Archive for category: Economy
By Pam Martens and Russ Martens: July 21, 2021 ~ The only time that tens of millions of Americans typically hear anything about the stock market on the evening news is when the S&P 500 Index sets a new high. That’s been happening a lot this year. For example, on June 30 it was widely reported that the S&P 500 had clinched its sixth record close for the year. But beneath the surface of that cheerful sound bite, major deterioration in the underpinnings of the market has been taking place. For example, recently there have been more stocks on the New York Stock Exchange setting 3-month lows than setting three-month highs. The same is true for the Nasdaq stock market and dramatically so for the smaller companies that trade Over-the-Counter (OTC). These measurements gauge the “breadth of the market.” When new lows consistently trounce new highs, it can be a forewarning of … Continue reading →
The Global Marxism series organized by SSK in Korea has delivered a number of important presentations and papers on aspects of Marxist economics. I participated in the second round with a paper on the Economics of Modern Imperialism. Recently Hideto Akashi of Komazawa University, Tokyo returned to the fray with a presentation on Marx’s law of the tendency of the rate of profit to fall.
As is well known in the small circles of Marxian economics, leading Marxist scholar, Michael Heinrich, the author of a detailed account of Marx’s Capital, has argued in the past that Marx’s law of profitability is logically faulty: in particular, it is ‘indeterminate’ in that its key categories do not show that profitability of capital must fall. According to Heinrich, “an increasing organic composition as such is not enough to prove a falling rate of profit”.
Moreover, Heinrich argues that, in the last decade of his life, Marx ‘probably’ recognized this and so dropped the law as part of his theoretical arsenal and as providing any basis for a theory of crises under capitalism, instead searching for a theory based on the excess of credit. Marx doubted his own law and instead in the 1870s switched to studying the credit system as a possible cause of crises. Heinrich: “These doubts were probably amplified in the course of the 1870s. In 1875, a comprehensive manuscript emerges which was first published under the title Mathematical Treatment of the Rate of Surplus-Value and Profit Rate. […] it quickly becomes apparent that in principle all sorts of movement are possible. Several times, Marx makes note of possibilities for the rate of profit to increase, although the value-composition of capital was increasing. In the case of a renewed composition of book III, all of these considerations would have had to find their way into a revision of the chapter on the “Law of the Tendency of the Rate of Profit to Fall”. A consistent regard for them should have led to the abandonment of the “law”. (Heinrich).
When Heinrich first proposed this critique, several authors including myself responded with firm rebuttals, which, in my view, were compelling in refuting Heinrich on both his points: the indeterminacy and Marx’s dispensing with the law. Indeed, I offer a detailed rebuttal of Heinrich’s claim that Marx dropped the law in my recent short book, Engels 200 (see pages 106-111).
But Heinrich’s claims were raised again in questions in the Global Marxism series and Akashi took them up again in his latest presentation. Akashi points out that the most important factor of the law of tendential fall of the general rate of profit is that the rate of profit falls and the quantity of profit increases while, at the same time, the organic composition of capital (ie more investment in means of production relative to employment) is rising. There are some counteracting factors, but these cannot diminish the former sufficiently to cause a secular rise in profitability.
Akashi also argues against Heinrich that after the publication of Capital, Marx did not abandon the law. Akashi cites Marxist scholar Kohei Saito who rejects Heinrich’s interpretation and points out that as late as 1878, Marx was still considering mathematically how the law of profitability would operate. Indeed, Marx tried to integrate the effect of turnover of capital into his argument for the rate of profit: Marx wrote a short manuscript in 1878 entitled “On the rate of profit, Turnover of Capital, Interest and Discount” by editors of MEGA. (MEGA II/14, Apparat p. 697).
Actually, in writing Capital, Marx had considered earlier the role of the turnover of capital. He discussed this with Engels in 1873 (after the publication of Capital), to ascertain the length of the turnover of fixed capital (see my book, Marx 200, pp56-8).
