William Baumol and the transformation problem

William J. Baumol, who died last week at the age of 95, was one of the pre-eminent mainstream economists of his generation.  He taught for more than 40 years at Princeton University and at New York University, where he retired in 2014. His work touched on monetary policy, corporate finance, welfare economics, resource allocation and entrepreneurship, but he was best known for the principle that came to bear his name: Baumol’s ‘cost disease’.

Baumol’s cost disease is the idea that personally delivered services — musical performances, medical care, education and garbage collection, for example — naturally and inevitably increase in price year after year. Improved technology may allow bagels and cars to be produced more efficiently and therefore more cost effectively, but, as Baumol famously observed, a Mozart string quartet requires today the services of four musicians, the same manpower it took in the 18th century.

This idea had immediate relevance in public policy, particularly in the areas of health care and education, because it showed why important public services could not be measured for cost-effectiveness in the same way as manufacturing in the capitalist sector.  They provided services for need, not profit.

“The critical point here is that because politicians do not understand the mechanism and nature of the cost disease, and because they face political pressures from a similarly uninformed electorate, they do not realize that we can indeed afford these services without forcing society to undergo unnecessary cuts, restrictions and other forms of deprivation,” he wrote in his 2012 book The Cost Disease.  It is a matter of public choice not ‘efficiency’.

Baumol was prolific in his economic research, particularly in looking at the role of ‘entrepreneur’ as innovator rather than as capitalist.  He also produced one of the main mathematical economics textbooks of the 1960 and 1970s – it was pretty dry, as I remember.

Baumol was a liberal.  He advised Hillary Clinton and various Democrat leaders and was strong advocate of public healthcare and education.  And he was a trustee for Economists for Peace and Security, a liberal UN body of economists opposed to nuclear weapons, along with Kenneth Arrow (who has also recently died) and JK Galbraith.

But what is less known is that in the early 1970s Baumol engaged in a mainstream debate with leading Keynesian Paul Samuelson on the validity and purpose of Marx’s value theory.  Samuelson had launched an attack on Marx’s theory as it began to gain some traction among student activists in those revolutionary days ((Paul A. Samuelson’s “Understanding the Marxian Notion of Exploitation: A Summary of the So-called Transformation Problem between Marxian Values and Competitive Prices, “J. Econ. Lit., June 1971, 9 (2), pp. 399-431).

Like Eugene Bohm-Bawerk tried to do in the late 1890s, and like Keynes in the 1930s, Samuelson wanted to expose the fallacies of Marx’s theory in case economics students became infected with Marxism.  Keynes called Marx’s value theory “scientifically erroneous and without application to the modern world’ (Keynes, Laissez-Faire and Communism, quoted in Hunt 1979: 377).  Samuelson’s approach was to argue, not that Marx’s value theory was illogical because values when measured in labour time could not equal prices measured in markets (as Bohm-Bawerk claimed), but that his theory of value was irrelevant to an explanation of the movement of market prices and therefore to any understanding of modern economies.

Samuelson argued that Marx’s ‘transformation’ of labour values into prices of production was unnecessary.  Market prices are explained by the movement of supply and demand, so what need of a value theory?  Indeed, it could be erased.  “The truth has now been laid bare.  Stripped of logical complication and confusion, anybody’s method of solving the famous transformation problem is seen to involve returning from an unnecessary detour… such a transformation is precisely like that which an eraser is used to rub out an earlier entry (i.e. value – MR) after which we make a new start to end up with a properly calculated entry (i.e. price – MR)”.

Well, Baumol carefully took Samuelson to task in his essay, The transformation of values: what Marx really meant. In so doing, he made an important contribution in explaining and validating Marx’s theory of value. Baumol points out that Samuelson, along with post-Keynesian Marxists like Joan Robinson, misunderstood Marx’s purpose in the so-called transformation of values into prices.  Marx did not want to show that market prices were related directly to values measured in labour time. “Marx did not intend his transformation analysis to show how prices can be deduced from values”.  The aim was to show that capitalism was a mode of production for profit and profits came from the exploitation of labour; but this fact was obscured by the market where things seemed to be exchanged on the basis of an equality of supply and demand.  Profit first comes from the exploitation of labour and then is redistributed (transformed) among the branches of capital through competition and the market into prices of production.

For Marx, that only labour creates value is self-evident. “Every child knows that any nation that stopped working, not for a year, but let us say, just for a few weeks, would perish…. This constitutes the economic laws of all societies, including capitalism. And every child knows, too, that the amounts of products corresponding to the differing amounts of needs, demand differing and quantitatively determined amounts of society’s aggregate labour”, Letter from Marx to Kugelmann, 11 July 1868, MECW, vol.43, pp.68-69.

Total surplus value is produced from exploitation of work forces employed by various capitalists – the difference in value measured in labour time between that time needed for the wages of the labour force and the price of the commodity or service produced realised in the market place for the capitalist.  But not all the surplus value or profit achieved by each capitalist’s workforce goes directly to the individual capitalist.  Each capitalist competes in the market to sell its commodities.  And that competition leads to profits being redistributed because profits tend to an average rate per unit of capital invested.

The transformation of values created by labour into prices in the market means that individual prices will differ from individual values.  As Baumol says, Marx knew that individual prices of production differed from individual values; unlike Ricardo who could not solve this transformation.

So total surplus value is converted (transformed) into total profit, interest and rent, with the market deciding how much for each capitalist.  Yes, ‘supply and demand’ decides profit or loss for an individual capitalist.  But that is just the appearance or result of the distribution of profit through market competition but created by the overall exploitation of labour in the production process.

Baumol’s explanation was a starting point for a more comprehensive answer and defence of Marx’s value theory developed by Marxist scholars like Carchedi, Yaffe, Kliman, Freeman, Moseley and others over the last 40 years since Samuelson’s attack.

Baumol’s interpretation of Marx’s theory provides a powerful answer not only to Samuelson but also to the ‘standard interpretation’ of the transformation problem, as Fred Moseley has named it in his book, Money and Totality (a book that explains in detail all the theoretical issues raised by mainstream and other heterodox economists and answers them).

Values in a commodity do not have to be ‘transformed’ into prices, as Robinson and Samuelson interpret Marx’s theory.  Prices are the appearance in the market of the exploitation of labour in production process.  As Fred Moseley says, if you accept Samuelson’s interpretation of Marx’s transformation of values into prices then “values do in fact cancel out and play no role in the determination of prices” (p229). However, this is not Marx’s theory.  Individual values are not converted into individual prices of production: “individual values play no role in Marx’s theory of prices.  What happens is that “total new value produced by current labour … is determined (in part) by the total surplus value produced, which in turn (in part) determines the general rate of profit and ultimately, prices of production… prices of production are not determined by multiplying transformation coefficients for each commodity by the individual values, but by adding the average profit to given money costs”.

There is no need to transform the values of constant capital (machinery etc) and variable capital (labour power/workforce) into prices.  They are already given as prices from the market in the previous process of production.  The only transformation that takes place is the transformation of the total new value from the production process in a re-distribution through market competition, with profits going to the various capitalists depending on the size of capital each advanced at the start of production.

As Baumol says, the distribution of surplus value from society’s central storehouse now takes place via the competitive process which assigns to each capital profits (or interest or rent) an amount strictly proportional to its capital investment.  “This is the heart of the transformation process – the conversion of surplus value into profit, interest and rent.  It takes from each according to its workforce and returns to each according to its total investment” p53

Marx’s transformation is temporal: you start (t1) with given money capital to invest in plant, machinery and labour and you get new value created by the exertion and exploitation of labour (t2).  The surplus value comes from after covering the cost of capital (constant and variable).  This is then redistributed through competition in the market, which drives all towards an average rate of profit.  Thus total value (dead labour and living labour plus surplus value) still equals total prices (based on the given cost of invested capital plus an average rate of profit), but total surplus value is transformed into profits, interest and rent and distributed according to the size of the capital invested.

Here is Marx’s actual schema for this transformation.

You can see that total values (TV) equal total prices (TP), but individual capitals have commodities with different values (V) to prices (P) because of the redistribution of surplus value (s) into profits (p) by the market.  There is no transformation of constant (c) and variable (v) capitals because they are already transformed (into money prices) in a previous production period.

Indeed, Baumol’s (and Marx’s) transformation has since been supported empirically.  Carchedi has shown that the money price average rate of profit is close to the value average rate of profit (i.e. across a whole economy). Other scholars have shown that when an individual sector’s production is measured in value terms (i.e. in labour time) and then aggregated, the total value is pretty close to total prices measured in money terms.  Thus Marx’s transformation of value into prices is not irrelevant even to relative price determination.

But, as Baumol said, it was not Marx’s purpose to show that.  He wanted to show that it is the exploitation of labour that creates value (through the private appropriation of the product of labour power) and that lies behind profit, interest and rent.

