Archive for the ‘marxism’ Category

Europe’s crisis: the Cluj debate with Mark Blyth

June 23, 2017

I’ve just returned from Cluj, Romania’s second largest city, where I discussed the Euro crisis and the future of Europe with Mark Blyth of Brown University.  Mark Blyth has published a number of books, including Austerity: a dangerous idea, which covers the history of the austerity doctrine as he sees it and its impact on the global financial crisis and on Europe’s economies.

The intellectual think-tank Tranzit.ro/Cluj (Tranzit), organised the event brilliantly and it was very well attended.  The discussion was billed as a debate between a Keynesian and Marxist analysis of Europe’s economic crisis.  But, of course, there were many areas of agreement between Mark and myself on the events leading up to the global financial crash and subsequent slumps particularly in the periphery of the Eurozone and on the impact of the policies adopted by the European leaders and the Troika with the distressed states of Ireland, Portugal, Spain and Greece.

In my presentation, I argued that the great European project that started after the second world war had two aims: first, it was to ensure that there were never any more wars between European nations; and second, to make Europe as an economic and political entity to rival America and Japan in global capital.  This would be led by Franco-German capital.

The move to a common market, customs union and eventually the political and economic structures of the European Union was a relative success.  The EU-12-15 from the 1980s to 1999 managed to achieve a degree of harmonisation and convergence: the weaker capitalist economies growing faster than the stronger.

But the move towards further integration with a single currency and the enlargement of the EU to now 28 (soon 27) countries was not so successful.  Now it was divergence, not convergence that was the result: the weaker capitalist economies (in southern Europe) within the euro area lost ground to the stronger (in the north).

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

This divergence was exposed in the global financial crash and the ensuing Great Recession.  The banking system of the southern states was driven to bankruptcy as property prices collapsed and companies and households were unable to meet their debt servicing costs.  This also put French and German banks at risk.  The weaker governments could not bail out their own banks without help and that meant agreeing to drastic austerity measures from the EU’s stability funds and the IMF.

At debate in Cluj, in my view, were two things: why did the period of success for the EU project turn into failure with the global financial crash?  And was the imposition of austerity programmes the main cause of the depression after the collapse in Portugal, Greece etc; or at least, would a reversal of those Troika-style measures have got Greece etc out of trouble?

My view was that the cause of the change from fast growth and convergence from the 1970s to slow growth and divergence from the 1990s can be found in the sharp decline in the profitability of capital in the major EU states (as elsewhere) after the end of the Golden Age of post-war expansion.

This led to fall in investment growth, productivity and trade divergence.  European capital, following the model of the Anglo-Saxon economies, adopted neo-liberal policies: anti trade union laws, deregulation of labour and product markets, free movement of capital and privatisations.  The aim was to boost profitability. This succeeded at least for the more advanced EU states of the north but less so for the south.

The introduction of the euro added another limitation on growth in the south and convergence with the north.  The euro was not an ‘optimal currency union’ (to use the mainstream economics term) because of this.  A strong euro was bad for exports in the south and gave investment power to the north.  The debts being built up by the south with the north were exposed in the crash and sparked the ‘euro crisis’, but only after the global financial crash.

The EU leaders had set criteria for joining the euro, but these criteria were all monetary (interest rates and inflation) and fiscal (budget deficits and debt).  They were not convergence criteria for productivity levels, GDP growth, investment or employment.  Why? Because those were areas for the free movement of capital (and labour) and capitalist production for the market; and not the province of interference or direction by the state.  After all, the EU project is a capitalist one.  Thus some countries clearly unable to converge were still incorporated into the euro area (Greece, Italy).

The imposition of austerity measures by the Franco-German EU leadership on the distressed countries during the crisis was the result of this ‘halfway house’ of euro criteria.  There was no full fiscal union (automatic transfer of revenues to those national economies with deficits) and there was no automatic injection of credit to cover capital flight and trade deficits – as there is in full federal unions like the United States or the United Kingdom.  Everything had to be agreed by tortuous negotiation among the Euro states.

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

But would a reversal of austerity on its own have turned these economies around without the pain of huge cuts in living standards?  In the debate, I argued that it would not.  The evidence shows that there is little correlation between faster growth and more government spending or bigger budget deficits.  Indeed, during the Great Recession and subsequently, many countries with faster economic growth also had low government spending and budget deficits (see the graph below – if austerity causes poor growth, the line should be sharply from bottom left to top right, but it is nearly flat).  It seemed that faster economic growth was more dependent on other factors – in particular, more investment and in turn higher profitability.

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

Reversing austerity or leaving the euro and devaluing would not do the trick.  I used the example of tiny Iceland that did renegotiate its debts and devalued its currency, but it made little difference to the hit that the Icelandic people took in living standards, because, in this case, inflation rocketed to eat into real wages.  In contrast, Estonia and Ireland adopted austerity measures.  But what enabled these economies to turn round and raise profitability was mass emigration of their workforces, which drove down the costs of capital (internal devaluation).

But so weak and corrupt was Greek capital that even drastic austerity and mass emigration have not raised up the economy on a capitalist basis.

Thus my argument was that we can look for the main cause of the crisis in the euro in the falling profitability of capital in Europe prior to the crisis, which was then triggered by the global financial crash and Great Recession.

Now Mark had a different analysis.  First, he pointed out that profits as a share of GDP in the US are near record highs, so how could the crisis be caused by low profitability or profits?  The American multi-nationals are rolling in money and cash; and tax havens are bulging with hidden profits.

Sure, we could agree that the undeniable drop in profitability in the 1970s played a role in the growing difficulties for the EU project and the introduction of neo-liberal policies.  But, in his view, as I understand it, it was these neo-liberal policies attacking real wages that caused the crisis of 2008-9, not falling profitability.  Real wages were held down and so the rising gap between production and consumption had to be filled by a huge expansion of credit (financialisation).  This eventually came tumbling down and kicked off the financial crash.

This analysis is basically the ‘post-Keynesian’ one in economic parlance and Mark mentioned several times the leading post-Keynesian Michal Kalecki in this context.  In this theory, crises are the product of the change in the distribution of product between profits and wages.  The crisis and stagflation of the 1970s was ‘profit-led’, when strong and confident labour forces forced up wages and squeezed profits and full employment led to inflation (Phillips curve style).  But the crisis of 2008 was ‘wage-led’, as wage share in the economy had plummeted and excess (household) credit designed to sustain consumption led to financial instability and collapse (Minsky-style).  Marx’s law of profitability of capital based on a rising organic composition of capital (not the distribution between profits and wages) was irrelevant to this narrative.

The 1970s was an era of profits squeeze and inflation.  According to Mark, this period of ‘stagflation’ (low growth and inflation) was ‘abnormal’; it did not fit into the post-Keynesian analysis that argues that only a full employment economy would generate inflation – as measured by the so-called Phillips curve that shows a trade-off between full employment and inflation.  But by the end of the 1990s, inflation had returned to ‘normal’ levels and now the problem was the post-Keynesian one of ‘wage squeeze’ and ‘underconsumption’.  In this period of ‘secular stagnation’ huge injections of credit did not drive up inflation as the monetarist economists expected but merely fuelled financial speculation and instability.

Now, in my view, this post-Keynesian analysis fails theoretically and empirically.  Was the 1970s collapse in profitability caused by wages rising too high and squeezing profits?  The empirical evidence shows that profitability was falling by the mid-1960s, well before any perceived rise in ‘wage share’ in the major economies.  And this coincided with a rise in the organic composition of capital, as in Marx’s law of profitability.  Profits squeeze only came later in the early 1970s. As Marx said in Capital Volume 3 (p239): “The tendency of the rate of profit to fall is bound up with a tendency of the rate of surplus-value to rise, hence with a tendency for the rate of labour exploitation to rise. Nothing is more absurd, for this reason, than to explain the fall in the rate of profit by a rise in the rate of wages, although this may be the case by way of an exception.”

If profits are the result of the exploitation of labour power and not merely the result of the distribution of production between wages and profits, then it is profits that matters for capital, not wages.  Keeping wages down and profits up is good for capital accumulation.  The contradiction does not lie in the wage-profit nexus but in the limitation in the increase in the productivity of labour as a counteracting factor to the tendency of the rate of profit on overall capital to fall.

Profit share in GDP may be at highs (at least in the US) – although its has been falling back recently.  But this only measures profit per output or profit margins, not profits against the stock of capital accumulated and invested in an economy.  Rising profit margins show capital is making bigger profits; but that can still mean overall profitability is falling.  Yes, many large multinationals are ‘awash with cash’, but there are also many more companies making only enough profit to service their debts (zombie companies) and corporate debt to GDP in most economies is at record high levels too.

Yes, corporations squeezed the share of value added going to wages from the 1980s to boost the rate of surplus value and reverse falling profitability.  But it only had limited success.  By the early 2000s as the euro area started, profitability was falling across the major economies.  Indeed, far from wages and consumption collapsing prior to the Great Recession, as the post-Keynesian thesis would suggest, it was profits and investment that did so, as the Marxist thesis would argue (graph shows inv in green and cons in blue).

Actually, over the period from the 1980s, wage share in most economies did not decline that much.  And when adjusted for social benefits, the share of total value going to labour was pretty stable.  In the graph below, the wage share for the US is measured against GDP and against national income.  Following the blue line, we can see that the ‘profits squeeze’ only began in the early 1970s (well after profitability fell).  Following the average black line, we can see that employee compensation to national income was pretty stable, if not rising in the post war period.

US personal consumption to GDP rose, not so much because of rising household debt filling the gap between output and wages, but because wages from work were supplemented by health and social benefits (so the green line below more than matches the blue line of personal consumption share).

Finally, there are policy implications from these rival theses.  If the euro crisis and the Great Recession were the product of wage compression and too much credit, then the solution for the EU project may just be better taxation of profits, more wage increases and public spending.   In other words, we need a return to the social democratic consensus of the Golden Age, when apparently the right balance between profits and wages was achieved.

Indeed, this scenario is exactly the view and policy objective of post-Keynesian analysis.  Two leading post-Keynesians summed thus up in a recent paper, when they said: “in contrast to other heterodox economists, especially from the Marxian tradition, Post-Keynesians believe that it is possible even within a capitalist economy to counteract effectively these destabilizing tendencies through appropriate macroeconomic policy actions of the state, as long as the political conditions are in place, as it happened to some extent during the early post-World War II “Golden Age”, especially as implemented by certain social democratic regimes, which had held power on the European continent and who were committed to full employment.” I assume this was at least one reason why Mark Blyth, when asked in Cluj, said that “je ne suis pas Marxist”.

However, if the cause of the euro crisis is be found in the main contradiction within capitalist production for profit, namely the law of the tendency of the rate of profit to fall (which brings about recurring and regular slumps in production whatever the ratio of distribution between profits and wages), then a managed solution within capitalism is not possible.  Crises would still re-occur.  And indeed, austerity then has a certain rationality in the very irrationality of capitalism, as it aims to raise profitability, not production or wages.

It is a vain hope that we could return to the golden age where wages and profits were ‘balanced’ (apparently) to avoid crises.  Modern capitalist economies are not generating high levels of profitability, full employment and investment as in the 1950 and 60s – on the contrary, they are depressed.  And they are depressed not by the lack of consumption (US personal consumption to GDP is at its height), but by the lack of sufficient profitability, notwithstanding Apple or Amazon’s huge cash piles.

If there was an abnormal period, it was not the ‘stagflation decade’ of the 1970s where the Phillips curve did not operate, as Mark argued.  It was the Golden age of the 1950s and 196os, when profitability was high after the war and capital could make concessions to labour (under pressure) for higher wages and a welfare state.  Indeed, the Phillips curve is still not operating as Keynesians and post-Keynesians expect.  Where is that curve?; it should be from the top left to the bottom right, but it was nearly flat in the 1970s and it is even flatter now.

Japan, the US and the UK now have record low unemployment rates and yet wages stay low and inflation is virtually non-existent (speech984). Instead of stagflation, economies have stagnation.  Now capitalism is in a new ‘abnormality’, if you like, a long depression, where it can concede nothing to labour, certainly not a social democratic consensus to balance profits and wages.

The profitability of crises

June 19, 2017

I was recently interviewed on my book, The Long Depression, and on other economic ideas, by José Carlos Díaz Silva from the Economics Department of the National University of Mexico (UNAM) where I have been invited next March 2018 to deliver a series of lectures.

In the first part of this interview, Jose questions me on the basic themes of my book.

