Archive for the ‘marxism’ Category

From amber to red?

January 15, 2019

Today’s news that the German economy, the powerhouse of Europe, had narrowly avoided a ‘technical recession’ in the second half of 2018 is another red light flashing for the world economy.  In 2018, German real GDP growth was 1.5% down from 2.2% in 2017.  This was the weakest growth rate in five years  And in the second half of last year, the growth was slowing fast, up only 1.1% yoy compared to 2% in Q2 2018.  It fell 0.2% in Q2 over Q1 and rose just 0.3% in Q3.

As for Germany’s industrial sector, that clearly is in recession. Industrial production in Germany decreased 4.7% in November of 2018 over the same month in the previous year.

German companies have been hit by poorer sales from a world economic slowdown and political uncertainty surrounding Brexit and the trade war between the US and China. The UK, US and China are all among German makers’ biggest markets.

The collapse is particularly noticeable in the very important auto sector, where the global slowdown, sharp drops in demand and the restrictions on diesel car emissions have destroyed the auto sector globally.  Passenger vehicle sales in China, the world’s largest car market, fell for the first time last year since the early 1990s, down 4.1%.  Sales in December were down 15.8 per cent from the same month last year, the steepest monthly fall in more than six years and the sixth consecutive month of declining sales.

Germany has dragged down industrial production in the Euro Area.  It fell 3.3% year-on-year in November.  It is the first annual fall in industrial output since January of 2017 and the biggest since November of 2012.

Indeed, the German experience is being followed in varying degrees across the globe, at least in the major economies.  The global PMI, the key business activity indicator, shows a slowing down. The level of activity is still above 50 (and therefore indicates expansion) and is not yet down to the recession depths of 2012 or 2016, but it is on its way.

And the global PMI for ‘new orders’ shows a slowdown in both manufacturing and services globally.

And among the so-called ‘emerging economies’, emergence is being replaced by submergence.  Real GDP in Latin America as a whole is contracting on annualised basis, according to investment bank JP Morgan.

Among the so-called BRICS (the major emerging economies), China’s industrial production slowed in November to 5.4% yoy, the smallest rate since the mini-recession of early 2016. Industrial production in Brazil contracted 0.9% in November, while Russia’s industrial production slowed to 2.4% yoy from 3.7% in October. Russian manufacturing output stopped growing altogether. Manufacturing output growth in South Africa slowed to 1.6% November from 2.8% in October. Even the fastest-growing major economy in the world, India, took a hit. India’s industrial production growth slowed sharply to 0.5% yoy in November, the smallest gain since June 2017 and manufacturing output actually fell 0.4%.

My post outlining an economic forecast in 2019 offered several different short-term indicators for the direction of the world economy.

The first was credit and the so-called ‘inverted yield curve’ ie the difference in the interest rate received for buying 10yr US government bonds and 2yr government bonds.  In a ‘normal’ situation, the interest rate earned for holding a longer term bond will be higher because the bond purchaser cannot get the bond back for ten years and there is higher risk from changes in inflation or default compared to a bond held over two years.  But on some rare occasions, the interest rate on two-year bonds can go higher than on ten-year ones.  This is because the interest rate is being driven up by hikes in the central bank rate and/or because investors are fearful of a recession, so they want to hold as much government paper as possible.  They sell their stocks and buy bonds.  Every time the yield curve inverts, an economic recession in the US at least follows within a year or so.

Well, investors have been selling stocks and the stock market has dived.  But we still don’t have an inverted yield curve yet, partly because the Federal Reserve appears to have decided not to raise its policy rate so quickly any more – precisely because it does not want to provoke a recession when the world is slowing down.

The second indicator is the price of copper.  As copper enters much of the components of industrial output, its price can be a good short-term gauge of the strength of economic activity globally.  Well, the copper price is down from its peak in 2017 but still not at levels seen in the mini-recession of early 2016.

The most important indicator in my view is the movement of profits for the capitalist sector of the major economies.  This drives investment and employment and thus incomes and spending.  But it is not possible to get such a high frequency measure – indeed most profit reports are quarterly at best.  Goldman Sachs, the investment bankers have made some forecasts, however for this year.  Their economists conclude that “In terms of profits, we do expect a sharp slowdown. In every region we expect profit growth to be below the current bottom-up consensus, and to be around 5% in 2019. In the case of the US, in particular, this would represent a very sharp slowdown from the 22% EPS growth expected for 2018.”  They ‘benchmark’ this profit forecast against their measure of ‘growth momentum’ and find that it “implies a further sharp deterioration in growth.”  But not yet a recession forecast.

These indicators all suggest a sharp slowdown in global growth, particularly in manufacturing and industry.  The US yield curve is close to inversion but not yet inverted; the copper price is down but not yet at lows; and global profits growth has slowed but is not yet falling.  So the amber light for a global slump in 2019 has still not turned red – yet.

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ASSA 2019 part 2 – the radical: profitability, growth and crises

January 8, 2019

While hundreds attend the big meetings of the mainstream sessions at the annual meeting of the American Economics Association (ASSA 2019), only tens go to the sessions of the radical and heterodox wing of economics.  And even that is thanks to the efforts of the Union of Radical Political Economics (URPE), which celebrated its 50th year in 2018 that even these sessions take place.  URPE provides an umbrella and platform for radical, heterodox and Marxian analysis.  But it is also true that the AEA has included URPE (and other evolutionary and institutional economics associations) in its annual sessions – a mainstream concession not offered by economic associations in the UK or continental Europe.

This year the keynote address within the URPE sessions was the David Gordon Memorial Lecture by Professor Anwar Shaikh of the New School of Social Research in New York.  Anwar Shaikh has made an enormous contribution to radical political economy over more than 40 years, with the body of his work compiled in his monumental book, Capitalism, competition, conflict, crises, published in 2016.

Shaikh’s presentation was entitled Social Structure and Macrodynamics, which was an envelope for discussing the differences between mainstream economics (both micro and macro) and radical (Marxist?) political economy – and the resultant policy solutions offered to avoid and/or restore capitalist economies in crisis.  Shaikh argued that political economists must recognise the social structure of capitalism, including the reality of imperialism – something denied or ignored by the mainstream.  Instead of looking at the social structure of economies, the mainstream deliberately locks itself into the arcane and unrealistic world of ”free markets’’ and such things as game theory.

On crises, Shaikh delineated orthodox or mainstream theory as arguing that ‘austerity’ ie cuts in public spending and wage restraint was necessary to restore an economy in a slump, painful as it might be.  Heterodox (radical Keynesian) theory opposed this and imagined that spending through monetary and fiscal stimulus could restore growth to the benefit of both capital and labour.  Both sides ignored the social structure of capitalism, in particular that it is a system of production for the profit of the owners of capital.  Shaikh put it: “The truth is that successful stimulus requires attention to both effective demand and profitability”.

Those who read my blog regularly know that I would go further or indeed put it differently.   Capitalist economies go into slumps because of a collapse in profits and investment and this leads to a collapse in “effective demand”, not vice versa as the Keynesians (in whatever species) would have it.  So a restoration of profitability is necessary to restore growth under capitalism- this is what I (and G Carchedi) have called the Marxist multiplier compared to the Keynesian multiplier.

What is wrong with Keynesian theory and thus policy is that it denies this determinant role of profitability.  Indeed, in a way, the neoclassical mainstream has a point – that it is necessary (rational?) to drive down wages, weaken labour through unemployment and reduce the burden of the state on capital to revive profits and the economy. Of course, the mainstream cannot explain crises; often deny they can happen; and have no policy for recovery except to make labour pay.

The debate continues between the two wings of mainstream economics over fiscal and monetary stimulus.  Former chief economist of the IMF, Olivier Blanchard was the outgoing President of the AEA and in his address at ASSA 2019 he argued that, because yields on bonds were so low now, the interest cost of debt was very low; and so governments can run up budget deficits (ie reverse austerity) without causing a problem.

This view was echoed by that arch Keynesian policy exponent, Larry Summers in a recent article warning of an upcoming slump and the need for governments to provide counter cyclical infrastructure spending to avoid it.  “Fiscal policymakers should realise the very low real yield on government bonds is a signal that more debt can be absorbed. It is not too soon to begin plans to launch large-scale infrastructure projects if a downturn comes.”

Blanchard and Summers’ support for fiscal stimulus was attacked by the austerity exponents like Kenneth Rogoff (the controversial debt crisis history expert) who responded that fiscal stimulus a la Keynes is and would ineffective in avoiding a crisis: “those who think fiscal policy alone will save the day are stupefyingly naive…. Over-reliance on countercyclical fiscal policy will not work any better in this century than in it did in the last.

And so the debate within the mainstream goes on, blithely (or deliberately?) ignoring the social structure of macrodynamics (as Shaikh put it), namely that capitalism is a ‘money-making’ mode of production for owners of capital and so profitability not demand (or even debt) is what counts for the health or otherwise of economies.

So what has happened to the profitability of capital since the end of the Great Recession in 2009?  Two papers in the URPE sessions considered this.  David Kotz, the well-known Marxist economist from University of Massachusetts, Amherst, looked at the Rate of Profit, Aggregate Demand and Long Term Economic Expansion in the US since 2009.  Kotz (therateofprofitaggregatedemandan_preview) noted, as many others have, including myself in my book, The Long Depression, that the US recovery since 2009 has been the weakest since the 1940s.  Indeed, the last ten years are better considered as ‘persistent stagnation’.

Kotz made the point that the onset of recession in the US economy in the period since World War II has always been preceded by a decline in the rate of profit.  After a sharp drop in 2009, the profit rate recovered through 2012-13. It then declined from 2013 through 2016, then rose slightly in 2017. Kotz asked the question: why was the three-year decline in the profit rate not followed by a recession? His tentative conclusion was that “a likely explanation is that the profit rate remained relatively high after 2013 compared to past experience in the neoliberal era.”  I would argue differently: the modest fall in profitability from 2014-2016 was actually accompanied by a mini-recession, as I have shown.  Indeed, fixed investment plummeted in 2016 to near zero, as Kotz also shows.  So the connect between profits and investment and growth is still there.

Kotz does not think that the 2008 recession was the “consequence of a falling profit rate but rather was set off by a deflating real estate bubble and severe financial crisis”.  It may have been “set off”, but was that underlying cause?  There is no space to deal with this old argument about the Great Recession.  I can only refer you to these papers here – and my new book, World in Crisis.

Even though the rate of accumulation followed the movement in profitability after 2009, it remained low compared to its pre-recession level.

As Kotz says, this is a good explanation of why US productivity growth was also poor in the long depression or stagnation since 2009.  Kotz’s stats also reveal that the major contribution to the recovery after the end of the Great Recession was business investment, contributing 53.3% of GDP growth, almost as large as the 61.8% contribution from consumer spending growth, even though the latter constitutes 60-70% of GDP and business investment only 10-15%.  After 2013, consumer spending became more important as investment tailed off, leading to the mini-recession of 2014-16.

