Archive for the ‘Profitability’ Category

ASSA 2020 – part three: currencies, climate, china and crises

January 8, 2020

In this last part of my review of ASSA 2020, I want to cover some other issues discussed at ASSA, especially one big issue: the economics of climate change; and finally, look at the papers in the sessions organised by the Union for Radical Political Economics (URPE) – the main association covering Marxist economics.

One populist subject over the last few years has been the role and value of cryptocurrencies.  I have discussed these privatised digital currencies on my blog here. The debate continues on how well a cryptocurrency can serve as a means of payment. One paper argued that cryptocurrencies need to overcome double spending by using costly mining and by delaying settlement. Indeed, the authors reckon that bitcoin “generates a welfare loss that is about 500 times larger than a monetary economy with 2% inflation” because it is so costly to ‘mine’ and because of slow settlement.  Only if an economy had 50% inflation would the loss to users be higher than bitcoin.  Clearly, these cryptocurrencies are never going to replace state fiat currencies as a means of payment. TheEconomicsOfCryptocurrencies_Bitco_preview t

Bill Nordhaus was awarded the Nobel (Riksbank) prize for pioneering work on using an integrated climate-economy assessment model (IAM) to study when and how the tipping point affects the social cost of carbon dioxide. While the mainstream has lauded Nordhaus, the reality is that IAMs have proved to be mostly useless.  Most IAMs struggle to incorporate the scale of the scientific risks, such as the thawing of permafrost, release of methane, and other potential tipping points. Furthermore, many of the largest potential impacts are omitted, such as widespread conflict as a result of large-scale human migration to escape the worst-affected areas.

The IPCC’s mitigation assessment concluded from its review of IAM outputs that the reduction in emissions needed to provide a 66% chance of achieving the 2°C goal would cut overall global consumption by between 2.9% and 11.4% in 2100. This was measured relative to a ‘business as usual’ scenario. But growth itself can be derailed by climate change from business-as-usual emissions. So the business-as-usual baseline, against which costs of action are measured, conveys a misleading message to policymakers that fossil fuels can be consumed in ever greater quantities without any negative consequences to growth itself. And heterodox economist Steve Keen has debunked Nordhaus’ calculations, which suggest that even a 4C rise global temparatures would have only a limited effect on growth and welfare over the rest of this century and in effect there was no tipping point when global warming would get out of control.

Based on this relatively benign view, mainstream economics concentrates on carbon pricing and taxes to mitigate global warming, rather than radical action to end fossil fuel production through control of the major energy companies. This is why the mainstream session on climate change was entitled Carbon Tax Policy with the discussion around whether carbon taxes would slow economic growth and whether carbon taxes would add to fiscal costs or not.  You will be pleased to hear that the presenters concluded that carbon taxes will not slow economic growth and there could actually be fiscal gains through reducing the cost of dealing with floods, droughts hurricanes. MeasuringTheMacroeconomicImpactOfC_preview (2)

So that’s all right then.  Only it isn’t.  All the latest climate science suggests that the tipping points are approaching fast and allowing fossil fuel production to continue while trying to reduce its use by ‘market’ solutions’ like carbon pricing and taxes will not be enough.TippingPointsInTheClimateSystemAnd_preview

In the URPE sessions, Ron Baiman of Benedictine University pointed out that the money created by the Fed for the three-year 2008-2011 financial bailout would have paid for almost thirty years 2020-2050 of global climate crisis mitigation through a Global Green New Deal (GGND). FinancialBailoutSpendingWouldHave_preview Mathew Forstater et al reckoned that the transition to a sustainable economy and just society required a transformation in the technological structure of production away from fossil fuel-based and toward renewable energy-based technologies.  Peter Dorman reckoned that the GND-type policies won’t be enough. It required structural change in the economy.  TheClimateCrisisAndTheGreenNewDea_preview (2)

Another big issue at ASSA is what is happening in China and what will happen in the continuing trade and technology war with the US.  There were dozens of mainstream sessions that covered or referred to China from all sorts of angles.  Clearly China dominates much of mainstream research.

There is the question of China’s fast growth and pollution. According to Bharati et al, China has not achieved the turning point of where pollution and emission no longer positively relate to the economic growth. But that would happen in 2036 or so.  According, to NAME, both countries lose from the Trump tariffs, where high-tech industries are disproportionately affected. China mainly loses from the decline in the production scale of its high-tech industries, while the US mainly lose from the increasing input prices used in its high-tech industries. In addition, Japan also loses from the Trump tariff due to higher input prices. FuelingTheEnginesOfLiberationWithC_preview

Most interestingly, Chang-tai Hsieh points out that the largest Chinese firms are conglomerates, where the largest 500 conglomerates in 2015 had an average of 17 thousand firms, and collectively account for almost half of all registered capital of all Chinese firms. Conglomerates are typically partnerships between private firms and state owned firms, where state owned firms are typically at the center of the conglomerates; 6) The number and size of Chinese conglomerates increased from 1995 to 2015.

Suprabha Baniya et al conclude that China’s Belt and Road Initiative increases trade flows among participating countries by up to 4.1 percent; (ii) these effects would be three times as large on average if trade reforms complemented the upgrading in transport infrastructure; and (iii) products that use time sensitive inputs and countries that are highly exposed to the new infrastructure and integrated in global value chains have larger trade gains. TradeEffectsOfTheNewSilkRoad_preview (1)

An URPE session also covered China.  Brian Chi-ang Lin, National Chengchi University reckoned that If China keeps growing (even at a slower rate), China could eventually regain the global economic power she once had in the seventeenth and eighteenth centuries, under its current model. “Under Chinese President Xi Jinping, China has recently initiated a series of important policies such as the domestic nationalization of private corporations and the international One Belt One Road (OBOR) initiative to promote the national economy and, accordingly, to sustain the CCP’s authoritative regime.”

