The impact of Brexit

June 24, 2016

Well, I got it wrong. I thought that the British people would vote to stay in the EU, if narrowly.  Instead they have narrowly voted to leave.  The turnout at 72% was much higher than the last general election in May 2015 (67%) that saw the Conservative party narrowly returned to office with a small majority of just 12 seats over other parties.  PM David Cameron had managed to squeak through to victory by agreeing to call a referendum on EU membership.  This sufficiently weakened the burgeoning vote for the euro-sceptic UK Independence party (UKIP) which had been polling over 20% in the EU and local elections.  By agreeing to a referendum, Cameron managed to reduce UKIP’s representation to just one seat in parliament.

But this political tactic has now backfired.  Cameron has lost the referendum and has announced that he will resign and give way to a pro-Brexit leader as PM to conduct the fraught and tortuous negotiations with the EU leaders in the autumn.  Winning the election has turned out to be a poisoned chalice as I suggested.

It seems that sufficient numbers of voters believed the arguments of the pro-Brexit Tories and UKIP that what was wrong with their lives was ‘too much immigration’ and ‘too much regulation’ by the EU (although Britain is already the most deregulated economy in the OECD).  It was not to do with the global capitalist slump, the ensuing Long Depression and the austerity policies of Tory government.

Yes, many voters did not swallow the immigration and regulation arguments; but these were mainly the young; those who lived in multi-ethnic areas like London and Manchester and the better-off households in the urban south.  They were not enough compared to those who voted to leave.  They were older, lived in small towns and cities mainly in the north or in Wales far away from London and from the sight of any ‘immigrants’, but who have suffered the most from low paid jobs, public sector cuts, run-down housing and high streets and general neglect.

Along with these were the die-hard racist elements of the petty-bourgeois small business who gain nothing from EU trade or its financial largesse.  They reckon that in some way a return to the good old days of British imperialism standing on its own (“taking back our country”) will be better.  Only it won’t because, it looks very likely that the Scots, having narrowly rejected the call for their own independence in September 2014, and who voted heavily to stay in the EU, will now insist on another vote to leave the UK and stay in the EU as an independent state.  Going back to the good old days of British imperialism is more likely going back to the time before union of 1603 when England/Wales and Scotland had separate kings!

So what now?  Well, the financial markets have naturally reacted with panic, with the value of sterling plummeting against the dollar to its lowest level since 1985 at the time of (another) oil crisis.  Stock prices have also dropped sharply.  But this is just a shocked reaction to the unexpected.  How financial markets react in the coming months will depend on how the negotiations go (and they could take two years or even more!) and what happens to the UK economy.

In previous posts, I have highlighted the near unanimous view among mainstream economists that Brexit would damage the UK economy both in the short and long term.  Most now reckon that the UK will drop into recession before the end of the year.  Why?  After all, with a weaker pound, British exporters will be able to compete on price in world and European markets.  Surely that will reduce the dangerously large external deficit (now 7% of GDP) that British capitalism has been running with the rest of the world?  And the Bank of England is to provide as much credit as banks and companies want and may even cut interest rates towards zero to help households with their mortgages and companies with their debts.

Well, maybe – except that history has shown that devaluation of a currency is seldom successful in turning round the economic growth, productivity and even trade of a country.  I have cited before how the Keynesians were wrong when they reckoned the devaluation of the peso in Argentina would turn that economy around in 2001 – the Great Recession soon disabused that claim.

And in the Great Recession, the UK dramatically let the pound drop.  But the recovery in exports remained muted and the recovery in the domestic economy driven by cheap interest rates and a housing boom only led to a wider current account deficit.

And this deficit has to be financed by capital inflows – foreigners investing in British industry; buying British company stocks and government bonds; and depositing cash in British banks to earn interest or re-invest.  That funding had already started to dry up with the fear of Brexit – now Brexit is a reality.  The only way the deficit can be financed will be by raising interest rates on deposits, not cutting rates.

But the external deficit may actually shrink, not because exports will improve, but because imports of foreign goods and services will drop.  That’s because if the British economy shudders to a halt, companies and households will buy less from abroad, particularly as import prices will rise with the fall in sterling and inflation may come back.  That will squeeze real incomes in the average British household.

And the benefits of a weaker pound also depend on demand elsewhere in the world. If the Eurozone and US economy are struggling, then lower prices may be insufficient to lead to big increase in UK export demand.  Also, in recent years, British exports have proved to be quite inelastic. (British goods tend to be higher value goods and services – less sensitive to price change than manufactured clothes).

And here is the real point.  Devaluation only really affects demand. The other side of the equation is supply and productive capacity. Devaluation doesn’t necessarily do anything to promote investment and higher productivity. Some even argue that devaluation can reduce the incentive to be efficient because you become competitive without the effort of increasing productivity.  What really matters is what is going to happen to business investment and profitability.

Higher production costs from imports, weaker demand at home and abroad are likely to discourage UK companies from investing at home and foreign investors from stepping in.  And overall profitability of UK companies at the end of 2015 was still below the peak of 1997, while profitability in the key manufacturing sector for exports was half that of 1997.

If the UK tips into recession, the demand for EU exports (German cars, French wine, Italian clothing etc) is going to weaken.  And so a recession in the UK could push the EU back too.  And this is in an environment where global economic growth has slowed to its lowest rate since the end of the Great Recession, where global corporate profits are at zero and business investment is dropping in many economies.

Brexit in the long run may not make a huge difference to the health of British capitalism, but right now it could help accelerate a new global recession.  And that would have a much bigger impact on the lives of those who voted for Brexit than the perceived problems of ‘overcrowding’ from immigration or regulation from Brussels.

Brexit, China, the Fed and the global recession  

June 15, 2016

I have to say that I did not expect the referendum on whether Britain should leave the European Union or not would have a big effect on global markets.  And over the long term, I do not expect it to have a great impact on the relative health or otherwise of British capitalism.  Much bigger damage could be expected from the next global recession, which is coming up like a storm on the horizon at increasing pace.  See my post on Brexit.

But it seems that the growing possibility (not probability) that Brexit could be a reality is really exercising the decisions of international investors (banks, hedge funds, etc) in financial assets.  World stock markets, after a significant rally towards previous highs in the last three months, have now started to turn down.

Three things are driving this reversal. First, the fear of ‘Brexit’; that it will lead not only to a severe downturn in the UK economy as the tortuous negotiations for withdrawal begin (up to 2019 according to the ‘leave’ camp!), but also trigger a new recession in the rest of Europe.

Second, the renewed worry that China, the world’s second biggest economy, is showing further signs of economic slowdown, with the risk of a credit bust.

And third, that the US economy, the relatively best performer among the major economies since the end of the Great Recession, is also showing weaker economic activity just at a time when the US Federal Reserve reckons it needs to hike interest rates to ‘cap’ inflation (and wage rises).  ‘Uncertainty’ is the word of the moment – and, as mainstream economists continually tell us, ‘confidence’ about the future is paramount for investment.

There appears to be growing uncertainty about the result of the UK referendum with just over a week to go.  Brexit polls now indicate a steady downtrend in the lead for ‘remain’ that has brought the outcome of next Thursday’s vote near to a toss-up. The downtrend appears driven by the undecided group breaking in favour of ‘leave’.  This is the opposite of what often happens in advance of such groundbreaking votes, when a bias for maintaining the status quo tends to emerge. I still think that it is likely that there will be a majority for ‘remain’, but as the Duke of Wellington said at the end of the Battle of Waterloo against Napoleon, it could be “damn close run thing”.

What is worrying financial markets is that a vote for Brexit would have a damaging impact on the UK economy.  And that is surely right – at least in the short term.  There have been many estimates of the gain or loss from Brexit for the UK economy – see my Brexit post.  But the latest from the UK treasury reckons UK GDP would be 3.6% lower after two years than if the UK voted to stay, unemployment 520,000 higher and the pound 12% lower. The Institute for Fiscal Studies has added that — instead of an improvement of £8bn a year in the fiscal position if the net contribution to the EU fell — the budget deficit might be £20-40bn higher in 2019-20 than otherwise.  These fears have already hit sterling, which has fallen 5-6% against other major currencies since the referendum campaign got under way.


