Archive for the ‘economics’ Category

Kenneth’s three arrows

February 25, 2017

Kenneth J. Arrow has died at the age of 95.  He was an important mainstream economist.  He won a Nobel Prize as a mathematical theorist.  Indeed, Arrow was the epitome of the neoclassical general equilibrium theorists who came to dominate mainstream economics, with the avowed aim of using mathematics to deliver economic analysis and answers, in a mimic of mathematical physics.

Arrow was a close associate of that other great neoclassical and anti-Keynesian theorist, John Hicks.  They both aimed to use general equilibrium theory and math to show that markets and economic growth under capitalism could achieve equilibrium through supply and demand in ‘competitive markets’.

Interestingly, Arrow was uncle to a current Keynesian guru of ‘managed capitalism’, Larry Summers and also brother-in-law to that other icon of 1960s mainstream ‘Keynesian’ economics and the then textbook writer to university students, Paul Samuelson.  It’s a small world in the mainstream – although not as small as the Marxist economics world!

What did this ‘giant’ of mainstream economics theory contribute to our understanding of modern economies or the workings of firms and people in a ‘market economy’?  Math was Arrow’s forte.  “I think my biggest hopes were methodological — to apply new developments in mathematics to economics,” he told Challenge: The Magazine of Economic Affairs, in 2000.

There are three areas (arrows) that spring to mind.  The first was Arrow’s ‘proof’ that each individual’s desires or needs cannot be combined into a collective result where everybody gains or their needs are satisfied.  His conclusion as outlined in his famous monograph Social Choice and Individual Values , was that “If we exclude the possibility of interpersonal comparisons of utility, then the only methods of passing from individual tastes to social preferences which will be satisfactory and which will be defined for a wide range of sets of individual orderings are either imposed or dictatorial.”  In other words, it was impossible to deliver what ‘society’ needed from individual preferences as expressed through markets free of ‘unwanted alternatives’, at any time, and for all, unless the market is replaced by ‘dictatorship’.

You can already see the irony of this result.  The leading mathematical theorist of capitalist markets proves that markets cannot meet each individual’s needs without worsening the needs or desires of others, or abolishing itself! As one economist put it, Arrow “proved it was logically impossible for there to be a system of voting which is free of anomalies, no matter what kind of system it is…You can say, ‘There’s no really good way to run an election,’ but it is something else to prove it. . . . It’s like proving a bicycle cannot be stable.”

As developers of this ‘impossibility’ theorem, like Amartya Sen, went on to show, this also meant that there was no way that markets, perfectly competitive or not, could deliver equality of outcomes for each individual – no Pareto optimality.  Another way of putting this is to say that it is impossible to get ‘society’ to make a choice that leads to satisfaction for everyone.  As Sen said, “It is important to recognize that Arrow was not only establishing a theorem, he was opening up a whole subject to social choice.”

Democracy means making choices or plans that the majority want or need even if the minority loses out.  You may find this result self-evident and trite but apparently Arrow gives you a mathematical proof!  But it does not answer the social question: who is the majority and who is the minority?  And in the current world is it not the minority of the 1% and super-rich that get their needs met at the expense of the 99%?  Arrow’s theorem suggests that such inequality is the way of the world of markets.

Arrow’s second contribution was to the notorious foundation of neoclassical theory of capitalist market harmony, general equilibrium theory.  The principle of GE theory is that supply and demand in markets can be equalised and stabilised at a certain price, thus proving that capitalism is not inherently unstable as Marx had argued with his critique of Say’s law.  In a paper to the American Economic Association, Arrow states, “From the time of Adam Smith’s Wealth of Nations in 1776, one recurrent theme of economic analysis has been the remarkable degree of coherence among the vast numbers of individual and seemingly separate decisions about the buying and selling of commodities. In everyday, normal experience, there is something of a balance between the amounts of goods and services that some individuals want to supply and the amounts that other, different individuals want to sell. Would-be buyers ordinarily count correctly on being able to carry out their intentions, and would-be sellers do not ordinarily find themselves producing great amounts of goods that they cannot sell. This experience of balance indeed so widespread that it raises no intellectual disquiet among laymen; they take it so much for granted that they are not supposed to understand the mechanism by which it occurs.”

So the invisible hand of the market (Smith) can lead to harmonious equilibrium in markets where supply and demand are ‘cleared’.  Working with Gerard Debreu, the Arrow-Debreu theorem in 1954 supposedly provided a rigorous mathematical proof of a ‘market-clearing’ equilibrium — or the price at which the supply of an item is equal to its demand.   It became just what mainstream economics needed to ‘prove’, namely that a theory of value and price formation could be based on individual consumer choices and not on the labour theory of value as put forward by the classical economists and Marx.  “Their (neoclassical) theory of value and price formation was really a fundamental element of economics…It’s the ABCs of economics and economic theory.”, said one follower of Arrow.

But again, what is ironic about the Arrow-Debreu proof is that it shows markets have to be completely ‘perfect’ in the sense that no one participant can have extra knowledge or economic power over another and that there must be no restriction or distortion of price from outside.  The theorem has been applied in financial markets on the grounds that these are ‘perfect markets’ where everybody has the same power and knowledge.  Such an assumption, we now know after the global financial crash (in part the result of dysfunctional derivatives markets), is unrealistic to the point of disaster.

That the theorem of general equilibrium in capitalist markets is based on totally unrealistic assumptions is not a decisive critique, because Arrow recognised this.  Indeed, he drew the conclusion that the aim of policy should be to try to ‘correct’ and ‘manage’ any anomalies in markets to achieve something closer to ‘equilibrium’.  As he said, “You cannot get a full understanding of the behavior of any part of the economy without understanding its reaction on other parts.”

He applied this approach to health economics.  In his 1963 paper “Uncertainty and the Welfare Economics of Medical Care”, he found that the delivery of health care deviated in fundamental ways from the traditional competitive market and, for this reason, was a ‘nonmarket’ relationship.  For example, in a ‘perfect market’, the buyer and seller in theory have access to the same information about market price and value. However, in the health-care market, the supplier (doctor) commonly has a superior knowledge of the quality, provision and distribution of health-care services — all of which puts the consumer (patient) at a relative disadvantage.  This creates a problem of ‘information asymmetry’.

Consumers also do not always know when they will need health care until the moment they require it (as with a stroke or heart attack). So when consumers purchase insurance, the cost can be prohibitive.  And insurance companies worry that offering coverage to protect consumers against losses could create ‘moral hazards’, such as risk-taking and irresponsible behaviour (indeed!).

Again it may not surprise you to find that the world’s leading equilibrium economist found that markets are not fair in delivering basic needs like health to people because they are rigged or corrupt!  Of course, unfortunately, that has not led to the conclusion that healthcare should be publicly owned (single supplier) and delivered free at the point of use (public good) to be maximise people’s needs.  Indeed, Arrow never followed his own theoretical conclusion when asked to consider whether money damages could be measured and so awarded to people suffering environmentally from the activities of ‘more informed’ multi-nationals.

What is the decisive critique of the Arrow-Debreu theorem’s relevance to modern economies is that economies are not static systems but dynamic.  Yes, Marx said, supply does equal demand but really only by accident.   In theory, under ludicrous assumptions, markets clear all supply and meet all demand, but in reality, they hardly ever do. Markets keep moving away from equilibrium all the time.  Nothing stands still and there are ‘laws of motion’ that continually change ‘equilibrium assumptions’, making market economies inherently uncertain. These laws of motion (as developed by classical and Marxist economics) rather than the ‘principle of equilibrium’ are much more relevant to understanding the capitalist economy of production and investment for profit.

