Archive for the ‘marxism’ Category

Disease, debt and depression

March 5, 2020

As I write the coronavirus epidemic (not yet declared pandemic) continues to spread.  Now there are more new cases outside China than within, with a particular acceleration in South Korea, Japan and Iran.  Up to now more than 80,000 people infected in China alone, where the outbreak originated. The number of people who have been confirmed to have died as a result of the virus has now surpassed 3,200.

As I said in my first post on the outbreak, “this infection is characterized by human-to-human transmission and an apparent two-week incubation period before the sickness hits, so the infection will likely continue to spread across the globe.”  Even though more people die each year from complications after suffering influenza, and for that matter from suicides or traffic accidents, what is scary about the infection is that the death rate is much higher than for flu, perhaps 30 times higher.  So if it spreads across the world, it will eventually kill more people.

And as I said in that first post, “The coronavirus outbreak may fade like others before it, but it is very likely that there will be more and possible even deadlier pathogens ahead.” That’s because the most likely cause of the outbreak was the transmission of the virus from animals, where it has probably been hosted for thousands of years, to humans through use of intensive industrial farming and the extension of exotic wildlife meat markets.

COVID-19 is more virulent and deadly than the annual influenza viruses that kill many more vulnerable people each year.  But if not contained, it will eventually match that death rate and appear in a new form each year.  However, if you just take precautions (hand washing, not travelling or working etc) you should be okay, especially if you are healthy, young and well-fed.  But if you are old, have lots of health issues and live in bad conditions, but you still must travel and go to work, then you are at a much greater risk of serious illness or death.  COVID-19 is not an equal-opportunity killer.

But the illnesses and deaths that come from COVID-19 is not the worry of the strategists of capital.  They are only concerned with damage to stock markets, profits and the capitalist economy.  Indeed, I have heard it argued in the executive suites of finance capital that if lots of old, unproductive people die off, that could boost productivity because the young and productive will survive in greater numbers!

That’s a classic early 19th century Malthusian solution to any crisis in capitalism.  Unfortunately, for the followers of the reactionary parson Malthus, his theory that crises in capitalism are caused by overpopulation has been demolished, given the experience of the last 200 years.  Nature may be involved in the virus epidemic, but the number of deaths depends on human action – the social structure of an economy; the level of medical infrastructure and resources and the policies of governments.

It is no accident that China, having been initially caught on the hop with this outbreak, was able to mobilise massive resources and impose draconian shut-down conditions on the population that has eventually brought the virus spread under control.  Things do not look so controlled in countries like Korea or Japan, or probably the US, where resources are less planned and governments want people to stay at work for capital, not avoid getting ill.  And poor, rotten regimes like Iran appear to have lost control completely.

No, the real worry for the strategists of capital is whether this epidemic could be the trigger for a major recession or slump, the first since the Great Recession of 2008-9.  That’s because the epidemic hit just at a time when the major capitalist economies were already looking very weak.  The world capitalist economy has already slowed to a near ‘stall speed’ of about 2.5% a year.  The US is growing at just 2% a year, Europe and Japan at just 1%; and the major so-called emerging economies of Brazil, Mexico, Turkey, Argentina, South Africa and Russia are basically static.  The huge economies of India and China have also slowed significantly in the last year.  And now the shutdown from COVID-19 has pushed the Chinese economy into a ravine.

The OECD – which represents the planet’s 36 most advanced economies – is now warning of the possibility that the impact of COVID-19 would halve global economic growth this year from its previous forecast.  The OECD lowered its central growth forecast from 2.9 per cent to 2.4 per cent, but said a “longer lasting and more intensive coronavirus outbreak” could slash growth to 1.5 per cent in 2020.  Even under its central forecast, the OECD warned that global growth could shrink in the first quarter. Chinese growth is expected to fall below 5% this year, down from 6.1% last year – which was already the weakest growth rate in the world’s second largest economy in almost 30 years. The effect of widespread factory and business closures in China alone would cut 0.5 percentage points from global growth as it reduced its main forecast to 2.4 per cent in the quarter to end-March.

Elsewhere, Italy endured its 17th consecutive monthly decline in manufacturing activity in February. And the Italian government announced plans to inject €3.6bn into the economy. IHS Markit’s purchasing managers’ index for Italian manufacturing edged down by 0.2 points to 48.7 in February. A reading below 50 indicates that the majority of companies surveyed are reporting a shrinking of activity. And the survey was completed on February 21, before the coronavirus outbreak intensified in Italy. There was a similar contraction of factory activity in France, where the manufacturing PMI fell by 1.3 points to 49.8. However, manufacturing activity increased for the eurozone as a whole in February, as the PMI for the bloc rose by 1.3 points to 49.2, but still under 50.

The US, so far, has avoided a serious downturn in consumer spending, partly because the epidemic has not spread widely in America.  Maybe the US economy can avoid a slump from COVID-19.  But the signs are still worrying. The latest activity index for services in February showed that the sector showed a contraction for the first time in six years and the overall indicator (graph below) also went into negative territory.

Outside the OECD area, there was more bad news on growth. South Africa’s Absa Manufacturing PMI fell to 44.3 in February of 2020 from 45.2 in the previous month. The reading pointed to the seventh consecutive month of contraction in factory activity and at the quickest pace since August 2009. And China’s capitalist sector reported its lowest level of activity since records began. The Caixin China General Manufacturing PMI plunged to 40.3 in February 2020, the lowest level since the survey began in April 2004.

The IMF too has reduced its already low economic growth forecast for 2020.  Experience suggests that about one-third of the economic losses from the disease will be direct costs: from loss of life, workplace closures, and quarantines. The remaining two-thirds will be indirect, reflecting a retrenchment in consumer confidence and business behavior and a tightening in financial markets.”  So “under any scenario, global growth in 2020 will drop below last year’s level. How far it will fall, and for how long, is difficult to predict, and would depend on the epidemic, but also on the timeliness and effectiveness of our actions.”

One mainstream economic forecaster, Capital Economics, cut its growth forecast by 0.4 percentage points to 2.5 per cent for 2020, in what the IMF considers recession territory. And Jennifer McKeown, head of economic research at Capital Economics, cautioned that if the outbreak became a global pandemic, the effect “could be as bad as 2009, when world GDP fell by 0.5 per cent.” And a global recession in the first half of this year is “suddenly looking like a distinct possibility”, said Erik Nielsen, chief economist at UniCredit.

In a study of a global flu pandemic, Oxford University professors estimated that a four-week closure of schools — almost exactly what Japan has introduced — would knock 0.6 per cent off output in one year as parents would have to stay off work to look after children. In a 2006 paper, Warwick McKibbin and Alexandra Sidorenko of the Australian National University estimated that a moderate to severe global flu pandemic with a mortality rate up to 1.2 per cent would knock up to 6 per cent off advanced economy GDP in the year of any outbreak.

The Institute of International Finance (IIF), the research agency funded by international banks and financial institutions, announced that: “We’re downgrading China growth this year from 5.9% to 3.7% & the US from 2.0% to 1.3%. Rest of the world is shaky. Germany struggling to retool autos, Japan weighed down by 2019 tax hike. EM has been weak for a while. Global growth could approach 1.0% in 2020, weakest since 2009.”

What are the policy reactions of the official authorities to avoid a serious slump?  The US Federal Reserve stepped in to cut its policy interest rate at an emergency meeting. Canada followed suit and others will follow.  The IMF and World Bank is making available about $50 billion through its rapid-disbursing emergency financing facilities for low income and emerging market countries that could potentially seek support. Of this, $10 billion is available at zero interest for the poorest members through the Rapid Credit Facility.

This may have some effect, but cuts in interest rates and cheap credit are more likely to end up being used to boost the stock market with yet more ‘fictitious capital’ – and indeed stock markets have made a limited recovery after falling more than 10% from peaks.  The problem is that this recession is not caused by ‘a lack of demand’, as Keynesian theory would have it, but by a ‘supply-side shock’ – namely the loss of production, investment and trade. Keynesian/monetarist solutions won’t work, because interest rates are already near zero and consumers have not stopped spending – on the contrary. Jon Cunliffe, deputy governor of the Bank of England, said that since coronavirus was “a pure supply shock there is not much we can do about it”.

And as British Marxist economist Chris Dillow argues, the coronavirus epidemic is really just an extra factor keeping the major capitalist economies dysfunctional and stagnating. He lays the main cause of the stagnation on the long-term decline in the profitability of capital. “basic theory (and common sense) tells us that there should be a link between yields on financial assets and those on real ones, so low yields on bonds should be a sign of low yields on physical capital. And they are.”  He identifies ‘three big facts’: the slowdown in productivity growth; the vulnerability to crisis; and low-grade jobs. And as he says, “Of course, all these trends have long been discussed by Marxists: a falling rate of profit; monopoly leading to stagnation; proneness to crisis; and worse living conditions for many people. And there is plenty of evidence for them.”  Indeed, as any regular reader of this blog will know.

And then there is debt.  In this decade of record low interest rates (even negative), companies have been on a borrowing binge.  This is something that I have banged on about in this blog ad nauseam.  Huge debt, particularly in the corporate sector, is a recipe for a serious crash if the profitability of capital were to drop sharply.

Now John Plender in the Financial Times has taken up my argument.  He pointed out, according to the IIF, the ratio of global debt to gross domestic product hit an all-time high of over 322 per cent in the third quarter of 2019, with total debt reaching close to $253tn. “The implication, if the virus continues to spread, is that any fragilities in the financial system have the potential to trigger a new debt crisis.”

The huge rise in US non-financial corporate debt is particularly striking.  This has enabled the very large global tech companies to buy up their own shares and issue huge dividends to shareholders while piling up cash abroad to avoid tax.  But it has also enabled the small and medium sized companies in the US, Europe and Japan, which have not been making any profits worth speaking of for years to survive in what has been called a ‘zombie state’; namely making just enough to pay their workers, buy inputs and service their (rising) debt, but without having anything left over for new investment and expansion.

Plender remarks that a recent OECD report says that, at the end of December 2019, the global outstanding stock of non-financial corporate bonds reached an all-time high of $13.5tn, double the level in real terms against December 2008. “The rise is most striking in the US, where the Fed estimates that corporate debt has risen from $3.3tn before the financial crisis to $6.5tn last year. Given that Google parent Alphabet, Apple, Facebook and Microsoft alone held net cash at the end of last year of $328bn, this suggests that much of the debt is concentrated in old economy sectors where many companies are less cash generative than Big Tech. Debt servicing is thus more burdensome.”

The IMF’s latest global financial stability report amplifies this point with a simulation showing that a recession half as severe as 2009 would result in companies with $19tn of outstanding debt having insufficient profits to service that debt.

So if sales should collapse, supply chains be disrupted and profitability fall further, these heavily indebted companies could keel over.  That would hit credit markets and the banks and trigger a financial collapse.  As I have shown on several occasions, the profitability of capital in the major economies has been on a downward trend (see graph above from Penn World tables 9.1).

And the mass of global profits was also beginning to contract before COVID-19 exploded onto the scene (my graph below from corporate profits data of six main economies, Q4 2019 partly estimated).  So even if the virus does not trigger a slump, the conditions for any significant recovery are just not there.

Eventually this virus is going to wane (although it might stay in human bodies forever mutating into an annual upsurge in winter cases).  The issue is whether the ‘supply shock’ is so great that, even though economies start to recover as people get back to work, travel and trade resumes, the damage has been so deep and the time taken so long to recover, that this won’t be a quick one-quarter, V-shaped economic cycle, but a proper U-shaped slump of six to 12 months.

