Archive for the ‘economics’ Category

Minsky and socialism

January 14, 2020

Recently, the Levy Institute, the think-tank centre for post-Keynesian economics (and in particular the theories of Hyman Minsky, the radical Keynesian economist of the 1980s), published a short video that that shows Minsky explaining his theory of crises under capitalism in his own words at an event in Colombia, November 1987. It is a very clear account of his theory of crises based on ‘financial fragility’’.

When the Great Recession hit the world capitalist economy, many radical and Marxist economists, and even some mainstream economists, called the GR a ‘Minsky moment’.  In other words, the cause of the Great Recession was a financial crash resulting from excessive debt that eventually could not be serviced.  Minsky’s key contention, that financial instability is endogenously generated, implies that not only financial but also ‘real’ crises arise as a result of the inner workings of the financial system: ‘History shows that every deep and long depression in the United States has been associated with a financial crisis, although, especially in recent history, we have had financial crises that have not led to a deep and long depression’ (Minsky*).

In my view, this is an accurate statement.  A financial crash occurs in every capitalist slump, but financial crashes can occur without a slump.  But this suggests that what is going on in the ‘real economy’ is what decides a financial crash, not vice versa.  Indeed, as G Carchedi has shown (see graph below), when both financial profits and profits in the productive sector start to fall, an economic slump ensues. That’s the evidence from the post-war slumps in the US.  But a financial crisis on its own (as measured by falling financial profits) does not lead to a slump if productive sector profits are still rising.

Indeed, if you listen closely to Minsky’s account (above) of his crisis theory, he recognises that excessive debt in the form of Ponzi finance only leads to a crash when the profits engendered in business and in banking are no longer sufficient to sustain debt expansion.  As Minsky puts it, “borrowers are myopic to the past and blind to the future.’’

At the recent ASSA 2020 conference, the annual meeting of mainstream economists organised by the American Economic Association, there were also sessions by the more radical wings of economics: post-Keynesians and Marxists. Riccardo Bellofiore, the erudite scholar of Marxist, Sraffian and Keynesian economic theory, presented two papers that offered interesting insights on Minsky’s theories.  In his first paper, Bellofiore argues that “the current crisis is the outcome of money manager capitalism stage of capitalism – the real subsumption of labour to finance, in Marxian terms. The most promising starting points are the structural dimensions of Minsky’s analysis and the monetary circuit approach.” Minsky’sSocializationOfInvestment__preview (6)
In his second paper, he argues that Minsky’s contributions are major necessary ingredients to a rethinking of Marxian theory of capitalist dynamics and crises.”
MarxBetweenSchumpeterAndKeynes_Augu_preview (2)

I beg to differ.  I do not think that Minsky’s theories dovetail with Marx’s theory of crises or that they provide a better explanation of booms and slumps than that of Marx. Marx not Minsky  As Maria Ivanova from Goldsmiths University, London has argued effectively (in a paper of a few years ago comparing Minsky and Marx’s theories of crises), Marx was firmly opposed to blaming crises on financial speculation, or on the recklessness of single individuals (Marx and Engels, Collected Works, 1975, p. 401). “Speculation and panic may trigger crises, but to trigger something does not mean to cause it. For Marx, the ultimate origins of all crises lie in the ‘real’ economy of production and exchange.” (Ivanova conf_2011_maria_ivanova-on-marx-minsky-and-the-gr)

Ivanova argues that Marx’s concept of money could not be more different from Minsky’s. Marx saw money as the social expression of value – the amount of socially necessary labour time embodied in a commodity. Money thus expresses the deepest contradiction of the capitalist production relations in ‘a palpable form’. The Minskyan perspective prides itself on its Keynesian origins. “In contradistinction to Marx, Keynes accorded primary importance to interest-bearing capital where capital appears as property and not as function.  And since capital in that form does not function (i.e. does not engage in immediate production), it does not directly exploit labour; class conflict appears obliterated since the rate of profit now forms an antithesis not with wage labor but with the rate of interest” .

Ivanova reckons that implicit in the Keynesian-Minskyan perspective is the insight that finance can repress production, overpower it, and ‘decouple’ from it (at least temporarily) to the detriment of the wider economy – this is what Bellofiore argues is its major insight. But it follows from this that Minsky reckons that if finance were controlled, regulated, restrained, some of the worst ills of capitalism could be kept at bay.  This view is in sharp contrast to Marx, who reckoned that the inherent contradictions of capitalism were beyond human control.

Minsky believed, in line with the Keynesian tradition, that the crises arising from the permanent disequilibrium of the capitalist system could be contained by the concerted effort of ‘Big Government and Big Finance (‘monetary authorities). As Ivanova puts it: “the popular tale of the purely financial origins of the recent crisis dovetails nicely with the belief that financial instability and crises, albeit tragically unavoidable and potentially devastating, can be managed by means of money artistry”  No wonder many mainstream economists in the depths of the global financial crash, like Paul Krugman, reckoned that ‘’we are all Minskyans now”.

