Dilemmas of great and good
Mainstream economists cannot provide the answers needed to revive a system mired in stagnation. Michael Roberts reports on the annual gathering of the American Economic Association
The conference of the American Economic Association was unusual this year, for obvious reasons. Instead of 13,000 academic and professional economists descending on an American city to present and discuss hundreds of submitted papers over a few days, because of the Covid-19 pandemic, ASSA 2021, as the conference was called, was virtual. Despite that, there were a host of papers presented - along with plenaries of the great and good in mainstream economics and economic policy.
Every year, there is an issue that tends to dominate among the mainstream presentations. Previously it had been the economics of rising inequality and last year it was the economics of climate change. Not surprisingly, this year it was the economic impact of Covid-19 and the policies needed to deal with the pandemic slump.
There were two large panel presentations on the economic impact. The first was on what was happening to the US economy and where it was going. Former central bank governor of India, Raghuram Rajan1 - now back at his neoclassical base at the University of Chicago - raised the risk of rising corporate debt turning into corporate “distress”. He reckoned that the current monetary and fiscal support offered to small and large corporations “will have to end eventually” and “at that point, the true extent of the distress will emerge”. Rajan reckoned it was time for “targeted support” to reduce debt accumulation and so avoid future bad debts on the banking system - a bankers’ policy, as recently advocated by the so-called Group of Thirty bankers.2
Carmen Reinhart - recently appointed as chief economist of the World Bank and joint author with Kenneth Rogoff of a huge (and controversial) book on the history of public debt3 - also echoed Rajan’s worry about rising debt: not only among corporates in the US, but particularly in the so-called ‘emerging economies’. In the great recession, the US dollar appreciated sharply against other currencies, as it was seen as a ‘safe haven’ for cash and assets. But in this slump, the dollar has depreciated significantly, because it seems investors fear that US fiscal spending is too large, while dollar interest rates have plunged. But what happens to the ability of ‘emerging economies’ to service their dollar debt, if the dollar should start to rise again?
Lawrence Summers, the guru of ‘secular stagnation’,4 reckoned that the pandemic slump has only increased the length of stagnation in advanced economies. Interest rates had dropped into negative territory and fiscal stimulus had been raised to new heights. But that would not end stagnation, unless “there are structural policies adopted”. He did not spell out what these were, but instead argued against untargeted fiscal spending like the proposed $2,000-per-person monthly payment to all Americans, which he saw as just adding to the incomes of those which had actually increased during Covid. Summers has been attacked for his rejection of the payment from the left, but what it shows is that the mainstream is increasingly worried that fiscal and monetary stimulus is creating uncontrolled debt levels (despite low interest costs) that will have to be reined it at some point - and also that Federal Reserve largesse has mostly ended up in boosting the stock market and the better-off.
Liberal left economist and Nobel laureate, Joseph Stiglitz5 called for a resetting of the US economy when the pandemic ends. He wanted to reverse the tax cuts to the corporations and better-off implemented by Trump, increase environmental regulations, break the power of the tech monopolies and make productive public investments. What is the likelihood of any of this under the Biden administration over the next four years?
In contrast, rightwing orthodox John Taylor of Stanford University6 wanted the Fed to stop its emergency bond purchases and other credit facilities as soon as possible, and for the new Biden administration to be cautious on further public spending. You see, for Taylor, the market system was innovative and works. During Covid, internet businesses and purchases had rocketed and this was the way forward, replacing the old ways with the new. But that needs not more, but less regulation of businesses like Uber or Amazon, of course.
Perhaps the most interesting paper in this session was that by Janice Eberly of North Western University who showed that during the current slump companies had saved huge amounts of capital spending on offices, travel and other physical equipment, as staff were working from home (at their own expense). This provided an opportunity for business to boost the productivity of the workforce without extra capital spending and less labour - a way out for capitalism after the pandemic?
The second big session was on the world economy. By any measure, the panellists agreed that the Covid-19 slump was the worst in the history of capitalism. But, even worse, it could take some time for economies to return to their pre-pandemic levels, if ever at all. On current projections, the Organisation for Economic Cooperation and Development reckons that will not happen until 2022, and even then world gross domestic product will remain behind the pre-pandemic trajectory.7
The impact on world trade has been even more damaging. According to the World Trade Organisation, world trade growth will never return to its previous trajectory. And, as it was argued in the US economic session, global debt levels are at record levels.
