Archive for the ‘marxism’ Category

The global debt mountain: a Minsky moment or Carchedi crunch?

October 20, 2017

During the current Chinese Communist party congress, Zhou Xiaochuan, governor of the People’s Bank of China, commented on the state of the Chinese economy.  “When there are too many pro-cyclical factors in an economy, cyclical fluctuations will be amplified…If we are too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a ‘Minsky Moment’. That’s what we should particularly defend against.” 

Here Zhou was referring to the idea of Hyman Minsky, the left Keynesian economist of the 1980s, who once put it: “Stability leads to instability. The more stable things become and the longer things are stable, the more unstable they will be when the crisis hits.”  China’s central banker was referring to the huge rise in debt in China, particularly in the corporate sector.  As a follower of Keynesian Minsky, he thinks that too much debt will cause a financial crash and an economic slump.

Now readers of this blog will know that I do not consider a Minsky moment as the ultimate or main cause of crises – and that includes the global financial crash of 2008 that was followed by the Great Recession, which many have argued was a Minsky moment.

Indeed, as G Carchedi has shown in a new paper recently presented to the Capital.150 conference in London, when both financial profits and profits in the productive sector start to fall, an economic slump ensues.  That’s the evidence of post-war slumps in the US.  But a financial crisis on its own (falling financial profits) does not lead to a slump if productive sector profits are still rising.

Nevertheless, a financial sector crash in some form (stock market, banks, or property) is usually the trigger for crises, if not the underlying cause.  So the level of debt and the ability to service it and meet obligations in the circuit of credit does matter.

That brings me to the evidence of the latest IMF report on Global Financial Stability. It makes sober reasoning.

The world economy has showed signs of a mild recovery in the last year, led by an ever-rising value of financial assets, with new stock price highs.  President Trump plans to cut corporate taxes in the US; the Eurozone economies are moving out of slump conditions, Japan is also making a modest upturn and China is still motoring on.  So all seems well, comparatively at least.  The Long Depression may be over.

However, the IMF report discerns some serious frailties in this rose-tinted view of the world economy.  The huge expansion of credit, fuelled by major central banks ‘printing’ money, has led to a financial asset bubble that could burst within the next few years, derailing the global recovery.  As the IMF puts it: “Investors’ concern about debt sustainability could eventually materialize and prompt a reappraisal of risks. In such a downside scenario, a shock to individual credit and financial markets …..could stall and reverse the normalization of monetary policies and put growth at risk.”

What first concerns the IMF economists is that the financial boom has led to even greater concentration of financial assets in just a few ‘systemic banks’.  Just 30 banks hold more than $47 trillion in assets and more than one-third of the total assets and loans of thousands of banks globally. And they comprise 70 percent or more of international credit markets.  The global credit crunch and financial crash was the worst ever because toxic debt was concentrated in just a few top banks.  Now ten years later, the concentration is even greater.

Then there is the huge bubble that central banks have created over the last ten years through their ‘unconventional’ monetary policies (quantitative easing, negative interest rates and huge purchases of financial assets like government and corporate bonds and even corporate shares).  The major central banks increased their holdings of government securities to 37 percent of GDP, up from 10 percent before the global financial crisis.  About $260 billion in portfolio inflows into emerging economies since 2010 can be attributed to the push of unconventional policies by the Federal Reserve alone.  Interest rates have fallen and the banks and other institutions have been desperately looking for higher return on their assets by investing globally in stocks, bonds, property and even bitcoins.

But now the central banks are ending their purchase programmes and trying to raise interest rates. This poses a risk to the world economy, fuelled on cheap credit up to now.  As the IMF puts it: “Too quick an adjustment could cause unwanted turbulence in financial markets and international spillovers … Managing the gradual normalization of monetary policies presents a delicate balancing act. The pace of normalization cannot be too fast or it will remove needed support for sustained recovery”.  The IMF reckons portfolio flows to the emerging economies will fall by $35bn a year and “a rapid increase in investor risk aversion would have a more severe impact on portfolio inflows and prove more challenging, particularly for countries with greater dependence on external financing.”

What worries the IMF is that this this borrowing has been accompanied by an underlying deterioration in debt burdens.  So “Low-income countries would be most at risk if adverse external conditions coincided with spikes in their external refinancing needs.”

But it is what might happen in the advanced capital economies on debt that is more dangerous, in my view.  As the IMF puts it: “Low yields, compressed spreads, abundant financing, and the relatively high cost of equity capital have encouraged a build-up of financial balance sheet leverage as corporations have bought back their equity and raised debt levels.”  Many companies with poor profitability have been able to borrow at cheap rates.  As a result, the estimated default risk for high-yield and emerging market bonds has remained elevated.

The IMF points out that debt in the nonfinancial sector (households, corporations and governments) has increased significantly since 2006 in many G20 economies.  So far from the global credit crunch and financial crash leading to a reduction in debt (or fictitious capital as Marx called it), easy financing conditions have led to even more borrowing by households and companies, while government debt has risen to fund the previous burst bubble.

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

Among G20 economies, total nonfinancial sector debt has risen to more than $135 trillion, or about 235 percent of aggregate GDP.

In G20 advanced economies, the debt-to-GDP ratio has grown steadily over the past decade and now amounts to more than 260 percent of GDP. In G20 emerging market economies, leverage growth has accelerated in recent years. This was driven largely by a huge increase in Chinese debt since 2007, though debt-to-GDP levels also increased in other G20 emerging market economies.

Overall, about 80 percent of the $60 trillion increase in G20 nonfinancial sector debt since 2006 has been in the sovereign and nonfinancial corporate sectors. Much of this increase has been in China (largely in nonfinancial companies) and the United States (mostly from the rise in general government debt). Each country accounts for about one-third of the G20’s increase. Average debt-to-GDP ratios across G20 economies have increased in all three parts of the nonfinancial sector.

The IMF comments: “While debt accumulation is not necessarily a problem, one lesson from the global financial crisis is that excessive debt that creates debt servicing problems can lead to financial strains. Another lesson is that gross liabilities matter. In a period of stress, it is unlikely that the whole stock of financial assets can be sold at current market values— and some assets may be unsellable in illiquid conditions.”

And even though there some large corporations that are flush with cash, the IMF warns: “Although cash holdings may be netted from gross debt at an individual company—because that firm has the option to pay back debt from its stock of cash—it could be misleading”.  This is because the distribution of debt and cash holdings differs between companies and those with higher debt also tend to have lower cash holdings and vice versa.

So “if there are adverse shocks, a feedback loop could develop, which would tighten financial conditions and increase the probability of default, as happened during the global financial crisis.”

Although lower interest rates have helped lower sovereign borrowing costs, in most of the G20 economies where companies and households increased leverage, nonfinancial private sector debt service ratios also increased.  And there are now several economies where debt service ratios for the private nonfinancial sectors are higher than average and where debt levels are also high.  Moreover, a build-up in leverage associated with a run-up in house price valuations can develop to a point that they create strains in the nonfinancial sector that, in the event of a sharp fall in asset prices, can spill over into the wider economy.

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

Yes, banks are in better shape than in 2007, but they are still at risk.  Yes, central banks are ready to reduce interest rates if necessary, but as they are near zero anyway, there is little “scope for monetary stimulus. Indeed, monetary policy normalization would be stalled in its tracks and reversed in some cases.”

The IMF poses a nasty scenario for the world economy in 2020.  The current ‘boom’ phase can carry on.  Equity and housing prices continue to climb in overheated markets.  This leads to investors to drift beyond their traditional risk limits as the search for yield intensifies despite increases in policy rates by central banks.

Then there is a Minsky moment.  There is a bust, with declines of up to 15 and 9 percent in stock market and house prices, respectively, starting at the beginning of 2020.  Interest rates rise and debt servicing pressures are revealed as high debt-to-income ratios make borrowers more vulnerable to shocks. “Underlying vulnerabilities are exposed and the global recovery is interrupted.”

The IMF estimates that the global economy could have a slump equivalent to about one-third as severe as the global financial crisis of 2008-9 with global output falling by 1.7 percent from 2020 to 2022, relative to trend growth.  Capital flows to emerging economies will plunge by about $65 billion in one year.

Of course, this is not the IMF’s ‘base case’; it is only a risk.  But it is a risk that has increasing validity as stock and bond markets rocket, driven by cheap money and speculation.  If we follow the Carchedi thesis, the driver of the bust would be when profits in the productive sectors of the economy fall.  If they were to turn down along with financial profits, that would make it difficult for many companies to service the burgeoning debts, especially if central banks were pushing up interest rates at the same time.  Any such downturn would hit emerging economies severely as capital flows dry up.  The Carchedi crunch briefly appeared in the US in early 2016, but recovered after.

Zhou is probably wrong about China having a Minsky moment, but the advanced capitalist economies may have a Carchedi crunch in 2020, if the IMF report is on the button.





Economic crises: look to science or the rain gods?

October 3, 2017

Recently, mainstream economists have been debating yet again why ‘economics’ was unable to see the global financial crash coming and/or provide effective policies to end what I have described as the Long Depression that has endured since the end of the Great Recession in 2009.

Mainstream economists John Quiggin and Henry Farrell summed up the debate in a paper: “some blame non-academic economists. Others blame prominent academics. Others still say that economic advice doesn’t really matter, because politicians will pay attention only to the advice that they wanted to hear anyway.”

But Quiggin and Farrell reckon the real reason that mainstream economics failed to be of any use was the lack of agreement among economists on what to do.  Economists could not agree on whether austerity was good or bad for the economy; or on whether economists had any influence over politicians.  And the reason for this lack of agreement was not due to differences on theory but to “sociology”.  By this they mean that mainstream economists are not pure objective ‘economists’ but are “deeply bound up with the political systems that they live within”

As I also pointed out in my book, The Long Depression, Quiggin and Farrell explain that, “prominent academic economists, far more than other social scientists, are likely to go back and forth between universities and roles in the Treasury Department, Federal Reserve, International Monetary Fund and World Bank. This means that economics has far more political clout than other social sciences, but it also has reshaped the profession, turning external policy influence into an important form of internal disciplinary prestige.” 

