Basic income – too basic, not radical enough

October 23, 2016

The idea of a basic income has gained much popularity recently and not just among leftists but also with right-wing pro-capital proponents.  Basic income boils down to making a monthly payment by a government to every citizen of an amount that meets ‘basic necessities’ whether that person is unemployed or not or whatever the circumstance. As Daniel Raventós, defines it in his recent book“Basic Income is an income paid by the state to each full member or accredited resident of a society, regardless of whether or not he or she wishes to engage in paid employment, or is rich or poor or, in other words, independently of any other sources of income that person might have, and irrespective of cohabitation arrangements in the domestic sphere” (Basic Income: The Material Conditions of Freedom).

He lists various things in its favour: that it would abolish poverty, enable us to better balance our lives between voluntary, domestic and paid work, empower women, and “offer workers a resistance fund to maintain strikes that are presently difficult to sustain because of the salary cuts they involve”.

And recent books such as Inventing the Future by Nick Srnicek and Alex Williams and Postcapitalism by Paul Mason have also brought this issue to prominence. These writers reckon that the demand for a universal basic income by labour should be part of the struggle in a move to ‘post-capitalism’ and should be a key demand to protect workers from a capitalist world increasingly dominated by robots and automation where human beings will become mostly unemployed.

But ‘basic income’ is also popular among some right-wing economists and politicians.  Why? Because paying each person a ‘basic’ income rather than wages and social benefits is seen as a way of ‘saving money’, reducing the size of the state and public services – in other words lowering the value of labour power and raising the rate of surplus value (in Marxist terms).  It would be a ‘wage subsidy’ to employers with those workers who get no top-up in income from social benefits under pressure to accept wages no higher than the ‘basic income’ which would be much lower than their average salary. As Raventos has noted, (in the American Journal of Economic Issues June 1996 with Catherine Kavanagh), “by partially separating income from work, the incentive of workers to fight against wage reductions is considerably reduced, thus making labour markets more flexible. This allows wages, and hence labor costs, to adjust more readily to changing economic conditions”.

Indeed, the danger is that the demand for a basic income would replace the demand for full employment or a job at a living wage.  For example, it has been worked out that, in the US, the current capitalist economy could afford only a national basic income of about $10,000 a year per adult. And that would replace everything else: the entire welfare state, including old age pensions disappears into that one $10,000 per adult payment.

The basic income demand is similar to the current idea among Keynesians and other leftist economists for increased public spending financed by ‘helicopter money’.  This policy means no fundamental reform of the economy but a just a cash handout to raise incomes and boost the capitalist economy.  Indeed, this is why the leftist Greek economist Yanis Varoufakis has viewed favourably the basic income idea.  A minimum equal income for everyone, Varoufakis tells us, is the most effective way to confront the deflationary trends that manifest capitalism’s inability to balance itself. Creating a minimum income that’s delinked from work, he argued, would increase effective demand without substantially increasing savings. The economy would grow again and would do so in a much more balanced way. The amount of the minimum income could become a simple, stand alone lever for the economic planners of the 21st century.

Here the basic income demand provides an answer to crises under capitalism without replacing the capitalist mode of production in the traditional Keynesian or post-Keynesian way, by ending ‘underconsumption’.  But what if underconsumption is not the cause of crises and there is a more fundamental contradiction within capitalism that a ‘basic income’ for all, gradually ratcheted up by government planners, cannot resolve?

Raventos retorts to this argument that “Some people complain that basic income won’t put an end to capitalism. Of course it won’t. Capitalism with a basic income would still be capitalism but a very different capitalism from the one we have now, just as the capitalism that came hot on the heels of the Second World War was substantially different from what came at the end of the seventies, the counter-reform we call neoliberalism. Capitalism is not one capitalism, just as “the market” is not just one market.”  

This answer opens up a whole bag of tricks by suggesting that we can have some form of non ‘neoliberal’, ‘fairer’ capitalism that would work for labour, as we apparently did for a brief decade or so after the second world war. But even if that were true, the ‘basic income’ demand stands little prospect of being adopted by pro-capitalist governments now in the middle of a Long Depression unless it actually reduced the value of labour power, not increased it.  And if a socialist worker government were to come to power in any major capitalist economy would the policy then be necessary when common ownership and planned production would be the agenda?  As one writer put it: “The call for basic income in order to soften the effects of automation is hence not a call for greater economic justice. Our economy stays as it is; we simply extend the circle of those who are entitled to receive public benefits. If we want economic justice, then our starting point needs to be more radical.”

In his book, Why the Future is Workless, Tim Dunlop says that “the approach we should be taking is not to find ways that we can compete with machines – that is a losing battle – but to find ways in which wealth can be distributed other than through wages. This will almost certainly involve something like a universal basic income.” But is that the approach that we should take?  Is it to find ways to ‘redistribute’ wealth “other than through wages” or is it to control the production of that wealth so that it can be allocated towards social need not profit?

I have discussed in detail in previous posts what the impact of robots and AI would be for labour under capitalism. And from that, we can see an ambiguity in the basic income demand. It both aims to provide a demand for labour to fight for under capitalism to improve workers conditions as jobs disappear through automation and also wants basic income as a way of paying people in a ‘post-capitalist’ world of workless humans where all production is done by robots (but still with private owners of robots?).

And when we think of this ambiguity, we can see that the issue is really a question of ownership of the technology, not the level of incomes for workless humans.  With common ownership, the fruits of robot production can be democratically planned, including hours of work  for all.  Also, under a planned economy with common ownership of the means of production (robots), it would be possible to extend free goods and services (like a national health service, education, transport and communications) to basic necessities and beyond. So people would work fewer hours and get more free goods and services, not just be compensated for the loss of work with a ‘basic income’.

In a post-capitalist world (what I prefer to call ‘socialism’ rather than mincing around with ‘post-capitalism’), the aim would be to remove (gradually or quickly) the law of value (prices and wages) and move to a world of abundance (free goods and services and low hours of toil).  Indeed, that is what robots and automation now offer as a technical possibility.

The basic income demand is just too basic. As a reform for labour, it is not as good as the demand for a job for all who need it at a living wage; or reducing the working week while maintaining wages; or providing decent pensions.  And under socialism, it would be redundant.


Shaikh at Greenwich

October 13, 2016

Professor Anwar Shaikh, author of the new book, Capitalism: competition, conflict, crises, addressed an audience of students and lecturers and some outsiders (including me) at the University of Greenwich, London earlier this week.

This was a great and rare opportunity in the UK to hear Shaikh talk about his magnum opus and answer questions.  And it was very instructive and stimulating.  I have previously reviewed Shaikh’s lifetime work on this blog in a relatively short post and I have just published a much longer and more comprehensive review.  But Shaikh’s Greenwich address is worth reporting because it confirmed in my mind the great merits of the book – and my doubts about aspects of it.

Shaikh first forcefully made the point that to understand the motions of the capitalist economy, we need to analyse real behaviour and not dream up the fictions of neoclassical ‘marginalist’ models.  Indeed, Shaikh reminded us that he was first trained in microeconomics back in the early 1960s by a leading neoclassical economist Gary Becker. 

Becker actually developed a model (that he later dropped) which explains supply and demand in a market economy without marginalist pre-conceptions or models of so-called rational expectations of ‘representative agents’, as neoclassical micro now insists on.  If you start at the level of the aggregate, all the different possible individual motivations and irrational behaviour are averaged out and a pattern of consumption or production ‘emerges’ for an economy.  “The aggregate is transformational”, so we do not need models of individual behaviour.  I quote from my own blog in 2010 along the same lines: More important, the power of the aggregate and history is completely ignored.  The aggregate irons out the irrational or the unexpected (even if some wrinkles remain) and history, namely empirical data and evidence, provides a degree of confidence for any theory (the goodness of fit).  With the neoclassical EFM, neither part of scientific method is applied.”

Second, Shaikh emphasised that any proper analysis of capitalism must start with the evident point that the driving force of the capitalist mode of production is profit – not output, not income, not technology, but profit.  Yes, capitalism has expanded the productive forces to previously unprecedented levels (and Shaikh showed this with various graphs that are in his book); but the other side of the capitalist coin was rising inequality and recurrent destruction of capital, both in means of production (bankruptcy and closures) and labour (unemployment and loss of wages).  Unemployment is permanent and cannot be removed under a capitalist system.

The main task of his book was to show how profit is created and operates through what Shaikh calls “real competition” in a turbulent and conflicting process. “It’s a war, not a ballet” – a conflicting struggle between capital and labour and between capitals, not some delicate dance of change.

Shaikh showed with a series of graphs from his book how capitalism lurches forward with regular crises, sometimes turning into deep depressions.  Shaikh reminded us that it was mainstream empirical analysis that confirms this.  And the Russian economist Kondratiev revealed the longer waves of capitalist boom and depression.  It was this analysis that led Shaikh to predict back in 2003 that a major slump was coming.  He reckons that another is also due soon.

This is all compelling.  But there are other less compelling aspects to Shaikh’s book that I raised in my review and were confirmed in my mind again after his Greenwich address.

The foundation of my doubts rests with Shaikh’s attempt to reconcile the Marxist ‘critique of political economy’ (as Marx sub-titled Capital) with ‘political economy’ itself – in other words submerging Marx into the ‘classical tradition’ of Smith, Ricardo, Mill etc.  Yes, Marx was very appreciative of Smith and Ricardo’s objective insights into the nature of industrial capitalism.  But he had profound disagreements and criticisms of their labour theory of value, which failed to recognise the dual nature of commodity production – combining use value (output of things and services) and exchange value (pricing in the capitalist market).  That dual nature reveals: first, that it is labour (power) that creates value; and second, that profit is the result of the exploitation of labour.

