Archive for the ‘marxism’ Category

Capital not ideology

October 18, 2019

Back in 2014, French economist Thomas Piketty published a blockbuster book, Capital in the 21st century.  Repeating the name of Marx’s Capital, the implication of the title was that it was an updating Marx’s 19th century critique of capitalism for the 21st century.  Piketty argued that the inequality of income and wealth in the major capitalist economies had reached extremes not seen since the late 18th century and unless something was done, inequality would continue to rise.

The book had a huge impact, not just among economists (particularly in America, less so in France) but also among the general public.  Two million copies were sold of this monumental 800p publication which was full of theoretical arguments, empirical data and anecdotes to explain increased inequality of wealth in modern capitalist economies.  The book eventually won the dubious honour for the most bought book that nobody read, taking over from Stephen Hawking’s The Brief History of Time.  I suppose Marx’s Capital is also part of this club.

Many critiques of Piketty’s arguments followed, both from the mainstream and the heterodox.  Piketty has made a great contribution in the empirical work that he, fellow Frenchman Daniel Zucman and Emmanuel Saez have made in estimating the levels of inequality in capitalist economies.  And before that, there was the father of inequality studies, the recently deceased Anthony Atkinson, (whose work was the foundation of my own PhD thesis on inequality of wealth in 19th century Britain).

But, as I argued in my own critique of Piketty, which was published in Historical Materialism at the time, Piketty was not following Marx at all – indeed, he trashed Marx’s economic theory based on the law of value and profitability. For Piketty, the exploitation of labour by capital was not the issue but the ownership of wealth (ie property and financial assets), which enabled the rich to increase their share of total income in an economy.  So it was not the replacement of the capitalist mode of production that was needed but the redistribution of the wealth accumulated by the rich.

Piketty’s fame among the mainstream soon faded.  At the 2015 annual conference of the American Economic Association, Piketty was feted, if criticised.  Within a year, all was forgotten. Now, six years later, Piketty has followed up with a new book, Capital and Ideology, which is even larger: some 1200pp; as one reviewer said, longer than War and Peace. Whereas the first book provided theory and evidence on inequality, this book seeks to explain why this had been allowed to happen in the second half of the 20th century.  And from that, he proposes some policies to reverse it.  Piketty broadens the scope of his analysis to the entire world and presents a historical panorama of how ownership of assets (including people) was treated, and justified, in various historical societies, from China, Japan, and India, to the European-ruled American colonies, and feudal and capitalist societies in Europe.

His premise is that inequality is a choice. It’s something ‘societies’ opt for, not an inevitable result of technology and globalisation. Whereas Marx saw ideologies as a product of class interests, Piketty takes the idealist view that history is a battle of ideologies. The major economies have increased inequalities because the ruling elites have provided bogus justifications for inequality. Every unequal society, he says, creates an ideology to justify inequality. All these justifications add up to what he calls the “sacralisation of property”.

The job of economists is to expose these bogus arguments.  Take billionaires. “How can we justify that their existence is necessary for the common good? Contrary to what is often said, their enrichment was obtained thanks to collective goods, which are the public knowledge, the infrastructures, the laboratories of research.” (Shades of Mariana Mazzucato’s work here).  The notion that billionaires create jobs and boost growth is false.  Per capita income growth was 2.2% a year in the U.S. between 1950 and 1990. But when the number of billionaires exploded in the 1990s and 2000s — growing from about 100 in 1990 to around 600 today — per capita income growth fell to 1.1%.

Piketty says that the type of free-market capitalism that has dominated the US since Ronald Reagan needs to be reformed. “Reaganism begun to justify any concentration of wealth, as if the billionaires were our saviours.” But; “Reaganism has shown its limits: Growth has been halved, inequalities have doubled. It is time to break out of this phase of sacredness of property.

He does not want what most people consider ‘socialism’, but he wants to “overcome capitalism.”  Far from abolishing property or capital, he wants to spread its rewards to the bottom half of the population, who even in rich countries have never owned much. To do this, he says, requires redefining private property as “temporary” and limited: you can enjoy it during your lifetime, in moderate quantities.

How is this to be done? Well, Piketty calls for a graduated wealth tax of 5% on those worth 2 million euros or more and up to 90% on those worth more than 2 billion euros. “Entrepreneurs will have millions or tens of millions,” he said. “But beyond that, those who have hundreds of millions or billions will have to share with shareholders, who could be employees. So no, there won’t be billionaires anymore. From the proceeds, a country such as France could give each citizen a trust fund worth about €120,000 at age 25. Very high tax rates, he notes, didn’t impede fast growth in the 1950-80 period.

Piketty also calls for “educational justice” — essentially, spending the same amount on each person’s education. And he favours giving workers a major say over how their companies are run, as in Germany and Sweden.  Employees should have 50% of the seats on company boards; that the voting power of even the largest shareholders should be capped at 10%; much higher taxes on property, rising to 90% for the largest estates; a lump sum capital allocation of €120,000 (just over £107,000) to everyone when they reach 25; and an individualised carbon tax calculated by a personalised card that would track each person’s contribution to global heating.  He calls this moving beyond capitalism to “participatory socialism and social-federalism”.

This all smacks of returning capitalist economies to the days of the so-called ‘golden age’ from 1948-65, when inequality was much lower, economic growth was much stronger and working class households experienced full employment and were able to get educated to levels that enabled them to do more skilled and better paid jobs.  There was a ‘mixed economy’, where capitalist companies supposedly worked in partnership with trade unions and the government. This was a myth.  But if you accept Piketty’s premise that this social democratic paradise existed and its demise was brought about by a change of ideology, it is possible to consider that “redistributive ideas’ could gain support after the experience of the Great Recession and the rise of extreme inequality now.

Piketty argues that the social democratic parties dropped their original aims of equality and opted instead for meritocracy ie hard work and education will deliver better lives for the working class.  And they did so because they had gradually transformed themselves from being parties of the less-educated and poorer classes to become parties of the educated and affluent middle and upper-middle classes. To a large extent, he reckons, traditionally left parties changed because their original social-democratic agenda was so successful in opening up education and high-income possibilities to the people, who in the 1950s and 1960s came from modest backgrounds. These people, the “winners” of social democracy, continued voting for left-wing parties but their interests and worldview were no longer the same as that of their (less-educated) parents. The parties’ internal social structure thus changed— it was the product of their own political and social success.

Really?  The failure of social democratic parties to represent the interests of working people goes way back before the 1970s.  Social democratic parties supported the nationalist aims of the warring capitalist powers in WW1; in Britain, the leaders of the Labour Party went into coalition with the Conservatives to impose austerity and break the trade unions in 1929.  After WW2, social democracy moved from Attlee to Wilson to Callaghan to Kinnock and finally to Blair and Brown.  It was a similar story in continental Europe: in France from Mitterand to Hollande; in Germany from Brandt to Schmidt.

This was not just because the composition of the SD parties changed from industrial workers to educated professionals.  The very health of post-war capitalist economies changed.  The brief ‘golden age’ came to an end, not because of a change of ideology (or as Joseph Stiglitz has put it, ‘a change of rules’) but because the profitability of capital plummeted in the 1970s (following Marx’s law of profitability as outlined in Capital).  That meant that pro-capitalist politicians could no longer make concessions to labour; indeed, the gains of the golden age had to be reversed in the ‘neoliberal’ period.  So ideology changed with the change in the economic health of capital.  And social democratic leaders went along with this change because, in the last analysis, they do not think it is possible to replace capitalism with socialism. “There is no alternative” – to use Thatcher’s phrase.

At least, Piketty reckons it is possible to go beyond capitalism, unlike Branco Milanovic who, in his latest book, Capitalism Alone that I reviewed recently, agrees with Thatcher and reckons capitalism is here to stay. “You have to go beyond capitalism,” says Piketty.  In an interview, when asked “Why this word ‘beyond”, why not “To get out of capitalism”?  Piketty replied: “I say “go beyond” to say go out, abolish, replace. But the term “exceed” me allows for a little more emphasis on the need to discuss the alternative system. After the Soviet failure, we can no longer promise the abolition of capitalism without debating long and precisely what we will put in place next. I’m trying to contribute.

Piketty reckons the “propriétariste and meritocratic narrative” of the neo-liberal period is getting fragile. “There’s a growing understanding that so-called meritocracy has been captured by the rich, who get their kids into the top universities, buy political parties and hide their money from taxation.  That leaves a gap in the political market for redistributionist ideas.

But Piketty’s answers are just that: a redistribution of unequal wealth and income generated by the private ownership of capital, not replacing the ownership and control of the means of production and the exploitation of labour in production with a system of common ownership and control.  Apparently, the big multi-nationals will continue, big pharma will continue; the fossil-fuel companies will continue; the military-industrial complex will continue.  Regular and recurring crises in capitalist production and accumulation will continue.  But, as these vested interests of capital are still not generating enough profitability to allow any significant increase in the taxation of extreme wealth and income that they control, what chances are there that the current ‘ideology’ of the ‘sacralisation of property’ can be overcome, without taking them over?

Capitalism – not so alone

October 12, 2019

Branko Milanovic is the world’s leading expert on global inequality i.e the differences in income and wealth between countries and between individuals in different countries. He was a former chief economist at the World Bank.  After leaving the bank, Milanovic wrote a definitive study on global inequality which was updated in a later paper in 2013 and finally came out as a book in 2015, Global Inequality.  In his earlier papers and in that book, Milanovic presented his now famous ‘Elephant chart’ (shaped like an elephant) of the changes in household incomes since 1988 from the poorest to the richest globally.  Milanovic shows that the middle half of the global income distribution have gained 60-70% in real income since 1988 while those nearer the top group had gained nothing.

Milanovic found that those who have gained income the most in the last 20 years are the ones in the ‘global middle’.  These people are not capitalists.  These are mainly people in India and China, formerly peasants or rural workers have migrated to the cities to work in the sweat shops and factories of globalisation: their real incomes have jumped from a very low base, even if their conditions and rights have not.

The biggest losers are the very poorest (mainly African rural farmers) who have gained nothing in 20 years. The other losers appear to be some of the ‘better off’ globally.  But this is in a global context, remember. These ‘better off’ are in fact mainly working class people in the former ‘Communist’ countries of Eastern Europe whose living standards were slashed with the return of capitalism in the 1990s and the broad working class in the advanced capitalist economies whose real wages have mostly stagnated in the past 20 years.

However the UK think tank, the Resolution Foundation has taken Milanovic’s elephant graph to task.  Faster population growth in highly populated countries like China and India distorts his conclusion that middle income people in the globe made such strides. Controlling for the huge population rise in China and India shows that inequality between the average person in the imperialist economies of the West (North?) has increased, not decreased, compared to the poor economies of the global periphery (South?).  The elephant disappears.

In his 2015 book, Milanovic concludes that there is no longer any social or economic basis for class struggle of a socialist revolution.  So we must look for ways to make capitalism better and fairer. “Global inequality may be reduced by higher growth rates in poor countries and through migration.” Now in his new book, Capitalism Alone, Milanovic returns this theme and his ‘way out’.  Again he starts from the premise that capitalism is now a global system with its tentacles into every corner of the world driving out any other modes of production like slavery or feudalism or Asian despotism to the tiniest of margins.  But also capitalism is not just only mode of production, it is the only future for humanity.

So he says “Capitalism gets much wrong, but also much right—and it is not going anywhere. Our task is to improve it.”  Milanovic argues that capitalism has triumphed because it works. It delivers prosperity and gratifies human desires for autonomy. But it comes with a moral price, pushing us to treat material success as the ultimate goal. And it offers no guarantee of stability. In the West, ‘liberal capitalism’ creaks under the strains of inequality and capitalist excess. That model now fights for hearts and minds with what Milanovic calls “political capitalism”, as exemplified by China, which many claim is more efficient, but which is more vulnerable to corruption and, when growth is slow, social unrest.

Milanovic condemns inequality “I think it is bad for growth. It is bad for social stability, and it is bad for equality of chances, or equality of opportunity.”  And capitalism is bad because it inherently increases inequality.  “The system, the way it functions today, is generating — and, I’ll actually give it two examples — generating, really increasing, inequality. And that increasing inequality leads to the control of the political process by the rich. And, the control of the political process by the rich is really required for the rich to transfer, or transmit, rather, all these advantages. Be it through money — financial advantages – or, education, to their offspring. Which then reinforces the dominance of whatever is called the upper class.”  Yes, that sounds like capitalism.

So Milanovic favours increased spending on public goods and services (including education) and social insurance – and the introduction of taxes on rich’s property and wealth, in order to end inherited dynasties, so that you can only get rich by merit and hard work – as if you ever did!  So his answer to a better capitalism is the same as in his previous book, but this time with a degree of more optimism about achieving it: namely reducing inequality and expanding migration from poor to richer countries.

