Understanding socialism

December 6, 2019

The New York Times magazine has described Richard Wolff as “probably America’s most prominent Marxist economist”.  And that is probably not an exaggeration as a description of this emeritus Professor of Economics at the University of Massachusetts, Amherst and visiting professor at the New School University in New York.

Richard Wolff has been one of a handful of Marxist economists with full tenure at an American university.  And he has worked tirelessly to bring home to students and all who would listen in the US, the Marxist alternative explanation of the nature of US capitalism and its current crisis.  Wolff has written several important economics books, sometimes with his close collaborator, Stephen A. Resnick.  In particular, their recent book,  Contending Economic Theories, neoclassical, Keynesian and Marxian is a very useful and clear explanation of the main strands of economics for those who don’t know. Professor Wolff’s weekly show, Economic Update with Richard D. Wolff, is syndicated on over 70 radio stations nationwide and available for broadcast on Free Speech TV.

Now Wolff has published two short books designed to explain the ideas of Marxism and socialism in a straightforward way: Understanding Marxism and Understanding Socialism.  The first analyses capitalism. He goes through the concepts of how competition develops between the capitalists (p.51); how labour power is commodified (p.41); and how capitalism is prone to crises and instability (p.60). Any individual, he says “exhibiting a personal instability comparable to the economic and social instability of capitalism would long ago have been required to seek professional help and to make basic changes” (p.61). But capitalism limps on and threatens to take us all down with it. Until workers get to decide democratically what to do about replacing it, so it will continue.

As Wolff has said: “If you want to understand an economy, not only from the point of view of people who love it, but also from the point of view of people who are critical and think we can do better, then you need to study Marxian economics as part of any serious attempt to understand what’s going on. Not to do it is to exclude yourself from the critical tradition.”

Wolff concentrates on Marx’s key discovery about capitalism, namely the surplus value, which is what employers appropriate above what they pay for wages.  Wolff shows that productive workers are not compensated for the full amount and worth of their labour.  And that constitutes exploitation. The expropriators constitute a tiny percentage of the population, and they control what happens with that surplus value. It is this relationship of production, Wolff insists, that has thwarted the democratic promises of the American, French, and other bourgeois revolutions. And this system of minority rule over ownership of assets and people’s labour power is also the cause of the staggering inequality that afflicts the world now.

The weakness in Wolff’s narrative, at least as expressed in his previous books is his explanation of why capitalism has crises in investment, production and employment that damages the lives of billions.  Wolff adopts the classic underconsumption argument that capitalists pay “insufficient wages to enable workers to purchase growing capitalist output”.  Regular readers of this blog will know that I consider this theory of capitalist crises as wrong.  Marx rejected it; it does not stand up theoretically as part of Marx’s law of value or profitability; and empirical evidence is against it.

In the second book, Understanding Socialism, Wolff looks at various socialist experiments throughout history and suggests a new path to socialism based on workplace democracy.  Socialism allows the many to control the fruits of their labour.  And this would be done in a democratic way, with the workers voting on these concerns, as democracy is extended way beyond voting for politicians and even ballot initiatives, to the factory floor, the office, etc.

Wolff focuses on this democratization of the workplace as the basis of a socialist future.  Wolff correctly emphasises that the economic base of socialism is the collective ownership of the means of production.  But he is concerned not to adopt the central planning model of the failed Soviet Union, as he sees it.  So he wants decentralised democracy through workers cooperatives.  For him, the solution to recurrent crises and rising inequality lies in “changing the class structure of capitalist enterprises” and replacing them with “workers-directed enterprises.” 

Wolff is concerned, rightly, to correct the view that the socialist alternative to capitalism is simply the public ownership of the major corporations and a national plan.  Without democracy and workers control at company level there can be no real socialist development.  Otherwise state officials merely replace a capitalist board of directors.  This is “insufficient conceptually and strategically”.

But Wolff wants to include and emphasise the role of what he calls Workers Self-Directed Enterprises (WSDEs).  To me, this seems to be bending the stick too far the other way, being close the utopian socialist ideas of Fourier and Robert Owen. Workers cooperatives without planning implies that markets will continue to rule between coops, opening the door to the forces of the law of value, rather than directing productive forces in the interest of society as a whole.  It is one thing to achieve democracy at the workplace, but is it not jumping out of the frying pan into the fire, by leaving the wider economy to power of the market?

Economics as a social science

December 5, 2019

Recently, Benoît Cœuré, a leading French member of the Executive Board of the European Central Bank, delivered an address to economics students at the job forum of Paris School of Economics. He wanted to explain to the gathered students that becoming an economist was a great thing to do and paid well. “For many, a master’s degree is a natural step towards a PhD. And a PhD is essentially a promise of employment. In the United States, for example, the unemployment rate for PhD economists is about 0.8%, the lowest among all sciences.  Not a bad place to start from.”

But the money was less important because “your PhD should be fuelled by your passion and your love for research rather than by hopes of earning more money.” That was the reason he studied economics and worked his way up as an economics bureaucrat in the public sector, in ministries of economy and finance, statistical institutes, international organisations such as the IMF, World Bank and other development banks, OECD, and central banks such as the US Federal Reserve or the European Central Bank.  Working in these agencies, Cœuré, reckoned “is probably as close as it gets to applied economics.”

Cœuré’s experience in the public sector may be different from those of us who worked in the private sector.  Having worked in the private sector, in banks and other financial institutions in my ‘career’, economic policy advice is not the target but instead, ‘how to make money’. Economics is geared to either corporate strategy for profits in production and trade or to investment strategy for profits in financial speculation.

For Cœuré, economics “is literally about taking the models, tools and methods that you learn at class to help design public policies. And as a considerable fraction of that work then ends up being published as new research “there is a virtuous feedback loop between academia and public sector institutions… Macroeconomic models underpin almost all of our work at the ECB.”, says Cœuré. That raises the question of the utility of models in economics.

Marxist economist Ben Fine has attacked mathematical models in economics because they have replaced theory. “The goal “of modelling the economy is fundamentally misconceived… a model of the economy is not the economy itself”. “ For Fine, mainstream mathematical theory is “unfit for purpose”.  Models have a place but “their extreme limitations need to be recognised.”  As such, macroeconomics remains divorced from what is going on in the real economy.  For example, the famous accelerator-multiplier Keynesian model may show the instability in capitalism, but it does not show why.

On the other hand, Dani Rodrick reckons models are the strength of economics.  They are what makes economics a science.  Rodrik rejects the view that economics can provide “universal explanations or prescriptions”.  All mainstream economics can do is “map bits of economic reality”.  In other words, economics is not ‘political economy’ in the sense of the classical economists and Marx.

Cœuré recognises that models have their limitations. That’s when art, or rather artisanat – craftsmanship – comes in. We need to interconnect these models, and fit them into a general equilibrium view of how the euro area economy evolves dynamically – preferably in a tractable way.”  Unfortunately, the track record of general equilibrium models leaves much to be desired.

With collapse of Keynesian economics in the 1970s, the mainstream concentrated on explaining ‘business cycles’ or ‘fluctuations’ in an economy using ‘modern’ techniques of  modelling from what it called  ‘microfoundations’. Econometric analyses like the Phillips curve were ditched because such ‘correlations’ between employment and inflation had been proved wrong.  The job now was not to look at macro or aggregate data but to work out some ‘model’ that started with some premises of agent (consumer) behaviour or preferences and then incorporated some possible ‘shocks’ to the general equilibrium of the market and then considered the number and probability of possible outcomes.

Thus were born the Dynamic Stochastic General Equilibrium (DSGE) models.  They were based on equilibrium assumptions because they started from the premise that supply would tend to equal demand; they were dynamic because the models incorporated changing behaviour by individuals or firms (agents); and they were stochastic as ‘shocks’ to the system (trade union wage push, government spending action) were considered as random with a range of outcomes, unless confirmed otherwise. This is now what most macro economists spend their time doing.  Forget empirical evidence, forget macro data, find a ‘micro’ foundation (model) that might help to at least offer a guide to what possibly might happen.

But DSGE models have  proved to be worthless in explaining anything.  These models failed to predict before or explain after the Great Recession and are unable to explain the subsequent weak recovery, or Long Depression.  And it is not hard to see why.  There is a total absence of investment or profit as ‘shocks’ in these models.  Everything starts with consumer preferences; the arch consumer is king as in the neoclassical world and Keynesian aggregate demand is reduced to just consumption.

Since the Great Recession, general equilibrium models have lost their glamour to some extent. Cœuré quotes our recent Nobel prize winners, Abhijit Banerjee and Esther Duflo: “We, the economists, are often wrapped up in our models and our methods and sometimes forget where science ends and ideology begins. We answer policy questions based on assumptions that have become second nature to us because they are the building blocks of our models, but it doesn’t mean that they are always correct”.  