Finally, let me look at some of the interesting papers on Marxist theory presented in the URPE sessions. Carolina Alves from Girton College, University of Cambridge developed some new ideas on Marx’s concept of fictitious capital in relation to government bonds. “Fictitious capital does not represent real capital but it is increasingly the channel through which the dominance of interest bearing capital over other capitals occurs. Government bonds are the most important tools whereby the state is able to intervene in the financial market. the backbone of operations in the secondary market, and a source for financial accumulation, rather than as a fortuitous aspect of state finance. So public debt can neither be avoided nor paid off in capitalist economies, and government bonds now offer an unparalleled scope for purely financial accumulation.”
TowardsACriticalFramework_Government_preview

Sergio Camara Izquierdo from the Metropolitan Autonomous University (UAM)-Azcapotzalco, and one of the authors in our book, World in Crisis, analysed the trends in profitability and accumulation in Mexico in the postwar period. with new estimations that includes intangible assets and geometric patterns of depreciation. Camara reveals expansive (1939-1982) and contractive (1983-2018) long waves in capital accumulation within which there us ae neoliberal contractive wave.  And note the collapse in profitability of capital in Mexico from the 1990s with the formation of NAFTA.

Baris Guven from the University of Massachusetts-Amherst attacked the idea of Marxian political economy that places great emphasis on the nexus between technological change and capital accumulation, based on the profit-motive and competition.  For Guven, on the contrary, the profit-motive is the reason why capitalist economies are prone to underproduce technical (and scientific) knowledge. It is the state that does the technological fix, and this fix, in addition to others, supports reproduction of capital accumulation at extended scale.  In other words, no innovation without state intervention.  While there is some truth in the argument that the state has played a crucial role in boosting technology, as Mariana Mazzucato has shown, profitability remains the key driver.  When profitability is low, then investment and productivity growth will slow.

There was a whole session on post-Keynesian theory, with the usual theme of financialisation there.  And there was a session developing the ideas of Hyman Minsky alongside those from a Marxist perspective.  I particularly liked the paper by Masahiro Yoshida of Komazawa University who provided some emphatic data on the extreme ‘rentier’ nature of the UK economy, with the highest services value-added share and the largest finance services share in the g20. As UK financial services are more important than the US for minimising the current account deficit and the majority of the UK’s financial services are exported to the EU, the impact of Brexit is yet to be felt. TheDevelopmentOfCapitalAccumulation_powerpoint (2)

And Jan Toporowski’s paper made some telling points against the ‘free lunch’ perspective of Modern Monetary Theory. “This economical, apparently free, method of financing government expenditure is of course attractive when public services, welfare and infrastructure are deteriorating in the face of austerity. But this low cost is only the case at the time of the expenditure. To understand the true efficiency of this kind of financing, it is necessary also to consider the consequences of such financing. In particular, it is necessary to understand how that money would be absorbed by the economy.”

Finally, Riccardo Bellofiore straddled both the post-Keynesian and Marxist theory (as Riccardo usually does!) – with two papers.
Minsky’sSocializationOfInvestment__preview (5)
MarxBetweenSchumpeterAndKeynes_Augu_preview (1)
I’ll refer to Riccardo’s discussion of the relation between the ideas of Minsky and Marx in a future post.  But for now, that’s enough.

In sum, ASSA 2020 confirmed my view that: 1) mainstream economics still does not know why there was a Great Recession and why there is now stagnation; 2) mainstream economics is still convinced of market solutions to climate change; and 3) how could it not be otherwise when mainstream economics starts from the premise that there is no other mode of production but capitalism – which may be imperfect, but must be made to work at best as it can.

Forecast 2020

December 30, 2019

“It is difficult to make predictions, especially about the future” is an old Danish proverb, often attributed to Nils Bohr, the Danish atomic physicist and quantum theorist.  And amusing and insightful as it may be, there is no getting away from realising that applying the scientific method to any issue requires making predictions that can be tested to support or throw doubt on a theory.

In the natural sciences, as they are called, where human beings are not being studied, prediction plays an important role.  For example, according to Einstein’s theory of relativity, tit was predicted that large stellar objects will bend space itself through ‘gravitational waves’.  And exactly 100 years ago, that prediction was confirmed through astronomical observation of a solar eclipse.

Applying the scientific method and making predictions in social science is clearly much more difficult because the subject being studied are human beings.  Scientific method is full of pitfalls: human mistakes; inadequate data; unrealistic assumptions; inconsistent conclusions.  And these pitfalls are  probably greater in the social sciences, given less data and where the political and ideological pressures are greater. Nevertheless, I reckon that prediction must be part of the social scientific process.

But there is a difference between predictions and forecasts, in my view.  Take the climate.  We can predict that in the temperate regions of the planet, there will be four distinct seasons from spring, summer, autumn and winter.  And we can predict that the sun will come over the horizon in the morning and set in the evening.  Modern climate scientists are predicting that the earth is set to warm up at a rate not seen in thousands of years because of greenhouse gas emissions.  Physicists predict that in about one and a half billion years, the moon will eventually break out from its orbit around the earth, producing catastrophic damage to the earth’s atmosphere and wiping out all life.  We won’t be around to confirm that prediction.

Similarly, we Marxist economists can make predictions with some degree of certainty; namely that under the capitalist mode of production there will be regularly occurring crises of slumps in investment and production that cannot be avoided.  We can also predict, I would claim, that the profitability of capital will fall over time as capitalism expands the productive forces and matures.

But that is not the same as making a forecast.  Climate scientists cannot be sure when the earth will heat up to a tipping point that leads to uncontrollable warming that damages the fabric of the planet and engenders destructive floods, droughts etc.  We don’t know in which year, decade, century or millennium when the moon will break away from the earth.  We have limited ability to forecast when it is going to rain, shine or snow – although we have got much better in making such weather forecasts. And in social sciences, any forecast is even more uncertain.  We cannot forecast when or how much the rate of profit will fall in any one year or the exact change in output or investment likely to be achieved in a year or month; or exactly when a new slump in production might come.

All this preamble in this post is designed to make excuses for the failure of my forecasts of a new global recession to emerge over the last few years.  After the end of the Great Recession in 2009, I made a prediction that eventually there would be a new global slump.  And I made a forecast that this would happen from about 2016 onwards and most likely by 2018, after all post-war recessions had come along about every 7-10 years.  And yet, as we enter 2020, the world capital economy has avoided a new slump for the longest period since 1945.  So how did I get my forecast wrong?

My forecast was partly based on a theory of cycles in capitalism built around the long term cycle of 55-70 years first expounded by Russian Marxist economist, Kondratiev.  I reckon there have been four K-cycles since the start of the industrial revolution in Europe. The fourth cycle started in 1946, peaked in the early 1980s and should have troughed around 2018.

