Archive for the ‘marxism’ Category

Summer economics

August 10, 2020

It’s summer in the northern hemisphere and holiday time in the year of the COVID.  So it’s an opportunity to review a few economics books published this year (but written before the pandemic and the Great Lockdown).

I am not a fan of clever, trick titles; they usually overhype the content of a book itself. We have had Freakonomics and Factfulness before, which never lived to up to their titles. Now we have Angryonomics by Eric Lonergan and Mark Blyth.

Eric Lonergan is a macro hedge-fund manager and Mark Blyth is an economics professor at Brown University.  Blyth is the author of Austerity: The History of a Dangerous Idea, a firmly Keynesian rebuttal of austerity policies after the Great Recession and his podcasts and his talks on YouTube are viewed by millions.  I have debated with Blyth on the future of the European Union (

Conducted in the format of a dialogue between Lonergan and Blyth, Angrynomics explores the rising tide of anger against the status quo in economics and economic policy exhibited by the populace.  Blyth and Lonergan reckon some of this anger is sane and justified (say the protest in Beirut against the political elite), but some is irrational, like intensified racism (or Brexit).  So ‘populism’ is a force for change or for reaction.

The two authors engage in a series of dialogues to make sense of “what appears at first sight to be an incoherent outpouring of primitive emotion”.  For our Socratic authors, there is a distinction between tribal anger, which appeals to our primal instincts, and moral outrage, which protests against the wrongs done to us by inept and sometimes corrupt governments. Both are a reaction to the vacuum created by the failure of ‘technocratic politics’.

What to do next? How to reset the system?  Lonergan and Blyth reject the mainstream economics of ‘nudging’ the ‘technocratic’ system back to stability.  They claim something more radical that still cuts across ‘political lines’ (presumably class lines too).  And what is the big answer?  To create a national wealth fund.  Governments should borrow and then invest in productive assets that reap returns to be used to boost education and health, so sadly neglected by governments before the COVID.

So that’s it, set up government wealth fund, just as Saudi Arabia or Norway have done. Or as the authors point out, as Hong Kong did in keeping its equity market going with direct funding in the Asian crisis of 1998.  No need to tax the billionaires and cause political divide.  Other solutions offered by our Socratic authors include a data dividend in which the big technology companies, such as Amazon, Google and Apple, would be required to pay for the use of our private data. Again, no need to break up the tech giants or take them over – just tax them a little.

The naivety of these solutions really beggars belief: nothing of the existing economic structure is to be touched; except for governments to sweep a few crumbs off the table of unequal wealth to fund education and health.  I doubt this solution would curb the anger of the populace, rational or irrational.

The idea of saving capitalism from itself without hurting it too much emerges from another book, The Economics of Belonging, by Martin Sandbu, the economics commentator for the Financial Times.

The subtitle of the book is A Radical Plan to Win Back the Left Behind and Achieve Prosperity for All.  This is a worthy objective and Sandbu reckons that he has a “radical new approach to economic policy that addresses the symptoms and causes of inequality in Western society today.”

Again, the context for Sandbu, as it was for the Socratic duo above, is the ‘rise of populism’ as the disenfranchised from the capitalist system threaten the existing social order of ‘liberal capitalism’.  “Like many others, I have worried that when our societies divide economically, they also fall apart culturally and politically.”  Sandbu argues that economics remains at the heart of our widening inequality and it is only by focusing on the right policies that we can address it. He proposes a detailed, radical plan for “creating a just economy where everyone can belong.”

Sandbu reckons rising inequality and dissatisfaction is not due to globalization going too far. “Rather, technological change and flawed but avoidable domestic policies have eroded the foundations of an economy in which everyone can participate”.  Given the rising skill bias of technical change, those without the skills are left behind to stay in low-paid, precarious jobs, while others reap the benefits of their technical skills. Manufacturing jobs have and are being automated, while services remain unskilled and unrewarded.  This scenario rings the truth of Marx’s law of accumulation: more technology replacing labour power so that productivity rises but wages do not.  But inequality is not just inequality of skills within labour and so inequality of income; it is much more inequality of wealth and ownership. 

What is Sandbu’s answer to the age-old trend in capitalism and to defeat the forces of ‘populism’ that threaten liberal democracy?  It’s education, education, education, as former UK prime minister Tony Blair used to parrot.  Spend more on education, and combine it with active labour market policies, a high minimum wage, and limits on top pay.

Having grown up in Norway, Sandbu puts forward that country’s economic model as the way out: “a nice contrast presented here is between poor immigrants who manually wash cars at stoplights in the US, and the Norwegian operators of automated car washes.”  Norway arguably came as close “as any modern society to the ideal of an economy with a place for everyone. Few have ever had lower economic inequality or a shorter social distance between top and bottom and managed to combine it with high productivity and strong growth.”

Picking out the richest per capita income country in the world, with just five million people, made rich by the fossil fuel industry (but still with substantial inequality in personal wealth) is hardly a likely model for the US or Greece, let alone for the UK. How does Sandbu see us getting to the ‘success’ of Norway?  He wants higher minimum wages, a universal basic income (to be financed by a carbon tax), generous government funding for education and labour-market mobility and strict enforcement of labour standards.  And he wants a wealth tax (unlike Angrynomics).

So we have policies that every major capitalist government rejects.  Instead of a radical restructuring of ownership and control to invest in basic public services, Sandbu offers us employee representation on company boards or universal basic income for people, working or not.  As one reviewer put it: “UBI will not buy me an adequate health or education or public transport system.” But he does not want to replace capitalism.  His ‘everyone economy;’ aims to “make capitalism work for all” and so save it from ‘populism’.

Saving capitalism from its own contradictions was of course the objective of John Maynard Keynes, the hero of our current summer authors.  In a new biographical history, The Price of Peace, Zachary Carter argues that it was Blair and Clinton who ended Keynes’s dream of a fair and prosperous capitalism for all, by adopting policies of inequality.  This seems a strange charge, for surely Clinton and Blair were the epitome of Keynesian-type policies of liberal capitalism.

Carter tells us the already well-known ‘revolutionary’ contribution of Keynes in the 1930s, namely that the economy had no natural tendency toward full employment. If governments did not intervene forcefully to boost consumption demand, Keynes argued, high unemployment could persist indefinitely. Cheap money provided by the central bank would not suffice to alter the circumstances decisively.

But as I have pointed in numerous other posts on Keynes that pour doubt on his supposed revolutionary fervour, Keynes was inconsistency incarnate, even on this basic Keynesian postulate.  Zachary quotes Lloyd George. “He dashed at conclusions with acrobatic ease [and] rushed into opposite conclusions with the same agility.” Carter points out that Keynes changed the views of economists and economic policy-making.  Maybe, but did he succeed in solving the contradictions of capitalist production?  Clearly not, if the Great Recession and the Great Lockdown now are to be recorded.

All these summer authors aim to save capitalism from itself with various policies, all of which are designed to make capitalism work without threatening anything in its fundamental structure.  Marxian political economy argues that this approach cannot succeed.  For a start, ‘liberal capitalism’ is a myth.  As Marx describes towards the end of Capital,If money comes into the world with a congenital blood-stain on one cheek,” he says, then “capital comes dripping from head to toe, from every pore, with blood and dirt.”

Blood and Money is the theme of a new book by David McNally, the Marxist Professor of History at the University of Houston.  Instead of some Whiggish history of the gradual emergence of a rational democratic liberal capitalism from the anti-scientific dark ages of feudalism, Blood and Money tells the story of money (the medium of capitalist exchange) as a history of violence and human bondage.

McNally reckons money’s emergence and its transformation are intimately connected to the buying and selling of slaves and the waging of war. For example, the need to finance armies led to the rise of paper currency and banks, including the Bank of England, which was incorporated in 1694 to fund a war with France. McNally shows how the British financial system contributed to the horrors of the Atlantic slave trade, detailing the story of the slave ship Zong, whose captain ordered 133 Africans to be thrown overboard in order to collect insurance money.

McNally’s argument has the ring of historic truth, but the emergence of money must still be seen as the product of exchange. And modern capitalism without slavery (mostly) is even more exploitative of human labour power and bodies.

The Keynesians may note the anger of people and seek to find ways of improving people’s futures, but within capitalism.  Marxian political economy shows why that is not possible.  The inter-war Marxist Henryk Grossman made some of the most important contributions in explaining this. In a new publication of his works, his long-standing biographer Rick Kuhn brings together some his essential texts, many of which have been previously unpublished.

The collection pulls from monographs, articles, essays, letters, and manuscript material to assemble Grossman’s most important contributions on economic theory.  The chapters on crisis theory and imperialism are an essential read.  If you cannot afford the book and have not read Grossman’s work before, go to the Marxist internet archive for his most important works.  Much more useful summer reading.

Taking on the ‘fearsome foursome’ and ‘market power’

August 1, 2020

Last Thursday, the US-based global tech giants reported their quarterly earnings simultaneously.  On the same day, the US economy recorded the biggest quarterly contraction in national output ever (-9.5% yoy or -32.9% annualised).

In contrast, the ‘fearsome foursome’: Alphabet (Google) – the world’s largest search engine; Amazon – the world’s largest online distributor; Apple – the world’s largest computer and mobile phone manufacturer; and Facebook – the world’s largest social media provider, posted double-digit revenue growth for the three months ended in June, raking in a combined $33.9 billion in profit in the second quarter alone. While the US and world economy have been plunged into the deepest slump since the 1930s by the lockdowns from the COVID-19 pandemic, the world’s most prominent tech companies have prospered.

Revenues are up across the tech board and the price of their shares (market cap) rose $178bn in the following day, taking their stock market value to $5trn, or 25% of US GDP.  Amazon CEO Jeff Bezos saw the largest single-day increase in wealth ever recorded for any individual. In just one day, his fortune increased by $13 billion. On current trends, he is on track to become the world’s first trillionaire by 2026.

At the same time as these results came out, the fearsome foursome were ‘grilled’ by a US Congressional Committee about their nefarious practices in dealing with competitors; and their increasing ‘market power’ and ever-growing monopoly position in the most profitable sector of the US economy.  The Judiciary Committee published 1300 documents that supposedly showed their attempts to crush competitors, buy them out or exclude them from markets.

Amazon’s Jeff Bezos, Apple’s Tim Cook, Google’s Sundar Pichai and Facebook’s Mark Zuckerberg

For example, Facebook chief Mark Zuckerberg mailed that he saw “acquisitions as an effective way to neutralise potential competitors”, and how many start-ups fear that if they reject a Facebook buyout he will go into “destroy mode” against them. Apparently, Google insiders worried about how to fend off competition on the way to erecting what critics called a “walled garden”. As one executive opined: “The open web we knew and loved is going away.” There is a mounting campaign to curb or break up these ‘super-star’ companies and end their monopoly market power.

But this is not new in the history of capitalism.  Successful companies in new expanding fields of capitalist accumulation have grown from small to large and eventually to ‘monopoly’ positions: railways, oil, motor vehicles, finance and telecoms.  In 1911, Standard Oil was broken up into 34 companies by Congress.  Rockefeller ran the company as its chairman until his retirement in 1897. He remained the major shareholder and after 1911, with the dissolution of the Standard Oil trust into 34 smaller companies, he stayed as the richest person in modern history, as the initial income of these individual enterprises proved to be much bigger than that of a single larger company. Its successors such as ExxonMobilMarathon PetroleumAmoco, and Chevron are still among the companies with the largest revenues in the world.