Marx’s law of profitability at SOAS

February 27, 2020

Last week I gave a lecture in the seminar series on Marxist political economy organised by the Department of Development Studies at the School of Oriental and African Studies (SOAS).  The Marxist Political Economy series is a course mainly for post-graduates and has several lecturers on different aspects of Marxian economics. Course Handbook – Marxist Political Economy 2019-20 (8)

Mine was on Marx’s law of the tendency of the rate of profit to fall.  Not surprisingly, the department team has noticed that I am apparently ‘obsessed’ by this law, at least according to critics of it.

Anyway, I thought it might be useful to go through my lecture in a post, with the accompanying slides referred to.  So here goes. (Marx’s law of the tendency of the rate)

I started by saying that Marx considered the law of the tendency of the rate of profit to fall as “peculiar to the capitalist mode of production” along with “the progressive development of the social productivity of labour.”  They go together: rising productivity and falling profitability.  (Slide 2).

Indeed, Marx’s law is the direct opposite of what Thomas Piketty, author of Capital in the 21st century claimed was Marx’s view.  Piketty reckoned that “Marx’s theory implicitly relies on a strict assumption of zero productivity growth over the long run” and that “Marxist analysis emphasises the falling rate of profit – a historical prediction that has turned out to be quite wrong.”  Indeed, Marx’s law is ignored by mainstream economics (except for getting wrong like Piketty) and also is either ignored or rejected by so-called heterodox economics.

Moreover, even most Marxist economists consider it irrelevant or wrong for any critique of capitalism. I referenced top MEGA scholar, Michael Heinrich: “A few manuscripts from the late 1860s and 1870s suggest that Marx had doubts about the ‘law of the tendency of the rate of profit to fall’, which he no longer mentioned after 1868.“  And then the world’s most famous Marxist economist, David Harvey: I find Heinrich’s account broadly consistent with my own long-standing scepticism about the general relevance of the law”.  Indeed, it is only a minority of Marxists who consider, like Alan Freeman, that “Marx’s LTRPF remains the only credible competitor left in the contest to explain what is going wrong with capitalism.” (Slide 3).

In contrast, I argued that Marx’s law of profitability is both theoretically valid, empirically supported and relevant to the critical analysis of modern capitalism.  But the law is only valid if two other laws of motion of capitalism that Marx held to are also valid. (Slide 4).

The first is the law of value.  The law of value says that the value of commodities depends on the amount of human labour exerted on producing commodities, as measured by the socially necessary labour time involved.  At one level, it is self-evident, “as any child knows” that nothing is produced to use or sell unless humans go to work to do it.  (Slide 5).

Under the capitalist mode of production, commodities are produced for sale, in a particular social relation.  The capitalist starts with money and the ownership of the means of production.  With that money he/she buys the technology and raw materials to make a new product for sale and employs the workers to do so.  Both that technology and workers are commodities to buy for the capitalist.  But only the workers produce the new commodity for sale on the market for a new amount of money.  And that end product must be worth more in labour time that invested by the capitalist and more in money than spent.  There must be a profit to make it worthwhile.  That profit comes from the surplus value appropriated by the capitalist over above the value paid for labour power.  M- C- P- C’- M’ (Slide 6)

Marx’s theory of value reveals that more value is created only by human labour power and a surplus is extracted by the capitalist because he/she owns and controls the means of production; and that value is realised by sale in markets.  The law of value is theoretically sound and indeed has been empirically supported, namely that total prices of commodities in an economy are closely correlated with total hours of labour time applied. (Slide 7)

The second law is Marx’s general law of accumulation. Competition among capitalists forces them to continue to expand their production in order to accumulate more profit or be driven out of business by others.  Competition drives each individual capitalist to increase the productivity of labour ie lower their costs of production. (Slide 8)

As capitalists spend more of their profits on means of production to boost the productivity of labour and reduce costs, the ratio of the value of means of production compared to the value of the labour power employed tends to rise.  Marx called this ratio the organic composition of capital. It is a law in capitalist economic expansion that the organic composition of capital will rise. (Slide 9)

The law is empirically valid. (Slide 10); fixed capital per worker rises over the long term.

But there is a dual nature to the accumulation process under capitalism.  On the one hand, there is a tendency to increased unemployment from technology shedding labour.  On the other hand, new technology creates new jobs.  Everything then depends on the momentum of the industrial cycle: “the general movement of wages is exclusively regulated by the expansion and contraction of the industrial reserve army and this corresponds to the periodic alternations of the industrial cycle”. Marx (Slide 11) Accumulation can drive down labour’s share in new value but also lower the price of future investment. (Slide 12).

In sum, the organic composition of capital (C/V) rises over time.  This means increased centralisation and concentration of capital. Rising C/V creates a reserve army of labour and technological unemployment. The size of reserve army will vary cyclically with the strength of accumulation.  This law can be empirically verified and has been in many studies. (Slide 13)

This brings us the main message of the lecture.  The first two laws of motion lead to the third law: the law of the tendency of the rate of profit to fall.  The first law says that only labour creates value.  The second says that capitalists will accumulate more capital over time and this will take the form of a faster rise in the value of the means of production over the value of labour power i.e. a rising organic composition of capital. (Slide 14) For Marx, the third law of profitability is “in every respect the most important law of modern political economy and the most essential for understanding the most difficult relations. It is the most important law from the historical standpoint. It is a law, which despite its simplicity, has never before been grasped and even less consciously articulated.” (Slide 15)

The law has a simple formula (Slide 16).  The capitalist starts with money to invest in:

Means of production (fixed capital) and raw materials (circulating capital) = constant capital (c)

Labour force to produce the commodities paid in wages.  But the labour force produces more value than it is paid in wages; so it is called variable capital (v).

The labour force produces commodities that contain surplus value over and above its own value in wages paid = surplus value (s)

The rate of profit is thus S/(C+V).  If we divide this formula by the value of labour power (V), we get s/v//c/v+1.  In other words, the rate of profit falls if C/V rises faster than S/V and vice versa.  (Slide 17)

Marx argues that rising C/V is the tendency which will generally rule and operate over time and rising S/V is a countertendency (induced by the tendency) that can curb, or slow or occasionally reverse the tendency.  If the tendency prevails, the rate of profit will fall  – and most of the time it does.  That is Marx’s law. (Slide 18)

This law has been subject to criticism from the start when it was first revealed in the 1890s in Volume Three of Capital.  (Slide 19)

There are two main critiques.  The first is the so-called ‘transformation problem’. In Volume Three, Marx shows how the values of commodities as expressed in socially necessary labour time are modified in competition for sale of those commodities.  There is price for the commodity in the market, but different producers have different efficiencies – some produce the commodity for sale in less labour time than others.  And they do so because they invest more in labour-saving technology as expressed in a higher organic composition of capital.  Through competition in the market, a production price is established.  At that production price, the more efficient producers make more profit.  They do so because in the market there is a transfer of value from the less efficient to the more efficient and profitability tend to an average across the economy.

Values are turned into prices of production by this competitive process.  Market prices will oscillate around production prices, which are also continually changing due to changes in technology and the organic composition of capitals.  But in Marx’s transformation, total value in the economy (in labour time) is still equal to total price of production (which is value modified by average profitability) and total surplus value is equal to total profit.  So value, the labour time exerted, is still the basis of prices in a capitalist economy. (Slide 20)

Marx’s transformation of values into prices was rejected and attacked by many Marxists.  Bortkiewicz argued that the inputs in values (c+v) on the value side of Marx’s table are really prices of production. In Marx’s formula, the value of the inputs before the equalization differ from the prices of production for the same commodities after the equalization of profit rates. But surely, says Bortkiewicz, the same commodities must be bought and sold as prices of production and not as values.  So Marx’s formula is incorrect and indeterminate. But if we ‘correct’ Marx’s transformation using simultaneous equations, total value no longer equals total price and/or total surplus value does not equal total profit.  So there is a logical inconsistency in Marx’s solution.  Value in labour time is no longer proven as the basis of prices. (Slide 21)

The reply to this critique is that Marx’s transformation is temporal.  The Bortkiewicz critique removes the temporal aspect completely.  Let us say that production starts at t1 and goes to t2.  The output produced during t1-t2 is then sold at t2, the end point of t1-t2.  Then t2 becomes also the initial point of the next production period, t2-t3. The output of t1-t2 has become the input of t2-t3. It exits one period and it enters with the same value in the next period.  Instead, the Bortkiewicz critique holds to the absurd notion that the output of one period is the input of the same period. That’s what simultaneous equations do; remove time. (Slide 22)

The second critique of Marx’s law is that is that new technology would never be introduced by a capitalist if it did not raise profitability.  Indeed, Marx says in Volume Three of Capital that “No capitalist ever voluntarily introduces a new method of production, no matter how much more productive it may be, and how much it may increase the rate of surplus-value, so long as it reduces the rate of profit.”  So Okishio says that “A profit-maximising individual capitalist will only adopt a new technique of production if it reduces the production cost per unit or increases profits per unit at going prices.  So capitalist accumulation must lead to a rise in the rate of profit, not a tendency to fall – otherwise why would any capitalist invest in new technology?” (Slide 23)

The reply to that is this argument is a fallacy of composition – to use the Keynesian term of logic.  Yes, the first capitalist to introduce a new technology will gain extra profit – at the expense of the other capitalists who have not.  The second capitalist will then introduce it and also gain some profitability (but not as much as the first did) at the expense of the other less efficient ones.  But once all capitalists adopt the technology, the extra profitability for introducing it will have dissipated.  And because the organic composition of capital (C/V) is likely to have risen, the rate of profit across all producers will have fallen compared to before.  As Marx says: ”Competition makes it general and subject to the general law. There follows a fall in the rate of profit — perhaps first in this sphere of production, and eventually it achieves a balance with the rest — which is, therefore, wholly independent of the will of the capitalist.” (Slide 24)

And there is one more retort to the critics of the law.  It is empirically supported.  Over decades, there has been a secular decline in the profitability of capital across all the major economies – if you like, the world rate of profit has fallen –  but not in a straight line, because there have been periods where the counteracting factors to the tendency have been stronger.  But over the history of modern capitalism, the rate of profit has fallen. (Slide 25)

Marx’s law is not only secular (namely a long-term tendency for profitability to fall).  The law also helps explain the cyclical recurrence of booms and slumps in capitalist production and investment. (Slide 26) The operation of counter-tendencies transforms the breakdown into a temporary crisis, so that the accumulation process is not something continuous, but takes the form of periodic cycles. (Slide 27)

The rate of profit can be falling but the total or mass of profit in the economy can be rising.  Indeed, that will be the usual situation as capitalists expand investment and production to increase profits as the profitability of each new unit of investment begins to drop.  This is what Marx called the double-edge law of profit. (Slide 28) So the mass of profit can and will rise as the rate of profit falls, keeping capitalist investment and production going. But as the rate of profit falls, eventually the increase in the mass of profit will decline to the point of what Marx called ‘absolute over-accumulation’, the tipping point for crises.

Thus Marx’s law of profitability provides an underlying explanation of the cycle of boom and slump that occurs periodically in capitalism. (Slide 29)

In sum:

The law of value:  only labour creates value.

The law of accumulation: the means of production will rise to drive up the productivity of labour and to dominate over labour.

