Archive for December, 2019

Forecast 2020

December 30, 2019

“It is difficult to make predictions, especially about the future” is an old Danish proverb, often attributed to Nils Bohr, the Danish atomic physicist and quantum theorist.  And amusing and insightful as it may be, there is no getting away from realising that applying the scientific method to any issue requires making predictions that can be tested to support or throw doubt on a theory.

In the natural sciences, as they are called, where human beings are not being studied, prediction plays an important role.  For example, according to Einstein’s theory of relativity, tit was predicted that large stellar objects will bend space itself through ‘gravitational waves’.  And exactly 100 years ago, that prediction was confirmed through astronomical observation of a solar eclipse.

Applying the scientific method and making predictions in social science is clearly much more difficult because the subject being studied are human beings.  Scientific method is full of pitfalls: human mistakes; inadequate data; unrealistic assumptions; inconsistent conclusions.  And these pitfalls are  probably greater in the social sciences, given less data and where the political and ideological pressures are greater. Nevertheless, I reckon that prediction must be part of the social scientific process.

But there is a difference between predictions and forecasts, in my view.  Take the climate.  We can predict that in the temperate regions of the planet, there will be four distinct seasons from spring, summer, autumn and winter.  And we can predict that the sun will come over the horizon in the morning and set in the evening.  Modern climate scientists are predicting that the earth is set to warm up at a rate not seen in thousands of years because of greenhouse gas emissions.  Physicists predict that in about one and a half billion years, the moon will eventually break out from its orbit around the earth, producing catastrophic damage to the earth’s atmosphere and wiping out all life.  We won’t be around to confirm that prediction.

Similarly, we Marxist economists can make predictions with some degree of certainty; namely that under the capitalist mode of production there will be regularly occurring crises of slumps in investment and production that cannot be avoided.  We can also predict, I would claim, that the profitability of capital will fall over time as capitalism expands the productive forces and matures.

But that is not the same as making a forecast.  Climate scientists cannot be sure when the earth will heat up to a tipping point that leads to uncontrollable warming that damages the fabric of the planet and engenders destructive floods, droughts etc.  We don’t know in which year, decade, century or millennium when the moon will break away from the earth.  We have limited ability to forecast when it is going to rain, shine or snow – although we have got much better in making such weather forecasts. And in social sciences, any forecast is even more uncertain.  We cannot forecast when or how much the rate of profit will fall in any one year or the exact change in output or investment likely to be achieved in a year or month; or exactly when a new slump in production might come.

All this preamble in this post is designed to make excuses for the failure of my forecasts of a new global recession to emerge over the last few years.  After the end of the Great Recession in 2009, I made a prediction that eventually there would be a new global slump.  And I made a forecast that this would happen from about 2016 onwards and most likely by 2018, after all post-war recessions had come along about every 7-10 years.  And yet, as we enter 2020, the world capital economy has avoided a new slump for the longest period since 1945.  So how did I get my forecast wrong?

My forecast was partly based on a theory of cycles in capitalism built around the long term cycle of 55-70 years first expounded by Russian Marxist economist, Kondratiev.  I reckon there have been four K-cycles since the start of the industrial revolution in Europe. The fourth cycle started in 1946, peaked in the early 1980s and should have troughed around 2018.

Marxist economist Anwar Shaikh has put forward a similar forecast to mine, also based on the dating of the K-cycle.  When measured by the gold/dollar price, he forecast that the downphase in the current K-cycle would trough around 2018.  More recently, Greek Marxist economists Tsoulfidis and Tsalikis (TT), in their new book, also identify long cycles.  Like me, they base the up and down waves in these cycles primarily on the movement in the rate and mass of profit.  However, TT reckon that the bottom of the current cycle will not be reached until 2023-28.

Cycle theory argues a new trough and slump in capitalist production is necessary to devalue the existing stock of capital before a new round of innovations based on rising profitability can begin.  But forecasting when that will happen is very difficult.  For the record, this is what I said at the beginning of each year since 2016, when the trough of the current cycle should have been reached.  In 2016, I said: “As for 2016, I expect much the same as 2015, but with a much higher risk of new global recession appearing….even if a new global slump is avoided this year, that could be the last year that it is.”  There was no slump in 2016 but the year did deliver a ‘mini-recession’ with global growth at its lowest since 2009.

Then in 2017, I said: “2017 will not deliver faster growth, contrary to the expectations of the optimists.  Indeed, by the second half of next year, we can probably expect a sharp downturn in the major economies …far from a new boom for capitalism, the risk of a new slump will increase in 2017.”  This forecast proved to be wrong as, instead, there was a mild recovery from the previous year in the major economies.

For 2018, I explained: “What seems to have happened is that there has been a short-term cyclical recovery from mid-2016, after a near global recession from the end of 2014-mid 2016.  If the trough of this Kitchin cycle was in mid-2016, the peak should be in 2018, with a swing down again after that.”  That forecast proved correct as growth slowed from mid-year 2018 and into 2019.

My forecast this time last year for 2019 was as follows: “slowing profits growth and a rising cost of (corporate) debt, alongside all the politico-economic factors of an international trade war between China and the US, suggest that in 2019 the likelihood of a global slump has never been higher since the end of the Great Recession in 2009.”

Well, there was no slump in the major economies in 2019, but they achieved the slowest rate of growth in any year since the end of the Great Recession.

So, while the decade of 2010s was the longest period without a slump in the major economies since 1945, it was also the weakest recovery from any recession in the same period.

And in 2019, global growth recorded its weakest pace since the global financial crisis a decade ago.

What were the factors for the slowdown and what are the factors that have enabled the major capitalist economies to avoid major slump that cycle theory predicts should have happened by now?

On the negative side, slow real GDP growth (of 1-2% a year) has been driven by continued low investment rates.  In its recent global outlook, the IMF highlighted that: firms turned cautious on long-range spending and global purchases of machinery and equipment decelerated.”.

The ongoing trade war between the US and China along with trade frictions with the EU was also an important factor in the slowdown in technology spending.  Global trade—which is intensive in durable final goods and the components used to produce them—slowed to a standstill.

Indeed, since the end of the Great Recession, globalisation and ‘free trade’ has increasingly given way to protectionist measures, as it did in the 1930s.  Since 2009, governments worldwide have introduced 2,723 new trade distortions, the cumulative effect of which was to distort 40% of world trade by November 2019.

The global trade and investment slowdown has particularly hit the so-called emerging economies, several of which have slipped into outright slumps. Emerging markets face a serious “secular stagnation” problem. Growth in almost all cases has been far lower in the last 6 years than in the 6 years leading up to the Great Recession. And in Argentina, Brazil, Russia, South Africa and Ukraine, there has been no growth at all.

Nevertheless, 2019 did not see a new global slump.  Why not?  First, the monetary authorities quickly reversed their previous policy stance that the global economy was fine and had ‘normalised’.  In 2018, many central banks had been on hold with their policy interest rates or in the case of the Federal Reserve had hiked the rate.  In 2019, the opposite was the case.

Interest rates on government bonds and other ‘safe assets’ fell back towards zero or even turned negative.  With borrowing so cheap, large corporations and banks sucked up cheap credit; but not to invest in productive assets, but instead to buy up shares and bonds.

Stock market prices rocketed, up 30% in the US.  Global stock markets are now worth $86trn, just shy of all-time high and equal to almost 100% of global GDP.

The main purchasers of corporate stocks are the corporations themselves.  These so-called buybacks pushed up stock prices, in turn making it easier to buy out other companies or gain even more credit.  Much of the buyback funds were borrowed.  This expansion of what Marx called ‘fictitious capital’ has replaced investment in productive capital and it has been financed by Minsky-style Ponzi finance (ie issuing more debt to fund the cost of servicing existing debt).

The major capitalist economies are now in a fantasy world where the stock and bond markets (‘fictitious capital’) are saying that world capitalism has never had it so good, while the ‘real economy’ is stagnating in output, trade, profits and investment.

The other counteracting factor that has enabled the capitalist economies to avoid a new slump in the 2010s has been the rise in employment and the fall in unemployment.  Instead of investing heavily in new technology and shedding labour, companies have sucked up available cheap labour from the reserve army of unemployed created in the Great Recession and from immigration.  According to the International Labor Organization, the global unemployment rate has dropped to just 5%, its lowest level in almost 40 years.

This did not happen in the 1930s Great Depression.  Then unemployment rates stayed high until the arms race and impending world war militarised the workforce.  In the 2010s, it seems that companies, rather than reducing their costs in the face of recession and low profitability by sacking the workforce and introducing labour-saving technology, opted to take on labour at low wage rates and with ‘precarious’ conditions (no pensions, zero hours, temporary contracts etc).  As a result, there has been a sharp increase in what are called ‘zombie companies’ that make only just enough money to pay a low-wage workforce and service their debts, but not enough to expand at all.

