Archive for the ‘Profitability’ Category

From Communism to Activism?

March 14, 2018

Last week, to commemorate 170 years since Marx and Engels wrote The Communist Manifesto, the editors of the UK’s Financial Times commissioned two executives of a ‘corporate advisory’ firm to consider what was right and wrong in that seminal work about capitalism and communism.  The two FT writers started by declaring that “as a partner in a corporate advisory firm and a professor of law and finance, we are true believers in free-market capitalism”, but nevertheless, the 1848 manifesto still had some value, especially “in the wake of a calamitous financial crisis and in the midst of whirlwind social change, a popular distaste of financial capitalists, and widespread revolutionary activity”.

But the FT authors wanted to convert the Communist Manifesto into what they call a “Activist Manifesto”.  They threw out the outdated concepts of two classes: capitalists and workers; and replaced them with the ‘haves’ and the ‘have nots’.  You see, classes and crises are out of date as the main critique of capitalism now is rising inequality, which the FT authors claim the Communist Manifesto was really about.  “As in Marx’s and Engels’ time, economic inequality is rising, wages are stagnating, and the owners of productive capital are reaping the benefits of technological advances”.

But the solution to this, the FT authors are at pains to say, is not the confiscation of private property or communism – this only breeds “murderous tyrannies”.  And “we also think Marx and Engels would update their views about private property. While the abolition of private property was their first and most prominent demand, we think they would recognise that Have-Nots have benefited from property rights. Moreover, we argue that state-held property is problematic, leading to waste, inefficiency and the likelihood of being co-opted by the Haves in our societies today. As the role of the state has grown, inequality has also grown. And the Have-Nots have been the ones who have paid for it.”

Instead what we need is ‘shareholder activism’ in companies “shaking up complacent boards and advocating for changes in corporate strategy and capital structure.” This is the way forward, according to our FT authors 170 years after Marx and Engels’ manifesto.  And even the global elite recognise it: “many Haves too are activists already today… Think of the billionaires such as Bill Gates, Warren Buffett and Mark Zuckerberg, who already support philanthropic efforts to alleviate inequality”.  So that’s all right then.

Should the Communist Manifesto be rewritten as a plea for ‘activism’ led by billionaires to reduce inequalities, rather than the abolition of private property in the means of production and the replacement of capitalism with communism?  While the FT was publishing its view on the Communist Manifesto today, I was delivering a talk on social classes today at the Metropolitan University of Mexico in Mexico City (Universidad Autónoma Metropolitana – UAM) as part of my recent visit there.  I too started off with a reminder that it was 170 years since the Communist Manifesto was published.  But I emphasised that the basic division of capitalism between two classes: the owners of the means of production (corporations globally) and those who own nothing and only have their labour power to sell; remains pretty much unchanged from how it was in 1848.

Recent empirical work on the US class division of incomes has been done by Professor Simon Mohun.  Mohun analysed US income tax returns and divided taxpayers into those who could live totally off income from capital (rent, interest and dividends) – the true capitalists, and those who had to work to make a living (wages).  He compared the picture in 1918 with now and found that only 3.8% of taxpayers could be considered capitalists, while 88% were workers in the Marxist definition.  In 2011, only 2% were capitalists and near 84% were workers.  The ‘managerial’ class, ie workers who also had some income from capital (a middle class ?) had grown a little from 8% to 14%, but still not decisive.  Capitalist incomes were 11 times higher on average than workers in 1918, but now they were 22 times larger.  The old slogan of the 1% and the 99% is almost accurate.

The class divide described in the Communist Manifesto is that between those who own and those who do not and Mohun’s ‘class’ stats confirm that.  For Marx and Engels, all previous history has been one of class struggle over the surplus created by labour.  In slave economies, the owners of capital literally owned humans as source of their surplus; in feudal society, they controlled the days of work and obligations of the serfs.

Under capitalism, the surplus was usurped in a hidden ‘invisible’ way.  Workers were paid a wage – a fair wage – but they produced more value in the commodities they made for sale and it was this surplus value realised in the sale of commodities (goods and services) that capitalists accumulated.  The class struggle under capitalism thus took the form of a struggle between the share of value going to wages or profits.  As Marx put it in Capital: “In the class struggle as a finale in which is found the solution of the whole smear! From a struggle over wages, hours and working conditions or relief, it becomes, even as it fights for those things, a struggle for the overthrow of the capitalist system of production – a struggle for proletarian revolution.”

In my presentation to UAM in Mexico, I ambitiously argued that we can gauge the intensity of the class struggle from the balance of forces in the wage-profit battle.  I used statistics of strikes in the UK since 1890 against the profitability of UK capital (for more on this, see my paper, Mapping out the class struggle).  The first long depression of capitalism was at its deepest just as Marx died in 1883. It came to an end in the UK in the early 1890s: profitability recovered and the labour movement strengthened with the advent of new mass unions.  Labour disputes erupted for a while.  The fall back in profitability from 1907 then sparked a new battle over the surplus leading to intense levels of strikes just before the WWI broke out.

After the war, the class struggle resumed with some intensity, but in the UK that ended with the defeat of the general strike in 1926.  On the back of that defeat, UK capital recovered some profitability while the unions were weakened.  Strikes and class struggle were depressed by the Great Depression of the 1930s.

The second world war drove up profitability and the labour movement also made a recovery.  It was the golden age of growth, investment, employment and the ‘welfare state’.  So when the profitability crisis of the late 1960s and 1970s commenced, British workers fought hard to maintain their gains.  Strikes were at a high level and there was talk of revolution.  That struggle came to an end with the defeat of the miners in 1985.  What followed was rising profitability in the neo-liberal period, along with weakened trade unions.  This was a recipe for low levels of class struggle.  With the Great Recession and the subsequent Long Depression, that low intensity continued.

I concluded from this short analysis that the class struggle as described in the Communist Manifesto has not disappeared and neither have the two basic classes, contrary to the amendments advocated in the ‘Activist Manifesto’ of the FT authors.  But the intensity of that struggle depends on the objective conditions of the profitability of capital and the strength of labour.  Class struggle is not always at fever pitch, revolutionary moments are rare.

The most intense periods of struggle appear to be when the labour movement is reasonably strong in incomes and organisation but when the profitability of capital has started to fall, according to Marx’s law of profitability.  Then the battle over the share of the surplus and wages rises.  Historically, in the UK that was from 1910 just before and just after WW1; and in the 1970s.  Such objective conditions have so far not arisen again.  So the spectre of Communism haunting Europe – the phrase that Marx and Engels started with their manifesto in 1848 (in a similar intense period as those above) – is not yet with us again.


UNAM 3 – the robotic future

March 9, 2018

My third and final lecture at the Autonomous National University of Mexico (UNAM) was on the impact of robots and artificial intelligence (AI). Are robots set to take over the world of work and thus the economy in the next generation and what does this mean for jobs and living standards for people? Will it mean socialist utopia in our time (the end of human toil and a superabundant harmonious society) or capitalist dystopia (more intense crises and class conflict)? Robots and AI Mexico

As readers of my blog know (only too often), I consider the current period in the world capitalist economy as a long depression, with low productivity, investment and trade growth.

One question is whether robots and AI can turn things round for capitalism and perhaps for us all. Robots have arrived. The level of robotics use has almost always doubled in the top capitalist economies in the last decade. Japan and Korea have the most robots per manufacturing employee, over 300 per 10,000 employees, with Germany following at over 250 per 10,000 employees. The United States has less than half the robots per 10,000 employees compared to Japan and The Republic of Korea. The adoption rate of robots increased in this period by 40% in Brazil, by 210% in China, by 11% in Germany, by 57% in The Republic of Korea, and by 41% in the United States.

Now all the talk is that the age of robots will mean the end of jobs for human beings. Two Oxford economists, Carl Benedikt Frey and Michael Osborne, looked at the likely impact of technological change on a sweeping range of 702 occupations, from podiatrists to tour guides, animal trainers to personal finance advisers and floor sanders. Their conclusions were: “According to our estimates, about 47 percent of total US employment is at risk. We further provide evidence that wages and educational attainment exhibit a strong negative relationship with an occupation’s probability of computerisation….Rather than reducing the demand for middle-income occupations, which has been the pattern over the past decades, our model predicts that computerisation will mainly substitute for low-skill and low-wage jobs in the near future. By contrast, high-skill and high-wage occupations are the least susceptible to computer capital.”

On the other hand, a study by economists at the consultancy Deloitte on the relationship between jobs and the rise of technology by trawling through census data for England and Wales going back to 1871. Their conclusion is unremittingly cheerful. Rather than destroying jobs, technology historically has been a “great job-creating machine”. Findings by Deloitte such as a four-fold rise in bar staff since the 1950s or a surge in the number of hairdressers this century suggest to the authors that technology has increased spending power, therefore creating new demand and new jobs. “The dominant trend is of contracting employment in agriculture and manufacturing being more than offset by rapid growth in the caring, creative, technology and business services sectors,” they write. “Machines will take on more repetitive and laborious tasks, but seem no closer to eliminating the need for human labour than at any time in the last 150 years.”

