Archive for the ‘economics’ Category


October 25, 2018

The US stock market turned volatile this week and has now erased all the gains made up to now in 2018 in just a week or so.  So much for Trump’s boast that things for rich investors have never been better.  The fall in the US market has been matched by similar drops in the European and Asian stock markets.  The all-world index has had its worst performance since the Euro debt crisis of 2012.

Now this fall could just be what market traders call a ‘correction’ and not a full ‘bear market’, when the prices of shares enter a long and deep decline.  But it could be that investors are beginning to fear that the boost to profits and sales that the Trump tax cuts generated is soon to be over, while interest rates (the cost of borrowing to invest or buy back shares to boost prices) are rising significantly.

CitiBank’s ‘global economic surprise index’ — which measures how often data comes in better or worse than expected — has been in negative territory since April. That is the longest sub-zero stretch in four years.

A slowdown in growth is pretty clear in Europe, where the measures of business activity are showing a significant drop in the pace of expansion.  The IMF in its latest report has already signalled the coming slowdown but lowering its forecast for global growth by a couple of notches.  And within sectors, there are serious declines; the global materials sector (manufacturing basic inputs for production) is down 20%.  ECB chairman Mario Draghi said in his press conference yesterday that there was a “weaker momentum” in Europe, but this was just temporary and really just to do with German car sales and Italy’s budget.  Next quarter will be better.

And it is not just Europe that is slowing.  China’s growth rate has been slowing since 2014, as the government tries to reduce debt in local authorities and industrial firms.  In Q3 2018, the real GDP growth rate slowed to 6.5 per cent, the slowest reading since the 2009 post-crisis nadir.  Falling profitability and the trade war with the US is beginning to have some effect.

And South Korea also appears to be slowing down with Q3 real GDP growth of 2% being the slowest expansion rate in nine years.  Investment dropped 6.5%.

However, unlike the rest of the world, the US economy still looks better.  The latest business activity surveys showed steady expansion.

And globally, the price of copper – a good leading indicator of global activity – remains above the ‘recession’ level it fell to in the growth trough of 2015-6.

However, investors are beginning to fret that the corporate profits growth seen earlier this year is as good as it will get, given rising wage costs, interest bills and materials prices. Moreover, the impact of the 2018 tax cut will make this year’s results hard to beat in 2019.  The third-quarter results of 3M and Caterpillar, two US industrial bellwethers that reported last Tuesday, feed this concern. 3M cut its earnings forecasts. While Caterpillar’s profits beat forecasts, its warnings of rising materials costs rattled investors.

The US may have reached a new trade agreement with Mexico and Canada to replace the Nafta deal reviled by President Trump, but Washington remains at loggerheads with China, slapping $250bn of tariffs on Chinese goods and demanding sweeping changes to the country’s economic policies. After occasional hints of a thaw, the imbroglio appears to have reached an impasse. If there is no progress in the coming weeks, the Trump administration is expected to introduce another $200bn worth of tariffs — perhaps sanctioning all Chinese imports.

And investors remain on edge about the impact of rising interest rates on both fixed-income and equity markets. The Federal Reserve is expected to lift rates for a fourth time this year in December, and is slowly but surely shrinking its balance sheet, which has been stuffed with bonds acquired when combating the financial crisis.  Former Fed chair Janet Yellen sounded a warning that the planned hikes could cause a new financial bust as many companies have taken out what are called ‘leveraged loans’ which are subject to sharp changes in interest rates.  Yellen commented that “If we have a downturn in the economy, there are a lot of firms that will go bankrupt, I think because of this debt.  That would probably worsen a downturn.”  Indeed, it is estimated that nearly 20% of US firms are already finding the cost of servicing their debt greater than the earnings to cover it.

Yellen also pointed out what current Fed Chair Powell has observed, that it was not clear what the appropriate Fed policy interest rate should be to ensure full employment and moderate inflation; there was “genuine uncertainty”.  In other words, the Fed has no idea what it was doing in raising interest rates.

Other central banks are also trying to ‘normalise’ monetary policy and turn off the money flow. The European Central Bank plans to end its own bond-buying by the end of the year, and even the Bank of Japan is easing back on its monetary pedal. The net effect of this is what investors have dubbed “quantitative tightening”, a sea change in the global monetary environment since the financial crisis that bodes ill for markets in 2019.

Back at the beginning of October I wrote that if the Fed is wrong and the productive sectors of the US economy do not resume ‘normal growth’ (the average real GDP growth rate since 1945 has been 3.3% – so growth is not back there yet), the rising costs of servicing corporate and consumer debt could lead to a new downturn.  The first estimates of real GDP growth figures for the US in the third quarter to September are out tomorrow.

Most important, corporate profits, after a stellar two quarters are beginning to fall back.  If you strip out financial sector profits, then corporate profits are still below levels of 2014, even after Trump’s tax boost. And in the productive sectors of the economy, like manufacturing, they are falling quite sharply – as measured per employee.

The stock market is not always a harbinger of what happens in the ‘real’ economy, but it may be this time.



Keynes part 2 – internationalist or nationalist?

October 17, 2018

Was Keynes the great internationalist who aimed to make capitalism a stable system through macro management on a world scale?  This is Ann Pettifor’s claim in her recent paeon of praise to Keynes.  Keynes made his name in showing that the policies of penury on Germany after WW1 would be self-defeating for the interests of France and Britain.  And he supposedly was the promoter of “the construction of the international financial architecture at Bretton Woods in 1944. Politicians and economists (if not bankers) had finally come round and endorsed his theory and policies.” (Pettifor)

Well, yes he wanted to set up ‘civilised’ institutions to ensure peace and prosperity globally through international management of economies, currencies and money. But these ideas of a world order to control the excesses of unbridled laisser-faire capitalism were eventually turned into institutions like the IMF, World Bank and the UN Council, mainly used to promote the policies of imperialism, led by America. Instead of a world of ‘civilised’ leaders sorting out the problems of the world, we got a terrible eagle astride the globe, imposing its will.  Material interests decide policies, not clever economists.  Keynes, the internationalist, gave us the IMF’s penury on struggling emerging economies.

Moreover, Keynes was always more a representative of the interests of the British empire than an internationalist.  After all, he had been in the British civil service in India.  The biographer of Keynes, Lord Skidelsky, entitles the third volume of his biography, Keynes: Fighting for Britain.  At the post-war Bretton Woods meetings, he represented, not the world’s masses or a democratic world order, but the narrow national interests of British imperialism against outright American dominance. After the agreement, Keynes told the British parliament that the Bretton Woods deal was not “an assertion of American power but a reasonable compromise between two great nations with the same goals; to restore a liberal world economy”. Only two nations mattered, the interests of others were ignored.

Was Keynes an internationalist when it came to economics?  He started off as a ‘free trader’ with the traditional neoclassical view that free markets in trade would benefit all.  As an under-graduate he served as secretary of the Cambridge University Free Trade Association and argued for free trade in several debates.  “We must hold to Free Trade, in its widest interpretation, as an inflexible dogma, to which no exception is admitted, wherever the decision rests with us. We must hold to this even where we receive no reciprocity of treatment and even in those rare cases where by infringing it we could in fact obtain a direct economic advantage. We should hold to Free Trade as a principle of international morals, and not merely as a doctrine of economic advantage.”  By 1928, however, Keynes had altered his position by suggesting that “the free trade case must be based in the future, not on abstract principles of laissez-faire, which few now accept, but on the actual expediency and advantages of such a policy.”

The terrible experience of the Great Depression shifted his views further.  In private evidence given in 1930 before the UK’s government-sponsored Macmillan Committee on Finance and Industry, set up to offer economic advice to the British government at the onset of the Great Depression, Keynes proposed import tariffs on foreign goods and subsidies for domestic investment. When asked whether abandoning free trade was worth the potential ameliorative effects of protection, Keynes replied, “I have not reached a clear-cut opinion as to where the balance of advantage lies,” but he saw the merits of tariffs as an alleviation of the slump. “I am frightfully afraid of protection as a long-term policy,” he testified, “but we cannot afford always to take long views . . . the question, in my opinion, is how far I am prepared to risk long-period disadvantages in order to get some help to the immediate position.”

Before long, he went further towards protectionist measures.  In response to questions from the prime minister, Keynes indicated that he had “become reluctantly convinced that some protectionist measures should be introduced.” In a memorandum prepared in September 1930 for the Committee of Economists of the Economic Advisory Council, Keynes elaborated on the benefits of a tariff, which he now described as “simply enormous.” These benefits included solving the basic problem of the misalignment of money costs and the exchange rate: a tariff would raise domestic prices and reduce real wages toward their ‘equilibrium value’, while avoiding a disruptive fall in nominal wages (so real wages would fall without the working class noticing). A tariff would also “restore business confidence and create a favourable climate for new investment”, he stated, “but would not (unless poorly designed) trigger demands by trade unions for higher pay or have adverse employment effects.” Tariffs would thus help British capital against its competitors by squeezing the real incomes of British households. Keynes preferred devaluation of the currency but tariffs would also be necessary.

He now advocated ’beggar thy neighbour’ economic policies to help British capital against its rivals. By 1933 he wrote of his sympathy “with those who would minimise, rather than with those who would maximize, economic entanglements between nations. Ideas, knowledge, art, hospitality, travel-these are things which should of their nature be international. But let goods be homespun whenever it is reasonable and conveniently possible; and, above all, let finance be primarily national.”  However, once the depression and war was over, Lord Keynes in his last speech returned to his support for the theory of ‘free trade’ when he said that “separate economic blocs and all the friction and loss of friendship they bring with them are expedients to which one may be driven in a hostile world where trade has ceased over wide areas, to be cooperative and peaceful and where are forgotten the rules of mutual advantage and equal treatment. But surely it is crazy to prefer that.”

I think what this tells you is that Keynes was an internationalist and free trader when he thought it was in the interests of British capital, but in favour of protection and beggar thy neighbour policies when he thought it was in the interests of British capital. For him, there were only two ‘civilised’ nations, the US and the UK (as junior partner), who could lead the world.  Keynes never criticised the role of the British Empire, on the contrary, he saw it as a good thing and something to be preserved.

Europe as a rival to American imperialism came after Keynes’ death.  With the rise of Europe, British capital began to move towards the continent, joining the Single Market and the EU.  But British capital remained split about where to align.  Within the psyche of the British ruling elite (mainly smaller and domestic-based capital), there has remained a nostalgia for the Empire and a look back across the Atlantic ‘pond’.  With the demise of Europe’s economies after the Great Recession, the reactionary empire loyalists pushed for a break with Europe and a return to the ‘old order’ as junior partner to American imperialism that existed in Keynes’s day.

