Archive for the ‘economics’ Category

Forecast for 2018: the trend and the cycles

December 29, 2017

What will happen to the world economy in 2018?  The global capitalist economy rises and falls in cycles, ie a slump in production, investment and employment comes along every 8-10 years.  In my view, these cycles are fundamentally driven by changes in the rate of profit on the accumulated capital invested in the major advanced capitalist economies.  The cycle of profitability is longer than the 8-10 year ‘business cycle’. There is an upwave in profitability that can last for about 16-18 years and this is followed by a downwave of a similar length.  At least this is the case for the US capitalist economy – the length of the profitability cycle will vary from country to country.

Alongside this profitability cycle, there is a shorter cycle of about 4-6 years called the Kitchin cycle.  And there also appears to be a longer cycle (commonly called the Kondratiev cycle) based on clusters of innovation and global commodity prices.  This cycle can be as long as 54-72 years.  The business cycle is affected by the direction of the profit cycle, the Kitchin cycle and and K-cycle and by specific national factors.

The drivers behind these different cycles are explained in my book, The Long Depression.  There I argued that when the downwaves of all these cycles coincide, world capitalism experiences a deep depression that it finds difficult to get out of.  In such a depression, it may require several slumps and even wars to end it.  There have been three such depressions since capitalism became the dominant mode of production globally (1873-97; 1929-1946; and 2008 to now).  The bottom of the current depression ought to be around 2018.  That should be the time of yet another slump necessary in order to restore profitability globally.  That has been my forecast or prediction etc for some time.  Anwar Shaikh in his book, Capitalism, takes a similar view.

This time last year, in my forecast for 2017, I said that 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.”

Well, as we come to the end of 2017 and go into 2018, that prediction about global growth proved to be wrong. Global real GDP growth picked up in 2017 – indeed, for the first time since the end of the Great Recession in 2009, virtually all the major economies increased their real GDP.  The IMF in its last economic outlook put it like this: 2017 is ending on a high note, with GDP continuing to accelerate over much of the world in the broadest cyclical upswing since the start of the decade.”

The OECD’s economists also reckon that “The global economy is now growing at its fastest pace since 2010, with the upturn becoming increasingly synchronised across countries. This long-awaited lift to global growth, supported by policy stimulus, is being accompanied by solid employment gains, a moderate upturn in investment and a pick-up in trade growth.”

Alongside the (still modest) recovery in global growth, investment and employment in the major economies in 2017, financial asset markets have had a great year.

The IMF again: “Equity valuations have continued their ascent and are near record highs, as central banks have maintained accommodative monetary policy settings amid weak inflation. This is part of a broader trend across global financial markets, where low interest rates, an improved economic outlook, and increased risk appetite boosted asset prices and suppressed volatility.”

So all looks set great for the world economy in 2018, confounding my forecast of a slump.

But it is sometimes the case that when all looks rosy, a storm cloud can appear very quickly – as in 2007.  First, it is worth remembering that, while world economic growth is accelerating a bit, the OECD reckons that “on a per capita basis, growth will fall short of pre-crisis norms in the majority of OECD and non-OECD economies.” So the world economy is still not yet out of the Long Depression that started in 2009.

Indeed, as the OECD economists put it: “Whilst the near-term cyclical improvement is welcome, it remains modest compared with the standards of past recoveries. Moreover, the prospects for continuing the global growth up-tick through 2019 and securing the foundations for higher potential output and more resilient and inclusive growth do not yet appear to be in place. The lingering effects of prolonged sub-par growth after the financial crisis are still present in investment, trade, productivity and wage developments. Some improvement is projected in 2018 and 2019, with firms making new investments to upgrade their capital stock, but this will not suffice to fully offset past shortfalls, and thus productivity gains will remain limited.”

The IMF’s economists make the same point.  The latest IMF projection for world economic growth is for 3.7% global GDP growth over the 2017-18 period, an acceleration of 0.4 percentage points from the anaemic 3.3% pace of the past two years.  But this is still less than the post-1965 trend of 3.8% growth and the expected gains over 2017-2018 follow an exceptionally weak recovery in the aftermath of the Great Recession.

The OECD also thinks that much of the recent pick-up is fictitious, being centred on financial assets and property. “Financial risks are also rising in advanced economies, with the extended period of low interest rates encouraging greater risk-taking and further increases in asset valuations, including in housing markets. Productive investments that would generate the wherewithal to repay the associated financial obligations (as well as make good on other commitments to citizens) appear insufficient.” Indeed, on average, investment spending in 2018-19 is projected to be around 15% below the level required to ensure the productive net capital stock rises at the same average annual pace as over 1990-2007.

The OECD concludes that, while global economic growth will be faster in the coming year, this will be the peak rate for growth.  After that, world economic growth will fade and stay well below the pre-Great Recession average.  That’s because global productivity growth (output per person employed) remains low and the growth in employment is set to peak.

Former chief economist of Morgan Stanley, the American investment bank, Stephen Roach remains sceptical that the low growth environment since the end of the Great Recession is now over and the capitalist economy is set for fair winds.  Such growth as the major economies have seen has been based on very low interest rates for borrowing and rising debt in the corporate and household sectors.  “Real economies have been artificially propped up by these distorted asset prices, and glacial normalization will only prolong this dependency. Yet when central banks’ balance sheets finally start to shrink, asset-dependent economies will once again be in peril. And the risks are likely to be far more serious today than a decade ago, owing not only to the overhang of swollen central bank balance sheets, but also to the overvaluation of assets.”

Stock markets are hugely ‘overvalued’, at least according to history.  The cyclically adjusted price-earnings (CAPE) ratio of 31.3 is currently about 15% higher than it was in mid-2007, on the brink of the subprime crisis. In fact, the CAPE ratio has been higher than it is today only twice in its 135-plus year history – in 1929 and in 2000. “Those are not comforting precedents” (Roach).   One measure of the price of financial assets compared to real assets is the stock market capitalisation compared to GDP (in the US).  It has only been higher just before the bust of 2000.

And I don’t need to tell readers of this blog that any economic recovery for world capitalism since 2009 has not been shared ‘fairly’.  There has been a host of data to show that the bulk of increase in incomes and wealth has gone to top 1% of income and wealth holders, while real wages from work for the vast majority in the advanced capitalist economies have stagnated or even fallen.

The main reason for this growing inequality has been that the top 1% own nearly all the financial assets (stocks, bonds and property) and the price of these assets have rocketed.  Corporations, particularly in the US, have used any rise in profits mainly to buy back their own shares (boosting their price) or pay out increased  dividends to shareholders.  And these are mainly the top 1%.

Companies in the S&P 500 Index bought $3.5 trillion of their own stock between 2010 and 2016, almost 50% more than in the previous expansion.

There are two things that put a question mark on the delivery of faster growth for most capitalist economies in 2018 and raise the possibility of the opposite.  The first is profitability and profits – for me, the key indicators of the ‘health’ of the capitalist economy, based as it is on investing and producing for profit not need.

In this context, let’s start with the US economy, which is still the largest capitalist economy both in total value, investment and financial flows – and so is still the talisman for the world economy.  As I showed in 2017, the overall profitability of US capital fell in 2016, making two successive years from a post-Great Recession in 2014.  Indeed, profitability is still below the pre-crisis peaks (depending on how you measure it) of 1997 and 2006.

As far as I can tell, in 2017, profitability flattened out at best – and still well down from 2014.

The total or mass of profits in the US corporate sector (that’s not profitability, which is measured as profits divided by the stock of capital invested) has recovered from the depths of the Great Recession in 2009.  But the mass of profit slipped back sharply in 2015 (along with profitability, as we have seen above). This fall stopped in mid-2016.  The fall seemed to coincide with the collapse in oil prices and the profits of the energy companies in particular.  But the oil price stabilised in mid-2016 and so did profits (although profitability continued to fall).  Profits rose again in 2017, but, after stripping out the mainly fictitious profits of the financial sector, the mass of profit is still well below the peak of end-2014 (red line below).

As I have shown in other places when profits fall back, so will investment within a year or so.  On the basis of the data for the US, 2017 produced flat profitability and a very small recovery in profits.  That suggests that, at best, investment in productive capacity will grow very little in 2018, especially as much of these profits are going into unproductive assets, property and financial.

What about the rest of the world?  Well, it is clear that the European capitalist economies (with the exception of post-Brexit Britain) have recovered in 2017.  Real GDP growth has picked up, led by Germany and northern Europe, although it is still below the growth rate in the US.  Japan too has recorded a modest recovery.

When we look at profitability, however, in core Europe it rose only slightly and fell in Japan in 2015 and 2016, as in the US.  Indeed, only Japan has a higher rate of profit compared to 2006.

When we look at the mass of global corporate profits (using my own measure), there has been a modest recovery in 2017 after the fall in 2015-6.  But remember my measure includes China, where profits in the state enterprises rose dramatically in 2016-7.

On balance, if profits and profitability are good indicators of what is to come in 2018, they suggest much the same as 2017 at best – but probably not provoking a slump in investment.

The other question mark against the overwhelming optimism that 2018 is going to be a great year for global capitalism is debt.  As many agencies have recorded and I have shown in this blog during 2017, global debt, particularly private sector (corporate and household) debt has continued to rise to new records.

The IMF comments “Private sector debt service burdens have increased in several major economies as leverage has risen, despite declining borrowing costs. Debt servicing pressure could mount further if leverage continues to grow and could lead to greater credit risk in the financial system.”

Among G20 economies, total nonfinancial sector debt (borrowing by governments, nonfinancial companies, and households from both banks and bond markets) has risen to more than $135 trillion, or about 235% of aggregate GDP.  In the G20 advanced economies, the debt-to-GDP ratio has grown steadily over the past decade and now amounts to more than 260% of GDP.

