Michael Roberts Blog

Steve Keen has a new book out.  It’s called: Can We Avoid Another Financial Crisis? Steve Keen is professor of economics at Kingston University in the UK.  His earlier book (Debunking economics) is a brilliant expose of the fallacious assumptions and conclusions of mainstream economics, i.e. ‘perfect competition; general equilibrium and ‘rational expectations’ of economic ‘agents’.

The failure of mainstream economics to see the coming of the global financial crash and the ensuing Great Recession is now well documented – see my own coverage here.  This failure has led several mainstream economists to disavow its usefulness.  One such recently was Paul Romer, a former New York university professor and now the chief economist of the World Bank.  Last fall, before taking up his appointment at the World Bank, Romer wrote a paper accusing his fellow macroeconomists of forming a monolithic intellectual community, which deferred to authority, disregarded the opinions of those outside of their group and ignored unwelcome facts. They behaved more like cult members than genuine scientists. Romer compared modern macroeconomics to string theory, famously described as “not even wrong.”

This did not go down well.  And now there has been a rebellion among his 600 economists (yes, 600!) at the World Bank.  They have insisted that he no longer be in charge of managing them, after he demanded that they drop their long-winded economic jargon and adopted a simpler style of prose.  Romer responded ironically to this demotion of his power at the World Bank, “Apparently the word is out that when I asked people to write more clearly, I wasn’t nice. And that I slaughter kittens in my office.”

But I digress.  The point of this Romer story is to show that those who dispute the assumptions and conclusions of mainstream economic apologia are not likely to get much of a hearing.  As I said in my post on Romer’s critique, that he won’t succeed in getting “mainstream economics yanked back into reality”. And so it has proved.

Steve Keen, however, continues his attempt to provide an alternative closer to economic reality.  And his new book also makes a prediction: that another crash is coming and even picks out some likely candidates where it is likely to kick off.  Now readers of this blog know that I think it is the job of economics, if it really sees itself as a science, to not only present theories and test them empirically, but also to make predictions.  That is part of the scientific method.  So Keen’s approach sounds promising.

But all depends, of course, on whether your theory is right.  Keen reiterates his main thesis from his previous work: that, in a modern capitalist economy credit is necessary to ensure investment and growth.  But once credit is in the economic process, there is nothing to stop it mismatching demand and supply.  Crises of excessive credit will appear and we can predict when by adding the level of credit to national income.  In the major capitalist economies leading up to the crisis of 2007, private sector credit reached record levels, over 300% of GDP in the US. That credit bubble was bound to burst and thus caused the Great Recession.  And this will happen again.  “A capitalist economy can no better avoid another financial crisis than a dog can avoid picking up fleas – it’s only a matter of time.”

So what of the next crisis? With his eye on credit growth, Keen sees China as a terminal case. China has expanded credit at an annualized rate of around 25 per cent for years on end. Private-sector debt there exceeds 200% of GDP, making China resemble the over-indebted economies of Ireland and Spain prior to 2008, but obviously far more significant to the global economy. “This bubble has to burst,” writes Keen.

Nor does he have much hope for his native Australia, whose credit and housing bubbles failed to burst in 2008, thanks in part to government measures to support the housing market, lower interest rates and massive mining investment to meet China’s insatiable demand for raw materials. Last year, Australian private-sector credit also nudged above 200% of GDP, up more than 20 percentage points since the global financial crisis. Australia shows, says Keen, that “you can avoid a debt crisis today only by putting it off till later.”

This idea that it is the level of credit and the pace of its rise that is the main criterion for gauging the likelihood of a slump in capitalist production also lies behind the view of another heterodox economist, Michael Hudson in his book Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy. Hudson’s main contention that the FIRE economy – finance, insurance, and real estate – cripples the “real” economy and is slowly reducing most of us to debt bondage.

