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NEO LIBERALISM, INVISIBLE HAND OR DEAD HAND.

(Note to the reader. This is the third posting in the series. Please read the Rate of Profit with variable

capital included first, followed by DEPRECIATION AND ITS CONTRIBUTION TO INEQUALITY.)

In a capitalist society the labour of the individual only becomes part of the labour of society indirectly

through first being exchanged. Capitalist production is therefore not for consumption but for

exchange. Before a commodity can be consumed it must be sold.

It follows that all economic crisis under capitalism results from the breakdown of exchange, hence the

separation of consumption from production. Production exceeds consumption or what is the same

thing consumption falls below production. Here we are referring to the economic wide breakdown in

exchange that typifies a generalised recession.

What could be causing this disproportion between production and consumption that is always latent

within capitalism? Popular theories under the banner of under-consumptionism, blames economic

crisis ultimately on the depressed income of the working class and the state. Workers’ wages are too

low and so too is government spending.

In this they follow Marx’s oft repeated but abstract observation that in the end all economic crisis are

attributable to the depressed consumption of the working class through its immiseration. The

diagnosis provides the remedy - increased wages and higher state spending. This it is argued would

raise effective demand and the world will return to balance. Everyone benefits. Workers will have a

better standard of living and the capitalists would be blessed with rising sales.

However history tragically teaches us that capitalism can and does grow even in periods where wages,

if not falling are stagnant and government spending if not stagnant is falling. One of those cruel periods

has and continues to occur in one of the richest countries in the world, which of course is the USA and

the period runs from 1973 to the present, or two generations a truly enormous period. Depending on

what series is chosen, wages over these 40 years had only risen in real terms between 10% and 30%

by 2008, since when they have barely recovered their falls after 2008, while productivity has increased

between 80% and 150%, depending on which series one uses. We will not reference this research as

it is easily obtained from the web and uncontroversial. The point is that during this time, despite

workers receiving a dime for every extra dollar they produced, and cut backs to state spending, the

US economy has not collapsed or even stagnated. (In our narrow focus on this issue we ignore other

factors which have contributed to the growth of the US economy such as globalisation and the collapse

of “scientific socialism”.)

Those who adopt and tenaciously hold on to the attractive theory of under consumptionism,

misconstrue capitalism. Capitalism is based on the private ownership of the means of production,

distribution and information. As a result workers are separated from their product which becomes the

property of the capitalist class. Once the employers have paid workers their wage, they are left with

a surplus product or balance of production.

As owners of society’s surplus product, the capitalist are the primary consumers. How they consume

this surplus determines the health of the economy in the future. They alone have the luxury of not

needing to consume, unlike workers who have to spend their wages or go without. If we are to

understand how production breaks down, slows down or speeds up, we need to examine and follow

the disposition of this surplus, owned, controlled and spent by the capitalist class. This is the concrete

rather than the abstract way of proceeding and it represents a distillation of Marx’s method.

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To repeat and emphasise this advice. To discover the secret of under-consumptionism, follow the

surplus and determine its disposition. And what a surplus it has become. If we take the reduction in

wages as a share of national income (BEA) since the 1970s and include the changing share of the top

1% of wage earners (Saez and Pikkerty 2014) together with the growth in depreciation, it is likely that

the surplus as a share of Gross Domestic Product has risen by more than sixteen percent and now

accounts for over half of total production.

Marx separated the consumption of the capitalist class into two spheres: unproductive consumption

and productive consumption. By unproductive consumption, Marx referred to the personal

consumption of the capitalist class; their lavish standard of living which is such a burden to society.

The unproductive consumption of the capitalist class accounts for part of the total consumption of the

surplus product. But even here we find, that the rich have got so rich, that they are unable to spend

sufficient wealth on themselves. Who better to inform us of this than J P Morgan, the giant bank that

knows the habits of the rich at first hand? Their chief economist, Michael Feroli, has revealed that in

the old days, the super-rich spent 3.8 cents on themselves for every Dollar of new income. Now they

spend less than 1.7 cents. Given they are $25 trillion richer since 2009, that translates into a loss in

spending power of $1 trillion since then. (Reported Bloomberg News 18 April 2014.) This is not due to

the fact that the rich are more frugal or have a guilty conscience, it is because they now have so much

money they are having difficulty spending it. After all there are only so many mansions, jets, yachts,

old masters and trophy wives/husbands one can buy.

