Archive for the ‘Profitability’ Category

Global slump: the trade and technology trigger

May 26, 2019

Despite all the optimistic talk by President Trump about the state of the US economy, the latest data on economic activity and industrial production suggest that America is joining Europe and Japan in a sharp slowdown as we enter the second half of 2019.  And this is at a time when the trade and technology war between the US and China has moved up another gear and so threatens to trigger an outright global recession before the year is out.

JP Morgan economists report that the so-called flash May PMIs for the US, Europe and Japan G-3 point to a 0.7-pt decline, consistent with just 2.5% annual growth in global GDP. Purchasing Managers Indexes (PMIs) are surveys of company views on their current and future sales and purchases.  They have proved to be reasonable guides to actual production.  And 2.5% growth globally is considered to be the ‘stall speed’ for the world economy, below which a recession is indicated.

JP Morgan find that global manufacturing is suffering most – being nearly at 50 in the PMI (anything below 50 means contraction).  But services, which constitute 70-80% of most major economies (at least in the official definition), are also sliding towards the levels of the mini-recession of 2015-6.

Most concerning, “the global manufacturing and services expectations measures look set to fall roughly 2-pts in May and would push the indexes beneath the lows set in early 2016.”  (JPM).

Like other forecasters, the OECD’s Economic Outlook, published last week, predicts slower growth this year than last in most big economies — in some cases much slower. What is more, even in 2020, global growth will not return to the pace it reached in the past few years, it says.  Angel Gurría, its secretary-general, said: “The world economy is in a dangerous place.”

Up to now, it has been in Europe and Japan that signs of a slowdown and even an outright recession were visible.  But now the US economy may be joining them.  The US Manufacturing PMI dropped to 50.6 in May, implying almost stagnation. It was the lowest reading since September 2009 as new orders fell for the first time since August 2009 while output and employment rose less.

US Manufacturing PMI

The services sector also dropped back. The overall economic indicator showed the weakest expansion in the private sector since May 2016.  Then on Friday, we had actual data for US manufactured durable goods. In May new orders fell 2.1% from a month earlier in April 2019.  Transportation equipment, also down two of the last three months, drove the decrease.  The Atlanta Fed’s GDPNow model estimate (a very reliable indicator of future growth) puts US real GDP growth in the second quarter of 2019 at just 1.3%.

When we get to Europe, the latest figure for Europe’s powerhouse, German manufacturing activity, makes particularly dismal reading.  The May reading pointed to a fifth month of contraction in the manufacturing sector, as new orders continued to fall sharply largely due to lower demand across the car industry and the effects of customer destocking. In addition, the rate of job losses accelerated to the quickest since January 2013.

German manufacturing PMI

Even with the services sector holding up, overall activity in Germany looks very weak. And the business morale survey is at its lowest for nearly five years. Activity in the Eurozone as a whole is also at a near five-year low.

Eurozone composite PMI

Japan’s economy is “worsening” for the first time in more than six years, according to one of the government’s main indicators.  The index of economic conditions compiled by Japan’s Cabinet Office fell 0.9% from February to March. That prompted government statisticians to cut their assessment of the economy from “weakening” to “worsening” — the lowest of five levels. The last time the Cabinet Office used the bottom grade to describe the economy was in January 2013.  Barclays economist Kazuma Maeda said that the “mechanical” downgrade in the assessment did not necessarily imply that a downturn was in prospect. But he added: “That said, there is mounting concern about an economic recession”

Nominal activity growth in Japan, which can be viewed as an up-to-date proxy for nominal GDP, has been falling since the end of 2017, since the decline in real output growth has been greater than the rise in inflation. On the core nominal activity measure, the rate of increase has now dipped to around 0.5 per cent, lower than it was at bottom of the 2016 deflationary shock.

As an aside, it is worth noting that Japan is supposed to be the poster child of Keynesian fiscal and monetary policy.  The Bank of Japan has negative interest rates and has bought virtually all government bonds available from the banks, as well corporate debt and stock, through massive credit injections in the last ten years.  And it has consistently run budget deficits to try and boost the economy; so much so that the government debt to GDP is the highest in the world. But nominal GDP growth and prices continue to stagnate.

Those who support Modern Monetary Theory should take note.  Yes, you can run budget deficits permanently and run up public debt without consequences for inflation or even the currency in an economy like Japan.  But you cannot get a permanent boost to growth if Japan’s corporations won’t invest or the government won’t either.  Creating money does not necessarily create value. The irony is that Prime Minister Abe plans to raise the sales tax later this year to try and lower the deficits and debt ratios in line with neo-liberal policy. The last time he did that, Japan went into recession.

Outside the imperialist blocs, the so-called ‘emerging market’ economies are also slowing.  Turkey, Argentina, Pakistan are already in recession.  Brazil and South Africa are on the brink.  And capital flows to these economies from the imperialist bloc are drying up, while public sector investment has nearly ground to a halt.

Net public investment in emerging market countries has fallen below 1% of GDP for the first time on record, raising fears of widening infrastructure gaps. The share of national output developing world governments are spending on investment in assets such as schools, hospitals and transport and power infrastructure, net of depreciation of the existing capital stock, has fallen from 3.3 per cent in 1997 to a low of just 0.9 per cent last year, according to data from the IMF. This is well below what the IMF believed was needed to meet basic needs and allow countries to close infrastructure gaps that are slowing the pace of development.

Indeed, if you exclude China, then investment growth is dropping in the rest of the G20 economies.  Only the US and India are keeping investment positive.  If they should falter, as investment is the driver, a global recession would follow.

If China is stripped out of the data, the weighted average for the rest of the emerging world is 3.9 per cent of GDP, markedly lower than the 4.8 per cent figure seen as recently as 2010. The 49 low-income developing countries, mainly in Africa but also encompassing the likes of Vietnam, Bangladesh and Moldova, are even more badly placed, with the IMF calculating they need to invest an additional 7.1 per cent of GDP a year until 2030 on roads, electricity and water alone. With health and education added in, this rises to a colossal 15.4 per cent of GDP, or $528bn, a year.

Low profitability explains above all else why corporate investment has been so weak since 2009.  What profits have been made have been switched into financial speculation: mergers and acquisitions, share buybacks and dividend payouts.  Also, there has been some hoarding of cash by the FAANGS.  All this is because the profitability of productive investment remains historically low.

The other key factor in the long depression has been the rise in debt, particularly corporate debt.  With profitability low, companies have run up more debt in order to fund projects or speculate.  The big companies like Apple or Microsoft can do this because they have cash hoards to fall back on if anything goes wrong; the smaller companies can only manage this debt spiral because interest rates remain at all-time lows and so servicing the debt is still feasible – as long as there is not a downturn in sales and profits.

When fundamentals like profitability and debt turn sour for capital, then anything can trigger a slump.  Each crisis has a different trigger or proximate cause.  The 1974-5 international recession was triggered by a sharp rise in oil prices and the US coming of the dollar-gold standard.  The 1980-82 slump was triggered by a housing bubble in Europe and a manufacturing crisis in major economies.  The 1990-2 recession was triggered by the Iraq war and oil prices.  The 2001 mild recession was the result of the bursting of the bubble.  And the Great Recession was started with the collapse of the housing bubble in the US and ensuing credit crunch brought on by the international diversification of credit derivatives. But underlying each of these crises was a downward movement in the profitability of productive capital and eventually a slowdown or decline in the mass of profits. (The profit investment nexus).

It now seems possible that brewing trade war between the US and China could be a new trigger for a global recession.  Certainly, US investment bank, Morgan Stanley has raised such a risk. “While a temporary escalation of trade tensions could be navigated without much damage at all, a lasting breakdown would inflict serious pain. If talks stall, no deal is agreed upon and the U.S. imposes 25% tariffs on the remaining circa $300 billion of imports from China, we see the global economy heading towards recession,” the bank’s analysts said in a note.

The OECD also highlighted the danger coming from the trade war.  According to the OECD, international trade has slowed abruptly. Its rate of increase has fallen from 5.5 per cent in 2017 to what the OECD thinks will be 2.1 per cent and 3.1 per cent this year and next respectively. That is lower than projected economic growth, meaning trade is shrinking as a share of global economic activity.  Since 2009, it had been the slowdown in investment growth that has led to a slowdown in trade growth; and the IMF estimated that three-quarters of the trade growth slowdown could be attributed to weak economic activity, especially in investment.  But now the boot seems to be on the other foot.

The OECD numbers on aggregate investment are corroborated by more fine-grained data. Most big US companies’ investment spending, as reported in regulatory filings, has stalled dramatically. A Wall Street Journal investigation of 356 of the S&P 500 companies found that they spent only 3 per cent more on capital in the first quarter year on year; down from a 20 per cent growth rate a year earlier. For the biggest capital spenders, investment fell outright. Trade frictions seem the main cause — directly for businesses particularly reliant on Chinese demand, such as specialised chip producers, as well as indirectly through the increased uncertainty spreading through the economy. Another survey has found that many US companies operating in China are also holding off on investing.

Morgan Stanley also warned not underestimate the impact of trade tensions in a number of ways.  Firstly, the impact on the U.S. corporate sector would be more widespread as China could put up non-tariff barriers such as restriction of purchases. Given the global growth slowdown that would follow, profits from firms’ international operations would be hit and companies would not be able to fully pass through the tariff increases to consumers.

