Archive for the ‘Profitability’ Category

Corporate debt – the IMF gets worried

November 16, 2018

The IMF does not pull any punches in its latest post on the IMF blog.  It is really worried that so-called ‘leveraged loans’ are reaching dangerous levels globally.  These loans, usually arranged by a syndicate of banks, are made to companies that are heavily indebted or have weak credit ratings. They are called “leveraged” because the ratio of the borrower’s debt to assets or earnings significantly exceeds industry norms.  The level of these loans globally now stands at $1.3trn and annual issuance is now matching the pre-crash year of 2007.

With interest rates extremely low for years and with ample money flowing though the financial system, yield-hungry investors are tolerating ever-higher levels of risk and betting on financial instruments that, in less speculative times, they might sensibly shun.” says the IMF.  About 70% of these loans are in the US; so that is where the risk of a credit crunch is greatest.  And more than half of this year’s total involves money borrowed to fund mergers and acquisitions and leveraged buyouts (LBOs), pay dividends, and buy back shares from investor—in other words, for financial risk-taking rather than productive investment.

And even though corporate earnings in the US have risen sharply in 2018, the share of companies that have raised their debt to earnings above five times has reached a higher level than in 2007.

New deals also include fewer investor protections, known as covenants, and lower loss-absorption capacity. This year, so-called covenant-lite loans account for up 80% of new loans arranged for non-bank lenders (so-called “institutional investors”), up from about 30% in 2007.

With rising leverage, weakening investor protections and eroding debt cushions, average recovery rates for defaulted loans have fallen to 69% from the pre-crisis average of 82%. So any sizeable defaults would hit the ‘real’ economy hard.

Back in 2007, the debt crunch was exacerbated by the phenomenal growth in credit derivatives issued by non-banks, the so-called ‘shadow banks’, not subject to central bank controls.  Now again, it is in the shadow bank area that a debt crisis is looming.  These institutions now hold about $1.1 trillion of leveraged loans in the US, almost double the pre-crisis level.  On top of that are $1.2 trillion in high yield, or junk bonds, outstanding. The non-bank institutions include loan mutual funds, insurance companies, pension funds, and collateralized loan obligations (CLOs), which package loans and then resell them to still other investors. CLOs buy more than half of overall leveraged loan issuance. Mutual funds (which are usually bought by average savers through their banks) that invest in leveraged loans have grown from roughly $20 billion in assets in 2006 to about $200 billion this year, accounting for over 20% of loans outstanding.

All this debt can be serviced as long as earnings pour into companies and the interest rate on the debt does not rise too much.  Corporate earnings appear to be strong at least in the US.  In the latest quarter of reported company earnings, with 85-90% of companies having reported, US corporate earnings are up nearly 27% from the same period last year (although sales revenues are up only 8%).  US sales revenue growth is about 20% higher than in Europe and Japan but earnings growth is two to three times larger.  That tells you US earnings are being inflated by the one-off Trump corporate tax cuts etc.

Moreover it is earnings in the energy/oil sector that have led the way, as oil prices rose through the last year.  Recently, the oil price has taken a serious plunge as supply (production in the US) has rocketed. That’s going to reduce the contribution of the large energy sector to earnings growth.

Anyway, the reported earnings by companies in their accounts are really smoke and mirrors.  The real level of profits is better revealed by the wider data provided in the official national accounts.  And the discrepancy between the rise in profits as recorded there and the company earnings reports has not been as high since the bust of 2000, which eventually presaged the mild economic slump of 2001.  Reported US corporate earnings per share are rising fast, but ‘whole economy’ profits are basically flat.

The other moving part is the cost of borrowing.  The decade of low interest rates is over as the US Fed continues with its policy of hiking its policy rate.

The Fed policy sets the floor for all borrowing rates, not only in the US economy, but also abroad whenever borrowing dollars.

As I have explained in a number of posts, the Fed’s hiking policy will add to the burden of servicing corporate debt, particularly for those companies that have resorted to leveraged loans and junk bonds.  Herein lies the kernel of a future slump.


Not before the sun burns out

November 12, 2018

This year’s Historical Materialism conference in London seemed well attended and with younger participants.  HM covers all aspects of radical thought: philosophical, political, cultural, psychological and economic.  But it’s economics that this blog concentrates on and so my account of HM London will be similar.

Actually, there did not seem to be as many economic sessions as in previous years, so let me begin with the ones that I organised!  They were the two book launch sessions: one on the new book, The World in Crisis, edited by Guglielmo Carchedi and myself; and the second on my short book, Marx 200, that elaborates on Marx’s key economics ideas and their relevance in the 21st century, some 200 years after his birth and 150 years since he published Volume One of Capital.

In the session on The World in Crisis, I gave a general account of the various chapters that all aim at providing a global empirical analysis of Marx’s law of profitability, with the work of mostly young authors from Europe, Asia, North and South America (not Africa, unfortunately). World in Crisis

As the preface in the book says: World in Crisis aims to provide empirical validity to the hypothesis that the cause of recurring and regular economic crises or slumps in output, investment and employment can be found ultimately in Marx’s law of the tendential fall in the rate of profit on capital.  My power point presentation showed one overall result: that wherever you look at the data globally, there has been a secular fall in the rate of profit on capital; and in several chapters there is evidence that the causal driver of crises under capitalism is a fall in profitability and profits.

In the session, Tony Norfield presented his chapter on derivatives and capital markets.  Tony has just published his powerpoint presentation on his excellent blog site here.  Tony traces the origin of the rise of derivatives from the 1990s to the instability of capital markets. Derivatives did not cause the global financial crash in 2008 but by extending the speculative boom in credit in the early 2000s, they helped spread the crash beyond the borders of the US and connecting the crash in the home markets to mortgages, commodities and sovereign debt.  Tony argued finance is now dominant in the controlling and distributing value globally but that still does not mean that finance can escape the laws of motion of capital and profitability.  On the contrary, finance intensifies the crisis of profitability.  So, in policy terms, acting to regulate or take over banking and finance will not be enough to change anything.

Brian Green stepped in to fill the slot for my fellow editor Guglielmo Carchedi who was unable to make the session.  Brian offered an intriguing new insight on how to measure the rate of profit on capital that could include circulating as well as fixed assets.  Most Marxists consider that it is impossible to properly measure circulating capital to add into the denominator in Marx’s rate of profit formula (s/(c+v)  Brian offers a method using national accounts to achieve this and, in so doing, he argued that a much more precise measure of the rate of profit can be achieved that will enable us to see more accurately any changes in profits and investment that would lead to a slump.

Some important questions were asked by the audience.  In particular, how can we connect Marx’s law of profitability (the rate of profit) with crises based on a falling mass of profit?  In Chapter One of the book, Carchedi and I show just that: that a falling rate of profit eventually leads to a fall in the mass of profit (or a fall in total new value) which triggers the collapse in investment.

Indeed, contrary to the view of Keynesians that a fall in household consumption triggers a crisis, it is investment that swings down, not consumption.  In the Great Recession, profits led investment which led GDP; consumption hardly moved.  Here is a graph showing the change in investment and consumption one year before each post-war slump in the US.

Another question was: why do bourgeois economists find a rise in the rate of profit from the early 1980s if Marx’s law is right?  The answer is two-fold: first, while Marx’s law holds that there will be a secular fall in profitability, it will not be in a straight line and there will be periods when the counteracting factors (eg. a rising rate of surplus value) to the law as such (a rising organic composition of capital) will be stronger.  And second, this was the case for the so-called neoliberal period from the early 1980s to the end of the century.  So mainstream measures, which always start at the beginning of the 1980s, miss part of the picture.

In the session on the book Marx 200, in my presentation, Marx 200 HM, I again outlined what I consider are the key laws of motion of capitalism that Marx revealed in his economic analysis: the law of value, the law of accumulation and the law of profitability.  The latter flows from the first two, so Marx’s theory of crises depends on all three laws being correct.  At the session, Riccardo Bellofiore of the University of Bergamo, kindly agreed to offer a critique of the book and my approach.  Riccardo considered that my emphasis on using empirical data and official statistics bordered on a ‘logical positivist’, undialectical method.  As Paul Mattick, the great Marxist economist of the 1950 and 1960s argued, it was impossible to use official data based only in fiat money terms to ascertain the changes in value in Marxist terms.  Moreover, my emphasis on data and economic trends was too ‘determinist’ and failed to take account of the role of working class struggle.  Not everything can be decided by economic forces, there was also the subjective role of the class and I was dismissing this.

