Archive for the ‘marxism’ Category

The US rate of profit in 2017

November 2, 2018

Official data are now available in order to update the measurement of the US rate of profit a la Marx for 2017.  So, as is my wont, I have updated the time series measure of the US rate of profit.  If you wish to replicate my results, I again refer you to the excellent manual for doing so compiled by Anders Axelsson from Sweden,

There are many ways to measure the rate of profit (see  As in last year, I have updated the measure used by Andrew Kliman (AK) in his book, The failure of capitalist production.

AK measures the US rate of profit based on corporate sector profits only and using the historic cost of net fixed assets as the denominator.  AK considers this measure as the closest to Marx’s formula, namely that the rate of profit should be based on the advanced capital already bought (thus historic costs) and not on the current cost of replacing that capital. Marx approaches value theory temporally; thus the price of denominator in the rate of profit formula is at t1 and should not be changed to the price at t2.  To do the latter is simultaneism, leading to a distortion of Marx’s value theory.  This seems correct to me.  The debate on this issue of measurement continues and can be found in the appendix in my book, The Long Depression, on measuring the rate of profit.

What are the results of the AK version of the rate of profit based on the US corporate sector?

There has been a fall in the rate of profit in 2017 from 24.4% in 2016 to 23.9% in 2017. Indeed, the US rate of profit on this measure has now fallen for three consecutive years from a post-crash peak in 2014.  This suggests that the recovery in profitability since the Great Recession low in 2009 is over.  The AK measure confirms Marx’s law in that there has been a secular decline in the US rate of profit since 1946 (25%) and since 1965 (30%).  But what is also interesting is that, on AK’s measure, the rate of profit in the US corporate sector has risen since the trough of 2001 and the Great Recession of 2009 did not see a fall below that 2001 trough.  Thus the 2000s appear to contradict the view of a ‘persistent’ fall in the US rate of profit.  I consider the explanation for this later.  But it is also true that the US rate of profit has not returned to the level of 2006, the registered peak in the neo-liberal period on AK’s measure. Indeed, in 2017 it was 17% lower than 2006.

Readers of my blog and other papers know that I prefer to measure the rate of profit a la Marx by looking at total surplus value in an economy against total productive capital employed; so as close as possible to Marx’s original formula of s/c+v.  So I have a ‘whole economy’ measure based on total national income (less depreciation) for surplus value; net fixed assets for constant capital; and employee compensation for variable capital – a general rate of profit, if you like.

Most Marxist measures exclude any measure of variable capital on the grounds that it is not a stock of invested capital but a flow of circulating capital that cannot be measured from available data.  I don’t agree that this is a restriction and G Carchedi and I have an unpublished work on this point.  However, given that the value of constant capital compared to variable capital is five to eight times larger (depending on whether you use a historic or current cost measure), the addition of a measure of variable capital to the denominator does not change the trend in the rate of profit.  The same result also applies to inventories (the stock of unfinished and intermediate goods).  They should and could be added as circulating capital to the denominator for the rate of profit, but I have not done so as the results would be little different.

On my ‘whole economy’ measure, the US rate of profit since 1945 looks like this. As for 2017, my results show a slight rise over 2016.  But the 2017 rate of profit is still 6-10% below the peak of 2006 and below the 2014 peak (as it is in the AK measure).

I have included measures based on historic (HC) and current costs (CC) for comparison.  What this shows is that the current cost measure hit its low in the early 1980s and the historic cost measure did not do so until the early 1990s.  Why the difference?  Well, Basu (as above) has explained. It’s inflation.  If inflation is high then the divergence between the changes in the HC measure and the CC measure will be greater.  When inflation drops off, the difference in the changes between the two HC and CC measures narrows.  From 1965 to 1982, the US rate of profit fell 21% on the HC measure but 36% on the CC measure.  From 1982 to 1997, the US rate of profit rose just 10% on the HC measure, but rose 29% on the CC measure.  But over the whole post-war period up to 2017, there was a secular fall in the US rate of profit on the HC measure of 28% and on the CC measure 28%!

There are many other ways of measuring the rate of profit.  And this was raised in an important and useful discussion in a workshop on the rate of profit (my rough notes on this are here) organised by Professors Murray Smith and Jonah Butovsky during my visit to Brock University, Southern Ontario, Canada two weeks ago.  Murray and Jonah have contributed to the new book, World in Crisis, edited by Mino Carchedi and myself.  In their chapter, they argue that a clear distinction must be made between the productive sectors of the capitalist economy ie where new value is created and the unproductive, but necessary, sectors of the economy.  The former would be manufacturing, industry, mining, agriculture, construction and transport and the latter would be commercial, financial, real estate and government.

Following the pioneering work of Sean Mage in the 1960s, Smith and Butovsky consider these socially necessary unproductive sectors as ‘overheads’ for capitalist production and so should be included in constant capital for the purposes of measuring the rate of profit. On their current cost measure, the US rate of profit has actually risen secularly since 1953.  However, looking at only the non-financial sector, Smith and Butovsky find that the US rate of profit peak of 2006 was some 50% below the peaks of the 1950s and 1960s, confirming Marx’s law.  Moreover, the strong rise in profitability recorded in all measures above can be considered as anomalous and based to a considerable extent on ‘fictitious profits’ booked in the finance, insurance, and real-estate sectors, and perhaps also by many firms operating in the productive economy.”  This is a similar conclusion reached by Peter Jones. He found that if you strip out ‘fictitious profits’, then the US corporate sector rate of profit actually fell from 1997 – see his graph below.

Recently, Lefteris Tsoulfidis from the University of Macedonia separated the rate of profit for the whole economy into a ‘general rate’ for all sectors and a ‘net rate’ for just the productive sectors.  Lefteris kindly sent me his data.  And this shows the following for the US general and net rate of profit from 1963 to 2015.

As in other measures, the US rate of profit is around 30% below 1960 levels but bottomed in the early 1980s with a modest recovery to the late 1990s in the so-called neoliberal period.  But interestingly, on Tsoulfidis’ measures, there was a decline, not a rise, in the rate of profit from 2000 leading up to the Great Recession.

I looked at the US non-financial corporate sector (which is not strictly the same as the Marxian definition of the ‘productive’ sector), using data from the Federal Reserve.  The net operating surplus over net financial assets is the measure I used for the rate of profit here.

