Archive for the ‘economics’ Category

Inequality, poverty and populism

June 5, 2018

There have been some compelling new studies on global inequality and the impact of growing income gaps in the US and Europe.  From these studies we can draw some conclusions about the causes of the rise of so-called ‘populism’ – the mainstream jargon for those elements in society that no longer accept the neoliberal model of globalised free market capitalist development of the last 40 years.

The Global Wealth Migration Review covers global wealth and wealth migration trends over the past 10 years, with projections for the next 10 years.  Total private wealth held worldwide amounts to approximately US$215 trillion. The average individual has net assets of US$28,400 (wealth per capita). But there are approximately 15.2 million ‘high net worth individuals (HNWIs) in the world, each with net assets of US$1 million or more.  And there are approximately 584,000 multi-millionaires in the world, each with net assets of US$10 million or more. Finally, as we go up the wealth inequality spectrum, there are now 2,252 billionaires in the world, each with net assets of US$1 billion or more.

Global wealth has risen by 27% over the past 10 years (from US$169 trillion at the end of 2007 to US$215 trillion at the end of 2017), assisted by strong wealth growth in Asia. Global wealth is expected to rise by 50% over the next decade, reaching US$321 trillion by 2027. This will again be driven by strong growth in Asia. The fastest growing wealth markets are expected to be Sri Lanka, India, Vietnam and China.

The report measured the proportion of wealth controlled by millionaires (HNWIs) – the higher the proportion the more unequal the country is. The most equal countries in the world (based on % of country’s wealth held by HNWIs) were Japan (23%), New Zealand (26%), Norway (27%), Australia (28%), Canada (28%), Germany (28%), Sweden (28%), Denmark (29%), South Korea (29%) and Finland (29%).  But remember this means the ‘most equal’ Japan still has HNWI owning 23% of all personal wealth – pretty unequal!  Japan has (only!) 35 billionaires which is well below the likes of USA, China, India, Russia and UK.

The most unequal countries in the world are Saudi Arabia (60%), Russia (58%), Nigeria (56%), Brazil (53%), Turkey (52%) – and these are probably the most corrupt (relative to any ‘rule of law’).  The inequality wealth ratio is 36% for the US and the UK, 40% for China and 48% for India against a worldwide average of 35%.  Yes, HNWIs own on average 35% of all the world’s personal wealth in property, financial assets and cash.

Another interesting measure is the proportion of a country’s wealth held by billionaires. ‘Croney capitalist’ Russia tops this list with 24% of total Russian wealth held by its oligarch billionaires. Japan again is the most equal with billionaires only controlling 3% of total wealth there.

Against this report on global inequality of wealth, there is inequality of income within countries.  I have reported on this in many posts but it is really something when the United Nations issues a report on poverty that singles out the US under Donald Trump in deliberately forcing millions of Americans into financial ruin, cruelly depriving them of food and other basic protections while lavishing vast riches on the super-wealthy.

According to Philip Alston, the UN special rapporteur who acts as a watchdog on extreme poverty around the world,  Trump is steering the country towards a “dramatic change of direction” that is rewarding the rich and punishing the poor by blocking access even to the most meagre necessities.  “This is a systematic attack on America’s welfare program that is undermining the social safety net for those who can’t cope on their own. Once you start removing any sense of government commitment, you quickly move into cruelty,”  Millions of Americans already struggling to make ends meet faced “ruination”, he warned. “If food stamps and access to Medicaid are removed, and housing subsidies cut, then the effect on people living on the margins will be drastic.”

According to the UN report, in the greatest capitalist economy in the world, 40 million Americans live in poverty. More than five million eke out an existence amid the kind of absolute deprivation normally associated with the developing world.  Americans now live shorter and sicker lives than citizens of other rich democracies; tropical diseases that flourish in conditions of poverty are on the rise; The US incarceration rate remains the highest in the world; Voter registration levels are among the lowest in industrialised nations – 64% of the voting-age population, compared with 91% in Canada and the UK and 99% in Japan. In 1980, the US and Europe stood side by side in terms of inequality – in both cases, the richest one percent earned about 10% of national income. Fast forward to 2017, and in Europe the 1% has edged up to 12% of national income. But in America the same elite now gobbles up 20%. This fits in a broader trend: the share of households that, while having earnings, also receive nutrition assistance rose from 19.6 per cent in 1989 to 31.8 per cent in 2015. 32

At the same time as the UN published its damning analysis, the US Federal Reserve annual economic survey was released.  It found that there was large pool of Americans who are vulnerable to any further erosion of their incomes. It found that four out of 10 Americans are so hard up they could not cover an emergency expense of $400 without borrowing money or selling possessions.

Over one-fifth of American adults are not able to pay all of their current month’s bills in full. Over one-fourth of adults skipped necessary medical care in 2017 due to being unable to afford the cost.  Over half of college attendees under age 30 took on some debt to pay for their education. Nearly one-fourth of borrowers who went to ‘for profit’ universities are behind on their loan payments, versus less than one-tenth of borrowers who went to public or private not-for-profit institutions.  Less than two-fifths of non-retired adults think that their retirement savings are on track, and one-fourth have no retirement savings or pension whatsoever.

Rising inequality and the persistence of poverty and the struggle to ‘make ends meet’ for millions, particularly in the last ten years since the end of the Great Recession has played a role in driving ‘public opinion’ away from mainstream economics and political parties.  In a recent article, former World Bank chief economist, Branko Milanovic reckoned there were two curses for European capital: immigration and rising inequality.  “The fact that the European Union is so prosperous and peaceful, compared both to its Eastern neighbors (Ukraine, Moldova, the Balkans, Turkey) and more importantly compared to the Middle East and Africa means that it is an excellent emigration destination. Not only is the income gap between the “core” Europe of the former EU15 and the Middle East and Africa huge, it has grown. Today, West European GDP per capita is just shy of $40,000 international dollars; sub-Saharan’s GDP per capita is $3,500 (the gap of about 11 to 1). In 1970, Western Europe’s GDP per capita was $18,000, sub-Saharan, $2,600 (the gap of 7 to 1). Since people in Africa can multiply their incomes by ten times by migrating to Europe, it is hardly surprising that, despite all the obstacles that Europe has recently began placing in the way of the migrants, they keep on coming.”

He reckoned that, given the size of the income gap, migration pressure will continue unabated or greater for at least 50 or more years —even if Africa in this century begins to catch up with Europe (that is, to grow at rates higher than those of the European Union). Nor is that pressure, in terms of the number of people who are banging on Europe’s doors, static. Since Africa is the continent with the highest expected population growth rates, the numbers of potential migrates will rise several-fold. While the population ratio between today’s sub-Saharan Africa and the EU is 1 billion vs. 500 million, in some thirty years, it will be 2.2 billion vs. 500 million.

Other than migration, the second issue fuelling the European political malaise is rising income and wealth inequalities. Switzerland is not only richer than India in terms of annual production of goods and services (the ratio between the two countries’ GDP per capita at market exchange rates is about 50 to 1), but Switzerland is even more richer in terms of wealth per adult (the ratio is almost 100 to 1).

Milanovic summed up the impact: “When one puts these two longer-term trends together: continued migratory pressure and a quasi-automatically rising inequality, that is, the two problems that today poison European political atmosphere, and one contrasts this with the difficulty of moving decisively towards solving either of them, it is not surprising that one might expect political convulsions to continue. They will not be gone in a couple of years. Nor does it make sense to accuse “populists” of irresponsibility or to believe that people preferences have been distorted by “fake news”. The problems are real. They require real solutions.”

Take Italy.  The Italians ‘populist’ parties have taken over the government with a program of restricting immigration and reducing inequalities – the Lega wants to kick out all ‘illegal’ immigrants while Five Star wants to introduce a universal basic income to help those struggling to find jobs or are in ‘precarious’ occupations, particularly in southern Italy.  The damage that done by the last 40 years of so-called neoliberal reforms designed to raise the profitability of capital at the expense of labour is revealed in another report on weekly working hours and earnings since the Great Recession.

