The macro: what’s the big idea?

January 21, 2018

Yet again, mainstream economics is trying to rethink its effectiveness as an objective scientific analysis of the laws of motion of major economies.  Ever since the mainstream failed to foresee the global financial crash, come up with a convincing explanation for what happened and adopt policies that could get the capitalist economy out of the subsequent long depression of growth and investment, the mainstream has been stymied.

I covered various attempts to rethink in posts on this blog by: Dani Rodrik, Paul RomerRobert Skidelsky and more recently by John Quiggin.  I have also covered the attempts of more heterodox economics to critique mainstream failures.

Now we have yet another bout of navel gazing.  The latest issue of the Oxford Review of Economic Policy is devoted to ‘Rebuilding macroeconomic theory’ (all the articles are free to view until February 7).  And Martin Sandbu in the UK’s Financial Times has reviewed the various papers in the journal from such eminent mainstream economists as former IMF chief economist Olivier Blanchard, Nobel prize winners Paul Krugman and Joseph Stiglitz; and leading UK Keynesian Simon Wren-Lewis.

In these papers, the usual criticisms of modern macro are repeated: the failure to cover ‘irrationality’ and uncertainty; the insistence on ‘micro-foundations’ for macro models of economics reality (ie the Lucas critique) and the use of unrealistic assumptions in so-called DSGE models that have no relation to empirical evidence.

Sandbu sums up his review of these new efforts of the mainstream to rethink its faults and failures and concludes: that it “leaves little doubt that mainstream macroeconomics is in deep need of reform.”  He says: “the question is how, and whether the standard approach, DSGE modelling, can be sufficiently improved or should be jettisoned altogether.”

Well, as for the latter, opinion in the mainstream is divided.  As Sandbu says, “DSGE macroeconomics does not really allow for the large-scale financial panic we saw in 2008, nor for some of the main contending explanations for the slow recovery and a level of economic activity that remains far below the pre-crisis trend.”

Yet Paul Krugman, while admitting the blind spot of conventional DSGE, argues that existing macroeconomic theory is “good enough for government work” and policy advice.  What he means is that mainstream economic theory cannot explain the motion of capitalism but it can be used for quick economic solutions.  This is Krugman’s way – if you read his book on the crisis, End this Depression Now!, he says, there is no need to explain the Great Recession; let’s just get on with adopting policies to get out of it.  I think most of us would think that we wont know what are the right policies if we don’t know what caused the crisis in the first place!

And others in the Oxford Review reckon that with a bit of tweaking, DSGE models can be made useful in forecasting crises.  And one attempt cited by Sandbu from the review does lead to some interesting results.  It tries to ‘model’ the current Long Depression and finds that its model explains why the major economies have not ‘recovered normally’ nor slipped into deep deflationary depression.

It’s due to the failure of investment in the capitalist sector to return to previous levels: “the economy can get caught in a prolonged period of stagnation. In addition, productivity growth is embedded at least in part in investment: hence investment-induced stagnation can tie down productivity growth to very low levels.”  However, even this model falls back on the explanation of low investment as due to a lack of a “shift to the optimistic scenario about future growth” (ie lack of ‘animal spirits’ a la Keynes), which is no explanation at all.

Other mainstream economists like Simon Wren-Lewis or Olivier Blanchard are not sure that DSGE models can ever be fixed: “The attempts of some of these models to do more than what they were designed to do seem to be overambitious. I am not optimistic that DSGEs will be good policy models unless they become much looser about constraints from theory. I am willing to see them used for forecasting, but I am again sceptical that they will win that game.” (Blanchard).

Joseph Stiglitz condemns the very ‘microfoundations’ of modern DSGE models as unrealistic.  That means microeconomics, in particular general equilibrium theory, utility theory and marginalism provide no sound basis for analysis of the ‘agents’ at work in the movement of modern capitalist economies.  Macroeconomics has come to a dead end because microeconomics is flawed.  As Sandbu puts it “Bad macro is, to some extent, a case of too much bad micro.”   Not good news for mainstream macro.

But what  else is there?  Despite recognising that “the fundamental difficulty of microfoundations is that we simply do not have a comprehensive and convincing theory of economic behaviour at the micro level”,  Sanbu wants to plough on with “a more expansive and liberal form of DSGE”. So no change then for mainstream economics: it will continue to use marginalism and general equilibrium theory, but try to incorporate ‘animal spirits’ or ‘irrationality’ into its models of modern economies.  Good luck!

In a new piece, Keynesian biographer, Robert Skidelsky complains of the failure radically to rethink mainstream economic theory and attacks Krugman for his view that macroeconomics is “good enough” for policy decisions.  Skidelsky, in contrast, sees modern macro theory as having crucial faultlines: “the problem for New Keynesian macroeconomists is that they fail to acknowledge radical uncertainty in their models, leaving them without any theory of what to do in good times in order to avoid the bad times…. macroeconomics still needs to come up with a big new idea.”

What Skidelsky and other critics of mainstream economics (both in its micro and macro parts) fail to recognise is that no new big idea will appear because mainstream economics is a deliberate result of the need to avoid considering the reality of capitalism.  Its theories are ideological justifications of capitalism( its supposed tendency to harmonious growth, equilibrium and equality). When reality does not bear out the mainstream, it is ignored. That’s because ‘mainstream’ means support for the existing dominant ideology.

‘Political economy’ started as an analysis of the nature of capitalism on an ‘objective’ basis by the great classical economists Adam Smith, David Ricardo, James Mill and others.  But once capitalism became the dominant mode of production in the major economies and it became clear that capitalism was another form of the exploitation of labour (this time by capital), then economics quickly moved to deny that reality.  Instead, mainstream economics became an apologia for capitalism, with general equilibrium replacing real competition; marginal utility replacing the labour theory of value and Say’s law replacing crises.

Even the so-called Keynesian revolution that came out of the experience of the Great Depression was hardly ever applied and was soon dumped when capitalism faced renewed crisis in the 1970s.  The Keynesians are now either advocates of theory that is ‘good enough’ or critics with no ‘big new idea’.


Carillion and the ‘dead end’ of privatisation

January 18, 2018

A few weeks ago, Martin Wolf, Keynesian economics journalist for the UK’s Financial Times, wrote a piece arguing that the renationalisation of privatised state companies was a ‘dead end’ and would not solve the failures of privately owned and run public services in the UK and elsewhere.

And yet within a week or so, it was announced that one of the leading construction and service companies in the UK that has got much of the ‘outsourced’ previously publicly owned projects had gone bust.  Carillion, as it likes to call itself, employs about 20,000 people in the UK and has more staff abroad. It specialised in the construction of public roads, rail and bridges and ‘facilities management’ and ongoing maintenance for state schools, the armed forces, the rail network and the UK’s national health service.

But it seems that it had taken on too many projects from the UK public sector at prices that delivered very narrow margins.  So, as debt issuance rose and profitability disappeared, cash began to haemorrhage.  Carillion ran up a huge debt pile of £900m.  But this did not stop the Carillion board lying about their financial state, continuing to pay themselves large salaries and bonuses and fat dividends to their shareholders.  In contrast, the company did little to reduce a mounting deficit on the pensions fund of their 40,000 global staff, putting their pensions in jeopardy. Indeed, Carillion raised its dividends every year for 16 years while running up a pensions deficit of £587m.  It paid out nearly £200m in dividends in the last two years alone.  The recently sacked CEO took home £660,000 a year plus bonuses.

But eventually, the bank creditors had enough and pulled the plug on further loans and Carillion has closed.  With the liquidation of the company, thousands of jobs are likely to go, while pension benefits could be cut and the British taxpayer will have to pick up the bill of maintaining necessary services previously provided by Carillion.

Amazingly, as I write, the Official Receiver for the bankrupt company says that all the top executives are “still on the payroll” and receiving their salaries, including the recently sacked chief executive.  The government has announced it will guarantee the salaries of employees in 450 public sector contracts run by Carillion.  So the taxpayer will be covering these.  But over 60,000 employees working on private sector jobs are likely to receive no more wages from now, while up to 30,000 sub-contractors have invoices of £1bn that are unlikely ever to be met.

Carillion is a very graphic confirmation that outsourcing public services and sectors to private companies to ‘save money’ on ‘inefficient’ public sector operations is a nonsense.  The reason for privatisation and outsourcing has really been to cut the costs of labour, reduce conditions and pension rights for employees and to make a quick buck for companies and hedge funds.  But such is competition for these contracts that, increasingly, private companies cannot sustain services or projects even when they have cut costs to the bone.  So they just pull out or go bust, leaving the taxpayer with the mess. It’s a microcosm of capitalist economic collapse.

Carillion is not the first example in the UK.  The 2007 failure of Metronet, which had been contracted to maintain and upgrade the London Underground cost the taxpayer at least £170m.  In the UK, outsourcing of public sector operations has reached 15% of public spending or about £100bn.  So more may be under threat.  Indeed, half a million UK businesses have started 2018 in significant financial distress, according to insolvency specialist Begbies Traynor, as the UK economy felt the effects of higher inflation, rising interest rates, growing business uncertainty and weaker consumer spending.

A total of 493,296 businesses were experiencing significant financial distress in the final quarter of 2017 according to Begbies’ latest “red flag alert”, which monitors the health of UK companies. That was 36% higher than at the same point in 2016 and 10% higher than in the third quarter of 2017.  And the worst situation was to be found in the services sector. A total of 121,095 businesses in the sector were showing signs of financial difficulty, up 43% on a year earlier.

Martin Wolf’s claim that privatisation has been a success because it is more efficient is just nonsense.  For the last 25 years, the UK government, starting with Thatcher and continued by right-wing Blair and Brown Labour governments, has resorted to ‘private finance initiatives’ to fund public sector building of schools, hospitals, rail and roads.  Under the PFI, banks and hedge funds fund the projects in return for interest and income paid by the operators of the projects, with payments spread over 25 years.  The idea was to keep down ‘public debt’ levels.  But of course, this was at the expense of future generations of taxpayers.