Although both capitalist ‘alternatives’ are riddled with corruption in their elites and state institutions, it is clear that Milanovic puts more faith in getting a return to the ‘liberal democratic’ model of Western (‘northern’) imperialism than he does for the ‘political capitalism’ of China.  But is Milanovic right to define the new cold war between Chinese and American capitalism as a contest between the liberal and the authoritarian, the meritocratic and the political?

Can we really accept this when we see Trump’s America; the callous and often brutal imperialist hegemony of the United States; and the corrupt money-bags ‘democracy’ that operates there, with its extreme and rising inequality. And can we really describe China, an authoritarian and corrupt state regime, as ‘political capitalism’?

As regular readers of this blog will know, I am not convinced that China is capitalist at all, given the overriding economic power of the state and its plan compared to the capitalist sector.  The lives of Chinese are much more decided by the state and state enterprises than through the vagaries and uncertainties of the market and the law of value.  As Milanovic says, China has grown in real GDP and average living standards in 70 years faster than any other economy in human history.  So is this really a demonstration of a successful capitalist economy (when all other capitalist economies only achieved less than a quarter of China’s growth rate and were subject to regular and recurring slumps in investment and production)?  Could not China’s different narrative be something to do with its 1949 revolution and the expropriation of its national capitalist class and the removal of foreign imperialism?  Perhaps capitalism is not alone after all.

So Milanovic’s dichotomy between ‘liberal democracy’ and ‘political capitalism’ seems false.  And it arises because, of course, Milanovic starts with his premise (unproven) that an alternative mode of production and social system, namely socialism, is ruled out forever.  In Global Inequality, Milanovic concluded that the idea of a united global proletariat making a worldwide revolution is out of the door because now the real inequalities are between Americans and Africans, not between capitalists and workers everywhere.  Trotsky’s international proletarian revolution is out of date: “This was the idea behind Trotsky’s “permanent revolution”. There were no national contradictions, just a worldwide class contradiction. But if the world’s actual situation is such that the greatest disparities are due to the income gaps between nations, then proletarian solidarity doesn’t make much sense.   Proletarian solidarity is then simply dead because there is no longer such a thing as global proletariat. This is why ours is a distinctly non-Marxian world.”

And yet the working class, both industrial workers and those in so-called ‘service’ industries, has never been larger in human history.  Globally, there were 2.2bn people at work and producing value back in 1991.  Now there are 3.2bn.  The global workforce has risen by 1bn in the last 20 years. Globally, the industrial workforce has risen by 46% since 1991 from 490m to 715m in 2012 and will reach well over 800m before the end of the decade.  Indeed, the industrial workforce has grown by 1.8% a year since 1991 and since 2004 by 2.7% a year, which is now a faster rate of growth than the services sector (2.6% a year)!  Globally, the share of industrial workers in the total workforce has risen slightly from 22% to 23%.   Capitalism is not alone; it has a gravedigger, the proletariat.

Milanovic dismisses this. In his new book, “I do believe, to a large extent, [capitalism] is sustainable. Even if all of inequality continue[s] to be the way that [it is], unchecked. It is sustainable, largely, because we don’t have a blueprint for an alternative system. However, something being sustainable, something being efficient, something being good, are two different things.”  Milanovic does not like capitalism, but to use Margaret Thatcher’s phrase in referring to her neoliberal policies for capitalism: he reckons there is no alternative (TINA).  So the aim must be, just as Keynes argued in the 1930s: “to make capitalism more sustainable. And that’s exactly what I think we should do now”.

The trouble is that Milanovic’s policies to reduce the inequality of wealth and income in capitalist economies and/or allow people to leave their countries of poverty for a better world seem to be just as (if not more) ‘utopian’ a future under capitalism than the ‘socialist utopia’ he rules out.

Knowledge commodities

October 8, 2019

In the Oxford Handbook of Karl Marx, Thomas Rotta and Rodrigo Teixeira have a chapter called the commodification of knowledge and information.  In this chapter, they argue that knowledge is ‘immaterial labour’ and ‘knowledge commodities’ are increasingly replacing material commodities in modern capitalism.

“Examples of knowledge- commodities are all sorts of commodified data, computer software, chemical formulas, patented information, recorded music, copyrighted compositions and movies, and monopolized scientific knowledge.”

According to Rotta and Teixeira, these knowledge commodities do not have any value in Marxist terms because their reproduction tends to be costless.  Knowledge can be reproduced infinitely without cost.  Previous authors have claimed that because knowledge commodities have no value, Marx’s law of value no longer holds.  Rotta and Teixeira argue that they can restore Marx’s law of value as an explanation of knowledge commodities.  And their solution is that, although knowledge commodities have no value, the owners of such commodities through patents and copyrights etc can extract rents from productive capitalist sectors, in the same way, as Marx explained, rents were extracted by landlords (through their monopoly of land) from productive capitalists.  They conclude by estimating the increased amount of value being extracted in the form of ‘rents’ by ‘knowledge industries’.

Does Rotta and Teixeira’s apparent defence of Marx law of value in relation to the information industry hold up?  I don’t think so.  Here’s why.  First, Rotta and Teixeira, like other authors before them (Negri etc), misunderstand Marx’s value theory on this question.  Just because knowledge is intangible, it does not make it immaterial.  Knowledge is material.  Both tangible objects and mental thoughts are material. Both require the expenditure of human energy, which is material, as shown by human metabolism.

More specifically, the expenditure of human energy that constitutes the cognitive process, thinking, causes a change in the nervous system, in the interconnections between the neurons of the brain. This is called synapsis. It is these changes that make possible a different perception of the world. So to deny that knowledge, even if intangible, is material is to ignore the results of neuroscience. After all, if electricity and its effects are material, why should the electrical activity of the brain and its effect (knowledge) not also be material? There is no ‘immaterial’ labour, despite the claims of all the ‘knowledge Marxists’ , including it seems Rotta and Teixeira. The dichotomy is not between material and mental labour, but whether it is tangible or not.

The second mistake that Rotta and Teixeira make is that because knowledge is ‘immaterial’, it is unproductive labour that produces no value.  But productive labour is labour expended under the capitalist production relation. Productive labour is not just what produces physical goods.  Productive labour also includes what mainstream economists call services.  As Marx explained: if a capitalist has a servant, that is unproductive labour.  But if he goes to a hotel and uses a valet to take his luggage to the room, that valet delivers productive labour because he/she is working for the capitalist owner of the hotel for a wage.

Rotta and Teixeira give us the example of a live concert performance. “Hence, what we call a concert is in act a bundle of several commodities, among them knowledge- commodities such as musical compositions. The live performance is a combination of the productive labor of musicians and technical staff, plus the unproductive labor of those who composed the songs in the first place.”  But what is unproductive about the composer?  He/she can sell that piece of music as copyright and performance royalties on the market.  Royalties must be paid if the music is used in the concert.  Surplus value is created and realised.

Then there is the example of a smart phone. “When you buy a smartphone, part of the phone price covers the production costs of the physical components. But another part of the price remunerates the patented design and the copyrighted software stored in the memory. The copyrighted parts of the phone are therefore knowledge-commodities, and the revenues associated with these specific components are knowledge-rents.”  But why are the revenues from copyright and patents considered only rents?  The idea, the design, and operating system have all been produced by mental labour employed by capitalist companies. The companies exploit that labour and appropriate surplus value by selling or leasing the software. This is productive labour and it produces value. It is no different from a pharma company employing scientists to come up with a formula for a new drug which they can sell on the market with a patent held for years.

For the same reason, the production of knowledge (mental labour) can be productive of value and surplus value if it is mental labour performed for capital. In this case, the quantity of new value generated during the mental labour process is given by the length and intensity of the abstract mental labour performed, given the value of the labour power of the mental labourers. Surplus value, then, is the new value generated by the mental labourers minus the value of their labour power; and the rate of exploitation is that surplus value divided by the value of their labour power.

The value of knowledge (and of any mental product) might be incorporated in an objective shell or not. In both cases it is an intangible but material commodity whose value is determined by the new value produced plus the value of the means of production used. The computer programmer or website maker is in principle just as productive as the worker making the computer if both work for the computer company.  Thus, knowledge production implies production of value and surplus value (exploitation) and not rent. Once produced, the capitalists owners of mental products (knowledge) can then extract ‘rent’ from their intellectual property (the knowledge produced by mental labourers for them) by applying to it intellectual property rights. But there is production of value first. The difference between production and appropriation is fundamental.

Also it is not correct to say that the value of mental labour and knowledge commodities cannot be quantified.  Rotta and Teixeira, to back their claim that reproduction of knowledge has no value, quote Marx: “But in addition to the material wear and tear, a machine also undergoes what we might call a moral depreciation. It loses exchange- value, either because machines of the same sort are being produced more cheaply than it was, or because better machines are entering into competition with it. In both cases, however young and full of life the machine may be, its value is no longer determined by the necessary labour time actually objectified in it, but by the labour time necessary to reproduce either it or the better machine. It has therefore been devalued to a greater or lesser extent.”

Rotta and Teixeira think this shows that, because the labour time to reproduce a machine might fall below the value of the first machine due to technical progress (moral depreciation), Marx is suggesting that knowledge commodities will tend to have no value at all because knowledge can be reproduced infinitely without labour time expended.  But this quote from Marx refers to the value of each new production process where the labour time involved in the value of a commodity (machine) falls. But that would not lead to a fall in the profitability of capital invested right down to zero.  The average rate of profit is determined by the initial fixed capital costs and any circulating capital costs involved in reproduction.  Profitability would still be determined by all the stages of production of the commodity, even if the value of each newly produced commodity falls.

And knowledge commodities cannot be produced for nothing because they are material.  The productivity of physical, tangible commodities is measured in units of output per unit of capital invested. This holds just as much for mental production, or knowledge commodities, say, a video game. The mental product can be contained in an objective shell (a DVD). The DVDs produced can be counted. It can also be contained in a digital file and be downloaded from a website to a computer and then onto another. The number of downloads can be counted. In short, mental output or knowledge commodities can be counted. On websites, the number of hits can be counted.  The reproduction becomes the numerator for productivity and profitability.

The original capital invested, the denominator, can be also be measured.  First, there is the capital invested in the prototype. This is not only fixed constant capital (computers, premises, facilities, chips foundries, assembly plants, etc.). It is also circulating constant capital (raw materials) and variable capital, wages, which go from very high (for highly qualified developers) to low. Then there are the costs of administration, of presale advertising and other marketing costs. Then there is the additional capital invested in the reproduction of the replicas of the prototype. In reality, the total value of the knowledge commodity can be high, not zero. The unit value is then given by the total value divided by the number of replicas made. It is directly proportional to the total value and inversely proportional to the quantity of the replicas. The value of reproducing such knowledge commodities won’t go towards zero because there are always replication costs of the knowledge commodity in delivery to the user.

Again, the reproduction of any knowledge commodity is no different from the reproduction of a new drug by a pharma company.  Built into the price of the drug is the initial cost of employing mental labour, testing the drug for humans etc, the production of the pills, liquids plus any equipment for administering it and so on.  Sure, the unit cost of the production of each new pill may fall to a very low value, but that does not mean that total value and unit value has fallen to zero.

In sum, knowledge is material (if intangible) and if knowledge commodities are produced under conditions of capitalist production ie using mental labour and selling the idea, the formula, the program, the music etc on the market, then value can be created by mental labour.  Value then comes from exploitation of productive labour, as per Marx’s law of value. There is no need to invoke the concept of rent extraction to explain the profits of pharma companies or Google.  The so-called ‘renterisation’ of modern capitalist economies that is now so popular as a modification or a supplanting of Marx’s law of value is not supported by knowledge commodity production.

Much of the arguments I have presented here were first comprehensively and brilliantly created by Guglielmo Carchedi in his paper, Old wine, new bottles and the internet, in Work, Organisation, labour and Globalisation, Volume 8, Number 1, Autumn 2Ol4.  His mental labour has been very productive, but as he did not patent it, the reproduction of his arguments here have cost me little (zero?).  So any credit that I get will thus be a huge extraction of rent from him.

A rent-seeking economy?

September 27, 2019

‘Financialisation’ has been promoted by heterodox economists as the cause of the iniquities and failures of modern capitalist economies.  Now an additional theory has been offered: ‘renterisation’. In a recent long article in the British Financial Times, its well-known economic columnist, Martin Wolf, offered this concept as the explanation of low productivity growth, rising inequality and the mountain of debt in the major economies.

