the gosplan of capitalism

Investment, Animal Spirits and Algae

Arjun and I did a webinar recently on our book Against Money, organized by Merijn Knibbe. We’re very grateful to him for putting it together, and should have video to share soon.

Even in a friendly setting like this, it can be a challenge to explain what the real-world stakes are in debates over money. But as it happens, there was a Matt Levine column the same day as the webinar, that offers a perfect application of one of the central themes of the book.

To be honest, this is not really surprising. You could even think of our project as backfilling the economic theory behind Levine’s columns, which the textbooks certainly don’t help with. “How Keynes explains last week’s Money Stuff” could be an elevator pitch for the book.

The lead item in this Money Stuff was about a hypothetical algae farming startup, and the financing thereof:

You start a startup with a far-fetched idea like genetically engineering algae to produce clean renewable fuel. You go out to investors to raise money. You say “we are going to genetically engineer algae to produce clean renewable fuel, if we succeed we will make a bajillion dollars, you want in?” The investors think that sounds cool, because it does. But they are responsible investors, they do their due diligence, they ask questions like “is that a thing” and “can you actually produce fuel algae” and “will it be cost-effective?” You do your best to answer their questions.

Do you exaggerate? Oh sure. That is the job of a startup founder. I once wrote, approximately:

What you want, when you invest in a startup, is a founder who combines (1) an insanely ambitious vision with (2) a clear-eyed plan to make it come true and (3) the ability to make people believe in the vision now. “We’ll tinker with [algae] for a while and maybe in a decade or so a fuel-[producing strain of algae] will come out of it”: True, yes, but a bad pitch. The pitch is, like, you put your arm around the shoulder of an investor, you gesture sweepingly into the distance, you close your eyes, she closes her eyes, and you say in mellifluous tones: “Can’t you see the [algae producing clean fuel oil] right now? Aren’t they beautiful? So clean and efficient, look at how nicely they [float in this pond], look at all those [genes], all built in-house, aren’t they amazing? Here, hold out your hand, you can touch the [algae] right now. Let’s go for a [swim].”

Of course, you are a startup founder; you are in essence a salesperson. Back at the lab, the algae scientists and chemical engineers and accountants are looking at your pitchbook in disbelief. “Wait, you’re telling investors that we can produce the fuel oil now? You’re telling them that we’ll have large profits in two years? Did you not read our latest status report?” The scientists and accountants are boring and conservative; it is their job to try to make the dream work in dreary reality. It is your job to sell the dream now.

(The brackets are there because he is repurposing text from an earlier column on AI.)

This is a story about finance, not venture capital specifically. The details would be different if the algae company were getting a loan from a bank, but the fundamental situation would be the same.

I want to make a few points about this.

First, what’s being described here is not a market outcome. Nobody has yet purchased any fuel made from genetically modified algae. To the extent there are market signals here, they point in the wrong direction — at current prices, the cost of producing this fuel would be greater than what it would sell for. Nor has this business shown profits in the past — it’s a startup. Right now, the market is saying this is a value-subtracting activity. Funding it anyway is the opposite of what market signals are saying to do.

Funding the algae project is an explicit decision by someone in authority. It is a decision based on promises. It is based, precisely as Levine says, on dreams.¹

Joseph Schumpeter compared the function of banks under modern capitalism to Gosplan, the central planning agency of the old Soviet Union. Banks, through a conscious, deliberate decision, dedicate some fraction of society’s resources to some project that they have decided is worthwhile. “The issue to the entrepreneurs of new means of payments created ad hoc” by the banks, he writes, is “what corresponds in capitalist society to the order issued by the central bureau in the socialist state.”

What’s more, as Arjun and I write in Against Money, banks

are stronger in a certain way than any real central planner, because they have the authority to redistribute anything. A Soviet planner might assign a plant this many tons of some raw material, that much electricity, use of those parts of the transportation network. Money as the universal equivalent is a token granting the holder use of whatever they need. A loan then is a ticket to the entrepreneur saying, you have the authority to take whatever labor and other resources your project requires.

In this sense, markets are not an alternative to planning, they are a tool for planning. Money is the substrate within which planning takes place.

People used to talk about a “soft budget constraint” as a defining feature of the Soviet economy — enterprises could continue operating even if their costs exceeded their sales, as long as the planners saw some social value in their continued operation.² Startups like the algae power company have the softest of budget constraints — they are able to incur substantial costs, often over many years, without any sales at all.

