Archive for the ‘Profitability’ Category

Managers rule, not capitalists?

April 29, 2018

The capitalist mode of production is coming to an end.  But it is not being replaced by socialism. Instead, there is a new mode of production, based on a managerial class that has been forming in the last hundred years.  This managerial class does not exploit the working class for surplus value and its accumulation as capital.  The managers instead use power and control which they exercise through the management of transnationals and finance.  The working class will not be the ‘gravediggers’ of capitalism, as Marx expected.  The ‘popular classes’ instead must press the managerial class to be progressive and modern; and eliminate the vestiges of the capitalist class in order to develop a new meritocratic society. Such is the thesis of a new book, Managerial Capitalism, by Gerard Dumenil and Dominique Levy (D-L), two longstanding and eminent French Marxist economists.

I participated in the launch of the book in London this week.  At the launch, Gerard Dumenil argued that capitalist class (i.e those who own the means of production) have been replaced by managers who control the big companies and take all the decisions that matter.  The capitalist class now is like the fading old feudal class in the early 19th century when Marx came on the scene.  The capitalist class took over then and the feudal class converted themselves into capitalists eventually as well.  Now the managerial class has taken over and the traditional capitalists are increasingly converting themselves into the new managerial class.

Marx was well aware to the separation of functions in capitalism between the owner of capital and the managers of corporate capital.  As he put it in Capital Vol 3: “Joint-stock companies in general (developed with the credit system) have the tendency to separate this function of managerial work more and more from the possession of capital, whether it is owned or borrowed … But since on the one hand the functioning capitalist confronts the mere owner of capital, the money capitalist, and with the development of credit this money capital itself assumes a social character, being concentrated in banks and loaned out by these, no longer by its direct proprietors; and since on the other hand the mere manager, who does not possess capital under any title, neither by loan nor in any other way, takes care of all real functions that fall to the functioning capitalist as such, there remains only the functionary, and the capitalist vanishes from the production process as someone superfluous.”(ibid. p. 512).

D-L spend some time in their book reminding us that Marx was aware of this division.  But Marx did not see this as leading to a new managerial class. The division was merely of appearance. The system had not altered: “producing surplus-value, i.e. unpaid labour, and in the most economical conditions at that, is completely forgotten in the face of the antithesis that interest accrues to the capitalist even if he does not perform any function as capitalist, but is simply the owner of capital; while profit of enterprise, on the other hand, accrues to the functioning capitalist even if he is not the owner of the capital with which he functions. In the face of the antithetical form of the two parts into which pro.t and thus surplus-value divides, it is forgotten that both are simply parts of surplus-value and that such a division can in no way change its nature, its origin and its conditions of existence” (p. 504).

D-L reckon that this view of the relation between outright capitalist families and their managers is out of date.  Managers, not capitalist families, now rule. In the book, D-L back up their thesis with empirical evidence on rising income inequality in the US and other major economies.  The top 1% of income earners in the US, who would usually be regarded as part of the capitalist class, now get 80% of their income as salaries from working as managers and top executives, not from capital income (dividends, interest and profit).  So these top people are managers, not capitalists.  This is why, D-L argue, we must revise the traditional Marxist view that top managers are merely functionaries of the capitalist class.

But the data could be interpreted in another way.  Simon Mohun has done similar empirical work (ClassStructure1918to2011wmf) on where the income of the top layers comes from.  He found that the working class – those who depend on wages alone for their living – still constitute 84% of the working population.  Managers constitute the rest, but only 2% (Qc in graph below) can actually live off rent, interest, capital gains and dividends alone.  They are the real capitalist class.  And that ratio has little changed in 100 years, even if their direct source of income has.

Moreover, this is the group that has gained most during the last 30 years of rising inequality.  The income of this capitalist class (Qc) has risen from about 9 times the average income of the working class to 22 times while managers’ incomes (Lpd in graphs) have risen from 2.5 times to 3.5 times workers income.  So rising inequality is primarily the result of increased exploitation (a rising rate of surplus value) in Marxist terms.

Yes, for the top 1%, since 1980, their ‘labour’ source of income has fluctuated around 60% of total average income (around double what it was in the 1920s). But this top 1% of managers includes investment bankers, corporate lawyers, hedge fund and private equity managers and corporate executives. Moreover, two-thirds of the top 1% are managers only in name, as an increasing proportion of these executive occupations are in so-called ‘closely held businesses’. That means they own their own businesses but pay wages to themselves as the main source of income.  This blurs the distinction between labour and non-labour income.  So the top 1-3%, according to Mohun, are still capitalists as Marx understood it, even if they pay themselves huge salaries and bonuses.

Moreover, as one study shows“The incomes of executives, managers, financial professionals, and technology professionals who are in the top 0.1% of the income distribution are found to be very sensitive to stock market fluctuations. Most of our evidence points towards a particularly important role for financial market asset prices, shifting of income between the corporate and personal tax bases, and possibly corporate governance and entrepreneurship, in explaining the dramatic rise in top income shares.”  So their labour income depends on capitalist stock markets and financial assets.

As for managers in general, by most definitions, they constitute about 17-20% of the workforce, but it seems a jump to suggest that these constitute a new managerial class, when they can vary from Jeff Bezos at Amazon to a supervisor in Walmarts. “While managers supervise, most of them are also supervised, and splitting the distribution into working class and non-working class does not address the question of who has to sell their labour-power and who does not. That is, in no way can managers be considered a homogeneous group, because they are fundamentally divided into those who might sell their labour-power but do not have to do so, and those who do sell their labour-power because they have to do so.” Mohun.

Erik Olin Wright looked the class structure of six advanced capitalist economies and showed that ‘managers’ are a curate’s egg of a group in modern capitalism.  By breaking down the skill factors of managers, he reckoned that most managers are really workers with skills.  The working class proper was still over 70% of the labour force.  Mohun’s tax calculation method finds that the working class is more like 80-85%.

Surely, the real question is: in whose class interest do managers carry out their managerial labour? The very nature of the capitalist economy obliges the managers to manage in the interest of the 1%.  Their jobs depend on the decisions of the shareholders, the company share price and its earnings performance, however highly paid they are.

Moreover, as Marx predicted, the main feature of modern capitalism is a growing concentration and centralisation of wealth (not income).  And that means wealth held in the means of production and not just household wealth.  In 2016, the top 1% of the US population held 40% of total net wealth, while the bottom 80% held just 10%. On the basis of Wright’s class structure analysis, this suggests that the top 1% is a combination of capitalists and expert managers. The next 20% by wealth consists of the remaining capitalists and the top two thirds of the managers. The bottom 80% by wealth consists of the bottom third of the managers and the entire working class (wage workers and supervisors).

Modern capitalism has developed into a huge network of interlocking companies with cross-shareholdings.  Three systems theorists at the Swiss Federal Institute of Technology in Zurich developed a database listing 37 million companies and investors worldwide and analysed all 43,060 transnational corporations and share ownerships linking them.  They discovered that a dominant core of 147 firms through interlocking stakes in others together control 40% of the wealth in the network.  A total of 737 companies control 80% of it all.   This is the concentrated power of capital.  147 control)

At the launch, Gerard Dumenil argued that this concentration of ownership among a small number of global companies, particularly banks, actually proved D-L’s thesis.  It was managers and finance directors who ran these companies and made decisions on mergers etc while the shareholders followed like sheep.  This was proof of ‘managerial capitalism’.  Instead, I would argue that it was proof that, since Marx wrote about joint stock companies 150 years ago,the capitalist mode of production has dominated even more over investment, employment and production globally.

One of the inherent features of the capitalist mode of production is that it generates crises of production, investment and employment at regular and recurring intervals.  This is the consequence of production for profit by individual private owners on a market which runs in contradiction to the needs of society.  This is a unique feature of capitalism. Has this disappeared?  Was Marx not proved right in expecting crises to become more global and damaging?

Dumenil seemed to be suggesting that Marx was wrong about growing crises.  At the launch he claimed that the recent Great Recession had avoided a major depression because of ‘managerialism’.  The crisis had been managed.  Well, the evidence is surely to the contrary –as I have argued at length on this blog and in my book, The Long Depression.

Dumenil, however, was insistent that those of us who stick to Marx’s old analysis and predictions needed to break with dogma and recognise the new mode of production that was upon us.  The political strategy that flowed from this was for the ‘popular classes’ (working classes) to reinvigorate the class struggle – but not for the replacement of capitalism with socialism.  That was not going to happen.  But instead the aim must be to push the ruling (progressive?) managerial class to the left to introduce pro-labour reforms and isolate the small and fading capitalist class.  Well, if the working class is still 80% of the adult population in most advanced economies (let alone elsewhere) and capital is even more concentrated and centralised than ever before, why not overthrow ‘managerial capitalism’ too?

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The value (price and profit) of everything

April 25, 2018

Mariana Mazzucato’s new book, The value of everything, seems to have caught the imagination of the liberal wing of mainstream economics.  It has even won the accolade of a review in the UK’s Financial Times by top mainstream Keynesian economic journalist, Martin Wolf and was launched at an event at the London School of Economics.

Mazzucato previously wrote an important book, The Entrepreneurial State, that ‘debunked’ the myth that only the capitalist sector contributes to innovation while the state sector is a burden and cost to growth.  On the contrary, Mazzucato showed that “From the internet to nanotech, most of the fundamental advances – in both basic research but also downstream commercialisation – were funded by government, with businesses moving into the game only once the returns were in clear sight. All the radical technologies behind the iPhone were government-funded: the internet, GPS, touchscreen display, and even the voice-activated Siri personal assistant.”

