Archive for the ‘marxism’ Category

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

April 25, 2017

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Bill Gates and 4bn in poverty

April 5, 2017

Is global poverty falling or rising?  Realistic estimates calculate that there are over 4 billion people in poverty in this world, or two-thirds of the population.  And yet, in their latest ‘public letter’ to us all, Bill and Melinda Gates, the richest family in the world, issued last month, were keen to tell us that the battle against global poverty was being won, as those living on less than $1.25 day had been cut by half since 1990.  How do we reconcile these two estimates?

Back in 2013, the World Bank released a report that there were 1.2bn people living on less than $1.25 a day, one-third of whom were children.  This compares with America’s poverty line of $60 a day for a family of four. But, according to the World Bank, things are getting better, with 720m less people on this very low threshold for poverty compared to 1981.  And Nobel prize winner Angus Deaton has emphasised that life expectancy globally has risen 50% since 1900 and is still rising. The share of people living on less than $1 a day (in inflation-adjusted terms) has dropped to 14 percent from 42 percent as recently as 1981. A typical resident of India is only as rich as a typical Briton in 1860, for example, but has a life expectancy more typical of a European in the mid-20th century. The spread of knowledge, about public health, medicine and diet, explains the difference.

However, when we delve into the data more closely, there is a less optimistic story.  Martin Kirk and Jason Hickel were quick to take the Gates’ to task on the arguments in their letter.  The Gates “use figures based on a $1.25 a day poverty line, but there is a strong scholarly consensus that this line is far too low…..Using a poverty line of $5 per day, which, even the UN Agency for Trade and Development suggests this is the bare minimum necessary for people to get adequate food to eat and to stand a chance of reaching normal life expectancy, global poverty measured at this level hasn’t been falling. In fact, it has been increasing – dramatically – over the past 25 years to over 4bn people, or nearly two-thirds of the world’s population.”

The World Bank has now raised its official poverty line to $1.90 a day.  But this merely adjusts the old $1.25 figure for changes in the purchasing power of the US dollar.  But it meant that global poverty was reduced by 100m people overnight.

And as Jason Hickel points out, this $1.90 is ridiculously low.  A minimum threshold would be $5 a day that the US Department of Agriculture calculated was the very minimum necessary to buy sufficient food. And that’s not taking account of other requirements for survival, such as shelter and clothing.  Hickel shows that in India, children living at $1.90 a day still have a 60% chance of being malnourished. In Niger, infants living at $1.90 have a mortality rate three times higher the global average.

In a 2006 paper, Peter Edward of Newcastle University uses an “ethical poverty line” that calculates that, in order to achieve normal human life expectancy of just over 70 years, people need roughly 2.7 to 3.9 times the existing poverty line.  In the past, that was $5 a day. Using the World Bank’s new calculations, it’s about $7.40 a day. That delivers a figure of about 4.2 billion people live in poverty today. Or up 1 billion over the past 35 years.

Now other experts argue that the reason there are more people in poverty is because there are more people!  The world’s population has risen in the last 25 years.  You need to look at the proportion of the world population in poverty and at a $1.90 cut-off, the proportion under the line has dropped from 35% to 11% between 1990 and 2013. So the Gates’ were right after all, goes the argument.  But this is disingenuous, to say the least.  The number of people in poverty, even at the ridiculously low threshold level of $1.25 a day, has increased, even if not as much as the total population in the last 25 years.  And even then, all this optimistic expert evidence is really based on the dramatic improvement in average incomes in China (and to a lesser extent in India).

In his paper, Peter Edward found that there were 1.139bn people getting less than $1 a day in 1993 and this fell to 1.093bn in 2001, a reduction of 85m.  But China’s reduction over that period was 108m (no change in India), so all the reduction in the poverty numbers was due to China.  Exclude China and total poverty was unchanged in most regions, while rising significantly in sub-Saharan Africa.  And, according to the World Bank, in 2010, the “average” poor person in a low-income country lived on 78 cents a day in 2010, compared to 74 cents a day in 1981, hardly any change.  But this improvement was all in China. In India, the average income of the poor rose to 96 cents in 2010, compared to 84 cents in 1981, while China’s average poor’s income rose to 95 cents, compared to 67 cents.  China’s state-run, still mainly planned, economy saw its poorest people make the greatest progress.

Poverty levels should not be confused with inequality of incomes or wealth.  On the latter, the evidence of rising inequality of wealth globally is well recorded and it’s the same story.  If you take China out of the figures, global inequality, however, you measure it, has been rising in the last 30 years.  The global inequality ‘elephant’ presented by Branco Milanovic found that the 60m or so people who constitute the world’s top 1% of income ‘earners’ have seen their incomes rise by 60% since 1988. About half of these are the richest 12% of Americans. The rest of the top 1% is made up by the top 3-6% of Britons, Japanese, French and German, and the top 1% of several other countries, including Russia, Brazil and South Africa. These people include the world capitalist class – the owners and controllers of the capitalist system and the strategists and policy makers of imperialism.

But Milanovic also found that those who have gained income even more 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 in African rural farmers) who have gained nothing in 20 years.

The empirical evidence supports Marx’s view that, under capitalism, an ‘amiseration of the working class’ (impoverishment) would take place, and refutes the Gates’ Letter that things are getting better.  Any improvement in poverty levels, however measured, is down to rising incomes in state-controlled China and any improvement in the quality and length of life comes from the application of science and knowledge through state spending on education, on sewage, clean water, disease prevention and protection, hospitals and better child development.  These are things that do not come from capitalism but from the common weal.


150 years since Capital was published – a special symposium

March 31, 2017

Karl Marx published the first volume of his life work, Capital: A Critique of Political Economy, in September 1867. Together with Volumes II and III, published after Marx’s death by Friedrich Engels, this book remains the most profound and challenging study of the logic of the capitalist system that still dominates our lives.

Karl Marx, the German born socialist philosopher, economist and writer. c.1867

To discuss Volume One, in conjunction with King’s College, London, I have organised a special conference to take place almost exactly at the same week as Volume One was published 150 years ago and very near to where Marx researched and wrote it.

150 years after the first appearance of Capital Volume I, that system is grappling with the effects of one of the greatest crises in its history and the resulting political instability. Many have turned to Marx’s Capital seeking to understand the present conjuncture. But Marx never finished this work, and the recent publication of his manuscripts has revealed both the immensity and the complexity of his project.

Within walking distance of the British Museum, where Marx conducted his research, this conference seeks to interrogate his project in the light of the present. It brings together from around the world some of the leading practitioners in the Marxist critique of political economy to explore the relevance of Capital to issues such as crisis, imperialism, social reproduction, class struggles, and communism. The conference is organized with the aim of maximizing debate that can help clarify what Capital means today.

The British Museum: The Reading Room. Illustration for The Queen’s London (Cassell, 1896).

Given that the speakers will include David Harvey, Paul Mattick, Michael Heinrich, Fred Moseley, Guglielmo Carchedi; among others like Tithi Bhattacharya, Eduardo da Motta e Albuquerque,Tony Norfield, Lucia Pradella,Beverly Silver,Raquel Varela and yours truly; it should be a cracker of a conference.