Moreover, ‘real competition’ means the equalisation of profit rates between sectors and industries as the result of capital flows searching for the highest profit.  So, as Marx explained, market prices move around (ever-changing) prices of production (measured as the cost of capital plus an average rate of profit) not around individual values of commodities measured by the labour time in them.  This was Ricardo’s omission or error in his labour theory of value.

Shaikh recognises this but is still determined to reconcile Marx with Ricardo by showing that the difference in prices when measured in labour value (times) and when measured in prices of production is a just a small percentage over a time series.  So Ricardo “was spot on” and Marx and Ricardo (nearly) agree.

Nearly but yet so far – a miss is as good as a mile.  The difference is crucial because Marx’s theory of value shows that it is the exploitation of labour as a commodity that is at heart of the capitalist mode of production and that the competitive struggle between capital for the share of the surplus value appropriated from labour power leads not only to a tendency to equalise profit rates BUT ALSO to a tendency for the average rate of profit to fall.  This is the result of capitalist competition and the drive to reduce the value of labour power in total value.

This is the fundamental contradiction in the capitalist mode of production and it is Marx’s concept, not Ricardo’s nor Smith’s.  Both the latter recognised that the rate of profit in an economy fell but neither Ricardo not Smith reckoned this was due to the exploitative role of capital over labour or the unintended result of the capitalist drive for more profit.  Their ‘dismal’ explanation for a falling rate of profit was either rising wage costs (Ricardo) or intense competition (Smith).  The Ricardian answer of rising input costs  was followed by the 20th century neo-Ricardians like Piero Sraffa or the post-Keynesians like Joan Robinson and Michal Kalecki – in opposition to Marx’s value theory and law of profitability.  Their positions cannot be reconciled with Marx – and more important, are not correct.

I have already explained in my recent long review some of these ambiguities that I find in Shaikh’s immense work and some of these were repeated in his lecture.  He tells us that profit has two sources: not only from production but also from the circuit of capital, following James Steuart, the classical economist who talked about two sources of profit: positive profit from production and relative profit from transfers of value from one capital to another.

As Bill Jefferies says in his recent review of Shaikh’s book, Shaikh blurs the picture further with a reinterpretation of Steuart’s discussion of positive and relative profit. Positive profit adds to the public good. Relative profit is an effect of ‘vibration’ of the existing stock of wealth. Positive profit is real value added, relative profit cannot exist in aggregate, as what is a gain for one is a loss to the other, of the same amount but in the opposite direction, and yet Shaikh says it can. Shaikh uses the strange example of a burglar stealing a TV (p209). What has this got to do with production? Presumably, if capital is no longer a social relationship, then labour need not be the source of all new value.”

Ironically, when you read what Marx says about Stueart’s classification, I don’t think you can agree with Shaikh that Stueart’s two sources of profit meant that Marx agreed that extra value is also created by trade and not just production. Marx says “Before the Physiocrats, surplus-value — that is, profit in the form of profit — was explained purely from exchange, the sale of the commodity above its value.  Sir James Steuart on the whole did not get beyond this restricted view; (but) he must rather be regarded as the man who reproduced it in scientific form.  I say “in scientific form”.  For Steuart does not share the illusion that the surplus-value which accrues to the individual capitalist from selling the commodity above its value is a creation of new wealth.”

And Marx goes on: “This profit upon alienation therefore arises from the price of the goods being greater than their real value, or from the goods being sold above their value.  Gain on the one side therefore always involves loss on the other.  No addition to the general stock is created.”  But “his theory of “vibration of the balance of wealth between parties”, however little it touches the nature and origin of surplus-value itself, remains important in considering the distribution of surplus-value among different classes and among different categories such as profit, interest and rent. (my emphasis).”

So there is no new profit from trade or transfer.  This relative profit is just that, relative.  Why does Shaikh, however, want to make much of this?  It would seem he wants to find new value from outside the exploitation of labour in production for two reasons: one to reconcile the “classical tradition” with Marx; and second, to explain how in the 20th century, finance capital can gain extra profit from outside production.  This extra profit comes from ‘revenue’ (i.e. profit circulating or hoarded and now outside production).  Just as a burglar can gain profit from stealing and selling on, so can a banker from extorting extra interest and fees from workers savings and mortgages.

Now finance capital can gain profit from slicing off a bit of workers’ wages in bank interest or from squeezing the profit of enterprise (non-financial capital). But this is not an extra source of profit but merely a redistribution of surplus value or a reduction of the value of labour power.  It does not mean that finance capital ‘creates’ a new source in the circulation of capital.  Shaikh says that profit is gained from ‘unequal exchange’, say with poor parts of the ‘non-capitalist’ world.  But taking hides and gold from the New World off indigenous tribes for little or nothing is not a new source of value; it is the (pre-capitalist) exploitation of the labour of those peoples.

As Joseph Choonara has pointed out: “exploitation in a Marxist sense has a quite specific meaning. It relates to the extraction of surplus value from workers even though the commodity they supply, their labour power, is obtained by the capitalist at its value. The surplus value generated is not a “swindle” as pre-Marxist socialists had argued but a result of the gap between the new value created by labour over a given period of time and the value required to reproduce that labour power (the wage). The mechanisms associated with financialisation do not generate surplus value .  As anyone with an overdraft can testify, it is undeniable that banks make profit out of personal finance.   To the extent that wages rise to account for this, it is a mechanism that shifts surplus value from capitalists concerned with production to those concerned with lending money, just as an arbitrary rise in the price of bread would (if wages rose correspondingly) shift surplus value to bread-producing capitalists. To the extent that wages are held down, it represents an increase in overall exploitation of workers, just as an arbitrary rise in food prices would under conditions of wage repression. And to the extent that workers default on their debts, whether credit cards or subprime mortgages, it represents a decline in a market in fictitious capital, with banks (and others) holding claims over future wage income, some of which turn out to be worthless. Whatever happens, the generation of surplus value within capitalist enterprises remains central to the system as a whole.”

So if the argument is that this an extra source of profit that must be added into economic accounts, then that breaks with Marxist theory or for that matter even with the ‘classical tradition’ as suggested by Stueart.  Shaikh’s assertion concedes to the ambiguities of the modern “financialisation” theories promoted prominently by Costas Lapavitsas or Jack Rasmus, namely that is finance that is now the exploiter, not capital.

I have discussed the theories of Costas Lapavitsas and Rasmus before and see Tony Norfield’s insightful critique of Lapavitsas’ approachSam Williams in his blog considers this attempt to identify sources of profit that are additional to surplus value in the exploitation of labour in production.  “What left-Keynesian economists, supported by the Keynesian-Marxists, really hope to achieve is to replace profits based on surplus value—that is, exploitation—with profits based on buying low and selling dear and on this basis reconcile the interests of the working class and the capitalist class.”

The University of Greenwich runs a political economy school which is clearly dominated by post-Keynesian analysis.  Shaikh is severe in his book about this strain of heterodox economics, because it accepts the neoclassical model of perfect and imperfect competition (Joan Robinson, Kalecki).  The source of exploitation then becomes monopoly power: the ‘mark-up’ over costs that monopolies obtain.  In his book, Shaikh demolishes this view (p234-5), also repeated by the Monthly Review school.

But at the lecture, he seemed to argue that Keynes and Kalecki’s view of profitability could be reconciled with Marx’s – namely that Marx’s law of the tendency of the rate of profit and Keynes’ ‘marginal efficiency of capital’ were equivalent (p577). Shaikh was a pupil of the radical Keynesian economist, the late Wynn Godley, who like Kalecki had a macroeconomic showing that investment and profits moved together.  But the Kalecki-Godley view is back to front.  For them, investment leads or even ‘creates’ profit.  For Marx, and surely for Shaikh (see pp544-545), profit leads or creates investment, not vice versa.  And this is crucial because it shows that profit and profitability is not only key to capitalist production but also the heart of any understanding of crises under capitalism.

For me, Keynesian and post-Keynesian economics are not to be reconciled with Marxist economics.  Shaikh critiques post-Keynesianism on the one hand and on the other tells us that Keynes and Kalecki have the same view of the role of profit as Marx – while Ricardo ‘nearly’ has the same view of the source of profit as Marx.  Can that be right?

I think not.  On this blog and in my new book, The Long Depression, I have argued that that are fundamental differences between Marx’s view of the capitalist process and that of Keynes.  It is not just theory; it is also Keynes’ clear support of the capitalist system and antagonism to socialism.  It is also that Keynesian policies do not work for labour or can even ‘save capitalism’.  Shaikh says that they can ‘dampen’ the effect of a slump for a while but cannot deliver sustained growth in incomes or employment.  I agree.

There is also no reconciliation possible between Marx’s value theory and that of Ricardo and Sraffa.  There is also no unification between Marx’s law of profitability as the underlying cause of recurrent crises and slumps and the post Keynesian/Kalecki view of a ‘profit-wage share’ economy.  And there is no meeting between Marx’s view of profitability and credit in modern capitalism and those who hold that finance creates value and that ‘financial speculation’ lies at the centre of capitalist crises.  Shaikh stands for Marx on most of these issues but seems want to build a bridge to other side too.  But that is not necessary.

The global debt hangover

October 9, 2016

The legacy of the global financial crash and the Great Recession has left a huge mound of debt globally that weighs down the world capitalist economy.  This debt is a major factor, along with the low level of profitability of capital in the major economies and is generating what I call the Long Depression since 2009.  Global growth has been well below pre-crisis trends and world trade growth has ground to a halt.

If companies face low profitability on their investment and still have high debts to repay or service, they will be reluctant to invest more.  If governments are burdened with high debts as a result of bailing out the banks and because unemployment and social security benefits stay high, then governments cut public investment.  If households are still burdened with large mortgages, they won’t spend more, but save.  All this adds up to weak investment and low wage and employment growth.