However, in Akashi’s view, Marx’s attempts in 1878 to show the impact of the turnover of capital on the rate of profit did not work. (MEGA II/4.2, p. 252, S. 216), which is why Marx abandoned the attempt. In Akashi’s view, Marx should have adopted a method of consideration based on first equalizing rates of profit to a general one and then applying turnover rates to that. “I supposed Marx should have dealt with capital transfer from industries with a higher organic composition and a slower speed of turnover to those with a lower organic composition and a higher speed of turnover, and then he should have taken the general rate of profit as given.” Once he had a general rate of profit, if he had simulated the equalization of turnover’s effect on the general rate of profit, he would have seen the capital transfer from the industry with lower speed turnover to the industry with higher speed turnover.
Actually, there has been further work by Marxist economists to bring the turnover of capital into the coordinates of the law of profitability. Engels himself began that work with his addition in Volume 3 of Capital – see my Engels 200, pp99-101). Modern accounts can be found from Brian Green, Peter Jones and others. Maito, for example, concludes that “while it (turnover rate) does not affect the sense of the trend (the fall in the rate of profit), it softens the slope” in referring to his calculation of the rate of profit in Japan.
But the main point here is that, as late as 1878, Marx was tinkering with the law of tendency of the rate of profit to fall and trying to integrate turnover rates into the equalization of profit rates in different sectors to produce a general ‘social’ average rate of profit. This confirms the view of many of us that Heinrich is wrong, namely that a) that Marx’s law is ‘indeterminate’ and b) that Marx had dropped the law in the period after Capital Volume One was published and Engels should never have included the law in Volume Three of Capital when he edited it.
Slow Covid-19 vaccine progress in low-income countries will widen divisions between rich and poor nations
The global economy is set for the fastest recovery from recession for more than 80 years, but poor nations are at risk of falling further behind wealthy countries amid slow progress with the Covid-19 vaccine, the World Bank has said.
In its half-yearly outlook report, the Washington-based institution said the world economy was forecast to grow at 5.6% this year, in a sharp upgrade from previous estimates it made in January for growth of 4.1%.
It has been the historic mission of the capitalist mode of production to develop the “productive forces” (namely the technology and labour necessary to increase the output of things and services that human society needs or wants). Indeed, it is the main claim of supporters of capitalism that it is the best (even only) system of social organisation able to develop scientific knowledge, technology and human ‘capital’, all through ‘the market’.
The development of the productive forces in human history is best measured by the level and pace of change in the productivity of labour. And there is no doubt, as Marx and Engels first argued in the Communist Manifesto, that capitalism has been the most successful system so far in raising the productivity of labour to produce more goods and services for humanity (indeed, see my recent post). In the graph below, we can see the accelerated rise in the productivity of labour from the 1800s onwards.
But Marx also argued that the underlying contradiction of the capitalist mode of production is between profit and productivity. Rising productivity of labour should lead to improved living standards for humanity including reducing the hours, weeks and years of toil in producing goods and services for all. But under capitalism, even with rising labour productivity, global poverty remains, inequalities of income and wealth are rising and the bulk of humanity has not been freed from daily toil.
Back in 1930, John Maynard Keynes was an esteemed proponent of the benefits of capitalism. He argued that if the capitalist economy was ‘managed’ well (by the likes of wise men like himself), then capitalism could eventually deliver, through science and technology, a world of leisure for the majority and the end of toil. This is what he told an audience of his Cambridge University students in a lecture during the depth of the Great Depression of the 1930s. He said: yes, things look bad for capitalism now in this depression, but don’t be seduced into opting for socialism or communism (as many students were thinking then), because by the time of your grandchildren, thanks to technology and the consequent rise in the productivity of labour, everybody will be working a 15-hour week and the economic problem will not be one of toil but leisure. (Economic Possibilities for Our Grandchildren, in his Essays in Persuasion)
Keynes concluded: “I draw the conclusion that, assuming no important wars and no important increase in population, the ‘economic problem’ may be solved, or be at least within sight of solution, within a hundred years. This means that the economic problem is not – if we look into the future – the permanent problem of the human race.” From this quote alone, we can see the failure of Keynes prognosis: no wars? (speaking just ten years before a second world war). And he never refers to the colonial world in his forecast, just the advanced capitalist economies; and he never refers to the inequalities of income and wealth that have risen sharply since the 1930s. And as we approach the 100 years set by Keynes, there is little sign that the ‘economic problem’ has been solved.