One of the main ‘reforms’ made since the Great Recession under the centre-left Democrat government in Italy was the Jobs Act.  Most Southern European mainstream governments introduced labour market reforms with the aim to increase ‘flexibility and competitiveness’, in line with EU requirements. In Italy, the `Jobs Act’ introduced a new labour contract with no protection from firing in the early years of seniority and has made several changes favouring firms over workers. A recent report found that there was “no evidence of the expected boost in employment.”  Instead, “an increase in the share of temporary contracts over the open-ended ones is observed; a raise of part-time contracts within the new permanent positions emerges. The ‘Jobs Act’ appears to be ineffective in terms of quantity, quality and duration of the jobs created since its introduction.”  No wonder the first proclaimed task of the new populist government in Italy (after kicking out immigrants) is to repeal the Jobs Act.

For capital, the price of globalisation, rising inequality and the Long Depression, accompanied by so-called ‘neoliberal reforms’, is the ‘populist’ threat to the existing order of the so-called ‘centre’ of the political spectrum.  But populism too will fail to end the trend of rising inequality, stagnation and the global displacement of millions.

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Spain: the challenge for Sanchez

June 1, 2018

The right-wing Popular Party (PP) minority government in Spain has been voted out by the Spanish parliament because of the recent corruption court decision that PP officials were taking money from corporations illegally for their coffers. PM Rajoy said he knew nothing about it – but even the court judge did not believe him.  A combination of the opposition Socialists, radical left Podemos and the nationalist Catalan and Basque parties managed to pass a vote of no confidence over the PP and the pro-business Citizens party that had backed Rajoy.

So now Socialist leader Pedro Sanchez will take over as prime minister of the world’s 13th largest and the Eurozone’s fourth-largest economy.  Sanchez was an economist and ‘political adviser’ for the European parliament – so has never done a proper job in his life. Sanchez’s doctoral thesis was published as “La nueva diplomacia económica europea”, where Sanchez appears to consider the relationship between the state and the corporate sector and how politicians should engage in ‘economic diplomacy’, namely how the Spanish national state engages in relations with a supra-national entity like the EU.  Now Sanchez will be testing his thesis in practice.

He takes over as PM in a minority socialist government depending on the votes of Podemos and the nationalists. And he faces a lot of economic challenges that the PP had failed to solve. As I argued at the time of the 2016 general election (which left Rajoy without a majority in parliament), before the Great Recession, economic growth in Spain had been largely due to investment in property, unproductive in capitalist terms.

Spain’s much-heralded economic boom saw 3.5% real growth a year during the 1990s but it stopped being based on productive investment for industry and exports in the 2000s and turned into a housing and real estate credit bubble, just like Ireland’s Celtic Tiger boom did.  As the IMF summed it up: “The pre-crisis period was characterized by decreasing productivity of capital, measured as output per units of capital stock, both in absolute terms and relative to the euro area average. This is because capital flew to nontradable sectors, in particular construction and real estate, characterised by higher profitability but lower marginal returns. By contrast, investment in information and communication technologies or intellectual property remained below that of other euro area countries.”

Since the end of Great Recession things have improved for Spanish capital only by keeping real wages down and employing cheap labour rather than making investments in new technology to raise productivity.  Gross fixed capital formation in still well below pre-crisis levels. And this includes all investment, private and government; productive investment has recovered even less.

Indeed, the Spanish investment rate to GDP has fallen way more compared to pre-crisis rates than its EU rivals.

Why is this?  As I said in my book, The Long Depression, the Achilles heel of Spanish capitalism is the long-term decline in its profitability. Every measure of Spanish capital’s profitability reveals the same long-term decline.  Here is the AMECO measure as calculated by me, but in our (Carchedi, Roberts) upcoming book, World in Crisis, Juan Pablo Mateo has more comprehensive measures that confirm the AMECO version.  And Maito, Esteban – The historical transience of capital. The downward tren in the rate of profit since XIX century also agrees.

The recovery in profitability since the end of the Great Recession has been modest.  The rate of profit is still some 7% below where it was in 2007.  And that is despite the huge cuts in government spending, reductions in employment and wages.

I quote from the IMF’s latest report on Spain: “Since 2009, unemployment has declined for all age groups, but remains higher than before the crisis disproportionately affecting low-skilled workers Those out of jobs more than a year account for roughly half of the unemployed. Involuntary part-time employment remains high, well above the EU average More than a quarter of workers are under temporary contracts

and the share of temporary employment among the youth is above its pre-crisis level.” 

http://www.imf.org/en/Publications/CR/Issues/2017/10/06/Spain-2017-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-Executive-45319

Moreover, Spain recorded the lowest real wage growth of all EU countries in 2017 – namely zero!  And this year, real wage growth will be negative, only Italian and British workers will suffer a larger fall.

Although ‘austerity’ in the guise of cuts in government spending, higher taxes and running budget surpluses (before interest costs) stopped in 2015, the state is still heavily burdened with debts built up from bailing out Spain’s reckless and corrupt banking system.  According to the IMF, annual gross financing needs are the highest in the euro area…even higher than debt-ridden Italy.

No wonder, the IMF reckons that “post-crisis, potential growth is projected to remain subdued with a lower investment rate.”

This long depression has also begun to break up the Spanish state, as last year’s unresolved Catalan separatist crisis exposed. Spain’s regional governments are deeply in debt and yet are being asked to make huge spending cuts. That’s why richer regional areas with their own nationalist interests, as in Catalonia and the Basque Country, have been making noises about separation from Madrid.  The Sanchez government will now be depending on their votes.

I don’t need to change what I said back in my 2016 post.  “The Spanish depression is a result of the collapse in capitalist investment. To reverse that requires a sharp rise in profitability. Until investment recovers, the depression will not end.  And there is the probability of a new economic recession in Europe ahead, while the political leadership of Spanish capital is divided and uncertain what to do.”

The fallacy of composition and the law of profitability

May 30, 2018

In mainstream economics, the concept of the ‘fallacy of composition’ is often used.  In a general sense, the fallacy of composition arises when it assumed that the sum of all individual parts will equal the whole.  Sometimes, it does not.  There are many examples: if you stand up at a concert, you can usually see better. But if everyone stands up, everyone cannot see better as it will lead to obscured views for the majority of attendees. Therefore, what might be true for one individual in the crowd is not true for the whole crowd.  This phenomenon happens because the interaction of individual moves can affect the overall result.

The fallacy of composition is often cited in economics.  Paul Samuelson in his ubiquitous Economics textbook for university students reckoned “the fallacy of composition is one of the most basic and distinctive principles to be aware of in the study of economics”. And it is invariably used by Keynesian economists in their advocacy of government spending to boost the economy.  This is the paradox of thrift.  This is the belief that if one individual can save more money by spending less, then society or an economy can also save more money by spending less. But if every household reduces spending, then the overall demand for products and services would decline. This decline would lead to lower sales revenue and profits for businesses. As a result, businesses would have to lower wages or lay off individuals. People would have less income and would save even less. What is true for an individual in the economy is not necessarily true for the whole economy.

The fallacy of composition in this context has been used by Keynesians to attack the view of the neoclassical and Austrian schools that economies are like individual households. Good housekeeping is good economic policy. But it may be good for a household to tighten its belt but not for whole economies.  So the Keynesians say that there is no crime in running budget deficits and avoiding ‘austerity’, even if it means rising public debt levels.

Now I have discussed the issue of whether rising debt (public and private) matters for a capitalist economy in many places.  So I’m not going over that ground again in this post.

What interests me is that the fallacy of composition applies in another area too – in the refutation of one major critique of Marx’s law of the tendency of the rate of profit to fall.  The most famous modern argument against the law is that by Nobuo Okishio, a Japanese Marxist economist.  Okishio argued way back in 1961 that under competitive capitalism, a profit-maximising individual capitalist will only adopt a new technique of production if it reduces the production cost per unit or increases profits per unit at going prices.  So capitalist accumulation must lead to a rise in the rate of profit not a tendency to fall – otherwise why would any capitalist invest in new technology?  And Marx is used to back up this argument: no capitalist ‘ever voluntarily introduces a new method of production … so long as it reduces the rate of profit’. Marx 1978a, p. 264

Yes, no individual capitalist would introduce a new technology unless it contributed to raising profits and market share, the individual rate of profit.  But this is where the fallacy of composition comes in.  The innovating capitalist steals a march on others through lowering the costs of production against the prevailing market price.  Its profits go up.  But that is being achieved by the profits of the other capitalists beginning to fall as they lose competitive advantage.  They must react by introducing the new technology (or even better technology) that lowers their costs too.  But then the productivity of the existing or probably reduced labour force for all the capitalists rises and thus lowers the value per unit of product.  Once all the capitalists have adopted the new technology, the organic composition of capital (the ratio of money spent on equipment versus wages) will have risen and, ceteris paribus, the general rate of profit will have fallen.

