The debate on the causes of the Great Recession

Mick Brooks comments here on the debate within the Committee For a Workers' International on the causes of the Great Recession and capitalist crisis. Check out a review or order Mick Brooks' book here .

by Mick Brooks

Since the outbreak of the Great Recession Marxists have debated its cause. This is a vital theoretical issue for understanding the world around us.

The debate centres around the issue as to whether the present crisis is caused by falling profits as explained by Marx’s law of the tendential fall in the rate of profit (LTFRP), dealt with in chapters 13-15 of ‘Capital Volume III’. Others argue that the crisis can be explained as one of underconsumption.

This debate is bubbling under within the ranks of the CWI. The leadership of the CWI (as of the IMT) take what I would characterise as an underconsumptionist position. Already two blogs are circulating inside the ranks of the CWI that advocate the LTFRP explanation, in addition to an excellent short film, and debates are beginning to take place in the localities. Signs of intelligent life? It looks like it. Check out:

Marx returns from the Grave, http://69.195.124.91/~brucieba/ 

Socialism is Crucial, http://socialismiscrucial.wordpress.com/

It should be explained at the outset that all parties agree that a crisis of capitalism takes the form of overproduction, of unsold goods, as it says in the ‘Communist Manifesto’. Overproduction and crisis, however, are not permanent features of capitalist production. It remains to be explained why capitalism dips into crisis when it does.

The leadership, reacting to criticism, has resorted to an ‘underconsumptionist’ explanation of the cause of crisis. The crisis is caused, according to a quote from Chapter 30 of ‘Capital Volume III’ by “the poverty and restricted consumption of the masses.” (As one of the bloggers, CrucialSteve, points out this was actually a bracketed note added by Engels into the original text.)

The problem with the underconsumptionist explanation is that there is a permanent tendency for capitalism to restrict the purchasing power of the working class, because it is a system based on profit. Underconsumptionism therefore has no explanatory power as an explanation of crisis.

In any case not all commodities are produced for workers – pallet trucks and computer numerically controlled machine tools are capital goods bought by capitalists. There are also luxury goods consumed only by capitalists such as yachts and private jets. Why should there be a specific outbreak of overproduction of consumer goods intended for workers’ consumption such as jumpers rather than pallet trucks or yachts? Empirically crises of overproduction usually break out in the capital goods industries. Investment is the most volatile element in national income.

The opposition bloggers within the CWI have a powerful argument in their favour – the rate and mass of profit in the major capitalist countries fell sharply prior to the onset of crisis in 2007. Marx’s theory is confirmed! To take the case of the USA:

“The US Bureau of Economic Analysis (BEA) shows that in the 3rd quarter of 2006 the mass of profits peaked at $1,865bn. By the 4th quarter of 2008 it bottomed out at $861bn.” (Brooks – Capitalist crisis; theory and practice, p.32)

The facts confirm Marx’s analysis of the LTFRP as the fundamental cause of crisis. Why should this cause surprise, since we all agree that capitalism is a system of production of profit?

The school of Marxian economists who support this analysis view the falling rate and also mass of profit only as an underlyingcause of crisis. Essentially the argument is about levels of causation in the crisis. What about the financial aspect of the crisis – the housing bubble, crazy loans and collapsing banks? Of course this was all very important. These specific factors profoundly influence the depth and nature of the downturn. Every crisis is a unique event with its own characteristics. But, with or without a ‘financial crisis’ the fact that the mass of profits in the USA, the most important capitalist country, halved over two years would have provoked a big collapse of output in any case.

How does the leadership of the CWI deal with the detailed criticisms of their approach thrown up by the advocates of the importance of the LTFRP as an explanation of crisis? Lynn Walsh argues in ‘Socialism Today’ that profit and investment have become disconnected in recent decades. “Despite the staggering increase in the share of income taken by the top 1% in the US, investment declined.”(‘Socialism Today’, November 2012) So profits (with the share of the top 1% as a proxy) are supposed have soared at the expense of working people, but this has not translated into productive investment. Walsh concludes, “This factual data..., in our view confirms the analysis of a crisis in capital accumulation put forward in ‘Socialism Today’ over many years” (ibid.).

If true, this is not an explanation for a pattern of booms and slumps. It presents a stagnationist perspective for the future of capitalism, a permanent slowing down of the rate of accumulation. Is the CWI serious about decades of stagnation? How do they explain the present crisis, where investment fell as a result of the fall in profits?

In fact there is a simple explanation for this alleged disjunction between profits and investment: the profit figures quoted are wrong. Michael Roberts has meticulously chronicled the rate of profit since the Second World War in his blog. Nobody has challenged his figures, which attempt to look beneath conventional statistics to work out a Marxian rate of profit.

Roberts concludes: first that there has been no return to the fabulous profits enjoyed by capitalists during the golden years of the post-War boom; and secondly that the rate of profit today in 2013 remains below that of 2007 before the onset of the great Recession. Andrew Kliman also carefully shows (in ‘The failure of capitalist production’) that the reason for lower investment in the years since 1974 is lower profits. There is just less to invest. Simples.

The CWI leadership buttress their ‘explanation’ as to why investment has been lower with recourse to the notion of financialisation. As Lynn Walsh argues in the same article, more and more funds have been gobbled up by financial shenanigans in preference to investing in industry. There is no mystery here. In so far as more “profits disappeared into the financial sector” (ibid.), that is a response to lower pickings to be made in production – because of the LTFRP itself.

Increasing exploitation of the workers over recent decades has not led to increasing rates of accumulation because of financialisation, it is asserted.  This is part of the analysis of a whole school of thought, regarding itself as Marxian, which sees the current crisis as one of the neoliberal form of capitalism rather than capitalism as a whole. In fact this is the conventional wisdom of the majority of academic Marxist economists. A whole new stage of capitalism is supposed to have developed since about 1980, buttressed by the holy trinity of globalisation, neoliberalism and financialisation.

Dumenil and Levy’s book – ‘The crisis of neoliberalism’, 2011 – is an example. Phil Hearse writing in Socialist Resistance, the publishing house of the so-called Fourth international, also refers to “a neoliberal ‘regime of accumulation’”. The logic of this approach seems to be that neoliberalism should be destroyed rather the capitalist system overthrown. 

As we see, the CWI leadership has swallowed this analysis whole. By accepting the interpretation of this school the CWI is on a slippery slope indeed. We’re with the opposition within their ranks on this one.

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Down in the Jackson Hole

By Michael Roberts

Central bankers from all over the world gather each August underneath the Grand Teton mountains in Jackson Hole, Wyoming for their summer symposium to discuss the global economy and what central bankers can do about it.  This year, Ben Bernanke, head of the most important central bank, the US Federal Reserve, is not present.  He is about to end his term of office at year-end, so perhaps he saw no need to attend.  But lots of other key bankers and mainstream economists are there.

The main issue to discuss, as it was last year, was how effective has been the policy of ‘quantitative easing’ (QE) in getting the global capitalist economy into recovery mode.  QE is where central banks buy up government, corporate and mortgage bonds through the expansion of central bank power money (‘printing money’), in order to inject ‘liquidity’ into the economy.  The idea is that this extra credit will filter through from the banks and pension funds that the central bank has bought the bonds from into loans to households and businesses.  Those loans will lead to more spending in the shops and more investment by businesses.

Well, has it worked?  That’s easy to answer.  No.  The global economy remains stuck in a low-growth mode, and most important, at such a low growth in economic activity that unemployment rates remain nearly double the rate before the Great Recession in the major economies and three or four times as high in the depressed economies of southern Europe.

At last summer’s symposium, central banks were worried that QE was not working and a leading mainstream economist, Michael Woodford presented a paper (http://www.kansascityfed.org/publicat/sympos/2012/mw.pdf?sm=jh083112-4) in which he argued that if central banks could change the perception of businesses and households that interest rates were going to stay very low for a long time, then that would inspire ‘confidence’ and thus lead to increased spending and investment.  This led to the recent policy of central banks, called ‘forward guidance’ (see my post, http://thenextrecession.wordpress.com/2013/08/13/a-blind-guide-dog/).  Forward guidance is an attempt by central bankers to persuade businesses and consumers that they do not have to worry about rising interest rates for years ahead and so they can start spending now.