Naturally I disagree.  It seems to me that ‘scientific socialism’ is just that: a scientific approach to explaining the irreconcilable contradiction within capitalism and why it needs to be and must be replaced with socialism if human society is to progress or even survive.  Marx recognised the role of empirical data in his backing up his theories and often attempted with the limited resources at his disposal to accumulate such (in Capital and elsewhere).   We cannot just assert that Marx’s laws of motion must be right because there are recurrent crises in capitalism – we have to show that it is Marx’s laws that lie behind these crises and not other explanations.  If correct, other explanations might (and do) mean that capitalism just needs ‘modification’ or ‘management’ (Keynes) or even better left alone (neoclassical and Austrian).

It is not determinist to argue that economic conditions are out of the conscious control of both capitalists and workers (an Invisible Leviathan) and the law of motion of capitalism will override the ability of people in struggle to irreversibly change their lives – without the ending of capitalism.  Class struggle operates continually, but its degree of intensity and the level of success for labour over capital will be partly (even mainly) determined by the economic conditions. Men make their own history, but they do not make it as they please; they do not make it under self-selected circumstances, but under circumstances existing” (Marx).

A number of other important issues were raised by the audience:  what about the three laws that Uno Kozo, the Japanese Marxist economist identified?  I cannot answer this one but there was a session at HM on just that with Elene Lange.

The other question that came up was again whether Marx’s law of profitability was really just a secular theory (ie long term) and basically irrelevant as offering any underlying cause of recurrent crises; or whether it was just a cyclical theory, explaining the ‘business cycle’ or ‘waves of capital accumulation’, and has nothing to say about the eventual demise or breakdown of capitalism.

It was Rosa Luxemburg’s view that it was the former – a very long-term tendency that was so long term that the ‘sun would burn out’ before a falling rate of profit would play a role in pushing capitalism into crises (Luxemburg made this remark sarcastically in reply to a Russian economist who suggested that Marx’s law of profitability might well be relevant).  On the other hand, many Marxist economists who do accept the relevance of Marx’s law of profitability in recurrent crises deny that it offers a prediction for the transient future of capitalism (ie capitalism cannot last forever).  In my view, the law is both secular and cyclical and I present arguments for this view in my book, The Long Depression.  And in the new book, The World in Crisis, there is evidence of both the secular view (Maito) and the cyclical view (Tapia).

Enough of my sessions, because it would be amiss not mention several good sessions on Latin America (Mariano Feliz, Angus McNelly); and looking back at Marx’s value theory
(Andy Higginbottom (Higginbottom2012JAPEpublished),
Heesang Jeon Value_Use_Value_Needs_and_the_Social_Div).
I shall be returning to these topics on my blog over the next period.

Finally, there was the Isaac Deutscher Memorial Prize awarded at HM for the best Marxist book of the year.  Last year’s winner was William Clare Roberts for his intriguing Marx’s Inferno: The Political Theory of Capital (Princeton UP).  For my initial thoughts on this work, see here. But last week, after hearing my namesake speak on the subject of the nature of freedom under socialism, I shall be returning to this subject in a future post.

The shortlist for 2018 was:

Sven-Eric Liedman, A World to Win: The Life and Works of Karl Marx (Verso)
Kim Moody, On New Terrain: How Capital is Reshaping the Battleground of Class War (Haymarket Books)
Kohei Saito, Karl Marx’s Ecosocialism: Capital, Nature, and the Unfinished Critique of Political Economy (Monthly Review)
Ranabir Samaddar, Karl Marx and the Postcolonial Age (Palgrave Macmillan)

America’s halfway house

November 7, 2018

The mid-term Congressional elections saw a swing to the opposition Democrats in the Lower House and the Republicans were ousted as the majority party.  This is a blow to President Trump who mounted a campaign based on fear of immigrant caravans flooding into the US from Latin America and supposed rising crime provoked by the Democrats. This line of attack did not work.  But the perceived strong US economy seems to have had the effect of consolidating Trump’s position in the Senate.  There the Republicans gained seats. Losing control of the lower house means that any further tax and financial handouts to big business and the rich are likely to be curtailed. But as the Republicans increased their hold on the Senate,Trump can expect to continue with his wild foreign policy outbursts and his ‘trade war’ with China.

Although there are more ‘progressive’, Sanders-type Democrats elected to Congress, the Democrat party remains a stalwart supporter of (and funded by) Wall Street and big business. As Democrat House leader Nancy Pelosi has made clear, “I have to say, we’re capitalist ― and that’s just the way it is”. She added that “However, we do think that capitalism is not necessarily meeting the needs with the income inequality that we have in our country.”  But she says nothing about how to reverse this income inequality (let alone wealth inequality).  Even the ‘left wing’ of the Democrats as led by Senator Elizabeth Warren, stay firmly in the capitalist camp – merely looking for ways to make it “accountable”.

So the Americans now face a second half of the Trump presidential term with little changed.  Except that there are increasing concerns that the supposed Trump economic boom is fast coming to an end. Back in August, I said that Q2 2018 would be the peak in US growth as the effect of Trump’s one-off cuts dissipate, with the impact of Trump’s protectionist policies on global growth to factor in.  “Economic activity is weakening again in Europe.  And then there is the emerging ‘emerging market’ debt crisis – Argentina, Turkey, Venezuela onto Brazil and South Africa.  So the last quarter is not going to be exceeded this quarter.”

And so it has proved.  Ex-Goldman Sachs chief economist and now writer for the UK’s Financial Times, Gavyn Davies delivered his latest global economic forecast.  Headlining the piece as “Global slowdown begins to look more troublesome”, Davies reckons the recent stock market ‘correction’ was “remarkable for its extent, the frequency of consecutive negative days, and the synchronised decline in all the major markets.”  Investors were becoming increasingly worried about a new global economic recession.

Davies goes on that “the flow of economic data suggest that there was indeed a decline in world activity in October.”  And he agrees with my own April conclusion that “the global growth rate clearly peaked late in 2017”.  He concludes that “the period of above trend average growth that was so powerful last year proved short-lived and now seems to have been mainly cyclical, rather than secular, in nature.”  Exactly.

Davies estimates that global economic growth has slowed from 5% in 2017 to just a 3% rate now, about 0.7% below the long-term trend.  China is slowing, Europe is slowing, only the US has been holding up.

Davies reckons the US is set to slow from here as Trump enters the next two years of his presidency.  However, Davies is still confident that world capitalism will be fine because “a significant slowdown in the US should be offset by rebound in China, Japan and the Eurozone” so that growth will get back on trend.

This optimistic view (which probably remains the consensus among mainstream economic views) is not supported by others.  John Mauldin put it simply in a recent post on his blog: “All good things come to an end, even economic growth cycles. The present one is getting long in the tooth. While it doesn’t have to end now, it will end eventually. Signs increasingly suggest we are approaching that point. Whenever it happens, the next downturn will hit millions who still haven’t recovered from the last recession, millions more who did recover but forgot how bad it was, and millions more who reached adulthood during the boom. They saw it as children or teens but didn’t feel the full impact. Now, with their own jobs and families, they will. Again, there’s no doubt—none, zero, zip—this will happen. The main question is when.”

Mauldin’s main argument for a fast approaching new recession is one spouted by the Austrian school of economics, represented in official circles by the Bank for International Settlements (BIS), an international research agency for the world’s central banks.  And the cause of the next recession for the BIS?  Burgeoning global debt and the cost of servicing that debt.  Mauldin points out the huge rise in public sector debt levels that Trumps tax cuts and big business handouts are creating. We are one recession away from having a $30 trillion US government debt total. It will happen seemingly overnight. And deficits will stay well above $1 trillion per year every year after that, not unlike now.”

I too have emphasised the rising level of debt both before the global financial crash and the Great Recession and after – contrary to the perception that I am just a ‘monocausal’ rate of profit man!  The high level of debt was a trigger for the crash of 2008-9; has been a depressing factor on the ability of the major capitalist economies to recover to previous rates of growth; and will be an important trigger in the next recession.

But it is corporate debt that is much more important as the motivator of a crash than the public debt that the neoclassical supporters of ‘austerity’ always look at.  Household and corporate debt is growing fast, too, and not just in the US.  Mauldin explains that US companies are significantly more leveraged now than they were ahead of the 2008 crisis. “We saw then what happens when the commercial paper market seizes up, and that was without a Fed in tightening mode. Now we have a central bank both raising short-term rates and slowly ending its crisis-era accommodations. Recent comments from FOMC members say they have no intent of stopping, either. A few high-profile junk bond defaults could ignite fears quickly.”  Everywhere now central banks are tightening liquidity (graph below of the top four central banks rate of money ‘printing’).

Mauldin warns: “There are trillions of dollars of low-rated corporate debt that can easily slide into the junk debt category in a recession. Since most public pension, insurance, and endowment programs are not legally allowed to own junk-rated debt, I can see where it could easily cause a debt crisis along the lines of the previous subprime crisis.”  