The story of bank tellers vs the cash machine (ATM) is an example of a technological innovation entirely replacing human labour for a particular task. Did this led to a massive fall in the number of bank tellers? Between the 1970s (when American’s first ATM was installed) and 2010, the number of bank tellers doubled. Reducing the number of tellers per branch made it cheaper to run a branch, so banks expanded their branch networks. And the role gradually evolved away from cash handling and more towards relationship banking.

So even if many of today’s jobs can be entirely replaced by machines, technology can also create new roles. At the end of the 19th century, half the US workforce was employed in agriculture, and this employment was rendered obsolete by technical change. But in that time a whole raft of new occupations – electrical engineer, computer programmer, etc – have been created.

Will the information revolution reduce working time under capitalism and thus lead progressively to post-capitalism? Well, previous technological changes have not done so. The average working week in the US in 1930 – if you had a job – was about 50 hours. It is still above 40 hours (including overtime) now for full-time permanent employment. In 1980, the average hours worked in a year was about 1800 in the advanced economies. Currently, it is about 1800 hours. So, since the great information revolution began under the ‘neoliberal period’ of capitalism, the average working year for an American has not changed. Indeed, hours of work have been rising since the 1970s in the US.

Then there is the great contradiction that I raised at UNAM on the question of robots – indeed with any technological revolution under capitalism. The aim of capitalist accumulation is to increase profits and accumulate more capital. So capitalists want to introduce machines that can boost the productivity of each employee and reduce costs compared to competitors. This is the great revolutionary role of capitalism in developing the productive forces available to society.

But in trying to raise the productivity of labour with the introduction of technology, there is a process of labour shedding. Yes, increased productivity might lead to increased output and open up new sectors for employment to compensate. But over time, a ‘capital-bias’ or labour shedding means less new value is created (as labour is the only content of value) relative to the cost of invested capital. So there is a tendency for profitability to fall as productivity rises. In turn, that leads eventually to a crisis in production that halts or even reverses the gain in production from the new technology. This is solely because investment and production depend on the profitability of capital in our modern (capitalist) mode of production.

What does this mean if we enter the extreme (science fiction?) future where robotic technology and AI leads to robots making robots AND robots extracting raw materials and making everything AND carrying out all personal and public services so that human labour is no longer required for ANY task of production at all? Surely, value has still been added by the conversion of raw materials into many more goods (but now without humans)? Surely, that refutes Marx’s claim that only human labour can create value?

But this confuses the dual nature of value under capitalism: use value and exchange value. There is use value (things and services that people need); and exchange value (the value measured in labour time and appropriated from human labour by the owners of capital and realised by sale on the market). In every commodity under the capitalist mode of production, there is both use value and exchange value. You can’t have one without the other under capitalism. But the latter rules the capitalist investment and production process, not the former.

Value (as defined) is specific to capitalism. Sure, living labour (and machines) can create things and do services (use values). But value is the substance of the capitalist mode of producing things. Capital (the owners) controls the means of production and will only put them to use in order to appropriate value created by human labour. Capital does not create value itself. So in our hypothetical all-encompassing robot/AI world, productivity (of use values) would tend to infinity while profitability (surplus value to capital value) would tend to zero.

This is no longer capitalism. The analogy is more with a slave economy as in ancient Rome. In ancient Rome, over hundreds of years, the formerly predominantly small-holding peasant economy was replaced by slaves in mining, farming and all sorts of other tasks. This happened because the booty of the successful wars that the Roman republic and empire conducted included a mass supply of slave labour. The cost to the slave owners of these slaves was incredibly cheap (to begin with) compared with employing free labour.

A fully robot economy means that the owners of the means of production (robots) would have a super-abundant economy of things and services at zero cost (robots making robots making robots). The owners can then just consume. They don’t need to make ‘profit’, just as the aristocrat slave owners in Rome just consumed and did not run businesses to sell commodities to make a profit. So a robotic economy could mean a super-abundant world for all or it could mean a new form of slave-type society with extreme inequality of wealth and income. It’s a social ‘choice’ or more accurately, it depends of the outcome of the class struggle under capitalism.

But just how close are AI/robots to doing all human work? Not very. The Defense Advanced Research Projects Agency, a Pentagon research arm, held a Robotics Challenge competition in Pomona, Calif. There was $2 million in prize money for the robot that performs best in a series of rescue-oriented tasks in under an hour. Robots had an hour to complete a set of eight tasks that would probably take a human less than 10 minutes. And the robots failed at many. Most of their robots were two-legged, but many had four legs, or wheels, or both. But none were autonomous. Human operators guided the machines via wireless networks and were largely helpless without human supervisors. Little headway has been made in “cognition,” the higher-level humanlike processes required for robot planning and true autonomy. As a result, any researchers have begun to think instead of creating ensembles of humans and robots, an approach they describe as co-robots or “cloud robotics.”

So there’s still a long way to go. Indeed, as Professor Jose Sandoval, who commented on my paper at UNAM pointed out, American economist Robert J Gordon reckons that the great new innovatory productivity enhancing paradigm that is supposedly coming from the digital revolution could be over already and the future robot/AI explosion will not change that.

William Nordhaus from Yale University’s department of economics, has tried to estimate the future economic impact of AI and robots. Nordhaus says, projecting the trends of the last decade or more, it would be in the order of a century before growth in robot skills would reach the level associated with full automation.

Robots and AI will only really take off when the current depression enters a new phase. Marx noticed that “a crisis always forms the starting-point of large new investments. Therefore, from the point of view of society as a whole … a new material basis for the next turn-over cycle.” (Marx, Capital Vol. II, p.186). New and massive investments will take the form of new technologies, which will be not only labour-shedding and productivity-increasing, but also new forms of domination of labour by capital.

The key issue is Marx’s law of the tendency of the rate of profit to fall. A rising organic composition of capital will lead to a fall in the overall rate of profit engendering recurring crises. If robots and AI do replace human labour at an accelerating rate, that can only intensify that tendency. Well before we get to a robot-all world, capitalism will experience ever-increasing periods of crises and stagnation.

I’ll be posting all my papers and the accompanying powerpoint presentations on my Facebook site.

UNAM 2 – Europe’s single currency

March 8, 2018

My second lecture to the economics faculty of the Autonomous National University of Mexico (UNAM) was on Europe’s single currency zone. Has the euro worked in taking the economies in the Eurozone forward both in improved living standards for the people within the area and also in integrating and converging each national economy into one effective capitalist unit? The euro

It’s a subject that interests Mexicans, as Mexico is part of the only effective free trade area in the Americas, the North American Free Trade Area (Mexico, US, Canada) – NAFTA, which is now under threat from US President Trump’s protectionist program.

In my presentation, I argued that this European project which started after the WWII, had two aims: first, to ensure that there were never any more devastating wars between European nations; and second, to make Europe into an economic and political entity that could rival America and Japan in global capital battle.  This project was led by Franco-German capital, and with the introduction of the euro, the project eventually went further than just a free trade area or even a customs union (with free movement of capital and labour), to a single currency and monetary policy.  The aim was to integrate all European capitalist economies into one unit to compete with the US and Asia in world capitalism with a rival currency to the dollar.

There are three views on the success of the European Union and the single currency.  The mainstream neoclassical view is that an Optimal Currency Area (OCA), where all members benefit from a single currency and monetary policy, is possible as long as economies move through similar business cycles.  If they don’t, then the market must be allowed to adjust wages and prices between national economies to bring about a new balance. Equilibrium can be established if there is wage flexibility and labour mobility in the currency area. And ideally there is also a common fiscal and monetary policy to adjust taxes and interest rates as necessary.

When the EU began, the EU Commission economists optimistically reckoned that, with higher trade integration, there would be increased synchronization of national business cycles. That’s because trade among EU economies is typically intra-industry and so does not lead to higher specialization, which could cause increased possibility of ‘asymmetric shocks’ ie differing business cycles.

But this neoclassical view of mobility of labour and wage flexibility was disputed by Keynesian theory.  In the 1990s, Nobel prize winner Paul Krugman, who specialised in international trade theory, argued that higher trade integration would lead to higher specialisation of industry.  That would lead to a concentration of industrial activity in just a few states. So far from convergence within the trade area between national economies, there was risk of divergence on productivity, wages and investment.

The Marxist view starts from the opposite position of the neoclassical mainstream.  There is no tendency to equilibrium in trade and production cycles under capitalism.  So fiscal, wage or price adjustments by the market (or even government) will not restore equilibrium.  Capitalism is an economic system that combines labour and trade, but unevenly.  The centripetal forces of combined accumulation and trade are countered by centrifugal forces of uneven development.

The idea that ‘free trade’ is beneficial to all countries and to all classes is a ‘sacred tenet’ of mainstream economics.  But it is a fallacious proposition based on the theory of comparative advantage (first proposed by the classical early 19th century economist, David Ricardo) that if each country concentrated on producing goods or services where it has a ‘comparative advantage’ over others, then all would benefit.  Trading between countries would balance and wages and employment would be maximised. But this is empirically untrue.  Countries run huge trade deficits and surpluses for long periods; have recurring currency crises; and workers lose jobs from competition from abroad without getting new ones from more competitive sectors.