But forward guidance has done no such thing.  Indeed, after both the ECB and the Bank of England followed the Fed and announced such ‘guidance’, stock markets fell and interest rates rose!  That was partly because businesses still do not believe that central banks won’t hike interest rates at the first sign of economic recovery.  But it was also because the Federal Reserve had already announced that it intends to begin to end its QE policy by gradually reducing its planned asset purchases that it will make from September onwards.  That is seen as a sign that central bank support for ‘easy money’ is coming to an end.  Stock markets, particularly in emerging economies, which have been the main beneficiaries of this largesse, have sold off big time.

And that’s the point.  QE has not boosted the ‘real economy’ but merely fuelled a new credit bubble in stock market and property prices – US home prices are now up over 12% since this time last year and in the UK, prices are up 5%, with over 10% in ‘hot’ London.  Indeed, as I pointed out in that previous post, the latest evidence shows that  QE measures have had little or no effect on boosting the real economy.  A recent paper by Vasco Curdia and Andrea Ferrero at the Federal Reserve Bank of San Francisco (Efficacy of QE) found that the Fed’s QE measures from 2010 had helped to boost real GDP growth by just 0.13 percentage points and the bulk of this ‘boost’ was thanks to forward guidance, namely convincing investors that interest rates were not going to rise.  If that factor had been left out, the US real GDP would have risen only 0.04 per cent as a result of QE.

This is worrying for central banks.  They would like to think that providing easy credit has done the trick and there is now sustained economic growth so that they can end their QE measures.  Instead, they cannot – indeed in the case of Japan, they have been extending them.  At the Jackson Hole symposuum, Christien Lagarde, head of the IMF, urged caution on ditching QE too early:  “now is not the time to pull back on these policies.. are still needed in all the places” these policies are being employed… I do not suggest a rush to exit,” Lagarde said, adding in Europe, “there is a good deal more mileage to be gained” from unconventional policy. As for Japan, she said an “exit is very likely some way off.”

And Lagarde added an important sting in the tail of her address.  She reckoned that QE should be maintained because it would help allow governments to push through yet more measures of wage cutting, privatisation, reductions in government spending and ‘liberalising’ markets in order to raise the profitability of capital and thus sustain economic revival down the road.   As she put it: “I do worry that all the hard work of central banks will be wasted if not enough is done on other fronts—to adopt the admittedly more difficult policies needed for balanced, durable, and inclusive growth. . . . [unconventional monetary policy] is providing the space for more reforms. We should use that space wisely.”

But despite the policies of austerity to reduce costs and despite the policy of easy money through QE, the global capitalist economy does not respond.   This has been the longest slump since the second world war. A recent CEPR discussion paper by Antonia Fatas and Olian Mihov (http://www.cepr.org/pubs/dps/DP9551# and http://www.voxeu.org/article/recoveries-missing-third-phase-business-cycle) found that the US economy has still not returned to ‘normal’, ie trend growth in real GDP after more than 16 quarters since the trough of the Great Recession – and still counting.  That compares with just six quarters to return to normal in previous post-war recessions.  Moreover, the accumulated loss in US GDP from its peak caused by the Great Recession and the subsequent weak recovery so far totals 22% of US peak GDP and still counting.  That compares with a maximum of 16% in the 1980-2 slump and only 4-5% in other post-war recessions.  The depth and duration of the Great Recession has been hugely damaging – ant the gap remains (see graph below).

The driver of economic recovery under capitalism is investment.  That leads to jobs and then to income and then to spending.  But sufficient investment depends on profitability recovering to previous levels or higher and on debt not being too high that it strangles corporate investment.  That has not happened so far.  While  cash flow and profits may be up for larger companies, the rate of profit has not recovered in many capitalist economies, like the UK and Europe.  Also, large multinationals have preferred to invest in emerging economies rather than in the domestic economy.  And cash-rich companies have taken advantage of credit-fuelled (QE) stock markets to buy back their own shares rather than invest and boost dividends.  This helps executive bonuses!

Small businesses cannot invest because they cannot borrow on current terms and many are zombie companies just able to pay the interest on their debt.  They have been hoarding labour rather than invest in new equipment and labour saving systems.  And overall corporate debt levels remain too high to allow new investment – paying down debt or holding cash is safer.

The conundrum of rising profits and stagnant investment in productive assets shows that the ‘recovery’ is artificial.  It depends on central bank liquidity, which finds its way into the financial sector not the real economy.  The really cash-rich companies are banks, financial institutions and large multinationals and not the bulk of non-financial companies that invest and employ labour.   One analyst reckons that as interest rates start to rise over the next year, when central banks try to wean the capitalist sector off its milk of ‘easy money’ that has slowed “down the process of creative destruction… then these zombie companies are going to present symptoms of a disease which will begin to affect other companies. That is when the recession will come.”

Meanwhile, small businesses in the US and elsewhere are struggling – and they are the main sources of new employment. In 1982, new companies made up roughly half of all US businesses, according to census data. By 2011, they accounted for just over a third.  From 1982 through 2011, the share of the labour force working at new companies fell to 11% from more than 20%.  Total venture capital invested in the US fell nearly 10% last year and is still below its pre-recession peak, according to PricewaterhouseCoopers.  New startups, as opposed to startup jobs, accelerated during the recession and remain higher than average, according to the Kaufman Foundation (http://www.kauffman.org/newsroom/entrepreneurial-activity-declines-as-jobs-rise-in-2012-according-to-kauffman-report.aspx).  But what this shows is that older and blue collar workers, forced out of their jobs, are trying to set up self-employed businesses to to make ends meet.  Most of these businesses soon die a death.

The unemployment rate in the US has dropped a little from its peak during the depth of the Great Recession.  But this hides the continuing depression in the labour market.  The labour participation rate, the ratio of people in the workforce against those adults of working age, has been dropping fast.

In other words, as Marx would put it, the reserve army of labour has been rising sharply since the late 1990s and accelerated during the Great Recession.  This reflects the efforts of the capitalist sector to counteract the fall in the US rate of profit since the late 1990s by raising the rate of surplus value – a major countertendency to the rise in the organic composition of capital – in effect the cost of new technology.  Capital aimed to exploit labour harder to compensate for increased costs of capital investment relative to profitability.

This succeeded for a while in checking a very sharp fall in profitability.   But eventually, a slump could not be resisted when profits began to slip from 2005 onwards.  Now the risk is that any growth in new value will be capped by the inability to employ more unused labour.  So economic growth will remain stunted.  Plenty for central bankers to ponder.

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Capitalist crises: It’s a technical malfunction. Not so, say the Marxists

J.M Keynes

by Michael Roberts

Paul Krugman launched out in his blog recently on yet another justification for the superiority of Keynesian economics (http://www.nybooks.com/articles/archives/2013/jun/06/how-case-austerity-has-crumbled/).  He put it: “Keynesian economics rests fundamentally on the proposition that macroeconomics isn’t a morality play—that depressions are essentially a technical malfunction. As the Great Depression deepened, Keynes famously declared that “we have magneto trouble”—i.e., the economy’s troubles were like those of a car with a small but critical problem in its electrical system, and the job of the economist is to figure out how to repair that technical problem. Keynes’s masterwork, The General Theory of Employment, Interest and Money, is noteworthy—and revolutionary—for saying almost nothing about what happens in economic booms. Pre-Keynesian business cycle theorists loved to dwell on the lurid excesses that take place in good times, while having relatively little to say about exactly why these give rise to bad times or what you should do when they do. Keynes reversed this priority; almost all his focus was on how economies stay depressed, and what can be done to make them less depressed. “

Two things strike me here.  First, for Krugman (and Keynes) recessions and even depressions are really a “technical malfunction’ in an otherwise perfectly functioning market economy.  The job of economists  is thus simple: “to figure out how to repair that technical problem”.  And second, Krugman praises Keynes’ failure to explain what happens in booms.  For me (and for Alan Freeman in a recent interesting piece, Freeman-Alan-What-causes-Booms) and of course, for Marx, what happens in booms explains why capitalism has slumps and what happens in them.  Without an explanation of the laws of motion of capitalism in booms, we cannot understand the slumps – but apparently not for Keynes or Krugman.

