It’s all going pear-shaped

August 24, 2019

With perfect timing, just as the summit meeting of the leaders of the top capitalist economies (G7) met in Biarritz, France, China announced a new round of tariffs on $75bn of US imported goods. This was in retaliation to a new planned round of tariffs on Chinese goods that the US planned for December. US President Trump reacted angrily and immediately announced that he was going to hike the tariff rates on his existing tariffs on $250bn of Chinese goods and impose more tariffs on another $350bn of imports.

The US president also said he was ordering US companies to look for ways to scrap their operations in China. “We don’t need China and, frankly, would be far better off without them,” Mr Trump wrote. “Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA.”

This intensification of the trade war naturally hit financial markets; the US stock market fell sharply, bond prices went up as investors looked for ‘safe-havens’ in government bonds and the crude oil price fell as China was going to impose a reduction on US oil imports.

These developments came only a day after the latest data on the state of the major capitalist economies revealed a significant slowdown.  The US manufacturing activity index (PMI) for August came in below 50 for the first time since the end of the Great Recession in 2009.

Indeed, the US, Eurozone and Japanese indexes are below 50, indicating a full-out manufacturing recession is here now.  And the ‘new orders’ components for each region was even worse – so the manufacturing index is set to fall further. Up to now, the service sectors of the major economies have been holding up, thus avoiding an indication of a full-blown economic slump. “This decline raises the risk that weakness in manufacturing may have begun to spill over to services, a risk that could generate a sharper-than-expected weakening in US and global labor markets.”  (JPM). Overall, JP Morgan reckons the world economy is growing at just a 2.4% annual pace – close to levels considered a ‘stall speed’ before outright recession.

Despite all his bluster about how well the US economy is doing, Trump is worried.  In addition to attacking China, he also launched again into criticising US Fed chair Jay Powell for not cutting interest rates further to boost the economy, calling Powell as big an “enemy” of the US economy as China!

Powell had just been speaking at the annual summer gathering of the world’s central bankers in Jackson Hole, Wyoming.  In his address, he basically said that there was only so much monetary policy could do.  Trade wars and other global ‘shocks’ could not be overcome by monetary policy alone.  Powell’s monetary policy committee is split on what to do.  Some want to hold interest rates where they are because they fear that too low interest rates (and everywhere they are going negative) will fuel an unsustainable credit boom and bust.  Others want to cut rates as Trump demands to resist the recessionary forces descending on the economy.  Powell bleated that “We are examining the monetary policy tools we have used both in calm times and in crisis, and we are asking whether we should expand our toolkit.”

The trouble is that the central bankers at Jackson Hole are realising, as had already become obvious, that monetary policy, whether conventional (cutting interest rates) or unconventional (printing money or ‘quantitative easing’) was not working to get economies out of low growth and productivity or avoid a new recession.

Many of the academic papers presented to the central bankers at Jackson Hole were laced with pessimism.  One argued that bankers needed to coordinate monetary policy around a global ‘natural rate of interest’ for all.  The problem was that there is considerable uncertainty about where the neutral rate really lies” in each country, let alone globally.  As one speaker put it: “I am cautious about using this impossible-to-measure concept to estimate the degree of policy divergence around the world (or even just the G4)”.  So much for the basis of most central bank monetary policy for the last ten years.

Another paper pointed out that “monetary policy divergence vis-a-vis the U.S. has larger spillover effects in emerging markets than advanced economies.”  So “domestic monetary policy transmission is imperfect, and consequently, emerging markets’ monetary policy actions designed to limit exchange rate volatility can be counterproductive.”  In other words, the impact of the Fed’s policy rate and the dollar on weaker economies is so great that smaller central banks can do nothing with monetary policy, except make things worse!

No wonder, Bank of England governor Mark Carney in his speech took the opportunity before he leaves his post to suggest that the answer was to end the rule of dollar in trading and financial markets.  The US accounts for only 10 per cent of global trade and 15 per cent of global GDP but half of trade invoices and two-thirds of global securities issuance, the BoE governor said. As a result, “while the world economy is being reordered, the US dollar remains as important as when Bretton Woods collapsed” in 1971. It caused too much imbalances in the world economy and threatened to bring down weaker emerging economies which could not get enough dollars.  It was time for a global fund to protect against capital flight and later a world monetary system with a world money!  Some hope!  But he showed the desperation of central bankers.

The impending global recession has also concentrated the minds of mainstream economics.  A division of opinion among mainstream economists has broken out over what economic policy to adopt to avoid a new global recession. Orthodox Keynesian, Larry Summers, former US treasury secretary under Clinton and Harvard professor, has argued the major capitalist economies are in ‘secular stagnation’. So he reckons monetary easing, whether conventional or unconventional, won’t work. Fiscal stimulus is needed.

On the other hand, Stanley Fischer, formerly deputy at the US Fed and now an executive of the mega investment fund, Blackrock, reckons that fiscal stimulus won’t work because it is not ‘nimble enough’ ie takes too long to have an effect. Also, it risks driving up public debt and interest rates to unsustainable levels. So monetary measures are still better.

The post-Keynesians and Modern Monetary Theory economists got very excited because Summers seemed to agree with them, finally, – namely that fiscal stimulus through budget deficits and government spending can stop ‘aggregate demand’ collapsing. It seems that the consensus among economists is moving to the view that central bankers can do little or nothing to sustain capitalist economies in 2019. 

But in my view, neither the ‘monetarists’ nor the Keynesians/MMT are right. Whether more monetary easing and fiscal stimulus, nothing will stop the oncoming slump. That’s because it is not to do with weak ‘aggregate demand’.  Household consumption in most economies is relatively strong as people continue to spend more, partly through extra borrowing at very low rates of interest.  The other part of ‘aggregate demand’, business investment is weak and getting weaker.  But that is because of low profitability and now, in the last year or so, falling profits in the US and elsewhere.  Indeed, US corporate profit margins (profits as a share of GDP) have been falling (from record highs) for over four years, the longest post-war contraction.

The Keynesians, post-Keynesians (and MMT supporters) see fiscal stimulus through more government spending and increased government budget deficits as the way to end the Long Depression and avoid a new slump.  But there has never been any firm evidence that such fiscal spending works, except in the 1940s war economy when the bulk of investment was made by government or directed by government, with business investment decisions taken away from capitalist companies.

The irony is that the biggest fiscal spenders globally have been Japan, which has run budget deficits for 20 years with little success in getting economic growth much above 1% a year since the end of the Great Recession; and Trump’s America with his tax cuts and corporate tax exemptions in 2017.  The US economy is slowing down fast, and Trump is hinting at more tax cuts and shouting at Powell to cut rates.  In Europe, the European Central Bank is preparing a new round of monetary easing measures.  And even the German government is hinting at fiscal deficit spending.

So we shall probably get a new round of monetary easing and fiscal stimulus measures, to satisfy all parts of mainstream and heterodox economics.  But they won’t work.  The trade and technology war is the trigger for a new global slump.

Recessions, monetary easing and fiscal stimulus

August 19, 2019

As the stock markets of the world gyrate up and down like a yo-yo, all talk in the financial media is on whether a new global recession is coming and when.  The financial pundits search for economic or financial indicators that might guide them to tell.  The favourite one is the ‘inverted bond yield curve’.  This is the difference in the annual interest rate that you get if you buy a government bond that has a ten-year life (the maturity before you get your money repaid) and the interest rate for buying either a three-month or two-year bond.

The curve of interest rates for differently maturing bonds is usually upwards, meaning that if you lend the government your cash (ie buy a government bond) for ten years you would normally expect to get a higher interest rate (yield) than if you lent the government your money for just three months.  But sometimes, in the market for buying and selling government bonds (the ‘secondary market’), the yield on the ten-year bond falls below that of the two-year or even three-month bond.  Then you have an inverted yield curve.

Why does this happen?  What it suggests is that investors in financial assets (who are banks, pension funds, companies and investment funds) are so worried about the economy that they no longer want to hold the stocks or bonds of companies (ie invest in or lend them cash).  It’s too risky and so instead investors prefer to hold very safe assets like government bonds – as the governments of Germany, Japan, the US or the UK are not going to go bust like a company or bank.

If investors buy more government bonds, they drive the price of those bonds up in the market.  The government pays an annual fixed interest on that bond until it matures, so if the price of the bond keeps rising, then the yield on that bond (ie. interest rate/bond price) keeps falling.  And then the bond yield curve can invert. Empirical evidence shows that every time that happens for a sufficient period (some months), within a year or so, an economic recession follows.

How reliable is this indicator of a recession coming?  Two Bloomberg authors have questioned the validity of inverted yield for causation; it may be that an inverted curve correlates with recessions, but that is no confirmation that another recession is on its way because all it shows is that investors are fearful of recession and they could well be wrong.  Indeed, when you look at corporate bonds, there is no inverted curve.  Longer-term corporate bonds have a much higher yield than short-term bonds.

On the other hand, JP Morgan economists recently did some regressions on the inverted yield curve and reckoned that the very low inflation that most major economies have experienced in the post Great Recession period may have altered the reliability of the indicator to some extent because the yield curve could go flat but not really express investor fear and loathing of stocks.  Even so, JP Morgan still reckoned it was a valuable indicator.  Currently, the US bond yield curves (10yr-3m) and (10yr-2yr) have inverted.  And as you can see from the JPM graph below, that every time that has happened before, a recession has followed (the grey areas) within a year.

JP Morgan reckons on this basis the current probability of a slump in the US economy within a year is about 40-60%.

And this is the US, the capitalist economy with still the best economic performance of the G7, with real GDP growth at about 2.3%.  Everywhere else in the G7, in Europe, in Asia, and also in many large so-called emerging economies, economic growth is falling fast towards zero and below.  Look at this list:

Canada: 1.3%; France 1.3%; Japan 1.2%; UK 1.2%; Russia 0.9%; Brazil 0.5%; Germany 0.4%; Italy 0.0; Mexico -0.7%;  Turkey -2.6%; Argentina -5.8%.  Only China, India and Indonesia can record decent growth rates and even here, there is a rapid slowdown.

I have reported before on the manufacturing and industry activity indexes that show the world is already in a manufacturing sector recession and only ‘service sectors’ like health, education, tourism etc are keeping the world economy moving.  But those sectors are ultimately dependent on the health of the productive sectors of a capitalist economy for their sales and profits.

In some of the major economies, there is so-called full employment, at least on the official stats, even if it is temporary, part-time, self-employed and on basic wage levels.  This employment income helps to keep spending going, but in many countries it is not enough, so that household savings are being run down.  For example, in the UK, the household savings rate is at a 50-year low.  So people cannot keep borrowing indefinitely, even though interest rates are very low.

