Archive for the ‘marxism’ Category

Lord Skidelsky and Keynes’ big idea

September 20, 2018

Last night, Lord Robert Skidelsky spoke to the UK’s Progressive Economy Forum (PEF) in London.  He was promoting his new book Money and Government: A Challenge to Mainstream Economics.  Its aim, the blurb says, is “to familiarise the reader with essential elements of Keynes’s ‘big idea’.“  The PEF is an economics think tank composed of just about all the top British Keynesian and leftist economists (but no Marxists).  At this highly promoted meeting was John McDonnell, the Labour spokesperson on finance and economics, where he gave a favourable response to Skidelsky’s ideas.

Lord Robert Skidelsky is emeritus professor of economics at Warwick University, England.  He is the most eminent biographer of John Maynard Keynes and is a firm promoter of his ideas.  Skidelsky is lauded by leftist Keynesians, even though his politics are as unreliable for the left as Keynes’ were. Originally a Labour Party member, he left that party to become a founding member of the renegade Social Democratic Party, which ensured the defeat of the Labour Party in the 1983 election.  He remained in the SDP until it fell apart in 1992, but he was rewarded for his part in defeating Labour with a life peerage as Baron Skidelsky by the then Conservative government.

Indeed after that he became a Conservative and was chief opposition spokesman for the Conservatives in the Lords when the Blair Labour government was in office.  He was chairman of the right-wing pro-privatisation and neoliberal reform think-tank, the Social Market Foundation between 1991 and 2001.  In 2001, he left the Conservative Party for what is called the ‘cross benches in the UK’s House of Lords (ie no party).  Despite this, Skidelsky is regarded by left Keynesians as ‘one of them’.  Indeed, he sits on the council of the PEF.

I have not got access to a review copy of his new book, but his speech last night and an article that Skidelsky wrote back in 2016 criticising mainstream economics probably sums up the views in the book.  This is what I said then
https://thenextrecession.wordpress.com/2016/12/25/the-system-is-broken/

In a more recent article in the British Guardian newspaper to promote his new book, Skidelsky starts from the premiss (like Keynes) that capitalism is the only viable and best mode of production and social relations possible – the alternative of a socialist system of planning based on public ownership is anathema to him (as it was to Keynes).  But capitalism has fault-lines and successively recurring slump and depressions reveals that. So Skidelsky’s job (as Keynes also saw it) is to save capitalism and manage these recurring crises to reduce or minimise their impact.

In his article, Skidelsky claims that the global financial crash and “the worst global downturn since the Great Depression of 1929” was “almost entirely unanticipated.”  Well, it was by mainstream economics and nearly all Keynesians, but as I have shown elsewhere, it was predicted by some heterodox economists, including Marxists.

Nevertheless, Skidelsky asks what we can learn from this financial disaster so we can avoid it next time (yes, it’s going to happen again). He says “prevention is far better than cure.”  But by prevention he does not mean “trying to stop the semi-regular fluctuations of the business cycle.”  There is nothing we can do about that under capitalism.  No, the job of the monetary authorities and governments is “to dampen, if not altogether prevent, these fluctuations”. And in doing so, we can avoid “looming state bankruptcy, or worse, state control over the economy.”(!)

Then he offers the usual mainstream prescriptions of monetary easing and fiscal spending (particularly in infrastructure).  But he reckons that the scale of last disaster will require “far more ambitious thinking”.  You see, you just cannot tell when it will happen again because “as John Maynard Keynes taught, the future is uncertain” (Really, I never guessed – MR).

Skidelsky then states that the reason for the weak recovery after the end of the Great Recession was ‘austerity’.  If only governments had expanded spending and run budget deficits, then economies would have been restored.  This is the same argument that American Keynesian Paul Krugman just offered on his blog and is the mantra of all Keynesian explanations of the Long Depression.  But regular readers of this blog know that there is plenty of evidence that increased government spending where it was applied (Japan) did not revive the economy; and there is little or no correlation between government spending and growth in the major economies.  That’s because under a capitalist economy, unless the profitability of capital rises, no amount of fiscal stimulus will work.

But what does Skidelsky think we should do?  First, we must break up the big banks into smaller units and “institute controls over the type and destination of loans they make.”  The idea of breaking up the banks is presented because some banks are now so large that if they fail, they would bring down the whole financial system.  But this ‘solution’ would simply mean that smaller banks would continue to conduct their sleazy, speculative, fraudulent activities.  Oh and I forgot: we are going to control (regulate) what they do.  Well, that worked well last time. There is no mention of the obvious solution: public ownership of the major banks with democratic control and accountability to establish a banking system that is a public service to households and small businesses, not acting as ‘financial weapons of mass destruction’.

The second thing Skidelsky wants to do is to ‘manage’ capitalism with proper fiscal and monetary policies.  Well, such Keynesian policies failed in the 1970s when the profitability of capital collapsed and advanced economies suffered a series of severe recessions (1974-5, 1980-2).  That’s why Keynesian macro-management was dropped by the strategists of capital.  In his speech, Skidelsky argued that it was not Keynesian policies in the 1970s that failed but the deregulation of finance.

I am unaware that such ‘deregulation’ was adopted then.  That came only after the profitability crises of the 1970s and early 1980s.  Deregulation was a response to the problems of capitalist production not the cause.  And ironically, Skidelsky ditched Labour just at this time to join the Social Democrats who supported deregulation and neo-liberal policies and broke with Labour because they feared the take-over of the party by Tony Benn (the precursor of Corbyn)!

Anyway Skidelsky wants to be a little more ambitious this time.  His aim is not to “fine tune the business cycle” but instead “maintain a steady stream of public investment amounting to at least 20% of total investment to offset the inherent volatility of the private economy.”  This smacks of Keynes’ famous call for the ‘socialisation of investment’ that the ‘master’ (Skidelsky’s phrase) advocated as a last resort in order to revive the capitalist economy when monetary easing and government spending failed in the 1930s.

Actually, in the ‘war economy’ of the 1940s, Keynes was much more radical than Skidelsky and proposed that up to 75% of total investment should be public, reducing the capitalist sector to a minority (Chinese-style)  Of course, that was in the war and no Keynesian now proposes to wipe out the dominance in investment of the big banks and the capitalist sector.  Skidelsky’s “20%” amounts to about 3% of GDP, the same target that the Labour leadership is proposing in its economic strategy.  But as I have explained in many previous posts and papers, that leaves the capitalist sector investment up to five times larger and so the profitability of capital will remain the driving force for growth.  And that means recurring crises and lower growth.

Ironically, up to now it has been President Trump who has (unknowingly) adopted apparently Keynesian prescriptions, with his tax cuts for the rich.  Two years ago when Trump also proposed a programme of infrastructure, Skidelsky got very excited.  He commented ““As Trump moves from populism to policy, liberals should not turn away in disgust and despair, but rather engage with Trumpism’s positive potential. His proposals need to be interrogated and refined, not dismissed as ignorant ravings.”  But since then nothing has come of Trump’s infrastructure promises.  All that has happened is that corporate profits are up, the stock market is booming, inequality has rocketed further, real wages are stagnant and public services are being slashed.  So much for Trump’s ‘positive potential’.

Third, Skidelsky wants to “reverse the rise in inequality”; but not because it is unjust or the result of the exploitation of labour by capital.  We need to reduce inequality so that wages are sufficiently high to sustain “the consumption base of the economy”. Otherwise it “becomes too weak to support full employment.”  Skidelsky seems to think that the cause of crises are low wages and consumption – actually something rejected by Keynes –he thought it was a low marginal efficiency of capital and too high interest rates.  Moreover, the argument that rising inequality is the cause of crises rather than the result of neoliberal policy measures has been disproved. But this argument is presented in Keynesian circles all the time.

Finally, there is the political.  You see, says Skidelsky, unless we act along these lines to save capitalism, there is the danger of the rise of ‘populism’ and “the flight of voters toward political extremism.”  Hopefully, he only means the rise of nationalist and semi-fascist forces of the right.  But I think he also means the forces of socialism on the radical left.  And they are just as much an enemy of the ‘liberal’ Skidelsky as the ‘extreme’ right (just as it was for Keynes). Lord Skidelsky remains an interesting political bedfellow for the labour movement – just as Lord Keynes did in the 1930s.

The PEF website has a quote from Keynes that they see as paramount. “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else“.  I hope the PEF do not really agree with the arrogance of Keynes’ statement that philosophers and economists are the real ‘rulers’ of the world (similar to the autocratic ideas of the ancient Greek aristocrat Plato). I think a better quote for the PEF would be: “Philosophers have hitherto only interpreted the world in various ways; the point is to change it.” (Karl Marx).

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It’s greed and fear

September 18, 2018

Larry Summers is one of the world’s leading Keynesian economists, a former Treasury Secretary under President Clinton, a candidate previously for the Chair of the US Fed, and a regular speaker at the massive ASSA annual conference of the American Economics Association, where he promotes the old neo-Keynesian view that the global economy tends to a form of ‘secular stagnation’.