This Fed measure shows that the US rate of profit peaked in 1997 to end the neo-liberal period and since then that rate has not been surpassed even in the credit-fuelled fictitious profits period from 2002 to 2006.  Indeed, after peaking post the Great Recession in 2012, the Fed measure has fallen consistently right up to mid-2018.  The Fed measure is quarterly and so provides a more up to date result.  On this measure, the US rate of profit remains 32% below its ‘golden age’ peak in 1966, again confirming Marx’s law.

Marx’s law is also confirmed because the driver of changes in US profitability depends on the relative movement of the two Marxian categories in the accumulation process: the organic composition of capital and the rate of surplus value (exploitation).  Since 1965 there has been the secular rise in the organic composition of capital of 21%, while the main ‘counteracting factor’ in Marx’s law, the rate of surplus value, has fallen over 4%.  Conversely, in the neo-liberal period from 1982 to 1997, the rate of surplus value rose 16%, more than the organic composition of capital (7%), so the rate of profit rose 9.5%.  Since 1997, the US rate of profit has fallen over 5%, because the organic composition of capital has risen over 14%, outstripping the rise in the rate of surplus value (5.4%).

One of the compelling results of the data is that they show that each economic recession in the US has been preceded by a fall in the rate of profit and then by a recovery in the rate after the slump.  This is what you would expect cyclically from Marx’s law of profitability.

Clearly a significant fall in the rate of profit is an indicator for an upcoming slump in investment and production in a capitalist economy.  Marx argued that a falling rate of profit would, for a while, be compensated for by an expansion of capital investment, so that the mass of profits would continue to rise.  But that could not last and eventually the fall in the rate of profit would lead to a fall in the mass of profits, which would engender ‘absolute overproduction’ of capital and a slump in production.  Marx explains all this clearly in Volume 3 of Capital, Chapter 15.  And that is what occurred in the Great Recession.

What is the situation now in the middle of 2018?  Well, US corporate profits are still rising, although non-financial profits are below the level at the end of 2014.

In a recent paper, G Carchedi identified three indicators for when crises occur: when the change in profitability; employment; and new value (v+s) are all negative at the same time.  Whenever that happened (12 times since 1946), it coincided with a crisis or slump in production in the US.  This is Carchedi’s graph.

My updated measure for the US rate of profit to 2017 confirms the first indicator is in place.  However, ‘new value’ had two quarters of decline in 2015 and one in 2017, but in the first two quarters of 2018 it has been rising; and employment growth continues.  So, on the basis of these three (Carchedi) indicators, a new recession in the US economy is not imminent as 2018 moves into the last quarter.

In sum, Marx’s law of profitability over the long term is again confirmed.  I am reminded that back in 2013, Basu and Manolakos did a highly sophisticated econometric analysis of Marx’s law for the US rate of profit, controlling for all the counteracting factors in the law like cheapening constant capital and a rising rate of surplus value.  They say “We find weak evidence of a long-run downward trend in the general profit rate for the U.S. economy for the period 1948-2007.”  By which they mean that there was evidence but it was not decisive. But they also found that a decline in the US rate of profit was “negative and statistically significant” ie the fall in the rate of profit was not random.  So “we find statistical evidence in favor of Marx’s hypothesis regarding the tendency of the general rate of profit to fall over time.”  Basu and Manolakos reckon there was an average annual 2% fall in the US rate of profit over the period.  In my own cruder calculations, I find exactly the same result for the period 1947-07 in the historic cost measure.

In conclusion, there has been a secular decline in US profitability, down by 28% since 1946 and 20% since 1965; and by 6-10% since the peak of 2006.  So the recovery of the US economy since 2009 at the end of the Great Recession has not restored profitability to its previous level.  Also, the driver of falling profitability has been the secular rise in the organic composition of capital, which has risen around 20% since 1965 while the main ‘counteracting factor’, the rate of surplus value, has fallen.

In 2017, the US rate of profit fell compared to 2016 on some measures (2%) or rose slightly on mine (1%).  All measures show that the US rate of profit in 2017 was 6-10% below the level of 2014.


Socialism and the White House

October 27, 2018

The Trump White House research team have issued a very strange report.  It’s called “The Opportunity Costs of Socialism,”.  It purports to prove that ‘socialism’ and ‘socialist’ policies would be damaging to Americans because the ‘opportunity costs’ of socialism compared to capitalism are so much higher.

What is strange and rather amusing is that the White House advisers to Trump deem it necessary to explain to Americans the failures of ‘socialism’ in 2018.  But when you delve into the report, it becomes clear that what is worrying the Trumpists is not ‘socialism’, but the policies of left Democrat Bernie Sanders for higher taxes on the rich 1% and the increased popularity of a ‘single-payer’ national health service for all.  The popularity of these policies threatens the Republican majority in Congress and also the wealth and income of big pharma corporations and Trump’s billionaire supporters.

What the White House means by socialism is apparently a national economy that is dominated and controlled by the state rather than the market. “Whether a country or industry is socialist is a question of the degree to which (a) the means of production, distribution, and exchange are owned or regulated by the state; and (b) the state uses its control to distribute the economic output without regard for final consumers’ willingness to pay or exchange (i.e., giving resources away “for free”).”

So the report has a wide and all-encompassing definition of ‘socialism’ that includes Maoist China (but not modern China it seems), the Soviet Union, Cuba and Venezuela and the Nordic ‘social democratic’ states.  The latter are bunched together with the former because Sanders lauds the latter and not the former.  Naturally this raises the question of whether any of these countries can be called ‘socialist’ ie a peasant-dominated Soviet Union in 1920 or China in 1950; or the family-owned corporate dominated economies of Sweden, Denmark and Norway.

The White House definition is not socialism or communism as proclaimed by Marx and Engels in the Communist Manifesto.  For them, Communism is a super-abundant society with no role for a state but only for the free association of individuals in common action and ownership of the products of labour.  Of course, such a world system does not exist and so cannot be compared with capitalism.  Instead, in effect, the White House is really trying to compare a planned national economy with a capitalist-dominated national market economy. But we should not be too harsh on the White House researchers: they are not going to know what socialism is; and their definition (that they got from the dictionary, apparently) is probably most people’s view.

Leaving that aside, what is wrong with all these ‘socialist’ states?  Well, “they provide little material incentive for production and innovation and, by distributing goods and services for free, prevent prices from revealing economically important information about costs and consumer needs and wants.”  In Maoist China and Stalinist Russia “their non-democratic governments seized control of farming, promising to make food more abundant. The result was substantially less food production and tens of millions of deaths by starvation.”  Thus socialism was a disaster.