In that book, she continued: “Apple initially received $500,000 from the Small Business Investment Corporation, a public financing arm of the government. Likewise, Compaq and Intel received early-stage grants, not from venture capital, but via public capital through the Small Business Innovation Research program (SBIR). As venture capital has become increasingly short-termist, SBIR loans and grants have had to increase their role in early-stage seed financing the US Department of Health and the Department of Energy. Indeed, it turns out that 75 per cent of the most innovative drugs owe their funding not to pharmaceutical giants or to venture capital but to that of the National Institutes of Health (NIH). The NIH has, over the past decade, invested $600 billion in the biotech-pharma knowledge base; $32 billion in 2012 alone.”  Mazzucato showed that taxpayer enabled these tech companies to become ‘uber’ rich.

Since then, Mazzucato’s powerful arguments in favour of government investment and the role of the state have led to her becoming an adviser to the UK’s Corbyn Labour leadership and also joint winner of the Leontief prize for advancing the frontiers of economic thought, with inequality expert Branco Milanovic, formerly chief economist at the World Bank.

Now in her new book, she takes on a bigger task: trying to define who (what) creates value in our economies, a subject that has been debated by the greatest economists of capitalism from Adam Smith onwards.  “Who really creates wealth in our world? And how do we decide the value of what they do?”

Her main line in this new book is that 1) government is not recognised in national accounts as adding to value through its contribution to investment and innovation; 2) finance has sneaked into accounts as productive and value-creating when in reality it ‘extracts’ value from productive sectors and breeds speculation and short-termism etc.; and 3) there has been the growth of a monopoly sector in modern capitalism that is ‘rent-seeking’ rather than ‘value-creating’.

Mazzucato argues that “until the 1960s, finance was not widely considered a ‘productive’ part of the economy. It was viewed as important for transferring existing wealth, not creating new wealth. Indeed, economists were so convinced about the purely facilitating role of finance that they did not even include most of the services that banks performed, such as taking in deposits and giving out loans, in their calculations of how many goods and services are produced by the economy. Finance sneaked into their measurements of Gross Domestic Product (GDP) only as an ‘intermediate input’ – a service contributing to the functioning of other industries that were the real value creators.  In around 1970, however, things started to change. The national accounts – which provide a statistical picture of the size, composition and direction of an economy – began to include the financial sector in their calculations of GDP, the total value of the goods and services produced by the economy in question.

So that today “the issue is not just the size of the financial sector, and how it has outpaced the growth of the non-financial economy (e.g. industry), but its effect on the behaviour of the rest of the economy, large parts of which have been ‘financialized’. Financial operations and the mentality they breed pervade industry, as can be seen when managers choose to spend a greater proportion of profits on share buy-backs – which in turn boost stock prices, stock options and the pay of top executives – than on investing in the long-term future of the business.”

Investment is now based on short-term returns which results in less reinvestment of profits and rising burdens of debt which, in a vicious cycle, makes industry even more driven by short-term considerations. “In modern capitalism, ‘value-extraction’ is rewarded more highly than value-creation: the productive process that drives a healthy economy and society. From companies driven solely to maximize shareholder value to astronomically high prices of medicines justified through big pharma’s ‘value pricing’, we misidentify taking with making, and have lost sight of what value really means”.

Now there are many powerful truths in Mazzucato’s theses, and they are very much the kernel of modern post-Keynesian and heterodox economics.  But as such, there are also serious weaknesses with her view of value.  To argue that government ‘creates’ value is to misunderstand the law of value under capitalism.  Under capitalism, production of commodities (things and services) are for sale to obtain profit.  Commodities must have use value (be useful to someone) but they must also have exchange value (make a sale for profit).  From that capitalist perspective, government does not create value – indeed, it can be seen as a (necessary) cost that reduces the profitability of capitalist production and accumulation.  GDP is biased as a measure of value created in an economy for that good reason. It measures much more closely exchange value not the production of all use values, which would include government investment and housework (perhaps even happiness, welfare and trust).

Sure, government creates use value (although it is often use values found in weaponry, nuclear arms, chemicals etc and security forces to protect the interests of capital). But it is not productive of value and surplus value for capital.  For capital, there is not ‘value in everything’.  For capital, it is (exchange) value, not use value that matters in the last analysis.

Mazzucato is right that the finance sector does not create value. Marxist economics says it only circulates value created by labour power in productive sectors (those sectors that increase the productivity of labour power and thus the accumulation of more capital).  Banks and the credit system contribute to reduce the costs of transferring money (taking deposits and making loans) so that businesses can borrow efficiently and keep capital circulating.

Finance and credit is necessary for capital to accumulate, but does not add value itself.  But even this contribution to the circulation of capital has increasingly taken a back seat to the risk-taking role of investing in ‘fictitious capital’ (bonds and stocks trading). In her book, Mazzucato quotes the work of Andy Haldane, now chief economist at the Bank of England.  He estimated what extra value in GDP terms the financial sector actually adds to the wider economy.

He found that in the US, the value-added of financial intermediaries was about $1.2 trillion in 2010 – equivalent to 8% of total GDP. In the UK, the value-added of finance was around 10% of GDP in 2009.  In the US, the share of finance in GDP has increased almost fourfold since the Second World War. But Haldane reckons these contributions really express high risk-taking in lending and investment by banks that eventually come a cropper when a financial or property bubble bursts, as they do periodically.  Echoing Marx’s value theory, Haldane concludes: “The act of investing capital in a risky asset is a fundamental feature of capital markets. For example, a retail investor that purchases bonds issued by a company is bearing risk, but not contributing so much as a cent to measured economic activity. Similarly, a household that decides to use all of its liquid deposits to purchase a house, instead of borrowing some money from the bank and keeping some of its deposits with the bank, is bearing liquidity risk. Neither of these acts could be said to boost overall economic activity or productivity in the economy. They re-allocate risk in the system but do not fundamentally change its size or shape.”  Indeed, an IMF paper has shown that it is not just that banks trigger regular financial collapses, the finance sector has a generally negative (parasitic?) effect on the productive sectors of the capitalist economy over time.

Finance is clearly unproductive.  But it is not just finance that is unproductive.  Real estate, commercial advertising and media and many other sectors are not ‘productive’ because the labour employed does not create new value but instead just circulates and redistributes value and surplus value created.  And it is the profitability of the productive sectors that is key to a capitalist economy, not the overall amount of use values produced.

Moreover, was there nothing wrong with capitalism before finance (and ‘financialisation’) emerged after the 1970s?  Were there no crises of overproduction and investment, no monopolies and rent-seeking before the 1970s?  Was there a wonderful productive, competitive, equal capitalist mode of production existing in the 1890s, 1930s or even in the 1960s? And why did finance suddenly emerge in the 1970s, leading to the GDP measure being altered to account for it?

Mazzucato offers no explanation of why capitalism became increasingly ‘unproductive’ and ‘rent-seeking’.  But Marx’s value theory does.  From the mid-1960s to the early 1980s, there was a sharp fall in the profitability of the productive sectors of all the major capitalist economies.  Capitalism entered the so-called neoliberal period of the destruction of the welfare state, restriction of trade unions, privatisation, globalisation – and financialisation.  Financialisation (looking to make profit from the purchase and sale of financial assets using new forms of financial derivatives) became a major counteracting factor to this fall in profitability.  For capital, it was not a matter of ‘choice’ but necessity to reduce the cost of government and raise profitability, partly through financial speculation and monopoly rent-seeking.

In a Bloomberg TV interview on her new book, Mazzucato was asked by the presenter how she could persuade chief executives of large multinationals to invest productively and innovate rather than buy back their shares to boost their share prices and pay higher dividends to shareholders (ie financial speculation).  Mazzucato replied that it was a matter of choice: some companies were investing more productively and others were not.  So apparently, we have to make these companies see the error of their ways.

Mazzucato argues that government should be “tilting the field in the favour of innovators and true value creators.”  But is that really possible where capital (and monopolies) dominate?  Mainstream economics remains highly unpersuaded that government can add value for capitalism.  In his review of the book, Martin Wolf in the FT commented that: “What I would have liked to see far more of, however, is a probing investigation of when and how governments add value. …How can one ensure that governments do add value rather than merely extract and waste it? In her enthusiasm for the potential role of the state, the author significantly underplays the significant dangers of governmental incompetence and corruption.”

In the launch of her book at the London School of Economics, Mazzucato presented the example of Brazil, where during the global financial crisis under the Lula government, the state banks were directed to invest in projects that would help boost employment and technology even if they were not profitable (at least not in the medium term).  But what happened?  Big business and finance (domestic and international) bitterly attacked this policy and its implementation through the Brazilian state development bank as reducing the profits of the finance sector.  When Lula was gone, the policy was reversed.

Mariana Mazzucato does not call for the replacement of capitalism or even the rent-seeking monopolies but “how we might reform it” in order to replace the current parasitic system with a type of capitalism that is more sustainable, more symbiotic – that works for us all.”  In her TV interview she talked of a “partnership between government, multi-nationals and a ‘third sector’ (presumably social non-profit coops etc).” She made no mention of bringing the ‘parasitic’ finance sector into public ownership, let alone the ‘short-termist’, ‘rent-seeking’ monopolies.  Instead, she seeks a ‘partnership’ of government, finance and monopolies.