And are they low!  We are now in the fantasy world of negative interest rates, where borrowers get paid to borrow and lenders pay to lend. In Denmark, one mortgage lender is offering loans at -0.1%, in other words it is paying you to take out a mortgage!  Over 20% of all government and even some corporate bonds have negative interest rates. The entire spectrum of German government bonds from two-years to 30 years have negative interest rates if you buy them. So sellers of bonds (borrowers) can expect you, the lender, to pay interest to them to buy their bonds!

So why are bond investors prepared to do this? As I said, it’s because they fear a global recession that will cause a collapse in stock markets and other ‘risky’ financial assets, so the safest place to put your money is with governments (which don’t go bust) like the US, the UK, Japan, Germany and Switzerland.

If a recession is coming, what can be done to avoid it?  Mainstream and Keynesian economics has basically two policy solutions.  The first is to inject more money into the financial system in the hope that piles of dollars, euros and yen will find their way into the coffers of corporate borrowers, which will then keep investing in jobs and machines; or into households who will keep spending

The ‘conventional’ way to do this was for the central banks of the major economies to cut their ‘policy’ interest rate, which would lead to falling interest rates across the board and thus reduce the cost of borrowing.  But the experience of the last ten years of what I call the Long Depression reveals that this does not work.  Investment has remained low as a share of GDP, wages have stagnated and economic growth has been feeble.

So governments and central banks have resorted to ‘unconventional monetary policy’ where the central banks buy billions of government and corporate bonds (even company stocks) from commercial banks.  This is called quantitative easing (QE). This led to a huge boost in bank reserves.  The banks were supposed to lend that cash on to companies to invest.  But it did not work.  Companies did not borrow to invest.  They were either so cash rich like Amazon or Microsoft that they did not need to borrow or so weak that the banks would not lend to them.  So all this cash ended up being invested in stocks and bonds (what Marx called fictitious capital, ie just claims on future profits or interest, not actual profits or interest).  The financial markets rocketed up, but the ‘real’ economy stagnated.

Monetary policy has failed, whether conventional or unconventional.  Central banks have been ‘pushing on a string’.  That was something that Keynes found too during the Great Depression of the 1930s.  His policy proposal for getting full employment and ending the depression in the early 1930s was first conventional interest-rate cuts and then unconventional QE.  By 1936, when he wrote his great work, The General Theory, he announced the failure of monetary policy.

And so it has been this time.  Mainstream economists including Keynesians like Paul Krugman at first advocated massive monetary injections to boost economies.  Japan’s government even invited Krugman and others to Tokyo to advise them on QE.  The government and the Bank of Japan adopted QE with a vengeance, so much so that the BoJ has bought virtually all the available government bonds in the market – but to no avail.  Growth remains weak, inflation is near zero and wages stagnate. 

The central banks have run out of ideas. And investors know it. That is why bond yields are negative and in the US the yield curve has inverted.  But there is nothing else that the central banks can do except cut interest rates where they are not yet zero and bring back yet more QE where they are.

Some radical economists have not given up on monetary policy.  Some are advocating ‘helicopter money’(named after right-wing monetarist economist Milton Friedman who advocated by-passing the banking system and printing cash and giving it directly to households to spend ie send helicopters over the country dropping dollars – not napalm as in Vietnam).  This ‘people’s money’ is the last resort of the monetary policy solution.

The more perceptive of mainstream economists now recognise that monetary easing will not work.  The Financial Times and even the Wall Street Journal have been trashing this policy.  And Keynesians who advocated it before now recognise its failure.  Take this example by Edward Harrison, a macro economic financial advisor.

“I think monetary policy is ineffective. We don’t even know how it works. Sure, rate policy can help at critical junctures in the business cycle by lowering interest payments when debtors are under stress. But, we’ve hit the limits of what central banks can do. As a result, we’ve resorted to quantitative easing, negative interest rates, and yield curve control. And for what? It’s crazy.   The solution is staring us in the face: help put money in the pockets of the people who are facing the most severe financial stress in our economies. Those are the people who need the money the most and are most likely to spend that money too. Until we do that, the stress on our economic and financial system will continue to grow… and political unrest will continue to grow with it.”

Harrison cites empirical work from his own college that shows monetary policy does not work – as Keynes discovered in the 1930s. “For example, economic researchers at my alma mater Dartmouth wrote this in 2013 as the abstract for an economic study:

“We study the factors that drive aggregate corporate investment from 1952–2010. Quarterly investment responds strongly to prior profits and stock returns but, contrary to standard predictions, is largely unrelated to changes in interest rates, market volatility, or the default spread on corporate bonds. At the same time, high investment is associated with low profit growth going forward and low quarterly stock returns when investment data are publicly released, suggesting that high investment signals aggregate over investment. Our analysis also shows that the investment decline following the financial crisis of 2008 represents a fairly typical response to changes in profits and GDP at the end of 2008 rather than an unusual reaction to problems in the credit markets.”

And he cites work by the US Federal Reserve that concluded that: A fundamental tenet of investment theory and the traditional theory of monetary policy transmission is that investment expenditures by businesses are negatively affected by interest rates. Yet, a large body of empirical research offer mixed evidence, at best, for a substantial interest-rate effect on investment. In this paper, we examine the sensitivity of investment plans to interest rates using a set of special questions asked of CFOs in the Global Business Outlook Survey conducted in the third quarter of 2012. Among the more than 500 responses to the special questions, we find that most firms claim to be quite insensitive to decreases in interest rates, and only mildly more responsive to interest rate increases.”

I have cited this paper that Harrison refers on many occasions in this blog before he brought it up.  But Harrison emboldens the text from the paper about how interest rates have little effect on business investment. But he ignores the other key conclusion in the paper cited.  I quote again with my emphasis now: “Quarterly investment responds strongly to prior profits and stock returns but, contrary to standard predictions…..Our analysis also shows that the investment decline following the financial crisis of 2008 represents a fairly typical response to changes in profits and GDP at the end of 2008 rather than an unusual reaction to problems in the credit markets.”

In other words, what drives capitalist economies and capital accumulation are changes in profits and profitability – indeed that is what the paper cited shows.  And there is a pile of other empirical evidence that confirms this relation, which I have covered in several papers. The profit investment nexus.  Economic growth in a capitalist economy is driven not by consumption but by business investment. That is the swing factor causing booms and slumps in capitalist economies.  And business investment is driven mainly by one thing: profits or profitability – not interest rates, not confidence and not consumer demand. It is this simple, obvious and empirically confirmed explanation of regular and recurring booms and slumps that is ignored or denied by the mainstream (including Keynesian) and heterodox post-Keynesian economics.

Take this alternative explanation of recessions recently offered by an ex-Bank of England economist Dan Davies.  Davies tells us that financial meltdowns aren’t the usual way in which recessions happen, and emergency credit lines and taxpayer bailouts aren’t the usual way that they’re prevented or managed. What normally happens is that there’s a shock of some sort to business confidence – say, political uncertainty or trade restrictions, as we’re seeing at the moment – and companies react to this by cutting back investment plans.”  According to Davies this orthodox Keynesian recession of this sort, unaccompanied by a financial market crisis, is the normal kind – and one of the best understood problems in economic policy.”  Really, best understood?

So this Keynesian explanation is that there is a sudden loss of business confidence caused by some external factor like a trade war or a government falling or a war. There is nothing endogenously wrong with the capitalist process of production and investment for profit.  The idea of ‘shocks’ to an inherently equilibrium system is the mainstream macro view, in essence.  It has bred a whole industry of empirical work based on Dynamic Stochastic General Equilibrium (DSGE) models, which is a smart word for seeing what happens to an economy when an external ‘shock’’ like a sudden loss of çonfidence’ or trade tariffs is applied.  Larry Summers, a leading Keynesian guru critiqued DSGE models“In four years of reflection and rather intense involvement with this financial crisis, not a single aspect of dynamic stochastic general equilibrium has seemed worth even a passing thought.”  He moaned: “Is macro about–as it was thought before Keynes, and came to be thought of again–cyclical fluctuations about a trend determined somewhere else, … inserting another friction in a DSGE model isn’t going to get us there. “

This orthodox Keynesian explanation of recessions explains nothing.  Why is there a sudden loss of business confidence as we are seeing now?  How does a sudden loss explain regular and recurring slumps and booms, not one-off shocks?  Davies argues that the Great Recession was exceptional in that the huge slump was caused by an extreme financial crash that won’t be repeated, as ‘normal’ slumps are just contingent ‘shocks’.

And yet the theory and the evidence is there that capitalist accumulation and production moves forward in a succession of booms and slumps of varying magnitude and length according to movement of the profitability of capital culminating on a regular basis in a collapse of profits, taking down investment, employment, incomes and consumption in that order.

In the 1930s when Keynes realised that monetary easing was not working to end the depression, he opted for government spending (investment) through running budget deficits to stimulate ‘effective demand’ and get investment and consumption on a rising trend.  This policy has become known as the Keynesian one, also adopted by more radical post-Keynesians and in their latest version, Modern Monetary Theory (MMT). The Keynesians reckon capitalist economies can be brought out of recessions by governments borrowing more than they get in tax revenues (running budget deficits).  Governments borrows by getting financial institutions to buy their bonds.

The more radical post-Keynesians and MMTers reckon that it not even necessary to issue bonds for that purpose.  Governments can just print the money and then spend it on useful projects.  But all agree that ‘fiscal easing’ is the answer to restoring growth, investment, employment and incomes in a capitalist economy.  The government borrows or prints money and the capitalists and workers spend it.  Once growth is restored and full employment and rising incomes are achieved any debt servicing can be funded and you can turn off the government money tap and moderate any possible ensuing inflation if the economy is ‘overheating’.

The trouble with this policy option is that we live in a capitalist economy where the investment decisions that drive any economy are made by capitalist companies. Unless government makes those investment decisions itself and rides roughshod over the capitalist sector or replaces it with state operations in a plan (as in China, for example), then investment and growth will depend on the decisions of capitalist companies.  And they only invest if they are confident of getting good profits ie the profitability of investment is high and rising.

The history of the Great Depression of the 1930s shows; and the collapse of Keynesian demand management policies in the 1970s shows; and the history of the Long Depression since 2009 shows, that if corporate profitability is low, and especially if its falling, then no amount of fiscal stimulus will deliver more investment and faster growth.

I and others have delivered a pile of empirical evidence to show that government spending has little or no impact on boosting economic growth or overall investment – the amount is either too small to have an impact (government investment averages just 2-3% of GDP in most capitalist economies compared to 15-20% of GDP for capitalist sector investment).  Or most government spending in capitalist economies are really handouts to capitalist companies or to boost welfare with little productive result.