Professor Simon Mohun provided an excellent example from game theory to show why innovation under capitalism and competition can lead to fall in average rate of profit, contrary to Okishio.

There are two capitalists: A and B.  Each starts with 3 in profit.  If neither A and B innovate to reduce costs and boost profits, A stays at 3 and B stays at 3.

But if A innovates and B does not; then A gets a higher profit (4) while B loses market share and gets less profit (1).  Alternatively, if A does not innovate and B does, then A gets 1 and B gets 4.  If both innovate, then A gets 2 and B gets 2.

There is a drive to innovate because A or B could raise profit from 3 to 4.  So there cannot be an agreement not to innovate, leaving A on 3 and B on 3.  But if one innovates first to get 4, then the other must do so or its profit will fall to 1.  But with both innovating, they both end up on 2 instead of 3 (if they had done nothing).  So innovation boosts the individual profit of the leader but eventually when both innovate, the profit is lower.

Again, this is over time.  If A and B could simultaneously introduce the innovation (as Okishio assumes), then they may not do so, and stay at 3, rather than fall to 2.  But that would not be reality.  Reality is temporal.

The Okishio theorem is an example of the fallacy of composition.  It simply sums the gain of one individual capitalist to the whole capitalist economy.  But what is good for each individual capitalist is not good for the profitability of the whole capitalist economy.  When everybody does it, overall profitability falls.

Moreover, each individual capitalist is not doing this ‘voluntarily’ after all, but of necessity to compete and not lose market share.  As Marx says, the law of value and profitability operates ‘behind the backs’ of the capitalists – it is not in their conscious control.  For Adam Smith, it is the ‘invisible hand’ of the market, for Marx, it is an ‘invisible Leviathan’, to use Murray Smith’s metaphor (Murray Smith, Invisible Leviathan, Historical Materialism, forthcoming 2018).

British capital: productivity and profitability

May 26, 2018

In the first quarter of 2018, the UK economy slowed almost to a standstill.  It grew by just 0.1% in real terms. This was the lowest growth rate for over five years since a 0.1% contraction in Q4 2012. Household spending rose the least in over three years and business investment shrank the most in nearly three years.

The government and the Bank of England have tried to pass this slowdown off as due to bad weather in early 2018.  But while acknowledging that bad weather had hit construction and parts of the retail sector, the official statistical agency, ONS, said “its overall impact was limited” and there was also an underlying slowdown in the growth of consumer spending.

The UK economy is now growing the slowest of the top G7 capitalist economies, as productivity has slowed to under 1% a year. Indeed, before the 2008-09 economic crisis, Britain’s output per hour worked grew steadily at an annual pace of 2.2% a year. In the decade since 2007, that rate has dropped to 0.2%.  If the previous trends had continued, the UK’s national income would be 20% higher than it is today.

The ONS points out that the UK has the largest “productivity puzzle” – the difference between post-downturn productivity performance and the pre-downturn trend in the G7; this was 15.6% in 2016, around double the average of 8.7% across the rest of the G7.  Indeed, only Italy has experienced a worse productivity performance since 2007 than the UK among the top G7 economies.

What this shows is that the UK capitalist economy is not suffering from bad weather or even the just the ”uncertainty” caused by Brexit, but instead there are deep underlying structural problems.  I have dealt with the reasons for these before. British capitalism has become a ‘rentier” economy, where surplus value increasingly comes from extracting ‘rents’ and financial profits from productive sectors in other parts of the world.

Now there have been some further new studies on the reasons for British capitalism’s poor productivity record.  It seems that poor productivity growth stems not from small local businesses that sell products and services within a small area, but failure lies with the heart of British capital’s big multi-national exporting companies.

A detailed sectoral analysis by the Economic Statistics Centre of Excellence this month that three-fifths of the drop in productivity growth stems from sectors representing only a fifth of output, including finance, utilities, pharmaceuticals, computing and professional services.  The Bank of England did a similar analysis down to the level of individual companies and found that it is the top ones that have become the slackers. The most productive groups are “failing to improve on each other at the same rate as their predecessors did”, according to its research. The best companies still improved their productivity faster than the rest, but productivity growth among the best has sharply fallen and this has hurt the UK’s growth rate.

The graph below shows that the top companies have still improved their productivity more than the small companies but at a slower pace than before the Great Recession and so overall productivity growth has slowed and fallen even further behind other capitalist economies.

Looking at individual companies on a regional basis, a study by the Centre for Cities showed that it is again the most successful companies, normally those with highly skilled employees and exposed to international competition through exports, that drive success across the UK.   “This idea that if only we can make the bottom 20 per cent of businesses more productive . . . is a bit of a red herring,” said Paul Swinney, head of policy and research at the Centre for Cities. “The fundamental problem is that we’ve got a low productivity economy outside the South-East.”

Why is productivity growth so poor in Britain, especially among the key big British multi-nationals?  The answer is clear: reduced business investment.  The latest business investment figure for Q1 2018 showed an absolute fall in investment.  Business investment growth has been on a steady trend down since the end of the Great Recession.

Indeed, total UK investment to GDP has been lower than most comparable capitalist economies and has been declining for the last 30 years.

While most mainstream economic studies accept that the reason for the UK’s poor productivity record, particularly since the end of the Great Recession, is due to low investment in key productive sectors by key large companies, nobody has an explanation for this.

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

British capitalism has increasingly become a ‘rentier’ economy that aims to make money from money (finance capital) rather than from investing in new technology to boost the productivity of productive labour.  This trend accelerated under the neo-liberal policies of Thatcher and successive governments and under global competitive pressure on old industrial and manufacturing sectors.  While German capitalism maintained its manufacturing sectors through new technology, investment and exports (and relocation to the east), British capitalism opted for finance and related services over production.

The final straw was the global financial crash and the Great Recession – that led to a severe blow to the financial sector.  Profitability in the non-financial sectors remains below the level before the global financial crash and well below the level of the last 1990s.  While that continues, business investment will fail to recover sufficiently to raise productivity growth back to levels seen prior to the global financial crash.

Greece: the spectre of debt

May 22, 2018

I’ve just got back from a visit to Greece to speak at a conference on my book, Marx 200.  While I was there I talked to several left activists and academics and it seems that little has improved for the Greek people since my last visit two years ago.  Back in 2010, Greece started to sink fast under the Aegean, hitting the bottom in 2015.  But since then, the economy has remained stuck in the mud and hardly moved.

In my book, The Long Depression I characterised the difference between a ‘normal’ slump in capitalist production and a depression.  The slump takes the form of a V in investment and output, down and then back up.  But a depression is more like a square root: down, then a small recovery but not to the previous level but staying trending below.  The Greek economy since the beginning of its crisis in 2010 fits that perfectly.

Greece’s economy grew 1.4% last year, marking the first time that real GDP growth has exceeded 1% since 2007.  But national output is still down 22% from its peak, an output collapse unprecedented in the annals of modern Europe and one that rivals the severity of the Great Depression in the United States while average real living standards (real wages, pensions, social welfare) are down 40% from the peak. Unemployment remains over 20% and youth unemployment is closer to 40%.

More than 600,000 working age Greeks have left the country seeking work.

And Greek capital remains prostrate.  Gross investment as a share of GDP is about half of its pre-crisis value.

Moreover, part of gross investment is the replacement of depreciating capital – such as replacing worn-out machines, or renovating decaying hotels. Net investment (i.e. gross investment, minus depreciation) was about 10% of GDP before the crisis, indicating that the capital stock was increasing at that time. But net investment has fallen absolutely since 2010, so the effective capital stock of the country is decaying.

Investment by the Greek private sector is constrained by low corporate profits (limiting its own funds available for investment) and weak bank balance sheet positions, as reflected by the approximately 40% share of total loans made by Greek banks that are non-performing loans (which constrains available bank lending).  Indeed, although the profitability of Greek capital has finally recovered a little, based on the liquidation of the weak and smaller businesses, huge unemployment and a reduction in real wages, the rate of profit is still below the level of 2010.

And small businesses and workers also face the huge burden of sharply increased taxes.  This is to meet the fiscal targets set by the Troika (the ECB, the IMF and the Eurogroup) imposed in a series of ‘bailout’ programmes introduced since 2010.  Greek public debt was about 80% of GDP in 2010 as the tsunami generated by the global financial crash and the Great Recession reached weak Greek capitalism.  That public debt is now around 180% of GDP.  Why?

