Author: JW Mason

Where do the rich get their money?

Well, from us, of course. All their dollars represent, is claims on our labor.

Still, it’s interesting to ask what forms those claims take. Especially since there is a widely-held belief that today, unlike in the bad old days, the incomes of even the super rich are, at least on paper, mainly compensation for their work — that they’re a return on “human capital” rather than the old-fashioned kind. Is there anything to that?

Here’s what the IRS Statistics of Income says:

Share of total income by source, filers reporting $1 million or more

Year Wages and salaries Interest, dividends, rent Capital gains Business income
1995 31.0% 17.2% 28.4% 23.1%
2000 33.2% 10.3% 42.5% 13.1%
2005 26.9% 15.7% 38.1% 22.3%
2008 30.7% 19.8% 30.4% 23.2%

Share of total income by source, filers reporting $10 million or more

Year Wages and salaries Interest, dividends, rent Capital gains Business income
2000 25.0% 8.6% 58.2% 7.4%
2005 17.5% 17.4% 50.8% 17.8%
2008 18.8% 22.1% 45.4% 18.7%

Share of total income by source, all filers

Year Wages and salaries Interest, dividends, rent Capital gains Business income
1995 76.4% 7.3% 4.0% 6.9%
2000 70.0% 6.5% 9.7% 6.6%
2005 69.5% 6.8% 8.9% 8.9%
2008 72.0% 8.1% 5.6% 7.5%

Source: IRS Statistics of income, author’s calculations
Notes: Income above $1 million not broken out before 2000. All nonwage income is net of losses. Business income includes business/professional income, S corporation and partnership income, and farm income.

So no, it’s no more true than it ever was that the rich earn their money, in even the most limited formal sense.

EDIT: In retrospect, I guess it would have been better to do the tables by year, with the rows by income class. Oh well.

What is Keynesianism?

[A bit of thumbsucking inspired by discussion here.]

As a policy of countercyclical demand management, Keynesianism is based on the idea that there are no automatic forces in industrial capitalism that reliably equilibrate aggregate supply and aggregate demand. In the absence of government stabilization policies, the economy will waver between inflationary periods of excess demand and depressed periods of inadequate demand. The main explanation for this instability is that private investment depends on long-term profitability expectations, but since aspects of the future relevant to profitability are fundamentally uncertain [1], these expectations are unanchored and conventional, inevitably subject to large collective shifts independent of current “fundamentals”. Government spending can stabilize demand if G+I varies less over the business cycle than I alone does. For which it’s sufficient that government spending be large. It’s even better if G and I move in opposite directions, but the reason Minsky answered No to Can “It” Happen Again? was because of big government as such, not countercyclical fiscal policy.The focus on cyclical stabilization assumes that there is no systematic long-term divergence between aggregate supply and aggregate demand. But Keynes believed that there was a secular tendency toward stagnation in advanced capitalist economies, so that maintaining full employment meant not just using public expenditure to stabilize private investment demand, but to incrementally replace it. Another way of looking at this is that the steady shift from small-scale to industrial production implies a growing weight of illiquid assets in the form of fixed capital. [2] There is not, however, any corresponding long-term increase in the demand of illiquid liabilities. If anything, the sociological patterns of capitalism point the other way, as industrial dynasties whose social existence was linked to particular enterprises have been steadily replaced by rentiers. [3] The whole line of financial innovations from the first joint-stock companies to the recent securitization boom have been attempts to bridge this gap. But this requires ever-deepening financialization, with all the social waste and instability that implies. It’s the government’s ability to issue liabilities backed by the whole economic output that makes it uniquely able to satisfy the demands of wealth-holders for liquid assets. In the functional finance tradition going back to Lerner, modern states do not possess a budget constraint in the same way households or firms do. Public borrowing has nothing to do with “funding” spending, it’s all about how much government debt the authorities want the banking system to hold. If the demand for safe, liquid assets rises secularly over time, so should government borrowing.From this point of view, one important source of the recent financial crisis was the surpluses of the 1990s, and insufficient borrowing by the US government in general. By restricting the supply of Treasuries, this excessive fiscal restraint spurred the creation of private sector substitutes purporting to offer similar liquidity properties, in the form of various asset-backed securities. (Here is a respectable mainstream guy making essentially this argument. [4]) But these new financial assets remained at bottom claims on specific illiquid real assets and their liquidity remained vulnerable to shifts in (expectations of) the value of those assets. The response to the crisis in 2008 then consists of the Fed retroactively correcting the undersupply of government liabilities by engaging in a wholesale swap of public for private liabilities, leaving banks (and liquidity-demanding wealth owners) holding government liabilities instead of private financial assets. The increase in public debt wasn’t an unfortunate side-effect of the solution to the financial crisis, it was the solution. Along the same lines, I sometimes wonder how much the huge proportion of government debt on bank balance sheets — 75 percent of assets in 1945 vs. 1.5 percent in 2005)contributed to the financial stability of the immediate postwar era. With that many safe assets sloshing around, it didn’t take financial engineering or speculative bubbles to convince banks to hold claims on fixed capital and housing. But as the supply of government debt has dwindled the inducements to hold other assets have had to grow increasingly garish. From which I conclude that ever-increasing government deficits may in fact be better Keynesianism – theoretically, historically and pragmatically – than countercyclical demand management.
[1] Davidson, Shackle, etc. would say nonergodic. This strand of Post Keynesian thinking often wanders beyond my comfort zone.[2] This shift is ongoing, not just historical — not only do capital-output ratios continue to rise in manufacturing, but we’re seeing the “industrialization” of retail, health care, etc.