Don’t believe me – then look at the evidence here.  Take Japan – it has run budget deficits of between 3-10% of GDP for nearly 20 years and yet its growth rate has been even lower than the US or Europe.

The Trump tax cuts have raised the US budget deficit in the last two years and going forward – Trump is following Keynesian policies in that sense – and yet the US is now slowing down fast.  The US is projected to run a primary budget deficit (that excludes the interest cost on the debt) for the foreseeable future.  Do Keynesians really expect the US economy to grow faster as a result?

US budget projections

Although the inverted yield curve can be checked daily, it may not be a useful indicator of a coming recession but falling profits are (unfortunately, profits data are mostly quarterly).  Empirical studies like the one mentioned by Harrison above and many others confirm this.  And global corporate profits are now stagnating;

while US non-financial corporate profits are falling.

Monetary and fiscal solutions to recessions that still preserve the profit-making capitalist system won’t work.  Monetary easing has failed, as it has done before.  Fiscal easing, where adopted, has also failed.  Indeed, capitalism can only get out of a recession by the recession itself.  A recession would wipe out weaker capitalist companies and lay off unproductive workers.  The cost of production then falls and those companies left after the slump have higher profitability as the incentive to invest.  That is the ‘normal’ recession.  In a depression, however, that process requires several slumps (as in the late 19th century depression) before normal service is resumed.  Another recession is on its way and neither monetary nor fiscal measures can stop it.

The political economy of Peterloo

August 16, 2019

Today is the 200th anniversary of what has come to be called the Peterloo massacre.  On 16 August 1819, 60,000 working people gathered at St Peter’s Field in Manchester England to demonstrate for the right to vote, against the terrible conditions and pay of factory workers and for the right to organise at the workplace, among a host of other injustices.

Peterloo has become a marker in the labour history of Britain. The peaceful demonstration was brutally attacked and dispersed by a private militia of thugs on horseback funded and directed by the local landlords and authorities with the tacit backing of the then Tory government under Lord Liverpool. An estimated 18 people, including a woman and a child, died from sabre cuts and trampling. Over 700 received serious injuries.

I am not going to discuss the event or the politics behind it as there are many thorough and better accounts to be had elsewhere.  Indeed, there is a film by leading British filmmaker, Mike Leigh on the day.

Instead, I want to comment on the economics of Peterloo: the state of the British economy and capitalism at the time  – to provide some context to the event and also perhaps draw out some wide generalisations.

Peterloo took place a few years after the end of so-called Napoleonic wars in which the aristocratic monarchies of Britain, Austria, Russia and Germany finally defeated the French republic.  The end of the war heralded a period of deep depression in European economies, as soldiers returned home without work and bad harvests and weather led to a sharp downturn in agricultural production – still the dominant form of economic activity in early 19th century Europe.

This period of depression started before the end of war in 1812 and continued for ten years to 1822. It is reckoned that England suffered more economically, socially and politically, than during the French wars when at least there were good harvests and armaments production provided work. During the wars, Britain’s export and re-export trade increased. British ships carried the world’s trade and also captured French colonies which further increased Britain’s trade potential. After 1815 this virtual monopoly ended and trade declined

The depression brought discontent and distress and a response from the growing layers of industrial workers in the ‘dark satanic mills’ of the new big cities of Manchester, Liverpool and Birmingham that had no parliamentary representation or civic rights.  The 18th century constitution remained, with the landlord class in control and forming the government.

In 1815 parliament passed the Corn Laws, enforcing higher prices for grain to protect landlord profits from cheaper foreign imports, squeezing the wages of workers and the profits of the industrial capitalists.  Classical bourgeois economist, David Ricardo wrote his Principles of Political Economy and Taxation in 1817 that presented a theoretical argument against agricultural rents and the corn laws.  Indeed, Ricardo led the demand in parliament for an inquiry into the Peterloo massacre.

Wages were held down by the so-called Speenhamland system, which subsidised wages from the public purse somewhat like the Universal Basic Income proposed now.  At the same time, the demobilisation of 300,000 soldiers, the influx of 100,000 Irish labourers and the use of children and women in the factories meant that the ‘reserve army of labour’ (to use Marx’s phrase) was huge.  Indeed, the population in the industrial areas was rocketing (up 50% in the first 30 years of the 19th century).

At the same time, any attempt by rural workers to feed themselves off the land was blocked and curtailed by the landowners.  The 1816 Game Laws allowed landowners to hunt for game; but not their workers.  The penalty for poaching was seven years transportation to Australia.  Common land had been wiped out by the enclosure measures decades before.

Decade Enclosures
1780-90 287
1790-1800 506
1800-1810 906

The war had driven up the public debt to £834 million. Interest on this was a heavy burden to taxpayers. But the answer of the government was to end income tax, thus shifting the burden of servicing the debt onto the poorest through various sales and customs taxes.  The interest paid on the debt went to the rich war bond holders now no longer paying income tax.  The government tried to inflate away the debt burden by staying off the gold standard and letting the pound devalue, driving up inflation and hitting the poor again.

Radical poet Lord Byron protested in the House of Lords about the situation in 1812 “I have been in some of the most oppressed provinces of Turkey; but never, under the most despotic of infidel governments, did I behold such squalid wretchedness as I have seen since my return, in the very heart of a Christian country”.

All this was compounded by the weather.  The year 1816 is now known as the ‘Year Without a Summer’ because of severe climate abnormalities that caused average global temperatures to decrease by 0.4–0.7 °C. This resulted in major food shortages across the Northern Hemisphere. Evidence suggests that the anomaly was predominantly a volcanic winter event caused by the massive 1815 eruption of Mount Tambora in the Dutch East Indies (now Indonesia). This eruption was the largest eruption in at least 1,300 years.

The Year Without a Summer was an agricultural disaster. Low temperatures and heavy rains resulted in failed harvests in Britain and Ireland. Families in Wales travelled long distances begging for food. Famine was prevalent in north and southwest Ireland, following the failure of wheat, oat, and potato harvests. In Germany, the crisis was severe; food prices rose sharply. With the cause of the problems unknown, people demonstrated in front of grain markets and bakeries, and later riots, arson, and looting took place in many European cities. It was the worst famine of 19th-century Europe.

Indeed, The Year Without a Summer is a misnomer; it was Years Without a Summer given the weather of 1816, 1817, and 1818.  Lord Byron, now in permanent exile, was moved to write an apocalyptic poem, The death of the sun, while staying by the banks of Lake Geneva in July 1816 as Europe and North America were gripped by one of the coldest summers on record.

“I had a dream, which was not all a dream. The bright sun was extinguish’d, and the stars Did wander darkling in the eternal space, Rayless, and pathless, and the icy earth, Swung blind and blackening in the moonless air; Morn came and went—and came, and brought no day, And men forgot their passions in the dread Of this their desolation.”

It is also no accident that Mary Shelley, the partner of Percy Shelley, went on to write Frankenstein in 1818. Shelley’s miserable Creature is usually portrayed as the terrible result of uncontrolled technology.  But in the context of the climate shock, it is also a figure representing the desperate refugees crowding Switzerland’s market towns in that year. Eyewitness accounts frequently refer to how hunger and persecution “turned men into beasts”, how fear of famine and disease-carrying refugees drove middle-class citizens to demonize these suffering masses as subhuman parasites and turn them away in horror and disgust.

Peterloo happened because the British government in this depression was the most reactionary.  There was a fear of the democratic ideas of the French Revolution spreading.  There was a lasting fear of popular movements, which reflected the fear of revolution. There was a determination to protect and defend the landed interest – the basis of the government’s political power. There was a general dislike of an organised police-force, so a consequent heavy reliance on the military and private militias meant that in any confrontation, made violence the preferred option. The government kept the Combination Acts on Statute Books until 1824, which suppressed all reform movements. This was a government of the landed few for the landed few.

The 18th century economist Adam Smith noted the imbalance in the rights of workers in regards to owners (or “masters”). In The Wealth of NationsBook I, chapter 8, Smith wrote: “We rarely hear, it has been said, of the combination of masters, though frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject. Masters are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labor above their actual rate[.]  When workers combine, masters … never cease to call aloud for the assistance of the civil magistrate, and the rigorous execution of those laws which have been enacted with so much severity against the combination of servants, labourers and journeymen.”

This was also the period of the so-called Luddites, a radical group of weavers who reacted to the introduction of machinery and their loss of jobs with attacks on the machines themselves.

In this light, the Peterloo massacre was the inevitable waiting to happen.  After the event, the great radical romantic poet, Percy Shelley graphically attacked the government and its ruling class in his famous poem, Masque of Anarchy, the final verse of which is echoed in the current campaign slogan of the British leftist Labour party:

‘Rise like Lions after slumber
In unvanquishable number –
Shake your chains to earth like dew
Which in sleep had fallen on you –
Ye are many – they are few.’

At a more general level, Peterloo took place in the same year as the very first capitalist-style crisis and financial crash. The Panic of 1819 started in the US and was triggered by the post-Napoleonic depression in Europe which led to the collapse of US export markets and the bankruptcy of several banks that had made export loans.  The ensuing recession lasted until 1821. The boom and bust cycle that has characterised capitalist accumulation to this day had begun.

This was the first capitalist slump – and also the first recognisable period of depression in modern industrial capitalism.  In my book, The Long Depression, I suggest that capitalist accumulation takes place in cycles of profitability.  There are periods of rising profitability and then periods of falling profitability (within the longer-term context of a secular fall as capitalist economies mature).

There are four seasons each of approximately 10-14 years in the 19th century (they are longer in the 20th century).The first season (Spring) sees a rise in profitability as new technology and an expanding workforce is applied.  In the second season (Summer), profitability falls and because labour has got stronger during the spring season, the class battle intensifies.  Then comes Autumn, a new period of rising profitability built on the defeat of previous labour struggles and the weakening of labour through slumps.  Finally, profitability falls again in the Winter season and there is a depression that can only be broken either by war or by successive slumps that eventually restore profitability for a new Spring.

1819 was a year right in the middle of such a Winter.  The weakening of labour in the previous Autumn of the war economy from 1800-1812 had seen profitability rise for both landowners and rising industrial capitalists.  But the post-war depression was one of falling profitability (as noted by Ricardo) in which the dominant landowning class tried to preserve its profits and hegemony at the expense of industry and labour through repression and taxation.  Peterloo was the marker for this.

After 1822, England entered a new Spring based on industrial expansion and the revival of export markets in Europe.  The industrial bourgeois mobilised its workers to fight for the vote in the cities and parliamentary representation (for property owners).  The Reform Act was passed in 1832.

