by Michael Roberts
Most years I attend the London conference of the Historical Materialism journal.
This brings together academics and others to present papers and discuss
issues from a generally Marxist viewpoint. This year I presented a
paper on whether rising inequality causes crises under capitalism (Does inequality causes crises). My session was well attended and the audience included many of the small band of Marxist economist s around at the moment.
The gist of what I said was this. Rising inequality of income and
wealth in the major economies has become a popular thesis among both
mainstream and heterodox economists. The thesis is founded on the
arguments that wages as a share of GDP have been falling in the major
economies. This creates a gap between demand and supply, or a tendency
to underconsumption. That gap was filled by an explosion of debt,
particularly household debt. It is also encouraged financial
institutions to engage in riskier financial investments that exposed
them to eventual disaster. The credit boom fuelled a housing bubble but
eventually that burst and the house of cards came tumbling down. QED?
My paper attempted to refute this theory of crisis with the following simple points.
1) Private consumption has not been weak or did not collapse, causing
a demand gap – on the contrary in most economies and particularly in
the US, consumption to GDP during the so-called neo-liberal period rose
to record highs.
2) The major international slumps of 1974-5 and 1980-2 cannot be laid
at the door of rising inequality because it did not rise at the time.
Indeed, most Marxist economists at least agree that the 1970s slump was
the result of a squeeze on profits not a squeeze on wages. The rising
inequality thesis cannot apply as a general theory of crises.
3) Actually, the share of labour income in national income when
non-work income is included (net social benefits) did not fall in the
neo-liberal period. Labour income share kept pace with consumption
share and debt was not needed to fill a ‘demand gap’.
4) A fall in consumption does not take place before slumps, so the
house of cards did not collapse because of a fall in consumer demand.
It is a fall in investment that provokes a slump and during a slump, it
is investment not consumption that falls the most.
5) There are many studies that show no connection between rising
inequality and credit or banking and general crises under capitalism.
6) There are better causal connections and correlations between profitability and investment and economic growth than between inequality, consumption and growth. Profits call the tune.
For a fuller account of these arguments, see my HM paper.
There did not seem too much opposition to my thesis, although there
were questions on my data. The discussion at the session came from an
accompanying paper by Jim Kincaid, formerly economics lecturer at Leeds
and other universities. Jim’s paper, which was apparently just an
excerpt from an upcoming article in the HM journal, aimed to analyse why
investment has been faltering in modern economies, particularly since
the end of the Great Recession. Above all, he wished to question or
refute the theory that Marx’s law of the tendency of the rate of profit
to fall is the underlying cause of crises, as advocated by myself,
Carchedi, Kliman and several others.
Jim Kincaid said he supported the position of Dumenil and Levy that
each major slump or ‘structural crisis’ in the history of modern
capitalism has had a different cause. The 19th century Great Depression
was the result of falling profitability; but the Great Depression of
the 1930s was not, and was caused by rising inequality and ‘crazy
investment’. The 1970s slump was the result of falling profitability
but the Great Recession was again caused by rising inequality and ‘crazy
financial investment’. These arguments of D-L have been dealt with in this blog before and are also taken up in my paper on inequality presented.
Interestingly, Professor Riccardo Bellofiore, who also presented a
different paper in the session on translating Marx’s concepts, commented
in passing that he reckons Marx’s law of profitability has been dead in
the water since the late 19th century depression because
since then the ‘counteracting factors’ have overcome the law
‘permanently’. This is a strange conclusion given all the recent evidence cited in this blog
for a secular fall in profitability globally since Marx’s time. Next
year, G Carchedi and I will publish a book, a collection of papers from
scholars around the world that will confirm Marx’s law of profitability
with empirical evidence.
But what was the essence of Kincaid’s critique of those ‘monocausal’
advocates of Marx’s law of falling profitability as the cause of crises
under capitalism? To quote Kincaid’s abstract: “I argue: (1)
empirically, the thesis of falling rates of profit in the major
economies is based on an uncritical use of not always reliable
government data; (2) Harvey and other sceptics are correct to stress
that central to the present crisis is the inability of the global system
to absorb large quantities”.