JCD: In general terms, how could you explain the recent crisis? Can we link the United States crash in 2008 with the problems that followed in Spain, Greece and Ireland, and the latter with the recent scenario as a unique process of crisis?

MR: In my book, The Great Recession and my subsequent book, The Long Depression, I argue that the global financial crash of 2008 and the ensuing deep global slump in capitalist production were caused by a combination of the falling profitability of productive capital (Marx’s law) and excessive borrowing to speculate in fictitious capital (stocks, bonds and property).  At a certain point, bank lending and mortgages and their ‘diversification’ into mortgage-backed derivatives (bought worldwide) could no longer be funded as profit in productive sectors dropped and incomes fell back.  The great Ponzi scheme of financial speculation then collapsed and revealed the underlying failure of capitalist production.  Investment plunged and took employment, incomes and consumption down with it.

This is the ‘normal’ process of capitalist crisis: profitability falls to a point where profits in total stop rising, then investment collapses and the costs of capital (means of production and labour) are reduced violently.  This particular slump was worse because it was combined with the destruction of fictitious capital that had reached unprecedented levels; and because it was global.  Every major economy and financial sector was affected.  The banking crash and the massive credit squeeze spread to Europe.  The credit crunch hit the property markets of Spain and Ireland; and the excessive over-leveraged property and corporate sectors in Greece.  Greece was brought to its knees because of the previously wild borrowing at cheap rates by Greek corporations especially in property; and the tax evasion and capital flight of those corporates and the rich meant that the Greek government had insufficient revenues to handle a collapse in the economy and meet the demands of its creditors, the French and German banks.

So the Euro crisis was really a crisis of global capitalism.  But it had special features in that the weakest parts of the Euro area were hit hardest because they were dependent on investment from the core (Germany, France etc).  And the Euro leaders were unwilling to subsidise the weaker economies.

JCD: Why is important to build a general theory of capitalist crisis?

MR: If we do not develop general theories then we remain in ignorance at the level of surface appearance.  In the case of crises, every slump in capitalist production may appear to have a different cause.  The 1929 crash was caused by a stock market collapse; the 1974-5 global slump by oil price hikes; the 2008-9 Great Recession by a property crash.  And yet, crises under capitalism occur regularly and repeatedly.  That suggests that there are underlying general causes of crises to be discovered.  Capitalist slumps are not just random events or shocks.

The scientific method is an attempt to draw out laws that explain why things happen and thus be able to understand how, why and when they may happen again.  I reckon that the scientific method applies to economics and political economy just as much as it does to what are called the ‘natural sciences’.  Of course, it is difficult to get accurate scientific results when human behaviour is involved and laboratory experiments are ruled out.  But the power of the aggregate and the multiplicity of data points help.  Trends can be ascertained and even points of reversal.

If we can develop a general theory of crises, then we can test against the evidence to see if it is valid – and even more, we can try and predict the likelihood and timing of the next slump.  Weather forecasting used to be unscientific and just based on the experience of farmers over centuries (not without some validity).  But scientists, applying theory and using more data have improved forecasting so that it is pretty accurate three days ahead and very accurate hours ahead.

Finally, a general theory of crises also reveals that capitalism is a flawed mode of production that can never deliver a harmonious and stable development of the productive forces to meet people’s needs across the globe.  Only its replacement by planned production in common ownership offers that.

JCD: When talking about the pertinence of the falling profit rate as a determinant of the crisis, it is commonly underlined in Marx’s works as the strongest explanation. This is, if Marx himself considered the falling profit rate as the foundation of the main explanation of the crisis, then we should think of it as correct, but if we find some textual evidence, in the Marx’s writings, that shows he abandoned this thesis In his last years of work, then it will be incorrect thinking on the falling rate of profit as the main explanation of the crisis. How fruitful is this way of doing research? Is it possible that waiting for the “Marx approval” is a noxious one for the possibility of constructing a theory of crisis?

MR: Interpreting Marx’s voluminous writings to ascertain what his theory of crises is useful, but only to some extent.  Marx’s contribution must be the foundation of any effective and relevant theory of crises under capitalism, in my view.  But as you say, there can be many interpretations and Marx’s unfinished works lead to ambiguities that can exercise academics and scholars for a lifetime!  So there are severe limits on this type of research.  Even if we were to agree on what Marx’s theory of crises is (or even that he had one – because that is disputed), what if he were just wrong?

Moreover, it is 150 years since Marx developed his analysis of capitalism based on the main example of British capital in the mid-19th century.  The world and capitalism has moved on since then – in particular, it is the US that is now the dominant hegemonic capital, capitalism is now global and controlled even more than before by finance capital.  Thus a theory of crises must take into account these new developments.  Also, we have much more data and information to work on compared to Marx’s limited access.  The task now is not to keep analyzing and re-interpreting Marx, but to stand on his shoulders and raise our understanding.

JCD: If we define the organic composition of capital as the level of the value of the means of production to the value of labor power, does this variable depend on distributional factors or the profit rate? Do you think it is important to take into account the materialized composition of capital and the organic composition of capital?

MR: The organic composition of capital is an important Marxian economic category.  It shows the social relation between human labour and machines as the means of production.  Under capitalism, individual capitalists compete to extract the maximum amount of value (and surplus value after paying for the wages of labour power) from their workforces.  That competitive drive for profit (getting the greater share of the total value produced) pushes capitalists to increase their use of machinery in order to raise the productivity of labour by shedding labour (costs).  So Marx reckoned that a rising organic composition of capital was the long-term tendency of the capitalist mode of production.  Indeed, it was the basis of the law of the tendency of the rate of profit to fall (the law as such).  The organic composition of capital is measured in money but Marx says its mirrors the technical composition of capital (machines measured in hours of labour against the amount of hours worked).  However, the increase in machinery by capitalists to replace labour will raise the productivity of labour and reduce the value of labour power if the costs of reproduction of labour fall.  And it can also reduce the costs of machinery.  So the value composition of capital can fall.  But Marx said that, as a rule, this would only slow the rise in the organic composition of capital, not cause it to fall over the long term.

All the empirical evidence shows that Marx was right.  So the basic assumption of Marx’s law of profitability, that there will be a rising organic composition of capital over time, is realistic and proven.  If there is no change in the rate of exploitation or surplus value of the workforce, then a rising organic composition will lead to a fall in the rate of profit.  However, increased mechanization will usually lead to a rise in the productivity of labour and the rate of surplus value.  This acts a counter-tendency to the rising organic composition of capital and the tendency of the rate of profit to fall.  But the tendency will override the countertendencies over time.

JCD: Is the dynamic between the falling profit rate and its counter tendencies the explanation of the economic cycles? Why is so? Which are the differences with the ideas of the Kondratiev’s long waves and the one of Schumpeter about the cycle?

Yes, in Marx’s theory, it is the dynamic between the rising organic composition of capital and the counter-tendencies of a rising rate of surplus value and a falling value composition of capital.  Marx’s law of profitability means that eventually a fall in the profit rate leads to a fall in the mass of profit or at least a fall in new value created.  This leads to a slump in new investment. Capitalists then look to reduce their costs of capital (labour power and assets). So capital values are devalued (after the bankruptcy and merger of capitals and a large increase in the reserve army of labour) to the point where the mass and rate of profit begins to rise again for the surviving capitalists and then investment resumes, and with it employment and incomes. The whole cycle commences again.

In my view, this profit (ability) cycle, as I call it, is the basis of the so-called business cycle.  But it is not the same as the business cycle.  That is affected by the turnover of capital in productive sectors and in unproductive sectors like housing, also by international trade etc.  The profit cycle from trough to trough can last 30-36 years, while the modern business cycle (Juglar) appears to be 8-10 years.  So, for example, in the period 1946-82, there were several business cycles or slumps (1958, 1970, 1974-5, 1980-2).

The Kondratiev cycle, if it exists, and I am inclined to think so, is much longer term, over 54-72 years (I think it has been getting longer).  The K-cycle is driven by the swings in world commodity prices and probably by the cluster of innovation cycles delineated by Schumpeter – but also by the direction of the profit cycle.  The K-cycle has been getting longer because people are living longer (at least in the major economies), so the generational effect is now four times 18 years, not four times 14 years, if you like.  This affects the length of the innovation cycle of discovery, development, explosion, maturity and stagnation – possibly.  In many ways, these are all hypotheses to be proven. Data points are few.  But I argue in my book, The Long Depression, that the conjunction of the downward phase of the K-cycle, the profit cycle and Juglar cycle only happens once every 60-70 years.  When it does, capitalism has a depression rather than just a ‘normal’ slump.  This was the case in the 1880s, the 1930s and now.

JCD: What are the main difficulties for calculating the profit rate? Is there some way of calculating the circulating capital turnover? If it would be possible to calculate the capital turn over, how different the calculation of the profit rate could be? This can explain the constancy of the materialized composition of capital that some have shown?

MR: The difficulties of measuring the rate of profit from the view of Marxian categories are manifold!  First, we must use official statistics that are not accumulated in the best way to measure Marxian categories.  Indeed, some Marxist economists reckon that trying to measure the rate of profit using official statistics in money is impossible and pointless.  Others reckon that the data are so poor we cannot do it practically.  I do not agree.  It is the job of any scientific analysis to overcome these theoretical and practical difficulties in measurement.  And many Marxist economists are doing just that.

On categories, should we measure the rate of profit of the whole economy, or just the capitalist sector, or just the corporate sector, or just the non-financial corporate sector, or just the ‘productive’ sector?  Should or can we include variable capital and circulating capital in the denominator?  Should we measure gross profit or net profit after depreciation?  Can we measure depreciation correctly?

All these various measures are useful and possible.  The data are available for many major economies and many Marxist scholars have now made such measurements.  And yes, variable capital should and can be included empirically.  And there has been work on measuring the impact of the turnover of capital too.  What increases confidence in this work is that, by and large, whatever measure is used, it shows, for most countries, over time that the rate of profit has been falling.  Of course, not in a straight line because there are periods when the counteracting factors dominate, if only for a while.  And each major slump produces a temporary recovery in profitability.  But these turning points are also broadly at the same time.  All this increases confidence that Marx’s law of profitability is valid and relevant to an explanation of recurrent crises under capitalism and also its eventual demise as a mode of production.

JCD: Which is the correct way of calculating the profit rate: historical cost or current cost? Why is so?

MR: Theoretically, capital accumulation should be seen as temporal.  By that I mean, a capitalist must pay a certain money amount for machinery and raw materials to start production.  Then the workforce is employed to produce a new commodity for sale.  It does not matter if the cost of replacing that machinery in the next production cycle has changed.  The profit for the capitalist should be based on the original (historic) cost of the machinery etc not on its current (replacement) cost.  So the rate of profit properly measured should use historic cost measures.  However, this is a matter of theoretical debate, with some scholars arguing for replacement costs and some arguing for something in between!  What is interesting is that the difference this makes to the measurement of the rate profit is greater or lesser according to the change in prices of the means of production over time.  So in the recent period where inflation has been low, particularly for capital goods, over time, the difference between the rate of profit measured on historic costs versus current costs has narrowed.

JCD: Why is the profit rate not in the core of the recent discussion about the crisis, both in the academic and journalistic field? Is it not paradoxical speaking about capital without underlining the profitability determinants?

MR: The reason that profitability is not considered in any discussion of crises is both ideological and theoretical.  Mainstream economics has no real theory of crises anyway: crises are just chance, random events or shocks to harmonious growth under capitalism; or they are the result of the interference in competition and markets by governments, or central banks; or they are result of monopoly or financial recklessness or greed.  Mainstream economics also denies any role or concept of profit in its marginalist theories of production and demand.  This is deliberate: there is no place for a theory of profit based on the exploitation of labour power (Marx’s value theory).  Diminishing returns on utility and productivity lead to no profit at the point of equilibrium.  Also heterodox/Keynesian theories also deny the role of profit, as they are also based on marginalism and (im)perfect competition.  Crises are therefore the result of a ‘lack of effective demand’ caused by an ‘irrational’ change in expectations (‘animal spirits’).  It has nothing to do with the profitability of capital, apparently – or more precisely the exploitation of labour.  And yet capitalism is a system of production for profit in competition.  So why is profit not a determinant in investment and production?  It is an ideological refusal to accept that.  Instead apparently, everybody gets their fair share according to their (marginal) contribution.  The mainstream finds no explanation of crises as a result; and the Keynesians look to ‘demand’ not profit as the driver of crises.

Cycles in capitalism – a critique of The Long Depression

June 7, 2017

In my last post, I outlined my response to the critique of my book, The Long Depression, presented by Paul Mattick jnr, discussant in the URPE panel session on my book at the Left Forum in New York last weekend.