Kotz wants to distinguish the period of 1948-79 as one of ‘regulated capitalism’ and the period 1979-2017 as the ‘neoliberal era’, by showing that investment spending growth was much higher than consumption spending growth in the first period and lower in the second period. This leads him to conclude that “neoliberal capitalism is stuck in its structural crisis phase, a condition that can be overcome within capitalism only by the construction of a new institutional form of capitalism. However, there is no sign yet of the emergence of a viable new institutional structure for U.S. capitalism.”

But I don’t think that flows from Kotz’s data.  Actually in the neo-liberal period, both investment and consumer spending growth slowed and so did growth.  The swing factor was investment growth, which halved, while consumer spending fell only 20%.  Professor Kotz may not agree but I think his analysis tells us is that business investment is still the driver of growth under capitalism, while consumption is the dependent variable in aggregate demand.  It’s the same story in the neoliberal period as in the ‘regulated period’. What happens to profitability and investment is thus the crucial indicator of the future, not the emergence of any ‘new institutional structure’.

In this light, there was a revealing paper presented by Erdogan Bakir of Bucknell University and Al Campbell of the University of Utah.  They looked at the before-tax profit rate of US capital, unlike Kotz who looked at the after-tax rate of non-financial companies.  Bakir and Campbell conclude that the before tax rate is “a good predictive of cyclical downturn in the U.S. economy.”  In a typical business cycle, profit rate peaks at a certain stage of the business cycle expansion and then starts to decline while economic growth continues. This initial decline in the profit rate during what they call the “late expansion phase of the business cycle” becomes a reliably good predictor of cyclical contraction.  This very much matches my own view of profit cycle under capitalism.  Unfortunately, I don’t have the details of this paper to hand, so I’ll have review its conclusions another time.

The gap between the levels of profitability and investment since 2000 in several major capitalist economies have been subject of much debate.  In the past, it has revolved round the view that profits and investment are not connected causally and investment is driven by other factors ie demand or animal spirits a la Keynes or financialisation, where investment is going into financial speculation and away from productive investment (see here).

More recently, this ‘puzzle’ has centred on the measurement of investment – in particular, that investment increasingly takes the form of ‘intangibles’ (brand names, trademarks, copyrights, patents etc in ‘’intellectual property’.  Ozgur Orhangazi at Kadir Has University took this up in another paper
(revisitingtheinvestmentprofitpuzzle_preview).
He presents the usual facts showing the gap between profitability and tangible investment. He argues that this gap can be explained by missing intangible investments. Intellectual property as a share of capital stock has doubled since the 1980s.

However, I note from his graph that, in the period of the 2000s, this share did not move very much and yet this is the period of the apparent ‘puzzle’.  Orhangazi draws lots of conclusions from his analysis which I shall leave the reader of his paper to consider but the key one is, as he says “All in all, these findings are in line with the suggestion that the increased use of intangible assets enables firms to have high profitability without a corresponding increase in investment.”  If this is correct it suggests, post-2009, that the causal connection between profits and tangible investment has weakened and that capitalism is actually doing ok and investing well (in intangibles) and just does not need so much profit to expand. That begs the question on whether ‘intangibles’ like ”goodwill’’ are really value-creating.

But is this argument of mismeasurement factually correct? In his AEA presidential address, Olivier Blanchard also looked at US profitability.  Like Marxist analyses of US (pre-tax) profitability, he noted that there was a big fall from the 1960s to the late 1970s and a stabilisation afterwards.

Blanchard noted that the ‘market value’ of firms had doubled compared to the stock of tangible capital invested (Tobin’s Q) since the 1980s.  But he dismisses the argument of mismeasurement of investment in intangibles to explain this:  “A number of researchers have explored this hypothesis, and their conclusion is that, even if the adjustment already made by the Bureau of Economic Analysis is insufficient, intangible capital would have to be implausibly large to reconcile the evolution of the two series: Measured intangible capital as a share of capital has increased from 6% in 1980 to 15% today. Suppose it had in fact increased by 25%. This would only lead to a 10% increase in measured capital, far from enough to explain the divergent evolutions of the two series.”

Blanchard says the ‘puzzle’ is more likely due to monopoly rents.  My own explanation and critique of these explanations can be found here.  But the essential point for explaining slumps in capitalism and predicting new ones is intact, in my view,: it depends on the relation between profitability and capitalist (productive) investment that leads to new value.

I have not got the space to deal with all the other interesting papers in the URPE sessions.  They include an analysis by Margarita Olivera of the Federal University of Brazil of the obstacles to industrial development in Latin America posed by trans-national companies and the new free trade agreements like TPP.  Eugenia Correa of UNAM and Wesley Marshall of UAM Mexico analysed the new counter-revolution in economic policy ahead as right-wing governments take over in Argentina, Brazil and Ecuador.  And again, I shall have to neglect an analysis of China’s industrial development provided by Hao Qi of Renmin University (semiproletarianizationinatwosector_preview).

There were also several papers from a post-Keynesian perspective with Michalis Nikioforos of the Levy Institute presenting the usual wage-led, profit-led theory of crises. Daniele Tavani and Luke Petach of Colorado State University presented an insightful alternative to the explanation by Thomas Piketty of rising inequality of wealth and income based on the switch to neo-liberal policies in the 1980s driving down the share of labour, not Piketty’s neoclassical marginal productivity argument (incomesharessecularstagnationand_preview).  And Lela Davis, Joao Paulo, and Gonzalo Hernandez presented a paper that showed financial fragility was to be found in smaller new firms entering and exiting – this was the weak link in the debt story for capital (theevolutionoffinancialfragilitya_preview).

Finally, there were several papers on developments in international finance.  Ingrid Kvangravenof the University of York looked at changing views on the beneficial role of international finance for capitalism; Carolina Alves of Girton College, Cambridge reckoned that ‘financial globalisation’’ and neoliberal policies have led the economic strategy of international institutions to drop fiscal stimulus policy and Keynesian-style intervention for monetary management.  Devika Dutt from Amherst reckoned that international reserve accumulation particularly in so-called emerging economies encourages volatile capital inflows that make those economies vulnerable to financial crises (canreserveaccumulationbecounterprodu_powerpoint).

To sum up ASSA 2019.  The mainstream still avoids explaining the global financial crash and the Great Recession, ten years since it ended.  So it is still confused about what economic policies would avoid a new slump; are they monetary, ‘macro-prudential’ or fiscal?  This is because it denies the social structure of capitalism, namely that is a mode of production for profit to the owners of capital who are engaged in a class struggle to extract value from labour.  The irreconcilable contradiction between profitability and growth over time was at the core of Marx’s insight as the underlying cause of regular recurring and unavoidable crises of capitalism.  This is what the mainstream does not accept and where radical political economy comes up front.

ASSA 2019 part one – the mainstream: avoiding recessions

January 7, 2019

Past annual conferences of the American Economics Association have had some dominant themes: rising inequality, slowing productivity and secular stagnation.  But in 2018 and in the 2019 conferences, the focus switched – at least among the mainstream economic stream that overwhelmingly dominate ASSA – to whether there will be a new recession in the US and globally, which could be perhaps triggered by a trade war between the US and its main economic rival China. At ASSA 2019, the big issue was whether mainstream economics had learnt the right lessons from the debacle of the Great Recession; and what monetary and fiscal policies of stimulus are best to avoid another slump or at least get out of one quickly?

Of course, there were way more subjects discussed by the 13,000 participants attending the Atlanta Georgia ASSA 2019.  In the hundreds of papers and panels presented, there were some important longer term themes debated, in particular, the impact on jobs of robots and AI, whether China would become the leading economic power in the 21st century or was heading for a fall; and a continual subject for economists, namely whether the assumptions of mainstream economic theory bore any relation to reality.

In this review, I cannot possible cover all the issues, facts and fallacies presented.  So let me first concentrate on the headline panel discussions where the leading economic policy officials and economic gurus spoke.  On Friday, there was a heavily publicised and TV broadcast session with the current Federal Reserve chair Jay Powell and the two previous chairs, Janet Yellen (under Obama) and Ben Bernanke (under Bush).

The pronouncements of Jay Powell that the Fed was going to be cautious about pursuing further interest rate increases in 2019 and would look at the data rallied the stock markets where investors are clearly worried that global growth is slowing and further hikes by the Fed could provoke a recession.  But the overall line of the Fed chairs was that the US economy was looking good, there would be no recession and measures to avoid a new financial crash, while not fully perfect, were much better than back in 2007.

But when asked about what the economics profession needed to do, Janet Yellen said that the profession failed to see the global financial crash and the Great Recession coming. So now more research is needed on “systemic risk” (ie financial collapse). Jay Powell admitted that the Fed still did not have all the “tools” to avoid credit crashes in non-bank areas. And Bernanke was worried about rising inequality which he could not explain.

It seems that mainstream economics is putting its faith in what it calls macroprudential policies to avoid or mitigate future crises ie reducing risks of instability in the finance sector, where the last crisis is supposed to have originated. As Kristin Forbes of MIT put it: “Macroprudential regulations currently focus on where the last set of vulnerabilities arose, especially in banks and mortgage markets. These are critically important, but the next crisis could start in other sectors. In fact, the success of existing regulations in reducing the risks in banks could be contributing to the build-up of vulnerabilities elsewhere, such as by shifting exposures to currency and liquidity risk to the corporate sector and shadow financial system—sectors about which regulators have less information and where entities may be less prepared to handle surprises. Macroprudential policy has made impressive progress and significantly reduced the probability of another crisis unfolding in the banking system as it did in 2008. Macroprudential policy still has some way to go, however, to ensure that there is not another crisis and economists are not asked again by a future monarch: “Why did no one see it coming?”
(macroprudentialpolicywhatweknowdo_preview). Indeed. See here for my view on whether regulation of the finance sector will do the trick next time.

As for the current state of the economy, in another session, President Trump’s top economic adviser, Kevin Hassett, made what one observer called “a victory lap” over what he considered were the successful corporate and personal tax cuts and reductions in repatriating profits enshrined in the so-called flagship Taxes Consolidation Act (TCA).  Hassett claimed that his model that supported the large reduction in the corporate tax rate and predicted a sharp jump in business investment and economic growth as a result had been vindicated.

Hassett said the model predicted a substantial jump in business investment and a rise in the US growth rate by up to 1.4% pts in a year. With US real GDP hitting 3% in 2018, he had been proved right.  Interestingly, this showed that the trend growth rate of the US since the end of the Great Recession was just 1.6%, the lowest rate of expansion of any ‘recovery’ after a slump since the 1930s.

