Boom and then bust?

April 25, 2019

Last March, I posted that the global economy seemed to be in a fantasy world where stock markets hit new highs but output of goods and services, investment and trade was stagnating in the major economies.  This week, the US stock recorded yet again new highs.  As the Financial Times described it: “The US economy appears to be enjoying the fabled Goldilocks scenario. Its porridge is neither too hot nor too cold”.

This financial market rally is founded on the decision of many central banks to hold their policy interest rates at very low levels.  The US Federal Reserve has basically announced that it will not hike its rate this year. The European Central Bank has done the same and has decided to have another bout of ‘quantitative easing’ (buying government bonds and other assets from commercial banks).  And today the Bank of Japan promised not to raise interest rates before spring 2020 as it continued its massive programme of monetary stimulus.

Central bank policy, along with the prospect of the US-China trade deal (still not realised), has given new encouragement to financial institutions to invest in stock markets.  But the biggest driver of the US stock market has been the major companies using this cheap finance to buy back their own shares to drive up the price and increase the ‘market value’ of the company.  In 2018, buybacks reached $1.18trn, twice as much as was invested (after covering for worn out equipment) in productive capacity (plant, offices, equipment, software etc).

Thus the financial markets boom, but the ‘real’ economy struggles.  The recovery since the Great Recession ended in mid-2009 is about to reach its tenth year this summer, making it the longest recovery from a slump in 75 years.  But it is also the weakest recovery since 1945.  And trend real GDP growth and business investment remains well down from the rate before 2007.  That is why I designate the last ten years as a Long Depression, similar to the periods of 1873-97 or 1929-42.

Behind the fantasy of financial markets, global growth has been slowing.  And worse, there are now several economies that appear to heading into outright recession.  Today, the Asian powerhouse, Korea, suffered its worst quarterly contraction since the global financial crisis (Korean real GDP growth has fallen to just 1.8% – graph), as this export-driven economy felt the pinch from weakening growth in China, global trade tension and a downturn in the technology sector.

Exports, which account for about half of the country’s GDP, are heading for a fifth consecutive monthly decline, falling 2.6 per cent quarter on quarter.  And business investment plunged 10.8 per cent, the worst reading since the 1998 Asian financial crisis, as big manufacturers, such as Samsung Electronics and SK Hynix, refrained from increasing capacity amid a global economic slowdown and weaker demand for semiconductors.

Even worse, several large so-called emerging economies are experiencing severe contractions.  After President Erdogan suffered significant defeats in local elections in Istanbul and Ankara, the Turkish central bank has been forced to prop up the country’s fast dwindling dollar reserves using ‘dollar swaps’, taking high risk short-term loans.  It had to do this because dollars have been fleeing the country as the economy plunged and Erdogan refused to take an IMF loan to bolster finances because it would mean severe austerity measures being imposed.  The net foreign assets figure, a proxy for the country’s financial defences, slumped by $9.4bn between March 6 and March 22 to $19.5bn, the lowest level on a US dollar basis since 2007. Excluding swaps, net foreign assets have stood at less than $11.5bn during the entire month of April, down from $28.7bn at the start of March on the same basis.

Argentina went deep into recession in 2018 under the governance of the right-wing administration of President Macri.  When he was elected in December 2015,he said this his ‘neo-liberal’  economic policies would attract foreign direct investment and lead to sustained increases in productivity. The currency crisis that erupted in April 2018 underscored the failure of that policy approach.

Unlike Turkey, Macri turned to the IMF for a $57 billion stand-by loan – the largest in the IMF’s history – a clear case of bias by the IMF to help a government that it and US favoured over the previous social-democratic Peronist administration.  The money is being used to make debt repayments as they come up.  Elections are now just six months away, and the IMF conditions for the loan are biting into government spending and increasing tax burdens.

Investment is stagnating, inflation has rocketed and the high interest rates imposed by the central bank have attracted short-term speculative portfolio capital, or ‘hot money’.  Capital like that is just as likely to reverse with any new crisis.   Next year, the amount of external debt that must be repaid will be at its highest and the IMF must also be repaid.  The new government would then face two unpleasant options: a straitjacket of higher debt payments, more austerity, and more recession, or a painful debt restructuring with an uncertain outcome.

And there is Pakistan.  This is another so-called emerging economy where capital to fund economic growth and investment has dried up.  Up to now the new administration under Imran Khan, the former Pakistan cricket captain, elected on a no corruption platform, has refused to take an IMF loan, for the same reasons as Turkey.  Its finance minister, Asad Umar instead to tried to raise new loans from China and the Middle East, much to the chagrin of the US. But it has not been enough to stave off a new potential collapse in the currency.  Pakistan’s inflation is at a five-year high of more than 9 per cent, while the rupee’s value has plummeted 33 per cent since 2017.

Umar was forced to resign last week.  The new finance minister has reached an agreement in principle to take an IMF loan – Pakistan business will thus gain some stability while the Pakistan people will pay with more taxes and cuts in services, labour conditions and infrastructure projects.  “The solutions are not going to be easy. The choices will be politically difficult for any government,” said Abid Suleri, an economic adviser to Khan.

Stock markets may be booming in North America but economic prosperity in many parts of the world is disappearing like water in a desert.  And in some parts, a sand storm is fast approaching.

Jokowi’s challenges

April 17, 2019

Indonesia has a general election today.  For the first time in Indonesian history, the president, the vice president, and members of the People’s Consultative Assembly (MPR), will be elected on the same day with over 190 million eligible voters – that’s the largest single day electorate in the world (India votes over a whole month.

In the presidential election, incumbent Indonesian President Joko Widodo, known as Jokowi, will run for re-election with senior Muslim cleric Ma’ruf Amin as his running mate against former general Prabowo Subianto and former Jakarta deputy governor Sandiaga Uno for the five-year term between 2019 and 2024. The election will be a re-match of the 2014 presidential election, in which Widodo defeated Prabowo.

The opinion polls suggest that the incumbent Jokowi will be re-elected.  International capital will like that – if only because they can rely on Jokowi to support foreign investment with incentives and sustain a ‘steady’ policy for the currency and public finances. In expectation of the Jokowi victory, foreign investors have poured into the Indonesian stock market in the first two months of 2019.

Prabowo has adopted a nationalist, hardline conservative Muslim campaign that does not appeal to foreign capital. Indonesia is the world’s largest Muslim country. It has the largest economy in Southeast Asia, is a member of the G20 top economies, and is the 11th largest economy in the world by nominal GDP.  But by GDP per capita, it is ranked only 115th in the world where China is 67th, or just 6% of that of the US.

So what is the state of the Indonesian economy as the election starts?  Here, I would appreciate the help of any blog readers from Indonesia or other Asian states for their opinion as it is always difficult to gauge things properly from afar.  But anyway, here goes.

Indonesia is very much a fossil fuel economy with oil and gas predominate, despite some development of manufacturing. Agriculture is a key sector which contributes 14% of Indonesia’s GDP. Indonesia is the world’s biggest producer of palm oil, providing about half of the world’s supply. The rapacious drive to farm palm oil has already destroyed much of the natural habitat of the country and the living of many peasant farmers.

From the point of view of the vast majority of Indonesians, Jokowi has disappointed.  In winning the election in 2014, Jokowi aimed to match the economic growth seen in China and India, but has fallen well short of his growth target of 7% in his first term. Average growth has been about 5% a year in the last five years and, given the current global slowdown, that rate is likely to slow further.  And when population growth is taken into account, real GDP per capita will only rise by less than 4% over the next few years, even if there is no global recession.  Sure, that is a good rate of growth by the standards of advanced capitalist economies, but nowhere near enough to lift the economy beyond what the World Bank likes to call ‘middle-income’ levels.

Indonesia’s economic growth has slowed in the past decade, with the contributions from capital and labour falling and that of TFP (innovation), remaining below its peers.  Indonesia still trails the performance of China and India, at least in GDP terms, by some way.  It is likely to fail to break out of the category of a ‘middle-income’ economy for the foreseeable future.

Slower growth has made it more difficult to create quality jobs for the nearly 2 million new labour force entrants each year. Jokowi aims to create 100 million jobs in the next five years in an economy where more than half the population of 260 million are under the age of 40.  The jobless rate is near a 20-year low of 5.3%, which looks good on paper, but hides a growing problem of underemployment. The number of people working less than 35 hours a week has been increasing. Almost 36 million people, near close to a third of the workforce, are classed as underemployed, according to official statistics.

While the poverty rate (as defined by the World Bank) has fallen by half since 1999, this is an illusion.  The gap between rich and poor has grown faster in Indonesia than in any other country in Southeast Asia. An Oxfam report on inequality in Indonesia found its four richest men now have more wealth than 100 million of the country’s poorest people. According to Asia Wealth Report, Indonesia has the highest growth rate of high-net-worth individuals (HNWI) predicted among the 10 most Asian economies. This is reflected in the country’s Gini index – which measures inequality from 0 (perfect equality) to 100 (perfect inequality). World Bank estimates reveal that Indonesia’s Gini index increased to 39.0 in 2017 from 30.0 in the 1990s.

