Archive for the ‘Profitability’ Category

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

April 25, 2017

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Gaining momentum?

April 19, 2017

At its semi-annual meeting that started this week, IMF economists announced an upgrade in their forecast for global economic growth.  This is the first upgrade that the IMF has made for six years.  It was only a slight increase in its previous forecast of growth made in January. The IMF now expects world real GDP to rise 3.5% this year (compared to 3.4% before) and 3.6% next year (unchanged).

As the IMF chief, Christine Lagarde put it, “The good news is that, after six years of disappointing growth, the world economy is gaining momentum as a cyclical recovery holds out the promise of more jobs, higher incomes, and greater prosperity going forward.”

But the IMF also warns that: “the world economy may be gaining momentum, but we cannot be sure that we are out of the woods.”

Nevertheless, there is a growing confidence among mainstream economists and official international agencies that the world capitalist economy is finally coming out of its slow and weak recovery since the Great Recession of 2008-9.  Below trend growth, weak investment and hardly any uptick in real incomes in most major economies since 2009 has been described variously as ‘secular stagnation’ or in my case as The Long Depression, similar to that of the 1930s and 1880s.

But maybe it is all over.  Only this week, the FT’s economic forecaster model was showing a sharp pickup.  The Brookings-FT Tiger index — tracking indices for the global economy — suggests growth has picked up sharply in both advanced economies and emerging markets in recent months. The index, which covers all major advanced and developing economies, compares many separate indicators of real activity, financial markets and investor confidence with their historical averages for the global economy and for each country separately. The Tiger index suggests growth in emerging markets has picked up sharply since the oil price fall hit output in 2015. Having languished well below historic average levels this time last year, the index for emerging market growth has climbed to a level not seen since early 2013. China and India appear to have weathered recent rocky periods and indicators for growth are back above historic averages for both countries.

And the main economic indicators in the US and global economy have been picking up.  The purchasing managers’ indexes (PMI) are surveys of companies in various countries on their likely spending, sales and investments.  And the PMIs everywhere are well above 50, meaning that more than 50% of the respondents are seeing improvement.  The global PMI now stands at its highest level (54) for three years and, according to JP Morgan economists, it suggests that global manufacturing output is now rising at a 4% pace compared to just 1% this time last year.

Things are also looking better in the so-called emerging economies.  China has not crashed as many expected this time last year.  On the contrary, the Chinese economy has picked up and, as a result, there has been increased demand for raw materials.  The Chinese economy expanded 6.9% year-on-year in the first quarter of this year that ended in March, slightly up from 6.8% growth in the fourth quarter of last year.  Investment and industrial production also had a slight uptick.

Gavyn Davies, former chief economist at Goldman Sachs and now a columnist for the Financial Times in London, pointed out that “Global activity growth has rebounded sharply, and recession risks have plummeted. Growth in real output is now running at higher levels than anything seen since the temporary rebound from the financial crash in 2009/10. Importantly, recent data suggest that the growth rate of fixed investment is beginning to recover, which is a body blow to one of the central tenets of the secular stagnation school.

Behind this apparent recovery is a small recovery in corporate profits, which up to the middle of 2016 had been falling quarterly.  Since then, corporate profits have recovered somewhat around the world and, according to JP Morgan, business investment has reversed its decline of the last year.

All this sounds promising, even convincing.  But as the IMF warned, maybe these optimists are jumping the gun.  The US economy remains the key driver of global growth, not Europe or China and there seems little sign of any uptick from the sluggish growth of 2% a year that the US economy has achieved over the last six years on average.

The stock market has been booming (until recently) on the expectation that President Trump would boost profits and investment through corporate profits tax reductions and a programme of infrastructure spending by the federal and state governments.  But so far, nothing has happened.  And anyway, in a previous post I showed that the impact of such measures on overall investment and growth would be minimal.

Indeed, what has happened is a growing divergence between economic data based on surveys of opinions about the US economy (‘soft data’) and actual figures (‘hard data’).  According to Morgan Stanley economists, “the divergence is stunning.” In other words, everybody is very optimistic about the prospects for the US economy over the next 12 months but the current data don’t show it.

This divergence is revealed by the huge differences in forecast US economic growth by the main economic forecasting agencies. The New York Federal Reserve reckons US real GDP will be up 2.6% in the first quarter that ended in March, while the widely respected Atlanta Fed forecast has dropped to just 0.5% for the same quarter. The difference is caused by New York including more ‘soft’ data and Atlanta excluding it.

Also investment analysts are now forecasting huge rises in corporate profits or earnings. First-quarter earnings are expected to rise 15% yoy for European companies, 9% for those in the US and 16% for Japanese firms – a complete turnaround from previous forecasts that predicted a slowdown in 2017 to follow the slowdown of 2016.  Yet the very earliest profits results for the top US companies released this week were very disappointing.

Indeed, when we consider the hard data, the situation is not so rosy. The final reading of US national output for the fourth quarter of 2016 confirmed that the US economy grew only 1.6% in 2016, the weakest annual rate of growth for five years. The pace of growth did pick up in the second half of 2016 from a near stop in early 2016, but was still growing no more than 2% a year in the fourth quarter.

The bright spot was a significant pick-up in US corporate profits. Between the beginning of 2015 and the second half of 2016, corporate profits had fallen by 9%. However, in the second half of last year profits rose back 6% and in the last quarter were up 9.3% yoy and even more after tax.

Business investment had followed profits down three quarters later in 2015, confirming again my thesis that profits lead investment in the capitalist economic cycle. Business investment fell yoy in every quarter last year and equipment investment, the most important part of business spending, is down 5% from mid-2015. But with profits now rising, investment may pick up in 2017 – we’ll see.  But the latest measures of what will happen to investment and lending in the first quarter made by the St Louis Fed do not suggest any pick-up at all.

Consumer spending also does not seem to be responding to all this optimistic talk.  US personal consumption spending seems to have slowed to just a 1.1% annual rate in the first quarter of 2017 compared to 3.5% in the last quarter of 2016, the weakest rate of expansion in four years and the worst first quarter since the end of the Great Recession in 2009.

And, as I have argued in several previous posts, corporate profitability in the major advanced capitalist economies remains weak and there is a sizeable section of ‘zombie’ firms, those unable to make any more profit than necessary to cover the servicing of their debts, let alone invest in new productive technology to raise productivity and expand.

Confidence may be rising among mainstream economists and official agencies, based on improving surveys of opinion, but that must be balanced against the fact that the current recovery period since the end of the Great Recession is pretty long already.

The IMF report signals the risk of a new recession.  Its indicator suggests that it is still quite low for most economies at around 20-40% as the world economy moves through 2017.  But Lagarde warns that “there are clear downside risks: political uncertainty, including in Europe; the sword of protectionism hanging over global trade; and tighter global financial conditions that could trigger disruptive capital outflows from emerging and developing economies.”

