Archive for the ‘marxism’ Category

Davos: responsible capitalism

January 16, 2017

Today, the global political and economic elite meet in Davos Switzerland under the auspices of the World Economic Forum (WEF).  Every year the WEF has an annual meeting in the super exclusive ski resort of Davos, with the participation of 3,000 politicians, business leaders, economists, entrepreneurs, charity leaders and celebrities.  For example, this year Chinese president Xi Jinping, South Africa’s Jacob Zuma and many of the economic mainstream gurus and banking officials are among the attendees. Xi Jinping will be the first Chinese president to attend Davos and will lead an unprecedented 80-strong delegation of business leaders, economists, academics and journalists.  He will deliver the opening plenary address on Tuesday and use it to defend “cooperation and economic globalisation”.  

US vice-president Joe Biden, China’s two richest men and London mayor Sadiq Khan will travel on private jets to nearby airports before transferring by helicopter to escape the traffic on the approach to the picturesque town. So many jets are expected that the Swiss government has opened up Dübendorf military airfield, an 85-mile helicopter flight away, to accommodate them.  The increase in private jet flights – which each burn as much fuel in one hour as typical use of a car does in a year – comes as the WEF warns that climate change is the second most important global concern.

While the rich elite fly in on their private jets, extra hotel workers are being bussed in to serve the delegates, while packing into five a room in bunk beds.  One of the main themes of Davos will be the rising inequality of income and wealth.  So Davos itself is a microcosm.

At Davos’ super luxury hotel the Belvedere, there will be “specially recruited people just for mixing cocktails”, as well as baristas, cooks, waiters, doormen, chambermaids and receptionists  to host world leaders, business people and celebrities, who this year include pop star Shakira and celebrity chef Jamie Oliver (worth $400m).  Last year, a Silicon Valley tech company was reportedly charged £6,000 for a short meeting with the president of Estonia in a converted luggage room. The hotel has also previously flown in New England lobster and provided special Mexican food for a company that was meeting a Mexican politician.

Britain’s Theresa May will be the only G7 leader to attend this year’s summit as it clashes with Donald Trump’s inauguration as the 45th US president.  Last year, former UK PM David Cameron partied tie-less with Bono, Leonardo DiCaprio and Kevin Spacey, at a lavish party hosted by Jack Ma, the founder of internet group Alibaba and China’s richest man with a $34.5bn (£28.5bn) fortune. Tony Blair also attended the Ma party last year.

Basic membership of the WEF and an entry ticket costs 68,000 Swiss francs (£55,400).  To get access to all areas, corporations must pay to become Strategic Partners of the WEF, costing SFr600,000, which allows a CEO to bring up to four colleagues, or flunkies, along with them. They must still pay SFr18,000 each for tickets. Just 100 companies are able to become Strategic Partners; among them this year are Barclays, BT, BP, Facebook, Google and HSBC. The most exclusive invite in town is to an uber-glamorous party thrown jointly by Russian billionaire Oleg Deripaska and British financier Nat Rothschild at the oligarch’s palatial chalet, a 15-minute chauffeur-driven car ride up the mountain from Davos. In previous years, Swiss police have reportedly been called to Deripaska’s home after complaints about the noise of his Cossack band. Deripaska’s parties have “endless streams of the finest champagne, vodka, and Russian caviar amidst dancing Cossacks and beautiful Russian models.”

The official theme of this year’s forum is “responsive and responsible leadership”!  That hints at the concerns of global capitalism’s elite: they need to be ‘responsive’ to the popular reaction to globalisation and the failure of capitalism to deliver prosperity since the end of the Great Recession and they also need to be ‘responsible’ in their policies and actions – a subtle appeal to the newly inaugurated Donald Trump as US president or Erdogan in Turkey, Zuma in South Africa, Putin in Russia and Xi in China.

The WEF has been the standard bearer of the positives from ‘globalisation’, new technology, free markets, ‘Western democracy’ and ‘responsible’ leadership.  Trump and other leaders of global and regional powers now seem to threaten that enterprise.  But Trump is the result of the failure of the WEF project itself i.e. global capitalist ‘progress’.

In my book, The Long Depression, in the final chapter I raised three big challenges for the capitalist mode of production over the next generation: rising inequality and slowing productivity; the rise of the robots and AI; and global warming and climate change.  And these issues are taken up in this year’s WEF report entitled The Global Risks Report.  The WEF report cites five challenges for capitalsim:  1 Rising Income and wealth disparity; 2 Changing climate; 3 Increasing polarization of societies; 4 Rising cyber dependency and 5 Ageing population.

The report points out that while, globally, inequality between countries has been “decreasing at an accelerating pace over the past 30 years”, within countries, since the 1980s the share of income going to the top 1% has increased in the United States, United Kingdom, Canada, Ireland and Australia (although not in Germany, Japan, France, Sweden, Denmark or the Netherlands).  Actually, as I have shown in recent posts, global inequality (between countries) has only decline because of the huge rise in incomes per head in China.  Excluding, there has been little improvement, with many lower income countries having worsening inequality.  And as the WEF says, the slow pace of economic recovery since 2008 has “intensified local income disparities with a more dramatic impact on many households than aggregate national income data would suggest.”

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The latest measures of inequality of incomes and wealth as presented by Thomas Piketty, Emmanuel Saez, Daniel Zucman and recently deceased Tony Atkinson, are truly shocking, with no sign of any reduction in inequality in the US, in particular.

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Since the global financial crisis the incomes of the top 1% in the US grew by more than 31%, compared with less than 0.5% for the remaining 99% of the population, with 540 million young people across 25 advanced economies facing the prospect of growing up to be poorer than their parents.  And to coincide with Davos, Oxfam, using the data compiled for the annual Credit Suisse wealth report finds that the world’s eight richest individuals have as much wealth as the 3.6bn people who make up the poorest half of the world!

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In my blog and , I discuss the reasons for this sharp increase in inequality.  Inequality is a feature of all class societies but under capitalism it will vary according to the balance of power in the class struggle between labour and capital.  The WEF report likes to think that the cause is the differential of skills between those who are better educated and therefore can obtain higher wages.  But research has shown this to be nonsense.  The real disparity comes when capital can usurp a greater proportion of value created in capitalist production.  Increased profitability, lower corporate taxes and booming stock and property markets since the 1980s have shifted up incomes from capital compared to wages, particularly for the top echelons in corporations.

And then there is the impact of ‘capital bias’ in capitalist production that I have referred to before.  According to the economists Michael Hicks and Srikant Devaraj, 86% of manufacturing job losses in the US between 1997 and 2007 were the result of rising productivity, compared to less than 14% lost because of trade.

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“Most assessments suggest that technology’s disruptive effect on labour markets will accelerate across non-manufacturing sectors in the years ahead, as rapid advances in robotics, sensors and machine learning enable capital to replace labour in an expanding range of service-sector job.  A frequently cited 2013 Oxford Martin School study has suggested that 47% of US jobs were at high risk from automation and in 2015, a McKinsey study concluded that 45% of the activities that workers do today could already be automated if companies choose to do so.” (WEF).

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Technological change is shifting the distribution of income from labour to capital: according to the OECD, up to 80% of the decline in labour’s share of national income between 1990 and 2007 was the result of the impact of technology.  While at a global level, however, many people are being left behind altogether: more than 4 billion people still lack access to the internet, and more than 1.2 billion people are without even electricity.

In my book, I cite the next challenge for capitalism is climate change from global warming.  The WEF report does too.  There are a growing “cluster of interconnected environment-related risks – including extreme weather events, climate change and water crises” .Global greenhouse gas (GHG) emissions are growing, currently by about 52 billion tonnes of CO2 equivalent per year.  Last year was the warmest on the instrumental record according to provisional analysis by the World Meteorological Organisation. It was the first time the global average temperature was 1 degree Celsius or more above the 1880–1999 average.  According to the National Oceanic and Atmospheric Administration, each of the eight months from January through August 2016 were the warmest those months have been in the whole 137 year record.

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As warming increases, impacts grow. The Arctic sea ice had a record melt in 2016 and the Great Barrier Reef had an unprecedented coral bleaching event, affecting over 700 kilometres of the northern reef. The latest analysis by the UN High Commissioner for Refugees (UNHCR) estimates that, on average, 21.5 million people have been displaced by climate- or weather-related events each year since 2008,59 and the UN Office for Disaster Risk Reduction (UNISDR) reports that close to 1 billion people were affected by natural disasters in 2015.

The Emissions Gap Report 2016 from the United Nations Environment Programme (UNEP) shows that even if countries deliver on the commitments – known as Nationally Determined Contributions (NDCs) – that they made in Paris, the world will still warm by 3.0 to 3.2°C. To keep global warming to within 2°C and limit the risk of dangerous climate change, the world will need to reduce emissions by 40% to 70% by 2050 and eliminate them altogether by 2100.

The World Bank forecasts that water stress could cause extreme societal stress in regions such as the Middle East and the Sahel, where the economic impact of water scarcity could put at risk 6% of GDP by 2050. The Bank also forecasts that water availability in cities could decline by as much as two thirds by 2050, as a result of climate change and competition from energy generation and agriculture. The Indian government advised that at least 330 million people were affected by drought in 2016. The confluence of risks around water scarcity, climate change, extreme weather events and involuntary migration remains a potent cocktail and a “risk multiplier”, especially in the world economy’s more fragile environmental and political contexts.

The third big challenge cited by the WEF is restoring global economic growth.  The report points out that permanently diminished growth translates into permanently lower living standards: with 5% annual growth, it takes just 14 years to double a country’s GDP; with 3% growth, it takes 24 years. “If our current stagnation persists, our children and grandchildren might be worse off than their predecessors. Even without today’s technologically driven structural unemployment, the global economy would have to create billions of jobs to accommodate a growing population, which is forecast to reach 9.7 billion by 2050, from 7.4 billion today.”

So the WEF report highlights a whole batch of problems ahead for the stability and success of global capitalism. And what are the answers for a ‘responsive and responsible’ global leadership gathering in Davos?  Capitalism must be preserved, of course, but it will necessary “to reform market capitalism and to restore the compact between business and society.”

But having said that globalisation is failing in its report, the WEF then says that the way forward is really more of the same.  “Free markets and globalization have improved living standards and lifted people out of poverty for decades. But their structural flaws – myopic short-termism, increasing wealth inequality, and cronyism – have fueled the political backlash of recent years, in turn highlighting the need to create permanent structures for balancing economic incentives with social wellbeing.”

Thus the WEF report calls on the rich elite “to be responsive to the demands of the people who have entrusted them to lead, while also providing a vision and a way forward, so that people can imagine a better future.” And how to do this?  “Leaders will have to build a dynamic, inclusive multi-stakeholder global-governance system…the way forward is to make sure that globalization is benefiting everyone.”

Reducing inequality and poverty, boosting productivity and growth through new technology while preserving jobs and raising incomes; reducing gas emissions into the atmosphere to avoid global catastrophes, while preserving and reforming capitalism through global cooperation from Trump in the US, Xi Ping in China, Putin in Russia and Brexit Britain and the European Union.  Hmm…

Optimism reigns

January 4, 2017

Global stock markets ended 2016 near record highs and have started 2017 in a similar vein. Optimism about global economic growth, employment and incomes has bounced.

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The latest data on manufacturing, as measured by the so-called purchasing managers’ index (PMI), the view of companies on their sales, exports, employment and orders, show a rise in December across the board and particularly in Europe and the US. PMIs measure whether manufacturing companies think that their activity is expanding or contracting. Anything above 50 suggests expansion. In Europe, the PMIs suggest that manufacturing is now expanding at a record pace (from a low level), while the global average PMI has now reached levels not seen since 2013.