In contrast, the Marxist theory of international trade is based on the law of value.  In the Eurozone, Germany has a higher technology ratio (organic composition of capital) than Italy.  Thus in any trade between the two, value is transferred from Italy to Germany.  But Italy cannot compensate for this by increasing the scale of its production/export to Germany, unlike say China.  So it transfers value to Germany and runs a permanent deficit on total trade with Germany.  In this situation, Germany gains within the Eurozone at the expense of Italy.  As nearly all other member states cannot scale up their production to surpass Germany, unequal exchange is compounded across the EMU.

Balance of trade between Germany and Italy (Euro m)

With a single currency, the value differentials between the weaker states (lower OCC) and the stronger (higher OCC) are exposed with no option to compensate by devaluation of any national currency or protectionist measures.  The weaker capitalist economies (in southern Europe) within the euro area eventually lost ground to the stronger (in the north).

Change in productivity levels since 1999 relative to Eurozone average (%)

The move to a common market and a customs union was a relative success in raising trade for all and in converging productivity levels and growth rates.  This was similar to where NAFTA is today.  But when the EU moved to free movement of labour and capital in 1993, harmonising its trade and employment regulations and setting up political controls, convergence in Europe stopped and the stronger capitalist economies increased their share of the value created at weaker economies’ expense.   This was a key point made by a participant at the UNAM session.

The EU leaders had set criteria for joining the euro, but these criteria were all monetary (interest rates and inflation) and fiscal (budget deficits and debt).  There were no convergence criteria for productivity levels, GDP growth, investment or employment.  That was because those were areas for the free movement of capital (and labour) and capitalist production for the market and not the province of interference or direction by the state.  After all, the EU project is a capitalist one.

This growing divergence in incomes and production per head and in profitability of capital was exposed when the Eurozone economy entered the major slump and debt crisis with the Great Recession of 2008-9. The global financial crash and the Great Recession were the result of Marx’s law of profitability, as I have argued ad nauseam elsewhere.

As Sergio Camara, Marxist economist at the Metropolitan University of Mexico (UAM), said in his commentary on my presentation at the UNAM session, we must distinguish between the underlying trends in capitalism globally and specific features for Europe.  Many Keynesians blame the euro for the euro crisis, but the crisis of the currency was really a crisis of capitalism in general.  The global crisis of capitalism took a particular form in the Eurozone because of the currency union. The debts being built up by the south with the north were exposed in the crash and sparked the ‘euro crisis’, but only after the global financial crash.

The global slump dramatically increased the divergent forces within the euro. The fragmentation of capital flows between the strong and weak Eurozone states exploded. Net capital assets and liabilities within the Eurozone should have been in balance – but they were far from that.

The capitalist sectors of the richer economies like Germany stopped lending directly to the weaker capitalist sectors in Greece and Slovenia, etc. As a result, in order to maintain a single currency for all, the official monetary authority, the ECB, and the national central banks had to provide the loans instead.

Franco-German capital was not prepared to pay for the ‘excesses’ of the weaker capitalist states.  Thus the bailout programmes were combined with ‘austerity’ to make the people of the distressed states pay with cuts in welfare, pensions and real wages, and to repay (virtually in full) their creditors (the banks of France and Germany and the UK).  The debt owed to the Franco-German banks was transferred to the EU state institutions and the IMF – in the case of Greece, probably in perpetuity.

It was the workers of the Baltic states and the distressed Eurozone states of Greece, Ireland, Cyprus, Spain, and Portugal who took the biggest hit. In these countries, real wages fell, unemployment rocketed, and hundreds of thousands have left their homelands to look for work somewhere else. That has enabled companies in those countries to sharply increase the rate of exploitation of their reduced workforce, although so far that has not been enough to restore profitability to levels before the Great Recession and thus sustain sufficiently high new investment for a sustained path of growth.

Keynesians blame the crisis in the Eurozone on the rigidity of the single-currency area and on the strident ‘austerity’ policies of the leaders of the Eurozone, Germany. They reckon that the weaker economies would have been better off leaving the euro and devaluing their currencies to reverse their trade and capital imbalances. But such policies would have been no better for the workers in those countries exiting the euro, possibly worse.

Keynesian policies would still mean a loss of real income through higher prices, a falling currency, and eventually rising interest rates. Take Iceland, a tiny country outside the EU, let alone the Eurozone.  It adopted the Keynesian policy of devaluation of the currency, a policy not available to the member states of the Eurozone.  But it still meant a 40% decline in average real incomes in euro terms and nearly 20% in krona terms since 2007.  Indeed, in 2015 Iceland’s real wages were still below where they were in 2005, ten years earlier, while real wages in the ‘distressed’ EMU states of Ireland and Portugal were more or less flat.

In the last 18 months, the Eurozone economies have made a modest economic recovery, after nearly ten years of depression.  But profitability of capital in most EZ economies remains below where it was in 2007 (see graph below). Progress in raising the rate of exploitation has been considerable.  But progress in devaluing and deleveraging the stock of capital and debt built up before has been slow and even being postponed by easy monetary policy from the European Central Bank. Given the current level of profitability, recovery may take too long before the world economy drops into another slump. Then all bets are off on the survival of the euro.


UNAM 1 – The profit investment nexus

March 7, 2018

My first lecture to the economics faculty of the Autonomous National University of Mexico (UNAM) was on the relationship between profits and profitability and investment and economic growth in capitalist economies. Do profits and profitability lead investment and GDP into slumps and out of them, or vice versa?  In my view, this is one of the big divisions between the Keynesian and Marxist theory of crises, or booms, slumps and depressions in capitalism. For all the references to research etc made below, see my paper: The profit investment nexus

In my presentation, I first pointed out that both Marxist and Keynesian analysis agree that investment (especially business investment) is the key driver of economic growth and the main swing factor in the capitalist business cycle of boom and slump.  This is contrary to the view of neoclassical theory, where in so far as it has any theory of crises at all, it starts from the premiss that the ‘consumer is king’ and that the ups and downs of consumer demand explain booms and slumps.  At least, the more sophisticated version of Keynesian theory recognises ‘effective demand’ (the Keynesian indicator of crises) under capitalism is primarily investment, not consumption – although many Keynesians seem to slip into the latter as the cause.

If we analyse the changes in investment and consumption prior to each recession or slump in the post-war US economy, we find that consumption demand has played little or no leading role in provoking a slump.  In the six recessions below, personal consumption fell less than GDP or investment on every occasion and does not fall at all in 1980-2.  Investment fell by 8-30% on every occasion.

But after that comes the difference with Marxist analysis.  The Keynesian macro-identities suggest that investment drives GDP, employment and profits through the mechanism of effective demand.  But Marxist theory says that it is profit that ‘calls the tune’, not investment.  Profit is part of surplus value, or the unpaid labour in production.  It is the result of the exploitation of labour – something ignored or denied by Keynesian theory, where profit is the result of ‘capital’ as a factor of production.

In my presentation, I argued that Keynesian macro-identities are thus ‘back to front’: investment does not ‘cause’ profit; profit ‘causes’ investment.  Moreover there is little empirical evidence that investment drives profits as the Keynesian model would suggest. And there is little evidence that government spending or budget deficits (net borrowing) restore economic growth or end slumps.  These end only when the profitability of business capital is revived.  Thus the Keynesian multiplier is less compelling than the ‘Marxist multiplier’.

For Keynesians, the causal direction is that investment creates profit. For orthodox Keynesians, crises come about because of a collapse in aggregate or ‘effective demand’ in the economy (as expressed in a fall of investment and consumption).  This fall in investment leads to a fall in employment and thus to less income.  Effective demand is the independent variable and incomes and employment are the dependent variables.  There is no mention of profit or profitability in this causal schema.

Keynes understood the central role of profit in the capitalist system. “Unemployment, I must repeat, exists because employers have been deprived of profit. The loss of profit may be due to all sorts of causes. But, short of going over to Communism, there is no possible means of curing unemployment except by restoring to employers a proper margin of profit.” But for him, and Michal Kalecki, the guru of post-Keynesian analysis of crises, investment creates profits not vice versa.  “Nothing obviously, can restore employment which does not first restore business profits. Yet nothing, in my judgement, can restore business profits that does not first restore the volume of investment.”  (Keynes).  To use the pithy phrase of Hyman Minsky, devoted follower of Keynes, “it is investment that calls the tune.”

As Jose Tapia has pointed out that “for the whole Keynesian school, investment is the key variable explaining macroeconomic dynamics and leading the cycle.”  But if investment is the independent variable, according to Keynes, what causes a fall in investment? For Keynes, it is loss of ‘animal spirits’ among entrepreneurs, or a ‘lack of confidence’ in employing funds for investment.  As Minsky said, investment is dependent on “the subjective nature of expectations about the future course of investment, as well as the subjective determination of bankers and their business clients of the appropriate liability structure for the financing of positions in different types of capital assets”

As Paul Mattick Snr retorted about the Keynesian explanation, “what are we to make of an economic theory, which after all claimed to explain some of the fundamental problems of twentieth-century capitalism, which could declare: ‘In estimating the prospects of investment, we must have regard, therefore, to the nerves and hysteria and even the digestions and reactions to the weather of those upon whose spontaneous activity it largely depends’?

In my presentation, I suggested that what if we turn the causal direction the other way.  Marx’s theory of value tells us that all value is created by labour and profit is a product of the exploitation of labour power and its appropriation by capital.  Then we have a theory of profit and investment based on an objective causal analysis within a specific form of class society.  And now, investment in an economy depends on profits.

