Archive for the ‘Profitability’ Category

Lives or livelihoods?

April 6, 2020

There are now two billion people across the world living under some form of lockdown as a result of the coronavirus pandemic. That’s a quarter of the world’s population. The world economy has seen nothing like this. Nearly all economic forecasts for global GDP in 2020 are for a contraction of 3-5%, as bad if not worse than in the Great Recession of 2008-9.

According to the OECD, output in most economies will fall by an average of 25% (OECD) while the lockdowns last and the lockdowns will directly affect sectors amounting to up to one third of GDP in the major economies. For each month of containment, there will be a loss of 2 percentage points in annual GDP growth.

This is a monstrous way of proving Marx’s labour theory of value, namely that “Every child knows a nation which ceased to work, I will not say for a year, but even for a few weeks, would perish.”  (Marx to Kugelmann, London, July 11, 1868).

The lockdowns in several major economies are having a drastic effect on production, investment and, above all, employment. The latest jobs figures for March out of the US were truly staggering, with a monthly loss of 700,000 and a jump in unemployment to 4.4%.

In just two weeks, nearly 10m Americans have filed for unemployment benefit.

All these figures surpass anything seen in the Great Recession of 2008-9 and even in the Great Depression of the 1930s.

Of course, the hope is that this disaster will be short-lived because the lockdowns will be removed within a month or so in Italy, Spain, the UK, the US and Germany.  After all, the Wuhan lockdown is ending this week after 50 days and China is gradually returning to work – if only gradually.  In other countries (Spain and Italy), there are signs that the pandemic has peaked and the lockdowns are working. In others (UK and US), the peak is still to come.

So once the lockdowns are over, then economies can quickly get back to business as usual. That’s the claim of US treasury secretary Mnuchin: “This is a short-term issue. It may be a couple of months, but we’re going to get through this, and the economy will be stronger than everKeynesian guru Larry Summers echoed this view: “I have the optimistic guess—but it’s only an optimistic guess—that the recovery can be faster than many people expect because it has the character of the recovery from the total depression that hits a Cape Cod economy every winter or the recovery in American GDP that takes place every Monday morning.”

During the lockdowns, various governments have announced cash handouts and boosted unemployment benefits for those laid off or ‘furloughed’ until business is restored.  And small businesses are supposedly getting relief in rates and cheap loans to tide them over.  That should save people’s livelihoods during the lockdowns.

One problem with this view is that, such have been the cuts in public services over the last decade or so, there is just not enough staff to process claims and shift the cash.  In the US, it is reckoned that many will not get any checks until June, by which time the lockdowns might be over!  Moreover, it is clear that many people and small businesses are not qualifying for the handouts for various reasons and will fall through this safety net.

For example, 58% of American workers say they won’t be able to pay rent, buy groceries or take care of bills if quarantined for 30 days or less, according to a new survey from the Society for Human Research Management (SHRM).  One in five workers said they’d be unable to meet those basic financial needs in less than one week under quarantine. Half of small businesses in the U.S. can’t afford to pay employees for a full month under quarantine conditions. More than half of small businesses expect to see a loss in revenue somewhere between 10-30%.

Indeed, many people are being forced to work, putting their health at risk because they cannot work at home like better paid, office-based workers.

Many small businesses in travel, retail and services will never come back after the lockdowns end. Even large companies in retail, travel and energy could well go bust, causing a cascade effect through sectors of economies. For example, the US Federal Reserve requires banks to run stress tests that assume certain bad scenarios to make sure the banks can weather a market downturn. The worst-case scenario had GDP falling by 9.9% in Q2 2020 with unemployment jumping to 10% by Q3 2021. Based upon recent estimates from Goldman Sachs, GDP will likely fall over 30% and unemployment could end up at a similar level… within weeks.

Also there are huge amounts of corporate debt issued by fairly risky companies which were not making much revenue and profit anyway before the pandemic.  And as I have said in previous posts, even before the virus hit the world economy, many countries were heading into recession.  Mexico, South Africa and Argentina among the G20 nations and Japan in the G7 were already in recession.  The Eurozone and the UK were close and even the best performer, the US, was slowing fast.  Now all that corporate debt that built up in the years since the end of the Great Recession could come tumbling down in defaults.

That is especially the case in the impoverished ‘Global South’ economies, which have experience an unprecedented $90bn outflow of capital as foreign investors leave the sinking ship.  And there is little or no safety net being offered by the likes of the IMF or the World Bank. Things are only going to get worse in the coming quarter and recovery may not be anywhere near the optimists’ view in H2 2020.

Clearly these lockdowns cannot go on forever, otherwise billions of people are going to be destitute and governments will be spending more and more, funded by more and more debt and/or the printing of money to make cash handouts and buy yet more debt.  You cannot go on doing that if there is no production or investment.  Jobs will disappear forever and inflation will eventually rocket.  We shall enter a world of permanent depression alongside hyper-inflation.

It seems that several European countries, encouraged by the peaking of cases are preparing to end their lockdowns by the end of this month.  But even if they do, a return to ‘normal’ will take months as it will depend on mass testing to gauge whether the virus will come back as it surely will and whether it could then be contained while gradually restoring production.  So any global recovery is not going to quick at all.  A German Ifo study predicted the German economy could shrink by up to 20% this year if the shutdown lasted three months and was followed by only a gradual recovery.

And the latest US forecasts from Goldman Sachs show the trough of the US recession being reached in the second quarter of 2020, with GDP likely to be 11-12 per cent below the pre-virus reading. This would involve a dramatic decline at an annualised rate of 34 per cent in that quarter.  GDP is then projected to rise very gradually, not reaching its pre-virus path before the end of 2021. This pattern, implying almost two “wasted” years in the US, has been common in recent economic forecasts. A similar picture is expected in the eurozone, which is experiencing a collapse in manufacturing output more precipitous than in the 2012 euro crisis.

But the gradual plan is the only óptimal’ option, says one bunch of economists: “importantly, the level of the lockdown, its duration, and the underlying economic and health costs depend critically on the measures that improve the capacity of the health system to cope with the epidemic (testing, isolating the vulnerable, etc.) and the capacity of the economic system to navigate through a period of suspended economic activities without compromising its structure.”

Could the lockdowns have been avoided?  The evidence is increasingly clear that they could have been.  When COVID-19 appeared on the scene, governments and health systems should have been ready.  It is not as if they had not been warned by epidemiologists for years.  As I have said before, COVID-19 was not an ‘unknown unknown’.  In early 2018, during a meeting at the World Health Organization in Geneva, a group of experts (the R&D Blueprint) coined the term “Disease X”: They predicted that the next pandemic would be caused by an unknown, novel pathogen that hadn’t yet entered the human population. Disease X would likely result from a virus originating in animals and would emerge somewhere on the planet where economic development drives people and wildlife together.

More recently, last September the UN published a report warning that there is a “very real threat” of a pandemic sweeping the planet, killing up to 80 million people. A deadly pathogen, spread airborne around the world, the report said, could wipe out almost 5 percent of the global economy.  “Preparedness is hampered by the lack of continued political will at all levels,” read the report. “Although national leaders respond to health crises when fear and panic grow strong enough, most countries do not devote the consistent energy and resources needed to keep outbreaks from escalating into disasters.”  The report outlined a history of deliberate ignoring of warnings by scientists over the last 30 years.

Governments ignored the warnings because they took the calculated view that the risk was not great and therefore spending on pandemics prevention and containment was not worth it.  Indeed, they cut back spending in pandemic research and containment.  It reminds me the decision of Heathrow airport in the UK to buy only two snow ploughs because it hardly ever snowed or froze in London, so the expense was not justifiable.  The airport was badly caught out one winter day and everything stopped.

How could the lockdowns have been avoided? If government had been able to test everybody for the virus, to provide protective equipment and huge armies of health workers to test and contract trace and then quarantine and isolate those infected.  The old and sick should have been shielded at home and supported by social care.  Then it would have been possible for everybody else to go to work, just as essential workers must do so now.  Small countries like Iceland (and Taiwan, South Korea) with high quality health systems have been able to do this.  Most countries with privatised or decimated health systems have not.  So lockdowns have been the only option if lives are to be saved.

The policy of the lockdowns is only partly to save lives; it is also to try and avoid health systems in countries being overwhelmed with cases, leaving medics with the Hobson choice of choosing who will die or will get help. The aim is to ‘flatten the curve’ in the rise in virus cases and deaths so that health system can cope.  The problem is that flattening the curve in the pandemic by lockdowns increases downward curve in jobs and incomes for hundreds of millions.

And yet if the pandemic were allowed to run riot, historical studies show that it also would eventually destroy an economy.  A recent Federal Reserve paper, looking at the impact of the Spanish flu epidemic in the US, found that the then uncontrolled pandemic reduced manufacturing output by 18%. So lockdowns may be less damaging in the end.  It seems you cannot win either way.