Wolf reckons that capitalism has been “rigged” by monopolistic economic powers. “So why is the economy not delivering? The answer lies, in large part, with the rise of rentier capitalism. In this case “rent” means rewards over and above those required to induce the desired supply of goods, services, land or labour. “Rentier capitalism” means an economy in which market and political power allows privileged individuals and businesses to extract a great deal of such rent from everybody else…. While the finance sector is an important part of this monopolistic development, so that ‘financialisation’ has enabled monopoly sectors to create their own profits (if often illusory) and generate financial crashes, the real enemy of successful capitalism is “the decline of competition”.  Wolf then cites all the recent empirical evidence of this ‘renterization’ of capitalism: market concentration; rising monopolistic profit mark-ups and ‘super star’ companies like the FAANGS making “monopolistic profits”.

But does this theory hold as the main reason for poor economic growth, rising inequality and financial crashes?  Is it monopoly capitalism that is the cause, not the contradiction of capitalism as a whole?  Well, let me remind readers of the empirical evidence for the renterisation theory.  I have recounted that in previous posts and the evidence is doubtful at best.  For example, you would expect  the biggest profit mark-ups to be achieved by the ‘monopoly’ giants – in fact the data show it is the smaller companies that get higher mark-ups.

Again, low productivity growth appears to be much more closely correlated with low investment and in turn with low profitability, not with monopolisation. The biggest slowdown in productivity growth in the US began after 2000, as investment in productive sectors and activity dropped off. It is a fall in the overall profitability of US capital that is driving things rather than any change in monopoly ‘market power’. Again, for example, evidence shows that the ‘rent-seekers’ appear to have played no role in the low investment rate of the Eurozone: it’s just low profitability there.  But such evidence is not convenient because it suggests that the cause of low productivity growth is due to contradictions in capitalist accumulation.  It is more encouraging to argue that if profits are high, then it’s ‘monopoly power’ that does it, not the exploitation of labour in the capitalist mode of production.  And it’s monopoly power that is keeping investment growth low, not low overall profitability.

Brett Christophers from the University of Uppsala in Sweden has published an important piece of work on renterisation (with a book to follow).  Christophers rejects the term ‘financialisation’ as a cause of the current malaise in capitalist growth.  Finance is too narrow a cause; because rents are being extracted in many other sectors like real estate.  Christophers argues that “renterism’ in its various guises is today a significant, even dominant, dynamic, in contrast to during the period preceding the neoliberal turn.”  He reckons the British economy “has been substantially rentierized.”  Christophers renterization  Christophers offers what he calls a hybrid definition of rent that tries to combine Marx’s view of rent coming from the monopoly ownership of a non-produced asset (land, minerals etc) with the mainstream view of “excess payment” over and above efficient production, namely payment above the ‘marginal productivity of labour or capital’.

I’m not sure that this hybrid definition is useful. It appears to fudge the key issue that Marx makes about how rent emerges: namely that it comes from the appropriation of surplus value created in the exploitation of labour in the production of commodities.  For Marx, rent comes from the ability of monopoly owners of non-produced assets to retain surplus-value from being merged with the competitive process of capital flows.  For Marx, ‘productive capitalists’ as appropriators of surplus value from the exploitation of labour are forced share some of that surplus value with owners of non-produced resources (rent) and finance (interest).  Rent and interest are part of total surplus value created in the production of commodities.  Value and surplus value must first be created by the exploitation of labour power.  Then the surplus value gets redistributed and those with some monopoly power can extract a part of that surplus value in rent.  “Excess payment’ over ‘efficiency’ implies that there is an acceptable payment to capitalists for exploiting labour power to benefit productivity and thus ignores these class relations.

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

Undoubtedly, much of the mega profits of the likes of Apple, Microsoft, Netflix, Amazon, Facebook are due to their control over patents, financial strength (cheap credit) and buying up of potential competitors.  But the renterization explanation goes too far.  Technological innovations also explain the success of these big companies, not just monopoly power.  Moreover, by its very nature, capitalism, based on ‘many capitals’ in competition, cannot tolerate any ‘eternal’ monopoly, namely a ‘permanent’ surplus profit deducted from the sum total of profits divided among the capitalist class as a whole.  The battle among individual capitalists to increase profits and their share of the market means monopolies are continually under threat from new rivals, new technologies and international competitors. Take the constituents of the US S&P-500 index.  The companies in the top 500 have not stayed the same.  New industries and sectors emerge and previously dominant companies wither on the vine.

The history of capitalism is one where the concentration and centralisation of capital increases, but competition continues to bring about the movement of surplus value between capitals (within a national economy and globally). The substitution of new products for old ones will in the long run reduce or eliminate monopoly advantage.  The monopolistic world of GE and the motor manufacturers of the 1960s and 1990s did not last once new technology bred new sectors for capital accumulation.  The world of Apple will not last forever.

‘Market power’ may have delivered rents to some very large companies in the US, but Marx’s law of profitability still holds as the best explanation of the accumulation process.  Rents to the few are a deduction from the profits of the many. Monopolies redistribute profit to themselves in the form of ‘rent’ but do not create profit.  Profits are not the result of the degree of monopoly or rent seeking, as neo-classical and Keynesian/Kalecki theories argue, but the result of the exploitation of labour.  Moreover, rents are no more than 20% of value-added in any major economy; financial profits are even smaller a proportion.  Moreover, the rise of renterism in the recent period is really a counteracting factor to the decline in the profitability of productive capital.

There is another definition of a rentier economy based on Marx’s explanation of the division of surplus value into profits, rent and interest that is relevant.  There are national economies where the capitalist sector appropriates much surplus value in the form of interest, dividends and profits through non-productive services like finance, insurance, and so-called business services.  Britain is one of these ‘rentier’ economies; Switzerland is another – both much more so than the likes of Germany or Japan, or even the US, where the appropriation of surplus value is still predominantly through the direct exploitation of labour power (both domestically and abroad).

As the spoke person for the City of London recently said, “London is the capital of capital”.  The City of London delivers a considerable inflow of income to the UK economy through its sale of financial services, bank interest and profits and allied business services.  The UK financial sector plus real estate (oligarchs want to live in London) and other business services contributes a much larger proportion of GDP and cross-border income inflows to the balance of payments than most other major economies.

Tony Norfield has developed a power index of imperialist economies and in that index, the US leads, but it is followed by the UK.  If you strip out of the index, the military and GDP constituents, Britain is way ahead of all as a rentier economy (at least in absolute dollar terms).

I did a little analysis from the WTO of commercial services exports of different countries.  The export of financial, insurance and other business services as well royalties and fees collected could be considered a measure of rentier exports if you like.  On this measure global rentier exports totalled $2trn in 2013.  The US received export income of $365bn, or 18% of world rentier income; the UK obtained $180bn, or 9%, while Japan received $78bn or 4% and Germany had no cross-border rentier income at all.  US GDP in 2013 was $16.7trn, the UK’s was $2.7trn.  So the UK received rentier export income equivalent to 7% of its GDP while the US got just 2% of its GDP from rentier exports.  In this sense, we can talk about a rentier economy and Britain as the poster child.  But that makes Britain particularly vulnerable to financial crashes.

Joseph Stiglitz and Martin Wolf reckon that what is wrong with capitalism is that ‘financialisation’ and monopoly rentier interests have ‘rigged’/ruined the ‘progressive’ features of capitalism, namely its ability to expand the productive forces harmoniously for all.  As Wolf puts it: “We need a dynamic capitalist economy that gives everybody a justified belief that they can share in the benefits. What we increasingly seem to have instead is an unstable rentier capitalism, weakened competition, feeble productivity growth, high inequality and, not coincidentally, an increasingly degraded democracy. Fixing this is a challenge for us all, but especially for those who run the world’s most important businesses. The way our economic and political systems work must change, or they will perish.”

But as LSE professor Jerome Roos perceptively pointed out in the British left journal, New Statesman, By opposing the “bad” capitalism of the unproductive rentier to the “good” capitalism of productive enterprise, however, the conventional liberal narrative overlooks the fact that the two are inextricably entwined. Such thinking relies on an idealised but entirely theoretical version of capitalism that is pure, uncorrupted and far more benign than it is, or has ever been or, in all likelihood, ever will be.  The reality is that the concentration of wealth and power in the hands of a few privileged rentiers is not a deviation from capitalist competition, but a logical and regular outcome. In theory, we can distinguish between an unproductive rentier and a productive capitalist. But there is nothing to stop the productive, supposedly responsible businessperson becoming an absentee landlord or a remote shareholder, and this is often what happens. The rentier class is not an aberration but a common recurrence, one which tends to accompany periods of protracted economic decline.(my emphasis)”.

In the past, this blog has posted overwhelming empirical evidence that the key to understanding the movement in productive investment remains in the underlying profitability of capital, not in the extraction of rents by a few market leaders, as Wolf and others suggest. If that is right, the Keynesian/mainstream solution of regulation and/or the break-up of monopolies (even if it were politically possible) will not solve the regular and recurrent crises in production and investment or stop rising inequality of wealth and income.

Theft or exploitation?- a review of Stolen by Grace Blakeley

September 13, 2019

All our wealth has been stolen by big finance and in doing so big finance has brought our economy to its knees.  So we must save ourselves from big finance.  That is the shorthand message of a new book, Stolen – how to save the world from financialisation, by Grace Blakeley.

Grace Blakeley is a rising star in the firmament of the radical left-wing of the British labour movement.  Blakeley got a degree in politics, philosophy and economics (PPE) at Oxford University and did a masters degree there in African studies.  Then Blakeley was a researcher at the Institute of Public Policy Research (IIPPE), a left-wing ‘think tank’, and has now become the economics correspondent of the leftist New Statesman journal.  Blakeley is a regular commentator and ‘soundbite’ supporter for left-wing ideas on various broadcasting media in Britain.  Her profile and popularity have taken her book, published this week, straight into the top 50 of all books on Amazon.

Stolen: how to save the world from financialisation is an ambitious account of the contradictions and failures of postwar capitalism, or more exactly Anglo-American capitalism (because European or Asian capitalism is hardly mentioned and the periphery of the world economy is covered only in passing).  The book aims to explain how and why capitalism has turned into a thieving model of ‘financialisation’ benefiting the few while destroying (stealing?) growth, employment and incomes from the many.

Stolen leads the reader through the various periods of Anglo-American capitalist development from 1945 to the Great Recession of 2008-9 and beyond.  And it finishes with some policy proposals to end the thievery with a new (post-financialisation) economic model that will benefit working people. This is compelling stuff. But is Blakeley’s account of the nature of modern Anglo-American capitalism and on the causes of recurring crises in capitalist production correct?

Just take the title of Blakeley’s book: “Stolen”.  It’s a catchy title for a book.  But it implies that the owners of capital, specifically finance capital, are thieves.  They have ‘stolen’ the wealth produced by others; or they have ‘extracted’ wealth from those who created it.  This is profits without exploitation.  Indeed, profit now comes merely from thieving from others.

Marx called this ‘profit of alienation’.  For Marx it is achieved by the transfer of existing wealth (value) created in the process of capitalist accumulation and production.  But value is not created by this financial thievery.  For Marx, profits, or surplus value as Marx called it, is only created through the exploitation of labour in the production of commodities (both things and services).  Workers’ wealth is not ‘stolen’, nor is the wealth they create.  Under capitalism, workers get a wage from employers for the hours they work, as negotiated.  But they produce more in value in the time they work than in the value (measured in labour time) that they receive in wages.  So capitalists obtain a surplus-value from the sale of the commodities produced by the workers which they appropriate as the owners of capital.  This is not thievery, but exploitation.  (See my book, Marx 200, for a fuller explanation).

Does it matter whether it is theft or exploitation?  Well, Marx thought so.  He argued fiercely against the idea of Pierre-Joseph Proudhon, the most popular socialist of his day that ‘property is theft’.  To say that, argued Marx, was to fail to see the real way in which the wealth created by the many and how it ends up in the hands of the few.  Thus it was not a question of ending thievery but ending capitalism.

In Stolen, Blakeley ignores this most important scientific discovery (as Engels put it), namely surplus value.  Instead Blakeley completely swallows the views of the modern Proudhonists like Costas Lapavitsas, David Harvey and others like Bryan and Rafferty who dismiss Marx’s view that profit comes from the exploitation of labour.  For them, that is old hat.  Now modern capitalism is now ‘financialised capitalism’ that gets its wealth from stealing or the extraction of ‘rents’ from everybody, not from exploitation of labour.  This leads Blakeley at one point to accept the false analysis of Thomas Piketty that the returns to capital will inexorably rise through this process – when the evidence is that returns to capital have been inexorably falling – see my critique of Piketty here.

