ASSA 2022: part two – the heterodox

By Michael Roberts

In this second post on the annual ASSA economics conference, I look at the papers and presentations made by radical and heterodox economists. These presentations are mostly under the auspices of the Union of Radical Political Economics (URPE) sessions, but the Association of Evolutionary Economics also provided an umbrella for some sessions.

The mainstream was focused on whether the US and world economy were set to recover strongly or not after COVID; whether the hike in inflation would eventually subside or not and what to do about it. The heterodox sessions were more focused, as you would expect, on the fault-lines in modern capitalist economies and why inequality of wealth and income has risen.

Analysis of US recessions since 1945

Interestingly, this year most heterodox presentations came from the post-Keynesian framework and not from Marxist political economy. The most interesting paper came from Al Campbell of Utah University and Erdogan Bakir of Bucknell University. Bakir looked at the dynamics of US recessions since 1945 through the prism of the Kaleckian profit model.

Now I have discussed the difference between the profit models of Kalecki and Marx on many occasions on my blog. Bakir and Campbell’s paper outlines the macro identities in the Kalecki model. But put simply, both aggregate models can be reduced to this simple formula:

Profit = Investment + Capitalist Consumption

But this is an identity: total profit must match total spending by capitalists (investing and consuming) by definition. It is assumed that workers spend and do not save their wages. As Kalecki put it: “workers spend all they earn, while capitalists earn all they spend“.

From investment to profit or vice versa?

This sums up the difference with Marx. Kalecki argues the direction of causation in the identity is from investment to profit, while Marx argues that the direction of causation is from profit to investment. Kalecki starts with investment as given and capitalists invest to ‘realise’ profits. Marx starts with profits as given and capitalists invest or consume those profits. Kalecki in true Keynesian style reckons capitalist economies are driven by aggregate demand and capitalist investment is part of that demand, so profits are merely the ‘residual’ or result of investment.

In contrast, Marx reckons capitalist economies are driven by profit, which comes from the exploitation of labour power, providing the profits for investment. Kalecki removes any semblance of Marx’s law of value and exploitation from his model; for Marx it is paramount.

In my view, this makes a fundamental difference because the Marxist theory of crises under capitalism depends on what is happening to profit, in particular, the rate of profit. For Marx, crises are caused by a lack of surplus value extracted from labour; for Kalecki, they are caused by a lack of demand for investment goods from capitalists and consumer goods from workers.

But it is still the case that the macro identity of both models is the same. The Bakir-Campbell paper starts from there and “analyzes the components of the Kaleckian profit, as distinct from its determinants.” Using US national income accounts Bakir and Campbell delineate how much goes to different sectors of the capitalist class ie how much to bankers, shareholders and to capitalists and in interest, dividends and capitalist consumption.

Table 2 from their paper shows that the share of the proprietor’s income in profit was, on average, 47.6% during the Golden Age (I-IV) and dropped to 34.4% under the period of neoliberalism (VII-XI). The share of undistributed profits also dropped rather substantially from 17.4% during the Golden Age to 10.3% in the neoliberal period. The share of rental income also declined from 13.8% to 9% between these two periods. The share of net interest payments and net dividend payments in profit, however, increased substantially in the neoliberal period compared to the Golden Age: from 10% to 28.7% for net interest payments and 11.2% to 17.6% for net dividend payment. “The data confirm that neoliberalism has involved a substantial redistribution of income from enterprises to rentiers and shareholders. To the extent that this redistribution reduces the savings of enterprises, it discourages investment.”

Capitalists switch from productive investment to speculation

In other words, there is good evidence that capitalists switched more of their profits out of productive investment to make more profits from financial speculation in the neoliberal period. This explains the decline in productive investment growth and the expansion of finance. Unfortunately, using the Kalecki model, Bakir-Campbell hide the Marxist cause for this switch; namely a falling rate of profit in productive sectors. But as they say, the determinants of profitability was not the purpose of the paper.

In another paper by Bakir and Campbell, the authors consider the role of increased debt in promoting and supporting that increased rate of profit. In this presentation, Al Campbell argued that finance was not a parasite on the productive sector as economists like Michael Hudson argue; it was worse than that! That’s because it slows productive accumulation. If it were just parasitic, why did the strategists of capital let debt in all its forms expand during the neo-liberal period? Neoliberalism cannot be reduced to so-called ‘financialisation’; neoliberalism had many different features, all aimed at raising profitability at which increasing credit/debt play an important role, but at the expense of productive investment. So it is a reformist illusion that capitalism can return to the Golden Age of fast growth in investment and production by controlling or curbing debt.

Slowing pace of investment and productivity

Another theme in several papers on the slowing pace of investment and productivity in modern capitalist economies was the Keynes-Kalecki view that it was due to the reduction in labour’s share of national income, so that aggregate demand growth slowed. Thomas Michl of Colgate University reckoned that the wage share regulates labour-saving technical change and employment regulates its capital using bias. So secular stagnation under neoliberal capitalism has been driven by a combination of diminished investment and reduced worker bargaining power more than by slower technical change and population growth. This increases the profit share and so reduces the rates of technical change, capital accumulation, and population growth. Again, this is a theory that is the opposite of Marx’s.

Similarly, Carlos Aguiar de Medeiros and Nicholas Trebat argue, “based on classical political economy and the power resources approach“ that “the key factor behind the increasing wage and income inequality of this period was the decline in workers’ bargaining power“ rather than globalization or technical change. It is surely correct that the demolition of trade union power in the neoliberal period had an important effect on reducing labour’s share in national incomes. But it does not follow that reduced labour share was the cause of crises in capitalist production post-1980 as post-Keynesians argue when they refer to ‘wage-led economies’.