Marxist economist Anwar Shaikh has put forward a similar forecast to mine, also based on the dating of the K-cycle.  When measured by the gold/dollar price, he forecast that the downphase in the current K-cycle would trough around 2018.  More recently, Greek Marxist economists Tsoulfidis and Tsalikis (TT), in their new book, also identify long cycles.  Like me, they base the up and down waves in these cycles primarily on the movement in the rate and mass of profit.  However, TT reckon that the bottom of the current cycle will not be reached until 2023-28.

Cycle theory argues a new trough and slump in capitalist production is necessary to devalue the existing stock of capital before a new round of innovations based on rising profitability can begin.  But forecasting when that will happen is very difficult.  For the record, this is what I said at the beginning of each year since 2016, when the trough of the current cycle should have been reached.  In 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.”  There was no slump in 2016 but the year did deliver a ‘mini-recession’ with global growth at its lowest since 2009.

Then in 2017, I said: “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 …far from a new boom for capitalism, the risk of a new slump will increase in 2017.”  This forecast proved to be wrong as, instead, there was a mild recovery from the previous year in the major economies.

For 2018, I explained: “What seems to have happened is that there has been a short-term cyclical recovery from mid-2016, after a near global recession from the end of 2014-mid 2016.  If the trough of this Kitchin cycle was in mid-2016, the peak should be in 2018, with a swing down again after that.”  That forecast proved correct as growth slowed from mid-year 2018 and into 2019.

My forecast this time last year for 2019 was as follows: “slowing profits growth and a rising cost of (corporate) debt, alongside all the politico-economic factors of an international trade war between China and the US, suggest that in 2019 the likelihood of a global slump has never been higher since the end of the Great Recession in 2009.”

Well, there was no slump in the major economies in 2019, but they achieved the slowest rate of growth in any year since the end of the Great Recession.

So, while the decade of 2010s was the longest period without a slump in the major economies since 1945, it was also the weakest recovery from any recession in the same period.

And in 2019, global growth recorded its weakest pace since the global financial crisis a decade ago.

What were the factors for the slowdown and what are the factors that have enabled the major capitalist economies to avoid major slump that cycle theory predicts should have happened by now?

On the negative side, slow real GDP growth (of 1-2% a year) has been driven by continued low investment rates.  In its recent global outlook, the IMF highlighted that: firms turned cautious on long-range spending and global purchases of machinery and equipment decelerated.”.

The ongoing trade war between the US and China along with trade frictions with the EU was also an important factor in the slowdown in technology spending.  Global trade—which is intensive in durable final goods and the components used to produce them—slowed to a standstill.

Indeed, since the end of the Great Recession, globalisation and ‘free trade’ has increasingly given way to protectionist measures, as it did in the 1930s.  Since 2009, governments worldwide have introduced 2,723 new trade distortions, the cumulative effect of which was to distort 40% of world trade by November 2019.

The global trade and investment slowdown has particularly hit the so-called emerging economies, several of which have slipped into outright slumps. Emerging markets face a serious “secular stagnation” problem. Growth in almost all cases has been far lower in the last 6 years than in the 6 years leading up to the Great Recession. And in Argentina, Brazil, Russia, South Africa and Ukraine, there has been no growth at all.

Nevertheless, 2019 did not see a new global slump.  Why not?  First, the monetary authorities quickly reversed their previous policy stance that the global economy was fine and had ‘normalised’.  In 2018, many central banks had been on hold with their policy interest rates or in the case of the Federal Reserve had hiked the rate.  In 2019, the opposite was the case.

Interest rates on government bonds and other ‘safe assets’ fell back towards zero or even turned negative.  With borrowing so cheap, large corporations and banks sucked up cheap credit; but not to invest in productive assets, but instead to buy up shares and bonds.

Stock market prices rocketed, up 30% in the US.  Global stock markets are now worth $86trn, just shy of all-time high and equal to almost 100% of global GDP.

The main purchasers of corporate stocks are the corporations themselves.  These so-called buybacks pushed up stock prices, in turn making it easier to buy out other companies or gain even more credit.  Much of the buyback funds were borrowed.  This expansion of what Marx called ‘fictitious capital’ has replaced investment in productive capital and it has been financed by Minsky-style Ponzi finance (ie issuing more debt to fund the cost of servicing existing debt).

The major capitalist economies are now in a fantasy world where the stock and bond markets (‘fictitious capital’) are saying that world capitalism has never had it so good, while the ‘real economy’ is stagnating in output, trade, profits and investment.

The other counteracting factor that has enabled the capitalist economies to avoid a new slump in the 2010s has been the rise in employment and the fall in unemployment.  Instead of investing heavily in new technology and shedding labour, companies have sucked up available cheap labour from the reserve army of unemployed created in the Great Recession and from immigration.  According to the International Labor Organization, the global unemployment rate has dropped to just 5%, its lowest level in almost 40 years.

This did not happen in the 1930s Great Depression.  Then unemployment rates stayed high until the arms race and impending world war militarised the workforce.  In the 2010s, it seems that companies, rather than reducing their costs in the face of recession and low profitability by sacking the workforce and introducing labour-saving technology, opted to take on labour at low wage rates and with ‘precarious’ conditions (no pensions, zero hours, temporary contracts etc).  As a result, there has been a sharp increase in what are called ‘zombie companies’ that make only just enough money to pay a low-wage workforce and service their debts, but not enough to expand at all.

High employment and low real GDP growth means low productivity growth, which over time means stagnating economies – a vicious circle.  The great AI/robot revolution in industry has not (yet) materialised.  Globally, the annual growth in output per worker has been hovering around 2 per cent for the past few years, compared with an annual average rate of 2.9 per cent between 2000 and 2007.

These counteracting factors may have delayed the advent of a new slump, but in my view, they can only delay it.  The fundamental driver of a capitalist economy is profit – and rising profits at that.  The most important factor for analysing the health of the capitalist economy remains the profitability of the capitalist sector and the movement in profits globally.  That decides whether investment and production will continue.  This blog has presented overwhelming evidence that profits and investment are highly correlated and in that order – see our book, World in Crisis.

