Archive for the ‘Profitability’ Category

ASSA 2017 part 2 – Economists and the state of economics

January 11, 2017

Part one of my report on ASSA 2017 covered the debate among mainstream economists and others on the scale and impact of rising inequality and the role of automation on labour and the capitalist economy.

Talking of inequality brings me to consider the state of economics now, as expressed in ASSA 2017.  The failure of mainstream economics to forecast the Great Recession or to explain it; and the subsequent failure to explain how to get out of the Long Depression that ensued raised questions about the methods and polices of the mainstream at this year’s ASSA.

Nobel prize winner Angus Deaton at ASSA had serious questions.  Economic data were faulty, the models used by economists were unreal and the inequality we see in the world was mirrored in the economics ‘profession’ itself.  Deaton sounded upset that most economists could not get their stuff into the top journals, leaving the gravy train of pay and fame to a small elite of Nobel prize winners.  A few top economists got high pay, good jobs and tenure and the same people got their papers in the top five journals and often not on merit.

Of the 537 people who have held American Economic Association office since 1950, for example, 51.1 percent got their doctorates at the University of Chicago, Columbia, Harvard and the Massachusetts Institute of Technology. One-third of the members of the Council of Economic Advisers have had doctorates from MIT. Elite-level economics has become a quite exclusive club.

But economists in general are not really hard done by in the wider scheme of things.  They generally get paid better than most other academics and other ‘professions’ – at least in America.  Indeed, the latest data at ASSA show that newly appointed economists in American academia could expect way more than in most jobs and even most ‘professions’ – starting salaries in the US ate $80-120k.  And even more is paid to economists who go into banking and the world of Goldman Sachs.

salaries

And it is not hard to see why.  The aim of mainstream economics is not to analyse society objectively but to defend and promote capitalism and markets as the only viable system of human organisation.  Modern economics is an apologia not a science. For this wasteful and unproductive exercise, economists are paid relatively well compared to occupations that provide things and services that most people actually need.

But the price of apologetics is to fail to see crises coming in the capitalist mode of production.  Mainstream economics failed to forecast the Great Recession and then to explain it.  And it has failed to explain the subsequent Long Depression and how to get out of it.

Indeed, as the ASSA elite bemoaned these failures in Chicago, the Bank of England’s chief economist also warned of the dangers of placing too much faith in economic forecasts. Andy Haldane admitted economic forecasting was “in crisis” and failed to warn adequately about the financial crisis. And he said of economics: “It’s a fair cop to say the profession is to some degree in crisis”. His intention was to highlight the problems inherent in placing too much reliance on large models of the economy which assume people always behave rationally. Mr Haldane said he hoped the lessons learnt after the financial crisis would help economics move away from “narrow and fragile” models to a broader analysis which encompasses insights from other disciplines.

In the Richard Ely ASSA lecture, Esther Duflo reckoned economists should give up on the big ideas and instead just solve problems like plumbers “lay the pipes and fix the leaks”.  Elsewher, at ASSA, it was also suggested that economists were more like engineers than physicists.

This sounded like Keynes’ famous remark that economists should be like dentists – sorting out troublesome teething problems so that capitalism can then run smoothly. Apparently, Duflo reckons the analogy of plumbers means that pure scientific method of cause and effect was less important than practical fixes. So economists should be more like doctors than medical researchers.  Plumbers, dentists, engineers, doctors – but not, it seems, social scientists, let alone scientific socialists.

The failure of economics does not auger well that the mainstream will know what to do about the rise of ‘the Donald’.  At ASSA, a pack of Nobel Prize-winning economists gave Donald Trump and his policy plans the thumbs-down.  “There is a broad consensus that the kind of policies that our president-elect has proposed are among the polices that will not work,” said Joseph Stiglitz, summing up the views of the panel that included his fellow Columbia University professor Edmund Phelps and Yale University’s Robert Shiller.

Phelps was particularly critical of Trump’s singling out of individual companies for abuse and praise, saying such interference could end up discouraging newcomers from entering markets and bringing with them much-needed innovation. “The Trump government is threatening to drive a silver spike into the heart of the innovation process,” he said. Phelps also voiced concern about Trump’s plans for big tax cuts and spending increases. “Such a policy runs the risk it could lead to an explosion of public debt and ultimately cause a serious loss of confidence and a deep recession,” he said.  Shiller was the only Nobel Prize winner on the panel discussion who didn’t take a shot at Trump. “I’m a natural optimist and I would not like to speculate on how bad it could get,” he said.

Much of this moaning appeared to be sour grapes.  So far, Trump has appointed only one economist to his administration, the rest are mostly billionaires.  Apparently, he does not like ‘experts’.  But as Glenn Hubbard, former Bush adviser and now head of Columbia Business School, said: “I think the president will get any economist, he asks”.  Indeed there was another ASSA panel, chaired by Harvard’s top professor Greg Mankiw who were positive about Trumponomics.  John Taylor and Alan Kreuger expected good results from Trump’s proposed infrastructure plans.

Of course, the economists who are really excluded are those on the radical wing of the ‘profession’ who are not engaged in apologia.  They were not looking to join Trump and they were not going to be invited. In the URPE sessions, Esther Jeffers of the University of Paris reckoned that capitalism is on the verge of a new crisis, due to “the misuse of monetary policy, and the fragility of emerging economies”.  Ilene Grabel of the University of Denver also focused the locus of crises in the so-called emerging economies, because they are being challenged by the pursuit of negative interest rates by some of the world’s central banks and the move away from monetary expansion by the US Fed.

As readers of my blog will know, while rising debt costs threaten many corporations in emerging economies, I still think the locus of the next recession will be found in the advanced capitalist economies, particularly the US.  Minqi Li at the University of Utah presented a new paper that looked at the fall in the profit rate in the US, Japan and China during the 1970s.  He reckoned the revival of profitability up to the Great Recession was now over and the locus of capitalism’s demise could be found in any further decline.

However, mainstream economics does not look at profitability of capital as an indicator of the health of capitalism.  That is why it failed to see the Great Recession coming and will not see the next one.  Since the end of the Great Recession, financial asset prices have rocketed while prices and profitability in the ‘real’ economy have not.

 

asset-prices

But, as we go into 2017, optimism reigns about the capitalist economy, if not with President Trump. It’s going to take a year or so to see if the current optimism expressed in financial markets and among some mainstream economists at ASSA about an economic recovery under Trump is based on good analysis or just on apologia.

ASSA 2017 – part one: productivity and inequality

January 9, 2017

One of the main themes of this year’s annual conference of the American Economics Association, ASSA 2017, was whether capitalism was slowing down.  Was the productivity of labour (output per ASSAworker or per hours worked) no longer growing at previous trend rates and indeed capitalism was entering some level of permanent stagnation?

If capitalism could no longer develop the productive forces effectively, then its historical raison d’etre disappears. Of course, the ASSA assembly of 13,000 economics professors and graduate students, mainly from American universities, to hear hundreds of economics papers did not see the ‘productivity puzzle’, as it has been called, like that.

In the largest hall, the leading mainstream economists of our time debated the issue of slowing productivity growth, confirmed by all the measures, and what this meant.  Olivier Blanchard, former chief economist at the IMF, doubted that productivity was being measured properly at all.  Barry Eichengreen from Berkeley University was more confident of measurement, but argued that there was nothing particularly strange about the current slowdown, as such “decelerations” are “ubiquitous” in many countries at different times.  Productivity slowdowns are usually the result of too little investment in the skills of the workforce and wasteful investment in means of production; or caused by special ‘shocks’ like a sharp oil price rise.  Eventually, the slowdowns end.

Kenneth Rogoff of Harvard University (infamous for the past juggling of his debt data) was even more optimistic.  The productivity growth slowdown now being experienced was temporary. Karl Marx claimed that capitalism would grind to a halt “as the first industrial revolution was fading” but it didn’t.  Keynesian Alvin Hansen (father of the ‘secular stagnation’ thesis) reckoned something similar “at the Great Depression” and he was wrong too.  Rogoff reckoned the current slowdown was caused by a huge ‘debt crisis’ that remains after 2007, but that will subside and the productivity slowdown will “eventually come to an end”.  Marty Feldstein, former economics adviser to the Bush presidency, was very buoyant.  The US economy may have slower productivity growth than before but it was doing better than anywhere else because of its wonderful “entrepreneurial culture and financial system” (!) and a labour market not encumbered with “barriers created by large labor unions, state-owned enterprises and very high tax rates.”

Amid this paean of praise for capitalism in its ‘temporary’ moment of slowdown, the data provided by Dale Jorgensen from Harvard offered a more realistic picture.  Jorgensen reckoned that there were clear signs that, while recovery from the current crisis was likely, a longer-term trend toward slower economic growth will be re-established.”  Jorgensen broke down the composition of economic growth globally and found that the real driver of growth was not ‘innovation’ or even investment in new technology (as measured in neoclassical terms as total factor productivity – TFP), but mainly more and more investment in existing technology and materials.

jorgensen

This conclusion had also been reached by John Ross in his study of Jorgensen’s work before“What is crucial is that the role of different forms of capital, i.e. intermediate products/circulating capital and fixed investment/fixed capital, is the overwhelming force driving US economic growth. Taking the two together 76% of US sectoral output growth is due to fixed and circulating capital, 15% due to labour, and only 9% due TFP.” (Ross).

ross

It means that capitalism mainly grows by relatively more investment in means of production, namely fixed capital with existing technology and material inputs (what Marx called constant capital) relative to investment in labour hours (or variable capital).  The impact of ‘innovation’ and new technology is small.  And Jorgensen reckons that the contribution of the latter will get smaller in the next decade.

In a way, this is another confirmation of Marx’s law of capital accumulation, a long-term tendency for the organic composition of capital to rise.  Marx’s law of the tendency of the rate of profit to fall is the other side of the coin.  To some extent, this tendency will be counteracted by an increase in the exploitation of labour through more people entering the workforce globally and by increased hours of work – but not decisively over the long term.

The other big issue relevant both to future productivity and inequality is the advent of robots and AI.  The ASSA conference collected the main mainstream researchers on this subject.  Daron Acemoglu from MIT argued that automation would actually create as many jobs as it would lose for human beings and the economy would be “self-correcting” in terms of employment and inequality.  William Nordhaus of Yale University presented six reasons why robots and AI would not lead to ‘singularity’ (exponential replacement of humans in production) in this century.  And so all is well with the advent of robotic automation in 21st century capitalism.  Fear of extreme inequality and mass unemployment can be dismissed.

