Archive for the ‘Profitability’ Category

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.

A global manufacturing recession

October 1, 2019

As we enter October, the global recession is with us – in manufacturing.  The PMI manufacturing activity indexes for most of the major economies are below 50, the threshold for expansion or contraction.  These are only surveys of corporate managers asking them about production, sales, employment etc.  But PMIs have been reasonably accurate indicators of actual industrial and manufacturing output, the data for which follow somewhat later.

In September, the manufacturing PMI for the Eurozone fell to its lowest level since the euro debt crisis of 2012, led by Germany but followed by the others.  So much for the success of Mario Draghi’s reign as ECB President.

In Japan, it is a similar story.  Sentiment among Japan’s large manufacturers fell to its lowest level in more than six years in the third quarter, according to a key survey conducted by the Bank of Japan.  And Japan’s manufacturing PMI is back to the level of contraction in the sector last seen in the mini-recession of 2016.

Japan manufacturing PMI

Even in the US, the manufacturing recession has arrived.  The Markit manufacturing PMI is hovering just above 50, but that is a lower level than in 2016.  And the US ISM manufacturing PMI in September fell to its lowest level since the Great Recession in 2009.

And of course, pre-Brexit Britain’s manufacturing sector has already been ‘in a ditch’, to use PM Boris Johnson’s phrase, for several months.

To complete the G7, Canada’s PMI is also below 50.

And it is not just the G7 manufacturing sector that is contracting.  The following countries are recording contractions in manufacturing activity:  Malaysia, Mexico, New Zealand, Poland, Russia, Singapore, South Africa, South Korea, Sweden, Switzerland, Turkey, Taiwan

And the following countries have an outright year on year fall in actual manufacturing output: Australia, Brazil, Canada, Chile, France, Germany, Greece, Italy, Japan, Netherlands, Portugal, South Korea, Turkey, the UK, and also the US.

And as for the fastest growing major economies in the world, China and India, they are both experiencing their slowest real GDP growth rates for over a decade, while their manufacturing sectors are just above the water line.

The slump in manufacturing is partly the result of general slowdown in investment by capitalist economies and partly the result of the intensifying trade war between the world’s two largest manufacturing economies: China and the US.  The trade war is acting as a trigger for a recession in manufacturing across the globe.  Global trade was already slowing down before the trade war broke out and it had already led to casualties globally: for example, Argentina and Turkey.

Both have seen a catastrophic collapse in production, foreign investment and in the value of their currencies.  Turkey has been thrown in a deep overall recession.  Argentina has been forced to default on its huge foreign debt payments.  As the country heads to a general election this month, bond holders are desperately trying to find ways of avoiding a severe ‘haircut’ on their holdings.  

But so far, the recession is limited to the manufacturing sector.  And manufacturing constitutes no more than 10-40% of most economies. The so-called services sector that includes retail, financial services, business services, real estate, tourism, ‘creative industries’, etc continues to keep its head above the water in most G20 economies.  There is not one G20 economy with a services PMI below 50.

And this why an economy like Greece, which was devastated in the global recession and euro debt crisis, is now able to report a modest 2% a year growth in GDP.  Tourism and leisure services, a key component of the Greek economy, continues to expand.  But a 2% growth rate is not much after a 25% contraction during the crisis.  The Greek recovery has been weak. Five years after the 1933 nadir of the Depression, US GDP per capita had risen by 35 per cent. Five years after the depths of Argentina’s 1998-2002 crash, GDP per capita was up by 45 per cent. But from 2013 to 2018, Greece’s GDP per capita rose by less than 6 per cent. Indeed, Oxford Economics predicts Greece won’t recover to its pre-crisis GDP levels until 2033! – and that assumes no global slump in the meantime.  And if the global services sector hits the wall, then Greece will plunge back into recession.

The question is whether the services sector will follow the manufacturing down into a slump.  Some say not because manufacturing is a much smaller sector.

But that argument does not recognise that many services sectors depend on manufacturing for their own expansion.  The spillover from a manufacturing slump has usually been significant in previous recessions.  If global employment growth should weaken or stop, workers’ purchasing power will wane and the services sector will start to suffer as well.  Employment depends on the willingness of capitalist companies to invest and expand.  And investment and expansion depend on the profitability of expected investment.  Capitalists gauge that by current profitability – unless they take a risk.

So what is happening to global profits?  Well, JP Morgan economists have just published a full analysis of global profits (unfortunately this report is not available to the public).  And they reckon that global profits in Q2 2019 have stalled. Each of the 10 sectors comprising the total market show a sharp slowing in profit growth, with half experiencing outright contractions in profits over the past year (particularly materials and telecoms).  Even those sectors that still have positive profits growth: retail, IT, financials and utilities, profits growth is dropping fast.

JPM reach the ‘surprising’ observation (that Marxist theory and previous empirical evidence could have told them) that “the downshift in global growth over the past year has coincided with an equally impressive deceleration in corporate profits.”

The stagnation in corporate profits globally is still not as bad as the 2016 mini-recession, or of course in the Great Recession or the previous slump of 2001-2, but it is getting there.  In particular, JPM notes that profits growth has declined to zero because profit margins are being squeezed – in other words, the costs of labour (more workers and higher wages) are not being compensated by increased value – the rate of surplus value is falling – a result that JPMorgan reckon “has historically preceded the start of recession dynamics.”

JPM Morgan cites the trade war as the trigger for this and makes the point that business sentiment (the PMIs) are falling in manufacturing because of the profits squeeze, not vice versa.  But the trade war “could also be an ominous portent of weaker earnings yet to come.”

As Marxist theory would predict, slowing or falling profits will eventually mean slowing or falling business investment, and JP Morgan agrees. “The slump in business profits and business sentiment is taking a toll on capital expenditures. Global capex growth has slowed substantially from a six-year high in 2017 to a near stall as of 2H19. It likely also is a contributing factor in the more recent pullback in job growth. The risk is that slowing labor income growth weighs on consumer spending, which then feeds back into business earnings and hiring.”  Exactly.

JPM remain optimistic that rising productivity growth will turn things around.  But that seems wishful thinking if investment keeps falling.

In the past I have highlighted some other key indicators (apart from profits) that can predict a coming outright recession. The most famous one is the so-called inverted yield curve on bonds.  I have explained how that operates in a previous post. Suffice it to say now, that when the yield curve on bonds inverts (and yield on longer maturity bonds fall below yields on short-term bonds) and stays inverted, then a recession follows within a year.  The US curve has stayed inverted since May.

Another indicator is the price of industrial metals, particularly copper, a metal that is used across the board in all sorts of production.  A fall in its price would indicate a slowdown in investment and production in many industries.  In the mini-recession of 2016, the copper price fell to about $200/lb.  In the Great Recession, it fell to $150/lb.  Having risen to $320/lb in early 2018, it has now fallen back to $250/lb.

The world capitalist economy is in a manufacturing recession now, but there are important indicators that the rest of the economy will join manufacturing soon.

A rent-seeking economy?

September 27, 2019

‘Financialisation’ has been promoted by heterodox economists as the cause of the iniquities and failures of modern capitalist economies.  Now an additional theory has been offered: ‘renterisation’. In a recent long article in the British Financial Times, its well-known economic columnist, Martin Wolf, offered this concept as the explanation of low productivity growth, rising inequality and the mountain of debt in the major economies.

Wolf reckons that capitalism has been “rigged” by monopolistic economic powers. “So why is the economy not delivering? The answer lies, in large part, with the rise of rentier capitalism. In this case “rent” means rewards over and above those required to induce the desired supply of goods, services, land or labour. “Rentier capitalism” means an economy in which market and political power allows privileged individuals and businesses to extract a great deal of such rent from everybody else…. While the finance sector is an important part of this monopolistic development, so that ‘financialisation’ has enabled monopoly sectors to create their own profits (if often illusory) and generate financial crashes, the real enemy of successful capitalism is “the decline of competition”.  Wolf then cites all the recent empirical evidence of this ‘renterization’ of capitalism: market concentration; rising monopolistic profit mark-ups and ‘super star’ companies like the FAANGS making “monopolistic profits”.

But does this theory hold as the main reason for poor economic growth, rising inequality and financial crashes?  Is it monopoly capitalism that is the cause, not the contradiction of capitalism as a whole?  Well, let me remind readers of the empirical evidence for the renterisation theory.  I have recounted that in previous posts and the evidence is doubtful at best.  For example, you would expect  the biggest profit mark-ups to be achieved by the ‘monopoly’ giants – in fact the data show it is the smaller companies that get higher mark-ups.