Neither average profitability of capital nor the mass of profits is rising in the major economies. According to the latest data on the net return on capital provided by the EU’s AMECO database, profitability in 2020 will be 4% lower than the peak of 2017 in Europe and the UK; 8% down in Japan; and flat in the US.  And profitability will be lower than in 2007, except in the US and Japan.

My estimate of global mass profits also shows, at best, stagnation.  Japanese corporate profits are currently down 5% yoy, the US down 3% and Germany down 9%.

As for the largest and still leading capitalist economy in the world, the US, its rate and mass of profit have been falling since 2014.  In 2018, on my measure, US overall profitability rose very slightly over 2017 (probably due to Trump’s corporate tax cuts).  But profitability in 2018 was still 5-7% below the 2014 peak.  If we assume real GDP, employee compensation and fixed asset growth for 2019 will have been similar to the mini-recession of 2015-16, we can expect a further significant downturn in US profitability, to levels well below 2006.  On another measure, of earnings as a % of fixed assets in US non-financial companies, the rate is lower than in 2008 and approaching the all-time lows of 2001 and 1982.

This growing profitability crisis threatens to turn the increased credit for corporations from a bonus into a burden.  The Institute of International Finance estimates that global debt has now hit $250 trillion and is expected to rise to a record $255 trillion at the end of 2019, up $12 trillion from $243 trillion at the end of 2018, and nearly $32,500 for each of the 7.7 billion people on the planet.

Separately, Bank of America recently calculated that since the collapse of Lehman, government debt has increased by $30tn, corporate debt by $25tn, household by $9tn and financial debt by $2tn.  The BofA warns that “the biggest recession risk is a disorderly rise in credit spreads & corporate deleveraging.”

The World Bank joined the BIS (the ‘central banks’ central bank) in warning that the largest and fastest rise in global debt in half a century could lead to another financial crisis as the world economy slows.  In a report titled, Global Waves of Debt, the World Bank looked at the four major episodes of debt increases that have occurred in more than 100 countries since 1970 — the Latin American debt crisis of the 1980s, the Asian financial crisis of the late 1990s and the global financial crisis from 2007 to 2009.  During the fourth wave, from 2010 to 2018, the debt to GDP ratio of developing countries has risen by more than half to 168%: a faster increase on an annual basis than during the Latin American debt crisis.

World Bank chief David Malpass warned that “a sudden rise in risk premiums could precipitate a financial crisis, as has happened many times in the past.”  And that risk was confirmed this time last year, when interest rates rose too high – due to the attempt to ‘normalize’ policy – and stock and bond prices tumbled.

As we enter a new decade and go into the 11th year since the end of the last global slump, these are the fundamental factors that suggest a new slump is not far away.  They are: stagnant or falling profits and profitability; weak or falling investment; rising corporate debt and falling trade (amid a global trade war).

But there are also counteracting factors that have so far enabled the major economies to escape a slump in production and investment (if at the price of low GDP growth, productivity and wages).  Global costs of borrowing are at all-time lows, partly due to central bank policy of zero interest rates and ‘quantitative easing’; but also because there is no demand from the capitalist sector for credit to invest in productive assets or from the governments to spend.  So the stock and bond markets of the world are hitting record highs.  And there is the new phenomenon, not seen in previous long depressions, namely low unemployment rates that provide at least a modicum of income for households.

Mainstream economic forecasts for 2020 are generally mildly optimistic.  The Fulcrum macro-model published in the FT reckons that “the outlook from the models shows global growth rates rising next year, returning roughly to trend rates. Recession risks are deemed to be low, currently standing about 5 per cent for the US and 15 per cent for the eurozone.”  Alternative models, such as those from Goldman Sachs suggests a recession risk of 24 per cent in the US next year.

Maybe these forecasts will prove to be right.  But eventually, the fundamental factors of profits and investment must override the counteracting factors of low interest and unemployment.  Profits rule investment and investment rules employment and income, and that rules spending.  The fantasy world cannot continue much longer.  2020 may be the year that it collapses.

Top ten posts of 2019

December 21, 2019

As has become customary since I started this blog, here is the annual summary of content on my blog this year.  This year, there have been 450,000 viewings of the blog site, with the last quarter hitting a record number of viewings since I began the blog back almost exactly ten years ago.  Over those ten years, I have posted 882 times with just under 3 million viewings. There are 4300 regular followers.

The Michael Roberts Facebook site, which I started exactly five years ago has just under 8000 followers.  On the Facebook site, I put short daily items of information or comment on economics and economic events.

How are my efforts received?  Well, here is a review of my work by Danish economist Karen Helveg Petersen.

https://solidaritet.dk/michael-roberts-og-den-faldende-profitrate/?fbclid=IwAR3ibOt_zhT0Mou1U9Xc-aedxL2vV4h2OjGhrn2HfMYmH6B2BsfirSA7Yjo

You can make up your own mind.

Anyway, here are the top ten posts from my blog this year, as measured by the number of viewings.  And as you might expect from a blog that concentrates on Marxist economics and on a Marxist perspective on the world capitalist economy, my blog viewers are mostly interested in Marxist economic theory and its critique of political economy.

The top posts of the year were on Modern Monetary Theory (MMT).  MMT has become the flavour of the year as the economic theory of anti-austerity economics, if not anti-capitalist.

https://thenextrecession.wordpress.com/2019/01/28/modern-monetary-theory-part-1-chartalism-and-marx/

Having been confined to the esoteric fringe of even heterodox economics, MMT really kicked off when the US left-wing Democrat Alexandria Ocasio-Cortez started promoting the theory as the basis for economic policy; and a leading MMT exponent discussed the theory with UK Labour’s left-wing economics and finance leader, John McDonnell.

MMT now has some traction in the left as it appears to offer theoretical support for policies of fiscal spending funded by central bank money and running up budget deficits and public debt without fear of crises – and thus backing policies of government spending on infrastructure projects, job creation and industry in direct contrast to neoliberal mainstream policies of austerity and minimal government intervention.

So, in a series of posts, I analysed MMT from what I consider is a Marxist perspective.  I argued that separating money from value and indeed making money the primary force for change in capitalism fails to recognise the reality of social relations under capitalism and production for profit.  MMT ignores or denies a theory of value.  So MMT enters a fictitious economic world, where the state can issue debt and have it converted into credits on the state account by a central bank at will and with no limit or repercussions in the real world of productive capital.

