Marxist Economics

 

Source

Michael Roberts, a formidable Marxist economist, is interviewed by Left Voice's Jason Koslowski in a post entitled Is a Major Slump on the Way? He is asked some basic questions about the tenets of Marxist economics, which makes for a useful read.

The first question asks about the labor theory of value, and why it is important today. Mr. Roberts responds:

Mainstream theories deny that the value/price of commodities is due to human labour.  Instead, some argue that the value or price of a commodity depends on the individual demand for it, its degree of utility. You might pay $1 for an ice cream but somebody else might pay $2, depending on the ‘marginal utility’ of an ice cream to each person. So the price is dependent on the desire of each individual, averaged in some way.  

This is nonsense; first, because how can you add up each individual’s desire for an ice cream to reach its average value?  Second, the question that is not answered is: why does an ice cream cost only $1-2 while a motor vehicle is priced at $30,000?  What decides that is the cost of producing each in terms of the labour time involved, not the individual demand for cars over ice creams.

You can count me among the "mainstream economists" here, who believe that it's consumers who assign values to products. A consumer will spend $30,000 on a car only if a car is worth that much money to her--and preferable to spending the same money on a fancy vacation or for the down payment on a house. Her calculation of value has nothing to do with what the workers think their time is worth.

Mr. Roberts asks how the capitalist can determine that "average value" for an ice cream cone? He can't, of course, but what he can do is find the revenue maximizing price. If the price is higher than that, then too few people will buy ice cream. If the price is lower, then he's just leaving money sitting on the table. There is a price--known as the market price--that maximizes revenue. In theory that happens to be where the red and green curves in the above diagram intersect. Prices convey information about how much consumers want a given product. It is consumers who set prices--not the capitalist or the workers.

Though Mr. Roberts isn't entirely wrong--he asks why a car can't be sold of one or two dollars, like an ice cream cone. This is, of course, because the cost of production--including labor--is much higher to produce a car than it is to produce an ice cream cone. So the price of a car must be higher than the cost of production, including labor. If consumers aren't willing to pay at least that much, then no cars will be produced. Neither capitalists nor workers will be willing to manufacture cars that can only fetch a couple bucks in the marketplace. Or, put another way, the price has to clear the market.

Of course some consumers are willing to pay much more than the market price. Only cheap cars will sell for $30K--these days one can easily find cars that are priced well over $100K! It seems that enough people are willing to spend that kind of money on a car. The production costs to make expensive cars are not that much higher than for the cheap, commodity cars, and so the luxury brands are very profitable for the capitalist. Not because the workers are exploited, but only because some consumers value brand, fashion, fancy electronics and leather seats more than most. In other words, automakers discriminate and they find customers who are willing to pay well above the market price for their cars.

It's the same with airline tickets. Basic economy tickets are a commodity product and are sold as cheaply as the cost of production allows. I use the word commodity here in the narrow sense, meaning products that compete primarily on price. But business class and first class seats sell for a lot more, and substantially add to the airline's profit margin. Unlike what Mr. Roberts implicitly claims, branded and/or luxury products are not commodities and are sold at (often substantially) higher prices. This is only because consumers are willing to pay for them, even if the additional labor cost is negligible.

Quoting again from Mr. Roberts:

Value in things and services produced as commodities for sale by capitalists has a dual basis: 1) it must be useful to somebody so that it will be bought, i.e. it has a “use-value”; but 2) it must be sold for money, i.e. it has exchange value. The great discovery by Marx was to show that the value or wages paid to workers for their labour time is less than the value of the goods or services sold by the capitalist.  The worker works eight hours in a day but gets paid the equivalent of just four hours labour time.  The capitalist appropriates the remaining four hours on the sale of the product. This is “surplus value” free to the capitalist.

What he calls "use-value" is, in fact, the value that the consumer puts on the product. Some consumers are willing to pay more and others less. Capitalists try to get consumers to pay more by upselling them to, say, business class. Consumers try to pay less by shopping around for sales and/or discounts. At the end of the day, the so-called "exchange value," aka price, is the result of bargaining between the consumer and the capitalist. This negotiation has nothing to do with the cost of labor.

Mr. Roberts posits yet a third value--determined by neither what the consumer wants nor by what the negotiated price eventually is. It is instead a spiritual quantity that Mr. Roberts calls "surplus value." I call it spiritual because there is no way this quantity can be measured--Mr. Roberts' offers the imaginary approximation that it accounts for 50% of the "exchange value" price. It is this spiritual, "surplus value" that is supposedly being stolen from the worker and pocketed by the capitalist as profit.

Wages are also the result of market competition. The capitalist needs to pay enough to convince the employee to come to work--and also not to work for another firm. The worker wants not only more money, but also benefits and leisure time. None of this has anything to do with what consumers are willing to pay.

Finally, Mr. Roberts completely misunderstands the role of "profit." There are two ways to measure profit: one as a fraction of all operating expenses, ie, operating profit. This is the measure that Marxists use (though they have a very weird and completely impractical way of estimating it). They posit a "law of economics" that global operating profits are declining. There is no empirical way to test this result.

While it is true that the operating profit has to be positive in order for there to be any profit of any kind, it doesn't have to be big. Walmart, for example, sets its operating profit to be 3%--if it's higher they lower prices; if it's lower, they eventually close the store. While low operating profits may be bad for the capitalist, the trend is excellent for consumers, since it means lower prices overall. Thus what Marxists interpret as being bad for the economy is actually good--assuming the trend of declining profits exists at all.

The way capitalists calculate "profit" is completely different: they calculate it as earnings per share, usually expressed in reciprocal form as the price/earnings ratio (PE ratio). Thus the relevant measure doesn't depend on operating profit at all (as long as it's positive), but instead as a percent of the total market capitalization of the company. By this measure there can never be any systematic decline in profits, since if operating profits go down, then share prices will go down in proportion.

The successful capitalist combines various resources--labor, capital, natural resources, expertise--into a company that creates something new that is of greater value to consumers than the constituent parts. Creating value for consumers is known as creating social utility, ie, making us all richer. Modern America is vastly richer than 18th Century Britain because capitalists, by imaginative recombinations of resources have been able to generate huge amounts of social utility.

The Marxists have economics all wrong--but if you want a concise and clear exposition of Marxist economics, then Michael Roberts is a good place to start.

Further Reading:

• Left Voice Demands 5 Things of UAW's Shawn Fain
• Three Militant Articles on the Economy
• Workers' Voice Doesn't Understand Deficits or Taxes

Workers' Voice Doesn't Understand Deficits or Taxes

Source: CATO Institute

Thanks to Jaime Monterojo over at Workers' Voice for writing a serious article about the debt ceiling. I'm a few weeks late in getting this up--that's because I've been traveling overseas for several weeks, and then also had some health issues.

Mr. Monterojo's good turn is an article entitled Democrats and GOP make a deal to avert debt crisis. It is a legitimate attempt to discuss the economics of the issue--and while I think his Marxism leads him hopelessly astray, as I'll detail below, I really do appreciate the effort.

Marxist theology comes through loud and clear in one of Mr. Monterojo's introductory paragraphs.

Today the debt is $31.4 trillion, or 133% of U.S. GDP, a 25% jump from 2016. This is the highest level of national debt in U.S. history.

The debt problem has at its root the crisis of capitalism’s profitability. The fall in this profitability, starting in the 1980s, prompted the rich to attack the conditions of the American working class through cuts in public services, anti-union attacks, and factory closures of companies that opted to move to other countries—mainly China—in search of better conditions to generate profits.