Again, low productivity growth appears to be much more closely correlated with low investment and in turn with low profitability, not with monopolisation. The biggest slowdown in productivity growth in the US began after 2000, as investment in productive sectors and activity dropped off. It is a fall in the overall profitability of US capital that is driving things rather than any change in monopoly ‘market power’. Again, for example, evidence shows that the ‘rent-seekers’ appear to have played no role in the low investment rate of the Eurozone: it’s just low profitability there.  But such evidence is not convenient because it suggests that the cause of low productivity growth is due to contradictions in capitalist accumulation.  It is more encouraging to argue that if profits are high, then it’s ‘monopoly power’ that does it, not the exploitation of labour in the capitalist mode of production.  And it’s monopoly power that is keeping investment growth low, not low overall profitability.

Brett Christophers from the University of Uppsala in Sweden has published an important piece of work on renterisation (with a book to follow).  Christophers rejects the term ‘financialisation’ as a cause of the current malaise in capitalist growth.  Finance is too narrow a cause; because rents are being extracted in many other sectors like real estate.  Christophers argues that “renterism’ in its various guises is today a significant, even dominant, dynamic, in contrast to during the period preceding the neoliberal turn.”  He reckons the British economy “has been substantially rentierized.”  Christophers renterization  Christophers offers what he calls a hybrid definition of rent that tries to combine Marx’s view of rent coming from the monopoly ownership of a non-produced asset (land, minerals etc) with the mainstream view of “excess payment” over and above efficient production, namely payment above the ‘marginal productivity of labour or capital’.

I’m not sure that this hybrid definition is useful. It appears to fudge the key issue that Marx makes about how rent emerges: namely that it comes from the appropriation of surplus value created in the exploitation of labour in the production of commodities.  For Marx, rent comes from the ability of monopoly owners of non-produced assets to retain surplus-value from being merged with the competitive process of capital flows.  For Marx, ‘productive capitalists’ as appropriators of surplus value from the exploitation of labour are forced share some of that surplus value with owners of non-produced resources (rent) and finance (interest).  Rent and interest are part of total surplus value created in the production of commodities.  Value and surplus value must first be created by the exploitation of labour power.  Then the surplus value gets redistributed and those with some monopoly power can extract a part of that surplus value in rent.  “Excess payment’ over ‘efficiency’ implies that there is an acceptable payment to capitalists for exploiting labour power to benefit productivity and thus ignores these class relations.

Marx considered that there were two forms of rent that could appear in a capitalist economy.  The first was ‘absolute rent’ where the monopoly ownership of an asset (land) could mean the extraction of a share of the surplus value from the capitalist process without investment in labour and machinery to produce commodities.  The second form Marx called ‘differential rent’.  This arose from the ability of some capitalist producers to sell at a cost below that of more inefficient producers and so extract a surplus profit.  This surplus profit could become rent when these low cost producers could stop others adopting even lower cost techniques by: blocking entry to the market; employing large economies of scale in funding; controlling patents; and making cartel deals.   This differential rent could be achieved in agriculture by better yielding land (nature) but in modern capitalism, it could be through a form of ‘technological rent’; ie monopolising technical innovation.

Undoubtedly, much of the mega profits of the likes of Apple, Microsoft, Netflix, Amazon, Facebook are due to their control over patents, financial strength (cheap credit) and buying up of potential competitors.  But the renterization explanation goes too far.  Technological innovations also explain the success of these big companies, not just monopoly power.  Moreover, by its very nature, capitalism, based on ‘many capitals’ in competition, cannot tolerate any ‘eternal’ monopoly, namely a ‘permanent’ surplus profit deducted from the sum total of profits divided among the capitalist class as a whole.  The battle among individual capitalists to increase profits and their share of the market means monopolies are continually under threat from new rivals, new technologies and international competitors. Take the constituents of the US S&P-500 index.  The companies in the top 500 have not stayed the same.  New industries and sectors emerge and previously dominant companies wither on the vine.

The history of capitalism is one where the concentration and centralisation of capital increases, but competition continues to bring about the movement of surplus value between capitals (within a national economy and globally). The substitution of new products for old ones will in the long run reduce or eliminate monopoly advantage.  The monopolistic world of GE and the motor manufacturers of the 1960s and 1990s did not last once new technology bred new sectors for capital accumulation.  The world of Apple will not last forever.

‘Market power’ may have delivered rents to some very large companies in the US, but Marx’s law of profitability still holds as the best explanation of the accumulation process.  Rents to the few are a deduction from the profits of the many. Monopolies redistribute profit to themselves in the form of ‘rent’ but do not create profit.  Profits are not the result of the degree of monopoly or rent seeking, as neo-classical and Keynesian/Kalecki theories argue, but the result of the exploitation of labour.  Moreover, rents are no more than 20% of value-added in any major economy; financial profits are even smaller a proportion.  Moreover, the rise of renterism in the recent period is really a counteracting factor to the decline in the profitability of productive capital.

There is another definition of a rentier economy based on Marx’s explanation of the division of surplus value into profits, rent and interest that is relevant.  There are national economies where the capitalist sector appropriates much surplus value in the form of interest, dividends and profits through non-productive services like finance, insurance, and so-called business services.  Britain is one of these ‘rentier’ economies; Switzerland is another – both much more so than the likes of Germany or Japan, or even the US, where the appropriation of surplus value is still predominantly through the direct exploitation of labour power (both domestically and abroad).

As the spoke person for the City of London recently said, “London is the capital of capital”.  The City of London delivers a considerable inflow of income to the UK economy through its sale of financial services, bank interest and profits and allied business services.  The UK financial sector plus real estate (oligarchs want to live in London) and other business services contributes a much larger proportion of GDP and cross-border income inflows to the balance of payments than most other major economies.

Tony Norfield has developed a power index of imperialist economies and in that index, the US leads, but it is followed by the UK.  If you strip out of the index, the military and GDP constituents, Britain is way ahead of all as a rentier economy (at least in absolute dollar terms).

I did a little analysis from the WTO of commercial services exports of different countries.  The export of financial, insurance and other business services as well royalties and fees collected could be considered a measure of rentier exports if you like.  On this measure global rentier exports totalled $2trn in 2013.  The US received export income of $365bn, or 18% of world rentier income; the UK obtained $180bn, or 9%, while Japan received $78bn or 4% and Germany had no cross-border rentier income at all.  US GDP in 2013 was $16.7trn, the UK’s was $2.7trn.  So the UK received rentier export income equivalent to 7% of its GDP while the US got just 2% of its GDP from rentier exports.  In this sense, we can talk about a rentier economy and Britain as the poster child.  But that makes Britain particularly vulnerable to financial crashes.

Joseph Stiglitz and Martin Wolf reckon that what is wrong with capitalism is that ‘financialisation’ and monopoly rentier interests have ‘rigged’/ruined the ‘progressive’ features of capitalism, namely its ability to expand the productive forces harmoniously for all.  As Wolf puts it: “We need a dynamic capitalist economy that gives everybody a justified belief that they can share in the benefits. What we increasingly seem to have instead is an unstable rentier capitalism, weakened competition, feeble productivity growth, high inequality and, not coincidentally, an increasingly degraded democracy. Fixing this is a challenge for us all, but especially for those who run the world’s most important businesses. The way our economic and political systems work must change, or they will perish.”

But as LSE professor Jerome Roos perceptively pointed out in the British left journal, New Statesman, By opposing the “bad” capitalism of the unproductive rentier to the “good” capitalism of productive enterprise, however, the conventional liberal narrative overlooks the fact that the two are inextricably entwined. Such thinking relies on an idealised but entirely theoretical version of capitalism that is pure, uncorrupted and far more benign than it is, or has ever been or, in all likelihood, ever will be.  The reality is that the concentration of wealth and power in the hands of a few privileged rentiers is not a deviation from capitalist competition, but a logical and regular outcome. In theory, we can distinguish between an unproductive rentier and a productive capitalist. But there is nothing to stop the productive, supposedly responsible businessperson becoming an absentee landlord or a remote shareholder, and this is often what happens. The rentier class is not an aberration but a common recurrence, one which tends to accompany periods of protracted economic decline.(my emphasis)”.

In the past, this blog has posted overwhelming empirical evidence that the key to understanding the movement in productive investment remains in the underlying profitability of capital, not in the extraction of rents by a few market leaders, as Wolf and others suggest. If that is right, the Keynesian/mainstream solution of regulation and/or the break-up of monopolies (even if it were politically possible) will not solve the regular and recurrent crises in production and investment or stop rising inequality of wealth and income.

You can take a horse to water but….

