The basis of this argument, in even orthodox economic theory, is very dubious. The basic argument, put forward, is that Government Expenditure "crowds out" the private sector, because, in borrowing money, to finance this expenditure, the Government necessarily raises interest rates above where they would otherwise have been. By raising interest rates, this increases the cost of Capital, and so at any level of economic activity the Supply of Capital will be reduced, so employment will be lower, and consequently, incomes and expenditure will be lower.There is no doubt that, at times, this argument could be valid. But, essentially, those times are when there is a shortage of loanable funds. On any basis, there is clearly no shortage of loanable funds at the present. Despite the fact that private sector indebtedness has ballooned in Britain, at the same time, the total amount of savings has also increased, as the survey from the NS&I demonstrates here. Moreover, this figure of £18,000 average in savings accounts does not take into account the large amounts of money that many people have accumulated in ISA's and PEP's in the last 20 years or so, or the vast amounts saved in Pension Funds, currently estimated at around £800 billion. Given that Pension Funds have to place significant amounts of money in Long dated securities, the Government has had a captive market for money into its Long dated Gilts, which is one reason that the structure of UK debt tends to be of much longer duration than other EU countries.
But, that is not the only source of loanable funds. As many economists have identified from the late 1980's onwards, the rate of profit has been rising. A look at the masses of profit, of large companies, such as Tesco, racked up year after year, is a testament to that fact. Although, some of that profit is paid out as dividends, and some is utilised for investment, most large companies, in profitable sectors of the economy, have stored up large cash balances on their Balance Sheets.
Moreover, Capital is now truly global, and it is not just large companies in the UK that have been amassing large cash balances. Microsoft, had at one point over $40 billion in cash. Its Total Current Assets stand at $55 billion. But, as this analyst points out,“With almost $37 billion in cash and short term securities on their balance sheet as of June 30, the company has very little need for more cash. But two weeks ago Microsoft announced the offering of $4.75 billion in bonds at record low rates. For example, it is issuing $1 billion of 10 year bonds yielding 3%.
If you can borrow money for 10 years at 3%, why not?”
I'm tempted to say that surely what is good for Microsoft should be good for the UK Government, which can also borrow for ten years at 3%. The point is that both Microsoft and the British Government can borrow at these historically low levels, precisely because there is no shortage of loanable funds! The list of where these loanable funds can come from is by no means exhausted. In addition to the vast sums, built up on the Balance Sheets, of large companies, around the globe, there are also vast amounts, sitting in the savings accounts of individuals around the globe, particularly in Asia, whose lifestyle leads them to have a culture of “saving therapy”, rather than “retail therapy”.
On top of that, countries such as China, and other Asian economies, along with countries in the Middle East, in Russia, and in Latin America, and even in Africa, have created huge Sovereign Wealth Funds with the revenues they have received as a result of booming economies, and exports to the West. All of these funds have to be put somewhere in order for them to fulfil their function as Capital, to bring in a return, and although higher returns can be made by using these funds to invest in global equities, and physically buying up companies, such investments are more risky than simply buying the debt of developed western economies such as the US and UK.Finally, there is another reason that there is no shortage of loanable Capital, and that is that over the last year or so, countries have been engaging in Quantitative Easing, money printing.
A Government can always find a buyer for its debt, simply by turning to its Central Bank, and asking it to buy that debt with newly printed money. One reason that the Tories analogy with domestic budgets is a crock is precisely that if a family did that they would end up in gaol.There is no basis for an argument that the private sector is being crowded out. There is no basis for the Tories argument that, had they not addressed the deficit, by introducing huge cuts, that international Capital would have raised the interest rate it demanded from the UK either.
As Alan Johnson said, in his response, the reality is that, despite the deficit, UK interest rates have been falling since the beginning of the year! The UK has had much higher debt to GDP ratios than this before, and no serious person believes that the UK is going to default on its debt. For one thing, it could do what the US has done many times and simply print money to cover those debts, and, just as the figure for private indebtedness hides the fact of huge domestic private savings, so Britain's Public Debts hides the fact that, as a result of several centuries of Colonialism and Imperialism, the UK has vast investments overseas. It could repatriate those investments if need be to cover the debts. The Tories say there is no alternative, but the reality is that there are many, many alternatives.But, there is also another problem with the Crowding Out Theory. Its best viewed with the aid of a graph.
