of labour power has fallen, so Okishio is addressing the wrong issue.

Actually, Okishio is wrong anyway about the capitalist accumulation process, not Marx, as several authors, like G Carchedi (see Behind the Crisis p87-92, Andrew Kliman (see Reclaiming Capital, chapter 7) and others have shown.  The Okishio theorem assumes a simultaneous change in prices of inputs to production and outputs – a physical impossibility in the reality of production over time.  Investment is first, production second and realisation last.  They can all be at different values or prices.  Reality is temporal.  In period one, capital is advanced for labour and means of production at a certain price or value.  Then a new technique is introduced and the cost of production falls.  Commodities are produced at a lower value or price BUT not the original investment.  That was advanced at the older (higher) price.  So the rate of profit can and will fall without a rise in real wages.

Moreover, using game theory and the ‘prisoners dilemma’, Mohun brilliantly showed why Okishio is wrong in practice.  Marx’s argument was that, if one capitalist innovates to gain a higher rate of profit over others, eventually the others will be forced to innovate too, leading to an equalisation of the rate of profit at a lower level (as the organic composition of capital rises).  Here is how I understood Mohun’s schema that shows why innovation under capitalism and competition can lead to fall in average rate of profit, contrary to Okishio.

There are two capitalists: A and B.  Each starts with 3 in profit.  If neither A and B innovate to reduce costs and boost profits, A stays at 3 and B stays at 3. But if A innovates and B does not; then A gets a higher profit (4) while B loses market share and gets only profit (1).  Alternatively, if A does not innovate and B does, then A gets 1 and B gets 4.  If both innovate, then A gets 2 and B gets 2.  There is a drive to innovate because A or B can raise profit from 3 to 4.  So there cannot be an agreement not to innovate, leaving A on 3 and B on 3.  But if one innovates first to get 4, then the other must do so or its profit will fall to 1.  But with both innovating, they both end up on 2 instead of 3 (if they had done nothing).  So innovation boosts the individual profit of the leader but eventually when both innovate, the profit is lower.  Again, this is over time.  If A and B could simultaneously introduce the innovation (as Okishio assumes), then they may not do so, and stay at 3, rather than fall to 2.  But that would not be reality.  Reality is temporal.

Despite these arguments for Marx’s law of profitability, Mohun left us wondering whether Marx’s law is ‘indeterminate’ and so does not explain or show why the rate of profit will or must fall.  Mohun also threw doubt on whether the rate of profit has actually fallen in reality.  Mohun pointed out the huge difficulties in measuring the rate of profit a la Marx from official statistics and we don’t have much more than the US or the UK to work on.  And Mohun left open the question of whether Marx’s law related in any way to crises.

Actually, Mohun himself has done excellent empirical work on the UK rate of profit in the inter-war period and more recently delivered a super paper on measuring the share of wages and profit in the US economy (ClassStructure1918to2011wmf.) Indeed, I’d like to think that some of us have made progress on the calculation issues and also in looking at profitability of capital globally beyond the US. In that latter regard, I have done work on a world rate of profit and even more recently a study of the UK rate of profit over the last 150 years (UK rate of profit August 2015).  And don’t forget the sterling work done by Esteban Maito on a world rate of profit based on 14 countries.  Next year, G Carchedi and I will publish a book containing the work of several young scholars who have measured the rate of profit in many countries globally.  These analyses will give renewed support to the relevance of Marx’s law of profitability.  Work is being done empirically.

John Weeks, eminent emeritus professor of economics at London’s SOAS university and author of many great books on Marxist economic theory took up the issue of the causal process between Marx’s law of profitability and crises.  He presented a flow chart that showed various possible outcomes (John Weeks handouts-1 (1)).  Weeks said we needed to define exactly what we meant by a crisis – which he reckoned was a significant sharp fall or contraction in output.  This is a point he made in a recent paper and I agree with him there.  If that is the definition of crisis, then Weeks reckoned there have been only three capitalist crises: the 1880s, 1930 and now.  I prefer to call these depressions and have outlined before the difference between ‘normal slumps’ and depressions.

But be that as it may.  As far as I could see, Weeks did not reach a conclusion about how Marx’s law could lead to crises, as he defined them.  You see, for Weeks, just a small fall in profitability cannot cause a crisis.  It needed to be big and long-lasting.  So, according to Weeks, we don’t have any proof of a connection between profitability and capitalist crises.  Well, actually, several authors have done just such work on the connection between profitability and growth in the post war period.  And G Carchedi has recently published a new paper showing the close connection between a change in new value (a fall) and recessions.  And I have raised the work of Tapia Granados on the causal connection between profits and investment in my blog on numerous occasions.  Apparently, all this has passed Weeks by.