In other words, economists with jobs in government and the central bank go with the flow (from the forces of capital): “So the world of economic politics and the world of economic thought are deeply intertwined. Channels of influence rarely flow only in one direction, as some economists have discovered to their dismay.”

This conclusion seemed to surprise as well as upset Quiggin and Farrell.  Yet, if they had read Marx, they would have expected nothing else.  As Marx pointed out 150 years ago, in a footnote to the chapter on Commodities and Money in Capital, while making the distinction between classical economics and vulgar economics: “Once for all I may here state, that by classical political economy, I understand that economy which, since the time of W. Petty, has investigated the real relations of production in bourgeois society, in contradistinction to vulgar economy, which deals with appearances only, ruminates without ceasing on the materials long since provided by scientific economy, and there seeks plausible explanations of the most obtrusive phenomena, for bourgeois daily use, but for the rest, confines itself to systematizing in a pedantic way, and proclaiming for everlasting truths, the trite ideas held by the self-complacent bourgeoisie with regard to their own world, to them the best of all possible worlds (p. 174 – 175).

Even earlier, Frederick Engels had anticipated the trend of economics in his Outlines Of A Critique Of Political Economy in 1843:The nearer to our time the economists whom we have to judge, the more severe must our judgment become. For while Smith and Malthus found only scattered fragments, the modern economists had the whole system complete before them: the consequences had all been drawn; the contradictions came clearly enough to light, yet they did not come to examine the premises and still accepted the responsibility for the whole system. The nearer the economists come to the present time, the further they depart from honesty”.

And in Theories of Surplus Value, Marx described “the vulgar economists—by no means to be confused with the economic investigators we have been criticising—translate the concepts, motives, etc., of the representatives of the capitalist mode of production who are held in thrall to this system of production and in whose consciousness only its superficial appearance is reflected.  They translate them into a doctrinaire language, but they do so from the standpoint of the ruling section, i.e., the capitalists, and their treatment is therefore not naïve and objective, but apologetic.”

In other words, all the obstruse theory presented by modern mainstream economics is presented as purely neutral, unbiased and logical, but in reality it is not “naïve and objective” but merely an apologia for the capitalist mode of production.  “It was henceforth,” Marx wrote, “no longer a question whether this theorem or that was true, but whether it was useful to capital or harmful, expedient or inexpedient, politically dangerous or not. Pure, selfless research gave way to battles between hired scribblers, and genuine scientific research was replaced by the bad conscience and the evil intent of apologetic”. Capital, vol. 1, p. 97

Recently, two mainstream economists (Identification in Macroeconomics Emi Nakamura and Jon Steinsson ´ ∗ Columbia University September 30, 2017) started their paper: “Any scientific enterprise needs to be grounded in solid empirical knowledge about the phenomenon in question. Milton Friedman put this well in his Nobel lecture in 1976: “In order to recommend a course of action to achieve an objective, we must first know whether that course of action will in fact promote the objective. Positive scientific knowledge that enables us to predict the consequences of a possible course of action is clearly a prerequisite for the normative judgment whether that course of action is desirable.” 

Sounds good, but unfortunately, “Many of the main empirical questions in macroeconomics are the same as they were 80 years ago when macroeconomics came into being as a separate sub-discipline of economics in the wake of the Great Depression. These are questions such as: What are the sources of business cycle fluctuations? How does monetary policy affect the economy? How does fiscal policy affect the economy? Why do some countries grow faster than others? Those new to our field or viewing it from afar may be tempted to ask: How can it be that after all this time we don’t know the answers to these questions?”  Indeed!

However, the authors remain optimistic.  For them, the problem is not that economists are locked into an apologia for the capitalist system, but that it is difficult to ‘identify’ the right variables in any causal analysis.  In other words, economics is a positivist science like physics but it is just  behind in its understanding of ‘the economy’ compared to physics because of the extra difficulty in empirical work.

Economics could progress in the same way that ‘natural science’ has.  Macroeconomics and meteorology are similar in certain ways. First, both fields deal with highly complex general equilibrium systems. Second, both field have trouble making long-term predictions. For this reason, considering the evolution of meteorology is helpful for understanding the potential upside of our research in macroeconomics. In the olden days, before the advent of modern science, people spent a lot of time praying to the rain gods and doing other crazy things meant to improve the weather. But as our scientific understanding of the weather has improved, people have spent a lot less time praying to the rain gods and a lot more time watching the weather channel. “

Unfortunately for the authors, such progress towards the truth will not take place in economics. To think so is just naïve.  To quote Milton Friedman as the epitomy of unbiased, objective positivist scientific analysis demonstrates that naivety.  Friedman was the peer example of an ideologist for capital, including his job as an advisor for General Pinochet after his coup against the democratically elected government of Chile in the 1970s (see my book, The Great Recession for more on Friedman).

Yes, economics is a science, in my view.  More accurately, as Marx says, it is political economy, the study of the social relations of the capitalist mode of production.  Yes, we need to test economic theories against the facts by identifying the causal variables.  Indeed, we should make predictions to test our theories.

But do not expect the body of mainstream economics to do so in any systematic way.  It has been hopelessly distorted by the need to preserve and defend the capitalist system.  As the authors say: “Policy discussions about macroeconomics today are, unfortunately, highly influenced by ideology. Politicians, policy makers and even some academics have held strong views about how macroeconomic policy works that are not based on evidence but rather on faith.”

They remain confident, however, that: “The only reason why this sorry state of affairs persists is that our evidence regarding the consequences of different macroeconomic policies is still highly imperfect and open to serious criticism. Despite this, we are hopeful regarding the future of our field. We see that solid empirical knowledge about how the economy works at the macroeconomic level is being uncovered at an increasingly rapid rate. Over time, as we amass a better understanding of how the economy works, there will be less and less scope for belief in “rain gods” in macroeconomics and more and more reliance on solid scientific facts.”

Unfortunately, as the global financial crash and the Great Recession showed, mainstream economics has not progressed as much as meteorologists in predicting storms and hurricanes.  Economists still look to the raingods because it’s a matter of faith not reason.

Capital.150: part 3 – struggle!

September 27, 2017

In the third and final part of my review of last week’s Capital.150 London symposium on the modern relevance of Marx’s Capital Volume One 150 years after it was published, I want to cover some of the presentations not mentioned so far.  This is going to be a quick compendium that won’t do justice to the presenters’ papers or to the debates on them.  But at least you can follow up by reading the papers that I shall refer to.

In the session on imperialism, the some old debates among Marxists were revived. As far as I understood the argument presented by Marcelo Dias Carcanholo from the Federal University Fluminense in Rio de Janeiro Brazil (Carcanholo PP) , Marcelo reckoned the ‘dependency’ was deepening, driven by ‘unequal exchange’ in trade with imperialism and significant ‘super-exploitation’ of labour in the peripheral economies.  This makes it increasingly difficult for national capitalist forces to engage the working class in the peripheral economies in class collaboration.  Both ‘dependency’ (of ‘colonial’ economies on imperialist ones) and ‘super-exploitation’ of labour (in the south by the north) as the main generator of profit, are controversial issues and the debate continues on the nature of modern imperialist exploitation and its implications for class struggle.  Raquel Varela from Lisbon New University argued that Marx’s theory of primitive accumulation as expounded in Volume One had new angles to take on modern capitalism – existing still in the poorest areas of so-called emerging economies like India, but Marx’s theory of exploitation of labour by capital was now dominant globally.

Tony Norfield, author of the best-selling book, The City, on London’s role in imperialism spoke on Das Kapital, finance, and imperialism. Tony seemed to be arguing that Marx’s law of value had “evolved” in the modern world of imperialism and finance capital and now “financial markets show more directly what the capitalist world economy allows” and so “equity markets, bond yields and FX markets are now the key market levers”, not the profitability of capital in the non-financial sectors.  That’s because the large tech corporations are really financial companies and use their financial power to appropriate more surplus value than they generate from production.  But that also means there is less profit available for productive investment.

In my view, Tony’s thesis suggests that capitalism has changed to the point that it is no longer the capitalism of Volume One.  This seems to me to destroy the relevance of Marx’s value theory in understanding the laws of motion of capitalism.  For me, stock and bond market prices reflect the vicissitudes of fictitious capital (speculative capital), but because this capital is fictitious, it will collapse when the productive sectors collapse with insufficient profits- and that is Marx’s point (and also the point of Carchedi’s paper – see my part one post,

So, far from stock prices being the best measure of capitalist health, surely they usually reflect speculative bubbles in assets that are eventually revealed to have no or less value?  For example, currently stock market prices are daily registering new highs and yet economic growth remains low and investment in productive capital flat.  It is not that Marx’s law of value should give way to stock prices, but that fictitious capital will eventually give way to value.  Maybe Tony meant that Marxists should take into the account the huge increase in fictitious capital and its impact of profitability.  If so, then some authors, including myself, have done so by either adding in financial assets to productive assets as part of the net worth of corporations (Debt matters) or by deducting fictitious profits from total profits.

The final sessions of the symposium covered the future of capital and the future of labour in 21st century capitalism.  Alex Callinicos author of Deciphering Capital: Marx’s Capital and Its Destiny reminded us that the current debate over the relevance of Marx’s law of the tendency of the rate of profit to fall started among Marxists just as soon as the publication of Volume 3 of Capital.  For example, there was a debate over its relevance between Benedetto Croce and Antonio Gramsci, with the latter defending the law. Hannah Holleman in her contribution brought to our attention the big new contradiction in capitalist accumulation that Marx had only noted in Capital: the destruction and pollution of the planet by the rapacious drive for profit, which has now culminated in global warming and climate change, possibly irreversibly.

Eduardo Motta Albuquerque of the Federal University of Minas Gerais, Belo Horizonte Brazil showed that Marx in Volume One also paid close attention to technological developments in 19th century capitalism as a guide to new waves of development (Albuquerque Marx Technology Divide).  Machines in England led to the destruction of Indian industry; with industries at the centre of imperialism and agriculture at the periphery.  The expansion of rail transport was accompanied by the global expansion of capital and the tentacles of imperialism.  “In sum: each technological revolution can reshape the international division of labour”. So what will be those new “starting points” in the 21st century?