High employment and low real GDP growth means low productivity growth, which over time means stagnating economies – a vicious circle.  The great AI/robot revolution in industry has not (yet) materialised.  Globally, the annual growth in output per worker has been hovering around 2 per cent for the past few years, compared with an annual average rate of 2.9 per cent between 2000 and 2007.

These counteracting factors may have delayed the advent of a new slump, but in my view, they can only delay it.  The fundamental driver of a capitalist economy is profit – and rising profits at that.  The most important factor for analysing the health of the capitalist economy remains the profitability of the capitalist sector and the movement in profits globally.  That decides whether investment and production will continue.  This blog has presented overwhelming evidence that profits and investment are highly correlated and in that order – see our book, World in Crisis.

Neither average profitability of capital nor the mass of profits is rising in the major economies. According to the latest data on the net return on capital provided by the EU’s AMECO database, profitability in 2020 will be 4% lower than the peak of 2017 in Europe and the UK; 8% down in Japan; and flat in the US.  And profitability will be lower than in 2007, except in the US and Japan.

My estimate of global mass profits also shows, at best, stagnation.  Japanese corporate profits are currently down 5% yoy, the US down 3% and Germany down 9%.

As for the largest and still leading capitalist economy in the world, the US, its rate and mass of profit have been falling since 2014.  In 2018, on my measure, US overall profitability rose very slightly over 2017 (probably due to Trump’s corporate tax cuts).  But profitability in 2018 was still 5-7% below the 2014 peak.  If we assume real GDP, employee compensation and fixed asset growth for 2019 will have been similar to the mini-recession of 2015-16, we can expect a further significant downturn in US profitability, to levels well below 2006.  On another measure, of earnings as a % of fixed assets in US non-financial companies, the rate is lower than in 2008 and approaching the all-time lows of 2001 and 1982.

This growing profitability crisis threatens to turn the increased credit for corporations from a bonus into a burden.  The Institute of International Finance estimates that global debt has now hit $250 trillion and is expected to rise to a record $255 trillion at the end of 2019, up $12 trillion from $243 trillion at the end of 2018, and nearly $32,500 for each of the 7.7 billion people on the planet.

Separately, Bank of America recently calculated that since the collapse of Lehman, government debt has increased by $30tn, corporate debt by $25tn, household by $9tn and financial debt by $2tn.  The BofA warns that “the biggest recession risk is a disorderly rise in credit spreads & corporate deleveraging.”

The World Bank joined the BIS (the ‘central banks’ central bank) in warning that the largest and fastest rise in global debt in half a century could lead to another financial crisis as the world economy slows.  In a report titled, Global Waves of Debt, the World Bank looked at the four major episodes of debt increases that have occurred in more than 100 countries since 1970 — the Latin American debt crisis of the 1980s, the Asian financial crisis of the late 1990s and the global financial crisis from 2007 to 2009.  During the fourth wave, from 2010 to 2018, the debt to GDP ratio of developing countries has risen by more than half to 168%: a faster increase on an annual basis than during the Latin American debt crisis.

World Bank chief David Malpass warned that “a sudden rise in risk premiums could precipitate a financial crisis, as has happened many times in the past.”  And that risk was confirmed this time last year, when interest rates rose too high – due to the attempt to ‘normalize’ policy – and stock and bond prices tumbled.

As we enter a new decade and go into the 11th year since the end of the last global slump, these are the fundamental factors that suggest a new slump is not far away.  They are: stagnant or falling profits and profitability; weak or falling investment; rising corporate debt and falling trade (amid a global trade war).

But there are also counteracting factors that have so far enabled the major economies to escape a slump in production and investment (if at the price of low GDP growth, productivity and wages).  Global costs of borrowing are at all-time lows, partly due to central bank policy of zero interest rates and ‘quantitative easing’; but also because there is no demand from the capitalist sector for credit to invest in productive assets or from the governments to spend.  So the stock and bond markets of the world are hitting record highs.  And there is the new phenomenon, not seen in previous long depressions, namely low unemployment rates that provide at least a modicum of income for households.

Mainstream economic forecasts for 2020 are generally mildly optimistic.  The Fulcrum macro-model published in the FT reckons that “the outlook from the models shows global growth rates rising next year, returning roughly to trend rates. Recession risks are deemed to be low, currently standing about 5 per cent for the US and 15 per cent for the eurozone.”  Alternative models, such as those from Goldman Sachs suggests a recession risk of 24 per cent in the US next year.

Maybe these forecasts will prove to be right.  But eventually, the fundamental factors of profits and investment must override the counteracting factors of low interest and unemployment.  Profits rule investment and investment rules employment and income, and that rules spending.  The fantasy world cannot continue much longer.  2020 may be the year that it collapses.

Top ten posts of 2019

December 21, 2019

As has become customary since I started this blog, here is the annual summary of content on my blog this year.  This year, there have been 450,000 viewings of the blog site, with the last quarter hitting a record number of viewings since I began the blog back almost exactly ten years ago.  Over those ten years, I have posted 882 times with just under 3 million viewings. There are 4300 regular followers.

The Michael Roberts Facebook site, which I started exactly five years ago has just under 8000 followers.  On the Facebook site, I put short daily items of information or comment on economics and economic events.

How are my efforts received?  Well, here is a review of my work by Danish economist Karen Helveg Petersen.

https://solidaritet.dk/michael-roberts-og-den-faldende-profitrate/?fbclid=IwAR3ibOt_zhT0Mou1U9Xc-aedxL2vV4h2OjGhrn2HfMYmH6B2BsfirSA7Yjo

You can make up your own mind.

Anyway, here are the top ten posts from my blog this year, as measured by the number of viewings.  And as you might expect from a blog that concentrates on Marxist economics and on a Marxist perspective on the world capitalist economy, my blog viewers are mostly interested in Marxist economic theory and its critique of political economy.

The top posts of the year were on Modern Monetary Theory (MMT).  MMT has become the flavour of the year as the economic theory of anti-austerity economics, if not anti-capitalist.

https://thenextrecession.wordpress.com/2019/01/28/modern-monetary-theory-part-1-chartalism-and-marx/

Having been confined to the esoteric fringe of even heterodox economics, MMT really kicked off when the US left-wing Democrat Alexandria Ocasio-Cortez started promoting the theory as the basis for economic policy; and a leading MMT exponent discussed the theory with UK Labour’s left-wing economics and finance leader, John McDonnell.

MMT now has some traction in the left as it appears to offer theoretical support for policies of fiscal spending funded by central bank money and running up budget deficits and public debt without fear of crises – and thus backing policies of government spending on infrastructure projects, job creation and industry in direct contrast to neoliberal mainstream policies of austerity and minimal government intervention.

So, in a series of posts, I analysed MMT from what I consider is a Marxist perspective.  I argued that separating money from value and indeed making money the primary force for change in capitalism fails to recognise the reality of social relations under capitalism and production for profit.  MMT ignores or denies a theory of value.  So MMT enters a fictitious economic world, where the state can issue debt and have it converted into credits on the state account by a central bank at will and with no limit or repercussions in the real world of productive capital.

In contrast, Marx’s law of value integrates money and credit into the capitalist mode of production and shows that money is not the decisive flaw in the capitalist mode of production and that sorting out finance is not enough. So it can explain why the Keynesian solutions (and MMT is a variant of Keynesian economics) do not work either to sustain economic prosperity or avoid crises.  I covered MMT in several posts, two of which made the top ten. Digital Commons has collated my posts into one paper which you can read here.

https://digitalcommons.fiu.edu/cgi/viewcontent.cgi?article=1133&context=classracecorporatepower

But the debate on MMT continues.

Rising government spending and unemployment are positively correlated in the OECD – the opposite of what MMT expects.

Also the debate that I conducted on the blog with Professor David Harvey on Marx’s law of value was in the top ten.

https://thenextrecession.wordpress.com/2018/04/02/marxs-law-of-value-a-debate-between-david-harvey-and-michael-roberts/

I argue that DH’s interpretation of Marx’s law of value is incorrect when he suggests that Marx did not have a ‘labour’ theory of value and that value only exists in ‘the market’.  From this flows the view that crises in capitalism are caused by a failure to ‘realise’ value through dislocation in the market ie underconsumption; and are not due to the failure to appropriate enough surplus value in production.  In the debate, DH strongly refutes my interpretation of his position and suggests my own view on crises is far too narrowly based as an explanation.  As I said in the post, this debate could be considered like a medieval religious debate about how many angels there are on the head of a pin; but it may be that it leads to something really worth knowing.  As it has made the top ten, it seems viewers think the latter.