Professor Alfred Saad-Filho, also at SOAS , then presented the workshop with a comprehensive history of the various interpretations of Marx’s crisis theory: overproduction (Engels-Kautsky); underconsumption (Luxemburg, Sweezy) disproportion (Tugan-Baronovsky,Hilferding) and the tendency of the rate of profit to fall (proponents of which he called ‘fundamentalists’ of a somewhat sectarian nature!).  For Saad-Filho, we needed to get away from adopting one interpretation of Marx’s incomplete crisis theory over another.  They were all in Marx at some point.  What we needed to do was integrate or synthesise them into one comprehensive theory to explain capitalist crises.  This still needs to be done, according to Saad-Filho.  But he did not provide any guide or show any progress on how to do this, except to present his own version of ‘financialisation’ as the cause of the current ‘neoliberal’ crisis.

Indeed, that appeared to be the conclusion I draw for the day as a whole.  I learnt about Marx’s value theory and the law of profitability; I learnt about the need to show how it connected or led to crises; I learnt how Marxists before have adopted all sorts of explanations for crises that have proved to have significant faults. But if this workshop is any guide, Marxist economics has not reached any definitive conclusions on these issues.  We don’t seem to have progressed much in delivering a coherent Marxist theory of capitalist crises since Marx died.

Actually I beg to differ: I’d like to think we have made progress, especially recently and even to the point of making predictions.  Still the workshop was very good.  We need more.


Olivier Blanchard and the IMF in the depression

September 4, 2015

The G20 group of top economies meets in Turkey this weekend.  For the meeting, the IMF issued an update on the state of the global economy – and the IMF is worried.  It points out that global growth in the first half of 2015 was lower than in the second half of 2014, reflecting a further slowdown in emerging economies and a weaker recovery in advanced economies. Productivity growth has been persistently weak.

So, once again, the IMF has lowered its confidence in global growth, and yet, once again, expects a ‘modest’ pick-up in the 2nd half of this year and into 2016. But apparently the “risks are tilted to the downside, and a simultaneous realization of some of these risks would imply a much weaker outlook.”

This G20 meeting was the last for the IMF’s chief economist, Olivier Blanchard, who is leaving to take up a lucrative new post with the mainstream economic think-tank, the Peterson Institute .  Blanchard gave an interview on the IMF blog that outlined his thoughts and reviewed his successes and failures.  French-born Blanchard, a former chairman of the economics department at the Massachusetts Institute of Technology, joined the IMF in 2008 at the height of global financial crash and in the depth of the ensuing Great Recession, just two weeks before Lehman Brother’s bank collapsed.


Blanchard is an eclectic mainstream economist extraordinaire, shuffling between neoclassical and Keynesian ideas as he sees fit – the perfect economic helmsman for the IMF as the institutional representative of international finance capital.

Blanchard says that “The crisis was a traumatic event during which we all had to question many cherished beliefs…. questioning various assumptions on the role of fiscal policy, including the size of fiscal multipliers, the use of unconventional monetary policy measures and macroprudential tools, capital flows and measures to control them, labour market policies and the role of micro and macro flexibility.“ In other words, everything has been questioned, except the causes of crises in capitalist production and accumulation.

No, that’s not fair. In the interview, Blanchard admits that it “would have been intellectually irresponsible, and politically unwise, to pretend that the crisis did not change our views about the way the economy works. Credibility would have been lost. So, rethinking, or pushing the envelope was not a choice, but a necessity.”

And what was the big rethink?  The big thing for the IMF during the Great Recession and the subsequent weak recovery was the size of what are called the ‘fiscal multipliers’, namely the degree of impact on economic growth and unemployment from imposing government spending cuts and tax increase to balance government books and reduce public debt in the middle of a major slump – the degree of ‘austerity’.  Blanchard is convinced that the fiscal multipliers are underestimated in a world of ‘zero-bound’ interest rates when monetary easing has little or no effect.  Correcting this was a great achievement of the IMF under his economic leadership.

The problem is that there is much counter-evidence that the fiscal multipliers are not much larger in recessions – in other words, the slump was not really a product of ‘too much austerity’, but of something else.  Anyway, even if Blanchard noticed that fiscal austerity made the slump worse than it might have been, did he advocate more fiscal spending by governments then?  No, he did not.  He just hinted that governments should not be so harsh.  That’s it.