While the lavish consumption of these vulgar parasites are a burden to society, the other side of their

consumption, productive consumption, is vital to the well-being of society. By productive

consumption we mean of course investment. Marx used the term productive consumption to denote

that part of the surplus that is thrown back into production in order to expand it.

We will now examine the ability and willingness of the capitalists to invest. The best place to explore

this behaviour is the corporate sector. In the graph below we plot corporate cash flow to investment.

In the previous posting we analysed corporate cash flow in detail in order to understand what

contributes to it. We recognised that much of it is composed of depreciation with the balance

composed of corporate profits.

We list three graphs. The top blue graph is cash flow comprising depreciation plus profits after tax.

The green line shows fixed investment plus inventories. The yellow line strips out the investment in

Intellectual Property I.P namely Research and Development and parts of software. We will deal with

the yellow graph later. For the time being we will deal with the top two graphs.

We deliberately use post-tax profits rather than undistributed profits plus depreciation to compare

cash flow. We call it gross cash flow to distinguish is from free cash flow which is used by the BEA,

which is defined as depreciation plus undistributed profits. We find post-tax profits more useful. For

example if the capitalists seek to give away their profits, notably in the form of share buy backs, this

will significantly diminish cash flow without altering the underlying surplus that has been produced.

Bloomberg reported on the 6/10/2014 that S&P 500 companies will spend $914billion in share buy

backs or 95% of their 2014 post-tax profits. This reduces free cash flow well below gross cash flow but

does not alter the original cash flow surplus generated.

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Y001RC1Q027SBEA for Intellectual Property Investment. NCBGFFA027N for fixed investment A191RD3A086NBEA for GDP deflator. W328RC1A027NBEA for post-tax profits.

B128RC1A027NBEA_20140805 for depreciation

We have deflated the figures so that we are comparing like with like. 1954 is our base year meaning all figures are in 1954 dollars. The following is to be observed and noted. During the post war boom which ended in 1970, and even during the decade of stagnation during the 1970s, cash flow and investment followed a similar trajectory. Only in 1980 does the gap open and it does so because of the fall in investment following the 1980 recession and the massive destruction of capital (rust belt phenomena) and export of capital. However, it is in 1992 that the gap widens for another reason, the growth of cash flow. This coincides with the second phase of the long boom, the impulse given to the world economy from the inclusion of what was COMECON and China into the world market. From then on cash flow expands rapidly. The same cannot be said about investment. It barely increases. We chose non-financial corporations deliberately to show this, as these corporations are the engine of the economy. As a result the gap between cash flow and investment widens dramatically. To show the scale of this surplus we have reproduced the graph in current dollars but this time for all corporation not only non-financial. In 2013 the gap was $1356 billion or 40% of cash flow. To put this figure into perspective this amounts to nearly 10% of Net National Product. In the opinion of the author, these two arms, the first which is investment and the second which is cash flow are open wide as if to embrace socialism, for here revealed, starkly, are the limitations of the capitalist mode of production.

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rsCASH FLOW vs INVESTMENT Non-financial Corporate USA

CASH FLOW vs INVESTMENT less R&D and in-house software

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BEA Table 1.12 for profits and depreciation. Table 4.7 for investment and Table 2.7 for IP adjustment. We can now address the issue of Intellectual property. We notice in both graphs we have included a third graph which is the bottom graph. The bottom graph removes parts of Intellectual Property investment. In our second posting we noted that much of the increase in investment was in the form of I.P. Although IP is less than 10% or 5% (if we remove software) of produced assets it contributes about third to both total investment and total depreciation. It is one of the big reasons why depreciation has grown as a percentage of N.N.P (Net National Product). It could be argued of course that the development of the forces of production and with it the implied technical conditions leads to an increase in intellectual labour compared to physical labour. Much has been written about the knowledge based economy, about the information age, the fact that intangible investment now exceeds tangible investment. It is clear that as the technique of production advances so products become more complicated and therefore the amount of intellectual labour needed for their emergence increases. What is often forgotten in this equation is that it increases the productivity of labour simultaneously. What is not clear is why this R&D effort should suddenly be transformed from a cost to capital, from a deduction from current profits or income into an addition to assets. Are we dealing with quantity turning into quality or something else? R&D has been present from the dawn of industrialisation, from the advent of the first machines. For 200 years it was treated as part of the cost of the machine or piece of equipment that was being produced. Patent law has been around for 150 years. Has it taken two centuries for the contribution of intellectual labour to be recognised? Surely not. This adjustment to the management of the national accounts, which took place on the 31st July 2013 in the USA, owes more to the growth of the global corporations and their monopoly power together with the growth of all forms of fictitious capital, than it has to do with accurate accounting.

