Archive for the ‘Profitability’ Category

The debt delusion

December 10, 2019

John Weeks is Professor Emeritus at the School of Oriental & African Studies, University of London.  He is also a coordinator of of the UK’s Progressive Economic Forum (“founded in May 2018 and brings together a Council of eminent economists and academics to develop a new macroeconomic programme for the UK.”).

John Weeks’ new book is The Debt Delusion: Living Within Our Means and Other Fallacies. It aims at demolishing economic arguments for the necessity of austerity.  ‘Austerity’ is the catch word for the policy of reducing government spending and budget deficits and public sector debt.  This has been considered as necessary to achieve sustained economic growth in capitalist economies after the Great Recession of 2008-9.  The argument of governments and their mainstream advisors was that public sector debt had mushroomed out of control. The size of the debt compared to GDP in most countries had got so high that it would drive up interest costs and so curb investment and growth in the capitalist sector and even generate new financial crashes.  Austerity policies were therefore essential.

Keynesians and other heterodox economists rejected this analysis behind austerity policies.  Far from trying to balance the government books, governments should run deficits when economies were in recession to boost aggregate demand and accelerate recovery.  Rising public debt was no problem as governments could always finance that debt by borrowing from the private sector or just by ‘printing’ more cash to fund deficits and debt costs (debt costs being the interest paid on government bonds to the holders of that debt and the rollover of the debt).  Austerity was not an economic necessity, but a political choice bred by the ideology of insane and out of date economics and self-serving right-wing politicians.

In his new book, Weeks sets out to debunk six austerity “myths”: 1) “We must live within our means” 2) “Our government must live within its means” 3) “We and our government must tighten our belts” 4) “We and our government must stay out of debt”; 5) “The way for governments to stay out of debt is to reduce expenditures, not to raise taxes”; 6) “There is no alternative to austerity”.

The most important myth to crack, according to Weeks, is the idea that government budgets are like household budgets and must be balanced.  This is nonsense.  Governments can run annual budget deficits by borrowing, as indeed can households, as long as they have the income to cover the interest and repayments costs.  Moreover, in the case of governments, all the major countries have run annual deficits for decades. “Even the Germans, those paragons of a balanced budget, have only had a surplus in seven of the past 24 years, and more than half of these were in the past four years.”

Indeed, households often resort to credit, short and long term. Long-term credit often even reduces expenditure. The same is true for a government. As Weeks emphasises, most long-term credits for governments are used to purchase assets (capital spending), some of which even produce income (such as social housing), others that serve important functions for our societies (for example schools, hospitals, public transport). The public sector creates use values (to apply Marx’s terms) ie things or services that people need and so boosts GDP.

Weeks makes the key point that before the global financial crash and the Great Recession, it was not rising public sector debt that was the problem, but fast-rising private sector debt as households increased mortgage debt at low interest rates to buy homes and the finance sector exponentially expanded their own debt instruments to speculate.  It was the bursting of this private sector credit boom that led to the credit crunch of 2007 and the banking crash, not high public debt. Instead, the latter became the trash can for dumping private debt as governments (taxpayers) picked up the bill.

But from hereon I part with Professor Weeks’ analysis.  Professor Weeks adopts the Keynesian view that the cause of crises under capitalism is the “lack of effective demand”.  He argues that, as austerity policies reduce aggregate demand, they are the main cause of the Great Recession and the poor recovery afterwards “the principle (sic) cause of our economic woes, which predates Brexit by several years and largely accounts for the global slowdown, are austerity policies by the governments of most of the G7 countries, whose economies together account for over half of global output.”

Back in the 1970s and 1980s, Professor Weeks criticised convincingly this Keynesian demand argument from a Marxist perspective (see John Weeks, “The Sphere of Production and the Analysis of Crisis in Capitalism,” Science & Society, XLI, 3 (Fall, 1977) and John Weeks on underconsumption) .  But now as coordinator of the Keynesian Progressive Economy Forum, he writes that “capitalist economies do suffer periodically from extreme instability, the most recent example being the Great Financial Crisis of the late 2000s. These moments of extreme instability, recessions and depressions, result … from private demand “failures”; specifically, the volatility of private investment and to a lesser extent of export demand.” He goes further: “public expenditure serves to compensate for the inherent instability of private demand. This is the essence of “counter-cyclical” fiscal policy, that the central government increases its spending when private demand declines and raises taxes when private expenditures create excessive inflationary pressures. During 1950-1970 that was the policy consensus, and it coincided with the “golden age of capitalism”.

So Weeks says, the lack of effective demand can be overcome or avoided by government spending and that is why capitalism worked so well back in the 1960s.  If we just drop austerity policies and go back to Keynesian-style government ‘demand management’, all will be well.

But just as excessive government spending, budget deficits or public debt was not the cause of the financial crash and the Great Recession, neither was austerity. Indeed, Carchedi has shown that before every post-war recession in most capitalist economies, government spending was rising as a share of GDP, not falling.

% change in government spending one year before a recession

Rising government spending and regular budget deficits did not enable any major capitalist economy to avoid the Great Recession.  For example, Japan ran budgets deficits for over a decade before the 2008-9 slump.  It made no difference.  Japan entered the slump, as did every other major economy.

And after the Great Recession ended, there is little evidence that those countries that ran budget deficits and thus increased public sector debt recovered quicker and increased GDP more than those that did not.  I and others have done several studies that show the so-called Keynesian multiplier (the ratio of real GDP growth to an increase in government spending or budget deficit) is poorly correlated with the economic recovery after 2009. The EU Commission finds that the Keynesian multiplier was well below 1 in the post-Great Recession period.  The average output cost of a fiscal adjustment equal to 1% of GDP is no more than 0.5% of GDP for the EU as a whole.

What does show a high correlation is the change in the rate of profit on productive assets owned by the capitalist sector.

Correlation between change in rate of profit and in real GDP growth for ten capitalist economies

If the rate of profit falls, there is a high likelihood that the rate of investment will fall to the point of a slump.  Then there is a ‘lack of effective demand’.  This Marxist multiplier, as Carchedi and I call it, is a much better explanation of booms and slumps in modern capitalist economies than the Keynesian demand multiplier.

This is not really surprising if you think about it.  What happens in the capitalist sector of the economy, which is about 80% of value in most countries, must be more decisive than what happens in the government sector, even if there is a significant Keynesian multiplier effect (which there is not, on the whole).  What matters in modern capitalist economies is the level and change in the rate of profit and the size and cost of corporate debt; not the size of public spending and debt.

There has been a long debate about whether ‘excessive’ public debt can slow economic growth by ‘crowding out’ credit for investment by the capitalist sector.  There was the (in)famous debate started by mainstream economists Reinhart and Rogoff etc.  They argued that if a country ran up a public debt ratio above 100% of GDP, that was a recipe for a slump or at least economic slowdown. The two Rs figure and methods were exposed to ridicule. But the debate remains.  Rogoff continues to argue the case.  And others present more evidence that high public debt can damage the capitalist sector.

A recent paper looking at data for over half a million firms in 69 countries found that high government debt affects corporate investment by tightening the credit constraint faced by companies, especially those companies that find it difficult to get credit: “when public debt is at 25% of GDP, the correlation between investment and cash-flow is just above 9%, but this correlation goes well above 10% when public debt surpasses 100% of GDP. This finding is consistent with the idea that higher level of public debt tightens the credit constraint faced by private firms.”  What this means is that, as banks use more and more of their cash on buying government bonds, they have less available to lend to firms – “crowding out”.

Christoph Boehm found the fiscal multiplier associated with government investment during the Great Recession was near zero. “After a government investment shock, private investment falls significantly below zero – without a lag. The estimates become insignificant in the sixth quarter, but remain more than one standard error below zero until the eighth quarter. Hence, the data support the theories’ prediction that private investment is crowded out, and the government investment multiplier small.”

In a way, Weeks’ book is outdated.  ‘Austerity’ is no longer the cry of the international agencies like the IMF, ECB or capitalist governments.  On the contrary, with the failure of monetary policy (zero interest rates, quantitative easing) to get economies back on a pre-2007 growth path, everybody (except the German government) has become Keynesian.  Fiscal policy (more government spending, running budget deficits by issuing bonds or just ‘printing’ money) has become the order of the day.  Japan has just launched a massive new fiscal stimulus programme to expand public works.  New ECB President Christine Lagarde has called for more fiscal spending by governments, as have the IMF and the OECD.

But as I have argued before, if introduced, fiscal stimulus will also fail in getting capitalist economies out of the slowest economic ‘recovery’ from a slump since the 1870s.  As European economist, Daniel Gros, shows in a recent paper, “the overall conclusion is clear. One would need a very large fiscal deficit to have even a modest impact on inflation or interest rates. Fiscal policy cannot save the ECB.”

Professor Weeks’ book shows that opposing budget deficits and rising public debt because it will cause slumps or low growth is a delusion.  But on the other hand, running government deficits won’t avoid slumps and will have little impact on boosting economic growth in capitalist economies.

The fantasy world continues

November 28, 2019

The fantasy world continues.  In the US and Europe, stock market index levels are hitting new all-time highs.  Bond prices are also near all-time highs.  Investment in both stocks and bonds are delivering massive profits for the financial institutions and companies.  Conversely, in the ‘real’ economy, particularly in the productive sectors of industry and transport, the story is dismal.  The world’s auto industry is in serious decline.  Layoffs of workers are on the agenda in most auto companies.  The manufacturing sectors in most major economies are contracting. And as measured by the so-called purchasing managers indexes (PMIs), which are indexes of surveys of company managers about the state and prospects for their companies, even the large service sectors are slowing or stagnant.

The latest estimate of US real GDP growth was published yesterday. In the third quarter of this year (June-September), the US economy expanded in real terms (ie after inflation of prices is deducted) at an annual rate of 2.1%, down from 2.3% in the previous quarter.  Even though this is modest growth historically, the US economy is doing better than any other major economy.  Canada is growing at just 1.6% a year, Japan at just 1.3% a year, the Euro area at 1.2% a year; and the UK at just 1%.  The larger so-called ‘emerging economies’ like Brazil, South Africa, Russia, Mexico, Turkey and Argentina are growing at no more than 1% a year or are even in recession.  And China and India have recorded their lowest growth rates for decades.  Overall global growth is variously estimated around 2.5% a year, the lowest rate since the Great Recession in 2009.

And slowing capitalist economies can find little escape from weak domestic growth by exporting.  On the contrary, world trade is contracting.  According to data from the CPB World Trade Monitor, in September global trade was down by 1.1 per cent compared to the same month in 2018, marking the fourth consecutive year-on-year contraction and the longest period of falling trade since the financial crisis in 2009.

It’s true that unemployment rates in the major economies have plunged to 20-year lows.  That has helped maintain consumer spending to some extent.

But it also means that productivity (measured as output divided by employees) is stagnating because employment growth is matching or even surpassing output growth.  Companies are taking on workers at unchanged wages rather than investing in labour-saving technology to boost productivity.

According the US Conference Board, globally, growth in output per worker was 1.9 percent in 2018, compared to 2 percent in 2017 and projected to return to 2 percent growth in 2019. The latest estimates extend the downward trend in global labour productivity growth from an average annual rate of 2.9 percent between 2000-2007 to 2.3 percent between 2010-2017. “The long-awaited productivity effects from digital transformation are still too small to see. A productivity recovery is much needed to prevent the economy from slipping towards a substantially slower growth than what has been experienced in recent years.”

The Conference Board summarises: “Overall, we have arrived in a world of stagnating growth. While no widespread global recession has occurred in the last decade, global growth has now dropped below its long-term trend of around 2.7 percent. The fact that global GDP growth has not declined even more in recent years is mainly due to solid consumer spending and strong labor markets in most large economies around the world.”

The OECD reaches a similar conclusion: “Global trade is stagnating and is dragging down economic activity in almost all major economies.  Policy uncertainty is undermining investment and future jobs and incomes. Risks of even weaker growth remain high, including from an escalation of trade conflicts, geopolitical tensions, the possibility of a sharper-than-expected slowdown in China and climate change.”

The reason for low real GDP and productivity growth lies with weak investment in productive sectors compared to investment or speculation in financial assets (what Marx called ‘fictitious capital’ because stocks and bonds are really just titles of ownership to any profits (dividends) or interest appropriated from productive investment in ‘real’ capital).  Business investment everywhere is weak.  As a share of GDP, investment in the major economies is some 25-30% lower than before the Great Recession.

Why is business investment so weak?  Well, first it is clear the huge injection of cash/credit by central banks and driving of interest rates down to zero – so-called unconventional monetary policies- has failed to boost investment in productive activities.  In the US, the demand for credit to invest is falling, not rising.

And for that matter, so far, Trump’s cutting of corporate taxes, boosting fiscal spending and running higher budget deficits has failed to restore investment.

In the US, capital spending by S&P 500 companies rose in the third quarter by just 0.8%, or a combined $1.38 billion, from the second quarter, according to data from S&P Dow.  But even that modest increase can be chalked up to a few big spenders: Inc. and Apple Inc. alone raised capital spending by $1.9 billion during the quarter. Without them, total spending by the 438 other companies that have reported so far this quarter would have shrunk slightly. And overall spending would have shrunk by 2.2% absent increases from three others: Intel Corp. , Berkshire Hathaway Inc. and NextEra Energy Inc. Together, the five companies increased their capital budgets by $4.7 billion, or 30%, from the second quarter to the third, the SPDJI data show.