The other thing that Blanchard reckoned where he ‘made a difference’ was in the Greek bailout discussions.  The IMF recognised that it had made a mistake in the first bailout in 2011 in not insisting on debt restructuring so that Greek public debt became sustainable.  They kept quiet about that.  Blanchard claims that “it made good sense to argue for debt relief first in private. We did. And when we thought our argument was not getting through, it made good sense to then go public.”  In future, the IMF would insist that private sector creditors (banks etc) also take a hit when restructuring public debt for a ‘distressed’ government wanting IMF ‘aid’.  Bit too late perhaps!

In the interview, Blanchard was also keen to emphasise that he had initiated discussions among mainstream economists about the nature, causes and remedies for the Great Recession and the Long Depression (as I call the weak recovery) afterwards.  He had launched three Rethinking Economics conferences under the auspices of the IMF.  And what did the great and good of assembled macroeconomists conclude?

Well, it was caused by naughty reckless bankers causing a financial panic (Ben Bernanke) or ‘financial shocks’ (David Romer) or it just happened (“my view is that it’s as if a cat has climbed a huge tree. It’s up there, and oh my God, we have this cat up there. The cat, of course, is this huge crisis. And everybody at the conference has been commenting about what we should do about this stupid cat and how do we get it down.”  said George Akerlof husband of current Fed chair Janet Yellen)!  At the time, Blanchard concluded that “we have a general sense of direction, but we are largely navigating by sight.”  By this, I think he really meant that economists are navigating blind, as there was no theory of what direction to take!  Indeed, Blanchard sums up: “There is no agreed vision of what the future financial architecture should look like, and by implication, no agreed vision of what the appropriate financial regulation should be.” In other words, no vision at all.

As Blanchard stated in the IMF interview: “The financial crisis raises a potentially existential crisis for macroeconomics.” Indeed!  He reckoned that mainstream economics must start to draw on old ideas from heterodox economics, namely “Hyman Minsky’s financial instability hypothesis. Kaldorian models of growth and inequality.” And even policy “that would have been considered anathema in the past are being proposed by ‘serious’’ economists: for example, monetary financing of the fiscal deficit.”  Also “some fundamental [neoclassical] assumptions are being challenged, for example the clean separation between cycles and trends” or “econometric tools, based on a vision of the world as being stationary around a trend, are being challenged.”

But it’s a mix for Blanchard: sticking to the mainstream and drawing on a few heterodox views about the damage caused by a debt-laden financial sector (Minsky) or rising inequality (Kaldor and, of course, now Piketty and Stiglitz).  Naturally, it goes without saying that the ideas of Marxist economics, of an irreconcilable contradiction between growth, employment and profitability under capitalist production is not part of Blanchard’s wider encompassing of ‘old ideas’.

Blanchard reckons that the experience of the Great Recession and Long Depression have led to “a clear swing of the pendulum away from markets towards government intervention” but “with much skepticism about the efficiency of government intervention”.  Well, he could have fooled me that mainstream economics and governments want more government and less markets.  And maybe the mainstream is right that government intervention won’t work anyway in restoring an economy – look at quantitative easing as an innovative monetary intervention.

As for the future, Blanchard hedges his bets.  It seems that the advance capitalist economies are going to suffer much lower growth “There is a good chance that we have entered a period of low productivity growth. There is a chance that we have entered a period of structurally weak demand, which will require very low interest rates.”  This is bad news for the strategists of capital, for which he is a leading economic consultant, as “low growth combined with increasing inequality, is not only unacceptable morally, but extremely dangerous politically”.

Blanchard offers no explanation about why market economies around the world are slowing down and delivering lower productivity growth and rising inequality.  But it is a moral dilemma, and even more worrying, ‘politically dangerous’ to capitalism.

So what does Capital do?  As Blanchard heads for his new job, he concluded that “there are no magical solutions: We have to be realistic as to what structural reforms are politically feasible, and what they can reasonably achieve.”  Great.

Australia: the lucky country

September 2, 2015

The FT published a piece over the weekend claiming that Australia is on track to surpass 26 consecutive years of growth, surpassing the record set by the Netherlands in the post 1945 period of capitalism.

Australia’s right-wing finance minister Joe Hockey was bullish, claiming that the slowdown in China would not damage the Aussie economy because there were big investments coming from the Chinese and other Asians that would keep the Australia’s record of avoiding a capitalist recession.

