US rate of profit measures for 2018

November 4, 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tax justice now!

October 30, 2019

The Triumph of Injustice: how the rich dodge taxes and how to make them pay is a new book by the inequality experts, Gabriel Zucman and Emmanuel Saez. It’s a searing indictment of American tax system, which, far from reducing the rising inequality of income and wealth in the US, actually drives it higher. The authors argue that “even as they became fabulously wealthy, the rich have seen their taxes collapse to levels last seen in the 1920s. Meanwhile working-class Americans have been asked to pay more.” Saez and Zucman show that the super-rich in America actually pay a lower tax rate than everybody else.

On their special website, Tax Justice Now, they present a wealth of data on the impact of taxation on the redistribution of income and wealth in the US. There is one staggering fact: for the first time in over century, The 400 American billionaires pay lower tax rates than their secretaries; something that billionaire investor Warren Buffet once jokingly suggested.  His joke is confirmed as fact.

Considering all taxes paid at all levels of governments in 2018, the authors find that: “Contrary to widely held view, US tax system is not progressive. The effective rate of tax takes into account all forms of taxation on the individual (income taxes, corporate tax, capital income taxes etc). On that measure for the top 400 income holders(billionaires) the effective tax rate is 23% while it is 25-30% for working and middle classes. America’s tax system is now technically ‘regressive’ and is “a new engine for increasing inequality.”

Why do the poor pay more as a share of their income? There are very regressive sales taxes: the US has a ‘poor man’s VAT’ not only on goods and services, but also through higher payroll taxes. And the rich pay less because income from capital (property and financial assets) is hardly taxed: corporation tax is low, and there are low rates on dividends and capital gains.  Indeed, US federal corporate tax revenue almost halved in just one year (2018) with the Trump tax cuts.

Since 2010, it is mandatory to have health insurance in the US but it is mostly done through employers.  The cost is about $13,000 per covered worker, irrespective of income. So health insurance premiums are like a huge poll tax administered by employers on behalf of government, with mandatory payments to private insurers.  These insurance premiums are very regressive.

For the bottom 50% of income earners, average pre-tax income has stagnated since 1980, at $18,500 per adult. Out of this stagnating income, a rising share goes to paying taxes and health insurance.  In contrast, at the top, there are booming pre-tax incomes and falling taxes.  Thus inequality of income and wealth rises.

Saez and Zucman argue that there are three main drivers of declining progressivity: the collapse in capital taxation; allowing tax avoidance loopholes and outright evasion and; globalization with tax havens and competition to reduce taxes for foreign investment.

Everywhere, governments are competing to cut taxes for corporations: the global corporate tax rate has halved since 1980s.  The rich incorporate and retain earnings within their firms and so can save tax free. They only get taxed when they spend, unlike the rest of us.

The Panama papers revealed the extent of international tax avoidance and evasion. And Zucman’s previous book showed that $7.6 trillion in assets were being held in offshore tax havens, equivalent to 8% of all financial assets in the world.  In the past five years, the amount of wealth in tax havens has increased over 25%.  There has never been as much money held offshore as there is today. In 2014, the LuxLeaks investigation revealed that multinationals paid almost no tax in Europe, thanks to their subsidiaries in Luxembourg. In the US, Americans can set up an ‘offshore company’ in Delaware or other states like Nevada – they don’t even need to go to Panama.

Nick Shaxson, in his devastating book, Treasure Islands, tax havens and the men who stole the world, exposed the workings of all these global tax avoidance schemes for the big corporations and how governments connive in it or allow it.  Britain is already, on some measures, the biggest player in the global tax haven game. A spider’s web of satellite havens, from the Cayman Islands and the British Virgin Islands to Jersey, captures wealth from around the world, polishes it and feeds it to the City of London. The British Overseas Territories like the British Virgin Islands or Jersey operate for these purposes and it’s the main source of revenue for these islands.

A new report from Transparency International, provides the latest evidence of the devastation Britain’s offshore spider’s web causes globally. It tots up £325bn of funds “diverted by rigged procurement, bribery, embezzlement and the unlawful acquisition of state assets”, from more than 100 countries – mostly in Africa, the former Soviet Union, Latin America and Asia. The financial criminals include a kingpin of a multibillion-pound scam to loot Malaysia, and a jailed former Moldovan prime minister. “Peppered throughout most major cases of bribery, embezzlement and rigged procurement,” says Transparency International, “you will find a UK nexus.”