The IMF sums up the risk.  “A continuing build-up in debt loads and overstretched asset valuations could have global economic repercussions. … a repricing of risks could lead to a rise in credit spreads and a fall in capital market and housing prices, derailing the economic recovery and undermining financial stability.”

The IMF economists do not see this risk of a new debt bust happening until 2020.  They may be right.  But the policy of low interest rates and huge injections of credit by the main central banks is now over.  The US Federal Reserve is now hiking its policy interest rate and has stopped buying bonds.  The European Central Bank will end its buying in this coming year; the Bank of England has already stopped.  Only the Bank of Japan plans more bond purchases through 2018.  The cost of borrowing is set to rise while the availability of credit will fall.  If profitability continues to fall in 2018, this is a recipe for investment collapse, not expansion.  This would especially hit the corporate sector of the so-called emerging economies.

Even if the major capitalist economies avoid a slump in 2018, nothing else has much changed.  Economic growth in the major economies remains low compared to before the Great Recession, even if it picks up in 2018.  And the prospect for the medium term is poor indeed.  Productivity (output per person working) growth is very low everywhere and employment growth from here will be muted.  So the potential long-term growth rate of the major economies will slow from any peak achieved in 2018.  After very low growth in 2016 of only 1.4%, the IMF predicts G7 growth in 2018 of 1.9% – a moderate but real upturn. However, G7 growth is then predicted to fall to 1.6% in 2019 and to a poor 1.5% in 2020-2022.

Thus the upturn in 2017-2018 seems cyclical and will not be consolidated into a new longer sustained ‘boom’.  That’s because, if there is no slump to devalue capital (productive and fictitious) and thus revive profitability, then investment and productivity growth will stay stuck in depression. Overall growth in the G7 economies since the Great Recession has been slower than during the ‘Great Depression’ of the 1930s.  Indeed, based on IMF projections, by 2022, that is 15 years after 2007, total GDP growth in the G7 economies will only be 20% compared to 62% in the 15 years after 1929.  And that assumes no major economic slump in the next five years.

Nevertheless, despite weak profitability and high debt, the modest recovery in profits in 2017 suggests that the major capitalist economies will avoid a new slump in production and investment in 2018, confounding my prediction.

Now when you are proved wrong (even if only in timing), it is necessary to go back and reconsider your arguments and evidence and revise them as necessary.  Now I don’t think I need to revise my fundamentals, based as they are on Marx’s laws of profitability as the underlying cause of crises. Profits in the major economies have risen in the last two years and so investment has improved accordingly (to Marx’s law).  Only when profitability starts falling consistently and takes profits down with it, will investment also fall.  Until that happens, the impact on the capitalist sector of the rising costs of servicing very high debt levels can be managed, for most.

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.  We shall see.


Top ten posts of 2017: Venezuela, Capital and class

December 24, 2017

So what were the ten top posts in terms of viewings on my blog in 2017?

The winner by some distance was my post last August on the tragic deterioration of the Chavista revolution in Venezuela.  Venezuela had been a beacon for hope in Latin America and elsewhere for the last ten years, but it now seemed to have all gone wrong.  I argued that the recent huge reversal of the gains of the working class in Venezuela was mainly due to Venezuela’s isolation in the ocean of capitalism and because the Chavista revolution had stopped ‘at less than halfway’, leaving the economy still predominantly in the control of capital.  This conclusion was controversial and many commentators on my post disagreed, blaming the forces of reaction for disrupting the revolution and the international media and institutions for distorting the story. No doubt true, but anybody who looks at the state of the economy knows that there is more to it than that.

Coming second was an equally controversial post on China and the recent ‘re-election’ of Chinese president Xi.  In my post, I asked the question: is China is a capitalist state or not?  The majority of Marxist political economists agree with mainstream economics in assuming or accepting that China is.  However, I am not one of them. I argued in the post that China is not capitalist (yet). In China, public ownership of the means of production and state planning remain dominant and the Communist party’s power base is rooted in public ownership.  So China’s economic rise has been achieved without the capitalist mode of production being dominant.

In the post, I added new data to back up my view. Using recently published IMF data, I found that China there are nearly three times as much stock of public productive assets to private capitalist sector assets in China.  In the US and the UK, public assets are less than 50% of private assets.  This shows that in China public ownership in the means of production is dominant – unlike any other major economy in the world.

The third most read post was on global poverty.  Is global poverty falling or rising?  Many mainstream economists continue to argue that the battle against global poverty was being won, as those living on less than $1.25 day (the official World Bank threshold, recently revised) had been cut by half since 1990.  But in the post, I show that any improvement in poverty levels, however measured, is down mainly to rising incomes in state-controlled China and any improvement in the quality and length of life comes from the application of science and knowledge through state spending on education, on sewage, clean water, disease prevention and protection, hospitals and better child development.  These are things that do not come from capitalism but from the common weal.

2017 marked 150 years since Marx published his analysis of the capitalist system.  In a post I critiqued the views of leading Keynesian economist Jonathan Portes on where Marx was right or wrong about capitalism.  For Portes, what is wrong with capitalism is not its exploitative essence or its failure to eliminate poverty or inequality or meet the basic needs of billions in peace and security, as Marx argued.  No, it was ‘excessive consumption’: i.e. too many things! I failed to see that excessive or endemic ‘consumerism’ was an issue for billions in the world or even millions in the UK, Europe or the US – it’s the opposite: the lack of consumption, including ‘social goods’ (public services, health, education, pensions, social care etc).

And in 2017, there were a host of studies revealing the growing inequality of income and wealth globally between nations and within them – along with scandals of the tax havens (Panama papers etc).  In another popular post, I recounted the development of these inequalities since Marx wrote Capital in 1867.  One important explanation for rising inequality is the control of wealth through capital, rather than through unequal incomes from work.  The US Economic Policy Institute found that the top 1% of society derives an increasing portion of income gains from capital.  So they are not rich because they are smarter or better educated.  It is because they are lucky (like Donald Trump) and inherited their wealth from the parents or relatives.

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

In another post, I referred yet again to the latest annual report by Credit Suisse on global personal wealth.  Every year my post on this report makes the top ten.  The bank’s economists found that top 1% of personal wealth holders globally now have over 50% of the world’s personal wealth – up from 45% ten years ago. And on current trends, this inequality will rise further. In the US, the three richest people in the US – Bill Gates, Jeff Bezos and Warren Buffett – own as much wealth as the bottom half of the US population, or 160 million people.

2017 was marked by the huge rise in the value of stock markets globally – driven by cheap borrowing as central banks pumped in more credit.  Rich investors went mad looking to make a quick buck.  There were new credit bubbles galore.  One of the most newsworthy was the crypto-currency craze, particularly in bitcoin.  The dollar price of bitcoin has risen 2000% and in the last year had quadrupled.  But as I write, in the last week it has fallen back 25%.  In my post last September, I argued that while the new technology behind these digital currencies, blockchain, may eventually find some productive use, cryptocurrencies would remain on the micro-periphery of global currencies, even if the crypto craze continued for a while longer.

2017 saw attempts by heterodox economists to organise against mainstream neoclassical orthodoxy in universities and there was a growing opposition to neoliberal economic policies adopted by incumbent governments.  But Keynesian economics still dominates the views on the left in the labour movement.  In a post I reckoned that this was because Keynes offers a third way.  In the 1920s and 1930s, Keynes feared that the ‘civilised world’ faced Marxist revolution or fascist dictatorship.  But socialism as an alternative to the capitalism of the Great Depression could well bring down ‘civilisation’, delivering instead ‘barbarism’ – the end of a better world, the collapse of technology and the rule of law, more wars etc.  But he thought that, through some modest fixing of ‘liberal capitalism’, it would be possible to make capitalism work without the need for socialist revolution.  There would no need to go where the angels of ‘civilisation’ fear to tread.  That was the Keynesian narrative and it remains dominant on the left.

The 150th anniversary of the publication of Capital was a feature of many of my most popular posts, including my account of September’s special conference held on Capital organised by this blog and Kings College, London.  In particular, I did a post on the two presentations that top Marxist scholar David Harvey and I made during the symposium.

David Harvey reckoned that the more crucial points of breakdown and class struggle are now to be found outside the traditional battle between workers and capitalists in the workplace or at the point of production.  Yes, that still goes on but the class struggle is much more to be found in battles in the sphere of circulation (for example, consumers fighting price-gouging by greedy pharma companies) ie. in the manipulation of people’s ‘wants, needs and desires’ in what they buy and think they need; and in distribution in battles over unaffordable rents with landlords or unrepayable debts like Greece or student debt.  These are the new and more important areas of ‘anti-capitalist’ struggle outside the remit of Volume One of Capital.

In contrast, in my analysis still puts the class struggle in the workplace at the centre of capitalism because it is about the struggle over the division of value between surplus value and labour’s share, as Marx intended with the publication of Volume One.  This is not to deny that capitalism creates inequalities, conflicts and battles outside the workplace over rents, debt, taxes, the urban environment and pollution that Harvey focuses on, nor that the struggle does not enter the political plane through elections etc.

The theme of the relevance of Marx’s Capital was also part of my post on this year’s Historical Materialism conference in London.  The plenary speakers were Moishe Postone, Michael Heinrich and David Harvey – an impressive line-up of heavyweight Marxist academics.  Part of the discussion was over whether value is only created in exchange and also whether class struggle is not really centred (any longer) on workers and capitalists in the production process.  The plenary speakers seemed to adopt theories that crises under capitalism are now mainly caused by faults in the ‘circulation of money and credit’ and not in the contradictions of capitalism between productivity and profitability in the production of surplus value, as I think Marx argued in Capital.