Profit is not the reward for ‘risking capital’ (money for equipment etc); or rent from ‘providing’ land; or interest for ‘lending’ money; thus rewards to various factors of production.  Baumol comments: “Such nonsense is precisely what Marx’ analysis anticipates and what it is intended to expose. Again, let Marx speak for himself. “In Capital-Profit, or better Capital-Interest, Land-Rent, Labor-Wages of Labor, in this economic trinity expressing professedly the connection of value and of wealth in general with their sources, we have the complete mystification of the capitalist mode of production.  …This formula corresponds at the same time to the interests of the ruling classes, by proclaiming the natural necessity and eternal justification of their sources of revenue and raising them to the position of a dogma.” (Volume III, Chapter 48, pp. 966-67).

It is no accident that it is the Keynesians and post-Keynesians like Joan Robinson that were (and are) the most vehement against Marxist economic theory – because Marxism is the main opponent of Keynesian influence in the labour movement.

William Baumol may have been as mainstream an economist that you could find – an exponent of the neoclassical equilibrium and marginalism.  But he was also a surprisingly acute observer of Marx’s exploitation theory of capitalism.  As a result, he could show the Keynesian (and neo-Ricardian) claim that Marx’s value theory was an ‘irrelevant and unnecessary detour’ was wrong.  For that, we can thank him.

North Korea: a story of isolation

Tensions in Asia have been rising sharply as North Korea continues its missile testing in defiance of US demands for them to cease. President Trump has been upping the ante with threats to by-pass China and the stalled so-called six party talks supposedly working out a ‘peace solution’ with North Korea, and ‘deal with’ North Korea on its own.  As US naval battalions enter Korean waters to impose Trump’s will on North Korea, I thought it might be worth looking at the state of the North Korean economy.

The end of the Korean war in the early 1950s left Korea with over one million dead and still divided in two in the same way that the ‘cold war’ between the US and the Soviet Union left Germany split in two.  Both parts of Korea were poor, but interestingly it was the south that was poorer because most of the natural resources (coal etc) and industry were in the north, although the mines were mostly destroyed.

That changed in the ensuing decade or so.  Huge amounts of foreign investment were ploughed into the south where a military regime was imposed, keeping wages to the minimum and establishing large monopolistic corporations (chaebol) heavily integrated into the state machine.  Investment was state-directed and the profitability of capital rose sharply through massive exploitation of labour.

Meanwhile in the north, the one-party state machine, resting on a nationalised industry and farms and built in the image of its mentors, Russia and China, received no such investment support as in the south.  In 1961 an ambitious seven-year plan was launched to continue industrial expansion and increase living standards, but within three years it became clear this was failing. The failure was due to reduced support from the Soviet Union when North Korea aligned more with China, and military pressure from the US, leading to increased defence spending.

In 1965 South Korea’s rate of economic growth exceeded North Korea’s for the first time and in most industrial areas, though South Korea’s per capita GNP remained lower than North Korea’s. North Korea did recover somewhat under its national plan, but by the early 1970s, per capita income in the south exceeded that of the north for the first time and the gap then accelerated.

North Korea’s planned economy struggled with its isolation in trade and investment; the lack of support from Russia and China (which had their own problems); and the stifling totalitarianism of the Kim dynasty, now firmly ensconsed as the ‘great leader’ (one after the other).  The south had its own autocratic regime with no democratic rights, but at least it had trade and investment to exploit its people more effectively.

The collapse of the Soviet Union presaged an unprecedented disaster for the North Korean economy.  Weighed down by heavy military spending to defend the regime, the disappearance of its export markets for coal and other minerals led to a collapse in industrial output.  This was accompanied by terrible harvests, leading to a major famine that saw 500,000 to nearly a million deaths!  Living standards fell by half as the average real GDP growth rate in the 1990s was -4%!

In 1999 the economy showed some signs of recovery. And the Kim regime decided to mimic the ‘reforms’ introduced in China to allow some private sector production and some markets in agriculture and for small businesses.  There has been steady if low economic growth since the late 1990s, even if the country is still the poorest in East Asia. During the period 2000-2005, the North grew at an average growth rate of 2.2 percent. There was a downturn yet again in the global Great Recession and from 2006-2010, only 2008 registered positive growth. But since 2010, North Korea resumed some growth again.

North Korea continues to depend on getting foreign currency to import goods by selling coal to China (one-third of all exports). In addition, the regime sends thousands of North Korean workers in forced labour conditions to China, Russia and the Middle East to work in mining, logging and construction to remit foreign currency.

Estimating GDP in North Korea is a difficult task because of a dearth of economic data and the problem of choosing an appropriate rate of exchange.  In 2014, the South Korea-based Bank of Korea estimated that the real GDP of North Korea in 2014 was KRW 4.2 billion  or just 1/44 of the size of the South Korean economy.  However, it is probably an underestimate of the North Korean economy. GDP per person was KRW1.388 million, or just one-20th of the average in South Korea.  This is a mighty huge gap.

A significant part of the population is still malnourished and the average North Korean family considers itself reasonably affluent if they can afford a new bicycle.  However, this year, North Korea enjoyed an exceptionally good harvest, which for the first time in more than two decades will be sufficient to feed the country’s entire population.  Ironically, in this year of possible attack by the US and the sabre-rattling of the Kim regime, the economy is growing around 3-4% a year, a record level since the 1970s.

The government appears to have allowed the private sector to grow.  Some ‘state companies’ are in effect owned by rich individuals, usually well-placed or related to senior state officials.  According to the most recent estimates, about 75 percent of North Korean household income now comes not from the state but from assorted private economic activities – activities that are now tacitly tolerated by the government. North Koreans today tend to their very own private plots, run their own food stalls, make clothes, footwear (and even counterfeited Chinese cigarettes) in unofficial workshops, and of course, they trade.  Since 2010, the number of government-approved markets in North Korea has doubled to 440, and satellite images show them growing in size in most cities. In a country with a population of 25 million, about 1.1 million people are now employed as retailers or managers in these markets, according to a study by the Korea Institute for National Unification in Seoul.

So the law of value is inevitably beginning to operate and strengthen in an economy that is unable to expand through state planning run by a dynastic autocracy.  But with the law of value and markets come rising inequality, fostered by the corruption of the bureaucracy.

But even if the political tensions were to subside, there is no way that the North Korean economy can really deliver sustained economic growth and living standards for its 25m people.  The key is foreign investment and a democratic plan.  North Korea will have neither under the current regime.  First, there are US-inspired sanctions against investing in the north, while the north pursues its aim of having effective nuclear weaponry – and that aim is seen as essential by the Kim regime for its survival.

And the regime sees foreign investors as institutions to be milked not as partners in expansion.  They have not learnt from the Chinese here.  For example, the Egyptian telecommunications firm Orascom created a North Korean mobile phone network virtually from scratch, but the North Koreans not only refused to pay the Egyptians from the proceeds of the network but confiscated all the assets.  Foreign capital is not likely to come on that basis.

The obvious immediate solution is the unification of north and south.  Koreans should be united as the Germans were.  But the only option offered is, of course, unification on the basis of capitalism, not democratic socialism.  Capital would dominate in the north as well as the south – something that has proved a failure even in Germany, where the gap between east and west in living standards remains wide, despite billions being ‘transferred’ to the east and slowing expansion in unified Germany for nearly a decade.  Those living in the east have real incomes at just two-thirds of those in the west and one-third of easterners have moved to the west.

And here is the rub.  The cost of unifying north and south Korea is way more than it was to bring west and east together.  Whereas, east Germany had 17m people against 60m in the west, a ratio of one to four; north Korea has 25m against 50m in the south, a ratio of one to two.  A report from the south still reckons it would be possible to unite Korea on a capitalist basis and raise the income per head in the north to $10,000 (compared to $1800 now and $25,000 in the south) and North Korea’s economy to 70% of the south’s by 2050, making a unified Korea the seventh-largest economy in the world.

But this is really a pipe-dream.  Even this optimistic report reckons that the south would have to commit 7% of GDP every year to the north to achieve this target (compared to 4% of West German GDP to the east).  That is clearly impossible on a capitalist basis, given the increasing economic problems facing the south since the Great Recession.  As I posted only last March, South Korea goes into a general election tomorrow with its political elite mired yet again in corruption and its economy increasingly sclerotic with its monopoly chaebols and facing increasingly difficult conditions in global trade, vital to the south’s expansion. No wonder political support for unification in the south has waned in recent years.

There is strong evidence that a planned and predominantly state-owned economy could succeed and do even better in a unified Korea.  If you compare, for instance, the development of Mexico and the Soviet Union from 1913 until the year the Berlin Wall fell, “the Soviet Union’s growth over the period of communism put Mexico’s to shame,” according to Charles Kenney, a senior fellow at the Center for Global Development. He points out that Soviet income per capita was 46% greater than Mexico’s in 1989, compared to just 1% larger in 1913.  And there is the story of China’s phenomenal and unprecedented economic expansion, taking hundreds of millions out of poverty.

Unification was tried back in the 1950s through a bloody war that decimated Korea.  Unification would only be successful peacefully if there were a unified, democratically elected, regime under the control of the working class of both south and north.  It would only be successful economically if the chaebol in the south were taken over and the resources of the north were integrated into a national investment plan.  The capitalist regime of the south and the cultist dictatorship of the north would have to go before that.