But if Keynesian economics is so superior in its explanation of slumps under capitalism and what to do about them, why don’t governments listen and act accordingly instead of sticking to failing austerity measures?  In another post on his blog, Krugman reckoned that it was the semi-Marxist, ‘post-Keynesian’ of the 1940s, Michal Kalecki who “had the answer. We are in a Keynesian crisis that calls for Keynesian policies; but conservatives find both the diagnosis and the cure anathema, for political reasons. Conceding that the government can and should create jobs would devalue the importance of being nice to businessmen, and suggest that in general the government can do good things. So the obvious diagnosis and response are unacceptable.”  So the reason is that Keynesian economics is not adopted is because it threatens the perceived interests of the capitalist class and their irrational ideological conviction that government is bad and market is good.  Indeed, the capitalists don’t recognise what is in their own interest.

Krugman’s adoption of Kalecki’s explanation for the failure of governments to solve depressions with Keynesian policies really stimulated Duncan Weldon, senior economist at the UK Trade Union Congress.  In his blog (http://touchstoneblog.org.uk/2013/08/political-economy-trumps-macroeconomics), Weldon proclaimed that “Paul Krugman wrote one of the most significant blog posts on economics I’ve ever read ^[1].  Weldon referenced Krugman digging up Kalecki’s famous paper arguing this entitled Political Aspects of Full Employment.  Quoting Kalecki, Krugman argued that captains of industry opposed solutions because such policies would undermine their political influence. “Hence budget deficits necessary to carry out government intervention must be regarded as perilous.”  Weldon was very excited: “Essentially Krugman’s (and indeed Kalecki’s) point is this – we have the macroeconomic tools to restart a robust recovery and get unemployment down but these tools are not being used for political reasons.”

Weldon goes on to quote various leading Keynesian economists as they ponder the conundrum that the technical malfunction in the capitalist economy can easily be repaired but no government tries.  Weldon quotes American Keynesian, Brad DeLong: “The working classes can vote, economists understand and publicly discuss nominal income determination, and no influential group stands to benefit from a deeper and more prolonged depression. But the monetarist-Keynesian post-WWII near-consensus, which played such a huge part in making the 60 years from 1945-2005 the most successful period for the global economy ever, may unravel nonetheless.”  And then he quotes arch- Keynesian Briton, Simon Wren-Lewis who wails that “on the issue of the stupidity of pro-cyclical fiscal policy, it is only the views of politicians on the far-left or far-right that matches those of the majority of macroeconomists.  Given the social, economic and political consequences of declining real wages and rising unemployment, which fiscal austerity only makes worse, this is both a very sad and rather dangerous state of affairs.”  The leading economist of the British trade union movement, Weldon, concludes that “many of supposed macroeconomic problems are not intractable, the problem is as much one of political economy as of economics.”

But is it true that Keynesian policies can solve capitalist slumps and the only reason such policies are not adopted is because of ‘political reasons’?  This is seems a thin reason.  Capitalist strategists are not stupid.  If they thought such policies would work to restore capitalist production, they would adopt them.  The real reason they don’t is that the policies don’t work – at least not to restore the profitability of capitalist production, even if such policies can reduce unemployment for a while.

I took up this issue in an article for the Socialist Review (http://www.socialistreview.org.uk/article.php?articlenumber=12273) and in a subsequent post (http://thenextrecession.wordpress.com/2013/04/08/meeting-keynes-meadway/). But let me just go over a few of the points against this argument that Keynes had the economics answers to slumps and Kalecki had a ‘political’ explanation of why they were not adopted.  As I argued in many previous posts (http://thenextrecession.wordpress.com/2012/04/21/paul-krugman-steve-keen-and-the-mysticism-of-keynesian-economics/, http://thenextrecession.wordpress.com/2012/06/13/keynes-the-profits-equation-and-the-marxist-multiplier/), there is a fundamental ‘malfunction’ in Keynesian-Kalecki theory.  It relies on categories of national income and spending and not on the category of profit to explain the motions of capitalist production.

For Keynes, Kalecki, Krugman and Weldon, profit and where it comes from is irrelevant.  Marx’s value theory, based on abstract labour and profit as the unpaid labour of the working-class, as Keynes put it (to his student Michael Straight): ”was even lower than social credit as an economic concept. It was complicated hocus-pocus.” [ Skidelsky, vol 2, p 523].  Keynes considered that Das Kapital was “an obsolete economic textbook which I know to be not only scientifically erroneous, but without interest or application to the modern world”.  Marx’s ideas were “characterised… by mere logical fallacy” and was a “doctrine so illogical and dull”.  Keynes did not need Marx’s value theory and law of profitability to explain capitalist crises.  They were ‘technical malfunctions’ and were to be found in the financial sector of the economy, the ‘rentier’ part, in the distribution of value or income in an economy and not in any way in the productive sectors of the economy.  There was nothing wrong with the capitalist mode of production as such.  Indeed, capitalism would eventually deliver prosperity for all, more leisure and a better society.  Keynes specifically argued for this capitalist future to his students at Cambridge at the height of the Great Depression in the early 1930s, as he was deeply worried that his students had become ‘infected’ with the dreaded and ridiculous ideas of Marxism (see my post http://thenextrecession.wordpress.com/2013/05/04/keynes-being-gay-and-caring-for-the-future-of-our-grandchildren/).

Keynes says the crisis comes about through a lack of ‘effective demand’, namely an unaccountable fall in investment and consumption and this causes profits and wages to fall.  In contrast, Marx says: let’s start with profits.  If profits fall, then capitalists would stop investing, lay off workers and wages would drop and consumption would fall.  Then there would be a lack of effective demand, but this would not be due to a drop in ‘animal spirits’, or a ‘lack of confidence’ (we often hear that phrase from economists), or even too high interest rates, but because profits are down.  The problem lies in the nature of capitalist production, not in the finance sector.

The Keynesian-Kalecki idea that profits depend on investment demand is back to front. For Marxists, it is the other way round: investment depends on profit – and profit depends on the exploitation of labour power and its appropriation by capital. Thus we have an objective causal analysis based on a specific form of class society, not on some mystical psychoanalysis of individual human behaviour among financial speculators (‘animal spirits’ or ‘confidence fairies’, http://thenextrecession.wordpress.com/2010/06/02/the-keynesian-answer-support-the-speculators/).

Now if investment in an economy depends on profits, and if profits are falling, then investment will fall.  So capitalist investment (ie investment for a profit) will now depend on reducing the siphoning off of profits into capitalist consumption (dividends) and/or on restricting non-capitalist investment (government investment). So capitalism needs more government saving, not spending.  The solution is the opposite of the Keynesian policy conclusion. Government spending will not boost profits, but the opposite – and profits are what matters under capitalism. So government spending is a negative for capitalist investment.

For that matter, contrary to some in the left of the labour movement who demand higher wages to boost demand and thus solve the crisis and invoke Keynes in support of such policy, Keynes himself was not on the side of the workers in a solution to a slump.  Keynes commented on whether boosting wages would solve a slump:  “In general, an increase in employment can only occur to the accompaniment of a decline in the rate of real wages.”  So cutting real wages should be part of the solution to a slump even for Keynes.  Indeed, real wages are falling in many capitalist economies at the moment.

So the austerity policies of most governments are not insane, as Keynesians think.  These policies follow from the need to drive down costs, particularly wage costs, but also taxation and interest costs, and the need to weaken the labour movement so that profits can be raised. It is a perfectly rational policy from the point of view of capital, which is why Keynesian policies were never introduced to any degree in the 1930s.  Capitalism came out of that Great Depression only when profitability rose and that was when the US went into a war economy mode, controlling wages and spending and driving up profits for arms manufacturers and others in the war effort.  Capitalism needed war, not Keynes.

Marx’s analysis of booms and slumps is a much superior explanation than that of Keynes-Kalecki.  Marx’s analysis shows that the capitalist system is not just suffering from a ‘technical malfunction’ in its financial sector but has inherent contradictions in the production sector, namely the barrier to growth caused by capital itself.  What flows from this is that the capitalist system cannot be ‘repaired’ in order to achieve sustained economic growth without booms and slumps – it must be replaced.  That is the ultimate policy action for the left.

I am now off to Madrid to debate just this issue with post-Keynesian radicals at the summer school of Spain’s Anti-Capitalist Initiative.

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The advanced world picks up at start of H2 2013

by Michael Roberts

Stock markets around the world head towards new highs. And this is not surprising because recent economic data and surveys suggest that there has been a pick-up in activity in the advanced capitalist economies last month.   Despite weak employment figures in the US last week and very weak GDP figures for Q2 (see my post, http://thenextrecession.wordpress.com/2013/07/31/the-us-economy-bigger-but-not-healthier/) , it seems that the US had a better July.
My measure for US economic activity – a combined ISM index for manufacturing and services sectors – ticked up in July.