To begin, there is no problem with "capitalism's profitability"--this is a myth foisted on us by Marx. Mr. Monterojo cites no data for his assertion, but I assume he's referring to work by Michael Roberts (see here, here and here. See my review of these articles here, along with the bottom-line criticism here.) In bullet points, the reasons why the Marxist notion of the declining rate of profit are wrong are given below.

• Marx's measure of "profit" was a very weirdly defined measure of operating margin. The data required to tabulate it is not collected today. Even Mr. Roberts can't reliably calculate the Marxist figure without making lots of dubious assumptions. The results of that calculation are meaningless, and nobody outside the small, Marxist circle pays any attention to them.
• Marx assumed that all products were commodities--i.e., the only distinguishing feature is price. For example, gasoline is mostly a commodity--one buys gas from the cheapest gas station, and rarely does any other feature count for much. But most of what we buy today are not commodities--nobody chooses an iPhone because it's cheap, and folks don't pick a restaurant based primarily on price. These are not commodities, and the profit margins do not depend on operating margins or the cost of production.
• Even if Marxists could accurately calculate their "operating margin/"profit", they don't understand what their result means. In fact, a "declining rate of profit" is good for the economy because it saves consumers money. The whole purpose of an economy is to benefit consumers (what other purpose could it conceivably have?), and lower profit margins benefit consumers. This is why Walmart limits its operating margins to 3% or below.
• For some bizarre reason, Marx insisted that the "rate of profit" only be calculated for the global economy as a whole. This is impossible--the data don't exist. And it's hard to see how any individual capitalist could make sense of that number even if you could calculate it.
• In point of fact, capitalists don't measure their profit by operating margins, but instead by return on investment. The operating margin does have to be above zero, but beyond that "profit" in the meaningful sense depends on the capital invested, as expressed by the price/earnings ratio. Here "price" is the price of a share of the company, i.e., the cost of capital.

Even if you accept Mr. Monterojo's thesis that profitability is "declining," it's still hard to see how that causes the debt crisis or cuts in public services. On the other hand, anti-union attacks and factory closures may increase profit margins, but more likely (and in the long term, always) reduce costs for consumers, i.e., make society richer and more prosperous. 

Then Mr. Montejero complains about how Presidents Bush and Trump lowered tax rates, and how this supposedly impoverished the working class. He writes,

The state began to also lower taxes paid by the rich, one of the fundamental causes of the rise in debt. Successive presidents since Reagan have lowered taxes paid by the wealthy and undermining federal revenues. For example, Bush II lowered taxes on the wealthy in 2001 and 2003, in addition to encouraging the invasions of Afghanistan in 2001 and Iraq in 2003, which required going over $2 trillion in debt, a sum that is growing. In 2017, Trump cut taxes for the country’s wealthiest people to a rate lower than that paid by the working class, the first time in the country’s history.

There are two parts to this argument. First he implies that tax receipts declined following the Trump tax cuts. The chart above shows that's not true. Total tax receipts are largely independent of tax rates.

Second, he says that marginal rates on wealthy people are lower than they are for us poorer folks. This is not strictly true. From this data, the top 1% paid 26.0% of their income in taxes. The top 50% paid 14.6% of  their income in taxes. The bottom 50% paid only 3.1% of their income in taxes.

Admittedly, this is only the federal income tax; it doesn't include payroll taxes, paid disproportionately by working people (who also receive a vastly disproportionate share of the benefits). Further, the very poorest people occasionally pay marginal rates in excess of 100%, e.g., when they exceed the maximum income to receive food stamps. So the story is more complicated, but since Mr. Montejero talks about tax rates, then he is obviously referring to the income tax.

Marginal tax rates aside, we have a remarkably progressive tax structure. The top 1% paid 42.3% of all federal income taxes. The next 49% paid 55.4% of all taxes. Meanwhile, the bottom 50% of the population paid only 2.3%. The rich paid more, not because of minor changes to marginal tax rates, but simply because the rich have more money and can afford to pay more.

Mr. Montejero writes,

So the ruling class is in a complicated situation: On the one hand, they need to borrow and spend more money to avoid a crisis and, on the other hand, they need to keep an exorbitant inflation at bay, during which two American banks—the Silicon Valley Bank and Signature—have collapsed. The agreement signed by the Democrats and Republicans worsens national indebtedness, keeps inflation levels high, and ultimately is a postponement of an economic storm that has been growing and threatening the world capitalist economy, at the expense of workers’ living standards.

This paragraph is actually mostly true. I'd replace the words "ruling class" with "government," but perhaps that's a distinction without a difference. Either way, they need to spend more money to avoid a crisis--and they're borrowing it! The flaw in our author's argument is not in this paragraph, but in the preceding where he attributes all ills to the mythical declining rate of profit. That's not the problem.

The problem is political. For decades politicians have been promising their constituents more and more: bigger social security checks, more comprehensive healthcare benefits, exorbitant payments to the higher education cartel, not to mention greater defense expenditures. They got away with this because they never had to pay the bill--the government always borrowed money at low interest rates, and it was up to future generations to pay it all back. By which time said politicians will long since have been out of office.

Well, the future has arrived--and now the bill is due. What we've got is a big, stinking pile of debt--not just in the US, but worldwide. The politicians are increasingly unable to refinance it. Somehow this debt is gonna have to be liquidated--either by paying it back (raising taxes), cutting entitlements (good luck with that!), defaulting on it (ouch!), or inflating it away (happening right now). There are no other alternatives. And that's the crisis.

Debt necessarily lowers future GDP--and today will be no different now that the future has arrived.

It's got nothing to do with any mythical Marxist measure of profit.

Further Reading:

• Oppression!
• The Harm Reduction Team
• It's Not Just About Abortion

Oppression!

My Trotskyist friends are big on oppression. 

Using The Militant's search bar for "oppression" yields 398 hits since 2018.  A similar search on the Left Voice website generates 109 pages of hits, each citing 10 incidences of the word--or nearly 1100 hits since 2017. My friends at Socialist Action don't give me a numerical count, but the first page yields 20 hits, and I don't know how many pages there are. The comrades at Worker's Voice also don't do a tally for me, but I counted 300 hits before I got tired of scrolling.

They're obsessed with the oppressed.

As a retired faculty member at a regional college, I have definitely been a victim of oppression. My salary was too low, my office was too small, my research contributions weren't properly recognized, and I had to spend twelve (12) hours per week in the classroom teaching! Oh the misery, the humiliation! No wonder I retired.

Of course my oppression is nothing compared to that of one of my colleagues who is triply oppressed--despite her similar status as a full professor. She's female, she's a POC (person of color in today's terminology, though her skin tone is indistinguishable from mine), and she's queer (formerly a synonym for weirdo). Her oppression is somehow three times worse than anything I've ever suffered, and accordingly she feels triply more sorry for herself than I ever did. As a white male, I'm supposed to feel sorry for her, too, and to hang my head in remorseful guilt.

She likely attributes her oppression to being minoritized and marginalized. I'm not sure what those words actually mean, but I think she does that to herself. She's the author of her own problems.

Marxists believe oppression stems from the theft of surplus value from workers. In this view workers receive a wage (which is determined by the market), but which is always less than the true value of their work, as supposedly determined by the labor theory of value. The difference between this theoretical value and the wage is the surplus unjustly extracted by capitalists and is perceived as oppression.

Michael Roberts gets into the weeds how surplus value is calculated here. The fundamental formula is

Marx's original equation for Rate of Profit (P) is

where s is the surplus value (i.e., what most people would call "profit), c is the total capital stock, and v is the total cost of labor. This is intended to be measured for the entire economy--not just for any individual company.

