Keen on the Profit Squeeze.

For those not in the know, there are several Marxist (some would say, Marx-inspired) theories of crises. Perhaps not surprisingly, beyond recent casual references to Marx, there has been some more serious talk about them on the net.

Well, one of those theories was termed, initially a bit humorously, the "profit squeeze" theory of crises. At any rate, the label stuck and many still use it, without any intended irony, although their first proponents preferred the "class struggle theory of crises" denomination.

In particular, Prof. Steve Keen (University of Western Sydney) has written about it recently, in connection with his own research. (See here)

But, what is the profit squeeze/class struggle theory of crises?

Keen puts it thus:

"(...) to produce output you need factories, and factories can't produce without hiring workers. The level of employment influences worker's ability to get wage rises, and profit is basically what's left after wages have been paid. Capitalists then invest using profits, and that investment determines whether the number of factories increases (because of gross investment) or falls (because of depreciation).

To my knowledge, one of the first expositions of the profit squeeze/class struggle theory of crises (a relatively widely cited and mathematically formalized one, mentioned by Keen) was provided by the late Richard M. Goodwin in 1967 (see here, here and especially here, in Spanish, for related econometric research).

During the stagflation crises of the mid-1970s, profit squeeze ideas gained some prominence among Marxist authors. Prof. John Bellamy Foster (University of Oregon) has recently written on it, contrasting the profit squeeze with Kalecki's views on employment, profits, prices and inflation.

Although Foster refers specifically to research by Raford Boddy and James Crotty published in 1974, other Marxist authors published on the subject around that time.

Sam Williams (from "A Critique of Crisis Theory" blog) analyses the work of Peter Bell and Harry Cleaver (1982), exclusively from a Marxist theoretical view. (See here)

Interestingly around the time, non-Marxist authors otherwise highly dismissive of Marxist economics, also found some interest in profit squeeze ideas, without acknowledging their origin.

Paul Samuelson, quoted by Mark Thoma:

"Actually, Keynes was an elitist exponent of the middle classes. Like Bertrand Russell, he recognized even before Stalin's hegemony the totalitarian inefficiencies of a system run in the name of the working class.
"An optimist who lived at a time when the world economy was running so badly that clever gimmicks could still work wonders, Keynes's object was to save capitalism from itself. In the end, his prescription in its most simple form self-destructed, as the obligation to run a full-employment humanitarian state caused modern economies to succumb to the new disease of stagflation - high inflation along with joblessness and excess capacity". (See here)

References:

Bell, P. & Cleaver, H. (1982). "Marx's Theory of Crisis as a Theory of Class Struggle". Research in Political Economy, 5.
Reprinted as
Bell, P., & Cleaver, H. (2002). "Marx's Theory of Crisis as a Theory of Class Struggle". The Commoner, 5, 1-61. (http://www.commoner.org.uk/?p=9)

Boddy, R., Crotty, J. (1974). "Class Conflict, Keynesian Policies, and the Business Cycle". Monthly Review, 26(5), 1-17.

Foster, J.B. (2013). "Marx, Kalecki, and Socialist Strategy". Monthly Review, 64(11).
(http://monthlyreview.org/2013/04/01/marx-kalecki-and-socialist-strategy)

Goodwin, R.M.  (1967). "A Growth Cycle", in C.H. Feinstein (ed.), "Socialism, Capitalism and Economic Growth". Cambridge: Cambridge University Press.

Herndon, Colbert and Abbott.

or, the Recession we Didn't Have to Have

h/t Mike Norman Economics
link to the same video 

These guys may have spoken about Reinhart and Rogoff, but I'll have to admit, they never said a word about the Grattan report in the Colbert Report...

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One who never fails to mention the important things is the next Australian prime minister, Tony Abbott.

Speaking last night with Leigh Sales (7.30 Report, ABC), the Liberal/National Coalition leader (conservative, centre-right, libertarian) made sure the viewers understood his stance about the surplus and that he is up-to-date with S&P expert assessments of the Australian economy:

"Our triple A credit rating is at risk if there's not a path back to surplus, and frankly, everything right now, Leigh, has to be tested against that framework: how is it going to help us get back to surplus? How is it gonna make our economy more productive?" (See here, my translation from Australian)

In a 13 minute interview, Abbott mentioned "SORE-plus" eight times... Phew! I feel better now that I know "good" economic management is on its way...

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Incidentally, according to this site, the Moon is currently 99% full.

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Are we heading to the recession we didn't have to have? The Abbott Recession?

Update:
05-05-2013 As the video originally linked to here was removed by its poster, I added a link to the same video, but posted under a different account.