And Fred Moseley, a longstanding Marxist economist and author of the recent book Money and Totality, updated his view of the relevance of the rate of profit for the future of US capitalism.  Fred argued that a key element for the growth of profitability was the relation between productive and unproductive labour, the latter being that part of labour not generating value or surplus value but only appropriating some of it.  These sectors were finance, government and other non-productive industries, but also supervisory and management workers in productive sectors.

The increasing appropriation of surplus value by these sectors sounds the death knell of economic resurgence by the US economy as it restricts profit for productive investment. Only a destruction of capital in these sectors could release more value for productive investment (Moseley PP).  For more on this, see the excellent new paper by Lefteris Tsoulfidis and Dimitris Paitaridis (MPRA_paper_81542).

The final Wednesday afternoon session at the Capital.150 symposium in London considered what would happen to labour in modern capitalism and how Marx envisaged society and labour would change under communism, Tithi Bhattacharya looked at the nature of modern labour in “Social reproduction theory: conceiving capital as social relation”. This produced a vigorous debate on whether social reproduction theory (SRT), around the issues of the exploitation of women at home and capitalist pressures on working class families, was a useful addition to Marx’s labour power theory in Volume One or not.

Lucia Pradella from King’s College looked at the impact of imperialism and migration on the power of labour and workers’ struggles.  Imperialism has created new disasters on world labour and a massive increase in the migration from the poorer to richer areas.  But just as in the 19th century with the migration of Irish people to work in British cities, that produced dangerous prejudices and divisions, it also opened up positive opportunities for global solidarity – something Marx also strived for in his day between English and Irish immigrant workers. Beverly Silver from John Hopkins University considered Marx’s general law of capital accumulation and the making and remaking of the global reserve army of labour. 

Finally, top Marxist scholar, Michael Heinrich analysed the nature of Communism as expounded in Marx’s Capital and other works.  His was a powerful account of the fundamental basis of a Communist society: ‘from each according to his/her abilities; to each according to their need’.  Can this ever be achieved in the 21st century?  Michael tolds us the story of somebody visiting Marx at his home in his later years.  He asked Marx, in effect, ‘what must we do?’  Marx paused before replying and then said just one word: “Struggle!”.

Capital.150 part two: the economic reason for madness

September 23, 2017

The evening session of the first day of Capital.150 was about how the class struggle would ‘map out’ in the 21st century.  Was Marx’s Capital still relevant in explaining where the hotspots for class battles would be concentrated?

Professor David Harvey made the first contribution.  David Harvey (DH) is probably the most well-known Marxist scholar in the world.  A renowned academic geographer with many awards, DH has become the leading expert on Marx’s Capital and its modern relevance through many books and presentations.  His website contains lectures on each chapter of Marx’s Capital and youtube is full of his presentations.

At this session, he presented his view of how class struggle, or ‘anti-capitalist’ struggle as he preferred to call it, is to be found in modern capitalism.  A video of this session will soon be available but you can get the gist of what DH said from previous video presentations – the latest of which is here (his recent LSE lecture) or here on his website.  DH’s thesis is also expounded in his latest book, Marx, Capital and the madness of economic reason.

DH started with saying that capital is ‘value in motion’ – and it is a circuit of capital starting with money, then going into the production of surplus value; and then, just as important, onto the realisation of that value through sale on the market (circulation); and then onto the distribution of that realised value between sections of capitalists (industrial, landlords and finance) and to workers in wages, taxes to government.

DH likens this circuit to the geographical circuit of the planet’s water cycle – from atmosphere to sea to land and back.  But the circuit of capital is not a simple cycle like that, but a spiral. It must continually accumulate and circulate and distribute ever more or it will reverse into a ‘bad infinity’ (to use a Hegelian term), spiralling down.

DH’s argues that Volume One of Capital only deals with the production part of the circuit (the production of value and surplus value).  Volume Two deals with the realisation and circulation of capital between sectors in its reproduction, while Volume 3 deals with the distribution of that value.  And while Marx gives a great analysis of the production part, his later volumes are not complete and have been scratched together by Engels.  And thus Marx’s analysis falls short of explaining developments in modern capitalism.

You see, as DH put at his LSE lecture, production is “just a small sliver of value in motion”.  The more crucial points of breakdown and class struggle are now to be found outside the traditional battle between workers and capitalists in the workplace or point of production.  Yes, that still goes on but the class struggle is much more to be found in battles in the sphere of circulation (here I think DH means, for example, consumers fighting price-gouging by greedy pharma companies, the manipulation of people’s ‘wants, needs and desires’ in what they buy and think they need); and in distribution in battles over unaffordable rents with landlords or unrepayable debts like Greece or student debt.  These are the new and more important areas of ‘anti-capitalist’ struggle outside the remit of Volume One of Capital.  They are in communities and streets and not in the workplace. To quote DH again, the big fights are elsewhere “from the process of production”.

There are two things here: first, the theoretical and empirical basis for DH’s conclusions; and second, whether class struggle is now to be found (mainly) outside the confines of Volume One.

DH provides a theoretical base to his class struggle thesis by arguing that crises under capitalism are at least as likely, if not more so, to be found in a breakdown in circulation or realisation (as DH claims Marx argued in Volume 2) than in the production of surplus value.  And crises are more likely now to happen in finance and over debt due to financialisation (from Volume 3).

Well, as Carchedi showed in his paper (see my post Part One), behind financial crises lies the crises in the production of surplus value, to be found in Marx’s law of general accumulation (from Volume One) and his law of the tendency of the rate of profit to fall (this law is actually found in Volume 3 – thus disputing DH’s claim that Volume 3 is all about ‘distribution’).

In my view, Volumes One, Two and Three link together to give us a theory of crises under capitalism based on the drive for profit and the accumulation of surplus value in capital which falls apart at regular and recurring intervals because of the operation of Marx’s la of profitability. As Paul Mattick Snr put it back in the 1970s, “Although it first appears in the process of circulation, the real crisis cannot be understood as a problem of circulation or of realisation, but only as a disruption of the process of reproduction as a whole, which is constituted by production and circulation together. And, as the process of reproduction depends on the accumulation of capital, and therefore on the mass of surplus value that makes accumulation possible, it is within the sphere of production that the decisive factors (though not the only factors) of the passage from the possibility of crisis to an actual crisis are to be found … The crisis characteristic of capital thus originates neither in production nor in circulation taken separately, but in the difficulties that arise from the tendency of the profit rate to fall inherent in accumulation and governed by the law of value.”[i]

When you put it like that, two weaknesses spring out from DH’s schema.  First, he makes no mention of the Marx’s law of the tendency of the rate of profit to fall. He did not mention it in his presentation nor does he in his latest book.  DH has already made it clear why in debates with me and others: he thinks the law is irrelevant and even wrong; and moreover (adopting the view of Michael Heinrich – also at Capital.150 – that Marx actually dropped it himself).  And yet there is the law clearly expressed in Volume 3 and offering a coherent theory of regular and recurrent crises of capital that can be tested (and many scholars have done so).

And that brings me to the second weakness: crises are regular and recurrent but DH’s thesis offers no explanation for this regularity.  Moreover, this regularity can be found going back 150 years since Capital was first published (and even before) without the modern role of finance or the modern manipulation of ‘wants, needs and desires’.  Does this not offer a different explanation from DH’s?

For example, DH wants to tell us that crises occur because wages are squeezed down to the limit, as they have been in the neo-liberal period after the 1970s (thus a realisation of, not a production of, surplus value problem).  But was the first simultaneous slump in post-war capitalism in 1974-5 due to low wages?  On the contrary, most analysts (including Marxists) at the time argued that wages were ‘squeezing’ profits and that caused the slump.  And most Marxists agree that this was a profitability crisis, as was the ensuing slump in 1980-2.  And moreover, I have shown that when ‘social wages’ (benefits etc) are taken into account, wage share in the neo-liberal period did not fall that much, at least until the early 2000s.

Carchedi’s paper shows too that slumps have never been a result of a realisation problem (wages and government spending were always rising before each (recurrent) slump in the post-war period, including the Great Recession in 2008-9.  The credit crunch and the euro debt crisis were the result of falling profitability and the switch to financial assets to raise profits, eventually leading to a financial crisis – and thus were the consequence of a crisis in the profitability of production not in its distribution.

DH reckoned capitalism worked well in the 1950s because wages were high and unions strong, presumably creating effective demand.  The alternative scenario is that capitalism had a golden age because profitability was high after the war and capital could thus make concessions to maintain production and accumulation.  When profitability started to fall in most of the major economies after the mid-1960s, the class battle intensified (in the workplace) and, after the defeat of labour, we entered the neo-liberal period.

That brings me to my paper, as I was the other contributor in this session (Capital.150 presentation).  Here I argued that the production of surplus value and the accumulation of capital remain central to Marx’s explanation of capitalism and its contradictions that lead to recurrent crises.  As Marx put it: “The profit of the capitalist class has to exist before it can be distributed.”  It is not “a small sliver of value in motion” but the largest, both conceptually for Marx and also quantitatively, because in any capitalist economy, 80% of gross output is made up of means of production and intermediate goods compared to consumption.

As Engels explained, Marx’s great discovery was the existence of surplus value as the specific driver of the capitalist accumulation and labour’s immiseration.  For Marx, the production of surplus-value comes first and is logically paramount, before circulation and distribution.  Production and circulation are not considered by Marx as having the same explanatory power in the analysis of capitalism. Marx is clear that production is more fundamental than circulation.  As Marx says, it is the production of surplus value that is the defining character of the capitalist mode of production, not how that surplus value it is circulated or distributed at the surface level.

In Volume One, Marx shows that the accumulation of capital takes the form of expanding investment in the means of production and technology while regularly shedding labour into a reserve army and thus keeping the labour content of value to a minimum.  This leads to a rising organic composition of capital (the value of means of production rises relative to the value of labour power).  But that very rise creates a tendency for the profitability of capital to fall over time, because value is only created by labour power.

Over history, the rate of profit in capitalism should therefore fall (despite counteracting factors).  This fall will periodically lead to slumps in production and slumps will devalue and destroy capital and thus revive profitability for a while.  Thus we have recurrent and regular cycles of boom and slump. But there is no permanent escape for capital.  The capitalist mode of production is transient because it cannot escape from the inexorable decline in profitability due to the increasingly difficult task of producing enough surplus value.