September 17, 2019

Last Thursday, Mario Draghi, the current head of the European Central bank, soon to be replaced by Christine Lagarde from the IMF, announced a parting gift to banks and financial markets.  The ECB decided to reintroduce its bond purchasing programme in order to inject yet more billions into Europe’s banks in order to persuade them to lend onto industry and boost lagging growth.

This was the return of quantitative easing (QE) by the ECB.  But this time there was to be no time limit on the E20bn monthly of ECB purchases. It was to be forever – QE to infinity!  Also, the ECB would purchase not just the government bonds of debt-ridden Italy, Spain etc but also much riskier assets like corporate bonds.

Draghi also announced a new two-tier interest rate system for bank cash reserves held at the central bank.  These reserves have spiralled as banks took cash from ECB purchases of government bonds they held, but instead of lending that cash on in loans to the wider economy, the banks just put them back in the central bank as deposits.

The ECB decided the the interest rate was to be held at zero for excess reserves, thus making sure that banks could not lose money if they were forced to offer negative rates to their borrowers. Banks can now also raise funds at negative rates and deposit these funds at the central bank up to six times the required reserve amount and get a zero rate, thus boosting profitability.

This two-tiered idea is seen by some mainstream monetary economists as revolutionary. In effect, the ECB is boosting bank profits with its own capital at risk.  Bank profits rise while the ECB buys government bonds at prices which offer negative rates and banks with large excess reserves’ can lend at a profit to those with low reserves.  But this ‘revolutionary’ policy is just about the last desperate measure of unconventional monetary policy.

The monetarists are hopeful that boosting bank profitability will lead to an expansion of lending to business and households and get the Eurozone out of its renewing depression. This assumes that the problem is the banks not being prepared to lend because it is not profitable for them.  But is that the reason for low loan growth rates and investment?  It’s not the supply of money or bank profitability that is the problem, but the demand for loans.  Nobody wants to borrow to invest or spend even at zero or negative rates, because revenues and profits are stagnant, inflation and wage growth are low and, above all, export trade has collapsed.

You can take a horse to water (and you can make it a huge lake of water) but you cannot make it drink if it is not thirsty.  Even the central bankers, like Draghi, are admitting now that monetary policy has failed.  And even supporters of the revolutionary new policy are not confident: “Dual rates is monetary rocket-fuel. In contrast to standard negative rates, to forward guidance, or QE, the marginal effects of these policies are increasingly powerful. I am not convinced that this specific combination of measures will suffice to generate enough demand to create an acceleration in Eurozone activity – but it will help.” Eric Lonergan.

The great new instrument to save capitalism from stagnation or a new slump is fiscal policy. “There are more and more people saying that monetary policy cannot be the only game in town, and if you don’t want more and more monetary policy the only instrument that is left is fiscal policy.”  Ex-ECB board member.

Draghi called for action by European governments, particularly those with ‘fiscal space’, eg Germany to run budget deficits and spend.  So far, Germany has been reluctant to do so.  But if it decides to up the ante fiscally, then we can test the Keynesian solution to capitalist recessions.  I’ll make a prediction: that won’t work either.

Theft or exploitation?- a review of Stolen by Grace Blakeley

September 13, 2019

All our wealth has been stolen by big finance and in doing so big finance has brought our economy to its knees.  So we must save ourselves from big finance.  That is the shorthand message of a new book, Stolen – how to save the world from financialisation, by Grace Blakeley.

Grace Blakeley is a rising star in the firmament of the radical left-wing of the British labour movement.  Blakeley got a degree in politics, philosophy and economics (PPE) at Oxford University and did a masters degree there in African studies.  Then Blakeley was a researcher at the Institute of Public Policy Research (IIPPE), a left-wing ‘think tank’, and has now become the economics correspondent of the leftist New Statesman journal.  Blakeley is a regular commentator and ‘soundbite’ supporter for left-wing ideas on various broadcasting media in Britain.  Her profile and popularity have taken her book, published this week, straight into the top 50 of all books on Amazon.

Stolen: how to save the world from financialisation is an ambitious account of the contradictions and failures of postwar capitalism, or more exactly Anglo-American capitalism (because European or Asian capitalism is hardly mentioned and the periphery of the world economy is covered only in passing).  The book aims to explain how and why capitalism has turned into a thieving model of ‘financialisation’ benefiting the few while destroying (stealing?) growth, employment and incomes from the many.

Stolen leads the reader through the various periods of Anglo-American capitalist development from 1945 to the Great Recession of 2008-9 and beyond.  And it finishes with some policy proposals to end the thievery with a new (post-financialisation) economic model that will benefit working people. This is compelling stuff. But is Blakeley’s account of the nature of modern Anglo-American capitalism and on the causes of recurring crises in capitalist production correct?

Just take the title of Blakeley’s book: “Stolen”.  It’s a catchy title for a book.  But it implies that the owners of capital, specifically finance capital, are thieves.  They have ‘stolen’ the wealth produced by others; or they have ‘extracted’ wealth from those who created it.  This is profits without exploitation.  Indeed, profit now comes merely from thieving from others.

Marx called this ‘profit of alienation’.  For Marx it is achieved by the transfer of existing wealth (value) created in the process of capitalist accumulation and production.  But value is not created by this financial thievery.  For Marx, profits, or surplus value as Marx called it, is only created through the exploitation of labour in the production of commodities (both things and services).  Workers’ wealth is not ‘stolen’, nor is the wealth they create.  Under capitalism, workers get a wage from employers for the hours they work, as negotiated.  But they produce more in value in the time they work than in the value (measured in labour time) that they receive in wages.  So capitalists obtain a surplus-value from the sale of the commodities produced by the workers which they appropriate as the owners of capital.  This is not thievery, but exploitation.  (See my book, Marx 200, for a fuller explanation).

Does it matter whether it is theft or exploitation?  Well, Marx thought so.  He argued fiercely against the idea of Pierre-Joseph Proudhon, the most popular socialist of his day that ‘property is theft’.  To say that, argued Marx, was to fail to see the real way in which the wealth created by the many and how it ends up in the hands of the few.  Thus it was not a question of ending thievery but ending capitalism.

In Stolen, Blakeley ignores this most important scientific discovery (as Engels put it), namely surplus value.  Instead Blakeley completely swallows the views of the modern Proudhonists like Costas Lapavitsas, David Harvey and others like Bryan and Rafferty who dismiss Marx’s view that profit comes from the exploitation of labour.  For them, that is old hat.  Now modern capitalism is now ‘financialised capitalism’ that gets its wealth from stealing or the extraction of ‘rents’ from everybody, not from exploitation of labour.  This leads Blakeley at one point to accept the false analysis of Thomas Piketty that the returns to capital will inexorably rise through this process – when the evidence is that returns to capital have been inexorably falling – see my critique of Piketty here.

But these ‘modern’ arguments are just as false as Proudhon’s.  Lapavitsas has been critiqued well by British Marxist Tony Norfield; I have engaged David Harvey in debate on Marx’s value theory and Bryan and Rafferty have been found wanting by Greek Marxist, Stavros Mavroudeas.  After you read these critiques, then you can ask yourself whether Marx’s law of value can be ignored in explaining the contradictions of modern capitalism.

Then there is the sub-title of Blakeley’s book: “how to save the world from financialisation’.  ‘Financialisation’ as a category or term has become overwhelmingly popular among heterodox economics.  The category originally came from mainstream economics, was taken up by some Marxists and promoted by post-Keynesian economists.  Its purpose was to explain the contradictions within capitalism and its recurring crises with a theory that did not involve Marx’s law of value and law of profitability – both of which post-Keynesians reject or ignore (see my letter to MR).

Blakeley takes the definition of the term from Epstein, Krippner and Stockhammer and makes it the centre-piece of the book’s narrative (p11).  As I outlined in a previous post, if the term means simply an increased role of the finance sector and a rise in its share of profits in the last 40 years, that is obviously true – at least in the US and the UK.  But if it means the “emergence of a new economic model … and a deep structural change in how the (capitalist) economy) works” (Krippner), then that is a whole new ballgame.

As Stavros Mavroudeas puts it in his excellent new paper (393982858-QMUL-2018-Financialisation-London), the ‘financialisation hypothesis’ reckons that “money capital becomes totally independent from productive capital (as it can directly exploit labour through usury) and it remoulds the other fractions of capital according to its prerogatives.” And if “financial profits are not a subdivision of surplus-value then…the theory of surplus-value is, at least, marginalized. Consequently, profitability (the main differentiae specificae of Marxist economic analysis vis-à-vis Neoclassical and Keynesian Economics) loses its centrality and interest is autonomised from it (i.e. from profit – MR).”