Mr. Roberts has a very hard time estimating these quantities since Marx's definitions don't match the way the terms are currently used or quantities tabulated. E.g., Marx refers to v as the variable capital, as opposed to fixed capital represented by c, but in modern terms it roughly means total wages.  More, the rate of profit is to be calculated only for the global economy as a whole--for which it is nigh impossible to collect data. It is meaningless to apply the formula to an individual firm.

In a word, the formula is useless, which is why nobody besides Mr. Roberts and a few of his friends bother to try to calculate it.

But Mr. Roberts does say that

The bottom line of the rate of profit formula should be restricted to the capitalist sector and not include public sector or residential housing capital.

Since both I and my POC colleague worked for the public/non-profit sector, we contributed nothing to the productive economy and therefore our salaries should not be included in any calculation of surplus value. In other words, nobody makes a profit off of our labor. We are NOT oppressed--not even a little bit. It doesn't matter what our skin color is or how small our offices are.

As stated, the Marxian concept of surplus value is valid only for the global economy as a whole--it can't be used for any individual firm, much less for a particular worker. Based on Marxism, it's impossible to say that the Walmart worker is more oppressed than, say, the CEO of Citibank (who is, ultimately, merely an employee of the company, albeit a very well compensated one). So while we know that public employees are not oppressed at all, we can only speculate about the oppression of actual workers.

Still, Marxian ambiguity notwithstanding, I'll suggest that the degree of oppression depends on the size of one's wage. That is, the surplus value that a capitalist can withhold from a low wage worker is less than what he can obtain from a high wage worker. So if the unemployed are not oppressed at all, then also the minimum wage employee is minimally oppressed. There isn't much value from which to extract any surplus. Accordingly, the CEO of Citibank is way more oppressed than the Walmart worker.

Besides me, other people who aren't oppressed are people who don't have jobs. I've gone from being not oppressed as a college professor to now being not oppressed as retiree living off my savings. The last time I was actually "oppressed" was when I worked as a taxi driver in Chicago 50 years ago--that being the last time I actually created value for anybody. Similarly, unemployed people aren't oppressed, nor are those who have left the workforce for any reason--not just retirement. Homeless people--despite their dire straits--are also not victims of oppression. They're part of the lumpen proletariat, a term which meaning I'd broaden to include the lumpen intelligentsia, e.g., college professors and their ilk.

Such is the topsy-turvy land of Marxist economics.

My Trotskyist friends will argue that I'm taking Marx too literally, and perhaps they're right. This is probably one of the many ways in which Marxist economics doesn't make any sense. If Mr. Roberts' herculean efforts at calculating the rate of profit fails, it's because the task is essentially impossible and the results are meaningless. No company measures its success on the global rate of profit, nor does any worker gauge their well-being on so ill-defined and irrelevant a concept. Even I admit that my career as a professor wasn't completely useless--a few of my students really did learn something. Though I will be the first to admit that I could have spent my time better, and I'd advise anybody who asks not to work for higher education.

My Trotskyist friends have broadened oppression way beyond its Marxian roots. If Marxist economics is hopelessly vague, then modern Trotskyism is a ball of confusion. In their world, not just workers are oppressed, but so are women, POCs (but not all POCS), "queer" people, and trans people. How all those groups fit into any Marxist category is beyond me. I've written about the so-called "oppression" of women here, and found the concept wanting.

I think Trotskyism attracts people who want to feel sorry for themselves. That certainly includes the academic precariat--who have voluntarily chosen their own misery but nevertheless want to blame it on somebody else. It includes much of the LGBTQIA+..., some of whom are mentally ill and probably rightly do feel sorry for themselves.

In summary, I believe the modern Trotskyist version of oppression is simply self-pity, and it's sad that the concept plays such a large role in their newspapers.

Further Reading:

• Academic Workers on the Rampage
• The Harm Reduction Team
• "Pedagogy of the Oppressed"

Michael Roberts & Monetarism

(Source)

Economist Michael Roberts pens a piece posted in Left Voice entitled Monetary Tightening, Inflation and Bank Failures. The article is about all those things, but the subtext is an argument against monetarism--and that is the aspect I wish to address. I think Mr. Roberts gets it wrong.

Monetarism (for our purposes, at least) can be summed up by Milton Friedman's famous dictum,

Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.

This is undoubtedly true, but it is frequently misinterpreted by many commentators. Especially on my side of the aisle, it is often claimed that the "Fed" is just "printing money" as fast as it can--one helicopter drop after the other. In fact, the Federal Reserve Bank can't print money--all it can do is add money to bank reserves. Those may eventually leak out into the economy, but such leakage depends not on the Fed, but on the economy's demand for money. 

While the Fed can't print money, the Treasury certainly can. The former is supposed to be politically independent (and to some extent it surely is) and is responsible for so-called monetary policy. The latter--responsible for fiscal policy--is very much beholden to the president and Congress (i.e., inherently political), and isn't allowed to spend anything without legislative authorization. Given that authorization, it can effectively print money.

As Mr. Friedman's suggests, inflation doesn't just depend on how much money is being created (or "printed," if you prefer that term), but also on how much money is needed by the economy. That is, if the supply of money ("printing") is balanced by the demand for money, then there will be no inflation (or deflation). Conversely, if the supply of money exceeds the demand, or the demand for money is less than the supply, then there will be inflation. (The reverse will lead to deflation.)

And this is where I think Mr. Roberts makes his most fundamental mistake: he confuses the supply of money with the supply of goods and services. He writes (link in original),

        And in a recent post, I recounted a long study by Joseph Stiglitz that offered comprehensive data showing that inflation was caused by supply-side shortages not ‘excessive demand.
        Since then, more evidence has appeared backing up the supply story.  One recent paper found that when the economy came out of the COVID pandemic lockdowns and slump there was a shift into buying more goods.  However, producers were unable to deal with this surge.

In the linked post, he compares the "supply story" with the demand story (here referring to the supply and demand of goods and services, not money). In the former, it's because of pandemic-driven snafus in the supply chain that caused price rises, and hence inflation. A variant of the "supply story" is the so-called wage-price spiral. In this case it is the labor supply that's causing the snafu, and the economy responds by raising prices.

Contrary to the supply story, it could be higher demand that's causing inflation. People want to buy more stuff, the stuff is not being produced at sufficient volume, the price of stuff goes up, so people empty out their bank accounts to buy the stuff anyway, even at the inflated prices. That is, inflation is caused because demand has outstripped supply. 

Mr. Roberts does not subscribe to the demand story--he believes that it's supply snafus that have caused inflation. The solution, therefore, is not to curtail demand (e.g., by raising interest rates), but instead to augment supply. In Mr. Stiglitz's opinion this is to be done by more regulation of the market.

I think both analyses are wrong. There is no question but that the pandemic made us poorer. It reduced the supply of a large number of goods and services--driving many businesses out of business altogether. Governments around the world made (in varying degrees) many things illegal, e.g., eating in restaurants, riding on airplanes or cruise ships, working in an office or factory, sending your children to school, etc. Increased poverty was the order of the day.

But poverty does not cause inflation--nor does inflation automatically cause poverty. Inflation is caused by variations in the money supply. Misters Roberts and Stiglitz err in conflating the money supply with supply and demand in the goods economy. They are not the same thing. And we're back at Mr. Friedman's dictum--inflation results when the supply of money (not goods) exceeds the demand for money (not goods).