What makes it likely that the trade war will not be resolved amicably to avoid a global recession is that the battle between the US and China is not just over ‘unfair trade’, it is much more an attempt by the US to maintain its global technological superiority in the face of China’s fast rise to compete. The attack on Huawei, globally organised by the US, is just a start.

A chain reaction is under way as a giant industry braces for a violent shock.  US Investment bank Goldman Sachs has noted that, since 2010, the only place where corporate earnings have expanded is in the US.  And this, according to Goldmans, is entirely down to the super-tech companies.  Global profits ex technology are only moderately higher than they were prior to the financial crisis, while technology profits have moved sharply upwards (mainly reflecting the impact of large US technology companies).

The growth slowdown is being driven by low investment and profitability in most economies and in most sectors.  Only the huge tech companies in the US have bucked this trend, helped by a recent profits bonanza from the Trump tax ‘reforms’.  But now the technology war with China will hit tech profits too – even if the US and China reach a trade deal.

The IMF is very concerned.  New IMF chief economist, Gita Gopinath, commented. “While the impact on global growth is relatively modest at this time, the latest escalation could significantly dent business and financial market sentiment, disrupt global supply chains, and jeopardise the projected recovery in global growth in 2019.”  Roberto Azevêdo, director general of the World Trade Organization, said the US-China trade war was hurting the global economy. The WTO has been bypassed by the US as the Trump administration aims its attacks directly on China.  Azevêdo said that: “$580bn [£458bn] of restrictive measures were introduced in the last year, seven times more than the previous year. This is holding back investors, this is holding back consumers, and of course it is having an impact on the expansion of the global economy. Everyone loses … every single country will lose unless we find a solution for this.”


India: another China or another Brazil?

May 19, 2019

It’s five years since the right-wing nationalist Bharatiya Janata Party (BJP), led by Narendra Modi swept back to power in India’s Lok Sabha (parliament) elections.  Now in the world’s third largest economy (in PPP terms), over 800m Indians have voted in elections lasting six weeks to re-elect its leaders.

The BJP ruled before, from 1998 to 2004. But the BJP then proved to be an unreliable tool for Indian capital, riddled as it is with former members of what is basically a Hindu religious fascist party, the Rashtriya Swayamsevak Sangh (RSS), an organisation modelled on Mussolini’s Black Brigades. Modi was a long time member of the RSS who then moved seamlessly into the BJP.  But in the last five years, Modi is now seen as leading a ‘business-friendly’ government with what he likes to call Modinomics.

Modinomics boils down to neoliberal economic policies aiming to raise the rate of exploitation of labour so that the profitability of capital is boosted and thus provide an incentive to invest.  To do this, Modi has introduced new sales taxes on the population and abolished high-denomination banknotes in an attempt to ‘demonetise’ the economy and put the banks more firmly in control of credit.

In the first years of Modinomics it seemed that India was leaping forward, with real GDP growth even faster than in China and with rising incomes for the rural workers and farmers that the BJP relies on principally for its votes, while being backed by big business and Indian capital.  But those early years have given way to increasing problems.  The world’s fastest growing major economy is now headed for a slowdown.  The official economic growth figures slowed to 6.6% in the three months to December, the slowest in six quarters and now the same rate as in China.

And these GDP figures are dubious anyway. Back in 2015, India’s statistical office suddenly announced revised figures for GDP.  That boosted GDP growth by over 2% pts a year overnight.  Nominal growth in national output was now being ‘deflated’ into real terms by a price deflator based on wholesale production prices and not on consumer prices in the shops, so that the real GDP figure rose by some way. Moreover, this revision was not applied to the whole economic series, so nobody knows how the current growth figure compares with before 2015. Also the GDP figures are not ‘seasonally adjusted’ to take into account any changes in the number of days in a month or quarter or weather etc. Seasonal adjustment would have shown India’s real GDP growth well below the official figure.  A better gauge of growth may be found in the industrial production data.  And that has just hit zero.

Sales of cars and SUVs have slumped to a seven-year-low. Tractors and two-wheelers sales are down. Net profits for 334 companies (excluding banks and financials) are down 18% year-on-year, according to the Financial Express newspaper.  The vehicle industry’s rapid expansion under the Modi government had prompted predictions that India would soon overtake Japan and Germany to become the world’s third-biggest motor market. But last month, passenger vehicle sales were 17.7% lower than a year before.

The car sector has become one of the most prominent victims of a debt market crunch that began in the ‘shadow banking’ market in India last September, when defaults by infrastructure and finance group IL&FS triggered sharp outflows from mutual funds. That drained money from the commercial paper market, a major source of funding for nonbank financial companies that had driven the growth of loans as they took market share from the ailing state-controlled banks. The so-called NBFCs were particularly active in areas such as vehicle loans and lending to small businesses.

That’s not all. In March, passenger growth in the world’s fastest growing aviation market expanded at the slowest pace in nearly six years. Demand for bank credit has spluttered. Hindustan Unilever, India’s leading maker of fast moving consumer goods, has reported March quarter revenue growth of just 7%, its weakest in 18 months.

It seems that middle-class ‘consumer boom’ initiated by Modi has burnt itself out.  There is a fall in both urban and rural incomes. A crop glut has seen farm incomes drop. Kaushik Basu, former chief economist of the World Bank and professor of economics at Cornell University, believes the slowdown is “much more serious” than he initially believed. Export growth has been close to zero for the last five years. And now the domestic consumer boom is weakening.

Unlike China, India seems to be heading into what the World Bank has called a ‘middle-income’ trap, where the vast majority of population remain in poverty while the top 10% live well and spend, but there is no investment or drive to deliver employment, training, education and housing for the rest.  India will end up like Brazil, not China, Korea or Japan – just going nowhere.  Under Modi, unemployment is at an all-time high. The “Make in India” plan seems to have flopped. And no Boeing, Airbus or Apple has come to invest in factories in India.

Two-thirds of Indian workers are employed in small businesses with less than ten workers, where labour rights are ignored – indeed most are paid on a casual basis and in cash rupees, the so-called ‘informal’ sector that avoids taxes and regulations. India has the largest ‘informal’ sector among the main so-called emerging economies.  But small businesses are not very productive.

Indeed, India has the lowest productivity levels in Asia.  Between 1950 and 1980, labour productivity growth averaged a meagre 1.7%. The two decades to the turn of the millennium saw that average more than double to 3.8%. This was the period when India’s manufacturing and services sectors took off, leaching labour from the lower productivity agricultural sector. Labour productivity growth peaked at 10.2% in 2010 and has been on the decline since.  In 2016, it stood at 4.75%. This does not bode well for achieving the growth targets that are needed to raise living standards.

Productivity would rise if generally underemployed peasants could move to the cities and get manufacturing jobs in the cities. This is how China has transformed its workforce, of course, to be exploited more by capital, but also to raise productivity and wages. China has done this through state planning of labour migration and huge infrastructure building. India cannot, so its rate of urbanisation is way behind that of China. Indian and foreign capital are still not fully exploiting the huge reserves of mainly youthful labour for profit. As a result, employment growth is pathetically slow. An estimated 10-12m young Indian people are entering the workforce each year but many cannot find jobs due to their paucity or because they lack the right skills.

Already, India is one of the most unequal societies in the world.  The richest 1% of Indians now own 52% of the country’s wealth, according to the latest data on global wealth from Credit Suisse Group. The richest 10% of Indians have increased their share of the pie from 68.8% in 2010 to 77% by 2018.  In sharp contrast, the bottom half of the Indian people own a mere 4% of the country’s wealth.

The Gini coefficient is one way of measuring inequality, with a reading of 100% denoting perfect inequality and zero indicating perfect equality. According to Credit Suisse, the Gini wealth coefficient in India has gone up from 81.3% in 2013 to 85.4% in 2018, which shows inequality of income is very high and rising.

As the Credit Suisse report says: “While wealth has been rising in India, not everyone has shared in this growth. There is still considerable wealth poverty, reflected in the fact that 91% of the adult population has wealth below $10,000. At the other extreme, a small fraction of the population (0.6% of adults) has a net worth over $100,000.”

And there is the issue of basic resources for India’s 1.2 billion people. Mechanically pumped groundwater now provides 85% of India’s drinking water and is the main water source for all uses. North India’s groundwater is declining at one of the fastest rates in the world and many areas may have already passed “peak water”. The World Bank predicts that a majority of India’s underground water resources will reach a critical state within 20 years.

The big demand from Indian capital is to cut back the size of the state. Bureaucratic and inefficient as it is, India’s central and state government, as well as state enterprises set up in the early days of ‘socialist’ India, have provided some solidity to India’s economy. But the multi-nationals and large Indian capitalists want this to go. Central and state government run up significant annual budget deficits because they subsidise food and fuel for the millions of poorer Indians. Those deficits are funded by borrowing and the cost of that borrowing has steadily eaten into the available revenue from taxes, leaving little for education, health or transport.

Government tax revenues are low because Indian companies pay little tax and rich individuals even less. Inequality of income in India is not as high as in China, Brazil or South Africa, but it is probably higher than the official gini index because of huge hidden income among the rich and it has been rising.  According to the OECD, income inequality has doubled in India since the early 1990s. The richest 10% of Indians earn more than 12 times as much money as the poorest 10%, compared to roughly six times in 1990.

This inequality is not down to the Modi government alone.  Previous Congress-led governments perpetuated this inequality too – indeed, under the corrupt Gandhi dynasty, made it worse.  That’s why the BJP is probably going to stay in power if with a reduced number of seats.

