Inflation and the case of the missing profits

Everyone knows that inflation in the United States is increasing. Anyone who has read the news, or for that matter has gone shopping lately. Prices are rising at the fastest rate in decades. The Consumer Price Index rose 8.6 percent in March, which is the highest rate of increase since December 1981 (when it was 8.9 percent).

Clearly, inflation is hurting lots of people—especially the elderly living on fixed incomes and workers whose wages aren’t keeping up the price increases. No mystery there.

The only real mystery is, what’s causing the current inflation? That’s where things gets interesting.

To listen to or read mainstream economists the answer to the whodunnit is workers’ wages. They’re going up too fast, because the level of unemployment is too low and their employers are forced to pay them higher wages. As a result, corporations are compelled to raise their prices. Therefore, something has to be done (like increasing interest rates) to slow down the economy and force more workers into the Reserve Army of the Underemployed and Unemployed.*

That’s exactly how Paul Krugman sees things:

The U.S. economy still looks overheated. Rising wages are a good thing, but right now they’re rising at an unsustainable pace. . .

This excess wage growth probably won’t recede until the demand for workers falls back into line with the available supply, which probably — I hate to say this — means that we need to see unemployment tick up at least a bit.

The amazing thing about Krugman’s story, and that of most mainstream economists, is there’s not a single word about profits. Corporate profits are entirely missing from their story. Inflation is only caused by workers’ wages, not the surplus raked in by U.S. corporations. Which is pretty amazing, given the numbers.

A quick look at the chart at the top of the post shows what’s been going on in the U.S. economy. Workers’ wages (the red line in the chart, the hourly wages of production and nonsupervisory workers) rose during 2021 at an annual average rate of less than 5 percent (ranging from 2.8 percent in the second quarter to 6.4 percent in the final quarter).

And profits? Well, they’ve been growing at astounding rates, magnitudes more than wages. Corporate profits (the light green line) rose during 2021 at an average rate of 40 percent, and the profits of nonfinancial corporations (the dark green line) expanded by even more: 69 percent!

Hmmm. . .

The fact that profits are entirely missing from the mainstream story about inflation reveals a fundamental problem within mainstream economic theories. On one hand, in their macroeconomics, wages and not profits are always the culprit. That’s because they only have a labor market, and not a capital market (much less a profit rate or, for that matter, a rate of surplus-value), when they analyze fluctuations in prices and output. It’s as if corporate profits are only a residual—what is left over in the difference between wages and wage-driven prices. On the other hand, in their microeconomics, profits represent the return to capital, and thus a key component of commodity prices as well as the driver of economic growth.

Such “capital fetishism” means that profits as the return to a thing, capital, play an important role in the mainstream theory of value but then disappear entirely in the macroeconomic story about inflation.

It’s therefore a problem in the basic theories of mainstream economics. And it’s a problem when it comes to their economic policies: anything and everything must be done to keep workers’ wages in check, and (without ever mentioning them) to safeguard corporate profits.

The fact is, once we solve the mystery of the missing profits we can actually tackle the problem of inflation. But neither mainstream economists nor the leaders of corporate America are going to like what we come up with.

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*The Federal Reserve is suggesting that it can raise interest rates to get prices down “without causing a recession.” In fact, according to research from the investment bank Piper Sandler, the Fed raised rates to combat inflation nine different times during the past 60 years, and on eight of those occasions a recession occurred not long after.

Class conflict and economics

A funny thing happened on the way to the recovery from the Pandemic Depression: class conflict is back at the core of economics.

At least, that’s what Martin Sandau (ht: bn) thinks. I beg to differ. But more on that anon. First, let us give Sandau his due. His argument is that the current labor shortages have shifted the balance of power toward workers (an issue I discussed a couple of weeks ago). As a result, economic analysis is starting to change:

What this looks like is the return of something that was exiled from centrist policy debate and mainstream economic analysis for decades: class conflict and its economic consequences. To be precise, we may be witnessing the manifestation of two outmoded ideas: that the relative power of economic classes alters macroeconomic outcomes; and that macroeconomic policy tilts that relative power.

For Sandau, that means a return to the work of Michal Kalecki, especially his theory of the “political aspects of full employment.” Kalecki was a contemporary of John Maynard Keynes but, in contrast to Keynes, Kalecki was well versed in Marxian theory and spent considerable time investigating the relationship between macroeconomics and class conflict. As I explained back in 2010, Kalecki developed a cogent analysis of business opposition to measures designed to achieve full employment:

The reasons for the opposition of the ‘industrial leaders’ to full employment achieved by government spending may be subdivided into three categories: (i) dislike of government interference in the problem of employment as such; (ii) dislike of the direction of government spending (public investment and subsidizing consumption); (iii) dislike of the social and political changes resulting from the maintenance of full employment. . .

Under a regime of permanent full employment, the ‘sack’ would cease to play its role as a disciplinary measure. The social position of the boss would be undermined, and the self-assurance and class-consciousness of the working class would grow. Strikes for wage increases and improvements in conditions of work would create political tension. It is true that profits would be higher under a regime of full employment than they are on the average under laissez-faire; and even the rise in wage rates resulting from the stronger bargaining power of the workers is less likely to reduce profits than to increase prices, and thus adversely affects only the rentier interests. But ‘discipline in the factories’ and ‘political stability’ are more appreciated than profits by business leaders. Their class instinct tells them that lasting full employment is unsound from their point of view, and that unemployment is an integral part of the ‘normal’ capitalist system.

As readers can clearly see, not much has changed since Kalecki published that analysis back in 1943. Employers and their financial backers are still adamantly opposed to government measures designed to move capitalist economies toward full employment.

Sandau is correct in arguing that “conventional economic thinking has little room” for the possibilities outlined by Kalecki. Mainstream economists assume that, when the labor market is in equilibrium (at A), workers are paid a wage equal to their contribution to production. If workers manage to receive wages higher than the equilibrium rate, the result will be unemployment—that is, the improvement in the situation of some workers will come at the expense of other workers. So, there can’t be class conflict within conventional economic thinking.

And there isn’t any class conflict in Sandau’s analysis. That’s because, if workers’ wages rise, capital can respond by raising productivity. Therefore, in his view, “productivity incentives from greater worker power can boost profits as well.”

Problem solved! Except. . .

What Sandau fails to see is that, as productivity increases, the prices of wage goods fall, and capital therefore needs to advance less money to purchase workers’ ability to labor. Capitalist profits rise precisely because the value of labor power falls. Within the confines of capitalism, that’s precisely the option capitalists have, to extract more surplus-value from the workers they employ.

That’s the class conflict that remains missing in Sandau’s analysis as in the rest of conventional economics.

Limits of mainstream economics today

In this post, I continue the draft of sections of my forthcoming book, “Marxian Economics: An Introduction.” The first five posts (here, here, here, here, and here) will serve as the basis for chapter 1, Marxian Economics Today. The text of this post is for Chapter 2, Marxian Economics Versus Mainstream Economics (following on from the previous posts, here, here, here, and here).

Limits of Mainstream Economics Today

Keynes’s criticisms of neoclassical economics set off a wide-ranging debate that came to define the terms of—and, ultimately, the limits of debate within—mainstream economics.

On one side are neoclassical economists, who celebrate the invisible hand and argue that markets are the best way to efficiently allocate scarce resources. On the other side are Keynesian economists, who argue instead for the visible hand of government intervention to move markets toward full employment.

That tension, between the theories and policies of neoclassical and Keynesian economics, is the reason why in most colleges and universities the principles of economics are taught in two separate courses: microeconomics and macroeconomics. Moreover, the tension between the two schools of thought plays out within every area of economics, including (but certainly not limited to) microeconomics and macroeconomics.

One way of understanding the differences between the two approaches is to think about them as conservative and liberal interpretations of mainstream economics. Conservative mainstream economics tend to presume that the basic assumptions of neoclassical economics hold in contemporary capitalism, while liberal mainstream economists think they don’t.

