Author Archive

You can take a horse to water but….

September 17, 2019

Last Thursday, Mario Draghi, the current head of the European Central bank, soon to be replaced by Christine Lagarde from the IMF, announced a parting gift to banks and financial markets.  The ECB decided to reintroduce its bond purchasing programme in order to inject yet more billions into Europe’s banks in order to persuade them to lend onto industry and boost lagging growth.

This was the return of quantitative easing (QE) by the ECB.  But this time there was to be no time limit on the E20bn monthly of ECB purchases. It was to be forever – QE to infinity!  Also, the ECB would purchase not just the government bonds of debt-ridden Italy, Spain etc but also much riskier assets like corporate bonds.

Draghi also announced a new two-tier interest rate system for bank cash reserves held at the central bank.  These reserves have spiralled as banks took cash from ECB purchases of government bonds they held, but instead of lending that cash on in loans to the wider economy, the banks just put them back in the central bank as deposits.

The ECB decided the the interest rate was to be held at zero for excess reserves, thus making sure that banks could not lose money if they were forced to offer negative rates to their borrowers. Banks can now also raise funds at negative rates and deposit these funds at the central bank up to six times the required reserve amount and get a zero rate, thus boosting profitability.

This two-tiered idea is seen by some mainstream monetary economists as revolutionary. In effect, the ECB is boosting bank profits with its own capital at risk.  Bank profits rise while the ECB buys government bonds at prices which offer negative rates and banks with large excess reserves’ can lend at a profit to those with low reserves.  But this ‘revolutionary’ policy is just about the last desperate measure of unconventional monetary policy.

The monetarists are hopeful that boosting bank profitability will lead to an expansion of lending to business and households and get the Eurozone out of its renewing depression. This assumes that the problem is the banks not being prepared to lend because it is not profitable for them.  But is that the reason for low loan growth rates and investment?  It’s not the supply of money or bank profitability that is the problem, but the demand for loans.  Nobody wants to borrow to invest or spend even at zero or negative rates, because revenues and profits are stagnant, inflation and wage growth are low and, above all, export trade has collapsed.

You can take a horse to water (and you can make it a huge lake of water) but you cannot make it drink if it is not thirsty.  Even the central bankers, like Draghi, are admitting now that monetary policy has failed.  And even supporters of the revolutionary new policy are not confident: “Dual rates is monetary rocket-fuel. In contrast to standard negative rates, to forward guidance, or QE, the marginal effects of these policies are increasingly powerful. I am not convinced that this specific combination of measures will suffice to generate enough demand to create an acceleration in Eurozone activity – but it will help.” Eric Lonergan.

The great new instrument to save capitalism from stagnation or a new slump is fiscal policy. “There are more and more people saying that monetary policy cannot be the only game in town, and if you don’t want more and more monetary policy the only instrument that is left is fiscal policy.”  Ex-ECB board member.

Draghi called for action by European governments, particularly those with ‘fiscal space’, eg Germany to run budget deficits and spend.  So far, Germany has been reluctant to do so.  But if it decides to up the ante fiscally, then we can test the Keynesian solution to capitalist recessions.  I’ll make a prediction: that won’t work either.

Theft or exploitation?- a review of Stolen by Grace Blakeley

September 13, 2019

All our wealth has been stolen by big finance and in doing so big finance has brought our economy to its knees.  So we must save ourselves from big finance.  That is the shorthand message of a new book, Stolen – how to save the world from financialisation, by Grace Blakeley.

Grace Blakeley is a rising star in the firmament of the radical left-wing of the British labour movement.  Blakeley got a degree in politics, philosophy and economics (PPE) at Oxford University and did a masters degree there in African studies.  Then Blakeley was a researcher at the Institute of Public Policy Research (IIPPE), a left-wing ‘think tank’, and has now become the economics correspondent of the leftist New Statesman journal.  Blakeley is a regular commentator and ‘soundbite’ supporter for left-wing ideas on various broadcasting media in Britain.  Her profile and popularity have taken her book, published this week, straight into the top 50 of all books on Amazon.

Stolen: how to save the world from financialisation is an ambitious account of the contradictions and failures of postwar capitalism, or more exactly Anglo-American capitalism (because European or Asian capitalism is hardly mentioned and the periphery of the world economy is covered only in passing).  The book aims to explain how and why capitalism has turned into a thieving model of ‘financialisation’ benefiting the few while destroying (stealing?) growth, employment and incomes from the many.

Stolen leads the reader through the various periods of Anglo-American capitalist development from 1945 to the Great Recession of 2008-9 and beyond.  And it finishes with some policy proposals to end the thievery with a new (post-financialisation) economic model that will benefit working people. This is compelling stuff. But is Blakeley’s account of the nature of modern Anglo-American capitalism and on the causes of recurring crises in capitalist production correct?

Just take the title of Blakeley’s book: “Stolen”.  It’s a catchy title for a book.  But it implies that the owners of capital, specifically finance capital, are thieves.  They have ‘stolen’ the wealth produced by others; or they have ‘extracted’ wealth from those who created it.  This is profits without exploitation.  Indeed, profit now comes merely from thieving from others.

Marx called this ‘profit of alienation’.  For Marx it is achieved by the transfer of existing wealth (value) created in the process of capitalist accumulation and production.  But value is not created by this financial thievery.  For Marx, profits, or surplus value as Marx called it, is only created through the exploitation of labour in the production of commodities (both things and services).  Workers’ wealth is not ‘stolen’, nor is the wealth they create.  Under capitalism, workers get a wage from employers for the hours they work, as negotiated.  But they produce more in value in the time they work than in the value (measured in labour time) that they receive in wages.  So capitalists obtain a surplus-value from the sale of the commodities produced by the workers which they appropriate as the owners of capital.  This is not thievery, but exploitation.  (See my book, Marx 200, for a fuller explanation).

Does it matter whether it is theft or exploitation?  Well, Marx thought so.  He argued fiercely against the idea of Pierre-Joseph Proudhon, the most popular socialist of his day that ‘property is theft’.  To say that, argued Marx, was to fail to see the real way in which the wealth created by the many and how it ends up in the hands of the few.  Thus it was not a question of ending thievery but ending capitalism.

In Stolen, Blakeley ignores this most important scientific discovery (as Engels put it), namely surplus value.  Instead Blakeley completely swallows the views of the modern Proudhonists like Costas Lapavitsas, David Harvey and others like Bryan and Rafferty who dismiss Marx’s view that profit comes from the exploitation of labour.  For them, that is old hat.  Now modern capitalism is now ‘financialised capitalism’ that gets its wealth from stealing or the extraction of ‘rents’ from everybody, not from exploitation of labour.  This leads Blakeley at one point to accept the false analysis of Thomas Piketty that the returns to capital will inexorably rise through this process – when the evidence is that returns to capital have been inexorably falling – see my critique of Piketty here.

But these ‘modern’ arguments are just as false as Proudhon’s.  Lapavitsas has been critiqued well by British Marxist Tony Norfield; I have engaged David Harvey in debate on Marx’s value theory and Bryan and Rafferty have been found wanting by Greek Marxist, Stavros Mavroudeas.  After you read these critiques, then you can ask yourself whether Marx’s law of value can be ignored in explaining the contradictions of modern capitalism.

Then there is the sub-title of Blakeley’s book: “how to save the world from financialisation’.  ‘Financialisation’ as a category or term has become overwhelmingly popular among heterodox economics.  The category originally came from mainstream economics, was taken up by some Marxists and promoted by post-Keynesian economists.  Its purpose was to explain the contradictions within capitalism and its recurring crises with a theory that did not involve Marx’s law of value and law of profitability – both of which post-Keynesians reject or ignore (see my letter to MR).

Blakeley takes the definition of the term from Epstein, Krippner and Stockhammer and makes it the centre-piece of the book’s narrative (p11).  As I outlined in a previous post, if the term means simply an increased role of the finance sector and a rise in its share of profits in the last 40 years, that is obviously true – at least in the US and the UK.  But if it means the “emergence of a new economic model … and a deep structural change in how the (capitalist) economy) works” (Krippner), then that is a whole new ballgame.

As Stavros Mavroudeas puts it in his excellent new paper (393982858-QMUL-2018-Financialisation-London), the ‘financialisation hypothesis’ reckons that “money capital becomes totally independent from productive capital (as it can directly exploit labour through usury) and it remoulds the other fractions of capital according to its prerogatives.” And if “financial profits are not a subdivision of surplus-value then…the theory of surplus-value is, at least, marginalized. Consequently, profitability (the main differentiae specificae of Marxist economic analysis vis-à-vis Neoclassical and Keynesian Economics) loses its centrality and interest is autonomised from it (i.e. from profit – MR).”

And that is clearly how Blakeley sees it.  Accepting this new model implies that finance capital is the enemy and not capitalism as a whole, ie excluding the productive (value-creating) sectors.  Blakeley denies that interpretation in the book.  Finance is not a separate layer of capital sitting on top of the productive sector. That’s because all capitalism is now ‘financialised!: any analysis that sees financialization as a “perversion” of a purer, more productive form of capitalism fails to grasp the real context. What has emerged in the global economy in recent decades is a new model of capitalism, one that is far more integrated than simple dichotomies suggest.”  According to Blakeley, “today’s corporations have become thoroughly financialised with some looking more like banks than productive enterprises”.  Blakeley argues that “We aren’t witnessing the “rise of the rentiers” in this era; rather, all capitalists — industrial and not — have turned into rentiers…In fact, nonfinancial corporations are increasingly engaging in financial activities themselves in order to secure the highest possible returns.”

If this were true, and all value comes from interest and rent ‘extracted’ from everybody and not from exploitation, then it would really be making money out of nothing and Marx has been talking nonsense.  However, the empirical evidence does not bear out the ‘financialisation’ thesis.  Yes, since the 1980s, finance sector profits have risen as a share of total profits in many economies, although mainly in the US.  But even at their peak (2006) the share of financial sector profits in total profits reached only 40% in the US.  After the Great Recession, the share fell back sharply and now averages about 25%.  And much of these profits have turned out to be ‘fictitious’, as Marx called it, based on gains from buying and selling of stocks and bonds (not on profits from production), which disappeared in the slump.

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

In other words, non-financial corporations like General Motors, Caterpillar, Amazon, Google, Microsoft, big tobacco and big pharma and so on still make their profits from selling commodities in the usual way.  Profits from ‘financialisation’ are tiny as a share of total income. These companies are not ‘financialised’.

