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The underlying reasons for the Long Depression

February 14, 2018

There are two new mainstream papers out that offer some interesting analysis on the reasons behind the Long Depression that the major economies (or at least, the US) have suffered since the end of the Great Recession in 2009 – in the growth of real GDP, productivity, investment and employment.

First, there is a paper by economists at the San Francisco Federal Reserve.  The Disappointing Recovery in U.S. Output after 2009 by John Fernald, Robert E. Hall, James H. Stock, and Mark W. Watson.  They consider the well-known evidence that US real GDP growth has expanded only slowly since the recession trough in 2009, counter to normal expectations of a rapid cyclical recovery.  In the paper, they remove the “cyclical effects” of the Great Recession and find that there was already a sharply slowing trend in underlying growth before the global financial crash in 2008.  The Fed economists conclude that the slowing trend reflected two factors: slow growth of innovation and declining labour force participation.

Figure 1 shows business-sector output per person in recent decades. The green line shows that output per person fell sharply during the recession and remains below any reasonable linear trend line extending its pre-recession trajectory. The figure shows one such trend line (yellow line), based on a simple linear extrapolation from 2003 to 2007.

Figure 1
Output per capita: Deep recession plus a sharp slowing trend

The blue line in Figure 1 shows the resulting estimate of trend output per capita after removing the cyclical effects associated with the deep recession. As expected, the cyclical adjustment removes the sharp drop in actual output associated with the recession. But since then, the trajectory of the blue line is nowhere close to a straight line projection from the 2007 peak. Rather, cyclically adjusted output per person rose slowly after 2007 and then plateaued in recent years.

The Fed economists reckon that the slow growth has been due to a slowdown in the productivity of labour, which in turn has been caused by a reduction in investment in innovation and new technology.  In mainstream economics, this is measured by the residual of output per person left over after increases in employment (labor input) and means of production (capital input) are accounted for.  The residual is called total factor productivity (TFP), to designate the increased productivity per unit of total input.  TFP supposedly captures the productivity benefits from formal and informal research and development, improvements in management practices, reallocation of production toward high productivity firms, and other efficiency gains.

The Fed economists, using this factor accounting, find that TFP growth slowed significantly even before the Great Recession.  It picked up in the mid-1990s and slowed in the mid-2000s—before the recession—and then was flat or even falling going into the recession.

Figure 2
Pre-recession slowdown in quarterly TFP growth

The economists dismiss the arguments that it was the Great Recession that caused the productivity slowdown or that productivity growth from info tech is being mismeasured: “such mismeasurement has long been present and there’s no evidence it has worsened over time.” They also dismiss the idea common from right-wing neoclassical economists that “increased regulatory burdens have reduced the economy’s dynamism.”  They find no link between regulation changes and TFP growth.

The explanation they fall back on is the one presented by Robert J Gordon in many papers and books: that TFP growth is really just back to normal and what was abnormal was the burst in innovation in the 1990s with the hi-tech and dot.com boom.  That ended in 2000 and won’t be repeated.  “Every story in the late 1990s and early 2000s emphasized the transformative role of IT, often suggesting a sequence of one-off gains—reorganizing retailing, say. Plausibly, businesses plucked the low-hanging fruit; afterward, the exceptional growth rate came to an end.”

The other factor in the slowdown was the decline in employment growth of those of working age.  Yes, there is supposed to be near ‘full employment’ now in the US and the UK etc.  But participation in employment by working age adults has fallen sharply.  That’s because populations are getting older and the ‘baby boomers’ who started worked in the 1960s and 1970s are now retiring and not being replaced.

Figure 3
Sharp declines in labor force participation rate

What the Fed economists want to tell us is that the Long Depression is not just the leftover of the Great Recession but reflects some deep-seated underlying slowdown in the dynamism of the US economy that is not going to correct through the current small economic upturn.   The US economy is just growing more slowly over the long term.

What the Fed economists don’t explain is why the US economy has been slowing in productivity growth and innovation since 2000.  What is missing from the analysis is what drives the adoption of new techniques and labour-saving equipment.  Gordon and others just accept the current slowdown as a ‘return to normal’  from the exceptional 1990s.

What is missing is the driver of investment under capitalism: profitability. Marxian studies that concentrate on this aspect reveal that the profitability of US capital stock and new investment peaked around 1997 and then turned down.  It was this fall in profitability that eventually provoked the collapse in the dot.com bubble in 2000.  The subsequent recovery in profitability did not achieve anything better that 1997 and indeed profits growth was mainly confined to the financial sector and increasingly to a small sector of top companies.  Average profitability remained flat or even down and the growth in profit was mainly fictitious (‘capital gains’ from real estate, bond and stock markets) and fuelled by easy credit and low interest rates.  That house of cards collapsed in the Great Recession.

Profitability peaked in the late 1990s in the US (and elsewhere for that matter) because the counteracting factors to Marx’s law of the tendency of the rate of profit to fall (a rising rate of exploitation in the neoliberal period) and increased employment to boost total new value were no longer sufficient to overcome a rising organic composition of capital from the tech boom of the 1990s.

In contrast to this scenario, the Keynesians/post Keynesians have been pushing a different explanation for the fallback in productive investment since 2000 – it’s the growth of ‘monopoly power’.  There have been several studies arguing this in recent years.  Now a brand new paper by Keynesian economists at Brown University seeks to do the same. Gauti Eggertsson, Ella Getz Wold etc claim that the puzzle of the huge rise in profits for the top US companies alongside slowing investment in productive sectors can be explained by an increase in monopoly power and falling interest rates.

The Brown University economists argue that an increase in firms’ market power leads to an increase in monopoly rents; economic parlance for profits in excess of competitive market conditions-and thus an increase in the market value of stocks (which hold the rights to these rents). This leads to an increase in financial wealth and to what’s known as Tobin’s Q, the ratio of a firm’s financial value (market capitalization) to the value of its assets (book value).

With an increase in market power, the share of income consisting of pure rents increases, while the labour and capital shares both decrease. Finally, the greater monopoly power of firms leads them to restrict output. In restricting their output, firms decrease their investment in productive capital, even in spite of low interest rates.

Now I have dealt previously in detail with this argument that it is increased monopoly power that explains the gap between profits and investment in the US since 2000 or so.  It is really a modification of neoclassical theory.  Neoclassical theory argues that if there is perfect competition and free movement of capital, then there will be no profit at all; just interest on capital advanced and wages on labour’s productivity.  Profit can only be ‘rent’ caused by imperfections in markets.  The Brown professors, in effect, accept this theory.  They just consider that, currently, ‘monopoly power’ is distorting it.  This implies that if there was competition or monopolies were regulated’ all would be well.  That solution ignores the Marxist view that profits are not just ‘rents’ or ‘interest’ but surplus value from the exploitation of labour.

The Brown University professors reckon that average profitability was constant from 1980 onwards, so increased profits must have come from the gap between profitability and the fall in the cost of borrowing (interest rates). But actually, you can see from their graph that average profitability rose from about 10% in 1980 to a peak in the late 1990s of 14% – that’s a 40% rise and is entirely compatible with estimates by me and other Marxist economists.  Average profitability was then flat from 200 or so.

Indeed, average profitability fell in the non-financial productive sectors of the economy, which is probably the reason for the gap that developed between overall profitability including financial profits (which rocketed between 2002 and 2007) and net investment in productive sectors.  The jump in corporate profits (yes, mainly concentrated in the banks and big tech companies) was increasingly fictitious, based on rising stock and bond market prices and low interest rates.  The rise of fictitious capital and profits seems to be the key factor after the end of dot.com boom and bust in 2000.

As I showed in a previous post, these mainstream analyses use Tobin’s Q as the measure of accumulated profit to compare against investment.  But Tobin’s Q is the market value of a firm’s assets (typically measured by its equity price) divided by its accounting value or replacement costs.  This is really a measure of fictitious profits.  Given the credit-fuelled financial explosion of the 2000s, it is no wonder that net investment in productive assets looks lower when compared with Tobin Q profits.  This is not the right comparison.  Where the financial credit and stock market boom was much less, as in the Eurozone, profits and investment movements match.

It may well be right that, in the neo-liberal era, monopoly power of the new technology megalith companies drove up profit margins or markups.  The neo-liberal era saw a driving down of labour’s share through the ending of trade union power, deregulation and privatisation.  Also, labour’s share was held down by increased automation (and manufacturing employment plummeted) and by globalisation as industry and jobs shifted to so-called emerging economies with cheap labour.  And the rise of new technology companies that could dominate their markets and drive out competitors, increasing concentration of capital, is undoubtedly another factor.

But the recent fall back in profit share and the modest rise in labour share since 2014 also suggests that it is a fall in the overall profitability of US capital that is driving things rather than any change in monopoly ‘market power’.  Undoubtedly, much of the mega profits of the likes of Apple, Microsoft, Netflix, Amazon, Facebook are due to their control over patents, financial strength (cheap credit) and buying up potential competitors.  But the mainstream explanations go too far.  Technological innovations also explain the success of these big companies.

Moreover, by its very nature, capitalism, based on ‘many capitals’ in competition, cannot tolerate indefinitely any ‘eternal’ monopoly; a ‘permanent’ surplus profit deducted from the sum total of profits which is divided among the capitalist class as a whole.  The battle to increase profit and the share of the market means monopolies are continually under threat from new rivals, new technologies and international competitors.

The history of capitalism is one where the concentration and centralisation of capital increases, but competition continues to bring about the movement of surplus value between capitals (within a national economy and globally). The substitution of new products for old ones will in the long run reduce or eliminate monopoly advantage.  The monopolistic world of GE and the motor manufacturers in post-war US did not last once new technology bred new sectors for capital accumulation.  The world of Apple will not last forever.