The Wealth Report 2015 by Knight Frank reported that in 2014 there were 24 individuals with a net worth above US$1 billion. Indeed 1% of Indonesia’s population have 49.3% of the country’s $1.8 trillion wealth.  In contrast, approximately 1 in 3 children under the age of 5 in Indonesia suffer from stunting which reflects impaired brain development that will affect the children’s future opportunities.

Economic growth has not been evenly spread – as is usual in any capitalist economy.  In an archipelago of more than 17,000 islands that spans the equivalent distance of New York to London, the island of Java, home to the capital Jakarta, accounts for almost 60% of Indonesia’s annual gross domestic product. While Jakarta’s economy grew 6.4 % last year, the country’s easternmost province of Papua (annexed in a war by the Indonesian generals) contracted about 17.8%.

Jakarta is one of the most densely populated cities on Earth, so Jokowi has been striving to boost infrastructure projects to cope.  But Indonesia is way behind compared to the efforts of China.  Indonesia finally saw its first underground rail line open in March. But by relying on foreign capital and markets to fund projects, the widely proclaimed infrastructure plan of $350bn by 2025 is falling well short.

One problem is that the rich, as in many so-called emerging capitalist economies, do not pay much tax – tax revenues are just 11.5% of GDP.  As a result, domestic savings and resources remain in the hands of the rich, forcing the government to borrow to invest.  The external deficit has been rising as a result, putting pressure on the currency, the rupiah.  The current deficit reached $8.5bn in 2018, or 3.5% of GDP.

This makes Indonesia reliant on foreign capital to fund its import needs, inflows that can be volatile as investor sentiment swings. In past global financial crises, Indonesia has been put in the camp of the ‘fragile five’ large emerging economies vulnerable to global capital flight.  Indonesia was targeted in an emerging market sell-off last year, triggered by rising US interest rates and a stronger dollar. The rupiah slumped more than 5% against the dollar in 2018, dropping to its lowest levels since the Asian financial crisis two decades prior, as investors pulled out of the nation’s stocks and bonds.  Indonesia’s main export markets are China, US and Japan; so any downturn there will severely affect the ability to finance growth.

The international agencies and foreign capital want Indonesia to carry out ‘neoliberal’ reforms as their solution to raising productivity and the growth rate.  Jokowi is not going fast enough in doing this. Jokowi has continued to shy away from the tough reforms that are needed to boost the country’s long-run prospects,” said Gareth Leather, senior Asia economist at research consultancy Capital Economics. “In particular, the president has made no progress on freeing-up Indonesia’s rigid labour market,” Leather wrote in a recent note. “So long as it remains extremely difficult to hire and fire workers, it will be very hard for Indonesia to develop the sort of labour-intensive manufacturing base that has underpinned the economic success of other countries in the region.” Give us cheap labour and all will be well.

The IMF wants the government to divest itself of state enterprises in key sectors of the economy.  As the IMF put it in a recent report on the country: “The dominant role of SOEs (state enterprises) needs to be reduced. Even though assets have risen to about 50% of GDP and revenue is stable, SOE efficiency declined through 2015.  This suggests SOEs have increased their non-commercial activities and are receiving implicit subsidies, including through price controls (for example, on gas, electricity, airfares, and the retail prices of various products) and import and export restrictions. These practices could undermine the financial strength of SOEs, increase fiscal risks from contingent liabilities, and crowd out private investment.”

Yes, the problem is that the state sector could ‘crowd out’ the privately owned corporate sector.  But then the latter won’t invest in the infrastructure necessary for more inclusive growth and won’t pay taxes to fund such investment.  Which way will Jokowi go?

A delicate moment

April 14, 2019

The IMF-World Bank meeting in Washington this weekend revealed again that the world economy is slowing down and the prospect of an outright recession is getting much higher.  The IMF economists cut their outlook for global growth  to the lowest since the global financial crisis of 2009 amid a bleaker outlook in most major advanced economies and signs that higher tariffs are weighing on trade – “a growth slowdown and precarious recovery”, the IMF called it.

The IMF estimates that the world economy will grow 3.3% this year, down from the 3.5% it had forecast for 2019 in January. It’s the third time the IMF has downgraded its outlook in six months.  The new IMF chief economist, Gita Gopinath reckoned the global economy had entered “a delicate moment”. She offered a decisive insight: “If the downside risks do not materialize and the policy support put in place is effective, global growth should rebound. If, however, any of the major risks materialize, then the expected recoveries in stressed economies, export-dependent economies, and highly-indebted economies may be derailed.” So, on the one hand or on the other….

Alongside the IMF view, the private Brookings Institution delivered its view on the global economy, concluding from its tracking index of economic activity that the world had entered a “synchronised slowdown” which may be difficult to reverse.  The Brookings-FT Tracking Index for the Global Economic Recovery (Tiger) compares indicators of real activity, financial markets and investor confidence with their historical averages for the global economy and for individual countries.  The headline readings slipped back significantly at the end of last year and are at their lowest levels for both advanced and emerging economies since 2016, the year of the weakest global economic performance since the financial crisis.

Brookings did not reckon a recession was imminent but “all parts of the world economy were losing momentum.” Even if a global recession is not yet with us, it is clear from the latest data on the major economies that the long depression, as I have characterised this period since 2009, is still with us.  Frances Coppola, the heterodox economist, has also blogged that capitalism is locked into a long depression and makes similar points to me on its outcome. But as for causes, Coppola, like other Keynesians, holds to the idea of ‘secular stagnation’, namely that the depression is due to a chronic “lack of demand’’.  Regular readers of this blog know that I do not consider this is an adequate explanation of crises and depressions.  In a profit-making economy, it is the profitability of capital that matters.

And here, the IMF’s new Global Stability Report offers more support for my causal interpretation of the long depression.  Confirming what I have shown empirically before, the IMF finds that corporate profitability (as measured by corporate earnings as a share of the stock of assets) in the major economies has not recovered to 2008 levels.  Indeed, profitability of capital is well below levels of the late 1990s.

This long depression has similar characteristics as the late 19th century depression and the Great Depression of the 1930s. The first was resolved by a series of slumps eventually driving up profitability and second was resolved by a world war.  It’s my view that this one will be resolved more like the 19th century one.

Low profitability explains above all else why corporate investment has been so weak since 2009.  What profits have been made have been switched into financial speculations: mergers and acquisitions, share buybacks and dividend payouts.  Also there has been hoarding of cash.  All this is because the profitability of productive investment remains historically low.

As Gillian Tett in the FT put it: “the IMF calculates that American companies made shareholder payouts and buybacks that were worth 0.9 per cent of assets last year, twice the level seen in 2010. Little wonder that equity markets have soared (leaving aside the wobble late last year). Companies have also used this arsenal for a mergers and acquisitions boom: such deals gobbled up cash flows equivalent to 0.4 per cent of assets in 2019, compared with virtually nothing in 2011. But the amount of cash flow spent on capex, in contrast, has flatlined since 2012, running at around 0.7 per cent of all assets — smaller than the cash flow spend on shareholder payouts. Or, as the IMF report notes: “Strong profits in the United States were used for payouts and other financial risk taking.” But not, it seems, lots more investment.

The other key factor in the long depression has been the rise in debt, particularly corporate debt.  With profitability low, companies have run up more debt in order to fund projects or speculate.  The big companies like Apple or Microsoft can do this because they have cash hoards to fall back on if anything goes wrong; the smaller companies can only manage this debt spiral because interest rates remain at all-time lows and so servicing the debt is still feasible – as long as there is not a downturn in sales and profits.

Again the IMF’s Global Stability Report sums up the issue. “In most advanced economies, debt-service capacity in the corporate sector improved during the recent cyclical upswing. Balance sheets appear strong enough to sustain a moderate economic slowdown or a gradual tightening of financial conditions. However, overall debt levels and financial risk taking have increased, and creditworthiness of borrowers has deteriorated in the investment-grade bond and leveraged loan markets. A significant downturn or a sharp tightening of financial conditions could lead to a notable repricing of credit risks and strain the debt-service capacity of indebted firms. Should monetary and financial conditions remain easy for longer, debt will likely continue to rise over the medium term in the absence of policy action, raising the risk of a sharper adjustment in the future”.

Each crisis has a different trigger or proximate cause.  The 1974-5 international recession was triggered by a sharp rise in oil prices and the US coming of the dollar-gold standard.  The 1980-82 slump was triggered by a housing bubble in Europe and a manufacturing crisis in major economies.  The 1990-2 recession was triggered by the Iraq war and oil prices.  The 2001 mild recession was the result of the bursting of the bubble.  And the Great Recession was started with the collapse of the housing bubble in the US and ensuing credit crunch brought on by the international diversification of credit derivatives. But underlying each of these crises was the downward movement in the profitability of productive capital and eventually a slowdown or decline in the mass of profits. (The profit investment nexus).