The only saving grace is that central banks have driven global interest rates down towards zero (or even negative), so that servicing debt is cheap and cheap credit can be used by corporations to buy back shares, pay out dividends and speculate in bond and stock markets; for governments to service their bonds and borrow more; and for households to pay their mortgages and run up credit card debt.

But the global debt hangover has not gone away and if interest rates should start to rise or if economies should drop into recession or deflation, this debt burden could turn into a spiral of collapse.

That is what is worrying the international economic agencies like the IMF or the Bank for International Settlements (BIS).  The IMF has just reported that global debt is at a record high.  Excluding the banking sector, non-financial sector (corporations, households and governments) debt has more than doubled since the turn of the century, reaching $152 trillion last year, and it’s still rising.  If you include the banking sector, McKinsey finds that the total debt reaches $200 trillion.


Current debt levels now sit at a record 225% of world GDP, with about two-thirds of that in the private sector (household mortgages and corporate borrowing).  The IMF says that slow global growth (the Long Depression in other words) is making it difficult to pay off the obligations, “setting the stage for a vicious feedback loop in which lower growth hampers deleveraging and the debt overhang exacerbates the slowdown.”  IMF fiscal chief, Vitor Gaspar, warned that “excessive private debt is a major headwind against the global recovery and a risk to financial stability.”

The IMF laid out the major risks to the financial system.  First, European banks are facing a chronic profitability crisis. Many haven’t been able to clear the legacy debt off their balance sheets and investors are increasingly sceptical they’ll be profitable based on their current structures.

This potential banking crisis has been exposed by the debacle of Deutsche Bank, Germany’s largest bank by far in Europe’s most successful economy.  Facing massive fines from the American Justice department for ‘mis-selling’ mortgage bonds to clients globally during the great housing boom and bust leading to the global financial crash, Deutsche has been pushed close to the edge and may have to be bailed out by more public money.  Last summer, the IMF did a report on German banks and concluded that “Deutsche Bank appears to be the most important net contributor to systemic risks in the global banking system,” followed by HSBC and Credit Suisse.  Deutsche has $47trn in notional value of derivatives outstanding.  In other words, because it is so big, if it goes down, it will take many other banks with it.

At the same time, Italy’s banks have over €200bn in bad loans on their books from companies which cannot service their debts because of the very weak Italian economy and slow global growth.  Italy’s third biggest and oldest bank, Monte Paschi, is bust and has already had two bailouts.  And then there are the Portuguese banks, the largest of which, Espirito Santo,like Monte Paschi, had to be bailed out to avoid a systemic crisis.

Second, there is rising corporate debt, particularly in so-called emerging markets. The combined shock of the commodity-price plunge and China’s slowdown has made the surge in private debt a major threat to emerging-market economies.

Investment bank JP Morgan reckons that the debt of non-financial corporations in emerging economies has surged from about 73% of GDP before the financial crisis to 106% of GDP. This 34%-point increase is enormous, averaging nearly 5%-points per year since 2007.  In previous research, the IMF has found that an increase in the ratio of credit to GDP of 5%-points or more in a single year signals a heightened risk of an eventual financial crisis. Many emerging market economies have registered such an increase since 2007. Hence the conclusion of the credit analysts, S&P, that “we have reached an inflexion point in the corporate credit cycle”.

The policy answer of the economic authorities in the major economies to the Long Depression has been to tighten government spending and try to reduce deficits on government budgets to get the public debt burden down, while central banks cut interest rates and print money by the trillions to create cheap money to pay debts and invest.

But fiscal ‘austerity’ and cheap money have not worked anywhere to get the world economy going.  Zero interest rate policy (ZIRP) has given way to negative interest rate policy (NIRP) and quantitative easing (QE) or printing money to give to the banks is giving way to the idea of ‘helicopter money’ (printing money to give directly to governments or even households).  But it is not doing the trick, because this credit just builds up in banks and in speculative financial investment as profitability in productive sectors remains too low to encourage new investment and consequently growth.

Now international agencies like the IMF and the OECD and Keynesian economists are calling for ‘fiscal action’.  The big call is for ‘infrastructure investment’, i.e. using government funds to build roads, bridges, communications etc.  This would boost investment and employment and get economies going, it is argued.  As I have said before, such investment would undoubtedly help but it would have to be huge to have much of an impact.  The G20 economies represent 92% of the world economy and in 2014 G20 ministers agreed to raise annual growth by an extra $2trn (without specifying how!).  But even if it were done by more infrastructure investment, it would not work.  As 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.”

Investment by the capitalist sector is seven or eight times larger than government investment in most major economies (China and India excepted).  A 1% of GDP increase in government investment sounds large at around say $1trn globally, but it is really a pinprick compared to the annual global investment of close to $20trn.

And anyway, the willingness of governments to initiate such spending is capped by the need to keep control of rising public debt.  Public debt is now around 85% of world GDP, according to the IMF data, with no sign of any decline.  Only very low interest rates are making it possible to service this debt without even more stringent fiscal ‘austerity’ (government spending cuts and tax rises).  A large increase in government investment will drive debt up further, at least to begin with.

So governments are not doing what the Keynesians (outside and inside the IMF) want.  Indeed, the IMF forecasts that budget balances will tighten not relax in both advanced and emerging markets next year.  Morgan Stanley, the American investment bank, reckons that the governments of the advanced economies will ease fiscal policy next year but only by 0.3% of GDP — equating to a mild $115 billion increase in spending – nowhere near $1trn or $2trn.   “Fiscal easing equivalent to 0.3% of GDP is unlikely to materially increase global growth,” said Elga Bartsch, lead author of the Morgan Stanley report.


The global debt hangover remains and the alka seltzer of cheap and plentiful credit has not cured it.  The alternative of fiscal spending won’t work either and won’t be enough anyway.  The mainstream economics of monetarism and Keynesianism cannot get rid of this hangover because the world capitalist economy is still drunk from too much debt and starved of profitability.

And now total corporate profits are falling globally while debt continues to rise – with the prospect of a new global slump on a fast-approaching horizon.

Global corporate profits

US economy – not so great

October 7, 2016

The US economy is the largest and most important capitalist economy.  It is usually considered as having performed the best of the top seven largest economies since the end of the Great Recession in 2009.  But is that really true?

If we take the average real GDP growth since 2009, we find that US growth has been lower at just under 2.2% than Canada, admittedly a much smaller economy.


Similarly, if we look at the average real GDP growth per person (per capita), US economy has average growth of just 1.4% a year, much lower than Germany at over 1.9% a year – although all the G7 economies are performing poorly.  In particular, note the terrible performance of Italy, with an average contraction in both GDP and GDP per capita.


The story of the US economic giant since the Great Recession is one not just of stagnation but of disappearing economic growth in the weakest economic recovery after a slump since the 1930s.


In its latest economic outlook, the IMF is forecasting just 1.6% annual real GDP growth for the ‘advanced economies’ down from 2.1% in 2015 and down from its July forecast of 1.8%.  And the main reason for this downgrade forecast is that the IMF now expects the US economy to expand at only 1.6% this year from a previous forecast of 2.2%.  This slowdown is to be mirrored in the UK (forecast 1.8% from 2.2% in 2015) and in the Eurozone (1.7% from 2% in 2015).  As for Japan, it is expected to expand in real terms by just 0.5%.

Maurice Obstfeld, the IMF’s chief economist, said the global economy held still significant risks fed by a “cocktail of interacting legacies” from the 2008 global financial crisis. These included high debt overhangs, bad loans on banks’ books and moribund investment, which were continuing to depress the global economy’s potential output.  Growth “has been too low for too long, and in many countries its benefits have reached too few — with political repercussions that are likely to depress global growth further,” Mr Obstfeld said.

Yes, the end of globalisation and its benefits to the largest and most powerful capitalist economies is giving way to weak trade growth and the collapse of future international trade agreements as political leaders respond to pressure to drop trade pact like TPP or TTIP and in the case of the UK, to leave the European Union and seek bilateral trade deals.

The hope was that US economy would pick up in the second half of 2016 – yet another bout of optimism that is losing force.  The Atlanta Fed Now GDP forecast is usually pretty accurate for US GDP growth.  At the beginning of the quarter starting in July and finishing in September, it predicted a 3.7% annual growth rate.  Now it is forecasting just 2.2%.  Expect it to drop even lower before we get to the official figures.  Similarly the Fed New York forecast is for 2.2% in the third quarter and just 1.2% in the fourth quarter.


For the long term, the US Federal Reserve bank economists are now forecasting just 1.8% a year expansion for the US economy compared to 2.6% at the end of the Great Recession.  And all this assumes no new economic recession.  The current ‘recovery’ is already one of the longest since 1945, having been supported by massive monetary injections by central banks globally.  But monetary pumping has not worked.


The likelihood of a new economic slump is high for 2017, as I have argued in previous posts.  But even without that, US capitalism’s economic performance is poor and only saved by the pitiful results achieved by other top capitalist economies.




The US rate of profit 1948-2015

October 4, 2016

The US Department of Commerce’s Bureau of Economic Analysis (BEA) has just updated its estimates of net fixed capital stock in the US economy.  This gives us the opportunity to measure the US rate of profit a la Marx up to 2015.

I made such measurements up to 2014 in a previous post about a year ago.  Last December, I summed up the conclusions from the data.  First, the secular decline in the US rate of profit since 1945 is confirmed and indeed, on most measures, profitability is close to post-war lows.  Second, the main cause of the secular fall is clearly a rise in the organic composition of capital, so Marx’s explanation of the law of the tendency of the rate of profit to fall is also confirmed.  Third, profitability on most measures peaked in the late 1990s after the ‘neoliberal’ recovery.  Since then, the US rate of profit has been static or falling. And fourth, since about 2010-12, profitability has started to fall again. Finally, the fall in the rate of profit in the US has now given way to a fall in the mass of profits.”