The Grattan Report: Good News, Bad News.

The bad news? The Grattan Institute report is long and deadly boring: 86 pages and some 50 charts.

The good news? Its Overview (page 2) is superbly written and tells everything you really need to know about its content.

Thus, the problem.

The basic conclusion of the report is this: "To be sustainable, current budgets need to be in surplus".

Why must budgets be in surplus?

Because:

"Over the economic cycle of boom and bust, balanced budgets are much better than the alternative. Persistent government deficits incur interest payments, and limit future borrowings. As a result they can unfairly shift costs between generations, and reduce flexibility in a crisis. Yet in good times it is hard for governments to run a surplus. They are invariably tempted to spend money. Many voters prefer outcomes with no obvious losers" (page 2, repeated verbatim in page 10)

So, budgets must be in surplus as a rule to avoid the temptation, full stop: ("lead us not into temptation but deliver us from evil").

So, laid bare and in few words, that's the wisdom behind the Grattan report: deficits are evil, surplus are "much better".

Whatever appearances to the contrary (50 charts!), the Grattan report is not an applied economics work, but a morality tale. How can you tell? Check the usual buzzwords. That's the tale: "courageous leaders" take the "tough policy choices", against the wishes of "many voters [who] prefer outcomes with no obvious losers". It's the "responsible" thing to do.

In fact, unmentioned in that tale there is a propitiatory sacrifice: the "losers", to be scapegoated (this time, they may be looking at you). And there is a reward in the hereafter: all is done on behalf of the future generations.

How can I be so sure that this "study" is worthless? For at least two reasons.

More qualified people than me have explained this at length and you would do well checking with them. But I'll give a quick explanation: a government that issues its own currency doesn't need to borrow money, as the report claims. It doesn't need to collect money as taxes in order to spend, either. It creates its own currency. Monetary policy is, at best, an accessory.

But there is a simpler reason. The "erudite" report offers 8 pages of References. Among the authors cited, there are many luminaries, like Reinhart and Rogoff: 

"Some argue that high debt reduces economic growth... Their successors and financial institutions can then find it difficult to borrow at reasonable costs, and economic growth is often slow for a long time". (page 8)

Their epic and widely publicized debunking at the hands of Thomas Herndon, Michael Ash, and Robert Pollin last week deserves only a footnote. I mean, you wouldn't expect Grattan to revise their "work" in one week, just because its theoretical base was shown to be bunk, right? Besides, Herndon et al at least were included in a footnote, other serious criticism didn't even deserve a footnote.

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I don't wish to be rude. But there is no other way to say this: this report is among the stupidest things I've read in a long time.

When dealing with other people's lives, stupidity is a dangerous thing.

Update:
24-04-2013. The Grattan Institute's record for stupidity surprisingly didn't last long. Standard & Poor's broke it last night:

"Standard & Poor’s has warned that Australia’s AAA rating could be vulnerable in five years if the credit ratings agency doubts the government’s commitment to restoring the surplus, national debt keeps rising and the economy fails to self-correct".

The Moon is 96% full, according to this site, which may have something to do with the S&P announcement.

Farewell to Reason, Something's Gotta Give.

A year and 24 days ago, Australia arguably was in a stronger economic position than it is now: there was no end in sight to the mining boom, mining investment was pouring by the hundred of billions, terms of trade were the best ever.

Although the labour market was sluggish, federal treasurer Wayne Swan (Labor) was promising a dramatic fiscal turnaround. Austerity was all the rage among the local cognoscenti.

At the time, Tim Colebatch (The Age's economic editor) lambasted, in my views quite correctly, Swan's "foolish economic fetish":

"Wayne Swan's determination to deliver a budget surplus, regardless of the state of the economy, is seriously reckless. Labor has chosen to risk sending most of Australia into recession in order to keep a promise it should never have made".

Fast forward one year and 24 days to the present.

The Australian economic position has not strengthened a single bit since last year, quite to the contrary. The mining boom seems to be over, huge mining projects were cancelled, terms of trade worsened; further, by all accounts China is set to change its economic policy to one of slower growth. Colebatch mentions each and every one of these things.

More: just last week we witnessed the collapse of half the empirical evidence for the austerian case: the Reinhart and Rogoff soap opera.

And, according to Colebatch, even the still shadow treasurer, Joe Hockey (Liberal/National Coalition), seems to be - allelujah! - wisening up to the fact that the austerity hysteria will backfire.

And what is it Tim Colebatch advises the government to do?