At the same time as the big hitters in mainstream economics debated global productivity and stagnation, in a much smaller room, radical economists, under the auspices of the Union of Radical Political Economics (URPE), were having a similar discussion.  Interestingly, nobody on the panel there though that capitalism was in some ‘secular stagnation’, as formulated by Keynesians like Larry Summers, Paul Krugman or Robert J Gordon, at previous ASSAs. 

Bill Lazonick reckoned that productivity growth had slumped because capital had switched from productive investment into rentier activities of financial speculation.  Companies don’t use the stock market to raise money, they support the stock market”.  Anwar Shaikh reckoned that the Keynesian idea of secular stagnation was silly and that the core of the capitalist problem lay with profitability, not productivity as such.  The key to investment was the profitability of enterprise (the profit rate after deducting interest, rent etc going to the capital of finance and circulation) and that was low.  Until that rose, productivity and economic growth would remain low.

In another room, the ‘centrist’ wing of ASSA met.  These are the more radical Keynesians who reckon that capitalism is failing because of wrong policies and regulations (or lack of them).  If the politicians and rich elite adopted the right ones, then all would be well – or at least fairer and more productive.  You see the problem is that the ‘rules of the game’ have been altered, as Nobel Prize winner and adviser to the leftist British Labour leadership, Joseph Stiglitz, puts it.  The rules have been altered in favour of the rich, corrupt and in favour of finance over productive; in favour of monopoly over competition; in favour of rent over productive profit (see his book).

The panel here were convinced that if the rules in the labour market were changed to help unions organise, then inequality and poverty could be reduced.  Lawrence Mishel reckoned that the “main driver of inequality was the lack of worker power and the globalisation which has led to trade agreements that hurt the incomes of the majority –something mainstream economists lie about”.  Mishel listed the “staggering” number of “poor economic decisions” made in recent decades like austerity, deregulating financial markets, supply-side tax cuts, inadequate efforts to address climate change, the fight against the Affordable Care Act in many states and in Congress, etc.

Dean Baker at the Center for Economic and Policy Research, who also has a book out aptly called “Rigged”, highlighted the need to reverse rising inequality from excessive CEO pay, a bloated financial sector, patent and copyright protections and protections for highly paid professionals.  He calculated that the “efficiency gains” from “reducing or eliminating these rents” would be worth over $3trn, to be used in other productive ways.

What was needed was to “restructure the market” to produce different outcomes because simple tax changes would not do the trick.  Baker said this policy ‘rigging’ of the economy shows that the ‘free market’ does not operate.  Here he seems to be implying that, if it did, then all would be well and fair.  Because the market is ‘rigged’, not because a market economy exists, we need government to intervene to correct inequalities, injustices and apply policies for the majority not for the few.

Baker fails to explain how the market got ‘rigged’.  Did this just happen? Why was the policy choice for the rich not the majority?  Was it not ever thus?  Baker is looking at the symptoms not the causes. Marxists like me would say the policies that led to rising inequality and the growth of finance capital came about because the Golden Age of capitalism, with its decent pensions, public services and benefits and full employment, could no longer be afforded by market capitalism as the profitability of capital plunged through the 1970s.  So the ‘rigging of the rules’ was necessary for the saving of the capitalist market system.

In a later ASSA session, the mainstream, the radical and the liberal met to discuss “the future of growth” (in effect, the future of capitalism). The IMF’s Jonathan Ostrey (naturally) remained optimistic about the future.  In contrast, Robert Gordon was there to tell us the story of his recent book: that capitalism was in for slow growth because the new technologies would have only limited impact.  Anwar Shaikh presented the (Marxist?) argument that capitalism was subject to regular crises and was past it use-by date.  And James Galbraith and Gerald Friedman presented the liberal Keynesian view as above.

There is no doubt that inequality of incomes and wealth has reached levels in some countries like the US or the UK not seen since the start of modern capitalism.  In another session, Daniel Zucman, presented a paper from himself, Emmanuel Saez, Thomas Piketty (the former rock star economist) and the recently deceased Tony Atkinson, that offered the latest data on inequality of incomes in the major economies.  It showed inequality of incomes was highest and still rising in the US; has risen sharply in China (although now tapering off) and was still relatively low (but still higher) in France.

zucman

But is high or rising inequality the fault-line of modern capitalism; is it the cause of low productivity growth and recurring crises of capitalist production?  The left Keynesians think so.  But I have argued that inequality is inherent in a class society including capitalism and that is a symptom rather than a cause of capitalist crises or stagnation.  One paper at ASSA gave some support to that.  The paper found that the empirical evidence does not support the argument that inequality is a major drag on demand growth, except when offset by borrowing by lower income households. There does not appear to be a clear link between the rise in income inequality in recent decades, the financial crisis, or the slow recovery since then.”

In part 2 on ASSA 2017, I’ll discuss the state of modern mainstream economics as ASSA participants see it and the likely efficacy of economic policy in the new era of Trumponomics.

Forecast for 2017

December 28, 2016

It has now been eight years of what I have called a Long Depression, since the Great Recession started in January 2008 (see Recessions,depressions and recoveries 071215).  So, in looking ahead to 2017, I thought it might be necessary to check what my forecasts or predictions were in previous years.

I have been accused of calling a new slump every year on the basis that eventually I’ll be right. That’s a bit like claiming that the time is midnight when it is not, but knowing that it eventually will be.  So were my previous annual forecasts just parroting the view that a slump is just around the corner?  Well, at the end of 2011, I said that “2012 is likely to be another year of very weak economic growth in the major capitalist economies.  But it is not likely to see a return of a big slump in capitalism.”  At the end of 2012, I said “In 2013, economic growth in the major economies is likely to be much the same as in 2012 – pretty weak and below long-term averages. But 2013 is not likely to see a return of a big slump in capitalism.”  At the beginning of 2014, I said that “the change in profitability of capital in the US does not suggest a new recession in 2014. ”At the beginning of 2015, I reckoned that “The global economy remains in a crawl and will do so in 2015 for one good reason: the failure of business investment to leap forward. “And at the beginning of this year (2016), I said As for 2016, I expect much the same as 2015, but with a much higher risk of new global recession appearing….Even if a new global slump is avoided this year, that could be the last year that it is.”

That brings me to 2017.  When I made my 2016 forecast, the world economy seemed to be slowing down fast.  The US economy was nearly at a standstill, Europe’s ‘recovery’ remained weak and Japan appeared to have entered a new recession.  The US economy grew far less than expected in the second quarter of 2016.  Real GDP (that’s the value of national production after inflation is removed) increased at only a 1.2% yoy rate. And US business investment fell at a 9.7% annual rate, the third straight quarterly fall. Japan failed to grow at all in Q2 2016, a sharp slowdown from 2% growth in Q1.  And business investment there also collapsed.  Eurozone growth was still stuttering.  Above all, the talk was for a collapse in China’s economy because of excessive debt, bringing about an end to its miracle growth story.  As Gavyn Davies, former chief economist at Goldman Sachs and now a columnist for the FT, recently described the economic mood at the beginning of 2016: “At the turn of the year, there were forecasts of global recession in 2016. ….It was a bleak period.”

But as the year went on, the imminent collapse of the Chinese economy proved to be wrong – something I did predict.  Indeed, by the second half of the year, there were signs of a modest pick-up in growth as the Chinese authorities pumped more credit into the state banks and corporations and directed a modest expansion in fiscal spending.

Now I have argued ad nauseam that it is the profitability of the capitalist sector of economies that is the driver of investment and thus employment and incomes.  A sustained fall in profitability and in the mass of profits will eventually lead to a fall in investment after a year or so and then deliver a slump in the productive sectors of a capitalist economy, triggering in turn, a financial (credit) crisis.  That appeared to be increasingly likely in the first half of 2016 as corporate profits and investment fell.

But in Q3, corporate profits in the major economies staged somewhat of a recovery back into positive territory and the major capitalist economies appeared to avoid a further slide down in growth towards zero. Corporate investment remains weak but if profits were to continue rise, then investment too could pick up.  JP Morgan seems to think so.  In the past, the investment bank’s economists, like me, have highlighted the strong role profits played in driving the capital expenditure (capex) cycle. So “the recent stabilisation in global profit growth bodes well for capex, in this regard.” (JPM).

global-corporate-profits

Financial markets in the last month or so have been buoyed by the possibility of a sustained economic recovery and also by the prospect of huge corporate tax cuts and infrastructure spending to be initiated by the new American oligarch president, Donald Trump, in 2017.  And America’s households also seem more optimistic about 2017.  The University of Michigan’s consumer sentiment index reached 98.2 in December 2016, the highest reading since January 2004.

consumer-confidence

This renewed optimism encouraged the US Federal Reserve in December to bite the bullet and risk raising its policy interest rate with aim of controlling credit and inflation, supposedly likely to rise next year.  So everywhere, mainstream economists are now forecasting an acceleration in economic growth.

Gavyn Davies summed this up: “there has been a marked rebound in global activity, and in recent weeks this has become surprisingly strong, at least by the modest standards seen hitherto in the post-shock economic recovery….. the first time that all of the major economies have been growing at above trend rates for several years”  So, says Davies, Overall, we can perhaps be hopeful, though certainly not yet confident, that the global economy will begin to overcome the powerful forces of secular stagnation next year.”

But is this optimism for 2017 justified?  After all, every year since the end of the Great Recession in 2009, the main international economic agencies, the IMF, the OECD etc, have forecast a rise in GDP growth, trade and investment.  And every year they have had to eat their words and revise their forecasts down.  Investment in the major economies is now some 20% below where the IMF forecast it would be back in 2007.

investment-slowdown

But perhaps the agencies and economists are right this time and perhaps my forecast of a new slump (predicted by 2018 or so) is going to be proven wrong. Well, perhaps.  But consider this.  First, the so-called pick up in US economic growth is minimal.  If the current forecasts of the final quarter of 2016 are realised, then the overall growth rate for 2016 in the US will be just 1.5%, the slowest annual growth rate since 2012.  And growth in real GDP per person in 2016 will be the slowest since the Great Recession ended in 2009.