SPRING 1776-86: profitability up; industrialisation begins, labour strengthens, first trade unions

SUMMER 1786-1800: profitability down; Marx’s law operates, labour fights

AUTUMN 1800-12: profitability up; war economy; labour weakened and overseas

WINTER 1812-22: profitability down; post-war depression, labour repressed

Finance: fiddling, fetish and fiction

August 12, 2019

Nothing changes in the finance sector globally, despite the catastrophic impact of the banks on the world capitalist economy in the global financial crash and the ensuing Great Recession.

In previous posts, I have highlighted the greed, recklessness and instability of the finance sector and its operational leaders. As Marx said, finance is the epitomy of the fetish of money, increasingly based on investing in fictitious capital, that bears no relation to any value created in an economy, let alone overall social need.  As former Bank of England chief economist Andy Haldane put it, finance is socially unproductive.

Haldane posed the question: “In what sense is increased risk-taking by banks a value-added service for the economy at large?”  He answers, “In short, it is not.”  Echoing Marx’s value theory, Haldane concluded: “The act of investing capital in a risky asset is a fundamental feature of capital markets. For example, a retail investor that purchases bonds issued by a company is bearing risk, but not contributing so much as a cent to measured economic activity. Similarly, a household that decides to use all of its liquid deposits to purchase a house, instead of borrowing some money from the bank and keeping some of its deposits with the bank, is bearing liquidity risk. Neither of these acts could be said to boost overall economic activity or productivity in the economy. They re-allocate risk in the system but do not fundamentally change its size or shape. For that reason, statisticians do not count these activities in capital markets as contributing to activity or welfare. Rightly so.”

More evidence of the criminal nature of global banking is to be found in the news that the Malaysian government has filed charges against 17 current and former executives of three Goldman Sachs subsidiaries, over the multi-billion-dollar 1MDB state fund scandal, where former Malaysian prime minister Najib Razak and his family corruptly siphoned off billions – it seems with the connivance of Goldman Sachs, the world’s largest investment bank.  Goldman’s used to be led by Lloyd Blankfein, who claimed he was doing God’s work.

Well, God’s work in this case appears to have Goldmans arranging bond issues worth $6.5 billion for 1MDB, with large amounts of state funds ($2.7bn) were misappropriated in the process.

Over in Switzerland, the former chief executive officer of HSBC’s Swiss private bank pleaded guilty to helping wealthy clients hide assets worth at least 1.6 billion euros ($1.8 billion). Peter Braunwalder was fined 500,000 euros and given a one-year suspended jail sentence, according to a Paris court ruling on the plea. The 68-year-old admitted that he took part in helping clients evade taxes between 2006 and 2007 by opening clandestine Swiss bank accounts and setting up offshore trusts or providing fake loans.  But no jail for him.

The HSBC case follows the conviction of a former minister and Swiss bank UBS which had to pay a record 4.5 billion-euro fine  for criminal wrongdoings of “an exceptionally serious nature.”  And HSBC has only just paid 300 million euros to resolve allegations in the same case.  Again, in the UBS case all the bank executives involved avoided a prison sentence. French bank Societe Generale also agreed last year to pay 250 million euros to end a bribery case and French fund manager Carmignac Gestion said in June it would pay 30 million euros to settle a tax-fraud case.

But in banking, as in capitalism in general, it’s one rule for the elite and another for the rest of us.  On the day Deutsche Bank began making thousands of employees redundant, some managing directors at the company’s office in the City of London were being fitted for suits that cost at least £1,200. Tailors from Fielding & Nicholson, an upmarket tailor, were pictured walking out of the bank’s UK office with suit bags. Ian Fielding-Calcutt, the tailor’s founder, and Alex Riley were there to fit suits for senior managers in spite of plans to cut 18,000 jobs  worldwide. Deutsche’s chief executive, Christian Sewing, has repeatedly said how much he regretted the decision to scrap a fifth of his global workforce. But it did not stop him paying out E50m in golden handshakes to top executives since 2018.

Over at Standard Chartered, American CEO Bill Winters had no compunction about accepting a pension contribution worth 40% of his annual salary and perks worth £6m, 79 times the average employee salary.  When this was questioned, he said that shareholders of the bank were being ‘immature”.  “I think it’s quite appropriate for the board not to ask me to take a pay cut”, he added. “And they didn’t — I don’t think it ever occurred to them to ask.”

And so it goes on.  Ex-UBS Group AG investment banking head Andrea Orcel is suing Banco Santander SA for about 100 million euros ($113 million) after the Spanish bank reneged on an agreement to hire him as chief executive .  In return, Santander has accused Orcel of “dubious ethical and moral behaviour”. The 56-year-old Italian had been offered the top job at Santander last year and had already quit his post as head of UBS’s investment bank when the bank changed its mind in January, saying it could not meet his exorbitant pay demands.

Meanwhile, in the UK, Britain’s largest mutual society (not even a bank legally) revealed that its former CEO Graham Beale, in addition to his £885,000 salary, got a £292,000 annual pension allowance, a £1 million bonus and £500 a day to cover the cost of travel, security and medical expenses. His benefits from annual expenses alone came to £185,000, covered the cost of travel, security and medical expenses. He was handed almost £400,000 of perks since joining Nationwide. Luke Hildyard, executive director of the High Pay Centre, said: ‘It’s hypocritical for Nationwide to market themselves as a different kind of organisation to the big banks, and then lavish these kinds of sums of money on its executives. It’s hard to believe these payments were critical to the success of the business.’

Then there is reckless drive of profit.  The Bank of England has found widespread weaknesses among the UK’s challenger banks in stress tests that showed new lenders cutting corners in an aggressive pursuit of growth. A senior regulator at the central bank wrote to chief ordering them to tighten standards and correct “overly optimistic” risk modelling. The BoE found that many new lenders displayed an “inability to explain assumptions” in their stress-test models and an “aggressive” focus on growth, even though they tend to make riskier loans. It comes after a scandal at Metro Bank, which had to slash growth plans and turn to investors for a £375m emergency share issue after admitting it had misclassified loans and did not hold sufficient capital.

And as the the world economy slows, for the lower ranks, banking is looking less lucrative. Global investment banks are shedding tens of thousands of jobs as falling interest rates, weak trading volumes and the march of automation create a brutal summer for the sector. Almost 30,000 lay-offs have been announced since April at banks including HSBC, Barclays, Société Générale, Citigroup and Deutsche Bank. Most of the cuts have come in Europe, with Deutsche accounting for more than half the total, while trading desks have been hit hardest.

So nothing has changed at the top of banking globally: big salaries, bonuses, pensions for the top executives, in return for overseeing tax scams, fraud and corruption.  And then there is the real and rising risk of instability and collapse as banks continue to speculate in the ‘fictitious capital’ of ‘exotic’ financial instruments.  More proof that ‘regulation’ will not work and only public ownership of the finance sector under democratic control will deliver a banking service for investment and people’s needs.

The Handbook of Karl Marx: profitability, crises and financialisation

August 6, 2019

The Oxford Handbook of Karl Marx, edited by Matt Vidal, Tomas Rotta, Tony Smith and Paul Prew, brings together a series of chapters by prominent Marxist scholars covering all aspects Marxist theory, from historical materialism, dialectics, political economy, social reproduction and post-capitalist models.

The editors have done an excellent job in arranging the various contributions into sections on the foundations of Marxism, labour and class, the nature of capitalist crises, and post-capitalist alternatives.  And in an introduction, the editors offer a succinct and informative account of Marx’s life and intellectual development, as well as summaries of the chapter contributions.

It is not possible to comment on all the contributions in this 870pp handbook, so I’ll concentrate on the chapters that interest me most.  As you might expect, these are the contributions on the Marx’s theory of crises and modern developments in capitalism like so-called ‘financialisation thesis’ and the digital economy. That’s enough on its own.

I was particularly interested in the chapter on Reproduction and Crisis in Capitalist Economies by Deepankar Basu, from the University of Massachusetts, Amhurst.  In the past, Basu has done excellent empirical work on the rate of profit.  In this chapter Basu develops some arguments about Marx’s theory of crisis.  According to Basu, “The Marxist tradition conceptualizes two types of crisis tendencies in capitalism: a crisis of deficient surplus value and a crisis of excess surplus value. Two mechanisms that become important in crises of deficient surplus value are the rising organic composition of capital and the profit squeeze: two mechanisms that are salient in crises of excess surplus value are problems of insufficient aggregate demand and increased financial fragility. This chapter offers a synthetic and synoptic account of the Marxist literature on capitalist crisis.”

In other words, Basu seeks to reconcile Marx’s law of profitability with ‘profit squeeze’ theory, in particular with Nobuo Okishio’s theorem which disputes Marx’s law, and with the post-Keynesian ‘wage-led’ underconsumption theory of crises. In my view, this ambitious aim fails. Basu reckons that “The controversy between proponents of the “falling rate of profit” crisis tendency and the “problems of demand” crisis tendency that has raged on for decades seem, from the perspective of the analysis of this chapter, rather unproductive and even unnecessary. Capitalist economies are prone to both types of crises: the first when the system generates too little surplus value and the latter when it generates too much. There is no theoretical reason to believe that capitalist economies will be plagued by only one or only the other.”

In particular, Basu argues that “Much of this controversy also seems (with the benefit of hindsight) needless. There are no theoretical grounds to claim that due to technological change, the rate of profit will have a tendency to always fall (as Marx claimed) or that it will have a tendency to always rise (as Okishio claimed). A careful analysis shows that the impact of technological change on the rate of profit depends crucially on what happens in the labor market. If the real wage rate rises sharply during the period of technological change, then the rate of profit tends to fall; on the other hand, if the real wage rate does not rise fast enough, then the rate of profit might rise.”

In my book, Marx 200, I deal in more detail with Okishio’s refutation of Marx. But let’s dissect Basu’s argument here. There are very good theoretical grounds to claim that the average profitability of capital in a capitalist economy will tend to fall over time.  Marx held to this view and provided solid theoretical foundations for this; namely if value (and surplus value) is created only by the exploitation of labour power and if Marx’s general law of accumulation holds in that there is a tendency for the organic composition of capital to rise over time (ie capitalist invest more in machinery and technology relative to labour power); then the rate of profit will tend to fall.

Moreover, the counteracting factor of a rising rate of surplus value from the increased productivity of labour power using machinery will, over time, not match the rise in the organic composition and so the rate of profit will actually fall.  If the rate of profit does so sufficiently and for a sustained period, then eventually there will be over accumulation, a fall in the mass of profit; and a crisis in production will ensue.  The slump will devalue the value of fixed assets, liquidate uncompetitive capital and reduce labour costs through rising unemployment, thus laying the foundations for a rise in profitability.  And the whole circle will begin again.