And that is clearly how Blakeley sees it.  Accepting this new model implies that finance capital is the enemy and not capitalism as a whole, ie excluding the productive (value-creating) sectors.  Blakeley denies that interpretation in the book.  Finance is not a separate layer of capital sitting on top of the productive sector. That’s because all capitalism is now ‘financialised!: any analysis that sees financialization as a “perversion” of a purer, more productive form of capitalism fails to grasp the real context. What has emerged in the global economy in recent decades is a new model of capitalism, one that is far more integrated than simple dichotomies suggest.”  According to Blakeley, “today’s corporations have become thoroughly financialised with some looking more like banks than productive enterprises”.  Blakeley argues that “We aren’t witnessing the “rise of the rentiers” in this era; rather, all capitalists — industrial and not — have turned into rentiers…In fact, nonfinancial corporations are increasingly engaging in financial activities themselves in order to secure the highest possible returns.”

If this were true, and all value comes from interest and rent ‘extracted’ from everybody and not from exploitation, then it would really be making money out of nothing and Marx has been talking nonsense.  However, the empirical evidence does not bear out the ‘financialisation’ thesis.  Yes, since the 1980s, finance sector profits have risen as a share of total profits in many economies, although mainly in the US.  But even at their peak (2006) the share of financial sector profits in total profits reached only 40% in the US.  After the Great Recession, the share fell back sharply and now averages about 25%.  And much of these profits have turned out to be ‘fictitious’, as Marx called it, based on gains from buying and selling of stocks and bonds (not on profits from production), which disappeared in the slump.

Also, the narrative that the productive sectors of the capitalist economy have turned into rentiers or bankers is just not borne out by the facts. Joel Rabinovich of the University of Paris has conducted a meticulous analysis of the argument that now non-financial companies get most of their profits from ‘extraction’ of interest, rent or capital gains and not from the exploitation of the workforces they employ.  He found that: “contrary to the financial rentieralization hypothesis, financial income averages (just) 2.5% of total income since the ‘80s while net financial profit gets more negative as percentage of total profit for nonfinancial corporations. In terms of assets, some of the alleged financial assets actually reflect other activities in which nonfinancial corporations have been increasingly engaging: internationalization of production, activities refocusing and M&As.” Here is his graph below.

In other words, non-financial corporations like General Motors, Caterpillar, Amazon, Google, Microsoft, big tobacco and big pharma and so on still make their profits from selling commodities in the usual way.  Profits from ‘financialisation’ are tiny as a share of total income. These companies are not ‘financialised’.

Blakely says that “financialization is a process that began in the 1980s with the removal of barriers to capital mobility”.  Maybe so, but why did it begin in the 1980s and not before or later?  Why did deregulation of the financial sector start then?  Why did ‘neoliberalism’ emerge then? There is no answer from Blakeley, or the post-Keynesians. Blakeley points out that the post-war ‘social democratic model’ had failed, but she provides no explanation for this – except to suggest that capitalism could no longer “afford to continue to tolerate union demand for pay increases in the context of rising international competition and high inflation”.( p48). Blakeley hints at an answer: “competition from abroad began to erode profits”(p51).  But that begs the question of why international competition now caused a problem when it had not before and why there was high inflation.

But Marxist economics can give an answer.  It was the collapse in the profitability of capital in all the major capitalist economies. This is well documented by Marxists and mainstream studies alike.  This blog has a host of posts on the subject and I have provided a clear analysis in my book, The Long Depression (not a best seller).  The fall in profitability forced capitalism to look for counteracting forces: the weakening of the labour movement through slumps and anti-labour measures; privatisations etc and also a switch into investing in financial assets (what Marx called ‘fictitious capital’) to boost financial profits.  All this was aimed at reversing the fall in the overall profitability of capital.  It succeeded to a degree.

But Blakeley dismisses this explanation.  It was not to do with the profitability of capital that crises regularly occur under capitalism and profitability had nothing to do with the Great Recession.  Instead Blakeley slavishly follows the explanation of post-Keynesian analysists like Hyman Minsky and Michel Kalecki.  Now I and others have spent a much ink on arguing that their analysis is incorrect as it leaves out the key driver of capitalist accumulation, profit and profitability.  As a result, they cannot really explain crises.

Kalecki says that crises are caused by a lack of ‘effective demand’, Keynesian-style and although governments could overcome this lack of demand through fiscal and other interventions, they are blocked by the political resistance of the capitalists.  You see, as Blakeley says, “Kalecki’s argument is that not that social democracy is economically unstable, but that it is politically unstable.”  For Kalecki, crises caused by capitalists being politically unwilling to agree to reforms. So apparently, social democracy would work under capitalism if it was not for the stupidity of the capitalists!

Minsky was right that the financial sector is inherently unstable and the massive growth in debt in the last 40 years increases that vulnerability – Marx made that point 150 years ago in Capital.  And in my blog, I have made the point in many posts that “debt matters”.  But financial crashes do not always lead to slumps in production and investment.  Indeed, there has been no financial crisis (bank busts, stock market crashes, house price collapse etc), that has led to a slump in capitalist production and investment unless there is also a crisis in the profitability of the productive sector of the capitalist economy.  The latter is still decisive.

In a chapter of the book, World in Crisis, edited by G Carchedi and myself (unfortunately again it is not a best seller) Carchedi provides compelling empirical support for the link between the financial and productive sectors in capitalist crises.  Carchedi: “Faced with falling profitability in the productive sphere, capital shifts from low profitability in the productive sectors to high profitability in the financial (i.e., unproductive) sectors. But profits in these sectors are fictitious; they exist only on the accounting books. They become real profits only when cashed in. When this happens, the profits available to the productive sectors shrink. The more capitals try to realize higher profit rates by moving to the unproductive sectors, the greater become the difficulties in the productive sectors. This countertendency—capital movement to the financial and speculative sectors and thus higher rates of profit in those sectors—cannot hold back the tendency, that is, the fall in the rate of profit in the productive sectors.”

What Carchedi finds is that:“Financial crises are due to the impossibility to repay debts, and they emerge when the percentage growth is falling both for financial and for real profits.“ Indeed, in 2000 and 2008, financial profits fall more than real profits for the first time.  Carchedi concludes that: “The deterioration of the productive sector in pre-crisis years is thus the common cause of both financial and non-financial crises. If they have a common cause, it is immaterial whether one precedes the other or vice versa. The point is that the (deterioration of the) productive sector determines the (crises in the) financial sector.”

You may ask: does it matter if the inequalities and crises we experience under capitalism are caused by financialisation or by Marx’s laws of value and profitability?  After all, we can all agree that the answer is to end the capitalist system, no?  Well I think it does matter, because policy action flows from any theory of causes.  If we accept financialisation as the cause of all our woes, does that mean that it is only finance that is the enemy of labour and working people and not the nice productive capitalists like Amazon who only exploit us at work?  It should not, but it does.  Take Minsky himself as an example.  Minsky started off as a socialist but his own theory of financialisation in the 1980s led him to not to expose the failings of capitalism but to explain how an unstable capitalism could be ‘stabilised’.

Undoubtedly Blakeley is made of sterner stuff.  Blakeley says that we must take on the bankers in the same degree of ruthlessness as Thatcher and Reagan took on the labour movement back in the neoliberal period starting in the 1980s.  Blakeley says that “the Labour Party’s manifesto reads like a return to the post-war consensus…we cannot afford to be so defensive today.  We must fight for something more radical…. because the capitalist model is running out of road. If we fail to replace it, there is no telling what destruction its collapse might bring.” (p229). That sounds like the roar of a lion of socialism.  But when it comes to the actual policies to deal with the financiers, Blakeley becomes a mouse of social democracy.

First, Blakeley says “we must adopt a policy agenda that challenges the hegemony of financial capital, revoking its privileges and placing the powers of investment back under democratic control.”  Now I have argued in many posts and at meetings of the labour movement in Britain that the only way to take democratic control is to bring into public ownership the big five banks that control 90% of lending and deposits in Britain. Regulation of these banks has not worked and won’t work. 

Yet Blakeley ignores this option and instead calls for ‘constraining’ measures on the existing banks, while setting up a public retail bank or postal banks in competition along with a National Investment Bank.  “Private finance must be properly constrained” (but not taken over), “using regulatory tools that are international adopted.” P285.  At various places, Blakeley refers to Lenin.  Perhaps Blakeley should remind herself what Lenin said about dealing with the banks. “The banks, as we know, are centres of modern economic life, the principal nerve centres of the whole capitalist economic system. To talk about “regulating economic life” and yet evade the question of the nationalisation of the banks means either betraying the most profound ignorance or deceiving the “common people” by florid words and grandiloquent promises with the deliberate intention of not fulfilling these promises.”