For more details, see:

Watch this space for more discussion on the issues and ideas that will become themes at the symposium.



Keynes, civilisation and the long run

March 27, 2017

Keynesian economics dominates on the left in the labour movement.  Keynes is the economic hero of those wanting to change the world; to end poverty, inequality and continual losses of incomes and jobs in recurrent crises.  And yet anybody who has read the posts on my blog knows that Keynesian economic analysis is faulty, empirically doubtful and its policy prescriptions to right the wrongs of capitalism have proved to be failures.

In the US, the great gurus of opposition to the neoliberal theories of Chicago school of economics and the policies of Republican politicians are Keynesians Paul Krugman, Larry Summers and Joseph Stiglitz or slightly more radical Dean Baker or James Galbraith. In the UK, the leftish leaders of the Labour party around Jeremy Corbyn and John McDonnell, self-proclaimed socialists, look to Keynesian economists like Martin Wolf, Ann Pettifor or Simon Wren Lewis for their policy ideas and analysis.  They bring them onto their advisory councils and seminars.  In Europe, the likes of Thomas Piketty rule.

Those graduate students and lecturers involved in Rethinking Economics, an international attempt to change the teaching and ideas away from neoclassical theory, are led by Keynesian authors like James Kwak or post-Keynesians like Steve Keen, or Victoria Chick or Frances Coppola.  Kwak, for example, has a new book called Economism, which argues that the economic faultline in capitalism is rising inequality and the failure of mainstream economics is in not recognising this.  Again the idea that inequality is the enemy, not capitalism as such, exudes from the Keynesians and post-Keynesians like Stiglitz, Kwak, Piketty or Stockhammer, and dominates the media and the labour movement.  This is not to deny the ugly importance of rising inequality, but to show that a Marxist view of this does not circulate.

Indeed, when the media wants to be daring and radical, publicity is heaped on new books from Keynesians or post-Keynesian authors, but not Marxists. For example, Ann Pettifor of Prime Economics has written a new book, The Production of Money, in which she tells us that “money is nothing more than a promise to pay” and that as “we’re creating money all the time by making these promises”, money is infinite and not limited in its production, so society can print as much of its as it likes in order to invest in its social choices without any detrimental economic consequences.  And through the Keynesian multiplier effect, incomes and jobs can expand.  And “it makes no difference where the government invests its money, if doing so creates employment”.  The only issue is to keep the cost of money, interest rates as low as possible, to ensure the expansion of money (or is it credit?) to drive the capitalist economy forward.  Thus there is no need for any change in the mode of production for profit, just take control of the money machine to ensure an infinite flow of money and all will be well.

Ironically, at the same time, leading post-Keynesian Steve Keen gets ready to deliver a new book advocating the control of debt or credit as the way to avoid crises.  Take your pick: more credit money or less credit.  Either way, the Keynesians drive the economic narrative with an analysis that reckons only the finance sector is the causal force in disrupting capitalism.

So why do Keynesian ideas continue to dominate?  Geoff Mann provides us with an insightful explanation.  Mann is director of the Centre for Global Political Economy at Simon Fraser University, Canada.  In a new book, entitled In the Long Run We are all Dead, Mann reckons it is not that Keynesian economics is seen as correct.  There have been “powerful Left critiques of Keynesian economics from which to draw; examples include the work of Paul Mattick, Geoff Pilling and Michael Roberts (thanks – MR)” (p218), but Keynesian ideas dominate the labour movement and among those opposed to what Mann calls ‘liberal capitalism’(what I would call capitalism) for political reasons.

Keynes rules because he offers a third way between socialist revolution and barbarism, i.e. the end of civilisation as we (actually the bourgeois like Keynes) know it.  In the 1920s and 1930s, Keynes feared that the ‘civilised world’ faced Marxist revolution or fascist dictatorship.  But socialism as an alternative to the capitalism of the Great Depression could well bring down ‘civilisation’, delivering instead ‘barbarism’  – the end of a better world, the collapse of technology and the rule of law, more wars etc.  So he aimed to offer the hope that, through some modest fixing of ‘liberal capitalism’, it would be possible to make capitalism work without the need for socialist revolution.  There would no need to go where the angels of ‘civilisation’ fear to tread.  That was the Keynesian narrative.

This appealed (and still appeals) to the leaders of the labour movement and ‘liberals’ wanting change.  Revolution was risky and we could all go down with it.  Mann: “the Left wants democracy without populism, it wants transformational politics without the risks of transformation; it wants revolution without revolutionaries”. (p21).

This fear of revolution, Mann reckons, was first exhibited after the French revolution.  That great experiment in bourgeois democracy turned into Robespierre and the terror; democracy turned into dictatorship and barbarism – or so the bourgeois myth goes. Keynesian economics offers a way out of the 1930s depression or the Long Depression now without socialism.  It is the third way between the status quo of rapacious markets, austerity, inequality, poverty and crises and the alternative of social revolution that may lead to Stalin, Mao, Castro, Pol Pot and Kim Jong-Un.  It is such an attractive ‘third way’ that Mann professes that it even appeals to him as an alternative to the risk that revolution will go wrong (see his last chapter, where Marx is portrayed as the Dr Jekyll of Hope and Keynes as the Mr Hyde of fear).

As Mann puts it, Keynes reckoned that, if civilised experts (like himself) dealt with the short-run problems of economic crisis and slump, then the long-run disaster of the loss of civilisation could be avoided.  The famous quote that makes the title of Mann’s book, that ‘in the long run we are all dead’, was about the need to act on the Great Depression with government intervention and not wait for the market to right itself over time, as the neoclassical (‘classical’ Keynes called it) economists and politicians thought.  For “this long run is a misleading guide to current affairs.  In the long run we are all dead.  Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past, the ocean is flat again” (Keynes).  You need to act on the short term problem or it will become a long-term disaster. This is the extra meaning of the long run quote: deal with depression and economic crises now or civilisation itself will come under threat from revolution in the long run.

Keynes liked to consider the role of economists as like dentists fixing a technical problem of toothache in the economy (“If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid”). And modern Keynesians have likened their role as plumbers, fixing the leaks in the pipeline of accumulation and growth. But the real method of political economy is not that of a plumber or dentist fixing short-run problems.  It is of a revolutionary social scientist (Marx), changing it for the long term. What the Marxist analysis of the capitalist mode of production reveals is that there is no ‘third way’ as Keynes and his followers would have it. Capitalism cannot deliver an end to inequality, poverty, war and a world of abundance for the common weal globally, and indeed avoid the catastrophe of environmental disaster, over the long run.

Like all bourgeois intellectuals, Keynes was an idealist.  He knew that ideas only took hold if they conformed to the wishes of the ruling elite. As he put it, “Individualism and laissez-faire could not, in spite of their deep roots in the political and moral philosophies of the late eighteenth and early nineteenth centuries, have secured their lasting hold over the conduct of public affairs, if it had not been for their conformity with the needs and wishes of the business world of the day…These many elements have contributed to the current intellectual bias, the mental make-up, the orthodoxy of the day.” Yet he still really believed that a clever man like him with forceful ideas could change society even it was against the interests of those who controlled it.