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Gavyn Davies, former chief economist at the infamous investment bank, Goldman Sachs, now blogs in the Financial Times and produces a measure of global economic activity with his Fulcrum Nowcast model. The latest monthly estimates show that economic growth has recovered markedly from the low point reached last March. Then fears of global recession were high. But Davies says now “not only were these fears too pessimistic, they were entirely misplaced. Growth rates have recently been running above long-term trend rates, especially in the advanced economies, which have seen a synchronised surge in activity in the final months of 2016.”

According to Fulcrum, the growth rate in global economic activity is currently running at 4.1 per cent, compared with an estimated trend rate of 3.8 per cent. This represents a vast improvement on the growth rates recorded in 2015 and early 2016, when growth dipped to below 2.5 per cent at times. The latest estimate for the advanced economies shows ‘activity growth’ running at 2.5 per cent, a rate achieved only rarely during the post-crash economic expansion.

JP Morgan investment bank is also more optimistic, if only a little. “Our global economic outlook calls for a 2.8% gain in global GDP in 2017 (4Q/4Q), a few tenths above potential. The year-ago rate bottomed out at 2.5% this year (during 1Q16-3Q16, we think), so the forecast represents a modest though still meaningful improvement over recent performance.” Goldman Sachs takes a similar view in its look ahead to 2017: “We expect global growth to improve modestly, from 2.5% in 2016 to 2.9% in 2017, with looser fiscal policy and still easy monetary policy in key countries.”  goldman-sachs-isg-outlook-2017

As I argued in my forecast for 2017, optimism that the world capitalist economy is now getting permanently out of its depressed state is driven by the possibility that the new US President Trump will activate a Keynesian-style fiscal stimulus of corporate tax cuts and infrastructure spending that will ‘pump-prime’ the US and other economies out their weak growth.

At the same time, China, having been close to a financial crash, according to mainstream economics this time last year, has steadied and is also picking up some traction. Indeed, China’s pick-up has confounded mainstream expectations that China’s seven-year credit boom, during which the debt/GDP ratio rose from 150% to 250%, would inevitably end in 2016. Almost all non-Chinese economists anticipated a significant slowdown, which would intensify deflationary pressures worldwide.

But the Chinese economy is a weird beast, not understood by mainstream (and even Marxist economists). President Xi may have endorsed in 2013 “the decisive role of the market,” but that hasn’t diminished the leading role of the state. As Aidan Turner put it recently, “Suppose that a full quarter of Chinese capital investment – currently running at around 44% of GDP – is wasted: that would mean China’s people are unnecessarily sacrificing 11% of GDP in lost consumption: but if the remaining 33% of GDP is well invested, rapid growth could still result. And, alongside obvious waste, China makes many high-return investments – in the excellent urban infrastructure of the first-tier cities, and in the automation equipment of private firms responding to rising real wages.”

Thus, according to Fulcrum, emerging economies are currently growing steadily at close to their 6 per cent trend rate, or 2 percentage points higher than achieved in 2015. They have therefore ceased to be a drag on the global expansion. No wonder stock markets are off to the races.

I won’t repeat myself with the arguments I presented against the view that capitalism has turned the corner and is entering a new boom period. I made these in my last post. But let me now add some caveats to the optimism of the banks, hedge funds and other financial institutions in investing our pension funds and savings in the stock market.

First, the expert financial consultants are notoriously wrong in their forecasts. Since 2000, they have predicted the S&P 500 would gain about 10% a year, grossly overshooting the market’s actual performance. And, on average, the consensus always has predicted annual gains, missing all five down years in that stretch. A study by CXO Advisory Group collected more than 6,500 forecasts from 68 so-called market gurus. More were wrong than right.

Second, in the last analysis, stock market prices depend on the expected earnings (profits) of companies. The ratio of the market valuation or price of the US stock market is now pretty high compared to profits by historic standards. When profits are set against the value of a company’s assets, the so-called return-on-equity for the top five listed companies in each industry is double that of the rest. And indeed, if you exclude the top five companies in each sector of US business, profitability (return on stocks purchased) is near 30 year-lows. In other words, earnings are concentrated in the very big oligopoly firms. Most American corporations are scratching a return.

And third, as I have pointed out before, corporate indebtedness has also been rising. A company’s value is measured by investors by its liabilities (net debt and stock value). Currently, those liabilities are at levels compared to earnings not seen since the dot.com collapse of 2000-1.

Finally, the US stock market relative to GDP is nearly back to the level seen just before the global financial crash in 2007-8. In other words, it is reaching extremes compared to the sales revenues and profitability of companies.

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Stock prices are being artificially driven up by corporations using their profits to buy back their own shares or make higher dividend payments. According to research by WPP, a global communications firm, among companies listed on the S&P 500, share buybacks and dividends have exceeded retained earnings (that is, profits withheld by companies and generally earmarked for investment) in five of the six quarters up to June 2016. Moreover, the ratio of payouts and buybacks to earnings has risen from around 60 percent in 2009 to over 130 percent in the first quarter of 2016.

The locus of what is going to happen to the global economy over the next year or two is to be found in the US. This remains the largest and most productive economy in the world, including manufacturing, and of course so-called services and finance. And the ‘recovery’ after the end of the Great Recession in 2009 has been weakest in post-war US economic history.

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US investment and consumption have still not recovered to levels relative to GDP seen before the Great Recession.

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So my mantra of a Long Depression is confirmed by these figures – even for the US, which has had the best ‘recovery’ of the major capitalist economies.

Moreover, the duration of this US recovery is the fourth-longest, at 30 quarters of a year, only exceeded by the recoveries in the ‘golden age’ of the 1960s and the profitability boom periods in the ‘neoliberal era’ after the slumps of 1980-2 and 1991.

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So the US is due for another slump on the law of averages, within a year or two.

But all mainstream economic forecasters rule out a new recession in 2017. The mantra is that recoveries ‘do not just die of old age’. Something must happen to stop them. As Goldman Sachs puts it: “Recessions in the US have been triggered by Federal Reserve tightening of monetary policy; by economic imbalances such as the bursting of the dot-com and housing bubbles in 2000 and 2008, respectively; or by external shocks such as the Arab oil embargo in 1973. The first two triggers are unlikely to occur in 2017, and the third, a shock, is not something that we can typically anticipate.”

GS goes on: “Historically, since WWII, the odds of a recession occurring over a 12-month period have been 18%. Our composite recession model, incorporating end-of-year financial and economic data, estimates the probability of a recession in 2017 at 23%.” So slightly higher than average. But “once we incorporate the likely passage of a fiscal stimulus package of tax cuts and infrastructure investments in the latter half of 2017, the probability of a recession this year declines to about 15%.”

The question is whether the optimism of markets and mainstream economists of an extended and permanent boom in global production based on fiscal spending and corporate tax cuts in America is justified. As I have argued in other posts, Keynesian-style policies have miserably failed in Japan to get that economy out of its long depression.

And I have argued that sustained growth depends on increased investment in productive sectors and that depends on corporate profits in the US rising, not falling as they have done up to the second half of 2016. This measure is ignored by Goldman Sachs, although not by others.

Trumponomics, in cutting corporate taxes and delivering tax breaks for infrastructure investment, might boost profits for some sectors. But as the data above show, the vast majority of US corporations are seeing the profitability in their investments falling, not rising. The odds of a new recession may be higher than Goldman Sachs thinks.

The system is broken

December 25, 2016

In an end of the year piece, the biographer of John Maynard Keynes, economist Lord Robert Skidelsky writes that Let’s be honest: no one knows what is happening in the world economy today. Recovery from the collapse of 2008 has been unexpectedly slow. Are we on the road to full health or mired in “secular stagnation”? Is globalization coming or going?”

He goes on: “Policymakers don’t know what to do. They press the usual (and unusual) levers and nothing happens. Quantitative easing was supposed to bring inflation “back to target.” It didn’t. Fiscal contraction was supposed to restore confidence. It didn’t.”

Skidelsky lays the blame for this on the state of macroeconomics – he reminds us of the now infamous visit of the British Queen Elizabeth to the London School of Economics at the depth of the Great Recession in 2008 when she asked a group of eminent economists: why did they miss this coming? (see my book, The Long Depression).  They replied that they did not know why they did not know!

Skidelsky goes on to consider various reasons for the failure of mainstream economics to see the crisis coming or now to know what to do about it.  One reason might be the concentration of economics education on unrealistic models and mathematical formulas, rather than grasping “the whole picture”. He reckons economics has cut itself off from “the common understanding of how things work, or should work.”  This analysis follows that recently argued by Paul Romer, the new chief economist at the World Bank, who, on resigning from academia, also attacked the state of macroeconomics today.

Skidelsky’s second reason is that mainstream economics views society as like a machine that can achieve equilibrium of supply and demand so that “deviations from equilibrium are “frictions,” mere “bumps in the road”; barring them, outcomes are pre-determined and optimal.”  What this fails to recognise, says Skidelsky, is that there are human beings operating in an economic system and they cannot be fitted into an equilibrium model or machine.  Mathematics then gets in the way of the big picture with all its human unpredictabilities and changes. What is wrong with economics, according to Skidelsky is that there is a lack of “broad education and outlook”.  Economists need to know about wider things in social organisation and behaviour and the history of human development, not just models and maths.

While Skidelsky’s arguments have more than an element of truth about them, he does not really explain why mainstream economics has become divorced from reality.  This is not a mistake of education or lack of recognition of wider social sciences like psychology; it is a deliberate result of the need to avoid considering the reality of capitalism.  ‘Political economy’ started as an analysis of the nature of capitalism on an ‘objective’ basis by the great classical economists Adam Smith, David Ricardo, James Mill and others.  But once capitalism became the dominant mode of production in the major economies and it became clear that capitalism was another form of the exploitation of labour (this time by capital), then economics quickly moved to deny that reality.  Instead, mainstream economics became an apologia for capitalism, with general equilibrium replacing real competition; marginal utility replacing the labour theory of value and Say’s law replacing crises.

As Marx succinctly put it: Once for all I may here state, that by classical political economy, I understand that economy, which, since the time of W. Petty, has investigated the real relations of production in bourgeois society, in contradistinction to vulgar economy, which deals with appearances only, ruminates without ceasing on the materials long since provided by scientific economy, and there seeks plausible explanations of the most obtrusive phenomena, for bourgeois daily use, but for the rest, confines itself to systematizing in a pedantic way, and proclaiming for everlasting truths, the trite ideas held by the self-complacent bourgeoisie with regard to their own world, to them the best of all possible worlds.”

What is wrong with mainstream economics is not (just) that economists of today are too narrowly mathematical and focused on economic models – there is nothing inherently wrong with using maths and models – or that most economists do not have the wider “erudition and multiple talents” of the classical economists of the past.  It is that economics is no longer ‘political economy’, an objective analysis the laws of motion of capitalism, but an apologia for all the ‘virtues’ of capitalism.

The assumption of economics is that capitalism is the only viable system of human social organisation that will deliver the wants and needs of people.  There is no alternative.  Capitalism is eternal and it works as long there is not too much interference in markets from outside forces like government or from ‘excessive’ monopolies.  Occasionally, the task is to control ‘shocks’’ to the system (neoclassical view) or make interventions to correct ‘technical problems’ in capitalist production and circulation (Keynesian view).  But the system itself is fine.

Take Paul Krugman’s reaction to Skidelsky’s piece.  What upsets Krugman is the suggestion from Skidelsky that mainstream economics reckons that fiscal contraction (austerity) was necessary to “restore confidence” after the Great Recession.  Krugman, as the modern doyen of Keynesianism, disagrees with the biographer of Keynes.  Mainstream economics, at least the Keynesian wing, argued the opposite.  More government spending, not less, would have got the capitalist economy out of its depression.   This is basic macroeconomics, Krugman says.