This time I reckon the trigger will be in corporate debt as companies get overstretched on cheap credit and as profits fall and interest costs rise, they become insolvent.  Marxist economist Eric Toussaint of the CADTM, agrees. “This mountain of corporate private debt will be a prime element in the next financial crisis.” He points out that “As interest rates climb the value of corporative debt sinks. The greater the share of sinking corporate debt in a company’s assets, the greater the negative impact on the corporate balance sheet. The corporate equity value sinks too and may get to a point where it no longer covers its obligations. In 2016 Apple informed US authorities that in the case of a 1% increase in interest rates it would lose $4,.9 billion. Of course, just like other companies Apple borrowed to finance its debt purchases. In 2017 Apple has already borrowed $28 billion, bringing the total to $75 billion. This, by domino effect, could produce a crisis of similar ampler to that of the US financial crisis in 2007-2008.”

As the IMF chief economist puts it: capitalism is in a delicate moment.

Invisible Leviathan – Marx’s law of value in the twilight of capitalism

April 6, 2019

My foreword to Invisible Leviathan, by Professor Murray Smith of Brock University, Ontario, Canada, published by Brill in November 2018.   Relevant, I think, to my recent presentation on the contribution of Marx to economics made at the Rethinking Economics conference at Greenwich University, London.

The message of Murray Smith’s book is aptly portrayed by its title, Invisible Leviathan. The book sets out to explain why Marx’s law of value lurks invisibly behind the movement of markets in modern capitalism and yet ultimately explains the disruptive and regular recurrence of crises in production and investment that so damage the livelihoods (and lives) of the many globally.

This book is a profound defence (both theoretically and empirically) of Marx’s law of value and its corollary, Marx’s law of the tendency of the rate of profit to fall, against the criticisms of bourgeois, ‘mainstream’ economics, the sophistry of ‘academic’ Marxists, and the epigones of the classical school of David Ricardo and Adam Smith. As the author points out, even the great majority of ‘left’ commentators concur that the causes of the ‘Great Recession’ of 2007–09 and the ensuing global slump are not to be found in Marx’s theories, but rather in the excessive greed of corporate and financial elites, in Keynes’s theory of deficient effective demand, or in Minksy’s theory of financial fragility. When acknowledged at all, Marx’s value theory and his law of profitability are attacked, marginalised or dismissed as irrelevant.

None of this should be surprising given the main political implication of Marx’s laws: namely, that there can be no permanent policy solutions to economic crises that involve preserving the capitalist mode of production. I am reminded of the debate at the 2016 annual meeting of the American Economics Association between some Marxists (including myself) and leading Keynesian Brad DeLong, who seemed to characterise us as ‘waiting for Godot’ – that is to say, as passive utopians, waiting for collapse and revolution – while he stood for ‘doing something now’ about the deplorable state of capitalism. But as Smith explains so well, it is the ‘practical’ Keynesians who are the real utopians in imagining that actually existing, twenty-first-century capitalism – characterised by crises, war and ‘the avarice and irresponsibility of the rich’ – can still be given a more human and progressive face.

Against the many variants of ‘practical’ economics, Smith’s book sets out to:

uphold Marx’s original analysis of capitalism, not only as the most fruitfully scientific framework for understanding contemporary economic problems and trends, but also as the indispensable basis for sustaining a revolutionary socialist political project in our time. It does so by examining the crisis-inducing dynamics and deepening irrationality of the capitalist system through the lens of Marx’s ‘value theory’ – which, despite the many unfounded claims of its detractors, has never been effectively ‘refuted’ and which continues to generate insights into the pathologies of capitalism unmatched by any other critical theory.

Marxian value theory has been subject to ridicule, distortion and incessant rebuttal ever since it was first expounded by Marx 150 years ago. And the simple reason for this is that value theory is necessarily at the core of any truly effective indictment of capitalism – and essential to refuting its apologists. What truly motivates the ‘Marx critique’ of the bourgeois mainstream is graphically confirmed by the (in)famous argument of Paul Samuelson (the leading exponent of the ‘neoclassical synthesis’ in mainstream economics after World War II) according to which Marx’s value theory is ‘redundant’ as an explanation of the movement of prices in markets. The market, you see, reveals prices, and that is really all we need to know.

It is instructive to note that, shortly after Samuelson’s 1971 broadside against Marx, the (recently deceased) neoclassical economist William Baumol offered a trenchant response to Samuelson’s ‘crude propaganda’. In a paper from 1974, Baumol pointed out quite correctly that Samuelson had entirely misunderstood Marx’s purpose in his discussion of the so-called transformation of values into prices. Marx did not want to show that market prices were related directly to values measured in labour time. Quite the contrary:

The aim was to show that capitalism was a mode of production for profit and profits came from the exploitation of labour; but this fact was obscured by the market where things seemed to be exchanged on the basis of an equality of supply and demand. Profit first comes from the exploitation of labour and then is redistributed (transformed) among the branches of capital through competition and the market into prices of production.

The whole process reveals the ‘Invisible Leviathan’ at work.

Unfortunately, it is not just mainstream economics that has tried to rubbish Marx’s value theory. ‘Post-Keynesians’ like Joan Robinson and neo-Ricardian Marxists like Piero Sraffa and Ian Steedman have also done so. Like Samuelson, they resort to the argument that Marx’s value magnitude analysis is redundant, unnecessary and above all fallacious. As an alternative, Sraffa claimed that prices in capitalist markets can be derived directly from physical output.

Murray Smith demolishes these critiques and revisions, standing firmly on what he calls a ‘fundamentalist’ position that involves a return to both aspects of Marx’s fundamental theoretical programme: the analysis of the form and the magnitude of value, as well as a concern with the relationship of each to the social substance of value: abstract labour. I join him under this banner.

According to Smith:

Marx’s theory of value yields two postulates that are central to his critical analysis of capitalism: 1) living labour is the sole source of all new value (including surplus-value), and 2) value exists as a definite quantitative magnitude that establishes parametric limits on prices, profits, wages and all other expressions of the ‘money-form’. From this flows Marx’s fundamental law of capitalist accumulation: that the tendency of the social capital to increase its organic composition (that is, to replace ‘living labour’ with the ‘dead labour’ embodied in an increasingly sophisticated productive apparatus) must exert a downward pressure on the rate of profit, the decisive regulator of capitalist accumulation.

The book’s theory of capitalist crises rests firmly on Marx’s law of profitability. But, as Smith insists,

Marx’s law of value is merely a ‘necessary presupposition’ of this law of profitability, not a sufficient one. Yet, there is a sense in which the latter stands as a corollary to the former, even if not a theoretically ineluctable one. For capitalism is a mode of production in which the goal of ‘economic activity’ is only incidentally the production of particular things to satisfy particular human needs or wants, while its real, overriding goal is the reproduction of capitalist social relations through the production of value, that ‘social substance’ which is the flesh and blood of Adam Smith’s powerful yet also fallible ‘invisible hand’ – of our ‘Invisible Leviathan’.

And so:

[T]hese laws provide a compelling basis for the conclusion that capitalism is, at bottom, an ‘irrational’ and historically limited system, one that digs its own grave by seeking to assert its ‘independence’ from living labour even while remaining decisively dependent upon the exploitation of living wage-labour for the production of its very life-blood: the surplus-value that is the social substance of private profit.

Smith is by no means content with a purely theoretical defence of Marx’s analysis of capitalism’s Invisible Leviathan; he moves on to empirical verification of the ‘economic law of motion’ of capital as postulated by Marx. I share his view that this is essential. The contrary opinion of certain Marxists is that it is simply impossible to verify Marx’s laws, as the latter are about labour values and official bourgeois data can only detect movements in prices, not values. Moreover, according to this line of thought, statistical verification of Marx’s value-theoretic hypotheses is unnecessary, as the regular recurrence of crises under capitalism is a self-evident fact revealing its obsolescence.

But this is passing the buck. Any authentically scientific socialism demands rigorous scientific analysis and empirical evidence to verify or falsify its theoretical foundations; and Marx himself was the first Marxist to look at data in an effort to confirm his theories. In this connection, Smith writes:

Marxist analysis of the historical dynamics of the capitalist world economy ought not to dispense with serious attempts to measure such fundamental Marxian (value-theoretic) ratios as the average rate of profit, the rate of surplus-value, and the organic composition of capital. To be sure, such attempts can never offer much more than rough approximations. Even so, they are vitally important to charting and comprehending essential trends in the [capitalist mode of production] – trends that can usefully inform, if only in a very general sense, the political-programmatic perspectives and tasks of Marxist socialists in relation to the broader working-class movement.

Murray Smith’s own empirical analysis is original and somewhat controversial. He revives the approach of Shane Mage, whose pioneering empirical work of 1963 on the rate of profit treated the wages of ‘socially necessary unproductive labour’ (SNUL) as a systemic ‘overhead’ cost that should not be regarded as a ‘non-profit’ component of (or absolute ‘deduction’ from) the surplus-value created by productive labour, but rather as a special form of constant capital. In Smith’s view,

by conceptualising SNUL as a necessary systemic overhead cost, the constant-capital approach emphasises that capital’s room for manoeuvre with respect to [persistent problems of valorisation and profitability] is quite limited, giving Marx’s proposition that ‘the true barrier to capitalist production is capital itself’ a somewhat new twist.