The more frequent but less reliable ECRI weekly indicator of US economic activity also supported that trend.

And for the first time since 2010, the purchasing managers’ indexes (PMIs) for the major economies all rose, even in the Eurozone, which is no longer contracting.  The UK PMI in particular leapt forward after several quarters of stagnation, if not contraction.  Indeed, the pace of expansion is the fastest since 2006..

But don’t get carried away, like the stock markets are.  The PMIs just show the pace of expansion or contraction not the level of manufacturing output or services growth or decline.    All the UK PMI shows is that the UK economy is growing at last after stagnating.   Indeed, real GDP growth is still likely to be little more than 1% this year.  And UK manufacturing is hardly cracking along.

At the same time, manufacturing PMIs for key emerging economies indicate that the pace of growth is slowing, not accelerating.

Overall, world GDP growth is modest at best, with the average real growth rate well below that before the crisis.

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Greece still bust, Spain depressed, Italy paralysed

by Michael Roberts

As the summer rolls on, it is increasingly clear that the depression in the southern Eurozone economies is not going to go away any time soon.  Sure, the latest PMI data would suggest that the pace of decline in the Eurozone peripherals is slowing and, overall, the Eurozone may have stopped contracting in Q2 2013.

But the southern states are still deep in depression.  The most revealing news came from the latest IMF report on Greece (http://www.imf.org/external/pubs/ft/scr/2013/cr13241.pdf).  According to the IMF, Greece is still bust and will not be able to get its huge public debt burden down sufficiently to sustain government finances or repay the loans it has received from the Euro leaders.  Despite the largest decline in living standards and real GDP of any European country since the Great Depression of the 1930s and all the austerity measures insisted by the Euro leaders and imposed by the right-wing coalition government, the government budget will still have a shortfall next year and need yet more funding if it is to close the gap.  Also, Greece won’t be able to meet the IMF’s target to reduce public sector debt from 176% of GDP this year to 124% by the end of the decade.  And remember 124% of GDP would put Greek state debt at a higher ratio than any other European country and way higher than can make debt servicing sustainable.

No developed country going through such a depression has experienced such an increase in taxes and other levies as a percentage of gross domestic product (GDP) in order to close the budget gap.  The economy shrank below €194 billion in market prices last year to a level last seen in 2005. This represents a drop of about 17% from the nominal GDP’s peak at €233 billion in 2008.  The economy is expected to shrink further to around €184 billion in 2013, representing a drop of 21% since the 2008 peak.  In 2005 Greek public debt stood at €212 billion, when the size of the economy was equal to last year’s, before skyrocketing to €355 billion in 2011 and the falling to €304 billion in 2012 thanks to the largest-ever sovereign debt restructuring (PSI).

But that ‘restructuring’ (debt default) has not been enough.  And the IMF report admits that more will be needed.  The IMF reckons the Euro leaders must provide €11bn more and Greece be relieved of debts already owed to Eurozone governments totalling 4% of GDP, or about €7.4bn, within the next two years.  The Euro leaders are avoiding grasping yet again this nettle until the German elections are over in September and have said they will not discuss further debt relief for Greece until April 2014 at the earliest, when Eurostat is due to rule on whether Athens has for the first time reached a balanced budget  when debt payments are not counted – a so-called “primary surplus”.  EU officials have indicated there may be ways to fill the immediate cash shortage – which the European Commission has estimated at €3.8bn for 2014, though the IMF puts it at €4.4bn – without forcing eurozone lenders to put additional cash into the €172bn joint EU-IMF programme. One EU official said there may be leftover funds intended to recapitalise Greece’s banking sector that may no longer be needed and can be reprogrammed, for example. However, the IMF report makes clear that the funding gap, which opens up in August 2014, goes beyond next year and into 2015, where it estimates Greece will need an additional €5.6bn.

In the meantime, the situation on the ground for Greek households is only getting worse.  The government published the names of more than 2122 primary and secondary school teachers who will be transferred to the new mobility scheme, including, (surprise!) the head of the Federation of Secondary School Teachers (OLME), Themis Kotsifakis.  A teacher in Larissa, central Greece, reportedly died of a heart attack earlier this week after learning she would be transferred.  Next to be published are some 3,000 municipal police officers, 1,500 administrative staff from universities and technical colleges, 1,500 public healthcare workers and 600 staff from various social security funds and the OAED manpower organization. The government has promised the dreaded troika of the IMF, ECB and the the EU that it will have 12,500 civil servants in the scheme by September and 25,000 by the end of the year. The public sector workers will receive 75% of their salary for eight months until another position is found for them. If no position is found for them, they will be dismissed at the end of eight months.

Spain’s depression is also worsening.  In another report (http://www.imf.org/external/pubs/ft/scr/2013/cr13244.pdf), the IMF forecasts that Spain’s unemployment rate will stay above 25% until 2018 at least.

Ignoring the 1.6% downturn that the IMF expects the country to suffer this year, average real growth for the Spanish economy between 2014 and 2018 will be just 0.6%.  GDP growth will remain below 1% until 2017 and thereafter only begin to expand beyond these levels. The IMF’s answer to all this is ‘more flexibility’ in the labour force – in other words, workers must take a reduction in pay and conditions in order to ‘price themselves’ into jobs at rates of profit acceptable to the owners of capital (see my post, http://thenextrecession.wordpress.com/2013/05/12/spain-the-return-of-the-inquisition/).  The IMF calls for wage cuts of up to 10% over the next two years, along with higher VAT for consumers and lower payroll taxes for employers!

In some ways, Italy is in the direst position.  Its rate of profit and real GDP growth continue to slide (see my post, http://thenextrecession.wordpress.com/2013/02/28/goodbye-monti-hello-the-three-bs/ for a fuller account of Italy’s economic state).

But the real pressure over the summer has been political.  After right-wing media mogul and former PM Silvio Berlusconi was finally convicted of tax fraud and faces imprisonment, fines and, above all, a ban from public office for five years, Berlusconi launched a tirade against the judges and threatened to withdraw from the fragile all-party coalition formed after the paralysing general election.  He even talked of the risk of “civil war” if the “injustice” of his sentence is not addressed!   So the government remains in power on the whim of a convicted tax fraudster.  At the same time, the Democrat party, supposedly on the left, is engaged in a leadership battle between those who lean towards the unions and an openly Blairite, neoliberal wing led by Enzo Renzi, the mayor of Florence, who wants to introduce privatisations and other ‘reforms’. The anti-political Five Star movement that did so well in the elections seems to have disintegrated into faction fighting.   So Italy will stumble on until the autumn and then we shall see.

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Global capitalism: The global search for value

by Michael Roberts

In my view, we are now in a Long Depression, centred in the advanced capitalist economies but also affecting the emerging capitalist economies.  The latter do better because they still have ample supplies of cheap labour available to exploit (well, at least some larger emerging economies do).   So absolute surplus value can be increased without Marx’s law of profitability applying too strongly.  What do I mean by that?

Well, capitalists are permanently engaged in the search for value, or more specifically, surplus value.  They can get that globally by drawing more of the population into capitalist production. The big issue is how much longer capitalism can continue to appropriate value from human labour power when the workforce globally can no longer expand sufficiently.

Ironically, the UK’s right-wing City paper City Am put it from the perspective of capital: “People, not commodities, land or even capital, are the ultimate resource of an economy, as the US academic Julian Simon famously put it. Without talented, motivated, skilled and educated individuals, nothing is possible; capital itself is a product of labour.  Human ingenuity is able to overcome everything. Malthusians who dream of a shrinking population and who reflexively believe that every country is over-populated are wrong. This is always a lesson that nations suffering from shrinking populations relearn at great cost: all the productivity growth in the world is rarely enough to compensate for the psychological and actual effect of a declining population.”

More important, more people means more potential value to be appropriated by capital.  But getting more value and surplus value through extending the size of the workforce is increasingly difficult or even impossible in many advanced capitalist economies.

Instead, in these economies, capitalists must try and raise surplus value though the intensity of work and through more mechanisation and technology that saves labour i.e relative surplus value.  But that, as Marx explained, brings into operation the law of the tendency of the rate of profit to fall and the ultimate barrier to further accumulation and growth in value (see my post on http://thenextrecession.wordpress.com/2012/09/12/crisis-or-breakdown/).