Saez and Zucman propose to end these iniquities by stopping corporate tax evasion and tax competition and taxing extreme wealth, while funding health care and education through progressive income taxation.  Corporate taxation should be on country-by-country profits. For example, if Apple pays 2% on the profits it books in Ireland, US would collect the missing 23% from the overall 25% tax rate.  If Nestle pays 2% tax globally but makes 30% of its sales in the US, US would collect 30% of the 25% US tax rate. If there were an international agreement on a 25% corporate minimum tax as a pre-condition for further trade liberalization, then taxes would be at the heart of future trade deals. The infamous tax havens in countries and islands would be closed down.

But the main proposal to reverse rising inequality of wealth and income advocated by the authors is a wealth tax. Saez and Zucman estimate that with a 10% wealth tax above $1 billion, US wealth inequality can return to its 1980 level. This would also generate revenue to pay for health and education services. For example, the wealth tax proposal of Democrat candidate Elizabeth Warren starting at 2% above $50m of wealth to 10% for billionaires would raise 1% of GDP and would eventually “abolish billionaires gradually”. If there was a 90% top rate, it would “abolish billionaires now”. 

The authors also propose a tax on all national income of 6% enough to fund health care for all.  It would mean a big tax cut for the bottom 90%, allowing the abolition of all sales taxes and Trump tariffs. Consumption taxes would have no role in this ‘optimal tax’.

At a conference organised by the Peterson Institute, a mainstream think-tank, former Clinton Treasury secretary and Keynesian guru, Larry Summers attacked the wealth tax proposals. In particular, Summers argued that Saez and Zucman’s data exaggerated the regressive nature of the American system because they only looked at taxation and did not include transfers (social welfare benefits).  Summers reckons: “government policy has become more redistributional if, as is proper, you include benefit.”  On their website, Saez and Zucman dealt with issue of social transfers. They found that, even after transfers, below average households benefited little from redistribution. Since it can be hard to know who benefits from certain forms of government spending (e.g., defense spending)”.


Summers then denied that wealth inequality was an important measure for redistribution. What if we had a “super effective social insurance against retirement, disability & health expenses?” Then average households would not save so much and would spend their assets. So the measure of wealth inequality would rise although people were actually better off!  But whether inequality would fall as the result of a ‘super effective social insurance’ is debatable. And anyway we don’t have such a system and wealth inequality is very high now.  Summers does not answer the basic question: why is inequality so high in the US?  At least, Saez and Zucman attempt to do so, blaming it on regressive taxation and tax havens.

Summers’ most excruciating argument against a wealth tax was that “forcing the wealthy to spend could boomerang. If the wealth tax had been in place a century ago, we would have had more anti-semitism from Henry Ford and a smaller Ford Foundation today.”  He implies that a wealth tax would force billionaires to put more money into tax-avoiding ‘foundations’ that could be used to promote nasty right-wing policies and attitudes like Henry Ford’s foundation in the 1930s.  So you see a wealth tax could generate more fascism from the rich!

Summers had to withdraw that implication.  But his conclusion stems from the assumption that billionaire foundations and charities are the best way to redistribute wealth, namely at the whim of a rich individual rather than through government social distribution.  Surely, the rich should pay taxes and everybody should get free public education and health, and get rid of private schools and hospitals funded by billionaire donations.

Summers is on stronger ground when he argued that a wealth tax won’t stop the rich controlling the political system: “there is a very real problem, but the wealth tax will not be remotely effective in addressing it. It costs $5 million a year at maximum to be a a central player in either political party. This will be easily affordable for the rich even with a wealth tax. Very few of the problems today involve personal contributions of the wealthy. They instead involve corporate contributions or large groups: e.g., the NRA, the insurance industry, sugar producers”.  Summers went on: “Saez was unable to provide even a single example of a specific instance of excessive political power that the wealth tax would address.”

And this is right. The real control of American society is through the big corporations and their lobbyists; wealthy individual billionaires play a minor role in that. It is the concentration of capital at the top through the grip of a few hundred corporations in the US and globally that is at the essence of power, control and wealth.  A wealth tax on billionaires will help state revenues and reduce inequalities to some extent. But the power of capital would not really be dented.