Hassett had to admit that his model was ‘ceteris paribus’ and there could be other factors that caused an acceleration in US growth from 2017 through 2018.  I can think of a few: heavy investment in energy sectors as oil prices rose; a pick-up in growth in Europe and Asia.  But it’s certainly true that the tax cut dramatically raised profits for US business (after tax profits were up 20% yoy in Q3 2018) and that has had an effect on getting business investment rising.  But most of the increased profit has been used by companies to buy back their own shares and raise dividends, leading to the stock market boom in 2017 and most of 2018.

The other counter to Hassett’s boasting is that the corporate tax cut is really a one-off and its apparent effect will dissipate as we go into this year.  According to two right-wing economic scholars, Robert Barro and Jason Furman of Harvard, in their paper, the tax cut could raise growth by 0.9% from trend in 2019 (taking growth to 2.5%).  But the long-term impact of the tax cut, if sustained for ten years would be to add a cumulative 0.4-1.2% to real GDP or just 0.04-0.13% a year!  But that boost would be cut if interest rates rose during that period.

Hassett was keen to argue that the poorest American workers would gain the most from the tax cuts. He put up a graph to show that there had been faster wage growth for low-paid workers.

The faster growth of the bottom 10% of wage workers was very slight however compared to the top 10% (and the latter’s wages are way larger!).  Moreover, back in 2013, the bottom 10% had bigger nominal wage increases than the top 10% when there was no special tax cut.  A more likely reason for the small acceleration in the wage growth of the bottom 10% was the recent hike in the federal minimum wage and the success of labour in some areas in raising the ‘living wage’.

Do corporate and personal tax cuts really boost economic growth?  Think of it the other way round: would higher taxes on the top 1% damage growth?  When left-wing Democrat Alexandria Ocasio-Cortez recently called for a 70% top rate of income tax for those ‘earning’ above $10m a year in the US, she was attacked for damaging growth.  Keynesian guru Paul Krugman rushed to her defence.  He claimed with this graph (below) that there was no correlation between a high personal tax rate and economic growth.  On the contrary, as the top marginal rate was cut over the decades, average economic growth slowed.

Clearly there is no long-term correlation because there are many factors in between the tax rate on income and the creation of that income from work or other sources.  Higher profits can mean that higher tax rates can be absorbed.  But when profitability falls then capitalist policy goes in the direction of cutting taxes on the rich (among other neo-liberal measures) to sustain profits and income for capital to invest and spend.  The real correlation is between profits and investment and investment and growth, the Marxist multiplier.  Indeed, that is what Hassett’s model shows.  When corporate taxes are cut, it provides a short-term boost to profits and thus to business investment and economic growth. But that does not last (as Barro and Furman show (macroeconomiceffectsofthe2017taxre_preview) and cannot reverse indefinitely any tendency in the capitalist accumulation for profitability and profits to fall.

Previous ASSA conferences had observed that the great period of globalisation: (rising world trade and capital flows) had ended with the Great Recession and ensuing Long Depression or slowdown since 2009. But in ASSA 2019, the big name headline speakers were concerned to talk about the end of globalisation slipping into outright trade war given the tit-for-tat trade tariff hikes already begun by the US and China during 2018.

A panel chaired by the IMF deputy director David Lipton were generally concerned that a trade war would be ‘disruptive’ to jobs in both the US and China. But as Jay Shambaugh at the Brookings Institution said, so was globalisation.  Yipian Huang from Peking University appeared optimistic that the US-China trade war would be avoided and things would improve (maybe that’s the Chinese leadership line).  Adam Posen, head of the Peterson Institute, was convinced that the trade war had been started by the US as a deliberate policy to isolate and weaken China.  And it could morph into a serious divergence bringing fragmentation to a previously US-dominated world.  For my view on that see here.

There were many papers at ASSA 2019 on China, its current situation and its future. US economists are putting a lot of effort into estimating where China is going, no doubt hoping they can find faultlines. I counted well over 70 papers on China, both from the mainstream and the radical. I cannot review these this post, however. I’ll be doing a a deeper analysis of China’s future development as a conference paper later this year.

But the theme that was highlighted most at ASSA 2019 is the impact of robots and AI on future productivity and jobs.  David Autor of MIT delivered the Richard Ely lecture called Work of the Past, Work of the Future .

Autor takes the view that robots and Ai are generally jobs creating and will not necessarily increase inequality of wealth and income in society.  He reckons that “it is great time to be young and educated” but not a clear “land of opportunity for non-college adults in the US.” One big problem is that young people are leaving the rural areas and moving to the cities to get qualifications and then staying there.  In the cities there are high wage, high education jobs that are less vulnerable to robots, but there are large numbers of jobs requiring less qualifications and mainly held by women that are vulnerable.  And the new jobs that will be created by the new technology displacing the old less qualified jobs constitute only 13% of total labour hours worked (see pix below).

Low skilled jobs that pay poorly like ‘gift wrappers’, baristas, marriage counsellors, wine waiters etc in leisure and care sectors are increasing but ‘mid-skill’ jobs are “falling off a cliff”.  Middle-skill work in cities has been hollowed out since 1980. Non-college educated workers have been pushed to do low-skill work in cities. In the 1950s, people living in cities were on average five years older than those in rural areas; now they are six years younger.  The rural areas and small towns are dying.

In another paper, Daron Acemoglu, MIT and Pascual Restrepo, Boston University reckoned that the aging population of the US and other countries will be the major contributor to automation
(automationandnewtaskstheimplicatio_preview).
It’s why older nations like Germany and Japan are on the forefront of replacing workers with robots.  It will soon be a driver in China where the population is about to peak at 1.44bn in 2029 and decline steadily afterwards as the population gets older.  Acemoglu and Restrepo took a balanced view of the future with automation.  capital to replace labor in tasks it was previously engaged in, shifts the task content of production against labor because of a displacement effect.  This reduces the share of labour in value-added.  But the effects of automation counterbalanced by the creation of new tasks in which labor has a comparative advantage: the reinstatement effect.  The slower growth of employment over the last three decades is accounted for by an acceleration in the displacement effect, especially in manufacturing, and a weaker reinstatement effect, and slower growth of productivity than in previous decades.”  They leave open the question of which way it will go from here.

In another paper (recentunitedstateseconomicperformanc_preview) in this session, Dale Jorgenson, Mun Ho and Jon project long-term growth of only 1.8% per year for US GDP growth, derived from a 0.50 pts of hours growth (more labour), 0.45 points from TFP (robots), 0.76 points from capital deepening (investment), and only 0.12 pts from labor quality (more skill). So as robots take over, education will matter less and less!  Interestingly, Robert J Gordon, the arch pessimist in the past on US productivity growth in 21st century took a more optimistic view for the near future in his paper
(prospectsforaproductivitygrowthrevi_preview).

So will robots, AI and automation mean less jobs or more?  The answer of the mainstream experts seems to be that there will be less jobs in the middle (manufacturing and clerical), some more jobs for a future workforce in new sectors but many more poorly paid jobs in sectors like leisure services and social care.  My own view is outlined here. Automation can create new jobs and income and destroy it. The balance will depend on the trend of profitability in an economy; if profitability is rising, companies will expand investment and production in new sectors to compensate for labour-shedding in other areas – and vice versa.

The issues of poverty and inequality that have dominated previous ASSA meetings have not disappeared. Bruce Meyer at the University of Chicago analysed US poverty and inequality of income over the last two decades.  He suggested that poverty and inequality was not as bad as researchers like Thomas Piketty and Gabriel Zucman have claimed because they have underreported transfer incomes from various US ‘safety nets’ in housing and medicare.

Indeed an argument over measuring the data has broken out between Davids Auten and Splinter
top1incomesharescomparingestimate_preview)
and the Piketty researchers. Auten and Splinter reckon that Piketty’s tax return based measures are biased. Correcting for this bias reduces the increase in top 1% income shares by two-thirds! Further, accounting for government transfers reduces the increase over 80%! However, in another session, Zucman questioned the assumptions and methods used by Auter and Splinter.

Pascal Paul at the Federal Reserve Bank of San Francisco presented empirical evidence for the view that rising and extreme inequality of income plus low productivity growth are harbingers of financial crises (historicalpatternsofinequalityandpr_preview).  But, as he said, he only shows evidence of high correlation not a causal connection.  I remain sceptical that financial crises are caused by high inequality and low productivity – if anything it is the other way round.

Finally, there was an inconclusive debate about whether mainstream microeconomics and its assumptions (free markets and ‘rational expectations’) were necessary for (the Lucas critique) or not compatible (heterodox) with macroeconomics.  The neoclassical view was expressed by Harvard’s Jacob Furman that “more and more research shows you can’t think about macro without thinking about what’s going on with individuals and firms. Furman: Inequality matters for macro and we can’t think about inequality if we ignore microfoundations.”  In contrast, Keynesian Amir Sufi says: macro data are super useful. For example, Sufi said, higher debt leads to a much larger contraction in household spending in response to unemployment. This is now well established. This has big implications for macro. But it also means representative agent macro models shouldn’t be used for business cycles.

My problem is not just with the neoclassical Lucas critique , but also with Keynesian-style macro models based on neoclassical DSGE that start from the idea that economies grow harmoniously but then get hit by ‘shocks’. This approach fails to recognise the uneven development of capital accumulation.  Any way going from the micro to the macro cannot work because of the fallacy of composition – the whole can deliver a different result from the sum of its parts.

A couple of interesting facts from some other papers:  1) there is no simple causal relationship between economic conditions and the abuse of opioids.” in the US (unitedstatesemploymentandopioidsis_preview); 2) in 18 US states, budget spending on prisons is greater than spending on education!

In part two, I’ll try and cover the deliberations of the non-mainstream and radical economic sessions at this year’s ASSA.

The euro – part two will it survive another 20 years?

January 2, 2019

In part two of my analysis of the euro currency, I consider the impact of the global slump of 2008-9 and the ensuing euro debt crisis on prospects for the euro.

The global slump dramatically increased the divergent forces within the euro. The fragmentation of capital flows between the strong and weak Eurozone states exploded. The capitalist sectors of the richer economies like Germany stopped lending directly to the weaker capitalist sectors in Greece and Slovenia, etc. As a result, in order to maintain a single currency for all, the official monetary authority, the ECB, and the national central banks had to provide the loans instead. The Eurosystem’s ‘Target 2’ settlement figures between the national central banks revealed this huge divergence within the Eurozone.

The imposition of austerity measures by the Franco-German EU leadership on the ‘distressed’ countries during the crisis was the result of the ‘halfway house’ of euro criteria.  There was no full fiscal union (tax harmonisation and automatic transfer of revenues to those national economies with deficits); there was no automatic injection of credit to cover capital flight and trade deficits (federal banking); and there was no banking union with EU-wide regulation and weak banks could be helped by stronger ones.  These conditions were the norm in full federal unions like the United States or the United Kingdom.  Instead, in the Eurozone, everything had to be agreed by tortuous negotiation among the Euro states.