And indeed, his analysis of the US capitalist economy (from 1950 to 2013) does reveal a long-term fall in the average rate of profit that is significantly correlated with a secular rise in the organic composition of capital, entirely in accordance with Marx’s view. This hugely important result has been replicated by many other Marxist studies in the last 20 years, several of which appear alongside Smith’s in The World in Crisis, a volume edited by Guglielmo Carchedi and myself. Many are also referenced in my own recent book The Long Depression.1 (It is noteworthy that Smith’s initial empirical study of Marx’s law of the tendency of the rate of profit to fall, employing data on the postwar Canadian economy, was first published in 1991, with an updated version appearing in 1996. The results of those studies, along with some others, are also to be found in the present volume.)

Theory and evidence should lead to practice – which means not ‘waiting for Godot’. At the end of the book, Smith refuses to evade the practical upshot of his theoretical and empirical investigations:

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

In this bicentennial year of his birth, I can’t help thinking Marx would be pleased. The enemies of his transformative, socialist vision will no doubt be disgruntled.

Michael Roberts


January 2018

Pluralism in economics: mainstream, heterodox and Marxist

April 3, 2019

Last weekend’s Rethinking Economics conference on Pluralism in Economics was excellent.  The organisers at Greenwich Rethinking Economics did a great job in getting together a range of top speakers on many aspects of modern economic ideas: money, inequality, imperialism and gender issues.  They even managed to persuade top economist, Michael Kumhoff at the Bank of England to speak on pluralist developments in economics.  And the turnout for the whole conference rivalled that of more well-known gatherings of radical economics.

But for me the most encouraging development was a separate session on the contribution of Marx to modern economics. Rethinking Economics national and internationally has aimed to widen the scope of economics beyond the mainstream neoclassical orthodoxy which has so signally failed to predict, explain or solve the global financial crash and the ensuing Great Recession.  But up to now, Rethinking’s alternative has been dominated by Keynesian and post-Keynesians with Marxian economics generally absent.

So it was great that I had been invited to present the case for the contribution of Marxist economics, along with Carolina Alves, the Joan Robinson fellow at Girton College, Cambridge. In my presentation (see my PP here The contribution of Marxian economics), I outlined the differences in theory and policy, both micro and macro between mainstream neoclassical economics, the heterodox alternatives (Keynesian, post-Keynesian, institutional and Austrian) and the Marxist.

I see this as three ‘schools’ of thought – something that some participants from the heterodox wing found strange.  Why was Marxian economics not subsumed within the heterodox?  For me, the answer was simple.  There was one thing that unites the mainstream and the heterodox (in every form) and one thing in which Marxian economics stood out: namely the labour theory of value and surplus value.  The neoclassical and all the heterodox from Keynes to Kalecki, Robinson, Minsky, Keen and the MMTers deny the validity and relevance of Marx’s key contribution to understanding the capitalist system: that is it is a system of production for profit; and profits emerge from the exploitation of labour power –  where value and surplus value arises.  Value does not come from marginal utility (individual satisfaction) or marginal productivity (return on factor input) but from exploitation, realised in the sale of commodities for a profit.

Capitalism is a monetary economy where production is for profit, not need.  This glaringly obvious reality is denied by the mainstream (where there is no profit “at the margin”) and also by the heterodox who either accept marginalism or reckon profit comes from ‘monopoly’ or ‘power’ or from ‘financialisation’ – but not from the exploitation of labour power.

For me, Marx’s explanation is not only correct in reality, it is also necessary in order to clarify the very process of accumulation and endemic crisis within capitalism – all other schools of economics fall short on this.  In the session on Marx, Carolina Alves also emphasised the other key aspect of Marx’s contribution to understanding society, namely the materialist conception of history.  ‘Social being determines consciousness’ not vice versa, and technology (the forces of production) and social relations (the ownership of the means of production) determine class struggle and forms of social organisation and ideology.  Contrary to Keynes’ idealist view that bad economics is held in the grip of some defunct economist’s idea, mainstream economics is reduced to an apologia for the status quo of capitalism because economists ultimately work for the material interests of capital, at expense of science.  Thus Marx’s main aim was a ‘critique of political economy’ – to use the subtitle of Capital.

Criticism of Marx’s theory of value, at least as expressed from the audience at the Marx session, was that Marx is outdated: he was okay in explaining the industrial economies of the 19th century and even the exploited labour of the emerging economies now, but he had no relevance to modern service hi-tech worker economies of the advanced capitalist economies.  My answer was: tell that to workers in Amazon.  More generally, exploitation rates in advanced economies are rising, not falling.  The other critique was that Marx could tell us little about what happened in the Soviet Union or China – that’s true to some extent, but then Capital is about capitalism and a critique of political economy, not post-capitalist economies.

That Marx’s value theory is ignored or rejected just as much by heterodox economics as by the mainstream was revealed in the session on the role of money and finance in modern economies.  Jo Michel, a post-Keynesian economist from the University of West of England, gave an excellent and clear account of the role of money. But when he was asked whether any theory of money and credit required the backing of a value theory, he replied (after some hesitation) “probably not”.

Thus money and finance are to be separated from value and commodities and have an autonomous (or even determining) role in capitalism rather than the production of value and surplus value.  This, of course, is exactly where modern monetary theory (MMT) also ends up – divorced from the anchor of value and profit and denying the social relations of capitalist production. The private ownership of the means of production and the exploitation of those who own noting but their labour power is ignored by heterodox, post-Keynesian-MMT analysis. As Jo Michell said, you cannot fix climate change or inequality through monetary action.  I would add, you cannot avoid regular crises in capitalism with just monetary or financial measures.

In the same session, Frances Coppola, a heterodox economics blogger, argued that crises were really the product of too little money chasing too many goods (referring to Irving Fisher’s comment during the Great Depression of the 1930s).  But she reckoned that monetary injections from central banks along the lines of quantitative easing after the Great Recession have failed to get capitalist economies going because banks won’t lend.  There is ‘fear and uncertainty’, which stops banks lending, companies investing and people spending.  This argument rings of the Keynesian idea of low ‘animal spirits’.  Crises and the long depression are the result of changes in the ‘psychology’ of investors and consumers and has nothing to do with the profitability of capital. When asked that, if crises were due to fear and uncertainty, what could we do to get rid of these fears?, she responded that we just have to wait until ‘confidence’ comes back!

Coppola too rejected the need for a theory of value or profit.  Instead Coppola reckoned money was controlled by ‘power structures’ (financial institutions?) and was not related to value.  Indeed, in a previous event organised by Rethinking Economics some years ago, Coppola did a session on value theory where she outrightly rejected Marx’s theory of value in favour of the marginal utility theory of the mainstream.  It seems to me that heterodox schools, in denying Marx’s value theory or the need for any theory of value, end up adopting neoclassical marginalism.

I also attended a session on dependency and imperialism where Ingrid Harvold from the University of York outlined all the variations of so-called dependency theory, namely that the peripheral ‘emerging’ economies are so dependent on the imperialist centre that they cannot develop and grow in any significant way.  There are many variations on the causes of this dependency from falling terms of trade due the different productivities, monopoly control of finance and technology by the imperialist economies, and lower wages and super-exploitation of the ‘south’.

Tony Norfield, author of The City, a book that I have reviewed before, presented his definition of imperialism as monopoly power by top states backed by international institutions like the IMF, World Bank and the UN.  This monopoly power gives the imperialists states better financial access and control of technology.  Norfield demonstrated with his ‘imperialist power index’ that there are really just ten or so countries that can be considered as imperialist with the rest just also-rans.  But he cautioned against the view that finance is all.  Financial power flows from productive and technological power.  Financial crises are a symptom of an underlying crisis in capitalism, when debt gets out of line with the production of value.

Yes, that was my key take-away from this excellent conference.  Marxist political economy stands separate from the mainstream and from heterodox theories because it is grounded on a theory of value based on the exploitation of labour power. This is the key, both to social relations of production and the role of money, but also to the causes of crises and imperialist domination.  Profit is the driving force of investment and production in a capitalist economy and so what happens to profits and the profitability of capital is the determining factor in crises.  Thus crises cannot be permanently expunged from modern economies until the profit-driven capitalist economy is replaced.  Trying to ‘fix’ finance through regulation; or slumps through fiscal or monetary stimulus, as the heterodox focus on, is doomed to failure.

Getting longer but lower

April 1, 2019

The first three months of 2019 have shown a significant slowing in global economic activity.  Global manufacturing output (as measured by JP Morgan economists) is actually falling.

So too is global trade for the first two months of this year.

And just today US retail sales for February also showed a slowdown.

We’ve had falling economic activity indicators in many major economies; and contracting industrial production in Europe and Japan.  The business activity indicators in the US are the highest among the G7 top capitalist economies, but even there, they are beginning to fall back.  Here is the latest Markit indicator for US manufacturing – still above 50 but dropping.