But the main reason that the UK economy would suffer is because it is weak anyway.  British capitalism has increasingly turned itself into a ‘rentier’ economy, where it get its surplus value, not mainly from the production of things and services to sell at home and abroad, but increasingly from acting as a banker and investor and business advisor for other capitals overseas, and raking off a percentage in interest, rents and fees.  That means the British population must import more and more goods from elsewhere to be paid for by monies ‘earned’ from financial and business services; and most important, from the willingness of foreign capitalists to put their money into banks and financial institutions in the City of London.

So the UK runs a massive current account deficit on goods and services with the rest of the world (currently 7% of GDP).

UK current account

And it finances this deficit through what Bank of England governor Mark Carney called “the kindness of strangers”.  By this he meant the inflow of foreign direct investment, foreigners purchase of UK government bonds and corporate stocks, and what has been called ‘hot money’, the movement of short-term cash and deposits into British banks.

Now these ‘capital flows’ are beginning to swing from the positive to the negative too.  The graph below shows the UK’s ‘capital account.

UK capital account

The yellow block is direct investment in British companies or setting up foreign ones on British soil.  That is pretty steady – but who knows if it would continue after Brexit.  Portfolio investment (blue block) shows that foreigners still want to buy and hold UK government bonds and stocks (as a ‘safe haven’).  But the light blue block is the ‘hot money’ – and it is flowing out big time up to 2015.  This has accelerated in 2016. If that outflow continues, then there will huge downward pressure on the pound, which may help exports down the road, but in the short term will drive up import prices and inflation, cutting into real incomes for the average household and raising costs for British industry.

Talking of capital outflows – that has been the issue in China as well.  As economic growth has slowed from double-digits to under 7% a year now (possibly lower) ,the Chinese currency has weakened and Chinese billionaires have been trying shift their money into dollars and out of the control of the Chinese authorities.  Dollar reserves have plummeted.

In a previous post, I argued that China’s slowdown will not bring the world down.  But renewed worries about the failure of the Chinese government to turn things round and growing talk by the likes of the IMF in a recent report of the dangerous levels of debt, particularly corporate debt, owed to the Chinese banks has recently revived concerns that China could implode.

The most significant sign that all is not well is the recent drop in investment growth in China.  For the first five months of this year, investment rose ‘only’ 7.5%. That may sound a lot compared to the pathetic rate achieved by the top capitalist economies (where investment is even falling), but compared to history, the current Chinese rate is way too low to sustain economic growth at even current levels.  Even more worrying, investment by private firms slowed to a record low, with growth cooling to 3.9% from double-digits last year. Private investment accounts for about 60% of overall investment in China.  And this investment and debt is having less and less an effect on sustaining growth and productivity.

China debt

The government has tried to boost infrastructure spending to compensate but not allow credit growth to get out of hand and cause a financial bust.  It is a dilemma that has provoked disagreement at the top of the Chinese Communist leadership, between the president Xi and the prime minister Li (in charge of economic policy).  The former wants ‘structural reform’ ie cuts in ‘zombie state’ companies, while the latter wants to engage in more credit injections.  And the battle between those who want to move further down the capitalist road towards privatisation and a market economy (backed by the World Bank and the IMF) and those who want to preserve ‘Chinese socialism’ with a state owned, party controlled planning mechanism smoulders on.

But the third point in the current nexus of worry is the US economy.  As Larry Summers, former US Treasury secretary, promoter of the thesis of ‘secular stagnation’, and regular columnist in the UK’s Ft, pointed out, “Any consideration of macro policy has to begin with the fact that the economy is now seven years into recovery and the next recession is at least on the far horizon. While recession certainly does not appear imminent, the annual probability of recession for an economy that is not in the early stage of recovery is at least 20 per cent. The fact that underlying growth is now only 2 per cent, that the rest of the world has serious problems, and that the US has an unusual degree of political uncertainty, all tilt toward greater pessimism. With at least some perceived possibility that a demagogue will be elected as President or that policy will lurch left, I would guess that from here the annual probability of recession is 25-30 per cent.”

Last month’s US jobs report was particularly weak and the US Federal Reserve’s own measure of employment conditions is falling at a rate that often presages an economic slump.

Fed labour index

The Fed is still dithering over whether to raise its policy interest rate or not this year.  It is still desperately hoping that the US economy is going to pick up in the second half of the year.  But at best, real GDP growth will be no more than 2%, as it has been more or less for the last five years.  At worst, it could slow or even contract.

And don’t forget my usual hobby-horse indicator of the health of a capitalist economy: the profitability of the capitalist sector and business investment.  The latest data show falling corporate profits.  And that usually presages a fall in business investment and from there to a recession – see the close correlation in the graph below.

US profits and investment

So if the Fed does go through with a hike in rates, that could add another negative to the conjunction of events (Brexit, China) tipping the world into a new recession.

As I have reiterated on many occasions, the world economy is in a Long Depression of below trend economic growth, near deflationary conditions, stagnant business investment and very weak productivity growth.  Most significant, world trade growth has slumped well below trend.

World trade

And at the same time, the great ‘globalisation’ of capital expansion around the world has reversed.  Capital flows between the major economies had reached 45% of their GDP in 2007.  Now that has fallen to just 5%.

Global capital flows

And the latest estimate by JP Morgan of global manufacturing output growth, the key sector of productive expansion, shows a level near zero.

The vote on Brexit has assumed a greater global significance than I originally thought.


Modelling the mainstream by Fine and Rodrik

June 10, 2016

When the forecasts of Keynesian economics were exposed by the stagflation of the 1970s, mainstream macroeconomics reversed back into what was called ‘microeconomic foundations’, or the so-called Lucas critique.

Outside intervention into the market was no longer justified by theory.  Uncertainty and irrational expectations, part of Keynesian thought, were replaced with ‘rational expectations’ in a myriad of Dynamic Stochastic General Equilibrium models.  DSGE models had equilibrium because they started from the premise that supply would equal demand ideally; they were dynamic because the models incorporated changing behaviour by individuals or firms (agents); and they were stochastic as ‘shocks’ to the system (trade union wage push, government spending action) were considered as random with a range of outcomes, unless confirmed otherwise).

Mainstream Keynesian economics now concentrated on explaining ‘business cycles’ or ‘fluctuations’ in an economy using ‘modern’ techniques of  modelling.  Econometric analyses like the Phillips curve were ditched because such ‘correlations’ between employment and inflation had been proved wrong.  The job now was not to look at macro or aggregate data but to work out some ‘model’ that started with some premises of agent (consumer) behaviour or preferences and then incorporated some possible ‘shocks’ to the general equilibrium of the market and then considered the number and probability of possible outcomes.

This is the context of the publication by Professor Ben Fine (with Ourania Dimakou) of two volumes called Microeconomics and Macroeconomics – a critical companion.

Ben Fine is a professor of economics at London’s School of Oriental and African Studies (SOAS).  He has been teaching economics for over 40 years and well-known for his excellent Marx’s Capital (written in 1975) and winner of both the Deutscher and Myrdal Prizes in political economy in 2009.  Fine is also a prominent organiser of the International Initiative for Promoting Political Economy (IIPPE) which brings together economics scholars critical of mainstream economics and exponents of heterodox alternatives.  Dimakou is a lecturer at SOAS with Fine.

Building on his years of experience in teaching mainstream economics, in these two volumes, Fine delivers a comprehensive critique of all mainstream economic theories and models.  This makes it an invaluable antidote to the conventional poison of marginalism and general equilibrium theory in microeconomics; and Say’s law and the denial of crises or slumps in macroeconomics.