In this sense, Capital is not so much about the ‘madness of economic reason’ but about the ‘economic reason for madness’.

In my paper, I concentrated on Britain in the 150 years after Marx published Capital.  I showed from Bank of England statistics how the overall rate of profit of British capital has fallen – not in a straight line because there were periods when the counteracting factors (a rising rate of surplus value and falling cost of technology) operated against the general tendency.

Indeed, these periods, in my view, provide crucial indicators for mapping out the intensity of the class struggle.  I found, using the profitability data with the strikes data available for Britain, that whenever profitability was falling in a period when the labour movement was strong and confident then the class struggles (measured in the number of strikes) reached peaks.  This was the case in Britain both prior and just after the First World War and again in the 1970s.

However, when the labour movement was defeated and weak and profitability was rising (partly as a result), as in the neo-liberal period; or when profitability was falling or low in the depressions of the 1930s and now, then the class struggle in the workplace was low too.  In ‘recovery’ periods when profitability picked from lows and unions reformed (1890s and 1950s), strikes were also low but gradually rose.

Thus class struggle in the workplace was at its height when capitalist profitability started falling, but the labour movement was strong after a period of recovery.  Then the best objective conditions for revolutionary change were in place.

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

But none of these iniquities of capitalism can be ended without control of the means of production by working people and the ending of the capitalist mode of production (namely, production for profit of the few not the need of the many).  And the working-class as a working class, not workers as consumers or debtors, remains the agency of change from capitalism to socialism.  The working class (by any definition) remains the largest social force in society and globally (even defined narrowly as industrial) it has never been larger – way larger than when Marx published Capital.

‘Accumulation by dispossession’ (Accumulation by dispossession) or ‘profit from alienation’ i.e. cheating, fraud, price gouging; speculation against currencies etc, that DH puts forward as the main driver of class struggle now, has existed in many class societies before capitalism, and is thus part of capitalism too. But Marx’s Capital makes it clear that the heart of the class struggle under capitalism is the battle over the production of value, unique to capital.  What happens to value is key and, in this sense, the health of any capitalist economy can be measured by the level and direction of the profitability of capital.

Capitalism has an irreversible contradiction in its ability to extract enough surplus value that brings capitalism into recurrent crises.  These cannot be resolved by higher wages, more government spending or more state regulation of finance, as alternative economic theories argue.  DH told us in the session that capitalism was saved in 2008 by Keynesian-type government spending measures in China.  China ran up huge debts to do this and then had to export excess money capital abroad.  This thesis suggests that Keynesian policies might work to avoid slumps (at least for a while) and thus there may be method in this madness of economic reason.  I don’t agree and I explain why in my paper.  I’ll deal with China in a future post, but in the meantime you can read what I had to say on China here.

[i] Economic Crisis and Crisis Theory. Paul Mattick 1974,

Capital.150 part one: measuring the past to gauge the future

September 21, 2017

About 230 people attended the Capital.150 symposium that I, along with Kings College lecturers Alex Callinicos and Lucia Pradella, dreamed up some time earlier this year.  The aim was to discuss the modern relevance of Marx’s Capital, published for the first time in September 1867.

Of course, this was not an original idea and there have been several such conferences around the world on this theme already. But Capital.150 did manage to attract some leading Marxist scholars to present papers and the initial feedback from those attending seems to be that the speakers’contributions were good, but that there was not enough time for discussion from the floor.  I agree, especially as those attending knew what they were talking about when it comes to Marx and Capital. The lesson for any future such events (if ever!) is: less speakers, less sessions and more time in each.

The symposium kicked off on the first day with papers on Marx’s theory of crises and its application to modern capitalism.  Guglielmo Carchedi delivered a long paper for the symposium but was ill (Carchedi The old and the new).  So I was forced to present it as best I could.

Carchedi argued that we could measure the exhaustion of post-1945 capitalism in the increasing number of financial crises and slumps as the 20th century ended.  He did so by identifying indicators that could reveal why and when slumps took place.

Carchedi based his analysis on Marx’s law of the tendency of the rate of profit to fall as the underlying driver of regular and recurrent slumps in capitalist production. He used data from the US economy to show that if you stripped out the effect of any rise in the rate of exploitation in the US corporate sector (CE-ARP), there was a clear secular decline in the rate of profit from 1945 to now, running inversely with the rise in organic composition of capital.  Even if you relaxed the condition of an unchanged rate of exploitation (VE-ARP), the average rate of profit in the US economy still fluctuated around a secular fall.

Carchedi also showed that the three major countertendencies to Marx’s tendential law of falling profitability: namely a rising rate of surplus value; a falling cost of means of production and technology cheapening constant capital; and in the neo-liberal era, a shift from productive to financial investment to boost profitability, did not succeed in reversing Marx’s law. The tendency overcame the countertendencies in post-war US.

Now this result is nothing new, as many scholars have found a similar result.  But what was new in Carchedi’s paper was that he identified some extra tendential forces driving down profitability AND key indicators for when crises actually occur.

The secondary tendential factors, as Carchedi called them, were: steadily falling employment relative to overall investment: and steadily falling new value as a share of total value.  It is these factors that demonstrate the progressive exhaustion of capitalism in its present phase – according to Carchedi.

Going further, Carchedi identified three indicators for when crises occur: when the change in profitability (CE-ARP), employment and new value are all negative at the same time.  Whenever that happened (12 times), it coincided with a crisis or slump in production in the US.  This is a very useful indicator – for example, it is not happening in 2017 in the US, where employment is rising and so is new value (just).  So, on the Carchedi gauge, a slump is not imminent.

The other great innovation in Carchedi’s new paper is to show that financial crises were the product of a crisis of profitability in the productive sectors, not vice versa as the ‘financialisation’ theorists claim.  He shows that financial crises occur when financial profits fall, but more important, they must also coincide with a fall in productive sector profits.

As Carchedi points out, “the first 30 years of post WW2 Us capitalist development were free from financial crises”.  Only when profitability in the productive sector fell in the 1970s, was there a migration of capital to the financial unproductive sphere that during the neo-liberal period delivered more financial crises.  “The deterioration of the productive sector in the pre-crisis years is thus the common cause of both financial and non-financial crises… it follows that the productive sector determines the financial sector, contrary to the financialisation thesis.”

Carchedi goes on to show that it was not the lack of wage demand that caused crises or the failure to boost government spending as the Keynesians argue – of the 12 post-war crises, eleven were preceded by rising wages and rising government spending!

Thus Carchedi concludes that Marx’s law of profitability remains the best explanation of crises under capitalism and its secular fall, particularly in the productive sector, reveals that capitalism is exhausting its productive potential.  It will require a major destruction of capital values, as in WW2, to change this.  What happens after that is an open question.  As he puts it in the title of his paper, taken from a Gramsci quote, The old is dying but the new cannot be born – and to rephrase: what will the new be?

Now I have dwelt on Carchedi’s paper in some depth because I think it has much to tell us with lots of evidence to back up Marx’s contribution to an understanding of crises in modern capitalism – and also because it hardly got a mention from the discussant in this session, Professor Ben Fine from SOAS.  Although Ben said he did ‘agree with’ Marx’s law of the tendency of the rate of profit to fall, he ignored the relevance of Carchedi’s paper because he reckoned the modern ‘structure of capital’ had changed so much through ‘financialisation’.  Ben did not have any time to explain what he meant, but presumably the changing financial structure of capitalism has made Marx’s law of profitability irrelevant to crises.

The other participant in this session was Paul Mattick Jnr who also had nothing to say on Carchedi’s paper, but for a different reason (Mattick Abstraction and Crisis).  For Paul, even trying to estimate the rate of profit a la Marx is impossible and unnecessary.  It is impossible because Marxian categories are in value terms and modern bourgeois national accounts do not allow us to delineate measures of value to test Marx’s law.  And it is unnecessary because the mere facts of regular financial crises and slumps in capitalist production show that Marx was right.  In Capital, Marx provides us with abstractions that enables us to explain the concrete reality of crises.  We can still describe these crises, but we cannot and don’t need to try to ‘test’ Marx’s laws in some pseudo natural science way with distorted bourgeois data.

Now Paul has presented this view on Marxist scientific analysis before, when he was discussant at Left Forum in New York on a critique of my book, The Long Depression, and he is soon to publish a new book on the subject.  As I replied then, “Using general events or trends to ‘illustrate’ the validity of a law can help.  But that is not enough.  To justify Marx’s law of profitability, I reckon we need to go further scientifically.  That means measuring profitability and connecting it causally with business investment and growth and slumps. Then we can even make predictions or forecasts of future crises.  And only then can other theories be dismissed by using a body of empirical evidence that backs Marx’s law.”  This may be difficult but not impossible.  Moreover, it is necessary.  Otherwise, alternative theories to Marx’s theory will continue to claim validity and hold sway.  And that is bad news because these alternative theories deliver policies that look to ‘manage’ or ‘correct’ capitalism rather than replace it. So they will not work in the interests of the majority (the working class) and will instead perpetuate the iniquities and horrors of capitalism.

Moreover, I think that was Marx’s view to test things empirically, at least according to the evidence shown by Rolf Hecker in another paper in this session (Hecker 1857-8 Crisis).  Rolf is a top scholar on Marx’s original writings and notebooks.  And in looking at Marx’s analysis of the 1857-8 general economic crisis, he found that Marx compiled detailed data (a la excel) on credit, interest rates and production (Hecker Crisis PP) in the search for empirical indicators of the direction and depth of the 1857 crisis.

Rolf reproduced Marx’s work in modern graphic form.

Apparently, Marx did not think it a waste of time to do empirical testing of his theories.  And now we have a great advantage over Marx.  We can stand on his shoulders and use the last 150 years of crises and data to test Marx’s laws against reality.  Carchedi’s paper adds further explanatory power to that task.

And so did other papers at Capital.150.  But more on that in part two of my review of the symposium.