Paul argued that it was impossible and unnecessary to try and measure the profitability of capital as I did in numerous places in the book.  It was impossible because official statistics are useless in measuring the Marxist rate of profit, which is based on labour values not prices.  And it is unnecessary because the very fact of recurring economic crises shows that Marx’s theory of crisis is valid anyway.

The other discussant at the panel session was Jose Tapia.  Tapia is professor in health economics at Drexel University, Pennsylvania and has made significant contributions in the study of mortality and global warming and its impact on economies.

But he has also presented papers showing the causal connection between profits, investment and growth (does_investment_call_the_tune_may_2012__forthcoming_rpe_) and is a contributing author to a new book, edited by me and G Carchedi, The World in Crisis, published this summer by Zero Books.  Jose wrote a book jointly with Rolando Astarita that offers a brilliant and comprehensive account of the Great Recession (from which I quote several times in my book).  Unfortunately, it is in Spanish, so it did not get the wider recognition that it deserves.  Tapia has a new book that develops the relationship between profits, investment and business cycles (again in Spanish) that provides further statistical support for the Marxist view on crises (reviewed here).

Jose is an accomplished statistician so he takes a different tack from Paul Mattick in his critique of my book.  He does not think it a waste of time to measure the rate of profit and test Marx’s theory of crises statistically.  However, he has important criticisms of my work.  He says he is unsure of the sources and methods that I use to gauge profitability (although I do have an appendix in the book on measuring the rate of profit and I have offered my workings on any graph in the book if requested).

More importantly, Jose is not convinced by one of the main themes of my book: that there are three distinct periods in capitalist accumulation which I define as depressions and not just ‘normal’ recessions: the late 19th century, the Great Depression of the 1930s and the period since 2008 that I call the Long Depression.  In a powerpoint presentation ( The Long Depression, by Michael Roberts – Comments) provided at the session, Jose reckoned that there was no discernible decline in the rate of real GDP growth for countries during the long depression of 1873-97.  Only France could be depicted as such.

Well, I don’t know why Jose chooses decades to gauge cumulative GDP growth.  Most commentators on the late 19th century depression consider that it started in 1873 and finished in 1897, or earlier depending on the country.  So it would be more appropriate to use those dates.  Andrew Tylecote did just that in his study of the period. He looked at industrial output data – and his results are cited in my book.  Tylecote shows that Britain, as the declining hegemonic power, had significantly slower industrial growth than the rising capitalist powers of the US and Germany in the second half of the 19th century.  But all the major economies had slower growth in the period 1873-90, than before 1873 or after 1890.  That seems to confirm that there was distinct depression period then.

And when you take into account the massive immigration into the US during the second half of the 19th century, real GDP growth per head in America was very slow during the depression period.

Jose reckons that UK growth was hardly different between 1850-70 and 1870-90.  Well, I looked at the GDP data and investment data for Britain provided by the Bank of England.  Using the BoE data, I found that between 1852-71, real GDP growth in Britain rose 66% or 2.7% a year, but it rose only an average 1.2% between 1872-86, or less than half the previous rate.  Investment rose 4.4% a year in the boom period of 1852-71, but it actually fell 2.1% a year in the period 1871-86.  That’s pretty conclusive evidence of a depression, it seems to me.  Indeed, the BoE data for the same period that Jose defines (1870-90) shows an accumulated GDP of only 42%, or just 1.9% a year.

The great economist J Arthur Lewis provides a very penetrating analysis of the late 19th century British economy, which I cite in my book.  Lewis found that there were several ‘Juglar’ (business cycle) recessions during the Long Depression and these recessions were clearly worse after 1873. Lewis gauged the intensity of these recessions by how long it takes for production to return to a level ‘exceeding that of the preceding peak’ growth rate. He found that between 1853 and 1873, it took about 3-4 years. But between 1873 and 1899, it took 6-7 years. He also measured the loss of output in recessions i.e. the difference between actual output and what output would have been if trend growth had been sustained. The waste of potential output was just 1.5% from 1853-73 because “recessions were short and mild”. From 1873-83, the waste was 4.4%; from 1883-99, 6.8%; and from 1899-13 5.3%, because “after 1873 recessions became quite violent and prolonged.” Wastage was thus two or three times greater in recessions during the late 19th century depression.

I also went back and looked at the US business cycles from 1854 to 1897 using the NBER data.  I found that between 1854-1873, the boom period, there were 76 months of contraction in US real GDP, or an average of four months in every year.  But between 1873-97, there were 161 months of contraction or about 6.7 months on average each year.  Again that suggests the 1873-97 period was a depression.

Jose’s main criticism of my book is his scepticism that there are ‘regular’ business cycles.  For Jose, capitalism accumulates in booms, which are interspersed with slumps. So slumps are recurring under capitalism, but they are not regular.  Using the NBER data, he shows that there is a wide dispersion in length of the each cycle from trough to trough in the US, varying between 3.8 to 9 years for the post-war period and (not so wide) 3.9 to 4.8 from 1873 to date.  his would seem to suggest that there is no regularity in booms and slumps under capitalism as I suggest.

However, again, I am not quite sure why Jose has chosen these dates.  If we go back to the NBER data and choose periods more related to the periods of changes in average profitability and exclude the specific depression periods, then I find that the business cycle is pretty regular at about 12 years from trough to trough.

Also, I think there is very good causal relation between profits and stock market performance.  When profitability is on the rise, stock prices rise and vice versa.  Yes, profitability has risen since the 2009 Great Recession ended, but it is still below the levels seen at the end of last bull market in 2000.  That is why I reckon that there is still a bear market.  Despite new highs in stock prices, in real terms and against gold and the dollar, stock prices are still below previous peaks.

For Jose, this is all too neat.  He reckons that my division of the stock market cycle in the post-war period into bull and bear markets based on the profit cycle could just easily be revised to deliver a different analysis – from four to five periods.

Jose goes onto to argue that my claim to the existence of longer cycles of 50-60 years, the so-called Kondratiev cycles, has even less validity.  Jose reckons that there is no regularity in the length of so-called K-cycles.  They vary from 14.7 to 75 years.

Again, Jose seems to choose odd dates for his K-cycle measure.  I reckon that the first K-cycle begins in about 1785, rises to a prices peak around 1818, and then goes to a trough in the early 1840s (about 54 years). The second cycle peaked in the mid-1860s and then troughed in the mid-1880s or early 1890s (again about 50 years). The third K-cycle started in the 1890s, peaked in 1920 and troughed in 1946 (another 50-60 years). The fourth K-cycle started in 1946, peaked in 1980 and will trough around 2018 (a much longer cycle of over 70 years – I explain why in the book).

However I recognise that the evidence to support the K-cycle is meagre – after all, there are only a few data points.  As I said in my book chapter on cycles (Chapter 12): “In many ways, it is really a series of propositions that are not fully confirmed by evidence. The first proposition is that crises are endemic to capitalism and continue to reoccur, the explanation for which lies in Marx’s law of profitability. That was discussed in a previous chapter. But this chapter says more than that. It argues that these crises occur in regular periods that can be measured and possibly predicted.”

So this chapter is more of a hypothesis to be tested by events. That is especially the case with my idea that the K-cycle and other cycles in capitalism can be coordinated with the profit cycle, and when all cycles are in a downward path, the capitalist economy becomes depressed.  Thus I conclude in the book that 2018 is likely to be trough of this fourth K-cycle and the bottom of the depression period.  Well, the proof of the pudding will be in the eating.

But I am not alone in my forecast.  Anwar Shaikh has put forward a similar forecast to mine, also based on the dating of the K-cycle.  In a paper that Shaikh presented in 2014 (Profitability-Long-Waves-Crises (2)), he reckons Kondratiev’s long waves have continued to operate, when measured by the gold/dollar price: the key value measure in modern capitalism.  And he also forecasts that the current downphase in the K-cycle will trough around 2018.

So watch this space.

Paul Mattick and validating Marx’s law – a critique of The Long Depression

June 5, 2017

Last weekend, at a session of the Left Forum in New York, I presented the basic theses in my book, The Long Depression.  My arguments were then subjected to critical analysis by my invited discussants, Paul Mattick Jnr and Jose Tapia.  The whole session was video recorded and will appear on You Tube – Left Forum in a few weeks.

Now, all three of us are agreed that Marx’s law of the tendency of the rate of profit to fall is the underlying foundation and main cause of crises under capitalism.  This view remains a minority one among Marxist economists, let alone other heterodox economics.  But even though we agree on this, there is still much to debate about how to explain and validate Marx’s law.  In this post, I shall respond to the profound critique of my book that Paul Mattick presented at the weekend.  In the next post, I shall look at Jose Tapia’s critique.

Paul Mattick is emeritus professor of philosophy at Adelphi University, New York and the son of that eminent contributor to Marxian economic analysis, Paul Mattick snr, who explained so well Marx’s theory of crisis in the post-war period and exposed where mainstream economics, particularly Keynesian theory and policy, fell short. Paul Mattick jnr has continued his father’s work just as successfully.  His book, Business as Usual is, in my view, the best analysis of the global financial crash and the Great Recession that is easily accessible to non-economists – essential reading.

Paul’s criticism of my book boils down to how to validate Marx’s law of profitability as the theory of crises.  As he says in his commentary paper (Roberts Panel) , he agrees that the world economy is in what could be described as a long depression and I am right that Keynesian and monetary policies of the mainstream have failed to get capitalism out of this depressed state.

However, he considers my attempt to validate Marx’s theory of crises by trying to measure the rate of profit in a Marxian way as impossible and unnecessary. “This is not possible, fundamentally because of the fact that value is represented only by prices, which move independently of values”. The Marxian rate of profit can only be measured in value terms (average labour time) and yet all official statistics are in prices; and worse, in the market prices of one currency usually.  Such price measures can and will vary well away from Marx’s modified values (prices of production), let alone value.  As such, all my (and other people’s) ‘Marxian’ measures of profitability are a waste of time.

Moreover, most of the measures of profitability made by me and other scholars are national rates of profit and usually just for the US.  Such measures, says Paul, tell us nothing about the movement of profitability in global capitalism.  And Marx’s law is one based on a world economy. But a world rate of profit with a proper calculation of total surplus value globally is impossible to measure.

Indeed, Paul argues we don’t need to ‘test’ Marx’s law and his theory of crises with such statistical measures.  We can validate Marx’s theory by the very fact that capitalist economies go into recurring slumps; that there are periods of prosperity and growth that give way to periods of depression, as now.  Capitalist accumulation cannot deliver harmonious and sustained expansion of production and, most particularly, accumulation of capital; and it cannot deliver full employment etc.  Paul says: “These are all features recognizable without a significant statistical apparatus; in Marx’s own work, historical data for the most part function to illustrate, not to test, theoretical ideas.”  There is no need to get into all the details of measuring rates of profit; that is an exercise in futility.

Well, I don’t agree.  Using general events or trends to ‘illustrate’ the validity of a law can help.  But that is not enough.  Slumps in capitalism could be explained by other theories like Keynesian ‘lack of demand,’ or from ‘underconsumption’ through low wages and rising inequality etc (post-Keynesian); or by the failure of consumer sectors to grow in line with capital goods sectors (disproportion theory); or by excessive debt (Minsky) or ‘too much profit’ that cannot be absorbed (Monthly Review).  The ‘features’ of capitalist crises can be used just as well to ‘illustrate’ these alternative theories.  Indeed, they are the more  dominant explanations in the labour movement and the same illustrative events are used to validate them.

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.

Such an approach may be ambitious, but it is not impossible.  First, Marx’s law may be based on labour values, but it is expressed in prices.  Capitalists start with money capital and finish with more money capital in the capitalist mode of production for profit.  Money is the nexus between value and price.  Yes, market prices can and will necessarily vary from prices of production and from commodity values.  But they are still tied like an anchor or a yo-yo to value over time, even as value incessantly changes due to changes in the productivity of labour.  Total value still equals total prices.

Several scholars have shown empirically the close connection between market prices and value in production.  And money prices can be checked empirically against value in labour time.  For example, Cockshott and Cottrell broke down the economy into a large number of sectors to show that the monetary value of the gross output of these sectors correlates closely with the labour concurrently expended to produce that gross output: Anwar Shaikh did something similar.  He compared market prices, labour values and standard prices of production calculated from US input-output tables and found that, on average, labour values deviate from market prices by only 9.2 per cent and that prices of production (calculated at observed rates of profit) deviate from market prices by only 8.2 per cent.