Summers has in the past attacked (correctly in my view) the decline of Keynesian economics into just doing sterile Dynamic Stochastic General Equilibrium models (DSGE), where it is assumed that the economy is stable and growing, but then is subject to some ‘shock’ like a change in consumer or investor behaviour.  The model then supposedly tells us any changes in outcomes.  Summers particularly objects to the demand by neoclassical and other Keynesian economists that any DSGE model must start from ‘microeconomic foundations’ ie the initial assumptions must be logical, according to marginalist neoclassical supply and demand theory, and the individual agents must act ‘rationally’ according to those ‘foundations’.

As Summers puts it: “the principle of building macroeconomics on microeconomic foundations, as applied by economists, contributed next to nothing to predicting, explaining or resolving the Great Recession.”  Instead, says Summers, we should think in terms of “broad aggregates”, ie empirical evidence of what is happening in the economy, not what the logic of neoclassical economic theory might claim ought to happen.

Not all Keynesians agree with Summers on this.  Simon Wren-Lewis, the leading British Keynesian economist claims that the best DSGE models did try to incorporate money and imperfections in an economy: “respected macroeconomists (would) argue that because of these problematic microfoundations, it is best to ignore something like sticky prices (wages) (a key Keynesian argument for an economy stuck in a recession – MR) when doing policy work: an argument that would be laughed out of court in any other science. In no other discipline could you have a debate about whether it was better to model what you can microfound rather than model what you can see. Other economists understand this, but many macroeconomists still think this is all quite normal.” In other words, you cannot just do empirical work without some theory or model to analyse it; or in Marxist terms, you need the connection between the concrete and the abstract.

There is confusion here in mainstream economics – one side want to condemn ‘models’ for being unrealistic and not recognising the power of the aggregate.  The other side condemns statistics without a theory of behaviour or laws of motion.

Summers reckons that the reason mainstream economics failed to predict the Great Recession is that it does not want to recognise ‘irrationality’ on the part of consumers and investors.  You see, crises are probably the result of ‘irrational’ or bad decisions arising from herd-like behaviour.  Markets are first gripped by ‘greed’ and then suddenly ‘animal spirits’ disappear and markets are engulfed by ‘fear’.  This is a psychological explanation of crises.

Summers recommends a new book by behavioural economists Andrei Shleifer’s and Nicola Gennaioli, “A Crisis of Beliefs: Investor Psychology and Financial Fragility.”  Summers proclaims that “the book puts expectations at the center of thinking about economic fluctuations and financial crises — but these expectations are not rational. In fact, as all the evidence suggests, they are subject to systematic errors of extrapolation. The book suggests that these errors in expectations are best understood as arising out of cognitive biases to which humans are prone.” Using the latest research in psychology and behavioural economics, they present a new theory of belief formation.  So it’s all down to irrational behaviour, not even a sudden ‘lack of demand’ (the usual Keynesian reason) or banking excesses.  The ‘shocks’ to the general equilibrium models are to be found in wrong decisions, greed and fear by investors.

Behavioural economics always seems to me ‘desperate macroeconomics’.  We don’t know why slumps occur in production, investment and employment at regular and recurring intervals.  We don’t have a convincing theoretical model that can be tested with empirical evidence; just saying slumps occur because there is a ‘lack of demand’ sounds inadequate.  So let’s turn to psychology to save economics.

Actually, the great behavourial economists that Summers refers to also have no idea what causes crises.  Robert Thaler reckons that stock market prices are so volatile that there is no rational explanation of their movements.  Thaler argues that there are ‘bubbles’, which he considers are ‘irrational’ movements in prices not related to fundamentals like profits or interest rates.  Top neoclassical economist Eugene Fama criticised Thaler.  Fama argued that a ‘bubble’ in stock market prices may merely express a change in view of investors about prospective investment returns; it’s not ‘irrational’.  On this point, Fama is right and Thaler is wrong.

The other behaviourist cited by Summers is Daniel Kahneman.  He has developed what he called ‘prospect theory’. Kahneman’s research has shown that people do not behave as mainstream marginal utility theory suggests. Instead Kahneman argues that there is “pervasive optimistic bias” in individuals.  They have irrational or unwarranted optimism.  This leads people to take on risky projects without considering the ultimate costs – against rational choice assumed by mainstream theory.

Kahneman’s work certainly exposes the unrealistic assumptions of marginal utility theory, the bedrock of mainstream economics.  But it offers as an alternative, a theory of chaos, that we can know nothing and predict nothing.  You see, the inherent flaw in a modern economy is uncertainty and psychology.  It’s not the drive for profit versus social need, but the psychological perceptions of individuals. Thus the US home price collapse and the global financial crash came about because consumers have irrational swings from greed to fear.  This leaves mainstream (including Keynesian) economics in a psychological purgatory, with no scientific analysis and predictive power.  Also, it leads to a utopian view of how to fix crises.  The answer is to change people’s behaviour; in particular, big multinational companies and banks need to have ‘social purpose’ and not be greedy!

Turning to psychology is not necessary for economics.  At the level of aggregate, the macro, we can draw out the patterns of motion in capitalism that can be tested and could deliver predictive power.  For example, Marx made the key observation that what drives stock market prices is the difference between interest rates and the overall rate of profit. What has kept stock market prices rising now has been the very low level of long-term interest rates, deliberately engendered by central banks like the Federal Reserve around the world.

Of course, every day, investors make ‘irrational’ decisions but, over time and, in the aggregate, investor decisions to buy or to sell stocks or bonds will be based on the return they have received (in interest or dividends) and the prices of bonds and stocks will move accordingly. And those returns ultimately depend on the difference between the profitability of capital invested in the economy and the costs of providing finance.  The change in objective conditions will alter the behaviour of ‘economic agents’.

Right now, interest rates are rising globally while profits are stagnating.

The scissor is closing between the return on capital and the cost of borrowing.  When it closes, greed will turn into fear.

The state of capitalism at IIPPE

September 14, 2018

This year’s conference of the International Initiative for the Promotion of Political Economy (IIPPE) in Pula, Croatia had the theme of The State of Capitalism and the State of Political Economy.  Most submissions concentrated on the first theme although the plenary presentations aimed at both.

I was struck by the number of papers (IIPPE 2018 – Abstracts) on the situation in Brazil, China and Turkey – a sign of the times – but also by the relative youth of the attendees, particularly from Asia and the ‘global south’.  The familiar faces of the ‘baby boomer’ generation of Marxist and heterodox economists (my own demographic) were less in evidence.

Obviously I could not attend all simultaneous sessions so I concentrated on the macroeconomics of advanced capitalist economies.  Actually my own session was among the first of the conference.  Under the title of The limits to economic policy management in the era of financialisation, I presented a paper on The limits of fiscal policy (my PP presentation is here (The limits to fiscal policy).

I argued that, during the Great Depression of the 1930s, Keynes had recognised that monetary policy would not work in getting depressed economies out of a slump, whether monetary policy was ‘conventional’ (changing the interest rate for borrowing) or ‘unconventional’ (central banks buying financial assets by ‘printing’ money).  In the end, Keynes opted for fiscal stimulus as the only way for governments to get the capitalist economy going.

In the current Long Depression, now ten years old, both conventional (zero interest rates)and unconventional (quantitative easing) monetary policy has again proved to be ineffective.  Monetary easing had instead only restored bank liquidity (saved the banks) and fuelled a stock and bond market bonanza. The ‘real’ or productive economy had languished with low real GDP growth, investment and wage incomes.

Maria Ivanova of Goldsmiths University of London also presented in my session (Ivanova_Quantitative Easing_IJPE_forthcoming) and she showed clearly that both conventional and unconventional monetary policies adopted by the US Fed had done little to help growth or investment and had only led to a new boom in financial assets and a sharp rise in corporate debt, now likely to be the weak link in the circulation of capital in the next slump.

Keynesian-style fiscal stimulus was hardly tried in the last ten years (instead ‘austerity’ in government spending and budgets was generally the order of the day).  Keynesians thus continue to claim that fiscal spending could have turned things around.  Indeed, Paul Krugman argued just that in the New York Times as the IIPPE conference took place.

But in my paper, I refer to Krugman’s evidence for this and show that in the past government spending and/or running budget deficits have had little effect in boosting growth or investment.  That’s because, under a capitalist economy, where 80-90% of all productive investment is by private corporations producing for profit, it is the level of profitability of capital that is the decisive factor for growth, not government spending boosting ‘aggregate demand’.  In the last ten years since the Great Recession, while profits have risen for some large corporations, average profitability on capital employed has remained low and below pre-crash levels (see profitability table below based on AMECO data).  At the same time, corporate debt has jumped up as large corporations borrow at near zero rates to buy their own share (to boost prices) and/or increased payouts to shareholders.

Government spending on welfare benefits and public services along with tax cuts to boost ‘consumer demand’ is what most modern Keynesians assume is the right policy.  But it would not solve the problem (and Keynes thought so too in the 1940s).  Indeed, what is required is a massive shift to the ‘socialisation of investment’, to use Keynes’ term, i.e. the government should resume responsibility for the bulk of investment and its direction.  During the 1940s, Keynes actually advocated that up to 75% of all investment in an economy should be state investment, reducing the role of the capitalist sector to the minimum (see Kregel, J. A. (1985), “Budget Deficits, Stabilization Policy and Liquidity Preference: Keynes’s Post-War Policy Proposals”, in F. Vicarelli (ed.), Keynes’s Relevance Today, London, Macmillan, pp. 28-50).