In contrast, Marx’s law of value integrates money and credit into the capitalist mode of production and shows that money is not the decisive flaw in the capitalist mode of production and that sorting out finance is not enough. So it can explain why the Keynesian solutions (and MMT is a variant of Keynesian economics) do not work either to sustain economic prosperity or avoid crises.  I covered MMT in several posts, two of which made the top ten. Digital Commons has collated my posts into one paper which you can read here.

https://digitalcommons.fiu.edu/cgi/viewcontent.cgi?article=1133&context=classracecorporatepower

But the debate on MMT continues.

Rising government spending and unemployment are positively correlated in the OECD – the opposite of what MMT expects.

Also the debate that I conducted on the blog with Professor David Harvey on Marx’s law of value was in the top ten.

https://thenextrecession.wordpress.com/2018/04/02/marxs-law-of-value-a-debate-between-david-harvey-and-michael-roberts/

I argue that DH’s interpretation of Marx’s law of value is incorrect when he suggests that Marx did not have a ‘labour’ theory of value and that value only exists in ‘the market’.  From this flows the view that crises in capitalism are caused by a failure to ‘realise’ value through dislocation in the market ie underconsumption; and are not due to the failure to appropriate enough surplus value in production.  In the debate, DH strongly refutes my interpretation of his position and suggests my own view on crises is far too narrowly based as an explanation.  As I said in the post, this debate could be considered like a medieval religious debate about how many angels there are on the head of a pin; but it may be that it leads to something really worth knowing.  As it has made the top ten, it seems viewers think the latter.

Investment not consumption is the main swing factor in slumps – contrary to the underconsumption view –

% chg in personal consumption, business investment and GDP

The debate between David Harvey and me on the relevance of Marx’s law of the tendency of the rate of profit to fall was continued in person at the recent Historical Materialism conference in London.  You can read my report on that session here.

https://thenextrecession.wordpress.com/2019/11/11/hm1-marxs-double-edge-law/

The other theoretical discussion that made the top ten was on the economics of imperialism.  In another session which I organised at the Historical Materialism conference, John Smith, author of Imperialism in the 21st century, a widely praised and important book, presented with Andy Higginbottom of Kingston University, Sam King from the University of Victoria, Australia and myself on the economic foundations of modern imperialism.

https://thenextrecession.wordpress.com/2019/11/14/hm2-the-economics-of-modern-imperialism/

The discussion revolved around how value is transferred from the periphery (or the ‘global south’, if you prefer) to the imperialist centre (the ‘global north’), through transfer pricing, international trade, and capital flows.  In particular, we debated the relevance of the concept of ‘super-exploitation’ in the south as the main source of value transfer.  Again, the debate on this continues.

% of GDP of value transfer between major emerging economies and the G7

It was not just Marxist economic theory that attracted viewings of my posts but also analyses of the current state of the world capitalist economy.  Recessions, monetary easing and fiscal stimulus got into the top ten, I suppose, because it summed up my view of the likelihood of a new global recession and whether the official economic policies of central banks and governments were working to get capitalism out its low growth, low investment stagnation and could avoid a new slump.  My final sentence was: “Another recession is on its way and neither monetary nor fiscal measures can stop it.”

https://thenextrecession.wordpress.com/2019/08/19/recessions-monetary-easing-and-fiscal-stimulus/

I’ll revisit this story in a future post on the prospects for the world economy in 2020.

Global business profits are stagnating

One of the developments in the world economy in 2019 was the emerging trade and technology war between Trump’s America and Xi’s China.  This war, even if temporarily in truce, will break out again in 2020 and has already had detrimental effects on the world economy.  In a post that made the top ten, I argued last May this war would be one of the triggers for a new global slump “before the year is out”.

https://thenextrecession.wordpress.com/2019/05/26/global-slump-the-trade-and-technology-trigger/

Well, that ain’t happened.  But, in my view, it remains at the heart of any future dislocation of the world capitalist economy.

Global trade is declining

One post that I do every year and which always makes the top ten is Credit Suisse’s annual measure of the degree of inequality of wealth globally.  Once again, the report revealed the staggering degree of wealth inequality in the world.  The top 1% of adults own 45% of all global personal wealth; 10% own 82%; the bottom 50% own less than 1%.  So poor are the bottom 50% (they own no wealth at all), that it means that the likes of you and me who might own (partly) a house or flat in the advanced capitalist economies are actually in the top 10% of wealth holders!

https://thenextrecession.wordpress.com/2019/10/25/the-top-1-own-45-of-all-global-personal-wealth-10-own-82-the-bottom-50-own-less-than-1/

I did quite a few book reviews during 2019.  See my post: https://thenextrecession.wordpress.com/2019/12/18/books-of-2019/

But only one review made the top ten posts.  That was Stolen! by young British economist and activist, Grace Blakeley.  This book on the cause of crises in capitalism and policies for solving it in Britain was widely circulated and sold, not only in the UK but in Europe and the US.

https://thenextrecession.wordpress.com/2019/09/13/theft-or-exploitation-a-review-of-stolen-by-grace-blakeley/

“All our wealth has been stolen by big finance and in doing so big finance has brought our economy to its knees.  So we must save ourselves from big finance.” That is the shorthand message of the book.  Unfortunately, like most post-Keynesian analyses, Blakeley ignores Marx’s law of value in explaining the contradictions in modern capitalist economies and instead leans on the Keynesian analysis that the root of all evil is money, credit and finance.  As a result, in my view, because this analysis is faulty, her policy proposals are also inadequate.

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

The debate on the right policies for the left in Britain has become somewhat academic with the victory of the hard-right Conservative government in the December general election.  I don’t usually post much on the UK because it is not the most important capitalist economy, but how and why the opposition leftist Labour party failed to win is under hot debate at the moment.  So my short response immediately after the election result on Brexit and on the underlying economic consequences made the top ten this year.

https://thenextrecession.wordpress.com/2019/12/13/get-brexit-done/

It is the economic situation that will become the testing ground for the Conservative government in 2020 if a global slump should emerge.

The economic well-being index (chg in real disposable income minus unemployment rate) shows that when the index is rising before an election, the incumbent government usually wins.