This is not some weird quirk of venture capital. This is a central purpose of finance – to direct society’s resources to one activity that has not yet been successful in the market, but that somebody think could be. The defining characteristic of an entrepreneur is that they undertake some new activity, something that is not already being done, with funding provided by someone else. An entrepreneur in this sense definitionally faces a soft budget constraint.

This is not, again, an anomaly, it is not a breakdown of the normal operation of capitalism. It is essential to what makes capital such a powerful force for transforming our material existence. And it needs to be central to our theoretical accounts of capital and of the investment process.

It certainly was for Keynes. As he famously observed in Chapter 12 of the General Theory,

a large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits—of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.

Enterprise only pretends to itself to be mainly actuated by the statements in its own prospectus, however candid and sincere. Only a little more than an expedition to the South Pole, is it based on an exact calculation of benefits to come. Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die;—though fears of loss may have a basis no more reasonable than hopes of profit had before.

It is safe to say that enterprise which depends on hopes stretching into the future benefits the community as a whole. But individual initiative will only be adequate when reasonable calculation is supplemented and supported by animal spirits.

Markets and the pursuit of private profit have existed for much longer than the their fusion with long-lived means of production command over wage labor that we call capital. One important reason for the failure of profit-seeking, through most of its history, to revolutionize production, is that these activities were subject to hard budget constraints and forced to adhere closely to market signals. Through most of their history, they couldn’t create new forms of production on the basis of dreams.

The algae company is getting access to real resources — authority over other people’s labor — because they have convinced a planner that their project is worthwhile.

Market socialists — whose belief in the virtue of markets is exceeded only, perhaps, by 19 year olds who have recently discovered Ayn Rand — like to ask how socialism can maintain the material accomplishments of capitalism without markets. But it isn’t markets that that produce the genuine and immense material accomplishments of capitalism.

The initial investments in AI or algae farming — or automobiles or airplanes or antibiotics — are not a response to market signals. They are conscious choices by some group of people to try something that hasn’t been done before. We might like algae and dislike AI (I do), but the solution is some substantive improvement in the planning system. It’s not an issue of planning versus markets.

Now, some people might say: This planning is based on the hope of future profit, it will eventually have to be validated by markets. But it is not incidental that the market outcome and the pursuit of profit are mediated by conscious planning.. They do not happen automatically. The judgement of the market can be deferred, in principle indefinitely.

We must also reject the idea that the assessment of future profitability is rational or objective. This is one reason the Levine story is useful – it focuses our attention on the ways that financing decisions are made in practice. Making energy from algae is cool! As he says, this an important part of the investment process. That should not be abstracted from.

There are many potentially profitable businesses that never get access to financing. The required return for most startups is very high, or effectively infinite. Manias may be essential to maintain an adequate level of investment. The irrationally high discount rate applied to future returns can only be offset by an irrationally high expectation of future profits. (See, as for much of this post, the current AI boom.)

Nor is it clear that future profit always is the motivation, certainly not the only one, and certainly in the early stages. It’s not incidental that Levine emphasis that algae energy could get funding in part because it is cool. It’s not, perhaps, incidental that OpenAI started its existence as nonprofit. The pursuit of profit is not always what motivates investment, especially when it involves fundamental departures from existing forms of production.

This conflict between the pursuit of profit and large-scale fixed investment goes back to the beginning of industrial capitalism. As Eric Hobsbawm observes in his classic account of the Industrial Revolution, the textile industry — small scale, labor-intensive — could develop through largely self-financed improvements on existing production methods serving existing markets.But the large-scale capital-goods industry, using novel techniques to serve a market that was only brought into existence by the Industrial Revolution itself, was a different story. There, the pursuit of profit was an inadequate spur in the absence of some additional non-pecuniary motive.

No industrial economy can develop beyond a certain point until it possesses adequate capital-goods capacity. … But it is also evident that under conditions of private enterprise the extremely costly capital investment necessary for much of this development is not likely to be undertaken… For [consumer goods] a mass market already exists, at least potentially: even very primitive men wear shirts or use household equipment and foodstuffs. The problem is merely how to put a sufficiently vast market sufficiently quickly within the purview of businessmen.

But no such market exists, e.g., for heavy iron equipment such as girders. It only comes into existence in the course of an industrial revolution (and not always then), and those who lock up their money in the very heavy investments required even by quite modest iron-works … are more likely to be speculators, adventurers and dreamers than sound businessmen. In fact in France a sect of such speculative technological adventurers, the Saint-Simonians, acted as chief propagandists of the kind of industrialization which needed heavy and long-range investment.