The mainstream/Keynesian explanation for low investment was expressed again in a recent blog in the UK Financial Times: “why is fixed investment declining?  One answer, dare we suggest it, is a dearth of demand. With no incremental demand for increased supply, why would a business invest in a new plant, shop or regional headquarters when the returns from buying back shares, or distributing dividends, is both known and higher?”

But this explanation is a tautology at best and wrong at worst.  First, in what area of demand is there a ‘dearth’?  Consumer demand and spending is holding up in most major capitalist economies, given fuller employment and even some rise in wages in the last year.  It is investment ‘demand’ that is floundering.  But to say that investment is weak because investment ‘demand’ is weak is just a tautology signifying nothing.

The more explanatory answer offered by Keynesian theory then comes forward.  The reason that central bank monetary policies and tax cuts have failed to boost investment “just boils down to risk appetite.”  This is the classic ‘animal spirits’ explanation of Keynes.  Capitalists have just lost ‘confidence’ in investing in productive activities.  But why? The previous quote above from the FT piece gives it away; why would a business invest in a new plant, shop or regional headquarters when the returns from buying back shares, or distributing dividends, is both known and higher?” But the returns (profitability) of investing in fictitious capital are higher because the profitability of investing in productive assets is too low. I have explained this ad nauseam in previous posts and papers, along with empirical evidence in support.

In Q3 2019, US corporate profits were down 0.8% from last year while margins (profits per unit of output) remain compressed at 9.7% of GDP – having declined nearly continuously for nearly five years.

But, of course, the failure to recognise or admit the role of profitability in the health of a capitalist economy is common to both mainstream neoclassical and Keynesian theory and arguments.

Low profitability in productive sectors of the most economies has stimulated the switch of profits and cash by companies into financial speculation. The main method used by companies to invest in this fictitious capital has been by buying back their own shares. Indeed, buybacks have become the biggest category of financial asset investment in the US and to some extent in Europe.  US buybacks reached nearly $1trn in 2018.  That’s only about 3% of the total market value of US top 500 stocks, but by boosting the price of their own shares, companies have attracted other investors to push stock market indexes to record highs.

But all good things must come to an end. Returns on fictitious capital investment ultimately depend on the earnings that companies report.  And they have been falling in the last two quarters.  So in the latter part of this year, corporate buyback spending started to plunge. According to Goldman Sachs, buyback spending slowed 18% to $161 billion during the second quarter, and the firm anticipates that the slowdown will continue. For 2019, total buybacks will drop 15% to $710 billion, and in 2020 GS sees a further 5% decline to $675 billion. “During full-year 2019, we expect S&P 500 cash spending will decline by 6%, the sharpest annual decline since 2009,” the firm says.

Anyway, buybacks are an arena dominated by major companies, many of them long-established tech titans. The top 20 buybacks accounted for 51.2% of the total for the 12 months ending in March, S&P Dow Jones Indices states. And more than half of all buybacks are now funded by debt. – “sort of like mortgaging your house to the hilt, then using it to throw a lavish party.” But once a recession inevitably arrives, the result may not be pretty for companies with lots of leverage, in no small part due to buybacks.

The market value of tradable U.S. dollar (USD) corporate debt has ballooned to close to $8 trillion – over three times the size it was at the end of 2008. Similarly in Europe, the corporate bond market has tripled to 2.5 trillion euros ($2.8 trillion) since 2008. From 2015-2018, over $800bn of non-financial high grade corporate bonds were issued to fund M&A. This accounted for 29% of all non-financial bond issuance, contributing to credit rating deterioration. And the ‘credit quality’ of corporate debt is deteriorating with low rated bonds now 61% of non-financial debt, up from 49% in 2011.  And the share of BBB-rated bonds in European investment grade has also risen from 25% to 48%.

And then are what are called zombie companies which earn less than the costs of servicing their existing debt and survive because they are borrowing more. These are mainly small companies.  About 28% of US companies with market cap <$1bn earn less than their interest payments, way up from the period before the crisis and this is with historically low interest rates. Bank of America Merrill Lynch estimates that there are 548 of these zombies in the OECD against a peak of 626 during the financial crash of 2008.

With corporate debt now higher than its peak in scary late-2008, Dallas Fed President Robert Kaplan has warned, overly leveraged companies “could amplify the severity of a recession.”

Nevertheless, the talk among many mainstream economists is that the worst may be over.  A trade deal between the US and China is imminent. And there are signs that the contraction in the manufacturing sectors of the major economies is beginning to stop.  If so, then any ‘spillover’ into the more buoyant and larger so-called ‘service’ sectors may be avoided.  Global economic growth may be at its slowest since the Great Recession; business investment is sluggish at best; productivity growth is falling; and global profits are flat, but employment is still strong in many economies, and wages are even picking up.

So, far from descending into an outright global recession in 2020, there may be just another year of depressed growth in the longest but weakest global recovery for capitalism. And the fantasy world may continue.  We shall see.

Milex and the rate of profit

November 18, 2019

A review of The Economics of Military Spending: A Marxist perspective – by Adem Yavuz Elveren, Routledge, 2019.

Brown University’s Watson Institute for International and Public Affairs published its annual “Costs of War” report last week.  This refers only to the costs of war for the US.  It takes into consideration the Pentagon’s spending and its Overseas Contingency Operations account, as well as “war-related spending by the Department of State, past and obligated spending for war veterans’ care, interest on the debt incurred to pay for the wars, and the prevention of and response to terrorism by the Department of Homeland Security.” The final count revealed, “The United States has appropriated and is obligated to spend an estimated $5.9 trillion (in current dollars) on the war on terror through Fiscal Year 2019, including direct war and war-related spending and obligations for future spending on post 9/11 war veterans.”

The report found that the “US military is conducting counterterror activities in 76 countries, or about 39 percent of the world’s nations, vastly expanding [its mission] across the globe.” In addition, these operations “have been accompanied by violations of human rights and civil liberties, in the US and abroad.”  Overall, researchers estimated that “between 480,000 and 507,000 people have been killed in the United States’ post-9/11 wars in Iraq, Afghanistan, and Pakistan.” This toll “does not include the more than 500,000 deaths from the war in Syria, raging since 2011” when a West-backed rebel and jihadi uprising challenged the government, an ally of Russia and Iran. That same year, the U.S.-led NATO Western military alliance intervened in Libya and helped insurgents overthrow long time leader Muammar el-Qaddafi, leaving the nation in an ongoing state of civil war.

Ever since the end of the second world war, there has been some sort of war, between regional powers, or as proxy wars backed by imperialist powers.  The monetary costs of war are huge, as the Watson Brown Institute shows, while the human costs of war are incalculable – not just the deaths and injuries, but also the destruction of homes, livelihoods, deprivation and disease and the horrors of migration.  Wars are a scourge on humanity.

But are they beneficial to the capitalist economy?  That’s another question.  Wars are often seen necessary by governments and politicians to preserve a capitalist power’s control over resources, land, profit etc.  And they are always portrayed by war-mongering governments to their peoples as necessary to ‘save the nation’ or ‘defend our way of life’.  But are wars and military spending that goes with war a necessary cost to deducted from the profits of capital or alternatively an additional boost to making money? That question has been discussed and analysed over the last 150 years by capitalist strategists and Marxist theorists from Engels to Lenin and Luxemburg and on into the 20th century.

However, the costs of military spending have been in decline for most capitalist governments since the end of so-called ‘cold war’ with the Soviet Union.  So interest in whether arms expenditure and wars are beneficial or detrimental to capitalism has also fallen away.  A Marxist perspective on the economic of military spending has been badly neglected – until now.

Adem Yavuz Elveren, Associate Professor at Fitchburg State University in the US, has now rectified that with his new book, simply entitled, The Economics of Military Spending.  As an earlier pioneer in such analysis, Ron Smith of Birkbeck University says in his foreword, Elveren “examines the interaction of military expenditures and the rate of profit and their contribution to capitalist crises.  It not only redirects attention to an increasingly relevant old literature but also makes an original theoretical and empirical contribution to the analysis.”  The book combines theoretical analysis with detailed econometric investigations for 30 countries over last 60 years.

In my opinion, Elveren’s approach is the right way to do political economy or Marxist social science.  Mainstream economic analysis is either boxed into micro-foundation models or generates purely econometric studies based on unrealistic assumptions – or both.  And unfortunately, most Marxist economic analysis is locked into dissecting the meaning of Marx’s writings as dug up and translated from the MEGA or into esoteric academic arguments over the ‘logic of capital’.  While theory is important, it must be tested by empirical evidence or it useless.  And too little of Marxist analysis of capitalism does that.  For example, I am not convinced by the argument that, as there are regular and recurring crises in capitalist production, this proves that capitalism is a failed system.  And that’s all we need to know.  We don’t need to produce empirical data to show that.  But surely, empirical evidence is essential, otherwise we cannot show the causes of these regular crises, and moreover, whether Marx’s own explanation (as there are others) is the most compelling.

No such charge can be laid against Elveren’s book of failing to provide both a theoretical and empirical explanation of the role of military spending in capitalism.  Elveren correctly starts from the basic assertion of Marx that “the driving force of capitalism is profit.”  And so the book “stands at the junction of defence economics and Marxist economics, examining the effect of military expenditure (milex) on the rate of profit, an indicator of the health of a capitalist economy.”

From this perspective, Elveren takes the reader through a brief history of military expenditure and its apparent economic effects.  Then he considers various models of economic growth that connect military spending.  He deals with the theory of ‘military Keynesianism’, popularly presented as an explanation for the fast growth and full employment in the post-war period, the so-called golden age of 20th century capitalism.  And then he gets into the meat of argument by analysing the various versions of the theory of capitalist crises presented under the Marxist banner.

Chapters 4 and 5 are excellent surveys of various Marxist theories of crises from underconsumption, profit squeeze and the Marx’s law of the tendency of the rate of profit to fall.  He expertly handles Luxemburg’s view on imperialism and military spending, as well as the Baran-Sweezy thesis of military spending compensating for a stagnating monopoly capitalism – and the so-called ‘permanent arms’ economy idea promoted by Michael Kidron in the post-war period, that capitalism can avoid crises by milex.  If the reader wants to gain knowledge of all these theories of milex and crises without verbiage and confusion, he or she can do no better than read Elveren here.

I have some caveats. Elveren seems to accept the revisionist view of Michael Heinrich that Marx dropped his law of the tendency of the rate of profit to fall from the 1870s onwards.  Heinrich argues that the law is wrong and irrelevant to understanding the cause of crises.  I disagree and you can read more about that debate here.  But Elveren’s view is that “Heinrich’s argument seems plausible”; that Marx dropped the idea that the rate of profit must fall over time (namely that the law is a tendency that will eventually overcome countertendencies).  Instead the fall in the rate of profit becomes purely contingent and so whether it falls is just “an empirical question”.

While I disagree with that conclusion, because Elveren does see the law as an empirical question, he can pitch into providing empirical analysis (unlike Heinrich and others). Elveren is fully cognisant of all the empirical work done previously on measuring the rate of profit in the US and elsewhere and it is on this basis that he looks at whether milex will tend to increase or lower the rate of profit and how that affects the capitalist economy in both the short and long term.

The theoretical question at debate in Marxist political economy is whether the production of weapons is productive of value?  The answer is that it must be for the arms producers.  The arms contractors deliver goods (weapons) which are paid for by the government by appropriating value (either present or future). These goods are new use values which have been made under capitalist conditions of production. The labour producing them, therefore, is productive of value and surplus value.

But at the level of the whole economy, arms production is unproductive of future value, in the same way that ‘luxury goods’ for just capitalist consumption are.  Arms production and luxury goods do not re-enter the next production process either as means of production or as means of subsistence for the working class.  While being productive of surplus value for the arms capitalists, the production of weapons is not reproductive and thus threatens the reproduction of capital.  Arms production restricts the volume of use values that can be employed for reproductive purposes.  So if the increase in the overall production of surplus value in an economy slows and the profitability of productive capital begins to fall, then reducing available surplus value for future investment through milex can damage the health of the capitalist accumulation process.

But the outcome depends on the effect on the profitability of capital. The military sector generally has a higher organic composition of capital than the average in an economy as it incorporates leading edge technologies. So the sector would tend to push down the average rate of profit. On the other hand, if taxes collected by the state to pay for arms manufacture are high, then wealth that might otherwise go to labour is distributed to capital and thus can add to available surplus value.  Which way does it go?

To help answer that question, Elveren offers the reader a circuit of capital model to include the military sector based on the model developed by Duncan Foley.  But the question can only be answered empirically.  And this is what Elveren does in the latter part of his book.  He carries out a detailed empirical study to measure the impact of milex against the movement in the rate of profit on capital for most capitalist economies.  This is a far more extensive study than any before.  Elveren uses the Extended Penn World Tables and the Penn World Tables for his cross-country data, as I have done to measure a world rate of profit and rates of profit in individual countries.  As he points out, and as I know only too well, there are many technical problems with these databases and the definitions and assumptions used.  But it is the best we have.