According to the UK’s National Audit Office in a new report, taxpayers will be forced to hand over nearly £200bn to contractors under PFI deals for at least the next 25 years.  And there was little evidence that there were any financial savings in doing PFI – indeed the cost of privately financing public projects can be 40% higher than relying solely upon government bonds, auditors found.  Annual charges for these deals amounted to £10.3bn in 2016-17. Even if no new deals are entered into, future charges that continue until the 2040s amount to £199bn, it.  “After 25 years of PFI, there is still little evidence that it delivers enough benefit to offset the additional costs of borrowing money privately,” … many local bodies are now shackled to inflexible PFI contracts that are exorbitantly expensive to change.”

And yet Martin Wolf reckons that it does not make sense to renationalise privatised state operations.  He makes the usual claim that state companies were huge inefficient behemoths that were not accountable to the public, “chronically overmanned and heavily politicised. They either underinvested or made poor investment decisions”.  Oh, unlike the private profit monopolies that now run Britain’s utilities, rail and energy and broadband.

Wolf digs up some research from the 1980s and 1990s by William Megginson of the University of Oklahoma who argues that public companies were more inefficient than the private counterparts.  Wolf also cites research from 2002 that British railways have been more efficient under the nightmarish private franchise experiment that rail travellers have experienced since 1997 along with the disastrous collapse of RailTrack, the private company that took over the maintenance of the track.  Tell this to rail travellers and staff.

There is, however, a pile of research that reaches opposite conclusions from Wolf’s sources.  I quote from the recent PSIRU report: “there is now extensive experience of all forms of privatisation and researchers have published many studies of the empirical evidence on comparative technical efficiency. The results are remarkably consistent across all sectors and all forms of privatisation and outsourcing: there is no empirical evidence that the private sector is intrinsically more efficient. The same results emerge consistently from sectors and services which are subject to outsourcing, such as waste management, and in sectors privatised by sale, such as telecoms.”

Detailed studies of the UK privatisations of electricity, gas, telecoms, water and rail have also found no evidence that privatisation has caused a significant improvement in productivity.  A comprehensive analysis in 2004 of all the UK privatisations concluded: “These results confirm the overall conclusion of previous studies that …privatisation per se has no visible impact …. I have been unable to find sufficient statistical macro or micro evidence that output, labour, capital and TFP productivity in the UK increased substantially as a consequence of ownership change at privatisation compared to the long-term trend.”

Evidence from developing countries points to the same conclusion. A global review of water, electricity, rail and telecoms by the World Bank in 2005 concluded: “the econometric evidence on the relevance of ownership suggests that in general, there is no statistically significant difference between the efficiency performance of public and private operators” (Estache et al 2005).

The largest study of the efficiency of privatized companies looked at all European companies privatized during 1980-2009. It compared their performance with companies that remained public and with their own past performance as public companies. The result? The privatized companies performed worse than those that remained public and continued to do so for up to 10 years after privatization.

Wolf’s answer to the failures of privatisation and outsourcing is to “reform the structure and purposes of regulation”.  As if regulation ever worked; indeed, current thought among government elites and big business is that economies need to loosen up regulation again in order to get things going.  To quote Wolf himself from his book on the lessons of the banking crash: “notwithstanding all the regulatory reforms, the system is bound to fail again,”

Public ownership is not of “totemic significance” to the left, as Wolf harps.  It is based on clear evidence that delivering services that people need is best done within a plan and not based on the level of profitability for the likes of Carillion. Yes, public ownership and state companies that become just milk cows for the profits of the private sector without any democratic control are not what we require.  But democratically run public companies as part of a plan for production for need are not “a dead end”, but the future.


ASSA 2018 part 2: value, profitability and crises

January 8, 2018

At ASSA 2018, away from the huge arenas where thousands listened to the millionaire guru mainstream economists speak, were the sessions under the umbrella of the Union of Radical Political Economics (URPE), where just handfuls heard papers from a range of heterodox and radical economists.  These sessions were a mixture of debate on Marx’s value theory (among Marxists) and its dismissal by followers of Piero Sraffa.  But there was also some very interesting research on the nature of capitalist economic cycles and the causes of crises, including the 2008 crash and the Great Recession.

Supporters of ‘neo-Ricardian’ theorist, Piero Sraffa, had a session aimed at comparing Marx’s analysis of capitalism with their own hero.  In his ‘point by point’ comparison of Marx and Sraffa, Robin Hahnel explained that Marx was the “great grandfather” of the critique of capitalism, but a great deal has happened since Marx died in 1883”and it was time to acknowledge that “Marx’s attempt to fashion a formal economic theory of price and income determination in capitalism based on a labor theory of value, and elaborate a Hegelian critique of capitalism, can now be surpassed”.  Now “a number of distinguished Sraffian economists have used modern mathematical tools to elaborate an intellectually rigorous version of Sraffian theory which surpasses formal Marxian economic theory in every regard”.


To justify this claim, Harnel then offers the usual set of neo-Ricardian arguments against Marx’s value theory (first raised by Ian Steedman in 1977): values are not necessary to explain prices or profit under capitalism, indeed they are redundant; Marx’s value and profitability theories are empirically refuted; and anyway, Okishio has completely rebutted Marx’s theory of crises based on the law of the tendency of the rate of profit to fall.

There is no room in this post to respond properly to these traditional arguments of the Sraffians.  Instead I refer readers to the battery of work done by Marxist economists over the last 40 years that show the logic of Marx’s theory, expose the unrealistic assumptions in Sraffa’s approach and provide empirical support for Marx’s laws of motion under capitalism.  I have only to mention but a few: the work of Husson, Carchedi, Freeman, Kliman and Moseley among many others.

Indeed, at ASSA, in other sessions Marxist value theory was convincingly expounded.  Riccardo Bellofiore took us carefully on a tour through Marx’s value theory from various anglesAnd see Bellofiore’s account of Sraffa from another session.



And Fred Moseley recounted his important summary of Marx’s value theory and laws of motion in his book of last year, Money and Totality.  His book offers a firm critique of Sraffian theory as well as a convincing interpretation of the so-called transformation problem of ‘converting’ labour values into the prices of production – an issue that the Sraffians and all critics of Marx’s value theory latch onto.


At ASSA, Moseley’s ‘macro-monetary’ approach to Marx’s value theory was criticised by David Laibman and Gilbert Skillman.


But Moseley was firm in his view that Marx’s theory of capitalism is internally logically consistent.  The long-standing and widely-held criticism that Marx “failed to transform the inputs” in his theory of prices of production in Volume 3 is not a valid criticism. Marx did not fail to transform the inputs because the inputs are not supposed to be transformed. The inputs of constant capital and variable capital are the same actual quantities money capital advanced at the beginning of the circuit of money capital to purchase means of production and labor-power which are taken as given”.  So prices of production can be derived from total surplus-value and general rate of profit in a logically consistent way.  Marx’s value theory is both necessary and sufficient in explaining market prices, indeed better than mainstream neoclassical marginalist theory or the ‘physicalist’ production equations of Sraffa.

As I said, the debate between Marxists and the neo-Ricardians/Sraffians is now over 40 years old.  It boils down to whether you think Marx’s value theory and his critique of capitalism is logically valid.  Marxists have, in my opinion, conclusively won that debate.

But for Marxist economics in the last 15 years, and certainly since the Great Recession, the issue has moved on to whether Marx’s value and crisis theory is empirically supported.  There has been a mountain of studies on this – with work by Freeman, Kliman, Moseley, Carchedi (and myself).  And this year, Carchedi and I will publish a collection of research by young Marxist economists from all corners of the globe that help verify empirically Marx’s law of profitability and theory of crises.

And at ASSA, yet more convincing empirical work was presented.  In particular, David Brennan presented an analysis based, he said, on using Marx’s law of profitability and Michal Kalecki’s macro identities. Brennan offered “a new methodology based on the work of Kalecki to provide empirical estimates of profits and the various components of realization, profit rates, and the organic composition of capital. These estimates provide new insights into the Great Recession and the “recovery.”


Now readers of this blog and some of my research papers will know that I have serious criticisms of the Keynes/Kalecki macro identities as a useful tool in explaining crises under capitalism.  In essence, as Brennan also shows when he goes through the macro categories, the capitalist economy’s driver can be boiled down to profits=investment identity.

Why? Because if we assume workers in general consume all they get and capitalists save all they get, while governments balance their books and external trade is in balance, then all that is left is profits=investment.  The Keynesian/Kalecki conclusion is that investment drives or creates profits based on the view of the ‘effective demand’ of capitalists.  But this is back to front.  The Marxist view is that profits drive or create investment, not vice versa.  And there is plenty of empirical evidence to confirm the Marxist view.

But Brennan wanted to make the point that crises could not be caused by just a fall in the rate of profit; slumps also depend on the realisation of the mass of profit.  Marxian theory was not wrong about the causes of the Great Recession, although various Marxian theories emphasized different aspects of the crisis. In the end, the rate of profit matters for the trajectory of the economy. But to understand crises like the Great Recession, profit rates alone are not sufficient. Crises, unlike typical recessions, are sudden and often unforeseen. The Great Recession was both a profit rate and a profit realization crisis.”

Brennan sees the latter as the contribution of Kalecki.  Actually, Marx’s theory of crises has always taken that into account.  Indeed, when the rate of profit falls and is no longer compensated for by a rise in the mass of profit, a slump is set to come.  The Marxist economist, Henryk Grossman, particularly emphasised this aspect of Marx’s crisis theory.

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

And this is what Brennan finds in the US data using his combination of a Marxian rate of profit and ‘Kalecki’ profits.  The profit rate fell in the 1964-1980 period and then rose in the neoliberal 1980-2006 period, fell during the Great Recession and recovered subsequently.  These results repeat what a host of studies have already shown.