Hudson goes further.  For him, the old system of industrial capitalism – hiring labor, investing in plants and equipment and creating real wealth backed by tangible goods and services – has been eclipsed by the re-emerging dominance of a parasitic neo-feudal class.   It is this elite, not industrial capitalists, who are the foundation of most of our economic woes.  The 2008 crisis was not a typical boom and bust housing crash of capitalism but the logical conclusion of financial parasites slowly bleeding most of us dry. “Today’s neoliberalism turns the [free market’s] original meaning on its head. Neoliberals have redefined ‘free markets’ to mean an economy free for rent-seekers, that is, ‘free’ of government regulation or taxation of unearned rentier income (rents and financial returns).”

I read this to mean that it is not capitalism of the past, competition and the accumulation of capital for investment, that is the problem and cause of crises, but the ‘neoliberal’ world of ‘rentier’ capital, ‘feudal’ parasites and ‘financialisation’.  This would suggest that crises could be solved if capitalism returned to its previous role, as Adam Smith envisaged it, as expanding production through division of labour and competition.

Also, for Hudson, the problem of capitalism is not one of profitability and the striving to extract surplus-value out of the productive labour force but one the extraction of ‘rents’ out of industry by landowners and financiers.  “Labor (‘consumers’) and industry are obliged to pay a rising proportion of their income in the form of rent and interest to the Financial and Property sector for access to property rights, savings and credit. This leaves insufficient wages and profits to sustain market demand for consumer goods and investment in the new means of production (capital goods). The main causes of economic austerity and polarization are rent deflation (payments to landlords and monopolists) and debt deflation (payments to banks, bondholders and other creditors).”  (Hudson)

Thus we have a model of capitalism where crises result from ‘imperfections’ in the capitalist model, either due to a lack of competition and the growth of financial rentiers (Hudson) or due to excessive credit (Keen).  Moreover, crises are the result of a chronic lack of demand caused by squeezing down wages and raising the level of debt for households. The latter thesis is not new – as many mainstream economists have argued similarly and it dominates as the cause of crises on the left.  As Mian and Sufi put it, “Recessions are not inevitable – they are not mysterious acts of nature that we must accept. Instead recessions are a product of a financial system that fosters too much household debt”.

The key omission in this view of crises is any role for profit and profitability – which is after all the core of Marx’s analysis of capitalism – a mode of production for profit not need.  Profit is missing from Keen’s analysis.  Indeed, Keen considers Marx’s theory of value to be wrong or illogical, accepting the standard neo-Ricardian interpretation and Marx’s law of the tendency of the rate of profit to fall as being irrelevant to a theory of crises.  Hudson has nothing to say about Marx’s key insights.

The post-Keynesians rely on the Keynes-Kalecki equation, namely that profits = investment, but it is investment that drives or creates profits, not vice versa, as Marx would have it.  This view recently reached its extreme in another relatively new book, Capitalism as Oligarchy, by Jim O’Reilly, where, similar to the view of leading post-Keynesian, Engelbert Stockhammer, that is rising inequality that is decisive to crises rather than profitability of capital, O’Reilly argues that “inequality isn’t a side-effect of something we happen to call ‘capitalism’ but is rather the core of what the system is”.

According to O’Reilly, profits does not come from the unpaid labour of the working class but are ‘created’ for capitalists by the sale of goods and services to the consumer.  Profits come from exploiting the consumer, not the worker.  “where does profit come from? It can’t be from workers since they can spend no more than the wage received (!! – MR).  Wages are a source of revenue through sales, but they’re also a cost. For the system as a whole, they must net to zero—workers are simply not profitable.”  Only capitalists have more income than they spend, so they create their own profits (hmm… MR).

Apparently, Rosa Luxemburg was on the case… “Her insight that profit had to come from a source beyond the worker was correct but she erred in accepting the conventional monetary wisdom that capitalism’s “aim and goal in life is profit in the form of money and accumulation of capital.”   In this theory, profits are not the driver of capitalism but the result of investment and consumption.

The argument that credit plays a key role in capitalism; and ‘excessive credit’ does so in crises was first explained by Marx.  As Marx wrote in Volume 3 of Capital, “in a system of production where the entire interconnection of reproduction process rests on credit, a crisis must inevitably break out if credit is suddenly withdrawn and only cash payment is accepted…at first glance, therefore the entire crisis presents itself as simply a credit and monetary crisis”.  (p621) But that’s at “first glance”.  Behind the financial crisis lies the law of profitability: “the real crisis can only be deduced from the real movement of capitalist production” (TSV2, p512).