Second, much of this very modest growth has come from an expansion of household consumption and corporate borrowing (fuelled by very low interest rates and massive injections of credit).  US mortgage rates are at an all-time low and the housing market is booming again.  In Q3, personal consumption contributed two-thirds of the 3.5% (annualised) growth rate achieved by the US economy with trade and a build-up of stocks delivering the rest. Business investment contributed nothing.

us-business-investment-growth

Global debt sales (half by corporations) reached a record in 2016, matching levels not seen since before the global financial crash.  The money raised has gone into financial speculation, buying back company shares and in higher dividends to shareholders, thus boosting the stock and bond markets rather than productive investment.

But household consumption, although the largest part of national spending, does not drive growth.  And if the cost of borrowing on credit cards and mortgages is now set to rise as the Fed continues to hikes its floor rate during 2017, as planned, then consumption growth could begin to fall back.  The recovery in corporate profits is based on keeping productive investment and wages low (thus weakening productivity growth) and not on an expansion of investment, sales and revenues.  Moreover global growth is mainly coming from emerging economies like China (half of total growth).  Only one-quarter is coming from the major capitalist economies, with the US, Europe and Japan making negligible contributions.

Globally, corporate debt levels continue to rise faster than productive investment.  As the world’s leading bond investment company, PIMCO commented: “The low cost of financing with record-low interest rates simply made building up leverage tempting…This happens every economic cycle, but what makes this one special is the added incentive to issue debt at very low interest rates. (But) it sows the seeds of the next downturn or the next credit event.”

global-debt-and-investment

And there is now the prospect of more reductions in global trade as various international trade agreements bite the dust or flounder – while ‘the Donald’ talks of higher trade tariffs and walls.

world-trade-growth

One of the most graphic illustrations that the days of globalisation are over, making it more difficult for capitalism to get higher profits from the export of capital as profits fall at home, is the sharp fall in global capital flows – from over 25% of world GDP in 2007 to near zero now.  Banks have stopped lending to other banks and taken their money back, while investors are increasingly reluctant to buy the corporate bonds of other countries.

global-capital-flows

Rising interest rates, along with still high corporate debt, sluggish world trade and poor business investment, do not look like a recipe for economic recovery in 2017.  So 2017 will not deliver faster growth, contrary to the expectations of the optimists.  Indeed, by the second half of next year, we can probably expect a sharp downturn in the major economies.  Depending on whether this generates a new credit squeeze on weaker corporations and more pressure on banks. similar to that now being experienced in Italy, is difficult to judge.  But far from a new boom for capitalism, the risk of a new slump will increase in 2017.

 

Top ten posts of 2016

December 23, 2016

As has become customary at the end of the calendar year, here are the top ten most popular posts from my blog for this year.  Topping the list was my review post of Anwar Shaikh’s magnum opus, Capitalism: competition, conflict and crises.  The fact that this was the most popular post is a credit to Shaikh’s magisterial book and also to the serious attitude that my blog readers take to Marxist economics.

As I said in the post, Shaikh’s book is a product of 15 years work.  A theory of ‘real competition’ is developed and applied to explain empirical relative prices, profit margins and profit rates, interest rates, bond and stock prices, exchange rates and trade balances.  Demand and supply are both shown to depend on profitability and interact in a way that is neither Say’s Law nor Keynesian, but based on Marx’s theory of value.  A classical theory of inflation is developed and applied to various countries.  A theory of crises is developed and integrated into macrodynamics.

In the post, I concentrated on Shaikh’s view on the causes of crises under capitalism and highlighted that he had a position is similar to my own on the causes of capitalist crises, the nature and existence of depressions, and the role of Kondratiev and profit cycles.  In a later post, however, I raised criticisms of his position on Marx’s theory of value,, particularly his attempt to reconcile Ricardo with Marx on value.  In my view, there is no reconciliation possible between Marx’s value theory and that of Ricardo and Sraffa.  There is also no unification possible between Marx’s law of profitability as the underlying cause of recurrent crises and slumps and the post Keynesian/Kalecki view of a ‘profit-wage share’ economy.  And there is no meeting between Marx’s view of profitability and credit in modern capitalism and those who hold that finance creates value and that ‘financial speculation’ lies at the centre of capitalist crises.  Shaikh stands for Marx on most of these issues but seems want to build a bridge to other side too.

The second most popular post was also a book review – of John Smith’s Imperialism in the 21st century, in many ways ground-breaking in its analysis of modern imperialism.  Smith shows that capital in the North restored much of the fall in its profitability in the 1970s on the back of the exploitation of the South in the 1980s onwards: “surplus-value extracted from these new legions of poorly paid workers helped to dig the capitalism system out of its hole in the 1970s”.

Smith firmly dismisses the idea that is prominent among mainstream and heterodox economics alike that the global financial crisis and the Great Recession were financial in origin. Smith reckons that gross domestic product (GDP) as a measure of value hides the fact that much of the US GDP is not value created by American workers but is captured through multinational exploitation and transfer pricing from profits created from the exploitation of the workers of the South.

Smith argues that the exploitation of the workers of the South is less through an expansion of absolute and relative surplus value and more through driving wages below the value of labour power (super-exploitation).There was a vigorous debate on my blog over whether Smith was right about this as the dominant characteristic of modern imperialism. That debate continues.

Smith’s view of imperialist exploitation is complemented by Tony Norfield’s book showing how the imperialist financial centres capture the value expropriated from the periphery.  My post on Norfield’s also made the top ten. A key part of Norfield’s book is to weave in facts like that about modern imperialism with a Marxist analysis of the role of finance capital.  And Norfield is incisive in illuminating the nature of the modern British economy.  I have described Britain in the past as the world’s largest ‘rentier’ economy.  That’s an old-fashioned French word for an economy based on sucking up ‘rents’ through the monopoly ownership of capital (or land) from the profits of the productive sectors.  Both the sectors exploit labour but the rentier economy relies on its financial and legal monopoly to take a share of the surplus value of productive capitalist sectors appropriated from labour. This gives British capital its important role in modern imperialism, but also its Achilles heel in any global financial crash or in the shock of Brexit.

The third most popular post in 2016 was on whether Marxist economic theory better explains what had happened in the last ten years than Keynesian economics, which remains the dominant thinking among leftist organisations. Leading Keynesian Brad Delong told us Marxist economists at the annual American Economics Association Conference in San Francisco last January that we are like pessimists just ‘waiting for Godot’, when capitalism can be made to work with the ‘concrete economics’ of Keynesian social democracy (the title of DeLong’s new book this year). Well, the last ten years cast doubt on that view and the next few years will see who is right.

In the post I argued that the cause of the Great Recession and the subsequent Long Depression is not the product of a ‘lack of demand’ as such or ‘pro-cyclical’ government spending policies (austerity) but is caused by a collapse of the capitalist sector, in particular, capitalist investment.  And that investment collapsed because profitability in the capitalist sector fell, then the mass of profits fell, leading to investment, employment and incomes to fall, in that order.  Then it’s the change in profits that leads to changes in investment and demand (consumption), not vice versa, as the Keynesians argue.

At the beginning of 2016, the world economy was looking pretty weak and there was much talk that a growing debt crisis in China was likely to lead to a major crash there, which would then spread globally.  But in a post that proved popular, I questioned the doom-mongering about China and also the size of the impact that China would have on the major capitalist economies. I argued that the US remains the pivotal economy for a global capitalist crisis, particularly as it dominates in financial and technology sectors.  In 1998, the emerging economies had a major economic and financial crisis but it did not lead to a global slump.  In 2008, the US had a biggest slump in its economic post-war history and it led to the Great Recession.  In my view, this weighting still applies.  That proved right, at least for 2016.

One of the big politico-economic events of 2016 was the referendum vote in Britain to leave the European Union.  My post on the day after Brexit got a lot of hits. I got it wrong, having expected a vote to remain in the EU. I had got two previous predictions right: that Scotland would vote to stay in the UK and that the Conservatives would win the 2015 UK general election, but I did not get a hat trick in 2016,  as former Conservative PM David Cameron’s wild political gamble did not come off.  In the post, I analysed the reasons why there was a vote for Brexit and looked at the possible economic impact. That impact has still to be felt both for the UK and for world trade.

The other major political event of 2016, of course, was the surprise victory of Donald Trump for the US presidency, despite polling more than 2m votes less than his Democratic opponent Hillary Clinton.  In a post directly after the result, I again analysed the reasons for Trump’s victory.  I said that, like the vote of the Brits for Brexit, against all expectations, a sufficient number of voters in America (mainly white, older and in small businesses or working in failing industries in smaller central US states) overcame the vote of the youth, the more educated and better-off in the big cities along the coasts.

But it was not so much a working class vote for Trump because hardly more than 50% or so of eligible voters turned out to vote.  A huge swathe of people never vote in American elections and they constitute a sizeable part of the working class.  The most significant issue (52%) for voters, when asked at the booths, was the state of the US economy, with terrorism next (but well down at 18%) and immigration (the Trump card) even lower.  So Trump won because he claimed he could improve the conditions of those ‘who have been left behind’ by globalisation, failing domestic industries and crushed small businesses.

Stock markets are now riding high on expectations that Trump can boost the US economy.  But in the post, I argued that Trump had been handed a poisoned chalice and the US economy would not recover.  Trump would not be able to deliver and his big business cabinet would do in the opposite of what those ‘left behind’ want.  We shall see in 2017.

One of the features of Brexit and Trump events is that it heralds the end of the great neo-liberal era of globalisation and ‘free trade’.  My post on the end of globalisation made the top ten.  It critiqued the views of Keynes in the 1930s and his modern epigone Brad Delong (again!) in claiming that capitalism has been the most successful mode of production in human history and it would be again. Instead, I argued that capitalism is really past its use-by date.  One indicator is that ‘globalisation’ (the spread of capitalism’s tentacles across the world) has ground to a halt.  And growth in the productivity of labour, the measure of future ‘progress’, has also more or less ceased in the major economies.

More short term, a key question for me and it seems my readers, was whether the world economy is heading for another slump.  In a post written early in the year, Can we avoid the coming recession?, I presented the facts as I saw them and offered a cautious forecast that a new economic recession was “due and will take place in the next one to three years at most.” I said that maybe there won’t be one in 2016 (as it has proved)… “But the factors for a new recession are increasingly in place: falling profitability and profits in the major economies and a rising debt burden for corporations in both mature and emerging economies.”