Let’s consider two examples. First, within microeconomics, conservative mainstream economists (such as the late Milton Friedman) believe that individuals make rational decisions within perfectly competitive markets. Therefore, if markets exist, they should be allowed to operate within any regulations; and, if a market doesn’t exist, it should be created. Liberal mainstream economics (such as Joseph Stiglitz), on the other hand, see both individual decisions and markets as being imperfect—because individuals have limited or asymmetric information, some firms have more market power than others, and so on. Therefore, they argue, markets need to be guided to the best outcome.

The second example is from macroeconomics. The view of conservative mainstream economists (such as Thomas J. Sargent) is that capitalism operates at or close to full employment (where, in the chart above, aggregate demand intersects the vertical portion of the aggregate supply curve), whereas liberal mainstream economists (such as Paul Krugman) believe that unregulated markets often lead to considerable unemployment (where aggregate demand intersects the horizontal portion of the aggregate supply curve, at level of output less than full employment).*

To attempt to reconcile the two competing views, many mainstream economists argue for a “middle position”—somewhere between the opposed neoclassical and Keynesian views. There (in the red portion of the aggregate supply curve), mainstream economists find a tradeoff between increases in output and changes in the price level, that is, between inflation and unemployment.

And the predominant view within mainstream economics shifts back and forth between the two poles. Sometimes, as in the years before the crash of 2007-08, mainstream economics moved closer to the neoclassical approach. That’s when policies such as deregulation, privatization, the reduction of government deficits, welfare reform, and so on were all the rage, within both academic and political circles. After the crash, when the neoclassical approach was said to have failed, mainstream economics swung back in other direction. That’s when there were calls for more government intervention and fewer worries about budget deficits and the like.

In the midst of the Pandemic Depression, much the same kind of debate between advocates of the two poles of mainstream economics has been taking place. On one side, conservative mainstream economists have argued in favor of rescuing banks and corporations, such that an economic recovery would “trickle down” to workers and their households. Liberal mainstream economists, on the other hand, have favored direct payments to workers who were furloughed or laid off—an idea that was attacked by their conservative counterparts, because such payments were seen as providing a “disincentive” for workers to return to their jobs.

Every time capitalism enters into crisis, the same kind of debate breaks out between conservative and liberal economists (and, of course, between different groups of politicians and voters).

If mainstream economists are so divided between the two approaches, what in the end unites them into what I have been calling mainstream economics? Like all such labels, it is defined in part by what it includes, and in part by what it excludes.

What mainstream economics includes is the idea that neoclassical and Keynesian approaches establish the limits within which theoretical and policy debates can and should take place. Together, they define what is in the “economic toolkit,” and therefore what it means to “think like an economist.” Moreover, the two groups of economists argue that capitalist markets are the way a modern economy can and should be organized. They may disagree about the relevant approach—for example, the “invisible hand” of free markets versus the “visible hand” of government intervention. But they all agree on the goal: to create the appropriate institutional environment so that capitalist markets work properly.

They also share the view that the only way capitalism operates falls below its general equilibrium, full-employment potential is because of some external “shock.” In other words, all economic downturns, such as recessions and depressions, are due to external causes, not because of anything internal to the normal workings of capitalism.

What the definition of mainstream economics excludes is any approach, such as Marxian economics, that is based on a theoretical approach that lies outside the protocols of neoclassical and Keynesian economics. So, for example, the idea of class exploitation is generally overlooked or ignored within mainstream economics. Similarly, imagining and creating ways of allocating resources other than through capitalist markets are pushed to or beyond the margins by mainstream economists.

Together, the inclusions and exclusions contained within the definition of mainstream economics serve to define what mainstream economists think and do in their theoretical practice as well as in the policy advice they offer.

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*As many contemporary Post Keynesian economists have noted, when neoclassical and Keynesian were combined in a single approach to economics (for example, in the “neoclassical synthesis” in the decades following World War II), many of the critical aspects of Keynes’s writings—including the notion of uncertainty and the idea that much stock market investment was merely speculation and added little to the productive capacity of the “real” economy—were downplayed or ignored altogether.

Beyond the mainstream

In this post, I continue the draft of sections of my forthcoming book, “Marxian Economics: An Introduction.” This, like the previous two posts, is for chapter 1, Marxian Economics Today.

Beyond the Mainstream

This is certainly not the first time people have looked beyond mainstream economics. There is a long history of criticisms of both mainstream economic theory and capitalism from the very beginning. Although students won’t have read about them in traditional economics textbooks.

Those texts are generally written with the presumption there’s only one economic theory and one economic system. The existence of Marxian economics opens up the debate, creating space for both multiple ways of thinking about economics and a variety of different economic systems.

Criticisms of Mainstream Economic Theory

In the history of economic thought, criticisms of the mainstream approach were formulated early on. Adam Smith, David Ricardo, and others (such as Jean-Baptiste Say, Thomas Robert Malthus, and John Stuart Mill) developed classical political economy in the late-eighteenth and early-nineteenth centuries, when the new economic system we now call capitalism was just getting off the ground—and almost immediately their approach was debated and challenged.

The classical political economists developed a labor theory of value to analyze the value of commodities, the goods and services that were bought and sold on markets. They utilized that labor theory of value to then argue that capitalism, based on increasing productivity and free international trade, would lead to the growth of industry and an increase in the wealth of nations.

The early critics of classical political economy included a wide variety of writers, especially in the United Kingdom and Western Europe, from Thomas Carlyle (an English Romantic who expressed his opposition to the market system, because it rewarded “salesmanship” and not hard work) and John Barton (a British Quaker who argued that the introduction of labor-saving machinery would permanently displace workers who would not be absorbed by other branches of industry) to Jean-Charles-Léonard Simonde de Sismondi (a Swiss historian who viewed capitalism as being detrimental to the interests of the poor and particularly prone to crisis brought about by an insufficient general demand for goods) and Thomas Hodgskin (an English socialist, critic of capitalism, and defender of both free trade and early trade unions).

In the middle of the nineteenth century, Marx (along with his friend and frequent collaborator Friedrich Engels) became a close student of classical political economy, developing his now-famous critique. During the course of his writings, he expressed both admiration for and opposition to the methods and the conclusions of the classical political economists. Over the course of this book, we will examine in considerable detail the ways Marx and later Marxian economists both built on and broke from classical political economy.

But the debate about early mainstream economics didn’t stop there.

In the late 1800s, a new school of economic thought, neoclassical economics was created, which represented both an extension of and break from classical political economy, although in a manner quite different from that of Marx. The early neoclassicals—such as William Stanley Jevons, Karl Menger, and Léon Walras—rejected the classicals’ labor theory of value, in favor of consumer utility, but accepted the classicals’ celebration of capitalism’s rising productivity and free trade. Hence, both the “neo” and the “classical” of their name.

The neoclassical economists’ basic argument was that, if all markets are allowed to operate freely, all consumers would maximize utility, all firms would maximize profits, and the economy as a whole would reach full employment. The “invisible hand” became the central thesis of contemporary mainstream microeconomics.

And it had general validity within mainstream economics until the Great Depression of the 1930s, when in the United States and elsewhere capitalist economies crashed and the unemployment rate soared to over 25 percent. Not surprisingly, the neoclassical orthodoxy was challenged at the time by many economists, including John Maynard Keynes. Keynes’s idea was that, because of fundamental uncertainty, especially on the part of investors, it was highly likely that capitalist economies would regularly operate at less-than-full employment. The need for the “visible hand” of government intervention to achieve full employment was the basis of the mainstream macroeconomics.

Attempts to combine neoclassical microeconomics and Keynesian macroeconomics—the invisible hand of markets and the visible hand of government fiscal and monetary policy—have defined mainstream economics ever since. That’s why, today, in most departments, mainstream economics is still taught in two separate courses, microeconomics and macroeconomics. And very few of them include any references to other approaches, especially Marxian economics.