Indeed the crisis in the south of the Eurozone is creating permanent damage to these economies: it is not just that their GDPs are shrinking, but there is an exodus of the workforce. The number of Greek and Spanish residents moving to other EU countries has doubled since 2007, reaching 39,000 and 72,000 respectively in 2011, according to new figures on immigration published by the OECD.  In contrast, Germany saw a 73% cent increase in Greek immigrants between 2011 and 2012, almost 50% for Spanish and Portuguese and 35% for Italians.

Japan is also suffering from the lack of expansion of its workforce.  In the short term GDP per capita growth in Japan looks better than its GDP growth so that US GDP per capita growth in recent years is little better than Japan.  Indeed on a per capita basis, the US has been stagnant since 2008 and Japan has risen slightly.

But longer term, this is bad news for Japan as its debt burden will mount and its working population to dependents will decline.  This is a growth and debt time bomb.  The move to crisis may be slow because Japan has huge reserves of FX reserves and foreign assets built up over decades so it has lots of funds to fall back on.  Japan’s net international investment position is 56% in the positive while the US is 19% in the negative.  Also its debt is mostly owned by its own citizens (only 7% by foreigners) while US government debt is 40% owned by foreigners.  However, the US dollar is still the world’s reserve currency, giving the US considerable leeway in funding its deficits and debt.  Japan’s banks and government are so intertwined that they will both go down together.  In the 1990s, the banks were bailed out by government; currently the banks are bailing out the government.  Next time, they both go down together.

George Magnus (Economic insights by George Magnus, 19 June, Demographics: from dividend to drag) recently pointed out that the support ratio in the US and Europe in the early 2000s was similar to that of Japan ten years earlier. It shows that from about  2016, the decline in China’s support ratio starts to speed up, so that by 2050, it will have fewer workers per older citizen than the US. It also includes India, by way of comparison, as the representative of the bulk of emerging markets and developing countries. India’s support ratio is predicted to grind lower but even by 2050, it will still be only the same as that in Western countries in the 1990s.  From the 1960s onwards – a little earlier in Japan – the total support ratio rose everywhere and more or less continuously, until about 1990 in Japan, and 2005-2010 in the US and Europe.  Japan’s support ratio is now approaching 1.5 workers per older citizen, and is predicted to carry on falling to parity in the middle of the century. The US and Europe are predicted to follow Japan, though support ratios are not expected to fall as far.

China and other emerging economies have not yet reached the point where the working population is no longer rising and the expansion of absolute surplus value is restricted – the so-called Lewis turning point (see my post, http://thenextrecession.wordpress.com/2012/11/16/chinas-transition-new-leaders-old-policies/).  But China is not far away.  In the meantime, China is pushing ahead with a sweeping plan to move 250 million rural residents into newly constructed towns and cities over the next dozen years — a massive of expansion of labour power into production.  The broad trend began decades ago. In the early 1980s, about 80% of Chinese lived in the countryside but only 47% today, plus an additional 17% that works in cities but is classified as rural.

And there are still huge reserves of labour as yet untapped, particularly in Africa.  The latest UN population projections for the world’s economies show that Africa is expected to dominate population growth over the next 90 years as populations in many of the world’s developed economies and China shrink.  Africa’s population is expected to more than quadruple over just 90 years,  while Asia will continue to grow, but peak about 50 years from now then start declining.  Europe will continue to shrink. South America’s population will rise until about 2050, at which point it will begin its own gradual population decline. North America will continue to grow at a slow, sustainable rate, surpassing South America’s overall population around 2070. 

China’s population is soon expected to go into decline , whereas India’s is expected to grow strongly for another 50 years, and the US’ and Indonesia’s populations are projected to grow steadily. Nigeria’s population is expected to explode eight-fold this century.

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Marxist Economics: Heinrich: a small rejoinder

by Michael Roberts

The debate in the comments section of this blog over the proper response to the misrepresentation by Michael Heinrich of Marx’s law of the tendency of the rate of profit to fall has got lively (see my previous posts, http://thenextrecession.wordpress.com/2013/07/25/returning-to-heinrich/ and http://thenextrecession.wordpress.com/2013/07/25/returning-to-heinrich/).  Some of the best Marxist economists in the world (Kliman, Freeman, Carchedi, Lebowitz) have pitched in and the debate continues.  I have not really intervened in the debate so far, but I thought it might be appropriate to add a short post now as a small rejoinder to some of the questions and differences raised so far.

I  think, understandably, that Professors Kliman and Freeman are concerned that none of us defenders of Marx’s law fall into the trap set by Heinrich who claims that supporters of the law are ‘fundamentalists’ and are trying to ‘prove’ Marx’s law by mathematics or by logic and that can’t be done.  Heinrich says at one point that Marx spent a lot of time with mathematical formulations to ‘prove’ his law but gave up.  But I am concerned (and I think Professor Carchedi is) that Professor Kliman’s formulation that the law ‘explains’ but does not ‘predict’ is in danger of conceding to Heinrich that the law is ‘indeterminate’, namely that it is the law of the tendency of the rate of profit to fall, rise and stay the same as circumstances permit.  That is no law, as Heinrich says.  But perhaps our differences here are just a matter of wording when Professor Kliman says that if the law was confirmed in the past then it is likely to be confirmed in the future and that is good enough proof?  Or is he still making the law ‘indeterminate’ by this formulation?  That is what worries me.

Let me put it this way.  For the purposes of the debate, I think Marx’s law is similar to the law of gravity.  In other words, if we see an apple come off a tree, we can predict that it will fall to the ground, but counteracting factors could intervene and the apple could get lodged in the tree or wind could blow it sideways for some time.   But that would change nothing about the law of gravity and moreover our prediction that this apple and others would eventually fall to the ground.  Eventually, the wind would subside and the apple would fall.  Later there would be no wind and all the apples would fall, although there could be significant periods when no apples would fall.  This does not make the law of gravity indeterminate.  It would only be indeterminate if it was decided that the power of the wind was just as strong as gravity and also should be incorporated into the law of gravity.  This is Heinrich’s main point: that a rising rate of surplus value is really a necessary part of Marx’s law, contrary to Marx’s view, and has equal power or weight in determining the direction of the rate of profit and therefore the law is indeterminate.

Marx says that the strength of the law, namely the tendency of the organic composition of capital to rise as capitalism expands the productive forces, is greater than the counteracting factors over time, in the same way that gravity exerts its downward pull on the apple and over time counteracting factors like wind will not prevail in stopping the apple falling.  In this sense, the law is ‘unidirectional and irreversible’, like the law of gravity.  The law of gravity does not say the apple will fall, rise or stay where it is depending on the circumstances, but predicts that it will fall.  If, in reality, it does not fall but rises, that is because of the intervention of counteracting factors that are not part of the law as such.

Wind is not part of the law of gravity and a rising rate of surplus value is not part of the law of profitability (as such).  We can show that this is the case for Marx’s law by starting with some assumptions that are realistic (the law of value operates and the organic composition of capital rises).  On those assumptions, the rate of profit will fall.  Then we can show that there are limits in reality for counteracting factors like a rising rate of surplus value to outstrip a rising organic composition of capital indefinitely, just like the wind cannot indefinitely triumph over the law of gravity.  Thus the law is based on the reality of capitalist development and the class struggle, just as the law of gravity is based on realistic assumptions about the universe.

Moreover, it does not take hundreds of years before the wind gives way and the apple falls and before the law overcomes the counteracting factors and the rate of profit falls.  If that were the case, it would be a pretty useless for our lifetime needs, like knowing that the moon will leave the earth’s orbit in 1.5 bn years and then the earth will start to wobble uncontrollably and life would become extinct.  That is a prediction with not much immediate practical use.

In contrast, empirical evidence shows that the law of profitability operates over much shorter periods.  We can show that the law is confirmed empirically on numerous occasions.  There has been a secular decline in the rate of profit in the US since 1947.  Sure, there are periods when the US rate of profit rose.  In my view, the US rate of profit rose from 1982 to 1997, but the law tells me that this will not last and the rate of profit will eventually start to fall. Heinrich says you cannot know such a thing because the law is indeterminate.