[3] Schumpeter is the only major economist to give sufficient attention to the sociology of the capitalist class, IMO. Marx’s insistence that the capitalist is simply the human representative of capital is a powerful analytic tool for many purposes, but it leaves some important questions unasked.

[4] Here is another.

Does fiscal policy need to be paid for in advance?

Let’s be clear: Paul Krugman is a national treasure. On fiscal policy – and politics generally – he has been saying exactly what should be said, clearly and forcefully, and just as important, from a platform that people can’t ignore. No one of remotely his stature has been as clear or consistent a critic of the Administration from the left. That said, his economics can be … problematic. I don’t know if it’s just because I’m interested in trade, or if, ironically but perhaps more likely, it’s because it’s where he made most of his own contributions, but it’s on international economics that Krugman seems most committed to orthodoxy, and correspondingly out of tune with reality. Case in point: This blog post, where he notes, correctly, that the most consistent expansionary response to the crisis has been in Asia, and then goes on to endorse the suggestion of David Pilling (in the Financial Times) that today’s Asian stimulus is the reward for fiscal rectitude in previous years:

Deficit spending is what you should do only when the economy is depressed and interest rates are at or near the zero lower bound. When times are good, you should be paying debt down. Pilling: “The scale of Asia’s stimulus may have matched, even surpassed, the west. But the context has been entirely different. Asian governments had plumped-up their fiscal cushions after the 1997 crisis, building a formidable pool of reserves. … when the crunch came, they had the wherewithal to spend.”

I’m sorry, but this is just wrong. First of all, let’s look at stimulus spending and earlier fiscal stances in various Asian countries:

Country Fiscal stimulus 2008 Average fiscal surplus, 1998-2007 Average fiscal surplus, 2003-2007
Malaysia 0.9 -1.72 -1.72
India 1.5 -5.50 -2.93
Indonesia 2.7 10.04 10.04
Australia 4.4 -3.00 -1.65
Philippines 4.5 -0.69 -0.69
Korea, Rep. of 5.4 0.98 1.20
New Zealand 5.9 -2.10 -2.23
Thailand 7.7 -4.80