Investment not consumption is the main swing factor in slumps – contrary to the underconsumption view –

% chg in personal consumption, business investment and GDP

The debate between David Harvey and me on the relevance of Marx’s law of the tendency of the rate of profit to fall was continued in person at the recent Historical Materialism conference in London.  You can read my report on that session here.

https://thenextrecession.wordpress.com/2019/11/11/hm1-marxs-double-edge-law/

The other theoretical discussion that made the top ten was on the economics of imperialism.  In another session which I organised at the Historical Materialism conference, John Smith, author of Imperialism in the 21st century, a widely praised and important book, presented with Andy Higginbottom of Kingston University, Sam King from the University of Victoria, Australia and myself on the economic foundations of modern imperialism.

https://thenextrecession.wordpress.com/2019/11/14/hm2-the-economics-of-modern-imperialism/

The discussion revolved around how value is transferred from the periphery (or the ‘global south’, if you prefer) to the imperialist centre (the ‘global north’), through transfer pricing, international trade, and capital flows.  In particular, we debated the relevance of the concept of ‘super-exploitation’ in the south as the main source of value transfer.  Again, the debate on this continues.

% of GDP of value transfer between major emerging economies and the G7

It was not just Marxist economic theory that attracted viewings of my posts but also analyses of the current state of the world capitalist economy.  Recessions, monetary easing and fiscal stimulus got into the top ten, I suppose, because it summed up my view of the likelihood of a new global recession and whether the official economic policies of central banks and governments were working to get capitalism out its low growth, low investment stagnation and could avoid a new slump.  My final sentence was: “Another recession is on its way and neither monetary nor fiscal measures can stop it.”

https://thenextrecession.wordpress.com/2019/08/19/recessions-monetary-easing-and-fiscal-stimulus/

I’ll revisit this story in a future post on the prospects for the world economy in 2020.

Global business profits are stagnating

One of the developments in the world economy in 2019 was the emerging trade and technology war between Trump’s America and Xi’s China.  This war, even if temporarily in truce, will break out again in 2020 and has already had detrimental effects on the world economy.  In a post that made the top ten, I argued last May this war would be one of the triggers for a new global slump “before the year is out”.

https://thenextrecession.wordpress.com/2019/05/26/global-slump-the-trade-and-technology-trigger/

Well, that ain’t happened.  But, in my view, it remains at the heart of any future dislocation of the world capitalist economy.

Global trade is declining

One post that I do every year and which always makes the top ten is Credit Suisse’s annual measure of the degree of inequality of wealth globally.  Once again, the report revealed the staggering degree of wealth inequality in the world.  The top 1% of adults own 45% of all global personal wealth; 10% own 82%; the bottom 50% own less than 1%.  So poor are the bottom 50% (they own no wealth at all), that it means that the likes of you and me who might own (partly) a house or flat in the advanced capitalist economies are actually in the top 10% of wealth holders!

https://thenextrecession.wordpress.com/2019/10/25/the-top-1-own-45-of-all-global-personal-wealth-10-own-82-the-bottom-50-own-less-than-1/

I did quite a few book reviews during 2019.  See my post: https://thenextrecession.wordpress.com/2019/12/18/books-of-2019/

But only one review made the top ten posts.  That was Stolen! by young British economist and activist, Grace Blakeley.  This book on the cause of crises in capitalism and policies for solving it in Britain was widely circulated and sold, not only in the UK but in Europe and the US.

https://thenextrecession.wordpress.com/2019/09/13/theft-or-exploitation-a-review-of-stolen-by-grace-blakeley/

“All our wealth has been stolen by big finance and in doing so big finance has brought our economy to its knees.  So we must save ourselves from big finance.” That is the shorthand message of the book.  Unfortunately, like most post-Keynesian analyses, Blakeley ignores Marx’s law of value in explaining the contradictions in modern capitalist economies and instead leans on the Keynesian analysis that the root of all evil is money, credit and finance.  As a result, in my view, because this analysis is faulty, her policy proposals are also inadequate.

Indeed, Joel Rabinovich of the University of Paris has conducted a meticulous analysis of the argument that now non-financial companies get most of their profits from ‘extraction’ of interest, rent or capital gains and not from the exploitation of the workforces they employ. He found that: “contrary to the financial rentieralization hypothesis, financial income averages (just) 2.5% of total income since the ‘80s while net financial profit gets more negative as percentage of total profit for nonfinancial corporations. In terms of assets, some of the alleged financial assets actually reflect other activities in which nonfinancial corporations have been increasingly engaging: internationalization of production, activities refocusing and M&As.” Here is his graph below.

The debate on the right policies for the left in Britain has become somewhat academic with the victory of the hard-right Conservative government in the December general election.  I don’t usually post much on the UK because it is not the most important capitalist economy, but how and why the opposition leftist Labour party failed to win is under hot debate at the moment.  So my short response immediately after the election result on Brexit and on the underlying economic consequences made the top ten this year.

https://thenextrecession.wordpress.com/2019/12/13/get-brexit-done/

It is the economic situation that will become the testing ground for the Conservative government in 2020 if a global slump should emerge.

The economic well-being index (chg in real disposable income minus unemployment rate) shows that when the index is rising before an election, the incumbent government usually wins.

Finally, there is Venezuela. It has disappeared off the media headlines in recent months now that the attempted coup organised by the US to overthrow the Maduro regime failed (unlike in Bolivia, where it succeeded).  What is interesting is that my post on Venezuela was written in 2017!

https://thenextrecession.wordpress.com/2017/08/03/the-tragedy-of-venezuela/

But viewers picked up that old post to get my understanding of why the Chavista revolution has failed.  In 2020, we shall see if Maduro can survive another year.

Venezuela real GDP falling near 30% since 2012.

Books of 2019

December 18, 2019

For me, the best book of the year is Classical Political Economics and Modern Capitalism by Greek Marxist economists, Lefteris Tsoulfidis and Persefoni Tsaliki.  And it is a book that I have not yet reviewed on my blog.  The reason why is that it’s so good that I am doing a longer and comprehensive view for the journal Marx 21 to be published next spring.  There will be some criticisms but for Marxist economics it is essential reading.

Suffice it to say now, the title tells the reader that the authors cover all aspects of Marxist economic theory as applied to modern capitalism in a succinct, rigorous manner.  In so doing, the authors refute neoclassical and Keynesian theories as better explanations of capitalism; and above all, they offer empirical evidence to support Marx’s key laws of motion of capitalism: the law of value and the law of profitability.  Both theory and evidence are offered to explain and justify Marx’s theory crises under capitalism.  The book is expensive, so it should really be seen as a textbook for economics students seeking an account of Marxian economics.  But each chapter can be purchased or read separately.  And it delivers well, better even than Anwar Shaikh’s monumental Capitalism (in 2016).

In contrast, American Marxist economist Richard Wolff has aimed at activists and not academics by publishing two short books designed to explain the ideas of Marxism and socialism in a straightforward way: Understanding Marxism and Understanding Socialism.  The books are powerful propaganda weapons for socialism, but they do suffer, yet again, from an incorrect explanation of crises under capitalism.  Wolff adopts the classic underconsumption argument that capitalists pay “insufficient wages to enable workers to purchase growing capitalist output”.  Regular readers of this blog will know that I consider this theory of capitalist crises as wrong.  Marx rejected it; it does not stand up theoretically as part of Marx’s law of value or profitability; and empirical evidence is against it.

Among other Marxist economics books in 2019 is the The Oxford Handbook of Karl Marx, edited by Matt Vidal, Tomas Rotta, Tony Smith and Paul Prew.  This brings together a series of chapters by prominent Marxist scholars covering all aspects Marxist theory, from historical materialism, dialectics, political economy, social reproduction and post-capitalist models.  https://thenextrecession.wordpress.com/2019/08/06/the-handbook-of-karl-marx-profitability-crises-and-financialisation/

I was particularly interested in the chapter on Reproduction and Crisis in Capitalist Economies by Deepankar Basu, from the University of Massachusetts, Amhurst.   Basu denies that there is a “Marxist theory of crisis’ and seeks to produce one that amalgamates the law of tendency of the rate of profit to fall, with profit squeeze theory from Okishio and straightforward underconsumption theory.  In my view, this does not work.  Indeed, I conclude that “all the Marxist authors discussing crises under capitalism in the Handbook are determined to trash Marx’s law of profitability as an explanation, in favour of others or deny that there is any general theory of crises at all.”