And finally there is my post on how unequal the world is, according to annual study by Credit Suisse, which makes the top ten every year.  This year was no exception, with the finding that the top 1% of the adult wealth holders in the world own 51% of all global personal wealth, while the bottom half of adults own only 1%.  Indeed, the top 10% of adults own 89% of all the world’s personal wealth!  This is a record.

In the past 12 months, global wealth has risen by 1.4% and so it has barely kept pace with population growth. As a result, in 2016, the mean average wealth per adult was unchanged for the first time since 2008, at approximately $52,800.  This mean average tells you that the vast majority of the world’s adults have way less wealth than that.  On average, wealth did not rise, while inequality between rich and poor rose again.

That’s the message of 2016 from my posts: continued depression for the majority and more for the tiny elite.

 

Best books of 2016

December 21, 2016

I thought I would remind myself and blog readers of what seemed to me were the best books on economics published this year.  The criteria for me were whether the book added any new idea or understanding of developments in modern capitalism or in Marxist economic theory. Yes, I know, very boring with no jokes or stories involved.

Let start with those books that looked at the activities of finance capital and imperialism in the major economies and globally.  In his excellent new book, Finance Capital Today, French Marxist Francois Chesnais analysed in detail the key developments in modern finance and the causes of the global financial crash in 2008.

As Francois says in a comment to my blog,  “Today not enough surplus value is being produced to re-launch the accumulation process and the amount that is serves to consolidate the accumulation of dividend and interest bearing assets by banks, funds and individuals (financial accumulation) and so the claims on this already very insufficient amount of surplus value. This has led both to the dead-end of the quasi-zero long term interest rate regime, which not simply the outcome of quantitative-easing and to the endless small shocks in the global financial system. Of course government debt and the resulting pro-rentier, pro-cyclical austerity policies only aggravate this situation but they do not explain it and their reversal would not solve capitalism’s basic problem.”  Tony Norfield provides a really comprehensive and positive review of Chesnais’ book on his blog site.

And of course, in 2016, Tony published his own analysis of modern capitalism with The City: London and the Global Power of FinanceNorfield brings us key insights into understanding the nature of modern financial systems and what role they play in the working (or non-working) of capitalism.  Tony defines as imperialism where a small number of countries dominate world markets through their multi-national corporations, which can be both making things, providing services and financial, or often all three.  Financial privilege is a form of economic power, enabling imperialist countries to draw upon resources and value created elsewhere in the world.   Finance and production in 21st century capitalism are inseparable – “they are close partners in exploitation”.  Norfield also reveals the large role of British capitalism in imperialism.  Britain is second only to the US in the importance of its financial sector globally and in some areas like foreign currency trading it leads. In a way, Britain is the world’s largest ‘rentier’ economy.  For that reason alone, the Brexit referendum vote puts the future of London as the centre of global finance capital in jeopardy.

While Tony Norfield’s book looked at modern imperialism from the apex of finance capital, John Smith, in his Imperialism in the 21st century, looked at it from the point of view of billions living under the grip of imperialism in what used to be called the Third World and is now called the ‘emerging’ or ‘developing’ economies.  There was quite a debate on my blog during the year on John’s view that it was the ‘super-exploitation’ of wage workers in the ‘South’ that is the foundation of modern imperialism.  That only helped to emphasise the importance of John’s book.

The role of finance in causing instability in modern capitalism was the theme of Jack Rasmus’ intriguing book, Systemic Fragility in the Global Economy. Rasmus reckons that mainstream economic theory has completely failed to account for this fragility; or forecast any crises like the Great Recession; or explain the ensuing depression.  But Jack is not only damning about mainstream economics.  He maintains that heterodox theories of crises in the post-1970s world economy have also been found wanting.  The followers of Keynes and Marx come in for criticism.  The Keynesians are at fault because they have lost the essence of Keynes’ insight into the instability and uncertainty found in a monetary and financially-dominated economy.  His book is certainly a thought-provoking contribution to an understanding of the fragility of modern capitalism.

The various theories or explanations of the cause of crises under capitalism from a Marxist or radical perspective were brought together in a collection of papers entitled The Great Financial Meltdown cleverly edited by Turan Subusat.

Turan provides an excellent introduction and summary of the views of top Marxist scholars.  It includes a debate between David Harvey and myself on the relevance of Marx’s law of profitability to crises.  Turan argues that the causes of crises under capitalism and, in particular, the recent global financial crash and subsequent Great Recession, can be considered from three angles: is there a systemic underlying cause of crises (the falling rate of profit or underconsumption); or is it conjunctural (each crisis has a different cause); or is it the result of policy decisions (eg the neoliberal agenda, financial deregulation etc)?

The failure of mainstream economics to have any useful part to play in such discussion was exposed Ben Fine in two volumes, called Microeconomics and Macroeconomics: a Critical Companion, Fine (along with co-author Ourania Dimakou) delivers a comprehensive critique of all mainstream economic theories and models.  This makes it an invaluable antidote to the conventional poison of marginalism and general equilibrium theory in microeconomics; and Say’s law and the denial of crises or slumps in macroeconomics.

Fine makes the point that macroeconomics has shifted from theory to models.  Mathematical models replaced theory, with models to be tested ex-post.  What is wrong with mainstream modelling is the lack of realism in the starting assumptions.  Fine goes through the famous accelerator-multiplier Keynesian model that shows the instability of capitalism but does not show why.  Fine goes onto analyse the counter-revolution against Keynes’ more radical model of instability and how the mainstream has castrated that into a model that moves to equilibrium given the assumptions of falling prices and wages – indeed, a synthesis with neoclassical theory.  Growth models are divorced from short-run fluctuation models.

It is interesting to compare Fine’s critique with that of Paul Romer, a mainstream economist, also lays into the state of macroeconomics in his paper The trouble with macroeconomics, Romer says that the explanation of crises under capitalism as just being the result of ‘exogenous shocks’ to an inherently harmonious process of economic growth is useless. If you just keep adding possible ‘imaginary shocks’ to explain sharp changes in an economy, “more variables makes the identification problem worse.”  As Romer points out, “solving the identification problem means feeding facts with truth values that can be assessed, yet math cannot establish the truth value of a fact. Never has. Never will.

Two great books on the big issues of modern capitalism: rising inequality and falling productivity and growth, were produced by non-Marxists.  In his book, Global Inequality, former World Bank chief economist Branco Milanovic shows that global inequality has increased since the early 1980s, when ‘globalisation’ got moving.   Rising inequality is the result the drive of capital to reduce labour’s share and raise profits and to the recurrent and periodic failures of capitalist production.  Growth of incomes has been concentrated in China, and to a lesser extent and more recently, India.

The most controversial economics book among the mainstream in 2016 was Robert J Gordon’s The rise and fall of American growth.  In his book, the accumulation of research over the last decade, Gordon concludes that the great new productivity-enhancing paradigm that is supposedly coming from the digital revolution is actually over already and the future robot/AI explosion will not change that.  On the contrary, far from faster economic growth and productivity, the world capitalist economy is slowing down as a product of slower population growth and productivity.

Balanced against Gordon are a myriad of techno-optimists and economists who reckon that the world is on the brink of a productivity explosion driven by robots, artificial intelligence, genetics, and a range of new ‘disruptive technologies’ – disruptive in the sense that traditional jobs and functions are going to disappear and be replaced by robots and algorithms.  The optimists argue that, since the time of Thomas Malthus, eras of depressed expectations like our own have inspired predictions of doom and gloom that were proved wrong when economies turned up a few years down the road.

Providing a balanced view of the impact of technology under capitalism is a short but great book, The Bleeding Edge, by Bob Hughes.  Hughes graphically outlines in a series of chapters that, if technology was controlled by public organisation and in common (or as he prefers, following Kropotkin, the thoughtful anarchist, in ‘mutual association’), then huge strides in innovation could be made.  He provides a host of examples for solving global warming, reversing environmental destruction, reducing wasteful production and protecting natural resources, including flora and fauna.

Finally, but by no means least, I come to the two great books of Marxist economic theory released this year.  Anwar Shaikh says he is not a Marxist but a ‘classical economist’.  In his magisterial 1000-page Capitalism: Competition, Conflict, Crises, Shaikh explains that his “approach is very different from both orthodox economics and the dominant heterodox tradition.”  He rejects the neoclassical approach that starts from “Perfect firms, perfect individuals, perfect knowledge, perfectly selfish behavior, rational expectations, etc.” and then “various imperfections are introduced into the story to justify individual observed patterns” although there “cannot be a general theory of imperfections.

Shaikh emphasises that it is profit under capitalism that drives growth and there are cyclical fluctuations in profitability.  These are expressed in business and fixed capital cycles inherent in capitalist production.  Crises are normal in capitalism.  The history of market systems reveals recurrent patterns of booms and busts over centuries, emanating precisely from the developed world.  The key crises under capitalism are ‘depressions’, such as that of the 1840s, the “Long Depression” 1873-1893, the “Great Depression” of the 1930s, the “Stagflation Crises” of the 1970s and the Great Global Crisis now.

Shaikh reckons that on the surface, the last crisis, the Great Recession, looks like a crisis of excessive financialization. But this fails to identify the real cause of the crisis.  Keynesians and Post Keynesians argue that the cause of the current crisis is inequality and unemployment, so there is a need to maintain a stable wage share and to use fiscal and monetary policy to maintain full employment. But Shaikh argues that such policies would not work because, at least in the US, the post-Keynesians have got the causes of the crisis wrong, the cause of which is the movement in profitability – the dominant factor under capitalism.

Fred Moseley’s book Money and Totality is a profound defence of Marx’s value theory and its relevance to the laws of motion in modern capitalism.  Moseley takes the reader carefully and thoroughly through all the competing interpretations of Marx’s value and price theory and shows that a Marxist analysis delivers a single realistic system of capitalism.  If we interpret Marx’s as a single system, an actual capitalist monetary macro-economy, then it is perfectly possible (with all the caveats of measurement problems and data) to carry out empirical analysis to verify or not Marx’s laws of motion of capitalism. Testing theory and laws with evidence is now the name of the game.  Fred Moseley allows us to do that with confidence that we are testing a logical and consistent theory that is verifiable empirically.