n/a

Singapore 8 -1.34 -1.93
China 13.5 2.70 4.69
Japan 14.6 -0.80 -0.95

See that striking correlation between prior surpluses and stimulus spending? Yeah, me neither. It’s true that some countries, like China and Korea, show prior surpluses and big stimulus. But others that are pursuing expansionary policy have had fiscal deficits for years, like Japan (as Krugman should know as well as anyone.) Empirically, the Krugman-Pilling argument that in Asia, fiscal surpluses paved the way for fiscal stimulus just does not hold up.
No, what’s allowed Asian countries to respond aggressively to the crisis is not their (mostly nonexistent) fiscal surpluses, but their current account surpluses. Unlike in past crises (or lots of countries in the current crisis, especially on the periphery of Europe) they are not dependent on private capital inflows, so they are under no pressure to undertake contractionary policy to maintain external balance. The case of Korea is exemplary. True, it was running a fiscal surplus prior to the crisis — but it was also running a fiscal surplus in the mid-1990s prior to the Asian Crisis, to which it responded with brutal austerity. The difference was that the current account was in deficit then, and in surplus this time. The fiscal position was irrelevant.(Incidentally, Pilling literally does not seem to realize there is a difference between a current account surplus and a fiscal surplus. That’s why he’s able to write something like “Asian governments had plumped-up their fiscal cushions after the 1997 crisis, building a formidable pool of reserves,” without realizing it’s a non sequitur.)What about the larger argument, that good Keynesian governments should engage in the precautionary accumulation of financial assets in good times to finance demand-boosting spending in bad times? Krugman himself admits that the Bush deficits are not a binding constraint on fiscal policy today, which is rather a blow to his argument. More broadly, it’s far from clear that there is any meaningful sense in which the existing level of public debt affects the space for fiscal policy. The argument for prudential saving might apply to the government of a premodern or underdeveloped country, which rests on a narrow fiscal base; but if substantial excess capacity exists in an industrialized country the government always can mobilize it. (Matt Yglesias gets this, even if Krugman does not.) As for the traditional Keynesian argument for federal surpluses in boom times, it has nothing to do with precautionary accumulation of financial assets, and everything to do with preventing aggregate demand from running ahead of aggregate supply.In the end, I suspect this idea of paid-in-advance Keynesianism says less about his intellectual weaknesses than about his institutional commitments. As a certified big-name economist, you have to make some concessions to orthodoxy if you don’t want to see your intellectual capital devalued. And what orthodoxy demands now — above all from those who want more expansionary policy — is gestures of somber concern with future deficits. (If not austerity today, at least austerity tomorrow.) With a few honorable exceptions, even left-leaning economists seem happy to comply.

Some Thoughts on the Euro

[I just posted this in response to a query on the UMass-Amherst economics department listserv. I reckon it might as well double as content for the blog.]

i’ve heard some people say that it would be best to keep the euro and the dollar at a 1:1 exchange rate. why would this be good? why might it be bad?

The Euro is currently at about $1.22. The last time it was significantly lower than this was in late 2003. The last time it was as low as $1.00 was in October 2002. So what you are hearing are proposals for a substantial depreciation of the Euro.

Why do people want this? I don’t think it’s any more complicated than (1) Europe, like the US, continues to see employment and output held down by inadequate aggregate demand, (2) political elites in Europe (especially Germany) are resistant to any effort to boost either public or private consumption, leaving exports as the only potential source of increased demand, and (3) net exports are assumed to respond to relative prices, and relative prices are assumed to move with exchange rates.

Folks like Dean Baker and Paul Krugman have been making similar arguments for the US — that given the lack of political support for further expansion of public spending, getting back to full employment will require a big improvement in the current account, meaning a big depreciation of the dollar. (Krugman tends to express this — unhelpfully IMO — in terms of Chinese “manipulation” of the yuan-dollar exchange rate, but the argument is the same.) Baker even gives the same figure you’re hearing — 20 percent — as an appropriate amount for the dollar to fall.

Problems:

First, since the US and the Euro area are both so large in world trade, it might be hard for both currencies to depreciate simultaneously. This is less of a problem than you might think, since there’s surprisingly little direct trade between the US and Euroland — less than 20 percent of the exports of each go to the other. (The US sells more to Canada’s 33 million residents than to the Euro area’s 330 million.) But it’s still the case that if the Euro is to fall against the dollar while the dollar itself is depreciating, both would have to fall even more against third-country currencies, which might be harder to achieve, and more disruptive if it were.

Second, the two cases are not symmetric. The US is starting from a position of big current account deficits, which have to be financed by large financial inflows which, arguably, contributed to the financial crisis. There is a plausible argument that, given the lack of international institutions to regulate capital flows, stable growth is more likely if countries remain in rough current account balance. So — by this logic — an improvement in the US current account wouldn’t just increase demand in the US, it would help prevent future financial crises. The Euro area, on the other hand, is in rough balance already — since 1999, the Euro area has run a current account deficit averaging just 0.2 percent of GDP. So an improvement in the Euro-area current account would mean a movement toward big surpluses, i.e. toward larger trade imbalances that would have to be financed by larger international capital flows. In other words, it would require the Euro area to assume a (larger) net creditor position towards its trade partners, i.e. to recapitulate the dynamic between Germany and Greece, Spain, etc. earlier in this decade. Perhaps the folks you are talking to feel that was a big success?