In this halfway house, Franco-German capital was not prepared to pay for the ‘excesses’ of the weaker capitalist states.  Thus any bailout programmes were combined with ‘austerity’ for those countries to make the people of the distressed states pay with cuts in welfare, pensions and real wages, and to repay (virtually in full) their creditors (the banks of France and Germany and the UK).  The debt owed to the Franco-German banks was transferred to the EU state institutions and the IMF – in the case of Greece, probably in perpetuity.

The ECB, the EU Commission, and the governments of the Eurozone proclaimed that austerity was the only way Europe was to escape from the Great Recession. Austerity in the public spending could force convergence on fiscal accounts too (123118-euroeconomicanalyst-weekly). But the real aim of austerity was to achieve a sharp fall in real wages and cuts in corporate taxes and thus raise the share of profit and profitability of capital. Indeed, after a decade of austerity, very little progress has been achieved in meeting the fiscal targets (particularly in reducing debt ratios); and, more important, in reducing the imbalances within the Eurozone on labour costs or external trade to make the weaker more ‘competitive’.

The adjusted wage share in national income, defined here as compensation per employee as percentage of GDP at factor cost per person employed, is the cost to the capitalist economy of employing the workforce (wages and benefits) as a percentage of the new value created each year. Every capitalist economy had managed to reduce labour’s share of the new value created since 2009.  Labour has been paying for this crisis everywhere.

Reduction in labour’s share of new value added 2009-15 (%)

Source: AMECO, author’s calculations

The evidence shows that those EU states that got a quicker recovery in their profitability of capital were able to recover from the euro crisis (Germany, Netherlands, Ireland etc) faster, while those that did not improve profitability stayed deep in depression (Greece).

One of the striking contributions to the fall in labour’s share of new value has been from emigration.  This was one of the OCA criteria for convergence during crises and it has become an important contributor in reducing costs for the capitalist sector in the larger economies like Spain (and smaller ones like Ireland). Before the crisis, Spain was the largest recipient of immigrants to its workforce: from Latin America, Portugal, and North Africa. Now there is net emigration even with these areas.

Keynesians blame the crisis in the Eurozone on the rigidity of the single-currency area and on the strident ‘austerity’ policies of the leaders of the Eurozone, like Germany. But the euro crisis is only partly a result of the policies of austerity.  Austerity was pursued, not only by the EU institutions, but also by states outside the Eurozone like the UK. Alternative Keynesian policies of fiscal stimulus and/or devaluation where applied have done little to end the slump and still made households suffer income losses.  Austerity means a loss of jobs and services and nominal and real income. Keynesian policies mean a loss of real income through higher prices, a falling currency, and eventually rising interest rates.

Take Iceland, a tiny country outside the EU, let alone the Eurozone.  It adopted the Keynesian policy of devaluation of the currency, a policy not available to the member states of the Eurozone.  But it still meant a 40% decline in average real incomes in euro terms and nearly 20% in krona terms since 2007.  Indeed, in 2015 Icelandic real wages were still below where they were in 2005, ten years earlier, while real wages in the ‘distressed’ EMU states of Ireland and Portugal have recovered.

Iceland’s rate of profit plummeted from 2005 and eventually the island’s property boom burst and along with it the banks collapsed in 2008–09. Devaluation of the currency started in 2008, but profitability up to 2012 remained well under the peak level of 2004. Profitability of capital in Iceland has now recovered but EMU distressed ‘austerity’ states, Portugal and Ireland, have actually done better and even Greek profitability has shown some revival.

Net return on capital for Iceland and Greece (2005=100)


Source: AMECO

Those arguing for exiting the euro as a solution to the Eurozone crisis hold that resorting to competitive devaluation would improve exports, production, wages, and profits.  But suppose Italy exits the euro and reverts to the lira while Germany keeps the euro. Under the assumption that there are international production prices, if Italy produces with a lower technology level than that used by the German producer, there is a loss of value from the Italian to the German producer. Now if Italy devalues its currency by half, the German importer can buy twice as much of Italy’s exports but the Italian importers can still only buy the same (or less) amount of German exports.  Sure, in lira terms, there is no loss of profit, but in international production value terms (euro), there is a loss. The fall in the value rate of profit is hidden by the improvement in the money (lira) rate of profit.

In sum, if Italy devalues its currency, its exporters may improve their sales and their money rate of profit. Overall employment and investments might also improve for a while.  But there is a loss of value inherent in competitive devaluation.  Inflation of imported consumption goods will lead to a fall in real wages. And the average rate of profit will eventually worsen with the concomitant danger of a domestic crisis in investment and production. Such are the consequences of devaluation of the currency.

The political forces that wish to break with the euro or refuse to join it have expanded electorally in many Eurozone countries.  This year’s EU elections could see ‘populist’ euro-sceptic parties take 25% of the vote and hold the balance of power in some states like Austria, Poland and Italy.  And yet, the euro remains popular with the majority.  Indeed, sentiment has improved in 13 member states since they joined, with double-digit bumps in Austria, Finland, Germany and Portugal. Even in Italy, which has witnessed a roughly 25-point decline, around 60% of people still favour sharing a currency with their neighbours.  Greeks are still 65% in favour. What this tells me is that working people in even the weaker Eurozone states reckon ‘going it alone’ outside the EU would be worse than being inside – and they are probably right.

Ultimately, whether the euro will survive in the next 20 years is a political issue.  Will the people of southern Europe continue to endure more years of austerity, creating a whole ‘lost generation’ of unemployed young people, as has already happened in?  Actually, the future of the euro will probably be decided not by the populists in the weaker states but by the majority view of the strategists of capital in the stronger economies.  Will the governments of northern Europe eventually decide to ditch the likes of Italy, Spain, Greece etc and form a strong ‘NorEuro’ around Germany, Benelux and Poland?  There is already an informal ‘Hanseatic league’ alliance being developed.

The EU leaders and strategists of capital need fast economic growth to return soon or further political explosions are likely.  But as we go into 2019, the Eurozone economies are slowing down (as are the US and the UK).  it may not be  too long before the world economy drops into another slump. Then all bets are off on the survival of the euro.

20 years of the euro – part one: has it been a success?

January 1, 2019

Today is the 20th anniversary of the launch of the euro and the Eurozone single currency area.  Starting with eleven members, two decades after its birth, membership has grown to 19 countries and the euro-area economy has swelled by 72% to 11.2 trillion euros ($12.8 trillion), second only to that of the US and positioning the European Union as a global force to be reckoned with.

The euro is now used daily by some 343 million Europeans. Outside Europe, a number of other territories also use the euro as their currency. And another 240 million people worldwide as of 2018 use currencies pegged to the euro. The euro is the second largest reserve currency as well as the second most traded currency in the world after the dollar. As of August 2018, with more than €1.2 trillion in circulation, the euro has one of the highest combined values of banknotes and coins in circulation in the world, having surpassed the US dollar.

That’s one measure of success.  But it is not the most important benchmark considered by its founders.  The great European project that started after the WW2 had two aims: first, it was to ensure that there were never any more wars between European nations; and second, to make Europe an economic and political entity that could rival America and Japan in global capital.  This project would be led by Franco-German capital.  The euro project went further and aimed at integrating all European capitalist economies into one unit to compete with the US and Asia in world capitalism within a single market and with a rival currency to the dollar.

In part one, I’ll consider whether the euro has been a success for capital in the participating states; and whether it has been good news for labour.  In part two, I’ll consider whether the euro will still be here in another 20 years.

How do we measure the success of a single currency area in economic terms?  Mainstream economic theory starts with the concept of an Optimal Currency Area (OCA).  The essence of OCA theory is that trade integration and a common currency will gradually lead to the convergence of GDP per head and labour productivity among participants.

The OCA says it makes sense for national economies to share a common monetary policy if they (1) have similarly timed business cycles and/or (2) have in place economic ‘shock absorbers’ such as fiscal transfers, labour mobility and flexible prices to adapt to any excessive fluctuations in the cycle. If (1) is true, then a one-size-fits-all monetary policy is possible. If (2) holds, then a national economy can be on a different business cycle with the rest of the currency union and still do okay inside it. Equilibrium can be established if there is ‘wage flexibility’, ‘labour mobility’ and automatic fiscal transfers.

The European Union has shown a degree of convergence.  Common trade rules and the free movement of labour and capital between countries in the EU has led to ‘convergence’ among participants in the EU. Convergence on productivity levels has been as strong as in fully federal US, although convergence more or less stopped in the 1990s, once the single currency union started to be implemented.

So the move to a common market, customs union and eventually the political and economic structures of the EU has been a relative success.  The EU-12/15 from the 1980s to 1999 managed to achieve a degree of harmonisation and convergence with the weaker capitalist economies growing faster than the stronger (graph below shows growth per capita 1986-99)..

But that was only up to the point of the start of EMU and preparations for it in the 1990s.  The evidence for convergence since then has been much less convincing.  On the contrary, the experience of EMU has been divergence.

The idea that ‘free trade’ is beneficial to all countries and to all classes is a ‘sacred tenet’ of mainstream economics.  But it is a fallacious proposition based on the theory of comparative advantage:  that if each country concentrated on producing goods or services where it has a ‘comparative advantage’ over others, then all would benefit.  Trading between countries would balance and wages and employment would be maximised.  But this is empirically untrue.  Countries run huge trade deficits and surpluses for long periods; have recurring currency crises; and workers lose jobs from competition from abroad without getting new ones from more competitive sectors.

The Marxist theory of international trade is based on the law of value.  In the Eurozone, Germany has a higher organic composition of capital (OCC) than Italy, because it’s technologically more advanced.  Thus in any trade between the two, value will be transferred from Italy to Germany.  Italy could compensate for this by increasing the scale of its production/export to Germany to run a trade surplus with Germany.  This is what China does.  But Italy is not large enough to do this.  So it transfers value to Germany and it still runs a deficit on total trade with Germany.

In this situation, Germany gains within the Eurozone at the expense of Italy.  All other member states cannot scale up their production to surpass Germany, so unequal exchange is compounded across the EMU.  On top of this, Germany runs a trade surplus with other states outside the EMU, which it can use to invest more capital abroad into the EMU deficit countries.

The Marxist theory of a currency union thus starts from the opposite position of neoclassical mainstream OCA theory.  Capitalism is an economic system that combines labour and capital, but unevenly.  The centripetal forces of combined accumulation and trade are often more than countered by the centrifugal forces of development and unequal flows of value. There is no tendency to equilibrium in trade and production cycles under capitalism.  So fiscal, wage or price adjustments will not restore equilibrium and anyway may have to be so huge as to be socially impossible without breaking up the currency union.

The EU leaders had set convergence criteria for joining the euro that were only monetary (interest rates and inflation) and fiscal (budget deficits and debt).  There were no convergence criteria for productivity levels, GDP growth, investment or employment.  Why? Because those were areas for the free movement of capital (and labour) and where capitalist production must be kept free of interference or direction by the state.  After all, the EU project is a capitalist one.