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CASH FLOW vs INVESTMENTCASH FLOW vs INVESTMENT less R&D and in-house software

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The BEA on its website explains the reasons for the switch to this form of accounting - http://www.bea.gov/faq/index.cfm?faq_id=1028. Immediately there is a problem with valuing R&D as capital. In its section on how to value capital it proposes the usual tautology put forward for valuing fictitious forms of capital which was rubbished long ago by Joan Robinson: “Conceptually, the value of R&D is equal to the present value of the future stream of benefits derived from R&D spending. - See more at: http://www.bea.gov/faq/index.cfm?faq_id=1028#sthash.J3XmIAJH.dpuf” However, this stream of benefits, (surely they must mean not only income but additional income) is unknown until such time this R&D effort not only gives rise to a use value, but that product is actually sold. Here the BEA breaks with the methodology of its founders Leontief and Kutznets and their understanding of value added derived from Volume 2 of Das Kapital. This stipulates that value added is equal to the value of all the final sales in the economy. In other words it is an aggregation of exchange values. And exchange values can only arise when commodities are sold. In a capitalist society, the labour of the individual only becomes part of the labour of society when it is sold. The capitalist social relation thus involves two exchanges, the first is the purchase and the second is the sale. In the case of the purchase the capitalist purchases the factors of production, labour power, means of production and possibly land on which to site production. By uniting the factors of production the capitalist sets production in motion and this produces new products. When these are sold the two exchanges are complete. In the first money goes out and in the second money comes in. As the incoming money tends to exceed the outgoing money thereby yielding a surplus, the capitalist enjoys a profit. In the case of R&D there is only one exchange not the two that establishes the capitalist social relation. Scientists and engineers are hired and the means of their investigation is purchased providing the basis for R&D to take place. But their R&D is not sold. Instead its purpose is to invent or improve upon a use value that can be sold to complete the second sale. Only through the production of these new or improved use values and their sale, can new money come in. Only through the sale of the products that embody this R&D effort can the capitalist recoup the money spent on R&D The division between intellectual and physical labour has existed for ten thousand years and will only end under communism. Until then, it is stupid to rip intellectual and physical labour apart. They cannot exist apart from each other and they form a unity. In other words the commodity sold is a fusion of intellectual and physical labour and its value is composed of both the intellectual and physical labour that produced it. Prior to 2013, Research and Development was treated as an intermediate input or as an expense in most countries including the USA. That was the correct method. R&D is not capital but a cost of production. It is no more capital than the vending machine that provides the caffeine to stimulate and excite the brains of these intellectual workers. R&D becomes commodity capital only when it is embodied in a use value, which may be intangible like software, or tangible like the computer that runs the software The issue here is double counting and as much as the BEA dogmatically asserts this is not the case, the 2.7% jump in GDP the change heralded, proves the point. Let us understand why. Labour, regardless of whether it is intellectual or physical is expended in production, but only becomes value through the act of exchange as we have noted above. In the case of R&D labour which is seldom sold, but incorporated into a thing to be sold, cannot produce value on its own. To get round this problem the BEA treats the cost of hiring intellectuals and acquiring the means of their experimentations not only as a purchase but as a simultaneous sale.