Th Saint-Simonians driving the investment boom of the 19th century, the rationalists and long-termists and Zizians driving investment in the 21st — perhaps it’s not such a far-fetched analogy. (Though personally I find Saint Simon more appealing.) However different the content, they are filling the same essential function. And that is the key point here — a system that relies on private initiative for irreversible commitments to projects that transform production, cannot be based on rational calculation, on objective market signals. The market outcomes of these kinds of projects cannot be known until long after the die is cast. A different kind of motivation is needed.

A related point: Nobody knows, right now, if the algae thing will work. Nobody knows if AI will turn out to be useful (I think not, or not very, but I am well aware I could be wrong.) The tradeoff is not about allocating real resources to their best use, among the known uses available. If the algae thing doesn’t get funding — and we can be sure that many, many projects as well founded are not getting funded — the reason will not be because society had a more urgent use for those resources. It will be because people couldn’t figure out a way to cooperate — that the mechanisms to convert promises (or dreams) into command over labor did not operate in that case.

(A flip side of this vision, which I can’t go into here but is essential to the larger argument, is that society has resources to spare. Many people’s time is being spent much less usefully than it could be.)

There’s another, more subtle point. It is not just that we don’t know how profitable these projects will be until someone finances them and they are carried out. There is not any fact of the matter about how profitable these projects will be, independent of how they are financed.

This is the point where Arjun’s and my argument may be challenging for a certain strand of Marxists. (It is not, I think, a challenge to Marx himself, who said a lot of different things on these questions, at different levels of abstraction.)

There is an idea — Anwar Shaikh offers a contemporary example — that the rate of profit is determined first, and then the rate of interest is secondary, a special case of profit, governed by it, or a deduction from it. But we can’t say what the profitability of the algae business even is, prior to the question of what terms it is financed. At one rate of interest it may be very profitable, at another less so or not worthier pursuing at all.

Now maybe you will say: sure, anyone can make a profit if they get that free Fed money. But it’s not just that. The relative profitability of different projects depends on the term on which they can be financed.

Let’s consider two projects. One will make energy from burning oil, the other from growing algae. The oil project is straightforward: 100 dollars laid today will yield 120 dollars worth of fossil-fuel energy a year from now. The algae project requires a lot more upfront costs — you have to first, you know, figure out how to make energy from algae. But your best guess is that $100 invested today will allow you to produce $50 worth of fuel from $10 worth of inputs every year starting 15 years from now.

So, which of these two projects should you commit your capital to? Which of them is more profitable?

The answer, of course, is that you can’t say until you know what terms the projects will be financed on.

Partly this is just a simple matter of discount rates. In these narrow terms, the algae project is more profitable if the interest rate is 5 percent; the fossil-fuel project is more profitable if the interest rate is 10 percent.

More broadly we have to consider, for instance, whether the financing will have to be rolled over, if, say, the project takes longer than expected. What are financing conditions are likely to be at that point? If the loan is due and can’t be rolled over and the project has not generated sufficient returns to repay it, then the return on whatever capital the undertaker put in themselves will be negative 100 percent. The chance of this happening — which, again, depends as much on future financial conditions as on the income generated by the project itself — has to be factored in to the expected returns.

We also have to consider the terms of the financing — what kind of collateral will be required? Will it have to be periodically marked to market? What control rights are demanded by investors or lenders? The viability of the project from the point of view of the person carrying it out depends as much on these considerations as on the physical problem of converting algae to energy.

I recall a Wall Street Journal article years ago – I’m sorry, I don’t have a link – on the economics of putting power plants on barges. There are technical issues pro and con, but the decisive advantage of putting a plant on a barge is that it is better collateral. Lenders are more willing to finance a power plant when they can physically tow it away in the event of default.

So if we are going to evaluate the profitability of a power plant on a barge versus one on land, we have to consider how important it is to keep lenders happy — how scarce or abundant financing is. We also have to consider other monetary factors. A big utility, or one guaranteed by a state, can be counted on to pay its debt, so collateral is less important than it is for a smaller business without public backing.

Another way of looking at this is that the distribution of profits has a variance as well as a mean. How much the higher moments matter, depends how confident we are that contracts will be honored in alls states of the world. It depends on how confident we are that short-term deficits can be financed and that only the long-term outcome matters.To the extent that that’s true, we should just focus on mean expected profits. But if defaults are possible, then the higher moments matter too — again complicating the question of what it means for one project to be more profitable than another.

This is the fundamental point Hyman Minsky was making with his two-price model. It’s why he insisted that money is not neutral. The price of long-lived assets depends on the interest rate (or as he put it, the supply of money), in a way that the price of current output does not. The price of a factory relative to the stuff coming out of it will shift as money becomes scarcer or more abundant.