Lives or livelihoods?  Some right-wing ‘neoliberal’ experts reckon that the capitalist economy is more important than lives.  After all, the people dying are mostly the old and the sick.  They do not contribute much value to capitalist production; indeed they are a burden on productivity and taxes.  In true Malthusian spirit, in the executive suites of the financial institutions, the view is prevalent that governments should let the virus rip and once all the young and healthy get immune, the problem would be solved.

This view also connects with some health expert studies that point out that every day, hospital doctors must make decisions on what is the most ‘cost effective’ from the point of view of health outcomes.  Should they save a very old person with COVID-19 if it means that some younger person’s cancer treatment is delayed because beds and staff have been transferred to the pandemic?

Here is that view: “if funds are not limitless – then we should focus on doing things whereby we can do the most good (save the most lives) for the least possible amount of money. Or use the money we have, to save the most lives.” Health economics measures the cost per QALY.  A QALY is a Quality Adjusted Life Year. One added year of the highest quality life would be one QALY.  “How much are we willing to pay for one QALY? The current answer, in the UK, is that the NHS will recommend funding medical interventions if they cost less than £30,000/QALY. Anything more than this is considered too expensive and yet the UK’s virus package is £350bn, almost three times the current yearly budget for the entire NHS. Is this a price worth paying?”  This expert reckoned that “the cost of saving a COVID victim was more than eleven times the maximum cost that the NHS will approve.” At the same time cancer patients are not being treated, hip replacements are being postponed, heart and diabetes sufferers are not being dealt with.

Tim Harford in the FT took a different view.  He points out that the US Environmental Protection Agency values a statistical life at $10m in today’s money, or $10 per micromort (one in a million risk of death) averted.  “If we presume that 1 per cent of infections are fatal, then it is a 10,000 micromort condition. On that measure, being infected is 100 times more dangerous than giving birth, or as perilous as travelling two and a half times around the world on a motorbike. For an elderly or vulnerable person, it is much more risky than that. At the EPA’s $10 per micromort, it would be worth spending $100,000 to prevent a single infection with Covid-19.  You don’t need a complex epidemiological model to predict that if we take no serious steps to halt the spread of the virus, more than half the world is likely to contract it. That suggests 2m US deaths and 500,000 in Britain — assuming, again, a 1 per cent fatality rate.  If an economic lockdown in the US saves most of these lives, and costs less than $20tn, then it would seem to be value for money.”  The key point for me here is that this dilemma of ‘costing’ a life would be reduced if there had been proper funding of health systems, sufficient to provide ‘spare capacity’ in case of crises.

There is the argument that the lockdowns and all this health spending are based on an unnecessary panic that will make the cure worse than the disease.  You see, the argument goes, COVID-19 is no worse than bad flu in its mortality rate and will have way less impact than lots of other diseases like malaria, HIV or cancer, which will kill more each year.  So stop the crazy lockdowns, just protect the old, wash your hands and we shall soon see that COVID is no Armageddon.

The problem with this argument is that evidence is against the view that COVID is no worse than annual flu.  It’s true that, so far, deaths have only reached 70,000 by April, some 40,000 less than flu this year and only quarter of the deaths from malaria.  But the virus ain’t over yet.  So far, all the evidence suggests that the mortality rate is at least 1%, ten times more deadly than annual flu; and is way more infectious. So if COVID-19 were not contained it would eventually affect up to 70% of the population before ‘herd immunity’ would be sufficient to allow the virus to wane.  That’s 50 million deaths at least!  Annual mortality rates would be doubled in most countries (see graph).

Moreover, this is a virus that is novel and different from flu viruses and there is no vaccine yet.  It is very likely to come back and mutate and so require yet more containment.

Some governments are risking people’s lives by trying to avoid total or even partial lockdowns to preserve jobs and the economy.  Some governments have put in place sufficient testing and contact tracing along with self-isolation, to claim that they can keep their economies going during the crisis .Unfortunately for them, even if that works, the lockdowns elsewhere have so destroyed trade and investment globally, even these countries cannot avoid a slump with global supply chains paralysed.

There is another argument against the lockdowns and saving lives.  A study by some Bristol University ‘safety experts’ reckoned that a “business as usual” policy would lead to the epidemic being over by September 2020, although such an approach would lead to a loss of life in the UK nearly as much as it suffered in the Second World War. But conversely, lockdowns could decrease GDP per head so much that the national population loses more lives as a result of the countermeasures than it saves.

But the Bristol study is just a risk assessment.  Proper health studies show that recessions do not increase mortality at all. A recession – a short-term, temporary fall in GDP – need not, and indeed normally does not, reduce life expectancy. Indeed, counterintuitively, the weight of the evidence is that recessions actually lead to people living longer. Suicides do indeed go up, but other causes of death, such as road accidents and alcohol-related disease, fall.

Marxist health economist Dr Jose Tapia (also an author of one of the chapters in our book World in Crisis) has done several studies on the impact of recessions on health.  He found that mortality rates in industrial countries tend to rise in economic expansions and fall in economic recessions. Deaths attributed to heart disease, pneumonia, accidents, liver disease, and senility—making up about 41% of total mortality—tend to fluctuate procyclically, increasing in expansions. Suicides, as well as deaths attributable to diabetes and hypertensive disease, make up about 4% of total mortality and fluctuate countercyclically, increasing in recessions. Deaths attributed to other causes, making up about half of total deaths, don’t show a clearly defined relationship with the fluctuations of the economy.  “All these effects of economic expansions or recessions on mortality that can be seen, e.g., during the Great Depression or the Great Recession, are tiny if compared with the mortality effects of a pandemic,” said Tapia in an interview.

In sum, the lockdowns could have been avoided if governments had taken notice of the rising risk of new pathogen pandemics.  But they ignored those warnings to ‘save money’. The lockdowns could have been avoided if health systems had been properly funded, equipped and staffed, instead of being run down and privatised over decades to reduce costs and raise profitability for capital.  But they weren’t.

And there is the even bigger picture.  If you have enough firemen and equipment, you can put out a bush fire after much damage, but if climate change is continually raising temperatures, another round of fires will inevitably come along.   These deadly new pathogens are coming into human bodies because the insatiable drive for profit in agriculture and industry has led to the commodification of nature, destroying species and bringing nature’s dangers closer to humanity.  Even if after this pandemic is finally contained (at least this year) and even if governments spend more on prevention and containment in the future, only ending the capitalist drive for profit will bring nature back into harmony with humanity.

For now, we are left with saving lives or livelihoods and governments won’t manage either.

A war economy?

March 30, 2020

If all country pandemics were the same, then the figure below would be how this pandemic will come to an end.  The start-to-peak ratio of Covid-19 infections for all countries would be 40-50 days. Many countries are not yet near the peak point and there is no guarantee that the peak will be at the same time point, if mitigation and suppression methods (testing, self-isolation, quarantine and lockdowns) are not working similarly.  But ultimately, there will be a peak everywhere and the pandemic will wane – if only to come back next year, maybe.

What is clear is that the lockdowns in so many major economies have and will deliver a humungous slump in production, investment, employment and incomes in most economies.  The OECD sums up the picture best.  The impact effect of business closures could result in reductions of 15% or more in the level of output throughout the advanced economies and major emerging-market economies. In the median economy, output would decline by 25%…. “For each month of containment, there will be a loss of 2 percentage points in annual GDP growth”.

Looking back in my book, The Long Depression, I found that the loss of GDP from the beginning of Great Recession in 2008 through the 18 months to the trough in mid-2009 was over 6% of GDP in the major economies.  Global real GDP fell about 3.5% over that period, while the so-called emerging market economies did not contract (because China continued to expand).

In this pandemic, if the major economies are locked down for two months and maybe more (China’s Wuhan lockdown will not be relieved until next week; so that’s more than two months), then global GDP is likely to contract in 2020 by more than in the Great Recession.

Of course, the hope is that the lockdowns will be short-lived.  As OECD general secretary Gurria said, “we don’t know how long it’s going to take to fix unemployment and the closures of millions of small businesses: but it’s wishful thinking to talk about a quick recovery.”  Clearly the idea of President Trump that America can get back to business by Easter Sunday is not realistic.

Nevertheless, on that hope that lockdowns will be short-lived and because they have no other choice if the pandemic is to be suppressed, pro-capitalist governments have thrown the kitchen sink at their economies in order to avoid the worst.  The first priority has been to save capitalist businesses, especially the large companies.  So central banks have cut their policy interest rates to zero or below; and they have announced a myriad of credit facilities and bond purchasing programmes that dwarf the bailouts and quantitative easing measures of the last ten years.  Governments have announced loan guarantees and grants for businesses at amounts never seen before.

Globally, I calculate that governments have announced fiscal ‘stimulus’ packages of around 4% of GDP and another 5% of GDP in credit and loan guarantees to the capitalist sector.  In the Great Recession, fiscal bailouts totalled only 2% of world GDP.

If we take the $2trn package agreed by the US Congress, way more than during the global financial meltdown in 2008-9, two-thirds of it will go in outright cash and loans that may not be repaid to big business (travel companies etc) and to smaller businesses, but just one-third to helping the millions of workers and self-employed to survive with cash handouts and tax deferrals.