Blakely says that “financialization is a process that began in the 1980s with the removal of barriers to capital mobility”.  Maybe so, but why did it begin in the 1980s and not before or later?  Why did deregulation of the financial sector start then?  Why did ‘neoliberalism’ emerge then? There is no answer from Blakeley, or the post-Keynesians. Blakeley points out that the post-war ‘social democratic model’ had failed, but she provides no explanation for this – except to suggest that capitalism could no longer “afford to continue to tolerate union demand for pay increases in the context of rising international competition and high inflation”.( p48). Blakeley hints at an answer: “competition from abroad began to erode profits”(p51).  But that begs the question of why international competition now caused a problem when it had not before and why there was high inflation.

But Marxist economics can give an answer.  It was the collapse in the profitability of capital in all the major capitalist economies. This is well documented by Marxists and mainstream studies alike.  This blog has a host of posts on the subject and I have provided a clear analysis in my book, The Long Depression (not a best seller).  The fall in profitability forced capitalism to look for counteracting forces: the weakening of the labour movement through slumps and anti-labour measures; privatisations etc and also a switch into investing in financial assets (what Marx called ‘fictitious capital’) to boost financial profits.  All this was aimed at reversing the fall in the overall profitability of capital.  It succeeded to a degree.

But Blakeley dismisses this explanation.  It was not to do with the profitability of capital that crises regularly occur under capitalism and profitability had nothing to do with the Great Recession.  Instead Blakeley slavishly follows the explanation of post-Keynesian analysists like Hyman Minsky and Michel Kalecki.  Now I and others have spent a much ink on arguing that their analysis is incorrect as it leaves out the key driver of capitalist accumulation, profit and profitability.  As a result, they cannot really explain crises.

Kalecki says that crises are caused by a lack of ‘effective demand’, Keynesian-style and although governments could overcome this lack of demand through fiscal and other interventions, they are blocked by the political resistance of the capitalists.  You see, as Blakeley says, “Kalecki’s argument is that not that social democracy is economically unstable, but that it is politically unstable.”  For Kalecki, crises caused by capitalists being politically unwilling to agree to reforms. So apparently, social democracy would work under capitalism if it was not for the stupidity of the capitalists!

Minsky was right that the financial sector is inherently unstable and the massive growth in debt in the last 40 years increases that vulnerability – Marx made that point 150 years ago in Capital.  And in my blog, I have made the point in many posts that “debt matters”.  But financial crashes do not always lead to slumps in production and investment.  Indeed, there has been no financial crisis (bank busts, stock market crashes, house price collapse etc), that has led to a slump in capitalist production and investment unless there is also a crisis in the profitability of the productive sector of the capitalist economy.  The latter is still decisive.

In a chapter of the book, World in Crisis, edited by G Carchedi and myself (unfortunately again it is not a best seller) Carchedi provides compelling empirical support for the link between the financial and productive sectors in capitalist crises.  Carchedi: “Faced with falling profitability in the productive sphere, capital shifts from low profitability in the productive sectors to high profitability in the financial (i.e., unproductive) sectors. But profits in these sectors are fictitious; they exist only on the accounting books. They become real profits only when cashed in. When this happens, the profits available to the productive sectors shrink. The more capitals try to realize higher profit rates by moving to the unproductive sectors, the greater become the difficulties in the productive sectors. This countertendency—capital movement to the financial and speculative sectors and thus higher rates of profit in those sectors—cannot hold back the tendency, that is, the fall in the rate of profit in the productive sectors.”

What Carchedi finds is that:“Financial crises are due to the impossibility to repay debts, and they emerge when the percentage growth is falling both for financial and for real profits.“ Indeed, in 2000 and 2008, financial profits fall more than real profits for the first time.  Carchedi concludes that: “The deterioration of the productive sector in pre-crisis years is thus the common cause of both financial and non-financial crises. If they have a common cause, it is immaterial whether one precedes the other or vice versa. The point is that the (deterioration of the) productive sector determines the (crises in the) financial sector.”

You may ask: does it matter if the inequalities and crises we experience under capitalism are caused by financialisation or by Marx’s laws of value and profitability?  After all, we can all agree that the answer is to end the capitalist system, no?  Well I think it does matter, because policy action flows from any theory of causes.  If we accept financialisation as the cause of all our woes, does that mean that it is only finance that is the enemy of labour and working people and not the nice productive capitalists like Amazon who only exploit us at work?  It should not, but it does.  Take Minsky himself as an example.  Minsky started off as a socialist but his own theory of financialisation in the 1980s led him to not to expose the failings of capitalism but to explain how an unstable capitalism could be ‘stabilised’.

Undoubtedly Blakeley is made of sterner stuff.  Blakeley says that we must take on the bankers in the same degree of ruthlessness as Thatcher and Reagan took on the labour movement back in the neoliberal period starting in the 1980s.  Blakeley says that “the Labour Party’s manifesto reads like a return to the post-war consensus…we cannot afford to be so defensive today.  We must fight for something more radical…. because the capitalist model is running out of road. If we fail to replace it, there is no telling what destruction its collapse might bring.” (p229). That sounds like the roar of a lion of socialism.  But when it comes to the actual policies to deal with the financiers, Blakeley becomes a mouse of social democracy.

First, Blakeley says “we must adopt a policy agenda that challenges the hegemony of financial capital, revoking its privileges and placing the powers of investment back under democratic control.”  Now I have argued in many posts and at meetings of the labour movement in Britain that the only way to take democratic control is to bring into public ownership the big five banks that control 90% of lending and deposits in Britain. Regulation of these banks has not worked and won’t work. 

Yet Blakeley ignores this option and instead calls for ‘constraining’ measures on the existing banks, while setting up a public retail bank or postal banks in competition along with a National Investment Bank.  “Private finance must be properly constrained” (but not taken over), “using regulatory tools that are international adopted.” P285.  At various places, Blakeley refers to Lenin.  Perhaps Blakeley should remind herself what Lenin said about dealing with the banks. “The banks, as we know, are centres of modern economic life, the principal nerve centres of the whole capitalist economic system. To talk about “regulating economic life” and yet evade the question of the nationalisation of the banks means either betraying the most profound ignorance or deceiving the “common people” by florid words and grandiloquent promises with the deliberate intention of not fulfilling these promises.”

As for a National Investment Bank, a Labour manifesto pledge, it leaves the majority of investment decisions and resources in the hands of the capitalist financial sector.  As I have shown before, the NIB would add only 1-2% of GDP in extra investment in the British economy, compared to the 15-20% on investment controlled by the capitalist sector.  So ‘financialisation’ would not be curbed.

Blakeley’s other key proposal is a People’s Asset Manager (PAM), which would gradually buy up shares in the big multinationals, thus “socialising ownership across the whole economy” and then “pressurising companies” to support investments in socially useful projects.  “As a public banking system emerges and grows alongside a People’s Asset manager, ownership will be steadily be transferred from the private sector to the public sector.” (p268) “in a bid to dissolve the distinction between capital and labour” (p267).  So Blakeley’s aim is not to end the capitalist mode of production by taking over the major sectors of capitalist investment and production, but to dissolve gradually the ‘distinction’ between capital and labour.

This is the ultimate in utopian gradualism.  Would capitalists stand by while their powers of control are gradually or steadily lost?  An investment strike would ensue and any socialist government would be faced with the task of taking over completely.  So why not spell out fully a programme for a democratically controlled publicly owned economy with a national plan for investment, production and employment?

Stolen aims to offer a radical analysis of the crises and contradictions of modern capitalism and policies that could end ‘financialisation’ and give control by the many over their economic futures.  But because the analysis is faulty, the policies are also inadequate.

Climate change and mitigation

September 6, 2019

There is a new IMF paper out on climate change and what policy instruments are available to do something about it.

I write this post from Brazil, where the fires in the Amazon rage on and the Bolsonaro government ignores this catastrophe and even welcomes it as a way of clearing the land for more agro production by big domestic and foreign companies.  Bolsonaro, Trump and other right-wing ‘populists’ of course deny that there is a problem from global warming and climate change.  And I know there are even some on the left in the labour movement who are sceptical at least or outright deniers, seeing it as either mistaken science or a scientific establishment conspiracy for grants and careers.

Well, all I can say to that is that evidence remains overwhelmingly convincing that the earth is heating up to levels not seen in recorded human history; that this global warming is caused by big increases in ‘greenhouse gases’ like carbon dioxide and methane; and that these increases are due to industrialisation and economic growth using fossil fuel energy.

Here is the graph on carbon emissions by NASA as published in the IMF paper.

And as the IMF paper says: “Climate change affects economic outcomes through multiple channels. Rising temperatures, sea-level rises, ocean acidification, shifting rainfall patterns, and extreme events (floods, droughts, heat waves, wildfires) affect the economy along multiple dimensions, including through wealth destruction, reduction and volatility of income and growth (Deryugina and Hsiang 2014, Mersch 2018) and effects on the distribution of income and wealth (IMF 2017, Bathiany et al. 2018, De Laubier-Longuet Marx et al. 2019, Pigato, ed., 2019).”

The IMF goes on:“The broad consensus in the literature is that expected damages caused by unmitigated climate change will be high and the probability of catastrophic tail-risk events is nonnegligible.”  And: “There is growing agreement between economists and scientists that the tail risks are material and the risk of catastrophic and irreversible disaster is rising, implying potentially infinite costs of unmitigated climate change, including, in the extreme, human extinction (see, e.g., Weitzman 2009).”

Maybe you might think this is scare-mongering and exaggerated.  But what if you are wrong and the ‘tail-end risks’ in the normal distribution of probability are fatter than you think?  Can you take the risk that it will all be ok?

So let us assume that the science is right and the consequences are potentially catastrophic to the earth, human living conditions and well-being.  What can be done about it, either to mitigate the effects or to stop any further rise in global warming?

Mainstream economics is seeped in complacency. William Nordhaus and Paul Romer won ‘Nobel’ prizes in economics for their contributions to the economic analysis and projections of climate change.  Using ‘integrated assessment models’ (IAMs), Nordhaus claimed he could make precise the trade-offs of lower economic growth against lower climate change, as well as making clear the critical importance of the social discount rate and the micro-estimates of the cost of adjustment to climate change.  And his results showed that things would not be that bad even if global warming accelerated well beyond current forecasts.

This neoclassical growth accounting approach is fraught with flaws, however.  And heterodox economist, Steve Keen, among others, has done an effective debunking job on the Nobel Laureate’s forecasts.  “If the predictions of Nordhaus’s Damage Function were true, then everyone—including Climate Change Believers (CCBs)—should just relax. An 8.5 percent fall in GDP is twice as bad as the “Great Recession”, as Americans call the 2008 crisis, which reduced real GDP by 4.2% peak to trough. But that happened in just under two years, so the annual decline in GDP was a very noticeable 2%. The 8.5% decline that Nordhaus predicts from a 6 degree increase in average global temperature (here CCDs will have to pretend that AGW is real) would take 130 years if nothing were done to attenuate Climate Change, according to Nordhaus’s model (see Figure 1). Spread over more than a century, that 8.5% fall would mean a decline in GDP growth of less than 0.1% per year”.