Another variant of this post-Keynesian analysis of capitalist crises was presented by John Komlos of Munich University. Starting from accepting Keynes’ view that “I think that capitalism, wisely managed, can probably be made more efficient for attaining economic ends than any alternative system yet in sight.”, Komlos reckoned that the pandemic slump was so severe because the capitalist economy was already fragile. So it took just a ‘black swan’ event like the pandemic to tip it over. The idea of black swans, or ‘unknown unknowns’ on the extreme of the probability spectrum was offered as an explanation of the Great Recession by some back in 2008-9 following the view of financial analyst Nassim Taleb that chance rules. At that time I argued that the black swan explanation of slumps (ie chance) could not explain regular and recurring crises (each time were they by chance?).

How to contain capitalist slumps

But what to do about avoiding or ameliorating slumps under capitalism. A very popular policy alternative has been taken up in heterodox circles, namely more government spending and even permanent budget deficits financed by money creation as per Modern Monetary Theory (MMT). MMT found some support in the heterodox sessions. Devin Rafferty of St Peters University reckoned that the heterodox economist Karl Polanyi and MMT would agree on the process by which money is created as well as on the mechanisms that regulate its value. Polanyi would have embraced the MMT policy measures of a ‘job guarantee’ and ‘functional finance’ —the two staples of the MMT approach–which he believed would foster international peace, national liberty, and individual freedom. I think this tells us something about Polanyi’s form of Marxism and MMT.

Much more critical of MMT was Brian Lin of National Chenghi University. Lin argued that public investment by state enterprises would be much more effective in avoiding slumps than MMT. State investment “is more a timely creation of advanced institutions for sustaining worldwide economies than a politico-economic phenomenon like the MMT”. It would be far better for a country to adopt a decisive policy of nationalizing private companies with financial difficulties instead of issuing more money for the unemployed. Lin’s view came in for heavy criticism by some attendees who reckoned state companies were bureaucratic and inefficient compared to the private sector and could not be relied on. Lin did not respond with the Chinese model as the success story for public investment but, of all countries, state enterprises in Sweden!

However, when it came to investment solutions for so-called Global South, the idea of expanding public development banks was supported. Gaëlle Despierre Corporon of the University of Grenoble reckoned such institutions “can give a positive impulse to the global relations between the South and the North and become dynamic institutions able to provide new perspectives for long-term development financing and ensure the coherence of the global system.” So apparently, the public sector can work globally but not nationally.

Global wealth and income inequality

That brings us to the rising global inequality of wealth and income – an important subject, ignored at this year’s ASSA by the mainstream, but taken up in a paper by Victor Manuel Isidro Luna of the University of the Sea. He pointed out that the majority of the countries of the world are not catching up consistently with the affluent countries. So ‘between country’ inequality has surged. In particular, between the richer and poorer Latin countries, there remains “an unbridgeable gulf”. The poorer countries globally were handicapped by a reliance on short-term foreign portfolio investment and longer term by foreign direct investment (FDI) which were controlled by the richer countries. This left poorer countries in the grip of the richer. So open markets cannot be the development model for the poorer countries.

‘Within country’ inequality was also discussed in some sessions. Some Norwegian economists reckoned that labour income is the most important determinant of wealth, except among the top 1%, where capital income and capital gains on financial assets were more important – pretty much as you would expect in a capitalist economy. Alicia Girón of the National Autonomous University of Mexico (UNAM) also confirmed that the recent rise in inequality is associated with rising asset valuation as opposed to capital accumulation both globally and within countries and is not driven by potentially spurious factors such as demographic changes and growth. In other words, the top 1% gain mostly from rising property and financial asset prices.

The emergence of crypto currencies

One of the major new financial assets for the rich has been the emergence of crypto currencies. Using the Marxist conceptualization of money, Juan Huato of St Francis College argued that the buyers of crypto currencies were not getting some great decentralised money asset but still dependent on the state “which they imagine to have escaped.” Edemilson Parana of the Federal University of Ceara reckoned that Bitcoin would be unable to establish itself as an alternative to the current monetary system as it does not meet elementary requirements of money. Despite its declared search for a substitution of world money, for monetary stability against the supposedly ‘inflationary’ state money and for ‘depoliticization’, decentralization and deconcentration of monetary power, what is empirically observed is precisely the opposite: low volume and range of circulation, great instability against state money, transactional (economic, ecological etc.) inefficiency and greater relative concentration of political and economic power among its users. In the end, the non-fulfilment of the radical neoliberal aspirations of Bitcoin shows that the attempt by its creators and enthusiasts of emptying money of its social content, i.e., to ‘neutralize’ it, in capitalism, is not feasible.

Finally, there was the elephant in the room – China. Surprisingly, there was not much on China in the heterodox sessions except on the inequality of income. To be more exact, in one study it was found that China’s ‘global middle class’ (ie equivalent in income to Europe’s middle class) had grown very rapidly, from 2% of the population in 2007 to 14% in 2013, and further to 25% of the population in 2018. This middle class was predominately urban, largely resides in China’s eastern region, and mainly depends on wage employment for income. A distinct ‘business’ middle class exists, but is relatively small.

Financialisation in the advanced capitalist economies through the Kalecki paradigm, doubts about MMT and cryptocurrencies, studies on rising inequality – these were the themes of the heterodox sessions.

From the blog of Michael Roberts. The original, with all charts and hyperlinks, can be found here.