What the Austrians don’t explain is why rising corporate debt could become a trigger for a new crisis – apparently it is just a fact of life in capitalist expansion like having a wild party one night eventually turns into a long and painful hangover the next morning.  The Marxist explanation is that when the profitability of capital in the productive sectors of the economy falls away, then credit is no longer the handmaiden of investment-led growth but turns into an oppressive squeeze of profits and production. Credit helps to fuel a rising economy but increases the degree of the crash when it comes, and then slows the recovery as credit becomes debt that weighs down on revenues and profits.  Below is a table that shows how increased debt since the end of the Great Recession no longer helped real GDP growth but hindered it.

And that is the danger ahead.  As the BIS showed in a September report, there is a large number of what are called ‘zombie’ businesses in the major economies which do not earn enough profits to cover the interest on their existing debt.  So they cannot invest and grow but just become the ‘undead’.  Around 12-15% of all quoted companies in the major economies are in this position – and this before interest rates on debt have risen significantly.

So can Trump and the US economy avoid a recession in the next two years?  Davies reckons that the US can because the rest of the world will recover to faster growth.  But there is no evidence that profitability, investment and production are likely to pick up in 2019 in Europe, Japan or the rest of Asia.  On the contrary, look at the latest measure of business activity in the Eurozone – the so-called PMI.  The composite PMI came in at 53.1 in October 2018, the weakest growth rate in the private sector since September 2016 as manufacturing expansion eased to a near four-year low (PMI at 52.0 vs 53.2 in September) and services output rose the least since January 2017 (PMI at 53.7 vs 54.7 in September).

And just look at the state of the Italian economy, as Italy’s budget with the EU takes on a Greek-style battle.

Then there is the UK.  British capital is suffering from the uncertainties of Brexit.  British small and medium-sized British factories are braced for the worst profits outlook in at least nine years, according to a recent survey that showed companies putting investment plans on ice ahead of Brexit.

Globally, manufacturing output growth is dropping back fast to 2016 levels.

According to JP Morgan economists and their model, overall global growth slipped back to a 3% annual rate in October, after peaking at about 3.7% at the beginning of 2018.

And there are increasing signs that US economic growth has also peaked.  The latest real GDP report for Q3 2018 showed a 3.5% annual real GDP growth rate (or 3% up from the same period in 2016).  But 2.1% of that GDP growth was actually inventory building, ie stock not sold.  Eventually production will have to slow so that this stock can be run down. And the Atlanta GDP Now forecast for the fourth quarter of 2018 is 2.9%, a further slowing.

Also in Q3. US non-residential business investment grew only 0.8% annualized, a sharp deceleration from the first quarter’s 11.5% rate.  Capital spending had accelerated from a slump in 2015 because mining, oil and gas investment rebounded as energy prices rose. Excluding mining, oil and gas, business spending on structures such as offices, factories and stores did jump in the first quarter, perhaps because of the Trump tax cut, but then cooled.

Moreover, non-financial profits remain below 2014 levels and, as I showed in a recent post, the rate of profit on capital in the US last year was flat at best over 2016, and well below the level of 2014.

The slower the US economy grows and the more the Federal Reserve hikes interest rates, the more the squeeze will be on the capitalist corporate sector and its ability to service their debts. Economists at Goldman Sachs, who have compiled ‘financial conditions’ into a single index, estimate that easier financial conditions helped bolster growth throughout 2017, led by surging stocks. In 2018 that contribution ebbed, as stocks plateaued and then in recent weeks dropped. Combine flat to lower stocks with higher bond yields and a generally firm dollar, and Goldman estimates financial conditions are now subtracting from, rather than adding to, growth, and that drag will peak in mid-2019.

There is a simple macro accounting identity for Marxists (the opposite of the Keynesian):  Profits + Government surpluses = Investment and the Current Account. If profits are set to fall while Trump runs huge government deficits (6% of GDP), then investment must fall and the current account deficit (3% of GDP) must narrow. That means a collapse in production and imports – a slump.

Timing a recession is notoriously hard (I’ve tried!).  And this long, crawling depressive ‘recovery’ has defied the odds; as only one recovery on record (from 1991-2001) has lasted as long as a decade. But there will be no escape for American capitalism as Trump enters the second half of his presidential term.

The US rate of profit in 2017

November 2, 2018

Official data are now available in order to update the measurement of the US rate of profit a la Marx for 2017.  So, as is my wont, I have updated the time series measure of the US rate of profit.  If you wish to replicate my results, I again refer you to the excellent manual for doing so compiled by Anders Axelsson from Sweden,

There are many ways to measure the rate of profit (see  As in last year, I have updated the measure used by Andrew Kliman (AK) in his book, The failure of capitalist production.

AK measures the US rate of profit based on corporate sector profits only and using the historic cost of net fixed assets as the denominator.  AK considers this measure as the closest to Marx’s formula, namely that the rate of profit should be based on the advanced capital already bought (thus historic costs) and not on the current cost of replacing that capital. Marx approaches value theory temporally; thus the price of denominator in the rate of profit formula is at t1 and should not be changed to the price at t2.  To do the latter is simultaneism, leading to a distortion of Marx’s value theory.  This seems correct to me.  The debate on this issue of measurement continues and can be found in the appendix in my book, The Long Depression, on measuring the rate of profit.

What are the results of the AK version of the rate of profit based on the US corporate sector?

There has been a fall in the rate of profit in 2017 from 24.4% in 2016 to 23.9% in 2017. Indeed, the US rate of profit on this measure has now fallen for three consecutive years from a post-crash peak in 2014.  This suggests that the recovery in profitability since the Great Recession low in 2009 is over.  The AK measure confirms Marx’s law in that there has been a secular decline in the US rate of profit since 1946 (25%) and since 1965 (30%).  But what is also interesting is that, on AK’s measure, the rate of profit in the US corporate sector has risen since the trough of 2001 and the Great Recession of 2009 did not see a fall below that 2001 trough.  Thus the 2000s appear to contradict the view of a ‘persistent’ fall in the US rate of profit.  I consider the explanation for this later.  But it is also true that the US rate of profit has not returned to the level of 2006, the registered peak in the neo-liberal period on AK’s measure. Indeed, in 2017 it was 17% lower than 2006.

Readers of my blog and other papers know that I prefer to measure the rate of profit a la Marx by looking at total surplus value in an economy against total productive capital employed; so as close as possible to Marx’s original formula of s/c+v.  So I have a ‘whole economy’ measure based on total national income (less depreciation) for surplus value; net fixed assets for constant capital; and employee compensation for variable capital – a general rate of profit, if you like.

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

On my ‘whole economy’ measure, the US rate of profit since 1945 looks like this. As for 2017, my results show a slight rise over 2016.  But the 2017 rate of profit is still 6-10% below the peak of 2006 and below the 2014 peak (as it is in the AK measure).

I have included measures based on historic (HC) and current costs (CC) for comparison.  What this shows is that the current cost measure hit its low in the early 1980s and the historic cost measure did not do so until the early 1990s.  Why the difference?  Well, Basu (as above) has explained. It’s inflation.  If inflation is high then the divergence between the changes in the HC measure and the CC measure will be greater.  When inflation drops off, the difference in the changes between the two HC and CC measures narrows.  From 1965 to 1982, the US rate of profit fell 21% on the HC measure but 36% on the CC measure.  From 1982 to 1997, the US rate of profit rose just 10% on the HC measure, but rose 29% on the CC measure.  But over the whole post-war period up to 2017, there was a secular fall in the US rate of profit on the HC measure of 28% and on the CC measure 28%!

There are many other ways of measuring the rate of profit.  And this was raised in an important and useful discussion in a workshop on the rate of profit (my rough notes on this are here) organised by Professors Murray Smith and Jonah Butovsky during my visit to Brock University, Southern Ontario, Canada two weeks ago.  Murray and Jonah have contributed to the new book, World in Crisis, edited by Mino Carchedi and myself.  In their chapter, they argue that a clear distinction must be made between the productive sectors of the capitalist economy ie where new value is created and the unproductive, but necessary, sectors of the economy.  The former would be manufacturing, industry, mining, agriculture, construction and transport and the latter would be commercial, financial, real estate and government.

Following the pioneering work of Sean Mage in the 1960s, Smith and Butovsky consider these socially necessary unproductive sectors as ‘overheads’ for capitalist production and so should be included in constant capital for the purposes of measuring the rate of profit. On their current cost measure, the US rate of profit has actually risen secularly since 1953.  However, looking at only the non-financial sector, Smith and Butovsky find that the US rate of profit peak of 2006 was some 50% below the peaks of the 1950s and 1960s, confirming Marx’s law.  Moreover, the strong rise in profitability recorded in all measures above can be considered as anomalous and based to a considerable extent on ‘fictitious profits’ booked in the finance, insurance, and real-estate sectors, and perhaps also by many firms operating in the productive economy.”  This is a similar conclusion reached by Peter Jones. He found that if you strip out ‘fictitious profits’, then the US corporate sector rate of profit actually fell from 1997 – see his graph below.