The graph shows the relation between total profits and the Supply of Capital. This can be viewed as the greater volume of profit to be made the more Capital is supplied, as Capital comes in in search of that profit. If, at any point, we divide the Total Profits by the Total Capital, (P/Q), then we get, at that point, the Rate of Profit, R. However, the theory is that if interest rates rise, the cost of Capital goes up. Consequently, because Capitalists have to pay more for that Capital, the amount left over for them (Profit of Enterprise) is reduced, so at any particularly Rate of Profit, they will tend to bring forward less Capital. The graph shows that, with higher interest rates, the curve, for the Supply of Capital, shifts to the left. In order to bring forward the same quantity of Capital at this new interest rate, the Rate of Profit has to rise from R1 to R2. In fact, at any point along this curve, R has to be higher, because, by definition, the same quantity of profit is divided by a smaller quantity of Capital.
We would expect then, if the theory is correct, to see that, in periods when the Rate of Interest is rising,the Supply of Capital would be reduced, and that consequently, the Rate of Profit would be rising. Conversely, where the Rate of Interest is falling, the Supply of Capital would be rising, and the Rate of Profit would be falling. In other words, because Capital is cheaper, Capitalists employ more of it, and as this results in an increased supply of goods, and competition between them, the Rate of Profit is squeezed. But, the problem is that from the mid to late 1980's, the trend for the Rate of Interest was falling, and continued to fall for around 20 years! In that case, we should have seen a declining Rate of Profit. But, it is precisely during this period that we have seen the opposite, the Rate of Profit has been rising from the mid to late 1980's.
That is not a surprise for a Marxist. For a Marxist, the determining factor is not the Rate of Interest, but the Rate of Profit, and the Absolute Volume of Profit.
The Rate of Profit will determine the movement of Capital from one sphere to another. If the Rate of Profit is low in steel-making, but high in Chemicals, Capital will tend to move from the former to the latter. By this means the supply of steel will fall, prices and profit will rise, whilst the Supply of Chemicals will rise, prices and profits will fall, bringing about a dynamic equalisation of profits, via a constant disequilibrium. But, this cannot determine the amount of Capital in total that is supplied. As Marx points out, although there is a minimum below which wages can fall – i.e. below a certain level labour power is simply not reproduced, so its supply will fall and its price rise – the same is not true for Capital. Capital is only Capital if it self-expands, and it can only do that by being productively employed. However, its clear that Capital CAN be destroyed. Capital used to produce commodities which have no Exchange Value – because there is no demand for them, either because simply no one wants them, or because due to a recession or other economic circumstances, consumers lack the resources to buy them – is effectively destroyed, it is not reproduced. Moreover, below a certain level of profits, its likely that Capitalists will simply decide that the risk of investment is too great. Rather than use Capital as capital, they will destroy it by reducing it to simply a means of unproductive consumption i.e. they will convert it to money, and spend it on luxuries, or simply hoard it in the bank.Forward To Part 2
Crowding out is not relevant as you so exhaustively establish, debt could potential become a problem but the aim of the cuts is to restructure the economy and British society.
ReplyDeleteDebt is what inflation used to be, a convenient excuse for advancing right wing economic policy.
thanks though for a nice clear bit of blogging that explains the issue to those who might be unaware of these concepts.
Derek,
ReplyDeleteThanks, for that. As i've written in another part of this series I saw Costas Lavapistas on TV the other day, and he made this same point. The Cuts are not necessary, and the fact that they have been scaled back, and back-ended, shows that it is more about an ideological offensive. Though, as I've said I think it is more complex than that, I think it also reflects pressure on Right-wing populist parties from their base, which they are responding to for electoral reasons.
But, such processes can have a dynamic of their own. I do NOT beleive that the Cuts are in the interests of Big Capital, or that Big Capital was pushing for these Cuts. Big Capital needs to restructure western economies as part of restructuring global Capitalism, and dealing with the imbalances. But, its prefered method would have been to draw that process out - which is why it used so many resources during the 1980's and 90's to avoid a full blown 1930's Depression. But, if the policies of these right-wing populists create that situation, then Big Capital will adapt its strategy accordingly. It will go for a quick, brutal restructuring. We can see the outlines of that now in terms of the kinds of industries that will be developed, and those that will disappear. I think the next 6 months will tell us which it is to be. I have to say I worry about the US.
Hi Boffy,
ReplyDeleteHope you get to see this, be interested in your opinion on a few things.
I'm of the opinion that the Loanable Funds model does not describe reality in a meaningful way and as such policy prescriptions that depend on it are not coherent. Also, I agree that what the Tories are proposing is not in the interests of "Big Capital" (as you call it) and are indeed amateur.