‘Market power’ may have delivered ‘rental’ profits to some very large companies in the US over the last decade (and just that short period it seems), but Marx’s law of profitability still holds as the best explanation of the accumulation process.  Rents to the few are a deduction from the profits of the many. Monopolies redistribute profit to themselves in the form of ‘rent’, but do not create profit.

Profits are not the result of the degree of monopoly or rent seeking, as neo-classical and Keynesian/Kalecki theories argue, but the result of the exploitation of labour. The key to understanding the movement in productive investment remains in its underlying profitability, not the extraction of rents by a few market leaders.

The Long Depression is a product of low investment and low productivity growth, which in turn is a product of lower profitability of investment in productive sectors and a switch to unproductive financial speculation (and yes, partly a product of oligopolistic power boosting the big at the expense of the small).

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Models of public ownership

February 10, 2018

I have just attended a special conference called by the British Labour Party to discuss models of public ownership.  The aim of the conference was to develop ideas on how a Labour government can build the public sector if it came into office at the next general election.

The centrepiece of the conference was a report commissioned by the Labour leadership and published last autumn called Alternative Models of Ownership (with the word ‘public’ strangely omitted).

Labour’s finance spokesman, John McDonnell (and ‘self-confessed’ Marxist) presented the key ideas in the report which had been compiled by a range of academic experts, including Andrew Cumbers of Glasgow University, who has written extensively on the issue of public ownership.  And Cat Hobbs of Weownit gave a compelling account of  the failures and waste of past privatisations.

In many ways, McDonnell’s speech was inspiring in that the next Labour government under Jeremy Corbyn and McDonnell  is genuinely dedicated to restoring properly-funded and resourced public services and reversing past privatisations of key economic sectors made by previous Conservative and Labour governments in the neoliberal period of the 30 years before the Great Recession.

McDonnell and the report emphasised a range of models for future publicly owned assets and services: from cooperatives, municipal services and the nationalisation of key sectors like health, education and utilities like water, energy and transport – the so-called ‘natural monopolies’.

As the report makes abundantly clear, the privatisations of the last 30 years have clearly failed even in their own professed objectives: more efficiency and higher productivity, more competition and greater equality.  It has been the complete opposite.  UK productivity growth has slumped, and, as many studies have shown (see my recent post), privatised industries have not been more efficient at all.

They have merely been entities designed to make a quick profit for shareholders at the expense of investment, customer services and workers’ conditions (pensions, wages and workload).  Indeed, the theme of privatised water, energy, rail and post in the UK has been ‘short-termism’ ie boost share prices, pay executives big bonuses and pay out huge dividends instead of investing for the long-term in a social plan for all.

State-owned industry is actually a successful economic model even in predominantly capitalist economies.  The Labour report cites the fact that the share of state enterprises in the top 500 international companies has risen from 9% in 2005 to 23% in 2015 (although this is mainly the result of the rise of Chinese state companies).  The history of East Asian economies’ success was partly the result of state-directed and owned sectors that modernised, invested and protected against US multinationals (although it was also the availability of cheap labour, suppressed workers’rights and the adoption of foreign technology).

As many authors, such as Mariana Mazzacuto have shown, state funding and research has been vital to development of major capitalist firms.  State owned industry and economic growth often go together – and Labour’s report cites “the seldom-discussed European success story is Austria, which achieved the second highest level of economic growth (after Japan) between 1945 and 1987 with the highest state-owned share of the economy in the OECD.” (Hu Chang).

The report also makes it clear that there should be no return to old models of nationalisation that were adopted after second world war.  They were state industries designed mainly to modernise the economy and provide basic industries to subsidise the capitalist sector.  There was no democracy and no input from workers or even government in the state enterprises and certainly no integration into any wider plan for investment or social need.  This was so-called ‘Morrisonian model’ named after right-wing Labour leader Herbert Morrison, who oversaw the post-war UK nationalisations.

The report cites alternative examples of democratically accountable state enterprise systems. There is the Norwegian Statoil model where one-third of the board is elected by employees; or even more to the point, the immediate post-war French electricity and gas sector where the boards of the state companies were “made up of four appointees from the state, four from technical and expert groups (including two to represent the consumer interest and four trade union representatives.” (B Bliss).

All this was very positive news and it was clear that the audience of Labour Party activists was enthused and ready to implement an “irreversible change towards worker-run public services.”  (McDonnell).  The aim of the Labour leaders is to reverse previous privatisations, end the iniquities of so-called private-public partnership funding; reverse the out-sourcing of public services to private contractors and take the market out of the National Health Service etc.  That is excellent, as is their willingness to consider, not just the faulty idea of a Universal Basic Income (UBI) as a social alternative to job losses from future automation, but also the much more progressive idea of Universal Basic Services, where public services like health, social care, education, transport and communications are provided free at the point of use – what we economists called ‘public goods’.

However, the issues for me remain the ones that I first raised in considering ‘Corbynomics’ back when Jeremy Corbyn first won the leadership of the Labour Party in 2015.  If public ownership is confined to just the so-called natural monopolies or utilities and is not extended to the banks and financial sector and to key strategic industries (the ‘commanding heights’ of the economy), capitalism will continue to predominate in investment and employment and the law of value and markets will still rule.  Labour’s plan for a state investment bank and state-induced or run investment spending would add about 1-2% to total investment to GDP in the UK.  But the capitalist sector invests nearer 12-15% and would remain dominant through its banks, pharma, aerospace, tech and business service conglomerates.

There was no talk of taking over these sectors at the conference.  That was not even talk of taking over the big five banks – something I have raised before in this blog and helped to write a study, on behalf of the Fire Brigades Union (and which is formally British Trade Union Congress policy).  Without control of finance and the strategic sectors of the British economy, a Labour government will either be frustrated in its attempts to improve the lot of “the many not the few” (Labour’s slogan), or worse, face the impact of another global recession without any protection from the vicissitudes of the market and the law of value.

The wealth of nations

February 9, 2018

How do we measure the wealth of nations, to use the title of classical economist Adam Smith’s famous book?

Using Gross Domestic Product (GDP) to measure the annual value of production for each national economy has been under criticism since it was first invented by Simon Kuznets for a report  to US Congress in the depth of the Great Depression in 1934.  It was the benign view of Kuznets that when capitalist economies ‘take off’ and industrialise, inequality of incomes will rise, but eventually, as economies ‘mature’, income inequality declines.  So GDP as an overall measure of the ‘wealth of nations’ was adequate.

But actually annual production is not a measure of wealth (the stock of assets and accumulated efforts of human labour), but a measure of annual productive power.  And it crucially excludes the inequalities in the distribution of that power.

So just a few years ago, the UN came up with a more comprehensive measure of ‘human development’.  The human development index (HDI) purports to measure the overall well-being of each national population by including health, life expectancy, education and communications in its index.

What the index reveals is that there were substantial gains in world human development from the mid-19th century as the world economy industrialised and urbanised, but especially over the period 1913-1970.  The major advance in human development across the board took place between 1920 and 1950, which resulted from substantial gains in longevity and education.

According to the index, although the gap between the advanced capitalist economies and the ‘Third World’ widened in absolute terms; in relative terms, there was a narrowing.  The Russian revolution from the 1920s and the Chinese one after 1947 led to fast industrialisation and a sharp improvement in health and education for hundreds of millions.  The second world war killed and displaced millions, but it also laid the basis for state intervention and the welfare state that had to be accepted by capital after the war, during the so-called ‘Golden Age’.

But after 1970, the gap in human development widened once again with globalisation, rising inequalities and the capitalist neo-liberal counter-revolution.  Only China closed the gap.  Since 1970, longevity gains have slowed down in most emerging economies, except China, and all the world regions have fallen behind in terms of the longevity index.

Now the World Bank has entered the fray with its own measure of ‘wealth’ per person.  The World Bank economists have measured not GDP levels but wealth i.e. assets such as infrastructure, forests, minerals, and human capital that produce GDP. The World Bank’s Changing Wealth of Nations 2018: Building a Sustainable Future covers national wealth for 141 countries over 20 years (1995–2014) as the sum of produced capital, 19 types of natural capital, net foreign assets, and human capital overall as well as by gender and type of employment.

The results show that that some countries with GDP growth actually saw per capita wealth fall.  Asia had a big increase in per capita wealth in the 20 years, driven mainly by China’s phenomenal rise, but sub-Saharan Africa slipped back, largely as a result of continued high birth rates in many countries that offset a rise in nominal wealth. Indeed, the poorest African countries are “shearing away” from the rest of the world.

When countries use their natural resources well, investing primarily in their people to increase labour productivity, then countries leap forward in terms of wealth per capita.  As nations develop, they convert natural capital into other forms — roads, factories, hospitals, schools and universities — so the share of natural capital in their total wealth falls, as other forms rise in importance. In high-income OECD countries, natural capital makes up just 3 per cent of total wealth as human and produced capital become the main drivers of growth. In poor countries, natural capital contributes 47 per cent of total wealth, according to the report.

But the UN’s HDI and the World Bank’s wealth per capita measures still do not account for inequalities of distribution, both between national economies globally and within each national economy, between rich and poor. The annual Credit Suisse wealth report does a great job in showing the huge inequalities globally between the richest 1% of wealth holders who currently own more than 50% of the world’s wealth and the bottom 90% who own no more than 14%.

Remember this is wealth across the whole world and so reflects not just inequality of wealth within a country but also inequality between countries.  Indeed, most of the top 10% live in the top seven (G7) advanced capitalist economies.