One chapter in the handbook deals with the commodification of knowledge and information.  In this chapter, the authors argue that knowledge is ‘immaterial labour’ and ‘knowledge commodities’ are increasingly replacing material commodities in modern capitalism.  Disputing the authors’ analysis, I would argue that knowledge is material (if intangible) and if knowledge commodities are produced under conditions of capitalist production ie using mental labour and selling the idea, the formula, the program, the music etc on the market, then value can be created by mental labour.  Value then comes from exploitation of productive labour, as per Marx’s law of value. The value of ‘knowledge commoditites’ does not tend to zero.  So there is no need to invoke the concept of rent extraction to explain the profits of pharma companies or Google. The so-called ‘renterisation’ of modern capitalist economies that is now so popular as a modification or a supplanting of Marx’s law of value is not supported by knowledge commodity production.

Another important book in Marxist economic analysis was The Economics of Military Spending: A Marxist perspective by Adem Yavuz Elveren.  In analysing the economic role of military expenditure (milex) in modern capitalism, Elveren combines theoretical analysis with detailed econometric investigations for 30 countries over last 60 years.  That’s the right way to do political economy or Marxist social science.  If the reader wants to gain knowledge of all the theories of milex and crises without verbiage and confusion, he or she can do no better than read Elveren.

Elveren’s empirical work appears to back up the Marxist view of the role of military spending in a capitalist economy.  It can act to lower the rate of profit on capital and thus on economic growth as it did in the neo-liberal period, when investment and economic growth slowed.  But it can also help bolster the rate of profit through state’s redistribution of value from labour to capital, when labour is forced to pay more in taxation, or the state borrows more, in order to boost investment and production in the military sector.

Another book from a Marxist perspective looks at the modern changes in the composition and activity of the global labour force. Jorg Nowak, a fellow at the University of Nottingham, looks at Mass Strikes and Social Movements in Brazil and India:: popular mobilisation in the Long Depression.  Nowak argues that in the 21st century and in this current long depression in the major economies, industrial action is no longer led by organised labour ie trade unions, and now takes the form of wider ‘mass strikes’ that involve unorganised workers and wider social forces in the community.  This popular mobilisation is closer to Rosa Luxemburg’s concept of mass strikes than the conventional ’eurocentric’ formation of trade unions. Nowak develops the argument that the intensity of class conflict between labour and capital varies with stages in the economic cycle of capitalist economic upswings and downswings.  He cites various authors who seek to show that when capitalism is in a general upswing in growth, investment and employment, class conflict as expressed in the number of strikes rises, particularly near the peak of the upswing.

There were a number of heterodox economics, not strictly Marxist in my view, published this year.  The most popular and widely praised was Stolen – how to save the world from financialisation, by Grace Blakeley, the young British socialist economist and Labour activist.  Blakely poses that “all our wealth has been stolen by big finance and in doing so big finance has brought our economy to its knees”.  So we must save ourselves from big finance.  That is the shorthand message of a new book.  The concept of financialisation dominates her view of capitalism, not exploitation of labour.

Stolen aims to offer a radical analysis of the crises and contradictions of modern capitalism and policies that could end ‘financialisation’ and give control by the many over their economic futures.  Accepting this model implies that finance capital is the enemy and not capitalism as a whole, ie excluding the productive (value-creating) sectors.  Moreover, the narrative that the productive sectors of the capitalist economy have turned into rentiers or bankers is just not borne out by the facts.  And because the analysis is faulty, her policies for reform are also inadequate.

Another heterodox book is by John Weeks, who used to write solid Marxist analyses of capitalism back in the 1980s.  In his new book, The Debt Delusion: Living Within Our Means and Other Fallacies. Weeks aims at demolishing economic arguments for the necessity of austerity.  But he adopts the Keynesian view that the cause of crises under capitalism is the “lack of effective demand”.  Weeks says the lack of effective demand can be overcome or avoided by government spending and that is why capitalism worked so well back in the 1960s.  If we just drop austerity policies and go back to Keynesian-style government ‘demand management’, all will be well.  Marxist theory and the history of modern capitalist crises beg to differ.

The desire to put Keynes in same box as Marx is repeated by James Crotty with his new book entitled Keynes Against Capitalism: His Economic Case for Social Liberalism, in which he claims that, far from being a conservative, Keynes was in fact a socialist, if not a revolutionary one like Marx. “Keynes did not set out to save capitalism from itself as many think, but instead reckoned it needed to be replaced by a liberal form of socialism.” This thesis does not hold water in my opinion.  There is plenty of evidence in Keynes’ writings that he really stood for ‘managed capitalism’, and not socialism by any reasonable definition.

Then there are the more mainstream but radical analyses of capitalism.  World renowned expert on global inequality, Branco Milanovic in his new book, Capitalism Alone, starts from the premise that capitalism is now a global system with its tentacles into every corner of the world driving out any other modes of production like slavery or feudalism or Asian despotism to the tiniest of margins.  But also capitalism is not just only mode of production left, it is the only future for humanity.  Milanovic poses just two models for the future: ‘liberal capitalism’ of the West which creaks under the strains of inequality and capitalist excess; and ‘political capitalism’, as exemplified by China, which many claim is more efficient, but which is autocratic and corrupt and vulnerable to social unrest.

In my view, Milanovic’s dichotomy between ‘liberal democracy’ and ‘political capitalism’ is false.  And it arises because, of course, Milanovic starts with his premise (unproven) that an alternative mode of production and social system, namely socialism, is ruled out forever. Indeed, Milanovic’s policies to reduce the inequality of wealth and income in capitalist economies and/or allow people to leave their countries of poverty for a better world seem to be just as (if not more) ‘utopian’ a future under capitalism than the ‘socialist utopia’ he rules out.

Then there is the new book by the radical superstar of mainstream economics, Thomas Piketty: Capital and Ideology. This is a follow up to his mega Capital in the 21st Century from 2014.  The new book is even larger: some 1200pp. Whereas the first book provided theory and evidence on rising inequality, this book seeks to explain why this was allowed to happen in the second half of the 20th century.  Piketty says that he does not want what most people consider ‘socialism’, but he wants to “overcome capitalism.” Far from abolishing property or capital, he wants to spread its rewards to the bottom half of the population, who even in rich countries have never owned much.  To do that, he says, we must return to the social-democratic principles that were so successful in the 1960s.

Certainly, the evidence of growing inequality of both wealth and incomes in all the major economies is overwhelming and in a new book, The Triumph of Injustice: how the rich dodge taxes and how to make them pay , inequality experts, Gabriel Zucman and Emmanuel Saez provide us with yet more updated data.  It’s a searing indictment of American tax system, which, far from reducing the rising inequality of income and wealth in the US, actually drives it higher. Like Piketty, their policy solution is a wealth tax on property and financial assets.  They do not propose more radical policies to take over the banks and large companies, stop the payment of grotesque salaries and bonuses to top executives and end the risk-taking scams that have brought economies to their knees. For them, the replacement of the capitalist mode of production is not necessary, only a redistribution of the wealth and income already accrued by capital. Abolish the billionaires by taxation, not by expropriation.

Redistribution of incomes and wealth by government taxation and regulation is the main policy proposal of radical mainstream – the alternative to the Marxist proposal of the replacement of the capitalist mode of production.  It is the theme also adopted by Joseph Stiglitz, a Nobel (Riksbank) prize winner in economics and former chief economist at the World Bank, as well as an adviser to the leftist Labour leadership in the UK.  He stands to the left in the spectrum of mainstream economics.  His new book called People, Power, and Profits: Progressive Capitalism for an Age of Discontentin which he proclaims that “We can save our broken economic system from itself.”  It is not capitalism that is the problem but vested interests, especially among monopolists and bankers. The answer is to return to the days of managed capitalism that Stiglitz believes existed in the golden age of the 1950s and 1960s.  Here he echoes the views of Weeks, Piketty, Milanovic and Crotty above.

To get back to this “progressive capitalism”, Stiglitz proposes regulation, breaking up the ‘monopolies’, progressive taxation, ending corruption and enforcing the rule of law in trade. But what on earth would make the top 1% and the very rich owners of capital agree to reduce their gains in order to get a more equal and successful economy?  And how would regulation and more equality deal with the impending disaster that is global warming as capitalism accumulates rapaciously without any regard for the planet’s resources and viability?  Programmes of redistribution do little for this.  And if an economy is made more equal, would it stop future slumps under capitalism or future Great Recessions?  More equal economies in the past did not avoid these slumps.