Third, leaving aside the desirability of an improvement in the Euro-area current account, there’s a question of how effective a tool Euro depreciation would actually be to realize it. I don’t have any estimates of exchange-rate elasticity for the Euro area handy. But for the US, estimates of import elasticity generally fall between 0.1 and 0.3 and export elasticity between 0.6 and 0.8, meaning that the Marshall-Lerner-Robinson condition is satisfied weakly at best, and a depreciation would produce little or no improvement in the trade balance. Of course the more favorable starting trade balance works in Europe’s favor here, making it more likely that a depreciation would improve the current account. But in the absence of concrete evidence for reasonably high exchange-rate elasticities, one shouldn’t just assume — as too many people do — that exchange rate changes reliably produce the “right” effect on trade.

So those are some arguments against. A few more issues.

One, why parity specifically? The argument one sometimes hears is that the goal should be PPP parity. Personally, I don’t buy that either — it assumes there are no systematic divergences in the ratio of tradable and non-tradable prices between the US and Euroland — but at least it has some principled basis. The International Comparison Program of the World Bank, which is the main source of PPP estimates, gives a range from $1.08 to the Euro for Germany to $1.25 Euro to the dollar for Spain (price levels vary across the Euro area) but there’s no major Euro country for which the PPP Euro is as weak as $1.00, let alone for the area as a whole. So 1 euro = 1 dollar looks like undervaluation by any standard.

Two, is this an argument mainly about the level of the Euro, or is it also about the desirability of fixing the Euro-dollar exchange rate? There’s a huge literature on fixed vs. floating exchange rates, which I’m not going to try to summarize here.

Finally, there’s the question of how a lower Euro would actually be achieved. For various reasons, I suspect the tool might be lower short-term interest rates, rather than (or in addition to) direct foreign-exchange market intervention. In that case, a policy of weakening the Euro might in effect be an excuse for the ECB to take a more expansionary stance than it is willing to do on domestic grounds. Ten years ago, the ECB’s attempts to strengthen the Euro were defeated by the perception that the higher interest rates involved would reduce European growth. (See here.) The opposite could happen now — lower interest rates, by increasing domestic demand and growth prospects, could increase imports and foreign investment into the Euro area, resulting in the current account moving more towards deficit rather than surplus — the opposite of the intended result. Which, ironically, would be the one good argument in favor of the policy.

A Difference of Perspective

So I’m reading Menzie Chinn’s helpful primer on different ways of calculating real effective exchange rates. And it’s got a bunch of pictures in it like this one, of various real exchange rates between the Indonesian rupiah and the dollar:

What do we see here? Well, when the dollar got strong in the early 1980s, the rupiah fell against it in real terms defined relative to export prices, but much less so in terms of domestic goods as measured by the CPI. Whereas when the rupiah fell in the Asian crisis, the real exchange rate fell whether you measured it by CPI or by export prices, albeit more by the latter. In other words, the strong dollar of the ’80s did not substantially increase American incomes relative to Indonesian, but the fall in the Rupiah in the ’90s did reduce Indonesian incomes relative to American. Interesting!

So when Chinn writes, “there are a number of interesting stylized facts to be gleaned from these figures,” I expect him to say something about these movements. But not a word! Instead, his discussion is all about the CPI-deflated series’ “more pronounced upward trend (or a less pronounced downward trend)” over the long run(the parenthetical is a nice concession to reality). “This pattern is often explained as the outcome of the Balassa-Samuelson model, wherein more-rapid productivity growth in the tradable sector than in the nontradable sector results in a rise in the relative price of nontradables.” So what Chinn sees in these figures is the rather dubious long-run pattern predicted by theory; he doesn’t notice the exciting ups and downs at all. And he’s one of the good ones.

“When the storm is long past, the ocean is calm again…”

EDIT: Now that I think about it, I’ve got the story of the ’80s wrong. The rupiah was pegged at that point, so when the dollar rose, the rupiah rose with it (apart from the two devaluations visible as downward spikes in the graph.) The decline in the export-price deflated series represents Indonesian exporters cutting their own-currency prices to remain competitive in world markets, something that US exporters, for various reasons, did not do. The larger point still holds.