The reason Loanable funds fails is that money supply has infinite elasticity at any given rate, because the aggregate banking sector balance sheet expands both sides at once. Effectively, investment is self-financing, as long as expected return offsets cost of funding.
The common understanding of "national saving" also fudges the definition to assume away business sector saving (profits), and so arrive at the nonsensical conclusion that a government surplus (a non-government dissaving by definition) increases "national saving", even though it doesn't increase total flow of net saving for the whole economy.
The idea that there is going to be more capital lying around if the government reduces net spending is wrong. Of the government successfully reduces its deficit it will most likely reduce the financial surplus of the business sector, unless households or the foreign sector make up the slack. This is because the deficit is explained almost entirely by the corporate surplus. Thus a reduction in the govt deficit decreases the business surplus and the change in total savings available for investment is zero. Cost of funding in the decreased govt deficit world is probably greater than in the business surplus world since the latter adds risk premia over cost of funding from retained earnings (which is probably why most investment is funded internally).
Even if the surplus were not held by the business sector, the logic of sectoral decomposition is such that any net saving flow is offset by a net dissaving flow and the effect is a wash. We cannot save on aggregate except by accumulating real assets (i.e. on aggregate saving is delta_net wealth>0). Rearranging flows of net saving an dissaving will not produce this, as a first order effect, as far as I can tell
Any thoughts?
Can I deal with the "Loanable Funds" bit first, and I'll come back to the other points later. The point you make is what I was getting at, but myself felt I should have expanded on. That is that the Demand and Supply of Money Capital are not independent variables.
ReplyDeleteThat was what I was trying to argue by referring to Marx's point about how expanding economic activity, itself creates a Supply of Money - essentially the volume of Surplus Value rises, and a portion of this takes the form of Money Capital, because Capital takes the form of Money, Productive, and Commodity at different phases of the process of circulation. But, that very process of circulation also affects the demand for Money Capital in the way suggested. We would also have to consider the consequences of the Credit Multiplier, as this Money Capital gets deposited in Banks.
But, I'm not sure I would agree with the idea that the Supply of Money is infinite at any rate. That would mean that Interest Rates are meaningless. There is some basis for arguing that that is the case in an environment where the State can intervene to set rates, where it can intervene to print money tokens, and so on, but I would want to argue that their are limits to this, otherwise you arrive at an argument by which Capitalism becomes a system whose contradictions can be regulated. I don't believe that to be true, and all evidence backs that up.
There is an ideological basis to the orthodox notion about the Supply of Money Capital, though. Some years ago I spent a lot of time arguing with economists and adherents of the Austrian School. A common argument was along the lines of "Without Capitalists where would Capital come from?" For people who generally showed some level of intelligence, such an absurd argument shows how powerful ideology can be in putting blinkers on people's vision.
They want to see Capital in terms of what Marx called Primary Accumulation. In other words, all Capital is the product of abstinence, of saving, which is why Hayek made his comment about the overcoat. They have a fetish for saving, as the only means of providing Money Capital. To admit that the majority of Capital actually arises through the re-investment of Surplus Value would lead to an examination of the nature of that Surplus Value.
To come back to the infinity point, though, I would also want to pick up on Marx's point about how Banks gathered together small desposits to make up a larger sum of Money Capital. Non-Capitalists do have savings that the Banking system mobilises, and I don't think the interest rate is insignificant in this regard. My point is that it is not determinant in rationing the demand for Money Capital, which is dependent on the Rate of Profit, and the absolute volume of profit, which is a function of the level of economic activity, and the Value of Labour Power.
On the Government deficit/Corporate Surplus. I don't think I agree, or at least it depends on the conditions. It depends on how you define Tax, for one thing. For example, Marx says all Tax is a deduction from Surplus Value. To that extent tax taken to reduce the deficit, which it has to be at some point even if at any point its financed by borrowing, is equally matched by a reduction in Surplus Value/the Corporate Surplus. However, as I've argued in another post "Tax" taken to finance the provision of commodities such as Health or Education is not a deduction from Surplus Value, but a collective deduction from workers wages in return for those commodities. In reality this is not "Tax" in the sense Marx was referring to it. The State capital employed is just as productive in that sense as private Capital. But, Tax in the sense that Marx describes is adeduction from Surplus Value, and goes to unproductive uses, whereas the Surplus Value would have been accumulated as Capital, and would have been capable of self-expansion.