In sum, my top ten most read posts in 2017 argued that Marx’s Capital still provides us with the clearest and most compelling analysis of the nature of the capitalist mode of production; and show why capitalism is transient and cannot last forever, contrary to what the apologists for capital claim.

Best books of 2017

December 21, 2017

Last year we had some seminal and important books on Marxist economics including: Anwar Shaikh’s lifetime compilation, Capitalism: competition, conflict and crises (that I dip into on a regular basis); Fred Moseley’s Money and Totality, a masterful defence of Marx’s value theory; Francois Chesnais’ Finance Capital Today, that recounts the current trends in modern finance; as well as major contributions from Tony Norfield (ttps://,) and John Smith (Imperialism in the 21st century).

It’s difficult to compete with these in 2017.  However, this year commemorated 150 years since Marx published Volume One of Capital, so there were a few important books that everybody should get.

In my view, Joseph Choonara’s A Readers Guide to Capital was the clearest and concise of all the various ‘readers’ or video lectures that are available or were published this year.  Choonara takes the reader through each chapter of Volume One with some clarifying analysis and relevant comment to help.  Choonara says that “It is designed to be read in parallel with Capital itself, with each chapter of this book consulted either before or after digesting the relevant sections of Marx’s work.”  The aim, unlike that of Harvey’s more comprehensive approach in his video lectures, is “instead to dwell on those areas that are the most vital to an overall understanding of the work and those that most often confuse, drawing on my own experience teaching Capital to left-wing audiences of students and workers over the past decade”.  For, in Choonara’s view, Marx attempted in Capital to see capitalism from the point of view of labour and aimed for a working-class audience.  Capital clearly does the former, but whether it achieved its aim of reaching working class readers is more doubtful.  Choonara’s guide can help here.

I certainly got more out of Choonara’s reader than I did from William Clare Roberts, Marx’s Inferno, this year’s winner of the Isaac Deutscher memorial prize.  Using Marx’s motif of Dante’s inferno to describe the iniquities of capitalism, Roberts presents us with a ‘political theory of capital’.  I’m not sure of the value of this approach.  As David Harvey says in his review of the book, “My most serious objection is that Roberts isolates Volume 1 of Capital as a standalone text and seeks to interpret it by ignoring its relation to Marx’s other works.”  And the inferno motif has little to say about Marx’s economic theory, except to accept Michael Heinrich’s (incorrect in my view) interpretation of Marx’s value theory.

If you want Marxist economic theory, there is the publication by Rick Kuhn of essays by Henryk Grossman on economic dynamics, Sismondi’s theory of crises and on the various trends in bourgeois economics.  It helps us realise how perceptive Marx’s analysis of capitalism is compared to the bourgeois mainstream and the utopian socialists. Marx’s analysis destroys the idea that all can be explained by exchange and markets.  You have to delve beneath the surface to the process of production, in particular to the production of value (use value and exchange value).  As Grossman puts it: “Marx emphasises the decisive importance of the production process, regarded not merely as a process of valorisation but at the same time a labour process… when the production process is regarded as a mere valorisation process – as in classical theory – it has all the characteristics of hoarding, becomes lost in abstraction and is no longer capable of grasping the real economic process.” p156.

Despite the power of Marx’s analysis, it is still the ideas of Keynes that dominate the thinking of heterodox economists in opposing the mainstream.  And this is no accident.  In an excellent book, Geoff Mann from Simon Fraser University presents a sophisticated explanation of Keynes’ dominance in the labour and leftist movements.  In his, In the Long run we are dead, Geoff argues that Keynes rules because he offers a third way between socialist revolution and barbarism, i.e. the end of civilisation as ‘we (actually the bourgeois like Keynes) know it’. This appealed (and still appeals) to the leaders of the labour movement and ‘liberals’ wanting change.  Revolution is risky and we could all go down with it.  Mann: “the Left wants democracy without populism, it wants transformational politics without the risks of transformation; it wants revolution without revolutionaries”. (p21).

What Mann argues is that Keynesian economics dominates the left despite its fallacies and failures because it expresses the fear that many of the leaders of the labour movement have about the masses and revolution.  As an example, read leading Keynesian, James Kwak’s latest book, Economism. Kwak quotes Keynes: “For the most part, I think that Capitalism, wisely managed, can probably be made more efficient for attaining economic ends than any alternative system yet in sight, but that in itself it is in many ways extremely objectionable. Our problem is to work out a social organisation which shall be as efficient as possible without offending our notions of a satisfactory way of life.” And  Kwak comments“That remains our challenge today.”

To be fair, it ain’t easy opting for an economic policy that threatens the established order.  An inferno will follow from the bourgeois media and institutions.  In the autobiographical book of the year, economist Yanis Varoufakis, Greek finance minister during the euro crisis of 2015, outlined the tortuous and labyrinthine encounters that he had with the Euro group in trying to combat the hell that the Troika of the IMF, ECB and EU aimed to impose on Greece.  Adults in the room, my battle with Europe’s deep establishment, is a personalised account, to say the least.  Varoufakis’ analysis of the crisis and his justification for what happened (the capitulation of the Syriza government and his resignation from the government) bear all the hallmarks of his ‘erratic Marxism’ (as he calls himself).  His battle was lost, but the war continues.

2017 was also the first year of Donald Trump’s reign over US capital.  One of his key aims was to deregulate the business and finance sector from the curbs that Congress had imposed (to some extent) after the global financial crash.  Deregulation at home, but protectionism abroad.  Brett Christophers’ book, The Great Leveller, looks at this dynamic tension between freeing capital from regulation and yet ensuring that it does not bring the house down.  Christopher 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”.  The theme that Christophers highlights is the role of the law in evening out the anarchic swings between excessive monopoly and ruinous competition in different periods of capitalism.  This is a new insight.

But this was the year of the 150th anniversary and it could not go by without a new book on Capital by David Harvey, the most influential Marxist today.  In his Madness of Economic Reason, Harvey sets out his latest view of Marx’s schema in Capital.  This is a well written and easy book to read and not too long.  And there are many video lectures by DH on the main arguments in the book.  Harvey presented his latest thesis at the Capital.150 conference organised by this blog and Kings College in September.

DH’s argues that Volume One of Capital only deals with the production part of the circuit (the production of value and surplus value).  Volume Two deals with the realisation and circulation of capital between sectors in its reproduction, while Volume 3 deals with the distribution of that value.  And while Marx gives a great analysis of the production part, his later volumes are not complete and have been scratched together by Engels.  And thus, according to DH, Marx’s analysis falls short of explaining developments in modern capitalism. Now in the 21st century, crises under capitalism are at least as likely, if not more so, to be found in a breakdown in the circulation or realisation of surplus value than in its production.  And so crises are more likely now to happen in finance and over debt, due to ‘financialisation’.

Anybody who reads my blog, including the post in this conference and previous debates with Harvey on these issues, will know that I do not agree with his view of Capital. I argue that the production of surplus value and the accumulation of capital remains central to Marx’s explanation of capitalism and its contradictions that lead to recurrent crises.  As Marx put it: “The profit of the capitalist class has to exist before it can be distributed.”  The production of value is not, as DH argues, “a small sliver of value in motion” but the largest, both conceptually for Marx and also quantitatively, because in any capitalist economy, 80% of gross output is made up of means of production and intermediate goods compared to consumption.  In my view, the class struggle in the workplace remains at the centre of capitalism because it is about the struggle over the division of value between surplus value and labour’s share, as Marx showed in Volume One.

Labour’s interim report on the UK economy

December 19, 2017

John McDonnell, the finance spokesman (‘shadow chancellor’) of the British opposition Labour Party, recently commissioned a report on the state of the UK economy and what is to be done.

McDonnell is characterised in the British capitalist media as a die-in-the-wool Marxist and his commissioned report was carried out by GFC economics, founded by Graham Turner since 1999. Turner wrote No Way to run an economy back in 2009 which drew on the ideas of both Keynes and Marx for his analysis of the crisis in global capitalism.

The report presented by GFC, Financing Investment: Interim report, provides us with a meticulous investigation of the failure of British capitalism to invest productively to deliver better productivity, incomes and employment.  The report exposes the failure of the UK banks to direct lending into productive sectors instead into speculative financial and unproductive property assets.  Thus, UK productivity performance is extremely poor, R&D spending is low and innovation is limited.

The capitalist sector of the British economy has failed to deliver for the needs of people, although it has delivered higher profits and house prices and a booming stock market.  Real disposable income per head has not risen since the end of the Great Recession.

And yet house prices have rocketed.

The GFC report echoes what other recent reports on the UK economy have pointed out (Time for Change: A New Vision for the British Economy,The Interim Report of the IPPR Commission on Economic Justice).

Both the GFC and the IPPR show that UK productivity has stagnated since the global financial crisis. Real output per hour worked rose just 1.4% between 2007 and 2016. Within the G7, only Italy performed worse (-1.7%). Excluding the UK, the G7 countries have experienced a 7.5% productivity increase over this period, led by the US, Canada and Japan. In addition, the ‘productivity gap’ for the UK – the difference between output per hour in 2016 and its pre-crisis trend – is minus 15.8%; while the productivity gap for the G7 ex-UK countries is minus 8.8%.

The GFC report confirms that British capitalism is a rentier economy , concentrated on finance, property and business services.

Tony Norfield in his book, The City, reveals the dominant role of finance in the history of British capital.  Now this seems to be at the expense of productive sectors like manufacturing and hi-tech. UK’s output of high-technology industries has fallen by an average of 0.4% y/y over the past ten years.  Only Sweden has experienced a bigger decline.