That other Nobel prize winner, Paul Romer, is also a ‘climate optimist’.  The founder of so-called ‘endogenous growth’ ie growth leads to more inventions and more inventions lead to more growth in a harmonious capitalist way, Romer reckons that ensuring faster growth will deliver innovatory solutions for stopping global warming and climate change.  Romer advocates setting up ’charter cities’ in the third world where enclaves in an existing country are handed over to another more stable and successful nation that would accelerate growth through innovation.  His favourite model for this was Hong Kong!

The IMF paper notes with sadness that ‘market solutions’ to mitigating global warming are not working.  That’s because companies and countries hope that somebody else will fix the problem and they don’t need to spend anything on it; or that companies and states never think long term and are only interested in what will happen in one, three of five years ahead, not fifty or a century.  But above all, market solutions are not working because for capitalist companies it is just not profitable to invest in climate change mitigation: “Private investment in productive capital and infrastructure faces high upfront costs and significant uncertainties that cannot always be priced. Investments for the transition to a low-carbon economy are additionally exposed to important political risks, illiquidity and uncertain returns, depending on policy approaches to mitigation as well as unpredictable technological advances.”

Indeed: “The large gap between the private and social returns on low-carbon investments is likely to persist into the future, as future paths for carbon taxation and carbon pricing are highly uncertain, not least for political economy reasons. This means that there is not only a missing market for current climate mitigation as carbon emissions are currently not priced, but also missing markets for future mitigation, which is relevant for the returns to private investment in future climate mitigation technology, infrastructure and capital.” In other words, it ain’t profitable to do anything significant.

The IMF then lists various measures of monetary and fiscal policy by governments that might be used to mitigate climate change.  They boil down to credit incentives to companies, or issuing ‘green bonds’ to try and fund climate change mitigation projects.  Then it considers what fiscal policies might be applied ie government investment in green projects or taxes on carbon emissions etc.

What does the IMF conclude on the efficacy of these policies: “Adding climate change mitigation as a goal in macroeconomic policy gives rise to questions about policy assignment and interactions with other policy goals such as financial stability, business cycle stabilization, and price stability. Political economy considerations complicate these questions. The literature does not provide answers yet.”  In other words, they see so many complications in using traditional policy tools within the framework of the capitalist mode of production for profit, that they don’t have any answers. In effect, how can the threat of disasters be averted if capitalist accumulation for profit must continue?

Now some on the left argue that the answer is to end the ‘growth mentality’ in capitalism.  Just ploughing on producing blindly and wastefully more will ensure disaster.  This is the ‘no-growth’ option.  And it is undoubtedly true that when economies accelerate in growth and industrial output, based on fossil fuel energy, then carbon emissions also rise inexorably.  Jose Tapia, a Marxist economist in the US, has produced firm empirical evidence of the correlation between economic growth and carbon emissions.  Indeed, whenever there is a recession as in 2008-9, carbon emission growth falls.

Tapia points out that “the evolution of CO2 emissions and the economy in the past half century leaves no room to doubt that emissions are directly connected with economic growth. The only periods in which the greenhouse emissions that are destroying the stability of the Earth climate have declined have been the years in which the world economy has ceased growing and has contracted, i.e., during economic crises. From the point of view of climate change, economic crises are a blessing, while economic prosperity is a scourge.”  Inexorable march toward utter climate disaster [f] (1)

There is an extensive literature arguing for this no growth option to be adopted by the labour movement and socialists globally.  But is no growth the answer, when there are three billion people in dire poverty and when even in the more advanced capitalist economies, stagnating economies would mean falling living standards and worse lives for the rest?  Instead, can we not mitigate climate change and environmental disasters, and even reverse the process through ending the capitalist mode of production?  Then under democratic global planning of the commonly owned resources of the world, we can phase out fossil fuel energy and still expand production to meet the needs of the many.  Is this utopian or a practical possibility?

I won’t spell out how that can be done because I think that Richard Smith has expounded how in a series of comprehensive articles.  As he says, what we need is not ‘no growth’ but ‘eco-socialism’.  It is not a choice between global warming and ‘no growth’ recession and depression for billions; but between capitalist production disaster or socialist planning. Green capitalism won’t work, as the IMF paper hints at, and a Green New Deal won’t be enough if the capitalist mode of production for profit still dominates.  But under democratic planning we can control unnecessary consumption and return resources to the environment in a way to keep the planet, human beings and nature as balanced as possible. We can “innovate”, create new things, but still balance our ecological inputs and outputs.  It’s a practical possibility, but time is running out.

The trade trigger

August 28, 2019

Financial markets globally continue to gyrate on any news about the trade war between the US and China.  When President Trump announced that the Chinese had called him during the G7 summit meeting in Biarritz to agree on talks on a trade deal, the stock markets rose.  Within hours after China said no such call had been made and this was just another Trump ‘fake news’, markets reversed and went down again.

Clearly what happens in the ongoing trade battle has become a trigger point for a stock market collapse and a massive switch into ‘safe haven’ government bonds and gold.  But it is more than that.  Global growth has been slowing and corporate investment has dropped off sharply.  This is driven by a fall in corporate profits, a profits recession.

Take the earnings results of the top 500 companies by stock market value in the US, S&P-500.  With nearly all results in for the second quarter of 2019 ending in June, total earnings (profits) are up only 0.5% and sales revenues up only 4.7%.  After taking into account current inflation, real earnings were negative and revenues barely positive.  And that’s for the top 500 companies.

For the smaller companies, the situation is even worse.  Earnings are down over 10% from last year and revenues up only 2.2%, or flat after inflation.  Excluding the finance sector, earnings would be down 21%.  A sector analysis shows that the retail sector did best as the American consumer went on spending, along with the finance sector.  But productive sectors like technology saw a 6.3% fall in profits.  And that is key.

For the first half of 2019, the earnings are in negative territory compared to a 23% rise in the first half of 2018.  And the forecast for Q3 earnings is for a further fall of 4.3% yoy.

Everywhere, domestic production is dropping back.  The usual answer is to sell more overseas through exports.  But here the world trade picture is looking bleak.  The Dutch database company CPB provides monthly world trade figures.  And in June, world trade fell by 1.4% over May and compared to June 2018.  Indeed, world trade has fallen since October 2018 by 3.5%.

And now we have the trade war, which is intensifying.  Only last week, China announced that it was imposing tariffs on US imports in retaliation for the planned September tariffs on Chinese imports into the US already announced by Trump.  Trump promptly announced further tariff hikes in response.

JP Morgan economists now reckon that direct effect of these tariff measures on China’s growth, already slowing, would be to knock 0.2% of the growth rate and deliver a permanent loss of 0.5% of China’s GDP.  The extra hikes threatened by Trump would drive that loss up to 0.9%.  US growth also would take a hit, to the tune of about 0.25% to 0.5% in permanent loss of GDP.  Even more worrying is that uncertainty about how far this war is going, is making businesses, already suffering from slowing or falling profits, as we have seen, even more unwilling to make new investments.

Global investment growth is already down to just 1% a year, according to JPM.  If investment should go negative globally in the next few quarters, then global real GDP growth, currently around 2.5% a year (depending on how you measure it), would drop towards zero – in other words, a global recession.


It’s all going pear-shaped

August 24, 2019

With perfect timing, just as the summit meeting of the leaders of the top capitalist economies (G7) met in Biarritz, France, China announced a new round of tariffs on $75bn of US imported goods. This was in retaliation to a new planned round of tariffs on Chinese goods that the US planned for December. US President Trump reacted angrily and immediately announced that he was going to hike the tariff rates on his existing tariffs on $250bn of Chinese goods and impose more tariffs on another $350bn of imports.

The US president also said he was ordering US companies to look for ways to scrap their operations in China. “We don’t need China and, frankly, would be far better off without them,” Mr Trump wrote. “Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA.”

This intensification of the trade war naturally hit financial markets; the US stock market fell sharply, bond prices went up as investors looked for ‘safe-havens’ in government bonds and the crude oil price fell as China was going to impose a reduction on US oil imports.

These developments came only a day after the latest data on the state of the major capitalist economies revealed a significant slowdown.  The US manufacturing activity index (PMI) for August came in below 50 for the first time since the end of the Great Recession in 2009.

Indeed, the US, Eurozone and Japanese indexes are below 50, indicating a full-out manufacturing recession is here now.  And the ‘new orders’ components for each region was even worse – so the manufacturing index is set to fall further. Up to now, the service sectors of the major economies have been holding up, thus avoiding an indication of a full-blown economic slump. “This decline raises the risk that weakness in manufacturing may have begun to spill over to services, a risk that could generate a sharper-than-expected weakening in US and global labor markets.”  (JPM). Overall, JP Morgan reckons the world economy is growing at just a 2.4% annual pace – close to levels considered a ‘stall speed’ before outright recession.

Despite all his bluster about how well the US economy is doing, Trump is worried.  In addition to attacking China, he also launched again into criticising US Fed chair Jay Powell for not cutting interest rates further to boost the economy, calling Powell as big an “enemy” of the US economy as China!

Powell had just been speaking at the annual summer gathering of the world’s central bankers in Jackson Hole, Wyoming.  In his address, he basically said that there was only so much monetary policy could do.  Trade wars and other global ‘shocks’ could not be overcome by monetary policy alone.  Powell’s monetary policy committee is split on what to do.  Some want to hold interest rates where they are because they fear that too low interest rates (and everywhere they are going negative) will fuel an unsustainable credit boom and bust.  Others want to cut rates as Trump demands to resist the recessionary forces descending on the economy.  Powell bleated that “We are examining the monetary policy tools we have used both in calm times and in crisis, and we are asking whether we should expand our toolkit.”

The trouble is that the central bankers at Jackson Hole are realising, as had already become obvious, that monetary policy, whether conventional (cutting interest rates) or unconventional (printing money or ‘quantitative easing’) was not working to get economies out of low growth and productivity or avoid a new recession.

Many of the academic papers presented to the central bankers at Jackson Hole were laced with pessimism.  One argued that bankers needed to coordinate monetary policy around a global ‘natural rate of interest’ for all.  The problem was that there is considerable uncertainty about where the neutral rate really lies” in each country, let alone globally.  As one speaker put it: “I am cautious about using this impossible-to-measure concept to estimate the degree of policy divergence around the world (or even just the G4)”.  So much for the basis of most central bank monetary policy for the last ten years.

Another paper pointed out that “monetary policy divergence vis-a-vis the U.S. has larger spillover effects in emerging markets than advanced economies.”  So “domestic monetary policy transmission is imperfect, and consequently, emerging markets’ monetary policy actions designed to limit exchange rate volatility can be counterproductive.”  In other words, the impact of the Fed’s policy rate and the dollar on weaker economies is so great that smaller central banks can do nothing with monetary policy, except make things worse!