Criticisms of Capitalism

Just as mainstream economic theory has been challenged from the very beginning, so has capitalism, the economic and social system celebrated by mainstream economists.

Perhaps the most famous early mass movement against capitalism was directed by the Luddites, a radical faction of English textile workers who in the early-nineteenth century attacked mills and destroyed textile machinery as a form of protest against low pay and harsh working conditions. While the name has come to be associated with anyone opposed to the use of new technologies, the actual historical movement objected to machinery that was introduced to speed up production and change the terms of negotiation in favor of employers and against workers.

Later, when workers were able to form labor unions—against a great deal of opposition from their employers and governments that backed those employers—they developed new strategies to challenge the ways they were considered and treated within capitalism. They often demanded higher pay, more secure employment, additional benefits, and even a say in how the enterprises in which they worked were managed. Depending on the situation, they set up picket lines, went on strike, occupied their workplaces, and organized unemployed workers. In many cases, while the workers were primarily concerning with meeting their daily needs, their activities were treated as attacks on capitalism itself.

That was certainly the case in the campaign for an eight-hour workday, which reached its peak in May 1886 in Haymarket Square in Chicago. It began as a peaceful rally to limit the length of the workday (at the time, workers were regularly required to labor much longer—often 10, 12, or more hours a day, without overtime pay) and then, when the police intervened to disperse the gathering, it became a full-on riot with a number of casualties. Ironically, in commemoration of the rally, 1 May has come to be celebrated around the world as Labor Day—except as it turns out, in the United States, where Labor Day was pushed back to the first Monday in September and no law has ever been passed to limit the length of the workday.

While many of the movements that have challenged capitalism have emerged from, been based on, or allied with workers and labor unions, many others have not. Students may recognize the names of some of the early utopian socialists and utopian experiments (although you probably read about them in courses other than economics): Charles Fourier, Henri de Saint-Simon, Robert Owen, and Henry George. Beginning in the nineteenth century, in the United States and around the world, groups of individuals (often, but not always, influenced by various strands of socialist thinking) formed “intentional communities” and cooperative societies. The Shakers (in the United States) and Mondragón (in Spain) are perhaps the best known.

And the list of critics of capitalism—both individuals and movements—goes on. It includes, of course, a wide variety of left-wing populist, socialist, and communist political parties (some of which have come to power, either through democratic elections or revolutions). A fundamental questioning of the capitalist system has also emerged from and influenced many other individuals, groups, and traditions, from civil rights leaders (such as Martin Luther King, Jr., in the United States) and religious groups (for example, the liberation theologians in Latin America) to independence movements (Angola and Mozambique are cases in point) and transnational protests (like Occupy Wall Street).

What can we conclude from this brief survey? From the very beginning, both mainstream economic thought and capitalism have brought forth their critical others.

Mainstream macroeconomics—pandemic edition

Right now, the United States is mired in an economic depression, the Pandemic Depression, not dissimilar to what happened in the 1930s and again after the crash of 2007-08.

Real (inflation-adjusted) gross domestic product contracted by an annual rate of 31.7 percent in the second quarter of 2020 (according to the Bureau of Economic Analysis) and at least 27 million American workers are currently unemployed (counting workers continuing to receive some kind of unemployment benefits, according to my own calculations).* By all accounts—from both macroeconomic data and anecdotes reported in the media—the current situation is an economic and social disaster equivalent to what the United States went through during the first and second Great Depressions.

The question is, does mainstream macroeconomics have anything to offer in terms of insights about the causes of the current crises or what should be done to solve them?

Many readers are, I’m sure, skeptical, given the abysmal track record of mainstream macroeconomic thinking in the United States. Going back just a bit more than a decade, to the Second Great Depression, it’s clear that mainstream macroeconomists failed on all counts: they didn’t predict the crash; they didn’t even include the possibility of such a crash within their basic theory or models; and they certainly didn’t know what to do once the crash occurred.

Can they do any better with the current depression?

The example I want to use was recently posted by Harvard’s Greg Mankiw, the author of the best-selling macroeconomics textbook on the market. I know it’s not the most sophisticated (or, if you prefer, technical or detailed) discussion out there but it does matter: next year, thousands upon thousands of students will receive their basic training in mainstream macroeconomic theory and its application to the Pandemic Depression from Mankiw’s text.

It should come as no surprise that Mankiw uses the macroeconomic model—of aggregate demand and supply—he has so laboriously built up over the course of many chapters to examine what he calls “the economic downturn of 2020.” His basic argument is that, first, aggregate demand declined (shifting to the left, from AD1 to AD2) due to a decline in the velocity of money (one of the exogenous variables that, in mainstream moderls, determines aggregate demand), and second, the long-run aggregate supply curve declines (shifts left, from LRAS1 to LRAS2), while the short-run aggregate supply curve (SRAS) stays the same. The result is a decline in output (the left-facing arrow at the bottom of the diagram).

This is all pretty straightforward stuff. Except: Mankiw wants to argue that it’s the “natural level of output” as represented by the long-run aggregate supply curve, not the perfectly elastic (or horizontal) short-run aggregate supply curve, that shifts to the left. Huh?

His only explanation is that

When a pandemic strikes and many businesses are temporarily closed, aggregate demand falls because people are staying at home rather than spending at those businesses. Because those businesses cannot produce goods and services, the economy’s potential output, as reflected in the LRAS curve, falls as well. The economy moves from point A to point B.

The problem is, there’s nothing in the way Mankiw has derived the long-run aggregate supply curve—from given resources (land, labor, and capital) and technology—that has changed. Instead, the shutdown of many businesses merely means that there’s enormous excess capacity in the economy. The “natural rate of output”—the level of output corresponding to the “natural level of unemployment”—remains as it was.

But Mankiw is trapped by his own model. The benefit of analyzing the current depression in terms of a shift in the long-run aggregate supply curve is that, as soon as the shutdown is lifted, the supply curve shifts back to the right and the economy moves back to its old long-run equilibrium. Problem solved!

And if the long-run aggregate supply curve doesn’t shift back to the right? Well, then, U.S. capitalism has in fact destroyed its resources—especially labor power—and the economy doesn’t recover, at least anytime soon.

Moreover, if he’d shifted the short-run aggregate supply curve (up in the diagram), well, then we’re in the land of inflation—with the price level rising—an even more severe decline in economic activity (smaller than B), and no return to long-run equilibrium. But prices are not, in general rising, which is why he uses the horizontal short-run aggregate supply curve in the first place (to reflect fixed prices, the result of monopoly enterprises).

Not only is Mankiw trapped by the logic of his own model. His analysis—both the model and the accompanying text—leaves out much of what is interesting and important about the Pandemic Depression.

We’ve seen, for example, that U.S. stock markets, after an initial downturn, have soared to new record highs, even as national output declines and unemployment reached numbers of workers not seen since the Great Depression of the 1930s. That doesn’t even warrant a mention in Mankiw’s analysis—which involves a discussion of assistance to workers and small businesses but nothing about the trillions of dollars available to the Treasury and Federal Reserve to bailout large corporations, keep credit flowing, and boost equity markets.

But there’s an even larger problem in Mankiw’s basic model: all downturns, whether recession or depressions, are the result of “accidents.”

Some surprise event shifts aggregate supply or aggregate demand, reducing production and employment. Policymakers are eager to return the economy to normal levels of production and employment as quickly as possible.

And the Pandemic Depression? Well, according to Mankiw, it was “by design.” But the distinction is meaningless: in all cases, the downturn occurs because of something outside the model—by some kind of “shock.”

So, capitalism itself is absolved. In Mankiw’s model, and in mainstream macroeconomics more generally, there’s nothing in capitalism itself—how profit rates behave, what decisions capitalists make, the fragility of the financial sector, obscene levels of inequality, and so on—that causes the economy to collapse.