In the 1984, AT&T was the main ‘monopoly’ telecoms provider and so was broken up into seven regional companies.  But AT&T continued to make huge profits as did its regional monopoly successors.  The break-up of ‘market power’ made little difference to improving competition or productivity or, most important, labour incomes.

The ending of monopoly ‘market power’ will not turn round the low productivity of the US economy and its current collapse into a deep slump, or for that matter, reduce inequality of incomes or wealth in the US.  Recent research by IMF economists found that the downward trend in the labour share of global income since the early 1990s was mainly due to ‘technological progress” as workers were replaced by labour-saving technology, particularly in so-called ‘routine occupations’. “The empirical analysis points to a dominant role of technology and global integration in this trend, although to different degrees between advanced and emerging market economies. Technological progress, reflected in the steep decline in the relative price of investment goods, has been the key driver in advanced economies, along with high exposure to routine occupations that could be automated, with global integration also playing a role, albeit a smaller one.”  Rising inequality is the result of ‘normal’ capitalist accumulation and the appropriation of profit through the exploitation of labour and labour-saving technology.

And yet the concept of ‘market power’ persists in left economics as the dominant explanation of what is wrong with American capitalism and globally. Take this recent article in Jacobin by rising star economic journalist, Grace Blakeley. “Many of the world’s largest tech companies have become global oligopolies and domestic monopolies. Globalization has played a role here, of course — many domestic firms simply can’t compete with global multinationals. But these firms also use their relative size to push down wages, avoid taxes, and gouge their suppliers, as well as lobbying governments to provide them with preferential treatment.”

Blakeley argues that Amazon has become America’s largest company through ‘anti-competitive practices’ that have landed it in trouble with the European Union’s competition authorities. The working practices in its warehouses are notoriously appalling. And a study from last year revealed Amazon to be one of the world’s most “aggressive tax avoiders.” Part of the reason Amazon has to work so hard to maintain its monopoly position is that its business model relies on network effects that only obtain at a certain scale, argues Blakeley. Tech companies like Amazon make money by monopolizing and then selling the data generated from the transactions on their sites.

And the rising market power of a small number of larger firms has actually reduced productivity. “This concentration has also constrained investment and wage growth as these firms simply don’t have to compete for labour, nor are they forced to innovate in order to outcompete their rivals.”

Much of what Blakeley says here is true.  Undoubtedly, much of the mega profits of the likes of Apple, Microsoft, Netflix, Amazon, Facebook are due to their control over patents, financial strength (cheap credit) and buying up potential competitors.  Indeed, take the latest case.  Microsoft is now in talks to purchase TikTok, which is owned by China’s ByteDance, with the aim of weakening this latest big rival to the super star companies. But the market power or monopoly explanation goes too far. Technological innovations also explain the success of these big companies.

Marx considered that there were two forms of rent that could appear in a capitalist economy.  The first was ‘absolute rent’ where the monopoly ownership of an asset (land) could mean the extraction of a share of surplus value from the capitalist process without investment in labour and machinery to produce commodities.  But the second form Marx called ‘differential rent’.  This arose from the ability of some capitalist producers to sell at a cost below that of more inefficient producers and so extract a surplus profit – as long as the low cost producers could stop others adopting even lower cost techniques by blocking entry to the market, employing large economies of scale in funding, controlling patents and making cartel deals.  This differential rent could be achieved in agriculture by better yielding land (nature) but in modern capitalism, it would be through a form of ‘technological rent’; ie monopolising technical innovation.

The history of capitalism is one where the concentration and centralisation of capital increases, but competition continues to bring about the movement of surplus value between capitals (within a national economy and globally). The substitution of new products for old ones will in the long run reduce or eliminate monopoly advantage.  The monopolistic world of GE and the motor manufacturers did not last once new technology bred new sectors for capital accumulation.  The oil giants are also now under threat from new technology. The world of Apple will not last forever.

Moreover, by its very nature, capitalism, based on ‘many capitals’ in competition, cannot tolerate any ‘eternal’ monopoly, a ‘permanent’ surplus profit deducted from the sum total of profits which is divided among the capitalist class as a whole.  The endless battle to increase profit and the share of the market means monopolies are continually under threat from new rivals, new technologies and international competitors.

It’s certainly true that accumulation of capital takes the form of increased concentration and centralisation of capital over time.  Monopolistic tendencies are inherent, as Marx argued in Volume One of Capital 150 years ago.  However, ‘market power’ may have delivered rental profits to some very large companies in the US, but rents to the few are a deduction from the profits of the many. Monopolies redistribute profit to themselves in the form of ‘rent’ but do not create profit.

Kathleen Kahle and Rene Stulz found that slightly more than 100 firms earned about half of the total profit made by US public firms in 1975. By 2015, just 30 did.  Now the top 100 firms have 84% of all earnings of these companies, 78% of all cash reserves and 66% of all assets. The top 200 companies by earnings raked in more than all listed firms, combined!  Indeed, the aggregate earnings of the 3,500 or so other listed companies is negative – so much for most US companies being awash with profits and cash.

Profits are not the result of the degree of monopoly or rent seeking, as neo-classical and Keynesian/Kalecki theories argue, but the result of the exploitation of labour.  Marx’s law of profitability is still central to a capitalist economy. Just before the COVID-19 pandemic hit the world economy, the major capitalist economies were already heading into a new recession, the first since the Great Recession of the 2008-9.  The profitability of capital was near all-time lows; up to 20% of US and European companies were making only enough profit to cover the interest on their debt, with none to spare for new investment.  Real GDP growth rates had dropped to their lowest rates since 2009 and business investment was stagnating.  A global recession was coming; and it had little to do with the ‘market power’ of the FAANGs sucking up all the profits; much more to do with the inability of capital to exploit labour enough.

But that is something mainstream economics (both neoclassical and Keynesian) never wants to consider.  For the mainstream, if profits are high, then it’s ‘monopoly power’ that does it, not the increased exploitation of labour.  And it’s monopoly power that is keeping investment growth low, not low overall profitability.  But if the ‘market power’ argument is accepted over a Marxian analysis of capital, then it implies that all that needs to be done is to weaken ‘market power’; or break up the monopolies and restore ‘competition’, not end the capitalist mode of production.

In her Jacobin article, Blakeley perceptively concludes that The only real way to tackle these inequities is to democratize the ownership of the means of production, and begin to hand the key decisions in our economy back to the people.”  Yes, but I’m not sure what she means specifically: workers on the boards – German style?; shares for employees?; regulation? All those measures have failed in the past to ‘hand key decisions back to the people’.  In the article, Blakeley advocates a wealth tax. But such a tax would do little to ‘democratize ownership of the means of production’.

The real solution to the market power of the likes of Apple, Microsoft, Amazon, Facebook, Google, Netflix etc is to bring them into public ownership to be run by democratically elected boards and managers drawn from the workers in these companies, consumer bodies, trade unions and government.  The fearsome foursome’s rule would then be ended. The billions they ‘own’ through their shares would be lost to them overnight. The nefarious practices of these companies would then be stopped and the social media scandals ended.  And most important, the key services that these companies provide (as the pandemic has revealed only too well) can then be supplied (at low cost without adverts!) to meet social needs, not deliver mega profits.

A world rate of profit: a new approach

July 25, 2020

Marx’s model of capitalism assumes a world economy, and starts with ‘capital in general’. It was at that level of abstraction that Marx developed his model of the laws of motion of capitalism and, in particular, what he considered was the most important law of motion in the capitalist process of production, the law of the tendency of the rate of profit to fall.

The rate of profit is the best indicator of the ‘health’ of a capitalist economy. It provides significant predictive value on future investment and the likelihood of recession or slump. So the level and direction of a world rate of profit can be an important guide to the future development of the world capitalist economy.

However, in the real world, there are many capitals; and not just one world capitalist state, but many national capitalist states. So there are barriers to the establishment of a world economy and a world rate of profit from labour, trade and capital restrictions designed to preserve and protect national and regional markets from the flow of global capital.  Even so, the capitalist mode of production has now spread to every corner of the globe and the ‘globalisation’ of trade and capital flows makes the concept of measure of a world rate of profit more realistic and discernible.

My first attempt to measure a world rate of profit was in a paper in 2012.  A proper measure of the world rate of profit would have to add up all the constant and variable capital in the world and estimate the total surplus value appropriated by this global capital.  At the time, this seemed an impossible task. So a weighted average of national profit rates was the only feasible way of getting a figure.

I attempted to develop a world rate of profit that included all the G7 economies plus the four economies of the BRIC acronym.  This covered 11 top economies and constituted a significant major share of global GDP. Then I used the Extended Penn World Tables as constructed by Professor Adalmir Marquetti from Brazil.  I weighted the national rates for the size of GDP, although the crude mean average rate did not seem to diverge significantly from the weighted average.

I found that 1) there was a fall in the world rate of profit from the starting point of that data in 1963 and the world rate never recovered to the 1963 level up to 2013; 2) the rate of profit reached a low in 1975 and then rose to a peak in the mid-1990s; 3) after that, the world rate of profit was static or slightly falling.

Then in 2015, I revisited the measurement of a world rate of profit . In the intervening period, Esteban Maito had done some ground-breaking work using a similar method of measurement (national rates weighted by GDP) for 14 countries, but using national statistics, not the Extended Penn World Tables, and going back to 1870 for some countries.  Maito confirmed my more limited study of a clear downward trend in the world rate of profit, although there were periods of partial recovery in both core and peripheral countries. Maito revised and updated his work for a chapter in World in Crisis: a global analysis of Marx’s law of profitability – essential reading.

The graph below is my adaptation of Maito’s work.

Maito showed that the behaviour of the profit rate on capital stock confirms the predictions made by Marx about the historical trend of the mode of production. There is a secular tendency for the rate of profit to fall under capitalism and Marx’s law operates.  Maito also found that there was a stabilisation and even a rise in the world rate of profit from the early or mid-1980s up to the end of the 1990s, the so-called neoliberal period of the destruction of trade unions, a reduction in the welfare state and corporate taxes, privatisation, globalisation, hi-tech innovation and the fall of the Soviet Union. Again, Maito showed that this recovery peaked about 1997.

The measurement of the world rate of profit my 2015 paper (Revisiting a world rate of profit June 2015 ); this time used the more up to date Penn World Tables 8.0 for data based on the G20 top economies.  These results exhibited a similar secular decline as did the Maito data. There was a significant fall from the first simultaneous international economic slump in 1974-5 to the early 1980s, then a modest recovery before another fall coinciding with the world 1991-2 economic recession. There was a mild recovery in the 1990s until the early 2000s. After that, the G20 rate of profit slumped, both before the 2008-9 Great Recession and after, with only a tiny recovery up to 2011.

I backed up these results with data from the Eurostat AMECO database, which are even more up to date.  The issue with AMECO data is that its measure for net capital stock is highly dubious, especially in the early years from 1963.  However, from the early 1980s, the AMECO profit rate follows that of the Penn Tables measure.