Using his econometric skills, Elveren shows that, overall (from 1963-2008), milex had a positive effect on profit rates in capitalist countries, but that it had a negative effect in the shorter time period – the so-called neo-liberal period from 1980 onwards.  It seems that milex helped to sustain profitability during the great profitability crisis that started in the mid-1960s to the early 1980s, but after that, milex acted against overall profitability in a period when profit rates were rising.

Elveren offers a tentative explanation, “This might be due to the changing structure of major economies in the neo-liberal era. With the rise of the financial sector and the rentier class, the rising share of profits earned by firms has begun to be used for interest payments, dividends and other unproductive expenditure, causing a smaller faction of profit to be invested in capital stock.”  This explanation may be too simple, bearing in mind work by Campbell and Bakir and myself – see my recent post.

But anyway, it seems that the productive sectors of capitalist economies had insufficient surplus value to invest at the previous pace as capitalists switched to financial speculation where profitability was higher.  Military spending then became just another negative.  Milex may have had a mildly positive effect on profit rates in arms exporting countries but not for arms importing ones.  In the latter, milex was a deduction from available profits for productive investment.

Over the period 1963-08, Elveren finds that milex, as a stimulant to capital accumulation (with its high-level technology) was mildly positive in the US, but in other major countries it has a negative effect, particularly in those countries that imported their arms.  In all countries milex was damaging for employment as a whole, as the arms sector used less labour on average.  Thus milex may sometimes help the rate of profit for capital but the flipside is that milex will increase the ‘reserve army of labour’.  And as Elveren adds “the effect of milex may change at different levels of the rate of profit”.

So Elveren’s empirical work appears to back up the Marxist view of the role of military spending in a capitalist economy.  It can act to lower the rate of profit on capital and thus on economic growth as it did in the neo-liberal period, when investment and economic growth slowed.  But it can also help bolster the rate of profit through state’s redistribution of value from labour to capital, when labour is forced to pay more in taxation, or the state borrows more, in order to boost investment and production in the military sector.

In the greater scheme of things, milex is not decisive for the health of the capitalist economy.  At its height, its share in GDP reached an average of 13%.  But that was due to the Korean war.  Even during the cold war period, that share fell by half to around 6% of GDP.  With the collapse of the Soviet Union, military spending in the major imperialist powers halved again to 3%.  Milex is not going to decide the future of capital, one way or the other.  But thanks to Elveren’s work, we have a much clearer picture of the economics of war and military spending beneath the horrors of its outcomes.

HM3: the profits-investment puzzle

November 16, 2019

The other session at the Historical Materialism London conference that I participated in was on The Relation between Profits, Investment and Crises.  This was organised by Al Campbell from the University of Utah. In his paper, Al outlined how in the last two decades a gap opened up between the growth in profitability and the rate of investment and accumulation (Al Campbell).  Al showed that the share of investment in total US profits fell from the early 2000s until the Great Recession and still stands well below the average share in the 1980s and 1990s.

So what was going on after 2000?  Al strips out profits that were distributed as dividends to shareholders and interest to lenders and bond holders to expose retained earnings and finds that “the answer (and it is an answer as far as it goes) – the amount of real investment tracks retained profits. Retained profits have fallen as a share of profits, and so real investment has fallen correspondingly.”

But why has there been such a reduction in retained profits for productive investment and an increase in the share of profits going in dividends and interest?  And what do the shareholders and bondholders do with their share?  Do they spend it (capitalist consumption) or do they save it (in cash) or do they re-invest it (financial assets)?

From the data, Al reckons the reduction in the share of retained profits is not because interest costs have risen (interest rates are at all-time lows) or because companies pay more to shareholders.  More likely, it is because the profitability of productive investment has stayed low so there is an ’over-investment’ of productive capital and the unused profits are either hoarded as cash by companies, or distributed in increased dividends and more recently used in huge share buyback programmes to drive up the prices of company stock.

Al asked the question: is there empirical evidence to explain this profit-investment gap?  Well, I think there is some.  I raised the same puzzle in a paper to HM London 2016, The Great Recession: a Marx not a Minsky moment.  (Marx not Minsky) This is what I said then: “Usually, US corporations have invested more than they had available in corporate savings.  The only period that this was not the case is 2000-07.  But note, corporate savings between 2000-7 did not grow faster (5.3% pa) than in other periods.  What happened was that capex grew much more slowly (4.0%).  That suggests that corporate savings were switched into financial rather than productive investment.”

There clearly is some cash hoarding.  But this hoarding was concentrated in the large tech companies, which either kept this cash abroad to avoid tax and/or increased bond issuance on the back of these assets.  At the start of the credit crisis in 2007, companies with more than $2.5bn each in cash and near cash items, such as short-term investments, held 76 per cent of the $1.98tn of cash reserves of the non-financial members of the S&P 1200.  By the third quarter of 2013, this had risen to 82 per cent (of a total $2.8tn), the highest percentage since before 2000. Of non-financial companies in the S&P Global 1200 index, just 8.4 per cent hold 50 per cent of the cash.  Indeed, 40% of companies actually reduced their cash balances. Most small to medium size have no cash piles. Indeed, as I showed in that 2016 paper, cash as a share of total corporate financial assets is not particularly high historically.

The switch is from productive assets to financial assets.  I found in the 2016 paper, that there appears to be a surplus of corporate savings over investment in capex from about 2000 (red line in graph below). However, when you add in financial asset investment (green line), there is a huge deficit (net borrowing), which takes off at the end of the 1990s.  So non-financial companies increasingly borrowed to speculate (often in their own shares) and not invest productively.

Alan Freeman, a leading Marxist economist, attempts to answer the same question in a new paper.
Rate_of_profit_investment_and_the_causes (1)
Alan poses: “If American and British companies only invest the minority of their surplus, what do they do with the rest? Do they keep it in the form of money – a classic form of crisis?  Do they invest it abroad – a classic form of imperialism; Do they invest it in financial assets – ie saleable monetary instruments?”  Freeman reckons it must be a combination of all those. But “in any case, they don’t use it to boost new production.”  Here Freeman shows that rise in the purchase of US financial assets compared to productive assets.

Freeman suggests that there has been a switch to holding financial assets (shares and bonds) rather than investing in productive assets because “the lower the productive rate (of profit), the larger the proportion that remains in the form of currency or financial assets.” And Alan goes on to show that rates of profit in Europe, the US and Japan have continued to fall if you include financial assets.

In a recent post, I too made similar points and offered up some empirical work from other scholars on this puzzle. Also, I have recently used the KLEMS database to calculate the profitability of the US productive sector. Between 1987 and 1997, the profitability of the productive sector rose 12%, then fell sharply, provoking the mini-recession of 2001.  Profitability then recovered to previous levels by 2004.  But then four years of decline led into the Great Recession. The recovery in profitability after the slump of 2008-9 was weak and started to fall as early as 2011.  This can explain the weak investment in productive activities in the period after 2009 that I call the Long Depression.

I have argued on this blog that the profitability of capital is key to gauging whether the capitalist economy is in a healthy state or not. If profitability persistently falls, then eventually the growth in the mass of profits will slow and even fall absolutely and that is the trigger for a collapse in investment and a slump.  This was the basis of my own paper in this session, on the Profits-Investment nexus. Profits-Investment Nexus

In my view, the Marxian theory of crises is based on the movement of business investment.  A fall in investment, not consumption, is the swing factor in generating a crisis of overproduction and a slump.  Keynesians and post-Keynesians might (partially) agree. But they think that business investment decisions depend on ‘uncertainty’, ‘confidence’ or so-called ‘animal spirits’.

In contrast, Marx starts his analysis of capitalism with the discovery of surplus value through the exploitation of labour.  Profit is thus the driving force of capitalist accumulation.  What drives business investment is profitability, profits and the expectation of profits, not ‘animal spirits’. And what the profit-investment puzzle of the last two decades reveals is that it is the rate of profit in productive investment that matters.  If it is low or is falling, then capital switches abroad, or hoards cash or invests in financial assets (what Marx called fictitious capital).  If companies borrow to do so, then a credit bubble inflates, which bursts when profits in productive assets fall.

In the session, Bucknell University’s Erdogan Bakir provided powerful support for this theory of crises. (erdogan bakir) As Erdogan quotes James Crotty in his paper: Marx theorizes the increasing fragility, vulnerability or sensitivity of the contract-credit system in the mature expansion. As the expansion overheats, the ability to fulfill contractual obligations will be increasingly threatened by any significant decline in the gross rate of profit.”  Bakir identifies a profit cycle where profitability rises, then Marx’s law of the tendency of the rate of profit to fall kicks in, and profitability falls back. He identifies 11 such cycles in the US post-war economy.


Eventually, the share of profit in total output falls, creating the conditions for a slump in investment and production.  So it goes from the rate to the mass (this follows closely my thesis presented in the debate with Professor David Harvey at this year’s HM – see my post on HM1).

In the boom part of the cycle, production and investment rise and interest rates are low to encourage credit. But in the later part of that cycle, interest rates rise, corporate debt reaches highs and profitability starts to fall.  Thus, there is a scissor effect on capitalist investment.

The current cycle since 2009 has been the longest post-war cycle in the US and profitability has fallen since 2014, the longest period of decline.  The US economy is now in its late part of the current cycle.  But meanwhile, the stock market booms – way out of line with corporate profits.  Another recession is overdue.

What this HM session suggested is that the next recession has been delayed because of the unprecedented expansion of fictitious capital since 2000 as central banks push down interest rates to zero and implemented huge injections of money into the banks.  Companies have relied on fictitious profits from rising share and bond prices while profitability in productive investment (even overseas) remained low and falling.  But this contradiction cannot last, if Erdogan Bakir’s thesis of the profit cycle holds.

Every year, HM hears an address from the winner of the Deutscher Memorial prize “for a book which exemplifies the best and most innovative new writing in or about the Marxist tradition”.  Last year, the winner was Kohei Saito, associate professor of political economy at Osaka University, for his book on Karl Marx’s Ecosocialism: Capital,Nature and the Unfinished Critique of Political Economy. I missed his address but I’ll try and review that book in the near future.  This year’s winner, announced after the conference, was Brett Christophers from Uppsala University, Sweden with his book, The New Enclosure: The Appropriation of Public Land in Neoliberal Britain.  Again, I shall try and review that book soon.

Finally, there were many other sessions at HM on all sorts of subjects and issues, including others on Marxist political economy.  But I had no time to attend these. The three posts on HM are the best that I could do.

HM2 – The economics of modern imperialism

November 14, 2019

At the Historical Materialism conference, the Saturday discussion between Professor David Harvey and myself on Marx’s double-edge law attracted more than 250 people.  Sunday’s session on the economics of modern imperialism that I had organised also attracted a good turnout of around 60 people, many of which were clearly experts on the subject.  Unfortunately for them, the four speakers (including myself) went over their allotted times and used up the available discussion time – apologies all round!

Anyway, at least the speakers presented some important arguments.  I spoke last.  But I think in this post, I shall outline my presentation first because I think it sets the scene for the others.  G Carchedi and I have been working on some new empirical work, trying to gauge which countries are the imperialist ones and how much value they are able to extract from the dominated or periphery (we prefer those names rather than ‘Global North’ and ‘Global South’, which is too geographical).  We emphasise that we are looking at the economic foundations of imperialism, not the political aspects or the superstructure if you like, ie the political control by imperialist countries over the periphery, or military might or interventions etc.  Direct political control through colonies has mostly disappeared (although not completely); so imperialism operates mainly through economic control now (while throwing in the occasional coup or proxy war).  After all, that is the aim of the imperialist powers: to appropriate as much value and resources from the dominated as possible. In that sense, the economic determines the political.

If we focus on the transfer of value from the periphery to the imperialist economies, there are several ways that this is achieved. There is value transfer through unequal exchange in international trade; through global value chain flows (transfer pricing) within multi-nationals; through factor income flows (debt interest, equity profits and property rents); through seignorage (ie control of the money supply: dollar is king) and through capital flows (foreign direct investment inflows and portfolio flows. ie buying and selling financial assets).

So which are the imperialist countries?  Carchedi and I define them as those countries which get a long-term appropriation of value from subaltern countries.  And this is achieved by the appropriation of surplus value by high technology companies (and countries) from low technology companies (countries).  So imperialist countries can be defined as those with a persistently large number of companies as measured by their high national average organic composition of capital (OCC) and whose average technological development is higher than the national average of other countries.

In our work, we used the IMF data on net primary income flows between countries. These are cross-border flows of profit, interest and rent.  We found that when these flows are netted out, there are about 10 countries at the most that fit the bill as imperialist.  Indeed, nothing much has changed in the 100 years since Lenin wrote his analysis of imperialism: it’s still the same countries.  No others have made it from dominated to imperialist status.  Net primary income per head is concentrated in the G7 plus a few other small states and the tiny tax haven states).  Every other country is an ‘also-ran’.

The G8-plus countries own the vast bulk of all the foreign-owned assets.  Even the so-called BRICS (Brazil, Russia, India, China and South Africa) own little abroad compared to the imperialist countries.  The G8 has six times as much FDI stock as the BRICS.