Akerlof agrees

And now just after writing the below, I find myself reading George Akerlof’s 2006 AEA presidential address, where he argues, more or less, that the whole problem with modern macroeconomics is the assumption that only economic arguments enter into utility functions. Bring in norms, and it’s goodbye to the permanent income hypothesis, Modigliani-Miller, Ricardian equivalence, and the rest of it, and back to where positive, empirical, pluralistic macro left off in the ’70s.

(The problem of preferences that include non-economic arguments is also the subject of Amrtya Sen’s article The Impossibility of a Paretian Liberal, which John Holbo so catastrophically misunderstood last year.)

Different angle of approach, same destination, seems to me.

Why do recessions matter?

There’s a tendency, and not only among economists, to describe the costs of downturns like the Great Recession in terms of foregone output. (It’s Okun gaps versus Harberger triangles.) And as far as it goes, it’s true. Less coffee and clothes and cars are being produced than would be, if the Lords of Finance hadn’t crashed the economy. But if, as this kind of talk implicitly assumes, the effect of economic life on wellbeing were just through the quantity of goods and services available – if the recession were a problem mainly for car consumers rather than car producers, coffee drinkers rather than coffee growers – it’s hard to see why anyone would care. So the US GDP fell in 2009 – all the way back to its level in 2006. Were we miserable then? This, by the way, was the point of Robert Lucas’ notorious 2003 AEA presidential address, where he claimed that the problem of macroeconomics was solved. He didn’t mean there were no more recessions, just that they didn’t matter since their magnitude was small compared with long-term growth – which, as far as measured output goes, is true, and of the Great Recession too. If he was wrong, his liberal critics are wrong as well.

The tendency to reduce economic questions to the aggregate output of goods and services (plus perhaps the quantity of labor input, as a cost) isn’t limited to recessions. You can find the same thing in the also right-as-far-as-it-goes Stern Review on global warming. Tote up the costs in foregone output of climate change, tote up the costs of doing something about it, and compare to see if burning up the planet is a good idea, or not. The problem is, even the upper range of the costs — 14 percent of world GDP — is equivalent to just a few years’ economic growth. So, again, who cares? I wonder if anyone has tried to do a similar analysis for World War II. They’d no doubt find that policymakers in the 30s should have been indifferent between averting the war, and increasing long-term growth by two or three tenths of a percent.

It’s tempting – to progressives too – to talk as though there’s a single score to measure economic outcomes. But no, this approach won’t do. Recessions are not important (just; really, hardly at all) because of output foregone. Unemployment is not just a reduction in your lifetime income. Indeed, for rich countries especially, long-term growth in output and income is not even a well-defined quantity. The main cost of unemployment is not the goods the unemployed workers aren’t producing. Indeed, as Keynes (and others) pointed out long ago, for many of the unemployed the disutility of labor is negative – there’s a net gain paying people to work, even if they produce nothing.

The real cost of unemployment is the unemployment itself. In part, this is about the loss of income – not the small reduction in aggregate lifetime income, but the large reduction in current income for those whose lose their jobs. The proportion of people without secure access to food, housing and other necessities is a much better measure of the economic costs of recession than the fall in GDP. But even this is the smaller part of the cost of unemployment. The most important thing about work, under capitalism, isn’t that it produces goods and provides an income, but that it is the carrier of self-worth, status and social power. For most of us, our work is our main bond with society at large; surveys agree with practical experience that losing a job is among the more important events in peoples’ lives. (“Individuals in the British Household Panel Survey commonly report employment-related events as major life events but none report that one of the most important things that happened to them in the past year is that they stopped shopping at Sainsburys and started going to Tescos.”) Persistent unemployment breaks social bonds, with profound effects that don’t show up in the aggregates.

We all know people who’ve been out of work for a while. Even if they are in no danger of hunger or homelessness, it’s corrosive. The get depressed; they stop socializing; they describe themselves as failures. I’ve just been reading a bit about unemployment in the 1930s. Here’s what happened in Marienthal, an Austrian village where the majority of the population became unemployed after town’s major employer, a textile factory, shut down in 1930:

Isolation was deepened by a decline in newspaper subscriptions. Subscriptions to the Social Democratic paper, which contained intellectual discussions as well as news, dropped by 60 percent. This was not entirely a matter of money, because the paper had a cheaper subscription rate for unemployed workers… Politics, like other leisure activities, should have benefited from the increased availability of time. But this advantage was heavily outweighed by an increase in apathy that reduced all forms of recreational activity. Library usage also declined; both the number of borrowers and the number of books checked out by each borrower fell. … One striking aspect of this lethargy was the fate of a park that had become a focal point of village life. In more prosperous times, villagers sat on its benches and walked on its paths on Sundays, and the grass and shrubs were neatly tended. In the depression, despite the increase in leisure time, the park fell rapidly into disuse and disrepair.