It seems to me a utopian illusion to imagine that monopolies can be persuaded to stop being ‘short termist’ and invest for higher productivity and innovation for the long term, if profitability in such productive pursuits seems to them too low compared to finance or real estate (if profitability was higher in productive investment, they would do it anyway).  Surely, a left government must instead look to replace big capital with democratically-run state enterprises in the ‘commanding heights’ of an economy.  This would lay the proper foundation for innovation and enterprise and thus put use-value before value, price and profit.

Global economy peaked?

April 20, 2018

Optimism for global economic growth remains.  But the acceleration in 2017 from the low growth rates experienced in 2015-6 now seems to have paused in the first quarter of 2018. To greet the semi-annual meeting of the IMF and the World Bank in Washington to discuss latest economic developments, Maurice Obstfeld, the IMF’s chief economist, stated that “the world economy continues to show broad-based momentum.”   But “against that positive backdrop, the prospect of a similarly broad-based conflict over trade presents a jarring picture.”

The IMF hiked its forecast for global real GDP growth to 3.9% for this year and in 2019.  This improvement from the poor levels of 2015 and 2016 is based on rising investment and a recovery in world trade (which now seems to be threatened).  The major economies of world capitalism are doing better but the idiocies of protectionism in trade by the likes of Donald Trump are threatening that recovery.  That seems to be the main worry.

But Obstfeld is worried about the high levels of global debt, in households, corporations and governments.  With interest rates set to rise, as the US Fed and possibly other major central banks start to raise their policy rates, the cost of servicing record-high debt will rise.  That threatens further investment in productive (value-creating) assets and also instability in financial markets.

There has already been a ‘correction’ in world stock markets of about 13% since the beginning of the year as financial speculators begin to worry about an international trade war and rising costs of debt.  And that is despite the huge handouts in tax cuts for US corporations introduced by Trump. Those tax cuts have sharply increased (temporarily) the profits of the largest US corporations, especially the banks.  But that extra money (paid for by further cuts in US federal public services and a big increase in government borrowing) is not going mainly into extra productive investment.  It is being used to buy back corporate shares to boost the share price of companies and into extra dividend payments to shareholders.

S&P 500 companies have already announced about $167bn of new buyback authorisations this year, and analysts at JPMorgan predict that trend will accelerate this quarter as boardrooms digest the full scale of the tax cuts passed in December. Overall, US companies will buy back about $800bn of their stock this year, up from $525bn in 2017, and boost dividend payouts by about 10 per cent to a record $500bn.  While US companies will lift their spending on investments, research and development by 11 per cent to more than $1tn this year, shareholder returns in the form of buybacks and dividends will grow by 21.6 per cent to nearly $1.2tn. The buyback spree will also lift the amount of profit companies make per share. S&P 500 companies are expected to report earnings growth of 17.1 per cent in the first quarter, which would the highest growth since the start of 2011, according to FactSet. That is up sharply from the rate of 11.3 per cent that was projected at the start of the year.

In contrast, US business investment in new plant, machinery and technology, while rising in gross amounts, is barely keeping pace with depreciation (wearing out) of existing fixed assets. Despite the recent acceleration in investment, net business investment has not re-attained levels achieved in 2014Q3 (let alone on the eve of the last recession).

I have argued before that business investment, not just in the US, but in most major economies remains low relative to before the Great Recession, ten years ago, for two main reasons: relatively low profitability and record high levels of debt.  In a previous post, using data from the EU’s AMECO database, I showed that the rate of profit in most major economies remains below that of 2007 and even 1999, at least up to 2016.

There was a small recovery in profitability in Europe in 2017, but a further fall in the US, despite rising total profits.

In its latest reports, the IMF has pointed out that global debt has now reached record highs as central banks pumped credit into banks and financial institutions and households and corporations borrowed more at very low interest rates to either speculate in stock and bond markets or real estate.  Governments also continued to rack up higher levels of public debt to fund bailouts to the financial institutions and cover rising budget deficits created by tax cuts and extra defence spending.

According to the IMF, global debt hit a new record high of $164 trillion in 2016, the equivalent of 225% of global GDP. Both private and public debt surged over the past decade. Of the $164 trillion, 63% is non-financial private sector debt (owed by households in mortgages and companies in bonds and loans), and 37% is public sector debt. Advanced economies have the most global debt. But, in the last ten years, emerging market economies have been responsible for most of the increase.

Debt-to-GDP ratios in advanced economies are at levels not seen since World War II. Public debt ratios have been increasing persistently over the past 50 years. In emerging market economies, public debt is at levels seen only during the 1980s’ debt crisis.

The US is still the largest and most important capitalist economy in the world.  But it is steadily losing out relatively to the rising economic powers of Asia, particularly China.  That is the driving force behind Trump’s protectionist crusade on trade and his huge cuts in corporate tax for American business.  The tax cuts will lead to a significant rise in US federal debt over the coming years and that means higher interest costs that will suck up funding that could have been used to maintain public services and expand badly needed infrastructure.  The IMF reckons that the annual US government deficit will go above $1trn in the next three years to reach 5% of GDP, taking the government debt level to 117% of US GDP then.  According to the IMF, the US will be the only economy with a rising government debt ratio to GDP in that period.

Indeed, US imperialism continues to reveal its long-term vulnerability.  The US now has a net investment liability with other economies in the world to the tune of 9.8% of world GDP.  This compares with countries which are net creditors: Japan (3.9%), Northern Europe (6.4%) and China (2.3%).  This US net liability measures the stock of investment and the amount of credit made by other countries into the US after deducting US investment and loans abroad.  US imperialism is extracting more net value from other economies to fund its growth, but at the expense of becoming more dependent on ‘tribute’ rather than trade.  The IMF forecasts that the US net liability to foreigners will reach 50% of its GDP by 2023, or 10.7% of world GDP.  That compares with the combined liability of the exploited peripheral economies of the world of 7.8%.  US imperialism gets away this because it is still the world’s largest economy, with the biggest financial sector, with the dollar as the world reserve currency and is the policeman of the world for imperialism.

As for the so-called emerging capitalist economies, the IMF points out that while foreign capital flows have remained robust in recent years, as the ‘global liquidity tide’ recedes with central banks raising interest rates, flows to emerging markets could decline by as much as $60 billion a year, equal to about a quarter of annual totals in 2010-17. “In such a scenario, less creditworthy borrowers may experience relatively larger outflows. Low-income countries may be affected, because more than 40 percent of them are at a high risk of debt distress.”

Falling profitability and rising debt (fictitious capital, to use Marx’s term) is a recipe for a nasty fall in global capitalism.  As the IMF admitted “Looking ahead, the odds of a downturn remain elevated, and there’s even a small chance of a global economic contraction over the medium-term.”

At the end of last year, I made my annual forecast for the world economy in 2018.  In that post, I recognised that I had not expected the relative pick-up in global growth in 2017 after the ‘bad years’ of 2015 and 2016.  But I was not convinced that this ‘recovery’ meant that the Long Depression of low growth, investment and profitability (along with stagnant average household incomes) was over.  I pointed out that IMF’s then projection global GDP growth was still less than the post-1965 trend of 3.8% growth and the expected gains over 2017-2018 followed an exceptionally weak recovery in the aftermath of the Great Recession.  The IMF has raised its forecast to 3.9% for this year and next but it does not seem too confident that it will be achieved and after 2019, it expects a significant slowdown again.

Nevertheless, I had been forecasting a new global recession in 2018.  I said then that “What seems to have happened is that there has been a short-term cyclical recovery from mid-2016, after a near global recession from the end of 2014-mid 2016.  If the trough of this Kitchin (short-term) cycle was in mid-2016, the peak should be in 2018, with a swing down again after that.”  The latest economic data in Q1 2018 suggest that growth has peaked globally.  High debt and low profitability remain.  Those fundamentals do not suggest any further upside – on the contrary.

Inequality and exploitation

April 11, 2018

I recently came across an interesting piece by Ian Wright of the Open University, UK.  Written in November 2016, Wright considers the cause of rising economic inequality, so evident over the last 30 years or more in most major and smaller economies.  Wright dismisses the mainstream causes of rising inequality: namely, unequal distribution of profits and wages or lower taxes on the rich; or automation driving down wages relatively for those not working in ‘knowledge-based’ industries.  Instead, the causes of rising inequality must be found in the very nature of the capitalist mode of production.  As Wright puts it, “capitalism is a system in which one economic class systematically exploits another. And its economic exploitation — not housing, tax policies or low wages — that is the root cause of the economic inequality we see all around us.”

The original mathematical analysis developed by Wright describes capitalism as an anarchic system that generates what physics calls entropy: “the activity of market exchange is acting just like the cocktail shaker: its mixing everything up, randomising things, and maximising the entropy of the system.”  As a result, “we might think that differences in wealth must arise from accidents of birth or personal virtue. But the principle of entropy maximisation tells us there’s a much more important causal factor at work. We quickly get extreme income inequality even in an economy with identical individuals with identical initial endowments of money.”

Wright develops a model of capitalism that is based on this principle of entropy in a market economy, but more than that.  “Maximising entropy under the single constraint of conservation of money yields an exponential distribution of wealth. That’s quite unequal. So the first cause of inequality is what Adam Smith called the higgling and haggling of the market. Since people are free to trade then entropy increases and the distribution of money becomes unequal.” But Wright argues that “we don’t find an exponential distribution in actual capitalist economies. We find something more complex. That’s because capitalist economies obey additional constraints on how money moves between individuals. Markets are not the only cause of the inequality we see in capitalism.”