Of course, such a policy has only happened in a war economy.  It would be quickly opposed and was dropped in ‘peace time’.  That’s because it would threaten the very existence of capitalist accumulation, as Michal Kalecki pointed out in his 1943 paper.

Now in 2018, the UK Labour Party wants to set up a ‘Keynesian-style’ National Investment Bank which would invest in infrastructure etc, alongside the big five UK banks which will continue to conduct ‘business as usual ‘ i.e. mortgages and financial speculation.  Under these Labour proposals, government investment (even if implemented in full) would rise to only 3.5% of GDP, less than 20% of total investment in the economy – hardly ‘socialisation’ a la Keynes at his most radical..

But perhaps President Trump’s version of Keynesian fiscal stimulus (huge tax cuts for the rich and corporations , driving up the budget deficit) will do the trick.  It is an irony that it is Trump that has adopted Keynesian policy.  He certainly thinks it is working – with the US economy growing at a 4% annual rate right now and official unemployment rates at near record lows.  But an excellent presentation by Trevor Evans of the Berlin School of Economics poured cold water on that optimism.  With a barrage of data, he showed that corporate profits are actually stagnating, corporate debt is rising and wage incomes are flat, all alongside highly inflated stock and bond markets.  The Trump boom is likely to fizzle out and turn into its opposite.

Also, Arturo Guillen of the Metropolitan University of Mexico City,( IIPPE 2018 inglés) reminded us that the medium term trajectory of US economic growth was very weak with productivity growth very low and productive investment crawling.  In that sense, the US was suffering from ‘secular stagnation’, but not for the reasons cited by Keynesians like Larry Summers (lack of demand) or by neoclassical critiques like Robert Gordon (ineffective innovation) but because of the low profitability for capital.

In another session, Joseph Choonara, took this further. Choonara saw the current crisis rooted in a long decline in profitability in the period from the late 1940s to the early 1980s. The subsequent neoliberal period developed new mechanisms to defer crises, notably financialisation and credit expansion. In the Long Depression since 2009, driven largely by the central bank response, debt continues to mount. The result is a financially fragile and uncertain recovery, which is creating the conditions for a new crisis

There were also some sessions on Marxist economic theory at IIPPE, including a view on why Marx sent so much time on learning differential calculus (Andrea Ricci) and on why Marx’s transformation of value into prices of production is dialectical in its solution (Cecilia Escobar).  Also Paul Zarembka from the University of Buffalo, US presented a paper arguing that the organic composition of capital in the US did not rise in the post-war period and so cannot be the cause of any fall in the rate of profit.

His concepts and evidence do not hold water in my view.  Zarembka argues that there is a major problem concerns using variable capital v in the denominator in the commonly-expressed organic composition of capital, C/v. That is because v can change without any change in the technical composition. Using, instead, what he calls the ‘materialized composition of capital’, C/(v+s), movement in C/v can be separated between the technical factor and the distributional factor since C/v = (1 + s/v).  With this approach, Zarembka reckons, using US data, he can show no rise in the organic composition of capital in the US and no connection between Marx’s basic category for laws of motion under capitalism and the rate of profitability.

But I think his category C/(v+s) conflates the Marx’s view of the basic ‘tendency’ (c/v) in capital accumulation with the lesser ‘counter-tendency’ (s/v) and thus confuses the causal process.  This makes Marx’s law of profitability ‘indeterminate’ in the same way that Sweezy and Heinrich etc claim.  As for the empirical consequences of rejecting Zarembka’s argument, I refer you to an excellent paper by Lefteris Tsoulfidis.

As I said previously, there were a host of sessions on Brazil, Southern Africa and China, most of which I was unable to attend.  On China, what I did seem to notice was that nearly all presenters accepted that China was ‘capitalist’ in just the same way as the US or at least as Japan or Korea, if less advanced.  And yet they all recognised that the state played a massive role in the economy compared to others – so is there a difference between state capitalism and capitalism?  I cannot say anything about the papers on Brazil except for you to look at IIPPE 2018 – Abstracts.  Brazil has an election within a month and I shall cover that then – and these are my past posts on Brazil.

There were other interesting papers on automation and AI (Martin Upchurch) and on bitcoin and a cashless economy (Philip Mader), as well as on the big issue of imperialism and dependency theory (which is back in mode).

The main plenary on the state of capitalism was addressed by Fiona Tregena from the University of Johannesburg.  Her primary area of research is on structural change, with a particular focus on deindustrialisation. Prof Tregena has promoted the concept of premature deindustrialisation.  Premature deindustrialisation can be defined as deindustrialisation that begins at a lower level of GDP per capita and/or at a lower level of manufacturing as a share of total employment and GDP, than is typically the case internationally. Many of the cases of premature deindustrialisation are in sub‐Saharan Africa, in some instances taking the form of ‘pre‐industrialisation deindustrialisation’. She has argued that premature deindustrialisation is likely to have especially negative effects on growth.

As for the state of political economy, Andrew Brown of Leeds University has explained some of the failures of mainstream economics, particularly marginal utility theory. Marginal utility theory has not to this day been developed in a concrete and realistic direction not because it is just vulgar apologetics for capitalism, but because it is theoretically nonsense. Marginal utility theory can provide no comprehension of the macroeconomic aggregates that drive the reproduction and development of the economic system.

‘Financialisation’ is the word/concept that dominates IIPPE conferences.  It is a concept that has some value when it describes the change in the structure of the financial sector from pure banks to a range of non-deposit financial institutions and the financial activities of non-financial corporations in the last 40 years.

But I am not happy with the concept when it used to suggest that the financial crash and the Great Recession were the result of some new ‘stage’ in capitalism.  From this, it is argued that crises now occur not because of the fall in productive sectors but because of the speculative role of ‘’financialisation.’  Such an approach , in my view, is not only wrong theoretically but does not fit the facts as well as Marx’s laws of motion: the law of value, the law of accumulation and the law of profitability.

For me, financialisation is not a new stage in capitalism that forces us to reject Marx’s laws of motion in Capital and neoliberal economics is not in some way the new economics of financialisation and a different theory of crises from Marx’s.  Finance does not drive capitalism, profit does.  Finance does not create new value or surplus value but instead finds new ways to circulate and distribute it.  The kernel of crises thus remains with the production of value.  Neoliberalism is merely a word invented to describe the last 40 years or so of policies designed to restore the profitability of capital that fell to new lows in the 1970s.  It is not the economics of a new stage in capitalism.

Sure, each crisis has its own particular features and the Great Recession had that with its ‘shadow banking’, special investment vehicles, credit derivatives and the rest.  But the underlying cause remained the profit nature of the production system. If financialisation means the finance sector has divorced itself from the wider capitalist system, in my view, that is clearly wrong.

Rethinking Rethinking economics

August 14, 2018

Can economics ever become ‘pluralist’?  Namely, will the universities and research institutes in the major capitalist economies expand their teaching and ideas to cover not just mainstream neoclassical and Keynesian theories but also more radical heterodox themes (post-Keynesian, Austrian and Marxian)?  If you look at the list of study courses that are considered heterodox by Heterodox News, there are not many in the UK and the US and are concentrated in a just few colleges – with the big names having no such courses at all.

Rethinking Economics, a pressure group of academics and students was launched over four years ago to turn this round. Now in July, Rethinking Economics said Britain’s universities were failing to equip economics students with the skills that businesses and the government say they need. Following extensive interviews with employers, including organisations such as the Bank of England, it found that universities were producing “a cohort of economic practitioners who struggle to provide innovative ideas to overcome economic challenges or use economic tools on real-world problems”.  Moreover, the group said, “when political decisions are backed by economics reasoning, as they so often are, economists are unable to communicate ideas to the public, resulting in a large democratic deficit.” 

There are efforts among some academics to broaden the outlook of economics graduates. The Core project was adopted by 13 UK universities last September and has won £3.7m from the Economic and Social Research Council.  As the Guardian put it: “the developers of the programme also claim it has freed itself from neoliberal thinking, which judges markets to be self-adjusting and consumers and businesses to be operating with the same information. The world is full of asymmetric power and information relationships, and Core reflects this.

The Core project has produced an antagonistic reaction from right-wing commentators.  The prolific right-wing British political blogger, “Guido Fawkes”, tweeted: “The left in the universities are trying to rehabilitate Marxist economics to poison the future. Very concerning that they got £3.7 million of taxpayers’ money to do it”.  One strong promoter of Core and Rethinking Economics, the leftist economist, Jonathan Portes, responded to Fawkes that he was sure that none of the contributors to the Core programme were Marxist and “I’m obviously not a “Marxist”.  And that is true.  

The reality is that Rethinking Economics and Core is dominated by Keynesian ideas with hardly any look-in for Marxist ones.  It’s true that Sam Bowles is one of the main coordinators of the Core textbook project and he considered himself a (neo?) Marxist in the past – but his recent comments on Marx’s theories at the 200th anniversary suggest otherwise now (see here).

I am reminded of that first London conference of Rethinking Economics.  At that meeting, leading radical economists Victoria Chick and Sheila Dow told us that reform of society would be impossible until we can change the ‘closed mind-set’ of mainstream economics. As if the issue was a psychological one. Mainstream economics is closed to alternatives because there a material interest involved. But Chick and Dow seemed to think that it’s just a question changing the mind-set of other economists that support the market – for their own good because austerity and neoliberal policies are actually bad for capitalism itself.