But the belief that social problems have monetary/financial origins and could be resolved by tinkering with money and financial institutions, is fundamentally flawed. “For the very recurrence of crises attests to the limits of fiscal and monetary policies as means to ensure ‘balanced’ accumulation.”” (Ivanova). Minsky** considered the dependence of non-financial businesses on ‘external funds to finance the long-term capital development of the economy’ a key source of instability. This provided an important rationale for government intervention. In his famous book, Minsky, Stabilizing an Unstable Economy (1986), he wrote ‘Once Big Government stabilizes aggregate profits, the banker’s reason for market power loses its force’.

So the job of the radical economist was to restore the profitability of capital by the intervention of the monetary and fiscal authorities, according to Minsky. This was more important that shifting the burden of any financial crisis off the backs of the many. As Minsky said in the 1980s: “It may also be maintained that capitalist societies are inequitable and inefficient. But the flaws of poverty, corruption, uneven distribution of amenities and private power, and monopoly-induced inefficiency (which can be summarized in the assertion that capitalism is unfair) are not inconsistent with the survival of a capitalist economic system. Distasteful as inequality and inefficiency may be, there is no scientific law or historical evidence that says that, to survive, an economic order must meet some standard of efficiency and equity (fairness) .”

Riccardo Bellofiore in his ASSA paper is keen to tell us that, in his book on Keynes (1975), Minsky adopted a more radical position than Keynes on the need for the “socialization of investment’’ as the solution to crises.  Riccardo reckons that Minsky’s socialization of investment, thanks to his reference to the New Deal, is not far from a socialization in the use of productive capacity: it is a “command” over the utilization of resources; its output very much looks like Marx’s “immediately social” use values. It is complementary to a socialization of banking and finance, and to a socialization of employment. Minsky goes further that a “Keynesian” welfare state and argues for a full employment policy led by the government as direct employer, through extra-market, extra-private enterprise and employment schemes.”

But this was in 1975. Mike Beggs, a lecturer in political economy at the University of Sydney  in a recent article, shows that, while that Minsky started off as a socialist, at least in following the ideas of ‘market socialism’ by Oscar Lange, he eventually retreated from seeing the need to replace capitalism with a new social organisation (or ‘socialised investment’), to trying to resolve the contradictions of finance capital within capitalism, as his eventual financial fragility theory of crises shows.

As Bellofiore says, in the 1970s, Minsky contrasted his position from Keynes.  Keynes had called for the “somewhat comprehensive socialization of investment” but went onto to modify that with the statement that “it is not the ownership of the instruments of production which it is important for the State to assume” — it was enough to “determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them.” But Minsky went further and called for the taking over of the “towering heights” of industry and, in this way, Keynesianism could be integrated with the ‘market socialism’ of Lange and Abba Lerner.

But by the 1980s, Minsky’s aim was not to expose the failings of capitalism, but to explain how an unstable capitalism could be ‘stabilised’. Biggs: “His proposals are aimed, then, at the stability problem. ….The expansion of collective consumption is dropped entirely. Minsky supports what he calls “Big Government” mainly as a stabilizing macroeconomic force. The federal budget should be at least of the same order of magnitude as private investment, so that it can pick up the slack when the latter recedes — but it need be no bigger.”

Indeed, Minsky’s policy approach is not dissimilar from that of today’s Modern Monetary Theory supporters.  Minsky even proposed a sort of MMT job guarantee policy. The government would maintain an employment safety net, promising jobs to anyone who would otherwise be unemployed. But these must be sufficiently low-paid to restrain market wages at the bottom end. The low pay is regrettably necessary, said Minsky, because “constraints upon money wages and labor costs are corollaries of the commitment to maintain full employment.” The discipline of the labour market must remain: working people may not fear unemployment, but would surely still fear a reduction to the minimum wage (Beggs). Thus, by the 1980s, Minsky saw government policy as aiming to establish financial stability, in order to support profitability and sustain private expenditure. “Once we achieve an institutional structure in which upward explosions from full employment are constrained even as profits are stabilised, then the details of the economy can be left to market processes.” (Minsky).

Minsky’s journey from socialism to stability for capitalist profitability comes about because he and the post-Keynesians deny and/or ignore Marx’s law of value, just as the ‘market socialists’, Lange and Lerner, did.  The post-Keynesians and MMTers deny/ignore that profit comes from surplus value extracted by exploitation in the capitalist production process and it is this that is the driving force for investment and employment. They ignore the origin and role of profit, except as a residual of investment and consumer spending. Instead they all have a money fetish. With the money fetish, money replaces value, rather than representing it. They all see money (finance) as both causing crises and, also as solving them by creating value!

In my view, far from Minsky providing the “necessary ingredients to a to a rethinking of Marxian theory of capitalist dynamics and crises”, as Bellofiore argues, Minsky’s theory of crises, like all those emanating from the post-Keynesian think tank of the Levy Institute, falls well short of delivering a comprehensive causal explanation of regular and recurring booms and slumps in capitalist production.  By limiting the searchlight of analysis to money, finance and debt, Minsky and the P-Ks ignore the exploitation of labour by capital (terms not even used).  They fail to recognise that financial fragility and collapse are triggered by the recurring insufficiency of value creation in capitalist accumulation and production.