"Both tax rises and spending cuts will be needed to get our budgets back in balance.
"The tax rises are easy: you don't need to raise tax rates (...)
"Second, the sense of entitlement needs to give way to restraint, almost across the board. In competition policy, the cosy deals done in easy times need to be unwound as they enter hard times. Fiscal policy needs to be tightened as monetary policy is eased (...)
"Wage growth must be restrained, and productivity growth, in all areas, become the priority. Environmental policies should be made 'economically efficient', while 'productivity-enhancing infrastructure' is the one area of spending that should grow."

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That goes to show that you can't praise journalists, as I praised Colebatch one year and 24 days ago: a 180 degrees flip-flop in one year and 24 days. And a flip-flop in the worst possible opportunity.

The only thing that didn't change is this: austerity is still all the rage among local cognoscenti.

Man, we're so totally screwed it's not funny.

Australia: Kill the Poor

According to most forecasts, the Liberal/National Coalition ("conservative, centre-right and libertarian"), represented by the blue line in the chart below, is set to win by a landslide the next federal election, scheduled for September this year:

(source: Macrobusiness)

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Menzies House, "Australia's leading community for conservative, centre-right and libertarian thinkers", came up with the final solution to Australia's poverty and fiscal deficit problems: "kill the poor".

"A modest cull would strike at the root of our fiscal dilemma. If the least productive 20% of citizens were decommissioned it would directly release a recurrent AUD25bn, which would almost cover overspending by the Gillard Government between now and September 14th".

The author of the note, Toby Ralph, identified additional gains: creation of innovative industries, new jobs in processing camps, faster traffic, homeless shelters could be used as gastro pubs, cafes and wine bars.

Additional increases in the culling thresholds would bring further benefits: a 30% "cull" would turn Australia into the "new tiger of Asia" and bring shorter hospital waiting lists; "expunging" the lower 50% of Australians, would turn Australia into "the Switzerland of the South", reduce income tax rates to 13%, and promote Australia to "regional financial centre".

Ralph identified those targeted for elimination. In general, anyone unable to produce a AUD100 bill upon command; that is: windscreen cleaners, pavement artists, beggars, homeless, students, single mums, social workers, performance artists, Greenpeace supporters, and what remains of manufacturing workers.

Lower order drug dealers, according to Ralph, would also be exterminated. Higher order drug dealers, however, are not mentioned; presumably their higher income would gain them acceptance in the Switzerland of the South.

According to Heath Aston (SMH political reporter), when asked by Fairfax Media, Ralph and Tim Andrews (of Menzies House) qualified the note as humorous.

I am not sure if they mean they would drop the open Zyklon B cans while laughing their asses off.

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Senator Cory Bernardi (Liberal/National Coalition), founder of Menzies House, has been personally involved in controversies. In October 2012 he notoriously linked gay marriage to bestiality and more recently he was a leading supporter of Dutch extreme right winger Geert Wilders, in his visit to Australia.

Adam Smith and Say's Law.

I've already pointed out that many ideas that eventually became central to economic theory were to be found in Adam Smith's "The Wealth of Nations".

The so-called Say's Law is one of them.

In Chapter II.3 ("Of the Accumulation of Capital, or of Productive and Unproductive Labour") Smith discusses his theory of capital accumulation. For Smith, the foremost feature of an economy was its capacity to grow, to produce increasing physical surplus (i.e. outputs in excess of inputs).

Adam Smith, engraving
by John Kay (1790). [A]

According to Smith, why do capitals grow?

"Capitals are increased by parsimony, and diminished by prodigality and misconduct.
"Whatever a person saves from his revenue he adds to his capital, and either employs it himself in maintaining an additional number of productive hands, or enables some other person to do so (...)."

So, savings was, in Smith's view, what makes capital grow: what's not consumed is saved. Note carefully: Smith defines savings as non-consumption; hoarding was ruled out by hypothesis.

But how does it work?

Whether consumed or invested, profits are used to pay for labour, goods and services.

If invested:

 "(...) That portion which he annually saves, as, for the sake of the profit, it is immediately employed as a capital, is consumed in the same manner, and nearly in the same time too, but by a different set of people: by labourers, manufacturers, and artificers, who reproduce, with a profit, the value of their annual consumption."

If it is consumed, "there is nothing behind them in return for their consumption". If idle consumption were excessive, there would be little left for investment, and the economy would slow or even stagnate.

This idea encapsulates what would later be known as Say's Law.

(Incidentally, you see why the chapter referred to unproductive and productive labour: labour employed in increasing production was called "productive". That's where landowners played a major role: in Smith's views they had a distressing tendency to engage in high living, employing non-productive labour.).