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This turns it into capital. Capital which can then be depreciated. The sale here is ideal, it is conjured up. It is a sale without its opposite, money, as though the corporation is buying something from outside and then selling it to itself. It is fabulous and it is a nonsense. R&D becomes productive only when and if it gives rise to a new product. The price of that new product embodies the labour of the intellectuals as much as it does the physical labour of the production workers. The only difference is that intellectual labour is amortised over each commodity. It is this amortisation that increases the value of the product and hence its price. Let us assume the R&D effort gives rise to a machine which is now sold for money, an actual sale, completing the second exchange where money comes in to replace the money that has gone out for R&D. The new owners, the purchasers of these machines put them into use and now depreciate them. This depreciation includes the depreciation of both the intellectual as well as the physical labour that actually produced it and was included in the sale price. In other words the intellectual labour contained in that machine is passed on to the new product being produced through depreciation. We therefore end up with two streams of depreciation. First the producer of the machines depreciates part of before it is sold and the buyer and user of the machines depreciates all of it after it is sold and put into use. The seller has depreciated the intellectual labour embodied in the machine, and the buyer has depreciated the intellectual as well as the physical labour embodied in that machine. The only time that depreciation would not be duplicated is if the buyer only depreciated the value added to the machine by physical labour. An absurdity, the buyer would lose out and the seller gain. The BEA has introduced duplication, and by doing so has wrecked the founding principle of national accounting – no duplication. The problem with I.P is manifold. Firstly as we have seen it includes capitalised future income which seems to give “value” to trade marks, patents, copy right and sometimes design. This represents fictitious capital which lays claim to monopoly profits. In addition, I.P. expenditure includes the valiant army of patent lawyers, advertisers and marketeers aimed at either securing this ‘asset’ or increasing/preserving its worth. What we may call wasted labour but it also includes productive labour in the form of research and development which is capitalised as if it were a commodity capital. Finally it includes genuine commodities like software which should not be included in this category in the first place. Software together with R&D accounts for the bulk of Intellectual Property Investment. Software is no different to any other commodity except that it did not exist before the Second World War. It is no different to a jet plane which is just as recent, but whereas a jet plane is treated like a commodity, software is treated like a special commodity, though to be sure a plane could not fly without incorporating software. That is why we have excluded it from our calculations. It’s so called intangible form does not give it a special and unique existence. A commodity is a social form, it is anything produced for sale, and commodities come in millions of different physical forms, from a song that leaves only a memory to nuclear products whose half-life is thousands of years, from the softness of wool to the hardness of steel. The BEA’s increasingly impaired methodology is found once again in its treatment of software. The national accounts reveal that software is not homogenous. Some of it is produced for sale, some of it is not. The latter is called ‘own account’ software, and its purpose is to be incorporated in products or services that are to be sold or to improve administration. Like R&D which is never sold, which never forms commodity capital, this in-house software is never turned into a commodity and is therefore excluded from our graph.

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Accordingly if we set aside this software and R&D investment we find that in 2013 this amounted to a reduction in investment of $322.7bn, equivalent to 55% of total non-residential I.P investment or 21% of total investment. When we strip out R&D investment and in-house software, we find that total investment has actually fallen in graph one and barely increased in graph two despite inflation. There has been no real or sustained growth in investment (1954 dollars) for over thirty years. No wonder parts of the USA look like a war zone and as for US infrastructure, the less said the better. We now turn to cash flow to examine the effect of turning I.P. into fictitious capital. Firstly by transforming R&D from an expense into capital, it is no longer treated as an expense deductible from profits. It is taken out of the income statement and placed on the balance sheets of corporations. With this ‘expense’ removed, profits increase. Simultaneously the balance sheet increases with this new capital. The net result – more profits and more capital. With the stroke of a pen, or the enter button on a keyboard, the corporation has become more valuable. This sleight of hand together with share buy backs have been an immense help to supporting share prices. However if you thought the corporation was twice blessed you would be wrong, it is thrice blessed. By treating aspects of I.P. as capital, it is able to depreciate it. This increased depreciation reduces profits, a reduction almost equal to the increase in profits achieved in the first place by transforming I.P. from an expense into capital. In turn, less profits as we have shown previously, but not necessarily less cash, means less tax to pay, completing all its blessings. A strict pre-2013 interpretation of cash flow would thus yield the following graph. Though the numbers in absolute terms are down we are still presented with the same relative cash surplus.