France: the choice

April 16, 2017

It’s only a week to go before the first round of the French presidential election and it seems that the race is wide open.  Only two candidates can take part in the second round in May.  But who will those two be?  Extreme right-wing Front National candidate Marine Le Pen has been the front runner in the polls over the last year, but her support has been slipping.  Ex-socialist minister and centrist darling of the bourgeois media, Emmanuel Macron is neck and neck with Le Pen, both at around 22-23%.  The official conservative (Republican) candidate Francois Fillon should be ahead, but he has been damaged by the expenses scandal of his wife and children getting huge government-funded salaries for parliamentary work which they did not do.  Even so, Fillon is getting about 18-19% share of those saying they will vote.  The big surprise in the last few weeks had been the rise of Leftist candidate Jean-Luc Melenchon, whose polling has leapt from 10-11% to around 19% now.  In so doing, the official Socialist party candidate, Benoit Hamon, has seen his vote slump to 6-7%.

It is still most likely that it will be Le Pen and Macron in the second round, with Macron more than likely to win the presidency by some distance over Le Pen.  But all combinations are possible, with the worst for French capital being a battle between leftist Eurosceptic, anti-NATO Melenchon and racist Eurosceptic Le Pen.

Back in February I analysed the state of the French economy, the second-largest in mainland Europe and one of top ten capitalist economies globally.  The profitability of French capital is at a post-war low (profitability is still down a staggering 22% since the peak just before the global financial crash in 2007), real GDP growth is only just over 1% a year, well below that of Germany.  The unemployment rate remains stuck close to 10% compared to just 3.9% in Germany.  Youth unemployment is 24%. Business investment has stagnated in the ‘recovery’ since 2009.

Because of the actions of the French labour movement, inequalities of income and wealth have not risen as much as in other G7 countries like the US and the UK in the last 30 years.

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Neoliberal policies have been less effective in getting profitability up and workers down under the thumb of capital.  French capital needs a president that can and will do this now.  Can it find one?

If we look at the programs of each candidate, we can see it is Francois Fillon who offers the best programme for the interests of French capital.  Fillon aims to end the key gain of the French labour movement, the official 35-week, often firmly enforced.  Under Fillon, workers would have to put in 39 hours before overtime or time-off in lieu is paid.  Fillon would slash the public sector workforce by 500,000 (or 10%), while increasing the working week for those who keep their jobs.  The retirement age would be raised to 65 from 62 now and everybody would have to work to that age or face pension loss.  Unemployment benefits would be cut.

Severe fiscal austerity would be imposed with a cut in public sector spending from the (astronomically high for capitalism) 57% of GDP to 50%, with a ‘balanced budget’. The cuts would be necessary because Fillon wants to cut corporate tax rates to 25% and other ‘burdens’ on the business sector, while raising VAT for purchases by French households by 2% pts.  He would scrap the current wealth tax on the rich. One area of extra spending would be more police and more prisons, while reducing gay rights.

This is an outright neo-liberal program that no French president has been able to impose successfully in the last 30 years.  But French capital demands it.  Unfortunately, for big business, Fillon is unlikely to make the presidency.

But what of Macron, the ex-banker and socialist minister, the man most likely to get into the Elysee Palace (the French White House)?  Macron’s program is a mix that attempts to appeal to labour and capital, as though they could be reconciled.  He wants to merge public and private pension and benefit schemes.  He claims that he will get the unemployment rate down to 7% through an investment plan.  And yet he plans to cut public sector spending and run a tight budget.

Like Fillon, he would cut corporate tax for businesses to 25% of declared profits.  He keeps the 35-hour week, but companies would be allowed to ‘negotiate’ a longer week.  Low-wage earners would be exempted from certain social welfare levies, a measure that would put an extra month’s wage per year in the employee’s pocket (but no clarity on how this would be paid for, except through ‘higher growth’).  He too would boost police and prisons but also provide a ‘payment for culture’ to students and reduce school class sizes.  He would cut the number of MPs and reduce time for re-election of officials, while banning Fillon-type payments to family members. This programme is thus a mix of help to business and wishful thinking for labour.  But it seems to appeal to just enough voters over the neoliberal alternative of Fillon.

Both Fillon and Macron are pro-EU and pro-euro.  This is the one big policy difference with Le Pen and Melenchon.  Le Pen’s program is a mixture of racist, anti-immigrant, anti-EU policies alongside pro-labour measures for the public sector and wages.  Le Pen would ‘re-negotiate’ the EU treaty with the rest of the EU and if that failed, call a referendum on leaving the EU within six months.  If French voters decided to stay in the EU, she would resign the presidency.  If they voted to leave, France would end the euro as its currency and re-introduce the franc.  Such a policy would be shattering for the French economy and probably sound the death-knell of the EU and the euro as we know it.

Le Pen would get on with ending immigration, strip many French muslims of citizenship, revoke international trade treaties and NATO operations and confine free education to French citizens only.  Companies employing foreigners would pay an extra 10% tax and foreign imports would be subject to a 3% tax.  And, of course, the police forces would be expanded.

Like the Brexiters in the UK referendum, she claims that she can cut taxes on average households and raise welfare benefits by saving money on EU membership and regulations (that has turned out to be a myth in the UK, where austerity has increased).  The number of MPS would be halved.

But Le Pen also aims to help (small) business with lower taxes.  And instead of raising the retirement age, as Fillon proposes, she would cut it to 60 years, increase benefits to the old and to children, while keeping the working week at 35 hours and overtime tax-free!

Le Pen’s economic policy is thus anathema to French capital and attractive to French labour, but combined with racist and nationalist measures.  But, of course, there is no real attack on the hegemony of French big business.  So this policy of raising wages and benefits while leaving the euro and introducing protectionism, in an economic world of low growth and a possible new economic slump, is utopian. Neither the needs of labour nor capital will be met.

When we turn to Melenchon, we see a similar utopianism, if from the perspective of defending the interests of labour over capital.  His economic program is similar to that of Corbyn’s Labour in the UK, if going further.  He proposes a 100-billion-euro economic stimulus plan funded by government borrowing and some nationalisation in sectors such as the motorway network.  He says he would raise public spending by 275 billion euros to fund the plan, to raise minimum and public sector wages, create jobs to reduce the unemployment rate to 6% and also, like Le Pen, cut the retirement age to 60.

This extra spending would, Keynesian-like, fund itself from higher economic growth and employment.  But with big business needing profits to invest, calling for more taxes on business (as well as the rich), may deliver the opposite of faster growth.  At the same time, he too would cut corporate tax rates to 25%!