Of course, Summers was not making this point to propose taking over big capital, but the opposite: to reject a wealth tax on the rich. But it does expose the weakness of Saez and Zucman’s policy proposals.  They only deal with redistributing income and wealth after the event. But rising wealth and income inequality are not due to regressive taxation in the main, but to the structure of investment, production and income in the capitalist economy, namely the exploitation of labour by capital.

Indeed, rising inequality in the US and in all the major economies only kicked in from the 1980s onwards when public sector spending on health prevention and care and on education was cut back (neoliberalism); all to reverse the low levels of profitability for capital reached globally in the early 1980s.  But inequality of wealth and income existed even in ‘the golden age’ of the 1950s and 1960s.  It was lower mainly because of the strength of the labour movement, high investment in productive sectors as opposed to finance and real estate – and also higher taxation.

The reason for rising inequality from the 1980s was a rise in income going to capital in the form of profits, rent and interest and not due to the more skilled labour getting higher income than the less skilled. And this rising capital-income ratio was driven mainly by inherited wealth. ‘From rags to riches’ is not the story of capitalist wealth: it is more ‘From father to son’ or ‘From husband to widow’.

This is what Thomas Piketty showed in his book, Capital in the 21st century.  But because he conflated capital into wealth by including non-productive assets like housing, stocks and bonds in his measure, he lost sight of how wealth is created and appropriated, as Marx shows with his law of value: namely through exploitation. As a result, Piketty (and his colleagues Saez and Zucman) have policy prescriptions for a better world that are confined to progressive taxation and a global wealth tax to ‘correct’ capitalist inequality.

And yet Piketty et al recognise that it is utopian to expect the wealthy (who control governments) to agree to a reduction in their own wealth.  They do not suggest another way to achieve a reduction in inequality: namely, to raise wage income share through labour struggles and to free trade unions from the shackles of labour legislation.

And they do not propose more radical policies to take over the banks and large companies, stop the payment of grotesque salaries and bonuses to top executives and end the risk-taking scams that have brought economies to their knees. For them, the replacement of the capitalist mode of production is not necessary, only a redistribution of the wealth and income already accrued by capital. Abolish the billionaires by taxation, not by expropriation.

The top 1% own 45% of all global personal wealth; 10% own 82%; the bottom 50% own less than 1%

October 25, 2019

The annual Credit Suisse report on global wealth has just been released. This report remains the most comprehensive and explanatory analysis of global wealth (not income) and inequality of wealth. Every year the CS global wealth report analyses the household wealth of 5.1 billion people across the globe. Household wealth is made up of the financial assets (stocks, bonds, cash, pension funds) and property (houses etc) owned.  And the report measures this net of debt. The report’s authors are James Davies, Rodrigo Lluberas and Anthony Shorrocks.  Professor Anthony Shorrocks was my university flatmate, where we both graduated in economics (although he has the much better mathematical skills!).

Global wealth grew during the past year by 2.6% to USD 360 trillion and wealth per adult reached a new record high of USD 70,850, 1.2% above the level of mid-2018 with Switzerland topping the biggest gains in wealth per adult this year. The US, China, and Europe contributed the most towards global wealth growth with USD 3.8 trillion, USD 1.9 trillion and USD 1.1 trillion respectively.

As in every year it has been published, the report reveals the extreme inequality of personal wealth globally.  The bottom half of adults in the world accounted for less than 1% of total global wealth in mid-2019, while the richest decile (the top 10% of adults) possessed 82% of global wealth and the top percentile (1%) owned nearly half (45%) of all household assets. Wealth inequality is lower within individual countries: typical values would be 35% for the share of the top 1% and 65% for the share of the top 10%. But these levels are still much higher than the corresponding figures for income inequality, or any other broad-based welfare indicator.

While advances by emerging markets continued to narrow the gaps between countries, inequality within countries grew as economies recovered after the global financial crisis. As a result, the top 1% of wealth holders increased their share of world wealth. But this trend appears to have abated since 2016 and global inequality has edged downward slightly.  Whereas the top 1% of wealth holders had 50% of the world’s personal wealth in 2016, up from 45% in 2006, that ratio has slipped back to 45%. Today, the share of the bottom 90% accounts for 18% of global wealth, compared to 11% in 2000.