Keynes continued: “for the first time since his creation man will be faced with his real, his permanent problem – how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest (!MR) will have won for him, to live wisely and agreeably and well.” Keynes predicted superabundance and a three-hour day – the socialist dream, but under capitalism. Well, the average working week in the US in 1930 – if you had a job – was about 50 hours. It is still above 40 hours (including overtime) now for full-time permanent employment. Indeed, in 1980, the average hours worked in a year was about 1800 in the advanced economies. Currently, it is still about 1800 hours – so again, no change there.
But even more disastrous for the capitalist mission and Keynes’ forecasts is that in the last 50 years from about the 1970s to now, growth in the productivity of labour has been slowing in all the major capitalist economies. Capitalism is not fulfilling its only claim to fame – expanding the productive forces. Instead it is showing serious signs of exhaustion. Indeed, as inequality rises, productivity growth falls.
Economic growth depends on two factors: 1) the size of employed workforce and 2) the productivity of that workforce. On the first factor, the advanced capitalist economies are running out of more human labour power. But let’s concentrate on the second facto in this post: the productivity of labour. Labour productivity growth globally has been slowing for 50 years and looks like continuing to do so.
For the top eleven economies (this excludes China), productivity growth has dropped to a trend rate of just 0.7% p.a.
Why is productivity growth in the major economies falling? The ‘productivity puzzle’ (as the mainstream economists like to call it) has been debated about for some time now. The ‘demand pull’ Keynesian explanation that capitalism is in secular stagnation due to a lack of effective demand needed to encourage capitalists to invest in productivity-enhancing technology. Then there is the supply-side argument from others that there are not enough effective productivity-enhancing technologies to invest in anyway – the day of the computer, the internet etc, is nearly over and there is nothing new that will have the same impact.
Look at the average growth rates of labour productivity in the most important capitalist economies since the 1890s. Note in every case, the rate of growth between 1890-1910 was higher than 2006-18. Broadly speaking, labour productivity growth peaked in the 1950s and fell back in succeeding decades to reach the lows we see in the last 20 years. The so-called Golden Age of 1950-60s marked the peak of the development of the ‘productive forces’ under global capital. Since then, it has been downhill at an accelerating pace. Annual average productivity growth in France is down 87% since the 1960s; Germany the same; in Japan it is down 90%; the UK down 80% and only the US is a little better, down only 60%.
There are three factors behind productivity growth: the amount of labour employed; the amount invested in machinery and technology; and the X-factor of the quality and innovatory skill of the workforce. Mainstream growth accounting calls this last factor, total factor productivity (TFP), measured as the ‘unaccounted for’ contribution to productivity growth after capital invested and labour employed. This last factor is in secular decline.
Corresponding to this slowing of labour productivity is the secular fall in the fixed asset investment to GDP in the advanced economies in the last 50 years ie starting from the 1970s.
Investment to GDP has declined in all the major economies and since 2007 (with the exception of China). In 1980, both advanced capitalist economies and ‘emerging’ capitalist ones (ex-China) had investment rates around 25% of GDP. Now the rate averages around 22%, a more than 10% decline. The rate fell below 20% for advanced economies during the Great Recession.
The slowdown in both investment and productivity growth began in the 1970s. And this is no accident. The secular slowing of productivity growth is clearly linked to the secular slowing of more investment in productive value-creating assets. There is new evidence to show this. In a comprehensive study, four mainstream economists have decomposed the causal components of the fall in productivity growth.
For the US, they find that, of a total slowdown of 1.6%pts in average annual productivity growth since the 1970s, 70bp or about 45% was due to slowing investment, either caused by recurring crises or by structural factors. Another 20bp of 13% was due to ‘mismeasurement’ (this is a recent argument trying to claim that there has been no fall in productivity growth). Another 17% was due to the rise of ‘intangibles’ (investment in ‘goodwill’) that does not show an increase in fixed assets (this begs the question of whether ‘intangibles’ like ”goodwill’’ are really value-creating). About 9% is due to the decline in global trade growth since the early 2000s; and finally near 25% is due to investment by capitalists into unproductive sectors like property and finance. The four economists sum up their conclusions: “Comparing the post-2005 period with the preceding decade for 5 advanced economies, we seek to explain a slowdown of 0.8 to 1.8pp. We trace most of this to lower contributions of TFP and capital deepening, with manufacturing accounting for the biggest sectoral share of the slowdown.”