Now I have taken a third look at the world rate of profit using the latest Penn World Tables 9.1 data. This latest database has an important innovation. It has a new series called the internal rate of return on capital stock (IRR), a very good proxy for the Marxian rate of profit.  Because the data are compiled on the same categories and concepts, the IRR series offers a valuable comparison between national rates of profit and it is also extended to 2017.  So we now have a series for the rate of profit for nearly all countries in the world, starting in many cases from 1950 up to 2017. (Internal rate of return)

In future posts on this, I shall consider any measurement problems with IRR and other categories; explain my methodology; and provide sources and workings.  Also, I shall look at decomposing the rate of profit into its key factors, namely the organic composition of capital and the rate of surplus value. This decomposition is important.  It is one thing to show a falling rate of profit over time; it is another to show that this is caused by Marx’s law of the tendency for the rate of profit to fall.  It could have other reasons.

If Marx’s law is correct, then it follows that when the rate of profit falls, the organic composition of capital (C/v) should be rising faster than the rate of exploitation (s/v).  Under Marx’s law, a rising organic composition of capital is the tendential determining factor for the fall in the rate of profit and the rate of exploitation is the (main) counteracting factor to that. If the latter rises faster than the former, then the rate of profit rises – and there have been periods when that has happened. But over the secular long term, the rate of profit falls and that is because the organic composition of capital rises more than the rate of exploitation.

I shall not discuss these issues in this post, but just consider the main results of measuring the world rate of profit using the IRR series in the Penn World Tables.  I have weighted the IRR series for the size of capital stock (not by GDP as in previous papers) to obtain a better measure for the G20 economies (19 countries excluding the EU), and also for the top G7 imperialist economies; and for selected emerging or developing economies.

The G7 results confirm the results from my previous two measures in 2012 and 2015; that the rate of profit in the major imperialist economies has been in long-term decline. The rate has not been a straight line down, but can be divided into four periods: 1) the ‘golden age’ of high and even rising profitability from 1950-1966; then the huge profitability collapse from 1966 to 1982; then the (relatively weak neo-liberal recovery); and since a peak in 1997, a general depression in the rate of profit up to 2017 (when the data end).

Now with the IRR series we can measure better the G20 rate of profit, probably the closest we can get to a ‘world rate’. This measure should be better than Maito’s or any previous measure because it includes more countries; although Maito’s ground-breaking work measures rates of profit back into the 19th century, not just to 1950.

The G20 rate of profit matches that of the G7 rate of profit in its trajectory.

But note that the level of the rate of profit is generally higher than the G7 rate. This should be expected under Marx’s law because the organic composition of capital will be higher in the imperialist countries than in the developing countries that are still trying to ‘catch up’ in technology.  We shall return to this point in a future post.

Indeed, let’s look at the rate of profit in some selected developing economies, in particular those G20 members, such as Argentina, Brazil, Mexico South Africa, China, India, Indonesia and Turkey. Again, we find that the rate of profit falls over the long term, but with the four sub-periods similar to the G7 and G20 series.

But again, note the much higher level of the rate of profit, up around 24% in the Golden Age compared to just 10% in the G7 economies and falling to 10% in last sub-period compared to 6.5% in the G7.  Also, the turning point into the neo-liberal period is later; in 1989 compared to 1982 for the G7.  And for these developing economies, any profitability recovery is short-lived, crashing back in the emerging market crisis of 1998.  The long depression in profitability in developing economies has ensued since.

Thus we can sum up these initial results from the Penn World Tables 9.1 IRR series as confirming the long-term decline in the world rate of profit (ie for most of the major and larger economies), with various subperiods, just as was discerned in the previous two measures of 2012 and 2015.

In future posts, I shall expand on these results.  I shall look at the decomposition of the world rate of profit and the factors driving it.  I shall consider the rate of profit in specific key economies (US, Germany, Japan, China) to see what we can learn.  I shall try to relate the change in the rate of profit to the regularity and intensity of crises in the capitalist mode of production. And I shall consider the question posed and answered in Maito’s work: if the world rate of profit is set to decline, will it go to zero and how is that possible?; and if so, how long will it take?  And what does that tell us about capitalism itself?

Capital Wars

July 19, 2020

We’ve had the argument that the major global issue of the 21st century is the growing trade and technology war between the US and China.  In their book, Trade Wars are Class Wars, Klein and Pettis reckon that the trade imbalances are cause by inequality and income and consumption in the two powers: China has ‘excess savings’ and the US has ‘excess consumption’.  I have argued that this argument is false in previous posts.

Now we have Capital Wars as an alternative scenario for the rivalry between China and the US.  The rivalry between the US and China in the economic sphere has so far been on trade and technology. There has been little comparable friction in financial markets. Indeed, as more Chinese stocks are incorporated into global indices, US investors have been pouring capital into China via their investment in index-tracking funds.

Yet that is unlikely to last, according to Michael Howell, a former research director of investment bank Salomon Brothers who now runs his own ‘boutique’. In Capital Wars he points out that the swap lines extended by the US Federal Reserve to other central banks after the 2008 financial crisis — an exercise repeated since coronavirus struck — have been extended to friendly nations, while China has been pointedly excluded. So the Fed’s role as a global lender of last resort has been both partial and politicised.

Howell reckons the nature of the relationship between these two powers is unbalanced. Despite its declining share of global output, the US is the main provider of the dominant reserve currency to world markets. But its economy is marked by low productivity growth along with highly developed financial markets. China has enjoyed high productivity growth as it catches up, but it has underdeveloped financial markets. Persistent trade surpluses have contributed to a huge accumulation of foreign exchange reserves: the majority is in dollar assets. All this creates a fractious interdependence.

China’s economic rise coincided with a long period of liberalisation in international financial markets. A central theme of Howell’s book is the ballooning of global liquidity — gross flows of credit, savings and international capital that facilitate debt, investment and cross-border capital flows. In 2019, this international pool of funds was estimated at $130tn, two-thirds larger than world GDP. China’s contribution was close to $36tn.

There is nothing new in Howell’s insight here.  Indeed, several authors, including myself, have pointed out the huge rise in ‘liquidity’ ie money supply, bank credit, debt (both public and private) and debt instruments like derivatives, particularly since the early 2000s.

What is new is Howell’s emphasis on what new ways the financial system has found to expand what Marx called ‘fictitious capital’, ie financial assets supposedly representing future new value and profits.  Whereas banks used to rely on customer deposits to lend and speculate with; now the chief source of funds is not deposits, but repurchase agreements or ‘repos’, a form of borrowing that has to be backed by ‘collateral’ in the form of “safe” assets such as government bonds.

Howell argues, like others, that the financial system has moved from the post-war model, where banks were the main facilitators in lending.  They borrowed from their retail depositors and lent to individuals and companies. Today, wholesale markets predominate; and the main providers of funds are financial institutions and large companies such as Apple or Toyota. Users range from companies and banks to hedge funds and governments: non-bank finance or ‘shadow banking’.

Howell’s main argument is that the chief source of instability in the modern financial system has been a shortage of safe assets for these liquidity creators to hold as there was not enough government debt and the return was low anyway.  Indeed, before the 2008 financial crisis, investment bankers tried to invent new ‘safe assets’ such as collateralised mortgage obligations.  Of course, we now know that such assets were not ‘safe’ at all, but nothing but a giant Ponzi scheme of credit that turned out to be very ‘fictitious’ indeed in the global financial meltdown in 2007-9.

The question that Howell hints at is whether the huge injection of credit money by the Federal Reserve and other central banks to bail out companies and governments in the COVID pandemic slump will lead to a similar financial ‘shock’ in due course.  The difference now is that it is the state that is buying up these ‘safe assets’ directly, rather than the banking or shadow banking system as in 2008-9.  Nevertheless, the size of central bank purchases of corporate and mortgage bonds, as well as government paper is so huge that, if there were to be substantial explosion of bankruptcies, the lender of last resort (central bank) – now turned into the first buyer for fictitious capital – may end up with huge losses for governments to absorb.

One merit of Howell’s book over others of the same ilk is that he offers an explanation of why there was this drastic change from ‘traditional banking’ to the ‘financialisation’ of government and corporate assets.  He puts the cause squarely at the collapse of profitability in the productive sectors of the economy.

Howell reckons that falling profitability in industrial capital led to rising global ‘liquidity’ and this contributed to declining interest rates across risk assets, leading to the search for safe financial assets beyond government debt and into ‘repos’, to the detriment of productive investment.

Here Howell half grasps the story of the 30 years leading up to the global financial crash and the Great Recession. Unfortunately, despite referring to Marx’s analysis on occasion, Howell does not use it. Instead he falls back on the usual Keynesian macro-identities to explain why crises occur.  Thus, as with all Keynesian macro identities, profits disappear from the equations.

Howell takes the basic identity: savings = investment and revises it into his key equation: Liquidity = fixed investment plus the net acquisition of financial assets.  Liquidity is really profit plus credit in its various forms.  But for Howell, the driving force of modern capitalism is not the profit part of ‘liquidity’, however, -that’s old hat.  It’s the credit part.  For him, financial flows and the risk-taking behaviour of investors drive the real economy and asset prices, not vice versa.  More liquidity leads to more purchases of financial assets.  And more purchases of financial assets require more liquidity.  Thus, we move from a view of capitalism as a mode of production for profit, to capitalism as a mode of financial speculation and financial instability.  This theory is akin to the Minsky approach and the modern ‘financialisation’ theories.

For Howell, the coming war between the US and China will be fought not so much through trade or technology, but through financial flows and the control of international currencies as rival powers struggle to offer the ‘safest’ financial assets to global capital: eg the dollar or the renminbi?

There is clearly some truth in this.  If China were able to offer a strong and liquid currency to replace the dollar, US imperialism would be in serious trouble.  But a strong currency cannot be ‘created’ by financial markets; it comes about from the relative strength of the productivity of labour and value creation in an economy. That is where the economic war is centred; with trade, technology and financial being the battle grounds.  Value decides, not credit.

Wealth or income?

July 15, 2020

Most discussions on inequality, whether between nations globally or within nations, take place around income.  Data and papers on inequality of income are profuse, particularly on the rise in most major economies since the 1980s and the cause of it.  I have covered many of these papers; the conclusions and causes; in many posts. 

Related to the debate around inequality of income is also the issue of ‘poverty’: how to define and measure it and whether poverty globally and within economies has risen or fallen. A recent report by the World Economic Forum, found that income inequality has risen or remained stagnant in 20 of the 29 advanced economies while poverty has increased in 17. Income inequality has increased more rapidly in North America, China, India and Russia than anywhere else, notes the World Inequality Report 2018 produced by the World Inequality Lab, a research center based at the Paris School of Economics. The difference between Western Europe and the United States is particularly striking: “While the top 1% income share was close to 10% in both regions in 1980, it rose only slightly to 12% in 2016 in Western Europe while it shot up to 20% in the United States. Meanwhile, in the United States, the bottom 50% income share decreased from more than 20% in 1980 to 13% in 2016.”

But discussion and analysis of inequality of wealth (personal wealth) does not get so much attention.  And yet, I would argue that anybody with huge amounts of wealth (defined as ownership of property, means of production and financial assets) correspondingly obtains high levels of income – and, it seems, relatively lower levels of taxation.