Melenchon would also renegotiate the EU treaties, ignore the EU fiscal austerity pact, call for a devaluation of the euro, take national control of the Banque de France from the ECB and leave NATO and the IMF.  And following Le Pen, if these measures are blocked, he would have a referendum on EU membership.

Melenchon’s program is similar to that of socialist Francois Mitterand (although somewhat less radical than Mitterand’s) when the latter won the presidency in 1981.  He too wanted to take France on an independent line from the rest of Europe in expanding the economy through public spending, nationalisation and more taxes on business and the rich.  That program fell down in face of the deep global slump in 1980-2, when financial investors fled France and the franc.  The choice then was for Mitterand to go the whole hog and take control from French capital or capitulate to neoliberal policies.  He chose the latter with his so-called “tournant de la rigueur” (austerity turn) in 1983.  That choice would soon face Melenchon, in the unlikely event that he won the presidency.

Apart from the economic utopianism of Le Pen and Melenchon under capitalism, they both face an immediate political problem.  In June, the French vote for a new National Assembly, which, at least right now, would probably elect a majority of conservative pro-capital, pro-EU MPs who would be backed by a media campaign from big business, the EU Commission and other EU governments aiming to shackle the new president.  The battle would be on from day one, while the euro and French financial assets reel from the shock.

But it probably won’t happen.

Keynes, civilisation and the long run

March 27, 2017

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Korea: corruption, cults and chaebols

March 19, 2017

Koreans have decided to impeach their President Park Geun-hye over corruption charges.  Last Friday the country’s top court upheld an earlier impeachment vote, officially ousting Park Geun-hye, South Korea’s first female leader, from office. This follows months of protests by South Koreans alarmed at claims of bribery, influence-peddling and even shamanistic cult rituals in the presidential Blue House. The demonstrations were more than 1m strong. An impeachment motion easily passed the legislature.

Park is the most unpopular South Korean leader since the country became a democracy in the late 1980s. The scandal ensnared senior government officials and business figures, including Lee Jae-yong, the acting head of Samsung, who denied bribery, corruption and other charges at the first hearing in his trial last week.  Samsung apparently  donated 43bn won ($40m) – more than any other firm – to the foundations run by the president’s confidant, Choi Soon-sil.

Choi is the Rasputin to Korea’s Park. She is the daughter of a South Korean ShamanisticEvangelical cult leader, Choi Tae-min. Her ex-husband is Park’s former chief of staff Chung Yoon-hoi and dressage athlete Chung Yoo-ra is their daughter.  Samsung allegedly gave millions of euros to fund Choi’s daughter’s equestrian training in Germany. Choi is in detention, accused of using her close ties with Park to force local firms to “donate” nearly $70m (£60m) to her non-profit foundations, which Choi allegedly used for personal gain.

It looks likely Moon Jae-in, a former human rights lawyer and political veteran from the opposition Democratic party, will win snap presidential polls in May. Mr Moon has won admirers among the country’s younger generation for his “progressive values” and pledges to tackle youth unemployment, which stands at a record high since the Asian crisis of 1997-8.  Despite what his opponents say, he is no communist.

Korea’s political turmoil is yet another example of how incumbent governments around the world have suffered the price of failure and exposure since the Long Depression began in 2009 after the global financial crash of 2007 and the Great Recession of 2008-9.

The mainstream view is that Korea is a capitalist success story.  Unlike other so-called ‘emerging economies’ in the post 1950 period, which have struggle to close the gap in output and living standards with the leading imperialist countries like the US, the UK or Japan, Korea has made substantial progress.  Between 1960s and the 1980s, Korea’s economy expanded by an average of 8% a year in real national output.  Per capital GDP rose from $104 in 1962 to $5,438 in 1989, and reached the $20,000 level just before the global financial crash. So per capita income rose from 5% of the US in 1960 to around 55%.

This progress was made possible because Korea embarked on, and adhered to, a state-directed industrialisation and export strategy for nearly 50 years. The manufacturing sector grew from 14.3% of GDP in 1962 to 30.3% in 1987.  Within two generations, Korea vaulted into the OECD, its goods and services became known around the globe, and its national corporate champions entered the ranks of the world’s most recognized companies.  In 2012, Korea became the seventh global member of the ’20-50′ club (population surpassing 50m with per capita income of $20,000), the supposed definition of a major capitalist economy.

Marx’s law of profitability can provide an underlying explanation of the success of Korean capitalism in the period from the 1960s after the Korean war to the end of the 1970s.  While the major capitalist economies experienced a fall in profitability from about the mid-1960s to the early 1980s, Korean capital had high and rising rates of profit.  The Korean rate of profit has been measured by several different authors including myself, but probably the best and most thorough measurements have been by Esteban Maito and Seongjin Jeong, the editor of Marxism21.

Maito finds that the Korean rate of profit rose from the 1960s to the late 1970s. (Maito, Esteban – The historical transience of capital. The downward tren in the rate of profit since XIX century ). And that was the peak.

Jeong presents the most comprehensive analysis of trends in the rate of profit on Korean capital.  Jeong finds that the rate of profit fell from a peak in 1978 to a low in 2002.  And the decline in the rate over the 1980s and 1990s was the underlying cause of the crisis and slump of 1997, part of the so-called Asian crisis. “The 1997 crisis was intimately related to a broader problem of declining capitalist profitability.  While the rate of profit has recovered since that crisis”, Jeong says, “its 2002 level still remains at only one-third of the level of 1978.  This suggests that the Korean economy remains in the middle of its long downturn.”

Jeong also shows that Marx’s law of profitability, based on a rising organic composition of capital, provides the underlying cause for this fall in profitability.  The era of Park Jung Hee, which saw a limited stabilisation of profitability, was only possible because of intensified exploitation of the Korean working class in the so-called neoliberal period of the 1980s, delivering a rise in the rate of surplus value or exploitation, the main counteracting factor to the tendency of the rate of profit to fall.  But even that factor could not overcome the eventual fall in profitability in the 1990s that finally culminated in the slump of 1997, ironically just as profitability in the major economies peaked.  In the 1997 Asian financial crisis, the South Korean economy suffered a liquidity crunch and had to rely on a bailout by the IMF.

The Asian crisis that hit Korea so hard led to a sharp devaluation of capital values (through the writing off of bankrupt companies and rising unemployment), followed by more neoliberal measures that boosted profitability.  But as Maito and my own measures of profitability show, after the 2001 mild global recession, Korean profitability resumed its decline, leading up to the global financial collapse of 2008.  Economic growth was stopped in its tracks in 2009.

Since then, Korean capitalism has become part of the Long Depression.  Underlying trend growth has weakened from 7% a year in the 1990s to just 3% now.

Moreover, Korean capitalism now faces serious structural challenges, many of which imply a further decline in potential growth.  Korea has one of the lowest birth rates in the world and one of the world’s most rapidly aging societies. The working age population is projected to peak this year and decline rapidly thereafter, depressing potential employment and growth. The overall population is expected to start declining after 2025.

