by Michael Roberts
This blog continually hammers home the view that it is
investment not consumption that is the key to economic growth.
Fluctuations in business investment in a predominantly business,
profit-making economy decide, in the first analysis, whether output
expands or contracts; whether there is a boom or slump. This view is
contrary to that of Keynesian economics, which although it appears to
recognise that investment plays an important role, sees investment and
consumption spending (domestic demand) as driving employment, output and
incomes and profit – in that order – not vice versa. And Keynesian economists often forget about the role of investment
and talk as though all that matters is consumption spending.
This
is also the view of neoclassical economics, when they consider the big
macro questions of boom or slump (which they seldom do). The consumer is king (or queen) and, as it is the largest component of national output or expenditure, then it decides. However, being the largest component of national spending does not
make consumption the ‘swing factor’ in growth. That is investment,
particularly business investment.
This is something most socialist economists forget too, with the
honourable exceptions of Michael Burke in the UK and John Ross based in
China. See Michael Burke’s past posts and the latest post by John Ross,
where he shows the powerful importance of capital investment (both in
fixed and circulating constant capital) compared to ‘innovation, design
and management’ as expressed in the nebulous concept of ‘total factor
productivity’.
Also I have shown empirically that it is investment (particularly
business investment) that is the swing factor. In all US economic
recessions since 1945, it is investment that has fallen one year before
the slump in GDP begins, while in nearly every recession, consumption
spending continues (in the few exceptions where there was a fall in
consumption prior to a recession, it was small).
In a recent article in Bloomberg, leading Keynesian blogger Noah Smith has suddenly noticed the role of investment. As he puts it: “The
U.S. seems to be out of ideas for economic growth. The main argument
appears to be over redistribution — tax rates, the size of the welfare
state, free college. Protectionism is also making a comeback; Bernie
Sanders would restrict trade and punish Wall Street, while Republican
candidates would curb immigration. These are mostly debates about the
size of the pie. But what about growing it?” Indeed, the
concentration of economists of all hues, mainstream and heterodox has
been on financialisation, inequalities of income and wealth and on
‘austerity’, not on the motors of economic growth.
He goes on: “So what else is there? Looking around, I see the
glimmer of a new idea forming. I’m tentatively calling it “New
Industrialism.” Its sources are varied — they include liberal think
tanks, Silicon Valley thought leaders and various economists. But the
central idea is to reform the financial system and government policy to
boost business investment.” He concludes that “Business
investment — buying equipment, building buildings, training employees,
doing research, etc. — is key to growth. It’s also the most volatile
component of the economy, meaning that when investment booms, everything
is good.” Exactly!
Smith then considers the issue of why “net U.S. business investment has been more or less in decline for decades”. Smith is not sure why. He poses a number of possible reasons: “This
could be happening because investors don’t see much of a future for
American businesses, and are thus choosing to get out while the getting
is good. On the other hand, it could mean that investors are simply
thinking in the short term and are more interested in quick cash grabs
than in pushing companies to maximize their long-term value.” He concludes that maybe governments need to ‘force’ businesses to invest by “using regulatory, financial and tax policies to push businesses toward greater real investment”.
The trouble with this conclusion is that it fails to get to the heart of why US business investment growth has been declining. There is clear evidence provided
by international agencies like the ECB, investment banks like JP Morgan
and Goldman Sachs and by new mainstream economic studies that the main
factor behind the gyration of business investment is profitability and
profits.
For example, the EU Commission in a recent report noted that
non-residential investment (which excludes households buying houses) as a
share of GDP and the main reason was “a reduced level of profitability.” The EU report makes the key point that “measures of corporate profits tend to be closely correlated with investment growth”
and only companies that don‘t need to borrow and are cash-rich can
invest—and even they are reluctant. The Commission found that Europe‘s
profitability “has stayed below pre-crisis levels.”
Similarly, the Bank for International Settlements (BIS), the central
bankers’ association (and dominated by Austrian economics), believes
that “the uncertainty about the economic outlook and expected
profits play a key role in driving investment, while the effect of
financing conditions is apparently small.” The BIS dismisses the
consensus idea that the cause of low growth and poor investment is the
lack of cheap financing from banks or the lack of central bank
injections of credit. Instead, the BIS looks for what it calls a “seemingly more plausible explanation for slow growth in capital formation,” namely, “a lack of profitable investment opportunities.” According to the BIS, companies are finding that the returns from expanding their capital stock “won’t exceed the risk-adjusted cost of capital or the returns they may get from more liquid financial assets.” So they won‘t commit the bulk of their profits into tangible productive investment. “Even
if they are relatively confident about future demand conditions, firms
may be reluctant to invest if they believe that the returns on
additional capital will be low.” Indeed.
A recent empirical study by mainstream economists, Kothari, Lewellen
and Warner find a close causal correlation between the movement in US
business investment (Capx in graph below) and business profitability (NI
in graph). As readers know from this blog and in other work by Marxist
economists, the US non-financial corporate rate of profit fell
secularly from the 1950s, reaching a low in the mid-1980s and then
consolidating or rising a little after that. The mainstream authors
find the same.
They also find that investment growth is highly predictable, up to 1½
years in advance, using past profits and stock returns but has little
connection to interest rates, credit spreads, or stock volatility.
Indeed, profits and stock returns swamp the predictive power of other
variables proposed by others like Noah Smith. Profits show a clear
business-cycle pattern and a clear correlation with investment. The data
show that investment grows rapidly following high profits and stock
returns—consistent with virtually any model of corporate investment—but
can take up to a year and a half to fully adjust.
They conclude that
“we find no evidence that investment drops following a spike in
aggregate uncertainty, contrary to the predictions of many models with
irreversible investment.” Finally, the authors found that “at least three-quarters of the
investment decline in the Great Recession can be thought of as a
historically typical drop given the behavior of profits. Problems in the
credit markets may have played a role, but the impact on corporate
investment is arguably small relative to a decline in investment
opportunities.”
So all the alternative explanations of crises offered by monetarists,
Keynesians and post-Keynesians have no empirical backing. The Marxist
one of investment being driven by profitability does. This suggests
that it is the profitability of capital that is decisive for the
recovery or otherwise from an economic recession or depression. If that
is the case, then trying to regulate or tax businesses may well reduce
investment if it affects profitability. This suggests that there is no
escape from the capitalist solution: a massive devaluation of the value
of capital (both in means of production and the labour force) through an
economic recession or slump.
No comments:
Post a Comment