The wealth pyramid captures the wealth differences between adults. Nearly 3bn adults – 57% of all adults in the world – have wealth below USD 10,000 in 2019. The next segment, covering those with wealth in the range USD 10,000–100,000, has seen the biggest rise in numbers this century, trebling in size from 514 million in 2000 to 1.7 billion in mid-2019. This reflects the growing prosperity of emerging economies, especially China. The average wealth of this group is USD 33,530, still less than half the level of average wealth worldwide, but considerably above the average wealth of the countries in which most of the members reside. This leaves the final group of countries with wealth below USD 5,000, which are heavily concentrated in central Africa and central and south Asia.

So here’s the staggering thing. If you live in one of the advanced capitalist countries and you own your house and have some savings, then you will be among the top 10% of all wealth holders in the world.  That’s because the vast majority of households in the world have little or no wealth at all.

A person needs net assets of just USD 7,087 to be among the wealthiest half of world citizens in mid-2019! However, USD 109,430 is required to be a member of the top 10% of global wealth holders and USD 936,430 to belong to the top 1%.  African and Indian citizens are concentrated in the base segment of the wealth pyramid, China in the middle tiers, and North America and Europe in the top percentile. But also evident is a significant number of North American and European residents in the bottom global wealth decile, as younger adults acquire debt in advanced economies, resulting in negative net wealth.

And inequality gets wider at the top of the pyramid.  There are 46.8 million millionaires in the world in mid-2019, but most have wealth between USD 1 million and USD 5 million: 41.1 million or 88% of the millionaires. Another 3.7 million adults (7.9%) are worth between USD 5 million and 10 million, and almost exactly two million adults now have wealth above USD 10 million. Of these, 1.8 million have assets in the USD 10–50 million range, leaving 168,030 Ultra High Net Worth (UHNW) individuals with net worth above USD 50 million in mid-2019.  In effect, these are the ruling elite of the world.

The United States has by far the greatest number of millionaires: 18.6 million, or 40% of the world total. For many years, Japan held second place in the millionaire rankings by a comfortable margin. However, Japan is now in third place with 6%, overtaken by China (10%). Next come the United Kingdom and Germany with 5% each, followed by France (4%), then Italy, Canada and Australia (3%).

Switzerland (USD 530,240), Australia (USD 411,060) and the United States (USD 403,970) again head the league table according to wealth per adult. The ranking by median average wealth per adult favours countries with lower levels of wealth inequality. This year, Australia (USD 191,450) edged ahead of Switzerland (USD 183,340) into first place.  So Australia has the highest median wealth per adult in the world (that’s mainly house values).

Financial assets suffered most during the financial crisis of 2008-9 and then recovered in the early post-crisis years. This year, their value rose in every region, contributing 39% of the increase in gross wealth worldwide, and 71% of the rise in North America. However, non-financial assets (property) provided the main stimulus to overall growth in recent years. Over the 12 months to mid-2019, they grew faster than financial assets in every region. Non-financial wealth accounted for the bulk of new wealth in China, Europe and Latin America, and almost all new wealth in Africa and India. But household debt rose even faster, at 4.0% overall. Household debt increased in all regions, and at a double-digit rate in China and India. The debt squeeze is coming.

Corporate debt, fiscal stimulus and the next recession

October 22, 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Capital not ideology

October 18, 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Poverty prize

October 14, 2019

Abhijit Banerjee, Esther Duflo and Michael Kremer have been jointly awarded the Nobel Prize in economics (or to be more exact, the Sveriges Riksbank Prize in memory of Alfred Nobel) for their experimental approach to alleviating global poverty.  Banerjee and Duflo — a couple both at work and in their private life — are professors at the Massachusetts Institute of Technology, while Kremer is a professor at Harvard University.

Duflo, 46, becomes only the second woman to be awarded an economics Nobel, after the US economist Elinor Ostrom who won the prize in 2009 for her work on human co-operation. She is also the youngest-ever laureate in economics: the previous record was held by Kenneth Arrow, who was 51 when he was awarded the prize in 1972.