From their definition, the White House report concludes: “The historical evidence suggests that the socialist program for the U.S. would make shortages, or otherwise degrade quality, of whatever product or service is put under a public monopoly. The pace of innovation would slow, and living standards generally would be lower. These are the opportunity costs of socialism from a modern American perspective.”

The White House report also claims that “replacing U.S. policies with highly socialist policies, such as Venezuela’s, would reduce real GDP at least 40 percent in the long run, or about $24,000 per year for the average person.”  And replacing the current US tax regime with that of the Nordic countries would increase the tax burden on Americans by $2,000 to $5,000 more per year net of transfers. “We estimate that if the United States were to adopt these policies, its real GDP would decline by at least 19 percent in the long run, or about $11,000 per year for the average person.”

The first argument of the White House report is that living standards are higher in the US compared to the ‘socialist’ Nordic states.  A most hilarious case study is presented for this claim: the cost of buying a pick-up truck in Texas compared to the cost in Scandinavia!

Well, a pick-up truck may be much more useful in Texas than Stockholm and, given that taxes on vehicles are lower in the US and fuel taxes are substantially lower, the argument that a pick-up truck costs much less than in the Nordic countries is irrefutable!  But does the more expensive truck in Norway compared to Texas prove that there is a higher ‘opportunity cost’ of living in ‘socialist’ Norway?  What about public transport, public services, health and education, unemployment and welfare benefits – things that the richer part of any capitalist country does not need or use as a ‘social wage’?  These things are not compared by the White House report.

The report points out that real GDP per capita is higher in the US than in the Scandinavian economies and in the non-oil part of Norway.  The data show this is true.  But all this shows is that Northern Europe started at a lower level when Marx wrote the Communist Manifesto.  Actually, if we look at real GDP growth per capita since 1960 (when Americans are told that they live in the greatest place on earth), US growth has fallen behind the most Nordic economies and for that matter, most European economies.  Indeed, since the early 1990s, real GDP per capita growth has been faster in Sweden than in the US.

And as for China, the growth rate has outstripped that of the US many times over since the 1990s, taking 800m people out of World Bank defined poverty.  No doubt the White House researchers would argue (although they don’t) that China turned ‘capitalist’ in the 1980s and this is why the economy has rocketed.  But this would be inconsistent with their view that a ‘socialist’ state is one where the state dominates and controls the free market economy.  For China must be the most state-directed major economy in the world, way more that the so-called ‘mixed economies’ of the Nordic countries.

Overall income is one thing but the distribution of that income is another.  Here the White House has to admit that “though the Nordic economies exhibit lower output and consumption per capita, they also exhibit lower levels of relative income inequality as conventionally measured.”  What is interesting here is that the US still has much higher inequality of wealth and income, but Nordic inequality has also risen much in the last 30 years as governments there adopted pro-business polices of reducing corporation and personal taxes (ie pro-market policies).

Indeed, as the White House report says, on some measures, the Nordic tax system is more accommodating to the top 10% than the US system – at least for personal tax: Lower personal income tax progressivity in the Nordic countries, combined with lower taxation on capital and on average only modestly higher marginal personal income tax rates on the right tail of the income distribution, means that a core feature of the Nordic tax model is higher tax rates on average and near-average income workers and their families. That is, contrary to the misperceptions of American proponents of Nordic-style democratic socialism, the Nordic model of taxation relies heavily not on imposing punitive rates on high-income households but rather on imposing high rates on households in the middle of the income distribution.”

This may be an attack on Sanders’ praise for the Nordic economies, but it seems to me that it proves how far away the Nordic states are now from ‘social democracy’, let alone ‘socialism’.  On the one hand, the White House report claims that ‘socialist’ states want to tax the rich harder (a la Sanders) but in reality they tax them less hard than in the US!

Of course, this is all smoke and mirrors.  All the data on inequality of wealth and income in the major advanced economies show that the US is the most unequal, both before and after tax; and that real disposable incomes for the average American family have hardly risen in 30 years while the top 1% have seen substantial rises.

The share of wealth held by the top 1% of earners in the US doubled from 10% to 20% between 1980 and 2016, while the bottom 50% fell from 20% to 13% in the same period.

But the main part of the White House report is to argue that privately-funded education and healthcare is more cost-effective than publicly-funded state schools or a national health service.  The report argues that paying for a US college education will bring a much bigger return in future earnings than it will in Norway, where there are no college fees.  What this implies, however, is that people in the US without higher education qualifications have no chance of earning decent incomes, while those without degrees in Norway do not earn much less than those that do!  So actually the opportunity cost of not having a college education in Norway is much lower.

Then there is healthcare.  According to the White House, ‘single payer’ health systems, as applied in nearly all advanced economies, are not as efficient and beneficial to health as America’s free market insurance company schemes, especially if Obama-care is excluded.  The proof? Well, old people in the US have to wait less time to be seen by a specialist than in single-payer systems, says the report.

Actually, American ‘seniors’ mostly receive Medicare, so they are on a single payer scheme when they get to see a specialist!

All healthcare systems are under pressure as people live longer and develop more illnesses in later life.  And they are under pressure because healthcare is not funded sufficiently compared to defence, business subsidies and tax cuts.  This applies to the US system too.

And if we look at an overall comparison of the efficacy of healthcare systems, the US scores badly.  The US health-care system is one of the least-efficient in the world.  America was 34th out of 50 countries in 2017, according to a Bloomberg index that assesses life expectancy, health-care spending per capita and relative spending as a share of gross domestic product.  “Socialist” Sweden is 8th and “Socialist” Norway is 11th.

Life-expectancy is a way of measuring how well, overall, a country’s medical system is working, which is why it is used in the index.  In the US, health expenditure averaged $9,403 per person, or a whopping 17.1% of GDP and yet life expectancy was only 78.9.  Cuba and the Czech Republic — with life expectancy closest to the US at 79.4 and 78.3 years — spent much less on health care: $817 and $1,379 per capita respectively. Switzerland and Norway, the only countries with  higher per capita spending than the US — $9,674 and $9,522 — had longer life expectancy, averaging 82.3 years.  Why? Well, the US system “tends to be more fragmented, less organized and coordinated, and that’s likely to lead to inefficiency,” said Paul Ginsburg, a professor at the University of Southern California and director of the Center for Health Policy at the Brookings Institution in Washington.

So the opportunity costs for the average American seem to be higher at least for basic public services like health and education than for the average Nordic ‘socialist’.

Keynes part 2 – internationalist or nationalist?