What do Professors Kliman and Freeman say on  this point?  I’m not sure: they seem to say that, as the law is not ‘unidirectional and irreversible’, presumably you can have no idea if the US rate of profit will fall over the next decade or not until it has happened.  But then they say that as it has been shown to fall in the past, so it is likely to do so in the future.  I’m not sure that this interpretation of the law (even if it is Marx’s, as Professor Kliman claims) is a very powerful ‘explanation’ (to use their words) of the law.  Ironically, Professor Kliman has spent much diligent and careful time arguing that the US rate of profit did NOT rise after 1982 and there has been a persistent fall in the US rate of profit since 1947.  And Professor Freeman has recently presented a paper to ‘correct’ the evidence that the UK rate of profit rose after the mid-1970s, claiming that it continued to fall.  If they are right, would that not support the view that the law is ‘unidirectional and irreversible’ in the sense above, and not indeterminate, as Heinrich argues?  Perhaps the professors should make a study of periods when the rate of profit has risen and explain why.   Does the rate of profit only rise when there is a slump and the value of capital employed is sharply destroyed?  Does it not rise sometimes in periods of boom?  If so, can the law explain or even predict these periods?

And that brings me to another possible difference, at least in the debate between Marxists trying to refute Heinrich’s bastardisation.  Does the law just show how there are crises in capitalism, booms and slumps, driven by the up and down movement of the rate of profit; or does it go further and say that IN A WORLD ECONOMY, where capitalism is exhausting all sources of value creation, the rate of profit will fall secularly to new lows and thus make it more and more difficult for capitalism to develop the productive forces?  In other words, the law shows why capitalism will come up against the ultimate barrier, namely capital itself, and so is a transient mode of production like other earlier class-based systems.  It will increasingly descend into stagnation, decay and chaos unless the progressive class, the proletariat, takes over.  If the law is just one of explaining recurrent booms and slumps in capitalism, that would suggest that capitalism could go on forever expanding the productive forces, albeit with waste, inequality and injustice.  If it is more than that, then it provides support for the view that capitalism is not eternal.

In summary, can we reach an agreement in this debate? Let me pose some statements that could have yes or no answers.
1 ) The law is not indeterminate; instead it argues that the rate of profit WILL fall over time, like the law of gravity that the apple will fall if it breaks from the tree.
2) The law is not a fake mathematical ‘proof’ as claimed by Heinrich, but, based on reasonable realistic and relevant assumptions, it predicts that the rate of profit will fall over time.
3) The law is not a law of the tendency of the rate of profit to fall, rise or stay the same, depending on various counteracting factors that come into play.  If the latter do, the rate of profit may rise, but eventually (and not in a hundred years), the counteracting factors cannot hold sway.
4) There is empirical evidence to back up the law, contrary to Heinrich.
5) The law goes further than just predicting booms and slumps, but also predicts capitalism’s eventual demise (in the sense of not taking the productive forces forward).

These are the questions for yes and no answers that may help you to know where you stand.  My answers are yes to all these statements.

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World Economy: The story of inequality

by Michael Roberts

The 15th conference of the Association of Heterodox Economists took place last week.  The keynote theme of this gathering of economists who are not of the mainstream was inequality.  The world’s greatest economic expert on inequality of wealth and income is Tony Atkinson, or should I say, Sir Anthony Atkinson.  Atkinson is senior research fellow at Nuffield College, Oxford and a distinguished econometrician.

Atkinson’s address was entitled “Where is inequality headed?”.  Inequality is back on the economic agenda after being ignored for decades by mainstream economics.  But official spokespeople and mainstream economists everywhere are now looking at the subject, after the financial crash and the revelation that the top 1% (bankers and top corporate executives) have been stacking up their ‘earnings’ while the 99% have been stuck with unmoving real incomes for years.
Atkinson was careful to define inequality for his purposes: namely inequality of income within a country, not inequality of wealth or income between countries. 

In previous posts (https://thenextrecession.wordpress.com/2010/01/10/20/), I have referred to the groundbreaking work of Branko Milanovic from the World Bank who has shown that the biggest inequalities of income and wealth are engendered by the gaps between the rich and poorer countries rather than inequalities between rich and poor within a country.  But Atkinson concentrates on inequalities within countries.  Atkinson reckons that the best measure of inequality of income is between households, not individuals, and after tax and benefits have been distributed.   This household disposable income includes not just earnings from work but also capital income (rent and interest and dividends).

On this measure, Atkinson has an interesting story to tell about the changes in inequality of incomes in the advanced capitalist economies.  Using the gini coefficient, which measures average inequality across the spectrum of households, Atkinson finds that in the OECD economies there has been a rise of about 3% pts in the coefficient from about 28 to 31 since the 1980s, or a rise of about 10%.  This confirms the evidence of the OECD that in a recent post (https://thenextrecession.wordpress.com/2013/05/17/inequality-theres-no-stopping-it/) I had previously referred to.

Adding to that OECD study, Atkinson pointed out that between 1911 and 1950, inequality of income actually declined slightly, reaching its most equal point (still pretty unequal) in the years immediately after WW2.  But from the 1980s it rose sharply.  Interestingly, the largest rise in inequality in the UK was in the 1980s during the Thatcher years, when the gini ratio rose a staggering 10% points, briefly exceeding the US by the early 1990s.  The other shocker was the rise in inequality in social democratic Sweden, which now no longer has a more equal society, at least as measured by disposable household income.  In contrast, inequality of income in France fell a little during the same period.
The latest data from the UK’s ONS confirm this story of rising inequality during the 1980s and then a levelling off in the 1990s onwards

Atkinson then asked the question: why?  What were the causes of the rise in household inequality of income in the advanced capitalist economies after the 1980s?  The usual reason given by mainstream economics is that new technology and globalisation led to a rise in the demand for skilled workers over unskilled and so drove up their earnings relatively.   This is the argument presented by Greg Mankiw recently in his defence of the top 1% of earners (https://thenextrecession.wordpress.com/2013/06/19/defending-the-indefensible/).

Atkinson dismissed this neoclassical apologia.  The biggest rises in inequality took place before globalisation and the dot.com revolution got underway in the 1990s.  Atkinson pinned down the causes to two.  The first was the sharp fall in direct income tax for the top earners under neoliberal government policies from the 1980s onwards and the sharp rise in capital income (i.e. income generated from the ownership of capital rather than from the sale of labour power).  The rising profit share in capitalist sector production that most OECD economies have generated since the 1980s was translated into higher dividends, interest and rent for the top 1-5% who generally own the means of production.  In 2011, capital income constituted 60% of the top 10% earners’ income compared to just 32% in the 1980s.

Higher returns from capital have been coupled with lower taxes on capital and on the income earned by the top earners.  The total effective tax rate is the total amount paid by households in both direct and indirect taxes as a percentage of their gross income.  In the UK, the effective tax rate grew during the 1960s and 1970s from 28.4% in 1961 to a peak of 39.4% in 1983.  But from then on, under Thatcher, Major and New Labour, the trend has been downward, reaching a low of 32.8% in 2009/10, before increasing slightly over the last two years to 34.6%.

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As a result, even though the rich pay more in tax than the poor because they earn more, the bottom 20% of households now pay more in tax as a percentage of income (36.6%) than the top 20% in the UK (35.5%)!

The other key issue on inequality is whether it is the main reason for the last global crisis.  Many leftist and some mainstream economists reckon that restricted incomes for the lower income groups caused the Great Recession because consumption and ‘effective demand’ weakened and because households resorted to taking on more debt to compensate for the lack of growth in the incomes from work.  I have argued before in previous posts that rising inequality was not the cause of the Great Recession of 2008-9 or the ensuing Long Depression now being experienced in the mature capitalist economies of the OECD (see my posts: http://thenextrecession.wordpress.com/2012/05/21/inequality-the-cause-of-crisis-and-depression/ and http://thenextrecession.wordpress.com/2011/10/21/1-versus-99/).  But this argument persists and many papers at this year’s AHE conference pressed on with this argument with some evidence.