And of course it’s not just two prices. It’s a whole set of prices, for capital goods that are more and less long-lived and are more or less specialized to particular production processes. The more scarce money is, the higher will be the price of the power plant on the barge relative to the power plant on land.

Again, this is not just a time discount. It’s a discount for uncertainty. It’s a discount for commitment. It’s a discount on hopes and dreams versus money on the table.

For every interest rate there is a different schedule of labor values. For every interest rate there is a different set of market signals. A tight-money market socialism does different things from a loose-money market socialism.

This is a version of Sraffa’s argument that one can’t calculate labor inputs for different commodities unless we already know the profit rate, which must be determined from outside the production process, for instance “by the rate of money interest.” Even if we assume that all production possibilities are already known and available, we can’t decide which are most profitable unless we know the terms on which production will be financed.

In the real world, again, the possibilities for production are not known in advance. And contrary to Sraffa’s preferred assumption of content returns to scale, industrial production tends to have increasing returns, implying the existence of multiple equilibria. But directionally, all these considerations point the same way. Easy money makes projects with longer-term returns, higher-variance or more uncertain returns, more specialized capital goods, more increasing returns, and greater departures from current production processes more attractive. Tight money, the opposite.

A central function of discourse around finance, and the stock market in particular, is to obscure this role of finance in shaping and directing production. The stock market creates the situation it pretends to reflect, in which one production process can be smoothly traded off against another.

If the algae-company investment is successful, it will eventually result in the creation of a listing on a stock market, creating a tradable claim on the future profits from algae trading. At that point, income from algae energy will have a market price reflecting its exchangeability with all sorts of other incomes. You will be able to swap one future dollar of algae-energy income with a future dollar of income from any of thousands of other listed companies. It is tempting to treat this as simply a fact of nature, to retroactively project it back to the whole process of building this company, and treat it all as a process of market exchange just like swapping one share for another.

That the delimitation of exchangeability is a distinct problem from the allocation of real resources — that, in a sense, is what our book is about.

At Jacobin: Yes, We Should Support Industrial Policy and the Green New Deal

(This piece was published by Jacobin on April 6, 2023, in response to the Dylan Riley post linked in the first paragraph. The version below adds a few unimportant footnotes and one somewhat important paragraph that I forgot to write before submitting it — the one about halfway through that mentions Oskar Lange.)

A few days ago, Dylan Riley wrote a post on New Left Review’s Sidecar blog that provoked a furious response on twitter. ³ Since I largely agree with the criticism made by Alex Williams, Nathan Tankus, Doug Henwood and others, perhaps I shouldn’t add to the chorus. But I want to try to clarify the larger stakes in this debate.

Riley’s piece starts from the suggestion that the failure of Silicon Valley Bank reflects a larger crisis of overcapacity and lack of investment opportunities. SVB, he writes,

had parked a huge quantity of its deposits in low-yield – but supposedly safe – government-backed securities and low-interest bonds. … the bank was overwhelmed by the massive growth in deposits from its tech clients – and neither it nor they could find anything worthwhile to invest in. …the SVB collapse is a beautiful, almost paradigmatic, demonstration of the fundamental structural problem of contemporary capitalism: a hyper-competitive system, clogged with excess capacity and savings, with no obvious outlets to soak them up.

This is an elegant framing but it runs into a problem immediately, involving the ambivalent meaning of ‘invest.” The depositors in SVB were not venture capitalists, but the firms that they had stakes in. The reason SVB had such big deposits was not because finance was unable to find profitable outlets even in the tech world, but precisely because it had done so. (Whether these businesses are doing anything socially useful is of course a different question.) The fact that SVB’s assets consisted of Treasury bonds rather than loans to its depositors reflects the shift in business financing, especially in tech, away from banks toward specialized venture capital funds — an interesting development, certainly, but one that doesn’t tell us anything about the overall population of businesses looking for financing.

Lurking behind Riley’s formulation here seems to be a crude version of commodity money theory, in which money is either out in the world being useful, or being left idle in the bank. But money in the real world is always in the form of bank deposits — that’s what money is — regardless of how actively it is circulating.

To be fair, Silicon Valley Bank is just the hook here. The real argument of the post — the one that provoked such a reaction — is that the ongoing crisis of overcapacity means that Green New Deal-type programs of public investment in decarbonization are a self-defeating dead end. “Imagine,” writes Riley,

that Bidenomics in its most ambitious form were successful. What exactly would this mean? Above all it would lead to the onshoring of industrial capacity in both chip manufacturing and green tech. But that process would unfold in a global context in which all the other capitalist powers were vigorously attempting to do more or less the same thing. The consequence of this simultaneous industrialization drive would be a massive exacerbation of the problems of overcapacity on a world scale, putting sharp pressure on the returns of the same private capital that was ‘crowded-in’ by ‘market-making’ industrialization policies.