More recently, leading leftist economists in the UK held a seminar on the state of mainstream economics, as taught in the universities.  They kicked this off by nailing a poster with 33 theses critiquing mainstream economics to the door of the London School of Economics.  This publicity gesture attempted to remind us that it was the 500th anniversary of when Martin Luther nailed his  95 theses to the Castle Church, Wittenberg and provoked the beginning of the Protestant reformation against the ‘one true religion’ of Catholicism.

The economists were purporting to tell us that mainstream economics was like Catholicism and must be protested against, just as Luther did back in 1517.  But as I commented then, is a revolution against the mainstream really to be painted as similar to Luther’s protestant revolt?  The history of the reformation tells us the protestant version of Christianity did not lead to a new pluralistic order and freedom to worship.  On the contrary, Luther was a bigot who worked with the authorities to crush more radical movements based on the peasants, led by Thomas Munzer.

Don’t get me wrong: attempts to expand economic ideas beyond the mainstream can only be good news and the content of the Core project is really stimulating and educational.  But it seems that, for Rethinking Economics and Core, the mainstream economic ‘religion’ is just neoclassical theory and that it is neoliberal economics that must be overthrown. They have nothing to say against Keynesian economics – indeed variants of Keynes are actually the way forward for them.

Take the new course at University College London for undergraduates. It’s called Rethinking Capitalism – a new elective module for UCL undergraduates.  Run by Mariana Mazzucato, the director of the Institute of Innovation and Public Purpose (IIPP) and author of The value of everything, it’s a great initiative, with guest lecturers including Branco Milanovic. . The module aims to “help students develop their critical thinking and make the connections between economic theory and real world policy issues. It will provide an introduction to a range of different economics perspectives, including Neoclassical, post-Keynesian, ecological, evolutionary, Marxist and institutional economics theories and how their different assumptions link to different public policies.”  But looking at the BASC0037 Rethinking Capitalism. I am sceptical that students will hear much about Marxist economic theory within its ‘heterodox’ approach.

Keynesian theory dominates in Rethinking Economics and so do the policy conclusions arising from Keynesian ideas in wider left circles.  Take the recent seminar organised by the IIPP in the UK’s House of Lords to discuss the financing of innovation (badly needed given the poor performance of the British capitalist sector in productivity growth).  But who did the IIPP line up to discuss with Mazzacuto the very limited proposal for a UK national investment bank to replace the European Investment Bank when the UK leaves the EU next year?  It was Tory Lord David Willetts, and as keynote speaker, Liberal leader Sir Vince Cable!  Cable was quoted approvingly to say that “The current enthusiasm for ‘selling the family silver’ (ie privatisation)) has its roots in bizarre Treasury accounting conventions.”  This was very rich hypocrisy coming from Cable, who when in coalition with the Conservatives, presided over the privatisation of Royal Mail, Britain’s state-owned postal service, selling it off for a price at least £1bn below market value – yes, selling the ‘family silver’.  I’m not sure that the IIPP will get far with its laudable aim of increasing the state role in innovation and investment by relying on these people for support.

And Keynesian ideas are central to the opinions of key advisers for the leftist Labour leaders in Britain.  In a recent article, Ann Pettifor, director of Prime Economics, blamed the economic crisis in Turkey and other ‘emerging economies’ on ‘orthodox economics’, in particular the move by central banks to hike interest rates and ‘normalise’ monetary policy. I’ll be debating with Ann Pettifor on what to do about finance at this year’s Momentum conference taking place during the Labour Party conference in Liverpool in late September.  I too have pointed out the risk that this policy entails for the world economy when profitability is still low and debt is high.

Pettifor’s conclusion was that “it was time to ditch economic orthodoxy” and….”revive the radical and revolutionary monetary theory and policies of John Maynard Keynes” as the way to avoid another global crisis.  But regular readers of this blog will know that I have shown Keynes’s ideas were far from radical, let alone revolutionary.  And they certainly would not avoid another global crisis.  And thinking they would do so would be a step back for the labour movement and its leaders.

One key point is that capitalism is not just a monetary economy as Keynesians think; it is a money-making economy.  You can print money indefinitely, but you cannot turn it into value under capitalism without the exploitation of human labour.  When you sift through the body of ideas in Core, one thing stands out: the failure to analyse modern economies with a law of value and a theory of exploitation for profit.  Profit and exploitation do not appear in the body of Core work (except for fleeting references to Marx).  And yet this is at the heart of capitalism and is the soul of Marxist theory.

Are there textbooks that do offer a Marxist alternative to neoclassical and Keynesian schools?  My favourite is Competing Schools of Economic Thought by Lefteris Tsoulfidis.  Then there is Contending Economic Theories by Richard Wolff And Stephen Resnick.  There is the new two-book textbook on Microeconomics and Macroeconomics by Ben Fine and Ourania Dimakou.  And of course, there is Anwar Shaikh’s monumental Capitalism (which the dedicated can dip into if they have their brains working!).  These should be on the curriculum of Core and Rethinking Economics courses. Maybe they will be.  But it may require a rethink.

World trade and imperialism

July 30, 2018

There is a new dataset on world trade that looks at changes in exports and imports globally going back to 1800 and the beginnings of modern industrial capitalism.  Two authors, Giovanni Federico, Antonio Tena-Junguito have presented a number of papers on the trends found in the data.

Their main conclusions are that trade grew very fast in the ‘long 19th century’ from Waterloo to WWI, recovered from the wartime shock in the 1920s, and collapsed by about a third during the Great Depression. It grew at breakneck speed in the Golden Age of the 1950s and 1960s and again, after a slowdown because of the oil crisis, from the 1970s to the outbreak of the Great Recession in 2007. The effect of the latter on trade growth is sizeable but almost negligible if compared with the joint effect of the two world wars and the Great Depression. “However, the effects might become more and more comparable if the current trade stagnation continues”.

The data show that there were two major periods of ‘globalisation’, if you like.  The first was from 1830-70 when the export to GDP ratio, a measure of openness in trade, rose.  The second was from the mid-1970s to 2007 – the great globalisation period of the 20th century.  According to the data, the current level of openness to trade is unprecedented in history. The export/GDP ratio at its 2007 peak was substantially higher than in 1913.

There were two periods of stagnation or decline in global trade expansion: during the depression of the late 19th century up to the start of WW1 and then in the 1930s Great Depression.  Indeed, “openness collapsed during the Great Depression, back to the mid-19th century level.”

Now we appear to be in another downturn in globalisation and trade.  “Since 2007, the apparently unstoppable growth of world trade has come to a halt, and the openness of the world economy has been stagnating, or even declining. The recent prospect of a trade war is fostering pessimism for the future. Some people are hinting at a repetition of the Great Depression”, conclude the authors.

As you would have expected, the rise of industrial capitalism globally meant that the share of agricultural and mineral products in total exports declined for both advanced capitalist (imperialist) countries and (interestingly) for the peripheral (colonial) economies.  The share of primary products fell from about 65% in the 1820s to slightly above 55% on the eve of WWI, with an acceleration of the trend around 1860 (as industrialisation spread).

The big change was the move of America from an agriculture exporter to industrial giant in the 20th century.  The continued rise in industrial and services trade in the late 20th century globalisation has been in turn been led by China’s transformation from a poor agricultural peasant economy into the manufacturing (and increasingly hi-tech) workshop of the world.

Share of primary products on exports, baseline series, 1820–1938

The data in general confirm that my own study of globalisation and imperialism that I recently presented.

In my thesis, I argue that globalisation and increased trade are responses by capitalism to falling profitability and then depression in a previous period.  Globalisation of trade and capital took off whenever profitability of capital fell in the imperialist centres.

Between 1832-48, profitability of capital in the major economies fell; after which there was an expansion of globalization to drive up profitability (1850-70).  However, a new fall in profitability led to the first depression of the late 19th century (1870-90), during which protectionism rose and capital flows shrunk.  With economic recovery after 1890, imperialist rivalry intensified, leading up to the Great War of 1914-18.

Again after the defeats of various labour struggles post 1945 in Europe, Japan and in the colonial territories, capitalism entered a new ‘golden age’ of relatively fast growth and rising profitability.  Globalisation of trade (reduction in tariffs and protectionism) and capital (dollar-led economies and international institutions) revived, until profitability again began to fall in the 1970s.  The 1970s saw a weakening of trade liberalization and capital flows.  From the 1980s however, capitalism saw a new expansion of globalization in trade and capital to restore profitability.

The beginning of the 21st century brought to an end this wave of globalisation.  Profitability in the major imperialist economies peaked by the early 2000s and after the short credit-fuelled burst of up to 2007, they entered the Great Recession, which was followed by a new long depression.  Like that of the late 19th century, this brought to an end globalisation.  World trade growth is now no faster than world output growth, or even slower.

So the counteracting factor to low profitability offered by exports, trade and credit has died away. This threatens the hegemony of US imperialism, already in relative decline to new ambitious powers like China, India and Russia. With US President Trump now launching his attempt to put the US back in the driving seat for international trade, renewed rivalry threatens to unleash major conflicts in the next decade or so.