Towards a world rate of profit – again

September 9, 2017

Back in 2012, I was inspired by the work of David Zachariah on measuring national rates of profit in a consistent comparative manner using data from the Extended Penn World Tables.  These tables were compiled by Adalmir Marquetti who extended data from the Penn World Tables to allow Marxist economists to make more useful estimates of the level and movement in the rate of profit for many countries covering the period from the early 1960s to the point of the Great Recession of 2008-9.

Picking up on this database, I went further than Zachariah who showed rates of profit for individual countries and I compiled a weighted measure of the rate of profit for the top seven capitalist economies (G7) and also the so-called BRIC economies (Brazil, India, Russia and China) in order to compute a ‘world rate of profit’.

The concept of a ‘world rate of profit’ in Marxian terms is open to dispute.  But as we approach the 150th anniversary of the publication of the first Volume of Marx’s Capital (a work that will be analysed by top Marxist scholars at a symposium that I have organised in conjunction with Kings College, London), it is important to realise that Marx always looked upon the capitalist mode of production as a world system, even though any concrete analysis had to be based on national economies, in particular, Britain as the leading capitalist economy of Marx’s time.

Most measures of profitability on Marxian categories tend to be confined to the US, the still leading capitalist economy of the 21st century, or on individual capitalist states.  In our upcoming book, World in Crisis, G Carchedi and I have brought together studies by young Marxist economists from around the globe to show the movement of rates of profit in many countries in the last 50-100 years.  They provide in-depth empirical analyses and confirm the validity of Marx’s law of profitability.

But Marx had a world view of capitalism as one system and over the last 150 years that has proved to be correct as Capital has established itself as the dominant mode of production globally to the almost total exclusion of other earlier modes of production (slavery, absolutism, feudalism etc).  So the concept of a world rate of profit becomes more credible – even though national barriers on trade, capital flows and labour remain in place, so distorting the tendency for the equalisation of profit rates across borders into one.

Back in 2012, I went ahead with the concept of a world rate of profit by simply weighting an average rate for the G7 and BRICs. I updated this work in 2015 (Revisiting a world rate of profit June 2015) by using other sources, in particular, the EU’s AMECO database, the ground-breaking work of Esteban Maito who looked at 14 major capitalist economies in working out a world rate; and also the Penn World Tables themselves.

By comparing all four sources, I found that “it is confirmed that the world rate of profit has been in secular decline in the post-war period” but “Marx’s law of the tendency of the rate of profit to fall does not imply that the rate of profit will fall in a straight line over time. Counteracting factors come into play that for a period of time can overcome the tendency.”  My results show that this was the case between the mid-1970s or early up to the late 1990s or early 2000s (depending on the measure). The neoliberal period of recovery in profitability did take place, but it came to an end well before the Great Recession. World profitability was falling by the early to mid-2000s on most measures.

Most important, the results showed that “the changes in the rate of profit in the post-war period follow Marx’s law, namely that the secular decline was accompanied by a rise in the organic composition of capital that outstripped any rise in the rate of surplus value achieved by capitalists, at least in the G7 economies. Profitability rose in the neo-liberal period because the counteracting factor of a rising rate of exploitation dominated”.

Now a new paper has been published by Ivan Trofimov of the Kolej Yayasan Saad Business School, Malaysia in the PSL Quarterly Review of June 2017 called Profit rates in developed capitalist countries: a time series investigation.  (Trofimov on profit rates). As Trofimov says, his paper “revisits the hypothesis of the secular decline in profit rates (the tendency of profit rates to decline in the long-run) that has been recurrent in classical economics and attempts to validate empirically whether profit rates in developed economies have declined in recent decades”.

Trofimov uses the Extended Penn World Tables as Zachariah and I have done and looks at 21 countries over the 40-year period from the early 1960s.  As Zachariah and I also argued, Trofimov points out the value of this data series.  “The use of a broader sample and of a sufficiently long series is advantageous; it allows examining secular tendencies in profit rates beyond cyclical fluctuations; it helps us trace structural and policy changes that took place over the recent decades in the developed economies”.

Yes, there is a problem with the Penn data.  Given the nature of national accounts (no differentiation between productive and unproductive activities and the inclusion of government sector and residential capital), “such a methodological choice may be problematic, as far as a possible interpretation of empirical results from a Marxist political economy perspective”.  But this is compensated for by the coherence and consistency of results. Trofimov also contributes extra value to his study by using “a battery of econometric tests” to support with some degree of significance the direction and movement of various national rates of profit.

What does Trofimov find?  Well as he puts it, “visual observation suggests that over the study period (1964 to late 2000s) profit rates were likely to exhibit downward trends in Austria, Canada, Japan, Portugal, Spain, Switzerland and USA. Upward trends were likely in Luxembourg and Norway. In other economies either there was no distinct trend, or trend reversals and random walk behaviour were likely.”

And “visual inspection of this figure also suggests two distinct patterns for profit rates in most economies – decline until the mid or late 1970s, followed by partial or complete reversal.”  In other words, Trofimov confirms what most studies of individual national accounts have found for the movement in the ‘Marxian’ rate of profit in the US and many other leading capitalist economies.

However, Trofimov points out that visual evidence (looking at a graph) can be misleading about whether a rise or fall in the rate of profit has taken place over time.  And when he applies a range of statistical tests, he concluded that “there is no firm evidence supporting the hypothesis of secular decline in economy-wide profit rates in all developed economies. Instead, a diverse pattern of movements in the profit rates has been identified, including upward or downward deterministic trends, staggered declines, random walk, or stability and reversion to the mean.”

That sounds bad news for the generally accepted view that the profitability of capital in most major economies was lower in 2009 than in 1964.  Yet Trofimov does say that “statistically significant positive trend coefficients were, however, only present for Greece (at 10% significance level), the Netherlands and Norway (at a 5% level). A negative trend was observed in 10 cases (Australia, Austria, Canada, Denmark, France, Japan, Portugal, Spain, Switzerland, and the USA). A statistically significant negative trend coefficient was present for Canada, Portugal, Switzerland and the USA (at a 5% significance level).” 

Thus nearly all the major economies had lower profitability in 2009 compared to 1964 and the only ones that did not were smaller economies like Luxembourg or Norway or Greece.  The tiny tax haven financial centre of Luxembourg is not hard to consider as an exception to Marx’s law and, as Trofimov says, for Greece and Norway, “In the first case this could be attributed to the rapid transformation of the economy in the 1960-1980s from a relatively low level; in the second case, the increase in economy-wide profit could have been boosted by the growth of the oil sector.”

Actually, I find the result for Greece puzzling.  Works done by Greek Marxist economists do not find this overall rise in Greek profitability over the whole period and Trofimov’s own graph for Greece does not visually show that.  In our upcoming World in Crisis book, Maniatis and Passas find the Greek rate of profit was lower in the early 21st century than in the 1960s, even though there was strong rise in the 1980s.

Of course, their measure uses different categories than Trofimov.  And, as Trofimov explains, “There is no perfect correspondence between national accounts and Marxian variables (e.g. constant and variable capital, and surplus value).”

Nevertheless, in the case of the US, comparing the results from the Extended Penn tables and those from the US national accounts (work done by me previously), there seems to be a close correspondence.  There is the well-established profitability crisis from the mid-1960s to the early 1980s; then a period of recovery in the neo-liberal period up to 1997 and then a new period of profitability decline culminating in the Great Recession.

While the US may be the most important capitalist economy, what was the trend across all the major economies?  Is Trofimov correct to conclude that “overall, the behavior of profit rates has proven to be rather diverse, therefore it is unlikely that “universal profit rates’ laws” hold, or that only one hypothesis is correct.”?

Well, I went back to the Extended Penn Tables and redid my weighted average rate of profit for the G7 economies.  Trofimov’s definition of the rate of profit from the tables is:

Y-Nw-D/K; where Y is the chain index of real GDP in 2005 purchasing power parity (PPP), K is the net fixed standardised capital stock in 2005 PPP, D is the estimated depreciation from K, w is the average real wage in 2005 PPP, and N is the number of employed workers.

I followed the same formula except that in the denominator I added in variable capital (Nw) to match Marx’s formula exactly, s/c+v.  Was this correct?  It remains a matter of debate (see here Measuring variable capital and turnover for the rate of profit).

After weighting the data by GDP, I came up with a rate of profit for the G7 from 1964-2009 as follows (my data and workings are available on request).

Now I took liberties with the data for Germany which were not available before 1984, given the division of Germany into west and east up to 1989.  But my assumptions for the data for the period 1964-84 were realistic, in my view.

What my results show is that the G7 rate of profit fell secularly from 1964 to 2007 – as in all other studies; the fall mainly took place in the 1970s – as in the US; there was a recovery of modest proportions during the neo-liberal period from the early 1980s which peaked in the late 1990s – again as in the US.  The subsequent recovery after the recession of 2001 gave way eventually to a steep fall in the Great Recession of 2008-9.  These results confirm my original results of 2012 and 2015.

In order to get closer to a ‘world rate of profit’, the emerging economies must be added to the G7 result.  I shall show that in a future post.  And don’t forget the work of Esteban Maito (

Clearly further research is necessary to get closer to a ‘Marxian’ rate of profit, as Trofimov points out, “These issues call for the need to construct “Marxian national accounts” prior to the analysis of profit rates in the Marxian formulation.  First of all, given that a large part of economic activity in developed economies is unproductive according to the Marxist formulation, the overall level of profit rate is likely to be overestimated. Secondly, unproductive activities, typically embodied in the services, tended to rise over the past decades, meaning that estimated falls in profit rates might become more drastic, and certain estimated increases might become less substantial.”

Yes, the next task is to develop a world rate of profit measure based on productive capital – over to Hercules.

Productivity, profit and market power

September 5, 2017

Going the rounds among mainstream economists in the US are new explanations for the slowdown in productivity growth and innovation especially since the beginning of the 21st century and also why labour’s share in national income has been in long-term decline since the early 1980s.

In a new paper,   The Rise of Market Power and the Macroeconomic Implications, Jan De Loecker and Jan Eeckhout (DE) argue that the markup of price over marginal cost charged by public US firms has been rising steadily since 1960, and in particular after 1980.  The paper suggests that that the decline of both the labor and capital shares, as well as the decline in low-skilled wages and other economic trends, have been aided by a significant increase in markups and market power – in other words the rise of monopoly capital in the form of ‘super-star’ companies like Apple, Amazon, Google etc that now dominate sales, profits and production and where the utilisation of labour is low compared to other companies and industries.  These monopolies won’t invest because they don’t need to compete, and so productivity growth slows.