Arrow did venture into the realm of classical economics of a dynamic economy and proposed an endogenous growth theory, which seeks to explain the source of technical change as part of the process of accumulation and not ‘external’ to the movement of supply or being set by consumer demand.  Yes, I know, it is difficult to believe, but mainstream neoclassical theory argued that aggregate supply and demand in an economy were driven by separate forces (the preference of firms on the one hand and by consumers on the other).

Endogenous theory recognised what any fool could see: that supply was affected by demand but also demand was affected by supply.  Innovation did not come out of the sky but from the drive of companies to grow (or in the case of Marxist theory, to make more profit and reduce labour costs). Of course, the neoclassical version of growth theory did not consider profitability relevant to innovation but instead looked at aggregate output.  This theory became popular with many reformist economists and politicians – apparently, former adviser and minister in the British Gordon Brown Labour government, Ed Balls, was a keen promoter.

So Kenneth Arrow leaves us with three arrows to enrich our understanding of the economic world: 1) markets collectively can never properly deliver every individual’s needs; 2) markets cannot equate supply and demand except under the most unrealistic assumptions and 3) economic growth is not achieved by just meeting the demand of consumers but requires decisions of investors to innovate.  Ironically, none of the implications of these economic arrows have been accepted by the owners of capital and their politicians in practical policy.  To do so, would be to admit that capitalism does not work for the majority or even much of the time for the capitalists.

Inequality after 150 years of Capital

February 19, 2017

I have written many posts on the level and changes in inequality of wealth and incomes, both globally and within countries.  There has been a ‘wealth’ of empirical studies showing rising inequality in incomes and wealth in most capitalist economies in the last century.

There have been various theoretical explanations provided for this change.  The most famous is by Thomas Piketty in his magisterial book, Capital in the 21st Century.  This book won the award for the most bought, least read book in 2014, surpassing A brief history of time by scientist Stephen Hawking.

I and others have discussed the merits and faults of Piketty’s work in many places.  Please read these to get a picture.  Suffice it to say that, although Piketty repeats the title of Marx’s book, published exactly 150 years ago, he dismisses Marx’s analysis of capitalism based on the law of value and the tendency of the rate of profit to fall and adopts the mainstream theories of marginal productivity and/or market ‘imperfections’ like ‘rent-seeking’.  This leads to the view that capitalism could be ‘reformed’ and inequality reduced by such measures as a global financial tax or progressive inheritance taxes or more recently a universal basic income (Piketty is now advising French socialist presidential candidate Hamon on this now).

Inequality remains the buzz word of liberal and leftist debate and analysis, not crisis and slump.  Widening inequality has been called “one of the key challenges of our time” by the World Economic Forum, the think-tank of the elite. The ratings agency S&P Global Ratings has cited the income gap as a long-term trend that threatens America’s economic growth. Even the major international agencies like the IMF or the OECD continually analyse movements in inequality to see if more equality would be better for growth and a more stable capitalism.

Post-Keynesian economists like Engelbert Stockhammer or more radical mainstreamers like Joseph Stiglitz reckon rising inequality is the main cause of crises, not falling profitability or the inherent instability of capital as a money-making machine. Again I have discussed these arguments here.

But whatever the causes and processes concerned with inequality of incomes and wealth in the major economies, there is no doubt that it has reached levels not seen since Marx published Capital.  Indeed, here is an interesting chart that tries to gauge the level of inequality reached in the UK back in 1867.  The gini coefficient is the most common measure of inequality of income or wealth.  And in this graph, provided by the global inequality expert, Branco Milanovic, the gini ratio reached over 55 in 1867.


According to the graph, that was the peak of inequality and it fell back over the next 100 years, thus appearing to refute Marx’s view that the working class would suffer ‘amiseration’ as capital took a growing share of value produced by labour.  Instead, it would appear to confirm the mainstream view of Simon Kuznets written in the 1960s that once capitalism got going and started delivering economic growth, the forces of market, if not interfered with, would steadily bring forth a more equal society.  The irony is that just as Kuznets reached this conclusion, most major capitalist economies began to generate an increase in inequality in both income and wealth – as the graph shows.

But don’t be fooled by the graph that it seems to show a huge jump in GDP per capita in dollars from 1867 to now.  It’s misleading.  It does not show whether the jump is due to faster economic growth or just slowing population growth in the UK (actually it is the latter).  And of course, it does not show the huge downturns in GDP caused by recurring and regular crises under capitalism in Britain and elsewhere.

The graph does reveal, however, that inequality has been worsening in England to levels not seen since the 1920s.  Indeed, in a new analysis of the World Income Database Piketty and colleagues from the Paris School of Economics and UC Berkeley, describe a “collapse” of the share of US national wealth claimed by the bottom 50% of the country — down to 12% from 20% in 1978 — along with an (unsurprising) drop in income for the poorest half of America. About 117 million American adults are living on income that has stagnated at about $16,200 per year before taxes and transfer payments, Piketty, Saez and Zucman found in research published last year.

And that makes an important point.  The top 1 percent of earners in America now take home about 20 percent of the country’s pretax national income, compared with less than 12 percent in 1978, according to the research the economists published at the National Bureau of Economic Research. Over the same time in China, the top 1 percent doubled their share of income, rising from about 6 percent to 12 percent. America has experienced “a complete collapse of the bottom 50 percent income share in the U.S. between 1978 to 2015,” the authors wrote. “In contrast, and in spite of a similar qualitative trend, the bottom 50 percent share remains higher than the top 1 percent share in 2015 in China.”

Meanwhile, economic growth in China has been so strong that — despite widening inequality — the incomes of the bottom 50 percent have also “grown markedly”, the economists wrote. Their analysis found that the poorest half of Chinese workers saw their average income grow more than 400 percent from 1978 to 20015. For their American counterparts, income decreased 1 percent.“This is likely to make rising inequality much more acceptable” in China, they noted. “In contrast, in the U.S. there was no growth left at all for the bottom 50 percent (-1 percent).”

The IMF and other agencies like the World Bank like to argue that economic growth has picked up so much under capitalism that millions have been taken out of poverty. But economic experts in the field of poverty and global inequality reveal from their figures that official ‘poverty’ has declined for just two reasons.  The first is that the definition of poverty of those living on less than$1 a day is out of date; and second because nearly all the decline has been in China due to its unprecedented economic growth under a state-controlled and directed economy, still far from market capitalism seen in 19th and 20th century capitalism that Piketty and others have analysed.  In most low income countries inequality has hardly changed from very high levels.


And the main reason is the control of wealth.  A very small elite owns the means of production and finance and that is how they usurp the lion’s share and more of the wealth and income.  The US Economic Policy Institute found that the top one percent of society derives an increasing portion of income gains from existing capital and wealth.  It is not because they are smarter or better educated.  It is because they are lucky (like Donald Trump) and inherited their wealth from the parents or relatives.


A recent study by two economists at the Bank of Italy found that the wealthiest families in Florence today are descended from the wealthiest families of Florence nearly 600 years ago!  So the rise of merchant capitalism in the city states of Italy and then the expansion of industrial capitalism and now finance capital made little or no difference to who owned the wealth. And the work of Emmanuel Saez and Gabriel Zucman has shown that in the US, wealth has become increasingly concentrated in the hands of the super-rich.


So Marx’s prediction 150 years ago that capitalism would lead to greater concentration and centralisation of wealth, in particular in the means of production and finance, has been borne out.  Contrary to the optimism and apologia of the mainstream economists, poverty for billions around the world remains the norm with little sign of improvement, while inequality within the major capitalist economies increases as capital is accumulated and concentrated in ever smaller groups.

The global paradox

February 14, 2017

Most people missed it but America’s intelligence services also looked recently at developments in the world economy.  The Office of the Director of National Intelligence (DNI)  published its latest assessment, called Global Trends: The Paradox of Progress, which “explores trends and scenarios over the next 20 years”.