Now that we have all the 2015 data, I have revised the results with the help of Anders Axelsson from Sweden who has produced a very handy manual for anybody to use to work out and replicate the results.  Anders has also checked the 2015 data as well. short-manual-for-downloading-rop-data-from-bureau-of-economic-analysis-1

The conclusions reached last year are pretty much unchanged. In last year’s post, I updated the rate of profit as measured using the assumptions and methods of Andrew Kliman in his book, The failure of capitalist production AK measures the rate of profit for the corporate sector only and uses the historic cost of net fixed assets as the denominator.  I also used a slightly different variation of AK’s approach in depreciating profits by current costs, while maintaining a historic cost measure of fixed assets.  If all this sounds technical, it is and I refer you to the already cited papers and posts for an explanation.  See Anders’ manual too.  And there is special appendix in my new book, The Long Depression, on measuring the rate of profit.

Anyway, the results for the US corporate rate of profit look like this.


In AK’s measure the US corporate rate of profit falls from the late 1970s to a trough in 2001 and then it appears to make a recovery.  But it could be said that the US rate of profit was more or less stable from the late 1980s.  My slightly revised measure reveals a very steady decline until a stabilisation from the 1980s – or the traditional ‘neoliberal period’.  Both measures suggest that the US corporate rate of profit has been at least static (with cyclical fluctuations) since 1997.  Either way, the US corporate rate of profit is some 30% below where it was after WW2 and 20% below the 1960s.

However, I prefer as a better guide to the health of a capitalist economy to look at the total surplus value created in an economy against the capital employed, thus following Marx’s basic formula, s/c+v.  So I have a ‘whole economy’ measure using total national output, fixed assets and employee compensation for variable capital.  The graph below shows the results updated to 2015 for this measure, using either historic or current costs to value fixed assets.


This shows that the overall US rate of profit has four phases: the post-war golden age of high profitability peaking in 1965; then the profitability crisis of the 1970s, troughing in the slump of 1980-2; then the neoliberal period of recovery or at least stabilisation in profitability, peaking more or less in 1997; then the current period of volatility and slight decline.  The historic cost measure differs from the current cost measure in that the trough in profitability is actually at the end of the 1980s, as in Kliman’s measure.  And the current cost measure always shows much greater upward or downward movement.

What is interesting about the update of data to 2015 is that it reveals that, whatever measure is used, the rate of profit in 2015 is lower than in 2012; lower than in 2006 (the peak of the last cycle); and lower than in 1997 when most measures peaked.  So there is currently a downward phase in the rate of profit.  Given the fall in the mass of profit during this year, we can expect to see a further decline in 2016.  I’ll return to this point later when we look at the measures of profitability provided by the US Federal Reserve.

We can sum up the movements in the rate of profit as follows: (1 = base point)

1948-65 1965-82 1982-97 1997-15 1948-15 2006-15
HC 0.78 0.79 1.10 0.97 0.67 0.93
CC 0.93 0.64 1.30 0.97 0.75 0.96

So between 1948 and 2015, the US rate of profit declined between 25-33% depending on whether you measure fixed assets in historic (HC) and current costs (CC).  Between 1965 and 1982, the rate fell 21-36%; but from 1982 to 1997 it rose 10-30%; but since 1997 it is down 3% and 4-7% from 2006.

And each economic recession in the US starting from the first large one in 1974-5 has been preceded by a fall in the rate of profit at least one year and often up to three years before. (1= base point)

1973-5 1978-82 1988-91 1997-01 2006-9
HC 0.95 0.84 0.92 0.89 0.81
CC 0.87 0.80 0.93 0.91 0.79

Last year, I compared the change in the rate of profit to changes in the organic composition of capital (fixed assets divided by employee compensation) and the rate of surplus value (profits divided by employee compensation).  I did this again for 2015 and it confirms Marx’s law of profitability, namely when the organic composition of capital rises faster than the rate of surplus value, the rate of profit will fall and vice versa.


Over the whole period, 1946-15, the rate of profit fell 30% (historic cost measure), while the organic composition of capital rose 46% and the rate of exploitation rose 2%.

The US Federal Reserve also provides data from which we can glean an estimate of the US rate of profit and on an even more up to date basis (to mid-2016).  However, the Fed measure only covers the non-financial corporate sector and only goes back to 1960.  The Fed measure, a la Marx, is the net operating surplus (profit) over non-financial assets and employee compensation.  It broadly confirms the long-term trends revealed in the whole economy measure.


More interestingly, the Fed measure shows that the rate of profit for non-financial companies has fallen since 2012 and particularly since 2014.

So, as I said at the start of this post, the main conclusions from last year remain.  What the 2015 measures add is that the US rate of profit (on any measure) fell in 2015 and is now down about 3% from 2012.  US corporate profits are falling in absolute terms and have been since early 2015.


The US rate of profit is likely to have fallen again this year and that fall is accelerating according to the more high frequency Fed data.

Global turbulence ahead

September 29, 2016

This coming week sees the start of the semi-annual meeting of the IMF and World Bank in New York.  This is an opportunity for the world’s economic strategists to review the state of the major world economies. And it’s not good news.  Earlier this month, the OECD, which looks after the world’s top 30 economies, reported in its ‘interim economic forecast’ that global GDP growth (including India and China) would be flat around 3% in 2016 with only a modest improvement projected in 2017. Overall, the OECD reckoned that the world economy “remained in a low-growth trap with persistent growth disappointments weighing on growth expectations and feeding back into weak trade, investment, productivity and wages.” Catherine Mann, chief economist at the OECD, said: “Action was needed to lift the global economy out of a low-growth trap”, she said. “The spiral is not upwards, it is downwards. Downwards on trade, downwards on productivity, downwards on global growth.”

As for world trade, prior to this weekend’s IMF meeting, its economists published a chapter from its upcoming World Economic Outlook in which they argued that one of the features of the current slow growth (depression) was the unprecedented decline in world trade growth.  “Since 2012, growth in the volume of world trade in goods and services has been less than half the rate during the preceding three decades. It has barely kept pace with world GDP and the slowdown has been widespread.  The IMF economists calculate that this slow trade is mostly a symptom of the sluggish economic recovery.  “Indeed, up to three-fourths of the shortfall in real trade growth since 2012 compared with 2003–07 can be traced to globally weaker economic growth, notably subdued investment.”

UNCTAD, the division of the UN economics that looks at so-called developing economies, issued a report which concluded that the world is on the verge of “entering a third phase of the financial crisis”. Alarm bells have been ringing over the explosion of corporate debt levels in emerging economies, which now exceed $25 trillion. “Damaging deflationary spirals cannot be ruled out.” According to UNCTAD, many ‘developing’ countries are doing no such thing (i.e. developing). There is no investment in the productive sectors to be found. Many countries have fallen further behind the rich world than they were in 1980, despite ‘opening up’ their economies to multinational capital flows.  While the profit share of GDP in emerging economy has risen to an historic high of 36% of GDP from 30% in 1980, private investment has slumped to 17% from 21%.  In other words, much of the profit made has left the country or been invested in unproductive sectors like real estate or financial speculation.

Also, as global interest rates have fallen, corporate debt in emerging markets has risen from 57% to 104% of GDP since the end of 2008, posing a real risk of financial collapse if a new global recession should appear or if interest rates jump sharply and national currencies plunge against the dollar or euro.

Weak investment is the cry of all these international agencies.  And it has also been the message of private sector economic strategists like McKinsey, the management consultants.  In a new report, called Turbulence ahead: Renewing consensus amidst greater volatility, McKinsey outlines why global trade and growth has slowed to a crawl since the end of the Great Recession in 2009.  “The shock of the 2008 global financial crisis triggered the first recorded drop in global GDP and the hangover has since persisted, with many countries struggling with unexpectedly weak recoveries.”  And it is not going to get any better, McKinsey projects: “More worryingly, long-term growth prospects are serious cause for concern. Annual GDP growth from 2014 to 2064 is projected to effectively halve, falling to 2.1 percent globally and 1.9 percent for developed countries”.

Existing policies adopted by governments have not worked: “private and public investment remain unresponsive to this cheap credit. Even the much anticipated policy of quantitative easing has done little to change this.”  Investment growth has slowed significantly since 2008. It collapsed outright in the European Union (EU), declining by $330 billion. Although gross investment in the US has picked up, net investment as a percentage of GDP has halved since 2007. Companies have invested in more short-lived assets but failed to compensate by raising gross investment. Without the state-directed investment by China, the global figures would be even worse. “China has propped up global investment, constituting 79 percent of the rise in investment since 2008. But this will not last: annual investment growth in China is expected to fall from 10.4 percent between 2008 and 2015 to 4.5 percent between 2015 and 2030.”

Indeed, the very latest data from the US – up to mid-2016 – show that US fixed investment has ground to a halt.


I have discussed the cause of this poor investment record in several posts.  In my view, it is not due to “poor consumer demand” stopping companies from stepping up investment.  Growth in consumer spending has been relatively robust since 2009.  Indeed, when consumer spending is excluded, the rest of the US economy is already in negative territory.