This is somewhat ironic. These Nobel prize winners do not use DSGE models. Instead they use Randomized Control Trials (RCT). You see: “good economics is much less strident, and quite different. It is less like the hard sciences and more like engineering or plumbing: it breaks big problems into manageable chunks and tries to solve them with a pragmatic approach – a combination of intuition and theory, trial and acknowledged errors.” The plumbing analogy follows closely Keynes’s view that economists are really like dentists, sorting out the aches and pains of capitalism.  Unfortunately, as Sanjay Reddy and others have pointed out, there are just as many faultlines in RCT as in DSGE models.  The Nobel prize winners’ ‘economics of poverty’ actually shows the poverty of economics.

That does not mean it is impossible to use mathematical models as long as they are based on realistic assumptions and tested empirically.  Marxist economics is based on scientific method. You start with a hypothesis that has realistic assumptions that have been ‘abstracted’ from reality and then construct a model or set of laws that can be tested against the evidence. The model can use mathematics to refine its precision, but eventually the evidence decides. Moreover, macro-economics is the world of the aggregate, not individual behaviour.  That delivers measurable data to test a theory.

The mainstream economics that Cœuré promoted to the Paris students as the basis for public policy has hardly proved successful in practice.  Just consider the ECB’s own attempt to deal with the banking crash of 2008-10, the euro debt crisis of 2011-3 and the subsequent attempt to revive the Eurozone economy. Cœuré claims that “the forward-looking nature of monetary policy makes the use of models indispensable”, but it seems that these models have proved to be ‘too simple’, and so monetary policy operations have become much more complex; with “forward guidance in central bank speak” and unconventional monetary policy’ like ‘quantitative easing’.

Cœuré says that “When we started purchasing securities, we had no guidance. but “over time, ECB staff have successfully filled this void. We now have state-of-the-art term structure models that help translate changes in the amount of bonds into changes in long-term interest rates.” Well, maybe.  But the ECB’s economic forward guidance on inflation and growth has been proved pretty much wrong.  The ECB has failed to achieve its 2% inflation target and real GDP growth has persistently fallen below ECB forecasts.  The Long Depression has defeated mainstream economics.

Forget forecasting.  Cœuré recognises that “uncertainty is a pervasive feature of our profession”, so he dismisses the criticism that economists failed to predict the outbreak of the financial crisis. “This criticism is nonsense. Do we expect physicians to predict illnesses? We don’t, of course. But we expect them to help us cure illnesses.  Economists should do the same. They should be judged by the quality of the advice they give.”

Again, we get the view that economists are like dentists, doctors or plumbers who clear up messes once they have happened.  But are doctors all that matter in human health?  Actually, improved doctoral skills in treating patients once they have become ill comes from scientific discovery about diseases, biology and the environment.  Successful drugs and medical practices are the result of learning what the cause of the illness is.  In medieval times, doctors applied all sorts of useless and dangerous treatments (leeches etc) because they did not know that about ‘germs’ (bacteria or viruses).  Cholera was eventually abated by a geographical study in London showing it was prevalent near bad drinking wells.  Malaria and smallpox were resolved by discovering the carriers of the bacteria in various animals.  Treatments by doctors then followed.

There is no substitute for the ‘big picture’. Economists should not be doctors but social scientists, or more accurately they should develop an economics that recognises the wider social forces that drive economic models, in particular, the social mode of production that is capitalism.  That is political economy, mostly not taught in universities and certainly not practised in international agencies.

In his address, Cœuré recognisedthat central banks had failed before the Great Recession. This was because its models expressed “an absence of a meaningful financial sector, which left models at a loss to explain the origins of the crisis and its consequences for the economy.”  And “prevailing models were built on a standard linear Gaussian set-up and hence proved inadequate to examine shocks on the scale of the global financial crisis.”  In other words, they assumed a normal steadily growing capitalist economy where there were no underlying contradictions that could erupt violently.

Remember the words of the then Fed chair Ben Bernanke back in 2004, just before the Great Recession.  He was proclaiming “The Great Moderation” that capitalism had become. “the substantial decline in macroeconomic volatility over the past twenty years, is a striking economic development. Whether the dominant cause of the Great Moderation is structural change, improved monetary policy, or simply good luck is an important question about which no consensus has yet formed.  This conclusion on my part makes me optimistic for the future, because I am confident that monetary policymakers will not forget the lessons of the 1970s.”.  

Mainstream economics underestimated the depth and length of the Long Depression that followed, where even negative interest rates have no effect on the ‘real economy’ and where attempting to reduce public debt (as in the Greek crisis) made things so much worse “in the aftermath of the crisis, with tragic social consequences”. But don’t worry, Cœuré told the students, “our general equilibrium models now feature a fully-fledged banking sector that accounts for the presence of financial frictions and that also allows us to analyse the effects of macroprudential policies.”  And we are getting much more data that can help economists solve problems: big data and richer and timelier datasets will help improve the input to our models.”

Cœuré cited climate change is perhaps the most far-reaching of the challenges ahead for economists. But he was delighted to tell the students that economics was making great strides in helping in that area: “William Nordhaus was awarded the Nobel Prize in Economic Sciences last year for integrating climate change into macroeconomic analysis.Again, there is a certain irony here.  For heterodox economist, Steve Keen, among others, has done an effective debunking job on the Nobel Laureate’s assumptions and forecasts. Actually, mainstream economics is doing little or nothing to come up with social scientific analysis and solutions on this literally burning issue.

Having expressed confidence in monetary policy as the tool to revive demand – despite evidence to the contrary, Cœuré finished by reminding his audience that “economics is a social science. Models will not take away the burden and responsibility of making judgements. Economics involves much trial and error – you have to take decisions in the fog when you can barely see your hand in front of your face. This makes our profession exciting!

Maybe exciting – but also fraught with failure in that fog and with serious consequences.

The fantasy world continues

November 28, 2019

The fantasy world continues.  In the US and Europe, stock market index levels are hitting new all-time highs.  Bond prices are also near all-time highs.  Investment in both stocks and bonds are delivering massive profits for the financial institutions and companies.  Conversely, in the ‘real’ economy, particularly in the productive sectors of industry and transport, the story is dismal.  The world’s auto industry is in serious decline.  Layoffs of workers are on the agenda in most auto companies.  The manufacturing sectors in most major economies are contracting. And as measured by the so-called purchasing managers indexes (PMIs), which are indexes of surveys of company managers about the state and prospects for their companies, even the large service sectors are slowing or stagnant.

The latest estimate of US real GDP growth was published yesterday. In the third quarter of this year (June-September), the US economy expanded in real terms (ie after inflation of prices is deducted) at an annual rate of 2.1%, down from 2.3% in the previous quarter.  Even though this is modest growth historically, the US economy is doing better than any other major economy.  Canada is growing at just 1.6% a year, Japan at just 1.3% a year, the Euro area at 1.2% a year; and the UK at just 1%.  The larger so-called ‘emerging economies’ like Brazil, South Africa, Russia, Mexico, Turkey and Argentina are growing at no more than 1% a year or are even in recession.  And China and India have recorded their lowest growth rates for decades.  Overall global growth is variously estimated around 2.5% a year, the lowest rate since the Great Recession in 2009.

And slowing capitalist economies can find little escape from weak domestic growth by exporting.  On the contrary, world trade is contracting.  According to data from the CPB World Trade Monitor, in September global trade was down by 1.1 per cent compared to the same month in 2018, marking the fourth consecutive year-on-year contraction and the longest period of falling trade since the financial crisis in 2009.

It’s true that unemployment rates in the major economies have plunged to 20-year lows.  That has helped maintain consumer spending to some extent.

But it also means that productivity (measured as output divided by employees) is stagnating because employment growth is matching or even surpassing output growth.  Companies are taking on workers at unchanged wages rather than investing in labour-saving technology to boost productivity.

According the US Conference Board, globally, growth in output per worker was 1.9 percent in 2018, compared to 2 percent in 2017 and projected to return to 2 percent growth in 2019. The latest estimates extend the downward trend in global labour productivity growth from an average annual rate of 2.9 percent between 2000-2007 to 2.3 percent between 2010-2017. “The long-awaited productivity effects from digital transformation are still too small to see. A productivity recovery is much needed to prevent the economy from slipping towards a substantially slower growth than what has been experienced in recent years.”

The Conference Board summarises: “Overall, we have arrived in a world of stagnating growth. While no widespread global recession has occurred in the last decade, global growth has now dropped below its long-term trend of around 2.7 percent. The fact that global GDP growth has not declined even more in recent years is mainly due to solid consumer spending and strong labor markets in most large economies around the world.”

The OECD reaches a similar conclusion: “Global trade is stagnating and is dragging down economic activity in almost all major economies.  Policy uncertainty is undermining investment and future jobs and incomes. Risks of even weaker growth remain high, including from an escalation of trade conflicts, geopolitical tensions, the possibility of a sharper-than-expected slowdown in China and climate change.”

The reason for low real GDP and productivity growth lies with weak investment in productive sectors compared to investment or speculation in financial assets (what Marx called ‘fictitious capital’ because stocks and bonds are really just titles of ownership to any profits (dividends) or interest appropriated from productive investment in ‘real’ capital).  Business investment everywhere is weak.  As a share of GDP, investment in the major economies is some 25-30% lower than before the Great Recession.

Why is business investment so weak?  Well, first it is clear the huge injection of cash/credit by central banks and driving of interest rates down to zero – so-called unconventional monetary policies- has failed to boost investment in productive activities.  In the US, the demand for credit to invest is falling, not rising.