BEA Table 1.12 for profits and depreciation. Table 4.7 for investment and Table 2.7 for IP adjustment. Corporation have become huge cash machines because investment has fallen so far below cash flow. Cash has piled up. Thomson Reuters reported (22/01/2014) that global corporations are sitting on over $7 trillion in cash and equivalents, double what they held ten years ago. This has happened despite the huge amount spent on share buy backs. In the USA that has amounted to 2% of all

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outstanding shares p.a. Bloomberg reported (06/10/2014) that the S&P 500 companies spent $914 or 95% of their post-tax profits buying back shares in 2014. DEFLATION AND LOW INTEREST RATES. The world is experiencing a glut of savings. Originally the focus was on China and its foreign reserves particularly its holdings of US government bonds. This was just xenophobic window dressing. These reserves were always dwarfed by the surpluses accruing in the USA which was not adequately captured by the BEA series 6 Tables. To this we can add the glut of savings being generated by the EU and other countries. Then of course there are the funds hidden and circulating via Tax Havens. Reuters reported this figure as anywhere between $21 trillion and $32 trillion (22/07/2012) based on work carried out by the Tax Justice Network. In the old days, illicit proceeds were hidden under mattresses. These days the super- rich are so rich that they need whole islands under which to hide their fortunes. The fact is that the 0.1% are extra judicial as are their corporations. As wealth has accumulated in their hands and as they are effectively on a tax strike, it is austerity for the rest of society. Finally to all these hoards must be added the glut of savings in banks. New York banks alone have increased their deposits with the US Fed by $2 trillion. J.P. Morgan asked large depositors such as hedge funds, whose individual holdings exceed $100 billion, to place their money somewhere else because they cannot use it. This savings glut or more accurately, this hoard of idle capital, has only one aim, to secure safety. This means primarily government bonds and gilts. Here interest rates have been driven close to zero and in a number of European countries to below zero. This is the equivalent of paying governments and banks a fee to hold your money. This is the penalty for hoarding capital rather than using it. It is the emergence of this hoard of idle capital internationally that explains why interest rates have had such a prolonged secular fall. The underlying fall began in the 1980s and accelerated this century with the final downward thrust being provided by the Quantitative Easing QE programmes carried out by various Central Banks especially the US Fed. The cash surpluses generated by the global corporations constitutes a hidden QE which dwarfs the QE generated by Central Banks both in extent and duration. These ongoing surplus thus compromises the exit strategies of the Central Banks in the US and the UK as they consider tightening their monetary policies in order to raise interest rates. While these banks may influence short term interest rates and consumer credit rates, it is unlikely to have much of an impact on longer term interest rates. If we turn to the financial crisis that erupted in 2008 we find this crisis to be an acute point in this long process of increased liquidity. As the global corporations have grown in size, and as they have become a generator of surplus cash, so the banks have lost their largest customer. There has been a fundamental alteration in the relationship between financial capital and industrial capital. With industrial capital becoming more or less self-sufficient on average, the banks had to seek out new areas of investment. They were forced to develop their retail arms; that is consumer lending encompassing mortgages, personal loans, student loans, credit cards, car loans and so on. Pride of place went to the explosive growth in mortgage lending. By 2007 mortgage lending as a percentage of total bank loans had increased from one third to two thirds within the space of a decade. The rest is history. A glut of idle capital will always induce repeated housing bubbles as it seeks investment havens. It is part of the cycle.

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Turning to deflation. The fall in prices is due to the growth of manufacturing particularly in Asia which has reduced the price of all produced goods, from clothes, through electronics to cars. For a while this deflation did not break through because of the rapid industrialisation in China. While investment stagnated or even fell in North America, Europe and Japan, it soared in China. As a result total investment in developing economies now exceeds total investment in these countries. China alone added investment equal to 4% of global output between 2000 and 2010. (World Bank. Global Development Horizons 2013) This surge in investment compensated to a large degree for the anaemic investment in countries like the USA. China’s rapid industrialisation gave rise to the commodity super cycle. Everything from minerals through oil to food was driven up in price. Producer countries including Australia, South Africa, Brazil, Chile and others were given a boost. This acted as a counter-vailing influence to prices. China became by far the largest industrial economy in the world within two decades. However with investment rates over 40% of GDP this momentum could not be sustained, and as a result the Chinese economy has become mired in over-capacity and debt, particularly Department 1 investment. With industrial investment stagnating in China, there is now no counter-vailing influence offsetting the tendency towards deflation. Deflation will not be confined to one country but be international for the first time since the Great Depression of the 1930s. IN CONCLUSION. We end by returning to the beginning, the rate of profit which acts as the spring of capitalist production. We noted in the first posting that it had reached a new peak and this explained the current dynamism of the US economy. Here we will look at how sustainable this improvement is by examining productivity and its trends. This posting has revealed a paradox. High levels of profitability but low rates of investment. Low rates of investment in turn has held back productivity growth. This is shown in the table below compiled by the Bureau of Labour Statistics (BLS) in the USA. Over the last four years (we exclude 2010 as these figures are a bounce back from the recession) the growth in productivity has slowed markedly. On average over the four years it rose by 0.7% p.a. in Nonfarm Business and by 1.5% in Manufacturing.