He then goes onto to claim that austerity is “strongly correlated with economic downturns”.  Actually the evidence for that claim is weak indeed, as I have shown in various places on my blog and in papers (published and upcoming).  The great Keynesian solutions of easy money, zero interest rates and fiscal spending have come well short of delivering an end to the depression when they have been tried (and all three have been tried in Japan).  Krugman, of course, tells us that they have not been tried, at least not enough.  Policymakers refused to use fiscal policy to promote jobs; they chose to believe in the confidence fairy to justify attacks on the welfare state, because that’s what they wanted to do. And yes, some economists gave them cover. But that’s a very different story from the claim that economics failed to offer useful guidance. On the contrary, it offered extremely useful guidance, which policymakers, for political reasons, chose to ignore.”

In my view, policy makers may have chosen to ignore fiscal spending to solve the ‘technical problem’ of the Long Depression partly “for political reasons”.  But there are also very good economic reasons for arguing that in a capitalist economy, increased government spending and running budget deficits would not get an economic recovery if the profitability of capital is low.

Skidelsky mentioned the other great blindspot of mainstream economics: the claim that the free movement of goods and capital, globalisation, works for all.  Angus Deaton,winner of the Nobel Prize for economics in 2015, is an optimistic defender of globalisation.  Deaton’s 2013 book The Great Escape argued that the world we live in today is healthier and wealthier than it would otherwise have been, thanks to centuries of economic integration. In an interview in the FT, Deaton says that “Globalisation for me seems to be not first-order harm and I find it very hard not to think about the billion people who have been dragged out of poverty as a result”.

I have discussed Deaton’s arguments in previous posts.  Deaton represents all that is best in mainstream economics now, as he looks at the big issues: globalisation, robots, inequality and human health and happiness.  He is now worried about the threat of robots for labour’s share, the growing inequalities from “rent-seeking” and the deteriorating health of Americans from over use of drugs pumped into them by pharma companies.  He reckons that happiness effectively peaked once a person was earning the equivalent of $75,000 a year.”  Of course, most don’t have even that, as Deaton knows.  But he remains confident that capitalism is the best system of social organisation as it has taken a billion people “out of poverty” over the last 250 years. So capitalism works, even if its apologists ignore its workings and cannot explain when it does not work.

The FT interviewer left Deaton and wandered back to his car “There is a limp, wet parking ticket stuck to my windscreen, a $40 fine. I smile. I’m also drawn back to the advice Deaton offered when I first sat down and mentioned my fear of a looming ticket.  “I’m sure you can get out of it,” the Nobel laureate told me. “Just tell them the system was broken.”

Well, the system is broken and the economists cannot get us out of it.

 

Top ten posts of 2016

December 23, 2016

As has become customary at the end of the calendar year, here are the top ten most popular posts from my blog for this year.  Topping the list was my review post of Anwar Shaikh’s magnum opus, Capitalism: competition, conflict and crises.  The fact that this was the most popular post is a credit to Shaikh’s magisterial book and also to the serious attitude that my blog readers take to Marxist economics.

As I said in the post, Shaikh’s book is a product of 15 years work.  A theory of ‘real competition’ is developed and applied to explain empirical relative prices, profit margins and profit rates, interest rates, bond and stock prices, exchange rates and trade balances.  Demand and supply are both shown to depend on profitability and interact in a way that is neither Say’s Law nor Keynesian, but based on Marx’s theory of value.  A classical theory of inflation is developed and applied to various countries.  A theory of crises is developed and integrated into macrodynamics.

In the post, I concentrated on Shaikh’s view on the causes of crises under capitalism and highlighted that he had a position is similar to my own on the causes of capitalist crises, the nature and existence of depressions, and the role of Kondratiev and profit cycles.  In a later post, however, I raised criticisms of his position on Marx’s theory of value,, particularly his attempt to reconcile Ricardo with Marx on value.  In my view, there is no reconciliation possible between Marx’s value theory and that of Ricardo and Sraffa.  There is also no unification possible between Marx’s law of profitability as the underlying cause of recurrent crises and slumps and the post Keynesian/Kalecki view of a ‘profit-wage share’ economy.  And there is no meeting between Marx’s view of profitability and credit in modern capitalism and those who hold that finance creates value and that ‘financial speculation’ lies at the centre of capitalist crises.  Shaikh stands for Marx on most of these issues but seems want to build a bridge to other side too.

The second most popular post was also a book review – of John Smith’s Imperialism in the 21st century, in many ways ground-breaking in its analysis of modern imperialism.  Smith shows that capital in the North restored much of the fall in its profitability in the 1970s on the back of the exploitation of the South in the 1980s onwards: “surplus-value extracted from these new legions of poorly paid workers helped to dig the capitalism system out of its hole in the 1970s”.

Smith firmly dismisses the idea that is prominent among mainstream and heterodox economics alike that the global financial crisis and the Great Recession were financial in origin. Smith reckons that gross domestic product (GDP) as a measure of value hides the fact that much of the US GDP is not value created by American workers but is captured through multinational exploitation and transfer pricing from profits created from the exploitation of the workers of the South.

Smith argues that the exploitation of the workers of the South is less through an expansion of absolute and relative surplus value and more through driving wages below the value of labour power (super-exploitation).There was a vigorous debate on my blog over whether Smith was right about this as the dominant characteristic of modern imperialism. That debate continues.

Smith’s view of imperialist exploitation is complemented by Tony Norfield’s book showing how the imperialist financial centres capture the value expropriated from the periphery.  My post on Norfield’s also made the top ten. A key part of Norfield’s book is to weave in facts like that about modern imperialism with a Marxist analysis of the role of finance capital.  And Norfield is incisive in illuminating the nature of the modern British economy.  I have described Britain in the past as the world’s largest ‘rentier’ economy.  That’s an old-fashioned French word for an economy based on sucking up ‘rents’ through the monopoly ownership of capital (or land) from the profits of the productive sectors.  Both the sectors exploit labour but the rentier economy relies on its financial and legal monopoly to take a share of the surplus value of productive capitalist sectors appropriated from labour. This gives British capital its important role in modern imperialism, but also its Achilles heel in any global financial crash or in the shock of Brexit.

The third most popular post in 2016 was on whether Marxist economic theory better explains what had happened in the last ten years than Keynesian economics, which remains the dominant thinking among leftist organisations. Leading Keynesian Brad Delong told us Marxist economists at the annual American Economics Association Conference in San Francisco last January that we are like pessimists just ‘waiting for Godot’, when capitalism can be made to work with the ‘concrete economics’ of Keynesian social democracy (the title of DeLong’s new book this year). Well, the last ten years cast doubt on that view and the next few years will see who is right.

In the post I argued that the cause of the Great Recession and the subsequent Long Depression is not the product of a ‘lack of demand’ as such or ‘pro-cyclical’ government spending policies (austerity) but is caused by a collapse of the capitalist sector, in particular, capitalist investment.  And that investment collapsed because profitability in the capitalist sector fell, then the mass of profits fell, leading to investment, employment and incomes to fall, in that order.  Then it’s the change in profits that leads to changes in investment and demand (consumption), not vice versa, as the Keynesians argue.

At the beginning of 2016, the world economy was looking pretty weak and there was much talk that a growing debt crisis in China was likely to lead to a major crash there, which would then spread globally.  But in a post that proved popular, I questioned the doom-mongering about China and also the size of the impact that China would have on the major capitalist economies. I argued that the US remains the pivotal economy for a global capitalist crisis, particularly as it dominates in financial and technology sectors.  In 1998, the emerging economies had a major economic and financial crisis but it did not lead to a global slump.  In 2008, the US had a biggest slump in its economic post-war history and it led to the Great Recession.  In my view, this weighting still applies.  That proved right, at least for 2016.

One of the big politico-economic events of 2016 was the referendum vote in Britain to leave the European Union.  My post on the day after Brexit got a lot of hits. I got it wrong, having expected a vote to remain in the EU. I had got two previous predictions right: that Scotland would vote to stay in the UK and that the Conservatives would win the 2015 UK general election, but I did not get a hat trick in 2016,  as former Conservative PM David Cameron’s wild political gamble did not come off.  In the post, I analysed the reasons why there was a vote for Brexit and looked at the possible economic impact. That impact has still to be felt both for the UK and for world trade.

The other major political event of 2016, of course, was the surprise victory of Donald Trump for the US presidency, despite polling more than 2m votes less than his Democratic opponent Hillary Clinton.  In a post directly after the result, I again analysed the reasons for Trump’s victory.  I said that, like the vote of the Brits for Brexit, against all expectations, a sufficient number of voters in America (mainly white, older and in small businesses or working in failing industries in smaller central US states) overcame the vote of the youth, the more educated and better-off in the big cities along the coasts.

But it was not so much a working class vote for Trump because hardly more than 50% or so of eligible voters turned out to vote.  A huge swathe of people never vote in American elections and they constitute a sizeable part of the working class.  The most significant issue (52%) for voters, when asked at the booths, was the state of the US economy, with terrorism next (but well down at 18%) and immigration (the Trump card) even lower.  So Trump won because he claimed he could improve the conditions of those ‘who have been left behind’ by globalisation, failing domestic industries and crushed small businesses.

Stock markets are now riding high on expectations that Trump can boost the US economy.  But in the post, I argued that Trump had been handed a poisoned chalice and the US economy would not recover.  Trump would not be able to deliver and his big business cabinet would do in the opposite of what those ‘left behind’ want.  We shall see in 2017.

One of the features of Brexit and Trump events is that it heralds the end of the great neo-liberal era of globalisation and ‘free trade’.  My post on the end of globalisation made the top ten.  It critiqued the views of Keynes in the 1930s and his modern epigone Brad Delong (again!) in claiming that capitalism has been the most successful mode of production in human history and it would be again. Instead, I argued that capitalism is really past its use-by date.  One indicator is that ‘globalisation’ (the spread of capitalism’s tentacles across the world) has ground to a halt.  And growth in the productivity of labour, the measure of future ‘progress’, has also more or less ceased in the major economies.

More short term, a key question for me and it seems my readers, was whether the world economy is heading for another slump.  In a post written early in the year, Can we avoid the coming recession?, I presented the facts as I saw them and offered a cautious forecast that a new economic recession was “due and will take place in the next one to three years at most.” I said that maybe there won’t be one in 2016 (as it has proved)… “But the factors for a new recession are increasingly in place: falling profitability and profits in the major economies and a rising debt burden for corporations in both mature and emerging economies.”

And finally there is my post on how unequal the world is, according to annual study by Credit Suisse, which makes the top ten every year.  This year was no exception, with the finding that the top 1% of the adult wealth holders in the world own 51% of all global personal wealth, while the bottom half of adults own only 1%.  Indeed, the top 10% of adults own 89% of all the world’s personal wealth!  This is a record.

In the past 12 months, global wealth has risen by 1.4% and so it has barely kept pace with population growth. As a result, in 2016, the mean average wealth per adult was unchanged for the first time since 2008, at approximately $52,800.  This mean average tells you that the vast majority of the world’s adults have way less wealth than that.  On average, wealth did not rise, while inequality between rich and poor rose again.

That’s the message of 2016 from my posts: continued depression for the majority and more for the tiny elite.

 

Best books of 2016

December 21, 2016

I thought I would remind myself and blog readers of what seemed to me were the best books on economics published this year.  The criteria for me were whether the book added any new idea or understanding of developments in modern capitalism or in Marxist economic theory. Yes, I know, very boring with no jokes or stories involved.

Let start with those books that looked at the activities of finance capital and imperialism in the major economies and globally.  In his excellent new book, Finance Capital Today, French Marxist Francois Chesnais analysed in detail the key developments in modern finance and the causes of the global financial crash in 2008.