Or again, the testimony of an unemployed worker in 1930s London: “You feel like you’re no good, if you know what I mean. … It isn’t the hard work of tramping about so much, although that is bad enough. It’s the hopelessness of every step you take when you go in search of a job you know isn’t there.”

We’re already seeing some of this today. If unemployment stays near 10 percent for years, as, absent a change in policy, it likely will, we’ll see much more. We’ll see a wide swathe of people cut off from the world, apathetic and discouraged, with no recognized place in society. We’ll see increasing stress on families and neighborhoods as they have to take up the role of an overstretched safety net. And quite possibly, if it goes on long enough, we’ll see a turn away from democracy. These are profound social changes that have only a tenuous connection with how long it takes GDP to return to trend.

We should remember, at least, what the classic political thinkers knew, what Hannah Arendt knew, when she wrote that “a competition between America and Russia with regard to production and standards of living … may be very interesting in many respects… There is only one question this outcome, whatever it may be, will never be able to decide, and that is which form of government is better.” Once past a threshold of sufficiency (which we have long passed) aggregate output and income have nothing to do with the good life. What matters is freedom and dignity, our chances to develop our inner capacities and our relationships with those around us. And that’s what mass unemployment erodes.

The King Street puzzle

Ever since I moved back to Northampton, I’ve been baffled by how sharply bounded the urban part of this town is. Downtown there’s a few blocks of dense, busy, pedestrian-friendly, expensive and, ok (I’ve come to terms with my bougieness) charming and enjoyable city streets, all solid three and four-story mixed-use brick buildings and sidewalks that, on a warm summer weekend, can’t accommodate the crowds. And then turn down King St., and you’re looking at parking lots, gas stations, empty lots, fast food places, more empty parking lots, and no one on the sidewalk at all.

There’s got to be a reason for this.

So why doesn’t Northampton’s successful downtown grow? It can’t be that unused parking is the highest and best use of land two blocks from one of the most successful commercial districts in Western Mass. As Atrios regularly and, rightly points out, land-use rules mostly make small-town downtowns like Northampton’s illegal to build today. But what are the specific legal obstacles here? Parking requirements? Zoning that prohibits mixed use? Floor-area ratio limits? People love downtown Northampton. Business loves downtown Northampton. Why can’t we have more downtown?

Turns out I’m not the only one wondering. Here is a proposal from the Northampton Chamber of Commerce to revise the zoning code for King St. And it looks like a step, if a small step, in the right direction.

For the Central Business Zone (which runs up to Trumbull St., for local folks), the Chamber wants to remove parking requirements; allow mixed uses by right; increase maximum building height from 55′ to 65′; eliminate the 5% open space requirement; and eliminate the minimum rear setback. All of this seems right.

Hard to say how important these specific regulations are in inhibiting dense urban development on King St. To be honest, as soon as one starts exploring this stuff in any detail, it’s hard not to be struck by how brutally complicated it all is. But the Chamber is clearly pulling in the right direction, which I suspect would not have been the case not that many years ago. The interesting question, now, will be who pulls the other way.