To reiterate, the unstated and unexamined assumption was that hoarding was, by definition, ruled out. Presumably, Smith thought hoarding was always, invariably, irrational and, thus, outside economic theorizing.

But if in Smith the assumption can only be inferred, J.B. Say ("A Treatise in Political Economy", Book I, Chaper XV, "Of the Demand for Market Products") gives it
explicitly:

Jean-Baptiste Say [B]

"When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other."

That's why Say considered "that it is production which opens a demand for products": "money performs but a momentary function in this double exchange; and when the transaction is finally closed, it will always be found, that one kind of commodity has been exchanged for another."

So, for Say it was out of the question that a producer would hoard produce or money: both were perishable and could lose value. Say assumed it was always irrational to hoard either money or commodities, presumably as Smith did.

Unlike some critics claim, neither Smith nor Say were considering a barter economy in any literal sense. To believe otherwise is absurd, as both men lived in a (mostly) monetary economy and were theorizing on that basis.

In practice, however, their model of this monetary economy acted like a barter economy, due to the assumption that is was irrational to hoard: money and stocks of commodities were hot potatoes, and no one holds a hot potato for long.

Image Credits:
[A] Adam Smith, engraving by John Kay (1790). Public domain. Wikipedia.
[B] Jean-Baptiste Say. Public domain. Wikipedia.

Update:
Prof. Nick Rowe (Carleton University, Ottawa, Canada) is a fairly conservative, mainstream economist.

I've found a relatively recent post ("Why 'saving' should be abolished", January 11) where he deals with some of the subjects treated here.

In my opinion, it's a bit of a mixed bag. But I can't help but agree with this:

"An individual's saving means anything he does with his income except spend it on newly-produced consumption.
"Saving isn't a thing, it's a non-thing. It's a residual. It's defined negatively, as not consuming part of your income. So when an individual increases his saving, for a given income, all we know for sure is that he is reducing his consumption. He must be increasing something else, but we don't know what it is he is increasing. We know (in this model) that he must be: buying more investment; buying more antiques; or hoarding more money. But we don't know which. And it really matters which. As I shall show." (my emphasis)

I only wish he was consistent with this, particularly in the first part of the post. Oh, well!

Selling Kidneys, God and Primitive Capital Accumulation.

"The Lord gave, and the Lord hath taken away; blessed be the name of the Lord". Job 1:21 (KJV)

That was the word of the Lord.

Hökarpanna, Swedish pork
and kidney stew. [A]

 

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"Make organ sales legal
"Your editorial states paying for organs 'devalues the dignity of life' ('Encouraging more to donate organs not without difficulties', April 9). What devalues the dignity of life is for some to impose disability and suffering on others when a cure is available. Australians should have the right to sell their kidneys. This would help assist some out of poverty, reduce the burden on the budget and most importantly remove the psychological slavery of what it means to be 'married' to a dialysis machine. It's about time the Australian government kept its nose out of the operating rooms of this country." Peter Lloyd, Asquith (Letters to the Editor, SMH, April 10, see here; emphasis added)

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Perhaps God acts like the quote from Job says: giving, first, and only later taking it away.

The Divine Market, however, is wiser. It takes away your livelihood, first; then it throws you into the scrap heap, making sure you stay there, and only then it gives you the freedom -indeed, the right!- to sell yourself, piece by piece.

And among those requiring merely your labour, or even your spare parts -and the Omniscient Market and his prophets know there are many- only those truly deserving, anointed by the Market itself, will receive your kidney, being able to afford it.

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Marx identified in British history a similar process, the enclosure process, when the landowners, striving to become capitalists, evicted their, until then, serfs. He called it primitive capitalist accumulation:

"The immediate producer, the labourer, could only dispose of his own person after he had ceased to be attached to the soil and ceased to be the slave, serf, or bondsman of another. To become a free seller of labour power, who carries his commodity wherever he finds a market, he must further have escaped from the regime of the guilds, their rules for apprentices and journeymen, and the impediments of their labour regulations. Hence, the historical movement which changes the producers into wage-workers, appears, on the one hand, as their emancipation from serfdom and from the fetters of the guilds, and this side alone exists for our bourgeois historians. But, on the other hand, these new freedmen became sellers of themselves only after they had been robbed of all their own means of production, and of all the guarantees of existence afforded by the old feudal arrangements. And the history of this, their expropriation, is written in the annals of mankind in letters of blood and fire". (See here)

Of course, most readers, being as knowledgeable about economics as they are, don't need to read that old fool. They know him mistaken without reading him.