As Francois says in a comment to my blog,  “Today not enough surplus value is being produced to re-launch the accumulation process and the amount that is serves to consolidate the accumulation of dividend and interest bearing assets by banks, funds and individuals (financial accumulation) and so the claims on this already very insufficient amount of surplus value. This has led both to the dead-end of the quasi-zero long term interest rate regime, which not simply the outcome of quantitative-easing and to the endless small shocks in the global financial system. Of course government debt and the resulting pro-rentier, pro-cyclical austerity policies only aggravate this situation but they do not explain it and their reversal would not solve capitalism’s basic problem.”  Tony Norfield provides a really comprehensive and positive review of Chesnais’ book on his blog site.

And of course, in 2016, Tony published his own analysis of modern capitalism with The City: London and the Global Power of FinanceNorfield brings us key insights into understanding the nature of modern financial systems and what role they play in the working (or non-working) of capitalism.  Tony defines as imperialism where a small number of countries dominate world markets through their multi-national corporations, which can be both making things, providing services and financial, or often all three.  Financial privilege is a form of economic power, enabling imperialist countries to draw upon resources and value created elsewhere in the world.   Finance and production in 21st century capitalism are inseparable – “they are close partners in exploitation”.  Norfield also reveals the large role of British capitalism in imperialism.  Britain is second only to the US in the importance of its financial sector globally and in some areas like foreign currency trading it leads. In a way, Britain is the world’s largest ‘rentier’ economy.  For that reason alone, the Brexit referendum vote puts the future of London as the centre of global finance capital in jeopardy.

While Tony Norfield’s book looked at modern imperialism from the apex of finance capital, John Smith, in his Imperialism in the 21st century, looked at it from the point of view of billions living under the grip of imperialism in what used to be called the Third World and is now called the ‘emerging’ or ‘developing’ economies.  There was quite a debate on my blog during the year on John’s view that it was the ‘super-exploitation’ of wage workers in the ‘South’ that is the foundation of modern imperialism.  That only helped to emphasise the importance of John’s book.

The role of finance in causing instability in modern capitalism was the theme of Jack Rasmus’ intriguing book, Systemic Fragility in the Global Economy. Rasmus reckons that mainstream economic theory has completely failed to account for this fragility; or forecast any crises like the Great Recession; or explain the ensuing depression.  But Jack is not only damning about mainstream economics.  He maintains that heterodox theories of crises in the post-1970s world economy have also been found wanting.  The followers of Keynes and Marx come in for criticism.  The Keynesians are at fault because they have lost the essence of Keynes’ insight into the instability and uncertainty found in a monetary and financially-dominated economy.  His book is certainly a thought-provoking contribution to an understanding of the fragility of modern capitalism.

The various theories or explanations of the cause of crises under capitalism from a Marxist or radical perspective were brought together in a collection of papers entitled The Great Financial Meltdown cleverly edited by Turan Subusat.

Turan provides an excellent introduction and summary of the views of top Marxist scholars.  It includes a debate between David Harvey and myself on the relevance of Marx’s law of profitability to crises.  Turan argues that the causes of crises under capitalism and, in particular, the recent global financial crash and subsequent Great Recession, can be considered from three angles: is there a systemic underlying cause of crises (the falling rate of profit or underconsumption); or is it conjunctural (each crisis has a different cause); or is it the result of policy decisions (eg the neoliberal agenda, financial deregulation etc)?

The failure of mainstream economics to have any useful part to play in such discussion was exposed Ben Fine in two volumes, called Microeconomics and Macroeconomics: a Critical Companion, Fine (along with co-author Ourania Dimakou) delivers a comprehensive critique of all mainstream economic theories and models.  This makes it an invaluable antidote to the conventional poison of marginalism and general equilibrium theory in microeconomics; and Say’s law and the denial of crises or slumps in macroeconomics.

Fine makes the point that macroeconomics has shifted from theory to models.  Mathematical models replaced theory, with models to be tested ex-post.  What is wrong with mainstream modelling is the lack of realism in the starting assumptions.  Fine goes through the famous accelerator-multiplier Keynesian model that shows the instability of capitalism but does not show why.  Fine goes onto analyse the counter-revolution against Keynes’ more radical model of instability and how the mainstream has castrated that into a model that moves to equilibrium given the assumptions of falling prices and wages – indeed, a synthesis with neoclassical theory.  Growth models are divorced from short-run fluctuation models.

It is interesting to compare Fine’s critique with that of Paul Romer, a mainstream economist, also lays into the state of macroeconomics in his paper The trouble with macroeconomics, Romer says that the explanation of crises under capitalism as just being the result of ‘exogenous shocks’ to an inherently harmonious process of economic growth is useless. If you just keep adding possible ‘imaginary shocks’ to explain sharp changes in an economy, “more variables makes the identification problem worse.”  As Romer points out, “solving the identification problem means feeding facts with truth values that can be assessed, yet math cannot establish the truth value of a fact. Never has. Never will.

Two great books on the big issues of modern capitalism: rising inequality and falling productivity and growth, were produced by non-Marxists.  In his book, Global Inequality, former World Bank chief economist Branco Milanovic shows that global inequality has increased since the early 1980s, when ‘globalisation’ got moving.   Rising inequality is the result the drive of capital to reduce labour’s share and raise profits and to the recurrent and periodic failures of capitalist production.  Growth of incomes has been concentrated in China, and to a lesser extent and more recently, India.

The most controversial economics book among the mainstream in 2016 was Robert J Gordon’s The rise and fall of American growth.  In his book, the accumulation of research over the last decade, Gordon concludes that the great new productivity-enhancing paradigm that is supposedly coming from the digital revolution is actually over already and the future robot/AI explosion will not change that.  On the contrary, far from faster economic growth and productivity, the world capitalist economy is slowing down as a product of slower population growth and productivity.

Balanced against Gordon are a myriad of techno-optimists and economists who reckon that the world is on the brink of a productivity explosion driven by robots, artificial intelligence, genetics, and a range of new ‘disruptive technologies’ – disruptive in the sense that traditional jobs and functions are going to disappear and be replaced by robots and algorithms.  The optimists argue that, since the time of Thomas Malthus, eras of depressed expectations like our own have inspired predictions of doom and gloom that were proved wrong when economies turned up a few years down the road.

Providing a balanced view of the impact of technology under capitalism is a short but great book, The Bleeding Edge, by Bob Hughes.  Hughes graphically outlines in a series of chapters that, if technology was controlled by public organisation and in common (or as he prefers, following Kropotkin, the thoughtful anarchist, in ‘mutual association’), then huge strides in innovation could be made.  He provides a host of examples for solving global warming, reversing environmental destruction, reducing wasteful production and protecting natural resources, including flora and fauna.

Finally, but by no means least, I come to the two great books of Marxist economic theory released this year.  Anwar Shaikh says he is not a Marxist but a ‘classical economist’.  In his magisterial 1000-page Capitalism: Competition, Conflict, Crises, Shaikh explains that his “approach is very different from both orthodox economics and the dominant heterodox tradition.”  He rejects the neoclassical approach that starts from “Perfect firms, perfect individuals, perfect knowledge, perfectly selfish behavior, rational expectations, etc.” and then “various imperfections are introduced into the story to justify individual observed patterns” although there “cannot be a general theory of imperfections.

Shaikh emphasises that it is profit under capitalism that drives growth and there are cyclical fluctuations in profitability.  These are expressed in business and fixed capital cycles inherent in capitalist production.  Crises are normal in capitalism.  The history of market systems reveals recurrent patterns of booms and busts over centuries, emanating precisely from the developed world.  The key crises under capitalism are ‘depressions’, such as that of the 1840s, the “Long Depression” 1873-1893, the “Great Depression” of the 1930s, the “Stagflation Crises” of the 1970s and the Great Global Crisis now.

Shaikh reckons that on the surface, the last crisis, the Great Recession, looks like a crisis of excessive financialization. But this fails to identify the real cause of the crisis.  Keynesians and Post Keynesians argue that the cause of the current crisis is inequality and unemployment, so there is a need to maintain a stable wage share and to use fiscal and monetary policy to maintain full employment. But Shaikh argues that such policies would not work because, at least in the US, the post-Keynesians have got the causes of the crisis wrong, the cause of which is the movement in profitability – the dominant factor under capitalism.

Fred Moseley’s book Money and Totality is a profound defence of Marx’s value theory and its relevance to the laws of motion in modern capitalism.  Moseley takes the reader carefully and thoroughly through all the competing interpretations of Marx’s value and price theory and shows that a Marxist analysis delivers a single realistic system of capitalism.  If we interpret Marx’s as a single system, an actual capitalist monetary macro-economy, then it is perfectly possible (with all the caveats of measurement problems and data) to carry out empirical analysis to verify or not Marx’s laws of motion of capitalism. Testing theory and laws with evidence is now the name of the game.  Fred Moseley allows us to do that with confidence that we are testing a logical and consistent theory that is verifiable empirically.

Oh, I forgot.  There is also my book, The Long Depression.

The elephant in the room

December 19, 2016

A review of The Bleeding Edge by Bob Hughes, New Internationalist, £10.99.

This is a very good book, which stands above many others in the ever-growing genre that looks at the role and impact of the new technologies of robots and artificial intelligence on the future of human social organisation. As Betsy Harmann, Professor of Development Studies at Hampshire College US, says in the book’s blurb: “Rejecting both apocalyptic pessimism and techno-optimism, Hughes provides a compelling map to the future in which information technologies are harnessed for the common good.”

Bob Hughes taught digital media at Oxford Brookes University, but he is also an activist, particularly for the rights of migrants, co-founding a campaigning organisation, No One is Illegal UK in 2003.  Danny Dorling, Professor of Geography at Oxford University, writes a foreword in which he argues that “technology is neutral.. how we use technology is up to us.  The machine is not in control, corporations and politicians are… it has not been artificial intelligence that has made our world more unequal.  It has been us.” This is Hughes’ message.

Hughes starts by arguing that technological progress has gone hand in hand with the development of capital.  As a result, computers, electronics, intellectual ideas have been converted into private property for profit, leading to “entrenched inequality”.  Yes, capitalism has been the social system under which massive technological progress has been made, reducing the material inputs and time it takes to deliver goods and services people need.  But this has been at the expense of growing inequality and the rapacious destruction and wasteful use of natural and human resources.

As Dorling says in his foreword, “profit maximisation is the anathema for true innovation.” Echoing Mariana Mazzucato in her book, The Entrepreneurial State, which shows how many key technological developments were not the results of capitalist innovation or ‘animal spirits’ but the product of state funding and public scientific research that were then ‘commodified’ by capitalist corporations like Apple, Microsoft or Google.

But Hughes also gives us excellent examples of the way that capitalism and the drive for profits distorts (and delays) innovation from meeting the needs of people.  Kodachrome, the first mass market film launched in 1935 (p32) did not come from research by capitalist corporations but from two musicians working in their spare time at the kitchen sink.  No corporation spent time and money trying to see if manned flight could be achieved; it was done by two Wright brothers on their own.  It is the same story with xerography (later privatised into Xerox), or disk memory (later IBM).  These advances were achieved by individuals in their own time and often in face of opposition from their employers who preferred research for a quick buck than for innovation.

One of the most famous was Colossus, the world’s first true programmable digital computer, which was developed by engineers in the state-owned British Post Office during WW2.  These pioneers were then consigned back to mundane jobs after the war and computer development was stunted for decades by corporate neglect.  A Brookings Institute study found that 75% of computer development funding had come from the state in 1950 – after which corporations did little to develop this exciting innovation, delaying its impact until well into the 1980s.

Hughes then gives us a chapter on the development of technology in class societies going back to the feudal period, arguing that it was the “takeover of egalitarian societies by unequal ones” that held back technological development.  It is here and really throughout the book, that I have my biggest disagreement.  Inequality or an “unequal world” is the bugbear for Hughes.  But this is an imprecise concept.