Recently, Lefteris Tsoulfidis from the University of Macedonia separated the rate of profit for the whole economy into a ‘general rate’ for all sectors and a ‘net rate’ for just the productive sectors.  Lefteris kindly sent me his data.  And this shows the following for the US general and net rate of profit from 1963 to 2015.

As in other measures, the US rate of profit is around 30% below 1960 levels but bottomed in the early 1980s with a modest recovery to the late 1990s in the so-called neoliberal period.  But interestingly, on Tsoulfidis’ measures, there was a decline, not a rise, in the rate of profit from 2000 leading up to the Great Recession.

I looked at the US non-financial corporate sector (which is not strictly the same as the Marxian definition of the ‘productive’ sector), using data from the Federal Reserve.  The net operating surplus over net financial assets is the measure I used for the rate of profit here.

This Fed measure shows that the US rate of profit peaked in 1997 to end the neo-liberal period and since then that rate has not been surpassed even in the credit-fuelled fictitious profits period from 2002 to 2006.  Indeed, after peaking post the Great Recession in 2012, the Fed measure has fallen consistently right up to mid-2018.  The Fed measure is quarterly and so provides a more up to date result.  On this measure, the US rate of profit remains 32% below its ‘golden age’ peak in 1966, again confirming Marx’s law.

Marx’s law is also confirmed because the driver of changes in US profitability depends on the relative movement of the two Marxian categories in the accumulation process: the organic composition of capital and the rate of surplus value (exploitation).  Since 1965 there has been the secular rise in the organic composition of capital of 21%, while the main ‘counteracting factor’ in Marx’s law, the rate of surplus value, has fallen over 4%.  Conversely, in the neo-liberal period from 1982 to 1997, the rate of surplus value rose 16%, more than the organic composition of capital (7%), so the rate of profit rose 9.5%.  Since 1997, the US rate of profit has fallen over 5%, because the organic composition of capital has risen over 14%, outstripping the rise in the rate of surplus value (5.4%).

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

Clearly a significant fall in the rate of profit is an indicator for an upcoming slump in investment and production in a capitalist economy.  Marx argued that a falling rate of profit would, for a while, be compensated for by an expansion of capital investment, so that the mass of profits would continue to rise.  But that could not last and eventually the fall in the rate of profit would lead to a fall in the mass of profits, which would engender ‘absolute overproduction’ of capital and a slump in production.  Marx explains all this clearly in Volume 3 of Capital, Chapter 15.  And that is what occurred in the Great Recession.

What is the situation now in the middle of 2018?  Well, US corporate profits are still rising, although non-financial profits are below the level at the end of 2014.

In a recent paper, G Carchedi identified three indicators for when crises occur: when the change in profitability; employment; and new value (v+s) are all negative at the same time.  Whenever that happened (12 times since 1946), it coincided with a crisis or slump in production in the US.  This is Carchedi’s graph.

My updated measure for the US rate of profit to 2017 confirms the first indicator is in place.  However, ‘new value’ had two quarters of decline in 2015 and one in 2017, but in the first two quarters of 2018 it has been rising; and employment growth continues.  So, on the basis of these three (Carchedi) indicators, a new recession in the US economy is not imminent as 2018 moves into the last quarter.

In sum, Marx’s law of profitability over the long term is again confirmed.  I am reminded that back in 2013, Basu and Manolakos did a highly sophisticated econometric analysis of Marx’s law for the US rate of profit, controlling for all the counteracting factors in the law like cheapening constant capital and a rising rate of surplus value.  They say “We find weak evidence of a long-run downward trend in the general profit rate for the U.S. economy for the period 1948-2007.”  By which they mean that there was evidence but it was not decisive. But they also found that a decline in the US rate of profit was “negative and statistically significant” ie the fall in the rate of profit was not random.  So “we find statistical evidence in favor of Marx’s hypothesis regarding the tendency of the general rate of profit to fall over time.”  Basu and Manolakos reckon there was an average annual 2% fall in the US rate of profit over the period.  In my own cruder calculations, I find exactly the same result for the period 1947-07 in the historic cost measure.

In conclusion, there has been a secular decline in US profitability, down by 28% since 1946 and 20% since 1965; and by 6-10% since the peak of 2006.  So the recovery of the US economy since 2009 at the end of the Great Recession has not restored profitability to its previous level.  Also, the driver of falling profitability has been the secular rise in the organic composition of capital, which has risen around 20% since 1965 while the main ‘counteracting factor’, the rate of surplus value, has fallen.

In 2017, the US rate of profit fell compared to 2016 on some measures (2%) or rose slightly on mine (1%).  All measures show that the US rate of profit in 2017 was 6-10% below the level of 2014.

Brazil’s Tropical Trump

October 29, 2018

The victory of Jair Bolsonaro as the new President of Brazil puts in the most far-right administration in the top 20 nations of the world.  Bolsonaro says he wants to crush ‘communism’, and restore ‘law and order’ by putting the military in control of the streets and stuffing the Supreme Court with his appointed judges.  He wants to loosen gun controls, crack down on gays and other ‘criminal’ elements, support President Trump’s policies and open up the economy and the Amazon forests to ‘proper exploitation’.

How was it possible that Bolsonaro won this election?  Well, his support was to be found in the burgeoning religious evangelical movement in Brazil, among the rich and small business sectors who have been militantly opposed to the rule of the Workers Party since 2002 under Lula and then Dilma, who they saw as taxing and regulating business for the benefit of low income families, and destroying family values.  But the biggest reason was that most Brazilians are fed up with rising crime, high unemployment and corruption by all politicians.

Bolsonaro is seen as the man to end corruption (of course that will turn out to be the opposite).  To the middle classes, the Workers Party is seen as ‘stealing’ the country.  Lula is still in custody for corruption (probably on trumped up charges and mainly to ensure he could not run in the election).  But Bolsonaro won mainly because of the disillusionment of the working class with the Workers Party.  After the collapse of commodity prices in resources and agriculture, the economy went into recession. The blame for this and corruption has been laid at the door of the Workers Party.

But Bolsonaro did not get the majority of the 147m Brazilians entitled to vote.  Although it is compulsory to vote in Brazil, around 30% spoilt their ballots or entered blank papers.  Also the Workers Party is still the largest party in the lower house of the Brazilian Congress, which has 30 different parties represented.  So it won’t be easy for Bolsonaro to get his most authoritarian measures passed democratically.

Most important remains economic policy.  As I have explained in previous posts, the Brazilian economy is in trouble.  Economic growth is stagnating at best.

Unemployment is near post-global crash highs.

Because the rich do not pay taxes and inequality of income and wealth is one of the highest in the world, the government does not raise enough revenue to avoid huge annual deficits.

As a result, Brazil’s public sector runs the largest debt to GDP among all emerging economies.

The solution of the rich and the Bolsonaro administration will be ‘austerity’, namely yet further cuts in public spending (many Brazilian state governments are already bust and starved of funds), privatisations and deregulation of industry and the banks – but, above all, the destruction of Brazil’s state pension scheme.

Stock and bond markets have risen on hopes Mr Bolsonaro will deliver on this.  These ‘neo-liberal’ policies will be pursued by Bolsonaro’s likely finance chief Paulo Guedes.  This University of Chicago-trained economist is co-founder of BTG Pactual, once the country’s biggest home-grown independent investment bank. Markets expect Guedes to maintain a freeze on fiscal spending introduced by current President Michel Temer. They also see him introducing formal autonomy for the central bank and allowing state-owned oil company Petrobras to set fuel prices at ‘market levels’.

On Sunday evening, following the victory of his putative future boss, Guedes said pension reform as well as slashing the “state’s privileges and waste” would be a priority for the new government.   So just as in the US, Brazilians will have ‘populist’ law and order talk from the President supposedly to stop crime, while introducing strident ‘neo-liberal’ reforms to help big business in Brazil and cut the share of income going to labour.

As I said in a post one year ago, the international agencies, foreign investors and Brazilian big business want an administration in power for four more years from 2018 to impose austerity, labour ‘flexibility’ and privatisations. That will drive up inequality further. Ironically, it won’t reduce the public sector debt because economic growth and tax revenues will be too low.  Indeed, the IMF forecasts debt will be much higher by 2020.

At the same time, more than half of Brazil’s population remain below a monthly income per head of R$560.  To cut this level of poverty to under 25% would require productivity four times as fast as the current rate. And there is no prospect of that under capitalism in Brazil.  That’s because the profitability of Brazilian capital is low and continues to stay low.