Corporate profits, which is the main driver of investment growth (usually with a one-year lag), are also slowing in some of the top economies. Indeed, China has just announced the biggest drop in industrial profits in ten years, down 14% in Jan-Feb over last year.

The forecasts for economic growth in the first quarter of this year which has just ended have all been lowered from previous estimates. In the US, after achieving near 3% a year in 2018, the average forecast is for just 2% annualised growth in Q1 2019 and even lower in Q2.

As I said in my last post, it appears that what I call the Long Depression in the major capitalist economies since the end of the Great Recession in 2009, is not over.  I define this Long Depression as one where global growth in real GDP, trade, investment and wage incomes are well below the previous pre-crisis rate up to 2007.  And the differential between where GDP and investment would be if trend growth had continued over the last ten years and where they actually are, remains, with little narrowing at all.

And yet this is after what John Mauldin, the investment blogger calls: “years of astonishing, amazing, unprecedented, and astronomically huge monetary stimulus by the Federal Reserve, Bank of Japan, European Central Bank, and others. In various and sundry ways, they opened the spigots and left them running full speed for almost a decade. And all it produced was the above-mentioned weak recovery.”

And it is not just the top economies in Europe and Asia that are slowing fast.  Australia, the so-called ‘lucky’ country, has avoided a recession for over 27 years – only China has a better record.  But with the slowdown in China and elsewhere, the Australian economy has entered what some call a ‘growth recession’, where real GDP growth no longer matches the expansion of the population, so GDP per person has been falling for the last two quarters of 2018.  After a mega housing boom taking household debt to GDP to over 120%, one of the highest in the world, with household debt to disposable income near 190%, house prices have started to collapse, falling 14% from 18 months ago.

And then there are the so-called emerging markets.  This is what I said last May:
“Rising global interest rates and the growing trade war initiated by US President Trump are going to hit the so-called emerging capitalist economies like Turkey. The cost of borrowing in foreign currency will rise sharply and foreign investment is likely to reverse…..Turkey is now near the top of the pile for a debt crisis, along with Argentina (already there), Ukraine and South Africa.”

Increased costs of borrowing in dollars and the fall in global trade, along with the risk of an outright trade war between the US and China have led to foreign investors holding back from putting their money into weaker or troubled emerging economies like Turkey, Argentina, Venezuela, and even Indonesia.  Their currencies have plunged, driving up costs of borrowing even further and leading a flight of capital by rich Turks or Argentines.  William Jackson, the chief emerging markets economist at the consultancy Capital Economics, said: “The scale of the tightening of financial conditions is similar to that during the 2011-12 eurozone debt crisis.”

With the news that Turkeys’s Trump, Erdogan lost local elections in the big cities like Ankara and Istanbul because the economy has gone into a slump, the Turkish lira has gone into meltdown.  Turkey’s central bank has used up one-third of its dollar reserves in trying to prop up the Turkish lira and, after that failed, the government is now blocking ‘short selling’ and banks lending money abroad. Erdogan has refused IMF funding because it would mean severe austerity and loss of control over government policy. But the lira is still slipping.

In contrast, Argentina’s right-wing government under Macri did opt for a huge IMF loan, indeed the biggest in IMF history – $57bn, as the IMF tried to prop up a government prepared to impose austerity and privatisation under the diktat of the IMF  But this seems to be to no avail either as the economy tanks. The peso is sliding again amid a deepening decline in the domestic economy as Argentina approaches a general election in October.

Ukraine has also been a recipient of IMF aid, imposed on the country amid the deep recession of 2016 and during the civil war that broke out between the centre under a right-wing government in Kiev and the Russian-speaking east, backed by Putin’s Russia.  Although the economy has made a mild recovery in 2017 and 2018, following the global pick-up in commodity prices, the level of corruption is unprecedented.

As a result, Ukraine electors have turned away from the main contenders, like President Poroshenko and the favourite of the West, Yulia Tymoshenko, and opted for a TV comedian who professes that he is clean and anti-corrupt.  “Under Poroshenko, our standard of living lowered even more. I became a pensioner under his administration. I have a 30-year work experience as a kindergarten teacher and I receive 1,600 hryvnia [$58], they recently raised it by 100 hryvnia [$3.6],” said one Ukrainian voter tearfully. “I am very unsatisfied with the current government. They are all ‘thieves in law’.”

And then there is the tragedy of Venezuela. There is no space to go again into the terrible situation there, with daily power blackouts, hyperinflation (by the IMF’s calculations, Venezuela’s annual rate of inflation for 2019 will be 10m %) and shortages amid an attempt at a coup by right-wing interests backed by the US and its underlings in other Latin American countries. They have seized financial control of the state oil company (although not on the ground). The Maduro regime hangs on with the limited support of Russian and Chinese aid.  Venezuela’s GDP meltdown since 2013 rivals the fall of the Soviet Union.

The advanced capitalist economies are slowing down fast and many so-called emerging economies are going into recession.  Even in the US, fear about a possible recession has led investors to hold government bonds, driving down the yield (effective interest rate) below the level found for short-term borrowing by banks.  The so-called inverted yield curve has been a fairly reliable indicator of a recession coming – because it reflects the unwillingness to invest for production even when interest rates for borrowing are very low.

How will any global recession emerge?  The most likely pivot point is corporate debt.  Since the end of the Great Recession, global non-financial debt has continued to rise.  Household debt has fallen because people have defaulted on their mortgages or they are unable to get one.  Government debt rocketed as governments bailed out the banks and borrowed to cover deficits caused by falling tax revenues and rising welfare benefits.  But government debt has now more or less stabilised (as share of GDP).  However, corporate debt goes on rising.

So far the interest cost of servicing this rising debt has been manageable – at least for most companies, although it is estimated by the Bank for International Settlements (BIS) that around 20% of companies are ‘zombies’ ie are not earning enough profit to cover their debt costs.  If interest rates were to shoot up (they cannot go any lower!), and/or profit were to dive, then whole swathes of companies could be in trouble and start defaulting on their bonds or loans from the banks.

Maybe, the current downturn is just a mild one – as the fall in GDP growth in 2015-16 was.  But it seems this time that it is wider in scope and may well be much deeper.


The fantasy world of the Long Depression

March 22, 2019

This week, the US Federal Reserve Bank decided to stop raising its policy interest rate for the rest of 2019.  The Fed started hiking rates from near zero back in late 2016 on the grounds that the Long Depression (in economic growth, investment and employment in the US and in other major economies) was over.  As economies reached full employment and used up excess capacity in industry, wages rises and price inflation would accelerate, so it would be necessary to curb any ‘overheating’ with higher interest rates to slow borrowing and spending.  This policy of ‘normalisation’, as it is called, seemed to be justified after the Trump tax cuts were introduced in late 2017. Those measures led to a sharp rise in after-tax profits for US corporations and an apparent pick-up in US real GDP growth, reaching a 3% yoy rate at the end of 2018.  All looked well.

However, as I argued back in spring 2018, the global economy had actually peaked.  And now nearly one year later, forecasts for a continued ‘recovery’ have been reversed.  A year ago, the Fed had raised its real GDP growth forecast for the whole of 2018 to 2.7% and 2.4% for 2019.  Now at its March 2019 meeting, it has lowered its forecast for 2019 to 2.1% and just 1.9% for 2020, slowing again to just 1.8% in 2021 – well below the boasted 3%-plus that Trump claims his tax measures would achieve permanently.

So now the Fed is stopping its rate hiking and also ending its monetary tightening policy of running down its huge holdings of government bonds that it had built up as part of the ‘quantitative easing’ programme, launched in the Great Recession to save the banks and provide cheap money for investment.

What is happening?  Well, it always was a risk that hiking interest rates when economic growth and investment were weak would cause a stock market collapse and a new economic slump.  Now with US economic growth in the current quarter to the end of March likely to be no more than at a 1.5% annual rate and the Eurozone, the UK and Japan slipping back towards outright recession, the Fed has taken fright and put its normalisation policy into cold storage. So the Long Depression is not over after all.

The most startling difference, however, between the Long Depression and the Great Depression of the 1930s is that, in the last decade in the major economies, the official unemployment rate has dropped back to near record lows (in the US, UK, Japan).

And yet inflation has not spiralled upwards at all.  The trade-off between low unemployment and high inflation (as shown by the so-called Phillips curve), is a hallmark prediction of Keynesian aggregate demand theory. But it has not materialised.  The Phillips curve (ratio of the unemployment rate to the inflation rate) is nearly flat in most capitalist economies – there is little trade-off.

This is confounding mainstream economic thought and the policies of central banks, as I outlined in my previous post. “I don’t feel we have convincingly achieved our 2% mandate in a symmetrical way,” said Fed chair Jay Powell. “It’s one of the major challenges of our time, to have downward pressure on inflation”.

What seems to have happened is that, in the wake of the Great Recession, in an environment of low profitability on capital in most major economies, companies have opted to take on more labour rather than invest.  The new labour entrants are being employed in low-wage occupations, and/or on temporary and part-time contracts. 