Inequality has existed for most of human civilisation, but it is driven by the control and distribution of surplus labour and output by a tiny elite.  The history of human social organisation after the primitive communism of hunter-gatherer societies has been the history of classes, to paraphrase Marx.  Inequality is a thus a product of class society; it is not the cause of it.  Thus it is the capitalist mode of production that has incentive to turn technology toxic, not ‘inequality’ as such.  If you were go through Hughes’ text and replace the words “inequality” or “unequal society” with the word “capitalism”, the picture of causality would be clear.

Making ‘inequality’ the enemy of technical progress smacks of the same ambiguity as found in such books as The Spirit Level, a book that has had wide success. That book argues that there are “pernicious effects that inequality has on societies: eroding trust, increasing anxiety and illness, (and) encouraging excessive consumption”.  But the real contradiction is not between an unequal society and technical progress, but between technical advances to boost the productivity of labour and the profitability of capital.

Hughes covers excellently the damage that capitalism (sorry, unequal societies) do to life expectancy, height, violence, the environment etc, just as the Spirit Level did.  These are chapters not be missed.  Hughes concludes that “inequality is the elephant in the room” that nobody likes to mention (p111).  Actually many refer to rising inequality now (as Thomas Piketty, the modern economist of inequality, put it in the interview: “I believe in capitalism, private property, the market” — but “how can we tackle inequality?” ).  But few (including Piketty) attach its cause to the capitalist mode of production. That is the real elephant in the room.  By delineating inequality, there is a danger that the elephant will be mistaken for a mouse.

Hughes graphically outlines in a series of chapters that, if technology was controlled by public organisation and in common (or as he prefers, following Kropotkin, the thoughtful anarchist, in ‘mutual association’), then huge strides in innovation could be made.  He provides a host of examples for solving global warming, reversing environmental destruction, reducing wasteful production and protecting natural resources, including flora and fauna.

Planning for need is not only necessary; Hughes shows that it now clearly viable with modern computer techniques like big data, artificial intelligence and quantum computers (see chapter 12 for an excellent account of the so-called ‘calculation debate’ of the 1980s that was supposed to show that planning was impossible because of the millions of decisions involved and therefore socialism was infeasible).  Indeed, Hughes reveals that during its brief rule, the socialist government of Salvador Allende in Chile, actually developed Cybersyn, a project that showed the possibility for harnessing digital computing to plan for social need.

In his final chapter, Utopia or Bust, Hughes discusses the key contradiction for the technology of the future. “Automation under capitalism (here the true elephant is mentioned) is less to relieve drudgery than to relieve manufacturers of some of their wage bills and reduce their reliance on skilled workers” (p310).  Automation under capitalism stunts individual ideas and innovation.  And it is also wasteful e.g. building roads rather than public transport and communications (“when you look at the hours a car can save you and the hours spent paying for it.. a worker has to dedicate each year about two months of work”) (p320).  Airplanes can be more ecologically friendly and more comfortable and useful if they just went slower (p322).  Labour saving devices to reduce toil in the home (washing machines) actually have increased the time spent on child care (nearly 30 hours a week for a woman, the same as in 1900! – p324).  Communal developments would save time and toil for housework – and so mainly for women.  Yet, as Hughes says, the “capitalist world seems specifically designed to eliminate communal activity” (p326).

At the end of the book, Hughes asks “dare we demand equality?” and he calls for the ‘banning of inequality’.  But is this the way to pose the issue?  Technology is indeed the handmaiden of the social order controlling it.  Inequality is the result of that social order.  What is needed is the removal of that social order and its replacement by what used to be called socialism (not ‘post-capitalism’ or ‘equality’).  Then technology can flourish for all and inequality itself will fade.  The demand we must dare for is the common ownership and control of technology, not ending the unequal distribution of its fruits.

Trump, trade and technology

December 10, 2016

US President-elect Donald Trump reckons that the cause of the losses in manufacturing jobs over the last 30 years has been the rigging of trade terms by low labour-cost manufacturing in China and Mexico.  So it is trade and the shifting of production locations by US multi-nationals overseas – in other words, globalisation.

This claim has upset mainstream economists who see ‘free trade’ as a totem of economic theory.  From Ricardo onwards, mainstream economic theory reckons that free trade is beneficial to all by applying the ‘comparative advantages’ that each trading nation has to make in exchanges of commodities.  Such trade is then mutually beneficial.

Actually, this theory is fraught with flaws, as Anwar Shaikh has only recently spelt out in his book, Capitalism: Competition, Conflict, Crises, while mainstream economist Dani Rodrik has pointed out that the so-called ‘Pareto optimum’ of equality of gains and losses cannot be achieved.  Rodrik argues in his book, The Globalization Paradox that democracy, national sovereignty and global economic integration are mutually incompatible.

Keynesian guru Paul Krugman has always been a proponent of ‘free trade’.  Indeed, he got his Nobel prize in economics for a ‘new’ theory of international trade that reckoned, even with tariffs and market imperfections, international trade would be beneficial to all participants.

From this position, Krugman has recently been at pains to argue against the Trump thesis that the loss of American manufacturing jobs is down to ‘nasty foreigners’ with their trading trickery and to American companies taking their factories overseas and selling their goods back into the US.

In a recent short paper and on his blog, Krugman shows that very few US manufacturing jobs would have been saved with different trade policies or by not agreeing to NAFTA, for example.  Manufacturing employment in the US fell from around a quarter of the work force in 1970 to 9% in 2015.  Krugman finds that “trade is less than half the story”.  Absent the US trade deficit, manufacturing may be a fifth bigger than it is. “That wouldn’t make much difference to the long-run downward trend, but looms larger relative to the absolute decline since 2000.”

Another study by Autor et al reckons competition from China led to the loss of 985,000 manufacturing jobs between 1999 and 2011. That’s less than a fifth of the absolute loss of manufacturing jobs over that period and a quite small share of the long-term manufacturing decline.  “So America’s shift away from manufacturing doesn’t have much to do with trade and even less to do with trade policy.”

The biggest reason Trump — or anyone else — can’t bring back home these manufacturing jobs is because they have been lost in large part to the success of efficiency. Manufacturing output in the US was at an all-time high in 2015. Over the past three-and-a-half decades, manufacturers have shed more than seven million jobs while producing more stuff than ever. The Economic Policy Institute (EPI) reported in The Manufacturing Footprint and the Importance of U.S. Manufacturing Jobs that “If you try to understand how so many jobs have disappeared, the answer that you come up with over and over again in the data is that it’s not trade that caused that — it’s primarily technology,”…Eighty percent of lost jobs were not replaced by workers in China, but by machines and automation. That is the first problem if you slap on tariffs. What you discover is that American companies are likely to replace the more expensive workers with machines.”

What these studies reveal is what Marxist economics could have told them many times before.  Under capitalism, increased productivity of labour comes through mechanisation and labour shedding i.e. reducing labour costs.  Marx explained in Capital that this is one of the key features in capitalist accumulation – the capital-bias of technology – something continually ignored by mainstream economics, until now it seems.

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 ( 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.

Marxist economists have already provided empirical evidence for this tendency.  G Carchedi in a recent paper shows that the ‘technical composition’ of capital (the value of machinery and plant relative to the number of workers) in productive sectors has risen in the last 60 years in the US (while profitability has fallen secularly (ARP)) – see ‘OCC’ in the graph below.  My own estimates show that the US organic composition of capital (the value of technology and plant to the value of labour power in wages etc) rose 46% in the last 70 years.

occ

This ‘capital bias’ in technology could also explain the falling labour share and growing inequalities.  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 too much that it causes profitability to decline.  So capitalist accumulation implies a falling share of value to labour over time or what Marx would call a rising rate of exploitation (or surplus value).

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.  But even Krugman now 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.

As he put it a few years ago: “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.  So it’s wrong to assume, as many people on the right seem to, that gains from technology always trickle down to workers; not necessarily.”

So it depends 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 underemployed and through the globalisation of manufacturing.

This is the real reason for American workers falling behind in wages relative to increased productivity and investment in new technology that sheds jobs.  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 – and by the introduction of new technology to replace labour after a major slump in production.

Another study found that the “negative correlation between the (weaker) penetration of collective bargaining agreements and increased wage inequality is strong. This result applies to the relationship between the lowest and highest wages, but also between the median wage and the hi ghest wage. Lower trade union density and lower unemployment also increase wage inequality.” So it was the weakened bargaining power of unions and higher unemployment combined with a marked decrease in redistribution through taxes and transfers that was the main explanation why Americans have fallen behind in income since the 1980s.

In this context, the latest report by the world’s top experts in the field, Thomas Piketty, Emmanuel Saez and Gabriel Zucman on the extreme inequality of incomes in the US, is perfectly explicable.  The trio find that the bottom half of the income distribution in the US has been completely shut off from economic growth since the 1970s. From 1980 to 2014, average national income per adult grew by 61% in the US, yet the average pre-tax income of the bottom 50% of individual income earners stagnated at about $16,000 per adult after adjusting for inflation. In contrast, income skyrocketed at the top of the income distribution, rising 121% for the top 10%, 205% for the top 1% and 636% for the top 0.001%!

In 1980, adults in the top 1% earned on average 27 times more than bottom 50% of adults. Today they earn 81 times more. This ratio of 1 to 81 is similar to the gap between the average income in the United States and the average income in the world’s poorest countries, among them the war-torn Democratic Republic of Congo, Central African Republic, and Burundi. And the increase in income concentration at the top in the US over the past 15 years is due to a boom in capital income i.e. income from dividends, interest and rents, not higher wages.

income-growth

It’s a tale of two countries. For the 117 million Americans in the bottom half of the income distribution, growth has been non-existent for a generation while at the top of the ladder it has been extraordinarily strong. And this stagnation of national income accruing at the bottom is not due to population aging. Quite the contrary: for the bottom half of the working-age population (adults below 65), income has actually fallen. From 1980 to 2014, for example, none of the growth in per-adult national income went to the bottom 50%, while 32% went to the middle class (defined as adults between the median and the 90th percentile), 68% to the top 10% and 36% to the top 1%. The trio comment: “An economy that fails to deliver growth for half of its people for an entire generation is bound to generate discontent with the status quo and a rejection of establishment politics.”  Indeed.

And because progressive income taxation has been eroded and social benefits cut back, government taxation and transfers have had little redistributive effect on the inequality caused by the market. “There was almost no growth in real (inflation-adjusted) incomes after taxes and transfers for the bottom 50 percent of working-age adults over this period”. As the trio say: “The diverging trends in the distribution of pre-tax income across France and the United States—two advanced economies subject to the same forces of technological progress and globalization—show that working-class incomes are not bound to stagnate in Western countries. In the United States, the stagnation of bottom 50 percent of incomes and the upsurge in the top 1 percent coincided with drastically reduced progressive taxation, widespread deregulation of industries and services, particularly the financial services industry, weakened unions, and an eroding minimum wage.” 

So the loss of US manufacturing jobs, as it has been in other advanced capitalist economies, is not due to nasty foreigners fixing trade deals.  It is due to the inexorable attempt of American capital to reduce its labour costs through mechanisation or through finding new cheap labour areas overseas to produce.  The rising inequality in incomes is a product of ‘capital-bias’ in capitalist accumulation and ‘globalisation’ aimed at counteracting falling profitability in the advanced capitalist economies. But it is also the result of ”neo-liberal’policies designed to hold down wages and boost profit share.  Trump cannot and won’t reverse that with all his bluster because to do so would threaten the profitability of America capital.

 

Mark Carney, Marx’s scribbles and the lost decade

December 6, 2016

Mark Carney is the governor of the Bank of England.  Formerly the head of the central Bank of Canada, some years ago he was headhunted to take over at the BoE on a huge salary and expenses.