Kincaid argues that it was not a falling rate of profit, or too little profit that caused the Great Recession and subsequent weak recovery, but too much.
Capitalist firms have built up huge cash reserves from profits that
they are not investing productively. So the problem is one of how to
‘absorb’ these surpluses, not how to get enough profit. This also
shows, according to Kincaid, that the causal sequence for crises, namely
falling profits to falling investment to falling income and employment
is nonsense because we have rising profits and falling investment.
Thus we have from Kincaid a thesis of surplus absorption that echoes not only that of David Harvey he refers to but also the view of Paul Sweezy and Paul Baran of the Monthly Review ‘school’
that monopoly capitalism has sunk into stagnation because it cannot
dispense with ever-increasing surpluses of profit. The fallacies in
this view have been dealt with by many authors.
But what about the issue of cash mountains in major non-financial
companies? Close readers of my blog will know that I have dealt with
this issue in several previous posts.
Let me now reiterate some of the points made in those posts (the data
have not been updated given the time, but will not have changed much).
It is true that cash reserves in US companies have reached record
levels, at just under $2trn – see graph below. (All figures come from
the US Federal Reserve’s flow of funds data.) The rise in cash looks
dramatic. But also note that this cash story did not really start until
the mid-1990s. In the glorious days of the 1950s and 1960s when
profitability was much higher, there was no cash build-up.
But the graph is misleading. It is just measuring liquid assets
(cash and those assets that can be quickly converted into cash).
Companies were also expanding all their financial assets (stocks, bonds, insurance etc). When we compare the ratio of liquid assets to total financial assets, we see a different story.
And according to Credit Suisse’s latest figures, US corporate cash to
total assets (financial and tangible) has risen but still way below the
1950s and 1960s.
US companies reduced their liquidity ratios in the Golden Age of the
1950s and 1960 to invest more or buy stocks. That stopped in the
neoliberal period but there was still no big rise in cash reserves
compared to other financial holdings. And that includes the apparent
recent burst in cash. The ratio of liquid assets to total financial
assets is about the same as it was in the early 1980s. That tells us
that corporate profits may have been diverted from real investment into
financial assets, but not particularly into cash.
Comparing corporate cash holdings to investment in the real economy,
we find that there has been a rise in the ratio of cash to investment.
But that ratio is still below where it was at the beginning of the
And remember within these aggregate averages lies the reality that
just a few mega companies hold most of the cash while thousands of small
and medium enterprises (SMEs) hold little cash and much more debt.
Indeed, a minority are re4ally ‘zombie’firms just raising enough profit
to service their debt.
Why does that cash to investment ratio rise after the 1980s? Well, it is not because of a fast rise in cash holdings but because the growth of investment in the real economy slowed
in the neoliberal period. The average growth in cash reserves from the
1980s to now has been 7.8% a year, which is actually slower than the
growth rate of all financial assets at 8.6% a year. But business
investment has increased at only 5.3% a year in the same period, so the
ratio of cash to investment has risen.
Interestingly, if we compare the growth rates since the start of the
Great Recession in 2008, we find that corporate cash has risen at a much
slower pace (because there ain’t so much cash around!) at 3.9% yoy.
That’s slightly faster than the rise in total financial assets at 3.3%
yoy. But investment has risen at just 1.5% a year. So consequently,
the ratio of investment to cash has slumped from an average of
two-thirds since the 1980s to just 40% now.
It does seem that there has been build-up of cash relative to
short-term debt, particularly in the credit boom of 2000s. This
suggests that corporations were borrowing more and needed to increase
their cash buffers as a safety measure.