But these ‘modern’ arguments are just as false as Proudhon’s.  Lapavitsas has been critiqued well by British Marxist Tony Norfield; I have engaged David Harvey in debate on Marx’s value theory and Bryan and Rafferty have been found wanting by Greek Marxist, Stavros Mavroudeas.  After you read these critiques, then you can ask yourself whether Marx’s law of value can be ignored in explaining the contradictions of modern capitalism.

Then there is the sub-title of Blakeley’s book: “how to save the world from financialisation’.  ‘Financialisation’ as a category or term has become overwhelmingly popular among heterodox economics.  The category originally came from mainstream economics, was taken up by some Marxists and promoted by post-Keynesian economists.  Its purpose was to explain the contradictions within capitalism and its recurring crises with a theory that did not involve Marx’s law of value and law of profitability – both of which post-Keynesians reject or ignore (see my letter to MR).

Blakeley takes the definition of the term from Epstein, Krippner and Stockhammer and makes it the centre-piece of the book’s narrative (p11).  As I outlined in a previous post, if the term means simply an increased role of the finance sector and a rise in its share of profits in the last 40 years, that is obviously true – at least in the US and the UK.  But if it means the “emergence of a new economic model … and a deep structural change in how the (capitalist) economy) works” (Krippner), then that is a whole new ballgame.

As Stavros Mavroudeas puts it in his excellent new paper (393982858-QMUL-2018-Financialisation-London), the ‘financialisation hypothesis’ reckons that “money capital becomes totally independent from productive capital (as it can directly exploit labour through usury) and it remoulds the other fractions of capital according to its prerogatives.” And if “financial profits are not a subdivision of surplus-value then…the theory of surplus-value is, at least, marginalized. Consequently, profitability (the main differentiae specificae of Marxist economic analysis vis-à-vis Neoclassical and Keynesian Economics) loses its centrality and interest is autonomised from it (i.e. from profit – MR).”

And that is clearly how Blakeley sees it.  Accepting this new model implies that finance capital is the enemy and not capitalism as a whole, ie excluding the productive (value-creating) sectors.  Blakeley denies that interpretation in the book.  Finance is not a separate layer of capital sitting on top of the productive sector. That’s because all capitalism is now ‘financialised!: any analysis that sees financialization as a “perversion” of a purer, more productive form of capitalism fails to grasp the real context. What has emerged in the global economy in recent decades is a new model of capitalism, one that is far more integrated than simple dichotomies suggest.”  According to Blakeley, “today’s corporations have become thoroughly financialised with some looking more like banks than productive enterprises”.  Blakeley argues that “We aren’t witnessing the “rise of the rentiers” in this era; rather, all capitalists — industrial and not — have turned into rentiers…In fact, nonfinancial corporations are increasingly engaging in financial activities themselves in order to secure the highest possible returns.”

If this were true, and all value comes from interest and rent ‘extracted’ from everybody and not from exploitation, then it would really be making money out of nothing and Marx has been talking nonsense.  However, the empirical evidence does not bear out the ‘financialisation’ thesis.  Yes, since the 1980s, finance sector profits have risen as a share of total profits in many economies, although mainly in the US.  But even at their peak (2006) the share of financial sector profits in total profits reached only 40% in the US.  After the Great Recession, the share fell back sharply and now averages about 25%.  And much of these profits have turned out to be ‘fictitious’, as Marx called it, based on gains from buying and selling of stocks and bonds (not on profits from production), which disappeared in the slump.

Also, the narrative that the productive sectors of the capitalist economy have turned into rentiers or bankers is just not borne out by the facts. Joel Rabinovich of the University of Paris has conducted a meticulous analysis of the argument that now non-financial companies get most of their profits from ‘extraction’ of interest, rent or capital gains and not from the exploitation of the workforces they employ.  He found that: “contrary to the financial rentieralization hypothesis, financial income averages (just) 2.5% of total income since the ‘80s while net financial profit gets more negative as percentage of total profit for nonfinancial corporations. In terms of assets, some of the alleged financial assets actually reflect other activities in which nonfinancial corporations have been increasingly engaging: internationalization of production, activities refocusing and M&As.” Here is his graph below.

In other words, non-financial corporations like General Motors, Caterpillar, Amazon, Google, Microsoft, big tobacco and big pharma and so on still make their profits from selling commodities in the usual way.  Profits from ‘financialisation’ are tiny as a share of total income. These companies are not ‘financialised’.

Blakely says that “financialization is a process that began in the 1980s with the removal of barriers to capital mobility”.  Maybe so, but why did it begin in the 1980s and not before or later?  Why did deregulation of the financial sector start then?  Why did ‘neoliberalism’ emerge then? There is no answer from Blakeley, or the post-Keynesians. Blakeley points out that the post-war ‘social democratic model’ had failed, but she provides no explanation for this – except to suggest that capitalism could no longer “afford to continue to tolerate union demand for pay increases in the context of rising international competition and high inflation”.( p48). Blakeley hints at an answer: “competition from abroad began to erode profits”(p51).  But that begs the question of why international competition now caused a problem when it had not before and why there was high inflation.

But Marxist economics can give an answer.  It was the collapse in the profitability of capital in all the major capitalist economies. This is well documented by Marxists and mainstream studies alike.  This blog has a host of posts on the subject and I have provided a clear analysis in my book, The Long Depression (not a best seller).  The fall in profitability forced capitalism to look for counteracting forces: the weakening of the labour movement through slumps and anti-labour measures; privatisations etc and also a switch into investing in financial assets (what Marx called ‘fictitious capital’) to boost financial profits.  All this was aimed at reversing the fall in the overall profitability of capital.  It succeeded to a degree.

But Blakeley dismisses this explanation.  It was not to do with the profitability of capital that crises regularly occur under capitalism and profitability had nothing to do with the Great Recession.  Instead Blakeley slavishly follows the explanation of post-Keynesian analysists like Hyman Minsky and Michel Kalecki.  Now I and others have spent a much ink on arguing that their analysis is incorrect as it leaves out the key driver of capitalist accumulation, profit and profitability.  As a result, they cannot really explain crises.

Kalecki says that crises are caused by a lack of ‘effective demand’, Keynesian-style and although governments could overcome this lack of demand through fiscal and other interventions, they are blocked by the political resistance of the capitalists.  You see, as Blakeley says, “Kalecki’s argument is that not that social democracy is economically unstable, but that it is politically unstable.”  For Kalecki, crises caused by capitalists being politically unwilling to agree to reforms. So apparently, social democracy would work under capitalism if it was not for the stupidity of the capitalists!

Minsky was right that the financial sector is inherently unstable and the massive growth in debt in the last 40 years increases that vulnerability – Marx made that point 150 years ago in Capital.  And in my blog, I have made the point in many posts that “debt matters”.  But financial crashes do not always lead to slumps in production and investment.  Indeed, there has been no financial crisis (bank busts, stock market crashes, house price collapse etc), that has led to a slump in capitalist production and investment unless there is also a crisis in the profitability of the productive sector of the capitalist economy.  The latter is still decisive.

In a chapter of the book, World in Crisis, edited by G Carchedi and myself (unfortunately again it is not a best seller) Carchedi provides compelling empirical support for the link between the financial and productive sectors in capitalist crises.  Carchedi: “Faced with falling profitability in the productive sphere, capital shifts from low profitability in the productive sectors to high profitability in the financial (i.e., unproductive) sectors. But profits in these sectors are fictitious; they exist only on the accounting books. They become real profits only when cashed in. When this happens, the profits available to the productive sectors shrink. The more capitals try to realize higher profit rates by moving to the unproductive sectors, the greater become the difficulties in the productive sectors. This countertendency—capital movement to the financial and speculative sectors and thus higher rates of profit in those sectors—cannot hold back the tendency, that is, the fall in the rate of profit in the productive sectors.”

What Carchedi finds is that:“Financial crises are due to the impossibility to repay debts, and they emerge when the percentage growth is falling both for financial and for real profits.“ Indeed, in 2000 and 2008, financial profits fall more than real profits for the first time.  Carchedi concludes that: “The deterioration of the productive sector in pre-crisis years is thus the common cause of both financial and non-financial crises. If they have a common cause, it is immaterial whether one precedes the other or vice versa. The point is that the (deterioration of the) productive sector determines the (crises in the) financial sector.”

You may ask: does it matter if the inequalities and crises we experience under capitalism are caused by financialisation or by Marx’s laws of value and profitability?  After all, we can all agree that the answer is to end the capitalist system, no?  Well I think it does matter, because policy action flows from any theory of causes.  If we accept financialisation as the cause of all our woes, does that mean that it is only finance that is the enemy of labour and working people and not the nice productive capitalists like Amazon who only exploit us at work?  It should not, but it does.  Take Minsky himself as an example.  Minsky started off as a socialist but his own theory of financialisation in the 1980s led him to not to expose the failings of capitalism but to explain how an unstable capitalism could be ‘stabilised’.

Undoubtedly Blakeley is made of sterner stuff.  Blakeley says that we must take on the bankers in the same degree of ruthlessness as Thatcher and Reagan took on the labour movement back in the neoliberal period starting in the 1980s.  Blakeley says that “the Labour Party’s manifesto reads like a return to the post-war consensus…we cannot afford to be so defensive today.  We must fight for something more radical…. because the capitalist model is running out of road. If we fail to replace it, there is no telling what destruction its collapse might bring.” (p229). That sounds like the roar of a lion of socialism.  But when it comes to the actual policies to deal with the financiers, Blakeley becomes a mouse of social democracy.

First, Blakeley says “we must adopt a policy agenda that challenges the hegemony of financial capital, revoking its privileges and placing the powers of investment back under democratic control.”  Now I have argued in many posts and at meetings of the labour movement in Britain that the only way to take democratic control is to bring into public ownership the big five banks that control 90% of lending and deposits in Britain. Regulation of these banks has not worked and won’t work. 

Yet Blakeley ignores this option and instead calls for ‘constraining’ measures on the existing banks, while setting up a public retail bank or postal banks in competition along with a National Investment Bank.  “Private finance must be properly constrained” (but not taken over), “using regulatory tools that are international adopted.” P285.  At various places, Blakeley refers to Lenin.  Perhaps Blakeley should remind herself what Lenin said about dealing with the banks. “The banks, as we know, are centres of modern economic life, the principal nerve centres of the whole capitalist economic system. To talk about “regulating economic life” and yet evade the question of the nationalisation of the banks means either betraying the most profound ignorance or deceiving the “common people” by florid words and grandiloquent promises with the deliberate intention of not fulfilling these promises.”

As for a National Investment Bank, a Labour manifesto pledge, it leaves the majority of investment decisions and resources in the hands of the capitalist financial sector.  As I have shown before, the NIB would add only 1-2% of GDP in extra investment in the British economy, compared to the 15-20% on investment controlled by the capitalist sector.  So ‘financialisation’ would not be curbed.

Blakeley’s other key proposal is a People’s Asset Manager (PAM), which would gradually buy up shares in the big multinationals, thus “socialising ownership across the whole economy” and then “pressurising companies” to support investments in socially useful projects.  “As a public banking system emerges and grows alongside a People’s Asset manager, ownership will be steadily be transferred from the private sector to the public sector.” (p268) “in a bid to dissolve the distinction between capital and labour” (p267).  So Blakeley’s aim is not to end the capitalist mode of production by taking over the major sectors of capitalist investment and production, but to dissolve gradually the ‘distinction’ between capital and labour.

This is the ultimate in utopian gradualism.  Would capitalists stand by while their powers of control are gradually or steadily lost?  An investment strike would ensue and any socialist government would be faced with the task of taking over completely.  So why not spell out fully a programme for a democratically controlled publicly owned economy with a national plan for investment, production and employment?

Stolen aims to offer a radical analysis of the crises and contradictions of modern capitalism and policies that could end ‘financialisation’ and give control by the many over their economic futures.  But because the analysis is faulty, the policies are also inadequate.

Recessions, monetary easing and fiscal stimulus

August 19, 2019

As the stock markets of the world gyrate up and down like a yo-yo, all talk in the financial media is on whether a new global recession is coming and when.  The financial pundits search for economic or financial indicators that might guide them to tell.  The favourite one is the ‘inverted bond yield curve’.  This is the difference in the annual interest rate that you get if you buy a government bond that has a ten-year life (the maturity before you get your money repaid) and the interest rate for buying either a three-month or two-year bond.