If we step outside the confines of Mankiw’s model, then we can begin to see how U.S. capitalism, while it did not create the novel coronavirus, certainly produced and exacerbated the destructive effects of the pandemic on the American economy. For example, after decades of neglect of the public healthcare system and attempts to shore up the private provision of healthcare in the United States, the country was ill-prepared to diagnosis and contain the pandemic. Even more, it worsened the already-grotesque inequalities of healthcare—as well as incomes, wealth, and household finances—it had originally created.

That same economic system also left in the hands of private employers—not the government or workers themselves—the decisions of whether to keep workers employed or, as happened across the country, to furlough or lay off tens of millions of their employees. Any to add to the misery: many of the workers who were supposed to be on temporary layoffs are now finding they’ve lost their jobs permanently and are spending more and more time attempting to find new jobs.

None of those pre-existing economic conditions figures in Mankiw’s analysis. They can’t, because they don’t exist within mainstream macroeconomics, which has been studiously constructed precisely to provide a hydraulic model of macroeconomic equilibrium—starting with full employment and price stability, one or another external “shock” that moves the economy away from there, and then automatic mechanisms to return the economy to its original position—on the basis of aggregate demand and aggregate supply.

And that’s how we get Mankiw’s excuse for the Pandemic Depression:

given the circumstances, a large economic downturn was arguably the best outcome that could be achieved.

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*Millions more workers are either unemployed but not receiving benefits or involuntarily underemployed, working part-time (often with cuts in pay and benefits) when they prefer to be working full-time.

Stiglitz vs. Summers

Mark Tansey, “Source of the Loue” (1988)

Two giants of mainstream economics—Joseph Stiglitz and Lawrence Summers—have been engaged in an acrimonious, titanic battle in recent weeks. The question is, what’s it all about? And, even more important, what’s at stake in this debate?

At first glance, the intense, even personal back-and-forth between Stiglitz and Summers seems a bit odd. Both economists are firmly in the liberal wing of mainstream economics and politics—as against, for example, Gene Epstein (an Austrian economist, who accuses Stiglitz of regularly siding with left-wing populists like Hugo Chávez) or John Taylor (a committed supply-sider, who has long been suspicious of “demand-side discretionary stimulus packages”). Both Stiglitz and Summers have pointed out the limitations of monetary policy, especially in the midst of deep economic recessions, and have favored relatively large fiscal-policy interventions, a hallmark of mainstream liberal economic policy.

One might be tempted to see it as merely a clash of outsized egos, which of course is not at all rare among mainstream economists. Their exaggerated sense of self-importance and intellectual arrogance are legion. Neither Stiglitz nor Summers has ever been accused of being a shrinking-violet when it comes to debates in the many academic and policy-related positions they’ve held.* And there’s certainly a degree of personal animus behind the current debate. Apparently, Summers [ht: bn] successfully lobbied in 2000 for Stiglitz’s removal from the World Bank, reportedly as a condition of the reappointment of Jim Wolfensohn as President of the World Bank. And, in 2013, Stiglitz came out strongly in favor of Janet Yellen, over Summers, for head of the Federal Reserve.**

That’s certainly part of the story. And the personal attacks and evident animosity from both sides have attracted a great deal attention of onlookers. But I think much more is at stake.

The current debate began with the critique Stiglitz leveled at the notion of “secular stagnation,” which Summers has championed starting in 2013 as an explanation for the slow recovery of the U.S. economy after the crash of 2007-08. The worry among many mainstream economists has been that, given the severity and duration of the Second Great Depression, capitalism could no longer deliver the goods.*** In particular, Summers invoked the specter of persistently slow growth, which had originally been put forward in the midst of the first Great Depression by Alvin Hansen, created by demography: the decrease in the number of available workers, itself a result of the declines in the rate of population growth and the labor force participation rate. The worry is that, looking forward, there simply won’t be enough workers to sustain the rates of potential economic growth we saw in the years leading up to the most recent crisis of capitalism. In the meantime, Summers, in traditional Keynesian fashion, expressed his support for raising the level of aggregate demand, through public and private spending, even at low real interest rates (which, in his view, were incapable of fulfilling their traditional role of boosting spending).****

Stiglitz for his part has dismissed the idea of secular stagnation, as “an excuse for flawed economic policies” (especially the inadequate stimulus package proposed and enacted by the administration of Barack Obama), and put forward an alternative analysis for capitalism’s slow growth problem: its inability to manage structural transformations of the economy. According to Stiglitz, the shift from manufacturing-led growth to services-led growth characterized the U.S. economy in the years before the most recent crash, analogous to the manner in which the crisis in agriculture “led to a decrease in demand for urban goods and thus to an economy-wide downturn” in the lead-up to the depression of the 1930s. Thus, in his view, World War II brought about a structural transformation in the United States (“as the war effort moved large numbers of people from rural areas to urban centers and retrained them with the skills needed for a manufacturing economy”) but nothing similar was undertaken in the wake of the crash of 2007-08.

The Obama administration made a crucial mistake in 2009 in not pursuing a larger, longer, better-structured, and more flexible fiscal stimulus. Had it done so, the economy’s rebound would have been stronger, and there would have been no talk of secular stagnation.

These are the terms of the theoretical debate, then, between Stiglitz and Summers: a focus on sectoral shifts versus a worry about secular stagnation. The first concerns the way the private forces of American capitalism have been inept in handling structural transformations of the economy, while the second focuses on ways in which “the private economy may not find its way back to full employment following a sharp contraction.”

For my part, both stories have an important role to play in making sense of both economic depressions—the first as well as the second. The problem is, neither Stiglitz nor Summers has presented an analysis of how American capitalism created the conditions for either crash. Stiglitz does not explain how the crisis in agriculture in the 1920s or the move away from manufacturing in recent decades was created by tendencies within existing economic institutions. Similarly, Summers does not conduct an analysis of the changes in U.S. capitalism that, in addition to producing lower growth rates, led to the massive downturn beginning in 2007-08. Their respective approaches are characterized by exogenous event rather than the endogenous changes leading to instability one might look for in a capitalist economy.

Moreover, both Stiglitz and Summers presume that the appropriate stimulus project will fulfill the mainstream macroeconomic utopia characterized by levels of output and a price level that corresponds to full employment and price stability. There is nothing in either of their approaches that recognizes capitalism’s inherent instability or its tendency, even in recovery, of generating one-sided outcomes. For Stiglitz, “the challenge was—and remains—political, not economic: there is nothing that inherently prevents our economy from being run in a way that ensures full employment and shared prosperity.” Similarly, Summers emphasizes the way “fiscal policies and structural measures to support sustained and adequate aggregate demand” can overcome the problems posed by secular stagnation. In other words, both Stiglitz and Summers redirect attention from capitalism’s own tendencies toward instability and uneven recoveries and focus instead on the set of economic policies that in their view are able to create full employment and price stability.

Finally, while Stiglitz and Summers mention en passant the problem of growing inequality, neither takes the problem seriously, at least in terms of analyzing the conditions that led to the crash of 2007-08—or, for that matter, the lopsided nature of the recovery. There’s nothing in the debate (or in their other writings) about how rising inequality across decades, based on stagnant wages and record profits, served to dismantle government regulations on the financial sector (because those who received the profits had both the means and interest to do so) and to propel the tremendous growth (on both the demand and supply sides) of financial activities within the U.S. economy. Nor is there a discussion of how focusing on the recovery of banks, large corporations, and the incomes and wealth of a tiny group at the top was based on a deterioration of the economic and social conditions of everyone else—much less how a larger stimulus package would have produced a substantially different outcome.

The fact is, the debate between Stiglitz and Summers is based on a discussion of terms and a mode of analysis that are firmly inscribed within the liberal wing of mainstream economics. Focusing on the choice between one or the other merely to serves to block, brick by brick, the development of much more germane approaches to analyzing the conditions and consequences of the ways American capitalism has been characterized by fundamental instability and obscene levels of inequality—today as in the past.