But the evidence for this thesis remains questionable.  A paper by Michael Bordo and Christopher Meissner from the Bank of International Settlements has analysed the data and concluded that inequality does not seem to be the reason for a crisis. Credit booms mostly lead to financial crises, but inequality does not necessarily lead to credit booms. “Our paper looks for empirical evidence for the recent Kumhof/Rancière hypothesis attributing the US subprime mortgage crisis to rising inequality, redistributive government housing policy and a credit boom. Using data from a panel of 14 countries for over 120 years, we find strong evidence linking credit booms to banking crises, but no evidence that rising income concentration was a significant determinant of credit booms. Narrative evidence on the US experience in the 1920s, and that of other countries, casts further doubt on the role of rising inequality.“

Edward Glaesar also points to research on the US economy that home prices in various parts of the US did not always increase where there was the most income inequality. That calls into question the claim that income inequality was inflating the housing bubble. And Glaesar refers to Atkinson on this: “Professors Atkinson and Morelli’s international data also suggest little regular connection between inequality and crises. Looking at 25 countries over a century, they find ten cases where crises were preceded by rising inequality and seven where crises were preceded by declining inequality.”  Moreover, inequality was higher in two of the six cases where a crisis is identified, which is exactly the same proportion as among the 15 cases where no crisis is identified.

It is one thing to recognise that inequality has rocketed in the last 30 years and quite another to claim that this explains the credit crunch and the Great Recession.  What is wrong theoretically with this argument is that it assumes, as the Keynesians do, that the fundamental weakness of capitalism lies on the demand side of the economy. Since many people had insufficient incomes to consume, they borrowed money to maintain their living standards.  Radically different conclusions follow if the problem is located on the supply side (with the cause to be found in profitability).  From this perspective, falling profitability explains the sluggish character of the productive economy and is at the root of the crisis.  If the economy had been more profitable, there would have been less need for such a rapid or ‘excessive’ expansion of credit.  From this perspective, the widening of inequality is more of a symptom than a cause of economic weakness. The rich became richer with the emergence of the asset bubble, but the underlying economy was far from healthy in the first place.

What is decisive for capitalism is surplus value (profit, interest and rent), not wage income or spending.  Control of that surplus is key.  The main feature of the last 100 years of capitalism has not been growing inequality of income – indeed, as Atkinson shows, inequality has not always risen.  The main feature has been a growing concentration and centralisation of wealth, not income.  And it has been in the wealth held in means of production and not just household wealth.

A new study shows how far that has gone in the recent period.  Three systems theorists at the Swiss Federal Institute of Technology in Zurich have taken a database listing 37 million companies and investors worldwide and analyzed all 43,060 transnational corporations and share ownerships linking them (147 control). They have a built a model of who owns what and what their revenues are, mapping out the whole edifice of economic power.  They discovered that a dominant core of 147 firms through interlocking stakes in others together control 40% of the wealth in the network.  A total of 737 companies control 80% of it all.   This is the inequality that matters for the functioning of capitalism – the concentrated power of capital.

There were other themes at the AHE conference, in particular the claim by Keynes that capitalism would achieve prosperity for all and increased leisure for all within 100 years of the 1930s.  I have dealt with Keynes’ arguments in a previous post (https://thenextrecession.wordpress.com/2013/05/04/keynes-being-gay-and-caring-for-the-future-of-our-grandchildren/) but I’ll return to that issue and also the paper that I presented on cycles in capitalism in a future post.

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Global Economy: The world is slowing

by Michael Roberts

There has been much talk of recovery picking up pace in the advanced capitalist economies but slowing down in the emerging economies, particularly China.  To get a more timely feel on the level of activity in the world economy, I use the purchasing manager’s indexes (PMIs).  These are monthly surveys compiled from companies in various countries on the state of production, employment, prices and orders, indexed up into a country by country figure.  The PMIs for June look like this.  These are PMIs for combined manufacturing and services sectors.

Anything over 50 implies that the economy is expanding.  In June, the only region still contracting was the Eurozone – still deep in recession.  But note that the Eurozone PMI is up from the figure in April.  So it would appear that the the rate of the Eurozone’s contraction is slowing – a small mercy.  Everywhere else, there is expansion.  However, the PMI data confirm that China and thus the World as a whole is expanding but at a slower rate than in April.  And that also applies to the US.   The US economy is still growing but according to the PMI at a slightly slower pace than in April.

The interesting development is that there has been a pick-up in the pace of expansion since April in the UK and Japan.  This would seem to confirm that the fear of a ‘triple-dip’ or ‘double-dip’ recession in the UK was unfounded.   Indeed, now all the economic forecasters are raising their guesses on UK expansion, including the IMF, from their dismal forecasts of a few months ago.  But just as the forecasters overdid their view on the UK to the downside, they are probably now swinging to be over-optimistic on the upside.  At best, UK GDP is going to grow by just 1% in real terms this year and even less per head of population.

And the world economy as a whole is slowing down in its expansion. driven by slower growth in China and the other major emerging capitalist economies.  Just as the very weak recovery in the advanced capitalist economies dragged down overall global growth between 2009-12, now it seems that the supposedly fast-growing emerging economies will dampen the impact of any relatively faster growth in the advanced economies.   In particular, the Chinese economy slowed to 7.7% a year in Q1-2012 from 7.9% at the end of 2012.  It is going to be even slower in the quarter just gone and through the rest of the year.  Of course, a real growth rate of 7%-plus is huge compared to the rest of the world, but it is not enough to absorb the flow of new labour into Chinese industry and services.  Elsewhere, Brazil, India and other major emerging economies are also slowing.

But it is the US economy that remains key to the health of the world capitalist economy – it remains the largest, the biggest trader and the dominant financial force.  And if we look at the US economy through the eyes of its combined manufacturing and services sector PMI, it remains stuck in a low-growth path, where it has been for almost the whole time since the end of the Great Recession.  If anything, the trend is for even slower growth going forward.
The more frequent but less reliable weekly indicator from ECRI tells the same story: the US has not achieved the usual economic recovery that comes after a slump.

Much has been made of the latest US jobs figures.  Employment rose 195,000 in June and after upward revisions for previous months, it seems that average employment growth is now 200,000 a month, higher than the less than 150,000 in the first quarter of this year.  But that increase has not made much of a dent in the unemployment rate because more Americans out of work have attempted to look for jobs after having given up for a while.  Indeed, the measure of long-term unemployment rose in June, from 13.8% to 14.3%—the highest level since February.  This suggests that new jobs are being snapped up by new claimants while those who lost their jobs in the Great Recession remain on the scrap heap, with their benefits being cut or expiring.

Moreover, just as in the UK, most of these new vacancies are not full-time permanent jobs at good wages, but part-time, low grade work. The number of people working part-time rose by 322,000 to 8.2 million. These people aren’t working part-time because they want to—it’s because they can’t find full-time work.  And of the  jobs created in June, 60% were in low-paying positions: 75,000 jobs were created in the leisure and hospitality sector and 37,000 jobs were created in the retail sector.  This will eventually translate into low or falling productivity in the US economy, just as it has done in the UK.  US corporations are taking advantage of the huge reserve army of labour still out there to introduce part-time and temporary jobs to save labour costs – reduced benefits, no holiday or sick pay etc.

Back in the UK, amid the new hope that the economy is about to burst forward at last, the latest data on UK corporate profitability were released with substantial revisions to the historic data.  In Q1-2013, non-financial corporations’ net return on capital stock, a pretty good measure of profitability, if not a la Marx, was 12%, slightly higher than the level of the last four years since the trough of the slump.  Manufacturing companies continued to achieve a much lower return at 8% on average.  So UK corporate profitability has improved a little from the slump, but it is still 20% below where it was at its peak in early 2008 and that was below its 1997 peak.


As I have shown in previous posts, this is the story of profitability in most capitalist economies, including the emerging economies.  A new slump may be necessary to ‘cleanse’ the capitalist economy of too much debt and too many inefficient ‘zombie’ companies.  As the leading global bond investment manager, PIMCO put it this week: “Statistically speaking, the global economy experiences a recession every six years or so, and the frequency of global recessions tends to increase when global indebtedness is high and falling as opposed to when indebtedness is low and rising. Given that the last global recession was four years ago, and also given that the global economy is significantly more indebted today than it was four years ago, we believe there is now a greater than 60% probability that we will experience another global recession in the next three to five years.”

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Brazil: the carnival is over

by Michael Roberts

The mass protests, demonstrations and actions that have shaken and still are shaking the pro-capitalist governments of Turkey, Brazil and Egypt show that the key emerging capitalist economies are not immune from the slump that has engulfed the advanced capitalist economies.  The advanced economies still contribute some 55-60% of world GDP (depending on how you measure it).  They remain the dominant influence over the world capitalist economy.