The Fed purports to moderate the money supply by using two tools: 1) open market transactions to keep overnight interest rates within a certain range; and 2) varying the size of total bank reserves by various tricks including quantitative easing (QE), etc. These are very blunt instruments, and they've gotten blunter with time. The link between overnight interest rates (that the Fed controls) and longer term interest rates (such as your home mortgage) looks to have broken down. The effectiveness of the other tools is dubious at best.

More, there are too many other players in the monetary game besides the Fed. There's the whole shadow banking network (including money market funds) that exists outside of the Fed's direct reach. And then the Eurodollar market (dollars housed outside the US, uncontrolled by the Fed) is huge and clearly has an impact on the domestic money supply. So the Fed is, in significant measure, a paper tiger. 

However little control the Fed has over the money supply, it does regulate and backstop the banking system (see Bagehot's Rule). This job is as important as ever, especially right now.

But even if the Fed can't control the money supply, it is still possible for the Treasury to "print" money. So they don't actually print it, but instead they borrow it. Through its QE programs the Fed dramatically increased the levels of bank reserves. This allows the banks to lend way more money if there is a market for the loans. There was a huge market--between Trump and Biden, the government borrowed $3 trillion for so-called "Covid relief." This had absolutely no effect on the supply of goods--not a single supply snafu was straightened out as a result. But it had a huge impact on the money supply.

Mr. Roberts seems to think this had no effect on inflation. He writes,

...that increased money supply is associated with rising house prices and stock prices – no mention of the prices of goods and services.  And that is the point.  Strong money supply growth and low interest rates up to the point of the pandemic did not lead to rising prices and accelerating inflation in the shops.  Instead, money supply fuelled a credit boom expressed in a boom in real estate and financial assets.

He's right, of course. The immediate effect of the Covid Relief windfall was to increase savings--after all, with pandemic restrictions there were no easy ways to spend the money. So it went into the stock market, high-end real estate, bitcoin and other crypto assets, and collectables. Mr. Roberts doesn't count this as "inflation" because it's not measured by the CPI. But it surely is a way to store money for later use.

And later arrived with the end of the pandemic rules. All that money was pulled out of storage and poured into the goods and services economy. Accordingly, asset prices tumbled, but inflation in goods and services soared--and we're confronted with the inflation problem we have today. Like all inflation, it's caused by too much money chasing too few goods--and it has nothing to do with a wage-price spiral or a supply snafu or some such.

What to do about it? The Fed will have to raise interest rates and engage in quantitative tightening to soak back up the extra cash. But it won't work very well--it is obviously breaking the banking system before it's ending inflation. So I'm not optimistic that inflation will go down anytime soon.

The bottom line is inflation is a function of government deficit spending. When the government spends money faster than the economy is growing, inflation will ensue. Only when the government cuts the deficit will inflation slow down. Cutting the deficit means cutting social security, Medicare, Medicaid, and the defense budget. This is politically and socially impossible.

Have a nice day.

Further Reading:

• Labor Notes 2022: Starbucks
• The China Beat
• The Declining Rate of Profit

Jeff Mackler Channels Michael Roberts

I intended to ignore Jeff Mackler, the octogenarian leader of a mini-grouplet called Socialist Action (SA). Mr. Mackler, readers of this blog may recall, ran the most incompetent campaign for president ever in history. Indeed, at least partly due to that ridiculous effort, SA is now reduced to a few dozen members.

SA is a "fraternal party" to the Fourth International (FI), an organization of Trotskyist parties around the world. Depending on how you define "membership," FI represents a few hundred to a few thousand people globally. In other words, it's of negligible political consequence. SA's mission is to set this organization on the true Trotskyist straight and narrow--that is, to return it to the concept of Leninist party building, which presumably has been abandoned by their international comrades.

It's a lost cause and a silly cause, and we may ignore it. Nevertheless, to that end three documents have been submitted to the FI, the most recent one entitled Debate in the Fourth International Part III: Capitalism’s World Economic, Political and Social Crises and the Coming Fightback. While authorship is not credited, the "politics in the report below were adopted by the National Committee of Socialist Action/USA..." However, it's obvious that Mr. Mackler is the actual author--he's a good writer and there is nobody else in that organization capable of the assignment--so I'll explicitly credit him here.

Because Mr. Mackler is a good writer, and because the topic is mostly economics, I break my vow to ignore him and will pay the man some attention.

The lede paragraph:

Today, world capitalism’s neo-liberal globalization is best characterized as a new form of organization where global value chains have become the dominant form of production, employing workers for one out of every five job on the planet. From low to high tech commodities, basic consumer goods to heavy capital equipment, food to services, goods for the world market are now produced across many countries, integrated through global value chains.

And this is true! Globalization has enriched people around the world. Bigger markets (and there is no bigger market than the globe) leads to more labor specialization (between countries and individuals), and as Adam Smith pointed out long ago, specialization is what increases productivity and makes people richer. There is a huge literature that makes this case, but I'll just cite three of my own posts, here, here and here.

But Mr. Mackler thinks globalization is evil, writing

This globalization was essentially driven by the inherent contradictions in the capitalist system itself. Ever declining average rates of profit, as repeatedly demonstrated by Marxist economist Michael Roberts, were countered worldwide by ever intensifying attacks on working people, ...

I don't think Mr. Roberts demonstrated any such thing. I wrote an (admittedly crappy) post on this some years ago. First, Mr. Roberts suggests a very weird definition of profit that nobody else uses and which has no effect on economic decision-making. Second, his definition only applies to the economy as a whole, and not to any individual company. So there is no way a CEO could make use of this information. Third, the quantities required to calculate "profit" are vague and not obviously tabulated anywhere. So all Mr. Roberts can do is estimate them.

And finally, he defines profit as something related to operating margins rather than return on investment. His ultimate claim is that operating margins have been shrinking over the past decades. I don't think that's true. Of course if it is true this is good--smaller operating margins are better for consumers, who get cheaper prices. Successful companies (e.g., Walmart) have capped their operating margins at 3%--if they go above that they reduce prices.

Profitability is usually and most meaningfully measured by return on investment, which is the quantity that's actually important to the capitalist. Accordingly, the price/earnings ratio is a lead indicator for how valuable a stock is.

Arguing for a falling rate of profit, Mr. Mackler cites Marx.

Simply put, as Marx explains in the first volume of Capital, the average value of any commodity is measured by the average amount of human labor power embodied in it in the course of its production.  Over time, competition compels capitalists to repeatedly renovate their productive facilities substituting machines for human labor power. This initially benefits the first on the market with the new technology and allows them to sell their product at a price above its real value. But as the competition heats up, weaker companies drop out while more serious competitors introduce even more advanced technological innovations and this initial advantage diminishes. 

In time the price and value of commodities tend to reach equilibrium and the corresponding average rate of profit declines in correspondence with the reduced quantity of human labor power embodied. 

And this is all true! I don't disagree with Marx at all. But Mr. Mackler leaves out two important points.

First, as already mentioned, declining profit rates (defined in terms of operating margins) are good for consumers, who get cheaper products. So I am in favor of shrinking profit margins--which as Mr. Mackler points out are often a result of new technology and increased productivity.  This increases our standard of living! If he is trying to convince me that capitalism is broken, this is not a very good argument.

Second, Mr. Mackler does not understand the meaning of "commodity." A commodity is a good which trades only on price. Gasoline is a commodity--people drive around searching for the lowest prices. They don't really care about anything else. So are basic economy airfares--you'll fly on the cheapest airline if all you want to do is save money. Obviously, things sold on commodity exchanges--e.g., copper, iron, wheat--all trade on price and not on any other quality.

Mr. Mackler cites an excellent example of something that is NOT a commodity.