The profitability of Brazil’s dominant capitalist sector had been in secular decline, imposing continual downward pressure on investment and growth.

Brazil’s ruling elite face a difficult task in imposing control over its working class and cutting public spending and wages, and thus attracting significant foreign capital.  Brazilian capitalism will be stuck in a low growth, low profitability future with continuing political and economic paralysis.  And that is without a new global recession coming over the horizon.


October 25, 2018

The US stock market turned volatile this week and has now erased all the gains made up to now in 2018 in just a week or so.  So much for Trump’s boast that things for rich investors have never been better.  The fall in the US market has been matched by similar drops in the European and Asian stock markets.  The all-world index has had its worst performance since the Euro debt crisis of 2012.

Now this fall could just be what market traders call a ‘correction’ and not a full ‘bear market’, when the prices of shares enter a long and deep decline.  But it could be that investors are beginning to fear that the boost to profits and sales that the Trump tax cuts generated is soon to be over, while interest rates (the cost of borrowing to invest or buy back shares to boost prices) are rising significantly.

CitiBank’s ‘global economic surprise index’ — which measures how often data comes in better or worse than expected — has been in negative territory since April. That is the longest sub-zero stretch in four years.

A slowdown in growth is pretty clear in Europe, where the measures of business activity are showing a significant drop in the pace of expansion.  The IMF in its latest report has already signalled the coming slowdown but lowering its forecast for global growth by a couple of notches.  And within sectors, there are serious declines; the global materials sector (manufacturing basic inputs for production) is down 20%.  ECB chairman Mario Draghi said in his press conference yesterday that there was a “weaker momentum” in Europe, but this was just temporary and really just to do with German car sales and Italy’s budget.  Next quarter will be better.

And it is not just Europe that is slowing.  China’s growth rate has been slowing since 2014, as the government tries to reduce debt in local authorities and industrial firms.  In Q3 2018, the real GDP growth rate slowed to 6.5 per cent, the slowest reading since the 2009 post-crisis nadir.  Falling profitability and the trade war with the US is beginning to have some effect.

And South Korea also appears to be slowing down with Q3 real GDP growth of 2% being the slowest expansion rate in nine years.  Investment dropped 6.5%.

However, unlike the rest of the world, the US economy still looks better.  The latest business activity surveys showed steady expansion.

And globally, the price of copper – a good leading indicator of global activity – remains above the ‘recession’ level it fell to in the growth trough of 2015-6.

However, investors are beginning to fret that the corporate profits growth seen earlier this year is as good as it will get, given rising wage costs, interest bills and materials prices. Moreover, the impact of the 2018 tax cut will make this year’s results hard to beat in 2019.  The third-quarter results of 3M and Caterpillar, two US industrial bellwethers that reported last Tuesday, feed this concern. 3M cut its earnings forecasts. While Caterpillar’s profits beat forecasts, its warnings of rising materials costs rattled investors.

The US may have reached a new trade agreement with Mexico and Canada to replace the Nafta deal reviled by President Trump, but Washington remains at loggerheads with China, slapping $250bn of tariffs on Chinese goods and demanding sweeping changes to the country’s economic policies. After occasional hints of a thaw, the imbroglio appears to have reached an impasse. If there is no progress in the coming weeks, the Trump administration is expected to introduce another $200bn worth of tariffs — perhaps sanctioning all Chinese imports.

And investors remain on edge about the impact of rising interest rates on both fixed-income and equity markets. The Federal Reserve is expected to lift rates for a fourth time this year in December, and is slowly but surely shrinking its balance sheet, which has been stuffed with bonds acquired when combating the financial crisis.  Former Fed chair Janet Yellen sounded a warning that the planned hikes could cause a new financial bust as many companies have taken out what are called ‘leveraged loans’ which are subject to sharp changes in interest rates.  Yellen commented that “If we have a downturn in the economy, there are a lot of firms that will go bankrupt, I think because of this debt.  That would probably worsen a downturn.”  Indeed, it is estimated that nearly 20% of US firms are already finding the cost of servicing their debt greater than the earnings to cover it.

Yellen also pointed out what current Fed Chair Powell has observed, that it was not clear what the appropriate Fed policy interest rate should be to ensure full employment and moderate inflation; there was “genuine uncertainty”.  In other words, the Fed has no idea what it was doing in raising interest rates.

Other central banks are also trying to ‘normalise’ monetary policy and turn off the money flow. The European Central Bank plans to end its own bond-buying by the end of the year, and even the Bank of Japan is easing back on its monetary pedal. The net effect of this is what investors have dubbed “quantitative tightening”, a sea change in the global monetary environment since the financial crisis that bodes ill for markets in 2019.

Back at the beginning of October I wrote that if the Fed is wrong and the productive sectors of the US economy do not resume ‘normal growth’ (the average real GDP growth rate since 1945 has been 3.3% – so growth is not back there yet), the rising costs of servicing corporate and consumer debt could lead to a new downturn.  The first estimates of real GDP growth figures for the US in the third quarter to September are out tomorrow.

Most important, corporate profits, after a stellar two quarters are beginning to fall back.  If you strip out financial sector profits, then corporate profits are still below levels of 2014, even after Trump’s tax boost. And in the productive sectors of the economy, like manufacturing, they are falling quite sharply – as measured per employee.

The stock market is not always a harbinger of what happens in the ‘real’ economy, but it may be this time.


Regulation does not work

October 6, 2018

There is one big lesson from the Danske Bank money laundering scandal.  Regulating the modern banking system does not work.  Modern banks are now primarily giant hedge fund managers speculating on financial assets or they are conduits for tax avoidance havens for the top 1% and the multi-nationals.

The Danske Bank scandal is the latest and largest example of these modern banking activities.  Over $235bn in ‘special transactions’ flowed through the bank’s tiny Estonian branch in just four years from 2012 – an amount that dwarfs the Baltic nation’s GDP.  And this was in the period when international bank regulation had been tightened up, according to the IMF and the Bank for International Settlements, after the ‘reckless’ behaviour before the global financial crash.

Indeed, it was probably not just Danske Bank, but according to the Estonian central bank, the supposed regulator, Estonian banks handled about 900 billion euros, or $1.04 trillion in cross-border transactions between 2008 and 2015. The notion that these foreign individuals and investors would choose to run such a large sum of their money through Estonia for explicitly legitimate purposes is difficult to swallow.  After all, this comes after the liquidation of ABLV, formerly the third largest bank in Latvia, after it was caught laundering money for North Korea.

John Horan, senior associate at Maze Investigation, Compliance and Training Ltd. in Belfast, says money laundering is a Europe-wide problem. dark money will almost certainly continue to flow through the European banking system like sand through a sieve.”  It’s a never-ending story.

Indeed, that’s not all.  The very latest scandal concerns the siphoning of over $2bn of Danish tax revenues through a scam involving claiming back tax paid by foreigners on Danish shares.  It appears that these foreigners never owned any shares or paid tax on them and yet they were able to get ‘refunds’ through the connivance or negligence of Danish government employees and small European banks shifted the money – and nobody has been charged or resigned over this massive loss of taxpayer money – equivalent to $110bn in US tax revenues.

The regulators have been useless in stopping these criminal tax avoidance schemes by the banks.  For example, Carol Sergeant was a regulator at the UK Financial Supervisory Authority and headed up supervision of the banks at the Bank of England.  She got an honour from the Queen for “services to financial regulation”.  She joined Lloyds Bank in 2010 and received bonuses which Lloyds are now asking back as she (among others) presided over the payment protection insurance (PPI) scandal for which Lloyds must pay now £18bn in compensation.  But guess where she works now?  Yes, it’s as non-executive director of Danske Bank, where her responsibilities include making sure that the bank operated under regulations!

Nevertheless, in its latest Global Financial Stability report, the IMF claims that “a decade after the global financial crisis, much progress has been made in reforming the global financial rulebook. The broad agenda set by the international community has given rise to new standards that have contributed to a more resilient financial system—one that is less leveraged, more liquid, and better supervised.”

Well, it may be true that international banks are better capitalised and less leveraged with bad debts after the gradual implementation of the Basel III capital and liquidity accords and the widespread adoption of ‘stress testing’, but even that can be disputed.  In 85% of those 24 countries that experienced the banking crisis in 2007-8, national output growth today remains below its pre-crisis trend.  And the IMF admits that “in many countries, systemic risks associated with new forms of shadow banking and market-based finance outside the prudential regulatory perimeter, such as asset managers, may be accumulating and could lead to renewed spillover effects on banks”.

The ‘official’ view that regulation is the only way to control the banks is accepted by most Keynesians or those who see the financial sector as the only enemy of labour.  Take Nick Shaxson.  Shaxson wrote a compelling book Treasure Islands, tax havens and the men who stole the world, that exposed the workings of all the global tax avoidance schemes and how banks promoted tax havens and tax avoidance for their rich clients.