The wrongness of that idea was brought home to him in his attempts to get the Roosevelt administration to adopt his ideas on ending the Great Depression and for the political elite to implement his ideas for a new world order after the world war.  He wanted to set up ‘civilised’ institutions to ensure peace and prosperity globally through international management of economies, currencies and money. But these ideas of a world order to control the excesses of unbridled laisser-faire capitalism were turned into institutions like the IMF, World Bank and the UN Council used to promote the policies of imperialism, led by America.  Instead of a world of ‘civilised’ leaders sorting out the problems of the world, we got a terrible eagle astride the globe, imposing its will.  Material interests decide policies, not clever economists.

Indeed, Keynes, the great idealist of civilisation turned into a pragmatist at the post-war Bretton Woods meetings, representing not the world’s masses, or even of a democratic world order, but the narrow national interests of British imperialism against American dominance. Keynes told the British parliament that the Bretton Woods deal was not “an assertion of American power but a reasonable compromise between two great nations with the same goals; to restore a liberal world economy”. Other nations were ignored, of course.

To avoid the situation where in the long run we are all dead, Keynes reckoned that you must sort out the short run.  But the short run cannot be sorted to avoid the long run.  Deliver full employment and all will be well, he thought.  Yet, now in 2017, we have near ‘full employment’ in the US, the UK, Germany and Japan and all is not well. Real wages are stagnating, productivity is not rising and inequalities are worsening.  There is a Long Depression now and no end to apparent ‘secular stagnation’.  Of course, the Keynesians says that this is because Keynesian policies have not been implemented.  But they have not (at least not fiscal spending) because ideas do not triumph over dominant material interests, contrary to Keynes.  Keynes had it upside down; in the same way that Hegel had it upside down.  Hegel reckoned that it was the conflict of ideas that led to conflict in history, when it was the opposite.  History is the history of class struggle.

And anyway, Keynes’ economic prescriptions are based on fallacy.  The long depression continues not because there is too much capital keeping down the return (‘marginal efficiency’) of capital relative to the rate of interest on money.  There is not too much investment (business investment rates are low) and interest rates are near zero or even negative. The long depression is the result of too low profitability and so not enough investment, thus keeping down productivity growth.  Low real wages and low productivity are the cost of ‘full employment’, contrary to all the ideas of Keynesian economics.  Too much investment has not caused low profitability, but low profitability has caused too little investment.

What Mann argues is that Keynesian economics dominates the left despite its fallacies and failures because it expresses the fear that many of the leaders of the labour movement have about the masses and revolution.  In his new book, James Kwak quotes Keynes: “For the most part, I think that Capitalism, wisely managed, can probably be made more efficient for attaining economic ends than any alternative system yet in sight, but that in itself it is in many ways extremely objectionable. Our problem is to work out a social organisation which shall be as efficient as possible without offending our notions of a satisfactory way of life.”  Kwak comments: “That remains our challenge today. If we cannot solve it, the election of 2016 (Trump) may turn out to be a harbinger of worse things to come.”  In other words, if we cannot manage capitalism, things could be even worse.

Behind the fear of revolution is the bourgeois prejudice that to give power to ‘the masses’ means the end of culture, scientific progress and civilised behaviour.  Yet it was the struggle of working people over the last 200 years (and before) that got all those gains of civilisation that the bourgeois is so proud of.  Despite Robespierre and the revolution’s ‘devouring of its own children’ (a term used by pro-aristocrat Mallet du Pan and adopted by the British conservative bourgeois, Edmund Burke), the French revolution opened up the expansion of science, technology in Europe. It ended feudalism, religious superstition and inquisition and introduced Napoleonic laws.  If it had not taken place, France would have suffered more generations of feudal profligacy and decline.

As we note that it is 100 years this month since the start of the Russian revolution, we can consider the counterfactual.  If the Russian revolution had not taken place, then Russian capitalism may have industrialised a little, but would have become a client state of British, French and German capital and many millions more would have been killed in a pointless and disastrous world war that Russia would have continued to participate in. Education of the masses and the development of science and technology would have been held back; as they were in China, which remained in the grip of imperialism for another generation or more. If the Chinese revolution had not taken place in 1949, China would have remained a client comprador ‘failed state’, controlled by Japan and the imperialist powers and ravaged by Chinese war lords, with extreme poverty and backwardness.

Keynes was a bourgeois intellectual par excellence.  His advocacy of ‘civilisation’ meant bourgeois society to him.  As he put it: “the class war will find me on the side of the educated bourgeoisie.”  There was no way he support socialism, let alone revolutionary change because preferring the mud to the fish, it exalts the boorish proletariat above bourgeois and the intelligentsia who, whatever their faults, are the quality in life and surely carry the seeds of all human advancement?”

Indeed, economically, in his later years, he praised the very laisser-faire ‘liberal’ capitalism that his followers condemn now.  In 1944, he wrote to Friedrich Hayek, the leading ‘neo-liberal’ of his time and ideological mentor of Thatcherism, in praise of his book, The Road to Serfdom, which argues that economic planning inevitably leads to totalitarianism: “morally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement with it, but in a deeply moved agreement.”

And Keynes wrote in his very last published article, “I find myself moved, not for the first time, to remind contemporary economists that the classical teaching embodied some permanent truths of great significance. . . . There are in these matters deep undercurrents at work, natural forces, one can call them or even the invisible hand, which are operating towards equilibrium. If it were not so, we could not have got on even so well as we have for many decades past.”  

Thus classical economics and a flat ocean returns.  Once the storm (of slump and depression) has passed and the ocean is flat again, bourgeois society can breathe a sigh of relief.  Keynes the radical turned into Keynes the conservative after the end of Great Depression. Will the Keynesian radicals become mainstream conservatives when the Long Depression ends?

We shall indeed all be dead if we do not end the capitalist mode of production.  And that will require a revolutionary transformation.  A tinkering with the supposed faults of ‘liberal’ capitalism will not ‘save’ civilisation – in the long run.

Getting a level playing field

March 6, 2017

Financial markets may be booming in the expectation that the US economy will grow faster under President Trump.  But they forget that the main emphasis of Trump’s programme, in so far as it is coherent, is to make America great again by imposing tariffs and other controls on imports and forcing US companies to produce at home – in other words, trade protectionism.  This is to be enforced by new laws.

That brings me to discuss the role of law in trying to make the capitalist economy work better for the interests of capital.  It’s an area that has been badly neglected.  How is the law used to protect the interests of capital against labour; national capital interests against foreign rivals; and the capitalist sector as a whole against monopoly interests?

Last year, there were a number of books that came out that helped to enlighten us both theoretically and empirically on the laws of motion of capitalism. But I think I missed one.  It’s The Great Leveller by Brett Christophers.  Christophers is a Professor in Human Geography at Uppsala University, Sweden.  His book takes a refreshingly new angle on the nature of crises under capitalism.  He says that we need to look at how capitalism is continually facing a dynamic tension between the underlying forces of competition and monopoly.  Christopher argues that in this dynamic, law and legal measures have an underappreciated role in trying to preserve a “delicate balance between competition and monopoly”, which is needed to “regulate the rhythms of capitalist accumulation”.