It’s the same in the UK and Europe with the pandemic packages: first, save capitalist business; and second, tide over working people. The payments for workers laid off and the self-employed are only expected to be in place for two months and often people won’t receive any cash for weeks, if not months.  So these measures are way short of providing sufficient support for the millions that have already been locked down or have seen their companies lay them off.

It really is naïve, if not ignorant, of Nobel prize winning economists like Joseph Stiglitz, Chris Pissarides or Adam Posen to praise such schemes as the UK’s governments, just because it is “more generous” than the one in the US.  “The U.K. deserves credit for really reversing its austerity and being very ambitious and coherent,” said Posen, who was a financial crisis-era policy maker at the BOE. “The wish-list in terms of design, size, content and coordination — all is terrific.”  British arch-Keynesian Will Hutton summed up the mood: “a Rubicon has been crossed. Keynesianism has been restored to its proper place in British public life.” Even the erstwhile Austerians joined the chorus of praise, including former austerity UK Chancellor, George Osborne.

The British and American public also seem to be convinced that the packages are generous, as the latest polls suggest a pick-up in support for the mendacious President Trump and ‘Operation Last Gasp’ Prime Minister Johnson.  It seems everywhere incumbent rulers have gained support during the crisis.  That may not last, however, if the lockdowns continue and slump begins to bite deep.

The reality is that the money being shifted towards working people compared to big business is minimal.  For example, the UK package offers an 80% of wages payout for employees and self-employed.  But that is actually no more than the usual unemployment benefits ratio offered by many governments in Europe.  The UK had a very low benefit ratio that is now being raised to the European average and then only for a few months.  And even then there are millions who will not qualify.

Moreover, none of these measures will avoid the slump and they are way insufficient to restore growth and employment in most capitalist economies over the next year.  There is every possibility that this pandemic slump will not have a V-shaped recovery as most mainstream forecasts hope for.  A U shaped recovery (ie a slump lasting a year or more) is more likely.  And there is a risk of a very slow recovery, more like a bent L-shape, as is appearing in China, so far.

Indeed, mainstream economics is not sure what to do.  The Keynesian view is presented to us by Lord Skidelsky, Keynes’ biographer.  Skidelsky pointed out that the lockdowns were the opposite of the typical Keynesian problem of ‘deficient demand’.  Indeed, it is a problem of deficient supply as most productive workers have stopped work. But Skidelsky does not see it that way.  You see, he reckons that it is not a ‘supply shock’ but a problem of ‘excess demand’.  But ‘excess demand’ is the mirror of ‘scarce supply’.  The question is where do we start: surely it starts with the loss of output and value creation, not with ‘excess demand’?

Skidelsky tells us that “a recession is normally triggered by a banking failure or a collapse in business confidence. Output is cut, workers are laid off, spending power falls and the slump spreads through a multiplied reduction in spending. Supply and demand fall together until the economy is stabilised at a lower level. In these circumstances, Keynes said, government spending should rise to offset the fall in private spending.”

Readers of my blog know well that I consider, that while a recession may be “triggered” by a banking failure or “a collapse in business confidence”, these triggers are not the underlying cause of recurring crises in capitalism.  Why do banking failures sometimes not cause a slump and why do businesses suddenly have a collapse in confidence?  Keynesian theory cannot tell us.

Skidelsky goes on that if the crisis is one of “excess demand”, then we need to reduce demand to meet supply!  I would have thought it would be better to get out of this slump by raising output to meet demand, but there we go.  Skidelsky points out that “It is not that business wants to produce less. It is forced to produce less because a section of its workforce is being prevented from working. The economic effect is similar to wartime conscription, when a fraction of the workforce is extracted from civilian production. Production of civilian goods falls, but aggregate demand remains the same: it is merely redistributed from workers producing civilian goods to workers conscripted into the army or reallocated to producing munitions. What happens today will be determined by what happens to the spending power of those made compulsorily idle.”

Really? In the war economy, everybody is still working – indeed during the second world war, there was in effect full employment as the war machine was pumped up.  Currently we are heading for the biggest rise in unemployment in a few quarters in economic history.  This is no war economy.

Skidelsky reminds us that Keynes’s solution in the war economy of ‘excess demand’ was to propose an increase in taxation.  “In his pamphlet How to Pay for the War (1940). civilian consumption, he said, had to be reduced to release resources for military consumption. Without an increase in voluntary saving, there were only two ways to reduce civilian consumption: inflation or higher taxes.”  “The solution he and the Treasury jointly hit on was to raise the standard rate of income tax to 50 per cent, with a top marginal rate of 97.5 per cent, and lower the threshold for paying taxes. The latter would bring 3.25m extra taxpayers into the income tax net. Everyone would pay the increased taxes which the war effort demanded, but the tax payments of the three million would be repayable after the war in the form of tax credits. There would also be rationing of essential goods.”

Wow!  So Skidelsky’s answer to the current slump is to raise taxation, even for those at the bottom of the income scale in order to stop them spending too much and causing inflation!  He finishes by saying that the pandemic “should deepen our understanding of what it is to be a Keynesian.”  Indeed.

The current situation is not a war economy, as James Meadway says.  When the so-called Spanish flu pandemic hit, it was right at the end of the first world war.  That pandemic claimed 675,000 lives in the US and at least 50 million worldwide.  The flu did not destroy the US economy.  In 1918, the year in which influenza deaths peaked in the US, business failures were at less than half their pre-war level, and they were lower still in 1919 (see chart). Driven by the wartime production effort, US real GDP rose by 9% in 1918, and by around 1% the following year even as the flu raged.

Of course, then there were no lockdowns and people were just left to die or live. But the point is that, once the current pandemic lockdowns end, what is needed to revive output, investment and employment is something like a war economy; not bailing out big business with grants and loans so that they can return to business as usual.  This slump can only be reversed with war time-like measures, namely massive government investment, public ownership of strategic sectors and state direction of the productive sectors of the economy.

Remember, even before the virus hit the global economy, many capitalist economies were slowing fast or already in outright recession.  In the US, one of the better performing economies, real GDP growth in Q4 had fallen to under 2% a year with forecasts of further slowdown this year.  Business investment was stagnating and non-financial corporate profits had been on downward trend for five years.  The capitalist sector was and is in no shape to lead an economic recovery that can lead back to full employment and rising real incomes.  It will require the public sector to lead.

Andrew Bossie and J.W. Mason have just published a perceptive paper on the experience of that public sector role in the war-time US economy. They show that all sorts of loan guarantees, tax incentives  etc were offered by the Roosevelt administration to the capitalist sector to begin with.  But it soon became clear that the capitalist sector could not do the job of delivering on the war effort as they would not invest or boost capacity without profit guarantees.  Direct public investment took over and government-ordered direction was imposed.

Bossie and Mason found that from 8 to 10 percent of GDP during the 1930s, federal spending rose to an average of around 40 percent of GDP from 1942 to 1945. And most significant, contract spending on goods and services accounted for 23 percent on average during the war.  Currently in most capitalist economies public sector investment is about 3% of GDP, while capitalist sector investment is 15%-plus. In the war that ratio was reversed.

I had shown the same result in a post of mine back in 2012.  I quote: “What happened was a massive rise in government investment and spending.  In 1940, private sector investment was still below the level of 1929 and actually fell further during the war.  So the state sector took over nearly all investment, as resources (value) were diverted to the production of arms and other security measures in a war economy.”  Keynes himself said that the war economy demonstrated that “It is, it seems, politically impossible for a capitalistic democracy to organize expenditure on the scale necessary to make the grand experiments which would prove my case — except in war conditions.

The war economy did not stimulate the private sector, it replaced the ‘free market’ and capitalist investment for profit.  To organize the war economy and to ensure that it produced the goods needed for war, the Roosevelt government spawned an array of mobilization agencies which not only often purchased goods but closely directed those goods’ manufacture and heavily influenced the operation of private companies and whole industries.

Bossie and Mason conclude that: “the more—and faster—the economy needs to change, the more planning it needs. More than at any other period in US history, the wartime economy was a planned economy. The massive, rapid shift from civilian to military production required far more conscious direction than the normal process of economic growth. The national response to the coronavirus and the transition away from carbon will also require higher than normal degrees of economic planning by government.”

What the story of the Great Depression and the war showed was that, once capitalism is in the depth of a long depression, there must be a grinding and deep destruction of all that capitalism had accumulated in previous decades before a new era of expansion becomes possible. There is no policy that can avoid that and preserve the capitalist sector. If that does not happen this time, then the Long Depression that the world capitalist economy has suffered since the Great Recession could enter another decade.

The major economies (let alone the so-called emerging economies) will struggle to come out of this huge slump unless the law of market and value is replaced by public ownership, investment and planning, utilising all the skills and resources of working people.  This pandemic has shown that.

Lockdown!

March 24, 2020

According to AFP estimates, some 1.7 billion people across the world are now living under some form of lockdown as a result of the coronavirus. That’s almost a quarter of the world population.  The world economy has seen nothing like this.