Memoirs of an erratic Marxist

Yanis Varoufakis once described himself as an ‘erratic Marxist’.  This heterodox economist became the finance minister in the Syriza-led Greek government during the most intense period of the Greek debt crisis when the Greeks were trying to avoid severe austerity measures being imposed by the Troika of the EU group, the IMF and the ECB back in 2015 and stay in the eurozone.

Varoufakis was sacked by PM Tsipras when Tsipras decided to capitulate to the Troika demands, despite the Greek people voting to oppose Troika austerity in an unprecedented referendum vote called by Tsipras himself.  Since then, the Syriza government has agreed to a succession of further fiscal austerity measures including cuts to wages and jobs in the public sector, pension reductions and privatisations in return for handouts by the EU in loans to repay previous debts – in a never-ending circle.

Now Varoufakis has published his memoirs of his time as finance minister and what happened in the discussions and negotiations with the EU leaders and others over managing Greek public debt.  According to Paul Mason, reviewing the book, “Varoufakis has written one of the greatest political memoirs of all time.”  Well, to me this stands as hyperbole compared Trotsky’s My Life or for that matter, Churchill’s political memoirs.  But no doubt the book is interesting, as Mason puts it, as “the inside story of high politics told by an outsider.”  According to Mason, Varoufakis shows graphically that “Elected politicians have little power; Wall Street and a network of hedge funds, billionaires and media owners have the real power, and the art of being in politics is to recognise this as a fact of life and achieve what you can without disrupting the system.”

Varoufakis makes the point that “not only was Greece bankrupt in 2010 when the EU bailed it out, and that the bailout was designed to save the French and German banks, but that Angela Merkel and Nicolas Sarkozy knew this; and they knew it would be a disaster.”  The aim of the Euro leaders back in 2010, when the Greek crisis mushroomed in the wake of the Great Recession and the global financial crash was to ensure that the German and French banks did not suffer severe losses from any default by the Greek.  These banks had bought huge amounts of Greek public debt to make profits and now in the crisis Greek bonds were worth nothing.  The EU leaders came up with a solution: the banks would take a small ‘haircut’ (no more than 10% on their bond holdings) and the rest of the debt would be shifted onto the books of the EU, ECB and the IMF to be paid off over the next decade or so.  The Troika would then squeeze and sweat the money they lent to pay off the banks out of the Greek people.

Eventually, the leftist Syriza won a famous victory in the Greek election on a programme of rejecting the debt burden and refusing austerity measures.  This is what I wrote at that time: “The alternative to grasp the nettle: demand the cancellation of the euro and IMF loans (the original demand of Syriza) or default; impose capital controls, take over the Greek banks and appeal to the Greek people for support and the European labour movement. Let the Euro leaders make the move on Eurozone membership, not Syriza. The problem is that now the Greek people have been led to believe that there is only one way out: a deal with the Eurogroup on increasingly bad terms. The alternative of a socialist plan for investment and a Europe-wide appeal is not before them.”

After months of negotiations with the Euro leaders, Tsipras called a referendum to refuse any austerity deal, expecting to lose the vote (as did Varoufakis apparently).  Losing the vote would have got Tsipras off the hook as he could have agreed to the Troika measures because the Greeks accepted them.  But he and Varoufakis got a shock.  Despite a massive media campaign by the Euro leaders and conservative forces within Greece; despite the Germans and ECB forcing a credit squeeze and a run on and closure of Greek banks for weeks, the Greek people said no.

Nevertheless, Tsipras decided to ignore that vote and opted to capitulate.  Mason says this was the right thing to do.  “I continue to believe Tsipras was right to climb down in the face of the EU’s ultimatum…. For Tsipras – and for the older generation of former detainees and torture victims who rebuilt the Greek left after 1974 – staying in power as a dented shield against austerity was preferable to handing power back to a bunch of political mafiosi backed by a mob of baying rich-kid fashionistas.”  Is Mason serious?  Was the right-wing Mafiosi the only alternative? Instead of building a movement of support for the government and proposing an emergency plan for the Greek people and its economy, the best solution was to give in?

Back in July 2015, I considered the options for Syriza.  There was the neoliberal solution being demanded by the Troika. This was to keep cutting back the public sector and its costs, to keep labour incomes down and to make pensioners and others pay more. This was aimed at raising the profitability of Greek capital and with extra foreign investment, restore the economy. Then maybe the Eurozone economy would eventually start to grow strongly and so help Greece, as a rising tide raises all boats.

The next solution was the Keynesian one, advocated by the left-wing within Syriza (but not by Varoufakis, who remained silent and left for America – apparently because of death threats to his family, according to his memoirs). This meant boosting public spending to increase demand, cancelling part of the government debt and for Greece to leave the euro and introduce a new currency (drachma) to be devalued by as much as was necessary to make Greek industry competitive in world markets.

The trouble with this solution was that it assumed Greek capital could revive with a lower currency rate and that more public spending would increase ‘demand’ without further lowering profitability.  But the profitability of capital is key to recovery under a capitalist economy. Greek exporters may have benefited from a devalued currency, but many Greek companies that earn money at home in drachma would be decimated. And rapidly rising inflation that would have followed devaluation would only raise profitability precisely because it will eat into the real incomes of the majority as wages failed to match inflation. Indeed, that is what is happening since the Brexit vote in the UK.

The third option was a socialist one – something not adopted then by either Tspiras, Varoufakis or the Syriza left (or it seems, could ever be viable, according to Mason). This recognised that Greek capitalism would not recover to restore living standards for the majority, whether inside the euro in a Troika programme or outside with its own currency and with no Eurozone support. The socialist solution would be to replace Greek capitalism with a planned economy where the Greek banks and major companies are publicly owned and controlled and the drive for profit is replaced with the drive for efficiency, investment and growth. The Greek economy is small but it is not without an educated people and many skills and some resources beyond tourism. Using its human capital in a planned and innovative way, it could grow. But being small, it would need, like all small economies, the help and cooperation of the rest of Europe.

This solution would have required Syriza mobilising the latent support of the people through workplace committees to discuss an emergency plan for change.  It would have entailed immediate nationalisation of the major banks to ensure payment of people’s deposits (despite the ECB) and the takeover of the major companies (reversing privatisations) in order to institute a plan for production and investment.  That would have meant approaching the labour movement and progressive forces within the major EU countries to force their governments to stop austerity on Greece or make it leave the euro and instead relieve them of this ‘odious debt’ just as the Germans were in the 1950s relieved of their reparation debt (still not paid to Greece for the destruction and death by the Nazis).

This socialist option was the only one that would have got Greece out of its hell.  But of course, it would be hugely difficult to implement.  Yes, the conservative forces within Greece would mobilise; yes, the Greek military may rear its head; and yes, the Euro leaders would try to strangle a tiny socialist Greece and kick it out of the euro and EU.  But the battle for a socialist transformation always poses these sorts of obstacles; and only the unity of the class across Europe and a determined Greek leadership could have overcome them.  But the Syriza leaders, including Varoufakis (the erratic Marxist), never considered this option as viable, and Marxist Paul Mason agrees with them.  For them, there was no alternative but to accept the Troika impositions – which have continued to this day.  And Mason admits that “Tsipras’s government has proved a not very effective shield for the Greek working class” even if (as he claims) it was “an effective protection for the million-plus Syrian migrants who landed on Greek shores in the weeks following the economic surrender.”

Mason reckons Tsipras’ achievement of building Syriza and getting it into government is greater than that of maverick ‘Marxist’ Varoufakis who kept ‘clean’ from the capitulation in July 2015.  But apparently if the ‘global left’ is recover than it “needs leaders like Tsipras and to find thinkers and doers like Varoufakis, and to nurture them.” Well, Varoufakis’ memoirs and Tsipras’ actions hardly seem to justify Mason’s admiration.  Only this week, the Syriza-led Greek government signed up to another round of severe austerity measures in order to get the next tranche of so-called bailout funds from the EU.  The government agreed to adopt another €3.6bn ($3.8bn) in cuts in 2019 and 2020 and have conceded fresh pension (9%) cuts and corporate tax breaks in return for permission to spend an equivalent sum on poverty relief measures.

The Syriza government has done everything it has been asked of by the Troika in making the Greek people pay for the failure of Greek capitalism. And yet the EU leaders have still not agreed to ‘debt relief’. Indeed, they are talking of only considering it once the austerity measures in the latest bailout have been implemented in full and the programme comes to an end in 2018. In the meantime, the Greek government is supposed to run a budget surplus (before interest payments on loans) of 3.5% of GDP a year for the foreseeable future. That is a level way higher than any other country in the EU and way higher for so long than any other government has achieved ever!

No wonder the IMF considers this approach as unsustainable.  “Even if Greece, through a heroic effort, could temporarily reach a surplus close to 3.5% of GDP, few countries have managed to reach and sustain such high levels of primary balances for a decade or more, and it is highly unlikely that Greece can do so considering its still weak policy making institutions and projections suggesting that unemployment will remain at double digits for several decades.” IMF.