There are a number of distinct arguments in, or at least in the vicinity of, Riley’s post. We can of course debate the specific content of the IRA — where does it fall on Daniela Gabor’s spectrum from “de-risking” to the “big green state”? There’s a larger political question about the extent to which activists and intellectuals on the left should attach themselves to programs carried out by the established political actors through the state, as opposed to popular movements outside of it. And then there is the specific question of overcapacity — is it reasonable to think that any boost to investment via public spending will just diminish opportunities for profitable accumulation elsewhere?

I’m not unsympathetic to the first two of these arguments, even if I don’t agree with them in this particular case.

In my opinion, the IRA model passes two key tests: The public money goes to productive enterprises, not to holders of financial assets; and there is affirmative direction of spending toward specific activities. To me there is an important difference between “for each new solar panel you install with union labor, you will get x dollars of subsidies” and “if you hold a bond that fits these broad criteria, the interest is taxed at a lower rate” — even though, at a sufficiently high level of abstraction, both involve subsidizing private capital. But there’s a lot of room for debate here about how to describe specific measures and where to draw the line; a different read of its provisions might plausibly put the IRA on the other side of it.

Similarly, it’s important to remember that winning some specific legislation does not mean that you control the state — there’s a real danger in imagining ourselves “in the room where it happens” when in reality we are very far from it. When Riley writes that “no socialist should advocate an ‘industrial policy’ of any sort, nor have any truck with self-defeating New Deals,” I, obviously, do not agree. But if you wrote a parallel sentence about the humanitarian activities of the US military in various parts of the globe, I would agree wholeheartedly. Over the years I’ve had many disagreements with people with broadly similar political commitments, who thought this particular intervention could was worth supporting. As far as I am concerned, when the instruments of the state are marines and cruise missiles, the only possible engagement from the left is protest and obstruction.

War is different from industrial policy. But one can imagine an argument along these lines that would be worth taking seriously. If you wanted to write a stronger critique of the Green New Deal from the left, you might stress the tight links between industrial policy and nationalism, and the frightening anti-China rhetoric that’s a ubiquitous part of the case for public investment.

Here, though, I want to talk about the specifically economic argument, about overproduction.

Riley’s post draws on a long-standing argument among writers for the New Left Review, that the fundamental challenge for contemporary capitalism is overproduction or excess capacity. In this story, the end of the postwar Golden Age was due to the end of US dominance in world trade. Starting in the 1970s, stable oligopolies in manufacturing gave way to to cutthroat competition as producers from an increasing number of countries competed for a limited market. Because manufacturing is so dependent on long-lived, specialized capital goods, producers are unwilling to exit even in the face of falling prices, giving rise to chronic depressed profits and excess capacity, and a turn to financial predation — what Robert Brenner calls neofeudalism — as an alternative outlet for investment. Even when profits recover, there’s little incentive to accumulate new means of production, given that there’s already capacity to produce more than markets can absorb.

The most influential version of this story is probably Brenner’s book-length New Left Review article from 1998. ⁴ It is clearly compelling on some level – a lot of people seem to believe something like it. It draws on a long tradition of theories of overproduction and destructive competition, going back at least to the underconsumption theories of Hobson, Lenin and Luxemburg on the one side and, on the other, the first generation of the US economics profession, shaped by the pathological effects of competition between railways. Richard Ely, founder of the American Economics Association, described the problem clearly: “whenever the principle of increasing returns works with any high degree of intensity, competition can never regulate private business satisfactorily.” His contemporary Arthur Hadley described destructive competition in capital-intensive industries in very much the same terms as Brenner: at prices

far below the point where it pays to do your own business, it pays to steal business from another man. The influx of new capital will cease; but the fight will go on, either until the old investment and machinery are worn out, or until a pool of some sort is arranged.

(The quotes are from Michael Perelman’s excellent The End of Economics.)

There’s an important truth to the idea that, in a world of long-lived specialized capital goods and constant or falling marginal costs, there is no tendency for market prices to reflect costs of production. Too much competition, and firms will sell at prices that don’t recoup their fixed costs, and drive each other to bankruptcy. Too little competition, and firms will recover their full costs and then some, while limiting socially useful output. No market process ensures that competition ends up at the goldilocks level in the middle.

