The investment problem

Are there any policies consistent with capitalism that could solve the UK's under-investment problem? This is the question raised by Paul's reasonable observation that "under-investment is at the heart of Britain’s economic decline." He suggests that the solutions to this should include: attacking the hegemony of the City; "a virtuous wage and demand growth circle"; and a "non-investment tax, where it costs corporations and banks more to hold surpluses over a certain percentage limit than it does to invest them productively."

I'm sceptical about all three ideas.

1.October's quarterly CBI survey_(pdf) found that only 6% of manufacturers said that investment was constrained by an inability to raise external finance. This proportion has been low for as long as I remember. Of course, this 6% might be important. But it's hardly a sign that financiers' starving industry of capital is a widespread problem.

2. "Wage-led growth" - whereby higher wages lead to higher aggregate demand and thus stronger investment - is theoretically possible. It happened post-war. But it requires that capitalists be confident that governments can maintain high aggregate demand. If this confidence falters, high wages will lead to investment cuts, as we saw in the 1970s. And, remember, the wage share rose between the mid-90s and mid-00s, without generating a great investment boom.

3. We already have a tax on non-investment. It's been imposed by the Bank of England which has cut interest rates to negative levels in real terms. (In fact, real interest rates have drifted downwards for most of the post-80s period). Whilst this probably has kept investment higher than it would otherwise have been, it has been insufficient to greatly increase it. As Keynes said: "It seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment."

I don't say all this to suggest instead that "neoliberal" policies would do better at promoting investment.

Quite the opposite. I do so to ask a question. Could it be that there are no policies consistent with capitalism as we know it that would generate sufficient investment to create lasting full employment? It could be that the eastward migration of low-wage work, plus the slowdown in technical progress that's created a lack of (monetizable) investment opportunities mean that any policies to promote investment will be at best only mildly effective.

Now, I honestly don't know the answer to this. Maybe we'll get a second wind of technical progress that does stimulate investment. Or maybe a reduction in uncertainty about the US fiscal cliff and euro debt crisis, combined with pent-up demand, will cause a strong bounce in capital spending.

Instead, my concern is that too many non-Marxist commentators are making an assumption which should be questioned - that there are some policies which could feasibly greatly promote investment.They seem to assume away Keynes' suggestion that "a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment."

Comments

[Luis Enrique]

"making an assumption which should be questioned - that there are some policies which could feasibly greatly promote investment."

before you even get that far, you need to convince yourself that investment is too low. I don't think we have a terribly good grasp of what the desirable level of investment is, nor how that relates to available investment data, which, as I understand it, at best only takes a stab at investment in intangibles etc.

if we start from the position that unemployment is too high, and it seems reasonable to assume that creating jobs for the unemployed is going to entail some associated investment, does that lead to the conclusion that "investment is too low"?

I'm not sure. Perhaps what we need is to change the pattern of investment towards labor intensive activities, without increasing the sum total of it. Perhaps whatever it is that realistically might employ the unemployed isn't going to have much associated investment, maybe, for example, hiring more pubic service sector workers.

or put another way, suppose the state decides to invest in lots of things intended to complement private sector investment (infrastructure, training etc.), and suppose subsidies and other policies succeed in raising private sector investment - how do we know what the returns on the the sum cost of all that is going to look like? How large will the net increase in employment be?

[FromArseToElbow]

Technical progress isn't slowing down. What's actually happening is that technology has proven so successful that it is reducing the cost of investment. It is technology (containersiation and ICT) that has enabled the eastwards migration of low-wage work. At one end of society this throws off huge amounts of money that we struggle to spend, while at the other end if leads to mass un/under-employment.

So you are correct: there are no policies consistent with capitalism that can deliver lasting full-employment. That is why possession of a job (strivers vs skivers) is becoming a dividing line, despite the growth of in-work poverty. If we are not to turn on each other, we need to challenge the allocation of working time, not just the distribution of financial rewards.

[chris]

@ Luis - I wasn't just thinking that investment is necessary to create jobs. Any job-creating policy will increase aggregate demand and if there isn't enough capacity in the economy, this could be inflationary. We thus need investment not just because investment creates jobs, but also because it creates the capacity that relieves the inflation constraint.

[gastro george]

It's interesting that Larry Elliot was positing that low investment might be due to our low wage economy, but in the sense that labour is so cheap that it's not worth investing in higher productivity.

[Colinrtalbot]

On investment: the doesn't appear to be any data in the CBI survey about the type of respondent. My understanding is that thee is a split on investment between large companies and SMEs. large companies have substantial reserves and are mainly not investing for confidence reasons. our Chancellor and the Government have massively contributed to this lack of confidence by their foolish exaggeration of our debt and deficit problem.

However, SMEs that can expand are finding it hard to get finance. That's where the CBI survey doesn't tell us if this is true or not, but lots of other sources suggest it is. I suspect the CBI data may be heavily weighted to large enterprises. I would be very interested to know what others think about this, and especially to see further evidence either way.

Historically of course there is a well established bifurcation between financial and industrial capital in UK, as the City grew out of the land-aristocracy and had weak social ties to the industrial capitalists. In other capitalist countries the industrial and financial elites were much more closely integrated.

[Staberinde]

But aren't companies using their spare cash to sort out their pension liabilities? Isn't this what the world wanted/needs?

[Skintnick]

A reformed money system (crucial in order for the human economy to become sustainable) with demurrage will encourage long-term investment. That is one reason why the Egyptian civilisation lasted for thousands of years.

[Passion Meets Experience]

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