Readers would be better advised to understand the nature of modern capitalism by carefully digesting the best Marxist analyses that combine theory with empirical evidence.  One such work is a new revised version of Invisible Leviathan, a book by Professor Murray Smith of Brock University, Ontario, Canada. The book sets out to explain why Marx’s law of value lurks invisibly behind the movement of markets in modern capitalism and yet ultimately explains the disruptive and regular recurrence of crises in production and investment that so damage the livelihoods (and lives) of the many globally.  This book is a profound defence (both theoretically and empirically) of Marx’s law of value and its corollary, Marx’s law of the tendency of the rate of profit to fall.

As Smith concludes: “The essential programmatic conclusion emerging from Marx’s analysis is that capitalism is constitutionally incapable of a ‘progressive’, ‘crisis-free’ evolution that would render the socialist project ‘unnecessary’, and furthermore, that a socialist transformation cannot be brought about through a process of gradual, incremental reform. Capitalism must be destroyed root and branch before there can be any hope of social reconstruction on fundamentally different foundations – and such a reconstruction is vitally necessary to ensuring further human progress.”

Land and the rentier economy

December 15, 2019

I should have reviewed Brett Christophers’ book, The New Enclosure, when it came out this time last year.  But better late than never. In 2017, Christophers, professor in Human Geography at Uppsala University, Sweden, published an excellent book, The Great Leveller, which takes a refreshingly new angle on the nature of capitalism.  He says that we need to look at how capitalism is continually facing a dynamic tension between the underlying forces of competition and monopoly.  Christophers argues that in this dynamic, law and legal measures have an underappreciated role in trying to preserve a “delicate balance between competition and monopoly”, which is needed to “regulate the rhythms of capitalist accumulation”.  And earlier this year, Christophers published an important piece of research on ‘renterism, as he calls it, in preparation for a new book on the nature of modern ‘rentier’ economy.

But in between, Christophers also wrote The New Enclosure: The Appropriation of Public Land in Neoliberal Britain, which delivers a forensic analysis of the ownership of land in Britain – historically the largest economic category of rental income in the modern capitalist economy.  Indeed, ever since the ‘enclosures’ of common land in the 16th century onwards, land has been privatised to accrue income through rent, ie income from property appropriated, not by exploitation of labour, but through monopoly ownership of an asset – income that Marx called ‘ground rent’.

Christophers shows that land makes up a staggering share of national wealth. Using the UK as his laboratory, he finds that, out of total national wealth of £9.8tn, land accounted for £5tn and houses and other structures added another £3.5tn on top of that.  The ownership of land acts as a store of wealth and, as the rents rack up, so grows inequality of incomes and wealth, while restricting the productive power of an economy.

The new enclosures of the 20th century in the UK emerged in the neo-liberal period from the early 1980s, when roughly half of publicly owned estates were privatised, the biggest of the Thatcherite privatisations.  Christophers carefully estimates that an astonishing 2 million hectares of public land, worth £400 billion, has been appropriated by the private sector in recent decades, representing 10% of the British land mass. When Thatcher entered Downing Street in May 1979, more land was owned by the state than ever before: 20 per cent of Britain’s total area. Today the figure is 10.5 per cent.

For example, in 1979, 42 per cent of the UK’s population lived in council housing. Today the figure is less than 8 per cent.

The new private owners of this public land hoarded the assets and throttled the construction of new homes, thus driving up house prices and rents.

From a peak of 350,000 permanent dwellings constructed per annum in the late 1960s, construction activity has fallen to around 150,000 units per year.  Land now accounts for 70 per cent of a house sale price. In the 1930s it was 2 per cent.

What happened?  When Britain’s post-war housebuilding boom began, it was based on cheap land. As the book, The Land Question by Daniel Bentley of thinktank Civitas, sets out, the 1947 Town and Country Planning Act under Clement Attlee’s government allowed local authorities to acquire land for development at “existing use value”. The unserviced land cost component for homes in Harlow and Milton Keynes was just 1% of housing costs at the time.

But landowners rebelled and Harold Macmillan’s Conservative government introduced the 1961 Land Compensation Act. Henceforth, landowners were to be paid the value of the land, including any “hope value”, when developed. Today a hectare of land is worth 100 times more when used for housing rather than farming. Yet when an council grants planning permission, all the value goes to the landowner, not the public. Bentley says landowners pocketed £9bn in profit from land they sold for new housing in 2014-15. Major infrastructure projects such as Crossrail 2 and the Bakerloo tube line extension are estimated to cost the public purse £36bn. Landowners, meanwhile, will pocket £87bn from increased land values nearby. Some externalities!

Classical political economy, starting with Adam Smith, David Ricardo and then to Karl Marx, explained the peculiar nature of this geographically bound asset that can be commodified, accruing an income for the owner without any productive effort.  ‘As soon as the land of any country has all become private property,’ Adam Smith wrote in The Wealth of Nations, ‘the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce.’ This is the beauty of land: it is an asset that increases in value according to demand, without any expenditure or labour on the part of its owner.

Thus both the early 19th century political economists of industrial capital and Marx agreed on the need to nationalise land – indeed, it is in the Communist Manifesto  But it has not happened.  Instead, private ownership has increased and through inheritance has ensured the continuation of the same ruling elites for centuries.  A recent study by two economists at the Bank of Italy found that the wealthiest families in Florence today are descended from the wealthiest families of Florence nearly 600 years ago! So the rise of merchant capitalism in the city states of Italy and then the expansion of industrial capitalism and now finance capital made little or no difference to who owned the wealth. When, in 1873, the government published the Return of Owners of Land, the most comprehensive survey of British land distribution since the Domesday Book, it came as no surprise that almost all the top hundred landowners were also members of the House of Lords. Just as predictably, 30 per cent of today’s Tory MPs are landlords.

The private ownership of land is part of what I call the rentier economy, income accruing to the owners of financial assets or physical resources. This income (rent and interest and dividends) is appropriated from the productive sectors of capitalism where surplus value has been obtained through the exploitation of labour.  Such rentier income can be appropriated from overseas through bank lending and foreign investment (as it has in the UK), but also domestically from land rentals.

As LSE professor Jerome Roos perceptively pointed out in the British left journal, New Statesman,“the concentration of wealth and power in the hands of a few privileged rentiers is not a deviation from capitalist competition, but a logical and regular outcome. In theory, we can distinguish between an unproductive rentier and a productive capitalist. But there is nothing to stop the productive, supposedly responsible businessperson becoming an absentee landlord or a remote shareholder, and this is often what happens. The rentier class is not an aberration but a common recurrence, one which tends to accompany periods of protracted economic decline”.

Christophers’ book shows that any plan to replace the capitalist mode of production with common ownership must include the nationalisation of the large landowners and the abolition of rentier income.

Get Brexit done!

December 13, 2019

That was the campaign slogan of the incumbent Conservative government under PM Boris Johnson.  And it was the message that won over a sufficient number of those Labour voters who had voted to leave the EU in 2016 to back the Conservatives.  One-third of Labour voters in the 2017 election wanted to leave the EU, mainly in the midlands and north of England, and in the small towns and communities that have few immigrants.  They have accepted the claim that their poorer living conditions and public services were due to the EU, immigration and the ‘elite’ of the London and the south.

Britain is the most divided in Europe geographically.  The election confirmed this ‘geography of discontent’, where rates of mortality vary more within Britain than in the majority of developed nations. The disposable income divide is larger than any comparable country and has increased over the past 10 years. The productivity divide is also larger than any comparable country.

The ‘leave’ view was stronger among those who are old enough to imagine the ‘good old days’ of English ‘supremacy’ when ‘we were in control’ before joining the EU in the 1970s. Once in the EU, we had the volatile 1970s and the crushing of manufacturing and industrial communities in the 1980s.  The flood of Eastern European immigrants (actually mainly to the large cities) in the 2000s was the last straw.

In the ’remain capital’ of England, London, Labour’s vote held up as the ‘remain’ party, the Liberal Democrats, were squeezed down.  The LDs did badly but still had a higher share of the vote (11%) than in 2017.  The Conservative share of the vote rose only slightly from 2017 (42.3% to 43.6%), but Labour’s slumped from 40% in 2017 to 32%.  So the opinion polls and the exit polls were very accurate.  Indeed, the overall turnout was down from 69% in 2017 to 67%, particularly in the Brexit areas.  Once again, the ‘no vote party’ was the largest.

This was clearly a Brexit election.  The Labour party had the most radical left-wing programme since 1945.  The social and economic manifesto of the left Labour leadership was actually quite popular.  Labour’s campaign was excellent and the activist turnout to canvass and get the vote in was terrific.  But in the end it made little difference.  Brexit still dominated and the Labour vote was squeezed.  Not every voter wanted to ‘get Brexit done’, but clearly sufficient of the 2016 ‘leave’ voters had enough of delay and procrastination by former PM May and parliament and wanted the issue dealt with.