The process [offshoring--ed] included such phenomena as major corporations like Apple employing some one million Chinese workers at near slave wages and hours and selling Apple I-phones for $1,000, only a few dollars of which went to Chinese and other Asian workers at the low end of the value chain.

I think the one million number is an exaggeration, as is the adjective "slave." But the point is mostly correct. In a post from 2013 I document that the assembly cost of an iPhone was only $8, while the sales price was closer to $300. The wages paid to the Chinese workers was 50 cents per hour. Add in the cost of components sourced from around the world, there is still no question that Apple made a healthy profit from the iPhone.

It's still true today, even with inflation doubling or tripling those numbers. The price of an iPhone is not determined by the production cost--and that's because an iPhone is NOT a commodity. Nobody buys it because it's cheap. Instead they appreciate the excellent engineering, the high-end components, the stellar design, and especially the cool factor in owning an iPhone. It's a fashion statement. An iPhone is expensive because Steve Jobs carefully and meticulously nurtured the brand. And for that reason it's very profitable with extremely high operating margins.

A commodity smart phone available on Amazon costs less than $40. That's the cost of production plus a small operating margin. An iPhone 13 sells for 20 times that much.

In Marx's time, almost everything sold was a commodity, and it is understandable that he expressed his economic theory in those terms. But that's not true today--most things Americans buy are not commodities. That is, the competition is not based solely or primarily on price, but rather on other qualities. The Marxist argument for declining profit margins does not apply.

Further Reading:

• Lost in the Amazon
• Socialist Action Believes American Children Should Freeze to Death
• Boring Jeff Mackler Runs for President Again

The China Beat

This post is in response to three recent articles from the Trotskyist press--one by Jeff Mackler, another by Michael Roberts, and a short piece by Roy Landersen.

Mr. Mackler's piece is entitled The Myth of a New “Cold War” Between the U.S. and China/Russia. He's addicted to the word imperialism--the word fragment imperial- shows up 28 times in the article. This despite the fact that he has no clue what the word means. He's not alone--nobody else knows what it means either.

What I think he thinks it means is something like unequal exchange. That is, on the one hand US capitalists will exploit Chinese workers who manufacture cheap products for American consumers by paying them "near slave wages." On the other hand, the US will export expensive, overpriced products back to China. Thus the capitalist realizes excess profits on both legs of the round trip. The problem is it doesn't work that way. Why would China volunteer their citizens for slavery? And why would they agree to buy overpriced products when the same can be had for cheaper from other countries?

Mr. Mackler actually admits that the imperialism model doesn't fit. He writes,

In the 20 years since China was admitted to the WTO, China went from operating as one of the world’s lowest technology nations to today, when Chinese technology rivals or exceeds almost all other nations on earth. In the past 20-plus years China was transformed from providing “internal migrant” teenage girls from the countryside, producing garments in prison-like foreign-owned dormitory factories at six cents per hour and seven days a week, to a nation with some of the most modern Chinese-owned factories in the world, producing world-class industrial tools and machinery and state-of-the-art 5G (fifth generation) electronics and telecommunication products.

So--in a mere 20 years those migrant slave girls went from being ruthlessly exploited to becoming middle class citizens of an increasingly wealthy country. There is still a lot of poverty in China, but the collaboration between Walmart, on the one hand, and Chinese entrepreneurs on the other has lifted 400,000,000 people into the global middle class--an achievement unprecedented in human history. Mr. Mackler needs to explain how "imperialism" wrought such a change, and if so, then why is "imperialism" such a bad thing?

It's not like American consumers suffered. Walmart reduced prices across the board, sharply lowering the cost of living, especially in rural areas. More, Walmart kept its operating margins at 3%, thereby passing nearly all the benefits of the China trade on to American consumers. Sam Walton only got a small slice.

The problem with Mr. Mackler's version of Marxism is that he sees trade as being a zero-sum game. He thinks anybody who trades with the USA is getting ripped off. Other people postulate the reverse: the US is getting ripped off by foreigners selling cheap products to Americans (I put Barry Sheppard into this category here). Though Mr. Mackler is inconsistent: he also believes Cuba's suffering is due to the US trade embargo, i.e., Cuba can't trade with the US.

There are social and geopolitical reasons why the US needs to curtail its trade with China--but we will pay an economic price by doing so.

Michael Roberts' article, entitled China at a turning point?, is much better--not least because the word imperialism isn't mentioned even once. More, Mr. Roberts actually knows something and is careful about terminology--nothing he says can be dismissed out of hand.

The article is inspired by the collapse of the giant real estate developer, Evergrande. I think Mr. Roberts' analysis of the near-term consequences is accurate. It is not a financial collapse on the order of Lehman Brothers, nor will it bankrupt the entire Chinese economy. But it will lower the standard of living by a misallocation of resources. Mr. Roberts suggests that China is creating "zombie companies" such as exist in many capitalist countries. He writes,

The real problem is that in the last ten years (and even before) the Chinese leaders have allowed a massive expansion of unproductive and speculative investment by the capitalist sector of the economy.  In the drive to build enough houses and infrastructure for the sharply rising urban population, the central and local governments left the job to private developers.  Instead of building houses for rent, they opted for the ‘free market’ solution of private developers building for sale.  Evergrande-like development in China wasn’t just capitalism doing its thing. It was capitalism facilitated by government officials for their own purposes. Beijing wanted houses and local officials wanted revenue. The housing projects helped deliver both. The result was a huge rise in house prices in the major cities and a massive expansion of debt.  Indeed, the real estate sector has now reached over 20% of China’s GDP. 

I think this diagnosis is largely correct, except I wouldn't blame the free market, but instead government intervention in the market. "Beijing wanted houses and local officials wanted revenue" has nothing to do with free market capitalism.

The Chinese problem is in a sense the opposite of that of the USA. In our country we subsidize housing demand: Section 8 vouchers, eviction moratoria, generous tax benefits, subsidized mortgages, concerted government efforts to extend home sales to poor people, etc. At the same time, housing supply is sharply limited, mostly by local zoning and environmental regulations. Many Greenies want to ban single family housing altogether. The result, of course, is sharply higher housing costs as subsidized demand outstrips constrained supply.

In China it's the other way round. Both the local and national governments want more houses--and boy, have they built houses! Whole ghost cities full of them. Supply is hugely subsidized, leading to falling prices. But the government can't have falling prices since that would destroy middle class savings. The result is a bankrupt Evergrande that is building houses that nobody really wants to pay for anymore.

My take on this is government regulation--on either the demand side or the supply side--screws things up. It's not capitalism anymore, but rather government cronyism, which eventually morphs into fascism/socialism.

Mr. Roberts' solution is to prohibit consumers from buying what they want. In the US consumers by a large majority want to live in single family homes in the suburbs. Chinese consumers want to own their own apartment and drive a car. But Mr. Roberts and his fellow socialists are against that--they think they know what the people want more than the people themselves. His penultimate paragraph makes precisely that point.

What is needed is not a further expansion of consumer sectors by opening them up to ‘free markets’, but instead state-led investment into technology to boost productivity growth.  And that state sector investment can be directed towards environmental goals and away from uncontrolled expansion in carbon-emitting fossil fuel industries.  As Richard Smith has put it: “The Chinese don’t need a higher standard of living based on endless consumerism. They need a better mode of life: clean unpolluted air, water and soil, safe and nutritious food, comprehensive public health care, safe, quality housing, a public transportation system centred on urban bicycles and public transit instead of cars and ring roads.” Rising personal consumption and wage growth will follow such investment, as it always does.

Somehow I doubt Chinese consumers prefer to ride around on bicycles instead of owning a car.