This week he gave the Roscoe Lecture at Liverpool’s John Moores University, his first speech since the decision of the Brits to vote (narrowly) to leave the European Union.  Carney took the opportunity to offer what his view of the state of global capitalism.  And he does not make it sound good.  speech946

Carney pointed out that since the global financial crash of 2008, average real incomes in Britain have taken the biggest plunge since the 1860s, when “Karl Marx was scribbling in the British Library.”  And “it was the poorest (who) are hit the hardest. During recessions the lower-skilled, lower paid people tend to lose their jobs first.”

real-wages

However, Carney was at pains to claim that capitalism has worked for people: “global markets and technological progress has lifted more than a billion people out of poverty, while a series of technological advances have fundamentally enriched our lives….. global markets and technological progress has lifted more than a billion people out of poverty, while a series of technological advances have fundamentally enriched our lives  He added “Globally, since 1960, real per capita GDP has risen more than two-and-a-half times, average incomes have begun to converge and life expectancy has increased by nearly two decades.”

poverty

What he did not say in this praise of this record of capitalism is that the majority of that one billion lifted out of deep poverty were in China, an economy that eschews ‘free markets’ and ‘globalisation’; and goes for state investment, capital controls and the direct submission of the private sector to the regime.  Life expectancy may have risen due to investment in public services and healthcare.  Capitalism and free markets have played no role in that.  In the ‘free markets’, most of the very poor in other countries remain poor.  Indeed, the policies of the central bankers, the IMF and the World Bank in driving for ‘globalisation’ and ‘free trade’ have made the lot of these poor even worse, not better.

Per capita incomes may have risen (again mainly due to China and to a lesser extent, India, in the equation), but those incomes have not been equally increased.  As Carney admitted in his speech “globalisation is associated with low wages, insecure employment, stateless corporations and striking inequalities.”  In Anglo-Saxon countries, the income share of the top 1% has risen notably since 1980. Today, in the US, the richest 1% of households receive 20% of all income.  Such high income inequalities are dwarfed by staggering wealth inequalities. The proportion of the wealth held by the richest 1% of Americans increased from 25% in 1990 to 40% in 2012. Globally, the share of wealth held by the richest 1% in the world rose from one-third in 2000 to one-half in 2010.  And now “a typical millennial earned £8,000 less during their twenties than their predecessors.”

Carney criticised mainstream economics: “Amongst economists, a belief in free trade is totemic. But, while trade makes countries better off, it does not raise all boats; in the clinical words of the economist, trade is not Pareto optimal. Rather the benefits from trade are unequally spread across individuals and time….. Some workers, however, lose their jobs and the dignity of work, or see their “factor prices” – in plain English, wages – equalised downwards.”  Perhaps Carney had been reading Marx’s scribbles after all – as this was close to scribbler’s view of free trade under capitalism – uneven and combined development.

But if capitalism has been successful over the last 50 years, according to Carney, what about the last ten? To put it mildly, the performance of the advanced economies over the past ten years has consistently disappointed.  …It doesn’t it feel like the good old days, because anxiety about the future has increased, productivity hasn’t recovered and real wages are below where they were a decade ago, something that no-one alive today has experienced before

No wonder, Carney concluded thatthe public is complaining about low wages, insecure employment, stateless corporations and striking inequalities.” He admitted that mainstream economics and policies had failed the majority. “Economists must clearly acknowledge the challenges we face, including the realities of uneven gains from trade and technology”, he said.

Why have things gone so wrong?  Don’t we need to know?  We do, said Carney,  because any doctor knows that the importance of diagnosing the underlying causes of the patient’s symptoms before administering the cure.”  Unfortunately, Carney does not know the cause:  “The underlying reasons for the 16% shortfall of the UK’s productive capacity, relative to trend, are poorly understood.”

But we must try.  Carney listed three priorities: “Economists must clearly acknowledge the challenges we face, including the realities of uneven gains from trade and technology”  “We must grow our economy by rebalancing the mix of monetary policy, fiscal policy and structural reforms.  We need to move towards more inclusive growth where everyone has a stake in globalisation.”  This wish list has as much chance of surviving as the proverbial snowball in the fires of hell.

But no matter, Carney was much more concerned to convince his Liverpool audience that if it had not been for the easy money policies of the Bank under his direction, things would be even worse in the UK – although given the stats he presented, that was hardly convincing.  “Monetary policy has been keeping the patient alive, creating the possibility of a lasting cure through fiscal and structural operations,” he said, adding, “monetary policy isn’t a spectre, but a friendly ghost”.  But then he delivered a health warning about easy money.  It leads to a consumer boom and that never provides sustained economic growth which depends on investment.  “The UK expansion is increasingly consumption-led. The saving rate has fallen towards historic lows and borrowing has resumed. Evidence from the past quarter century across a range of countries suggests episodes of consumption-led growth tends to be both slower and less durable.  This is because consumption growth eventually outpaces earnings growth, increasing debt and making demand more sensitive to changes in employment and income.”  The relative boom in the British economy (ie 2%-plus economic growth) won’t last.”

consumption

It was up to governments now to turn things round.  But given that Carney and his bank economists did not know why things had got so bad, he offered no real advice to governments on how to get productivity up, inequality down and real incomes restored.

Next year is the 150th anniversary of the publication of Marx’s Capital Volume One, the product of the ‘scribblings’ that Marx was making in the British Museum in the 1860s.  Perhaps Carney should have read them to see why things are so bad and what to do about it.

The long depression and Marx’s law – a reply to Pete Green

December 2, 2016

Pete Green has now taken up the cudgels in the debate that Jim Kincaid and I have begun over the causes of regular and recurrent crises in capitalist production and in particular the Great Recession.  He makes a welcome and considered critique of my views, as expressed in my book, The Long Depression and in recent discussions at the Historical Materialism conference in London earlier this month.  I think he raises some new and important points in his critique, which, as he says, will require further debate and research.

Like Pete, I cannot deal with all arguments in this short reply on my blog but I’ll do my best to take up some key ones, but it still makes this post long enough!

Pete starts by saying he is not going to dispute the data on the rate of profit that I have presented, mainly for the US, but also for other economies.  But apparently he “shares Jim Kincaid’s scepticism about reliance on US national income accounts as source for corporate profitability”.  Actually, I am not sure Jim is sceptical of the official data.  Indeed, he has said that I have used the data accurately and as Pete says, “there is no adequate alternative available for those engaged in empirical investigation”.

And that is what the bulk of my research is: engaging in empirical investigation to verify or otherwise particular theories or laws.  In my view, too many Marxist economists have ignored empirical work and concentrated on interpreting (and re-interpreting) Marx’s writings and ‘what he meant’, rather testing his laws of motion of capitalism to see if they best fit the facts.

Luckily, I am not alone in doing empirical investigations – Andrew Kliman has done prodigious analysis, Anwar Shaikh’s new book is a gold mine of empirical studies, G Carchedi has also tested Marx’s law with the evidence.  And there is a host of new young scholars internationally doing such work.  Carchedi and I will be publishing a book of these research projects next year that empirically support Marx’s law of profitability.

But Pete wants to “step back” from any debate over the stats and consider the “theoretical framework” of my book.  He does not think that Marx’s law of the tendency of the rate of profit to fall is “sufficient for an explanation of the cyclical fluctuations that have characterised capitalism”.  Why not?  Well, it seems that, while he does not deny “the logical coherence” of Marx’s law of profitability and its relevance to “whole period since the 1960s”, using the law to explain regular crises or “fluctuations” is “over-reductionist” and “two-dimensional”, especially in reference to the latest crises (ie the Great Recession?).

So Pete reckons that Marx’s law of profitability is logically coherent but irrelevant to an understanding of crises.  It’s ‘overreductionist’ (or maybe just reductionist?) to claim its relevance to crises.  There are more dimensions than two (presumably the tendency and the counter-tendency?), he says.

This does not seem the way to approach the relevance of Marx’s law to crises.  Pete says that the law is not “sufficient” to explain crises.  But does he think it “necessary”, which is not the same thing as sufficient?  If he does; how does it fit in?  You see, I think we must start with Marx’s approach, which was to abstract from reality the underlying essential (necessary) laws of capitalist motion and then add back concrete features of capitalism to reach the immediate.  In only that way can we identify the causes of crises under capitalism.  In that sense, Marx’s law can be seen as the underlying or ‘ultimate’ cause of recurrent crises, which can be triggered by ‘proximate’ events i.e. (oil price crisis, stock market bubble, real estate crash etc).  Then we have ‘sufficient’ causes.  For more on this, see my paper, Presentation to the Third seminar of the FI on the economic crisis

This approach thus makes it transparent that a financial crash or credit crisis is not the essence of crises in capitalism, but their surface manifestation.  Jim Kincaid has done a new post in which he outlines what Marx said about the 1847 crisis in Britain making the point that the falling rate of profit plays no role in Marx’s account”, considering only the financial speculation and credit crunches.  Jim claims that for Marx, “The fall in the rate of profit of these businesses is only a transmission mechanism.  What matters are the causes of bankruptcy and business collapse.

At this point, I am reminded of what Marx said a little later in 1858 during the first great international crisis of the 19th century: “What are the social circumstances reproducing, almost regularly, these seasons of general self-delusion, of over-speculation and fictitious credit?  If they were once traced out, we should arrive at a very plain alternative.  Either they may be controlled by society, or they are inherent in the present system of production.  In the first case, society may avert crises; in the second, so long as the system lasts, they must be borne with, like the natural changes of the seasons”.   Dispatches for the New York Tribune, Penguin p201.

As Marx puts it, ‘over-speculation and fictitious credit’ arise from regular crises in the capitalist system of production.  They cannot be eradicated by social action unless the mode of production is replaced.  It is not possible to separate crises in the financial sector from what is happening in the production sector.

Pete refers to the debate between Marxist economists on the cause of crises in the 1920s and 1930s, as described in Richard Day’s excellent book, The crisis and the crash.  As Pete says, the debate was between those who explained cyclical fluctuations as due to disproportionality between departments of production and those who reckoned it was due to the ‘limited consumption of the masses’, ie underconsumption.  As Pete says, “Marx’s tendency for the rate of profit to fall, as a function of a rising organic composition of capital, plays no role at all in these debates.”  But that does that mean the law is irrelevant?  It was no accident that the law was ignored.  Most leading Marxist revolutionaries had not read or seen Volume 3 of Capital where Marx’s “most important law of political economy” is expounded.  And if they had, they were guided away from Marx’s law as a cause of crises by the likes of Kautsky, Hilferding and Luxemburg.

One Marxist economist who had read and digested Volume 3 was Henryk Grossman.  As a result, he was able to present a coherent theory of capitalist crises based on the law, showing the connection between the tendency of the rate of profit to fall and the countertendencies; the relation between the rate of profit and the mass of profit; and thus the relation between profit and crises.  But his thesis, as Rick Kuhn says in his excellent biography of Grossman, was “an economic theory without a political home”.  Grossman also shows in his work, The law of accumulation being also a theory of crises, that those who followed an ‘anarchy of production’ theory of crises could not really provide a coherent argument for regular and recurring slumps or breakdowns inherent in capitalist production.  Indeed, just remove competition and allow monopoly to regulate and the anarchy can be controlled, suggested Hilferding or Kautsky.

Pete brings to our attention the work of Pavel Maksakovsky at that time.  As Pete says, he provides us with the most sophisticated version of the anarchy of production theory of crises.  As usual, Maksakovsky refers to Marx’s law of profitability, but only to dismiss it as irrelevant to the cycles of boom and slump and instead, like those in debate of the 1920s, focuses on Volume Two of Capital with its reproduction schema.  Maksakovksy outlines his theory succinctly in pp136-9 of his book.  This is a disproportion theory but with the addition of trying to show that the disproportion between the sectors of means of production gets ‘periodically detached from consumption’.  Interestingly, Maksakovsky, correctly in my view, dismisses the idea that excessive credit and financial market busts are the cause of crises (p139), just as Marx did in 1858, but now revived by Jim.  They are only at the ‘superstructural level’ of capitalist society and can never eliminate the cyclical developments caused by the ‘anarchy of production’.  This is worth remembering in the light of the arguments now being presented by many modern Marxist economists that finance is the real cause of crises now and for the Great Recession (see below).