Global inequality has been definitively studied by Branco Milanovic, formerly of the World Bank.  I have referred to his work before in numerous posts.  Milanovic regularly refines and updates his research on global inequality.  Recently he presented a comprehensive summary of his results in a lecture to the Annual Research Conference Brussels, in honour of the Anthony Atkinson, recently deceased and a pioneer in inequality studies.

Using the traditional measure of inequality, the gini index, Milanovic found that global income inequality has risen inexorably from the early days of modern industrial capitalism, interrupted only by the impact of the two terrible world wars of the 20th century.  But since 2000, the gini index had fallen back a little, entirely due to the rise in living standards of the mass of the Chinese population.

Milanovic notes that global inequality is much greater than inequality within any individual country.  The global gini is around 70, substantially greater than inequality in Brazil, the highest for a country. And it is almost twice as great as inequality in the US.

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

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

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

Milanovic reckons that global inequality can be decomposed into two parts. The first part is due to differences in incomes within nations, which means that that part of total inequality is due to income differences between rich and poor Americans, rich and poor Chinese, rich and poor Egyptians and so on for all countries in the world. If one adds up all of these within-national inequalities, you get the aggregate contribution to global inequality. Milanovic calls this the traditional Marxist “class” component of global inequality because it accounts for (the sum) of income inequalities between different “income classes” within countries.

The second component, which he calls the “location” component, refers to the differences between mean incomes of all the countries in the world.  Around 1850, ‘class’ explained nearly half of global inequality.  But around 2011, around 80% was due to where you lived, ‘location’.

When Milanovic first developed this distinction, he concluded that the Marxist class analysis has been proved wrong.  “Karl Marx could indeed eloquently write in 1867 in “Das Kapital”, or earlier in “The Communist Manifesto” about proletarians in different parts of the world—peasants in India, workers in England, France or Germany— sharing the same political interests. They were invariably poor and, what is important, they were all about equally poor, eking out a barely above-subsistence existence, regardless of the country in which they lived. There was not much of a difference in their material positions.”  But not now.

However, his latest data suggest that inequalities within nations have increased so much that, given current trends, by 2050 such inequalities will play just as important role as they did 200 years ago when modern capitalism first rose to dominance as a mode of production.

Indeed, the only reason that ‘location’ has been so important for global inequality is the huge difference in living standards for the working populations of the leading imperialist powers and those living in the ‘global south’.  That gap has been closed partially by the rise of China (and east Asia and India to a lesser extent), although, as the World Bank data show, not anywhere else.  But inequality within China and India has also risen sharply.  That adds back to the global inequality index.

In his lecture Milanovic dealt with a technical issue in measuring inequality in the US that has arisen.  The work of Piketty, Saez and Zucman in recent years has shown that the share of national income going to the top 1% of income earners had increased substantially since 1960.  However, this has recently been disputed by two economists at the US Treasury who argue that the Piketty et al tax return based measures are biased by tax base changes and missing income sources. Accounting for these limitations reduces the increase in top 1% share by two-thirds. Further, accounting for government transfers reduces the increase by over 80%.

So instead of the top 1% taking 20% of national income currently up from around 10% in 1960, the rise is only from 8% to 10% – not much at all.  Well maybe, says Milanovic, but the distortion or gap in the data (strongly denied by Piketty et al by the way) does not seem to apply to any other country, for example, Norway.

As the recently deceased Atkinson had shown, rising inequality of income (and wealth) has been a feature of all major capitalist economies in the neo-liberal period since the 1970s.

What all this empirical work offers up some important political implications.   The UK’s Resolution Foundation found that, while real incomes have risen for lower middle and working classes in the advanced capitalist countries since the 1980s, the bottom 80% labour share of GDP in the UK and US has declined as a proportion of GDP (defined as the labour share of GDP multiplied by the proportion of labour income received by the bottom 80% of the income distribution.

And, as I have pointed out before in previous posts, the management consultants, McKinsey found that in 2014, between 65 and 70 percent of households in 25 advanced economies were in income segments whose real market incomes were flat or below where they had been in 2005 (Poorer Than Their parents? Flat or Falling Incomes in Advanced Economies.  This does not mean that individual households’ wages necessarily went down but that households earned the same as or less than similar households had earned in 2005 on average.

US households in the 10th percentile(those poorer than 90 percent of the population) are still poorer than they were in 1989. Across the entire bottom 60 percent of the distribution, households are taking home a smaller slice of the pie than they did in the 1960s and 1970s.

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

First, that global inequality has increased since capitalism really got going from the 1850s.  Second, that the partial fall in global inequality is down to the growth of average income in China, and to a lesser extent and more recently, India.  Otherwise, global inequality would have continued to rise.  Third, there has been a rise in average household incomes in the major advanced capitalist economies since the 1980s, but the growth has been much less than in China or India (starting from way further down the income levels) and much less than the top 1-5% have gained.  So inequality within most national economies has risen, particularly from the 1980s.  Fourth, since the beginning of the millennium, most households in the top capitalist economies have seen their incomes from work or interest on savings stagnate.

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

Milanovic reckons that the majority of the world’s population are ‘trapped’ in low-income countries while real income growth for those in the OECD has slowed.  At the same time, the top 1% or even 0.1% are (and will) usurp an even greater proportion of global income and wealth.  Thus, Marx’s prediction of a widening chasm between those who own and those who must work for a living has gained even more credence in the 21st century.

Milanovic’s answer is more migration from poor countries to rich ones, faster growth in the emerging economies and reduced inequalities within the advanced capitalist economies.  Such solutions are, of course, impossible while the capitalist mode of production survives.

Stock market crash: 1987, 2007 or 1937?

February 6, 2018

Yesterday, the US stock market fell by the most in one day since mid-2007, just before the credit crunch, the banking crash and the start of the Great Recession.

Is history set to repeat itself?  Well, the old saying goes that history never repeats itself but it rhymes.   In other words, there are echoes of the past in the present.  But what are the echoes this time.  There are three possibilities.

This crash will be similar to that 1987 and be followed by a quick and decisive recovery and the stock market and the US economy will resume its recent march upward.  The crash will be seen as blip in the recovery from the Long Depression of the last ten years.

Or this could be like 2007.  Then the stock market crash heralded the beginning of the mightiest collapse in global capitalist production since the 1930s and biggest collapse in the financial sector ever – to be followed by the weakest economic recovery since 1945.

Or finally it could be like 1937, when the stock market fell back as the US Fed hiked interest rates and the ‘New Deal’ Roosevelt administration stopped spending to boost the economy.  The Great Depression resumed and was only ended with the arms race and the entry of the US into the world war in 1941.

Now I have discussed the relationship between the stock market (fictitious capital as Marx called it) and the ‘real’ economy of productive capital in posts before.

On the day of the crash, a new Fed Chair Jerome Powell was sworn in to replace Janet Yellen.  Powell now faces some new dilemmas.

Marx made the key observation that what drives stock market prices is the difference between interest rates and the overall rate of profit. What has kept stock market prices rising has been the very low level of long-term interest rates, deliberately engendered by central banks like the Federal Reserve around the world, with zero short-term rates and quantitative easing (buying financial assets with credit injections).  The gap between returns on investing in the stock market and the cost of borrowing to do it has been huge.

Of course, every day, investors make ‘irrational’ decisions but, over time and, in the aggregate, investor decisions to buy or to sell stocks or bonds will be based on the return they have received (in interest or dividends) and the prices of bonds and stocks will move accordingly.  And those returns ultimately depend on the difference between the profitability of capital invested in the economy and the costs of providing finance.  If stock prices get way out of line with the profitability of capital in an economy, then eventually they will fall back.  The further out of line they are, the bigger the eventual fall.

So there are two factors that are key to judging whether this stock crash is a 1987, 2007 or 1937 situation: the profitability of productive capital (is it going up or down?); and the level of debt held by industry (will it become too expensive to service?).

In 1987, the profitability of capital was on the rise.  It was right in the middle of the neo-liberal period of rising exploitation of labour, globalisation and new tech developments, all of which were counteracting factors at play against the tendency of the rate of profit to fall.  Profitability continued to rise right up to 1997.  And interest rates, far being hiked by the Fed, were being reduced as inflation fell.

In 2007, profitability was falling (it had been declining since the end of 2005), the housing market was beginning to dive and inflation was expected to rise and along with it, the Fed planned to raise its policy rate, as it is planning now in 2018.  But there are differences from 2007 now.  The banking system is not so stretched and engaged in risky financial derivatives.  And while profitability in most major economies is still below the peak of 2007, total profits are currently rising.  It may be that wages are beginning to pick up and this could squeeze profits down the road.  Also, the Fed plans to raise interest rates and thus also squeeze profits as debt servicing costs rise.

Perhaps 1937 is much closer to where US capitalism is now.  I have written on the parallels with 1937 before.  Profitability in 1937 had recovered from the depths of 1932 but was still well below the peak of 1926.

And more worrying now is that corporate debt since the end of the Great Recession in 2009 has not been reduced.  On the contrary, it has never been higher.  Based on a global sample of 13,000 entities, the S&P agency estimates that the proportion of highly leveraged corporates — those whose debt-to-earnings exceed 5x — stood at 37 percent in 2017, compared to 32 percent in 2007 before the global financial crisis. Over 2011-2017, global non-financial corporate debt grew by 15 percentage points to 96 percent of GDP.

The stock market crash tells me two things.  First, that it is the US economy, still the largest and most important capitalist economy, leads.  It’s not Europe, not Japan, not China that will trigger a new global slump, but the US.  Second, this time any slump will not be triggered by a housing bust or a banking crash, but by a crunch in the non-financial corporate sector.  Bankruptcies and defaults will appear as weaker capitalist companies find it difficult to meet their debt burdens and produce a chain reaction.