The main way that value is transferred from the periphery to the imperialist nations is still through international trade. There has been a large increase in intra-firm trade by affiliates to the parent company using price mark-ups (transfer pricing).  For example, UNCTAD reckons that trans-national companies (TNCs) are involved in 80% of global trade. And of TNC trade, about 40% is intra-firm; 15% through fixed contracts with suppliers and 40% with so-called arms-length firms (ie not owned affiliates but ‘captive’ domestic firms). Actual intra-firm trade (affiliates to parent company) is about 33% of all annual trade.  So the main way is still export trade on world markets with internationally set prices.(UNCTAD GVC)

In Capital, Marx shows that, through competition, there is a tendency for the profit rates measured in value (labour time) to equalise into prices of production. There is a transfer of value from some capitals to others to bring about this equalisation of profit rates.  This transfer process in competition also applies to international trade. The transfer of value from the dominated to the imperialist economies is achieved by the tendency to equalise rates of profit between nations in the international market for goods and capital.

The periphery has less technology and more labour and so produces more value (in labour time) to make the same product.  The imperialist countries have more technology and less labour and so produce less value (in labour time).  When profit rates are equalised through competition in world markets, then a portion of the extra surplus value that has been extracted from the workers by the capitalists in the South gets transferred to the capitalists of the North.  So, although international trade in goods and services appears to work through equality of exchange (money for goods, goods for money at set prices), beneath the surface, there is an unequal exchange of value (UE).  The imperialist capitals gain extra value while the peripheral capitalists lose value. Figure 13 of my PP presentation shows how this transfer of value works. (The economics foundations of imperialism)

Carchedi and I have made calculations of the magnitude of this transfer of value.  We used some aggregate databases and applied a formula for the transfer. Details of this are in Figure 14 of the PP presentation and excel files are available for anybody who wants to replicate and check our methods and workings.  We found that the transfer of value from the dependent bloc (defined as below) to the G7 rose from $20bn a year in the 1960s; to $90bn in the 1970s, dropping off to $50bn in the 1980s. Then with China becoming the great trading force, there was a take-off from the late 1990s to reach over $120bn by the time of the Great Recession.

So there is annual value transfer from these countries to the G7 through their international trade of $120bn or more a year. This annual transfer of value to the imperialist countries (G7) is equivalent to about 2-3% of their combined GDP.  But the transfer from the dominated countries is much more, around 10% of their combined GDP.  So there is a substantial transfer out of the South through unequal exchange.

Recently, other authors have tried to compute the magnitude of the transfer of value to imperialist countries. Using the World Input-Output database, Italian economist Andrea Ricci of Urbino University, Italy found that for the developed countries “the global amount of value transfers corresponded to 1.8 percent of global value added… while for developing economies, the relative size of outflow transfers ranged from 10 to 20 percent of the domestic value added.” Ricci unequal exchange And Greek Marxist economists, Lefteris Tsoulfidis and Persefoni Tsaliki, looked at the transfer of value in trade between the US and China.  They find a similar magnitude of bilateral transfer of value between the US and China as we do. URPE_CHN_2019

In our view, based on the Marxian theory of unequal exchange, the transfer of value from the periphery to the imperialist countries through international trade and competition takes place because the imperialist countries have a much higher organic composition of capital.  That expresses their technological superiority and delivers much higher labour productivity.  The G7 economies on average are five times more technologically superior than the BRICS and so four times more productive per worker.

This is where the other speakers at the session come in.  John Smith is author of the highly commended, award-winning book, Imperialism in the 21st century.  The book’s main argument is that imperialism rests and thrives on the ‘super-exploitation’ of workers in the ‘Global South’.

What do we mean by ‘super-exploitation’? Well, Marx referred briefly to the idea that some workers may end up receiving wages that are below the value of their labour power (the amount needed to live and reproduce). But he did not base his theory of surplus value on ‘super-exploitation’. For Marx, even without super-exploitation, workers were still exploited for surplus value and profit under capitalism.

However, John Smith reckons that super-exploitation is now the main generator of imperialist value gains in the 21st century and technological superiority and ‘normal’ exploitation are no longer in the driving seat, so to speak. For John, this is almost self-evident, given the incredibly low wages in the sweatshops of many Global South countries and the huge mark-ups in the global value chain for imperialist multi-nationals.  Anybody who denied this and argued that workers in the North were just as or even more exploited would be denying the very existence of imperialism.

At the HM session, Andy Higginbottom from Kingston University provided some of the theoretical support for  the thesis of ‘super-exploitation’ as the economic driver of imperialism (HM 2019 Labour super-exploitation plus transformation makes for international value (1).  He pointed out that Marx’s transfer of value model as shown in our PP Figure 13 assumed equal rates of surplus value. That clearly could not be reality. If you relaxed that restriction, then different rates of surplus value between imperialist and peripheral economies come into play in the transfer of value, and not just differing rates of organic composition and labour productivity.  And then it can be argued that the rate of exploitation is not just affected by labour intensity, productivity etc, but also by differences in wages (ie super-exploitation).

But I don’t think Marx’s theory of unequal exchange must assume equal rates of surplus value in all countries.  In Figure 20 of our presentation, we show that value is transferred from South to North through trade in the same way even with differing rates of exploitation; indeed if the rates of surplus value are higher in the South, then the North gains even more value in the transfer. But the Southern capitalists also gain more, because they are exploiting their workers even more, either by longer hours and intensity and/or by poverty wages.

The point is that the transfer to the North takes place because of the imperialist countries’ superior technology and labour productivity.  That enables them to sell their goods in world markets at costs below the international average.  The Southern capitalists try to compensate for their lower technical level and productivity by driving the wages of their workers down. So the higher rate of exploitation in the South, whether by super-exploitation or not, is a reaction to the failure to compete against the North.

In our empirical analysis, we found that the contributions to the transfer of value from South to North came from both higher organic composition in the North and higher rates of exploitation in the South – it is both, not just technical superiority, nor just exploitation. But there is also a transfer of value between imperialist countries through trade.  And indeed, competition there remains fierce.  The annual flows of FDI show that, until very recently, flows between advanced capitalist economies were higher than between the imperialist and the less developed South.  In the decade from 2007, inflows to developed economies exceeded inflows to developing economies.  Last year was the first reversal of that.

In his paper for the HM session, Smith developed an analysis of the rate of exploitation (s/v).  Exploitation and super-exploitation in the theory of imperialism.  He reminds us that Marx recognised a so-called ‘moral and historical’ component in the value of labour-power, i.e. “the extent to which the class struggle and general social evolution (different ways of saying the same thing) has resulted in the incorporation of new needs into those necessary for the reproduction of labour-power.”

That means that the value of labour power is partly set by the class struggle. But super exploitation is not part of Marx’s theory of value, or s/v.  In the process of production, capitalists might force a lower wage. If the necessities of life and their production prices remain the same, the lower wage purchases less wage goods (consumption falls) as the price of labour power (wages) falls below its value (the production price of those socially determined necessities). That is super exploitation.  But if this low wage is maintained permanently, workers must eventually accept a lower value of labour power in the goods and services that they can buy with it.  In that sense, super exploitation becomes simply a higher level or rate of (“normal”) exploitation because the value of labour power has been lowered by the class struggle. Yes, there is more exploitation, but not ‘super-exploitation’ as a new category of capital.

So I don’t think that super-exploitation is proven either theoretically or empirically as “the single-most important means of increasing the rate of surplus value and countering the tendency of the rate of profit to fall.” (Smith).  Or that imperialism has an “insatiable lust for super-exploitable labour”.  Imperialism has a lust for profit and is the result of the drive for more profit beyond national borders as the rate of profit at ‘home’ fell.  Denying the dominance of super-exploitation as the main form of exploitation under imperialism is not “imperialism denial”, like global warming or climate change denial, as Smith suggests.

Moreover, it just might be that the days of ‘super-exploitation’, as Smith categorises it, are ending.  At the launch of a new book at HM, Ashok Kumar, a lecturer in International Political Economy at Birkbeck University, argued that there are signs that the ‘monopsony’ power of the imperialist buyers of the products of suppliers in the global South is weakening because the number of producers is also shrinking.  This increases the countervailing power of the Southern capitalists (producers) against the Northern capitalists (retailers).  And that gives a window of opportunity for the workers of the Southern sweat shops to push up wages through successful struggles – of which Kumar gives examples.

While it is possible to argue any super exploitation of the workers in the low technology countries (the so-called “South) is caused by the technological backwardness of the South’s capitalists, it is impossible to argue the opposite; that this technological backwardness is caused by super exploitation. And if super exploitation is determined, it cannot be the main determinant element. In sum, the productivity of labour is key to the transfer of value in trade between imperialist countries and the periphery. The major cause of UE is technological superiority. Differences in the rates of surplus value are significant but play a lesser role. Exclusive emphasis on only one of these two factors is misleading.

Moreover, even it were the case that super-exploitation is the main cause of higher rates of surplus value in the peripheral economies, a transfer of value has to take place.  And that can only go to countries with vastly superior technology and labour productivity and can maintain that superiority through monopolising that technology.  Indeed, that was one of the arguments made by Sam King, from Victoria University Australia, at the HM session, based on his upcoming book on imperialism.

Sam reckoned that Lenin’s Imperialism was still valid.  There were still only a few countries reaping these value transfers.  Although Lenin refers to ‘monopoly capital, he did not mean that there was no competition between capitals. Competition still took place voraciously between various imperialist economies but also with ‘Southern’ capitalists. The monopoly was in the technical superiority of the imperialist companies, which they jealously guarded.  The labour productivity gap between these countries and the periphery had not altered since Lenin’s time.  Now in the 21st century, the US is worried that its technology ‘monopoly’ may be threatened by China’s move up the value-added ladder. This is the real reason for the current trade war.

The empirical evidence shows that imperialism is an inherent feature of modern capitalism. Capitalism’s international system mirrors its national system (a system of exploitation): exploitation of less developed economies by the more developed ones. The imperialist countries of the 20th century are unchanged – it’s still the G7/10. There are no intermediate, ‘sub-imperialist’ economies. And China is not imperialist on these measures. And the transfer of value from the periphery to the imperialist core is continually rising.

Finally, Marx’s model of unequal exchange shows that the economics of imperialism works through the transfer of value by the exploitation of the workers of the South by the capitalists of the South and then through the transfer of some of that surplus value appropriated to the capitalists of the North in international markets and internal global value chains. The workers of the North do not benefit in any way from this imperialist transfer.

To suggest, as some do, that the welfare state, pensions and national health services in the North were only possible because of the imperialist exploitation of the South is economic nonsense. After all, the great period of imperialist exploitation was in the neo-liberal period of globalization since the 1980s, when the welfare and wage gains of workers in the North were taken back.  Globalisation of the late 20th century was a response to falling rates of profit in the North (as it was in the late 19th century).  It is also a political insult against the class struggles made by Northern workers to achieve those gains in the first place.  Both the workers of the South and the North are exploited by capital.  It is capital that is the enemy of both.

HM1 – Marx’s double-edge law

November 11, 2019

This year’s Historical Materialism (HM) conference in London was apparently attended by over 850 people with some 400-plus papers presented over three days.  HM brings together radical and Marxist academics and activists to discuss and debate issues covering the spectrum of socialist issues: philosophy, culture, science, history and economics. This year’s theme was on climate change and ‘extinction’. But as usual, this blog will concentrate on the Marxian economics sessions and, within that, only those sessions at which I presented or attended, and thus only scratching the surface.

My first presentation was to help launch a new revised version of Invisible Leviathan, a book by Professor Murray Smith of Brock University, Ontario, Canada. Postgraduate student Josh Watterton also added some new insights on the empirical work on the US rate of profit too.  Murray Smith’s book is a must read for those who want to understand Marx’s law of value (the ‘invisible leviathan’) and get a clear rebuttal of all the distortions and mistakes made by Marxists and others about the law since Marx died.  I have reviewed this book before and wrote a foreword to the new edition.  You can read that here.  And Josh Watterton’s work will soon be available too.  So I won’t go any further in reviewing that session.

Instead in this post, I want to concentrate on my second session, namely the discussion between me and Professor David Harvey.  David Harvey (DH) is one of the world’s pre-eminent geographers and a prolific writer of books and articles on Marxian economic theory, as well as on the structure and trends in modern capitalism. For his latest view on that, see his book  Capital and the Madness of economic reason.

Over the years, DH and I have debated and discussed issues on Marx’s law of value and his law of profitability.  DH rejects the view that Marx’s law of the tendency of the rate of profit to fall (LRTPF) has much to do with changes in a capitalist economy or as a cause of crisesHe has criticised me and others who hold that view of being ‘monocausal’ ie obsessed with one cause when crises are the result a multiplicity of causes. He also thrown doubt on whether Marx’s law is logically valid, empirically supported and even if Marx continued to support it in his later years.  I won’t go over old ground here and you can read these various issues on my blog in many posts.