As for a National Investment Bank, a Labour manifesto pledge, it leaves the majority of investment decisions and resources in the hands of the capitalist financial sector.  As I have shown before, the NIB would add only 1-2% of GDP in extra investment in the British economy, compared to the 15-20% on investment controlled by the capitalist sector.  So ‘financialisation’ would not be curbed.

Blakeley’s other key proposal is a People’s Asset Manager (PAM), which would gradually buy up shares in the big multinationals, thus “socialising ownership across the whole economy” and then “pressurising companies” to support investments in socially useful projects.  “As a public banking system emerges and grows alongside a People’s Asset manager, ownership will be steadily be transferred from the private sector to the public sector.” (p268) “in a bid to dissolve the distinction between capital and labour” (p267).  So Blakeley’s aim is not to end the capitalist mode of production by taking over the major sectors of capitalist investment and production, but to dissolve gradually the ‘distinction’ between capital and labour.

This is the ultimate in utopian gradualism.  Would capitalists stand by while their powers of control are gradually or steadily lost?  An investment strike would ensue and any socialist government would be faced with the task of taking over completely.  So why not spell out fully a programme for a democratically controlled publicly owned economy with a national plan for investment, production and employment?

Stolen aims to offer a radical analysis of the crises and contradictions of modern capitalism and policies that could end ‘financialisation’ and give control by the many over their economic futures.  But because the analysis is faulty, the policies are also inadequate.

Climate change and mitigation

September 6, 2019

There is a new IMF paper out on climate change and what policy instruments are available to do something about it.

I write this post from Brazil, where the fires in the Amazon rage on and the Bolsonaro government ignores this catastrophe and even welcomes it as a way of clearing the land for more agro production by big domestic and foreign companies.  Bolsonaro, Trump and other right-wing ‘populists’ of course deny that there is a problem from global warming and climate change.  And I know there are even some on the left in the labour movement who are sceptical at least or outright deniers, seeing it as either mistaken science or a scientific establishment conspiracy for grants and careers.

Well, all I can say to that is that evidence remains overwhelmingly convincing that the earth is heating up to levels not seen in recorded human history; that this global warming is caused by big increases in ‘greenhouse gases’ like carbon dioxide and methane; and that these increases are due to industrialisation and economic growth using fossil fuel energy.

Here is the graph on carbon emissions by NASA as published in the IMF paper.

And as the IMF paper says: “Climate change affects economic outcomes through multiple channels. Rising temperatures, sea-level rises, ocean acidification, shifting rainfall patterns, and extreme events (floods, droughts, heat waves, wildfires) affect the economy along multiple dimensions, including through wealth destruction, reduction and volatility of income and growth (Deryugina and Hsiang 2014, Mersch 2018) and effects on the distribution of income and wealth (IMF 2017, Bathiany et al. 2018, De Laubier-Longuet Marx et al. 2019, Pigato, ed., 2019).”

The IMF goes on:“The broad consensus in the literature is that expected damages caused by unmitigated climate change will be high and the probability of catastrophic tail-risk events is nonnegligible.”  And: “There is growing agreement between economists and scientists that the tail risks are material and the risk of catastrophic and irreversible disaster is rising, implying potentially infinite costs of unmitigated climate change, including, in the extreme, human extinction (see, e.g., Weitzman 2009).”

Maybe you might think this is scare-mongering and exaggerated.  But what if you are wrong and the ‘tail-end risks’ in the normal distribution of probability are fatter than you think?  Can you take the risk that it will all be ok?

So let us assume that the science is right and the consequences are potentially catastrophic to the earth, human living conditions and well-being.  What can be done about it, either to mitigate the effects or to stop any further rise in global warming?

Mainstream economics is seeped in complacency. William Nordhaus and Paul Romer won ‘Nobel’ prizes in economics for their contributions to the economic analysis and projections of climate change.  Using ‘integrated assessment models’ (IAMs), Nordhaus claimed he could make precise the trade-offs of lower economic growth against lower climate change, as well as making clear the critical importance of the social discount rate and the micro-estimates of the cost of adjustment to climate change.  And his results showed that things would not be that bad even if global warming accelerated well beyond current forecasts.

This neoclassical growth accounting approach is fraught with flaws, however.  And heterodox economist, Steve Keen, among others, has done an effective debunking job on the Nobel Laureate’s forecasts.  “If the predictions of Nordhaus’s Damage Function were true, then everyone—including Climate Change Believers (CCBs)—should just relax. An 8.5 percent fall in GDP is twice as bad as the “Great Recession”, as Americans call the 2008 crisis, which reduced real GDP by 4.2% peak to trough. But that happened in just under two years, so the annual decline in GDP was a very noticeable 2%. The 8.5% decline that Nordhaus predicts from a 6 degree increase in average global temperature (here CCDs will have to pretend that AGW is real) would take 130 years if nothing were done to attenuate Climate Change, according to Nordhaus’s model (see Figure 1). Spread over more than a century, that 8.5% fall would mean a decline in GDP growth of less than 0.1% per year”.

That other Nobel prize winner, Paul Romer, is also a ‘climate optimist’.  The founder of so-called ‘endogenous growth’ ie growth leads to more inventions and more inventions lead to more growth in a harmonious capitalist way, Romer reckons that ensuring faster growth will deliver innovatory solutions for stopping global warming and climate change.  Romer advocates setting up ’charter cities’ in the third world where enclaves in an existing country are handed over to another more stable and successful nation that would accelerate growth through innovation.  His favourite model for this was Hong Kong!

The IMF paper notes with sadness that ‘market solutions’ to mitigating global warming are not working.  That’s because companies and countries hope that somebody else will fix the problem and they don’t need to spend anything on it; or that companies and states never think long term and are only interested in what will happen in one, three of five years ahead, not fifty or a century.  But above all, market solutions are not working because for capitalist companies it is just not profitable to invest in climate change mitigation: “Private investment in productive capital and infrastructure faces high upfront costs and significant uncertainties that cannot always be priced. Investments for the transition to a low-carbon economy are additionally exposed to important political risks, illiquidity and uncertain returns, depending on policy approaches to mitigation as well as unpredictable technological advances.”

Indeed: “The large gap between the private and social returns on low-carbon investments is likely to persist into the future, as future paths for carbon taxation and carbon pricing are highly uncertain, not least for political economy reasons. This means that there is not only a missing market for current climate mitigation as carbon emissions are currently not priced, but also missing markets for future mitigation, which is relevant for the returns to private investment in future climate mitigation technology, infrastructure and capital.” In other words, it ain’t profitable to do anything significant.

The IMF then lists various measures of monetary and fiscal policy by governments that might be used to mitigate climate change.  They boil down to credit incentives to companies, or issuing ‘green bonds’ to try and fund climate change mitigation projects.  Then it considers what fiscal policies might be applied ie government investment in green projects or taxes on carbon emissions etc.

What does the IMF conclude on the efficacy of these policies: “Adding climate change mitigation as a goal in macroeconomic policy gives rise to questions about policy assignment and interactions with other policy goals such as financial stability, business cycle stabilization, and price stability. Political economy considerations complicate these questions. The literature does not provide answers yet.”  In other words, they see so many complications in using traditional policy tools within the framework of the capitalist mode of production for profit, that they don’t have any answers. In effect, how can the threat of disasters be averted if capitalist accumulation for profit must continue?

Now some on the left argue that the answer is to end the ‘growth mentality’ in capitalism.  Just ploughing on producing blindly and wastefully more will ensure disaster.  This is the ‘no-growth’ option.  And it is undoubtedly true that when economies accelerate in growth and industrial output, based on fossil fuel energy, then carbon emissions also rise inexorably.  Jose Tapia, a Marxist economist in the US, has produced firm empirical evidence of the correlation between economic growth and carbon emissions.  Indeed, whenever there is a recession as in 2008-9, carbon emission growth falls.

Tapia points out that “the evolution of CO2 emissions and the economy in the past half century leaves no room to doubt that emissions are directly connected with economic growth. The only periods in which the greenhouse emissions that are destroying the stability of the Earth climate have declined have been the years in which the world economy has ceased growing and has contracted, i.e., during economic crises. From the point of view of climate change, economic crises are a blessing, while economic prosperity is a scourge.”  Inexorable march toward utter climate disaster [f] (1)

There is an extensive literature arguing for this no growth option to be adopted by the labour movement and socialists globally.  But is no growth the answer, when there are three billion people in dire poverty and when even in the more advanced capitalist economies, stagnating economies would mean falling living standards and worse lives for the rest?  Instead, can we not mitigate climate change and environmental disasters, and even reverse the process through ending the capitalist mode of production?  Then under democratic global planning of the commonly owned resources of the world, we can phase out fossil fuel energy and still expand production to meet the needs of the many.  Is this utopian or a practical possibility?