But history does not repeat but rhymes.  The mass of profits in the major economies is still rising and interest rates, inflation and wage rises are still low relative to history.  That should ameliorate the collapse in the prices of fictitious capital (and they are still high).  But the direction of profits, interest rates and inflation could soon change.

Trading economics the Chinese way

February 2, 2018

In my view, the Chinese economy remains at a structural crossroads.  The state and state enterprises continue to dominate the economy in investment, employment and production.  That means that foreign capital, domestic private capital and market forces do not hold sway, even though they have been increasing in weight and power over the last 30 years.

My view is controversial in Marxist circles. The vast majority of Marxist economists and ‘experts’ on Marx’s ‘theory of the state’ reckon that China is capitalist or ‘state capitalist’.  But for me, the class nature of the Chinese state remains open.

All I would add at this point is to remind readers of the data that I published in a past post on the sheer weight of the public sector and public assets in the Chinese economy.

The IMF has published a full data series on the size of public sector investment and its growth going back 50 years for every country in the world.  It shows that China has a stock of public sector assets worth 150% of annual GDP.  Only Japan has anything like that amount at 130%.  Every other major capitalist economy has less than 50% of GDP in public assets.  Every year, China’s public investment to GDP is around 16% compared to 3-4% in the US and the UK.

There is nearly three times as much stock of public productive assets to private capitalist sector assets in China.  In the US and the UK, public assets are less than 50% of private assets.  Even in ‘mixed economy’ India or Japan, the ratio of public to private assets is no more than 75%.  This shows that in China public ownership in the means of production is dominant – unlike any other major economy.

But the IMF data also show that, while public sector assets in China are still nearly twice the size of capitalist sector assets, the gap is closing.  Private (capitalist) sector investment stock is growing faster than state sector assets.

In this post, I want to show that, because the Chinese economy is balanced between the power of the state and the market, this is increasingly reflected in the ideology and economic thinking of Chinese officials and academics.  There are still many academics in Chinese universities that hold to what they think is Marxist economy theory and categories.  But there are many more, particularly officials in government and state enterprises that have been educated in ‘Western’ universities, who have long abandoned a Marxist view and opted for mainstream neoclassical or Keynesian theory.

A recent striking example is Wang Zhenying, director-general of the research and statistics department at the PBoC’s Shanghai head office and vice chairman of the Shanghai Financial Studies Association.  This leading Chinese state banker recently summarised his economic views from his Chinese language textbook on economics (for Chinese students) in the Financial Times of all places.

Wang tells us that “Crises destroy, but crises also create.”  He means that “the outbreak of each crisis gives rise to new economic theories. Marx’s theory of Surplus Value was created amidst frequent economic crises in the late 19th century and Keynes’s revolutionary theory was put forward during the Great Depression in the 1930s. Today, with a worldwide financial tsunami only now receding, people are expecting a new economic theory in response to the failure of the pre-crisis mainstream.”

So for Wang, Marx has had his day in the theoretical limelight (ie 19th century) and for that matter so has Keynes (2oth century).  The recent global financial crisis needs a new theory for the 21st century.  Marx and Keynes apparently have nothing more to offer.

And what is this new exciting theory that Wang is proposing to his students to explain the world economic crisis?  He calls it ‘Trading Economics’.

What’s this?  Wang: “Trading economics” is one new theory emerging against this backdrop. Mainstream economics deduces the macro whole by extrapolating from the behavior of individual “representative agents”. Trading economics replaces this with a systematic and comprehensive analysis approach. It stresses that in an interconnected world, the interaction between trading subjects is the fundamental driving force behind the operation, development, and evolution of economic systems.”

Well, I am still no wiser.  Wang explains that mainstream neoclassical theory is stuck with ‘representative agents’ who have ‘rational expectations’ who maximise utility and profits, while market prices move up and down to achieve equilibrium.  As Wang says, this bears no relation to the reality of modern economies and never did.  In contrast…

“Trading economics chooses a different path. Everyone participating in economic activities is put in a specific organisational structure. As a result, their behaviour becomes affected by culture, morality, property, and system. There is no “economic person” like Robinson Crusoe in trading economics. Trading economics only has organizations with specific internal structures: households and enterprises. This is the first step to bring economic theory back to the reality”.

This all sounds promising.  Wang is going to ‘rethink’ economics and return it to reality.  And what does he come up with – behavioural economics.  “Behavioural economics experiments have demonstrated that choices are characterised by variety — there is no single answer to all situations.”

Now this is not so promising.  Economics is reduced to considering each situation or problem as having a different answer.  That would suggest we cannot find any generalised laws about the world economy and its crises.

According to Wang; “Trading economics differs by recognising that different people have different information, in part because they have different experiences. So while each trading subject seeks maximum profits, the “maximum” differs from one subject to another, even when trading and constraints are the same. Therefore, if the behaviour model in neoclassical economics is the absolute maximum, then it is the relative maximum in trading economics. This is where the difference lies.”

Hmm. I am still none the wiser.

What Wang really seems to be arguing for is free trade and international integration. “From the study of the development rules of economic system, it is found that global economic integration is neither the innovation of a single politician, nor a strategy implemented by a certain country to pursue its own interests. Instead, it is the only option following the development rules of social economic system. Today’s world has shifted from an isolated island, through small-world development, to a network without marks. To achieve comprehensive progress and development, the world economy must promote the integration of trading network among countries. We need to listen to the warning of trading economics in a world awash with anti-globalisation thoughts.”

This is shades of the very line presented by President Xi at Davos 2017, where he claimed that China is the leading globaliser. Now the economic theorist of People’s Bank of China is offering ‘trading economics’ to support Xi.

A key feature of Wang’s ‘trading economics’ is that it rejects the idea of looking for causal relationships between economic variables.  He refers to the ‘masterpiece’ work of right-wing monetarist Milton Friedman’s analysis of the cause of the Great Depression of the 1930s.  Friedman argued that the failure of the Federal Reserve Bank to control the money supply properly was the cause.  The banks collapsed because of an unnecessary monetary squeeze.  But others argued that the economy collapsed because a change in ‘expectations’.

Wang concludes that “It is impossible to find a single factor among various events to explain the great contraction”. You see it’s just too complex for ordinary mainstream theory.  So Wang says we must “give up on simple causal relationships”.  Instead, using ‘trading economics’ we can get “a concrete structure through the trading network.” Then, apparently, “various possibilities of economic operation can be predicted, including the fluctuation of economic cycles, the probability of crisis, assessment of policy effects, etc.”

Wang provides no evidence in his FT article for his claim of the power of prediction enabled by trading economics.  And here is the nub of his theory, namely its close “connection between macroeconomics and behavioural economics.  According to Wang, “The behaviour of each trading subject and the ways in which they react to external disturbances can be informed by the research of behavioural economists and psychologists. The economic operation simulated in this way is better targeted and the analysis has more solid experimental foundation.”

There we have it.  Far from carrying out empirical research for cause and effect, all we need is to go back into the laboratory of behaviour and do ‘experimental research’.  Wang claims that this “is a great leap in methods of economic theory research because it represents the unity of economic research and natural science in methodology.”

Actually, behaviourist approach is an economics cul ­de ­sac.  Before the global financial collapse, this micro motivation approach to economics was popular with young economists who had turned away from questions like poverty, inequality or unemployment to study behaviour on television game shows.  Looking at the ‘irrational’ behaviour of people’s brains and thinking was substituted for the aggregate trends and changes in modern economies.

The irony of Wang’s view is that, since the global financial crash, empirical studies have come back into favour in looking for the causes of the Great Recession, because mainstream and behaviourial theory had failed. Despite that, Wang wants us to ditch Marxist macro theory for Keynes’ psychological  ‘animal spirits’ or the micro ‘nudge’ theories of behaviourists like Richard Thaler.

Is the way forward really through behaviourists developing computer models where the idea is to populate virtual markets with artificially intelligent agents who trade and interact and compete with each other much like real people? Sure, every situation is different but anyone who makes a living out of data analysis knows that ‘heterogeneity’ is limited enough so that the well ­understood past can be informative about the future.

In my view, if economists want to understand the causes of financial and economic crises, they need to look away from individual behaviour models and instead look to the aggregate: from the particular to the general. And they need to turn back from deductive a priori reasoning alone towards history, the evidence of the past. History may not be a guide to the future, but speculation without history is even less based in reality. Economists need theories that can be tested by evidence, but the evidence of the aggregate and history not the laboratory.

Yes, Wang recognises that mainstream economic is no good at explaining developments in modern capitalism, but does ‘trading economics’ take us any further? It seems more like an ideologically acceptable theory as an alternative to Marxism in the country of ‘socialism with Chinese characteristics’.

Davos and the Donald

January 26, 2018

Today, US President Donald Trump delivered his keynote speech to the meeting of the global elite, World Economic Forum at Davos, Switzerland.  It was eagerly awaited by the corporate chiefs, finance and hi-tech social media moguls, as well as other government leaders.  Last year at Davos, the star of the show was Chinese President Xi who told his glittering audience that China was ready to take over the leadership in the fight for ‘globalisation’ and free trade as the US under trump stepped back and went down the protectionist road.

So Xi, autocratic leader of a one party state directed and controlled economy, became the darling of Davos.  Would the Donald take the prize this year.  After a tumultuous and often debasing year in office, Trump has managed to get through his Congress huge cuts in corporate and personal taxation that will benefit the profits of US multinationals and the incomes of top 1%.  But he failed to reverse Obamacare, that limited measure of subsidised private health insurance; he has yet to build ‘the wall’ to keep out illegal Mexican immigrants; and he has very little to stop Chinese manufacturing imports flooding into the US.