Overall business investment languishes at the bottom of the 34 OECD economies.

As a result, British workers are increasingly employed in low wage sectors (or self-employed), particularly for those regions outside London and the South East.  Britain has a distorted economy, relying on finance over technology and concentrated in the south-east.

Business enterprise R&D also experienced a secular decline relative to GDP during the 1980s and 1990s, dropping from 1.41% in 1981 to a low of 0.96% in 2005. Successive governments have failed to invest in the UK’s long-term future. R&D performed (i.e. undertaken) by the government (including research councils) declined from 0.46% of GDP in 1981 to 0.11% in 2016 (chart 11).27 The UK’s share of government spending is well below the European Union average (0.23%), for example.  The UK’s educational performance is mediocre.

The GFC report points out that Britain’s banking sector has dismally failed to support productive sector investment and growth.  This  is the same conclusion that the report on banking by the UK Firefighters Union (authored by Mick Brooks and myself) reached back in 2013.

As the GFC report puts it: “A dearth of lending to key industries indicates that banks are failing to help UK businesses to invest.” The outstanding stock of loans to smaller companies has dropped from £197.8bn in April 2011 to £165.4bn in October 2017

Instead bank loans have poured into real estate.  The productive sectors of manufacturing, professional scientific & technical activities, information & communication and administrative & support services account for 28.7% of real GDP. But loans outstanding to these four sectors total just £108.82bn, or 5.5% of GDP.  This is less than the total of loans outstanding to companies engaged in the buying, selling & renting of real estate (£135.97bn or 6.9% of GDP).

The message from the GFC report’s analysis is that, while the media goes on about the impact of Brexit and austerity on the UK economy, there are other even more serious long-term structural defects in the model of British capital that even an end to austerity or a reversal of Brexit would not overcome.

So what is to be done?  The GFC’s interim report says that a Labour government should set up a Strategic Investment Board to coordinate R&D, commercialisation and information flows.  This board should be situated outside London and the Bank of England should also be relocated to Birmingham, England’s second largest city.  This would concentrate efforts to revive productive industry and rebalance the economy regionally.

Now the latter idea has captured the media headlines, as has the proposal to widen the ambit of the Bank of England to beyond just an inflation target to include growth and employment (similar to the objectives of the US Federal Reserve).

But that’s it.  The question to be asked is whether setting up an investment board and moving the Bank of England is in any way sufficient to raise productivity and growth and boost real incomes, education, training and decent jobs.  The GFC report comments that “Existing banks left to their own devices may struggle to change. Politicians and regulators have failed to prepare the existing banks for the challenge posed by a new era of technology. They have not ensured that banks play their part in supporting the growth of new businesses. Instead, banks have entrenched their focus on unproductive lending.”  But there is no call for public ownership of the major five banks, let alone the key strategic industries in the productive sectors.  That would surely be needed if any plan for investment and innovation could be effectively implemented.  If the capitalist sector remains dominant, then the state investment bank will be insufficient.

Worse, even the less than radical policy of a state investment bank has been greeted with hostility by the big investment banks in the finance sector.  Morgan Stanley, the American investment bank, reckoned that a Corbyn-led government would be a disaster for British capital.  As it put it: “For much of the past 30 years and more, a change of government ultimately had a relatively limited impact on the UK equity market, as policy settings didn’t change too dramatically. However, this may not be the case if we see a Labour government take power under its current leadership, given its very different policy approach.”  In other words, up to now, a Labour government has been no threat to the established order, but a Corbyn government could be.  “It is certainly plausible that the Labour party could ultimately moderate some of its more radical policy ideas; the alternative could be the most significant political shift in the UK since the end of the 1970s.”

Corbyn responded by agreeing with Morgan Stanley that it was right to regard him as a threat, pointing out that it was the likes of Morgan Stanley who were the same “speculators and gamblers who crashed our economy in 2008”… Nurses, teachers, shopworkers, builders, just about everyone is finding it harder to get by, while Morgan Stanley’s CEO paid himself £21.5m last year and UK banks paid out £15bn in bonuses,” Corbyn said.

But, ironically, some of Corbyn’s economic advisers went out of their way to argue that Labour’s investment plans were not damaging at all to big business.  Indeed, they could help capitalism save itself.  Ann Pettifor, director of Policy Research in Macroeconomics (PRIME), a Keynesian think tank and author of a recent book advocating ‘breaking the power of bankers’ through the injection of more money credit with people’s QE, wrote that the GFC report shows that business could prosper under a Corbyn government.

Pettifor reckons that “Labour’s public spending plans will boost investment, with contracts that largely benefit the “timid mouse” that is the private sector. In other words, the “roaring lion” that is a government backed by a central bank, will, under Labour, at last take action to stimulate a private sector that has significant spare capacity; one not yet fully recovered from the catastrophic impact of the great financial crisis and that still lacks confidence.”

In other words, more public investment and BoE monetary support can help Britain’s capitalist sector get going and deliver on investment and growth.  Thus we are back with the same old Keynesian reformist view that capital just needs a helping hand from government, not its replacement.  As Marxist economic blogger, Chris Dillon commented, “The difference between Marxists such as me and social democrats such as Ann is, I suspect, that we are more sceptical than she is of governments’ ability to fix capitalism.”  Moreover, as Geoff Mann showed in his recent book, Keynesian policy prescriptions dominate labour movement thinking because they appear to offer a way out short of a revolutionary transformation.

As usual, the question that is not asked is why British capital does not invest enough to boost productivity.  Yes, it is partly because the UK is a rentier economy that aims at unproductive parasitic accumulation of surplus value from others.  And yes, it is partly because British business in particular has preferred to employ young and cheap immigrant labour in ‘precarious’ employment of zero hours, short-term, temporary and part-time contracts rather than invest in training long-term staff.  It’s been a cheap short cut to more profits.  But that shows the basic contradiction of capitalism.  Capitalist production is for profit not for need; for profitability not productivity.

And profitability in the productive sectors of the British economy remains low relative to before the Great Recession and even back to the 1990s.  Profitability reached in peak in 1997.  Since then, overall profits have risen in nominal terms by about 60%.  But despite the credit boom of the early 2000s and the recovery since the Great Recession, profitability (ie profits per the stock of capital invested) remains below that peak.  As a result, British capital has invested in financial assets or hoarded cash in tax havens or invested abroad rather than in the UK.

Thus it should be no surprise that UK businesses stopped investing in productive capital.

A National Investment Board will do little to alter that.  As I have argued before, the ratio of investment in the capitalist sector compared to the public sector is 5 to 1.  The NIB could raise public investment as a share of GDP by 1%. But An investment strike by capitalism will not be compensated for by a government-led investment programme that just adds 1-2% of GDP in investment when the capitalist sector invests over 15% of GDP.  And the latter will not be touched.  Contrary to the view of Keynesians like Ann Pettifor, the chair of JP Morgan, the US investment bank put it: “I would put quantitative targets on things that are under governments’ control and national GDP growth is not,” Dr Frenkel said. “As much as you’d like to jump 5 metres without a pole you will not be able to.” 

Surely the obvious conclusion from the defects of British capital exposed by the GFC report is that the major banks and strategic sectors of the British economy (transport, pharma, aerospace, autos, telecoms and utilities) need to be brought into public ownership to make any investment plan really work in delivering higher productivity and good secure wage jobs?

Yet that is not the programme (yet) of the Labour leaders. If a Corbyn-led Labour government should come to office in the next year or few, it will be faced with the wrath of the right-wing media and the likes of Morgan Stanley, but without the economic programme to defeat them.

The economics of Luther or Munzer?

December 16, 2017

Last week leading leftist economists in the UK held a seminar on the state of mainstream economics, as taught in the universities.  They kicked this off by nailing a poster with 33 theses critiquing mainstream economics to the door of the London School of Economics.  This publicity gesture attempted to remind us that it was the 500th anniversary of when Martin Luther nailed his 95 theses to the Castle Church, Wittenberg and provoked the beginning of the Protestant reformation against the ‘one true religion’ of Catholicism.

The economists were purporting to tell us that mainstream economics was like Catholicism and must be protested against as Luther did back in 1517.  As they put it, “Economics is broken.  From climate change to inequality, mainstream (neoclassical) economics has not provided the solutions to the problems we face and yet it is still dominant in government, academia and other economic institutions. It is time for a new economics.”

The economists included Ha-Joon Chang, University of Cambridge, and author of 23 Things They Don’t Tell You About Capitalism and Economics: The User’s Guide.  He commented that “Neoclassical economics plays the same role as Catholic theology did in Medieval Europe – a system of thought arguing that things are what they are because they have to be.

Steve Keen, head of economics at Kingston University, London, and author of the excellent ‘Debunking Economics’ that exposed the unrealistic and illogical assumptions of neoclassical theory, exclaimed that “Economics needs a Copernican Revolution, let alone a Reformation. Equilibrium thinking in Economics should go the way of Ptolemaic Epicycles in Astronomy”.

Another post-Keynesian economist, Victoria Chick, warned that students should “read the economic scriptures, in all their great variety, for themselves. Thus they will learn that the Pope (formerly Samuelson, now Mankiw) is not infallible and that they must search for Truth in the contest of ideas.”

This all sounded progressive and exciting and reflected the movement against mainstream economic teaching that has mushroomed over the last few years since the global financial crash, organised by the Rethinking Economics group of graduates and lecturers.