October 17, 2018

Was Keynes the great internationalist who aimed to make capitalism a stable system through macro management on a world scale?  This is Ann Pettifor’s claim in her recent paeon of praise to Keynes.  Keynes made his name in showing that the policies of penury on Germany after WW1 would be self-defeating for the interests of France and Britain.  And he supposedly was the promoter of “the construction of the international financial architecture at Bretton Woods in 1944. Politicians and economists (if not bankers) had finally come round and endorsed his theory and policies.” (Pettifor)

Well, yes he wanted to set up ‘civilised’ institutions to ensure peace and prosperity globally through international management of economies, currencies and money. But these ideas of a world order to control the excesses of unbridled laisser-faire capitalism were eventually turned into institutions like the IMF, World Bank and the UN Council, mainly used to promote the policies of imperialism, led by America. Instead of a world of ‘civilised’ leaders sorting out the problems of the world, we got a terrible eagle astride the globe, imposing its will.  Material interests decide policies, not clever economists.  Keynes, the internationalist, gave us the IMF’s penury on struggling emerging economies.

Moreover, Keynes was always more a representative of the interests of the British empire than an internationalist.  After all, he had been in the British civil service in India.  The biographer of Keynes, Lord Skidelsky, entitles the third volume of his biography, Keynes: Fighting for Britain.  At the post-war Bretton Woods meetings, he represented, not the world’s masses or a democratic world order, but the narrow national interests of British imperialism against outright American dominance. After the agreement, Keynes told the British parliament that the Bretton Woods deal was not “an assertion of American power but a reasonable compromise between two great nations with the same goals; to restore a liberal world economy”. Only two nations mattered, the interests of others were ignored.

Was Keynes an internationalist when it came to economics?  He started off as a ‘free trader’ with the traditional neoclassical view that free markets in trade would benefit all.  As an under-graduate he served as secretary of the Cambridge University Free Trade Association and argued for free trade in several debates.  “We must hold to Free Trade, in its widest interpretation, as an inflexible dogma, to which no exception is admitted, wherever the decision rests with us. We must hold to this even where we receive no reciprocity of treatment and even in those rare cases where by infringing it we could in fact obtain a direct economic advantage. We should hold to Free Trade as a principle of international morals, and not merely as a doctrine of economic advantage.”  By 1928, however, Keynes had altered his position by suggesting that “the free trade case must be based in the future, not on abstract principles of laissez-faire, which few now accept, but on the actual expediency and advantages of such a policy.”

The terrible experience of the Great Depression shifted his views further.  In private evidence given in 1930 before the UK’s government-sponsored Macmillan Committee on Finance and Industry, set up to offer economic advice to the British government at the onset of the Great Depression, Keynes proposed import tariffs on foreign goods and subsidies for domestic investment. When asked whether abandoning free trade was worth the potential ameliorative effects of protection, Keynes replied, “I have not reached a clear-cut opinion as to where the balance of advantage lies,” but he saw the merits of tariffs as an alleviation of the slump. “I am frightfully afraid of protection as a long-term policy,” he testified, “but we cannot afford always to take long views . . . the question, in my opinion, is how far I am prepared to risk long-period disadvantages in order to get some help to the immediate position.”

Before long, he went further towards protectionist measures.  In response to questions from the prime minister, Keynes indicated that he had “become reluctantly convinced that some protectionist measures should be introduced.” In a memorandum prepared in September 1930 for the Committee of Economists of the Economic Advisory Council, Keynes elaborated on the benefits of a tariff, which he now described as “simply enormous.” These benefits included solving the basic problem of the misalignment of money costs and the exchange rate: a tariff would raise domestic prices and reduce real wages toward their ‘equilibrium value’, while avoiding a disruptive fall in nominal wages (so real wages would fall without the working class noticing). A tariff would also “restore business confidence and create a favourable climate for new investment”, he stated, “but would not (unless poorly designed) trigger demands by trade unions for higher pay or have adverse employment effects.” Tariffs would thus help British capital against its competitors by squeezing the real incomes of British households. Keynes preferred devaluation of the currency but tariffs would also be necessary.

He now advocated ’beggar thy neighbour’ economic policies to help British capital against its rivals. By 1933 he wrote of his sympathy “with those who would minimise, rather than with those who would maximize, economic entanglements between nations. Ideas, knowledge, art, hospitality, travel-these are things which should of their nature be international. But let goods be homespun whenever it is reasonable and conveniently possible; and, above all, let finance be primarily national.”  However, once the depression and war was over, Lord Keynes in his last speech returned to his support for the theory of ‘free trade’ when he said that “separate economic blocs and all the friction and loss of friendship they bring with them are expedients to which one may be driven in a hostile world where trade has ceased over wide areas, to be cooperative and peaceful and where are forgotten the rules of mutual advantage and equal treatment. But surely it is crazy to prefer that.”

I think what this tells you is that Keynes was an internationalist and free trader when he thought it was in the interests of British capital, but in favour of protection and beggar thy neighbour policies when he thought it was in the interests of British capital. For him, there were only two ‘civilised’ nations, the US and the UK (as junior partner), who could lead the world.  Keynes never criticised the role of the British Empire, on the contrary, he saw it as a good thing and something to be preserved.

Europe as a rival to American imperialism came after Keynes’ death.  With the rise of Europe, British capital began to move towards the continent, joining the Single Market and the EU.  But British capital remained split about where to align.  Within the psyche of the British ruling elite (mainly smaller and domestic-based capital), there has remained a nostalgia for the Empire and a look back across the Atlantic ‘pond’.  With the demise of Europe’s economies after the Great Recession, the reactionary empire loyalists pushed for a break with Europe and a return to the ‘old order’ as junior partner to American imperialism that existed in Keynes’s day.

How would Keynes have reacted to this?  In my view, as he was at the time of Bretton Woods, Keynes was generally in favour of freer trade and international capital flows, as he thought it would be to the advantage of Anglo-American capital.  So he may have supported the UK’s entry into the EU, but not into the euro, because that would have taken away control over the currency and the option of devaluation.  What would Keynes’ view have been on Brexit?  Would Keynes have been a ‘leaver’ or ‘remainer’?  Probably the former as that is where his nationalist inclinations lay. But maybe the latter, as according to his economic rival of the 1930s, Friedrich Hayek, Keynes changed his ideas like he changed his shirts.  Keynes was an internationalist only as long as it did not conflict with the interests of British capital (or American imperialism) – pretty much the same position as Churchill.