The curve of interest rates for differently maturing bonds is usually upwards, meaning that if you lend the government your cash (ie buy a government bond) for ten years you would normally expect to get a higher interest rate (yield) than if you lent the government your money for just three months.  But sometimes, in the market for buying and selling government bonds (the ‘secondary market’), the yield on the ten-year bond falls below that of the two-year or even three-month bond.  Then you have an inverted yield curve.

Why does this happen?  What it suggests is that investors in financial assets (who are banks, pension funds, companies and investment funds) are so worried about the economy that they no longer want to hold the stocks or bonds of companies (ie invest in or lend them cash).  It’s too risky and so instead investors prefer to hold very safe assets like government bonds – as the governments of Germany, Japan, the US or the UK are not going to go bust like a company or bank.

If investors buy more government bonds, they drive the price of those bonds up in the market.  The government pays an annual fixed interest on that bond until it matures, so if the price of the bond keeps rising, then the yield on that bond (ie. interest rate/bond price) keeps falling.  And then the bond yield curve can invert. Empirical evidence shows that every time that happens for a sufficient period (some months), within a year or so, an economic recession follows.

How reliable is this indicator of a recession coming?  Two Bloomberg authors have questioned the validity of inverted yield for causation; it may be that an inverted curve correlates with recessions, but that is no confirmation that another recession is on its way because all it shows is that investors are fearful of recession and they could well be wrong.  Indeed, when you look at corporate bonds, there is no inverted curve.  Longer-term corporate bonds have a much higher yield than short-term bonds.

On the other hand, JP Morgan economists recently did some regressions on the inverted yield curve and reckoned that the very low inflation that most major economies have experienced in the post Great Recession period may have altered the reliability of the indicator to some extent because the yield curve could go flat but not really express investor fear and loathing of stocks.  Even so, JP Morgan still reckoned it was a valuable indicator.  Currently, the US bond yield curves (10yr-3m) and (10yr-2yr) have inverted.  And as you can see from the JPM graph below, that every time that has happened before, a recession has followed (the grey areas) within a year.

JP Morgan reckons on this basis the current probability of a slump in the US economy within a year is about 40-60%.

And this is the US, the capitalist economy with still the best economic performance of the G7, with real GDP growth at about 2.3%.  Everywhere else in the G7, in Europe, in Asia, and also in many large so-called emerging economies, economic growth is falling fast towards zero and below.  Look at this list:

Canada: 1.3%; France 1.3%; Japan 1.2%; UK 1.2%; Russia 0.9%; Brazil 0.5%; Germany 0.4%; Italy 0.0; Mexico -0.7%;  Turkey -2.6%; Argentina -5.8%.  Only China, India and Indonesia can record decent growth rates and even here, there is a rapid slowdown.

I have reported before on the manufacturing and industry activity indexes that show the world is already in a manufacturing sector recession and only ‘service sectors’ like health, education, tourism etc are keeping the world economy moving.  But those sectors are ultimately dependent on the health of the productive sectors of a capitalist economy for their sales and profits.

In some of the major economies, there is so-called full employment, at least on the official stats, even if it is temporary, part-time, self-employed and on basic wage levels.  This employment income helps to keep spending going, but in many countries it is not enough, so that household savings are being run down.  For example, in the UK, the household savings rate is at a 50-year low.  So people cannot keep borrowing indefinitely, even though interest rates are very low.

And are they low!  We are now in the fantasy world of negative interest rates, where borrowers get paid to borrow and lenders pay to lend. In Denmark, one mortgage lender is offering loans at -0.1%, in other words it is paying you to take out a mortgage!  Over 20% of all government and even some corporate bonds have negative interest rates. The entire spectrum of German government bonds from two-years to 30 years have negative interest rates if you buy them. So sellers of bonds (borrowers) can expect you, the lender, to pay interest to them to buy their bonds!

So why are bond investors prepared to do this? As I said, it’s because they fear a global recession that will cause a collapse in stock markets and other ‘risky’ financial assets, so the safest place to put your money is with governments (which don’t go bust) like the US, the UK, Japan, Germany and Switzerland.

If a recession is coming, what can be done to avoid it?  Mainstream and Keynesian economics has basically two policy solutions.  The first is to inject more money into the financial system in the hope that piles of dollars, euros and yen will find their way into the coffers of corporate borrowers, which will then keep investing in jobs and machines; or into households who will keep spending

The ‘conventional’ way to do this was for the central banks of the major economies to cut their ‘policy’ interest rate, which would lead to falling interest rates across the board and thus reduce the cost of borrowing.  But the experience of the last ten years of what I call the Long Depression reveals that this does not work.  Investment has remained low as a share of GDP, wages have stagnated and economic growth has been feeble.

So governments and central banks have resorted to ‘unconventional monetary policy’ where the central banks buy billions of government and corporate bonds (even company stocks) from commercial banks.  This is called quantitative easing (QE). This led to a huge boost in bank reserves.  The banks were supposed to lend that cash on to companies to invest.  But it did not work.  Companies did not borrow to invest.  They were either so cash rich like Amazon or Microsoft that they did not need to borrow or so weak that the banks would not lend to them.  So all this cash ended up being invested in stocks and bonds (what Marx called fictitious capital, ie just claims on future profits or interest, not actual profits or interest).  The financial markets rocketed up, but the ‘real’ economy stagnated.

Monetary policy has failed, whether conventional or unconventional.  Central banks have been ‘pushing on a string’.  That was something that Keynes found too during the Great Depression of the 1930s.  His policy proposal for getting full employment and ending the depression in the early 1930s was first conventional interest-rate cuts and then unconventional QE.  By 1936, when he wrote his great work, The General Theory, he announced the failure of monetary policy.

And so it has been this time.  Mainstream economists including Keynesians like Paul Krugman at first advocated massive monetary injections to boost economies.  Japan’s government even invited Krugman and others to Tokyo to advise them on QE.  The government and the Bank of Japan adopted QE with a vengeance, so much so that the BoJ has bought virtually all the available government bonds in the market – but to no avail.  Growth remains weak, inflation is near zero and wages stagnate. 

The central banks have run out of ideas. And investors know it. That is why bond yields are negative and in the US the yield curve has inverted.  But there is nothing else that the central banks can do except cut interest rates where they are not yet zero and bring back yet more QE where they are.

Some radical economists have not given up on monetary policy.  Some are advocating ‘helicopter money’(named after right-wing monetarist economist Milton Friedman who advocated by-passing the banking system and printing cash and giving it directly to households to spend ie send helicopters over the country dropping dollars – not napalm as in Vietnam).  This ‘people’s money’ is the last resort of the monetary policy solution.

The more perceptive of mainstream economists now recognise that monetary easing will not work.  The Financial Times and even the Wall Street Journal have been trashing this policy.  And Keynesians who advocated it before now recognise its failure.  Take this example by Edward Harrison, a macro economic financial advisor.

“I think monetary policy is ineffective. We don’t even know how it works. Sure, rate policy can help at critical junctures in the business cycle by lowering interest payments when debtors are under stress. But, we’ve hit the limits of what central banks can do. As a result, we’ve resorted to quantitative easing, negative interest rates, and yield curve control. And for what? It’s crazy.   The solution is staring us in the face: help put money in the pockets of the people who are facing the most severe financial stress in our economies. Those are the people who need the money the most and are most likely to spend that money too. Until we do that, the stress on our economic and financial system will continue to grow… and political unrest will continue to grow with it.”

Harrison cites empirical work from his own college that shows monetary policy does not work – as Keynes discovered in the 1930s. “For example, economic researchers at my alma mater Dartmouth wrote this in 2013 as the abstract for an economic study:

“We study the factors that drive aggregate corporate investment from 1952–2010. Quarterly investment responds strongly to prior profits and stock returns but, contrary to standard predictions, is largely unrelated to changes in interest rates, market volatility, or the default spread on corporate bonds. At the same time, high investment is associated with low profit growth going forward and low quarterly stock returns when investment data are publicly released, suggesting that high investment signals aggregate over investment. Our analysis also shows that the investment decline following the financial crisis of 2008 represents a fairly typical response to changes in profits and GDP at the end of 2008 rather than an unusual reaction to problems in the credit markets.”

And he cites work by the US Federal Reserve that concluded that: A fundamental tenet of investment theory and the traditional theory of monetary policy transmission is that investment expenditures by businesses are negatively affected by interest rates. Yet, a large body of empirical research offer mixed evidence, at best, for a substantial interest-rate effect on investment. In this paper, we examine the sensitivity of investment plans to interest rates using a set of special questions asked of CFOs in the Global Business Outlook Survey conducted in the third quarter of 2012. Among the more than 500 responses to the special questions, we find that most firms claim to be quite insensitive to decreases in interest rates, and only mildly more responsive to interest rate increases.”

I have cited this paper that Harrison refers on many occasions in this blog before he brought it up.  But Harrison emboldens the text from the paper about how interest rates have little effect on business investment. But he ignores the other key conclusion in the paper cited.  I quote again with my emphasis now: “Quarterly investment responds strongly to prior profits and stock returns but, contrary to standard predictions…..Our analysis also shows that the investment decline following the financial crisis of 2008 represents a fairly typical response to changes in profits and GDP at the end of 2008 rather than an unusual reaction to problems in the credit markets.”

In other words, what drives capitalist economies and capital accumulation are changes in profits and profitability – indeed that is what the paper cited shows.  And there is a pile of other empirical evidence that confirms this relation, which I have covered in several papers. The profit investment nexus.  Economic growth in a capitalist economy is driven not by consumption but by business investment. That is the swing factor causing booms and slumps in capitalist economies.  And business investment is driven mainly by one thing: profits or profitability – not interest rates, not confidence and not consumer demand. It is this simple, obvious and empirically confirmed explanation of regular and recurring booms and slumps that is ignored or denied by the mainstream (including Keynesian) and heterodox post-Keynesian economics.

Take this alternative explanation of recessions recently offered by an ex-Bank of England economist Dan Davies.  Davies tells us that financial meltdowns aren’t the usual way in which recessions happen, and emergency credit lines and taxpayer bailouts aren’t the usual way that they’re prevented or managed. What normally happens is that there’s a shock of some sort to business confidence – say, political uncertainty or trade restrictions, as we’re seeing at the moment – and companies react to this by cutting back investment plans.”  According to Davies this orthodox Keynesian recession of this sort, unaccompanied by a financial market crisis, is the normal kind – and one of the best understood problems in economic policy.”  Really, best understood?

So this Keynesian explanation is that there is a sudden loss of business confidence caused by some external factor like a trade war or a government falling or a war. There is nothing endogenously wrong with the capitalist process of production and investment for profit.  The idea of ‘shocks’ to an inherently equilibrium system is the mainstream macro view, in essence.  It has bred a whole industry of empirical work based on Dynamic Stochastic General Equilibrium (DSGE) models, which is a smart word for seeing what happens to an economy when an external ‘shock’’ like a sudden loss of çonfidence’ or trade tariffs is applied.  Larry Summers, a leading Keynesian guru critiqued DSGE models“In four years of reflection and rather intense involvement with this financial crisis, not a single aspect of dynamic stochastic general equilibrium has seemed worth even a passing thought.”  He moaned: “Is macro about–as it was thought before Keynes, and came to be thought of again–cyclical fluctuations about a trend determined somewhere else, … inserting another friction in a DSGE model isn’t going to get us there. “

This orthodox Keynesian explanation of recessions explains nothing.  Why is there a sudden loss of business confidence as we are seeing now?  How does a sudden loss explain regular and recurring slumps and booms, not one-off shocks?  Davies argues that the Great Recession was exceptional in that the huge slump was caused by an extreme financial crash that won’t be repeated, as ‘normal’ slumps are just contingent ‘shocks’.

And yet the theory and the evidence is there that capitalist accumulation and production moves forward in a succession of booms and slumps of varying magnitude and length according to movement of the profitability of capital culminating on a regular basis in a collapse of profits, taking down investment, employment, incomes and consumption in that order.

In the 1930s when Keynes realised that monetary easing was not working to end the depression, he opted for government spending (investment) through running budget deficits to stimulate ‘effective demand’ and get investment and consumption on a rising trend.  This policy has become known as the Keynesian one, also adopted by more radical post-Keynesians and in their latest version, Modern Monetary Theory (MMT). The Keynesians reckon capitalist economies can be brought out of recessions by governments borrowing more than they get in tax revenues (running budget deficits).  Governments borrows by getting financial institutions to buy their bonds.

The more radical post-Keynesians and MMTers reckon that it not even necessary to issue bonds for that purpose.  Governments can just print the money and then spend it on useful projects.  But all agree that ‘fiscal easing’ is the answer to restoring growth, investment, employment and incomes in a capitalist economy.  The government borrows or prints money and the capitalists and workers spend it.  Once growth is restored and full employment and rising incomes are achieved any debt servicing can be funded and you can turn off the government money tap and moderate any possible ensuing inflation if the economy is ‘overheating’.