The other aspect is exploitation of labour for a profit. Capitalists accumulate profits as capital. “Firms follow a power­ law distribution in size. And capital concentrates in the same way. A large number of small capitals exploit a small group of workers, and a small number of big capitals exploit a large group of workers. Profits are roughly proportional to the number of workers employed. So, capitalist income also follows a power­ law.  The more workers you exploit the more profit you make. The more profit you make the more workers you can exploit.”  This is the reason for rising inequality when there are no checks on capital accumulation.  As Wright sums it: “the fundamental social architecture of capitalism is the main cause of economic inequality. We can’t have capitalism without inequality: it’s an inescapable and necessary consequence of the economic rules of the game.”

This mathematical analysis accords nicely with the empirical evidence.  For example, Simon Mohun, Emeritus Professor of Economics, ClassStructure1918to2011wmf has published a paper that showed that Marx’s class analysis, which rests on the ownership of the means of production (between the owner of the means of production and who exploits those who own nothing but their labour power), remains broadly correct, even in modern capitalist economies like the US.  He found that the working class – those who depend on wages alone for their living – still constitute 84% of the working population.  Managers constitute the rest, but only 2% (Qc in graph) can actually live off rent, interest, capital gains and dividends alone.  They are the real capitalist class.  And that ratio has little changed in 100 years.

Moreover, this is the group that has gained most during the last 30 years of rising inequality.  The income of this capitalist class (Qc) has risen from about 9 times the average income of the working class to 22 times while managers incomes (Lpd) have risen from 2.5 times to 3.5 times workers income.  So rising inequality is primarily the result of increased exploitation, a rising rate of surplus value, in Marxist terms.

I commented back in 2013 on the work by the father of inequality research, Sir Anthony Atkinson, now sadly deceased, who showed that it was not new technology and globalisation led to a rise in the demand for skilled workers over unskilled and so drove up their earnings relatively as mainstream economics likes to argue.  Atkinson dismissed this neoclassical apologia.  The biggest rises in inequality took place before globalisation and the dot.com revolution got underway in the 1990s.

What is decisive for capitalism is surplus value (profit, interest and rent), not differences in wage income or spending.  The main feature of the last 100 years of capitalism has not been growing inequality of income – indeed, as Atkinson shows, inequality has not always risen.  The main feature has been a growing concentration and centralisation of wealth, not income.  And it has been in the wealth held in means of production and not just household wealth.  That has generated a power law in inequality at the top.

One study shows how far that has gone in the recent period.  Three systems theorists at the Swiss Federal Institute of Technology in Zurich developed a database listing 37 million companies and investors worldwide and analysed all 43,060 transnational corporations and share ownerships linking them (147 control). They built a model of who owns what and what their revenues are, mapping out the whole edifice of economic power.  They discovered that a dominant core of 147 firms through interlocking stakes in others together control 40% of the wealth in the network.  A total of 737 companies control 80% of it all.   This is the inequality that matters for the functioning of capitalism – the concentrated power of capital.

The policy implication of this analysis follows.  Yes, increasing taxes on the richest 2%, particularly on capital gains and ‘earnings’ from capital, would make some difference.  Atkinson showed this in a study.  But the extreme levels of inequality that most capitalist economies have now reached would only be dented a little.  What is required is to end exploitation (of labour) for surplus value.  That’s where the power law operates.  And that means ending the capitalist mode of production.

Trump, trade and the tech war

April 4, 2018

President Trump has now moved on from steel tariffs (with exemptions for some allies) to the real battle: stopping China from gaining market share in America’s key industries: technology, pharma and other knowledge-based sectors. Can China make further inroads globally or will Trump’s policies stop them?

The first thing to note is where things are right now.  Economists at Goldman Sachs, the US investment bank, have looked at the data.  They find that the US position as a global technological leader remains strong. The US’s economy-wide productivity remains high compared to other advanced economies, and its shares of global R&D, patents and IP royalties remain impressive.”  China has been catching up though, but in medium value-added goods sectors and hardly at all in knowledge-based tech.  So, while overall, the US share of global high-tech goods exports has declined as China’s share has grown, the US trade sector deficits have been concentrated in medium-high-tech goods rather than in the most advanced categories. Indeed, the US share of global knowledge-intensive service exports has held up, contributing to a rising trade surplus and higher employment in those sectors.

Take overall productivity, as measured by output per hour worked.  On this broad measure of the productivity of labour, the US remains ahead, even compared to other advanced economies in Europe and Japan.  China’s labour productivity level is just 20% of the US, although that is a quadrupling since 2000.

The US continues to invest a relatively large share of its GDP in research and development. While the US share of global R&D has declined, in part due to a rapid increase in China’s share, the US remains the global R&D leader, accounting for nearly 30% of the world total, about 1.5-2 times the US share of world GDP.

Total patents granted for new inventions show that the US share has held roughly steady at around 20%. China’s share of total patents granted has risen very rapidly over the last decade to over 20%, but most patents granted to Chinese innovators have come from its own domestic patent office, with far fewer granted abroad. The US share of the world total of royalties on intellectual property has declined somewhat as the EU’s has grown, but it remains very large. China’s share remains negligible.  That means US capital is still taking the lion’s share of global profits in technology.

The modern 21st century US economy relies increasingly on advanced knowledge and technology sectors for its growth.  The share of US GDP for these sectors is now 38%, the highest of any major economy. But China is not far behind with 35% of its GDP in these sectors, amazingly high for a ‘developing’ economy.

Where Trump is now concentrating his ire on China is on the share of hi-tech goods sales in world markets.  While the US is the largest producer of high-tech goods, its share of world exports has shrunk considerably while China’s share has grown.  This rising Chinese competition has caused US manufacturing firms to reduce their patent production, which has been accompanied by reduced global sales, profits, and employment.

But on the services side, the US is the largest global producer of commercial knowledge-intensive services and second only to the EU in exports. China’s share remains quite small.  If China gains market share in this area, it will really hurt US capital.

That’s because, although the US runs a deficit on trade in tech and knowledge industries, that deficit has shrunk from the early 2000s.  The US is more than holding its own in this area even since China joined the World Trade Organisation. Indeed, it runs a surplus in knowledge-intensive services, which has grown over the last decade.  It is this that Trump seeks to protect.

While jobs have been lost to technology replacing labour (capital-bias) and the shift of US industry to China in manufacturing, the employment share of hi-tech and knowledge sectors has risen to about one-third of all US jobs.  Trump claims to be restoring the ‘smoke-stack’ sectors where he won some votes, but in reality that battle for jobs is already lost, thanks to US industry shifting out.  The real battle is now over profits and jobs in the knowledge-based sectors where the US still rules.

But these sectors are highly concentrated in just a few firms, the technology leaders.  There are wide swathes of American industry, including tech, which benefits little from this US superiority.  Just five firms have over 60% of sales in biotechnology, pharma, software, internet and comms equipment.  The top five in each sector are taking the lion’s share of profits too.

What this shows is that, contrary to the mainstream economic idea that international ‘free trade’ will benefit all, the gains from trade are concentrated in just the leading firms which take advantage of network, scale, and experience and gain larger market share.  The rising industry concentration has in turn boosted their corporate profit margins.  As Goldman Sachs puts it: “global trade is particularly concentrated, with “export superstars” accounting for a very large share of exports in many industries and countries.”

Contrary to the Ricardian theory of comparative advantage, international trade is transacted by companies not countries and, as such, value (profit) gets transferred to those with technological advantage and they gain at the expense of others.  Trade represents a form of combined development, but capitalism delivers this unevenly.

As I argued in a previous post, over the last 30 years or so, the world capitalist economies had moved closer to ‘free trade’ with sharp reductions in tariffs, quotas and other restrictions – and many international trade deals.  But since the Great Recession and in the current Long Depression, globalisation has paused or even stopped.  World trade ‘openness’ (the share of world trade in global GDP) has been declining since the end of the Great Recession.

It is this decline in globalisation as world economic growth stays low and the profitability of capital remains squeezed that lies behind this new trade war.  Trump’s blundering blows on trade have an objective reason: to preserve US profits and capital in the key growing tech sectors of the world economy from the rising force of Chinese industry.  So far, the US is still holding a strong lead in hi-tech and intellectual property sectors, while China’s growth has been mainly in taking market share at home from American companies, not yet globally. But China is gaining.

The Fed, trade wars and recession

March 23, 2018

World stock markets took another tumble on the news that the US Federal Reserve under its new chair, Jerome Powell, had raised its policy interest rate and that President Trump had upped the stakes on an international trade war by adding to the already announced tariffs on imported steel and aluminium, a new range of tariffs on imported Chinese goods.  With China likely to retaliate, the risks are rising of a new recession triggered by rising borrowing costs on debt and falling exports globally.

The Trump administration announced plans on Thursday to impose tariffs on up to $60bn in annual imports from China, raising fears of a trade war between the world’s two largest economies and sending US stocks sharply lower.

The Fed’s ‘policy’ interest rate sets the floor for all borrowing costs in the US and even internationally in many countries.  It is now at 1.75%, a level not seen since 2005.  And the Fed’s policy committee (FOMC) signalled that it intended to raise its rate at least twice more this year and even more in 2019 and 2020, to double the rate to 3.5%.  Powell commented that “the economy was healthier than it had been in ten years” (i.e. at the beginning of the Great Recession in 2008).

The long depression, characterised by weak economic growth (the slowest recovery from a slump in the post-war period), low investment rates and profitability in the capitalist sector, appeared to be over.  And this justified further interest rate hikes to “normalise” the economy.  In addition, the recent corporate tax cuts and other measures by President Trump would lead to a sharp boost to consumer and investment demand “for at least, say, the next three years”.  The US economy was now primed to grow at 3% a year at minimum, suggested Powell.