In other words, if we exclude ‘intangibles’, mismeasurement and unproductive investment, the cause of lower productivity growth is lower investment growth in productive assets. The paper also notes that there has been no reduction in scientific research and development, on the contrary. It is just that new technical advances are not being applied by capitalists into investment. Now maybe, the rise of robots and AI is going to give a productivity boost in the major economies in the post-COVID world. But don’t count on it. As the great productivity theorist of the 1980s, Robert Solow, put it in a famous quip ‘you can see the computer age everywhere but in the productivity statistics’ (Solow 1987).
If investment is key to productivity growth, the next question follows: why did investment begin to drop off from the 1970s? Is it really a ‘lack of effective demand’ or a lack of productivity-generating technologies as the mainstream has argued? More likely it is the Marxist explanation. Since the 1960s businesses in the major economies have experienced a secular fall in the profitability of capital and so find it increasingly unprofitable to invest in heaps of new technology to replace labour.
And when you compare the changes in the productivity of labour and the profitability of capital in the US, you find a close correlation.
Source: Penn World Tables 10.0 (IRR series), TED Conference Board output per employee series
I also find a positive correlation of 0.74 between changes in investment and labour productivity in the US from 1968 to 2014 (based on Extended Penn World Tables). And the correlation between changes in the rate of profit and investment is also strongly positive at 0.47, while the correlation between changes in profitability and labour productivity is even higher at 0.67.
And as the new mainstream study also concludes, there is another key factor that has led to a decline in investment in productive labour: the switch by capitalists to speculating in ‘fictitious capital’ in the expectation that gains from buying and selling shares and bonds will deliver better returns than investment in technology to make things or deliver services. As profitability in productive investment fell, investment in financial assets became increasingly attractive and so there was a fall in what the new study calls “allocative efficiency” in investment. This has accelerated during the COVID slump.
There is a basic contradiction in capitalist production. Production is for profit, not social need. And increased investment in technology that replaces value-creating labour leads to a tendency for profitability to fall. And the falling profitability of capital accumulation eventually comes into conflict with developing the productive forces. The long-term decline in the profitability of capital globally has lowered growth in productive investment and thus labour productivity growth. Capitalism is finding it ever more difficult to expand the ‘productive forces’. It is failing in its ‘historic mission’ that Keynes was so confident of 90 years ago.
In a two-sector model with circulating capital, Laibman (1982) shows that a capital-using and labor-saving technical change in the consumption goods sector lowers the rate of profit under the assumption of constant rate of exploitation. This paper generalizes his finding in a two-department multi-sector model that considers the capital advanced.JEL Classification: B51, C67
There are two basic ways to interpret economic news. One is the academic way, in which every development is weighed and scrutinized and plugged into various models in a more or less genuine attempt to intuit what is happening in the chaotic complex system we call “the economy.” This is what honest economists do, and sometimes they develop new theories that end up causing enormous shifts in global history, many years downstream. This is not the kind of economics we are talking about now, in 2021.
The other way of approaching economics is the political way, in which each new piece of economic data is hammered and squeezed and molded into a form that serves a preexisting political agenda. This is economics as an instrument to serve politics, not vice versa. This is, unfortunately, the way that most people experience “the economy”: not as something to be understood, but as something to be either squeezed for all its worth, or something that is squeezing you for all you’re worth. Karl Marx and Adam Smith may have been honest economists in the first category, but most of their disciples in governments have been firmly in the second.
It is important to understand this distinction when we discuss economics, lest the discussion go off in two different directions. While academic economists and journalists peer at the past year’s bizarre economic contortions—a historic collapse followed rapidly by a historic government-fueled rebound leading to an uncertain future—and conclude (honestly) that they don’t really know what’s happening, political actors are already sharpening their knives to go to war over what happens next.
In terms of political economy, the question now is whether we are poised to enact a new New Deal—a huge increase in government-funded social spending to finally try to turn the tide on inequality that has been building for more than 40 years—or whether we are instead poised to swing back towards austerity, a brutal budget-balancing to “make up for” the large spending bills enacted during the past year’s lockdowns. Despite the fact that the trillions of dollars the government spent in several relief bills has successfully staved off what would have been another Great Depression (and has caused a boom in financial asset prices that is making rich people richer), the institutional preference of the Republican Party is, always, for austerity. The political case for austerity is going to be made no matter what. And inflation is going to be the primary tool used to make it. The honesty of this analysis is beside the point.
