The elephant in the room

A review of The Bleeding Edge by Bob Hughes, New Internationalist, £10.99.

This is a very good book, which stands above many others in the ever-growing genre that looks at the role and impact of the new technologies of robots and artificial intelligence on the future of human social organisation. As Betsy Harmann, Professor of Development Studies at Hampshire College US, says in the book’s blurb: “Rejecting both apocalyptic pessimism and techno-optimism, Hughes provides a compelling map to the future in which information technologies are harnessed for the common good.”

Bob Hughes taught digital media at Oxford Brookes University, but he is also an activist, particularly for the rights of migrants, co-founding a campaigning organisation, No One is Illegal UK in 2003.  Danny Dorling, Professor of Geography at Oxford University, writes a foreword in which he argues that “technology is neutral.. how we use technology is up to us.  The machine is not in control, corporations and politicians are… it has not been artificial intelligence that has made our world more unequal.  It has been us.” This is Hughes’ message.

Hughes starts by arguing that technological progress has gone hand in hand with the development of capital.  As a result, computers, electronics, intellectual ideas have been converted into private property for profit, leading to “entrenched inequality”.  Yes, capitalism has been the social system under which massive technological progress has been made, reducing the material inputs and time it takes to deliver goods and services people need.  But this has been at the expense of growing inequality and the rapacious destruction and wasteful use of natural and human resources.

As Dorling says in his foreword, “profit maximisation is the anathema for true innovation.” Echoing Mariana Mazzucato in her book, The Entrepreneurial State, which shows how many key technological developments were not the results of capitalist innovation or ‘animal spirits’ but the product of state funding and public scientific research that were then ‘commodified’ by capitalist corporations like Apple, Microsoft or Google.

But Hughes also gives us excellent examples of the way that capitalism and the drive for profits distorts (and delays) innovation from meeting the needs of people.  Kodachrome, the first mass market film launched in 1935 (p32) did not come from research by capitalist corporations but from two musicians working in their spare time at the kitchen sink.  No corporation spent time and money trying to see if manned flight could be achieved; it was done by two Wright brothers on their own.  It is the same story with xerography (later privatised into Xerox), or disk memory (later IBM).  These advances were achieved by individuals in their own time and often in face of opposition from their employers who preferred research for a quick buck than for innovation.

One of the most famous was Colossus, the world’s first true programmable digital computer, which was developed by engineers in the state-owned British Post Office during WW2.  These pioneers were then consigned back to mundane jobs after the war and computer development was stunted for decades by corporate neglect.  A Brookings Institute study found that 75% of computer development funding had come from the state in 1950 – after which corporations did little to develop this exciting innovation, delaying its impact until well into the 1980s.

Hughes then gives us a chapter on the development of technology in class societies going back to the feudal period, arguing that it was the “takeover of egalitarian societies by unequal ones” that held back technological development.  It is here and really throughout the book, that I have my biggest disagreement.  Inequality or an “unequal world” is the bugbear for Hughes.  But this is an imprecise concept.

Inequality has existed for most of human civilisation, but it is driven by the control and distribution of surplus labour and output by a tiny elite.  The history of human social organisation after the primitive communism of hunter-gatherer societies has been the history of classes, to paraphrase Marx.  Inequality is a thus a product of class society; it is not the cause of it.  Thus it is the capitalist mode of production that has incentive to turn technology toxic, not ‘inequality’ as such.  If you were go through Hughes’ text and replace the words “inequality” or “unequal society” with the word “capitalism”, the picture of causality would be clear.

Making ‘inequality’ the enemy of technical progress smacks of the same ambiguity as found in such books as The Spirit Level, a book that has had wide success. That book argues that there are “pernicious effects that inequality has on societies: eroding trust, increasing anxiety and illness, (and) encouraging excessive consumption”.  But the real contradiction is not between an unequal society and technical progress, but between technical advances to boost the productivity of labour and the profitability of capital.

Hughes covers excellently the damage that capitalism (sorry, unequal societies) do to life expectancy, height, violence, the environment etc, just as the Spirit Level did.  These are chapters not be missed.  Hughes concludes that “inequality is the elephant in the room” that nobody likes to mention (p111).  Actually many refer to rising inequality now (as Thomas Piketty, the modern economist of inequality, put it in the interview: “I believe in capitalism, private property, the market” — but “how can we tackle inequality?” ).  But few (including Piketty) attach its cause to the capitalist mode of production. That is the real elephant in the room.  By delineating inequality, there is a danger that the elephant will be mistaken for a mouse.

Hughes graphically outlines in a series of chapters that, if technology was controlled by public organisation and in common (or as he prefers, following Kropotkin, the thoughtful anarchist, in ‘mutual association’), then huge strides in innovation could be made.  He provides a host of examples for solving global warming, reversing environmental destruction, reducing wasteful production and protecting natural resources, including flora and fauna.

Planning for need is not only necessary; Hughes shows that it now clearly viable with modern computer techniques like big data, artificial intelligence and quantum computers (see chapter 12 for an excellent account of the so-called ‘calculation debate’ of the 1980s that was supposed to show that planning was impossible because of the millions of decisions involved and therefore socialism was infeasible).  Indeed, Hughes reveals that during its brief rule, the socialist government of Salvador Allende in Chile, actually developed Cybersyn, a project that showed the possibility for harnessing digital computing to plan for social need.

In his final chapter, Utopia or Bust, Hughes discusses the key contradiction for the technology of the future. “Automation under capitalism (here the true elephant is mentioned) is less to relieve drudgery than to relieve manufacturers of some of their wage bills and reduce their reliance on skilled workers” (p310).  Automation under capitalism stunts individual ideas and innovation.  And it is also wasteful e.g. building roads rather than public transport and communications (“when you look at the hours a car can save you and the hours spent paying for it.. a worker has to dedicate each year about two months of work”) (p320).  Airplanes can be more ecologically friendly and more comfortable and useful if they just went slower (p322).  Labour saving devices to reduce toil in the home (washing machines) actually have increased the time spent on child care (nearly 30 hours a week for a woman, the same as in 1900! – p324).  Communal developments would save time and toil for housework – and so mainly for women.  Yet, as Hughes says, the “capitalist world seems specifically designed to eliminate communal activity” (p326).

At the end of the book, Hughes asks “dare we demand equality?” and he calls for the ‘banning of inequality’.  But is this the way to pose the issue?  Technology is indeed the handmaiden of the social order controlling it.  Inequality is the result of that social order.  What is needed is the removal of that social order and its replacement by what used to be called socialism (not ‘post-capitalism’ or ‘equality’).  Then technology can flourish for all and inequality itself will fade.  The demand we must dare for is the common ownership and control of technology, not ending the unequal distribution of its fruits.

The Fed takes the risk

This week, the US Federal Reserve raised its benchmark interest rate for 0.5% to 0.75% for just the second time since the financial crisis of 2008, arguing that the American economy was expanding “at a healthy pace”.  The Fed’s monetary committee also indicated that it planned to hike its policy rate at least three times in 2017 on the grounds that economic growth, employment and inflation were picking up and President-elect Trump’s proposed policies of cutting corporate taxes and boosting infrastructure spending could accelerate US economic recovery.  “My colleagues and I are recognizing the considerable progress the economy has made,” said Janet Yellen, the Fed’s chairwoman, “We expect the economy will continue to perform well.”

There is a certain irony in Yellen’s statement given that this time last year, in hiking the policy rate for the first time in nine years, she made a similar declaration of confidence in the economy and then economic growth slowed to a trickle and the Fed postponed any further hikes.

The US economy has expanded on average by only 2% a year since the end of the Great Recession in 2009.  The unemployment rate has dropped to more or less the same level as before global financial crash, but investment and productivity growth has been very weak.

Back last December, I raised the question that, given weak business investment hiking interest rates might push a layer of US companies into difficulty and trigger a new recession or slump.  Indeed, that was why the Fed held off further hikes during this year.

So are things that much better that this risk of rising interest rates triggering a recession is now over? Well, Yellen described the rate increase as “a vote of confidence in the economy.”  And the justification for this comes from somewhat improved figures of real GDP growth in the third quarter of this year, at a 3.2% annual rate. However, the pick-up was all in housing and inventories (building up stocks not sold), while business investment stayed flat.  And on a year-on-year basis, US real GDP was higher by only 1.6%, while business investment contracted by 1.4%.

However, after falling in Q2, corporate profits rose in Q3, up 6.6% compared to Q2 and higher by 2.8% from Q3 2015.  So it could be argued that the US economy is doing better in the second half of 2016 than in the first half, which was dire. House prices have surpassed their pre-recession peak and consumer confidence is at a new high.

US corporate profits August

Globally, corporate profits also picked up in the third quarter of 2016.  A weighted average of five key economies, US, China, Japan, Germany and the UK) saw profits rise by over 5% yoy.  Along with rising business activity indicators in the US and Europe, it seems that the major economies have staged a bit of a recovery in third quarter. But global business investment growth remains weak.

There are two risks that could undermine Yellen’s confident forecast (for the second time.  The first is that rising interest rates will lead to increased costs of servicing corporate and household debt that cannot be funded through extra profits or real incomes in households.  So default rates on debt obligations will rise.

There has been no real reduction in the build-up of private-sector debt in the major economies that took place in the early 2000s and culminated in the global credit crunch of 2007. That accumulated debt took place against a backdrop of favourable borrowing conditions—low interest rates and easy credit. Between 2000 and 2007, the ratio of global private-sector debt to GDP surged from about 140% to 163%, according to the IMF.


Public sector debt mushroomed after the global financial crash to bail out the banks and fund spending on unemployment and other benefits. The average level of public debt to GDP rose from 34% pts to roughly 90% – a post-1945 record.  Combined with private-sector debt, the level of total nonfinancial borrowing to GDP in the advanced capitalist economies is actually higher today than it was in 2007.

In the emerging economies, after the Great Recession the increase in private sector debt has been massive. China is in a league of its own, with a 96%-pt increase in its ratio to 205% of GDP.  Even excluding China, the figures are still big, up 25% pts and at 92% of GDP for emerging economies.  Indeed, the increase in the private debt to GDP ratio in the emerging economies outside China now exceeds what took place in the DM in the 2000s expansion.

Most of this extra debt is the result of corporations in these countries borrowing more to increase investment, but often in unproductive areas like property and finance.  And much of this extra borrowing was done in dollars.  So the Fed’s move to raise the cost of borrowing dollars will feed through these corporate debts.