For example, there are 17% of American workers only employed part-time, one-third more than in the 1960s.  The US official unemployment rate may be down but that is partly because many Americans of working age have disappeared from the labour market: to study, work informally or just live at home with the family.

And there has been a rise in self-employment – in the so-called ‘gig economy’. So, while skilled workers (in short supply) have begun to experience wage rises, the bulk of the non-management workforce in the US, the UK, Japan and Europe instead have seen significant periods of falling real earnings. While the average real GDP growth rate per person in the US has been about 1.5% since 2009, average hourly real earnings for most US workers have risen only 0.8% a year.

Thus there has been no ‘wage-push’ inflation and average real incomes have stagnated.  The capitalist sector has not increased investment in new machinery, plant or technology to a level that would lead to replacing labour or boosting the productivity of the existing workforce.  Whereas in the Great Depression of the 1930s, unemployment remained high up to the start of WW2 while productivity rose sharply; the opposite is the case in this Long Depression.

The latest estimate of global capital investment made by JP Morgan economists suggests that investment orders are falling and imports of capital goods have moved into negative territory.

In contrast, the US stock market heads back to new highs. We are now in an economic world where there appears to be a sort of ‘full employment’, but stagnant real wages (for most), low interest rates and inflation and above all low productive investment. Meanwhile corporate debt is rising fast globally as major companies issue bonds at low rates of interest in order to buy back their own shares and thus boost the company’s stock price and continue the party.

The Long Depression has become a fantasy world of rising financial asset prices, low investment and productivity growth, where nearly everybody can get a job (working part-time, temporary or self-employed), but not a living.

Secular stagnation, monetary policy and John Law

March 16, 2019

Last week, the prestigious Brooking Institution held a conference on the efficacy of monetary policy in stimulating and sustaining economic growth.  At the conference, Larry Summers, former US Treasury secretary and professor at Harvard University and Lukasz Rachel of the Bank of England, presented a paper that aimed to revive, yet again, the idea that the major capitalist economies are locked into ‘secular stagnation’: Our findings support the idea that, absent offsetting policies, mature industrial economies are prone to secular stagnation.”

According this thesis, there is a long-term stagnation in the major capitalist economies.  Despite central banks pushing interest rates down to zero or even below (so that bankers and capitalists are paid to borrow!); and despite central banks printing huge amounts of money to buy bonds and other financial assets (quantitative easing), real GDP growth and investment remain weak.  Although unemployment rates are officially near cycle lows in many countries, inflation is equally low, confounding the traditional Keynesian view that there is a trade-off between employment and inflation (the so-called Phillips curve).

Central bank monetary stimulation has failed, except to promote ‘credit bubbles’ and speculation in financial assets and property. For example, here are the conclusions of a recent study on the impact of the monetary injections of the ECB in Europe: “the efforts of the ECB to hit its inflation target would be more credible if there was convincing empirical evidence that its balance sheet policies are effective at stimulating output and inflation. Our recent research shows that this macroeconomic evidence is still lacking.”

And there is every prospect of another economic slump approaching in which central banks will be powerless to do anything as interest rates are already near zero and the balance sheets of central banks are already at record highs. “Our findings support the idea that, absent offsetting policies, mature industrial economies are prone to secular stagnation. This raises profound questions about stabilization policy going forward.” (Summers and Rachel)

In the FT, Keynesian columnist Martin Wolf echoed the views of Summers and Rachel.  Interest rates are near all-time lows and if you follow the Fisher-Wicksell theory of a ‘natural’ rate of interest that enables full employment, then it now seems that the natural ‘private sector’ interest rate needed to achieve jobs for all who want them has be in negative territory.

Of course, this so-called natural rate is a dubious concept at best.  But even you accept the theory, as it seems many Keynesians want to do [“That is the root of our problem: the natural nominal rate of interest … today is less than zero, and so the Federal Reserve cannot push the market nominal rate of interest down low enough.” Brad DeLong], it just exposes the problem.  Monetary policy has not and will not work in restoring the capitalist economy to a pace of growth that delivers investment and thus sustains jobs at rising real wages.

Indeed, as I have pointed out before, Keynes also realised after the Great Depression continued deep into the 1930s, that his advocacy of low interest rates and even ‘unconventional’ monetary policy (buying government bonds and printing money) was not working: ““I am now somewhat sceptical of the success of a merely monetary policy directed towards influencing the rate of interest… since it seems likely that the fluctuations in the market estimation of the marginal efficiency of different types of capital, calculated on the principles I have described above, will be too great to be offset by any practicable changes in the rate of interest”.  In other words, there is no natural rate of interest low enough to persuade capitalists to borrow and invest if they think the return on that investment would be too low.  You can take a horse to water, but you cannot make it drink.

This week the Bank of Japan monetary committee met and threw up its hands in despair.  After years of central bank ‘unconventional’ monetary easing (buying government bonds to the tune of 100% of GDP!) by printing money, the huge injection of credit into the banks has had no effect in lifting the economy.  As Darren Aw, Asia economist with Capital Economics, remarked: “There is a good chance that Japan’s economy will contract again in Q1 2019, for a third time in five quarters”… Given this, the key question for the Bank of Japan is no longer when it might retreat from its ultra-loose policy stance but whether it can do any more to support the economy.” Thus the first of the PM Abe’s three arrows of economic policy (monetary easing, fiscal stimulus and neoliberal de-regulation) has failed.

Now it’s true that per capita GDP growth in Japan since the end of the Great Recession ten years ago is actually faster than in most other major capitalist economies.  But that is simply because Japan has a sharply falling population.  Real and nominal (before inflation) GDP has been virtually static.  National output has remained more or less the same but there are less people that generate and consume it.  Japan has the lowest working population as ratio to total population in the top 12 economies of the world.

And yet monetary easing is still pushed by Keynesians, especially the more radical ones from the post-Keynesian school, including those following Modern Monetary Theory (MMT).  If the state and/or central bank prints money, it can use that money to stimulate the capitalist economy to get it going.  Money is not so much the root of all evil but the genesis of all that is good, it seems.  This sentiment reminds me of the earliest exponent of the magic of money – or the ‘money fetish’, namely John Law, who around 300 years ago had a unique opportunity to apply money printing to put an economy on its feet.

Ann Pettifor, the left Keynesian exponent of magic money, has called John Law a “much maligned genius whose 1705 account of the nature of money cannot be bettered”.  This proto-Keynesian was the son of a wealthy Scottish goldsmith and banker. Law was born in Edinburgh, proceeding to squander his father’s substantial inheritance on gambling and fast living. Convicted of killing a love rival in a duel in London in 1694, Law bribed his way out of prison and escaped to the Continent.  There Law concentrated on developing and publishing his monetary theory cum scheme, which he presented to the Scottish Parliament in 1705, publishing the memorandum the same year in a tract, Money and Trade Considered, with a Proposal for Supplying the Nation with Money (1705).

Law argued for a central bank to issue paper money backed by ‘the land of the nation’. Echoing the MMT (or is it the other way round?), Law proposed to “supply the nation” with a sufficiency of money. This would vivify trade and increase employment and production. Like MMT, Law stressed money is a mere government creation which had no intrinsic value. Its only function is to be a medium of exchange and not any store of value for the future.

Law was sure that any increased money supply and bank credit would not raise prices and expanding bank credit and bank money would push down the rate of interest (MMT again). To Law, as to Keynes after him, the main enemy of his scheme was the menace of “hoarding,” a practice that would defeat the purpose of greater spending.  So, like the late 19th-century German money fetisher Silvio Gesell, Law proposed a statute that would prohibit the hoarding of money.

Amazingly Law found a supporter for his theories in the regent of France. The regent, the Duke of Orléans, set up Law as head of the Banque Générale in 1716, a central bank with a grant of the monopoly of the issue of bank notes in France. He was made the head of the new Mississippi Company, as well as director-general of French finances. The Mississippi Company issued bonds that were allegedly “backed” by the vast, undeveloped land that the French government owned in the Louisiana territory in North America.

This scheme eventually led, not to a booming economy, but instead to a speculative financial bubble where bonds, bank credit, prices, and monetary values skyrocketed from 1717 to 1720.  Finally, in 1720, the bubble collapsed and Law ended up as a pauper heavily in debt, forced once again to flee the country.  Law was not so much a ‘much maligned genius’ but more “a pleasant character mixture of swindler and prophet” Karl Marx (1894: p.441).  What the Law debacle showed was that the state just issuing money cannot replace the ‘real economy’ of production and trade. Money alone does not create investment or production.

Of course, modern Keynesians (unless they are of the MMT variety) do not promote unending printing of money for governments and the private sector to spend.  That’s because they have been forced to recognise; as John Law found in 1719-20; and as Keynes found in 1933; and as Abe in Japan has found now; and the secular stagnationists also accept, printing money does not work if capitalists and bankers hoard that money or switch it into speculative investments in financial assets.