How would Keynes have reacted to this?  In my view, as he was at the time of Bretton Woods, Keynes was generally in favour of freer trade and international capital flows, as he thought it would be to the advantage of Anglo-American capital.  So he may have supported the UK’s entry into the EU, but not into the euro, because that would have taken away control over the currency and the option of devaluation.  What would Keynes’ view have been on Brexit?  Would Keynes have been a ‘leaver’ or ‘remainer’?  Probably the former as that is where his nationalist inclinations lay. But maybe the latter, as according to his economic rival of the 1930s, Friedrich Hayek, Keynes changed his ideas like he changed his shirts.  Keynes was an internationalist only as long as it did not conflict with the interests of British capital (or American imperialism) – pretty much the same position as Churchill.

Keynes was vehemently opposed to socialist internationalism.  Keynes saw all his policies as designed to save capitalism from itself and to avoid the dreaded alternative of socialism.  As he made clear: 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.”  So “the class war will find me on the side of the educated bourgeoisie.”  Was he a fighter for greater equality?  This is what he said. “For my own part, I believe that there is social and psychological justification for significant inequalities of incomes and wealth, but not for such large disparities as exist today. There are valuable human activities which require the motive of money-making and the environment of private wealth-ownership for their full fruition.“  This is Pettifor’s revolutionary.

Keynes reckoned that as capitalism expanded, it would, through more technology, create a world of abundance and leisure.  Because of that abundance, the return on lending money to invest would fall.  So bankers and financiers would no longer be necessary; they could be phased out (‘the euthanasia of the rentier’).  Well, that does not seem to be happening.  The followers of Keynes now argue that capitalism is being distorted by ‘financialisation’ and finance capital – and that is the real enemy.  What happened to the gradual phasing out of finance in late capitalism a la Keynes?

In contrast, Marx’s theory of finance capital did not foresee a gradual removal of finance; on the contrary, Marx described the increased role of credit and finance in the concentration and centralisation of capital in late capitalism.  Yes, the functions of management and investment become more separated from the shareholders in the big companies, but this does not alter the essential nature of the capitalist mode of production – and certainly does not imply that coupon clippers or speculators in financial investment will gradually disappear.

Keynes, the supposed radical opponent of neoclassical economics, according to Pettifor, reverted back.  In one of his last articles on the capitalist economy as the Great Depression ended and the second world war began, Keynes remarked that “Our criticism of the accepted classical theory of economics has consisted not so much in finding logical flaws in its analysis as in pointing out that its tacit assumptions are seldom or never satisfied, with the result that it cannot solve the economic problems of the actual world. But if our central controls succeed in establishing an aggregate volume of output corresponding to full employment as nearly as is practicable, the classical theory comes into its own again from this point onwards.” So once full employment is achieved, we can dispense with planning and ‘socialised investment’ and return to free markets and mainstream neoclassical economics and policy: “the result of filling in the gaps in the classical theory is not to dispose of the ‘Manchester System’ (‘free’ markets – MR), but to indicate the nature of the environment which the free play of economic forces requires if it is to realise the full potentialities of production.”

Indeed, economically, in his later years, he praised the very laisser-faire ‘liberal’ capitalism that his followers condemn now.  In 1944, he wrote to Friedrich Hayek, the leading ‘neo-liberal’ of his time and ideological mentor of Thatcherism, in praise of his book, The Road to Serfdom, which argues that economic planning inevitably leads to totalitarianism: “morally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement with it, but in a deeply moved agreement.”! And Keynes wrote in his very last published article, “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.”  Thus the ‘(neo) Classical’ economics of the ‘invisible hand’ and ‘equilibrium’ returned after all – the opposite of what Keynesian followers now stand for. Once the storm (of slump and depression) had passed and ‘the ocean’ was flat again, bourgeois society could breathe a sigh of relief.  So Keynes the radical turned into Keynes the conservative.

Yet the myth of Keynes, the radical and revolutionary, is preserved and promoted by the Keynesian left and continues to influence the labour movement (particularly its leaders) as the ‘alternative’ to neo-liberal, ‘austerity’ pro-market economics.  Why is this?  Well, there are theoretical reasons.

Keynesian macroeconomics assumes that capitalism works to develop the productive forces and meet the needs of people. The problem is that occasionally, there is a ‘technical malfunction’ (Paul Krugman).  For some reason (loss of confidence, or animal spirits?), capitalist investment gets stuck in a ‘hoarding of money’ mode that it cannot get out of (liquidity trap).  So it is necessary for government authorities to give it a ‘nudge’ with monetary and/or fiscal stimulus, and then all will be right again – until the next time!  Keynes liked to consider economists as dentists fixing a technical problem of toothache in the economy (“If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid”). And modern Keynesians have likened their role as plumbers, fixing the leaks in the pipeline of accumulation and growth.

What the Marxist analysis of the capitalist mode of production reveals is that capitalism cannot deliver an end to inequality, poverty, war and a world of abundance for the common weal globally, or indeed avoid the catastrophe of environmental disaster (something ignored by Keynes), over the long run.  That’s because capitalism is a mode of production driven by profit not need; exploitation not cooperation; and that generates irreconcilable contradictions that cannot be resolved by ‘technical macro-management’ of the economy.  It can only be resolved by replacing it.  In this sense, Marx, rather than Keynes, is closer to Darwin as a revolutionary in economics.

But there is another reason.  Geoff Mann, in his excellent book, In the long run we are all dead, offered an explanation. Keynes rules on the left because he offers a supposed third way between socialist revolution and barbarism, i.e. the end of civilisation as ‘we’ (actually the bourgeois like Keynes) know it.  In the 1920s and 1930s, Keynes feared that the ‘civilised world’ faced Communist revolution or fascist dictatorship.  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.

So Keynes aimed for some modest fixing of ‘liberal capitalism’, 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.  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: “the Left wants democracy without populism, it wants transformational politics without the risks of transformation; it wants revolution without revolutionaries”. (Mann p21).  But we shall indeed all be dead if we do not end the capitalist mode of production.  And that will require a revolutionary transformation. Tinkering with the supposed malfunctions of ‘liberal’ capitalism will not ‘save’ civilisation – in the long run.

Keynes: revolutionary or reactionary? – part one: the economics

October 14, 2018

Was Keynes a revolutionary in economic thought and policy?  Was he at least radical in his ideas?  Or was he a reactionary opposed to the interests of working people and a conservative in economic theory?  Ann Pettifor is a leading economic advisor to the British leftist Labour leaders, Jeremy Corbyn and John McDonnell.  She is director of Prime Economics, a left-wing economics consultancy and author of several books, in particular the recent The Production of Money.  And she has just won Germany’s Hannah Arendt prize for political thought – for focusing on “the political and societal impact of the current money production system, mainly operated by banks through digital lending” and as effective critic of “the global financial industry, which operates outside of the scope of political influence and democratic control”.

So Ann Pettifor is an undoubted battler against the austerity economics of the neoclassical school and a promoter of government measures to restore public services and boost the economy.  But to achieve that, she relies entirely on the theories and policies of JM Keynes and ‘Keynesianism’.  Recently she published a short article for the prestigious Times Literary Supplement, entitled The indefatigable efforts of J. M. Keynes. This is part of Footnotes to Plato, a TLS Online series appraising the works and legacies of the great thinkers and philosophers.

In this article, Pettifor compares Keynes’ theories as being as game-changing in economics as the discovery of evolution by Charles Darwin in biology.  In her view, Keynes ‘invented’ macroeconomics, the study of trends in economies at the aggregate level, escaping the stifling neoclassical obsession with microeconomics (the study of value and markets at the level of the individual unit).  She concurs with Keynes’s theory of money and his explanation of crises under capitalism as being caused by ‘hoarding’ money rather than spending it; and she praises his ‘internationalism’ in arguing for international financial institutions to control financial speculation and avoid instability in market capitalism.  She finishes with the concern that Keynes’ ideas and policies have been reneged on and rejected and there has been a return to ‘decadent’ capitalism, far removed from the golden age of the post-1945 period when Keynesian policies were applied to make capitalism work effectively for all.  She concludes with the call that “It is time to restore the revolutionary Keynes.”

Well, I beg to differ on this view of Keynes and Keynesian theories and policies.  For a start, it is inflated to suggest that Keynes’ ideas are on a par with those of Darwin.  Yes, there may be a few creationists who reckon that God designed the world and its living beings in his own image and preserved it accordingly.  But no sane person thinks this has any validity.  The evidence is overwhelming that Darwin was broadly right on the evolution of life.  But can we say that Keynes is broadly right about the laws of motion and trends in the capitalist economy?  I don’t think so – and I’ll briefly attempt to show why.

For a start, Pettifor is wrong when she says that ‘classical economics’ was microeconomics as we know it now.  The use of the term ‘classical’ used by Keynes bunched all the great early 19th century economists like Adam Smith, James Mill and David Ricardo and their grand studies of economies with the reactionary marginalist, subjectivist, equilibrium theories of the mid to late 19th century of Jevons, Senior, Bohm-Bawerk, Walrus and Mises. Keynes rejected the former while continuing to accept the microeconomics of the latter.  For the classical economists of the early 19th century capitalism, there was no distinction between the micro and the macro.  The task was to analyse the motion and trends in ‘economies’ and for that a theory of value was a necessary tool but not an end in itself.

Microeconomics became an end in itself as a way of combating the dangerous development in classical economy towards a theory of value that implied the exploitation of labour and conflicting social relations.  So the labour theory of value was replaced with the marginal utility of purchase by the consumer as a result.  ‘Political economy’ started as an analysis of the nature of capitalism on an ‘objective’ basis by the great classical economists.  But once capitalism became the dominant mode of production in the major economies and it became clear that capitalism was another form of the exploitation of labour (this time by capital), economics quickly moved to deny that reality.  Instead, mainstream economics became an apologia for capitalism, with general equilibrium replacing real competition; marginal utility replacing the labour theory of value; and Say’s law replacing crises.

Macroeconomics appears in the 20th century as a response to the failure of capitalist production – in particular, the great depression of the 1930s.  Something had to be done.  Keynes kept marginalist theory from his mentor, Alfred Marshall, but dynamically moved it beyond supply and demand among individual consumers and producers onto the aggregate. Mainstream ‘bourgeois’ economics could no longer rely on the comforting theory that marginal utility would equate with marginal productivity to deliver a general equilibrium of supply and demand and thus a harmonious and stable growth path for production, investment, incomes and employment.  The automatic equality of supply and demand, Say’s law, was now questioned.  It had to be recognised that capitalism was subject to booms and slumps, to (permanent?) disequilibria, and thus to regular crises.  And these crises had to be dealt with – to be ‘managed’.  That required macroeconomic analysis.  In a sense, bourgeois economics had to put back the economic clock to classical economics – the study of aggregate trends – but without returning to ‘political economy’, which recognised that economics was really about social structure and relations (class exploitation) and not a theory of ‘scarcity’ and ‘market prices’.

