The free market reveals its true colours

 

Corporate profits, not workers’ wages, are the largest factor behind the inflation afflicting Europe, it was revealed last month.

This was the conclusion of the International Monetary Fund, a body not noted for its pro-worker outlook. Rather it’s been a bastion of the austerity mania besetting the world over the last few decades.

The IMF conceded that domestic profits were responsible for 45% of the inflation that occurred in Europe over the last year. Rising import prices, by contrast, contributed 40% and labour costs 25%.

This rather contradicts the assertion of conservative commentators that we are in the grip of a ‘wage-price’ spiral. This idea was always fantastical in the context of the longest wage stagnation in Britain since Napoleonic times.  Costs – labour costs – that are going down, or barely rising, in real terms, can’t be responsible for soaring prices (inflation).

Gouge Away

In contrast, the evidence for a ‘profits-price spiral’ is strong. One recent book on the cost of living crisis in Britain found that the biggest companies increased their “mark ups” – prices above the cost of production – from 58% in 2002 to 82% in 2020. The Bank of England has recently found that goods price inflation (prices) is still rising while the cost of inputs is falling. Now we have the IMF – hardly a neutral body – admitting that “firms have passed on more than the nominal cost shock” [of the rise in commodity prices caused by the pandemic, the war in Ukraine etc.] to consumers.

But what is really interesting is that if mainstream economics is remotely trustworthy as a description of reality this profits-price spiral shouldn’t be happening at all.

The core belief of mainstream economics is that we inhabit an innately competitive, self-regulating market economy whose defining characteristic is price competition. As neoclassical economist Milton Friedman asserted, competition exists when there are a large number of firms and none of them can control price levels even though they might want to. “An individual firm is powerless to intervene in ways that change the basic competitive forces it or another firm faces,” he said. “The fate of each business is thus largely determined by market forces beyond its control.”

Fellow ‘free market’ economist, and favourite of Margaret Thatcher, Friedrich Hayek echoed, “the price system will fulfil its function only if competition prevails, that is, if the individual producer has to adapt himself to price changes and cannot control them”.

Essentially, under the system, if one firm raises prices way beyond the cost of production, it will immediately face competition from another firm offering lower prices. Either it relents, or it goes bust.

But this is true only if it is the case that we live in this fabled market system, where impersonal competition is the rule everyone must abide by. But what if we don’t? What if, in fact, we live – whether we like it or not – in a corporate capitalist system where large, dominant firms are able to determine prices and levels of investment?

Marxist truth bomb

This is the conclusion of a variant of Marxist economics, known as monopoly capitalism. A group of large firms, it says, – not just one as the name suggests – rise to dominance and, as a result, are able to collude in raising prices, controlling levels of investment and the introduction of new technologies, and making it difficult for smaller firms to gain a foothold in the market.  This process is enabled by the fact that markets in general are becoming more concentrated – i.e. mergers mean that larger and larger firms dominate markets as opposed to the competitive idyll of a welter of small firms.

A think-tank report last summer in Britain found that, at the close of 2021, the profits of the largest non-financial companies were up 34% compared to pre-pandemic levels, with over 90% of the increase accounted for by just 25 companies. “Some firms could have considerable market power with very few competitors,” the report argued, “and this could be making the cost of living crisis worse by raising prices beyond what would be economically justified.”

What gives credence to the idea that the ‘market economy’ is not as innately competitive as claimed is that a profits price spiral was happening before the current spate of run-away inflation. As I noted in my 2019 book The Disobedient Society:

In 2016 The Economist magazine analysed 900 sectors of the US economy and found that 2/3rds became more concentrated between 1997 and 2012. As a result, corporate America was raking in ‘exceptional profits’ of about $300 billion a year, equivalent to a third of taxed operating profits. And contrary to ‘one of the fundamental principle of economics’—that prices equal marginal costs—these profits were not being passed on to the consumer, with some more concentrated sectors of the economy, according to The Economist’s analysis, seeing prices rises of double the rate of inflation.

Of course, back in 2016, consumer inflation wasn’t an issue, it was negligible. Rather, the fear was deflation and what that would do to the economy. Which does beg the question of what the original cause of the inflation we are now experiencing was? Possibly price gouging, therefore, didn’t spark the jump in inflation, but is helping to prolong it.

Reneging on the Deal

But what this does unquestionably do is undermine the whole justification of the ‘market’ economy.  Essentially, we in the West were presented with a deal. Put up with submission to the will of an employer in the form of wage labour, in addition to skyrocketing inequality, and you will be rewarded with cheap food and other consumer goods. In mainstream economics, labour is the burden for which consumption enabled by wages is the compensation. But this compensation is looking remarkably threadbare, and for many, non-existent. In the process, the whole concept of the market economy – competitive markets allocating scarce resources and ensuring the consumer gets the best possible outcome – is revealed to be something that exists in the pages of a textbook rather than in the real world.

