Stagnationism, exhilarationism & beyond

Norm writes:

If a rightwing union-busting, welfare-eroding government openly assaults the living standards of working people, that presumably is an attempt, wise or otherwise, to manage the common affairs of the bourgeoisie by increasing capitalist opportunities for profit. If a reforming social-democratic government introduces labour legislation, a generous minimum wage, progressive welfare measures, that also is managing the common affairs of the bourgeoisie, since a happier and healthier labour force will make capitalist firms function better.

Of course, both of these cannot be true at the same time. But they can both be true at different times. And a large part of the story of post-war economic history and our current malaise reflect exactly this.

The key question is: what is the link between capitalist investment (and hence economic growth) and profit margins?

In the 50s and 60s, the link was positive. Social-democratic efforts to main full employment tended to squeeze profit margins. But this promoted investment because low profit margins were accompanied by high (expected) aggregate demand and high profit rates; this is what Marglin and Bhaduri called a stagnationist regime.

But in the 70s, this broke down. The profit squeeze no longer promoted aggregate demand, so profit rates fell and investment and growth slowed.

The solution - which Thatcherism and neoliberalism stumbled upon in the 80s - was union-busting, welfare-eroding government. In creating mass unemployment, profit margins were restored and with them investment and growth. We had, in Marglin and Bharduri’s words, an exhilarationist regime.

Which brings us to our current plight. The exhilarationist regime might have broken down, just as the stagnationist one did in the 70s. Neoliberalism no longer promotes investment. Between 1981 and 2001 - roughly, cyclical troughs - the volume of business investment rose 5.3% a year. But since 2001, it has grown just 0.1% a year. And even if the OBR’s forecasts (pdf) are right, it will grow just 2.7% between 2001 and 2016.

This might reflect the fact that the UK, more than other economies, suffers from the failure of neoliberalism to no longer promote investment: the industry in which we have a comparative advantage - financial services - is in decline; our main trading partner, the euro zone, suffers long-term sclerosis; and endogenous growth considerations mean we cannot conjure a vibrant manufacturing base from very little.

This poses a question which is insufficiently appreciated: what lies beyond exhilarationism? The right’s answer is: nothing. It assumes that tax breaks and diminishing the welfare state will re-ignite investment. The statist left’s answer is that we‘re seeing a return to stagnationism, in which case fiscal expansion and wage-led growth will work. But what if they’re both wrong?

Comments

[Metatone]

As a comparator - how is investment going in the USA? And the Netherlands?

(USA is not Eurosclerotic, Netherlands is land-constrained...)

The big problem with this post is that when you load up the paper and look at the tables of investment rates, it doesn't fit the theory.

Investment rates didn't slow in the late 60s and into the 70s in the UK or USA.

It did in some other places, but those places had a different political timeline.

So it's hard to see how you can link "business fixed investment" to the economic story, as the economic story is a roller-coaster and BFI just isn;t...

[Luis Enrique]

I like the idea of a sweeping story that explains big trends like this ... but I have my doubts.

Maybe I just don't understand it. Take this bit: "But this promoted investment because low profit margins were accompanied by high (expected) aggregate demand and high profit rates;"

so returns on investment were high because although margins were low, the top line was growing. But what caused that growth? You write "but this promoted investment" - how do "Social-democratic efforts to main full employment [that] squeeze profit margins." cause growth?

If these forces cause growth and increase returns on investment, why aren't today's investors in favour of them? There must be some coordination failure or just lack of rationality (a failure to understand that higher margins actually mean lower returns, somehow).

and what were firms investing in during the 1950s and 60s? Heaving industry? But the decline of UK heavy industry has more to do with globalization and the shift to a services economy than the absence of social democratic forces, unless they boil down to protectionism. So would protectionism boost UK investment? And at what cost ... would it be desirable?

If we could achieve growth via "Social-democratic efforts to main full employment" in the past, why can't we today?

[Blissex]

«The solution - which Thatcherism and neoliberalism stumbled upon in the 80s - was union-busting, welfare-eroding government. In creating mass unemployment, profit margins were restored and with them investment and growth.»

What if neoliberalism had very little effect on overall growth and was mostly a redistribution policy instead, the the growth effect was due to a simple commodities boom?

Because between 1981 and 2006 (the 25 golden years) the most obvious change was that the UK was a net oil exporter, and the UK state got a lot of free money as oil royalties and excise taxes.

It is comical to attribute determinant influence to managerialist choices between "stagnationist" and "exhilarationist" policies while ignoring this graph:

http://mazamascience.com/OilExport/output_en/Exports_BP_2011_oil_mtoe_GB_MZM_NONE_auto__.png

That graph seems to suggest that there was no neoliberal Thatcher Boom, or no neolabour Blair Boom, just two massive oil booms, accompanied by redistributive "trickle up" policies to ensure that most of the benefits would go to property owners.

[james higham]

If a reforming social-democratic government introduces labour legislation, a generous minimum wage, progressive welfare measures, that also is managing the common affairs of the bourgeoisie, since a happier and healthier labour force will make capitalist firms function better.

No, both can't be true. The first is not because it's not conservative and the second because it is a euphemism for Statist, enslaving party.

Then it becomes clear.