No wonder, Bank of England governor Mark Carney in his speech took the opportunity before he leaves his post to suggest that the answer was to end the rule of dollar in trading and financial markets.  The US accounts for only 10 per cent of global trade and 15 per cent of global GDP but half of trade invoices and two-thirds of global securities issuance, the BoE governor said. As a result, “while the world economy is being reordered, the US dollar remains as important as when Bretton Woods collapsed” in 1971. It caused too much imbalances in the world economy and threatened to bring down weaker emerging economies which could not get enough dollars.  It was time for a global fund to protect against capital flight and later a world monetary system with a world money!  Some hope!  But he showed the desperation of central bankers.

The impending global recession has also concentrated the minds of mainstream economics.  A division of opinion among mainstream economists has broken out over what economic policy to adopt to avoid a new global recession. Orthodox Keynesian, Larry Summers, former US treasury secretary under Clinton and Harvard professor, has argued the major capitalist economies are in ‘secular stagnation’. So he reckons monetary easing, whether conventional or unconventional, won’t work. Fiscal stimulus is needed.

On the other hand, Stanley Fischer, formerly deputy at the US Fed and now an executive of the mega investment fund, Blackrock, reckons that fiscal stimulus won’t work because it is not ‘nimble enough’ ie takes too long to have an effect. Also, it risks driving up public debt and interest rates to unsustainable levels. So monetary measures are still better.

The post-Keynesians and Modern Monetary Theory economists got very excited because Summers seemed to agree with them, finally, – namely that fiscal stimulus through budget deficits and government spending can stop ‘aggregate demand’ collapsing. It seems that the consensus among economists is moving to the view that central bankers can do little or nothing to sustain capitalist economies in 2019. 

But in my view, neither the ‘monetarists’ nor the Keynesians/MMT are right. Whether more monetary easing and fiscal stimulus, nothing will stop the oncoming slump. That’s because it is not to do with weak ‘aggregate demand’.  Household consumption in most economies is relatively strong as people continue to spend more, partly through extra borrowing at very low rates of interest.  The other part of ‘aggregate demand’, business investment is weak and getting weaker.  But that is because of low profitability and now, in the last year or so, falling profits in the US and elsewhere.  Indeed, US corporate profit margins (profits as a share of GDP) have been falling (from record highs) for over four years, the longest post-war contraction.

The Keynesians, post-Keynesians (and MMT supporters) see fiscal stimulus through more government spending and increased government budget deficits as the way to end the Long Depression and avoid a new slump.  But there has never been any firm evidence that such fiscal spending works, except in the 1940s war economy when the bulk of investment was made by government or directed by government, with business investment decisions taken away from capitalist companies.

The irony is that the biggest fiscal spenders globally have been Japan, which has run budget deficits for 20 years with little success in getting economic growth much above 1% a year since the end of the Great Recession; and Trump’s America with his tax cuts and corporate tax exemptions in 2017.  The US economy is slowing down fast, and Trump is hinting at more tax cuts and shouting at Powell to cut rates.  In Europe, the European Central Bank is preparing a new round of monetary easing measures.  And even the German government is hinting at fiscal deficit spending.

So we shall probably get a new round of monetary easing and fiscal stimulus measures, to satisfy all parts of mainstream and heterodox economics.  But they won’t work.  The trade and technology war is the trigger for a new global slump.

Recessions, monetary easing and fiscal stimulus

August 19, 2019

As the stock markets of the world gyrate up and down like a yo-yo, all talk in the financial media is on whether a new global recession is coming and when.  The financial pundits search for economic or financial indicators that might guide them to tell.  The favourite one is the ‘inverted bond yield curve’.  This is the difference in the annual interest rate that you get if you buy a government bond that has a ten-year life (the maturity before you get your money repaid) and the interest rate for buying either a three-month or two-year bond.

The curve of interest rates for differently maturing bonds is usually upwards, meaning that if you lend the government your cash (ie buy a government bond) for ten years you would normally expect to get a higher interest rate (yield) than if you lent the government your money for just three months.  But sometimes, in the market for buying and selling government bonds (the ‘secondary market’), the yield on the ten-year bond falls below that of the two-year or even three-month bond.  Then you have an inverted yield curve.

Why does this happen?  What it suggests is that investors in financial assets (who are banks, pension funds, companies and investment funds) are so worried about the economy that they no longer want to hold the stocks or bonds of companies (ie invest in or lend them cash).  It’s too risky and so instead investors prefer to hold very safe assets like government bonds – as the governments of Germany, Japan, the US or the UK are not going to go bust like a company or bank.

If investors buy more government bonds, they drive the price of those bonds up in the market.  The government pays an annual fixed interest on that bond until it matures, so if the price of the bond keeps rising, then the yield on that bond (ie. interest rate/bond price) keeps falling.  And then the bond yield curve can invert. Empirical evidence shows that every time that happens for a sufficient period (some months), within a year or so, an economic recession follows.

How reliable is this indicator of a recession coming?  Two Bloomberg authors have questioned the validity of inverted yield for causation; it may be that an inverted curve correlates with recessions, but that is no confirmation that another recession is on its way because all it shows is that investors are fearful of recession and they could well be wrong.  Indeed, when you look at corporate bonds, there is no inverted curve.  Longer-term corporate bonds have a much higher yield than short-term bonds.

On the other hand, JP Morgan economists recently did some regressions on the inverted yield curve and reckoned that the very low inflation that most major economies have experienced in the post Great Recession period may have altered the reliability of the indicator to some extent because the yield curve could go flat but not really express investor fear and loathing of stocks.  Even so, JP Morgan still reckoned it was a valuable indicator.  Currently, the US bond yield curves (10yr-3m) and (10yr-2yr) have inverted.  And as you can see from the JPM graph below, that every time that has happened before, a recession has followed (the grey areas) within a year.

JP Morgan reckons on this basis the current probability of a slump in the US economy within a year is about 40-60%.

And this is the US, the capitalist economy with still the best economic performance of the G7, with real GDP growth at about 2.3%.  Everywhere else in the G7, in Europe, in Asia, and also in many large so-called emerging economies, economic growth is falling fast towards zero and below.  Look at this list:

Canada: 1.3%; France 1.3%; Japan 1.2%; UK 1.2%; Russia 0.9%; Brazil 0.5%; Germany 0.4%; Italy 0.0; Mexico -0.7%;  Turkey -2.6%; Argentina -5.8%.  Only China, India and Indonesia can record decent growth rates and even here, there is a rapid slowdown.

I have reported before on the manufacturing and industry activity indexes that show the world is already in a manufacturing sector recession and only ‘service sectors’ like health, education, tourism etc are keeping the world economy moving.  But those sectors are ultimately dependent on the health of the productive sectors of a capitalist economy for their sales and profits.

In some of the major economies, there is so-called full employment, at least on the official stats, even if it is temporary, part-time, self-employed and on basic wage levels.  This employment income helps to keep spending going, but in many countries it is not enough, so that household savings are being run down.  For example, in the UK, the household savings rate is at a 50-year low.  So people cannot keep borrowing indefinitely, even though interest rates are very low.

And are they low!  We are now in the fantasy world of negative interest rates, where borrowers get paid to borrow and lenders pay to lend. In Denmark, one mortgage lender is offering loans at -0.1%, in other words it is paying you to take out a mortgage!  Over 20% of all government and even some corporate bonds have negative interest rates. The entire spectrum of German government bonds from two-years to 30 years have negative interest rates if you buy them. So sellers of bonds (borrowers) can expect you, the lender, to pay interest to them to buy their bonds!

So why are bond investors prepared to do this? As I said, it’s because they fear a global recession that will cause a collapse in stock markets and other ‘risky’ financial assets, so the safest place to put your money is with governments (which don’t go bust) like the US, the UK, Japan, Germany and Switzerland.

If a recession is coming, what can be done to avoid it?  Mainstream and Keynesian economics has basically two policy solutions.  The first is to inject more money into the financial system in the hope that piles of dollars, euros and yen will find their way into the coffers of corporate borrowers, which will then keep investing in jobs and machines; or into households who will keep spending

The ‘conventional’ way to do this was for the central banks of the major economies to cut their ‘policy’ interest rate, which would lead to falling interest rates across the board and thus reduce the cost of borrowing.  But the experience of the last ten years of what I call the Long Depression reveals that this does not work.  Investment has remained low as a share of GDP, wages have stagnated and economic growth has been feeble.

So governments and central banks have resorted to ‘unconventional monetary policy’ where the central banks buy billions of government and corporate bonds (even company stocks) from commercial banks.  This is called quantitative easing (QE). This led to a huge boost in bank reserves.  The banks were supposed to lend that cash on to companies to invest.  But it did not work.  Companies did not borrow to invest.  They were either so cash rich like Amazon or Microsoft that they did not need to borrow or so weak that the banks would not lend to them.  So all this cash ended up being invested in stocks and bonds (what Marx called fictitious capital, ie just claims on future profits or interest, not actual profits or interest).  The financial markets rocketed up, but the ‘real’ economy stagnated.

Monetary policy has failed, whether conventional or unconventional.  Central banks have been ‘pushing on a string’.  That was something that Keynes found too during the Great Depression of the 1930s.  His policy proposal for getting full employment and ending the depression in the early 1930s was first conventional interest-rate cuts and then unconventional QE.  By 1936, when he wrote his great work, The General Theory, he announced the failure of monetary policy.

And so it has been this time.  Mainstream economists including Keynesians like Paul Krugman at first advocated massive monetary injections to boost economies.  Japan’s government even invited Krugman and others to Tokyo to advise them on QE.  The government and the Bank of Japan adopted QE with a vengeance, so much so that the BoJ has bought virtually all the available government bonds in the market – but to no avail.  Growth remains weak, inflation is near zero and wages stagnate. 

The central banks have run out of ideas. And investors know it. That is why bond yields are negative and in the US the yield curve has inverted.  But there is nothing else that the central banks can do except cut interest rates where they are not yet zero and bring back yet more QE where they are.

Some radical economists have not given up on monetary policy.  Some are advocating ‘helicopter money’(named after right-wing monetarist economist Milton Friedman who advocated by-passing the banking system and printing cash and giving it directly to households to spend ie send helicopters over the country dropping dollars – not napalm as in Vietnam).  This ‘people’s money’ is the last resort of the monetary policy solution.

The more perceptive of mainstream economists now recognise that monetary easing will not work.  The Financial Times and even the Wall Street Journal have been trashing this policy.  And Keynesians who advocated it before now recognise its failure.  Take this example by Edward Harrison, a macro economic financial advisor.