Contrary to Pettifor’s account, it only appeared that Keynesian macroeconomics had done the trick in saving capitalism.  In the ‘golden age’ of post-1948 capitalism, economic growth was strong, employment was full and incomes high.  So (macro) economics could appear to provide policies to ‘manage’ capitalism successfully.  But this was just a momentary illusion.  The golden age soon lost its glitter.  Keynesian theory and policy was exposed with the first simultaneous international recession of 1974-5 and was followed by the deep slump of 1980-2.  Remember these major collapses in production and investment internationally took place during the supposed operation of Keynesian policies of macroeconomic management, in Pettifor’s account.

Pettifor says the crises of late 20th century were the result of “the decision by public authorities the world over to abandon the regulation of credit creation and capital mobility after the 1960s and early 70s”, in other words, a lack of regulation over the reckless bankers.  But the question not answered is: why the strategists of capital dropped Keynesian-style management and control and opted for de-regulation etc if it was all working so well in the 1950s and 1960s?  The reason that pro-capitalist governments swung to monetarism and neoliberal policies was that Keynesianism had failed.  And it failed in the most important area for capitalism – in sustaining the profitability of capital.

The big change from the mid-1960s onwards up to the early 1980s was a collapse in the profitability of capital in the major economies leading to a succession of slumps in 1970, 1974 and then 1980-2.  This is what provoked capitalist theorists and policy makers to break with Keynes.  Public services, the welfare state, good wages and full employment could no longer be ‘afforded’ and, as Pettifor says, Keynesianism was seen to be “state interventionist, soft on government deficit spending.”  But all these policy reversals came after the slump of the 1970s before which finance capital was ‘regulated’, currencies were ‘managed’, trade unions had rights, the government could intervene fiscally, and there was little privatisation.  It was the failure of capitalist production and the inability of Keynesian ideas to work that caused the change in theory and policy, not vice versa.

Nevertheless, Pettifor argues, dropping Keynesianism was a mistake for the ‘powers that be’ because Keynes had all the answers to avoid crises and get capitalist economies going. You see Keynes had developed a “revolutionary theory” of money – his Liquidity Preference Theory.  This explained that crises occur when investors or holders of money do not spend it, but hoard it.  They do this for some subjective reasons – a lack of ‘animal spirits’, a loss of belief that any spending or investing will deliver sufficient return.  So a surplus of money builds up that is not spent.  The answer, claims Pettifor, is for the monetary authorities to intervene and drive down the cost of borrowing by ‘printing’ money, so that interest rates on borrowing fall below the perceived return on investing.  This will encourage money hoarders to invest.  Such policies are “still considered too radical to be acceptable today”.

In her book, The Production of Money, Pettifor tells us that “money is nothing more than a promise to pay” and that as “we’re creating money all the time by making these promises”, money is infinite and not limited in its production, so society can print as much of it as it likes in order to invest in its social choices without any detrimental economic consequences.  And through the Keynesian multiplier effect, incomes and jobs can expand.  And “it makes no difference where the government invests its money, if doing so creates employment”.  The only issue is to keep the cost of money, interest rates, as low as possible, to ensure the expansion of money (or is it credit?) to drive the capitalist economy forward.  Thus there is no need for any change in the mode of production for profit; just take control of the money machine to ensure an infinite flow of money and all will be well.

Well, capitalism is a monetary economy but it is not a money economy (alone).  Money cannot make more money if no new value is created and realized.  And that requires the employment and exploitation of labour power.  Marx said it was a fetish to think that money can create more money out of the air.  Yet this version of Keynesianism seems to think it can.  When central banks expand the money supply through printing ‘fiat’ money or creating bank reserves (deposits), more recently so-called ‘quantitative easing’, this does not expand value.  It would only do so if this money is then put to productive use in increasing the means of production or the workforce to increase output and so increase value.

But, as Marx argued way back in the 1840s against the ‘quantity theory of money’, just expanding the supply of ‘fiat’ money will not increase value and production but is more likely to inflate prices and thus devalue the national currency, and/or inflate financial asset prices.  It is the latter that has mostly happened in the recent period of money printing.  Quantitative easing has not ended the current global depression but merely sparked new financial speculation. This version of Keynesian economics is thus hardly ‘revolutionary’ or ‘radical’ at all, as it was adopted by all central banks after the Great Recession in 2008 and has failed to restore economic growth, productive investment and average incomes.

Actually, during the Great Depression of the 1930s, as it worsened, Keynes himself came to dispense with monetary solutions to the slumps and opted for fiscal stimulus and even proposed the ‘socialisation of investment’, a much more radical policy than the production of more money.  In his Treatise on Money, written in 1930 at the start of the Great Depression, Keynes argued that central banks would have to intervene with what we now call ‘unconventional monetary policies’ designed to lower the cost of borrowing and raise sufficient liquidity for investment. Just trying to get the official interest rate down would not be enough.  But by 1936 after five more years of depression (similar to the time since the Great Recession now), Keynes became less convinced that ‘unconventional monetary policies’ would work.  In his famous General Theory of Employment, Interest and Money, Keynes moved on.

Why did just the production of more money fail, according to Keynes?  The problem was that ““I am now somewhat sceptical of the success of a merely monetary policy directed towards influencing the rate of interest… since it seems likely that the fluctuations in the market estimation of the marginal efficiency of different types of capital, calculated on the principles I have described above, will be too great to be offset by any practicable changes in the rate of interest”.  And so Keynes moved on to advocating fiscal spending and state intervention to complement or pump-prime failing business investment.  Pettifor has latched onto that part of Keynesian macro theory and policy, monetary easing, to the neglect of fiscal stimulus, let alone the more radical policy of the ‘socialisation of investment’ (not even mentioned by Pettifor).  Thus Pettifor’s account of Keynes’s economics is at his least ‘revolutionary’.

Part Two to follow: Was Keynes a revolutionary internationalist or reactionary nationalist?

Climate change and growth – Nordhaus and Romer

October 9, 2018

It is both appropriate and Ironic that, on the day that William Nordhaus should get the Riksbank prize (also called Nobel) for his contribution to the economics of climate change, the top scientific body, the Intergovernmental Panel on Climate Change (IPCC), should release its latest update on global warming.  The report sets out the key practical differences between the Paris agreement’s two contrasting goals: to limit the increase of human-induced global warming to well below 2℃, and to “pursue efforts” to limit warming to 1.5℃.

The IPCC says that if we are to limit warming to 1.5℃, we must reduce carbon dioxide emissions by 45% by 2030, reaching near-zero by around 2050. Whether we are successful primarily depends on the rate at which government and non-state bodies take action to reduce emissions. Yet despite the urgency, current national pledges under the Paris Agreement are not enough to remain within a 3℃ temperature limit, let alone 1.5℃.

Rapid action is essential and the next ten years will be crucial. In 2017, global warming breached 1℃. If the planet continues to warm at the current rate of 0.2℃ per decade, we will reach 1.5℃ of warming around 2040. At current emissions rates, within the next 10 to 14 years there is a 2/3 chance we will have used up our entire carbon budget for keeping to 1.5C.  Global emissions of carbon dioxide, methane and other greenhouse gases need to reach net zero globally by around 2050. By 2050, 70-85% of electricity globally will need to be supplied by renewables. Investment in low-carbon and energy-efficient technologies will need to double, whereas investment in fossil-fuel extraction will need to decrease by around a quarter.

Although the Paris Agreement aims to hold global warming as close to 1.5℃ as possible, that doesn’t mean it is a “safe” level. Communities and ecosystems around the world have already suffered significant impacts from the 1℃ of warming so far, and the effects at 1.5℃ will be harsher still. Poverty and disadvantages will increase as temperatures rise to 1.5℃. Small island states, deltas and low-lying coasts are particularly vulnerable, with increased risk of flooding, and threats to freshwater supplies, infrastructure, and livelihoods.

Warming to 1.5℃ also poses a risk to global economic growth, with the tropics and southern subtropics potentially being hit hardest. Extreme weather events such as floods, heatwaves, and droughts will become more frequent, severe, and widespread, with attendant costs in terms of health care, infrastructure, and disaster response.

This is where William Nordhaus, a professor of economics at Yale University, comes in.  He pioneered the economic analysis of climate change. He is also a leading proponent of the use of carbon taxation to reduce emissions, a policy approach preferred by many mainstream economists.  Nordhaus’ contribution was to develop a model that could supposedly gauge the likely impact on economies from climate change.  Nordhaus constructed so-called integrated assessment models (IAMs) to estimate the social cost of carbon (SCC) and evaluate alternative abatement policies.

And this is where it becomes ironic.  Nordhaus’ IAMs have flaws that make them close to useless as tools for policy analysis. The IPCC pointed out  that estimates of losses resulting from a 2 °C increase in mean global temperature above pre-industrial levels ranged from 0.2% to 2% of global gross domestic product.  It admitted that the global economic impacts are “difficult to estimate” and that attempts depend on a large number of “disputable” assumptions. Moreover, many estimates do not account for factors such as catastrophic changes and tipping points ie where global warming gets out of control and damages economies much more quickly and deeper than forecast.

Most IAMs struggle to incorporate the scale of the scientific risks, such as the thawing of permafrost, release of methane, and other potential tipping points. Furthermore, many of the largest potential impacts are omitted, such as widespread conflict as a result of large-scale human migration to escape the worst-affected areas.

IAMs are also used to calculate the social cost of carbon (SCC). They attempt to model the incremental change in, or damage to, global economic output resulting from 1 tonne of anthropogenic carbon dioxide emissions or equivalent. These SCC estimates are used by policymakers in cost–benefit analyses of climate-change-mitigation policies.

Because the IAMs omit so many of the big risks, SCC estimates are often way too low. As the IPCC acknowledged2, published SCC estimates “lie between a few dollars and several hundreds of dollars”. These values often depend crucially on the ‘discounting’ used to translate future costs to current dollars. The high discount rates that predominate essentially assume that benefits to people in the future are much less important than benefits today.

These discount rates are central to any discussion. Most current models of climate-change impacts make two flawed assumptions: that people will be much wealthier in the future and that lives in the future are less important than lives now. The former assumption ignores the great risks of severe damage and disruption to livelihoods from climate change. The latter assumption is ‘discrimination by date of birth’. It is a value judgement that is rarely scrutinized, difficult to defend and in conflict with most moral codes.

The other role of IAMs — to estimate the costs of climate-change mitigation — also suffers from major shortcomings. The IPCC’s mitigation assessment concluded from its review of IAM outputs that the reduction in emissions needed to provide a 66% chance of achieving the 2°C goal would cut overall global consumption by between 2.9% and 11.4% in 2100. This was measured relative to a ‘business as usual’ scenario. But growth itself can be derailed by climate change from business-as-usual emissions. So the business-as-usual baseline, against which costs of action are measured, conveys a misleading message to policymakers that fossil fuels can be consumed in ever greater quantities without any negative consequences to growth itself.

The discount rate used to calculate the likely monetary damage to economies is arbitrary.  If we use a 3% discount rate, that means the current rise in global warming would lead to $5trn of economic damage (loss of GDP), but the cost in current money of global warming would be no more than $400bn, about what China spends on hi-speed rail.  So, on this discount rate, global warming causes little economic damage and thus the social cost of carbon (SCC) is only about $10/ton, so mitigation action can be limited.  This is what Nordhaus uses in his model.