Moreover, by claiming that capitalism’s problem lies in the finance sector, the policy solutions offered are the regulation and control of that sector, rather than the replacement of the capitalist mode of production.  Indeed, that is the very path that Minsky took: from his socialism and ‘’socialisation of investment’’ in the 1970s to ‘stabilising finance’ in the 1990s.

* Minsky, H. P. (1992a) Reconstituting the United States financial structure: some fundamental issues, Working Paper No. 69, Levy Economics Institute of Bard College.

** Minsky, H. P. (1996) Uncertainty and the institutional structure of capitalist economies: remarks upon receiving the Veblen-Commons award, Journal of Economic Issues, 30, pp. 357-368.

ASSA 2020 – part three: currencies, climate, china and crises

January 8, 2020

In this last part of my review of ASSA 2020, I want to cover some other issues discussed at ASSA, especially one big issue: the economics of climate change; and finally, look at the papers in the sessions organised by the Union for Radical Political Economics (URPE) – the main association covering Marxist economics.

One populist subject over the last few years has been the role and value of cryptocurrencies.  I have discussed these privatised digital currencies on my blog here. The debate continues on how well a cryptocurrency can serve as a means of payment. One paper argued that cryptocurrencies need to overcome double spending by using costly mining and by delaying settlement. Indeed, the authors reckon that bitcoin “generates a welfare loss that is about 500 times larger than a monetary economy with 2% inflation” because it is so costly to ‘mine’ and because of slow settlement.  Only if an economy had 50% inflation would the loss to users be higher than bitcoin.  Clearly, these cryptocurrencies are never going to replace state fiat currencies as a means of payment. TheEconomicsOfCryptocurrencies_Bitco_preview t

Bill Nordhaus was awarded the Nobel (Riksbank) prize for pioneering work on using an integrated climate-economy assessment model (IAM) to study when and how the tipping point affects the social cost of carbon dioxide. While the mainstream has lauded Nordhaus, the reality is that IAMs have proved to be mostly useless.  Most IAMs struggle to incorporate the scale of the scientific risks, such as the thawing of permafrost, release of methane, and other potential tipping points. Furthermore, many of the largest potential impacts are omitted, such as widespread conflict as a result of large-scale human migration to escape the worst-affected areas.

The IPCC’s mitigation assessment concluded from its review of IAM outputs that the reduction in emissions needed to provide a 66% chance of achieving the 2°C goal would cut overall global consumption by between 2.9% and 11.4% in 2100. This was measured relative to a ‘business as usual’ scenario. But growth itself can be derailed by climate change from business-as-usual emissions. So the business-as-usual baseline, against which costs of action are measured, conveys a misleading message to policymakers that fossil fuels can be consumed in ever greater quantities without any negative consequences to growth itself. And heterodox economist Steve Keen has debunked Nordhaus’ calculations, which suggest that even a 4C rise global temparatures would have only a limited effect on growth and welfare over the rest of this century and in effect there was no tipping point when global warming would get out of control.

Based on this relatively benign view, mainstream economics concentrates on carbon pricing and taxes to mitigate global warming, rather than radical action to end fossil fuel production through control of the major energy companies. This is why the mainstream session on climate change was entitled Carbon Tax Policy with the discussion around whether carbon taxes would slow economic growth and whether carbon taxes would add to fiscal costs or not.  You will be pleased to hear that the presenters concluded that carbon taxes will not slow economic growth and there could actually be fiscal gains through reducing the cost of dealing with floods, droughts hurricanes. MeasuringTheMacroeconomicImpactOfC_preview (2)

So that’s all right then.  Only it isn’t.  All the latest climate science suggests that the tipping points are approaching fast and allowing fossil fuel production to continue while trying to reduce its use by ‘market’ solutions’ like carbon pricing and taxes will not be enough.TippingPointsInTheClimateSystemAnd_preview

In the URPE sessions, Ron Baiman of Benedictine University pointed out that the money created by the Fed for the three-year 2008-2011 financial bailout would have paid for almost thirty years 2020-2050 of global climate crisis mitigation through a Global Green New Deal (GGND). FinancialBailoutSpendingWouldHave_preview Mathew Forstater et al reckoned that the transition to a sustainable economy and just society required a transformation in the technological structure of production away from fossil fuel-based and toward renewable energy-based technologies.  Peter Dorman reckoned that the GND-type policies won’t be enough. It required structural change in the economy.  TheClimateCrisisAndTheGreenNewDea_preview (2)

Another big issue at ASSA is what is happening in China and what will happen in the continuing trade and technology war with the US.  There were dozens of mainstream sessions that covered or referred to China from all sorts of angles.  Clearly China dominates much of mainstream research.