Nor is poor or even negative investment due to ‘uncertainty’ or regulation etc.  It just comes down to profitability.  I have cited an increasing number of studies that confirm this.  For example, mainstream economists Kothari, Lewellen and Warner wrote a paper called The behavior of corporate investment.AggregateInvestment

The authors find a close causal correlation between the movement in US business investment and business profitability.  The three mainstream authors of the paper find that “investment growth is highly predictable, up to 1½ years in advance, using past profits and stock returns but has little connection to interest rates, credit spreads, or stock volatility. Indeed, profits and stock returns swamp the predictive power of other variables proposed in the literature.”  And that “Profits show a clear business-cycle pattern and a clear correlation with investment.”

The data show that investment grows rapidly following high profits and stock returns—consistent with virtually any model of corporate investment—but can take up to a year and a half to fully adjust. This was exactly the conclusion that I reached in my own study and jointly with G Carchedi (

And in a recent report, JP Morgan economists point out that capital-to-output ratios are above their historical average and capital productivity has trended lower over the past decade.  In Marxist terms, the organic composition of capital is rising and the returns on capital stock are declining.  The latest official figures for capital stock up to 2015 in the US are now available, so in a future post, I shall update the latest position on the US rate of profit, a la Marx.

But in the meantime, let me repeat the work of the senior economist at the Cleveland Federal Reserve, who found that “A simple correlation analysis shows that the correlation between the change in corporate profits and the contemporaneous change in industrial production is 54 percent, but the correlation goes up to 66 percent if I use the one-quarter-ahead change in industrial production. Similarly, the correlation between the change in corporate profits and the contemporaneous change in gross domestic private investment is 57 percent, but the correlation goes up to 68 percent if I use the one-quarter-ahead change in investment. More formally, a Granger causality test indicates that the quarterly change in profits leads the quarterly change in production by one quarter, but the change in profits is independent of the change in production. A similar relationship applies to the quarterly change in profits and investment.6 Thus, firms seem to adjust their production and investment after seeing a drop in their profits.”

According to Dubravko Lakos-Bujas at JP Morgan, since 1900 there have been 27 instances of two straight quarters of corporate earnings decline, similar to what we have now.  Lakos-Bujas goes on: “Declining corporate profits as measured by US equity EPS have been closely followed by, or coincided with, a recession 81% of the time since 1900.”


The economists at Deutsche Bank have also reached similar conclusions.  They cite four indicators that popped up before the recessions in 1990, 2001, and 2008.  And they are showing red now.  First, there’s already a recession for US profits. They’ve been sliding since they peaked in the second quarter of 2014.  Second, the Fed’s Labor Market Conditions Index, a tracker of multiple indicators, turned negative in August. A subzero reading was followed by a recession five times in the last 40 years. Third, capital-expenditure growth has turned negative, down 2% over the past year.  And fourth, corporate default rates are rising.

There was only one year (1986) in the last 60 years when US corporate margins declined without this leading to a recession. It was also the only period in 40 years when a recession did not happen even though capital-expenditure growth declined.  So usually, where profits go, investment follows.  And the very latest US figures show just that.


As the IMF and the World Bank meetings take place, the global economy remains in a weak state.  The IMF economists are calling for global coordinated action to “counteract renewed slowdowns”  In a new paper, they claim that the right policies can “debunk widespread concerns that little can be done by policymakers facing a vicious cycle of (too) low growth, (too) low inflation, near-zero interest rates, and high debt levels.” They call for fiscal action (government spending and investment); and ‘structural reforms’ of labour markets and stronger banks and financial systems.

Apart from the question of whether any of these policies would work, there is no sign that the governments of the major economies are prepared to coordinate globally any policy action.  Government investment to compensate for weak business investment is still being cut in most countries to try and ‘balance the budget’ and keep government debt down.  Structural reforms (namely privatisation and reduction in labour rights) are facing serious opposition from labour.  And there are now new signs that banks are back in trouble (Deutsche Bank in Germany; Italian banks etc).

Real GDP per capita growth is slowing in both the advanced capitalist economies and the so-called emerging ones, while the big beast in global expansion, China is also slowing.  Now if the US economy should falter from its already snail-like pace, all bets are off for avoiding a new global slump.  The indicators are starting to turn red.  So, as McKinsey puts it, global turbulence lies ahead.

Paul Romer, the mainstream and reality  

September 22, 2016

Paul Romer is a top mainstream economist. Romer has just been appointed chief economist at the World Bank.  World Bank President Jim Yong Kim described Romer’s appointment with acclaim: “We’re thrilled to have an economist as accomplished as Paul Romer join us,” said Kim.“We’re most excited about his deep commitment to tackling poverty and inequality and finding innovative solutions that we can take to scale.” For a critical review of Romer’s’ ideas and his likely influence at the World Bank, see this piece from the graduate blog, the New School Economic Review.

So it is big news among professional mainstream economics that Romer should publish just this month a working paper in which he trashes the whole basis of macroeconomics (i.e. looking at an economy as a whole), both neoclassical and Keynesian versions, in what appears to be a parting farewell to his colleagues in economic academia (leo16_romer).  This is what he says in his intro to the paper, The trouble with macroeconomics, “For more than three decades, macroeconomics has gone backwards. …Macroeconomic theorists dismiss mere facts by feigning an obtuse ignorance… Their models attribute fluctuations in aggregate variables to imaginary causal forces that are not influenced by the action that any person takes… a general failure mode of science that is triggered when respect for highly regarded leaders evolves into a deference to authority that displaces objective fact from its position as the ultimate determinant of scientific truth.”

Romer’s critique mirrors the criticisms that have been expressed by heterodox and Marxist economists for decades.  For example, see Steve Keen’s excellent book, Debunking economics, which exposes the fallacious assumptions and approach of mainstream economics; or more recently, Ben Fine’s critique of both micro and macroeconomics. But now we have top mainstream economist Paul Romer dismissing the approach and methods that he and others have taught in all the economics departments of universities across the world.

Romer starts by an attack on the explanation of crises under capitalism as just being the result of ‘exogenous shocks’ to an inherently harmonious process of economic growth. “Macroeconomists got comfortable with the idea that fluctuations in macroeconomic aggregates are caused by imaginary shocks, instead of actions that people take.”  The great economist of models based on shock was Nobel prize winner Edward Prescott.  In 1986, he calculated that 84% of output variability (crises) is due to technology ‘shocks’, even though others came up with estimates that “fill the entire range from Prescott estimate of about 80% down to 0:003%, 0:002% and 0%”! (Romer).

By ‘imaginary’ is the idea that mainstream economics just invents possible exogenous causes for crises because it does not want to admit that crises could be endogenous.  These imaginary shocks become increasingly unrealistic.  As Romer says, the “standard defense invokes Milton Friedman’s (1953) methodological assertion from unnamed authority that “the more significant the theory, the more unrealistic the assumptions (p.14).”  Romer adds, “More recently, “all models are false” seems to have become the universal hand-wave for dismissing any fact that does not conform to the model that is the current favorite.

What this approach leads to is that we cannot make a proper identification of what causes a change economically.  If you just keep adding possible ‘imaginary shocks’ to explain sharp changes in an economy, “more variables makes the identification problem worse.”  As Romer points out, “solving the identification problem means feeding facts with truth values that can be assessed, yet math cannot establish the truth value of a fact. Never has. Never will.”

Looking at the facts has given way to the purity of mathematical models and seeking the truth has given way to deference to authority.  “Because guidance from authority can align the efforts of many researchers, conformity to the facts is no longer needed as a coordinating device. As a result, if facts disconfirm the officially sanctioned theoretical vision, they are subordinated.  Progress in the field is judged by the purity of its mathematical theories, as determined by the authorities.”

Romer concludes that “the disregard for facts has to be understood as a choice.” In other words, mainstream economics is stuck in an ideological defence of the status quo and of the ‘conventional wisdom’, to use the term of Keynes and JK Galbraith.  The defence of capitalism and the ruling order is more important than seeking the truth.

Romer agrees that leading neoclassical economist Robert Lucas had a point when he reckoned that Keynesian economic models “relied on identifying assumptions that were not credible.”  And that the “predictions of those Keynesian models, the prediction that an increase in the inflation rate would cause a reduction in the unemployment rate,  have proved to be wrong”.  But Romer also takes to task Lucas himself with his now (infamous) quote in 2003 that “macroeconomics in this original sense has succeeded: Its central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades.”  As Romer puts it “Using the worldwide loss of output as a metric, the financial crisis of 2008-9 shows that Lucas’s prediction is far more serious failure than the prediction that the Keynesian models got wrong.”

The trouble with Romer’s critique is that he actually accepts the idea of ‘shocks’ external to the endogenous growth of capital accumulation as the cause of ‘fluctuations’ or crises under capitalism.  He just has different ones.  Romer’s main complaint is that mainstream macro models, because they must be tied to neoclassical models of rational expectations and unrealistic assumptions like ‘perfect competition’, cannot account for ‘shocks’ caused by monetary policy.  And it is those changes that cause ‘fluctuations’.  He cites as an example that if a central bank raised its policy rate dramatically, by say 5% points, as Fed chair Paul Volcker did in the early 1980s, that will cause a slump.  So monetary policy matters.  This is his litmus test for the role of money and central banks.

No heterodox or Marxist economist would deny the role of money and credit in the circuit of capital accumulation, but that does not mean that monetary policy action is the main cause of crises. Did Paul Volcker cause the ‘double-dip’ recession of 1980-2 by his attempt to drive down late 1970s high inflation?  Or were there ‘endogenous’ causes to do with the very low level of corporate profitability by the late 1970s that led to an investment collapse?

Brad Setser, a right-wing economist, points out Romer seems to accept that the mainstream view that there is some natural equilibrium rate of interest that determines when an economy is growing ‘just right’, with full employment and no inflation.  But this ‘Wicksellian’ rate is just as much ‘imaginary’ as the neoclassical ‘shocks’ that Romer criticises.  “Romer… claims that the real interest rate is a useful measure of the stance of monetary policy, and it isn’t—not even close.  All of the traditional indicators are unreliable. After all, the Wicksellian equilibrium rate cannot be directly observed.  You need to look at outcomes”.