Korea’s economic success came on the back of exports, but that heavy reliance may now be a liability in a world of slowing trade and with the prospect of the end of globalisation and the rise of protectionism after the election of President Donald Trump in the US.  With exports exceeding 50% of GDP—one of the highest shares among advanced economies—Korea is heavily exposed to any shocks or change in China and the US, particularly from China, its largest trading partner.  Some of the heavy industrial sectors that underpinned Korea’s past growth—for instance, shipbuilding, shipping, steel, and petrochemicals—are now facing bleak prospects globally given the trade slowdown and competition from China.  Korean capital is under severe pressure.

Moreover, South Korea’s economy is still dominated by oligopolistic chaebol that are now being squeezed at the low end by expanding Chinese manufacturers and at the high end by Japanese players who have benefited from a deliberately-weakened yen. Exporters are creating fewer jobs in South Korea as the chaebol move production offshore to look for cheaper labour.  That has left the domestic economy hurting: small and medium-sized businesses are still failing and the high-value services sector is lagging well behind other countries. “This has raised concerns about Korea’s traditional catch-up strategy led by exports produced by large chaebol companies”, the OECD said in a report last year.

In the 1990s, Korean capitalists adopted neoliberal employment policies by keeping much of its workers on casual temporary contracts.  The share of temporary workers was nearly 22% in 2014, double the OECD average.  But this led to slowing productivity and under-investment in skills.  Labor productivity rose at an average annual rate of 5.5% in 1990-2011, but it has stagnated since then and remains only 40% of the three most productive OECD countries.  Labor productivity is particularly low in the service sector—much lower than in peer economies and only half that of manufacturing and much lower in smaller companies.

Korean capital prospered on the backs of overworked staff, working long hours and by avoiding any social security.  The Basic Livelihood Security Program (BLSP), introduced in 2000, provides cash and in-kind benefits to the most vulnerable, but is substantially less generous than the OECD average. The National Pension System (NPS) currently covers about one-third of the elderly and the OECD reports that pension benefits were only around one-quarter of the average wage in 2015.

This has led to increasing household debt: many retirees borrow to open (risky) small businesses, in an attempt to supplement their incomes. Total social spending amounts to just 10% of GDP, less than half the OECD average, while household debt rose steadily from 40% of GDP in the early 1990s to nearly 90% today.  At the same time, corporate debt has been consistently high at about 100% over the last decade.   This high and rising debt indicates that Korean capital is no capable of getting a healthy and rising rate of profit and is forced to borrow to grow – increasing the impact of any future slump.

Back in 2012, the now disgraced Park Geun-hye pledged to rebuild the ‘middle class’ and increase its size to 70% of society.  This has turned out to be a sham.  Instead, there has been increasing economic polarisation in the Long Depression.  Economic inequality increased noticeably during and after the 1997 crisis and the Great Recession of 2008-9. South Korea’s average gini coefficient — a measure of inequality — for 1990–1995 was 0.258, but with rising inequality its coefficient increased to 0.298 in 1999. It continued to increase, reaching 0.315 in 2010.  The same trend can be seen in income distribution: the share held by the top 10% of income holders divided by that of the bottom 10% has increased from 3.30 in 1990 to 4.90 in 2010. The income share of the top 1% was 16.6% of national income in 2012, not far short of the extremes in the US and much worse than in Japan.  The most recent statistics released by a government source indicate that as much as 73% of Seoul residents identified themselves as belonging to the ‘lower class’.

The Great Recession has increased the precarious position of Korean workers and produced an even sharper cleavage between regularly employed workers on standard contracts and irregularly employed workers (those who are limited-term, part-time, temporary or dispatched), increasing the latter from 27% of the working population in 2002 to 34% in 2011. This means that approximately one-third of South Korean workers suffer from insecure job conditions, receiving only around 60% of regular workers’ wages with no medical insurance, severance pay or company welfare subsidies.

Since the late 1990s, a general trend among South Korean firms has been to discard the old seniority-based salary system and adopt the American style ability-based salary system. With this change, the wage gap between professional and managerial workers and the rest of the workforce has widened greatly. As the South Korean economy has moved towards being knowledge-based, the value of scarce skills and knowledge has increased and globalised business sectors have begun to offer extremely high salaries to attract talent.

So significant income disparities that have long existed between South Korea’s conglomerate firms and medium to small-sized firms have become even greater in recent years. South Korea’s top 1% of income earners are most likely to be employed in the leading conglomerates, like Samsung, Hyundai and LG, which have grown into truly world-class companies and become very profitable.

Finally, in South Korea, as in most societies, wealth inequality is much larger than earned income inequality. In 2012, the top 10% of the population possessed 46% of the country’s total wealth. The bottom 50% possessed only 9.5%. This wealth inequality emerged primarily from the booming real estate market. But in recent years, the stock market and other financial investments have replaced the real estate market as the major means of wealth accumulation.

According to Statistics Korea, the average monthly household income of the top 10% was 10,627,099 won.  This is 5.1 times higher than that in 1990, which was 2,097,826 won. For the bottom of 10%, the figure increased only 3.6 times from 248,027 won to 896,393 won. So the gap between these two groups increased from 8.5 times to 11.9 times. The data is based on 8,700 households, not including the extremely poor or the top chaebol families, so the actual gap appears to be much larger.

One out of six people live with less than 10 million won per year and one out of four households are more often in the red than in the black. The poverty rate of people over 65 years old is 48.5%, which is 3.4 times higher than that of the OECD average. Moreover, the suicide rate is among the highest in the world. Korean capitalism may appear to have been a relative success by world standards over the last 50 years, but it has been at the expense of its people.

The future of Korean capitalism is tied up with the future of global capital.  No national economy can escape that.  But there are specific challenges for Korean capital too.  The biggest and possibly the most immediate is what happens with North Korea.  If and when the Stalinist-type regime falls there, Korean capital is no position to integrate the people of the north into the capitalist system of the south.  The cost that West German capital and economy suffered when the Berlin Wall fell and Germany was united again was significant and held back one of the most successful capitalist economies for a decade.  The disruption to Korean capital would be very much greater, especially if this should happen in this period of economic stagnation and political turmoil.

Then there is Korean capital’s longer term future.  The slowing of world trade everywhere is damaging to Korean capitalism, but this slowdown appears to morphing into the end of the period of so-called globalisation that world capitalism has benefited from since the early 1980s.  Regional trade agreements like TPP and TTIP are in the rubbish bin, thanks to Donald Trump, while he talks of tariffs on imports into the US and forcing American capital back to the US.  The next global recession could be an even bigger hit to Korean capital than the last.