This is Marx’s theory of crisis, of which Basu says “there are no theoretical grounds to claim”.  That conclusion was precisely the point of Okishio’s theorem, which purported to argue that capitalists would never invest in new technology unless it brought them a higher rate of profit.  Increased technology would lead to higher productivity of labour, which was immediately transformed into a higher rate of surplus value for each unit of production.  So the rate of profit would not fall but on the contrary would rise.  Only the class struggle, bringing about a rise in the real wage, would counteract that and cause the rate of profit to fall.

Okishio’s theorem has been refuted decisively by many authors – I refer you to the following, including recent authors and those in the Handbook itself
(;;;;;;;; And there is also plenty of empirical evidence showing the causal connection between a rising organic composition of capital and falling profitability.

And yet Basu claims he can reconcile Marx’s theory with Okishio’s theorem: “The idea that there is no necessary contradiction between the claims advanced by Marx and Okishio” because “the rate of profit falls or rises after the adoption of a new technique of production ultimately depends on how the real wage rate behaves”.  But the argument that the real wage decides the direction of profitability is not Marx’s.  Indeed, it is closer to Ricardo, which is why Okishio and previous theorists who argue something similar have been called ‘neo-Ricardian’.  There is no way that Marx’s theory of crisis can be reconciled with the ‘real wage’ or ‘profit squeeze’ theory of Ricardo.

Basu goes onto suggest that Marx’s theory of crisis can also be reconciled with the post-Keynesian theory that crises are caused by either low wages leading to a collapse in consumption or by low profits leading to a collapse in investment.  There is no space to deal with the post-Keynesian distribution of income theory here – it is yet another variant of the discredited underconsumption view of crises.  All I can add now is to note the facts.  In the US in every post-war slump, it has been investment not consumption that has led the economy into recession, and it has been a fall in profit and profitability that has led investment.  I remain puzzled why Basu deems it necessary to reconcile neo-Ricardian profit squeeze theory and post-Keynesian underconsumption theory with Marx’s theory of crisis, which in my opinion is theoretically clear and empirically supported.

At least Basu is attempting to develop a Marxist theory of crises under capitalism.  Leo Panitch and Sam Grindin, in their chapter on capitalist crises and the state, deny that there is any theory of crises at all: “the genesis, nature, and outcome of which are historically contingent and the resolution of which changes the terrain for the development of future crises. Crises are always historically specific.”  This view has been expressed before by Panitch and Gindin and by others like David Harvey.

As the P and G put it: “The weakness of a general theory that tries to encompass each of these crises lies in what is thereby obscured. As David Harvey (2008:24–25) has cautioned, “There is no singular theory of crisis formation within capitalism, just a series of barriers that throw up multiple possibilities for different kinds of crises,” each determined by a combination of specific conditions at a “particular historical moment.” This does not mean retreating to an eclectic description of conditions in those historical moments designated as crises. It rather means recognizing that capitalist development is a contradictory process prone to crises—the genesis, nature, and outcome of which are historically contingent and need to be investigated with the tools of historical materialism”.

In their view, they are taking a much more sophisticated view of capitalist crises with its layers than some crude single theory approach.  I have dealt with this argument in many places.  But let me add the simple comment of Mino Carchedi on this sophisticated approach: “if crises are recurrent and if they have all different causes, these different causes can explain the different crises, but not their recurrence. If they are recurrent, they must have a common cause that manifests itself recurrently as different causes of different crises. There is no way around the ”monocausality” of crises.”  We monocausal theorists have never denied that each crisis of capitalism has its own characteristics.

See my Amsterdam paper Presentation to the Third seminar of the FI on the economic crisis
and my post The trigger in 2008 was the huge expansion of fictitious capital that eventually collapsed when real value expansion could no longer sustain it, as the ratio of house prices to household income reached extremes.  I do not say that such different ‘triggers’ are not ‘causes’, but argue that behind them is a general cause of crisis: the law of the tendency of the rate of profit to fall.

But P and G go further.  They deny altogether any role in crises for Marx’s law of profitability: “there was always a basic problem with this concept; the many “counter-tendencies” that Marx himself adduced to explain why the tendency does not always manifest itself were, as often as not, the very substance of capitalism’s dynamics: that is, the development of new technologies and commodities, the emergence of new markets, international expansion, innovations in credit provision, not to mention state interventions of various kinds. Above all, it depended on whether the extraction of greater surplus value from labor could be counted on to offset falling profits. Insofar as this could not be secured, then “the falling tendency is nothing but the expression of popular struggles against exploitation.”

In other words, as with Basu, Marx’s general of law of accumulation of a rising organic composition of capital is countered by a rising rate of surplus value and the result is ‘indeterminate’ ie there is no theoretical reason that the former will overcome the latter and lead to falling profitability.  Marx was wrong.  And “mechanically” spouting on about and trying to measure the rate of profit (as some of us do) is a wasted exercise.  Again, this idea of indeterminacy, propagated by Paul Sweezy in the 1940s, by the neo-Ricardians in the 1970s and by Michael Heinrich and David Harvey currently can be refuted and has been done by many authors (as above), including me.

What matters for P and G in explaining crises is the strength of the working class not the profitability of capital: “a key factor in generating the conditions that led by 2007– 2008 to the greatest financial crisis since 1929 was the weakness of the working class. This is important for understanding why, in contrast to the other three crises, this crisis was not caused by a profit squeeze or collapse of investment due to overaccumulation as many Marxist economists have insisted    The “Great Financial Crisis” was triggered in the United States, where profits and investments had recovered by the late 1990s, and it was only after the financial meltdown of 2007–2008 that profits and investment declined.”

Here P and G argue that profitability was irrelevant to the Great Recession and only fell afterwards as a result not a cause.  This is an empirical argument and it is wrong. There is plenty of evidence that there was a fall in US profitability of capital and the mass of profits before the Great Recession started – indeed, profits led investment and investment led production and employment in and out of the Great Recession.  And see this recent analysis supporting this.

One of the Handbook’s editors, Matt Vidal, in his chapter Geriatric capital: stagnation and crisis in Western Capitalism, does use Marx’s law of profitability in his explanation of the collapse of ‘Fordism’, mass factory production from the 1970s.  But he too seems to want to reconcile Marx’s “convoluted” law of profitability with disproportion and underconsumptionist alternatives to deliver “stagnationist” tendencies in post-war capitalist economies.

At least, Vidal shows that Marx’s law of falling profitability is supported by empirical evidence. As he says: Evidence demonstrates that the profit rate decline was driven in part by a rising organic composition of capital in the United States (Shaikh 1987), Germany, the United Kingdom, and France (Duménil and Lévy 2004). The evidence also indicates that a profit squeeze due to an increasing labor share of income also contributed to the profit rate decline in the United States (Wolff 2003), Germany, the United Kingdom, France, Italy, and Japan (Glyn et al. 2007).”

Vidal argues (correctly in my view) that the reason economies have not restored real GDP, investment and productivity growth rates since the ‘golden age’ of ‘Fordism’ in the 1960s is because profitability of capital remains low.  So credit injections and monetary easing may have kept capitalism from collapsing but essentially stagnation is the main theme – expressing the “structural problems of an ageing capitalism”.

And then there is the brave attempt of Jeff Powell in his chapter to reconcile the ‘financialisation thesis’ with Marxian economic theory.  Readers of this blog will know that the ‘financialisation thesis is that capitalism has changed from the days of ‘Fordism’ when investment in productive assets was the driving force of capitalist accumulation for profit.  Now in the ‘neo-liberal’ era, capitalists no longer invest so much in productive assets and or exploit labour in the production process, but instead seek to speculate and profit in the financial sector and exploit working people through ‘usury’, ie mortgages, savings instruments, rents and taxes.

The financial sector now dominates and is the real enemy of working people and the productive sectors of the capitalist have been relegated by the power of finance capital.  Thus, crises in capitalism are now to be found not in the falling profitability of capitalism but in the ‘fragility’ of the reckless, debt ridden financial institutions that suffer ’Minsky moments’ not ‘Marx moments.’

Thus Powell says “Falling profitability can, at best, be a contributing but far from a driving factor of financialization. Indeed, the overriding concern of the TRPF advocates themselves seems to be less about asserting that falling profits cause financialization than arguing against the diametrically opposed post-Keynesian narrative that financialization causes falling profits.”  I think we should argue both.

Powell reckons that “there has been a secular shift in the role of finance in the period of late neoliberalism. This shift marks the emergence of a new stage of what can be called financialized capitalism, distinct (but intertwined with) processes of financialization. While the speculative excesses of finance that have accompanied this transformation abound, the key point here is that those excesses are by their very nature short-lived, while the emergence of a qualitatively different role for finance represents a structural shift emblematic of a new stage. Finance is providing a system of discipline and control necessary for capital accumulation in an era of globalized production networks.”  So, in this analysis, financialisation is indeed more than just the increase in the size of the financial sector and financial sector profits in neoliberal capitalism.  It is a new stage of capitalism, particularly expressed in international financial flows and production networks.

I am not convinced by Powell’s attempt to distinguish between financialisation as cyclical process (meaning it has older historical roots) and financialised capitalism as secular stage (meaning the contemporary capitalism with its supposedly new features).

I still prefer Marx’s explanation.  Capitalists need finance and credit to invest in and exploit labour; it is more efficient to have specialised credit players then raise finance internally or just use previous profits.  But when profitability falls, capitalists try to switch into financial speculation and investment to sustain profitability (as in the 1980s onwards).  But this leads to an explosion of ‘fictitious capital’, the buying and selling of bonds and stocks that are merely titles to the ownership of potential profits in production.  Fictitious capital can extend the financial market boom and give the appearance that finance is all powerful.  But the collapse of profitability and profits in the productive sectors will soon end that myth.

As Guglielmo Carchedi, in his excellent, but often ignored Behind the Crisis puts it: “The basic point is that financial crises are caused by the shrinking productive base of the economy. A point is thus reached at which there has to be a sudden and massive deflation in the financial and speculative sectors. Even though it looks as though the crisis has been generated in these sectors, the ultimate cause resides in the productive sphere and the attendant falling rate of profit in this sphere.”

In every slump in the US in the post-war period, a slump in profits in the productive sectors has brought about a slump in profits in finance and a recession.  If finance rules crises now, why have the major economies not recovered to previous growth rates in production, investment and wages post the Great Recession?  Because the financial sector has certainly recovered, with stock and bond markets at record highs.  No, productive sectors rule over finance in crises, not vice versa.