The trouble with this policy option is that we live in a capitalist economy where the investment decisions that drive any economy are made by capitalist companies. Unless government makes those investment decisions itself and rides roughshod over the capitalist sector or replaces it with state operations in a plan (as in China, for example), then investment and growth will depend on the decisions of capitalist companies.  And they only invest if they are confident of getting good profits ie the profitability of investment is high and rising.

The history of the Great Depression of the 1930s shows; and the collapse of Keynesian demand management policies in the 1970s shows; and the history of the Long Depression since 2009 shows, that if corporate profitability is low, and especially if its falling, then no amount of fiscal stimulus will deliver more investment and faster growth.

I and others have delivered a pile of empirical evidence to show that government spending has little or no impact on boosting economic growth or overall investment – the amount is either too small to have an impact (government investment averages just 2-3% of GDP in most capitalist economies compared to 15-20% of GDP for capitalist sector investment).  Or most government spending in capitalist economies are really handouts to capitalist companies or to boost welfare with little productive result.

Don’t believe me – then look at the evidence here.  Take Japan – it has run budget deficits of between 3-10% of GDP for nearly 20 years and yet its growth rate has been even lower than the US or Europe.

The Trump tax cuts have raised the US budget deficit in the last two years and going forward – Trump is following Keynesian policies in that sense – and yet the US is now slowing down fast.  The US is projected to run a primary budget deficit (that excludes the interest cost on the debt) for the foreseeable future.  Do Keynesians really expect the US economy to grow faster as a result?

US budget projections

Although the inverted yield curve can be checked daily, it may not be a useful indicator of a coming recession but falling profits are (unfortunately, profits data are mostly quarterly).  Empirical studies like the one mentioned by Harrison above and many others confirm this.  And global corporate profits are now stagnating;

while US non-financial corporate profits are falling.

Monetary and fiscal solutions to recessions that still preserve the profit-making capitalist system won’t work.  Monetary easing has failed, as it has done before.  Fiscal easing, where adopted, has also failed.  Indeed, capitalism can only get out of a recession by the recession itself.  A recession would wipe out weaker capitalist companies and lay off unproductive workers.  The cost of production then falls and those companies left after the slump have higher profitability as the incentive to invest.  That is the ‘normal’ recession.  In a depression, however, that process requires several slumps (as in the late 19th century depression) before normal service is resumed.  Another recession is on its way and neither monetary nor fiscal measures can stop it.

The political economy of Peterloo

August 16, 2019

Today is the 200th anniversary of what has come to be called the Peterloo massacre.  On 16 August 1819, 60,000 working people gathered at St Peter’s Field in Manchester England to demonstrate for the right to vote, against the terrible conditions and pay of factory workers and for the right to organise at the workplace, among a host of other injustices.

Peterloo has become a marker in the labour history of Britain. The peaceful demonstration was brutally attacked and dispersed by a private militia of thugs on horseback funded and directed by the local landlords and authorities with the tacit backing of the then Tory government under Lord Liverpool. An estimated 18 people, including a woman and a child, died from sabre cuts and trampling. Over 700 received serious injuries.

I am not going to discuss the event or the politics behind it as there are many thorough and better accounts to be had elsewhere.  Indeed, there is a film by leading British filmmaker, Mike Leigh on the day.

Instead, I want to comment on the economics of Peterloo: the state of the British economy and capitalism at the time  – to provide some context to the event and also perhaps draw out some wide generalisations.

Peterloo took place a few years after the end of so-called Napoleonic wars in which the aristocratic monarchies of Britain, Austria, Russia and Germany finally defeated the French republic.  The end of the war heralded a period of deep depression in European economies, as soldiers returned home without work and bad harvests and weather led to a sharp downturn in agricultural production – still the dominant form of economic activity in early 19th century Europe.

This period of depression started before the end of war in 1812 and continued for ten years to 1822. It is reckoned that England suffered more economically, socially and politically, than during the French wars when at least there were good harvests and armaments production provided work. During the wars, Britain’s export and re-export trade increased. British ships carried the world’s trade and also captured French colonies which further increased Britain’s trade potential. After 1815 this virtual monopoly ended and trade declined

The depression brought discontent and distress and a response from the growing layers of industrial workers in the ‘dark satanic mills’ of the new big cities of Manchester, Liverpool and Birmingham that had no parliamentary representation or civic rights.  The 18th century constitution remained, with the landlord class in control and forming the government.

In 1815 parliament passed the Corn Laws, enforcing higher prices for grain to protect landlord profits from cheaper foreign imports, squeezing the wages of workers and the profits of the industrial capitalists.  Classical bourgeois economist, David Ricardo wrote his Principles of Political Economy and Taxation in 1817 that presented a theoretical argument against agricultural rents and the corn laws.  Indeed, Ricardo led the demand in parliament for an inquiry into the Peterloo massacre.

Wages were held down by the so-called Speenhamland system, which subsidised wages from the public purse somewhat like the Universal Basic Income proposed now.  At the same time, the demobilisation of 300,000 soldiers, the influx of 100,000 Irish labourers and the use of children and women in the factories meant that the ‘reserve army of labour’ (to use Marx’s phrase) was huge.  Indeed, the population in the industrial areas was rocketing (up 50% in the first 30 years of the 19th century).

At the same time, any attempt by rural workers to feed themselves off the land was blocked and curtailed by the landowners.  The 1816 Game Laws allowed landowners to hunt for game; but not their workers.  The penalty for poaching was seven years transportation to Australia.  Common land had been wiped out by the enclosure measures decades before.

Decade Enclosures
1780-90 287
1790-1800 506
1800-1810 906

The war had driven up the public debt to £834 million. Interest on this was a heavy burden to taxpayers. But the answer of the government was to end income tax, thus shifting the burden of servicing the debt onto the poorest through various sales and customs taxes.  The interest paid on the debt went to the rich war bond holders now no longer paying income tax.  The government tried to inflate away the debt burden by staying off the gold standard and letting the pound devalue, driving up inflation and hitting the poor again.

Radical poet Lord Byron protested in the House of Lords about the situation in 1812 “I have been in some of the most oppressed provinces of Turkey; but never, under the most despotic of infidel governments, did I behold such squalid wretchedness as I have seen since my return, in the very heart of a Christian country”.

All this was compounded by the weather.  The year 1816 is now known as the ‘Year Without a Summer’ because of severe climate abnormalities that caused average global temperatures to decrease by 0.4–0.7 °C. This resulted in major food shortages across the Northern Hemisphere. Evidence suggests that the anomaly was predominantly a volcanic winter event caused by the massive 1815 eruption of Mount Tambora in the Dutch East Indies (now Indonesia). This eruption was the largest eruption in at least 1,300 years.

The Year Without a Summer was an agricultural disaster. Low temperatures and heavy rains resulted in failed harvests in Britain and Ireland. Families in Wales travelled long distances begging for food. Famine was prevalent in north and southwest Ireland, following the failure of wheat, oat, and potato harvests. In Germany, the crisis was severe; food prices rose sharply. With the cause of the problems unknown, people demonstrated in front of grain markets and bakeries, and later riots, arson, and looting took place in many European cities. It was the worst famine of 19th-century Europe.

Indeed, The Year Without a Summer is a misnomer; it was Years Without a Summer given the weather of 1816, 1817, and 1818.  Lord Byron, now in permanent exile, was moved to write an apocalyptic poem, The death of the sun, while staying by the banks of Lake Geneva in July 1816 as Europe and North America were gripped by one of the coldest summers on record.

“I had a dream, which was not all a dream. The bright sun was extinguish’d, and the stars Did wander darkling in the eternal space, Rayless, and pathless, and the icy earth, Swung blind and blackening in the moonless air; Morn came and went—and came, and brought no day, And men forgot their passions in the dread Of this their desolation.”

It is also no accident that Mary Shelley, the partner of Percy Shelley, went on to write Frankenstein in 1818. Shelley’s miserable Creature is usually portrayed as the terrible result of uncontrolled technology.  But in the context of the climate shock, it is also a figure representing the desperate refugees crowding Switzerland’s market towns in that year. Eyewitness accounts frequently refer to how hunger and persecution “turned men into beasts”, how fear of famine and disease-carrying refugees drove middle-class citizens to demonize these suffering masses as subhuman parasites and turn them away in horror and disgust.

Peterloo happened because the British government in this depression was the most reactionary.  There was a fear of the democratic ideas of the French Revolution spreading.  There was a lasting fear of popular movements, which reflected the fear of revolution. There was a determination to protect and defend the landed interest – the basis of the government’s political power. There was a general dislike of an organised police-force, so a consequent heavy reliance on the military and private militias meant that in any confrontation, made violence the preferred option. The government kept the Combination Acts on Statute Books until 1824, which suppressed all reform movements. This was a government of the landed few for the landed few.

The 18th century economist Adam Smith noted the imbalance in the rights of workers in regards to owners (or “masters”). In The Wealth of NationsBook I, chapter 8, Smith wrote: “We rarely hear, it has been said, of the combination of masters, though frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject. Masters are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labor above their actual rate[.]  When workers combine, masters … never cease to call aloud for the assistance of the civil magistrate, and the rigorous execution of those laws which have been enacted with so much severity against the combination of servants, labourers and journeymen.”

This was also the period of the so-called Luddites, a radical group of weavers who reacted to the introduction of machinery and their loss of jobs with attacks on the machines themselves.

In this light, the Peterloo massacre was the inevitable waiting to happen.  After the event, the great radical romantic poet, Percy Shelley graphically attacked the government and its ruling class in his famous poem, Masque of Anarchy, the final verse of which is echoed in the current campaign slogan of the British leftist Labour party:

‘Rise like Lions after slumber
In unvanquishable number –
Shake your chains to earth like dew
Which in sleep had fallen on you –
Ye are many – they are few.’

At a more general level, Peterloo took place in the same year as the very first capitalist-style crisis and financial crash. The Panic of 1819 started in the US and was triggered by the post-Napoleonic depression in Europe which led to the collapse of US export markets and the bankruptcy of several banks that had made export loans.  The ensuing recession lasted until 1821. The boom and bust cycle that has characterised capitalist accumulation to this day had begun.

This was the first capitalist slump – and also the first recognisable period of depression in modern industrial capitalism.  In my book, The Long Depression, I suggest that capitalist accumulation takes place in cycles of profitability.  There are periods of rising profitability and then periods of falling profitability (within the longer-term context of a secular fall as capitalist economies mature).

There are four seasons each of approximately 10-14 years in the 19th century (they are longer in the 20th century).The first season (Spring) sees a rise in profitability as new technology and an expanding workforce is applied.  In the second season (Summer), profitability falls and because labour has got stronger during the spring season, the class battle intensifies.  Then comes Autumn, a new period of rising profitability built on the defeat of previous labour struggles and the weakening of labour through slumps.  Finally, profitability falls again in the Winter season and there is a depression that can only be broken either by war or by successive slumps that eventually restore profitability for a new Spring.

1819 was a year right in the middle of such a Winter.  The weakening of labour in the previous Autumn of the war economy from 1800-1812 had seen profitability rise for both landowners and rising industrial capitalists.  But the post-war depression was one of falling profitability (as noted by Ricardo) in which the dominant landowning class tried to preserve its profits and hegemony at the expense of industry and labour through repression and taxation.  Peterloo was the marker for this.

After 1822, England entered a new Spring based on industrial expansion and the revival of export markets in Europe.  The industrial bourgeois mobilised its workers to fight for the vote in the cities and parliamentary representation (for property owners).  The Reform Act was passed in 1832.

SPRING 1776-86: profitability up; industrialisation begins, labour strengthens, first trade unions

SUMMER 1786-1800: profitability down; Marx’s law operates, labour fights

AUTUMN 1800-12: profitability up; war economy; labour weakened and overseas

WINTER 1812-22: profitability down; post-war depression, labour repressed

Finance: fiddling, fetish and fiction

August 12, 2019

Nothing changes in the finance sector globally, despite the catastrophic impact of the banks on the world capitalist economy in the global financial crash and the ensuing Great Recession.

In previous posts, I have highlighted the greed, recklessness and instability of the finance sector and its operational leaders. As Marx said, finance is the epitomy of the fetish of money, increasingly based on investing in fictitious capital, that bears no relation to any value created in an economy, let alone overall social need.  As former Bank of England chief economist Andy Haldane put it, finance is socially unproductive.