I am fully reviewing Fine’s books elsewhere (to be announced), but here I want to consider what Fine says about mainstream economic models.  Fine makes the point that macroeconomics has shifted from theory to models.  Mathematical models replaced theory, with models to be tested ex-post.  For Fine, what is wrong with mainstream modelling is the lack of realism in the starting assumptions.  Fine goes through the famous accelerator-multiplier Keynesian model that shows the instability of capitalism but does not show why.  Fine goes onto analyse the counter-revolution against Keynes’ more radical model of instability and how the mainstream has castrated that into a model that moves to equilibrium given the assumptions of falling prices and wages – indeed, a synthesis with neoclassical theory.  Growth models were divorced from short-run fluctuation models.

We can contrast Fine’s view of economic models and their limitations with that of mainstream economist , Dani Rodrik, in his new book, Economics rules.  The subtitle tells the story: “why economics works, when it fails and how to tell the difference.”  For Rodrik, models are the strength of economics (but also its Achilles heel).  They are also what makes economics a science.  Rodrik rejects the view that economics can provide “universal explanations or prescriptions”.  All mainstream economics can do is “map bits of economic reality”.  In other words, economics is not ‘political economy’ in the sense of classical economists and Marx.

Rodrik clearly differs from Fine, who reckons models have become a diversion from proper ‘theory’, which can be tested empirically.  Fine rejects the view of Rodrik that the “macroeconomy can be readily and easily modelled in ways that allow more or less complex and knowable policy levers to be deployed” on the basis of ‘rational behaviour’ of ‘representative agents’.

Fine sums up his critique of mainstream economics as “to present and to challenge how macroeconomics has been constructed and has evolved, drawing upon two themes – its convergence upon general equilibrium and macroeconomics and the relationship between the short and long runs”.  The goal “of modelling the economy is fundamentally misconceived… a model of the economy is not the economy itself”.  For Fine, mainstream mathematical theory is “unfit for purpose”.  Models have a place but “their extreme limitations need to be recognised.”  As such, macroeconomics remains divorced from the real economy.

DSGE models reduce complex questions to overly simple “hypothesis tests” using arbitrary “significance levels” to “accept or reject” a single parameter value.  In contrast, the practical statistician needs a sound understanding of how baseball, poker, elections or other uncertain processes work, what measures are reliable and which not, what scales of aggregation are useful, and then to utilize the statistical tool kit as well as possible. You need extensive data sets, preferably collected over long periods of time, from which one can then use statistical techniques to incrementally change probabilities up or down relative to prior data.

Indeed, we do not have to accept the Lucas critique about statistical analysis.  The Bayesian approach, named after the 18th century minister Thomas Bayes who discovered a simple formula for updating probabilities using new data. The essence of the Bayesian approach is to provide a mathematical rule explaining how you should change your existing beliefs in the light of new evidence. In other words, it allows scientists to combine new data with their existing knowledge or expertise.

Bayes law shows the power of data or facts over theory and models. Neoclassical mainstream economics is not just ‘voodoo economics’ because it is ideologically biased, an apologia for the capitalist mode of production.  But in making assumptions about individual consumer behaviour, about the inherent equilibrium of capitalist production etc, it is also based on theoretical models that bear no relation to reality: the known facts or priors.  In contrast, a scientific approach would aim to test theory against the evidence on a continual basis, not just to falsify it (as Karl Popper would have it) but also to strengthen its explanatory power.

Janet Yellen and the US economy

June 6, 2016

Last December, the Federal Reserve decided to raise its policy interest rate for the first time since the Great Recession.  At the time, the Fed thought that the US economy was starting to expand at a sufficiently fast rate that it would suck up all the unemployed and create conditions for increased demand and rising prices.  Janet Yellen, the Federal Reserve chief explained that the US economy “is on a path of sustainable improvement.” and “we are confident in the US economy”.   It was expected the Fed would proceed to raise interest rates by up to 1% point in 2016 in order to control inflation and avoid sharp wage rises.

Well, over six months later, the Fed has not raised interest rates again.  And the reason is clear: US economic growth, far from being on a ‘path of sustainable improvement’, has been slowing.  In the first quarter of 2016, real GDP growth rose only at an annual rate of 0.8%.  And today, Yellen told the World Affairs Council in Philadelphia that the latest jobs growth figures had been disappointing, and while she remained optimistic, there was little ground for raising interest rates yet.  Indeed, new jobs rose just 38,000 in May, half the consensus forecast of 160,000.


The US labour market, far from ‘tightening’, is beginning to weaken.  The Fed’s labour conditions index  was revised down to -3.4 from -0.8 in April while the May reading came in at -4.8, confirming an accelerating decline in conditions. This rate of decline has in the past presaged a new economic recession.

Fed labour conditions

And according to a survey of mainstream economists by the National Association of Business Economics, US economic growth will slacken in 2016 to its slowest pace in four years, or just 1.9%, compared to a previous forecast of 2.5%.  But even that could be optimistic.


Sure, the unemployment rate in May fell to 4.7%, the lowest since November 2007, but it did so for the wrong reasons as household employment barely rose. It’s just that the labour force shrank 458,000 as people are giving up looking for a job.  The labour participation rate (the number of people working compared to those of working age), which had been picking up slightly, pulled back again.

There are currently 7.4 million American adults officially unemployed, but add in the ‘underemployment’ (part-time, temporary etc) and that number is much closer to 20 million. Full-time employment declined 59,000 on top of a 316,000 plunge in April. Those working part-time for economic reasons — actually preferring full-time employment but no such luck — jumped 468,000 in the sharpest increase for any month since September 2012.

Janet Yellen may think the US economy is getting better but the experience for Americans is different.  Student loan debt has never been higher. Food stamp applications are at a record high. Healthcare costs continue to mount, and inequality increases while average family incomes fall.


The percentage of men aged 25 to 54 (prime working years) not working is at an all-time high.  Real median household income is still 1.3% lower today than it was in 2007.

Growth in the productivity of labour is the benchmark for US economic growth.  It declined at a 1.7% annual rate in Q4 of last year and followed that up with a 1.0% drop in Q1.  Productivity is in decline because business investment growth has been weak.  As I have argued before, business investment growth ultimately depends on the profitability of capital and profitability has remained low.  And now total profits are falling.  The NABE economists reckon corporate profits will fall this year for the first time since 2011, when they declined 2.9 percent.

I have argued in previous posts that the US economy will head into a new recession within the next year or two.  According to JP Morgan, the US investment bank, the probability of a recession occurring within the next 12 months has never been higher during the current economic recovery. “Our preferred macroeconomic indicator of the probability that a recession begins within 12 months has moved up from 30% on May 5 to 34% last week to 36% today,”.

US recession Prob recession

Nevertheless, Yellen continues to hope.  “I see good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones,” Yellen said. “As a result, I expect the economic expansion to continue, with the labour market improving further and GDP growing moderately.”  Watch this space.

Richard Wolff and the deepening crisis

June 2, 2016

Capitalism’s crisis deepens by Richard D Wolff, Haymarket Books $18.95

The New York Times magazine has described Richard Wolff as “probably America’s most prominent Marxist economist”.  And that is probably not an exaggeration in the description of this emeritus Professor of Economics at the University of Massachusetts, Amherst and visiting professor at the New School University in New York.

Richard Wolff has been one of a handful of Marxist economists with full tenure at an American university.  And he has worked tirelessly to bring home to students and all who would listen in the US the Marxist alternative explanation of the nature of US capitalism and its current crisis.  Wolff has written several important economics books, sometimes with his close collaborator, Stephen A. Resnick.  In particular, their recent book,  Contending Economic Theories, neoclassical, Keynesian and Marxian is a very useful and clear explanation of the main strands of economics for those who don’t know.

His new book, however, is a compilation of his short articles and essays that he has written since the end of the Great Recession in 2010.  In many ways, it mirrors the approach that I adopted in my book, The Great Recession (Lulu 2009), which also was a series of essays and articles in chronological order covering the lead-up to the Great Recession and its immediate aftermath.

Wolff’s book is not chronological as such, as he breaks down his essays into themes about the current crisis: the first section looks the depth of the crisis and the responses of economists and politicians; the second part considers the specific issues of austerity, bank failure and debt; the third looks at the failure of government monetary and fiscal policy; and the final part looks at the socialist alternatives.