But while this problem is real, there’s something very strange about the way Riley deploys it as an argument against the Green New Deal. Rather than a story about competition, he — following Brenner — talks as if there was a fixed amount of demand out there that producers must compete for. In a world of overproduction, he says, any public investment will just create more excess capacity, driving down profits and accumulation somewhere else.

In a funny way, this is the mirror image of the Treasury View of the 1930s — which said that any increase in public employment would just mean an equal fall in private employment — or of its modern day successors like Jason Furman and Lawrence Summers. The Furman-Summers line is that the world has only a certain amount of productive capacity; any public spending above that level that will just result in inflation, or else crowding out of private investment. The Brenner-Riley line is that the world has only a certain amount of demand, both in general and for carbon-reducing technology specifically. Try to produce any more than that, and you’ll just have excess capacity and falling profits. Both sides agree that the economy is like a bathtub — try to overfill it and the excess will just run over the sides. The difference is that for first side demand is the water and productive capacity is the tub, while for the other the water is capacity and the tub is demand.

Riley invokes Oskar Lange’s 1930s discussions of electoral socialism in support of his contention that “half-measures are self-contradictory absurdities” — which very much includes any “blather about New Deals.” But the situation facing socialist governments in the 1930s was quite different. Their problem was that any serious discussion of nationalization would terrify capital and discourage investment, sending the economy into a deeper slump and dooming socialists’ prospects for extending their initial electoral gains. This meant that nationalization had to be carried out all at once or not at all — which in practice, of course, meant the latter. (There is a good discussion of this in Przeworski’s Paper Stones.) Keynesian fiscal policy was precisely what offered the way out of this trap, by allowing an expansion of the public sector on terms consistent with continued private accumulation. Riley here is rejecting exactly the solution to the problem Lange identified.

But there’s a deeper problem with the Riley-Brenner vision. In Jim Crotty’s review of Brenner’s long article, he argues that, in response to what Brenner saw as an excessive focus on labor-capital conflict in accounts of the end of the postwar boom, he created an equally one-sided story focused exclusively on inter-capitalist competition. I think this gets to the crux of the matter.

Let’s take a step back.

The development of a capitalist economy is a complex process, which can go wrong at many points. Production on an increased scale requires the expansion of the physical and organizational means of production, with whatever technical and material requirements that entails. Additional labor must be enlisted and supervised. New raw materials must be acquired, and the production process itself has to be carried out on an increased scale. The resulting products have to be sold at a price that covers the cost of production — in other words, there must be sufficient demand. The resulting surplus has to be channeled back to investment. All of this has to take place without excessive changes in relative prices, and in particular without politically destabilizing changes in wages or the distribution of income. The reinvestment stage normally happens via the financial system; the ongoing payment commitments this generates have to be consistently met. And it all must take place without generating unsustainable cross-border payment flows or commitments.

All of these steps have to happen in sync, across a wide range of sectors and enterprises. A business expanding production has to be confident that the market for its products is also growing, as well as the supply of the inputs it uses, the financing it depends on, and the labor it exploits. An interruption in any of these will halt the whole process. When growth is steady and incremental, this can be mostly taken for granted, but not in the case of more rapid or qualitative change, as in industrialization.

This problem was clearly recognized by earlier development economists. It’s the idea behind the “two gap” and “three gap” models of Hollis Chenery and his collaborators, the “big push” of Rosenstein-Rodan, or Gerschenkron’s famous essay on late industrialization.⁵ Everything has to move forward together. Industrialization requires not only factories, but ports, railroads, water, electricity, schools. All of these depend on the others. You need savings (or at least credit), and you need demand, and you need labor, and you need foreign exchange.⁶

At the same time, an essential feature of the capitalist mode of production is that the various steps each involve different decision makers, acting with an eye only to their own monetary returns. From the point of view of each decision maker, the choices of all the others look like fixed, objective constraints. From the point of view of a particular producer, the question of whether there is sufficient demand to justify additional output is an objective fact. For the producers collectively, it is their decisions that determine the level of demand just as much as — in fact simultaneously with — the level of current output. But for them individually, it’s a given, an external constraint.

The problem comes when in thinking about the system as a whole we treat something like destructive competition not as what it is – a coordination problem – but from the partial perspective of the individual producer. From this perspective, it appears as objectively given, as if there were only so much demand to go around. The mainstream, of course, makes the exact same error when they treat the productive capacity of the system as prior to and independent of the actual level of activity. (This is the point of Arjun Jayadev’s and my recent paper on supply constraints.) The fact that when one part of the system moves ahead faster it encounters friction from parts that are lagging imposes genuine limits on the pace of expansion — both supply and demand constraints are real – but we should not treat them as absolute or externally given.