There are defenders of Marx’s value theory and his law of profitability in the Handbook, namely Andrew Kliman, Alan Freeman and Fred Moseley, but their chapters are on more fundamental explanations of Marx’s theory of value and the nature of capital.  But it seems that all the Marxist authors discussing crises under capitalism in the Handbook are determined to trash Marx’s law of profitability as an explanation, in favour of others or deny that there is any general theory of crises at all.

That will do for now, but I plan to return to the Handbook to consider the arguments presented in a chapter by Tomas Rotta on the nature of profits and the ‘commodification of knowledge’ in the digital economy.  Is Marx’s value theory still relevant when the knowledge is ‘costless’ and how does knowledge enter the capitalist accumulation process?

US profits revision

July 29, 2019

Last Friday, the US real GDP growth figures for the second quarter of 2019 were released.  The annualised rate of real GDP growth slowed in Q2 to 2.1% from 3.1% in the first quarter.  This was the slowest growth rate since the end of 2016.

US real GDP was 2.3% higher than in the same quarter last year ie (Q2 2018), down from 2.7% yoy in Q1 2019 and recording the lowest yoy growth rate for two years.

So it seems that the boost to US growth, supposedly promoted by President Trump’s corporate tax cuts and exemptions, has run its course and US growth is back to the average of the last ten years, with the prospect of further slowing in the second half of this year.

And why is a further slowdown likely, perhaps even to the point of recession?  We can find clues in the second quarter data.  The main contributors to the slowdown came from weakening investment, particularly productive investment in equipment and structures; and from falling net exports or trade, as the trade war with China bites.

The 0.6% drop in business investment was the first decline since the first quarter of 2016. And that drop was led by a 10.6% decline in investment in structures, ironically the category of investment that should have received the largest boost from the tax cut.

Investment in new buildings and factories is now down by 4.6% from its year ago level. Equipment investment rose by just 0.7% after a 0.1% fall in the first quarter. The pace of investment in so-called intellectual products or computer software also slowed sharply, slowing to 4.7%, after double-digit increases in the prior two quarters (driven by Trump’s tax exemptions).  Exports fell at a 5.2% annual rate.

But the most interesting part of the GDP report was the revision to the past three years data.  The revised data showed that real GDP growth was substantially slower for 2018 than previously reported, with the growth from the fourth quarter of 2017 to the fourth quarter of 2018 just 2.5%, well below the administration’s projection at the time of the Trump tax cut.

But most important in my mind were the downward revisions to corporate profits.  Instead of corporate profits rising by some 20% in the last three years, it seems that profits have actually fallen and are now lower than they were in 2014!  Corporate profits were revised up $1.4 billion, or 0.1% for 2014, revised up $4.3 billion, or 0.2% for 2015, but revised down $23.5 billion, or -1.2%, for 2016, and a whopping $93.3 billion, or -4.4% for 2017, and $188.1 billion, or -8.3% for 2018.

Overall corporate profits have suffered two successive quarterly declines, both before and after tax up to Q1 2019 (the second quarter figures will be released at the end of August).  US corporate profits are now 2% below where they were at the beginning of 2018.

Even before these revisions, non-financial sector corporate profits have been falling over the last five years.  What this means is that while speculative or fictitious profits from investment in financial assets have increased sharply, especially with Trump’s tax cuts, profits in the productive sector of the US economy have stagnated at best.

Now I have argued in this blog and in many papers that there is a strong correlation between profits and investment in modern capitalist economies – after all, capitalist production is for profit not need and so investment in production must be profitable or it will eventually slow or stop.  And there is plenty of evidence that this simple idea is correct.  Not only is the correlation between profit growth and investment growth high, but the causal direction from profits to investment with a lag (on average of about a year) is also supported in empirical research.

When profits dropped in the ‘mini-recession’ of 2015-16 (mainly due to the collapse in oil prices), investment followed.

Now it seems that profits in unproductive sectors like finance and real estate are beginning to suffer.  Financial profits are about 25% of total corporate profits and they have been broadly stagnant over the last year.  If they should fall, as well as non-financial sector profits, that may well generate a stock market collapse in the second half of this year.

Up to now, the Trump tax cuts and the prospect that the Federal Reserve is going to cut its interest rate (probably this week) – the so-called ‘Powell put’ – has buoyed the US stock market to new record highs.

But the effect of that may wear over the next few months as investors begin to see the earnings results of the major companies.  And any stock market ‘correction’ typically leads the ‘real economy’ by up to three quarters.

The world’s scariest economist?

July 26, 2019

Mariana Mazzucato is one of the world’s most influential economists, according to Quartz magazine.  She has won many awards for her work.  She is an adviser to the UK Labour Party on economic policy; she “has the ear” of radical Congress representative Alexandria Ocasio-Cortez, she advises Democratic presidential hopeful, Senator Elizabeth Warren and also Scottish Nationalist leader Nicola Sturgeon.  And she has written two key books: The Entrepreneurial State (2013) and the The Value of Everything (2018).

Mazzucato is considered radical, even ‘scary,’ by many mainstream economists and conservative politicians.  This is because she has highlighted the important role that the state and governments have played in delivering innovation in technology and in advancing productive investment.  The idea that the state can be a leading force in innovation and investment in useful activity is anathema to the right-wing neo-liberal ‘free market’ views of the majority of mainstream economists and politicians.

In earlier posts, I highlighted her important insights into how government investment and direction were essential to the development pf the new technologies of the internet, the worldwide web, microsoft, apple, the iphone etc.  The IPhone for example was developed using public funds and military procurement projects for microprocessors.  The innovators were publicly funded universities and research institutes, not clever entrepreneur capitalists.  Indeed, there is nothing new about government or state funding for the most important innovations in capitalist accumulation.  The technological advances made during the first and second world wars using government ‘defence’ funds were huge: jet aircraft, radar, telecomms, vehicle construction etc.

So it is no accident that the sharp fall in government investment to GDP in most advanced capitalist economies in the so-called neoloiberal period since the early 1980s has been accompanied by slowing productivity growth.

Capitalist sector investment has failed to deliver faster productivity per person since 1980s than in the period of higher government investment before.  Falling profitability in the 1970s in all the major economies led to cutting state sector investment in technology and ‘human capital’ in order to reduce taxes on capital and keep wages down.  Indeed, privatisation was the order of the day. That helped profitability in the capitalist sector a little (along with successive slumps), but at the expense of productivity growth.

As Mazzucato makes clear in her second book, The Value of Everything, government investment and production does create value ie things or services we need and is not just a (necessary) cost. But as I commented in a review of that book, in Marxist terms, Mazzucato conflates value with use-value.  Yes, government investment in schools, hospitals, transport, infrastructure and technology creates useful things, but under the capitalist mode of production for profit, it does not create value (surplus value or profit).  On the contrary, it can lower overall profitability for the capitalist sector. So there is an inherent contradiction in capitalism between more use-value and value.

Unfortunately, this is not recognised in Mazzucato’s work.  As a result, she sees her task as an economist to show how government can help to make capitalism work by getting governments to create more ‘value’.   For Mazzucato, governments can do more “than play a passive role in fixing market failures” (I doubt that it can even do that – MR) but instead “be allowed to embrace entrepreneurial spirit to steer the direction of innovation and economic growth”.  She wants governments to have missions “to get shit done”.  Now this sounds scary to the mainstream but they need not worry.  Mazzucato does not advocate replacing capitalism with socialism – as she says “I don’t think these words are helpful… there are all sorts of different ways to do capitalism.. that’s what I think needs completely rebooting rather than to start calling things socialism”. Here she echoes the approach of Elizabeth Warren.

Capitalism, socialism; what’s in a name?  Well, behind a name lies a categorisation of the structure of a mode of production and social relations.  Mazzucato wants capitalism to deliver more and better things and services for people, but without touching the private ownership of the means of production.  And talking about replacing capitalist companies with common ownership, planning and workers democracy would be a mistake. “If you start talking about socialism, it’s not going to make companies do anything different from what they’re doing now.”  But will suggesting that big business invest productively without taking into account “shareholder value” work either?

For Mazzucato, socialism is a nice idea but not practical.  “Regardless of what I would like to see in an ideal world, I think realistically we’ll have capitalism”. The problem I have with that conclusion is that being ‘realistic’ and accepting that capitalism will be here for the foreseeable future and so trying to make it work better is what is not realistic!  Under capitalism, can regular and recurring economic slumps be avoided that cost many millions their jobs, homes and livelihoods in every generation?  Can imperialist adventures and exploitations be avoided?  Can extreme inequality of wealth and income be reversed?  Can climate change and global warming be stopped?

Can any of these horrors realistically be removed by getting governments and multi-nationals to have ‘missions’ to ‘get shit done’ while still preserving the capitalist system of production and investment for private profit? That is what is unrealistic.  But it is safer to talk about saving capitalism from itself or making it work better with the help of government than replacing capitalism.  The latter would really be scary for the existing order.



A profits recession?

July 14, 2019

This week, we get the first US company reports on earnings for the second quarter of 2019.  And it looks as though there will be the first back-to-back drop in overall earnings since the mini-recession of 2016.  S&P 500 companies are expected to report an average earnings fall of 2.8 per cent in the second quarter, according to data provider FactSet, following a 0.3 per cent dip in the first three months of the year.

Much is made of the large profits that the top tech companies, the so-called FAANGS, make.  But this hides the situation for the majority of US companies.  Those with a market value of $300m to $2bn look set to experience a 12% drop in earnings from this time last year after a 17% drop in Q1 2019.  So small to medium size American companies are suffering a sharp profits decline.

And even with the larger companies, profits are not as good as portrayed.  That’s because earnings per share have been boosted by the large companies buying back their own shares (same earnings but with less shares available).  Net share buybacks are expected to contribute 2.1 percentage points to EPS growth in the second quarter, according to analysts at Credit Suisse. US companies snapped up more than $1tn of their own stock last year, a record figure, driven by the Trump tax measures.

Underlying this decline in profits are higher wage costs as fuller employment forces companies to concede wage increases to keep skilled workers – it’s a different story with the less skilled outside the tech sector.  Also the cost of other non-labour inputs (energy, raw materials etc) are rising.  So profit margins (profits per unit of production) are falling.  Analysts expect non-financial companies to report net margins of 10.8 per cent in the second quarter, down from 11.5 per cent in the year-ago quarter, according to figures cited by BofA analysts. “We have been highlighting risk to margins from rising input costs for companies that don’t have pricing power, as well as for labour-intensive companies and sectors amid rising wages, and we expect full-year net margins to contract to 11.2 per cent in 2019 ex-financials from 11.7 per cent in 2018,” they add.