The DNI concludes that the world is “living in paradox – industrial and information age achievements are shaping a world both more dangerous and richer with opportunity. Human choices will determine whether promise or peril prevails.”  The DNI praises capitalism over the last few decades for “connecting people, empowering individuals, groups, and states and lifting a billion people out of poverty in the process.”

But American capital’s eyes and ears are worried about the future.  There have been worrying “shocks like the Arab Spring, the 2008 Global Financial Crisis, and the global rise of populist, anti-establishment politics. These shocks reveal how fragile the achievements have been, underscoring deep shifts in the global landscape that portend a dark and difficult near future.”  All these developments are bad things for global capital and American supremacy, it seems.  And the DNI reckons that things are not going to get better.  The next five years will see rising tensions within and between countries. Global growth will slow, just as increasingly complex global challenges impend.”

What is the answer?  Well, this comment from the DNI report is unvarnished: It will be tempting to impose order on this apparent chaos, but that ultimately would be too costly in the short run and would fail in the long. Dominating empowered, proliferating actors in multiple domains would require unacceptable resources in an era of slow growth, fiscal limits, and debt burdens. Doing so domestically would be the end of democracy, resulting in authoritarianism or instability or both. Although material strength will remain essential to geopolitical and state power, the most powerful actors of the future will draw on networks, relationships, and information to compete and cooperate. This is the lesson of great power politics in the 1900s, even if those powers had to learn and relearn it.”

In other words, while it would be better to just crush opposition and “impose order” in America’s interests, this is probably not possible with a weak world economy and lack of funds.  Better to try “draw on networks, relationships and information” (ie spy and manipulate) to get “cooperation”.

But it is not going to be easy to sustain America’s dominance and the rule of capital, the DNI report concludes, as globalisation “hollowed out Western middle classes  (read working classes) and stoked a pushback against globalization.”  Moreover, “migrant flows are greater now than in the past 70 years, raising the specter of drained welfare coffers and increased competition for jobs, and reinforcing nativist, anti-elite impulses.” And “slow growth plus technology-induced disruptions in job markets will threaten poverty reduction and drive tensions within countries in the years to come, fueling the very nationalism that contributes to tensions between countries.”

You see, the problem is that the population of America and its capitalist allies are getting older and the new powers have younger, more productive populations.  Yet capitalism cannot deliver for these growing populations in the so-called ‘developing countries’.  Meanwhile, “automation and artificial intelligence threaten to change industries faster than economies can adjust, potentially displacing workers and limiting the usual route for poor countries to develop.”  And then there is climate change and environmental disasters that will entail. This is all going to “make governing and cooperation harder and to change the nature of power—fundamentally altering the global landscape.”

So it is not a pretty picture beneath all the optimistic talk and fanfare we heard from the rich elite at Davos only last month.  Instead, the DNI reckons “challenges will be significant, with public trust in leaders and institutions sagging, politics highly polarized, and government revenue constrained by modest growth and rising entitlement outlays. Moreover, advances in robotics and artificial intelligence are likely to further disrupt labor markets.”  The DNI tries to sound hopeful at the end of this litany of dangers to global capitalism but they are not convincing.

I have posted before about the clear signs that the age of globalisation and capital’s expansion at the expense of labour everywhere appears over.  Another indicator of this was a report from the US-based Global Financial Integrity (GFI) and the Centre for Applied Research at the Norwegian School of Economics.  The report found that trade misinvoicing and tax havens mean the world’s givers are more like takers.  The GFI tallied up all of the financial resources that get transferred between rich countries and poor countries each year: not just aid, foreign investment and trade flows but also non-financial transfers such as debt cancellation, unrequited transfers like workers’ remittances, and unrecorded capital flight (more of this later).  What they discovered is that the flow of money from rich countries to poor countries pales in comparison to the flow that runs in the other direction.

In 2012, the last year of recorded data, developing countries received a total of $1.3tn, including all aid, investment, and income from abroad. But that same year some $3.3tn flowed out of them. In other words, developing countries sent $2tn more to the rest of the world than they received. If we look at all years since 1980, these net outflows add up to $16.3tn – that’s how much money has been drained out of the global south over the past few decades.

Developing countries have forked out over $4.2tn in interest payments alone since 1980 – a direct cash transfer to big banks in New York and London, on a scale that dwarfs the aid that they received during the same period. Another big contributor is the income that foreigners make on their investments in developing countries and then repatriate back home.  But by far the biggest chunk of outflows has to do with unrecorded – and usually illicit – capital flight. GFI calculates that developing countries have lost a total of $13.4tn through unrecorded capital flight since 1980.

Most of these unrecorded outflows take place through the international trade system. Basically, corporations – foreign and domestic alike – report false prices on their trade invoices in order to spirit money out of developing countries directly into tax havens and secrecy jurisdictions, a practice known as “trade misinvoicing”. Usually the goal is to evade taxes, but sometimes this practice is used to launder money or circumvent capital controls. In 2012, developing countries lost $700bn through trade misinvoicing, which outstripped aid receipts that year by a factor of five.

But now global trade growth has slowed to a trickle and capital flows are also falling back.  It has become just that more difficult for multi-nationals and banks to exploit the global south as a way to boost profitability from its decline in the global north.


The ratio of import growth to real GDP growth in the major economies has fallen back sharply.


The DNI report suggests that increased rivalry over the spoils of imperialism in the 1900s led to a world war.  The DNI reckons that “Although material strength will remain essential to geopolitical and state power, the most powerful actors of the future will draw on networks, relationships, and information to compete and cooperate”.  Compete and cooperate?  And Trump in the presidency?

Apple and the cash pile story

February 8, 2017

The tech giant Apple has accumulated an enormous cash hoard of $246bn, larger than Sri Lanka’s estimated 2016 GDP. If Apple’s cash pile was its own public company, it would be the 13th largest in the world.  Much of this cash pile ($215bn) is held abroad to avoid paying the higher rate of corporation tax that the US applies.  For example Apple paid only 0.005 per cent tax in Ireland in 2014.  The EU Commission is trying to force Apple pay a proper tax amount to Ireland on the grounds that its profits in Europe have not been taxed properly because it accounts for its sales through Ireland.  The Irish government has sided with Apple in this dispute!

But Apple’s cash pile is not actually “cash” nor “on hand”. Apple has only about $16.7 billion in cash and equivalents on its balance sheet. The rest is stashed in long-term marketable securities, meaning Apple plans to let those funds — roughly $177 billion — accrue interest for more than a year.

Everybody notices the high cash hoards that some of the largest US companies are accumulating but do not notice that their debt has rocketed too.  Apple’s debt has exploded. It has $80bn in debt, which since 2012 is essentially an increase of $80bn. That’s right, a few years ago, Apple had near-zero debt levels and now has a solid $80bn worth.


And while cash and securities pile up overseas, Apple is piling up debt in the US. Apple – even before this latest borrowing – had more debt than the telecom and cable companies which typically carry the most debt since they have stable cash flow and slow growth. The company currently sits on about $53.2 billion in long-term debt obligations as well as $32.2 billion in “non-current liabilities,” after executing a series of bond sales including the largest in history for a nonfinancial U.S. business, making it the fourth most-indebted company in the Standard & Poor’s 500.


By borrowing instead, Apple gets cash to pay dividends and buy back shares of stock without hauling its billions stored overseas back to the US, which could trigger a ‘tax event’.  Apple is a little more than three-quarters of the way through a $200 billion capital-return program that it believes will set a corporate record for stock buybacks. There is another $47 billion promised to shareholders. There is no doubt that Apple is raking in cash with its massive hardware sales and has plenty of ammunition for potential acquisitions. But Apple is actually borrowing to finance the promises it has already made.

And it’s the same story behind the so-called cash hoards that have built up in other very large US multi-national corporations.