Moody’s, the US credit monitoring agency, reckons that there is now $7trn of global government debt that will face downgrades for risk of default because of rising costs of financing if the US dollar stays strong and global interest rates start rising during 2017.  That’s 16% of total global public debt.  In 2016 anyway, there were 35 credit downgrades for country debt.

Nevertheless, stock markets in the major economies head towards new highs on the expectation that the major economies are on the road to sustained recovery and that Trump’s policies will stimulate spending and boost corporate profits next year.

I have already put huge question marks against the likelihood that Trump can achieve fast and sustained economic growth in the US with his policies.  And I am not the only doubter.  I have already referred to the views of Deutsche Bank and JP Morgan on likely economic recovery in the US in 2017.

Now huge private equity fund, Bridgwater Associates, is also doubtful about the expected economic recovery.  Its founder, Ray Dalio, reckons that “This is not a normal business cycle; monetary policy will be a lot less effective in the future; investment returns will be very low.”  Echoing the view presented, ad nauseam, on this blog, Dalio identifies a “short-term debt cycle, or business cycle, running every five to ten years but also a “long-term debt cycle, over 50 to 75 years.”  He comments “Most people don’t adequately understand the long-term debt cycle because it comes along so infrequently. But this is the most important force behind what is happening now.”  Dalio reckons that debt growth has outstripped the income growth in the form of profits and interest necessary to service the current levels of debt.  Easy money and low central bank rates cannot counteract the rising costs of debt servicing for long.

Now in 2017, it seems that the floor of interest rates globally, set by the Fed’s policy rate, is set to rise, if the Fed sticks to its plan to hike three more times and again in 2018.  At the same time, oil prices are set to rise, assuming the OPEC oil producers stick to their plan to cut production.  That will increase fuel prices and cut into corporate profits.  And if the dollar stays strong against other major currencies, the servicing of dollar debt globally will jump, putting many corporations into difficulty.


So the relative recovery in global corporate profits and economic activity in the last part of 2016 may not last in 2017.

Trump, trade and technology

US President-elect Donald Trump reckons that the cause of the losses in manufacturing jobs over the last 30 years has been the rigging of trade terms by low labour-cost manufacturing in China and Mexico.  So it is trade and the shifting of production locations by US multi-nationals overseas – in other words, globalisation.

This claim has upset mainstream economists who see ‘free trade’ as a totem of economic theory.  From Ricardo onwards, mainstream economic theory reckons that free trade is beneficial to all by applying the ‘comparative advantages’ that each trading nation has to make in exchanges of commodities.  Such trade is then mutually beneficial.

Actually, this theory is fraught with flaws, as Anwar Shaikh has only recently spelt out in his book, Capitalism: Competition, Conflict, Crises, while mainstream economist Dani Rodrik has pointed out that the so-called ‘Pareto optimum’ of equality of gains and losses cannot be achieved.  Rodrik argues in his book, The Globalization Paradox that democracy, national sovereignty and global economic integration are mutually incompatible.

Keynesian guru Paul Krugman has always been a proponent of ‘free trade’.  Indeed, he got his Nobel prize in economics for a ‘new’ theory of international trade that reckoned, even with tariffs and market imperfections, international trade would be beneficial to all participants.

From this position, Krugman has recently been at pains to argue against the Trump thesis that the loss of American manufacturing jobs is down to ‘nasty foreigners’ with their trading trickery and to American companies taking their factories overseas and selling their goods back into the US.

In a recent short paper and on his blog, Krugman shows that very few US manufacturing jobs would have been saved with different trade policies or by not agreeing to NAFTA, for example.  Manufacturing employment in the US fell from around a quarter of the work force in 1970 to 9% in 2015.  Krugman finds that “trade is less than half the story”.  Absent the US trade deficit, manufacturing may be a fifth bigger than it is. “That wouldn’t make much difference to the long-run downward trend, but looms larger relative to the absolute decline since 2000.”

Another study by Autor et al reckons competition from China led to the loss of 985,000 manufacturing jobs between 1999 and 2011. That’s less than a fifth of the absolute loss of manufacturing jobs over that period and a quite small share of the long-term manufacturing decline.  “So America’s shift away from manufacturing doesn’t have much to do with trade and even less to do with trade policy.”

The biggest reason Trump — or anyone else — can’t bring back home these manufacturing jobs is because they have been lost in large part to the success of efficiency. Manufacturing output in the US was at an all-time high in 2015. Over the past three-and-a-half decades, manufacturers have shed more than seven million jobs while producing more stuff than ever. The Economic Policy Institute (EPI) reported in The Manufacturing Footprint and the Importance of U.S. Manufacturing Jobs that “If you try to understand how so many jobs have disappeared, the answer that you come up with over and over again in the data is that it’s not trade that caused that — it’s primarily technology,”…Eighty percent of lost jobs were not replaced by workers in China, but by machines and automation. That is the first problem if you slap on tariffs. What you discover is that American companies are likely to replace the more expensive workers with machines.”

What these studies reveal is what Marxist economics could have told them many times before.  Under capitalism, increased productivity of labour comes through mechanisation and labour shedding i.e. reducing labour costs.  Marx explained in Capital that this is one of the key features in capitalist accumulation – the capital-bias of technology – something continually ignored by mainstream economics, until now it seems.

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 ( 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.

Marxist economists have already provided empirical evidence for this tendency.  G Carchedi in a recent paper shows that the ‘technical composition’ of capital (the value of machinery and plant relative to the number of workers) in productive sectors has risen in the last 60 years in the US (while profitability has fallen secularly (ARP)) – see ‘OCC’ in the graph below.  My own estimates show that the US organic composition of capital (the value of technology and plant to the value of labour power in wages etc) rose 46% in the last 70 years.


This ‘capital bias’ in technology could also explain the falling labour share and growing inequalities.  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 too much that it causes profitability to decline.  So capitalist accumulation implies a falling share of value to labour over time or what Marx would call a rising rate of exploitation (or surplus value).

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.  But even Krugman now 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.

As he put it a few years ago: “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.  So it’s wrong to assume, as many people on the right seem to, that gains from technology always trickle down to workers; not necessarily.”

So it depends 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 underemployed and through the globalisation of manufacturing.

This is the real reason for American workers falling behind in wages relative to increased productivity and investment in new technology that sheds jobs.  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 – and by the introduction of new technology to replace labour after a major slump in production.

Another study found that the “negative correlation between the (weaker) penetration of collective bargaining agreements and increased wage inequality is strong. This result applies to the relationship between the lowest and highest wages, but also between the median wage and the hi ghest wage. Lower trade union density and lower unemployment also increase wage inequality.” So it was the weakened bargaining power of unions and higher unemployment combined with a marked decrease in redistribution through taxes and transfers that was the main explanation why Americans have fallen behind in income since the 1980s.

In this context, the latest report by the world’s top experts in the field, Thomas Piketty, Emmanuel Saez and Gabriel Zucman on the extreme inequality of incomes in the US, is perfectly explicable.  The trio find that the bottom half of the income distribution in the US has been completely shut off from economic growth since the 1970s. From 1980 to 2014, average national income per adult grew by 61% in the US, yet the average pre-tax income of the bottom 50% of individual income earners stagnated at about $16,000 per adult after adjusting for inflation. In contrast, income skyrocketed at the top of the income distribution, rising 121% for the top 10%, 205% for the top 1% and 636% for the top 0.001%!

In 1980, adults in the top 1% earned on average 27 times more than bottom 50% of adults. Today they earn 81 times more. This ratio of 1 to 81 is similar to the gap between the average income in the United States and the average income in the world’s poorest countries, among them the war-torn Democratic Republic of Congo, Central African Republic, and Burundi. And the increase in income concentration at the top in the US over the past 15 years is due to a boom in capital income i.e. income from dividends, interest and rents, not higher wages.


It’s a tale of two countries. For the 117 million Americans in the bottom half of the income distribution, growth has been non-existent for a generation while at the top of the ladder it has been extraordinarily strong. And this stagnation of national income accruing at the bottom is not due to population aging. Quite the contrary: for the bottom half of the working-age population (adults below 65), income has actually fallen. From 1980 to 2014, for example, none of the growth in per-adult national income went to the bottom 50%, while 32% went to the middle class (defined as adults between the median and the 90th percentile), 68% to the top 10% and 36% to the top 1%. The trio comment: “An economy that fails to deliver growth for half of its people for an entire generation is bound to generate discontent with the status quo and a rejection of establishment politics.”  Indeed.

And because progressive income taxation has been eroded and social benefits cut back, government taxation and transfers have had little redistributive effect on the inequality caused by the market. “There was almost no growth in real (inflation-adjusted) incomes after taxes and transfers for the bottom 50 percent of working-age adults over this period”. As the trio say: “The diverging trends in the distribution of pre-tax income across France and the United States—two advanced economies subject to the same forces of technological progress and globalization—show that working-class incomes are not bound to stagnate in Western countries. In the United States, the stagnation of bottom 50 percent of incomes and the upsurge in the top 1 percent coincided with drastically reduced progressive taxation, widespread deregulation of industries and services, particularly the financial services industry, weakened unions, and an eroding minimum wage.” 

So the loss of US manufacturing jobs, as it has been in other advanced capitalist economies, is not due to nasty foreigners fixing trade deals.  It is due to the inexorable attempt of American capital to reduce its labour costs through mechanisation or through finding new cheap labour areas overseas to produce.  The rising inequality in incomes is a product of ‘capital-bias’ in capitalist accumulation and ‘globalisation’ aimed at counteracting falling profitability in the advanced capitalist economies. But it is also the result of ”neo-liberal’policies designed to hold down wages and boost profit share.  Trump cannot and won’t reverse that with all his bluster because to do so would threaten the profitability of America capital.


Mark Carney, Marx’s scribbles and the lost decade

Mark Carney is the governor of the Bank of England.  Formerly the head of the central Bank of Canada, some years ago he was headhunted to take over at the BoE on a huge salary and expenses.

This week he gave the Roscoe Lecture at Liverpool’s John Moores University, his first speech since the decision of the Brits to vote (narrowly) to leave the European Union.  Carney took the opportunity to offer what his view of the state of global capitalism.  And he does not make it sound good.  speech946

Carney pointed out that since the global financial crash of 2008, average real incomes in Britain have taken the biggest plunge since the 1860s, when “Karl Marx was scribbling in the British Library.”  And “it was the poorest (who) are hit the hardest. During recessions the lower-skilled, lower paid people tend to lose their jobs first.”


However, Carney was at pains to claim that capitalism has worked for people: “global markets and technological progress has lifted more than a billion people out of poverty, while a series of technological advances have fundamentally enriched our lives….. global markets and technological progress has lifted more than a billion people out of poverty, while a series of technological advances have fundamentally enriched our lives  He added “Globally, since 1960, real per capita GDP has risen more than two-and-a-half times, average incomes have begun to converge and life expectancy has increased by nearly two decades.”