And for that matter, so far, Trump’s cutting of corporate taxes, boosting fiscal spending and running higher budget deficits has failed to restore investment.

In the US, capital spending by S&P 500 companies rose in the third quarter by just 0.8%, or a combined $1.38 billion, from the second quarter, according to data from S&P Dow.  But even that modest increase can be chalked up to a few big spenders: Amazon.com Inc. and Apple Inc. alone raised capital spending by $1.9 billion during the quarter. Without them, total spending by the 438 other companies that have reported so far this quarter would have shrunk slightly. And overall spending would have shrunk by 2.2% absent increases from three others: Intel Corp. , Berkshire Hathaway Inc. and NextEra Energy Inc. Together, the five companies increased their capital budgets by $4.7 billion, or 30%, from the second quarter to the third, the SPDJI data show.

The mainstream/Keynesian explanation for low investment was expressed again in a recent blog in the UK Financial Times: “why is fixed investment declining?  One answer, dare we suggest it, is a dearth of demand. With no incremental demand for increased supply, why would a business invest in a new plant, shop or regional headquarters when the returns from buying back shares, or distributing dividends, is both known and higher?”

But this explanation is a tautology at best and wrong at worst.  First, in what area of demand is there a ‘dearth’?  Consumer demand and spending is holding up in most major capitalist economies, given fuller employment and even some rise in wages in the last year.  It is investment ‘demand’ that is floundering.  But to say that investment is weak because investment ‘demand’ is weak is just a tautology signifying nothing.

The more explanatory answer offered by Keynesian theory then comes forward.  The reason that central bank monetary policies and tax cuts have failed to boost investment “just boils down to risk appetite.”  This is the classic ‘animal spirits’ explanation of Keynes.  Capitalists have just lost ‘confidence’ in investing in productive activities.  But why? The previous quote above from the FT piece gives it away; why would a business invest in a new plant, shop or regional headquarters when the returns from buying back shares, or distributing dividends, is both known and higher?” But the returns (profitability) of investing in fictitious capital are higher because the profitability of investing in productive assets is too low. I have explained this ad nauseam in previous posts and papers, along with empirical evidence in support.

In Q3 2019, US corporate profits were down 0.8% from last year while margins (profits per unit of output) remain compressed at 9.7% of GDP – having declined nearly continuously for nearly five years.

But, of course, the failure to recognise or admit the role of profitability in the health of a capitalist economy is common to both mainstream neoclassical and Keynesian theory and arguments.

Low profitability in productive sectors of the most economies has stimulated the switch of profits and cash by companies into financial speculation. The main method used by companies to invest in this fictitious capital has been by buying back their own shares. Indeed, buybacks have become the biggest category of financial asset investment in the US and to some extent in Europe.  US buybacks reached nearly $1trn in 2018.  That’s only about 3% of the total market value of US top 500 stocks, but by boosting the price of their own shares, companies have attracted other investors to push stock market indexes to record highs.

But all good things must come to an end. Returns on fictitious capital investment ultimately depend on the earnings that companies report.  And they have been falling in the last two quarters.  So in the latter part of this year, corporate buyback spending started to plunge. According to Goldman Sachs, buyback spending slowed 18% to $161 billion during the second quarter, and the firm anticipates that the slowdown will continue. For 2019, total buybacks will drop 15% to $710 billion, and in 2020 GS sees a further 5% decline to $675 billion. “During full-year 2019, we expect S&P 500 cash spending will decline by 6%, the sharpest annual decline since 2009,” the firm says.

Anyway, buybacks are an arena dominated by major companies, many of them long-established tech titans. The top 20 buybacks accounted for 51.2% of the total for the 12 months ending in March, S&P Dow Jones Indices states. And more than half of all buybacks are now funded by debt. – “sort of like mortgaging your house to the hilt, then using it to throw a lavish party.” But once a recession inevitably arrives, the result may not be pretty for companies with lots of leverage, in no small part due to buybacks.

The market value of tradable U.S. dollar (USD) corporate debt has ballooned to close to $8 trillion – over three times the size it was at the end of 2008. Similarly in Europe, the corporate bond market has tripled to 2.5 trillion euros ($2.8 trillion) since 2008. From 2015-2018, over $800bn of non-financial high grade corporate bonds were issued to fund M&A. This accounted for 29% of all non-financial bond issuance, contributing to credit rating deterioration. And the ‘credit quality’ of corporate debt is deteriorating with low rated bonds now 61% of non-financial debt, up from 49% in 2011.  And the share of BBB-rated bonds in European investment grade has also risen from 25% to 48%.

And then are what are called zombie companies which earn less than the costs of servicing their existing debt and survive because they are borrowing more. These are mainly small companies.  About 28% of US companies with market cap <$1bn earn less than their interest payments, way up from the period before the crisis and this is with historically low interest rates. Bank of America Merrill Lynch estimates that there are 548 of these zombies in the OECD against a peak of 626 during the financial crash of 2008.

With corporate debt now higher than its peak in scary late-2008, Dallas Fed President Robert Kaplan has warned, overly leveraged companies “could amplify the severity of a recession.”

Nevertheless, the talk among many mainstream economists is that the worst may be over.  A trade deal between the US and China is imminent. And there are signs that the contraction in the manufacturing sectors of the major economies is beginning to stop.  If so, then any ‘spillover’ into the more buoyant and larger so-called ‘service’ sectors may be avoided.  Global economic growth may be at its slowest since the Great Recession; business investment is sluggish at best; productivity growth is falling; and global profits are flat, but employment is still strong in many economies, and wages are even picking up.

So, far from descending into an outright global recession in 2020, there may be just another year of depressed growth in the longest but weakest global recovery for capitalism. And the fantasy world may continue.  We shall see.

Labour’s economic policy: the challenge ahead

November 23, 2019

Whatever government is formed in the UK after the 12 December election, it faces an immense challenge.  The British economy is in a mess and its society is riven with division.

After ten years of austerity measures under Conservative/Liberal Democrat governments, public services and welfare benefits have been cut to the bone and beneath.  The British state pension is the lowest in Europe!  The NHS, after being hollowed out by outsourcing and internal privatisation and then starved of funds, is on its knees.  Social care for the old and infirm has been decimated and/or hideously expensive.  School classroom sizes are higher than ever, higher education colleges are going bust and students are racking up huge debts.  The housing shortage is so bad that young people are forced to live at home with parents or in crowded, unfit private rental accommodation.  Transport is an expensive nightmare: rail, energy and fuel prices are the among the highest in Europe.

Inequality of wealth and incomes are as high as in the 1930s.  While Britain boasts of 135 billionaires, 14 million are officially classed as poor and 4 million children are living in poverty.  Regional disparities in living standards between London and the south east and the rest of the UK are the widest in northern Europe.  Millions work in the poorly paid self-employed ‘gig’ economy, and one million people work on zero-hours contracts often for wages below the official minimum wage; while the disabled and ill are forced back into low wage work through the removal of benefits.

All this while people of Britain are divided over whether it is better to leave the European Union or not; whether Scotland and Northern Ireland should break with the Union; and whether immigration is good or bad for the economy and society.

Most important, on the economic front, Britain’s growth of national output is slowing as the population expands, making it increasingly difficult to provide the resources to meet these challenges.  Britain’s economic growth is disappearing fast.  The capitalist sector of the British economy has failed to deliver for the needs of people, although it has delivered higher profits and house prices and a booming stock market for the rich. Real disposable income per head has more or less stagnated since the end of the Great Recession, the longest period in 167 years!

That is because investment by big business is contracting, partly because of the uncertainty of what will happen after Brexit and partly because both domestic and foreign investors no longer expect much of a return from investment in Britain.  With falling investment comes low growth in what each worker in Britain can produce.  And low productivity growth means permanent low economic growth.

Real output per hour worked rose just 1.4% between 2007 and 2016. Within the G7, only Italy performed worse (-1.7%). Excluding the UK, the G7 countries have experienced a 7.5% productivity increase over this period, led by the US, Canada and Japan. In addition, the ‘productivity gap’ for the UK – the difference between output per hour in 2016 and its pre-crisis trend – is minus 15.8%; while the productivity gap for the G7 ex-UK countries is minus 8.8%.

British capitalism is a ‘rentier economy’, concentrated on finance, property and business services, more than any other major economy. Having helped trigger the global financial crash and the huge slump in 2008-9, the City of London has done nothing since to support UK businesses, particularly smaller ones.  Loans to smaller companies have fallen.  Instead, bank loans have poured into real estate.  Britain’s productive sectors (manufacturing, professional scientific & technical activities, information & communication and administrative & support services) account for 28.7% of real GDP. But bank loans to these four sectors total just 5.5% of GDP.  This is less than the total of loans outstanding to companies engaged in the buying, selling & renting of real estate (6.9% of GDP).

So what is to be done?  The UK Labour party’s election manifesto takes on the challenge.  The key underlying issue on which all depends is finding a way to increase investment in more productivity-enhancing projects and in a better trained and skilled workforce, employed in decent conditions and paid living wages.  In this regard, Labour is making serious attempts to reverse British industry’s decline.

