Brexit as symptom

Simon says that Brexit is a “symptom of a deeper malaise” – of a dysfunctional political-media system that gave us economically illiterate austerity.

I agree that austerity caused Brexit, not least because as Ben Friedman has shown, stagnant incomes make people more hostile to immigrants. But I wonder: is there an even deeper malaise here – namely, a fundamental failure of capitalism?

What I mean is that capitalism was faltering even before the banking crisis. For example:

 - The real income of the median UK household, after housing costs, rose only 1.6% per year in the five years to 2007, well down from the 2.4% growth of the previous thirty. This wasn’t merely because growth was captured by the rich: GDP per head in that period grew only 2.1% per year, which was weak by the standards of previous expansions.

 - Business investment accounted for less than 10% of UK GDP in the mid-00s, compared to over 12% in the late 90s. This reflected what Ben Bernanke in 2005 called a “dearth of investment opportunities” in western economies.

 - Real bond yields were trending downwards from the early 90s. Whether this reflected a savings glut, investment dearth or shortage of safe assets is in a sense beside the point. The downtrend betokened a loss of economic dynamism: a lack of belief in growth caused investors to prefer safer assets.

These signs of stagnation might have a common cause – that, as Andrew Kliman (big pdf) and Michael Roberts have shown, rates of profit in many developed economies had been falling since the 60s. That sapped capitalists’ motive to invest in productive assets, thus depressing growth.

All this is consistent with Ravi Jagannathan’s claim (pdf) that the 2008 crisis was “the symptom not the disease.” It was a bust without a preceding boom.

To see the point, imagine that (contrary to reality) there had been an abundance of highly profitable business investment projects in western economies in the 00s. The “glut” of savings from Asian economies would then have financed these rather than house price inflation. We’d have seen genuine real growth rather than bubbles and malinvestments. We’d not then have had the crisis.

And as Nick Crafts says, without the crisis we’d not have had austerity and hence Brexit. This isn’t because the crisis necessitated austerity. It’s because the recession weakened support for the Labour government and the post-crisis rise in government debt allowed the Tories and the media to exploit illiterate debt phobia.

There is, I think, a pretty clear line from capitalist stagnation to the 2008 crisis, to austerity and hence to Brexit.

My dispute with Simon echoes an old one between Marxists and social democrats. Whereas the latter tend to emphasize the role of bad policy, we Marxists stress deeper-rooted failings of capitalism.

The disagreement here is, I suspect, one of emphasis. Where Simon and I agree is that Brexit is indeed a symptom. In this sense, there’s a sharp difference between us and Tory Remainers such as Anna Soubry who supported austerity and Lib Dems and other centrist Remainers who acquiesced in it. They seem to think Brexit happened because voters suffered a fit of irrationality to which they were immune. This is silly narcissism – a morbid symptom of what we get when one’s political opinions are not anchored in social science.

Comments

[e]

"They seem to think irrationality”. I see common or garden variety class bigotry; very little thinking. Without the bigotry we might be prey to inadvertently falling for an expert respecting democracy. To whose advantage would that work? Its sad when the die an all, but what can you do? They just can't budget...

[Dipper]

Wren-Lewis doesn't get it, so congratulations to you for half getting it.

"the 2008 crisis was “the symptom not the disease.” Exactly. governments stoked a credit boom until there was no-one left to lend to, and it crashed.

"This reflected what Ben Bernanke in 2005 called a “dearth of investment opportunities” in western economies." - Well I'm astonished that economies in which big companies fund governments to introduce rafts of legislation and regulation to effectively prevent small companies from challenging them should turn out to have low growth opportunities. Luckily for us the EU clearly demonstrates that it is possible to have a highly-regulated centrally-controlled economy and high growth. Oh hang on ...

"There is, I think, a pretty clear line from capitalist stagnation to the 2008 crisis, to austerity and hence to Brexit.". But your criticism of Austerity seems at variance with your previous comments. How was government borrowing going to magically generate investment opportunities and growth? Austerity was a response to the failures you identified, not a cause of them.

"stagnant incomes make people more hostile to immigrants". So for clarity, there re just two opinions possible; believing in completely open borders and making the welfare sate completely open to all who come here, or being a racist who hates immigrants. There is no middle ground where people think we should have limits on migration and don't hate immigrants. Have I got that right?