But why 3%?  Nicholas Stern, of the famous Stern Review on climate change, took Nordhaus’ data and applied a 1.4% discount rate.  The SCC then rises to $85/ton – meaning that it costs economies $85 for every ton of Co2, or closer to $3trn now!  If you take a median range discount rate on likely damage, the SCC is probably about $50/t.  But the current carbon price is about $25/t.  So the social cost is not being ‘internalised’ in any market prices.

The argument about the discount rate exposes the argument about the future.  The IAMs assume that the world economy will have a much larger GDP in 50 years so that even if carbon emissions rise as the IPCC predicts, governments can defer the cost of mitigation to the future.  And if you apply stringent carbon abatement measures eg ending all coal production, you might lower growth rates and incomes and so make it more difficult to mitigate in the future.  Yes, that is what Nordhaus’ IAMs can lead us to conclude.

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

And IAMs also exclude the feedback – namely that global warming leads to more natural disasters, droughts and floods and thus to massive disruption and migration of affected populations and thus a sharp reduction in GDP growth rates.  The world will not be much ‘richer’ in the next generation if global warming goes unchecked. Finally, as with all these neoclassical growth accounting models of which the IAM of Nordhaus is one, there is no allowance for recurring crises of production in capitalism or rising inequality of income and wealth.

Growth accounting is the mainstream version of explaining long-term economic growth.  Neoclassical theory assumes perfect competition and free markets and it assumes what it should prove that capitalist economic expansion will be harmonious and without crises as long as markets are free and competition is operating.

Applying these microeconomic assumptions to long-term growth was the province of factor productivity models, originating with Solow and Swan in 1956.  Based on marginal utility theory, each factor of production (capital and labour) contributed to growth according to its marginal productivity.  The problem with this factor accounting model was two-fold.

First, the nature of ‘capital’ could not be defined or measured – what was it: numbers of different machines or the present value of the interest rate for borrowing ‘capital’?  This led to the so-called Cambridge controversy, where the neoclassical school was confounded by those who showed that you needed a common measure of value (labour?), otherwise the definition of capital was circular (namely its marginal productivity was the rate of interest on borrowing, but the amount of capital was the present value of the rate of interest!).

The second problem was that adding up the marginal contributions of capital and labour factors to GDP growth would lead a ‘residual’; which was designated as ‘technical innovation’, the productivity growth of all the factors.  This appeared to be ‘exogenous’ i.e. from outside the market system of marginal productivity.  Mainstream economics had no explanation for technological innovation!

This is where the contribution of Paul Romer comes in.  He developed an “endogenous growth model”, where long-run economic growth is determined by forces that are internal to the economic system, namely the ‘knowledge’ incorporated in the workforce of an economy. Technological progress takes place through innovations, in the form of new products, processes and markets, many of which are the result of economic activities. Thus there are constant or increasing returns to factors, not diminishing marginal ones.  This theory became popular with many reformist economists and politicians – apparently, former adviser and minister in the British Gordon Brown Labour government, Ed Balls, was a keen promoter.

Actually Romer was not the first to come up with this ‘endogenous’ model.  That honour goes to the recently deceased Kenneth Arrow, the doyen of neoclassical economics.  Arrow recognised what any fool could see: that supply was affected by demand but also demand was affected by supply.  Innovation did not come out of the sky but from the drive of companies to grow (or in the case of Marxist theory, to make more profit and reduce labour costs). Of course, the mainstream version of growth theory did not consider profitability relevant to innovation but instead looked at aggregate output.

However, the endogenous model is little better (and may be even worse) than the exogenous model in explaining and accounting for long-term growth in economies.  Romer argues that the explanation for why some countries grow faster and get richer than others is not more investment in machines, or more labour power and skills; but more ‘ideas’. Whereas the old exogenous model predicted that growth would slow as new investment in skills and capital yielded diminishing returns, Romer’s New Growth Theory opened the window onto a sunnier world view: a larger number of affluent people means more ideas, so prosperity and population expansion might cause growth to speed up.

This is nonsense, of course.  Capitalism does not work like that.  ‘Ideas’ or innovations become the property of individual capitalist companies; IPRs, patents etc are applied.  The general distribution of innovation only takes place through the rough and tumble of competition and the battle for profit and market share.  Innovation under capitalism depends on profitability and if that is low or not there, or to be given to all, then it won’t be applied. As one critic has pointed out, Romer was very much a profit-making ‘entrepreneur’ himself, having founded and sold on an online economic teaching company – so no open spillover of ‘ideas’ there.

In a way, Romer recognises market forces and argues that governments need to intervene to foster technological innovation, for example, by investing in research and development and by writing patent laws that provided sufficient rewards for new ideas without letting inventors permanently monopolize those rewards.  Thus we must correct and manage the competitive struggle.

Romer is a professor of economics at New York University, but recently he became chief economist at the World Bank for a short and chequered period.  It was a surprising appointment for an organisation that is supposed to help poor countries end their poverty.  That’s because one of the conclusions that Romer took from his endogenous model of ‘knowledge’ was that developing countries would benefit from creating pockets within urban areas that are administered by a more advanced country, so-called ‘charter cities’. The advanced country would develop a small part of the country by introducing ‘good institutions’ and the benefits of development will spill over into the rest of the economy.

Romer’s ideal example was Hong Kong. Rather than seeing Hong Kong’s signing away to Britain as unjust or humiliating for China, Romer saw it as an ‘intervention’ that has done much more to reduce poverty than any aid program and at a much lower cost. Therefore, he concludes that the world needs more Hong Kongs.  The whole approach is that a country would gain from giving up sovereignty to a more advanced nation that can better administer its affairs.

But has China’s phenomenal growth over the last 40 years, taking 800m people out of World Bank-defined poverty, needed ‘charter cities’ and ‘knowledge’ kindly administered by ‘advanced ‘ economies like the US.  Indeed, keeping imperialism out of China is part of the reason for China’s growth success.  Romer actually persuaded the government of Madagascar to apply his development plan.  It led to massive popular uprisings against the President after he agreed to lease a part of Madagascar to a South Korean corporation for 99 years!

Both the long-term growth models of Nordhaus and Romer rest on neoclassical free market theory.  As Ben Fine pointed out nearly 20 years ago in his analysis of endogenous growth theory, it has “nothing to do as such with an economy as a whole, other than in the trivial sense of requiring at least two economic agents in order for exchange to arise. Indeed, often implicitly and sometimes explicitly, the literature takes a microeconomic theory and simply interprets it as macroeconomics…In short, endogenous growth theory is heavily implicated in the traditional and strengthening microeconomic foundations of neoclassical economics.” Romer himself has recognised the failure of mainstream economics in his paper The trouble with macroeconomics, In that paper he goes on to trash all macroeconomic models for being unrealistic in their assumptions.

Both Nordhaus and Romer start with neoclassical theory and apply it to analyse long-term growth.  Their contributions are therefore stunted for that reason.  Factor of production models do not explain growth – they leave ‘residuals’ and they cannot account for the nature of ‘capital’ – it’s either just things (machines) or accumulated interest.  And there is no connection between these models of growth and the reality of capitalist accumulation for profit and the recurring crises in investment and production in capitalist expansion.

Nordhaus and Romer are aware of these contradictions at the heart of capitalism. They know that ‘free markets’ bring pollution and global warming; and ‘markets’ will block innovation if left alone. But their answer is to manage capitalism and try to persuade governments to do so. As the world gets hotter faster, and growth gets slower, good luck with that.

Regulation does not work

October 6, 2018

There is one big lesson from the Danske Bank money laundering scandal.  Regulating the modern banking system does not work.  Modern banks are now primarily giant hedge fund managers speculating on financial assets or they are conduits for tax avoidance havens for the top 1% and the multi-nationals.

The Danske Bank scandal is the latest and largest example of these modern banking activities.  Over $235bn in ‘special transactions’ flowed through the bank’s tiny Estonian branch in just four years from 2012 – an amount that dwarfs the Baltic nation’s GDP.  And this was in the period when international bank regulation had been tightened up, according to the IMF and the Bank for International Settlements, after the ‘reckless’ behaviour before the global financial crash.

Indeed, it was probably not just Danske Bank, but according to the Estonian central bank, the supposed regulator, Estonian banks handled about 900 billion euros, or $1.04 trillion in cross-border transactions between 2008 and 2015. The notion that these foreign individuals and investors would choose to run such a large sum of their money through Estonia for explicitly legitimate purposes is difficult to swallow.  After all, this comes after the liquidation of ABLV, formerly the third largest bank in Latvia, after it was caught laundering money for North Korea.

John Horan, senior associate at Maze Investigation, Compliance and Training Ltd. in Belfast, says money laundering is a Europe-wide problem. dark money will almost certainly continue to flow through the European banking system like sand through a sieve.”  It’s a never-ending story.

Indeed, that’s not all.  The very latest scandal concerns the siphoning of over $2bn of Danish tax revenues through a scam involving claiming back tax paid by foreigners on Danish shares.  It appears that these foreigners never owned any shares or paid tax on them and yet they were able to get ‘refunds’ through the connivance or negligence of Danish government employees and small European banks shifted the money – and nobody has been charged or resigned over this massive loss of taxpayer money – equivalent to $110bn in US tax revenues.

The regulators have been useless in stopping these criminal tax avoidance schemes by the banks.  For example, Carol Sergeant was a regulator at the UK Financial Supervisory Authority and headed up supervision of the banks at the Bank of England.  She got an honour from the Queen for “services to financial regulation”.  She joined Lloyds Bank in 2010 and received bonuses which Lloyds are now asking back as she (among others) presided over the payment protection insurance (PPI) scandal for which Lloyds must pay now £18bn in compensation.  But guess where she works now?  Yes, it’s as non-executive director of Danske Bank, where her responsibilities include making sure that the bank operated under regulations!

Nevertheless, in its latest Global Financial Stability report, the IMF claims that “a decade after the global financial crisis, much progress has been made in reforming the global financial rulebook. The broad agenda set by the international community has given rise to new standards that have contributed to a more resilient financial system—one that is less leveraged, more liquid, and better supervised.”

Well, it may be true that international banks are better capitalised and less leveraged with bad debts after the gradual implementation of the Basel III capital and liquidity accords and the widespread adoption of ‘stress testing’, but even that can be disputed.  In 85% of those 24 countries that experienced the banking crisis in 2007-8, national output growth today remains below its pre-crisis trend.  And the IMF admits that “in many countries, systemic risks associated with new forms of shadow banking and market-based finance outside the prudential regulatory perimeter, such as asset managers, may be accumulating and could lead to renewed spillover effects on banks”.

