Ben Bernanke and the ‘natural’ rate of return

Today, former head of the US Federal Reserve, Ben Bernanke launched his own economics blog through the Brookings Institution (  As Ben put it, “Now that I’m a civilian again, I can once more comment on economic and financial issues without my words being put under the microscope by Fed watchers. I look forward to doing that—periodically, when the spirit moves me—in this blog. I hope to educate, and I hope to learn something as well”.

Well, can we learn something from Ben’s blog?  After all, this is the economist who is supposedly an expert on the Great Depression of the 1930s and its causes; and vowed back in 2002, when addressing a celebration of Milton Friedman, the great exponent of monetarism, that he and the Fed had learned the lesson that by judicious use of monetary policy (lowering interest rates and boosting money supply through ‘quantitative easing’ or even through cash handouts to the banks), depressions could be avoided.

“We won’t let it happen again” said Ben at the time.  And ‘helicopter Ben’, as he became known, for advocating monetary largesse on an industrial scale dropped from helicopters on the countryside if necessary in times of slump, duly applied Friedman’s monetary injections during the Global Financial Crash and the Great Recession.

But did such policies of low interest rates and helicopter money work?  Well, you can read my many posts on that for the efficacy of QE and Bernanke-style monetary policy.

But the outcome is clear: the weakest recovery from a slump in the post-war period and forecast for future growth have been steadily downgraded, as this graph shows.

Economic recoveries

Current US real GDP is some 12% below where it would have been now without the Great Recession and subsequent weak recovery..

Trend US growth

It would seem that monetary policy is not anywhere near enough to get even the US capitalist economy going and ‘return to normal’.

And it seems that Bernanke in his first blog post today agrees.  Ben tells us that low interest rates are here to stay, but not because of lax monetary policy but because the real rate of return on assets (both tangible and financial) are staying low

Ben points out that interest rates along with inflation have been in a downward trend since the early 1980s.  Indeed, real rates (after inflation) are actually negative now.

Interest rates and inflation

And this is a “not a short-term aberration, but part of a long-term trend.”  Now this may be a revelation to Ben, the former Fed Chairman, but it is not to readers of my blog or my book, The Great Recession, where I point out in some detail that capitalism in its long-term downward phase in production prices (in what has been called the Kondratiev cycle, after the Russian economist who first identified this cycle) –

But Bernanke asks the question: “Why are interest rates so low? Will they remain low? What are the implications for the economy of low interest rates?”  Well, they are low not because the Fed and other central banks have pumped too much money into the economy – although that used to be what Ben said he wanted to do.  No, the reason for low interest rates is the low rate of return on capital investment.  Well, well.  “The real interest rate is most relevant for capital investment decisions, for example. The Fed’s ability to affect real rates of return, especially longer-term real rates, is transitory and limited. Except in the short run, real interest rates are determined by a wide range of economic factors, including prospects for economic growth—not by the Fed.”

Ben invokes the work of Knut Wicksell, the pre 1914 Swedish economist who introduced the concept of the equilibrium real interest rate. This equilibrium interest rate is the real interest rate consistent with full employment of labour and capital resources. And the problem is that the equilibrium real rate is low because “investment opportunities are limited and relatively unprofitable.”

What this tells you is that monetary policy is restricted in its impact by what is going on in the ‘real’ economy, more specifically, the dominant capitalist sector.  “The bottom line is that the state of the economy, not the Fed, ultimately determines the real rate of return attainable by savers and investors.”

So Ben’s argument that it is the underlying real rate of return on investment that decides things, not Federal Reserve monetary policy, is really to justify and defend his actions as Fed chair against criticism from the Austrian school and the neoliberal camp that he kept interest rates artificially too low; and from Keynesian camp that he did not intervene enough.  You see, the critics are wrong about Fed policy because the Fed has little say in the underlying growth or otherwise of the US capitalist economy.  That depends on its underlying profitability, or in Wicksell’s language the ‘equilibrium ‘natural rate of return’.

“The state of the economy, not the Fed, is the ultimate determinant of the sustainable level of real returns. This helps explain why real interest rates are low throughout the industrialized world, not just in the United States.”   By why is the real rate of return so low?  Ben will tell us in future posts.  Don’t hold your breath.


Actually, we did not have to hold our breath for very long.  Ben did his second part on why interest rates are low today.

In this part he slammed into the ‘secular stagnation’ thesis propounded by Larry Summers (see my posts, and  Ben does not think that the US economy is in stagnation, at least not permanently.  That’s because with interest rates so low, there cannot be a “permanent dearth of profitable investment projects.”  Ben agrees with some other economists that US economic growth over the past few decades is not just a product of ‘credit bubbles’ as Summers claimed, but came from genuine real improvements.  So there is nothing wrong with the US economy and the ‘headwinds’ created by the Great Recession are now dissipating.  And anyway, higher profits from investing overseas should help bolster the US economy.

Hardly a convincing case for the end of this Long Depression.  After all, the latest figures on corporate profits show a contraction, led by a sharp fall in overseas profits! (see my post,  It’s true that economic growth was higher decades ago because the profitability of investment was higher, but if profitability is now in trouble, then the converse outcome is likely.


One thought on “Ben Bernanke and the ‘natural’ rate of return

  1. Which brings you back to Marx’s question set out in Capital III, Chapter 49, of why that “natural” rate changes over time, and why it is, at any time the rate it is?

    The real reason, as Marx sets out, in Capital III, and in Theories of Surplus Value, is that it comes down to the value of commodities. The surplus product, depends upon the difference between the annual output (new value created by labour during the year), and the necessary output (required for the physical reproduction of labour-power).