There is the question of China’s fast growth and pollution. According to Bharati et al, China has not achieved the turning point of where pollution and emission no longer positively relate to the economic growth. But that would happen in 2036 or so.  According, to NAME, both countries lose from the Trump tariffs, where high-tech industries are disproportionately affected. China mainly loses from the decline in the production scale of its high-tech industries, while the US mainly lose from the increasing input prices used in its high-tech industries. In addition, Japan also loses from the Trump tariff due to higher input prices. FuelingTheEnginesOfLiberationWithC_preview

Most interestingly, Chang-tai Hsieh points out that the largest Chinese firms are conglomerates, where the largest 500 conglomerates in 2015 had an average of 17 thousand firms, and collectively account for almost half of all registered capital of all Chinese firms. Conglomerates are typically partnerships between private firms and state owned firms, where state owned firms are typically at the center of the conglomerates; 6) The number and size of Chinese conglomerates increased from 1995 to 2015.

Suprabha Baniya et al conclude that China’s Belt and Road Initiative increases trade flows among participating countries by up to 4.1 percent; (ii) these effects would be three times as large on average if trade reforms complemented the upgrading in transport infrastructure; and (iii) products that use time sensitive inputs and countries that are highly exposed to the new infrastructure and integrated in global value chains have larger trade gains. TradeEffectsOfTheNewSilkRoad_preview (1)

An URPE session also covered China.  Brian Chi-ang Lin, National Chengchi University reckoned that If China keeps growing (even at a slower rate), China could eventually regain the global economic power she once had in the seventeenth and eighteenth centuries, under its current model. “Under Chinese President Xi Jinping, China has recently initiated a series of important policies such as the domestic nationalization of private corporations and the international One Belt One Road (OBOR) initiative to promote the national economy and, accordingly, to sustain the CCP’s authoritative regime.”

Finally, let me look at some of the interesting papers on Marxist theory presented in the URPE sessions. Carolina Alves from Girton College, University of Cambridge developed some new ideas on Marx’s concept of fictitious capital in relation to government bonds. “Fictitious capital does not represent real capital but it is increasingly the channel through which the dominance of interest bearing capital over other capitals occurs. Government bonds are the most important tools whereby the state is able to intervene in the financial market. the backbone of operations in the secondary market, and a source for financial accumulation, rather than as a fortuitous aspect of state finance. So public debt can neither be avoided nor paid off in capitalist economies, and government bonds now offer an unparalleled scope for purely financial accumulation.”

Sergio Camara Izquierdo from the Metropolitan Autonomous University (UAM)-Azcapotzalco, and one of the authors in our book, World in Crisis, analysed the trends in profitability and accumulation in Mexico in the postwar period. with new estimations that includes intangible assets and geometric patterns of depreciation. Camara reveals expansive (1939-1982) and contractive (1983-2018) long waves in capital accumulation within which there us ae neoliberal contractive wave.  And note the collapse in profitability of capital in Mexico from the 1990s with the formation of NAFTA.

Baris Guven from the University of Massachusetts-Amherst attacked the idea of Marxian political economy that places great emphasis on the nexus between technological change and capital accumulation, based on the profit-motive and competition.  For Guven, on the contrary, the profit-motive is the reason why capitalist economies are prone to underproduce technical (and scientific) knowledge. It is the state that does the technological fix, and this fix, in addition to others, supports reproduction of capital accumulation at extended scale.  In other words, no innovation without state intervention.  While there is some truth in the argument that the state has played a crucial role in boosting technology, as Mariana Mazzucato has shown, profitability remains the key driver.  When profitability is low, then investment and productivity growth will slow.

There was a whole session on post-Keynesian theory, with the usual theme of financialisation there.  And there was a session developing the ideas of Hyman Minsky alongside those from a Marxist perspective.  I particularly liked the paper by Masahiro Yoshida of Komazawa University who provided some emphatic data on the extreme ‘rentier’ nature of the UK economy, with the highest services value-added share and the largest finance services share in the g20. As UK financial services are more important than the US for minimising the current account deficit and the majority of the UK’s financial services are exported to the EU, the impact of Brexit is yet to be felt. TheDevelopmentOfCapitalAccumulation_powerpoint (2)

And Jan Toporowski’s paper made some telling points against the ‘free lunch’ perspective of Modern Monetary Theory. “This economical, apparently free, method of financing government expenditure is of course attractive when public services, welfare and infrastructure are deteriorating in the face of austerity. But this low cost is only the case at the time of the expenditure. To understand the true efficiency of this kind of financing, it is necessary also to consider the consequences of such financing. In particular, it is necessary to understand how that money would be absorbed by the economy.”

Finally, Riccardo Bellofiore straddled both the post-Keynesian and Marxist theory (as Riccardo usually does!) – with two papers.
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I’ll refer to Riccardo’s discussion of the relation between the ideas of Minsky and Marx in a future post.  But for now, that’s enough.

In sum, ASSA 2020 confirmed my view that: 1) mainstream economics still does not know why there was a Great Recession and why there is now stagnation; 2) mainstream economics is still convinced of market solutions to climate change; and 3) how could it not be otherwise when mainstream economics starts from the premise that there is no other mode of production but capitalism – which may be imperfect, but must be made to work at best as it can.