Looking for a cause is scientific. But dialectically there can be causes at different levels, the ultimate (essence) and the proximate (appearance). The ultimate is found from the real events and then provides an explanation for the proximate. The crisis of 2008-9, like other crises, had an underlying cause based on the contradictions between accumulation of capital and the tendency of the rate of profit to fall under capitalism. That contradiction arose because the capitalist mode of production is production for value not for use. Profit is the aim, not production or consumption. Value is created only by the exertion of labour (by brain and brawn). Profit comes from the unpaid value created by labour and appropriated by private owners of the means of production.

The underlying contradiction between the accumulation of capital and falling rate of profit (and then a falling mass of profit) is resolved by crisis, which takes the form of collapse in value, both real value and fictitious. Indeed, wherever the fictitious expansion of capital has developed most is where the crisis begins e.g. tulips, stock markets, housing debt, corporate debt, banking debt, public debt etc. The financial sector is often where the crisis starts; but a problem in the production sector is the cause.

Undoubtedly the rise of excessive credit in the major capitalist economies was a feature of the period before the crisis.  And its very size meant that the crunch would be correspondingly more severe as capitalist sector saw the value of this fictitious capital destroyed.

But is it really right to say that excessive credit is the cause of capitalist crises?  Marx argued that credit gets out of hand because capitalists find that profitability is falling and they look to boost the mass of profits by extending credit.

It is a delusion or a fetish to look at credit as the main or only cause of crisis.  In a capitalist economy, profit rules.  If you deny that, you are denying that capitalism is the right term to describe the modern economy.   Maybe it would be better to talk about a credit economy, and credit providers or creators and not capitalists.  Thinking of credit only, as Keen does, leads him to conclude that China is the most likely trigger of the next global crisis.  But that has already been refuted by the experience of the last year.

We must start with profit, which leads to money, investment and capital accumulation and then to employment and incomes.   And there is a mass of empirical evidence that profitability and profits lead investment, not vice versa.

Moreover, why did debt and financial rents become ‘excessive’ in the so-called neoliberal period?  The Marxist explanation is that the profitability of productive capital declined in most modern economies between the mid-1960s and the early 1980s, and so there was a rise of investment in finance, property and insurance (FIRE), along with other neo-liberal counter measures like anti-trade union legislation, labour laws, privatisation and globalisation.  The aim was to raise profitability of capital, which succeeded to a limited extent up to late 1990s.

But as profitability began to fall back, the credit boom was accelerated in the early 2000s, leading eventually to the global financial crash, credit crunch and the Great Recession.  As profitability in most top capitalist economies has not returned to the levels of the early 2000s, investment in productive sectors and productivity growth remains depressed.  The boom in credit and stock markets has returned instead.  Fictitious capital has expanded again – as Keen shows.  And rentier capital dominates – as Hudson shows.

If excessive credit alone is to blame for capitalist crises and not any flaws in the profit mode of production, then the answer is the control of credit.  If rentier capital is to blame for the poverty of labour and crises, then the answer is to control finance.  Indeed, Keen argues that the best policy prescription is to keep private sector credit at about 50% of GDP in capitalist economies.   Then financial crises could be avoided.  Hudson recommends annulling unpayable debts of households. And Hudson recommends a nationalized banking system that provides basic credit.

These are undoubtedly important reforms that a pro-labour government or administration should implement if it had such power to do so.  But that alone would not stop crises under capitalism, if the majority of the productive sectors remained privately owned and investing only for profit not need.  As Hudson says himself: “Just to be clear, ridding ourselves of financial and rentier parasites will not usher in an economic utopia. Even under a purely industrial system, economic problems will abound. Giants such as Apple will continue to offshore profits, companies like Chipotle will keep stealing their workers’ wages, and other big businesses will still gobble up subsidies while fulminating against any kind of government regulation. Class divisions will remain a serious issue.”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Here is Marx’s actual schema for this transformation.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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