Nearly all economic forecasts for global GDP in 2020 are for a contraction of 1-3%, as bad if not worse than in the Great Recession of 2008-9.  And forecasts for the major economies for this quarter ending this week and the next quarter are coming in at an annualised drop of anything between 20-50%! The economic activity indicators (called PMIs), which are surveys of company views on what they are doing, are recording all-time lows of contraction for March.

US composite PMI to March 2020

This is all due to the lockdown of businesses globally and isolation of workers in their homes. Could the lockdowns have been avoided so that this drastic ‘supply shock’ would not have been necessary in order to cope with the pandemic?  I think it probably could.  If governments had acted immediately with the right measures when COVID-19 first appeared, the lockdowns could have been averted.

What were these right measures?  What we now know is that everybody over the age of 70 years and/or with medical conditions should have gone into self-isolation.  There should have been mass testing of everybody regularly and anybody infected quarantined for up to two weeks.  If this had been done from the beginning, then there would have been fewer deaths, hospitalisations and a quicker dying out of the virus.  So lockdowns could probably have been avoided.

But testing and isolation was not done at the beginning in China.  At first there was denial and a cover-up of the virus risk.  By the time the Chinese authorities acted properly with testing and isolation, Wuhan was inundated and a lockdown had to be applied.

At least the Chinese had the excuse that this was a new virus unknown to humans and its level of infection, spread and mortality was not known before. But there is no excuse for governments in the major capitalist economies. They had time to prepare and act.  Italy left it too late to apply testing and isolation so that the lockdown there was closing the doors after the virus had bolted.  Their health system is now overloaded and can hardly cope.

There were some countries that did adopt mass testing and effective isolation.  South Korea did both; and Japan where 90% of the population wore masks and gloves and washed, appears to have curbed the impact of the pandemic through effective self-isolation without having a lockdown.

Similarly, in one small Italian village amid the pandemic, Vo Euganeo, which actually had Italy’s first virus death, they tested all 3000 residents and quarantined the 3% affected, even though most had no symptoms.  Through isolation and quarantine, the lockdown there lasted only two weeks.

At the other extreme, the UK and the US have taken ages to ramp up testing (which is still inadequate) and get the vulnerable to self-isolate.  In the US, the federal government is still not going for a state-wide lockdown.

Why did the G7 governments and others fail to act?  As Mike Davis explains, the first and foremost reason was that the health systems of the major economies were in no position to act.  Over the last 30 years, public health systems in Europe have been decimated and privatised. In the US, the dominant private sector has slashed services in order to boost profits.  According to the American Hospital Association, the number of in-patient hospital beds declined by an extraordinary 39% between 1981 and 1999. The purpose was to raise profits by increasing ‘census’ (the number of occupied beds). But management’s goal of 90% occupancy meant that hospitals no longer had the capacity to absorb patient influx during epidemics and medical emergencies.

As a result, there are only 45,000 ICU beds available to deal with the projected flood of serious and critical corona cases. (By comparison, South Koreans have more than three times more beds available per thousand people than Americans.) According to an investigation by USA Today “only eight states would have enough hospital beds to treat the 1 million Americans 60 and over who could become ill with COVID-19.

Local and state health departments have 25% less staff today than they did before Black Monday 12 years ago. Over the last decade, moreover, the CDC’s budget has fallen 10% in real terms. Under Trump, the fiscal shortfalls have only been exacerbated. The New York Times recently reported that “21 percent of local health departments reported reductions in budgets for the 2017 fiscal year.”  Trump also closed the White House pandemic office, a directorate established by Obama after the 2014 Ebola outbreak to ensure a rapid and well-coordinated national response to new epidemics.

The for-profit nursing home industry, which warehouses 1.5 million elderly Americans, is highly competitive and is based on low wages, understaffing and illegal cost-cutting. Tens of thousands die every year from long-term care facilities’ neglect of basic infection control procedures and from governments’ failure to hold management accountable for what can only be described as deliberate manslaughter. Many of these homes find it cheaper to pay fines for sanitary violations than to hire additional staff and provide them with proper training.

The Life Care Center, a nursing home in the Seattle suburb of Kirkland, is “one of the worst staffed in the state” and the entire Washington nursing home system “as the most underfunded in the country—an absurd oasis of austere suffering in a sea of tech money.” (Union organiser).  Public health officials overlooked the crucial factor that explains the rapid transmission of the disease from Life Care Center to nine other nearby nursing homes: “Nursing home workers in the priciest rental market in America universally work multiple jobs, usually at multiple nursing homes.” Authorities failed to find out the names and locations of these second jobs and thus lost all control over the spread of COVID-19.

Then there is big pharma.  Big pharma does little research and development of new antibiotics and antivirals. Of the 18 largest US pharmaceutical companies, 15 have totally abandoned the field. Heart medicines, addictive tranquilizers and treatments for male impotence are profit leaders, not the defences against hospital infections, emergent diseases and traditional tropical killers. A universal vaccine for influenza—that is to say, a vaccine that targets the immutable parts of the virus’s surface proteins—has been a possibility for decades, but never deemed profitable enough to be a priority.

I have argued in previous posts that COVID-19 was not a bolt of the blue.  Such pandemics have been forecast well in advance by epideomologists, but nothing was done because it costs money.  Now it’s going to cost a lot more.

The global slump is here.  But how long and how deep will it be?  Most forecasts talk about a short, sharp drop followed by a quick recovery.  Will that happen?  It depends on how quickly the pandemic can be controlled and fade away – at least for this year.  On 8 April, the lockdown in Wuhan will be lifted as there are no new cases.  So, from the emergence of virus there in January, it will be about three months, with a lockdown of over two months.  It also seems that the peak of the pandemic may have been reached in Italy which has been in full lockdown for only two weeks.  So perhaps in another month or two, Italy will be freed.  But other countries like the UK are just entering a lockdown phase, with others still facing exponential growth in cases which may require lockdowns.

So it seems that an end to the global supply shock is unlikely before June, probably much later.  Of course, the production collapse could be reversed earlier if governments decide not to have lockdowns or to end them early.  The Trump administration is already hinting at lifting any lockdown in the next 15 days ‘to get the economy going’ (at the expense of more deaths etc); but many state governors may not go along with that.

Even if economies do bounce back in the second half of 2020 as the lockdowns are ended, there will still be a global slump.  And it is a vain hope that recovery will be quick and sharp in the second half of this year.  There are two reasons to doubt that. First, the global economy was already slipping into recession before the pandemic hit.  Japan was in recession; The Eurozone was close to it and even US growth had slowed to under 2% a year.

And many large so-called emerging economies like Mexico, Argentina and South Africa were already contracting. Indeed, capital was flooding out of the global south to the north, a process than has now accelerated with the pandemic to record levels.  With the collapse in energy and industrial metal prices, many commodity-based emerging economies (Brazil, Russia, Saudi Arabia, Indonesia, Ecuador etc) face a huge drop in export revenues.  And this time, unlike 2008, China will not quickly return to its old levels of investment, production and trade (especially as the trade war tariffs with the US remain in place).  For the whole year, China’s real GDP growth could be as low as 2%, compared to over 6% last year.

With the collapse in energy and industrial metal prices, many commodity-based emerging economies (Brazil, Russia, Saudi Arabia, Indonesia, Ecuador etc) face a huge drop in export revenues.  And this time, unlike 2008, China will not quickly return to its old levels of investment, production and trade (especially as the trade war tariffs with the US remain in place).  For the whole year, China’s real GDP growth could be as low as 2%, compared to over 6% last year.

Second, stock markets are jumping back because of the recent Fed credit injections and the expected huge US Congress fiscal measures.  But this slump will not be avoided by central bank largesse or the fiscal packages being planned. Once a slump gets under way, incomes collapse and unemployment rises fast. That has a cascade or multiplier effect through the economy, particularly for non-financial companies in the capitalist sector.  This will lead to a sequence of bankruptcies and closures.

And corporate balance sheets are dangerously frail. Across the major economies, concerns have been rising over mounting corporate debt. In the United States, against the backdrop of decades-long access to cheap money, non-financial corporations have seen their debt burdens more than double from $3.2 trillion in 2007 to $6.6 trillion in 2019.

A recent paper by Joseph Baines and Sandy Brian Hager starkly reveals all.   For decades, the capitalist sector has switched from investing in productive assets and moved to investing in financial assets – or ‘fictitious capital’ as Marx called it. Stock buybacks and dividend payments to shareholders have been the order of the day rather than re-investing profits into new technology to boost labour productivity. This particularly applied to larger US companies.

As a mirror, large companies have reduced capital expenditure as a share of revenues since the 1980s.  Interestingly, smaller companies engaged less in ‘financial engineering’ and continued to raise their investment.  But remember the bulk of investment comes from the large companies.

The vast swathe of small US firms is in trouble.  For them, profit margins have been falling.  As a result, the overall profitability of US capital has fallen, particularly since the late 1990s.  Baines and Hager argue that “the dynamics of shareholder capitalism have pushed the firms in the lower echelons of the US corporate hierarchy into a state of financial distress.”  As a result, corporate debt has risen, not only in absolute dollar terms, but also relative to revenue, particularly for the smaller companies.