Pakistan: it’s not cricket

July 25, 2018

Pakistan has 200 million people and 105m of them were registered to vote in today’s general election.  This makes it the fifth largest democracy and second largest Muslim democracy after Indonesia in the world.

Who won?  Well, it seems that voter turnout was unchanged from the last election in 2013, at just 53%.  So the ‘no vote’ party was the biggest winner.  But a relatively new party has won the most seats in the National Assembly.  This is Pakistan Tehreek-e-Insaf (PTI) or Pakistan Justice Party, led by Imran Khan, a former international cricketer (the sport inherited from British colonial rule and godlike in the Indian sub-continent, muslim and hindu alike).

Khan’s party has defeated Nawaz Sharif’s Muslim League.  Sharif was the former prime minister of Pakistan before he was convicted of corruption.  Sharif’s family came under judicial scrutiny over the Panama Papers. After disqualifying Sharif from holding public office the Pakistan courts was sentenced him to jail and he absented himself to the UK.  Just before the election he came back to Pakistan to start a 10-year jail sentence.  This martyrdom, as he sees it, was designed to increase the chances of an election victory for his party now led by his brother.  But this risky move appears to have failed.

Pakistan is one of the most unequal countries in the world.  Just 22 families control 66% of Pakistan’s industrial assets and the richest 20% consume seven times more than the poorest 20%.  Both the names Khan and Sharif mean ‘ruler’ or ‘noble’. According to a 2013 study, 45% of all holders of office across Pakistan came from family ‘dynasties’, moving from one party to another with bewildering rapidity, with their political direction decided by whom the military establishment selects.

Khan has won because he had campaigned for several years on ‘fighting corruption’, for which the previous two main parties of government, the Muslim League and the People’s Party (led by the Bhutto dynasty), were notorious.  The anti-corruption message has won over sufficient voters, mainly middle class.  Khan appealed to this layer as a more ‘secular’ candidate (not surprising considering his personal affairs).

Although, the PTI’s support comes from the urban middle classes, in the election he aligned his party with smaller extreme religious parties in order to try to gain a majority, stepping back on equality and ‘social’ issues.  Moreover, he is regarded as the new favourite of the military, which wishes to continue its policy of backing the Taliban in Afghanistan and allying Pakistan with China against India.  China is now Pakistan’s largest foreign investor.

Khan claims he wants to ‘depoliticise’ the police and establish ‘law and order’ in a violent crime-ridden society; to ‘improve health and education’ through bringing health insurance to 70% of the population. Yet in no way is Khan sympathetic to the interests of Pakistan’s working class or rural farmers.  He is set to follow the dictates of the IMF as the ‘solution’ for Pakistan’s continuing economic failure.  And that means his policy ‘aspirations’ will never be met.

The reality is that Pakistan’s stuttering economy is entering yet another period of slump and crisis after a short boom.  The IMF’s last report reckoned that Pakistan was growing at 5-6% a year. But this was only being achieved by cheap money policy from the central bank, fiscal spending and a rising current account deficit.

Foreign exchange reserves have fallen to just 2.3 months of imports as the authorities tried to support the currency despite the deteriorating economy.  The trade deficit and upcoming FX debt repayments will double external financing needs, taking a further toll on foreign exchange reserves.  Pakistan will soon require an IMF funding package to pay its way, and with it, will follow yet another period of ‘austerity’.

Although there has been some improvement in human development indicators in Pakistan since 2010, youth enrolment in higher education and skills training remains very low. In health, stunting is chronically high among children under five years of age, with 44% in this age group being either severely or moderately stunted.  A large proportion of the population still does not have access to piped water at home or toilets linked to a sewage system.

There is little in public funds available to deal with these problems because the rich pay little or no tax.  Less than 1% of the country’s working population file income returns. Of the 72,000 or so firms registered in 2016, less than half filed returns. And of those that filed returns, half paid no tax at all. Pakistan aims to increase tax collection to 15% of GDP by 2020.  But growth in direct taxes is actually slowing because of a sustained reduction in corporate taxes. Most taxes are indirect i.e. through consumption purchases, which hit the poor the most.

Investment by the capitalist sector is just 11% of GDP (and falling), with another 4% from the public sector.  This compares with China at 45% or even most less developed countries at over 20%.  Most income held by the rich goes into real estate and financial assets (much of it spirited abroad).

Exports make up just 7.6% of the country’s GDP. That’s nearly 17 percentage points less than than the average for middle-income countries overall. What the country does export tends to be low-value-added products, like cotton and rice. Pakistan is the 115th most competitive nation in the world out of 137 countries ranked in the 2017-2018 edition of the Global Competitiveness Report.  As a result, Pakistan relies on an ever-decelerating flow of remittances and outside funding, which makes it highly susceptible to external shocks.

As Khan takes over (with the military behind the scenes) Pakistan is facing another balance of payments crisis.  The Pakistan rupee is diving as a result as FX reserves run out.

Without Chinese investment and funding, the crisis would already be upon the Pakistan economy.  The China-Pakistan Economic Corridor (CPEC) is a collection of infrastructure and trade projects, valued at up to $63bn.  It has become the centrepiece of China’s $1 trillion-plus Belt and Road Initiative (BRI). From shoddy ports and expressways to inefficient power plants, the Chinese-funded CPEC aims to resolve many of the shortcomings that have stifled Pakistani manufacturers. The flow of loans to Pakistan has surged since 2015.

All this means that the Pakistan ruling elite must choose between the IMF for future funding or rely on the ‘goodwill’ of China.

Over to you, Imran Khan.

Free trade or protectionism? – the Keynesian dilemma

July 11, 2018

The trade war that has broken out has confused mainstream macroeconomics.  The majority still see tariff increases as ‘protectionism’ and ‘free trade’ as the only way to operate. Trump’s measures are generally condemned.  But among the Keynesians, there is confusion and split.

Martin Wolf, the Keynesian economic journalist, who writes for the FT, reckoned that the trade war would be costly for global capital: “Global co-operation would surely be shattered”  Nevertheless, he argued for UK retaliation against Trump’s measures “more because the alternative looks weak than in the belief that it would work. Another thing the rest of the world should do is to strengthen their co-operation.”  On the other hand, he thought Trump’s wild proposal to create tariff-free area (for rich countries only) could be taken up. “Who knows? It might even work.”  He did not explain how cutting tariffs on goods from the 3-4% (that they average now for most advanced countries) to zero would make any difference.

While Wolf looks for ways to ‘save globalisation and free trade’ through retaliation, another Keynesian Dani Rodrik actually advocates protectionism as a good idea for economies with weak domestic growth: “US protectionism surely will generate some beneficiaries as well in other countries.” 

In a contrary view to Wolf, who calls for retaliation to stand up to Trump. Rodrik says Europe and China should “should refuse to be drawn into a trade war, and say to Trump: you are free to damage your own economy; we will stick by policies that work best for us.”  Indeed, he says, domestic industries may benefit from tariffs on their exports to the US – they could sell at home instead. He cites how Boeing could sell more planes in the US and Airbus could do the same in Europe. “Some European airlines favor Boeing over Airbus, while some US airlines prefer Airbus over Boeing. Trade restrictions may result in a total collapse in this large volume of two-way trade in aircraft between the US and Europe. But the overall loss in economic welfare would be small, so long as airlines view the two companies’ products as close substitutes.”  According to Rodrik, “US protectionism surely will generate some beneficiaries as well in other countries.”

The protectionist line has also been peddled by leftist economist Dean Baker.  He points out that not everyone gains from ‘free trade’. He claims that it was free trade that lost manufacturing jobs in the US, echoing the Trumpist argument.  However, there is much evidence that this was not the case.  As I said in a past post on Trump, trade and technology, “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.”

Baker claims that trade deficits lose jobs because it reduces “demand” and so reducing the US trade deficit would save jobs.  He makes this argument when the official unemployment rate in the US, the UK and Japan is at an all-time low (yes, I know many are crap jobs)!  Apparently, if everybody ran a trade surplus (impossible by the way) all would be better off.  What he really means is Trump is right to turn the US trade deficit into a surplus and get manufacturing jobs back from the developing world and Europe. It is certainly a weird and confused argument for nationalism.

The Keynesians are confused about whether they favour ‘free trade’ or protectionist/nationalist measures.  That echoes that confusion that Keynes had during the last Great Depression of the 1930s.  He changed his mind from a strong free trader in the late 1920s to a protectionist and advocate of tariffs by the mid-1930s.  This changing view was really an expression of the changing view of British capitalism.  Free trade is fine for those winning in markets; protectionism is better when a national capital loses share.  And that was Britain’s position.

In 1923, Keynes endorsed free trade in no uncertain terms: “We must hold to Free Trade, in its widest interpretation, as an inflexible dogma, to which no exception is admitted, wherever the decision rests with us. We must hold to this even where we receive no reciprocity of treatment and even in those rare cases where by infringing it we could in fact obtain a direct economic advantage. We should hold to Free Trade as a principle of international morals, and not merely as a doctrine of economic advantage.”

