Archive for the ‘Profitability’ Category

HM1 – Marx’s double-edge law

November 11, 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

US rate of profit measures for 2018

November 4, 2019

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

There are many ways to measure the rate of profit a la Marx (for the various ways, see http://pinguet.free.fr/basu2012.pdf). As previously, I start with an update of the measure used by Andrew Kliman (AK) in his book, The failure of capitalist production. AK measures the US rate of profit based on corporate sector profits only for the numerator and uses the historic cost measure of net fixed assets as the denominator (ie s/C).  AK considers this measure as the closest to Marx’s formula, namely that the rate of profit should be based on the advanced capital already bought (thus historic costs) and not on the current cost of replacing that capital.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Corporate debt, fiscal stimulus and the next recession

October 22, 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Capital not ideology

October 18, 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Knowledge commodities

October 8, 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A global manufacturing recession

October 1, 2019

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

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

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

Japan manufacturing PMI

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A rent-seeking economy?

September 27, 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

You can take a horse to water but….

September 17, 2019

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

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

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

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

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

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

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

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

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

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

September 13, 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Climate change and mitigation

September 6, 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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