This explains why the core countries of EMU diverged from the periphery.  With a single currency, the value differentials between the weaker states (lower OCC) and the stronger (higher OCC) were exposed with no option to compensate by the devaluation of any national currency or by scaling up overall production.  So the weaker capitalist economies (in southern Europe) within the euro area lost ground to the stronger (in the north).  The graph below shows how each member state has fared in growth relative to the Eurozone average.

Franco-German capital expanded into the south and east to take advantage of cheap labour there, while exporting outside the euro area with a relatively competitive currency.  The weaker EMU states built up trade deficits with the northern states and were flooded with northern capital that created property and financial booms out of line with growth in the productive sectors of the south.

Even so, none of this would have caused a crisis in the single currency union had it not been for a significant change in global capitalism: the sharp decline in the profitability of capital in the major EU states (as elsewhere) after the end of the Golden Age of post-war expansion. This led to fall in investment growth, productivity and trade divergence.  European capital, following the model of the Anglo-Saxon economies, adopted neo-liberal policies: anti trade union laws, deregulation of labour and financial markets, cuts in public spending and corporate tax, free movement of capital and privatisations.  The aim was to boost profitability. This succeeded somewhat for the more advanced EU states of the north, but less so for the south.

Then came the global financial crash and the Great Recession.  This exposed the fault-lines in the single currency area.

Books in 2018: value, crashes and socialism

December 24, 2018

Let me remind you of the books that I reviewed on the blog this year.  Of course, they are economics books only and not necessarily the best books published or let alone Marxist in approach.  But several got a big audience.

Factfulness. was a book that swept the popular media  Hans Rosling posthumously argues that, contrary to the conventional wisdom, the world is becoming a better place.  Global 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; and democracy is on the rise.  The facts provided in the book lend support to these assertions.

As a result, many of the great and good have praised the book in countering the doom and gloom of many that capitalism is a failed and broken system.  For example, the world’s richest man, multi- billionaire Bill Gates of Microsoft, saw Factfulness as justifiying his view that things are getting better for the majority.  With the right policies on health, education, population, climate change etc, the world could progress without any change in its mode of production and social structure is the conclusion.

What Factfulness tries to ignore, however, is that inequality between rich and poor is widening, within and between many countries, including the rich ones.  And climate change and global warming are accelerating despite the technological possibilities for controlling it.  And Factfulness does not deal with or explain the causes of the recurring crises of production in world capitalism that regularly wipe out the living standards of millions for a generation.

Within the world of academic economics, one book got massive widespread coverage. Mariana Mazzucato’s The value of everything seemed to have caught the imagination of the liberal wing of mainstream economics.  So much so that Mazzacuto even got a spot on Desert Island Discs, a BBC radio programme that invites ‘celebrities’ to outline what music they would like to take with them if marooned on a desert island.  As I write, the Financial Times has again highlighted her work.

Mazzucato previously wrote an important book, The Entrepreneurial State, that ‘debunked’ the mainstream myth that only the capitalist sector contributes to innovation while the state sector is a burden and cost to growth.  In this new book, she took on a bigger task: trying to define who or what creates value in our economies, a subject that has been debated by the greatest economists of capitalism from Adam Smith onwards.

Her arguments were that 1) government is not recognised in national accounts as adding to value through its contribution to investment and innovation but should be; 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’.

There are many powerful truths in Mazzucato’s theses.  But there are also serious weaknesses, in my view.  To argue that government ‘creates’ value is to misunderstand the law of value under capitalism.  Under capitalism, the commodities (things and services) are produced for sale to obtain profit.  Sure, commodities must have use value (be useful to someone) but they must also have exchange value (make a 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.  It is the profitability of the productive sectors that is essential to a capitalist economy, not the overall amount of use values produced.

Finance is clearly ‘unproductive’ even in a capitalist sense.  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 already created.

The result of Mazzucato’s view is that finance is the enemy, not capitalism.  So she does not call for the replacement of capitalism 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.”  She wants a “partnership between government, multi-nationals and a ‘third sector’ (presumably social non-profit coops etc).” Indeed, she makes no mention of bringing the ‘parasitic’ finance sector into public ownership, let alone the ‘short-termist’, ‘rent-seeking’ monopolies.

The other academic book with huge impact in 2018 was that of economic historian Adam Tooze of Columbia University.  Crashed, How a decade of financial crises changed the world is an important contribution to the economic history of the global financial crash of 2008-9.  Tooze shows how it came about that the great credit boom of the early 2000s eventually led to the biggest financial disaster in modern economies and the ensuing deepest slump in capitalist production since the 1930s.  Tooze particularly emphasises that the crash was not so much a story of the US spreading its financial contagion to Europe. The credit boom was just as strong in Europe.

He shows how governments ensured that the stronger and luckier big banks gained at the expense of the weaker and smaller; and how government intervention provided funding for the culprits of the financial disaster at the expense of the victims, working people, tax payers and small businesses.  Crashed is a granular and fascinating account of the crash and its aftermath.  It powerfully shows what happened and how, but, in my view, does not adequately show why it happened.  For Tooze, the cause seems to be the previous deregulation of the banking system, financial greed and incompetent authorities.  For me, these are only symptoms or immediate catalysts of the underlying causes in the capitalist economy.  For the latter, we must go deeper to the nature and movement of profitability in capitalist economies.

The theme that the global financial crash and the Great Recession were caused by financial deregulation and reckless bankers was also promoted by Lord Robert Skidelsky in his new book Money and Government: A Challenge to Mainstream EconomicsLord Robert Skidelsky is emeritus professor of economics at Warwick University, England.  and the most eminent biographer of John Maynard Keynes and a firm promoter of his ideas.

Skidelsky’s book, its cover blurb says, is “to familiarise the reader with essential elements of Keynes’s ‘big idea’.“ 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 Skidelsky (as it was to Keynes).  But capitalism has fault-lines and successively recurring slumps and depressions reveal 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.

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.” Second, we need to ‘manage’ capitalism with proper fiscal and monetary policies.  Third, 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.”  Thus Skidelsky seems to think that the causes of crises are low wages and consumption.  And like Tooze, Skidelsky says that 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.”

Mazzacuto’s attempt to resuscitate classical value theory is flawed, in my view.  In contrast, Professor Murray Smith of Brock University Canada offers a much clearer analysis, in his 2018 book, Invisible Leviathan, which, of course, has not got any acclaim or coverage from the left, let alone, the mainstream.  Smith critically explores the debate surrounding Karl Marx’s ‘capitalist law of value’ and its corollary, the law of the falling rate of profit.  The reader gets a clear account of the various interpretations of value theory and Smith makes his own significant contribution.  In my view, it is essential reading (not just because I wrote a foreword!).  The price set by the publishers, Brill, is prohibitive.  However, a paperback version will appear in 2019.

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 Managerial Capitalism, by Gerard Dumenil and Dominique Levy (D-L), two longstanding and eminent French Marxist economists.

For me, this seemed an old-fashioned, outdated and refuted scenario to present in 2018.  After all, Marx wrote about joint stock companies 150 years ago.  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.  Capitalism has not really changed in its fundamentals in the last 150 years.

But one thing has changed – the ‘socialist’ alternative of the Soviet Union has disappeared.  What can we learn about the feasibility of socialism from this failed state?  In a new book, Varieties of Alternative Economic Systems, edited by Richard Westra, Robert Albritton and Seong Jeong, Marxist economists try to ‘look beyond’ just a critique of capitalism and consider ‘practical utopias’ for the socialist alternative.

How a socialist future might work is a badly neglected area of debate with most Marxists just relying Marx’s own short Critique of the Gotha Programme of the German Social Democrats, or occasional economic analyses that deny the feasibility of socialism. This book moves things on to discuss ‘positive practicalities’ with some ground-breaking work from the likes of Richard Westra, Al Campbell and Seong Jeong.  Factfulness argued that the future is bright – but this book shows that this is true only with the arrival of ‘practical’ socialism.

Top ten posts in 2018: value and robots, populism, stock markets and debt

December 22, 2018

Here is my usual resume of the top ten most read posts on my blog in 2018.  Leading the list by some way was my post on a debate that I had over Marx’s value theory with Professor David Harvey. As most of my readers will know, David Harvey is the most well-known Marxist theorist globally, so the argument that I had with him obviously interested blog readers.

In a recent paper, entitled Marx’s refusal of the labour theory of value, Harvey argued that Marx did not have a ‘labour theory of value’ at all. As he put it: “if there is no market, there is no value”.  I understood this to mean it is in the realization of value as expressed in money that value emerges, not in the production process as such.  Harvey then goes on to argue that if wages are forced down to the minimum or even to nothing, then there will be no market for commodities and thus no value – and this is the “real root of capitalist crises”. And thus it follows that a policy for capital to avoid crises would be by “raising wages to ensure “rational consumption” from the standpoint of capital and colonizing everyday life as a field for consumerism”.

In the post, I responded that, in Marx’s view, the value of a commodity is still the labour contained in it and expended during the production process before it gets to market.  Value is not a creature of money – on the contrary.  Money is the representation or exchange value of labour expended, not vice versa. With Harvey’s interpretation, Marx’s theory of crisis (based on insufficient surplus value) is replaced with insufficient use values for workers as consumers.  Overaccumulation is replaced by underconsumption.  The class struggle becomes not workers versus capitalists; but consumers versus capitalists or taxpayers versus governments.  Naturally, Harvey firmly disagreed with my interpretation and found the empirical support I offered for my view  (eg the graph below shows that it is investment not consumption that leads slumps in the US) nonsensical. But read the post and make up your own minds.

The second most viewed post was on robots and what they mean for jobs and incomes.  I’ve covered the issue of robots and AI in earlier posts, but in a way, this post summed up the arguments for and against robots in delivering more or less jobs and incomes and offered some policy responses, preferring Universal Basic Services, (ie what are called public goods and services, free at the point of use) as a better policy option than Universal Basic Income.

This month has seen a very sharp fall in global stock markets as world economic growth slows, the trade war between the US and China continues and the global debt mountain accumulates. The S&P 500 index is down 10.6 per cent so far this month, its largest December drop since 1931 at the depths of the Great Depression. The benchmark’s 7.8 per cent drop so far in 2018 is its biggest since 2008.

Back last February, I argued, as I have done in earlier posts, that the economic landscape looks much like 1937, when an apparent economic recovery from the Great Depression in the US came to a sharp stop when the US Fed hiked interest rates, triggering a new downturn.  And throughout this year, the Fed has been hiking (with the latest rise this week), while the stock market is falling and economic growth is slowing.

Several of the top ten in 2018 covered specific countries, including the economic meltdown in Turkey, a key example of rumbling emerging market debt crisis that I have highlighted before. This is what I said in May after Turkey’s general election. “Rising global interest rates and the growing trade war initiated by US President Trump are going to hit the so-called emerging capitalist economies like Turkey.  The cost of borrowing in foreign currency will rise sharply and foreign investment is likely to reverse…..Turkey is now near the top of the pile for a debt crisis, along with Argentina (already there), Ukraine and South Africa.”