On this occasion, DH entitled his presentation, Marx’s ‘Double-Edged Law’ of the Falling Rate of Profit and the Rising Mass of Profit.  DH kindly sent me an unfinished paper of his that outlined the argument he was going to make.  The gist of it was that many Marxists pay too much attention to the rate of profit in looking at capitalism and not what is happening with the mass of profit.  And yet Marx’s law is double-edged.  Marx spells it out in Volume One of Capital: “despite the enormous decline in the general rate of profit…the number of workers employed by capital i.e. the absolute mass of labour set in motion by it, hence the absolute mass of the surplus labour absorbed, appropriated by it, hence the mass of surplus value it produces, hence the absolute magnitude or mass of the profit produced by it, can therefore grow, and progressively so, despite the progressive fall in the rate of profit.” He then adds: “this not only can, but must be the case…. The same laws “produce both a growing absolute mass of profit, which the social capital appropriates, and a falling rate of profit.” And then Marx asks:  How, then should we present this double-edged law of a decline in the rate of profit coupled with a simultaneous increase in the absolute mass of profit arising from the same causes?”

Thus DH argues that it is really the mass of profit and capital that we must look at for an indication of what is happening in a modern capitalist economy.  At the HM session, DH pointed out examples of why mass was more important than the rate of change in the mass.

Quantitative easing (an expansion of the mass of money supply) used by central banks since the end of the global financial crash to save the financial system and the economy with floods of money was one example.  Central banks were using ‘mass’ rather than rate (interest rate).  But this had only benefited the rich through the stock and bond markets.

Then there was climate change. So large had annual carbon emissions reached (over 400ppm) that the rate of increase was increasingly irrelevant; the damage was already done and cutting back the mass was now the issue.

On the economic front, DH pointed out that world GDP had doubled in real terms every 25 years and so even slow growth in GDP was less important to analyse than the sheer size of annual output and use of resources.  China was now sucking up the world’s natural resources fast and producing cement at astronomical levels; not because it was growing fast (growth is slowing) but because China was now so large (mass).

These were very imaginative insights by DH.  But disconcertingly for me, he made no further explanation of this theme in relation to Marx’s law of profitability (LTRPF) or for that matter the double-edged nature of Marx’s law as expressed above.  I had prepared a detailed response to the arguments in his paper, most of which he had not mentioned in his address.  But I decided to plough on regardless and try to answer his new critique of what I called the work of ‘we falling rate of profit boys and girls’ (and there are girls).

As Marx explained and DH quoted, the LTRPF has a double-edge.  As the rate of profit falls in a capitalist economy, it is perfectly possible, indeed likely, that the mass of profit will rise.  It’s arithmetical really: a falling rate still implies a rising mass.  But a double-edge cuts both ways.  As Marx goes on to explain in Volume 3 of Capital (chapter 13).  The two movements not only go hand in hand, but mutually influence one another and are phenomena in which the same law expresses itself….. there would be absolute over-production of capital as soon as additional capital for purposes of capitalist production = 0.   at a point, therefore, when the increased capital produced just as much, or even less, surplus-value than it did before its increase, there would be absolute over-production of capital; i.e., the increased capital C + ΔC would produce no more, or even less, profit than capital C before its expansion by ΔC.”  So the mass of profit can and will rise as the rate of profit falls, keeping capitalist investment and production going.  But as the rate of profit falls, the increase in the mass of profit will eventually fall to the point of ‘absolute over-accumulation’, the tipping point for crises.

And it is not true that the LTRPF supporters ignore this double edge law. On the contrary, the most important exponent of the LTRPF in the 1920s, who virtually revived this theory of crisis against alternatives, Henryk Grossman, built his whole theory around the double-edge law and what happened to the mass of profit as the rate of profit fell.  I quote: “Not only does the rate of profit fall but the rate of growth of the mass of profit …. also falls behind the rate of growth of the total value of production.  So a point is eventually reached when the increase in mass of profit is not large enough to cover the projected increase in investment, which is growing at a higher rate. The rate of profit cannot, therefore, fall indefinitely. Whatever the rate of accumulation assumed in the model, the rate of profit eventually declines to a level at which the mass of surplus value is not great enough to sustain that rate of accumulation (Grossmann 1929b p. 103, Grossmann 1932a pp. 331-332). It was this mechanism, which he saw as intrinsic to the process of capital accumulation, that Grossman regarded as ‘the decisively important’ factor in Marx’s theory of economic crisis and breakdown (Grossmann 1929b p. 183).

Grossman spent a large part of his masterpiece creating tables showing how the rate and mass of profit affect each other and so ended up with a crisis based on insufficient profit to sustain further investment.  The table below gives you a simple arithmetic version from me.

Here we have two capitals, one Big ($100) and one Small ($10).  The whole economy totals 100+10 = 110.  There is an average rate of profit that applies to both capitals.  I start this at 10% and reduce in each following year. The rate of profit falls but the mass of profit (the profit for big and small capitals combined) rises each year.  So that by year 9 the mass of profit is $132.8 compared to $100 at the start of year 1.  But note that the rise in the mass of profit is falling towards zero.  Indeed, the growth in profits for the small capital in absolute dollars is infinitesimal by year 9.  And with a slowing rise in the mass of profit, investment will also slow and Grossman argues would eventually stop, triggering a crisis of production.

This is a very unrealistic example, however.  In the example, the rate of profit falls from 10% to nearly zero.  That does not happen in any capitalist economy.  So let us consider a real example.

Here we have the actual figures for the US rate of profit and the mass of profit (as calculated by me – see my post Measuring the US rate of profit in 2018) leading up to the Great Recession.  The rate of profit rises from 2002 to 2006 and then starts to fall, reaching a trough in 2009.  The mass of profit also rises but then contracts in 2007 (one year later than the rate) and in 2008 coinciding with the Great Recession.  So the falling rate of profit eventually takes the mass of profit down, leading to an investment collapse and a slump in capitalist production.  Marx’s double-edge law.

This is seen much more clearly when we use quarterly figures for the mass of profit, investment and GDP.  The graph below comes from Chapter 1 of the book World in Crisis (2018), edited by G Carchedi and me.

The mass of corporate profits peaks in mid-2006; while business investment and GDP follow 18 months later.  The mass of profits starts to recover at the end of 2008 but the Great Recession only ends in mid-2009 when investment and GDP recover.  Profits lead investment, and the rate of profit leads the mass.

And in every US recession since the war, it is broadly the same.  The rate of profit falls before each recession from a peak by between 6-20% and the (growth) in the mass of profit then drops by 5-12% points.  The mass of profits may not go negative (although it did before the Great Recession) but it slows considerably, causing an investment strike by capital.

This is not really surprising.  If company management see their profits or earnings slowing, they reduce their investment expansion and employment hiring and even reverse it.

Indeed, we ‘falling rate of profit boys and girls’ have been well aware of Marx’s double-edge law, even if DH has only just discovered its importance.  For example, in our World in Crisis book, in one chapter, Jose Tapia from Drexel University, shows the close connection between the changes in the mass of US corporate profits and investment, leading to successive crises.  As Tapia concludes from his empirical analysis: “the evidence is quite overwhelming that profits peak several quarters before the recession.  Then profits recover before investment does as illustrated by the investment trough that occurs around the end of the recession or the start of the expansion, but following the profit trough for at least a few quarters.”  And G Carchedi in another chapter in that book shows that when total new value (mass) in a capitalist economy starts to fall along with a fall in the rate of profit and employment, a slump in production follows.

DH commented in the discussion that I and other LTRPF exponents only ever seem to concentrate on the US for data and ignore other countries.  Anybody who reads World in Crisis will find analyses from scholars on the US, Canada, Mexico, Argentina, Brazil, Greece, Spain, the UK, China and Japan.  At HM itself there was a paper that looked at the LTRPF and the mass of profit in Finland (see HM programme Friday)!  In addition, there are studies on Sweden, Germany, Italy, Korea and South Africa.

In the session, DH brought to our attention the importance at looking at the mass or size of things and not just the rate of change.  That is undoubtedly useful.  But I think DH’s purpose was also to weaken belief in the role of Marx’s law of profitability and its relevance to crises.  By bringing up the double-edge law, it seems to me, DH was saying that a rising mass of profit or capital stock or GDP is the problem. And thus the problem for capitalism is not insufficient profit due to a falling rate but too much surplus due to rising mass.  How are we going to absorb or cope with ‘too much’ is the problem.

This connects with DH’s view that crises under capitalism arise because of too much capital or profit relative to the ability of consumers to use it.  Indeed, DH argues that it is consumer confidence and the level of consumption that matters in triggering crises not the rate or level of profits and investment. But the evidence on that does not support DH’s thesis as I have shown before.

In every US recession since 1945, it has not been a fall in household consumption levels that has emerged before a slump, but a fall in business investment levels.  Consumption may be 70% of US GDP on official accounts (it is actually much less), but it is the 15-20% of GDP in capital investment that is the swing factor in causing slumps.  Consumption hardly drops – because households have to go on paying for energy, food and basics, running up debts and running down savings.

It was argued from the floor in the debate that consumption has stayed up because households borrowed (particularly mortgages for housing) in the neoliberal period, and when that borrowing got too high, then the house of cards collapsed and this caused the Great Recession.  This thesis was expounded by several post-Keynesians and mainstream economists like Mian and Sufi in their book, House of Debt.  It has been dealt with by me in other posts, so I won’t go into it now.

Marx’s double-edge law of profit is actually the basis of the profit cycle that leads to boom and slump and then boom again in capitalist economies – as I show in this graph that I use often.

Starting at the top, the capitalist economy booms but the rate of profit falls; then as we go clockwise, the rate of profit eventually slows the rise in the mass of profit and then leads to the fall in investment.  At the bottom that triggers a financial and credit collapse.  Then once the costs of capital and labour have been reduced through the laying off labour, merging companies and liquidating weak ones, the survivors can start the process again, as the rate and mass of profit rises again.

DH rejects Marx’s law of profitability as the underlying cause of crises in favour what he has called a multiplicity of causes.  He accuses those who focus on Marx’s rate of profit law as being ‘monocausal’.  But he finds it difficult to refute the empirical evidence of a falling rate of profit.  So now he has moved the goal posts from the rate to the mass.  But shifting the goalposts just leaves us with a new goal to score in.  Marx’s double edge law is not a refutation of the law of profitability as the underlying cause of crises; on the contrary, it is the foundation.  And alternative causes (like underconsumption, ‘too much surplus to absorb’, disproportion, financial fragility etc) remain unconvincing and unproven in comparison.

My next post on HM will cover the session on the economics of modern imperialism.

US rate of profit measures for 2018

November 4, 2019

Every year, I look at measuring the US rate of profit a la Marx.  Official data are now available in order to update the measurement for 2018 (not 2019 yet!). As usual, if you wish to replicate my results, I again refer you to the excellent manual for doing so, kindly compiled by Anders Axelsson from Sweden. 

There are many ways to measure the rate of profit a la Marx (for the various ways, see As previously, I start with an update of the measure used by Andrew Kliman (AK) in his book, The failure of capitalist production. AK measures the US rate of profit based on corporate sector profits only for the numerator and uses the historic cost measure of net fixed assets as the denominator (ie s/C).  AK considers this measure as the closest to Marx’s formula, namely that the rate of profit should be based on the advanced capital already bought (thus historic costs) and not on the current cost of replacing that capital.

Marx approaches value theory temporally so the value of the denominator in the rate of profit formula is at t1 and should not be changed to the value at t2. To do the latter is ‘simultaneism’, leading to a distortion of Marx’s value theory.  For more on this, see AK’s book, Reclaiming Marx’s Capital.  This seems correct to me. But the debate on this issue of measurement continues and can be found in the appendix in my book, The Long Depression, on measuring the rate of profit.

What are the results of the AK version for the US rate of profit up to 2018?

First, the AK measure confirms Marx’s law in that there has been a secular decline in the US rate of profit since 1946 (27%) and since 1965 (31%).  But also interesting is that, on AK’s measure, the rate of profit in the US corporate sector has risen since the trough of 2001 (17%).  Indeed, the Great Recession of 2009 did not see a fall below that 2001 trough. So the 2000s appear to contradict the view of a ‘persistent’ fall in the US rate of profit. I’ll consider some explanations for this later in this post.  But even so, on AK’s measure, the US rate of profit has not returned to the level of 2006 and in 2018 is some 18% below.

Readers of my blog and other papers know that I prefer to measure the rate of profit by looking at total surplus value in an economy against total private capital employed in production; to be as close as possible to Marx’s original formula of s/C+v. So I have a ‘whole economy’ measure based on total national income (less depreciation) for surplus value; net non-residential private fixed assets for constant capital; and adding in employee compensation for variable capital (AK does not do this).  This is what might be called a general rate of profit.

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

Brian Green has done some powerful work in measuring circulating capital and its rate of turnover for the US economy in order to incorporate it into the measure of the rate of profit.  He considers this vital to establishing the proper rate of profit and also as an indicator of likely recessions. You can consider the usefulness of Green’s work at his website here: . All I would say now is that adding circulating capital to fixed assets in the denominator does not make much difference to the outcome for measuring the US rate of profit.

Anyway, on my ‘whole economy’ measure, the US rate of profit since 1946 to 2018 looks like this.

I have included measures based on historic (HC) and current costs (CC) for comparison.  What this shows is that the current cost measure hit its low in the early 1980s and the historic cost measure did not do so until the early 1990s. Why the difference? Well, Basu (as above) has explained. It’s inflation. If inflation is high, as it was between the 1960s and late 1980s, then the divergence between the changes in the HC measure and the CC measure will be greater. When inflation drops off, the difference in the changes between the two HC and CC measures will narrow.  From 1965 to 1982, the US rate of profit fell 20% on the HC measure, but 35% on the CC measure.  From 1982 to 1997, the US rate of profit rose just 9% on the HC measure, but rose 29% on the CC measure.  But over the whole post-war period up to 2018, there was a secular fall in the US rate of profit on the HC measure of 30% and on the CC measure 30%!