With Marx, profit is the result of the exploitation of labour (power) and thus is logically prior to investment.  But it is also temporally prior.  If we adopt a theory that profits cause or lead investment, that ‘profits call the tune’, not investment, then we can construct a reasonably plausible cycle of profit, investment and economic activity.

And not only is this the Marxist approach theoretically more realistic and valid, there is a wealth of empirical evidence to support the analysis that profits lead investment, not vice versa.  I gave a long list of studies along these lines, from both mainstream and Marxist analysts, including my own (see my paper above).

My presentation then went on to draw the policy conclusions from the difference between Keynesian and Marxist analysis.  It is the kernel of Keynesian economic policy that the way out of economic recession under capitalism is to boost ‘effective demand’. And in a ‘depression’, it will be necessary to stimulate this demand, either by easing the cost of investment or consumer borrowing (monetary policy) and/or by government spending (fiscal policy).

But if the Marxist analysis is right, then this is a utopian policy. Government spending and tax increases or cuts must be viewed from whether they boost or reduce profitability. If they do not raise profitability or even reduce it, then any short-term boost to GDP from more government spending will only be at the expense of a lengthier period of low growth and an eventual return to recession.

There is no assurance that more spending means more profits – on the contrary.  Government investment in infrastructure may boost profitability for those capitalist sectors getting the contracts, but if it is paid for by higher taxes on profits, there is no gain overall.  And if it is financed by borrowing, profitability will eventually be constrained by a rising cost of capital.

I then outlined a load of empirical evidence to show that the so-called Keynesian ‘multiplier’ of government spending boosting real GDP growth was ineffective, and the ‘Marxist multiplier’, to coin the term from G Carchedi, that investment and growth under capitalism only really responds to changes in profitability and profits, was way more compelling.

I compared average real GDP growth against the average change in government spending and as a ratio of the change in the net return on capital for successive decades since 1960.  Real GDP growth is strongly correlated with changes in the profitability of capital (Marxist multiplier), while the correlation was negative with changes in government spending (Keynesian multiplier).  The Marxist multiplier was considerably higher in three out of the five decades, and particularly in the current post Great Recession period.  And in the other two decades, the Keynesian multiplier was only slightly higher and failed to go above 1.

There was some discussion from the floor about the validity of econometric causal analysis in reaching these results and their statistical significance.  But I think we can safely say that there was stronger evidence that the Marxist multiplier is more relevant to economic recovery under capitalism than the Keynesian multiplier.

In her commentary on my presentation, Professor Gloria Martinez from UNAM, carefully considered my arguments, making the point that it was not a fall in profitability that was the direct cause of slumps, but in particular, the eventual fall in the mass of profit.  And so there is an issue of how crises can take place when the rate of profit is rising, as it was in the neo-liberal period from the 1980s.

Well, there are several responses to that.  First, many studies show that the overall rate of profit in the US and elsewhere stopped rising after the end of the millennium – the neoliberal recovery was over.  Indeed, profitability in the US began to fall from 2006, well before the credit crunch and the Great Recession, as did eventually the mass of profit.  So the Marxist analysis still holds.

Second, as Carchedi has shown, if you strip out the counteracting factor of a rising rate of surplus value from the 1980s, the law of profitability ‘as such’ was still operating.  Indeed, crises occur when total new value (wages and profit) fell or slowed markedly and Marx’s law of profitability then asserted itself.

The other response comes from the issue of fictitious profits and the rise of finance capital in the neo-liberal period, but particularly after 2002.  This was raised by several members of the audience.  After 2002, total profits in the US rose sharply but investment did not follow.  So where was the profits-investment nexus then?  Well, if you strip out the profits from fictitious capital (financial speculation in stocks and bonds with credit), then profitability was falling from 2002 – this is what a study by Peter Jones from Australia has shown (see paper).

Second, if you strip out finance capital profits (not all of which is fictitious because interest income and commissions are revenue for banks and finance houses), profitability in the productive sector of the US economy was weak and falling and has not really recovered since the end of the Great Recession.

The conclusions of my presentation were that:

1) the Keynesian view that effective demand and investment drive profits is logically weak and empirically unproven;

2) the Marxist view is that profitability and profits drive investment in a capitalist economy.  This is theoretically logical and empirically supported;

3) this implies that it is the Marxist multiplier (the changes in real GDP relative to profitability) that is a better guide to any likely recovery in a capitalist economy than the Keynesian multiplier (changes in real GDP relative to government net spending – dissaving) and

4) Keynesian fiscal (and monetary) stimulus policy prescriptions are unlikely to work in restoring investment, growth and employment in a capitalist economy – indeed they could even delay recovery.


Italy’s Ides of March

March 5, 2018

The winners in the Italian general election held on Sunday were the so-called ‘populist’ parties.  The Five Star party founded by ex-TV comedian Beppo Grillo and now led by Luigi Di Maio, took over 30% of the vote and will be the largest single party in the new parliament.  It presented itself as an anti-establishment, anti-corruption party.  Previously it had called for a referendum to leave the EU but recently dropped that and switched to social policies.  In the election, it proposed a Universal Basic Income (UBI) for all, which won it many votes from the young unemployed and poor, particularly in the south.

The other winner was the Northern League, which, as it name implies, used to be a separatist party campaigning for autonomy of the richer northern parts of Italy and calling for an end government transfers to the poor and ‘lazy’ south.  But under its new leader, Matteo Silvini, it has become an anti-immigrant and anti-EU party like the National Front in France or UKIP in Britain.  This led to a sharp increase in its vote share, to around 18%.  Italy now has the highest proportion of anti-EU opinion in the Eurozone (although that’s still a minority view).

The losers in the election were the traditional mainstream centre-left and centre-right parties.  The incumbent centre-left Democrat party was humiliated in the vote.  A product of a merger between the Communists and the Socialists in the 1990s, it had steadily moved to the right to become a pro-capitalist ‘Blairite’ party.  Its vote share under Matteo Renzi, the former prime minister, fell to under 20%, half its share just five years ago.

The centre-right party, Forza Italia, is a creature of media billionaire and former PM, Silvio Berlusconi.  It was expected to do better in the election but eventually it polled just 13%, way less than its electoral coalition partner, the Northern League.

The other winner was the ‘no vote’ party.  The rise in the number of those not voting at all has been a feature of elections in the major capitalist economies in the neoliberal period and in this Long Depression.  Since Italy abolished compulsory voting in 1993, voter turnout has steadily fallen.  In this election it reached a new low.  The no vote ‘party’ polled 28% (if still relatively low by the standards of voter turnout in the US or the UK).

None of the parties or electoral coalitions have enough seats to form a governing majority in parliament, so what now? It seems to me that there are three possibilities. The first is that, despite losing the election, the centre-right and centre-left will form a coalition, possibly with the Northern League.  Such coalition has been the solution in Germany where last September’s election led to a similar decline in the two mainstream parties.  It would be what Italian and European capital would prefer.  But such a coalition will be difficult to sustain given that the Northern League has polled better than Forza Italia in their coalition and the Democrats have been crushed.

The second possibility is the worst for Italian capital, namely that Five Star and the Northern League form a government.  That would mean breaking from austerity policies on public finances, possible attacks on big business interests and increased demands for withdrawal from the Eurozone.  But this again is unlikely because the Northern League would not want to be a junior partner in a coalition with a party that gets its main support from the poor south.

The third possibility, assuming that Five Star sticks to its refusal to form any coalition, is that the Italian president appoints a temporary ‘technocratic’ government for say six months and calls another election in September.

It’s a political mess.  But that political mess mirrors the mess that is the Italian economy.  The Eurozone economy has enjoyed a modest revival in the last 18 months and the area as a whole is now growing faster even than the US and the UK.  But Italy is not.  It is still a member of top G7 advanced capitalist economies, but its working population is falling, despite an influx of immigrants in recent years, and the productivity of the workforce is stagnating.

Unemployment remains high compared to other EU economies.

Combine low employment growth with low productivity growth of that labour force and the Italian economy has a low long-term potential growth rate of no more than 1% a year.

Productivity growth is stagnating because Italian capital is not investing productively enough.

And why is that?  Because profitability is low.  The profitability of Italian capital reached an all-time low back in the early 1980s, like most other major capitalist economies.  During the neo-liberal period, profitability rose significantly and with the start of the full European Union, Italian profitability returned to the highs of the 1960s.  But joining the Eurozone saw a sharp turn downwards.

Italian businesses were now exposed directly by Franco-German capital.  Italy has a high proportion of small to medium size companies with particular markets and these were now in trouble.  The Great Recession and the ensuing Long Depression compounded that weakness and many Italian companies ran up huge debts with banks that they increasingly could not pay. Italy’s banks started to go bust and, despite recent government bailouts, Italy’s banks still have more ‘bad debts’ on their books than the rest of the Eurozone put together.

The current upswing in Eurozone economies may help to keep the Italian economy’s head just above the water, but with per capita income is falling and unemployment is still high.

Public debt to GDP is the highest in Europe after Greece and the corporate debt overhang still huge.  So any new global slump is going to put Italian capital back into deep trouble.  The current political paralysis shows that the politicians have as yet no solutions.  With the Ides of March approaching.