And more recently, he has done a new piece of research that argues that not only does the City of London and the UK financial sector operate to help tax avoidance and money laundering, it does not provide credit for productive investment. Indeed, “research increasingly shows that all the money swirling around our oversized financial sector may actually be making us collectively poorer. As Britain’s economy has steadily become re-engineered towards serving finance, other parts of the economy have struggled to survive in its shadow.”

Shaxson goes on: “Long ago, our oversized financial sector began turning away from supporting the creation of wealth, and towards extracting it from other parts of the economy. To achieve this, it shapes laws, rules, thinktanks and even our culture so that they support it. The outcomes include lower economic growth, steeper inequality, distorted markets, spreading crime, deeper corruption, the hollowing-out of alternative economic sectors and more.” So what are we to about these criminals at the centre of our economies, according to Shaxson? “We can tax, regulate and police our financial sector as we ought to.” So it’s regulation again – a policy that Danske and other scandals have proven not to work.

Then take Joseph Stiglitz, Nobel prize winner in economics, tireless campaigner against the finance sector and its iniquitous role, and (once again) adviser to the British Labour Party.  Just after the global financial crash, Stiglitz wrote a book, Freefall, about the bursting of the housing bubble and the ensuing massive defaults on mortgages that triggered the financial meltdown of 2008–09.  It was based on his study he had done for the UN, published as The Stiglitz Report, on the financial crisis, which declared: “Governments, deluded by market fundamentalism, forgot the lessons of both economic theory and historical experience which note that if the financial sector is to perform its critical role, there must be adequate regulation.”  

Stiglitz proposed that future meltdowns could be prevented by empowering incorruptible regulators, who are smart enough to do the right thing. “[E]ffective regulation requires regulators who believe in it,” he wrote. “They should be chosen from among those who might be hurt by a failure of regulation, not from those who benefit from it.” Where can these impartial advisors be found? His answer: “Unions, nongovernmental organizations (NGOs), and universities.” But all the regulatory agencies that failed in 2008 and are failing now are already well staffed with economists boasting credentials of just this sort, yet they still managed to get things wrong.

In a 2011 book, Engineering the Financial Crisis: Systemic Risk and the Failure of Regulation, Jeffrey Friedman and Wladimir Kraus contested Stiglitz’s claim that regulations could have prevented the disaster, if implemented by the right people. Friedman and Kraus observe: “Virtually all decision-making personnel at the Federal Reserve, the FDIC, and so on, are . . . university-trained economists.” The authors argue that Stiglitz’s mistake is “consistently to downplay the possibility of human error—that is, to deny that human beings (or at least uncorrupt human beings such as himself) are fallible.”  But note that Friedman and Kraus were no better in coming up with a solution.  They argued for less regulation – free market style!

More recently, David Kane at the New Institute for Economic Thinking has shown that banks have managed to avoid most attempts to regulate them since the global crash as “the instruments assigned to this task are too weak to work for long. With the connivance of regulators, US megabanks are already re-establishing their ability to use dividends and stock buybacks to rebuild their leverage back to dangerous levels.”

Kane notes that “top regulators seem to believe that an important part of their job is to convince taxpayers that the next crash can be contained within the financial sector and won’t be allowed to hurt ordinary citizens in the ways that previous crises have.”  But “these rosy claims are bullsh*t.”  Kane wants criminal bankers locked up, not the banks just fined.

Regulatory reform since the global financial meltdown has not brought under control the criminal and reckless unproductive activities of modern banking.  Even the IMF quietly admits this in its latest GFS report: “As the financial system continues to evolve and new threats to financial stability emerge, regulators and supervisors should remain attentive to risks… no regulatory framework can reduce the probability of a crisis to zero, so regulators need to remain humble. Recent developments documented in the chapter show that risks can migrate to new areas, and regulators and supervisors must remain vigilant to this evolution.”

Indeed!  As Gabriel Zucman  and Thomas Wright have shown in a meticulous and in-depth analysis of the size and extent of tax havens and tax avoidance, far from them being reduced or controlled, on the contrary, such schemes are an increasing part of US corporate profits, organised and transacted by the banks.

About half of all the foreign profits of US multinationals are booked in tax havens with Ireland topping the charts as the favourite (Irish tax rate just 5.7%). And the benefits for the increase in profits have gone to shareholders, the Zucman and Wright showed. “Ireland solidifies its position as the #1 tax haven,” Zucman said on Twitter. “US firms book more profits in Ireland than in China, Japan, Germany, France & Mexico combined.”  

Zucman and Wright also show that the rate of return (or profit) on US multi-national investments abroad has not risen, indeed the rate has slipped.  But thanks to favourable tax regimes (including the latest Trump measures) and the availability of tax havens like Ireland, after-tax profitability has jumped.

So those who think that ‘regulating’ the banks and tax evasion using ‘regulators’ will work are expecting pigs to rev up their jet engines for flight.

I have posted before on Stiglitz’s views as expressed in his book,“We can’t leave to market forces to solve the problems by themselves”, concluded Stiglitz, so we must rewrite the rules of the game.  But he admitted that his rule changes were unlikely to see the light of day. Changing the rules or regulation of the banks won’t work; we need ownership and control.

50 years of radical political economy

October 2, 2018

The 50th anniversary conference of the Union of Radical Political Economy (URPE) finished last weekend.  URPE has played an important role in developing and enhancing alternative economic theory and analysis to the dominant mainstream theories in modern economics.  It has survived despite the long reaction in economics during the ‘neo-liberal’ era that we have been subjected to since the 1980s – where even the so-called ‘progressive’ economics of Keynesians was submerged under the general equilibrium, ‘free market’ economics of the neoclassical mainstream.

I was unable to attend to conference held at the University of Massachusetts, Amherst, so my comments on proceedings will be solely based on some of the papers presented that I have obtained and also from some of the comments on the sessions by participants. This is obviously inadequate but I think it is still worth doing if only to publicise the role of URPE and to let readers of my blog know the sort of issues being debated.

There were many themes at the conference: social reproduction theory; labor economics; crisis theory; environmental economics; alternative economic systems post-capitalism; international economics; broad issues in Marxist political economy and of course, China.  But as is my wont, I shall concentrate on the themes that interest me most.

There was the usual heterodox mixture of the Marxist approach, alongside post-Keynesian/’financialisation’ schema, as well as some support for the contribution of the neo-Ricardian views of Piero Sraffa.  URPE is radical political economy, not just Marxist.

In political economy, this means there was some discussion about whether Keynesian theory had anything to offer to Marxist economics.  Readers of this blog know well that I do not consider Keynesian theory as a complement to Marxist economics – indeed, on the contrary I view it as part of mainstream bourgeois economics being applied to macro-managing slumps in capitalist production.

Deekpankar Basu (UMass) presented a paper entitled “Does Marxist Economics need Keynesian Insight?” and his short answer was apparently: no. Simply put, Keynesian theory looks to the failure of aggregate demand for the explanation of crises; neoclassical theory looks to ‘shocks’ to the smooth running of production (supply); but Marx looks to the profitability of capital for the faultlines in capitalist production.   Basu’s analysis was backed up by a panel on Marxist political economy which one participant reckoned showed that “the key advantage of Marxist analysis is it theorises profit, which mainstream economic models pretend doesn’t exist – despite overwhelming evidence (from the mainstream) that it does.”

Nevertheless, Peter Skott, also at Amherst, did present a post-Keynesian analysis on the relationship between capitalist accumulation and employment in his paper “Post-Keynesian growth theory and the reserve army of labor”.  I cannot comment on this paper, but I refer you another of Skott’s which deals with the challenges facing post-Keynesian analysis of modern economies.

On the Marxist front, there were several papers on recent developments in theory.  Hyun Woon Park (Denison University) took what he considers are puzzling inconsistencies in use of MELT (the monetary equivalent of labour time, a tool used to analyse trends in capitalism with Marxist categories)(Park and Rieu. 2018). Park was concerned that if Marxist theory says that unproductive sectors like finance, real estate, merchanting etc do not produce value but merely redistribute value created in productive sectors, does it have any role in capitalism?  If it plays the role of helping to make the productive sector more efficient, can we talk about an ‘optimal’ size for the sector?  He concludes (as far as I can tell from his paper) that there is no ‘optimal’ size where the unproductive sector helps rather than detracts from capital accumulation in the productive sector in modern economies.  I’m not sure what we should conclude from this.