And G Carchedi in a recent paper showed that the validity of Marx’s law of value can be tested using official US data, which are deflated money prices of use values.  He found that money and value rates of profit moved in the same direction (tendentially downward) and tracked each other very closely.  Carchedi and I used this in a joint paper to show how the rate of profit in the sectors that create value and surplus value in the US economy is not so far out of line with the overall rate of profit in the ‘whole economy’.

That brings me to another criticism of my approach by Paul.  He says that the Marxian rate of profit is the total surplus produced by productive labour in an economy and unproductive labour should be measured as part of total surplus value.  But, says Paul, many measures of the rate of profit by scholars fail to take account of interest, rent and financial profit which are also parts of total surplus value. In Marxian terms, the rate of profit should be a measure of total surplus value against capital advanced, not profit as defined in capitalist statistics.

Paul is right.  Indeed that is why I use what I call a ‘whole economy’ measure.  This defines surplus value (for a national economy) as annual gross national income (less the annual depreciation of the means of production) less the cost of wages and benefits.  Then, to get the rate of profit, this surplus value is divided by the total capital advanced for means of production (fixed assets) and circulating capital (raw materials or inventories) in the productive sectors and variable capital (labour) in the productive sectors.  This then encompasses Paul’s critique of some measures that exclude rent, interest and financial profits.  In my view, all these moving parts can be measured to deliver a meaningful rate of profit using official statistics.  We can measure ‘productive’ capital and we can incorporate all forms of surplus value.  And several scholars have done so for different countries.  If you read this blog regularly, you know who they are.

What gives support to these attempts to do the impossible (in Paul’s view) are the results.  However the rate of profit is measured, the general trend is the same. Take the post-war period, using official statistics for the US, you can measure the rate of profit for the ‘whole economy’, for the corporate sector alone, for the non-financial corporate sector or even for a more accurately defined ‘productive’sector’ and the general trend is the same.  There was a high rate of profit immediately after 1945, which holds up to the mid-1960s.  Then there is a profitability crisis that lasts until the early 1980s.  Then there is a ‘neo-liberal’ recovery in profitability that comes to an end about the late 1990s or by 2001.  After that, the rate of profit does not return to the level of the 1990s and certainly not to that in the 1960s. I think these measures are robust (because they are similar) and thus provide powerful validations of Marx’s law of profitability.  So they are not to be dismissed, as they help to refute alternative theories of crises.

Yes, these measures are just national and do not show the ‘world rate of profit’, which would be necessary to support Marx’s law fully.  As Paul says: “An increase in the profitability of American capital tells us nothing determinate about the Marxian rate of profit”.  But attempts there are being made to measure such a ‘world rate’ by various scholars, including me.  They are by averaging national rates, not an ideal solution theoretically, but nevertheless, again they deliver similar results to the US measures as described above.

Paul says that you cannot get a direct connection between profitability and investment in a capitalist economy, because returns on investment in the stock market are really reflections of fictitious capital, not the rate of profit on productive capital.  As Paul quotes a securities analyst: “the security’s price does not have a direct relationship to the surplus value currently being exploited from the productive workforce”.

Clearly stock market returns can and do vary sharply from the return on productive capital.  In The Long Depression, and in my previous book, The Great Recession, I make this point as well.  Dividends and capital gains from stock market purchases are not the Marxian measure of profit as they are distorted by the fictitious nature of financial capital – much of profits accumulated in the financial sector are fictitious, particularly gains from the purchases of government bonds.  Government borrowing and the printing of money deliver a continual stream of fictitious profits.

But this can be accounted for and several scholars have done so.  We can delve into the data and begin to show the clear causal connection between the movement in the profitability of capital in the productive sectors, investment in productive capital and economic growth – indeed, the movement in the mass of profit in an economy is a very good guide to the likelihood of a change in business investment and a slump in capitalist production (The profit investment nexus Michael Roberts HMNY April 2017).  The other discussant at Left Forum, Jose Tapia, has shown just that for the US economy  (does_investment_call_the_tune_may_2012__forthcoming_rpe_), as has a recent and comprehensive paper by G Carchedi on Marx’s law and crises.

So I think we can go further than just use anecdotal evidence to ‘illustrate’ Marx’s law of crises. We can provide hard evidence based on robust empirical data to support Marx’s law of profitability and its relation to recurrent crises under capitalism.  Yes, the task of defining our categories and massaging the data so that we measure things accurately is formidable.  But nobody is arguing that science is easy (and we often get it wrong), but I am arguing that it is 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. And these policies don’t work and will not work in the interests of the majority (the working class) and will instead perpetuate the iniquities and horrors of capitalism.

Paul is also sceptical of my proposition that there are discernible cycles or regularities in capitalist accumulation, although he reckons that whether there are or not does “not matter very much from a Marxian point of view.”  In the next post, I shall deal with the critique of my view on cycles in capitalism as presented by Jose Tapia, the other discussant at the Left Forum panel on my book.

Excessive credit, rentier capital and crises

May 29, 2017

Steve Keen has a new book out.  It’s called: Can We Avoid Another Financial Crisis? Steve Keen is professor of economics at Kingston University in the UK.  His earlier book (Debunking economics) is a brilliant expose of the fallacious assumptions and conclusions of mainstream economics, i.e. ‘perfect competition; general equilibrium and ‘rational expectations’ of economic ‘agents’.

The failure of mainstream economics to see the coming of the global financial crash and the ensuing Great Recession is now well documented – see my own coverage here.  This failure has led several mainstream economists to disavow its usefulness.  One such recently was Paul Romer, a former New York university professor and now the chief economist of the World Bank.  Last fall, before taking up his appointment at the World Bank, Romer wrote a paper accusing his fellow macroeconomists of forming a monolithic intellectual community, which deferred to authority, disregarded the opinions of those outside of their group and ignored unwelcome facts. They behaved more like cult members than genuine scientists. Romer compared modern macroeconomics to string theory, famously described as “not even wrong.”

This did not go down well.  And now there has been a rebellion among his 600 economists (yes, 600!) at the World Bank.  They have insisted that he no longer be in charge of managing them, after he demanded that they drop their long-winded economic jargon and adopted a simpler style of prose.  Romer responded ironically to this demotion of his power at the World Bank, “Apparently the word is out that when I asked people to write more clearly, I wasn’t nice. And that I slaughter kittens in my office.”

But I digress.  The point of this Romer story is to show that those who dispute the assumptions and conclusions of mainstream economic apologia are not likely to get much of a hearing.  As I said in my post on Romer’s critique, that he won’t succeed in getting “mainstream economics yanked back into reality”. And so it has proved.

Steve Keen, however, continues his attempt to provide an alternative closer to economic reality.  And his new book also makes a prediction: that another crash is coming and even picks out some likely candidates where it is likely to kick off.  Now readers of this blog know that I think it is the job of economics, if it really sees itself as a science, to not only present theories and test them empirically, but also to make predictions.  That is part of the scientific method.  So Keen’s approach sounds promising.

But all depends, of course, on whether your theory is right.  Keen reiterates his main thesis from his previous work: that, in a modern capitalist economy credit is necessary to ensure investment and growth.  But once credit is in the economic process, there is nothing to stop it mismatching demand and supply.  Crises of excessive credit will appear and we can predict when by adding the level of credit to national income.  In the major capitalist economies leading up to the crisis of 2007, private sector credit reached record levels, over 300% of GDP in the US. That credit bubble was bound to burst and thus caused the Great Recession.  And this will happen again.  “A capitalist economy can no better avoid another financial crisis than a dog can avoid picking up fleas – it’s only a matter of time.”

So what of the next crisis? With his eye on credit growth, Keen sees China as a terminal case. China has expanded credit at an annualized rate of around 25 per cent for years on end. Private-sector debt there exceeds 200% of GDP, making China resemble the over-indebted economies of Ireland and Spain prior to 2008, but obviously far more significant to the global economy. “This bubble has to burst,” writes Keen.

Nor does he have much hope for his native Australia, whose credit and housing bubbles failed to burst in 2008, thanks in part to government measures to support the housing market, lower interest rates and massive mining investment to meet China’s insatiable demand for raw materials. Last year, Australian private-sector credit also nudged above 200% of GDP, up more than 20 percentage points since the global financial crisis. Australia shows, says Keen, that “you can avoid a debt crisis today only by putting it off till later.”

This idea that it is the level of credit and the pace of its rise that is the main criterion for gauging the likelihood of a slump in capitalist production also lies behind the view of another heterodox economist, Michael Hudson in his book Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy. Hudson’s main contention that the FIRE economy – finance, insurance, and real estate – cripples the “real” economy and is slowly reducing most of us to debt bondage.

Hudson goes further.  For him, the old system of industrial capitalism – hiring labor, investing in plants and equipment and creating real wealth backed by tangible goods and services – has been eclipsed by the re-emerging dominance of a parasitic neo-feudal class.   It is this elite, not industrial capitalists, who are the foundation of most of our economic woes.  The 2008 crisis was not a typical boom and bust housing crash of capitalism but the logical conclusion of financial parasites slowly bleeding most of us dry. “Today’s neoliberalism turns the [free market’s] original meaning on its head. Neoliberals have redefined ‘free markets’ to mean an economy free for rent-seekers, that is, ‘free’ of government regulation or taxation of unearned rentier income (rents and financial returns).”

I read this to mean that it is not capitalism of the past, competition and the accumulation of capital for investment, that is the problem and cause of crises, but the ‘neoliberal’ world of ‘rentier’ capital, ‘feudal’ parasites and ‘financialisation’.  This would suggest that crises could be solved if capitalism returned to its previous role, as Adam Smith envisaged it, as expanding production through division of labour and competition.

Also, for Hudson, the problem of capitalism is not one of profitability and the striving to extract surplus-value out of the productive labour force but one the extraction of ‘rents’ out of industry by landowners and financiers.  “Labor (‘consumers’) and industry are obliged to pay a rising proportion of their income in the form of rent and interest to the Financial and Property sector for access to property rights, savings and credit. This leaves insufficient wages and profits to sustain market demand for consumer goods and investment in the new means of production (capital goods). The main causes of economic austerity and polarization are rent deflation (payments to landlords and monopolists) and debt deflation (payments to banks, bondholders and other creditors).”  (Hudson)

Thus we have a model of capitalism where crises result from ‘imperfections’ in the capitalist model, either due to a lack of competition and the growth of financial rentiers (Hudson) or due to excessive credit (Keen).  Moreover, crises are the result of a chronic lack of demand caused by squeezing down wages and raising the level of debt for households. The latter thesis is not new – as many mainstream economists have argued similarly and it dominates as the cause of crises on the left.  As Mian and Sufi put it, “Recessions are not inevitable – they are not mysterious acts of nature that we must accept. Instead recessions are a product of a financial system that fosters too much household debt”.

The key omission in this view of crises is any role for profit and profitability – which is after all the core of Marx’s analysis of capitalism – a mode of production for profit not need.  Profit is missing from Keen’s analysis.  Indeed, Keen considers Marx’s theory of value to be wrong or illogical, accepting the standard neo-Ricardian interpretation and Marx’s law of the tendency of the rate of profit to fall as being irrelevant to a theory of crises.  Hudson has nothing to say about Marx’s key insights.

The post-Keynesians rely on the Keynes-Kalecki equation, namely that profits = investment, but it is investment that drives or creates profits, not vice versa, as Marx would have it.  This view recently reached its extreme in another relatively new book, Capitalism as Oligarchy, by Jim O’Reilly, where, similar to the view of leading post-Keynesian, Engelbert Stockhammer, that is rising inequality that is decisive to crises rather than profitability of capital, O’Reilly argues that “inequality isn’t a side-effect of something we happen to call ‘capitalism’ but is rather the core of what the system is”.

According to O’Reilly, profits does not come from the unpaid labour of the working class but are ‘created’ for capitalists by the sale of goods and services to the consumer.  Profits come from exploiting the consumer, not the worker.  “where does profit come from? It can’t be from workers since they can spend no more than the wage received (!! – MR).  Wages are a source of revenue through sales, but they’re also a cost. For the system as a whole, they must net to zero—workers are simply not profitable.”  Only capitalists have more income than they spend, so they create their own profits (hmm… MR).

Apparently, Rosa Luxemburg was on the case… “Her insight that profit had to come from a source beyond the worker was correct but she erred in accepting the conventional monetary wisdom that capitalism’s “aim and goal in life is profit in the form of money and accumulation of capital.”   In this theory, profits are not the driver of capitalism but the result of investment and consumption.