The law of profitability: the first two laws create a contradiction between rising productivity of labour and falling profitability for capital. This can only be reconciled by recurring crises of production and investment; and, in the long term, by the replacement of capitalism. (Slide 30).

That was the lecture.  Questions from the seminar attendees were many and perceptive.  Here are a few.

Are there no other factors that cause crises in capitalism apart from profitability?

What is the difference between the organic composition of capital and the technical composition of capital that Marx refers to?

Does not the law suggest that there is no economic policy within capitalism that can stop recurring crises? 

If so, do the crises go on forever or will it come to a total breakdown at certain point?

I’ll leave the reader to consider these answers, if there are any answers.

Coronavirus: nature fights back

January 31, 2020

As I write, the new deadly coronavirus 2019-nCoV, related to SARS and MERS, and apparently originating in live animal markets in Wuhan, China, is starting to spread worldwide. According to the latest data as of today, there are just under 10,000 cases globally with just 130 or so outside China.  So far, there have been 230 fatalities, none outside China, or about a 2% death ratio, compared to 10% with the SARS virus back in 2009.  The rate of spread is about 1.5, a figure that appears to slowing, although it may be too early to say.

This infection is characterized by human-to-human transmission and an apparent two-week incubation period before the sickness hits, so the infection will likely continue to spread across the globe.

As epidemiologist Rob Wallace from the Institute for Global Studies, University of Minnesota says in Climate and Capitalism, “Outbreaks are dynamic. Yes, some burn out, including, maybe, 2019-nCoV. It takes the right evolutionary draw and a little luck to beat out chance extirpation. Sometimes enough hosts don’t line up to keep transmission going. Other outbreaks explode. Those that make it on the world stage can be game changers, even if they eventually die out. They upend the everyday routines of even a world already in tumult or at war.”

Wallace adds: “The SARS outbreak proved less virulent than it first seemed. But it still quietly killed patients, at magnitudes far beyond these first follow-up dismissals. H1N1 (2009) killed as many as 579,000 people its first year, producing complications in fifteen times more cases than initially projected from lab tests alone.  Under such widespread percolation, low mortality for a large number of infections can still cause a large number of deaths. If four billion people are infected at a mortality rate of only 2%, a death rate less than half that of the 1918 influenza pandemic, eighty million people are killed.”

But unlike for seasonal influenza, there is neither ‘herd immunity’, nor a vaccine to slow it down. Even speeded-up development will at best take three months to produce a vaccine for 2019-nCoV, assuming it even works. Scientists successfully produced a vaccine for the H5N2 avian influenza only after the U.S. outbreak ended.  These unknowns—the exact source, infectivity, penetrance, and possible treatments—together explain why epidemiologists and public health officials are worried about 2019-nCoV.

But whatever the specific source of 2019-noV, there appears to be an underlying structural cause: the pressure of the law of value through industrial farming and the commodification of natural resources.  Commoditizing the forest may have lowered the ecosystemic threshold to such a point that no emergency intervention can drive any outbreak low enough to burn out.  For example, in relation to the Ebola outbreak in the Congo (which is also happening again), “Deforestation and intensive agriculture may strip out traditional agroforestry’s stochastic friction, which typically keeps the virus from lining up enough transmission.” 

The blame for the 2019-nCoV outbreak is supposedly open markets for exotic animals in Wuhan, but it could also be due to the industrial farming of hogs across China.  And anyway, “even the wildest subsistence species are being roped into ag value chains: among them ostriches, porcupine, crocodiles, fruit bats, and the palm civet, whose partially digested berries now supply the world’s most expensive coffee bean. Some wild species are making it onto forks before they are even scientifically identified, including one new short-nosed dogfish found in a Taiwanese market.”

All are increasingly treated as food commodities. As nature is stripped place-by-place, species-by-species, what’s left over becomes that much more valuable. Spreading factory farms meanwhile may force increasingly corporatized wild foods companies to trawl deeper into the forest, increasing the likelihood of picking up a new pathogen, while reducing the kind of environmental complexity with which the forest disrupts transmission chains.

There has been much academic discussion among Marxists and ‘green ecologists’ recently on the relation of humans to nature.  The argument is around whether capitalism has caused a ‘metabolic rift’ between homo sapiens and the planet ie disrupting the precious balance among species and the planet, and thus generating dangerous viruses and, of course, potentially uncontrollable global warming and climate change that could destroy the planet.

The debate is round whether using the term ‘metabolic rift’ is useful because it suggests that at some time in the past before capitalism there was some metabolic balance or harmony between humans on the one hand and ‘nature’ on the other.  But nature has never been in some state of equilibrium.  It has always been changing and evolving, with species going extinct and emerging well before homo sapiens (a la Darwin).  And humans have never been in a position to dictate conditions in the planet or with other species without repercussions. ‘Nature’ lays down the environment for humans and humans act on nature.  To quote Marx: “Men make their own history but they do not make it just as they please; they do not make it under circumstances chosen by themselves, but under circumstances directly encountered and inherited from the past.”

What is clear is that the endless drive for profit by capital and the law of value exert a destructive power not just through the exploitation of labour, but also through the degradation of nature.  But nature reacts periodically in a deadly manner.

The coronavirus outbreak may fade like others before it, but it is very likely that there will be more and possible even deadlier pathogens ahead.  And the outbreak may have only a limited effect on capitalism, through a fall in the stock market and perhaps a slowdown in global growth and investment.

On the other hand, it could be a trigger for a new economic slump because the world capitalist economy has slowed to near ‘stall speed’.  The US is growing at just 2% a year, Europe and Japan at just 1%; and the major so-called emerging economies of Brazil, Mexico, Turkey, Argentina, South Africa,and Russia are basically static.  The huge economies of India and China have also slowed significantly in the last year and if China takes an economic hit from the disruption caused by 2019-nCoV, that could be a tipping point.

Eurozone slows to 1% a year in 2019.

The value in GDP

January 27, 2020

At the recent ASSA 2020 conference there was a session on whether Gross Domestic Product (GDP), the ubiquitous measure of national output, was adequate as a gauge of “well-being or social welfare”. Various proposals have been put forward for attempting to measure social welfare, including “dashboards” of economic and social indicators as well as approaches that are more explicitly tied to economic theory.  The US Bureau of Economic Analysis (BEA) initiated a discussion at ASSA to consider the pros and cons of alternative approaches.

Gross domestic product (GDP) is the basic mainstream measure of a country’s level of output and even prosperity.  It is a monetary measure of the market value of all the final goods and services produced in a specific time period. The measure goes back to the earliest of days of classical political economy, with William Petty developing the basic concept in the 17th century.  The modern concept was first developed by Simon Kuznets in 1934 to measure the national output of the US.

There are three ways to measure GDP.  The first is the production approach, which sums up the outputs of every enterprise.  The second is the expenditure approach which sums up all the purchases made; and third is the income approach which sums up all the incomes received by producers.

These three different approaches broadly match the three main schools of economic thought.  The production approach has an affinity with neoclassical school, which sees national output as the sum of all micro-agents’ production. The expenditure approach has been adopted by the Keynesian school, which looks at investment, consumption and saving at a ‘macro level’ to measure “effective demand”. The income approach has the closest connection with Marxist and classical political economy, because it distinguishes wages and profits as the main categories of national income and thus exposes the class divisions in the distribution of GDP; and the driving force for investment and production in capitalism ie profit.

Ever since the development of GDP, multiple observers have pointed out limitations of using GDP as the overarching measure of economic and social progress. GDP does not account for the distribution of income among the residents of a country, because GDP is merely an aggregate measure.  Neither does it measure unpaid housework, the level of happiness or well-being.  That is why there have been various attempts to replace GDP with other ‘broader’ measures.

One recent attack on GDP as a measure of national ‘wealth’ or well-being has come from Vint Cerf via this Wired article. Cerf makes the usual complaint that the measure does not capture the level of pro bono work that pervades many societies, by homemakers whose unpaid labour is an integral part of most functional societies, and non-profit organisations whose work also contributes to the benefit of society.”  He goes on “Moreover, GDP does not capture the many negative effects of some economic activities such as pollution, including carbon dioxide and other greenhouse gases. Their consequences should be factored into any measure of economic well-being if we are to accurately assess the state of the planet and its population.”  And finally,“As an average measure, GDP also fails to capture wealth and income disparities within a society, often negatively correlated with the health of that society.”

All this is true.  But is that the purpose of GDP as a measure?  At the time of its launch, Kuznets specifically warned against considering GDP as a measure of ‘welfare’ in a society.  Vint’s critique, echoed by others, fails to recognise that the value (or wealth) that modern economics wants to measure is the ‘market value’ of national output not the welfare of labour, women and children.  Capitalism has no direct interest in measuring that.  GDP has a specific purpose for capital not labour.

Household work provides a massive contribution to the welfare of communities.  And it delivers unpaid labour to sustain labour power in work for capitalist enterprises.  But because it is not a cost for capital, it does not need to be included in GDP.  Similarly, the grotesque (and rising) inequalities of income and wealth that exist within most countries is not a relevant factor for capitalist investment and production and so again does not need to be included in GDP.  Finally, the ‘externalities’ of capitalist production: eg, diseases, industrial accidents, pollution and climate change are not immediate costs to the profitability of capital (private ownership of production).  Indeed, if these ingredients were included in a revised measure of national ‘value’ they would become confusing obstacles to measuring properly the ‘health’ of capitalist production in a country.  And that is what matters in capitalism: having good measures of capitalist accumulation for policy decisions by capitalist enterprises and government and monetary authorities.

Of course, even within that paradigm, the GDP measure has its faults.  Diane Coyle is one economist that has criticised strongly GDP as a sufficiently accurate measure of production and investment.  She argues that GDP does not capture changes in investment that involve ‘intangibles’ and innovation.  In other words, national output and productivity growth may be much higher than GDP exposes.  However, even here, the argument that the failure to measure intangibles explains the productivity puzzle (low productivity growth) is not convincing.

Mariana Mazzucato got a lot of traction out of her recent book, The value of everything, where she complains that in GDP, finance is regarded as productive when it is really an ‘extractive’ sector and government investment is not given the ‘utility’ it deserves in GDP.  But this is to misunderstand the law of value under capitalism.  Under capitalism, production of commodities (things and services) are for sale to obtain profit.  Commodities must have use value (be useful to someone), but they must also have exchange value (make a sale for profit).  GDP is biased as a measure of value created in an economy for that good reason.

For Marxist analysis, there are many issues with using GDP.  National output in Marxist terms is c+v+s.  C is ‘constant capital’ (raw materials, intermediate products used up in production plus the depreciation of machinery etc). V is wages spent on the labour force + S (profits made on sales of the commodities produced).  In theory, GDP data can be converted into these Marxist categories because in an economy total prices of all goods in aggregate must equal total values in labour time, even though that equality will not exist in sectors of the economy.

The practical complexities of turning GDP as measured by government statistics in national accounts into the Marxist formulae have been comprehensively explained in works like that of Shaikh and Tonak. But when it comes to the world economy and the transfer of value between countries and companies globally, GDP is inadequate and misleading. As John Smith has pointed out, “it is impossible to analyse the global economy without using data on GDP and trade, yet every time we uncritically cite this data we open the door to the core fallacies of neoclassical economics which these data project.” The key concept within GDP is ‘value added’ by ‘agents of production’, but that means GDP does not expose value that is transferred or redistributed between countries or companies as a result of competition in markets.