In previous posts, I have argued that if the cost of borrowing rose while profits and profitability in the corporate sector turned down, then the Fed could provoke a new recession, as happened in 1937 during the Great Depression of the 1930s, when the US monetary authority thought the depression was over.  But profitability then had not made a recovery and increased borrowing costs only squeezed earnings for investment and so pushed the economy back again.  The risk is that this could happen again now.

The Fed does not look at profitability as an indicator of the health of the US capital; instead its mandate is employment and inflation.  On these indicators, employment continues to rise, with the official unemployment rate right down to pre-crisis levels; and inflation remains relatively subdued.  So all appears well.  And if the Fed did look at profitability, it might still argue that things are ok there too.  But that is not entirely correct.  As I argued in previous posts, the overall trend in US corporate profits has been down for over two years. And this is particularly the case for non-financial profits, the key sector for driving productive investment.

Indeed, although the first three months of 2018 are not yet over, various economic indicators forecast that US economic growth, far from accelerating towards 3% a year, has slowed to under 2% from 2.5% at the end of 2017.

Sure, that could just be a first quarter downward slip, as has happened in previous years.  After all, the Fed has raised its forecast for the whole of 2018 to 2.7% and 2.4% for 2019 – not 3%, but a bit better than previous years since 2008.

Actually, despite Trump’s boasts and Powell’s expectations, the US economy is stubbornly stuck in the 2% range of economic expansion.  And the Fed economists have been notoriously wrong in their forecasts of economic growth, inflation and employment.  The real pick-up since trough in the Kitchin short-term growth cycle of 2015-6 has been outside the US; in Europe and to some extent Japan and Asia.  Real GDP growth in Europe is currently higher than in the US.

Most significant has been a profit recovery. JP Morgan economists recently looked at global corporate profits, which in past posts I have measured as making a mild recovery.  Measuring profits as earnings from the top quoted companies in various stock exchanges (by no means a perfect measure as JPM admits), the JPM economists recorded a significant jump in profits across most areas of the capitalist world after a recession-like contraction through mid-2016”.

And where does this jump in profits come from? Mainly the energy sector, as oil prices recovered from the deep lows of the 2015-6; and from the financial sector, as stock and bond markets boomed.  In contrast, healthcare, IT and telecoms profits slowed.  And it came regionally in the advanced economies, while the emerging economies made only modest moves up. Within the advanced capitalist economies, it was profits in Europe and Japan that shot up – areas where the corporate sector had been in the doldrums or worse until recently.

None of this may last.  ‘High frequency’ indicators of economic activity, called the purchasing managers indexes (PMIs), have been at very high levels.  Anything over 50 implies that an economy is expanding and anything over 60 means very strong growth of up to 4% a year rate.  The US ‘composite’ PMI stands at 54 – not bad, but hardly exciting.  The Eurozone’s is higher at 55 but coming down.  Japan is around 52 and China is 53.

Indeed, figures for retail sales (consumer spending), employment and GDP growth suggest a ‘topping out’ of the recent acceleration since 2016.  And now the major capitalist economies face a double whammy of rising borrowing costs and the prospect of an international trade war – just as trade was picking up from the doldrums of the long depression.

A key measure of US borrowing costs, the spread between the US three-month Libor rate and the Overnight Index Swap rate, has reached its highest level since 2009.  And we already know that corporate debt in the US, Japan and Europe, is at record highs relative to GDP.

The hoped-for end to the long depression may be wishful thinking.

 

Trump’s trade tantrums – free trade or protectionism?

March 19, 2018

Today, the finance ministers of the top 20 economies (G20) meet in Buenos Aires, Argentina, and the big topic for discussion is trade protectionism and the possibility of an outright trade war between the US and other major economics areas, particularly China.

There is a real concern that all the blustering by President Trump is finally turning into reality and ‘The Donald’ is now going to honour his promise to ‘make America great again’ by introducing a range of tariffs, quotas and bans on various imports from Europe and Asia into the US.  Trade protectionism is coming back after decades of ‘free trade’ and globalisation.

Up to now, Trump has only imposed tariffs (taxes or enforced price rises) on steel and aluminium imports.  But he has also pulled the US out of the Trans-Pacific Partnership (TPP) and demanded a re-negotiation of the terms of North Atlantic Free Trade Area (NAFTA). But there is talk of more measures, including action to stop the free exchange of intellectual property rights by US companies and other countries.

The steel and aluminium tariffs (facilitated by an old GATT loophole, allowing countries to enact barriers for reasons of ‘national security’ (US defence spending consumes 3% of US steel output) are really small beer on their own.  In 2002 when the US last imposed steel tariffs, the US produced almost as much steel as today. But now it produces it with a small fraction of the 2002 workforce. Technology has boosted productivity and created products that use less steel.  So direct job gains for US workers are likely to be small, if any.

Back in 2002, President Bush signed into law tariffs for certain steel products following a spate of mill closures and surging imports. The net effect on employment in the steel production industry was minimal. But, according to a Trade Partnership Worldwide study, businesses that consumed steel products shed approximately 200,000 jobs, compared to the 180,000 employed in steel production.  The pain was born principally by smaller manufacturing firms (smaller than 500 employees), which had limited room to negotiate on prices and similarly restricted space to pass costs on due to price competition. The Bush barriers were only in place for a little over a year, but the impact was immediate as price distortions squeezed end users.

If the impact on the employment figures of effectively raising the cost of steel was uppermost in Trump’s mind, he should have considered the potential net loss of jobs in the car industry, the aviation industry and the countless other manufacturers that depend on cheap steel as a raw material. These companies are expected to pass on the extra cost to their customers and suffer the usual consequences – lower demand and a profit squeeze.

Moreover, since 2002, US steel mills have moved south and west, where unions are weak and labour is cheaper.  But now the industry has fewer workers because it is increasingly automated. The Trump tariffs will not bring any new jobs and certainly not in the old steel ‘smokestack’ regions that looked to him for help. The real hit will be on many emerging economies.  Canada and Mexico are exempt from the tariffs because they are part of NAFTA.  But Brazil is a big exporter to the US.  Canada and Brazil account for around one-third of US steel imports, while China accounts for no more than 3%.  With Canada exempt and China unimportant, Trump’s ‘steel’ protectionist move is both weak and misdirected.

Anyway, Trump’s claimed objective to ‘make America great again’ by boosting steel production and other traditional industries means rolling back the advance of technology to recreate smokestack industries.  It can’t and won’t happen.  Trump’s claim that American workers have been losing jobs in traditional ‘smokestack’ industries because of unfair trade by other countries is bogus.  The loss of US manufacturing jobs has been replicated in other advanced capitalist economies over the last 30 years.  This decline is not due to nasty foreigners fixing trade deals.  It is due to the inexorable attempt of American capital to reduce its labour costs through mechanisation or through finding new cheap labour areas overseas to produce.

The rising inequality in incomes is a product of ‘capital-bias’ in capitalist accumulation and ‘globalisation’ aimed at counteracting falling profitability in the advanced capitalist economies. But it is also the result of “neo-liberal’ policies designed to hold down wages and boost profit share.  Trump cannot and won’t reverse that – on the contrary – with all his bluster because to do so would threaten the profitability of America capital.

Nevertheless, it seems that Trump and his new ‘protectionist’ advisers are going to launch a series of measures against the imports of other countries – particularly against China.  But in the last 20 years, China has moved up the value-added ladder from basic industries into higher and higher tech products.  Indeed, much of the global flow of technological innovation is now coming from China, not the US.

Efforts to punish China with tariffs could quicken this trend. Typically, such businesses are highly adaptable in the face of restrictions, shifting investment and capacity overseas. And China is already moving in this direction with a huge rise in outward FDI. China now ranks second only below the US in terms of outward investment. Its stock of direct investment assets has been growing 25% annually hitting a value of $1.3trn (see graph below). Two thirds of this outflow is directed towards Asia (blue line). China is also pushing aggressively into ‘the belt’ countries of its ‘one road’ project. That’s reflected in its exports, with sales to these states double those to the US. So any restrictive measures taken by the Trump administration against China can only accelerate this reallocation process.

Also, while Trump and his new ‘protectionist’ advisers want to take action against China and other ‘unfair’ trading nations, European and Asian economies, along with the international agencies, want to hold the line for ‘globalisation’ and ‘free trade’.  The rest of the world is still trying to lower barriers. The EU completed free trade agreements with both Canada and Japan at the end of last year. Meanwhile Japan, Canada, Australia, New Zealand, Mexico, Malaysia, Vietnam, Peru, Chile, Brunei and Singapore ratified a revised TPP without the US.

And what Trump forgets is that now in world capitalism, it is not so much trade, or even services trade rather than goods trade, that matters; it is capital flows.  And any full trade war would seriously threaten US foreign investment just at a time when China is expanding its overseas flows.

Foreign trade now contributes relatively little to US corporate profits. Back in the 1940s, foreign subsidiaries of US-based corporations accounted for only 7% of all US profits – the same proportion as exports. Globalisation of US corporate operations and capital investment has changed that in the last 35 years. In 2016, the share of domestic profits has shrunk to 48% of total profits, while the shares of foreign operations and exports have grown to 40% and 12%, respectively.