For Greece, there is no escape from the penury of public debt owed to the IMF and Eurogroup.  There is a new and detailed study of the plans of the Troika (EU, ECB and IMF) to force the Greek government to run a primary (excluding interest payments) budget surplus of 3.5% of GDP from 2018 onwards.  It shows that it will be impossible for Greece to deliver this level of austerity and, even if it did, it would not stop the debt burden rising even more.  “Past experience suggests the fiscal policy expected – a budget surplus before interest payments worth 3.5 per cent of GDP, sustained for 16 years — has literally no chance of happening even if Greece were able to start generating a 3.5 per cent primary surplus by 2018, as per the targeted schedule”.  It goes on: “Greece’s debts to the EFSF would more than double to about €278 billion in 2050, when interest deferral is assumed to end, and then begin a slow decline, but the outstanding amount in 2080 would still be higher than it is today.”  That’s 70 years since the crisis began!  The paper says that the EU should offer more bailout money from next year to “tide Greece over”. But the debt would remain and keep on rising, even if yet more austerity measures (already unprecedented in fiscal history) were applied. The only solution is to write the debt off.

So, while Varoufakis publishes his memoirs of his time as finance minister during the debt crisis, exposes the rotten and cruel policies of the Troika, and goes around Europe in seminars to demand a better Europe, the Tsipras-led Syriza government continues trying to meet the demands and targets of the Troika in the vain hope that European capitalism will recover and grow and so allow Greeks to get some crumbs off the table. There may eventually some deal on ‘debt relief’. But it will still mean that Greece has an unsustainable burden of debt on its books for generations to come, while living standards for the average Greek household fall back below where they were before Greece joined the Eurozone. A whole generation of Greeks will be worse off than the last and another global recession is still to come.

Labour’s share

The leading Keynesian bloggers have been discussing the causes of inequality again.  In particular, they have highlighted the apparent decline in labour’s share of national income in most advanced capitalist economies since the early 1980s.

According to an ILO report, in 16 developed economies, labour took a 75% share of national income in the mid-1970s, but this dropped to 65% in the years just before the economic crisis. It rose in 2008 and 2009 – but only because national income itself shrank in those years – before resuming its downward course. Even in China, where wages have tripled over the past decade, workers’ share of the national income has gone down.

And the very latest IMF World Economic Report finds that “After being largely stable in many countries for decades, the share of national income paid to workers has been falling since the 1980s.” 

The IMF goes on “Labor’s share of income declines when wages grow more slowly than productivity, or the amount of output per hour of work. The result is that a growing fraction of productivity gains has been going to capital. And since capital tends to be concentrated in the upper ends of the income distribution, falling labor income shares are likely to raise income inequality.”

As Keynesian blogger Noah Smith put in an article, “For decades, macroeconomic models assumed that labor and capital took home roughly constant portions of output — labor got just a bit less than two-thirds of the pie, capital slightly more than one-third. Nowadays it’s more like 60-40.”  What has happened?  Smith reckons that there are four possible explanations: 1) China, 2) robots, 3) monopolies and 4) landlords.

By China, he means that globalisation and the shift of manufacturing by multi-nationals to so-called emerging economies has led to labour in advanced economies losing jobs and seeing their wages stagnate while productivity has risen.  Yet, as Smith points out, labour’s share has fallen in China too and (until recently) inequality of income rose sharply.

Then there is the accelerating substitution of machines for workers, particularly with robots and artificial intelligence.  What appears to be happening is that more efficient, hi-tech firms are growing fast, leaving behind inefficient firms that use more labour.  These less efficient firms lose market share and so start to employ less workers as well.

Well, that is pretty much a trend in capitalist accumulation from a Marxist perspective – so it should be no surprise.  Indeed, the IMF report backs up this view.  “In advanced economies, about half of the decline in labor shares can be traced to the impact of technology. The decline was driven by a combination of rapid progress in information and telecommunication technology, and a high share of occupations that could be easily be automated.”

It used to be argued in mainstream economics that inequalities were the result of different skills in the workforce and the share going to labour was dependent on the race between workers improving their skills and education and introduction of machines to replace past skills.

Indeed, another leading Keynesian Brad Delong still supports this answer.  In a recent post, he suggests that Smith and Krugman have it wrong. “let me suggest that there is no mystery to explain.”  If we look at labour’s share of net GDP, i.e. after deducting depreciation (the amount of output needed to replace worn-out plant and equipment), then labour’s ratio has not really fallen, except during the Great Recession.

So Delong concludes that any redistribution of income was indeed within labour’s share from low earners to high earners (CEOs, top executives, doctors and dentists etc) and not between labour and capital.

Delong’s argument is not convincing.  First, depreciation may not be defined as profit but it is clearly a deduction from gross profits. Second, even the graph above does show a trend decline in labour share after its sharp rise in the late 1960s, which led to an intensification in the fall in profitability in most advanced capitalist economies from the mid-1960s and in an accompanying class struggle.  The decline was also significant from 2000 during the credit-boom in the US (unlike Europe, where labour’s share was steady and even rose in the Great Recession – the opposite of the US experience).

And third, the gains in income for CEOs and small business doctors, dentists, lawyers and other ‘professionals’ are really profits not wages.  See Simon Mohun’s excellent work in this regard.

Paul Krugman has returned to the theme of falling labour share in a recent post on his blog, where he argues that it is monopoly power among such capital-intensive companies like Google, Microsoft, etc and the energy companies that drives up profits the overall economy. This is an argument he has raised before. As he said back in 2012, “Are we really back to talking about capital versus labor? Isn’t that an old-fashioned, almost Marxist sort of discussion, out of date in our modern information economy?”  

Krugman recognises that inequalities of income and wealth across US society and the declining share of income going to labour in the capitalist sector are not due to the level of education and skill in the US workforce, but to deeper factors.   In 2012, he cited two possible explanations: “One is that technology has taken a turn that places labor at a disadvantage; the other is that we’re looking at the effects of a sharp increase in monopoly power. Think of these two stories as emphasizing robots on one side, robber barons on the other.”

The first argument is that modern technology is ‘capital-biased’, namely it aims to replace labour by machines over time.  As Krugman put it: “The effect of technological progress on wages depends on the bias of the progress; if it’s capital-biased, workers won’t share fully in productivity gains, and if it’s strongly enough capital-biased, they can actually be made worse off.”

This is not new in Marxist economic theory.  Marx put it differently to the mainstream.  Investment under capitalism takes place for profit only, not to raise output or productivity as such.  If profit cannot be sufficiently raised through more labour hours (ie.e more workers and longer hours) or by intensifying efforts (speed and efficiency – time and motion), then the productivity of labour can only be increased by better technology.  So, in Marxist terms, the organic composition of capital (the amount of machinery and plant relative to the number of workers) will rise secularly.  Workers can fight to keep as much of the new value that they have created as part of their ‘compensation’ but capitalism will only invest for growth if that share does not rise so much that it causes profitability to decline.  So capitalist accumulation implies a falling share to labour over time or what Marx would call a rising rate of exploitation (or surplus value).

And yes, it does all depend on the class struggle between labour and capital over the appropriation of the value created by the productivity of labour.  And clearly labour has been losing that battle, particularly in recent decades, under the pressure of anti-trade union laws, ending of employment protection and tenure, the reduction of benefits, a growing reserve army of unemployed and underemployed and through the globalisation of manufacturing.

Apart from capital-bias technology, Krugman considers that the fall in labour’s share may be caused by ‘monopoly power’, or the rule of ‘robber barons’.  Krugman puts it this way.  Maybe labour’s share of income is falling because “we don’t actually have perfect competition” under capitalism, “increasing business concentration could be an important factor in stagnating demand for labor, as corporations use their growing monopoly power to raise prices without passing the gains on to their employees.”  

What Krugman seems to be suggesting is that it is an imperfection in the market economy that creates this inequality and if we root out this imperfection (monopoly) all will correct itself.  So Krugman presents the issue in the terms of neoclassical economics.

But it is not monopoly rule as such, but the rule of capital.  Sure, capital accumulates through increased centralisation and concentration of the means of production in the hands of a few.  This ensures that the value created by labour is appropriated by capital and that the share going to the 99% is minimised. This is not monopoly as an imperfection of perfect competition, as Krugman explains it; it is the monopoly of ownership of the means of production by a few.  This is the straight forward functioning of capitalism, warts and all.

The falling share going to labour in national income began at just the point when US corporate profitability was at an all-time low in the deep recession of the early 1980s.  Capitalism had to restore profitability.  It did so partly by raising the rate of surplus value through sacking workers, stopping wage increases and phasing out benefits and pensions.  Indeed, it is significant that the collapse in labour’s share intensified after 1997 when US profitability again peaked and began to slide again.  The IMF graph above shows that this applied to most economies.

Labour’s share in the capitalist sector in the US and other major capitalist economies is down because of increased technology and ‘capital bias’, from globalisation and cheap labour abroad; from the destruction of trade unions; from the creation of a larger reserve army of labour (unemployed and underemployed); and from ending of work benefits and secured tenure contracts etc.  Indeed, this seems to be the conclusion reached by the IMF in its latest report, Chapter 3 of the April 2017 World Economic Outlook finds that this trend is driven by rapid progress in technology and global integration.