 

*Stiglitz is a recipient of the John Bates Clark Medal (1979) and the Nobel Prize in Economics (2001). He served as the Chair of Bill Clinton’s Council of Economic Advisers (1995-1997) and Chief Economist at the World Bank (1997-2000). He is currently a professor of economics at Columbia University (since 2001). Summers is former Vice President of Development Economics and Chief Economist of the World Bank (1991–93), senior U.S. Treasury Department official throughout Clinton’s administration (ultimately Treasury Secretary, 1999–2001), and former director of the National Economic Council for President Obama (2009–2010). He is a former president of Harvard University (2001–2006), where he is currently a professor and director of the Mossavar-Rahmani Center for Business and Government at Harvard’s Kennedy School of Government.

**My choice, for what it’s worth, was Federal Reserve Governor Sarah Raskin.

***As I explained in 2016, contemporary capitalism has a slow-growth problem—”because growth is both a premise and promise of a particularly capitalist way of organizing our economic activities.”

****An archive of Summers’s various blog posts on secular stagnation can be found here.

Utopia and work

The goal of mainstream economists is to get everybody to work. As a result, they celebrate capitalism for creating full employment—and worry that capitalism will falter if not enough people are working.

The utopian premise and promise of mainstream economic theory are that capitalism generates an efficient allocation of resources, including labor. Thus, underlying all mainstream economic models is a labor market characterized by full employment.

Thus, for example, in a typical mainstream macroeconomic model, an equilibrium wage rate in the the labor market (W_f, in the lower left quadrant) is characterized by full employment (the supply of and demand for labor are equal, at L_f), which in turn generates a level of full-employment output (Y_f, via the production function, in the lower right quadrant) and a corresponding level of prices (P₀, in the upper quadrants). If the money wage is flexible it is possible to ignore the top left quadrant, because, in that case, the equilibrium real wage, employment and output are W_f, L_f and Y_f, respectively, whatever the price level. With flexible money wages, the aggregate supply curve is independent of the price level and is represented by Y_FY_F.

That’s the neoclassical version of the story. The Keynesian alternative is that the aggregate supply curve is relatively elastic below full employment and the wage rate is fixed by institutions, and therefore is not perfectly flexible. In such a case, aggregate demand determines the level of output, which will normally fall below the full-employment level.

And so we have the longstanding argument between the two wings of mainstream economics—between the invisible hand of flexible wages and the visible hand of government spending. But, equally important, what the two theories of macroeconomics have in common is the ultimate goal: full employment. In other words, both groups of economists presume that the aim of capitalism is to generate full employment and that, with the appropriate policies—free markets for the neoclassicals, government intervention for the Keynesians—capitalism is capable of putting everyone to work.

But the argument also goes in the opposite direction: capitalism works best when everyone is working. That’s because capitalist growth (e.g., in terms of Gross Domestic Product per capita, the green line in the chart, measured on the left) is predicated on the growth of the labor force (the the red line, measured on the right).

Mainstream economists also argue that a low work rate is an important cause of low incomes and high poverty. They argue that, when considering different policy interventions for this population—including improving educational attainment, raising the minimum wage, and increasing the number of two-earner families—the most beneficial intervention for improving incomes is to assume that all household heads work full-time.

Finally, mainstream economists argue that, in addition to increasing incomes and decreasing poverty, work has an additional benefit: it gives people dignity and a sense of self-worth. The idea, as articulated for example by Brad DeLong, is that having a job gives workers an honorable place in society, which presumably they are deprived of if they receive some kind of government assistance—whether in the form of payments from one or another anti-poverty program or a universal basic income. “Just giving people money” (according to Eduardo Porter) disrupts the incentive to work and undermines the “social, psychological, and economic anchor” associated with having a job.

That’s why there’s such an intense debate these days over the participation rate of U.S. workers. Even though the unemployment rate has fallen to historically low levels (and now stands at 3.8 percent), the lack of participation—whether measured in terms of the labor force participation rate (the blue line in the chart) or the employment-population ratio (the red line)—remains much lower than it was a couple of decades ago.* According to mainstream economists, that’s why rates of growth in output and incomes have slowed. There simply aren’t enough people working.

Once again, there’s an ongoing discussion among mainstream economists about the causes of that decline and what to do about it. More conservative mainstream economists tend to focus on the supply side of the labor market and the unwillingness of workers to make themselves available—mostly because they’re benefiting from some part of the social safety net (such as disability insurance, welfare, or government health insurance). Liberal mainstream economists also worry about the supply side (especially, for example, when it comes to women, who might not be able to work because they don’t have adequate childcare) but put more emphasis on the demand side (for example, the elimination of specific kinds of jobs based on international trade, automation, or the effects of economic downturns). Underlying this debate is a shared presumption that more people working will be better for them and for the economy as a whole.

Even portions of the Left accept the idea that the goal is to move toward more work. Thus, for example, both modern monetary theorists and Bernie Sanders argue in favor of a government job guarantee. The idea is that, if private employers can’t or won’t make the decisions to hire workers and create full employment, then the government needs to step in, as the “employer of last resort.” Again, the presumption—shared with those in both wings of mainstream economics—is that the goal of the current economic system and appropriate economic policy is get more workers to work more.

The utopianism of full employment is so entrenched, as a seemingly uncontested common sense, it’s difficult to imagine a different utopian horizon. But there is one, which emerges from at least three different theoretical and political traditions.

In the Marxian tradition, more work also means more surplus labor, which benefits all those who manage to get a cut of the surplus—but not workers themselves, who fall increasingly behind their employers and others in the small group at the top. That’s because, as employment increases, more workers are performing both necessary and surplus labor. Therefore, even assuming the rate of surplus extraction remains constant, the total amount of surplus created by workers increases. But, of course, the rate itself often increases—for example, as a result of competition among capitalists, who find ways of increasing productivity, which tends to lower the amount they have to pay to hire their workers (as I explain in more detail here). So, what appears to be an unalloyed good in the mainstream tradition—more jobs and more workers—is an economic and social disaster from a Marxian perspective. More workers produce more surplus, which is used to create a growing gap between those at the top and everyone else.

Then there’s the broader socialist tradition, which attacked the capitalist work ethic and claimed “The Right to Be Lazy.” Here’s Paul LaFargue back in 1883:

Capitalist ethics, a pitiful parody on Christian ethics, strikes with its anathema the flesh of the laborer; its ideal is to reduce the producer to the smallest number of needs, to suppress his joys and his passions and to condemn him to play the part of a machine turning out work without respite and without thanks.

And LaFargue criticized both economists (who “preach to us the Malthusian theory, the religion of abstinence and the dogma of work”) and workers themselves (who invited the “miseries of compulsory work and the tortures of hunger” and need instead to forge a brazen law forbidding any man to work more than three hours a day, the earth, the old earth, trembling with joy would feel a new universe leaping within her”).

Today, in the United States and around the world, the capitalist work ethic still prevails.

Workers are exhorted to search for or keep their jobs, even as wage increases fall far short of productivity growth, inequality (already obscene) continues to rise, new forms of automation threaten to displace or destroy a wage range of occupations, unions and other types of worker representation have been undermined, and digital work increasingly permeates workers’ leisure hours.

The world of work, already satirized by LaFargue and others in the nineteenth century, clearly no longer works.

Not surprisingly, the idea of a world without work has returned. According to Andy Beckett, a new generation of utopian academics and activists are imagining a “post-work” future.

Post-work may be a rather grey and academic-sounding phrase, but it offers enormous, alluring promises: that life with much less work, or no work at all, would be calmer, more equal, more communal, more pleasurable, more thoughtful, more politically engaged, more fulfilled – in short, that much of human experience would be transformed.

To many people, this will probably sound outlandish, foolishly optimistic – and quite possibly immoral. But the post-workists insist they are the realists now. “Either automation or the environment, or both, will force the way society thinks about work to change,” says David Frayne, a radical young Welsh academic whose 2015 book The Refusal of Work is one of the most persuasive post-work volumes. “So are we the utopians? Or are the utopians the people who think work is going to carry on as it is?”