The faster and farther reaching are the changes in production, the harder it is for a decentralized market system to maintain coherence, and the more necessary conscious, more or less centralized coordination becomes. This was one of the main lessons of the economic mobilization for World War II, and a critical consideration for decarbonization. Planning is ubiquitous in real-world capitalism, and more rapid transformations in activity require planning at a higher level.

At the same time, we shouldn’t underestimate the capacity of our system of anarchic production for profit to eventually break through the barriers it encounters — something Marx understood better than anyone. That is why it’s become the world-encompassing system it is. Sustained demand will itself call forth the new labor and improved production techniques required to meet it. Conversely, while Say’s law may not hold in the short run, or as a matter of logic, it is very much the case that improvements in production create new markets, and expand demand qualitatively as well as quantitatively.

Overproduction and excess capacity are not new phenomena. They have been a recurring feature of the great crises that capitalist economies have experienced for the past two hundred years. Here is Jules Michelet’s beautiful contemporary description of the 1842 commercial crisis in France:

The cotton mills were at the last gasp, choking to death. The warehouses were stuffed, and there were no sales. The terrified manufacturer dared neither work nor stop working with those devouring machines. Yet usury is not laid off, so he worked half-time, and the glut grew worse. Prices fell, but in vain; they went on falling until cotton cloth stood at six sous.

We should never forget about the misery and chaos of crises like this. But we should also not forget how this story ends. It is not “and then eventually enough mills were shut down and things went back to how they were before.”

Here’s how the Michelet passage continues:

Then something completely unexpected happened. The words six sous aroused the people. Millions of purchasers — poor people who had never bought anything — began to stir. Then we saw what an immense and powerful consumer the people is when engaged. The warehouses were emptied in a moment. The machines began to work furiously again, and chimneys began to smoke. That was a revolution in France, little noted but a great revolution nonetheless. It was a revolution in cleanliness and the embellishments of the homes of the poor; underwear, bedding, table linen, and window curtains were now being used by whole classes who had not used them since the beginning of the world.

An openness to the possibility of this sort of transformational change is what’s fundamentally missing from both the Summers-Furman and Brenner-Riley views. This is not a system in homeostasis, that if disturbed returns to its old position. It is a system lurching from one unstable equilibrium to another. And this is very relevant, I think, to decarbonization.

Not so very long ago, it was conventional wisdom that photovoltaic energy was never going to be more than a niche power source — useful when you can’t connect to the grid, but way too expensive to to ever be used at utility scale. And now look — solar accounted for nearly half of new electricity generation installed last year. There’s an almost endless scope for further growth in renewable energy, as more of the economy is electrified. The fact that Silicon Valley Bank was holding a bunch of Treasury bonds does not mean that the field of productive investment has been exhausted.

The tremendous growth of renewable energy over the past generation wouldn’t have happened without public subsidies and regulation. At the same time, most of the actual production has been carried out by employees of private, profit-seeking businesses. Riley is absolutely right that no one should be counting on private investment in education or in care work. Explaining why those activities depend critically on the autonomy and intrinsic motivation of the workers carrying them out, and are therefore inherently unsuited to for-profit businesses, is something we need to keep doing. The same goes for many public functions that have been turned over to contractors. But there are many other areas where it is still possible to harness the profit motive to meet human needs.

(I am not, to be clear, saying anything about the virtues of markets or the profit motive in the abstract. I would like to progressively eliminate them from human life. I am simply stating the fact that my house was put up by a private builder, for profit, and yet the roof does keep out the rain.)

There is plenty of scope to criticize the specific content of the IRA and other climate legislation, and the strategic choices of the groups that support them. (Altho a bit of humility is called for with the latter.) But we need to categorically reject the idea that there is some hard constraint such that any program to increase private spending on decarbonization will be canceled out by a reduction in spending somewhere else.

The bottom line, both for the politics and the economics, is that we need to resist thinking in terms of a change in one area while everything else stays the same. Ceteris paribus may be a useful analytic tool, but it’s fundamentally inapplicable to historical processes where one change creates the pressure, and the possibility, for another.

Yes, given the existing productive technology, given existing markets, one country’s support for renewable energy might compete with another’s. But these things are not given. Economies of scale exist at the level of the industry as well as the firm; technological progress in one place quickly spills over to others. As, say, hydrogen becomes practical for large-scale energy storage, it will be come practical to produce green energy in areas where it isn’t today. This is as far as you can get from the Brenner paradigm of a zero-sum competition for shares of a fixed market.