What he did not say in this praise of this record of capitalism is that the majority of that one billion lifted out of deep poverty were in China, an economy that eschews ‘free markets’ and ‘globalisation’; and goes for state investment, capital controls and the direct submission of the private sector to the regime.  Life expectancy may have risen due to investment in public services and healthcare.  Capitalism and free markets have played no role in that.  In the ‘free markets’, most of the very poor in other countries remain poor.  Indeed, the policies of the central bankers, the IMF and the World Bank in driving for ‘globalisation’ and ‘free trade’ have made the lot of these poor even worse, not better.

Per capita incomes may have risen (again mainly due to China and to a lesser extent, India, in the equation), but those incomes have not been equally increased.  As Carney admitted in his speech “globalisation is associated with low wages, insecure employment, stateless corporations and striking inequalities.”  In Anglo-Saxon countries, the income share of the top 1% has risen notably since 1980. Today, in the US, the richest 1% of households receive 20% of all income.  Such high income inequalities are dwarfed by staggering wealth inequalities. The proportion of the wealth held by the richest 1% of Americans increased from 25% in 1990 to 40% in 2012. Globally, the share of wealth held by the richest 1% in the world rose from one-third in 2000 to one-half in 2010.  And now “a typical millennial earned £8,000 less during their twenties than their predecessors.”

Carney criticised mainstream economics: “Amongst economists, a belief in free trade is totemic. But, while trade makes countries better off, it does not raise all boats; in the clinical words of the economist, trade is not Pareto optimal. Rather the benefits from trade are unequally spread across individuals and time….. Some workers, however, lose their jobs and the dignity of work, or see their “factor prices” – in plain English, wages – equalised downwards.”  Perhaps Carney had been reading Marx’s scribbles after all – as this was close to scribbler’s view of free trade under capitalism – uneven and combined development.

But if capitalism has been successful over the last 50 years, according to Carney, what about the last ten? To put it mildly, the performance of the advanced economies over the past ten years has consistently disappointed.  …It doesn’t it feel like the good old days, because anxiety about the future has increased, productivity hasn’t recovered and real wages are below where they were a decade ago, something that no-one alive today has experienced before

No wonder, Carney concluded thatthe public is complaining about low wages, insecure employment, stateless corporations and striking inequalities.” He admitted that mainstream economics and policies had failed the majority. “Economists must clearly acknowledge the challenges we face, including the realities of uneven gains from trade and technology”, he said.

Why have things gone so wrong?  Don’t we need to know?  We do, said Carney,  because any doctor knows that the importance of diagnosing the underlying causes of the patient’s symptoms before administering the cure.”  Unfortunately, Carney does not know the cause:  “The underlying reasons for the 16% shortfall of the UK’s productive capacity, relative to trend, are poorly understood.”

But we must try.  Carney listed three priorities: “Economists must clearly acknowledge the challenges we face, including the realities of uneven gains from trade and technology”  “We must grow our economy by rebalancing the mix of monetary policy, fiscal policy and structural reforms.  We need to move towards more inclusive growth where everyone has a stake in globalisation.”  This wish list has as much chance of surviving as the proverbial snowball in the fires of hell.

But no matter, Carney was much more concerned to convince his Liverpool audience that if it had not been for the easy money policies of the Bank under his direction, things would be even worse in the UK – although given the stats he presented, that was hardly convincing.  “Monetary policy has been keeping the patient alive, creating the possibility of a lasting cure through fiscal and structural operations,” he said, adding, “monetary policy isn’t a spectre, but a friendly ghost”.  But then he delivered a health warning about easy money.  It leads to a consumer boom and that never provides sustained economic growth which depends on investment.  “The UK expansion is increasingly consumption-led. The saving rate has fallen towards historic lows and borrowing has resumed. Evidence from the past quarter century across a range of countries suggests episodes of consumption-led growth tends to be both slower and less durable.  This is because consumption growth eventually outpaces earnings growth, increasing debt and making demand more sensitive to changes in employment and income.”  The relative boom in the British economy (ie 2%-plus economic growth) won’t last.”


It was up to governments now to turn things round.  But given that Carney and his bank economists did not know why things had got so bad, he offered no real advice to governments on how to get productivity up, inequality down and real incomes restored.

Next year is the 150th anniversary of the publication of Marx’s Capital Volume One, the product of the ‘scribblings’ that Marx was making in the British Museum in the 1860s.  Perhaps Carney should have read them to see why things are so bad and what to do about it.

The long depression and Marx’s law – a reply to Pete Green

Pete Green has now taken up the cudgels in the debate that Jim Kincaid and I have begun over the causes of regular and recurrent crises in capitalist production and in particular the Great Recession.  He makes a welcome and considered critique of my views, as expressed in my book, The Long Depression and in recent discussions at the Historical Materialism conference in London earlier this month.  I think he raises some new and important points in his critique, which, as he says, will require further debate and research.

Like Pete, I cannot deal with all arguments in this short reply on my blog but I’ll do my best to take up some key ones, but it still makes this post long enough!

Pete starts by saying he is not going to dispute the data on the rate of profit that I have presented, mainly for the US, but also for other economies.  But apparently he “shares Jim Kincaid’s scepticism about reliance on US national income accounts as source for corporate profitability”.  Actually, I am not sure Jim is sceptical of the official data.  Indeed, he has said that I have used the data accurately and as Pete says, “there is no adequate alternative available for those engaged in empirical investigation”.

And that is what the bulk of my research is: engaging in empirical investigation to verify or otherwise particular theories or laws.  In my view, too many Marxist economists have ignored empirical work and concentrated on interpreting (and re-interpreting) Marx’s writings and ‘what he meant’, rather testing his laws of motion of capitalism to see if they best fit the facts.

Luckily, I am not alone in doing empirical investigations – Andrew Kliman has done prodigious analysis, Anwar Shaikh’s new book is a gold mine of empirical studies, G Carchedi has also tested Marx’s law with the evidence.  And there is a host of new young scholars internationally doing such work.  Carchedi and I will be publishing a book of these research projects next year that empirically support Marx’s law of profitability.

But Pete wants to “step back” from any debate over the stats and consider the “theoretical framework” of my book.  He does not think that Marx’s law of the tendency of the rate of profit to fall is “sufficient for an explanation of the cyclical fluctuations that have characterised capitalism”.  Why not?  Well, it seems that, while he does not deny “the logical coherence” of Marx’s law of profitability and its relevance to “whole period since the 1960s”, using the law to explain regular crises or “fluctuations” is “over-reductionist” and “two-dimensional”, especially in reference to the latest crises (ie the Great Recession?).

So Pete reckons that Marx’s law of profitability is logically coherent but irrelevant to an understanding of crises.  It’s ‘overreductionist’ (or maybe just reductionist?) to claim its relevance to crises.  There are more dimensions than two (presumably the tendency and the counter-tendency?), he says.

This does not seem the way to approach the relevance of Marx’s law to crises.  Pete says that the law is not “sufficient” to explain crises.  But does he think it “necessary”, which is not the same thing as sufficient?  If he does; how does it fit in?  You see, I think we must start with Marx’s approach, which was to abstract from reality the underlying essential (necessary) laws of capitalist motion and then add back concrete features of capitalism to reach the immediate.  In only that way can we identify the causes of crises under capitalism.  In that sense, Marx’s law can be seen as the underlying or ‘ultimate’ cause of recurrent crises, which can be triggered by ‘proximate’ events i.e. (oil price crisis, stock market bubble, real estate crash etc).  Then we have ‘sufficient’ causes.  For more on this, see my paper, Presentation to the Third seminar of the FI on the economic crisis

This approach thus makes it transparent that a financial crash or credit crisis is not the essence of crises in capitalism, but their surface manifestation.  Jim Kincaid has done a new post in which he outlines what Marx said about the 1847 crisis in Britain making the point that the falling rate of profit plays no role in Marx’s account”, considering only the financial speculation and credit crunches.  Jim claims that for Marx, “The fall in the rate of profit of these businesses is only a transmission mechanism.  What matters are the causes of bankruptcy and business collapse.

At this point, I am reminded of what Marx said a little later in 1858 during the first great international crisis of the 19th century: “What are the social circumstances reproducing, almost regularly, these seasons of general self-delusion, of over-speculation and fictitious credit?  If they were once traced out, we should arrive at a very plain alternative.  Either they may be controlled by society, or they are inherent in the present system of production.  In the first case, society may avert crises; in the second, so long as the system lasts, they must be borne with, like the natural changes of the seasons”.   Dispatches for the New York Tribune, Penguin p201.

As Marx puts it, ‘over-speculation and fictitious credit’ arise from regular crises in the capitalist system of production.  They cannot be eradicated by social action unless the mode of production is replaced.  It is not possible to separate crises in the financial sector from what is happening in the production sector.

Pete refers to the debate between Marxist economists on the cause of crises in the 1920s and 1930s, as described in Richard Day’s excellent book, The crisis and the crash.  As Pete says, the debate was between those who explained cyclical fluctuations as due to disproportionality between departments of production and those who reckoned it was due to the ‘limited consumption of the masses’, ie underconsumption.  As Pete says, “Marx’s tendency for the rate of profit to fall, as a function of a rising organic composition of capital, plays no role at all in these debates.”  But that does that mean the law is irrelevant?  It was no accident that the law was ignored.  Most leading Marxist revolutionaries had not read or seen Volume 3 of Capital where Marx’s “most important law of political economy” is expounded.  And if they had, they were guided away from Marx’s law as a cause of crises by the likes of Kautsky, Hilferding and Luxemburg.

One Marxist economist who had read and digested Volume 3 was Henryk Grossman.  As a result, he was able to present a coherent theory of capitalist crises based on the law, showing the connection between the tendency of the rate of profit to fall and the countertendencies; the relation between the rate of profit and the mass of profit; and thus the relation between profit and crises.  But his thesis, as Rick Kuhn says in his excellent biography of Grossman, was “an economic theory without a political home”.  Grossman also shows in his work, The law of accumulation being also a theory of crises, that those who followed an ‘anarchy of production’ theory of crises could not really provide a coherent argument for regular and recurring slumps or breakdowns inherent in capitalist production.  Indeed, just remove competition and allow monopoly to regulate and the anarchy can be controlled, suggested Hilferding or Kautsky.