Oh, I forgot.  There is also my book, The Long Depression.

The Fed takes the risk

December 15, 2016

This week, the US Federal Reserve raised its benchmark interest rate for 0.5% to 0.75% for just the second time since the financial crisis of 2008, arguing that the American economy was expanding “at a healthy pace”.  The Fed’s monetary committee also indicated that it planned to hike its policy rate at least three times in 2017 on the grounds that economic growth, employment and inflation were picking up and President-elect Trump’s proposed policies of cutting corporate taxes and boosting infrastructure spending could accelerate US economic recovery.  “My colleagues and I are recognizing the considerable progress the economy has made,” said Janet Yellen, the Fed’s chairwoman, “We expect the economy will continue to perform well.”

There is a certain irony in Yellen’s statement given that this time last year, in hiking the policy rate for the first time in nine years, she made a similar declaration of confidence in the economy and then economic growth slowed to a trickle and the Fed postponed any further hikes.

The US economy has expanded on average by only 2% a year since the end of the Great Recession in 2009.  The unemployment rate has dropped to more or less the same level as before global financial crash, but investment and productivity growth has been very weak.

Back last December, I raised the question that, given weak business investment hiking interest rates might push a layer of US companies into difficulty and trigger a new recession or slump.  Indeed, that was why the Fed held off further hikes during this year.

So are things that much better that this risk of rising interest rates triggering a recession is now over? Well, Yellen described the rate increase as “a vote of confidence in the economy.”  And the justification for this comes from somewhat improved figures of real GDP growth in the third quarter of this year, at a 3.2% annual rate. However, the pick-up was all in housing and inventories (building up stocks not sold), while business investment stayed flat.  And on a year-on-year basis, US real GDP was higher by only 1.6%, while business investment contracted by 1.4%.

However, after falling in Q2, corporate profits rose in Q3, up 6.6% compared to Q2 and higher by 2.8% from Q3 2015.  So it could be argued that the US economy is doing better in the second half of 2016 than in the first half, which was dire. House prices have surpassed their pre-recession peak and consumer confidence is at a new high.

US corporate profits August

Globally, corporate profits also picked up in the third quarter of 2016.  A weighted average of five key economies, US, China, Japan, Germany and the UK) saw profits rise by over 5% yoy.  Along with rising business activity indicators in the US and Europe, it seems that the major economies have staged a bit of a recovery in third quarter. But global business investment growth remains weak.

There are two risks that could undermine Yellen’s confident forecast (for the second time.  The first is that rising interest rates will lead to increased costs of servicing corporate and household debt that cannot be funded through extra profits or real incomes in households.  So default rates on debt obligations will rise.

There has been no real reduction in the build-up of private-sector debt in the major economies that took place in the early 2000s and culminated in the global credit crunch of 2007. That accumulated debt took place against a backdrop of favourable borrowing conditions—low interest rates and easy credit. Between 2000 and 2007, the ratio of global private-sector debt to GDP surged from about 140% to 163%, according to the IMF.

global-debt-record-highs

Public sector debt mushroomed after the global financial crash to bail out the banks and fund spending on unemployment and other benefits. The average level of public debt to GDP rose from 34% pts to roughly 90% – a post-1945 record.  Combined with private-sector debt, the level of total nonfinancial borrowing to GDP in the advanced capitalist economies is actually higher today than it was in 2007.

In the emerging economies, after the Great Recession the increase in private sector debt has been massive. China is in a league of its own, with a 96%-pt increase in its ratio to 205% of GDP.  Even excluding China, the figures are still big, up 25% pts and at 92% of GDP for emerging economies.  Indeed, the increase in the private debt to GDP ratio in the emerging economies outside China now exceeds what took place in the DM in the 2000s expansion.

Most of this extra debt is the result of corporations in these countries borrowing more to increase investment, but often in unproductive areas like property and finance.  And much of this extra borrowing was done in dollars.  So the Fed’s move to raise the cost of borrowing dollars will feed through these corporate debts.

Moody’s, the US credit monitoring agency, reckons that there is now $7trn of global government debt that will face downgrades for risk of default because of rising costs of financing if the US dollar stays strong and global interest rates start rising during 2017.  That’s 16% of total global public debt.  In 2016 anyway, there were 35 credit downgrades for country debt.

Nevertheless, stock markets in the major economies head towards new highs on the expectation that the major economies are on the road to sustained recovery and that Trump’s policies will stimulate spending and boost corporate profits next year.

I have already put huge question marks against the likelihood that Trump can achieve fast and sustained economic growth in the US with his policies.  And I am not the only doubter.  I have already referred to the views of Deutsche Bank and JP Morgan on likely economic recovery in the US in 2017.

Now huge private equity fund, Bridgwater Associates, is also doubtful about the expected economic recovery.  Its founder, Ray Dalio, reckons that “This is not a normal business cycle; monetary policy will be a lot less effective in the future; investment returns will be very low.”  Echoing the view presented, ad nauseam, on this blog, Dalio identifies a “short-term debt cycle, or business cycle, running every five to ten years but also a “long-term debt cycle, over 50 to 75 years.”  He comments “Most people don’t adequately understand the long-term debt cycle because it comes along so infrequently. But this is the most important force behind what is happening now.”  Dalio reckons that debt growth has outstripped the income growth in the form of profits and interest necessary to service the current levels of debt.  Easy money and low central bank rates cannot counteract the rising costs of debt servicing for long.

Now in 2017, it seems that the floor of interest rates globally, set by the Fed’s policy rate, is set to rise, if the Fed sticks to its plan to hike three more times and again in 2018.  At the same time, oil prices are set to rise, assuming the OPEC oil producers stick to their plan to cut production.  That will increase fuel prices and cut into corporate profits.  And if the dollar stays strong against other major currencies, the servicing of dollar debt globally will jump, putting many corporations into difficulty.

dollar

So the relative recovery in global corporate profits and economic activity in the last part of 2016 may not last in 2017.

Trump, trade and technology

December 10, 2016

US President-elect Donald Trump reckons that the cause of the losses in manufacturing jobs over the last 30 years has been the rigging of trade terms by low labour-cost manufacturing in China and Mexico.  So it is trade and the shifting of production locations by US multi-nationals overseas – in other words, globalisation.

This claim has upset mainstream economists who see ‘free trade’ as a totem of economic theory.  From Ricardo onwards, mainstream economic theory reckons that free trade is beneficial to all by applying the ‘comparative advantages’ that each trading nation has to make in exchanges of commodities.  Such trade is then mutually beneficial.

Actually, this theory is fraught with flaws, as Anwar Shaikh has only recently spelt out in his book, Capitalism: Competition, Conflict, Crises, while mainstream economist Dani Rodrik has pointed out that the so-called ‘Pareto optimum’ of equality of gains and losses cannot be achieved.  Rodrik argues in his book, The Globalization Paradox that democracy, national sovereignty and global economic integration are mutually incompatible.

Keynesian guru Paul Krugman has always been a proponent of ‘free trade’.  Indeed, he got his Nobel prize in economics for a ‘new’ theory of international trade that reckoned, even with tariffs and market imperfections, international trade would be beneficial to all participants.

From this position, Krugman has recently been at pains to argue against the Trump thesis that the loss of American manufacturing jobs is down to ‘nasty foreigners’ with their trading trickery and to American companies taking their factories overseas and selling their goods back into the US.

In a recent short paper and on his blog, Krugman shows that very few US manufacturing jobs would have been saved with different trade policies or by not agreeing to NAFTA, for example.  Manufacturing employment in the US fell from around a quarter of the work force in 1970 to 9% in 2015.  Krugman finds that “trade is less than half the story”.  Absent the US trade deficit, manufacturing may be a fifth bigger than it is. “That wouldn’t make much difference to the long-run downward trend, but looms larger relative to the absolute decline since 2000.”

Another study by Autor et al reckons competition from China led to the loss of 985,000 manufacturing jobs between 1999 and 2011. That’s less than a fifth of the absolute loss of manufacturing jobs over that period and a quite small share of the long-term manufacturing decline.  “So America’s shift away from manufacturing doesn’t have much to do with trade and even less to do with trade policy.”

The biggest reason Trump — or anyone else — can’t bring back home these manufacturing jobs is because they have been lost in large part to the success of efficiency. Manufacturing output in the US was at an all-time high in 2015. Over the past three-and-a-half decades, manufacturers have shed more than seven million jobs while producing more stuff than ever. The Economic Policy Institute (EPI) reported in The Manufacturing Footprint and the Importance of U.S. Manufacturing Jobs that “If you try to understand how so many jobs have disappeared, the answer that you come up with over and over again in the data is that it’s not trade that caused that — it’s primarily technology,”…Eighty percent of lost jobs were not replaced by workers in China, but by machines and automation. That is the first problem if you slap on tariffs. What you discover is that American companies are likely to replace the more expensive workers with machines.”

What these studies reveal is what Marxist economics could have told them many times before.  Under capitalism, increased productivity of labour comes through mechanisation and labour shedding i.e. reducing labour costs.  Marx explained in Capital that this is one of the key features in capitalist accumulation – the capital-bias of technology – something continually ignored by mainstream economics, until now it seems.

Marx put it differently to the mainstream.  Investment under capitalism takes place for profit only, not to raise output or productivity as such.  If profit cannot be sufficiently raised through more labour hours ( more workers and longer hours) or by intensifying efforts (speed and efficiency – time and motion), then the productivity of labour can only be increased by better technology.  So, in Marxist terms, the organic composition of capital (the amount of machinery and plant relative to the number of workers) will rise secularly.

Marxist economists have already provided empirical evidence for this tendency.  G Carchedi in a recent paper shows that the ‘technical composition’ of capital (the value of machinery and plant relative to the number of workers) in productive sectors has risen in the last 60 years in the US (while profitability has fallen secularly (ARP)) – see ‘OCC’ in the graph below.  My own estimates show that the US organic composition of capital (the value of technology and plant to the value of labour power in wages etc) rose 46% in the last 70 years.

occ

This ‘capital bias’ in technology could also explain the falling labour share and growing inequalities.  Workers can fight to keep as much of the new value that they have created as part of their ‘compensation’ but capitalism will only invest for growth if that share does not rise too much that it causes profitability to decline.  So capitalist accumulation implies a falling share of value to labour over time or what Marx would call a rising rate of exploitation (or surplus value).