The argument that credit plays a key role in capitalism; and ‘excessive credit’ does so in crises was first explained by Marx.  As Marx wrote in Volume 3 of Capital, “in a system of production where the entire interconnection of reproduction process rests on credit, a crisis must inevitably break out if credit is suddenly withdrawn and only cash payment is accepted…at first glance, therefore the entire crisis presents itself as simply a credit and monetary crisis”.  (p621) But that’s at “first glance”.  Behind the financial crisis lies the law of profitability: “the real crisis can only be deduced from the real movement of capitalist production” (TSV2, p512).

Looking for a cause is scientific. But dialectically there can be causes at different levels, the ultimate (essence) and the proximate (appearance). The ultimate is found from the real events and then provides an explanation for the proximate. The crisis of 2008-9, like other crises, had an underlying cause based on the contradictions between accumulation of capital and the tendency of the rate of profit to fall under capitalism. That contradiction arose because the capitalist mode of production is production for value not for use. Profit is the aim, not production or consumption. Value is created only by the exertion of labour (by brain and brawn). Profit comes from the unpaid value created by labour and appropriated by private owners of the means of production.

The underlying contradiction between the accumulation of capital and falling rate of profit (and then a falling mass of profit) is resolved by crisis, which takes the form of collapse in value, both real value and fictitious. Indeed, wherever the fictitious expansion of capital has developed most is where the crisis begins e.g. tulips, stock markets, housing debt, corporate debt, banking debt, public debt etc. The financial sector is often where the crisis starts; but a problem in the production sector is the cause.

Undoubtedly the rise of excessive credit in the major capitalist economies was a feature of the period before the crisis.  And its very size meant that the crunch would be correspondingly more severe as capitalist sector saw the value of this fictitious capital destroyed.

But is it really right to say that excessive credit is the cause of capitalist crises?  Marx argued that credit gets out of hand because capitalists find that profitability is falling and they look to boost the mass of profits by extending credit.

It is a delusion or a fetish to look at credit as the main or only cause of crisis.  In a capitalist economy, profit rules.  If you deny that, you are denying that capitalism is the right term to describe the modern economy.   Maybe it would be better to talk about a credit economy, and credit providers or creators and not capitalists.  Thinking of credit only, as Keen does, leads him to conclude that China is the most likely trigger of the next global crisis.  But that has already been refuted by the experience of the last year.

We must start with profit, which leads to money, investment and capital accumulation and then to employment and incomes.   And there is a mass of empirical evidence that profitability and profits lead investment, not vice versa.

Moreover, why did debt and financial rents become ‘excessive’ in the so-called neoliberal period?  The Marxist explanation is that the profitability of productive capital declined in most modern economies between the mid-1960s and the early 1980s, and so there was a rise of investment in finance, property and insurance (FIRE), along with other neo-liberal counter measures like anti-trade union legislation, labour laws, privatisation and globalisation.  The aim was to raise profitability of capital, which succeeded to a limited extent up to late 1990s.

But as profitability began to fall back, the credit boom was accelerated in the early 2000s, leading eventually to the global financial crash, credit crunch and the Great Recession.  As profitability in most top capitalist economies has not returned to the levels of the early 2000s, investment in productive sectors and productivity growth remains depressed.  The boom in credit and stock markets has returned instead.  Fictitious capital has expanded again – as Keen shows.  And rentier capital dominates – as Hudson shows.

If excessive credit alone is to blame for capitalist crises and not any flaws in the profit mode of production, then the answer is the control of credit.  If rentier capital is to blame for the poverty of labour and crises, then the answer is to control finance.  Indeed, Keen argues that the best policy prescription is to keep private sector credit at about 50% of GDP in capitalist economies.   Then financial crises could be avoided.  Hudson recommends annulling unpayable debts of households. And Hudson recommends a nationalized banking system that provides basic credit.

These are undoubtedly important reforms that a pro-labour government or administration should implement if it had such power to do so.  But that alone would not stop crises under capitalism, if the majority of the productive sectors remained privately owned and investing only for profit not need.  As Hudson says himself: “Just to be clear, ridding ourselves of financial and rentier parasites will not usher in an economic utopia. Even under a purely industrial system, economic problems will abound. Giants such as Apple will continue to offshore profits, companies like Chipotle will keep stealing their workers’ wages, and other big businesses will still gobble up subsidies while fulminating against any kind of government regulation. Class divisions will remain a serious issue.”

Reading Capital Today

May 18, 2017

As we approach the exact date of the publication of Marx’s Capital Volume One 150 years ago (14 September), a host of conferences and books are coming out in the small world of Marxist study on the relevance of Capital today.  The symposium that I am organising with King’s College London will be on 19-20 September, just around the corner from the British Library where Marx did the research for his opus magnum.  But already there have been conferences in Greece on Capital; a conference in New York at Hofstra University, and next week, York University, Toronto.  All have a large participation by leading Marxist scholars.

And the books are also coming out. The first is aptly entitled Reading Capital Today edited by Ingo Schmidt and Carl Fanelli from two Canadian universities and includes contributions from various activists and academics covering the issues of class struggle, internationalism and the Bolshevik revolution, imperialism, social reproduction and the environment. But I’ll only comment on the specifically economic subject: the labour theory of value.

Prabhat Patnaik is emeritus professor of economics at the Jawaharlal Nehru University in Kerala, India.  In his chapter, Patnaik argues that Marx’s value theory is not meant to explain relative prices between commodities.  The real purpose is to show that commodities priced in money reflect the socially necessary labour time involved in the whole economy.  However, that is as far as I can agree with Patnaik’s interpretation of Marx’s theory.

Patnaik seems to accept that there are two systems, one of value and one of price and that Marx’s transformation of value into prices leads to the total surplus value in an economy being different than the total profit.  This is clearly wrong as the work of scholars like Carchedi, Freeman, Kliman and Moseley have shown.  He also seems to think that Marx’s theory depends solely on commodity money (gold) and does not work or apply to fiat money (notes and reserves not backed by gold) – again a wrong interpretation.

It is true, as Patnaik says, that Marx argued that a rise in wages does not lead to inflation of prices as such, but instead to a fall in the share going to profit (see Marx’s famous debate with Weston, a British trade unionist, in Value, Price and Profit).  But from this, Patnaik seems to conclude that the fundamental contradiction in capitalism revealed by Marx’s law of value is that rising wages will squeeze profits (a profit squeeze theory).  There is no mention of how Marx’s value theory leads onto his law of the tendency of the rate of profit to fall.  For Patnaik, Marx’s value theory appears to differ little from that of Ricardo (two systems of value and prices and the distribution of wages and profits as key to crises).  With this interpretation, Marx’s famous formula for the rate of profit (s/c+v) becomes irrelevant.

A more useful exercise for those interested in studying Capital today is to read the book itself.  And some great Marxist scholars have developed reading courses that can be followed to do so.  The most comprehensive is that by David Harvey, probably the most well-known scholar on Marxist economics in the world today – and one of our speakers at Capital.150 this September in London.   Indeed, David Harvey debated only this month with Patnaik on the latter’s current take on imperialism.

Harvey covers Volume One of Capital in detail here, as well as Volume Two and a recent set of lectures on his take on Capital today.  These lectures are compiled in written form in: A Companion to Marx’s Capital (Verso, 2010) and A Companion to Marx’s Capital Volume 2 (Verso, 2013).

Over the next few months, I shall try to critique Harvey’s and other scholars’ analysis as we head towards the Capital.150 symposium.  But you can see some of the differences that I and other scholars have already raised with Harvey’s views, particularly on the causes of crises here.

David Harvey’s contribution to understanding Marx’s great work has been invaluable.  But there are other readings that have also made an important contribution, if less well known.  For example, out in Los Angeles, Frieda Afary, a philosophy MA and librarian, has been conducting community-based readings of Capital throughout this year.

But perhaps, the most useful guide in reading Capital today is a new book by Joseph Choonara, A Reader’s Guide to Marx’s Capital (not published until July).  Choonara takes the reader through each chapter of Volume One with some clarifying analysis and relevant comment to help.  Choonara says that “It is designed to be read in parallel with Capital itself, with each chapter of this book consulted either before or after digesting the relevant sections of Marx’s work.”  The aim, unlike that of Harvey’s more comprehensive approach in his video lectures, is “instead to dwell on those areas that are the most vital to an overall understanding of the work and those that most often confuse, drawing on my own experience teaching Capital to left-wing audiences of students and workers over the past decade”.  For, in Choonara’s view, Marx attempted in Capital to see capitalism from the point of view of labour and aimed for a working-class audience.  Capital clearly does the former, but whether it achieved its aim of reaching working class readers is more doubtful.  Choonara’s guide can help here.

Choonara says that “Marx focuses on production in the first volume. The second deals with the circulation process, which is the way that capital passes through its various phases (production, but also purchase and sale). The third volume integrates both aspects of capitalism and so deals with the process as a whole, allowing Marx to explore some of the most complex aspects of the system.”  This is important, because the full story of capitalism as Marx sees it requires the reading of all three volumes (and what is often called the fourth – Theories of Surplus Value) as well as Marx’s earlier research notes compiled in what is called the Grundrisse.

This is important, Choonara comments, because “the interlinked nature of the project causes problems for those who just read volume one. This can potentially lead to a crude focus on production, in which issues related to the circulation of capital or questions such as finance and credit that are discussed mainly in volume three are overlooked. That said, it is helpful to see production as forming the foundation for circulation, and so Marx’s ordering of volumes makes sense.”  This contrasts with Harvey’s interpretation: “In this I take issue with David Harvey’s very influential reading of Capital, which tends to flatten down these different levels of analysis, treating them all as equally fundamental.”   Choonara goes on: Harvey’s “idea is that production and circulation should be considered as having the same explanatory priority in the analysis of capitalism, whereas Marx clearly feels that production is in some sense more basic than circulation.”

Choonara is not afraid to take a view on what Marx means, particularly in the more difficult early chapters on value.  In particular, he varies from Patnaik’s view on Marx’s view of money: “there is nothing in this analysis that precludes the replacement of the money commodity with symbolic representations or electronically created credit (the form taken by most money today). To understand this requires going much further into Capital, and in particular the sections on finance and credit in the third volume.”  This follows from Marx’s endogenous theory of money, namely that “more or less money would circulate according to the needs of circulation …. Marx’s argument is that the amount of money simply reflects the total price that has to be circulated and the speed with which it circulates.”

Choonara’s reading also shows that Marx did not have some ‘iron law of wages’, as argued by the classical economists Ricardo and Malthus, leading to the view that it was impossible to raise the real wages of workers by their own efforts as wages were determined by the value of the means of subsistence and the effect of productivity and capital accumulation on that.

Choonara comments: “One peculiarity of the subsequent attacks on Marxist theory is that this iron law is often attributed to Marx himself. The vehemence of Marx’s attack (on the iron law) reflects the fact that if the “iron law” were correct, then struggles over wages, and indeed the formation of trade unions, would be pointless, leading the socialist movement into a dogmatic cul-de-sac by isolating it from the real movement of workers.”

Recently, the eminent Marxist professor Michael Lebowitz seems to claim Marx did fall into this fallacy.  Lebowitz implies that Marx’s accumulation theory that workers cannot raise their living standards through struggle as the gains from productivity growth will all go to capital.  In Lebowitz’s words, Marx accepts the ‘Ricardian default’.

Yes, for Marx, “the rate of accumulation is the independent, not the dependent variable; the rate of wages is the dependent, not the independent variable”. In other words, the pattern of accumulation tends to drive the shifts in wages, not the other way round.  But changes to wages, emerging out of accumulation, can still react back onto the patterns of accumulation (Choonara).

And that perceptive mainstream economist, William Baumol, long ago showed that for Marx “wages need not be equal to the value of labour power… and the omission of any fixed equilibrium was deliberate because Marx wanted to show that workers have the power to raise wages substantially even under capitalism”.  Indeed, they could do so and actually alter “the historical and social element that enters into the value of labour power”, which is not determined by the iron law of nature or ‘subsistence’.

Indeed, that is the lesson of the struggle to lower the working day so comprehensively described in Capital.  As Marx put it: “The Ten Hours’ Bill was not only a great practical success; it was the victory of a principle; it was the first time that in broad daylight the political economy of the middle class [ie the capitalists] succumbed to the political economy of the working class.”  This was a gain for the value of labour power that was permanent, as is the 8 hour day in the 20th century – although only continual class struggle can preserve such gains.