Sraffian economics was also discussed at URPE.  This school is based on the approach of Piero Sraffa, who also argued that the real contradiction in capitalism was not the tendency for profitability to fall, but the class battle between profits and wages.  At least this is what I think we can conclude from the Sraffa’s theoretical model, based on the classical political economy of David Ricardo.  Bill McColloch of Keene State college, presented a paper “On Sraffa and the History of Economic Thought;”, which was kindly posted on the Naked Keynesianism website.

According to McColloch, “In Sraffa’s mind Marx’s great victory was to have rediscovered the essential meaning of the classical system in an era in which it was increasingly lost to all observers” namely “that capitalism rest upon exploitation, an exploitation of human beings and of nature, and that is remains the task of economics today to speak to this reality and its consequences. Whether Marx’s own proof of exploitation can be shown to be true is perhaps of negligible importance.”.. McCulloch asks “if Sraffa was ‘really’ a Marxist? I would suggest not”.  But apparently that does not matter because both Sraffa and Marx saw economic theory as both ‘sociological and institutional’ and not bound by ‘technique’ as in the neoclassical.  Well, I find it hardly “negligible” whether Marx’s theory of exploitation is true or not.  There is now a whole literature backing up Marx’s theory why profit only comes from exploitation of labour and nowhere else – while Sraffa’s theory is full of holes on that point, among others.  For a more thorough critique of Sraffian economics, see Fred Moseley’s book, Money and Totality

Marx’s theory of exploitation is important because, at URPE, the arguments of post-Keynesian and financialisation theorists were presented again.  Fletcher Baragar of the University of Manitoba has argued that the financial crash and Great Recession were the result of increased ‘financialisation’, as expressed through rising household debt that eventually led to the housing bust.  Financialisation had created ‘two forms of profit’, one the traditional exploitation of labour in production and the other, the exploitation of households by the financial sector. (Baragar, Fletcher. 2015. “Crises of Disproportionality and the Crisis of 2007.- 2009.”).

I have disputed the argument before that there are two sources of profit (profit of exploitation and profit of alienation) under modern capitalism (see my book, Marx 200).  And I have also extensively rejected the view  that it was ‘excessive’ household debt that caused the crisis of 2008.  The first is a distortion of Marx’s value theory and the second is no more than a mainstream explanation based on debt alone.

On my blog, I have posted several times on the financialisation theme.  Recently, Mavroudeas & Papadatos have criticised the whole financialisation hypothesis on five counts.  The Financialisation Hypothesis and Marxism: a positive contribution or a Trojan Horse?’ – S.Mavroudeas, 2nd World Congress on Marxism, Peking University, 5-6 May 2018.

The most important questions for me are these: 1) if financialisation was the cause of the Great Recession, what about crises even as late as 1980 when finance was not such a large part of the economy or non-financial companies had not become financial?;  2) has finance completely separated from what happens in the productive sectors where value is created?; 3) so is finance the class enemy while ‘productive’ capitalism and workers are allies?; 4) are all crises are the result of ‘financial instability’, subject to Minsky moments and the underlying profitability of capital is irrelevant?  If they are, does this mean we just need to control the financial institutions and can leave the non-financial sector of capitalism alone?  Do we control the investment decisions of JP Morgan but not those of Amazon of Boeing?

Imperialism has become a hot topic among Marxists in the recent period with ‘globalisation’, the rise of multi-nationals operating in the so-called emerging economies; and the centralisation of finance in the US and Europe.  There is a running debate on how imperialism operates and who is exploiting whom (Harvey versus Smith) that URPE has followed.  And there were some very incisive papers on this at the conference that show light on the debate from Marx’s value theory.  I can only refer to Depankur Basu’s superb and precise account of Marx’s theory of ground rent and Hao Qi (Renmin University) on Marx’s theory of absolute rent, both of which can be applied to the issue of imperialism.  Ramaa Vasudevan (Colorado State university) also moved into this territory.  Marx_s Analysis of Ground-Rent_ Theory Examples and ApplicationsA Model of the Marxist Rent Theory

Finally, there is what happens if and when capitalism is overthrown globally.  What are the economic outlines and categories for a communist society?  Can we go beyond the prescriptions that Marx offered in the Critique of the Gotha Programme?  A panel composed of Seongjin Jeong (Gyeongsang National University, Korea), Richard Westra, Al Campbell and Ann Davis took this up at a session on an ‘alternative economic system for the 21st century’.

Al Campbell (emeritus professor at Utah) has offered some pioneering work in this area. And Seongjin Jeong’s paper on the faultlines of Soviet planning was revealing.  Two things here: first that the most important development under an economy moving towards communism is raising the productive forces to levels that quickly enable goods and services to be provided free at the point of consumption (ie transport, education, health, energy, basic foodstuffs etc).  But that could not be applied for some time for all goods and services, so there would have to be planned production and distribution.

Jeong argues that such planning should be based on labour time calculation.  But the Soviet economy of 1917–91 was not a labour-time planned economy. Although input-output tables are essential to the calculation of the total labour time needed to produce goods and services and were available to Soviet planners, they never seriously considered using them and instead depended on material balances.  However, with the development of AI, algorithms, big data and quantum power, such planning by labour time calculation is clearly feasible.  Communism will work. SovietPlanningLTC_Seongjin_URPE20180928. 

Back to normality?

September 28, 2018

US real GDP growth for the second quarter of 2018 was confirmed at an annual rate of 4.2%.  And that means US real GDP is 2.9% higher than one year ago. The ‘annualised’ rate was the highest since the third quarter of 2014.  Similarly the year on year rate is the highest since 2014. But not the highest rate in history – as President Trump claims!

But it does show a relative recovery from the near recession rates of 2016.

But as I have mentioned before in previous posts, the underlying story is not so sanguine.  First, the 4% ‘annualised’ growth rate is really dependent on some one-off factors that will soon turn into their opposites.  US net exports was a big factor in the 4% rate and this was mainly due to the rush by China to buy up American soybeans before tariffs on US exports took effect in retaliation to Trump’s trade war with China.

Second, growth has been jacked up by Trump’s huge tax cuts for corporations on their profits.  While pre-tax profits for the major corporations have risen a little, it is post-tax profits where there has been a bonanza.  According to a recent report by Zion Research, for the top 500 US companies, 49% of their 2018 profits were due to the Trump tax cuts. For some sectors, like the telephone companies, it was 152% of 2018 profits ie from loss to profit.

Nevertheless, mainstream economics seems generally convinced that the US is out of its Long Depression of the last ten years and is now motoring ‘normally’.  The official unemployment rate is at all-time lows, wages are beginning to rise a little and inflation has ticked up marginally.

So the US Federal Reserve decided to push up its policy interest rate for the eighth time since 2015 to reach 2.25%.  The rate is used to set credit card, mortgage and loan rates and will trigger rises across the board for consumers and businesses. In a statement the Fed signalled more rate hikes were imminent. “The committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2% objective over the medium term. Risks to the economic outlook appear roughly balanced,”   So the Fed seeks to ‘normalise’ rates in line with the ‘normal’ growth of the US economy and reckons its economic forecasts are about right.

But as I pointed out in a previous post, if the Fed is wrong and the productive sectors of the US economy do not resume ‘normal growth’ (the average real GDP growth rate since 1945 has been 3.3% – so growth is not back there yet), the rising costs of servicing corporate and consumer debt could lead to a new downturn.

The key factor for growth is investment by the capitalist sector.  And what decides the level of that investment in the last analysis is not the level or cost of debt but the profitability of any investment.  Business investment has made a modest recovery in the last few quarters, driven by the 16% rise in corporate profits after tax.  But the bulk of this profits bonanza for US corporates in 2018 has been used to pay higher dividends to shareholders and buying back company shares to boost the share price, not in productive investment.  And within productive investment, most has gone into the oil industry and into ‘intellectual property’ (software etc).  Investment in equipment and new structures in other businesses has been very modest.

Moreover, non-financial corporate profits are still below levels of 2014, even after Trump’s boost.

And in the productive sectors of the economy, like manufacturing, they are falling quite sharply – as measured per employee.

At the other end of the economy, average incomes for American families are making little progress.  In an excellent post, Jack Rasmus of the American Green Party showed that for non-supervisory workers (non-managers) who are the bulk of the American workforce (133m out of 162m), real incomes are falling not rising, while the burden of consumer debt is rising. When Trump announced his corporate tax cuts, he claimed that this would allow companies to increase wages from their increased profits.  This, of course, has turned out to be nonsense. There has been very little increase in private sector wage compensation since the end of 2017.

And it is only in the US that we can talk about ‘recovery’ or ‘normal’ growth.  Everywhere else hopes of a return to pre-crisis growth rates seem dashed.  In the Eurozone, growth has slipped back to around 2% a year, still one-third below pre-crisis rates.

In Japan, it’s back at 1%.  China too is ‘struggling’ to stay above 6% a year.