Does the anarchy of production or disproportion of sectors of reproduction hold up to scrutiny as an alternate theory of crises?  I don’t think so.  Grossman demolishes it in his book and in a little known essay on Marx’s reproduction schema (recently edited by Rick Kuhn).  Grossman shows that Marx’s schema do not show a “widening and deepening contradiction” (Maksakovsky) between production and consumption under capitalism and so cannot be the Marxist explanation of recurrent crises.  By assuming in the reproduction schema, accumulation and exchange between the sectors take place at the level of labour values, Maksakovsky makes the same mistake as Luxemburg and others and so finds ‘disproportion’.  But Marx’s reproduction schema are at the level of prices of production after the process of competition.  Rates of profit are averaged.  At that level, there is no inherent disproportion from the reproduction schema.

To deny disproportion as the cause of capitalist crises is not to support Say’s law (or ‘fallacy’, to be more exact) that ‘supply creates its own demand’ –as Pete suggests that I do.  Marx was fierce in his dismissal of Say’s nonsense.  The very process of exchange on the market creates the ‘possibility of crisis’.  But that does not explain the periodic and recurrent crises in capitalist production and investment.

Pete does not like the “clever” flow chart in my book that shows the different possible theories of crisis.  He says I want the readers to follow me down to Marx’s law of profitability, but he has three objections to that path.  Pete admits that in the circuit of capital “production is primary” but then goes onto say that production and circulation are in a “contradictory unity” in capitalism.  So is production not ‘primary’ after all?  Indeed, he refers us to the thesis of David Harvey who argues that capitalism has various ‘bottleneck points’ in the circuit of capital and crises can come from any one of them, not just or even mainly in the ‘primary’ production of surplus value and the accumulation of capital, but also in the ‘secondary’ circulation of capital through credit finance, households and the role of government.  So Pete says we need to have a theory of crisis that “embraces the whole circuit of capital” not just in production.

That’s fine but does this mean that the ‘bottlenecks’ in the circulation and distribution of capital are on the same level of causality as breakdowns in the ‘primary’ production process?  The Marxist answer, in my opinion, is no.  As I said before, in my view, and I think in Marx’s, circulation and distribution are at a lower plane of causal abstraction, or if you like closer to the proximate than the ultimate or underlying causes.  A collapse in the stock market or in real estate prices will not lead to a collapse in production unless there are already serious difficulties in the latter.  There have been many stock market collapses without a slump in production and employment (1987), but not vice versa.

Indeed, I agree with what Jim says summing up his post on the 1847 crisis mentioned above that The rate of profit and the forces which determine it should remain central in our analysis.  Marx’s own account of the 1847 crisis would surely have been strengthened by attention to profitability and its conflicting trends. We need to trace the many ways in which the law of value asserts itself – often in displaced and distorted forms.  But also recognise, and give due weight to, the role of contingent factors in any crisis we examine.”

Pete also wants to drag in the Keynesian “lack of effective demand” as one of the multi-dimensional causes of crises.  I have argued in many places that this ‘cause’ is no such thing.  Pete agrees that aggregate demand is endogenous to investment and profit; “Keynes himself would have agreed”.  Yes, but for the wrong reasons.  The Keynesian-Kalecki thesis puts ‘effective demand’ i.e. investment demand, as the causal factor in the movement of profits.  But Marxist economics says profits call the tune, not investment.  I and other Marxist scholars have shown that the empirical evidence for the Keynesian ‘multiplier’ (a fall in spending leads to a slump) is very weak compared to the Marxist multiplier (a fall in profits leads to a slump).

Pete says I should not ‘conflate’ the underconsumption thesis with the overproduction thesis as the cause of crises.  But then says that the “problem is a relative lack of productive consumption”.  We may be bandying with words here, but that sounds like an underconsumption thesis to me.  I presume this to refer to an excess of investment goods produced over the capitalists’ demand for them.  But crises do not happen because of a lack of “productive consumption”, but because of insufficient profits brought on by falling profitability over time.  And this can be proved empirically.

Andrew Kliman shows in his book, The failure of capitalist production (Chapter 8) that investment growth is always outstripping consumption but it does not lead to recurrent crises, as Maksakovsky ansd Sweezy argued.  The cyclical crisis of boom and slump does not flow from excessive investment over consumption but from insufficient profit from investment.  I await an empirical justification of the Maksakovksy thesis.

Pete says the proponents of Marx’s law of profitability as the underlying and ultimate causes of recurrent and regular crises are neglecting the ‘multi-dimensional’ and ‘complex’ nature of capitalism.  I ignore the uneven and combined development of the world economy as expressed in the global imbalances so “astutely” identified by Keynesian economic commentator, Martin Wolf (or for that matter, I could add Yanis Varoufakis in his book, The Global Minatour).  I also ignore the counteracting factors of globalisation in driving up the rate of profit.  I also ignore the role of finance and growth of financial profits in total corporate profits.

The more I go down these points by Pete, the more I feel that a series of straw men have been erected for my views to be knocked down by him.  These layers of ‘multi-dimension’ have not been ignored by me.  The counteracting factors explain the up and down waves of the profitability cycle in capitalism.  In both my books, I have spent some time looking at these long waves of profitability.  And I discuss the impact of uneven and combine development of capital in the context of the euro crisis in my book.

Pete says that “Unlike some critics,  I am not rejecting the relevance of this or the equally significant role of counter-tendencies raising profitability over the long-term. Indeed I would endorse to a degree Michael’s emphasis on longer waves in profitability but link them more closely to Kondratiev waves”.  But I have done just that in both books – trying to relate these waves to Kondratiev’s!

Pete is right to say that Marx’s law of profitability appears to have different cycles than the so-called ‘business’ or Juglar cycles of boom and slump.  I could not agree more.  In my first book, The Great Recession, I spent much time trying to analyse the connections between the various cycles in ‘capital in motion’ and try to link them together.  I did the same in The Long Depression in a whole chapter.

Pete says that “What can be shown in my view is that when the underlying rate of profit is falling, the business cycle fluctuations are more severe as is evident from the late 1960s to the early 1980s, and when the underlying rate is rising, the amplitude or the severity of recessions is reduced as in the 1990s and early 2000s.”  That almost word for word what I have said in the past.

Pete is keen to tell us that what is new is the “unprecedented rise in the share of financial profits in total corporate profits”. Again this is dealt with in both my books.  Indeed, I try to integrate this new development into an analysis of unproductive investment and fictitious capital as one of the new ‘counteracting factors’ to the law as such.  I even try to measure its impact (see my paper, Debt matters).

Pete finishes by wanting to defend or promote again the Keynesian idea of “a lack of effective demand” as the cause of crises.  He rejects my claim that the Keynesian position is a tautology (‘it rains because it rains’) of a slump not a cause. In retort, he suggests that Marx’s law of profitability is as remote a cause of crises as saying storms and hurricanes are caused by global warming; only worse, the law of profitability as a proven cause is more questionable than man-made global warming.  Pete is not a global warming sceptic but he is falling profitability one.

Actually, his analogy has some merit.  Global warming is an underlying cause of increased storms, floods and extreme weather.  The science of correlations, causation and forecasts strongly supports this.  Similarly, I and others argue that capitalist crises have an underlying cause in the inability of capitalists to stop the overall rate of profit on capital falling as they accumulate and try to increase profits.  This dialectical contradiction also has increasing empirical backing with correlations, causations and forecasts.  By the way, Marx used the analogy of the law of gravity and the movement of objects to place his law of profitability in crises.

I’m afraid the thesis of Maksakovsky has not changed my view that all other theories of crises in capitalism: underconsumption, overproduction, disproportion, bottlenecks in circulation, global imbalances, financial instability, are either wrong or at a lower plane of abstraction, so that, on their own, they do not explain crises.  As Alan Freeman says, Marx’s law remains “the only credible competitor left in the contest to explain what is going wrong with capitalism”.

Transformation and realisation – no problem

November 14, 2016

The annual London Historical Materialism conference is not just or even mostly about Marxist economics.  As its name suggests, the sessions are about Marxist analyses of all social phenomena.  But obviously for me, the issues in Marxist economics are what matters.  And there are two issues or themes (for me) that arose at this year’s conference.

They are not new and have been debated and discussed for over a hundred years.  But old issues die hard (as do older Marxists).  The first is the so-called transformation problem, namely, can Marx’s theory of labour value explain or be consistent with actual market prices in a capitalist economy?  The second is whether crises, slumps in production in the capitalist mode of production, can be explained or are caused by a problem in the production for profit (as per Marx’s law of profitability) or whether crises emerge because capital cannot ‘realise’ its production of surplus value in the market place through sales.  In other words, are capitalist crises due to insufficient surplus value or  too much surplus value that cannot be ‘realised’ in the market, i.e. ‘disproportion’ or ‘overproduction’?

This year’s HM continued yet again the debate on these issues.  On the first issue, Fred Moseley presented his new book, Money and Totality, which I have reviewed before on this blog.

In his book, Fred aims to put to bed the ‘transformation problem’.  And he succeeds.  He shows that Marx solved Ricardo’s problem: namely that market prices of individual commodities do not reflect their value measured in labour time.  The discrepancy is solved through the competition between individual capitals that leads to an equalisation of profit rates and an average rate of profit for the whole system.  Market prices fluctuate around prices of production measured in money, based on the cost of capital invested in money terms and the average rate of profit.  So capitalists start with money and invest in labour and means of production measured in market prices (which revolve around prices of production).  In the circuit of capital and the accumulation process, it is prices of production that rule, not individual labour values for commodities.  So no ‘transformation’ of values into prices is necessary.  Prices are given in money.

Moseley’s book refutes the critique of mainstream economics and what are called the ‘neo-Ricardians’ like Piero Sraffa who either say that the labour theory of value is irrelevant to market prices or that Marx’s solution needs correcting for logical inconsistency.  Moseley is not the first to do this, but his book provides a clear and comprehensive defence of Marx’s value theory.  The debate at the HM session was partly around some ‘Marxist’ solutions that Moseley rejects and about whether Marx’s prices of production can be considered ‘long-term equilibrium’ prices or not.  I won’t go into those controversies here, because I want to discuss that other non-problem, realisation.

I presented the basic ideas of my book, The Long Depression, in one HM session.  One of the discussants, Jim Kincaid, then presented his critique of my work, the substance of which was outlined in a previous post.  But Jim’s underlying criticism, and that was repeated by several senior Marxist economists from the floor, is that Marx’s law of the tendency of the rate of profit to fall cannot be considered the sole underlying cause of crises under capitalism, and in the case of the Great Recession was not the cause at all.  In particular, it is charged that I ignore the ‘problem of realisation’ of surplus value in the market and see the cause of crises only in the drive for profit in production – and yet there are two sides to the circuit of capital: production and realisation.

Jim Kincaid made this part of his critique and, in his new and excellent book, Francois Chesnais, the eminent French Marxist economist, also chided me for failing to recognise in any meaningful way the ‘realisation’ problem. I quote Chesnais from his book: “macroeconomic conditions shaping the capital-labour relations of power prevent the whole of the surplus value produced globally from being realised. Capital is faced by a roadblock at C′ of the complete accumulation process  (M-C . . . P . . . C′-M′)” …The fact that a ‘realisation problem’ exists alongside the insufficient rate of profit is now recognised somewhat reluctantly by Michael Roberts”.   

Actually, I am not sure that I do recognise, even reluctantly, that there is a realisation problem as posed by Chesnais and others.  Let me explain. I also participated in a session at HM on a critique of Keynesian policies like quantitative easing and fiscal stimulus to overcome the Long Depression.  There was an excellent paper on the failure of QE by Maria Ivanova and Tony Norfield presented a lucid account of the continued build-up of global debt that threatens a new financial crash that Keynesians ignore or dismiss.