So what’s the answer?  Well, as Martin Wolf puts it: “The credibility of the “secular stagnation” thesis and our unhappy experience with the impact of monetary policy prove that we have come to rely far too heavily on central banks. But they cannot manage secular stagnation successfully. If anything, they make the problem worse, in the long run. We need other instruments. Fiscal policy is the place to start.”  Yes, it’s back to fiscal stimulus.  But will that work either?

Last year President Trump launched a fiscal stimulus of sorts by cutting taxes for the rich and the big corporations.  It boosted after-tax profits in 2017 sharply and real GDP growth ticked up a little towards 3% a year.  But that boost has been all too fleeting.  US real GDP growth is heading back down to below a 1% rate in this quarter and business investment is also turning down.

One of the policy arrows of Abenomics in Japan was fiscal stimulus.  Indeed, there is no major economy that can match Japan for its government running permanent budget deficits (MMT-style).

Japan: annual budget deficits to GDP (%)

This should be the policy dream of MMT and other post-Keynesians.  But it has not worked in Japan.  Japan has ‘full employment’, but at low wages and with temporary and part-time contracts for many (particularly women).  Real household consumption has risen at only 0.4% a year since 2007, less than half the rate before.  So fiscal stimulus has not worked in Japan which remains in ‘secular stagnation’.

And it did not work in the Great Depression of the 1930s.  After dropping monetary easing as the policy answer to the depression, in the Los Angeles Times on 31 December 1933, Keynes wrote: ‘Thus, as the prime mover in the first stage of the technique of recovery, I lay overwhelming emphasis on the increase of national purchasing power resulting from governmental expenditure which is financed by loans and is not merely a transfer through taxation from existing incomes. Nothing else counts in comparison with this.’   Deficit-financing was the answer.

The Roosevelt regime ran consistent budget deficits of around 5% of GDP from 1931 onwards, spending twice as much as tax revenue.  And the government took on lots more workers on jobs programmes (MMT-style) – but all to little effect.  The New Deal under Roosevelt did not end the Great Depression.  Keynes summed it up “It is, it seems, politically impossible for a capitalistic democracy to organize expenditure on the scale necessary to make the grand experiments which would prove my case — except in war conditions,” (from The New Republic (quoted from P. Renshaw, Journal of Contemporary History  1999 vol. 34 (3) p. 377 -364).

Wolf recognises that fiscal policy may also not work. “It is of course essential to ask how best to use those deficits productively. If the private sector does not wish to invest, the government should decide to do so.” So if the ‘private sector’ (ie the capitalist sector) won’t increase investment rates to boost growth despite negative interest rates and despite huge government money injections funded by money printing, the government will have to step in do the job itself, apparently.

Thus, the Keynesian/MMT answer is to act as a backstop to capitalist failure. But the capitalist sector dominates investment decisions and it makes those on the basis of potential profitability, not on the cost of borrowing. Keynes saw it as politically impossible to ensure sufficient investment through government spending – and he was right in a way. Only complete control of the capitalist sector could enable governments to ensure full employment at decent wages. At this point, I’m tempted to repeat the comment of left Keynesian Joan Robinson to MMT/Keynesians: “Any government which had both the power and will to remedy the major defects of the capitalist system would have the will and power to abolish it altogether”.

Neoliberalism: not so bad?

March 12, 2019

I don’t really like the term ‘neoliberal’ because it is used lazily as an alternative to pro-capitalist policies or even to the word ‘capitalism’ itself. In doing so, it causes confusion in explanations about trends and failures in capitalist development.  What flows is the argument that if ‘neoliberalism’ is ended, then we can return to ‘managed capitalism’ or social democracy’, neither of which, in my view, should be used to suggest something different from the capitalist mode of production itself.

And if leftists continue to use ‘neoliberalism’ as a term to replace capitalism (or as some nasty ‘free market version), they open the door to the sort of nonsense that economic journalist Noah Smith concocted last week, as expressed in his Bloomberg piece: “Neoliberalism should not be a dirty word on the left”.

In his piece, Smith argues that by attacking neoliberalism,“Too many people forget the contribution markets have made to human well-being.”  He justifies the success of neoliberalism (as defined by him as capitalist market forces and policies that support such) with three main stylised facts.

The first is that “Market liberalization in countries such as India and China seems to have precipitated a shift to faster growth, while trade and investment links with rich countries have helped these and other developing countries tremendously.”  So China’s growth miracle is a product of neoliberal policies of ‘market liberalisation’, presumably introduced by Deng in the late 1970s and supplemented by foreign investment and China joining the World Trade Organisation (WTO).

This story has been perpetuated by many mainstream economists.  But it does not hold water.  Yes, China opened up sectors of the economy to foreign investment and the market, particularly in agriculture.  But the bulk of investment and foreign trade was still controlled by the state and state corporations; and capital controls were in force.  The state was everywhere in the operation of the economy.  So was China’s success really a product of neoliberalism?  See my post on this misconception here.

The second argument is that neoliberal policies have “helped pull a billion people out of desperate poverty, and billions more are on the way to becoming middle class.”  This is yet another myth offered by the apologists for global capitalism by the likes of Microsoft billionaire, Bill Gates, among others. Smith follows in those footsteps to justify ‘neoliberalism’.

Anthropologist Jason Hickel has provided an excellent refutation of this claim that global poverty is being solved and falling fast, thanks to capitalism.  Much depends on how to define poverty.  Hickel:  “If we use $7.40 per day, we see a decline in the proportion of people living in poverty, but it’s not nearly as dramatic as your rosy narrative would have it. In 1981 a staggering 71% lived in poverty. Today it hovers at 58% (for 2013, the most recent data). Suddenly your grand story of progress seems tepid, mediocre, and – in a world that’s as fabulously rich as ours – completely obscene…. “And if we look at absolute numbers, the trend changes completely. The poverty rate has worsened dramatically since 1981, from 3.2 billion to 4.2 billion, according to World Bank data. Six times higher than you would have people believe. That’s not progress in my book – that’s a disgrace.

In his pursuit of praise for neoliberalism (in reality capitalism) Smith has elsewhere tried to trash Hickel’s arguments that global poverty has not really declined.  But, as usual, Smith and others who take his line, ignore the key fact that the fall in global poverty levels, whatever the threshold points chosen, is mostly down to the massive reduction in poverty levels in China – a country that can hardly be considered having an economy that operates on neoliberal free market forces (although Smith seems to claim it does!).

Of the billion that Smith cites, there are over 800m Chinese who have been taken above the poverty threshold in the last 30 years.  Sanjay Reddy looked at the poverty data excluding China. He found “modest decreases in total poverty headcount or even increases, sometimes sizable, especially at higher poverty lines & over longer periods, more marked in certain regions.”

Smith supplements his argument for neoliberalism by arguing that in the last 30 years “progress in the developing world has been impressive — something for which neoliberalism probably deserves a lot of credit — but it is far from complete; most of South Asia is still very poor, and much of Africa is just beginning to industrialize.” Indeed, far from complete.  The inhabitants of Nigeria, Africa’s most populated country or those of the Congo can tell Smith that progress in their countries has not been “impressive” at all. And not just there.  According to Ha-Joon Chang, a Cambridge economist, during the 1960s-and-70s per capita income in Sub-Saharan Africa was around 1.6% per annum; however, after they were imposed with a neoliberal economic model by the West, during the 1980s and 90s, per capita income fell to only 0.7% per year.

What industrialisation that has taken place in recent decades (beyond just basic resource and agro commodity production) in Africa is mainly due to the investment being offered and applied by China – the opposite of Smith’s model of neoliberalism, in my view.

Smith also argued that “neoliberal policies might have led to faster productivity growth in the 1990s and early 2000s” in the advanced capitalist economies.  You see “The spurt of growth is commonly attributed to the information-technology boom, but that boom might not have been possible if the US had more strictly regulated emerging industries in order to protect favored incumbents.”  This is just speculation without evidence.  Whatever “spurt” in productivity took place in the hi-tech boom of the 1990s, it was still way less than in the pre-neoliberal period of the 1950s and 1960s (see graph).

Moreover, it has been the state that has sparked much of that ‘innovation’ back in the 1960s and after, Mariana Mazzacuto, in her book, The Entrepreneurial State, explains thatthe real story behind Silicon Valley is not the story of the state getting out of the way so that risk-taking venture capitalists – and garage tinkerers – could do their thing. 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.”

Contrary to Smith’s neoliberal view, state-owned industry and economic growth often go together – “the seldom-discussed European success story is Austria, which achieved the second highest level of economic growth (after Japan) between 1945 and 1987 with the highest state-owned share of the economy in the OECD.” (Hu Chang).

Smith claims neoliberal reforms in the labour market helped to achieve lower unemployment rates in places like Germany. “Germany suffered high unemployment in the 1980s and 1990s, thanks to its rigid labour market regulations; eventually, it eased those restrictions, which substantially lowered the unemployment rate.”  Here he refers to the infamous Haartz labour reforms that introduced a tiered employment system, putting millions into low wage programmes that boosted German industry’s profitability while keeping real wage incomes stagnant.