Because the German and French banks demanded full face value repayment of the Greek government and bank bonds that they had bought before 2010 when interest yield was so high. But Greek banks could no longer service these bonds because Greek capitalists were going bust or defaulting on their bank loans.

The Greek state was also unable to bail out its banks and meet its bond obligations as the economy collapsed.  The rising cost of unemployment and welfare and falling tax revenues drove up the government budget deficit to record levels.

Austerity was now the order of the day.  Workers, as taxpayers, had to take on the burden of servicing and repaying the capitalist sector’s debt.  First, Greek conservative governments agreed with the Troika on a series of cuts in public sector jobs and services, privatisations and pension reductions to ‘stabilise’ the debt.  But despite the sacrifices, successive bailout programs failed to restore the economy. So more loans from the official agencies were conjured up, along with yet more austerity.

Then the leftist Syriza party won the election in 2015 pledged to oppose any further austerity and called for debt repudiation.  And as we know, in July 2015 the Greek people voted 60-40 to reject the Troika measures.  But within days of that referendum, the Syriza government capitulated to the pressure of capital as the ECB withdrew credit and support for Greek banks and the banks were closed.  Syriza signed up for a new program that took the debt up to its current 180% of GDP.

That program comes to an end in August this year and in the next few days the Eurogroup and the Syriza government must decide what to do next. But, as a recent report by some top mainstream economists, put it: “A spectre continues to haunt Greece and no less its creditors. Under plausible projections for growth, interest rates and fiscal performance, the government’s debt is unsustainable, as its official creditors have effectively acknowledged.”  Despite never-ending ‘austerity’ in the form of annual budget surpluses, the debt level has remained undisturbed – because as fast as the government cuts spending, the loans keep rising – but not to fund government services but to repay previous loans to the IMF and the ECB!

The Syriza government has done everything asked of it by the Troika and now, with just a maximum of a year to go before new elections, it is desperate to get the Eurogroup to agree to some ‘debt relief’ to convince voters that things are finally going to improve.  The IMF agrees that debt relief is needed, along with a less severe trajectory for further austerity.  But the Eurogroup does not.  It refuses, so far, to reduce further the interest rate on its loans (already pretty low) or extend the time scale of the maturity of the debt repayments (already well into 2030).  And it certainly does not want any actual cut in the face value of the debt outstanding (a write-off), which it sees as setting a precedent that future debtors can get away without paying eventually.

The Eurogroup claims that the Greeks should be able to service their debt and grow now that they have met the terms of latest program and so can return to ‘normal’ by borrowing on world markets.  The IMF and most economists disagree.  The IMF reckons the burden of the debt is too high for generations of Greeks to service through taxation and cuts indefinitely.  So the IMF supports a form of debt relief (extend loan maturities and lower interest rates).  But it also wants the Syriza government to pursue a neoliberal programme of: decimating trade union rights, deregulating markets and continuing privatisations.  As the recent IMF communique put it:“Despite progress on the structural front, Greece’s overarching challenge remains the liberalization of restrictions that impair its investment climate. Thus, the authorities should reconsider their plans to reverse cornerstone collective-bargaining reforms after the end of the program, and should instead focus on redoubling efforts to open up still protected product and service markets, so as to facilitate investment and create new jobs.”

The reality is that with the Greek economy unlikely to grow at more than 2% a year after inflation for the foreseeable future and the burden of financing the debt standing at 15% of GDP each year and rising, there is no way that Greek capitalism can escape of the spectre of the debtors prison.

At the end of 2015, 75% of Greek public debt was in the form of official loans. Bond holdings of European central banks amounted to an additional 6%, while some additional percentage was held by (largely state-owned) Greek banks. Even if Greece reaches an overall budget balance this year, new borrowing will be needed in the future. The current €16bn loan from the IMF needs to be repaid by 2021, and the €20bn bond holdings of the ECB and national central banks by 2026. The current stock of €3bn pre-2012 bonds, which were not restructured in 2012, also needs to be repaid. Repayment of the remaining €31bn bonds which resulted from the 2012 debt restructuring will start in 2023. The €53bn bilateral loans from euro-area partners granted in the first financial assistance programme will have to be repaid between 2020-2041, according to current schedule.

As the economists group put it starkly: “To achieve debt sustainability without face-value debt relief, ….would imply a large increase in the total exposure to Greece of the European official sector from currently expected end-2018 levels, that is, by 50% or more. It would also mean that Greece could still be paying off debts to European official creditors well into the 22nd century.”!

As the economy crawls along the bottom, the Syriza government can offer no relief to its voters from the grinding poverty and tax burdens they now suffer.  Indeed, on 1 January 2019, pensions, already cut heavily, face another cut of up to 18%.  The government calls for debt relief from the Troika but what is really needed is debt cancellation; proper taxation of the very rich who continue to avoid any severe measures; the public ownership of the banks and big businesses that rule Greek investment and a state plan for investment.   It was what was needed at the time of 2015 referendum when the Greek people voted down the Troika measures.  Three years later, nothing has really changed and, as a result, in the next election, voter turnout will plummet and Syriza is likely to lose and be replaced by a right-wing coalition.  The spectre of debt will remain.

Rising world inequality

May 15, 2018

There is a book sweeping the popular media at the moment.  It’s called Factfulness.  It purports to argue that, contrary to the conventional wisdom, the world is becoming a better place.  Poverty is falling, life expectancy is rising; health levels are improving; people have more things and better services.  Even violence and wars are in decline.

This is a hoary old message that has been expounded in the past by billionaire Bill Gates, among others.  Indeed, he gives this new book much praise – as it justifies his view that things are getting better for the majority and with the right policies on health, education, population, climate change etc, the world can progress without any change in its mode of production and social structure.

I have taken up this optimistic message in previous posts and my latest book, Marx 200, discusses the dialectical nature of the development of capitalism – something Marx recognised as early as 1848 in the Communist Manifesto.  Yes, capitalism has taken the productive forces forward like no other mode of production before (slave society, feudalism and Asian despotism) but it also carries with it a dark side of increased exploitation, dominance of the market and machine over people’s freedom and livelihoods; and global wars and even the destruction of the planet.

In contrast to the optimistic Factfulness, the latest World Inequality Report is a sobering analysis.  Inequality between rich and poor is widening at an increasing pace.  The authors, the most highly respected experts on inequality of income and wealth globally, conclude that the number of billionaires rose by the biggest amount ever in 2017, while over half the world’s population lives on between $2 and $10 a day. The report shows the share of wealth held by the top 1% of earners in the US doubled from 10% to 20% between 1980 and 2016, while the bottom 50% fell from 20% to 13% in the same period.

Kofi Annan, former head of the United Nations, called this scale of global economic inequality “staggering and shaming”.  The authors find that income inequality has increased in nearly all world regions in recent decades, but at different speeds.  Since 1980, income inequality has increased rapidly in North America, China, India, and Russia. Inequality has grown moderately in Europe.

At the global level, inequality has risen sharply since 1980, despite strong growth in China. The poorest half of the global population has seen its income grow significantly thanks to high growth in Asia (particularly in China and India). However, because of high and rising inequality within countries, the top 1% richest individuals in the world captured twice as much growth as the bottom 50% individuals since 1980.

When it comes to inequality of wealth as opposed to income, there are some startling findings in the report.  “Economic inequality is largely driven by the unequal ownership of capital, which can be either privately or public owned. We show that since 1980, very large transfers of public to private wealth occurred in nearly all countries, whether rich or emerging. While national wealth has substantially increased, public wealth is now negative or close to zero in rich countries.”

The authors reckon that the combination of large privatizations and increasing income inequality within countries has fuelled the rise of wealth inequality, even if it has not yet returned to its extremely high early-twentieth-century level in rich countries. The rise in wealth inequality has nonetheless been very large in the United States, where the top 1% wealth share rose from 22% in 1980 to 39% in 2014. Most of that increase in inequality was due to the rise of the top 0.1% wealth owners.

In my view, inequality of wealth and income is an inherent feature of class societies, and capitalism is no exception.  But that does not mean it would rise indefinitely, a point made by the Inequality report.  That depends on dynamics of capital accumulation and policy action by governments.