Modi rules, Harvard doesn’t

March 14, 2017

The overwhelming victory of the governing BJP in key Indian states last weekend seems to have cemented the rule of India’s prime minister Narendra Modi.  In the world’s largest capitalist democracy, Modi’s Hindu nationalist BJP swept the board in Uttar Pradesh state, the most populated in India with 220m voters.  The BJP won 312 seats out of 403 and took just under 40% of the vote, slightly less than Modi achieved when winning the 2014 general election with the biggest parliamentary majority in 30 years.

Similarly, the Uttar Pradesh result gave the BJP the biggest majority in any state for one party since 1977. Modi’s BJP now heads the government in states where more than half of Indians live, while the Congress party, which has ruled India for most of the 70 years since independence, leads in regions covering less than 8 percent of the population.

The result came five months after the shock move last November by the Modi government to abolish high-denomination banknotes. The government claimed the aim was to flush out ill-gotten gains by rich Indians hiding their earnings in cash to avoid tax.  Some Western economists like Harvard’s Larry Summers, Nobel Prize winner Amartya Sen and the opposition Congress party claimed that it would squeeze credit and destroy consumer spending and lower growth.

Well, Modi appears to have been vindicated, at least by the electorate.  His barbed attack on ‘Harvard University economists’ during the election campaign scored.  “On one hand, there are these intellectuals who talk about Harvard, and on the other, there is this son of a poor mother, who is trying to change the economy of the country through hard work. In fact, hard work is much more powerful than Harvard.” The Hindu poor, in the rural areas particularly, where the ‘demonetisation’ was supposed to hurt the most, voted BJP.  The reality is that, while many transactions are conducted ‘informally’ ie not through the banking system, most rural poor never see the sight of large bank notes.  They are held by richer merchants, farmers and the urban elite to avoid paying tax.  So Modi’s move was popular.

But it was not only that which gave the BJP victory.  The party, formerly based on the fascist RSS, continued with its communally divisive propaganda to get people to vote on caste and religious lines. Its state leader Amit Sha promised to construct a Hindu temple on a razed mosque site and ban the slaughter of cows, worshipped by millions of Hindus.

Modi may have won the vote but the ‘demonetisation’ of 86% of circulated banknotes may still have economic repercussions.  In the short term, it caused lengthy queues at ATMs, when the government failed to provide sufficient amounts of new banknotes, stalling credit and transactions, with limits placed on cash withdrawals.  Those limits are only being removed next week, some five months later.  The demonetisation was supposed to attack corruption and tax evasion, but it seems to have had little effect on that.  Indeed, lots of rich Indians made ‘private arrangements’ to obtain new bank notes and avoid having to declare monies into bank accounts.

India has the largest ‘informal’ sector among the main so-called emerging economies.   Government tax revenues are low because Indian companies pay little tax and rich individuals even less.  It may be that demonetisation was invoked to reduce corruption and tax scams, but it was also a move that would strengthen the banking system’s control over people’s money in an undemocratic way.  A completely bank accounting transaction system would put big business and the banks in the driving seat for credit and liquidity, however, more efficient.  But for the rural poor, so far, that argument means little when you don’t have cash to withdraw anyway. Two-thirds of Indian workers are employed in small businesses with less than ten workers – most are paid on a casual basis and in cash rupees.

Modi may claim that the government’s November move has proved to have no long-term effect on the economy, but that is not true.  There has been a significant fall in consumer spending and business investment that has meant India can no longer be the fastest growing major economy over the likes of China.  The IMF reckons that India grew 6.6% in 2016 compared with China’s 6.7% and has lowered its forecasts for this year.

Moreover, India’s figures for real GDP are to be no more trusted that those in the past provided for China, or for that matter for Ireland in the last year.  Back in 2015, India’s statistical office suddenly announced revised figures for GDP.  That boosted GDP growth by over 2% pts a year overnight.  It seems nominal growth in national output was now being ‘deflated’ into real terms by a price deflator based on wholesale production prices and not on consumer prices in the shops, so that the real GDP figure rose by some way.  Moreover, this revision was not applied to the whole economic series, so nobody knows how the current growth figure compares with before 2015.  Also the GDP figures are not ‘seasonally adjusted’ to take into account any changes in the number of days in a month or quarter or weather etc.  Seasonal adjustment would have shown India’s real GDP growth as slowing towards the end of last year to about 5.7%, well below the official figure of 7.5%.

Real GDP growth may look strong on official data, but industrial output does not.  India’s industrial sector is hardly growing.

Business investment is stagnating, as Indian companies are overwhelmed by large debt burdens; and these debts put a lot of pressure on the banking system.  The Modi government, in contradiction with its neoliberal agenda, is trying to overcome the stagnation in business investment with government spending, but this is limited to defence and transport.  Ironically, the BJP government plans to strengthen the state energy sector through mergers of its 13 state-controlled relatively small oil companies.

The real problem for Indian capitalism is the falling profitability of its business sector.  The rate of profit is high by international standards, like many ‘emerging economies’ that have masses of cheap labour brought in from rural areas.  But, over the decades, investment in capital equipment relative to labour has started to create a reserve army of labour alongside falling profitability.

Source: Extended Penn World tables and Penn World Tables 9.0, author’s calculations.

The Modi government remains optimistic that the Indian economy is going to pick up even faster this year and onwards, based on ‘Modinomics’, which boil down to privatisation, cuts in food and fuel subsidies and a new sales tax, a tax that is the most regressive way to get revenue as it hits the poor the most.  The aim here, as it always is with neoliberal economic policy, is to raise the rate of exploitation of labour so that the profitability of capital is boosted and thus provide an incentive to invest, something Indian capital is refusing to do right now.  Now that Modi has triumphed and looks set to win the next general election in 2019, India’s big business and foreign investors will expect Modinomics to be accelerated.

This can only increase inequality.  Already, India is one of the most unequal societies in the world.  The richest 1% of Indians now own 58.4% of the country’s wealth, according to the latest data on global wealth from Credit Suisse Group.  The share of the top 1% is up from 53% last year. In the last two years, the share of the top 1% has increased at a cracking pace, from 49% in 2014 to 58.4% in 2016. The richest 10% of Indians have increased their share of the pie from 68.8% in 2010 to 80.7% by 2016.  In sharp contrast, the bottom half of the Indian people own a mere 2.1% of the country’s wealth.

This inequality is not down to the Modi government alone.  Previous Congress-led governments perpetuated this inequality too – indeed, under the corrupt Gandhi dynasty, made it worse.  No wonder India’s poor won’t vote for the Gandhis any more.  Just as in 2014, India’s electorate in the state elections were faced with a choice between a corrupt, family-run party backed by big business and landholder interests and an extreme nationalist party (with increasing backing from big business and foreign investors).  For the moment, Modi wins their vote.