Brennan now adds the impact of the movement in the mass of profits (a la Kalecki) and finds that the Marxian profit rate peaked well before the global financial crash and then was followed a fall in the mass of profit and investment.  “It was the significant dip in total profit flows coupled with the low rates of profit, accumulation and exploitation that formed the Great Recession.” Exactly: below is my version.

Brennan adds a slightly different interpretation: “The rate of exploitation up to that time peaked during 2006Q1. Yet profit flows continued to rise until 2008Q3. Therefore, the financial sector was essentially trying to realize profit gains that were not there in real production. This is one reason why the housing boom could not continue much past the end of 2005. While the crisis was indeed precipitated by the housing collapse, the collapse was brought on by difficulties of both profit production and realization.”  Yet, Brennan’s Kalecki analysis confirms the Marxist analysis already presented by Carchedi, Freeman, Kliman, (myself) and many others.

Marx’s crisis theory stands out as mainstream economics flails about, unable to forecast or explain the global financial crash, the ensuing Great Recession and the Long Depression that has followed.

ASSA 2018 – part one: globalisation, inequality and populism

January 7, 2018

ASSA 2018 is the annual conference of the American Economic Association, drawing together the economics profession in the US to discuss hundreds of papers and debate the key issues and ideas that mainstream economics considers.  This year in freezing Philadelphia, there has been an obsession with President Trump, his antics and ‘Trumponomics’ if we can call it that.  As Trump launched his latest tirade of weird tweets against a new book outlining his mentally unstable antics, the great and good of America’s mainstream economists considered his economic policies.

And they were worried.  Three things gripped the mainstream.  The first was the apparent failure of globalisation since the Great Recession; the poor level of productivity growth in the major capitalist economies in the last ten years; and the effectiveness of Trump’s proclaimed protectionist trade policy that he has combined with slashing reductions in taxation on the US corporate sector and his rich elite friends.

It seems that the mainstream is now aware that free trade and free movement of capital that has accelerated globally over the last 30 years has not led to gains for all – contrary to the mainstream economic theory of comparative advantage and competition.

Since the end of the Great Recession, world trade growth has slowed almost to the level of global GDP growth – something unprecedented in the post-1945 period.  And cross-border capital flows have declined sharply, particularly bank lending.  And then along comes Trump with his threats to end US participation in trade pacts, to slap duties on Chinese imports and run a wall against Mexico etc.

But the other factor about globalisation that has now dawned on the mainstream is that it has increased inequality of wealth and income, both between nations and also within economies as trans-national corporations move their activities to cheaper labour areas and bring in new technology that requires less labour.  Of course, this is the basis of Trump’s appeal to those ‘left behind’.  The Great Recession, the weak recovery in this Long Depression, the imposition of ‘austerity’ in public sector spending and huge cuts in taxation for the rich has engendered the rise of ‘populism’ ie anti ‘free trade, anti-immigration, anti-deregulation, anti-bankers.

All this is very worrying for the mainstream.  Olivier Blanchard, former chief economist of the IMF and one of the great and good who always speaks at the big ASSA meetings, kicked off his analysis of the first year under Trump with a real concern that there was “a large degree of uncertainty about what policies will in the end be adopted. So far, and surprisingly, this policy uncertainty does not seem to have affected economic activity.”  Blanchard was relieved but “it is still early to tell”.  TheEffectsOfPolicyUncertainty_powerpoint

Edmund Phelps, a Nobel prize winner and economics guru of Columbia University NY, also spoke.  He has said in the past that Trump’s ideas were “like economic policy at a time of fascism”.  At ASSA he was worried that Trumpean economics has “no awareness that nations at the frontier need indigenous innovation to have ample growth.”  What was needed was for the US economy to be opened up for risk-taking, not “stunted economics” that just tries to boost Americans’ wages through protectionism.  Phelps was worried that what he called “the post-World War II global economic and political order” (ie free markets, globalisation and the rule of the dollar) was under threat to detriment of all.  AmericasPolicyThinkingInTheAgeO_preview

In other sessions, another Nobel prize winner Joseph Stiglitz and Harvard professor Dani Rodrik were less sanguine about the perceived benefits of the last 30 years of globalisation.   TrumpAndGlobalization_preview

Rodrik in an opening plenary session reckoned that the problem with unbridled free trade and free movement of capital globally was that it was bound to intensify inequality of income because it often leads to increased “market failures” (another word for crises and slumps).  Indeed, ‘compensation’ cannot credibly address the longer-term erosion of distributional bargains entailed in trade agreements and financial globalization.

Stiglitz also argued globalisation and free trade were “not a Pareto improvement” (did not offer equal gains) and so that government intervention would be necessary to right any income imbalances.  “While Trump was wrong in claiming that the trade agreements were unfair to the US, there is little doubt that globalization contributed to the weakening of wages of America’s skilled workers. Learning this lesson—if in fact we do—may be the only silver lining in this dark cloud hanging over the global horizon.” 


So it seems that, with the rise of Trump and other populists, mainstream economics’ blind faith in ‘free trade’ and free movement of capital as the mantra of capitalist success has been shaken.

Of course, Marxist economics could have revealed this outcome of globalisation.  David Ricardo’s ‘thought theory’ of comparative advantage has always been demonstrably untrue.  Under capitalism, with open markets, more efficient economies will take trade share from the less efficient. So trade and capital imbalances do not tend towards equilibrium and balance over time.  On the contrary, countries run huge trade deficits and surpluses for long periods, have recurring currency crises and workers lose jobs to competition from abroad without getting new ones from more competitive sectors (see Carchedi, Frontiers of Political Economy p282).

It is not comparative advantage or costs that drive trade gains, but absolute costs (in other words relative profitability). If Chinese labour costs are much lower than American companies’ labour costs, then China will gain market share, even if America has some so-called “comparative advantage” in design or innovation (contrary to the view of Phelps). What really decides is the productivity level and growth in an economy and the cost of labour.

So far from globalisation and free trade leading to a rise in incomes for all, under the free movement of capital owned by the trans-nationals and free trade without tariff and restrictions, the big efficient capitals triumph at the expense of the weaker and inefficient – and workers in those sectors take the hit.

Now the mainstream has woken up to this fact, even if they have not dropped comparative advantage theory.  As one session paper put it: “the distributional effects of financial globalization, unlike those of trade, have gone largely unrecognized. In fact, however, episodes of capital account liberalization are followed by an increase in the gini coefficient and top income shares and declines in the labor share of income. These distributional effects hold with a de jure measure of liberalization and only get stronger when this measure is scaled by the extent of the capital flows that ensue in the aftermath of liberalization. Financial globalization emerges as a robust determinant of inequality, even after accounting for the effects of trade, technology and other drivers.” (Jeffry Frieden, Harvard University).


Thomas Piketty, Emmanuel Saez and Gabriel Zucman, the gurus of inequality, showed in their session, that inequality of income and wealth rose sharply during the neoliberal period of globalisation and free trade.  They presented new evidence that global inequality and growth since 1980 has increased almost everywhere, if at very different speeds. Growth in incomes has been explosive for the global top income earners. TheElephantCurveOfGlobalInequality_powerpoint

But what really worries the mainstream in their defence of the capitalist mode of production are the consequences of the end of globalisation and the potential reversal of free trade – namely the rise of ‘populism’ in the major capitalist economies.  In Europe, anti-free trade, anti-immigrant nationalist parties are polling 25-30% in elections, threatening the status quo of the pro-capitalist centre right and social democratic parties.  In the US, there is Trump and his 30%-plus support and in the UK, there is Brexit.  Neoliberalism threatens to be replaced by nationalist reaction, leading to the end of ‘democracy’ (i.e. the existing capitalist order of ‘business as usual’).  This is the fear of Rodrik and Stiglitz and the other gurus at ASSA.  MakingGlobalizationMoreInclusiveWhe_powerpoint

But it was also expressed in one of the ASSA sessions held by the Union of Radical Political Economy (URPE).  In the David Gordon memorial lecture, longstanding Marxist economist John Weeks talked of “authoritarian tendencies” having a “quantum leap” both in Europe because of “austerity” and in China and Vietnam where central planning has been replaced by “market authoritarianism”.


Why has this happened?  According to Weeks, it “comes from the excesses generated by capitalist competition, unleashed and justified now not by fascism but by neoliberalism.”  You see, the rules of trade and competition were altered under neoliberalism to benefit finance and oligopolies at the expense of labour and the rest.  “The purpose of destroying the post war regulatory consensus was to liberate financial capital from constraints. The macroeconomics of Keynes and even more so Kalecki influenced provided both the theoretical explanation for why these constraints were needed and the practical policy tools to manage an economy within those constraints. The “Keynesian revolution” briefly institutionalized the sensible principle that representative governments have policy tools they can use to pursue the welfare of the populations they were elected to serve.”

But is the reason for the rise of reactionary semi-fascist nationalism due to ‘the excesses” of neoliberalism, finance capital (but not industrial capital?) and austerity?  Or through changing the nice “sensible principles” of government management of the economy that apparently started with the New Deal and continued (“briefly”) with the consensus post-war Keynesian policies?

I don’t think this is a convincing explanation.  Keynesian or New Deal policies of fiscal and monetary management of the capitalist economy, in so far as they were ever applied (and that was limited indeed), collapsed in the 1970s and neoliberal policies of financial deregulation, globalisation and the reduction of the welfare state came in.  But that was not because politicians decided to ‘change the rules’ and ‘rational’ Keynesian policies were dispensed with for the greed of the 1%.

This is the argument of the mainstream liberal economists like Joseph Stiglitz who wrote a book exactly along those lines.  But it was not a change of ideology alone – it was the result of forced circumstances for capitalism from the late 1960s onwards.  The capitalist mode of production got into deep trouble as the profitability of capital plunged everywhere.  A drastic reversal of economic policy was necessary.  Out went the Keynesian ‘revolution’; in came monetarism, Hayekian free markets, the crushing of unions and the ending of trade barriers and government intervention.