Naturally, the authors (or Kofi Annan) do not propose a radical restructuring of the capitalist system ie its replacement.  Instead, they look for progressive taxation of incomes; control of tax evasion and offshore havens for wealth; ‘more education’ and public investment.  The problem with these worthy policies is that they cannot be implemented if the interests of capital are to be protected, particularly when capitalism is struggling to sustain the profitability of capital precisely by holding down trade union strength (which is an important counter to rising inequality ignored by the authors); maintaining privatisations (not public investment) and ‘deregulating’ labour markets ie by increasing the overall exploitation of labour.

Moreover, recurring crises in capitalist production are not the result of rising inequality (although some leftists argue this); and so the real faultlines of capitalism will not be resolved by reducing inequality.

What is also missing from the report is why wealth inequality has risen – it is mainly the result of the increased concentration and centralisation of productive assets in the capitalist sector.  The real wealth concentration is expressed in the fact that big capital (finance and business) controls the investment, employment and financial decisions of the world.  A dominant core of 147 firms through interlocking stakes in others together control 40% of the wealth in the global network according to the Swiss Institute of Technology. A total of 737 companies control 80% of it all. This is the inequality that matters for the functioning of capitalism – the concentrated power of capital.

Global debt crisis ahead?

May 8, 2018

Argentina is seeking International Monetary Fund aid after a series of drastic interest rate rises failed to stop the slide in the peso, pushing the country towards a financial crisis. Mauricio Macri, Argentina’s right-wing, pro-big business president, announced the approach to the IMF in a nationally televised address, saying international assistance would enable the government to “avoid a crisis like the ones we have faced before in our history”.  Asking the IMF for funds will mean more fiscal austerity and a hit to living standards.  One foreign investor said “The most effective way would be to restrict wage hikes.”

In recent weeks, the right-wing government in Argentina has been forced to hike its policy interest rate (which sets the floor for all borrowing rates) dramatically from an already high 27% in April up to 40% last week.  In January, the Argentine central bank had been experimenting with reducing its interest rate but that came to an end very quickly.  Why? For three reasons.

First, foreign investors (who are key to the success of the austerity and pro-business policies being adopted by the Macri government) were concerned that inflation was not under control and began to withdraw their capital.  Even the government admitted that inflation was heading towards 15% this year.  The Argentine peso started to slip against the dollar.

Second, the dollar started to jump in the last month because of fears of an international trade war, which always leads to investors rushing to the ‘safe haven’ of the dollar and because the US Federal Reserve is pressing on with raising its policy rate, thus making investing in other countries’ currencies less attractive to speculators.

And third, there has been a sharp rise in the crude oil price, driven by attempts to boost it from the OPEC cartel in the Middle East and growing political tensions between the US and Iran.  That means extra costs of importing energy for many economies like Argentina, Turkey or South Africa.

Those economies with large trade deficits, high inflation and apparently little control over their government spending, and above all, high levels of debt, are the most vulnerable to foreign investors taking their money away.  And that means Argentina, Turkey, South Africa and others.

The Argentine peso has now fallen to a record low (fuelling even more inflation) and its government bond prices have plummeted.  Only last year the Macri government issued a 100-year bond, confident that enthusiasm for the ending of the left-reformist Kirchner administration after 12 years would lead to a flood of foreign demand.  The value of the bond has now dropped to 83 cents to the dollar.  With the government now offering over 6% interest on that bond, compared to just under 3% for the ‘safe’ US government bond, the government is hoping to stem the outflow of capital. The central bank in Buenos Aires has blown $5bn of foreign exchange reserves in a week and enacted three shock rate rises in an attempt to halt the slide in the value of the peso.

But rising interest rates in the US threatens to put many emerging economies, both their corporate and government sectors into new difficulties.  Many have borrowed dollars to cover their deficits, to invest or to speculate, and now the cost of that debt is going to rise.  Turkey is now seriously in trouble.  The Turkish lira sank, in spite of the central bank intervention. Dollar-denominated government bond yields jumped to new post-crisis highs and the stock market extended its decline this year to 22 per cent — the worst performance of any bourse in the world outside of Venezuela. If the central bank hikes rates, as Argentina has done, it risks inflict severe damage on the local economy.

In previous posts, I have raised the risk that the hiking of interest rates by the Fed could provoke a debt crisis, particularly in the so-called emerging economies, because debt levels have reached record high levels in those economies.  Also global debt is at a record high because governments and corporations have borrowed heavily at cheap rates in order to stabilise the banking system and boost stock markets and spending.

The Washington-based Institute for International Finance (IIF) argues that, in addition to Argentina and Turkey, Ukraine and South Africa are relatively vulnerable to a sharp shift in ‘risk appetite’ by foreign investors – see graph below.

The IIF now reckons that global debt rose another $21trn in 2017 to take the total to $237trn.  Sure much of this extra debt has been incurred by China, but that economy is much more able to manage that debt.  Most of it is in local currency not dollars and China has huge foreign currency reserves in dollars ($3trn) that provide a buffer for any debt collapses.

But other ‘emerging’ economies are not so well placed.  Dollar and euro debt now tops $8trn in these countries or 15% on average of all debt.  Argentina’s debt is over 60% owned by foreigners, while Turkey has seen one of the biggest rises in FX debt since the end of the Great Recession in 2009.

As interest rates rise on this debt, servicing it has become more difficult.  According to the IIF, ‘stressed’ firms now account for more than 20% of corporate assets in Brazil, India and Turkey and those companies where profits are greater than interest costs are shrinking fast. “Even with low global rates, many non-financial corporates are running into trouble with debt service,” the IIF added.  In Argentina, interest rates for smaller companies have moved above 15%.  “Companies have burned through their working capital since then as they can’t get rational financing,” he said. “Big corporates with access to international financing are in a better position, but medium and small companies are in trouble.”, said one analyst.

The crunch will come when corporate profits in many economies begin to fall as debt servicing costs rise.  My latest estimate of global corporate profits (based on a weighted average of profits in the US, Germany, the UK, Japan and China, showed a fall in the last quarter of 2017 for the first since mid-2016.  It remains to be seen how things went in the first quarter of 2018.

Watch this space.

Marx and Keynes in Berlin

May 5, 2018

It’s 200 years today since Karl Marx was born.  And it’s just over 100 years since the great 20th century economist John Maynard Keynes wrote about Marx’s contribution.  Keynes wrote then: “how  can I accept the (Communist) doctrine which sets up as its bible above and beyond criticism, an obsolete textbook which I know not only to be scientifically erroneous but without interest or application to modern world”.  I think we can see that Keynes had a low opinion of Marx’s ideas.

And we can see why from the following comment of Keynes.  “How can I adopt a creed which, preferring the mud to the fish, exalts the boorish proletariat above the bourgeoisie and the intelligentsia, who with all their faults, are the quality of life and surely carry the seeds of all human achievement? “

Keynes stood for the preservation of capitalism and its ruling class, for all its faults, over the ‘boorish proletariat’.  This was my opening salvo in my presentation to the Marx 200 conference in Berlin, organised by the Rosa Luxemburg Institute.  My presentation went on to cover where I thought Marx and Keynes differed and why Marx’s ideas were superior as an analysis of capitalism and as a basis for political action.  In my view, it is necessary to spell out these differences because the dominant analysis of capitalism adopted in the labour movements of the major capitalist economies, especially by the leaders of those movements, is Keynesian theory and policy, not Marx.  Marx is ignored or dismissed, on the whole.

However, at the session, Professor Radhika Desai disagreed with me.  For her, the similarities (agreements) between Keynes and Marx were greater than the differences.  It’s a debate that we could have, because in my view expunging the influence of Keynes (a supporter of the ruling class) from his dominant influence in the labour movement is an essential task.  Certainly Keynes was determined to expunge the influence of Marx from the labour movement and from his economics students –as the quotes above show.

But let’s just briefly consider the similarities and differences between these two great political economists of the last 200 years.  First, the agreements as usually presented by those who see them.  Both Marx and Keynes think there is something wrong with capitalism.  Both Marx and Keynes have a falling rate of profit theory.  Both Marx and Keynes wanted the ‘socialisation of investment’.  Both Marx and Keynes wanted and expected the ‘euthanasia of the rentier’ (Keynes’ words), namely the disappearance of finance capital.