As Setser points out, in criticising the ludicrous position of Robert Shiller, the behavioural economist of the mainstream, Shiller seems unaware that it’s normal for the economy to be weak during periods of low interest rates, and strong during periods of high interest rates.  He seems to assume the opposite.  In fact, interest rates are usually low precisely during those periods when the investment schedule has shifted to the left (ie DOWN).  Shiller’s mistake would be like someone being puzzled that oil consumption was low during 2009 “despite” low oil prices.”  The cause of crises lies in the fall in investment which induces lower interest rates, not vice versa.

Nevertheless, Romer has ruffled the feathers of traditional mainstream Keynesian economists like Simon Wren-Lewis.  Having spent most of the last month or so writing posts on his blog arguing that the new leftist leader of the British Labour party, Jeremy Corbyn, was a loser and did not have any hope of winning an election (and leaving Corbyn’s advisory council accordingly), he has now tried to defend mainstream economic models from Romer’s critique.

Wren-Lewis argued that Romer was out of date in his critique and the latest (DSGE) models did try to incorporate money and imperfections in an economy: “macroeconomics needs to use all the hard information it can get to parameterise its models. “respected macroeconomists (would) argue that because of these problematic microfoundations it is best to ignore something like sticky prices (wages) (a key Keynesian argument for an economy stuck in a recession – MR) when doing policy work: an argument that would be laughed out of court in any other science. In no other discipline could you have a debate about whether it was better to model what you can microfound rather than model what you can see. Other economists understand this, but many macroeconomists still think this is all quite normal.”  In other words, there are good and bad macroeconomists and macroeconomics and we should not throw the baby out with the bath water.

Romer has been quick to retort in an update on his paper that If we know that the RBC (Lucas) model makes no sense, why was it left as the core of the DSGE (Keynesian) model? Those phlogiston (imaginary) shocks are still there. Now they are mixed together with a bunch of other made-up shocks. Moreover, I see no reason to be confident about what we will learn if some econometrician adds ‘sticky prices’ and then runs a horse to see if the shocks are more or less important than the sticky prices. The essence of the identification problem is that the data do not tell you who wins this kind of race. The econometrician picks the winner.”  In other words, Keynesian type DSGE models are just as full of econometric tricks and unrealistic assumptions as neoclassical, non-monetary models.

Leftist journalist Paul Mason wrote a piece on Romer’s critique, highlighting that Romer’s huge mea culpa on behalf of mainstream economics is a sign that, after a decade-long hunt for trolls and gremlins as the cause of crisis, academia now has to begin the search for the cause of instability inside the system, not outside it.”  Maybe, although I am not as optimistic as he is that the mainstream will look at the economic world realistically from now on rather than ideologically.  Marx thought that after the end of classical economists, political economy became ‘vulgar’ economics, namely an apologia for capitalism and the rule of capital.  I don’t expect that to change because it is still the task of the mainstream.

Mason notes that Marx too tried to develop mathematical models that would help explain an economy but he did not succeed.  That does not mean it is impossible to use mathematical models as long as they are based on realistic assumptions and tested empirically.  But I’m not sure that Mason is right that such models will be based on “large, agent-based simulations, in which millions of virtual people take random decisions driven by irrational urges – such as sex and altruism – not just the pursuit of wealth.” – whatever that might mean.

In my book, The Long Depression, I argue that Marxist economics is based on scientific method.  You start with a hypothesis that has realistic assumptions that have been ‘abstracted’ from reality and then construct a model or set of laws that can be tested against the evidence.  The model can use mathematics to refine its precision, but eventually the evidence decides.  Moreover, macro-economics is the world of the aggregate, not individual behaviour.  That delivers measurable data to test a theory.

Romer ends with an appeal to return to the scientific method.  “Scientists commit to the pursuit of truth even though they realize that absolute truth is never revealed. All they can hope for is a consensus that establishes the truth of an assertion in the same loose sense that the stock market establishes the value of a firm. It can go astray, perhaps for long stretches of time. But eventually, it is yanked back to reality by insurgents who are free to challenge the consensus and supporters of the consensus who still think that getting the facts right matters. Despite its evident flaws, science has been remarkably good at producing useful knowledge. It is also a uniquely benign way to coordinate the beliefs of large numbers of people, the only one that has ever established a consensus that extends to millions or billions without the use of coercion.”

True, but I don’t expect mainstream economics ever to be “yanked back to reality”.

From R* to r

September 19, 2016

This is a big week for the central banks of the major economies.  The US Federal Reserve meets on Wednesday to decide on whether to resume its planned series of hikes in its policy rate that sets the floor for all interest rates domestically and often internationally.  On the same day, the Bank of Japan (BoJ) must decide whether to resume its negative interest rate policy (NIRP) by going even deeper into negative territory on its policy rate.

While both central banks appear to be going in different directions (one raising interest rates because it wants to ‘control’ a budding economic recovery and the other lowering rates in order to ‘stimulate’ a stagnant economy) in reality both banks are in a similar position.  Their reason for existence and the credibility of their strategies are in serious jeopardy.

The reality is that despite nine years of holding rates (until last December) by the Fed and despite cuts and negative rates by the BoJ, along with massive credit injections by both into the banking system through ‘quantitative easing’ (buying government and corporate bonds with the creation of new money), the economies of the US and Japan have failed to recover to anything like the trend growth in real GDP (and per capita) that was achieved before the Great Recession of 2008-9.

In effect, monetary policy as a weapon for economic recovery has miserably failed.  The members of both the US Fed and BoJ monetary committees are divided on what to do.  The Fed’s chair Janet Yellen reckoned at the beginning of this year that the US economy was on the road to achieving trend growth and full employment.  But the latest data on the economy make dismal reading.


Not only has the real GDP rate slowed to near 1% with industrial production falling, but now even retail sales growth, an indicator of consumer spending and a key plus up to now for the US recovery, has dropped back (at only +0.8% yoy after inflation is deducted).


The Fed has been following a monetary policy theory that there is some ‘equilibrium’ rate of interest that can be identified that would be appropriate for an economy to be back at trend growth and full employment without serious inflation.  The Fed calls this (imaginary) rate, R*.  This idea is based on the theory of the neo-classical economist Kurt Wicksell.  The trouble is that it is nonsense – there is no equilibrium rate.  Even worse, the Fed’s economists have no idea what it should be anyway.  In their latest projection, they reckon R* is anywhere between 1% and 5% for two years ahead, with a best guess at about 2%. The current Fed rate is 0.5%.


And because the US economy has failed to get back towards pre-crisis trend growth, the Fed’s economists keep revising down that estimate.


It’s the same with the BoJ.  Their economists have no idea what policy rate to set in order to kick-start the economy and get Japan out of a deflationary environment.  That is why they are conducting a ‘full review’ of monetary policy to be discussed at their meeting this week.

It’s clear that monetary policy has failed.  As this was a major plank of so-called Abenomics in Japan (and strongly promoted by American monetarist Ben Bernanke and Keynesian Paul Krugman), there should be egg on many faces.  The response of the mainstream economists has been to look for even more extreme measures of monetary easing: NIRP is one, helicopter money is another.

Keynesian economic journalist Martin Wolf has been calling for helicopter money.  You see, R* is not really anywhere near as high as the Fed economists think.  The major economies are in a state of ‘secular stagnation’ caused by ageing, slowing productivity growth, falling prices of investment goods, reductions in public investment, rising inequality, the “global savings glut” and shifting preferences for less risky assets.  If we recognise that R* is really low, then we can adopt the policy of handing out cash to companies and individuals directly and combine that with more public spending (with larger government budget deficits) on investment projects – something advocated by many Keynesians, like Larry Summers.

But these answers are really an admission of the failure of monetarism and monetary policy, something that Marxist economics could have told the mainstream (and some did) years ago.  Mainstream economics (like Wolf above) still fails (or refuses) to recognise what Marxist economics can explain: the capitalist economy does not respond to injections of money (or, for that matter, injections of government spending) but to the profitability of investment.  The rate of profit on capital invested is the best indicator for investment and growth, not the rate of interest on borrowing.  It is r, not R*, that matters.

I and other Marxist economists have spelt this out both theoretically and empirically over several years. But it is not only Marxist economists. Mainstream academic economics may ignore profits as a key driver of investment and growth, but economists in investment banks (who have the money and profits for investors on the line) have started to recognise it.

First, there was Goldman Sachs, even if its analysis was locked into a neoclassical marginalist approach. Then there was JP Morgan.  In a recent repprt, JP Morgan economists reckon that business investment and profits are closely correlated – “both business confidence and profit growth are highly statistically significant in explaining capital spending.”  JP Morgan reckons that business spending “is less a function of borrowing costs than of an assessment of the outlook and profitability. On balance, this model explains 70-85% of the variation in business equipment spending growth”.

Now there is Deutsche Bank.  Deutsche Bank’s economists have noticed that “Profit margins always peak in advance of recession. Indeed, there has not been one business cycle in the post-WWII era where this  has not been the case. The reason margins are a leading indicator is simple:When corporate profitability declines, a pullback in spending and hiring eventually ensues.”  From Q3 2014, when profit margins peaked, to Q1 2016, domestic profits have declined by a little over -$175 billion. Not surprisingly, the decline in profit growth has occurred alongside a deceleration in domestic demand.