This worked for capitalism for a whole generation and profitability recovered (at least somewhat) at the expense of labour, mainly through a rising rate of exploitation (as well as globalisation).  But, as Marx’s law of profitability argues, the counteracting factors to the tendency for profitability of capital to decline over time do not work forever.  The global financial crash, the ensuing Great Recession and the subsequent Long Depression confirmed that the era of globalisation and neoliberal policies were no longer working.  And now the consensus among mainstream economics is broken.  Rethinking economics is now the cry.

It was not the ‘excesses’ of neoliberalism and globalisation that caused the rise of nationalism and Trump, but the failure of the capitalist mode of production to deliver. The likes of Stiglitz, Phelps, DeLong, Krugman etc want to ‘change the rules’ back so that capitalism can be ‘managed’.  But this is an illusory aim unless the profitability of capital returns on a sustained basis.

In his address, Marxist John Weeks naturally went further than the mainstream Joseph Stiglitz in his policies for change.  But, in my view, it won’t be enough just to “reform” markets “to prevent the power of financial capital from creating fascism for the 21st century and so rebuild “social democracy for the 21st century”.  The capitalist mode of production must be completely replaced, if labour is to benefit and future crises are to be avoided.  And that means a global planned economy to mobilise resources, innovation and labour skills, let alone to end global warming and climate change.

In part 2 of ASSA 2018, I’ll discuss the papers presented in sessions of the radical economists attending.

Forecast for 2018: the trend and the cycles

December 29, 2017

What will happen to the world economy in 2018?  The global capitalist economy rises and falls in cycles, ie a slump in production, investment and employment comes along every 8-10 years.  In my view, these cycles are fundamentally driven by changes in the rate of profit on the accumulated capital invested in the major advanced capitalist economies.  The cycle of profitability is longer than the 8-10 year ‘business cycle’. There is an upwave in profitability that can last for about 16-18 years and this is followed by a downwave of a similar length.  At least this is the case for the US capitalist economy – the length of the profitability cycle will vary from country to country.

Alongside this profitability cycle, there is a shorter cycle of about 4-6 years called the Kitchin cycle.  And there also appears to be a longer cycle (commonly called the Kondratiev cycle) based on clusters of innovation and global commodity prices.  This cycle can be as long as 54-72 years.  The business cycle is affected by the direction of the profit cycle, the Kitchin cycle and and K-cycle and by specific national factors.

The drivers behind these different cycles are explained in my book, The Long Depression.  There I argued that when the downwaves of all these cycles coincide, world capitalism experiences a deep depression that it finds difficult to get out of.  In such a depression, it may require several slumps and even wars to end it.  There have been three such depressions since capitalism became the dominant mode of production globally (1873-97; 1929-1946; and 2008 to now).  The bottom of the current depression ought to be around 2018.  That should be the time of yet another slump necessary in order to restore profitability globally.  That has been my forecast or prediction etc for some time.  Anwar Shaikh in his book, Capitalism, takes a similar view.

This time last year, in my forecast for 2017, I said that 2017 will not deliver faster growth, contrary to the expectations of the optimists.  Indeed, by the second half of next year, we can probably expect a sharp downturn in the major economies …far from a new boom for capitalism, the risk of a new slump will increase in 2017.”

Well, as we come to the end of 2017 and go into 2018, that prediction about global growth proved to be wrong. Global real GDP growth picked up in 2017 – indeed, for the first time since the end of the Great Recession in 2009, virtually all the major economies increased their real GDP.  The IMF in its last economic outlook put it like this: 2017 is ending on a high note, with GDP continuing to accelerate over much of the world in the broadest cyclical upswing since the start of the decade.”

The OECD’s economists also reckon that “The global economy is now growing at its fastest pace since 2010, with the upturn becoming increasingly synchronised across countries. This long-awaited lift to global growth, supported by policy stimulus, is being accompanied by solid employment gains, a moderate upturn in investment and a pick-up in trade growth.”

Alongside the (still modest) recovery in global growth, investment and employment in the major economies in 2017, financial asset markets have had a great year.

The IMF again: “Equity valuations have continued their ascent and are near record highs, as central banks have maintained accommodative monetary policy settings amid weak inflation. This is part of a broader trend across global financial markets, where low interest rates, an improved economic outlook, and increased risk appetite boosted asset prices and suppressed volatility.”

So all looks set great for the world economy in 2018, confounding my forecast of a slump.

But it is sometimes the case that when all looks rosy, a storm cloud can appear very quickly – as in 2007.  First, it is worth remembering that, while world economic growth is accelerating a bit, the OECD reckons that “on a per capita basis, growth will fall short of pre-crisis norms in the majority of OECD and non-OECD economies.” So the world economy is still not yet out of the Long Depression that started in 2009.

Indeed, as the OECD economists put it: “Whilst the near-term cyclical improvement is welcome, it remains modest compared with the standards of past recoveries. Moreover, the prospects for continuing the global growth up-tick through 2019 and securing the foundations for higher potential output and more resilient and inclusive growth do not yet appear to be in place. The lingering effects of prolonged sub-par growth after the financial crisis are still present in investment, trade, productivity and wage developments. Some improvement is projected in 2018 and 2019, with firms making new investments to upgrade their capital stock, but this will not suffice to fully offset past shortfalls, and thus productivity gains will remain limited.”

The IMF’s economists make the same point.  The latest IMF projection for world economic growth is for 3.7% global GDP growth over the 2017-18 period, an acceleration of 0.4 percentage points from the anaemic 3.3% pace of the past two years.  But this is still less than the post-1965 trend of 3.8% growth and the expected gains over 2017-2018 follow an exceptionally weak recovery in the aftermath of the Great Recession.

The OECD also thinks that much of the recent pick-up is fictitious, being centred on financial assets and property. “Financial risks are also rising in advanced economies, with the extended period of low interest rates encouraging greater risk-taking and further increases in asset valuations, including in housing markets. Productive investments that would generate the wherewithal to repay the associated financial obligations (as well as make good on other commitments to citizens) appear insufficient.” Indeed, on average, investment spending in 2018-19 is projected to be around 15% below the level required to ensure the productive net capital stock rises at the same average annual pace as over 1990-2007.

The OECD concludes that, while global economic growth will be faster in the coming year, this will be the peak rate for growth.  After that, world economic growth will fade and stay well below the pre-Great Recession average.  That’s because global productivity growth (output per person employed) remains low and the growth in employment is set to peak.

Former chief economist of Morgan Stanley, the American investment bank, Stephen Roach remains sceptical that the low growth environment since the end of the Great Recession is now over and the capitalist economy is set for fair winds.  Such growth as the major economies have seen has been based on very low interest rates for borrowing and rising debt in the corporate and household sectors.  “Real economies have been artificially propped up by these distorted asset prices, and glacial normalization will only prolong this dependency. Yet when central banks’ balance sheets finally start to shrink, asset-dependent economies will once again be in peril. And the risks are likely to be far more serious today than a decade ago, owing not only to the overhang of swollen central bank balance sheets, but also to the overvaluation of assets.”

Stock markets are hugely ‘overvalued’, at least according to history.  The cyclically adjusted price-earnings (CAPE) ratio of 31.3 is currently about 15% higher than it was in mid-2007, on the brink of the subprime crisis. In fact, the CAPE ratio has been higher than it is today only twice in its 135-plus year history – in 1929 and in 2000. “Those are not comforting precedents” (Roach).   One measure of the price of financial assets compared to real assets is the stock market capitalisation compared to GDP (in the US).  It has only been higher just before the bust of 2000.

And I don’t need to tell readers of this blog that any economic recovery for world capitalism since 2009 has not been shared ‘fairly’.  There has been a host of data to show that the bulk of increase in incomes and wealth has gone to top 1% of income and wealth holders, while real wages from work for the vast majority in the advanced capitalist economies have stagnated or even fallen.

The main reason for this growing inequality has been that the top 1% own nearly all the financial assets (stocks, bonds and property) and the price of these assets have rocketed.  Corporations, particularly in the US, have used any rise in profits mainly to buy back their own shares (boosting their price) or pay out increased  dividends to shareholders.  And these are mainly the top 1%.

Companies in the S&P 500 Index bought $3.5 trillion of their own stock between 2010 and 2016, almost 50% more than in the previous expansion.

There are two things that put a question mark on the delivery of faster growth for most capitalist economies in 2018 and raise the possibility of the opposite.  The first is profitability and profits – for me, the key indicators of the ‘health’ of the capitalist economy, based as it is on investing and producing for profit not need.

In this context, let’s start with the US economy, which is still the largest capitalist economy both in total value, investment and financial flows – and so is still the talisman for the world economy.  As I showed in 2017, the overall profitability of US capital fell in 2016, making two successive years from a post-Great Recession in 2014.  Indeed, profitability is still below the pre-crisis peaks (depending on how you measure it) of 1997 and 2006.

As far as I can tell, in 2017, profitability flattened out at best – and still well down from 2014.

The total or mass of profits in the US corporate sector (that’s not profitability, which is measured as profits divided by the stock of capital invested) has recovered from the depths of the Great Recession in 2009.  But the mass of profit slipped back sharply in 2015 (along with profitability, as we have seen above). This fall stopped in mid-2016.  The fall seemed to coincide with the collapse in oil prices and the profits of the energy companies in particular.  But the oil price stabilised in mid-2016 and so did profits (although profitability continued to fall).  Profits rose again in 2017, but, after stripping out the mainly fictitious profits of the financial sector, the mass of profit is still well below the peak of end-2014 (red line below).

As I have shown in other places when profits fall back, so will investment within a year or so.  On the basis of the data for the US, 2017 produced flat profitability and a very small recovery in profits.  That suggests that, at best, investment in productive capacity will grow very little in 2018, especially as much of these profits are going into unproductive assets, property and financial.

What about the rest of the world?  Well, it is clear that the European capitalist economies (with the exception of post-Brexit Britain) have recovered in 2017.  Real GDP growth has picked up, led by Germany and northern Europe, although it is still below the growth rate in the US.  Japan too has recorded a modest recovery.