Sure, he took the US out of the Trans-Pacific Partnership (TPP) trade deal – a deal that ironically was designed to isolate China from trade and investment in the region.  And only last week he announced tariffs on imported solar energy equipment from China.  But that’s it.  He wants to renegotiate the terms of the longstanding North American Free Trade Association (NAFTA) with Canada and Mexico.  But little has happened.  In the meantime, TPP has been revived by the other participants, Canada signed a free trade deal with the EU and Japan is looking to do one with Europe too.

So it appears that globalisation (free trade and investment) is not being blocked much by Trump’s America First policy so far.  Nevertheless, globalisation and world trade has slowed sharply since the end of the Great Recession.  Global trade growth in the era of globalisation from the mid-1980s onwards grew faster than global GDP by an average ratio of around 2 to 1.  But since the Great Recession, it has barely matched a low world GDP growth rate.

It’s the same story with global capital flows, a major feature of the globalisation era.

Overall flows (direct investment, portfolio investment and loans) have flattened as a share of global GDP since 2007.

The United Nations Investment Trends Monitor, released Monday, showed a 16% decline in foreign direct investment worldwide between 2016 and 2017. FDI (foreign direct investment) flows dropped by more than a quarter in what the UN terms “developed economies,” with the US and the UK responsible for a large portion of that decline.

Cross-border mergers and acquisitions and “greenfield” projects — businesses building factories and other facilities in foreign countries — both suffered in 2017. The value of cross-border M&As declined by 23%, despite a 44% increase in value of cross-border M&As in developing economies. Greenfield-project value declined 32% to $573 billion, the lowest point since 2003.

The potential end of globalisation and the rise of populists and other nationalist leaders like Trump in many countries is really worrying the global elite meeting in Davos.  FT columnist Martin Wolf, who once wrote a book called Why Globalisation works back in 2004 before the global financial crash, reversed his view back in 2016.  He now feared that globalisation would be reversed to detriment of all.  And just before Davos, he told his readers that ‘democracy’ itself was threatened by protectionism and autocratic nationalist rulers, but admitting that globalisation itself failed to sustain prosperity and improve equality. On the contrary, the wild effusion of speculative capital eventually triggered the biggest financial crash since 1929 and inequality of income and wealth in the major economies had reached levels not seen in 150 years.

Just before Davos, Oxfam updated its estimate of global wealth inequality and found Last year saw the biggest increase in the number of billionaires in history, with one more billionaire every two days. This huge increase could have ended global extreme poverty seven times over. 82% of all wealth created in the last year went to the top 1%, and nothing went to the bottom 50%.

There are now 2,043 dollar billionaires worldwide. Nine out of 10 are men. Billionaires also saw a huge increase in their wealth. This increase was enough to end extreme poverty seven times over. 82% of all of the growth in global wealth in the last year went to the top 1%, whereas the bottom 50% saw no increase at all.  New data from Credit Suisse means 42 people now own the same wealth as the bottom 3.7 billion people.

Talk about the uneven and combined development of global capitalism!

There is currently huge optimism among the Davos elite that in 2018 world capitalism is finally recovering from the Great Recession of 2008-9 and ensuing Long Depression.  For the first time since the early 2000s, all the major economies are growing simultaneously.  Capitalism has never been more globally synchronised. But that has another side.  Capitalism has never more prone to international simultaneous crises.

The risk remains that if the US turns down, then so will all the rest.  And that could well be triggered over the next year or so by the rising cost of international debt as the US Fed and other central banks carry out their planned interest rate hikes (in the graph – when the blue line of Fed policy rate rises above the black line of US treasury yields, a recession usually follows.

Davos is the debating hub of the leaders and supporters of global capital and globalisation (free movement of multinational capital and trade without national restrictions).  Globalisation is part of the neoliberal project to maximise profits, although this aim is cloaked in the respectable mainstream economics view that it will bring growth and incomes to all.  The Davos elite see that this propaganda has been exposed by the evidence of global poverty and inequality.  But even worse, the leader of the largest capitalist power stands for protectionism and nationalism – at least in words.

Thus speaker after speaker, from Indian President Modi to French President Macron, mouthed support for maintaining free trade, while ‘recognising’ the need to ‘do something’ about inequality (and climate change – another Trump bugbear). “If we commit ourselves to make our current globalisation more fair..  we can converge and build a new globalisation.” Macron.  Thus the theme of Davos 2018 was to stop ‘fragmentation’ and sustain ‘fair’ globalisation.

So what did ‘the Donald’ tell the assembled Davos elite?  Well, he wants to “put America first, but not America alone”.  In other words, he aims to put the US in ascendancy in trade, investment and military power and for everybody else to get in line.  That’s the classic position of the leading imperialist power – so no change there.

The Trump administration aims to get a ‘better deal ‘ on trade with Asia (China) and Europe. And also it aims to weaken the dollar so that US export are more competitive.  US Treasury Secretary Steven Mnuchin has been going round Davos saying that “a softer dollar will juice US economic growth… because “obviously a weaker dollar is good for us as it relates to trade and opportunities.”   That did not go down well with ECB president Mario Draghi at his press conference yesterday, who pointed out that there was an international understanding that countries should “not target our exchange rates for competitive purposes”.

“We don’t even like to use the word ‘protectionism’ . . . We don’t use that word,” said Mnuchin. “This is not about protectionism. This is about free and fair reciprocal trade. Anybody who wants to do trade with us on reciprocal terms is welcome to do so.”  And in the same breath, Wilbur Ross, US trade secretary, has been talking about closing down the World Trade Organization and/or kicking China out. “It’s an old system, decades old. The world has changed, the economies have changed. The pecking order of countries has changed (ie meaning the US does not get its way any more – MR). Everything has changed. The WTO has not really modified its role. It needs to be updated, at best (ie the US needs to be in charge – MR).”

Protectionist trade policies and competitive devaluation are nationalist medicines for economic weakness and domestic slump.  But they only work (even then for just a limited time) as long as nobody reciprocates.  In the Asian crisis of 1998, Malaysia did not obey the IMF and opted for nationalist policies and it worked because all other Asian economies did what they were told.  But in the 1930s, when the US imposed tariffs, other countries followed suit and so aggravated the slump.

The point is that it is not ‘unfair competition’ in world trade that has caused the decimation of US manufacturing jobs since the 1970 but the decision of US capital to invest in technology to replace labour and to send their factories and units abroad to use cheaper labour.  Globalisation was the a reaction of the global crisis in profitability in the 1970s (as the previous wave of globalisation in the late 19th century was).  It was part of the neoliberal agenda to drive up the rate of exploitation and thus profitability.  But it did not last.

The global elite gathering in Davos fret that Trump and other nationalists will spoil the party and even end democracy.  But the Donald emerged because of the failure of global capital, as represented by Davos.  The Donald’s appearance shows that, as trade and finance stagnate, imperialist rivalry will grow.  And it will be labour that will pay for this once again.

The macro: what’s the big idea?

January 21, 2018

Yet again, mainstream economics is trying to rethink its effectiveness as an objective scientific analysis of the laws of motion of major economies.  Ever since the mainstream failed to foresee the global financial crash, come up with a convincing explanation for what happened and adopt policies that could get the capitalist economy out of the subsequent long depression of growth and investment, the mainstream has been stymied.

I covered various attempts to rethink in posts on this blog by: Dani Rodrik, Paul RomerRobert Skidelsky and more recently by John Quiggin.  I have also covered the attempts of more heterodox economics to critique mainstream failures.

Now we have yet another bout of navel gazing.  The latest issue of the Oxford Review of Economic Policy is devoted to ‘Rebuilding macroeconomic theory’ (all the articles are free to view until February 7).  And Martin Sandbu in the UK’s Financial Times has reviewed the various papers in the journal from such eminent mainstream economists as former IMF chief economist Olivier Blanchard, Nobel prize winners Paul Krugman and Joseph Stiglitz; and leading UK Keynesian Simon Wren-Lewis.

In these papers, the usual criticisms of modern macro are repeated: the failure to cover ‘irrationality’ and uncertainty; the insistence on ‘micro-foundations’ for macro models of economics reality (ie the Lucas critique) and the use of unrealistic assumptions in so-called DSGE models that have no relation to empirical evidence.

Sandbu sums up his review of these new efforts of the mainstream to rethink its faults and failures and concludes: that it “leaves little doubt that mainstream macroeconomics is in deep need of reform.”  He says: “the question is how, and whether the standard approach, DSGE modelling, can be sufficiently improved or should be jettisoned altogether.”

Well, as for the latter, opinion in the mainstream is divided.  As Sandbu says, “DSGE macroeconomics does not really allow for the large-scale financial panic we saw in 2008, nor for some of the main contending explanations for the slow recovery and a level of economic activity that remains far below the pre-crisis trend.”

Yet Paul Krugman, while admitting the blind spot of conventional DSGE, argues that existing macroeconomic theory is “good enough for government work” and policy advice.  What he means is that mainstream economic theory cannot explain the motion of capitalism but it can be used for quick economic solutions.  This is Krugman’s way – if you read his book on the crisis, End this Depression Now!, he says, there is no need to explain the Great Recession; let’s just get on with adopting policies to get out of it.  I think most of us would think that we wont know what are the right policies if we don’t know what caused the crisis in the first place!

And others in the Oxford Review reckon that with a bit of tweaking, DSGE models can be made useful in forecasting crises.  And one attempt cited by Sandbu from the review does lead to some interesting results.  It tries to ‘model’ the current Long Depression and finds that its model explains why the major economies have not ‘recovered normally’ nor slipped into deep deflationary depression.