Christophers reckons this monopoly/competition imbalance is an important contradiction of capitalism that has been neglected or not developed enough.  It may not be the only contradiction but it is an important one that the law (imperfectly) works on.  Indeed, uneven and combined development is an inherent feature of capitalism.

Christophers argues that corporate laws swing from one aim to another, depending on the needs of capital in any particular period.  Thus, in certain periods, anti-trust legislation (breaking up monopolies) dominates legal economic thinking; at others, it is patenting and protecting ‘intellectual property’ (monopoly rights).  The law is a “great leveller”, aiming to keep a balance between too much competition and too much monopoly.

I’m reminded of the recent period prior to the global financial crash and the Great Recession.  The tone of the day was to ‘deregulate’, particularly in the financial sector, to allow new financial products (derivatives) to expand ‘financial diversification’ (competition).  The dangers of this ‘excessive risk-taking’ and uncontrolled ‘competition’ were brought to the attention of the ‘powers that be’ at the annual Federal Reserve Jackson Hole central bankers symposium of 2005 by Raghuram Rajam, then a professor at Harvard and later head of the Reserve Bank of India.  He presented a paper that questioned the reduced banking controls introduced by Clinton’s advisers, Robert Rubin and Larry Summers in the late 1990s.  Immediately he was attacked by Summers as a ‘Luddite’, holding back progress and competition.  Of course, after the Great Recession, Summers became a leading supporter of banking regulation and of the Dodd-Frank banking regulation laws.

The balance between competition and monopoly is the main theme of Christophers’ book.  In my view, contrary to the view of the Monthly Review school, who follow Paul Sweezy’s characterisation of modern capital as ‘monopoly capitalism’, monopoly is not the dominant order of capitalism: competition is – at least what Shaikh calls ‘real competition’, in his huge Capitalism.  The continual battle to increase profit and the share of the market means monopolies are continually under threat from new rivals, new technologies and international competitors. 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).

Brett Christophers understands well this dialectical dynamic in capitalism.  In his excellent theoretical chapter 1 on Competition, he rejects the monopoly capital theory.  “Monopoly produces competition, competition produces monopoly” (Marx).  The law plays a key role in trying to achieve a balance between the inherently unstable and precarious forces of centralisation and decentralisation that Marx prognosticated.

However, Christopher seems a little ambiguous or ‘soft’ on the theoretical explanations offered for the inherently unstable nature of capitalism.  He appears to accept the view that (underlying) causes of capitalist instability cannot be found in the capitalist mode of production but, as Marxist David Harvey has argued, must really be found in the full circuit of capital (production, distribution and circulation).  To emphasise, as Marx did himself, the production of surplus value at the core of crises and imbalances is to be “productivist” (Jim Kincaid) and to exclude the “chaotic singularities of consumption” (Harvey).  The “anarchy of capitalism” is to be found in competition and exchange, not in the exploitation of labour in production (Bob Jessop).

Well maybe, but this leaves Christophers open to the massaging of Marx’s value theory so that no marks are left.  First, he appears to accept Harvey’s view that value can be created in exchange or even consumption (p74).  Second, he appears to follow the view of post-Keynesian Michal Kalecki that profits are the result of the degree of monopoly or ‘rent-seeking’, thus dismissing Marx’s clear view that new value only comes from the exploitation of labour, not from monopolistic power.   Then there is the reference to the work of mainstream economist Edward Chamberlin’s theory imperfect competition, an extension of neoclassical marginal equilibrium theory.  Marx’s value theory as the basis of the laws of accumulation of capital and competition among capitals has been ignored or chipped away by these authors.

But this is perhaps another debate.  The theme that Christophers highlights is the role of the law in evening out the anarchic swings between excessive monopoly and ruinous competition in different periods of capitalism.  This is a new insight.  As Christophers says, this is a “work of levelling not plugging” to achieve “ongoing growth – in a relatively stable fashion”.  Even that seems a generous concession to the efficacy of competition law between capitals in maintaining stable expansion and accumulation under capitalism.  Do we not note over 50 slumps or recessions in the last 200 years and three huge depressions under the capitalist mode of production, where legislation on banking, corporate monopolies, patents and intellectual property did not work in preserving ‘harmony’?

In a series of well-researched chapters, Christophers outlines the detail in the swings between monopoly and competition according to the conditions of capitalist development. He makes a convincing case for arguing that the first case of ‘legal leveling’ began at the outset of 20th century after a period of excessive competition threatened to drive capitalism into a deflationary spiral.  Legal support for monopoly powers to protect profits dominated between the world wars.  After the second world war, competition came to the fore in order to help innovation and new industries.  In turn, the neo-liberal period from the 1980s, the laws of patent and intellectual property increasingly superseded the anti-trust legislation of Golden Age of the 1960s and 1970s.

This is a powerful narrative but it is also raises questions of causation.  Should we not see company and competition laws as reactions to changes in the health of capital accumulation, rather than something that (successfully?) evens out the upswings and downswings of capitalist expansion? Christophers reckons that the profitability of capital has been “remarkably consistent” since 1945, with an average of corporate profits to GDP of 10% in the last 70 years, which “rarely strayed far from this mean” (p2).  But profits to GDP are not the measure of the profitability of capital (at least in Marxist terms) and even so there has been a wide divergence (6-14%).  All the proper measures of US profitability show a secular decline since 1945, not stability; and in particular, a fall from the 1960s to the 1980s followed by a rise during the neo-liberal period 1980-00 – and a small decline, subsequently to date (see my book, The Long Depression).

This suggests to me that corporate and competition law is more like another counteracting factor designed to react to the health and profitability of capital in the same way as globalisation, attacks on the trade unions and privatisations that we saw from the 1980s – in an attempt (partially successful) to raise profitability of capital as a whole.  After all, it is the level of profitability for capital as a whole which is key to the degree and frequency of crises rather than the sharing out of profit among capitals.

Marx argued that, as capital accumulates, it will experience regular and recurring crises of production and exchange, slumps we call them.  They occur because accumulation leads, over time, to a fall in profitability and profits, forcing capitalists into an investment ‘strike’.  However, Marx also outlined several counteracting factors to this law of the tendency of the rate of profit to fall:  greater exploitation, cheaper technology, expanding foreign trade; speculation in financial assets.  Law could be seen as another counteracting factor, introduced to curb either the excesses of ‘ruinous competition’ in driving down prices and profitability (i.e. helping to protect super profits from innovation or monopoly power); or to break down too much ‘monopoly control’ that could hamper profitability for more efficient smaller capitals or from new technology.

Indeed, one area of law that is missing from Christophers’ otherwise comprehensive analysis is labour law.  One big area of capitalist law is designed to ensure the dominance of capital in the workplace and over the production and control of surplus value.  These are even more important to capital than the laws designed to level the playing field between capitalists.

As we approach the 150th anniversary of the publication of Volume One of Marx’s Capital, we can remember that Marx spent much time recounting the role of law and regulation (inspector reports) in the struggle to protect and improve the conditions and hours of workers in Victorian factories and work places.  The battle for the 10-hour day and getting children out of dark satanic mills and mines etc.