A recent study of multinational cash holdings found that “since corporate assets tend to grow over time, the dollar amount of cash holdings would grow even if the ratio of cash to assets stays constant.” And that is what has been happening.  Cash reserves have risen but cash to asset ratios have not.  “Using all non-financial and non-regulated public firms with assets and market capitalization greater than $5 million per year in the US, the average cash/assets ratio is 20.18% in 2009-2010 compared to 20.50% in the 2004-2006 pre-crisis period.” That’s down.


The median ratio is higher by 0.87% in 2009-2010 than in 2004-2006 and the asset-weighted ratio is higher by 0.74% in the recent period. That tells you large firms have increased their cash holdings more.  This confirms the recent OECD study that found that the huge profits gained since the end of the Great Recession have been mostly confined to the large companies: “just a few mega companies hold most of the cash while thousands of small and medium enterprises (SMEs) hold little cash and much more debt

The big rise in cash holdings took place in the global credit boom of the early 2000s. From 1998-2000 to 2004-2006, the average cash/assets ratio in US corporations increased by 3.77%, the median by 6.39%, and the asset-weighted average by 3.62%.  And this appears to be a US phenomenon.

The study found that cash/assets ratios increased across the world in the 2000s compared to the late 1990s. But the increase in average cash holdings across the world was smaller than the increase in the US. Indeed median cash holdings in the US in the late 1990s were lower than median cash holdings in foreign countries, but the opposite was true by 2010.  And after 2010, there is little evidence of an increase in average cash holdings for foreign firms.

Why have cash to asset ratios risen since 1998?  The study finds that cash holdings may have changed simply because firm characteristics have changed. If this were the case, there might be nothing abnormal about the large cash holdings of American firms in recent years. Bates, Kahle, and Stulz (2009) show that changes in firm characteristics explain much of the increase in cash holdings in the 1980s and 1990s.  US multinationals held comparable amounts of cash than purely domestic firms in the late 1990s, but now hold significantly more cash than similar purely domestic firms.

The tax treatment of remittances made it advantageous for multinationals to keep their earnings abroad. But the increase in cash holdings of multinationals is strongly related to their R&D intensity, so that multinationals with no R&D expenditures do not have an increase in abnormal cash holdings compared to domestic firms with no R&D expenditures. In sum, what this study shows is that cash hoarding is really confined to large hi-tech multinationals which keep cash for high risk R&D spending that burns cash, while borrowing and issuing debt to pay shareholders their dividends and buy back shares, as this is cheap and tax efficient.

This confirms previous studies such as that in the Journal of Finance (2009), Why firms have so much cash, which found that in order to compete, companies increasingly must invest in new and untried technology rather than just increase investment in existing equipment.  That’s riskier: “the greater importance of R&D relative to capital expenditures also has a permanent effect on the cash ratio. Because of lower asset tangibility, R&D investment opportunities are costlier to finance than capital using external capital expenditures. Consequently, greater R&D intensity relative to capital expenditures requires firms to hold a greater cash buffer against future shocks to internally generated cash flow.”  

So companies have to build up cash reserves as a sinking fund to cover likely losses on research and development.  This partly explains why there was a growing gap between cash held by corporations and investment in means in production between 1998 and 2008

Share prices, profits and debt

February 6, 2017
The world’s stock markets continue to hit the roof, particularly the US markets which have reached all-time highs.  ‘The Donald’ may dominate the headlines with his presidential decrees and tweets, but on the whole, financial investors remain optimistic.  As I showed in a previous post, there is a growing consensus among economists and investors that things are looking up and the world economy is set for a sustained recovery.

Take the latest forecasts from Gavyn Davies, former chief economist at Goldman Sachs and now running his own financial agency, Fulcrum.

He comments “One of the most important questions for 2017 is whether this bout of reflation will continue. My answer, based partly on the latest results from the Fulcrum nowcast and inflation models, is that it will continue, at least compared to the sluggish rates of increase in nominal GDP since the Great Financial Crash.” Moreover “The nowcasts continue to report strong growth across the board, with world activity now expanding at a 4.2 per cent annualised rate   Strong growth is especially apparent in the advanced economies, where the growth rate is now 3.0 per cent, a figure that is well above the long term trend of 1.8 per cent. Furthermore, activity growth is estimated to be above trend in all of the major advanced economies simultaneously: US (3.6 per cent), Eurozone (2.5 per cent), Japan (1.8 per cent) and the UK (2.5 per cent).”

So it is looking good.  However, as I did in my previous post, I must throw some cold water on this forecast for higher and sustained economic growth.  Sustained trend growth does not depend on consumption; it does not depend on more spending by households on goods and services financed by more borrowing or induced by higher share prices.  It depends on increased investment in production capacity leading to higher productivity growth. And that, in turn depends on better profits for the key corporate sector of an economy.  And as yet, there is little sign of that.

For example, in the data for the last quarter of 2016 for the US economy, any pickup in business investment was minimal.  US real GDP figures show an annualised rise of 1.9%. So real growth in 2016 was just 1.6% compared to 2.6% in 2015 – the slowest rate since the end of the Great Recession.  There was a bit more business investment after three quarters of decline. But business investment was still up only 0.3% yoy. The key sector of equipment investment was still falling by 3.6% yoy.


As a result, productivity growth (that’s the increase in output per worker), is stagnant, especially in the key productive sectors like manufacturing.


These are similar points to those made by John Ross in his latest post on the US economy, namely the myth of a strong economic recovery.


Well, it could be argued: that’s the past.  As Gavyn Davies and others argue, things will be different this year.  Even ‘post-Brexit’ Britain is likely to record reasonable growth of 2% this year, say the Bank of England and other agencies, contrary to their doomladen forecasts after the referendum last summer.

But I say again, the key indicators are an increase in business investment and behind that, the driver of, an increase in corporate profits.  The figures we have for the third quarter of 2016 (general the latest) suggest a mild recovery in global profits from the slowdown experienced since 2014.  But it is not much to go on.


The overall trend in US corporate profits has been down for over two years.  The graph below shows what has happened to earnings per share (EPS) for the top 500 companies in America.


And behind this decline lies a fall in the record highs achieved in corporate profit margins (i.e. the share of profits in total output) from as early as 2011 – in other words, corporate profits rose but even more slowly than corporate sales or total output.  Some mainstream economists argue that this is good news because tighter margins will increase competition and reduce inequality.  But this is nonsense, as I argued in Jacobin last year.  I argued in that Jacobin piece, falling profits and profit margins herald a slump in investment and then a slump in production and employment.  JP Morgan and other investment bank economists have made the same point.

Corporate profit margins are still well above their historic average. In order for them to revert to their mean, they would have to fall to 9%, according to Casey Research.  The last time profit margins sunk that low, the US economy entered the Great Recession of 2008-9.


As I showed in a recent post, profitability across the spectrum of the corporate sector in the major advanced capitalist economies remains weak and there is a sizeable section of that sector that are ‘zombie’ firms, unable to make any more profit than necessary to cover the servicing of their debts, let along invest in new productive technology to raise productivity and expand.

And behind that situation is the level of corporate debt, something ignored by the likes of Gavyn Davies.  As Austrian economist, William White puts it in a damning piece, “the question that all market observers ultimately have to answer today is whether the epic accumulation of global debt is sustainable. If it is not, as I believe, the next question is how to identify the signs indicating that excesses are becoming unsustainable and leading to breakage.”

Michael Lewitt points out that stock markets “are chasing the highest valuations in history.”  As the graph below shows, they still have some way to go to match the hi-tech bubble excess of 2000. But the US stock market is now at the same level of valuation as just before the 1929 crash.


And yet financial markets are not supported by strong corporate earnings and real GDP growth.  According to Factset, estimated non- GAAP earnings growth for S&P companies in 2016 was a paltry +0.1% (and GAAP earnings growth was negative). Revenues were up roughly 2.0%.  “Wall Street strategists trying to tempt investors into buying more stocks at these levels are playing with fire.” (Casey).