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

Indian capital’s profitability had been falling steadily (if from a high ‘emerging market’ level) even before the global economic slump started. It has fallen further since and is now some 20% below levels in the 1980s. The boom double-digit growth years of the early 2000s, when all the talk was about India’s software outsourcing industry and new auto companies, seem unlikely to return without drastic reductions in the share of value going to labour.

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

The answer for Indian capital and endorsed by Modi is privatisation, cuts in food and fuel subsidies and a new sales tax, a tax that is the most regressive way to get revenue as it hits the poor the most.  The aim here, as it always is with neoliberal economic policy, is to raise the rate of exploitation of labour so that the profitability of capital is boosted and thus provide an incentive to invest, something Indian capital is refusing to do right now.

Just as in 2014, India’s electorate are faced with a choice between a corrupt, family-run party backed by big business and landholder interests and an extreme nationalist party (with increasing backing from big business and foreign investors).  For the moment, Modi wins their vote (just).

Australia: luck running out?

May 17, 2019

Australia has a general election on Saturday.  The opposition Labor Party has been leading in the polls and given a redistribution of the seats in parliament that favours Labour, it is expected to gain office and defeat the incumbent coalition of the National and Liberal parties.

The usual thing said about Australia’s economy is that it is the ‘lucky country’.  It was the only OECD economy to avoid a slump during the Great Recession and has enjoyed 28 consecutive years of real GDP growth.

But there have been quarters of downturn and when the sharp increase in population (mainly through immigration) is taken into account (up from 15m in 1980 to 25m now), per capital growth is not so stellar – about 1.7% a year compared to average annual real GDP growth of 3.1%.

Even so, Australians have experienced a much faster improvement in national output and real incomes than just about any other advanced capitalist economy in the last 30-40 years.

However, growth has been slowing significantly in the last few years, down to 2.3% yoy on the latest data.  Indeed stripping out population growth, real GDP per capita has been no more than 1% a year since the start of the global Long Depression ten years ago.

Apart from immigration, Australia has been ‘lucky’ because of its close proximity to the fastest growing giant economy of China over the last 25 years. “Australia was uniquely placed to benefit from China and Asia’s long-term growth by exporting resources, agricultural produce and services to the region”.  Also the economy benefited from an influx of skilled labour through immigration from all parts but also immigrants who came with wealth of their own to invest.” (Hockey)

The relative success of Australian capitalism has been expressed in the profitability of its capital.  I collated three measures of Australia’s profitability as a capitalist economy since the early 1980s and profitability has risen by 40-60% – with only some signs of flattening out since the Great Recession.

But Australia is heavily dependent on its exports to China and world growth in general.

China is now the largest source of foreign investment in Australia, leapfrogging the US. Total investment in real estate was $74.6bn, up from $51.9bn a year earlier.  And it’s mainly in real estate.  This has led to a massive house price boom.  Household debt has rocketed to 165% of personal disposable income.

And although unemployment rates are relatively low, much of the new employment has been in temporary contracts and part-time.  As a result, while the employment participation rate has been rising and the official unemployment rate has been falling during the housing boom, the ‘underemployment’ rate is near all-time highs.

Wage growth is also slowing.

You can get a job in Australia, but don’t expect it to be on a permanent contract or full-time.  As a result, productivity growth has fallen from near 2.5% a year in the 1990s to under 1% a year now as capital investment is stagnating.

Australia may be a ‘lucky country’ but luck can change.  The economy relies on raw material exports and so is vulnerable to any plunge in commodity prices and if China were to slow down or the trade war with the US really spike, then Australia is vulnerable.  The OECD put it this way “a negative external shock cold prompt a sharp cut to incomes, a rise in unemployment and downturn in consumption.  This would increase mortgage stress and further escalate a fall in house prices.  A currency depreciation would also be likely.”

Ratings agency Moody’s has just forecast that Sydney house prices will drop by 9.3% this year, revised from its January prediction of 3.3%. It’s a similar story in Melbourne, with Moody’s original January forecast of a 6% decline updated most recently to an 11.4% fall this year. The Reserve Bank of Australia warned that more than 3% of Australian homes are in negative equity.

There is little to choose between the current government and the opposition on economic policy.  Both are pledged to cut back on government spending, cut taxes and yet run tight fiscal budgets.  It seems that government services and employees are the fall guys here.

And then there is climate change.  Of all the major advanced capitalist economies, global warming is likely to damage Australia more than any other.  Climate change in Australia has been a critical issue since the beginning of the 21st century.  Australia is becoming hotter and will experience more extreme heat and longer fire seasons. In 2014, the Bureau of Meteorology released a report on the state of Australia’s climate that highlighted several key points, including the significant increase in Australia’s temperatures (particularly night-time temperatures) and the increasing frequency of bush fires, droughts and floods, which have all been linked to climate change.

Yet the economy depends very much on its fossil fuel exports and developing the mining industry.  Non-renewable fossil fuels still account for about 85 percent of Australia‘s electricity generation. Australia is one of the world’s largest per capita emitters – producing some 1.3 percent of global carbon emissions in 2017 with only 0.3 of the world’s population.

While the centre-right government insists it is on track to meet Australia’s commitments under the 2020 Kyoto targets, it also seeks to placate the country’s powerful extractive industries and energy sector. A week prior to the election, incumbent prime minister Morrison announced $20.7m for a new school of mines and manufacturing at Central Queensland University.

Problems for Australian capital are hotting up in many ways.

Inequality and risk – both rising

May 14, 2019

The US Federal Reserve governor Lael Brainard, in a speech in Washington, revealed the extent of rising inequality in the US.  Using the latest income and wealth data, she outlined that the incomes and wealth of working-class (the American establishments like to use ‘middle-class’) households in the US have been squeezed in the last 50 years and particularly in the last 20 years.

Average American households have still not fully recovered the wealth they lost in the Great Recession. At the end of 2018, the average middle income household had wealth of $340,000 (mainly a home), while those in the top 10% had $4.5 million, up 19% from before the recession. The latter’s rise was mainly due to the surge in the stock market.

According to the Fed’s consumer survey, one third of middle income adults say they would borrow money, sell something or not be able to pay an unexpected $400 expense. One fourth said they skipped some kind of medical care in 2018 because of its cost.  Nearly three in 10 middle-income adults carry a balance on their credit card most or all of the time. Meanwhile the share of income spent on rent by middle class renters rose to 25% in 2018 from 18% in 2007, a rise of 40%.

The gini coefficient (the basic measure of inequality) for incomes is now at its highest ever in the US, at a record breaking 0.48 up from 0.38 in the late 1960s – a rise of 30% (see graph above).

Brainard suggested that so bad is this development that reasonable living standards for most Americans will never return.  “In recent years, households at the middle of the income distribution have faced a number of challenges,’’ Brainard said. “That raises the question of whether middle-class living standards are within reach for middle-income Americans in today’s economy.’

Such a situation also threatened to weaken the economy with lower consumption per person.  “Research shows that households with lower levels of wealth spend a larger fraction of any income gains than their wealthier counterparts. That has long-term implications for consumption, the single biggest engine of growth in the economy” she said.  And it even risked ‘democracy’ itself.  “A strong middle class is often seen as a cornerstone of a vibrant economy and, beyond that, a resilient democracy,’’ she said. Such are the fears of one of the members of the pillars of American capital, the Federal Reserve.

While the ‘middle-class’ in the US and many other advanced capitalist countries is being squeezed, the top 1% and even more, the top 0.1%, have never had it so good.  It’s as though the Great Recession never happened.

The wealth of the world’s richest people did decline by 7% to $8.56 trillion in 2018, Wealth-X said, citing global trade tensions, stock-market volatility a slowdown in economic growth. And the number of billionaires fell 5.4% to 2,604, the second annual fall since the financial crash a decade ago.  But the America’s richest fared the best of the three main regions, recording a slight rise in the number of billionaires of 0.9% to 892, even if their wealth fell by 5.8% to $3.54 trillion.

San Francisco has more billionaires per inhabitant in the world — with one billionaire for approximately every 11,600 residents — followed by New York, Dubai and Hong Kong.

There has not been a fall in billionaires in Brexit Britain, however.  According to the Sunday Times rich list just published, there are a record 151 billionaires in the UK.  And to be a billionaire is like a god in the sky compared to the average wealth of households.  If we measure the difference in time, say days, it is staggering. An NHS nurse’s annual salary is like half a day, while a billionaire’s is like 11,500.  The billionaire’s income has a 32 year gap!

Like climate change and global warming, inequality around the world has now reached an irreversible tipping point.  The UK-based House of Commons Library reckons that, if current trends continue, the richest 1% will control nearly 66% of world’s money by 2030. Based on 6% annual growth in wealth, they would hold assets worth approximately $305 trillion, up from $140 trillion today.  This follows a report released earlier this year by Oxfam, which said that just eight billionaires have as much wealth as 3.6 billion people — the poorest half of the world.

Chief Economist at the Bank of England Andy Haldane also delivered an insightful study of how in Britain the rich and poor are spread across the country.  From his home town, Sheffield in northern England, Haldane showed that wealth and income are heavily concentrated in the south-east of England.  Indeed, the UK has the worst regional dispersion of income and wealth in Europe – even worse than Italy.

Income and wealth are concentrated in London and the south-east, although long hours and travel time seem to make Londoners more miserable than their poorer fellow citizens in the north, according to surveys.