From this, it sounds that, despite Keynes’ crude dismissal of Marx, he had a lot in common with Marx’s analysis.  But that would be looking at it very superficially, in my opinion.  In my paper to the conference session, I make a lot of points about how Keynes rejected the labour theory of value (both classical and Marx’s) and stood by marginalist and utility theory.  Berlin 2018  For Keynes, there was no theory of exploitation of labour power that extracted profit from the unpaid labour of the working class.  Profit came from ‘capital’ investing.  Workers got wages for working; bankers got interest from lending and capitalists got profit from investing; each according to his or her own.  This is the standard mainstream ‘factors of production’ theory.  So from the start, Keynes denies that there is exploitation in the capitalist mode of production; the market decides and there is free and fair exchange: profit for capital, wages for workers.

Of course, if you have followed this blog and read Marx’s ideas, you would know that this is nonsense and a mere apologia for the rule of capital.  Where does profit come from in this mainstream theory?  There is no explanation.  Somebody must pay for it and yet there is free and fair exchange of commodities in the market –so there can be no profit in the market, merely an exchange of value (money).  Keynes’ and the mainstream approach really justifies the rule of capital and, for that matter, inequality of income and wealth by denying the reality that a small group controls of the means of production and forces the rest of us to work for a living.  Indeed, Keynes said that: “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.“

Then there is the rate of profit theory.  Those who reckon Marx and Keynes are allies in their critique of capitalism like to point out that Keynes had a theory of a falling rate of profit as well as Marx.  Indeed, they were the same.  But Keynes’ theory has little to do with Marx’s.  Keynes did see the fluctuation of the rate of profit—or the marginal efficiency of capital (MEC), to use Keynes’s terminology—as the main factor that determines the changes in the phases of industrial cycle: “Now, we have been accustomed in explaining the ‘crisis’ to lay stress on the rising tendency of the rate of interest under the influence of the increased demand for money both for trade and speculative purposes. At times this factor may certainly play an aggravating and, occasionally perhaps, an initiating part. But I suggest that a more typical, and often the predominant, explanation of the crisis is, not primarily a rise in the rate of interest, but a sudden collapse in the marginal efficiency of capital.

But Keynes’ theory of MEC is based on falling ‘marginal productivity’ due to the growing ‘abundance of capital’ and on the psychological expectations of capitalists about the future.  The rate of profit will gradually fall as more and more technology is produced; the more abundant is capital, the less it is wanted and so its marginal value falls.  This is not Marx’s theory.  His depends on the continual drive by capital to replace labour in production with machines.  Individual capitalists compete with each other to drive down costs and in so doing that pushes up the organic composition of capital by shedding labour.  As labour is the only source of profit, not capital (as in Keynes’ theory), the rate of profit tends to fall.  And it is a tendency.

For Keynes, however, the MEC will fall not because insufficient value is being extracted from labour but because capitalists ‘suddenly’ lose their appetite for investment: “that marginal efficiency of capital depends, not only on the existing abundance or scarcity of capital-goods and the current cost of production of capital-goods, but also on current expectations as to the future yield of capital-goods. In the case of durable assets it is, therefore, natural and reasonable that expectations of the future should play a dominant part in determining the scale on which new investment is deemed advisable. But, as we have seen, the basis for such expectations is very precarious. Being based on shifting and unreliable evidence, they are subject to sudden and violent changes.”

So the fall in Keynes’ rate of profit is due to individual capitalists’ subjective views about the future (‘confidence’) not because of an objective change in the conditions of accumulation of capital and production (Marx’s view).  As Paul Mattick Snr commented 50 years ago, “what are we to make of an economic theory, which after all claimed to explain some of the fundamental problems of twentieth-century capitalism, which could declare: ‘In estimating the prospects of investment, we must have regard, therefore, to the nerves and hysteria and even the digestions and reactions to the weather of those upon whose spontaneous activity it largely depends’?

The ‘sudden collapse’ in MEC has caused the slump (because interest rates are now too high compared to profitability and people ‘hoard’ money instead of investing or consuming).  But once that is overcome, we can return to the ‘normal’ capitalist mode of production.  “Economic prosperity is…dependent on a political and social atmosphere which is congenial to the average businessman.”  Unemployment, I must repeat, exists because employers have been deprived of profit. The loss of profit may be due to all sorts of causes. But, short of going over to Communism, there is no possible means of curing unemployment except by restoring to employers a proper margin of profit.”

Then there is this ‘socialisation of investment’.  Keynes called for this (a vague phrase) as a ‘final solution’ to the problem of depression in a capitalist economy.  If monetary easing (cutting interest rates and pumping in money by central banks) or fiscal stimulus (tax cuts and government spending) did not work in reviving the capitalist economy and getting capitalist to invest more, then maybe it would be necessary for the government to step in directly and take over the show. It is not clear, however, that Keynes meant any expropriation of capitalist industry and companies – something he would hate.  He probably meant that state operations and even some plan should be introduced – something similar to Roosevelt’s New Deal projects in the 1930s in the US.  And anyway, it is clear that Keynes saw ‘socialisation of investment’ as just a temporary measure to get capitalism going again (perhaps like the war economy 1940-45 eventually did).  Once the ‘technical malfunction’ (lack of demand) in the capitalist mode of production had been overcome, then we could revert to free markets and investment for profit and end ‘socialised investment’.

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.”

Keynes saw all his policies as designed to save capitalism from itself and to avoid the dreaded alternative of socialism.  “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.”  Fear of revolution was central to Keynes’ policies.  I don’t need to explain that Marx did not see this way at all.

As for the ‘euthanasia of the rentier’, 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 as the MEC fell.  So bankers and financiers would no longer be necessary; they could be phased out.  Well, that does not seem to be happening.  Indeed, the very people who claim that Keynes is a ‘progressive’ economist with great similarities to Marx 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, he describes 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 as I have argued in a previous post, 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.

So I reckon that the differences (and there are others in my paper) between Keynes and Marx are fundamental and any superficial similarities pale in comparison.  That is important because it is Keynesian ideas that dominate in the labour movement, not Marx 200 years since his birth.

More on other things at the Berlin conference in another post.

Managers rule, not capitalists?

April 29, 2018

The capitalist mode of production is coming to an end.  But it is not being replaced by socialism. Instead, there is a new mode of production, based on a managerial class that has been forming in the last hundred years.  This managerial class does not exploit the working class for surplus value and its accumulation as capital.  The managers instead use power and control which they exercise through the management of transnationals and finance.  The working class will not be the ‘gravediggers’ of capitalism, as Marx expected.  The ‘popular classes’ instead must press the managerial class to be progressive and modern; and eliminate the vestiges of the capitalist class in order to develop a new meritocratic society. Such is the thesis of a new book, Managerial Capitalism, by Gerard Dumenil and Dominique Levy (D-L), two longstanding and eminent French Marxist economists.

I participated in the launch of the book in London this week.  At the launch, Gerard Dumenil argued that capitalist class (i.e those who own the means of production) have been replaced by managers who control the big companies and take all the decisions that matter.  The capitalist class now is like the fading old feudal class in the early 19th century when Marx came on the scene.  The capitalist class took over then and the feudal class converted themselves into capitalists eventually as well.  Now the managerial class has taken over and the traditional capitalists are increasingly converting themselves into the new managerial class.

Marx was well aware to the separation of functions in capitalism between the owner of capital and the managers of corporate capital.  As he put it in Capital Vol 3: “Joint-stock companies in general (developed with the credit system) have the tendency to separate this function of managerial work more and more from the possession of capital, whether it is owned or borrowed … But since on the one hand the functioning capitalist confronts the mere owner of capital, the money capitalist, and with the development of credit this money capital itself assumes a social character, being concentrated in banks and loaned out by these, no longer by its direct proprietors; and since on the other hand the mere manager, who does not possess capital under any title, neither by loan nor in any other way, takes care of all real functions that fall to the functioning capitalist as such, there remains only the functionary, and the capitalist vanishes from the production process as someone superfluous.”(ibid. p. 512).

D-L spend some time in their book reminding us that Marx was aware of this division.  But Marx did not see this as leading to a new managerial class. The division was merely of appearance. The system had not altered: “producing surplus-value, i.e. unpaid labour, and in the most economical conditions at that, is completely forgotten in the face of the antithesis that interest accrues to the capitalist even if he does not perform any function as capitalist, but is simply the owner of capital; while profit of enterprise, on the other hand, accrues to the functioning capitalist even if he is not the owner of the capital with which he functions. In the face of the antithetical form of the two parts into which pro.t and thus surplus-value divides, it is forgotten that both are simply parts of surplus-value and that such a division can in no way change its nature, its origin and its conditions of existence” (p. 504).