Dumenil on Marx

[This past Febuary, a few of us were lucky enough to take part in a discussion of the structure of Capital led by Gerard Dumenil. I just unearthed my notes; for the sake of posterity, here they are.] Marx’s method Marx moves from the concrete, to the abstract, and back to concrete. Concrete reality is unitary, but concepts are necessarily partial. So the definitions of particualr concepts don’t matter except insofar as they form part of a particular science. Marx’s work contains several, at least partially independent systems of concepts. So for instance alienation is not part of the system of concepts, or science, constituted by value, capital, profit, etc. Capital begins with the commondity, builds via money to value, and then builds to capital. The error of idealism is to confuse the production of theoory with the exposition of theory; the latter builds up logicallly from the simplest concepts, while the former cannot. Exposition can follow a deductive method, but the original development of theory cannot. The three volumes of Capital Volume I is of course finished, Volume II is also largely finished, but Volume III is not. Capital is value in a movement of self-expansion. It is necessary, but basically indeterminate, to give one of these eleements priority in exposition. The commodity is the unity of use- and exchange-value, or of utility and value. Volume II is accounting. Volume I is explaining the class anture of capital. That’s why Marx begins with the self-expansion of capital, rather than the movement (circuit) of capital, even though either is equally acceptable logically. In a sense Volume I is all about unemployment. But it’s just as much about exploitation, and about technical-organizational change. It ends with primitive accumulation for political rather than scientific reasons – he wants to conclude with a topic that allows for a harsh condemnation of capitalism. Volume II then is the “movement” part of value in movement of self-expansion. Each “atom” of value moves through various forms, from money, to commodity, to the productive process, to different commodities, back to money – the familiar M-C-P-C’-M’. Volume II is really providing a form of accounting: the distribution of value among its various forms is like the asset side of a balance sheet. Together the discussion of circulation and the reproduction schemes articualt both aspects – movement and self-expansion. The reproduction schemes imagine all the circuits taking place together, in sync. The three sectors – I, constant capital; II, wage goods; and III, luxuries – correspond to the three forms of valorization – c, v and s. (Marx recognized the concept of national income before it was widely understood.) In Volume III the different conponents that have been described separately are integrated into a picture of the cpitalist process as a whole. Marx is no longer discussing basic concepts, but mechanisms. In some sense, the section on the Law of Capitalist Accumulation could better have gone here. Now we no longer assume prices are proportional to values, but introduce prices of production. (Probably not the best name to have used.) The mechanism governing prices of production is that excess supply of a good produces lower prices in the short run; lower output (Marx doesn’t emphasize this, but it is key); and less investment in that industry. In the long run, as this process equalizes profit rates across industries, market prices come into line with prices of production. Crises Marx’s theory of crises does not rely on disproportions, in fact he criticizes Ricardo for his focus on them. There really is no theory of short-run crises in Marx. (The Labor Theory of Value: What happens with long-run prices that are not proportionate to values? Marx should not have spoken of the “transformation” of values into prices.) The tendency of the Rate of Profit to Fall is fundamentally about the character of innovations – capital-saving innovations are rare. Increased competition is the result, not the cause, of the falling rate of profit. (Here we are at the limits of Marx’s analysis.) Historically there have been two main periods of declining profits, the late 19th century and the 1970s. The profit squeeze is part of the story of the 1970s fall – maybe one-third. An explanation based on intensified international competition, as in Brenner, is absolute bullshit. [Dumenil’s words.] Finance Only industrial capital makes the full circuit described above. Commercial capital is limited to the “commodity-handling” and “money-handling” parts of the circuit. All labor in these circuits is unproductive labor. Cases like transportation are tricky and can be placed in either circuit. Interest-bearing capital: this embodies the division between active and inactive capitalists. If the analysis in Volume II corresponds to the asset side of a balance sheet, the analysis of interest-bearing capital corresponds to the liability side, that is, how capital comes into the firm, how the firm is financed. (In Marx’s terms interest-bearing capital includes shares as well as debt.) The active capitalist has the chracter of an owner but also of a worker, pays self a wage. Eventually the active capitalist disappears and is replaced by a salaried manager: this was a very prescient observation by Marx. Banking capital: Banks become adminstrators of interest-bearing capital, while remaining one of the main embodiments of commercial capital. So financial institutions have two aspects: on the one hand, they carry out a specific commercial function, but on the other they are the representatives of the capoitalist class in general. Fictitious capital: This is not value in the movement of self-expansion. All interest-bearing capital is fictitious. Securities issued by corporations are “less fictitious” since they finance productive capital, but they are still not capital, because (1) that would be double-counting [with the productive capital they finance], and (2) their value may fluctuate independently. In any case, we should not fetishize the concept of fictitious capital. The question of how much of the income of the financial sector comes through fictious capital is superficial. Remember, banks are partly one