Learning from the Great Depression

March 9, 2017

Recently, the economics editor of the Guardian newspaper in the UK, Larry Elliott, presented us with a comparison of the Great Depression of the 1930s and now.  In effect, Elliott argued that the world economy was now in a similar depression as then.  The 1930s depression started with a stock market crash in 1929, followed by a global banking crash and then a huge slump in output, employment and investment.  In that order. The number of bank failures rose from an annual average of about 600 during the 1920s, to 1,350 in 1930 and then peaked in 1933 when 4,000 banks were suspended. Over the entire period 1930-33, one-third of all US banks failed.  But it was the stock market crash that was first.

The Long Depression, as I like to call the current one, started with a housing crash in the US, only then followed by a banking crash that was global and then a huge slump in output, investment and employment.  The aftermath in both depressions was a long, slow and weak economic recovery with many national economies still not returning to pre-crash levels of output, investment or profitability.

By the way, if anybody doubts that the major economies (G20) are not in what I call a Long Depression, defined as below-trend growth in output, investment, productivity and employment, then consider this nice summary by Wells Fargo bank economists of the key indicators since the end of the Great Recession in 2009 for the US, the economy that has recovered the most.

They conclude that during the 2008-2015 period, the average annual reduction in the level of real GDP from trend was 9.9 percent, 9.8 percent in personal consumption and 10.7 percent in real disposable personal income. During the same time period, the average annual loss in business fixed investment was 20.1 percent, 7.8 percent in employment and 6.9 percent in total factor productivity. The average reduction in the labor force was 2.2 percent, 7.9 percent in labor productivity and 6.4 percent in capital services during the 2008-2015 period.

“And there has been long lasting damages from the Great Recession as the level (trend) of potential series (for all variables) has shifted downward.  These results are consistent with the overall economic environment since the Great Recession. That is, a painfully slow economic recovery along with a slower growth in the personal income, employment, wages and business fixed investment.”

Elliott points out that very few economists or pundits predicted the crash of 1929 at the height of huge credit-fuelled boom in stock markets and economic expansion.  Similarly, very few forecast the US housing crash and subsequent global financial meltdown.  But some did.

The more interesting part of Elliott’s account are the reasons given for the Great Depression of the 1930s and whether they are the same reasons for the current Long Depression.  Elliott quotes the biographer of Keynes, Lord Skidelsky, that the main cause was excessive debt.  “We got into the Great Depression for the same reason as in 2008: there was a great pile of debt, there was gambling on margin on the stock market, there was over-inflation of assets, and interest rates were too high to support a full employment level of investment.”

This explanation is almost the conventional one among leftist and heterodox economists.  Skidelsky combines the views of post-Keynesians (Steve Keen, Ann Pettifor) and some mainstream economists (Mian and Sufi) who highlight the levels of private sector debt (particularly household debt) – “great pile of debt” – with the view of Keynes that “interest rates were too high to support full employment”.

Indeed, next month, Steve Keen, leading post-Keynesian and Minskyite, publishes a new book in which he argues that “ever-rising levels of private debt make another financial crisis almost inevitable unless politicians tackle the real dynamics causing financial instability.” Ironically, And Anne Pettifor has just published a new book that seeks to argue that printing money (more debt?) could help take the capitalist economy out of its depression.

Now there is a lot of truth in the argument that excessive debt (or credit, which is just the other side of the balance sheet) is a prime indicator of impending financial crashes.  Debt was high in the 1920s before the crash. This has been documented by many studies, including the seminal work of Rogoff and Reinhart. And Claudio Borio at the Bank of International Settlements has also built up a weight of evidence to show that it is the level and rate of increase or decrease in credit (in effect, a cycle of debt) that is much better indicator of likely financial crashes than the neo-Keynesian idea of some secular stagnation in growth and a collapse in ‘aggregate demand’ (a la Paul Krugman or Larry Summers).

And it is no accident that Steve Keen was one of the few economists to predict the impending crash of 2008.  In my book, The Long Depression, I devote a whole chapter to this issue of debt – what Marx called fictitious capital.  Credit allows capital accumulation to be extended beyond the creation of real value, for a time.  But it also means that when the eventual contraction in investment comes because profitability in productive sectors falls, then the crash is that much greater as debt must be written off with the devaluation of capital values.  Credit acts like a yo-yo, going out and then snapping back. So ‘excessive debt’ is undoubtedly a ‘cause’ of crashes, in that sense.  The question is what makes it ‘excessive’ – excessive to what?  Borio says excessive to GDP growth, but then what determines that?

The other argument that is linked to the ‘excessive debt’ cause is rising inequality as the cause of the crashes of the 1929 and 2008.  As Elliott puts it: “while employees saw their slice of the economic cake get smaller, for the rich and powerful, the Roaring Twenties were the best of times. In the US, the halving of the top rate of income tax to 32% meant more money for speculation in the stock and property markets. Share prices rose six-fold on Wall Street in the decade leading up to the Wall Street Crash. Inequality was high and rising, and demand only maintained through a credit bubble.”  Yes, similar to the period up to 2008.

Now I don’t think that rising inequality was the cause of the crisis of the 1930s or in 2008 and I have detailed my arguments against the view in several places. The empirical evidence does not support a causal connection from inequality to crash.  Indeed, a new study by JW Mason presented at Assa 2017 in Chicago adds further weight to the argument that rising inequality and the consequent (?) rise in household debt was not the cause of the financial crash of 1929 or 2008.  “The idea is that rising debt is the result of rising inequality as lower-income households borrowed to maintain rising consumption standards in the face of stagnant incomes; this debt-financed consumption was critical to supporting aggregate demand in the period before 2008. This story is often associated with Ragnuram Rajan and Mian and Sufi but is also widely embraced on the left; it’s become almost conventional wisdom among Post Keynesian and Marxist economists. In my paper, I suggest some reasons for skepticism.”

The gist of my view is that inequality is always part of capitalism (and for that matter class societies, by definition) and rising inequality from the 1980s in the neo-liberal period went on for decades before there was the crash.  It is more convincing that rising profitability and a rising share going to capital from labour in accumulation was the cause of rising inequality, not vice versa.  So the underlying cause of the eventual slump must be found in the capitalist accumulation process itself and some change in the profit-making machine.

The third cause or reason offered by Elliott for the Great Depression of the 1930s and the Long Depression now is that there is no hegemonic power in a position to act as a ‘lender of last resort’ to bail out banks and national economies with credit and also set the rules for global economic recovery. Between the two world wars, the UK was no longer hegemonic as it had been in mid-19th century and the US was unable or unwilling to take its place.  So there was, in effect, no global banker and thus anarchy and protectionism in the world economy.