This is a counter-explanation to the current dominant explanations for the perceived decline in labour’s share, namely, globalization (American workers are losing out to their counterparts in places like China and India) and automation (American workers are losing out to robots) and inverse rise in the share going to profits.  Now various mainstream economists are arguing that this rise is not due to globalisation or automation but due to higher markups in prices from companies that control their markets monopolistically.  In other words, they are making extra profit over and above ‘normal competitive costs’.  De Loecker and Eeckhout find that between 1950 and 1980, markups were more or less stable at around 20 percent above ‘marginal cost’, and even slightly decreased from 1960 onward. Since 1980, however, markups have increased significantly: on average, firms charged 67 percent over marginal cost in 2014, compared with 18 percent in 1980.

Evolution of average markups (1960 – 2014). Average markup is weighted by market share of sales in the sample. Source: De Loecker and Eeckhout (2017)

So the enormous increase in profits over the past 35 years, they argue, is consistent with an increase in market power. “In perfect competition, your costs and total sales are identical, because there’s no difference between price and marginal costs. The extent to which these two numbers—the sales-to-wage bill and total-costs-to-wage bill—start differing is going to be immediately indicative of the market power,” says De Loecker.  “Most of the action happens within industries, where we see the big guys getting bigger and their markups increase,” De Loecker explains.

In another paper, a group of mainstream economists considered a ‘superstar firm’ explanation for the fall in labour share of GDP.  The hypothesis is that technology or market conditions—or their interaction—have evolved to increasingly concentrate sales among firms with superior products or higher productivity, thereby enabling the most successful firms to control a larger market share. Because these superstar firms are more profitable, they will have a smaller share of labour income in total sales or value-added. Consequently, the aggregate share of labour falls as the weight of superstar firms in the economy grows. They found that the concentration of sales (and of employment) has indeed risen from 1982 to 2012 in each of the six major sectors covered by the US economic census. And those industries where concentration rises the most have seen the sharpest falls in the labour share, so that the fall in the labour share is mainly due to a reallocation of labour toward firms with lower (and declining) labour shares, rather than due to declining labour shares within most firms.

It’s certainly true that accumulation of capital will take 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. And Marx’s prediction of increased concentration and centralisation of capital as a long-term law of capitalist development finds further confirmation in a new study of US publicly quoted companies.  Kathleen Kahle and Rene Stulz find 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.

Why is this happening? According to this study, it is the drive for new technology to lower costs, as Marx argued before. Research and development has become increasingly critical to competitiveness. The bigger and richer the market Goliaths get, the harder it is for the Davids of the US economy—and the need for R&D to compete. Companies drowning in cash can easily afford patents and the investments to develop those. Or, as seems to be happening, to buy the company with the patent.

However, there are two things against the ‘market power’ argument, at least as the sole or main explanation of the rise in profits share and profit per unit of production.  First, as De Loecker and Eeckhout find, economy-wide, it is mainly smaller firms that have the higher markups – hardly an indicator of monopoly power.  And second, labour share did not really fall very much until after 2000 to reach a low in 2014.  Indeed, in 2001 it was at 64%, the same share as in 1951 – although it is true that it had fallen to the low 60%s in the 1980s and 1990s.  But by 2014, labour share in GDP was as low as 60%.

And it’s the same with profits per unit of US national output or corporate value-added.  Profits per unit of gross value added (a measure of new output) in US non-financial companies rose from just 2% in the 1970s to 4-6% in the 1990s.  Bu the real take-off was again from 2000, with profit per unit rising to a peak of near 14% by 2014.

Was the basis of this recent leap in profit share and sharp fall in labour share a product of globalisation, or automation or monopoly power, or is there another explanation?  Well, one mainstream economist, Mordecai Kurz of Stanford University in another paper, On the Formation of Capital and Wealth, has measured what he calls ‘surplus wealth’ being accumulated by large firms.  This he defines as the difference between wealth created (equity and debt) in the form of financial assets and a firms’ actual real fixed assets. This is equivalent to Tobin’s Q measure of the stock market price relative to the real value of corporate capital.  In a Marxist sense, it is really a measure of company’s fictitious capital or profit.

Kurz finds that aggregate ‘surplus wealth’ rose from -$0.59 Trillion in 1974 to $24 Trillion which is 79% of total market value in 2015. The added wealth was created mostly in sectors transformed by IT. Declining or slow-growing firms with broadly distributed ownership have been replaced by IT based firms with highly concentrated ownership. Rising fraction of capital has been financed by debt, reaching 78% in 2015.  Kurz reckons this has been made possible by IT innovations that enable and accelerate the erection of barriers to entry and once erected, IT facilitates maintenance of restraints on competition. These innovations also explain rising size of firms.  Measuring monopoly power from this ‘surplus wealth’, Kurz reckons it rose from zero in the early 1980s to 23% in 2015.

Now Kurz and the other mainstream papers may well be right that, in the neo-liberal era, monopoly power of the new technology megalith companies drove up profit margins or markups.  The neo-liberal era saw a driving down of labour’s share through the ending of trade union power, deregulation and privatisation.  Also, labour’s share was held down by increased automation (and manufacturing employment plummeted) and by globalisation as industry and jobs shifted to so-called emerging economies with cheap labour.  And the rise of new technology companies that could dominate their markets and drive out competitors, increasing concentration of capital, is undoubtedly another factor.

But another compelling explanation is that the rise in corporate profits was increasingly fictitious, based on rising stock and bond market prices and low interest rates.  The rise of fictitious capital and profits seems to be the key factor after the end of boom and bust in 2000.  Thereafter, profits came increasingly from finance and property, not technology. If that is right, then it helps to explain why the biggest slowdown in productivity growth in the US began after 2000, as investment in productive sectors and activity dropped off.

And if that is right, then the recent fall back in profit share and modest rise in labour share since 2014, suggests that it is a fall in the overall profitability of US capital that is driving things rather than any change in monopoly ‘market power’.

But that is something mainstream economics never wants to consider.  If profits are high, then it’s ‘monopoly power’ that does it, not the increased exploitation of labour in the capitalist mode of production.  And it’s monopoly power that is keeping investment growth low, not low overall profitability.

Ten years on

August 8, 2017

It’s ten years on to the day since the global financial crash began with the news that the French bank, BNP had suspended its sub-prime mortgage funds because of “an evaporation of liquidity”.

Within six months, credit tightened and inter-bank interest rates rocketed (see graph above).  Banks across the globe began to experience huge losses on the derivative funds that they had set up to profit from the housing boom that had taken off in the US, but had started to falter.  And the US and the world entered what was later called The Great Recession, the worst slump in world production and trade since the 1930s.

Ten years later, it is worth reminding ourselves of some of the lessons and implications of that economic earthquake.

First, the official institutions and mainstream economists never saw it coming.  In 2002, the head of the Federal Reserve Bank, Alan Greenspan, then dubbed as the great maestro for apparently engineering a substantial economic boom, announced that ‘financial innovations’ i.e. derivatives of mortgage funds etc, had ‘diversified risk’ so that “shocks to overall economic will be better absorbed and less likely to create cascading failures that could threaten financial stability”.  Ben Bernanke, who eventually presided at the Fed over the global financial crash, remarked in 2004 that “the past two decades had seen a marked reduction in economic volatility” that he dubbed as the Great Moderation. And as late as October 2007, the IMF concluded that “in advanced economies, economic recessions had virtually disappeared in the post-war period”.

Once the depth of the crisis was revealed in 2008, Greenspan told the US Congress, “I am in a state of shocked disbelief”.  He was questioned “in other words, you found that your view of the world , your ideology, was not right, it was not working” (House Oversight Committee Chair, Henry Waxman). “Absolutely, precisely, you know that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well”.

The great mainstream economists were no better.  When asked what caused the Great Recession if it was not a credit bubble that burst, Nobel Prize winner and top Chicago neoclassical economist Eugene Fama responded: “We don’t know what causes recessions. I’m not a macroeconomist, so I don’t feel bad about that. We’ve never known. Debates go on to this day about what caused the Great Depression. Economics is not very good at explaining swings in economic activity… If I could have predicted the crisis, I would have. I don’t see it.  I’d love to know more what causes business cycles.”

Soon to be IMF chief economist, Olivier Blanchard, commented in hindsight that “The financial crisis raises a potentially existential crisis for macroeconomics.” … some fundamental [neoclassical] assumptions are being challenged, for example the clean separation between cycles and trends” or “econometric tools, based on a vision of the world as being stationary around a trend, are being challenged.”

But then most of the so-called heterodox economists, including Marxists, did not see the crash and the ensuing Great Recession coming either.  There were a few exceptions:  Steve Keen, the Australian economist forecast a credit crash based on his theory that “the essential element giving rise to Depression is the accumulation of private debt” and that had never been higher in 2007 in the major economies.  In 2003, Anwar Shaikh reckoned the downturn in the profitability of capital and the downwave in investment was leading to a new depression. And yours truly in 2005  said: “There has not been such a coincidence of cycles since 1991. And this time (unlike 1991), it will be accompanied by the downwave in profitability within the downwave in Kondratiev prices cycle. It is all at the bottom of the hill in 2009-2010! That suggests we can expect a very severe economic slump of a degree not seen since 1980-2 or more”  (The Great Recession).

As for the causes of the global financial crash and the ensuing Great Recession, they have been analysed ad nauseam since.  Mainstream economics did not see the crash coming and were totally perplexed to explain it afterwards. The crash was clearly financial in form: with collapse of banks and other financial institutions and the weapons of mass financial destruction, to use the now famous phrase of Warren Buffett, the world’s most successful stock market investor.  But many fell back on the theory of chance, an event that was one in a billion; ‘a black swan’ as Nassim Taleb claimed.