Pete brings to our attention the work of Pavel Maksakovsky at that time.  As Pete says, he provides us with the most sophisticated version of the anarchy of production theory of crises.  As usual, Maksakovsky refers to Marx’s law of profitability, but only to dismiss it as irrelevant to the cycles of boom and slump and instead, like those in debate of the 1920s, focuses on Volume Two of Capital with its reproduction schema.  Maksakovksy outlines his theory succinctly in pp136-9 of his book.  This is a disproportion theory but with the addition of trying to show that the disproportion between the sectors of means of production gets ‘periodically detached from consumption’.  Interestingly, Maksakovsky, correctly in my view, dismisses the idea that excessive credit and financial market busts are the cause of crises (p139), just as Marx did in 1858, but now revived by Jim.  They are only at the ‘superstructural level’ of capitalist society and can never eliminate the cyclical developments caused by the ‘anarchy of production’.  This is worth remembering in the light of the arguments now being presented by many modern Marxist economists that finance is the real cause of crises now and for the Great Recession (see below).

Does the anarchy of production or disproportion of sectors of reproduction hold up to scrutiny as an alternate theory of crises?  I don’t think so.  Grossman demolishes it in his book and in a little known essay on Marx’s reproduction schema (recently edited by Rick Kuhn).  Grossman shows that Marx’s schema do not show a “widening and deepening contradiction” (Maksakovsky) between production and consumption under capitalism and so cannot be the Marxist explanation of recurrent crises.  By assuming in the reproduction schema, accumulation and exchange between the sectors take place at the level of labour values, Maksakovsky makes the same mistake as Luxemburg and others and so finds ‘disproportion’.  But Marx’s reproduction schema are at the level of prices of production after the process of competition.  Rates of profit are averaged.  At that level, there is no inherent disproportion from the reproduction schema.

To deny disproportion as the cause of capitalist crises is not to support Say’s law (or ‘fallacy’, to be more exact) that ‘supply creates its own demand’ –as Pete suggests that I do.  Marx was fierce in his dismissal of Say’s nonsense.  The very process of exchange on the market creates the ‘possibility of crisis’.  But that does not explain the periodic and recurrent crises in capitalist production and investment.

Pete does not like the “clever” flow chart in my book that shows the different possible theories of crisis.  He says I want the readers to follow me down to Marx’s law of profitability, but he has three objections to that path.  Pete admits that in the circuit of capital “production is primary” but then goes onto say that production and circulation are in a “contradictory unity” in capitalism.  So is production not ‘primary’ after all?  Indeed, he refers us to the thesis of David Harvey who argues that capitalism has various ‘bottleneck points’ in the circuit of capital and crises can come from any one of them, not just or even mainly in the ‘primary’ production of surplus value and the accumulation of capital, but also in the ‘secondary’ circulation of capital through credit finance, households and the role of government.  So Pete says we need to have a theory of crisis that “embraces the whole circuit of capital” not just in production.

That’s fine but does this mean that the ‘bottlenecks’ in the circulation and distribution of capital are on the same level of causality as breakdowns in the ‘primary’ production process?  The Marxist answer, in my opinion, is no.  As I said before, in my view, and I think in Marx’s, circulation and distribution are at a lower plane of causal abstraction, or if you like closer to the proximate than the ultimate or underlying causes.  A collapse in the stock market or in real estate prices will not lead to a collapse in production unless there are already serious difficulties in the latter.  There have been many stock market collapses without a slump in production and employment (1987), but not vice versa.

Indeed, I agree with what Jim says summing up his post on the 1847 crisis mentioned above that The rate of profit and the forces which determine it should remain central in our analysis.  Marx’s own account of the 1847 crisis would surely have been strengthened by attention to profitability and its conflicting trends. We need to trace the many ways in which the law of value asserts itself – often in displaced and distorted forms.  But also recognise, and give due weight to, the role of contingent factors in any crisis we examine.”

Pete also wants to drag in the Keynesian “lack of effective demand” as one of the multi-dimensional causes of crises.  I have argued in many places that this ‘cause’ is no such thing.  Pete agrees that aggregate demand is endogenous to investment and profit; “Keynes himself would have agreed”.  Yes, but for the wrong reasons.  The Keynesian-Kalecki thesis puts ‘effective demand’ i.e. investment demand, as the causal factor in the movement of profits.  But Marxist economics says profits call the tune, not investment.  I and other Marxist scholars have shown that the empirical evidence for the Keynesian ‘multiplier’ (a fall in spending leads to a slump) is very weak compared to the Marxist multiplier (a fall in profits leads to a slump).

Pete says I should not ‘conflate’ the underconsumption thesis with the overproduction thesis as the cause of crises.  But then says that the “problem is a relative lack of productive consumption”.  We may be bandying with words here, but that sounds like an underconsumption thesis to me.  I presume this to refer to an excess of investment goods produced over the capitalists’ demand for them.  But crises do not happen because of a lack of “productive consumption”, but because of insufficient profits brought on by falling profitability over time.  And this can be proved empirically.

Andrew Kliman shows in his book, The failure of capitalist production (Chapter 8) that investment growth is always outstripping consumption but it does not lead to recurrent crises, as Maksakovsky ansd Sweezy argued.  The cyclical crisis of boom and slump does not flow from excessive investment over consumption but from insufficient profit from investment.  I await an empirical justification of the Maksakovksy thesis.

Pete says the proponents of Marx’s law of profitability as the underlying and ultimate causes of recurrent and regular crises are neglecting the ‘multi-dimensional’ and ‘complex’ nature of capitalism.  I ignore the uneven and combined development of the world economy as expressed in the global imbalances so “astutely” identified by Keynesian economic commentator, Martin Wolf (or for that matter, I could add Yanis Varoufakis in his book, The Global Minatour).  I also ignore the counteracting factors of globalisation in driving up the rate of profit.  I also ignore the role of finance and growth of financial profits in total corporate profits.

The more I go down these points by Pete, the more I feel that a series of straw men have been erected for my views to be knocked down by him.  These layers of ‘multi-dimension’ have not been ignored by me.  The counteracting factors explain the up and down waves of the profitability cycle in capitalism.  In both my books, I have spent some time looking at these long waves of profitability.  And I discuss the impact of uneven and combine development of capital in the context of the euro crisis in my book.

Pete says that “Unlike some critics,  I am not rejecting the relevance of this or the equally significant role of counter-tendencies raising profitability over the long-term. Indeed I would endorse to a degree Michael’s emphasis on longer waves in profitability but link them more closely to Kondratiev waves”.  But I have done just that in both books – trying to relate these waves to Kondratiev’s!

Pete is right to say that Marx’s law of profitability appears to have different cycles than the so-called ‘business’ or Juglar cycles of boom and slump.  I could not agree more.  In my first book, The Great Recession, I spent much time trying to analyse the connections between the various cycles in ‘capital in motion’ and try to link them together.  I did the same in The Long Depression in a whole chapter.

Pete says that “What can be shown in my view is that when the underlying rate of profit is falling, the business cycle fluctuations are more severe as is evident from the late 1960s to the early 1980s, and when the underlying rate is rising, the amplitude or the severity of recessions is reduced as in the 1990s and early 2000s.”  That almost word for word what I have said in the past.

Pete is keen to tell us that what is new is the “unprecedented rise in the share of financial profits in total corporate profits”. Again this is dealt with in both my books.  Indeed, I try to integrate this new development into an analysis of unproductive investment and fictitious capital as one of the new ‘counteracting factors’ to the law as such.  I even try to measure its impact (see my paper, Debt matters).

Pete finishes by wanting to defend or promote again the Keynesian idea of “a lack of effective demand” as the cause of crises.  He rejects my claim that the Keynesian position is a tautology (‘it rains because it rains’) of a slump not a cause. In retort, he suggests that Marx’s law of profitability is as remote a cause of crises as saying storms and hurricanes are caused by global warming; only worse, the law of profitability as a proven cause is more questionable than man-made global warming.  Pete is not a global warming sceptic but he is falling profitability one.

Actually, his analogy has some merit.  Global warming is an underlying cause of increased storms, floods and extreme weather.  The science of correlations, causation and forecasts strongly supports this.  Similarly, I and others argue that capitalist crises have an underlying cause in the inability of capitalists to stop the overall rate of profit on capital falling as they accumulate and try to increase profits.  This dialectical contradiction also has increasing empirical backing with correlations, causations and forecasts.  By the way, Marx used the analogy of the law of gravity and the movement of objects to place his law of profitability in crises.

I’m afraid the thesis of Maksakovsky has not changed my view that all other theories of crises in capitalism: underconsumption, overproduction, disproportion, bottlenecks in circulation, global imbalances, financial instability, are either wrong or at a lower plane of abstraction, so that, on their own, they do not explain crises.  As Alan Freeman says, Marx’s law remains “the only credible competitor left in the contest to explain what is going wrong with capitalism”.

The long depression in Italy

Italy has a referendum this coming weekend.  Italy’s Blairite (Clintonesque) prime minister Matteo Renzi of the ruling the centre-left Democrats called a referendum, British Cameron-style, to ‘reform’ the electoral constitution.  He wants to reduce the size of the upper house of parliament, the Senate, from over 350 senators to just 100 and also have them come from the regions and cities, namely the elected mayors etc.  Most important, he wants to end the ability of the Senate to send back policies or measures passed by the lower house assembly (elected by popular vote in proportional representation – i.e. seats according to the share of the vote).  Thus, the Senate could no longer go on with ‘ping-ponging’ tactics back and forth with the lower assembly.

Renzi has staked his political reputation and his position as PM on winning this vote, like David Cameron did in the UK over the Brexit referendum.  And, according to the opinion polls, he looks as though he is heading for the same defeat as Cameron, throwing another major capitalist state into confusion, uncertainty and paralysis.

But it is all relative – after all, Italian politics and the economy have been in a state of paralysis for decades, with the situation only worsening since the end of the Great Recession.  Italy is now in a Long Depression that it seems unable to escape from.

Italy GDP

The immediate problem is Italy’s banks.  Europe’s banks currently hold €1trn of what are called ‘non-performing loans’, loans that the borrowers are no longer paying interest on and could be about to default on.  Of that €1trn, around one-third is held by Italy’s banks.  These bad debts are like a millstone around the necks of Italy’s finance sector.  The myriad of small Italian regional and large national banks have been lending to small businesses and property companies.  But thousands of these small companies are bust and cannot pay back their debts as the economy stagnates.

As I said in my book, The Long Depression, (Chapter 9) in some ways, Italy is in the most dire position of the top seven capitalist economies.  Italian capital was in the doldrums before the Great Recession.  Profitability has been falling since 2000 and is now down 30% since 2004.  Net investment has dried up and productivity of labour is not just growing slowly, as it is in other major economies, it is contracting outright.  Italy cannot recover because the Long Depression in Europe continues.