“Global integration—as captured by trends in final goods trade, participation in global value chains, and foreign direct investment—also played a role. Its contribution is estimated at about half that of technology. Because participation in global value chains typically implies offshoring of labor-intensive tasks, the effect of integration is to lower labor shares in tradable sectors.  Admittedly, it is difficult to cleanly separate the impact of technology from global integration, or from policies and reforms. Yet the results for advanced economies are compelling. Taken together, technology and global integration explain close to 75 percent of the decline in labor shares in Germany and Italy, and close to 50 percent in the United States.”

Maybe ‘capital bias’ and ‘globalisation’ had less of an effect on labour share in the US because of the greater growth in financial profits and rents there than in the rest of the advanced economies.

Indeed, as Noah Smith puts it, “monopoly power, robots and globalization might all be part of one unified phenomenon — new technologies that disproportionately help big, capital-intensive multinational companies.”  I call that modern capital, which, quoting Smith again, “provides a possible way to unify at least some of the competing explanations for this disturbing economic trend.”

HMNY – the profit-investment nexus: Keynes or Marx?

The main themes of this year’s Historical Materialism conference in New York last week were the Russian Revolution and the prospects for revolutionary change one hundred years later.

But my main interest, as always, was on the relevance of Marxist economic theory in explaining the current state of global capitalism – if you like, understanding the objective conditions for the struggle to replace capitalism with a socialist society.

On that theme, in a plenary session, Professor Anwar Shaikh at the New School for Social Research (one of the most eminent heterodox economists around) and I looked at the state of the current economic situation for modern capitalism.  Anwar concentrated on the main points from his massive book, Capitalism, published last year – the culmination of 15 years of research by him.  This is a major work of political economy in which Anwar uses what he calls the classical approach of Adam Smith, David Ricardo and Karl Marx (and sometimes Keynes) under one umbrella (not specifically Marxist apparently).  His book is essential reading (and I have reviewed it here) and also see the series of lectures that he has done to accompany it.

His main points at the plenary were to emphasise that capitalism is not a system that started off as competitive and then developed into monopoly capitalism, but it is one of turbulent ’real competition’.  There has never been perfect competition as mainstream economics implies from which we can look at ‘imperfections’ like monopoly.

Anwar went on to say that crises under capitalism are the result of falling profitability over time in a long downwave (see graph comparing my measures with Shaikh).  The neoliberal period from the early 1980s was a result of the rejection of Keynesian economics and the return of neoclassical theory and the replacement of fiscal management of the economy, which was not working, with monetarism from the likes of Milton Friedman.  But even neo-liberal policies could not avoid the Great Recession. And since then, there has not been a full recovery for capitalism.  Massive monetary injections have avoided the destruction of capital values, but at the expense of stagnation.

In my contribution, I emphasised the points of my book, The Long Depression, which also saw the current crisis as a result of Marx’s law of profitability in operation.  I argued that mainstream economics failed to see the slump coming, could not explain it, and do not have policies to get out of the long depression that has ensued since 2009 because they have no real theory of crises.  Some deny crises at all; some claim they are due to reckless greedy bankers; or to ‘changing the rules of game’ by the deregulation of the finance sector causing instability; or due to rising inequality squeezing demand.

In my view, none of these explanations are compelling.  But neither are the alternatives that are offered within the labour movement. Anwar was right that neoclassical economics dominates again in mainstream economics, but I was keen to point out that Keynesian economics is dominant as the alternative theory, analysis and policy prescription in the labour movement.  And, in my view, Keynesianism was just as useless in predicting or explaining crises and thus so are its policy prescriptions.

Indeed, that was the main point made in the paper that I presented at another session at HM at which Anwar Shaikh was the discussant.  In my paper, entitled, The profit-investment nexus: Marx or Keynes?, (The profit investment nexus Michael Roberts HMNY April 2017), I argued that it is business investment not household consumption that drives the booms and slumps in output under capitalism.  For crude Keynesians, it is what happens with consumer demand that matters, but empirical analysis shows that before any major slump, it is investment that falls not consumption and, indeed, often there is no fall in consumption at all -the graph below shows that investment fell much more from peak of the boom to the trough of the slump in US post-war recessions.

Moreover, what drives business investment is profit and profitability, not ‘effective demand’.  That’s because profits are not some ‘marginal product’ of the ‘factor of capital’, as mainstream marginalist economics (that Keynes also held to) reckons.  Profits are the result of unpaid labour in production, part of surplus value appropriated by capitalists.  Profits come first before investment, not as a marginal outcome of capital investment. In the paper, I show that the so-called Keynesian macro identities used in mainstream economic textbooks fail to reveal that the causal connection is not from investment to savings or profit but from profits to investment.  Investment does not cause profit, as Keynesian theory argues, but profits cause investment.

Shaikh commented in his contribution that Keynes was also well aware that profits were relevant to investment.  That sounds contradictory to what I am arguing.  But let Keynes himself resolve how he saw it, when he says that “Nothing obviously can restore employment which first does not restore business profits.  Yet nothing in my judgement can restore business profits that does not first restore the volume of investment”.  To answer Keynes, my paper shows that there is plenty of empirical evidence to show that profits lead investment into any slump and out into a boom – the Marxist view.  And there is little or no evidence that investment drives profits – the Keynesian view.

Shaikh at HM argued that it is the ‘profits of enterprise’ that matter not profits as such.  By this he means that the interest or rent taken by finance capital and landlords must be deducted before we can see the direct connection between business profits and business investment.  Maybe so, but the evidence is also strong that the overall surplus value in the hands of capital (including finance capital) is the driving force behind investment.  Interest and rent can never be higher than profit as they are deductions from total profits made by productive capital.

Also Shaikh reckons that it is expectations of future profit on new investment that is decisive in the movement of business investment, not the mass or the rate of profit on the existing stock of capital invested.  Yes, capitalists invest on the expectation of profit but that expectation is based on what their actual profitability was before.  So the profitability on existing capital is what matters.  Otherwise, the expectation of profit becomes some ephemeral subjective measure, like Keynes’ animal spirits’.  Indeed, as I quote Paul Mattick in my paper, “what are we to make of an economic theory …. which could declare; “In estimating the prospects for investment, we must have regard therefore, to the nerves and hysteria and the digestions and reactions to the weather of those upon whose spontaneous activity it largely depends” (Keynes).

My paper concludes that different economic policy conclusions flow from the Marxist or Keynesian view of what drives investment.  The Keynesian multiplier reckons that it is demand that drives investment and if consumer and investment demand is low or falling, a suitable boost of government investment and spending can compensate and so pump prime or boost the capitalist economy back on its feet.

But when we study the evidence of the efficacy of the Keynesian multiplier, as I do in this paper, it is not compelling.  On the other hand, the Marxist multiplier, namely the effect of changes in the profitability of business capital on investment and economic growth, is much more convincing.  Thus Keynesian fiscal and monetary stimulus policies do not work and do not deliver economic recovery when profitability of capital is low and/or falling. Indeed, they may make things worse.

At the plenary I pointed out that Donald Trump plans some limited form of Keynesian stimulus by government spending on infrastructure programmes worth about $250bn.  I have discussed these plans and their fake nature before.  But even if they were genuine increases in state investment, it will do little.  Business investment as a share of GDP in most advanced capitalist economies is around 12-18% of GDP.  Government investment is about 2-4%, or some four to six times less. That’s hardly surprising as these are capitalist economies!  But that means an increase of just 0.2% of GDP in government investment as Trump proposes will make little difference, even if the ‘multiplier effect’ of such investment on GDP growth were more than one (and evidence suggests it will be little more,LEEPER_LTW_FMM_Final).

What matters under capitalism is profit because the capitalist mode of production is not just a monetary economy as Keynesian theory emphasises; it is, above all, a money-making economy.  So without profitability rising, capitalist investment will not rise.  This key point was the starting point of another session on Fred Moseley’s excellent book, Money and Totality, which explains and defends Marx’s analysis of capital accumulation, his laws of value and profitability, from competing and distorting interpretations. I have reviewed Moseley’s book elsewhere.

But the key points relevant to this post are that Moseley shows there is no problem of reconciling Marx’s law of value (based on all value being created by labour power) with relative prices of production and profitability in a capitalist economy.  There is no need to ‘transform’ labour values into money prices of production as Marx starts the circuit of production with money inputs and finishes it with (more) money outputs.  The law of value and surplus value provided the explanation of how more money results – but no mathematical transformation is necessary.

But this also means that for Marx’s law of value to hold and for total value to explain total prices (and for total surplus value to explain total profits), only labour can be the source of all value created.  There cannot be profit without surplus value.  That is why I disagree with Anwar Shaikh’s view that Marx also recognised profit from ‘alienation’, or transfer.  I have explained where I disagree here.