I’m willing to keep the utopian label for the post-work thinkers precisely because they criticize the world of work—as neither natural nor particularly old—and extend that critique to the dictatorial powers and assumptions of modern employers, thus opening a path to consider other ways of organizing the world of work. Most importantly, post-work thinking creates the possibility of criticizing the labor involved in exploitation and thus of creating the conditions whereby workers no longer need to succumb to or adhere to the distinction between necessary and surplus labor.

In this sense, the folks working toward a post-work future are the contemporary equivalent of the “communist physiologists, hygienists and economists” LaFargue hoped would be able to

convince the proletariat that the ethics inoculated into it is wicked, that the unbridled work to which it has given itself up for the last hundred years is the most terrible scourge that has ever struck humanity, that work will become a mere condiment to the pleasures of idleness, a beneficial exercise to the human organism, a passion useful to the social organism only when wisely regulated and limited to a maximum of three hours a day; this is an arduous task beyond my strength.

And there’s a third tradition, one that directly contests the idea that participating in wage-labor is intrinsically dignified.

According to Friedrich Nietzsche (in his 1871 preface to an unwritten book, “The Greek State”), the dignity of labor was invented as one of the “needy products of slavedom hiding itself from itself.” That’s because, in Nietzsche’s view (following the Greeks), labor is only a “painful means” for existence and existence (as against art) has no value in itself. Therefore, “labour is a disgrace.”

Accordingly we must accept this cruel sounding truth, that slavery is of the essence of Culture; a truth of course, which leaves no doubt as to the absolute value of Existence.  This truth is the vulture, that gnaws at the liver of the Promethean promoter of Culture.  The misery of toiling men must still increase in order to make the production of the world of art possible to a small number of Olympian men.

And if slaves—or, today, wage-workers—no longer believe in the “dignity of labour,” it falls to the likes of both conservatives and liberals to ignore the “disgraced disgrace” of labor and create the necessary “conceptual hallucinations.” And then, on that basis, to suggest the appropriate government policies such that the “enormous majority [will], in the service of a minority be slavishly subjected to life’s struggle, to a greater degree than their own wants necessitate.”

Nietzsche believed that, in the modern world, the so-called dignity of labor was one of the “transparent lies recognizable to every one of deeper insight.” Apparently, neither wing of mainstream economists (nor, for that matter, many today on the liberal-left) has been able to formulate or sustain such insight.

Contesting the utopianism of full employment with a different utopian horizon creates the possibility of imagining and creating a different world—in which work acquires different meanings, in which the distinction between necessary and surplus is redefined and perhaps erased, and for the first time in modern history workers are no longer forced to have the freedom to sell their ability to work to someone else and achieve the right to be lazy.

 

*The Bureau of Labor Statistics calculates the labor force participation rate as the share of the 16-and-over civilian noninstitutional population either working or willing to work. Simply put, it is the portion of the population that is currently employed or looking for work. It differs from both the unemployment rate (the number of unemployed divided by the civilian labor force) and the employment-population ratio (the ratio of total civilian employment to the 16-and-over civilian noninstitutional population).

 

Utopia and economic development

From the very beginning, the area of mainstream economics devoted to Third World development has been imbued with a utopian impulse. The basic idea has been that traditional societies need to be transformed in order to pass through the various stages of growth and, if successful, they will eventually climb the ladder of progress and achieve modern economic and social development.

Perhaps the most famous theory of the stages of growth was elaborated by Walt Whitman Rostow in 1960, as an answer to the following questions:

Under what impulses did traditional, agricultural societies begin the process of their modernization? When and how did regular growth become a built-in feature of each society? What forces drove the process of sustained growth along and determined its contours? What common social and political features of the growth process may be discerned at each stage? What forces have determined relations between the more developed and less developed areas?

Rostow’s model postulated that economic growth occurs in a linear path through five basic stages, of varying length—from traditional society through take-off and finally into a mature stage of high mass consumption.

While Rostow’s model and much of mainstream development theory can trace its origins back to Adam Smith—through the emphasis on increasing productivity, the expansion of markets, and the definition of development as the growth in national income—the development models that were prevalent in the immediate postwar period presumed that the pre-conditions growth were not automatic, but would have to be engineered through government intervention and foreign aid.

Mainstream modernization theory was created in the 1950s—and thus after the first Great Depression and World War II, when world trade had been severely disrupted, and in the midst of decolonization and the rise of the Cold War, when socialism and communism were attractive alternatives to many of the national liberation movements in the Global South. It was a determined effort, on the part of academics and policymakers in the United States and Western Europe, to showcase capitalist development and make the economic and social changes necessary in the West’s former colonies to initiate the transition to modern economic growth.*

The presumption was that government intervention was required to disrupt the economic and social institutions of so-called traditional society, in order to chart a path through the necessary steps to shift the balance from agriculture to industry, create national markets, build the appropriate physical and social infrastructure, generate a domestic entrepreneurial class, and eventually raise the level of investment and employ modern technologies to increase productivity in both rural and urban areas.

That was the time of the Big Push, Unbalanced Growth, and Import-Substitution Industrialization. Only later, during the 1980s, was development economics transformed by the successful pushback from the neoclassical wing of mainstream economics and free-market policymakers. The new orthodoxy, often referred to as the Washington Consensus, focused on privatizing public enterprises, eliminating government regulations, and the freeing-up of trade and capital flows.

Throughout the postwar period, mirroring the debates in mainstream microeconomic and macroeconomic theory, mainstream development theory has oscillated back and forth—within and across countries—between more public, government-oriented and more private, free-market forms of mainstream development theory and policy. And, of course, the ever-shifting middle ground. In fact, the latest fads within mainstream development theory combine an interest in government programs with micro-level decision-making. One of them focuses on local experiments—using either the randomized-control-trials approach elaborated by Abhijit Banerjee and Esther Duflo or the Millenium Villages Project pioneered by Jeffrey Sachs, which they use to test and implement strategies so that impoverished people in the Third World can find their own way out of poverty. The other is the discovery of the importance of “good” institutions—for example, by Daron Acemoglu—especially the delineation and defense of private-property rights, so that Rostow’s modern entrepreneurs can, with public guarantees but minimal interference otherwise, be allowed to keep and utilize the proceeds of their private investments.

The debates among and between the various views within mainstream development economics have, of course, been intense. But underlying their sharp theoretical and policy-related differences has been a shared utopianism based on the idea that modern economic development is equivalent to and can be achieved as a result of the expansion of markets, the creation of a well-defined system of private property rights, and the growth of national income. In the end, it is the same utopianism that is both the premise and promise of a long line of contributions, from Smith’s Wealth of Nations through Rostow’s stages of growth to the experiments and institutions of today’s mainstream development economists.

The alternatives to mainstream development also have a utopian horizon, which is grounded in a ruthless criticism of the theory and practice of the “development industry.”

One part of that critique, pioneered by among others Arturo Escobar (e.g., in his Encountering Development), has taken on the whole edifice of western ideas that supported development, which he and other post-development thinkers and practitioners regard as a contradiction in terms.** For them, development has amounted to little more than the West’s convenient “discovery” of poverty in the third world for the purposes of reasserting its moral and cultural superiority in supposedly post-colonial times. Their view is that development has been, unavoidably, both an ideological export (something Rostow would willingly have admitted) and a simultaneous act of economic and cultural imperialism (a claim Rostow rejected). With its highly technocratic language and forthright deployment of particular norms and value judgements, it has also been a form of cultural imperialism that poor countries have had little means of declining politely. That has been true even as the development industry claimed to be improving on past practice—as it has moved from anti-poverty and pro-growth to pro-poor and basic human needs approaches. It continued to fall into the serious trap of imposing a linear, western modernizing agenda on others. For post-development thinkers the alternative to mainstream development emerges from creating space for “local agency” to assert itself. In practice, this has meant encouraging local communities and traditions rooted in local identities to address their own problems and criticizing any existing distortions—both economic and political, national as well as international—that limit peoples’ ability to imagine and create diverse paths of development.