Of course, there has been excellent work in measuring levels of personal wealth and changes in the distribution of that wealth over time.  Every year, I post a report on the Credit Suisse global wealth report, which shows how much personal wealth is held by individuals worldwide.  The current score shows that the top 1% of wealth holders have just under 50% of all the world’s wealth.  Oxfam regularly publishes data on how just a few families have huge portions of personal wealth in nations and globally.  And economists like Thomas Piketty, Emmanuel Saez and Gabriel Zucman have produced sterling work in recent years to show the huge inequity in the ownership of the means of production, land, property, financial assets and even patents and ‘knowledge’ products,.

But this is the rub.  Both in advanced and emerging economies, wealth is significantly more unequally distributed than income.  And the WEF reports that: “This problem has improved little in recent years, with wealth inequality rising in 49 economies.”

In 1912, Italian sociologist and statistician Corrado Gini developed a means of measuring wealth distribution within societies known as the Gini index or Gini coefficient: its value ranges from 0 (or 0%) to 1 (or 100%), with the former representing perfect equality (wealth distributed evenly) and the latter representing perfect inequality (wealth held in few hands).

And when you use the gini index for both income and wealth for each country, the difference is staggering.  Take a few examples. The gini index for the US is 37.8 for income distribution (pretty high), but the gini index for wealth distribution is 85.9!  Or take supposedly egalitarian Scandinavia. The gini index for income in Norway is just 24.9 but the wealth gini is 80.5!  It’s the same story in the other Nordic countries.  The Nordic countries may have lower than average inequality of income but they have higher than average inequality of wealth.

Which countries have the worst inequality in personal wealth? Here are the top ten most unequal societies in the world.

You might expect to find some of these countries listed here in the top ten: ie very poor or ruled by dictators or military.  But the top ten also includes the US and Sweden.  So, both a ‘neoliberal’ advanced economy and a ‘social democratic’ economy make the list:  capitalism does not discriminate when it comes to wealth.

Nevertheless, the US stands out as leader in the top G7 advanced economies in wealth and income inequality.

Indeed, can we discern whether high inequality in wealth is closely correlated with inequality in incomes?  Using the WEF index, I found that there was a positive correlation of about 0.38 across the data: so the higher the inequality of personal wealth in an economy, the more likely that the inequality of income will be higher.

The question is which drives which? This is easily answered. Wealth begets wealth. And more wealth begets more income.  A very small elite owns the means of production and finance and that is how they usurp the lion’s share and more of the wealth and income.

And a study by two economists at the Bank of Italy found that the wealthiest families in Florence today are descended from the wealthiest families of Florence nearly 600 years ago!  So the same families are still at the top of the wealth pile starting from the rise of merchant capitalism in the city states of Italy through the expansion of industrial capitalism and now in the world of finance capital..

And talking of the shockingly high inequality of wealth in ‘egalitarian’ Sweden, new research from there reveals that good genes don’t make you a success but family money, or marrying into it, does. People are not rich because they are smarter or better educated.  It is because they are either ‘lucky’ and/or inherited their wealth from their parents or relatives (like Donald Trump).

Researchers found that “wealth is highly correlated between parents and their children” and “Comparing the net wealth of adopted and biological parents and that of the adopted child, we find that, even prior to any inheritance, there is a substantial role for environment and a much smaller role for pre-birth factors.”  The researchers concluded that “wealth transmission is not primarily because children from wealthier families are inherently more talented or more able but that, even in relatively egalitarian Sweden, wealth begets wealth.”

So Marx’s prediction 150 years ago that capitalism would lead to greater concentration and centralisation of wealth, in particular in the means of production and finance, is borne out.  Contrary to the optimism and apologia of the mainstream economists, poverty (in wealth and income) for billions around the world remains the norm with little sign of improvement, while inequality of wealth and income within the major capitalist economies increases as capital is accumulated and concentrated in ever smaller groups. The work of Emmanuel Saez and Gabriel Zucman has also shown that, in the US, wealth has become increasingly concentrated in the hands of the super-rich.

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

What that means is that policies aimed at reducing inequality of income by taxation and regulation, or even by boosting workers’ wages, will not achieve much impact while there is such a high level of inequality of wealth.  And that inequality of wealth stems from the concentration of the means of production and finance in the hands of a few.  While that ownership structure remains untouched, taxes on wealth will fall short too.

Sweatshops and monopsony power – a review

July 5, 2020

Leicester is a medium-sized city in the centre of England.  It has come into the limelight in the last few weeks because of an outbreak of COVID-19 in the city, forcing a local lockdown, while the rest of England starts to ‘come out’.  Leicester has a relatively high British Asian community and many are concentrated for work in the garment industry.  And it is here that the COVID outbreak seems to have emerged.

The reason is clear. Garment workers in Leicester work out of tiny, unsafe factories or even homes, employed for below poverty wages ($5 an hour!) and they have worked throughout the coronavirus crisis lockdown. These small businesses had to carry on because there was really only one buyer, the online retailer, British Asian owned BooHoo.  Like Amazon, Boohoo has made a fortune during the pandemic with shop-based retailers in lockdown.  Its profits are registered in the tax haven island of Jersey. And it dominates the Leicester garment industry.  It’s a classic example of monopsony power.

We often see the concept of ‘monopoly’ in political economy and leftist circles as a relevant category for modern capitalism. We don’t usually recognise ‘monopsony capitalism’.  But we should.  This is where Ashok Kumar’s book, Monopsony Capitalism Power and Production in the Twilight of the Sweatshop Age fills a gap.

Whereas, monopoly implies a dominant or hegemonic seller in the market for goods and services, controlling prices and keeping out potential rivals, monopsony implies the control of the market by a dominant buyer over many smaller sellers.  The capitalist labour market is one key example, where capital exerts relative monopsonic power over workers, unless they are organised in unions etc.

The Boohoo monopsony in Leicester is repeated on an even larger scale with major retailers like Walmart in the US or Amazon globally, or manufacturers like Nike or Apple or food producers like Nescafe or Del Mar, which exert huge monopsonic power over their suppliers (in farming, garment and footwear, electronics etc).

Kumar is a lecturer in International Political Economy at the School of Business, Economics and Informatics at Birkbeck University. His book takes us to the heart of the monopsonic capitalism globally through the value chain of cheap garments and shoes in the shops of the ‘global north’ to the sweatshops of Bangladesh and other countries under the domination of the multi-nationals.

Monopsony Capitalism argues that the garment value chain globally relies on the unequal power dynamic of many suppliers and few buyers – monopsony. The result is a low level of surplus value capture at the production phase of the supply chain, which ensures chronically low capital investment in the peripheral countries’ industry.  Cheap labour and many suppliers are preserved, as opposed to the use of machinery and fewer, larger companies. Fragmentation and low capital investment in garment and footwear value chains creates low barriers to entry, resulting in bidding wars between thousands of smaller firms from around the world.  Indeed, a ‘sweatshop’ can be defined as a workplace where labour has essentially no bargaining power.

The Rana Plaza tragedy of 2013 when a massive garment factory in Bangladesh collapsed, floor upon floor, crushing many of its occupants was a catalytic moment. “The Rana Plaza disaster proved a monument to the complete and utter failure of Western activism: 1,134 workers perished.”  Consumer boycotts and campaigning in the global North against ‘sweatshops’ proved to have had no effect.

But what has happened since shows another way out of this nightmare. After Rana Plaza, the Bangladeshi unions demanded new safety conditions, similar to the way in which reduced hours and better safety was fought for in cotton sweatshops of mid-19th century Britain that Marx records. By August 2013, 45 garment factory unions had been registered with the Bangladeshi government. The unions used a ‘hot shop’ organizing model, following the trail of labour unrest from case to case, factory to factory, establishing and strengthening union footholds. An almost endless pool of small garment firms across the globe began to steadily disappear, absorbed into larger rivals or forced to merge.  Thus, Kumar argues the monopsony power of the multi-national retailers increasingly faced oligopolistic companies, driven by their workforces to demand better prices and terms.

Kumar’s book analyses workers’ collective action at various sites of production primarily in China, India, Honduras, and United States, and secondarily in Vietnam, Cambodia, Bangladesh, and Indonesia. Action by labour in these countries have “tested the limits of the social order, stretching it until the seams show, and forcing bosses to come to the proverbial table, hat in hand, to hash out agreements with those who assemble their goods.”

In these case studies Kumar reveals that there has been increasing supplier-end consolidation, raising the surviving suppliers’ share of value, and so facilitating self-investment and higher entry barriers.  Workers struggles over wages and conditions have altered the balance of economic power between the multi-nationals and the domestic suppliers.

Kumar reminds us that Marx and Engels argued that global capital would generate a global proletariat that would ultimately be its undoing. But perhaps collective worker action is the exception under capitalism. Maybe capital’s structural advantages in certain sectors, like garment and footwear, have effectively resolved the dialectical struggle in favour of capitalists.  Kumar’s case studies suggest otherwise. The garment sector (and vertically disintegrated value chains generally) are also “animated by the logic of competition, which moves inexorably in the direction of consolidation, thereby reducing the monopsonistic power of buyers. while changes in the value chain are reflected in the bargaining power of workers.”

Kumar confirms that Marx’s law of accumulation still operates, namely that capitalism must increasingly come to rely on ‘dead labour’ (technology and so on) and less and less on ‘living labour’ (workers) and that includes the peripheral ‘emerging economies’ too. Higher levels of ‘dead labour’ start to create higher barriers to entry:  Why? “Because the smaller the organic composition of capital, the less capital is required at the beginning in order to enter this branch and establish a new venture. It is far easier to put together the million or two million dollars necessary for building a new textile plant than to assemble the hundreds of millions needed to set up even relatively small steel works.”

Relying on this fundamental trend in capitalist accumulation, Kumar reckons “there is a change in the air.” In China, India, Honduras, Vietnam, Cambodia, and Indonesia many factories already have a relatively high organic composition. It becomespossible to glimpse another world where bosses come to the proverbial table, hat in hand, to hash out agreements with those who assemble their goods. When labour unions, activists, and advocates marshal their resource  – financial, moral, political, and human – to support smart, focused, bottom-up organizing in large, increasingly integrated firms, garment workers will transform their industry.”

Once barriers to entry have been established among the domestic suppliers it will be impossible to tear them down and return to monopsony power. Sweatshops occur where surpluses are limited, and production is diffuse and isolated from consumption. But competition eventually creates a centralized industry, with a few mega-firms in a few locations.  Then suppliers ascend, giving workers the high ground too.  But as Kumar says, “whether this is indeed the twilight of the sweatshop age or a new race to the bottom may ultimately depend on the self-organization and demands of the working people.”  That applies to the garment sweatshops of COVID-19 Leicester too.

Trade wars and class wars: part one – the global savings glut?

June 21, 2020

This review of a new book is in two parts as there is much to say. Here is the first part.

Trade wars are class wars‘ is the title of a new book by Matthew Klein and Michael Pettis. Matthew C. Klein is the Economics Commentator at Barron’s. He has previously written for the Financial Times, Bloomberg View, and the Economist.  Michael Pettis is professor of finance at Peking University’s Guanghua School of Management and a senior fellow at the Carnegie Endowment for International Peace.

The book has a provocative title but it’s apposite, given the growing global rivalry between the US and the China with the implementation of trade tariff and technology war, as the US tries to curb and reverse the rising share of trade and hi-tech production that China has been achieving and using to widen its influence globally; at the expense of an ageing and relatively declining US hegemony.