In his presentation, Dale Jorgenson of Harvard University - an expert on global productivity growth and its constituents - reckoned that the differentials in output and output per worker between the G7 economies and the ‘emerging economies’ of China and India would be resumed: “Growth in the advanced economies will recover from the financial and economic crisis of the past decade, but a longer-term trend toward slower economic growth will be re-established.” Interestingly, he argued that the consensus view that China’s economic growth will slow because its working-age population is falling may not be the case, if China can raise the quality of its labour force through education and extend the working age. That could deliver an annual growth rate closer to 6% than the 4%-5% forecast by many.
The other half of the Rogoff-Reinhart history of debt team, Kenneth Rogoff, again presented his current view that the level of global debt is near a tipping point. Yes, interest rates are very low making debt servicing sustainable. But economic growth is also low and, if interest costs (r) start to exceed growth (g), then a debt crisis could ensue. So the problem of fiscal sustainability has not gone away, as many argue. Of course, Rogoff only talks about public sector debt, when the problem of record high corporate debt is much more worrying for the sustainability of future economic growth in capitalist economies.
Joseph Stiglitz’s answer to a post-pandemic global debt crisis was to cancel the debts of the poorest countries. This should be done by “creating an international framework facilitating this in an orderly way”. What chance of this being agreed and implemented by the International Monetary Fund and World Bank, let alone all the private creditors like the banks and hedge funds?
My overall impression from these panels is that the mainstream is fairly pessimistic about a sufficient economic recovery from the pandemic, both in the US and globally. But the great and good are torn between the obvious requirement to maintain monetary and fiscal stimulus to avoid a meltdown in the world economy and financial assets, on the one hand, and the impending need to end that stimulus to avoid unsustainable debt levels and a new financial crisis, on the other. It is certainly a dilemma for capitalist economics.
That dilemma also led to some papers by mainstream economists looking for ways to forecast future financial crashes. One paper reminded us that during the depth of the great recession, the Queen of England visited the London School of Economics. As she was shown graphs emphasising the scale of imbalances in the financial system, she asked a simple question: “Why didn’t anybody notice?” It took several months before she got an official reply from the economists. They blamed the lack of foresight of the crisis on the “psychology of denial”. There was a “failure to foresee the timing, extent and severity of the crisis and to head it off”.8
In the same paper, the authors attempt to deal with this lack of foresight with machine learning. Using these modern techniques, they reckon that they can now predict systemic financial crises 12 quarters ahead.9 They go further in suggesting that the empirical work can offer “precious hints” on why there are regular and recurring financial crises in modern economies - although I could not see what they were.
In another paper, the authors looked at five large financial crises over the last 200 years of capitalism to see what policies were most effective in recovering from crises.10 They found that crises had “persistent effects both on financial markets and on economic activity”. Surprise! However, they also found that, since the end of the dollar-based gold standard, while “downturns in economic activity following a crisis in the financial center continue to be quite protracted, the effects on financial markets are far less persistent”. In other words, monetary injections by central banks under floating fiat currencies can preserve the value of financial assets, but not help productive assets - just as we have seen during the Covid slump.
The other worry about the impact of the pandemic for the mainstream was the possible collapse of trade and ‘global value chains’. One paper found clearly that international trade wars and reducing the optimum distribution of international suppliers for political reasons was damaging.11 It would reduce US GDP by 1.6%, “but barely change US exposure to a foreign shock”.
The impact of Covid-19 was not the only issue that concentrated the minds of the mainstream: the economics of climate change was not ignored either. Yet another paper showed that mainstream economics market solutions to global warming were failing and carbon pricing was not working. Perhaps it is time to phase out mainstream economics itself! One paper raised the possibility that artificial intelligence could replace economists soon and do all the calculations that humans do now.
At ASSA’s annual conference there are also sessions hosted by the Union for Radical Political Economics,12 where heterodox economists and even Marxists present papers.
This year, many of the URPE sessions were, like the mainstream ones, dominated by the economic impact of Covid-19 and climate change, but, of course, from a different perspective. But first, let me start with the annual David Gordon lecture,13 which is presented by a different economist each year.
This year it was Michael Hudson - a longstanding radical economist with a wide reputation, who considers himself to be a ‘classical’ economist.14 His theme was ‘Has finance capitalism destroyed industrial capitalism?’ Hudson argued that industrial capitalism started as progressive in its development of the productive forces. But since the 1980s “financial capitalism” had superseded industrial capitalism, and this really represented a return to feudalism, where the surplus in an economy was extracted by landlords (rent) and financiers (interest and capital gains), not by the exploitation of labour-power (profits).
Feudalism had originally been critiqued by the great classical economists like Adam Smith and David Ricardo, who reckoned that the landlords and financiers held back the productivity of labour by reducing the surplus going to the industrial capitalists. Hudson argued that Marx also supported industrial capitalism as progressive, since he was “the last of the great classical economists”.