Usually, elections are won on what the state of the economy is.  This election was generally different.  But even so, the measure of ‘economic well-being’ index (based on a mix of the change in real disposable income and unemployment rate) suggested an improvement since former PM May lost her majority in 2017.  The economy at the level of investment and output may have been stagnating, but the average UK household was feeling slightly better off since 2017, with full employment and slight improvement in real incomes.  That helped the Johnson government.

What now?  The government under Johnson will now move quickly to pass through parliament the legislation necessary for the UK to leave the EU by end of January at the latest.  And then the more tortuous process of signing up a trade deal with the EU will begin.  That is supposed to be completed by June 2020, unless the UK asks for an extension.  Johnson will try to avoid that and he can now make all kinds of concessions to the EU in order to get a deal done without the fear of a backlash from ‘no deal’ Brexiters in his party, as he has a big enough majority to see them off.

With the Brexit issue likely to be out of the way by this time next year, the British economy, which has been on its knees (stagnation of GDP and investment) is likely to have a short pick-up.  With ‘uncertainty’ over, foreign investment may return, house prices recover and with the labour market tightening, wages may even pick up.  The Johnson government may even steal some of Labour’s proposals and boost public spending for a short period.

Longer term, the future of the British economy is dismal.  All studies show that outside the EU, the British economy will grow slower in real terms than it would have done if it had remained an EU member.  The degree of relative loss is estimated at between 4-10% of GDP over the next ten years, depending on the terms of the trade and labour deal with the EU.  Also, it is still unclear how much damage there will be to the financial services sector in the City of London. But this is all relative; implying just 0.4-1% off the projected annual growth rate.  So, for example, if the UK grew at 2% a year in the EU, it would now grow at about 1.5% a year.

And then there is the joker in the pack: the global economy.  The major capitalist economies are growing at the slowest rate since the Great Recession. There may be a temporary truce in the ongoing trade war between the US and China, but it will break out again.  And corporate profitability in the US, Europe and Japan is sliding, alongside rising corporate debt.  The risk of a new world economic recession is at its highest since 2008.  If a new global slump comes, then the mood of the British electorate may change sharply; and the Johnson government’s Brexit bubble will then be pricked.

The debt delusion

December 10, 2019

John Weeks is Professor Emeritus at the School of Oriental & African Studies, University of London.  He is also a coordinator of of the UK’s Progressive Economic Forum (“founded in May 2018 and brings together a Council of eminent economists and academics to develop a new macroeconomic programme for the UK.”).

John Weeks’ new book is The Debt Delusion: Living Within Our Means and Other Fallacies. It aims at demolishing economic arguments for the necessity of austerity.  ‘Austerity’ is the catch word for the policy of reducing government spending and budget deficits and public sector debt.  This has been considered as necessary to achieve sustained economic growth in capitalist economies after the Great Recession of 2008-9.  The argument of governments and their mainstream advisors was that public sector debt had mushroomed out of control. The size of the debt compared to GDP in most countries had got so high that it would drive up interest costs and so curb investment and growth in the capitalist sector and even generate new financial crashes.  Austerity policies were therefore essential.

Keynesians and other heterodox economists rejected this analysis behind austerity policies.  Far from trying to balance the government books, governments should run deficits when economies were in recession to boost aggregate demand and accelerate recovery.  Rising public debt was no problem as governments could always finance that debt by borrowing from the private sector or just by ‘printing’ more cash to fund deficits and debt costs (debt costs being the interest paid on government bonds to the holders of that debt and the rollover of the debt).  Austerity was not an economic necessity, but a political choice bred by the ideology of insane and out of date economics and self-serving right-wing politicians.

In his new book, Weeks sets out to debunk six austerity “myths”: 1) “We must live within our means” 2) “Our government must live within its means” 3) “We and our government must tighten our belts” 4) “We and our government must stay out of debt”; 5) “The way for governments to stay out of debt is to reduce expenditures, not to raise taxes”; 6) “There is no alternative to austerity”.

The most important myth to crack, according to Weeks, is the idea that government budgets are like household budgets and must be balanced.  This is nonsense.  Governments can run annual budget deficits by borrowing, as indeed can households, as long as they have the income to cover the interest and repayments costs.  Moreover, in the case of governments, all the major countries have run annual deficits for decades. “Even the Germans, those paragons of a balanced budget, have only had a surplus in seven of the past 24 years, and more than half of these were in the past four years.”

Indeed, households often resort to credit, short and long term. Long-term credit often even reduces expenditure. The same is true for a government. As Weeks emphasises, most long-term credits for governments are used to purchase assets (capital spending), some of which even produce income (such as social housing), others that serve important functions for our societies (for example schools, hospitals, public transport). The public sector creates use values (to apply Marx’s terms) ie things or services that people need and so boosts GDP.

Weeks makes the key point that before the global financial crash and the Great Recession, it was not rising public sector debt that was the problem, but fast-rising private sector debt as households increased mortgage debt at low interest rates to buy homes and the finance sector exponentially expanded their own debt instruments to speculate.  It was the bursting of this private sector credit boom that led to the credit crunch of 2007 and the banking crash, not high public debt. Instead, the latter became the trash can for dumping private debt as governments (taxpayers) picked up the bill.

But from hereon I part with Professor Weeks’ analysis.  Professor Weeks adopts the Keynesian view that the cause of crises under capitalism is the “lack of effective demand”.  He argues that, as austerity policies reduce aggregate demand, they are the main cause of the Great Recession and the poor recovery afterwards “the principle (sic) cause of our economic woes, which predates Brexit by several years and largely accounts for the global slowdown, are austerity policies by the governments of most of the G7 countries, whose economies together account for over half of global output.”

Back in the 1970s and 1980s, Professor Weeks criticised convincingly this Keynesian demand argument from a Marxist perspective (see John Weeks, “The Sphere of Production and the Analysis of Crisis in Capitalism,” Science & Society, XLI, 3 (Fall, 1977) and John Weeks on underconsumption) .  But now as coordinator of the Keynesian Progressive Economy Forum, he writes that “capitalist economies do suffer periodically from extreme instability, the most recent example being the Great Financial Crisis of the late 2000s. These moments of extreme instability, recessions and depressions, result … from private demand “failures”; specifically, the volatility of private investment and to a lesser extent of export demand.” He goes further: “public expenditure serves to compensate for the inherent instability of private demand. This is the essence of “counter-cyclical” fiscal policy, that the central government increases its spending when private demand declines and raises taxes when private expenditures create excessive inflationary pressures. During 1950-1970 that was the policy consensus, and it coincided with the “golden age of capitalism”.

So Weeks says, the lack of effective demand can be overcome or avoided by government spending and that is why capitalism worked so well back in the 1960s.  If we just drop austerity policies and go back to Keynesian-style government ‘demand management’, all will be well.

But just as excessive government spending, budget deficits or public debt was not the cause of the financial crash and the Great Recession, neither was austerity. Indeed, Carchedi has shown that before every post-war recession in most capitalist economies, government spending was rising as a share of GDP, not falling.

% change in government spending one year before a recession

Rising government spending and regular budget deficits did not enable any major capitalist economy to avoid the Great Recession.  For example, Japan ran budgets deficits for over a decade before the 2008-9 slump.  It made no difference.  Japan entered the slump, as did every other major economy.

And after the Great Recession ended, there is little evidence that those countries that ran budget deficits and thus increased public sector debt recovered quicker and increased GDP more than those that did not.  Several studies show the so-called Keynesian multiplier (the ratio of real GDP growth to an increase in government spending or budget deficit) is poorly correlated with the economic recovery after 2009. (see below). The EU Commission finds that the Keynesian multiplier was well below 1 in the post-Great Recession period.  The average output cost of a fiscal adjustment equal to 1% of GDP is no more than 0.5% of GDP for the EU as a whole.

https://voxeu.org/article/government-spending-multipliers-and-business-cycle

https://voxeu.org/article/fiscal-stimulus-times-high-public-debt-reconsidering-multipliers-and-twin-deficits

https://voxeu.org/epubs/cepr-reports/how-big-are-fiscal-multipliers

What does show a high correlation is the change in the rate of profit on productive assets owned by the capitalist sector.

Correlation between change in rate of profit and in real GDP growth for ten capitalist economies

If the rate of profit falls, there is a high likelihood that the rate of investment will fall to the point of a slump.  Then there is a ‘lack of effective demand’.  This Marxist multiplier, as Carchedi and I call it, is a much better explanation of booms and slumps in modern capitalist economies than the Keynesian demand multiplier.