Just as more technologically advanced companies get a transfer of value from less advanced companies through competition on the market (Marx’s transformation of values into prices of production), so imperialist countries get a transfer of value from peripheral countries through the unequal exchange of value in international trade and through transfer pricing within companies.  GDP does not capture that.  However, recent Marxist research has made progress in measuring this transfer in  the imperialist countries (see Carchedi and Roberts, Ricci and URPE_CHN_2019). These suggest that the GDP of the major capitalist economies is exaggerated by transfers of value through international trade and multi-national pricing equivalent to 3-5% of GDP every year.

Then there is the issue of productive and unproductive labour, something that Mazzucato took up but in a misleading way.  Mazzucato argues that the government sector creates value, but that is because she considers only use-value and does not recognise the dual character of value under capitalism, where profit through exploitation is value.  Marxist value theory maintains that many sectors and people are supposedly generating value-added but are really engaged in non-productive activities like finance and administration that produce no value at all.  And for capital, that includes the government sector: it may be necessary, but it is not value-creating for capital.

As Marx put it: “Only the narrow-minded bourgeois, who regards the capitalist form of production as its absolute form, hence as the sole natural form of production, can confuse the question of what are productive labour and productive workers from the standpoint of capital with the question of what productive labour is in general, and can therefore be satisfied with the tautological answer that all that labour is productive which produces, which results in a product, or any kind of use value, which has any result at all.”

For the neoclassical theory, any labour whose outcome can secure remuneration in the market is considered productive and contributes to the creation of new value. Thus, not only activities in the sphere of commodity circulation, but also those aimed at maintaining and reproducing the social order, are considered to produce new values and increase the level of prosperity and wealth of an economy

In contrast, as Shaikh and Tonak explain: “Economists of the classical political economy tradition pay particular attention to the fact that the non-production sectors of trade and finance as well as government in order to perform their socially useful functions employ labour and other inputs while at the same time their capital  stock depreciates; such expenses are drawn out from the surplus generated by the productive sectors of the economy.” (Shaikh and Tonak 1994, p61).

As Tsoulfidis and Tsaliki put it: “The main problem with orthodox national accounts is that they present many activities as ‘production’ while they should be portrayed as ‘social consumption’. As the ‘personal consumption’ sphere contributes to the reproduction of individuals in a capitalist society, the non-productive activities, such as trade, financial services or private security, in turn contribute to the reproduction and development of the capitalist system; however, their necessity does not negate the fact that as the total consumption (personal and social) increases, the part of surplus destined for the accumulation of capital is reduced and by extent the social wealth diminishes.”

So measuring the relative expansion of productive and unproductive activities is crucial to gauging the growth potential of capitalist economy, because only investment in productive sectors can sustain expansion under capitalism.  Indeed, a rising share of unproductive activity will exert a downward effect on the profitability of capital over time.

Again, this is an area where Marxist research has made strides in measurement: (Moseley; Roberts; Paitaridis, Tsoulfidis and Tsaliki, Peter Jones and others).  In this way, we can obtain the value in GDP.

 

Minsky and socialism

January 14, 2020

Recently, the Levy Institute, the think-tank centre for post-Keynesian economics (and in particular the theories of Hyman Minsky, the radical Keynesian economist of the 1980s), published a short video that that shows Minsky explaining his theory of crises under capitalism in his own words at an event in Columbia University, November 1987. It is a very clear account of his theory of crises based on ‘financial fragility’’.

When the Great Recession hit the world capitalist economy, many radical and Marxist economists, and even some mainstream economists, called the GR a ‘Minsky moment’.  In other words, the cause of the Great Recession was a financial crash resulting from excessive debt that eventually could not be serviced.  Minsky’s key contention, that financial instability is endogenously generated, implies that not only financial but also ‘real’ crises arise as a result of the inner workings of the financial system: ‘History shows that every deep and long depression in the United States has been associated with a financial crisis, although, especially in recent history, we have had financial crises that have not led to a deep and long depression’ (Minsky*).

In my view, this is an accurate statement.  A financial crash occurs in every capitalist slump, but financial crashes can occur without a slump.  But this suggests that what is going on in the ‘real economy’ is what decides a financial crash, not vice versa.  Indeed, as G Carchedi has shown (see graph below), when both financial profits and profits in the productive sector start to fall, an economic slump ensues. That’s the evidence from the post-war slumps in the US.  But a financial crisis on its own (as measured by falling financial profits) does not lead to a slump if productive sector profits are still rising.

Indeed, if you listen closely to Minsky’s account (above) of his crisis theory, he recognises that excessive debt in the form of Ponzi finance only leads to a crash when the profits engendered in business and in banking are no longer sufficient to sustain debt expansion.  As Minsky puts it, “borrowers are myopic to the past and blind to the future.’’

At the recent ASSA 2020 conference, the annual meeting of mainstream economists organised by the American Economic Association, there were also sessions by the more radical wings of economics: post-Keynesians and Marxists. Riccardo Bellofiore, the erudite scholar of Marxist, Sraffian and Keynesian economic theory, presented two papers that offered interesting insights on Minsky’s theories.  In his first paper, Bellofiore argues that “the current crisis is the outcome of money manager capitalism stage of capitalism – the real subsumption of labour to finance, in Marxian terms. The most promising starting points are the structural dimensions of Minsky’s analysis and the monetary circuit approach.” Minsky’sSocializationOfInvestment__preview (6)
In his second paper, he argues that Minsky’s contributions are major necessary ingredients to a rethinking of Marxian theory of capitalist dynamics and crises.”
MarxBetweenSchumpeterAndKeynes_Augu_preview (2)

I beg to differ.  I do not think that Minsky’s theories dovetail with Marx’s theory of crises or that they provide a better explanation of booms and slumps than that of Marx. Marx not Minsky  As Maria Ivanova from Goldsmiths University, London has argued effectively (in a paper of a few years ago comparing Minsky and Marx’s theories of crises), Marx was firmly opposed to blaming crises on financial speculation, or on the recklessness of single individuals (Marx and Engels, Collected Works, 1975, p. 401). “Speculation and panic may trigger crises, but to trigger something does not mean to cause it. For Marx, the ultimate origins of all crises lie in the ‘real’ economy of production and exchange.” (Ivanova conf_2011_maria_ivanova-on-marx-minsky-and-the-gr)

Ivanova argues that Marx’s concept of money could not be more different from Minsky’s. Marx saw money as the social expression of value – the amount of socially necessary labour time embodied in a commodity. Money thus expresses the deepest contradiction of the capitalist production relations in ‘a palpable form’. The Minskyan perspective prides itself on its Keynesian origins. “In contradistinction to Marx, Keynes accorded primary importance to interest-bearing capital where capital appears as property and not as function.  And since capital in that form does not function (i.e. does not engage in immediate production), it does not directly exploit labour; class conflict appears obliterated since the rate of profit now forms an antithesis not with wage labor but with the rate of interest” .

Ivanova reckons that implicit in the Keynesian-Minskyan perspective is the insight that finance can repress production, overpower it, and ‘decouple’ from it (at least temporarily) to the detriment of the wider economy – this is what Bellofiore argues is its major insight. But it follows from this that Minsky reckons that if finance were controlled, regulated, restrained, some of the worst ills of capitalism could be kept at bay.  This view is in sharp contrast to Marx, who reckoned that the inherent contradictions of capitalism were beyond human control.

Minsky believed, in line with the Keynesian tradition, that the crises arising from the permanent disequilibrium of the capitalist system could be contained by the concerted effort of ‘Big Government and Big Finance (‘monetary authorities). As Ivanova puts it: “the popular tale of the purely financial origins of the recent crisis dovetails nicely with the belief that financial instability and crises, albeit tragically unavoidable and potentially devastating, can be managed by means of money artistry”  No wonder many mainstream economists in the depths of the global financial crash, like Paul Krugman, reckoned that ‘’we are all Minskyans now”.

But the belief that social problems have monetary/financial origins and could be resolved by tinkering with money and financial institutions, is fundamentally flawed. “For the very recurrence of crises attests to the limits of fiscal and monetary policies as means to ensure ‘balanced’ accumulation.”” (Ivanova). Minsky** considered the dependence of non-financial businesses on ‘external funds to finance the long-term capital development of the economy’ a key source of instability. This provided an important rationale for government intervention. In his famous book, Minsky, Stabilizing an Unstable Economy (1986), he wrote ‘Once Big Government stabilizes aggregate profits, the banker’s reason for market power loses its force’.

So the job of the radical economist was to restore the profitability of capital by the intervention of the monetary and fiscal authorities, according to Minsky. This was more important that shifting the burden of any financial crisis off the backs of the many. As Minsky said in the 1980s: “It may also be maintained that capitalist societies are inequitable and inefficient. But the flaws of poverty, corruption, uneven distribution of amenities and private power, and monopoly-induced inefficiency (which can be summarized in the assertion that capitalism is unfair) are not inconsistent with the survival of a capitalist economic system. Distasteful as inequality and inefficiency may be, there is no scientific law or historical evidence that says that, to survive, an economic order must meet some standard of efficiency and equity (fairness) .”

Riccardo Bellofiore in his ASSA paper is keen to tell us that, in his book on Keynes (1975), Minsky adopted a more radical position than Keynes on the need for the “socialization of investment’’ as the solution to crises.  Riccardo reckons that Minsky’s socialization of investment, thanks to his reference to the New Deal, is not far from a socialization in the use of productive capacity: it is a “command” over the utilization of resources; its output very much looks like Marx’s “immediately social” use values. It is complementary to a socialization of banking and finance, and to a socialization of employment. Minsky goes further that a “Keynesian” welfare state and argues for a full employment policy led by the government as direct employer, through extra-market, extra-private enterprise and employment schemes.”

But this was in 1975. Mike Beggs, a lecturer in political economy at the University of Sydney  in a recent article, shows that, while that Minsky started off as a socialist, at least in following the ideas of ‘market socialism’ by Oscar Lange, he eventually retreated from seeing the need to replace capitalism with a new social organisation (or ‘socialised investment’), to trying to resolve the contradictions of finance capital within capitalism, as his eventual financial fragility theory of crises shows.

As Bellofiore says, in the 1970s, Minsky contrasted his position from Keynes.  Keynes had called for the “somewhat comprehensive socialization of investment” but went onto to modify that with the statement that “it is not the ownership of the instruments of production which it is important for the State to assume” — it was enough to “determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them.” But Minsky went further and called for the taking over of the “towering heights” of industry and, in this way, Keynesianism could be integrated with the ‘market socialism’ of Lange and Abba Lerner.

But by the 1980s, Minsky’s aim was not to expose the failings of capitalism, but to explain how an unstable capitalism could be ‘stabilised’. Biggs: “His proposals are aimed, then, at the stability problem. ….The expansion of collective consumption is dropped entirely. Minsky supports what he calls “Big Government” mainly as a stabilizing macroeconomic force. The federal budget should be at least of the same order of magnitude as private investment, so that it can pick up the slack when the latter recedes — but it need be no bigger.”

Indeed, Minsky’s policy approach is not dissimilar from that of today’s Modern Monetary Theory supporters.  Minsky even proposed a sort of MMT job guarantee policy. The government would maintain an employment safety net, promising jobs to anyone who would otherwise be unemployed. But these must be sufficiently low-paid to restrain market wages at the bottom end. The low pay is regrettably necessary, said Minsky, because “constraints upon money wages and labor costs are corollaries of the commitment to maintain full employment.” The discipline of the labour market must remain: working people may not fear unemployment, but would surely still fear a reduction to the minimum wage (Beggs). Thus, by the 1980s, Minsky saw government policy as aiming to establish financial stability, in order to support profitability and sustain private expenditure. “Once we achieve an institutional structure in which upward explosions from full employment are constrained even as profits are stabilised, then the details of the economy can be left to market processes.” (Minsky).