Haldane posed the question: “In what sense is increased risk-taking by banks a value-added service for the economy at large?”  He answers, “In short, it is not.”  Echoing Marx’s value theory, Haldane concluded: “The act of investing capital in a risky asset is a fundamental feature of capital markets. For example, a retail investor that purchases bonds issued by a company is bearing risk, but not contributing so much as a cent to measured economic activity. Similarly, a household that decides to use all of its liquid deposits to purchase a house, instead of borrowing some money from the bank and keeping some of its deposits with the bank, is bearing liquidity risk. Neither of these acts could be said to boost overall economic activity or productivity in the economy. They re-allocate risk in the system but do not fundamentally change its size or shape. For that reason, statisticians do not count these activities in capital markets as contributing to activity or welfare. Rightly so.” http://www.voxeu.org/article/what-contribution-financial-sector

More evidence of the criminal nature of global banking is to be found in the news that the Malaysian government has filed charges against 17 current and former executives of three Goldman Sachs subsidiaries, over the multi-billion-dollar 1MDB state fund scandal, where former Malaysian prime minister Najib Razak and his family corruptly siphoned off billions – it seems with the connivance of Goldman Sachs, the world’s largest investment bank.  Goldman’s used to be led by Lloyd Blankfein, who claimed he was doing God’s work.

Well, God’s work in this case appears to have Goldmans arranging bond issues worth $6.5 billion for 1MDB, with large amounts of state funds ($2.7bn) were misappropriated in the process.

Over in Switzerland, the former chief executive officer of HSBC’s Swiss private bank pleaded guilty to helping wealthy clients hide assets worth at least 1.6 billion euros ($1.8 billion). Peter Braunwalder was fined 500,000 euros and given a one-year suspended jail sentence, according to a Paris court ruling on the plea. The 68-year-old admitted that he took part in helping clients evade taxes between 2006 and 2007 by opening clandestine Swiss bank accounts and setting up offshore trusts or providing fake loans.  But no jail for him.

The HSBC case follows the conviction of a former minister and Swiss bank UBS which had to pay a record 4.5 billion-euro fine  for criminal wrongdoings of “an exceptionally serious nature.”  And HSBC has only just paid 300 million euros to resolve allegations in the same case.  Again, in the UBS case all the bank executives involved avoided a prison sentence. French bank Societe Generale also agreed last year to pay 250 million euros to end a bribery case and French fund manager Carmignac Gestion said in June it would pay 30 million euros to settle a tax-fraud case.

But in banking, as in capitalism in general, it’s one rule for the elite and another for the rest of us.  On the day Deutsche Bank began making thousands of employees redundant, some managing directors at the company’s office in the City of London were being fitted for suits that cost at least £1,200. Tailors from Fielding & Nicholson, an upmarket tailor, were pictured walking out of the bank’s UK office with suit bags. Ian Fielding-Calcutt, the tailor’s founder, and Alex Riley were there to fit suits for senior managers in spite of plans to cut 18,000 jobs  worldwide. Deutsche’s chief executive, Christian Sewing, has repeatedly said how much he regretted the decision to scrap a fifth of his global workforce. But it did not stop him paying out E50m in golden handshakes to top executives since 2018.

Over at Standard Chartered, American CEO Bill Winters had no compunction about accepting a pension contribution worth 40% of his annual salary and perks worth £6m, 79 times the average employee salary.  When this was questioned, he said that shareholders of the bank were being ‘immature”.  “I think it’s quite appropriate for the board not to ask me to take a pay cut”, he added. “And they didn’t — I don’t think it ever occurred to them to ask.”

And so it goes on.  Ex-UBS Group AG investment banking head Andrea Orcel is suing Banco Santander SA for about 100 million euros ($113 million) after the Spanish bank reneged on an agreement to hire him as chief executive .  In return, Santander has accused Orcel of “dubious ethical and moral behaviour”. The 56-year-old Italian had been offered the top job at Santander last year and had already quit his post as head of UBS’s investment bank when the bank changed its mind in January, saying it could not meet his exorbitant pay demands.

Meanwhile, in the UK, Britain’s largest mutual society (not even a bank legally) revealed that its former CEO Graham Beale, in addition to his £885,000 salary, got a £292,000 annual pension allowance, a £1 million bonus and £500 a day to cover the cost of travel, security and medical expenses. His benefits from annual expenses alone came to £185,000, covered the cost of travel, security and medical expenses. He was handed almost £400,000 of perks since joining Nationwide. Luke Hildyard, executive director of the High Pay Centre, said: ‘It’s hypocritical for Nationwide to market themselves as a different kind of organisation to the big banks, and then lavish these kinds of sums of money on its executives. It’s hard to believe these payments were critical to the success of the business.’

Then there is reckless drive of profit.  The Bank of England has found widespread weaknesses among the UK’s challenger banks in stress tests that showed new lenders cutting corners in an aggressive pursuit of growth. A senior regulator at the central bank wrote to chief ordering them to tighten standards and correct “overly optimistic” risk modelling. The BoE found that many new lenders displayed an “inability to explain assumptions” in their stress-test models and an “aggressive” focus on growth, even though they tend to make riskier loans. It comes after a scandal at Metro Bank, which had to slash growth plans and turn to investors for a £375m emergency share issue after admitting it had misclassified loans and did not hold sufficient capital.

And as the the world economy slows, for the lower ranks, banking is looking less lucrative. Global investment banks are shedding tens of thousands of jobs as falling interest rates, weak trading volumes and the march of automation create a brutal summer for the sector. Almost 30,000 lay-offs have been announced since April at banks including HSBC, Barclays, Société Générale, Citigroup and Deutsche Bank. Most of the cuts have come in Europe, with Deutsche accounting for more than half the total, while trading desks have been hit hardest.

So nothing has changed at the top of banking globally: big salaries, bonuses, pensions for the top executives, in return for overseeing tax scams, fraud and corruption.  And then there is the real and rising risk of instability and collapse as banks continue to speculate in the ‘fictitious capital’ of ‘exotic’ financial instruments.  More proof that ‘regulation’ will not work and only public ownership of the finance sector under democratic control will deliver a banking service for investment and people’s needs.

The Handbook of Karl Marx: profitability, crises and financialisation

August 6, 2019

The Oxford Handbook of Karl Marx, edited by Matt Vidal, Tomas Rotta, Tony Smith and Paul Prew, brings together a series of chapters by prominent Marxist scholars covering all aspects Marxist theory, from historical materialism, dialectics, political economy, social reproduction and post-capitalist models.

The editors have done an excellent job in arranging the various contributions into sections on the foundations of Marxism, labour and class, the nature of capitalist crises, and post-capitalist alternatives.  And in an introduction, the editors offer a succinct and informative account of Marx’s life and intellectual development, as well as summaries of the chapter contributions.

It is not possible to comment on all the contributions in this 870pp handbook, so I’ll concentrate on the chapters that interest me most.  As you might expect, these are the contributions on the Marx’s theory of crises and modern developments in capitalism like so-called ‘financialisation thesis’ and the digital economy. That’s enough on its own.

I was particularly interested in the chapter on Reproduction and Crisis in Capitalist Economies by Deepankar Basu, from the University of Massachusetts, Amhurst.  In the past, Basu has done excellent empirical work on the rate of profit.  In this chapter Basu develops some arguments about Marx’s theory of crisis.  According to Basu, “The Marxist tradition conceptualizes two types of crisis tendencies in capitalism: a crisis of deficient surplus value and a crisis of excess surplus value. Two mechanisms that become important in crises of deficient surplus value are the rising organic composition of capital and the profit squeeze: two mechanisms that are salient in crises of excess surplus value are problems of insufficient aggregate demand and increased financial fragility. This chapter offers a synthetic and synoptic account of the Marxist literature on capitalist crisis.”

In other words, Basu seeks to reconcile Marx’s law of profitability with ‘profit squeeze’ theory, in particular with Nobuo Okishio’s theorem which disputes Marx’s law, and with the post-Keynesian ‘wage-led’ underconsumption theory of crises. In my view, this ambitious aim fails. Basu reckons that “The controversy between proponents of the “falling rate of profit” crisis tendency and the “problems of demand” crisis tendency that has raged on for decades seem, from the perspective of the analysis of this chapter, rather unproductive and even unnecessary. Capitalist economies are prone to both types of crises: the first when the system generates too little surplus value and the latter when it generates too much. There is no theoretical reason to believe that capitalist economies will be plagued by only one or only the other.”

In particular, Basu argues that “Much of this controversy also seems (with the benefit of hindsight) needless. There are no theoretical grounds to claim that due to technological change, the rate of profit will have a tendency to always fall (as Marx claimed) or that it will have a tendency to always rise (as Okishio claimed). A careful analysis shows that the impact of technological change on the rate of profit depends crucially on what happens in the labor market. If the real wage rate rises sharply during the period of technological change, then the rate of profit tends to fall; on the other hand, if the real wage rate does not rise fast enough, then the rate of profit might rise.”

In my book, Marx 200, I deal in more detail with Okishio’s refutation of Marx. But let’s dissect Basu’s argument here. There are very good theoretical grounds to claim that the average profitability of capital in a capitalist economy will tend to fall over time.  Marx held to this view and provided solid theoretical foundations for this; namely if value (and surplus value) is created only by the exploitation of labour power and if Marx’s general law of accumulation holds in that there is a tendency for the organic composition of capital to rise over time (ie capitalist invest more in machinery and technology relative to labour power); then the rate of profit will tend to fall.

Moreover, the counteracting factor of a rising rate of surplus value from the increased productivity of labour power using machinery will, over time, not match the rise in the organic composition and so the rate of profit will actually fall.  If the rate of profit does so sufficiently and for a sustained period, then eventually there will be over accumulation, a fall in the mass of profit; and a crisis in production will ensue.  The slump will devalue the value of fixed assets, liquidate uncompetitive capital and reduce labour costs through rising unemployment, thus laying the foundations for a rise in profitability.  And the whole circle will begin again.

This is Marx’s theory of crisis, of which Basu says “there are no theoretical grounds to claim”.  That conclusion was precisely the point of Okishio’s theorem, which purported to argue that capitalists would never invest in new technology unless it brought them a higher rate of profit.  Increased technology would lead to higher productivity of labour, which was immediately transformed into a higher rate of surplus value for each unit of production.  So the rate of profit would not fall but on the contrary would rise.  Only the class struggle, bringing about a rise in the real wage, would counteract that and cause the rate of profit to fall.

Okishio’s theorem has been refuted decisively by many authors – I refer you to the following, including recent authors and those in the Handbook itself
(http://digamo.free.fr/carchedi84.pdf; http://digamo.free.fr/carchedi91.pdf;http://digamo.free.fr/kliman2007.pdf; http://digamo.free.fr/moseley15.pdf; https://brill.com/view/title/32834; http://digamo.free.fr/yaffe72.pdf; http://gesd.free.fr/miller95.pdf; https://edgeorgesotherblog.wordpress.com/2013/07/04/but-still-it-falls-on-the-rate-of-profit; https://thenextrecession.wordpress.com/2013/07/25/returning-to-heinrich). And there is also plenty of empirical evidence showing the causal connection between a rising organic composition of capital and falling profitability.

And yet Basu claims he can reconcile Marx’s theory with Okishio’s theorem: “The idea that there is no necessary contradiction between the claims advanced by Marx and Okishio” because “the rate of profit falls or rises after the adoption of a new technique of production ultimately depends on how the real wage rate behaves”.  But the argument that the real wage decides the direction of profitability is not Marx’s.  Indeed, it is closer to Ricardo, which is why Okishio and previous theorists who argue something similar have been called ‘neo-Ricardian’.  There is no way that Marx’s theory of crisis can be reconciled with the ‘real wage’ or ‘profit squeeze’ theory of Ricardo.

Basu goes onto suggest that Marx’s theory of crisis can also be reconciled with the post-Keynesian theory that crises are caused by either low wages leading to a collapse in consumption or by low profits leading to a collapse in investment.  There is no space to deal with the post-Keynesian distribution of income theory here – it is yet another variant of the discredited underconsumption view of crises.  All I can add now is to note the facts.  In the US in every post-war slump, it has been investment not consumption that has led the economy into recession, and it has been a fall in profit and profitability that has led investment.  I remain puzzled why Basu deems it necessary to reconcile neo-Ricardian profit squeeze theory and post-Keynesian underconsumption theory with Marx’s theory of crisis, which in my opinion is theoretically clear and empirically supported.

At least Basu is attempting to develop a Marxist theory of crises under capitalism.  Leo Panitch and Sam Grindin, in their chapter on capitalist crises and the state, deny that there is any theory of crises at all: “the genesis, nature, and outcome of which are historically contingent and the resolution of which changes the terrain for the development of future crises. Crises are always historically specific.”  This view has been expressed before by Panitch and Gindin and by others like David Harvey.