“I think monetary policy is ineffective. We don’t even know how it works. Sure, rate policy can help at critical junctures in the business cycle by lowering interest payments when debtors are under stress. But, we’ve hit the limits of what central banks can do. As a result, we’ve resorted to quantitative easing, negative interest rates, and yield curve control. And for what? It’s crazy.   The solution is staring us in the face: help put money in the pockets of the people who are facing the most severe financial stress in our economies. Those are the people who need the money the most and are most likely to spend that money too. Until we do that, the stress on our economic and financial system will continue to grow… and political unrest will continue to grow with it.”

Harrison cites empirical work from his own college that shows monetary policy does not work – as Keynes discovered in the 1930s. “For example, economic researchers at my alma mater Dartmouth wrote this in 2013 as the abstract for an economic study:

“We study the factors that drive aggregate corporate investment from 1952–2010. Quarterly investment responds strongly to prior profits and stock returns but, contrary to standard predictions, is largely unrelated to changes in interest rates, market volatility, or the default spread on corporate bonds. At the same time, high investment is associated with low profit growth going forward and low quarterly stock returns when investment data are publicly released, suggesting that high investment signals aggregate over investment. Our analysis also shows that the investment decline following the financial crisis of 2008 represents a fairly typical response to changes in profits and GDP at the end of 2008 rather than an unusual reaction to problems in the credit markets.”

And he cites work by the US Federal Reserve that concluded that: A fundamental tenet of investment theory and the traditional theory of monetary policy transmission is that investment expenditures by businesses are negatively affected by interest rates. Yet, a large body of empirical research offer mixed evidence, at best, for a substantial interest-rate effect on investment. In this paper, we examine the sensitivity of investment plans to interest rates using a set of special questions asked of CFOs in the Global Business Outlook Survey conducted in the third quarter of 2012. Among the more than 500 responses to the special questions, we find that most firms claim to be quite insensitive to decreases in interest rates, and only mildly more responsive to interest rate increases.”

I have cited this paper that Harrison refers on many occasions in this blog before he brought it up.  But Harrison emboldens the text from the paper about how interest rates have little effect on business investment. But he ignores the other key conclusion in the paper cited.  I quote again with my emphasis now: “Quarterly investment responds strongly to prior profits and stock returns but, contrary to standard predictions…..Our analysis also shows that the investment decline following the financial crisis of 2008 represents a fairly typical response to changes in profits and GDP at the end of 2008 rather than an unusual reaction to problems in the credit markets.”

In other words, what drives capitalist economies and capital accumulation are changes in profits and profitability – indeed that is what the paper cited shows.  And there is a pile of other empirical evidence that confirms this relation, which I have covered in several papers. The profit investment nexus.  Economic growth in a capitalist economy is driven not by consumption but by business investment. That is the swing factor causing booms and slumps in capitalist economies.  And business investment is driven mainly by one thing: profits or profitability – not interest rates, not confidence and not consumer demand. It is this simple, obvious and empirically confirmed explanation of regular and recurring booms and slumps that is ignored or denied by the mainstream (including Keynesian) and heterodox post-Keynesian economics.

Take this alternative explanation of recessions recently offered by an ex-Bank of England economist Dan Davies.  Davies tells us that financial meltdowns aren’t the usual way in which recessions happen, and emergency credit lines and taxpayer bailouts aren’t the usual way that they’re prevented or managed. What normally happens is that there’s a shock of some sort to business confidence – say, political uncertainty or trade restrictions, as we’re seeing at the moment – and companies react to this by cutting back investment plans.”  According to Davies this orthodox Keynesian recession of this sort, unaccompanied by a financial market crisis, is the normal kind – and one of the best understood problems in economic policy.”  Really, best understood?

So this Keynesian explanation is that there is a sudden loss of business confidence caused by some external factor like a trade war or a government falling or a war. There is nothing endogenously wrong with the capitalist process of production and investment for profit.  The idea of ‘shocks’ to an inherently equilibrium system is the mainstream macro view, in essence.  It has bred a whole industry of empirical work based on Dynamic Stochastic General Equilibrium (DSGE) models, which is a smart word for seeing what happens to an economy when an external ‘shock’’ like a sudden loss of çonfidence’ or trade tariffs is applied.  Larry Summers, a leading Keynesian guru critiqued DSGE models“In four years of reflection and rather intense involvement with this financial crisis, not a single aspect of dynamic stochastic general equilibrium has seemed worth even a passing thought.”  He moaned: “Is macro about–as it was thought before Keynes, and came to be thought of again–cyclical fluctuations about a trend determined somewhere else, … inserting another friction in a DSGE model isn’t going to get us there. “

This orthodox Keynesian explanation of recessions explains nothing.  Why is there a sudden loss of business confidence as we are seeing now?  How does a sudden loss explain regular and recurring slumps and booms, not one-off shocks?  Davies argues that the Great Recession was exceptional in that the huge slump was caused by an extreme financial crash that won’t be repeated, as ‘normal’ slumps are just contingent ‘shocks’.

And yet the theory and the evidence is there that capitalist accumulation and production moves forward in a succession of booms and slumps of varying magnitude and length according to movement of the profitability of capital culminating on a regular basis in a collapse of profits, taking down investment, employment, incomes and consumption in that order.

In the 1930s when Keynes realised that monetary easing was not working to end the depression, he opted for government spending (investment) through running budget deficits to stimulate ‘effective demand’ and get investment and consumption on a rising trend.  This policy has become known as the Keynesian one, also adopted by more radical post-Keynesians and in their latest version, Modern Monetary Theory (MMT). The Keynesians reckon capitalist economies can be brought out of recessions by governments borrowing more than they get in tax revenues (running budget deficits).  Governments borrows by getting financial institutions to buy their bonds.

The more radical post-Keynesians and MMTers reckon that it not even necessary to issue bonds for that purpose.  Governments can just print the money and then spend it on useful projects.  But all agree that ‘fiscal easing’ is the answer to restoring growth, investment, employment and incomes in a capitalist economy.  The government borrows or prints money and the capitalists and workers spend it.  Once growth is restored and full employment and rising incomes are achieved any debt servicing can be funded and you can turn off the government money tap and moderate any possible ensuing inflation if the economy is ‘overheating’.

The trouble with this policy option is that we live in a capitalist economy where the investment decisions that drive any economy are made by capitalist companies. Unless government makes those investment decisions itself and rides roughshod over the capitalist sector or replaces it with state operations in a plan (as in China, for example), then investment and growth will depend on the decisions of capitalist companies.  And they only invest if they are confident of getting good profits ie the profitability of investment is high and rising.

The history of the Great Depression of the 1930s shows; and the collapse of Keynesian demand management policies in the 1970s shows; and the history of the Long Depression since 2009 shows, that if corporate profitability is low, and especially if its falling, then no amount of fiscal stimulus will deliver more investment and faster growth.

I and others have delivered a pile of empirical evidence to show that government spending has little or no impact on boosting economic growth or overall investment – the amount is either too small to have an impact (government investment averages just 2-3% of GDP in most capitalist economies compared to 15-20% of GDP for capitalist sector investment).  Or most government spending in capitalist economies are really handouts to capitalist companies or to boost welfare with little productive result.

Don’t believe me – then look at the evidence here.  Take Japan – it has run budget deficits of between 3-10% of GDP for nearly 20 years and yet its growth rate has been even lower than the US or Europe.

The Trump tax cuts have raised the US budget deficit in the last two years and going forward – Trump is following Keynesian policies in that sense – and yet the US is now slowing down fast.  The US is projected to run a primary budget deficit (that excludes the interest cost on the debt) for the foreseeable future.  Do Keynesians really expect the US economy to grow faster as a result?

US budget projections

Although the inverted yield curve can be checked daily, it may not be a useful indicator of a coming recession but falling profits are (unfortunately, profits data are mostly quarterly).  Empirical studies like the one mentioned by Harrison above and many others confirm this.  And global corporate profits are now stagnating;

while US non-financial corporate profits are falling.

Monetary and fiscal solutions to recessions that still preserve the profit-making capitalist system won’t work.  Monetary easing has failed, as it has done before.  Fiscal easing, where adopted, has also failed.  Indeed, capitalism can only get out of a recession by the recession itself.  A recession would wipe out weaker capitalist companies and lay off unproductive workers.  The cost of production then falls and those companies left after the slump have higher profitability as the incentive to invest.  That is the ‘normal’ recession.  In a depression, however, that process requires several slumps (as in the late 19th century depression) before normal service is resumed.  Another recession is on its way and neither monetary nor fiscal measures can stop it.

The political economy of Peterloo

August 16, 2019

Today is the 200th anniversary of what has come to be called the Peterloo massacre.  On 16 August 1819, 60,000 working people gathered at St Peter’s Field in Manchester England to demonstrate for the right to vote, against the terrible conditions and pay of factory workers and for the right to organise at the workplace, among a host of other injustices.

Peterloo has become a marker in the labour history of Britain. The peaceful demonstration was brutally attacked and dispersed by a private militia of thugs on horseback funded and directed by the local landlords and authorities with the tacit backing of the then Tory government under Lord Liverpool. An estimated 18 people, including a woman and a child, died from sabre cuts and trampling. Over 700 received serious injuries.

I am not going to discuss the event or the politics behind it as there are many thorough and better accounts to be had elsewhere.  Indeed, there is a film by leading British filmmaker, Mike Leigh on the day.

Instead, I want to comment on the economics of Peterloo: the state of the British economy and capitalism at the time  – to provide some context to the event and also perhaps draw out some wide generalisations.

Peterloo took place a few years after the end of so-called Napoleonic wars in which the aristocratic monarchies of Britain, Austria, Russia and Germany finally defeated the French republic.  The end of the war heralded a period of deep depression in European economies, as soldiers returned home without work and bad harvests and weather led to a sharp downturn in agricultural production – still the dominant form of economic activity in early 19th century Europe.

This period of depression started before the end of war in 1812 and continued for ten years to 1822. It is reckoned that England suffered more economically, socially and politically, than during the French wars when at least there were good harvests and armaments production provided work. During the wars, Britain’s export and re-export trade increased. British ships carried the world’s trade and also captured French colonies which further increased Britain’s trade potential. After 1815 this virtual monopoly ended and trade declined

The depression brought discontent and distress and a response from the growing layers of industrial workers in the ‘dark satanic mills’ of the new big cities of Manchester, Liverpool and Birmingham that had no parliamentary representation or civic rights.  The 18th century constitution remained, with the landlord class in control and forming the government.

In 1815 parliament passed the Corn Laws, enforcing higher prices for grain to protect landlord profits from cheaper foreign imports, squeezing the wages of workers and the profits of the industrial capitalists.  Classical bourgeois economist, David Ricardo wrote his Principles of Political Economy and Taxation in 1817 that presented a theoretical argument against agricultural rents and the corn laws.  Indeed, Ricardo led the demand in parliament for an inquiry into the Peterloo massacre.