It’s due to the failure of investment in the capitalist sector to return to previous levels: “the economy can get caught in a prolonged period of stagnation. In addition, productivity growth is embedded at least in part in investment: hence investment-induced stagnation can tie down productivity growth to very low levels.”  However, even this model falls back on the explanation of low investment as due to a lack of a “shift to the optimistic scenario about future growth” (ie lack of ‘animal spirits’ a la Keynes), which is no explanation at all.

Other mainstream economists like Simon Wren-Lewis or Olivier Blanchard are not sure that DSGE models can ever be fixed: “The attempts of some of these models to do more than what they were designed to do seem to be overambitious. I am not optimistic that DSGEs will be good policy models unless they become much looser about constraints from theory. I am willing to see them used for forecasting, but I am again sceptical that they will win that game.” (Blanchard).

Joseph Stiglitz condemns the very ‘microfoundations’ of modern DSGE models as unrealistic.  That means microeconomics, in particular general equilibrium theory, utility theory and marginalism provide no sound basis for analysis of the ‘agents’ at work in the movement of modern capitalist economies.  Macroeconomics has come to a dead end because microeconomics is flawed.  As Sandbu puts it “Bad macro is, to some extent, a case of too much bad micro.”   Not good news for mainstream macro.

But what  else is there?  Despite recognising that “the fundamental difficulty of microfoundations is that we simply do not have a comprehensive and convincing theory of economic behaviour at the micro level”,  Sanbu wants to plough on with “a more expansive and liberal form of DSGE”. So no change then for mainstream economics: it will continue to use marginalism and general equilibrium theory, but try to incorporate ‘animal spirits’ or ‘irrationality’ into its models of modern economies.  Good luck!

In a new piece, Keynesian biographer, Robert Skidelsky complains of the failure radically to rethink mainstream economic theory and attacks Krugman for his view that macroeconomics is “good enough” for policy decisions.  Skidelsky, in contrast, sees modern macro theory as having crucial faultlines: “the problem for New Keynesian macroeconomists is that they fail to acknowledge radical uncertainty in their models, leaving them without any theory of what to do in good times in order to avoid the bad times…. macroeconomics still needs to come up with a big new idea.”

What Skidelsky and other critics of mainstream economics (both in its micro and macro parts) fail to recognise is that no new big idea will appear because mainstream economics is a deliberate result of the need to avoid considering the reality of capitalism.  Its theories are ideological justifications of capitalism( its supposed tendency to harmonious growth, equilibrium and equality). When reality does not bear out the mainstream, it is ignored. That’s because ‘mainstream’ means support for the existing dominant ideology.

‘Political economy’ started as an analysis of the nature of capitalism on an ‘objective’ basis by the great classical economists Adam Smith, David Ricardo, James Mill and others.  But once capitalism became the dominant mode of production in the major economies and it became clear that capitalism was another form of the exploitation of labour (this time by capital), then economics quickly moved to deny that reality.  Instead, mainstream economics became an apologia for capitalism, with general equilibrium replacing real competition; marginal utility replacing the labour theory of value and Say’s law replacing crises.

Even the so-called Keynesian revolution that came out of the experience of the Great Depression was hardly ever applied and was soon dumped when capitalism faced renewed crisis in the 1970s.  The Keynesians are now either advocates of theory that is ‘good enough’ or critics with no ‘big new idea’.

Carillion and the ‘dead end’ of privatisation

January 18, 2018

A few weeks ago, Martin Wolf, Keynesian economics journalist for the UK’s Financial Times, wrote a piece arguing that the renationalisation of privatised state companies was a ‘dead end’ and would not solve the failures of privately owned and run public services in the UK and elsewhere.

And yet within a week or so, it was announced that one of the leading construction and service companies in the UK that has got much of the ‘outsourced’ previously publicly owned projects had gone bust.  Carillion, as it likes to call itself, employs about 20,000 people in the UK and has more staff abroad. It specialised in the construction of public roads, rail and bridges and ‘facilities management’ and ongoing maintenance for state schools, the armed forces, the rail network and the UK’s national health service.

But it seems that it had taken on too many projects from the UK public sector at prices that delivered very narrow margins.  So, as debt issuance rose and profitability disappeared, cash began to haemorrhage.  Carillion ran up a huge debt pile of £900m.  But this did not stop the Carillion board lying about their financial state, continuing to pay themselves large salaries and bonuses and fat dividends to their shareholders.  In contrast, the company did little to reduce a mounting deficit on the pensions fund of their 40,000 global staff, putting their pensions in jeopardy. Indeed, Carillion raised its dividends every year for 16 years while running up a pensions deficit of £587m.  It paid out nearly £200m in dividends in the last two years alone.  The recently sacked CEO took home £660,000 a year plus bonuses.

But eventually, the bank creditors had enough and pulled the plug on further loans and Carillion has closed.  With the liquidation of the company, thousands of jobs are likely to go, while pension benefits could be cut and the British taxpayer will have to pick up the bill of maintaining necessary services previously provided by Carillion.

Amazingly, as I write, the Official Receiver for the bankrupt company says that all the top executives are “still on the payroll” and receiving their salaries, including the recently sacked chief executive.  The government has announced it will guarantee the salaries of employees in 450 public sector contracts run by Carillion.  So the taxpayer will be covering these.  But over 60,000 employees working on private sector jobs are likely to receive no more wages from now, while up to 30,000 sub-contractors have invoices of £1bn that are unlikely ever to be met.

Carillion is a very graphic confirmation that outsourcing public services and sectors to private companies to ‘save money’ on ‘inefficient’ public sector operations is a nonsense.  The reason for privatisation and outsourcing has really been to cut the costs of labour, reduce conditions and pension rights for employees and to make a quick buck for companies and hedge funds.  But such is competition for these contracts that, increasingly, private companies cannot sustain services or projects even when they have cut costs to the bone.  So they just pull out or go bust, leaving the taxpayer with the mess. It’s a microcosm of capitalist economic collapse.

Carillion is not the first example in the UK.  The 2007 failure of Metronet, which had been contracted to maintain and upgrade the London Underground cost the taxpayer at least £170m.  In the UK, outsourcing of public sector operations has reached 15% of public spending or about £100bn.  So more may be under threat.  Indeed, half a million UK businesses have started 2018 in significant financial distress, according to insolvency specialist Begbies Traynor, as the UK economy felt the effects of higher inflation, rising interest rates, growing business uncertainty and weaker consumer spending.

A total of 493,296 businesses were experiencing significant financial distress in the final quarter of 2017 according to Begbies’ latest “red flag alert”, which monitors the health of UK companies. That was 36% higher than at the same point in 2016 and 10% higher than in the third quarter of 2017.  And the worst situation was to be found in the services sector. A total of 121,095 businesses in the sector were showing signs of financial difficulty, up 43% on a year earlier.

Martin Wolf’s claim that privatisation has been a success because it is more efficient is just nonsense.  For the last 25 years, the UK government, starting with Thatcher and continued by right-wing Blair and Brown Labour governments, has resorted to ‘private finance initiatives’ to fund public sector building of schools, hospitals, rail and roads.  Under the PFI, banks and hedge funds fund the projects in return for interest and income paid by the operators of the projects, with payments spread over 25 years.  The idea was to keep down ‘public debt’ levels.  But of course, this was at the expense of future generations of taxpayers.

According to the UK’s National Audit Office in a new report, taxpayers will be forced to hand over nearly £200bn to contractors under PFI deals for at least the next 25 years.  And there was little evidence that there were any financial savings in doing PFI – indeed the cost of privately financing public projects can be 40% higher than relying solely upon government bonds, auditors found.  Annual charges for these deals amounted to £10.3bn in 2016-17. Even if no new deals are entered into, future charges that continue until the 2040s amount to £199bn, it.  “After 25 years of PFI, there is still little evidence that it delivers enough benefit to offset the additional costs of borrowing money privately,” … many local bodies are now shackled to inflexible PFI contracts that are exorbitantly expensive to change.”

And yet Martin Wolf reckons that it does not make sense to renationalise privatised state operations.  He makes the usual claim that state companies were huge inefficient behemoths that were not accountable to the public, “chronically overmanned and heavily politicised. They either underinvested or made poor investment decisions”.  Oh, unlike the private profit monopolies that now run Britain’s utilities, rail and energy and broadband.

Wolf digs up some research from the 1980s and 1990s by William Megginson of the University of Oklahoma who argues that public companies were more inefficient than the private counterparts.  Wolf also cites research from 2002 that British railways have been more efficient under the nightmarish private franchise experiment that rail travellers have experienced since 1997 along with the disastrous collapse of RailTrack, the private company that took over the maintenance of the track.  Tell this to rail travellers and staff.

There is, however, a pile of research that reaches opposite conclusions from Wolf’s sources.  I quote from the recent PSIRU report: “there is now extensive experience of all forms of privatisation and researchers have published many studies of the empirical evidence on comparative technical efficiency. The results are remarkably consistent across all sectors and all forms of privatisation and outsourcing: there is no empirical evidence that the private sector is intrinsically more efficient. The same results emerge consistently from sectors and services which are subject to outsourcing, such as waste management, and in sectors privatised by sale, such as telecoms.”

Detailed studies of the UK privatisations of electricity, gas, telecoms, water and rail have also found no evidence that privatisation has caused a significant improvement in productivity.  A comprehensive analysis in 2004 of all the UK privatisations concluded: “These results confirm the overall conclusion of previous studies that …privatisation per se has no visible impact …. I have been unable to find sufficient statistical macro or micro evidence that output, labour, capital and TFP productivity in the UK increased substantially as a consequence of ownership change at privatisation compared to the long-term trend.”