First, it looks to launch a Green New Deal which will direct resources away from unproductive activities and instead focus on curbing the acceleration in global warming by investing in renewable energy projects and offering hundreds of thousands of apprenticeships for skilled jobs in green projects.

Second, it looks to bring back into public ownership the key energy and water companies, ending the rip-off of the public by the current private monopolies.  Rail and bus transport will also return to the public sector, thus ending the wasteful anarchy of franchised routes and inefficient and expensive local bus services.  And Labour will aim to deliver free super-fast broadband internet to every household within ten years, at half the cost that the private sector would spend, by taking over the broadband division of BT.  And it would bring the Royal Mail back into public ownership.  The largest companies would be expected to give their workers shares in the company with rights to representation on company boards.  And collective bargaining rights would be restored, reversing Thatcher’s anti-trade union laws.  These measures would provide new impetus for investment and jobs.

And third, Labour would expand public investment to compensate for the failure of businesses to invest.  Labour would set up a Strategic Investment Board to coordinate R&D, commercial services and information flows.  It would set up a state investment bank to invest £25bn year in projects and infrastructure.  It would start a new banking service for small businesses based on the Post Office.

How will all this be paid for?  Well, under the existing conditions, Labour plans to raise income taxes for the highest  5% of earners (ie more than £80,000 a year); and it aims to capture missing taxes currently unpaid by big business and the rich through tax havens and evasion – that is estimated at $25bn a year!  Labour would be prepared to increase government borrowing to fund more spending on health, education and some of the longer-term projects.  Given that interest rates are at their lowest in 60 years, the cost of borrowing would add little to annual budget costs.  Also planned investments should deliver increased productivity and growth and thus more tax revenues.  It is estimated that the cost of nationalising energy, rail, water and telecoms would be covered from the revenues of these sectors within seven years.

Contrary to the media reaction, this would not make the UK have the biggest state spending of major economies.  As the Resolution Foundation shows, it would take the size of government expenditure as a share of total annual spending to around 45% of GDP, in the middle of the range within OECD economies.

As Simon Wren-Lewis says, in his comprehensive post, “another way of putting it is that the UK will become closer to the European average, and further away from the US/Canada level.”

Can this plan work to turn Britain into a more prosperous, more equal and more united society?  Much depends on three things.  First, can just one state bank and investment board really be enough to re-direct Britain’s rentier economy into more productive areas for employment?  Labour does not propose to bring into public ownership and control the big five banks or the major insurance companies and pension funds.  Yet these will continue to provide the bulk of potential investment funding (some 15% of GDP compared to the state’s 4%, at best).  That will weaken the ability of a Labour government to deliver real improvements in investment, services and incomes.  Labour’s tax and other measures to redistribute income and wealth from the super-rich to the rest are also very limited.  Indeed, although Labour plans to raise the annual increase on spending on the NHS by 4% a year, that is still less than under the Blair government and is barely enough to meet the needs of an ageing population.  And Labour’s measures will only make a small dent in the extreme levels of inequality.

Second, there is the inevitable reaction from big business and the media.  They will go hell for leather to block and reverse Labour plans and any sign of failure will be seized upon.  And so there is a serious risk that Labour’s relatively modest plans to rebalance the wealth and power within the country may falter.  Big business and the rich have already threatened to take their investment and money elsewhere and the coming to power of a radical Labour government may well provoke what is called ‘capital flight’, inducing a run on the value of the pound and driving up interest rates.  Labour may have to take more drastic measures like capital controls. But without control of the major banks, the currency would be under threat from this financial terrorism.

And third, and most important, is the high likelihood of a new global slump in production, investment and employment.  It has been ten years since the end of the Great Recession, the biggest global slump since the 1930s.  Another recession is well overdue and there are signs that is coming, as the major economies are slowing down significantly and the trade and technology war between the US and China is intensifying, destroying world trade growth.  By this time next year, the new British government could be faced with British businesses going bust, laying off workers and imposing an investment strike.

The only way the impact of such a recession could be reduced would be for Labour to take control of what used to be called the ‘commanding heights of the economy’: the banks, insurance companies, pension funds, and the key strategic companies in Britain’s main manufacturing, energy and other productive sectors.  Only then could a national plan for investment and jobs and to combat climate change be possible because it would not rely on capitalist investment.  Labour’s current economic policies fall short of that.  Instead, Labour’s leaders and advisers rule out such drastic measures because they think they will not be necessary and instead ‘a regulated and managed capitalism’ can still deliver the needs of British people.  History tells us otherwise.

Mainstream economics and money trees

November 22, 2019

“There is a growing feeling, among those who have the responsibility of managing large economies, that the discipline of economics is no longer fit for purpose. It is beginning to look like a science designed to solve problems that no longer exist.” Such was the opening para of a long essay in the New York Review of Books by leftist anthropologist David Graeber, author of the monumental Debt, the first 5000 years. Graeber was reviewing a new book by Robert Skidelsky, the biographer of John Maynard Keynes and epigone of Keynes’ economic thought and policies.

Graeber was attacking mainstream economics and its policy makers for not seeing the coming of the global financial crash and the ensuing Great Recession and for still not learning anything since.  Neoclassical economic theory still dominates the mainstream and so economics is locked into ‘microfoundations’ based on unrealistic assumptions, namely that crises are really momentary ‘shocks’ to a basically harmonious market economy where equilibrium is the tendency, not disequilibrium.

But was mainstream economics ever ‘fit for purpose’?  Surely, that depends on what the purpose is.  With the end of classical political economy in the mid-19th century and the beginning of the neoclassical counter-revolution, political economy was no longer an objective analysis of the laws of motion governing capitalism.  Instead, it became ‘vulgar economics’, as Marx called it, designed to be an apologia for capital.  In that sense, it was very fit for purpose.  Until, of course, it was exposed by regular and recurring failures in capitalist production and the evident inequalities it breeds.

The apologia of the mainstream continues.  Take a recent review by Martin Wolf, the FT’s economics columnist.  Wolf praises to the skies a new book by mainstream French economist, Thomas Philippon, who shows that “Over the past two decades, competition and competition policy have atrophied, with dire consequences, Philippon writes in this superbly argued and important book. America is no longer the home of the free-market economy.”

Philippon is part of that group of modern mainstream economists, like Olivier Blanchard or latest Nobel prize winner Esther Duflo, who are supposedly delivering meticulous empirical work to reveal the state of capitalism. So this is not apologia but science. But what does Phillipon conclude from his work showing that US capitalism is not a free market economy after all?  Wolf: “Philippon insists that he believes passionately in the value of competition. Indeed, The Great Reversal contains a chapter arguing just that. …The great obstacle to action in the US is the pervasive role of money in politics. The results are the twin evils of oligopoly and oligarchy.”  So the policy aim is not to replace capitalism but to restore “competitive capitalism”.  In other words, let us return to some mythical model of a ‘free market’ economy and all will be well.

Wolf sees the problem as the ‘pervasive role of money in politics’.  So back to Graeber.  Graeber claims that “Ostensibly an attempt to answer the question of why mainstream economics rendered itself so useless in the years immediately before and after the crisis of 2008, it is really an attempt to retell the history of the economic discipline through a consideration of the two things—money and government—that most economists least like to talk about.

In his book review, Graeber is concerned to expose the policy of austerity that supported by the mainstream economists and followed by the politicians in the wake of the Great Recession.  Austerity (cuts in public spending) was adopted as the only necessary policy in order to get public debt levels down.  Public debt had been driven up by borrowing to bail out the banks and by the costs of the ensuing recession, which led to a collapse in tax revenues and a rise in welfare and unemployment benefits.

Typical of the justification for austerity were the words of UK PM Theresa May in the 2017 election.  She argued that ‘money does not grow on trees and it cannot be created out of thin air, like magic.’  Graeber retorts: “The truly extraordinary thing about May’s phrase is that it isn’t true. There are plenty of magic money trees in Britain, as there are in any developed economy. They are called “banks.” Since modern money is simply credit, banks can and do create money literally out of nothing, simply by making loans. Almost all of the money circulating in Britain at the moment is bank-created in this way.”  Money can be created out of thin air and capitalist economies could be revived by public spending financed by the banking system with injections of cash.  For Graeber, the failure to see this is a key fallacy of mainstream economics.

But is he right?  Frances Coppola is a leftist ex-City economist.  She answers Graeber’s argument clearly,it is entirely incorrect to say that money is “spirited from thin air.” It is not…. when banks create a new loan asset, they must also create an equal and opposite liability, in the form of a new demand deposit. This demand deposit, like all other customer deposits, is included in central banks’ measures of broad money. In this sense, therefore, when banks lend, they create money. But this money has in no sense been “spirited from thin air”. It is fully backed by a new asset – a loan.” 

Coppola continues “in theory a central bank could literally “spirit money from thin air” without asset purchases or lending to banks. This is Milton Friedman’s famous “helicopter drop.” The central bank would become technically insolvent as a result, but provided the government is able to tax the population, that wouldn’t matter.” 