The ‘official’ view that regulation is the only way to control the banks is accepted by most Keynesians or those who see the financial sector as the only enemy of labour.  Take Nick Shaxson.  Shaxson wrote a compelling book Treasure Islands, tax havens and the men who stole the world, that exposed the workings of all the global tax avoidance schemes and how banks promoted tax havens and tax avoidance for their rich clients.

And more recently, he has done a new piece of research that argues that not only does the City of London and the UK financial sector operate to help tax avoidance and money laundering, it does not provide credit for productive investment. Indeed, “research increasingly shows that all the money swirling around our oversized financial sector may actually be making us collectively poorer. As Britain’s economy has steadily become re-engineered towards serving finance, other parts of the economy have struggled to survive in its shadow.”

Shaxson goes on: “Long ago, our oversized financial sector began turning away from supporting the creation of wealth, and towards extracting it from other parts of the economy. To achieve this, it shapes laws, rules, thinktanks and even our culture so that they support it. The outcomes include lower economic growth, steeper inequality, distorted markets, spreading crime, deeper corruption, the hollowing-out of alternative economic sectors and more.” So what are we to about these criminals at the centre of our economies, according to Shaxson? “We can tax, regulate and police our financial sector as we ought to.” So it’s regulation again – a policy that Danske and other scandals have proven not to work.

Then take Joseph Stiglitz, Nobel prize winner in economics, tireless campaigner against the finance sector and its iniquitous role, and (once again) adviser to the British Labour Party.  Just after the global financial crash, Stiglitz wrote a book, Freefall, about the bursting of the housing bubble and the ensuing massive defaults on mortgages that triggered the financial meltdown of 2008–09.  It was based on his study he had done for the UN, published as The Stiglitz Report, on the financial crisis, which declared: “Governments, deluded by market fundamentalism, forgot the lessons of both economic theory and historical experience which note that if the financial sector is to perform its critical role, there must be adequate regulation.”  

Stiglitz proposed that future meltdowns could be prevented by empowering incorruptible regulators, who are smart enough to do the right thing. “[E]ffective regulation requires regulators who believe in it,” he wrote. “They should be chosen from among those who might be hurt by a failure of regulation, not from those who benefit from it.” Where can these impartial advisors be found? His answer: “Unions, nongovernmental organizations (NGOs), and universities.” But all the regulatory agencies that failed in 2008 and are failing now are already well staffed with economists boasting credentials of just this sort, yet they still managed to get things wrong.

In a 2011 book, Engineering the Financial Crisis: Systemic Risk and the Failure of Regulation, Jeffrey Friedman and Wladimir Kraus contested Stiglitz’s claim that regulations could have prevented the disaster, if implemented by the right people. Friedman and Kraus observe: “Virtually all decision-making personnel at the Federal Reserve, the FDIC, and so on, are . . . university-trained economists.” The authors argue that Stiglitz’s mistake is “consistently to downplay the possibility of human error—that is, to deny that human beings (or at least uncorrupt human beings such as himself) are fallible.”  But note that Friedman and Kraus were no better in coming up with a solution.  They argued for less regulation – free market style!

More recently, David Kane at the New Institute for Economic Thinking has shown that banks have managed to avoid most attempts to regulate them since the global crash as “the instruments assigned to this task are too weak to work for long. With the connivance of regulators, US megabanks are already re-establishing their ability to use dividends and stock buybacks to rebuild their leverage back to dangerous levels.”

Kane notes that “top regulators seem to believe that an important part of their job is to convince taxpayers that the next crash can be contained within the financial sector and won’t be allowed to hurt ordinary citizens in the ways that previous crises have.”  But “these rosy claims are bullsh*t.”  Kane wants criminal bankers locked up, not the banks just fined.

Regulatory reform since the global financial meltdown has not brought under control the criminal and reckless unproductive activities of modern banking.  Even the IMF quietly admits this in its latest GFS report: “As the financial system continues to evolve and new threats to financial stability emerge, regulators and supervisors should remain attentive to risks… no regulatory framework can reduce the probability of a crisis to zero, so regulators need to remain humble. Recent developments documented in the chapter show that risks can migrate to new areas, and regulators and supervisors must remain vigilant to this evolution.”

Indeed!  As Gabriel Zucman  and Thomas Wright have shown in a meticulous and in-depth analysis of the size and extent of tax havens and tax avoidance, far from them being reduced or controlled, on the contrary, such schemes are an increasing part of US corporate profits, organised and transacted by the banks.

About half of all the foreign profits of US multinationals are booked in tax havens with Ireland topping the charts as the favourite (Irish tax rate just 5.7%). And the benefits for the increase in profits have gone to shareholders, the Zucman and Wright showed. “Ireland solidifies its position as the #1 tax haven,” Zucman said on Twitter. “US firms book more profits in Ireland than in China, Japan, Germany, France & Mexico combined.”  

Zucman and Wright also show that the rate of return (or profit) on US multi-national investments abroad has not risen, indeed the rate has slipped.  But thanks to favourable tax regimes (including the latest Trump measures) and the availability of tax havens like Ireland, after-tax profitability has jumped.

So those who think that ‘regulating’ the banks and tax evasion using ‘regulators’ will work are expecting pigs to rev up their jet engines for flight.

I have posted before on Stiglitz’s views as expressed in his book,“We can’t leave to market forces to solve the problems by themselves”, concluded Stiglitz, so we must rewrite the rules of the game.  But he admitted that his rule changes were unlikely to see the light of day. Changing the rules or regulation of the banks won’t work; we need ownership and control.

The business perspective: trade, debt and recession

October 3, 2018

Jerome Powell, the Trump-appointed Chair of the US Federal Reserve, spoke to the National Association of Business Economists (NABE)  yesterday.  He told the assembled mainstream economists who work for big business in the US that the US economy is strong, with unemployment near 50-year lows and inflation roughly at the Fed’s 2% rate objective.  So the Fed was going to continue to ‘normalise’ monetary policy by raising gradually its policy rate over the next year or so.

The NABE held its conference in New York at the same time as the Union of Radical Political Economy (URPE) was holding their 50th anniversary conference in Massachusetts.  I have already reported on some of issues that URPE participants discussed. But it is interesting to compare what mainstream business economists thought were the key issues to consider.

First and foremost was the issue of trade.  Was Trump’s protectionist ‘trade war’ with America’s trading ‘partners’ (rivals?) going to lead to disaster for the US economy?  The keynote speaker was Dani Rodrik, Ford Foundation Professor of International Political Economy, Harvard Kennedy School and author of, Straight Talk on Trade: Ideas for a Sane World Economy.  Rodrik was an interesting choice because he has been prominent in arguing that ‘free trade’ is not always the most optimal and best policy for national capitalist governments to promote.  With free trade, not everybody is a winner and many are losers.

Rodrik made this argument at last year’s mainstream conference of the American Economic Association (ASSA).  It seems that, since the Great Recession and the slowdown in world trade growth, ‘free trade’ and globalisation are now being questioned as the only way forward for American capital.  Big business economists are looking for an alternative economic theory to back protectionist policies.  So there were several sessions on this issue dealing with NAFTA and the impact of protection on manufacturing.

Other subjects discussed at NABE included behavourial economics (rising again as a possible alternative to the failure of neoclassical equilibrium theory); climate change and global warming; the property, transport and retail markets.

There was considerable concern about rising debt post the Great Recession, both globally and within the US.  One session was entitled, Corporate Debt, Student Loans, Auto Loans, or EM: Which is the Next Subprime?, Lund in which Susan Lund from McKinsey reiterated the consultancy’s research on global debt, pointing to rising corporate debt as the real worry for the next crash – something that I have also focused on.

Carmen Reinhart, the well-known (even infamous) debt historian, pointed out that the level of debt to GDP was just as high as in the last crisis but the amount of defaults by governments or corporation was much lower.  Maybe this was due to low interest rates on debt, better macro-management by governments and central banks or just mis-measurement of the impending bust – who knows?, said Reinhart! Reinhart

Some presentations considered the problem of low productivity growth in this Long Depression since the end of the Great Recession.  Could the digital and ‘knowledge’ based sectors of the economy turn things round to sustain growth? Many were confident that US capitalism would take advantage of new technologies to restore productivity growth to near previous levels.

But probably the key issue that NABE participants considered was whether there would be a new slump in the US economy or would the second-longest (if weakest) expansion in post-1945 US real GDP after a slump continue?  The NABE took a survey of its members on whether and when there would be a new recession.  Over 60% of NABE economists reckoned there would be no recession until the end of 2020 at the earliest and one-third ruled it out for the foreseeable future.  Only 10% thought there would be a slump in 2019. Swift – NABE Outlook

This optimism clashed with some of the presentations at NABE on the likelihood of a new recession.  The director of the National Bureau of Economic Research (NBER) , which is the very body that counts up the number of recessions in the US historically, concluded from an analysis of ‘business cycles’ since the 1960s that the US economy was suffering from slowing trend growth and if the growth rate drops to around 1.5%, then it increases the likelihood of recession to nearly 50%. Stock

In another session, the NABE’s own in-house economists considered what was the best indicator of an upcoming recession. They rejected the most commonly referenced monetary indicator, namely the so-called inverted yield curve (where the short-term interest rate (3m) rises above the long-term rate (10yr).  Instead, they found a much more reliable indicator.  It was the ‘threshold’ between the fed funds rate (FFR) and the 10-year Treasury yield (10-year). Whenever “in a rising fed funds rate period, the fed funds rate crosses or touches the lowest level of the 10-year bond yield in that cycle, then that is a predictor of an upcoming recession.”  This indicator apparently has predicted all US economic recessions since 1954, “with an average lead time of 17 months and a range of 6-34 months.” Iqbal

With the December 2017 rate hike by the FOMC, the fed funds rate hit 1.50% and, hence, this FFR/10-year threshold was met (the cycle low for the 10-year bond yield is 1.36%). This suggests that, starting in December 2017, there is a 69.2% chance of a recession during the next 17 months (average lead time). They also found that the cumulative effect of Trump’s tax cuts on this recession call was insignificant. Bu, higher tariffs and a trade war could speed up a recession.

So it’s a near 70% chance on this indicator that there will be a new slump in the US by summer 2019.  That’s much higher risk than the NABE members think.

50 years of radical political economy

October 2, 2018

The 50th anniversary conference of the Union of Radical Political Economy (URPE) finished last weekend.  URPE has played an important role in developing and enhancing alternative economic theory and analysis to the dominant mainstream theories in modern economics.  It has survived despite the long reaction in economics during the ‘neo-liberal’ era that we have been subjected to since the 1980s – where even the so-called ‘progressive’ economics of Keynesians was submerged under the general equilibrium, ‘free market’ economics of the neoclassical mainstream.

I was unable to attend to conference held at the University of Massachusetts, Amherst, so my comments on proceedings will be solely based on some of the papers presented that I have obtained and also from some of the comments on the sessions by participants. This is obviously inadequate but I think it is still worth doing if only to publicise the role of URPE and to let readers of my blog know the sort of issues being debated.