Everything has been held together because the interest on corporate debt has fallen significantly, keeping debt servicing costs down.  Even so, the smaller companies are paying out interest at a much higher level than the large companies. Since the 1990s, their debt servicing costs have been more or less steady, but are nearly twice as high as for the top ten percent.

But the days of cheap credit could be over, despite the Fed’s desperate attempt to keep borrowing costs down.  Corporate debt yields have rocketed during this pandemic crisis.  A wave of debt defaults is now on the agenda.  That could “send shockwaves through already-jittery financial markets, providing a catalyst for a wider meltdown.”

Even if the lockdowns last only a few months through to the summer, that contraction could see hundreds of small firms go under and even some big fish too.  The idea that the major economies can have a V-shaped recovery seems much less likely than a L-shaped one.

It was the virus that did it

March 15, 2020

I’m sure when this disaster is over, mainstream economics and the authorities will claim that it was an exogenous crisis nothing to do with any inherent flaws in the capitalist mode of production and the social structure of society.  It was the virus that did it.  This was the argument of the mainstream after the Great Recession of 2008-9 and it will be repeated in 2020.

As I write the coronavirus pandemic (as it is now officially defined) has still not reached a peak.  Apparently starting in China (although there is some evidence that it may have started in other places too), it has now spread across the globe.  The number of infections is now larger outside China than inside.  China’s cases have trickled to a halt; elsewhere there is still an exponential increase.

This biological crisis has created panic in financial markets. Stock markets have plunged as much 30% in the space of weeks.  The fantasy world of every rising financial assets funded by ever lower borrowing costs is over.

COVID-19 appears to be an ‘unknown unknown’, like the ‘black swan’-type global financial crash that triggered the Great Recession over ten years ago.  But COVID-19, just like that financial crash, is not really a bolt out of the blue – a so-called ‘shock’ to an otherwise harmoniously growing capitalist economy.  Even before the pandemic struck, in most major capitalist economies, whether in the so-called developed world or in the ‘developing’ economies of the ‘Global South’, economic activity was slowing to a stop, with some economies already contracting in national output and investment, and many others on the brink.

COVID-19 was the tipping point.  One analogy is to imagine a sandpile building up to a peak; then grains of sand start to slip off; and then comes a certain point with one more sand particle added, the whole sandpile falls over. If you are a post-Keynesian you might prefer calling this a ‘Minsky moment’, after Hyman Minsky, who argued that capitalism appears to be stable until it isn’t, because stability breeds instability.  A Marxist would say, yes there is instability but that instability turns into an avalanche periodically because of the underlying contradictions in the capitalist mode of production for profit.

Also, in another way, COVID-19 was not an ‘unknown unknown’.  In early 2018, during a meeting at the World Health Organization in Geneva, a group of experts (the R&D Blueprint) coined the term “Disease X”: They predicted that the next pandemic would be caused by an unknown, novel pathogen that hadn’t yet entered the human population. Disease X would likely result from a virus originating in animals and would emerge somewhere on the planet where economic development drives people and wildlife together.

Disease X would probably be confused with other diseases early in the outbreak and would spread quickly and silently; exploiting networks of human travel and trade, it would reach multiple countries and thwart containment. Disease X would have a mortality rate higher than a seasonal flu but would spread as easily as the flu. It would shake financial markets even before it achieved pandemic status. In a nutshell, Covid-19 is Disease X.

As socialist biologist, Rob Wallace, has argued, plagues are not only part of our culture; they are caused by it. The Black Death spread into Europe in the mid-14th century with the growth of trade along the Silk Road. New strains of influenza have emerged from livestock farming. EbolaSARSMERS and now Covid-19 has been linked to wildlife. Pandemics usually begin as viruses in animals that jump to people when we make contact with them. These spillovers are increasing exponentially as our ecological footprint brings us closer to wildlife in remote areas and the wildlife trade brings these animals into urban centers. Unprecedented road-building, deforestation, land clearing and agricultural development, as well as globalized travel and trade, make us supremely susceptible to pathogens like corona viruses.

There is a silly argument among mainstream economists about whether the economic impact of COVID-19 is a ‘supply shock’ or a ‘demand shock’.  The neoclassical school says it is a shock to supply because it stops production; the Keynesians want to argue it is really a shock to demand because people and businesses won’t spend on travel, services etc.

But first, as argued above, it is not really a ‘shock’ at all, but the inevitable outcome of capital’s drive for profit in agriculture and nature and from the already weak state of capitalist production in 2020.

And second, it starts with supply, not demand as the Keynesians want to claim.  As Marx said: “Every child knows a nation which ceased to work, I will not say for a year, but even for a few weeks, would perish.” (K Marx to Kugelmann, London, July 11, 1868).  It is production, trade and investment that is first stopped when shops, schools, businesses are locked down in order to contain the pandemic.  Of course, then if people cannot work and businesses cannot sell, then incomes drop and spending collapses and that produces a ‘demand shock’.  Indeed, it is the way with all capitalist crises: they start with a contraction of supply and end up with a fall in consumption – not vice versa.

Here is one mainstream (and accurate) view of the anatomy of crises.

Some optimists in the financial world are arguing that the COVID-19 shock to stock markets will end up like 19 October 1987.  On that Black Monday the stock market plunged very quickly, even more than now, but within months it was back up and went on up.  Current US Treasury Secretary Steven Mnuchin is sure that the financial panic will end up like 1987. “You know, I look back at people who bought stocks after the crash in 1987, people who bought stocks after the financial crisis,” he continued. “For long-term investors, this will be a great investment opportunity.”  This is a short-term issue. It may be a couple of months, but we’re going to get through this, and the economy will be stronger than ever,” the Treasury secretary said.

Mnuchin’s remarks were echoed by White House economic adviser Larry Kudlow, who urged investors to capitalize on the faltering stock market amid coronavirus fears. “Long-term investors should think seriously about buying these dips,” describing the state of the U.S. economy as “sound.”  Kudlow really repeated what he said just two weeks before the September 2008 global financial crash: “for those of us who prefer to look ahead, through the windshield, the outlook for stocks is getting better and better.”

The 1987 crash was blamed on heightened hostilities in the Persian Gulf leading to a hike in oil prices, fear of higher interest rates, a five-year bull market without a significant correction, and the introduction of computerized trading.  As the economy was fundamentally ‘healthy’ so it did not last.  Indeed, the profitability of capital in the major economies was rising and did not peak until the late 1990s (although there was a slump in 1991).  So 1987 was what Marx called a pure ‘financial crash’ due to the instability inherent in speculative capital markets.

But that is not the case in 2020.  This time the collapse in the stock market will be followed by an economic recession as in 2008.  That’s because, as I have argued in previous posts, now the profitability of capital is low and global profits are static at best, even before COVID-19 erupted.  Global trade and investment have been falling, not rising.  Oil prices have collapsed, not risen.  And the economic impact of COVID-19 is found first in the supply chain, not in unstable financial markets.

What will be the magnitude of the slump to come?  There is an excellent paper by Pierre-Olivier Gourinchas that models the likely impact.  He shows the usual pandemic health diagram doing the rounds. Without any action, the pandemic takes the form of the red line curve, leading to a huge number of cases and deaths.  With action on lockdowns and social isolation, the peak of the (blue) curve can be delayed and moderated, even if the pandemic gets spun out for longer.  This supposedly reduces the pace of the infection and the number of deaths.

Public health policy should aim to “flatten the curve” by imposing drastic social distancing measures and promoting health practices to reduce the transmission rate. Currently Italy is following the Chinese approach of total lockdown, even if it may be closing the stable doors after the virus has bolted.  The UK is attempting a very risky approach of self-isolation for the vulnerable and allowing the young and healthy to get infected in order to build up so-called ‘herd immunity’ and avoid the health system being overwhelmed.  What this approach means is basically writing off the old and vulnerable because they are going to die anyway if infected and avoiding a total lockdown that would damage the economy (and profits).  The US approach is basically to do nothing at all: no mass testing, no self-isolation, no closure of public events; just wait until people get ill and then deal with the severe cases.

We could call this latter approach the Malthusian answer. The most reactionary of the classical economists in the early 19th century was the Reverend Thomas Malthus, who argued that there were too many ‘unproductive’ poor people in the world, so regular plagues and disease were necessary and inevitable to make economies more productive.

British Conservative journalist Jeremy Warner argued this for the Covid-19 pandemic which ‘primarily kills the elderly’. “Not to put too fine a point on it, from an entirely disinterested economic perspective, the COVID-19 might even prove mildly beneficial in the long term by disproportionately culling elderly dependents.” Responding to criticism ‘Obviously, for those affected it is a human tragedy whatever the age, but this is a piece about economics, not the sum of human misery.’ Indeed, that’s why Marx called economics in the early 19th century – the philosophy of misery.