The danger of accepting that profit can come from somewhere else than from the exploitation of labour power is that it opens the door to the fallacies of mainstream economics, particularly Keynesian economics, that creating money or credit can deliver more income (demand) and is not fictitious but real value.  If that were true, then monetarism and Keynesian policies become theoretically valid options for ending the current Long Depression and future slumps without replacing the capitalist mode of production.  Luckily, the view that profits can be created out of money and by not exploiting labour is demonstrably false.

Gaining momentum?

At its semi-annual meeting that started this week, IMF economists announced an upgrade in their forecast for global economic growth.  This is the first upgrade that the IMF has made for six years.  It was only a slight increase in its previous forecast of growth made in January. The IMF now expects world real GDP to rise 3.5% this year (compared to 3.4% before) and 3.6% next year (unchanged).

As the IMF chief, Christine Lagarde put it, “The good news is that, after six years of disappointing growth, the world economy is gaining momentum as a cyclical recovery holds out the promise of more jobs, higher incomes, and greater prosperity going forward.”

But the IMF also warns that: “the world economy may be gaining momentum, but we cannot be sure that we are out of the woods.”

Nevertheless, there is a growing confidence among mainstream economists and official international agencies that the world capitalist economy is finally coming out of its slow and weak recovery since the Great Recession of 2008-9.  Below trend growth, weak investment and hardly any uptick in real incomes in most major economies since 2009 has been described variously as ‘secular stagnation’ or in my case as The Long Depression, similar to that of the 1930s and 1880s.

But maybe it is all over.  Only this week, the FT’s economic forecaster model was showing a sharp pickup.  The Brookings-FT Tiger index — tracking indices for the global economy — suggests growth has picked up sharply in both advanced economies and emerging markets in recent months. The index, which covers all major advanced and developing economies, compares many separate indicators of real activity, financial markets and investor confidence with their historical averages for the global economy and for each country separately. The Tiger index suggests growth in emerging markets has picked up sharply since the oil price fall hit output in 2015. Having languished well below historic average levels this time last year, the index for emerging market growth has climbed to a level not seen since early 2013. China and India appear to have weathered recent rocky periods and indicators for growth are back above historic averages for both countries.

And the main economic indicators in the US and global economy have been picking up.  The purchasing managers’ indexes (PMI) are surveys of companies in various countries on their likely spending, sales and investments.  And the PMIs everywhere are well above 50, meaning that more than 50% of the respondents are seeing improvement.  The global PMI now stands at its highest level (54) for three years and, according to JP Morgan economists, it suggests that global manufacturing output is now rising at a 4% pace compared to just 1% this time last year.

Things are also looking better in the so-called emerging economies.  China has not crashed as many expected this time last year.  On the contrary, the Chinese economy has picked up and, as a result, there has been increased demand for raw materials.  The Chinese economy expanded 6.9% year-on-year in the first quarter of this year that ended in March, slightly up from 6.8% growth in the fourth quarter of last year.  Investment and industrial production also had a slight uptick.

Gavyn Davies, former chief economist at Goldman Sachs and now a columnist for the Financial Times in London, pointed out that “Global activity growth has rebounded sharply, and recession risks have plummeted. Growth in real output is now running at higher levels than anything seen since the temporary rebound from the financial crash in 2009/10. Importantly, recent data suggest that the growth rate of fixed investment is beginning to recover, which is a body blow to one of the central tenets of the secular stagnation school.

Behind this apparent recovery is a small recovery in corporate profits, which up to the middle of 2016 had been falling quarterly.  Since then, corporate profits have recovered somewhat around the world and, according to JP Morgan, business investment has reversed its decline of the last year.

All this sounds promising, even convincing.  But as the IMF warned, maybe these optimists are jumping the gun.  The US economy remains the key driver of global growth, not Europe or China and there seems little sign of any uptick from the sluggish growth of 2% a year that the US economy has achieved over the last six years on average.

The stock market has been booming (until recently) on the expectation that President Trump would boost profits and investment through corporate profits tax reductions and a programme of infrastructure spending by the federal and state governments.  But so far, nothing has happened.  And anyway, in a previous post I showed that the impact of such measures on overall investment and growth would be minimal.

Indeed, what has happened is a growing divergence between economic data based on surveys of opinions about the US economy (‘soft data’) and actual figures (‘hard data’).  According to Morgan Stanley economists, “the divergence is stunning.” In other words, everybody is very optimistic about the prospects for the US economy over the next 12 months but the current data don’t show it.

This divergence is revealed by the huge differences in forecast US economic growth by the main economic forecasting agencies. The New York Federal Reserve reckons US real GDP will be up 2.6% in the first quarter that ended in March, while the widely respected Atlanta Fed forecast has dropped to just 0.5% for the same quarter. The difference is caused by New York including more ‘soft’ data and Atlanta excluding it.

Also investment analysts are now forecasting huge rises in corporate profits or earnings. First-quarter earnings are expected to rise 15% yoy for European companies, 9% for those in the US and 16% for Japanese firms – a complete turnaround from previous forecasts that predicted a slowdown in 2017 to follow the slowdown of 2016.  Yet the very earliest profits results for the top US companies released this week were very disappointing.

Indeed, when we consider the hard data, the situation is not so rosy. The final reading of US national output for the fourth quarter of 2016 confirmed that the US economy grew only 1.6% in 2016, the weakest annual rate of growth for five years. The pace of growth did pick up in the second half of 2016 from a near stop in early 2016, but was still growing no more than 2% a year in the fourth quarter.

The bright spot was a significant pick-up in US corporate profits. Between the beginning of 2015 and the second half of 2016, corporate profits had fallen by 9%. However, in the second half of last year profits rose back 6% and in the last quarter were up 9.3% yoy and even more after tax.

Business investment had followed profits down three quarters later in 2015, confirming again my thesis that profits lead investment in the capitalist economic cycle. Business investment fell yoy in every quarter last year and equipment investment, the most important part of business spending, is down 5% from mid-2015. But with profits now rising, investment may pick up in 2017 – we’ll see.  But the latest measures of what will happen to investment and lending in the first quarter made by the St Louis Fed do not suggest any pick-up at all.

Consumer spending also does not seem to be responding to all this optimistic talk.  US personal consumption spending seems to have slowed to just a 1.1% annual rate in the first quarter of 2017 compared to 3.5% in the last quarter of 2016, the weakest rate of expansion in four years and the worst first quarter since the end of the Great Recession in 2009.

And, as I have argued in several previous posts, corporate profitability in the major advanced capitalist economies remains weak and there is a sizeable section of ‘zombie’ firms, those unable to make any more profit than necessary to cover the servicing of their debts, let alone invest in new productive technology to raise productivity and expand.

Confidence may be rising among mainstream economists and official agencies, based on improving surveys of opinion, but that must be balanced against the fact that the current recovery period since the end of the Great Recession is pretty long already.

The IMF report signals the risk of a new recession.  Its indicator suggests that it is still quite low for most economies at around 20-40% as the world economy moves through 2017.  But Lagarde warns that “there are clear downside risks: political uncertainty, including in Europe; the sword of protectionism hanging over global trade; and tighter global financial conditions that could trigger disruptive capital outflows from emerging and developing economies.”

France: the choice

It’s only a week to go before the first round of the French presidential election and it seems that the race is wide open.  Only two candidates can take part in the second round in May.  But who will those two be?  Extreme right-wing Front National candidate Marine Le Pen has been the front runner in the polls over the last year, but her support has been slipping.  Ex-socialist minister and centrist darling of the bourgeois media, Emmanuel Macron is neck and neck with Le Pen, both at around 22-23%.  The official conservative (Republican) candidate Francois Fillon should be ahead, but he has been damaged by the expenses scandal of his wife and children getting huge government-funded salaries for parliamentary work which they did not do.  Even so, Fillon is getting about 18-19% share of those saying they will vote.  The big surprise in the last few weeks had been the rise of Leftist candidate Jean-Luc Melenchon, whose polling has leapt from 10-11% to around 19% now.  In so doing, the official Socialist party candidate, Benoit Hamon, has seen his vote slump to 6-7%.

It is still most likely that it will be Le Pen and Macron in the second round, with Macron more than likely to win the presidency by some distance over Le Pen.  But all combinations are possible, with the worst for French capital being a battle between leftist Eurosceptic, anti-NATO Melenchon and racist Eurosceptic Le Pen.

Back in February I analysed the state of the French economy, the second-largest in mainland Europe and one of top ten capitalist economies globally.  The profitability of French capital is at a post-war low (profitability is still down a staggering 22% since the peak just before the global financial crash in 2007), real GDP growth is only just over 1% a year, well below that of Germany.  The unemployment rate remains stuck close to 10% compared to just 3.9% in Germany.  Youth unemployment is 24%. Business investment has stagnated in the ‘recovery’ since 2009.

Because of the actions of the French labour movement, inequalities of income and wealth have not risen as much as in other G7 countries like the US and the UK in the last 30 years.


Neoliberal policies have been less effective in getting profitability up and workers down under the thumb of capital.  French capital needs a president that can and will do this now.  Can it find one?

