On capitalist stagnation

One of the problems with even the best journalism is that it reports day-to-day events without putting them into context, thereby telling us about the weather but not the climate. So it is with the news that ten-year Treasury yields have hit a record low.

Although the latest move is due to increased risk aversion triggered by the coronavirus this merely continues a long-term trend. Nominal yields have been trending down since the 80s, and real yields probably since it 90s.

Why? Standard explanations talk of the shortage of safe assets and global savings glut. Useful as they are, such explanations miss something important. This is that basic theory (and common sense) tells us that there should be a link between yields on financial assets and those on real ones, so low yields on bonds should be a sign of low yields on physical capital.

And they are. My chart shows that the profit rate for US non-financial companies has trended down since the 1950s. I’m not using fancy Marxian calculations here – though they tell a similar story. I’m simply using the Fed’s own numbers, expressing pre-tax profits as a percentage of non-financial assets measured at historic cost. Although this profit rate is higher than it was in the crises of 2000-01 and 2008-09, it is much lower now than it was in the 60s and 70s. And profits have never sustainably recovered from the crisis of the 70s and 80s. Even by their own lights, therefore, neoliberal policies – such as lower taxes, sharper CEO incentives, weak unions and a focus on shareholder value - have failed.

You might find this surprising. How can we reconcile it with the fact that, until a few days ago, the stock market was at a record high? Simple. For one thing, listed firms are an unrepresentative sample of all firms. They tend to be bigger and more monopolistic than the average – and the bigger ones among them are more profitable. And for another, the market’s high valuations reflect the hope that firms which are not very profitable (or loss-making such as Tesla) today will deliver monopoly profits in future. If we look past a few giant monopolies, the typical American firm has been struggling.

In light of this, three Big Facts make sense.

The first is the slowdown in productivity growth. Having risen by 2.2% per year in the 50 years to 2007, output per worker-hour has grown only one per cent per year in the last ten years. One reason for this (of several) is that lower profits reduce the incentive to invest and innovate. This is especially the case when low profits for many firms co-exist alongside monopoly power for a few, because monopolies prefer to entrench their power rather than innovate. Secular stagnation did not drop from the sky. It’s the product of trends within capitalism.

The second is capitalism’s vulnerability to crisis. To see this, imagine a different world in which there were abundant big profit opportunities for non-financial firms in the early 00s. The flow of savings from Asia would then have financed these cheaply. We’d thus have seen strong growth in the real capital stock and in productivity and profits (and maybe wages and employment too). But we didn’t, because there were few such opportunities. Savings flowed instead into housing and mortgage derivatives thereby stoking up a bubble which led to the crisis.

The third fact is documented by Anne Case and Angus Deaton in their new book, Deaths of Despair, wherein they show that, for middle-aged white people without much education, deaths from suicide, alcohol and drug misuse have soared since the 90s. A big reason for this is that employment opportunities for such people have worsened; even in today’s supposedly “tight” labour market, people without degrees are much less likely to be in work than they were in the 90s. And many of those who are in work are in worse jobs. Case and Deaton note that white men without a degree earn less in real terms than they did in 1979. Fewer and worse jobs mean a lower sense of self-worth, stress, family breakdown and hence deaths of despair.

But why have such job opportunities declined? It’s easy to blame globalization or technical change. But these are different ways of saying that it is no longer profitable for capitalism to employ less-skilled people at a decent wage.

The drop in bond yields is therefore one of the more innocuous symptoms of a dysfunctional capitalism.

Of course, all these trends have long been discussed by Marxists: a falling rate of profit (pdf); monopoly leading to stagnation; proneness to crisis; and worse living conditions for many people. And there is plenty of evidence (pdf) for them. The problem is, however, that many people want to shut their eyes to this evidence. In this sense, perhaps today’s two big stories – the record-low for bond yields and the success of Joe Biden in the Super Tuesday primaries – are related.

Comments

[georgesdelatour]

“...capitalism’s vulnerability to crisis”.