As Deutsche points out, the year-over-year growth rate of real final sales to private domestic purchasers, “our favorite indicator of underlying demand”, peaked at 3.6% in Q4 2014 and has since slowed to 2.6% as of last quarter.  Deutsche goes on: “With that in mind, the historical data reveals that the average and median lead times between the peak in margins and the onset of recession are nine and eight quarters, respectively, which, as DB concludes, “would imply that the economy could enter recession as soon as the second half of this year.”


And Deutsche Bank’s economists are also worried that profits are falling just at a time when corporate debt has reached new highs, As DB calculates, US non-financial corporate debt has increased by $2 trillion from its trough in Q4 2010 through Q4 2015. The ratio of non-financial corporate debt to nominal GDP is now at its highest level since Q2 2009, when the economy was still in recession and nominal output was substantially depressed.


Even more recently, another US investment bank, Morgan Stanley revealed that its “Cycle Indicators” across the US, Eurozone and Japan have stalled, highlighting the increasing risk “that we have moved from ‘expansion’ to ‘downturn’ in [developed markets], even as our economics team flags upside risks to its macro outlook,”.  The MS team pointed out that if this is in fact the start of a cycle change, it would represent the shallowest recovery for the U.S. in more than 30 years.

But the Cleveland Fed’s analysis remains the most pertinent. And this is a regional central bank.  Emre Ergungor, the Cleveland’s senior economic advisor, has found that there is a very high correlation between the movement of business profits, investment and industrial production!  He found that “the correlation between the change in corporate profits and the contemporaneous change in gross domestic private investment is 57 percent, but the correlation goes up to 68 percent if I use the one-quarter-ahead change in investment.” And concluded that “firms seem to adjust their production and investment after seeing a drop in their profits.”  His time gap between profits and investment is about three quarters of a year.  My own estimate is slightly longer.

With profits falling and corporate debt at highs since the end of the Great Recession, Janet Yellen’s optimistic forecast for a ‘normal’ economy and of reaching the mythical R* looks pretty feeble.  So it is likely that the Fed will not hike its policy rate this week and the BoJ will also wait until after its ‘review’ to decide what to do.  The spectre of global recession continues to emerge.

Globalisation and Milanovic’s elephant

September 14, 2016

Branco Milanovic is the former chief economist at the World Bank, where he became recognised as the expert on global inequality of incomes.  After leaving the bank, Milanovic wrote a definitive study on global inequality which was updated in a later paper in 2013 and finally came out as a book last year, Global Inequality.  In his earlier papers and in the new book, Milanovic presented his now famous ‘Elephant chart’ (shaped like an elephant) of the changes in household incomes since 1988 from the poorest to the richest globally.  Milanovic shows that the middle half of the global income distribution has gained 60-70% in real income since 1988 while those nearer the top group have gained nothing.


Milanovic found that the 60m or so people who constitute the world’s top 1% of income ‘earners’ have seen their incomes rise by 60% since 1988. About half of these are the richest 12% of Americans. The rest of the top 1% is made up by the top 3-6% of Britons, Japanese, French and German, and the top 1% of several other countries, including Russia, Brazil and South Africa. These people include the world capitalist class – the owners and controllers of the capitalist system and the strategists and policy makers of imperialism.

But Milanovic found that those who have gained income even more in the last 20 years are the ones in the ‘global middle’.  These people are not capitalists.  These are mainly people in India and China, formerly peasants or rural workers have migrated to the cities to work in the sweat shops and factories of globalisation: their real incomes have jumped from a very low base, even if their conditions and rights have not.

The biggest losers are the very poorest (mainly in African rural farmers) who have gained nothing in 20 years. The other losers appear to be some of the ‘better off’ globally.  But this is in a global context, remember. These ‘better off’ are in fact mainly working class people in the former ‘Communist’ countries of Eastern Europe whose living standards were slashed with the return of capitalism in the 1990s and the broad working class in the advanced capitalist economies whose real wages have stagnated in the past 20 years.

There are many controversial points in Milanovic’s work that I have outlined in previous posts, but a new controversy has arisen now.  The British think-tank Resolution Foundation has analysed the Elephant chart.  The Resolution Foundation found that faster population growth in countries like China and India distort the conclusion that it was the lower classes of the advanced capitalist economies that had no income gains since 1988.  Indeed, if we assume for the moment that incomes were unchanged in every country, then the population effect alone would lead to apparent drops of 25 per cent in parts of the global income scale associated with poorer people in rich countries.

A revised graph that removes the effect of different population growth would show that the lower income groups in the advanced capitalist economies did see real incomes rise since the late 1980s – although nowhere near as much as the top 5-10% of income earners.


This result has led the likes of the Financial Times and other supporters of global capitalism to argue that rising inequality has not been due to ‘globalisation’ (the shifting of capital and investment in manufacturing and industry into ‘emerging economies’ at the expense of the industrial proletariat of the ‘North’).

This is a comforting conclusion for the apologists of capital at a time when populist anti-capitalist sentiment is rising and is attacking the idea of ‘free trade’ and ‘free movement of capital’, thus threatening the profitability of capital globally.

But the Resolution Foundation’s analysis does not do away with the incontrovertible fact that inequality of incomes and wealth has increased since the early 1980s in virtually every country.  Milanovic’s own work shows that inequality of income (and wealth) within the imperialist countries has risen in the last 30 years and is now as high, if not higher, than in 1870.

As Toby N points out, what the Resolution Foundation finds is that a large section of Western lower middle and working classes experienced a cumulative real income growth of c25% (with Japanese lower income deciles experiencing contraction, US lower income deciles experiencing low but positive growth, and Western European lower deciles experiencing c45% cumulative income growth).  But these levels of cumulative income growth have been lower than the income growth at the top of each of the income distributions for the respective developed market blocs (leading in many developed countries to higher levels of income inequality), and lower than the income growth of the global median or global poor (leading to lower levels of income inequality across the globe, principally due to the rise of China).

And so, while real incomes have risen for lower middle and working classes in absolute terms, the bottom 80% labour share of GDP in the UK and US has declined as a proportion of GDP (defined as the labour share of GDP multiplied by the proportion of labour income received by the bottom 80% of the income distribution, see chart below), while the relative cost of labour in the West vs the rest of the world has reduced. (It is also notable that the big decline in the UK occurred in the 1980s, with an evening out thereafter.)


And, as I have pointed out before in previous posts, the management consultants, McKinsey found that in 2014, between 65 and 70 percent of households in 25 advanced economies were in income segments whose real market incomes—from wages and capital—were flat or below where they had been in 2005 (Poorer Than Their parents? Flat or Falling Incomes in Advanced Economies.  This does not mean that individual households’ wages necessarily went down but that households earned the same as or less than similar households had earned in 2005 on average.  In the preceding years, between 1993 and 2005, this flat or falling phenomenon was rare, with less than 2 percent of households not advancing.  In absolute numbers, while fewer than ten million people were affected in the 1993-2005 period, that figure exploded to between 540 million and 580 million people in 2005-14.  For example, 81 percent of the US population were in groups with flat or falling market income.

However, according to the latest report by the US Census Bureau, Americans last year (2015) reaped the largest annual gain in nearly a generation as poverty fell, health insurance coverage spread and incomes rose sharply for households on every rung of the economic ladder, ending years of stagnation. The median household’s income in 2015 was $56,500, up 5.2 percent from the previous year — the largest single-year increase since record-keeping began in 1967. The share of Americans living in poverty also posted the sharpest decline in decades.  The average incomes of the poorest fifth of the population increased 6.6 percent after three consecutive years of decline. And the official poverty rate declined to 13.5 percent from 14.8 percent in 2014, the sharpest decline since the late 1960s.

But beneath these headline figures, the story is not so sanguine. The numbers still offer a lopsided picture, with a gargantuan share of income rising to the top. While the bottom fifth of households increased their share of the nation’s income, by the census’s definition, to 3.4 percent from 3.3 percent, the richest 5 percent kept 21.8 percent of the pie, the same as in 2014.

And incomes in the middle, measured in 2015 dollars, were still 1.6 percent below the previous peak of $57,423 a household, which was attained in 2007, just before the economy sank into what has come to be known as the Great Recession. Today, US median household incomes are still 2.4 percent below the absolute peak they hit in 1999 just before the bust and global financial crash.


Indeed, according to Elise Gould of the Economic Policy Institute, the income of American households in the middle of the distribution last year was still 4.6 percent below its level in 2007 and 5.4 percent below where it was in 1999. Men’s earnings from work increased 1.5 percent. But they are still lower than in the 1970s!

Households at the 10th percentile — those poorer than 90 percent of the population — are still a bit poorer than they were in 1989. Across the entire bottom 60 percent of the distribution, households are taking home a smaller slice of the pie than they did in the 1960s and 1970s. The 3.4 percent of income that households in the bottom fifth took home last year was less than the 5.8 percent they had in 1974.  By contrast, households in the top 5 percent have profited nicely from America’s expansions. In 2015, they took in $350,870, on average. That is 4.9 percent more than in 1999 and 37.5 percent more than in 1989!

Sure in 2015, the US poverty rate dropped by 1.2%. However, there are still 43.1 million people living in poverty in the US, up from 38 million in 2007.  The poverty rate has hardly budged since the 1980s.


So let’s sum up; what does all the analysis of global and national inequality tell us?

First, that global inequality has increased since the early 1980s, when ‘globalisation’ got moving.  Second, that global growth of incomes has been concentrated in China, and to a lesser extent and more recently, India.  Otherwise average global household income growth would have been much lower.  Third, there has been a rise in average household incomes in the major advanced capitalist economies since the 1980s, but the growth has been much less than in China or India (starting from way further down the income levels) and much less than the top 1-5% have gained.  Fourth, since the beginning of the millennium, most households in the top capitalist economies have seen their incomes from work or interest on savings stagnate and must rely on transfers and benefits to improve their lot.