ASSA 2020 – part two: stagnation and stimulus

January 7, 2020

The other big debate among mainstream economists at ASSA 2020 was over whether the major capitalist economies are stuck in a long period of ‘secular stagnation’ and what to do about it.  Top economist from the Bank for International Settlements, Claudio Borio and others had a session entitled WhySoLowForSoLong_ALong-TermView_preview

Their view was not that of the Keynesians.  The Keynesians reckon low interest rates and low growth are due to a lack of effective demand from consumers and investment.  In contrast, Borio et al, being from the Austrian school, reckon low interest rates are a product of interference by central banks.  Quantitative easing and other ‘unconventional’ measures of monetary policy have artificially driven interest rates down: “we find evidence that persistent shifts in real interest rates coincide with changes in monetary regimes.”

Nobel prize winner Robert Shiller from Yale University PopularEconomicNarrativesAdvancingTh_powerpoint. Yes, the US economy has set a new record for length of expansion without recession, now over a decade. The unemployment rate is at its lowest in almost 50 years, while stock, bond and housing market prices are at record highs. But the expansion is also the weakest since 1945.  So the state of the US economy is more like uninterrupted stagnation.

In a special session, the great and the good of the world’s leading central bankers discussed the causes of this ‘secular stagnation’.

Janet Yellen, former head of the Federal Reserve reckoned that there were “structural factors” causing a savings glut.  These were found in ageing population that spends less and in low productivity growth (caused by??). With real interest rates (that’s after inflation is deducted) down to no more than 1%, monetary policy is less effective.  And you don’t want to take interest rates into negative territory to stimulate the economy.  That’s why central banks resorted to ‘unconventional policies’ like quantitative easing or so-called ‘forward guidance’.

Ben Bernanke, another former Fed chief, when addressing the AEA as its new president, claimed that unconventional monetary policies under his watch had been equivalent to a 3% pt cut in the Fed’s policy rate.  And he reckoned there was still plenty of monetary measures available to keep the economy going.   Yellen reckoned that “we have had to keep rates lower for longer but we have avoided negative rates in the US.”  But now the Fed must keep this approach to prepare for the ‘next downturn’. Both Bernanke and Yellen, and Mario Draghi who addressed the audience by video were positive about the value and success of monetary policies adopted by central banks in the last ten years.  They had avoided another slump or financial crash.

But then they would say that, wouldn’t they?  Claudio Borio from the BIS was worried that these easy money, zero interest policies would eventually generate another credit bust globally.  At the other end of the mainstream spectrum, Keynesian former Treasury chief Larry Summers was much less sanguine about the efficacy of monetary policy.  Summers said that Europe and Japan are already in a zero rate world.  A new recession will drive US rates down to zero rates like Europe and japan.  So there is a Keynesian-style ‘liquidity trap’ that is semi-permanent in industrialised world.  A liquidity trap means that no amount of money ‘printing’ or central bank bond purchases will get the ‘real’ economy going.  QE has diminishing returns.  At the same time, low rates risk financial instability with speculative capital (Borio or Minsky-style).  Despite companies like Apple and Google having oodles of cash, productive investment is low.  Money, instead, is ploughed into bonds and stocks.  Low investment, low inflation, low growth could lead to outright deflation.

So what’s the answer?  Summers presented the classic Keynesian solution: we need fiscal stimulus.

There is no problem with running budget deficits that leads to higher public debt because interest costs on that debt will be low.  And anyway, the boost to the economy from government spending on productive investments as in energy efficiency and social measures will stimulate demand and deliver more tax revenue.   And there will be no crowding out of capitalist investment while credit is so plentiful.

Yellen pretty much agreed with this. And in his presidential address, Bernanke just noted that if the neutral rate is quite low, monetary policy may need help from automatic fiscal policy. And Adam Posen, from the Petersen Institute and an expert on the Japanese economy, pointed out that Japan had survived and even prospered with a public debt ratio of over 230%of GDP because the Bank of Japan kept interest rates low so that the government could run budget deficits.  Yes, it was true that nominal GDP growth in Japan had been near zero, but this did not mean that Japan had suffered a ‘lost decade’ of growth because with inflation below or at zero and a falling population, per capital real GDP growth matched that of Europe, ir not the US.

To add to this, the proponents of Modern Monetary Theory were at ASSA, like Randall Wray, to tell us that there is no financial constraint on government spending and budget deficits. Indeed with interest rates set low or at zero by central banks, governments can fund new spending through the creation of money at will.

So all is fine, then.  There may be low growth but at least there is no new slump.  And with judicious use of central bank monetary policy and government fiscal stimulus programmes, the major economies can avoid a new slump and even achieve a pick-up in growth with a debt crisis if they act aggressively. I beg to differ.

First, all the speakers were agreed on one fact.  Capitalist investment was weak and as a share of GDP had been falling in all the major economies.  But why was not clear to the mainstream.  Yellen said that “There is common factor globally”, but did not say what it was. I have argued in this blog that the key reason is low profitability in capital.  The huge cash profits of the likes of Apple, Google etc (the so-called FAANGS), even in the US, overall profitability is still low compared to before the Great Recession and global total profits are stagnating.  This explains low productive investment and, in turn, low productivity growth. And thus, stagnation or depression.