When we look at profitability, however, in core Europe it rose only slightly and fell in Japan in 2015 and 2016, as in the US.  Indeed, only Japan has a higher rate of profit compared to 2006.

When we look at the mass of global corporate profits (using my own measure), there has been a modest recovery in 2017 after the fall in 2015-6.  But remember my measure includes China, where profits in the state enterprises rose dramatically in 2016-7.

On balance, if profits and profitability are good indicators of what is to come in 2018, they suggest much the same as 2017 at best – but probably not provoking a slump in investment.

The other question mark against the overwhelming optimism that 2018 is going to be a great year for global capitalism is debt.  As many agencies have recorded and I have shown in this blog during 2017, global debt, particularly private sector (corporate and household) debt has continued to rise to new records.

The IMF comments “Private sector debt service burdens have increased in several major economies as leverage has risen, despite declining borrowing costs. Debt servicing pressure could mount further if leverage continues to grow and could lead to greater credit risk in the financial system.”

Among G20 economies, total nonfinancial sector debt (borrowing by governments, nonfinancial companies, and households from both banks and bond markets) has risen to more than $135 trillion, or about 235% of aggregate GDP.  In the G20 advanced economies, the debt-to-GDP ratio has grown steadily over the past decade and now amounts to more than 260% of GDP.

The IMF sums up the risk.  “A continuing build-up in debt loads and overstretched asset valuations could have global economic repercussions. … a repricing of risks could lead to a rise in credit spreads and a fall in capital market and housing prices, derailing the economic recovery and undermining financial stability.”

The IMF economists do not see this risk of a new debt bust happening until 2020.  They may be right.  But the policy of low interest rates and huge injections of credit by the main central banks is now over.  The US Federal Reserve is now hiking its policy interest rate and has stopped buying bonds.  The European Central Bank will end its buying in this coming year; the Bank of England has already stopped.  Only the Bank of Japan plans more bond purchases through 2018.  The cost of borrowing is set to rise while the availability of credit will fall.  If profitability continues to fall in 2018, this is a recipe for investment collapse, not expansion.  This would especially hit the corporate sector of the so-called emerging economies.

Even if the major capitalist economies avoid a slump in 2018, nothing else has much changed.  Economic growth in the major economies remains low compared to before the Great Recession, even if it picks up in 2018.  And the prospect for the medium term is poor indeed.  Productivity (output per person working) growth is very low everywhere and employment growth from here will be muted.  So the potential long-term growth rate of the major economies will slow from any peak achieved in 2018.  After very low growth in 2016 of only 1.4%, the IMF predicts G7 growth in 2018 of 1.9% – a moderate but real upturn. However, G7 growth is then predicted to fall to 1.6% in 2019 and to a poor 1.5% in 2020-2022.

Thus the upturn in 2017-2018 seems cyclical and will not be consolidated into a new longer sustained ‘boom’.  That’s because, if there is no slump to devalue capital (productive and fictitious) and thus revive profitability, then investment and productivity growth will stay stuck in depression. Overall growth in the G7 economies since the Great Recession has been slower than during the ‘Great Depression’ of the 1930s.  Indeed, based on IMF projections, by 2022, that is 15 years after 2007, total GDP growth in the G7 economies will only be 20% compared to 62% in the 15 years after 1929.  And that assumes no major economic slump in the next five years.

Nevertheless, despite weak profitability and high debt, the modest recovery in profits in 2017 suggests that the major capitalist economies will avoid a new slump in production and investment in 2018, confounding my prediction.

Now when you are proved wrong (even if only in timing), it is necessary to go back and reconsider your arguments and evidence and revise them as necessary.  Now I don’t think I need to revise my fundamentals, based as they are on Marx’s laws of profitability as the underlying cause of crises. Profits in the major economies have risen in the last two years and so investment has improved accordingly (to Marx’s law).  Only when profitability starts falling consistently and takes profits down with it, will investment also fall.  Until that happens, the impact on the capitalist sector of the rising costs of servicing very high debt levels can be managed, for most.

What seems to have happened is that there has been a short-term cyclical recovery from mid-2016, after a near global recession from the end of 2014-mid 2016.  If the trough of this Kitchin cycle was in mid-2016, the peak should be in 2018, with a swing down again after that.  We shall see.

Top ten posts of 2017: Venezuela, Capital and class

December 24, 2017

So what were the ten top posts in terms of viewings on my blog in 2017?

The winner by some distance was my post last August on the tragic deterioration of the Chavista revolution in Venezuela.  Venezuela had been a beacon for hope in Latin America and elsewhere for the last ten years, but it now seemed to have all gone wrong.  I argued that the recent huge reversal of the gains of the working class in Venezuela was mainly due to Venezuela’s isolation in the ocean of capitalism and because the Chavista revolution had stopped ‘at less than halfway’, leaving the economy still predominantly in the control of capital.  This conclusion was controversial and many commentators on my post disagreed, blaming the forces of reaction for disrupting the revolution and the international media and institutions for distorting the story. No doubt true, but anybody who looks at the state of the economy knows that there is more to it than that.

Coming second was an equally controversial post on China and the recent ‘re-election’ of Chinese president Xi.  In my post, I asked the question: is China is a capitalist state or not?  The majority of Marxist political economists agree with mainstream economics in assuming or accepting that China is.  However, I am not one of them. I argued in the post that China is not capitalist (yet). In China, public ownership of the means of production and state planning remain dominant and the Communist party’s power base is rooted in public ownership.  So China’s economic rise has been achieved without the capitalist mode of production being dominant.

In the post, I added new data to back up my view. Using recently published IMF data, I found that China there are nearly three times as much stock of public productive assets to private capitalist sector assets in China.  In the US and the UK, public assets are less than 50% of private assets.  This shows that in China public ownership in the means of production is dominant – unlike any other major economy in the world.

The third most read post was on global poverty.  Is global poverty falling or rising?  Many mainstream economists continue to argue that the battle against global poverty was being won, as those living on less than $1.25 day (the official World Bank threshold, recently revised) had been cut by half since 1990.  But in the post, I show that any improvement in poverty levels, however measured, is down mainly to rising incomes in state-controlled China and any improvement in the quality and length of life comes from the application of science and knowledge through state spending on education, on sewage, clean water, disease prevention and protection, hospitals and better child development.  These are things that do not come from capitalism but from the common weal.

2017 marked 150 years since Marx published his analysis of the capitalist system.  In a post I critiqued the views of leading Keynesian economist Jonathan Portes on where Marx was right or wrong about capitalism.  For Portes, what is wrong with capitalism is not its exploitative essence or its failure to eliminate poverty or inequality or meet the basic needs of billions in peace and security, as Marx argued.  No, it was ‘excessive consumption’: i.e. too many things! I failed to see that excessive or endemic ‘consumerism’ was an issue for billions in the world or even millions in the UK, Europe or the US – it’s the opposite: the lack of consumption, including ‘social goods’ (public services, health, education, pensions, social care etc).

And in 2017, there were a host of studies revealing the growing inequality of income and wealth globally between nations and within them – along with scandals of the tax havens (Panama papers etc).  In another popular post, I recounted the development of these inequalities since Marx wrote Capital in 1867.  One important explanation for rising inequality is the control of wealth through capital, rather than through unequal incomes from work.  The US Economic Policy Institute found that the top 1% of society derives an increasing portion of income gains from capital.  So they are not rich because they are smarter or better educated.  It is because they are lucky (like Donald Trump) and inherited their wealth from the parents or relatives.

Contrary to the optimism and apologia of the mainstream economists, poverty for billions around the world remains the norm with little sign of improvement, while inequality within the major capitalist economies increases as capital is accumulated and concentrated in ever smaller groups. So Marx’s prediction 150 years ago that capitalism would lead to greater concentration and centralisation of wealth, in particular in the means of production and finance, has been borne out.

In another post, I referred yet again to the latest annual report by Credit Suisse on global personal wealth.  Every year my post on this report makes the top ten.  The bank’s economists found that top 1% of personal wealth holders globally now have over 50% of the world’s personal wealth – up from 45% ten years ago. And on current trends, this inequality will rise further. In the US, the three richest people in the US – Bill Gates, Jeff Bezos and Warren Buffett – own as much wealth as the bottom half of the US population, or 160 million people.

2017 was marked by the huge rise in the value of stock markets globally – driven by cheap borrowing as central banks pumped in more credit.  Rich investors went mad looking to make a quick buck.  There were new credit bubbles galore.  One of the most newsworthy was the crypto-currency craze, particularly in bitcoin.  The dollar price of bitcoin has risen 2000% and in the last year had quadrupled.  But as I write, in the last week it has fallen back 25%.  In my post last September, I argued that while the new technology behind these digital currencies, blockchain, may eventually find some productive use, cryptocurrencies would remain on the micro-periphery of global currencies, even if the crypto craze continued for a while longer.

2017 saw attempts by heterodox economists to organise against mainstream neoclassical orthodoxy in universities and there was a growing opposition to neoliberal economic policies adopted by incumbent governments.  But Keynesian economics still dominates the views on the left in the labour movement.  In a post I reckoned that this was because Keynes offers a third way.  In the 1920s and 1930s, Keynes feared that the ‘civilised world’ faced Marxist revolution or fascist dictatorship.  But socialism as an alternative to the capitalism of the Great Depression could well bring down ‘civilisation’, delivering instead ‘barbarism’ – the end of a better world, the collapse of technology and the rule of law, more wars etc.  But he thought that, through some modest fixing of ‘liberal capitalism’, it would be possible to make capitalism work without the need for socialist revolution.  There would no need to go where the angels of ‘civilisation’ fear to tread.  That was the Keynesian narrative and it remains dominant on the left.

The 150th anniversary of the publication of Capital was a feature of many of my most popular posts, including my account of September’s special conference held on Capital organised by this blog and Kings College, London.  In particular, I did a post on the two presentations that top Marxist scholar David Harvey and I made during the symposium.