The second moment of that critique challenges the notion—held by mainstream economists and often shared by post-development thinkers—that capitalism is the centered and centering essence of Third World development. Moreover, such a “capitalocentric” vision of the economy has served to weaken or limit a radical rethinking of and beyond development.*** One way out of this dilemma is to recognize class diversity and the specificity of economic practices that coexist in the Third World and to show how modernization interventions have, themselves, created a variety of noncapitalist (as well as capitalist) class structures, thereby adding to the diversity of the economic landscape rather than reducing it to homogeneity. This is a discursive strategy aimed at rereading the economy outside the hold of capitalocentrism. The second strategy opens up the economy to new possibilities by theorizing a range of different and potential connections among and between diverse class processes. This forms part of a political project that can perhaps articulate with both old and new social movements in order to create new subjectivities and forge new economic and social futures in the Third World.

The combination of post-development and class-based anti-capitalocentric thinking refuses the utopianism of Third World development, as it constitutes a different utopian horizon—a critique of the naturalizing and normalizing strategies that are central to mainstream development theory and practice in the world today. It therefore leads in a radically different direction: to make noncapitalist class processes and projects more visible, less “unrealistic,” as one step toward dethroning the “development industry” and invigorating an economic politics beyond development.

 

*At the same time, the Western Powers attempted to reconstruct the global institutions of capitalism, through the triumvirate of the World Bank, the International Monetary Fund, and the General Agreement on Tariffs and Trade (predecessor to the World Trade Organization) that was initially hammered out in 1944 in the Bretton-Woods Agreement.

**A short reading list for the post-development critique of mainstream development includes the following: Wolfgang Sachs, ed., The Development Dictionary: A Guide to Knowledge As Power (Zed, 1992); Arturo Escobar, Encountering Development: The Making and Unmaking of the Third World (Princeton, 1995); Gustavo Esteva et al., The Future of Development: A Radical Manifesto (Policy, 2013); and the recent special issue of Third World Quarterly (2017), “The Development Dictionary @25: Post-Development and Its Consequences.”

***Building on a feminist definition of phallocentrism, I along with J.K. Gibson-Graham (in “‘After’ Development: Reimagining Economy and Class,” an essay published in my Development and Globalization: A Marxian Class Analysis) identify capitalocentrism whenever noncapitalism is reduced to and seen merely as the same as, the opposite of, the complement to, or located inside capitalism itself.

Utopia and macroeconomics

From the beginning, mainstream macroeconomics has been a battleground between the visible and the invisible hand.

Keynesian macroeconomics, represented on the left-hand side of the chart above, has an aggregate supply curve with a long horizontal section at levels of output (Y or real GDP) below full employment (Yfe). What this means is that the aggregate demand determines the actual level of output, which can be and often is at less than full employment (e.g., when AD falls from AD1 to AD2, output to Y1, and prices to P2), with no necessary tendency to return to full employment and price stability. Therefore, according to Keynesian economists, the visible hand of government needs to step in and, through a combination of fiscal and monetary policy, move the economy toward full employment (at Yfe) and stable prices (at P1).

Neoclassical macroeconomists, like their classical predecessors, have a very different view of the macroeconomy, which is represented on the right-hand side of the chart. They start with a vertical aggregate supply curve at a level of output corresponding to full employment. Therefore, according to their theory—often referred to as Say’s Law or “supply creates its own demand”—aggregate demand does not determine the level of output; instead, it determines only the price level. Thus, for example, if aggregate demand falls (e.g., from AD1 to AD2), output does not change (it remains at Yfe)—only the price level falls (from P1 to P2). On the neoclassical view, the invisible hand of the market maintains full employment (through the labor market) and reverses price deflation (through the so-called real-balance effect) by boosting aggregate demand (back to AD1 from AD2).

Anyone who has read or heard the intense debates concerning capitalism’s recurrent crises, recently and going back to the 1930s, knows that there are significant theoretical and policy differences between Keynesian and neoclassical macroeconomists. For example, Keynesians focus on uncertainty (especially the uncertain knowledge of investors) and the important role of government (especially fiscal) policy, while neoclassicals emphasize the supply side (especially the role of correct “factor prices,” particularly wages) and the necessity of getting government out of the way of markets (relying, instead, on rules-driven monetary policy).*

But there are equally significant similarities between the two approaches. For example, both Keynesian and neoclassical economists tend to blame economic downturns on exogenous events. There is nothing in either theory that recognizes capitalism’s inherent instability. Instead, mainstream macroeconomists of both stripes direct their attention to equilibrium outcomes—of less-than-full employment in the case of Keynesians, of full employment for neoclassicals—such that only something outside the model can shift the underlying variables and cause the economy to move away from equilibrium. That’s why neither group was able to foresee the crash of 2007-08, let alone the other eighteen recessions and depressions that have haunted capitalism during the past century. Their theories literally don’t include the possibility, endogenously created, of capitalism’s ongoing crises.

There’s another, perhaps even more important, similarity I want to draw attention to here: their shared utopianism. The premise and promise of both Keynesian and neoclassical macroeconomics is that, with the appropriate institutions and policies, capitalism can be characterized by and should be celebrated for achieving full employment and price stability. Those are the shared goals of the two theories. And their criteria of success. Thus, each group of macroeconomists is able to claim a position of expertise when the actual performance of the economy achieves, or at least moves closer and closer to, a utopia characterized by levels of output and a price level that corresponds to full employment and price stability.

It is precisely in this sense that the economic utopianism of mainstream macroeconomics conditions and is conditioned by an epistemological utopianism. Because they know how the macroeconomy works—because of their theoretical and modeling certainty—both Keynesian and neoclassical macroeconomists claim for themselves the mantle of scientific superiority. These are the lords of macroeconomic policy, domestically and internationally, moving back and forth among their positions as academics, corporate advisers, and policy experts. Hence the persistent claim on both sides that, if only the politicians and policymakers listened to them and adopted the correct economic policies, everything would be fine. Not to mention the ongoing complaints, again on the part of both groups of mainstream macroeconomists, that their advice has been ignored.

That, of course, is where the critique of mainstream macroeconomics begins—with a radically different utopian horizon. When the explanations and policies of either side are said to have failed, there’s a shift to the opposing viewpoint. Thus, for example, neoclassical macroeconomics held sway (in the United States and elsewhere) in the run-up to the crash of 2007-08—just as it had in the years preceding the first Great Depression. Leading macroeconomists and their students had moved away from and largely ignored anything that had to do with Keynesian macroeconomics (including, most notably, Hyman Minsky’s writings on financial instability). Then, of course, the tables were turned and at least some mainstream macroeconomists went back and discovered (many for the first time) the theories and policies associated with the Keynesian tradition.

It’s a familiar back-and-forth pendulum swing that we’ve seen in many other countries, in other times. From neoclassical free markets and deregulation to government stimulus and one or another form of reregulation—and back again. But we also need to recognize that the failures of mainstream macroeconomics, when examined from an alternative perspective, have actually succeeded. As I wrote back in 2010, the failure of neoclassical macroeconomists were apparent to many: they

failed to see the onset of the current crises; they have had little to offer in terms of understanding how the crises occurred even after the fact; and they certainly haven’t had much in the way of good policy advice to solve the problems of unemployment, poverty, and inequality. . .

On another level, mainstream economists have succeeded. Not only have they maintained their hegemony within the discipline; their models and policy advice have kept the discussion confined to tinkering with the existing set of capitalist institutions. In terms of policy: a bail-out of Wall Street and a mild set of financial reforms, a small stimulus program, and an expansionary monetary policy. And intellectually: a rediscovery of Keynes and an allowance of behavioral approaches to finance. They haven’t proposed even the public works programs and financial reorganization of the New Deal, let alone an honest debate about capitalism itself.