Are you claiming that capitalism is uniquely or peculiarly vulnerable to crisis? Most of human history seems to involve crisis (e.g. the Crisis of the Third Century, the Crisis of the Late Middle Ages, etc).

It would be more accurate to speak of “human society’s vulnerability to crisis”, surely.

[Josh]

above has it exactly backwards....... c's vulnerability to crises certainly implies that such crises are historically specific to c

[Gonzalo I. Gil]

Perhaps it might be more fitting to consider them "murder by capitalist realism" you know, like putting someone up against the edge of material existence until "they make a choice". I will grant you that sticking around to attempt to strategize against them would, without a doubt, be of great benefit.

[Jim]

This seems a problem of management. How to combine the economy of clever, well trained people with the economy of not so clever well trained people.

We might ask why there is a difference, awkward question, better to just assume there is a difference.

One view might be to go for integrating these groups. But this won't work, the clever etc will crowd out the not so clever. This is natural and why we don't have a fishing fleet out of Lymington or cattle ranches in Surrey.

Tories say they want to promote business in Manchester, Birmingham and all points north. But this proves hard going. For one thing businesses fall into the conceptual and implementation phases. Conceptual is 'nice', 'implementation' is messy. The conceptual phase goes where creative brains are, implementation goes where hands are cheap or not required at all.

In earlier times the conceptual work was centred around the London Oxford Cambridge triangle. Cecil Northcote Parkinson described all this as 'La Ronde' in 'The Law of Delay' back in the late 1960s. Essentially he describes The Desperate who live in Warrington, Birkenhead etc, The Passive who live in Hereford and Sheffield, the Ambitious who live in Cheltenham, Northampton, Cambridge and Oxford and finally the Privileged who live in Essex, Berkshire, Hampshire, Surrey and (marginally) in Sussex and Kent..

If any of the HoLords and HoCommons survive CV we might usefully move the whole of Parliament and its offices oop North and sell off the crumbling pile to some hotel chain.

But in the end the poor are always with us, we must structure matters so they too can live reasonably.

[the_last_name_left]

Why the major spike in 2001-2008?

[MJW]

Think georgesdelatour hits the nail on the head. The 'trends long discussed by Marxists' are not exceptional in the broad sweep of human existence. Geopolitical circumstances change and that shapes economic change and human social relations. I think it's a weakness of much left-wing narrative that it makes a special case of capitalism by treating things as exceptional when they're not e.g. 'economic crisis', 'colonialism', 'imperialism' etc. That's not to say these things shouldn't be analysed or critiqued, just that there's no practical benefit to be gained treating stuff as somehow exceptional to capitalism when thousands of years of evidence suggests they're not!

[the_last_name_left]

"there's no practical benefit to be gained treating stuff as somehow exceptional to capitalism when thousands of years of evidence suggests they're not!"
-----

I don't think that ever has been the view of 'the left': I don't think 'the left' has ever suggested only capitalism has crises. Rather you can't have a capitalist crisis without capitalism and only capitalism can have the crises of capitalism. They are necessarily different to, say, crises in feudalism.

----quote

“We see then: the means of production and of exchange, on whose foundation the bourgeoisie built itself up, were generated in feudal society. At a certain stage in the development of these means of production and of exchange, the conditions under which feudal society produced and exchanged, the feudal organisation of agriculture and manufacturing industry, in one word, the feudal relations of property became no longer compatible with the already developed productive forces; they became so many fetters. They had to be burst asunder; they were burst asunder.

“Into their place stepped free competition, accompanied by a social and political constitution adapted in it, and the economic and political sway of the bourgeois class.

end quote------Marx, Manifesto

So, there's a historic process, where things change and where the crises of one epoch are not the same as those in another.

And Marx suggested capitalism had its own innate contradictions which could/would eventually undermine capitalism itself, even as it produced the conditions for its own replacement. One of those was the 'falling rate of profit', as the article says.