But “The ability of the government to tax the population depends on the credibility of the government and the productive capacity of the economy. …. So faith in money is, in reality, faith in the government that guarantees it. That in turn requires faith in the future productive capacity of the economy. As the productive capacity of any economy ultimately comes from the work of people, we could therefore say that faith in money is faith in people, both those now on the earth and those who will inhabit it in future. The “magic money tree” is made of people, not banks.

Having suggested that money can go on trees because commercial and central banks can create it out of thin air, Graeber goes on with little or no criticism to endorse the Keynesian views expressed in Skidelsky’s new book.  “Accordingly, one of the most significant books to come out of the UK in recent years would have to be Robert Skidelsky’s Money and Government: The Past and Future of Economics.”

Greaber mentions that “Skidelsky is best known as the author of the definitive, three-volume biography of John Maynard Keynes, and has for the last three decades sat in the House of Lords as Baron of Tilton, affiliated at different times with a variety of political parties, and sometimes none at all. During the early Blair years, he was a Conservative, and even served as opposition spokesman on economic matters in the upper chamber; currently he’s a cross-bench independent, broadly aligned with left Labour. In other words, he follows his own flag. Usually, it’s an interesting flag.”  You’d think that history might make him more cautious about his praise for Skidelsky.  Indeed, as I have shown in several other posts, Skidelsky aims to find ways the save capitalism from itself by adopting Keynesian theory and policies.

Graeber recognises that “Keynes himself was staunchly anti-Communist, but largely because he felt that capitalism was more likely to drive rapid technological advance that would largely eliminate the need for material labor. He wished for full employment not because he thought work was good, but because he ultimately wished to do away with work, envisioning a society in which technology would render human labor obsolete.”  But Keynes was not just anti-communist because he wanted and expected a leisure not a work society under capitalism.  He went much further than that.  Just read pp94-98 of my book, Marx 200.

The point is that capitalism is not just a ‘money economy’ as Keynesians, and it seems Graeber, think.  It is a money-making economy. You can print money indefinitely, but you cannot turn it into value under capitalism without the exploitation of human labour, or as Coppola would put it, without using ‘the productive capacity of the economy’.  But production, profit and exploitation do not appear in Keynesian analysis, nor in Skidelsky and Graeber’s critique of the mainstream. And yet this is at the heart of capitalism and explains the failure of both neoclassical and Keynesian economics to predict or explain crises under capitalism.

Money theories of crises have one thing in common.  They ignore or deny the law of value, namely that all the things that we need or use in society are the product of human labour power and under a capitalist economy where production is for profit (ie for money over the costs of production), not need, then money represents the socially necessary labour time expended.

But it is a fetish to think that money is something that is outside and separate from value. Graeber appears to have this money fetish. With the money fetish, money replaces value, rather than representing it. Graeber sees money as both causing crises and also as solving them! He ignores the origin and role of profit.  Indeed, his main work sees debt not exploitation as all that is wrong with capitalism. As Mike Biggs explains, for Graeber: “The story of the origins of capitalism, then, is not the story of the gradual destruction of traditional communities by the impersonal power of the market. It is, rather, the story of how an economy of credit was converted into an economy of interest; of the gradual transformation of moral networks by the intrusion of the impersonal — and often vindictive — power of the state. And that is Graeber’s explanation for the rise of capitalism. Evil: the root of all money.”  Or perhaps, debt is the root of all evil, not exploitation of the many by the few.

In his review, Graeber raises some key questions for modern economic theory. “The problem of how to determine the optimal distribution of work and resources to create high levels of economic growth is simply not the same problem we are now facing: i.e., how to deal with increasing technological productivity, decreasing real demand for labor, and the effective management of care work, without also destroying the Earth. This demands a different science.”  Really, Marxist political economy would beg to differ. The rise of technology to replace labour and the rapacious destruction of the planet by the drive for profit under capitalism are precisely the issues that the Marx’s laws of value and profitability address and explain.

Instead, Graeber looks to a “new viable science” that “will either have to draw on the accumulated knowledge of feminism, behavioral economics, psychology, and even anthropology to come up with theories based on how people actually behave, or once again embrace the notion of emergent levels of complexity—or, most likely, both.”  Sure, the contributions of various disciplines in social sciences are necessary, but again that is what the historical materialism of Marx’s political economy draws upon, not the fetishes of modern monetary theory or Keynesian ‘animal spirits’.

Milex and the rate of profit

November 18, 2019

A review of The Economics of Military Spending: A Marxist perspective – by Adem Yavuz Elveren, Routledge, 2019.

Brown University’s Watson Institute for International and Public Affairs published its annual “Costs of War” report last week.  This refers only to the costs of war for the US.  It takes into consideration the Pentagon’s spending and its Overseas Contingency Operations account, as well as “war-related spending by the Department of State, past and obligated spending for war veterans’ care, interest on the debt incurred to pay for the wars, and the prevention of and response to terrorism by the Department of Homeland Security.” The final count revealed, “The United States has appropriated and is obligated to spend an estimated $5.9 trillion (in current dollars) on the war on terror through Fiscal Year 2019, including direct war and war-related spending and obligations for future spending on post 9/11 war veterans.”

The report found that the “US military is conducting counterterror activities in 76 countries, or about 39 percent of the world’s nations, vastly expanding [its mission] across the globe.” In addition, these operations “have been accompanied by violations of human rights and civil liberties, in the US and abroad.”  Overall, researchers estimated that “between 480,000 and 507,000 people have been killed in the United States’ post-9/11 wars in Iraq, Afghanistan, and Pakistan.” This toll “does not include the more than 500,000 deaths from the war in Syria, raging since 2011” when a West-backed rebel and jihadi uprising challenged the government, an ally of Russia and Iran. That same year, the U.S.-led NATO Western military alliance intervened in Libya and helped insurgents overthrow long time leader Muammar el-Qaddafi, leaving the nation in an ongoing state of civil war.

Ever since the end of the second world war, there has been some sort of war, between regional powers, or as proxy wars backed by imperialist powers.  The monetary costs of war are huge, as the Watson Brown Institute shows, while the human costs of war are incalculable – not just the deaths and injuries, but also the destruction of homes, livelihoods, deprivation and disease and the horrors of migration.  Wars are a scourge on humanity.

But are they beneficial to the capitalist economy?  That’s another question.  Wars are often seen necessary by governments and politicians to preserve a capitalist power’s control over resources, land, profit etc.  And they are always portrayed by war-mongering governments to their peoples as necessary to ‘save the nation’ or ‘defend our way of life’.  But are wars and military spending that goes with war a necessary cost to deducted from the profits of capital or alternatively an additional boost to making money? That question has been discussed and analysed over the last 150 years by capitalist strategists and Marxist theorists from Engels to Lenin and Luxemburg and on into the 20th century.

However, the costs of military spending have been in decline for most capitalist governments since the end of so-called ‘cold war’ with the Soviet Union.  So interest in whether arms expenditure and wars are beneficial or detrimental to capitalism has also fallen away.  A Marxist perspective on the economic of military spending has been badly neglected – until now.

Adem Yavuz Elveren, Associate Professor at Fitchburg State University in the US, has now rectified that with his new book, simply entitled, The Economics of Military Spending.  As an earlier pioneer in such analysis, Ron Smith of Birkbeck University says in his foreword, Elveren “examines the interaction of military expenditures and the rate of profit and their contribution to capitalist crises.  It not only redirects attention to an increasingly relevant old literature but also makes an original theoretical and empirical contribution to the analysis.”  The book combines theoretical analysis with detailed econometric investigations for 30 countries over last 60 years.

In my opinion, Elveren’s approach is the right way to do political economy or Marxist social science.  Mainstream economic analysis is either boxed into micro-foundation models or generates purely econometric studies based on unrealistic assumptions – or both.  And unfortunately, most Marxist economic analysis is locked into dissecting the meaning of Marx’s writings as dug up and translated from the MEGA or into esoteric academic arguments over the ‘logic of capital’.  While theory is important, it must be tested by empirical evidence or it useless.  And too little of Marxist analysis of capitalism does that.  For example, I am not convinced by the argument that, as there are regular and recurring crises in capitalist production, this proves that capitalism is a failed system.  And that’s all we need to know.  We don’t need to produce empirical data to show that.  But surely, empirical evidence is essential, otherwise we cannot show the causes of these regular crises, and moreover, whether Marx’s own explanation (as there are others) is the most compelling.

No such charge can be laid against Elveren’s book of failing to provide both a theoretical and empirical explanation of the role of military spending in capitalism.  Elveren correctly starts from the basic assertion of Marx that “the driving force of capitalism is profit.”  And so the book “stands at the junction of defence economics and Marxist economics, examining the effect of military expenditure (milex) on the rate of profit, an indicator of the health of a capitalist economy.”

From this perspective, Elveren takes the reader through a brief history of military expenditure and its apparent economic effects.  Then he considers various models of economic growth that connect military spending.  He deals with the theory of ‘military Keynesianism’, popularly presented as an explanation for the fast growth and full employment in the post-war period, the so-called golden age of 20th century capitalism.  And then he gets into the meat of argument by analysing the various versions of the theory of capitalist crises presented under the Marxist banner.