The strong US dollar has also meant that US export companies are finding it more difficult to sustain sales growth.  S&P 500 companies are forecast to report a 3.7 per cent increase in revenues, which would be the weakest growth since the third quarter of 2016.

Materials companies, the sector with the most sensitivity to China and the fallout from the ongoing trade war between Washington and Beijing, are expected to have had the toughest time in the second quarter. DuPont and Freeport-McMoRan are expected to be the biggest contributors to the sector’s earnings slump, according to FactSet. The sector is projected to report a 16 per cent year-on-year decline in earnings and a 14.9 per cent drop in revenues.

Most important, even the tech sector will experience an 11.9 per cent fall in earnings and a 1.1 per cent drop in revenues.  This is important because it is this sector above all that has driven profits growth in American companies over the period since the Great Recession.  If the FAANGS show a decline on profits, then American capital is in trouble.

As James Montier, the post-Keynesian economist at GMO, the large asset fund manager, points out, real earnings growth in the corporate sector has been below the rate of real GDP growth even after the significant boost from the financial engineering from share buybacks.  According to Montier, when you dig down into the market you find that a staggering 25-30 per cent of firms are actually making a loss.

In Montier’s view, “the US is witnessing the rise of the “dual economy” — where productivity growth is reasonable in some sectors, and totally absent in others. Even in the sectors with good productivity growth, real wages are lagging (wage suppression is occurring). All the employment growth we are seeing is coming from the low productivity sectors. On top of this, the paltry gains in income that are being made are all going to the top 10%. This is not what a booming economy should feel like.”

There is a segregation of the US economy into sectors with reasonable productivity growth and those with no productivity growth at all. The single biggest driver of productivity is manufacturing, with information and wholesale trade scoring respectably as well. On the least productive side there’s transportation, accommodation, education and healthcare. What’s more, in the laggard group, zero productivity growth has gone hand in hand with zero real wage growth.

Not that this historic non-profitability has stopped investors from piling into even more loss-making opportunities. According to Montier, some 83 per cent of IPOs (new stock issues) this year have come to the market with negative earnings. He stresses:”This is a higher percentage than that seen even at the height of the tech bubble!”

So the stock market rolls on upward to more record highs, floated by the expectation of yet more cheap or near zero cost money from the Federal Reserve.  But beneath the hype, the reality is that profits are falling for many US companies, and over a quarter are making loss – in effect, they are ‘zombie companies’.

It is the same story in Europe and Japan. If the profits crash materialises and is sustained through the year, a sharp fall in investment and eventually employment and spending will follow, despite the stock market boom – in effect a new recession.

Greece: completing the vicious circle

July 8, 2019

So the full circle is completed.  The corrupt pro-business conservative New Democracy party in Greece that was ousted by the anti-capitalist Syriza party in 2015 has been returned to office in yesterday’s general election, with an outright majority over all other parties.

New Democracy party got just under 40% of the votes cast. Syriza under Alexis Tsipras got just under 32% of the vote. The voter turnout was just over 57%, the lowest rate since the end of military rule in 1974, suggesting huge disillusionment with all parties.  The Syriza vote share was down only 3.5% from the last election in 2015, but the New Democracy share rose from 28% to 40%. The small parties (including the Syriza left breakaway parties) did poorly, although the former PASOK social democrats increased their share from 6.3% to 8% and the Communists were unchanged at 5%. Also a new party MeRa25, set up by former Syriza finance minister Yanis Varoufakis, got over the 3% threshold and will have MPs for the first time.  The neo-fascist Golden Dawn failed to make it.

The last four years of the Syriza government have been both tumultuous and saddening.  Elected to oppose the policies of the Troika (the ECB, IMF, and the EU) in imposing vicious austerity measures on Greeks in return for ‘bailing out’ its banks, foreign banks and government debt, Syriza at first resisted the Troika.  Under Tsipras and Varoufakis, it searched for a deal with the Euro leaders that would not impose the austerity.  When such a deal was rejected by the Troika and the Euro leaders led by Germany and the Netherlands, Tsipras called a referendum on the Troika ‘memorandum’: should Greeks accept the austerity or reject it?  Despite a massive propaganda campaign by the pro-business media in Greece and internationally and lack lustre campaigning by Syriza, Greeks voted 60-40 to reject the Troika.  Little more than one day later, the government ignored the vote and capitulated.

For the next four years, the Syriza government has duly attempted to implement every single demand of the Troika.  Pensions have been slashed, public sector employees have been sacked and wage freezes imposed, state assets have been sold off, taxes have been raised sharply.  Varoufakis resigned after the capitulation and toured Europe; and the left faction in Syriza split away to run its own electoral parties – to no avail.  The Syriza government ploughed on in the hope and expectation that if it met the austerity measures imposed by the Troika, it would eventually be able to resume economic growth, gain some ‘fiscal space’ and ‘return to the market’ for government borrowing.

The first loans that the government had got from the Troika were used to pay off French and German banks which held billions on Greek government debt that was not virtually worthless.  After this private sector bailout, the next loans were used to meet repayments to the IMF, the ECB and other governments from the first bailouts.  In this never-ending circle more debt was raised to pay off previous debt!  None of this money went to alleviate the depression being suffered by Greeks to their living standards.  The Greek economy collapsed by 30%, pensions and wages fell 40%; thousands of young people emigrated for work and public services and jobs were decimated.  And the biggest hit was to private sector jobs in tourism, industry and travel.

Did these sacrifices restore Greek capitalism and eventually reverse the calamitous decline in output, employment and incomes?  The short answer is no.  Greek unemployment rates remain very high, especially for young people.

Capital investment collapsed during the debt crisis but has not recovered.  Greek business cannot invest.

Gross capital formation (Em)


Government spending has been driven down by the austerity measures.

Government spending to GDP

But this has not reduced government debt to GDP, which remains at a staggering 180% of GDP and will stay there for the foreseeable future.  All the austerity measures have not dented the government debt built up to bail out the foreign banks, the Greek banks and other holders of Greek government debt.  The failure of the private sector, Greek business and global capitalism has been shifted onto the books of the government and its people for generations to come.

Public debt to GDP (%)

The huge loans that the Greek government owes to the EU leaders (the IMF and the ECB have been paid off) do not have to be repaid for a decade or more and the interest cost on the loans is low.  But the debt has not been written off; it must be repaid eventually and the Greek government must run a huge budget surplus in order to cover future payments, the interest on the debt and to obtain new loans from the global market.

The whole strategy of the Syriza government was that, as economic growth returned to the Eurozone, it would lift up the Greek boat with other European boats in the rising tide of economic recovery.  ‘Fiscal space’ would be created and public services and pensions could then be improved while still meeting the repayment schedule of the creditors.

But it has not worked out like that.  Eurozone economic growth since the debt crisis has been pathetic, hardly creeping above 2% a year and now slowing again fast.  During the debt crisis and the eventual capitulation of the Syriza government, I estimated that Greek economic growth would have to average at least 3% a year in order to end austerity if the government continued its commitments to the Troika.  Instead, the Greek growth rate has been averaged little more than 1% a year under the Syriza government.  It’s currently slowing down from a short burst above 2% to just 1.3%

Greece: annual real GDP growth (%)

The new Conservative government takes over just as the Eurozone economies and much of the rest of the world face a slowdown in investment, trade and growth at best – and an outright recession at worst.

The Syriza leaders’ economic strategy of accepting the Troika programme, honouring the debt burden and staying in the EU has failed.  The result has been total disillusionment with Syriza, particularly among the young. Many have left to find work; those who have not either did not vote in the election or voted for a change of government in the form of New Democracy.  Anecdotes of these attitudes have been expressed in the media.

Like many young Greeks, Tasos Stavridis plans to leave the country once he finishes his degree in political science.  “Our financial crisis has gone on much longer than we expected and we are so exhausted,” says the 22-year-old. “Most of my friends plan to leave too. In Greece the salaries are so low, and the economic situation is so bad,”  What about New Democracy? “The truth is, I blame them [for the crisis] too,” admits Stavridis. “But I believe Mitsotakis has made a lot of changes. I agree with the economic plan this party has, and I believe it will help us escape this situation.” We must focus on the private sector in order to get better economically,” he believes. “Our public sector is inefficient and lazy.”  Then “The last time my family supported something left, it turned out to be a lot worse,” says Zoe Babaolou, a 19 year old from Thessaloniki who voted for New Democracy in the European elections. “It seems better to return to something safer.” Babaolou adds: “We voted for ideology in 2015 and we didn’t see any changes. So I’m more interested in economic measures.”

Could there have been an alternative to the strategy of Tsripras and the Syriza leaders back in July 2015 when the referendum to oppose Troika austerity was supported by the majority of Greek people?  I think there was.  One option prominently pushed by the left faction of Syriza MPs was to break with the EU and the euro; revert to the Greek drachma, devalue the currency, impose capital controls on any flight of money, renege on the debt and revert to government spending programmes.

For example, this was the option presented by socialist economist and Syriza MP, Costas Lapavitsas, at the time.  Lapavitsas took a principled stand against the capitulation and broke with Syriza.  But he argued that: “the obvious solution for Greece right now, when I look at it as a political economist, the optimal solution, would be a negotiated exit. Not necessarily a contested exit, but a negotiated exit.” This would involve a 50% write-off the debt owed to the EU and protection of the new Greek currency (devalued by just 20%) with liquidity from the ECB.

My thought then was that even if the Troika were to agree to such a ‘negotiated exit’, which was a moot point; and even if the new Greek drachma only depreciated by 20% (extremely unlikely), the Greek economy would still be on its knees, unable to restore living standards for the majority. Devaluation and rising prices would eat into any gains made from cheaper exports. Lapavitsas seemed to recognise this when he said at the time:“Wages must rise, but even if they rise, you’re not going to go back to where you were. It’s just not feasible at the moment. We need a growth strategy for that.”

But Lapavitsas opposed a growth strategy based on socialist planning. “I don’t think that Syriza should come out with a broad and wide nationalization program right now. What is necessary is to nationalize the banks, of course. And to make sure that energy privatizations stop, electricity in particular. That stops. And privatization of other key assets stops. We need to put a growth and recovery strategy in place immediately outside of the euro, and later to have a medium-term development plan.” For me, the strategy that Greece leaves the euro and implements a broad Keynesian spending programme first, leaving any socialist measures to later could not work because the forces of capital internationally and domestically would be untouched.

In my view, there was another option: a broad and wide programme to replace capitalism. For me Greek capitalism needed to be replaced, in or out of the euro. That would mean public ownership of all big business and foreign capital in Greece; a democratic mobilisation of workers to control their workplaces and the economy with a plan of investment and production.  A socialist Syriza could then appeal for support among the wider labour movement in Europe to force their governments to drop their imposition of austerity, cancel the debt and begin a Europe-wide programme of investment to include Greece.