Robots: what do they mean for jobs and incomes?

February 26, 2018

The recent opening by Amazon of a new retail store in the basement of its headquarters in Seattle has provoked more talk that human labour is soon to be wiped out by the expansion of robots and AI.

At the store, which is clearly a ‘pilot’, customers walk in, scan their phones, pick what they want off the shelves and walk out again. There are no checkouts or cashiers. Instead, customers first download an app onto their smartphones and then machines in the shop sense which customer is which and what they are picking off the shelves. Within a minute or two of the shopper leaving the store, a receipt pops up on their phone for items they have bought.  This development in ‘automatic’ retailing mirrors other automation: in offices, driverless cars, social care and in decision-making.

So does this mean that humans will soon be totally replaced by intelligent learning machines and algorithms?  In previous posts, I have outlined the forecasts on the number of jobs that will be lost to robots over the next decade or more.  It appears to be huge: and not just in manual work in factories but also in so-called white-collar work like journalism, banking and even economists!

The techno-futurists think robots will soon replace humans.  But I think they are running before they can walk – or to be more exact, so far, robots can hardly run and catch compared to humans.  This is ‘Moravec’s paradox, namely that “it is comparatively easy to make computers exhibit adult-level performance on intelligence tests or playing games, and difficult or impossible to give them the skills of a one-year-old when it comes to perception and mobility” (Moravec).   So algorithms can vote on whether to invest or not for hedge funds or banks, but a robot cannot even hit a tennis ball, let alone beat a club player.  Indeed, robot development is heading  more towards ‘cobots’, which act as an extension of the worker, in factories with the heavy work and in hospitals and social care for diagnosis. This does not directly replace the worker.

The mainstream economic debate is whether ‘technology’ will create more jobs than it destroys.  After all, the argument goes, new technology may get rid of certain jobs (hand loom weavers in the early 19th century) but provide new ones (textile factories).

One thought experiment is that provided by Paul Krugman.  In Krugman’s celebrated example, imagine there are two goods, sausages and bread rolls, which are then combined one for one to make hot dogs.  120 million workers are divided equally between the two industries:  60 million producing sausages, the other 60 million producing rolls, and both taking two days to produce one unit of output.

Now suppose new technology doubles productivity in bakeries.  Fewer workers are required to make rolls, but this increased productivity will mean that consumers get 33% more hot dogs.  Eventually the economy has 40 million workers making rolls and 80 million making sausages.  In the interim, the transition might lead to unemployment, particularly if skills are very specific to the baking industry. But in the long run, a change in relative productivity reallocates rather than destroys employment.

The story of bank tellers vs the cash machine (ATM) is another example of a technological innovation entirely replacing human labour for a particular task.  Did this led to a massive fall in the number of bank tellers?  Between the 1970s (when American’s first ATM was installed) and 2010 the number of bank tellers doubled. Reducing the number of tellers per branch made it cheaper to run a branch, so banks expanded their branch networks.  And the role gradually evolved away from cash handling and more towards relationship banking.

That’s the optimistic view.  But even then, as Marx pointed out with the rise of machines in the 19th century, the loss of jobs in one sector and their recreation in another is no seamless process of change. As Marx put it: The real facts, which are travestied by the optimism of the economists, are these: the workers, when driven out of the workshop by the machinery, are thrown onto the labour-market. Their presence in the labour-market increases the number of labour-powers which are at the disposal of capitalist exploitation…the effect of machinery, which has been represented as a compensation for the working class, is, on the contrary, a most frightful scourge. For the present I will only say this: workers who have been thrown out of work in a given branch of industry can no doubt look for employment in another branch…even if they do find employment, what a miserable prospect they face! Crippled as they are by the division of labour, these poor devils are worth so little outside their old trade that they cannot find admission into any industries except a few inferior and therefore over-supplied and under-paid branches. Furthermore, every branch of industry attracts each year a new stream of men, who furnish a contingent from which to fill up vacancies, and to draw a supply for expansion. As soon as machinery has set free a part of the workers employed in a given branch of industry, the reserve men are also diverted into new channels of employment, and become absorbed in other branches; meanwhile the original victims, during the period transition, for the most part starve and perish.” Grundrisse.

And then there is the profitability of technology.  Robots will not be widely applied unless they can deliver more profit for owners and investors in robotic applications.  But more robots and relatively less human labour will mean relative less value created per unit of capital invested, because from Marx’s law of value, we know that value (as incorporated in the sale of production for profit) is only created by human labour power.  And if that declines relatively to means of production employed, then there is tendency for profitability to fall.  So the expansion of robots and AI increases the likelihood and magnitude of profitability crises.  So it is very likely that slumps in capitalist production will intensify as machines increasingly replace labour.  This is the great contradiction of capitalism: increasing the productivity of labour through more machines reduces the profitability of capital.

Mainstream economics either denies the law of value or ignores it. Back in 1898, neo-Ricardian economist Vladimir Dmitriev, in order to refute Marx’s value theory, presented a hypothetical economy where machines (robots) did all and there was no human labour.  He argued that as there was still a huge surplus produced without labour, so Marx’s value theory was wrong.

But Dmitriev’s thought experiment is irrelevant because he and other mainstream economists do not understand value in the capitalist mode of production.  Value in a commodity for sale is double-sided: there is physical ‘use value’ in the good or service sold, but there is also ‘exchange-value’ in money and profit that must be realised in the sale.  Without the latter, capitalist production does not take place.  And only labour power creates such value.  Machines create no value (profit) without humans turning machines on.  Indeed, Dmitriev’s super abundant robot only economy would no longer be capitalist because there would be no profit for individual capitalists.

And here is the great contradiction of capitalism.  As machines replace human labour power, under capitalism, profitability falls even if the productivity of labour rises (more things and services are produced).  And falling profitability will periodically disrupt production of individual capitalists because they only employ labour and machines to make profits.  So crises are intensified well before we get to Dmitriev’s hypothetical robot world.

But what to do, as jobs are lost to robots?  Some liberal economists talk of a ‘robot tax’.  But all this would do is slow down automation – hardly a progressive move in reducing toil. The idea of universal basic income (UBI) continues to gain traction among economists, both leftist and mainstream.  I have discussed the merits and demerits of UBI before.  UBI is advocated by many neoliberal economic strategists as a way of replacing the ‘welfare state’ of free health, education and decent pensions with a basic income.  And it is being proposed to keep wages down for those in work.  Any decent level of basic income would be just too costly for capitalism to afford.  And even if UBI were won by workers in struggle, it would still not solve the issue of who owns the robots and the means of production in general.

A more exciting alternative, in my view, is the idea of Universal Basic Services i.e. what are called public goods and services, free at the point of use.  A super-abundant society is by definition one where our needs are met without toil and exploitation ie a socialist society. But the transition to such a society can start with devoting socially necessary labour to the production of basic social needs like education, health, housing, transport and basic foodstuffs and equipment.

Why use resources to give everybody a basic income to buy these social needs; why not make them free at the point of use?  Instead of cutting people who are not working off from those that are working with income handouts, we need to build unity at work through reducing the hours of labour and expanding (free at use) public services and goods for all.

Of course, this would require the many owning and controlling the means of production and planning the application of those resources for social need, not the profit of the few.  Robots and AI would then become part of the technological advance that would make a super-abundant society possible.


The underlying reasons for the Long Depression

February 14, 2018

There are two new mainstream papers out that offer some interesting analysis on the reasons behind the Long Depression that the major economies (or at least, the US) have suffered since the end of the Great Recession in 2009 – in the growth of real GDP, productivity, investment and employment.

First, there is a paper by economists at the San Francisco Federal Reserve.  The Disappointing Recovery in U.S. Output after 2009 by John Fernald, Robert E. Hall, James H. Stock, and Mark W. Watson.  They consider the well-known evidence that US real GDP growth has expanded only slowly since the recession trough in 2009, counter to normal expectations of a rapid cyclical recovery.  In the paper, they remove the “cyclical effects” of the Great Recession and find that there was already a sharply slowing trend in underlying growth before the global financial crash in 2008.  The Fed economists conclude that the slowing trend reflected two factors: slow growth of innovation and declining labour force participation.

Figure 1 shows business-sector output per person in recent decades. The green line shows that output per person fell sharply during the recession and remains below any reasonable linear trend line extending its pre-recession trajectory. The figure shows one such trend line (yellow line), based on a simple linear extrapolation from 2003 to 2007.

Figure 1
Output per capita: Deep recession plus a sharp slowing trend

The blue line in Figure 1 shows the resulting estimate of trend output per capita after removing the cyclical effects associated with the deep recession. As expected, the cyclical adjustment removes the sharp drop in actual output associated with the recession. But since then, the trajectory of the blue line is nowhere close to a straight line projection from the 2007 peak. Rather, cyclically adjusted output per person rose slowly after 2007 and then plateaued in recent years.

The Fed economists reckon that the slow growth has been due to a slowdown in the productivity of labour, which in turn has been caused by a reduction in investment in innovation and new technology.  In mainstream economics, this is measured by the residual of output per person left over after increases in employment (labor input) and means of production (capital input) are accounted for.  The residual is called total factor productivity (TFP), to designate the increased productivity per unit of total input.  TFP supposedly captures the productivity benefits from formal and informal research and development, improvements in management practices, reallocation of production toward high productivity firms, and other efficiency gains.