Keynes was vehemently opposed to socialist internationalism.  Keynes saw all his policies as designed to save capitalism from itself and to avoid the dreaded alternative of socialism.  As he made clear: For the most part, I think that Capitalism, wisely managed, can probably be made more efficient for attaining economic ends than any alternative system yet in sight, but that in itself it is in many ways extremely objectionable. Our problem is to work out a social organisation which shall be as efficient as possible without offending our notions of a satisfactory way of life.”  So “the class war will find me on the side of the educated bourgeoisie.”  Was he a fighter for greater equality?  This is what he said. “For my own part, I believe that there is social and psychological justification for significant inequalities of incomes and wealth, but not for such large disparities as exist today. There are valuable human activities which require the motive of money-making and the environment of private wealth-ownership for their full fruition.“  This is Pettifor’s revolutionary.

Keynes reckoned that as capitalism expanded, it would, through more technology, create a world of abundance and leisure.  Because of that abundance, the return on lending money to invest would fall.  So bankers and financiers would no longer be necessary; they could be phased out (‘the euthanasia of the rentier’).  Well, that does not seem to be happening.  The followers of Keynes now argue that capitalism is being distorted by ‘financialisation’ and finance capital – and that is the real enemy.  What happened to the gradual phasing out of finance in late capitalism a la Keynes?

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

Keynes, the supposed radical opponent of neoclassical economics, according to Pettifor, reverted back.  In one of his last articles on the capitalist economy as the Great Depression ended and the second world war began, Keynes remarked that “Our criticism of the accepted classical theory of economics has consisted not so much in finding logical flaws in its analysis as in pointing out that its tacit assumptions are seldom or never satisfied, with the result that it cannot solve the economic problems of the actual world. But if our central controls succeed in establishing an aggregate volume of output corresponding to full employment as nearly as is practicable, the classical theory comes into its own again from this point onwards.” So once full employment is achieved, we can dispense with planning and ‘socialised investment’ and return to free markets and mainstream neoclassical economics and policy: “the result of filling in the gaps in the classical theory is not to dispose of the ‘Manchester System’ (‘free’ markets – MR), but to indicate the nature of the environment which the free play of economic forces requires if it is to realise the full potentialities of production.”

Indeed, economically, in his later years, he praised the very laisser-faire ‘liberal’ capitalism that his followers condemn now.  In 1944, he wrote to Friedrich Hayek, the leading ‘neo-liberal’ of his time and ideological mentor of Thatcherism, in praise of his book, The Road to Serfdom, which argues that economic planning inevitably leads to totalitarianism: “morally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement with it, but in a deeply moved agreement.”! And Keynes wrote in his very last published article, “I find myself moved, not for the first time, to remind contemporary economists that the classical teaching embodied some permanent truths of great significance…. There are in these matters deep undercurrents at work, natural forces, one can call them or even the invisible hand, which are operating towards equilibrium. If it were not so, we could not have got on even so well as we have for many decades past.”  Thus the ‘(neo) Classical’ economics of the ‘invisible hand’ and ‘equilibrium’ returned after all – the opposite of what Keynesian followers now stand for. Once the storm (of slump and depression) had passed and ‘the ocean’ was flat again, bourgeois society could breathe a sigh of relief.  So Keynes the radical turned into Keynes the conservative.

Yet the myth of Keynes, the radical and revolutionary, is preserved and promoted by the Keynesian left and continues to influence the labour movement (particularly its leaders) as the ‘alternative’ to neo-liberal, ‘austerity’ pro-market economics.  Why is this?  Well, there are theoretical reasons.

Keynesian macroeconomics assumes that capitalism works to develop the productive forces and meet the needs of people. The problem is that occasionally, there is a ‘technical malfunction’ (Paul Krugman).  For some reason (loss of confidence, or animal spirits?), capitalist investment gets stuck in a ‘hoarding of money’ mode that it cannot get out of (liquidity trap).  So it is necessary for government authorities to give it a ‘nudge’ with monetary and/or fiscal stimulus, and then all will be right again – until the next time!  Keynes liked to consider economists as dentists fixing a technical problem of toothache in the economy (“If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid”). And modern Keynesians have likened their role as plumbers, fixing the leaks in the pipeline of accumulation and growth.

What the Marxist analysis of the capitalist mode of production reveals is that capitalism cannot deliver an end to inequality, poverty, war and a world of abundance for the common weal globally, or indeed avoid the catastrophe of environmental disaster (something ignored by Keynes), over the long run.  That’s because capitalism is a mode of production driven by profit not need; exploitation not cooperation; and that generates irreconcilable contradictions that cannot be resolved by ‘technical macro-management’ of the economy.  It can only be resolved by replacing it.  In this sense, Marx, rather than Keynes, is closer to Darwin as a revolutionary in economics.

But there is another reason.  Geoff Mann, in his excellent book, In the long run we are all dead, offered an explanation. Keynes rules on the left because he offers a supposed third way between socialist revolution and barbarism, i.e. the end of civilisation as ‘we’ (actually the bourgeois like Keynes) know it.  In the 1920s and 1930s, Keynes feared that the ‘civilised world’ faced Communist revolution or fascist dictatorship.  Socialism as an alternative to the capitalism of the Great Depression could well bring down ‘civilisation’, delivering instead ‘barbarism’ – the end of a better world, the collapse of technology and the rule of law, more wars etc.

So Keynes aimed for some modest fixing of ‘liberal capitalism’, to make capitalism work without the need for socialist revolution.  There would no need to go where the angels of ‘civilisation’ fear to tread.  That was the Keynesian narrative.  This appealed (and still appeals) to the leaders of the labour movement and ‘liberals’ wanting change.  Revolution is risky and we could all go down with it: “the Left wants democracy without populism, it wants transformational politics without the risks of transformation; it wants revolution without revolutionaries”. (Mann p21).  But we shall indeed all be dead if we do not end the capitalist mode of production.  And that will require a revolutionary transformation. Tinkering with the supposed malfunctions of ‘liberal’ capitalism will not ‘save’ civilisation – in the long run.

Keynes: revolutionary or reactionary? – part one: the economics

October 14, 2018

Was Keynes a revolutionary in economic thought and policy?  Was he at least radical in his ideas?  Or was he a reactionary opposed to the interests of working people and a conservative in economic theory?  Ann Pettifor is a leading economic advisor to the British leftist Labour leaders, Jeremy Corbyn and John McDonnell.  She is director of Prime Economics, a left-wing economics consultancy and author of several books, in particular the recent The Production of Money.  And she has just won Germany’s Hannah Arendt prize for political thought – for focusing on “the political and societal impact of the current money production system, mainly operated by banks through digital lending” and as effective critic of “the global financial industry, which operates outside of the scope of political influence and democratic control”.