Hudson argued that Marx had a vision that capitalism will eventually create the objective conditions for a transition to socialism. Instead, in the last 50 years finance capital has blocked that vision with a form of “neo-feudalism”, represented by monopolies extracting ‘rents’ and by bankers extracting interest and capital gains. And now the main enemy of workers was not the capitalist owners of industrial companies, but rentier capitalists, who exploit us through mortgages, loan rates, housing rents, etc. It was rising debt that was the cause of capitalist crises and not the falling rate of profit of productive capital. This was where David Harvey15 and Hyman Minsky16 had taken us forward from Marx, according to Hudson.
I disagree. This classic ‘financialisation’ thesis has many holes, in my opinion. First, modern capitalism can hardly be described as “neo-feudalism”, because feudalism was never a mode of production based on monopoly rents or usury. Under feudalism, the surplus created by the serfs and peasants was appropriated by the landed aristocracy directly from the produce of the land. Commercial and financial activity was an adjunct, not the dominant activity of feudalism.
Yes, the classical economists opposed the landlords and monopolies and supported industrial capitalism, but the whole point of the Marxist critique was to reveal the new form of exploitation under the capitalist mode of production: namely the exploitation of labour power for profit by industrial capitalists. Indeed, Marx’s Capital has a subtitle - A critique of political economy - and back in 1842, Engels wrote a piece entitled An outline of a critique of political economy.17 Both attacked the position of classical political economy because it backed markets and the exploitation of workers for profit in industry.
At no time did Marx or Engels suggest that ‘industrial capitalism’ could move smoothly to socialism without first ending the contradiction between labour and capital through class struggle. The idea of a seamless progression to socialism was that of the later revisionists like Eduard Bernstein. Yet Hudson seemed to suggest that the gains that workers made in public services, wages and welfare in the ‘golden age’ after World War II were made possible because it was in the interests of the ‘progressive’ industrial capitalists. Tell that to the workers who had to fight hard for these gains! They were only possible because the industrial capitalists were forced to concede them by labour action; and they were able to do so only because profitability was relatively high. But, when profitability started to fall in the 1970s, ushering in the era of ‘neoliberalism’, that was when there was a reversal of those gains and the relative rise of financial capital.
Indeed, the idea that we can divide this mode of production into progressive industrial capitalism and reactionary monopoly financial capitalism is not only not the Marxist view: it is also empirically invalid. There is a very high integration between financial and industrial functions in modern capitalist companies - they are not separate. And - most important - the industrial surplus-value-creating function is still the largest section of capital by any measure.18
Josh Mason from John Jay College19 was the discussant on Hudson’s lecture and he made some telling points. He queried Hudson’s claim that industrial capitalists supported better public services because it raised the quality of the labour force. Mason argued that industrial capitalists’ main aim is always to lower wage costs and, for them, public services are a cost not a saving. In the neoliberal period, industry supported austerity, crushed trade unions and demanded public spending cuts just as much as bankers. And monopolies are found in industrial sectors just as much as in finance. Moreover, is Jeff Bezos just a rent extractor? Surely Amazon exploits workers for profit in its distribution and web services like an industrial capitalist, not like a ‘neo-feudal’ financier?
For me, the Hudson ‘financialisation’ thesis not only weakens and distorts Marx’s critique of capitalism by ditching his law of value for post-Keynesian monopoly rent extraction theory. It is also empirically incorrect. And it leaves the door open for a reformist policy: if we regulate or control the finance sector and monopolies and return to ‘competitive industrial capitalism’ (something that never really existed), then we can gradually move on to socialism.
There were some important papers on China in the URPE sessions. Minqi Li of the University of Utah made a compelling empirical case that China was not an imperialist country in Marxist terms. Li argued that, although China had developed an exploitative relationship with south Asia, Africa and other raw material exporters, it continued to transfer a greater amount of surplus value to the core countries in the capitalist world system than it receives from the periphery. Just a handful of countries are rentier imperialist economies getting super profits from working people in the global south and China is not one of them.
China has a net stock of financial investment of around $2 trillion, but this is mainly foreign exchange reserves held in US treasury bonds ($3.5 trillion). Gross foreign direct investment (FDI) stock is $1.7 trillion, but only a tiny share is invested in Africa or Latin America. It is mostly in tax havens! So 90% has not been invested for imperial super-profits. Indeed, the profitability of China’s FDI is lower than that for overseas investment in China: ie, its net investment income from abroad is negative.
Zhonglin Li and David Kotz reach a similar conclusion in their paper. China is ruled by a Communist Party that came to power through a socialist revolution. China still has a significant sector of large state-owned enterprises and the party and state exercise considerable control over the economy. China’s role in other parts of the world does not fit the Marxist concept of imperialism. China does not operate a free-market economy, as the CP is still directing investment and employment to a great degree.