Minsky’s journey from socialism to stability for capitalist profitability comes about because he and the post-Keynesians deny and/or ignore Marx’s law of value, just as the ‘market socialists’, Lange and Lerner, did.  The post-Keynesians and MMTers deny/ignore that profit comes from surplus value extracted by exploitation in the capitalist production process and it is this that is the driving force for investment and employment. They ignore the origin and role of profit, except as a residual of investment and consumer spending. Instead they all have a money fetish. With the money fetish, money replaces value, rather than representing it. They all see money (finance) as both causing crises and, also as solving them by creating value!

In my view, far from Minsky providing the “necessary ingredients to a to a rethinking of Marxian theory of capitalist dynamics and crises”, as Bellofiore argues, Minsky’s theory of crises, like all those emanating from the post-Keynesian think tank of the Levy Institute, falls well short of delivering a comprehensive causal explanation of regular and recurring booms and slumps in capitalist production.  By limiting the searchlight of analysis to money, finance and debt, Minsky and the P-Ks ignore the exploitation of labour by capital (terms not even used).  They fail to recognise that financial fragility and collapse are triggered by the recurring insufficiency of value creation in capitalist accumulation and production.

Moreover, by claiming that capitalism’s problem lies in the finance sector, the policy solutions offered are the regulation and control of that sector, rather than the replacement of the capitalist mode of production.  Indeed, that is the very path that Minsky took: from his socialism and ‘’socialisation of investment’’ in the 1970s to ‘stabilising finance’ in the 1990s.

* Minsky, H. P. (1992a) Reconstituting the United States financial structure: some fundamental issues, Working Paper No. 69, Levy Economics Institute of Bard College.

** Minsky, H. P. (1996) Uncertainty and the institutional structure of capitalist economies: remarks upon receiving the Veblen-Commons award, Journal of Economic Issues, 30, pp. 357-368.

ASSA 2020 – part three: currencies, climate, china and crises

January 8, 2020

In this last part of my review of ASSA 2020, I want to cover some other issues discussed at ASSA, especially one big issue: the economics of climate change; and finally, look at the papers in the sessions organised by the Union for Radical Political Economics (URPE) – the main association covering Marxist economics.

One populist subject over the last few years has been the role and value of cryptocurrencies.  I have discussed these privatised digital currencies on my blog here. The debate continues on how well a cryptocurrency can serve as a means of payment. One paper argued that cryptocurrencies need to overcome double spending by using costly mining and by delaying settlement. Indeed, the authors reckon that bitcoin “generates a welfare loss that is about 500 times larger than a monetary economy with 2% inflation” because it is so costly to ‘mine’ and because of slow settlement.  Only if an economy had 50% inflation would the loss to users be higher than bitcoin.  Clearly, these cryptocurrencies are never going to replace state fiat currencies as a means of payment. TheEconomicsOfCryptocurrencies_Bitco_preview t

Bill Nordhaus was awarded the Nobel (Riksbank) prize for pioneering work on using an integrated climate-economy assessment model (IAM) to study when and how the tipping point affects the social cost of carbon dioxide. While the mainstream has lauded Nordhaus, the reality is that IAMs have proved to be mostly useless.  Most IAMs struggle to incorporate the scale of the scientific risks, such as the thawing of permafrost, release of methane, and other potential tipping points. Furthermore, many of the largest potential impacts are omitted, such as widespread conflict as a result of large-scale human migration to escape the worst-affected areas.

The IPCC’s mitigation assessment concluded from its review of IAM outputs that the reduction in emissions needed to provide a 66% chance of achieving the 2°C goal would cut overall global consumption by between 2.9% and 11.4% in 2100. This was measured relative to a ‘business as usual’ scenario. But growth itself can be derailed by climate change from business-as-usual emissions. So the business-as-usual baseline, against which costs of action are measured, conveys a misleading message to policymakers that fossil fuels can be consumed in ever greater quantities without any negative consequences to growth itself. And heterodox economist Steve Keen has debunked Nordhaus’ calculations, which suggest that even a 4C rise global temparatures would have only a limited effect on growth and welfare over the rest of this century and in effect there was no tipping point when global warming would get out of control.

Based on this relatively benign view, mainstream economics concentrates on carbon pricing and taxes to mitigate global warming, rather than radical action to end fossil fuel production through control of the major energy companies. This is why the mainstream session on climate change was entitled Carbon Tax Policy with the discussion around whether carbon taxes would slow economic growth and whether carbon taxes would add to fiscal costs or not.  You will be pleased to hear that the presenters concluded that carbon taxes will not slow economic growth and there could actually be fiscal gains through reducing the cost of dealing with floods, droughts hurricanes. MeasuringTheMacroeconomicImpactOfC_preview (2)

So that’s all right then.  Only it isn’t.  All the latest climate science suggests that the tipping points are approaching fast and allowing fossil fuel production to continue while trying to reduce its use by ‘market’ solutions’ like carbon pricing and taxes will not be enough.TippingPointsInTheClimateSystemAnd_preview

In the URPE sessions, Ron Baiman of Benedictine University pointed out that the money created by the Fed for the three-year 2008-2011 financial bailout would have paid for almost thirty years 2020-2050 of global climate crisis mitigation through a Global Green New Deal (GGND). FinancialBailoutSpendingWouldHave_preview Mathew Forstater et al reckoned that the transition to a sustainable economy and just society required a transformation in the technological structure of production away from fossil fuel-based and toward renewable energy-based technologies.  Peter Dorman reckoned that the GND-type policies won’t be enough. It required structural change in the economy.  TheClimateCrisisAndTheGreenNewDea_preview (2)

Another big issue at ASSA is what is happening in China and what will happen in the continuing trade and technology war with the US.  There were dozens of mainstream sessions that covered or referred to China from all sorts of angles.  Clearly China dominates much of mainstream research.

There is the question of China’s fast growth and pollution. According to Bharati et al, China has not achieved the turning point of where pollution and emission no longer positively relate to the economic growth. But that would happen in 2036 or so.  According, to NAME, both countries lose from the Trump tariffs, where high-tech industries are disproportionately affected. China mainly loses from the decline in the production scale of its high-tech industries, while the US mainly lose from the increasing input prices used in its high-tech industries. In addition, Japan also loses from the Trump tariff due to higher input prices. FuelingTheEnginesOfLiberationWithC_preview

Most interestingly, Chang-tai Hsieh points out that the largest Chinese firms are conglomerates, where the largest 500 conglomerates in 2015 had an average of 17 thousand firms, and collectively account for almost half of all registered capital of all Chinese firms. Conglomerates are typically partnerships between private firms and state owned firms, where state owned firms are typically at the center of the conglomerates; 6) The number and size of Chinese conglomerates increased from 1995 to 2015.

Suprabha Baniya et al conclude that China’s Belt and Road Initiative increases trade flows among participating countries by up to 4.1 percent; (ii) these effects would be three times as large on average if trade reforms complemented the upgrading in transport infrastructure; and (iii) products that use time sensitive inputs and countries that are highly exposed to the new infrastructure and integrated in global value chains have larger trade gains. TradeEffectsOfTheNewSilkRoad_preview (1)

An URPE session also covered China.  Brian Chi-ang Lin, National Chengchi University reckoned that If China keeps growing (even at a slower rate), China could eventually regain the global economic power she once had in the seventeenth and eighteenth centuries, under its current model. “Under Chinese President Xi Jinping, China has recently initiated a series of important policies such as the domestic nationalization of private corporations and the international One Belt One Road (OBOR) initiative to promote the national economy and, accordingly, to sustain the CCP’s authoritative regime.”

Finally, let me look at some of the interesting papers on Marxist theory presented in the URPE sessions. Carolina Alves from Girton College, University of Cambridge developed some new ideas on Marx’s concept of fictitious capital in relation to government bonds. “Fictitious capital does not represent real capital but it is increasingly the channel through which the dominance of interest bearing capital over other capitals occurs. Government bonds are the most important tools whereby the state is able to intervene in the financial market. the backbone of operations in the secondary market, and a source for financial accumulation, rather than as a fortuitous aspect of state finance. So public debt can neither be avoided nor paid off in capitalist economies, and government bonds now offer an unparalleled scope for purely financial accumulation.”
TowardsACriticalFramework_Government_preview

Sergio Camara Izquierdo from the Metropolitan Autonomous University (UAM)-Azcapotzalco, and one of the authors in our book, World in Crisis, analysed the trends in profitability and accumulation in Mexico in the postwar period. with new estimations that includes intangible assets and geometric patterns of depreciation. Camara reveals expansive (1939-1982) and contractive (1983-2018) long waves in capital accumulation within which there us ae neoliberal contractive wave.  And note the collapse in profitability of capital in Mexico from the 1990s with the formation of NAFTA.

Baris Guven from the University of Massachusetts-Amherst attacked the idea of Marxian political economy that places great emphasis on the nexus between technological change and capital accumulation, based on the profit-motive and competition.  For Guven, on the contrary, the profit-motive is the reason why capitalist economies are prone to underproduce technical (and scientific) knowledge. It is the state that does the technological fix, and this fix, in addition to others, supports reproduction of capital accumulation at extended scale.  In other words, no innovation without state intervention.  While there is some truth in the argument that the state has played a crucial role in boosting technology, as Mariana Mazzucato has shown, profitability remains the key driver.  When profitability is low, then investment and productivity growth will slow.

There was a whole session on post-Keynesian theory, with the usual theme of financialisation there.  And there was a session developing the ideas of Hyman Minsky alongside those from a Marxist perspective.  I particularly liked the paper by Masahiro Yoshida of Komazawa University who provided some emphatic data on the extreme ‘rentier’ nature of the UK economy, with the highest services value-added share and the largest finance services share in the g20. As UK financial services are more important than the US for minimising the current account deficit and the majority of the UK’s financial services are exported to the EU, the impact of Brexit is yet to be felt. TheDevelopmentOfCapitalAccumulation_powerpoint (2)

And Jan Toporowski’s paper made some telling points against the ‘free lunch’ perspective of Modern Monetary Theory. “This economical, apparently free, method of financing government expenditure is of course attractive when public services, welfare and infrastructure are deteriorating in the face of austerity. But this low cost is only the case at the time of the expenditure. To understand the true efficiency of this kind of financing, it is necessary also to consider the consequences of such financing. In particular, it is necessary to understand how that money would be absorbed by the economy.”

Finally, Riccardo Bellofiore straddled both the post-Keynesian and Marxist theory (as Riccardo usually does!) – with two papers.
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I’ll refer to Riccardo’s discussion of the relation between the ideas of Minsky and Marx in a future post.  But for now, that’s enough.

In sum, ASSA 2020 confirmed my view that: 1) mainstream economics still does not know why there was a Great Recession and why there is now stagnation; 2) mainstream economics is still convinced of market solutions to climate change; and 3) how could it not be otherwise when mainstream economics starts from the premise that there is no other mode of production but capitalism – which may be imperfect, but must be made to work at best as it can.

Top ten posts of 2019

December 21, 2019

As has become customary since I started this blog, here is the annual summary of content on my blog this year.  This year, there have been 450,000 viewings of the blog site, with the last quarter hitting a record number of viewings since I began the blog back almost exactly ten years ago.  Over those ten years, I have posted 882 times with just under 3 million viewings. There are 4300 regular followers.