It is no accident that the Trump administration is looking to deregulate banking and reduce environmental regulations, not to help small businesses against monopolies, but instead business in general against labour and the cost of people’s health.  Take the right to work laws of the last 30 years or more.  Following decades of declining membership, unions face an existential crisis as right-to-work laws being pushed at state and federal levels would ban their ability to collect mandatory fees from the workers they represent, a key source of revenue for organized labour.  In their first weeks in office, the new Republican governors of Kentucky and Missouri have already signed right-to-work laws, making them the 27th and 28th states, respectively, to ban mandatory union fees.

On the first page of his book, Christophers rightly highlights the comments that Keynesian guru Paul Krugman made on his blog back in 2012.  Inequality of incomes had risen sharply in the neoliberal period and the average wages of non-supervisory workers had stagnated.  The share of value going to capital had risen.  “So the story has totally shifted; if you want to understand what’s happening to income distribution in the 21st century economy, you need to stop talking so much about skills, and start talking much more about profits and who owns the capital. Mea culpa: I myself didn’t grasp this until recently. But it’s really crucial.” (Krugman)  The amiseration of the working class, as Marx called this relative poverty, appeared to be borne out.  As Krugman said, “isn’t that an old fashioned sort of Marxist discussion?”

As Christophers explains, Krugman offered two possible reasons for this amiseration: either growing monopoly profits of ‘robber barons’ (the Kalecki argument) or technology displacing labour with the means of production (the Marxist argument of labour-saving and ‘capital bias’).  The latest research on the causes of the long-term fall in US manufacturing employment alongside rising output shows that the Marxist explanation is more convincing than the Kalecki ‘monopoly rents’ one.

It’s not monopoly power or rising rents going to the ‘robber barons’ of the monopolies that forced down labour’s share, it’s just (‘real competition’) capitalism.  Labour’s share in the capitalist sector in the US and other major capitalist economies is down because of increased technology and ‘capital bias’, from globalisation and cheap labour abroad; from the destruction of trade unions; from the creation of a larger reserve army of labour (unemployed and underemployed); and from ending of work benefits and secured tenure contracts etc (labour laws).  Companies that are not monopolies in their markets probably did more of this than the big firms.

Christophers only deals with international trade law in passing, as his perceptive analysis concentrates on concentration and centralisation within national economies.  But “The Donald” is concentrating his enviable skills and focus on international law to revoke trade agreements; control the movement of labour across borders and impose tariffs and restrictions on rival powers’ exports etc.  The irony is that this will do nothing to restore manufacturing jobs and incomes in the US – quite the contrary.  No great levelling there.

Perhaps the real great leveller under capitalism is not so much laws designed to level the playing field among competing capitals –important as Christophers has shown that it is.  The real leveller is capitalist crises themselves.  In another new book, also coincidentally called The Great Leveller, Walter Scheidel, a Stanford University historian, argues that what really reduces inequality is catastrophe – either epidemics, wars or massive economic depressions.  It is a simple and perhaps crude idea.  But it is certainly true that the Great Depression of the 1930s cleansed capitalism of its unproductive and inefficient capitals and massively weakened labour to create conditions for new levels of profitability.  And the world war itself destroyed capital values (and physical capital) and introduced new military-induced technologies to exploit new layers of the global working class in the post-war boom.  That was a great leveller of the capitalist landscape (in a different sense) – to lay the basis for renewal of the profit making machine from the 1940s through the Golden Age of the 1960s.

So far the current Long Depression has not managed a similar ‘levelling’.  As Christophers says, it is unclear whether the law will be applied to reduce monopoly power as it was after 1945.  While the depression is unresolved, I doubt it.  Indeed, as Christophers confirms, the balance between competition and monopoly has moved to the international plane, with the likelihood of a new imperialist struggle that we saw at the beginning of the 20th century.


Kenneth’s three arrows

February 25, 2017

Kenneth J. Arrow has died at the age of 95.  He was an important mainstream economist.  He won a Nobel Prize as a mathematical theorist.  Indeed, Arrow was the epitome of the neoclassical general equilibrium theorists who came to dominate mainstream economics, with the avowed aim of using mathematics to deliver economic analysis and answers, in a mimic of mathematical physics.

Arrow was a close associate of that other great neoclassical and anti-Keynesian theorist, John Hicks.  They both aimed to use general equilibrium theory and math to show that markets and economic growth under capitalism could achieve equilibrium through supply and demand in ‘competitive markets’.

Interestingly, Arrow was uncle to a current Keynesian guru of ‘managed capitalism’, Larry Summers and also brother-in-law to that other icon of 1960s mainstream ‘Keynesian’ economics and the then textbook writer to university students, Paul Samuelson.  It’s a small world in the mainstream – although not as small as the Marxist economics world!

What did this ‘giant’ of mainstream economics theory contribute to our understanding of modern economies or the workings of firms and people in a ‘market economy’?  Math was Arrow’s forte.  “I think my biggest hopes were methodological — to apply new developments in mathematics to economics,” he told Challenge: The Magazine of Economic Affairs, in 2000.

There are three areas (arrows) that spring to mind.  The first was Arrow’s ‘proof’ that each individual’s desires or needs cannot be combined into a collective result where everybody gains or their needs are satisfied.  His conclusion as outlined in his famous monograph Social Choice and Individual Values , was that “If we exclude the possibility of interpersonal comparisons of utility, then the only methods of passing from individual tastes to social preferences which will be satisfactory and which will be defined for a wide range of sets of individual orderings are either imposed or dictatorial.”  In other words, it was impossible to deliver what ‘society’ needed from individual preferences as expressed through markets free of ‘unwanted alternatives’, at any time, and for all, unless the market is replaced by ‘dictatorship’.

You can already see the irony of this result.  The leading mathematical theorist of capitalist markets proves that markets cannot meet each individual’s needs without worsening the needs or desires of others, or abolishing itself! As one economist put it, Arrow “proved it was logically impossible for there to be a system of voting which is free of anomalies, no matter what kind of system it is…You can say, ‘There’s no really good way to run an election,’ but it is something else to prove it. . . . It’s like proving a bicycle cannot be stable.”

As developers of this ‘impossibility’ theorem, like Amartya Sen, went on to show, this also meant that there was no way that markets, perfectly competitive or not, could deliver equality of outcomes for each individual – no Pareto optimality.  Another way of putting this is to say that it is impossible to get ‘society’ to make a choice that leads to satisfaction for everyone.  As Sen said, “It is important to recognize that Arrow was not only establishing a theorem, he was opening up a whole subject to social choice.”

Democracy means making choices or plans that the majority want or need even if the minority loses out.  You may find this result self-evident and trite but apparently Arrow gives you a mathematical proof!  But it does not answer the social question: who is the majority and who is the minority?  And in the current world is it not the minority of the 1% and super-rich that get their needs met at the expense of the 99%?  Arrow’s theorem suggests that such inequality is the way of the world of markets.