Rising inequality is creating conditions for rising risk and uncertainty in capitalist economies. That’s because the main way that the inequality of wealth has increased is through rising prices of financial assets.  Marx called these assets fictitious capital, as they represented a claim on the value of companies and government that may not be reflected in the value realised in the earnings and assets of companies or government revenues.  Financial crashes are regular occurrences, often of increased severity, and they can wipe out the ‘value’ of these assets at a stroke.  Such crashes can be triggers for a collapse in any underlying weakness in the productive sectors of the capitalist economy.

The latest report of the US Federal Reserve on the financial stability in the US makes sober reading.

According to the report, “Borrowing by businesses is historically high relative to gross domestic product (GDP), with the most rapid increases in debt concentrated among the riskiest firms amid signs of deteriorating credit standards.”  Interest rates for loans are near historic lows, so the borrowing binge among companies continues.  According the Fed, “Debt owed by the business sector, however, has expanded more rapidly than output for the past several years, pushing the business-sector credit-to-GDP ratio to historically high levels.”

Moreover, “The sizable growth in business debt over the past seven years has been characterized by large increases in risky forms of debt extended to firms with poorer credit profiles or that already had elevated levels of debt.”

And this borrowed money is not used to invest in productive assets but to speculate in the stock market.  Indeed, the main buyers of US stocks are companies themselves, thus driving up the price of their own shares (buybacks).

As long as interest rates stay low and there is no major collapse in corporate earnings, this scenario of corporate borrowing and stock market buybacks can continue.  But if interest rates should turn up and/or profits fall, then this corporate house of cards could tumble badly.  As the Fed puts it: “Even without a sharp decrease in credit availability, any weakening of economic activity could boost default rates and lead to credit-related contractions to employment and investment among these businesses. Moreover, existing research suggests that elevated vulnerabilities, such as excessive borrowing in the business sector, increase the downside risk to broader economic activity.”

Naturally, the Fed’s report concluded that things were going to be all right and the banks and corporations were resilient and healthy.  But overall uncertainty about the future for the major capitalist economies is rising, according to the latest reading of the World Uncertainty Index, a device that supposedly measures the confidence of capitalist investors globally.

The latest measure of the WUI has risen sharply to a level higher than before the global financial crash.  And the recent drop in share prices driven by the ongoing trade war between the US and China is an indication of what could happen in the next year.

Productivity, investment and profitability

May 11, 2019

Radical economic historian Adam Tooze recently tweeted that Whenever I see figures for the decline in the (advanced economies) AE productivity growth rate I am left puzzling: do we really have an explanation? Do we really have an explanation?”

Well, I think we do.  As I outlined in a previous post, over the last 40 years and especially in the last 15, there’s been a broad-based slowdown in output per hour worked across the major economies. For the top G11 economies (which excludes China), it’s currently running at a trend rate of just 0.7% p.a.

Russia’s productivity level is falling, while that of Italy and the UK is hardly moving.

But why is productivity growth in the major economies falling? The productivity puzzle has been debated by mainstream economists for some time now. The ‘demand pull’ Keynesian explanation is that capitalism is in ‘secular stagnation’ due to a lack of ‘effective demand’,which is necessary to encourage capitalists to invest in productivity-enhancing technology. This is the view of such Keynesians as Larry Summers or Martin Wolf. It is also promoted in semi-Marxist form by John Bellamy Foster at the Monthly Review.

Then there is a ‘supply-side’ argument from other conventional economists that there are not enough effective productivity-enhancing technologies to invest in – the day of the computer, the internet etc, is over and there is nothing new that will have the same impact.  This thesis is strongly propounded by Robert J Gordon.

But there is also another very simple explanation. There are three factors behind productivity growth: the amount of labour employed, the amount invested in machinery and technology and the X-factor of the quality and innovatory skill of the workforce.  Mainstream growth accounting calls this last factor, total factor productivity (TFP), measured as the unaccounted-for (residual) contribution to productivity growth after capital invested and labour employed.

Evidence shows that productivity growth is mainly driven by capital investment, which replaces labour with machines – as machines boost the output of each worker using the latest technology, they also reduce the number of workers needed.  In the graph below, the US Conference Board shows, in the 20 years up to the global financial crash, the main contribution to productivity growth came from capital investment (32%+18%); labour contributed 23% and TFP 26%.

And TFP growth slowed after the Great Recession in most economies, except for China and India.  In the US, all three factors driving productivity growth were at their strongest in the ‘hi-tech’ decade of the 1990s, but in the 2000s, all factors slowed sharply.

Indeed, the slowdown in productivity growth in the AEs began in the 1970s.  And this is no accident.

Decomposing the factors driving productivity growth clarifies things.  Slowing investment in productive assets, particularly hi-technology led to a slowing in the productivity of labour.  Here is a figure generated by JPMorgan economists recently.  There has been a secular fall in the fixed asset investment to GDP in the advanced economies in the last 50 years ie starting from the 1970s.

Part of the decline in US capital and labour investment can be laid at the door of increased globalisation as American companies went overseas for their factories and activities. But investment to GDP has declined in all the major economies (with the exception of China).

In 1980, both advanced capitalist economies and ‘emerging’ capitalist ones (ex-China) had investment rates around 25% of GDP. Now the rate averages around 22%, or a more than 10% decline.  The rate fell to 20% for advanced economies during the Great Recession.

JPMorgan’s economists note that situation is becoming serious.  Growth in global business investment in new equipment is grinding to a halt for the third time since the Great Recession ended in 2009.

And the JPM economists comment: “Even more concerning is that the latest survey data suggest the capex growth slowdown has yet to find a bottom.”  Their proxy model forecast is for zero growth in 2019.

So secular slowing of productivity growth comes from the secular slowing of more investment in productive value creating assets.  The next question follows: why did new investment in technology begin to drop off from the 1970s? Is it really a ‘lack of effective demand’ or a lack of productivity-generating technologies?  More likely it is the Marxist explanation: businesses in the major economies experienced a secular fall in the profitability of capital and so began to think that it was not profitable enough to invest in heaps of new technology to replace labour.

The figure offered by JPMorgan on the long-term decline in fixed asset investment is perfectly matched by the long-term decline in the profitability of capital in the major economies (see graph below).

A world rate of profit – average of 14 major economies (profits as % of fixed assets)

This has been strikingly clear in the post Great Recession period.  In many major economies like the US, the UK, Japan and in Europe, companies have preferred to keep their labour force and then employ new workers on more ‘precarious’ contracts with fewer non-wage benefits and part-term or temporary contracts. That is revealed in very low official unemployment rates alongside low investment rates. Thus productivity growth is poor and overall real GDP growth is below-par.

And the share of investment in the productive value creating sector of the major economies has also declined because of the increase in investment in unproductive labour and sectors ie. marketing, commerce, finance, insurance, real estate, government (particularly arms spending etc).  These sectors sucked up an increased share of surplus value, thus lowering the profitability of the productive sectors.

Here is a chart produced by Australian Marxist economist, Peter Jones, from his new book, The Falling Rate of Profit and the Great Recession, which decomposes the factors affecting the rate of profit in the productive sectors of the US economy: (s-u)/C.  The factors lowering profitability are: 1) a rising organic composition of capital a la classical Marxist analysis (green bars); and 2) the rise in the share of unproductive labour (blue bars).

Over the long term, these factors have overwhelmed any counteracting factors that raise profitability like a rising rate of exploitation of labour or the cheapening effects of new technology.  No wonder, fixed investment rates have been falling and thus productivity growth.

JP Morgan economists also note that the slowdown in productive investment is driven by slowing profitability (which leads to a lack of business confidence to invest): “the projected slowing in capex growth owes entirely to weaker confidence and profit growth relative to past years.”

But there is one other key factor that has led to a decline in investment in productive labour: the switch by capitalists to speculating in fictitious capital in the expectation that gains from buying and selling stock market shares and government and corporate bonds will deliver better returns than investment in technology to make things or deliver services.  As profitability in productive investment fell, investment in financial assets became increasingly attractive.

The growth of fictitious capital has been a long-term feature since the trough in the profitability of capital by the early 1980s.  The share of financial sector profits in total profits in the US and other capitalist economies rose at an increasing rate up to the global financial crash – note that this share only really rocketed from the 1980s.

And much of this investment is fictitious (as Marx called it) as the prices of stocks or bonds may bear no relation to the underlying earnings of assets of companies, and these prices  can dissolve in any financial crash.

Peter Jones in his book provides one measure of the amount of financial profits that are fictitious and there are other new studies on their way.  But one crude but simple measure of the size of fictitious capital can be based on Tobin’s Q.  Named after the leftist economist James Tobin of the 1970s, it measures the ratio between the market price of equities against the book value (or price) of the fixed assets of companies in an economy.  The ratio thus expresses the fictitious portion of financial assets.

We can see that in the bull market in stocks from the early 1980s up to bust in 2000, the market value of US companies was some 70% above money value of company assets.

Given that the long-term average ratio of Q is about 70 not 110 as now, you can thus gauge the extent of the fictitious part of buying financial assets.

So while the stock market booms, with the help of near zero interest rates and quantitative easing, the profitability of productive capital stays low – and along with it, low investment growth and poor productivity growth.

South Africa: the dashing of a dream

May 7, 2019

South Africa has a general election tomorrow, 25 years since the end of apartheid and six years since the death of Nelson Mandela.  In those 25 years, the aspirations and hopes of most black South Africans (90% of the 58m South Africans) and, for that matter, many white South Africans, have been disappointed.  In those 25 years, the majority have not seen any startling improvement in their living standards, education, health and public services.  Indeed, for many, particularly young blacks, things are even worse.  Inequality of incomes, wealth and land is extreme; corruption in government and in the party of the black majority, the African National Congress (ANC), is rife.