D-L reckon that this view of the relation between outright capitalist families and their managers is out of date.  Managers, not capitalist families, now rule. In the book, D-L back up their thesis with empirical evidence on rising income inequality in the US and other major economies.  The top 1% of income earners in the US, who would usually be regarded as part of the capitalist class, now get 80% of their income as salaries from working as managers and top executives, not from capital income (dividends, interest and profit).  So these top people are managers, not capitalists.  This is why, D-L argue, we must revise the traditional Marxist view that top managers are merely functionaries of the capitalist class.

But the data could be interpreted in another way.  Simon Mohun has done similar empirical work (ClassStructure1918to2011wmf) on where the income of the top layers comes from.  He found that the working class – those who depend on wages alone for their living – still constitute 84% of the working population.  Managers constitute the rest, but only 2% (Qc in graph below) can actually live off rent, interest, capital gains and dividends alone.  They are the real capitalist class.  And that ratio has little changed in 100 years, even if their direct source of income has.

Moreover, this is the group that has gained most during the last 30 years of rising inequality.  The income of this capitalist class (Qc) has risen from about 9 times the average income of the working class to 22 times while managers’ incomes (Lpd in graphs) have risen from 2.5 times to 3.5 times workers income.  So rising inequality is primarily the result of increased exploitation (a rising rate of surplus value) in Marxist terms.

Yes, for the top 1%, since 1980, their ‘labour’ source of income has fluctuated around 60% of total average income (around double what it was in the 1920s). But this top 1% of managers includes investment bankers, corporate lawyers, hedge fund and private equity managers and corporate executives. Moreover, two-thirds of the top 1% are managers only in name, as an increasing proportion of these executive occupations are in so-called ‘closely held businesses’. That means they own their own businesses but pay wages to themselves as the main source of income.  This blurs the distinction between labour and non-labour income.  So the top 1-3%, according to Mohun, are still capitalists as Marx understood it, even if they pay themselves huge salaries and bonuses.

Moreover, as one study shows“The incomes of executives, managers, financial professionals, and technology professionals who are in the top 0.1% of the income distribution are found to be very sensitive to stock market fluctuations. Most of our evidence points towards a particularly important role for financial market asset prices, shifting of income between the corporate and personal tax bases, and possibly corporate governance and entrepreneurship, in explaining the dramatic rise in top income shares.”  So their labour income depends on capitalist stock markets and financial assets.

As for managers in general, by most definitions, they constitute about 17-20% of the workforce, but it seems a jump to suggest that these constitute a new managerial class, when they can vary from Jeff Bezos at Amazon to a supervisor in Walmarts. “While managers supervise, most of them are also supervised, and splitting the distribution into working class and non-working class does not address the question of who has to sell their labour-power and who does not. That is, in no way can managers be considered a homogeneous group, because they are fundamentally divided into those who might sell their labour-power but do not have to do so, and those who do sell their labour-power because they have to do so.” Mohun.

Erik Olin Wright looked the class structure of six advanced capitalist economies and showed that ‘managers’ are a curate’s egg of a group in modern capitalism.  By breaking down the skill factors of managers, he reckoned that most managers are really workers with skills.  The working class proper was still over 70% of the labour force.  Mohun’s tax calculation method finds that the working class is more like 80-85%.

Surely, the real question is: in whose class interest do managers carry out their managerial labour? The very nature of the capitalist economy obliges the managers to manage in the interest of the 1%.  Their jobs depend on the decisions of the shareholders, the company share price and its earnings performance, however highly paid they are.

Moreover, as Marx predicted, the main feature of modern capitalism is a growing concentration and centralisation of wealth (not income).  And that means wealth held in the means of production and not just household wealth.  In 2016, the top 1% of the US population held 40% of total net wealth, while the bottom 80% held just 10%. On the basis of Wright’s class structure analysis, this suggests that the top 1% is a combination of capitalists and expert managers. The next 20% by wealth consists of the remaining capitalists and the top two thirds of the managers. The bottom 80% by wealth consists of the bottom third of the managers and the entire working class (wage workers and supervisors).

Modern capitalism has developed into a huge network of interlocking companies with cross-shareholdings.  Three systems theorists at the Swiss Federal Institute of Technology in Zurich developed a database listing 37 million companies and investors worldwide and analysed all 43,060 transnational corporations and share ownerships linking them.  They discovered that a dominant core of 147 firms through interlocking stakes in others together control 40% of the wealth in the network.  A total of 737 companies control 80% of it all.   This is the concentrated power of capital.  147 control)

At the launch, Gerard Dumenil argued that this concentration of ownership among a small number of global companies, particularly banks, actually proved D-L’s thesis.  It was managers and finance directors who ran these companies and made decisions on mergers etc while the shareholders followed like sheep.  This was proof of ‘managerial capitalism’.  Instead, I would argue that it was proof that, since Marx wrote about joint stock companies 150 years ago,the capitalist mode of production has dominated even more over investment, employment and production globally.

One of the inherent features of the capitalist mode of production is that it generates crises of production, investment and employment at regular and recurring intervals.  This is the consequence of production for profit by individual private owners on a market which runs in contradiction to the needs of society.  This is a unique feature of capitalism. Has this disappeared?  Was Marx not proved right in expecting crises to become more global and damaging?

Dumenil seemed to be suggesting that Marx was wrong about growing crises.  At the launch he claimed that the recent Great Recession had avoided a major depression because of ‘managerialism’.  The crisis had been managed.  Well, the evidence is surely to the contrary –as I have argued at length on this blog and in my book, The Long Depression.

Dumenil, however, was insistent that those of us who stick to Marx’s old analysis and predictions needed to break with dogma and recognise the new mode of production that was upon us.  The political strategy that flowed from this was for the ‘popular classes’ (working classes) to reinvigorate the class struggle – but not for the replacement of capitalism with socialism.  That was not going to happen.  But instead the aim must be to push the ruling (progressive?) managerial class to the left to introduce pro-labour reforms and isolate the small and fading capitalist class.  Well, if the working class is still 80% of the adult population in most advanced economies (let alone elsewhere) and capital is even more concentrated and centralised than ever before, why not overthrow ‘managerial capitalism’ too?

The value (price and profit) of everything

April 25, 2018

Mariana Mazzucato’s new book, The value of everything, seems to have caught the imagination of the liberal wing of mainstream economics.  It has even won the accolade of a review in the UK’s Financial Times by top mainstream Keynesian economic journalist, Martin Wolf and was launched at an event at the London School of Economics.

Mazzucato previously wrote an important book, The Entrepreneurial State, that ‘debunked’ the myth that only the capitalist sector contributes to innovation while the state sector is a burden and cost to growth.  On the contrary, Mazzucato showed that “From the internet to nanotech, most of the fundamental advances – in both basic research but also downstream commercialisation – were funded by government, with businesses moving into the game only once the returns were in clear sight. All the radical technologies behind the iPhone were government-funded: the internet, GPS, touchscreen display, and even the voice-activated Siri personal assistant.”

In that book, she continued: “Apple initially received $500,000 from the Small Business Investment Corporation, a public financing arm of the government. Likewise, Compaq and Intel received early-stage grants, not from venture capital, but via public capital through the Small Business Innovation Research program (SBIR). As venture capital has become increasingly short-termist, SBIR loans and grants have had to increase their role in early-stage seed financing the US Department of Health and the Department of Energy. Indeed, it turns out that 75 per cent of the most innovative drugs owe their funding not to pharmaceutical giants or to venture capital but to that of the National Institutes of Health (NIH). The NIH has, over the past decade, invested $600 billion in the biotech-pharma knowledge base; $32 billion in 2012 alone.”  Mazzucato showed that taxpayer enabled these tech companies to become ‘uber’ rich.

Since then, Mazzucato’s powerful arguments in favour of government investment and the role of the state have led to her becoming an adviser to the UK’s Corbyn Labour leadership and also joint winner of the Leontief prize for advancing the frontiers of economic thought, with inequality expert Branco Milanovic, formerly chief economist at the World Bank.

Now in her new book, she takes on a bigger task: trying to define who (what) creates value in our economies, a subject that has been debated by the greatest economists of capitalism from Adam Smith onwards.  “Who really creates wealth in our world? And how do we decide the value of what they do?”