The data confirm Marx’s explanation of the trends in profitability.  According to Marx, the driver of changes in US profitability depends on the relative movement of two Marxian categories in the accumulation process: the organic composition of capital (C/v) and the rate of surplus value (exploitation) (s/v).  Since 1965, there has been the secular rise in the organic composition of capital (HC measure) of 60%, while the main ‘counteracting factor’ in Marx’s law of the tendency of the rate of profit to fall, the rate of surplus value, has actually fallen over 9%.  So the rate of profit fell 30%. Conversely, in the so-called ‘neo-liberal’ period from 1982 to 1997, the rate of surplus value rose 16%, more than the organic composition of capital (11%), so the rate of profit rose 9%.  Since 1997, the US rate of profit has fallen around 5%, because the organic composition of capital has risen nearly 17%, outstripping the rise in the rate of surplus value (4%).

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

It appears there was significant rise in the rate of profit in the early 2000s to a peak in 2006, after which there was fall through to the Great Recession of 2008-9.  The 2006 peak was higher than the peak of 1997.  How can we explain this?  Well, in the period after the end of the mild recession of 2001 there was a massive credit-fuelled boom that led to profits in the financial sector reaching a record share of around 40% of total profits by 2006.

The profitability of the US non-financial corporate sector also rose in the period 2002-06.  It seems that the non-financial sector profitability was also boosted by the credit boom up to 2006.

But the non-financial sector is not strictly the same as the Marxian definition of the ‘productive’ sector.  A clear distinction must be made between the productive sectors of the capitalist economy ie where new value is created and the unproductive, but often necessary, sectors of the economy. The former would be manufacturing, industry, mining, agriculture, construction and transport and the latter would be commercial, financial, real estate and government.

Recently, Dimitris Paitaridis and Lefteris Tsoulfidis (PT) from the University of Macedonia separated the rate of profit for the whole economy into a ‘general rate’ for all sectors and a ‘net rate’ for just the productive sectors. This shows the following for the US general and net rate of profit from 1963 to 2015.

As in other measures, the US rate of profit is around 30% below 1960 levels but bottomed in the early 1980s with a modest recovery to the late 1990s in the so-called neoliberal period.  Interestingly, on their measure, the peak in the rate of profit was in 1997/2000, which was not surpassed in the credit boom of 2002-6 before the Great Recession.  This difference in results from AK’s and mine may be due to PT’s use of gross capital stock (before depreciation) rather than net capital stock (after depreciation) where PT find the data dubious. PT argue that the falling profit rate from 1997 onwards induced the banking sector to cut interest rates to boost lending, exposing the economy to excessive credit which eventually burst in 2007.  PT find that regression analysis showed “unidirectional causality from the rate of profit to the interest rate and unproductive activities.”

Canadian scholars Smith and Butovsky offer a similar explanation for the rise in profitability after 2001. They consider it as “anomalous and based to a considerable extent on ‘fictitious profits’ booked in the finance, insurance, and real-estate sectors, and perhaps also by many firms operating in the productive economy.”  This is a similar conclusion reached by Australian scholar Peter Jones. He found that if you strip out ‘fictitious profits’, then the US corporate sector rate of profit actually fell from 1997 – see his graph below.

More recently, in a yet unpublished thesis, Josh Watterton of Brock University, Canada argues that “although the ARP peaked in 2006, this peak was mainly due to an excessive amount of “fictitious profits” treated as real corporate booked profits.” By 2005, FIRE (finance, insurance and real estate) sector profits doubled from 2000, totalling a near $270Bn; and reached $300Bn mark in 2016. Here is Watterton’s estimate.

Fictitious capital are financial assets like stocks, bonds and derivatives of those.  The buying and selling of these financial assets can deliver profits that are booked on the accounts of companies.  But they are not profits from investment in the production of commodities through the exploitation of labour power.  Only that can produce new value.  So if profitability and profits from productive investment fall, the profits from speculation in stocks and bonds may then also disappear and turn out to be ‘fictitious’. That is what happened from 2007 onwards.

I used the KLEMS database to calculate the profitability of the US productive sector, as defined above.  Between 1987 and 1997, the profitability of the productive sector rose 12%, then fell sharply, provoking the mini-recession of 2001.  Profitability then recovered to previous levels by 2004.  Three years of decline then led into the Great Recession. The recovery in profitability after the slump of 2008-9 was weak and in 2018 profitability remained below the peaks of 1997 and 2004 and started to fall as early as 2011.  This can explain the weak investment in productive activities in the period after 2009 that I call the Long Depression.  PT make the same point.

Using another database (the EU’s AMECO), I calculated the weighted (by GDP) average overall rate of profit in the top six capitalist economies of the world.  There was a sharp rise in profitability from 2002 to 2006; then profitability fell and the Great Recession ensued.  Profitability recovered at the end of the Great Recession but, on average, remains below the level prior to the great crash.

I have argued that the profitability of capital is key to gauging whether the capitalist economy is in a healthy state or not.  If profitability persistently falls, then eventually the mass of profits will start to fall and that is the trigger for a collapse in investment and a slump.

In 2018, on my measure, US overall profitability rose very slightly over 2017 (probably due to Trump’s corporate tax cuts).  But profitability in 2018 was still 5-7% below the 2014 peak.  If we assume real GDP, employee compensation and fixed asset growth for 2019 similar to the mini-recession of 2015-16, we can expect a further significant downturn in US profitability this year, to levels well below 2006.

Indeed, the period from 2014 to 2019 is now the longest period of contraction in US profitability since 1946.  Recessions have usually followed after just 2-3 years.  A recession is long overdue.

Despite this, the US stock market is hitting new record highs.  Corporate debt in the US is at record highs.  The price of bonds (the inverse of yields) are at record highs.  So fictitious capital is racing up again just as it did in the period 2002-06.

In contrast, the profitability of capital (a la Marx), profit margins (the gap between costs and revenues per unit of production) and the mass of corporate profits are all falling.  From 2006, the fall in profits in productive investment eventually led the economy down into recession despite record fictitious profits.  That situation beckons again.

Corporate debt, fiscal stimulus and the next recession

October 22, 2019

The debt owed by corporations in the major economies has risen since the end of the Great Recession in 2009.  With global growth slowing and the prospect rising of an outright global recession recurring ten years after the last one, the debt held by corporations may soon become so burdensome to a sufficiently large number of companies that it triggers a round of corporate bankruptcies.  The banks will then see a sharp rise in non-performing loans. That could lead to a new credit crunch as banks refuse to lend to each other.

Such a credit squeeze briefly erupted last month, when the US Federal Reserve was forced to inject over $50bn into the banking system in order to reverse a very sharp rise in inter-bank interest rates as cash-flush banks refused to help out weaker ones.  The cause of that squeeze was a rise in the supply of government bonds as the Trump administration issued more to cover its rising budget deficit.  Some banks were not able to fund the purchases they were committed to without borrowing. So, as bank reserves held with central banks in US, Europe and Japan have surged, interbank money market volume has declined.

As a result of this shock to the credit markets, the Fed has returned to the market to buy short-term Treasury bills to restore bank liquidity.  So, having ended quantitative easing (buying bonds) and started to hike its policy interest rate last year, the Fed has had to backtrack, cut rates and re-introduce QE again. More than half of central banks are now in easing mode, the biggest proportion since the aftermath of the financial crisis. During the third quarter of 2019, 58% of central banks cut interest rates.

In its latest Global Financial Stability report, the IMF expressed its worry that: “corporations in eight major economies are taking on more debt, and their ability to service it is weakening. We look at the potential impact of a material economic slowdown—one that is as half as severe as the global financial crisis of 2007-08 and our conclusion is sobering: debt owed by firms unable to cover interest expenses with earnings, which we call corporate debt-at-risk, could rise to $19 trillion. That is almost 40 percent of total corporate debt in the economies we studied, which include the United States, China, and some European economies.”

And in emerging markets: “external debt is rising among emerging and frontier economies as they attract capital flows from advanced economies, where interest rates are lower. Median external debt has risen to 160 percent of exports from 100 percent in 2008 among emerging market economies. A sharp tightening in financial conditions and higher borrowing costs would make it harder for them to service their debts.” Tobias Adrian and Fabio Natalucci, two senior IMF officials responsible for the Global Financial Stability Report, said: “A sharp, sudden tightening in financial conditions could unmask these vulnerabilities and put pressures on asset price valuations.”

I have suggested for some time (years) that corporate debt could be the financial trigger for a new recession.  It was housing debt (sub-prime mortgages) in 2007-8; now it could be corporate debt (through ‘leveraged loans’ ie loans companies already loaded with debt).

Now it seems that the IMF is catching on to that possibility.  Ex-Goldman Sachs chief economist and now columnist for the FT, Gavyn Davies, has also latched on to this growing risk.  Davies commented: “I argued in March that this problem was not yet dangerous, but that was probably too complacent.”  He was complacent, he says, because “Although US corporate debt-to-income ratios were already close to all-time peaks, other aspects of company balance sheets and financial flows were in much better shape. Profit margins were still fairly robust, the net financial balance of the corporate sector was in comfortable surplus, interest-to-income ratios were low and debt-to-equity ratios were healthy.”  But now: “In the last six months, the condition of US corporate finances has become more worrying. As in other major economies, profit margins have come under increasing downward pressure, because producers’ wage costs have been rising more rapidly than selling prices to the consumer.”

As a result of shrinking profit margins and slowing revenue growth, earnings for S&P 500 companies are now estimated to have fallen in the past 12 months, down from 20 per cent growth in 2018. Furthermore, earnings growth for the large quoted companies contained in the S&P 500, including foreign profits, has been much higher than the figure for the entire company sector in the domestic economy.  Those figures show that US profits have risen by only 6 per cent in the last three years, compared with an increase of 50 per cent for the S&P 500.  And non-financial sector profits are actually lower than in 2014!  It’s a profits recession.

In a previous post ahead of Davies, I looked at the earnings results of the top 500 companies by stock market value in the US, S&P-500.  With nearly all results in for the second quarter of 2019 ending in June, total earnings (profits) are up only 0.5% and sales revenues up only 4.7%.  After taking into account current inflation, real earnings were negative and revenues barely positive.  And that’s for the top 500 companies.  For the smaller companies, the situation is even worse.  Earnings are down over 10% from last year and revenues up only 2.2%, or flat after inflation.  Excluding the finance sector, earnings would be down 21%.  A sector analysis shows that the retail sector did best as the American consumer went on spending, along with the finance sector.  But productive sectors like technology saw a 6.3% fall in profits.  And that is key. For the first half of 2019, the earnings are in negative territory compared to a 23% rise in the first half of 2018.  And the forecast for Q3 earnings is for a further fall of 4.3% yoy.

Davies reckons that: “The deterioration in profits growth has been accompanied by more aggressive corporate financial behaviour, while real capital investment to expand productive capacity has been cut back. According to the IMF stability report, share buybacks, dividends and merger and acquisition activities — financed by leveraged loans and high-yield bonds — have surged in 2019. These activities have spread to small and medium-sized firms, which the IMF says are particularly vulnerable on the profit front.”  Exactly.  As profitability (and now even the mass of profits) falls, companies have tried to counteract this with financial speculation. That might be okay for large firms with considerable cash reserves but not for smaller companies that are not cash-rich.

So Davies now concludes exactly what I argued some time ago. “Taken in isolation from other economic shocks, such corporate financial weaknesses are unlikely to trigger a recession, but they could certainly exacerbate the effects of other contractionary shocks. This is what happened in 2008, when a medium-sized shock in the subprime mortgage market caused an enormous downturn in economic activity. The impact of the trade disputes on business confidence, which has been collapsing in recent months, is the most obvious current threat.”

At the same time as Davies reached this conclusion, the chief US economist for the Societe Generale bank, Stephen Gallagher, argued that US recessions are typically preceded by an erosion in corporate profit margins, or profit per dollar of revenue. Costs generally rise near the end of the cycle while sales flatten out.  There is a profit cycle – something that readers of this blog will know well.  The current profit margin cycle (the blue line in the graph below) is reaching the point of a recession.  The graph shows the historic trend in profit margins at various stages of the business cycle, as well as the margins in this cycle.

Gallagher points out that US profit margins have been squeezed since 2016. The erosion in margins is the key to business-cycle dynamics,” says Gallagher. “If the U.S. does enter a recession in 2020, history is very likely to view it as a trade-war recession. But trade tensions are only the catalyst, not the main cause.” he says.  “With a backdrop of weak profit expectations, the trade uncertainty poses serious challenges for business planning,” Gallagher argues. “In an environment of much stronger profit margins, the same trade uncertainty would likely pose less of a deterrent.”  

As economic historian and author of Crashed, Adam Tooze tweeted, “What if we orientate our analysis of business cycle around what is presumably the basic driver of business activity i.e. corporate profits, rather than intermediate factors that may or may not seriously impact those profits e.g. tariffs?”  Exactly. A financial crash or a trade war does not lead to an economic recession unless there are already serious problems with profitability.