France: penned in

February 1, 2017

The victory of Benoit Hamon as the new leader of the ruling Socialist party in France sets the scene for an unpredictable outcome from the upcoming presidential election in April-May.

Hamon is a Corbyn-Sanders type left leader who defeated the right-wing Blairite-Clinton candidate in the socialist primary that saw nearly 2m vote.  He stands for cutting the working week, boosting the minimum wage and reversing various neo-liberal measures introduced by incumbent ‘socialist’ President Hollande, who is so unpopular (with 4% approval) that he decided to not to run again.

Hamon starts way behind in the public opinion polls, with about 15% of those voting likely to support him, but ahead of the ‘far left’ candidate Jean-Luc Melenchon with 10%.  The leader of the pack is Marie Le Pen, head of the (formerly openly fascist) racist, anti-immigrant, anti-EU Front National (NF), who is polling about 25%.  The centre-right, neo-liberal main capitalist party, the Republicans, have picked Francois Fillon, who wants to increase the working week, privatise more and cut public employees and services sharply.  Fillon, who has been caught in a scandal of paying his wife €800,000 as his ‘secretary’ from public funds for doing nothing, is polling about 22%.  Then there is the so-called centre candidate, a former right-wing ‘socialist’ minister, Emmanuel Macron, who is pro-EU, wants more neo-liberal policies etc.  He is getting about 21%.

So it’s all wide open.  As the French presidential election is over two rounds, with the top two in the first round then having a run-off, the most likely outcome is that Le Pen may get to the second round but then be roundly defeated by one of the others (in a second round any of the others are ahead against Le Pen by about 60-40).  So it is unlikely that France will vote in a racist Eurosceptic president.

But that does not rule out a new right-wing president who will try to boost profitability at the expense of labour, by raising the working week, imposing stringent labour laws, cuts in public services, pensions and have more privatisations.  That’s because French capital needs to act as it slips further behind its major partner in Europe, German capital.

The French economy picked up the last quarter of 2016, but it was a very modest recovery.  The French economy grew 1.1 percent in all of 2016, compared with 3.2 percent in Spain and 1.9 percent in Germany.  The unemployment rate remains stuck close to 10 percent compared to just 3.9% in Germany.


The reality is that French capital has been in trouble for some time.  The best estimate of the profitability of French capital in the last 50 years shows that after the profitability slump of the 1960s that all the major capitalist economies experienced, French capital made only a limited recovery in the so-called neo-liberal era.


That was partly due to the failure of French industry to invest and compete in world markets and eventually in the Eurozone compared to Germany.  And it was also partly due to the stubborn militancy of French labour to allow cuts in wages and conditions and to preserve public services and benefits – France has the best national health service in the world and still relatively good social benefits and pensions (although these have been eaten away).  And it has an official 35-hour week which is enforced by the labour movement.

At the end of the 20th century, profitability peaked and began to fall again.  It is now at a post-war low.  As a result, French capital is struggling to compete.  Indeed, since the euro started in 1999, the profitability of French capital has plummeted 27% compared to a 21% rise in Germany.  Profitability is still down a staggering 22% since the peak just before the global financial crash in 2007 – that’s way more than the decline in Germany or the Euro area average.


As a result, investment, particularly business investment, has stagnated in the ‘recovery’ since 2009.


As investment has been so poor, growth in productivity has been low (as in many other capitalist economies).


French productivity levels (GDP per hour worked) seem higher than the G7 and the UK.  But this is partly an illusion because the unemployment rate is close to 10% or double that of the UK and Germany.  When you account for that, French productivity is not much higher than the UK.


So this upcoming election is important.  French capital wants a president elected who will introduce policies designed to reverse the long-term secular decline in the profitability of capital and put French labour in its place.  For this, they look to Fillon or Macron – either will do.  But votes do not always work out as the strategists want or expect – as we have seen in the UK with Brexit and Trump in the US.

It is still unlikely that Le Pen will enter the Elysee Palace or that Hamon or Melenchon will combine to enable a leftist candidate to get into the second round and defeat Le Pen.  But it’s possible.  But whatever the outcome, the next French president will face major challenges with an economy that has sluggish growth and investment, high unemployment and growing ethnic divisions.  And that is not even considering the probability that there will be a new global slump during the next presidency.

Abenomics: an update

January 27, 2017

Back in 2012 when Japanese PM Abe came to power, he launched a new economic policy that was supposed to get Japan out of its seemingly permanent deflationary stagnation.  The ‘three arrows’ of this policy were 1) to print money and take interest rates down to zero and beyond to stimulate consumer spending – so-called ‘unconventional monetary policy’; 2) to increase government spending and run sizeable budget deficits to ‘pump-prime’ the economy in traditional Keynesian-style; and 3) to introduce ‘structural reforms’ i.e. labour and market deregulation in the neo-liberal approach. Warning – graph alert!

Former Fed chair Ben Bernanke, the architect of unconventional monetary policy, was flown to Abe’s Cabinet meetings to advise on the first arrow.

Japan monetary base

Paul Krugman, the great guru of Keynesian stimulus policies, was also flown in to advise on the second arrow; while Abe himself tried to implement the third arrow with sharp cuts in corporate taxes and weakening of labour laws.


In previous posts, I pointed out that Abenomics was really the ultimate policy of mainstream economics in all its wings that would supposedly end Japan’s depression – but it would not work unless profitability of capital was revived and business investment took off.

One of the key targets of Abenomics was to get inflation of prices in the shops rising at 2% a year. This supposedly would force Japanese citizens to spend more and stop saving too much, which had been the result of the deflation of previous years. The combined policies of monetarism and Keynesianism would do the trick.


Well, the latest data from Japan show the miserable failure of these policies.  Annual consumer prices are now falling not rising.  Core consumer prices, which include oil products but exclude volatile fresh food, fell 0.3% in 2016 from a year earlier, a 10th straight monthly decline.


And as for economic growth, Abenomics has failed spectacularly.  Real GDP growth is struggling to reach 1% this year, way below levels achieved when Abe came into office at the time of ‘recovery’ from the Great Recession.


It is just as well that Japan’s ageing population continues to shrink because that has meant that GDP per person has risen more.


But even this meagre rise in GDP hides the deeper failure of Keynesian style policies.  Fiscal stimulus and monetary easing has not led to increased household spending.  On the contrary, Japanese households are consistently spending less.


Why is that?  Well, the answer lies in the partial success of the third arrow – the real drive of Abenomics – namely trying to raise the profitability of capital and the productivity of labour to get Japanese capitalism going. Under Abenomics, profitability has been turned around.  Japanese profitability was in long-term decline during the 1990s and that was only reversed by  the previous neo-liberal policies of PM Koizumi and the global credit boom of the 2000s.  But the Great Recession saw a 25% collapse in profitability.  Abenomics set out to restore profitability of capital.


And Abe did it in two ways.  The first was a sharp cut in corporate taxes.


And while corporate profits taxes were reduced, a special sales tax was imposed on the Japanese public and social security contributions were hiked.


The outcome was a big shift in the share of labour in national income towards profit share.  Real wages per employee fell and with it, household spending.


However, it seems that Japanese corporations, despite improved profitability, are still not prepared to step up business investment by any decisive amount.  That’s because the actual generation of profitable investment is still weak and cuts in corporate taxes are not enough to counteract that. Capital formation remains nearly 20% below where it was in the late 1990s and still below the peak of 2007.


As a result, Japan’s productivity per worker has not increased at all under Abenomics.


So, after four years of Abenomics, employing all the weapons of mainstream economics, and paying their leading advisers to help, Japanese capitalism remains stagnant and worker’s real incomes are falling.



Beware the zombies

January 23, 2017

Mainstream economics has been seriously puzzled by the failure of the major economies to restore the previous growth rate in the productivity of labour since the end of the Great Recession.  There has been an intense debate over the issue. 