The reason that the US and British governments won’t impose (yet) draconian measures, as in China eventually and now in Italy (belatedly) and elsewhere, is because it will inevitably steepen the macroeconomic recession curve. Consider China or Italy: increasing social distances has required closing schools, universities, most non-essential businesses, and asking most of the working-age population to stay at home. While some people may be able to work from home, this remains a small fraction of the overall labour force. Even if working from home is an option, the short-term disruption to work and family routines is major and likely to affect productivity. In short, the best public health policy plunges the economy into a sudden stop.  The supply shock.

The economic damage would be considerable. Gourinchas attempts to model the impact. He assumes that relative to a baseline, containment measures reduce economic activity by 50% for one month and 25% for another month, after which the economy returns to the baseline. “That scenario would still deliver a massive blow to headline GDP numbers, with a decline in annual output growth of the order of 6.5% relative to the previous year. Extend the 25% shutdown for just another month and the decline in annual output growth (relative to the previous year) reaches almost 10%!”  As a point of comparison, the decline in output growth in the U.S. during the 2008-09 `Great Recession’ was around 4.5%. Gourinchas concludes that “we are about to witness a downturn that could dwarf the Great Recession.”

At the peak of the Great Recession, the US economy was shedding jobs at the rate of 800,000 workers per month, but the vast majority of people were still employed and working. The unemployment rate peaked at `just’ 10%. By contrast, the coronavirus is creating a situation where – for a brief amount of time – 50% or more of people may not be able to work. The impact on economic activity is comparatively that much larger.

The upshot is that the economy, like the health system, faces a ‘flatten the curve’ problem. The red curve plots output lost during a sharp an intense downturn, amplified by the economic decisions of millions of economic agents trying to protect themselves by cutting spending, shelving investment, cutting down credit and generally hunkering down.

What to do to flatten the curve?  Well, central banks can and are providing emergency liquidity to the financial sector. Governments can deploy discretionary targeted fiscal measures or broader programs to support economic activity. These measures could help `flatten the economic curve’, i.e. limit the economic loss, as in the blue curve, by keeping workers paid and employed so they can meet bills or have bills delayed or written off for a period.  Small businesses could be funded to ride out the storm and banks bailed out, as in the Great Recession.

But a financial crisis is still a high risk.  In the US, corporate debt has risen and is concentrated in bonds issued by the weaker companies (BBB or lower).

And the energy sector is being hit with a double whammy as oil prices have plunged. Bond risk premia (the cost of borrrowing) have rocketed in the energy and transport sectors.

Monetary easing certainly won’t be enough to flatten the curve.  Central bank interest rates are already near, at or below zero.  And the huge injections of credit or money into the banking system will be like ‘pushing on a string’ in its effect on production and investment. Cheap financing won’t speed up the supply chain or make people want to travel again. Nor will it help corporate earnings if customers aren’t spending.

The main economic mitigation will have to come from fiscal policy. The international agencies like the IMF and World Bank have offered $50bn. National governments are now launching various fiscal stimulus programmes.  The UK government announced a big spend in its latest budget and the US Congress has agreed an emergency spend.

But is it enough to flatten the curve if two months of lockdown knock back most economies by a staggering 10%?  None of the current fiscal packages come anywhere near 10% of GDP.  Indeed, in the Great Recession, only China delivered such an amount.  The UK government’s proposals amount to just 1.5% of GDP maximum, while Italy’s is 1.4% and the US at less than 1%.

There is a chance that by the end of April we will have seen the global total number of cases peak and begin to decline.  That is what governments are hoping and planning for.  If that optimistic scenario happens, the coronavirus will not disappear.  It become yet another flu-like pathogen (which we know little about) that will hit us each year like its predecessors.  But even two months lockdown will incur huge economic damage. And the monetary and fiscal stimulus packages planned are not going to avoid a deep slump, even if they reduce the ‘curve’ to some extent.  The worst is yet to come.

Let’s get fiscal!

March 9, 2020

How to grease the aching wheels of a sickening world capitalist economy?  Let’s get fiscal is the universal cry of economists and policy makers.  The COVID meltdown and impending global recession is forcing authorities to consider fiscal stimulus.

Monetary policy is running out of ammunition and was not working anyway in restoring business investment, productivity and growth even before the virus epidemic. The US Federal Reserve cut its policy rate (the floor for all interest rates) by ½% last week and plans more cuts. It has some room to do so.  The European Central Bank (ECB) may follow this week and perhaps the Bank of England too. But these banks have already got their policy rates near zero, so they don’t have much more to offer. The Bank of Japan has been at zero for years. The Fed cut had no effect at all in stopping the meltdown in global stock markets: all it did was to weaken the US dollar.

So the cry is out for fiscal stimulus: i.e. increased government spending and tax cuts through deficit borrowing on budgets.  The IMF, OECD, World Bank etc are clamouring for governments to take action.  The IMF has offered $50bn in emergency funding.  The stricken Italians announced a $4bn injection, which will mean that the annual budget deficit will break Eurozone fiscal cap rules.  The new UK government presents its budget this week and will surely increase spending even if the ‘golden rule’ of balancing current expenditure with taxes is broken.  The US Congress passed a bill to provide funding for dealing with the virus and there may be more infrastructure plans soon, though the Trump administration has been running significant budget deficits already after its corporate tax cuts.  Even the fiscally prudent German government has announced increased spending.

But will any of this make a difference?  Will running fiscal deficits and increasing spending avoid a global recession or even reduce significantly the impact on jobs, incomes and trade?  That’s certainly what the Keynesians and post-Keynesians (including those in the Modern Monetary School) expect.  Take Paul Krugman, the world’s most popular Keynesian economist.  In his New York Times blog, he tells us that is it time for permanent fiscal stimulus.  Let’s get fiscal!

“I hereby propose that the next U.S. president and Congress move to permanently spend an additional 2 percent of GDP on public investment, broadly defined (infrastructure, for sure, but also things like R&D and child development) — and not pay for it.”  Krugman points out that monetary policy won’t work because the US economy is now in “a liquidity trap, that is, a situation in which monetary policy loses most of its traction, much if not most of the time. We were in a liquidity trap for 8 of the past 12 years; the market now appears to believe that something like this is the new normal.” Funny that he should point this out after initially advocating cheap money getting Japan out of its ‘lost decade’ back in 2000.

Anyway, the point is that “conventional (or even unconventional? MR) monetary policy doesn’t work in a liquidity trap, but fiscal policy is highly effective. The problem is that the kind of fiscal policy you really want — public investment that takes advantage of very low interest rates and strengthens the economy in the long run — is hard to get going on short notice.” So what we also need is “fiscal stimulus, like the one advanced by Jason Furman, basically involve handing out cash — a good idea given the constraints.”  But such ‘helicopter money’ is limited in effect over time as it goes into consumers’ pockets when we need “to invest in the future.”

So Krugman’s answer is to keep “investment-centered stimulus in place all the time. It would cushion the economy when adverse shocks hit.” through permanent budget deficits with spending on infrastructure and emergencies.  No need to worry about rising public debt, even though it is hitting over 100% of GDP in the US and servicing costs are already sucking funds from public services.  You see, interest rates are so low that servicing the debt is no problem.  Even at 100% of GDP and nominal interest rates of 2%, the interest cost is half that of nominal growth (real plus inflation) of 4% in the US economy.  So “in the long run, fiscal policy is sustainable if it stabilizes the ratio of debt to GDP. Because interest rates are below the growth rate, our hypothetical economy can in fact stabilize the debt ratio while running persistent primary deficits (deficits not including interest payments.)”.  So we can run a deficit of 2% to spend on a public investment program without driving up the debt burden.  “My permanent-stimulus plan would raise the debt/GDP ratio to only 150 percent by the year 2055. That’s a level the UK has exceeded for much of its modern history”.  So that’s all right then.

Krugman goes on in the usual Keynesian way that the ‘multiplier’ effect on growth from increased spending would more than pay its way: “the extra public investment will have a multiplier effect, raising GDP relative to what it would otherwise be. Based on the experience of the past decade, the multiplier would probably be around 1.5, meaning 3 percent higher GDP in bad times — and considerable additional revenue from that higher level of GDP.

The problem with this argument is manifold.  First, it assumes that US economic growth can be sustained at 2% in real terms with inflation of 2%.  In a slump, that nominal rate will dive and so the debt to GDP ratio will rise sharply. That could lead to increased debt servicing costs even with interest rates on bonds so low.

Second, there is no evidence that ‘permanent’ deficits work to stimulate the capitalist economy.  Krugman advocated such a policy for Japan and Japan has run permanent deficits for 20 years, but Japan has failed to sustain real GDP growth – indeed it was entering yet another slump just before the epidemic hit. Will increased government spending save the airlines, energy companies and other travel-based operations from collapse. How will it stop the dramatic fall in the oil price, leading to a collapse in investment in shale and energy companies across the world?

Some argue lower fuel prices will boost consumer spending, as would government cash handouts to households.  But if you are told not to travel, cheaper pump prices are not going to do much.  And what is also forgotten is that two-thirds of transactions in a modern capitalist economy are business to business, not business to consumers.  So what matters is the investment and trading decisions of businesses.  If your company sacks you because of a slump in profits, having a cash handout from the government is unlikely to stimulate you to buy more things and services.