Finally, there is Venezuela. It has disappeared off the media headlines in recent months now that the attempted coup organised by the US to overthrow the Maduro regime failed (unlike in Bolivia, where it succeeded).  What is interesting is that my post on Venezuela was written in 2017!

https://thenextrecession.wordpress.com/2017/08/03/the-tragedy-of-venezuela/

But viewers picked up that old post to get my understanding of why the Chavista revolution has failed.  In 2020, we shall see if Maduro can survive another year.

Venezuela real GDP falling near 30% since 2012.

Books of 2019

December 18, 2019

For me, the best book of the year is Classical Political Economics and Modern Capitalism by Greek Marxist economists, Lefteris Tsoulfidis and Persefoni Tsaliki.  And it is a book that I have not yet reviewed on my blog.  The reason why is that it’s so good that I am doing a longer and comprehensive view for the journal Marx 21 to be published next spring.  There will be some criticisms but for Marxist economics it is essential reading.

Suffice it to say now, the title tells the reader that the authors cover all aspects of Marxist economic theory as applied to modern capitalism in a succinct, rigorous manner.  In so doing, the authors refute neoclassical and Keynesian theories as better explanations of capitalism; and above all, they offer empirical evidence to support Marx’s key laws of motion of capitalism: the law of value and the law of profitability.  Both theory and evidence are offered to explain and justify Marx’s theory crises under capitalism.  The book is expensive, so it should really be seen as a textbook for economics students seeking an account of Marxian economics.  But each chapter can be purchased or read separately.  And it delivers well, better even than Anwar Shaikh’s monumental Capitalism (in 2016).

In contrast, American Marxist economist Richard Wolff has aimed at activists and not academics by publishing two short books designed to explain the ideas of Marxism and socialism in a straightforward way: Understanding Marxism and Understanding Socialism.  The books are powerful propaganda weapons for socialism, but they do suffer, yet again, from an incorrect explanation of crises under capitalism.  Wolff adopts the classic underconsumption argument that capitalists pay “insufficient wages to enable workers to purchase growing capitalist output”.  Regular readers of this blog will know that I consider this theory of capitalist crises as wrong.  Marx rejected it; it does not stand up theoretically as part of Marx’s law of value or profitability; and empirical evidence is against it.

Among other Marxist economics books in 2019 is the The Oxford Handbook of Karl Marx, edited by Matt Vidal, Tomas Rotta, Tony Smith and Paul Prew.  This brings together a series of chapters by prominent Marxist scholars covering all aspects Marxist theory, from historical materialism, dialectics, political economy, social reproduction and post-capitalist models.  https://thenextrecession.wordpress.com/2019/08/06/the-handbook-of-karl-marx-profitability-crises-and-financialisation/

I was particularly interested in the chapter on Reproduction and Crisis in Capitalist Economies by Deepankar Basu, from the University of Massachusetts, Amhurst.   Basu denies that there is a “Marxist theory of crisis’ and seeks to produce one that amalgamates the law of tendency of the rate of profit to fall, with profit squeeze theory from Okishio and straightforward underconsumption theory.  In my view, this does not work.  Indeed, I conclude that “all the Marxist authors discussing crises under capitalism in the Handbook are determined to trash Marx’s law of profitability as an explanation, in favour of others or deny that there is any general theory of crises at all.”

One chapter in the handbook deals with the commodification of knowledge and information.  In this chapter, the authors argue that knowledge is ‘immaterial labour’ and ‘knowledge commodities’ are increasingly replacing material commodities in modern capitalism.  Disputing the authors’ analysis, I would argue that knowledge is material (if intangible) and if knowledge commodities are produced under conditions of capitalist production ie using mental labour and selling the idea, the formula, the program, the music etc on the market, then value can be created by mental labour.  Value then comes from exploitation of productive labour, as per Marx’s law of value. The value of ‘knowledge commoditites’ does not tend to zero.  So there is no need to invoke the concept of rent extraction to explain the profits of pharma companies or Google. The so-called ‘renterisation’ of modern capitalist economies that is now so popular as a modification or a supplanting of Marx’s law of value is not supported by knowledge commodity production.

Another important book in Marxist economic analysis was The Economics of Military Spending: A Marxist perspective by Adem Yavuz Elveren.  In analysing the economic role of military expenditure (milex) in modern capitalism, Elveren combines theoretical analysis with detailed econometric investigations for 30 countries over last 60 years.  That’s the right way to do political economy or Marxist social science.  If the reader wants to gain knowledge of all the theories of milex and crises without verbiage and confusion, he or she can do no better than read Elveren.

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

Another book from a Marxist perspective looks at the modern changes in the composition and activity of the global labour force. Jorg Nowak, a fellow at the University of Nottingham, looks at Mass Strikes and Social Movements in Brazil and India:: popular mobilisation in the Long Depression.  Nowak argues that in the 21st century and in this current long depression in the major economies, industrial action is no longer led by organised labour ie trade unions, and now takes the form of wider ‘mass strikes’ that involve unorganised workers and wider social forces in the community.  This popular mobilisation is closer to Rosa Luxemburg’s concept of mass strikes than the conventional ’eurocentric’ formation of trade unions. Nowak develops the argument that the intensity of class conflict between labour and capital varies with stages in the economic cycle of capitalist economic upswings and downswings.  He cites various authors who seek to show that when capitalism is in a general upswing in growth, investment and employment, class conflict as expressed in the number of strikes rises, particularly near the peak of the upswing.

There were a number of heterodox economics, not strictly Marxist in my view, published this year.  The most popular and widely praised was Stolen – how to save the world from financialisation, by Grace Blakeley, the young British socialist economist and Labour activist.  Blakely poses that “all our wealth has been stolen by big finance and in doing so big finance has brought our economy to its knees”.  So we must save ourselves from big finance.  That is the shorthand message of a new book.  The concept of financialisation dominates her view of capitalism, not exploitation of labour.

Stolen aims to offer a radical analysis of the crises and contradictions of modern capitalism and policies that could end ‘financialisation’ and give control by the many over their economic futures.  Accepting this model implies that finance capital is the enemy and not capitalism as a whole, ie excluding the productive (value-creating) sectors.  Moreover, the narrative that the productive sectors of the capitalist economy have turned into rentiers or bankers is just not borne out by the facts.  And because the analysis is faulty, her policies for reform are also inadequate.