It used to be argued in mainstream economics that inequalities were the result of different skills in the workforce and the share going to labour was dependent on the race between workers improving their skills and education and introduction of machines to replace past skills.  But even Krugman now recognises that inequalities of income and wealth across US society and the declining share of income going to labour in the capitalist sector are not due to the level of education and skill in the US workforce, but to deeper factors.

As he put it a few years ago: “The effect of technological progress on wages depends on the bias of the progress; if it’s capital-biased, workers won’t share fully in productivity gains, and if it’s strongly enough capital-biased, they can actually be made worse off.  So it’s wrong to assume, as many people on the right seem to, that gains from technology always trickle down to workers; not necessarily.”

So it depends on the class struggle between labour and capital over the appropriation of the value created by the productivity of labour.  And clearly labour has been losing that battle, particularly in recent decades, under the pressure of anti-trade union laws, ending of employment protection and tenure, the reduction of benefits, a growing reserve army of underemployed and through the globalisation of manufacturing.

This is the real reason for American workers falling behind in wages relative to increased productivity and investment in new technology that sheds jobs.  The falling share going to labour in national income began at just the point when US corporate profitability was at an all-time low in the deep recession of the early 1980s.  Capitalism had to restore profitability.  It did so partly by raising the rate of surplus value through sacking workers, stopping wage increases and phasing out benefits and pensions – and by the introduction of new technology to replace labour after a major slump in production.

Another study found that the “negative correlation between the (weaker) penetration of collective bargaining agreements and increased wage inequality is strong. This result applies to the relationship between the lowest and highest wages, but also between the median wage and the hi ghest wage. Lower trade union density and lower unemployment also increase wage inequality.” So it was the weakened bargaining power of unions and higher unemployment combined with a marked decrease in redistribution through taxes and transfers that was the main explanation why Americans have fallen behind in income since the 1980s.

In this context, the latest report by the world’s top experts in the field, Thomas Piketty, Emmanuel Saez and Gabriel Zucman on the extreme inequality of incomes in the US, is perfectly explicable.  The trio find that the bottom half of the income distribution in the US has been completely shut off from economic growth since the 1970s. From 1980 to 2014, average national income per adult grew by 61% in the US, yet the average pre-tax income of the bottom 50% of individual income earners stagnated at about $16,000 per adult after adjusting for inflation. In contrast, income skyrocketed at the top of the income distribution, rising 121% for the top 10%, 205% for the top 1% and 636% for the top 0.001%!

In 1980, adults in the top 1% earned on average 27 times more than bottom 50% of adults. Today they earn 81 times more. This ratio of 1 to 81 is similar to the gap between the average income in the United States and the average income in the world’s poorest countries, among them the war-torn Democratic Republic of Congo, Central African Republic, and Burundi. And the increase in income concentration at the top in the US over the past 15 years is due to a boom in capital income i.e. income from dividends, interest and rents, not higher wages.

income-growth

It’s a tale of two countries. For the 117 million Americans in the bottom half of the income distribution, growth has been non-existent for a generation while at the top of the ladder it has been extraordinarily strong. And this stagnation of national income accruing at the bottom is not due to population aging. Quite the contrary: for the bottom half of the working-age population (adults below 65), income has actually fallen. From 1980 to 2014, for example, none of the growth in per-adult national income went to the bottom 50%, while 32% went to the middle class (defined as adults between the median and the 90th percentile), 68% to the top 10% and 36% to the top 1%. The trio comment: “An economy that fails to deliver growth for half of its people for an entire generation is bound to generate discontent with the status quo and a rejection of establishment politics.”  Indeed.

And because progressive income taxation has been eroded and social benefits cut back, government taxation and transfers have had little redistributive effect on the inequality caused by the market. “There was almost no growth in real (inflation-adjusted) incomes after taxes and transfers for the bottom 50 percent of working-age adults over this period”. As the trio say: “The diverging trends in the distribution of pre-tax income across France and the United States—two advanced economies subject to the same forces of technological progress and globalization—show that working-class incomes are not bound to stagnate in Western countries. In the United States, the stagnation of bottom 50 percent of incomes and the upsurge in the top 1 percent coincided with drastically reduced progressive taxation, widespread deregulation of industries and services, particularly the financial services industry, weakened unions, and an eroding minimum wage.” 

So the loss of US manufacturing jobs, as it has been in other advanced capitalist economies, is not due to nasty foreigners fixing trade deals.  It is due to the inexorable attempt of American capital to reduce its labour costs through mechanisation or through finding new cheap labour areas overseas to produce.  The rising inequality in incomes is a product of ‘capital-bias’ in capitalist accumulation and ‘globalisation’ aimed at counteracting falling profitability in the advanced capitalist economies. But it is also the result of ”neo-liberal’policies designed to hold down wages and boost profit share.  Trump cannot and won’t reverse that with all his bluster because to do so would threaten the profitability of America capital.

 

Mark Carney, Marx’s scribbles and the lost decade

December 6, 2016

Mark Carney is the governor of the Bank of England.  Formerly the head of the central Bank of Canada, some years ago he was headhunted to take over at the BoE on a huge salary and expenses.

This week he gave the Roscoe Lecture at Liverpool’s John Moores University, his first speech since the decision of the Brits to vote (narrowly) to leave the European Union.  Carney took the opportunity to offer what his view of the state of global capitalism.  And he does not make it sound good.  speech946

Carney pointed out that since the global financial crash of 2008, average real incomes in Britain have taken the biggest plunge since the 1860s, when “Karl Marx was scribbling in the British Library.”  And “it was the poorest (who) are hit the hardest. During recessions the lower-skilled, lower paid people tend to lose their jobs first.”

real-wages

However, Carney was at pains to claim that capitalism has worked for people: “global markets and technological progress has lifted more than a billion people out of poverty, while a series of technological advances have fundamentally enriched our lives….. global markets and technological progress has lifted more than a billion people out of poverty, while a series of technological advances have fundamentally enriched our lives  He added “Globally, since 1960, real per capita GDP has risen more than two-and-a-half times, average incomes have begun to converge and life expectancy has increased by nearly two decades.”

poverty

What he did not say in this praise of this record of capitalism is that the majority of that one billion lifted out of deep poverty were in China, an economy that eschews ‘free markets’ and ‘globalisation’; and goes for state investment, capital controls and the direct submission of the private sector to the regime.  Life expectancy may have risen due to investment in public services and healthcare.  Capitalism and free markets have played no role in that.  In the ‘free markets’, most of the very poor in other countries remain poor.  Indeed, the policies of the central bankers, the IMF and the World Bank in driving for ‘globalisation’ and ‘free trade’ have made the lot of these poor even worse, not better.

Per capita incomes may have risen (again mainly due to China and to a lesser extent, India, in the equation), but those incomes have not been equally increased.  As Carney admitted in his speech “globalisation is associated with low wages, insecure employment, stateless corporations and striking inequalities.”  In Anglo-Saxon countries, the income share of the top 1% has risen notably since 1980. Today, in the US, the richest 1% of households receive 20% of all income.  Such high income inequalities are dwarfed by staggering wealth inequalities. The proportion of the wealth held by the richest 1% of Americans increased from 25% in 1990 to 40% in 2012. Globally, the share of wealth held by the richest 1% in the world rose from one-third in 2000 to one-half in 2010.  And now “a typical millennial earned £8,000 less during their twenties than their predecessors.”

Carney criticised mainstream economics: “Amongst economists, a belief in free trade is totemic. But, while trade makes countries better off, it does not raise all boats; in the clinical words of the economist, trade is not Pareto optimal. Rather the benefits from trade are unequally spread across individuals and time….. Some workers, however, lose their jobs and the dignity of work, or see their “factor prices” – in plain English, wages – equalised downwards.”  Perhaps Carney had been reading Marx’s scribbles after all – as this was close to scribbler’s view of free trade under capitalism – uneven and combined development.

But if capitalism has been successful over the last 50 years, according to Carney, what about the last ten? To put it mildly, the performance of the advanced economies over the past ten years has consistently disappointed.  …It doesn’t it feel like the good old days, because anxiety about the future has increased, productivity hasn’t recovered and real wages are below where they were a decade ago, something that no-one alive today has experienced before

No wonder, Carney concluded thatthe public is complaining about low wages, insecure employment, stateless corporations and striking inequalities.” He admitted that mainstream economics and policies had failed the majority. “Economists must clearly acknowledge the challenges we face, including the realities of uneven gains from trade and technology”, he said.

Why have things gone so wrong?  Don’t we need to know?  We do, said Carney,  because any doctor knows that the importance of diagnosing the underlying causes of the patient’s symptoms before administering the cure.”  Unfortunately, Carney does not know the cause:  “The underlying reasons for the 16% shortfall of the UK’s productive capacity, relative to trend, are poorly understood.”

But we must try.  Carney listed three priorities: “Economists must clearly acknowledge the challenges we face, including the realities of uneven gains from trade and technology”  “We must grow our economy by rebalancing the mix of monetary policy, fiscal policy and structural reforms.  We need to move towards more inclusive growth where everyone has a stake in globalisation.”  This wish list has as much chance of surviving as the proverbial snowball in the fires of hell.

But no matter, Carney was much more concerned to convince his Liverpool audience that if it had not been for the easy money policies of the Bank under his direction, things would be even worse in the UK – although given the stats he presented, that was hardly convincing.  “Monetary policy has been keeping the patient alive, creating the possibility of a lasting cure through fiscal and structural operations,” he said, adding, “monetary policy isn’t a spectre, but a friendly ghost”.  But then he delivered a health warning about easy money.  It leads to a consumer boom and that never provides sustained economic growth which depends on investment.  “The UK expansion is increasingly consumption-led. The saving rate has fallen towards historic lows and borrowing has resumed. Evidence from the past quarter century across a range of countries suggests episodes of consumption-led growth tends to be both slower and less durable.  This is because consumption growth eventually outpaces earnings growth, increasing debt and making demand more sensitive to changes in employment and income.”  The relative boom in the British economy (ie 2%-plus economic growth) won’t last.”

consumption

It was up to governments now to turn things round.  But given that Carney and his bank economists did not know why things had got so bad, he offered no real advice to governments on how to get productivity up, inequality down and real incomes restored.