The Fed economists, using this factor accounting, find that TFP growth slowed significantly even before the Great Recession.  It picked up in the mid-1990s and slowed in the mid-2000s—before the recession—and then was flat or even falling going into the recession.

Figure 2
Pre-recession slowdown in quarterly TFP growth

The economists dismiss the arguments that it was the Great Recession that caused the productivity slowdown or that productivity growth from info tech is being mismeasured: “such mismeasurement has long been present and there’s no evidence it has worsened over time.” They also dismiss the idea common from right-wing neoclassical economists that “increased regulatory burdens have reduced the economy’s dynamism.”  They find no link between regulation changes and TFP growth.

The explanation they fall back on is the one presented by Robert J Gordon in many papers and books: that TFP growth is really just back to normal and what was abnormal was the burst in innovation in the 1990s with the hi-tech and boom.  That ended in 2000 and won’t be repeated.  “Every story in the late 1990s and early 2000s emphasized the transformative role of IT, often suggesting a sequence of one-off gains—reorganizing retailing, say. Plausibly, businesses plucked the low-hanging fruit; afterward, the exceptional growth rate came to an end.”

The other factor in the slowdown was the decline in employment growth of those of working age.  Yes, there is supposed to be near ‘full employment’ now in the US and the UK etc.  But participation in employment by working age adults has fallen sharply.  That’s because populations are getting older and the ‘baby boomers’ who started worked in the 1960s and 1970s are now retiring and not being replaced.

Figure 3
Sharp declines in labor force participation rate

What the Fed economists want to tell us is that the Long Depression is not just the leftover of the Great Recession but reflects some deep-seated underlying slowdown in the dynamism of the US economy that is not going to correct through the current small economic upturn.   The US economy is just growing more slowly over the long term.

What the Fed economists don’t explain is why the US economy has been slowing in productivity growth and innovation since 2000.  What is missing from the analysis is what drives the adoption of new techniques and labour-saving equipment.  Gordon and others just accept the current slowdown as a ‘return to normal’  from the exceptional 1990s.

What is missing is the driver of investment under capitalism: profitability. Marxian studies that concentrate on this aspect reveal that the profitability of US capital stock and new investment peaked around 1997 and then turned down.  It was this fall in profitability that eventually provoked the collapse in the bubble in 2000.  The subsequent recovery in profitability did not achieve anything better that 1997 and indeed profits growth was mainly confined to the financial sector and increasingly to a small sector of top companies.  Average profitability remained flat or even down and the growth in profit was mainly fictitious (‘capital gains’ from real estate, bond and stock markets) and fuelled by easy credit and low interest rates.  That house of cards collapsed in the Great Recession.

Profitability peaked in the late 1990s in the US (and elsewhere for that matter) because the counteracting factors to Marx’s law of the tendency of the rate of profit to fall (a rising rate of exploitation in the neoliberal period) and increased employment to boost total new value were no longer sufficient to overcome a rising organic composition of capital from the tech boom of the 1990s.

In contrast to this scenario, the Keynesians/post Keynesians have been pushing a different explanation for the fallback in productive investment since 2000 – it’s the growth of ‘monopoly power’.  There have been several studies arguing this in recent years.  Now a brand new paper by Keynesian economists at Brown University seeks to do the same. Gauti Eggertsson, Ella Getz Wold etc claim that the puzzle of the huge rise in profits for the top US companies alongside slowing investment in productive sectors can be explained by an increase in monopoly power and falling interest rates.

The Brown University economists argue that an increase in firms’ market power leads to an increase in monopoly rents; economic parlance for profits in excess of competitive market conditions-and thus an increase in the market value of stocks (which hold the rights to these rents). This leads to an increase in financial wealth and to what’s known as Tobin’s Q, the ratio of a firm’s financial value (market capitalization) to the value of its assets (book value).

With an increase in market power, the share of income consisting of pure rents increases, while the labour and capital shares both decrease. Finally, the greater monopoly power of firms leads them to restrict output. In restricting their output, firms decrease their investment in productive capital, even in spite of low interest rates.

Now I have dealt previously in detail with this argument that it is increased monopoly power that explains the gap between profits and investment in the US since 2000 or so.  It is really a modification of neoclassical theory.  Neoclassical theory argues that if there is perfect competition and free movement of capital, then there will be no profit at all; just interest on capital advanced and wages on labour’s productivity.  Profit can only be ‘rent’ caused by imperfections in markets.  The Brown professors, in effect, accept this theory.  They just consider that, currently, ‘monopoly power’ is distorting it.  This implies that if there was competition or monopolies were regulated’ all would be well.  That solution ignores the Marxist view that profits are not just ‘rents’ or ‘interest’ but surplus value from the exploitation of labour.

The Brown University professors reckon that average profitability was constant from 1980 onwards, so increased profits must have come from the gap between profitability and the fall in the cost of borrowing (interest rates). But actually, you can see from their graph that average profitability rose from about 10% in 1980 to a peak in the late 1990s of 14% – that’s a 40% rise and is entirely compatible with estimates by me and other Marxist economists.  Average profitability was then flat from 200 or so.

Indeed, average profitability fell in the non-financial productive sectors of the economy, which is probably the reason for the gap that developed between overall profitability including financial profits (which rocketed between 2002 and 2007) and net investment in productive sectors.  The jump in corporate profits (yes, mainly concentrated in the banks and big tech companies) was increasingly fictitious, based on rising stock and bond market prices and low interest rates.  The rise of fictitious capital and profits seems to be the key factor after the end of boom and bust in 2000.

As I showed in a previous post, these mainstream analyses use Tobin’s Q as the measure of accumulated profit to compare against investment.  But Tobin’s Q is the market value of a firm’s assets (typically measured by its equity price) divided by its accounting value or replacement costs.  This is really a measure of fictitious profits.  Given the credit-fuelled financial explosion of the 2000s, it is no wonder that net investment in productive assets looks lower when compared with Tobin Q profits.  This is not the right comparison.  Where the financial credit and stock market boom was much less, as in the Eurozone, profits and investment movements match.

It may well be right that, in the neo-liberal era, monopoly power of the new technology megalith companies drove up profit margins or markups.  The neo-liberal era saw a driving down of labour’s share through the ending of trade union power, deregulation and privatisation.  Also, labour’s share was held down by increased automation (and manufacturing employment plummeted) and by globalisation as industry and jobs shifted to so-called emerging economies with cheap labour.  And the rise of new technology companies that could dominate their markets and drive out competitors, increasing concentration of capital, is undoubtedly another factor.

But the recent fall back in profit share and the modest rise in labour share since 2014 also suggests that it is a fall in the overall profitability of US capital that is driving things rather than any change in monopoly ‘market power’.  Undoubtedly, much of the mega profits of the likes of Apple, Microsoft, Netflix, Amazon, Facebook are due to their control over patents, financial strength (cheap credit) and buying up potential competitors.  But the mainstream explanations go too far.  Technological innovations also explain the success of these big companies.

Moreover, by its very nature, capitalism, based on ‘many capitals’ in competition, cannot tolerate indefinitely any ‘eternal’ monopoly; a ‘permanent’ surplus profit deducted from the sum total of profits which is divided among the capitalist class as a whole.  The battle to increase profit and the share of the market means monopolies are continually under threat from new rivals, new technologies and international competitors.

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

‘Market power’ may have delivered ‘rental’ profits to some very large companies in the US over the last decade (and just that short period it seems), but Marx’s law of profitability still holds as the best explanation of the accumulation process.  Rents to the few are a deduction from the profits of the many. Monopolies redistribute profit to themselves in the form of ‘rent’, but do not create profit.

Profits are not the result of the degree of monopoly or rent seeking, as neo-classical and Keynesian/Kalecki theories argue, but the result of the exploitation of labour. The key to understanding the movement in productive investment remains in its underlying profitability, not the extraction of rents by a few market leaders.

The Long Depression is a product of low investment and low productivity growth, which in turn is a product of lower profitability of investment in productive sectors and a switch to unproductive financial speculation (and yes, partly a product of oligopolistic power boosting the big at the expense of the small).


Stock market crash: 1987, 2007 or 1937?

February 6, 2018

Yesterday, the US stock market fell by the most in one day since mid-2007, just before the credit crunch, the banking crash and the start of the Great Recession.

Is history set to repeat itself?  Well, the old saying goes that history never repeats itself but it rhymes.   In other words, there are echoes of the past in the present.  But what are the echoes this time.  There are three possibilities.

This crash will be similar to that 1987 and be followed by a quick and decisive recovery and the stock market and the US economy will resume its recent march upward.  The crash will be seen as blip in the recovery from the Long Depression of the last ten years.

Or this could be like 2007.  Then the stock market crash heralded the beginning of the mightiest collapse in global capitalist production since the 1930s and biggest collapse in the financial sector ever – to be followed by the weakest economic recovery since 1945.

Or finally it could be like 1937, when the stock market fell back as the US Fed hiked interest rates and the ‘New Deal’ Roosevelt administration stopped spending to boost the economy.  The Great Depression resumed and was only ended with the arms race and the entry of the US into the world war in 1941.