Evidence from developing countries points to the same conclusion. A global review of water, electricity, rail and telecoms by the World Bank in 2005 concluded: “the econometric evidence on the relevance of ownership suggests that in general, there is no statistically significant difference between the efficiency performance of public and private operators” (Estache et al 2005).

The largest study of the efficiency of privatized companies looked at all European companies privatized during 1980-2009. It compared their performance with companies that remained public and with their own past performance as public companies. The result? The privatized companies performed worse than those that remained public and continued to do so for up to 10 years after privatization.

Wolf’s answer to the failures of privatisation and outsourcing is to “reform the structure and purposes of regulation”.  As if regulation ever worked; indeed, current thought among government elites and big business is that economies need to loosen up regulation again in order to get things going.  To quote Wolf himself from his book on the lessons of the banking crash: “notwithstanding all the regulatory reforms, the system is bound to fail again,”

Public ownership is not of “totemic significance” to the left, as Wolf harps.  It is based on clear evidence that delivering services that people need is best done within a plan and not based on the level of profitability for the likes of Carillion. Yes, public ownership and state companies that become just milk cows for the profits of the private sector without any democratic control are not what we require.  But democratically run public companies as part of a plan for production for need are not “a dead end”, but the future.

 

ASSA 2018 part 2: value, profitability and crises

January 8, 2018

At ASSA 2018, away from the huge arenas where thousands listened to the millionaire guru mainstream economists speak, were the sessions under the umbrella of the Union of Radical Political Economics (URPE), where just handfuls heard papers from a range of heterodox and radical economists.  These sessions were a mixture of debate on Marx’s value theory (among Marxists) and its dismissal by followers of Piero Sraffa.  But there was also some very interesting research on the nature of capitalist economic cycles and the causes of crises, including the 2008 crash and the Great Recession.

Supporters of ‘neo-Ricardian’ theorist, Piero Sraffa, had a session aimed at comparing Marx’s analysis of capitalism with their own hero.  In his ‘point by point’ comparison of Marx and Sraffa, Robin Hahnel explained that Marx was the “great grandfather” of the critique of capitalism, but a great deal has happened since Marx died in 1883”and it was time to acknowledge that “Marx’s attempt to fashion a formal economic theory of price and income determination in capitalism based on a labor theory of value, and elaborate a Hegelian critique of capitalism, can now be surpassed”.  Now “a number of distinguished Sraffian economists have used modern mathematical tools to elaborate an intellectually rigorous version of Sraffian theory which surpasses formal Marxian economic theory in every regard”.

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To justify this claim, Harnel then offers the usual set of neo-Ricardian arguments against Marx’s value theory (first raised by Ian Steedman in 1977): values are not necessary to explain prices or profit under capitalism, indeed they are redundant; Marx’s value and profitability theories are empirically refuted; and anyway, Okishio has completely rebutted Marx’s theory of crises based on the law of the tendency of the rate of profit to fall.

There is no room in this post to respond properly to these traditional arguments of the Sraffians.  Instead I refer readers to the battery of work done by Marxist economists over the last 40 years that show the logic of Marx’s theory, expose the unrealistic assumptions in Sraffa’s approach and provide empirical support for Marx’s laws of motion under capitalism.  I have only to mention but a few: the work of Husson, Carchedi, Freeman, Kliman and Moseley among many others.

Indeed, at ASSA, in other sessions Marxist value theory was convincingly expounded.  Riccardo Bellofiore took us carefully on a tour through Marx’s value theory from various anglesAnd see Bellofiore’s account of Sraffa from another session.

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And Fred Moseley recounted his important summary of Marx’s value theory and laws of motion in his book of last year, Money and Totality.  His book offers a firm critique of Sraffian theory as well as a convincing interpretation of the so-called transformation problem of ‘converting’ labour values into the prices of production – an issue that the Sraffians and all critics of Marx’s value theory latch onto.

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At ASSA, Moseley’s ‘macro-monetary’ approach to Marx’s value theory was criticised by David Laibman and Gilbert Skillman.

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But Moseley was firm in his view that Marx’s theory of capitalism is internally logically consistent.  The long-standing and widely-held criticism that Marx “failed to transform the inputs” in his theory of prices of production in Volume 3 is not a valid criticism. Marx did not fail to transform the inputs because the inputs are not supposed to be transformed. The inputs of constant capital and variable capital are the same actual quantities money capital advanced at the beginning of the circuit of money capital to purchase means of production and labor-power which are taken as given”.  So prices of production can be derived from total surplus-value and general rate of profit in a logically consistent way.  Marx’s value theory is both necessary and sufficient in explaining market prices, indeed better than mainstream neoclassical marginalist theory or the ‘physicalist’ production equations of Sraffa.

As I said, the debate between Marxists and the neo-Ricardians/Sraffians is now over 40 years old.  It boils down to whether you think Marx’s value theory and his critique of capitalism is logically valid.  Marxists have, in my opinion, conclusively won that debate.

But for Marxist economics in the last 15 years, and certainly since the Great Recession, the issue has moved on to whether Marx’s value and crisis theory is empirically supported.  There has been a mountain of studies on this – with work by Freeman, Kliman, Moseley, Carchedi (and myself).  And this year, Carchedi and I will publish a collection of research by young Marxist economists from all corners of the globe that help verify empirically Marx’s law of profitability and theory of crises.

And at ASSA, yet more convincing empirical work was presented.  In particular, David Brennan presented an analysis based, he said, on using Marx’s law of profitability and Michal Kalecki’s macro identities. Brennan offered “a new methodology based on the work of Kalecki to provide empirical estimates of profits and the various components of realization, profit rates, and the organic composition of capital. These estimates provide new insights into the Great Recession and the “recovery.”

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Now readers of this blog and some of my research papers will know that I have serious criticisms of the Keynes/Kalecki macro identities as a useful tool in explaining crises under capitalism.  In essence, as Brennan also shows when he goes through the macro categories, the capitalist economy’s driver can be boiled down to profits=investment identity.

Why? Because if we assume workers in general consume all they get and capitalists save all they get, while governments balance their books and external trade is in balance, then all that is left is profits=investment.  The Keynesian/Kalecki conclusion is that investment drives or creates profits based on the view of the ‘effective demand’ of capitalists.  But this is back to front.  The Marxist view is that profits drive or create investment, not vice versa.  And there is plenty of empirical evidence to confirm the Marxist view.

But Brennan wanted to make the point that crises could not be caused by just a fall in the rate of profit; slumps also depend on the realisation of the mass of profit.  Marxian theory was not wrong about the causes of the Great Recession, although various Marxian theories emphasized different aspects of the crisis. In the end, the rate of profit matters for the trajectory of the economy. But to understand crises like the Great Recession, profit rates alone are not sufficient. Crises, unlike typical recessions, are sudden and often unforeseen. The Great Recession was both a profit rate and a profit realization crisis.”

Brennan sees the latter as the contribution of Kalecki.  Actually, Marx’s theory of crises has always taken that into account.  Indeed, when the rate of profit falls and is no longer compensated for by a rise in the mass of profit, a slump is set to come.  The Marxist economist, Henryk Grossman, particularly emphasised this aspect of Marx’s crisis theory.

As Marx put it: “the so-called plethora (overaccumulation) of capital always applies to a plethora of capital for which the fall in the rate of profit is not compensated by the mass of profit… and “overproduction of commodities is simply overaccumulation of capital”.  It is precisely when the mass of profit stopped rising that the Great Recession ensued.

And this is what Brennan finds in the US data using his combination of a Marxian rate of profit and ‘Kalecki’ profits.  The profit rate fell in the 1964-1980 period and then rose in the neoliberal 1980-2006 period, fell during the Great Recession and recovered subsequently.  These results repeat what a host of studies have already shown.

Brennan now adds the impact of the movement in the mass of profits (a la Kalecki) and finds that the Marxian profit rate peaked well before the global financial crash and then was followed a fall in the mass of profit and investment.  “It was the significant dip in total profit flows coupled with the low rates of profit, accumulation and exploitation that formed the Great Recession.” Exactly: below is my version.

Brennan adds a slightly different interpretation: “The rate of exploitation up to that time peaked during 2006Q1. Yet profit flows continued to rise until 2008Q3. Therefore, the financial sector was essentially trying to realize profit gains that were not there in real production. This is one reason why the housing boom could not continue much past the end of 2005. While the crisis was indeed precipitated by the housing collapse, the collapse was brought on by difficulties of both profit production and realization.”  Yet, Brennan’s Kalecki analysis confirms the Marxist analysis already presented by Carchedi, Freeman, Kliman, (myself) and many others.

Marx’s crisis theory stands out as mainstream economics flails about, unable to forecast or explain the global financial crash, the ensuing Great Recession and the Long Depression that has followed.

ASSA 2018 – part one: globalisation, inequality and populism

January 7, 2018

ASSA 2018 is the annual conference of the American Economic Association, drawing together the economics profession in the US to discuss hundreds of papers and debate the key issues and ideas that mainstream economics considers.  This year in freezing Philadelphia, there has been an obsession with President Trump, his antics and ‘Trumponomics’ if we can call it that.  As Trump launched his latest tirade of weird tweets against a new book outlining his mentally unstable antics, the great and good of America’s mainstream economists considered his economic policies.

And they were worried.  Three things gripped the mainstream.  The first was the apparent failure of globalisation since the Great Recession; the poor level of productivity growth in the major capitalist economies in the last ten years; and the effectiveness of Trump’s proclaimed protectionist trade policy that he has combined with slashing reductions in taxation on the US corporate sector and his rich elite friends.