The three, who often collaborate in their research, were awarded the prize —— for developing new, experimental research methods to identify the most effective policy interventions to fight poverty through field studies. “Our goal is to make sure the fight against poverty is based on scientific evidence,” Duflo told a press conference. “Often the poor get reduced to caricatures and even those [who] try to help them do not understand the deep roots of what is making them poor . . . We try to address problems as scientifically as possible.”  

The Nobel committee said the trio’s approach had “completely reshaped” development economics, with a clear impact on poverty and great potential to further improve the lives of the worst-off around the world.  An example cited by the committee was their work on the “learning crisis”, which found that providing textbooks would not by itself help children learn more in school, without better and more tailored teaching.

Kremer first ran field studies to explore these issues in Kenya in the mid-1990s, while Mr Banerjee and Ms Duflo later conducted similar trials in two Indian cities, Mumbai and Vadodara. Such field experiments have now become the standard method for development economists, the Nobel Committee said. Their approach mirrors those traditionally used in clinical trials for new drugs; but the Nobel committee noted that as well as testing whether a certain intervention worked, they also investigated why it worked, using contract theory and behavioural economics to understand the driving forces behind people’s decisions.

In some ways, having the prize awarded to development economists who study the issues of poverty or to be more exact, the problems of the poor and why they stay poor, is good news.  It is a move away from awarding the economics prize to neoclassical mainstream economists, usually from the University of Chicago, who have never done any empirical work in their lives, let alone experimental work.  Similarly, it was good news, in a way, when Angus Deaton won the prize for his empirical work on global poverty.  Now the winners are economists who have ‘got their hands dirty’ in field work globally to see the issues facing the poor at first hand.

Alan Kremer started the use of randomized trials to evaluate interventions in the social sciences. He created the well-known economic theory regarding skill complementarities called Kremer’s O-Ring Theory of Economic Development. This argues that workers with similar skills who work together will deliver higher productivity even if the technology is the same.  Perhaps a trivial and simple result, but apparently not obvious before.

Kremer also earlier proposed one of the most convincing explanations for the phenomenon of population growth prior to the early 1970s.  He showed that contrary to Malthus, high population spurs technological change and thus accelerates economic growth. From this work, Kremer has advanced various market incentives to encourage the development of vaccines for use in developing countries.

Duflo is a French economist and her research has focused on microeconomic issues in developing countries, including household behaviour, education, access to finance, health, and policy evaluation. In 2003, she co-founded Poverty Action Lab at MIT, which has since conducted over 200 empirical development experiments and train development practitioners in running randomized controlled trials.

Her partner in crime, Banerjee, co-authored with Duflo, Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty (2011).  Banerjee and Duflo claim that their book lays out a middle ground between “purely market-based solutions” to global poverty, versus “grand development plans.” They advocate the use of observation, using “rigorous randomized controlled testing” on five continents, and most importantly by actually listening to what the poor have to say. From this empirical approach, the authors believe that the best strategies for eradicating poverty can emerge. They believe that small changes can have big effects.

But again, you could say their conclusions are trivial e.g. “income per se matters for education decisions: Jamal will get less education than John because his parents are poorer, even if the income gains from education are the same for both”. This finding, they argue, is important, because if parental income plays such a vital role in determining educational investment, rich children will get more education even if they are not particularly talented, and talented poor children may be deprived of an education.  Surprise!

Banerjee and Duflo also seem to prefer the charter school model in America. They conclude that “these schools have been shown, in several studies based on comparing those winners and losers of the admission lotteries, to be extremely effective and successful. A study of charter schools in Boston suggests that expanding fourfold the capacity of charter schools and keeping the current demographic profile of students the same would have the potential to erase up to 40 percent of the citywide gap in math test scores between white and black children.”  Many will disagree with that conclusion – see and

Duflo, Banerjee and Kremer represent an approach in economics based on evidence and field surveys.  That can only be good.  But theory must also be relevant and the big picture cannot be replaced by micro studies.  Back in 2017, In the Richard Ely ASSA lecture, Esther Duflo reckoned economists should give up on the ‘big ideas’ and instead just solve problems like plumbers: “lay the pipes and fix the leaks”. This ignores whether the plumbing is designed properly in the first place. Far from fixing leaks, economists may be trying to stop a flood with a spoon.