Along with the contentions “raising the minimum wage destroys jobs” and “raising taxes hurts the economy” canards, a key part of the right wing economic gospel is that increasing government spending is bad because it leads to dangerous levels of inflation. Never mind the fact that right-wing economists have been steadily predicting this outcome since the recovery from the 2008 recession, and it has never come true. They will continue to predict it.
Now, inflation is actually here. Never mind the fact that the Fed believes that inflation can be kept under control, and that more government spending is in order—all popular media coverage of inflation occurs in the frame of fear. A little evidence of inflation combined with a lot of fear of inflation will be the formula for turning inflation into a political weapon in service of austerity.
You should get ready to hear two primary messages. The first, with each passing month of inflation, will be: “OUT OF CONTROL government spending is causing inflation that will EAT UP YOUR SAVINGS and cause prices to SPIRAL OUT OF CONTROL and we must immediately STOP all new spending and also CUT ENTITLEMENTS.” In this way, longstanding Republican priorities—namely, cutting government spending on everyone except the rich—will be shoehorned into a prescription for today’s (mostly imaginary) problems, without mentioning that the GOP was pushing the same prescription a decade ago when the problems were the opposite.
The second message you will hear, which may be a bit subtler, will be: “This is caused by Modern Monetary Theory, a wacky theory that Democrats embrace, and all this inflation proves that the theory is a failure.” Political speech is about caricatures. The caricature of MMT is: “These fools think the government can print as much money as it wants with no consequences, but we all know that that will cause runaway inflation.” If you know a little about MMT, you may object to this characterization by understanding that, in fact, MMT specifically focuses on inflation as the signal to tell us how much the government can spend. That doesn’t matter. It is too nuanced for the caricature, and in politics, the caricature can become far more important than the reality.
What percentage of Republicans who hold strong opinions on “Critical Race Theory” do you think have actually studied critical race theory outside of the caricature? Exactly.
It will only take a shift of a single seat in the Senate and a small handful of seats in the House to make the idiotic Republican economic caricatures into the reigning economic orthodoxy of the United States Congress. At that point, the opportunity for transformative change is finished. And even if Republicans don’t manage to win back control of Congress in the midterms, there is the danger that the caricature becomes influential enough to scare Democrats back into the deficit-fearing hole where they have spent most of the past half century.
Every last thing happening right now counsels strong, fast action. Get the money out the door now or risk losing any chance at major debt-fueled government spending programs in the foreseeable future. That means the obliteration of any hope for turning around the rise in economic inequality, the single most damaging trend in America in my lifetime.
Most Americans are economically illiterate. This is not an insult to them. It is just an observation of fact, and the completely predictable outcome of our nation’s unwillingness to engage in any widespread form of economic education that is not soaked in free market jingoism. For political purposes, nobody knows what MMT is. But they do know enough to fear inflation, because inflation makes stuff cost more, and nobody likes that. Therefore the weaponized rhetorical power of inflation will tend to overwhelm whatever it is being deployed against. And we know that it will be deployed with full force against the possibility that the American welfare state could be permanently expanded. That always makes rich people scared that they’ll have higher taxes, and therefore they will wage war against it.
We are now in a race to give people new government benefits before they get tricked out of wanting them. Every month that inflation ticks up, the lies will get louder, and the task will get harder. Spend the fucking money now. There is no time to waste.
These notes were based on an interview with me by Swiss-based journalist Thomas Schneider in German in early May.
A sugar rush or economic recovery?
The IMF foresees a strong economic recovery. The assumption is that the virus can be controlled to such an extent that lockdowns and social distancing are no longer necessary. This is mainly due to the vaccination campaigns.
It looks like an upswing, at least in the G7 countries, this year most major economies, at least in advanced countries, are likely to (more or less) reach the real GDP level of the end of 2019 by the end of this year. Europe is forecast to lag slightly behind, while the US is developing more strongly. However, the situation in the so-called Global South, or ‘emerging economies’, is different. India and other countries are in a terrible situation.
The US, along with China, is one of the countries that seems to be recovering most quickly. That’s partly because of the Biden administration’s big fiscal packages, which have reduced income losses and provided money to companies. The big question, however, is how effective and sustainable this will be.