Wages were held down by the so-called Speenhamland system, which subsidised wages from the public purse somewhat like the Universal Basic Income proposed now.  At the same time, the demobilisation of 300,000 soldiers, the influx of 100,000 Irish labourers and the use of children and women in the factories meant that the ‘reserve army of labour’ (to use Marx’s phrase) was huge.  Indeed, the population in the industrial areas was rocketing (up 50% in the first 30 years of the 19th century).

At the same time, any attempt by rural workers to feed themselves off the land was blocked and curtailed by the landowners.  The 1816 Game Laws allowed landowners to hunt for game; but not their workers.  The penalty for poaching was seven years transportation to Australia.  Common land had been wiped out by the enclosure measures decades before.

Decade Enclosures
1780-90 287
1790-1800 506
1800-1810 906

The war had driven up the public debt to £834 million. Interest on this was a heavy burden to taxpayers. But the answer of the government was to end income tax, thus shifting the burden of servicing the debt onto the poorest through various sales and customs taxes.  The interest paid on the debt went to the rich war bond holders now no longer paying income tax.  The government tried to inflate away the debt burden by staying off the gold standard and letting the pound devalue, driving up inflation and hitting the poor again.

Radical poet Lord Byron protested in the House of Lords about the situation in 1812 “I have been in some of the most oppressed provinces of Turkey; but never, under the most despotic of infidel governments, did I behold such squalid wretchedness as I have seen since my return, in the very heart of a Christian country”.

All this was compounded by the weather.  The year 1816 is now known as the ‘Year Without a Summer’ because of severe climate abnormalities that caused average global temperatures to decrease by 0.4–0.7 °C. This resulted in major food shortages across the Northern Hemisphere. Evidence suggests that the anomaly was predominantly a volcanic winter event caused by the massive 1815 eruption of Mount Tambora in the Dutch East Indies (now Indonesia). This eruption was the largest eruption in at least 1,300 years.

The Year Without a Summer was an agricultural disaster. Low temperatures and heavy rains resulted in failed harvests in Britain and Ireland. Families in Wales travelled long distances begging for food. Famine was prevalent in north and southwest Ireland, following the failure of wheat, oat, and potato harvests. In Germany, the crisis was severe; food prices rose sharply. With the cause of the problems unknown, people demonstrated in front of grain markets and bakeries, and later riots, arson, and looting took place in many European cities. It was the worst famine of 19th-century Europe.

Indeed, The Year Without a Summer is a misnomer; it was Years Without a Summer given the weather of 1816, 1817, and 1818.  Lord Byron, now in permanent exile, was moved to write an apocalyptic poem, The death of the sun, while staying by the banks of Lake Geneva in July 1816 as Europe and North America were gripped by one of the coldest summers on record.

“I had a dream, which was not all a dream. The bright sun was extinguish’d, and the stars Did wander darkling in the eternal space, Rayless, and pathless, and the icy earth, Swung blind and blackening in the moonless air; Morn came and went—and came, and brought no day, And men forgot their passions in the dread Of this their desolation.”

It is also no accident that Mary Shelley, the partner of Percy Shelley, went on to write Frankenstein in 1818. Shelley’s miserable Creature is usually portrayed as the terrible result of uncontrolled technology.  But in the context of the climate shock, it is also a figure representing the desperate refugees crowding Switzerland’s market towns in that year. Eyewitness accounts frequently refer to how hunger and persecution “turned men into beasts”, how fear of famine and disease-carrying refugees drove middle-class citizens to demonize these suffering masses as subhuman parasites and turn them away in horror and disgust.

Peterloo happened because the British government in this depression was the most reactionary.  There was a fear of the democratic ideas of the French Revolution spreading.  There was a lasting fear of popular movements, which reflected the fear of revolution. There was a determination to protect and defend the landed interest – the basis of the government’s political power. There was a general dislike of an organised police-force, so a consequent heavy reliance on the military and private militias meant that in any confrontation, made violence the preferred option. The government kept the Combination Acts on Statute Books until 1824, which suppressed all reform movements. This was a government of the landed few for the landed few.

The 18th century economist Adam Smith noted the imbalance in the rights of workers in regards to owners (or “masters”). In The Wealth of NationsBook I, chapter 8, Smith wrote: “We rarely hear, it has been said, of the combination of masters, though frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject. Masters are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labor above their actual rate[.]  When workers combine, masters … never cease to call aloud for the assistance of the civil magistrate, and the rigorous execution of those laws which have been enacted with so much severity against the combination of servants, labourers and journeymen.”

This was also the period of the so-called Luddites, a radical group of weavers who reacted to the introduction of machinery and their loss of jobs with attacks on the machines themselves.

In this light, the Peterloo massacre was the inevitable waiting to happen.  After the event, the great radical romantic poet, Percy Shelley graphically attacked the government and its ruling class in his famous poem, Masque of Anarchy, the final verse of which is echoed in the current campaign slogan of the British leftist Labour party:

‘Rise like Lions after slumber
In unvanquishable number –
Shake your chains to earth like dew
Which in sleep had fallen on you –
Ye are many – they are few.’

At a more general level, Peterloo took place in the same year as the very first capitalist-style crisis and financial crash. The Panic of 1819 started in the US and was triggered by the post-Napoleonic depression in Europe which led to the collapse of US export markets and the bankruptcy of several banks that had made export loans.  The ensuing recession lasted until 1821. The boom and bust cycle that has characterised capitalist accumulation to this day had begun.

This was the first capitalist slump – and also the first recognisable period of depression in modern industrial capitalism.  In my book, The Long Depression, I suggest that capitalist accumulation takes place in cycles of profitability.  There are periods of rising profitability and then periods of falling profitability (within the longer-term context of a secular fall as capitalist economies mature).

There are four seasons each of approximately 10-14 years in the 19th century (they are longer in the 20th century).The first season (Spring) sees a rise in profitability as new technology and an expanding workforce is applied.  In the second season (Summer), profitability falls and because labour has got stronger during the spring season, the class battle intensifies.  Then comes Autumn, a new period of rising profitability built on the defeat of previous labour struggles and the weakening of labour through slumps.  Finally, profitability falls again in the Winter season and there is a depression that can only be broken either by war or by successive slumps that eventually restore profitability for a new Spring.

1819 was a year right in the middle of such a Winter.  The weakening of labour in the previous Autumn of the war economy from 1800-1812 had seen profitability rise for both landowners and rising industrial capitalists.  But the post-war depression was one of falling profitability (as noted by Ricardo) in which the dominant landowning class tried to preserve its profits and hegemony at the expense of industry and labour through repression and taxation.  Peterloo was the marker for this.

After 1822, England entered a new Spring based on industrial expansion and the revival of export markets in Europe.  The industrial bourgeois mobilised its workers to fight for the vote in the cities and parliamentary representation (for property owners).  The Reform Act was passed in 1832.

SPRING 1776-86: profitability up; industrialisation begins, labour strengthens, first trade unions

SUMMER 1786-1800: profitability down; Marx’s law operates, labour fights

AUTUMN 1800-12: profitability up; war economy; labour weakened and overseas

WINTER 1812-22: profitability down; post-war depression, labour repressed

Finance: fiddling, fetish and fiction

August 12, 2019

Nothing changes in the finance sector globally, despite the catastrophic impact of the banks on the world capitalist economy in the global financial crash and the ensuing Great Recession.

In previous posts, I have highlighted the greed, recklessness and instability of the finance sector and its operational leaders. As Marx said, finance is the epitomy of the fetish of money, increasingly based on investing in fictitious capital, that bears no relation to any value created in an economy, let alone overall social need.  As former Bank of England chief economist Andy Haldane put it, finance is socially unproductive.

Haldane posed the question: “In what sense is increased risk-taking by banks a value-added service for the economy at large?”  He answers, “In short, it is not.”  Echoing Marx’s value theory, Haldane concluded: “The act of investing capital in a risky asset is a fundamental feature of capital markets. For example, a retail investor that purchases bonds issued by a company is bearing risk, but not contributing so much as a cent to measured economic activity. Similarly, a household that decides to use all of its liquid deposits to purchase a house, instead of borrowing some money from the bank and keeping some of its deposits with the bank, is bearing liquidity risk. Neither of these acts could be said to boost overall economic activity or productivity in the economy. They re-allocate risk in the system but do not fundamentally change its size or shape. For that reason, statisticians do not count these activities in capital markets as contributing to activity or welfare. Rightly so.”

More evidence of the criminal nature of global banking is to be found in the news that the Malaysian government has filed charges against 17 current and former executives of three Goldman Sachs subsidiaries, over the multi-billion-dollar 1MDB state fund scandal, where former Malaysian prime minister Najib Razak and his family corruptly siphoned off billions – it seems with the connivance of Goldman Sachs, the world’s largest investment bank.  Goldman’s used to be led by Lloyd Blankfein, who claimed he was doing God’s work.

Well, God’s work in this case appears to have Goldmans arranging bond issues worth $6.5 billion for 1MDB, with large amounts of state funds ($2.7bn) were misappropriated in the process.

Over in Switzerland, the former chief executive officer of HSBC’s Swiss private bank pleaded guilty to helping wealthy clients hide assets worth at least 1.6 billion euros ($1.8 billion). Peter Braunwalder was fined 500,000 euros and given a one-year suspended jail sentence, according to a Paris court ruling on the plea. The 68-year-old admitted that he took part in helping clients evade taxes between 2006 and 2007 by opening clandestine Swiss bank accounts and setting up offshore trusts or providing fake loans.  But no jail for him.

The HSBC case follows the conviction of a former minister and Swiss bank UBS which had to pay a record 4.5 billion-euro fine  for criminal wrongdoings of “an exceptionally serious nature.”  And HSBC has only just paid 300 million euros to resolve allegations in the same case.  Again, in the UBS case all the bank executives involved avoided a prison sentence. French bank Societe Generale also agreed last year to pay 250 million euros to end a bribery case and French fund manager Carmignac Gestion said in June it would pay 30 million euros to settle a tax-fraud case.

But in banking, as in capitalism in general, it’s one rule for the elite and another for the rest of us.  On the day Deutsche Bank began making thousands of employees redundant, some managing directors at the company’s office in the City of London were being fitted for suits that cost at least £1,200. Tailors from Fielding & Nicholson, an upmarket tailor, were pictured walking out of the bank’s UK office with suit bags. Ian Fielding-Calcutt, the tailor’s founder, and Alex Riley were there to fit suits for senior managers in spite of plans to cut 18,000 jobs  worldwide. Deutsche’s chief executive, Christian Sewing, has repeatedly said how much he regretted the decision to scrap a fifth of his global workforce. But it did not stop him paying out E50m in golden handshakes to top executives since 2018.