In the first section, Wolff outlines how mainstream economics has been dominated by and divided between neoclassical and Keynesian theories, while Marxist economic theory has been excluded and ignored.  And yet it is Marxian economics that best explains “capitalism’s repeated crises over the last century” (p7).  However, it is here that Wolff’s own view of the Marxist explanation of recurrent crises under capitalism appears – and it is very much the old ‘underconsumptionist’ thesis with extras added on about excessive household debt that many (indeed most) left Keynesians and Marxists have adopted as the explanation of the Great Recession.

According to Wolff, it was the end of rising wages in the neo-liberal period from the early 1980s and rising household debt to compensate for that which eventually led to the great slump as “mass worker exhaustion, stress and debt  drove the system to collapse” (p14).  Indeed, Wolff sums up five main reasons for the “persistence of the crisis” (what I call the Long Depression after the end of the Great Recession) – p31-34.  They are: the exhausted purchasing power of the working class; overcapacity and too much cash “without profitably productive outlets”; renewed speculation and debt; unending corruption; and no firm political and economic alternatives.

Now readers of my blog and my papers know that I do not agree that the Great Recession, and for that matter, previous capitalist slumps, were due to the lack of workers purchasing power or even just an excessive credit/debt bubble that burst.  For one of the earliest and best denials that underconsumption is Marxian economic theory, see this article by John Weeks back in 1982 (

For Wolff, the “classic contradiction” of capitalism is that capitalists “paid insufficient wages to enable workers to purchase growing capitalist output” (p166).  But the main contradiction, in my view, lies not in ‘insufficient wages’ but in Marx’s law of the tendency of the rate of profit to fall.  This tendency can for periods (sometimes long) be counteracted by more exploitation and new technology, but it eventually operates to drive down profitability and total profits, leading to a collapse in investment and then incomes and employment.

This explanation is entirely missing in Wolff’s book. Wolff’s five reasons for the Long Depression are true only because they describe the nature of the current low-growth world, but the explanation lies with continued low profitability (near post-war lows), a failure to reduce debt levels and the failure of business investment to recover as a result.  It’s not too much cash and capacity but too little profit.

Wolff does take up the “truth about profits” p81, but only to tell us that “profits have risen dramatically over the last 30 years”.  This is true if measured against GDP, as many do.  But this really only measures profit margins (profits per unit of output) not profitability in the Marxist sense, as profits over the stock of capital and labour employed.  On that measure, profitability has risen somewhat since the 1980s, only to start to decline again from the end of 1990s and is now below levels achieved 20 years ago in most major capitalist economies.  And now even profit margins are falling. By the way, Wolff’s book concentrates almost totally on the US capitalist experience.

In later sections, Wolff clearly exposes the failure of mainstream economic policies designed to restore the fortunes of US capitalism: whether it is ‘austerity’ policies; bailing out the banks; easy money etc.  So what is the alternative?  Wolff dismisses the prescriptions of the Keynesians like Paul Krugman or Robert Reich, pointing out correctly that the New Deal and deficit spending never “overcame the 1930s depression (World War 2 did)” p167.

A key problem with Wolff’s underconsumption theory is that it implies that if wages are made ‘sufficient’, then purchasing power returns and capitalist companies can sell and all is well.  This is the economic and political implication of the underconsumption theory: that capitalism can deliver as long as the distribution of profits and wages is pitched right as presumably it was in the Golden Age of the 1960s.

Wolff rightly does not draw that conclusion that flows from his analysis.  Instead, for him, the solution to recurrent crises and rising inequality lies in “changing the class structure of capitalist enterprises” and replacing them with “workers-directed enterprises.”  Wolff is concerned , rightly, to correct the view that the socialist alternative to capitalism is simply the public ownership of the major corporations and a national plan (p312-3).  Without democracy and workers control at company level there can be no real socialist development.  Otherwise state officials merely replace a capitalist board of directors.  This is “insufficient conceptually and strategically” (p316).

Wolff wants to include and emphasise the role of what he calls Workers Self-Directed Enterprises (WSDEs).  I think that Wolff still sees the necessity of a national plan based on collective ownership of the major sectors of the economy, finance, industry and key services, to be combined with WSDEs.  I hope so because the socialist alternative cannot just be the latter any more than it can be just the former.

Venezuela: near the end?

May 31, 2016

According to all reports, Venezuela is gripped by rolling blackouts, racing inflation, homicide rates that make it the world’s second most murderous country and shortages of basic goods and medicines.  The opposition parties are attempting to impeach and remove from office Nicolas Maduro, the Chavista leader, who took over from Hugo Chavez when he died in 2013 and who then managed to win narrowly the last presidential election.  The opposition tactic appears to be the same as that adopted successfully in Brazil by the right-wing parties in getting Workers Party leader, Dilma Rouseff, out of the presidency.

Across South America, centre-left social democratic governments that have been in office during the great commodity price boom since the early 2000s have lost power as oil and other raw material prices plummeted due to the drop in global demand as the world economy entered its long depression after the Great Recession.  Both neo-liberal and Keynesian policies adopted in Argentina, Brazil and Venezuela have miserably failed to avoid severe economic recession.

Over two years ago, I wrote on this blog that there was a significant risk that the ‘Chavista revolution’ would not survive the death of Hugo Chavez.  As I pointed out then, Venezuela’s economic fortunes have always been tied to world oil prices.  When petroleum prices began to fall in the mid-1980s, Venezuela’s GDP per head, a reasonable measure of average living standards, started to fall sharply from 50% above 1950 levels to just 10%.  The subsequent crisis in emerging market debt that erupted in the late 1990s, as in Argentina, led to a further fall, so that living standards by the early 2000s were below that of 1950  – a great example of the success of the market economy in Venezuela before Chavez came to power!

Venezuela GDP

The collapse in GDP growth coincided, not surprisingly, with a sharp fall in the profitability of Venezuelan capital (oil industry mainly). In 1989, the then president who had won with a campaign against the IMF, reversed his mandate and said that he no choice but to submit to its dictates.  He announced a plan to abolish food and fuel subsidies, increase gas prices, privatize state industries and cut spending on health care and education.  Profitability was driven up, but only modestly.  And Venezuelan capitalism continued to fail.


When Chavez came to power, he promised broad reforms, constitutional change and nationalization of key industries under his so-called Bolivarian Revolution.  Chavez’s programmes, aimed at helping the poor, included free health care, subsidised food and land reform.  This succeeded in decreasing poverty levels by 30% between 1995 and 2005, mostly due to an increase in the real per capita income.  Extreme poverty diminished from 32% to 19% of the population.  A recent IMF report (sdn1208rev) showed, in a world of rising inequality of incomes and wealth, that there was one country that has become more equal over the last 20 years – Venezuela.  And all that improvement was under the presidency of Chavez, with the gini coefficient of inequality falling from 45.4% in 2005 to 36.3% now.

But Chavez was lucky.  He took power just as the commodity price boom and oil prices rose to a peak.  Venezuelan capital gained with a significant rise in profitability(see graph), and because the commodity boom continued for a while longer despite the Great Recession (because China kept on growing), economic growth and profitability stayed up.  Oil accounts for more than 30% of Venezuela’s GDP, approximately 90% of exports and 50% of fiscal income. With high oil prices, Chávez was able to pour money into social programmes and engage in a burst of petro-diplomacy – subsidising like-minded governments not only in Cuba but also Bolivia and Nicaragua.

But in the last few years, the oil price has plummeted, along with other commodity prices.  The world economy has slowed into a low-growth stagnation, while China, the major consumer of energy and other commodity exports, has reduced purchases dramatically.  Brazil, Argentina and Venezuela have taken the biggest hits, and with that, their ‘leftist’ governments can no longer deliver for the majority.Ven trade

Venezuela’s currency, the bolivar, had to be devalued in order to sustain its dollar-based oil exports.  Inflation spiralled way more than in other Latin American countries.

Ven inflation

That hit the savings of the middle-class, in particular.  As a result, significant opposition to Chavismo grew, even among relatively lower middle-class strata.  Government spending stopped, living standards fell (again) and social problems (especially crime) began to erupt.