About one quarter of the German workforce now receive a “low income” wage, using a common definition of one that is less than two-thirds of the median, which is a higher proportion than all 17 European countries, except Lithuania.  A recent Institute for Employment Research (IAB) study found wage inequality in Germany has increased since the 1990s, particularly at the bottom end of the income spectrum. The number of temporary workers in Germany has almost trebled over the past 10 years to about 822,000, according to the Federal Employment Agency.  In my view, this is not the best example of the ‘success’ of neoliberal policies, at least not for labour.

It is ironic that Smith pushes the policies of the ‘free market’ at a time when all the trends in the current neoliberal world show slowing growth in real GDP, productivity and investment, along with stagnant real wages and rising inequality.

And yet, Smith presses on with the argument for neoliberal policies to “restrain social democrats’ more ambitious impulses” and “to protect the US economy’s entrepreneurial private sector, and to make sure that technological progress and international trade don’t get forgotten.”  In other words, he  reckons that we need to balance, against the urgent need for decent public services, proper labour rights and conditions, control of the corrupt and unproductive finance sector and the avoidance of disastrous economic slumps, the fundamental (neoliberal) aim to raise the profitability of the capitalist sector.  Because we must not ‘forget’ the “contribution of markets to human well-being.”

Demographic demise

March 8, 2019

There is one outstanding statistical feature of 21st century capitalism.  Capitalism is increasingly failing to develop what Marx called the “productive forces” (namely the technology and labour necessary to expand the output of things and services that human society needs or wants).  As measured by gross national product in all the economies of the world (or per person), world capitalism is finding it more and more difficult to expand.

When Marx and Engels wrote the Communist Manifesto 170 years ago, they proclaimed the productive power unleashed by the capitalist exploitation of labour power, based on using more and more means of production (machines, technology etc) to replace human labour, while extending its tentacles to all parts of the globe.  Indeed, the rapacious drive for profit has led to an uncontrolled destruction of nature and of the earth’s resources that has polluted the planet.  And now, fossil fuel production has caused an increasingly irreversible global warming that is changing the earth’s climate, bringing with it extreme weather and disasters.

Last year global GDP among the world’s 195 nations hit a record $85trn.  Remarkably, three-quarters of this was accounted for by just 14 economies – the lucky few with an individual GDP in excess of $1trn.

The global population also hit a record last year of 7.6bn.  That’s a doubling in less than half a century.  The working age population (WAP) has reached 5bn, but this is mainly outside the top 12 economies (ie G14 minus India and Brazil).

In the major capitalist economies, output is now expanding much more slowly than ever before.  As Alan Freeman has shown in a recent paper, “economic growth of the industrialised North has fallen continuously, with only brief and limited interruptions, since at least the early 1960s. The trend is extremely strong and includes all major Northern economies without exception.” The_sixty-year_downward_trend_of_economi (1)

As Freeman concludes, “we face, not merely a decline in the GDP growth rate of one country (for example, the United States, whose decline has been studied more exhaustively) but of an entire group – the advanced or industrialised countries – whose growth rates follow  the same trend and indeed, have converged. The trend observed is thus highly likely to be systemic – accounted for by the structure of the world economy as a whole – than being a result of the problems or vagaries of one particular country.”

Capitalism is not fulfilling its only claim to fame –expanding the productive forces.  It is exhausted.  Alongside that, inequality of wealth and income in the major economies is widening, poverty levels and the gap between rich and poor countries and people is widening.  And nature and the climate are severely damaged.

Economic growth depends on two factors: 1) the size of employed workforce and 2) the productivity of that workforce.  On the first factor, there is a demographic demise.  The advanced capitalist economies are running out of more human labour power.  As for the second factor, the productivity growth of the employed workforce is slowing.

For the first time since the emergence of capitalism as the dominant mode of production globally, the largest economies – the G12 — saw their collective working age populations (WAP) decline. And this decline will accelerate, according UN Population Division forecasts.

Of the 14 economies with $1trn or more GDP, there are only two – India and Brazil – where the working age population will grow over the next generation.  The other 12 will experience a decline in their workforce.  It’s possible that increased immigration from more populous regions could enable the US, the UK, Canada and Australia to expand their workforce for a while – although the governments in all these countries want to cut back immigration.  In Japan, Germany and Italy even immigration will not stop the fall.  In South Korea, Germany and Italy, excluding immigration, the workforce will fall by 1% a year over the next ten years.  So, other things being equal, that is 1% a year of potential GDP growth.

As a result, these leading capitalist economies will have ageing workforces and an increasingly dependent non-working population.  Currently, among the biggest economies, people of working age (15-64 year olds) typically account for 65% of the total population.

Japan’s rapidly ageing population, however, shows the way forward.  By 2030, the ratio of WAP/total population will decline everywhere.  For those countries unable to “import” skilled working-age people, it will decline precipitously.

Then there is the productivity of that declining workforce.  If productivity growth could be accelerated, then this could compensate for the contraction in the workforce and so sustain real GDP growth.  But global productivity growth is slowing.

Over the last 40 years and especially in the last 15, there’s been a broad-based slowdown in output per hour worked across the major economies.  For the G11 (excludes China), it’s currently running at a trend rate of just 0.7% p.a.

Russia’s productivity level is falling, while that of Italy and the UK is hardly moving.

If we add together the potential growth in the workforce and the growth in productivity of that workforce, we can get a forecast of potential real GDP growth over the next ten years.  And remember, this assumes no new slumps in investment, employment and production from a crisis in capitalist production.

Without net immigration, real GDP across the G11 bloc will expand by less than 1% a year, with Australia doing best at 0.9% a year, while Russia and Italy could suffer an annual shrinkage of a similar proportion.  With immigration, Australia’s potential annual growth could reach the heady heights of 1.7% a year, but everybody else would have a sub-1% growth rate. Even allowing for some skilled immigration from outside, it’s unlikely that real GDP growth for the G11 bloc as a whole would exceed 0.5% p.a!

But why is productivity growth in the major economies falling?  The productivity puzzle has been debated by mainstream economists for some time now.  The ‘demand pull’ Keynesian explanation that capitalism is in secular stagnation due to a lack of effective demand to encourage capitalists to invest in productivity enhancing technology.  Then there is the supply-side argument from others that there are not enough effective productivity-enhancing technologies to invest in – the day of the computer, the internet etc, is over and there is nothing new that will have the same impact.

But there is also another very simple explanation.  Evidence shows that productivity growth is mainly driven by capital investment, which replaces labour with machines – the machines boost the output of each worker using the technology and also reduce the number of workers needed.  There are three factors behind productivity growth, the amount of labour employed, the amount invested in machinery and technology and the X-factor of the quality and innovatory skill of the workforce.  Mainstream growth accounting calls this last factor, total factor productivity (TFP), measured as the unaccounted for contribution to productivity growth after capital invested and labour employed.

In the case of the US, all three factors were at their strongest in the ‘hi-tech’ decade of the 1990s, but in the 2000s, the contribution of capital investment and labour employed dropped and since the Great Recession and in the subsequent Long Depression, all three factors have declined.

Part of the decline in US capital and labour investment can be laid at the door of increased globalisation as American companies went overseas for their factories and activities.  But investment to GDP has declined in all the major economies and since 2007 (with the exception of China).

In 1980, both advanced capitalist economies and ‘emerging’capitalist ones (ex-China) had investment rates around 25% of GDP.  Now the rate averages around 22%, or a more than 10% decline.  The rate fell below 20% for advanced economies during the Great Recession.

Indeed, productivity growth is also slowing in the so-called emerging economies like China, Brazil and India.

Why is investment in new technology so sluggish and thus failing to restore productivity growth?  The main reason for low investment in capitalist economies is that capitalists do not think it is profitable to invest in new technology to replace labour. Indeed, in the post Great Recession period, in many major economies like the US, the UK, Japan and in Europe, companies have preferred to keep their labour force and employ new workers on more ‘precarious’ contracts with fewer non-wage benefits and part-term or temporary contracts.  That is revealed in very low official unemployment rates alongside low investment rates.  Thus productivity growth is poor and overall real GDP growth is below-par.

The way to restore productivity growth and so get economies growing at a rate that can meet the demands of people for decent homes, education, health, and renewable energy is boost investment in new technology and the labour skills to go with it and distribute the gains to all.  But here lies the contradiction in capitalist production.  Production for profit not need.  And increased investment in technology that replaces value-creating labour leads to a tendency for profitability to fall.  So the need to expand and develop the productive forces comes into conflict capitalist accumulation.  And resolving that contradiction through slumps that raise profitability or by increased exploitation of the global workforce is getting much more difficult.

world rate of profit – average of 14 major economies (profits as % of fixed assets)

The global workforce available to exploit is not growing so fast and while there are still reserves of labour in Africa (eg Nigeria etc) and Asia, in the developed capitalist economies, the workforces are set to shrink; while productivity growth through more investment in technology cannot compensate if profitability continues to press downwards over time.