Over at Standard Chartered, American CEO Bill Winters had no compunction about accepting a pension contribution worth 40% of his annual salary and perks worth £6m, 79 times the average employee salary.  When this was questioned, he said that shareholders of the bank were being ‘immature”.  “I think it’s quite appropriate for the board not to ask me to take a pay cut”, he added. “And they didn’t — I don’t think it ever occurred to them to ask.”

And so it goes on.  Ex-UBS Group AG investment banking head Andrea Orcel is suing Banco Santander SA for about 100 million euros ($113 million) after the Spanish bank reneged on an agreement to hire him as chief executive .  In return, Santander has accused Orcel of “dubious ethical and moral behaviour”. The 56-year-old Italian had been offered the top job at Santander last year and had already quit his post as head of UBS’s investment bank when the bank changed its mind in January, saying it could not meet his exorbitant pay demands.

Meanwhile, in the UK, Britain’s largest mutual society (not even a bank legally) revealed that its former CEO Graham Beale, in addition to his £885,000 salary, got a £292,000 annual pension allowance, a £1 million bonus and £500 a day to cover the cost of travel, security and medical expenses. His benefits from annual expenses alone came to £185,000, covered the cost of travel, security and medical expenses. He was handed almost £400,000 of perks since joining Nationwide. Luke Hildyard, executive director of the High Pay Centre, said: ‘It’s hypocritical for Nationwide to market themselves as a different kind of organisation to the big banks, and then lavish these kinds of sums of money on its executives. It’s hard to believe these payments were critical to the success of the business.’

Then there is reckless drive of profit.  The Bank of England has found widespread weaknesses among the UK’s challenger banks in stress tests that showed new lenders cutting corners in an aggressive pursuit of growth. A senior regulator at the central bank wrote to chief ordering them to tighten standards and correct “overly optimistic” risk modelling. The BoE found that many new lenders displayed an “inability to explain assumptions” in their stress-test models and an “aggressive” focus on growth, even though they tend to make riskier loans. It comes after a scandal at Metro Bank, which had to slash growth plans and turn to investors for a £375m emergency share issue after admitting it had misclassified loans and did not hold sufficient capital.

And as the the world economy slows, for the lower ranks, banking is looking less lucrative. Global investment banks are shedding tens of thousands of jobs as falling interest rates, weak trading volumes and the march of automation create a brutal summer for the sector. Almost 30,000 lay-offs have been announced since April at banks including HSBC, Barclays, Société Générale, Citigroup and Deutsche Bank. Most of the cuts have come in Europe, with Deutsche accounting for more than half the total, while trading desks have been hit hardest.

So nothing has changed at the top of banking globally: big salaries, bonuses, pensions for the top executives, in return for overseeing tax scams, fraud and corruption.  And then there is the real and rising risk of instability and collapse as banks continue to speculate in the ‘fictitious capital’ of ‘exotic’ financial instruments.  More proof that ‘regulation’ will not work and only public ownership of the finance sector under democratic control will deliver a banking service for investment and people’s needs.

The Handbook of Karl Marx: profitability, crises and financialisation

August 6, 2019

The Oxford Handbook of Karl Marx, edited by Matt Vidal, Tomas Rotta, Tony Smith and Paul Prew, brings together a series of chapters by prominent Marxist scholars covering all aspects Marxist theory, from historical materialism, dialectics, political economy, social reproduction and post-capitalist models.

The editors have done an excellent job in arranging the various contributions into sections on the foundations of Marxism, labour and class, the nature of capitalist crises, and post-capitalist alternatives.  And in an introduction, the editors offer a succinct and informative account of Marx’s life and intellectual development, as well as summaries of the chapter contributions.

It is not possible to comment on all the contributions in this 870pp handbook, so I’ll concentrate on the chapters that interest me most.  As you might expect, these are the contributions on the Marx’s theory of crises and modern developments in capitalism like so-called ‘financialisation thesis’ and the digital economy. That’s enough on its own.

I was particularly interested in the chapter on Reproduction and Crisis in Capitalist Economies by Deepankar Basu, from the University of Massachusetts, Amhurst.  In the past, Basu has done excellent empirical work on the rate of profit.  In this chapter Basu develops some arguments about Marx’s theory of crisis.  According to Basu, “The Marxist tradition conceptualizes two types of crisis tendencies in capitalism: a crisis of deficient surplus value and a crisis of excess surplus value. Two mechanisms that become important in crises of deficient surplus value are the rising organic composition of capital and the profit squeeze: two mechanisms that are salient in crises of excess surplus value are problems of insufficient aggregate demand and increased financial fragility. This chapter offers a synthetic and synoptic account of the Marxist literature on capitalist crisis.”

In other words, Basu seeks to reconcile Marx’s law of profitability with ‘profit squeeze’ theory, in particular with Nobuo Okishio’s theorem which disputes Marx’s law, and with the post-Keynesian ‘wage-led’ underconsumption theory of crises. In my view, this ambitious aim fails. Basu reckons that “The controversy between proponents of the “falling rate of profit” crisis tendency and the “problems of demand” crisis tendency that has raged on for decades seem, from the perspective of the analysis of this chapter, rather unproductive and even unnecessary. Capitalist economies are prone to both types of crises: the first when the system generates too little surplus value and the latter when it generates too much. There is no theoretical reason to believe that capitalist economies will be plagued by only one or only the other.”

In particular, Basu argues that “Much of this controversy also seems (with the benefit of hindsight) needless. There are no theoretical grounds to claim that due to technological change, the rate of profit will have a tendency to always fall (as Marx claimed) or that it will have a tendency to always rise (as Okishio claimed). A careful analysis shows that the impact of technological change on the rate of profit depends crucially on what happens in the labor market. If the real wage rate rises sharply during the period of technological change, then the rate of profit tends to fall; on the other hand, if the real wage rate does not rise fast enough, then the rate of profit might rise.”

In my book, Marx 200, I deal in more detail with Okishio’s refutation of Marx. But let’s dissect Basu’s argument here. There are very good theoretical grounds to claim that the average profitability of capital in a capitalist economy will tend to fall over time.  Marx held to this view and provided solid theoretical foundations for this; namely if value (and surplus value) is created only by the exploitation of labour power and if Marx’s general law of accumulation holds in that there is a tendency for the organic composition of capital to rise over time (ie capitalist invest more in machinery and technology relative to labour power); then the rate of profit will tend to fall.

Moreover, the counteracting factor of a rising rate of surplus value from the increased productivity of labour power using machinery will, over time, not match the rise in the organic composition and so the rate of profit will actually fall.  If the rate of profit does so sufficiently and for a sustained period, then eventually there will be over accumulation, a fall in the mass of profit; and a crisis in production will ensue.  The slump will devalue the value of fixed assets, liquidate uncompetitive capital and reduce labour costs through rising unemployment, thus laying the foundations for a rise in profitability.  And the whole circle will begin again.

This is Marx’s theory of crisis, of which Basu says “there are no theoretical grounds to claim”.  That conclusion was precisely the point of Okishio’s theorem, which purported to argue that capitalists would never invest in new technology unless it brought them a higher rate of profit.  Increased technology would lead to higher productivity of labour, which was immediately transformed into a higher rate of surplus value for each unit of production.  So the rate of profit would not fall but on the contrary would rise.  Only the class struggle, bringing about a rise in the real wage, would counteract that and cause the rate of profit to fall.

Okishio’s theorem has been refuted decisively by many authors – I refer you to the following, including recent authors and those in the Handbook itself
(;;;;;;;; And there is also plenty of empirical evidence showing the causal connection between a rising organic composition of capital and falling profitability.

And yet Basu claims he can reconcile Marx’s theory with Okishio’s theorem: “The idea that there is no necessary contradiction between the claims advanced by Marx and Okishio” because “the rate of profit falls or rises after the adoption of a new technique of production ultimately depends on how the real wage rate behaves”.  But the argument that the real wage decides the direction of profitability is not Marx’s.  Indeed, it is closer to Ricardo, which is why Okishio and previous theorists who argue something similar have been called ‘neo-Ricardian’.  There is no way that Marx’s theory of crisis can be reconciled with the ‘real wage’ or ‘profit squeeze’ theory of Ricardo.

Basu goes onto suggest that Marx’s theory of crisis can also be reconciled with the post-Keynesian theory that crises are caused by either low wages leading to a collapse in consumption or by low profits leading to a collapse in investment.  There is no space to deal with the post-Keynesian distribution of income theory here – it is yet another variant of the discredited underconsumption view of crises.  All I can add now is to note the facts.  In the US in every post-war slump, it has been investment not consumption that has led the economy into recession, and it has been a fall in profit and profitability that has led investment.  I remain puzzled why Basu deems it necessary to reconcile neo-Ricardian profit squeeze theory and post-Keynesian underconsumption theory with Marx’s theory of crisis, which in my opinion is theoretically clear and empirically supported.

At least Basu is attempting to develop a Marxist theory of crises under capitalism.  Leo Panitch and Sam Grindin, in their chapter on capitalist crises and the state, deny that there is any theory of crises at all: “the genesis, nature, and outcome of which are historically contingent and the resolution of which changes the terrain for the development of future crises. Crises are always historically specific.”  This view has been expressed before by Panitch and Gindin and by others like David Harvey.

As the P and G put it: “The weakness of a general theory that tries to encompass each of these crises lies in what is thereby obscured. As David Harvey (2008:24–25) has cautioned, “There is no singular theory of crisis formation within capitalism, just a series of barriers that throw up multiple possibilities for different kinds of crises,” each determined by a combination of specific conditions at a “particular historical moment.” This does not mean retreating to an eclectic description of conditions in those historical moments designated as crises. It rather means recognizing that capitalist development is a contradictory process prone to crises—the genesis, nature, and outcome of which are historically contingent and need to be investigated with the tools of historical materialism”.

In their view, they are taking a much more sophisticated view of capitalist crises with its layers than some crude single theory approach.  I have dealt with this argument in many places.  But let me add the simple comment of Mino Carchedi on this sophisticated approach: “if crises are recurrent and if they have all different causes, these different causes can explain the different crises, but not their recurrence. If they are recurrent, they must have a common cause that manifests itself recurrently as different causes of different crises. There is no way around the ”monocausality” of crises.”  We monocausal theorists have never denied that each crisis of capitalism has its own characteristics.

See my Amsterdam paper Presentation to the Third seminar of the FI on the economic crisis
and my post The trigger in 2008 was the huge expansion of fictitious capital that eventually collapsed when real value expansion could no longer sustain it, as the ratio of house prices to household income reached extremes.  I do not say that such different ‘triggers’ are not ‘causes’, but argue that behind them is a general cause of crisis: the law of the tendency of the rate of profit to fall.