The real problem for the Green New Deal and broader industrial policy program is not scarcity, whether of material or of markets. It is twofold. First, it requires a capacity for public planning that is currently lacking, in the US and elsewhere. Industrial policy means building up and legitimating the state’s direct role in a wider range of activity— a challenge when the biggest existing form of direct public provision, the public schools, are under ferocious attack from the right. Second, to the extent that a rush of public and private spending leads to a sustained boom, that will create profound challenges for a system that is used to managing distributional conflicts through unemployment. We’ve gotten a sense of what the political reaction to full employment might look like from recent inflation discourse, with its fears of “labor scarcity.” It’s reasonable, for now, to respond that it’s silly to worry about a wage-price spiral when labor is so weak. But what happens when labor is stronger?

These are real challenges. But we shouldn’t see them as arguments against this program, only as markers for where the next conflicts are likely to be. That’s always how it is. “Gradualism cannot work,” declares Riley, but all politics is incremental. Socialism is only a direction of travel. Even if the “commanding heights of the economy” could “be seized at once” — Riley’s rather ambitious alternative to the Green New Deal — that would only be a step toward the next struggle.

A program to mobilize the existing bourgeois state to push private spending in the direction of meeting human needs, and the need for a habitable planet in particular, faces many obstacles — that is true. Whatever successes the left has had under the Biden administration have been limited and compromised. Some of the most important, like the expansion of unemployment and family benefits, have already been rolled back — that is also true. But the same could be said for all the socialist programs of the past. We have to just keep going, with one eye on the long run direction of travel and the other on the contingencies of the present. The one thing we can say for certain about the future is that it hasn’t happened yet. If we keep going, we will see things that haven’t been seen since the beginning of the world.

The Class Struggle on Wall Street: A Footnote

Remember back at the beginning of February when the stock markets were all crashing? Feels like ages ago now, I know. Anyway, Seth Ackerman and I had an interesting conversation about it over at Jacobin.

My rather boring view is that short-term movements in stock markets can’t be explained by any kind of objective factors, because in the short run prices are dominated by conventional expectations — investors’ beliefs about investors’ beliefs… [1] But over longer periods, the value of shares is going to depend on the fraction of output claimed as profits and that, in general, is going to move inversely with the share claimed as wages. So if working people are getting raises — and they are, at least more than they were in 2010-2014 — then shareholders are right to worry about their own claim on the product.

One thing I say in the interview that a couple people have been surprised at, is that

there has been an upturn in business investment. In the corporate sector, at least, business investment, after being very weak for a number of years, is now near the high end of its historical range as a fraction of output.

Really, near the high end? Isn’t investment supposed to be weak?

As with a lot of things, whether investment is weak or strong depends on exactly what you measure. The figure below shows investment as a share of total output for the economy as a whole and for the nonfinancial corporate sector since 1960. The dotted lines show the 10th and 90th percentiles.

Gross capital formation as a percent of output

As you can see, while invesment for the economy as a whole is near the low end of its historic range, nonfinancial corporate investment is indeed near the high end.

What explains the difference? First, investment by households collapsed during the recession and has not significantly recovered since. This includes purchases of new houses but also improvements of owner-occupied houses, and brokers’ fees and other transactions costs of home sales (that last item accounts for as much as a quarter of residential investment historically; many people don’t realize it’s counted at all). Second, the investment rate of noncorporate businesses is about half what it was in the 1970s and 80s. This second factor is exacerbated by the increased weight of noncorporate businesses relative to corproate businesses over the past 20 years. I’m not sure what concrete developments are being described by these last two changes, but mechanically, they explain a big part of the divergence in the figure above. Finally, the secular increase in the share of output produced by the public sector obviously implies a decline in the share of private investment in GDP.

I think that for the issues Seth and I were talking about, the corporate sector is the most relevant. It’s only there that we can more or less directly observe quantities corresponding to our concepts of “the economy.” In the public (and nonprofit) sector we can’t observe output, in the noncorproate sector we can’t observe profits and wages (they’re mixed up in proprietors income), and in the household sector we can’t observe either. And financial sector has its own issues.

Anyway, you should read the interview, it’s much more interesting than this digression. I just thought it was worth explaining that one line, which otherwise might provoke doubts.

[1] While this is a truism, it’s worth thinking through under what conditions this kind of random walk behavior applies. The asset needs to be and liquid and long-lived relative to the relevant investment horizon, and price changes over the investment horizon have to be much larger than income or holding costs. An asset that is normally held to maturity is never going to have these sort of price dynamics.