ReplyDeleteHi Boffy,
ReplyDeleteWe seem to agree on quite a bit, which is a bit strange for me as I wouldn't have thought I had much in common with a Marxist, in terms of analysis. Maybe I need to go back and reread the old chap.
So although you're using terms in a way I don't totally follow I think we're on the same page as far as profit goes (I guess you could describe my position as Kaleckian). I think that you identify the profit paradox correctly, which is a fallacy of composition, in that on an individual level, reduced wages increase margins, but on aggregate reduced wages reduce profits. Since profits are savings and the first choice of funding for fixed investment, this reduces investment all things equal.
I do not believe that the government can really "print money" in any meaningful sense. Of course, literally it can print as many notes as its likes, but the amount of cash held by the public is demand determined and of no real relevance to anything.
The money supply proper is also demand determined and, as such, is endogenous to the system. The government can influence the price of extending credit via monetary policy, but the actual quantity extended is the result of the lending decisions of banks subject to private demand and the availability of risk capital.
The way I see it is that the CB can set its policy rate and raise or lower costs of funding; the banking sector determines the price differential according to liquidity preference, and then supplies as much credit as is demanded subject to capital and regulatory constraints, and its own subjective assessment of the borrower's ability to repay the loan.
Because the banking sector's aggregate balance sheet expands both sides at the same time when a bank makes a loan, and because the CB is committed to ensuring the smooth functioning of the payments system, funding for the loan is always available (on aggregate).
I'm afraid that I don't have much to say about the ontological status of capitalism. But there is a sense in which your Austrian antagonists are correct, in that the strict definition of savings is income not consumed. To invest is to save, i.e. to raise net worth. Which is why macroeconomic (measurable) net wealth is the tangible asset stock. Of course, this brings us right back to business saving aka profits, which you obviously understand pretty well.
My fundamental point as elaborated elsewhere is that the ability or otherwise of Government policy to regulate Capitalism is dependent upon the concrete conditions, and in particular on the Long wave conjuncture.
ReplyDeleteFor example, in the 1930's, Keynesian policies could not have worked in the UK. Partly, for the reverse of the above argument. Had the State attempted to spend it would either have had to do that by deficit spending or by raising tax. The latter would have simply been a transfer, and would have led to potential Capital with the ability to self-expand being absorbed in production for which there was no Value equivalent. It would mean a destruction of Capital. Even borrowing under those conditions would mean that Capital would look at the conditions, and conclude that only a short term releif was possible. The injection of liquidity, and the resultant demand would lead Capital to raise prices rather than production or investment, and where strong enough workers would seek compensating wage rises. It leads only to the stagflation seen in the 1970's. That's why Capital did not apply such methods during these periods. There might be an argument that by cutting back Government spending during such periods, the crisis is deepened and sharpened, and consequently the only condiitons that CAN result in an upturn - a reduction in the Value of Labour Power, the clearing out of inefficient Capital, the restructuring of Capital to redress disproportions etc. - are hastened. But, the costs for Capital can be severe, and might require the kind of resort to fascism to suppress social unrest that was seen in Italy and Germany. On the whole I think Capital seeks to avoid the costs involved in such a solution.
Hi Boffy,
ReplyDeleteHope I'm not re-sending comments millions of times but I'm having a bit of trouble with getting my response through. I can't tell if I managed to do this with my (reasonably long) response to your comment at 30 October 2010 09:58. I will stop trying to resend and wait to see if you've got it.
I'm not sure what you mean by surplus value. I'm defining corporate surplus in terms of a sectoral financial balance where total credits exceed total debits. At present the corporate surplus is roughly equal to the govt deficit (again defined as sector financial balance, where total debits exceed total credit), so that CFB = GFB, or equivalently, CFB + GFB = 0. I'm leaving out the relatively moderate household and foreign (im)balances for simplicity.
So holding the latter two sector's constant, a reduction in the deficit must reduce the corporate surplus, cet par, because the accounts must balance (i.e. sum of all sector balances equals zero).
Need to think more about the rest of your comment. The language not familiar--I need to translate it maybe and see if it makes sense.
Best,
v
V,
ReplyDeleteI am defining Surplus Value in standard Marxist terms. That is output is divided into three component parts. Constant Capital comprising all those things which can only transfer their value to the final product – Machines, buildings, materials etc.; Variable Capital i.e. Labour Power, which divides into that part which is actually paid for in the form of wages, and that part which is unpaid for, and comprises the third component Surplus Value. On this basis, if we take a national Capital, C + V + S = K, then it follows that if V falls, S rises by the same amount. But, in a dynamic model, we have a series of questions that arise in relation to the realisation of S. In other words on paper your debits and credit might result in a Corporate Surplus of X, but if the consequence of reducing V, is an umatched reduction in Aggregate Demand, there will be unsold output, and consequently the theoretical surplus will not be realised. That is there will be underconsumption.