If the IMF now says that we will have strong growth, it is mainly due to economies opening up. If a substantial part of an economy has been closed and can now reopen, there will obviously be a strong bounce back. But this pace will not be sustainable. It is really like a sugar rush and as you know, once the sugar is consumed, you feel a little sleepy and down afterwards.
The Biden administration is passing a huge infrastructure program through the US Congress to boost the economy and create jobs. Two trillion dollars sounds like a lot of money at first glance, but if you spread it over five to ten years, the stimulus then amounts to just half a percent of US economic output each year.
So Biden’s package will give the US economy an early rush, but it’s not enough to boost long-term growth. The low pre-pandemic growth rate will resume; and with it, productivity-boosting investment will be weak, wages will not grow much and jobs will remain precarious for a large part of wage-earners.
The pandemic slump has been over two years in which there have been huge losses in production, resources, income and jobs, many gone forever. Globally, the slump has pushed some 150 million people further into the most abject poverty, who were otherwise seeing some improvement. These two years have been a huge disaster. The loss of the two years will never be made up again. It’s like an abyss, down one side and up the other, but the abyss is still left behind.
Profitability and growth
The global economy was already growing very weakly in 2019, which is likely to be the case again after the rapid recovery in 2021. That’s because capitalism grows sustainably and strongly only if profitability increases. However, average profitability was already very low before the pandemic, and in some countries, it was at the lowest level since the end of the Second World War.
The investments now being made to boost employment and income will not restore this profitability. Profitability will improve compared to the bottom of the pandemic, but it will not go above the rates of previous years. That means that investment and growth will not improve in the longer term. In capitalism, profitability determines economic development. Investments must pay off accordingly. If we had a different economy, we wouldn’t have to worry about that.
At the moment, we see in that around 15 percent of GDP is productively invested by the capitalist sector, ie not in property (4-5%) and financial speculation. By contrast, public investment is low: it contributes just 3 percent of GDP a year to productive investment, and Biden’s packages will increase that by only 0.5 percent, as above.
This will not be decisive for economic development over the long term. Indeed, even the U.S. Congressional Budget Office expects long-term average real GDP growth of only 1.8 percent per year in the US for the rest of this decade, based on its forecasts of productivity and employment growth. That rate is even lower than in the last decade.
Zombie companies and debt
Profitability would only increase if some rotten layers of capital were removed. There are, for example, the so-called zombie companies, which make little profit and can only just cover their debts. In the advanced economies, we are now talking about 15 to 20 percent of the companies that are struggling in this situation. These companies keep overall productivity low, hindering the more efficient parts of the economy from expanding and growing.
The zombies reflect in the enormous increase in debt, especially in corporate debt, globally. Debt levels are the highest since World War II in most developed economies. Interest rates are at historic lows, but the sheer mass of debt is still weighing on firms’ ability to invest productively.
The immense debt also gnaws at profitability. When profitability falls in the productive sector, capital flees into financial speculation to make more profits. In the COVID slump, the super-rich have done so well!
When there is a financial crisis, there are defaults and devaluations, but there is no economic downturn if the productive sector is healthy. But the financial crisis can trigger a production crisis if it is combined with low profitability in the productive sector, as we saw in 2008.
The burden of debt and low profitability can be overcome through so-called “creative destruction”, as Austrian economist Joseph Schumpeter called it. This is also the perspective of Marxian economic criticism, which Schumpeter had read very carefully. Through the devaluation (writing off) of capital and, in particular, the liquidation of inefficient, indebted companies, profitability can be raised. But that means a huge devaluation, in order to create the conditions for a new upswing.
So far, there has not yet been much destruction of capital because it is a grisly thought for governments and decision-makers – instead, bankruptcies of weak firms have been very low. Governments fear the political consequences and so are forced to continue with the big credit/money glut to keep companies running even if their productivity and profitability growth slows.
Many people have suffered severe hardship in the pandemic slump, but others have also saved money that could now be spent as economies open up. This will lead to a sharp increase in demand for all kinds of goods and services. Probably the supply side will not be able to keep up with that. So there could be stronger inflation over the next six to 12 months, especially in import prices, as international supply chains are still weakened. We could therefore see a rise in prices over a period of time.