Table C. Revised annual average changes in productivity and related measures: 2010-2014

Sector Nonfarm Business Manufacturing 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014

Productivity 3.3 0.2 1.0 0.9 0.7 6.2 0.8 1.0 1.9 2.2 Output 3.2 2.2 3.2 2.6 3.0 6.2 2.9 3.3 2.7 3.8 Hours -0.1 2.0 2.2 1.7 2.3 0.0 2.1 2.3 0.8 1.6 Hourly pay 2.0 2.2 2.7 1.1 2.5 1.2 1.7 1.8 0.5 2.3 Real hourly pay 0.3 -0.9 0.6 -0.3 0.8 -0.4 -1.4 -0.3 -0.9 0.6 Unit labor costs -1.3 2.1 1.7 0.2 1.8 -4.7 1.0 0.8 -1.4 0.1 B.L.S. March 5th 2015 This fall in productivity has been challenged by those who claim output no longer measures like with like.

Computers have become more powerful, cars have more gadgets, TVs more features. This misses the point.

Productivity is not measured by use value but by exchange value output. Under socialism higher productivity is

measured by price falls and under capitalism by the increase in value added per worker. Productivity has come

down and this has happened despite the growth of Intellectual Property particularly R&D.

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In the graph below we look at the longer term trend of labour productivity. If we take the two long waves of

expansion, 1948-73 and 1990 to 2014 we find productivity in the first wave average 2.8% and 2.1% in the second,

a fall of 25%. And yet profit margins has increased more in the second wave than in the first. This is due to two

factors and two factors alone. Wages in relation to productivity have fallen in the second wave compared to the

first, and there has been more outsourcing to low wage countries in Asia.

In order to isolate the actual profit margin we reproduce the following graph for domestic business. Conventional graphs on profit margins do not discriminate between profits produced in the US and profits earned abroad. US corporations suck in $400 billion more profits than the US economy pays out to foreign corporations operating in the US, a figure included in conventional graphs. We note that 2013 matches the previous post war peak at 7.2% and 2014 will exceed it.

BEA Account Code: W273RE1

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However this tells only part of the story. In our earlier analysis of cash flow we noted that the larger part consists of depreciation. If we plot the gross cash flow of business comprising depreciation and after tax corporate profits we note that it has almost doubled since 1950. Once again the biggest jump has occurred this century. Between 1964 and 2000 it hovered below 14% and since then it has jumped to 18% and beyond. A similar pattern is observed when we compare it to Gross National Income.

BEA Table 2.12

If we return to the table on page 9 and look at real wage growth in the non-farm business sector,

wages over the 5 years grew by half a percent and in manufacturing it actually fell by two and a half

percent. The reasons for the remarkable increase in profit margins above is therefore depressed

wages. Profitability is not improving because of vigorous investment that is yielding higher levels of

productivity. They are rising because of the sweating of labour, that is through employing more

workers to work harder for longer for less. Marx called this increase in the rate of exploitation an

absolute increase in the rate of exploitation and he called increasing the rate of exploitation through

improving the productivity of labour, an increase in the relative rate of exploitation.

The difference is important. The increase in the absolute rate of surplus value is finite. It is limited by

the length of the working day, the stamina of the worker and the wage needed to sustain this

gargantuan effort. As long as industry can employ more workers at lower wages then margins can

continue to expand. However in a period of deflation this will become increasingly difficult.