Italy ROP

And as a result, its banks are close to bankruptcy.  Banking analysts reckon that up to eight banks, led by Italy’s third largest and oldest, the infamous Monte Pachi, risk failing if Renzi loses the referendum.  That’s because potential investors in these banks, badly needed to recapitalise them if they write off these huge bad debts, won’t cough up.

I made some simple estimates of the likely losses that the Italian banks face (based on the Bank of Italy’s recent financial review).  The banks have lent up to now €2trn to Italians businesses and households.  About €330bn of these loans are ‘bad’ (i.e. won’t be paid back).  That’s about 20% of Italy’s GDP.  The banks have built up reserves to cover these potential losses of about €150bn and they could expect to sell off some of assets of bust businesses over time.  Even so, there would still be a potential loss of about €100bn on the banks’ books if they grasped the nettle and ‘wrote off’ these bad loans.  That would completely wipe out the value of the shares of the investors in many of these banks.  For example, the hit to Monte Paschi would be nine times more than the bank is worth on the stock market right now.  And Italy’s largest, Unicredit, which is supposed to helping the other smaller bust banks like Banco Veneto, would also be wiped out.  Indeed, Unicredit wants to raise €13bn for itself to shore it up.

I reckon that a bailout of the banks would cost at least €40bn, just to put the larger banks back on their feet.  Where is such a bailout to come from?  The Renzi government set up a special fund called Atlante, which was funded by the other larger banks, with a little from the state savings bank.  This raised just €4bn, most of which has already been spent on Monte Paschi to no avail.  But that is not the worst of it.  Under the new EU banking bailout rules, insisted on by Germany, state money cannot be used to bail out the banks.  The bank shareholders and bond holders must take the hit – at least first.

That sounds okay, you might say.  Let the bank shareholders pay.  But here is the rub.  The Italian banks have been engaged in crude mis-selling to all their customers with their savings.  Customers were encouraged to ‘save’ by buying the bank’s own bonds – in other words lending to the bank itself.  So hundreds of thousands of older (not so wealthy) people would now lose all their savings if the banks write off their bad debts and ‘recapitalise’ by writing down their own borrowings (bonds to zero).  This would be political dynamite, apart from causing misery to hundreds of thousands – and it has already happened to ‘savers’ with Banco Veneto and Monte Paschi.

Renzi has been pressing the Germans and EU leaders to relax the rules and allow state funds (ideally European ‘stability’ funds, which are available) to bail out his banks.  But the Germans are stubbornly holding to the rules, particularly as bailing out the Italians, after the Greeks, is anathema in Germany and fuel to fire to the Eurosceptics in the upcoming German election in 2017.

So if the vote goes against Renzi on Sunday, international and Italian investors are going to be very reluctant to stomp up funds to Italian banks when they fear the Italian government will fall and possibly be replaced in an early general election by the populist Five Star alliance, which has already won mayor’s positions in Rome and Turin and is leading in the opinion polls.  Could there be a ‘populist’ leading Italy out of control of the elite, and this time not Berlusconi?  At best, there will be a government unable to act through parliament to implement ‘reforms’ in the interest of capital, namely reducing labour rights; more privatisation and government spending cuts.

It’s possible that Renzi will win the vote against all the expectations as ‘no’ voters don’t bother to turn out.  Even if he does, the problem of the banks won’t go away.  And the problem of the banks is merely a symptom of the failure of Italian capitalism and the paralysis of its political elite.  Italy remains deep in depression and we have not even had a new slump yet.

Top 1% of adults own 51% of the world’s wealth; top 10% own 89%; and bottom 50% own only 1%.

The top 1% of the adult wealth holders in the world own 51% of all global wealth, while the bottom half of adults own only 1%.  Indeed, the top 10% of adults own 89% of all the world’s wealth!  This is the new figure reached for 2016 by the annual Credit Suisse global wealth report.  Every year, Credit Suisse presents this report, authored by Professor Tony Shorrocks, James Davies and Rodrigo Lluberas, who used to do it for the UN.  I report on the results each year and it is usually the one of the most popular posts I write.

The last time that I discussed the Credit Suisse results, the top 1% had 48% of global wealth.  So, in the last year and a half, global inequality on this measure has risen yet again.   The shares of the top 1% and top 10% in world wealth fell between 2000 and 2007: for instance, the share of the top percentile declined from 50% to 46%. However, the trend reversed after the financial crisis and the top shares have returned to the levels observed at the start of the century.

The Credit Suisse researchers reckon these changes mainly reflect the relative importance of financial assets in the household portfolio, which have risen in value since 2008, pushing up the wealth of many of the richest countries, and of many of the richest people, around the world. Although the share of financial assets fell this year, the shares of the top wealth groups continued to edge upwards.  At the other end of the global pyramid of wealth, the bottom half of adults collectively own less than 1% of total wealth.


The main reason for this huge inequality is that there are so many poor (in wealth) people in the world.  You see, it does not take that much to get into the top 1% of wealth holders.  Once debts have been subtracted, a person needs only $3,650 to be among the wealthiest half of the world’s citizens. However, about $77,000 is required to be a member of the top 10% of global wealth holders and $798,000 to belong to the top 1%.  So if you own a home in any major city in the rich North on your own and without a mortgage, you are part of the top 1%.  Do you feel rich if you do?  This just shows how poor the vast majority of people in the world are: with no property, no cash and certainly no stocks and bonds!

The research shows that 3.5 billion individuals – 73% of all adults in the world – have wealth below $10,000 in 2016. A further 900 million adults (19% of the global population) fall in the $10,000–100,000 range.   The poor in wealth are concentrated in India and Africa and the poorer Asian nations, with 73% of those in the bottom wealth holders.  But there are also significant numbers of people who are wealth poor by global standards in North America and Europe, with 9% of North Americans, most with negative net worth, in the global bottom quintile and 34% of Europeans in the global bottom half.  These people not only have no wealth, they are in debt.

And who is getting better off?  Well, it is not Indians.  India has just 3.1% of ‘middle-class’ people globally (wealth of $10-100k) and that share has hardly changed.  In contrast, China accounts for a huge 33% of middle wealth people, ten times that of India – and that proportion has doubled since 2000.  What this tells you is that China’s unprecedented economic expansion has taken hundreds of millions out of poverty, even if inequality of wealth has risen.

Indeed, the number of millionaires, which fell in 2008, showed a fast recovery after the financial crisis and is now more than double its 2000 figure.  There are now 32.9m millionaires globally i.e. adults with more than $1m in property or savings after debt.   Indeed, there are only 140,000 people in the whole world who have more than $50m in wealth.  And there are now over 2000 billionaires – these are the people that really own the world.


Assuming no change in global wealth inequality, another 945 billionaires are expected to appear in the next five years, raising the total number of billionaires to nearly 3,000. More than 300 of the new billionaires will be from North America. China is projected to add more billionaires than all of Europe combined, pushing the total from China above 420.

Credit Suisse estimates that total global wealth is now $334trn, or about four times annual world GDP.  After the turn of the century, there was at first a rapid rise in global wealth, with the fastest growth in China, India, and other emerging economies, which accounted for 25% of the rise in wealth, although they owned only 12% of world wealth in the year 2000. Global wealth declined in 2008, but has trended slowly upwards since, at a significantly lower rate than before the financial crisis. In fact, wealth has fallen in dollar terms in all regions other than North America, Asia-Pacific, and China since 2010. On a per-adult basis, wealth has barely grown at all and median wealth has fallen each year since 2010.  The average adult is getting poorer.

In the past 12 months, global wealth has risen by 1.4% and has barely kept pace with population growth. As a result, in 2016, mean wealth per adult was unchanged for the first time since 2008, at approximately 52,800 dollars.  So the world’s population as a whole has not got wealthier in the last year and a half, while inequality has risen.

For more on inequality of wealth and income and what it means, see my Essays on Inequality.



A Trump boom?

The US stock market continues to jump and has now reached a record high.


Finance capital is getting very positive about Trumponomics with its plans for cutting taxes (both corporate and personal), reducing the regulation of the banks and implementing range of infrastructure projects to create jobs and boost investment.  But even assuming all this would happen under a Trump presidency, will it really get the US economy out of its depressingly slow crawl?  In my last post, I doubted it.  Now JP Morgan economists have taken a similar sceptical line.

They reckon Trump’s agenda will likely yield little impact on US employment and inflation in the next two years, while tax cuts will boost growth by only a modest 0.4 percentage points by the end of 2018 (i.e. over two years) at most.

JP Morgan thinks that Trump will introduce tax cuts worth around $200 billion per year, evenly split between personal and corporate taxes.  Interestingly, they agree with me that the so-called Keynesian ‘multiplier’ (how much rise in real GDP growth from tax cuts) is low: just 0.6 for personal taxes and 0.4 for corporate taxes — meaning for every $1 in tax breaks received by individuals and by businesses, that will likely boost aggregate demand to the tune of 60 cents and 40 cents in a given fiscal year, respectively.


As a result, JPMorgan reckons US economic growth will hardly pick up at all from its current 2% a year average and will be nowhere near the 4% annual that Trump claims he can get.  I would argue that faster growth would depend not on more spending in the shops or more house purchases but on higher business investment and that is what is missing from the equation.

Part of the Trump plan (again I hasten to add if it happens) is to cut the tax rate for companies that hold huge cash reserves overseas if they return these funds to invest at home.  Unlike other developed nations, the US taxes corporate income globally, but it allows companies to defer paying tax on offshore earnings until they decide to repatriate that income. As a result, US companies have avoided U.S. taxes by stashing roughly $2.6trn offshore, a figure cited by Congress’s Joint Committee on Taxation. The top five in order of overseas cash holdings as of Sept. 30, are Apple ($216 billion), Microsoft ($111 Billion), Cisco ($60 billion), Oracle Corp. ($51 billion) and Alphabet Inc. ($48 billion).


Such an idea was tried back in 2004 under George Bush.  But the result was not a rise in productive investment but a new bout of financial speculation.  Companies got a tax ‘amnesty’ but used the cash they brought home on buying back their own shares or pay out dividends to shareholders, driving up the stock price and then borrowing on the enhanced ‘market value’ of the company at very low rates.  In 2004, when US firms brought back $300bn in cash, S&P 500 buybacks rose by 84%.

