British Labour, Marxist McDonnell and deficit-denying

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

Mcdonnell

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

19 Responses to “British Labour, Marxist McDonnell and deficit-denying”

  1. Geoff Fieldsend Says:

    Very interesting, Michael. A couple of things: David (Danny) Blanchflower – another of McDonnell’s wise advisers – said on the BBC yesterday that the usual business cycle meant that a contraction in the world/UK economy was likely in the next few years. So he agrees with you on that point at least. But it was also put to him that British employers were investing now ‘at record rates’. He didn’t seem to contest this. If they are investing, I take it they are putting their money into non productive assets as you suggest. Do you have any data on this? Cheers

  2. 1ngram Says:

    Why borrow more money when you can simply “print” it?

  3. Edgar Says:

    “You see the problem is a ‘lack of demand’, not a lack of profitability. “

    No the actual problem is a degenerated working class, conditioned by decades of tabloid bile. Socialism requires a revolutionary class not a revolutionary party. McDonnell and Corbyn are simply recognising the hapless historic conjuncture and doing their best with a pretty awful hand. I suspect McDonnell would agree with most of your analysis actually but politics is different to analysis.

    What did interest me was that McDonnell spoke about co-operatives in his speech, so they are very gently introducing genuine transformative measures into the narrative. I hope nationalisation of the key sectors is also on the table, but politics may prevent that!

    • solitaryproletarian Says:

      It’s an interesting comment you make there, but is your suggestion that a party should do nothing to build revolutionary consciousness among the population? Surely a revolutionary party plays a fundamental role in this sense? In Ireland and the UK at least, the stance of the Labour parties in recent decades has been seen as a betrayal of the working-class by those on the radical left, although Corbyn’s victory is a welcome event nonetheless.

      • Edgar Says:

        “but is your suggestion that a party should do nothing to build revolutionary consciousness among the population? ”

        No, my point is the exact opposite. You build the consciousness first before you can build the revolutionary class. This is what is being constructed in places like Venezuela and Bolivia (who have put Marxist literature on the school curriculum for example). It is a consciousness building exercise not a revolutionary transformation of the means of production. You can’t have that without the revolutionary class and that class only becomes revolutionary when it is conscious.

        It maybe that you need a revolutionary party to create the revolutionary class but that doesn’t change the fact that you need the revolutionary class before you can implement socialist policies!

        So Corbyn can only transform capitalism and raise consciousness. He cannot do anything else. If Marx himself were leader that is all he could do too!

        And finally, revolutionary phrase mongering does not automatically make for a revolutionary party.

        I think Corbyn is just about striking the right balance.

        But with the media and entire political class so hostile it just may not work.

  4. vallebaeza Says:

    Reblogged this on Alejandro Valle Baeza.

  5. Roberto Says:

    Michael,

    Thanks for your blog. I’m learning a lot. Your books are in my reading list now.

    I am reading a lot of Modern Monetary Theory also and I would be very interested in your opinions.

    For instance, in this post you talk about deficits in, what I see now like the neoliberal narrative.

    I would like your opinion in the empiric fact that public deficits are the other side of the coin of the private (capitalist + households) sector ( see, for instance: http://neweconomicperspectives.org/2011/06/recent-usa-sectoral-balances-goldilocks.html and http://neweconomicperspectives.org/2009/07/sector-financial-balances-model-of_26.html )

    I have read you here: https://thenextrecession.wordpress.com/2011/08/07/debt-and-deficits-do-matter/ but I am not convinced that you rebut the MMT guys.

    • andy blatchford Says:

      I would say a problem with the post is that yes the way deficits are talked about not so much ‘neoliberal’ it’s that it is in a fixed FX paradigm which doesn’t apply to countries that float & are non convertible. The countries mentioned (Greece & Puerto Rico, you can also add Venezuela who have an official convesion rate between it’s currency & the USD) are in fixed fx systems (Euro for Greece). So called bond vigilantes can do nothing against currency sovereigns as interest rates are policy choices.