The subtitle of the Klein and Pettis’ book is “how inequality distorts the global economy and threatens international peace.” Klein and Pettis argue that the origins of today’s trade wars emerge from decisions made by politicians and business leaders in China, Europe, and the United States over the past thirty years. Across the world, the rich have prospered while workers can no longer afford to buy what they produce, have lost their jobs, or have been forced into higher levels of debt.  Rising inequality has weakened aggregate demand; and a global ‘savings glut’ generated by countries like Germany and China are creating huge global imbalances in demand and supply that threaten economic crises, increased protectionist rivalry and international peace.

The essence of the problem for Klein and Pettis is “the greater eagerness of producers to sell than of consumers to buy”. According to them, this is at the heart of the imperialist rivalry globally. The authors revert openly and clearly to the thesis of John Hobson, the anti-semitic, social reformist writer and economist of the early 20th century.  They update the Hobsonian thesis for the 21st century. As Pettis puts it: “Our argument is fairly straightforward: trade cost and trade conflict in the modern era don’t reflect differences in the cost of production; what they reflect is a difference in savings imbalances, primarily driven by the distortions in the distribution of income. We argue that the reason we have trade wars is because we have persistent imbalances, and the reason we have persistent trade imbalances is because around the world, income is distributed in such a way that workers and middle class households cannot consume enough of what they produce.

Thus, we have a straightforward underconsumption theory of crises as presented by Hobson. What is added by the authors is the concept of a ‘global savings glut’, or the reciprocal of a lack of consumption, which generates ‘global imbalances’ between those countries running systematic trade and income surpluses (China, Germany) with others (the US) running chronic deficits. This imbalance of consumption and saving between the major economic powers is the essential cause of future crises and even wars, according to the authors.

What is missing from this analysis is what is missing from all underconsumption theories; namely investment ie capitalist investment.  Consumption is not the only category of ‘aggregate demand’; there is also investment demand by capitalists. Indeed, Marx argued that this was the most important factor in driving growth of production in a capitalist economy – and even Keynes sometimes agreed.  I have shown in several posts and papers that it is capitalist investment that is the ‘swing factor’ in booms and slumps – a fall in investment leads capitalist economies into slumps and leads them out.  Consumption is a lagging factor, and indeed changes in consumption are small during the cycle of boom and slump compared to investment.

Moreover, using IMF/World bank data, if we look at investment rates (as measured by total investment to GDP in an economy), we find that in the last ten years, total investment to GDP in the major economies has been weak; indeed in 2019, total investment (government, housing and business) to GDP is still lower than in 2007. In other words, even the low real GDP growth rate in the major economies in the last ten years has not been matched by total investment growth.  And if you strip out government and housing, business investment has performed even worse.

The national savings ratio of the advanced capitalist economies in 2019 is no higher than in 2007, while the investment ratio has fallen 7%.  There has been an investment dearth not a savings glut.  In my view, this is not the result of a lack of aggregate demand caused by rising inequality and the inability of workers to buy back their own production. It is the result of the declining profitability of capital in the major capitalist economies, forcing companies to look overseas to invest where profitability is higher (the investment ratio in emerging economies is up 10% in the last ten years – something Klein and Pettis do not note.). As usual with Keynesian and post-Keynesian analyses, the movement of profit and profitability is ignored.

Klein and Pettis like to refer to the work of Mian and Sufi who emphasise rising inequality from the 1980s, a shift in income from the poorer to the top 1%, leading to a rise in household debt and a ‘savings glut’.  But the latter do not explain why there was rising inequality from the early 1980s and they ignore the rise in corporate debt which is surely more relevant to capital accumulation and the capitalist economy.  Household debt rose because of mortgage lending at cheaper rates, but in my view, that was the result of the change in nature of capitalist accumulation from the 1980s, not the cause.  Actually, in their new work, Mian and Sufi hint at this. They note that the rise in inequality from the early 1980s “reflected shifts in technology and globalization that began in the 1980s.”  Exactly. What happened in the early 1980s?  The profitability of productive capital had reached a new low in most major capitalist economies (the evidence for this overwhelming – see World in Crisis, the co-edited by G Carchedi and me).

If we are measuring ‘aggregate demand’ by consumption globally, there has been no decline; on the contrary, household consumption in the major economies rose to new highs as a share of GDP.  What ended this speculative credit boom was the turning down in the profitability of capital from the end of the 1990s, leading to the mild ‘hi-tech’ bubble burst of 2001 and eventually to the financial crash and Great Recession of 2008. A ‘savings glut’ is really one side of an ‘investment dearth’. Low profitability in productive assets became a debt-fuelled speculative bubble in fictitious assets.

Crises are not the result of an ‘indebted demand’ deficit; but are caused by a ‘profitability deficit’. The ‘class war’ that Klein and Pettis argue is the cause of trade wars is related to the exploitation of labour by capital for higher profitability, not a lack of domestic consumption caused by low wages.

Klein and Pettis follow John Hobson in his argument that ‘imperialism’ (or trade wars for our authors) was the result of capital being forced to seek new markets overseas because of the lack of consumption demand at home.  Pettis: “It’s interesting to go back to Hobson. He argued that the reason England and other European countries exported capital abroad was not military adventurism, but income inequality. You had incredibly high savings because much of the income was concentrated among the wealthy, and so England had to export those excess savings and the accompanying excess production. Imperialism enabled it to lock in markets for both of those exports. Hobson’s prescription was that increasing the wages of English workers such that they’re able to consume what they produce would make imperialism unnecessary—and this is where I see the connection to today.”

This is what Hobson reckoned for the late 19th century. But the evidence does not back this up. The UK was the leading imperialist power of the 19th century. The great economist J Arthur Lewis summed up the driver behind Britain’s imperialist ambitions in the late 19th century. “In the low level of profits in the last quarter of the century we have an explanation which is powerful enough to explain the retardation of industrial growth in the 1880s and 1890s… we have here also, in low domestic profits, the solution to the great mystery of British foreign investment, namely why Britain poured so much capital overseas…  home industry was so unprofitable in the 1880s through the squeeze on profits between wages and prices.” Lewis shows that during the long depression, nominal wages fell, but as prices fell more, real wages stayed up at the expense of profits.  (See my book, The Long Depression).

As the Marxist economist of the 1920s, Henryk Grossman said of Hobson’s thesis: It is not enough to account for capital export in terms of the lack of profitable investment opportunities at home, as the liberal economist and pioneering critic of imperialism, John Hobson put it”“[W]hy,” then, “are profitable investments not to be found at home?…..The fact of capital export is as old as modern capitalism itself. The scientific task consists in explaining this fact, hence in demonstrating the role it plays in the mechanism of capitalist production.” It is the race for higher rates of profit that is the motive power of world capitalism. Foreign trade can yield a surplus profit for the advanced country.

From about the 1980s onwards, the rate of profit in the major economies reached new lows, so the leading capitalist states again looked to counteract Marx’s law through renewed capital flows into countries that had massive potential reserves of labour that would be submissive and accept ‘super-exploiting’ wages. World trade barriers were lowered, restrictions on cross-border capital flows were reduced and multi-national corporations moved capital at will within their corporate accounts.  This explains the policies of the major imperialist states at home (an intensified attack on the working class) and abroad (a drive to transform foreign nations into tributaries).

A recent paper by two economists at the US Federal Reserve, Joseph Gruber and Steven Kamin shows a widening gap between corporate savings (or profits) and corporate investment in most of the major economies (Gruber corporate profits and saving.) But Gruber and Kamin demonstrate that this was because rates of corporate investment “had fallen below levels that would have been predicted by models estimated in earlier years”.  With the exception of Japan, since 1998, corporate savings to GDP have been broadly flat. But there has been a fall in the investment to GDP ratio in the major economies, with the exception of Japan, where it has been broadly flat. So the gap between savings and investment cannot have been caused by rising savings.

There has NOT been a global corporate savings (or profits) ‘glut’ but a dearth of investment.  There is not too much profit (surplus savings), but too little investment. The capitalist sector has reduced its investment relative to GDP since the late 1990s and particularly after the end of the Great Recession.

As profitability fell, investment declined and growth had to be boosted by an expansion of fictitious capital (credit or debt) to drive consumption and unproductive financial and property speculation.  The reason for the Great Recession and the subsequent weak recovery was not a lack of consumption or a savings glut, but a collapse in investment.

The deficit myth

June 16, 2020

Stephanie Kelton is  professor of economics and public policy at Stony Brook University, a former Chief Economist on the U.S. Senate Budget Committee (Democratic staff) and was an economic policy adviser to Senator Bernie Sanders, the leftist American presidential hopeful.  Kelton is a prominent exponent and populariser of what is called Modern Monetary Theory (MMT).

In a new book The Deficit Myth, Kelton explains what is the most important conclusion to draw from MMT – namely, it is a myth that if the government runs large budget deficits (ie spending more than it gets in tax revenues) and borrows the difference, eventually public sector debt will become unsustainable (ie debt repayments and interest will become too much for the government to deal with), leading to sharp increases in taxation or cuts in public spending and possibly a run on the national currency by foreign creditors.

Kelton says that this argument of the ‘Austerians’ is a myth. In her book, she brings forward the main arguments of MMT: first, that “governments in nations that maintain control of their own currencies — like Japan, Britain and the United States, and unlike Greece, Spain and Italy — can increase spending without needing to raise taxes or borrow currency from other countries or investors.” The state (national government) controls the unit of currency accepted and used by the public, so it can create any amount of that currency to spend. So the state need not issue bonds to borrow from the private sector, it can just digitally ‘print’ the money.  Indeed, that is what is happening right now during the COVID-19 pandemic, the argument goes.  The US administration and others are spending trillions on paying workers to stay at home and businesses to go into hibernation. Yes, it is financing some of this by issuing bonds, but it is the Federal Reserve or the Bank of England that is the main purchaser of these bonds, so in effect ‘printing’ money to spend.

The argument of MMT and Kelton is that this is a new way of looking at public finances and monetary policy. You see, what nobody has realised until the MMT guys were listened to is that, historically, “It’s the state’s ability to make and enforce its tax laws that sustains a demand for them, which in turn makes those dollars valuable.” This is the theory of chartalism, developed by a German economist of the 1920s, George Knapp and others, that money has emerged in modern economies as the result of the state needing to spend and so needing to invent a unit of currency that it can tax people in.  So the demand for money by people has been created by the state in order to pay taxes.  Money is created by the state and then taken back (destroyed) by taxation.  So, you see, the state controls money and therefore can control the modern economy.  It can spend without the constraint of rising debt.

Kelton makes the point that all MMT supporters make: that “M.M.T. simply describes how our monetary system actually works. Its explanatory power doesn’t depend on ideology or political party.”  When I read or hear that from MMT supporters, I am concerned.  Of course, truth and reality can be distinguished from ideology, but ideology uses the truth that it wants to reveal – there is never a neutral objectivity.  Is MMT really the basis for left-wing or socialist economic policy that so many of its adherents claim? – well, not according Kelton. Apparently, MMT is just as useful to right-wing Republicans as it is to Marxists.  Indeed, the idea that governments can run deficits as they please appeals to both left and right in the capitalist spectrum.  As Dick Cheney, the extreme right-wing Vice President under George W Bush, put it when military spending rocketed to fund the invasion of Iraq: “deficits don’t matter.”