The death of Nelson Mandela in 2013 was a reminder of the great victory that the black masses of South Africa achieved over the vicious, cruel, and regressive apartheid system first encouraged by British imperialism and then adopted by a reactionary and racist white South African ruling class to preserve the privileges of a tiny minority. Mandela spent 27 years as a political prisoner, and the people he represented fought a long, hard battle to overthrow a grotesque regime that was backed for decades by the major imperialist powers, including the United States and Britain.

But the end of apartheid in the 1990s was also attributable to a change of attitude by the white ruling class in South Africa and the ruling classes of the major capitalist states. There was a hard-headed decision by them to no longer consider Mandela a terrorist and recognize that a black president was inevitable and even necessary.

At the time, in the late 1980s and early 1990s, South Africa’s capitalist economy was on its knees. This was not just because of global boycotting of its exports but because the productivity of black labour in the mines and factories had dropped away. The quality of investment in industry and availability of investment from abroad had fallen sharply. This was expressed in the profitability of capital reaching a postwar low in the global recession of the early 1980s. Unlike other capitalist economies, apartheid South Africa could find no way of turning that around through the further exploitation of the black labour force.

The ruling class had to change strategy. The white leadership under F. W. de Klerk reversed decades of previous policy, opted to release Mandela and go for black majority government that could restore labor discipline and revive profitability. For his efforts, de Klerk shared the Nobel Peace Prize with Mandela, who was elected president at the age of seventy-six! And profitability did rise dramatically under the first Mandela administration as foreign investment poured in and the rate of exploitation of the workforce rocketed.

As one of the so-called BRICs, South Africa’s economy was traditionally rooted in the primary sectors – the result of a wealth of mineral resources and favourable agricultural conditions. Under Mandela and then later Thabo Mbeki, the black majority saw some improvements in their truly awful living situation, in sanitation, housing, electricity, education, health, and so on, ending the cruel and arbitrary control of movement and the inequality of the apartheid regime.

But despite its professed socialist ideology, written into its constitution, the ANC leaders quickly ditched any radical change to the economy and social structure.  ANC governments opted for capitalism and never even considered any state takeover of the mines, resource industries and land owned by the whites.  Instead the ANC leaders took a slice of the action themselves.

Thus the tiny, wealthy white minority has remained pretty much unaffected by the ending of apartheid. Now the rich whites have been joined by a few rich blacks who dominate the businesses and exert overwhelming influence over  the ruling ANC. The party now expresses the sharp divisions between the majority of working-class blacks and the small black ruling class that has developed. These fissures erupt every so often, as yet without a decisive break.

By the early 2000s, the relative recovery of the economy began to peter out and then the Great Recession globally dealt a technical knock-out to South African capitalism from which it has not recovered.  Profitability of capital dropped away and growth in investment, productivity and output began to crawl, making it impossible for the black majority to make any progress. South African industry is now in difficulty; unemployment and crime remain at global highs, and economic growth is foundering.

Investment stagnates (ZARm)

Gross domestic product grew by 2.9% on average between 1994 and 2000 under Mandela after apartheid wrecked the economy.  And under Mr Mandela’s successors, growth accelerated to an average of 4.2% a year until the 2008 financial crisis. But the economy has stalled in the decade since, recording average growth of 1.6%. 

Indeed, once population growth is taken into account, real GDP per person has been stagnating in the Long Depression of the last ten years.

Per capita GDP ($ per person)

The World Bank calls South Africa “the most unequal country in the world by any measure”. Inequality of consumption has increased under the ANC government to a huge gini ratio of 0.63.  Inequality in wealth is even higher: the richest 10% of the population held around 71% of net wealth in 2015, while the bottom 60% held just 7%. Furthermore, intergenerational mobility is low, meaning inequalities are passed down from generation to generation with little change over time. Ramaphosa encapsulates the country’s failure to tackle inequality at its root. He is a wealthy tycoon, part of a narrow black business elite that has been forged by ANC policies.

The progress in poverty reduction in the early years of the ANC government in the late 1990s has also stopped.  Even on the dubious World Bank figures of a poverty rate of $1.90 a day, 19% of South Africans are below this level compared with 17% in 2011. According to figures provided by Moeletsi Mbeki, brother of former president Thabo, only 37,000 black South Africans earn more than $4,300 a month. Those earning more than $820 number just 1.25m in a country of 58m people. T

There are 8.3m people of working age with no job.  Unemployment officially stands at 27.1% in the fourth quarter of 2018. The unemployment rate is even higher among youths, at around 54.7%.

Unemployment rate (%)

The racial and class divide remains in the extreme 15 years since apartheid was ended.  The divide is entrenched early in people’s lives: in the education system. Almost all white pupils pass the final-year secondary school exams that are required to enter university. Only two-thirds of their black counterparts manage the same feat. Black South Africans also face disadvantages accessing healthcare and other services. Rolling electricity blackouts caused by long-running and ongoing problems resulting from mismanagement and corruption at the state utility Eskom plague the black communities.

Corruption in the higher echelons has increased.  Transparency International’s index puts South Africa on 42 (where zero is total corruption) and that is down from 57 when apartheid ended.

Corruption index (lower means more corruption)

There is a national plan to take South Africa’s black millions out of poverty. The National Development Plan 2030 is official ANC policy but it has never been implemented.  Moreover, the plan is really one of compromise with big business and landowners. The rich will pay more tax, the government will then provide better services (and be less corrupt), but real wages will be reduced so that employment can rise!  This was the strategy of the ANC leaders under Ramaphosa offered in their election campaign.

But the ANC is in some electoral trouble.  In August 2016 the ANC lost majority support in four of the metropolitan cities. Political parties negotiated coalition deals that saw the ANC unseated in the cities of Johannesburg, Pretoria and Nelson Mandela Bay.  In this election, there is a possibility that, although the ANC will win again, it will poll less than 50% for the first time.

Ramphosa says he wants to reduce corruption at the top but the ANC party apparatus is still controlled by the cronies of former President Zuma.  Ace Magashule, the ANC’s powerful secretary-general, is called “Mr Ten Per Cent” for looting an entire province as a party supremo under Mr Zuma.

The opposition Democratic Alliance (DA) is set to poll about 20%.  It was formerly the party of liberal white South Africans, but now it has a young black leader for the first time, Mmusi Maimane.  Maimane is integrated into South African big business and the party stands for some limited reforms on land ownership, reducing corruption and crime – all proposals that the ANC stands for too.  The DA could attract the small group of middle-class black households disgusted with the corruption of the ANC.

The most radical party is the Economic Freedom Fighters (EFF), a split-off from the ANC led by former ANC youth leader, Julius Malema.  The EFF wants the nationalisation of land without compensation and the state take-over of the mines and the central bank.  It already has 25 seats in parliament and is likely to poll around 12-14% in this election and increase its representation with backing from radical youth.

South African capitalism in the post-apartheid era has not kept pace with its BRIC peers, particularly China, Russia and India, and is now really a member of the ‘fragile five’ (India, Brazil, Indonesia, Turkey and South Africa). So Ramaphosa must deal with a stagnant capitalist economy, high levels of poverty, inequality, corruption and crime; and with an economy very vulnerable to a global slump that would expose the external trade deficit that has been growing and would lead to capital flight and rising interest rates.

Widening current account deficit (% of GDP)

A deep economic crisis is a very real prospect for the ANC government over the next five years.

HM Athens: Greeks bearing gifts

May 6, 2019

The first Historical Materialism conference held in Athens was very well attended – making it the biggest of such events in southern Europe and with mostly younger attendees.  As is usual with HM conferences, there was a plethora of papers and sessions on all sorts of subjects around the theme of the conference, Rethinking Crisis, Resistance and Strategy.  It is not possible to review these in this post.  Indeed, I am not even able to consider some very interesting papers in the political economy sessions in this review.

I am going to concentrate on the issues raised in the plenary session where I spoke on the subject of Marx’s relevance to contemporary capitalism.  I was on the platform along with John Milios, Professor of Political Economy at the Technical University of Athens and the author of many books on Marxist economy theory; and Costas Lapavitsas, professor of political economy at SOAS, London.  Both John and Costas were also former Syriza MPs during the Greek debt crisis but broke with the Syriza leadership when the latter capitulated to the Troika.

The contributions from the platform and the floor emerged as a debate on the causes of crises in capitalism in the 21st century.  John Milios’ subject was Marx’s theory of finance in the light of the ‘financialisation’ of capitalism in the neoliberal period.  Costas Lapavitsas’ address was similar.  Both considered financialisation as the key to current crises in capitalism.  In contrast, I argued that the Marx’s law of the tendency of the rate of profit to fall lay at the heart of crises in capitalism and the new developments in finance capital and the global financial crash and the ensuing Great Recession were reactions to that law.

In my presentation (powerpoint here), I argued, in contrast to some Marxists, that Marx did have a coherent theory of crises under capitalism (by that I mean recurrent and regular collapses in investment, production and employment). It was based on Marx’s law of the tendency of the rate of profit to fall.  Moreover, I argued that it was not just enough to interpret Marx’s theory of crisis from his writings and ascertain their relevance; we had to be scientific and test the theory empirically.  I claimed that Marx’s law of profitability was empirically valid, with a host of statistical studies showing this to be the case.  The evidence from many authors showed that the profitability of capital did fall over time (not in a straight line as there were periods of rising profitability after major depressions or wars which had destroyed the value and use of ‘dead’ capital).  Indeed, this is what the recent book, World in Crisis, co-edited with G Carchedi, and containing the empirical work of authors from Europe, North and Latin America and Japan, shows.