The logical consequence is that if we can’t rely on the putative ‘market’ economy to do what it is supposed to do, then – at the very least – it needs to be properly regulated in the public interest by some body that is genuinely independent of corporate interests. Policies such as an excess profits tax and price caps become ways to correct what the market – because it isn’t a real market – is failing to do.

Meanwhile, we continue to reap the benefit of the ‘free market’. Even though it isn’t free and it doesn’t operate like a market.

The Horror, the Horror .... the Silence. Conservatives and unconditional income

 

The 20^th century Polish economist Michał Kalecki noted an apparently perplexing trait of business leaders and their bought “experts”. One would expect such people to oppose public investment much more vehemently than subsidizing mass consumption because the former contains the possibility of competition from state enterprises. But such expectations are misplaced. “Indeed”, said Kalecki “subsidizing mass consumption is much more violently opposed by these experts than public investment. For here a moral principle of the highest importance is at stake. The fundamentals of capitalist ethics require that ‘you shall earn your bread in sweat’ – unless you happen to have private means”.

Kalecki was writing in the 1940s with an eye on the previous decade. But his observations are particularly apposite to our own era.

Boris Johnson revealed the lingering mind-set of conservatism when he justified ending the £20 uplift to Universal Credit by citing his “strong preference” that people see their wages rise “though their efforts” rather than by welfare.

The same mentality was at work in the pervasive uneasiness around the now defunct furlough scheme which was only introduced under pressure from lame duck Labour leader Jeremy Corbyn and the unions. It can still be seen in the ‘get back to the office’ propaganda that conservatives and business executives – supported by the media – routinely dish out.

The anxiety – verging on horror – that these schemes provoke in conservatives stems from the fact that, in Kalecki’s words, “a moral principle of the highest importance is at stake”. That principle is the maintenance of work discipline. The sanctions regime at the heart of Universal Credit exemplifies the edict of conservatives – big C conservatives and those who go by other nomenclature – that no money be given to ordinary people without stringent conditions.  “Please keep on cracking the whip,” exhorted Good Morning Britain host Richard Madeley earlier this week in true conservative style.

But note Kalecki’s caveat – “unless you happen to have private means”. In which case, all qualms instantly vanish. In fact, regarding the lack of actual work undertaken by the ultra-rich, a veil of silence reigns.

So what do you do?

The existence of huge swathes of people who receive large amounts of money without doing anything to earn it is capitalism’s dirty little secret. “What do capitalists actually do?” asks mathematician David Schweickart in his 2002 book After Capitalism. The answer is very little. They have an entirely passive role. “The capitalist” he says “engages in nothing that can be reasonably regarded as ‘productive activity’. Workers produce and distribute goods and services. Salaried managers coordinate production. Entrepreneurs and other creative personnel develop new products and techniques of production. The capitalist qua capitalist does none of these things.” In sum:

In a capitalist society, enormous sums are paid to people who do not engage in any entrepreneurial activity or take on any significant risk with their capital. Trillions flows to shareholders who make an entirely passive contribution to production.

Some have tried to quantify the enormity of these “enormous sums”. According to economists Thomas Piketty, Emmanuel Saez and Gabriel Zucman, around 30% of all income produced in the United States is paid out as “capital income”. These payments, in the form of interest, rents and share dividends, are “entirely passive”. They comprise “income divorced from work”.

But conservatives are, to borrow a phrase from Peter Mandelson, “intensely relaxed” about this form of unconditional basic income. In fact, they’d rather not talk about it if you don’t mind.

Capitalism, but not as we know it

However, this was the income distribution under capitalism. The past tense is not a typo. Because under the state capitalist system we’ve inhabited since the financial crisis – one vastly ramped up by the Covid pandemic – the passive income of the ultra-rich has been multiplied many times over by the actions of the state.

This process goes by the name of Quantitative Easing (QE) – so-called because it increases the quantity of money in, putatively the economy, but in reality swishing around the financial system.

QE is an extension of practices undertaken by central banks before the financial crisis over a decade ago – known as Open Market Operations – but one that vastly changes their nature. Central banks used to buy assets from commercial banks in order to ensure they had cash in order to settle their day to day transactions with each other, but these purchases were only very short-term. The assets would usually be sold back after a week.

However, under QE the central banks uses the money only it can create to buy assets – government bonds, corporate bonds or mortgage-backed securities usually – outright. Not temporarily. That why, under QE, the balance sheets of central banks have grown exponentially.