Goldman Sachs economists reckon that this will happen again with the Trump plan.  Indeed GS reckon that next year could see buybacks take the largest share of company profits for 20 years.  They estimate that $150bn (or 20 percent of total buybacks) will be driven by repatriated overseas cash. They predict buybacks 30 percent higher than last year, compared to just 5 percent higher without the repatriation impact, while productive investment’s share will be little changed.

Asked what he would do with repatriated cash should the Trump administration slash taxes on foreign profits, Cisco Systems Inc. Chief Executive Officer Chuck Robbins said “We do have various scenarios in terms of what we’d do but you can assume we’ll focus on the obvious ones — buy-backs, dividends and M&A activities.”


Now it is argued by some that the hoard of overseas cash shows that the problem American capital has is not that its profitability is too low.  On the contrary, it is awash with profits (and profits not counted in the official stats).  But here is an interesting observation by Morgan Stanley economists.  Of the $2.6trn cash held abroad by American companies, only 40%, or roughly $1 trillion, is available in the form of cash and marketable securities. The other $1.5 trillion has been reinvested to support foreign operations and exists in the form of other operating assets, such as inventory, property, equipment, intangibles and goodwill.  So it has been invested not held in cash after all.  And the cash is not so awash.

It’s also highly unlikely that companies with factories overseas will shift meaningful production to the US. After all, labour remains significantly cheaper in nations like China. Hourly compensation costs were $36.49 per employee in the US in 2013, according to The Conference Board. The comparable cost in China was just $4.12 that year (the most recent figure), even after having increased more than six-fold over the preceding ten years.

Besides, many companies that do still make products in the US are automating production. Consider Intel Corp. The chipmaker has giant fabrication plants in Oregon, Arizona and New Mexico that employ just a handful of people to keep the machines running. Nothing the Trump administration does will stop robots from taking over large swathes of manufacturing in the long run.

Another part of Trumponomics is to implement an infrastructure program of building roads and communications.  His plan to fund this from private money in return for ownership and revenues from the projects.  This has made Keynesian economic guru, Paul Krugman apoplectic, and rightly so.

As Krugman explains “imagine a private consortium building a toll road for $1 billion. Under the Trump plan, the consortium might borrow $800 billion while putting up $200 million in equity — but it would get a tax credit of 82 percent of that sum, so that its actual outlays would only be $36 million. And any future revenue from tolls would go to the people who put up that $36 million. Crucially, it’s not a plan to borrow $1 trillion and spend it on much-needed projects — which would be the straightforward, obvious thing to do.  Instead “If the government builds it, it ends up paying interest but gets the future revenue from the tolls. But if it turns the project over to private investors, it avoids the interest cost — but also loses the future toll revenue. The government’s future cash flow is no better than it would have been if it borrowed directly, and worse if it strikes a bad deal, say because the investors have political connections.”

Second, Krugman goes on, “how is this kind of scheme supposed to finance investment that doesn’t produce a revenue stream? Toll roads are not the main thing we need right now; what about sewage systems, making up for deferred maintenance, and so on?  Third, how much of the investment thus financed would actually be investment that wouldn’t have taken place anyway? That is, how much “additionality” is there?”

Suppose that there’s a planned tunnel, which is clearly going to be built; but now it’s renamed the Trump Tunnel, the building and financing are carried out by private firms, and the future tolls and/or rent paid by the government go to those private interests. In that case we haven’t promoted investment at all, we’ve just in effect privatized a public asset — and given the buyers 82 percent of the purchase price in the form of a tax credit.”

So the Trump plans will be ineffective in getting US economic growth rates up, in delivering more jobs, real incomes and better transport; but it will boost financial markets and a speculative boom.

Testing Trumponomics

Before Donald Trump was elected, stock markets went down every time he improved in the public opinion polls.  Finance capital did not want him to win.  But since his surprise election, stock markets have not slumped.  On the contrary, they have risen substantially along with a strengthening dollar.  It seems that ‘the Donald’ could be a good thing for Capital after all.

Much of this optimism will turn out to be wishful thinking.  But wishful thinking can work the markets for a while.  The thinking is based on the policies that Trump is proposing: in particular, tax cuts for the corporate sector and personal income tax cuts that will benefit the top 1% of income earners the most.  Also, he claims that he will spend up to $1trn on new infrastructure and investment projects around the country and deregulate the banks and reduce labour rights (what’s left of them).

The stimulus measures are music to the ears of Keynesian economics, despite the general distaste that the top Keynesian gurus have had for the attitudes and rants of ‘the Donald’.  Indeed, if these policies are implemented over the next year or so, Trumponomics will be the next test of the Keynesian solution for the world economy to get out of this Long Depression.  Abenomics in Japan, following similar policies of public spending, tax cuts and quantitative easing, has miserably failed.  Japan’s GDP growth has hardly moved, while wage incomes and prices remain transfixed.


But now some Keynesians are applauding Trump’s approach as ‘a break from neoliberalism’.  The great historian and biographer of Keynes, Robert Skidelsky tells us that “Trump has also promised an $800bn-$1tn programme of infrastructure investment, to be financed by bonds, as well as a massive corporation tax cut, both aimed at creating 25m new jobs and boosting growth. This, together with a pledge to maintain welfare entitlements, amounts to a modern form of Keynesian fiscal policy”.  So Skidelsky goes on: “As Trump moves from populism to policy, liberals should not turn away in disgust and despair, but rather engage with Trumpism’s positive potential. His proposals need to be interrogated and refined, not dismissed as ignorant ravings.”  Well, liberals of the Keynesian persuasion may want to ‘engage’ with Trump and adopt Trumponomics, but those who want to improve the lot of Labour, the majority not the top 1%, will take a  different view.

Indeed, let’s look at Trumponomics.  Apparently, Skidelksy thinks that cutting corporation tax will create new jobs and raise growth.  Well, there is no evidence that previous cuts in corporation tax have done so anywhere in the major economies.  Corporate tax rates were slashed during the neoliberal period and yet economic growth has floundered.  What has happened is a rise in the share going to the profits of capital at labour’s expense and a rise in unproductive financial speculation. Officially, the US has a 35% marginal tax rate on corporations but after various exemptions, it is effectively only 23%, among the lowest in the world.


Trump’s infrastructure plan is badly needed.  In my blog, I have often shown the terrible state of the public services and communications in the US.  The average age of America’s fixed assets is 22.8 years — the oldest in data back to 1925.   Infrastructure spending is at 30-year lows and bridges, roads and railways are crumbling before our eyes. According to the 2013 report card by the American Society of Civil Engineers, the US has serious infrastructure needs of more than $3.4 trillion through 2020, including $1.7 trillion for roads, bridges and transit; $736 billion for electricity and power grids; $391 billion for schools; $134 billion for airports; and $131 billion for waterways and related projects.  But federal investment in infrastructure has dropped by half during the past three decades, from 1% to 0.5% of GDP.

Undoubtedly, public investment in infrastructure would help the US economy and raise growth a little – Goldman Sachs reckons by 0.2% pts a year.  But Trump’s proposal of $1trn spending over four years is a fake.  Most of this would not be public investment at all.  The funds would come from private sources which would get incentives to provide money: the big construction companies and developers (like Trump Inc itself) will be offered tax breaks and also the right to own the bridges, roads, etc built with toll charges to the users of these.  Direct public spending and construction will be limited.

Moreover, as I have argued in many posts, there is little evidence that Keynesian stimulus programmes work to deliver jobs and growth. Skidelsky talks about the Roosevelt era of the 1930s.  Actually, very few permanent or new jobs were created under Roosevelt.  The unemployment rate stayed right up to the start of the war.  As Paul Krugman, the American Keynesian guru, pointed out in his book, End Depression now, it took the war to deliver full employment and economic recovery.

During the period of ‘austerity’, from 2009, when governments tried to run budget surpluses and wants to cut public debt after the Great Recession – a period we are still in –  we were told by Keynesians that the ‘multiplier’ of austerity was huge (i.e. growth was being reduced drastically by more than one-to-one by cutting budget deficits or government spending).  Well, again in previous posts, I have shown that this ‘strong multiplier’ is seriously open to question.  Indeed, there is little correlation between reducing or raising government deficits or spending and growth since 2009.  The best correlation with growth is with profits, not government spending.

Recently, Nora Traum of North Carolina State University presented a paper titled Clearing Up the Fiscal Multiplier Morass.  She found that “different assumptions create different multipliers”.  She asked nine modelers, using three different kinds of models, to predict the effect on growth of three different tax reform proposals. For one reform, predictions on growth varied from –4.2 percent to 16.4 percent in the short run, and from 1.7 percent to 7.5 percent in the long run.

Recent research has shown that the best news for capital is cutting government spending rather than raising taxes to apply austerity.  Reducing government spending gives more room for private capital than raising taxes like corporate taxes, which is much more damaging to capital and thus to growth.  If we are now to expect fiscal expansion not austerity from Trump (we shall see), then capital will like the tax cut but will not want government spending (except for those developers which get the contracts) especially if it directly interferes or replaces private investment.  Such was the point against Keynesian stimulus made by post-Keynesian Michal Kalecki himself.

Marxist economics explains why.  What really drives investment and in modern capitalist economies, where private capital investment dominates, is the profitability of projects.  Private investment has failed to deliver because the profitability is too low, but even so the public sector must not interfere.


That’s the difference between Trump’s plan and that of the Chinese government in its massive infrastructure and urbanisation investment since 2009.  China has spent about $11 trillion on infrastructure in the last decade — more than 10 times what Trump is proposing.  This public investment, bankrolled by state banks and carried out by state companies, has weakened the private sector’s growth in China.  But as the Chinese state controls the economy, not domestic or foreign big business (much to the chagrin of the World Bank), such investment can go ahead and deliver 6-7% annual real growth during this Long Depression.


So the likelihood that Trumponomics will work and take economic growth up to 4% a year, as Trump claims, is very low.  It is ironic that when Bernie Sanders’ advisers suggested that a program similar to Trump’s be adopted and would achieve 4% or more real GDP growth, mainstream economists (romer-and-romer-evaluation-of-friedman1), jumped all over them, saying it was a pipe dream – correctly, in my view.  But now Trump advocates it, financial markets and Keynesians find it attractive and even possible.

Like Abenomics, Trumponomics is really a combination of Keynesianism and neoliberalism. The new spending and tax cuts are to be paid for, apparently, by more deregulation of markets and labour conditions to boost profits.   This is supposed to boost the growth rate in a ‘dynamic model’, or what used to be called ‘trickle-down economics’, where the rich get tax cuts and spend it on the goods and services so that the rest of us get some more income and jobs.  The main incentive according to Trump’s own economic expert is not from reductions in the personal or corporate tax rate, but from allowing businesses to write off their investments immediately instead of over time.