Actually, Greek political economy has offered the most important gifts in this empirical confirmation of Marx’s law of profitability and theory of crises.  In World in Crisis, Maniatas and Passas conclude that: “the claims of certain Marxists that the present crisis is not a crisis of profitability seem to be unfounded.” Also, Economakis and Markaki:  “The Greek crisis resurfaced due to the low profitability of capital, a result of a rising OCC.” (from Mavroudeas); Mavroudeas and Paitaridis: “the 2007-8 economic crisis is a crisis a-la Marx (i.e. stemming from the tendency of the profit rate to fall – TRPF) and not a primarily financial crisis and this represents the ‘internal’ cause of the Greek crisis.”.  And even more recently, Tsoulfidis and Paitaridis: “The falling net rate of profit is responsible for this new phase change, the Great Recession.”

From the floor, Professor Michael Heinrich criticised my support for all these empirical gifts that show falling profitability of capital over time.  He reckoned that official statistics were so dubious that the results of these many authors could not be relied on.  Indeed, it may be impossible to use official statistics at all.  Professor Heinrich then argued, as he has done before, that Marx probably dropped his law of profitability in his later years as he never mentioned it in relation to the contradictions in capitalism after 1875.  Readers will know I dispute this claim here.  Heinrich also reckoned that just showing profitability falling did not prove that such a fall was based on Marx’s law (ie through a rising organic composition of capital overcoming any counteracting factors that might raise profitability like a rising rate of exploitation or a cheapening of machinery etc).

But anybody who has read my book, The Long Depression or my more recent book, Marx 200 will see that decomposing the causes of the fall in profitability is carried out in detail.  And in World in Crisis, there is a host of analyses doing the same for different countries.  And what is the conclusion: that the rate of profit falls because, over time, the organic composition of capital rises more than the rate of exploitation or the fall in the value of constant capital.  In a new book, the young Australian Marxist economist, Peter Jones, decomposes very carefully the forces affecting the rate of the profit in the US since the 1930s.  As the graph below from his book shows, it is the organic composition of capital (green bars) that is the main cause of falling profitability.

But most important, Marx’s law of profitability is not just a secular or long-term gradual thing that has no relevance to the cycle of crises in capitalism.  The law is both secular and cyclical.  When profitability falls to such a point that the mass of profit and even total new value stops rising, a collapse in investment and output ensues.  When capital has been reduced (closures, mergers, layoff of labour) sufficiently to restore profitability, then production recovers and the whole cycle begins again.  This is the cycle of profitability that explains regular booms and slumps in modern capitalist economies.

Capitalism is a profit-making economy so it is profit and profitability that decides investment, then output and employment.  The Keynesians say it is the other way round; investment leads profits. But this is back to front.  In my presentation, I offered causal empirical evidence (not just correlations) that profits lead investment, not vice versa.

I argued that Marx’s law of profitability is the underlying cause of recurrent and regular crises.  In his summary, Costa Lapavitsas exclaimed that how could anyone justify that “all the features of capitalist crises can be attributed causally to changes in the rate of profits with just 70 years of changes in profitability stats?”  This accusation of ‘monocausality’ has been levied before at the law of profitability as the foundation of crises – see my debate with Professor David Harvey here. But this accusation does not recognise that there are different levels of abstraction in any scientific analysis of empirical events.

There are proximate causes (at the surface, contingent at the time); but beneath that are ultimate causes (laws) that explain the recurrence of similar events.  Weather can vary from place to place, even within a few kilometres, but the recurrence of rain in an area can be explained by its longitude, the season, and whether it is near the sea or up a mountain.  There are laws for weather.  Weather varies but it keeps coming back!

Each crisis in capitalism may have a different trigger; eg the 1929 crisis was triggered by a stock market crash; 1974 by a hike in energy prices; the same with 1980-2; and of course, the Great Recession was triggered by the bursting of the housing bubble in the US and a credit crunch spread by the use of credit derivatives and other exotic instruments of financial mass destruction (Warren Buffet).  But the regularity and recurrence of these crises requires a more general explanation, a theory or law.

Indeed, it was the profitability crisis of the 1970s in all the major capitalist economies that led to the neoliberal period of deregulation of finance and cheap money to enable banks, financial institutions and non-financial companies to engage in speculation in financial assets so that profits from speculation in the stock and bond markets (what Marx called fictitious capital) was a counteracting factor to the low profitability in the productive (value-creating) sectors of the capitalist economies.  And as profitability still remains low despite the Great Recession, the advanced capitalist economies are now locked into a Long Depression of low investment, productivity and trade, while debt, particularly corporate debt, keeps mounting.

Such was my thesis in a nutshell.  But this was disputed by Milios and Lapavitsas.  John Milios argued that finance had always been at the centre of the circuit of capital.  Capital has a Janus head, namely one side was the capitalist as a functioning productive investor extracting value from labour power; and on the other side was the capitalist as a lender of money for investment.  But in the neoliberal period, the latter half of Janus had now become dominant or both sides had merged.  This has bred an instability, inherent in finance.  ‘Financialisation’ of capitalism in the neoliberal period since the early 1980s now creates the conditions for crises.  Indeed, “it was the financial crisis in the Great Recession that led to the fall in profitability”, not vice versa.

Costas Lapavitsas seemed to offer a similar conclusion.  For Costas, capitalism was now in a second phase of financialisation.  The first was in the late 19th century when German and Austrian banks provided the finance for Austro-German capitalist industry to emerge.  Then it was a capitalism dominated by the finance capital of the banks, as the Marxist Hilferding explained.  But now capitalism is in a second phase of financialisation, where non-financial corporations and non-bank institutions provide credit or raise debt through bond and equity issuance.

Costas showed that financial profits as a share of total profits (at least in the US) had rocketed to over 40% by 2007 and remained much higher than in the 1970s.  Debt had also risen dramatically, particularly public debt.  This had happened because of the deregulation of finance and the switch by banks and other entities from providing funding for productive capital to ‘secondary exploitation’ of the working class through loans and mortgages and control of workers’ savings in pension funds.  This secondary exploitation, if not the major, was the “crucial” form of profit now.  It was this financialisation and secondary exploitation that explains the global financial crash and Great Recession, not Marx’s law of profitability.

Now I have discussed both the theses of ‘financialisation’ and ‘secondary exploitation’ in several previous posts which I cite here. Please read these.  But the gist of my argument against the theses of Milios and Lapavitsas is that they have been mesmerised by the appearance of things on the surface and have ignored the underlying causes beneath. Yes, there has been a significant rise in financial profits and debt, not just public debt, but more important, corporate debt.

Indeed, in my earlier book, The Great Recession, I highlighted these very facts (rising financial profits) as indicators of the coming crash and slump (in 2006, I forecast a crash for 2009-10 – but I was wrong, it came in 2008-9).

Where I disagree with the financialisation thesis is when it wants to replace Marx’s law of profitability with the post-Keynesian theory of financial instability as the cause of crises.  But crises in capitalism predate the 1980s: was the late 19th century depression a result of financial instability for excessive speculation in financial assets?  No.  Was the Great Depression of the 1930s also?  No.  In a chapter in World in Crisis, G Carchedi shows that there have been increasing financial crises since the 1980s, but they did not lead to an investment and production collapse, unless they were accompanied by a fall in productive profits too.  It was the latter (still 60% of all profits at the height of the financial boom of the early 2000s) that was “crucial”, not vice versa.

As Carchedi points out, “the first 30 years of post WW2 Us capitalist development were free from financial crises”. Only when profitability in the productive sector fell in the 1970s, was there a migration of capital to the financial unproductive sphere that during the neo-liberal period delivered more financial crises. “The deterioration of the productive sector in the pre-crisis years is thus the common cause of both financial and non-financial crises… it follows that the productive sector determines the financial sector, contrary to the financialisation thesis.”

Marx’s law of profitability explains the role of credit and debt in a capitalist economy. Credit is clearly essential to investment and the accumulation of capital but, if expanded to compensate for falling profitability and to postpone a slump in production, it becomes a monster that can magnify the eventual collapse. Yes, financial fragility has increased in the last 30 years, but precisely because of the difficulties for global capital to sustain profitability in the productive sectors in the latter part of the 20th century.

Indeed, much of the rise in financial profits and credit in the period leading up to the global financial crash was based on fictitious capital and thus fictitious profits.  When Costas said in the plenary that “what was capital gains if it was not profit”, he breaks from Marx’s view that such gains are fictitious as they are really based on speculation, not exploitation.  And in the Great Recession, these gains disappeared like water in the desert of the collapse in the profits of productive capital.

Marx talked about ‘secondary exploitation’, namely the extraction from the value of labour power by gouging workers’ wages, through interest on loans, various commissions on savings etc.  But the key point is that this was not an alternative form of surplus value.  Value can only be created by labour power and surplus value (overall profit) can only be extracted from the labour power of workers in those sectors that add new value.  If then bankers and others extract for profit a portion of workers earnings by loans etc, or take a portion of capitalist profits through interest and speculation, that is not an extra creation of value, but a redistribution of value.  At least, that is Marx’s law of value.