It is not just Gavyn Davies and the IMF that are waking up to the financial and debt risk. In a speech on 25 September, Fed governor Lael Brainard said that “financial risk-taking by US companies in the form of payouts and M&A has increased — in contrast with subdued capital expenditures. Surges in financial risk-taking usually precede economic downturns. As business losses accumulate, and delinquencies and defaults rise, banks are less willing or able to lend. This dynamic feeds on itself.”  So the Fed must act with new monetary easing: “The Fed will decide whether to activate its countercyclical capital buffer in November. This mechanism enables the Fed to require the nation’s largest banks to increase capital buffers against the time when economic stresses emerge.”

Over in Japan, it is the same story.  The Bank of Japan’s chief Kuroda called for a mix of steps to boost economic growth. He returned to what used to be called the three arrows of Abenomics: monetary easing, flexible fiscal spending and structural reforms to raise the country’s long-term growth potential. Kuroda is still convinced that central banks can save the day, even if governments should also help with fiscal stimulus measures. “We are equipped with unconventional tool kits, so there is no need to be too pessimistic about the effectiveness of monetary policy.  Kuroda hinted at further easing as early as this month.

But as I have discussed in detail before, monetary policy easing has failed to restore pre-2007 growth rates and is now unable to stop the oncoming recession.  Indeed, interest rates globally are at record lows and even negative in many major economies, and yet the world economy is still slowing to a stop.

At the recent IMF-World Bank meeting, former governor of the Bank of England during the Great Recession, Mervyn King reckoned that the “world economy is sleepwalking into a new financial crisis because mainstream economics and official institutions have still not changed their complacent and faulty ideas before the last crash.  By sticking to the new orthodoxy of monetary policy and pretending that we have made the banking system safe, we are sleepwalking towards that crisis.” King went on: resistance to new thinking meant a repeat of the chaos of the 2008-09 period was looming.”  This was rich of King, who before 2007 has remarked at how well the world economy was doing – ‘a nice decade’ he called it. He too was stuck in the ‘old thinking’ then.

Echoing my own view of what I call The Long Depression, King said the world economy was stuck in a ‘low growth trap’ and that the recovery from the slump of 2008-09 was weaker than that after the Great Depression. “Following the Great Inflation, the Great Stability and the Great Recession, we have entered the Great Stagnation.” King supported the view regularly expressed by Keynesian former US Treasury secretary Larry Summers of the concept of secular stagnation, a permanent period of low growth in which ultra-low interest rates are ineffective.

If monetary policy is now useless despite the vain hopes of Powell at the Fed or Kuroda at the BoJ, what is to be done?  King claims the problem was “a distorted pattern of demand and output” ie excessive investment in China and Germany and insufficient investment elsewhere.  There has to be a global shift in savings and investment.  But apart from the obvious question of how such a shift could possibly be achieved without international cooperation, it is not a ‘global imbalance’ that is the problem.  There has been such an imbalance for decades.  The US, UK etc have regularly run current account deficits while Germany, Japan and China have run surpluses.  And yet economic growth has still taken place. The cause of regular and recurring crises can be found in the arguments of Gavyn Davies, not Mervyn King.

Everywhere, whether among mainstream economists or official institutions, the cry now is for ‘fiscal stimulus’. For example, Laurence Boone and Marco Buti, OECD economists call for Right here, right now: The quest for a more balanced policy mix.while monetary policy is widely recognised as facing increasing constraints, fiscal policy and structural reforms need to play a stronger role. In particular, fiscal policy could become more supportive, notably in the euro area. Undertaking the right type of public investment now – in infrastructure, education or to mitigate climate change – would both stimulate our economies and contribute to making them stronger and more sustainable.”

Just as Keynes claimed it would be necessary in the 1930s Great Depression, now, as the Long Depression enters its tenth year, the answer is for higher government spending, tax cuts and budget deficits (and don’t worry about rising government debt any longer). But just as fiscal stimulus did not work in the 1930s (instead it took a world war and governments taking control of savings and investment), so it will not work this time either.  And that is assuming that politicians will even try it.

Fiscal stimulus and government ‘management of the economy’ is the touchstone of Keynesian and post-Keynesian thinking, including so-called Modern Monetary Theory (MMT).   The only real difference between Keynesian and MMT stimulus is the latter think it can be done without issuing bonds to fund it: ‘printing money’ is just fine.

The real shock is that even some Marxists consider that fiscal stimulus and more government spending is all we need to avoid a new slump.  The question of falling profitability and profits highlighted by Gavyn Davies is apparently not relevant at all.  The profitability of capital apparently plays no key role in this profit-making capitalist system.  You see profits come from investment, not vice versa.  So all we have to do is boost investment.

Take a recent article by John Weeks, a longstanding leftist (Marxist?) economist who once wrote a brilliant paper back in the 1980s (John Weeks on underconsumption) that showed Marxist crisis theory had nothing to do with a lack of effective demand caused by the underconsumption of workers. Weeks is now the coordinator of the Progressive Economy Forum, a leftist think-tank.  He now writes: “Market economies require policy management: (as) Keynes taught us.”  You see back in the Golden Age of the 1960s when economic policy-makers followed Keynes and intervened with fiscal measures to manage the economy, there was high economic growth and no crises.  It was only when Keynesian management was dropped by neo-liberal governments that crises ensued.

Weeks now argues that “capitalist economies do suffer periodically from extreme instability, the most recent example being the Great Financial Crisis of the late 2000s. These moments of extreme instability, recessions and depressions, result … from private demand “failures”; specifically, the volatility of private investment and to a lesser extent of export demand.”  Weeks correctly points out that it is the volatility in investment that causes booms and slumps, not private consumption.  But what causes the swings in investment?  Weeks offers a straight Keynesian answer: “The instability results because investments are made in anticipation of future economic conditions, which are uncertain.”  So it is uncertainty about the future – a subjective cause and nothing to do with the objective picture of the current profitability of investment.

If Weeks (and the Keynesians) are right, then indeed, “public expenditure (can) serves to compensate for the inherent instability of private demand. This is the essence of “counter-cyclical” fiscal policy, that the central government increases its spending when private demand declines, and raises taxes when private expenditures create excessive inflationary pressures. During 1950-1970 that was the policy consensus, and it coincided with the “golden age of capitalism“.

But it is not right.  First, the golden age did not come to an end because Keynesian policies were dropped; on the contrary, Keynesian policies were dropped because the Golden Age came to an end.  And that was because the profitability of capital took a serious dive from the late 1960s to the early 1980s in all the major capitalist economies. As a result, investment was volatile and economies suffered several slumps.  Far from Keynesian demand management stopping these swings, even in the 1950s and 1960s, they actually exacerbated them.  At least that was the view of the leading British Keynesian economist of the 1960s, Christopher Dow, who summed up his monumental history of the period: “The major fluctuations in the rate of growth of demand and output in the years after 1952 were thus chiefly due to government policy. This was not the intended effect; in each phase, it must be supposed, policy went further than intended, as in turn did the correction of those effects. As far as internal conditions are concerned then, budgetary and monetary policy failed to be stabilising, and must on the contrary be regarded as having been positively destabilising.” (JCR Dow, The Management of the British Economy, 1964)

Second, investment does not lead profits, but vice versa in a capitalist economy.  It is not the lack of private demand that causes a crisis; but a crisis is just that: a lack of effective demand.  But this ‘realisation’ crisis, to use Marx’s term, is the result of the profitability crisis.  That is where any proper analysis should start on the causes of crises – as now Davies and Tooze suggest.  I and others have presented both theoretical (Marxist) and empirical support for this causal connection. Keynesians may deny it, but it seems that even mainstream economists like Gavyn Davies have now woken up to this causal connection.  If this is right, then attempts to avoid a new slump using fiscal policies will not curb or reverse the fall in corporate profits and investment – and thus will not avoid a new slump.

There is already a global manufacturing recession.  The German economy as a whole is in virtual recession, according to its own central bank, the Bundesbank. China is now growing at its slowest pace in nearly 30 years.  The trigger points for a global slump are multiplying.  We have riots and protests against austerity cuts in several ‘emerging economies’ as the global slowdown hits exports and revenues: in Lebanon, in Ecuador, in Chile, in impoverished Haiti.  At the same time, the larger emerging economies are either in a slump (Argentina, Turkey) or in stagnation (Brazil, Mexico, South Africa).

Even in the US, the best performing major advanced capitalist economy, growth is slowing, while investment and profits are falling.  And within that, one of America’s major companies is in deep trouble.  The grounding of the 737 Max jet after two tragic crashes has quietly lowered US growth, reduced productivity and trimmed earnings at a number of American companies. Boeing is no ordinary company. It is the largest manufacturing exporter in the US and a very large private employer. Its products cost hundreds of millions of dollars and require thousands of suppliers. It is no surprise that benching Boeing’s fastest-selling aircraft is having ripple effects throughout the economy.  Economists put the drag on growth from Boeing at around 0.25 percentage points in the second quarter while the White House Council of Economic Advisers reckoned the damage was even greater: Boeing’s troubles cut GDP from March through June by 0.4 percentage points.

Monetary and fiscal policy will be helpless in stopping any oncoming economic tsunami.

Capital not ideology

October 18, 2019

Back in 2014, French economist Thomas Piketty published a blockbuster book, Capital in the 21st century.  Repeating the name of Marx’s Capital, the implication of the title was that it was an updating Marx’s 19th century critique of capitalism for the 21st century.  Piketty argued that the inequality of income and wealth in the major capitalist economies had reached extremes not seen since the late 18th century and unless something was done, inequality would continue to rise.

The book had a huge impact, not just among economists (particularly in America, less so in France) but also among the general public.  Two million copies were sold of this monumental 800p publication which was full of theoretical arguments, empirical data and anecdotes to explain increased inequality of wealth in modern capitalist economies.  The book eventually won the dubious honour for the most bought book that nobody read, taking over from Stephen Hawking’s The Brief History of Time.  I suppose Marx’s Capital is also part of this club.

Many critiques of Piketty’s arguments followed, both from the mainstream and the heterodox.  Piketty has made a great contribution in the empirical work that he, fellow Frenchman Daniel Zucman and Emmanuel Saez have made in estimating the levels of inequality in capitalist economies.  And before that, there was the father of inequality studies, the recently deceased Anthony Atkinson, (whose work was the foundation of my own PhD thesis on inequality of wealth in 19th century Britain).

But, as I argued in my own critique of Piketty, which was published in Historical Materialism at the time, Piketty was not following Marx at all – indeed, he trashed Marx’s economic theory based on the law of value and profitability. For Piketty, the exploitation of labour by capital was not the issue but the ownership of wealth (ie property and financial assets), which enabled the rich to increase their share of total income in an economy.  So it was not the replacement of the capitalist mode of production that was needed but the redistribution of the wealth accumulated by the rich.

Piketty’s fame among the mainstream soon faded.  At the 2015 annual conference of the American Economic Association, Piketty was feted, if criticised.  Within a year, all was forgotten. Now, six years later, Piketty has followed up with a new book, Capital and Ideology, which is even larger: some 1200pp; as one reviewer said, longer than War and Peace. Whereas the first book provided theory and evidence on inequality, this book seeks to explain why this had been allowed to happen in the second half of the 20th century.  And from that, he proposes some policies to reverse it.  Piketty broadens the scope of his analysis to the entire world and presents a historical panorama of how ownership of assets (including people) was treated, and justified, in various historical societies, from China, Japan, and India, to the European-ruled American colonies, and feudal and capitalist societies in Europe.

His premise is that inequality is a choice. It’s something ‘societies’ opt for, not an inevitable result of technology and globalisation. Whereas Marx saw ideologies as a product of class interests, Piketty takes the idealist view that history is a battle of ideologies. The major economies have increased inequalities because the ruling elites have provided bogus justifications for inequality. Every unequal society, he says, creates an ideology to justify inequality. All these justifications add up to what he calls the “sacralisation of property”.

The job of economists is to expose these bogus arguments.  Take billionaires. “How can we justify that their existence is necessary for the common good? Contrary to what is often said, their enrichment was obtained thanks to collective goods, which are the public knowledge, the infrastructures, the laboratories of research.” (Shades of Mariana Mazzucato’s work here).  The notion that billionaires create jobs and boost growth is false.  Per capita income growth was 2.2% a year in the U.S. between 1950 and 1990. But when the number of billionaires exploded in the 1990s and 2000s — growing from about 100 in 1990 to around 600 today — per capita income growth fell to 1.1%.

Piketty says that the type of free-market capitalism that has dominated the US since Ronald Reagan needs to be reformed. “Reaganism begun to justify any concentration of wealth, as if the billionaires were our saviours.” But; “Reaganism has shown its limits: Growth has been halved, inequalities have doubled. It is time to break out of this phase of sacredness of property.

He does not want what most people consider ‘socialism’, but he wants to “overcome capitalism.”  Far from abolishing property or capital, he wants to spread its rewards to the bottom half of the population, who even in rich countries have never owned much. To do this, he says, requires redefining private property as “temporary” and limited: you can enjoy it during your lifetime, in moderate quantities.