Krugman advocates an extra 2% points of government investment through deficit financing. If implemented, that would take government investment to GDP in the US to about 5% – a post-war high. And yet business and real estate investment is 15-20%.  If that were to fall by 25% in a slump, the downward impact would be double Krugman’s stimulus package.  So unless there was a huge shift from capitalist to state investment, such deficit spending would be insufficient to reverse or avoid a slump in capitalist investment. Only China has ever adopted such a sufficiently large use of government investment in an economy and succeeded in reducing or avoiding a slump – as it did in 2008-9.

Krugman and most Keynesians only ever talk about fiscal stimulus in the G7 economies. Is it feasible to expect all those so-called emerging economies to resort to fiscal stimulus?  The global trade and investment slowdown has already hit emerging economies, several of which have slipped into outright slumps. Emerging markets face a serious “secular stagnation” problem. Growth in almost all cases has been far lower in the last 6 years than in the 6 years leading up to the Great Recession. And in Argentina, Brazil, Russia, South Africa and Ukraine, there has been no growth at all. Emerging markets (EMs) that in 2019 grew less than developed markets were Brazil, Uruguay, Turkey, South Africa, Ecuador, Mexico, Saudi Arabia and Argentina. EMs that barely outgrew developed markets were Russia, Nigeria and Thailand. Running huge budget deficits in these countries is condemned by the likes of the IMF and would probably induce a massive run on national currencies by foreign investors.  Instead governments there are imposing more austerity measures.

Most important, it is not correct to assume that the Keynesian multiplier (the ratio of the unit increase of real GDP from a unit increase in real government spending) is high at all.  There are many studies that put it at below 1 i.e. a 1% pt rise in government spending adds less than 1% pt in real GDP growth.  Just see all these studies:

https://voxeu.org/article/fiscal-multipliers-during-european-sovereign-debt-crisis

https://voxeu.org/article/fiscal-multipliers-and-fiscal-positions-new-evidence

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

https://voxeu.org/article/world-war-ii-america-spending-deficits-multipliers-and-sacrifice

As I have argued in previous posts, the key to restoring economic growth is investment and that depends on profitability.  In a predominantly capitalist economy, raising the profitability of capital has a much higher impact on growth (the Marxist multiplier) than government spending (the Keynesian multiplier).  http://gesd.free.fr/carch12.pdf.  Indeed, more government spending based on more debt or taxation can threaten the profitability of capital.  The blockage to government spending may not be from high and rising public debt when interest rates are near zero; but the blockage to business investment may well be from high and rising corporate debt when profitability of capital is low and falling.

Monetary easing has failed, as it has done before.  Fiscal easing, if adopted, will also fail.  A recession wipes out weaker capitalist companies and lays off unproductive workers.  The cost of production then falls and those companies left after the slump have higher profitability as the incentive to re-invest.  Capitalism can only get out of a recession by the recession itself.

Disease, debt and depression

March 5, 2020

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Marx’s law of profitability at SOAS

February 27, 2020

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In sum:

The law of value:  only labour creates value.

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

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

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

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

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

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

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

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

Japan: Abenomics revisited

February 19, 2020

The news that Japan’s real GDP dropped sharply in the last quarter of 2019 and the economy appears to be entering a new ‘technical’ recession (two consecutive quarterly contractions) in 2020 has produced a reaction from mainstream economics.

The worry is that ‘Abenomics’ – the economic policy approach of the current Liberal Democrat prime minister, Shinzo Abe – is failing.  Abenomics was introduced in 2012 after a fanfare of support and encouragement by such economic luminaries as Ben Bernanke, former head of the US Federal Reserve and now President of the American Economics Association;, and Paul Krugman, Nobel prize winner and leading Keynesian guru.  Both economists were invited by Abe to address the Japanese cabinet on the right policies to get Japan out of the stagnation that the economy had experienced through the 1990s and then after the impact of the Great Recession of 2008-9.

Bernanke, being a leading monetarist, proposed reducing interest rates and pumping huge injections of credit (quantitative easing) by the Bank of Japan into the banks –  just as he had done with the Federal Reserve in the US.  Paul Krugman supported that but also advocated increased government spending by running budget deficits in order to stimulate demand.  In essence, Abe was encouraged to adopt the two policy proposals of mainstream/Keynesian economics (monetary and fiscal) to get a capitalist economy out of stagnation and the recurrence of a slump.  Indeed, these policies are exactly what is proposed now to get the world capitalist economy out of its low growth in GDP, investment and productivity in 2019.

Abe adopted these policies as two of the three ‘arrows’ of Abenomics.  The other arrow was ‘structural reform’, a nice name for ‘neoliberal’ policies of reducing labour rights, privatisations, pensions and holding down wages so that costs of production are reduced and profitability of capital is raised.  At the time, I called Abenomics a Keynesian/neoliberal mix.  And I said Abenomics will prove to be a failure because “Keynesian policies in the 1990s did not work for Japan and they probably won’t work in this decade either.”  I concluded that “Japan now has a policy recipe that the IMF in its new anti-austerity mode would approve: fiscal and monetary stimulus along with reducing the power of labour and government regulation.  So Japan’s experiment combines all known mainstream economic potions in one bottle to take on the ‘unknown unknowns’.  Watch this space.”

Well, after watching, we find that Abenomics has not worked and Japan is heading back into another slump after a yet another lost decade of stagnation.  So what is the response of the mainstream?  The Financial Times editorial was quick to tell us. “All the elements of Abenomics needed to work together to push the economy to a new balance: monetary stimulus to weaken the yen, fiscal stimulus to jump-start demand and structural measures such as trade deals to create growth opportunities and incentives for business investment. It was never going to be easy but this combination proved its worth. 2013 brought a sharp weakening of the yen and a burst of optimism.”

But then says the FT, the government tried to reduce its budget deficits and huge government debt ratios by introducing a consumption (sales) tax that hit fragile consumer spending and demand has collapsed.  The answer is that “the only sensible action Mr Abe can take in the short-term — other than a politically impossible reversal of the tax rise — is more fiscal stimulus. The problem, as it has been throughout the past seven years, is not Abenomics. The problem is not enough of it.”  Paul Krugman was also quick to support the FT’s message “If you have zero interest rates and a weak economy nonetheless, you need fiscal stimulus, not austerity.” The IMF also echoes this view:Japan needs to strengthen the mutually-reinforcing policies of “Abenomics”—including monetary easing, flexible fiscal policy, and structural reforms (particularly labor market reforms).”

But were a tax hike and reduced budget deficits (ie ‘austerity’) the cause of this new recession? Would more Abenomics really do the trick after failing for the last eight years?  It’s true that the annual budget deficit as a% of GDP has been falling since 2010 but throughout the period of the lost decade of the 1990s, budget deficits were widened sharply and yet Japan stagnated.  And the annual deficits have been higher since the Great Recession than in most of the 1990s.

Despite nearly three decades of government budget deficits, Japan has stagnated with an average real GDP growth rate of 1%, interspersed with recurring ‘technical’ recessions.  Indeed, Japan’s fastest growth period was from 2002-2007, when austerity was imposed by Koizumi!

So history does not support the Keynesian policy solution.  Moreover, it does not augur well for the policy conclusions of Modern Monetary Theory (MMT).  MMT exponents argue that governments should run ‘permanent’ budget deficits to boost government spending to the point where ‘full employment’ is achieved.  There would be no need to worry about the size of government debt because a country like Japan, which services that debt from Japanese citizens’ savings through the banks buying government bonds, will never default.

It’s true that Japan is unlikely to default on its debt, the highest public debt ratio in the world, particularly with interest at or near zero.  But on the other hand, Japan has done exactly what MMT suggests and has run permanent government deficits, spending it on construction and other projects and yet Japan’s economy has stagnated.

The MMT retort could be to say that the positive result of these deficits is that there is full employment in Japan.  The official unemployment rate is at a record low of 2.2%.

And employment has rocketed.

But this is a phenomenon that has been repeated in other G7 economies.  Both the UK and the US also have record low official unemployment rates and the rate in the Eurozone has also dropped sharply in the last ten years.  But in all these countries, this employment is not in well-paid, secure jobs, with training and career prospects.  Most are in ‘precarious’, low paid, low skill work.

In Japan, most of the new employees are women and older people who are taking up jobs in health and social care, temporary and part-time, the lower end of wage market. More than a third of the Japanese workforce is working in non-regular positions. Factors underlying this situation include the increasing number of older people who become contract or temporary workers after retirement.

Within the working-age population (15–64), the number of regular employees rose by 460,000 to 33.2 million, and the total for employees aged 65 and over climbed 100,000 to 1.1 million.  Meanwhile, there were 17.2 million non-regular employees aged 15 to 64 in 2017, down 30,000 on the previous year. The number of workers 65 and older with non-regular jobs rose by 150,000 to 3.2 million.