What Skidelsky ignores in his paeon of praise for Trump’s policies is the hallmark of Trumponomics: trade protectionism and restrictions on immigration.  These policies are much more likely to be imposed than his Keynesian-style stimulus.  Trump plans to drop TTP (the regional trade deal with Japan and Asia) and TTIP (with Europe) and ‘renegotiate’ NAFTA, the regional trade pact with Mexico and Canada.  The aim is to ‘protect’ American jobs and end cheap Mexican labour.

As the Donald said last March: “I’m going to get Apple to start making their computers and their iPhones on our land, not in China.”  And he wants to impose a 45% tariff on Chinese imports.  It’s been estimated this could drag down China’s GDP by 4.8% and Chinese exports to the US by 87% in three years, according to Daiwa Capital Markets.  Even if Apple finds enough workers to assemble in the US, the cost of making an Apple iPhone 7 could increase $30-40, estimates Jason Dedrick, a professor at the School of Information Studies at Syracuse University. Since labour accounts for only a small part of an electronic device’s overall costs, most of these higher expenses would come from shipping parts to the US.  If the iPhone components were also made in the US, the device’s costs could climb up to $90. That means that, if Apple chose to pass along all these costs to consumers, the device’s retail price could climb about 14%. So Trump’s trade policies would mean a sharp rise in prices of goods in the US for a start, even assuming there is no retaliation by China.


As John Smith has shown in his powerful book, Imperialism in the Twenty-First Century: Globalization, Super-Exploitation, and Capitalism’s Final Crisis :“about 80 percent of global trade (in terms of gross exports) is linked to the international production networks of TNCs.”  UNCTAD estimates that “about 60 percent of global trade . . . consists of trade in intermediate goods and services that are incorporated at various stages in the production process of goods and services for final consumption.”.  A striking feature of contemporary globalization is that a very large and growing proportion of the workforce in many global value chains is now located in developing economies. In a phrase, the centre of gravity of much of the world’s industrial production has shifted from the North to the South of the global economy.”, as Smith quotes Gary Gereffi.

Reversing this key feature of what has been called ‘globalisation’ can only be damaging to American corporations, while at the same time shifting the burden of any cost and prices rises onto average American households.

Globalisation – the cross-border expansion of world trade and capital flows and the development of value-added chains internationally – has been an important counteracting factor to the falling rate of profit experienced after the mid-1960s up to the early 1980s in the major advanced economies.  Deregulating labour rights, crushing trade union power, privatising public sector assets domestically went with global expansion by multinationals.  Trump now talks about reversing this counteracting factor to benefit his supposed electoral support in the ‘rust-belt’ of mid-West America that has suffered the most from the movement of American multinationals to exploit cheaper labour in Mexico, Asia and Latin America.

The irony (and the worry for capital) is that the Great Recession and the ensuing Long Depression seems to be ending globalisation anyway.  Globalisation was already in trouble before Trump and Brexit.  The global financial crash, the Great Recession and ensuing Long Depression (similar to that of the 1930s) since 2009 had brought the expansion of world trade to a grinding halt.


On a standard measure of participation in global value chains produced by the IMF, the rise in profitability for the major multi-nationals is now stalling.


Sure, information flows (internet traffic and telephone calls, mainly) have exploded, but trade and capital flows are still below their pre-recession peaks.  Global foreign direct investment as share of GDP is now falling.


And capital flows to the so-called emerging economies have plummeted.


The G20 leaders met recently before the Trump victory and they could already see the writing on the wall for globalisation.  They said they were opposed to trade protectionism “in all its forms”.  As Deutsche Bank economists put it:  “It feels like we’re coming towards the end of an economic era… and time is running out to prevent economic and political regime change given the existing stresses in the system.”

The strategists of capital are worried that Trumponomics will only makes things worse for profitability globally.  Bin Smaghi, ex member of the ECB and leading strategist of finance capital, commented: “Trying to reverse globalisation can be damaging, particularly for the country that takes the first step. It is the advanced economies that are facing the greatest challenges in its most recent wave, which is why anti-globalisation movements are gaining support and governments are tempted to become inward looking. However, because their economies are so large, and so bound by the web of globalisation, they cannot reverse its course, unless emerging markets also retreat.”

And the risk is that the emerging economies could be driven into a slump as trade falls further and capital inflows dry up. Emerging economies have been building up large amounts of debt (credit) raised from US and European banks to invest, not always in productive sectors.  This has not caused any problem up to now because interest rates globally have been very low and the US dollar has been weak so that borrowing in dollars has not been a problem.

But this is beginning to change, partly due to Trumponomics.  Moody’s Investors Service has issued 35 credit downgrades this year in countries including Austria, Turkey, and Saudi Arabia, while only issuing five upgrades. And 35 of the 134 countries assessed by the ratings firm currently have a negative outlook hanging over them.  That puts at least $7 trillion of government debt at risk of a downgrade, according to data from the Bank of International Settlements for the end of last year.  This proportion of countries with a negative outlook from Moody’s is the largest it has been since 2012, and it couldn’t come at a worse time. Interest rates on bonds, especially ones with longer maturities, are now rising sharply. If this is the end of a 35-year bull run in the bond market, governments, after years of low interest rates, might have to prepare for significantly higher borrowing costs.

At the same time, the US dollar has spiralled upwards in strength compared to other major trading currencies.


Global debt relative to productive investment has been sharply increasing.


And emerging economies’ corporate sector debt to capital ratio has also risen sharply.


Low and slowing economic growth globally along with a rising cost of borrowing and stagnant trade, now threatened by Trumponomics, will increase the risk of a global slump, not avoid it.

Transformation and realisation – no problem

The annual London Historical Materialism conference is not just or even mostly about Marxist economics.  As its name suggests, the sessions are about Marxist analyses of all social phenomena.  But obviously for me, the issues in Marxist economics are what matters.  And there are two issues or themes (for me) that arose at this year’s conference.

They are not new and have been debated and discussed for over a hundred years.  But old issues die hard (as do older Marxists).  The first is the so-called transformation problem, namely, can Marx’s theory of labour value explain or be consistent with actual market prices in a capitalist economy?  The second is whether crises, slumps in production in the capitalist mode of production, can be explained or are caused by a problem in the production for profit (as per Marx’s law of profitability) or whether crises emerge because capital cannot ‘realise’ its production of surplus value in the market place through sales.  In other words, are capitalist crises due to insufficient surplus value or  too much surplus value that cannot be ‘realised’ in the market, i.e. ‘disproportion’ or ‘overproduction’?

This year’s HM continued yet again the debate on these issues.  On the first issue, Fred Moseley presented his new book, Money and Totality, which I have reviewed before on this blog.

In his book, Fred aims to put to bed the ‘transformation problem’.  And he succeeds.  He shows that Marx solved Ricardo’s problem: namely that market prices of individual commodities do not reflect their value measured in labour time.  The discrepancy is solved through the competition between individual capitals that leads to an equalisation of profit rates and an average rate of profit for the whole system.  Market prices fluctuate around prices of production measured in money, based on the cost of capital invested in money terms and the average rate of profit.  So capitalists start with money and invest in labour and means of production measured in market prices (which revolve around prices of production).  In the circuit of capital and the accumulation process, it is prices of production that rule, not individual labour values for commodities.  So no ‘transformation’ of values into prices is necessary.  Prices are given in money.

Moseley’s book refutes the critique of mainstream economics and what are called the ‘neo-Ricardians’ like Piero Sraffa who either say that the labour theory of value is irrelevant to market prices or that Marx’s solution needs correcting for logical inconsistency.  Moseley is not the first to do this, but his book provides a clear and comprehensive defence of Marx’s value theory.  The debate at the HM session was partly around some ‘Marxist’ solutions that Moseley rejects and about whether Marx’s prices of production can be considered ‘long-term equilibrium’ prices or not.  I won’t go into those controversies here, because I want to discuss that other non-problem, realisation.

I presented the basic ideas of my book, The Long Depression, in one HM session.  One of the discussants, Jim Kincaid, then presented his critique of my work, the substance of which was outlined in a previous post.  But Jim’s underlying criticism, and that was repeated by several senior Marxist economists from the floor, is that Marx’s law of the tendency of the rate of profit to fall cannot be considered the sole underlying cause of crises under capitalism, and in the case of the Great Recession was not the cause at all.  In particular, it is charged that I ignore the ‘problem of realisation’ of surplus value in the market and see the cause of crises only in the drive for profit in production – and yet there are two sides to the circuit of capital: production and realisation.

Jim Kincaid made this part of his critique and, in his new and excellent book, Francois Chesnais, the eminent French Marxist economist, also chided me for failing to recognise in any meaningful way the ‘realisation’ problem. I quote Chesnais from his book: “macroeconomic conditions shaping the capital-labour relations of power prevent the whole of the surplus value produced globally from being realised. Capital is faced by a roadblock at C′ of the complete accumulation process  (M-C . . . P . . . C′-M′)” …The fact that a ‘realisation problem’ exists alongside the insufficient rate of profit is now recognised somewhat reluctantly by Michael Roberts”.   

Actually, I am not sure that I do recognise, even reluctantly, that there is a realisation problem as posed by Chesnais and others.  Let me explain. I also participated in a session at HM on a critique of Keynesian policies like quantitative easing and fiscal stimulus to overcome the Long Depression.  There was an excellent paper on the failure of QE by Maria Ivanova and Tony Norfield presented a lucid account of the continued build-up of global debt that threatens a new financial crash that Keynesians ignore or dismiss.

In my paper (the-crisis-and-keynesian-policies) dealing comparing the efficacy of Keynesian fiscal stimulus solutions to a slump with the Marxist explanation (the Keynesian multiplier versus the Marxist one), I likened the Keynesian explanation of crises as due to “a lack of effective demand” as really like a weather man telling us that it is raining because there is water coming down from the sky.  The ‘lack of demand’ explanation is no explanation at all but merely a description of slump (falling investment and consumption).  For this analogy, I was picked up Pete Green for, again, not recognising the ‘realisation problem’ – namely the cause of crises is not (just) to be found in the capitalist mode of production but also in the distribution of surplus value and thus in an inability to ‘realise’ all the surplus value produced.

So it seems many wish to continue to reject Marx’s law of profitability as the main or ultimate cause of crises and seek alternative or eclectic explanations.  Chesnais reckons crises have multi-causes, following the views of David Harvey (see my debate with Harvey on this here).  “Marx discusses a range of issues, not simply the LTRPF but also the over-accumulation of capital and the accompanying overproduction of commodities, as well as raising the hypothesis of the ‘absolute over-production of capital’ which is hardly ever mentioned in today’s debates. So I agree with Harvey that there is no single causal theory of crisis formation”, p23 Finance Capital Today.