How is this to be done? Well, Piketty calls for a graduated wealth tax of 5% on those worth 2 million euros or more and up to 90% on those worth more than 2 billion euros. “Entrepreneurs will have millions or tens of millions,” he said. “But beyond that, those who have hundreds of millions or billions will have to share with shareholders, who could be employees. So no, there won’t be billionaires anymore. From the proceeds, a country such as France could give each citizen a trust fund worth about €120,000 at age 25. Very high tax rates, he notes, didn’t impede fast growth in the 1950-80 period.

Piketty also calls for “educational justice” — essentially, spending the same amount on each person’s education. And he favours giving workers a major say over how their companies are run, as in Germany and Sweden.  Employees should have 50% of the seats on company boards; that the voting power of even the largest shareholders should be capped at 10%; much higher taxes on property, rising to 90% for the largest estates; a lump sum capital allocation of €120,000 (just over £107,000) to everyone when they reach 25; and an individualised carbon tax calculated by a personalised card that would track each person’s contribution to global heating.  He calls this moving beyond capitalism to “participatory socialism and social-federalism”.

This all smacks of returning capitalist economies to the days of the so-called ‘golden age’ from 1948-65, when inequality was much lower, economic growth was much stronger and working class households experienced full employment and were able to get educated to levels that enabled them to do more skilled and better paid jobs.  There was a ‘mixed economy’, where capitalist companies supposedly worked in partnership with trade unions and the government. This was a myth.  But if you accept Piketty’s premise that this social democratic paradise existed and its demise was brought about by a change of ideology, it is possible to consider that “redistributive ideas’ could gain support after the experience of the Great Recession and the rise of extreme inequality now.

Piketty argues that the social democratic parties dropped their original aims of equality and opted instead for meritocracy ie hard work and education will deliver better lives for the working class.  And they did so because they had gradually transformed themselves from being parties of the less-educated and poorer classes to become parties of the educated and affluent middle and upper-middle classes. To a large extent, he reckons, traditionally left parties changed because their original social-democratic agenda was so successful in opening up education and high-income possibilities to the people, who in the 1950s and 1960s came from modest backgrounds. These people, the “winners” of social democracy, continued voting for left-wing parties but their interests and worldview were no longer the same as that of their (less-educated) parents. The parties’ internal social structure thus changed— it was the product of their own political and social success.

Really?  The failure of social democratic parties to represent the interests of working people goes way back before the 1970s.  Social democratic parties supported the nationalist aims of the warring capitalist powers in WW1; in Britain, the leaders of the Labour Party went into coalition with the Conservatives to impose austerity and break the trade unions in 1929.  After WW2, social democracy moved from Attlee to Wilson to Callaghan to Kinnock and finally to Blair and Brown.  It was a similar story in continental Europe: in France from Mitterand to Hollande; in Germany from Brandt to Schmidt.

This was not just because the composition of the SD parties changed from industrial workers to educated professionals.  The very health of post-war capitalist economies changed.  The brief ‘golden age’ came to an end, not because of a change of ideology (or as Joseph Stiglitz has put it, ‘a change of rules’) but because the profitability of capital plummeted in the 1970s (following Marx’s law of profitability as outlined in Capital).  That meant that pro-capitalist politicians could no longer make concessions to labour; indeed, the gains of the golden age had to be reversed in the ‘neoliberal’ period.  So ideology changed with the change in the economic health of capital.  And social democratic leaders went along with this change because, in the last analysis, they do not think it is possible to replace capitalism with socialism. “There is no alternative” – to use Thatcher’s phrase.

At least, Piketty reckons it is possible to go beyond capitalism, unlike Branco Milanovic who, in his latest book, Capitalism Alone that I reviewed recently, agrees with Thatcher and reckons capitalism is here to stay. “You have to go beyond capitalism,” says Piketty.  In an interview, when asked “Why this word ‘beyond”, why not “To get out of capitalism”?  Piketty replied: “I say “go beyond” to say go out, abolish, replace. But the term “exceed” me allows for a little more emphasis on the need to discuss the alternative system. After the Soviet failure, we can no longer promise the abolition of capitalism without debating long and precisely what we will put in place next. I’m trying to contribute.

Piketty reckons the “propriétariste and meritocratic narrative” of the neo-liberal period is getting fragile. “There’s a growing understanding that so-called meritocracy has been captured by the rich, who get their kids into the top universities, buy political parties and hide their money from taxation.  That leaves a gap in the political market for redistributionist ideas.

But Piketty’s answers are just that: a redistribution of unequal wealth and income generated by the private ownership of capital, not replacing the ownership and control of the means of production and the exploitation of labour in production with a system of common ownership and control.  Apparently, the big multi-nationals will continue, big pharma will continue; the fossil-fuel companies will continue; the military-industrial complex will continue.  Regular and recurring crises in capitalist production and accumulation will continue.  But, as these vested interests of capital are still not generating enough profitability to allow any significant increase in the taxation of extreme wealth and income that they control, what chances are there that the current ‘ideology’ of the ‘sacralisation of property’ can be overcome, without taking them over?

Knowledge commodities

October 8, 2019

In the Oxford Handbook of Karl Marx, Thomas Rotta and Rodrigo Teixeira have a chapter called the commodification of knowledge and information.  In this chapter, they argue that knowledge is ‘immaterial labour’ and ‘knowledge commodities’ are increasingly replacing material commodities in modern capitalism.

“Examples of knowledge- commodities are all sorts of commodified data, computer software, chemical formulas, patented information, recorded music, copyrighted compositions and movies, and monopolized scientific knowledge.”

According to Rotta and Teixeira, these knowledge commodities do not have any value in Marxist terms because their reproduction tends to be costless.  Knowledge can be reproduced infinitely without cost.  Previous authors have claimed that because knowledge commodities have no value, Marx’s law of value no longer holds.  Rotta and Teixeira argue that they can restore Marx’s law of value as an explanation of knowledge commodities.  And their solution is that, although knowledge commodities have no value, the owners of such commodities through patents and copyrights etc can extract rents from productive capitalist sectors, in the same way, as Marx explained, rents were extracted by landlords (through their monopoly of land) from productive capitalists.  They conclude by estimating the increased amount of value being extracted in the form of ‘rents’ by ‘knowledge industries’.

Does Rotta and Teixeira’s apparent defence of Marx law of value in relation to the information industry hold up?  I don’t think so.  Here’s why.  First, Rotta and Teixeira, like other authors before them (Negri etc), misunderstand Marx’s value theory on this question.  Just because knowledge is intangible, it does not make it immaterial.  Knowledge is material.  Both tangible objects and mental thoughts are material. Both require the expenditure of human energy, which is material, as shown by human metabolism.

More specifically, the expenditure of human energy that constitutes the cognitive process, thinking, causes a change in the nervous system, in the interconnections between the neurons of the brain. This is called synapsis. It is these changes that make possible a different perception of the world. So to deny that knowledge, even if intangible, is material is to ignore the results of neuroscience. After all, if electricity and its effects are material, why should the electrical activity of the brain and its effect (knowledge) not also be material? There is no ‘immaterial’ labour, despite the claims of all the ‘knowledge Marxists’ , including it seems Rotta and Teixeira. The dichotomy is not between material and mental labour, but whether it is tangible or not.

The second mistake that Rotta and Teixeira make is that because knowledge is ‘immaterial’, it is unproductive labour that produces no value.  But productive labour is labour expended under the capitalist production relation. Productive labour is not just what produces physical goods.  Productive labour also includes what mainstream economists call services.  As Marx explained: if a capitalist has a servant, that is unproductive labour.  But if he goes to a hotel and uses a valet to take his luggage to the room, that valet delivers productive labour because he/she is working for the capitalist owner of the hotel for a wage.

Rotta and Teixeira give us the example of a live concert performance. “Hence, what we call a concert is in act a bundle of several commodities, among them knowledge- commodities such as musical compositions. The live performance is a combination of the productive labor of musicians and technical staff, plus the unproductive labor of those who composed the songs in the first place.”  But what is unproductive about the composer?  He/she can sell that piece of music as copyright and performance royalties on the market.  Royalties must be paid if the music is used in the concert.  Surplus value is created and realised.

Then there is the example of a smart phone. “When you buy a smartphone, part of the phone price covers the production costs of the physical components. But another part of the price remunerates the patented design and the copyrighted software stored in the memory. The copyrighted parts of the phone are therefore knowledge-commodities, and the revenues associated with these specific components are knowledge-rents.”  But why are the revenues from copyright and patents considered only rents?  The idea, the design, and operating system have all been produced by mental labour employed by capitalist companies. The companies exploit that labour and appropriate surplus value by selling or leasing the software. This is productive labour and it produces value. It is no different from a pharma company employing scientists to come up with a formula for a new drug which they can sell on the market with a patent held for years.

For the same reason, the production of knowledge (mental labour) can be productive of value and surplus value if it is mental labour performed for capital. In this case, the quantity of new value generated during the mental labour process is given by the length and intensity of the abstract mental labour performed, given the value of the labour power of the mental labourers. Surplus value, then, is the new value generated by the mental labourers minus the value of their labour power; and the rate of exploitation is that surplus value divided by the value of their labour power.

The value of knowledge (and of any mental product) might be incorporated in an objective shell or not. In both cases it is an intangible but material commodity whose value is determined by the new value produced plus the value of the means of production used. The computer programmer or website maker is in principle just as productive as the worker making the computer if both work for the computer company.  Thus, knowledge production implies production of value and surplus value (exploitation) and not rent. Once produced, the capitalists owners of mental products (knowledge) can then extract ‘rent’ from their intellectual property (the knowledge produced by mental labourers for them) by applying to it intellectual property rights. But there is production of value first. The difference between production and appropriation is fundamental.

Also it is not correct to say that the value of mental labour and knowledge commodities cannot be quantified.  Rotta and Teixeira, to back their claim that reproduction of knowledge has no value, quote Marx: “But in addition to the material wear and tear, a machine also undergoes what we might call a moral depreciation. It loses exchange- value, either because machines of the same sort are being produced more cheaply than it was, or because better machines are entering into competition with it. In both cases, however young and full of life the machine may be, its value is no longer determined by the necessary labour time actually objectified in it, but by the labour time necessary to reproduce either it or the better machine. It has therefore been devalued to a greater or lesser extent.”

Rotta and Teixeira think this shows that, because the labour time to reproduce a machine might fall below the value of the first machine due to technical progress (moral depreciation), Marx is suggesting that knowledge commodities will tend to have no value at all because knowledge can be reproduced infinitely without labour time expended.  But this quote from Marx refers to the value of each new production process where the labour time involved in the value of a commodity (machine) falls. But that would not lead to a fall in the profitability of capital invested right down to zero.  The average rate of profit is determined by the initial fixed capital costs and any circulating capital costs involved in reproduction.  Profitability would still be determined by all the stages of production of the commodity, even if the value of each newly produced commodity falls.

And knowledge commodities cannot be produced for nothing because they are material.  The productivity of physical, tangible commodities is measured in units of output per unit of capital invested. This holds just as much for mental production, or knowledge commodities, say, a video game. The mental product can be contained in an objective shell (a DVD). The DVDs produced can be counted. It can also be contained in a digital file and be downloaded from a website to a computer and then onto another. The number of downloads can be counted. In short, mental output or knowledge commodities can be counted. On websites, the number of hits can be counted.  The reproduction becomes the numerator for productivity and profitability.

The original capital invested, the denominator, can be also be measured.  First, there is the capital invested in the prototype. This is not only fixed constant capital (computers, premises, facilities, chips foundries, assembly plants, etc.). It is also circulating constant capital (raw materials) and variable capital, wages, which go from very high (for highly qualified developers) to low. Then there are the costs of administration, of presale advertising and other marketing costs. Then there is the additional capital invested in the reproduction of the replicas of the prototype. In reality, the total value of the knowledge commodity can be high, not zero. The unit value is then given by the total value divided by the number of replicas made. It is directly proportional to the total value and inversely proportional to the quantity of the replicas. The value of reproducing such knowledge commodities won’t go towards zero because there are always replication costs of the knowledge commodity in delivery to the user.

Again, the reproduction of any knowledge commodity is no different from the reproduction of a new drug by a pharma company.  Built into the price of the drug is the initial cost of employing mental labour, testing the drug for humans etc, the production of the pills, liquids plus any equipment for administering it and so on.  Sure, the unit cost of the production of each new pill may fall to a very low value, but that does not mean that total value and unit value has fallen to zero.

In sum, knowledge is material (if intangible) and if knowledge commodities are produced under conditions of capitalist production ie using mental labour and selling the idea, the formula, the program, the music etc on the market, then value can be created by mental labour.  Value then comes from exploitation of productive labour, as per Marx’s law of value. There is no need to invoke the concept of rent extraction to explain the profits of pharma companies or Google.  The so-called ‘renterisation’ of modern capitalist economies that is now so popular as a modification or a supplanting of Marx’s law of value is not supported by knowledge commodity production.

Much of the arguments I have presented here were first comprehensively and brilliantly created by Guglielmo Carchedi in his paper, Old wine, new bottles and the internet, in Work, Organisation, labour and Globalisation, Volume 8, Number 1, Autumn 2Ol4.  His mental labour has been very productive, but as he did not patent it, the reproduction of his arguments here have cost me little (zero?).  So any credit that I get will thus be a huge extraction of rent from him.