Chapters 4 and 5 are excellent surveys of various Marxist theories of crises from underconsumption, profit squeeze and the Marx’s law of the tendency of the rate of profit to fall.  He expertly handles Luxemburg’s view on imperialism and military spending, as well as the Baran-Sweezy thesis of military spending compensating for a stagnating monopoly capitalism – and the so-called ‘permanent arms’ economy idea promoted by Michael Kidron in the post-war period, that capitalism can avoid crises by milex.  If the reader wants to gain knowledge of all these theories of milex and crises without verbiage and confusion, he or she can do no better than read Elveren here.

I have some caveats. Elveren seems to accept the revisionist view of Michael Heinrich that Marx dropped his law of the tendency of the rate of profit to fall from the 1870s onwards.  Heinrich argues that the law is wrong and irrelevant to understanding the cause of crises.  I disagree and you can read more about that debate here.  But Elveren’s view is that “Heinrich’s argument seems plausible”; that Marx dropped the idea that the rate of profit must fall over time (namely that the law is a tendency that will eventually overcome countertendencies).  Instead the fall in the rate of profit becomes purely contingent and so whether it falls is just “an empirical question”.

While I disagree with that conclusion, because Elveren does see the law as an empirical question, he can pitch into providing empirical analysis (unlike Heinrich and others). Elveren is fully cognisant of all the empirical work done previously on measuring the rate of profit in the US and elsewhere and it is on this basis that he looks at whether milex will tend to increase or lower the rate of profit and how that affects the capitalist economy in both the short and long term.

The theoretical question at debate in Marxist political economy is whether the production of weapons is productive of value?  The answer is that it must be for the arms producers.  The arms contractors deliver goods (weapons) which are paid for by the government by appropriating value (either present or future). These goods are new use values which have been made under capitalist conditions of production. The labour producing them, therefore, is productive of value and surplus value.

But at the level of the whole economy, arms production is unproductive of future value, in the same way that ‘luxury goods’ for just capitalist consumption are.  Arms production and luxury goods do not re-enter the next production process either as means of production or as means of subsistence for the working class.  While being productive of surplus value for the arms capitalists, the production of weapons is not reproductive and thus threatens the reproduction of capital.  Arms production restricts the volume of use values that can be employed for reproductive purposes.  So if the increase in the overall production of surplus value in an economy slows and the profitability of productive capital begins to fall, then reducing available surplus value for future investment through milex can damage the health of the capitalist accumulation process.

But the outcome depends on the effect on the profitability of capital. The military sector generally has a higher organic composition of capital than the average in an economy as it incorporates leading edge technologies. So the sector would tend to push down the average rate of profit. On the other hand, if taxes collected by the state to pay for arms manufacture are high, then wealth that might otherwise go to labour is distributed to capital and thus can add to available surplus value.  Which way does it go?

To help answer that question, Elveren offers the reader a circuit of capital model to include the military sector based on the model developed by Duncan Foley.  But the question can only be answered empirically.  And this is what Elveren does in the latter part of his book.  He carries out a detailed empirical study to measure the impact of milex against the movement in the rate of profit on capital for most capitalist economies.  This is a far more extensive study than any before.  Elveren uses the Extended Penn World Tables and the Penn World Tables for his cross-country data, as I have done to measure a world rate of profit and rates of profit in individual countries.  As he points out, and as I know only too well, there are many technical problems with these databases and the definitions and assumptions used.  But it is the best we have.

Using his econometric skills, Elveren shows that, overall (from 1963-2008), milex had a positive effect on profit rates in capitalist countries, but that it had a negative effect in the shorter time period – the so-called neo-liberal period from 1980 onwards.  It seems that milex helped to sustain profitability during the great profitability crisis that started in the mid-1960s to the early 1980s, but after that, milex acted against overall profitability in a period when profit rates were rising.

Elveren offers a tentative explanation, “This might be due to the changing structure of major economies in the neo-liberal era. With the rise of the financial sector and the rentier class, the rising share of profits earned by firms has begun to be used for interest payments, dividends and other unproductive expenditure, causing a smaller faction of profit to be invested in capital stock.”  This explanation may be too simple, bearing in mind work by Campbell and Bakir and myself – see my recent post.

But anyway, it seems that the productive sectors of capitalist economies had insufficient surplus value to invest at the previous pace as capitalists switched to financial speculation where profitability was higher.  Military spending then became just another negative.  Milex may have had a mildly positive effect on profit rates in arms exporting countries but not for arms importing ones.  In the latter, milex was a deduction from available profits for productive investment.

Over the period 1963-08, Elveren finds that milex, as a stimulant to capital accumulation (with its high-level technology) was mildly positive in the US, but in other major countries it has a negative effect, particularly in those countries that imported their arms.  In all countries milex was damaging for employment as a whole, as the arms sector used less labour on average.  Thus milex may sometimes help the rate of profit for capital but the flipside is that milex will increase the ‘reserve army of labour’.  And as Elveren adds “the effect of milex may change at different levels of the rate of profit”.

So Elveren’s empirical work appears to back up the Marxist view of the role of military spending in a capitalist economy.  It can act to lower the rate of profit on capital and thus on economic growth as it did in the neo-liberal period, when investment and economic growth slowed.  But it can also help bolster the rate of profit through state’s redistribution of value from labour to capital, when labour is forced to pay more in taxation, or the state borrows more, in order to boost investment and production in the military sector.

In the greater scheme of things, milex is not decisive for the health of the capitalist economy.  At its height, its share in GDP reached an average of 13%.  But that was due to the Korean war.  Even during the cold war period, that share fell by half to around 6% of GDP.  With the collapse of the Soviet Union, military spending in the major imperialist powers halved again to 3%.  Milex is not going to decide the future of capital, one way or the other.  But thanks to Elveren’s work, we have a much clearer picture of the economics of war and military spending beneath the horrors of its outcomes.

HM3: the profits-investment puzzle

November 16, 2019

The other session at the Historical Materialism London conference that I participated in was on The Relation between Profits, Investment and Crises.  This was organised by Al Campbell from the University of Utah. In his paper, Al outlined how in the last two decades a gap opened up between the growth in profitability and the rate of investment and accumulation (Al Campbell).  Al showed that the share of investment in total US profits fell from the early 2000s until the Great Recession and still stands well below the average share in the 1980s and 1990s.

So what was going on after 2000?  Al strips out profits that were distributed as dividends to shareholders and interest to lenders and bond holders to expose retained earnings and finds that “the answer (and it is an answer as far as it goes) – the amount of real investment tracks retained profits. Retained profits have fallen as a share of profits, and so real investment has fallen correspondingly.”

But why has there been such a reduction in retained profits for productive investment and an increase in the share of profits going in dividends and interest?  And what do the shareholders and bondholders do with their share?  Do they spend it (capitalist consumption) or do they save it (in cash) or do they re-invest it (financial assets)?

From the data, Al reckons the reduction in the share of retained profits is not because interest costs have risen (interest rates are at all-time lows) or because companies pay more to shareholders.  More likely, it is because the profitability of productive investment has stayed low so there is an ’over-investment’ of productive capital and the unused profits are either hoarded as cash by companies, or distributed in increased dividends and more recently used in huge share buyback programmes to drive up the prices of company stock.

Al asked the question: is there empirical evidence to explain this profit-investment gap?  Well, I think there is some.  I raised the same puzzle in a paper to HM London 2016, The Great Recession: a Marx not a Minsky moment.  (Marx not Minsky) This is what I said then: “Usually, US corporations have invested more than they had available in corporate savings.  The only period that this was not the case is 2000-07.  But note, corporate savings between 2000-7 did not grow faster (5.3% pa) than in other periods.  What happened was that capex grew much more slowly (4.0%).  That suggests that corporate savings were switched into financial rather than productive investment.”

There clearly is some cash hoarding.  But this hoarding was concentrated in the large tech companies, which either kept this cash abroad to avoid tax and/or increased bond issuance on the back of these assets.  At the start of the credit crisis in 2007, companies with more than $2.5bn each in cash and near cash items, such as short-term investments, held 76 per cent of the $1.98tn of cash reserves of the non-financial members of the S&P 1200.  By the third quarter of 2013, this had risen to 82 per cent (of a total $2.8tn), the highest percentage since before 2000. Of non-financial companies in the S&P Global 1200 index, just 8.4 per cent hold 50 per cent of the cash.  Indeed, 40% of companies actually reduced their cash balances. Most small to medium size have no cash piles. Indeed, as I showed in that 2016 paper, cash as a share of total corporate financial assets is not particularly high historically.

The switch is from productive assets to financial assets.  I found in the 2016 paper, that there appears to be a surplus of corporate savings over investment in capex from about 2000 (red line in graph below). However, when you add in financial asset investment (green line), there is a huge deficit (net borrowing), which takes off at the end of the 1990s.  So non-financial companies increasingly borrowed to speculate (often in their own shares) and not invest productively.