These workers are having to do two or more jobs to make ends meet.  Some people are working 70-hour weeks out of multiple jobs. According to Lancers research, some 4.5 million full-time workers in Japan have second jobs, where they work, on average, between six and 14 additional hours each week, on top of any overtime hours they clock at their primary job; a small number of them work up to 30 or 40 hours per week at their second jobs.

In the food-service industry, workers are in such short supply that McDonald’s recently resorted to an expensive advertising campaign aimed at recruiting housewives and retirees to help out with its busiest shifts. Convenience-store chains have hired more foreign workers, while small and mid-sized manufacturing companies have increasingly turned to automation.

But the one recruitment strategy that hasn’t really taken hold is increasing wages! Instead, Japan’s corporations have chosen to sit on the piles of cash they’ve earned from Abe’s fiscal policy. Each spring, over the past six years of Abenomics, the leaders of Japan’s major industries have ceded remarkably little ground to unions during the annual wage negotiations known as shuntō. Overall, workers are spending an average of 11 percent more time to earn the same salary they were bringing home about 20 years ago, and some are working unpaid overtime on top of that.

Employ, pay them little and don’t invest.  That has been the policy of the capitalist sector in most of the major economies since the Great Recession and the result is that the productivity of labour has hardly risen.  In the case of Japan, the population has been falling and ageing.  So per capita income growth has been better than total GDP growth.  Per capita Japan’s real GDP is up 10.8% since 2010 while real GDP is up 9.6%.  Even so, a Malthusian solution (reducing the population) is hardly a way of raising incomes for those still living.  And the Malthusian solution is set to worsen over the next generation as Japan ages at a fast rate.

That brings us to the third arrow of Abenomics: so-called ‘structural reforms’.  Reducing the cost of production by deregulating the labour market, privatising and cutting taxes on profits etc – these measures aim to help boost the rate of exploitation and the profitability of capital in Japan.  As I said in 2012, the real purpose of Abenomics was to raise the profitability of Japanese capitalism, at the expense of labour.  Neoliberal measures were applied under Premier Koizumi at the end of the 1990s and they had some success in raising profitability.  So Japan’s economic growth was relatively better in the 2000s up to the Great Recession and the tsunami than in the 1990s.

That was because Japan’s corporate profitability improved. It did so because the then neo-liberal government of prime minister Koizumi opted for the restructuring of the banks, privatisation of state agencies and higher taxes on consumption.  This produced a short revival in profitability, at the expense of average living standards, reduced pensions and worse work benefits.

Abe applied some more.  He cut corporate profit taxes sharply – Trump-style

while he hiked employee social security contributions to reduce the burden for employers.

The outcome was a shift in the share of labour in national income towards profit share. Real wages per employee fell and, with it, household spending.

But this has not been sufficient to restore profitability to even pre-GR levels.

*This rate of return measure is compiled from IRR series in the Penn World Tables 9.1 with an estimated update for 2018 and 2019 using the AMECO database on NRR.

After the great hi-tech expansion and credit bubble burst in Japan at the end of the 1980s, the profitability of capital plummeted in Japan, and, with it, investment and output.  The Koizumi reforms and the global credit boom after 2001 helped to restore profitability somewhat.  But then came the Great Recession and profitability dropped again. The period of Abenomics saw a small recovery up to 2017, but profitability has fallen back again and remains near Great Recession lows.

This is the underlying causal factor behind low investment rates and stagnation – as it is in many other major capitalist economies.  Neither Monetarist not Keynesian stimulation (the first two arrows of Abenomics) have done anything to reverse that.  Structural reforms to reduce labour and other production costs might help profitability but politically that would be very difficult to impose.  Abenomics continues to fail.  More Abenomics, as suggested by the mainstream/Keynesian voices, won’t change that.

Trump’s trickle dries up

February 4, 2020

“The economy now has hit 3 percent. Nobody thought we’d be anywhere close. I think we can go to 4, 5, and maybe even 6 percent.” – Donald Trump, Dec. 16, 2017

Well, Trump’s boast turned to dust in 2019. US GDP grew by 2.3% in 2019, well below President Trump’s promise of 3%+ growth. The most recent GDP number proved that the tax cuts championed by Trump had no sustained impact on US growth.  Indeed , even the most optimistic forecasts see growth to stay well below 3% for the next few years. Of course, that won’t stop Trump in his State of the Union speech today in Congress proclaiming a huge rise in the living standards of working people under his reign.  Actually, cumulative growth under Trump has been lower than under both Obama and Bush Jnr.

US real GDP growth yoy (%)

Leading mainstream economist Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, used to serve as the chief economist and economic adviser to Vice President Joe Biden.  He points out that the Trump administration’s bullish forecast was based on the belief that the tax cut developed and passed by Trump and the Republicans at the end of 2017 would increase the economy’s trend growth rate. “Trump and his economic team have long argued that the tax cuts — especially the big drop in the corporate rate from 35% to 21% would kick off a virtuous cycle delivering lasting growth above the roughly 2 percent that has prevailed for the past two decades. The idea was that lower corporate rates would incentivize more capital investment in things like factories or large equipment and that this added capital stock would permanently boost the economy’s productive capacity.”

As Bernstein says, this is ‘trickle-down’ economics as popularized by economists like Art Laffer and Rober Mundell, wherein tax cuts targeted at investors trickle down through the broader economy, lifting growth, wages, and spinning off more tax revenue to help offset the tax cut’s initial cost.  But this has turned out to be nonsense.  On the contrary, real business investment has declined for three quarters in a row, the worst such stretch since the last recession.

Why did Trump’s trickle-down economics not work?  Bernstein answers that Keynes explains all.  You see, there is a lack of effective demand in the private sector.  And “Keynesian economics, in this context, argues that in periods when private sector demand is inadequate to achieve full employment, the government should step in and temporarily make up for the lost demand through deficit spending.” 

So it’s a lack of demand in the private sector.  It’s clearly not household consumption or demand, which continues to rise.  Indeed, Trump can boast that hourly wages (but not weekly earnings) are rising at nearly the same pace as they were just before the Great Recession in 2008 under Obama.

But it is business investment that is falling.  So, according to Bernstein, the capitalist economy needs “Keynesian fiscal jolts give economies a temporary boost by using, for a limited time, public-sector demand to offset lagging private-sector demand.”  Just for a limited time, mind; once capitalist investment is back on its feet, we can curb public investment and spending.  Although Bernstein notices that it may be necessary to “relentlessly go back to the Keynesian fiscal well year-after-year” or “we should expect such benefits to fade, as they have.  Bernstein decides that “given the corporate sector’s unwillingness to invest their elevated after-tax earnings…we should consider a large public investment program” to boost productivity and ‘human capital’ (skills and education) and also to mitigate the effects of global warming.

Yes, capitalist investment ‘demand’ is too low.  But what Bernstein, and for that matter Keynesians in general, never explain is why the capitalist economy gets into this state of a lack of demand.  Private sector demand is too weak, ie businesses are not investing enough in productive activities.   But why?  There is no answer from Bernstein – it seems it just happens every so often.  And when it does, government must intervene to “make up for the lost demand”.

Keynesian guru Paul Krugman wrote a short book in the depth of Great Recession.  It was entitled End this depression now! – with the exclamation mark prominent.  In it he said, it matters less why there was a slump (in demand); more important was to take action to boost government spending to end the slump (in demand).

But surely unless we know why such recessions (or for that matter slowdowns in investment growth) take place at recurring intervals, we shall be trying to judge forever the amount of ‘limited time’ that governments need to run budget deficits and spend more or less.  And such macro-management of capitalist economies has never been successful.

Actually, there is plenty of evidence that can explain the ups and downs of business investment.  It is not changes in interest rates; and it is not sudden changes in ‘business confidence’, as many mainstream economists argue.  Those are usually the consequence, not the cause of low demand.  The fundamental cause under capitalism is profitability and the movement of corporate profits.  The evidence for that is in abundance.

The US rate of profit on productive capital remains well below where it was in the late 1990s.  It was hardly boosted by the depreciation of assets in the 2008-9 recession.

Source: Penn World Tables 9.1 IIR series

And this applies to the current real GDP growth in the US.  Growth is much lower than Trump hoped for because businesses have not invested productively but used the extra cash from tax cuts to pay larger dividends to shareholders; or buy back their own shares to boost the price; or to shift profits abroad into tax havens.  They have not invested as much in new structures, equipment etc in the US because the profitability of such investments is still too low historically; and especially relative to investment in the ‘fictitious capital’ of the stock and bond markets, where prices have reached all-time highs.

Indeed, non-financial sector profits have fallen 25% since 2014!  Trump’s corporate tax cuts helped post-tax profits for a while, but pre-tax profits have continued to fall.

Source: US BEA NIPA tables

The bulk of productive investment decisions remain in the hands of big business.  Out of the 20% of US GDP in investment, only 3% is public investment and much of that is military spending.  Until that ratio is reversed, “relentless Keynesian” fiscal spending will no more boost growth than ‘trickle-down’ economics.  Only a good, deep recession can restore profitability by sharply reducing the costs of fixed assets and new investments for those businesses that survive.

The value in GDP

January 27, 2020

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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