This was the main argument of the great economic historian, Charles Kindleberger, with his “hegemonic stability theory” in his book, The World in Depression, 1929-39.  This theory of international crises has been followed on by such economic historians as Barry Eichengreen and HSBC economist, Stephen King, cited by Elliott as saying, “There are similarities between now and the 1930s, in the sense that you have a declining superpower”. So the argument goes that the US is now no longer hegemonic and cannot impose international rules of commerce as it did after 1945 with the IMF, the World Bank and GATT.  Now, there are rival economic powers like  China and even the European Union that no longer bend to US will.  And the IMF is no position to act as lender of last resort to bail out economies like Greece etc.

This view also comes from Marxist economists like Leo Panitch and Sam Gindin, who (conversely) argue that the US is still a hegemonic power and thus still decides all in an “informal American empire” and this explains the huge economic recovery after the 1980s in the neo-liberal period.  Yanis Varoufakis argues something similar in his book, The Global Minotaur.  Skidelsky too likes the argument that the neoliberal ‘recovery’ was achieved by globalisation under US imperial control.  “Globalisation enables capital to escape national and union control.”  He considers this the Marxist explanation: “I am much more sympathetic since the start of the crisis to the Marxist way of analysing things.”  

But is the crisis of the 2008 the result of weak US imperial power or too much US power?  Either way, I doubt that the hegemonic stability theory is a sufficient explanation of the Great Depression or the Long Depression.  Clearly, the US has been in (relative) decline as the leading imperialist power economically, although it remains the leading financial power and overwhelmingly dominant as a military power – similar to the Roman empire in its declining period.

No doubt that this has had some effect on the ability of all the major capitalist economies to get out of this depression and increased the move towards nationalism, protectionism and isolationism that we now see in many countries and in Trump’s America itself now. But the end of ‘globalisation’ was not the result of weakening American power but the result of the slowdown in global investment, trade and, above all, in the profitability of capital that empirical evidence has revealed since the late 1990s. The ‘death’ of globalisation was accelerated by the global financial crash and the collapse in world trade and debt flows since 2008.

The long depression has continued not because of high inequality or the weakening of US hegemony or because of the move to protectionism (that has hardly started).  It has continued, I contend, because of the failure of profitability to rise sufficiently to revive productive investment and productivity growth; and the continued hangover of fictitious capital and debt.  Indeed, I have shown that these are the same reasons that extended the Great Depression of the 1930s: low profitability, high debt levels and weak trade.

In Elliott’s article we are also offered some differences between the 1930s and now.  The first is that, unlike the 1930s, now central banks acted to boost money supply and bail out the banks with interest-rate cuts to zero and quantitative easing.  Back in the 1930s, according to Adam Tooze in his book The Deluge, deflationary policies were pursued everywhere. “The question that critics have asked ever since is why the world was so eager to commit to this collective austerity. If Keynesian and monetarist economists can agree on one thing, it is the disastrous consequences of this deflationary consensus.” (Tooze).

And they did agree on this in the current depression.  As I have shown in several posts, former US Fed chief Ben Bernanke was a mainstream expert on the causes of the Great Depression and once told a meeting of the mainstream to commemorate his mentor, the great monetarist, Milton Friedman, that the mistake of the 1930s not to expand the money supply would not be repeated.  But QE and easy money may have bailed out the banks and restored ‘business as usual’ fro them, but it did not end the current Long Depression.  Actually, that easy money and unconventional monetary policy would end the Great Depression was thought possible by Keynes in 1931.  But by 1936, when he wrote his famous General Theory, he realised it was inadequate.  And indeed, the idea that things would be different this time compared to the 1930s because of easy monetary policy has turned out to be bogus.

The Keynesians, having in many cases advocated easy money as the way out of the current depression, now push fiscal stimulus as the solution, just as Keynes finally resorted to in 1936.  Keynesians like Skidelsky claim that the UK had fiscal ‘automatic stabilisers’ that were kicking in to ameliorate the slump of the 1930s but the governments of the day smashed those and imposed austerity and that caused the extension of the slump into depression.

Most governments now have not adopted massive government spending or run large budget deficits to boost investment and growth – mainly because they fear a massive increase in public debt and the burden that will put on funding it from the capitalist sector. So we hear from the battery of leftist and Keynesian economists that the application of ‘austerity’ is the cause of the continued Long Depression now.  It is difficult to prove one way or another, but in a series of posts and papers, I have put considerable doubt on the Keynesian explanation of the Long Depression.

The New Deal did not end the Great Depression.  Indeed, the Roosevelt regime ran consistent budget deficits of around 5% of GDP from 1931 onwards, spending twice as much as tax revenue.  And the government took on lots more workers on programmes – but all to little effect.

Coming off the gold standard and devaluing currencies did not stop the Great Depression.  Indeed, resorting to competitive devaluations and protectionist tariffs and restrictions on international trade probably made things worse.

And monetary easing has not worked this time and nor has fiscal stimulus (as Abenomics in Japan has shown), which we shall see again if Trump ever does manage to run budgets deficits to lower corporate taxes and increase infrastructure spending.

Now it seems protectionism and devaluations are becoming more likely in this post-Trump, post-Brexit period of the Long Depression.  Indeed, the latest policy document for the upcoming G20 summit in Germany next week has actually dropped its condemnation of protectionist policies.  As Elliott sums it up: “So far, financial markets have taken a positive view of Trump. They have concentrated on the growth potential of his plans for tax cuts and higher infrastructure spending, rather than his threat to build a wall along the Rio Grande and to slap tariffs on Mexican and Chinese imports.  There is, though, a darker vision of the future, where every country tries to do what Trump is doing. In this scenario, a shrinking global economy leads to shrinking global trade, and deflation means personal debts become more onerous.”

The Great Depression only ended when the US prepared to enter the world war in 1941.  Then government took over from the private sector in directing investment and employment and using the savings and consumption of the people for the war effort. Profitability of capital rocketed and continued after the end of the war. Looking back, the depression of the  1880s and 1890s in the major economies only ended after a series of slumps finally managed to raise the profitability of capital in the most efficient sectors and national economies and so delivered more sustained investment – although eventually that led to imperialist rivalry over the exploitation of the globe and the first world war.

How will this Long Depression end?

Getting a level playing field

March 6, 2017

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

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

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

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

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

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

The balance between competition and monopoly is the main theme of Christophers’ book.  In my view, contrary to the view of the Monthly Review school, who follow Paul Sweezy’s characterisation of modern capital as ‘monopoly capitalism’, monopoly is not the dominant order of capitalism: competition is – at least what Shaikh calls ‘real competition’, in his huge Capitalism.  The continual battle to increase profit and the share of the market means monopolies are continually under threat from new rivals, new technologies and international competitors. The history of capitalism is one where the concentration and centralisation of capital increases but competition continues to bring about the movement of surplus value between capitals (within a national economy and globally).