Alan Freeman, a leading Marxist economist, attempts to answer the same question in a new paper.
Rate_of_profit_investment_and_the_causes (1)
Alan poses: “If American and British companies only invest the minority of their surplus, what do they do with the rest? Do they keep it in the form of money – a classic form of crisis?  Do they invest it abroad – a classic form of imperialism; Do they invest it in financial assets – ie saleable monetary instruments?”  Freeman reckons it must be a combination of all those. But “in any case, they don’t use it to boost new production.”  Here Freeman shows that rise in the purchase of US financial assets compared to productive assets.

Freeman suggests that there has been a switch to holding financial assets (shares and bonds) rather than investing in productive assets because “the lower the productive rate (of profit), the larger the proportion that remains in the form of currency or financial assets.” And Alan goes on to show that rates of profit in Europe, the US and Japan have continued to fall if you include financial assets.

In a recent post, I too made similar points and offered up some empirical work from other scholars on this puzzle. Also, I have recently used the KLEMS database to calculate the profitability of the US productive sector. 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.  But then four years of decline led into the Great Recession. The recovery in profitability after the slump of 2008-9 was weak 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.

I have argued on this blog 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 growth in the mass of profits will slow and even fall absolutely and that is the trigger for a collapse in investment and a slump.  This was the basis of my own paper in this session, on the Profits-Investment nexus. Profits-Investment Nexus

In my view, the Marxian theory of crises is based on the movement of business investment.  A fall in investment, not consumption, is the swing factor in generating a crisis of overproduction and a slump.  Keynesians and post-Keynesians might (partially) agree. But they think that business investment decisions depend on ‘uncertainty’, ‘confidence’ or so-called ‘animal spirits’.

In contrast, Marx starts his analysis of capitalism with the discovery of surplus value through the exploitation of labour.  Profit is thus the driving force of capitalist accumulation.  What drives business investment is profitability, profits and the expectation of profits, not ‘animal spirits’. And what the profit-investment puzzle of the last two decades reveals is that it is the rate of profit in productive investment that matters.  If it is low or is falling, then capital switches abroad, or hoards cash or invests in financial assets (what Marx called fictitious capital).  If companies borrow to do so, then a credit bubble inflates, which bursts when profits in productive assets fall.

In the session, Bucknell University’s Erdogan Bakir provided powerful support for this theory of crises. (erdogan bakir) As Erdogan quotes James Crotty in his paper: Marx theorizes the increasing fragility, vulnerability or sensitivity of the contract-credit system in the mature expansion. As the expansion overheats, the ability to fulfill contractual obligations will be increasingly threatened by any significant decline in the gross rate of profit.”  Bakir identifies a profit cycle where profitability rises, then Marx’s law of the tendency of the rate of profit to fall kicks in, and profitability falls back. He identifies 11 such cycles in the US post-war economy.


Eventually, the share of profit in total output falls, creating the conditions for a slump in investment and production.  So it goes from the rate to the mass (this follows closely my thesis presented in the debate with Professor David Harvey at this year’s HM – see my post on HM1).

In the boom part of the cycle, production and investment rise and interest rates are low to encourage credit. But in the later part of that cycle, interest rates rise, corporate debt reaches highs and profitability starts to fall.  Thus, there is a scissor effect on capitalist investment.

The current cycle since 2009 has been the longest post-war cycle in the US and profitability has fallen since 2014, the longest period of decline.  The US economy is now in its late part of the current cycle.  But meanwhile, the stock market booms – way out of line with corporate profits.  Another recession is overdue.

What this HM session suggested is that the next recession has been delayed because of the unprecedented expansion of fictitious capital since 2000 as central banks push down interest rates to zero and implemented huge injections of money into the banks.  Companies have relied on fictitious profits from rising share and bond prices while profitability in productive investment (even overseas) remained low and falling.  But this contradiction cannot last, if Erdogan Bakir’s thesis of the profit cycle holds.

Every year, HM hears an address from the winner of the Deutscher Memorial prize “for a book which exemplifies the best and most innovative new writing in or about the Marxist tradition”.  Last year, the winner was Kohei Saito, associate professor of political economy at Osaka University, for his book on Karl Marx’s Ecosocialism: Capital,Nature and the Unfinished Critique of Political Economy. I missed his address but I’ll try and review that book in the near future.  This year’s winner, announced after the conference, was Brett Christophers from Uppsala University, Sweden with his book, The New Enclosure: The Appropriation of Public Land in Neoliberal Britain.  Again, I shall try and review that book soon.

Finally, there were many other sessions at HM on all sorts of subjects and issues, including others on Marxist political economy.  But I had no time to attend these. The three posts on HM are the best that I could do.

HM2 – The economics of modern imperialism

November 14, 2019

At the Historical Materialism conference, the Saturday discussion between Professor David Harvey and myself on Marx’s double-edge law attracted more than 250 people.  Sunday’s session on the economics of modern imperialism that I had organised also attracted a good turnout of around 60 people, many of which were clearly experts on the subject.  Unfortunately for them, the four speakers (including myself) went over their allotted times and used up the available discussion time – apologies all round!

Anyway, at least the speakers presented some important arguments.  I spoke last.  But I think in this post, I shall outline my presentation first because I think it sets the scene for the others.  G Carchedi and I have been working on some new empirical work, trying to gauge which countries are the imperialist ones and how much value they are able to extract from the dominated or periphery (we prefer those names rather than ‘Global North’ and ‘Global South’, which is too geographical).  We emphasise that we are looking at the economic foundations of imperialism, not the political aspects or the superstructure if you like, ie the political control by imperialist countries over the periphery, or military might or interventions etc.  Direct political control through colonies has mostly disappeared (although not completely); so imperialism operates mainly through economic control now (while throwing in the occasional coup or proxy war).  After all, that is the aim of the imperialist powers: to appropriate as much value and resources from the dominated as possible. In that sense, the economic determines the political.

If we focus on the transfer of value from the periphery to the imperialist economies, there are several ways that this is achieved. There is value transfer through unequal exchange in international trade; through global value chain flows (transfer pricing) within multi-nationals; through factor income flows (debt interest, equity profits and property rents); through seignorage (ie control of the money supply: dollar is king) and through capital flows (foreign direct investment inflows and portfolio flows. ie buying and selling financial assets).

So which are the imperialist countries?  Carchedi and I define them as those countries which get a long-term appropriation of value from subaltern countries.  And this is achieved by the appropriation of surplus value by high technology companies (and countries) from low technology companies (countries).  So imperialist countries can be defined as those with a persistently large number of companies as measured by their high national average organic composition of capital (OCC) and whose average technological development is higher than the national average of other countries.

In our work, we used the IMF data on net primary income flows between countries. These are cross-border flows of profit, interest and rent.  We found that when these flows are netted out, there are about 10 countries at the most that fit the bill as imperialist.  Indeed, nothing much has changed in the 100 years since Lenin wrote his analysis of imperialism: it’s still the same countries.  No others have made it from dominated to imperialist status.  Net primary income per head is concentrated in the G7 plus a few other small states and the tiny tax haven states).  Every other country is an ‘also-ran’.

The G8-plus countries own the vast bulk of all the foreign-owned assets.  Even the so-called BRICS (Brazil, Russia, India, China and South Africa) own little abroad compared to the imperialist countries.  The G8 has six times as much FDI stock as the BRICS.

The main way that value is transferred from the periphery to the imperialist nations is still through international trade. There has been a large increase in intra-firm trade by affiliates to the parent company using price mark-ups (transfer pricing).  For example, UNCTAD reckons that trans-national companies (TNCs) are involved in 80% of global trade. And of TNC trade, about 40% is intra-firm; 15% through fixed contracts with suppliers and 40% with so-called arms-length firms (ie not owned affiliates but ‘captive’ domestic firms). Actual intra-firm trade (affiliates to parent company) is about 33% of all annual trade.  So the main way is still export trade on world markets with internationally set prices.(UNCTAD GVC)

In Capital, Marx shows that, through competition, there is a tendency for the profit rates measured in value (labour time) to equalise into prices of production. There is a transfer of value from some capitals to others to bring about this equalisation of profit rates.  This transfer process in competition also applies to international trade. The transfer of value from the dominated to the imperialist economies is achieved by the tendency to equalise rates of profit between nations in the international market for goods and capital.

The periphery has less technology and more labour and so produces more value (in labour time) to make the same product.  The imperialist countries have more technology and less labour and so produce less value (in labour time).  When profit rates are equalised through competition in world markets, then a portion of the extra surplus value that has been extracted from the workers by the capitalists in the South gets transferred to the capitalists of the North.  So, although international trade in goods and services appears to work through equality of exchange (money for goods, goods for money at set prices), beneath the surface, there is an unequal exchange of value (UE).  The imperialist capitals gain extra value while the peripheral capitalists lose value. Figure 13 of my PP presentation shows how this transfer of value works. (The economics foundations of imperialism)

Carchedi and I have made calculations of the magnitude of this transfer of value.  We used some aggregate databases and applied a formula for the transfer. Details of this are in Figure 14 of the PP presentation and excel files are available for anybody who wants to replicate and check our methods and workings.  We found that the transfer of value from the dependent bloc (defined as below) to the G7 rose from $20bn a year in the 1960s; to $90bn in the 1970s, dropping off to $50bn in the 1980s. Then with China becoming the great trading force, there was a take-off from the late 1990s to reach over $120bn by the time of the Great Recession.