Another heterodox book is by John Weeks, who used to write solid Marxist analyses of capitalism back in the 1980s.  In his new book, The Debt Delusion: Living Within Our Means and Other Fallacies. Weeks aims at demolishing economic arguments for the necessity of austerity.  But he adopts the Keynesian view that the cause of crises under capitalism is the “lack of effective demand”.  Weeks says the lack of effective demand can be overcome or avoided by government spending and that is why capitalism worked so well back in the 1960s.  If we just drop austerity policies and go back to Keynesian-style government ‘demand management’, all will be well.  Marxist theory and the history of modern capitalist crises beg to differ.

The desire to put Keynes in same box as Marx is repeated by James Crotty with his new book entitled Keynes Against Capitalism: His Economic Case for Social Liberalism, in which he claims that, far from being a conservative, Keynes was in fact a socialist, if not a revolutionary one like Marx. “Keynes did not set out to save capitalism from itself as many think, but instead reckoned it needed to be replaced by a liberal form of socialism.” This thesis does not hold water in my opinion.  There is plenty of evidence in Keynes’ writings that he really stood for ‘managed capitalism’, and not socialism by any reasonable definition.

Then there are the more mainstream but radical analyses of capitalism.  World renowned expert on global inequality, Branco Milanovic in his new book, Capitalism Alone, starts from the premise that capitalism is now a global system with its tentacles into every corner of the world driving out any other modes of production like slavery or feudalism or Asian despotism to the tiniest of margins.  But also capitalism is not just only mode of production left, it is the only future for humanity.  Milanovic poses just two models for the future: ‘liberal capitalism’ of the West which creaks under the strains of inequality and capitalist excess; and ‘political capitalism’, as exemplified by China, which many claim is more efficient, but which is autocratic and corrupt and vulnerable to social unrest.

In my view, Milanovic’s dichotomy between ‘liberal democracy’ and ‘political capitalism’ is false.  And it arises because, of course, Milanovic starts with his premise (unproven) that an alternative mode of production and social system, namely socialism, is ruled out forever. Indeed, Milanovic’s policies to reduce the inequality of wealth and income in capitalist economies and/or allow people to leave their countries of poverty for a better world seem to be just as (if not more) ‘utopian’ a future under capitalism than the ‘socialist utopia’ he rules out.

Then there is the new book by the radical superstar of mainstream economics, Thomas Piketty: Capital and Ideology. This is a follow up to his mega Capital in the 21st Century from 2014.  The new book is even larger: some 1200pp. Whereas the first book provided theory and evidence on rising inequality, this book seeks to explain why this was allowed to happen in the second half of the 20th century.  Piketty says that he does not want what most people consider ‘socialism’, but he wants to “overcome capitalism.” Far from abolishing property or capital, he wants to spread its rewards to the bottom half of the population, who even in rich countries have never owned much.  To do that, he says, we must return to the social-democratic principles that were so successful in the 1960s.

Certainly, the evidence of growing inequality of both wealth and incomes in all the major economies is overwhelming and in a new book, The Triumph of Injustice: how the rich dodge taxes and how to make them pay , inequality experts, Gabriel Zucman and Emmanuel Saez provide us with yet more updated data.  It’s a searing indictment of American tax system, which, far from reducing the rising inequality of income and wealth in the US, actually drives it higher. Like Piketty, their policy solution is a wealth tax on property and financial assets.  They do not propose more radical policies to take over the banks and large companies, stop the payment of grotesque salaries and bonuses to top executives and end the risk-taking scams that have brought economies to their knees. For them, the replacement of the capitalist mode of production is not necessary, only a redistribution of the wealth and income already accrued by capital. Abolish the billionaires by taxation, not by expropriation.

Redistribution of incomes and wealth by government taxation and regulation is the main policy proposal of radical mainstream – the alternative to the Marxist proposal of the replacement of the capitalist mode of production.  It is the theme also adopted by Joseph Stiglitz, a Nobel (Riksbank) prize winner in economics and former chief economist at the World Bank, as well as an adviser to the leftist Labour leadership in the UK.  He stands to the left in the spectrum of mainstream economics.  His new book called People, Power, and Profits: Progressive Capitalism for an Age of Discontentin which he proclaims that “We can save our broken economic system from itself.”  It is not capitalism that is the problem but vested interests, especially among monopolists and bankers. The answer is to return to the days of managed capitalism that Stiglitz believes existed in the golden age of the 1950s and 1960s.  Here he echoes the views of Weeks, Piketty, Milanovic and Crotty above.

To get back to this “progressive capitalism”, Stiglitz proposes regulation, breaking up the ‘monopolies’, progressive taxation, ending corruption and enforcing the rule of law in trade. But what on earth would make the top 1% and the very rich owners of capital agree to reduce their gains in order to get a more equal and successful economy?  And how would regulation and more equality deal with the impending disaster that is global warming as capitalism accumulates rapaciously without any regard for the planet’s resources and viability?  Programmes of redistribution do little for this.  And if an economy is made more equal, would it stop future slumps under capitalism or future Great Recessions?  More equal economies in the past did not avoid these slumps.

Readers would be better advised to understand the nature of modern capitalism by carefully digesting the best Marxist analyses that combine theory with empirical evidence.  One such work is a new revised version of Invisible Leviathan, a book by Professor Murray Smith of Brock University, Ontario, Canada. The book sets out to explain why Marx’s law of value lurks invisibly behind the movement of markets in modern capitalism and yet ultimately explains the disruptive and regular recurrence of crises in production and investment that so damage the livelihoods (and lives) of the many globally.  This book is a profound defence (both theoretically and empirically) of Marx’s law of value and its corollary, Marx’s law of the tendency of the rate of profit to fall.

As Smith concludes: “The essential programmatic conclusion emerging from Marx’s analysis is that capitalism is constitutionally incapable of a ‘progressive’, ‘crisis-free’ evolution that would render the socialist project ‘unnecessary’, and furthermore, that a socialist transformation cannot be brought about through a process of gradual, incremental reform. Capitalism must be destroyed root and branch before there can be any hope of social reconstruction on fundamentally different foundations – and such a reconstruction is vitally necessary to ensuring further human progress.”