I won’t spell out how that can be done because I think that Richard Smith has expounded how in a series of comprehensive articles.  As he says, what we need is not ‘no growth’ but ‘eco-socialism’.  It is not a choice between global warming and ‘no growth’ recession and depression for billions; but between capitalist production disaster or socialist planning. Green capitalism won’t work, as the IMF paper hints at, and a Green New Deal won’t be enough if the capitalist mode of production for profit still dominates.  But under democratic planning we can control unnecessary consumption and return resources to the environment in a way to keep the planet, human beings and nature as balanced as possible. We can “innovate”, create new things, but still balance our ecological inputs and outputs.  It’s a practical possibility, but time is running out.

The trade trigger

August 28, 2019

Financial markets globally continue to gyrate on any news about the trade war between the US and China.  When President Trump announced that the Chinese had called him during the G7 summit meeting in Biarritz to agree on talks on a trade deal, the stock markets rose.  Within hours after China said no such call had been made and this was just another Trump ‘fake news’, markets reversed and went down again.

Clearly what happens in the ongoing trade battle has become a trigger point for a stock market collapse and a massive switch into ‘safe haven’ government bonds and gold.  But it is more than that.  Global growth has been slowing and corporate investment has dropped off sharply.  This is driven by a fall in corporate profits, a profits recession.

Take 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.

Everywhere, domestic production is dropping back.  The usual answer is to sell more overseas through exports.  But here the world trade picture is looking bleak.  The Dutch database company CPB provides monthly world trade figures.  And in June, world trade fell by 1.4% over May and compared to June 2018.  Indeed, world trade has fallen since October 2018 by 3.5%.

And now we have the trade war, which is intensifying.  Only last week, China announced that it was imposing tariffs on US imports in retaliation for the planned September tariffs on Chinese imports into the US already announced by Trump.  Trump promptly announced further tariff hikes in response.

JP Morgan economists now reckon that direct effect of these tariff measures on China’s growth, already slowing, would be to knock 0.2% of the growth rate and deliver a permanent loss of 0.5% of China’s GDP.  The extra hikes threatened by Trump would drive that loss up to 0.9%.  US growth also would take a hit, to the tune of about 0.25% to 0.5% in permanent loss of GDP.  Even more worrying is that uncertainty about how far this war is going, is making businesses, already suffering from slowing or falling profits, as we have seen, even more unwilling to make new investments.

Global investment growth is already down to just 1% a year, according to JPM.  If investment should go negative globally in the next few quarters, then global real GDP growth, currently around 2.5% a year (depending on how you measure it), would drop towards zero – in other words, a global recession.


It’s all going pear-shaped

August 24, 2019

With perfect timing, just as the summit meeting of the leaders of the top capitalist economies (G7) met in Biarritz, France, China announced a new round of tariffs on $75bn of US imported goods. This was in retaliation to a new planned round of tariffs on Chinese goods that the US planned for December. US President Trump reacted angrily and immediately announced that he was going to hike the tariff rates on his existing tariffs on $250bn of Chinese goods and impose more tariffs on another $350bn of imports.

The US president also said he was ordering US companies to look for ways to scrap their operations in China. “We don’t need China and, frankly, would be far better off without them,” Mr Trump wrote. “Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA.”

This intensification of the trade war naturally hit financial markets; the US stock market fell sharply, bond prices went up as investors looked for ‘safe-havens’ in government bonds and the crude oil price fell as China was going to impose a reduction on US oil imports.

These developments came only a day after the latest data on the state of the major capitalist economies revealed a significant slowdown.  The US manufacturing activity index (PMI) for August came in below 50 for the first time since the end of the Great Recession in 2009.

Indeed, the US, Eurozone and Japanese indexes are below 50, indicating a full-out manufacturing recession is here now.  And the ‘new orders’ components for each region was even worse – so the manufacturing index is set to fall further. Up to now, the service sectors of the major economies have been holding up, thus avoiding an indication of a full-blown economic slump. “This decline raises the risk that weakness in manufacturing may have begun to spill over to services, a risk that could generate a sharper-than-expected weakening in US and global labor markets.”  (JPM). Overall, JP Morgan reckons the world economy is growing at just a 2.4% annual pace – close to levels considered a ‘stall speed’ before outright recession.

Despite all his bluster about how well the US economy is doing, Trump is worried.  In addition to attacking China, he also launched again into criticising US Fed chair Jay Powell for not cutting interest rates further to boost the economy, calling Powell as big an “enemy” of the US economy as China!

Powell had just been speaking at the annual summer gathering of the world’s central bankers in Jackson Hole, Wyoming.  In his address, he basically said that there was only so much monetary policy could do.  Trade wars and other global ‘shocks’ could not be overcome by monetary policy alone.  Powell’s monetary policy committee is split on what to do.  Some want to hold interest rates where they are because they fear that too low interest rates (and everywhere they are going negative) will fuel an unsustainable credit boom and bust.  Others want to cut rates as Trump demands to resist the recessionary forces descending on the economy.  Powell bleated that “We are examining the monetary policy tools we have used both in calm times and in crisis, and we are asking whether we should expand our toolkit.”

The trouble is that the central bankers at Jackson Hole are realising, as had already become obvious, that monetary policy, whether conventional (cutting interest rates) or unconventional (printing money or ‘quantitative easing’) was not working to get economies out of low growth and productivity or avoid a new recession.

Many of the academic papers presented to the central bankers at Jackson Hole were laced with pessimism.  One argued that bankers needed to coordinate monetary policy around a global ‘natural rate of interest’ for all.  The problem was that there is considerable uncertainty about where the neutral rate really lies” in each country, let alone globally.  As one speaker put it: “I am cautious about using this impossible-to-measure concept to estimate the degree of policy divergence around the world (or even just the G4)”.  So much for the basis of most central bank monetary policy for the last ten years.

Another paper pointed out that “monetary policy divergence vis-a-vis the U.S. has larger spillover effects in emerging markets than advanced economies.”  So “domestic monetary policy transmission is imperfect, and consequently, emerging markets’ monetary policy actions designed to limit exchange rate volatility can be counterproductive.”  In other words, the impact of the Fed’s policy rate and the dollar on weaker economies is so great that smaller central banks can do nothing with monetary policy, except make things worse!

No wonder, Bank of England governor Mark Carney in his speech took the opportunity before he leaves his post to suggest that the answer was to end the rule of dollar in trading and financial markets.  The US accounts for only 10 per cent of global trade and 15 per cent of global GDP but half of trade invoices and two-thirds of global securities issuance, the BoE governor said. As a result, “while the world economy is being reordered, the US dollar remains as important as when Bretton Woods collapsed” in 1971. It caused too much imbalances in the world economy and threatened to bring down weaker emerging economies which could not get enough dollars.  It was time for a global fund to protect against capital flight and later a world monetary system with a world money!  Some hope!  But he showed the desperation of central bankers.

The impending global recession has also concentrated the minds of mainstream economics.  A division of opinion among mainstream economists has broken out over what economic policy to adopt to avoid a new global recession. Orthodox Keynesian, Larry Summers, former US treasury secretary under Clinton and Harvard professor, has argued the major capitalist economies are in ‘secular stagnation’. So he reckons monetary easing, whether conventional or unconventional, won’t work. Fiscal stimulus is needed.

On the other hand, Stanley Fischer, formerly deputy at the US Fed and now an executive of the mega investment fund, Blackrock, reckons that fiscal stimulus won’t work because it is not ‘nimble enough’ ie takes too long to have an effect. Also, it risks driving up public debt and interest rates to unsustainable levels. So monetary measures are still better.

The post-Keynesians and Modern Monetary Theory economists got very excited because Summers seemed to agree with them, finally, – namely that fiscal stimulus through budget deficits and government spending can stop ‘aggregate demand’ collapsing. It seems that the consensus among economists is moving to the view that central bankers can do little or nothing to sustain capitalist economies in 2019. 

But in my view, neither the ‘monetarists’ nor the Keynesians/MMT are right. Whether more monetary easing and fiscal stimulus, nothing will stop the oncoming slump. That’s because it is not to do with weak ‘aggregate demand’.  Household consumption in most economies is relatively strong as people continue to spend more, partly through extra borrowing at very low rates of interest.  The other part of ‘aggregate demand’, business investment is weak and getting weaker.  But that is because of low profitability and now, in the last year or so, falling profits in the US and elsewhere.  Indeed, US corporate profit margins (profits as a share of GDP) have been falling (from record highs) for over four years, the longest post-war contraction.