Now the right-wing ‘free marketeers’ tell us that this shows ‘socialism’ does not work and there is no escape from the rigours of the market.  As the right-wing Forbes magazine put it; “The ongoing disaster that is the Venezuelan economy under Bolivarian socialism tells us a number of interesting economic lessons. In part that there’s no economic theory so deluded that someone, somewhere, won’t believe in it. That we cannot simply ascribe prices randomly to goods: prices are not just an allocation method, they are information too. But the most basic point that needs to be made is that the price of something just is the price of something. We’re not going to be able to change that price simply by randomly sticking some other numbers on a piece of paper: the price of dried milk is what the price of dried milk will be, coffee will cost what coffee costs. Government, our plans, even the most deluded of economic policies, are just not going to change this: the price is the price.” 

In other words, you have to do what the markets says: the price is the price.  That is true only if the capitalist mode of production and the law of value dominates and is allowed to.  And it did and still does in Venezuela, despite the Chavista ‘revolution’.  The majority of industry and finance is still in private hands and the foreign capital still plays a powerful role.  State ownership of the oil industry and its revenues are no longer enough to resist the forces of the global market.  The International Monetary Fund predicts an 8 per cent economic contraction for 2016; the inflation rate is now the fastest in the world; electricity and running water are luxuries. Food and medicine are scarce.

Ven GDP growth

The Chavista regime would have to move to restrict the law of value and replace the capitalist mode of production in order to end the rule of global market. That would require the state monopoly of foreign trade; expropriation of the food production and distribution; default on the foreign debt; expropriation of the banks and big businesses; and a national democratic plan of production.

Even that would not be enough if Venezuela remained isolated without any sympathetic governments in Latin America also prepared to adopt similar measures.  And token support from Cuba aside, Venezuela is isolated.  China, which has loaned Caracas $65bn against future oil deliveries, is unlikely to extend fresh credit.  So it is probably too late, as the forces of reaction gain ground every day in the country.  It seems that we await only the decision of the army to change sides and oust the Chavistas.

G7 economies in trouble

May 26, 2016

World leaders are meeting in Japan at the so-called G7 meeting of top capitalist economies.  The state of the global economy is the main subject.  There will be no agreement on what to do about sluggish economic growth, still high unemployment in many countries, falling average real incomes in many others and above all, for capitalism, low productivity growth and dismal business investment.

The policy answers from the G7 leaders to this continued Long Depression vary from “structural reform” (i.e. neo-liberal measures to squeeze more surplus-value out of labour through reductions in labour rights; hiring and firing; privatisation) to more monetary easing (quantitative easing, negative interest rates) and then to fiscal stimulus (more government spending).  But nobody is agreed on common action, so nothing will change on policy.

What is changing is the further deterioration of the world capitalist economy.  Global industrial output growth continues to slow and in the case of the G7 economies (red line below), industrial production is now contracting.

World IP

And world trade, something that I have reported on before, is in significant negative territory (red line below).  This is partly due to the collapse in energy and other industrial raw material prices.  But even when you strip out the impact of the deflation in prices, world trade volume is basically static (blue line) and well below even the low world GDP growth rate of around 2.5%.  Countries with low domestic demand can expect no compensation through exports.

world trade

The most worrying thing for global capitalism is that the US economy, the best performer among the G7 since the end of the Great Recession in 2009, is also showing signs of fading.  In previous posts, I have argued that it would not be China that would pull down the world into a new recession but what happened in the US, which remains the most important capitalist economy, both in production and finance.

The latest survey of business activity among US companies, the so-called purchasing manager index (PMI), made dismal reading.  The PMI surveys companies to see if they think they are increasing production or not.  Anything over 50 suggests expansion.  The latest May figure shows that the US economy, both industry and services, is barely growing, with the PMI at just 50.8 (green line) compared to over 60 just two years ago.


And the prospects for a pick-up in growth ahead are not good.  The US Conference Board monitors the state of productivity around the world.  That’s the measure of output per worker (and per hour).  Productivity growth plus growth in the labour force constitutes the make-up of long-term real GDP growth.  Population and employment growth has been slowing in the Long Depression, so productivity growth is even more important.

The latest data from the Conference Board are particularly shocking.  Output per person grew just 1.2 per cent across the world in 2015, down from 1.9 per cent in 2014. Productivity growth in the eurozone, measured by gross domestic product per hour, is set to be a feeble 0.3 per cent and barely better in Japan at 0.4 per cent.  But the US slowed last year to just 0.3 per cent from 0.5 per cent in 2014, well below the pace of 2.4 per cent in 1999 to 2006.  Britain’s output per hour worked fell to an average annual increase of only 0.2 per cent between 2007 and 2013 and after a false dawn in 2015, is expected to show zero growth this year.

UK productivity growth

And now the Conference Board expects -0.2% for the US this year, the first contraction in three decades. Last year it looked like we were entering into a productivity crisis: now we are right in it,” said Bart van Ark, the Conference Board’s chief economist.  The Conference Board pleaded that “Companies really need to invest seriously in innovation. It is time for companies to move on the productivity agenda to turn this story around.”

US productivity growth


But they are not.  US business investment fell 0.4% in first quarter of 2016 compared to the first quarter of 2015 and spending on equipment fell for the first time since the Great Recession ended.

Why are companies in the G7 not rising to the occasion and investing more and more in new technology to get productivity growth up?  The usual mainstream economics argument was repeated by Goldman Sachs CEO Lloyd Blankfein recently.  The notorious head of the world’s most rapacious investment bank had one word to tie together everything happening on Wall Street and in the global economy right now.  “It all comes down to confidence”, he said at the firm’s annual meeting.  Right now, Blankfein said, “we’re in a low-confidence environment.”  But Blankfein’s answer begs the question: why is there a ‘lack of confidence” among companies to raise investment?  I have answered this question on numerous occasions in this blog.  The latest is in this post.    And see this by Jose Tapia Granados.

Corporate investment is stagnating or falling because profitability remains low and total profits have stopped rising.  Also corporate debt burdens are beginning to weight down on ‘confidence’.  Last year in the US, Last year business debt, excluding off balance sheet liabilities, rose $793 billion, while total gross private domestic investment (which includes fixed and inventory investment) rose only $93 billion.

More than 70 corporate borrowers have defaulted globally so far this year, piling up at the fastest pace since 2009 and closing in on the 113 issuers that defaulted in 2015, according to Standard & Poor’s.  It’s true that most of these are in the hard-hit energy and mining sectors.  the energy and resources sector accounted for more than half of the overall 72 issuers that have defaulted so far in 2016. Within this, 29 have been in the oil and gas industry, 12 were in metals, mining and steel and one was a utility company.

But the S&P is concerned that defaults could spread to other sectors: “So far, there has been little spillover effect into other sectors, but we are not ruling this out in the coming quarters. We also expect this stress on many U.S. oil and gas companies to persist with continued low oil prices, ongoing cash flow deficits as a result of declining prices, more limited debt-funding sources (including credit facilities and bank lending), and potentially limited benefits from plans to further cut capital expenditures.”  Corporate defaults are heading back up to territory last seen in 2009, when the financial crisis hit bottom.

US debt

So while the G7 leaders ponder the state of the world, far from corporations taking up the challenge of boosting productivity through more investment and R&D, they are holding back.  And a missing ‘confidence fairy’ is not the reason.

Greece: the never-ending circle

May 24, 2016

The next stage in the never-ending tragedy that is the Greek economy takes place today. The Greek government meets with the EU leaders and the IMF to discuss what to do about the current ‘bailout’ programme of credit and its public sector finances.

Over the weekend, the ‘leftist’ Syriza government in Greece got through parliament yet another range of severe cuts in public spending, increased taxes and a programme of extended privatisations, in order to meet the demands of the Troika (the EU, the ECB and the IMF). In return, the Greek government will receive another tranche of funding as part of the third ‘bailout’ package designed to get Greece to repay its pubic sector debts and ‘recapitalise’ its banks.