So Ann Pettifor is an undoubted battler against the austerity economics of the neoclassical school and a promoter of government measures to restore public services and boost the economy.  But to achieve that, she relies entirely on the theories and policies of JM Keynes and ‘Keynesianism’.  Recently she published a short article for the prestigious Times Literary Supplement, entitled The indefatigable efforts of J. M. Keynes. This is part of Footnotes to Plato, a TLS Online series appraising the works and legacies of the great thinkers and philosophers.

In this article, Pettifor compares Keynes’ theories as being as game-changing in economics as the discovery of evolution by Charles Darwin in biology.  In her view, Keynes ‘invented’ macroeconomics, the study of trends in economies at the aggregate level, escaping the stifling neoclassical obsession with microeconomics (the study of value and markets at the level of the individual unit).  She concurs with Keynes’s theory of money and his explanation of crises under capitalism as being caused by ‘hoarding’ money rather than spending it; and she praises his ‘internationalism’ in arguing for international financial institutions to control financial speculation and avoid instability in market capitalism.  She finishes with the concern that Keynes’ ideas and policies have been reneged on and rejected and there has been a return to ‘decadent’ capitalism, far removed from the golden age of the post-1945 period when Keynesian policies were applied to make capitalism work effectively for all.  She concludes with the call that “It is time to restore the revolutionary Keynes.”

Well, I beg to differ on this view of Keynes and Keynesian theories and policies.  For a start, it is inflated to suggest that Keynes’ ideas are on a par with those of Darwin.  Yes, there may be a few creationists who reckon that God designed the world and its living beings in his own image and preserved it accordingly.  But no sane person thinks this has any validity.  The evidence is overwhelming that Darwin was broadly right on the evolution of life.  But can we say that Keynes is broadly right about the laws of motion and trends in the capitalist economy?  I don’t think so – and I’ll briefly attempt to show why.

For a start, Pettifor is wrong when she says that ‘classical economics’ was microeconomics as we know it now.  The use of the term ‘classical’ used by Keynes bunched all the great early 19th century economists like Adam Smith, James Mill and David Ricardo and their grand studies of economies with the reactionary marginalist, subjectivist, equilibrium theories of the mid to late 19th century of Jevons, Senior, Bohm-Bawerk, Walrus and Mises. Keynes rejected the former while continuing to accept the microeconomics of the latter.  For the classical economists of the early 19th century capitalism, there was no distinction between the micro and the macro.  The task was to analyse the motion and trends in ‘economies’ and for that a theory of value was a necessary tool but not an end in itself.

Microeconomics became an end in itself as a way of combating the dangerous development in classical economy towards a theory of value that implied the exploitation of labour and conflicting social relations.  So the labour theory of value was replaced with the marginal utility of purchase by the consumer as a result.  ‘Political economy’ started as an analysis of the nature of capitalism on an ‘objective’ basis by the great classical economists.  But once capitalism became the dominant mode of production in the major economies and it became clear that capitalism was another form of the exploitation of labour (this time by capital), economics quickly moved to deny that reality.  Instead, mainstream economics became an apologia for capitalism, with general equilibrium replacing real competition; marginal utility replacing the labour theory of value; and Say’s law replacing crises.

Macroeconomics appears in the 20th century as a response to the failure of capitalist production – in particular, the great depression of the 1930s.  Something had to be done.  Keynes kept marginalist theory from his mentor, Alfred Marshall, but dynamically moved it beyond supply and demand among individual consumers and producers onto the aggregate. Mainstream ‘bourgeois’ economics could no longer rely on the comforting theory that marginal utility would equate with marginal productivity to deliver a general equilibrium of supply and demand and thus a harmonious and stable growth path for production, investment, incomes and employment.  The automatic equality of supply and demand, Say’s law, was now questioned.  It had to be recognised that capitalism was subject to booms and slumps, to (permanent?) disequilibria, and thus to regular crises.  And these crises had to be dealt with – to be ‘managed’.  That required macroeconomic analysis.  In a sense, bourgeois economics had to put back the economic clock to classical economics – the study of aggregate trends – but without returning to ‘political economy’, which recognised that economics was really about social structure and relations (class exploitation) and not a theory of ‘scarcity’ and ‘market prices’.

Contrary to Pettifor’s account, it only appeared that Keynesian macroeconomics had done the trick in saving capitalism.  In the ‘golden age’ of post-1948 capitalism, economic growth was strong, employment was full and incomes high.  So (macro) economics could appear to provide policies to ‘manage’ capitalism successfully.  But this was just a momentary illusion.  The golden age soon lost its glitter.  Keynesian theory and policy was exposed with the first simultaneous international recession of 1974-5 and was followed by the deep slump of 1980-2.  Remember these major collapses in production and investment internationally took place during the supposed operation of Keynesian policies of macroeconomic management, in Pettifor’s account.

Pettifor says the crises of late 20th century were the result of “the decision by public authorities the world over to abandon the regulation of credit creation and capital mobility after the 1960s and early 70s”, in other words, a lack of regulation over the reckless bankers.  But the question not answered is: why the strategists of capital dropped Keynesian-style management and control and opted for de-regulation etc if it was all working so well in the 1950s and 1960s?  The reason that pro-capitalist governments swung to monetarism and neoliberal policies was that Keynesianism had failed.  And it failed in the most important area for capitalism – in sustaining the profitability of capital.

The big change from the mid-1960s onwards up to the early 1980s was a collapse in the profitability of capital in the major economies leading to a succession of slumps in 1970, 1974 and then 1980-2.  This is what provoked capitalist theorists and policy makers to break with Keynes.  Public services, the welfare state, good wages and full employment could no longer be ‘afforded’ and, as Pettifor says, Keynesianism was seen to be “state interventionist, soft on government deficit spending.”  But all these policy reversals came after the slump of the 1970s before which finance capital was ‘regulated’, currencies were ‘managed’, trade unions had rights, the government could intervene fiscally, and there was little privatisation.  It was the failure of capitalist production and the inability of Keynesian ideas to work that caused the change in theory and policy, not vice versa.