Take Japan, Ben Bernanke in his address claimed that Japan’s monetary policy worked.  Adam Posen reckoned that from the late 1990s, a combination of easy money and fiscal stimulus led to a revival in Japan’s (real) growth rate.  So this was the way forward for others.  But was Japan’s relative recovery in the 2000s really due to monetary and fiscal stimulus?  I have shown that the underlying reason was a recovery in the profitability of capitalist sector through an increased exploitation of the workforce.

The central bankers at ASSA all said that monetary policy had been successful and yet they all advocated fiscal measures now.  But if monetary policy is so successful, why do capitalist economies need fiscal intervention by governments?  Yellen actually pointed out that there was no empirical evidence that interest rates can have an effect on investment.
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Then there is the issue of ‘semi-permanent’ budget deficits leading to dangerously high levels of public debt, so that the servicing costs of that debt rise significantly and start to ‘crowd out’ capitalist sector investment.  All the speakers in this session were sanguine about this risk.  And anyway, Yellen said, as long we can keep long-term government spending on pensions and healthcare down, debt will not rise too much!  There’s a thought.

Other top mainstream economists are less sanguine.  The famous (infamous) public debt expert, Kenneth Rogoff predicted a new Systemic Financial Crisis.  “Deep systemic financial crises tend to be infrequent events, as they leave deep lasting scars on the psyche of consumers, investors, politicians and regulators. Normally, especially given strengthened regulation and, one would not expect another systemic event for many decades. But the situation today is anything but normal. Record high global public and private debt combined with political paralysis and extraordinarily weak leadership outside central banks make today’s uncharacteristically fragile at this point in the debt supercycle.

The neoclassical gang of economists had their own session on fiscal policy.  Richard Evan of the University of Chicago attacked the view that low interest rates meant that high public debt was no problem.  His empirical research, he claimed, shows that high debt raises financial risk and lowers output gains, contrary to the prevailing view of Olivier Blanchard. PublicDebtLowInterestRatesAndN_preview Top right-wing neoclassical economist Greg Mankiw presented his critique of MMT as the solution for government deficit financing (A Skeptic’s Guide to Modern Monetary Theory).  ASkeptic’sGuideToModernMonetaryT_preview  Jasmina Hasanhodzic, Assistant Professor of Finance, Babson College argued that rising pubic debt would leave a huge burden on future generations in servicing the debt. SimulatingTheBlanchard-SummersConjec_preview “welfare losses resulting from the introduction of a pay-go pension Ponzi scheme are significant, measuring 20 percent in terms of expected lifetime utility.”  

Other economists considered whether fiscal stimulus would not boost the economy much – ie, the magnitude of the fiscal multiplier. I have looked at this issue before. The evidence is varied.  At ASSA, one empirical paper on the efficacy of Japan’s government spending concluded that “the on-impact output multiplier is 1.5 in the ZLB period and 0.6 outside of it. We estimate that government spending shocks increase both private consumption and investment during the ZLB period, but crowd them out in the normal period.”  So even the best estimate delivers quite a low multiplier, ie a 1% of GDP rise in public spending may boost real GDP by 1.5% if interest rates are zero, but no more than 0.6% with ‘normal rates’. TheGovernmentSpendingMultiplierAtTh_preview

Perhaps the most controversial paper on the impact of high debt came from outside the ASSA conference.  During the conference, the IMF published a new report, entitled Debt is not free. The report stated the issue: “with public debt soaring across the world, a growing concern is whether current debt levels are a harbinger of fiscal crises, thereby restricting the policy space in a downturn. The empirical evidence to date is however inconclusive, and the true cost of debt may be overstated if interest rates remain low.”  But the IMF found that “public debt is the most important predictor of crises, showing strong non-linearities. Moreover, beyond certain debt levels, the likelihood of crises increases sharply regardless of the interest-growth differential. These results, while not necessarily implying causality, show governments should be wary of high public debt even when borrowing costs seem low.”

So we are back to the old argument presented by Reinhart and Rogoff in their book, Growth in the time of debt, that argued that when public sector debt got as high as 90% of GDP, there was a high probability of a debt crisis and a slump.  The credibility of this thesis was crushed when it was found that their working were full of error and adjustments.  But it seems that the mainstream remains worried that fiscal stimulus and budget deficits, especially if financed by the expansion of money supply (MMT) will create such high public debt that it could cause a financial bust or lower economic growth by squeezing out capitalist investment.  It is the classic dilemma for the mainstream.  They want to preserve capitalism and free markets but when capitalism is not working well, should governments intervene if intervention only kills the goose that (supposedly) lays the golden egg.

The problem for the mainstream, whether neoclassical, Austrian or Keynesian, is that they start from the premise that capitalism is the only economic system that works.  But capitalism has contradictions that cannot be resolved by tinkering or management; or by leaving things alone.

In the final part of my report on ASSA 2020, I’ll briefly look at some other sessions covering climate change, China and cryptocurrencies before reviewing the presentations made in the sessions of the Union of Radical Political Economics (URPE).

ASSA 2020 – part one: inclusive economics

January 6, 2020

ASSA 2020 is the annual conference of the American Economics Association, which brings together all the various economics associations in America. This year’s conference in San Diego, California was attended by over 13,000 economists, lecturers and students not just from the US but all over the world.  It’s the biggest event in mainstream economics, but also includes heterodox and Marxist presentations.