Next year is the 150th anniversary of the publication of Marx’s Capital Volume One, the product of the ‘scribblings’ that Marx was making in the British Museum in the 1860s.  Perhaps Carney should have read them to see why things are so bad and what to do about it.

The long depression and Marx’s law – a reply to Pete Green

December 2, 2016

Pete Green has now taken up the cudgels in the debate that Jim Kincaid and I have begun over the causes of regular and recurrent crises in capitalist production and in particular the Great Recession.  He makes a welcome and considered critique of my views, as expressed in my book, The Long Depression and in recent discussions at the Historical Materialism conference in London earlier this month.  I think he raises some new and important points in his critique, which, as he says, will require further debate and research.

Like Pete, I cannot deal with all arguments in this short reply on my blog but I’ll do my best to take up some key ones, but it still makes this post long enough!

Pete starts by saying he is not going to dispute the data on the rate of profit that I have presented, mainly for the US, but also for other economies.  But apparently he “shares Jim Kincaid’s scepticism about reliance on US national income accounts as source for corporate profitability”.  Actually, I am not sure Jim is sceptical of the official data.  Indeed, he has said that I have used the data accurately and as Pete says, “there is no adequate alternative available for those engaged in empirical investigation”.

And that is what the bulk of my research is: engaging in empirical investigation to verify or otherwise particular theories or laws.  In my view, too many Marxist economists have ignored empirical work and concentrated on interpreting (and re-interpreting) Marx’s writings and ‘what he meant’, rather testing his laws of motion of capitalism to see if they best fit the facts.

Luckily, I am not alone in doing empirical investigations – Andrew Kliman has done prodigious analysis, Anwar Shaikh’s new book is a gold mine of empirical studies, G Carchedi has also tested Marx’s law with the evidence.  And there is a host of new young scholars internationally doing such work.  Carchedi and I will be publishing a book of these research projects next year that empirically support Marx’s law of profitability.

But Pete wants to “step back” from any debate over the stats and consider the “theoretical framework” of my book.  He does not think that Marx’s law of the tendency of the rate of profit to fall is “sufficient for an explanation of the cyclical fluctuations that have characterised capitalism”.  Why not?  Well, it seems that, while he does not deny “the logical coherence” of Marx’s law of profitability and its relevance to “whole period since the 1960s”, using the law to explain regular crises or “fluctuations” is “over-reductionist” and “two-dimensional”, especially in reference to the latest crises (ie the Great Recession?).

So Pete reckons that Marx’s law of profitability is logically coherent but irrelevant to an understanding of crises.  It’s ‘overreductionist’ (or maybe just reductionist?) to claim its relevance to crises.  There are more dimensions than two (presumably the tendency and the counter-tendency?), he says.

This does not seem the way to approach the relevance of Marx’s law to crises.  Pete says that the law is not “sufficient” to explain crises.  But does he think it “necessary”, which is not the same thing as sufficient?  If he does; how does it fit in?  You see, I think we must start with Marx’s approach, which was to abstract from reality the underlying essential (necessary) laws of capitalist motion and then add back concrete features of capitalism to reach the immediate.  In only that way can we identify the causes of crises under capitalism.  In that sense, Marx’s law can be seen as the underlying or ‘ultimate’ cause of recurrent crises, which can be triggered by ‘proximate’ events i.e. (oil price crisis, stock market bubble, real estate crash etc).  Then we have ‘sufficient’ causes.  For more on this, see my paper, Presentation to the Third seminar of the FI on the economic crisis

This approach thus makes it transparent that a financial crash or credit crisis is not the essence of crises in capitalism, but their surface manifestation.  Jim Kincaid has done a new post in which he outlines what Marx said about the 1847 crisis in Britain making the point that the falling rate of profit plays no role in Marx’s account”, considering only the financial speculation and credit crunches.  Jim claims that for Marx, “The fall in the rate of profit of these businesses is only a transmission mechanism.  What matters are the causes of bankruptcy and business collapse.

At this point, I am reminded of what Marx said a little later in 1858 during the first great international crisis of the 19th century: “What are the social circumstances reproducing, almost regularly, these seasons of general self-delusion, of over-speculation and fictitious credit?  If they were once traced out, we should arrive at a very plain alternative.  Either they may be controlled by society, or they are inherent in the present system of production.  In the first case, society may avert crises; in the second, so long as the system lasts, they must be borne with, like the natural changes of the seasons”.   Dispatches for the New York Tribune, Penguin p201.

As Marx puts it, ‘over-speculation and fictitious credit’ arise from regular crises in the capitalist system of production.  They cannot be eradicated by social action unless the mode of production is replaced.  It is not possible to separate crises in the financial sector from what is happening in the production sector.

Pete refers to the debate between Marxist economists on the cause of crises in the 1920s and 1930s, as described in Richard Day’s excellent book, The crisis and the crash.  As Pete says, the debate was between those who explained cyclical fluctuations as due to disproportionality between departments of production and those who reckoned it was due to the ‘limited consumption of the masses’, ie underconsumption.  As Pete says, “Marx’s tendency for the rate of profit to fall, as a function of a rising organic composition of capital, plays no role at all in these debates.”  But that does that mean the law is irrelevant?  It was no accident that the law was ignored.  Most leading Marxist revolutionaries had not read or seen Volume 3 of Capital where Marx’s “most important law of political economy” is expounded.  And if they had, they were guided away from Marx’s law as a cause of crises by the likes of Kautsky, Hilferding and Luxemburg.

One Marxist economist who had read and digested Volume 3 was Henryk Grossman.  As a result, he was able to present a coherent theory of capitalist crises based on the law, showing the connection between the tendency of the rate of profit to fall and the countertendencies; the relation between the rate of profit and the mass of profit; and thus the relation between profit and crises.  But his thesis, as Rick Kuhn says in his excellent biography of Grossman, was “an economic theory without a political home”.  Grossman also shows in his work, The law of accumulation being also a theory of crises, that those who followed an ‘anarchy of production’ theory of crises could not really provide a coherent argument for regular and recurring slumps or breakdowns inherent in capitalist production.  Indeed, just remove competition and allow monopoly to regulate and the anarchy can be controlled, suggested Hilferding or Kautsky.

Pete brings to our attention the work of Pavel Maksakovsky at that time.  As Pete says, he provides us with the most sophisticated version of the anarchy of production theory of crises.  As usual, Maksakovsky refers to Marx’s law of profitability, but only to dismiss it as irrelevant to the cycles of boom and slump and instead, like those in debate of the 1920s, focuses on Volume Two of Capital with its reproduction schema.  Maksakovksy outlines his theory succinctly in pp136-9 of his book.  This is a disproportion theory but with the addition of trying to show that the disproportion between the sectors of means of production gets ‘periodically detached from consumption’.  Interestingly, Maksakovsky, correctly in my view, dismisses the idea that excessive credit and financial market busts are the cause of crises (p139), just as Marx did in 1858, but now revived by Jim.  They are only at the ‘superstructural level’ of capitalist society and can never eliminate the cyclical developments caused by the ‘anarchy of production’.  This is worth remembering in the light of the arguments now being presented by many modern Marxist economists that finance is the real cause of crises now and for the Great Recession (see below).

Does the anarchy of production or disproportion of sectors of reproduction hold up to scrutiny as an alternate theory of crises?  I don’t think so.  Grossman demolishes it in his book and in a little known essay on Marx’s reproduction schema (recently edited by Rick Kuhn).  Grossman shows that Marx’s schema do not show a “widening and deepening contradiction” (Maksakovsky) between production and consumption under capitalism and so cannot be the Marxist explanation of recurrent crises.  By assuming in the reproduction schema, accumulation and exchange between the sectors take place at the level of labour values, Maksakovsky makes the same mistake as Luxemburg and others and so finds ‘disproportion’.  But Marx’s reproduction schema are at the level of prices of production after the process of competition.  Rates of profit are averaged.  At that level, there is no inherent disproportion from the reproduction schema.

To deny disproportion as the cause of capitalist crises is not to support Say’s law (or ‘fallacy’, to be more exact) that ‘supply creates its own demand’ –as Pete suggests that I do.  Marx was fierce in his dismissal of Say’s nonsense.  The very process of exchange on the market creates the ‘possibility of crisis’.  But that does not explain the periodic and recurrent crises in capitalist production and investment.

Pete does not like the “clever” flow chart in my book that shows the different possible theories of crisis.  He says I want the readers to follow me down to Marx’s law of profitability, but he has three objections to that path.  Pete admits that in the circuit of capital “production is primary” but then goes onto say that production and circulation are in a “contradictory unity” in capitalism.  So is production not ‘primary’ after all?  Indeed, he refers us to the thesis of David Harvey who argues that capitalism has various ‘bottleneck points’ in the circuit of capital and crises can come from any one of them, not just or even mainly in the ‘primary’ production of surplus value and the accumulation of capital, but also in the ‘secondary’ circulation of capital through credit finance, households and the role of government.  So Pete says we need to have a theory of crisis that “embraces the whole circuit of capital” not just in production.

That’s fine but does this mean that the ‘bottlenecks’ in the circulation and distribution of capital are on the same level of causality as breakdowns in the ‘primary’ production process?  The Marxist answer, in my opinion, is no.  As I said before, in my view, and I think in Marx’s, circulation and distribution are at a lower plane of causal abstraction, or if you like closer to the proximate than the ultimate or underlying causes.  A collapse in the stock market or in real estate prices will not lead to a collapse in production unless there are already serious difficulties in the latter.  There have been many stock market collapses without a slump in production and employment (1987), but not vice versa.

Indeed, I agree with what Jim says summing up his post on the 1847 crisis mentioned above that The rate of profit and the forces which determine it should remain central in our analysis.  Marx’s own account of the 1847 crisis would surely have been strengthened by attention to profitability and its conflicting trends. We need to trace the many ways in which the law of value asserts itself – often in displaced and distorted forms.  But also recognise, and give due weight to, the role of contingent factors in any crisis we examine.”