Neither would they read modern authors, like Mathew Forstater (University of Missouri-Kansas City), who identified a similar process elsewhere. I mean, people like Forstater only embarrass themselves by reading Marx.

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But, in all fairness, Marx was only partially right. In his optimism, he was speaking metaphorically of people selling their bodies.

People (I suspect wealthy people) have reached the stage of talking very literally about your right to let them buy your body, bit by bit. Like a pig carcass.

Try to find that in your economics textbooks.


Image Credits:
[A] "Hökarpanna, Swedish pork and kidney stew". File licensed under the Creative Commons Attribution-Share Alike 3.0 Unported, 2.5 Generic, 2.0 Generic and 1.0 Generic license. Wikipedia. Author: Jonathan Koertge. My use of the file does not in any way suggests its author endorses me or my use of the work.

EU to Portugal: ...Or Else

After the Portuguese Constitutional Court ruled that 4 out of 9 austerity measures included by Pedro Passos Coelho (centre-right PSD/PPD) in the 2013 budget were unconstitutional (see here), the European Commission, headed by José M. Barroso (former Portuguese PM, 2002-04, PSD/PPD) issued the following memo:

"Brussels, 7 April 2013
"Statement by the European Commission on Portugal
"The European Commission welcomes that, following the decision of the Portuguese Constitutional Court on the 2013 state budget, the Portuguese Government has confirmed its commitment to the adjustment programme, including its fiscal targets and timeline. Any departure from the programme's objectives, or their re-negotiation, would in fact neutralise the efforts already made and achieved by the Portuguese citizens, namely the growing investor confidence in Portugal, and prolong the difficulties from the adjustment.
"The Commission therefore trusts that the Portuguese Government will swiftly identify the measures necessary to adapt the 2013 budget in a way that respects the revised fiscal target as requested by the Portuguese Government and supported by the Troika in the 7th review of the programme.
"Continued and determined implementation of the programme offers the best way to restore sustainable economic growth and to improve employment opportunities in Portugal. At the same time, it is a precondition for a decision on the lengthening of the maturities of the financial assistance to Portugal, which would facilitate Portugal's return to the financial markets and the attainment of the programme's objectives. The Commission supports that such a decision be taken soon.
"The Commission will continue to work constructively with the Portuguese authorities within the parameters agreed to alleviate the social consequences of the crisis.
"The Commission reiterates that a strong consensus around the programme will contribute to its successful implementation. In this respect, it is essential that Portugal's key political institutions are united in their support". (Emphasis added. See here)

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The masters spoke. Now it's up to the Portuguese: they either stand tall or shit their pants. What's gonna be?

Austerity Measures Unconstitutional: Portugal.

Pedro Passos Coelho. [A]

The Portuguese Constitutional Court repealed last Friday (March 5) 4 of the 9 austerity measures included by conservative PM, Pedro Passos Coelho (from the singularly called Social Democrat Party of Portugal) in the 2013 budget.

"The measures are declared unconstitutional and, therefore, lose effect since the moment of their application, in this case, since January 1", declared Joaquim Sousa Ribeiro, president of the CC. (See here, my translation from Portuguese)

The cuts involved further reductions to unemployment benefits, to age pension and to public servants' wages, for a total of EUR1.5bn and come after, three months ago, the conservative President of the Republic, Aníbal Cavaco Silva, formally asked the court to rule about the budget's fairness, under the terms of the country's constitution. (See here)

Apart from the find of unconstitutionality, the CC criticized the Finance Minister, Vítor Gaspar, for the so-called "exceptional" austerity measures, which have repeatedly and for third consecutive year target retirees and public servants.

The Portuguese parliamentary opposition and groups protesting the Troika-imposed austerity demanded Passos Coelho's resignation, while Luís Marques Mendes, secretary of State, accused the CC of threatening the country's financial stability. The Portuguese government was tipped to ask for an extension of the repayment schedule, in the upcoming Berlin meeting of finance ministers. (See here, from Spanish)

Portugal was considered a successful example of the Troika-fostered austerity, having warned the Greek public against voting for Syriza last year.

The Portuguese unemployment figures reached 17.6% last January, the third highest in the Eurozone, after Spain and Greece, and "most Portuguese workers, the annual tax rises are equivalent to more than a month's wages. The standard income tax rate is rising from 24.5% to 28.5%" (See here)

Image Credits:
[A] Pedro Passos Coelho. File licensed under the Creative Commons Attribution-Share Alike 3.0 unported licence. Wikipedia. Author: Cruckz. My use of the file does not in any way suggests its author endorses me or my use of the work.