Summers vs Bernanke: Sick capitalism

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Heavyweight economists can offer only a partial understanding of the weak recovery. Step forward, Karl Marx.

A fascinating debate is taking place between former US Treasury secretary Larry Summers and former US Federal Reserve chair Ben Bernanke. These two big beasts of economics are slugging it out over the reasons for the weakness of the half decade long recovery.

Summers argues that there has been a significant permanent loss of output. The US economy is 10 percent smaller than it would have been based on pre-crisis predictions. He says that this is due to “secular stagnation”, resulting from structural shifts in the economy. In particular in the long-term the “equilibrium” interest rate has fallen, making it hard to combine rapid growth with financial stability.

In downturns, if interest rates are already low, it is hard for governments to cut them any further to boost the economy. In upswings, cheap borrowing promotes financial speculation. For instance, there could be reasonable growth in the US from 2002 to 2007 but only at the cost of a property bubble and a massive expansion of household debt.

Summers points to a range of long-term factors that might have produced this situation — notably a slowdown in investment, slowing population growth, inequality depressing consumer spending and perhaps even a slowdown in the pace of innovation. Bernanke has countered that recent slow growth is mostly due to “temporary ‘headwinds’ that are already in the process of dissipating”.

Besides, he argues, there are plenty of profitable places to invest outside of the US. The real problem is the “global saving glut”, an excess of saving over investment on an international scale. This, he says, can be resolved simply through policy measures that free up flows of capital across borders and prevent currency manipulation by various governments.

We do not have to accept notions such as an “equilibrium” rate of interest and so on to recognise that both views offer partial insights into the problems facing capitalism today. Yet faced with this, mainstream economics is woefully inadequate. Financial Times columnist Wolfgang Münchau admits, “Macroeconomists currently have no coherent technical framework to deal with a secular stagnation or saving glut.”

They will “continue to tinker with their models, and hope that no policy maker will ever use them”. He concludes that any challenge to the paucity of economics will likely “come from outside the discipline” and “it will be brutal”. Step forward, Karl Marx...

It is clear that investment globally has slumped. The latest IMF World Economic Outlook devotes a whole chapter to the problem, noting that in advanced economies private investment has averaged 25 percent lower than pre-crisis forecasts. To explain this, the IMF appeals to the weakness of economic activity. But this is hopelessly circular reasoning because investment is a key factor driving economic activity.

The Marxist argument is that investment tends to follow patterns of profitability. In periods in which return on capital is high, investment will tend to be high. However, according to Marx, the ultimate source of all profit is living labour — the workers employed by capital. Investment in “dead labour”, such as machinery and raw material, tends to expand more rapidly than the hiring of new living labour in the long run. Profit relative to total investment falls and this eventually begins to choke off productive investment and promote speculative activity.

Marxism can explain both the slump in investment noted by Bernanke and the IMF, and the incapacity of the economy to grow steadily without increasing financial instability that Summers identifies. Overcoming this malaise requires the destruction of some of the mass of unprofitable capital and the eradication of a portion of the accumulation of debt. These processes, together with a greater squeeze on workers, can produce a sharp bounce-back after a crisis.

However, while the squeeze on workers had been immense, the other processes have not taken hold. Instead we have seen ultra-low interest rates and policies such as quantitative easing designed to ameliorate the crisis. This can produce bursts of dynamism but it poses the problem of what happens when the life support machine is turned off. The Financial Times notes that in “the months ahead the global economy is likely to face the first US interest rate rise in nine years, threatening to destabilise the fragile recovery”.

The fall in oil and commodity prices has given some respite to economies that rely on these imports but even this has added new instability. In particular it exposes the weakness of the booms in countries such as Brazil, Turkey and Russia. Meanwhile a possible Greek default continues to haunt European policy makers. China’s expansion has slowed from the spectacular levels it reached in earlier years. And there is now evidence that profits growth among US corporations is declining.

Sluggish growth and instability seem likely to be the pattern for some time to come. None of this means that capitalism is in permanent slump or faces collapse. But the concerns of Summers, Bernanke and others are symptoms of a chronic sickness within capitalism.