Stimulated by Trump’s protectionist talk, the debate in mainstream economics over whether free trade is better for every country and the people living in them has also revived.  The longstanding neoclassical view is based on David Ricardo’s law of comparative advantage.  In his book On the Principles of Political Economy and Taxation (1817), now over 200 years old, Ricardo argued that, although Portugal could produce both cloth and wine with less amount of labour than England, both countries would benefit from trade with each other. Because the comparative advantage for Portugal with England is greater in the production of wine than in cloth, it would still make sense for Portugal to produce excess wine and trade that for English cloth. England in turn would benefit from this trade, because while it still costs the same to produce cloth, the price for wine would fall considerably.  So free trade is a win-win situation.

And yet the historical evidence for this ‘law’ is the opposite.  Over the last 30 years or so, the world capitalist economies have move closer to ‘free trade’ with sharp reductions in tariffs, quotas and other restrictions – and many international trade deals.  But economic growth since the 1980s has been slower than in the 1960s.

Another conclusion of the mainstream theory is that free trade will eventually lead to harmonisation and equilibrium in trade balances through the adjustments in international exchange rates and production costs.  And yet there has been little such harmonisation.  The US has continually run a goods and services trade deficit over the last 30 years; and so have many supposedly ‘comparatively advantaged’ emerging economies.

And as for harmonisation of incomes and employment, inequality of incomes and wealth between countries and within them has worsened in the last three decades, while 1.5bn workers globally are still without a regular job or income.

Free trade has been no great capitalist success.  And now globalisation seems to have paused or even stopped. World trade ‘openness’ (the share of world trade in global GDP) has been declining since the end of the Great Recession.

This has led to various mainstream voices suggesting that maybe protectionist policies by individual countries might better for them.  Dani Rodrik has been pushing this line; reminding us that the US itself protected its domestic industry in the 1870s onwards to get it going; and Germany did similarly in the 1890s, while Japan and other Asians followed suit in the post-war period.

Rodrik, Stiglitz and other ‘leftist’ mainstream economists who now denounce the failure of globalisation really do so from the point of view that free markets are fine as long as they are really free.  But they are not and so governments must intervene to reduce monopoly and other distortions and to control and regulate financial speculation.  And internationally, you need proper and ‘fair’ agreements on trade to protect the weaker national economies.  Apart from this being a utopian aim, this ‘alternative’ to unbridled ‘free trade’ is really an admission that Ricardo’s win-win theory is faulty and disproved, even if there were fully ‘free trade’.

Capitalism does not tend to equilibrium in the process of accumulation.  As Adam Smith put it, in contrast to Ricardo, “When a rich man and a poor man deal with one another, both of them will increase their riches, if they deal prudently, but the rich man’s stock will increase in a greater proportion than the poor man’s. In like manner, when a rich and a poor nation engage in trade the rich nation will have the greatest advantage, and therefore the prohibition of this commerce is most hurtful to it of the two”. Capitalism does not grow globally in a smooth and balanced way, but in what Marxists have called ‘uneven and combined development’.  Those firms and countries with better technological advances will gain at the expense of those who are behind the curve and there will be no equalisation.

Free trade works for national capitalist states when the profitability of capital is rising (as it was from the 1980s to 2000) and everybody can gain from a larger cake (if in differing proportions).  Then globalisation appears very attractive.  The strongest capitalist economy (technologically and thus competitively in price per unit terms) will be the strongest advocate of ‘free trade’, as Britain was from 1850-1870; and the US was from 1945-2000.  Then globalisation was the mantra of the US and its international agencies, the World Bank, the OECD and the IMF.

But if profitability starts to fall consistently, then ‘free trade’ loses its glamour, especially for the weaker capitalist economies as the profit cake stops getting larger.  ‘Populism’ and nationalism rears its head and mainstream economists opposed to ‘free trade’ become more prominent.  That was the situation in the 1870s and 1880s.  That was the situation in the 1930s Great Depression.  That is the situation since the early 2000s and especially since the end of the Great Recession.

US capitalism has lost ground relatively, not only to Europe and Japan, but even more worryingly to the rising economic juggernaut that is China, where foreign investment is strictly controlled and subservient to the state sector and to an autocratic Communist elite.  The US is now in the same position as the UK was in the 1880s, only worse.  Trump is the consequence of that.

Marx and Engels recognised that ‘free trade’ could drive capital accumulation globally and so expand economies, as has happened in the last 170 years.  But they also saw (as is the dual nature of capitalist accumulation) the other side: rising inequality, a permanently floating ‘reserve army’ of unemployed and increased exploitation of labour in the weaker economies.  And so they recognised that rising industrial capitalist nations could probably only succeed through protecting their industries with tariffs and controls and even state support (China is an extreme example of that).

But is free trade or protectionism better for labour and the working class?  It depends.  Perhaps the answer is best summed up by Robert Tressell in famous book, The Ragged Trousered Philanthropist, written in 1910 in the UK: “We’ve had Free Trade for the last fifty years and today most people are living in a condition of more or less abject poverty, and thousands are literally starving. When we had Protection things were worse still. Other countries have Protection and yet many of their people are glad to come here and work for starvation wages. The only difference between Free Trade and Protection is that under certain circumstances one might be a little worse that the other, but as remedies for poverty, neither of them are of  any real use whatever, for the simple reason that they do not deal with the real causes of poverty”.

American workers can expect nothing from Trump’s trade tantrums – indeed it can make things worse.

From Communism to Activism?

March 14, 2018

Last week, to commemorate 170 years since Marx and Engels wrote The Communist Manifesto, the editors of the UK’s Financial Times commissioned two executives of a ‘corporate advisory’ firm to consider what was right and wrong in that seminal work about capitalism and communism.  The two FT writers started by declaring that “as a partner in a corporate advisory firm and a professor of law and finance, we are true believers in free-market capitalism”, but nevertheless, the 1848 manifesto still had some value, especially “in the wake of a calamitous financial crisis and in the midst of whirlwind social change, a popular distaste of financial capitalists, and widespread revolutionary activity”.

But the FT authors wanted to convert the Communist Manifesto into what they call a “Activist Manifesto”.  They threw out the outdated concepts of two classes: capitalists and workers; and replaced them with the ‘haves’ and the ‘have nots’.  You see, classes and crises are out of date as the main critique of capitalism now is rising inequality, which the FT authors claim the Communist Manifesto was really about.  “As in Marx’s and Engels’ time, economic inequality is rising, wages are stagnating, and the owners of productive capital are reaping the benefits of technological advances”.

But the solution to this, the FT authors are at pains to say, is not the confiscation of private property or communism – this only breeds “murderous tyrannies”.  And “we also think Marx and Engels would update their views about private property. While the abolition of private property was their first and most prominent demand, we think they would recognise that Have-Nots have benefited from property rights. Moreover, we argue that state-held property is problematic, leading to waste, inefficiency and the likelihood of being co-opted by the Haves in our societies today. As the role of the state has grown, inequality has also grown. And the Have-Nots have been the ones who have paid for it.”

Instead what we need is ‘shareholder activism’ in companies “shaking up complacent boards and advocating for changes in corporate strategy and capital structure.” This is the way forward, according to our FT authors 170 years after Marx and Engels’ manifesto.  And even the global elite recognise it: “many Haves too are activists already today… Think of the billionaires such as Bill Gates, Warren Buffett and Mark Zuckerberg, who already support philanthropic efforts to alleviate inequality”.  So that’s all right then.

Should the Communist Manifesto be rewritten as a plea for ‘activism’ led by billionaires to reduce inequalities, rather than the abolition of private property in the means of production and the replacement of capitalism with communism?  While the FT was publishing its view on the Communist Manifesto today, I was delivering a talk on social classes today at the Metropolitan University of Mexico in Mexico City (Universidad Autónoma Metropolitana – UAM) as part of my recent visit there.  I too started off with a reminder that it was 170 years since the Communist Manifesto was published.  But I emphasised that the basic division of capitalism between two classes: the owners of the means of production (corporations globally) and those who own nothing and only have their labour power to sell; remains pretty much unchanged from how it was in 1848.

Recent empirical work on the US class division of incomes has been done by Professor Simon Mohun.  Mohun analysed US income tax returns and divided taxpayers into those who could live totally off income from capital (rent, interest and dividends) – the true capitalists, and those who had to work to make a living (wages).  He compared the picture in 1918 with now and found that only 3.8% of taxpayers could be considered capitalists, while 88% were workers in the Marxist definition.  In 2011, only 2% were capitalists and near 84% were workers.  The ‘managerial’ class, ie workers who also had some income from capital (a middle class ?) had grown a little from 8% to 14%, but still not decisive.  Capitalist incomes were 11 times higher on average than workers in 1918, but now they were 22 times larger.  The old slogan of the 1% and the 99% is almost accurate.

The class divide described in the Communist Manifesto is that between those who own and those who do not and Mohun’s ‘class’ stats confirm that.  For Marx and Engels, all previous history has been one of class struggle over the surplus created by labour.  In slave economies, the owners of capital literally owned humans as source of their surplus; in feudal society, they controlled the days of work and obligations of the serfs.

Under capitalism, the surplus was usurped in a hidden ‘invisible’ way.  Workers were paid a wage – a fair wage – but they produced more value in the commodities they made for sale and it was this surplus value realised in the sale of commodities (goods and services) that capitalists accumulated.  The class struggle under capitalism thus took the form of a struggle between the share of value going to wages or profits.  As Marx put it in Capital: “In the class struggle as a finale in which is found the solution of the whole smear! From a struggle over wages, hours and working conditions or relief, it becomes, even as it fights for those things, a struggle for the overthrow of the capitalist system of production – a struggle for proletarian revolution.”