The Keynesians, post-Keynesians (and MMT supporters) see fiscal stimulus through more government spending and increased government budget deficits as the way to end the Long Depression and avoid a new slump.  But there has never been any firm evidence that such fiscal spending works, except in the 1940s war economy when the bulk of investment was made by government or directed by government, with business investment decisions taken away from capitalist companies.

The irony is that the biggest fiscal spenders globally have been Japan, which has run budget deficits for 20 years with little success in getting economic growth much above 1% a year since the end of the Great Recession; and Trump’s America with his tax cuts and corporate tax exemptions in 2017.  The US economy is slowing down fast, and Trump is hinting at more tax cuts and shouting at Powell to cut rates.  In Europe, the European Central Bank is preparing a new round of monetary easing measures.  And even the German government is hinting at fiscal deficit spending.

So we shall probably get a new round of monetary easing and fiscal stimulus measures, to satisfy all parts of mainstream and heterodox economics.  But they won’t work.  The trade and technology war is the trigger for a new global slump.

Recessions, monetary easing and fiscal stimulus

August 19, 2019

As the stock markets of the world gyrate up and down like a yo-yo, all talk in the financial media is on whether a new global recession is coming and when.  The financial pundits search for economic or financial indicators that might guide them to tell.  The favourite one is the ‘inverted bond yield curve’.  This is the difference in the annual interest rate that you get if you buy a government bond that has a ten-year life (the maturity before you get your money repaid) and the interest rate for buying either a three-month or two-year bond.

The curve of interest rates for differently maturing bonds is usually upwards, meaning that if you lend the government your cash (ie buy a government bond) for ten years you would normally expect to get a higher interest rate (yield) than if you lent the government your money for just three months.  But sometimes, in the market for buying and selling government bonds (the ‘secondary market’), the yield on the ten-year bond falls below that of the two-year or even three-month bond.  Then you have an inverted yield curve.

Why does this happen?  What it suggests is that investors in financial assets (who are banks, pension funds, companies and investment funds) are so worried about the economy that they no longer want to hold the stocks or bonds of companies (ie invest in or lend them cash).  It’s too risky and so instead investors prefer to hold very safe assets like government bonds – as the governments of Germany, Japan, the US or the UK are not going to go bust like a company or bank.

If investors buy more government bonds, they drive the price of those bonds up in the market.  The government pays an annual fixed interest on that bond until it matures, so if the price of the bond keeps rising, then the yield on that bond (ie. interest rate/bond price) keeps falling.  And then the bond yield curve can invert. Empirical evidence shows that every time that happens for a sufficient period (some months), within a year or so, an economic recession follows.

How reliable is this indicator of a recession coming?  Two Bloomberg authors have questioned the validity of inverted yield for causation; it may be that an inverted curve correlates with recessions, but that is no confirmation that another recession is on its way because all it shows is that investors are fearful of recession and they could well be wrong.  Indeed, when you look at corporate bonds, there is no inverted curve.  Longer-term corporate bonds have a much higher yield than short-term bonds.

On the other hand, JP Morgan economists recently did some regressions on the inverted yield curve and reckoned that the very low inflation that most major economies have experienced in the post Great Recession period may have altered the reliability of the indicator to some extent because the yield curve could go flat but not really express investor fear and loathing of stocks.  Even so, JP Morgan still reckoned it was a valuable indicator.  Currently, the US bond yield curves (10yr-3m) and (10yr-2yr) have inverted.  And as you can see from the JPM graph below, that every time that has happened before, a recession has followed (the grey areas) within a year.

JP Morgan reckons on this basis the current probability of a slump in the US economy within a year is about 40-60%.

And this is the US, the capitalist economy with still the best economic performance of the G7, with real GDP growth at about 2.3%.  Everywhere else in the G7, in Europe, in Asia, and also in many large so-called emerging economies, economic growth is falling fast towards zero and below.  Look at this list:

Canada: 1.3%; France 1.3%; Japan 1.2%; UK 1.2%; Russia 0.9%; Brazil 0.5%; Germany 0.4%; Italy 0.0; Mexico -0.7%;  Turkey -2.6%; Argentina -5.8%.  Only China, India and Indonesia can record decent growth rates and even here, there is a rapid slowdown.

I have reported before on the manufacturing and industry activity indexes that show the world is already in a manufacturing sector recession and only ‘service sectors’ like health, education, tourism etc are keeping the world economy moving.  But those sectors are ultimately dependent on the health of the productive sectors of a capitalist economy for their sales and profits.

In some of the major economies, there is so-called full employment, at least on the official stats, even if it is temporary, part-time, self-employed and on basic wage levels.  This employment income helps to keep spending going, but in many countries it is not enough, so that household savings are being run down.  For example, in the UK, the household savings rate is at a 50-year low.  So people cannot keep borrowing indefinitely, even though interest rates are very low.

And are they low!  We are now in the fantasy world of negative interest rates, where borrowers get paid to borrow and lenders pay to lend. In Denmark, one mortgage lender is offering loans at -0.1%, in other words it is paying you to take out a mortgage!  Over 20% of all government and even some corporate bonds have negative interest rates. The entire spectrum of German government bonds from two-years to 30 years have negative interest rates if you buy them. So sellers of bonds (borrowers) can expect you, the lender, to pay interest to them to buy their bonds!

So why are bond investors prepared to do this? As I said, it’s because they fear a global recession that will cause a collapse in stock markets and other ‘risky’ financial assets, so the safest place to put your money is with governments (which don’t go bust) like the US, the UK, Japan, Germany and Switzerland.

If a recession is coming, what can be done to avoid it?  Mainstream and Keynesian economics has basically two policy solutions.  The first is to inject more money into the financial system in the hope that piles of dollars, euros and yen will find their way into the coffers of corporate borrowers, which will then keep investing in jobs and machines; or into households who will keep spending

The ‘conventional’ way to do this was for the central banks of the major economies to cut their ‘policy’ interest rate, which would lead to falling interest rates across the board and thus reduce the cost of borrowing.  But the experience of the last ten years of what I call the Long Depression reveals that this does not work.  Investment has remained low as a share of GDP, wages have stagnated and economic growth has been feeble.

So governments and central banks have resorted to ‘unconventional monetary policy’ where the central banks buy billions of government and corporate bonds (even company stocks) from commercial banks.  This is called quantitative easing (QE). This led to a huge boost in bank reserves.  The banks were supposed to lend that cash on to companies to invest.  But it did not work.  Companies did not borrow to invest.  They were either so cash rich like Amazon or Microsoft that they did not need to borrow or so weak that the banks would not lend to them.  So all this cash ended up being invested in stocks and bonds (what Marx called fictitious capital, ie just claims on future profits or interest, not actual profits or interest).  The financial markets rocketed up, but the ‘real’ economy stagnated.

Monetary policy has failed, whether conventional or unconventional.  Central banks have been ‘pushing on a string’.  That was something that Keynes found too during the Great Depression of the 1930s.  His policy proposal for getting full employment and ending the depression in the early 1930s was first conventional interest-rate cuts and then unconventional QE.  By 1936, when he wrote his great work, The General Theory, he announced the failure of monetary policy.

And so it has been this time.  Mainstream economists including Keynesians like Paul Krugman at first advocated massive monetary injections to boost economies.  Japan’s government even invited Krugman and others to Tokyo to advise them on QE.  The government and the Bank of Japan adopted QE with a vengeance, so much so that the BoJ has bought virtually all the available government bonds in the market – but to no avail.  Growth remains weak, inflation is near zero and wages stagnate. 

The central banks have run out of ideas. And investors know it. That is why bond yields are negative and in the US the yield curve has inverted.  But there is nothing else that the central banks can do except cut interest rates where they are not yet zero and bring back yet more QE where they are.

Some radical economists have not given up on monetary policy.  Some are advocating ‘helicopter money’(named after right-wing monetarist economist Milton Friedman who advocated by-passing the banking system and printing cash and giving it directly to households to spend ie send helicopters over the country dropping dollars – not napalm as in Vietnam).  This ‘people’s money’ is the last resort of the monetary policy solution.

The more perceptive of mainstream economists now recognise that monetary easing will not work.  The Financial Times and even the Wall Street Journal have been trashing this policy.  And Keynesians who advocated it before now recognise its failure.  Take this example by Edward Harrison, a macro economic financial advisor.