As the P and G put it: “The weakness of a general theory that tries to encompass each of these crises lies in what is thereby obscured. As David Harvey (2008:24–25) has cautioned, “There is no singular theory of crisis formation within capitalism, just a series of barriers that throw up multiple possibilities for different kinds of crises,” each determined by a combination of specific conditions at a “particular historical moment.” This does not mean retreating to an eclectic description of conditions in those historical moments designated as crises. It rather means recognizing that capitalist development is a contradictory process prone to crises—the genesis, nature, and outcome of which are historically contingent and need to be investigated with the tools of historical materialism”.

In their view, they are taking a much more sophisticated view of capitalist crises with its layers than some crude single theory approach.  I have dealt with this argument in many places.  But let me add the simple comment of Mino Carchedi on this sophisticated approach: “if crises are recurrent and if they have all different causes, these different causes can explain the different crises, but not their recurrence. If they are recurrent, they must have a common cause that manifests itself recurrently as different causes of different crises. There is no way around the ”monocausality” of crises.”  We monocausal theorists have never denied that each crisis of capitalism has its own characteristics.

See my Amsterdam paper Presentation to the Third seminar of the FI on the economic crisis
and my post
https://thenextrecession.wordpress.com/2014/02/16/tendencies-triggers-and-tulips/. The trigger in 2008 was the huge expansion of fictitious capital that eventually collapsed when real value expansion could no longer sustain it, as the ratio of house prices to household income reached extremes.  I do not say that such different ‘triggers’ are not ‘causes’, but argue that behind them is a general cause of crisis: the law of the tendency of the rate of profit to fall.

But P and G go further.  They deny altogether any role in crises for Marx’s law of profitability: “there was always a basic problem with this concept; the many “counter-tendencies” that Marx himself adduced to explain why the tendency does not always manifest itself were, as often as not, the very substance of capitalism’s dynamics: that is, the development of new technologies and commodities, the emergence of new markets, international expansion, innovations in credit provision, not to mention state interventions of various kinds. Above all, it depended on whether the extraction of greater surplus value from labor could be counted on to offset falling profits. Insofar as this could not be secured, then “the falling tendency is nothing but the expression of popular struggles against exploitation.”

In other words, as with Basu, Marx’s general of law of accumulation of a rising organic composition of capital is countered by a rising rate of surplus value and the result is ‘indeterminate’ ie there is no theoretical reason that the former will overcome the latter and lead to falling profitability.  Marx was wrong.  And “mechanically” spouting on about and trying to measure the rate of profit (as some of us do) is a wasted exercise.  Again, this idea of indeterminacy, propagated by Paul Sweezy in the 1940s, by the neo-Ricardians in the 1970s and by Michael Heinrich and David Harvey currently can be refuted and has been done by many authors (as above), including me.

What matters for P and G in explaining crises is the strength of the working class not the profitability of capital: “a key factor in generating the conditions that led by 2007– 2008 to the greatest financial crisis since 1929 was the weakness of the working class. This is important for understanding why, in contrast to the other three crises, this crisis was not caused by a profit squeeze or collapse of investment due to overaccumulation as many Marxist economists have insisted    The “Great Financial Crisis” was triggered in the United States, where profits and investments had recovered by the late 1990s, and it was only after the financial meltdown of 2007–2008 that profits and investment declined.”

Here P and G argue that profitability was irrelevant to the Great Recession and only fell afterwards as a result not a cause.  This is an empirical argument and it is wrong. There is plenty of evidence that there was a fall in US profitability of capital and the mass of profits before the Great Recession started – indeed, profits led investment and investment led production and employment in and out of the Great Recession.  And see this recent analysis supporting this.

One of the Handbook’s editors, Matt Vidal, in his chapter Geriatric capital: stagnation and crisis in Western Capitalism, does use Marx’s law of profitability in his explanation of the collapse of ‘Fordism’, mass factory production from the 1970s.  But he too seems to want to reconcile Marx’s “convoluted” law of profitability with disproportion and underconsumptionist alternatives to deliver “stagnationist” tendencies in post-war capitalist economies.

At least, Vidal shows that Marx’s law of falling profitability is supported by empirical evidence. As he says: Evidence demonstrates that the profit rate decline was driven in part by a rising organic composition of capital in the United States (Shaikh 1987), Germany, the United Kingdom, and France (Duménil and Lévy 2004). The evidence also indicates that a profit squeeze due to an increasing labor share of income also contributed to the profit rate decline in the United States (Wolff 2003), Germany, the United Kingdom, France, Italy, and Japan (Glyn et al. 2007).”

Vidal argues (correctly in my view) that the reason economies have not restored real GDP, investment and productivity growth rates since the ‘golden age’ of ‘Fordism’ in the 1960s is because profitability of capital remains low.  So credit injections and monetary easing may have kept capitalism from collapsing but essentially stagnation is the main theme – expressing the “structural problems of an ageing capitalism”.

And then there is the brave attempt of Jeff Powell in his chapter to reconcile the ‘financialisation thesis’ with Marxian economic theory.  Readers of this blog will know that the ‘financialisation thesis is that capitalism has changed from the days of ‘Fordism’ when investment in productive assets was the driving force of capitalist accumulation for profit.  Now in the ‘neo-liberal’ era, capitalists no longer invest so much in productive assets and or exploit labour in the production process, but instead seek to speculate and profit in the financial sector and exploit working people through ‘usury’, ie mortgages, savings instruments, rents and taxes.

The financial sector now dominates and is the real enemy of working people and the productive sectors of the capitalist have been relegated by the power of finance capital.  Thus, crises in capitalism are now to be found not in the falling profitability of capitalism but in the ‘fragility’ of the reckless, debt ridden financial institutions that suffer ’Minsky moments’ not ‘Marx moments.’

Thus Powell says “Falling profitability can, at best, be a contributing but far from a driving factor of financialization. Indeed, the overriding concern of the TRPF advocates themselves seems to be less about asserting that falling profits cause financialization than arguing against the diametrically opposed post-Keynesian narrative that financialization causes falling profits.”  I think we should argue both.

Powell reckons that “there has been a secular shift in the role of finance in the period of late neoliberalism. This shift marks the emergence of a new stage of what can be called financialized capitalism, distinct (but intertwined with) processes of financialization. While the speculative excesses of finance that have accompanied this transformation abound, the key point here is that those excesses are by their very nature short-lived, while the emergence of a qualitatively different role for finance represents a structural shift emblematic of a new stage. Finance is providing a system of discipline and control necessary for capital accumulation in an era of globalized production networks.”  So, in this analysis, financialisation is indeed more than just the increase in the size of the financial sector and financial sector profits in neoliberal capitalism.  It is a new stage of capitalism, particularly expressed in international financial flows and production networks.

I am not convinced by Powell’s attempt to distinguish between financialisation as cyclical process (meaning it has older historical roots) and financialised capitalism as secular stage (meaning the contemporary capitalism with its supposedly new features).

I still prefer Marx’s explanation.  Capitalists need finance and credit to invest in and exploit labour; it is more efficient to have specialised credit players then raise finance internally or just use previous profits.  But when profitability falls, capitalists try to switch into financial speculation and investment to sustain profitability (as in the 1980s onwards).  But this leads to an explosion of ‘fictitious capital’, the buying and selling of bonds and stocks that are merely titles to the ownership of potential profits in production.  Fictitious capital can extend the financial market boom and give the appearance that finance is all powerful.  But the collapse of profitability and profits in the productive sectors will soon end that myth.

As Guglielmo Carchedi, in his excellent, but often ignored Behind the Crisis puts it: “The basic point is that financial crises are caused by the shrinking productive base of the economy. A point is thus reached at which there has to be a sudden and massive deflation in the financial and speculative sectors. Even though it looks as though the crisis has been generated in these sectors, the ultimate cause resides in the productive sphere and the attendant falling rate of profit in this sphere.”

In every slump in the US in the post-war period, a slump in profits in the productive sectors has brought about a slump in profits in finance and a recession.  If finance rules crises now, why have the major economies not recovered to previous growth rates in production, investment and wages post the Great Recession?  Because the financial sector has certainly recovered, with stock and bond markets at record highs.  No, productive sectors rule over finance in crises, not vice versa.

There are defenders of Marx’s value theory and his law of profitability in the Handbook, namely Andrew Kliman, Alan Freeman and Fred Moseley, but their chapters are on more fundamental explanations of Marx’s theory of value and the nature of capital.  But it seems that all the Marxist authors discussing crises under capitalism in the Handbook are determined to trash Marx’s law of profitability as an explanation, in favour of others or deny that there is any general theory of crises at all.

That will do for now, but I plan to return to the Handbook to consider the arguments presented in a chapter by Tomas Rotta on the nature of profits and the ‘commodification of knowledge’ in the digital economy.  Is Marx’s value theory still relevant when the knowledge is ‘costless’ and how does knowledge enter the capitalist accumulation process?

US profits revision

July 29, 2019

Last Friday, the US real GDP growth figures for the second quarter of 2019 were released.  The annualised rate of real GDP growth slowed in Q2 to 2.1% from 3.1% in the first quarter.  This was the slowest growth rate since the end of 2016.

US real GDP was 2.3% higher than in the same quarter last year ie (Q2 2018), down from 2.7% yoy in Q1 2019 and recording the lowest yoy growth rate for two years.

So it seems that the boost to US growth, supposedly promoted by President Trump’s corporate tax cuts and exemptions, has run its course and US growth is back to the average of the last ten years, with the prospect of further slowing in the second half of this year.

And why is a further slowdown likely, perhaps even to the point of recession?  We can find clues in the second quarter data.  The main contributors to the slowdown came from weakening investment, particularly productive investment in equipment and structures; and from falling net exports or trade, as the trade war with China bites.

The 0.6% drop in business investment was the first decline since the first quarter of 2016. And that drop was led by a 10.6% decline in investment in structures, ironically the category of investment that should have received the largest boost from the tax cut.

Investment in new buildings and factories is now down by 4.6% from its year ago level. Equipment investment rose by just 0.7% after a 0.1% fall in the first quarter. The pace of investment in so-called intellectual products or computer software also slowed sharply, slowing to 4.7%, after double-digit increases in the prior two quarters (driven by Trump’s tax exemptions).  Exports fell at a 5.2% annual rate.

But the most interesting part of the GDP report was the revision to the past three years data.  The revised data showed that real GDP growth was substantially slower for 2018 than previously reported, with the growth from the fourth quarter of 2017 to the fourth quarter of 2018 just 2.5%, well below the administration’s projection at the time of the Trump tax cut.

But most important in my mind were the downward revisions to corporate profits.  Instead of corporate profits rising by some 20% in the last three years, it seems that profits have actually fallen and are now lower than they were in 2014!  Corporate profits were revised up $1.4 billion, or 0.1% for 2014, revised up $4.3 billion, or 0.2% for 2015, but revised down $23.5 billion, or -1.2%, for 2016, and a whopping $93.3 billion, or -4.4% for 2017, and $188.1 billion, or -8.3% for 2018.

Overall corporate profits have suffered two successive quarterly declines, both before and after tax up to Q1 2019 (the second quarter figures will be released at the end of August).  US corporate profits are now 2% below where they were at the beginning of 2018.

Even before these revisions, non-financial sector corporate profits have been falling over the last five years.  What this means is that while speculative or fictitious profits from investment in financial assets have increased sharply, especially with Trump’s tax cuts, profits in the productive sector of the US economy have stagnated at best.

Now I have argued in this blog and in many papers that there is a strong correlation between profits and investment in modern capitalist economies – after all, capitalist production is for profit not need and so investment in production must be profitable or it will eventually slow or stop.  And there is plenty of evidence that this simple idea is correct.  Not only is the correlation between profit growth and investment growth high, but the causal direction from profits to investment with a lag (on average of about a year) is also supported in empirical research.

When profits dropped in the ‘mini-recession’ of 2015-16 (mainly due to the collapse in oil prices), investment followed.

Now it seems that profits in unproductive sectors like finance and real estate are beginning to suffer.  Financial profits are about 25% of total corporate profits and they have been broadly stagnant over the last year.  If they should fall, as well as non-financial sector profits, that may well generate a stock market collapse in the second half of this year.

Up to now, the Trump tax cuts and the prospect that the Federal Reserve is going to cut its interest rate (probably this week) – the so-called ‘Powell put’ – has buoyed the US stock market to new record highs.

But the effect of that may wear over the next few months as investors begin to see the earnings results of the major companies.  And any stock market ‘correction’ typically leads the ‘real economy’ by up to three quarters.