No doubt during every uptick in that graph of profit rates, folks have claimed it proved Marx wrong. Perhaps similar to climate deniers claiming every year that doesn't set a record high temp means AGW is 'wrong'. :D

[Paulc156]

@ the_last_name_left
I agree. MJW and georgesdelatour are both guilty of posing a straw man argument. Clearly Marx never claimed that crises were 'only' a feature of capitalism but he did argue for the symptoms and mechanics of crises that were specific to capitalism. That's what the article is getting at too.

[Alex]

How do you deal with the fact it's stopped falling since about 1986?

[Almar]

As noticed by @at_the_last..., drawing conclusions by "eye-balling" diagrams can be problematic.

In the of the diagram, it looks as though there has been no declining trend in the rate of profit over the past 30 years (i.e. from 1988-2018), though there are large cyclical variations.

[georgesdelatour]

“c’s vulnerability to crises certainly implies that such crises are historically specific to c”

Only if you can show that un-capitalisms (whatever they were, are or might be) are invulnerable to crises.*

Chris says “It’s easy to blame globalization or technical change”, implying it’s really bold, brave and original to blame capitalism. But people have been blaming capitalism for pretty much every human ill since at least the mid-19th century. They’ve been saying we’re living in late-stage capitalism since at least 1900. It boils down to saying that every problem faced by industrial/ postindustrial societies can only be fixed by abolishing private property and the commodity form. And since we’re not about to do either, all we can do is fall further and further down the abyss.

What are we arguing about here? I think periodic crises tend to affect pretty much every society. Their causes are multivariate, involving economics, demography, culture, the state of knowledge, you name it. Cliodynamics, Structural-Demographic Theory - these all may have some useful explanatory power. I’m up for considering any strategies which might work. If we want to help middle-aged Americans without degrees, it’s probably wise to compare their plight with that of comparable groups in other OECD countries. If outcomes are better in other OECD countries, why is that?

I’m not a fan of the privatise-everything extreme form of capitalism. In broad terms I’m a Keynesian, and I favour strong anti-trust laws.

*Even if un-capitalist arrangements are conveniently declared never to have been tried (even in societies where every instrument of power was in the hands of people who professed vigorous anti-capitalist beliefs), it ought to be possible to rank actually existing societies according to a kind of capitalism Richter scale. You could then check if the enthusiastically capitalistic societies experience more extreme crises than the hesitantly capitalistic ones. If your ideological priors require you to insist that every society which hasn’t abolished the commodity form is equally capitalistic, this kind of analysis won’t be available to you, of course.

[Paulc156]

@Alex
The secular ROP has been in decline since the beginning of the chart. It makes more sense to look at the peaks in succession and the successive troughs.
The low point was circa 2002. Subsequently we saw the downward trend was bucked by 2006. That peak was actually higher than the previous. Subsequent fall in ROP in the financial crash didn't breach previous 2002 trough and profits recovered but have since rolled over rather sharply.If current coronovirus linked declines escalate there could plausibly be a breach of that 2002 low within a year or two.

The 2002-06 run up in profits can easily be linked with the credit boom. Ditto post 2009 run up. Debts may have transferred from private into public hands but there has also been a very significant rise in corporate debts 'since' the 08-09 crash.

So the answer to your question could at least in part be answered by the relentless rise in corporate debt.

https://www.google.com/amp/s/thenextrecession.wordpress.com/2019/11/04/us-rate-of-profit-measures-for-2018/amp/

[Robert Mitchell]

"neoliberal policies – such as lower taxes, sharper CEO incentives, weak unions and a focus on shareholder value - have failed."

Profits have moved into the financial sector. Even a Mom & Pop shop can buy ETFs and capture average market gains which exceed their real sales profits. If you buy bond ETFs, they go up in price as yields go down. A lit of people are making more money on bonds whose price is increasing as yields decline. A lot of those profits don't show up in your nonfinancial asset counts.

Corporate debt may be rising but so are corporate assets, implicitly backstopped by the Fed. Assets rise faster than debt, and the difference is equity, which is easily undercounted by primitive measures of nonfinancial profit.