The funds will be used partly to cover the arrears of payments to the health service and schools that the central government had run up in order to make its own books balance. But most of it will be used to pay back existing loans and interest owed to the ECB and the IMF. So more money is being borrowed from the Troika to pay the Troika in a never-ending circle of madness!

The Greek public debt burden arose for two main reasons. Greek capitalism was so weak in the 1990s and the profitability of productive investment was so low that Greek capitalists needed the Greek state to subsidise them through low taxes and exemptions and handouts to favoured Greek oligarchs. In return, Greek politicians got all the perks and tips that made them wealthy too.

This weak and corrupt Greek economy then joined the euro in 2001 and the gravy train of EU funding was made available.  German and French finance came along to buy up Greek companies and allow the government to borrow and spend. The annual budget deficits and public debt rocketed under successive conservative and social democratic governments. These were financed by bond markets because German and French capital had invested in Greek businesses and bought Greek government bonds that delivered a much better interest than their own. So Greek capitalism lived off the credit-fuelled boom of the 2000s that hid its real weaknesss.

But then came the global financial crash and the Great Recession. The Eurozone headed into slump and Eurozone banks and companies got into deep trouble. Suddenly a Greek government with 120% of GDP debt and running a 15% of GDP annual deficit was no longer able to finance itself from the market and needed a ‘bailout’ from the rest of Europe.

But the bailout was not to help Greeks maintain living standards and preserve public services during the slump. On the contrary, living standards and public services had to be cut to ensure that German and French banks got their bond money back and foreign investment in Greek industry was protected.

So through the bailout programmes, foreign capital was more or less repaid in full, with the debt burden shifted onto the books of the Greek government, the Euro institutions and the IMF – in other words, taxpayers and citizens. The Greek people were ultimately committed to meeting the costs of the reckless failure of Greek and Eurozone capital.

Last summer 2015, the ‘Greek crisis’ came to head. The newly-elected leftist Syriza government appeared to refuse to accept the austerity measures demanded by the Troika. Finance minister Yanis Varoufakis went into the lion’s den of the Eurozone group meetings to call for debt relief and a rejection of the austerity measures. Eventually, Syriza leader Tsipras called a referendum of the people to say yes or no to the terms of Troika, amid the cutting off of credit to the Greek banks by the ECB, the imminent threat of financial and economic collapse and dire threats from the German leaders and the Eurozone group. The Greek people amazingly (including to Tsipras) voted by 62% to say no to these threats and austerity. The No side won every constituency in Greece and Tspiras had a mandate to reject the Eurozone demands.

But he and most of the other Syriza leaders backed down. They could not see any alternative but to accept the Troika demands. As they saw it, otherwise, credit would be cut off, Greece would be thrown out of the Eurozone and the economy would plunge even deeper into depression. They decided to agree to Troika terms in return for the vague promise that, some time later, the EU leaders would agree to ‘debt relief’. This presumably meant that Greece would have to pay less back to its creditors (now mainly the EU official loans) and so would have some ‘fiscal space’ to end austerity and get the economy going again – on a capitalist basis.

This is what I wrote last August on the news that Syriza had agreed to the terms of the third bailout: “The economic uncertainty is whether, even if the Greeks follow the deal to the letter, it will work to reduce Greece’s public sector debt burden, restore economic growth and reduce unemployment and reverse the drastic fall in living standards.  The answer to that question is clear.  It won’t”

“The IMF is not prepared to provide any further credit as part of this bailout because it does not think that Greek public sector debt can be stopped from rising as a share of GDP and that the Greeks can ever service it by borrowing from the market.  In other words, the debt is ‘unsustainable’.”

Now here we are, getting on for a year later, and Greece remains in economic recession.  The Greek economy contracted 0.4 percent on the quarter in the first three months of 2016 after growing by a meager 0.1 percent in the previous period. Compared with the same period a year earlier, the non-seasonally adjusted GDP shrank for the third quarter in a row by 1.2 percent, accelerating from a 0.7 percent fall in the last three months of 2015. So, since the Syriza government backed down, Greece has fallen back again into recession.


Unemployment remains well above 20% and is double that for youth unemployment. Average real wages are still falling; pensions have been cut yet again and public services remain in tatters. And Greece is taking the brunt of the influx of refugees from Syria and the Middle East.

The Syriza government has done everything it has been asked of by the Troika in making the Greek people pay for the failure of Greek capitalism. And yet the EU leaders have still not agreed to ‘debt relief’. Indeed, they are talking of only considering it once the austerity measures in the latest bailout have been implemented in full and the programme comes to an end in 2018. In the meantime, the Greek government is supposed to run a budget surplus (before interest payments on loans) of 3.5% of GDP a year for the foreseeable future. That is a level way higher than any other country in the EU and way higher for so long than any other government has achieved ever!

No wonder the IMF considers this approach as unsustainable. The IMF executives have a mandate not to lend money to any country that it does not think can pay it back – simple. And the IMF analysts reckon that applies to Greece. (

“Even if Greece, through a heroic effort, could temporarily reach a surplus close to 3.5% of GDP, few countries have managed to reach and sustain such high levels of primary balances for a decade or more, and it is highly unlikely that Greece can do so considering its still weak policy making institutions and projections suggesting that unemployment will remain at double digits for several decades.” IMF.

So the IMF wants the EU leaders (who own most of the debt) to agree to ‘debt relief’. The EU leaders stubbornly refuse as they think it would set a precedent for Eurozone governments to get away from ‘honouring’ their obligations and would look bad in particular to the German electorate with a general election only 18 months away and the Eurosceptic parties there gaining ground.  This is an irony considering that in 1953 Germany was allowed to write off the debt it owed to the Allied Powers after the second world war.  That was done to get Germany to return to the capitalist fold and allow economic recovery.  But not for Greece in 2016.

Today, the IMF and the EU leaders meet with the Greek negotiators. The IMF has repeated it would take part in Greece’s €86bn bailout only if its European partners could prove “the numbers add up”.

The IMF reckons that without debt relief, Greece’s public sector debt to GDP ratio (the measure everybody follows) would not fall even with further austerity. Indeed, it would rise from around 180% now to nearly 300% by 2060 – in a ‘snowball’ effect where debt is repaid with more debt and interest payments keep rising on top.

Greece’s gross financing needs, or GFN, (the money it would need to service its debt pile) would soar to 67.4 per cent of total economic output. That compares to financing needs of just 18.5 per cent today. With sufficient ‘debt relief’, Greek public debt could finally start to fall, the IMF claims. Even so, the debt ratio would still be above 100% over 40 years from now!

And what is this ‘debt relief’. Well, the IMF suggests “payment deferrals” until 2040 – which would mean Greece would pay none of the costs of servicing any of its bonds or loans for the next 24 years. This would mean extending the grace period on its existing European Financial Stability Fund loans by another 17 years, ESM loans another 6 years, and loans owed to member states by 20 years. In total, these measures would help reduce the country’s payments bill by 4.5 per cent of GDP over the next 24 years, according to the IMF.

An additional proposal is to extend the life on the loans owed to Greece’s fellow member states (known as the Greek loan facility) by 40 years, from their current maturation date of 2040 to 2080 instead. And loans issued by the eurozone’s emergency bailout fund – the European Financial Stability Facility – would be extended by 24 years from 2056 to 2080 and from the permanent European Stability Mechanism (Greece’s largest single creditor) by another 20 years, also taking them up to 2080. Combined, the IMF calculates such measures would help keep the cost of servicing Greece’s total loans below 20 per cent of GDP by 2060.

The IMF also proposes that Greece should pay no more than 1.5 per cent of its GDP every year to service the costs of its ESM/EFSF loans until 2045. The fund proposes this be done by swapping current expensive short-term bonds with higher interest rates, with longer term paper with lower repayments.

All these ideas are not really debt relief in the sense of actually writing off the debt. Such a move is taboo. Greece must honour its ‘debts’. In reality, these propoals would mean that the debt would be perpetually ‘rolled over’ to the future and interest payments would be reduced to the minimum. The IMF wants these measures of debt relief to start now while the Euro leaders, led by Germany, want to push them back to after 2018.