Pete also wants to drag in the Keynesian “lack of effective demand” as one of the multi-dimensional causes of crises.  I have argued in many places that this ‘cause’ is no such thing.  Pete agrees that aggregate demand is endogenous to investment and profit; “Keynes himself would have agreed”.  Yes, but for the wrong reasons.  The Keynesian-Kalecki thesis puts ‘effective demand’ i.e. investment demand, as the causal factor in the movement of profits.  But Marxist economics says profits call the tune, not investment.  I and other Marxist scholars have shown that the empirical evidence for the Keynesian ‘multiplier’ (a fall in spending leads to a slump) is very weak compared to the Marxist multiplier (a fall in profits leads to a slump).

Pete says I should not ‘conflate’ the underconsumption thesis with the overproduction thesis as the cause of crises.  But then says that the “problem is a relative lack of productive consumption”.  We may be bandying with words here, but that sounds like an underconsumption thesis to me.  I presume this to refer to an excess of investment goods produced over the capitalists’ demand for them.  But crises do not happen because of a lack of “productive consumption”, but because of insufficient profits brought on by falling profitability over time.  And this can be proved empirically.

Andrew Kliman shows in his book, The failure of capitalist production (Chapter 8) that investment growth is always outstripping consumption but it does not lead to recurrent crises, as Maksakovsky ansd Sweezy argued.  The cyclical crisis of boom and slump does not flow from excessive investment over consumption but from insufficient profit from investment.  I await an empirical justification of the Maksakovksy thesis.

Pete says the proponents of Marx’s law of profitability as the underlying and ultimate causes of recurrent and regular crises are neglecting the ‘multi-dimensional’ and ‘complex’ nature of capitalism.  I ignore the uneven and combined development of the world economy as expressed in the global imbalances so “astutely” identified by Keynesian economic commentator, Martin Wolf (or for that matter, I could add Yanis Varoufakis in his book, The Global Minatour).  I also ignore the counteracting factors of globalisation in driving up the rate of profit.  I also ignore the role of finance and growth of financial profits in total corporate profits.

The more I go down these points by Pete, the more I feel that a series of straw men have been erected for my views to be knocked down by him.  These layers of ‘multi-dimension’ have not been ignored by me.  The counteracting factors explain the up and down waves of the profitability cycle in capitalism.  In both my books, I have spent some time looking at these long waves of profitability.  And I discuss the impact of uneven and combine development of capital in the context of the euro crisis in my book.

Pete says that “Unlike some critics,  I am not rejecting the relevance of this or the equally significant role of counter-tendencies raising profitability over the long-term. Indeed I would endorse to a degree Michael’s emphasis on longer waves in profitability but link them more closely to Kondratiev waves”.  But I have done just that in both books – trying to relate these waves to Kondratiev’s!

Pete is right to say that Marx’s law of profitability appears to have different cycles than the so-called ‘business’ or Juglar cycles of boom and slump.  I could not agree more.  In my first book, The Great Recession, I spent much time trying to analyse the connections between the various cycles in ‘capital in motion’ and try to link them together.  I did the same in The Long Depression in a whole chapter.

Pete says that “What can be shown in my view is that when the underlying rate of profit is falling, the business cycle fluctuations are more severe as is evident from the late 1960s to the early 1980s, and when the underlying rate is rising, the amplitude or the severity of recessions is reduced as in the 1990s and early 2000s.”  That almost word for word what I have said in the past.

Pete is keen to tell us that what is new is the “unprecedented rise in the share of financial profits in total corporate profits”. Again this is dealt with in both my books.  Indeed, I try to integrate this new development into an analysis of unproductive investment and fictitious capital as one of the new ‘counteracting factors’ to the law as such.  I even try to measure its impact (see my paper, Debt matters).

Pete finishes by wanting to defend or promote again the Keynesian idea of “a lack of effective demand” as the cause of crises.  He rejects my claim that the Keynesian position is a tautology (‘it rains because it rains’) of a slump not a cause. In retort, he suggests that Marx’s law of profitability is as remote a cause of crises as saying storms and hurricanes are caused by global warming; only worse, the law of profitability as a proven cause is more questionable than man-made global warming.  Pete is not a global warming sceptic but he is falling profitability one.

Actually, his analogy has some merit.  Global warming is an underlying cause of increased storms, floods and extreme weather.  The science of correlations, causation and forecasts strongly supports this.  Similarly, I and others argue that capitalist crises have an underlying cause in the inability of capitalists to stop the overall rate of profit on capital falling as they accumulate and try to increase profits.  This dialectical contradiction also has increasing empirical backing with correlations, causations and forecasts.  By the way, Marx used the analogy of the law of gravity and the movement of objects to place his law of profitability in crises.

I’m afraid the thesis of Maksakovsky has not changed my view that all other theories of crises in capitalism: underconsumption, overproduction, disproportion, bottlenecks in circulation, global imbalances, financial instability, are either wrong or at a lower plane of abstraction, so that, on their own, they do not explain crises.  As Alan Freeman says, Marx’s law remains “the only credible competitor left in the contest to explain what is going wrong with capitalism”.

The long depression in Italy

November 28, 2016

Italy has a referendum this coming weekend.  Italy’s Blairite (Clintonesque) prime minister Matteo Renzi of the ruling the centre-left Democrats called a referendum, British Cameron-style, to ‘reform’ the electoral constitution.  He wants to reduce the size of the upper house of parliament, the Senate, from over 350 senators to just 100 and also have them come from the regions and cities, namely the elected mayors etc.  Most important, he wants to end the ability of the Senate to send back policies or measures passed by the lower house assembly (elected by popular vote in proportional representation – i.e. seats according to the share of the vote).  Thus, the Senate could no longer go on with ‘ping-ponging’ tactics back and forth with the lower assembly.

Renzi has staked his political reputation and his position as PM on winning this vote, like David Cameron did in the UK over the Brexit referendum.  And, according to the opinion polls, he looks as though he is heading for the same defeat as Cameron, throwing another major capitalist state into confusion, uncertainty and paralysis.

But it is all relative – after all, Italian politics and the economy have been in a state of paralysis for decades, with the situation only worsening since the end of the Great Recession.  Italy is now in a Long Depression that it seems unable to escape from.

Italy GDP

The immediate problem is Italy’s banks.  Europe’s banks currently hold €1trn of what are called ‘non-performing loans’, loans that the borrowers are no longer paying interest on and could be about to default on.  Of that €1trn, around one-third is held by Italy’s banks.  These bad debts are like a millstone around the necks of Italy’s finance sector.  The myriad of small Italian regional and large national banks have been lending to small businesses and property companies.  But thousands of these small companies are bust and cannot pay back their debts as the economy stagnates.

As I said in my book, The Long Depression, (Chapter 9) in some ways, Italy is in the most dire position of the top seven capitalist economies.  Italian capital was in the doldrums before the Great Recession.  Profitability has been falling since 2000 and is now down 30% since 2004.  Net investment has dried up and productivity of labour is not just growing slowly, as it is in other major economies, it is contracting outright.  Italy cannot recover because the Long Depression in Europe continues.

Italy ROP

And as a result, its banks are close to bankruptcy.  Banking analysts reckon that up to eight banks, led by Italy’s third largest and oldest, the infamous Monte Pachi, risk failing if Renzi loses the referendum.  That’s because potential investors in these banks, badly needed to recapitalise them if they write off these huge bad debts, won’t cough up.

I made some simple estimates of the likely losses that the Italian banks face (based on the Bank of Italy’s recent financial review).  The banks have lent up to now €2trn to Italians businesses and households.  About €330bn of these loans are ‘bad’ (i.e. won’t be paid back).  That’s about 20% of Italy’s GDP.  The banks have built up reserves to cover these potential losses of about €150bn and they could expect to sell off some of assets of bust businesses over time.  Even so, there would still be a potential loss of about €100bn on the banks’ books if they grasped the nettle and ‘wrote off’ these bad loans.  That would completely wipe out the value of the shares of the investors in many of these banks.  For example, the hit to Monte Paschi would be nine times more than the bank is worth on the stock market right now.  And Italy’s largest, Unicredit, which is supposed to helping the other smaller bust banks like Banco Veneto, would also be wiped out.  Indeed, Unicredit wants to raise €13bn for itself to shore it up.

I reckon that a bailout of the banks would cost at least €40bn, just to put the larger banks back on their feet.  Where is such a bailout to come from?  The Renzi government set up a special fund called Atlante, which was funded by the other larger banks, with a little from the state savings bank.  This raised just €4bn, most of which has already been spent on Monte Paschi to no avail.  But that is not the worst of it.  Under the new EU banking bailout rules, insisted on by Germany, state money cannot be used to bail out the banks.  The bank shareholders and bond holders must take the hit – at least first.

That sounds okay, you might say.  Let the bank shareholders pay.  But here is the rub.  The Italian banks have been engaged in crude mis-selling to all their customers with their savings.  Customers were encouraged to ‘save’ by buying the bank’s own bonds – in other words lending to the bank itself.  So hundreds of thousands of older (not so wealthy) people would now lose all their savings if the banks write off their bad debts and ‘recapitalise’ by writing down their own borrowings (bonds to zero).  This would be political dynamite, apart from causing misery to hundreds of thousands – and it has already happened to ‘savers’ with Banco Veneto and Monte Paschi.

Renzi has been pressing the Germans and EU leaders to relax the rules and allow state funds (ideally European ‘stability’ funds, which are available) to bail out his banks.  But the Germans are stubbornly holding to the rules, particularly as bailing out the Italians, after the Greeks, is anathema in Germany and fuel to fire to the Eurosceptics in the upcoming German election in 2017.

So if the vote goes against Renzi on Sunday, international and Italian investors are going to be very reluctant to stomp up funds to Italian banks when they fear the Italian government will fall and possibly be replaced in an early general election by the populist Five Star alliance, which has already won mayor’s positions in Rome and Turin and is leading in the opinion polls.  Could there be a ‘populist’ leading Italy out of control of the elite, and this time not Berlusconi?  At best, there will be a government unable to act through parliament to implement ‘reforms’ in the interest of capital, namely reducing labour rights; more privatisation and government spending cuts.

It’s possible that Renzi will win the vote against all the expectations as ‘no’ voters don’t bother to turn out.  Even if he does, the problem of the banks won’t go away.  And the problem of the banks is merely a symptom of the failure of Italian capitalism and the paralysis of its political elite.  Italy remains deep in depression and we have not even had a new slump yet.