The Michael Roberts Facebook site, which I started exactly five years ago has just under 8000 followers.  On the Facebook site, I put short daily items of information or comment on economics and economic events.

How are my efforts received?  Well, here is a review of my work by Danish economist Karen Helveg Petersen.

https://solidaritet.dk/michael-roberts-og-den-faldende-profitrate/?fbclid=IwAR3ibOt_zhT0Mou1U9Xc-aedxL2vV4h2OjGhrn2HfMYmH6B2BsfirSA7Yjo

You can make up your own mind.

Anyway, here are the top ten posts from my blog this year, as measured by the number of viewings.  And as you might expect from a blog that concentrates on Marxist economics and on a Marxist perspective on the world capitalist economy, my blog viewers are mostly interested in Marxist economic theory and its critique of political economy.

The top posts of the year were on Modern Monetary Theory (MMT).  MMT has become the flavour of the year as the economic theory of anti-austerity economics, if not anti-capitalist.

https://thenextrecession.wordpress.com/2019/01/28/modern-monetary-theory-part-1-chartalism-and-marx/

Having been confined to the esoteric fringe of even heterodox economics, MMT really kicked off when the US left-wing Democrat Alexandria Ocasio-Cortez started promoting the theory as the basis for economic policy; and a leading MMT exponent discussed the theory with UK Labour’s left-wing economics and finance leader, John McDonnell.

MMT now has some traction in the left as it appears to offer theoretical support for policies of fiscal spending funded by central bank money and running up budget deficits and public debt without fear of crises – and thus backing policies of government spending on infrastructure projects, job creation and industry in direct contrast to neoliberal mainstream policies of austerity and minimal government intervention.

So, in a series of posts, I analysed MMT from what I consider is a Marxist perspective.  I argued that separating money from value and indeed making money the primary force for change in capitalism fails to recognise the reality of social relations under capitalism and production for profit.  MMT ignores or denies a theory of value.  So MMT enters a fictitious economic world, where the state can issue debt and have it converted into credits on the state account by a central bank at will and with no limit or repercussions in the real world of productive capital.

In contrast, Marx’s law of value integrates money and credit into the capitalist mode of production and shows that money is not the decisive flaw in the capitalist mode of production and that sorting out finance is not enough. So it can explain why the Keynesian solutions (and MMT is a variant of Keynesian economics) do not work either to sustain economic prosperity or avoid crises.  I covered MMT in several posts, two of which made the top ten. Digital Commons has collated my posts into one paper which you can read here.

https://digitalcommons.fiu.edu/cgi/viewcontent.cgi?article=1133&context=classracecorporatepower

But the debate on MMT continues.

Rising government spending and unemployment are positively correlated in the OECD – the opposite of what MMT expects.

Also the debate that I conducted on the blog with Professor David Harvey on Marx’s law of value was in the top ten.

https://thenextrecession.wordpress.com/2018/04/02/marxs-law-of-value-a-debate-between-david-harvey-and-michael-roberts/

I argue that DH’s interpretation of Marx’s law of value is incorrect when he suggests that Marx did not have a ‘labour’ theory of value and that value only exists in ‘the market’.  From this flows the view that crises in capitalism are caused by a failure to ‘realise’ value through dislocation in the market ie underconsumption; and are not due to the failure to appropriate enough surplus value in production.  In the debate, DH strongly refutes my interpretation of his position and suggests my own view on crises is far too narrowly based as an explanation.  As I said in the post, this debate could be considered like a medieval religious debate about how many angels there are on the head of a pin; but it may be that it leads to something really worth knowing.  As it has made the top ten, it seems viewers think the latter.

Investment not consumption is the main swing factor in slumps – contrary to the underconsumption view –

% chg in personal consumption, business investment and GDP

The debate between David Harvey and me on the relevance of Marx’s law of the tendency of the rate of profit to fall was continued in person at the recent Historical Materialism conference in London.  You can read my report on that session here.

https://thenextrecession.wordpress.com/2019/11/11/hm1-marxs-double-edge-law/

The other theoretical discussion that made the top ten was on the economics of imperialism.  In another session which I organised at the Historical Materialism conference, John Smith, author of Imperialism in the 21st century, a widely praised and important book, presented with Andy Higginbottom of Kingston University, Sam King from the University of Victoria, Australia and myself on the economic foundations of modern imperialism.

https://thenextrecession.wordpress.com/2019/11/14/hm2-the-economics-of-modern-imperialism/

The discussion revolved around how value is transferred from the periphery (or the ‘global south’, if you prefer) to the imperialist centre (the ‘global north’), through transfer pricing, international trade, and capital flows.  In particular, we debated the relevance of the concept of ‘super-exploitation’ in the south as the main source of value transfer.  Again, the debate on this continues.

% of GDP of value transfer between major emerging economies and the G7

It was not just Marxist economic theory that attracted viewings of my posts but also analyses of the current state of the world capitalist economy.  Recessions, monetary easing and fiscal stimulus got into the top ten, I suppose, because it summed up my view of the likelihood of a new global recession and whether the official economic policies of central banks and governments were working to get capitalism out its low growth, low investment stagnation and could avoid a new slump.  My final sentence was: “Another recession is on its way and neither monetary nor fiscal measures can stop it.”

https://thenextrecession.wordpress.com/2019/08/19/recessions-monetary-easing-and-fiscal-stimulus/

I’ll revisit this story in a future post on the prospects for the world economy in 2020.

Global business profits are stagnating

One of the developments in the world economy in 2019 was the emerging trade and technology war between Trump’s America and Xi’s China.  This war, even if temporarily in truce, will break out again in 2020 and has already had detrimental effects on the world economy.  In a post that made the top ten, I argued last May this war would be one of the triggers for a new global slump “before the year is out”.

https://thenextrecession.wordpress.com/2019/05/26/global-slump-the-trade-and-technology-trigger/

Well, that ain’t happened.  But, in my view, it remains at the heart of any future dislocation of the world capitalist economy.

Global trade is declining

One post that I do every year and which always makes the top ten is Credit Suisse’s annual measure of the degree of inequality of wealth globally.  Once again, the report revealed the staggering degree of wealth inequality in the world.  The top 1% of adults own 45% of all global personal wealth; 10% own 82%; the bottom 50% own less than 1%.  So poor are the bottom 50% (they own no wealth at all), that it means that the likes of you and me who might own (partly) a house or flat in the advanced capitalist economies are actually in the top 10% of wealth holders!

https://thenextrecession.wordpress.com/2019/10/25/the-top-1-own-45-of-all-global-personal-wealth-10-own-82-the-bottom-50-own-less-than-1/

I did quite a few book reviews during 2019.  See my post: https://thenextrecession.wordpress.com/2019/12/18/books-of-2019/

But only one review made the top ten posts.  That was Stolen! by young British economist and activist, Grace Blakeley.  This book on the cause of crises in capitalism and policies for solving it in Britain was widely circulated and sold, not only in the UK but in Europe and the US.

https://thenextrecession.wordpress.com/2019/09/13/theft-or-exploitation-a-review-of-stolen-by-grace-blakeley/

“All our wealth has been stolen by big finance and in doing so big finance has brought our economy to its knees.  So we must save ourselves from big finance.” That is the shorthand message of the book.  Unfortunately, like most post-Keynesian analyses, Blakeley ignores Marx’s law of value in explaining the contradictions in modern capitalist economies and instead leans on the Keynesian analysis that the root of all evil is money, credit and finance.  As a result, in my view, because this analysis is faulty, her policy proposals are also inadequate.

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

The debate on the right policies for the left in Britain has become somewhat academic with the victory of the hard-right Conservative government in the December general election.  I don’t usually post much on the UK because it is not the most important capitalist economy, but how and why the opposition leftist Labour party failed to win is under hot debate at the moment.  So my short response immediately after the election result on Brexit and on the underlying economic consequences made the top ten this year.

https://thenextrecession.wordpress.com/2019/12/13/get-brexit-done/

It is the economic situation that will become the testing ground for the Conservative government in 2020 if a global slump should emerge.

The economic well-being index (chg in real disposable income minus unemployment rate) shows that when the index is rising before an election, the incumbent government usually wins.

Finally, there is Venezuela. It has disappeared off the media headlines in recent months now that the attempted coup organised by the US to overthrow the Maduro regime failed (unlike in Bolivia, where it succeeded).  What is interesting is that my post on Venezuela was written in 2017!

https://thenextrecession.wordpress.com/2017/08/03/the-tragedy-of-venezuela/

But viewers picked up that old post to get my understanding of why the Chavista revolution has failed.  In 2020, we shall see if Maduro can survive another year.

Venezuela real GDP falling near 30% since 2012.

Books of 2019

December 18, 2019

For me, the best book of the year is Classical Political Economics and Modern Capitalism by Greek Marxist economists, Lefteris Tsoulfidis and Persefoni Tsaliki.  And it is a book that I have not yet reviewed on my blog.  The reason why is that it’s so good that I am doing a longer and comprehensive view for the journal Marx 21 to be published next spring.  There will be some criticisms but for Marxist economics it is essential reading.

Suffice it to say now, the title tells the reader that the authors cover all aspects of Marxist economic theory as applied to modern capitalism in a succinct, rigorous manner.  In so doing, the authors refute neoclassical and Keynesian theories as better explanations of capitalism; and above all, they offer empirical evidence to support Marx’s key laws of motion of capitalism: the law of value and the law of profitability.  Both theory and evidence are offered to explain and justify Marx’s theory crises under capitalism.  The book is expensive, so it should really be seen as a textbook for economics students seeking an account of Marxian economics.  But each chapter can be purchased or read separately.  And it delivers well, better even than Anwar Shaikh’s monumental Capitalism (in 2016).

In contrast, American Marxist economist Richard Wolff has aimed at activists and not academics by publishing two short books designed to explain the ideas of Marxism and socialism in a straightforward way: Understanding Marxism and Understanding Socialism.  The books are powerful propaganda weapons for socialism, but they do suffer, yet again, from an incorrect explanation of crises under capitalism.  Wolff adopts the classic underconsumption argument that capitalists pay “insufficient wages to enable workers to purchase growing capitalist output”.  Regular readers of this blog will know that I consider this theory of capitalist crises as wrong.  Marx rejected it; it does not stand up theoretically as part of Marx’s law of value or profitability; and empirical evidence is against it.

Among other Marxist economics books in 2019 is the The Oxford Handbook of Karl Marx, edited by Matt Vidal, Tomas Rotta, Tony Smith and Paul Prew.  This brings together a series of chapters by prominent Marxist scholars covering all aspects Marxist theory, from historical materialism, dialectics, political economy, social reproduction and post-capitalist models.  https://thenextrecession.wordpress.com/2019/08/06/the-handbook-of-karl-marx-profitability-crises-and-financialisation/

I was particularly interested in the chapter on Reproduction and Crisis in Capitalist Economies by Deepankar Basu, from the University of Massachusetts, Amhurst.   Basu denies that there is a “Marxist theory of crisis’ and seeks to produce one that amalgamates the law of tendency of the rate of profit to fall, with profit squeeze theory from Okishio and straightforward underconsumption theory.  In my view, this does not work.  Indeed, I conclude that “all the Marxist authors discussing crises under capitalism in the Handbook are determined to trash Marx’s law of profitability as an explanation, in favour of others or deny that there is any general theory of crises at all.”