But is MMT right that money emerges in modern economies because of the state’s need to spend? This claim of chartalism is certainly open to question. Historians of money and the great economists of classical political economy would deny it.  In particular, Marx would not agree.  For Marx, money emerges in society as a universal medium of exchange in trade within and between local communities. (Grundrisse:The circulation of commodities is the original precondition of the circulation of money” p165 – not the state). In capitalism, money takes on the role of capital as money buys labour power and means of production for exploitation and the production of value and surplus value “money itself can exist as a developed moment of production only where and when wage labour exists” p 223).  Money represents value created in an economy (“It is the comprehensive representation of commodities”, p210).

For Marx, money does not emerge from outside the process of exchange in markets or in accumulation of capital.  It is not exogenous, coming from the state, as MMT claims; instead it is deeply endogenous to the capitalist mode of production, the objective of which is to make money. As Marx says in Grundrisse: “Money does not arise by convention, any more than the state does. It arises out of exchange and arises naturally out of exchange: it is a product of the same.” p165. For Marx, neither the state nor money is exogenous or neutral to the capitalist mode of production.  Thus Marxist Monetary Theory, as opposed to Modern Monetary Theory, is ideological.  It is on the side of labour, based on the law of value and the exploitation of labour power. MMT has no concept of value or the law of value in capitalist economies, namely that production is for profit not social need; production is for exchange value, not use value; based on the exploitation in production, not on the creation of money for taxation. Profit does not touch the sides of MMT.

But maybe Modern Monetary Theory is right and Marxist Monetary Theory is wrong.  In her book, Kelton tells readers of her conversion to the first MMT. It happened when she met the ‘father of MMT’, former hedge fund manager Warren Mosler.  Kelton visited him at his beach house in the tax haven US Virgin Islands.  Mosler explained that he got his children to do their chores by insisting that they must be taxed and if they could not pay, then all their privileges would be withdrawn. His tax took the form of his business cards (this was the unit of currency created by Mosler, representing ‘the state’). In order to get these business cards, the children had to carry out tasks. Thus the ‘Mosler state’ created money (business cards) which the people needed in order to pay taxes.  Kelton was overwhelmed by this proof of “how the monetary system works” and became a convert – and, as the old saying goes, converts can be even more fervent than the original prophets.  Kelton is now the loudest supporter of MMT, at least in America.

What Kelton failed to recognise in the Mosler example is that there were chores to be done. Things had to be produced and human labour had to be exerted. So the children must work or the household goes downhill.  But the Mosler household was not producing for exchange, but for consumption within the household. The Mosler household was not trading with other households and exchanging goods or services. If they were, then the Mosler business cards would have to represent some exchange-value, not just some labour time involved within the Mosler house. The cards would have to be acceptable as a representation of labour time in other households. His ‘state’ (Mosler) could not decide that. In Grundrisse, Marx explains why having labour chits is not money and cannot operate as money in a capitalist economy, where production (work) is for exchange not for consumption.

Take a topical example.  Currently many airlines cancelling flights in the COVID lockdown are trying to avoid refunding customers with money (dollars) and instead are offering vouchers.  Anybody can see that these vouchers are not money, not a universal representation of the exchange value of all flights and other commodities, but merely tickets with that particular airline and so worth only the dollar price of trips with that airline alone. Inside that one airline house, these vouchers are ‘money’, but nowhere else.

The idea that it is the state’s power to tax that is an explanation of the emergence of money and exploitation seems far-fetched, anyway. Kelton claims that “the British Empire and others before it were able to effectively rule: conquer, erase the legitimacy of a given people’s original currency, impose British currency on the colonized, then watch how the entire local economy begins to revolve around British currency, interests and power.”  Do we really think that British imperialism worked because it controlled the currency of other nations?  Would it not be more accurate to say that because British imperialism imposed through force and conquest its control over many nations, it was able to exploit its people and then control their currency? Does the US rule the world because it has the international reserve currency, the dollar; or did the dollar become the international reserve currency because US imperialism dominated the world in trade, technology, finance and military power?

Kelton cites Mosler’s comment that “Since the U.S. government is the sole issuer of the currency, he said, it was silly to think of Uncle Sam as needing to get dollars from the rest of us.  Well, yes, that’s ok for Uncle Sam, but for many countries exploited by imperialism, they do not control their own currencies and are heavily dependent on the decisions of foreign multi-nationals and financial institutions. Can those governments print money without constraint to spend and tax?  Ask Argentina and other emerging economies in the current COVD-crisis. Their ‘fiscal space’ is very much constrained by international capital.  MMT is no use to them.

But the real issue for me with Kelton’s book and with MMT is whether knowing that governments can spend money and run deficits without the constraint of the burden of rising debt is really saying anything new or radical.  Keynesian economic theory has always argued that government deficits and rising public sector debt need not become ‘unsustainable’, as long as the extra spending produced faster economic growth.  If real GDP growth is higher than the interest cost on the debt (g>r), then (public) debt can be sustainable.  All MMT seems to be adding is that governments don’t even need to increase debt in the form of government bonds; the central bank/state can ‘print’ money to fund spending.

But there are constraints on unlimited government spending that MMT admits to.  Kelton points out: “the only economic constraints currency-issuing states face are inflation and the availability of labor and other material resources in the real economy.” Two big constraints, it seems to me. How would inflation arise? According to MMT, it is when unused capacity in an economy is used up, so that there is full employment of the workforce and given technology.  After that, if there is no extra capacity, more government spending financed by printing money will be inflationary. If governments keep printing money to spend, inflation of prices will take place because supply has reached its maximum.

But Kelton says that this constraint allows us to concentrate on the real issue: “M.M.T. asks us to focus on the limits that matter. At any point in time, every economy faces a sort of speed limit, regulated by the availability of its real productive resources — the state of technology and the quantity and quality of its land, workers, factories, machines and other materials. If any government tries to spend too much into an economy that’s already running at full speed, inflation will accelerate.”

Exactly!  And here the real issue is exposed. How does a capitalist economy expand capacity, investment and production? There are limits on its ability to do that.  But MMT actually does not focus on these ‘limits that matter’, only on the one that does not matter (so much) – deficits and debt.  More important to understand is why is there unused capacity; and why growth drops and there are slumps.  Indeed, why are there regular and recurring slumps in capitalist economies? These questions are not dealt with or answered by MMT. According to Kelton, “M.M.T. simply describes how our monetary system actually works”. Even if that were right, which I have doubted above, that does not take us very far.

In contrast, Marxist monetary theory does deal with the ‘constraint’ that matters, because it based on the law of value; namely that value is created by the exertion of human labour.  Under capitalism, human labour power is bought by capital (which owns the means of production) to exploit and produce value and surplus value (profit).  Under capitalism, value is not created by the state issuing money; instead, money represents value created by the exploitation of labour power. Printing more money so that governments can spend more money will not produce more value unless labour power is exploited more by capital as a result.

Kelton says that “In 2020, Congress has been showing us — in practice if not in its rhetoric — exactly how M.M.T. works: It committed trillions of dollars this spring that in the conventional economic sense it did not “have.”  If that is right, it is not good news for MMT. For will all these trillions deliver more output and more resources to meet social need? Much of this largesse from the ‘digital printing’ of money into bank reserves will not end up as more output, employment and investment.  Most of the trillions are either being hoarded by the big companies, while raising more debt at zero rates; or being invested in the stock and bond markets for capital gains.  It will not go into increasing capacity in productive sectors, because the profitability of capital is very low – as I have shown in other posts.  MMT has nothing to say about this, instead resting on its faith in increasing the quantity of a state currency unit.  Marxist theory does: hoarding money tells you that money has become a fetish, the objective in itself, rather than to be used as capital to extract more surplus value from the exploitation of labour in production.

It may be an ‘Austerian’ myth that governments cannot run deficits and need to ‘balance the books’. But it is an illusion to reckon that the crisis-prone nature of capitalist production can be ‘managed’ by means of ‘money artistry’, that is, by the manipulation of money, credit and government deficits. That’s because the structural causes of the crises and under-capacity lie not in the financial or monetary sector or the fiscal sector, but in the system of globalized capitalist production.

MMT and Kelton do not touch on the important issues of the failure of capitalism to deliver social needs and the underlying exploitation of the many by the few. On those questions, MMT has nothing to say and different MMTers have different views. I’m sure most, if not all MMTers (like traditional Keynesians), want governments to intervene to meet social needs. Some (like Bill Mitchell) support socialist measures to replace the law of value and the capitalist mode of production; some (like Kelton) don’t. Ah, says Kelton and MMTers, that is not the point of MMT.  We just want to show that it is a myth that the state cannot run up deficits without consequences. Again, that does not seem very new, radical and not even correct in all circumstances.

Capitulating to adults

May 31, 2020

During the pandemic lockdown, I have been able to read a range of new economics books, some Marxist but most not.  It seems that many leading economists have published new stuff in the last two months. Over the next few weeks, I shall post some reviews of these.

I shall start with Sellouts in the Room by Eric Toussaint. Originally published in French and in Greek in March 2020 under the title Capitulation entre Adultes, the book will be available in English before the end of 2020.  Eric Toussaint takes us back to events of Greek debt crisis when the Troika (the EU Commission, the ECB and the IMF) tried to impose a drastic austerity programme on the Greek people in return for ‘bailout’ funds to cover existing debts owed by Greek banks and the Greek government to foreign creditors, as credit for Greece in markets dried up and the government headed for default.

At the beginning of 2015, the Greek people elected the left-wing Syriza party to power. Syriza pledged to resist austerity measures. The new prime minister Tsipras appointed the already well-known leftist economist Yanis Varoufakis as finance minister to negotiate a deal with the Troika.  As we subsequently know, Varoufakis was unable to persuade the Troika and EU leaders to drop the austerity demands. Tsipras called a referendum for the Greek people on whether to accept the Troika demands.  Despite a massive media campaign by the capitalist press and dire threats from the Troika and the strangling of the Greek economy and banks by the ECB, the Greek people voted 60% to reject the Troika plan.  But immediately after the vote, Tsipras caved into the Troika and agreed to their demands.

Varoufakis resigned as finance minister and later he wrote an account of his negotiations with the Troika, called Adults in the Room. Éric Toussaint was also in Greece at the time.  He was coordinating the work of a debt audit committee set up by the president of the Hellenic Parliament in 2015 to look at the nature of the debt that the Greeks owed to the likes of European banks, hedge funds and other governments. He “lived nearly three months in Athens between February and July 2015, and in the context of my work as scientific coordinator of the audit of Greece’s debt, I was in direct contact with a number of members of the Tsipras government.”  Toussaint has now written an alternative view of those events from that recounted by Varoufakis.  And it amounts to a devastating critique of the Syriza government and of Varoufakis’ strategy and tactics during 2015.

Does it matter what happened? Toussaint reckons it does because there are important lessons to be learned from the Greek debt crisis. The common view now is that Syriza had no alternative but to submit to the Troika as otherwise the Greek banks would have collapsed, the economy would have fallen down an abyss and Greece would have been thrown out of the European Union to fend for itself.  For example, Paul Mason, British leftist broadcaster and writer, wrote in 2017 that “I continue to believe Tsipras was right to climb down in the face of the EU’s ultimatum, and that Varoufakis was at fault for the way he designed the “game” strategy.”