Li and Kotz argued that the pro-market faction has not triumphed in China. Indeed, this is also the conclusion of another paper by Isabelle Weber, who reckoned the direction of ‘more market’ was dominant very early in the reform process in the 1980s, but the question of how to introduce market mechanisms into China’s command economy remained highly contested and is still unresolved.
Two other Chinese scholars provided further empirical support for the view that China is not imperialist. Using the world input-output database, they argued that China transfers up to 10% of its value added through trade to the US and other imperialist economies. Indeed, there is an asymmetrical trade relationship with the US, so that if the US and China were to completely halt and transfer their bilateral merchandise trade elsewhere, the Chinese economy would lose 2.5 percentage points in its growth rate and over ten million jobs, while the United States would gain 1.3% and some 700 thousand jobs. That is why President Xi Jinping is looking to adopt a ‘dual circulation’ strategy of switching more to the domestic market.
All these studies confirm the empirical work that Guglielmo Carchedi and I first presented to the Historical Materialism conference in 2019.20 China is not an imperialist country in the Marxist definition. But two questions on China remained unanswered for me. All the contributors reckoned that China was a capitalist state in some form, if not imperialist. In which case (1) how did this capitalist economy perform so unprecedently well during the neoliberal period, when the imperialist economies and other peripheral capitalist economies did so poorly? And (2) if China is capitalist and yet so huge, will it eventually become imperialist? But that is for another day.
There were also several good papers on the impact of Covid and the economics of climate change. Ron Baiman of Benedictine University highlighted the huge loss in Arctic ice in the recent period that had now become a tipping point in its impact on global warming. Stopping emissions rising was not enough, he argued: we need to reduce the existing carbon stock. If we could reduce the stock already in the Arctic, we could give the planet an extra 17 years to turn things round. It was utopian to solve the crises by looking to achieve zero emissions alone. He reckoned that there were technical solutions that could lower stock levels, including Arctic Sea-Ice climate triage and carbon cycle climate restoration, which “would rapidly move us toward avoiding increasingly catastrophic climate impacts”. Strangely, he did not mention to need to phase out fossil fuel production.
Robert Williams of Guilford College gave us chapter and verse on how the pandemic would increase the already high levels of inequality of wealth and income in the major capitalist economies. Even before Covid, Federal Reserve policies “have lavished hundreds of billions of dollars annually on the rich”. Despite an unemployment rate trumpeted by many for its 50-year low, “these structural forces and policies have left the vast majority of US households wholly unprepared for the sudden onslaught of the coronavirus”.
Chyrs Esseau, Tomar Galaragga and Sherif Khalifa in their paper showed how previous epidemics have affected income inequality. They found that an epidemic/pandemic shock increased income inequality by 4.6 points (Gini coefficient): “We conclude that the epidemics and pandemics of the early 21st century contributed to the stagnation, and even worsening, of the otherwise slightly decreasing trends in global income inequality.”
Sergio Camara from the Autonomous Metropolitan University of Mexico provided an overall Marxian framework for the pandemic, breaking the crisis down into its cyclical, structural and systemic parts. Cyclically, the world economy was already “on the verge of falling into a new cyclical crisis because of the imbalances accumulated after the 2007-09 cyclical crisis”. Structurally, the major capitalist economies were not equipped to handle the pandemic, because they had run down the health, medical and public services needed to cope. And, systemically, the pandemic had shown that capitalism’s drive for profit over need leads to recurring crises in humanity, the climate and nature.
Finally, there was a session on ‘Post-capitalist futures’, which, I think, exposed how market economies cannot cope with pandemics and reinforced the need for democratic socialist planning. Robin Hahnel and Mitchell Szczepanczyk presented the results of their innovative attempt to model democratic annual planning in a post-capitalist economy. Through iterative computer simulations of the planning process from local to central level and back, using a new coding technique, they found that it would not take long at all to reach a feasible and practical annual plan to meet social needs with available resources, which involved the participation and democratic decisions of people.
This was another compelling refutation of the critique made by neoclassical pro-market theorists like Ludwig von Mises and Friedrich Hayek; and Keynesian pro-market social democrats like Alec Nove, who argued that socialist planning was infeasible because there were just too many calculations to make. Apparently only the invisible hand of the market could do this.
This paper showed that this was not true, especially now with the advances in computer programming. Democratic socialist planning can work and can replace market chaos.
Michael Roberts blogs at thenextrecession.wordpress.com
See my critique in Engels 200: his contribution to political economy London 2020.↩︎