This is not really surprising if you think about it.  What happens in the capitalist sector of the economy, which is about 80% of value in most countries, must be more decisive than what happens in the government sector, even if there is a significant Keynesian multiplier effect (which there is not, on the whole).  What matters in modern capitalist economies is the level and change in the rate of profit and the size and cost of corporate debt; not the size of public spending and debt.

There has been a long debate about whether ‘excessive’ public debt can slow economic growth by ‘crowding out’ credit for investment by the capitalist sector.  There was the (in)famous debate started by mainstream economists Reinhart and Rogoff etc.  They argued that if a country ran up a public debt ratio above 100% of GDP, that was a recipe for a slump or at least economic slowdown. The two Rs figure and methods were exposed to ridicule. But the debate remains.  Rogoff continues to argue the case.  And others present more evidence that high public debt can damage the capitalist sector.

A recent paper looking at data for over half a million firms in 69 countries found that high government debt affects corporate investment by tightening the credit constraint faced by companies, especially those companies that find it difficult to get credit: “when public debt is at 25% of GDP, the correlation between investment and cash-flow is just above 9%, but this correlation goes well above 10% when public debt surpasses 100% of GDP. This finding is consistent with the idea that higher level of public debt tightens the credit constraint faced by private firms.”  What this means is that, as banks use more and more of their cash on buying government bonds, they have less available to lend to firms – “crowding out”.

Christoph Boehm found the fiscal multiplier associated with government investment during the Great Recession was near zero. “After a government investment shock, private investment falls significantly below zero – without a lag. The estimates become insignificant in the sixth quarter, but remain more than one standard error below zero until the eighth quarter. Hence, the data support the theories’ prediction that private investment is crowded out, and the government investment multiplier small.”

In a way, Weeks’ book is outdated.  ‘Austerity’ is no longer the cry of the international agencies like the IMF, ECB or capitalist governments.  On the contrary, with the failure of monetary policy (zero interest rates, quantitative easing) to get economies back on a pre-2007 growth path, everybody (except the German government) has become Keynesian.  Fiscal policy (more government spending, running budget deficits by issuing bonds or just ‘printing’ money) has become the order of the day.  Japan has just launched a massive new fiscal stimulus programme to expand public works.  New ECB President Christine Lagarde has called for more fiscal spending by governments, as have the IMF and the OECD.

But as I have argued before, if introduced, fiscal stimulus will also fail in getting capitalist economies out of the slowest economic ‘recovery’ from a slump since the 1870s.  As European economist, Daniel Gros, shows in a recent paper, “the overall conclusion is clear. One would need a very large fiscal deficit to have even a modest impact on inflation or interest rates. Fiscal policy cannot save the ECB.”

Professor Weeks’ book shows that opposing budget deficits and rising public debt because it will cause slumps or low growth is a delusion.  But on the other hand, running government deficits won’t avoid slumps and will have little impact on boosting economic growth in capitalist economies.

Understanding socialism

December 6, 2019

The New York Times magazine has described Richard Wolff as “probably America’s most prominent Marxist economist”.  And that is probably not an exaggeration as a description of this emeritus Professor of Economics at the University of Massachusetts, Amherst and visiting professor at the New School University in New York.

Richard Wolff has been one of a handful of Marxist economists with full tenure at an American university.  And he has worked tirelessly to bring home to students and all who would listen in the US, the Marxist alternative explanation of the nature of US capitalism and its current crisis.  Wolff has written several important economics books, sometimes with his close collaborator, Stephen A. Resnick.  In particular, their recent book,  Contending Economic Theories, neoclassical, Keynesian and Marxian is a very useful and clear explanation of the main strands of economics for those who don’t know. Professor Wolff’s weekly show, Economic Update with Richard D. Wolff, is syndicated on over 70 radio stations nationwide and available for broadcast on Free Speech TV.

Now Wolff has published two short books designed to explain the ideas of Marxism and socialism in a straightforward way: Understanding Marxism and Understanding Socialism.  The first analyses capitalism. He goes through the concepts of how competition develops between the capitalists (p.51); how labour power is commodified (p.41); and how capitalism is prone to crises and instability (p.60). Any individual, he says “exhibiting a personal instability comparable to the economic and social instability of capitalism would long ago have been required to seek professional help and to make basic changes” (p.61). But capitalism limps on and threatens to take us all down with it. Until workers get to decide democratically what to do about replacing it, so it will continue.

As Wolff has said: “If you want to understand an economy, not only from the point of view of people who love it, but also from the point of view of people who are critical and think we can do better, then you need to study Marxian economics as part of any serious attempt to understand what’s going on. Not to do it is to exclude yourself from the critical tradition.”

Wolff concentrates on Marx’s key discovery about capitalism, namely the surplus value, which is what employers appropriate above what they pay for wages.  Wolff shows that productive workers are not compensated for the full amount and worth of their labour.  And that constitutes exploitation. The expropriators constitute a tiny percentage of the population, and they control what happens with that surplus value. It is this relationship of production, Wolff insists, that has thwarted the democratic promises of the American, French, and other bourgeois revolutions. And this system of minority rule over ownership of assets and people’s labour power is also the cause of the staggering inequality that afflicts the world now.

The weakness in Wolff’s narrative, at least as expressed in his previous books is his explanation of why capitalism has crises in investment, production and employment that damages the lives of billions.  Wolff adopts the classic underconsumption argument that capitalists pay “insufficient wages to enable workers to purchase growing capitalist output”.  Regular readers of this blog will know that I consider this theory of capitalist crises as wrong.  Marx rejected it; it does not stand up theoretically as part of Marx’s law of value or profitability; and empirical evidence is against it.

In the second book, Understanding Socialism, Wolff looks at various socialist experiments throughout history and suggests a new path to socialism based on workplace democracy.  Socialism allows the many to control the fruits of their labour.  And this would be done in a democratic way, with the workers voting on these concerns, as democracy is extended way beyond voting for politicians and even ballot initiatives, to the factory floor, the office, etc.

Wolff focuses on this democratization of the workplace as the basis of a socialist future.  Wolff correctly emphasises that the economic base of socialism is the collective ownership of the means of production.  But he is concerned not to adopt the central planning model of the failed Soviet Union, as he sees it.  So he wants decentralised democracy through workers cooperatives.  For him, the solution to recurrent crises and rising inequality lies in “changing the class structure of capitalist enterprises” and replacing them with “workers-directed enterprises.” 

Wolff is concerned, rightly, to correct the view that the socialist alternative to capitalism is simply the public ownership of the major corporations and a national plan.  Without democracy and workers control at company level there can be no real socialist development.  Otherwise state officials merely replace a capitalist board of directors.  This is “insufficient conceptually and strategically”.

But Wolff wants to include and emphasise the role of what he calls Workers Self-Directed Enterprises (WSDEs).  To me, this seems to be bending the stick too far the other way, being close the utopian socialist ideas of Fourier and Robert Owen. Workers cooperatives without planning implies that markets will continue to rule between coops, opening the door to the forces of the law of value, rather than directing productive forces in the interest of society as a whole.  It is one thing to achieve democracy at the workplace, but is it not jumping out of the frying pan into the fire, by leaving the wider economy to power of the market?

Economics as a social science

December 5, 2019

Recently, Benoît Cœuré, a leading French member of the Executive Board of the European Central Bank, delivered an address to economics students at the job forum of Paris School of Economics. He wanted to explain to the gathered students that becoming an economist was a great thing to do and paid well. “For many, a master’s degree is a natural step towards a PhD. And a PhD is essentially a promise of employment. In the United States, for example, the unemployment rate for PhD economists is about 0.8%, the lowest among all sciences.  Not a bad place to start from.”

But the money was less important because “your PhD should be fuelled by your passion and your love for research rather than by hopes of earning more money.” That was the reason he studied economics and worked his way up as an economics bureaucrat in the public sector, in ministries of economy and finance, statistical institutes, international organisations such as the IMF, World Bank and other development banks, OECD, and central banks such as the US Federal Reserve or the European Central Bank.  Working in these agencies, Cœuré, reckoned “is probably as close as it gets to applied economics.”

Cœuré’s experience in the public sector may be different from those of us who worked in the private sector.  Having worked in the private sector, in banks and other financial institutions in my ‘career’, economic policy advice is not the target but instead, ‘how to make money’. Economics is geared to either corporate strategy for profits in production and trade or to investment strategy for profits in financial speculation.