Wall Street despite the many fools who populate it, knows this to be the case. There is a recognition

that this kind of profit extraction is reaching its limits. Cutting overheads may reduce the bottom line,

but working class resistance is increasing, equipment is ageing and revenue is not growing. These cash

generators are reaching their limits.

In the final analysis, this remarkable period of growth, this long wave has been underpinned by the

absolute increase in the rate of exploitation at home together with the inclusion of the USSR and China

into the world market which has accelerated globalisation. It has been based on the international

defeat of the working class. Neo-liberalism has been the consolidation of that defeat.

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6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

19

50

19

52

19

54

19

56

19

58

19

60

19

62

19

64

1966

19

68

1970

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

1988

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

2006

20

08

20

10

20

12

CORPORATE CASH FLOW as a % of G.D.P. CORPORATE CASH FLOW as a % of G.N.I.

12

Neo-liberalism has three arms. Firstly to turn more objects into commodities. In other words to spread

the market into all spheres of human life and activity. To eliminate state involvement in and direction

of the economy. To deregulate the market. This freedom it is argued will empower the capitalist

economy and the riches produced will trickle down from the top to the rest of society.

This has been a nonsense. The US economy has grown more slowly in the neo-liberal period. The

growth (measured in 1999 dollars) between 1990 and 2013 of 114% compares to a growth of 121% in

the period 1950-73. (Table 1.7.5 for N.N.P. and BEA Account Code: B358RG3 for value added deflator).

Using 1999 dollars creates an inbuilt bias in favour of the latter period so we can assume that the

difference was even bigger.

Slower growth, more inequality and recurring financial crises undermines the thesis of neo-liberalism.

Neo-liberalism has enriched a minority but at the expense of society. It has spawned repeated asset

bubbles while bankrupting the state and whole sections of society. It is proof that society cannot be

run on the bases of personal enrichment. Neo-liberalism is the epitome of capitalism, capitalism in its

naked form, liberated capital and it has led society into a historical cul-de-sac.

It is unsustainable. The idle hoard has reached such a scale that it has infiltrated every crevice and

pore in the economy. It has smothered speculation, the pond looks almost glass like as volatility has

been suppressed by its weight. But glass can shatter and quickly. Should only a small part of it be

thrown back into circulation it will lead to rapid inflation as the means of its disposal? The total value

of fictitious capital in the US now amounts to $60,226 trillion composed of outstanding bonds of

$38,340 (Q3 2014) and outstanding shares currently of $21,886. This is roughly three and a half times

larger than US GDP which stood $17,418 at the end of 2014. (Contrary to popular belief the gross

market value of OTC derivatives internationally in the second half of 2013 was only $20 trillion and

not the hundreds of trillions usually bandied about. Bank of International Settlements latest figures.)

However what is more likely in the near future is the opposite, a period of deflation. Deflation has

been building up this whole century and was previously limited to produced goods (manufacturers).

The extraordinary growth of China, contributing one third of global growth in recent years or more

than the US, the EU and Japan combined, has prevented deflation spreading throughout the world

economy. The collapse in oil prices following that of copper, iron ore, milk and other commodities

shows that deflation is breaking through into the wider economy as the Chinese economy stagnates.

Deflation poses acute problems to the model of neo liberalism based on short termism with low rates

of investment compensated for by rising exploitation. In a deflationary environment where

productivity is stalling, additional profits depends on wages falling at least as fast as prices. The attack

on the working class will increase. Employers cannot tolerate wages rising while prices are falling.

In the end it will be the response from workers that will decide the balance between inflation and

deflation. If workers resist this increased attack, then deflation will end. If they don’t, then deflation

will be endure, regardless of the policies of the Central Banks. Any of their additional money will simply

be squirrelled away together with the share buy-backs and other corporate cash injections, creating

the phenomena of prices for fictitious capital and housing rising from a sea of deflation.

It appears the long wave of capitalist expansion, which some date from the mid-1980s and others

from the early 1990s is coming to an end. At a time when the mass of society is already disillusioned

with its politicians, a renewed economic crisis could have dramatic political repercussions. The case

for socialism grows ever stronger.

Brian Green. March 2015