Now I have discussed the relationship between the stock market (fictitious capital as Marx called it) and the ‘real’ economy of productive capital in posts before.

On the day of the crash, a new Fed Chair Jerome Powell was sworn in to replace Janet Yellen.  Powell now faces some new dilemmas.

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 has been the very low level of long-term interest rates, deliberately engendered by central banks like the Federal Reserve around the world, with zero short-term rates and quantitative easing (buying financial assets with credit injections).  The gap between returns on investing in the stock market and the cost of borrowing to do it has been huge.

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.  If stock prices get way out of line with the profitability of capital in an economy, then eventually they will fall back.  The further out of line they are, the bigger the eventual fall.

So there are two factors that are key to judging whether this stock crash is a 1987, 2007 or 1937 situation: the profitability of productive capital (is it going up or down?); and the level of debt held by industry (will it become too expensive to service?).

In 1987, the profitability of capital was on the rise.  It was right in the middle of the neo-liberal period of rising exploitation of labour, globalisation and new tech developments, all of which were counteracting factors at play against the tendency of the rate of profit to fall.  Profitability continued to rise right up to 1997.  And interest rates, far being hiked by the Fed, were being reduced as inflation fell.

In 2007, profitability was falling (it had been declining since the end of 2005), the housing market was beginning to dive and inflation was expected to rise and along with it, the Fed planned to raise its policy rate, as it is planning now in 2018.  But there are differences from 2007 now.  The banking system is not so stretched and engaged in risky financial derivatives.  And while profitability in most major economies is still below the peak of 2007, total profits are currently rising.  It may be that wages are beginning to pick up and this could squeeze profits down the road.  Also, the Fed plans to raise interest rates and thus also squeeze profits as debt servicing costs rise.

Perhaps 1937 is much closer to where US capitalism is now.  I have written on the parallels with 1937 before.  Profitability in 1937 had recovered from the depths of 1932 but was still well below the peak of 1926.

And more worrying now is that corporate debt since the end of the Great Recession in 2009 has not been reduced.  On the contrary, it has never been higher.  Based on a global sample of 13,000 entities, the S&P agency estimates that the proportion of highly leveraged corporates — those whose debt-to-earnings exceed 5x — stood at 37 percent in 2017, compared to 32 percent in 2007 before the global financial crisis. Over 2011-2017, global non-financial corporate debt grew by 15 percentage points to 96 percent of GDP.

The stock market crash tells me two things.  First, that it is the US economy, still the largest and most important capitalist economy, leads.  It’s not Europe, not Japan, not China that will trigger a new global slump, but the US.  Second, this time any slump will not be triggered by a housing bust or a banking crash, but by a crunch in the non-financial corporate sector.  Bankruptcies and defaults will appear as weaker capitalist companies find it difficult to meet their debt burdens and produce a chain reaction.

But history does not repeat but rhymes.  The mass of profits in the major economies is still rising and interest rates, inflation and wage rises are still low relative to history.  That should ameliorate the collapse in the prices of fictitious capital (and they are still high).  But the direction of profits, interest rates and inflation could soon change.


Davos and the Donald

January 26, 2018

Today, US President Donald Trump delivered his keynote speech to the meeting of the global elite, World Economic Forum at Davos, Switzerland.  It was eagerly awaited by the corporate chiefs, finance and hi-tech social media moguls, as well as other government leaders.  Last year at Davos, the star of the show was Chinese President Xi who told his glittering audience that China was ready to take over the leadership in the fight for ‘globalisation’ and free trade as the US under trump stepped back and went down the protectionist road.

So Xi, autocratic leader of a one party state directed and controlled economy, became the darling of Davos.  Would the Donald take the prize this year.  After a tumultuous and often debasing year in office, Trump has managed to get through his Congress huge cuts in corporate and personal taxation that will benefit the profits of US multinationals and the incomes of top 1%.  But he failed to reverse Obamacare, that limited measure of subsidised private health insurance; he has yet to build ‘the wall’ to keep out illegal Mexican immigrants; and he has very little to stop Chinese manufacturing imports flooding into the US.

Sure, he took the US out of the Trans-Pacific Partnership (TPP) trade deal – a deal that ironically was designed to isolate China from trade and investment in the region.  And only last week he announced tariffs on imported solar energy equipment from China.  But that’s it.  He wants to renegotiate the terms of the longstanding North American Free Trade Association (NAFTA) with Canada and Mexico.  But little has happened.  In the meantime, TPP has been revived by the other participants, Canada signed a free trade deal with the EU and Japan is looking to do one with Europe too.

So it appears that globalisation (free trade and investment) is not being blocked much by Trump’s America First policy so far.  Nevertheless, globalisation and world trade has slowed sharply since the end of the Great Recession.  Global trade growth in the era of globalisation from the mid-1980s onwards grew faster than global GDP by an average ratio of around 2 to 1.  But since the Great Recession, it has barely matched a low world GDP growth rate.

It’s the same story with global capital flows, a major feature of the globalisation era.

Overall flows (direct investment, portfolio investment and loans) have flattened as a share of global GDP since 2007.

The United Nations Investment Trends Monitor, released Monday, showed a 16% decline in foreign direct investment worldwide between 2016 and 2017. FDI (foreign direct investment) flows dropped by more than a quarter in what the UN terms “developed economies,” with the US and the UK responsible for a large portion of that decline.

Cross-border mergers and acquisitions and “greenfield” projects — businesses building factories and other facilities in foreign countries — both suffered in 2017. The value of cross-border M&As declined by 23%, despite a 44% increase in value of cross-border M&As in developing economies. Greenfield-project value declined 32% to $573 billion, the lowest point since 2003.

The potential end of globalisation and the rise of populists and other nationalist leaders like Trump in many countries is really worrying the global elite meeting in Davos.  FT columnist Martin Wolf, who once wrote a book called Why Globalisation works back in 2004 before the global financial crash, reversed his view back in 2016.  He now feared that globalisation would be reversed to detriment of all.  And just before Davos, he told his readers that ‘democracy’ itself was threatened by protectionism and autocratic nationalist rulers, but admitting that globalisation itself failed to sustain prosperity and improve equality. On the contrary, the wild effusion of speculative capital eventually triggered the biggest financial crash since 1929 and inequality of income and wealth in the major economies had reached levels not seen in 150 years.

Just before Davos, Oxfam updated its estimate of global wealth inequality and found Last year saw the biggest increase in the number of billionaires in history, with one more billionaire every two days. This huge increase could have ended global extreme poverty seven times over. 82% of all wealth created in the last year went to the top 1%, and nothing went to the bottom 50%.

There are now 2,043 dollar billionaires worldwide. Nine out of 10 are men. Billionaires also saw a huge increase in their wealth. This increase was enough to end extreme poverty seven times over. 82% of all of the growth in global wealth in the last year went to the top 1%, whereas the bottom 50% saw no increase at all.  New data from Credit Suisse means 42 people now own the same wealth as the bottom 3.7 billion people.

Talk about the uneven and combined development of global capitalism!

There is currently huge optimism among the Davos elite that in 2018 world capitalism is finally recovering from the Great Recession of 2008-9 and ensuing Long Depression.  For the first time since the early 2000s, all the major economies are growing simultaneously.  Capitalism has never been more globally synchronised. But that has another side.  Capitalism has never more prone to international simultaneous crises.

The risk remains that if the US turns down, then so will all the rest.  And that could well be triggered over the next year or so by the rising cost of international debt as the US Fed and other central banks carry out their planned interest rate hikes (in the graph – when the blue line of Fed policy rate rises above the black line of US treasury yields, a recession usually follows.

Davos is the debating hub of the leaders and supporters of global capital and globalisation (free movement of multinational capital and trade without national restrictions).  Globalisation is part of the neoliberal project to maximise profits, although this aim is cloaked in the respectable mainstream economics view that it will bring growth and incomes to all.  The Davos elite see that this propaganda has been exposed by the evidence of global poverty and inequality.  But even worse, the leader of the largest capitalist power stands for protectionism and nationalism – at least in words.

Thus speaker after speaker, from Indian President Modi to French President Macron, mouthed support for maintaining free trade, while ‘recognising’ the need to ‘do something’ about inequality (and climate change – another Trump bugbear). “If we commit ourselves to make our current globalisation more fair..  we can converge and build a new globalisation.” Macron.  Thus the theme of Davos 2018 was to stop ‘fragmentation’ and sustain ‘fair’ globalisation.

So what did ‘the Donald’ tell the assembled Davos elite?  Well, he wants to “put America first, but not America alone”.  In other words, he aims to put the US in ascendancy in trade, investment and military power and for everybody else to get in line.  That’s the classic position of the leading imperialist power – so no change there.

The Trump administration aims to get a ‘better deal ‘ on trade with Asia (China) and Europe. And also it aims to weaken the dollar so that US export are more competitive.  US Treasury Secretary Steven Mnuchin has been going round Davos saying that “a softer dollar will juice US economic growth… because “obviously a weaker dollar is good for us as it relates to trade and opportunities.”   That did not go down well with ECB president Mario Draghi at his press conference yesterday, who pointed out that there was an international understanding that countries should “not target our exchange rates for competitive purposes”.