Land and the rentier economy

December 15, 2019

I should have reviewed Brett Christophers’ book, The New Enclosure, when it came out this time last year.  But better late than never. In 2017, Christophers, professor in Human Geography at Uppsala University, Sweden, published an excellent book, The Great Leveller, which takes a refreshingly new angle on the nature of capitalism.  He says that we need to look at how capitalism is continually facing a dynamic tension between the underlying forces of competition and monopoly.  Christophers argues that in this dynamic, law and legal measures have an underappreciated role in trying to preserve a “delicate balance between competition and monopoly”, which is needed to “regulate the rhythms of capitalist accumulation”.  And earlier this year, Christophers published an important piece of research on ‘renterism, as he calls it, in preparation for a new book on the nature of modern ‘rentier’ economy.

But in between, Christophers also wrote The New Enclosure: The Appropriation of Public Land in Neoliberal Britain, which delivers a forensic analysis of the ownership of land in Britain – historically the largest economic category of rental income in the modern capitalist economy.  Indeed, ever since the ‘enclosures’ of common land in the 16th century onwards, land has been privatised to accrue income through rent, ie income from property appropriated, not by exploitation of labour, but through monopoly ownership of an asset – income that Marx called ‘ground rent’.

Christophers shows that land makes up a staggering share of national wealth. Using the UK as his laboratory, he finds that, out of total national wealth of £9.8tn, land accounted for £5tn and houses and other structures added another £3.5tn on top of that.  The ownership of land acts as a store of wealth and, as the rents rack up, so grows inequality of incomes and wealth, while restricting the productive power of an economy.

The new enclosures of the 20th century in the UK emerged in the neo-liberal period from the early 1980s, when roughly half of publicly owned estates were privatised, the biggest of the Thatcherite privatisations.  Christophers carefully estimates that an astonishing 2 million hectares of public land, worth £400 billion, has been appropriated by the private sector in recent decades, representing 10% of the British land mass. When Thatcher entered Downing Street in May 1979, more land was owned by the state than ever before: 20 per cent of Britain’s total area. Today the figure is 10.5 per cent.

For example, in 1979, 42 per cent of the UK’s population lived in council housing. Today the figure is less than 8 per cent.

The new private owners of this public land hoarded the assets and throttled the construction of new homes, thus driving up house prices and rents.

From a peak of 350,000 permanent dwellings constructed per annum in the late 1960s, construction activity has fallen to around 150,000 units per year.  Land now accounts for 70 per cent of a house sale price. In the 1930s it was 2 per cent.

What happened?  When Britain’s post-war housebuilding boom began, it was based on cheap land. As the book, The Land Question by Daniel Bentley of thinktank Civitas, sets out, the 1947 Town and Country Planning Act under Clement Attlee’s government allowed local authorities to acquire land for development at “existing use value”. The unserviced land cost component for homes in Harlow and Milton Keynes was just 1% of housing costs at the time.

But landowners rebelled and Harold Macmillan’s Conservative government introduced the 1961 Land Compensation Act. Henceforth, landowners were to be paid the value of the land, including any “hope value”, when developed. Today a hectare of land is worth 100 times more when used for housing rather than farming. Yet when an council grants planning permission, all the value goes to the landowner, not the public. Bentley says landowners pocketed £9bn in profit from land they sold for new housing in 2014-15. Major infrastructure projects such as Crossrail 2 and the Bakerloo tube line extension are estimated to cost the public purse £36bn. Landowners, meanwhile, will pocket £87bn from increased land values nearby. Some externalities!

Classical political economy, starting with Adam Smith, David Ricardo and then to Karl Marx, explained the peculiar nature of this geographically bound asset that can be commodified, accruing an income for the owner without any productive effort.  ‘As soon as the land of any country has all become private property,’ Adam Smith wrote in The Wealth of Nations, ‘the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce.’ This is the beauty of land: it is an asset that increases in value according to demand, without any expenditure or labour on the part of its owner.

Thus both the early 19th century political economists of industrial capital and Marx agreed on the need to nationalise land – indeed, it is in the Communist Manifesto  But it has not happened.  Instead, private ownership has increased and through inheritance has ensured the continuation of the same ruling elites for centuries.  A recent study by two economists at the Bank of Italy found that the wealthiest families in Florence today are descended from the wealthiest families of Florence nearly 600 years ago! So the rise of merchant capitalism in the city states of Italy and then the expansion of industrial capitalism and now finance capital made little or no difference to who owned the wealth. When, in 1873, the government published the Return of Owners of Land, the most comprehensive survey of British land distribution since the Domesday Book, it came as no surprise that almost all the top hundred landowners were also members of the House of Lords. Just as predictably, 30 per cent of today’s Tory MPs are landlords.

The private ownership of land is part of what I call the rentier economy, income accruing to the owners of financial assets or physical resources. This income (rent and interest and dividends) is appropriated from the productive sectors of capitalism where surplus value has been obtained through the exploitation of labour.  Such rentier income can be appropriated from overseas through bank lending and foreign investment (as it has in the UK), but also domestically from land rentals.

As LSE professor Jerome Roos perceptively pointed out in the British left journal, New Statesman,“the concentration of wealth and power in the hands of a few privileged rentiers is not a deviation from capitalist competition, but a logical and regular outcome. In theory, we can distinguish between an unproductive rentier and a productive capitalist. But there is nothing to stop the productive, supposedly responsible businessperson becoming an absentee landlord or a remote shareholder, and this is often what happens. The rentier class is not an aberration but a common recurrence, one which tends to accompany periods of protracted economic decline”.

Christophers’ book shows that any plan to replace the capitalist mode of production with common ownership must include the nationalisation of the large landowners and the abolition of rentier income.

The debt delusion

December 10, 2019

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

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

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

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

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

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

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

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

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

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

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

% change in government spending one year before a recession

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

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

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

https://voxeu.org/article/fiscal-stimulus-times-high-public-debt-reconsidering-multipliers-and-twin-deficits

https://voxeu.org/epubs/cepr-reports/how-big-are-fiscal-multipliers

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

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

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

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

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

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

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

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

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

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

The fantasy world continues

November 28, 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Milex and the rate of profit

November 18, 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

HM3: the profits-investment puzzle

November 16, 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

HM2 – The economics of modern imperialism

November 14, 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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