As a result of QE the bank or corporation that sells the assets suddenly has an enormous amount of cash to spend. The volume of financing under QE is astronomical, amounting to $834 million an hour by central banks worldwide. By buying the assets, the central bank causes their prices to rise and their yield to fall. The sellers – the banks and corporations – are therefore ‘incentivised’ to put their new money elsewhere, for example into shares or property or acquisitions. Thus, synthetic ‘asset booms’ are generated and the prices of assets rise. In theory, QE is meant to generate a ‘wealth effect’ in the ‘real economy’ by stimulating investment and lowering the borrowing costs for corporations. But there is no evidence this actually happens.

What there is evidence of is an immense, artificially induced, increase in the wealth of the ultra-rich. The combined wealth of US billionaires, for example, has risen by 70 per cent (!!)* since the beginning of the pandemic, a stretch of a little more than 18 months. That is, during a period of severe economic contraction – not to mention prolonged suffering endured by many people – billionaire wealth has leapt from just under $3 trillion to over $5 trillion. In addition, the number of billionaires in the US has risen from 614 in March 2020 to 745. According to Ruchir Sharma of Morgan Stanley Investment Management (and he should know) “the fundamental driver … of the billionaire boom” is “easy money [QE and ultra-low interest rates] pouring out of central banks.” For a sense of perspective here, a billion is a thousand million.

That’s capitalism folks. Except of course it isn’t just capitalism. Pure capitalism, inequality generating machine though it undoubtedly is, does not increase billionaire wealth by 70% in a year and a half all by itself. In essence, the passive wealth accruing nature of capitalism – the ‘normal’ workings of the market – has melded with the passive wealth accruing intervention of central banks – the abnormal workings of the state capitalist regime. But about both unconditional fountains of income for the rich conservatives are, almost universally, mute.

Drop the Pilot

However, the deafness is not limited to conservatives. Leftists also seem unable to grasp the nature of QE. Often the only problem they have with the “easy money” regime is that they think it should be redirected. The authorities, it is said, seem peculiarly oblivious to the unsuccessful nature of QE: that – despite the vast sums involved – it doesn’t actually seem to stimulate the economy.

As an alternative, many advocate cutting out the middleman and instituting so-called “helicopter money”. This involves the metaphorical ‘dropping’ (the term was coined by right-wing economist Milton Friedman in 1969) of large amounts of free money into ordinary citizens’ bank accounts. The theory is that this will actually stimulate the economy as poor (or not rich) people, unlike “high net worth” individuals, are liable to spend the money rather than save it. And it can achieve this at a fraction of the cost of QE.

The problem is that helicopter money flagrantly transgresses Kalecki’s “moral principle of the highest importance”. It doles out unconditional income to the multitude. Therefore, whatever its economic rationality, it won’t be allowed to happen. QE only appears unsuccessful. It wasn’t ever seriously intended to stimulate the economy. QE has served – and continues to serve – its real purpose. It preserves the existence of large corporations and banks and bolsters the wealth of the mega-wealthy.

For conservatives, that is justification enough. As for the rest of us the whip needs to keep being cracked, as it has been for centuries past.

*Elon Musk, CEO of electric vehicle manufacturer Tesla and potential coloniser of Mars, tops the list. He has seen his wealth grow from a mere $24.6 billion in March 2020 to $209.3 billion in October 2021, a rise of 750%. Indeed, he subsequently saw his fortune increase by another $36.2 billion in one day in October. You could argue that this latest alignment of cherries has something to do with the ‘natural workings’ of capitalism. Rental car firm Hertz placed an order for 100,000 Teslas. But even here the fingerprints of the QE regime are all over the deal. Last year Hertz declared bankruptcy but under the strange conditions of QE infinity its share price surged and it issued $1 billion worth of new shares. If the ‘laws’ of capitalism existed anymore, Hertz wouldn’t be around to wave a magic wand over Elon Musk’s wealth.

"When she went there, the cupboard was bare" the exhaustion of policy

“No policy of any kind – whether imposed by a dictator, produced by democratic consensus, or anything in between – can ‘fix the problem’” said economist Richard Wolff in 2008.  “No policy ever did”.

The world is now realising this. “Policy” is exhausted. The only company with good prospects at the moment is the one that makes the t-shirt of Karl Marx saying, “I warned you this would happen”.

According to broker Louise Cooper, “the horrible reality is that those leaders in charge of our economy have no answers”.

 If policy can’t solve anything, then it’s time to look again at economists who never believed it could, like Richard Wolff and Harry Shutt, whose books have been reviewed in this blog.

There were only three policy tricks. The first was supply-side economics. This was the right-wing idea that the reason why companies don’t expand, or individuals create businesses, is that they are taxed too much. In the UK in 1973, the corporate tax rate was 53 per cent. It will be 23 per cent in 2014. The Con-Dems’ enterprise zones, with zero business rates for five years, spring from the same contorted and remorseless logic – tax cuts will conjure up economic growth.