Mr. Landersen, writing for The Militant, pens a piece entitled Embracing Mao, Chinese rulers continue assault on working people. The premise is much the same as Mr. Mackler's--Chinese workers were exploited and oppressed by their Stalinist masters (which makes me wonder why The Militant offered the Maoists critical support for all those years). That oppression continues near unabated to this very day--the dramatic rise in China's material well-being is barely mentioned.

China's travails are contrasted with Cuba's virtues:

This is the opposite of the working-class trajectory of the Marxist leadership of Cuba’s socialist revolution. Under Fidel Castro and the July 26 Movement, workers and farmers were led to take political power into their own hands and to take on ever-greater control over all aspects of economic and social life, transforming themselves in the process. Working people became conscious actors in history, extending their hand to anti-imperialist struggles around the world.

Yet China has manifestly been more successful than Cuba! Cities like Shanghai and Beijing look a lot more like New York than Havana. There are good restaurants, excellent public transportation, and nice stores. As mentioned China has a sizeable middle class.

None of that exists in Cuba. Smart and ambitious Cubans have all been exiled. Those still living in Cuba are hungry, live in housing so dilapidated that they're functionally homeless, and survive without electricity for much of the day.

China has a lot of problems--but there is no way that Cuba compares favorably with China.

Further Reading:

• Book Review: Capitalism Alone
• Comrade Keith L. Writes About China
• Book Review: Walmart

Software Eats The World!

Michael Roberts, in a wonderful article republished in Left Voice, describes the current economy as clearly and as accurately as anybody. There is almost nothing he says that I disagree with. It's what he doesn't say that raises issues.

Weirdly, I'm actually more pessimistic about the economy than he is. Usually it's Marxists who predict capitalism's imminent demise--but now I'm in the strange position of seeing more problems than he.

His description of the current economy is spot-on. I'll condense Mr. Roberts' argument to bullet points.

• "US economic activity is still some 20-25% below where it was this time last year."
• "Overall, the US economy has shrunk by about 4-5% in 2020.  That is the largest contraction since the early 1930s – or 90 years ago!"
• "All the evidence suggests that there has been permanent ‘scarring’ to the economy in employment, investment and incomes."
• "Instead, there is what I have called a ‘reverse square root’ recovery where output falls but then does not recover to the same trajectory of economic growth that was there before. That output is lost forever, as the forecast for the US from Oxford Economics below shows."

(Source)

Mr. Roberts then describes the government response to this situation. I don't disagree with him, but I'd like to put it in a different context.

There are two components to the so-called "stimulus," which for shorthand I'll refer to (imprecisely) as fiscal stimulus and monetary stimulus.  Fiscal stimulus refers to payments made by the government directly to households and businesses. The money comes from government borrowing. That would include the CARES package, the $1200 checks we all got a few months ago, and the $600 checks we got a couple weeks ago. This is actual money put into the real economy, and should by all rights be inflationary.

Monetary stimulus, meanwhile, are actions taken by the Fed, most notably quantitative easing (QE), also misleadingly known as "printing money."

Jeffrey Snider (paywalled) describes the Fed as operating a warehouse, and as long as money stays within the warehouse, there is little effect on the real economy outside. The Fed prints money inside the warehouse, but unless the cash escapes into the wider economy, it doesn't really do anything. QE means the Fed is buying T-bills (and other assets) from banks (and now corporations). These assets are considered cash equivalents, i.e., nearly as good as money, and they are removed from the economy and sucked into the Fed's vaults inside the warehouse. Meanwhile, freshly-printed money is simply moved from one side of the warehouse to the other side--it never leaves!

The result--since cash equivalent assets are sucked into the warehouse and no cash is let out--is QE is disinflationary! Indeed, in the long history of quantitative easing, no inflation has ever ensued.

Essentially, in terms of inflation, QE undoes what the fiscal stimulus is supposed to accomplish--namely to create inflation. While QE removes assets, fiscal stimulus injects cash--and there is no net inflation. But there is now more cash and there isn't very much to buy with it (restaurants aren't open; planes aren't flying), so it goes back into assets. Mr. Roberts describes it this way.

Indeed, what has happened to all these credit injections is that they have been used by banks and big businesses to speculate in the stock and bond markets rather than to pay wages, preserve jobs or raise investment.  After the initial panic of the pandemic in March, the US stock market has gone on an unparalleled binge.

It is now at all-time highs and, relative to earnings and productive assets, is at extreme levels.  Yet with more Fed support to come, financial markets may well go rolling on up for a while longer.  So all monetary policy has done is to keep businesses on life support, while boosting the wealth of the very rich.

I'd take slight issue with the last phrase. It's not just the "very rich" who have benefited (though they certainly have), but it's anybody able to invest in assets. That includes the upper middle class--perhaps the top 10-15% of the population. People with 401Ks, owners of real estate, buyers of fancy collectables, and even bitcoin hoarders have benefited. Investable assets have all gone up.

It's a gigantic merry-go-round, spinning faster and faster, that nobody wants to be riding. If the Fed stops QE we'll end up with hyperinflation, which would be much worse than the problems we've got. And if they stop fiscal stimulus, the result will be bottomless deflation which, given the huge global debt overhang would rapidly lead to the biggest credit crunch the world has ever seen. So we're stuck.

Put aside the merry-go-round--which is just forestalling disaster. What really is the big problem that starts the merry-go-round spinning to begin with?

The big problem is deflation--the secular cost of everything is going down. The world is getting cheaper. That sounds wonderful--life on $2/day is sweet. But there are winners and losers in a deflationary world. The big losers are people in debt, since deflation causes real interest rates to go up. That's why we need all the fiscal stimulus--to make sure people can make their mortgage payments. It's hard to live on $2/day when the rent is $1500/month.

(Above I suggested a future problem might be hyperinflation. How can hyperinflation and deflation coexist at the same time? Hyperinflation is a problem with the dollar--too many of them chasing too few goods. The deflation I'm talking about is a much deeper problem, and it is that the costs of goods and services are decreasing in real terms, i.e., independent of whatever unreliable currency unit you choose to measure them with.)

The causes of deflation are much discussed. A big reason is demographics--global population growth is slowing, and in many big economies it is now shrinking. Because baby boomers are aging into retirement, the labor force is shrinking even faster than the population. The result is less demand for everything--food, oil, copper, etc., and accordingly, lower prices.

A second reason is automation--the examples are legion and are now part of everyday life. Just one to illustrate: in the old days a human cashier would ring up your groceries, and then make change for a $20 bill. Today I use the self-checkout (beep, beep, beep) and pay with a debit card (no change required). They still do have a few cashiers at Walmart for old folks who haven't caught on yet.

But we ain't seen nothing yet! Because now we're embarking on the second half of the chessboard. I first encountered that analogy in a book entitled The Second Machine Age (my review here). The analogy refers to the ancient king, proposing as a settlement for some debt, suggesting that his rival put a grain of wheat on a chessboard square. And a month later two grains of wheat on the second square, and then four on the third square, and then, on subsequent squares, 8, 16, 32, 64... By the time you get to the 32nd square, the king is due 4,294,967,296 grains of wheat--still maybe doable. But when you go beyond that, to the 33rd square and more, pretty soon his rival will owe more grains of wheat than there are stars in the universe!

Moore's Law is like that--computer power doubles roughly every 18 months. (While Moore's Law in the narrow sense seems to have reached its physical limits, progress in software and bandwidth continues the effect.) For example: college professors smugly note that Zoom meetings are no competition for the live classroom--and true enough. But 18 months from now, Zoom (or whatever replaces it) will be twice as good. And in 36 months it will be four times as good--so good, in fact, that nobody will ever want to sit in a classroom again (at least not for getting an education).