For Cœuré, economics “is literally about taking the models, tools and methods that you learn at class to help design public policies. And as a considerable fraction of that work then ends up being published as new research “there is a virtuous feedback loop between academia and public sector institutions… Macroeconomic models underpin almost all of our work at the ECB.”, says Cœuré. That raises the question of the utility of models in economics.

Marxist economist Ben Fine has attacked mathematical models in economics because they have replaced theory. “The goal “of modelling the economy is fundamentally misconceived… a model of the economy is not the economy itself”. “ For Fine, mainstream mathematical theory is “unfit for purpose”.  Models have a place but “their extreme limitations need to be recognised.”  As such, macroeconomics remains divorced from what is going on in the real economy.  For example, the famous accelerator-multiplier Keynesian model may show the instability in capitalism, but it does not show why.

On the other hand, Dani Rodrick reckons models are the strength of economics.  They are what makes economics a science.  Rodrik rejects the view that economics can provide “universal explanations or prescriptions”.  All mainstream economics can do is “map bits of economic reality”.  In other words, economics is not ‘political economy’ in the sense of the classical economists and Marx.

Cœuré recognises that models have their limitations. That’s when art, or rather artisanat – craftsmanship – comes in. We need to interconnect these models, and fit them into a general equilibrium view of how the euro area economy evolves dynamically – preferably in a tractable way.”  Unfortunately, the track record of general equilibrium models leaves much to be desired.

With collapse of Keynesian economics in the 1970s, the mainstream concentrated on explaining ‘business cycles’ or ‘fluctuations’ in an economy using ‘modern’ techniques of  modelling from what it called  ‘microfoundations’. Econometric analyses like the Phillips curve were ditched because such ‘correlations’ between employment and inflation had been proved wrong.  The job now was not to look at macro or aggregate data but to work out some ‘model’ that started with some premises of agent (consumer) behaviour or preferences and then incorporated some possible ‘shocks’ to the general equilibrium of the market and then considered the number and probability of possible outcomes.

Thus were born the Dynamic Stochastic General Equilibrium (DSGE) models.  They were based on equilibrium assumptions because they started from the premise that supply would tend to equal demand; they were dynamic because the models incorporated changing behaviour by individuals or firms (agents); and they were stochastic as ‘shocks’ to the system (trade union wage push, government spending action) were considered as random with a range of outcomes, unless confirmed otherwise. This is now what most macro economists spend their time doing.  Forget empirical evidence, forget macro data, find a ‘micro’ foundation (model) that might help to at least offer a guide to what possibly might happen.

But DSGE models have  proved to be worthless in explaining anything.  These models failed to predict before or explain after the Great Recession and are unable to explain the subsequent weak recovery, or Long Depression.  And it is not hard to see why.  There is a total absence of investment or profit as ‘shocks’ in these models.  Everything starts with consumer preferences; the arch consumer is king as in the neoclassical world and Keynesian aggregate demand is reduced to just consumption.

Since the Great Recession, general equilibrium models have lost their glamour to some extent. Cœuré quotes our recent Nobel prize winners, Abhijit Banerjee and Esther Duflo: “We, the economists, are often wrapped up in our models and our methods and sometimes forget where science ends and ideology begins. We answer policy questions based on assumptions that have become second nature to us because they are the building blocks of our models, but it doesn’t mean that they are always correct”.  

This is somewhat ironic. These Nobel prize winners do not use DSGE models. Instead they use Randomized Control Trials (RCT). You see: “good economics is much less strident, and quite different. It is less like the hard sciences and more like engineering or plumbing: it breaks big problems into manageable chunks and tries to solve them with a pragmatic approach – a combination of intuition and theory, trial and acknowledged errors.” The plumbing analogy follows closely Keynes’s view that economists are really like dentists, sorting out the aches and pains of capitalism.  Unfortunately, as Sanjay Reddy and others have pointed out, there are just as many faultlines in RCT as in DSGE models.  The Nobel prize winners’ ‘economics of poverty’ actually shows the poverty of economics.

That does not mean it is impossible to use mathematical models as long as they are based on realistic assumptions and tested empirically.  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.

The mainstream economics that Cœuré promoted to the Paris students as the basis for public policy has hardly proved successful in practice.  Just consider the ECB’s own attempt to deal with the banking crash of 2008-10, the euro debt crisis of 2011-3 and the subsequent attempt to revive the Eurozone economy. Cœuré claims that “the forward-looking nature of monetary policy makes the use of models indispensable”, but it seems that these models have proved to be ‘too simple’, and so monetary policy operations have become much more complex; with “forward guidance in central bank speak” and unconventional monetary policy’ like ‘quantitative easing’.

Cœuré says that “When we started purchasing securities, we had no guidance. but “over time, ECB staff have successfully filled this void. We now have state-of-the-art term structure models that help translate changes in the amount of bonds into changes in long-term interest rates.” Well, maybe.  But the ECB’s economic forward guidance on inflation and growth has been proved pretty much wrong.  The ECB has failed to achieve its 2% inflation target and real GDP growth has persistently fallen below ECB forecasts.  The Long Depression has defeated mainstream economics.

Forget forecasting.  Cœuré recognises that “uncertainty is a pervasive feature of our profession”, so he dismisses the criticism that economists failed to predict the outbreak of the financial crisis. “This criticism is nonsense. Do we expect physicians to predict illnesses? We don’t, of course. But we expect them to help us cure illnesses.  Economists should do the same. They should be judged by the quality of the advice they give.”

Again, we get the view that economists are like dentists, doctors or plumbers who clear up messes once they have happened.  But are doctors all that matter in human health?  Actually, improved doctoral skills in treating patients once they have become ill comes from scientific discovery about diseases, biology and the environment.  Successful drugs and medical practices are the result of learning what the cause of the illness is.  In medieval times, doctors applied all sorts of useless and dangerous treatments (leeches etc) because they did not know that about ‘germs’ (bacteria or viruses).  Cholera was eventually abated by a geographical study in London showing it was prevalent near bad drinking wells.  Malaria and smallpox were resolved by discovering the carriers of the bacteria in various animals.  Treatments by doctors then followed.

There is no substitute for the ‘big picture’. Economists should not be doctors but social scientists, or more accurately they should develop an economics that recognises the wider social forces that drive economic models, in particular, the social mode of production that is capitalism.  That is political economy, mostly not taught in universities and certainly not practised in international agencies.

In his address, Cœuré recognisedthat central banks had failed before the Great Recession. This was because its models expressed “an absence of a meaningful financial sector, which left models at a loss to explain the origins of the crisis and its consequences for the economy.”  And “prevailing models were built on a standard linear Gaussian set-up and hence proved inadequate to examine shocks on the scale of the global financial crisis.”  In other words, they assumed a normal steadily growing capitalist economy where there were no underlying contradictions that could erupt violently.

Remember the words of the then Fed chair Ben Bernanke back in 2004, just before the Great Recession.  He was proclaiming “The Great Moderation” that capitalism had become. “the substantial decline in macroeconomic volatility over the past twenty years, is a striking economic development. Whether the dominant cause of the Great Moderation is structural change, improved monetary policy, or simply good luck is an important question about which no consensus has yet formed.  This conclusion on my part makes me optimistic for the future, because I am confident that monetary policymakers will not forget the lessons of the 1970s.”.  

Mainstream economics underestimated the depth and length of the Long Depression that followed, where even negative interest rates have no effect on the ‘real economy’ and where attempting to reduce public debt (as in the Greek crisis) made things so much worse “in the aftermath of the crisis, with tragic social consequences”. But don’t worry, Cœuré told the students, “our general equilibrium models now feature a fully-fledged banking sector that accounts for the presence of financial frictions and that also allows us to analyse the effects of macroprudential policies.”  And we are getting much more data that can help economists solve problems: big data and richer and timelier datasets will help improve the input to our models.”

Cœuré cited climate change is perhaps the most far-reaching of the challenges ahead for economists. But he was delighted to tell the students that economics was making great strides in helping in that area: “William Nordhaus was awarded the Nobel Prize in Economic Sciences last year for integrating climate change into macroeconomic analysis.Again, there is a certain irony here.  For heterodox economist, Steve Keen, among others, has done an effective debunking job on the Nobel Laureate’s assumptions and forecasts. Actually, mainstream economics is doing little or nothing to come up with social scientific analysis and solutions on this literally burning issue.

Having expressed confidence in monetary policy as the tool to revive demand – despite evidence to the contrary, Cœuré finished by reminding his audience that “economics is a social science. Models will not take away the burden and responsibility of making judgements. Economics involves much trial and error – you have to take decisions in the fog when you can barely see your hand in front of your face. This makes our profession exciting!

Maybe exciting – but also fraught with failure in that fog and with serious consequences.