My posts on the elections in Sweden and Italy also caught the attention of blog readers.  In both, there was a dramatic rise in the votes of the so-called ‘populist’ parties.  In Italy, Five-Star (on the left) and the Liga (on the right) won and formed an unstable coalition government that has quickly come into conflict with the EU Commission over its attempt to expand public spending beyond EU fiscal caps.

Sweden has long been the poster child of the ‘mixed economy’, the social democrat state – where capitalism is supposedly ‘moulded’ to provide a welfare state, equality and decent working and living conditions for the majority. The 2018 general election result put that story to bed. The so-called Democrats, an anti-immigrant party with neo-Nazi roots, came third and now hold the balance of power between the traditional parties of the ‘centre-left’ and ‘centre-right’.

In these posts, I argued that the results in Italy and Sweden – and for that matter the giles jaunes mass protests in France and the Brexit debacle – follow the pattern of so-called populism.  It is the product of the failure of capitalism to deliver after the end of the Golden Age in the mid-1960s, but particularly after the global financial crash, the Great Recession and the ensuing Long Depression.

As for the UK, my post critiquing the opposition Labour Party’s plans for more public ownership also made the top ten.  The aim of the Labour leaders to reverse previous privatisations, end the iniquities of so-called private-public partnership funding; reverse the out-sourcing of public services to private contractors and take the market out of the National Health Service etc is excellent, However, without control of finance and the strategic sectors of the British economy, a Labour government will either be frustrated in its attempts to improve the lot of “the many not the few” (Labour’s slogan), or worse, face the impact of another global recession without any protection from the vicissitudes of the market and the law of value.

As usual every year, my post summing up the latest degree of global inequality of personal wealth in 2018 makes the top ten.  This is based on the annual report of Credit Suisse bank.   Last year, the bank’s economists found that top 1% of personal wealth holders globally had over 50% of the world’s personal wealth – up from 45% ten years ago. In the US, the three richest people in the US – Bill Gates, Jeff Bezos and Warren Buffett – own as much wealth as the bottom half of the US population, or 160 million people.  In contrast, around two-thirds of the world’s adults remain basically without any personal wealth worth speaking of.

Two of the top ten posts that interested blog readers were on the key factor that could trigger a new slump in the world economy: the rising level of global debt and the likely global credit crunch to come.  In one post from May, I highlight the vulnerability of many so-called emerging economies, like Turkey (as above), Argentina, Brazil and South Africa.

The story of the last ten years since the Great Recession is that the world capitalist economy has staggered on at low levels of growth and investment and with virtually no improvement in real incomes for the 90%.  And it has only staggered on because of a huge build-up in debt, particularly in the capitalist sector.  Now, monetary authorities are trying to reverse the credit binge and restore ‘normality’.  As a result, the cost of servicing that debt is on the rise and availability of more credit to finance is shrinking.

With global debt now reaching $237trn by the end of 2017, and with interest rates rising 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. The crunch will come when corporate profits in many economies begin to fall as debt servicing costs rise. But this has not happened yet.  I’ll discuss when and how this might happen in my annual post forecasting economic outcomes in 2019 – coming up.

Finally, let me thank all my blog followers for their interest in the blog this year and also to those who have made comments on my posts (sometimes favourably, but often critically).  This blog aims to provide information on the world economy, discuss and develop economic theory and research from a Marxist point of view and comment on economic policy; with the aim of showing how and why it is necessary to replace capitalism with a new stage of human social organisation, socialism.

Also remember, you can follow my Facebook site, where I cover day-to-day items of interest.  I now have a combined following on my blog and on my accompanying Facebook site https://www.facebook.com/Michael-Roberts-blog-925340197491022/ of just under 11,000. During 2018, I had a record 440,000 viewings of posts on the blog and over 195,000 different visits to the blog.

As for my books, you can get my Essays on Inequality in Createspace:
https://www.createspace.com/5078983;
or the Kindle version for the US:
http://www.amazon.com/dp/B00RES373S;
and the UK:
http://www.amazon.co.uk/s/?field-keywords=Essays%20on%20inequality%20%28Essays%20on%20modern%20economies%20Book%201%29&node=341677031.

You can get my first book, The Great Recession – a Marxist view (2009), here.  I think it still has a lot to say.  And if you have not got my best-selling book, The Long Depression (2016), you can get it here; check to see how its forecasts are turning out.

In 2018, I published two books.  To commemorate the 200th anniversary of Marx’s birth, I published Marx 200, covering Marx’s main economic ideas and their relevance in the 21st century (here).  And just last month, I co-edited with Guglielmo Carchedi, World in Crisis, a global analysis of Marx’s law of profitability (here), which provides empirical backing to Marx’s law from authors spanning the globe.

More projects are planned for 2019!

Back to Front

December 10, 2018

Is it supply that drives an economy or demand?  Such was the question asked by Keynesian economics blogger and Bloomberg columnist Noah Smith.  Smith often raises issues that enlighten us on the differences (and similarities) between mainstream neoclassical and Keynesian economics, and, in so doing, where Keynesian theory and policy differs from a Marxian analysis.

In a recent article, Smith questioned the traditional neoclassical view of economic growth, namely that real GDP expansion depends on employment plus productivity (output per employee).  This neoclassical view, says Smith, means that, while Keynesian monetary and fiscal policies might get an economy out of a slump, they can do little to raise long-term productivity growth.  But he begs to differ.

This ‘supply-side view’ is inadequate, says Smith.  Boosting demand with Keynesian-style measures of cheap money and government spending could create the conditions for raising output permanently onto a new and higher trajectory: it may be time to momentarily step away from economic orthodoxy and look at demand-based policies to help boost productivity.” There is a ‘demand-side’ view of long-term economic growth.

Smith cites Verdoorn’s law as relevant to this thesis: Dutch economist Petrus Johannes Verdoorn describes a correlation between output and productivity — when growth is faster, productivity also grows faster. You can see this correlation in the data.”  This, claims Smith, “leaves open the tantalizing possibility that the reverse is happening — that high levels of aggregate demand also drive up productivity.”  So, when there is a boom in demand, this leads to more sales and output and encourages companies to invest more and, as a result, this leads to rising productivity.  Thus demand creates its own supply – the reverse of Say’s law, as promoted by Ricardian and neoclassical economics, that supply creates its own demand.

So has neoclassical economics got things back to front and all we need to do in economic policy is to keep “running the economy hot, through continued monetary and fiscal stimulus”? Well, the first thing to say is that Smith’s reference to Verdoorn’s law to support his argument that Keynesian-style demand boosts will sustain increased productivity is misleading.  Actually, all that Verdoorn shows is that “in the long run a change in the volume of production, say about 10 per cent, tends to be associated with an average increase in labor productivity of 4.5 per cent.”  This correlation proves nothing about causation.  So output and productivity growth are correlated – surprise! – but is it total ‘demand’ or output growth that stimulates productivity growth, or vice versa?

Smith cites research that is supposed to show the causal connection from demand to supply, but when you check that research you find that the authors cited, Iván Kataryniuk and Jaime Martínez-Martín, conclude: “some of the deterioration of the TFP (productivity – MR) growth outlook in recent years may be explained by a negative business cycle, but structural weaknesses remain behind the slowdown in medium-term growth, especially for emerging countries.”  So it’s not demand that is the main cause of long-term productivity growth.

From a Marxist view, what’s missing from this debate, as always between mainstream neoclassical and Keynesian disputes, is profit and profitability.  Sure, it is obvious that when an economy is booming and demand for goods is strong, then companies will usually increase investment in new technology as well as employing more workers (but I say ‘usually’, because in this Long Depression, it seems companies have increasingly kept cash or invested in financial assets ie their own shares, rather than in productive assets).

An expanding economy leads to a virtuous circle of growth, investment and even productivity growth.  But that virtuous circle eventually turns into a vicious circle of slump, a collapse in investment and output that cannot be corrected by easy money or fiscal stimulus.  Why does a boom turn into slump?  The Marxist view is not because of some unexplained shock to the harmonious development of the market economy (the neoclassical view) or some unexplained change in the ‘animal spirits’ of entrepreneurs to invest (the Keynesian view).  It is because, in a profit-making economy (i.e. capitalism), profitability and profits fall back.  When that happens, as it will at recurring intervals, then output, investment and productivity will follow.  There is a profit cycle.

The Marxian view argues that it is the Keynesian view that is back to front.  Supply leads demand, not vice versa.  But this is not the same as the neoclassical view that supply creates its own demand (Say’s law).  For Marx, Say’s law was a fallacy.  In a monetary economy, there is always the possibility of a breakdown (both in time and inclination) between sale for money and purchase with money.  Hoarding of money can cause a collapse of sales and purchases. But what causes that possibility to become a probability or reality?  For Marx, it is a fall in the profitability of capital.

In the Keynesian world of macro-identities, National Income equals National Expenditure.  National income is composed of wages and profits and National Expenditure is composed of Consumption and Investment.

NI = NE can be decomposed to

Wages +Profits = Consumption + Investment

If we assume that workers do not save but spend all their wages, then the equation becomes:

Profits = Investment

This is an identity that does not reveal the causal direction.  The Keynesian view is that Investment (demand) creates Profits (supply).  But the evidence is against Noah Smith and the Keynesians.  The body of empirical evidence is that changes in profitability and profits lead to changes in investment.  And it is this that decides when there are cyclical booms and slumps and also the long-term growth path of a capitalist economy

Smith says “much more research is needed” to see whether demand creates supply or vice versa.  But the research is already there.  It is well established that ‘easy money’ (low interest rates and ‘quantitative easing’) won’t work in restoring long-term productivity growth – as Keynes also concluded in the 1930s and the evidence of the last ten years confirms.  The search for some ‘natural rate of interest’ that establishes full employment and maximum potential output growth is a mirage (reaching for the stars).

And studies (including my own) of the (Keynesian) ‘multiplier’ effect of boosting government spending or running the economy ‘hot’ (Smith) is much weaker (and even inverse in direction) than the impact of the profitability of capital on growth and productivity.

Clearly in this Long Depression, hysteresis is in operation, namely that low growth in output and profits has pushed investment and productivity growth onto a permanently lower trajectory.  But this is not the result of a lack of ‘effective demand’ per se, but comes from the failure of the profitability of capital to return to pre-2008 levels and/or to grow fast enough.

Smith may suggest that neoclassical theory has got it ‘back to front’.  But so has Keynesian theory.

Financialisation or profitability?