In my presentation to UAM in Mexico, I ambitiously argued that we can gauge the intensity of the class struggle from the balance of forces in the wage-profit battle.  I used statistics of strikes in the UK since 1890 against the profitability of UK capital (for more on this, see my paper, Mapping out the class struggle).  The first long depression of capitalism was at its deepest just as Marx died in 1883. It came to an end in the UK in the early 1890s: profitability recovered and the labour movement strengthened with the advent of new mass unions.  Labour disputes erupted for a while.  The fall back in profitability from 1907 then sparked a new battle over the surplus leading to intense levels of strikes just before the WWI broke out.

After the war, the class struggle resumed with some intensity, but in the UK that ended with the defeat of the general strike in 1926.  On the back of that defeat, UK capital recovered some profitability while the unions were weakened.  Strikes and class struggle were depressed by the Great Depression of the 1930s.

The second world war drove up profitability and the labour movement also made a recovery.  It was the golden age of growth, investment, employment and the ‘welfare state’.  So when the profitability crisis of the late 1960s and 1970s commenced, British workers fought hard to maintain their gains.  Strikes were at a high level and there was talk of revolution.  That struggle came to an end with the defeat of the miners in 1985.  What followed was rising profitability in the neo-liberal period, along with weakened trade unions.  This was a recipe for low levels of class struggle.  With the Great Recession and the subsequent Long Depression, that low intensity continued.

I concluded from this short analysis that the class struggle as described in the Communist Manifesto has not disappeared and neither have the two basic classes, contrary to the amendments advocated in the ‘Activist Manifesto’ of the FT authors.  But the intensity of that struggle depends on the objective conditions of the profitability of capital and the strength of labour.  Class struggle is not always at fever pitch, revolutionary moments are rare.

The most intense periods of struggle appear to be when the labour movement is reasonably strong in incomes and organisation but when the profitability of capital has started to fall, according to Marx’s law of profitability.  Then the battle over the share of the surplus and wages rises.  Historically, in the UK that was from 1910 just before and just after WW1; and in the 1970s.  Such objective conditions have so far not arisen again.  So the spectre of Communism haunting Europe – the phrase that Marx and Engels started with their manifesto in 1848 (in a similar intense period as those above) – is not yet with us again.

UNAM 3 – the robotic future

March 9, 2018

My third and final lecture at the Autonomous National University of Mexico (UNAM) was on the impact of robots and artificial intelligence (AI). Are robots set to take over the world of work and thus the economy in the next generation and what does this mean for jobs and living standards for people? Will it mean socialist utopia in our time (the end of human toil and a superabundant harmonious society) or capitalist dystopia (more intense crises and class conflict)? Robots and AI Mexico

As readers of my blog know (only too often), I consider the current period in the world capitalist economy as a long depression, with low productivity, investment and trade growth.

One question is whether robots and AI can turn things round for capitalism and perhaps for us all. Robots have arrived. The level of robotics use has almost always doubled in the top capitalist economies in the last decade. Japan and Korea have the most robots per manufacturing employee, over 300 per 10,000 employees, with Germany following at over 250 per 10,000 employees. The United States has less than half the robots per 10,000 employees compared to Japan and The Republic of Korea. The adoption rate of robots increased in this period by 40% in Brazil, by 210% in China, by 11% in Germany, by 57% in The Republic of Korea, and by 41% in the United States.

Now all the talk is that the age of robots will mean the end of jobs for human beings. Two Oxford economists, Carl Benedikt Frey and Michael Osborne, looked at the likely impact of technological change on a sweeping range of 702 occupations, from podiatrists to tour guides, animal trainers to personal finance advisers and floor sanders. Their conclusions were: “According to our estimates, about 47 percent of total US employment is at risk. We further provide evidence that wages and educational attainment exhibit a strong negative relationship with an occupation’s probability of computerisation….Rather than reducing the demand for middle-income occupations, which has been the pattern over the past decades, our model predicts that computerisation will mainly substitute for low-skill and low-wage jobs in the near future. By contrast, high-skill and high-wage occupations are the least susceptible to computer capital.”

On the other hand, a study by economists at the consultancy Deloitte on the relationship between jobs and the rise of technology by trawling through census data for England and Wales going back to 1871. Their conclusion is unremittingly cheerful. Rather than destroying jobs, technology historically has been a “great job-creating machine”. Findings by Deloitte such as a four-fold rise in bar staff since the 1950s or a surge in the number of hairdressers this century suggest to the authors that technology has increased spending power, therefore creating new demand and new jobs. “The dominant trend is of contracting employment in agriculture and manufacturing being more than offset by rapid growth in the caring, creative, technology and business services sectors,” they write. “Machines will take on more repetitive and laborious tasks, but seem no closer to eliminating the need for human labour than at any time in the last 150 years.”

The story of bank tellers vs the cash machine (ATM) is an example of a technological innovation entirely replacing human labour for a particular task. Did this led to a massive fall in the number of bank tellers? Between the 1970s (when American’s first ATM was installed) and 2010, the number of bank tellers doubled. Reducing the number of tellers per branch made it cheaper to run a branch, so banks expanded their branch networks. And the role gradually evolved away from cash handling and more towards relationship banking.

So even if many of today’s jobs can be entirely replaced by machines, technology can also create new roles. At the end of the 19th century, half the US workforce was employed in agriculture, and this employment was rendered obsolete by technical change. But in that time a whole raft of new occupations – electrical engineer, computer programmer, etc – have been created.

Will the information revolution reduce working time under capitalism and thus lead progressively to post-capitalism? Well, previous technological changes have not done so. The average working week in the US in 1930 – if you had a job – was about 50 hours. It is still above 40 hours (including overtime) now for full-time permanent employment. In 1980, the average hours worked in a year was about 1800 in the advanced economies. Currently, it is about 1800 hours. So, since the great information revolution began under the ‘neoliberal period’ of capitalism, the average working year for an American has not changed. Indeed, hours of work have been rising since the 1970s in the US.

Then there is the great contradiction that I raised at UNAM on the question of robots – indeed with any technological revolution under capitalism. The aim of capitalist accumulation is to increase profits and accumulate more capital. So capitalists want to introduce machines that can boost the productivity of each employee and reduce costs compared to competitors. This is the great revolutionary role of capitalism in developing the productive forces available to society.

But in trying to raise the productivity of labour with the introduction of technology, there is a process of labour shedding. Yes, increased productivity might lead to increased output and open up new sectors for employment to compensate. But over time, a ‘capital-bias’ or labour shedding means less new value is created (as labour is the only content of value) relative to the cost of invested capital. So there is a tendency for profitability to fall as productivity rises. In turn, that leads eventually to a crisis in production that halts or even reverses the gain in production from the new technology. This is solely because investment and production depend on the profitability of capital in our modern (capitalist) mode of production.

What does this mean if we enter the extreme (science fiction?) future where robotic technology and AI leads to robots making robots AND robots extracting raw materials and making everything AND carrying out all personal and public services so that human labour is no longer required for ANY task of production at all? Surely, value has still been added by the conversion of raw materials into many more goods (but now without humans)? Surely, that refutes Marx’s claim that only human labour can create value?

But this confuses the dual nature of value under capitalism: use value and exchange value. There is use value (things and services that people need); and exchange value (the value measured in labour time and appropriated from human labour by the owners of capital and realised by sale on the market). In every commodity under the capitalist mode of production, there is both use value and exchange value. You can’t have one without the other under capitalism. But the latter rules the capitalist investment and production process, not the former.

Value (as defined) is specific to capitalism. Sure, living labour (and machines) can create things and do services (use values). But value is the substance of the capitalist mode of producing things. Capital (the owners) controls the means of production and will only put them to use in order to appropriate value created by human labour. Capital does not create value itself. So in our hypothetical all-encompassing robot/AI world, productivity (of use values) would tend to infinity while profitability (surplus value to capital value) would tend to zero.

This is no longer capitalism. The analogy is more with a slave economy as in ancient Rome. In ancient Rome, over hundreds of years, the formerly predominantly small-holding peasant economy was replaced by slaves in mining, farming and all sorts of other tasks. This happened because the booty of the successful wars that the Roman republic and empire conducted included a mass supply of slave labour. The cost to the slave owners of these slaves was incredibly cheap (to begin with) compared with employing free labour.

A fully robot economy means that the owners of the means of production (robots) would have a super-abundant economy of things and services at zero cost (robots making robots making robots). The owners can then just consume. They don’t need to make ‘profit’, just as the aristocrat slave owners in Rome just consumed and did not run businesses to sell commodities to make a profit. So a robotic economy could mean a super-abundant world for all or it could mean a new form of slave-type society with extreme inequality of wealth and income. It’s a social ‘choice’ or more accurately, it depends of the outcome of the class struggle under capitalism.

But just how close are AI/robots to doing all human work? Not very. The Defense Advanced Research Projects Agency, a Pentagon research arm, held a Robotics Challenge competition in Pomona, Calif. There was $2 million in prize money for the robot that performs best in a series of rescue-oriented tasks in under an hour. Robots had an hour to complete a set of eight tasks that would probably take a human less than 10 minutes. And the robots failed at many. Most of their robots were two-legged, but many had four legs, or wheels, or both. But none were autonomous. Human operators guided the machines via wireless networks and were largely helpless without human supervisors. Little headway has been made in “cognition,” the higher-level humanlike processes required for robot planning and true autonomy. As a result, any researchers have begun to think instead of creating ensembles of humans and robots, an approach they describe as co-robots or “cloud robotics.”