“Cassandras are loud, whereas optimists are getting on with the job. We are going to break the record and go beyond the Dutch,” he said. “Our growth is somewhere between 2 and 2.5 per cent and that’s with the biggest fall in the terms of trade in our history.”  The Netherlands enjoyed 26 years of economic growth between 1982 and 2008 on the back of discovery of North Sea oil. In comparison, Australia has enjoyed 24 years of uninterrupted growth.

However, that might be coming to an end.  The latest real GDP figures for Australia came out today.  Real GDP growth slowed to just 0.2% in Q2 2015, taking year-on-year growth down to 2%, the slowest rate since 2013.  The slowdown is driven by slowing demand from China for Australia’s raw materials.   The fall in net exports has taken 0.6% pts off growth.

Aus net exports

And it’s not strictly true that Australia had avoided recessions in the last 20 years or so.  If we measure Australia real GDP per head, then there was a contraction in 1990-1 and the Great Recession saw growth per head flatten out.  Even so, it is a pretty good record compared to any other major advanced capitalist economy.

Aussi real GDP

The reason is fairly clear, I think.  Australia has been ‘lucky’.  It has been alongside the huge expansion in growth and trade in China and other Asian countries in the last 25 years during the period of ‘globalisation’.  As Hockey said, “Australia was uniquely placed to benefit from China and Asia’s long-term growth by exporting resources, agricultural produce and services to the region”.  Also the economy benefited from an influx of skilled labour through immigration from all parts but also immigrants who came with wealth of their own to invest.

This shows in the profitability of Australian capital.  I collated three measures of Australia’s profitability as a capitalist economy since the early 1980s and profitability has risen by 40-60% (but that’s not unlike many other capitalist economies during the so-called neo-liberal period).

Aussie ROP

But are the good times over? The latest GDP data might suggest this. Chinese economic growth has been dropping off and other Asian economies are in trouble.  Demand for Australia’s iron ore, coal and other minerals has weakened.  Australia’s trade account has been deteriorating and unemployment is rising.

Aussie exports

If you compare average real GDP growth per head since 2008, Australia’s per capita growth has slowed from 2.5% a year from 1992 to 2007 to exactly half that rate at 1.25%.  Australia did not escape the global Long Depression at least in the sense of lower growth.  Also, the profitability graph above does suggest that profitability may have peaked in the last ten years or so.

The argument of Hockey is that, although Australia’s mining industry may be falling back because of weakening Chinese demand, Australia can compensate for that through the services sector and foreign (Chinese) investment.  “Our services industry, which is 70 per cent of our economy, provides everything that the emerging middle class wants in healthcare, education, tourism and financial services,” he said. “It is starting to lift quite significantly.”

For the first time in 2013-14, China became the largest source of foreign investment in Australia, leapfrogging the US. Total investment in real estate was $74.6bn, up from $51.9bn a year earlier.  Hockey reckons that the boom in property investment was helping the economy’s transition from a decade-long mining investment boom by creating jobs in housing and apartment construction.  “It is helping to fuel a construction boom in Sydney, Melbourne, increasingly in Brisbane and I think we will see it spread around the country,” Hockey said, claiming that fast-rising house prices in Sydney and Melbourne were not a “bubble”.

It would be interesting to hear from Australian readers of my blog on how they see Australia’s economy panning out.

Getting out of the Jackson Hole

August 31, 2015

After the market turmoil last week, global stock markets have quietened down for now, although by most measures of stock price against corporate profits or earnings, stock markets are still ‘overvalued’.  Take one of the most perceptive measures, the ratio of the stock market value of the major companies in the US (S&P-500) versus previously booked profits (‘trailing earnings’ reported), i.e. the price to earnings ratio.  If we adjust that ratio for inflation and average it on a ten-year rolling basis, then the ratio is around 23, or some 25-30% above the historic average (see graph below).


So the stock market crash may have another leg yet.  That would be especially likely if the US Federal Reserve finally carries through its plan to hike its basic interest rate for the first time since the Great Recession began back in early 2008.  This basic rate is virtually zero and the Fed has added to zero rates and series of quantitative easing (QE) programmes over the past few years (printing money and buying government and mortgage bonds) to try and boost the economy and restore the banking system.  QE did the latter but failed to do the former.  Stephen Williamson,vice-president of the Federal Reserve Bank of St Louis, just issued a study in which he concludes : “There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed – inflation and real economic activity. Indeed casual evidence suggests that QE has been ineffective.”