You could tell the main themes of this year’s ASSA from the live webcasts transmitted over the three days.  So let’s start with those. One big meeting was organised by Economics for Inclusive Prosperity (EfIP), which is a new network of ‘progressive’ mainstream economists with some big names like Dani Rodrick or Gabriel Zucman. Their stated aim is show that “the tools of mainstream economists not only lend themselves to, but are critical to, the development of a policy framework for what we call “inclusive prosperity.” While prosperity is the traditional concern of economists, the “inclusive” modifier demands both that we consider the interest of all people, not simply the average person, and that we consider prosperity broadly, including non-pecuniary sources of well-being, from health to climate change to political rights.”

So economics and economic policy should be for all.  Sounds progressive, right?  Suresh Naidu of Columbia University told the audience that “Our societies confront serious challenges arising from uneven technological progress, globalization shocks, and climate change. We discuss the extent to which the contemporary practice of economics is conducive to generating solutions to these problems. We are cautiously optimistic that economics can be an ally of inclusive prosperity, but emphasize that economists must combine their analytical and empirical tools with institutional imagination and creativity.”

Samuel Bowles, from the Santa Fe Institute spoke.  Bowles used to consider himself a Marxist.  But those days are long gone.  In a recent article for Vox, he wrote on the legacy of Marx’s economic ideas in order to dismiss them.  In that article, he agreed with Keynes’ view that Capital is “an obsolete economic textbook [that is] not only scientifically erroneous but without interest or application to the modern world” (Keynes 1925). And he agreed with the judgement of 1960s mainstream economic guru, Paul Samuelson that “From the viewpoint of pure economic theory, Karl Marx can be regarded as a minor post-Ricardian…and who in turn was “the most overrated of economists” (Samuelson 1962).  Bowles reckons that mainstream economics, in particular neoclassical marginalism, went on to sort out Marx’s failures by replacing his value theory.  And this has also led to dropping the idea of social ownership of the means of production to replace the capitalist mode. “Modern public economics, mechanism design and public choice theory has also challenged the notion – common among many latter-day Marxists, though not originating with Marx himself – that economic governance without private property and markets could be a viable system of economic governance.”

Apparently, all that is left of Marx’s legacy is what Bowles calls “despotism in the workplace”, or the exploitive nature of capitalist production; which is not due to the exploitation of labour power for surplus value; but due to the ‘power structure’ where moguls and managers rule the roost over the worker serfs.

And Bowles presented this ‘power’ theme to the ASSA audience again.  You see, free market economics is at one pole and Keynesian-style government management economics is at the other – but we need a third way.  We should “explore the normative, modeling and policy challenges arising if we locate policies and institutions in a two-dimensional space by adding a third pole: community, based in important respects on social norms rather than state-imposed laws or contractual exchanges.”  For Bowles, inclusive economics means turning to the community….

Then came Luigi Zingales from the neo-classical heartland of the University of Chicago.  He showed that quite often economists come up with theory and policy that people don’t like and politicians won’t implement even though it may be right.  To overcome these political limits to the great ideas of mainstream economics, “Economists should help design a system that conforms to people’s preferences.”  The use of the neoclassical concept of consumer preference was telling.  Policy based on democratic planning for social need was not Zingales’ way. ThePoliticalLimitsOfEconomics_preview (2)

The second livestream meeting was on the future of capitalism.  Nobel prize winner and poverty expert, Angus Deaton from Princeton University introduced a galaxy of stars including Raghuram Rajan from the University of Chicago and former head Reserve Bank of India; and Kenneth Rogoff from Harvard. Rajan is famous for warning about the risk of ‘financial engineering’ causing a credit crunch at a meeting of central bankers in the early 2000s, where he was dismissed by the likes of Keynesian Larry Summers, former Treasury secretary under Clinton. Rajan also written a book with Zingales called Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity.

In that book, the authors reckon that the free market is the form of economic organization most beneficial to human society and for improving the human condition.  But free markets can flourish over the long run only when government plays a visible role in determining the rules that govern the market and supporting it with the proper infrastructure. Government, however, is subject to influence by organized private interests.  Incumbent private interests, therefore, may be able to leverage the power of governmental regulation to protect their own economic position at the expense of the public interest by repressing the same free market through which they originally achieved success. Thus, society must act to “save capitalism from the capitalists”—i.e. take appropriate steps to protect the free market from powerful private interests who would seek to impede the efficient function of free markets, entrench themselves, and thereby reduce the overall level of economic opportunity in society.

The authors offer the following recommendations: Reduce incumbent capitalists’ incentives to oppose markets, especially by limiting the concentration of ownership of productive assets. Provide a social safety net for the economically distressed to help maintain broad political support for free markets. Keep the borders of the economy open to support free trade and maintain a high level of competitive pressure on incumbent firms. Educate the public regarding the benefits of free markets to build political support for free market policies, or more specifically, oppose governmental interventions in the market designed to protect incumbents at the expense of overall economic opportunity.  This was broadly what Rajan told the ASSA audience.