If we look at the programs of each candidate, we can see it is Francois Fillon who offers the best programme for the interests of French capital.  Fillon aims to end the key gain of the French labour movement, the official 35-week, often firmly enforced.  Under Fillon, workers would have to put in 39 hours before overtime or time-off in lieu is paid.  Fillon would slash the public sector workforce by 500,000 (or 10%), while increasing the working week for those who keep their jobs.  The retirement age would be raised to 65 from 62 now and everybody would have to work to that age or face pension loss.  Unemployment benefits would be cut.

Severe fiscal austerity would be imposed with a cut in public sector spending from the (astronomically high for capitalism) 57% of GDP to 50%, with a ‘balanced budget’. The cuts would be necessary because Fillon wants to cut corporate tax rates to 25% and other ‘burdens’ on the business sector, while raising VAT for purchases by French households by 2% pts.  He would scrap the current wealth tax on the rich. One area of extra spending would be more police and more prisons, while reducing gay rights.

This is an outright neo-liberal program that no French president has been able to impose successfully in the last 30 years.  But French capital demands it.  Unfortunately, for big business, Fillon is unlikely to make the presidency.

But what of Macron, the ex-banker and socialist minister, the man most likely to get into the Elysee Palace (the French White House)?  Macron’s program is a mix that attempts to appeal to labour and capital, as though they could be reconciled.  He wants to merge public and private pension and benefit schemes.  He claims that he will get the unemployment rate down to 7% through an investment plan.  And yet he plans to cut public sector spending and run a tight budget.

Like Fillon, he would cut corporate tax for businesses to 25% of declared profits.  He keeps the 35-hour week, but companies would be allowed to ‘negotiate’ a longer week.  Low-wage earners would be exempted from certain social welfare levies, a measure that would put an extra month’s wage per year in the employee’s pocket (but no clarity on how this would be paid for, except through ‘higher growth’).  He too would boost police and prisons but also provide a ‘payment for culture’ to students and reduce school class sizes.  He would cut the number of MPs and reduce time for re-election of officials, while banning Fillon-type payments to family members. This programme is thus a mix of help to business and wishful thinking for labour.  But it seems to appeal to just enough voters over the neoliberal alternative of Fillon.

Both Fillon and Macron are pro-EU and pro-euro.  This is the one big policy difference with Le Pen and Melenchon.  Le Pen’s program is a mixture of racist, anti-immigrant, anti-EU policies alongside pro-labour measures for the public sector and wages.  Le Pen would ‘re-negotiate’ the EU treaty with the rest of the EU and if that failed, call a referendum on leaving the EU within six months.  If French voters decided to stay in the EU, she would resign the presidency.  If they voted to leave, France would end the euro as its currency and re-introduce the franc.  Such a policy would be shattering for the French economy and probably sound the death-knell of the EU and the euro as we know it.

Le Pen would get on with ending immigration, strip many French muslims of citizenship, revoke international trade treaties and NATO operations and confine free education to French citizens only.  Companies employing foreigners would pay an extra 10% tax and foreign imports would be subject to a 3% tax.  And, of course, the police forces would be expanded.

Like the Brexiters in the UK referendum, she claims that she can cut taxes on average households and raise welfare benefits by saving money on EU membership and regulations (that has turned out to be a myth in the UK, where austerity has increased).  The number of MPS would be halved.

But Le Pen also aims to help (small) business with lower taxes.  And instead of raising the retirement age, as Fillon proposes, she would cut it to 60 years, increase benefits to the old and to children, while keeping the working week at 35 hours and overtime tax-free!

Le Pen’s economic policy is thus anathema to French capital and attractive to French labour, but combined with racist and nationalist measures.  But, of course, there is no real attack on the hegemony of French big business.  So this policy of raising wages and benefits while leaving the euro and introducing protectionism, in an economic world of low growth and a possible new economic slump, is utopian. Neither the needs of labour nor capital will be met.

When we turn to Melenchon, we see a similar utopianism, if from the perspective of defending the interests of labour over capital.  His economic program is similar to that of Corbyn’s Labour in the UK, if going further.  He proposes a 100-billion-euro economic stimulus plan funded by government borrowing and some nationalisation in sectors such as the motorway network.  He says he would raise public spending by 275 billion euros to fund the plan, to raise minimum and public sector wages, create jobs to reduce the unemployment rate to 6% and also, like Le Pen, cut the retirement age to 60.

This extra spending would, Keynesian-like, fund itself from higher economic growth and employment.  But with big business needing profits to invest, calling for more taxes on business (as well as the rich), may deliver the opposite of faster growth.  At the same time, he too would cut corporate tax rates to 25%!

Melenchon would also renegotiate the EU treaties, ignore the EU fiscal austerity pact, call for a devaluation of the euro, take national control of the Banque de France from the ECB and leave NATO and the IMF.  And following Le Pen, if these measures are blocked, he would have a referendum on EU membership.

Melenchon’s program is similar to that of socialist Francois Mitterand (although somewhat less radical than Mitterand’s) when the latter won the presidency in 1981.  He too wanted to take France on an independent line from the rest of Europe in expanding the economy through public spending, nationalisation and more taxes on business and the rich.  That program fell down in face of the deep global slump in 1980-2, when financial investors fled France and the franc.  The choice then was for Mitterand to go the whole hog and take control from French capital or capitulate to neoliberal policies.  He chose the latter with his so-called “tournant de la rigueur” (austerity turn) in 1983.  That choice would soon face Melenchon, in the unlikely event that he won the presidency.

Apart from the economic utopianism of Le Pen and Melenchon under capitalism, they both face an immediate political problem.  In June, the French vote for a new National Assembly, which, at least right now, would probably elect a majority of conservative pro-capital, pro-EU MPs who would be backed by a media campaign from big business, the EU Commission and other EU governments aiming to shackle the new president.  The battle would be on from day one, while the euro and French financial assets reel from the shock.

But it probably won’t happen.

Economic well-being and Brexit

The latest employment figures out his week for both the US and the UK look great on the surface.  In the US, the official unemployment rate is down to 4.5%, not far from the last low at the end of hi-tech boom in 2000 of 3.8%.  And the employment to population ratio is picking up, although still well below the peak of 2000.

In the UK, the story is similar.  UK unemployment rate held at an almost 12-year low of 4.7% in February 2017. And the employment rate stood at an all-time high of 74.6%.

However, it is not the same story for average real incomes and living standards.  Most of these new jobs are low-paid, temporary and/or part-time.  As a result, growth in weekly earnings is not racing up with employment.  US average hourly earnings are rising at about 2.4% a year compared to average price inflation of 2.7%.  So average real incomes are not rising at all.

In the UK, it’s the same story again.  Average weekly earnings for employees in nominal terms increased by 2.3% compared with a year earlier.  And guess what, inflation is rising at the same rate.  So average real earnings are flat.  Real pay growth fell to 0.1 per cent in the three months to February. The Resolution Foundation notes that pay is already falling in nine sectors of the UK economy, including accommodation and food services, transport, finance and the public sector. Together these sectors for account for 40% of the workforce.

Some time ago, I discussed in a post the concept of what has been called the misery index.  This was an attempt to measure the overall economic well-being of people by adding together the unemployment rate and the inflation rate.

This was not a bad measure of misery when inflation was a big issue and attempts to drive it down would often lead to rising unemployment – or so the dilemma of Keynesian versus monetarist economic policy was posed.  However, inflation rates slowed steadily to lows by the beginning of the 21st century, so the misery index could no longer indicate too much any more about economic well-being.

Back in late 2014, the Bank of England chief economist, Andy Haldane tried to develop a new index, which he dubbed as an ‘agony index’.

This was a simple index of real wages, real interest rates and productivity growth.  His agony index showed that in the aftermath of the Great Recession, the British people and the economy had been in ‘agony’ for the longest time since the 1800s, with the exception of world wars and the early 1970s.

But the irony of the Haldane agony index was, just at the time he published it, the level of agony began to fall as the unemployment rate fell and real income growth picked with falling inflation and moderate improvement in wages.

At the time, I drew up a new simpler measure of ‘economic well-being’, based on the growth in real income per head less the unemployment rate.  This showed that one year before the British general election of May 2015, the index had improved to levels not seen since the beginning the great global slump.

That led me to predict that the Conservatives could well win the May election against all the odds.

Given that real incomes are stagnating in the US and the UK, while unemployment rates are low, I thought I would look at my index again, at a time when both countries are being governed by right-wing administrations that are trying to shift the issue of economic well-being off the agenda in favour of immigration, terrorism, trade and Brexit.

I redid my ‘economic well-being’ index going back to the 1970s.

What I found was; first, that the index has been steadily been falling since the 1970s, implying that for the majority of British households, economic well-being has deteriorated in the last 50 years.  Second, when economic well-being has dropped well below trend for any sustained period, the incumbent government is likely to lose in a general election.  Thus, for the UK, the Tories lost in 1974, Labour lost in the depth of agony in 1979 and Labour lost in the depth of Great Recession in 2010.  As I said in a previous post, “for one year before the 2010 election economic well-being was below par. No wonder Labour lost.”

