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’.
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.