But I have some reservations.  First, is a progressive revolution against the mainstream really to be painted as similar to Luther’s protestant revolt?  The history of the reformation tells us the protestant version of Christianity did not lead to a new pluralistic order and freedom to worship.  On the contrary, Luther was a bigot who worked with the authorities to crush more radical movements based on the peasants led by Thomas Munzer.

As Engels put it in his book Peasant War in Germany: “Luther had given the plebeian movement a powerful weapon—a translation of the Bible. Through the Bible, he contrasted feudal Christianity of his time with moderate Christianity of the first century. In opposition to decaying feudal society, he held up the picture of another society which knew nothing of the ramified and artificial feudal hierarchy. The peasants had made extensive use of this weapon against the forces of the princes, the nobility, and the clergy. Now Luther turned the same weapon against the peasants, extracting from the Bible a veritable hymn to the authorities ordained by God—a feat hardly exceeded by any lackey of absolute monarchy. Princedom by the grace of God, passive resistance, even serfdom, were being sanctioned by the Bible.[8]

But maybe all this shows is that analogies or metaphors have their limits and the idea of copying Luther’s theses as a publicity trick can only go so far.

More seriously, it is clear from the comments of the erstwhile academics that, for them, the mainstream economic religion is just neoclassical theory, namely there is perfect competition in markets, which tend to equilibrium; and economies can grow harmoniously, except for shocks caused by imperfections in markets (trade unions and monopolies) or interference by governments.  Our Lutheran-type protestors thus argue that it is this neoliberal economics that must be overthrown.

But is that all there is of the mainstream?  Our protestors have nothing to say against Keynesian economics – indeed variants of Keynes are the way forward for them.  That’s an irony for a start because the basis of neoclassical theory is marginalism: marginal utility of the consumer and marginal productivity of ‘capital’.  And Keynes held entirely to the marginal theory propounded by his mentor Alfred Marshall.  All he added was that, because of uncertainty and unpredictability in investment decisions by individuals (driven by psychology or ‘animal spirits’), sometimes economies can get locked into an equilibrium where markets don’t clear and unemployment becomes permanent.  For Keynes, this was a ‘technical problem’ that could be fixed; it was not inherent feature of the capitalist production process.

As he said at the end of his life: “I find myself moved, not for the first time, to remind contemporary economists that the classical teaching embodied some permanent truths of great significance. . . . There are in these matters deep undercurrents at work, natural forces, one can call them or even the invisible hand, which are operating towards equilibrium. If it were not so, we could not have got on even so well as we have for many decades past.”  Keynes, the neoliberal.

But our Lutheran protestors had not a word of critique against Keynes, and certainly not his more radical followers like Hyman Minsky.  On the contrary, the 33 theses show clear support of Minskyan theory on crises under capitalism.  Thesis 28 refers to “financialisation, short-termism, speculative finance and financialised real economy” as the key issues, thus implying that it is the growth of finance under neoliberalism that is the cause of crises, not any inherent flaws or contradictions in the capitalist profit-making system as a whole.  Marx’s critique of the mainstream (and not just neoclassical and neoliberal economics) is ignored.

Our protestors follow Luther, not Munzer.  They want to replace Catholic economics with Protestant economics, but they do not want to do away with the religion of capitalist economics.  They wish to correct a ‘capitalism distorted by finance’, not replace the mode of production and social relations.  Indeed, this has been the dominant position of Rethinking Economics as it seeks to reverse the dominance of neoclassical theory in the universities.

The result is that there will be no revolution in economics by following Luther.  Indeed, our Lutheran economists have gone little further than the revisions to ‘neoliberal economics’ that mainstream ‘Catholic’ gurus are considering too.  Martin Sandbu in the FT pointed out that “economists are debating intensively how to upgrade their understanding of the economy in order to prepare better for future disruptions and provide better guides for good policy”.  Nobody could be more mainstream and Keynesian than former IMF chief economist Olivier Blanchard and former US Treasury secretary Larry Summers (who is related to Paul Samuelson, the pope of mainstream ‘neoliberal’ economics in the 1970s, according to Chick).  They too want to ‘rethink economics’.  Indeed, all the things advocated in the 33 theses are being considered by the great and good of academic economics.

Back in the 1520s, Luther was eventually accommodated and Protestantism became a religion of the establishment and many monarchies across Europe (and the religious motivation behind capitalism, some argue).  Today’s economic Lutherans may also be absorbed to save capital.  Munzer was executed.

Capitalism without capital – or capital without capitalism?

December 10, 2017

There is a new book out called Capitalism without capital – the rise of the intangible economy.  The authors, by Jonathan Haskel of Imperial College and Stian Westlake of Nesta, are out to emphasise a big change in the nature of modern capital accumulation – namely that increasingly investment by large and small companies is not in what are called tangible assets, machines, factories, offices etc but in ‘intangibles’, research and development, software, databases, branding and design.  This is where investment is rising fast relative to investment in material items.

The authors call this capitalism without capital.  But of course, this is using ‘capital’ in its physicalist sense, not as a mode of production and social relation, as Marxist theory uses the word.  For Marxist theory what matters is the exploitive relation between the owners of the means of production (tangible and intangible) and the producers of value, whether they are manual or ‘mental’ workers.

As G Carchedi has explained, there is no fundamental distinction between manual and mental labour in explaining exploitation under capitalism.  Capitalism cannot be without capital in that sense.

Knowledge is produced by mental labour but this is not ultimately different from manual labour. Both entail expenditure of human energy. The human brain, we are told, consumes 20% of all the energy we derive from nourishment and the development of knowledge in the brain produces material changes in the nervous system and synaptic changes which can be measured. Once the material nature of knowledge is established, the material nature of mental work follows. Productive labour (whether manual or mental) transforms existing use-values into new use-values (realised in exchange value). Mental labour is labour transforming mental use values into new mental use values.  Manual labour consists of objective transformations of the world outside us; mental labour of transformations of our perception and knowledge of that world. But both are material.

The point is that discoveries, generally now made by teams of mental workers, are appropriated by capital and controlled by patents, by intellectual property or similar means. Production of knowledge is directed towards profit. Medical research, for example, is directed towards developing medicines to treat disease, not preventing disease, agricultural research is directed to developing plant types which capital can own and control, rather than relieving starvation.

What Haskell and Westlake find is that investment in intangible assets now exceeds that in tangible assets.

And they reckon this is changing the nature of modern capitalism.  Indeed, it could expose the uselessness of the so-called market economy.  The argument is that an intangible asset (like a piece of software) can be used over and over again at low cost and allow a business to grow very fast.  That’s an exaggeration, of course, because tangible assets like machines can also be used over again, but it’s true that they have ‘wear and tear’ and depreciation.  But then software also gets out of date and also becomes ‘tired’ for the continually changing purposes required.

Indeed, the ‘moral depreciation’ of intangibles is probably even greater than tangibles and so increases the contradictions of capitalist accumulation.  For an individual capitalist, protecting profit gained from a new piece of research or software, or the branding of a company, becomes much more difficult when software can easily be replicated and brands copied.

Brett Christophers showed in his book, The Great Leveller, capitalism is continually facing a dynamic tension between the underlying forces of competition and monopoly.  “Monopoly produces competition, competition produces monopoly” (Marx).

That’s why companies are keen on intellectual property rights (IPR).  But IPR is actually inefficient in developing production.  ‘Spillover’, as the authors call it, where the benefit of any new discovery is shared in the community, is more productive, but by definition almost, is only possible outside capitalism and private profit – in other words rather than capitalism without capital; it becomes capital without capitalism.

As Martin Wolf of the FT concludes in his analysis of the rise of ‘intangibles’, “intangibles exhibit synergies. This goes against the spillovers. Synergies encourage inter-firm co-operation (or outright mergers), while spillovers are likely to discourage it. Who really wants to give a free lunch to competitors?”  So “Taken together, these features explain two other core features of the intangible economy: uncertainty and contestedness. The market economy ceases to function in the familiar ways.”

Under capitalism, the rise of intangible investment is leading to increased inequality between capitalists.  The leading companies are controlling the development of ideas, research and design and blocking ‘spillover’ to others.  The FANGs are gaining monopoly rents as a result, but at the expense of the profitability of others, reducing them to zombie status (just covering their debts without the ability to expand or invest).

Indeed, the control of intangibles by a small number of mega companies could well be weakening the ability to find new ideas and develop them.  Research productivity is declining at a rate of about 6.8 per cent per year in the semiconductor industry. In other words, we’re running out of ideas. That’s the conclusion of economic researchers from Stanford University and the Massachusetts Institute of Technology Innovation.  They reckon that in order to maintain Moore’s Law – by which transistor density doubles every two years or so – it now takes 18 times as many scientists as it did in the 1970s. That means each researcher’s output today is 18 times less effective in terms of generating economic value than it was several decades ago.

Thus we have the position where the new leading sectors are increasingly investing in intangibles while investment overall falls along with productivity and profitability.  Marx’s law of profitability is not modified but intensified.

The rise of intangibles means the increased concentration and centralisation of capital.  Capital without capitalism becomes a socialist imperative.

Grossman on capitalism’s contradictions

December 5, 2017

Henryk Grossman, Capitalism’s contradictions: studies in economic theory before and after Marx, edited by Rick Kuhn, published by Haymarket Books.

Rick Kuhn, the indefatigable editor, biographer and publisher of the writings of Henryk Grossman, has another book out on his work.  Grossman was an invaluable contributor to the development of Marxist political economy since Marx’s death in 1883.  An activist in the Polish Social Democrat party and later in the Communist party in Germany, Grossman, in my view, made major contributions in explaining and developing Marx’s theory of value and crises under capitalism.