These outcomes are down partly to globalisation by multinational capital taking factories and jobs into what used to be called the Third World; and partly due to neo-liberal policies in the advanced economies (i.e. reducing trade union power and labour rights; casualization of labour and holding down wages; privatisation and a reduction in public services, pensions and social benefits).  And it is also down to regular and recurrent collapses or slumps in capitalist production, which lead to a loss of household incomes for the majority that can never be restored in any ‘recovery’, particularly since 2009.

In other words, rising inequality is the result the drive of capital to reduce labour’s share and raise profits and to the recurrent and periodic failures of capitalist production.  That is something that the likes of FT and mainstream economics wishes to ignore.

For more on inequality: see my booklet:…/…/ref=sr_1_5…

The end of globalisation and the future of capitalism

September 11, 2016

Keynesian economist Brad DeLong recently reprised the argument made by John Maynard Keynes back in 1931 that capitalism might be in a depression now, but if we take the long view, we can see that capitalism has been the most successful mode of production for people’s needs in human history; so don’t worry, it will be again.

Keynes made this argument in a lecture to his economics students at Cambridge, called The economic possibilities of our grandchildren.  He argued that within a hundred years, average incomes would have increased eight-fold and everybody would be working a 15-hour week.  So, he said, keep faith in capitalism and don’t go off adopting stupid Marxist ideas – as many were doing at the time.

Now Brad DeLong has become the Keynes of 2016, in the midst of the latest Long Depression.  In his blog, he recognises that “economic growth since 2008 has been profoundly disappointing. There is no reasoned case for optimistically expecting a turn for the better in the next five years or so. And the failure of global institutions to deliver ever-increasing prosperity has undermined the trust and confidence which in better times would serve to suppress the murderous demons of our age.”  But fear not: if we look at global economic growth not just five years out, but over the next 30-60 years, the picture looks much brighter…..The reason is simple: the large-scale trends that have fueled global growth since World War II have not stopped. More people are gaining access to new, productivity enhancing technologies, more people are engaging in mutually beneficial trade, and fewer people are being born, thus allaying any continued fears of a so-called population bomb….. Moreover, innovation, especially in the global north, has not ceased, even if it has possibly slowed since the 1880s. And while war and terror continue to horrify us, we are not witnessing anything on the scale of the genocides that were a hallmark of the twentieth century.”

DeLong claims that these major trends are likely to continue, according to data from thePenn World Table research project, the best source for summary information on global economic growth. The PWT data on average real (inflation-adjusted)per capitaGDP show that the world in 1980 was 80% better off than it was in 1950, and another 80% better off in 2010 than it was in 1980. In other words, our average material well-being is three times what it was in 1950.

Actually that evidence shows that Keynes was way too optimistic back in 1931.  I did estimates like DeLong a few years ago and found that if we look at the world economy as a whole (something JMK does not), then world per capita GDP rose only about 2.5 times from 1930 to 1990.  JMK was far too optimistic. And the average working week in the US in 1930 – if you had a job – was about 50 hours.  It is still above 40 hours (including overtime) now for full-time permanent employment.  Indeed, in 1980, the average hours worked in a year was about 1800 for advanced economies.  Currently, it is about 1800 hours – so again, no change there.

DeLong echoes Keynes in 1931 by concluding that “short of a nightmare scenario like terror-driven nuclear war, you can expect my successors in 2075 to look back and relish that, once again, their world is three times better off than ours is today.” 

This pro-capitalist optimism was also recently promoted by Nobel prize winner Angus Deaton.   Deaton is an expert on world poverty, the consumption patterns of households and how to measure them.  He emphasises that life expectancy globally has risen 50% since 1900 and is still rising. The share of people living on less than $1 a day (in inflation-adjusted terms) has dropped to 14 percent from 42 percent as recently as 1981. The greatest progress against cancer and heart disease has come in the last 20 to 30 years.  “Things are getting better,” he writes, “and hugely so.” 

But Deaton makes it clear that progress in living conditions and quality of life is a relatively recent development. And much of this 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.

Moreover, things are not that rosy.  Back in 2013, the World Bank reported that there were roughly 1.2 billion people completely destitute (living on less than $1.25 a day), one-third of which are 400 million children.  One of every three extremely poor people is a child under the age of 13.   So there are over one billion people, one-third of them children, who are virtually starving in the 21st century.  While extreme poverty rates have declined in all regions, the world’s 35 low-income countries (LICs) – 26 of which are in Africa — registered 103 million more extremely poor people today than three decades ago.  Aside from China and India,“ individuals living in extreme poverty [in the developing world] today appear to be as poor as those living in extreme poverty 30 years ago,” the World Bank said.

Deaton himself recognises this: “the number of those who live on less than $2 a day is rising according to the most recent estimates.”  In 2010, 33 percent of the extreme poor lived in low-income countries (LICs), compared to 13 percent in 1981.  In India, the average income of the poor rose to 96 cents in 2010, compared to 84 cents in 1981, and China’s average poor’s income rose to 95 cents, compared to 67 cents.  China’s state-run still mainly planned economy saw its poorest people make the greatest progress.   But the “average” poor person in a low-income country lived on 78 cents a day in 2010, compared to 74 cents a day in 1981, hardly any change.

But here is the crucial underlying story behind the improvement that has been registered under capitalism since 1950.  It is mostly due to the rapid rise of the economic colossus of China, and in the last decade, to a lesser extent, India (where the figures have been cooked a little).  As DeLong shows, China’s real  per capita  GDP in 1980 was 60% lower than the world average, but today it is 25% above it. India’s real per capita  GDP in 1980 was more than 70% below the world average, but India has since closed that gap by half.

DeLong thinks that China’s progress is down to having “strong leaders” like Deng Xiaoping, and in India like Rajiv Gandhi (!).  Apparently China’s economic model had nothing to do with it.  But when we look at the evidence, as David Rosnick has done with Branco Milanovic’s data from his new book Global Inequality, Rosnick finds that global growth was much lower without China in the equation.  As “China implemented different policies, often in opposition to reforms that much of the rest of the world was adopting (e.g. state ownership of most the banking system, government control over most investment including foreign direct investment, industrial policy, and lax enforcement of intellectual property rights.) If this period’s successes in development are mostly driven by China, then we may reach different conclusions regarding the success of widespread global reforms.”

The problem with the optimism of the likes of DeLong and Deaton with the continued ‘success’ of capitalism is that capitalism appears to heading past its use-by date.  Deutsche Bank economists, in a recent study, make the point that ‘globalisation’ (the spread of capitalism’s tentacles across the world) has ground to a halt.  And growth in the productivity of labour, the measure of future ‘progress’, has also more or less ceased in the major economies.

Deutsche strategists Jim Reid, Nick Burns, and Sukanto Chanda comment that “It feels like we’re coming towards the end of an economic era. Such eras often come and go in long waves.  In the past 30 years a perfect storm of factors — China re-entering the global economy in the 70s, the fall of the Soviet Union, and to some extent, the economic liberalisation of India — added more than a billion workers into the global labour market.”  This, Deutsche notes “has coincided with a general surge in the global workforce population in absolute terms and also relative to the overall population, thus creating a perfect storm and an abundance of workers.”

But the era of the ‘baby-boomers’ in the advanced economies is over and the expansion of the workforce in the emerging economies is beginning to slow – the graph below shows how the ratio of productive workers to total population in the major economies is set to fall from hereon.


At the same time, the world economy is in a downwave of profitability and investment.  “With demographics deteriorating it seems highly unlikely that the next couple of decades (possibly longer) will see real growth rates returning close to their pre-crisis, pre-leverage era levels. Obviously if there is a sustainable exogenous boost to productivity then a more optimistic scenario (relative to the one below) can be painted. At this stage it is hard to see where such a boost comes from – and even if it does, time is running out for it to prevent economic and political regime change given the existing stresses in the system.”

Indeed, the Deutsche study hints at my own view of long waves in economic development under capitalism.  In this blog, and in my books, I have argued that world capitalism is in a major downwave in prices, productivity and profitability which won’t come to an end without further major convulsions in capitalist production similar to that in 2008-9.  If that is right, the optimistic predictions of DeLong and Deaton will be confounded.

American economist Robert J Gordon has emphasised that productivity growth everywhere has slowed to a trickle despite the new technological advances of the internet, big data, social media, 3d printing etc.  And the debate continues on whether the current era of ‘disruptive’ new technologies will drive capitalism forward and with the majority of people.

Mainstream economics remains divided on the issue.  On the one hand, economists at the Bank of England reckon that the new technologies will deliver renewed economic growth and employment, as they have done in the past.  The BoE reckons that technological progress won’t create mass unemployment and while it probably won’t make your working week much shorter and it’ll probably push up average wages.  So “robots are (probably) our friends”.

On the other side, the IMF’s economists are less sanguine.  They argue thatrobot capital tends to replace workers and drive down wages, and at first the diversion of investment into robots dries up the supplies of traditional capital that help raise wages. The difference, though, is that humans’ special talents become increasingly valuable and productive as they combine with this gradually accumulating traditional and robot capital. Eventually, this increase in labor productivity outweighs the fact that the robots are replacing humans, and wages (as well as output) rise.  But there are two problems…it takes 20 years for the productivity effect to outweigh the substitution effect and drive up wages. Second, capital will still likely greatly increase its role in the economy. It will take a higher share of income, even in the long run when wages are above the pre-robot-era level. Thus, inequality will be worse, possibly dramatically so.”  So, not so great.

Keynes’ 1930s optimism gained credence with the boom during a major world war and the subsequent post-war Golden Age that restored the profitability of capital for a generation.  Let’s hope it does not take another world war to confirm the optimism of the modern Keynesians like DeLong.