But even these measures of debt relief won’t work unless the Greek economy starts to grow again.  How can the Greek economy be made to grow? I posed three possible economic policy solutions last summer. There is the neoliberal solution currently being demanded and imposed by the Troika. This is to keep cutting back the public sector and its costs, to keep labour incomes down and to make pensioners and others pay more. This is aimed at raising the profitability of Greek capital and with extra foreign investment, restore the economy. At the same time, it is hoped that the Eurozone economy will start to grow strongly and so help Greece, as a rising tide raises all boats. So far, this policy solution has been a signal failure. Profitability has only improved marginally and Eurozone economic growth remains dismal.

The next solution is the Keynesian one. This means boosting public spending to increase demand, cancelling part of the government debt and for Greece to leave the euro and introduce a new currency (drachma) that is devalued by as much as is necessary to make Greek industry competitive in world markets. The trouble with this solution is that it assumes Greek capital can revive with a lower currency rate and that more public spending will increase ‘demand’ without further lowering profitability.

But the profitability of capital is key to recovery under a capitalist economy. Moreover, while Greek exporters may benefit from a devalued currency, many Greek companies that earn money at home in drachma will still be faced with paying debts in euros. Many will be bankrupted. Already over 40% of Greek banks loans to industry are not being serviced. Rapidly rising inflation that will follow devaluation would only raise profitability precisely because it will eat into the real incomes of the majority as wages failed to match inflation. There would also be the loss of EU social funding and other subsidies if Greece is also ejected from the EU and its funding institutions.  This solution has been rejected by the Greek government and most of its people too.

The third option is a socialist one. This recognises that Greek capitalism cannot recover to restore living standards for the majority, whether inside the euro in a Troika programme or outside with its own currency and with no Eurozone support. The socialist solution is to replace Greek capitalism with a planned economy where the Greek banks and major companies are publicly owned and controlled and the drive for profit is replaced with the drive for efficiency, investment and growth. The Greek economy is small but it is not without an educated people and many skills and some resources beyond tourism. Using its human capital in a planned and innovative way, it can grow. But being small, it will need, like all small economies, the help and cooperation of the rest of Europe.

This solution has never been posed by the Syriza leaders.  So the EU leaders and the Syriza government will continue trying to meet the demands and targets of the Troika in the vain hope that European capitalism will recover and grow and so allow Greeks to get some crumbs off the table.

There may be some deal on ‘debt relief’ from the discussions. But it will still mean that Greece has an unsustainable burden of debt on its books for generations to come, while living standards for the average Greek household fall back below where they were before Greece joined the Eurozone. And another global recession is fast approaching.

Labour’s new economics – not so new

May 22, 2016

Over 1000 people packed into a London college to take part in a day of analysis of the state of the British economy.  And hundreds had been turned away.  This was a conference called by the new left-wing leadership of the opposition Labour party in Britain.  The hardworking and dedicated activists within the Labour party that had backed Jeremy Corbyn, the new leftist leader, had turned out in droves to discuss with due intent what is wrong with capitalism in Britain and what to do about it. It was an unprecedented event: the leadership of the Labour party calling a meeting to discuss economics and economic policy and allowing party members to discuss.

Labour’s finance leader, John McDonnell opened the conference by saying the aim of the various sessions was to see how Labour could “transform capitalism” into delivering a “fairer, democratic sustainable prosperity shared by all”.  We needed to “rewrite the rules” of capitalism to make it work for all.  He argued the British capital was failing to invest for growth and jobs.  We needed to break with the ‘free market’ ideology of the neo-liberal agenda and “reshape the narrative” with “new economics”.

What was this new economics?  Well, I’m afraid it was not new but really a rehash of old Keynesian arguments and policy proposals.  As McDonnell said, the aim was to “transform capitalism” with new rules and state intervention, not to replace it.

The key note speaker at the conference was left Keynesian Cambridge University economist Ha-Joon Chang.  He delivered an entertaining and amusing presentation, the gist of which he had already written in an article for the British liberal Guardian newspaper that week.  Chang presented a compelling argument that the strategy adopted by previous right-wing and Labour governments of weakening manufacturing and industry in favour of finance, property and other unproductive services (in other words, turning Britain into a rentier economy) was a big mistake.

British capitalism was failing to compete in world markets with a record high deficit on trade with the rest of the world – see graph below (all graphs in this post have been researched by me and are not those of any speaker).


And its people had seen no rise in real incomes for eight years since the global financial collapse.  British economic strategists reckon that the UK economy did not need a thriving industrial base and could rely on its financial services – just like Switzerland.  The irony was that Switzerland is actually the most industrialised economy in the world, as measured by manufacturing output per person (see below).

manuf peer head

In contrast, British manufacturing has been in fast decline as a share of total output among major capitalist economies.

uk manuf

Chang reckoned Labour should aim to boost industry, R&D and investment, because those sectors can raise productivity for all sectors and incomes.  But he did not expand on how that was to be done in an economic world where banks and hedge funds rule, loans are made for property, while businesses hold back from investment.

In the finance workshop, the poverty of analysis and policy was very evident.  The main speakers were Frances Coppola, who has worked as an economist in many banks and now runs a blog on economics; and Anastasia Nesvetailova, who is a professor at the City of London university on finance and has spoken before at the series of ‘new economics’ meetings run by the Labour party.  Both speakers basically told hundreds before them that the regulation of the banks  would not avoid a future financial crash – indeed by making regulation ‘too tight’, it was strangling the ability of the banks to lend.  A financial transaction tax would not work either in controlling risk-taking by banks, particularly in new finance areas outside regulation.  Breaking up the big banks or separating their speculative operations from basic banking would not work either. Indeed, nothing would work to avoid yet another crash in the future: “we just had to prepare for one”!

So our finance experts had not a clue what to do. Staring them in the face was the obvious answer.  If the big banks are still engaged in risk activities, in greedy laundering and in paying grotesque salaries to their top executives, despite regulation, why not take them into public ownership under democratic control so that banking becomes a public service for the people to help investment and growth? This policy move was never even considered by these banking experts and yet Britain’s own firefighters union have produced an analysis showing why it was the best way forward, which was formally approved by the trade union federation.  I was told that state-owned banks would not work because they are corrupted by politicians – sure, as opposed to privately-owned banks that are as pure as snow.

At least in the session on fiscal and monetary policy, Michael Burke provided a coherent account of how the weak economic recovery in the major economies including the UK was not due to a lack of consumer demand as the Keynesian ‘experts’ keep arguing, but to one major factor: the failure of business to invest. The graph below for the UK shows how it was investment that collapsed in the Great Recession not consumption. It was the same story in all the major economies.

investment and concumption

The large companies were hoarding cash, small business were just hanging on and governments were cutting back on public sector investment.  Indeed, British capital has the lowest level of investment to GDP of the major capitalist economies (see black line in graph below).

investment to gdp

Weak and even falling investment had lowered growth rates and so held down incomes.  The answer was a new plan for growth based on public investment.

The conclusion of the day’s conference screamed out to me.  The capitalist sector had caused the crash, not the public sector.  But the public sector had to pay with increased debt and a reduction in the role of the state as support for growth and as a safety net for those who lost their jobs, homes and incomes.

So instead of trying to “transform capitalism”, Labour needs to develop a programme to replace capitalism by bringing into public ownership the major banks and business sectors under democratic control to be integrated into a plan for investment in people’s needs not profit.  Instead, Labour’s advisers and experts offered just some old ideas that had been tried and failed before to direct or regulate capitalism to make it work better.  No new economics there.


Monopoly or competition: which is worse?

May 17, 2016

In a recent article, Joseph Stiglitz, former chief economist of the World bank, Nobel prize winner in economics and now adviser to the British Labour Party, reckons that we are in a new era of monopoly and this is a the key cause of extreme inequality of income and wealth, inefficiency and low productivity growth and general stagnation in the major economies.

Stiglitz argues that the classical and neoclassical schools of economics assumed ‘competitive markets’ where all companies were on a ‘level playing field’.  This meant that owners of capital received profits that matched their contribution to an increase in output, their ‘marginal product’.