In my paper (the-crisis-and-keynesian-policies) dealing comparing the efficacy of Keynesian fiscal stimulus solutions to a slump with the Marxist explanation (the Keynesian multiplier versus the Marxist one), I likened the Keynesian explanation of crises as due to “a lack of effective demand” as really like a weather man telling us that it is raining because there is water coming down from the sky.  The ‘lack of demand’ explanation is no explanation at all but merely a description of slump (falling investment and consumption).  For this analogy, I was picked up Pete Green for, again, not recognising the ‘realisation problem’ – namely the cause of crises is not (just) to be found in the capitalist mode of production but also in the distribution of surplus value and thus in an inability to ‘realise’ all the surplus value produced.

So it seems many wish to continue to reject Marx’s law of profitability as the main or ultimate cause of crises and seek alternative or eclectic explanations.  Chesnais reckons crises have multi-causes, following the views of David Harvey (see my debate with Harvey on this here).  “Marx discusses a range of issues, not simply the LTRPF but also the over-accumulation of capital and the accompanying overproduction of commodities, as well as raising the hypothesis of the ‘absolute over-production of capital’ which is hardly ever mentioned in today’s debates. So I agree with Harvey that there is no single causal theory of crisis formation”, p23 Finance Capital Today.

Pete Green apparently (at least according to the title of his HM paper) looks to ‘long forgotten’ theories of disproportionality between accumulation and consumption (due to the anarchy of capitalist production); between the expansion of capitalist production and the ‘limits of the market’ for a crisis theory.  This is an idea that comes originally from the 19th century Russian economist, Tugan Baranovsky (who actually argued that there was no ‘realisation problem’) and Marxist Rosa Luxemburg (who did think there was one). Jim Kincaid looks to the idea of too much surplus being created to be absorbed and a lack of ‘profitable investment opportunities’ (akin to the position of Sweezy and Baran).  Chesnais wants to combine Marx’s law with the idea of a crisis of ‘overproduction’, suggesting that falling profitability and overproduction are not connected but are separate (and combined?) causes of crises. “the financial events of 2007–8 were typically an integral part of a crisis ‘in the sphere of money and credit’, the underlying causes of which are overproduction and over-accumulation at a world level along with (my emphases) an effective play of the tendency of the rate of profit to fall.”

None of these alternative explanations or eclectic melanges is new and in my opinion has been dealt with effectively by a succession of Marxist economists.  G Carchedi looked at all these alternative explanations in his seminal work of 1990s (now apparently ‘long forgotten’), Frontiers of Political Economy.  http://digamo.free.fr/carchedi91.pdf. Carchedi comments: “The disproportionality thesis submits that the root of crises lies in the difference between the technologically determined demand for specific use values as inputs of some branches and the technologically determined supply of the same use values as outputs of other branches. Marx’s answer is that those “ price fluctuations, which prevent large portions of the total capital from replacing themselves in their average proportions … must always call forth general stoppages”, due to “ the general interrelations of the entire reproduction process as developed in particular by credit” . However, these are only “ of a transient nature”.  (Marx, 1967c, pp. 483-4).  Thus disproportions can either be determined by price fluctuations, and in this case they are self-correcting and cannot explain crises, or by lack of purchasing power, and in this case it is the latter, rather than disproportions, which explain crises. The disproportionality and underconsumption theories cannot account for the inevitability of crises; but, as we have seen, these theories do account for the inevitability of temporary and self-correcting disturbances. Only the approach linking insufficient production of (surplus) value with technological innovations can provide such an explanation.”

It is no accident that ‘underconsumption’ as such has not been revived as an alternative theory to Marx’s law of profitability.  That’s because the idea that crises are caused by the inability of workers to pay for the goods they have produced has been so thoroughly discredited both theoretically and empirically.  But the theory of ‘overproduction’ beyond ‘the limits of the market’ is really just the other side of the coin of underconsumption.  Overproduction is when capitalists produce too much compared to the demand for things or services.  Suddenly capitalists build up stocks of things they cannot sell, they have factories with too much capacity compared to demand and they have too many workers than they need.  So they close down plant, slash the workforce and even just liquidate the whole business.  That is a capitalist crisis.

Overproduction is the very expression of a capitalist crisis.  Before capitalism, crises were ones of underproduction (namely famine or scarcity).  But to say overproduction is the form that a capitalist crisis takes is not to say it is the cause of the crisis.  To say that crises are like a thunderstorm does not explain why we are wet.  If it were the cause, then capitalism would be in permanent slump because workers can never buy back all the goods they produce.   After all, the difference between what the workers get in wages and the price of the goods or services they produce that are sold by the capitalists are the profits.  By definition, that value is not available to workers to spend, but is in the hands of the capitalist owners.

Marx devastatingly criticised those capitalist economists who claimed that there could never be a crisis of overproduction because every sale that a capitalist makes means that there will be purchaser.  As Marx said, that there is purchaser for every seller is a tautology, the very definition of exchange. Sure, “no one can sell unless someone else purchases.  But no one is forthwith bound to purchase just because he has sold”. The money from a sale can be hoarded (saved) and not used to buy.  That alone raises the possibility of overproduction and crisis.

But the possibility of crisis in the process of capitalist exchange using money does not mean it will happen and provides no explanation of when or how.  So Marx went further and explained that what will decide whether capitalists make purchases for investing in plant or new technology and to buy labour power to produce is the profitability of doing so.  “The rate of profit is the motive power of capitalist production.  Things are produced only so long as they can be produced with a profit”.

And this is where Marx’s law of the tendency of the rate of profit to fall comes in. Marx shows that the profitability of capitalist production does not stay stable, but is subject to an inexorable downward pressure (or tendency).  That eventually leads to capitalists overinvesting (overaccumulating) relative to the profits they get out of the workers.  At a certain point, overaccumulation relative to profit (ie a falling rate of profit) leads to the total or mass of profit no longer rising.  Then capitalists stop investing and producing and we have overproduction, or a capitalist crisis.  So the falling rate of profit (and falling profits) causes overproduction, not vice versa.

As Henryk Grossman explained so well, a falling rate of profit does not directly lead to a crisis as long as the mass of profit can rise.  When a falling rate of profit eventually leads to a fall in the mass of profit and thus overaccumulation of investment and overproduction of goods and services (that are profitable), then the crisis ensues.

As Marx put it: “the so-called plethora (overaccumulation) of capital always applies to a plethora of capital for which the fall in the rate of profit is not compensated by the mass of profit… and “overproduction of commodities is simply overaccumulation of capital”.  It is precisely when the mass of profit stopped rising that the Great Recession ensued.

Thus the so-called realisation problem is the result of the production problem.  Falling profitability and falling mass of profits lead to collapsing investment, wages and employment and then swathes of companies cannot sell their goods or services at existing prices and workers cannot buy them.  This is a crisis of overproduction and underconsumption.

Indeed, only Marx’s law of profitability can explain the cycle of boom and slump, while overproduction or disproportion cannot do so.  See Paul Mattick Jnr’s excellent account of Marx’s law and the business cycle pp48-51 in the best short account of the Great Recession so far, Business as usual.

And there is a political implication from the discussion of alternative theories of capitalist crises.  For example, if we think capitalist crisis is caused by overproduction (or underconsumption) relative to the ability of workers to buy the goods produced, as Keynesians do, then the policy answer may be just to boost spending by government or make tax cuts (as Donald Trump plans now, it seems).  Problem solved.  Only, as our session at HM showed – the ‘problem of realisation’ is not solved by these measures, as Trump and the American people will find out precisely because it is not a problem of realisation but of profitability.

On the other hand, if we think it is caused by lack of profit, then there is only one solution for capitalism: destroying the value of existing capital (plant, machines and employees) in order to cut costs and so restore profitability.  Only that will get capitalism going again (for a while), but at the expense of the rest of us.  Thus the inherent contradiction of capitalism is exposed.  Only its abolition will stop the cycle of boom and slump.  The problem of production for profit is a real problem that cannot be resolved.

In my view, ‘too much surplus’, ‘disproportion’, ‘overproduction’ or ‘underconsumption’ are not Marx’s theory of crises.  But more important, they are very weak alternatives to Marx’s law of profitability as an explanation.  They are weak theoretically and even worse, empirically unverifiable.  What are we measuring when we look at ‘disproportionality’ or ‘underconsumption’?  Does consumption fall before a slump?  No, the evidence is clearly to the contrary, unlike profits and investment.  Will disproportionate investment growth compared to consumption lead to overproduction and periodic crises?  Well no, as Andrew Kliman has shown for the US in his book, The failure of capitalist production, chapter 8.  Historically, business investment always grows faster than workers’ consumption – that is the result of capitalist accumulation.  But this does not create a chronic slump or permanent stagnation because investment creates its own demand (capitalist demand).  Indeed, investment drives the productivity of labour and thus drives economic growth.  The problem is when investment collapses, not when it grows ‘too fast’.

Everybody in Marxist economic circles seems to agree that the crises of the 1970s and early 1980s were the result of falling profitability rather than overproduction or underconsumption.  But you see, the argument now goes, each crisis can have a different cause because capitalism metamorphoses into new forms or structures (neoliberalism or financialisation) that change the causal contradictions.  So we are now being told that, because profitability rose after 2001 up to the Great Recession, Marx’s law does not apply and we need to consider that the GR was the result of either financial instability, excessive credit, rising inequality and falling wage share, or weak demand and secular stagnation.

Well, none of these alternatives seems convincing to me.  As Alan Freeman recently said in his paper in the book on the crisis, The Great Financial Meltdown: Marx’s law remains “the only credible competitor left in the contest to explain what is going wrong with capitalism”.

Rejoinder:

Francois Chesnais has kindly sent me a rejoinder to my comments on his view of the current Long Depression and its causes:

“One is faced with a situation where has been a continuous drive by capital to raise the rate of exploitation in the course of the crisis yet the conditions of profitability and new investment have not been restored.

In the explanation offered the starting notion is that of “fresh fields of accumulation” (Luxemburg) as necessary to end a long recession, a further one the function of crisis in capitalism and the key central one that of “dearth of actual surplus value”.

One must start by looking at were the “fresh fields” that ended the two previous world long recessions or depressions. In the case of the 1880s it was a combination of an extension of the world market, a reach out to the many regions not properly include or not included at all, and of the opening for profitable investment over a long time span of the major industries of the “Second industrial revolution”. In the case of the 1930s it was as you said very clearly in one of your talks it was the Second war world.

Then one must look at whether a crisis is allowed to play its function of destroying existing productive and fictitious capital, of clearing the deck for new investment. This was the case in 1929 and the 1930s.

So what is the picture today? We have a situation which combines the fact that the crisis was not allowed to play its function of destroying existing productive and fictitious capital, of clearing the deck for new investment on any significant scale and that since a World war is not in preparation the only candidate as a “fresh field” would have to be new technologies associated with the emergence of whole new industrial sectors with strong new employment creation effects. The ones there are do not have this quality, on the contrary.

A low level of investment means a low creation of surplus value.  “Virtuous cumulative accumulation process” are one where profit expectation drives investment of a strong enough employment effect as to generate both surplus creation and demand permitting the completion of the accumulation cycle M-C-P-C’-M’.

Today not enough surplus value is being produced to re-launch the accumulation process and the amount that is serves to consolidate the accumulation of dividend and interest bearing assets by banks, funds and individuals (financial accumulation) and so the claims on this already very insufficient amount of surplus value. This has led both to the dead-end of the quasi-zero long term interest rate regime, which not simply the outcome of quantitative-easing and to the endless small shocks in the global financial system.

Of course government debt and the resulting pro-rentier, pro-cyclical austerity policies only aggravate this situation but they do not explain it and their reversal would not solve capitalism’s basic problem.”