There were many themes at the conference: social reproduction theory; labor economics; crisis theory; environmental economics; alternative economic systems post-capitalism; international economics; broad issues in Marxist political economy and of course, China.  But as is my wont, I shall concentrate on the themes that interest me most.

There was the usual heterodox mixture of the Marxist approach, alongside post-Keynesian/’financialisation’ schema, as well as some support for the contribution of the neo-Ricardian views of Piero Sraffa.  URPE is radical political economy, not just Marxist.

In political economy, this means there was some discussion about whether Keynesian theory had anything to offer to Marxist economics.  Readers of this blog know well that I do not consider Keynesian theory as a complement to Marxist economics – indeed, on the contrary I view it as part of mainstream bourgeois economics being applied to macro-managing slumps in capitalist production.

Deekpankar Basu (UMass) presented a paper entitled “Does Marxist Economics need Keynesian Insight?” and his short answer was apparently: no. Simply put, Keynesian theory looks to the failure of aggregate demand for the explanation of crises; neoclassical theory looks to ‘shocks’ to the smooth running of production (supply); but Marx looks to the profitability of capital for the faultlines in capitalist production.   Basu’s analysis was backed up by a panel on Marxist political economy which one participant reckoned showed that “the key advantage of Marxist analysis is it theorises profit, which mainstream economic models pretend doesn’t exist – despite overwhelming evidence (from the mainstream) that it does.”

Nevertheless, Peter Skott, also at Amherst, did present a post-Keynesian analysis on the relationship between capitalist accumulation and employment in his paper “Post-Keynesian growth theory and the reserve army of labor”.  I cannot comment on this paper, but I refer you another of Skott’s which deals with the challenges facing post-Keynesian analysis of modern economies.

On the Marxist front, there were several papers on recent developments in theory.  Hyun Woon Park (Denison University) took what he considers are puzzling inconsistencies in use of MELT (the monetary equivalent of labour time, a tool used to analyse trends in capitalism with Marxist categories)(Park and Rieu. 2018). Park was concerned that if Marxist theory says that unproductive sectors like finance, real estate, merchanting etc do not produce value but merely redistribute value created in productive sectors, does it have any role in capitalism?  If it plays the role of helping to make the productive sector more efficient, can we talk about an ‘optimal’ size for the sector?  He concludes (as far as I can tell from his paper) that there is no ‘optimal’ size where the unproductive sector helps rather than detracts from capital accumulation in the productive sector in modern economies.  I’m not sure what we should conclude from this.

Sraffian economics was also discussed at URPE.  This school is based on the approach of Piero Sraffa, who also argued that the real contradiction in capitalism was not the tendency for profitability to fall, but the class battle between profits and wages.  At least this is what I think we can conclude from the Sraffa’s theoretical model, based on the classical political economy of David Ricardo.  Bill McColloch of Keene State college, presented a paper “On Sraffa and the History of Economic Thought;”, which was kindly posted on the Naked Keynesianism website.

According to McColloch, “In Sraffa’s mind Marx’s great victory was to have rediscovered the essential meaning of the classical system in an era in which it was increasingly lost to all observers” namely “that capitalism rest upon exploitation, an exploitation of human beings and of nature, and that is remains the task of economics today to speak to this reality and its consequences. Whether Marx’s own proof of exploitation can be shown to be true is perhaps of negligible importance.”.. McCulloch asks “if Sraffa was ‘really’ a Marxist? I would suggest not”.  But apparently that does not matter because both Sraffa and Marx saw economic theory as both ‘sociological and institutional’ and not bound by ‘technique’ as in the neoclassical.  Well, I find it hardly “negligible” whether Marx’s theory of exploitation is true or not.  There is now a whole literature backing up Marx’s theory why profit only comes from exploitation of labour and nowhere else – while Sraffa’s theory is full of holes on that point, among others.  For a more thorough critique of Sraffian economics, see Fred Moseley’s book, Money and Totality

Marx’s theory of exploitation is important because, at URPE, the arguments of post-Keynesian and financialisation theorists were presented again.  Fletcher Baragar of the University of Manitoba has argued that the financial crash and Great Recession were the result of increased ‘financialisation’, as expressed through rising household debt that eventually led to the housing bust.  Financialisation had created ‘two forms of profit’, one the traditional exploitation of labour in production and the other, the exploitation of households by the financial sector. (Baragar, Fletcher. 2015. “Crises of Disproportionality and the Crisis of 2007.- 2009.”).

I have disputed the argument before that there are two sources of profit (profit of exploitation and profit of alienation) under modern capitalism (see my book, Marx 200).  And I have also extensively rejected the view  that it was ‘excessive’ household debt that caused the crisis of 2008.  The first is a distortion of Marx’s value theory and the second is no more than a mainstream explanation based on debt alone.

On my blog, I have posted several times on the financialisation theme.  Recently, Mavroudeas & Papadatos have criticised the whole financialisation hypothesis on five counts.  The Financialisation Hypothesis and Marxism: a positive contribution or a Trojan Horse?’ – S.Mavroudeas, 2nd World Congress on Marxism, Peking University, 5-6 May 2018.

The most important questions for me are these: 1) if financialisation was the cause of the Great Recession, what about crises even as late as 1980 when finance was not such a large part of the economy or non-financial companies had not become financial?;  2) has finance completely separated from what happens in the productive sectors where value is created?; 3) so is finance the class enemy while ‘productive’ capitalism and workers are allies?; 4) are all crises are the result of ‘financial instability’, subject to Minsky moments and the underlying profitability of capital is irrelevant?  If they are, does this mean we just need to control the financial institutions and can leave the non-financial sector of capitalism alone?  Do we control the investment decisions of JP Morgan but not those of Amazon of Boeing?

Imperialism has become a hot topic among Marxists in the recent period with ‘globalisation’, the rise of multi-nationals operating in the so-called emerging economies; and the centralisation of finance in the US and Europe.  There is a running debate on how imperialism operates and who is exploiting whom (Harvey versus Smith) that URPE has followed.  And there were some very incisive papers on this at the conference that show light on the debate from Marx’s value theory.  I can only refer to Depankur Basu’s superb and precise account of Marx’s theory of ground rent and Hao Qi (Renmin University) on Marx’s theory of absolute rent, both of which can be applied to the issue of imperialism.  Ramaa Vasudevan (Colorado State university) also moved into this territory.  Marx_s Analysis of Ground-Rent_ Theory Examples and ApplicationsA Model of the Marxist Rent Theory

Finally, there is what happens if and when capitalism is overthrown globally.  What are the economic outlines and categories for a communist society?  Can we go beyond the prescriptions that Marx offered in the Critique of the Gotha Programme?  A panel composed of Seongjin Jeong (Gyeongsang National University, Korea), Richard Westra, Al Campbell and Ann Davis took this up at a session on an ‘alternative economic system for the 21st century’.

Al Campbell (emeritus professor at Utah) has offered some pioneering work in this area. And Seongjin Jeong’s paper on the faultlines of Soviet planning was revealing.  Two things here: first that the most important development under an economy moving towards communism is raising the productive forces to levels that quickly enable goods and services to be provided free at the point of consumption (ie transport, education, health, energy, basic foodstuffs etc).  But that could not be applied for some time for all goods and services, so there would have to be planned production and distribution.

Jeong argues that such planning should be based on labour time calculation.  But the Soviet economy of 1917–91 was not a labour-time planned economy. Although input-output tables are essential to the calculation of the total labour time needed to produce goods and services and were available to Soviet planners, they never seriously considered using them and instead depended on material balances.  However, with the development of AI, algorithms, big data and quantum power, such planning by labour time calculation is clearly feasible.  Communism will work. SovietPlanningLTC_Seongjin_URPE20180928. 

Back to normality?

September 28, 2018

US real GDP growth for the second quarter of 2018 was confirmed at an annual rate of 4.2%.  And that means US real GDP is 2.9% higher than one year ago. The ‘annualised’ rate was the highest since the third quarter of 2014.  Similarly the year on year rate is the highest since 2014. But not the highest rate in history – as President Trump claims!

But it does show a relative recovery from the near recession rates of 2016.

But as I have mentioned before in previous posts, the underlying story is not so sanguine.  First, the 4% ‘annualised’ growth rate is really dependent on some one-off factors that will soon turn into their opposites.  US net exports was a big factor in the 4% rate and this was mainly due to the rush by China to buy up American soybeans before tariffs on US exports took effect in retaliation to Trump’s trade war with China.

Second, growth has been jacked up by Trump’s huge tax cuts for corporations on their profits.  While pre-tax profits for the major corporations have risen a little, it is post-tax profits where there has been a bonanza.  According to a recent report by Zion Research, for the top 500 US companies, 49% of their 2018 profits were due to the Trump tax cuts. For some sectors, like the telephone companies, it was 152% of 2018 profits ie from loss to profit.

Nevertheless, mainstream economics seems generally convinced that the US is out of its Long Depression of the last ten years and is now motoring ‘normally’.  The official unemployment rate is at all-time lows, wages are beginning to rise a little and inflation has ticked up marginally.

So the US Federal Reserve decided to push up its policy interest rate for the eighth time since 2015 to reach 2.25%.  The rate is used to set credit card, mortgage and loan rates and will trigger rises across the board for consumers and businesses. In a statement the Fed signalled more rate hikes were imminent. “The committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2% objective over the medium term. Risks to the economic outlook appear roughly balanced,”   So the Fed seeks to ‘normalise’ rates in line with the ‘normal’ growth of the US economy and reckons its economic forecasts are about right.

But as I pointed out in a previous post, if the Fed is wrong and the productive sectors of the US economy do not resume ‘normal growth’ (the average real GDP growth rate since 1945 has been 3.3% – so growth is not back there yet), the rising costs of servicing corporate and consumer debt could lead to a new downturn.

The key factor for growth is investment by the capitalist sector.  And what decides the level of that investment in the last analysis is not the level or cost of debt but the profitability of any investment.  Business investment has made a modest recovery in the last few quarters, driven by the 16% rise in corporate profits after tax.  But the bulk of this profits bonanza for US corporates in 2018 has been used to pay higher dividends to shareholders and buying back company shares to boost the share price, not in productive investment.  And within productive investment, most has gone into the oil industry and into ‘intellectual property’ (software etc).  Investment in equipment and new structures in other businesses has been very modest.

Moreover, non-financial corporate profits are still below levels of 2014, even after Trump’s boost.

And in the productive sectors of the economy, like manufacturing, they are falling quite sharply – as measured per employee.

At the other end of the economy, average incomes for American families are making little progress.  In an excellent post, Jack Rasmus of the American Green Party showed that for non-supervisory workers (non-managers) who are the bulk of the American workforce (133m out of 162m), real incomes are falling not rising, while the burden of consumer debt is rising. When Trump announced his corporate tax cuts, he claimed that this would allow companies to increase wages from their increased profits.  This, of course, has turned out to be nonsense. There has been very little increase in private sector wage compensation since the end of 2017.