David Harvey reckoned that the more crucial points of breakdown and class struggle are now to be found outside the traditional battle between workers and capitalists in the workplace or at the point of production.  Yes, that still goes on but the class struggle is much more to be found in battles in the sphere of circulation (for example, consumers fighting price-gouging by greedy pharma companies) ie. in the manipulation of people’s ‘wants, needs and desires’ in what they buy and think they need; and in distribution in battles over unaffordable rents with landlords or unrepayable debts like Greece or student debt.  These are the new and more important areas of ‘anti-capitalist’ struggle outside the remit of Volume One of Capital.

In contrast, in my analysis still puts the class struggle in the workplace at the centre of capitalism because it is about the struggle over the division of value between surplus value and labour’s share, as Marx intended with the publication of Volume One.  This is not to deny that capitalism creates inequalities, conflicts and battles outside the workplace over rents, debt, taxes, the urban environment and pollution that Harvey focuses on, nor that the struggle does not enter the political plane through elections etc.

The theme of the relevance of Marx’s Capital was also part of my post on this year’s Historical Materialism conference in London.  The plenary speakers were Moishe Postone, Michael Heinrich and David Harvey – an impressive line-up of heavyweight Marxist academics.  Part of the discussion was over whether value is only created in exchange and also whether class struggle is not really centred (any longer) on workers and capitalists in the production process.  The plenary speakers seemed to adopt theories that crises under capitalism are now mainly caused by faults in the ‘circulation of money and credit’ and not in the contradictions of capitalism between productivity and profitability in the production of surplus value, as I think Marx argued in Capital.

In sum, my top ten most read posts in 2017 argued that Marx’s Capital still provides us with the clearest and most compelling analysis of the nature of the capitalist mode of production; and show why capitalism is transient and cannot last forever, contrary to what the apologists for capital claim.

Best books of 2017

December 21, 2017

Last year we had some seminal and important books on Marxist economics including: Anwar Shaikh’s lifetime compilation, Capitalism: competition, conflict and crises (that I dip into on a regular basis); Fred Moseley’s Money and Totality, a masterful defence of Marx’s value theory; Francois Chesnais’ Finance Capital Today, that recounts the current trends in modern finance; as well as major contributions from Tony Norfield (ttps://,) and John Smith (Imperialism in the 21st century).

It’s difficult to compete with these in 2017.  However, this year commemorated 150 years since Marx published Volume One of Capital, so there were a few important books that everybody should get.

In my view, Joseph Choonara’s A Readers Guide to Capital was the clearest and concise of all the various ‘readers’ or video lectures that are available or were published this year.  Choonara takes the reader through each chapter of Volume One with some clarifying analysis and relevant comment to help.  Choonara says that “It is designed to be read in parallel with Capital itself, with each chapter of this book consulted either before or after digesting the relevant sections of Marx’s work.”  The aim, unlike that of Harvey’s more comprehensive approach in his video lectures, is “instead to dwell on those areas that are the most vital to an overall understanding of the work and those that most often confuse, drawing on my own experience teaching Capital to left-wing audiences of students and workers over the past decade”.  For, in Choonara’s view, Marx attempted in Capital to see capitalism from the point of view of labour and aimed for a working-class audience.  Capital clearly does the former, but whether it achieved its aim of reaching working class readers is more doubtful.  Choonara’s guide can help here.

I certainly got more out of Choonara’s reader than I did from William Clare Roberts, Marx’s Inferno, this year’s winner of the Isaac Deutscher memorial prize.  Using Marx’s motif of Dante’s inferno to describe the iniquities of capitalism, Roberts presents us with a ‘political theory of capital’.  I’m not sure of the value of this approach.  As David Harvey says in his review of the book, “My most serious objection is that Roberts isolates Volume 1 of Capital as a standalone text and seeks to interpret it by ignoring its relation to Marx’s other works.”  And the inferno motif has little to say about Marx’s economic theory, except to accept Michael Heinrich’s (incorrect in my view) interpretation of Marx’s value theory.

If you want Marxist economic theory, there is the publication by Rick Kuhn of essays by Henryk Grossman on economic dynamics, Sismondi’s theory of crises and on the various trends in bourgeois economics.  It helps us realise how perceptive Marx’s analysis of capitalism is compared to the bourgeois mainstream and the utopian socialists. Marx’s analysis destroys the idea that all can be explained by exchange and markets.  You have to delve beneath the surface to the process of production, in particular to the production of value (use value and exchange value).  As Grossman puts it: “Marx emphasises the decisive importance of the production process, regarded not merely as a process of valorisation but at the same time a labour process… when the production process is regarded as a mere valorisation process – as in classical theory – it has all the characteristics of hoarding, becomes lost in abstraction and is no longer capable of grasping the real economic process.” p156.

Despite the power of Marx’s analysis, it is still the ideas of Keynes that dominate the thinking of heterodox economists in opposing the mainstream.  And this is no accident.  In an excellent book, Geoff Mann from Simon Fraser University presents a sophisticated explanation of Keynes’ dominance in the labour and leftist movements.  In his, In the Long run we are dead, Geoff argues that Keynes rules because he offers a third way between socialist revolution and barbarism, i.e. the end of civilisation as ‘we (actually the bourgeois like Keynes) know it’. This appealed (and still appeals) to the leaders of the labour movement and ‘liberals’ wanting change.  Revolution is risky and we could all go down with it.  Mann: “the Left wants democracy without populism, it wants transformational politics without the risks of transformation; it wants revolution without revolutionaries”. (p21).

What Mann argues is that Keynesian economics dominates the left despite its fallacies and failures because it expresses the fear that many of the leaders of the labour movement have about the masses and revolution.  As an example, read leading Keynesian, James Kwak’s latest book, Economism. Kwak quotes Keynes: “For the most part, I think that Capitalism, wisely managed, can probably be made more efficient for attaining economic ends than any alternative system yet in sight, but that in itself it is in many ways extremely objectionable. Our problem is to work out a social organisation which shall be as efficient as possible without offending our notions of a satisfactory way of life.” And  Kwak comments“That remains our challenge today.”

To be fair, it ain’t easy opting for an economic policy that threatens the established order.  An inferno will follow from the bourgeois media and institutions.  In the autobiographical book of the year, economist Yanis Varoufakis, Greek finance minister during the euro crisis of 2015, outlined the tortuous and labyrinthine encounters that he had with the Euro group in trying to combat the hell that the Troika of the IMF, ECB and EU aimed to impose on Greece.  Adults in the room, my battle with Europe’s deep establishment, is a personalised account, to say the least.  Varoufakis’ analysis of the crisis and his justification for what happened (the capitulation of the Syriza government and his resignation from the government) bear all the hallmarks of his ‘erratic Marxism’ (as he calls himself).  His battle was lost, but the war continues.

2017 was also the first year of Donald Trump’s reign over US capital.  One of his key aims was to deregulate the business and finance sector from the curbs that Congress had imposed (to some extent) after the global financial crash.  Deregulation at home, but protectionism abroad.  Brett Christophers’ book, The Great Leveller, looks at this dynamic tension between freeing capital from regulation and yet ensuring that it does not bring the house down.  Christopher argues that in this dynamic, law and legal measures have an underappreciated role in trying to preserve a “delicate balance between competition and monopoly”, which is needed to “regulate the rhythms of capitalist accumulation”.  The theme that Christophers highlights is the role of the law in evening out the anarchic swings between excessive monopoly and ruinous competition in different periods of capitalism.  This is a new insight.

But this was the year of the 150th anniversary and it could not go by without a new book on Capital by David Harvey, the most influential Marxist today.  In his Madness of Economic Reason, Harvey sets out his latest view of Marx’s schema in Capital.  This is a well written and easy book to read and not too long.  And there are many video lectures by DH on the main arguments in the book.  Harvey presented his latest thesis at the Capital.150 conference organised by this blog and Kings College in September.

DH’s argues that Volume One of Capital only deals with the production part of the circuit (the production of value and surplus value).  Volume Two deals with the realisation and circulation of capital between sectors in its reproduction, while Volume 3 deals with the distribution of that value.  And while Marx gives a great analysis of the production part, his later volumes are not complete and have been scratched together by Engels.  And thus, according to DH, Marx’s analysis falls short of explaining developments in modern capitalism. Now in the 21st century, crises under capitalism are at least as likely, if not more so, to be found in a breakdown in the circulation or realisation of surplus value than in its production.  And so crises are more likely now to happen in finance and over debt, due to ‘financialisation’.

Anybody who reads my blog, including the post in this conference and previous debates with Harvey on these issues, will know that I do not agree with his view of Capital. I argue that the production of surplus value and the accumulation of capital remains central to Marx’s explanation of capitalism and its contradictions that lead to recurrent crises.  As Marx put it: “The profit of the capitalist class has to exist before it can be distributed.”  The production of value is not, as DH argues, “a small sliver of value in motion” but the largest, both conceptually for Marx and also quantitatively, because in any capitalist economy, 80% of gross output is made up of means of production and intermediate goods compared to consumption.  In my view, the class struggle in the workplace remains at the centre of capitalism because it is about the struggle over the division of value between surplus value and labour’s share, as Marx showed in Volume One.

Labour’s interim report on the UK economy

December 19, 2017

John McDonnell, the finance spokesman (‘shadow chancellor’) of the British opposition Labour Party, recently commissioned a report on the state of the UK economy and what is to be done.

McDonnell is characterised in the British capitalist media as a die-in-the-wool Marxist and his commissioned report was carried out by GFC economics, founded by Graham Turner since 1999. Turner wrote No Way to run an economy back in 2009 which drew on the ideas of both Keynes and Marx for his analysis of the crisis in global capitalism.

The report presented by GFC, Financing Investment: Interim report, provides us with a meticulous investigation of the failure of British capitalism to invest productively to deliver better productivity, incomes and employment.  The report exposes the failure of the UK banks to direct lending into productive sectors instead into speculative financial and unproductive property assets.  Thus, UK productivity performance is extremely poor, R&D spending is low and innovation is limited.