Alternatively, capitalism was inherently unstable and occasional slumps were unavoidable.  Greenspan took this view: “I know of no form of economic organisation based on the division of labour (he refers to the Smithian view of a capitalist economy), from unfettered laisser-faire to oppressive central planning that has succeeded in achieving both maximum sustainable economic growth and permanent stability.  Central planning certainly failed and I strongly doubt that stability is achievable in capitalist economies, given the always turbulent competitive markets continuously being drawn toward but never quite achieving equilibrium”.  He went on, “unless there is a societal choice to abandon dynamic markets and leverage for some form of central planning, I fear that preventing bubbles will in the end turn out to be infeasible.  Assuaging the aftermath is all we can hope for.”

Most official economic leaders like Blanchard and Bernanke saw only the surface phenomena of the financial crash and concluded that the Great Recession was the result of financial recklessness by unregulated banks or a ‘financial panic’.  This coincided with some heterodox views based on the theories of Hyman Minsky, radical Keynesian economist of the 1980s, that the finance sector was inherently unstable because “the financial system necessary for capitalist vitality and vigour, which translates entrepreneurial animal spirits into effective demand investment, contains the potential for runaway expansion, powered by an investment boom.  Steve Keen, a follower of Minsky put it thus: “capitalism is inherently flawed, being prone to booms, crises and depressions.  This instability, in my view, is due to characteristics that the financial system must possess if it is to be consistent with full-blown capitalism.”   Most Marxists accepted something similar to the Minskyite view, seeing the Great Recession as a result of ‘financialisation’ creating a new form of fragility in capitalism.

Of the mainstream Keynesians, Paul Krugman railed against the neoclassical school’s failings but offered no explanation himself except that it was a ‘technical malfunction’ that needed and could be corrected by restoring ‘effective demand’.  

Very few Marxist economists looked to the original view of Marx on the causes of commercial and financial crashes and ensuing slumps in production.  One such was G Carchedi, who summed that view up in his excellent, but often ignored Behind the Crisis with: ““The basic point is that financial crises are caused by the shrinking productive base of the economy. A point is thus reached at which there has to be a sudden and massive deflation in the financial and speculative sectors. Even though it looks as though the crisis has been generated in these sectors, the ultimate cause resides in the productive sphere and the attendant falling rate of profit in this sphere.”  Agreeing with that explanation, the best book on the crash remains that by Paul Mattick Jnr, Business as usual. 

And indeed, profitability in the productive sectors of the capitalist major economies was low historically in 2007, as several studies have shown.  In the US, profitability peaked in 1997 and the rise in profitability in the credit boom of 2002-6 was overwhelmingly in the financial and property sectors.  This encouraged a huge rise in fictitious capital (stocks and debt) that could not be justifies by sufficient improvement in profits from productive investment.

The mass of profit began to fall in the US in 2006, more than a year before the credit crunch struck in August 2007.  Falling profits meant over-accumulation of capital and thus a sharp cutback in investment.  A slump in production, employment and incomes followed i.e. The Great Recession.

Since the end of that recession in mid-2009, most capitalist economies have experienced a very weak recovery, much weaker than after previous post-war recessions and in some ways even weaker than in the 1930s.  A recent Roosevelt Institute report by JW Mason found that “there is no precedent for the weakness of investment in the current cycle. Nearly ten years later, real investment spending remains less than 10 percent above its 2007 peak. This is slow even relative to the anemic pace of GDP growth, and extremely low by historical standards.”

So the Great Recession became the Long Depression, as I described it, a term also adopted by many others, including Keynesian economists like Paul Krugman and Simon Wren-Lewis.  Why did the Great Recession not lead to a ‘normal’ economic recovery to previous investment and production rates?  The mainstream economists of the monetarist school argue that governments and central banks were slow in cutting interest rates and adopting ‘unconventional’ monetary tools like quantitative easing.  But when they did, such policies appeared to have failed in reviving the economy and merely fuelled a new stock market and debt boom.

The neoclassical school reckons that debt should be cut back as it weighs on the ability of companies to invest while governments ‘crowd out’ credit because of their high levels of borrowing.  This ignored the reason for high government debt, namely the huge cost of bailing out banks globally and the slump in tax revenues from the recession.  In opposition, the Keynesians say the Long Depression was all due to ‘austerity’ ie governments trying to reduce government spending and balance budgets.  But the evidence for that conclusion is not compelling.

What the neoclassical, Keynesian and heterodox views have in common is a denial for any role for profit and profitability in booms and slumps in capitalism!  As a result, none look for an explanation for low investment in low profitability.  And yet the correlation between profit and investment is high and continually confirmed and profitability in most capitalist economies is still lower than in 2007.  

After ten years and a decidedly long, if very weak, economic recovery phase in the ‘business cycle’, are we due for another slump soon?  History would suggest so.  It won’t be triggered by another property slump, in my view.  Real estate prices in most countries have still not recovered to 2007 levels and even though interest rates are low, housing transaction levels are modest.

The new trigger is likely to be in the corporate sector itself.  Corporate debt has continued to rise globally, especially in the so-called emerging economies.  Despite low interest rates, a significant section of weaker companies are barely able to service their debts.  S&P Capital IQ noted that a record stash of $1.84trn in cash held by US non-financial companies masked a $6.6trn debt burden. The concentration of cash of the top 25 holders, representing 1% of companies, now accounts for over half the overall cash pile. That is up from 38% five years ago.  The big talk about the hegemoths like Apple, Microsoft, Amazon having mega cash reserves hides the real picture for most companies. 

Profit margins overall are slipping and in the US non-financial corporate profits have been falling.

And now central banks, starting with the US Federal Reserve, have started to reverse ‘quantitative easing’ and hike policy interest rates.  The cost of borrowing and existing debt servicing will rise, just at a time when profitability is flagging.

That’s a recipe for a new slump – ten years after the last one in 2008?

Profitability and investment again – the AMECO data

July 26, 2017

Recently, Larry Elliott, the economics correspondent of the British liberal newspaper, The Guardian raised again the puzzle of the gap between rising corporate profits and stagnant corporate investment in the major capitalist economies. Elliott put it “The multinational companies that bankroll the WEF’s annual meeting in Davos are awash with cash. Profits are strong. The return on capital is the best it has been for the best part of two decades. Yet investment is weak. Companies would rather save their cash or hand it back to shareholders than put it to work.”

Why was this?  Elliott posed some possibilities: “corporate caution is that businesses think bad times are just around the corner”, but as Elliott pointed out the hoarding of corporate cash was “going on well before Brexit became an issue and it affects all western capitalist countries, not just Britain.”

So he considered other reasons that have been raised before: “cutting-edge companies need less physical capital than they did in the past and more money in the bank unless somebody comes along with a takeover bid” or that “the people running companies are dominated by short-term performance targets and the need to keep shareholders sweet”.

So company managers use the cash to buy back their shares or pay out large dividends rather than invest in new technology. “Shareholder value maximisation has certainly delivered for the top 1%. They own 40% of the US stock market and benefit from the dividend payouts, and the share buybacks that drive prices higher on Wall Street. Those running companies, also members of the 1%, have remuneration packages loaded up with stock options, so they too get richer as the company share price goes up.”

There is some element of truth in all these possible explanations for ‘the gap’ between corporate earnings and investment that opened up in the early 2000s.  But I don’t think that corporate investment is abnormally low relative to cash flow or profits.  The reason for low business investment is simpler: lower profitability relative to the existing capital invested and the perceived likely returns for the majority of corporations.

I have dealt with this issue before in previous posts and in debate with other Marxist economists who deny the role of profitability in directing the level of corporate investment and, ultimately growth in production in the major capitalist economies.

The point is that the mass of profits is not the same as profitability and in most major economies, profitability (as measured against the stock of capital invested) has not returned to the levels seen before the Great Recession or at the end of neoliberal period with the crash in 2000.

And the high leveraging of debt by corporations before the crisis started is acting as a disincentive to invest and/or borrow more to invest, even for companies with sizeable amounts of cash. Corporations have used their cash to pay down debt, buy back their shares and boost share prices, or increase dividends and continue to pay large bonuses (in the financial sector) rather than invest in productive equipment, structures or innovations.

For example, look at the UK’s corporate sector.  Sure the mass of profits in non-financial corporations has jumped from $40bn a quarter in 2000 to £85bn now.  And it may be true that “the return on capital is the best it has been for the best part of two decades”, as Elliott claims.  But it is all relative.  The rate of return on UK capital invested has dropped from a peak of 14% in 1997 to 11.5% now.  Profitability recovered after the Great Recession trough of 9.5% in 2009 but it is still below the peak prior to the crash of 12.3% in 2006.  And UK profitability has stagnated since 2014, prior to Brexit.

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

It’s the same story in the US, where not only is the average profitability of US corporations falling, but so are total profits in the non-financial sector.  Profit margins (profits as a share of non-financial corporate sales) measure the profit gained for each increase in output and these have been falling for some quarters.

And more recently, total profits in non-financial corporations have been contracting.

So again, it is no surprise that business investment is also contracting among US corporations.

I have dealt before with the argument that Elliott offers again that companies are “awash with cash”.

First, it is only a small minority of very large companies like Apple, Amazon, Microsoft etc that have large cash hoards.  The majority of companies do not have such hoards and indeed have increased levels of corporate debt.  And there is a sizeable and growing minority that have profits only sufficient to service their debt interest with none left for expansion and productive investment.  According to the Bank for International Settlements, the share of these ‘zombie’ companies has climbed to over 10%: “the share of zombie firms – whose interest expenses exceed earnings before interest and taxes – has increased significantly despite unusually low levels of interest rates”.

But perhaps the most compelling support for my argument that weak business investment in the major capitalist economies is the result of low profitability is some new evidence that I have gleaned from the EU’s AMECO statistical database. finance/ameco/user/serie/ SelectSerie.cfm

Based on the simple Marxist formula for the rate of profit of capital s/c+v, where s= surplus value and c= constant capital and v= variable capital, I used the following AMECO categories.  s = Net national income (UVNN) less employee compensation (UWCD); c = Net capital stock (OKND) inflated to current prices by (PVGD); v = employee compensation (UWCD).  From these data series, I calculated the rate of profit for each of the major capitalist economies.