One chapter in the handbook deals with the commodification of knowledge and information.  In this chapter, the authors argue that knowledge is ‘immaterial labour’ and ‘knowledge commodities’ are increasingly replacing material commodities in modern capitalism.  Disputing the authors’ analysis, I would argue that knowledge is material (if intangible) and if knowledge commodities are produced under conditions of capitalist production ie using mental labour and selling the idea, the formula, the program, the music etc on the market, then value can be created by mental labour.  Value then comes from exploitation of productive labour, as per Marx’s law of value. The value of ‘knowledge commoditites’ does not tend to zero.  So there is no need to invoke the concept of rent extraction to explain the profits of pharma companies or Google. The so-called ‘renterisation’ of modern capitalist economies that is now so popular as a modification or a supplanting of Marx’s law of value is not supported by knowledge commodity production.

Another important book in Marxist economic analysis was The Economics of Military Spending: A Marxist perspective by Adem Yavuz Elveren.  In analysing the economic role of military expenditure (milex) in modern capitalism, Elveren combines theoretical analysis with detailed econometric investigations for 30 countries over last 60 years.  That’s the right way to do political economy or Marxist social science.  If the reader wants to gain knowledge of all the theories of milex and crises without verbiage and confusion, he or she can do no better than read Elveren.

Elveren’s empirical work appears to back up the Marxist view of the role of military spending in a capitalist economy.  It can act to lower the rate of profit on capital and thus on economic growth as it did in the neo-liberal period, when investment and economic growth slowed.  But it can also help bolster the rate of profit through state’s redistribution of value from labour to capital, when labour is forced to pay more in taxation, or the state borrows more, in order to boost investment and production in the military sector.

Another book from a Marxist perspective looks at the modern changes in the composition and activity of the global labour force. Jorg Nowak, a fellow at the University of Nottingham, looks at Mass Strikes and Social Movements in Brazil and India:: popular mobilisation in the Long Depression.  Nowak argues that in the 21st century and in this current long depression in the major economies, industrial action is no longer led by organised labour ie trade unions, and now takes the form of wider ‘mass strikes’ that involve unorganised workers and wider social forces in the community.  This popular mobilisation is closer to Rosa Luxemburg’s concept of mass strikes than the conventional ’eurocentric’ formation of trade unions. Nowak develops the argument that the intensity of class conflict between labour and capital varies with stages in the economic cycle of capitalist economic upswings and downswings.  He cites various authors who seek to show that when capitalism is in a general upswing in growth, investment and employment, class conflict as expressed in the number of strikes rises, particularly near the peak of the upswing.

There were a number of heterodox economics, not strictly Marxist in my view, published this year.  The most popular and widely praised was Stolen – how to save the world from financialisation, by Grace Blakeley, the young British socialist economist and Labour activist.  Blakely poses that “all our wealth has been stolen by big finance and in doing so big finance has brought our economy to its knees”.  So we must save ourselves from big finance.  That is the shorthand message of a new book.  The concept of financialisation dominates her view of capitalism, not exploitation of labour.

Stolen aims to offer a radical analysis of the crises and contradictions of modern capitalism and policies that could end ‘financialisation’ and give control by the many over their economic futures.  Accepting this model implies that finance capital is the enemy and not capitalism as a whole, ie excluding the productive (value-creating) sectors.  Moreover, the narrative that the productive sectors of the capitalist economy have turned into rentiers or bankers is just not borne out by the facts.  And because the analysis is faulty, her policies for reform are also inadequate.

Another heterodox book is by John Weeks, who used to write solid Marxist analyses of capitalism back in the 1980s.  In his new book, The Debt Delusion: Living Within Our Means and Other Fallacies. Weeks aims at demolishing economic arguments for the necessity of austerity.  But he adopts the Keynesian view that the cause of crises under capitalism is the “lack of effective demand”.  Weeks says the lack of effective demand can be overcome or avoided by government spending and that is why capitalism worked so well back in the 1960s.  If we just drop austerity policies and go back to Keynesian-style government ‘demand management’, all will be well.  Marxist theory and the history of modern capitalist crises beg to differ.

The desire to put Keynes in same box as Marx is repeated by James Crotty with his new book entitled Keynes Against Capitalism: His Economic Case for Social Liberalism, in which he claims that, far from being a conservative, Keynes was in fact a socialist, if not a revolutionary one like Marx. “Keynes did not set out to save capitalism from itself as many think, but instead reckoned it needed to be replaced by a liberal form of socialism.” This thesis does not hold water in my opinion.  There is plenty of evidence in Keynes’ writings that he really stood for ‘managed capitalism’, and not socialism by any reasonable definition.

Then there are the more mainstream but radical analyses of capitalism.  World renowned expert on global inequality, Branco Milanovic in his new book, Capitalism Alone, starts from the premise that capitalism is now a global system with its tentacles into every corner of the world driving out any other modes of production like slavery or feudalism or Asian despotism to the tiniest of margins.  But also capitalism is not just only mode of production left, it is the only future for humanity.  Milanovic poses just two models for the future: ‘liberal capitalism’ of the West which creaks under the strains of inequality and capitalist excess; and ‘political capitalism’, as exemplified by China, which many claim is more efficient, but which is autocratic and corrupt and vulnerable to social unrest.

In my view, Milanovic’s dichotomy between ‘liberal democracy’ and ‘political capitalism’ is false.  And it arises because, of course, Milanovic starts with his premise (unproven) that an alternative mode of production and social system, namely socialism, is ruled out forever. Indeed, Milanovic’s policies to reduce the inequality of wealth and income in capitalist economies and/or allow people to leave their countries of poverty for a better world seem to be just as (if not more) ‘utopian’ a future under capitalism than the ‘socialist utopia’ he rules out.

Then there is the new book by the radical superstar of mainstream economics, Thomas Piketty: Capital and Ideology. This is a follow up to his mega Capital in the 21st Century from 2014.  The new book is even larger: some 1200pp. Whereas the first book provided theory and evidence on rising inequality, this book seeks to explain why this was allowed to happen in the second half of the 20th century.  Piketty says that he does not want what most people consider ‘socialism’, but he wants to “overcome capitalism.” Far from abolishing property or capital, he wants to spread its rewards to the bottom half of the population, who even in rich countries have never owned much.  To do that, he says, we must return to the social-democratic principles that were so successful in the 1960s.

Certainly, the evidence of growing inequality of both wealth and incomes in all the major economies is overwhelming and in a new book, The Triumph of Injustice: how the rich dodge taxes and how to make them pay , inequality experts, Gabriel Zucman and Emmanuel Saez provide us with yet more updated data.  It’s a searing indictment of American tax system, which, far from reducing the rising inequality of income and wealth in the US, actually drives it higher. Like Piketty, their policy solution is a wealth tax on property and financial assets.  They do not propose more radical policies to take over the banks and large companies, stop the payment of grotesque salaries and bonuses to top executives and end the risk-taking scams that have brought economies to their knees. For them, the replacement of the capitalist mode of production is not necessary, only a redistribution of the wealth and income already accrued by capital. Abolish the billionaires by taxation, not by expropriation.

Redistribution of incomes and wealth by government taxation and regulation is the main policy proposal of radical mainstream – the alternative to the Marxist proposal of the replacement of the capitalist mode of production.  It is the theme also adopted by Joseph Stiglitz, a Nobel (Riksbank) prize winner in economics and former chief economist at the World Bank, as well as an adviser to the leftist Labour leadership in the UK.  He stands to the left in the spectrum of mainstream economics.  His new book called People, Power, and Profits: Progressive Capitalism for an Age of Discontentin which he proclaims that “We can save our broken economic system from itself.”  It is not capitalism that is the problem but vested interests, especially among monopolists and bankers. The answer is to return to the days of managed capitalism that Stiglitz believes existed in the golden age of the 1950s and 1960s.  Here he echoes the views of Weeks, Piketty, Milanovic and Crotty above.

To get back to this “progressive capitalism”, Stiglitz proposes regulation, breaking up the ‘monopolies’, progressive taxation, ending corruption and enforcing the rule of law in trade. But what on earth would make the top 1% and the very rich owners of capital agree to reduce their gains in order to get a more equal and successful economy?  And how would regulation and more equality deal with the impending disaster that is global warming as capitalism accumulates rapaciously without any regard for the planet’s resources and viability?  Programmes of redistribution do little for this.  And if an economy is made more equal, would it stop future slumps under capitalism or future Great Recessions?  More equal economies in the past did not avoid these slumps.

Readers would be better advised to understand the nature of modern capitalism by carefully digesting the best Marxist analyses that combine theory with empirical evidence.  One such work is a new revised version of Invisible Leviathan, a book by Professor Murray Smith of Brock University, Ontario, Canada. The book sets out to explain why Marx’s law of value lurks invisibly behind the movement of markets in modern capitalism and yet ultimately explains the disruptive and regular recurrence of crises in production and investment that so damage the livelihoods (and lives) of the many globally.  This book is a profound defence (both theoretically and empirically) of Marx’s law of value and its corollary, Marx’s law of the tendency of the rate of profit to fall.

As Smith concludes: “The essential programmatic conclusion emerging from Marx’s analysis is that capitalism is constitutionally incapable of a ‘progressive’, ‘crisis-free’ evolution that would render the socialist project ‘unnecessary’, and furthermore, that a socialist transformation cannot be brought about through a process of gradual, incremental reform. Capitalism must be destroyed root and branch before there can be any hope of social reconstruction on fundamentally different foundations – and such a reconstruction is vitally necessary to ensuring further human progress.”

The debt delusion

December 10, 2019

John Weeks is Professor Emeritus at the School of Oriental & African Studies, University of London.  He is also a coordinator of of the UK’s Progressive Economic Forum (“founded in May 2018 and brings together a Council of eminent economists and academics to develop a new macroeconomic programme for the UK.”).

John Weeks’ new book is The Debt Delusion: Living Within Our Means and Other Fallacies. It aims at demolishing economic arguments for the necessity of austerity.  ‘Austerity’ is the catch word for the policy of reducing government spending and budget deficits and public sector debt.  This has been considered as necessary to achieve sustained economic growth in capitalist economies after the Great Recession of 2008-9.  The argument of governments and their mainstream advisors was that public sector debt had mushroomed out of control. The size of the debt compared to GDP in most countries had got so high that it would drive up interest costs and so curb investment and growth in the capitalist sector and even generate new financial crashes.  Austerity policies were therefore essential.

Keynesians and other heterodox economists rejected this analysis behind austerity policies.  Far from trying to balance the government books, governments should run deficits when economies were in recession to boost aggregate demand and accelerate recovery.  Rising public debt was no problem as governments could always finance that debt by borrowing from the private sector or just by ‘printing’ more cash to fund deficits and debt costs (debt costs being the interest paid on government bonds to the holders of that debt and the rollover of the debt).  Austerity was not an economic necessity, but a political choice bred by the ideology of insane and out of date economics and self-serving right-wing politicians.

In his new book, Weeks sets out to debunk six austerity “myths”: 1) “We must live within our means” 2) “Our government must live within its means” 3) “We and our government must tighten our belts” 4) “We and our government must stay out of debt”; 5) “The way for governments to stay out of debt is to reduce expenditures, not to raise taxes”; 6) “There is no alternative to austerity”.

The most important myth to crack, according to Weeks, is the idea that government budgets are like household budgets and must be balanced.  This is nonsense.  Governments can run annual budget deficits by borrowing, as indeed can households, as long as they have the income to cover the interest and repayments costs.  Moreover, in the case of governments, all the major countries have run annual deficits for decades. “Even the Germans, those paragons of a balanced budget, have only had a surplus in seven of the past 24 years, and more than half of these were in the past four years.”