But until the stock market crash and the China slowdown, the Fed had been becoming confident that the US economy was recovering with GDP growth up and unemployment down.  It was getting ready to hike its interest rate.  The basic rate sets the rates for all others, like mortgages and loans to corporations.

The US second quarter real GDP figures were revised up last week. Now the stats say US real GDP rose 0.9% in Q2 instead of just 0.6% over Q1. That means the US economy was now 2.7% larger in 2015 so far than in 2014 at the same time.  That’s not bad compared to growth in the other major capitalist economies, although it is still below the long-term average for the US of 3.3% a year and well below rates of growth usually achieved in the ‘recovery’ period from a recession.

The Fed sees reasonably strong growth in the US, but weak growth everywhere else.  So the monetary policy committee of the Fed, which meets on 17 September, is in a dilemma.  Should it start to raise rates in order to ‘curb’ any possible future inflation as labour markets get too ‘tight’ and also restore control of credit markets; or should it wait until the rest of the world catches up or stops sliding back?

Every year at the end of August, central bankers of the world meet in Jackson Hole, Wyoming for a series of seminars on the state of the world economy, the latest economic theory and monetary policy (in the afternoons the bankers take hikes up the mountains of the Grand Tetons for philosophical meditation).  At Jackson Hole, eminent mainstream economists present papers to the bankers for discussion.  Last weekend, the subject of the seminars was Inflation dynamics and monetary policy.

This time, the head of the Fed, Janet Yellen, was not present and neither was the ECB chief, Mario Draghi.  So the keynote speech was delivered by Fed deputy chair, Stanley Fischer (Fed Official Fischer Leaves Door Open for September Rate Increase).

Fischer was all over the place.  On the one hand, he said that the Fed was preparing to raise interest rates soon because of the “impressive” growth of the domestic economy.  On the other hand, he suggested that the recent volatility of global financial markets could cause the Fed to hesitate, but only if it persisted. “We haven’t made a decision yet, and I don’t think we should,….We’ve got time to wait and see” (well, only two weeks!).  Some amount of uncertainty is inevitable. “When the case is overwhelming, if you wait that long,” he said, “then you’ve waited too long.”(!).  “The change in the circumstances which began with the Chinese devaluation is relatively new and we’re still watching how it unfolds, so I wouldn’t want to go ahead and decide right now what the case is — more compelling, less compelling etc,”  So Fischer sums up: “”The economy is returning to normal. We’re not certain we are there yet.”

Make that of what you will.  The Fed seems to have no idea what to do.  The UK’s Bank of England has been even worse than the Fed in forecasting what would happen to the UK economy.  And on whether to hike rates, it is even more confused.  The UK economy has also been growing faster than most other major economies (although whether that is sustainable is doubtful).  Inflation is near zero (although there is some underlying pick-up coming).  But the UK is much smaller economy than the US and more subject to the weakness of growth in the Eurozone and China than America.  So that should weigh on any decision to hike in the UK.

But Mark Carney, the useless (and very expensive) BoE governor seems to have no idea what to do.  “Realisation of some of a downside risk previously identified by the MPC, if it persists, has to be weighed against ongoing domestic strength, underpinned by credible policy regimes and an increasingly robust financial system,” Carney argued.  As usual with Britain, the BoE will wait to see what America does.

And there is no doubt that,outside the US and possibly the UK, there is little sign of economic recovery.  On the contrary, things are getting worse.  According to the OECD, economic growth in the 34 major advanced capitalist economies grew by only 0.4% in the second quarter of 2015 from the first quarter – a deceleration from the 0.5 per cent quarter-on-quarter growth achieved in the first three months of this year. Of the world’s seven major economies, the UK was the fastest growing in the second quarter, achieving 0.7 per cent expansion. The US took second place with 0.6 per cent. Other developed economies did not do so well in Q2, with a 0.4 per cent economic contraction in Japan, a 0.2 per cent contraction in Italy and flat-lining growth in France. Year-on-year GDP growth for the OECD area remained unchanged at 2 per cent in the second quarter of 2015.

Last week, the US credit rating firm Moody’s cut its 2016 global economic growth forecast just ten days after its last forecast.  It put average growth in the top G20 world economies at 2.8 percent on average, versus the 3 percent it had forecast previously. It even revised down the US for next year: “We have revised our U.S. 2016 forecast down slightly as the negative impact of the stronger dollar seems more pronounced than we assumed previously,” it said cutting it to 2.6 percent from 2.8 percent.