And it is only in the US that we can talk about ‘recovery’ or ‘normal’ growth.  Everywhere else hopes of a return to pre-crisis growth rates seem dashed.  In the Eurozone, growth has slipped back to around 2% a year, still one-third below pre-crisis rates.

In Japan, it’s back at 1%.  China too is ‘struggling’ to stay above 6% a year.

As the OECD put it in its latest interim report on the global economy: “Global growth is peaking; the trade war is beginning to bite; investment growth is still too weak to boost productivity; real wages are still below pre-crisis levels; and the losses in income from the Great Recession will never be recovered.”


“Trade tensions are starting to bite, and are already having adverse effects on confidence and investment plans.   Trade growth has stalled, restrictions are having marked sectoral effects and the level of uncertainty on trade stances remains high.”

So “It is urgent for countries to end the slide towards further protectionism, reinforce the global rules‑based international trade system and boost international dialogue, which will provide business with the confidence to invest,”.

And as for the so-called emerging markets, the situation continues to deteriorate.  According to the IIF, growth tracker, emerging market growth is now at a two-year low.

And as interest rates globally rise (driven by the Fed) and trade wars begin to squeeze global trade, emerging markets with high corporate debt are especially vulnerable.

The right-wing government of Argentina has now had to swallow a record-breaking IMF bailout of $57bn.  IMF chief Lagarde said that, as part of the deal, Argentina’s central bank can only intervene to stabilize its currency if the peso depreciates below 44 pesos to the dollar. It is currently at 39 pesos to the dollar after losing 50% of its value since the start of the year. The president of Argentina’s central bank, Nicolás Caputo, resigned because of this condition.

The size of the bailout shows how desperate the IMF is to support the right-wing government in Argentina, but also to remove any independent action by the Argentine monetary and fiscal authorities. Argentina’s economic policy is now being run by the IMF.  Argentina is now under the grip of IMF dictates, something the right-wing Macri government said would never happen again.  A massive slump and austerity will now follow for the Argentine people – repeating the hell of the last major slump of 2001.

At the same time, the Turkish economy is in meltdown. There the Erdogan government refuses to take IMF money in return for austerity and control over its currency and interest rate policy – unlike Argentina.  But it will make no difference: both countries cannot avoid a serious slump as interest rates spiral and inflation rockets.

There is one economic lesson to be learned here.  When Greece was locked in the straitjacket of the so-called Troika (the IMF, the ECB and the Euro group), many Keynesians and radicals said that the reason Greece was in this mess was that it was inside the Eurozone and so it could not devalue its currency or control its interest rates.  If it broke away, it could control its own destiny.

Well, Argentina and Turkey now show that it was not the Eurozone as such that was the problem, but the forces of global capitalism.  Both Argentina and Turkey control their currency and interest rate policy.  The former has opted for IMF control and the latter refuses it.  But it will make no difference – the working people in both countries will pay the price for the crisis in their economies.

More momentum on the banks

September 25, 2018

At the weekend, I participated in a session on what to do about the banks at the Momentum conference (The World Transformed) in Liverpool, England.  For those readers who do not know what Momentum is, it is a campaigning group within the British Labour Party that supports more radical measures in favour of labour and backs the current leftist leadership in the Labour Party of Jeremy Corbyn.  The Momentum conference takes place alongside that of the official Labour Party Conference and complements it with debates, discussions and events.

The session on banking took place at the same time as Corbyn was speaking with other big names in a separate session.  Nevertheless, we got over 100 hundred along to discuss what to do about the banks.  It was chaired by Sarah-Jayne Clifton of the Jubilee Debt Campaign.  The Jubilee Debt Campaign is part of a global movement working to break the chains of debt and build a finance system that works for everyone. Founded in 1996, it is a UK-based charity focused on the connections between poverty and debt.

Matt Wrack, the general secretary of the British fire fighters union (FBU) led off.  The fire fighters have a socialist clause in their constitution and have campaigned since the end of the Great Recession for Labour to nationalise the big banks.  The FBU commissioned a pamphlet called Time to Take over the Banks (co-written by Mick Brooks, a Labour economist and myself).  Matt Wrack pointed out that Labour had a great opportunity to act on the banks when the global financial crash ensued, but the then Labour leadership, infused with ‘neoliberal’, pro-market, pro-finance ideas, did nothing, except to bail them out.

Indeed, Labour leaders adopted ‘light touch regulation’ of the banks, praising the City of London.  When Chancellor, in 2004 Gordon Brown even opened Lehman Bros’ new Canary Wharf office, saying “Lehman brothers is a great company that can look backwards with pride and look forwards with hope”(!).  As we know, the bankruptcy of this rapacious American investment bank was the trigger for the global financial meltdown.  And it seems, said Wrack, that even now the current trade union and Labour leaders are unwilling the grasp the nettle and deal with the big banks.

Fran Boait of Positive Money spelt out how ‘neo-liberal’ pro-market ideas dominated thinking on finance.  Mainstream economists did not see the global financial crash coming and on the whole have not offered any real changes, except to suggest more capital backing for banks.  Positive Money campaigns for “an economy that isn’t driven by housing bubbles, stock market booms, and a bloated financial sector and where wealth isn’t concentrated in fewer and fewer hands. Instead, investment in productive sectors of the real economy, such as affordable housing, helps to boost incomes, bring down inequality and serve society’s needs.”

Ann Pettifor is a well-known UK-based analyst of the global financial system, director of Policy Research in Macroeconomics (PRIME) a network of economists concerned with Keynesian monetary theory and policies; an honorary research fellow at the Political Economy Research Centre at City University, London (CITYPERC) and a fellow of the New Economics Foundation, London.  She is an important adviser to the current Labour leadership on economic policy.  Ann argued for the Bank of England to be brought under democratic control and then used to provide funds for the big banks as long as they were committed to use it ‘productively’ in investment and jobs etc.  This would go alongside the current Labour proposal for a National Investment Bank (NIB).

In my view, none of these approaches is likely to deliver what we need: namely, turning banking into a public service for the many and not a speculative, tax evasion tool for the few rich investors and corporations. Surely, the history of the period leading up to the global financial crash – the wild credit boom, the sub-prime mortgage crisis, the ‘toxic’ derivatives etc – has shown that the big banks will not be a public service without them being publicly owned with democratic accountability.  And the period since (the last ten years), only confirms that view.

In my contribution, I outlined briefly how the big banks even after the end of the global crash and the bailouts, have carried on just as before – it’s business as usual.  Or as Lloyd Blankfein, the head of Goldman Sachs, the world’s most predatory investment bank, once said: they continue to do “God’s work”.  And what has doing God’s work entailed over the last ten years?  A never-ending litany of scandals – particularly by British banks.

Take RBS, Britain’s largest bank, partly nationalised after the crash.  Before the crash, it was run by ‘Fred the Shred’ Goodwin (so named for his penchant for slashing lower ranked banking jobs and bank branches). Sir Fred Goodwin was knighted for his “services to the banking industry” by the then Labour government.  He was noted for his bullying of staff and his love for risky ventures and huge bonuses.  After driving RBS into near bankruptcy in the crash, he left, but not without taking a fat pension and handshakes from the RBS board, as have all the senior executives of the banks when they have been asked to ‘step down’ following a scandal.

After the crash, RBS was prominent (while still part nationalised) in the notorious Libor-rate rigging scandal, where bank traders colluded to fix the interest rate for inter-bank lending.  Libor sets the floor for most loan costs across the world.  That rigging meant that local authorities, charities and businesses ended up paying billions more than they should for loans.  The rigging activities of RBS appeared to have been even worse under the ‘watchful’ eye of Stephen Heston, appointed when the bank was nationalised.  For two years after Heston got the job, the Libor traders in this publicly-owned bank carried on rigging the rate knowing it was illegal.

Then there is Britain’s next biggest bank, Lloyds Bank (also part nationalised), which took over the scandal-ridden Bank of Scotland in the crash.  Along with all the other banks, it has had to compensate customers for mis-selling them personal injury insurance to the tune of £5bn.

During the crash, Barclays Bank was run by Bob Diamond. It has now been revealed that when Barclays was threatened with partial nationalisation, the Barclays board loaned money to Qatar who then invested in the stock of the bank to the tune £12bn.  In this way, the bank avoided state control by issuing more loans for equity.  It is still not clear what “commissions” were paid to Qatari investors.

And then there is HSBC.  In the US, HSBC was fined $5bn by the Federal authorities for ‘laundering’ money for Mexican drug cartels!  In Switzerland, former chairman, Stephen Green, was also doing ‘God’s work’ for HSBC. Reverend Green, an ordained vicar, published Good Value in 2009, an extended essay on how to promote ‘corporate responsibility and high ethical standards in the age of globalisation’!  The good Reverend was in charge of HSBC’s private banking division based in Switzerland. The Swiss division was engaged in hiding the ill-gotten gains of thousands of rich people in many countries who did not want to pay tax. HSBC arranged various schemes to enable these rich people to recycle their cash back to the UK and other countries without tax payments.

Indeed, tax evasion is just what privately-owned, not democratically accountable banks get up to: providing tax avoidance and evasion for very rich people and corporations.  Take the very latest scandal emerging from Danske Bank, Denmark’s largest. After the global crash up to 2015, Danske’s Estonian branch laundered over $200bn of Russian and British corporate cash to avoid tax.  UK corporate entities were the second-biggest proportion of customers, behind the Russian mafia, of 15,000 non-resident customers at the Estonian branch of Danske. making it one of the biggest money-laundering scandals ever. Surely we cannot let this continue?

A proper banking service should take our deposits, look after our savings and offer loans to households and small businesses for big ticket items at reasonable interest rates.  But the current banking system is much more interested in speculating in financial markets for big bucks, making corporate finance deals and helping the rich evade payments; while top executives take home huge wages, bonuses and pensions.

Britain’s banks cannot even do the basics properly, because they do not spend enough on their staff and systems.  There has been a stream of outages and failures in internet banking systems.  As current Conservative minister, Nicky Morgan put it: “It simply isn’t good enough to expose customers to IT failures, including delays in paying bills and an inability to access their own money. High street banks justify the closure of their branch networks on the basis that they are providing a seamless online and mobile phone banking service. These justifications carry little weight if their banking apps and websites cannot be relied upon.”

As for providing credit for productive investment in the economy; it’s a joke.  In our report for the FBU we calculated that less than 6% of bank assets go to industry for productive investment.  The big five British banks control 60% of all lending; their firepower for investment is much greater that Labour’s proposed NIB will ever have.  But the big five banks do not use that credit productively.  The NIB will not succeed in turning the British economy around if the big five continue to do ‘God’s work’.  Instead, another financial crash and recession is more likely.

So public ownership of the big five is essential.  Even if the government bought all the shares at market price it would cost only a one-off 3% of GDP (not that full compensation to shareholders is merited).  That could easily be financed by the issuance of government bonds and serviced easily with the revenues and profits from the big five.  The top executives of these banks would then be paid civil service salaries and have no shares – bank workers and trade unionists would sit on the boards to ensure accountability.  Public ownership does not mean more bureaucracy – on the contrary, it means more democracy.