This rosy view is dismissed by Stiglitz.  In reality, who gets what in society is dependent on ‘power’.  Large companies can dictate prices in markets to small companies and can dictate wages to labour where they have no collective power (trade unions).  This ‘monopoly’ (over markets for commodities and labour) is what is ruining capitalism, argues Stiglitz.

Clearly, there is more than an element of truth in this perspective of capitalism.  The balance of forces in the struggle between capital and labour determines the share of income created by labour between profits and wages.  And it’s also true that large companies can often fix prices and market access to gain a lion’s share of sales and profits.

Indeed, Marx forecast over 160 years ago that the competitive struggle for profits between capitals and recurrent crises in production would lead to greater concentration of capital in the hands of a few and the centralisation of capital in financial sectors, intimately connected to the state itself.

Stiglitz cites a very recent account of market concentration in the US carried out by the US government.  The report found that in most industries, according to the CEA, standard metrics show large – and in some cases, dramatic – increases in market concentration. The top 10 banks’ share of the deposit market, for example, increased from about 20% to 50% in just 30 years, from 1980 to 2010.

Stiglitz concludes “today’s markets are characterised by the persistence of high monopoly profits”.  Stiglitz thus calls for ‘government intervention’ to reduce the power of monopolies and presumably create an environment for more competition so that there is “efficiency and shared prosperity”.  But this begs the question: is ‘competitive capitalism’ any more likely to deliver better economic growth, higher productivity from the labour force (efficiency) and less inequality than ‘monopoly capitalism’?

The answer to the question is partly met by pointing out the illusion that there ever was a great ‘competitive capitalism’ that grew fast without crises and distributed incomes and wealth on a ‘fairer basis’.  Capitalism became the dominant mode of production globally with all the warts of monopoly, state support and firm suppression of labour power already there.  There never was a level-playing field and, globally now, despite the competitive struggle for markets, there are different levels of monopoly or imperialist power.

But the other contradictory side of the answer to the question is that competition has not disappeared.  Stiglitz dismisses the view of Joseph Schumpeter that monopolies are eventually undermined by new competitors with new technologies or new products and markets.  Yet, as Marx showed, the development of ‘monopoly’ super-profits become an incentive for new capital to flow in (if it can break through the tariff, scale and other cartel barriers).  And that happens all the time: from publishers to Amazon; from British industry in the 19th century to German and US industry in the 20th; to Chinese manufacturing in the 21st.

After all, monopoly power is really oligopoly (a few large companies) and oligopoly can exhibit fierce competition, nationally and internationally.  The real cause of inequality is not monopoly but the increased exploitation of labour by big capital since the 1980s in the effort to reverse falling and low profitability experienced in the 1970s.  And the real cause of ‘stagnation’ and low productivity growth is not monopoly but the failure to invest, not only by large ‘monopolies’ but also by smaller capitals suffering from low profitability and high debts.  In other words, it is not monopoly that is the problem per se, but the weakness of the capitalist mode of production where investment and employment is only for profit.

This Stiglitz ignores.  As a result, his solution of government intervention to reduce inequality and create a more ‘level playing field’ for ‘competition’ among capitalist companies is utopian (you can’t turn the capitalist clock back) and unworkable (it would not achieve greater equality or better growth).

Ironically, there is another study that Stiglitz has not noticed that shows the rise in US inequality has coincided with the decline of large companies that used to employ hundreds of thousands or even millions of workers and their substitution by much smaller companies.  The share of large employers in total US employment went down simultaneously with the increase in US income inequality.  This study shows that is the decline in the power of labour through out-sourcing and globalisation that has driven up inequality in incomes.

The ‘internal’ break-up of large company (Fordist) employment into small contractors is the key feature of Stiglitz’s world of ‘monopoly’. In other words, what workers in America need is not the break-up of monopolies to create small companies in competition but trade unions.  The monopoly power that matters is that held by capital over labour.

new report this week from the Labor Center at the University of California, Berkeley, found that a third of production workers — non-managers working on factory floors and in related occupations — earn so little that their families receive some form of public assistance such as food stamps or the Earned Income Tax Credit. Many of those workers are temps, who account for a growing share of factory employment. The median wage for a manufacturing production worker, according to separate data from the Bureau of Labor Statistics, was $16.14 an hour in 2015, below the $17.40 an hour for all workers

The average manufacturing production worker in Michigan earns $20.80 an hour, vs.$18.86 in South Carolina, according to data from the Bureau of Labor Statistics.  Why do factory workers make more in Michigan? In a word: unions. The Midwest was, at least until recently, a bastion of union strength. Southern states, by contrast, are mostly “right-to-work” states where unions never gained a strong foothold. Private-sector unions have been shrinking , but they are stronger in the Midwest than in most other parts of the country. In Michigan, 23 percent of manufacturing production workers were union members in 2015; in South Carolina, less than 2 percent were.

Unions also help explain why the middle class is healthier in the Midwest than in the Southeast, where manufacturing jobs have been growing rapidly in recent decades. A new analysis from the Pew Research Center this week explored the state of the middle class in different parts of the country by looking at the share of households making between two-thirds and double the national median income, after controlling for the local cost of living. In many Midwestern cities, 60 percent or more of households are considered “middle-income” by this definition; in some Southern cities, even those with large manufacturing bases, middle-income households are now in the minority.

The power of capital over labour has produced post the Great Recession in America millions of households in permanent jeopardy of slipping into outright poverty. A Federal Reserve survey that found 47% of Americans wouldn’t be able to cover an unexpected $400 expense without borrowing or selling something. The Gallup Good Jobs Index measures the percentage of the adult population that works 30+ hours a week for a regular paycheck. It stood at 45.1%. In the US, 62.8% of the civilian noninstitutional population participates in the labor force, and 5% are unemployed, while Gallup tells us only 45.1% have what it considers a “good job.” These aren’t directly comparable datasets, but a rough estimate suggests that maybe a fifth of the labor force is either unemployed or have less-than-good jobs.

People who lose jobs in a recession experience a variety of long-lasting effects. Their new jobs often pay them lower wages, and it takes years for them to reach their previous earnings peak. These people are less likely to own a home; they experience more psychological problems; and their children perform worse in school. This is called ‘wage scarring’.

wage scarring

About 40 million Americans lost their jobs in the 2007–2009 recession. Only about one in four displaced workers have got back to pre-layoff earning levels after five years, according to University of California, Los Angeles economist Till von Wachter. A pay gap persists, even decades later, between workers who experienced a period of unemployment and similar workers who avoided a layoff. People who lost a job during recessions made 15-20% less than their nondisplaced peers after 10 to 20 years.  And these people will reach retirement age with little or no savings. They will either keep working or they will live frugally.

The April jobs report showed a staggering 16% unemployment rate for teenagers ages 16–19. This sample includes only those who were actively looking for jobs, so these aren’t full-time students. They have either dropped out, or they want to work while in school.  And there is the surprisingly higher death rate among middle-aged whites in America. That rate is the direct result of increased suicides and abuse of drugs and alcohol – all part of the psychological depression process. Over the past decade, Hispanic people have been dying at a slower rate. Black people have been dying at a slower rate; white people in other countries have been dying at a slower rate.

mortality rates

Yes, monopoly (more accurately oligopoly) power has increased in the last 150 years since Marx forecast that the capitalist mode of production would lead to increased concentration and centralisation of capital.  And that shows that capitalism is in its late stage of development and so must be replaced by ‘social monopoly’.  But that also means that a return to competition by government regulation, as Stiglitz implies, would not work; either to renew the power of capitalist development or to reduce inequality.

The permanent damage to millions of people’s lives in America, one of the richest capitalist economies in the world and the ‘land of the free’ is not the result of monopoly, but of the failure of capitalism to deliver enough things and services that people need, affordably.  Yes, the rich elite sit atop their huge companies and banks ‘earning’ massive salaries and bonuses and hedge fund managers and bankers reap big capital gains.  But the vast majority of Americans are struggling to make ends meet precisely because of ‘competitive capitalism’ and its failures.


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