Such a strategy would have more support from other European workers and at home than one that concentrated on condemning the euro as the problem.  After all, there was always a majority of Greeks in favour of staying in the euro and the EU. Greece is a small and weak capitalist economy; it cannot succeed without success in the rest of Europe; and that applies to a socialist Greece too.  But at least the Greek people would be in control of their own capital assets and labour allocation.

But whatever the merits of a Keynesian or Marxist option back in 2015, now we have the return of the pro-business, corrupt, dynastic-led New Democracy government which originally presided over the financial crash and recession back in 2010.  The programme of the Mitsotakis government is to privatise, reduce taxes for the rich and encourage foreign investment, while keeping wages and pensions down and government services to the minimum – neoliberalism if you want to call it that.

The real aim is to boost the profitability of Greek capital as the economic solution and hope that capitalist then invest in Greece.  According to the EU’s AMECO database, Greece’s net return on capital plummeted by 35% from 2007 to 2012.  Under the Syriza government, profitability recovered 20% but is still some 15% below the 2007 peak.  The aim of the new government will be to continue the work of Syriza to save capitalism but with extra energy and vengeance.  Meanwhile a new global recession looms nearer.

Imperialism and profitability at Lille

July 7, 2019

The joint conference of the International Initiative for the Promotion of Political Economy (IIPP), the French Association of Political Economy (AFEP) and the Association of Heterodox Economists (AHE) brought together a large gathering of radical economists in Lille France last week.  The theme of the conference was Envisioning the Economy of the Future and the Future of Political Economy.

There were hundreds of presentations on various themes: World Economy, Economic Thought, Environment, Financialisation, China, Social Capital, Beyond Capitalism; Neoliberalism and Marxist Political Economy.  Of course, it is impossible to cover all or even most of the papers presented, particularly as sessions often clashed with others.  So, as usual, for such conference reports, I shall just discuss papers in sessions I attended or where the presenters have kindly sent me their papers.

The word Financialisation once again dominated many sessions.  Readers of this blog will know that I am very sceptical about whether this concept adds much to our understanding of modern capitalist trends; indeed it may even confuse on many issues.  Does it simply mean that the financial sector has grown in importance quantitatively in the structure of capitalism in the 21st century; or does it mean much more; that capitalism has entered a fundamentally new stage in the capitalist mode of production?  Those who push financialisation seem to be in the latter camp:  finance is where we must look for the key faultlines in capital and not in capital overall.  If so, I disagree.  But whatever it is, ‘financialisation’ seems to dominate the research of many radical scholars.

I wanted to attend these ‘financialisation’ sessions to get a better idea of where the concept was going but in the end I missed most of those papers, so I shall return to the discussion of ‘financialisation’ in future posts.  In the meantime, here are few papers and sources on the subject.

On Marxist political economy, Nick Potts of Southampton Solent University and a leading advocate of the Temporal Single State Interpretation (TSSI) of Marx’s theory of value and law of profitability, presented an incisive critique of those scholars who have argued that creative industries like advertising require a revision of Marx’s value theory based on the value-form interpretation that value is only created at the point of exchange or sale. 

Potts, correctly in my view, denies that advertising and marketing sectors produce value.  They are activities that appropriate value at exchange from those activities that are productive of value.  Under capitalism and production for the market, advertising, branding, marketing, copyright, etc may be necessary for individual capitalist companies to gain market share and profit, but they are still unproductive of new value.  In the same way, through the process of international exchange, imperialist countries can appropriate extra value transferred from dominated countries that produce value: “if we simply think advanced countries produce all the value they appropriate, then we cannot see how the success of the advanced is built on capturing value (robbing) from everyone else ie we would thus make growing global inequality appear to be ‘fair’”.

Indeed, the nature of the economics of imperialism and the way in which there is a transfer of value from the poor capitalist economies with lower levels of technology to the rich imperialist economies has been greatly neglected by Marxist economists in the recent period.  The discussion on imperialism has centred more on political and military power, or on ‘forced dispossession’ of natural resources or on the ‘super-exploitation’ of the poorest workers worldwide by transnational corporations.  But Marx’s analysis of the transfer of value through trade, the hidden ‘unequal exchange’ of value beneath the apparently equal exchange in trade, has not been analysed or quantified, until recently.

Now Lefteris Tsoulfidis and colleagues at the University of Macedonia have produced results using world input-output tables to show how value is steadily transferred from the rest of the world to a small group of imperialist countries. And they have measured the unequal exchange between Germany and Greece in Marxist value terms.

And at the Lille conference, Andrea Ricci, Assistant Professor of Economics, Department of Economics Society and Politics, University of Urbino, presented a new paper (which is also published in the latest Review of Radical Political Economics) Ricci unequal exchange, in which he develops a model to measure unequal exchange in international trade.  Again, using world input-output tables like Tsoulfidis to calculate hours of labour in trade for 78% of world export, he shows that there were positive transfers of value to the top imperialist economies of around 2% of GDP a year from the rest of the world.

Two things struck me as important in this analysis.  First, that imperialism is concentrated in just a few top ten economies, with the US in the lead (taking $195bn in 2007) while everybody else is in deficit, including the so-called BRICS that are often considered as ‘sub-imperialist’ (ie both subject to transfers to the imperialists but gaining transfers from those lower down the pecking order).  That does not seem to be the case: China had a negative UE value transfer of $382bn in 2007; India $189bn, Brazil $63bn etc).  China is not an imperialist economy on this definition.

G Carchedi and I are working on a paper on the economics of imperialism that covers measuring unequal exchange in trade, factor income flows on the current account; and foreign investment on the capital account.  We reach similar conclusions to Ricci in that imperialism is alive and well and inequality between the imperialist economies and the rest is just as wide as it was 100 years go.  Value produced in the dominated countries get appropriated and transferred to the imperialist economies in ever-increasing amounts.

The same theoretical theme and empirical analysis on the transfer of value through trade from the low-technology, high labour intensity economies to the high-tech, low labour input economies, a la Marx’s transformation of values into prices model, was taken up in another session by Ivan Rubinic within the context of the Eurozone.  Here was a trading area using one currency and free movement of labour and capital – an excellent laboratory test for Marx’s theory.

Rubinic and Tajnikar (Rubinić and Tajnikar – Labour Force Exploitation and Unequal Labour Exchange as the Root Cause of the Eurozone’s Inequality) use a model that compares the ratio between national income and value added for the each Eurozone economy for the ten-year period 2004-13.  If the aggregated national income is higher than the aggregated value added, that implies an appropriation through unequal transfer from other Eurozone economies.  They find that 10 of the 18 EZ economies suffer a negative transfer to the other six (led by Ireland with its American-owned tech industries and core Europe).  In my view, it is another validation of Marx’s theory that value is transferred through trade from the low-tech economies (the laggards) to the high-tech economies (the leaders); the higher the country’s capital-labour ratio, the more net transfer of value in trade.

The ratio of national income to new value added

The question still unclear is whether unequal exchange is the result only of differential technical composition or organic compositions of capital between trading nations or is due more to monopoly barriers and pricing.  In other words, is it due to ‘differential rents’ or ‘monopoly rents’? Ricci is not clear on this.  Also, much trade (one-third) is within companies across borders and the value transfer there is not captured.

The argument that monopoly power is the main reason for unequal appropriation of profits among capitalist entities can also be considered within a country.  Armagan Gezici presented a paper (Concentration&Technology_Gezici_July2019) that dealt with whether rising concentration in sectors was the explanation for slowing productivity growth in the US economy – the so-called productivity puzzleGezici poses it thu: “A crucial question is why the relationship between concentration and productivity turned negative throughout the 2000s. A possible explanation is that firms did gain market power in the late 1990s due to productive investments in technology; once they grew large and well-established, they relied on their market power, monopoly rents, and practices rather than productive investments to keep their superior positions.”  Gezici’s conclusion is in the context of the US economy; but it also suggests that imperialist economies in general may gain their hegemonic position in the appropriation of value and the accumulation of capital through their superior technological position, but then sustain it through monopoly practices.

This brings me back to the hoary old subject of measuring the contributions to the movement in the rate of profit in a capitalist economy.  If the rate of profit declines, is this due to a rising organic composition of capital (OCC) outstripping any rise in the rate of surplus value or exploitation, a la Marx; or does OCC play little role and it is all down to the class struggle between wages and profits (profits squeeze)?

Erdogan Bakir presented some new research on the US economy.  He found that in the post-war period, the US rate of profit fell an average 0.3% a year (I too find a similar result).  Erdogan decomposes that fall among whether workers increased wages at the expense of profit share (offensive), or merely defended wage share as profitability declined; or whether the rate of profit fell secularly because of a secular rise in the OCC.  Much of the fall depended on the ability of labour to defend its wage share in new value but also “changes in the organic composition of capital had secondary but still significant effect on the profit rate over the full period. 39 percent of the decline in the profit rate over the full period was accounted for by the rising organic composition of capital.”

The rate of profit was also the subject of the session on the UK that presented a paper on (UK rate of profit since 1855 and the).  The UK rate of profit and British economic history is also published in World in Crisis, jointly edited by me and Mino Carchedi.  In my paper, I argued that Marx’s law of the tendency of the rate of profit to fall helps to explain the development of British capitalism since it became the hegemonic capitalist power in the mid-19th century at the time Marx himself was writing Capital, his fully fledged analysis of the capitalist mode of production, based on the reality of the UK economy.

From the analysis of the movement in the rate of profit from various sources, it is clear that there was a secular decline in the UK rate of profit over the last 150 years, supporting the predictions of Marx’s law and paralleling the decline of British imperialism.

The periods of steepest decline in the rate of profit matched the most difficult times for British capitalism: the long depression of the 1880s; the collapse of British industry after 1918; the long profitability crisis after 1946.  But there were also periods when profitability rose: the recovery after the 1880s in the late Victorian era; the substantial recovery in the 1920s and 1930s after the defeat of the British labour movement and demolition of old industries during the Great Depression; and the neo-liberal revival based on further dismantling of the welfare state, the privatisation of state assets, the defeat of labour struggles and, most important, a switch to reliance on the financial sectors as Britain increasingly adopted rentier capitalism  The UK economy now lives or dies with the health of the global financial sector and its associated business, legal and commercial services.

I have missed out many key discussions and papers on the nature of China’s mode of production (capitalist, state capitalist or not?), on the latest research in post-Keynesian economics; on developments in Brazil, Mexico; and also the plenary sessions on the future of political economy, the environment; the future of the EU etc.  But in this post, you will only read about my own particular interests.