My own latest estimate of global PMI, an average of the monthly business activity indexes for national economies, shows that, in August, emerging economies have entered contraction territory, dragging world business activity down to a two-year low. World business is still growing overall (index above 50), but a significant slowdown has appeared in the summer (of the northern hemisphere).

Global PMI August

Most worrying of all is the state of world trade.  The World Trade Monitor reports that world trade suffered its biggest fall in the six years since the financial crisis in the first half of this year.  Much of this year’s slowdown in global trade has been due to a halting recovery in Europe as well as a slowing economy in China.  The graph below compares world trade growth with industrial output growth.  Usually world trade grows much faster than industrial output so that national economies can gain from exporting if their domestic economy is weak.  But for the first time in 15 years, for several quarters in 2014, trade has grown more slowly than industrial output globally.  And the gap in trade growth and industrial growth has narrowed sharply since the Great Recession.

World trade and IP growth

Mainstream economics is divided about whether it is a good idea for the Fed and the BoE to start to raise rates or not.  The Keynesians like Larry Summers and Paul Krugman reckon it would seriously damage consumer spending and investment and cause another credit crunch.  They would prefer to keep the credit bubble going with cheap money forever, along with some more government spending on infrastructure etc, to avoid ‘secular stagnation’.  Summers wrote that “a reasonable assessment of current conditions suggest that raising rates in the near future would be a serious error”.

On the other hand, the Austrian school of economics as represented by the Bank for International Settlements (BIS), reckon that to keep fuelling the credit bubble with cheap money and QE is presaging yet another financial crash down the road as debt in all the major economies is still too high.  Credit bubbles lead to ‘malinvestment’ and low productivity.  It is better to keep government spending curbed and to hike rates so that money is not spend on useless projects and the credit bubble is ‘pricked’.

In its annual report the BIS raised fears that unending printing of money and credit injections was creating financial and property asset ‘bubbles’ that would eventually burst and renew the financial crash of 2008.  Jaime Caruana, head of the BIS, said the international system “is in many ways more fragile than it was in the build-up to the Lehman crisis”. 

Both sides are probably right and wrong.  The Keynesians are probably right that tightening monetary policy when inflation is low and global growth is weak could well trigger another stock market crash.  But they are wrong to ignore the dangers of ‘permanent’ credit bubbles and high debt in causing crashes too (after all, what about the global financial crash of 2007).  The Austerians (Austrians) are right that permanent credit bubbles are ‘unproductive’ and risk financial crashes, but they are wrong to think that cutting government spending and making borrowing costs higher when investment and growth is so low would not also risk a new recession.

What both sides never consider is why economic growth, investment and prices are so low.  They ignore the role of profitability in capitalist economies  – although it is self-evident really that capitalism wont ‘recover’ unless profitability does.  Globally, that has not happened in the major economies, with the exception possibly of the US.  And even there, profitability is still below the peak of the late 1990s.  In 2014, US profitability hardly moved and now growth in the mass of US profits (not the rate) is slowing to a trickle.  Last week along with the revised GDP figures, the date for corporate profits in Q2 2015 were released. Profits were up slightly on the quarter but are nearly 2% down on this time last year.

US corporate profits August

The slowdown in profits in the US is mirrored in China too, where industrial profits are now contracting.

Chinese profits

And if we look at global corporate profits (five major economies as compiled by me), there is little growth at all.

Global corporate profits August

When profit growth slows, investment slows.  When profits fall, investment follows (I recently estimated that for the US,  the correlation between changes in the rate of profit and investment was 64%; second, the correlation between the mass of profit and investment was 76%; and third, the correlation between the rate of profit (lagged one year) and the mass of profit was also 76%.) The Great Recession saw a significant fall in investment, much more than consumption.  Since the end of the Great Recession and in the ‘recovery’ investment growth has remained well behind trend in the major economies.

Real investment lag

At the same time, the overall debt burden for the major economies has increased.

Advanced economy debt

And most important, corporate debt is still on the rise (partly because of cheap money and low rates for borrowing).  If profits start to fall that will put an extra burden on debt servicing for companies.

US NFC debt

So if the Fed hikes rates in September or later, it is likely to increase the risk of a new stock market slide and more important a new slump, something that I have warned about before. Getting out of the Jackson Hole won’t be easy.


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