Grossman established a much clearer view of Marx’s analysis, overcoming the confusions of the epigones, who either dropped Marx’s value theory for the mainstream bourgeois utility theory, or in the case of crises, opted for variants of pre-Marxist theories of underconsumption or disproportion.  In his works, Grossman weaved his way through these diversions, most extensively in his Law of Accumulation and the Breakdown of the Capitalist System in 1929. Grossman put value theory and Marx’s laws of accumulation and profitability at the centre of the cause of recurrent and regular crises under capitalism.

This book brings together essays and articles by Grossman that critiques the errors and revisionism of the Marxists who followed Marx and in so doing combats the apology of capitalism offered by mainstream (or what Grossman calls ‘dominant’) economics.  Rick Kuhn provides a short but comprehensive introduction on Grossman’s life and works, but also on the essence of the essays in the book.

They include an analysis of the economic theories of the Swiss political economist Simonde de Sismonde, who exercised a powerful influence on the early socialists who preceded Marx – and, for that matter, Marx himself.  Then there is a critical essay by Grossman on all the various ideas and theories presented by Marx’s epigones from the 1880s onwards; and two essays on the ideas of the so-called ‘’evolutionists’’, who tried to develop an alternative to the mainstream based on history and development rather than cold theory.  Their argument was the capitalism was changing and developing away from competition and harmonious growth into monopoly, stagnation and inequality.  But, as Grossman says, Marx too recognised these trends but only he could provide a theoretical explanation of why, based on his laws of accumulation (p250).  Change, time and dynamics as opposed to equilibrium, simultaneity and statics is a big theme of Grossman’s exposition of Marxist economics and that is why the chapter on classical political economy and dynamics in the book is the most important, in my view.

But let me highlight the key conclusions that come out of Grossman’s essays that Rick Kuhn also identifies.  Marx considered that one of his greatest contributions to understanding capitalism was the dual nature of value.  Things and services are produced for use by humans (use value), but under capitalism, they are only produced for money (exchange value).  This is the driver of investment and production – value and, in particular, surplus value.  And both use and exchange value are incorporated into a commodity for sale.  But this dual nature of the value also exposes capitalism’s weakness and eventual downfall.  That is because there is an irreconcilable contradiction between production for use and for profit (between use value and exchange value), which leads to regular and recurring crises of production of increasing severity.

As Grossman shows, Sismondi was aware of this contradiction, which he saw as one between production and consumption.  But he did not see, as Marx did, the laws of motion in capitalism, from the law of value to the law of accumulation and finally to the law of the tendency of the rate of profit to fall, that reveal the causes of crises of overproduction.

The vulgar economists of capitalism have tried to deny this contradiction of capitalist production ever since it was hinted at by the likes of Sismondi, and logically suggested by the law of value based on labour, first proposed by Adam Smith and David Ricardo. The apologists dropped classical theory and turned to a marginal utility theory of value to replace the dangerous labour theory.  They turned to equilibrium as the main tendency of modern economies and they ignored the effect of time and change.  Only the market and exchange became matters of economic analysis, not the production and exploitation of labour.

But as Kuhn points out that “economic processes involve not just the circulation of commodities but their production as use values.  The duration of the periods of production and even the circulation of different commodities vary.  Their coincidence if it occurs at all, can only be accidental.  Yet vulgar economics simply assumes such coincidence or simultaniety of transactions.  It cannot theoretically incorporate time and therefore history.” p17.

Marx’s analysis destroys the idea that all can be explained by exchange and markets.  You have to delve beneath the surface to the process of production, in particular to the production of value (use value and exchange value).  As Grossman puts it: “Marx emphasises the decisive importance of the production process, regarded not merely as a process of valorisation but at the same time a labour process… when the production process is regarded as a mere valorisation process – as in classical theory – it has all the characteristics of hoarding, becomes lost in abstraction and is no longer capable of grasping the real economic process.” p156.

In my view, Grossman makes an important point in emphasising that the production of value is the driving force behind the contradictions in capitalism not its circulation or distribution, even as these are an integral part of the circuit of capital, or value in motion.  This issue of the role of production retains even more relevance in debates on the relevant laws of motion of capitalism today, given the development of ‘financialisation’ and the apparent slumber of industrial proletariat.

In the chapter on dynamics, Grossman perceptively exposes the failure of mainstream theories which are based on static analysis.  Such theories lead to the conclusion that crises are just shocks to an essentially tendency towards equilibrium and even a stationary state – something that Keynes too accepted.  Capitalism is not gradually moving on (with occasional shocks) in a generally harmonious way towards superabundance and a leisure society where toil ceases – on the contrary it is increasingly driven by crises, inequality and destruction of the planet.

It is the “incongruence” between the value side and the material side of the process of reproduction that is the key to the disruption of capitalist accumulation.  There is no symmetry as the mainstream thinks. The value of individual commodities tends to fall while the mass of material goods increases. Here is the essence of the transitional nature of capitalism as expressed in Marx’s ”dual” value theory and the law of profitability.

Boom or bust?

December 1, 2017

Last week, the OECD published its latest World Economic Outlook.   WARNING GRAPHICS OVERLOAD AHEAD!

The OECD’s economists reckon that “The global economy is now growing at its fastest pace since 2010, with the upturn becoming increasingly synchronised across countries. This long-awaited lift to global growth, supported by policy stimulus, is being accompanied by solid employment gains, a moderate upturn in investment and a pick-up in trade growth.”

While world economic growth is accelerating a bit, the OECD reckons that “on a per capita basis, growth will fall short of pre-crisis norms in the majority of OECD and non-OECD economies.” So the world economy is still not yet out of the Long Depression that started in 2009.

The OECD went on: “Whilst the near-term cyclical improvement is welcome, it remains modest compared with the standards of past recoveries. Moreover, the prospects for continuing the global growth up-tick through 2019 and securing the foundations for higher potential output and more resilient and inclusive growth do not yet appear to be in place. The lingering effects of prolonged sub-par growth after the financial crisis are still present in investment, trade, productivity and wage developments. Some improvement is projected in 2018 and 2019, with firms making new investments to upgrade their capital stock, but this will not suffice to fully offset past shortfalls, and thus productivity gains will remain limited.”

The OECD also thinks that much of the recent pick-up is fictitious, being centred on financial assets and property. “Financial risks are also rising in advanced economies, with the extended period of low interest rates encouraging greater risk-taking and further increases in asset valuations, including in housing markets. Productive investments that would generate the wherewithal to repay the associated financial obligations (as well as make good on other commitments to citizens) appear insufficient.”  Indeed, on average, investment spending in 2018-19 is projected to be around 15% below the level required to ensure the productive net capital stock rises at the same average annual pace as over 1990-2007.

The OECD concludes that, while global economic growth will be faster in 2017 and 2018, this will be the peak.  After that, world economic growth will fade and stay well below the pre-Great Recession average.  That’s because global productivity growth (output per person employed) remains low and the growth in employment is set to peak.  That’s a ‘slow burn’ of slowing economic growth.

But even more worrying for global capitalism is the prospect of a new economic slump, now that we are some nine years since the last one.  In a chapter of the World Economic Outlook, the OECD’s economists raise the issue of the very high levels of debt (both private and public sector) that linger on since 2009.  “Despite some deleveraging in recent years, the indebtedness of households and nonfinancial businesses remains at historically high levels in many countries, and continues to increase in some.”  The debt of non-financial firms (NFC) rose relative to GDP during the mid-2000s, generally peaking at the onset of the global financial crisis and remaining stable thereafter.

After a limited downward adjustment during the post-crisis period, NFC debt-to-GDP ratios have increased again since.

Household debt-to-income ratios also rose significantly up to 2007 and stabilised thereafter at historically high levels in most advanced economies. The rise in the debt-to-income ratio was driven by the acceleration in debt accumulation prior to the crisis, with subdued household income growth impeding deleveraging thereafter.

And as I have reported before in previous posts, non-financial companies (NFC) in the so-called emerging economies have sharply increased their debt burdens over the last nine years, so that now, ‘rolling over’ this debt as it matures for repayment amounts to about half of the gross issuance of international debt securities in 2016.  In other words, debt is being issued to repay earlier debt at an increasing rate.

The OECD points out that there is empirical evidence that high indebtedness increases the risk of severe recessions. Also, if the prices of ‘fictitious’ assets like property or stocks get well out of line with the value of productive assets (ie capital investment), that is another indicator of a coming recession. Currently, there is no OECD economy in recession (defined as two consecutive quarters of a fall in GDP), but the global house price index is reaching a peak level over the trend average that has signalled recessions in the past.

Credit is necessary to capitalism to overcome the ‘lumpiness’ in capital investment and smooth over cash liquidity.  But as Marx argued, ‘excessive’ credit expansion is a sign that the profitability of productive investment is falling.  As the OECD puts it: “If borrowing is well used, higher indebtedness contributes to economic growth by raising productive capacity or augmenting productivity. However, in many advanced economies, the post-crisis build-up of corporate debt has not translated into a rise in corporate capital expenditure.”

So the OECD concludes that the post-crisis combination of rising corporate debt and historically high share buybacks may suggest that, rather than financing investment, firms took on debt to return funds to shareholders. This reflects “pessimism about future demand and economic growth, leading corporations to defer capital spending and return cash to their shareholders for want of attractive investment opportunities.”  Moreover, firms with a persistently high level of indebtedness and low profits can become chronically unable to grow and become “zombie” firms. And zombie “congestion” may thus reduce potential output growth by hampering the productivity-enhancing reallocation of resources towards more dynamic higher productivity firms.