It seems that the mainstream is now aware that free trade and free movement of capital that has accelerated globally over the last 30 years has not led to gains for all – contrary to the mainstream economic theory of comparative advantage and competition.

Since the end of the Great Recession, world trade growth has slowed almost to the level of global GDP growth – something unprecedented in the post-1945 period.  And cross-border capital flows have declined sharply, particularly bank lending.  And then along comes Trump with his threats to end US participation in trade pacts, to slap duties on Chinese imports and run a wall against Mexico etc.

But the other factor about globalisation that has now dawned on the mainstream is that it has increased inequality of wealth and income, both between nations and also within economies as trans-national corporations move their activities to cheaper labour areas and bring in new technology that requires less labour.  Of course, this is the basis of Trump’s appeal to those ‘left behind’.  The Great Recession, the weak recovery in this Long Depression, the imposition of ‘austerity’ in public sector spending and huge cuts in taxation for the rich has engendered the rise of ‘populism’ ie anti ‘free trade, anti-immigration, anti-deregulation, anti-bankers.

All this is very worrying for the mainstream.  Olivier Blanchard, former chief economist of the IMF and one of the great and good who always speaks at the big ASSA meetings, kicked off his analysis of the first year under Trump with a real concern that there was “a large degree of uncertainty about what policies will in the end be adopted. So far, and surprisingly, this policy uncertainty does not seem to have affected economic activity.”  Blanchard was relieved but “it is still early to tell”.  TheEffectsOfPolicyUncertainty_powerpoint

Edmund Phelps, a Nobel prize winner and economics guru of Columbia University NY, also spoke.  He has said in the past that Trump’s ideas were “like economic policy at a time of fascism”.  At ASSA he was worried that Trumpean economics has “no awareness that nations at the frontier need indigenous innovation to have ample growth.”  What was needed was for the US economy to be opened up for risk-taking, not “stunted economics” that just tries to boost Americans’ wages through protectionism.  Phelps was worried that what he called “the post-World War II global economic and political order” (ie free markets, globalisation and the rule of the dollar) was under threat to detriment of all.  AmericasPolicyThinkingInTheAgeO_preview

In other sessions, another Nobel prize winner Joseph Stiglitz and Harvard professor Dani Rodrik were less sanguine about the perceived benefits of the last 30 years of globalisation.   TrumpAndGlobalization_preview

Rodrik in an opening plenary session reckoned that the problem with unbridled free trade and free movement of capital globally was that it was bound to intensify inequality of income because it often leads to increased “market failures” (another word for crises and slumps).  Indeed, ‘compensation’ cannot credibly address the longer-term erosion of distributional bargains entailed in trade agreements and financial globalization.

Stiglitz also argued globalisation and free trade were “not a Pareto improvement” (did not offer equal gains) and so that government intervention would be necessary to right any income imbalances.  “While Trump was wrong in claiming that the trade agreements were unfair to the US, there is little doubt that globalization contributed to the weakening of wages of America’s skilled workers. Learning this lesson—if in fact we do—may be the only silver lining in this dark cloud hanging over the global horizon.” 

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So it seems that, with the rise of Trump and other populists, mainstream economics’ blind faith in ‘free trade’ and free movement of capital as the mantra of capitalist success has been shaken.

Of course, Marxist economics could have revealed this outcome of globalisation.  David Ricardo’s ‘thought theory’ of comparative advantage has always been demonstrably untrue.  Under capitalism, with open markets, more efficient economies will take trade share from the less efficient. So trade and capital imbalances do not tend towards equilibrium and balance over time.  On the contrary, countries run huge trade deficits and surpluses for long periods, have recurring currency crises and workers lose jobs to competition from abroad without getting new ones from more competitive sectors (see Carchedi, Frontiers of Political Economy p282).

It is not comparative advantage or costs that drive trade gains, but absolute costs (in other words relative profitability). If Chinese labour costs are much lower than American companies’ labour costs, then China will gain market share, even if America has some so-called “comparative advantage” in design or innovation (contrary to the view of Phelps). What really decides is the productivity level and growth in an economy and the cost of labour.

So far from globalisation and free trade leading to a rise in incomes for all, under the free movement of capital owned by the trans-nationals and free trade without tariff and restrictions, the big efficient capitals triumph at the expense of the weaker and inefficient – and workers in those sectors take the hit.

Now the mainstream has woken up to this fact, even if they have not dropped comparative advantage theory.  As one session paper put it: “the distributional effects of financial globalization, unlike those of trade, have gone largely unrecognized. In fact, however, episodes of capital account liberalization are followed by an increase in the gini coefficient and top income shares and declines in the labor share of income. These distributional effects hold with a de jure measure of liberalization and only get stronger when this measure is scaled by the extent of the capital flows that ensue in the aftermath of liberalization. Financial globalization emerges as a robust determinant of inequality, even after accounting for the effects of trade, technology and other drivers.” (Jeffry Frieden, Harvard University).

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Thomas Piketty, Emmanuel Saez and Gabriel Zucman, the gurus of inequality, showed in their session, that inequality of income and wealth rose sharply during the neoliberal period of globalisation and free trade.  They presented new evidence that global inequality and growth since 1980 has increased almost everywhere, if at very different speeds. Growth in incomes has been explosive for the global top income earners. TheElephantCurveOfGlobalInequality_powerpoint

But what really worries the mainstream in their defence of the capitalist mode of production are the consequences of the end of globalisation and the potential reversal of free trade – namely the rise of ‘populism’ in the major capitalist economies.  In Europe, anti-free trade, anti-immigrant nationalist parties are polling 25-30% in elections, threatening the status quo of the pro-capitalist centre right and social democratic parties.  In the US, there is Trump and his 30%-plus support and in the UK, there is Brexit.  Neoliberalism threatens to be replaced by nationalist reaction, leading to the end of ‘democracy’ (i.e. the existing capitalist order of ‘business as usual’).  This is the fear of Rodrik and Stiglitz and the other gurus at ASSA.  MakingGlobalizationMoreInclusiveWhe_powerpoint

But it was also expressed in one of the ASSA sessions held by the Union of Radical Political Economy (URPE).  In the David Gordon memorial lecture, longstanding Marxist economist John Weeks talked of “authoritarian tendencies” having a “quantum leap” both in Europe because of “austerity” and in China and Vietnam where central planning has been replaced by “market authoritarianism”.

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Why has this happened?  According to Weeks, it “comes from the excesses generated by capitalist competition, unleashed and justified now not by fascism but by neoliberalism.”  You see, the rules of trade and competition were altered under neoliberalism to benefit finance and oligopolies at the expense of labour and the rest.  “The purpose of destroying the post war regulatory consensus was to liberate financial capital from constraints. The macroeconomics of Keynes and even more so Kalecki influenced provided both the theoretical explanation for why these constraints were needed and the practical policy tools to manage an economy within those constraints. The “Keynesian revolution” briefly institutionalized the sensible principle that representative governments have policy tools they can use to pursue the welfare of the populations they were elected to serve.”

But is the reason for the rise of reactionary semi-fascist nationalism due to ‘the excesses” of neoliberalism, finance capital (but not industrial capital?) and austerity?  Or through changing the nice “sensible principles” of government management of the economy that apparently started with the New Deal and continued (“briefly”) with the consensus post-war Keynesian policies?

I don’t think this is a convincing explanation.  Keynesian or New Deal policies of fiscal and monetary management of the capitalist economy, in so far as they were ever applied (and that was limited indeed), collapsed in the 1970s and neoliberal policies of financial deregulation, globalisation and the reduction of the welfare state came in.  But that was not because politicians decided to ‘change the rules’ and ‘rational’ Keynesian policies were dispensed with for the greed of the 1%.

This is the argument of the mainstream liberal economists like Joseph Stiglitz who wrote a book exactly along those lines.  But it was not a change of ideology alone – it was the result of forced circumstances for capitalism from the late 1960s onwards.  The capitalist mode of production got into deep trouble as the profitability of capital plunged everywhere.  A drastic reversal of economic policy was necessary.  Out went the Keynesian ‘revolution’; in came monetarism, Hayekian free markets, the crushing of unions and the ending of trade barriers and government intervention.

This worked for capitalism for a whole generation and profitability recovered (at least somewhat) at the expense of labour, mainly through a rising rate of exploitation (as well as globalisation).  But, as Marx’s law of profitability argues, the counteracting factors to the tendency for profitability of capital to decline over time do not work forever.  The global financial crash, the ensuing Great Recession and the subsequent Long Depression confirmed that the era of globalisation and neoliberal policies were no longer working.  And now the consensus among mainstream economics is broken.  Rethinking economics is now the cry.

It was not the ‘excesses’ of neoliberalism and globalisation that caused the rise of nationalism and Trump, but the failure of the capitalist mode of production to deliver. The likes of Stiglitz, Phelps, DeLong, Krugman etc want to ‘change the rules’ back so that capitalism can be ‘managed’.  But this is an illusory aim unless the profitability of capital returns on a sustained basis.

In his address, Marxist John Weeks naturally went further than the mainstream Joseph Stiglitz in his policies for change.  But, in my view, it won’t be enough just to “reform” markets “to prevent the power of financial capital from creating fascism for the 21st century and so rebuild “social democracy for the 21st century”.  The capitalist mode of production must be completely replaced, if labour is to benefit and future crises are to be avoided.  And that means a global planned economy to mobilise resources, innovation and labour skills, let alone to end global warming and climate change.

In part 2 of ASSA 2018, I’ll discuss the papers presented in sessions of the radical economists attending.