Indeed, households often resort to credit, short and long term. Long-term credit often even reduces expenditure. The same is true for a government. As Weeks emphasises, most long-term credits for governments are used to purchase assets (capital spending), some of which even produce income (such as social housing), others that serve important functions for our societies (for example schools, hospitals, public transport). The public sector creates use values (to apply Marx’s terms) ie things or services that people need and so boosts GDP.

Weeks makes the key point that before the global financial crash and the Great Recession, it was not rising public sector debt that was the problem, but fast-rising private sector debt as households increased mortgage debt at low interest rates to buy homes and the finance sector exponentially expanded their own debt instruments to speculate.  It was the bursting of this private sector credit boom that led to the credit crunch of 2007 and the banking crash, not high public debt. Instead, the latter became the trash can for dumping private debt as governments (taxpayers) picked up the bill.

But from hereon I part with Professor Weeks’ analysis.  Professor Weeks adopts the Keynesian view that the cause of crises under capitalism is the “lack of effective demand”.  He argues that, as austerity policies reduce aggregate demand, they are the main cause of the Great Recession and the poor recovery afterwards “the principle (sic) cause of our economic woes, which predates Brexit by several years and largely accounts for the global slowdown, are austerity policies by the governments of most of the G7 countries, whose economies together account for over half of global output.”

Back in the 1970s and 1980s, Professor Weeks criticised convincingly this Keynesian demand argument from a Marxist perspective (see John Weeks, “The Sphere of Production and the Analysis of Crisis in Capitalism,” Science & Society, XLI, 3 (Fall, 1977) and John Weeks on underconsumption) .  But now as coordinator of the Keynesian Progressive Economy Forum, he writes that “capitalist economies do suffer periodically from extreme instability, the most recent example being the Great Financial Crisis of the late 2000s. These moments of extreme instability, recessions and depressions, result … from private demand “failures”; specifically, the volatility of private investment and to a lesser extent of export demand.” He goes further: “public expenditure serves to compensate for the inherent instability of private demand. This is the essence of “counter-cyclical” fiscal policy, that the central government increases its spending when private demand declines and raises taxes when private expenditures create excessive inflationary pressures. During 1950-1970 that was the policy consensus, and it coincided with the “golden age of capitalism”.

So Weeks says, the lack of effective demand can be overcome or avoided by government spending and that is why capitalism worked so well back in the 1960s.  If we just drop austerity policies and go back to Keynesian-style government ‘demand management’, all will be well.

But just as excessive government spending, budget deficits or public debt was not the cause of the financial crash and the Great Recession, neither was austerity. Indeed, Carchedi has shown that before every post-war recession in most capitalist economies, government spending was rising as a share of GDP, not falling.

% change in government spending one year before a recession

Rising government spending and regular budget deficits did not enable any major capitalist economy to avoid the Great Recession.  For example, Japan ran budgets deficits for over a decade before the 2008-9 slump.  It made no difference.  Japan entered the slump, as did every other major economy.

And after the Great Recession ended, there is little evidence that those countries that ran budget deficits and thus increased public sector debt recovered quicker and increased GDP more than those that did not.  Several studies show the so-called Keynesian multiplier (the ratio of real GDP growth to an increase in government spending or budget deficit) is poorly correlated with the economic recovery after 2009. (see below). The EU Commission finds that the Keynesian multiplier was well below 1 in the post-Great Recession period.  The average output cost of a fiscal adjustment equal to 1% of GDP is no more than 0.5% of GDP for the EU as a whole.

https://voxeu.org/article/government-spending-multipliers-and-business-cycle

https://voxeu.org/article/fiscal-stimulus-times-high-public-debt-reconsidering-multipliers-and-twin-deficits

https://voxeu.org/epubs/cepr-reports/how-big-are-fiscal-multipliers

What does show a high correlation is the change in the rate of profit on productive assets owned by the capitalist sector.

Correlation between change in rate of profit and in real GDP growth for ten capitalist economies

If the rate of profit falls, there is a high likelihood that the rate of investment will fall to the point of a slump.  Then there is a ‘lack of effective demand’.  This Marxist multiplier, as Carchedi and I call it, is a much better explanation of booms and slumps in modern capitalist economies than the Keynesian demand multiplier.

This is not really surprising if you think about it.  What happens in the capitalist sector of the economy, which is about 80% of value in most countries, must be more decisive than what happens in the government sector, even if there is a significant Keynesian multiplier effect (which there is not, on the whole).  What matters in modern capitalist economies is the level and change in the rate of profit and the size and cost of corporate debt; not the size of public spending and debt.

There has been a long debate about whether ‘excessive’ public debt can slow economic growth by ‘crowding out’ credit for investment by the capitalist sector.  There was the (in)famous debate started by mainstream economists Reinhart and Rogoff etc.  They argued that if a country ran up a public debt ratio above 100% of GDP, that was a recipe for a slump or at least economic slowdown. The two Rs figure and methods were exposed to ridicule. But the debate remains.  Rogoff continues to argue the case.  And others present more evidence that high public debt can damage the capitalist sector.

A recent paper looking at data for over half a million firms in 69 countries found that high government debt affects corporate investment by tightening the credit constraint faced by companies, especially those companies that find it difficult to get credit: “when public debt is at 25% of GDP, the correlation between investment and cash-flow is just above 9%, but this correlation goes well above 10% when public debt surpasses 100% of GDP. This finding is consistent with the idea that higher level of public debt tightens the credit constraint faced by private firms.”  What this means is that, as banks use more and more of their cash on buying government bonds, they have less available to lend to firms – “crowding out”.

Christoph Boehm found the fiscal multiplier associated with government investment during the Great Recession was near zero. “After a government investment shock, private investment falls significantly below zero – without a lag. The estimates become insignificant in the sixth quarter, but remain more than one standard error below zero until the eighth quarter. Hence, the data support the theories’ prediction that private investment is crowded out, and the government investment multiplier small.”

In a way, Weeks’ book is outdated.  ‘Austerity’ is no longer the cry of the international agencies like the IMF, ECB or capitalist governments.  On the contrary, with the failure of monetary policy (zero interest rates, quantitative easing) to get economies back on a pre-2007 growth path, everybody (except the German government) has become Keynesian.  Fiscal policy (more government spending, running budget deficits by issuing bonds or just ‘printing’ money) has become the order of the day.  Japan has just launched a massive new fiscal stimulus programme to expand public works.  New ECB President Christine Lagarde has called for more fiscal spending by governments, as have the IMF and the OECD.

But as I have argued before, if introduced, fiscal stimulus will also fail in getting capitalist economies out of the slowest economic ‘recovery’ from a slump since the 1870s.  As European economist, Daniel Gros, shows in a recent paper, “the overall conclusion is clear. One would need a very large fiscal deficit to have even a modest impact on inflation or interest rates. Fiscal policy cannot save the ECB.”

Professor Weeks’ book shows that opposing budget deficits and rising public debt because it will cause slumps or low growth is a delusion.  But on the other hand, running government deficits won’t avoid slumps and will have little impact on boosting economic growth in capitalist economies.

Understanding socialism

December 6, 2019

The New York Times magazine has described Richard Wolff as “probably America’s most prominent Marxist economist”.  And that is probably not an exaggeration as a description of this emeritus Professor of Economics at the University of Massachusetts, Amherst and visiting professor at the New School University in New York.

Richard Wolff has been one of a handful of Marxist economists with full tenure at an American university.  And he has worked tirelessly to bring home to students and all who would listen in the US, the Marxist alternative explanation of the nature of US capitalism and its current crisis.  Wolff has written several important economics books, sometimes with his close collaborator, Stephen A. Resnick.  In particular, their recent book,  Contending Economic Theories, neoclassical, Keynesian and Marxian is a very useful and clear explanation of the main strands of economics for those who don’t know. Professor Wolff’s weekly show, Economic Update with Richard D. Wolff, is syndicated on over 70 radio stations nationwide and available for broadcast on Free Speech TV.

Now Wolff has published two short books designed to explain the ideas of Marxism and socialism in a straightforward way: Understanding Marxism and Understanding Socialism.  The first analyses capitalism. He goes through the concepts of how competition develops between the capitalists (p.51); how labour power is commodified (p.41); and how capitalism is prone to crises and instability (p.60). Any individual, he says “exhibiting a personal instability comparable to the economic and social instability of capitalism would long ago have been required to seek professional help and to make basic changes” (p.61). But capitalism limps on and threatens to take us all down with it. Until workers get to decide democratically what to do about replacing it, so it will continue.

As Wolff has said: “If you want to understand an economy, not only from the point of view of people who love it, but also from the point of view of people who are critical and think we can do better, then you need to study Marxian economics as part of any serious attempt to understand what’s going on. Not to do it is to exclude yourself from the critical tradition.”

Wolff concentrates on Marx’s key discovery about capitalism, namely the surplus value, which is what employers appropriate above what they pay for wages.  Wolff shows that productive workers are not compensated for the full amount and worth of their labour.  And that constitutes exploitation. The expropriators constitute a tiny percentage of the population, and they control what happens with that surplus value. It is this relationship of production, Wolff insists, that has thwarted the democratic promises of the American, French, and other bourgeois revolutions. And this system of minority rule over ownership of assets and people’s labour power is also the cause of the staggering inequality that afflicts the world now.

The weakness in Wolff’s narrative, at least as expressed in his previous books is his explanation of why capitalism has crises in investment, production and employment that damages the lives of billions.  Wolff adopts the classic underconsumption argument that capitalists pay “insufficient wages to enable workers to purchase growing capitalist output”.  Regular readers of this blog will know that I consider this theory of capitalist crises as wrong.  Marx rejected it; it does not stand up theoretically as part of Marx’s law of value or profitability; and empirical evidence is against it.

In the second book, Understanding Socialism, Wolff looks at various socialist experiments throughout history and suggests a new path to socialism based on workplace democracy.  Socialism allows the many to control the fruits of their labour.  And this would be done in a democratic way, with the workers voting on these concerns, as democracy is extended way beyond voting for politicians and even ballot initiatives, to the factory floor, the office, etc.

Wolff focuses on this democratization of the workplace as the basis of a socialist future.  Wolff correctly emphasises that the economic base of socialism is the collective ownership of the means of production.  But he is concerned not to adopt the central planning model of the failed Soviet Union, as he sees it.  So he wants decentralised democracy through workers cooperatives.  For him, the solution to recurrent crises and rising inequality lies in “changing the class structure of capitalist enterprises” and replacing them with “workers-directed enterprises.” 

Wolff is concerned, rightly, to correct the view that the socialist alternative to capitalism is simply the public ownership of the major corporations and a national plan.  Without democracy and workers control at company level there can be no real socialist development.  Otherwise state officials merely replace a capitalist board of directors.  This is “insufficient conceptually and strategically”.

But Wolff wants to include and emphasise the role of what he calls Workers Self-Directed Enterprises (WSDEs).  To me, this seems to be bending the stick too far the other way, being close the utopian socialist ideas of Fourier and Robert Owen. Workers cooperatives without planning implies that markets will continue to rule between coops, opening the door to the forces of the law of value, rather than directing productive forces in the interest of society as a whole.  It is one thing to achieve democracy at the workplace, but is it not jumping out of the frying pan into the fire, by leaving the wider economy to power of the market?