For me, that banks and other financial institutions have got profits from this ‘secondary exploitation’ does not mean that there is some new stage in capitalism where profit from productive investment has been replaced as “crucial”. Similarly, the increase in financial profits as a share of total profits and the rise of corporate debt and speculation in fictitious capital does not mean that capitalism is in new stage of ‘financialisation’, replacing ‘old-style’ 19th century industrial capitalism. As I said in summarising my presentation: “‘Financialisation’ and/or rising inequality and/or debt are not alternative causes of crises but are themselves explained by Marx’s law of profitability. The Great Recession was a Marx, not a Minsky moment.”

In that sense, my Greek friends on the plenary platform were not delivering new gifts but a Trojan horse to Marxist economic theory.  By reckoning that it is the finance sector that causes instability and crises, and not the capitalist sector as a whole, particularly the productive value-creating sectors, supporters of ‘financialisation’ open the door to reformist policy solutions along Keynesian lines.  This version of Rethinking the Crisis leads to the wrong strategy, in my view.

Costas Lapavitsas courageously offered the meeting some policy solutions for ending financial crashes and ‘secondary exploitation’.  He said we needed to start at the level of ‘national state intervention’ through ‘popular sovereignty’ based on ‘democracy’.  Then we should introduce capital controls to stop the flight of capital and protect the value of the currency.  Then we should set up public banks and a national investment bank.

For me, this programme falls well short of taking control of any capitalist economy so that we can plan production and investment and reduce the power of the market and the law of value.  Ending or curbing ‘secondary exploitation’ and ‘financialisation’ by regulating capital flows and the finance sector is not going to be enough.  A socialist policy must go further than ‘popular sovereignty’ and ‘democracy’.  It means taking over the productive sectors of a capitalist economy from the owners of capital and breaking the law of profitability.  That would be real popular sovereignty.

Progressive capitalism – an oxymoron

April 27, 2019

Joseph Stiglitz is a Nobel (Riksbank) prize winner in economics and former chief economist at the World Bank, as well as an adviser to the leftist Labour leadership in the UK.  He stands to the left in the spectrum of mainstream economics.

He has just published a new book called People, Power, and Profits: Progressive Capitalism for an Age of Discontent, in which he proclaims that “We can save our broken economic system from itself.”  He is very concerned about the rising inequality of incomes and wealth in the major economies, especially in the US.  “Some 90 percent have seen their incomes stagnate or decline in the past 30 years. This is not surprising, given that the United States has the highest level of inequality among the advanced countries and one of the lowest levels of opportunity — with the fortunes of young Americans more dependent on the income and education of their parents than elsewhere.”

You see, capitalism used to be ‘progressive’ in that it developed the economy and raised the human condition, using scientific knowledge and innovation; and it worked well, with the rule of law and democratic checks on ‘excesses’.  But then in the 1980s, Ronald Reagan and Margaret Thatcher came along and changed the rules, deregulating the economy – and now Trump is breaking down the checks and balances.  So the progressive capitalism of the 1960s has been destroyed.  By relying on uncontrolled markets, exploitation and inequality has run riot.

“The result is an economy with more exploitation — whether it’s abusive practices in the financial sector or the technology sector using our own data to take advantage of us at the cost of our privacy. The weakening of antitrust enforcement, and the failure of regulation to keep up with changes in our economy and the innovations in creating and leveraging market power, meant that markets became more concentrated and less competitive.” (Stiglitz)

What is Stiglitz’s solution? “Things don’t have to be that way. There is an alternative: progressive capitalism. Progressive capitalism is not an oxymoron; we can indeed channel the power of the market to serve society.” You see, it is not capitalism that is the problem but vested interests, especially among monopolists and bankers. The answer is to return to the days of managed capitalism that Stiglitz believes existed in the golden age of the 1950s and 1960s.

How are we to return to the golden age of progressive capitalism?  On Democracy Now, the online broadcaster, Stiglitz was asked in an interview: “should it be progressive capitalism or workers power?”  He replied, the market is going to have to play an important role. So, that’s why I wanted to use the word “capitalism.” But I wanted to signal that the form of capitalism that we’ve seen over the last 40 years has not been working for most people. And that’s why I talk about people. We have to have progressive capitalism. We have to tame capitalism and redirect capitalism so it serves our society. You know, people are not supposed to serve the economy; the economy is supposed to serve our people”. When he was asked “Hasn’t capitalism always done that (ie serve the rich and the monopolies rather than the poor and workers)?”, he responded “Not to the extent that it has.”

Stiglitz’s views are either pure naivety or clever sophistry –or maybe both. Does he really think that there was a period when capitalism benefited both workers and corporations; rich and poor?  The ‘golden age’ after 1945 up to the late 1960s was the exception in advanced capitalist economies and then only for those economies, not for Latin America, Asia, the Middle East and Africa.  For the greater part of the globe, those decades were ones of dire poverty and a battle against imperialist exploitation.

Anyway, it is a myth that in the 1950s and 1960s that everybody gained from ‘progressive’ capitalism in the West.  And what gains that were made in public services, a welfare state, relatively full employment and rising incomes were mainly the result of struggle and pressure by the labour movement, forcing concessions from the owners of capital.

And Stiglitz never explains why this supposed regulated, democratic progressive capitalism came to an end in the 1970s, except to suggest it was down to the vile politics of Reagan, Thatcher etc.  But readers of this blog know that there was a change of objective conditions from the mid-1960s, namely a sharp fall in the profitability of capital globally.

That meant that capital could no longer accede to rising real incomes, more public services and free education and health etc.  The years of high profitability that allowed for concessions were over. Profitability is the driving force of capitalism, so politicians were elected (both right and left) committed to reducing the welfare state and labour power; privatising and deregulating. Above all, progressive” capitalism had a series of major slumps that weakened the labour movement and restored (to some extent) profitability.

Indeed, Stiglitz never mentions the causes of recessions at all except to suggest that they are due to rising inequality: “If we had curbed exploitation in all of its forms and encouraged wealth creation, we would have had a more dynamic economy with less inequality. We might have curbed the opioid crisis and avoided the 2008 financial crisis.”  And yet the international slumps of 1974-5 and 1980-82 took place when inequality was at its lowest since industrial capitalism began (according to Thomas Piketty – graph).  So rising inequality was not the cause of the Great Recession but the result of efforts to raise profitability after the 1980s.  

And how do we get back to this ‘progressive capitalism’ anyway?  Stiglitz proposes regulation, breaking up the ‘monopolies’, progressive taxation, ending corruption and enforcing the rule of law in trade. “The prescription follows from the diagnosis: It begins by recognizing the vital role that the state plays in making markets serve society. We need regulations that ensure strong competition without abusive exploitation, realigning the relationship between corporations and the workers they employ and the customers they are supposed to serve. We must be as resolute in combating market power as the corporate sector is in increasing it.” These prescriptions are the stock of the reformist left in the US and elsewhere.  America’s Left Democrat Senator Elizabeth Warren has made similar proposals with her “accountable capitalism” plan.

What on earth would make the top 1% and the very rich owners of capital agree to reduce their gains in order to get a more equal and successful economy?  And how would regulation and more equality deal with the impending disaster that is global warming as capitalism accumulates rapaciously without any regard for the planet’s resources and viability?  Programmes of redistribution do little for this.  And if an economy is made more equal, would it stop future slumps under capitalism or future Great Recessions?  More equal economies in the past did not avoid these slumps.

Unlike 1949, in 2019, none of Stiglitz’s ‘progressive’ measures are possible. Indeed, radical change is now probably only possible with ‘workers’ power’ and if that became a reality we could move beyond such measures to real democratic control of the economy, by replacing capitalism, rather than ‘saving it from itself’’.

Boom and then bust?

April 25, 2019

Last March, I posted that the global economy seemed to be in a fantasy world where stock markets hit new highs but output of goods and services, investment and trade was stagnating in the major economies.  This week, the US stock recorded yet again new highs.  As the Financial Times described it: “The US economy appears to be enjoying the fabled Goldilocks scenario. Its porridge is neither too hot nor too cold”.

This financial market rally is founded on the decision of many central banks to hold their policy interest rates at very low levels.  The US Federal Reserve has basically announced that it will not hike its rate this year. The European Central Bank has done the same and has decided to have another bout of ‘quantitative easing’ (buying government bonds and other assets from commercial banks).  And today the Bank of Japan promised not to raise interest rates before spring 2020 as it continued its massive programme of monetary stimulus.

Central bank policy, along with the prospect of the US-China trade deal (still not realised), has given new encouragement to financial institutions to invest in stock markets.  But the biggest driver of the US stock market has been the major companies using this cheap finance to buy back their own shares to drive up the price and increase the ‘market value’ of the company.  In 2018, buybacks reached $1.18trn, twice as much as was invested (after covering for worn out equipment) in productive capacity (plant, offices, equipment, software etc).

Thus the financial markets boom, but the ‘real’ economy struggles.  The recovery since the Great Recession ended in mid-2009 is about to reach its tenth year this summer, making it the longest recovery from a slump in 75 years.  But it is also the weakest recovery since 1945.  And trend real GDP growth and business investment remains well down from the rate before 2007.  That is why I designate the last ten years as a Long Depression, similar to the periods of 1873-97 or 1929-42.

Behind the fantasy of financial markets, global growth has been slowing.  And worse, there are now several economies that appear to heading into outright recession.  Today, the Asian powerhouse, Korea, suffered its worst quarterly contraction since the global financial crisis (Korean real GDP growth has fallen to just 1.8% – graph), as this export-driven economy felt the pinch from weakening growth in China, global trade tension and a downturn in the technology sector.