Banerjee and Duflo have a new book out next month, called “Good Economics for Hard Times” Juggernaut Books.  The promo says it aims to “show how economics, when done right, can help us solve the thorniest social and political problems of our day.” That’s some claim. The blurb goes on: “Immigration and inequality, globalization and technological disruption, slowing growth and accelerating climate change–these are sources of great anxiety across the world. The resources to address these challenges are there–what we lack are ideas that will help us jump the wall of disagreement and distrust that divides us.” If that is right and they have the answers to the economic, social and political problems of our day using their experimental research that they have done over the last few decades, then they are certainly worthy winners of the prize.

Capitalism – not so alone

October 12, 2019

Branko Milanovic is the world’s leading expert on global inequality i.e the differences in income and wealth between countries and between individuals in different countries. He was a former chief economist at the World Bank.  After leaving the bank, Milanovic wrote a definitive study on global inequality which was updated in a later paper in 2013 and finally came out as a book in 2015, Global Inequality.  In his earlier papers and in that book, Milanovic presented his now famous ‘Elephant chart’ (shaped like an elephant) of the changes in household incomes since 1988 from the poorest to the richest globally.  Milanovic shows that the middle half of the global income distribution have gained 60-70% in real income since 1988 while those nearer the top group had gained nothing.

Milanovic found that those who have gained income the most in the last 20 years are the ones in the ‘global middle’.  These people are not capitalists.  These are mainly people in India and China, formerly peasants or rural workers have migrated to the cities to work in the sweat shops and factories of globalisation: their real incomes have jumped from a very low base, even if their conditions and rights have not.

The biggest losers are the very poorest (mainly African rural farmers) who have gained nothing in 20 years. The other losers appear to be some of the ‘better off’ globally.  But this is in a global context, remember. These ‘better off’ are in fact mainly working class people in the former ‘Communist’ countries of Eastern Europe whose living standards were slashed with the return of capitalism in the 1990s and the broad working class in the advanced capitalist economies whose real wages have mostly stagnated in the past 20 years.

However the UK think tank, the Resolution Foundation has taken Milanovic’s elephant graph to task.  Faster population growth in highly populated countries like China and India distorts his conclusion that middle income people in the globe made such strides. Controlling for the huge population rise in China and India shows that inequality between the average person in the imperialist economies of the West (North?) has increased, not decreased, compared to the poor economies of the global periphery (South?).  The elephant disappears.

In his 2015 book, Milanovic concludes that there is no longer any social or economic basis for class struggle of a socialist revolution.  So we must look for ways to make capitalism better and fairer. “Global inequality may be reduced by higher growth rates in poor countries and through migration.” Now in his new book, Capitalism Alone, Milanovic returns this theme and his ‘way out’.  Again he starts from the premise that capitalism is now a global system with its tentacles into every corner of the world driving out any other modes of production like slavery or feudalism or Asian despotism to the tiniest of margins.  But also capitalism is not just only mode of production, it is the only future for humanity.

So he says “Capitalism gets much wrong, but also much right—and it is not going anywhere. Our task is to improve it.”  Milanovic argues that capitalism has triumphed because it works. It delivers prosperity and gratifies human desires for autonomy. But it comes with a moral price, pushing us to treat material success as the ultimate goal. And it offers no guarantee of stability. In the West, ‘liberal capitalism’ creaks under the strains of inequality and capitalist excess. That model now fights for hearts and minds with what Milanovic calls “political capitalism”, as exemplified by China, which many claim is more efficient, but which is more vulnerable to corruption and, when growth is slow, social unrest.

Milanovic condemns inequality “I think it is bad for growth. It is bad for social stability, and it is bad for equality of chances, or equality of opportunity.”  And capitalism is bad because it inherently increases inequality.  “The system, the way it functions today, is generating — and, I’ll actually give it two examples — generating, really increasing, inequality. And that increasing inequality leads to the control of the political process by the rich. And, the control of the political process by the rich is really required for the rich to transfer, or transmit, rather, all these advantages. Be it through money — financial advantages – or, education, to their offspring. Which then reinforces the dominance of whatever is called the upper class.”  Yes, that sounds like capitalism.