But his ‘moral’ position soon dissipated as British capitalism fell into a long depression in the mid-1920s and then in the 1930s.  In his seminal work, The General Theory, published in 1936, he concluded that “the one big (and smart) idea of absolute monarchy was to push exports over imports…..“A favorable balance, provided it is not too large, will prove extremely stimulating; whilst an unfavorable balance may soon produce a state of persistent depression.”

He advocated tariffs on imports into the UK as an alternative way of cutting real wages (by increased import prices) and to boost domestic production.  For Keynes, it was a way for British capital to gain a cost advantage over its rivals by reducing wage costs in real terms.  “I am frightfully afraid of protection as a long-term policy,” he testified to a UK parliamentary commission, “but we cannot afford always to take long views . . . the question, in my opinion, is how far I am prepared to risk long-period disadvantages in order to get some help to the immediate position.” Of course, once capitalism globally had recovered and, with it British capital, then ‘free trade’ could be renewed.

The current confusion in macroeconomics and particularly among modern Keynesians mirrors the changing views of Keynes as the current Long Depression lingers and ‘globalisation’ fails for all.  So now we have Keynesians like Rodrik and Baker supporting tariffs on US imports and pushing for trade surpluses, while calling on Europe and China not to retaliate!  And Wolf calls for retaliation by Europe and Asia.

What is the Marxist view?  Should we support tariffs and other protectionist measures introduced by weaker capitalist nations to ‘stand up’ to Trump’s measures (Wolf)?  Alternatively should we support Trump’s measures as a way of saving US manufacturing jobs (Baker) and perhaps helping other countries to boost their domestic industries (Rodrik)?

Free trade or protection?  I outlined my answer in a previous post.  Free trade has been no great capitalist success.  Capitalism does not tend to equilibrium in the process of accumulation.  As Adam Smith put it, in contrast to Ricardo, “When a rich man and a poor man deal with one another, both of them will increase their riches, if they deal prudently, but the rich man’s stock will increase in a greater proportion than the poor man’s. In like manner, when a rich and a poor nation engage in trade the rich nation will have the greatest advantage, and therefore the prohibition of this commerce is most hurtful to it of the two”. Capitalism does not grow globally in a smooth and balanced way, but in what Marxists have called ‘uneven and combined development’.  Those firms and countries with better technological advances will gain at the expense of those who are behind the curve and there will be no equalisation.

Free trade works for national capitalist states when the profitability of capital is rising (as it was from the 1980s to 2000) and everybody can gain from a larger cake (if in differing proportions).  Then globalisation appears very attractive.  The strongest capitalist economy (technologically and thus competitively in price per unit terms) will be the strongest advocate of ‘free trade’, as Britain was from 1850-1870; and the US was from 1945-2000.  Then globalisation was the mantra of the US and its international agencies, the World Bank, the OECD and the IMF. But if profitability starts to fall consistently, then ‘free trade’ loses its glamour, especially for the weaker capitalist economies as the profit cake stops getting large.

Marx and Engels recognised that ‘free trade’ could drive capital accumulation globally and so expand economies, as has happened in the last 170 years.  But they also saw (as is the dual nature of capitalist accumulation) the other side: rising inequality, a permanently floating ‘reserve army’ of unemployed and increased exploitation of labour in the weaker economies.  And so they recognised that rising industrial capitalist nations could probably only succeed through protecting their industries with tariffs and controls and even state support (China is an extreme example of that).

Engels re-considered the case for free trade in 1888 when writing a new preface on a pamphlet on free trade that Marx had wrote in 1847.  Engels concluded that “the question of Free Trade or Protection moves entirely within the bounds of the present system of capitalist production, and has, therefore, no direct interest for us socialists who want to do away with that system. Whether you try the Protectionist or the Free Trade will make no difference in the end.”

But it is informative to see the Keynesians split over favouring free trade for global capital (Krugman) or protection for national capitals (Rodrik and Baker for the US and Wolf for the UK and Europe).  Sign of the times.

China workshop: challenging the misconceptions

June 7, 2018

The recent workshop on China organised by the China Workshop (poster and programme_05062018) in London asked all the questions, even if it did not resolve them.  What are the reasons for China’s phenomenal growth in the last 40 years and can it last?  What is the nature of the Chinese economy: is it capitalist or not?  What explains under Xi the new emphasis on studying Marxism in China’s universities?  Is China’s export and investment expansion abroad imperialist or not?  How will the trade war between the US and China pan out?

In the opening session, Dr Dic Lo, Reader in Economics at SOAS, London University and Zhu Andong, Vice Dean at the School of Marxism at Tsinghua University, Beijing (representing a delegation from various Chinese universities) were at pains to argue that China is misrepresented in the so-called West and not just through mainstream capitalist views but also from the left.

All the talk from the left, said Lo, was about political repression, labour exploitation, inequality or Chinese ‘imperialism’. But then how to explain China’s phenomenal growth and success in taking over 850m people out of poverty (as defined by the World Bank) and reaching national output second only to the US.  China doubles real living standards every 13 years. It now takes the US and Europe 50 years and Japan even longer.  Is this just fake or illusory and if not, how can this ‘capitalist’ and ‘imperialist’ economy have bucked the trend, when the record of all other capitalist economies (advanced or ‘emerging’) can show no such success? “How can it be possible, in our times, for a late-developing nation to move up the world political-economic hierarchy to become imperialist? Can anyone on the left answer this question?

Dic Lo criticised the majority view of left political economists that China could be characterised as “neoliberal capitalist”, the so-called “Foxconn Model” of labour exploitation. This view was pioneered by Martin Hart-Landsberg and Paul Burkett, made most influential by David Harvey, most systematic by Minqi Li; and politically correct by Pun Ngai.  But were they right?

Zhu Andong also critiqued what he considered was this Western view.  In contrast, far from a Marxist critique disappearing in China, there was growing official support for the study of Marxism in Chinese universities, both in special departments and even increasingly in economics departments, which up to recently had been dominated by mainstream neoclassical economics influenced by Western universities.

In my contribution, I also referred to the dominance of mainstream economic analyses on the nature of China – and such theories also still appeared in China’s own financial institutions like the People’s Bank of China.  A recent striking example is Wang Zhenying, director-general of the research and statistics department at the PBoC’s Shanghai head office and vice chairman of the Shanghai Financial Studies Association. For Wang, Marx has had his day in the theoretical limelight (ie 19th century) and for that matter so had Keynes (20th century).  The recent global financial crisis needs a new theory for the 21st century.  And this apparently was the behavourial economics of ‘uncertainty’, not Marx.

I argued that there are really three models of development that could explain China’s growth miracle and whether it would last.  I deal these in detail in my paper on China for the Leeds IIPPE conference in 2015.  So please consult that for a fuller account than this post can provide.  https://thenextrecession.files.wordpress.com/2015/09/china-paper-july-2015.pdf

There is the mainstream neoclassical view that: China went through a primitive industrial expansion using its ‘comparative advantage’ of cheap and plentiful labour and investment in heavy industry.  But now China had reached the ‘Lewis point’ (named after the left economist of the 1950s, Arthur Lewis). Put simply, this is the point at which a developing country stops being able to achieve rapid growth relatively easily, by simply taking rural workers doing unproductive farm labour and putting them to work in factories and cities instead. But once this ‘reserve army of labour’ is exhausted, urban wages rise, incomes reach a certain level and a middle-class emerges.  China is now in a ‘middle-income’ trap like many other emerging economies, from which it cannot escape and become an advanced economy, unless it gets rid of state enterprises and heavy industry and orients towards the consumer and services.

This view is nonsense for several reasons – not least because comparative advantage theory is bogus and unrealistic – after all, China has grown exponentially not just because of cheap labour but also because of massive productive investment promoted and controlled by the state sector.  Actually, as a result of that investment expansion, consumption spending is also growing very fast. Would a switch to capitalist companies serving a middle-class consumer be better?

The second model is the Keynesian.  This recognises that China’s success has been due to massive investment in productive capital, not just the use of cheap labour.  Infrastructure investment directed and controlled by the state was behind the ability of the Chinese economy to avoid the worst effects of global financial crash and the Great Recession where every other economy suffered.  But what the Keynesian model fails to recognise is that China cannot escape the law of value and imbalances and inequalities that value creation through trade and the growing market economy generates.

The Marxist analysis starts from the basic premise that human social organisation aims to raise the productivity of labour to the point that sufficient abundance will make it possible for toil and poverty to be eliminated.  But the drive for higher productivity in capitalism comes into conflict with capital’s requirement for profitability.  Increasingly, the issue for China is whether the capitalist sector of the economy will eventually override the planned public sector, so that profitability will dominate over productivity and crises will appear, leading to stagnation not expansion.

In my view, that point has not yet been reached in China.  The state sector and public investment through one-party dictatorship still control investment, employment and production decisions in China – the private capitalist sector, although growing, is still subject to that control.  See my post here.

Now this is a minority view among Marxian economists, let alone mainstream economics.  Most consider that China is capitalist just like any other capitalist economy, if with a bit more state intervention.  Indeed, it is even imperialist in the Marxist sense.  But, as I have shown in previous posts, 102 big conglomerates contributed 60 per cent of China’s outbound investments by the end of 2016.  State-owned enterprises including China General Nuclear Power Corp and China National Nuclear Corp have assimilated Western technologies—sometimes with cooperation and sometimes not—and are now engaged in projects in Argentina, Kenya, Pakistan and the UK.  And the great ‘one belt, one road’ project for central Asia is not aimed to make profit.  It is all to expand China’s economic influence globally and extract natural and other technological resources for the domestic economy.