Her main line in this new book is that 1) government is not recognised in national accounts as adding to value through its contribution to investment and innovation; 2) finance has sneaked into accounts as productive and value-creating when in reality it ‘extracts’ value from productive sectors and breeds speculation and short-termism etc.; and 3) there has been the growth of a monopoly sector in modern capitalism that is ‘rent-seeking’ rather than ‘value-creating’.

Mazzucato argues that “until the 1960s, finance was not widely considered a ‘productive’ part of the economy. It was viewed as important for transferring existing wealth, not creating new wealth. Indeed, economists were so convinced about the purely facilitating role of finance that they did not even include most of the services that banks performed, such as taking in deposits and giving out loans, in their calculations of how many goods and services are produced by the economy. Finance sneaked into their measurements of Gross Domestic Product (GDP) only as an ‘intermediate input’ – a service contributing to the functioning of other industries that were the real value creators.  In around 1970, however, things started to change. The national accounts – which provide a statistical picture of the size, composition and direction of an economy – began to include the financial sector in their calculations of GDP, the total value of the goods and services produced by the economy in question.

So that today “the issue is not just the size of the financial sector, and how it has outpaced the growth of the non-financial economy (e.g. industry), but its effect on the behaviour of the rest of the economy, large parts of which have been ‘financialized’. Financial operations and the mentality they breed pervade industry, as can be seen when managers choose to spend a greater proportion of profits on share buy-backs – which in turn boost stock prices, stock options and the pay of top executives – than on investing in the long-term future of the business.”

Investment is now based on short-term returns which results in less reinvestment of profits and rising burdens of debt which, in a vicious cycle, makes industry even more driven by short-term considerations. “In modern capitalism, ‘value-extraction’ is rewarded more highly than value-creation: the productive process that drives a healthy economy and society. From companies driven solely to maximize shareholder value to astronomically high prices of medicines justified through big pharma’s ‘value pricing’, we misidentify taking with making, and have lost sight of what value really means”.

Now there are many powerful truths in Mazzucato’s theses, and they are very much the kernel of modern post-Keynesian and heterodox economics.  But as such, there are also serious weaknesses with her view of value.  To argue that government ‘creates’ value is to misunderstand the law of value under capitalism.  Under capitalism, production of commodities (things and services) are for sale to obtain profit.  Commodities must have use value (be useful to someone) but they must also have exchange value (make a sale for profit).  From that capitalist perspective, government does not create value – indeed, it can be seen as a (necessary) cost that reduces the profitability of capitalist production and accumulation.  GDP is biased as a measure of value created in an economy for that good reason. It measures much more closely exchange value not the production of all use values, which would include government investment and housework (perhaps even happiness, welfare and trust).

Sure, government creates use value (although it is often use values found in weaponry, nuclear arms, chemicals etc and security forces to protect the interests of capital). But it is not productive of value and surplus value for capital.  For capital, there is not ‘value in everything’.  For capital, it is (exchange) value, not use value that matters in the last analysis.

Mazzucato is right that the finance sector does not create value. Marxist economics says it only circulates value created by labour power in productive sectors (those sectors that increase the productivity of labour power and thus the accumulation of more capital).  Banks and the credit system contribute to reduce the costs of transferring money (taking deposits and making loans) so that businesses can borrow efficiently and keep capital circulating.

Finance and credit is necessary for capital to accumulate, but does not add value itself.  But even this contribution to the circulation of capital has increasingly taken a back seat to the risk-taking role of investing in ‘fictitious capital’ (bonds and stocks trading). In her book, Mazzucato quotes the work of Andy Haldane, now chief economist at the Bank of England.  He estimated what extra value in GDP terms the financial sector actually adds to the wider economy.

He found that in the US, the value-added of financial intermediaries was about $1.2 trillion in 2010 – equivalent to 8% of total GDP. In the UK, the value-added of finance was around 10% of GDP in 2009.  In the US, the share of finance in GDP has increased almost fourfold since the Second World War. But Haldane reckons these contributions really express high risk-taking in lending and investment by banks that eventually come a cropper when a financial or property bubble bursts, as they do periodically.  Echoing Marx’s value theory, Haldane concludes: “The act of investing capital in a risky asset is a fundamental feature of capital markets. For example, a retail investor that purchases bonds issued by a company is bearing risk, but not contributing so much as a cent to measured economic activity. Similarly, a household that decides to use all of its liquid deposits to purchase a house, instead of borrowing some money from the bank and keeping some of its deposits with the bank, is bearing liquidity risk. Neither of these acts could be said to boost overall economic activity or productivity in the economy. They re-allocate risk in the system but do not fundamentally change its size or shape.”  Indeed, an IMF paper has shown that it is not just that banks trigger regular financial collapses, the finance sector has a generally negative (parasitic?) effect on the productive sectors of the capitalist economy over time.

Finance is clearly unproductive.  But it is not just finance that is unproductive.  Real estate, commercial advertising and media and many other sectors are not ‘productive’ because the labour employed does not create new value but instead just circulates and redistributes value and surplus value created.  And it is the profitability of the productive sectors that is key to a capitalist economy, not the overall amount of use values produced.

Moreover, was there nothing wrong with capitalism before finance (and ‘financialisation’) emerged after the 1970s?  Were there no crises of overproduction and investment, no monopolies and rent-seeking before the 1970s?  Was there a wonderful productive, competitive, equal capitalist mode of production existing in the 1890s, 1930s or even in the 1960s? And why did finance suddenly emerge in the 1970s, leading to the GDP measure being altered to account for it?

Mazzucato offers no explanation of why capitalism became increasingly ‘unproductive’ and ‘rent-seeking’.  But Marx’s value theory does.  From the mid-1960s to the early 1980s, there was a sharp fall in the profitability of the productive sectors of all the major capitalist economies.  Capitalism entered the so-called neoliberal period of the destruction of the welfare state, restriction of trade unions, privatisation, globalisation – and financialisation.  Financialisation (looking to make profit from the purchase and sale of financial assets using new forms of financial derivatives) became a major counteracting factor to this fall in profitability.  For capital, it was not a matter of ‘choice’ but necessity to reduce the cost of government and raise profitability, partly through financial speculation and monopoly rent-seeking.

In a Bloomberg TV interview on her new book, Mazzucato was asked by the presenter how she could persuade chief executives of large multinationals to invest productively and innovate rather than buy back their shares to boost their share prices and pay higher dividends to shareholders (ie financial speculation).  Mazzucato replied that it was a matter of choice: some companies were investing more productively and others were not.  So apparently, we have to make these companies see the error of their ways.

Mazzucato argues that government should be “tilting the field in the favour of innovators and true value creators.”  But is that really possible where capital (and monopolies) dominate?  Mainstream economics remains highly unpersuaded that government can add value for capitalism.  In his review of the book, Martin Wolf in the FT commented that: “What I would have liked to see far more of, however, is a probing investigation of when and how governments add value. …How can one ensure that governments do add value rather than merely extract and waste it? In her enthusiasm for the potential role of the state, the author significantly underplays the significant dangers of governmental incompetence and corruption.”

In the launch of her book at the London School of Economics, Mazzucato presented the example of Brazil, where during the global financial crisis under the Lula government, the state banks were directed to invest in projects that would help boost employment and technology even if they were not profitable (at least not in the medium term).  But what happened?  Big business and finance (domestic and international) bitterly attacked this policy and its implementation through the Brazilian state development bank as reducing the profits of the finance sector.  When Lula was gone, the policy was reversed.

Mariana Mazzucato does not call for the replacement of capitalism or even the rent-seeking monopolies but “how we might reform it” in order to replace the current parasitic system with a type of capitalism that is more sustainable, more symbiotic – that works for us all.”  In her TV interview she talked of a “partnership between government, multi-nationals and a ‘third sector’ (presumably social non-profit coops etc).” She made no mention of bringing the ‘parasitic’ finance sector into public ownership, let alone the ‘short-termist’, ‘rent-seeking’ monopolies.  Instead, she seeks a ‘partnership’ of government, finance and monopolies.

It seems to me a utopian illusion to imagine that monopolies can be persuaded to stop being ‘short termist’ and invest for higher productivity and innovation for the long term, if profitability in such productive pursuits seems to them too low compared to finance or real estate (if profitability was higher in productive investment, they would do it anyway).  Surely, a left government must instead look to replace big capital with democratically-run state enterprises in the ‘commanding heights’ of an economy.  This would lay the proper foundation for innovation and enterprise and thus put use-value before value, price and profit.