Arrow’s second contribution was to the notorious foundation of neoclassical theory of capitalist market harmony, general equilibrium theory.  The principle of GE theory is that supply and demand in markets can be equalised and stabilised at a certain price, thus proving that capitalism is not inherently unstable as Marx had argued with his critique of Say’s law.  In a paper to the American Economic Association, Arrow states, “From the time of Adam Smith’s Wealth of Nations in 1776, one recurrent theme of economic analysis has been the remarkable degree of coherence among the vast numbers of individual and seemingly separate decisions about the buying and selling of commodities. In everyday, normal experience, there is something of a balance between the amounts of goods and services that some individuals want to supply and the amounts that other, different individuals want to sell. Would-be buyers ordinarily count correctly on being able to carry out their intentions, and would-be sellers do not ordinarily find themselves producing great amounts of goods that they cannot sell. This experience of balance indeed so widespread that it raises no intellectual disquiet among laymen; they take it so much for granted that they are not supposed to understand the mechanism by which it occurs.”

So the invisible hand of the market (Smith) can lead to harmonious equilibrium in markets where supply and demand are ‘cleared’.  Working with Gerard Debreu, the Arrow-Debreu theorem in 1954 supposedly provided a rigorous mathematical proof of a ‘market-clearing’ equilibrium — or the price at which the supply of an item is equal to its demand.   It became just what mainstream economics needed to ‘prove’, namely that a theory of value and price formation could be based on individual consumer choices and not on the labour theory of value as put forward by the classical economists and Marx.  “Their (neoclassical) theory of value and price formation was really a fundamental element of economics…It’s the ABCs of economics and economic theory.”, said one follower of Arrow.

But again, what is ironic about the Arrow-Debreu proof is that it shows markets have to be completely ‘perfect’ in the sense that no one participant can have extra knowledge or economic power over another and that there must be no restriction or distortion of price from outside.  The theorem has been applied in financial markets on the grounds that these are ‘perfect markets’ where everybody has the same power and knowledge.  Such an assumption, we now know after the global financial crash (in part the result of dysfunctional derivatives markets), is unrealistic to the point of disaster.

That the theorem of general equilibrium in capitalist markets is based on totally unrealistic assumptions is not a decisive critique, because Arrow recognised this.  Indeed, he drew the conclusion that the aim of policy should be to try to ‘correct’ and ‘manage’ any anomalies in markets to achieve something closer to ‘equilibrium’.  As he said, “You cannot get a full understanding of the behavior of any part of the economy without understanding its reaction on other parts.”

He applied this approach to health economics.  In his 1963 paper “Uncertainty and the Welfare Economics of Medical Care”, he found that the delivery of health care deviated in fundamental ways from the traditional competitive market and, for this reason, was a ‘nonmarket’ relationship.  For example, in a ‘perfect market’, the buyer and seller in theory have access to the same information about market price and value. However, in the health-care market, the supplier (doctor) commonly has a superior knowledge of the quality, provision and distribution of health-care services — all of which puts the consumer (patient) at a relative disadvantage.  This creates a problem of ‘information asymmetry’.

Consumers also do not always know when they will need health care until the moment they require it (as with a stroke or heart attack). So when consumers purchase insurance, the cost can be prohibitive.  And insurance companies worry that offering coverage to protect consumers against losses could create ‘moral hazards’, such as risk-taking and irresponsible behaviour (indeed!).

Again it may not surprise you to find that the world’s leading equilibrium economist found that markets are not fair in delivering basic needs like health to people because they are rigged or corrupt!  Of course, unfortunately, that has not led to the conclusion that healthcare should be publicly owned (single supplier) and delivered free at the point of use (public good) to be maximise people’s needs.  Indeed, Arrow never followed his own theoretical conclusion when asked to consider whether money damages could be measured and so awarded to people suffering environmentally from the activities of ‘more informed’ multi-nationals.

What is the decisive critique of the Arrow-Debreu theorem’s relevance to modern economies is that economies are not static systems but dynamic.  Yes, Marx said, supply does equal demand but really only by accident.   In theory, under ludicrous assumptions, markets clear all supply and meet all demand, but in reality, they hardly ever do. Markets keep moving away from equilibrium all the time.  Nothing stands still and there are ‘laws of motion’ that continually change ‘equilibrium assumptions’, making market economies inherently uncertain. These laws of motion (as developed by classical and Marxist economics) rather than the ‘principle of equilibrium’ are much more relevant to understanding the capitalist economy of production and investment for profit.

Arrow did venture into the realm of classical economics of a dynamic economy and proposed an endogenous growth theory, which seeks to explain the source of technical change as part of the process of accumulation and not ‘external’ to the movement of supply or being set by consumer demand.  Yes, I know, it is difficult to believe, but mainstream neoclassical theory argued that aggregate supply and demand in an economy were driven by separate forces (the preference of firms on the one hand and by consumers on the other).

Endogenous theory recognised what any fool could see: that supply was affected by demand but also demand was affected by supply.  Innovation did not come out of the sky but from the drive of companies to grow (or in the case of Marxist theory, to make more profit and reduce labour costs). Of course, the neoclassical version of growth theory did not consider profitability relevant to innovation but instead looked at aggregate output.  This theory became popular with many reformist economists and politicians – apparently, former adviser and minister in the British Gordon Brown Labour government, Ed Balls, was a keen promoter.

So Kenneth Arrow leaves us with three arrows to enrich our understanding of the economic world: 1) markets collectively can never properly deliver every individual’s needs; 2) markets cannot equate supply and demand except under the most unrealistic assumptions and 3) economic growth is not achieved by just meeting the demand of consumers but requires decisions of investors to innovate.  Ironically, none of the implications of these economic arrows have been accepted by the owners of capital and their politicians in practical policy.  To do so, would be to admit that capitalism does not work for the majority or even much of the time for the capitalists.



I omitted to mention that, despite being an apparent standard bearer of neoclassical general equilibrium theory, Arrow was by no means a supporter of capitalism. Indeed, he wrote an article in fall 1978 in Dissent magazine making a ‘cautious case for socialism’.…/a-cautious-case-for-socia…

It’s not a Marxist view (“It was in this area of political-economic interactions that Marxist doctrine was most appealing. I was never a Marxist in any literal sense”) but Arrow still exposed many faultlines in capitalism: “as I observed, read, and reflected, the capitalist drive for profits seemed to become a major source of evil”.

“The absorption of the economy by a small elite implied that the formal democracy and freedom was increasingly a sham; the major decisions on which human welfare depended were being made by a few, in their own interests.”

“To sum up, the basic values that motivated my preference for socialism over capitalism were (1) efficiency in making sure that all resources were used, (2) the avoidance of war and other political corruptions of the pursuit of profits, (3) the achievement of freedom from control by a small elite, (4) equality of income and power, and (5) encouragement of cooperative as opposed to competitive motives in the operation of society.”

“There can be no complete conviction on this score until we can observe a viable democratic socialist society. But we certainly need not fear that gradual moves toward increasing government intervention or other forms of social experimentation will lead to an irreversible slide to “serfdom.”
It would be a pleasure to end this lecture with a rousing affirmation one way or the other. But as T. S. Eliot told us, that is not “how the world will end.” Experiment is perilous, but it is not given to us to refrain from the attempt.”

Inequality after 150 years of Capital

February 19, 2017

I have written many posts on the level and changes in inequality of wealth and incomes, both globally and within countries.  There has been a ‘wealth’ of empirical studies showing rising inequality in incomes and wealth in most capitalist economies in the last century.

There have been various theoretical explanations provided for this change.  The most famous is by Thomas Piketty in his magisterial book, Capital in the 21st Century.  This book won the award for the most bought, least read book in 2014, surpassing A brief history of time by scientist Stephen Hawking.