industry among others, but partly the carriers of the status and claims of the capitalist class as a whole. (Over time capital ownership is becoming more collective.) Big financial institutions are the police of capitalism, enforcing capitalist logic on the management of firms. If the capitalist class loses control of finance, it loses control of the productive process. Consider the highest-income 0.1% of the population [in the United States], with incomes of at least $2 million per year. Half of their income takes the form of wages. (Not e however that a larger fraction of capital income than wage income is probably hidden, so the real share of wages may be smaller.) It is as if some part of claims on profits are shifting away from traditional forms of interest-bearing capital, and toward positions within financial institutions. But it is not as simple as saying that the highest wages are really profits or rents. The important point isn’t simply that wages are high, but that they come from control over production. Those who get the most “profit-like” wage income as executive salaries, bonuses, etc., are in the same families that own financial assets – the relationship [between the financial and “traditional” parts of the capitalist class] is now a love affair, not a conflict. The 1970s saw a revolt of the money capitalists, with new discipline imposed on managers, using the language of corproate governance, “shareholder value,” etc. This was very successful – of course top managers were happy to go along in the US. Managers in Europe and Japan were more reluctant. So in the US all those ideas of managerialism, “soulful corporation,” and so on, seemed to disappear. But this shift did not really extend to the inner workings of the firm – production is organized more than ever by professional managers. The difference is that managers no longer think of themselves as standing between owners and the popular classes. This earlier conception had been the result of a history of class struggle. The business cycle Marx’s theory of the business cycle is not found in any one section or chapter. It’s not a theory of disproportion, of the misallocation of capital between sectors. In Marx, a recession is a sudden contraction of activity. There are five phases of the cycle; one is overproduction, which requires a definition of “over” – relative to what? In Volume III, overproduction is over with respect to the supply of labor. This is what produces a short-run fall in the profit rate. In general, there are two short-term mechanisms producing recessions: wages and interest rates. One or both rises in expansions and encroaches on profits. This produces contractions, although how is not explicit in Marx. The phrase that the “ultimate ground of crises is the restricted consumption of the masses” sounds like a story of insufficient aggregate demand. But this is not what marx has in mind. As he says in Volume II, wages usually peak just before a crash. Marx supposes the typical cycle to be ten years long, but this is a vague gneeralization without any sophisticated reasoning behind it. This may be connected to technological factors, but the idea that a lack of real investment opportunities leads to excessive financial investment is total bullshit. [Again, GD’s phrase.] Stability and instability Volume III has a clear story about competition: If profits are higher in one sector, there will be investment there; if the output of a sector can’t be sold, prices will be cut. This can be modeled. It is difficult, but not impossible, to produce Marx’s results. Stability requires some reaction to imbalances, but not too much. The second question, is what determines the overall size of the economy? Imbalances between supply and demand in the goods market are dealt with by quantity (as well as price) adjustments. This “direct control of quantities” is present in Ricardo and of course Keynes but not Marx. Control of quantities makes it easier to get convergence in the model. The overall size of the economy is determined by the supply of credit. Credit creation is procyclical but the money supply is counercyclical. (Kalecki’s model needs a credit mechanism to allow investment to vary independently. It doesn’t have it – Kalecki never considered money.) We [D&L, not Marx] speak of proportions and dimensions. Proportion is investment abd relative prices between industries. Dimension is the overall size of the economy, the growth path. To model capitalism, we need to have stability of proportion and instability of dimension. Capitalism remains at the frontier of stability of dimension. (The price mechanism is slower than the quantity mechanism.) Inventories grow – if the quantity adjustment is too large there is an increase in inventories elsewhere that ouweighs the decrease at the first firm. The short-run dynamics are somewhat Keynesian. The development of the credit system creates the possibility of greater instability of dimension. This in turn invites more active control by the authorities. Take a simple two-factor model. Innovation is local – new technologies are similar to old ones. Innovation is random in the neighborhood of existing technologies. If an innovation raises the profit rate, it is adopted. In addition, Marx believes it is easier to innovate by raising the proportion of capital – technological change is biased in a capital-using direction. Hortatory You need to understand mechanisms. You need a global perspective. You need to know history. You need to be an activist. We absolutely need to get rid of the capitalist classes. You need to get some political culture. Don’t become stupid writing a dissertation. Do not attempt to derive concrete developments from abstract laws of value. Do not fall into idealism. If you’ve only read Capital you know nothing about the contemporary crisis. You need to explain what’s going on. This is not the end of history. Your research agenda will be determined by what happens next. Still, there are some principles: We live in a class society, classes are not going to disappear tomorrow. The basic marxist framework is not absolute, it may evolve, but it still applies. When you are told that your dissertation is too broad, listen with only one ear.