“We don’t even like to use the word ‘protectionism’ . . . We don’t use that word,” said Mnuchin. “This is not about protectionism. This is about free and fair reciprocal trade. Anybody who wants to do trade with us on reciprocal terms is welcome to do so.”  And in the same breath, Wilbur Ross, US trade secretary, has been talking about closing down the World Trade Organization and/or kicking China out. “It’s an old system, decades old. The world has changed, the economies have changed. The pecking order of countries has changed (ie meaning the US does not get its way any more – MR). Everything has changed. The WTO has not really modified its role. It needs to be updated, at best (ie the US needs to be in charge – MR).”

Protectionist trade policies and competitive devaluation are nationalist medicines for economic weakness and domestic slump.  But they only work (even then for just a limited time) as long as nobody reciprocates.  In the Asian crisis of 1998, Malaysia did not obey the IMF and opted for nationalist policies and it worked because all other Asian economies did what they were told.  But in the 1930s, when the US imposed tariffs, other countries followed suit and so aggravated the slump.

The point is that it is not ‘unfair competition’ in world trade that has caused the decimation of US manufacturing jobs since the 1970 but the decision of US capital to invest in technology to replace labour and to send their factories and units abroad to use cheaper labour.  Globalisation was the a reaction of the global crisis in profitability in the 1970s (as the previous wave of globalisation in the late 19th century was).  It was part of the neoliberal agenda to drive up the rate of exploitation and thus profitability.  But it did not last.

The global elite gathering in Davos fret that Trump and other nationalists will spoil the party and even end democracy.  But the Donald emerged because of the failure of global capital, as represented by Davos.  The Donald’s appearance shows that, as trade and finance stagnate, imperialist rivalry will grow.  And it will be labour that will pay for this once again.


Carillion and the ‘dead end’ of privatisation

January 18, 2018

A few weeks ago, Martin Wolf, Keynesian economics journalist for the UK’s Financial Times, wrote a piece arguing that the renationalisation of privatised state companies was a ‘dead end’ and would not solve the failures of privately owned and run public services in the UK and elsewhere.

And yet within a week or so, it was announced that one of the leading construction and service companies in the UK that has got much of the ‘outsourced’ previously publicly owned projects had gone bust.  Carillion, as it likes to call itself, employs about 20,000 people in the UK and has more staff abroad. It specialised in the construction of public roads, rail and bridges and ‘facilities management’ and ongoing maintenance for state schools, the armed forces, the rail network and the UK’s national health service.

But it seems that it had taken on too many projects from the UK public sector at prices that delivered very narrow margins.  So, as debt issuance rose and profitability disappeared, cash began to haemorrhage.  Carillion ran up a huge debt pile of £900m.  But this did not stop the Carillion board lying about their financial state, continuing to pay themselves large salaries and bonuses and fat dividends to their shareholders.  In contrast, the company did little to reduce a mounting deficit on the pensions fund of their 40,000 global staff, putting their pensions in jeopardy. Indeed, Carillion raised its dividends every year for 16 years while running up a pensions deficit of £587m.  It paid out nearly £200m in dividends in the last two years alone.  The recently sacked CEO took home £660,000 a year plus bonuses.

But eventually, the bank creditors had enough and pulled the plug on further loans and Carillion has closed.  With the liquidation of the company, thousands of jobs are likely to go, while pension benefits could be cut and the British taxpayer will have to pick up the bill of maintaining necessary services previously provided by Carillion.

Amazingly, as I write, the Official Receiver for the bankrupt company says that all the top executives are “still on the payroll” and receiving their salaries, including the recently sacked chief executive.  The government has announced it will guarantee the salaries of employees in 450 public sector contracts run by Carillion.  So the taxpayer will be covering these.  But over 60,000 employees working on private sector jobs are likely to receive no more wages from now, while up to 30,000 sub-contractors have invoices of £1bn that are unlikely ever to be met.

Carillion is a very graphic confirmation that outsourcing public services and sectors to private companies to ‘save money’ on ‘inefficient’ public sector operations is a nonsense.  The reason for privatisation and outsourcing has really been to cut the costs of labour, reduce conditions and pension rights for employees and to make a quick buck for companies and hedge funds.  But such is competition for these contracts that, increasingly, private companies cannot sustain services or projects even when they have cut costs to the bone.  So they just pull out or go bust, leaving the taxpayer with the mess. It’s a microcosm of capitalist economic collapse.

Carillion is not the first example in the UK.  The 2007 failure of Metronet, which had been contracted to maintain and upgrade the London Underground cost the taxpayer at least £170m.  In the UK, outsourcing of public sector operations has reached 15% of public spending or about £100bn.  So more may be under threat.  Indeed, half a million UK businesses have started 2018 in significant financial distress, according to insolvency specialist Begbies Traynor, as the UK economy felt the effects of higher inflation, rising interest rates, growing business uncertainty and weaker consumer spending.

A total of 493,296 businesses were experiencing significant financial distress in the final quarter of 2017 according to Begbies’ latest “red flag alert”, which monitors the health of UK companies. That was 36% higher than at the same point in 2016 and 10% higher than in the third quarter of 2017.  And the worst situation was to be found in the services sector. A total of 121,095 businesses in the sector were showing signs of financial difficulty, up 43% on a year earlier.

Martin Wolf’s claim that privatisation has been a success because it is more efficient is just nonsense.  For the last 25 years, the UK government, starting with Thatcher and continued by right-wing Blair and Brown Labour governments, has resorted to ‘private finance initiatives’ to fund public sector building of schools, hospitals, rail and roads.  Under the PFI, banks and hedge funds fund the projects in return for interest and income paid by the operators of the projects, with payments spread over 25 years.  The idea was to keep down ‘public debt’ levels.  But of course, this was at the expense of future generations of taxpayers.

According to the UK’s National Audit Office in a new report, taxpayers will be forced to hand over nearly £200bn to contractors under PFI deals for at least the next 25 years.  And there was little evidence that there were any financial savings in doing PFI – indeed the cost of privately financing public projects can be 40% higher than relying solely upon government bonds, auditors found.  Annual charges for these deals amounted to £10.3bn in 2016-17. Even if no new deals are entered into, future charges that continue until the 2040s amount to £199bn, it.  “After 25 years of PFI, there is still little evidence that it delivers enough benefit to offset the additional costs of borrowing money privately,” … many local bodies are now shackled to inflexible PFI contracts that are exorbitantly expensive to change.”

And yet Martin Wolf reckons that it does not make sense to renationalise privatised state operations.  He makes the usual claim that state companies were huge inefficient behemoths that were not accountable to the public, “chronically overmanned and heavily politicised. They either underinvested or made poor investment decisions”.  Oh, unlike the private profit monopolies that now run Britain’s utilities, rail and energy and broadband.

Wolf digs up some research from the 1980s and 1990s by William Megginson of the University of Oklahoma who argues that public companies were more inefficient than the private counterparts.  Wolf also cites research from 2002 that British railways have been more efficient under the nightmarish private franchise experiment that rail travellers have experienced since 1997 along with the disastrous collapse of RailTrack, the private company that took over the maintenance of the track.  Tell this to rail travellers and staff.

There is, however, a pile of research that reaches opposite conclusions from Wolf’s sources.  I quote from the recent PSIRU report: “there is now extensive experience of all forms of privatisation and researchers have published many studies of the empirical evidence on comparative technical efficiency. The results are remarkably consistent across all sectors and all forms of privatisation and outsourcing: there is no empirical evidence that the private sector is intrinsically more efficient. The same results emerge consistently from sectors and services which are subject to outsourcing, such as waste management, and in sectors privatised by sale, such as telecoms.”

Detailed studies of the UK privatisations of electricity, gas, telecoms, water and rail have also found no evidence that privatisation has caused a significant improvement in productivity.  A comprehensive analysis in 2004 of all the UK privatisations concluded: “These results confirm the overall conclusion of previous studies that …privatisation per se has no visible impact …. I have been unable to find sufficient statistical macro or micro evidence that output, labour, capital and TFP productivity in the UK increased substantially as a consequence of ownership change at privatisation compared to the long-term trend.”

Evidence from developing countries points to the same conclusion. A global review of water, electricity, rail and telecoms by the World Bank in 2005 concluded: “the econometric evidence on the relevance of ownership suggests that in general, there is no statistically significant difference between the efficiency performance of public and private operators” (Estache et al 2005).

The largest study of the efficiency of privatized companies looked at all European companies privatized during 1980-2009. It compared their performance with companies that remained public and with their own past performance as public companies. The result? The privatized companies performed worse than those that remained public and continued to do so for up to 10 years after privatization.

Wolf’s answer to the failures of privatisation and outsourcing is to “reform the structure and purposes of regulation”.  As if regulation ever worked; indeed, current thought among government elites and big business is that economies need to loosen up regulation again in order to get things going.  To quote Wolf himself from his book on the lessons of the banking crash: “notwithstanding all the regulatory reforms, the system is bound to fail again,”

Public ownership is not of “totemic significance” to the left, as Wolf harps.  It is based on clear evidence that delivering services that people need is best done within a plan and not based on the level of profitability for the likes of Carillion. Yes, public ownership and state companies that become just milk cows for the profits of the private sector without any democratic control are not what we require.  But democratically run public companies as part of a plan for production for need are not “a dead end”, but the future.