The capitalist sector of the British economy has failed to deliver for the needs of people, although it has delivered higher profits and house prices and a booming stock market.  Real disposable income per head has not risen since the end of the Great Recession.

And yet house prices have rocketed.

The GFC report echoes what other recent reports on the UK economy have pointed out (Time for Change: A New Vision for the British Economy,The Interim Report of the IPPR Commission on Economic Justice).

Both the GFC and the IPPR show that UK productivity has stagnated since the global financial crisis. Real output per hour worked rose just 1.4% between 2007 and 2016. Within the G7, only Italy performed worse (-1.7%). Excluding the UK, the G7 countries have experienced a 7.5% productivity increase over this period, led by the US, Canada and Japan. In addition, the ‘productivity gap’ for the UK – the difference between output per hour in 2016 and its pre-crisis trend – is minus 15.8%; while the productivity gap for the G7 ex-UK countries is minus 8.8%.

The GFC report confirms that British capitalism is a rentier economy , concentrated on finance, property and business services.

Tony Norfield in his book, The City, reveals the dominant role of finance in the history of British capital.  Now this seems to be at the expense of productive sectors like manufacturing and hi-tech. UK’s output of high-technology industries has fallen by an average of 0.4% y/y over the past ten years.  Only Sweden has experienced a bigger decline.

Overall business investment languishes at the bottom of the 34 OECD economies.

As a result, British workers are increasingly employed in low wage sectors (or self-employed), particularly for those regions outside London and the South East.  Britain has a distorted economy, relying on finance over technology and concentrated in the south-east.

Business enterprise R&D also experienced a secular decline relative to GDP during the 1980s and 1990s, dropping from 1.41% in 1981 to a low of 0.96% in 2005. Successive governments have failed to invest in the UK’s long-term future. R&D performed (i.e. undertaken) by the government (including research councils) declined from 0.46% of GDP in 1981 to 0.11% in 2016 (chart 11).27 The UK’s share of government spending is well below the European Union average (0.23%), for example.  The UK’s educational performance is mediocre.

The GFC report points out that Britain’s banking sector has dismally failed to support productive sector investment and growth.  This  is the same conclusion that the report on banking by the UK Firefighters Union (authored by Mick Brooks and myself) reached back in 2013.

As the GFC report puts it: “A dearth of lending to key industries indicates that banks are failing to help UK businesses to invest.” The outstanding stock of loans to smaller companies has dropped from £197.8bn in April 2011 to £165.4bn in October 2017

Instead bank loans have poured into real estate.  The productive sectors of manufacturing, professional scientific & technical activities, information & communication and administrative & support services account for 28.7% of real GDP. But loans outstanding to these four sectors total just £108.82bn, or 5.5% of GDP.  This is less than the total of loans outstanding to companies engaged in the buying, selling & renting of real estate (£135.97bn or 6.9% of GDP).

The message from the GFC report’s analysis is that, while the media goes on about the impact of Brexit and austerity on the UK economy, there are other even more serious long-term structural defects in the model of British capital that even an end to austerity or a reversal of Brexit would not overcome.

So what is to be done?  The GFC’s interim report says that a Labour government should set up a Strategic Investment Board to coordinate R&D, commercialisation and information flows.  This board should be situated outside London and the Bank of England should also be relocated to Birmingham, England’s second largest city.  This would concentrate efforts to revive productive industry and rebalance the economy regionally.

Now the latter idea has captured the media headlines, as has the proposal to widen the ambit of the Bank of England to beyond just an inflation target to include growth and employment (similar to the objectives of the US Federal Reserve).

But that’s it.  The question to be asked is whether setting up an investment board and moving the Bank of England is in any way sufficient to raise productivity and growth and boost real incomes, education, training and decent jobs.  The GFC report comments that “Existing banks left to their own devices may struggle to change. Politicians and regulators have failed to prepare the existing banks for the challenge posed by a new era of technology. They have not ensured that banks play their part in supporting the growth of new businesses. Instead, banks have entrenched their focus on unproductive lending.”  But there is no call for public ownership of the major five banks, let alone the key strategic industries in the productive sectors.  That would surely be needed if any plan for investment and innovation could be effectively implemented.  If the capitalist sector remains dominant, then the state investment bank will be insufficient.

Worse, even the less than radical policy of a state investment bank has been greeted with hostility by the big investment banks in the finance sector.  Morgan Stanley, the American investment bank, reckoned that a Corbyn-led government would be a disaster for British capital.  As it put it: “For much of the past 30 years and more, a change of government ultimately had a relatively limited impact on the UK equity market, as policy settings didn’t change too dramatically. However, this may not be the case if we see a Labour government take power under its current leadership, given its very different policy approach.”  In other words, up to now, a Labour government has been no threat to the established order, but a Corbyn government could be.  “It is certainly plausible that the Labour party could ultimately moderate some of its more radical policy ideas; the alternative could be the most significant political shift in the UK since the end of the 1970s.”

Corbyn responded by agreeing with Morgan Stanley that it was right to regard him as a threat, pointing out that it was the likes of Morgan Stanley who were the same “speculators and gamblers who crashed our economy in 2008”… Nurses, teachers, shopworkers, builders, just about everyone is finding it harder to get by, while Morgan Stanley’s CEO paid himself £21.5m last year and UK banks paid out £15bn in bonuses,” Corbyn said.

But, ironically, some of Corbyn’s economic advisers went out of their way to argue that Labour’s investment plans were not damaging at all to big business.  Indeed, they could help capitalism save itself.  Ann Pettifor, director of Policy Research in Macroeconomics (PRIME), a Keynesian think tank and author of a recent book advocating ‘breaking the power of bankers’ through the injection of more money credit with people’s QE, wrote that the GFC report shows that business could prosper under a Corbyn government.

Pettifor reckons that “Labour’s public spending plans will boost investment, with contracts that largely benefit the “timid mouse” that is the private sector. In other words, the “roaring lion” that is a government backed by a central bank, will, under Labour, at last take action to stimulate a private sector that has significant spare capacity; one not yet fully recovered from the catastrophic impact of the great financial crisis and that still lacks confidence.”

In other words, more public investment and BoE monetary support can help Britain’s capitalist sector get going and deliver on investment and growth.  Thus we are back with the same old Keynesian reformist view that capital just needs a helping hand from government, not its replacement.  As Marxist economic blogger, Chris Dillon commented, “The difference between Marxists such as me and social democrats such as Ann is, I suspect, that we are more sceptical than she is of governments’ ability to fix capitalism.”  Moreover, as Geoff Mann showed in his recent book, Keynesian policy prescriptions dominate labour movement thinking because they appear to offer a way out short of a revolutionary transformation.

As usual, the question that is not asked is why British capital does not invest enough to boost productivity.  Yes, it is partly because the UK is a rentier economy that aims at unproductive parasitic accumulation of surplus value from others.  And yes, it is partly because British business in particular has preferred to employ young and cheap immigrant labour in ‘precarious’ employment of zero hours, short-term, temporary and part-time contracts rather than invest in training long-term staff.  It’s been a cheap short cut to more profits.  But that shows the basic contradiction of capitalism.  Capitalist production is for profit not for need; for profitability not productivity.

And profitability in the productive sectors of the British economy remains low relative to before the Great Recession and even back to the 1990s.  Profitability reached in peak in 1997.  Since then, overall profits have risen in nominal terms by about 60%.  But despite the credit boom of the early 2000s and the recovery since the Great Recession, profitability (ie profits per the stock of capital invested) remains below that peak.  As a result, British capital has invested in financial assets or hoarded cash in tax havens or invested abroad rather than in the UK.

Thus it should be no surprise that UK businesses stopped investing in productive capital.

A National Investment Board will do little to alter that.  As I have argued before, the ratio of investment in the capitalist sector compared to the public sector is 5 to 1.  The NIB could raise public investment as a share of GDP by 1%. But An investment strike by capitalism will not be compensated for by a government-led investment programme that just adds 1-2% of GDP in investment when the capitalist sector invests over 15% of GDP.  And the latter will not be touched.  Contrary to the view of Keynesians like Ann Pettifor, the chair of JP Morgan, the US investment bank put it: “I would put quantitative targets on things that are under governments’ control and national GDP growth is not,” Dr Frenkel said. “As much as you’d like to jump 5 metres without a pole you will not be able to.” 

Surely the obvious conclusion from the defects of British capital exposed by the GFC report is that the major banks and strategic sectors of the British economy (transport, pharma, aerospace, autos, telecoms and utilities) need to be brought into public ownership to make any investment plan really work in delivering higher productivity and good secure wage jobs?

Yet that is not the programme (yet) of the Labour leaders. If a Corbyn-led Labour government should come to office in the next year or few, it will be faced with the wrath of the right-wing media and the likes of Morgan Stanley, but without the economic programme to defeat them.

The economics of Luther or Munzer?

December 16, 2017

Last week leading leftist economists in the UK held a seminar on the state of mainstream economics, as taught in the universities.  They kicked this off by nailing a poster with 33 theses critiquing mainstream economics to the door of the London School of Economics.  This publicity gesture attempted to remind us that it was the 500th anniversary of when Martin Luther nailed his 95 theses to the Castle Church, Wittenberg and provoked the beginning of the Protestant reformation against the ‘one true religion’ of Catholicism.

The economists were purporting to tell us that mainstream economics was like Catholicism and must be protested against as Luther did back in 1517.  As they put it, “Economics is broken.  From climate change to inequality, mainstream (neoclassical) economics has not provided the solutions to the problems we face and yet it is still dominant in government, academia and other economic institutions. It is time for a new economics.”

The economists included Ha-Joon Chang, University of Cambridge, and author of 23 Things They Don’t Tell You About Capitalism and Economics: The User’s Guide.  He commented that “Neoclassical economics plays the same role as Catholic theology did in Medieval Europe – a system of thought arguing that things are what they are because they have to be.