There are many other useful commentaries by Choonara on aspects of Capital: on the nature of alienation, productive and unproductive labour, mental and material labour, complex and simple labour, on accumulation etc. But enough for now, for there will be more to follow over the coming months, as we consider the relevance of Capital, now 150 years old.

William Baumol and the transformation problem

May 12, 2017

William J. Baumol, who died last week at the age of 95, was one of the pre-eminent mainstream economists of his generation.  He taught for more than 40 years at Princeton University and at New York University, where he retired in 2014. His work touched on monetary policy, corporate finance, welfare economics, resource allocation and entrepreneurship, but he was best known for the principle that came to bear his name: Baumol’s ‘cost disease’.

Baumol’s cost disease is the idea that personally delivered services — musical performances, medical care, education and garbage collection, for example — naturally and inevitably increase in price year after year. Improved technology may allow bagels and cars to be produced more efficiently and therefore more cost effectively, but, as Baumol famously observed, a Mozart string quartet requires today the services of four musicians, the same manpower it took in the 18th century.

This idea had immediate relevance in public policy, particularly in the areas of health care and education, because it showed why important public services could not be measured for cost-effectiveness in the same way as manufacturing in the capitalist sector.  They provided services for need, not profit.

“The critical point here is that because politicians do not understand the mechanism and nature of the cost disease, and because they face political pressures from a similarly uninformed electorate, they do not realize that we can indeed afford these services without forcing society to undergo unnecessary cuts, restrictions and other forms of deprivation,” he wrote in his 2012 book The Cost Disease.  It is a matter of public choice not ‘efficiency’.

Baumol was prolific in his economic research, particularly in looking at the role of ‘entrepreneur’ as innovator rather than as capitalist.  He also produced one of the main mathematical economics textbooks of the 1960 and 1970s – it was pretty dry, as I remember.

Baumol was a liberal.  He advised Hillary Clinton and various Democrat leaders and was strong advocate of public healthcare and education.  And he was a trustee for Economists for Peace and Security, a liberal UN body of economists opposed to nuclear weapons, along with Kenneth Arrow (who has also recently died) and JK Galbraith.

But what is less known is that in the early 1970s Baumol engaged in a mainstream debate with leading Keynesian Paul Samuelson on the validity and purpose of Marx’s value theory.  Samuelson had launched an attack on Marx’s theory as it began to gain some traction among student activists in those revolutionary days ((Paul A. Samuelson’s “Understanding the Marxian Notion of Exploitation: A Summary of the So-called Transformation Problem between Marxian Values and Competitive Prices, “J. Econ. Lit., June 1971, 9 (2), pp. 399-431).

Like Eugene Bohm-Bawerk tried to do in the late 1890s, and like Keynes in the 1930s, Samuelson wanted to expose the fallacies of Marx’s theory in case economics students became infected with Marxism.  Keynes called Marx’s value theory “scientifically erroneous and without application to the modern world’ (Keynes, Laissez-Faire and Communism, quoted in Hunt 1979: 377).  Samuelson’s approach was to argue, not that Marx’s value theory was illogical because values when measured in labour time could not equal prices measured in markets (as Bohm-Bawerk claimed), but that his theory of value was irrelevant to an explanation of the movement of market prices and therefore to any understanding of modern economies.

Samuelson argued that Marx’s ‘transformation’ of labour values into prices of production was unnecessary.  Market prices are explained by the movement of supply and demand, so what need of a value theory?  Indeed, it could be erased.  “The truth has now been laid bare.  Stripped of logical complication and confusion, anybody’s method of solving the famous transformation problem is seen to involve returning from an unnecessary detour… such a transformation is precisely like that which an eraser is used to rub out an earlier entry (i.e. value – MR) after which we make a new start to end up with a properly calculated entry (i.e. price – MR)”.

Well, Baumol carefully took Samuelson to task in his essay, The transformation of values: what Marx really meant. In so doing, he made an important contribution in explaining and validating Marx’s theory of value. Baumol points out that Samuelson, along with post-Keynesian Marxists like Joan Robinson, misunderstood Marx’s purpose in the so-called transformation of values into prices.  Marx did not want to show that market prices were related directly to values measured in labour time. “Marx did not intend his transformation analysis to show how prices can be deduced from values”.  The aim was to show that capitalism was a mode of production for profit and profits came from the exploitation of labour; but this fact was obscured by the market where things seemed to be exchanged on the basis of an equality of supply and demand.  Profit first comes from the exploitation of labour and then is redistributed (transformed) among the branches of capital through competition and the market into prices of production.

For Marx, that only labour creates value is self-evident. “Every child knows that any nation that stopped working, not for a year, but let us say, just for a few weeks, would perish…. This constitutes the economic laws of all societies, including capitalism. And every child knows, too, that the amounts of products corresponding to the differing amounts of needs, demand differing and quantitatively determined amounts of society’s aggregate labour”, Letter from Marx to Kugelmann, 11 July 1868, MECW, vol.43, pp.68-69.

Total surplus value is produced from exploitation of work forces employed by various capitalists – the difference in value measured in labour time between that time needed for the wages of the labour force and the price of the commodity or service produced realised in the market place for the capitalist.  But not the surplus value or profit achieved by each capitalist’s workforce does not go directly to the individual capitalist.  Each capitalist competes in the market to sell its commodities.  And that competition leads to profits being redistributed because profits tend to an average rate per unit of capital invested.

The transformation of values created by labour into prices in the market means that individual prices will differ from individual values.  As Baumol says, Marx knew that individual prices of production differed from individual values; unlike Ricardo who could not solve this transformation.

So total surplus value is converted (transformed) into total profit, interest and rent, with the market deciding how much for each capitalist.  Yes, ‘supply and demand’ decides profit or loss for an individual capitalist.  But that is just the appearance or result of the distribution of profit through market competition but created by the overall exploitation of labour in the production process.

Baumol’s explanation was a starting point for a more comprehensive answer and defence of Marx’s value theory developed by Marxist scholars like Carchedi, Yaffe, Kliman, Freeman, Moseley and others over the last 40 years since Samuelson’s attack.

Baumol’s interpretation of Marx’s theory provides a powerful answer not only to Samuelson but also to the ‘standard interpretation’ of the transformation problem, as Fred Moseley has named it in his book, Money and Totality (a book that explains in detail all the theoretical issues raised by mainstream and other heterodox economists and answers them).

Values in a commodity do not have to be ‘transformed’ into prices, as Robinson and Samuelson interpret Marx’s theory.  Prices are the appearance in the market of the exploitation of labour in production process.  As Fred Moseley says, if you accept Samuelson’s interpretation of Marx’s transformation of values into prices then “values do in fact cancel out and play no role in the determination of prices” (p229). However, this is not Marx’s theory.  Individual values are not converted into individual prices of production: “individual values play no role in Marx’s theory of prices.  What happens is that “total new value produced by current labour … is determined (in part) by the total surplus value produced, which in turn (in part) determines the general rate of profit and ultimately, prices of production… prices of production are not determined by multiplying transformation coefficients for each commodity by the individual values, but by adding the average profit to given money costs”.

There is no need to transform the values of constant capital (machinery etc) and variable capital (labour power/workforce) into prices.  They are already given as prices from the market in the previous process of production.  The only transformation that takes place is the transformation of the total new value from the production process in a re-distribution through market competition, with profits going to the various capitalists depending on the size of capital each advanced at the start of production.

As Baumol says, the distribution of surplus value from society’s central storehouse now takes place via the competitive process which assigns to each capital profits (or interest or rent) an amount strictly proportional to its capital investment.  “This is the heart of the transformation process – the conversion of surplus value into profit, interest and rent.  It takes from each according to its workforce and returns to each according to its total investment” p53

Marx’s transformation is temporal: you start (t1) with given money capital to invest in plant, machinery and labour and you get new value created by the exertion and exploitation of labour (t2).  The surplus value comes from after covering the cost of capital (constant and variable).  This is then redistributed through competition in the market, which drives all towards an average rate of profit.  Thus total value (dead labour and living labour plus surplus value) still equals total prices (based on the given cost of invested capital plus an average rate of profit), but total surplus value is transformed into profits, interest and rent and distributed according to the size of the capital invested.

Here is Marx’s actual schema for this transformation.

You can see that total values (TV) equal total prices (TP), but individual capitals have commodities with different values (V) to prices (P) because of the redistribution of surplus value (s) into profits (p) by the market.  There is no transformation of constant (c) and variable (v) capitals because they are already transformed (into money prices) in a previous production period.

Indeed, Baumol’s (and Marx’s) transformation has since been supported empirically.  Carchedi has shown that the money price average rate of profit is close to the value average rate of profit (i.e. across a whole economy). Other scholars have shown that when an individual sector’s production is measured in value terms (i.e. in labour time) and then aggregated, the total value is pretty close to total prices measured in money terms.  Thus Marx’s transformation of value into prices is not irrelevant even to relative price determination.

But, as Baumol said, it was not Marx’s purpose to show that.  He wanted to show that it is the exploitation of labour that creates value (through the private appropriation of the product of labour power) and that lies behind profit, interest and rent.

Profit is not the reward for ‘risking capital’ (money for equipment etc); or rent from ‘providing’ land; or interest for ‘lending’ money; thus rewards to various factors of production.  Baumol comments: “Such nonsense is precisely what Marx’ analysis anticipates and what it is intended to expose. Again, let Marx speak for himself. “In Capital-Profit, or better Capital-Interest, Land-Rent, Labor-Wages of Labor, in this economic trinity expressing professedly the connection of value and of wealth in general with their sources, we have the complete mystification of the capitalist mode of production.  …This formula corresponds at the same time to the interests of the ruling classes, by proclaiming the natural necessity and eternal justification of their sources of revenue and raising them to the position of a dogma.” (Volume III, Chapter 48, pp. 966-67).

It is no accident that it is the Keynesians and post-Keynesians like Joan Robinson that were (and are) the most vehement against Marxist economic theory – because Marxism is the main opponent of Keynesian influence in the labour movement.

William Baumol may have been as mainstream an economist that you could find – an exponent of the neoclassical equilibrium and marginalism.  But he was also a surprisingly acute observer of Marx’s exploitation theory of capitalism.  As a result, he could show the Keynesian (and neo-Ricardian) claim that Marx’s value theory was an ‘irrelevant and unnecessary detour’ was wrong.  For that, we can thank him.

Memoirs of an erratic Marxist

May 4, 2017

Yanis Varoufakis once described himself as an ‘erratic Marxist’.  This heterodox economist became the finance minister in the Syriza-led Greek government during the most intense period of the Greek debt crisis when the Greeks were trying to avoid severe austerity measures being imposed by the Troika of the EU group, the IMF and the ECB back in 2015 and stay in the eurozone.

Varoufakis was sacked by PM Tsipras when Tsipras decided to capitulate to the Troika demands, despite the Greek people voting to oppose Troika austerity in an unprecedented referendum vote called by Tsipras himself.  Since then, the Syriza government has agreed to a succession of further fiscal austerity measures including cuts to wages and jobs in the public sector, pension reductions and privatisations in return for handouts by the EU in loans to repay previous debts – in a never-ending circle.

Now Varoufakis has published his memoirs of his time as finance minister and what happened in the discussions and negotiations with the EU leaders and others over managing Greek public debt.  According to Paul Mason, reviewing the book, “Varoufakis has written one of the greatest political memoirs of all time.”  Well, to me this stands as hyperbole compared Trotsky’s My Life or for that matter, Churchill’s political memoirs.  But no doubt the book is interesting, as Mason puts it, as “the inside story of high politics told by an outsider.”  According to Mason, Varoufakis shows graphically that “Elected politicians have little power; Wall Street and a network of hedge funds, billionaires and media owners have the real power, and the art of being in politics is to recognise this as a fact of life and achieve what you can without disrupting the system.”

Varoufakis makes the point that “not only was Greece bankrupt in 2010 when the EU bailed it out, and that the bailout was designed to save the French and German banks, but that Angela Merkel and Nicolas Sarkozy knew this; and they knew it would be a disaster.”  The aim of the Euro leaders back in 2010, when the Greek crisis mushroomed in the wake of the Great Recession and the global financial crash was to ensure that the German and French banks did not suffer severe losses from any default by the Greek.  These banks had bought huge amounts of Greek public debt to make profits and now in the crisis Greek bonds were worth nothing.  The EU leaders came up with a solution: the banks would take a small ‘haircut’ (no more than 10% on their bond holdings) and the rest of the debt would be shifted onto the books of the EU, ECB and the IMF to be paid off over the next decade or so.  The Troika would then squeeze and sweat the money they lent to pay off the banks out of the Greek people.