[Staberinde]

Chris,

I'm interested in whether you think this decline in the performance of capitalism in the West is similar to Larry Summers's secular stagnation hypothesis?

Also, I think you're being a little harsh on social democrats. After all, to them Marxists sound like the Millennial cultists who claim that the end times are upon us, only for the sun to rise the next day, prompting a fresh claim that "Well technically the millennium is next year, or based on the Aztec calendar, or following the next planetary alignment..." The Marxist wheel of history argument is incompatible with arguing against austerity - either policy is trivial, or it ain't. But you can't argue that only austerity policy is non-trivial!

I also note that Japan seems to have endured a very long run of lackluster growth, but hasn't descended into Brexit-levels of stupidity or culture war.

[Jim]

"I also note that Japan seems to have endured a very long run of lackluster growth, but hasn't descended into Brexit-levels of stupidity or culture war."

Japan is a racially and culturally homogeneous country that is also a sovereign state, not bound into a supranational body like the EU.

Just sayin'....................

[Dave Timoney]

All states are sovereign, but some are more sovereign than others. Most historians would agree that the constraints imposed on Japan by the international community (mainly the US) in the post-war era were a major factor in its economic growth.

Also, it's a de facto one-party state, but I'm not sure whether that's relevant. Just sayin'.

More seriously, the relevance of its homogeneous culture to its economic performance is the tendency of its citizens to buy national debt and to invest capital domestically.

[georgesdelatour]

Chris

The Dillow thesis is - to paraphrase Bill Clinton - that “it’s the capitalism, stupid”. How do we test that thesis empirically?

At a bare minimum, we need something like a capitalist Richter scale: a way to rank individual economies according to how intensely capitalistic they are. If we can do that, we can look to see if more intensely capitalistic economies experience the problems you highlight more intensely than the more mildly capitalistic ones do.

What statistics are most useful for this? An important one is the ratio of government spending to GDP. The Dillow thesis should predict that South Korea (32%) will have these problems far more intensely than France (54%). Yet last year South Korea had twice the economic growth of France.

To be clear, the statistics don’t support the opposite thesis - that it’s the lack of capitalist intensity which causes the problems. But there are clearly other factors at play.

[georgesdelatour]

We used to be a relatively high wage / low property price economy, and we’re become a relatively low wage / high property price economy. There must be some mystery factor behind this change. Any suggestions?

The property price factor is enormous. Between 1996 and 2016 property prices rose by 280% nationally and 500% in London. At the bottom, higher rents effectively reduce real wages. At the top, when the profits from property become really high, it sucks resources away from more productive investments.

[Dipper]

@ georgeadelatour.

Hmmm. As the UK population rockets towards 80 million I wonder what could possibly be contributing to a shortage of housing pushing up prices? I wonder if landlords buyng houses then subletting them as multiple occupancy accommodation to immigrants coming from poor countries to work in low-wage jobs in the UK might, in some way, serve to push up property prices?

Of course we could just build more houses. Enough for 16 million extra people. Like building The Netherlands in a generation (okay its 17 million ...). I can't see why that would be a challenge.

[marku52]

And the stagnation is pretty much everywhere, not just the UK. It's almost as if capitalism needs virgin fields to send its externalities to in order to create "growth"

Infinite growth on a finite planet?

[georgesdelatour]

There’s lots of “catch up” GDP growth going on all over the world. Last year Asian countries like India, Vietnam and China all managed to grow by around 7%; as did African countries like Ethiopia, Ivory Coast and Senegal; and in Europe Romania managed that too. Its just the already very rich countries which now find it hard to grow like that.

That’s why I don’t think the “capitalism equals low GDP growth” argument really works. I think Tyler Cowen’s books, like “The Great Stagnation”, “Average Is Over” and “The Complacent Class” all do a good job of analysing the problems a typical developed OECD country faces.

[Nanikore]

You are sharing a view that a lot of people have had here for a long time. But you must also include policy failure as part of the failures in capitalism. Hubris was behind policy during the Great Moderation, and it was during this time that problems were building up which manifested in the GFC. Unconventional policy measures (that owe nothing to mainstream/New Keynesian theory - they owe far more to the historicalJapanese experience) and expansionary policy initially implemented helped avoid another GFC and a deep recession, but they did not go far enough in addressing the real problems. We need far more government intervention in resource allocation, but this going against what mainstream economists have said since Samuelson. They will come around eventually - and no doubt say "they knew it all along".