So the OECD story is that world economic growth is picking up and there is little sign of any slump in production in the immediate future, even if growth may stay well below the pre-crisis average.  But there are risks ahead because the still very high levels of debt and speculation in financial assets that could come a cropper if profitability and growth should falter.

This is much the same story that the IMF told in latest IMF report on Global Financial Stability that I referred to in a recent post.  As the IMF put it: “Private sector debt service burdens have increased in several major economies as leverage has risen, despite declining borrowing costs. Debt servicing pressure could mount further if leverage continues to grow and could lead to greater credit risk in the financial system.”  

The IMF comments: “While debt accumulation is not necessarily a problem, one lesson from the global financial crisis is that excessive debt that creates debt servicing problems can lead to financial strains. Another lesson is that gross liabilities matter. In a period of stress, it is unlikely that the whole stock of financial assets can be sold at current market values— and some assets may be unsellable in illiquid conditions.” So “if there are adverse shocks, a feedback loop could develop, which would tighten financial conditions and increase the probability of default, as happened during the global financial crisis.”  

The IMF sums up the risk.  “A continuing build-up in debt loads and overstretched asset valuations could have global economic repercussions. … a repricing of risks could lead to a rise in credit spreads and a fall in capital market and housing prices, derailing the economic recovery and undermining financial stability.”

The IMF posed an even nastier scenario for the world economy than the OECD by 2020.  Yes, the current ‘boom’ phase can carry on.  Equity and housing prices can continue to climb.  But this leads to investors to drift beyond their traditional risk limits as the search for yield intensifies despite increases in policy rates by central banks.  Then there is a ‘Minsky moment’.

There is a bust, with declines of up to 15 and 9 percent in stock market and house prices, respectively, starting at the beginning of 2020.  Interest rates rise and debt servicing pressures are revealed as high debt-to-income ratios make borrowers more vulnerable to shocks. “Underlying vulnerabilities are exposed and the global recovery is interrupted.” The IMF estimates that the global economy could have a slump equivalent to about one-third as severe as the global financial crisis of 2008-9 with global output falling by 1.7 percent from 2020 to 2022, relative to trend growth.

Will the high debt in the corporate sector globally eventually bring down the house of cards that is built on fictitious capital and engender a new global slump?  When is credit excessive and financial asset prices a bubble?

The key for me, as readers of this blog know, is what is happening to the profitability of capital in the major economies.  If profitability is rising, then corporate investment and economic growth will follow – but also vice versa.  But if profitability and profits are falling, debt accumulated will become a major burden.  Eventually the zombies will start to go bankrupt, spreading across sectors and a slump will ensue.  Financial prices will quickly collapse toward the real value of their underlying productive assets.

Indeed, according to Goldman Sachs economists, the prices of financial assets (bonds and stocks) are currently at their highest against actual earnings since 1900!

What the OECD and IMF reports show is that if there is a downturn in profitability, the next slump will be severe, given that private debt (both corporate and household) has not been ‘deleveraged’ in the last nine years – indeed on the contrary.  As I said, in my paper on debt back in 2012: “Capitalism is now left with a huge debt burden in both the private and public sector that will take years to deleverage in order to restore profitability.  So, contrary to the some of the conclusions of mainstream economics, debt (particularly private sector debt) does matter.”

For now, the world economy is making a modest recovery from the stagnation that appeared to be setting in from the end of 2014 to mid-2016.  The Eurozone economic area is seeing an acceleration of growth to its highest rate since the end of the Great Recession.

Japan too is picking up, based on a weak currency that is enabling exports to be sold.  And the latest figures for the US show an annualised rise of 3.3% in third quarter of 2017, putting year on year growth at 2.3%, still below the rates achieved in 2014 but much better than in 2016 (1.6%).  And the forecast for this current quarter is for similar.

As for corporate profits and investment, the latest data show that US corporate profits were rising at over 5-7% yoy before tax, although stripping out the mainly fictitious profits of the financial sector reveals that the mass of profit is still well below the peak of end-2014.

And as I showed in a recent post, profitability has fallen since 2014.

There is a high correlation and causality between the movement of profits and productive investment.

And that is confirmed in the latest data for the US.  As corporate profits have recovered from the slump of 2015-16, so business investment has made a modest improvement.

As for global corporate profits, we don’t have all the data for Q3 2017, but it looks as though it will continue to be on the up.

So overall, global economic growth has improved in 2017 and, so far, looks likely to do so in 2018 too.  Corporate profits are rising and that should help corporate investment.  But profitability of capital  remains weak and near post-war lows and corporate debt has never been higher.

Any sharp upswing in interest rate costs (and the US Fed continues to hike) will increase the debt servicing burden.  So if corporate profits should peak and falter in the next year or so, a major recession will be on the agenda.

Neoliberalism works for the world?

November 27, 2017

Noah Smith is a regular economics blogger of the mainstream Keynesian persuasion and writes regularly for Bloomberg now.  A recent piece by him was headlined “free markets improved more lives than anything ever”.  And he delivered the now usual argument that capitalism has actually been a great success in delivering better lives for billions compared to any previous mode of production and social organisation and, as far as he can see, it will remain the ‘market leader’ for human beings.

Smith is keen to refute the ‘mixed economy’, anti free trade ideas that have been sneaking into mainstream economics since the Great Recession, namely that ‘neo-liberalism’ and free markets are bad for living standards.  Instead, a little dose of protectionism on trade (Rodrik) and state intervention and regulation (Kwak) helps capitalism to work better.

But no, says Smith. Neoliberalism works better.  He cites China’s growth phenomenon as his main example!  In China, “the shift from a rigid command-and-control economy to one that blended state and market approaches — and the liberalization of trade — was undoubtedly a neoliberal reform. Though Deng’s changes were mostly done in an ad-hoc, common sense manner, he did invite famed neoliberal economist Milton Friedman to give him advice.”

He then adds India to this argument:  “A decade after China began its experiment, India followed suit. In 1991, after a sharp recession, Prime Minister Narasimha Rao and Finance Minister Manmohan Singh scrapped a cumbersome system of business licensing, eased curbs on foreign investment, ended many state-sanctioned monopolies, lowered tariffs and did a bunch of other neoliberal things.

Boy, does this take the biscuit.  China’s economy is an example of successful neoliberal economic policy!?  In several posts I have shown that China is not a free market economy by any stretch of the evidence and may not even be described as capitalist.  It is state-owned and controlled with investment and production state-directed, with profit secondary to growth as the objective.  Indeed, the IMF data on the size of public investment and stock globally put China in a different league compared to any other economy in the world.

As for India, the state sector also remains significant, something which continually upsets the World Bank and neoliberal economists.  The policy measures of the 1990s can hardly be used as the explanation of the pick-up in economic growth in India.  During the 1990s, productivity growth in all the major ‘emerging economies’ picked up – only to fall back again after the Great Recession.  Globalisation and foreign capital were drivers then everywhere.

Anyway it is not really true that Indian government policy is ‘neo-liberal’ – on the contrary.  In contrast, the clear shock switch to neoliberal capitalism by Russia’s post-Soviet governments and its oligarchs was a total disaster (Smith calls it a ‘mixed success’!).  Growth, living standards and life expectancy collapsed.  Indeed, the conclusion that might be drawn is not that ‘neo-liberal reforms’ have driven the relative economic success of China and India in the last 30 years but their resistance to such policies.

The other main argument presented by Smith for the success of capitalism is the supposed decline in global poverty since Marx wrote Capital 150 years ago.  “All of the evidence above suggests that the population living in extreme poverty has fallen very substantially in the last 200 years across the world. As we have noted, on aggregate, the global population in extreme poverty went from 80% in 1820 to 10% in the latest estimates.”

Now Marx was the first to note the tremendous boost to production that the capitalist mode of production delivered compared to previous modes.  But as I have shown in previous posts, there is another side to capitalism’s early years: the immiseration of the working class.   And that is a different reality from Smith’s claims.

Back in 2013, the World Bank released a report that there were 1.2bn people living on less than $1.25 a day, one-third of whom were children.  The World Bank raised its official poverty line to $1.90 a day and Smith refers to sources based on this threshold.  This merely adjusted the old $1.25 figure for changes in the purchasing power of the US dollar.  But it meant that global poverty was reduced by 100m people overnight.

And, as Jason Hickel points out, this $1.90 is ridiculously low.  A minimum threshold would be $5 a day that the US Department of Agriculture calculated was the very minimum necessary to buy sufficient food. And that’s not taking account of other requirements for survival, such as shelter and clothing.  Hickel shows that in India, children living at $1.90 a day still have a 60% chance of being malnourished. In Niger, infants living at $1.90 have a mortality rate three times higher the global average.

In a 2006 paper, Peter Edward of Newcastle University used an “ethical poverty line” that calculates that, in order to achieve normal human life expectancy of just over 70 years, people need roughly 2.7 to 3.9 times the existing poverty line.  In the past, that was $5 a day. Using the World Bank’s new calculations, it’s about $7.40 a day. That delivers a figure of about 4.2 billion people living below that level today; or up 1 billion over the past 35 years.

Some argue that the reason there are more people in poverty is because there are more people!  The world’s population has risen in the last 25 years.  You need to look at the proportion of the world population in poverty and, at a $1.90 cut-off, the proportion under the line has dropped from 35% to 11% between 1990 and 2013.  So Smith is right after all.  But this is disingenuous, to say the least.

The absolute number of people in poverty, even at the ridiculously low threshold level of $1.25 a day, has still increased, even if not as much as the total population in the last 25 years.  And even then, all this optimistic expert evidence is really based on the dramatic improvement in average incomes in China (and to a lesser extent in India).