This also lends the lie to the common idea among some Marxist economists that China’s export of capital to invest in projects abroad is the product of the need to absorb ‘surplus capital’ at home, similar to the export of capital by the capitalist economies before 1914 that Lenin presented as key feature of imperialism.  China is not investing abroad through its state companies because of ‘excess capital’ or even because the rate of profit in state and capitalist enterprises has been falling.

Indeed, the real issue ahead is the battle for trade and investment globally between China and the US.  The US is out to curb and control China’s ability to expand domestically and globally as an economic power. At the workshop, Jude Woodward, author of The US vs China: Asia’s new cold war?, outlined the desperate measures that the US is taking to try to isolate China, block its economic progress and surround it militarily. But this policy is failing.  Trump may have launched his tariff hikes, but what really worries the Americans is China’s progress in technology. China, under Xi, aims not just to be the manufacturing centre of the global economy but also to take a lead in innovation and technology that will rival that of the US and other advanced capitalist economies within a generation.

There was a theoretical debate at the workshop about whether China was heading towards capitalism (if not already there) or towards socialism (in a gradual way).  Marx’s view of socialism and communism was cited (from Marx’s famous Critique of Gotha Programme) with different interpretations.  For me, I reckon Marx’s view of socialism and/or communism starts from two realistic premises; 1) that communism as a society of super-abundance where toil, exploitation and class struggle have been eliminated to free the individual, is technically possible now – especially with the 21st technology of AI, robots, internet etc; and 2) socialism and/or any transition to communism cannot even start until the capitalist mode of production is no longer dominant globally and instead workers’ power and planned democratically-run (not dictatorships) economies dominate. That means China on its own cannot move (even gradually) to socialism (even as the first stage towards communism) unless the dominant power of imperialism is ended in the so-called West. Remember China may be the second-largest economy in the world in dollar terms but its labour productivity is less than one-third of the US.

China has succeeded in transforming its economy and society since the revolution of 1949 by the removal of capitalist and imperialist power and through state control of the commanding heights of industry and agriculture.  And it is now succeeding in applying new technology to take it forward as a modern urbanised society in this century.  But at the same time, the law of value and capitalism operates within the country.  Indeed, the capitalist sector in the economy is growing; there are many more Chinese billionaires and inequality of income and wealth has risen; while Chinese labour struggles against exploitation in the workplaces.  And the law of value exerts its destructive influence also through international, trade, multi-national companies and capital flows – it was no accident that when China last year relaxed its capital controls on the advice of neoliberal elements in the monetary institutions that the economy suffered serious capital flight.

There is a (permanent) struggle going on within the political elite in China over which way to go – towards the Western capitalist model; or to sustain “socialism with Chinese characteristics”.  After the experience of the Great Recession and the ensuing Long Depression in the West, the pro-capitalist factions have been partially discredited for now.  President for Life Xi now looks to promote ‘Marxism’ and says state control (through party control) is here to stay.  But the only real way to guarantee China’s progress, to reduce the growing inequalities and to avoid the risk of a swing to capitalism in the future will be to establish working class control over Chinese political and economic institutions and adopt an internationalist policy a la Marx.  That is something that Xi and the current political elite will not do.

The fallacy of composition and the law of profitability

May 30, 2018

In mainstream economics, the concept of the ‘fallacy of composition’ is often used.  In a general sense, the fallacy of composition arises when it assumed that the sum of all individual parts will equal the whole.  Sometimes, it does not.  There are many examples: if you stand up at a concert, you can usually see better. But if everyone stands up, everyone cannot see better as it will lead to obscured views for the majority of attendees. Therefore, what might be true for one individual in the crowd is not true for the whole crowd.  This phenomenon happens because the interaction of individual moves can affect the overall result.

The fallacy of composition is often cited in economics.  Paul Samuelson in his ubiquitous Economics textbook for university students reckoned “the fallacy of composition is one of the most basic and distinctive principles to be aware of in the study of economics”. And it is invariably used by Keynesian economists in their advocacy of government spending to boost the economy.  This is the paradox of thrift.  This is the belief that if one individual can save more money by spending less, then society or an economy can also save more money by spending less. But if every household reduces spending, then the overall demand for products and services would decline. This decline would lead to lower sales revenue and profits for businesses. As a result, businesses would have to lower wages or lay off individuals. People would have less income and would save even less. What is true for an individual in the economy is not necessarily true for the whole economy.

The fallacy of composition in this context has been used by Keynesians to attack the view of the neoclassical and Austrian schools that economies are like individual households. Good housekeeping is good economic policy. But it may be good for a household to tighten its belt but not for whole economies.  So the Keynesians say that there is no crime in running budget deficits and avoiding ‘austerity’, even if it means rising public debt levels.

Now I have discussed the issue of whether rising debt (public and private) matters for a capitalist economy in many places.  So I’m not going over that ground again in this post.

What interests me is that the fallacy of composition applies in another area too – in the refutation of one major critique of Marx’s law of the tendency of the rate of profit to fall.  The most famous modern argument against the law is that by Nobuo Okishio, a Japanese Marxist economist.  Okishio argued way back in 1961 that under competitive capitalism, a profit-maximising individual capitalist will only adopt a new technique of production if it reduces the production cost per unit or increases profits per unit at going prices.  So capitalist accumulation must lead to a rise in the rate of profit not a tendency to fall – otherwise why would any capitalist invest in new technology?  And Marx is used to back up this argument: no capitalist ‘ever voluntarily introduces a new method of production … so long as it reduces the rate of profit’. Marx 1978a, p. 264

Yes, no individual capitalist would introduce a new technology unless it contributed to raising profits and market share, the individual rate of profit.  But this is where the fallacy of composition comes in.  The innovating capitalist steals a march on others through lowering the costs of production against the prevailing market price.  Its profits go up.  But that is being achieved by the profits of the other capitalists beginning to fall as they lose competitive advantage.  They must react by introducing the new technology (or even better technology) that lowers their costs too.  But then the productivity of the existing or probably reduced labour force for all the capitalists rises and thus lowers the value per unit of product.  Once all the capitalists have adopted the new technology, the organic composition of capital (the ratio of money spent on equipment versus wages) will have risen and, ceteris paribus, the general rate of profit will have fallen.

Professor Simon Mohun provided an excellent example from game theory to show why innovation under capitalism and competition can lead to fall in average rate of profit, contrary to Okishio.

There are two capitalists: A and B.  Each starts with 3 in profit.  If neither A and B innovate to reduce costs and boost profits, A stays at 3 and B stays at 3.

But if A innovates and B does not; then A gets a higher profit (4) while B loses market share and gets less profit (1).  Alternatively, if A does not innovate and B does, then A gets 1 and B gets 4.  If both innovate, then A gets 2 and B gets 2.

There is a drive to innovate because A or B could raise profit from 3 to 4.  So there cannot be an agreement not to innovate, leaving A on 3 and B on 3.  But if one innovates first to get 4, then the other must do so or its profit will fall to 1.  But with both innovating, they both end up on 2 instead of 3 (if they had done nothing).  So innovation boosts the individual profit of the leader but eventually when both innovate, the profit is lower.

Again, this is over time.  If A and B could simultaneously introduce the innovation (as Okishio assumes), then they may not do so, and stay at 3, rather than fall to 2.  But that would not be reality.  Reality is temporal.

The Okishio theorem is an example of the fallacy of composition.  It simply sums the gain of one individual capitalist to the whole capitalist economy.  But what is good for each individual capitalist is not good for the profitability of the whole capitalist economy.  When everybody does it, overall profitability falls.

Moreover, each individual capitalist is not doing this ‘voluntarily’ after all, but of necessity to compete and not lose market share.  As Marx says, the law of value and profitability operates ‘behind the backs’ of the capitalists – it is not in their conscious control.  For Adam Smith, it is the ‘invisible hand’ of the market, for Marx, it is an ‘invisible Leviathan’, to use Murray Smith’s metaphor (Murray Smith, Invisible Leviathan, Historical Materialism, forthcoming 2018).

Marx and Keynes in Berlin

May 5, 2018

It’s 200 years today since Karl Marx was born.  And it’s just over 100 years since the great 20th century economist John Maynard Keynes wrote about Marx’s contribution.  Keynes wrote then: “how  can I accept the (Communist) doctrine which sets up as its bible above and beyond criticism, an obsolete textbook which I know not only to be scientifically erroneous but without interest or application to modern world”.  I think we can see that Keynes had a low opinion of Marx’s ideas.

And we can see why from the following comment of Keynes.  “How can I adopt a creed which, preferring the mud to the fish, exalts the boorish proletariat above the bourgeoisie and the intelligentsia, who with all their faults, are the quality of life and surely carry the seeds of all human achievement? “

Keynes stood for the preservation of capitalism and its ruling class, for all its faults, over the ‘boorish proletariat’.  This was my opening salvo in my presentation to the Marx 200 conference in Berlin, organised by the Rosa Luxemburg Institute.  My presentation went on to cover where I thought Marx and Keynes differed and why Marx’s ideas were superior as an analysis of capitalism and as a basis for political action.  In my view, it is necessary to spell out these differences because the dominant analysis of capitalism adopted in the labour movements of the major capitalist economies, especially by the leaders of those movements, is Keynesian theory and policy, not Marx.  Marx is ignored or dismissed, on the whole.