Steve Keen, head of economics at Kingston University, London, and author of the excellent ‘Debunking Economics’ that exposed the unrealistic and illogical assumptions of neoclassical theory, exclaimed that “Economics needs a Copernican Revolution, let alone a Reformation. Equilibrium thinking in Economics should go the way of Ptolemaic Epicycles in Astronomy”.

Another post-Keynesian economist, Victoria Chick, warned that students should “read the economic scriptures, in all their great variety, for themselves. Thus they will learn that the Pope (formerly Samuelson, now Mankiw) is not infallible and that they must search for Truth in the contest of ideas.”

This all sounded progressive and exciting and reflected the movement against mainstream economic teaching that has mushroomed over the last few years since the global financial crash, organised by the Rethinking Economics group of graduates and lecturers.

But I have some reservations.  First, is a progressive revolution against the mainstream really to be painted as similar to Luther’s protestant revolt?  The history of the reformation tells us the protestant version of Christianity did not lead to a new pluralistic order and freedom to worship.  On the contrary, Luther was a bigot who worked with the authorities to crush more radical movements based on the peasants led by Thomas Munzer.

As Engels put it in his book Peasant War in Germany: “Luther had given the plebeian movement a powerful weapon—a translation of the Bible. Through the Bible, he contrasted feudal Christianity of his time with moderate Christianity of the first century. In opposition to decaying feudal society, he held up the picture of another society which knew nothing of the ramified and artificial feudal hierarchy. The peasants had made extensive use of this weapon against the forces of the princes, the nobility, and the clergy. Now Luther turned the same weapon against the peasants, extracting from the Bible a veritable hymn to the authorities ordained by God—a feat hardly exceeded by any lackey of absolute monarchy. Princedom by the grace of God, passive resistance, even serfdom, were being sanctioned by the Bible.[8]

But maybe all this shows is that analogies or metaphors have their limits and the idea of copying Luther’s theses as a publicity trick can only go so far.

More seriously, it is clear from the comments of the erstwhile academics that, for them, the mainstream economic religion is just neoclassical theory, namely there is perfect competition in markets, which tend to equilibrium; and economies can grow harmoniously, except for shocks caused by imperfections in markets (trade unions and monopolies) or interference by governments.  Our Lutheran-type protestors thus argue that it is this neoliberal economics that must be overthrown.

But is that all there is of the mainstream?  Our protestors have nothing to say against Keynesian economics – indeed variants of Keynes are the way forward for them.  That’s an irony for a start because the basis of neoclassical theory is marginalism: marginal utility of the consumer and marginal productivity of ‘capital’.  And Keynes held entirely to the marginal theory propounded by his mentor Alfred Marshall.  All he added was that, because of uncertainty and unpredictability in investment decisions by individuals (driven by psychology or ‘animal spirits’), sometimes economies can get locked into an equilibrium where markets don’t clear and unemployment becomes permanent.  For Keynes, this was a ‘technical problem’ that could be fixed; it was not inherent feature of the capitalist production process.

As he said at the end of his life: “I find myself moved, not for the first time, to remind contemporary economists that the classical teaching embodied some permanent truths of great significance. . . . There are in these matters deep undercurrents at work, natural forces, one can call them or even the invisible hand, which are operating towards equilibrium. If it were not so, we could not have got on even so well as we have for many decades past.”  Keynes, the neoliberal.

But our Lutheran protestors had not a word of critique against Keynes, and certainly not his more radical followers like Hyman Minsky.  On the contrary, the 33 theses show clear support of Minskyan theory on crises under capitalism.  Thesis 28 refers to “financialisation, short-termism, speculative finance and financialised real economy” as the key issues, thus implying that it is the growth of finance under neoliberalism that is the cause of crises, not any inherent flaws or contradictions in the capitalist profit-making system as a whole.  Marx’s critique of the mainstream (and not just neoclassical and neoliberal economics) is ignored.

Our protestors follow Luther, not Munzer.  They want to replace Catholic economics with Protestant economics, but they do not want to do away with the religion of capitalist economics.  They wish to correct a ‘capitalism distorted by finance’, not replace the mode of production and social relations.  Indeed, this has been the dominant position of Rethinking Economics as it seeks to reverse the dominance of neoclassical theory in the universities.

The result is that there will be no revolution in economics by following Luther.  Indeed, our Lutheran economists have gone little further than the revisions to ‘neoliberal economics’ that mainstream ‘Catholic’ gurus are considering too.  Martin Sandbu in the FT pointed out that “economists are debating intensively how to upgrade their understanding of the economy in order to prepare better for future disruptions and provide better guides for good policy”.  Nobody could be more mainstream and Keynesian than former IMF chief economist Olivier Blanchard and former US Treasury secretary Larry Summers (who is related to Paul Samuelson, the pope of mainstream ‘neoliberal’ economics in the 1970s, according to Chick).  They too want to ‘rethink economics’.  Indeed, all the things advocated in the 33 theses are being considered by the great and good of academic economics.

Back in the 1520s, Luther was eventually accommodated and Protestantism became a religion of the establishment and many monarchies across Europe (and the religious motivation behind capitalism, some argue).  Today’s economic Lutherans may also be absorbed to save capital.  Munzer was executed.

Capitalism without capital – or capital without capitalism?

December 10, 2017

There is a new book out called Capitalism without capital – the rise of the intangible economy.  The authors, by Jonathan Haskel of Imperial College and Stian Westlake of Nesta, are out to emphasise a big change in the nature of modern capital accumulation – namely that increasingly investment by large and small companies is not in what are called tangible assets, machines, factories, offices etc but in ‘intangibles’, research and development, software, databases, branding and design.  This is where investment is rising fast relative to investment in material items.

The authors call this capitalism without capital.  But of course, this is using ‘capital’ in its physicalist sense, not as a mode of production and social relation, as Marxist theory uses the word.  For Marxist theory what matters is the exploitive relation between the owners of the means of production (tangible and intangible) and the producers of value, whether they are manual or ‘mental’ workers.

As G Carchedi has explained, there is no fundamental distinction between manual and mental labour in explaining exploitation under capitalism.  Capitalism cannot be without capital in that sense.

Knowledge is produced by mental labour but this is not ultimately different from manual labour. Both entail expenditure of human energy. The human brain, we are told, consumes 20% of all the energy we derive from nourishment and the development of knowledge in the brain produces material changes in the nervous system and synaptic changes which can be measured. Once the material nature of knowledge is established, the material nature of mental work follows. Productive labour (whether manual or mental) transforms existing use-values into new use-values (realised in exchange value). Mental labour is labour transforming mental use values into new mental use values.  Manual labour consists of objective transformations of the world outside us; mental labour of transformations of our perception and knowledge of that world. But both are material.

The point is that discoveries, generally now made by teams of mental workers, are appropriated by capital and controlled by patents, by intellectual property or similar means. Production of knowledge is directed towards profit. Medical research, for example, is directed towards developing medicines to treat disease, not preventing disease, agricultural research is directed to developing plant types which capital can own and control, rather than relieving starvation.

What Haskell and Westlake find is that investment in intangible assets now exceeds that in tangible assets.

And they reckon this is changing the nature of modern capitalism.  Indeed, it could expose the uselessness of the so-called market economy.  The argument is that an intangible asset (like a piece of software) can be used over and over again at low cost and allow a business to grow very fast.  That’s an exaggeration, of course, because tangible assets like machines can also be used over again, but it’s true that they have ‘wear and tear’ and depreciation.  But then software also gets out of date and also becomes ‘tired’ for the continually changing purposes required.

Indeed, the ‘moral depreciation’ of intangibles is probably even greater than tangibles and so increases the contradictions of capitalist accumulation.  For an individual capitalist, protecting profit gained from a new piece of research or software, or the branding of a company, becomes much more difficult when software can easily be replicated and brands copied.

Brett Christophers showed in his book, The Great Leveller, capitalism is continually facing a dynamic tension between the underlying forces of competition and monopoly.  “Monopoly produces competition, competition produces monopoly” (Marx).

That’s why companies are keen on intellectual property rights (IPR).  But IPR is actually inefficient in developing production.  ‘Spillover’, as the authors call it, where the benefit of any new discovery is shared in the community, is more productive, but by definition almost, is only possible outside capitalism and private profit – in other words rather than capitalism without capital; it becomes capital without capitalism.

As Martin Wolf of the FT concludes in his analysis of the rise of ‘intangibles’, “intangibles exhibit synergies. This goes against the spillovers. Synergies encourage inter-firm co-operation (or outright mergers), while spillovers are likely to discourage it. Who really wants to give a free lunch to competitors?”  So “Taken together, these features explain two other core features of the intangible economy: uncertainty and contestedness. The market economy ceases to function in the familiar ways.”

Under capitalism, the rise of intangible investment is leading to increased inequality between capitalists.  The leading companies are controlling the development of ideas, research and design and blocking ‘spillover’ to others.  The FANGs are gaining monopoly rents as a result, but at the expense of the profitability of others, reducing them to zombie status (just covering their debts without the ability to expand or invest).

Indeed, the control of intangibles by a small number of mega companies could well be weakening the ability to find new ideas and develop them.  Research productivity is declining at a rate of about 6.8 per cent per year in the semiconductor industry. In other words, we’re running out of ideas. That’s the conclusion of economic researchers from Stanford University and the Massachusetts Institute of Technology Innovation.  They reckon that in order to maintain Moore’s Law – by which transistor density doubles every two years or so – it now takes 18 times as many scientists as it did in the 1970s. That means each researcher’s output today is 18 times less effective in terms of generating economic value than it was several decades ago.

Thus we have the position where the new leading sectors are increasingly investing in intangibles while investment overall falls along with productivity and profitability.  Marx’s law of profitability is not modified but intensified.

The rise of intangibles means the increased concentration and centralisation of capital.  Capital without capitalism becomes a socialist imperative.