Eventually, the leftist Syriza won a famous victory in the Greek election on a programme of rejecting the debt burden and refusing austerity measures.  This is what I wrote at that time: “The alternative to grasp the nettle: demand the cancellation of the euro and IMF loans (the original demand of Syriza) or default; impose capital controls, take over the Greek banks and appeal to the Greek people for support and the European labour movement. Let the Euro leaders make the move on Eurozone membership, not Syriza. The problem is that now the Greek people have been led to believe that there is only one way out: a deal with the Eurogroup on increasingly bad terms. The alternative of a socialist plan for investment and a Europe-wide appeal is not before them.”

After months of negotiations with the Euro leaders, Tsipras called a referendum to refuse any austerity deal, expecting to lose the vote (as did Varoufakis apparently).  Losing the vote would have got Tsipras off the hook as he could have agreed to the Troika measures because the Greeks accepted them.  But he and Varoufakis got a shock.  Despite a massive media campaign by the Euro leaders and conservative forces within Greece; despite the Germans and ECB forcing a credit squeeze and a run on and closure of Greek banks for weeks, the Greek people said no.

Nevertheless, Tsipras decided to ignore that vote and opted to capitulate.  Mason says this was the right thing to do.  “I continue to believe Tsipras was right to climb down in the face of the EU’s ultimatum…. For Tsipras – and for the older generation of former detainees and torture victims who rebuilt the Greek left after 1974 – staying in power as a dented shield against austerity was preferable to handing power back to a bunch of political mafiosi backed by a mob of baying rich-kid fashionistas.”  Is Mason serious?  Was the right-wing Mafiosi the only alternative? Instead of building a movement of support for the government and proposing an emergency plan for the Greek people and its economy, the best solution was to give in?

Back in July 2015, I considered the options for Syriza.  There was the neoliberal solution being demanded by the Troika. This was to keep cutting back the public sector and its costs, to keep labour incomes down and to make pensioners and others pay more. This was aimed at raising the profitability of Greek capital and with extra foreign investment, restore the economy. Then maybe the Eurozone economy would eventually start to grow strongly and so help Greece, as a rising tide raises all boats.

The next solution was the Keynesian one, advocated by the left-wing within Syriza (but not by Varoufakis, who remained silent and left for America – apparently because of death threats to his family, according to his memoirs). This meant boosting public spending to increase demand, cancelling part of the government debt and for Greece to leave the euro and introduce a new currency (drachma) to be devalued by as much as was necessary to make Greek industry competitive in world markets.

The trouble with this solution was that it assumed Greek capital could revive with a lower currency rate and that more public spending would increase ‘demand’ without further lowering profitability.  But the profitability of capital is key to recovery under a capitalist economy. Greek exporters may have benefited from a devalued currency, but many Greek companies that earn money at home in drachma would be decimated. And rapidly rising inflation that would have followed devaluation would only raise profitability precisely because it will eat into the real incomes of the majority as wages failed to match inflation. Indeed, that is what is happening since the Brexit vote in the UK.

The third option was a socialist one – something not adopted then by either Tspiras, Varoufakis or the Syriza left (or it seems, could ever be viable, according to Mason). This recognised that Greek capitalism would not recover to restore living standards for the majority, whether inside the euro in a Troika programme or outside with its own currency and with no Eurozone support. The socialist solution would be to replace Greek capitalism with a planned economy where the Greek banks and major companies are publicly owned and controlled and the drive for profit is replaced with the drive for efficiency, investment and growth. The Greek economy is small but it is not without an educated people and many skills and some resources beyond tourism. Using its human capital in a planned and innovative way, it could grow. But being small, it would need, like all small economies, the help and cooperation of the rest of Europe.

This solution would have required Syriza mobilising the latent support of the people through workplace committees to discuss an emergency plan for change.  It would have entailed immediate nationalisation of the major banks to ensure payment of people’s deposits (despite the ECB) and the takeover of the major companies (reversing privatisations) in order to institute a plan for production and investment.  That would have meant approaching the labour movement and progressive forces within the major EU countries to force their governments to stop austerity on Greece or make it leave the euro and instead relieve them of this ‘odious debt’ just as the Germans were in the 1950s relieved of their reparation debt (still not paid to Greece for the destruction and death by the Nazis).

This socialist option was the only one that would have got Greece out of its hell.  But of course, it would be hugely difficult to implement.  Yes, the conservative forces within Greece would mobilise; yes, the Greek military may rear its head; and yes, the Euro leaders would try to strangle a tiny socialist Greece and kick it out of the euro and EU.  But the battle for a socialist transformation always poses these sorts of obstacles; and only the unity of the class across Europe and a determined Greek leadership could have overcome them.  But the Syriza leaders, including Varoufakis (the erratic Marxist), never considered this option as viable, and Marxist Paul Mason agrees with them.  For them, there was no alternative but to accept the Troika impositions – which have continued to this day.  And Mason admits that “Tsipras’s government has proved a not very effective shield for the Greek working class” even if (as he claims) it was “an effective protection for the million-plus Syrian migrants who landed on Greek shores in the weeks following the economic surrender.”

Mason reckons Tsipras’ achievement of building Syriza and getting it into government is greater than that of maverick ‘Marxist’ Varoufakis who kept ‘clean’ from the capitulation in July 2015.  But apparently if the ‘global left’ is recover than it “needs leaders like Tsipras and to find thinkers and doers like Varoufakis, and to nurture them.” Well, Varoufakis’ memoirs and Tsipras’ actions hardly seem to justify Mason’s admiration.  Only this week, the Syriza-led Greek government signed up to another round of severe austerity measures in order to get the next tranche of so-called bailout funds from the EU.  The government agreed to adopt another €3.6bn ($3.8bn) in cuts in 2019 and 2020 and have conceded fresh pension (9%) cuts and corporate tax breaks in return for permission to spend an equivalent sum on poverty relief measures.

The Syriza government has done everything it has been asked of by the Troika in making the Greek people pay for the failure of Greek capitalism. And yet the EU leaders have still not agreed to ‘debt relief’. Indeed, they are talking of only considering it once the austerity measures in the latest bailout have been implemented in full and the programme comes to an end in 2018. In the meantime, the Greek government is supposed to run a budget surplus (before interest payments on loans) of 3.5% of GDP a year for the foreseeable future. That is a level way higher than any other country in the EU and way higher for so long than any other government has achieved ever!

No wonder the IMF considers this approach as unsustainable.  “Even if Greece, through a heroic effort, could temporarily reach a surplus close to 3.5% of GDP, few countries have managed to reach and sustain such high levels of primary balances for a decade or more, and it is highly unlikely that Greece can do so considering its still weak policy making institutions and projections suggesting that unemployment will remain at double digits for several decades.” IMF.

For Greece, there is no escape from the penury of public debt owed to the IMF and Eurogroup.  There is a new and detailed study of the plans of the Troika (EU, ECB and IMF) to force the Greek government to run a primary (excluding interest payments) budget surplus of 3.5% of GDP from 2018 onwards.  It shows that it will be impossible for Greece to deliver this level of austerity and, even if it did, it would not stop the debt burden rising even more.  “Past experience suggests the fiscal policy expected – a budget surplus before interest payments worth 3.5 per cent of GDP, sustained for 16 years — has literally no chance of happening even if Greece were able to start generating a 3.5 per cent primary surplus by 2018, as per the targeted schedule”.  It goes on: “Greece’s debts to the EFSF would more than double to about €278 billion in 2050, when interest deferral is assumed to end, and then begin a slow decline, but the outstanding amount in 2080 would still be higher than it is today.”  That’s 70 years since the crisis began!  The paper says that the EU should offer more bailout money from next year to “tide Greece over”. But the debt would remain and keep on rising, even if yet more austerity measures (already unprecedented in fiscal history) were applied. The only solution is to write the debt off.

So, while Varoufakis publishes his memoirs of his time as finance minister during the debt crisis, exposes the rotten and cruel policies of the Troika, and goes around Europe in seminars to demand a better Europe, the Tsipras-led Syriza government continues trying to meet the demands and targets of the Troika in the vain hope that European capitalism will recover and grow and so allow Greeks to get some crumbs off the table. There may eventually some deal on ‘debt relief’. But it will still mean that Greece has an unsustainable burden of debt on its books for generations to come, while living standards for the average Greek household fall back below where they were before Greece joined the Eurozone. A whole generation of Greeks will be worse off than the last and another global recession is still to come.

Labour’s share

April 30, 2017

The leading Keynesian bloggers have been discussing the causes of inequality again.  In particular, they have highlighted the apparent decline in labour’s share of national income in most advanced capitalist economies since the early 1980s.

According to an ILO report, in 16 developed economies, labour took a 75% share of national income in the mid-1970s, but this dropped to 65% in the years just before the economic crisis. It rose in 2008 and 2009 – but only because national income itself shrank in those years – before resuming its downward course. Even in China, where wages have tripled over the past decade, workers’ share of the national income has gone down.

And the very latest IMF World Economic Report finds that “After being largely stable in many countries for decades, the share of national income paid to workers has been falling since the 1980s.” 

The IMF goes on “Labor’s share of income declines when wages grow more slowly than productivity, or the amount of output per hour of work. The result is that a growing fraction of productivity gains has been going to capital. And since capital tends to be concentrated in the upper ends of the income distribution, falling labor income shares are likely to raise income inequality.”

As Keynesian blogger Noah Smith put in an article, “For decades, macroeconomic models assumed that labor and capital took home roughly constant portions of output — labor got just a bit less than two-thirds of the pie, capital slightly more than one-third. Nowadays it’s more like 60-40.”  What has happened?  Smith reckons that there are four possible explanations: 1) China, 2) robots, 3) monopolies and 4) landlords.

By China, he means that globalisation and the shift of manufacturing by multi-nationals to so-called emerging economies has led to labour in advanced economies losing jobs and seeing their wages stagnate while productivity has risen.  Yet, as Smith points out, labour’s share has fallen in China too and (until recently) inequality of income rose sharply.

Then there is the accelerating substitution of machines for workers, particularly with robots and artificial intelligence.  What appears to be happening is that more efficient, hi-tech firms are growing fast, leaving behind inefficient firms that use more labour.  These less efficient firms lose market share and so start to employ less workers as well.

Well, that is pretty much a trend in capitalist accumulation from a Marxist perspective – so it should be no surprise.  Indeed, the IMF report backs up this view.  “In advanced economies, about half of the decline in labor shares can be traced to the impact of technology. The decline was driven by a combination of rapid progress in information and telecommunication technology, and a high share of occupations that could be easily be automated.”

It used to be argued in mainstream economics that inequalities were the result of different skills in the workforce and the share going to labour was dependent on the race between workers improving their skills and education and introduction of machines to replace past skills.

Indeed, another leading Keynesian Brad Delong still supports this answer.  In a recent post, he suggests that Smith and Krugman have it wrong. “let me suggest that there is no mystery to explain.”  If we look at labour’s share of net GDP, i.e. after deducting depreciation (the amount of output needed to replace worn-out plant and equipment), then labour’s ratio has not really fallen, except during the Great Recession.

So Delong concludes that any redistribution of income was indeed within labour’s share from low earners to high earners (CEOs, top executives, doctors and dentists etc) and not between labour and capital.

Delong’s argument is not convincing.  First, depreciation may not be defined as profit but it is clearly a deduction from gross profits. Second, even the graph above does show a trend decline in labour share after its sharp rise in the late 1960s, which led to an intensification in the fall in profitability in most advanced capitalist economies from the mid-1960s and in an accompanying class struggle.  The decline was also significant from 2000 during the credit-boom in the US (unlike Europe, where labour’s share was steady and even rose in the Great Recession – the opposite of the US experience).

And third, the gains in income for CEOs and small business doctors, dentists, lawyers and other ‘professionals’ are really profits not wages.  See Simon Mohun’s excellent work in this regard.

Paul Krugman has returned to the theme of falling labour share in a recent post on his blog, where he argues that it is monopoly power among such capital-intensive companies like Google, Microsoft, etc and the energy companies that drives up profits the overall economy. This is an argument he has raised before. As he said back in 2012, “Are we really back to talking about capital versus labor? Isn’t that an old-fashioned, almost Marxist sort of discussion, out of date in our modern information economy?”  

Krugman recognises that inequalities of income and wealth across US society and the declining share of income going to labour in the capitalist sector are not due to the level of education and skill in the US workforce, but to deeper factors.   In 2012, he cited two possible explanations: “One is that technology has taken a turn that places labor at a disadvantage; the other is that we’re looking at the effects of a sharp increase in monopoly power. Think of these two stories as emphasizing robots on one side, robber barons on the other.”