But P and G go further.  They deny altogether any role in crises for Marx’s law of profitability: “there was always a basic problem with this concept; the many “counter-tendencies” that Marx himself adduced to explain why the tendency does not always manifest itself were, as often as not, the very substance of capitalism’s dynamics: that is, the development of new technologies and commodities, the emergence of new markets, international expansion, innovations in credit provision, not to mention state interventions of various kinds. Above all, it depended on whether the extraction of greater surplus value from labor could be counted on to offset falling profits. Insofar as this could not be secured, then “the falling tendency is nothing but the expression of popular struggles against exploitation.”

In other words, as with Basu, Marx’s general of law of accumulation of a rising organic composition of capital is countered by a rising rate of surplus value and the result is ‘indeterminate’ ie there is no theoretical reason that the former will overcome the latter and lead to falling profitability.  Marx was wrong.  And “mechanically” spouting on about and trying to measure the rate of profit (as some of us do) is a wasted exercise.  Again, this idea of indeterminacy, propagated by Paul Sweezy in the 1940s, by the neo-Ricardians in the 1970s and by Michael Heinrich and David Harvey currently can be refuted and has been done by many authors (as above), including me.

What matters for P and G in explaining crises is the strength of the working class not the profitability of capital: “a key factor in generating the conditions that led by 2007– 2008 to the greatest financial crisis since 1929 was the weakness of the working class. This is important for understanding why, in contrast to the other three crises, this crisis was not caused by a profit squeeze or collapse of investment due to overaccumulation as many Marxist economists have insisted    The “Great Financial Crisis” was triggered in the United States, where profits and investments had recovered by the late 1990s, and it was only after the financial meltdown of 2007–2008 that profits and investment declined.”

Here P and G argue that profitability was irrelevant to the Great Recession and only fell afterwards as a result not a cause.  This is an empirical argument and it is wrong. There is plenty of evidence that there was a fall in US profitability of capital and the mass of profits before the Great Recession started – indeed, profits led investment and investment led production and employment in and out of the Great Recession.  And see this recent analysis supporting this.

One of the Handbook’s editors, Matt Vidal, in his chapter Geriatric capital: stagnation and crisis in Western Capitalism, does use Marx’s law of profitability in his explanation of the collapse of ‘Fordism’, mass factory production from the 1970s.  But he too seems to want to reconcile Marx’s “convoluted” law of profitability with disproportion and underconsumptionist alternatives to deliver “stagnationist” tendencies in post-war capitalist economies.

At least, Vidal shows that Marx’s law of falling profitability is supported by empirical evidence. As he says: Evidence demonstrates that the profit rate decline was driven in part by a rising organic composition of capital in the United States (Shaikh 1987), Germany, the United Kingdom, and France (Duménil and Lévy 2004). The evidence also indicates that a profit squeeze due to an increasing labor share of income also contributed to the profit rate decline in the United States (Wolff 2003), Germany, the United Kingdom, France, Italy, and Japan (Glyn et al. 2007).”

Vidal argues (correctly in my view) that the reason economies have not restored real GDP, investment and productivity growth rates since the ‘golden age’ of ‘Fordism’ in the 1960s is because profitability of capital remains low.  So credit injections and monetary easing may have kept capitalism from collapsing but essentially stagnation is the main theme – expressing the “structural problems of an ageing capitalism”.

And then there is the brave attempt of Jeff Powell in his chapter to reconcile the ‘financialisation thesis’ with Marxian economic theory.  Readers of this blog will know that the ‘financialisation thesis is that capitalism has changed from the days of ‘Fordism’ when investment in productive assets was the driving force of capitalist accumulation for profit.  Now in the ‘neo-liberal’ era, capitalists no longer invest so much in productive assets and or exploit labour in the production process, but instead seek to speculate and profit in the financial sector and exploit working people through ‘usury’, ie mortgages, savings instruments, rents and taxes.

The financial sector now dominates and is the real enemy of working people and the productive sectors of the capitalist have been relegated by the power of finance capital.  Thus, crises in capitalism are now to be found not in the falling profitability of capitalism but in the ‘fragility’ of the reckless, debt ridden financial institutions that suffer ’Minsky moments’ not ‘Marx moments.’

Thus Powell says “Falling profitability can, at best, be a contributing but far from a driving factor of financialization. Indeed, the overriding concern of the TRPF advocates themselves seems to be less about asserting that falling profits cause financialization than arguing against the diametrically opposed post-Keynesian narrative that financialization causes falling profits.”  I think we should argue both.

Powell reckons that “there has been a secular shift in the role of finance in the period of late neoliberalism. This shift marks the emergence of a new stage of what can be called financialized capitalism, distinct (but intertwined with) processes of financialization. While the speculative excesses of finance that have accompanied this transformation abound, the key point here is that those excesses are by their very nature short-lived, while the emergence of a qualitatively different role for finance represents a structural shift emblematic of a new stage. Finance is providing a system of discipline and control necessary for capital accumulation in an era of globalized production networks.”  So, in this analysis, financialisation is indeed more than just the increase in the size of the financial sector and financial sector profits in neoliberal capitalism.  It is a new stage of capitalism, particularly expressed in international financial flows and production networks.

I am not convinced by Powell’s attempt to distinguish between financialisation as cyclical process (meaning it has older historical roots) and financialised capitalism as secular stage (meaning the contemporary capitalism with its supposedly new features).

I still prefer Marx’s explanation.  Capitalists need finance and credit to invest in and exploit labour; it is more efficient to have specialised credit players then raise finance internally or just use previous profits.  But when profitability falls, capitalists try to switch into financial speculation and investment to sustain profitability (as in the 1980s onwards).  But this leads to an explosion of ‘fictitious capital’, the buying and selling of bonds and stocks that are merely titles to the ownership of potential profits in production.  Fictitious capital can extend the financial market boom and give the appearance that finance is all powerful.  But the collapse of profitability and profits in the productive sectors will soon end that myth.

As Guglielmo Carchedi, in his excellent, but often ignored Behind the Crisis puts it: “The basic point is that financial crises are caused by the shrinking productive base of the economy. A point is thus reached at which there has to be a sudden and massive deflation in the financial and speculative sectors. Even though it looks as though the crisis has been generated in these sectors, the ultimate cause resides in the productive sphere and the attendant falling rate of profit in this sphere.”

In every slump in the US in the post-war period, a slump in profits in the productive sectors has brought about a slump in profits in finance and a recession.  If finance rules crises now, why have the major economies not recovered to previous growth rates in production, investment and wages post the Great Recession?  Because the financial sector has certainly recovered, with stock and bond markets at record highs.  No, productive sectors rule over finance in crises, not vice versa.

There are defenders of Marx’s value theory and his law of profitability in the Handbook, namely Andrew Kliman, Alan Freeman and Fred Moseley, but their chapters are on more fundamental explanations of Marx’s theory of value and the nature of capital.  But it seems that all the Marxist authors discussing crises under capitalism in the Handbook are determined to trash Marx’s law of profitability as an explanation, in favour of others or deny that there is any general theory of crises at all.

That will do for now, but I plan to return to the Handbook to consider the arguments presented in a chapter by Tomas Rotta on the nature of profits and the ‘commodification of knowledge’ in the digital economy.  Is Marx’s value theory still relevant when the knowledge is ‘costless’ and how does knowledge enter the capitalist accumulation process?

US profits revision

July 29, 2019

Last Friday, the US real GDP growth figures for the second quarter of 2019 were released.  The annualised rate of real GDP growth slowed in Q2 to 2.1% from 3.1% in the first quarter.  This was the slowest growth rate since the end of 2016.

US real GDP was 2.3% higher than in the same quarter last year ie (Q2 2018), down from 2.7% yoy in Q1 2019 and recording the lowest yoy growth rate for two years.

So it seems that the boost to US growth, supposedly promoted by President Trump’s corporate tax cuts and exemptions, has run its course and US growth is back to the average of the last ten years, with the prospect of further slowing in the second half of this year.

And why is a further slowdown likely, perhaps even to the point of recession?  We can find clues in the second quarter data.  The main contributors to the slowdown came from weakening investment, particularly productive investment in equipment and structures; and from falling net exports or trade, as the trade war with China bites.

The 0.6% drop in business investment was the first decline since the first quarter of 2016. And that drop was led by a 10.6% decline in investment in structures, ironically the category of investment that should have received the largest boost from the tax cut.

Investment in new buildings and factories is now down by 4.6% from its year ago level. Equipment investment rose by just 0.7% after a 0.1% fall in the first quarter. The pace of investment in so-called intellectual products or computer software also slowed sharply, slowing to 4.7%, after double-digit increases in the prior two quarters (driven by Trump’s tax exemptions).  Exports fell at a 5.2% annual rate.

But the most interesting part of the GDP report was the revision to the past three years data.  The revised data showed that real GDP growth was substantially slower for 2018 than previously reported, with the growth from the fourth quarter of 2017 to the fourth quarter of 2018 just 2.5%, well below the administration’s projection at the time of the Trump tax cut.

But most important in my mind were the downward revisions to corporate profits.  Instead of corporate profits rising by some 20% in the last three years, it seems that profits have actually fallen and are now lower than they were in 2014!  Corporate profits were revised up $1.4 billion, or 0.1% for 2014, revised up $4.3 billion, or 0.2% for 2015, but revised down $23.5 billion, or -1.2%, for 2016, and a whopping $93.3 billion, or -4.4% for 2017, and $188.1 billion, or -8.3% for 2018.

Overall corporate profits have suffered two successive quarterly declines, both before and after tax up to Q1 2019 (the second quarter figures will be released at the end of August).  US corporate profits are now 2% below where they were at the beginning of 2018.

Even before these revisions, non-financial sector corporate profits have been falling over the last five years.  What this means is that while speculative or fictitious profits from investment in financial assets have increased sharply, especially with Trump’s tax cuts, profits in the productive sector of the US economy have stagnated at best.

Now I have argued in this blog and in many papers that there is a strong correlation between profits and investment in modern capitalist economies – after all, capitalist production is for profit not need and so investment in production must be profitable or it will eventually slow or stop.  And there is plenty of evidence that this simple idea is correct.  Not only is the correlation between profit growth and investment growth high, but the causal direction from profits to investment with a lag (on average of about a year) is also supported in empirical research.

When profits dropped in the ‘mini-recession’ of 2015-16 (mainly due to the collapse in oil prices), investment followed.

Now it seems that profits in unproductive sectors like finance and real estate are beginning to suffer.  Financial profits are about 25% of total corporate profits and they have been broadly stagnant over the last year.  If they should fall, as well as non-financial sector profits, that may well generate a stock market collapse in the second half of this year.

Up to now, the Trump tax cuts and the prospect that the Federal Reserve is going to cut its interest rate (probably this week) – the so-called ‘Powell put’ – has buoyed the US stock market to new record highs.

But the effect of that may wear over the next few months as investors begin to see the earnings results of the major companies.  And any stock market ‘correction’ typically leads the ‘real economy’ by up to three quarters.