Toussaint’s denies the narrative of TINA (‘there is no alternative’), arguing that there was an alternative strategy that Syriza could have followed and, in particular, Toussaint singles out Varoufakis for failing to recognise or adopt this in his role as finance minister.  In Toussaint’s view, Varoufakis started from the premiss that he had to persuade the Troika to act as “adults” and aim to convince them to reach a reasonable compromise.  From the very beginning Varoufakis made extremely minimal counter-proposals to the Troika austerity measures: “Varoufakis reassured his opposite numbers that the Greek government would not request a reduction of the debt stock, and he never called into question the legitimacy or legality of the debt whose repayment was demanded of Greece.” He never asserted the right and the determination of the Greek government to conduct an audit of Greece’s debts, says Toussaint.

And Varoufakis not only said that the government he represented would not call into question the privatizations that had been conducted since 2010, but even allowed for the possibility of further privatizations.  Indeed, Varoufakis repeatedly told the European leaders that 70 per cent of the measures called for by the Troika’s Memorandum of Understanding were acceptable.  While Varoufakis discussed with these ‘adults in a room’, the Syriza government continued to pay off several billion euros in debts between February and 30 June 2015, while the Troika did not make a single euro available. The public coffers continued to be emptied, principally for the benefit of the IMF.

Varoufakis and the inner circle around Tsipras, in reaching an agreement with the Troika in late February 2015 to extend the second Memorandum of Understanding, never showed evidence of the slightest determination to take action if the creditors refused to make concessions. And the latter gave every evidence of contempt for Greece’s government.

Most important, says Toussaint, the Syriza government ministers did not take the time to go out and meet the Greek people, to speak at rallies where the Greek population was represented. They did not travel around the country to meet and talk with voters and explain what was going on during the negotiations or the measures the government wanted to take to fight the humanitarian crisis and re-start the country’s economy. They utterly failed to appeal to the working people of Europe and elsewhere for support. Instead, Varoufakis and the other Greek ministers involved to conduct ‘secret diplomacy’ in rooms, thus encouraging the Troika to “persist in using the worst forms of blackmail.”

The referendum of 5 July 2015 was the culmination of those negotiations. Clearly, Tsipras expected the Greek people to bow to the pressure of the media and the threat of economic disaster and expulsion from the EU by accepting the Troika demands. But they did not. Toussaint says that the referendum results was a perfect opportunity to mobilise the Greek people to reject the Troika’s blackmail, refuse their ultimatums and instead respond by suspending further repayments of debt pending an audit. The government should have announced the nationalisation of the banks and implemented capital controls to stop capital flight and take control of the payments system.

As Toussaint points out: “When a coalition or a party of the Left takes over government, it does not take over the real power. Economic power (which comes from ownership of and control over financial and industrial groups, the mainstream private media, mass retailing, etc.) remains in the hands of the capitalist class, the richest 1 per cent of the population. That capitalist class controls the state, the courts and the police, the ministries of the economy and finance, the central bank, the major decision-making bodies.”

That was ignored or denied by the Syriza governemnt, including its rockstar finance minister. They started from the premiss that representatives of capital in the Troika could be persuaded to be reasonable, to act as adults.  The class nature of the struggle was omitted.  As Toussaint says: “In reality, a major strategic choice of the Syriza government–one which led to its downfall–was constantly to avoid confrontation with the Greek capitalist class. It was not simply that Syriza and the government did not seek popular mobilization against the Greek bourgeoisie, who widely adhered to the EU’s neoliberal policies. The government openly pursued policies of conciliation with them.”

Toussaint offers an alternative strategy in his book.  The Syriza government “should have resolutely followed the path of disregarding the European treaties and refusing to submit to the dictates of the creditors. At the same time they should have taken the offensive against the Greek capitalists, making them pay taxes and fines, especially in the sectors of shipping, finance, the media and mass retail. It was also important to make the Orthodox Church, the country’s main land owner, pay taxes. As a means of reinforcing these policies, the government should have encouraged the development of self-organization processes in existing collective projects in various domains (for example, self-managed health dispensaries to deal with the social and humanitarian crisis or associations working to feed the most vulnerable people.”

That brings us to the issue of Greece’s membership of the European Union.  Up to the point of the referendum, apart from the Communist party, no party stood for leaving the EU as a solution to the crisis. The vast majority of Greeks did not want this. After the capitulation of Syriza, the party leadership split and those opposed to the capitulation (with the exception of Varoufakis) called for Grexit as the main policy proposal and solution. In the subsequent election, these factions failed to make any headway into parliament and the Tsipras government was returned intact.

In his book, Toussaint reckons that the Syriza government should have opted for triggering Article 50 in the EU constitution as a way of getting out of the EU. This Article is what the UK government subsequently used to achieve its exit after its referendum to leave in 2016.  Toussaint reckons that using this instrument would have given Greece two years to argue the toss with the EU, while it refused to pay any more debt etc. I am not so sure that this would have been a good tactic. As Toussaint points out, no EU member state can be thrown out and there are few sanctions that the EU could impose on a Greek government anyway, apart from the ECB blocking credit, something they were doing anyway. By applying for Article 51, Syriza would have been telling the Greek people that the government aimed to leave the EU voluntarily (something the majority of Greek did not want); and also giving the EU leaders an easy way out of getting rid of Greece, something that, as Varoufakis points out in his narrative, German finance minister Schauble was keen on doing.

In my posts during the Greek crisis, I argued that the Syriza government should have refused to pay the debt; taken over the banks and large Greek companies, mobilised the people to occupy the workplaces and introduce workers control; blocked the movement of funds by the rich and corporates; and appealed to the labour movement in Europe for support against the policies of their governments.  Let those governments try to throw Greece out; but do not give them constitutional weapon to do so.

The main emphasis in Toussaint’s book is on the role of Varoufakis, not because of any personal animosity, but because this ‘erratic Marxist’, as Varoufakis calls himself, was at the centre of events and went on to write his best-selling personal account of what happened. Varoufakis then formed a pan-European wide political party DIEM 25, and was eventually re-elected as an MP in the Greek parliament in the recent 2019 election that led to the Conservative party taking back power.

Why did Varoufakis from the beginning as finance minister adopt the strategy of trying to persuade the Troika leaders to be reasonable, rather than mobilise the Greek people for a fight against the Troika demands? The answer, I think, lies in Varuofakis’ view of the possibilities for socialism. Before he was appointed finance minister by Tsipras, he had not been a member of Syriza; he had been an academic. Back then, he wrote, “You see, it is not an environment for radical socialist policies after all. Instead it is the Left’s historical duty, at this particular juncture, to stabilise capitalism; to save European capitalism from itself and from the inane handlers of the Eurozone’s inevitable crisis”.  He had written what was called a Modest Proposal for Resolving the Euro Crisis with Social Democrat academic Stuart Holland and his close colleague and friend, post-Keynesian James Galbraith, in which Varoufakis was proud to say “does not have a whiff of Marxism in it.”

This ‘erratic Marxist’ saw his task as Greek finance minister “to save European capitalism from itself” so as to “minimise the unnecessary human toll from this crisis; the countless lives whose prospects will be further crushed without any benefit whatsoever for the future generations of Europeans.” Apparently, for Varoufakis, socialism cannot do this because “we are just not ready to plug the chasm that a collapsing European capitalism will open up with a functioning socialist system”.  By ‘we’, he means working people, but in practice he meant himself.

Varoufakis went further. You see, “a Marxist analysis of both European capitalism and of the Left’s current condition compels us to work towards a broad coalition, even with right-wingers, the purpose of which ought to be the resolution of the Eurozone crisis and the stabilisation of the European Union… Ironically, those of us who loathe the Eurozone have a moral obligation to save it!”  Thus he campaigned for his Modest Proposal for Europe with “the likes of Bloomberg and New York Times journalists, of Tory members of Parliament, of financiers who are concerned with Europe’s parlous state.”

In Sellouts in the Room, Eric Toussaint scathingly exposes this wrong-headed approach of the ‘erratic Marxist’. It’s a painful read in many ways, as Toussaint chapter by chapter recounts Varoufakis’ sorry progress, or lack of it. In a recent interview, Varoufakis was asked “what would I have done differently with the information I had at the time? I think I should have been far less conciliatory to the Troika. I should have been far tougher. I should not have sought an interim agreement. I should have given them an ultimatum: “a restructure of debt, or we are out of the euro today”.

Unfortunately, there is never much benefit in hindsight, except to to avoid the same mistakes when another opportunity arises. Toussaint’s book is a guide to that. In the meantime, the Greek people now face yet another round of austerity and depression after the coronavirus crisis, following the terrible years before and after the capitulation of 2015. The IMF forecast for 2020 would take Greek national income back to the level of 25 years ago!

China in the post-pandemic 2020s

May 22, 2020

China’s National Peoples Congress (NPC) opened today, having been delayed by the coronavirus pandemic.  The NPC is China’s version of a parliament and used by the Communist party leaders to report on the state of the economy and outline their plans for the future, both domestically and globally.

Prime Minister Li Keqiang announced that for the first time in decades that there would be no growth target for the year.  So the Chinese leaders have abandoned their much heralded aim to have doubled the country’s GDP under the current plan by this year. That was bowing to the inevitable.

The pandemic and lockdown had driven the Chinese economy into a severe contraction for several months, from which it is only just recovering. The economy contracted by 6.8 per cent in the first quarter and most forecasts for the whole year are for less than half of the 6.1 per cent growth rate posted last year.  But even that figure would be way better than all the G7 economies in 2020.

Industrial production and investment is now picking up, but consumer spending remains depressed.

But Li said that main reason that there was no growth target was because of uncertainty about “the Covid-19 pandemic and the world economic and trade environment.” In other words, even if the domestic economy is recovering, the rest of the world is still depressed.  With world trade contracting, there are slim prospects for the exports of the manufactures that China has mainly depended for its expansion.

China is ahead of other major economies in coming out of the pandemic.  But even Li had to admit that a lot of mistakes were made in handling the pandemic and there was “still room for improvement in the work of government,” including delays in alerting the public allowed the virus to spread. “Pointless formalities and bureaucratism remain an acute issue. A small number of officials shirk their duties or are incapable of fulfilling them. Corruption is still a common problem in some fields,” Li admitted. Nevertheless, compared to the performance of governments in the West, China had done much better in keeping cases and deaths down.

In the short term, Li said the government intends to give a boost to the economy with some fiscal stimulus and monetary easing, similar to that in the G7 economies.  China is targeting a 2020 budget deficit of at least 3.6% of GDP, above last year’s 2.8%, and increased funding for local-government borrowing by two-thirds.  And for the first time, the central government will issue bonds to be used to help local government spending and firms in difficulty.  Unemployment is officially recorded at 5.5% but it is probably more like 15-20%, so the government aims to create more jobs and reduce poverty in rural areas to curb the flood of rural migrants to the cities.

That brings us to discuss the long-term future of the Chinese economy in the post-pandemic world and in the context of the intensifying trade and technology war with the US and other imperialist powers.

In my view there are three ways of looking at the economic development of China (this is something that I have written on in detail in a recent paper for the Austrian Journal of Development Studies). The mainstream economics view is that China should become a full ‘market’ economy like those of the G7.  Relying on cheap labour to sell manufacturing goods to the West is over.  Rising labour costs show that China’s state-driven and led economic model cannot succeed in developing modern technology or delivering consumer goods to the people.  This was the policy advice of the World Bank and other international agencies of global capital in the past and it gained some traction among a section of the elite, especially those closely connected to China’s private billionaires.  But so far, this option has been rejected by the majority in the current leadership.