      Is MMT even Keynesian? That’s even debatable as Bill Mitchell doesn’t think so http://bilbo.economicoutlook.net/blog/?p=31681

  6. Simon Says:

    As a new reader of your blog I would find it useful if you could recommend some good introductions to Marxist economic theory. I have recently purchased David Harvey’s The Limits To Capital. But any other recommendations would be welcome.

  7. Mike Ballard Says:

    Most people don’t have a clue as to what Marx and Engels meant when they spoke and wrote about “socialism” and “communism”. Most people don’t know that they used the terms interchangeably. Therefore, most people are easily convinced that Keynesianism is “socialist”.

    “Let us now picture to ourselves, by way of change, a community of free individuals, carrying on their work with the means of production in common, in which the labour power of all the different individuals is consciously applied as the combined labour power of the community. All the characteristics of Robinson’s labour are here repeated, but with this difference, that they are social, instead of individual. Everything produced by him was exclusively the result of his own personal labour, and therefore simply an object of use for himself. The total product of our community is a social product. One portion serves as fresh means of production and remains social. But another portion is consumed by the members as means of subsistence. A distribution of this portion amongst them is consequently necessary. The mode of this distribution will vary with the productive organisation of the community, and the degree of historical development attained by the producers. We will assume, but merely for the sake of a parallel with the production of commodities, that the share of each individual producer in the means of subsistence is determined by his labour time. Labour time would, in that case, play a double part. Its apportionment in accordance with a definite social plan maintains the proper proportion between the different kinds of work to be done and the various wants of the community. On the other hand, it also serves as a measure of the portion of the common labour borne by each individual, and of his share in the part of the total product destined for individual consumption. The social relations of the individual producers, with regard both to their labour and to its products, are in this case perfectly simple and intelligible, and that with regard not only to production but also to distribution.”

    from CAPITAL volume I, chapter one

    “Within the co-operative society based on common ownership of the means of production, the producers do not exchange their products; just as little does the labor employed on the products appear here as the value of these products, as a material quality possessed by them, since now, in contrast to capitalist society, individual labor no longer exists in an indirect fashion but directly as a component part of total labor. The phrase “proceeds of labor”, objectionable also today on account of its ambiguity, thus loses all meaning.

    “What we have to deal with here is a communist society, not as it has developed on its own foundations, but, on the contrary, just as it emerges from capitalist society; which is thus in every respect, economically, morally, and intellectually, still stamped with the birthmarks of the old society from whose womb it emerges. Accordingly, the individual producer receives back from society — after the deductions have been made — exactly what he gives to it. What he has given to it is his individual quantum of labor. For example, the social working day consists of the sum of the individual hours of work; the individual labor time of the individual producer is the part of the social working day contributed by him, his share in it. He receives a certificate from society that he has furnished such-and-such an amount of labor (after deducting his labor for the common funds); and with this certificate, he draws from the social stock of means of consumption as
    much as the same amount of labor cost. The same amount of labor which he has given to society in one form, he receives back in another.

    “Here, obviously, the same principle prevails as that which regulates the exchange of commodities, as far as this is exchange of equal values. Content and form are changed, because under the altered circumstances no one can give anything except his labor, and because, on the other hand, nothing can pass to the ownership of individuals, except individual means of consumption. But as far as the distribution of the latter among the individual producers is concerned, the same principle prevails as in the exchange of commodity equivalents: a given amount of labor in one form is exchanged for an equal amount of labor in another form.

    “Hence, equal right here is still in principle — bourgeois right, although principle and practice are no longer at loggerheads, while the exchange of equivalents in commodity exchange exists only on the average and not in the individual case.

    “In spite of this advance, this equal right is still constantly stigmatized by a bourgeois limitation. The right of the producers is proportional to the labor they supply; the equality consists in the fact that measurement is made with an equal standard, labor.

    “But these defects are inevitable in the first phase of communist society as it is when it has just emerged after prolonged birth pangs from capitalist society. Right can never be higher than the economic structure of society and its cultural development conditioned thereby.