The problem is reality. Economic growth was much higher in the ‘60s and ‘70s before supply-side economics took hold. Attempting to answer the paradox that to open a factory in South Korea in the early ‘90s required 299 permits, while the country had grown at over six per cent for three decades, the South Korean economist, Ha-Joon Chang, said: “Strange as it may seem to most people without business experience, business people will get 299 permits, if there is enough money to be made at the end of the process … in contrast, if there is little money to be made at the end  of the process, even twenty-nine permits may look too onerous.”

For permits, read taxation. If there is money to be made, taxation, won’t deter expansion. The trouble is, there isn’t.

Trick number two, was interest rates. They are lower, in Britain, than they have been for 400 years. The United States Federal Reserve has tried to halt huge stock market falls by promising to keep interest rates at near to zero until 2013  At that miniscule level, they are meant to bring about spending and borrowing and make saving an unattractive option. But with personal borrowing at historically unprecedented levels, £1.46 billion in Britain, this doesn’t work either. And if consumer spending doesn’t rise, you can reduce corporate taxation to zero (which might well happen given the mentality of “policy-makers” in the UK and US ) and it won’t magically revive economic growth.

The last trick was the cruellest of all. Take trillions of pounds of private sector debt and transfer them to the public. In Britain, the government has a debt of £2.3 trillion and, £1.5 trillion of that stems from the banking bail-out. Gordon Brown was lauded as the saviour of the global economy. But the economy wasn’t saved from depression. Banks prospered temporarily, but the recovery didn't apply to jobs or spending. And nothing, as we are now seeing, was solved. According to the UN, $18 trillion was added to public sector debt. And just what, it will increasingly be asked, did that unprecedented spending achieve? To delay the inevitable by three years?

The reality of the exhaustion of policy is not pleasant or easy to face. In one way it is an admission of impotence. “The world is now embarked on a supposed recovery strategy that is both self-contradictory and doomed to failure,” said Harry Shutt in 2010. The only comparable experience, he says, was the Great Depression, which lasted a decade and was only ended by the Second World War.

Richard Wolff also likens what is happening now to the Great Depression. Then the reaction was far more creative. The US government employed directly 11 million people, some as singers, poets, painters to take culture around the US. But that far more interventionist policy didn’t solve the Great Depression.

“Policy” solutions are like closing the stable door after the horse has bolted. We can reject the self-imposed policy strait-jacket of western governments, and call for new ones. We can all become Keynesians again, re-regulate finance, ban derivatives or hedge funds. Corporations can be taxed properly and tax havens closed. That might conceivably help with the next downturn but we are still in the middle of this one.

“The whole idea of policy is bizarre,” wrote Richard Wolff in 2008. “The ‘right policy’ represents an absurd claim that that this or not that law or regulation can somehow undo the many different factors that cumulatively produced this crisis. Policies are ‘magic potions’ offered to populations urgently demanding solutions to real problems.”

Wolff attributes the 2007 economic crisis to the fact that US wages had stagnated for thirty years. Huge amounts of borrowing to compensate for this change enabled debt-based financial instruments to become so dominant. And when defaults began as interest rates rose, the contagion spread, causing the “credit crunch”. No government policy could “somehow undo” these trends.

Which is why Wolff’s answer doesn’t involve policy, but rather a shift out of capitalism. Only that can really “solve” the crisis. He wants workers to become their own board of directors. That post-capitalist settlement can change the factors that made the economic crisis happen in the first place.

For Harry Shutt, the problem is related but larger. Capitalist economies like ours are subject to the business cycle. The incessant recycling of profit to make more profit eventually produces more than can be absorbed by consumers.

But the downside of the business cycle – recession - has been evaded for years by government and business.  Now it is happening and will be more severe for having been eluded for so long. One consequence of the business cycle not being allowed to take its natural course, is that people, and governments, are overloaded with debt, and can’t bolster spending even if they wanted to.

Financial speculation is now more profitable than actual production. The upswings of future business cycles will be brief. So, he too, wants a transition out of capitalism, and end to the requirement that for an enterprise to exist it must make a profit, and the severing of the link between a liveable income and paid employment.

These solutions are now out of sight. But if governments have no answers to what will happen, then inevitably attention will shift to those who have some kind of explanation, and a solution, however radical it appears at the moment.

Milton Friedman, who was one of the gurus of neoliberalism, said in 1976 that “brute experience proved far more potent than the strongest of political or ideological preferences” in ending Keynesian economic policies and ushering in free market policies.

In other words, brute experience has a way of altering minds in a way that argument and debate can’t on their own. We shall see.