The second view is what might be called Keynesian.  It recognises the success of the Chinese economy in the last 30 years in taking nearly 900m people out of the official poverty level set by the World Bank.  Indeed, the World Bank has just adjusted its figures for the decline in those who are now under its poverty level.  The decline seems impressive, until you realise that 75% of those brought out of poverty globally in the last three decades are Chinese.

This Keynesian view argues that China’s success has been based on massive investment in industry and infrastructure which has enabled the country to become the world’s manufacturing powerhouse.  But now that emphasis on industrial investment must be changed because household consumption is weak and in a modern economy it is consumption that matters.  Unless there is a swing to consumption, the Chinese economy will slow and the huge level of corporate and household debt will increase the risk of financial crises.

Actually, personal consumption in China has been increasing much faster than fixed investment in recent years, even if it is starting at a lower base.   Consumption rose 9% last year, much faster than GDP. And consumption growth would be even faster if the government took steps to reduce the high level of inequality of income.

The idea that China is heading for a crash because of under consumption and over investment is not convincing. It’s true that according to the Institute of International Finance (IFF), China’s total debt hit 317 per cent of gross domestic product (GDP) in the first quarter of 2020.  But most of the domestic debt is owed by one state entity to another; from local government to state banks, from state banks to central government.  When that is all netted off, the debt owed by households (54% of GDP) and private corporations is not so high, while central government debt is low by global standards.  Moreover, external dollar debt to GDP is very low (15%) and indeed the rest of the world owes China way more, 6% of global debt.  China is a huge creditor to the world and has massive dollar and euro reserves, 50% larger than its dollar debt.

It’s true that some of the fixed investment expansion may have been wasted.  Indeed, the Keynesian development model of China based on just rising investment and private consumption demand is increasingly flawed.  As President Xi Jinping said, “Houses are built to be inhabited, not for speculation.” But the government allowed capitalist speculation in property so that 15% of all apartments currently are owned as investments, often not even connected to electricity supply.  This property speculation was fuelled by credit funded by the state banks but also by ‘shadow banking’ entities.  This sort of speculation wasted resources and did not direct investment into areas like reducing CO2 emissions to meet the government’s declared aim to make China a ‘clean economy’.  With China’s population peaking in this decade and the working age population falling 20% by 2050, the aim of investment must be towards job creation, automation and productivity growth.

That brings me to the third development model, the Marxist one.  The key to prosperity is not market forces (neoclassical mainstream) or investment and consumption demand (Keynesian) but in raising the productivity of labour in a planned and harmonious way (Marxist).

In a capitalist economy, companies compete with each other to raise profitability through the introduction of new technologies.  But there is an inherent contradiction under capitalist production between a falling profitability of capital and a rising productivity of labour.  As capitalists try to raise the productivity of labour by shedding labour with technology and so lowering labour costs and increasing profits and market share, the overall profitability of investment and production begins to fall. Then, in a series of crises, investment collapses and productivity stagnates.

This is clearly an issue for China in its more mature stage of accumulation in the 21st century – if you accept that China is just another capitalist economy like the imperialist powers or the emerging ones like Brazil or India.  The argument goes, that China may be different from the ‘liberal capitalism’ of the West and instead is an autocratic ‘political capitalism’, as Branco Milanovic describes China in his book, Capitalism Alone, but it is still capitalism.

If you accept that view, then we can gauge the health and future of China’s economy by measuring the profitability of its burgeoning capitalist sector. In a new paper (Catching Up China India Japan (1)), Brazilian Marxist economists, Adalmir Marquetti, Luiz Eduardo Ourique and Henrique Morrone compared China’s development to that of India in catching up with the G7 economies. They show that the high capital accumulation rate in China has led to a fall in profitability even lower than in the US, so that further expansion is at risk.  In another paper, they argue that there is now an overaccumulation crisis brewing and further heavy investment would not work, especially given rising greenhouse emissions it would create. 71548-211901-1-PB (1)

Like Marquetti et al, I have measured the profitability of the capitalist sector in China (from Penn World Tables 9.1 internal rate of return on capital series) and I find a similar fall. The huge expansion of investment and technology, particularly once global markets were opened up to Chinese industry after 2000 when joining the World Trade Organisation, led to double-digit growth rates up to the Great Recession of 2008. But the increased organic composition of capital drove profitability down prior to global pandemic crisis, and eventually growth slowed.

Does this mean that China is heading for major slump along classic capitalist lines some time in this decade?  Marquetti et al seem to suggest that: “The larger profit rate explained the robust mechanization in the early stages of the process. Fast capital accumulation diminishes capital productivity and the profit rate. Then, the success in catching up must hinge on raising the saving and investment rates. It may further reduce capital productivity and the profit rate, putting the process at risk, which seems to be the case in China and India.” And they quote Minqi Li that ‘‘if China were to follow essentially the same economic laws as in other capitalist countries (such as the United States and Japan), a decline in the profit rate would be followed by a deceleration of capital accumulation, culminating in a major economic crisis.’’

But the question for me is whether the capitalist sector in China’s economy is dominant. Does China follow the same law of value as other capitalist economies?  China seems to be more than just an autocratic, undemocratic, ‘political’ version of capitalism compared to the ‘liberal democratic’ version of the West (as argued by Milanovic).  Its economy is not dominated by the market, by investment decisions based on profitability; or by capitalist companies and bosses; or by foreign investors. Its economy is still dominated by state control, state investment, state banks and by Communist apparatchiks who control the big companies and plan the economy (often inefficiently as there is no accountability to China’s working people).

I remind readers of the study I made a few years ago of the extent of state assets and investment in China compared to any other country. It showed that China has a stock of public sector assets worth 150% of annual GDP; only Japan has anything like that amount at 130%.  Every other major capitalist economy has less than 50% of GDP in public assets.  Every year, China’s public investment to GDP is around 16% compared to 3-4% in the US and the UK.  And here is the killer figure.  There are nearly three times as much stock of public productive assets to private capitalist sector assets in China.  In the US and the UK, public assets are less than 50% of private assets.  Even in ‘mixed economy’ India or Japan, the ratio of public to private assets is no more than 75%.  This shows that in China public ownership in the means of production is dominant – unlike any other major economy.

And now the IMF has published new data that confirm that analysis.  China has public capital stock near 160% of GDP, way more than anywhere else.  But note that this public sector stock has been falling faster than even the neo-liberal Western economies.  The capitalist mode of production may not be dominant in China, but it is growing fast.

Which way will China go?  In the post-pandemic decade will it move towards an outright capitalist economy that is just like the rest of world?  In other words, adopting the neoliberal mainstream model.  So far, in the light of the disastrous failure of ‘liberal democratic’ market economies in handling the pandemic, with death rates 100 times higher than in China and now deep in a slump not seen since the 1930s, that market model does not seem attractive to the Communist dictatorship or the Chinese people.  Instead Xi and Li seem to want to continue and expand the existing model of development: a state-directed and controlled economy that curbs the capitalist sector and resists imperialist intervention.

Indeed, China looks to expand its technological prowess and its influence globally through the Belt and Road investment initiative and its huge lending programmes to the likes of African and other states.  And it will be able to do so because its economic model does not rest on the falling profitability of its admittedly sizeable capitalist sector.  An IIF report found that China is now the world’s largest creditor to low income countries.

That is why the post-pandemic strategy of imperialism towards China is taking a sharp turn.  And this is the big geopolitical issue of the next decade.  The imperialist approach has changed.  When Deng came to take over the Communist leadership in 1978 and started to open up the economy to capitalist development and foreign investment, the policy of imperialism was one of ‘engagement’.  After Nixon’s visit and Deng’s policy change, the hope was that China could be brought into the imperialist nexus and foreign capital would take over, as it has in Brazil, India and other ‘emerging markets’.  With ‘globalisation’ and the entry of China to the World Trade Organisation, engagement was intensified with the World Bank calling for privatisation of state industry and the introduction of market prices etc.

But the global financial crash and the Great Recession changed all that.  Under its state controlled model, China survived and expanded while Western capitalism collapsed. China was fast becoming not just a cheap labour manufacturing and export economy, but a high technology, urbanised society with ambitions to extend its political and economic influence, even beyond East Asia.  That was too much for the increasingly weak imperialist economies.  The US and other G7 nations have lost ground to China in manufacturing, and their reliance on Chinese inputs for their own manufacturing has risen, while China’s reliance on G7 inputs has fallen.

Source: Manufacturing shares from World Development Indicator online database. Reliance computations by authors, based on OECD ICIO Tables (

So the strategy has changed: if China was not going to play ball with imperialism and acquiesce, then the policy would become one of ‘containment’.  The sadly recently deceased Jude Woodward wrote an excellent book describing this strategy of containment that began even before Trump launched his trade tariff war with China on taking the US presidency in 2016.  Trump’s policy, at first regarded as reckless by other governments, is now being adopted across the board, after the failure of the imperialist countries to protect lives during the pandemic. The blame game for the coronavirus crisis is to be laid at China’s door.

The aim is to weaken China’s economy and destroy its influence and perhaps achieve ‘regime change’.  Blocking trade with tariffs; blocking technology access for China and their exports; applying sanctions on Chinese companies; and turning debtors against China; this may all be costly to imperialist economies.  But the cost may be worth it, if China can be broken and US hegemony secured.

China is not a socialist society.  Its autocratic one-party Communist government is often inefficient and it imposed draconian measures on its people during the pandemic.  The Maoist regime suppressed dissidents ruthlessly and the cultural revolution was a shocking travesty.  The current government also suppresses minorities like the grotesque herding of the muslim Uighurs in Xinjiang Province into ‘reeducation camps’.  And nobody can speak out against the regime without repercussions.  And now the leadership has announced the introduction of military rule in Hong Kong, ending parliament and suppressing the protests there.  And it still looks to ensure that Taiwan, the home of the former warlord nationalists who fled to Formosa and occupied it at the end of the civil war in 1949, is eventually incorporated into the mainland.

China’s leadership is not accountable to its working people; there are no organs of worker democracy.  And China’s leaders are obsessed with building military might – the NPC heard that the military budget would rise by 6.6 per cent for 2020 and China now spends 2% of GDP on arms. But that is still way less than the US. The US military budget in 2019 was $732bn, representing 38 per cent of global defence spending, compared with China’s $261bn.

But remember, all China’s so-called  ‘aggressive behaviour’ and crimes against human rights are easily matched by the crimes of imperialism in the last century alone: the occupation and massacre of millions of Chinese by Japanese imperialism in 1937; the continual gruesome wars post-1945 conducted by imperialism against the Vietnamese people, Latin America and proxy wars in Africa and Syria, as well as the more recent invasion of Iraq and Afghanistan and the appalling nightmare in Yemen by the disgusting US-backed regime in Saudi Arabia etc.  And don’t forget the horrific poverty and inequality that weighs for billions under the imperialist mode of production.

The NPC reveals that China is at a crossroads in its development. Its capitalist sector has deepening problems with profitability and debt.  But the current leadership has pledged to continue with its state-directed economic model and autocratic political control.  And it seems determined to resist the new policy of ‘containment’ emanating from the ‘liberal democracies’. The trade, technology and political ‘cold war’ is set to heat up over the rest of this decade, while the planet heats up too.