Some argue that productivity growth has been restored but is just not being measured properly, now that much new productivity comes from data, intellectual ideas, software etc and not from the production of things.  But recent research has thrown cold water on this explanation. 

Others argue that productivity growth may be lower, but that is simply the result of the aftermath of the Great Recession, leaving companies unwilling to invest in capital equipment and preferring to speculate in financial markets or just hold cash.  There is some truth in this argument, as I shall explain below.  After all, after a major slump, capitalist companies are going to hoard cash rather than possibly waste it on investment and extra production that may not find a buyer. And a past OECD study found support for what it called the ‘pro-cyclical’ element in post global crash productivity.  “Firms may respond to short-run fluctuations in demand by varying the rates at which their existing capital and labour are utilized, for example by hoarding labour at the time of a crisis waiting for the recovery or underutilising the existing capital stock without shedding it

Others reckon productivity growth had already slowed down before the Great Recession and would not recover because we are now in an era of low growth as all the hi-tech innovations have been exhausted and robots and AI will have little impact on the wider economy.  This view has been strongly contended by mainstream economist, Robert J Gordon, and by more radical observers. It suggests that capitalism may have passed its use-by date.  Again, this argument has some merit but, as I have explained in previous posts, it still does not identify the reason for the investment and productivity growth slowdowns since the end of the Great Recession.

Now some new research brings stronger light onto the debate.   The European Central Bank, the Bank of England and the OECD have recently produced reports that hone in one key feature of the ‘productivity puzzle’.  It seems that productivity growth is not stuttering everywhere in capitalist economies.  In the major economies, the so-called ‘frontier’ companies are increasing their productivity as fast as before the financial crisis.  The disappointing economy-wide productivity figures are to be blamed on the companies that are ‘behind the frontier’.

The OECD finds that the ‘diffusion’ of innovation and productivity growth from leading to lagging companies has slowed down.  The ECB also finds the same thing in its study of Eurozone productivity (where it is worse for services than for manufacturing) and the Bank of England finds the same for the UK and that its effect is substantial.  What is most significant is that the new OECD study found that the cause was the large number of ‘zombie’ companies (companies whose regular revenues at most cover their interest expenses (if that) — companies that, to paraphrase BoE governor Carney, “depend on the kindness of their creditors”.  

The OECD researchers find that such zombies take up a frighteningly large part of the economy. Across the nine European countries they studied, the share of the total private capital stock ‘sunk’ in zombie companies ranges from 5 to 20 per cent. The suggestion is that such businesses hog capital and crowd the market for newcomers, make it harder for more promising companies to expand and hold back the reallocation of labour and capital to more productive and faster-growing companies.   The paper concludes that “the prevalence of, and resources sunk in, zombie firms have risen since the mid-2000s, which is significant given that recessions typically provide opportunities for restructuring and productivity-enhancing allocation” and that “a higher share of industry capital sunk in zombie firms tends to crowd out the growth—measured in terms of investment and employment—of the typical non-zombie firm.” All in all “a 3.5% rise in the share of zombie firms—roughly equivalent to that observed between 2005 and 2013 on average across the nine OECD countries in the sample—is associated with a 1.2% decline in the level of labour productivity across industries.” 

This confirms what I argued in a recent debate on the role of profitability.  The huge profits gained since the end of the Great Recession have been mostly confined to the large companies: just a few mega companies hold most of the cash while thousands of small and medium enterprises (SMEs) hold little cash and much more debt.  Indeed, a minority are really ‘zombie’ firms just raising enough profit to service their debt.”

It is easy to see why there are so many zombies.  Despite the relative recovery of headline profitability in many economies in the credit-fuelled boom from 2002 to 2006, many small to medium-sized companies did not see an improvement in profitability.  Instead they racked up higher debt through bank loans.  The Great Recession caused a collapse in profits and even after 2009, profitability improved little for these companies while debt remained high. But the zombie companies have struggled on because interest rates were so low and banks would not foreclose.  This scenario has been found in the extreme in Italy where ‘non-performing’ bank loans have reached 20% of GDP.

As the ECB explains in its report (ecb-zombie-credit-acharya-et-al-whatever-it-takes ),While banks that benefited from the announcement increased their overall loan supply, this supply was mostly targeted towards low-quality firms with pre-existing lending relationships with these banks. As a result, there was no positive impact on real economic activity like employment or investment. Instead, these firms mainly used the newly acquired funds to build up cash reserves. Finally, we document that creditworthy firms in industries with a prevalence of zombie firms suffered significantly from the credit misallocation, which slowed down the economic recovery.”

According to research by the ‘free market’ Adam Smith Institute, 108,000 so-called zombie businesses in the UK are only able to service the interest on their debt, preventing them from restructuring. In other words, they slow the ‘creative destruction’ of capital by the liquidation of the weak for the strong.

This confirms previous studies such as that in the Journal of Finance (2009), Why firms have so much cash, which found that in order to compete, companies increasingly must invest in new and untried technology rather than just increase investment in existing equipment.  That’s riskier: “the greater importance of R&D relative to capital expenditures also has a permanent effect on the cash ratio. Because of lower asset tangibility, R&D investment opportunities are costlier to finance than capital using external capital expenditures. Consequently, greater R&D intensity relative to capital expenditures requires firms to hold a greater cash buffer against future shocks to internally generated cash flow.”  So companies have to build up cash reserves as sinking fund to cover likely losses on research and development.

Similarly, in a recent paper, Ben Broadbent from the Bank of England noted that UK companies were now setting very high hurdles for profitability before they would invest as they perceived that new investment was too risky. “Even if the crisis originated in the banking system there is now a higher hurdle for risky investment –  a rise in the perceived probability of an extremely bad economic outcome….In reality, many investments  involve sunk costs. Big FDI projects, in-firm training, R&D, the adoption of new technologies, even simple managerial reorganisations – these are all things that can improve productivity but have risky returns and cannot be easily reversed after the event.”  So the profitability of capital has got to be high enough both to justify riskier hi-tech investment and to cover a much higher debt burden (even if current servicing costs are low).  Firms are not going to borrow more to invest even if banks are willing to lend.

Marx’s theory of crisis rests on the idea that after a slump capital will only start to invest to raise the productivity of labour if profitability is rising and at a sufficient level.  Indeed, slumps in production should provide the basis for a recovery in profitability and a reduction in the debt burden (credit) built up to the point of the crisis. But right now there are thousands of heavily indebted SMEs which are barely keeping their heads above water despite low interest rates.  They are keeping profitability too low and debt too high.  They are clogging up the system.

Profitability in the major economies did recover from the trough reached at the depth of the Great Recession in 2009.  According the European Commission’s AMECO database, the net return on capital stock is up between 8-30% since 2009 in the major economies.  But even that recovery has not meant that profitability has returned to its previous peak (2005-7) before the great crash, varying from flat to down near 14%.  And in the UK and the US profitability is now falling, according to AMECO.


At the same time, corporate debt levels are still high and rising.


The most extreme strategists of capital recognise the ‘proper’ solution.  Back at the beginning of the Great Depression of the 1930s, the then US Treasury Secretary, Andrew Mellon, warned against keeping ‘dead’ capital going ‘zombie like’ as a ‘moral hazard’.  “Liquidate labour, liquidate stocks, liquidate farmers, liquidate real estate … it will purge the rottenness out of the system. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less enterprising people”.

The ‘solution’ for capital of ‘creative destruction’ in a slump or depression has not altered.  “The fundamental tenet of capitalism, which holds that some bad companies need to fail to make way for new and better ones, is being rewritten,” says Alan Bloom, global head of ‘restructuring’ at Ernst & Young management consultants. “Many European companies are just declining slowly and have an urgent need for new management, a revised capital structure or at worst to be allowed to fail,” he adds.