As the OECD put it in its latest interim report on the global economy: “Global growth is peaking; the trade war is beginning to bite; investment growth is still too weak to boost productivity; real wages are still below pre-crisis levels; and the losses in income from the Great Recession will never be recovered.”


“Trade tensions are starting to bite, and are already having adverse effects on confidence and investment plans.   Trade growth has stalled, restrictions are having marked sectoral effects and the level of uncertainty on trade stances remains high.”

So “It is urgent for countries to end the slide towards further protectionism, reinforce the global rules‑based international trade system and boost international dialogue, which will provide business with the confidence to invest,”.

And as for the so-called emerging markets, the situation continues to deteriorate.  According to the IIF, growth tracker, emerging market growth is now at a two-year low.

And as interest rates globally rise (driven by the Fed) and trade wars begin to squeeze global trade, emerging markets with high corporate debt are especially vulnerable.

The right-wing government of Argentina has now had to swallow a record-breaking IMF bailout of $57bn.  IMF chief Lagarde said that, as part of the deal, Argentina’s central bank can only intervene to stabilize its currency if the peso depreciates below 44 pesos to the dollar. It is currently at 39 pesos to the dollar after losing 50% of its value since the start of the year. The president of Argentina’s central bank, Nicolás Caputo, resigned because of this condition.

The size of the bailout shows how desperate the IMF is to support the right-wing government in Argentina, but also to remove any independent action by the Argentine monetary and fiscal authorities. Argentina’s economic policy is now being run by the IMF.  Argentina is now under the grip of IMF dictates, something the right-wing Macri government said would never happen again.  A massive slump and austerity will now follow for the Argentine people – repeating the hell of the last major slump of 2001.

At the same time, the Turkish economy is in meltdown. There the Erdogan government refuses to take IMF money in return for austerity and control over its currency and interest rate policy – unlike Argentina.  But it will make no difference: both countries cannot avoid a serious slump as interest rates spiral and inflation rockets.

There is one economic lesson to be learned here.  When Greece was locked in the straitjacket of the so-called Troika (the IMF, the ECB and the Euro group), many Keynesians and radicals said that the reason Greece was in this mess was that it was inside the Eurozone and so it could not devalue its currency or control its interest rates.  If it broke away, it could control its own destiny.

Well, Argentina and Turkey now show that it was not the Eurozone as such that was the problem, but the forces of global capitalism.  Both Argentina and Turkey control their currency and interest rate policy.  The former has opted for IMF control and the latter refuses it.  But it will make no difference – the working people in both countries will pay the price for the crisis in their economies.

It’s greed and fear

September 18, 2018

Larry Summers is one of the world’s leading Keynesian economists, a former Treasury Secretary under President Clinton, a candidate previously for the Chair of the US Fed, and a regular speaker at the massive ASSA annual conference of the American Economics Association, where he promotes the old neo-Keynesian view that the global economy tends to a form of ‘secular stagnation’.

Summers has in the past attacked (correctly in my view) the decline of Keynesian economics into just doing sterile Dynamic Stochastic General Equilibrium models (DSGE), where it is assumed that the economy is stable and growing, but then is subject to some ‘shock’ like a change in consumer or investor behaviour.  The model then supposedly tells us any changes in outcomes.  Summers particularly objects to the demand by neoclassical and other Keynesian economists that any DSGE model must start from ‘microeconomic foundations’ ie the initial assumptions must be logical, according to marginalist neoclassical supply and demand theory, and the individual agents must act ‘rationally’ according to those ‘foundations’.

As Summers puts it: “the principle of building macroeconomics on microeconomic foundations, as applied by economists, contributed next to nothing to predicting, explaining or resolving the Great Recession.”  Instead, says Summers, we should think in terms of “broad aggregates”, ie empirical evidence of what is happening in the economy, not what the logic of neoclassical economic theory might claim ought to happen.

Not all Keynesians agree with Summers on this.  Simon Wren-Lewis, the leading British Keynesian economist claims that the best DSGE models did try to incorporate money and imperfections in an economy: “respected macroeconomists (would) argue that because of these problematic microfoundations, it is best to ignore something like sticky prices (wages) (a key Keynesian argument for an economy stuck in a recession – MR) when doing policy work: an argument that would be laughed out of court in any other science. In no other discipline could you have a debate about whether it was better to model what you can microfound rather than model what you can see. Other economists understand this, but many macroeconomists still think this is all quite normal.” In other words, you cannot just do empirical work without some theory or model to analyse it; or in Marxist terms, you need the connection between the concrete and the abstract.

There is confusion here in mainstream economics – one side want to condemn ‘models’ for being unrealistic and not recognising the power of the aggregate.  The other side condemns statistics without a theory of behaviour or laws of motion.

Summers reckons that the reason mainstream economics failed to predict the Great Recession is that it does not want to recognise ‘irrationality’ on the part of consumers and investors.  You see, crises are probably the result of ‘irrational’ or bad decisions arising from herd-like behaviour.  Markets are first gripped by ‘greed’ and then suddenly ‘animal spirits’ disappear and markets are engulfed by ‘fear’.  This is a psychological explanation of crises.

Summers recommends a new book by behavioural economists Andrei Shleifer’s and Nicola Gennaioli, “A Crisis of Beliefs: Investor Psychology and Financial Fragility.”  Summers proclaims that “the book puts expectations at the center of thinking about economic fluctuations and financial crises — but these expectations are not rational. In fact, as all the evidence suggests, they are subject to systematic errors of extrapolation. The book suggests that these errors in expectations are best understood as arising out of cognitive biases to which humans are prone.” Using the latest research in psychology and behavioural economics, they present a new theory of belief formation.  So it’s all down to irrational behaviour, not even a sudden ‘lack of demand’ (the usual Keynesian reason) or banking excesses.  The ‘shocks’ to the general equilibrium models are to be found in wrong decisions, greed and fear by investors.

Behavioural economics always seems to me ‘desperate macroeconomics’.  We don’t know why slumps occur in production, investment and employment at regular and recurring intervals.  We don’t have a convincing theoretical model that can be tested with empirical evidence; just saying slumps occur because there is a ‘lack of demand’ sounds inadequate.  So let’s turn to psychology to save economics.

Actually, the great behavourial economists that Summers refers to also have no idea what causes crises.  Robert Thaler reckons that stock market prices are so volatile that there is no rational explanation of their movements.  Thaler argues that there are ‘bubbles’, which he considers are ‘irrational’ movements in prices not related to fundamentals like profits or interest rates.  Top neoclassical economist Eugene Fama criticised Thaler.  Fama argued that a ‘bubble’ in stock market prices may merely express a change in view of investors about prospective investment returns; it’s not ‘irrational’.  On this point, Fama is right and Thaler is wrong.

The other behaviourist cited by Summers is Daniel Kahneman.  He has developed what he called ‘prospect theory’. Kahneman’s research has shown that people do not behave as mainstream marginal utility theory suggests. Instead Kahneman argues that there is “pervasive optimistic bias” in individuals.  They have irrational or unwarranted optimism.  This leads people to take on risky projects without considering the ultimate costs – against rational choice assumed by mainstream theory.

Kahneman’s work certainly exposes the unrealistic assumptions of marginal utility theory, the bedrock of mainstream economics.  But it offers as an alternative, a theory of chaos, that we can know nothing and predict nothing.  You see, the inherent flaw in a modern economy is uncertainty and psychology.  It’s not the drive for profit versus social need, but the psychological perceptions of individuals. Thus the US home price collapse and the global financial crash came about because consumers have irrational swings from greed to fear.  This leaves mainstream (including Keynesian) economics in a psychological purgatory, with no scientific analysis and predictive power.  Also, it leads to a utopian view of how to fix crises.  The answer is to change people’s behaviour; in particular, big multinational companies and banks need to have ‘social purpose’ and not be greedy!

Turning to psychology is not necessary for economics.  At the level of aggregate, the macro, we can draw out the patterns of motion in capitalism that can be tested and could deliver predictive power.  For example, Marx made the key observation that what drives stock market prices is the difference between interest rates and the overall rate of profit. What has kept stock market prices rising now has been the very low level of long-term interest rates, deliberately engendered by central banks like the Federal Reserve around the world.

Of course, every day, investors make ‘irrational’ decisions but, over time and, in the aggregate, investor decisions to buy or to sell stocks or bonds will be based on the return they have received (in interest or dividends) and the prices of bonds and stocks will move accordingly. And those returns ultimately depend on the difference between the profitability of capital invested in the economy and the costs of providing finance.  The change in objective conditions will alter the behaviour of ‘economic agents’.

Right now, interest rates are rising globally while profits are stagnating.

The scissor is closing between the return on capital and the cost of borrowing.  When it closes, greed will turn into fear.