Community colleges and grad schools are already headed for extinction, replaced by Zoom and YouTube. Four-year colleges are not far behind--the notion that one has to sit in a classroom to get educated is doomed. And with that realization, everything else about colleges collapses: degree programs disintegrate, tuition plunges, campuses sit empty. Everything gets sucked up into the ether.

The ultimate software is artificial intelligence, which is advancing very rapidly. Consider another example: drug discovery. Today, a clinical trial consists of a single drug tested against a single disease. That's all the human brain can process at one time. But given enough data, AI can measure a single drug against all diseases, or for that matter all drugs and nutrients against all diseases, all overlayed on variations in the human genome. In other words, drug discovery becomes vastly more efficient--think about all the scientists who are about to get unemployed.

So here's the rub--where deflation is biting most hard. The real wages of the bottom half of our society are going down (h/t Jeff Booth--paywalled). They're competing against software, and in the end software is vastly cheaper. Software will win--it's eating the world. This is a disaster--society can't survive when half the population--professors, retail clerks, insurance agents, factory workers--are being reduced to poverty. The merry-go-round exists to forestall this cataclysmic event. 

The Fed--which is neither evil nor stupid--is working all out to prevent disaster. But it's got the wrong toolbox--using tools that were invented before software was ever a thing. All it can do is spin the merry-go-round ever faster until the whole thing falls apart.

It's not the fault of the bourgeoisie--who will also eventually lose out to software. Their current increase in wealth comes from the Fed whose merry-go-round pumps money into assets. But when the spinning stops the markets will crash, and only owners of software assets (e.g., bitcoin) will come out on top.

It's not the fault of the Democrats--who are working hard to completely miss the boat, arguing about who is more woke and who deserves promotion in the English department.

It's not the fault of the Republicans--who think if we just cut the budget all our problems will be solved. Nope.

Our Marxist friends have no solution. The proletariat can't stop the march of software anymore than the bourgeoisie. Fretting over the precise nature of the "vanguard party" is a spectacular waste of time.

The only winners will (eventually) be consumers, which ultimately is all of us. We'll all be able to live comfortably on $2 per day.

Further Reading:

• Austerity Comes to Campus
• Robots of the World, Unite!
• Getting Richer While Feeling Poorer

Trickle-Up Economics

Michael Roberts says nothing but the truth. Comparing our current pandemic-recession with that of 2009, he writes,

But so far, [unlike in 2009--ed] there has not been a ‘financial shock’.  On the contrary, the stock and bond markets of the major countries are at record highs.  The reason is clear.  The response of the key national monetary institutions and governments was to inject trillions of money/credit into their economies to bolster up the banks, major companies and smaller ones; as well as pay checks for millions of unemployed and/or laid off workers.  The size of this ‘largesse’, financed by the ‘printing’ of money by central banks, is unprecedented in the history of modern capitalism.

With massive money-printing one would expect inflation, perhaps even hyperinflation. And there has been considerable food inflation, likely due to a severe food shortage in China.

Cost of food in the United States increased 3.70 percent in November of 2020 over the same month in the previous year. source: U.S. Bureau of Labor Statistics (Source)

On the other hand, energy prices have declined sharply, and other prices have trended down. The net result is inflation for 2020 is near a record low--despite the Fed's desire to hit a 2.0% inflation rate.

(Source)

So what happened? All those trillions of dollars in stimulus and bail-outs had to go somewhere! They obviously didn't get spent. Some of the money is sitting uselessly in the Fed's vaults, and much more of it is tied up in assets. As Mr. Roberts points out, there's no problem with liquidity--we're drowning in it.

In short, while the quantity of money has increased dramatically, the velocity of money (the rate at which money changes hands) went through the floor.

(Source)

Still, it's all a little weird. Lots of money has been printed, but it's all been "sterilized", that is somehow taken out of circulation. But here's the catch: many people were forced out of the labor force in March, 2020, as shown below. While there has been some recovery, as of last month there were nearly 10 million fewer employed people than there were a year ago. That inevitably means that fewer goods and services are being produced today than were produced in 2019.

(Find more statistics at Statista)

It's easy to identify the missing product: restaurant service has been severely curtailed if not shut down entirely, airlines are flying a small fraction of last year's customers, hotels are empty or closed, theaters have gone dark. It's now very difficult to spend money on any of those items.

So not only is there way more money being printed, but there is less stuff to spend it on than we used to have. If this isn't a recipe for massive inflation, then what is? But all we've got is crickets.

There are three kinds of inflation. One measures the cost of consumer items, often reported as the Consumer Price Index (CPI), shown above. Despite all the liquidity, consumer prices ain't budging. Why not? Likely because automation and globalization have made manufactures cheaper. As I believe Raoul Pal put it, a Domino's Pizza made by robots isn't going to cost more. Or, another example, today's cars contain fewer parts put together by fewer workers built from globalized supply chains. There's no way cars are going up in price (unless they also go up in quality, e.g., from an econobox to an SUV).

The second kind of inflation is commodity inflation. I refer here to the industrial sort, not the scarce stuff such as gold. And at least some commodity prices are going up! I've already mentioned the price of food. Copper prices (often referred to as King Copper, since it's often indicative of the health of the industrial economy) are also up dramatically.

Copper price ($/lb), 2019-20

Industrial metal prices have gone up this year, though not as much as copper.

(Source)

So that's a partial solution to our problem--there is inflation in commodities--certainly in food and industrial metals. So Mr. Pal's "Domino's Pizza" example isn't entirely apt--while the assembly and delivery of the pizza now costs less, the raw materials surely cost more today than they did a year ago.

The third kind of inflation is that of scarce commodities. These are items they're not making any more of, or at least not a whole lot more. Gold is the premier example--gold mines add only 2% annually to the existing supply, and the price has gone up nearly 22% in 2020. Silver has done even better, rising 37% so far this year.

The stock market is also a scarce commodity.

Between the lack of IPO activity, the pickup of M&A, and buybacks, the U.S. equity world is becoming smaller and smaller, and this could be one of many reasons why active managers are lagging behind their indexes.

The number of stocks available is about half of what one could buy in 1997. So needless to say, the price of shares gets bid up, and all the more so when the Fed is printing money. The S&P 500 is up 65% from its low last March, despite the fact that corporate earnings are expected are expected to decline by nearly 14% in 2020. People are buying stocks because they have no place else to put their money.

All kinds of scarce commodities are getting more expensive: real estate (esp. luxury), fancy/antique cars, famous art, one-of-a-kind baseball cards, and indeed, collectables of all kinds. The most famous scare commodity today is bitcoin, which nearly tripled in price in 2020.

I'll suggest that inflation in scarce commodities has been dramatic, and is where most of the excess money is flowing. This is great for those households with investable assets, i.e., the those in the top 10% of the wealth distribution. It doesn't really help anybody else.

In light of this, what are the appropriate goals of fiscal/monetary policy?

First and most important, those ten million unemployed people need to get back to work. This is not just for their own benefit, but if we can't increase production then the economy has to shrink--no amount of money-printing can change that outcome. This will be bad not just for the unemployed, but for everybody. So getting them back to work in productive jobs (i.e., not government-funded, make-work jobs) is crucial.

Second, financial and (most) corporate accounts are liquid. Accordingly, lending money to money center banks is not helpful, and neither is lending money to most corporations.