So there is annual value transfer from these countries to the G7 through their international trade of $120bn or more a year. This annual transfer of value to the imperialist countries (G7) is equivalent to about 2-3% of their combined GDP.  But the transfer from the dominated countries is much more, around 10% of their combined GDP.  So there is a substantial transfer out of the South through unequal exchange.

Recently, other authors have tried to compute the magnitude of the transfer of value to imperialist countries. Using the World Input-Output database, Italian economist Andrea Ricci of Urbino University, Italy found that for the developed countries “the global amount of value transfers corresponded to 1.8 percent of global value added… while for developing economies, the relative size of outflow transfers ranged from 10 to 20 percent of the domestic value added.” Ricci unequal exchange And Greek Marxist economists, Lefteris Tsoulfidis and Persefoni Tsaliki, looked at the transfer of value in trade between the US and China.  They find a similar magnitude of bilateral transfer of value between the US and China as we do. URPE_CHN_2019

In our view, based on the Marxian theory of unequal exchange, the transfer of value from the periphery to the imperialist countries through international trade and competition takes place because the imperialist countries have a much higher organic composition of capital.  That expresses their technological superiority and delivers much higher labour productivity.  The G7 economies on average are five times more technologically superior than the BRICS and so four times more productive per worker.

This is where the other speakers at the session come in.  John Smith is author of the highly commended, award-winning book, Imperialism in the 21st century.  The book’s main argument is that imperialism rests and thrives on the ‘super-exploitation’ of workers in the ‘Global South’.

What do we mean by ‘super-exploitation’? Well, Marx referred briefly to the idea that some workers may end up receiving wages that are below the value of their labour power (the amount needed to live and reproduce). But he did not base his theory of surplus value on ‘super-exploitation’. For Marx, even without super-exploitation, workers were still exploited for surplus value and profit under capitalism.

However, John Smith reckons that super-exploitation is now the main generator of imperialist value gains in the 21st century and technological superiority and ‘normal’ exploitation are no longer in the driving seat, so to speak. For John, this is almost self-evident, given the incredibly low wages in the sweatshops of many Global South countries and the huge mark-ups in the global value chain for imperialist multi-nationals.  Anybody who denied this and argued that workers in the North were just as or even more exploited would be denying the very existence of imperialism.

At the HM session, Andy Higginbottom from Kingston University provided some of the theoretical support for  the thesis of ‘super-exploitation’ as the economic driver of imperialism (HM 2019 Labour super-exploitation plus transformation makes for international value (1).  He pointed out that Marx’s transfer of value model as shown in our PP Figure 13 assumed equal rates of surplus value. That clearly could not be reality. If you relaxed that restriction, then different rates of surplus value between imperialist and peripheral economies come into play in the transfer of value, and not just differing rates of organic composition and labour productivity.  And then it can be argued that the rate of exploitation is not just affected by labour intensity, productivity etc, but also by differences in wages (ie super-exploitation).

But I don’t think Marx’s theory of unequal exchange must assume equal rates of surplus value in all countries.  In Figure 20 of our presentation, we show that value is transferred from South to North through trade in the same way even with differing rates of exploitation; indeed if the rates of surplus value are higher in the South, then the North gains even more value in the transfer. But the Southern capitalists also gain more, because they are exploiting their workers even more, either by longer hours and intensity and/or by poverty wages.

The point is that the transfer to the North takes place because of the imperialist countries’ superior technology and labour productivity.  That enables them to sell their goods in world markets at costs below the international average.  The Southern capitalists try to compensate for their lower technical level and productivity by driving the wages of their workers down. So the higher rate of exploitation in the South, whether by super-exploitation or not, is a reaction to the failure to compete against the North.

In our empirical analysis, we found that the contributions to the transfer of value from South to North came from both higher organic composition in the North and higher rates of exploitation in the South – it is both, not just technical superiority, nor just exploitation. But there is also a transfer of value between imperialist countries through trade.  And indeed, competition there remains fierce.  The annual flows of FDI show that, until very recently, flows between advanced capitalist economies were higher than between the imperialist and the less developed South.  In the decade from 2007, inflows to developed economies exceeded inflows to developing economies.  Last year was the first reversal of that.

In his paper for the HM session, Smith developed an analysis of the rate of exploitation (s/v).  Exploitation and super-exploitation in the theory of imperialism.  He reminds us that Marx recognised a so-called ‘moral and historical’ component in the value of labour-power, i.e. “the extent to which the class struggle and general social evolution (different ways of saying the same thing) has resulted in the incorporation of new needs into those necessary for the reproduction of labour-power.”

That means that the value of labour power is partly set by the class struggle. But super exploitation is not part of Marx’s theory of value, or s/v.  In the process of production, capitalists might force a lower wage. If the necessities of life and their production prices remain the same, the lower wage purchases less wage goods (consumption falls) as the price of labour power (wages) falls below its value (the production price of those socially determined necessities). That is super exploitation.  But if this low wage is maintained permanently, workers must eventually accept a lower value of labour power in the goods and services that they can buy with it.  In that sense, super exploitation becomes simply a higher level or rate of (“normal”) exploitation because the value of labour power has been lowered by the class struggle. Yes, there is more exploitation, but not ‘super-exploitation’ as a new category of capital.

So I don’t think that super-exploitation is proven either theoretically or empirically as “the single-most important means of increasing the rate of surplus value and countering the tendency of the rate of profit to fall.” (Smith).  Or that imperialism has an “insatiable lust for super-exploitable labour”.  Imperialism has a lust for profit and is the result of the drive for more profit beyond national borders as the rate of profit at ‘home’ fell.  Denying the dominance of super-exploitation as the main form of exploitation under imperialism is not “imperialism denial”, like global warming or climate change denial, as Smith suggests.

Moreover, it just might be that the days of ‘super-exploitation’, as Smith categorises it, are ending.  At the launch of a new book at HM, Ashok Kumar, a lecturer in International Political Economy at Birkbeck University, argued that there are signs that the ‘monopsony’ power of the imperialist buyers of the products of suppliers in the global South is weakening because the number of producers is also shrinking.  This increases the countervailing power of the Southern capitalists (producers) against the Northern capitalists (retailers).  And that gives a window of opportunity for the workers of the Southern sweat shops to push up wages through successful struggles – of which Kumar gives examples.

While it is possible to argue any super exploitation of the workers in the low technology countries (the so-called “South) is caused by the technological backwardness of the South’s capitalists, it is impossible to argue the opposite; that this technological backwardness is caused by super exploitation. And if super exploitation is determined, it cannot be the main determinant element. In sum, the productivity of labour is key to the transfer of value in trade between imperialist countries and the periphery. The major cause of UE is technological superiority. Differences in the rates of surplus value are significant but play a lesser role. Exclusive emphasis on only one of these two factors is misleading.

Moreover, even it were the case that super-exploitation is the main cause of higher rates of surplus value in the peripheral economies, a transfer of value has to take place.  And that can only go to countries with vastly superior technology and labour productivity and can maintain that superiority through monopolising that technology.  Indeed, that was one of the arguments made by Sam King, from Victoria University Australia, at the HM session, based on his upcoming book on imperialism.

Sam reckoned that Lenin’s Imperialism was still valid.  There were still only a few countries reaping these value transfers.  Although Lenin refers to ‘monopoly capital, he did not mean that there was no competition between capitals. Competition still took place voraciously between various imperialist economies but also with ‘Southern’ capitalists. The monopoly was in the technical superiority of the imperialist companies, which they jealously guarded.  The labour productivity gap between these countries and the periphery had not altered since Lenin’s time.  Now in the 21st century, the US is worried that its technology ‘monopoly’ may be threatened by China’s move up the value-added ladder. This is the real reason for the current trade war.

The empirical evidence shows that imperialism is an inherent feature of modern capitalism. Capitalism’s international system mirrors its national system (a system of exploitation): exploitation of less developed economies by the more developed ones. The imperialist countries of the 20th century are unchanged – it’s still the G7/10. There are no intermediate, ‘sub-imperialist’ economies. And China is not imperialist on these measures. And the transfer of value from the periphery to the imperialist core is continually rising.

Finally, Marx’s model of unequal exchange shows that the economics of imperialism works through the transfer of value by the exploitation of the workers of the South by the capitalists of the South and then through the transfer of some of that surplus value appropriated to the capitalists of the North in international markets and internal global value chains. The workers of the North do not benefit in any way from this imperialist transfer.

To suggest, as some do, that the welfare state, pensions and national health services in the North were only possible because of the imperialist exploitation of the South is economic nonsense. After all, the great period of imperialist exploitation was in the neo-liberal period of globalization since the 1980s, when the welfare and wage gains of workers in the North were taken back.  Globalisation of the late 20th century was a response to falling rates of profit in the North (as it was in the late 19th century).  It is also a political insult against the class struggles made by Northern workers to achieve those gains in the first place.  Both the workers of the South and the North are exploited by capital.  It is capital that is the enemy of both.

HM1 – Marx’s double-edge law

November 11, 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

US rate of profit measures for 2018

November 4, 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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