“I think monetary policy is ineffective. We don’t even know how it works. Sure, rate policy can help at critical junctures in the business cycle by lowering interest payments when debtors are under stress. But, we’ve hit the limits of what central banks can do. As a result, we’ve resorted to quantitative easing, negative interest rates, and yield curve control. And for what? It’s crazy.   The solution is staring us in the face: help put money in the pockets of the people who are facing the most severe financial stress in our economies. Those are the people who need the money the most and are most likely to spend that money too. Until we do that, the stress on our economic and financial system will continue to grow… and political unrest will continue to grow with it.”

Harrison cites empirical work from his own college that shows monetary policy does not work – as Keynes discovered in the 1930s. “For example, economic researchers at my alma mater Dartmouth wrote this in 2013 as the abstract for an economic study:

“We study the factors that drive aggregate corporate investment from 1952–2010. Quarterly investment responds strongly to prior profits and stock returns but, contrary to standard predictions, is largely unrelated to changes in interest rates, market volatility, or the default spread on corporate bonds. At the same time, high investment is associated with low profit growth going forward and low quarterly stock returns when investment data are publicly released, suggesting that high investment signals aggregate over investment. Our analysis also shows that the investment decline following the financial crisis of 2008 represents a fairly typical response to changes in profits and GDP at the end of 2008 rather than an unusual reaction to problems in the credit markets.”

And he cites work by the US Federal Reserve that concluded that: A fundamental tenet of investment theory and the traditional theory of monetary policy transmission is that investment expenditures by businesses are negatively affected by interest rates. Yet, a large body of empirical research offer mixed evidence, at best, for a substantial interest-rate effect on investment. In this paper, we examine the sensitivity of investment plans to interest rates using a set of special questions asked of CFOs in the Global Business Outlook Survey conducted in the third quarter of 2012. Among the more than 500 responses to the special questions, we find that most firms claim to be quite insensitive to decreases in interest rates, and only mildly more responsive to interest rate increases.”

I have cited this paper that Harrison refers on many occasions in this blog before he brought it up.  But Harrison emboldens the text from the paper about how interest rates have little effect on business investment. But he ignores the other key conclusion in the paper cited.  I quote again with my emphasis now: “Quarterly investment responds strongly to prior profits and stock returns but, contrary to standard predictions…..Our analysis also shows that the investment decline following the financial crisis of 2008 represents a fairly typical response to changes in profits and GDP at the end of 2008 rather than an unusual reaction to problems in the credit markets.”

In other words, what drives capitalist economies and capital accumulation are changes in profits and profitability – indeed that is what the paper cited shows.  And there is a pile of other empirical evidence that confirms this relation, which I have covered in several papers. The profit investment nexus.  Economic growth in a capitalist economy is driven not by consumption but by business investment. That is the swing factor causing booms and slumps in capitalist economies.  And business investment is driven mainly by one thing: profits or profitability – not interest rates, not confidence and not consumer demand. It is this simple, obvious and empirically confirmed explanation of regular and recurring booms and slumps that is ignored or denied by the mainstream (including Keynesian) and heterodox post-Keynesian economics.

Take this alternative explanation of recessions recently offered by an ex-Bank of England economist Dan Davies.  Davies tells us that financial meltdowns aren’t the usual way in which recessions happen, and emergency credit lines and taxpayer bailouts aren’t the usual way that they’re prevented or managed. What normally happens is that there’s a shock of some sort to business confidence – say, political uncertainty or trade restrictions, as we’re seeing at the moment – and companies react to this by cutting back investment plans.”  According to Davies this orthodox Keynesian recession of this sort, unaccompanied by a financial market crisis, is the normal kind – and one of the best understood problems in economic policy.”  Really, best understood?

So this Keynesian explanation is that there is a sudden loss of business confidence caused by some external factor like a trade war or a government falling or a war. There is nothing endogenously wrong with the capitalist process of production and investment for profit.  The idea of ‘shocks’ to an inherently equilibrium system is the mainstream macro view, in essence.  It has bred a whole industry of empirical work based on Dynamic Stochastic General Equilibrium (DSGE) models, which is a smart word for seeing what happens to an economy when an external ‘shock’’ like a sudden loss of çonfidence’ or trade tariffs is applied.  Larry Summers, a leading Keynesian guru critiqued DSGE models“In four years of reflection and rather intense involvement with this financial crisis, not a single aspect of dynamic stochastic general equilibrium has seemed worth even a passing thought.”  He moaned: “Is macro about–as it was thought before Keynes, and came to be thought of again–cyclical fluctuations about a trend determined somewhere else, … inserting another friction in a DSGE model isn’t going to get us there. “

This orthodox Keynesian explanation of recessions explains nothing.  Why is there a sudden loss of business confidence as we are seeing now?  How does a sudden loss explain regular and recurring slumps and booms, not one-off shocks?  Davies argues that the Great Recession was exceptional in that the huge slump was caused by an extreme financial crash that won’t be repeated, as ‘normal’ slumps are just contingent ‘shocks’.

And yet the theory and the evidence is there that capitalist accumulation and production moves forward in a succession of booms and slumps of varying magnitude and length according to movement of the profitability of capital culminating on a regular basis in a collapse of profits, taking down investment, employment, incomes and consumption in that order.

In the 1930s when Keynes realised that monetary easing was not working to end the depression, he opted for government spending (investment) through running budget deficits to stimulate ‘effective demand’ and get investment and consumption on a rising trend.  This policy has become known as the Keynesian one, also adopted by more radical post-Keynesians and in their latest version, Modern Monetary Theory (MMT). The Keynesians reckon capitalist economies can be brought out of recessions by governments borrowing more than they get in tax revenues (running budget deficits).  Governments borrows by getting financial institutions to buy their bonds.

The more radical post-Keynesians and MMTers reckon that it not even necessary to issue bonds for that purpose.  Governments can just print the money and then spend it on useful projects.  But all agree that ‘fiscal easing’ is the answer to restoring growth, investment, employment and incomes in a capitalist economy.  The government borrows or prints money and the capitalists and workers spend it.  Once growth is restored and full employment and rising incomes are achieved any debt servicing can be funded and you can turn off the government money tap and moderate any possible ensuing inflation if the economy is ‘overheating’.

The trouble with this policy option is that we live in a capitalist economy where the investment decisions that drive any economy are made by capitalist companies. Unless government makes those investment decisions itself and rides roughshod over the capitalist sector or replaces it with state operations in a plan (as in China, for example), then investment and growth will depend on the decisions of capitalist companies.  And they only invest if they are confident of getting good profits ie the profitability of investment is high and rising.

The history of the Great Depression of the 1930s shows; and the collapse of Keynesian demand management policies in the 1970s shows; and the history of the Long Depression since 2009 shows, that if corporate profitability is low, and especially if its falling, then no amount of fiscal stimulus will deliver more investment and faster growth.

I and others have delivered a pile of empirical evidence to show that government spending has little or no impact on boosting economic growth or overall investment – the amount is either too small to have an impact (government investment averages just 2-3% of GDP in most capitalist economies compared to 15-20% of GDP for capitalist sector investment).  Or most government spending in capitalist economies are really handouts to capitalist companies or to boost welfare with little productive result.

Don’t believe me – then look at the evidence here.  Take Japan – it has run budget deficits of between 3-10% of GDP for nearly 20 years and yet its growth rate has been even lower than the US or Europe.

The Trump tax cuts have raised the US budget deficit in the last two years and going forward – Trump is following Keynesian policies in that sense – and yet the US is now slowing down fast.  The US is projected to run a primary budget deficit (that excludes the interest cost on the debt) for the foreseeable future.  Do Keynesians really expect the US economy to grow faster as a result?

US budget projections

Although the inverted yield curve can be checked daily, it may not be a useful indicator of a coming recession but falling profits are (unfortunately, profits data are mostly quarterly).  Empirical studies like the one mentioned by Harrison above and many others confirm this.  And global corporate profits are now stagnating;

while US non-financial corporate profits are falling.

Monetary and fiscal solutions to recessions that still preserve the profit-making capitalist system won’t work.  Monetary easing has failed, as it has done before.  Fiscal easing, where adopted, has also failed.  Indeed, capitalism can only get out of a recession by the recession itself.  A recession would wipe out weaker capitalist companies and lay off unproductive workers.  The cost of production then falls and those companies left after the slump have higher profitability as the incentive to invest.  That is the ‘normal’ recession.  In a depression, however, that process requires several slumps (as in the late 19th century depression) before normal service is resumed.  Another recession is on its way and neither monetary nor fiscal measures can stop it.