The first argument is that modern technology is ‘capital-biased’, namely it aims to replace labour by machines over time.  As Krugman put it: “The effect of technological progress on wages depends on the bias of the progress; if it’s capital-biased, workers won’t share fully in productivity gains, and if it’s strongly enough capital-biased, they can actually be made worse off.”

This is not new in Marxist economic theory.  Marx put it differently to the mainstream.  Investment under capitalism takes place for profit only, not to raise output or productivity as such.  If profit cannot be sufficiently raised through more labour hours (ie.e more workers and longer hours) or by intensifying efforts (speed and efficiency – time and motion), then the productivity of labour can only be increased by better technology.  So, in Marxist terms, the organic composition of capital (the amount of machinery and plant relative to the number of workers) will rise secularly.  Workers can fight to keep as much of the new value that they have created as part of their ‘compensation’ but capitalism will only invest for growth if that share does not rise so much that it causes profitability to decline.  So capitalist accumulation implies a falling share to labour over time or what Marx would call a rising rate of exploitation (or surplus value).

And yes, it does all depend on the class struggle between labour and capital over the appropriation of the value created by the productivity of labour.  And clearly labour has been losing that battle, particularly in recent decades, under the pressure of anti-trade union laws, ending of employment protection and tenure, the reduction of benefits, a growing reserve army of unemployed and underemployed and through the globalisation of manufacturing.

Apart from capital-bias technology, Krugman considers that the fall in labour’s share may be caused by ‘monopoly power’, or the rule of ‘robber barons’.  Krugman puts it this way.  Maybe labour’s share of income is falling because “we don’t actually have perfect competition” under capitalism, “increasing business concentration could be an important factor in stagnating demand for labor, as corporations use their growing monopoly power to raise prices without passing the gains on to their employees.”  

What Krugman seems to be suggesting is that it is an imperfection in the market economy that creates this inequality and if we root out this imperfection (monopoly) all will correct itself.  So Krugman presents the issue in the terms of neoclassical economics.

But it is not monopoly rule as such, but the rule of capital.  Sure, capital accumulates through increased centralisation and concentration of the means of production in the hands of a few.  This ensures that the value created by labour is appropriated by capital and that the share going to the 99% is minimised. This is not monopoly as an imperfection of perfect competition, as Krugman explains it; it is the monopoly of ownership of the means of production by a few.  This is the straight forward functioning of capitalism, warts and all.

The falling share going to labour in national income began at just the point when US corporate profitability was at an all-time low in the deep recession of the early 1980s.  Capitalism had to restore profitability.  It did so partly by raising the rate of surplus value through sacking workers, stopping wage increases and phasing out benefits and pensions.  Indeed, it is significant that the collapse in labour’s share intensified after 1997 when US profitability again peaked and began to slide again.  The IMF graph above shows that this applied to most economies.

Labour’s share in the capitalist sector in the US and other major capitalist economies is down because of increased technology and ‘capital bias’, from globalisation and cheap labour abroad; from the destruction of trade unions; from the creation of a larger reserve army of labour (unemployed and underemployed); and from ending of work benefits and secured tenure contracts etc.  Indeed, this seems to be the conclusion reached by the IMF in its latest report, Chapter 3 of the April 2017 World Economic Outlook finds that this trend is driven by rapid progress in technology and global integration.

“Global integration—as captured by trends in final goods trade, participation in global value chains, and foreign direct investment—also played a role. Its contribution is estimated at about half that of technology. Because participation in global value chains typically implies offshoring of labor-intensive tasks, the effect of integration is to lower labor shares in tradable sectors.  Admittedly, it is difficult to cleanly separate the impact of technology from global integration, or from policies and reforms. Yet the results for advanced economies are compelling. Taken together, technology and global integration explain close to 75 percent of the decline in labor shares in Germany and Italy, and close to 50 percent in the United States.”

Maybe ‘capital bias’ and ‘globalisation’ had less of an effect on labour share in the US because of the greater growth in financial profits and rents there than in the rest of the advanced economies.

Indeed, as Noah Smith puts it, “monopoly power, robots and globalization might all be part of one unified phenomenon — new technologies that disproportionately help big, capital-intensive multinational companies.”  I call that modern capital, which, quoting Smith again, “provides a possible way to unify at least some of the competing explanations for this disturbing economic trend.”

HMNY – the profit-investment nexus: Keynes or Marx?

April 25, 2017

The main themes of this year’s Historical Materialism conference in New York last week were the Russian Revolution and the prospects for revolutionary change one hundred years later.

But my main interest, as always, was on the relevance of Marxist economic theory in explaining the current state of global capitalism – if you like, understanding the objective conditions for the struggle to replace capitalism with a socialist society.

On that theme, in a plenary session, Professor Anwar Shaikh at the New School for Social Research (one of the most eminent heterodox economists around) and I looked at the state of the current economic situation for modern capitalism.  Anwar concentrated on the main points from his massive book, Capitalism, published last year – the culmination of 15 years of research by him.  This is a major work of political economy in which Anwar uses what he calls the classical approach of Adam Smith, David Ricardo and Karl Marx (and sometimes Keynes) under one umbrella (not specifically Marxist apparently).  His book is essential reading (and I have reviewed it here) and also see the series of lectures that he has done to accompany it.

His main points at the plenary were to emphasise that capitalism is not a system that started off as competitive and then developed into monopoly capitalism, but it is one of turbulent ’real competition’.  There has never been perfect competition as mainstream economics implies from which we can look at ‘imperfections’ like monopoly.

Anwar went on to say that crises under capitalism are the result of falling profitability over time in a long downwave (see graph comparing my measures with Shaikh).  The neoliberal period from the early 1980s was a result of the rejection of Keynesian economics and the return of neoclassical theory and the replacement of fiscal management of the economy, which was not working, with monetarism from the likes of Milton Friedman.  But even neo-liberal policies could not avoid the Great Recession. And since then, there has not been a full recovery for capitalism.  Massive monetary injections have avoided the destruction of capital values, but at the expense of stagnation.

In my contribution, I emphasised the points of my book, The Long Depression, which also saw the current crisis as a result of Marx’s law of profitability in operation.  I argued that mainstream economics failed to see the slump coming, could not explain it, and do not have policies to get out of the long depression that has ensued since 2009 because they have no real theory of crises.  Some deny crises at all; some claim they are due to reckless greedy bankers; or to ‘changing the rules of game’ by the deregulation of the finance sector causing instability; or due to rising inequality squeezing demand.

In my view, none of these explanations are compelling.  But neither are the alternatives that are offered within the labour movement. Anwar was right that neoclassical economics dominates again in mainstream economics, but I was keen to point out that Keynesian economics is dominant as the alternative theory, analysis and policy prescription in the labour movement.  And, in my view, Keynesianism was just as useless in predicting or explaining crises and thus so are its policy prescriptions.

Indeed, that was the main point made in the paper that I presented at another session at HM at which Anwar Shaikh was the discussant.  In my paper, entitled, The profit-investment nexus: Marx or Keynes?, (The profit investment nexus Michael Roberts HMNY April 2017), I argued that it is business investment not household consumption that drives the booms and slumps in output under capitalism.  For crude Keynesians, it is what happens with consumer demand that matters, but empirical analysis shows that before any major slump, it is investment that falls not consumption and, indeed, often there is no fall in consumption at all -the graph below shows that investment fell much more from peak of the boom to the trough of the slump in US post-war recessions.

Moreover, what drives business investment is profit and profitability, not ‘effective demand’.  That’s because profits are not some ‘marginal product’ of the ‘factor of capital’, as mainstream marginalist economics (that Keynes also held to) reckons.  Profits are the result of unpaid labour in production, part of surplus value appropriated by capitalists.  Profits come first before investment, not as a marginal outcome of capital investment. In the paper, I show that the so-called Keynesian macro identities used in mainstream economic textbooks fail to reveal that the causal connection is not from investment to savings or profit but from profits to investment.  Investment does not cause profit, as Keynesian theory argues, but profits cause investment.

Shaikh commented in his contribution that Keynes was also well aware that profits were relevant to investment.  That sounds contradictory to what I am arguing.  But let Keynes himself resolve how he saw it, when he says that “Nothing obviously can restore employment which first does not restore business profits.  Yet nothing in my judgement can restore business profits that does not first restore the volume of investment”.  To answer Keynes, my paper shows that there is plenty of empirical evidence to show that profits lead investment into any slump and out into a boom – the Marxist view.  And there is little or no evidence that investment drives profits – the Keynesian view.

Shaikh at HM argued that it is the ‘profits of enterprise’ that matter not profits as such.  By this he means that the interest or rent taken by finance capital and landlords must be deducted before we can see the direct connection between business profits and business investment.  Maybe so, but the evidence is also strong that the overall surplus value in the hands of capital (including finance capital) is the driving force behind investment.  Interest and rent can never be higher than profit as they are deductions from total profits made by productive capital.

Also Shaikh reckons that it is expectations of future profit on new investment that is decisive in the movement of business investment, not the mass or the rate of profit on the existing stock of capital invested.  Yes, capitalists invest on the expectation of profit but that expectation is based on what their actual profitability was before.  So the profitability on existing capital is what matters.  Otherwise, the expectation of profit becomes some ephemeral subjective measure, like Keynes’ animal spirits’.  Indeed, as I quote Paul Mattick in my paper, “what are we to make of an economic theory …. which could declare; “In estimating the prospects for investment, we must have regard therefore, to the nerves and hysteria and the digestions and reactions to the weather of those upon whose spontaneous activity it largely depends” (Keynes).

My paper concludes that different economic policy conclusions flow from the Marxist or Keynesian view of what drives investment.  The Keynesian multiplier reckons that it is demand that drives investment and if consumer and investment demand is low or falling, a suitable boost of government investment and spending can compensate and so pump prime or boost the capitalist economy back on its feet.

But when we study the evidence of the efficacy of the Keynesian multiplier, as I do in this paper, it is not compelling.  On the other hand, the Marxist multiplier, namely the effect of changes in the profitability of business capital on investment and economic growth, is much more convincing.  Thus Keynesian fiscal and monetary stimulus policies do not work and do not deliver economic recovery when profitability of capital is low and/or falling. Indeed, they may make things worse.

At the plenary I pointed out that Donald Trump plans some limited form of Keynesian stimulus by government spending on infrastructure programmes worth about $250bn.  I have discussed these plans and their fake nature before.  But even if they were genuine increases in state investment, it will do little.  Business investment as a share of GDP in most advanced capitalist economies is around 12-18% of GDP.  Government investment is about 2-4%, or some four to six times less. That’s hardly surprising as these are capitalist economies!  But that means an increase of just 0.2% of GDP in government investment as Trump proposes will make little difference, even if the ‘multiplier effect’ of such investment on GDP growth were more than one (and evidence suggests it will be little more,LEEPER_LTW_FMM_Final).

What matters under capitalism is profit because the capitalist mode of production is not just a monetary economy as Keynesian theory emphasises; it is, above all, a money-making economy.  So without profitability rising, capitalist investment will not rise.  This key point was the starting point of another session on Fred Moseley’s excellent book, Money and Totality, which explains and defends Marx’s analysis of capital accumulation, his laws of value and profitability, from competing and distorting interpretations. I have reviewed Moseley’s book elsewhere.

But the key points relevant to this post are that Moseley shows there is no problem of reconciling Marx’s law of value (based on all value being created by labour power) with relative prices of production and profitability in a capitalist economy.  There is no need to ‘transform’ labour values into money prices of production as Marx starts the circuit of production with money inputs and finishes it with (more) money outputs.  The law of value and surplus value provided the explanation of how more money results – but no mathematical transformation is necessary.

But this also means that for Marx’s law of value to hold and for total value to explain total prices (and for total surplus value to explain total profits), only labour can be the source of all value created.  There cannot be profit without surplus value.  That is why I disagree with Anwar Shaikh’s view that Marx also recognised profit from ‘alienation’, or transfer.  I have explained where I disagree here.

The danger of accepting that profit can come from somewhere else than from the exploitation of labour power is that it opens the door to the fallacies of mainstream economics, particularly Keynesian economics, that creating money or credit can deliver more income (demand) and is not fictitious but real value.  If that were true, then monetarism and Keynesian policies become theoretically valid options for ending the current Long Depression and future slumps without replacing the capitalist mode of production.  Luckily, the view that profits can be created out of money and by not exploiting labour is demonstrably false.