The Great Recession and the subsequent weak recovery have led to a significant fall in trade and investment flows to the emerging economies, particularly to the largest so-called BRICS (Brazil, Russia, China, India and South Africa).  Their growth rates have also begun to fall away.  In addition, the largest by far of the BRICS, China, is experiencing a 2-3% pt fall in its super-fast growth rate and that has been enough to cause sharp drop in the demand for commodities (agricultural and raw materials), the main exports of other emerging economies.  So the crisis is a world-wide one.
Take Brazil.  The nationwide street demonstrations of the past few weeks have sent shockwaves through Brazil’s political elite. There is widespread discontent with a ruling class that is seen as self-serving and corrupt.  More than a million Brazilians have poured on to the streets in recent weeks to protest against a litany of grievances, from corruption and poor public services to outrage at billions of pounds in taxpayers’ money being spent to host the 2014 World Cup.  It seems that the carnival for Brazilian capitalism of recent years is now over.

How has Brazil’s carnival of capital played out?  We can look at the Brazilian economy from a Marxist viewpoint by analysing the movement in the rate of profit for the whole economy.  Using the Extended Penn World Tables as my source data and my own calculations, I reckon the rate of profit in Brazil moved like this.

So between 1963 and 2008 (the latest year, I have), the rate of profit declined secularly by about 19%.  But this secular fall was really the product of the very large decline in the rate of profit from 1963 to the early 1980s and 1990s.  Over these 20 years or so, the rate of profit fell over 30% while the organic composition rose 23% and the rate of exploitation fell 17% – a classic example of Marx’s law of profitability at work.

But from the mid-1990s, Brazil’s’ ruling elite adopted neo-liberal policies designed to restore the rate of profit.  Between 1993 and 2004, the rate of profit rose 35%. The organic composition of capital rose 20% as foreign investment flooded into new industries (autos, chemicals and petroleum), but the rate of exploitation rose even more, up 55%, as more Brazilians entered the industrial and agro processing labour force with intensive capitalist production methods, while wages were held down.

Over the last three decades Brazil became a major agricultural producer and exporter to the world market. Leading exports include soybeans and products, beef, poultry meat, sugar, ethanol, coffee, orange juice, and tobacco. Brazil’s agrifood sector now accounts for about 28% of the country’s GDP.  Brazil’s is now the world’s third-largest agricultural exporter (in value terms), after the US and the EU.  Rapid export growth was accompanied by changes in the composition of agricultural exports away from tropical products to processed products – up the value-added scale. Processed products now account for about three-fifths of agricultural exports.

And Brazil, like some other emerging economies, benefited from some other favourable external factors that supported the neo-liberal policies at home.  Food commodity prices rose.  In a way, it was like the discovery of North Sea oil that helped Britain’s Thatcher government in the 1980s.  The income windfall to Latin America from persistently high commodity prices over the past decade has been unprecedented.  It averaged 15% of domestic income on an annual basis and close to 90% on a cumulative basis.

he income windfall from persistently high commodity prices over the past decade has been unprecedented. The windfall averaged 15 percent of domestic income on an annual basis, and close to 90 percent on a cumulative basis (see Chart 2). – See more at: http://www.economonitor.com/blog/2013/05/after-a-golden-decade-can-latin-america-keep-its-luster/#sthash.bfZQvDxX.dpuf

So a combination of rising commodity prices driven by Chinese demand, productivity gains as the rate of exploitation rose and the expansion of employment from the rural areas boosted profitability and growth for a decade.  After the 2002 crisis, GDP growth averaged above 4% per year until 2010.  This led to significant improvements in living standards and life in general. But the iniquities of capitalist development remained embedded in the system. Inequality of income and wealth in Brazil remains at extreme levels, exceeded only by post-apartheid South Africa – and when measured by a gini coefficient per capita, Mexico.  Note Turkey is next.

Despite the boom of the last decade, average household net-adjusted disposable income in Brazil  is still way lower than the OECD average of $23,047 a year – and that’s the average.  Over 16 million people are still living in what is deemed extreme poverty, with monthly incomes of below 70 reais (about $33).  Some 80% of men are in paid work, compared with 56% of women and 12% of employees work very long hours, higher than the OECD average of 9%, with 15% of men working very long hours compared with 9% for women.  Around 7.9% of people reported falling victim to assault over the previous 12 months, nearly twice the OECD average of 4.0%.  Brazil’s homicide rate is 21.0, almost ten times the OECD average of 2.2, one of the highest in the world at 21 per 100,000. Violence is concentrated among young people and over the past decade and a half, violence – including armed violence – has become a major social problem in the country.  And Brazil’s regional disparities remain very high: average GDP per capita varies from just 46% of the national average in the Northeast region to 34% above the average in the Southeast.


Under the government of former president Lula and the commodity boom, there were some important gains for the working class: a social protection system,  increasing credit at low interest rates for workers and universalising health and education.  The Bolsa Familia, or family allowance programme, is the most visible face of these policies. Between 2004 and 2011, the number of families benefiting from income transfers more than doubled, from 6.5 million to 13.3 million, representing nearly one-quarter of the population. In the more isolated regions, payments under this programme have become the principal engine of the local economy.  Another pillar of government policy, adopted through negotiations with the unions, was to raise the minimum wage and associated pension. It went up by 211% in nominal terms between 2002 and 2012, for a real inflation-discounted increase of 66%.  Unemployment rate plunged from 12.3% to 6.7% and the labour force expanded at a 1.6% yearly rate.

However, during this boom, Marx’s law of profitability was still at work.  From 2004 the rate of profit began to fall (down 8% to 2008 and more since), as wages shot up and the rate of exploitation dropped 25%.  It was only the continued boom in food commodity prices that kept growth going.

The fall in profitability since 2004 was mirrored in other major emerging capitalist economies (see my post on Turkey for a similar trend, http://thenextrecession.wordpress.com/2013/06/03/turkey-cant-see-the-trees-for-the-woods/).  In my paper, A world rate of profit (roberts_michael-a_world_rate_of_profit), I show that the rising rate of profit in the emerging economies was able to push up the overall world rate of profit through the mid-2000s, but not since then.
When the global slump came in 2008-9, the emerging capitalist economies could not avoid the consequences.  In the case of Brazil, it seemed that rising commodity prices plus a deliberate policy by the government to increase state-financed investment had enabled Brazil to avoid the worst of the slump compared to others.

But prices for Brazil’s key agricultural exports began to falter from 2011 onwards. In the last year, global commodity prices fell back sharply and profitability began to fall further. Now Brazil’s export profitability is some 20% below its best years before 2004.

Brazil’s GDP growth has consequently slowed since 2011.  There has been a sharp fall in manufacturing investment and exports over the past two years.  While public investment increased by 0.4% points to 5.4% of GDP, it has not been enough to compensate for the fall in the ratio of private investment to GDP from 14.3% to 12.7% last year.  Industry has not even returned to its pre 2008 crisis production level.

The government has tried to get private sector investment going through tax cuts and incentives for the corporate sector but only at the cost of running up a deficit on its budget.  Interest costs on the public debt have been mounting, forcing the government to cut subsidies to transport, housing and education on which the majority rely.  It was the last straw to spend huge amounts on football and the Olympics (partly to boost capitalist sector profits) at the expense of basic public services.  Thus the eruption of protest.

What now?  Dilma Rousseff’s approval rating has sunk by 27 percentage points in the last three weeks.  The share of people who consider Rousseff’s administration “great” or “good” plummeted to 30% from 57% in early June, according to a Datafolha opinion poll, the sharpest drop for a Brazilian leader since 1990, when Fernando Collor outraged the population by freezing all savings accounts in a desperate attempt to stop hyperinflation.   81% said they support the demonstrations. Asked if the protests had resulted in positive changes, 65% said yes.

The unrest has prompted a flurry of government promises to improve public services and other measures aimed at quelling the protests.  In the past week alone, Brazil’s Congress voted on a battery of bills promoting issues popular with the protesters, and the supreme court ordered the arrest of a lower house representative convicted of corruption.  Rousseff is now seeking congressional support for a non-binding referendum to ask Brazilians how they would like to see the political system changed.

But while the government appears to be making paper concessions, in reality it has no intention of reversing its neo-liberal policies.  Finance minister Guido Mantega made that clear when he said that he will “raise taxes or cut public spending to compensate for any future subsidies it offers to support struggling sectors”.   Profitability in the capitalist sector will not recover without further hits to living standards and economic growth will remain low as long as the world economic recovery remains weak and China slows down.  The carnival is over.

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