So companies are not really ‘awash with cash’ any more than they were
30 years ago. What has happened is that US corporations have used more
and more of their profits to invest in financial assets rather than in
productive investment. Their cash ratios are pretty much unchanged,
suggesting that there is not a ‘wall of money’ out there waiting to be
invested in the real economy.
In a recent paper in the Journal of Finance (2009), Why firms have so much cash, the authors found that there was “a dramatic increase from 1980 through 2006 in the average cash ratio for U.S. firms.”
But interestingly, cash hoarding was not taking place among firms who
paid high dividends to their shareholders. On the contrary. The
authors argue that the “main reasons for the increase in
the cash ratio are that inventories have fallen, cash flow risk for
firms has increased, capital expenditures have fallen, and R&D
expenditures have increased.” In order to compete, companies
increasingly must invest in new and untried technology rather than just
increase investment in existing equipment. That’s riskier: So
companies must build up cash reserves as a sinking fund to cover likely
losses on research and development. Rising cash is more a sign of
perceived riskier investments than a sign of corporate health.
In a recent paper,
Ben Broadbent from the Bank of England noted that UK companies were now
setting very high hurdles for profitability before they would invest as
they perceived that new investment was too risky. Broadbent put it: “Prior
to the crisis finance directors would approve new investments
that looked likely to pay for themselves (not including depreciation)
over a period of six years – equivalent to an expected net rate
of return of around 9%. Now, it seems, the payback period has shortened
to around four years, a required net rate of return of 14%.” And remember that the current net rate of return on UK capital is well below that figure at about 11%.
Broadbent continued: “Even if the crisis originated in the
banking system there is now a higher hurdle for risky investment – a
rise in the perceived probability of an extremely bad
economic outcome….In reality, many investments involve sunk costs. Big
FDI projects, in-firm training, R&D, the adoption of
new technologies, even simple managerial reorganisations – these are all
things that can improve productivity but have risky returns and cannot
be easily reversed after the event.”
So it seems that companies have become convinced that the returns on
productive investment are too low relative to the risk of making a loss.
This is particularly the case for investment in new technology or
research and development which requires considerable upfront funding for
no certainty of eventual success.
And here is the rub. Just at this time when Jim Kincaid raises the
issue of huge cash reserves and suggests that the cause of crises is due
the difficulty of ‘absorbing’ profits, US corporate earnings are
falling and profit growth has ground to a halt. Cash reserves are set
to fall. The latest tally by Thomson Reuters of earnings by the S&P
500 in the US finds that earnings are on course to fall 1.3 per cent on
the back of revenues down 3.6 per cent. In Europe, Stoxx 600 companies
are on course to report a drop of 8.2 per cent in revenues compared with
a year ago and earnings falls of 4.3 per cent year on year. And, as I
have shown on numerous occasions, corporate profits in the major
economies are now hardly growing at all.
Yes, large firms in the capitalist sector of the major economies have
been hoarding more cash rather than investing over the last 20 years or
so. But they are not investing so much because profitability is
perceived as being too low to justify investment in riskier hi-tech and
R&D projects, and because there are better and safer returns to be
had in buying shares, taking dividends or even just holding cash. Also
many companies are still burdened by high debt even if the cost of
servicing it remains low.
The point is that the mass of profits is not the same as
profitability and in most major economies, profitability (as measured
against the stock of capital invested) has not returned to levels seen before Great Recession.
And the high leveraging of debt by corporations before the crisis
started is acting as a disincentive to invest and/or borrow more to
invest, even for companies with sizeable amounts of cash. Corporations
have used their cash to pay down debt, buy back their shares and boost
share prices, or increase dividends and continue to pay large bonuses
(in the financial sector) rather than invest in productive equipment,
structures or innovations.
I conclude that the cash reserves of major companies is not an
indication that the cause of crises is due to inability to absorb
‘surplus profit’ but due to an unwillingness to invest when
profitability remains low and debt is relatively high. That is the
cause of this Long Depression. Marx’s law holds. Too much profit, or
too little? Too little. Too much cash or too much debt? Too much
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