However, at the session, Professor Radhika Desai disagreed with me.  For her, the similarities (agreements) between Keynes and Marx were greater than the differences.  It’s a debate that we could have, because in my view expunging the influence of Keynes (a supporter of the ruling class) from his dominant influence in the labour movement is an essential task.  Certainly Keynes was determined to expunge the influence of Marx from the labour movement and from his economics students –as the quotes above show.

But let’s just briefly consider the similarities and differences between these two great political economists of the last 200 years.  First, the agreements as usually presented by those who see them.  Both Marx and Keynes think there is something wrong with capitalism.  Both Marx and Keynes have a falling rate of profit theory.  Both Marx and Keynes wanted the ‘socialisation of investment’.  Both Marx and Keynes wanted and expected the ‘euthanasia of the rentier’ (Keynes’ words), namely the disappearance of finance capital.

From this, it sounds that, despite Keynes’ crude dismissal of Marx, he had a lot in common with Marx’s analysis.  But that would be looking at it very superficially, in my opinion.  In my paper to the conference session, I make a lot of points about how Keynes rejected the labour theory of value (both classical and Marx’s) and stood by marginalist and utility theory.  Berlin 2018  For Keynes, there was no theory of exploitation of labour power that extracted profit from the unpaid labour of the working class.  Profit came from ‘capital’ investing.  Workers got wages for working; bankers got interest from lending and capitalists got profit from investing; each according to his or her own.  This is the standard mainstream ‘factors of production’ theory.  So from the start, Keynes denies that there is exploitation in the capitalist mode of production; the market decides and there is free and fair exchange: profit for capital, wages for workers.

Of course, if you have followed this blog and read Marx’s ideas, you would know that this is nonsense and a mere apologia for the rule of capital.  Where does profit come from in this mainstream theory?  There is no explanation.  Somebody must pay for it and yet there is free and fair exchange of commodities in the market –so there can be no profit in the market, merely an exchange of value (money).  Keynes’ and the mainstream approach really justifies the rule of capital and, for that matter, inequality of income and wealth by denying the reality that a small group controls of the means of production and forces the rest of us to work for a living.  Indeed, Keynes said that: “For my own part, I believe that there is social and psychological justification for significant inequalities of incomes and wealth, but not for such large disparities as exist today. There are valuable human activities which require the motive of money-making and the environment of private wealth-ownership for their full fruition.“

Then there is the rate of profit theory.  Those who reckon Marx and Keynes are allies in their critique of capitalism like to point out that Keynes had a theory of a falling rate of profit as well as Marx.  Indeed, they were the same.  But Keynes’ theory has little to do with Marx’s.  Keynes did see the fluctuation of the rate of profit—or the marginal efficiency of capital (MEC), to use Keynes’s terminology—as the main factor that determines the changes in the phases of industrial cycle: “Now, we have been accustomed in explaining the ‘crisis’ to lay stress on the rising tendency of the rate of interest under the influence of the increased demand for money both for trade and speculative purposes. At times this factor may certainly play an aggravating and, occasionally perhaps, an initiating part. But I suggest that a more typical, and often the predominant, explanation of the crisis is, not primarily a rise in the rate of interest, but a sudden collapse in the marginal efficiency of capital.

But Keynes’ theory of MEC is based on falling ‘marginal productivity’ due to the growing ‘abundance of capital’ and on the psychological expectations of capitalists about the future.  The rate of profit will gradually fall as more and more technology is produced; the more abundant is capital, the less it is wanted and so its marginal value falls.  This is not Marx’s theory.  His depends on the continual drive by capital to replace labour in production with machines.  Individual capitalists compete with each other to drive down costs and in so doing that pushes up the organic composition of capital by shedding labour.  As labour is the only source of profit, not capital (as in Keynes’ theory), the rate of profit tends to fall.  And it is a tendency.

For Keynes, however, the MEC will fall not because insufficient value is being extracted from labour but because capitalists ‘suddenly’ lose their appetite for investment: “that marginal efficiency of capital depends, not only on the existing abundance or scarcity of capital-goods and the current cost of production of capital-goods, but also on current expectations as to the future yield of capital-goods. In the case of durable assets it is, therefore, natural and reasonable that expectations of the future should play a dominant part in determining the scale on which new investment is deemed advisable. But, as we have seen, the basis for such expectations is very precarious. Being based on shifting and unreliable evidence, they are subject to sudden and violent changes.”

So the fall in Keynes’ rate of profit is due to individual capitalists’ subjective views about the future (‘confidence’) not because of an objective change in the conditions of accumulation of capital and production (Marx’s view).  As Paul Mattick Snr commented 50 years ago, “what are we to make of an economic theory, which after all claimed to explain some of the fundamental problems of twentieth-century capitalism, which could declare: ‘In estimating the prospects of investment, we must have regard, therefore, to the nerves and hysteria and even the digestions and reactions to the weather of those upon whose spontaneous activity it largely depends’?

The ‘sudden collapse’ in MEC has caused the slump (because interest rates are now too high compared to profitability and people ‘hoard’ money instead of investing or consuming).  But once that is overcome, we can return to the ‘normal’ capitalist mode of production.  “Economic prosperity is…dependent on a political and social atmosphere which is congenial to the average businessman.”  Unemployment, I must repeat, exists because employers have been deprived of profit. The loss of profit may be due to all sorts of causes. But, short of going over to Communism, there is no possible means of curing unemployment except by restoring to employers a proper margin of profit.”

Then there is this ‘socialisation of investment’.  Keynes called for this (a vague phrase) as a ‘final solution’ to the problem of depression in a capitalist economy.  If monetary easing (cutting interest rates and pumping in money by central banks) or fiscal stimulus (tax cuts and government spending) did not work in reviving the capitalist economy and getting capitalist to invest more, then maybe it would be necessary for the government to step in directly and take over the show. It is not clear, however, that Keynes meant any expropriation of capitalist industry and companies – something he would hate.  He probably meant that state operations and even some plan should be introduced – something similar to Roosevelt’s New Deal projects in the 1930s in the US.  And anyway, it is clear that Keynes saw ‘socialisation of investment’ as just a temporary measure to get capitalism going again (perhaps like the war economy 1940-45 eventually did).  Once the ‘technical malfunction’ (lack of demand) in the capitalist mode of production had been overcome, then we could revert to free markets and investment for profit and end ‘socialised investment’.

In one of his last articles on the capitalist economy as the Great Depression ended and the second world war began, Keynes remarked that “Our criticism of the accepted classical theory of economics has consisted not so much in finding logical flaws in its analysis as in pointing out that its tacit assumptions are seldom or never satisfied, with the result that it cannot solve the economic problems of the actual world. But if our central controls succeed in establishing an aggregate volume of output corresponding to full employment as nearly as is practicable, the classical theory comes into its own again from this point onwards.”

So once full employment is achieved, we can dispense with planning and ‘socialised investment’ and return to free markets and mainstream neoclassical economics and policy: “the result of filling in the gaps in the classical theory is not to dispose of the ‘Manchester System’ (‘free’ markets – MR), but to indicate the nature of the environment which the free play of economic forces requires if it is to realise the full potentialities of production.”

Keynes saw all his policies as designed to save capitalism from itself and to avoid the dreaded alternative of socialism.  “For the most part, I think that Capitalism, wisely managed, can probably be made more efficient for attaining economic ends than any alternative system yet in sight, but that in itself it is in many ways extremely objectionable. Our problem is to work out a social organisation which shall be as efficient as possible without offending our notions of a satisfactory way of life.”  So “the class war will find me on the side of the educated bourgeoisie.”  Fear of revolution was central to Keynes’ policies.  I don’t need to explain that Marx did not see this way at all.

As for the ‘euthanasia of the rentier’, Keynes reckoned that as capitalism expanded, it would, through more technology, create a world of abundance and leisure.  Because of that abundance, the return on lending money to invest would fall as the MEC fell.  So bankers and financiers would no longer be necessary; they could be phased out.  Well, that does not seem to be happening.  Indeed, the very people who claim that Keynes is a ‘progressive’ economist with great similarities to Marx now argue that capitalism is being distorted by ‘financialisation’ and finance capital – and that is the real enemy.  What happened to the gradual phasing out of finance in late capitalism a la Keynes?

In contrast, Marx’s theory of finance capital did not foresee a gradual removal of finance; on the contrary, he describes the increased role of credit and finance in the concentration and centralisation of capital in late capitalism.  Yes, the functions of management and investment become more separated from the shareholders in the big companies, but as I have argued in a previous post, this does not alter the essential nature of the capitalist mode of production – and certainly does not imply that coupon clippers or speculators in financial investment will gradually disappear.

So I reckon that the differences (and there are others in my paper) between Keynes and Marx are fundamental and any superficial similarities pale in comparison.  That is important because it is Keynesian ideas that dominate in the labour movement, not Marx 200 years since his birth.

More on other things at the Berlin conference in another post.