Nevertheless, Pettifor argues, dropping Keynesianism was a mistake for the ‘powers that be’ because Keynes had all the answers to avoid crises and get capitalist economies going. You see Keynes had developed a “revolutionary theory” of money – his Liquidity Preference Theory.  This explained that crises occur when investors or holders of money do not spend it, but hoard it.  They do this for some subjective reasons – a lack of ‘animal spirits’, a loss of belief that any spending or investing will deliver sufficient return.  So a surplus of money builds up that is not spent.  The answer, claims Pettifor, is for the monetary authorities to intervene and drive down the cost of borrowing by ‘printing’ money, so that interest rates on borrowing fall below the perceived return on investing.  This will encourage money hoarders to invest.  Such policies are “still considered too radical to be acceptable today”.

In her book, The Production of Money, Pettifor tells us that “money is nothing more than a promise to pay” and that as “we’re creating money all the time by making these promises”, money is infinite and not limited in its production, so society can print as much of it as it likes in order to invest in its social choices without any detrimental economic consequences.  And through the Keynesian multiplier effect, incomes and jobs can expand.  And “it makes no difference where the government invests its money, if doing so creates employment”.  The only issue is to keep the cost of money, interest rates, as low as possible, to ensure the expansion of money (or is it credit?) to drive the capitalist economy forward.  Thus there is no need for any change in the mode of production for profit; just take control of the money machine to ensure an infinite flow of money and all will be well.

Well, capitalism is a monetary economy but it is not a money economy (alone).  Money cannot make more money if no new value is created and realized.  And that requires the employment and exploitation of labour power.  Marx said it was a fetish to think that money can create more money out of the air.  Yet this version of Keynesianism seems to think it can.  When central banks expand the money supply through printing ‘fiat’ money or creating bank reserves (deposits), more recently so-called ‘quantitative easing’, this does not expand value.  It would only do so if this money is then put to productive use in increasing the means of production or the workforce to increase output and so increase value.

But, as Marx argued way back in the 1840s against the ‘quantity theory of money’, just expanding the supply of ‘fiat’ money will not increase value and production but is more likely to inflate prices and thus devalue the national currency, and/or inflate financial asset prices.  It is the latter that has mostly happened in the recent period of money printing.  Quantitative easing has not ended the current global depression but merely sparked new financial speculation. This version of Keynesian economics is thus hardly ‘revolutionary’ or ‘radical’ at all, as it was adopted by all central banks after the Great Recession in 2008 and has failed to restore economic growth, productive investment and average incomes.

Actually, during the Great Depression of the 1930s, as it worsened, Keynes himself came to dispense with monetary solutions to the slumps and opted for fiscal stimulus and even proposed the ‘socialisation of investment’, a much more radical policy than the production of more money.  In his Treatise on Money, written in 1930 at the start of the Great Depression, Keynes argued that central banks would have to intervene with what we now call ‘unconventional monetary policies’ designed to lower the cost of borrowing and raise sufficient liquidity for investment. Just trying to get the official interest rate down would not be enough.  But by 1936 after five more years of depression (similar to the time since the Great Recession now), Keynes became less convinced that ‘unconventional monetary policies’ would work.  In his famous General Theory of Employment, Interest and Money, Keynes moved on.

Why did just the production of more money fail, according to Keynes?  The problem was that ““I am now somewhat sceptical of the success of a merely monetary policy directed towards influencing the rate of interest… since it seems likely that the fluctuations in the market estimation of the marginal efficiency of different types of capital, calculated on the principles I have described above, will be too great to be offset by any practicable changes in the rate of interest”.  And so Keynes moved on to advocating fiscal spending and state intervention to complement or pump-prime failing business investment.  Pettifor has latched onto that part of Keynesian macro theory and policy, monetary easing, to the neglect of fiscal stimulus, let alone the more radical policy of the ‘socialisation of investment’ (not even mentioned by Pettifor).  Thus Pettifor’s account of Keynes’s economics is at his least ‘revolutionary’.

Part Two to follow: Was Keynes a revolutionary internationalist or reactionary nationalist?

50 years of radical political economy

October 2, 2018

The 50th anniversary conference of the Union of Radical Political Economy (URPE) finished last weekend.  URPE has played an important role in developing and enhancing alternative economic theory and analysis to the dominant mainstream theories in modern economics.  It has survived despite the long reaction in economics during the ‘neo-liberal’ era that we have been subjected to since the 1980s – where even the so-called ‘progressive’ economics of Keynesians was submerged under the general equilibrium, ‘free market’ economics of the neoclassical mainstream.

I was unable to attend to conference held at the University of Massachusetts, Amherst, so my comments on proceedings will be solely based on some of the papers presented that I have obtained and also from some of the comments on the sessions by participants. This is obviously inadequate but I think it is still worth doing if only to publicise the role of URPE and to let readers of my blog know the sort of issues being debated.

There were many themes at the conference: social reproduction theory; labor economics; crisis theory; environmental economics; alternative economic systems post-capitalism; international economics; broad issues in Marxist political economy and of course, China.  But as is my wont, I shall concentrate on the themes that interest me most.

There was the usual heterodox mixture of the Marxist approach, alongside post-Keynesian/’financialisation’ schema, as well as some support for the contribution of the neo-Ricardian views of Piero Sraffa.  URPE is radical political economy, not just Marxist.

In political economy, this means there was some discussion about whether Keynesian theory had anything to offer to Marxist economics.  Readers of this blog know well that I do not consider Keynesian theory as a complement to Marxist economics – indeed, on the contrary I view it as part of mainstream bourgeois economics being applied to macro-managing slumps in capitalist production.

Deekpankar Basu (UMass) presented a paper entitled “Does Marxist Economics need Keynesian Insight?” and his short answer was apparently: no. Simply put, Keynesian theory looks to the failure of aggregate demand for the explanation of crises; neoclassical theory looks to ‘shocks’ to the smooth running of production (supply); but Marx looks to the profitability of capital for the faultlines in capitalist production.   Basu’s analysis was backed up by a panel on Marxist political economy which one participant reckoned showed that “the key advantage of Marxist analysis is it theorises profit, which mainstream economic models pretend doesn’t exist – despite overwhelming evidence (from the mainstream) that it does.”

Nevertheless, Peter Skott, also at Amherst, did present a post-Keynesian analysis on the relationship between capitalist accumulation and employment in his paper “Post-Keynesian growth theory and the reserve army of labor”.  I cannot comment on this paper, but I refer you another of Skott’s which deals with the challenges facing post-Keynesian analysis of modern economies.