November 27, 2018

Financialisation, like neoliberalism, is the buzz word among leftists and heterodox economists.  It dominates leftist academic conferences and circles as the theme that supposedly explains crises, as well as a cause of rising inequality in modern capitalist economies particularly over the last 40 years.  The latest manifestation of this financialisation hypothesis comes from Grace Blakeley, a British leftist economist, who appears to be a rising media star in the UK.  In a recent paper, she presented all the propositions of the financialisation school.

But what does the term ‘financialisation’ mean and does it add value to our understanding of the contradictions of modern capitalism and guide us to the right policy to change things?  I don’t think so.  This is because either the term is used so widely that it provides very little extra insight; or it is specified in such a way as to be both theoretically and empirically wrong.

The wide definition mainly quoted by the financialisation school was first offered by Gerald Epstein.  Epstein’s definition was “financialization means the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies.” As you can see, this tells us little beyond the obvious that we can see in the development of modern, mature capitalism in the 20th century.

But as Epstein says: “some writers use the term ‘financialization’ to mean the ascendancy of ‘shareholder value’ as a mode of corporate governance; some use it to refer to the growing dominance of capital market financial systems over bank-based financial systems; some follow Hilferding’s lead and use the term ‘financialization’ to refer to the increasing political and economic power of a particular class grouping: the rentier class; for some financialization represents the explosion of financial trading with a myriad of new financial instruments; finally, for Krippner (who first used the term – MR) herself, the term refers to a ‘pattern of accumulation in which profit making occurs increasingly through financial channels rather than through trade and commodity production’”.

The content of financialisation under these terms takes us much further, especially the Krippner approach.  The Krippner definition takes us beyond Marx’s accumulation theory and into new territory where profit can come from other sources than from the exploitation of labour.  Finance is the new and dominant exploiter, not capital as such.  Thus finance is now the real enemy, not capitalism as such.  And the instability and speculative nature of finance capital is the real cause of crises in capitalism, not any fall in the profitability of production of things and services, as Marx’s law of profitability argues.

As Stavros Mavroudeas puts it in his excellent new paper (393982858-QMUL-2018-Financialisation-London), the ‘financialisation hypothesis’ reckons that “money capital becomes totally independent from productive capital (as it can directly exploit labour through usury) and it remoulds the other fractions of capital according to its prerogatives.” And if financial profits are not a subdivision of surplus-value then…the theory of surplus-value is, at least, marginalized. Consequently, profitability (the main differentiae specificae of Marxist economic analysis vis-à-vis Neoclassical and Keynesian Economics) loses its centrality and interest is autonomised from it (i.e. from profit – MR).”

As Mavroudeas says, financialisation is really a post-Keynesian theme based on a theory of classes inherited from Keynes that dichotomises capitalists in two separate classes: industrialists and financiers.” The post-Keynesians are supposedly ‘radical’ followers of Keynes from the tradition of Keynesian-Marxists Joan Robinson and Michel Kalecki, who reject Marx’s theory of value based on the exploitation of labour and the law of the tendency of the rate of profit to fall.  Instead, they have a distribution theory: crises are either the result of wages being too low (wage-led) or profits being too low (profit-led).  Crises in the neoliberal period since the 1980s are ‘wage-led’.  Increased (‘excessive’?) debt was a compensation mechanism to low wages, but only caused and exacerbated a financial crash later.  Profitability had nothing to do with it.

As Mavroudeas explains, the hypothesis goes: “The advent of neoliberalism in the 1980s transformed radically capitalism. Liberalisation and particularly financial liberalization led to financialisation (as finance was both deregulated and globalized). This caused a tremendous increase in financial leverage and financial profits but at the expense of growing instability. This resulted in the 2008 crisis, which is a purely financial one.”

Linking debt to the post-Keynesian distribution theory of crises follows from the theories of Hyman Minsky, radical Keynesian economist of the 1980s, that the finance sector is inherently unstable because “the financial system necessary for capitalist vitality and vigor, which translates entrepreneurial animal spirits into effective demand investment, contains the potential for runaway expansion, powered by an investment boom.” The modern follower of Minsky,Steve Keen, puts it thus: “capitalism is inherently flawed, being prone to booms, crises and depressions. This instability, in my view, is due to characteristics that the financial system must possess if it is to be consistent with full-blown capitalism.” Blakeley too follows closely the Minsky-Kalecki analysis and offers it as an improvement on or a modern revision of Marx.

Many in the financialisation school go onto argue that ‘financialisation’ has created a new source of profit (secondary exploitation) that does not come from the exploitation of labour but from gouging money out workers and productive capitalists through financial commissions, fees, and interest charges (‘usury’).  I have argued in many posts that this is not Marx’s view.

Post-Keynesian authors and supporters of financialisation like JW Mason refer to the work of mainstream economists like Mian and Siaf to support the idea that modern capitalist crises are the result of rising inequality, excessive household debt leading to financial instability and have nothing to do with the failure of profit ability in productive investment.  Mian and Sufi published a book, called the House of Debt, described  by the ‘official’ proponent of Keynesian policies, Larry Summers, as the best book this century! In it, the authors argue that “Recessions are not inevitable – they are not mysterious acts of nature that we must accept. Instead recessions are a product of a financial system that fosters too much household debt”.

For me, financialisation is a hypothesis that looks only at the surface phenomena of the financial crash and concludes that the Great Recession was the result of financial recklessness by unregulated banks or a ‘financial panic’.  Marx recognised the role of credit and financial speculation.  But for him, financial investment was a counteracting factor to the tendency for the rate of profit to fall in capitalist accumulation.  Credit is necessary to lubricate the wheels of capitalist commerce, but when the returns from the exploitation of labour begin to drop off, credit turns into debt that cannot be repaid or at serviced.  This is what the financialisation school cannot explain: why and when does credit turn into excessive debt?

UNCTAD is a UN research agency specialising in trade and investment trends. It published a report on the move from investment in productive to financial assets.  It was written by leading post-Keynesian economists. It found that companies used more of their profits to buy shares or pay our dividends to shareholders and so less was available productive investment.  But again, this does not tell us why this started to happen from the 1980s.

In the current issue of Real World Economics Review, an on-line journal dominated by post-Keynesian analysis and the ‘financialisation’ school, John Bolder considers the connection between the ‘productive and financial uses of credit’: “up until the early 1980s, credit was used mostly to finance production of goods and services. Growth in credit from 1945 to 1980 was closely linked with growth in incomes. The incomes that were generated were then used to amortize and eventually extinguish the debt. This represented a healthy use of debt; it increased incomes and introduced negligible financial fragility.”  But from the 1980s, “credit creation shifted toward asset-based transactions (e.g., real estate, equities bonds, etc.). This transition was also fuelled by the record-high (double-digit) interest rates in the early 1980s and the relatively low risk-adjusted returns on productive capital”.

‘Financialisation’ could be the word to describe this development.  But note that Bolder recognises that it was fall in profitability (‘low risk-adjusted returns on productive capital’) in productive investment and the rise in interest costs that led to the switch to what Marx would call investment in fictitious capital. But this does not mean that finance capital is now the decisive factor in crises or slumps. Nor does it mean the Great Recession was just a financial crisis or a ‘Minsky moment’ (to refer to Hyman Minsky’s thesis  that crises are a result of ‘financial instability’ alone). Crises always appear as monetary panics or financial collapses, because capitalism is a monetary economy.  But that is only a symptom of the underlying cause of crises, namely the failure to make enough money!

Guglielmo Carchedi, in his excellent, but often ignored Behind the Crisis  states: “The basic point is that financial crises are caused by the shrinking productive base of the economy. A point is thus reached at which there has to be a sudden and massive deflation in the financial and speculative sectors. Even though it looks as though the crisis has been generated in these sectors, the ultimate cause resides in the productive sphere and the attendant falling rate of profit in this sphere.”

Despite the claims of the financialisation school, the empirical evidence is just not there.  For example, Mian and Sufi reckon that the Great Recession was immediately caused by a collapse in consumption. This is the traditional Keynesian view.  But the Great Recession and the subsequent weak recovery was not the result of consumption contracting, but investment slumping (see my post, https://thenextrecession.wordpress.com/2012/11/30/us-its-investment-not-consumption/).

Recently Ben Bernanke, former head of the US Federal Reserve during the great credit boom of the early 2000s, has revived his version of ‘financialisation’ as the cause of crises.  For him, crises are the result of ‘financial panics’ – ie people just lose their heads and panic into selling and calling in their credits in a completely unpredictable way (“Although the panic was certainly not an exogenous event, its timing and magnitude were largely unpredictable, the result of diverse structural and psychological factors”)In his latest revival, Bernanke considers empirically any connection between ‘financial variables’ like credit costs and ‘real economic activity’.  He concludes that “the empirical portion of this paper has shown that the financial panic of 2007-2009, including the runs on wholesale funding and the retreat from securitized credit, was highly disruptive to the real economy and was probably the main reason that the recession was so unusually deep.”

But when we look at the evidence provided, Bernanke has to admit that “balance sheet factors (ie changes in debt etc) do not forecast economic developments well in my setup.” In other words, his conclusions are not supported by his own empirical results. “It may be that both household and bank balance sheets evolve too slowly and (comparatively) smoothly for their effects to be picked up in the type of analysis presented in this paper.”

And yet there is plenty of evidence for the Marxist view that it is a collapse in profitability and profits in the productive sectors that is the necessary basis for a slump in the ‘real’ economy.  All the major crises in capitalism came after a fall in profitability (particularly in productive sectors) and then a collapse in profits (industrial profits in the 1870s and 1930s and financial profits at first in the Great Recession).  Wages did not collapse in any of these slumps until they started.

In a chapter of our new book, World in Crisis, G Carchedi provides compelling empirical support for Marx’s law of profitability showing the link between the financial and productive sectors in capitalist crises.  From the early 1980s, the strategists of capital tried to reverse the low profitability reached then.  Profitability rose partly through a series of major slumps (1980, 1982, 1991, 2001 etc).  But it also recovered (somewhat) through so-called neoliberal measures like privatisations, ending trade union rights, reductions in government and pensions etc.

But there was also another countertendency: the switch of capital into unproductive financial sectors. “Faced with falling profitability in the productive sphere, capital shifts from low profitability in the productive sectors to high profitability in the financial (i.e., unproductive) sectors. But profits in these sectors are fictitious; they exist only on the accounting books. They become real profits only when cashed in. When this happens, the profits available to the productive sectors shrink. The more capitals try to realize higher profit rates by moving to the unproductive sectors, the greater become the difficulties in the productive sectors. This countertendency—capital movement to the financial and speculative sectors and thus higher rates of profit in those sectors—cannot hold back the tendency, that is, the fall in the rate of profit in the productive sectors.”