Smith says that “the reduction of global poverty has been substantial even when we do not take into account the poverty reduction in China. In 1981, almost one third (29%) of the non-Chinese world population was living in extreme poverty. By 2013, this share had fallen to 12%.“

However Peter Edward found that there were 1.139bn people getting less than $1 a day in 1993 and this fell to 1.093bn in 2001, a reduction of 85m.  But China’s reduction over that period was 108m (no change in India), so all the reduction in the poverty numbers was due to China.  Exclude China and total poverty was unchanged in most regions, while rising significantly in sub-Saharan Africa.  And, according to the World Bank, in 2010, the “average” poor person in a low-income country lived on 78 cents a day in 2010, compared to 74 cents a day in 1981, hardly any change.  But this improvement was all in China and India. In India, the average income of the poor rose to 96 cents in 2010, compared to 84 cents in 1981, while China’s average poor’s income rose to 95 cents, compared to 67 cents.

Moreover, poverty levels should not be confused with inequality of incomes or wealth.  On the latter, the evidence of rising inequality of wealth globally is well recorded .  The latest annual report by Credit Suisse on global personal wealth found that top 1% of personal wealth holders globally now have over 50% of the world’s wealth – up from 45% ten years ago. Actually, the majority of people in the major advanced capitalist economies will be in the top 10% of wealth holders because billions of people have no wealth at all!

Credit Suisse found that global wealth rose 6.4% over the past year – the fastest since 2012 – thanks to rising share markets and house prices.  But the weakest growth was in Africa, the poorest region, where household wealth rose just 0.9%. Taking in into account population changes, wealth per adult fell by 1.9% in Africa. The fastest growth was in North America, where it rose 8.8% per adult.

And on current trends, inequality will rise further. The outlook for the millionaire segment looks much better than for the bottom of the wealth pyramid (less than $10,000). The former is expected to rise by 22%, from 36 million millionaires today to 44 million in 2022, while the group occupying the lowest tier of the pyramid is expected to shrink by only 4%.  In the US, the three richest people in the US – Bill Gates, Jeff Bezos and Warren Buffett – own as much wealth as the bottom half of the US population, or 160 million people.

As for incomes, if you take China out of the figures, global inequality, however you measure it, has been rising in the last 30 years.  The global inequality ‘elephant’ presented by Branco Milanovic found that the 60m or so people who constitute the world’s top 1% of income ‘earners’ have seen their incomes rise by 60% since 1988. About half of these are the richest 12% of Americans. The rest of the top 1% is made up by the top 3-6% of Britons, Japanese, French and German, and the top 1% of several other countries, including Russia, Brazil and South Africa. These people include the world capitalist class – the owners and controllers of the capitalist system and the strategists and policy makers of imperialism.

But Milanovic also found that those who have gained income even more in the last 20 years are the ones in the ‘global middle’.  These people are not capitalists.  These are mainly people in India and China, formerly peasants or rural workers have migrated to the cities to work in the sweat shops and factories of globalisation: their real incomes have jumped from a very low base, even if their conditions and rights have not. The biggest losers are the very poorest (mainly in African rural farmers) who have gained nothing in 20 years.

The empirical evidence supports Marx’s view that, under capitalism, poverty (as defined) and inequality of income and wealth have not really improved under capitalism, neoliberal or otherwise. Any improvement in poverty levels globally, however measured, is mainly explained by in state-controlled China and any improvement in the quality and length of life comes from the application of science and knowledge through state spending on education, on sewage, clean water, disease prevention and protection, hospitals and better child development.  These are things that do not come from capitalism but from the common weal.

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

Budget and Brexit

November 22, 2017

Today’s UK budget could be the last by a British Conservative chancellor (finance minister) in this decade.  Last June the Conservative government lost its majority after a snap election was called by the new prime minister Theresa May.  Instead of increasing her small majority that she inherited from previous PM Cameron, May found that she had to beg and bribe the extreme right wing ‘Democatic’ Unionists group in Northern Ireland to back her government and stay in office.

And then there is Brexit. The cabinet is split between the so-called hard Brexiters (supporters of leaving the EU) and the ‘Remainers’ in negotiating with the EU.  As a result, nothing has been achieved for over a year in the negotiations for a new arrangement with the EU.  In the meantime, the pound sterling has slumped and inflation has spiralled.

Even before Brexit, the UK economy, was already showing serious signs of frailty.  In a previous post, I showed: the underlying feebleness of output growth (the slowest growing G7 economy); productivity among the lowest among advanced economies (and not rising); and investment to GDP that has been falling for over 30 years.  This failure of capitalist production in the UK has meant that the average British household has experienced no ‘recovery’ at all income since the end of the Great Recession in 2009.  Real wage growth is at its slowest since the mid-19th century. Indeed, the UK is one (and the largest) of six countries in the 30-country OECD bloc where earnings are still below their 2007 levels (the UK is joined by Greece and Portugal).

In his budget speech, Hammond made two ridiculous claims.  The first was that it was “Labour’s Great Recession”.  The only correct bit in this statement was that there was terrible slump in 2008-9 globally that hit the UK too when a Labour government was in office.  But it was not Labour’s recession but that of global capitalism.  The financial crash, the slump in production and rise in unemployment, along with a rocketing budget deficit and debt was a failure of capitalism under which Labour was helpless.

The other ludicrous claim from Hammond was that income inequality in Britain was improving under the Conservatives and was now at its most equal in 30 years.  This claim is based on the gini coefficient of income inequality.  This indeed has fallen slightly since 1987 after reaching an all-time high under the Thatcher government.  But the main part of that fall was after the Great Recession when incomes for the rich (from financial assets and property) took a bit of hit.

The slight improvement in the inequality ratio from an all-time high did not come from any government action on taxes or benefits at all.  So Hammond can hardly claim the credit, especially as Labour governments were in office for nearly half that time.  Hammond pointed out that top 1% of income earners are paying more income tax than ever before.  But then they have never earned so much!  The richest 20% of Brits still have around five times more to spend after taxes and benefits than the poorest 20%.

And as for the ‘economic recovery’ under the Conservatives since 2010, it has been very poor. The Institute for Fiscal Studies (IFS) points out that national income per adult was 15% lower at the last Budget in March than it would have been if pre-2008 trends had continued. By 2022, the gap is set to grow to 18%, performance the IFS describes as “astonishing”.  The UK economy is currently growing at its slowest since the end of the Great Recession.  And the official forecast for real GDP growth has been revised down to 1.5% for this year and 1.4% in 2018.  Indeed, the long-term forecast (and that assumes no slump) out to 2022 is just 1.4% a year, down from a previous forecast of 1.9% a year. Real GDP is now expected to grow by 5.7% between 2017-18 and 2021-22 – down from 7.5% forecast last March.

The main reason is that official forecast for productivity growth has been reduced after successive optimistic forecasts proved wrong.  Even so, the productivity forecast for the next five years remains well above the current rate (which is virtually static).  And even that means a per capita growth rate of under 1% a year until 2023, or half the long-term average.

As a result, the Conservatives great aim to reduce the annual budget deficit to zero has been pushed out yet again to 2023 and beyond, some 20 years after the Great Recession drove it up to 10% of GDP.  And the public sector net debt ratio to GDP, which more than doubled during the recession will only peak this year (if Hammond is right) at about 86.5% of GDP (closer to 100% on a gross basis).  And it will fall back only a little to 79% by 2023 – still double its pre-crisis level in 2006.

Moreover, the government’s debt forecast includes £15bn from the sale of the taxpayer’s stake in the Royal Bank of Scotland (at a loss, as the current share price is 271p compared to the break-even price of 502p) – and by moving local housing association debt off the books.  So the small debt reduction is achieved by selling off public assets at a loss and by changing the accounting rules.

And even that improvement will require yet more measures of ‘austerity’, ie cuts in government spending and services.  Austerity will continue into the next decade if this government has its way.  Analysis by the IFS finds that existing plans mean welfare, the health service and prisons face further deep cuts, regardless of the budget, leaving departments such as justice and work and pensions facing a real-terms cut of as much as 40% over the decade to 2020.  There will be a further £12bn cut in welfare spending by 2020/21, that the NHS will face its tightest funding period since the 1950s and that prisons will see a real-terms cut of 22%.

Hammond announced some extra funding of the National Health Service, mainly to get it through a major crisis this winter as the old and infirm struggle.  But the extra spending of about £3bn over two years is little more than the spending on Brexit planning.  Without Brexit, the government could have doubled its funding.  And the NHS will still be badly underfunded and, according to the IFS, “If anything, it looks like the funding increases over the next few years get a bit harder rather than a bit easier”.  For example, the NHS budget increased by 8.6% a year between 2001/2 and 2004/5, but increases will average just 1.1% a year from 2009/10 to 2020/21.  Public funding for health care as a proportion of GDP is now forecast to fall from 7.6% in 2009/10 to 6.8% by 2019/20. Growth in health spending will not keep pace with the growing and ageing population, so NHS spending per person will fall by 0.3% next year.

Hammond announced the removal of taxes on buying a home under £300k, supposedly to help first-time buyers.  But it is the law of unintended consequences here – this will just drive prices up even more.

Overall, Hammond’s budget injects about 0.4% of GDP into the economy, mainly through government spending on R&D, infrastructure and housing incentives.  That is nowhere near compensating for the downward revisions in the prospects for economic growth as business investment and productivity stagnate.

Britain has been a rentier economy extraordinaire, with the highest dependence on the financial sector of all major economies.  And the biggest fall in productivity growth has been in this sector since 2007.

Moreover, with Brexit, the City of London is set to lose many facilities and expertise to Europe.  And another recession is due before the end of this decade. Even the reduced growth forecasts look optimistic.