Third, many institutions are not illiquid, but rather insolvent. This means that they're not just short on cash, but instead their entire business model is broken. Indeed, what we face in this country is not a liquidity crisis, but rather an insolvency crisis. Insolvent organizations must be allowed to go bankrupt, however painful that is in the short term.

For example, the airlines are likely insolvent. Their business model--flying business people around from meeting to meeting--has been permanently disrupted by Zoom software. So at least one or more of the big three airlines probably has to go out of business. Neither the Fed nor Congress should bail them out.

Likewise, the states of Illinois and New Jersey (among others) are bankrupt. They need to fail--i.e., default on their obligations. The bondholders should take a big haircut, along with other state creditors such as pensioners (for whom an expansion of the welfare state will likely be necessary). Once the debts are wiped clean (bankruptcy does that) then the states can be reorganized along fiscally responsible lines.

Politically and legally, state bankruptcies will be really hard to pull off. But under no circumstances should they be bailed out.

Finally, it is my hope that the ten million unemployed are not insolvent, but merely illiquid. In other words, I'm suggesting that they can all be reemployed over the next year, and that there will be no increase long term unemployment. They need a bridge loan--aka bailout--to tide them over in the meantime. This means a longer extension of unemployment benefits, albeit at a level that doesn't keep them from seeking employment.

Think of it this way. Because of the bailout, our friendly waitress can pay her rent. Which means the landlord can pay his mortgage. Which means the bank can pay its depositors who want to withdraw money. Which means the financial system remains both liquid and solvent. Eventually the waitress--because she's solvent--will be reemployed productively, making us all richer.

It's called trickle-up economics.

So beyond extended unemployment benefits (and something comparable for small businesses), I'm against any other bailouts. Nothing for the banks. Nothing for the corporations. Nothing for the bondholders. Nothing for the corruptocrats running states like Illinois. These bailouts--unlike that awarded the waitress--will do nothing but inflate asset prices and make bitcoin investors rich.

Further Reading:

• Austerity Comes to Campus
• Trotskyists on the Economy
• Let Them Eat Little Bits of Green Paper

The Declining Rate of Profit

I keep dinging my Trotskyist friends about the declining rate of profit--magic words they invoke to account for any economic problem at all. It is clear that they generally have no clue as to what that means. But honestly I, too, had no clue what that means, so I thought I'd best go educate myself.

The best source I've found is a conference paper by Michael Roberts, presented in 2011, entitled Measuring the rate of profit; profit cycles and the next recession (pdf). I also looked at two blog posts by Mr. Roberts, here and here. Predictably, there is a huge literature on this topic, and my brief perusal does not qualify me as an expert. So think of this as questions from a novice--for which there are perhaps simple answers--rather than a critique.

The question I always ask my Trotskyist friends is whether by profit they mean operating profit or return on investment--these, of course, are two different things. By Mr. Roberts' account it is some variant of operating profit, i.e., income minus expenses.

Marx's original equation for Rate of Profit (P) is

where s is the surplus value (i.e., what most people would call "profit), c is the total capital stock, and v is the total cost of labor. This is intended to be measured for the entire economy--not just for any individual company.

Mr. Roberts goes through many ways of calculating this equation, but eventually concludes "In my view, the simplest is the best." He measures surplus value as

Or, in words, surplus value is everything left over after depreciation on capital equipment and total wages paid to employees, i.e., something like profit. 

This looks a whole lot like EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortization, which is the gold standard measure for operating margins. It's not clear to me why Mr. Roberts didn't use EBITDA, but I'll speculate because it's only calculated for individual companies rather than for the economy as a whole. He discusses why he doesn't subtract taxes, but he never mentions interest or amortization. 

That last seems to me to be a very important omission. He does write "But these shorter-length profit cycles are really the product of the running down the stock of working capital (called the Kitchin cycle, named after that economist) and not a decisive ‘turning-point’ in profitability," which sounds like amortization in disguise. He seems to believe that all companies amortize all their equipment at the same rates, i.e., over 16 year cycles, and then replace their equipment at the same time. I find this hard to believe. Why not subtract amortization from the measure of surplus value?

On the other hand, perhaps amortization is better included in the calculation of c--the total capital stock. Mr. Roberts chooses what seems to me to be a very strange measure, namely the cost of plant and equipment at the time of original purchase. Alternatively, other authors calculate c as the current replacement cost, which given inflation will be a larger number. Mr. Roberts argues that latter method misrepresents Marx's original purpose, and from his explanation I agree with him. But either way, to include the cost of capital without including amortization is misleading. Amortized equipment no longer counts as an asset beyond its resale value.

I might disagree with Mr. Roberts on some more general, philosophical principles. This sentence bothers: 

The cause of a crisis like the Great Recession must lie with the key laws of motion of capitalism.

Marx, who lived during an exciting time in physics when both thermodynamics and electromagnetism were completely elucidated, may be forgiven for thinking that economics follows physics-like behavior--some "laws of motion." In fact, economics is more a branch of psychology than physics, for it depends ultimately on what consumers want to purchase. Who would've guessed that the most used part of a mobile phone is not the phone but instead the camera?--a fact that put traditional camera makers out of business. Consumer choices like that have a vastly bigger impact on economics than hypothetical measures such as the "global rate of profit."

Likewise, Trump's biggest impact on the economy was likely not the tax cuts, but rather his bully pulpit--his constant championing about how great things are. It gets the animal spirits flowing. Economists call this "expectations," which is a strange word that understates the effect. Judging from Mr. Roberts' essay, Marxist economists discount expectations and/or psychology altogether, which to my mind means they don't understand economics.

Perhaps as a corollary, if there are no "laws of motion" in economics, then I don't understand the purpose in aggregating the rate of profit across the entire economy. Apple has a very high rate of profit; by contrast Walmart fixes its operating margin at 3%--lowering prices when it goes above that, and closing stores if it falls irremediably below that. What is the point of averaging those two companies together? What do you learn from that statistic? I will argue, nothing.

Finally, Marxists make some very weird definitions. They distinguish between productive employees and unproductive employees. The former are workers who actually sit on the assembly line and make, mine, or grow stuff to sell. The latter are all the others, such as managers, marketers, accountants, professors and real estate agents. Perhaps that made sense in Marx's day when the economy consisted only of commodities. But today 80% of all workers are in services. Are they all unproductive employees?

Walmart is ultimately in the marketing business. Yes, I know they have some trucks and warehouses, but at the end of the day it's all about marketing to consumers. Are all those shelf stockers and cashiers unproductive? I certainly don't think so. People like me would starve to death without the efforts of Walmart workers! (And I depend on their managers, too.)

I think the distinction between productive and unproductive doesn't make sense anymore--at least not in the way Marx understood it.

Marxists consider stock market investments to be fictitious capital, to be distinguished from the real money actually invested in plant and equipment as computed by Mr. Roberts, which they call organic capital. If you're stuck with a just-like-physics view of economics, perhaps this makes sense, but economics is not like physics--it's about psychology. Here is the relevant question: Is company X using its resources--capital and labor--in a way that maximizes benefits for their customers? If the answer is yes, then the stock will go up. If the answer is no, the stock will go down. The problem is that customers are fickle--they may decide they prefer telephones to cameras, or sushi to french fries, or whatever. As consumer sentiments change, then so do investor sentiments, and the stock price varies accordingly, even by the hour.

Unlike what Marxists claim, it is precisely so-called fictitious capital that determines business viability. The total market capitalization depends on the stock price--not the sunk cost of plant and equipment. The relevant measure of profit is return on investment, not some bizarre measure of operating income.

Further Reading:

• Robots and AI
• Let Them Eat Little Bits of Green Paper
• Kim Moody on "Persistent Inequalities"