Financial profits have claimed an increasing share of real profits throughout the whole post–World War II phase. “The growth of fictitious profits causes an explosive growth of global debt through the issuance of debt instruments (e.g., bonds) and of more debt instruments on the previous ones. The outcome is a mountain of interconnected debts. ….But debt implies repayment. When this cannot happen, financial crises ensue. This huge growth of debt in its different forms is the substratum of the speculative bubble and financial crises, including the next one. So this countertendency, too, can overcome the tendency only temporarily. The growth in the rate of profit due to fictitious profits meets its own limit: recurring financial crises, and the crises they catalyze in the productive sectors.”

What Carchedi finds is that “Financial crises are due to the impossibility to repay debts, and they emerge when the percentage growth is falling both for financial and for real profits.“ Indeed, in 2000 and 2008, financial profits fall more than real profits for the first time.

Carchedi concludes that “It is held that if financial crises precede the economic crises, the former determine the latter, and vice versa.  But this is not the point. The question is whether financial crises are preceded by a decline in the production of value and surplus value…The deterioration of the productive sector in pre-crisis years is thus the common cause of both financial and non-financial crises. If they have a common cause, it is immaterial whether one precedes the other or vice versa. The point is that the (deterioration of the) productive sector determines the (crises in the) financial sector.”

By rejecting Marx’s law of value and the law of profitability, the post-Keynesian ‘financialisation’ school opts for the idea that the distribution between profits and wages; rising inequality and debt; and above all, an inherent instability in finance that causes crises.  Actually, it is ironic that these radical followers of Keynes look to the dominance of finance as the new form of (or stage in) capital accumulation because Keynes thought that capitalism would eventually evolve into a leisure society with the ‘euthanasia of the rentier’ ie the financier, would disappear.  It was Marx who predicted the rise of finance alongside increasing centralisation and concentration of capital.

The rejection of changes in profits and profitability as the cause of crises in a profit-driven economy can only be ideological.  It certainly leads to policy prescriptions that fall well short of replacing the capitalist mode of production.  If you think finance capital is the problem and not capitalism, then your solutions will fall short.

In the Epstein book, various policy prescriptions for dealing with the evil of “excessive financialisation” are offered.  Grabel (chapter 15) wants “taxes on domestic asset and foreign exchange transactions – so-called Keynes and Tobin taxes – reserve requirements on capital inflows (so-called Chilean regulations), foreign exchange restrictions, and so-called trip-wires and speed bumps, which are early warning systems combined with temporary policies to slow down the excessive inflows and/or outflows of capital.” Pollin reckons that by “taxing the excesses of financialization and channeling the revenue appropriately, governments can help to restore public services and investments which, otherwise, are among financialization’s first and most severe casualties.”  This is no more radical than the policy prescriptions of Joseph Stiglitz, the ‘progressive’ Nobel prize winning economist who said, “I am no left-winger, I’m a middle of the road economist”.

Most important, if ‘financialisation is not the cause, such reforms of finance won’t work in ending rising inequality or regular and recurring slumps in economies.  The financialisation school needs to remember what one of its icons, Joan Robinson once said: “Any government which had both the power and will to remedy the major defects of the capitalist system would have the will and power to abolish it altogether”.

Not before the sun burns out

November 12, 2018

This year’s Historical Materialism conference in London seemed well attended and with younger participants.  HM covers all aspects of radical thought: philosophical, political, cultural, psychological and economic.  But it’s economics that this blog concentrates on and so my account of HM London will be similar.

Actually, there did not seem to be as many economic sessions as in previous years, so let me begin with the ones that I organised!  They were the two book launch sessions: one on the new book, The World in Crisis, edited by Guglielmo Carchedi and myself; and the second on my short book, Marx 200, that elaborates on Marx’s key economics ideas and their relevance in the 21st century, some 200 years after his birth and 150 years since he published Volume One of Capital.

In the session on The World in Crisis, I gave a general account of the various chapters that all aim at providing a global empirical analysis of Marx’s law of profitability, with the work of mostly young authors from Europe, Asia, North and South America (not Africa, unfortunately). World in Crisis

As the preface in the book says: World in Crisis aims to provide empirical validity to the hypothesis that the cause of recurring and regular economic crises or slumps in output, investment and employment can be found ultimately in Marx’s law of the tendential fall in the rate of profit on capital.  My power point presentation showed one overall result: that wherever you look at the data globally, there has been a secular fall in the rate of profit on capital; and in several chapters there is evidence that the causal driver of crises under capitalism is a fall in profitability and profits.

In the session, Tony Norfield presented his chapter on derivatives and capital markets.  Tony has just published his powerpoint presentation on his excellent blog site here.  Tony traces the origin of the rise of derivatives from the 1990s to the instability of capital markets. Derivatives did not cause the global financial crash in 2008 but by extending the speculative boom in credit in the early 2000s, they helped spread the crash beyond the borders of the US and connecting the crash in the home markets to mortgages, commodities and sovereign debt.  Tony argued finance is now dominant in the controlling and distributing value globally but that still does not mean that finance can escape the laws of motion of capital and profitability.  On the contrary, finance intensifies the crisis of profitability.  So, in policy terms, acting to regulate or take over banking and finance will not be enough to change anything.

Brian Green stepped in to fill the slot for my fellow editor Guglielmo Carchedi who was unable to make the session.  Brian offered an intriguing new insight on how to measure the rate of profit on capital that could include circulating as well as fixed assets.  Most Marxists consider that it is impossible to properly measure circulating capital to add into the denominator in Marx’s rate of profit formula (s/(c+v)  Brian offers a method using national accounts to achieve this and, in so doing, he argued that a much more precise measure of the rate of profit can be achieved that will enable us to see more accurately any changes in profits and investment that would lead to a slump.

Some important questions were asked by the audience.  In particular, how can we connect Marx’s law of profitability (the rate of profit) with crises based on a falling mass of profit?  In Chapter One of the book, Carchedi and I show just that: that a falling rate of profit eventually leads to a fall in the mass of profit (or a fall in total new value) which triggers the collapse in investment.

Indeed, contrary to the view of Keynesians that a fall in household consumption triggers a crisis, it is investment that swings down, not consumption.  In the Great Recession, profits led investment which led GDP; consumption hardly moved.  Here is a graph showing the change in investment and consumption one year before each post-war slump in the US.

Another question was: why do bourgeois economists find a rise in the rate of profit from the early 1980s if Marx’s law is right?  The answer is two-fold: first, while Marx’s law holds that there will be a secular fall in profitability, it will not be in a straight line and there will be periods when the counteracting factors (eg. a rising rate of surplus value) to the law as such (a rising organic composition of capital) will be stronger.  And second, this was the case for the so-called neoliberal period from the early 1980s to the end of the century.  So mainstream measures, which always start at the beginning of the 1980s, miss part of the picture.

In the session on the book Marx 200, in my presentation, Marx 200 HM, I again outlined what I consider are the key laws of motion of capitalism that Marx revealed in his economic analysis: the law of value, the law of accumulation and the law of profitability.  The latter flows from the first two, so Marx’s theory of crises depends on all three laws being correct.  At the session, Riccardo Bellofiore of the University of Bergamo, kindly agreed to offer a critique of the book and my approach.  Riccardo considered that my emphasis on using empirical data and official statistics bordered on a ‘logical positivist’, undialectical method.  As Paul Mattick, the great Marxist economist of the 1950 and 1960s argued, it was impossible to use official data based only in fiat money terms to ascertain the changes in value in Marxist terms.  Moreover, my emphasis on data and economic trends was too ‘determinist’ and failed to take account of the role of working class struggle.  Not everything can be decided by economic forces, there was also the subjective role of the class and I was dismissing this.

Naturally I disagree.  It seems to me that ‘scientific socialism’ is just that: a scientific approach to explaining the irreconcilable contradiction within capitalism and why it needs to be and must be replaced with socialism if human society is to progress or even survive.  Marx recognised the role of empirical data in his backing up his theories and often attempted with the limited resources at his disposal to accumulate such (in Capital and elsewhere).   We cannot just assert that Marx’s laws of motion must be right because there are recurrent crises in capitalism – we have to show that it is Marx’s laws that lie behind these crises and not other explanations.  If correct, other explanations might (and do) mean that capitalism just needs ‘modification’ or ‘management’ (Keynes) or even better left alone (neoclassical and Austrian).

It is not determinist to argue that economic conditions are out of the conscious control of both capitalists and workers (an Invisible Leviathan) and the law of motion of capitalism will override the ability of people in struggle to irreversibly change their lives – without the ending of capitalism.  Class struggle operates continually, but its degree of intensity and the level of success for labour over capital will be partly (even mainly) determined by the economic conditions. Men make their own history, but they do not make it as they please; they do not make it under self-selected circumstances, but under circumstances existing” (Marx).

A number of other important issues were raised by the audience:  what about the three laws that Uno Kozo, the Japanese Marxist economist identified?  I cannot answer this one but there was a session at HM on just that with Elene Lange.

The other question that came up was again whether Marx’s law of profitability was really just a secular theory (ie long term) and basically irrelevant as offering any underlying cause of recurrent crises; or whether it was just a cyclical theory, explaining the ‘business cycle’ or ‘waves of capital accumulation’, and has nothing to say about the eventual demise or breakdown of capitalism.

It was Rosa Luxemburg’s view that it was the former – a very long-term tendency that was so long term that the ‘sun would burn out’ before a falling rate of profit would play a role in pushing capitalism into crises (Luxemburg made this remark sarcastically in reply to a Russian economist who suggested that Marx’s law of profitability might well be relevant).  On the other hand, many Marxist economists who do accept the relevance of Marx’s law of profitability in recurrent crises deny that it offers a prediction for the transient future of capitalism (ie capitalism cannot last forever).  In my view, the law is both secular and cyclical and I present arguments for this view in my book, The Long Depression.  And in the new book, The World in Crisis, there is evidence of both the secular view (Maito) and the cyclical view (Tapia).

Enough of my sessions, because it would be amiss not mention several good sessions on Latin America (Mariano Feliz, Angus McNelly); and looking back at Marx’s value theory
(Andy Higginbottom (Higginbottom2012JAPEpublished),
Heesang Jeon Value_Use_Value_Needs_and_the_Social_Div).
I shall be returning to these topics on my blog over the next period.

Finally, there was the Isaac Deutscher Memorial Prize awarded at HM for the best Marxist book of the year.  Last year’s winner was William Clare Roberts for his intriguing Marx’s Inferno: The Political Theory of Capital (Princeton UP).  For my initial thoughts on this work, see here. But last week, after hearing my namesake speak on the subject of the nature of freedom under socialism, I shall be returning to this subject in a future post.

The shortlist for 2018 was:

Sven-Eric Liedman, A World to Win: The Life and Works of Karl Marx (Verso)
Kim Moody, On New Terrain: How Capital is Reshaping the Battleground of Class War (Haymarket Books)
Kohei Saito, Karl Marx’s Ecosocialism: Capital, Nature, and the Unfinished Critique of Political Economy (Monthly Review)
Ranabir Samaddar, Karl Marx and the Postcolonial Age (Palgrave Macmillan)