What can public service banks do?  Well, take the example of North Dakota.  The main bank in this right-wing US state has been publicly owned since the Great Depression.  It looks after the deposits of customers and provides loans for households and farmers, and any profit it makes goes back to the state government.  It does no speculation and no laundering.  It did not suffer during the global crash.

As for investment, take the role of China’s state banking system.  Whatever we might say about the autocratic, one party dictatorship in China, its state-owned banks provide credit to support a national investment programme that has transformed China’s infrastructure.  I came up to Liverpool on one of Britain’s privatised train routes.  It left one hour late because of ‘engineering works’and crawled up to Liverpool at a maximum speed of 75mph.  On the same day, China launched a new high-speed service (220km/h) from Hong Kong to China linking it with 15 cities: punctual, modern and cheap.  This high-speed rail service reduces the need for air flights and lowers the carbon footprint. And all this was financed by state bank loans and railway bonds.

It was argued at the Momentum session by Fran Boait and by several in the audience that we don’t want great big bureaucratic banks but more diversification: regional banks, coops, credit unions etc.  I agree.  Germany’s banking system is predominantly state-owned at regional level with savings banks and development banks.  Linking the nationally owned big five with such regional and local banks would be the way to go.  Indeed, I have even drawn up a plan for such a banking system.

But this will only work if we have the core of banking in public hands.  If diversification means keeping the big five still owned by capital with just small banks and credit unions around the periphery and/or competing with the big five, then that would be like saying the health service should have at its centre big private health companies with only small public operations in the community.

There seems to be a reluctance to opt for public ownership at the centre of the banking system.  Why only railways, energy and water?  The lack of momentum on this crucial cog in controlling the economy for the many not the few seems be partly based on fear of the media and the City of London’s response.  But breaking up the banks or taxing them, or giving workers shares in the banks as Labour’s finance leader John McDonnell is now proposing will provoke just as much antagonism from capital – but without delivering banking as a public service and a force for productive investment.

I don’t quote Lenin very often.  But he hit the nail on its head (as he often did), when he said: “The banks, as we know, are centres of modern economic life, the principal nerve centres of the whole capitalist economic system. To talk about “regulating economic life” and yet evade the question of the nationalisation of the banks means either betraying the most profound ignorance or deceiving the “common people” by florid words and grandiloquent promises with the deliberate intention of not fulfilling these promises.”

Lord Skidelsky and Keynes’ big idea

September 20, 2018

Last night, Lord Robert Skidelsky spoke to the UK’s Progressive Economy Forum (PEF) in London.  He was promoting his new book Money and Government: A Challenge to Mainstream Economics.  Its aim, the blurb says, is “to familiarise the reader with essential elements of Keynes’s ‘big idea’.“  The PEF is an economics think tank composed of just about all the top British Keynesian and leftist economists (but no Marxists).  At this highly promoted meeting was John McDonnell, the Labour spokesperson on finance and economics, where he gave a favourable response to Skidelsky’s ideas.

Lord Robert Skidelsky is emeritus professor of economics at Warwick University, England.  He is the most eminent biographer of John Maynard Keynes and is a firm promoter of his ideas.  Skidelsky is lauded by leftist Keynesians, even though his politics are as unreliable for the left as Keynes’ were. Originally a Labour Party member, he left that party to become a founding member of the renegade Social Democratic Party, which ensured the defeat of the Labour Party in the 1983 election.  He remained in the SDP until it fell apart in 1992, but he was rewarded for his part in defeating Labour with a life peerage as Baron Skidelsky by the then Conservative government.

Indeed after that he became a Conservative and was chief opposition spokesman for the Conservatives in the Lords when the Blair Labour government was in office.  He was chairman of the right-wing pro-privatisation and neoliberal reform think-tank, the Social Market Foundation between 1991 and 2001.  In 2001, he left the Conservative Party for what is called the ‘cross benches in the UK’s House of Lords (ie no party).  Despite this, Skidelsky is regarded by left Keynesians as ‘one of them’.  Indeed, he sits on the council of the PEF.

I have not got access to a review copy of his new book, but his speech last night and an article that Skidelsky wrote back in 2016 criticising mainstream economics probably sums up the views in the book.  This is what I said then

In a more recent article in the British Guardian newspaper to promote his new book, Skidelsky starts from the premiss (like Keynes) that capitalism is the only viable and best mode of production and social relations possible – the alternative of a socialist system of planning based on public ownership is anathema to him (as it was to Keynes).  But capitalism has fault-lines and successively recurring slump and depressions reveals that. So Skidelsky’s job (as Keynes also saw it) is to save capitalism and manage these recurring crises to reduce or minimise their impact.

In his article, Skidelsky claims that the global financial crash and “the worst global downturn since the Great Depression of 1929” was “almost entirely unanticipated.”  Well, it was by mainstream economics and nearly all Keynesians, but as I have shown elsewhere, it was predicted by some heterodox economists, including Marxists.

Nevertheless, Skidelsky asks what we can learn from this financial disaster so we can avoid it next time (yes, it’s going to happen again). He says “prevention is far better than cure.”  But by prevention he does not mean “trying to stop the semi-regular fluctuations of the business cycle.”  There is nothing we can do about that under capitalism.  No, the job of the monetary authorities and governments is “to dampen, if not altogether prevent, these fluctuations”. And in doing so, we can avoid “looming state bankruptcy, or worse, state control over the economy.”(!)

Then he offers the usual mainstream prescriptions of monetary easing and fiscal spending (particularly in infrastructure).  But he reckons that the scale of last disaster will require “far more ambitious thinking”.  You see, you just cannot tell when it will happen again because “as John Maynard Keynes taught, the future is uncertain” (Really, I never guessed – MR).

Skidelsky then states that the reason for the weak recovery after the end of the Great Recession was ‘austerity’.  If only governments had expanded spending and run budget deficits, then economies would have been restored.  This is the same argument that American Keynesian Paul Krugman just offered on his blog and is the mantra of all Keynesian explanations of the Long Depression.  But regular readers of this blog know that there is plenty of evidence that increased government spending where it was applied (Japan) did not revive the economy; and there is little or no correlation between government spending and growth in the major economies.  That’s because under a capitalist economy, unless the profitability of capital rises, no amount of fiscal stimulus will work.

But what does Skidelsky think we should do?  First, we must break up the big banks into smaller units and “institute controls over the type and destination of loans they make.”  The idea of breaking up the banks is presented because some banks are now so large that if they fail, they would bring down the whole financial system.  But this ‘solution’ would simply mean that smaller banks would continue to conduct their sleazy, speculative, fraudulent activities.  Oh and I forgot: we are going to control (regulate) what they do.  Well, that worked well last time. There is no mention of the obvious solution: public ownership of the major banks with democratic control and accountability to establish a banking system that is a public service to households and small businesses, not acting as ‘financial weapons of mass destruction’.

The second thing Skidelsky wants to do is to ‘manage’ capitalism with proper fiscal and monetary policies.  Well, such Keynesian policies failed in the 1970s when the profitability of capital collapsed and advanced economies suffered a series of severe recessions (1974-5, 1980-2).  That’s why Keynesian macro-management was dropped by the strategists of capital.  In his speech, Skidelsky argued that it was not Keynesian policies in the 1970s that failed but the deregulation of finance.

I am unaware that such ‘deregulation’ was adopted then.  That came only after the profitability crises of the 1970s and early 1980s.  Deregulation was a response to the problems of capitalist production not the cause.  And ironically, Skidelsky ditched Labour just at this time to join the Social Democrats who supported deregulation and neo-liberal policies and broke with Labour because they feared the take-over of the party by Tony Benn (the precursor of Corbyn)!

Anyway Skidelsky wants to be a little more ambitious this time.  His aim is not to “fine tune the business cycle” but instead “maintain a steady stream of public investment amounting to at least 20% of total investment to offset the inherent volatility of the private economy.”  This smacks of Keynes’ famous call for the ‘socialisation of investment’ that the ‘master’ (Skidelsky’s phrase) advocated as a last resort in order to revive the capitalist economy when monetary easing and government spending failed in the 1930s.

Actually, in the ‘war economy’ of the 1940s, Keynes was much more radical than Skidelsky and proposed that up to 75% of total investment should be public, reducing the capitalist sector to a minority (Chinese-style)  Of course, that was in the war and no Keynesian now proposes to wipe out the dominance in investment of the big banks and the capitalist sector.  Skidelsky’s “20%” amounts to about 3% of GDP, the same target that the Labour leadership is proposing in its economic strategy.  But as I have explained in many previous posts and papers, that leaves the capitalist sector investment up to five times larger and so the profitability of capital will remain the driving force for growth.  And that means recurring crises and lower growth.

Ironically, up to now it has been President Trump who has (unknowingly) adopted apparently Keynesian prescriptions, with his tax cuts for the rich.  Two years ago when Trump also proposed a programme of infrastructure, Skidelsky got very excited.  He commented ““As Trump moves from populism to policy, liberals should not turn away in disgust and despair, but rather engage with Trumpism’s positive potential. His proposals need to be interrogated and refined, not dismissed as ignorant ravings.”  But since then nothing has come of Trump’s infrastructure promises.  All that has happened is that corporate profits are up, the stock market is booming, inequality has rocketed further, real wages are stagnant and public services are being slashed.  So much for Trump’s ‘positive potential’.

Third, Skidelsky wants to “reverse the rise in inequality”; but not because it is unjust or the result of the exploitation of labour by capital.  We need to reduce inequality so that wages are sufficiently high to sustain “the consumption base of the economy”. Otherwise it “becomes too weak to support full employment.”  Skidelsky seems to think that the cause of crises are low wages and consumption – actually something rejected by Keynes –he thought it was a low marginal efficiency of capital and too high interest rates.  Moreover, the argument that rising inequality is the cause of crises rather than the result of neoliberal policy measures has been disproved. But this argument is presented in Keynesian circles all the time.

Finally, there is the political.  You see, says Skidelsky, unless we act along these lines to save capitalism, there is the danger of the rise of ‘populism’ and “the flight of voters toward political extremism.”  Hopefully, he only means the rise of nationalist and semi-fascist forces of the right.  But I think he also means the forces of socialism on the radical left.  And they are just as much an enemy of the ‘liberal’ Skidelsky as the ‘extreme’ right (just as it was for Keynes). Lord Skidelsky remains an interesting political bedfellow for the labour movement – just as Lord Keynes did in the 1930s.

The PEF website has a quote from Keynes that they see as paramount. “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else“.  I hope the PEF do not really agree with the arrogance of Keynes’ statement that philosophers and economists are the real ‘rulers’ of the world (similar to the autocratic ideas of the ancient Greek aristocrat Plato). I think a better quote for the PEF would be: “Philosophers have hitherto only interpreted the world in various ways; the point is to change it.” (Karl Marx).