    If productivity rises, so that commodity values fall, then the value of labour-power falls. The proportion of the social working day required to physically reproduce labour-power falls, and the surplus product rises.

    But, as Marx sets out in Chapter 49 and in TOSV, this only tells us that the massive rise in productivity seen since the late 1980’s has caused the sharp fall in commodity values, your chart shows – despite the massive depreciation of currencies, that countered the fall in values, by masking it, in terms of money prices. It explains why the rate of surplus value, in terms of the proportion of social surplus product, to necessary product rose so much. It doesn’t explain why the rate of profit rose so much during that time.

    The explanation for that, however, as Marx sets out is also explained by the value of commodities. Out of societies, gross output, not only must the commodities required for the material reproduction of labour-power be reproduced, but so too must the commodities that physically reproduce the constant capital.

    The same massive rise in productivity that slashed the value of commodities required for the reproduction of labour-power, also slashed the value of commodities consumed as constant capital. As Marx puts it, although these commodities must be reproduced in kind (i.e. physically replaced), that only applies in terms of effectiveness.

    A machine that does the work of two machines, replaces the first in terms of effectiveness, but in terms of the cost to society, in terms of the proportion of current social labour-time required, or the proportion of the current social product, required to bring about this replacement, it has been slashed. But, the same rise in productivity also slashes the current labour-time required to produce all of the circulating constant capital too.

    As a consequence, out of current gross output, not only does a smaller proportion have to be devoted to the reproduction of labour-power, which raises the rate of surplus value, but a smaller proportion has to be devoted to replacing the constant capital. The consequence is that not only does s rise relative to v, but it rises also relative to c. Society’s surplus product, rises relative to the proportion of social product that is required to reproduce the commodities that comprise the constant and variable capital, so the rate of profit rises.

    Put another way, as Marx describes it, as a consequence of this rise in productivity, the new level of surplus product will enable a much greater expansion of capital, because it represents a much greater physical quantity of means of production and consumption, required for that expansion.

    “But in general, it should be noted here, as in the previous case, that if variations take place, either due to savings in constant capital, or due to fluctuations in the price of raw materials, they always affect the rate of profit, even if they leave the wage, hence the rate and amount of surplus-value, untouched. They change the magnitude of C in s’ (v/C), and thus the value of the whole fraction. It is therefore immaterial, in this case as well — in contrast to what we found in our analysis of surplus-value — in which sphere of production these variations occur; whether or not the production branches affected by them produce necessities for labourers, or constant capital for the production of such necessities…

    The raw materials here include auxiliary materials as well, such as indigo, coal, gas, etc. Furthermore, so far as machinery is concerned under this head, its own raw material consists of iron, wood, leather, etc. Its own price is therefore affected by fluctuations in the price of raw materials used in its construction. To the extent that its price is raised through fluctuations, either in the price of the raw materials of which it consists, or of the auxiliary materials consumed in its operation, the rate of profit falls pro tanto. And vice versa.”

    As he summarises it,

    “Since the rate of profit is s/C, or s/(c + v), it is evident that every thing causing a variation in the magnitude of c, and thereby of C, must also bring about a variation in the rate of profit, even if s and v, and their mutual relation, remain unaltered. Now, raw materials are one of the principal components of constant capital. Even in industries which consume no actual raw materials, these enter the picture as auxiliary materials or components of machinery, etc., and their price fluctuations thus accordingly influence the rate of profit. Should the price of raw material fall by an amount = d, then s/C, or s/(c + v) becomes s/(C – d), or s/((c – d) + v). Thus, the rate of profit rises. Conversely, if the price of raw material rises, then s/C, or s/(c + v), becomes s/(C + d), or s/((c + d) + v), and the rate of profit falls. Other conditions being equal, the rate of profit, therefore, falls and rises inversely to the price of raw material.”

    Which is why viewing capital accumulation only in terms of fixed capital is extremely misleading, and why the dramatic fall in the price of oil and other elements of circulating constant capital currently represents a powerful stimulus to the rate of profit, and accumulation.

    But, as Marx sets out in his discussion of the business cycle, and the rate of interest, it also explains why the rate of interest has been falling for the last 30 years, because, as he sets out, that rate is determined by two factors – the demand for loanable money-capital, and the supply of loanable money-capital.

    In the period immediately after the 1970’s, and early 80’s period of overproduction and crisis, marked by high rates of interest, the demand for loanable money-capital is low, because accumulation is low, due to low rates of profit, and a lack of spheres of investment for productive-capital. In the late 1980’s and early 90’s, during the period of stagnation, that low demand for loanable money-capital continues, but the rate of profit rises, which as Marx describes, makes available a large pool of potential money capital, which thereby pushes down on interest rates.

    Even as the demand for loanable money capital rises, therefore, as new spheres of production with high rates of profit start to be developed, this growing mass of loanable money-capital continues to push down interest rates.

    The interesting thing, now is that looking at the global economy, its clear that interest rates are not uniformly low. Interest rates in some countries like the US are low in some respects, because the state has printed money to buy bonds, raising their price, and depressing yields. Yet, elsewhere in the globe, we see bond rates soaring, because that same artificial backing for US bonds, sucks money from elsewhere in the global economy.

    The same thing is true in relation to other market rates of interest. Ask someone who has had to take out a Pay Day Loan recently, whether the 4000% p.a. they are paying seems like a low rate of interest, or even just anyone paying 20-30% on their credit card!

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