Pete Green apparently (at least according to the title of his HM paper) looks to ‘long forgotten’ theories of disproportionality between accumulation and consumption (due to the anarchy of capitalist production); between the expansion of capitalist production and the ‘limits of the market’ for a crisis theory.  This is an idea that comes originally from the 19th century Russian economist, Tugan Baranovsky (who actually argued that there was no ‘realisation problem’) and Marxist Rosa Luxemburg (who did think there was one). Jim Kincaid looks to the idea of too much surplus being created to be absorbed and a lack of ‘profitable investment opportunities’ (akin to the position of Sweezy and Baran).  Chesnais wants to combine Marx’s law with the idea of a crisis of ‘overproduction’, suggesting that falling profitability and overproduction are not connected but are separate (and combined?) causes of crises. “the financial events of 2007–8 were typically an integral part of a crisis ‘in the sphere of money and credit’, the underlying causes of which are overproduction and over-accumulation at a world level along with (my emphases) an effective play of the tendency of the rate of profit to fall.”

None of these alternative explanations or eclectic melanges is new and in my opinion has been dealt with effectively by a succession of Marxist economists.  G Carchedi looked at all these alternative explanations in his seminal work of 1990s (now apparently ‘long forgotten’), Frontiers of Political Economy. Carchedi comments: “The disproportionality thesis submits that the root of crises lies in the difference between the technologically determined demand for specific use values as inputs of some branches and the technologically determined supply of the same use values as outputs of other branches. Marx’s answer is that those “ price fluctuations, which prevent large portions of the total capital from replacing themselves in their average proportions … must always call forth general stoppages”, due to “ the general interrelations of the entire reproduction process as developed in particular by credit” . However, these are only “ of a transient nature”.  (Marx, 1967c, pp. 483-4).  Thus disproportions can either be determined by price fluctuations, and in this case they are self-correcting and cannot explain crises, or by lack of purchasing power, and in this case it is the latter, rather than disproportions, which explain crises. The disproportionality and underconsumption theories cannot account for the inevitability of crises; but, as we have seen, these theories do account for the inevitability of temporary and self-correcting disturbances. Only the approach linking insufficient production of (surplus) value with technological innovations can provide such an explanation.”

It is no accident that ‘underconsumption’ as such has not been revived as an alternative theory to Marx’s law of profitability.  That’s because the idea that crises are caused by the inability of workers to pay for the goods they have produced has been so thoroughly discredited both theoretically and empirically.  But the theory of ‘overproduction’ beyond ‘the limits of the market’ is really just the other side of the coin of underconsumption.  Overproduction is when capitalists produce too much compared to the demand for things or services.  Suddenly capitalists build up stocks of things they cannot sell, they have factories with too much capacity compared to demand and they have too many workers than they need.  So they close down plant, slash the workforce and even just liquidate the whole business.  That is a capitalist crisis.

Overproduction is the very expression of a capitalist crisis.  Before capitalism, crises were ones of underproduction (namely famine or scarcity).  But to say overproduction is the form that a capitalist crisis takes is not to say it is the cause of the crisis.  To say that crises are like a thunderstorm does not explain why we are wet.  If it were the cause, then capitalism would be in permanent slump because workers can never buy back all the goods they produce.   After all, the difference between what the workers get in wages and the price of the goods or services they produce that are sold by the capitalists are the profits.  By definition, that value is not available to workers to spend, but is in the hands of the capitalist owners.

Marx devastatingly criticised those capitalist economists who claimed that there could never be a crisis of overproduction because every sale that a capitalist makes means that there will be purchaser.  As Marx said, that there is purchaser for every seller is a tautology, the very definition of exchange. Sure, “no one can sell unless someone else purchases.  But no one is forthwith bound to purchase just because he has sold”. The money from a sale can be hoarded (saved) and not used to buy.  That alone raises the possibility of overproduction and crisis.

But the possibility of crisis in the process of capitalist exchange using money does not mean it will happen and provides no explanation of when or how.  So Marx went further and explained that what will decide whether capitalists make purchases for investing in plant or new technology and to buy labour power to produce is the profitability of doing so.  “The rate of profit is the motive power of capitalist production.  Things are produced only so long as they can be produced with a profit”.

And this is where Marx’s law of the tendency of the rate of profit to fall comes in. Marx shows that the profitability of capitalist production does not stay stable, but is subject to an inexorable downward pressure (or tendency).  That eventually leads to capitalists overinvesting (overaccumulating) relative to the profits they get out of the workers.  At a certain point, overaccumulation relative to profit (ie a falling rate of profit) leads to the total or mass of profit no longer rising.  Then capitalists stop investing and producing and we have overproduction, or a capitalist crisis.  So the falling rate of profit (and falling profits) causes overproduction, not vice versa.

As Henryk Grossman explained so well, a falling rate of profit does not directly lead to a crisis as long as the mass of profit can rise.  When a falling rate of profit eventually leads to a fall in the mass of profit and thus overaccumulation of investment and overproduction of goods and services (that are profitable), then the crisis ensues.

As Marx put it: “the so-called plethora (overaccumulation) of capital always applies to a plethora of capital for which the fall in the rate of profit is not compensated by the mass of profit… and “overproduction of commodities is simply overaccumulation of capital”.  It is precisely when the mass of profit stopped rising that the Great Recession ensued.

Thus the so-called realisation problem is the result of the production problem.  Falling profitability and falling mass of profits lead to collapsing investment, wages and employment and then swathes of companies cannot sell their goods or services at existing prices and workers cannot buy them.  This is a crisis of overproduction and underconsumption.

Indeed, only Marx’s law of profitability can explain the cycle of boom and slump, while overproduction or disproportion cannot do so.  See Paul Mattick Jnr’s excellent account of Marx’s law and the business cycle pp48-51 in the best short account of the Great Recession so far, Business as usual.

And there is a political implication from the discussion of alternative theories of capitalist crises.  For example, if we think capitalist crisis is caused by overproduction (or underconsumption) relative to the ability of workers to buy the goods produced, as Keynesians do, then the policy answer may be just to boost spending by government or make tax cuts (as Donald Trump plans now, it seems).  Problem solved.  Only, as our session at HM showed – the ‘problem of realisation’ is not solved by these measures, as Trump and the American people will find out precisely because it is not a problem of realisation but of profitability.

On the other hand, if we think it is caused by lack of profit, then there is only one solution for capitalism: destroying the value of existing capital (plant, machines and employees) in order to cut costs and so restore profitability.  Only that will get capitalism going again (for a while), but at the expense of the rest of us.  Thus the inherent contradiction of capitalism is exposed.  Only its abolition will stop the cycle of boom and slump.  The problem of production for profit is a real problem that cannot be resolved.

In my view, ‘too much surplus’, ‘disproportion’, ‘overproduction’ or ‘underconsumption’ are not Marx’s theory of crises.  But more important, they are very weak alternatives to Marx’s law of profitability as an explanation.  They are weak theoretically and even worse, empirically unverifiable.  What are we measuring when we look at ‘disproportionality’ or ‘underconsumption’?  Does consumption fall before a slump?  No, the evidence is clearly to the contrary, unlike profits and investment.  Will disproportionate investment growth compared to consumption lead to overproduction and periodic crises?  Well no, as Andrew Kliman has shown for the US in his book, The failure of capitalist production, chapter 8.  Historically, business investment always grows faster than workers’ consumption – that is the result of capitalist accumulation.  But this does not create a chronic slump or permanent stagnation because investment creates its own demand (capitalist demand).  Indeed, investment drives the productivity of labour and thus drives economic growth.  The problem is when investment collapses, not when it grows ‘too fast’.

Everybody in Marxist economic circles seems to agree that the crises of the 1970s and early 1980s were the result of falling profitability rather than overproduction or underconsumption.  But you see, the argument now goes, each crisis can have a different cause because capitalism metamorphoses into new forms or structures (neoliberalism or financialisation) that change the causal contradictions.  So we are now being told that, because profitability rose after 2001 up to the Great Recession, Marx’s law does not apply and we need to consider that the GR was the result of either financial instability, excessive credit, rising inequality and falling wage share, or weak demand and secular stagnation.

Well, none of these alternatives seems convincing to me.  As Alan Freeman recently said in his paper in the book on the crisis, The Great Financial Meltdown: Marx’s law remains “the only credible competitor left in the contest to explain what is going wrong with capitalism”.


Francois Chesnais has kindly sent me a rejoinder to my comments on his view of the current Long Depression and its causes:

“One is faced with a situation where has been a continuous drive by capital to raise the rate of exploitation in the course of the crisis yet the conditions of profitability and new investment have not been restored.

In the explanation offered the starting notion is that of “fresh fields of accumulation” (Luxemburg) as necessary to end a long recession, a further one the function of crisis in capitalism and the key central one that of “dearth of actual surplus value”.

One must start by looking at were the “fresh fields” that ended the two previous world long recessions or depressions. In the case of the 1880s it was a combination of an extension of the world market, a reach out to the many regions not properly include or not included at all, and of the opening for profitable investment over a long time span of the major industries of the “Second industrial revolution”. In the case of the 1930s it was as you said very clearly in one of your talks it was the Second war world.

Then one must look at whether a crisis is allowed to play its function of destroying existing productive and fictitious capital, of clearing the deck for new investment. This was the case in 1929 and the 1930s.

So what is the picture today? We have a situation which combines the fact that the crisis was not allowed to play its function of destroying existing productive and fictitious capital, of clearing the deck for new investment on any significant scale and that since a World war is not in preparation the only candidate as a “fresh field” would have to be new technologies associated with the emergence of whole new industrial sectors with strong new employment creation effects. The ones there are do not have this quality, on the contrary.

A low level of investment means a low creation of surplus value.  “Virtuous cumulative accumulation process” are one where profit expectation drives investment of a strong enough employment effect as to generate both surplus creation and demand permitting the completion of the accumulation cycle M-C-P-C’-M’.

Today not enough surplus value is being produced to re-launch the accumulation process and the amount that is serves to consolidate the accumulation of dividend and interest bearing assets by banks, funds and individuals (financial accumulation) and so the claims on this already very insufficient amount of surplus value. This has led both to the dead-end of the quasi-zero long term interest rate regime, which not simply the outcome of quantitative-easing and to the endless small shocks in the global financial system.

Of course government debt and the resulting pro-rentier, pro-cyclical austerity policies only aggravate this situation but they do not explain it and their reversal would not solve capitalism’s basic problem.”