Exports, which account for about half of the country’s GDP, are heading for a fifth consecutive monthly decline, falling 2.6 per cent quarter on quarter.  And business investment plunged 10.8 per cent, the worst reading since the 1998 Asian financial crisis, as big manufacturers, such as Samsung Electronics and SK Hynix, refrained from increasing capacity amid a global economic slowdown and weaker demand for semiconductors.

Even worse, several large so-called emerging economies are experiencing severe contractions.  After President Erdogan suffered significant defeats in local elections in Istanbul and Ankara, the Turkish central bank has been forced to prop up the country’s fast dwindling dollar reserves using ‘dollar swaps’, taking high risk short-term loans.  It had to do this because dollars have been fleeing the country as the economy plunged and Erdogan refused to take an IMF loan to bolster finances because it would mean severe austerity measures being imposed.  The net foreign assets figure, a proxy for the country’s financial defences, slumped by $9.4bn between March 6 and March 22 to $19.5bn, the lowest level on a US dollar basis since 2007. Excluding swaps, net foreign assets have stood at less than $11.5bn during the entire month of April, down from $28.7bn at the start of March on the same basis.

Argentina went deep into recession in 2018 under the governance of the right-wing administration of President Macri.  When he was elected in December 2015,he said this his ‘neo-liberal’  economic policies would attract foreign direct investment and lead to sustained increases in productivity. The currency crisis that erupted in April 2018 underscored the failure of that policy approach.

Unlike Turkey, Macri turned to the IMF for a $57 billion stand-by loan – the largest in the IMF’s history – a clear case of bias by the IMF to help a government that it and US favoured over the previous social-democratic Peronist administration.  The money is being used to make debt repayments as they come up.  Elections are now just six months away, and the IMF conditions for the loan are biting into government spending and increasing tax burdens.

Investment is stagnating, inflation has rocketed and the high interest rates imposed by the central bank have attracted short-term speculative portfolio capital, or ‘hot money’.  Capital like that is just as likely to reverse with any new crisis.   Next year, the amount of external debt that must be repaid will be at its highest and the IMF must also be repaid.  The new government would then face two unpleasant options: a straitjacket of higher debt payments, more austerity, and more recession, or a painful debt restructuring with an uncertain outcome.

And there is Pakistan.  This is another so-called emerging economy where capital to fund economic growth and investment has dried up.  Up to now the new administration under Imran Khan, the former Pakistan cricket captain, elected on a no corruption platform, has refused to take an IMF loan, for the same reasons as Turkey.  Its finance minister, Asad Umar instead to tried to raise new loans from China and the Middle East, much to the chagrin of the US. But it has not been enough to stave off a new potential collapse in the currency.  Pakistan’s inflation is at a five-year high of more than 9 per cent, while the rupee’s value has plummeted 33 per cent since 2017.

Umar was forced to resign last week.  The new finance minister has reached an agreement in principle to take an IMF loan – Pakistan business will thus gain some stability while the Pakistan people will pay with more taxes and cuts in services, labour conditions and infrastructure projects.  “The solutions are not going to be easy. The choices will be politically difficult for any government,” said Abid Suleri, an economic adviser to Khan.

Stock markets may be booming in North America but economic prosperity in many parts of the world is disappearing like water in a desert.  And in some parts, a sand storm is fast approaching.

A delicate moment

April 14, 2019

The IMF-World Bank meeting in Washington this weekend revealed again that the world economy is slowing down and the prospect of an outright recession is getting much higher.  The IMF economists cut their outlook for global growth  to the lowest since the global financial crisis of 2009 amid a bleaker outlook in most major advanced economies and signs that higher tariffs are weighing on trade – “a growth slowdown and precarious recovery”, the IMF called it.

The IMF estimates that the world economy will grow 3.3% this year, down from the 3.5% it had forecast for 2019 in January. It’s the third time the IMF has downgraded its outlook in six months.  The new IMF chief economist, Gita Gopinath reckoned the global economy had entered “a delicate moment”. She offered a decisive insight: “If the downside risks do not materialize and the policy support put in place is effective, global growth should rebound. If, however, any of the major risks materialize, then the expected recoveries in stressed economies, export-dependent economies, and highly-indebted economies may be derailed.” So, on the one hand or on the other….

Alongside the IMF view, the private Brookings Institution delivered its view on the global economy, concluding from its tracking index of economic activity that the world had entered a “synchronised slowdown” which may be difficult to reverse.  The Brookings-FT Tracking Index for the Global Economic Recovery (Tiger) compares indicators of real activity, financial markets and investor confidence with their historical averages for the global economy and for individual countries.  The headline readings slipped back significantly at the end of last year and are at their lowest levels for both advanced and emerging economies since 2016, the year of the weakest global economic performance since the financial crisis.

Brookings did not reckon a recession was imminent but “all parts of the world economy were losing momentum.” Even if a global recession is not yet with us, it is clear from the latest data on the major economies that the long depression, as I have characterised this period since 2009, is still with us.  Frances Coppola, the heterodox economist, has also blogged that capitalism is locked into a long depression and makes similar points to me on its outcome. But as for causes, Coppola, like other Keynesians, holds to the idea of ‘secular stagnation’, namely that the depression is due to a chronic “lack of demand’’.  Regular readers of this blog know that I do not consider this is an adequate explanation of crises and depressions.  In a profit-making economy, it is the profitability of capital that matters.

And here, the IMF’s new Global Stability Report offers more support for my causal interpretation of the long depression.  Confirming what I have shown empirically before, the IMF finds that corporate profitability (as measured by corporate earnings as a share of the stock of assets) in the major economies has not recovered to 2008 levels.  Indeed, profitability of capital is well below levels of the late 1990s.

This long depression has similar characteristics as the late 19th century depression and the Great Depression of the 1930s. The first was resolved by a series of slumps eventually driving up profitability and second was resolved by a world war.  It’s my view that this one will be resolved more like the 19th century one.

Low profitability explains above all else why corporate investment has been so weak since 2009.  What profits have been made have been switched into financial speculations: mergers and acquisitions, share buybacks and dividend payouts.  Also there has been hoarding of cash.  All this is because the profitability of productive investment remains historically low.

As Gillian Tett in the FT put it: “the IMF calculates that American companies made shareholder payouts and buybacks that were worth 0.9 per cent of assets last year, twice the level seen in 2010. Little wonder that equity markets have soared (leaving aside the wobble late last year). Companies have also used this arsenal for a mergers and acquisitions boom: such deals gobbled up cash flows equivalent to 0.4 per cent of assets in 2019, compared with virtually nothing in 2011. But the amount of cash flow spent on capex, in contrast, has flatlined since 2012, running at around 0.7 per cent of all assets — smaller than the cash flow spend on shareholder payouts. Or, as the IMF report notes: “Strong profits in the United States were used for payouts and other financial risk taking.” But not, it seems, lots more investment.

The other key factor in the long depression has been the rise in debt, particularly corporate debt.  With profitability low, companies have run up more debt in order to fund projects or speculate.  The big companies like Apple or Microsoft can do this because they have cash hoards to fall back on if anything goes wrong; the smaller companies can only manage this debt spiral because interest rates remain at all-time lows and so servicing the debt is still feasible – as long as there is not a downturn in sales and profits.

Again the IMF’s Global Stability Report sums up the issue. “In most advanced economies, debt-service capacity in the corporate sector improved during the recent cyclical upswing. Balance sheets appear strong enough to sustain a moderate economic slowdown or a gradual tightening of financial conditions. However, overall debt levels and financial risk taking have increased, and creditworthiness of borrowers has deteriorated in the investment-grade bond and leveraged loan markets. A significant downturn or a sharp tightening of financial conditions could lead to a notable repricing of credit risks and strain the debt-service capacity of indebted firms. Should monetary and financial conditions remain easy for longer, debt will likely continue to rise over the medium term in the absence of policy action, raising the risk of a sharper adjustment in the future”.

Each crisis has a different trigger or proximate cause.  The 1974-5 international recession was triggered by a sharp rise in oil prices and the US coming of the dollar-gold standard.  The 1980-82 slump was triggered by a housing bubble in Europe and a manufacturing crisis in major economies.  The 1990-2 recession was triggered by the Iraq war and oil prices.  The 2001 mild recession was the result of the bursting of the bubble.  And the Great Recession was started with the collapse of the housing bubble in the US and ensuing credit crunch brought on by the international diversification of credit derivatives. But underlying each of these crises was the downward movement in the profitability of productive capital and eventually a slowdown or decline in the mass of profits. (The profit investment nexus).

This time I reckon the trigger will be in corporate debt as companies get overstretched on cheap credit and as profits fall and interest costs rise, they become insolvent.  Marxist economist Eric Toussaint of the CADTM, agrees. “This mountain of corporate private debt will be a prime element in the next financial crisis.” He points out that “As interest rates climb the value of corporative debt sinks. The greater the share of sinking corporate debt in a company’s assets, the greater the negative impact on the corporate balance sheet. The corporate equity value sinks too and may get to a point where it no longer covers its obligations. In 2016 Apple informed US authorities that in the case of a 1% increase in interest rates it would lose $4,.9 billion. Of course, just like other companies Apple borrowed to finance its debt purchases. In 2017 Apple has already borrowed $28 billion, bringing the total to $75 billion. This, by domino effect, could produce a crisis of similar ampler to that of the US financial crisis in 2007-2008.”

As the IMF chief economist puts it: capitalism is in a delicate moment.