So Milanovic favours increased spending on public goods and services (including education) and social insurance – and the introduction of taxes on rich’s property and wealth, in order to end inherited dynasties, so that you can only get rich by merit and hard work – as if you ever did!  So his answer to a better capitalism is the same as in his previous book, but this time with a degree of more optimism about achieving it: namely reducing inequality and expanding migration from poor to richer countries.

Although both capitalist ‘alternatives’ are riddled with corruption in their elites and state institutions, it is clear that Milanovic puts more faith in getting a return to the ‘liberal democratic’ model of Western (‘northern’) imperialism than he does for the ‘political capitalism’ of China.  But is Milanovic right to define the new cold war between Chinese and American capitalism as a contest between the liberal and the authoritarian, the meritocratic and the political?

Can we really accept this when we see Trump’s America; the callous and often brutal imperialist hegemony of the United States; and the corrupt money-bags ‘democracy’ that operates there, with its extreme and rising inequality. And can we really describe China, an authoritarian and corrupt state regime, as ‘political capitalism’?

As regular readers of this blog will know, I am not convinced that China is capitalist at all, given the overriding economic power of the state and its plan compared to the capitalist sector.  The lives of Chinese are much more decided by the state and state enterprises than through the vagaries and uncertainties of the market and the law of value.  As Milanovic says, China has grown in real GDP and average living standards in 70 years faster than any other economy in human history.  So is this really a demonstration of a successful capitalist economy (when all other capitalist economies only achieved less than a quarter of China’s growth rate and were subject to regular and recurring slumps in investment and production)?  Could not China’s different narrative be something to do with its 1949 revolution and the expropriation of its national capitalist class and the removal of foreign imperialism?  Perhaps capitalism is not alone after all.

So Milanovic’s dichotomy between ‘liberal democracy’ and ‘political capitalism’ seems false.  And it arises because, of course, Milanovic starts with his premise (unproven) that an alternative mode of production and social system, namely socialism, is ruled out forever.  In Global Inequality, Milanovic concluded that the idea of a united global proletariat making a worldwide revolution is out of the door because now the real inequalities are between Americans and Africans, not between capitalists and workers everywhere.  Trotsky’s international proletarian revolution is out of date: “This was the idea behind Trotsky’s “permanent revolution”. There were no national contradictions, just a worldwide class contradiction. But if the world’s actual situation is such that the greatest disparities are due to the income gaps between nations, then proletarian solidarity doesn’t make much sense.   Proletarian solidarity is then simply dead because there is no longer such a thing as global proletariat. This is why ours is a distinctly non-Marxian world.”

And yet the working class, both industrial workers and those in so-called ‘service’ industries, has never been larger in human history.  Globally, there were 2.2bn people at work and producing value back in 1991.  Now there are 3.2bn.  The global workforce has risen by 1bn in the last 20 years. Globally, the industrial workforce has risen by 46% since 1991 from 490m to 715m in 2012 and will reach well over 800m before the end of the decade.  Indeed, the industrial workforce has grown by 1.8% a year since 1991 and since 2004 by 2.7% a year, which is now a faster rate of growth than the services sector (2.6% a year)!  Globally, the share of industrial workers in the total workforce has risen slightly from 22% to 23%.   Capitalism is not alone; it has a gravedigger, the proletariat.

Milanovic dismisses this. In his new book, “I do believe, to a large extent, [capitalism] is sustainable. Even if all of inequality continue[s] to be the way that [it is], unchecked. It is sustainable, largely, because we don’t have a blueprint for an alternative system. However, something being sustainable, something being efficient, something being good, are two different things.”  Milanovic does not like capitalism, but to use Margaret Thatcher’s phrase in referring to her neoliberal policies for capitalism: he reckons there is no alternative (TINA).  So the aim must be, just as Keynes argued in the 1930s: “to make capitalism more sustainable. And that’s exactly what I think we should do now”.

The trouble is that Milanovic’s policies to reduce the inequality of wealth and income in capitalist economies and/or allow people to leave their countries of poverty for a better world seem to be just as (if not more) ‘utopian’ a future under capitalism than the ‘socialist utopia’ he rules out.

Knowledge commodities

October 8, 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A global manufacturing recession

October 1, 2019

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

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

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

Japan manufacturing PMI

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A rent-seeking economy?

September 27, 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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