I and others have discussed the merits and faults of Piketty’s work in many places.  Please read these to get a picture.  Suffice it to say that, although Piketty repeats the title of Marx’s book, published exactly 150 years ago, he dismisses Marx’s analysis of capitalism based on the law of value and the tendency of the rate of profit to fall and adopts the mainstream theories of marginal productivity and/or market ‘imperfections’ like ‘rent-seeking’.  This leads to the view that capitalism could be ‘reformed’ and inequality reduced by such measures as a global financial tax or progressive inheritance taxes or more recently a universal basic income (Piketty is now advising French socialist presidential candidate Hamon on this now).

Inequality remains the buzz word of liberal and leftist debate and analysis, not crisis and slump.  Widening inequality has been called “one of the key challenges of our time” by the World Economic Forum, the think-tank of the elite. The ratings agency S&P Global Ratings has cited the income gap as a long-term trend that threatens America’s economic growth. Even the major international agencies like the IMF or the OECD continually analyse movements in inequality to see if more equality would be better for growth and a more stable capitalism.

Post-Keynesian economists like Engelbert Stockhammer or more radical mainstreamers like Joseph Stiglitz reckon rising inequality is the main cause of crises, not falling profitability or the inherent instability of capital as a money-making machine. Again I have discussed these arguments here.

But whatever the causes and processes concerned with inequality of incomes and wealth in the major economies, there is no doubt that it has reached levels not seen since Marx published Capital.  Indeed, here is an interesting chart that tries to gauge the level of inequality reached in the UK back in 1867.  The gini coefficient is the most common measure of inequality of income or wealth.  And in this graph, provided by the global inequality expert, Branco Milanovic, the gini ratio reached over 55 in 1867.


According to the graph, that was the peak of inequality and it fell back over the next 100 years, thus appearing to refute Marx’s view that the working class would suffer ‘amiseration’ as capital took a growing share of value produced by labour.  Instead, it would appear to confirm the mainstream view of Simon Kuznets written in the 1960s that once capitalism got going and started delivering economic growth, the forces of market, if not interfered with, would steadily bring forth a more equal society.  The irony is that just as Kuznets reached this conclusion, most major capitalist economies began to generate an increase in inequality in both income and wealth – as the graph shows.

But don’t be fooled by the graph that it seems to show a huge jump in GDP per capita in dollars from 1867 to now.  It’s misleading.  It does not show whether the jump is due to faster economic growth or just slowing population growth in the UK (actually it is the latter).  And of course, it does not show the huge downturns in GDP caused by recurring and regular crises under capitalism in Britain and elsewhere.

The graph does reveal, however, that inequality has been worsening in England to levels not seen since the 1920s.  Indeed, in a new analysis of the World Income Database Piketty and colleagues from the Paris School of Economics and UC Berkeley, describe a “collapse” of the share of US national wealth claimed by the bottom 50% of the country — down to 12% from 20% in 1978 — along with an (unsurprising) drop in income for the poorest half of America. About 117 million American adults are living on income that has stagnated at about $16,200 per year before taxes and transfer payments, Piketty, Saez and Zucman found in research published last year.

And that makes an important point.  The top 1 percent of earners in America now take home about 20 percent of the country’s pretax national income, compared with less than 12 percent in 1978, according to the research the economists published at the National Bureau of Economic Research. Over the same time in China, the top 1 percent doubled their share of income, rising from about 6 percent to 12 percent. America has experienced “a complete collapse of the bottom 50 percent income share in the U.S. between 1978 to 2015,” the authors wrote. “In contrast, and in spite of a similar qualitative trend, the bottom 50 percent share remains higher than the top 1 percent share in 2015 in China.”

Meanwhile, economic growth in China has been so strong that — despite widening inequality — the incomes of the bottom 50 percent have also “grown markedly”, the economists wrote. Their analysis found that the poorest half of Chinese workers saw their average income grow more than 400 percent from 1978 to 20015. For their American counterparts, income decreased 1 percent.“This is likely to make rising inequality much more acceptable” in China, they noted. “In contrast, in the U.S. there was no growth left at all for the bottom 50 percent (-1 percent).”

The IMF and other agencies like the World Bank like to argue that economic growth has picked up so much under capitalism that millions have been taken out of poverty. But economic experts in the field of poverty and global inequality reveal from their figures that official ‘poverty’ has declined for just two reasons.  The first is that the definition of poverty of those living on less than$1 a day is out of date; and second because nearly all the decline has been in China due to its unprecedented economic growth under a state-controlled and directed economy, still far from market capitalism seen in 19th and 20th century capitalism that Piketty and others have analysed.  In most low income countries inequality has hardly changed from very high levels.


And the main reason is the control of wealth.  A very small elite owns the means of production and finance and that is how they usurp the lion’s share and more of the wealth and income.  The US Economic Policy Institute found that the top one percent of society derives an increasing portion of income gains from existing capital and wealth.  It is not because they are smarter or better educated.  It is because they are lucky (like Donald Trump) and inherited their wealth from the parents or relatives.


A recent study by two economists at the Bank of Italy found that the wealthiest families in Florence today are descended from the wealthiest families of Florence nearly 600 years ago!  So the rise of merchant capitalism in the city states of Italy and then the expansion of industrial capitalism and now finance capital made little or no difference to who owned the wealth. And the work of Emmanuel Saez and Gabriel Zucman has shown that in the US, wealth has become increasingly concentrated in the hands of the super-rich.


So Marx’s prediction 150 years ago that capitalism would lead to greater concentration and centralisation of wealth, in particular in the means of production and finance, has been borne out.  Contrary to the optimism and apologia of the mainstream economists, poverty for billions around the world remains the norm with little sign of improvement, while inequality within the major capitalist economies increases as capital is accumulated and concentrated in ever smaller groups.

Beware the zombies

January 23, 2017

Mainstream economics has been seriously puzzled by the failure of the major economies to restore the previous growth rate in the productivity of labour since the end of the Great Recession.  There has been an intense debate over the issue. 

Some argue that productivity growth has been restored but is just not being measured properly, now that much new productivity comes from data, intellectual ideas, software etc and not from the production of things.  But recent research has thrown cold water on this explanation. 

Others argue that productivity growth may be lower, but that is simply the result of the aftermath of the Great Recession, leaving companies unwilling to invest in capital equipment and preferring to speculate in financial markets or just hold cash.  There is some truth in this argument, as I shall explain below.  After all, after a major slump, capitalist companies are going to hoard cash rather than possibly waste it on investment and extra production that may not find a buyer. And a past OECD study found support for what it called the ‘pro-cyclical’ element in post global crash productivity.  “Firms may respond to short-run fluctuations in demand by varying the rates at which their existing capital and labour are utilized, for example by hoarding labour at the time of a crisis waiting for the recovery or underutilising the existing capital stock without shedding it

Others reckon productivity growth had already slowed down before the Great Recession and would not recover because we are now in an era of low growth as all the hi-tech innovations have been exhausted and robots and AI will have little impact on the wider economy.  This view has been strongly contended by mainstream economist, Robert J Gordon, and by more radical observers. It suggests that capitalism may have passed its use-by date.  Again, this argument has some merit but, as I have explained in previous posts, it still does not identify the reason for the investment and productivity growth slowdowns since the end of the Great Recession.