With corporate debt levels higher than before the global crash and profitability in most economies lower than before and now peaking again, ‘zombie’ companies are going to have to be removed in a new deluge before improved profitability and productivity can be achieved.


ASSA 2017 part 2 – Economists and the state of economics

January 11, 2017

Part one of my report on ASSA 2017 covered the debate among mainstream economists and others on the scale and impact of rising inequality and the role of automation on labour and the capitalist economy.

Talking of inequality brings me to consider the state of economics now, as expressed in ASSA 2017.  The failure of mainstream economics to forecast the Great Recession or to explain it; and the subsequent failure to explain how to get out of the Long Depression that ensued raised questions about the methods and polices of the mainstream at this year’s ASSA.

Nobel prize winner Angus Deaton at ASSA had serious questions.  Economic data were faulty, the models used by economists were unreal and the inequality we see in the world was mirrored in the economics ‘profession’ itself.  Deaton sounded upset that most economists could not get their stuff into the top journals, leaving the gravy train of pay and fame to a small elite of Nobel prize winners.  A few top economists got high pay, good jobs and tenure and the same people got their papers in the top five journals and often not on merit.

Of the 537 people who have held American Economic Association office since 1950, for example, 51.1 percent got their doctorates at the University of Chicago, Columbia, Harvard and the Massachusetts Institute of Technology. One-third of the members of the Council of Economic Advisers have had doctorates from MIT. Elite-level economics has become a quite exclusive club.

But economists in general are not really hard done by in the wider scheme of things.  They generally get paid better than most other academics and other ‘professions’ – at least in America.  Indeed, the latest data at ASSA show that newly appointed economists in American academia could expect way more than in most jobs and even most ‘professions’ – starting salaries in the US ate $80-120k.  And even more is paid to economists who go into banking and the world of Goldman Sachs.


And it is not hard to see why.  The aim of mainstream economics is not to analyse society objectively but to defend and promote capitalism and markets as the only viable system of human organisation.  Modern economics is an apologia not a science. For this wasteful and unproductive exercise, economists are paid relatively well compared to occupations that provide things and services that most people actually need.

But the price of apologetics is to fail to see crises coming in the capitalist mode of production.  Mainstream economics failed to forecast the Great Recession and then to explain it.  And it has failed to explain the subsequent Long Depression and how to get out of it.

Indeed, as the ASSA elite bemoaned these failures in Chicago, the Bank of England’s chief economist also warned of the dangers of placing too much faith in economic forecasts. Andy Haldane admitted economic forecasting was “in crisis” and failed to warn adequately about the financial crisis. And he said of economics: “It’s a fair cop to say the profession is to some degree in crisis”. His intention was to highlight the problems inherent in placing too much reliance on large models of the economy which assume people always behave rationally. Mr Haldane said he hoped the lessons learnt after the financial crisis would help economics move away from “narrow and fragile” models to a broader analysis which encompasses insights from other disciplines.

In the Richard Ely ASSA lecture, Esther Duflo reckoned economists should give up on the big ideas and instead just solve problems like plumbers “lay the pipes and fix the leaks”.  Elsewher, at ASSA, it was also suggested that economists were more like engineers than physicists.

This sounded like Keynes’ famous remark that economists should be like dentists – sorting out troublesome teething problems so that capitalism can then run smoothly. Apparently, Duflo reckons the analogy of plumbers means that pure scientific method of cause and effect was less important than practical fixes. So economists should be more like doctors than medical researchers.  Plumbers, dentists, engineers, doctors – but not, it seems, social scientists, let alone scientific socialists.

The failure of economics does not auger well that the mainstream will know what to do about the rise of ‘the Donald’.  At ASSA, a pack of Nobel Prize-winning economists gave Donald Trump and his policy plans the thumbs-down.  “There is a broad consensus that the kind of policies that our president-elect has proposed are among the polices that will not work,” said Joseph Stiglitz, summing up the views of the panel that included his fellow Columbia University professor Edmund Phelps and Yale University’s Robert Shiller.

Phelps was particularly critical of Trump’s singling out of individual companies for abuse and praise, saying such interference could end up discouraging newcomers from entering markets and bringing with them much-needed innovation. “The Trump government is threatening to drive a silver spike into the heart of the innovation process,” he said. Phelps also voiced concern about Trump’s plans for big tax cuts and spending increases. “Such a policy runs the risk it could lead to an explosion of public debt and ultimately cause a serious loss of confidence and a deep recession,” he said.  Shiller was the only Nobel Prize winner on the panel discussion who didn’t take a shot at Trump. “I’m a natural optimist and I would not like to speculate on how bad it could get,” he said.

Much of this moaning appeared to be sour grapes.  So far, Trump has appointed only one economist to his administration, the rest are mostly billionaires.  Apparently, he does not like ‘experts’.  But as Glenn Hubbard, former Bush adviser and now head of Columbia Business School, said: “I think the president will get any economist, he asks”.  Indeed there was another ASSA panel, chaired by Harvard’s top professor Greg Mankiw who were positive about Trumponomics.  John Taylor and Alan Kreuger expected good results from Trump’s proposed infrastructure plans.

Of course, the economists who are really excluded are those on the radical wing of the ‘profession’ who are not engaged in apologia.  They were not looking to join Trump and they were not going to be invited. In the URPE sessions, Esther Jeffers of the University of Paris reckoned that capitalism is on the verge of a new crisis, due to “the misuse of monetary policy, and the fragility of emerging economies”.  Ilene Grabel of the University of Denver also focused the locus of crises in the so-called emerging economies, because they are being challenged by the pursuit of negative interest rates by some of the world’s central banks and the move away from monetary expansion by the US Fed.

As readers of my blog will know, while rising debt costs threaten many corporations in emerging economies, I still think the locus of the next recession will be found in the advanced capitalist economies, particularly the US.  Minqi Li at the University of Utah presented a new paper that looked at the fall in the profit rate in the US, Japan and China during the 1970s.  He reckoned the revival of profitability up to the Great Recession was now over and the locus of capitalism’s demise could be found in any further decline.

However, mainstream economics does not look at profitability of capital as an indicator of the health of capitalism.  That is why it failed to see the Great Recession coming and will not see the next one.  Since the end of the Great Recession, financial asset prices have rocketed while prices and profitability in the ‘real’ economy have not.



But, as we go into 2017, optimism reigns about the capitalist economy, if not with President Trump. It’s going to take a year or so to see if the current optimism expressed in financial markets and among some mainstream economists at ASSA about an economic recovery under Trump is based on good analysis or just on apologia.

ASSA 2017 – part one: productivity and inequality

January 9, 2017

One of the main themes of this year’s annual conference of the American Economics Association, ASSA 2017, was whether capitalism was slowing down.  Was the productivity of labour (output per ASSAworker or per hours worked) no longer growing at previous trend rates and indeed capitalism was entering some level of permanent stagnation?

If capitalism could no longer develop the productive forces effectively, then its historical raison d’etre disappears. Of course, the ASSA assembly of 13,000 economics professors and graduate students, mainly from American universities, to hear hundreds of economics papers did not see the ‘productivity puzzle’, as it has been called, like that.

In the largest hall, the leading mainstream economists of our time debated the issue of slowing productivity growth, confirmed by all the measures, and what this meant.  Olivier Blanchard, former chief economist at the IMF, doubted that productivity was being measured properly at all.  Barry Eichengreen from Berkeley University was more confident of measurement, but argued that there was nothing particularly strange about the current slowdown, as such “decelerations” are “ubiquitous” in many countries at different times.  Productivity slowdowns are usually the result of too little investment in the skills of the workforce and wasteful investment in means of production; or caused by special ‘shocks’ like a sharp oil price rise.  Eventually, the slowdowns end.