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Trump’s 100 days

March 2, 2017

After Donald Trump delivered his first presidential address to the US Congress, the American stock market hit yet again a record high.  Since he was elected, the stock market is up over 11%.

The buoyant mood in the market for financial assets is also being mirrored in the views of the top financial analysts.  “There’s no question that animal spirits have been unleashed a bit post the election,” remarked New York Federal Reserve President William Dudley, echoing the terms of Keynesian economic thinking that economies take off when entrepreneurs feel optimistic about future sales.

And the main economic indicators in the US and global economy have been picking up.  The purchasing managers’ indexes (PMI) are surveys of companies in various countries on their likely spending, sales and investments.  And the PMIs everywhere are well above 50, meaning that more than 50% of the respondents are seeing improvement.  The global PMI now stands at its highest level (54) for three years and, according to JP Morgan economists, it suggests that global manufacturing output is now rising at a 4% pace compared to just 1% this time last year.

global-pmi

US manufacturing PMI hit its highest level for two years.

us-pmi

European economies manufacturing sectors also have seemed to turned the corner.

eurozone-pmi

Things are also looking better in the so-called emerging economies.  China has not crashed as many expected this time last year.  On the contrary, the Chinese economy has picked up and, as a result, there has been increased demand for raw materials.

china-pmi

Iron ore prices have rocketed back up, enabling the Australian economy to avoid a recession.  In the last quarter of 2016, the Aussie real GDP grew by 1.1 per cent, the strongest rate of quarterly growth over the past five years (although annual growth in 2016 was 2.4%, better than most other advanced economies, but lower than average).  India too recorded a pick-up in GDP growth to over 7%.

So good are things looking that Gavyn Davies in the FT sarcastically attacked those economists who have been talking about ‘secular stagnation’ in the major economies.  “Whatever happened to that?”, says Davies, pointing out that “Global activity growth has rebounded sharply, and recession risks have plummeted. Growth in real output is now running at higher levels than anything seen since the temporary rebound from the financial crash in 2009/10. Importantly, recent data suggest that the growth rate of fixed investment is beginning to recover, which is a body blow to one of the central tenets of the secular stagnation school.”

fulcrum-forecast

According to the Institute of International Finance, an industry association, growth in GDP across emerging markets surged to an average of 6.4 per cent in January, its fastest monthly rate since June 2011. If confirmed, this will show emerging economies reversing a downward trend in growth that has been in place since the global financial crisis.

em-prospects

Behind this apparent recovery is a small recovery in corporate profits, which up to the middle of 2016 had been slowing fast.  Since then, corporate profits have recovered somewhat around the world and,.according to JP Morgan, business investment has reversed its decline of the last year.

global-capex-jpm

Investors have responded.  Flows to emerging market equity and bond funds have begun the year positively for the first time since 2013. Foreign investors withdrew more than $38bn from EM stocks and bonds in the last three months of 2016 but sent more than $12bn back to those markets in January, the IIF estimates.

debt-flows

Even world trade growth, which has been abysmal and stopping rising altogether at the beginning of 2016, rose 2% at the end of last year (but still way below 3-4% rate in 2015).

So it would seem that the ‘Trump rally’ in stock markets is being accompanied by stronger economic growth and an end to the risk of deflation and stagnation.  Indeed, it is now expected that the US Federal Reserve Bank may well be confident enough to decide to raise its policy interest rate again this month, having stalled on its planned hikes after December.

But as I have argued before in previous posts, financial markets and mainstream economists may be getting ahead of themselves.

Is the US economy really going to leap forward from its sluggish pace of 2% or less that it has achieved since 2009?  Indeed, revised data for US real GDP growth in the last quarter was just 1.9% year over year, actually below the average growth rate since the end of the Great Recession.

us-real-gdp

It is no accident that the wild claims by Trump that his policies would lead to the US economy soon growing at a 4% rate have already been watered down.  Barely a month into Trump’s presidency, his advisers have already downgraded that rather elevated forecast. Steve Mnuchin, Trump’s recently confirmed Treasury secretary who is a former banker at Goldman Sachs, substantially downgraded the Trump’s goal for economic growth to just 3%.  And the Federal Reserve has proved to be wrong repeatedly in its forecast of faster economic growth.

Moreover, business investment growth slowed to a trickle. Investment badly needs a boost if the US economy is to sustain any significant growth rate, let alone the claimed 3-4% target of the Trump administration.  With business investment so weak, US economic growth is not going to accelerate unless corporate profits leap forward and government investment steps up to the plate.

us-investment

Business investment contributed just 0.17 percentage point to GDP growth in the last quarter of 2016, while government investment has collapsed.

us-government-investment

That, of course, is the Trump plan (such as he can explain it), namely to cut corporate taxes to raise after-tax profits and to introduce an infrastructure investment programme.  We shall see.  But corporate profit margins (profit per unit of sales) are not rising but narrowing and the fiscal multiplier effect of any Trump government investment stimulus is likely to be small.

There has been little sign of a recovery in real GDP per person in the US since the Great Recession – on the contrary – and that is the real indicator of (average) economic success.

real-gdp-per-capita

And what happens in the US has a profound influence on the rest of the capitalist world.  There is a close synchronisation of growth rates between the US and the rest of the world economy. Recent research indicates that the US appears to influence the timing and duration of recessions in many major economies.  Estimates indicate that a percentage-point increase in US growth could boost growth in advanced economies by 0.8 of a percentage point, and in emerging market and developing economies by 0.6 of a percentage point after one year.

correlations

Sources: Haver Analytics; World Bank; Kose and Terrones (2015); IMF.
Notes: Contemporaneous correlations between cyclical component of US real GDP and cyclical component of real GDP of advanced economies and emerging economies.

But it also works the other way.  A fall in US economic growth will weaken growth rates elsewhere and any crash in the US stock market will quickly spread abroad.  Estimates suggest that a sustained 10% increase in US stock market volatility could, after one year, reduce investment growth in the US by about 0.6 of a percentage point, in other advanced economies by around 0.5 of a percentage point, and in emerging market and developing economies by 0.6 of a percentage point.

As I have pointed out before, the US stock market is looking ‘overvalued’ and liable to a crash.

sp-500 sp-500-to-sales

The stock market price compared to sales by the companies in the stock market is back at levels not seen since the last crash in 2000.

As I have argued before, the key indicators to tell you if the US and world economy is starting to grow faster or is slipping back are the movement of profits and investment.  In the last half of 2016, corporate profits moved back into positive territory.  To finish off the batch of graphs in this post, here is my measure of global corporate profit growth up to end-2016.

global-profits-updated

Where this graph goes in 2017 is crucial to an analysis of the future.

Kenneth’s three arrows

February 25, 2017

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ADDENDUM

 

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

https://www.dissentmagazine.org/…/a-cautious-case-for-socia…

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

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

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

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