Now some new research brings stronger light onto the debate.   The European Central Bank, the Bank of England and the OECD have recently produced reports that hone in one key feature of the ‘productivity puzzle’.  It seems that productivity growth is not stuttering everywhere in capitalist economies.  In the major economies, the so-called ‘frontier’ companies are increasing their productivity as fast as before the financial crisis.  The disappointing economy-wide productivity figures are to be blamed on the companies that are ‘behind the frontier’.

The OECD finds that the ‘diffusion’ of innovation and productivity growth from leading to lagging companies has slowed down.  The ECB also finds the same thing in its study of Eurozone productivity (where it is worse for services than for manufacturing) and the Bank of England finds the same for the UK and that its effect is substantial.  What is most significant is that the new OECD study found that the cause was the large number of ‘zombie’ companies (companies whose regular revenues at most cover their interest expenses (if that) — companies that, to paraphrase BoE governor Carney, “depend on the kindness of their creditors”.  

The OECD researchers find that such zombies take up a frighteningly large part of the economy. Across the nine European countries they studied, the share of the total private capital stock ‘sunk’ in zombie companies ranges from 5 to 20 per cent. The suggestion is that such businesses hog capital and crowd the market for newcomers, make it harder for more promising companies to expand and hold back the reallocation of labour and capital to more productive and faster-growing companies.   The paper concludes that “the prevalence of, and resources sunk in, zombie firms have risen since the mid-2000s, which is significant given that recessions typically provide opportunities for restructuring and productivity-enhancing allocation” and that “a higher share of industry capital sunk in zombie firms tends to crowd out the growth—measured in terms of investment and employment—of the typical non-zombie firm.” All in all “a 3.5% rise in the share of zombie firms—roughly equivalent to that observed between 2005 and 2013 on average across the nine OECD countries in the sample—is associated with a 1.2% decline in the level of labour productivity across industries.” 

This confirms what I argued in a recent debate on the role of profitability.  The huge profits gained since the end of the Great Recession have been mostly confined to the large companies: just a few mega companies hold most of the cash while thousands of small and medium enterprises (SMEs) hold little cash and much more debt.  Indeed, a minority are really ‘zombie’ firms just raising enough profit to service their debt.”

It is easy to see why there are so many zombies.  Despite the relative recovery of headline profitability in many economies in the credit-fuelled boom from 2002 to 2006, many small to medium-sized companies did not see an improvement in profitability.  Instead they racked up higher debt through bank loans.  The Great Recession caused a collapse in profits and even after 2009, profitability improved little for these companies while debt remained high. But the zombie companies have struggled on because interest rates were so low and banks would not foreclose.  This scenario has been found in the extreme in Italy where ‘non-performing’ bank loans have reached 20% of GDP.

As the ECB explains in its report (ecb-zombie-credit-acharya-et-al-whatever-it-takes ),While banks that benefited from the announcement increased their overall loan supply, this supply was mostly targeted towards low-quality firms with pre-existing lending relationships with these banks. As a result, there was no positive impact on real economic activity like employment or investment. Instead, these firms mainly used the newly acquired funds to build up cash reserves. Finally, we document that creditworthy firms in industries with a prevalence of zombie firms suffered significantly from the credit misallocation, which slowed down the economic recovery.”

According to research by the ‘free market’ Adam Smith Institute, 108,000 so-called zombie businesses in the UK are only able to service the interest on their debt, preventing them from restructuring. In other words, they slow the ‘creative destruction’ of capital by the liquidation of the weak for the strong.

This confirms previous studies such as that in the Journal of Finance (2009), Why firms have so much cash, which found that in order to compete, companies increasingly must invest in new and untried technology rather than just increase investment in existing equipment.  That’s riskier: “the greater importance of R&D relative to capital expenditures also has a permanent effect on the cash ratio. Because of lower asset tangibility, R&D investment opportunities are costlier to finance than capital using external capital expenditures. Consequently, greater R&D intensity relative to capital expenditures requires firms to hold a greater cash buffer against future shocks to internally generated cash flow.”  So companies have to build up cash reserves as sinking fund to cover likely losses on research and development.

Similarly, in a recent paper, Ben Broadbent from the Bank of England noted that UK companies were now setting very high hurdles for profitability before they would invest as they perceived that new investment was too risky. “Even if the crisis originated in the banking system there is now a higher hurdle for risky investment –  a rise in the perceived probability of an extremely bad economic outcome….In reality, many investments  involve sunk costs. Big FDI projects, in-firm training, R&D, the adoption of new technologies, even simple managerial reorganisations – these are all things that can improve productivity but have risky returns and cannot be easily reversed after the event.”  So the profitability of capital has got to be high enough both to justify riskier hi-tech investment and to cover a much higher debt burden (even if current servicing costs are low).  Firms are not going to borrow more to invest even if banks are willing to lend.

Marx’s theory of crisis rests on the idea that after a slump capital will only start to invest to raise the productivity of labour if profitability is rising and at a sufficient level.  Indeed, slumps in production should provide the basis for a recovery in profitability and a reduction in the debt burden (credit) built up to the point of the crisis. But right now there are thousands of heavily indebted SMEs which are barely keeping their heads above water despite low interest rates.  They are keeping profitability too low and debt too high.  They are clogging up the system.

Profitability in the major economies did recover from the trough reached at the depth of the Great Recession in 2009.  According the European Commission’s AMECO database, the net return on capital stock is up between 8-30% since 2009 in the major economies.  But even that recovery has not meant that profitability has returned to its previous peak (2005-7) before the great crash, varying from flat to down near 14%.  And in the UK and the US profitability is now falling, according to AMECO.


At the same time, corporate debt levels are still high and rising.


The most extreme strategists of capital recognise the ‘proper’ solution.  Back at the beginning of the Great Depression of the 1930s, the then US Treasury Secretary, Andrew Mellon, warned against keeping ‘dead’ capital going ‘zombie like’ as a ‘moral hazard’.  “Liquidate labour, liquidate stocks, liquidate farmers, liquidate real estate … it will purge the rottenness out of the system. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less enterprising people”.

The ‘solution’ for capital of ‘creative destruction’ in a slump or depression has not altered.  “The fundamental tenet of capitalism, which holds that some bad companies need to fail to make way for new and better ones, is being rewritten,” says Alan Bloom, global head of ‘restructuring’ at Ernst & Young management consultants. “Many European companies are just declining slowly and have an urgent need for new management, a revised capital structure or at worst to be allowed to fail,” he adds.

With corporate debt levels higher than before the global crash and profitability in most economies lower than before and now peaking again, ‘zombie’ companies are going to have to be removed in a new deluge before improved profitability and productivity can be achieved.


Davos: responsible capitalism

January 16, 2017

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

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

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

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

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

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

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

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

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

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

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


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


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

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


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

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

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


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

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

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

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

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

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

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

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

Optimism reigns

January 4, 2017

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


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

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

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

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

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

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

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

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

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

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

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

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

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


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

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


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


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

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


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

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

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

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

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

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