In this sense, the continued failure of mainstream economists has become a success for capitalism.

That’s why we need to question the shared utopianism of the two sides of mainstream macroeconomics. What has gone missing from much of the current debate, even outside the mainstream, is that full employment and price stability are consistent with the worst abuses of contemporary capitalism. As David Leonhardt recently explained,

The headlines may talk about growth, but we are living in a dark economic era. For most families, income and wealth have stagnated in recent decades, barely keeping pace with inflation. Nearly all the bounty of the economy’s growth has flowed to the affluent.

And if you somehow doubt the economic data, it’s worth looking at the many other alarming signs. “Deaths of despair” have surged. For Americans without a bachelor’s degree, one social indicator after another — obesity, family structure, life expectancy — has deteriorated.

There has been no period since the Great Depression with this sort of stagnation. It is the defining problem of our age, the one that aggravates every other problem. It has made people anxious and angry. It has served as kindling for bigotry. It is undermining America’s vaunted optimism.

In fact, an even stronger argument can be made: the various attempts to move the economy toward full employment and price stability have created the conditions whereby capitalism has both broadened and deepened its presence and made the lives of the vast majority of people even more unstable and insecure.

The utopianism of mainstream macroeconomics represents a dystopia for “most families” attempting to survive within contemporary capitalism.

What’s left then is a critique of the assumptions and consequences of mainstream macroeconomics—of both neoclassical and Keynesian economic theories. The goal is not just to tinker with the theories (e.g., by bringing finance into the discussion) or the policies (such as technocratic changes to the tax code and raising the level of productivity). Recognizing how narrow the existing discourse has become means we need to question the entire edifice of mainstream macroeconomics, including its utopian promise of full employment and price stability.

Only then can we begin to recognize how bad things have gotten under both the successes and failures of mainstream macroeconomics and to imagine and invent a radically different set of economic institutions.

That’s the only utopian horizon currently worth pursuing.

 

*Throughout I refer to two groups of Keynesian and neoclassical macroeconomists. But, of course, both theories have changed over time. Today, the two opposing sides of mainstream macroeconomics are constituted by new Keynesian and new classical theories, with increased attention to the “microfoundations” of macroeconomics. The former emphasizes market imperfections (such as price stickiness and imperfect competition), while the latter dismisses the relevance of market imperfections (and emphasizes, instead, flexible prices and rational expectations). And then, of course, there’s the ever-shifting middle ground, which is the basis of a macroeconomics according to which new Keynesian and new classical are both valid, at different points in the business cycle. Like the earlier neoclassical synthesis, the middle ground of “new consensus macroeconomics” is the approach presented to most students of economics.

Global rentier capitalism

Mainstream economics lies in tatters. Certainly, the crash of 2007-08 and the Second Great Depression called into question mainstream macroeconomics, which has failed to provide a convincing explanation of either the causes or consequences of the most severe crisis of capitalism since the Great Depression of the 1930s.

But mainstream microeconomics, too, increasingly appears to be a fantasy—especially when it comes to issues of corporate power.

Neoclassical microeconomics is based on a set of models that assume perfect competition. What that means, as my students learned the other day, is that, while in the short run firms may capture super-profits (because price is greater than average total cost, at P1 in the chart above), in the “long run,” with free entry and exit, all those extra-normal profits are competed away (since price is driven down to P2, equal to minimum average total cost). That’s why the long run is such an important concept in neoclassical economic theory. The idea is that, starting with perfect competition, neoclassical economists always end up with. . .perfect competition.*

Except, of course, in the real world, where exactly the opposite has been occurring for the past few decades. Thus, as the authors of the new report from the United Nations Conference on Trade and Development have explained, there is a growing concern that

increasing market concentration in leading sectors of the global economy and the growing market and lobbying powers of dominant corporations are creating a new form of global rentier capitalism to the detriment of balanced and inclusive growth for the many.

And they’re not just talking about financial rentier incomes, which has been the focus of attention since the global meltdown provoked by Wall Street nine years ago. Their argument is that a defining feature of “hyperglobalization” is the proliferation of rent-seeking strategies, from technological innovations to mergers and acquisitions, within the non-financial corporate sector. The result is the growth of corporate rents or “surplus profits.”**

As Figure 6.1 shows, the share of surplus profits in total profits grew significantly for all firms both before and after the global financial crisis—from 4 percent during the 1995-2000 period to 19 percent in 2001-2008 and even higher, to 23 percent, in 2009-2015. The top 100 firms (ranked by market capitalization) also saw the growth of their surplus profits, from 16 percent to 30 percent and then, most recently, to 40 percent.***

The analysis suggests both that surplus profits for all firms have grown over time and that there is an ongoing process of bipolarization, with a growing gap between a few high-performing firms and a growing number of low-performing firms.

That conclusion is confirmed by their analysis of market concentration, which is presented in Figure 6.2 in terms of the market capitalization of the top 100 nonfinancial firms between 1995 and 2015. The red line shows the actual share of the top 100 firms relative to their hypothetical equal share, assuming that total market capitalization was distributed equally over all firms. The blue line shows the observed share of the top 100 firms relative to the observed share of the bottom 2,000 firms in the sample.

Both measures indicate that the market power of the top companies increased substantially over the 1995-2015 period. For example, the combined share of market capitalization of the top 100 firms was 23 times higher than the share these firms would have held had market capitalization been distributed equally across all firms. By 2015, this gap had increased nearly fourfold, to 84 times. This overall upward surge in concentration, measured by market capitalization since 1995, experienced brief interruptions in 2002−03 after the bursting of the dotcom bubble, and in 2009−2010 in the aftermath of the global financial crisis, and it stabilized at high levels thereafter.****

So, what is causing this growth in market concentration? One reason is because of the nature of the underlying technologies, which involve costs of production that do not rise proportionally to the quantities produced. Instead, after initial high sunk costs (e.g., in the form of expenditures on research and development), the variable costs of producing additional units of output are negligible.***** And then, of course, growing firms can use intellectual property rights and lobbying powers to protect themselves against actual or potential competitors.

Giant firms can also use their super-profits to merge with and to acquire other firms, a process that has accelerated because—as both a consequence and cause—of the weakening of antitrust legislation and enforcement.

What we’re seeing, then, is a “vicious cycle of underregulation and regulatory capture, on the one hand, and further rampant growth of corporate market power on the other.”

The models of mainstream economics turn out to be a shield, hiding and protecting this strengthening of corporate rule.

What the rest of us, including the folks at UNCTAD, have been witnessing in the real world is the emergence and consolidation of global rentier capitalism.

 

*There’s another reason why the long run is so important for neoclassical economists. All incomes are presumed to be returns to “factors of production” (e.g., land, labor, and capital), equal to their “marginal products.” But short-run super-profits are a theoretical embarrassment. They represent a return not to any factor of production but to something else: serendipity or Fortuna. Oops! That’s another reason it’s important, within a neoclassical world, for short-run super-profits to be competed away in the long run—to eliminate the existence of returns to the decidedly non-productive factor of luck.

**UNCTAD defines surplus profits as the difference between the estimate of total typical profits and the total of actually observed profits of all firms in the sample in that year. Thus, they end up with a lower estimate of surplus or super-profits than if they’d used a strictly neoclassical definition, which would compare actual profits to a zero-rent (or long-run equilibrium) benchmark.

***The authors note that

these results need to be interpreted with caution. More important than the absolute size of surplus profits for firms in the database in any given sub-period, is their increase over time, in particular the surplus profits of the top 100 firms.

****The authors of the study focus particular attention on the so-called high-tech sector, in which they show “a growing predominance of ‘winner takes most’ superstar firms.”

*****Thus, as Piero Sraffa argued long ago, the standard neoclassical model of perfect competition, with U-shaped marginal and average cost curves (i.e., “diminishing returns”), is called into question by increasing returns, with declining marginal and average cost curves.