Inflation in the late 1980s was immense. In most advanced countries, it was in the double-digit percentage range. Over the last two decades, inflation in these countries has, broadly speaking, been around 2%. But perhaps we will see inflation for the next 12 months until production can catch up with increased demand.
The monetarist theory that an increased money supply must lead to inflation has been proven wrong. Central banks have spent vast amounts of money and supported banks and firms without prices rising. While the sum of money has increased, its orbital speed has decreased. Instead, it was parked at the banks, which did not lend it onto companies. The big firms often did not need the money, the smaller ones were cautious about borrowing even at low interest rates. So the banks put the money into financial speculation. There was also an unprecedented rise in the price of financial assets. But will it continue?
The answer is complex, but there are certainly two factors that are decisive. On the one hand, how much value is present in economies, how much flows to the capitalists as profit, and how much goes in wages to the workers. The development of these variables determines demand. The capitalists drive the demand for capital goods, the wage-earners for consumer goods. The level of wages and profits is therefore central, but the supply of money also plays a major role, because this is intended to compensate for weak profits and thus to stimulate demand.
In Marxist theory, there is a strong argument for a long-term decline in inflation. Rising productivity means that less investment is made in labour power and more in means of production, which also leads to an increasing organic composition of capital. As a result, both sources of demand are undermined: wages and profits (new value) growth slows. Capitalism therefore has a tendency towards disinflation when there are no counter-measures involved. Central banks have been trying to reverse the disinflation trend with money injections for about 30 years, but with little success.
The Keynesian notion that higher wages drive inflation is not supported by the evidence. Marx had once conducted a discussion with Thomas Weston, a trade union socialist of the Ricardian school. Weston claimed that the fight for higher wages must also lead to higher prices. Marx replied that this did not have to be the case, since the higher wages would likely come at the expense of profits. Inflation only needs to occur when wages and profits rise at the same time and then demand increases, while investment remains relatively low due to low profitability. It depends on the combination of these factors.
Golden Years and neoliberalism
The golden years of post-World War II capitalism were an exception, at least for the advanced economies: near full employment, rising living standards, high profits in advanced economies, and expansion of trade. If you look at the history of capitalism, you don’t find many such periods. The closest is probably the “Belle Epoque” from the 1890s to the 1910s. The big question is: why didn’t these phases last?
Neither mainstream economists nor most left-wing theories have an answer to this question. The latter claim that the post-World War II phase was over because of the departure from Keynesianism – because governments stopped spending enough money and stopped managing the economy. The follow-up question arises: why did they stop? The answer is found in economic development itself, the declining profitability of large capitals. This led to a decline in investment, to which Keynesian macro management did not find an answer. Thus the big capitals put pressure on governments to take a neoliberal path.
The law of value and profit
The central argument of Marxian criticism is based on the law of value. This roughly means that companies only invest if they can make a profit. Profit is the centre of their actions and not the needs of the people. These are only considered important so that the products can be purchased. Profit, however, comes from the exploitation of the labour force in the production process. Labour produces goods and services that can be sold but in constant competition with other capitalists. This means that companies are constantly looking for better methods of exploitation, new technologies and new methods.
For mainstream economists, profit simply does not matter. But even among the left-wing Keynesians, profit hardly appears. For them it is all about ‘demand’, about ‘speculation’ or about ‘financialisation’. These things all play a major role, but profit is the key category for understanding the capitalist process of production and accumulation. And it is important to put it in relation to a company’s investments: the rate of profit is the key to understanding how healthy an economy is. And profitability has tended to fall over the last 50 years, not linearly, but in a wave-like movement.
The high profits of tech companies such as Amazon, Apple or Alphabet are hiding the problem of profitability across the whole capitalist economy. There are a lot of unprofitable zombie companies and for most profit rates have fallen. We need to look at how this has affected investment. This is the central aspect that Marxian economic criticism can bring to the debate on the world economy.
Empirical evidence supports Marx’s law of the tendency to fall in the rate of profit. There are the counteracting factors to this law, but the law is the dominant factor. As far as we can measure the data, they suggest that there is a long-term trend towards falling rates of profit in the major economies. Every eight to ten years, capitalism plunges into crisis. We must continue to learn why these crises take place and what the political consequences.