Kenneth Rogoff of Harvard University (infamous for the past juggling of his debt data) was even more optimistic.  The productivity growth slowdown now being experienced was temporary. Karl Marx claimed that capitalism would grind to a halt “as the first industrial revolution was fading” but it didn’t.  Keynesian Alvin Hansen (father of the ‘secular stagnation’ thesis) reckoned something similar “at the Great Depression” and he was wrong too.  Rogoff reckoned the current slowdown was caused by a huge ‘debt crisis’ that remains after 2007, but that will subside and the productivity slowdown will “eventually come to an end”.  Marty Feldstein, former economics adviser to the Bush presidency, was very buoyant.  The US economy may have slower productivity growth than before but it was doing better than anywhere else because of its wonderful “entrepreneurial culture and financial system” (!) and a labour market not encumbered with “barriers created by large labor unions, state-owned enterprises and very high tax rates.”

Amid this paean of praise for capitalism in its ‘temporary’ moment of slowdown, the data provided by Dale Jorgensen from Harvard offered a more realistic picture.  Jorgensen reckoned that there were clear signs that, while recovery from the current crisis was likely, a longer-term trend toward slower economic growth will be re-established.”  Jorgensen broke down the composition of economic growth globally and found that the real driver of growth was not ‘innovation’ or even investment in new technology (as measured in neoclassical terms as total factor productivity – TFP), but mainly more and more investment in existing technology and materials.


This conclusion had also been reached by John Ross in his study of Jorgensen’s work before“What is crucial is that the role of different forms of capital, i.e. intermediate products/circulating capital and fixed investment/fixed capital, is the overwhelming force driving US economic growth. Taking the two together 76% of US sectoral output growth is due to fixed and circulating capital, 15% due to labour, and only 9% due TFP.” (Ross).


It means that capitalism mainly grows by relatively more investment in means of production, namely fixed capital with existing technology and material inputs (what Marx called constant capital) relative to investment in labour hours (or variable capital).  The impact of ‘innovation’ and new technology is small.  And Jorgensen reckons that the contribution of the latter will get smaller in the next decade.

In a way, this is another confirmation of Marx’s law of capital accumulation, a long-term tendency for the organic composition of capital to rise.  Marx’s law of the tendency of the rate of profit to fall is the other side of the coin.  To some extent, this tendency will be counteracted by an increase in the exploitation of labour through more people entering the workforce globally and by increased hours of work – but not decisively over the long term.

The other big issue relevant both to future productivity and inequality is the advent of robots and AI.  The ASSA conference collected the main mainstream researchers on this subject.  Daron Acemoglu from MIT argued that automation would actually create as many jobs as it would lose for human beings and the economy would be “self-correcting” in terms of employment and inequality.  William Nordhaus of Yale University presented six reasons why robots and AI would not lead to ‘singularity’ (exponential replacement of humans in production) in this century.  And so all is well with the advent of robotic automation in 21st century capitalism.  Fear of extreme inequality and mass unemployment can be dismissed.

At the same time as the big hitters in mainstream economics debated global productivity and stagnation, in a much smaller room, radical economists, under the auspices of the Union of Radical Political Economics (URPE), were having a similar discussion.  Interestingly, nobody on the panel there though that capitalism was in some ‘secular stagnation’, as formulated by Keynesians like Larry Summers, Paul Krugman or Robert J Gordon, at previous ASSAs. 

Bill Lazonick reckoned that productivity growth had slumped because capital had switched from productive investment into rentier activities of financial speculation.  Companies don’t use the stock market to raise money, they support the stock market”.  Anwar Shaikh reckoned that the Keynesian idea of secular stagnation was silly and that the core of the capitalist problem lay with profitability, not productivity as such.  The key to investment was the profitability of enterprise (the profit rate after deducting interest, rent etc going to the capital of finance and circulation) and that was low.  Until that rose, productivity and economic growth would remain low.

In another room, the ‘centrist’ wing of ASSA met.  These are the more radical Keynesians who reckon that capitalism is failing because of wrong policies and regulations (or lack of them).  If the politicians and rich elite adopted the right ones, then all would be well – or at least fairer and more productive.  You see the problem is that the ‘rules of the game’ have been altered, as Nobel Prize winner and adviser to the leftist British Labour leadership, Joseph Stiglitz, puts it.  The rules have been altered in favour of the rich, corrupt and in favour of finance over productive; in favour of monopoly over competition; in favour of rent over productive profit (see his book).

The panel here were convinced that if the rules in the labour market were changed to help unions organise, then inequality and poverty could be reduced.  Lawrence Mishel reckoned that the “main driver of inequality was the lack of worker power and the globalisation which has led to trade agreements that hurt the incomes of the majority –something mainstream economists lie about”.  Mishel listed the “staggering” number of “poor economic decisions” made in recent decades like austerity, deregulating financial markets, supply-side tax cuts, inadequate efforts to address climate change, the fight against the Affordable Care Act in many states and in Congress, etc.

Dean Baker at the Center for Economic and Policy Research, who also has a book out aptly called “Rigged”, highlighted the need to reverse rising inequality from excessive CEO pay, a bloated financial sector, patent and copyright protections and protections for highly paid professionals.  He calculated that the “efficiency gains” from “reducing or eliminating these rents” would be worth over $3trn, to be used in other productive ways.

What was needed was to “restructure the market” to produce different outcomes because simple tax changes would not do the trick.  Baker said this policy ‘rigging’ of the economy shows that the ‘free market’ does not operate.  Here he seems to be implying that, if it did, then all would be well and fair.  Because the market is ‘rigged’, not because a market economy exists, we need government to intervene to correct inequalities, injustices and apply policies for the majority not for the few.

Baker fails to explain how the market got ‘rigged’.  Did this just happen? Why was the policy choice for the rich not the majority?  Was it not ever thus?  Baker is looking at the symptoms not the causes. Marxists like me would say the policies that led to rising inequality and the growth of finance capital came about because the Golden Age of capitalism, with its decent pensions, public services and benefits and full employment, could no longer be afforded by market capitalism as the profitability of capital plunged through the 1970s.  So the ‘rigging of the rules’ was necessary for the saving of the capitalist market system.

In a later ASSA session, the mainstream, the radical and the liberal met to discuss “the future of growth” (in effect, the future of capitalism). The IMF’s Jonathan Ostrey (naturally) remained optimistic about the future.  In contrast, Robert Gordon was there to tell us the story of his recent book: that capitalism was in for slow growth because the new technologies would have only limited impact.  Anwar Shaikh presented the (Marxist?) argument that capitalism was subject to regular crises and was past it use-by date.  And James Galbraith and Gerald Friedman presented the liberal Keynesian view as above.

There is no doubt that inequality of incomes and wealth has reached levels in some countries like the US or the UK not seen since the start of modern capitalism.  In another session, Daniel Zucman, presented a paper from himself, Emmanuel Saez, Thomas Piketty (the former rock star economist) and the recently deceased Tony Atkinson, that offered the latest data on inequality of incomes in the major economies.  It showed inequality of incomes was highest and still rising in the US; has risen sharply in China (although now tapering off) and was still relatively low (but still higher) in France.


But is high or rising inequality the fault-line of modern capitalism; is it the cause of low productivity growth and recurring crises of capitalist production?  The left Keynesians think so.  But I have argued that inequality is inherent in a class society including capitalism and that is a symptom rather than a cause of capitalist crises or stagnation.  One paper at ASSA gave some support to that.  The paper found that the empirical evidence does not support the argument that inequality is a major drag on demand growth, except when offset by borrowing by lower income households. There does not appear to be a clear link between the rise in income inequality in recent decades, the financial crisis, or the slow recovery since then.”

In part 2 on ASSA 2017, I’ll discuss the state of modern mainstream economics as ASSA participants see it and the likely efficacy of economic policy in the new era of Trumponomics.