On the Marxist front, there were several papers on recent developments in theory.  Hyun Woon Park (Denison University) took what he considers are puzzling inconsistencies in use of MELT (the monetary equivalent of labour time, a tool used to analyse trends in capitalism with Marxist categories)(Park and Rieu. 2018). Park was concerned that if Marxist theory says that unproductive sectors like finance, real estate, merchanting etc do not produce value but merely redistribute value created in productive sectors, does it have any role in capitalism?  If it plays the role of helping to make the productive sector more efficient, can we talk about an ‘optimal’ size for the sector?  He concludes (as far as I can tell from his paper) that there is no ‘optimal’ size where the unproductive sector helps rather than detracts from capital accumulation in the productive sector in modern economies.  I’m not sure what we should conclude from this.

Sraffian economics was also discussed at URPE.  This school is based on the approach of Piero Sraffa, who also argued that the real contradiction in capitalism was not the tendency for profitability to fall, but the class battle between profits and wages.  At least this is what I think we can conclude from the Sraffa’s theoretical model, based on the classical political economy of David Ricardo.  Bill McColloch of Keene State college, presented a paper “On Sraffa and the History of Economic Thought;”, which was kindly posted on the Naked Keynesianism website.

According to McColloch, “In Sraffa’s mind Marx’s great victory was to have rediscovered the essential meaning of the classical system in an era in which it was increasingly lost to all observers” namely “that capitalism rest upon exploitation, an exploitation of human beings and of nature, and that is remains the task of economics today to speak to this reality and its consequences. Whether Marx’s own proof of exploitation can be shown to be true is perhaps of negligible importance.”.. McCulloch asks “if Sraffa was ‘really’ a Marxist? I would suggest not”.  But apparently that does not matter because both Sraffa and Marx saw economic theory as both ‘sociological and institutional’ and not bound by ‘technique’ as in the neoclassical.  Well, I find it hardly “negligible” whether Marx’s theory of exploitation is true or not.  There is now a whole literature backing up Marx’s theory why profit only comes from exploitation of labour and nowhere else – while Sraffa’s theory is full of holes on that point, among others.  For a more thorough critique of Sraffian economics, see Fred Moseley’s book, Money and Totality

Marx’s theory of exploitation is important because, at URPE, the arguments of post-Keynesian and financialisation theorists were presented again.  Fletcher Baragar of the University of Manitoba has argued that the financial crash and Great Recession were the result of increased ‘financialisation’, as expressed through rising household debt that eventually led to the housing bust.  Financialisation had created ‘two forms of profit’, one the traditional exploitation of labour in production and the other, the exploitation of households by the financial sector. (Baragar, Fletcher. 2015. “Crises of Disproportionality and the Crisis of 2007.- 2009.”).

I have disputed the argument before that there are two sources of profit (profit of exploitation and profit of alienation) under modern capitalism (see my book, Marx 200).  And I have also extensively rejected the view  that it was ‘excessive’ household debt that caused the crisis of 2008.  The first is a distortion of Marx’s value theory and the second is no more than a mainstream explanation based on debt alone.

On my blog, I have posted several times on the financialisation theme.  Recently, Mavroudeas & Papadatos have criticised the whole financialisation hypothesis on five counts.  The Financialisation Hypothesis and Marxism: a positive contribution or a Trojan Horse?’ – S.Mavroudeas, 2nd World Congress on Marxism, Peking University, 5-6 May 2018.

The most important questions for me are these: 1) if financialisation was the cause of the Great Recession, what about crises even as late as 1980 when finance was not such a large part of the economy or non-financial companies had not become financial?;  2) has finance completely separated from what happens in the productive sectors where value is created?; 3) so is finance the class enemy while ‘productive’ capitalism and workers are allies?; 4) are all crises are the result of ‘financial instability’, subject to Minsky moments and the underlying profitability of capital is irrelevant?  If they are, does this mean we just need to control the financial institutions and can leave the non-financial sector of capitalism alone?  Do we control the investment decisions of JP Morgan but not those of Amazon of Boeing?

Imperialism has become a hot topic among Marxists in the recent period with ‘globalisation’, the rise of multi-nationals operating in the so-called emerging economies; and the centralisation of finance in the US and Europe.  There is a running debate on how imperialism operates and who is exploiting whom (Harvey versus Smith) that URPE has followed.  And there were some very incisive papers on this at the conference that show light on the debate from Marx’s value theory.  I can only refer to Depankur Basu’s superb and precise account of Marx’s theory of ground rent and Hao Qi (Renmin University) on Marx’s theory of absolute rent, both of which can be applied to the issue of imperialism.  Ramaa Vasudevan (Colorado State university) also moved into this territory.  Marx_s Analysis of Ground-Rent_ Theory Examples and ApplicationsA Model of the Marxist Rent Theory

Finally, there is what happens if and when capitalism is overthrown globally.  What are the economic outlines and categories for a communist society?  Can we go beyond the prescriptions that Marx offered in the Critique of the Gotha Programme?  A panel composed of Seongjin Jeong (Gyeongsang National University, Korea), Richard Westra, Al Campbell and Ann Davis took this up at a session on an ‘alternative economic system for the 21st century’.

Al Campbell (emeritus professor at Utah) has offered some pioneering work in this area. And Seongjin Jeong’s paper on the faultlines of Soviet planning was revealing.  Two things here: first that the most important development under an economy moving towards communism is raising the productive forces to levels that quickly enable goods and services to be provided free at the point of consumption (ie transport, education, health, energy, basic foodstuffs etc).  But that could not be applied for some time for all goods and services, so there would have to be planned production and distribution.

Jeong argues that such planning should be based on labour time calculation.  But the Soviet economy of 1917–91 was not a labour-time planned economy. Although input-output tables are essential to the calculation of the total labour time needed to produce goods and services and were available to Soviet planners, they never seriously considered using them and instead depended on material balances.  However, with the development of AI, algorithms, big data and quantum power, such planning by labour time calculation is clearly feasible.  Communism will work. SovietPlanningLTC_Seongjin_URPE20180928. 

Lord Skidelsky and Keynes’ big idea

September 20, 2018

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

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

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

I have not got access to a review copy of his new book, but his speech last night and an article that Skidelsky wrote back in 2016 criticising mainstream economics probably sums up the views in the book.  This is what I said then

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

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

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

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

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

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

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

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

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

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

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

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

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

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

It’s greed and fear

September 18, 2018

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The state of capitalism at IIPPE

September 14, 2018

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Rethinking Rethinking economics

August 14, 2018

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

World trade and imperialism

July 30, 2018

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

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

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

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

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

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

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

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

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

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

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

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

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

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