The exception that may not prove the rule to this was the series of victories for the incumbent Thatcher government in 1983 and 1987 when economic well-being for the majority remained bad, if improved under Labour in 1979.  The Tories even held on in 1992 under John Major just after the slump of 1991.  Labour did not regain office until 1997 when things had improved and won two more elections during the credit boom of the early 2000s. But the Great Recession finished them off. What does seem to rule is that if economic well-being on my index is above average, then the incumbent government will win a general election.

I made some rough projections of where the index might go by 2020, when the next general election is expected in the UK.  The narrow Tory win in 2015 coincided with that significant recovery in economic well-being.  But the latest figures on real incomes do not auger well for the index staying up under the government of Theresa May.  It is very likely to be well below the trend average by 2020.  The May government is riding high in the polls at the moment and the Labour opposition under Corbyn is struggling.  But if ‘it’s the economy stupid’, then it may not be plain sailing for the Tories in 2020 – and that’s assuming there is no major global economic slump before then.

The Scottish independence and Brexit referendums cut across the issue of the economy and class in the minds of the British electorate, just as the so-called Falkland Islands war cut across class antagonism to Thatcher in the 1983 election. Indeed, prior to the Brexit vote, UK membership of the EU was a non-issue in the polls compared to the economy. But immigration fears were there and the Brexit campaign drove that and the EU to the fore.

But as the excellent post by the FlipChart blog argues, that, after prohibition in the US was introduced in the 1920s, the crash and the Great Depression of the 1930s brought home to people that drinking or not drinking alcohol was less important that their real incomes and jobs.  Those who voted for Brexit were mainly from rural areas and small towns.  And they are the ones that will suffer from falling real incomes and lack of proper jobs the most and suffer the most damage to their well-being from any new economic slump.  Whether the UK is in or out of the EU may seem less important then.

Bill Gates and 4bn in poverty

Is global poverty falling or rising?  Realistic estimates calculate that there are over 4 billion people in poverty in this world, or two-thirds of the population.  And yet, in their latest ‘public letter’ to us all, Bill and Melinda Gates, the richest family in the world, issued last month, were keen to tell us that the battle against global poverty was being won, as those living on less than $1.25 day had been cut by half since 1990.  How do we reconcile these two estimates?

Back in 2013, the World Bank released a report that there were 1.2bn people living on less than $1.25 a day, one-third of whom were children.  This compares with America’s poverty line of $60 a day for a family of four. But, according to the World Bank, things are getting better, with 720m less people on this very low threshold for poverty compared to 1981.  And Nobel prize winner Angus Deaton has emphasised that life expectancy globally has risen 50% since 1900 and is still rising. The share of people living on less than $1 a day (in inflation-adjusted terms) has dropped to 14 percent from 42 percent as recently as 1981. A typical resident of India is only as rich as a typical Briton in 1860, for example, but has a life expectancy more typical of a European in the mid-20th century. The spread of knowledge, about public health, medicine and diet, explains the difference.

However, when we delve into the data more closely, there is a less optimistic story.  Martin Kirk and Jason Hickel were quick to take the Gates’ to task on the arguments in their letter.  The Gates “use figures based on a $1.25 a day poverty line, but there is a strong scholarly consensus that this line is far too low…..Using a poverty line of $5 per day, which, even the UN Agency for Trade and Development suggests this is the bare minimum necessary for people to get adequate food to eat and to stand a chance of reaching normal life expectancy, global poverty measured at this level hasn’t been falling. In fact, it has been increasing – dramatically – over the past 25 years to over 4bn people, or nearly two-thirds of the world’s population.”

The World Bank has now raised its official poverty line to $1.90 a day.  But this merely adjusts the old $1.25 figure for changes in the purchasing power of the US dollar.  But it meant that global poverty was reduced by 100m people overnight.

And as Jason Hickel points out, this $1.90 is ridiculously low.  A minimum threshold would be $5 a day that the US Department of Agriculture calculated was the very minimum necessary to buy sufficient food. And that’s not taking account of other requirements for survival, such as shelter and clothing.  Hickel shows that in India, children living at $1.90 a day still have a 60% chance of being malnourished. In Niger, infants living at $1.90 have a mortality rate three times higher the global average.

In a 2006 paper, Peter Edward of Newcastle University uses an “ethical poverty line” that calculates that, in order to achieve normal human life expectancy of just over 70 years, people need roughly 2.7 to 3.9 times the existing poverty line.  In the past, that was $5 a day. Using the World Bank’s new calculations, it’s about $7.40 a day. That delivers a figure of about 4.2 billion people live in poverty today. Or up 1 billion over the past 35 years.

Now other experts argue that the reason there are more people in poverty is because there are more people!  The world’s population has risen in the last 25 years.  You need to look at the proportion of the world population in poverty and at a $1.90 cut-off, the proportion under the line has dropped from 35% to 11% between 1990 and 2013. So the Gates’ were right after all, goes the argument.  But this is disingenuous, to say the least.  The number of people in poverty, even at the ridiculously low threshold level of $1.25 a day, has increased, even if not as much as the total population in the last 25 years.  And even then, all this optimistic expert evidence is really based on the dramatic improvement in average incomes in China (and to a lesser extent in India).

In his paper, Peter Edward found that there were 1.139bn people getting less than $1 a day in 1993 and this fell to 1.093bn in 2001, a reduction of 85m.  But China’s reduction over that period was 108m (no change in India), so all the reduction in the poverty numbers was due to China.  Exclude China and total poverty was unchanged in most regions, while rising significantly in sub-Saharan Africa.  And, according to the World Bank, in 2010, the “average” poor person in a low-income country lived on 78 cents a day in 2010, compared to 74 cents a day in 1981, hardly any change.  But this improvement was all in China. In India, the average income of the poor rose to 96 cents in 2010, compared to 84 cents in 1981, while China’s average poor’s income rose to 95 cents, compared to 67 cents.  China’s state-run, still mainly planned, economy saw its poorest people make the greatest progress.

Poverty levels should not be confused with inequality of incomes or wealth.  On the latter, the evidence of rising inequality of wealth globally is well recorded and it’s the same story.  If you take China out of the figures, global inequality, however, you measure it, has been rising in the last 30 years.  The global inequality ‘elephant’ presented by Branco Milanovic found that the 60m or so people who constitute the world’s top 1% of income ‘earners’ have seen their incomes rise by 60% since 1988. About half of these are the richest 12% of Americans. The rest of the top 1% is made up by the top 3-6% of Britons, Japanese, French and German, and the top 1% of several other countries, including Russia, Brazil and South Africa. These people include the world capitalist class – the owners and controllers of the capitalist system and the strategists and policy makers of imperialism.

But Milanovic also found that those who have gained income even more in the last 20 years are the ones in the ‘global middle’.  These people are not capitalists.  These are mainly people in India and China, formerly peasants or rural workers have migrated to the cities to work in the sweat shops and factories of globalisation: their real incomes have jumped from a very low base, even if their conditions and rights have not. The biggest losers are the very poorest (mainly in African rural farmers) who have gained nothing in 20 years.

The empirical evidence supports Marx’s view that, under capitalism, an ‘amiseration of the working class’ (impoverishment) would take place, and refutes the Gates’ Letter that things are getting better.  Any improvement in poverty levels, however measured, is down to rising incomes in state-controlled China and any improvement in the quality and length of life comes from the application of science and knowledge through state spending on education, on sewage, clean water, disease prevention and protection, hospitals and better child development.  These are things that do not come from capitalism but from the common weal.


150 years since Capital was published – a special symposium

Karl Marx published the first volume of his life work, Capital: A Critique of Political Economy, in September 1867. Together with Volumes II and III, published after Marx’s death by Friedrich Engels, this book remains the most profound and challenging study of the logic of the capitalist system that still dominates our lives.

Karl Marx, the German born socialist philosopher, economist and writer. c.1867

To discuss Volume One, in conjunction with King’s College, London, I have organised a special conference to take place almost exactly at the same week as Volume One was published 150 years ago and very near to where Marx researched and wrote it.

150 years after the first appearance of Capital Volume I, that system is grappling with the effects of one of the greatest crises in its history and the resulting political instability. Many have turned to Marx’s Capital seeking to understand the present conjuncture. But Marx never finished this work, and the recent publication of his manuscripts has revealed both the immensity and the complexity of his project.

Within walking distance of the British Museum, where Marx conducted his research, this conference seeks to interrogate his project in the light of the present. It brings together from around the world some of the leading practitioners in the Marxist critique of political economy to explore the relevance of Capital to issues such as crisis, imperialism, social reproduction, class struggles, and communism. The conference is organized with the aim of maximizing debate that can help clarify what Capital means today.

The British Museum: The Reading Room. Illustration for The Queen’s London (Cassell, 1896).

Given that the speakers will include David Harvey, Paul Mattick, Michael Heinrich, Fred Moseley, Guglielmo Carchedi; among others like Tithi Bhattacharya, Eduardo da Motta e Albuquerque,Tony Norfield, Lucia Pradella,Beverly Silver,Raquel Varela and yours truly; it should be a cracker of a conference.

For more details, see:


Watch this space for more discussion on the issues and ideas that will become themes at the symposium.