However, Marxists do not accept that crises are fundamentally crises of underconsumption, but are crises of overproduction of Capital. I have set out an argument under current conditions whereby a reduction in wages, may be counter-productive for Capital. However, that is not always the case. In the 19th Century, Capital continually drove wages down, not always just in proportion to the reduction in the Value of Labour Power. Under conditions of rapidly expanding markets, a reduction in wages that drives up profits need have no detrimental effect for capital at all. Provided Capitalists in general believe that the market will continue to expand, the increase in S resulting from a fall in V, can result not in a fall in Aggregate Demand, but merely a movement of that demand away from Consumption (production of wage goods), to Investment (production of Producer Goods). Indeed, ultimately, this is the basic process by which a crisis of overaccumulation arises. This is also a fundamental reason for disagreeing with the Austrian point about saving equals investment equals Capital. At a certain point the Capital so accumulated ceases to be Capital, because it cannot be reproduced, it is no longer capable of self-expansion i.e. its output can no longer be sold at a profit if at all. It ceases being Capital, and is destroyed.
Cont'd
Moreover, there are countervailing tendencies at work. Marx demonstrates in Capital, how because of such methods of extraction of Absolute Surplus Value i.e. driving wages below the Value of Labour Power, extending the working day, intensifying the labour process, Capital simply used up what had been ample supplies of Labour-power, released from the land. The higher the rate of profit, the faster accumulation, and with it, the higher the demand for Labour-power. At a certain point demand and supply tilt in workers favour, and wages have to rise at least to the level of the Value of Labour Power. See:Wages, prices & profits. But, as Marx again points out there are countervailing tendencies to these countervailing tendencies. Not only is capital able to mobilise this latent reserve army of labour – landless labourers, immigrants, women workers, children - but, the very process of Capitalist development, itself creates a reserve, because even outside large technological developments, the gradual improvement in technique, the gains from economies of scale, and so on, mean that higher levels of output can be achieved without a proportionate increase in the demand for labour-power. The more workers are able to utilise a temporary market advantage to raise wages, the more capital will seek to find ways to replace Labour-power.
ReplyDeleteAnd, although, I have referred to the fact that maintaining the level of Aggregate demand by using Surplus Value to buy luxury goods might not be a solution for capital, in the longer term it can be. Again as Marx sets out in the Grundrisse, the history of Capitalism has been one in which luxury goods, which were previously the preserve of the rich, become through increased production, and lowered costs, mass market items.
On Money and Money Supply, just to cover this again. For a Marxist the basic position is this. In an economy Total Value circulated determines the amount of money required for that circulation. The physical amount of money required in circulation is then determined by the Velocity of Circulation. So in a Contribution To A Critique of Political economy, Marx sets out the basic relationship which determines how much money is required.
ReplyDeleteBut, having said that I don't think it is correct to say that Monetary Policy has no effect on actual economic activity. I think the message of the 1980's/90's, is that under conditions of capacity underutilisation, monetary policy can given the right conditions act to spur borrowing, which in turn can create demand. But, it has limited scope. In the 1980's/90's there were special circumstances that might not be repeated. In short, the period after WWII saw a build up of assets by workers – houses, in particular. In part, debt could only be built up on the basis of securing it against these assets. Secondly, the Value of Labour Power was reduced significantly as a result of a flood of increasingly cheap wage goods imported from Asia. This meant that living standards could rise, whilst the share of wages in total output relatively fell, and profits rose. Monetary policy greased the wheels of this process by inflation, and by stimulating current demand by borrowing from future demand.
I'm also not sure how much Government policy can actually be said to control the things you speak of. The Bond Vigilantes, for example, were able to override the Fed's attempts to determine market rates.
I've just read your further comment on Money. I was not meaning that Money is more than just notes and coins in the sense you have taken it, but in the sense that it is a deeper concept for a Marxist along the lines described above, that is to do with historical specificity, the determination of exchange value and so on. So, as I've written in some of those other posts referred to, for a Marxist the existence of coins in some ancient civilisations is not evidence of the existence of Money in the sense we would attribute to it today, precisely because in the absence of generalised commodity production, and the evaluating of commodities to arrive at Exchange values, there can be no money commodity that acts as a universal equiavalent.