Of course, the AMECO categories do not match proper Marxist categories for many reasons.  But they do give cross-comparisons, unlike national statistics.  And my results seem reasonably robust when compared with national data calculations.  For example, when I compared the net rate of return on capital for the US using the AMECO data and Anwar Shaikh’s more ‘Marxist’ measure for the rate of profit in US corporations for 1997-2011, I found similar peaks and troughs and turning points.

The results for profitability in the major capitalist economies, using the AMECO data, confirm that the rate of profit is lower than in 1999 in all economies, except Germany and Japan.  Japan, by the way, still has the lowest rate of profit of all the major economies.  Indeed, the level of the rate of profit is highest in the UK, Italy and an enlarged EU (which includes Sweden and Eastern Europe), while the lowest rate of profit is in the US and Japan.

All countries suffered a severe slump in profitability during the Great Recession, as you might expect.  Then profitability recovered somewhat after 2009. But, with the exception of Japan, all economies have lower rates of profit in 2016 than in 2007, and by some considerable margins.  And in the last two years, profitability has fallen in nearly all economies, including Japan.

The table below shows the percentage change in the level of the rate of profit for different periods.

So the AMECO data show that profitability is still historically low and is now falling. No wonder business investment in productive capital has remained weak since the end of the neo-liberal period (graph below for the US) and now is even falling in some economies.

Capitalism – where Marx was right and wrong

July 17, 2017

Jonathan Portes is a leading mainstream Keynesian economist. Formerly head of the British economic think-tank, the National Institute of Economic and Social Research, he is now senior fellow and professor of Economics and Public Policy, Kings College, London.  Late last year Portes wrote a short book on Capitalism: 50 ideas you really need to know.

Some of the points in that book were repeated up in Portes’ article in the centre-left British journal, The New Statesman, entitled ‘What Marx got right’. This sounds promising from such an eminent mainstream ‘centre-left’ economist.  However, it soon becomes clear that what Marx got right was not much, and mostly he got things wrong – according to Portes.

Portes starts with defining a capitalist. “Are you a capitalist? The first question to ask is: do you own shares? Even if you don’t own any directly (about half of Americans do but the proportion is far lower in most other countries) you may have a pension that is at least partly invested in the stock market; or you’ll have savings in a bank.  So you have some financial wealth: that is, you own capital. Equally, you are probably also a worker, or are dependent directly or indirectly on a worker’s salary; and you’re a consumer. Unless you live in an autonomous, self-sufficient commune – very unusual – you are likely to be a full participant in the capitalist system.”

But for Marx, you are not a capitalist if you do not get your income predominantly from surplus-value (profit or dividends, interest and rent).  And only a very tiny percentage of people of working age do.  Indeed, Marxist economist Simon Mohun has shown that less than 2% of income earners in the US fit that bill.  Nearly 99% of us have to work (sell our labour power) for a living.  Even if some of us get some dividends, or rent, or interest from savings, we cannot live off that alone.  Yes, we workers ‘interact’ in the capitalist system but only through the exploitation of our value-creating (for capital) labour power.  We are not a ‘full participant’ in capitalism, except in that sense.

Portes goes on to tell us that capitalism is constrained by laws and the state on our behalf: “property rights are rarely unconstrained…. This web of rules and constraints, which both defines and restricts property rights, is characteristic of a complex economy and society.

However, the idea that the state just arbitrates between capitalists and between capitalists and workers to ensure a ‘level playing field’ is an illusion.  The state needs to control outright conflict between classes and individuals (over property rights), but its primary role is to deliver the needs of the ruling elite (“the executive committee of the ruling class” – Marx).  In the case of capitalism, that means the interests of capital and the owners of the means of production.

But what did Marx get right?, according to Portes.  “Marx had two fundamental insights. The first was the importance of economic forces in shaping human society. For Marx, it was the “mode of production” – how labour and capital were combined, and under what rules – that explained more or less everything about society, from politics to culture. So, as modes of production change, so too, does society.”

Yes, social relations are determined by the mode of production – although, for Marx, labour and ‘capital’ only exist as real social categories in the capitalist mode of production.  ‘Capital’ is not just the physical means of production or fixed assets, as Portes implies and as mainstream economics thinks. For Marx, it is a specific social relation that reveals the form and content of exploitation of labour under capitalism.

Portes goes on: “The second insight was the dynamic nature of capitalism in its own right. Marx understood that capitalism could not be static: given the pursuit of profit in a competitive economy, there would be constant pressure to increase the capital stock and improve productivity. This in turn would lead to labour-saving, or capital-intensive, technological change.”   Yes, Marx saw capitalism as a dynamic mode of production that would drive up the productivity of labour through a rise in the organic composition of capital, as never seen before (contrary to Piketty’s view that Marx expected productivity to fall to zero) 

But Portes significantly leaves out the other side of the coin of capitalism, namely that, while competition may drive capitalists to invest and boost the productivity of labour, there is a contradiction between the ‘dynamism’ of capitalism and private profit.  A rising organic composition of capital tends to lead to a fall in the profitability of capital. Capitalism is not a permanently ‘progressive mode of production’, as Portes implies, but is flawed and ultimately fails at the door of sustaining profitability.

Portes says that Marx’s critique of capitalism is based on the idea that the wages of labour would be driven to subsistence levels and this is where he waswrong. “Though Marx was correct that competition would lead the owners of capital to invest in productivity-enhancing and labour-saving machinery, he was wrong that this would lead to wages being driven down to subsistence level, as had largely been the case under feudalism. Classical economics, which argued that new, higher-productivity jobs would emerge, and that workers would see their wages rise more or less in line with productivity, got this one right.”

Portes claims that “so far, it seems that increased productivity, increased wages and increased consumption go hand in hand, not only in individual countries but worldwide.”  Really? What about this gap in the advanced economies?

Actually Marx never had a subsistence theory of wages.  On the contrary, he criticised fiercely such a view, as expressed by reactionary ‘classical’ economist Thomas Malthus and socialist Ferdinand Lassalle.  Unfortunately, Portes accepts this common distortion of Marx’s view on the relation between wages and profits.

What Marx said was that wages cannot eat up all productivity, because profits must be made for capital.  But the degree of the distribution between profits and wages is not fixed by some ‘iron law’ but is determined by the class struggle between workers and capitalists.  That is a question of distribution of the value created in production.  But it is in the production of value that Marx finds the key contradiction of the capitalist mode of production: namely between the productivity of labour and the profitability of capital.

Portes says, because Marx got it wrong when he thought wages would be driven to subsistence levels, “in turn, Marx’s most important prediction – that an inevitable conflict between workers and capitalists would lead ultimately to the victory of the former and the end of capitalism – was wrong.”  He goes on to argue that “thanks to increased productivity, workers’ demands in most advanced capitalist economies could be satisfied without the system collapsing.”

Well, the system may not have ‘collapsed’, but it is subject to regular and recurring crises of production, and sometimes long periods of economic depression that sap the incomes, employment and future of billions.  And have “workers demands in most advanced capitalist economies” (Portes leaves out the billions in other economies, just as Keynes did) been “satisfied”?  What about the poverty levels in most advanced economies, what about employment conditions, housing, education and health?  What about huge and increasing levels of inequality of wealth and income in ‘most advanced capitalist economies’, let alone globally?

Portes admits that there was huge inequality “in the late 19th and early 20th centuries”.  However, “not only did this trend stop in the 20th century, it was sharply reversed … after the Second World War the welfare state redistributed income and wealth within the framework of a capitalist economy.”  But this ‘golden era’ of reduced inequality was a short-lived exception, something that the work of Thomas Piketty and others have shown.

Portes knows that after the 1970s inequality rose again but he accepts the argument that “the chief story of the past quarter-century has been the rise of the “middle class”: people in emerging economies who have incomes of up to $5,000 a year.”  Actually, the reduced level of ‘global inequality’ between countries and between income groups is down solely to ending of poverty for 600m people in China.  Exclude China and global inequality of wealth and income is no better, if not worse, than 50 years ago.  Capitalism has not been a success here.

Portes recognises the rise of China and its phenomenal growth.  His explanation for this appears to be some idea of ‘mixed economy’ capitalism where the state plays a role in constraining unregulated capital. “Access to capital still remains largely under state control. Moreover, though its programme is not exactly “Keynesian”, China has used all the tools of macroeconomic management to keep growth high and relatively stable.”  Portes notes that “China is still far from a “normal” capitalist economy.”

For Portes, what is wrong with capitalism is not its failure to eliminate poverty or inequality or meet the basic needs of billions in peace and security, as Marx argued.  No, it is excessive consumption. “Although we are at least twice as rich as we were half a century ago, the urge to consume more seems no less strong…. we strive to “keep up with the Joneses”. But excessive or endemic ‘consumerism’ is not an issue for the billions in the world or even millions in the UK, Europe or the US – it’s the opposite: the lack of consumption, including ‘social goods’ (public services, health, education, pensions, social care etc).

Portes does recognise that capitalism is not harmoniously dynamic and that it has crises.  However, apparently all that is necessary is to regulate the financial sector properly and all will be well. He “would prefer a more wholesale approach to reining in the financial system; this would have gained the approval of Keynes, who thought that while finance was necessary, its role in capitalism should be strictly limited.”  But what if “there is a more fundamental problem: that recurrent crises are baked into the system?”  Then we need to “make sure that we have better contingency plans next time round.”

But is the explanation of crises under capitalism that go back 150 years or more to be found in the lack of regulation of finance?  Marx had more to say on this with his law of profitability and the role of fictitious capital.  And if Marx was right, ‘better contingency plans’ to ‘regulate’ finance will not be (and have not been) enough to avoid more slumps.

Portes finishes by saying that “There is no viable economic alternative to capitalism at the moment but that does not mean one won’t emerge.”  But he is vague: “The defining characteristic of the economy and society will be how that is produced, owned and commanded: by the state, by individuals, by corporations, or in some way as yet undefined.”  Indeed “ just as it wasn’t the “free market” or individual capitalists who freed the slaves, gave votes to women and created the welfare state, it will be the collective efforts of us all that will enable humanity to turn economic advances into social progress.

Portes is implying the need for socialism, namely a collectively-owned and democratically-run economy of super-abundance that eventually ends the ‘economic question’ itself.  That was Marx’s vision too – but it would only be possible by the ending of the capitalist mode of production, not by ‘regulating’ it.