So there’s still a long way to go. Indeed, as Professor Jose Sandoval, who commented on my paper at UNAM pointed out, American economist Robert J Gordon reckons that the great new innovatory productivity enhancing paradigm that is supposedly coming from the digital revolution could be over already and the future robot/AI explosion will not change that.

William Nordhaus from Yale University’s department of economics, has tried to estimate the future economic impact of AI and robots. Nordhaus says, projecting the trends of the last decade or more, it would be in the order of a century before growth in robot skills would reach the level associated with full automation.

Robots and AI will only really take off when the current depression enters a new phase. Marx noticed that “a crisis always forms the starting-point of large new investments. Therefore, from the point of view of society as a whole … a new material basis for the next turn-over cycle.” (Marx, Capital Vol. II, p.186). New and massive investments will take the form of new technologies, which will be not only labour-shedding and productivity-increasing, but also new forms of domination of labour by capital.

The key issue is Marx’s law of the tendency of the rate of profit to fall. A rising organic composition of capital will lead to a fall in the overall rate of profit engendering recurring crises. If robots and AI do replace human labour at an accelerating rate, that can only intensify that tendency. Well before we get to a robot-all world, capitalism will experience ever-increasing periods of crises and stagnation.

I’ll be posting all my papers and the accompanying powerpoint presentations on my Facebook site.

UNAM 2 – Europe’s single currency

March 8, 2018

My second lecture to the economics faculty of the Autonomous National University of Mexico (UNAM) was on Europe’s single currency zone. Has the euro worked in taking the economies in the Eurozone forward both in improved living standards for the people within the area and also in integrating and converging each national economy into one effective capitalist unit? The euro

It’s a subject that interests Mexicans, as Mexico is part of the only effective free trade area in the Americas, the North American Free Trade Area (Mexico, US, Canada) – NAFTA, which is now under threat from US President Trump’s protectionist program.

In my presentation, I argued that this European project which started after the WWII, had two aims: first, to ensure that there were never any more devastating wars between European nations; and second, to make Europe into an economic and political entity that could rival America and Japan in global capital battle.  This project was led by Franco-German capital, and with the introduction of the euro, the project eventually went further than just a free trade area or even a customs union (with free movement of capital and labour), to a single currency and monetary policy.  The aim was to integrate all European capitalist economies into one unit to compete with the US and Asia in world capitalism with a rival currency to the dollar.

There are three views on the success of the European Union and the single currency.  The mainstream neoclassical view is that an Optimal Currency Area (OCA), where all members benefit from a single currency and monetary policy, is possible as long as economies move through similar business cycles.  If they don’t, then the market must be allowed to adjust wages and prices between national economies to bring about a new balance. Equilibrium can be established if there is wage flexibility and labour mobility in the currency area. And ideally there is also a common fiscal and monetary policy to adjust taxes and interest rates as necessary.

When the EU began, the EU Commission economists optimistically reckoned that, with higher trade integration, there would be increased synchronization of national business cycles. That’s because trade among EU economies is typically intra-industry and so does not lead to higher specialization, which could cause increased possibility of ‘asymmetric shocks’ ie differing business cycles.

But this neoclassical view of mobility of labour and wage flexibility was disputed by Keynesian theory.  In the 1990s, Nobel prize winner Paul Krugman, who specialised in international trade theory, argued that higher trade integration would lead to higher specialisation of industry.  That would lead to a concentration of industrial activity in just a few states. So far from convergence within the trade area between national economies, there was risk of divergence on productivity, wages and investment.

The Marxist view starts from the opposite position of the neoclassical mainstream.  There is no tendency to equilibrium in trade and production cycles under capitalism.  So fiscal, wage or price adjustments by the market (or even government) will not restore equilibrium.  Capitalism is an economic system that combines labour and trade, but unevenly.  The centripetal forces of combined accumulation and trade are countered by centrifugal forces of uneven development.

The idea that ‘free trade’ is beneficial to all countries and to all classes is a ‘sacred tenet’ of mainstream economics.  But it is a fallacious proposition based on the theory of comparative advantage (first proposed by the classical early 19th century economist, David Ricardo) that if each country concentrated on producing goods or services where it has a ‘comparative advantage’ over others, then all would benefit.  Trading between countries would balance and wages and employment would be maximised. But this is empirically untrue.  Countries run huge trade deficits and surpluses for long periods; have recurring currency crises; and workers lose jobs from competition from abroad without getting new ones from more competitive sectors.

In contrast, the Marxist theory of international trade is based on the law of value.  In the Eurozone, Germany has a higher technology ratio (organic composition of capital) than Italy.  Thus in any trade between the two, value is transferred from Italy to Germany.  But Italy cannot compensate for this by increasing the scale of its production/export to Germany, unlike say China.  So it transfers value to Germany and runs a permanent deficit on total trade with Germany.  In this situation, Germany gains within the Eurozone at the expense of Italy.  As nearly all other member states cannot scale up their production to surpass Germany, unequal exchange is compounded across the EMU.

Balance of trade between Germany and Italy (Euro m)

With a single currency, the value differentials between the weaker states (lower OCC) and the stronger (higher OCC) are exposed with no option to compensate by devaluation of any national currency or protectionist measures.  The weaker capitalist economies (in southern Europe) within the euro area eventually lost ground to the stronger (in the north).

Change in productivity levels since 1999 relative to Eurozone average (%)

The move to a common market and a customs union was a relative success in raising trade for all and in converging productivity levels and growth rates.  This was similar to where NAFTA is today.  But when the EU moved to free movement of labour and capital in 1993, harmonising its trade and employment regulations and setting up political controls, convergence in Europe stopped and the stronger capitalist economies increased their share of the value created at weaker economies’ expense.   This was a key point made by a participant at the UNAM session.

The EU leaders had set criteria for joining the euro, but these criteria were all monetary (interest rates and inflation) and fiscal (budget deficits and debt).  There were no convergence criteria for productivity levels, GDP growth, investment or employment.  That was because those were areas for the free movement of capital (and labour) and capitalist production for the market and not the province of interference or direction by the state.  After all, the EU project is a capitalist one.

This growing divergence in incomes and production per head and in profitability of capital was exposed when the Eurozone economy entered the major slump and debt crisis with the Great Recession of 2008-9. The global financial crash and the Great Recession were the result of Marx’s law of profitability, as I have argued ad nauseam elsewhere.

As Sergio Camara, Marxist economist at the Metropolitan University of Mexico (UAM), said in his commentary on my presentation at the UNAM session, we must distinguish between the underlying trends in capitalism globally and specific features for Europe.  Many Keynesians blame the euro for the euro crisis, but the crisis of the currency was really a crisis of capitalism in general.  The global crisis of capitalism took a particular form in the Eurozone because of the currency union. The debts being built up by the south with the north were exposed in the crash and sparked the ‘euro crisis’, but only after the global financial crash.

The global slump dramatically increased the divergent forces within the euro. The fragmentation of capital flows between the strong and weak Eurozone states exploded. Net capital assets and liabilities within the Eurozone should have been in balance – but they were far from that.

The capitalist sectors of the richer economies like Germany stopped lending directly to the weaker capitalist sectors in Greece and Slovenia, etc. As a result, in order to maintain a single currency for all, the official monetary authority, the ECB, and the national central banks had to provide the loans instead.

Franco-German capital was not prepared to pay for the ‘excesses’ of the weaker capitalist states.  Thus the bailout programmes were combined with ‘austerity’ to make the people of the distressed states pay with cuts in welfare, pensions and real wages, and to repay (virtually in full) their creditors (the banks of France and Germany and the UK).  The debt owed to the Franco-German banks was transferred to the EU state institutions and the IMF – in the case of Greece, probably in perpetuity.

It was the workers of the Baltic states and the distressed Eurozone states of Greece, Ireland, Cyprus, Spain, and Portugal who took the biggest hit. In these countries, real wages fell, unemployment rocketed, and hundreds of thousands have left their homelands to look for work somewhere else. That has enabled companies in those countries to sharply increase the rate of exploitation of their reduced workforce, although so far that has not been enough to restore profitability to levels before the Great Recession and thus sustain sufficiently high new investment for a sustained path of growth.

Keynesians blame the crisis in the Eurozone on the rigidity of the single-currency area and on the strident ‘austerity’ policies of the leaders of the Eurozone, Germany. They reckon that the weaker economies would have been better off leaving the euro and devaluing their currencies to reverse their trade and capital imbalances. But such policies would have been no better for the workers in those countries exiting the euro, possibly worse.

Keynesian policies would still mean a loss of real income through higher prices, a falling currency, and eventually rising interest rates. Take Iceland, a tiny country outside the EU, let alone the Eurozone.  It adopted the Keynesian policy of devaluation of the currency, a policy not available to the member states of the Eurozone.  But it still meant a 40% decline in average real incomes in euro terms and nearly 20% in krona terms since 2007.  Indeed, in 2015 Iceland’s real wages were still below where they were in 2005, ten years earlier, while real wages in the ‘distressed’ EMU states of Ireland and Portugal were more or less flat.

In the last 18 months, the Eurozone economies have made a modest economic recovery, after nearly ten years of depression.  But profitability of capital in most EZ economies remains below where it was in 2007 (see graph below). Progress in raising the rate of exploitation has been considerable.  But progress in devaluing and deleveraging the stock of capital and debt built up before has been slow and even being postponed by easy monetary policy from the European Central Bank. Given the current level of profitability, recovery may take too long before the world economy drops into another slump. Then all bets are off on the survival of the euro.