Such was the progressive wing of mainstream economics at ASSA. It aims at ‘inclusive economics’, based on the assumption that market and capitalism are best, but require management and the involvement of people, so that they can recognise the expertise of economists in solving social problems.

Of course, added to these presentations were many on the inequality of wealth and income in modern capitalist economies and what to do about it.  There was a session on how GDP is no proper measure of social welfare and how to revise it with economic and social indicators that would make national output more ‘inclusive’.  And in another session, Gabriel Zucman and Emmanuel Saez presented the results of the latest measures of wealth inequality in the US, as published in their recent book.

Their main message is that progressive taxation and a wealth tax could make real inroads on inequality.  But as I said in my review of their book, these excellent progressive economists are seeking to redress unequal distributions created by capitalist exploitation and financial power with tax measures.  There is no policy for removing the ‘market’ causes of inequality.

Even those who profess to be more heterodox and radical than the mainstream progressives look only at tax and redistribution measures to reduce inequality.  In giving the David Gordon Memorial Lecture at ASSA, Heather Boushey reckoned that  “economic inequality—in all its forms—is obstructing, subverting, and distorting the pathways to strong, stable, and broadly shared growth”.  It’s just inequality that’s in the way of making capitalism work.

The problem is that the innovative power of capitalism has been distorted by monopoly.  This was the message from progressive Nobel prize winner Angus Deaton that “we should especially pay attention when makers of public benefit (innovators etc.) become rich and turn from makers into destroyers of public benefit (via politics etc)”  This was a reference to the rise of the big tech and online firms that have turned into super star companies that dominate their markets and the economy.

But is inequality the product of monopoly market power distorting competition?  Top economist mainstream John Van Reenen in a presentation claimed that it was.  His empirical work “shows that across-firm inequality has increased in line with rising concentration levels within all industries (even sectors) as well as higher aggregate markups in US since 1980s.”  But another group of economists saw it differently: For while “growth has fallen in the U.S., and firm concentration and profits have risen and labor’s share of national income is down, this is due to accelerating IT advances. the most efficient firms (with higher markups) spread into new markets, thereby generating a temporary burst of growth. Because their efficiency is difficult to imitate, less efficient firms find markets more difficult to enter profitably and therefore innovate less. Eventually, due to greater competition from efficient firms, within-firm markups actually fall. Despite the increase in the aggregate markup and rents, firm incentives to innovate decline—lowering the long run growth rate.”

So profit ‘mark-ups’ are really due to more efficient firms gaining advantage over less efficient.  Another paper argued that it was both technological competition and market power that led to higher mark-ups.  “Both technological change and a change in market structure are necessary to explain the observed change in markups between 1980 and 2016. We find that 2016 welfare would be 19% higher with 1980 market power.”

Is inequality of income and wealth rising because AI and robots are replacing workers? One group of economists reckon that: “AI-related invention is far more pervasive than previous analyses have suggested.  We find that AI-related innovations are positively associated with firm growth as firms with AI-related innovations have 25% faster employment growth and 40% faster revenue growth than a comparative set of firms.  We also find evidence that AI-related innovations appear to raise output per worker and increase within-firm wage inequality.” This sounds very much like Marx’s view of technological competition driving down overall profitability and eventually bringing a stop to growth in investment. Indeed has the labour share in national income fallen across the globe? BoE’s Sophie Piton argued that correcting for housing + self-employment, labour’s share was stable in all major economies bar the US.

Inclusive economics aims to make modern capitalist economies less unequal, but it is the very process of accumulation and investment in technological competition and the concentration of economic power in a few firms that is creating inequality.  So making capitalism much fairer through redistribution of taxation is a pipe dream.

In part two on ASSA 2020, I’ll cover the big mainstream issues of why the major economies are stuck in a low growth, low interest rate state and what to do about it if another recession should rear its head.  And in part three, I’ll cover the issues discussed by more radical economists.

Forecast 2020

December 30, 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Top ten posts of 2019

December 21, 2019

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

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

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

You can make up your own mind.

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

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

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

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

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

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

But the debate on MMT continues.

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

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

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

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

% chg in personal consumption, business investment and GDP

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

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

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

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

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

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

Global business profits are stagnating

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

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

Global trade is declining

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

I did quite a few book reviews during 2019.  See my post:

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

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

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

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

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

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

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

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

Venezuela real GDP falling near 30% since 2012.

Books of 2019

December 18, 2019

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

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

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

Among other Marxist economics books in 2019 is the The Oxford Handbook of Karl Marx, edited by Matt Vidal, Tomas Rotta, Tony Smith and Paul Prew.  This brings together a series of chapters by prominent Marxist scholars covering all aspects Marxist theory, from historical materialism, dialectics, political economy, social reproduction and post-capitalist models.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Land and the rentier economy

December 15, 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Get Brexit done!

December 13, 2019

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

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

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

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

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

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

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

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

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

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

The debt delusion

December 10, 2019

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

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

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

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

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

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

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

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

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

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

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

% change in government spending one year before a recession

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

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

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

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

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

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

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

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

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

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

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

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