    “In a higher phase of communist society, after the enslaving subordination of the individual to the division of labor, and therewith also the antithesis between mental and physical labor, has vanished; after labor has become not only a means of life but life’s prime want; after the productive forces have also increased with the all-around development of the individual, and all the springs of co-operative wealth flow more abundantly — only then then can the narrow horizon of bourgeois right be crossed in its entirety and society inscribe on its banners: From each according to his ability, to each according to his needs!”

    from the Critique of the Gotha Programme

    “On the basis of socialised production the scale must be ascertained on which those operations — which withdraw labour-power and means of production for a long time without supplying any product as a useful effect in the interim — can be carried on without injuring branches of production which not only withdraw labour-power and means of production continually, or several times a year, but also supply means of subsistence and of production. Under socialised as well as capitalist production, the labourers in branches of business with shorter working periods will as before withdraw products only for a short time without giving any products in return; while branches of business with long working periods continually withdraw products for a longer time before they return anything. This circumstance, then, arises from the material character of the particular labour-process, not from its social form. In the case of socialised production the money-capital is eliminated. Society distributes labour-power and means of production to the different branches of production. The producers may, for all it matters, receive paper vouchers entitling them to withdraw from the social supplies of consumer goods a quantity corresponding to their labour-time. These vouchers are not money. They do not circulate.”

    CAPITAL Volume II, chapter 18, page 358

    Finally, there is no doubt that the credit system will serve as a powerful lever during the transition from the capitalist mode of production to the mode of production of associated labour; but only as one element in connection with other great organic revolutions of the mode of production itself. On the other hand, the illusions concerning the miraculous power of the credit and banking system, in the socialist sense, arise from a complete lack of familiarity with the capitalist mode of production and the credit system as one of its forms. As soon as the means of production cease being transformed into capital (which also includes the abolition of private property in land), credit as such no longer has any meaning. This, incidentally, was even understood by the followers of Saint-Simon. On the other hand, as long as the capitalist mode of production continues to exist, interest-bearing capital, as one of its forms, also continues to exist and constitutes in fact the basis of its credit system. Only that sensational writer, Proudhon, who wanted to perpetuate commodity-production and abolish money, was capable of dreaming up the monstrous crèdit gratuit, the ostensible realization of the pious wish of the petty-bourgeois estate.

    CAPITAL Volume III, chapter 36, page 607

  8. Boffy Says:

    “As I argued in a previous post, British capitalism, along with global capital, is likely to enter another slump before the next British general election in 2020. ”

    Except that in that previous post you claimed that the profit cycle peaked in 1997, and was due to trough in 2018. In fact, on the basis of your claim that this cycle lasts between 32-36 years, it should then have troughed between 2013-15.

    By the by. If it troughs in 2018, then on the basis of your claim that profits precede investment, then you should logically argue that we are on the verge of a new investment boom created by this new rise in the profit cycle. In that case, surely you should be arguing that the period ahead is one of investment led growth not slump!

    But, then it seems that there is no end of occasions when the data can be presented as foreshadowing yet another period of recession (no doubt hence the title of the blog itself), and when that does not fit the projected period of the cycle, that is not a problem, because the duration of the current cycle can always be amended to fit.

  9. sartesian Says:

    “and when that does not fit the projected period of the cycle, that is not a problem, because the duration of the current cycle can always be amended to fit.”

    Look who’s talking…..

  10. santelli Says:

    I’ve just found this blog, and I’ve got to say it’s brilliant to read so much sense. This is the firsts sensible analysis of McDonnellomics I have read, bar none. I’ve had several arguments with friends on the left, who have become smitten with left-keynsian, and post-keynesian arguments, and it is fantastic to see somebody sticking to their guns.

    A friend and I have recently written an article on the political limits of keynesianism, it’s not published yet, but I’d very much appreciate your thoughts on it. Could I email it to you?

  11. santelli Says:

    And, I have no doubt at all that McDonnell knows the stakes here. He’s more marxist, and less erratic than Varoufakis.

  12. VN Gelis Says:

    Stiglitz was involved in the mass privatisation programme of Russia.
    Keynesianism died in the early 70s. Zombies exist in films not real life.

  13. George (Γιώργος) Says:

    With pro-EU, pseudo-Marxist celebrities like Varoufakis enlisted, failure is assured.

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