The end of interest

by John Quiggin on July 26, 2020

Although my book-in-progress is called The Economic Consequences of the Pandemic, a lot of it will deal with changes that were already underway, and have only been accelerated by the pandemic. This was also true of Keynes’ Economic Consequences of the Peace. The economic order destroyed by the Great War was already breaking down, as was discussed for example, in Dangerfield’s Strange Death of Liberal England.

Amid all the strange, alarming and exciting things that have happened lately, the fact that real long-term (30-year) interest rates have fallen below zero has been largely overlooked. Yet this is the end of capitalism, at least as it has traditionally been understood. Interest is the pure form of return to capital, excluding any return to monopoly power, corporate control, managerial skills or compensation for risk.

If there is no real return to capital, then then there is no capitalism. In case it isn’t obvious, I’ll make the point in subsequent posts that there is no reason to expect the system that replaces capitalism (I’ll call it plutocracy for the moment) to be an improvement.

But first let’s look at the real 30-year bond rate. The US Treasury is currently offering an inflation-protected 30 year bond at a rate of -0.3 per cent. That is, if you buy the bond at say, age 35, you can get your money back, less a 10 per cent reduction in real value, when you are 65. This rate has fallen from 2 per cent, when the bond was introduced in 2010, and started declining sharply in late 2018, before the pandemic, and while the Federal funds rate was rising.

In thinking about the future of the economic system, interest rates on 30-year bonds are much more significant than the ‘cash’ rates set by central banks, such as the Federal Funds rate, which have been at or near zero ever since the GFC, or the short-term market rates they influence. These rates aren’t critical in evaluating long-term investments.

The central idea of capitalism is, as the name implies, that of capital. Capital is accumulated through saving, then invested in machines, buildings and other capital assets to be used by workers in producing goods and services. Part of the value of those goods and services is paid out as wages, and the rest is returned to capital, as interest on loans and bonds or as profits for shareholders. Some of the return to capital is saved and reinvested, allowing growth to continue indefinitely. Workers, on this account, can become capitalists too, by saving and investing some of their wages. At a minimum, they should be able to save enough, while working, to finance a decent standard of living in retirement.

But what happens if there is no return to capital? The collapse of interest rates on government means that’s already true for anyone who wants a secure investment. And the situation isn’t any different for the two remaining AAA-rated corporate borrowers, Microsoft and Johnson and Johnson. Microsoft is currently offering a rate of 2.5 per cent on 30-year bonds, and has exchanged lots of outstanding debt for new bonds at that rate (paying a 40 per cent premium for higher-interest bonds). That’s a real return of 0.5 per cent if you assume that the Fed sticks to its current 2 per cent target and hits it on average. (There’s a lot more room for inflation to surprise on the upside, in my view). If you allow a 15 per cent risk that Microsoft will go bankrupt some time before 2050, the expected real return falls to zero.

To complete the picture of returns to capital, we need to look at stock markets and corporate profits. That’ll be the subject of another post.

{ 56 comments }

1

John Quiggin 07.26.20 at 3:32 am

It’s tempting to link all of this to the long-term historical decline in interest rates that led 19th century economists, most notably Marx, to talk about the declining rate of profit. But that decline came to an end in late C19. Real interest rates bounced about in the 20th century with no obvious trend. Much of the earlier decline may be have been due to a reduction in default risk as capitalism became established, but that’s just speculation on my part.

2

John Quiggin 07.26.20 at 3:33 am

Also, I plan to talk more about Keynes’ thoughts on the euthanasia of the rentier, which seems to be happening, although without much in the way of anaesthesia.

3

bruce wilder 07.26.20 at 4:20 am

There is capital and then there is capital — calling different things by the same name to avoid (!?) confusion.

The process of capital investment — using money to mobilize resources to strategically alter the costs of production well in advance of sale or consumption — that process has always depended directly on the ability to assemble and exercise essentially political power. There is nothing pure about it, and nothing at all, should you exclude any return to monopoly power, corporate control, managerial skills or compensation for risk. The most substantial returns from capital investment are only available to the fount of political power, the state. The debility or senility of the state as provider of public goods might have something to do with the inability to earn a return on investment.

Money, qua money — “wealth” of the purely nominal sort unrelated to mobilizing resources to productive purpose — has only one purpose: insurance. “Insurance” in this very broad sense can include cruel uses of money, facilitated by deflation: usury, debt peonage — even the words are cruel.

Central banks have been trained to flood the markets with “liquidity” to stave off the day of reckoning for fraud and foolishness. It is as if the want to prove every bad thing the Austrians ever said about them.

The true heart of capitalism is “other people’s money”. Borrowing money to lend money. For this purpose, there is no one interest rate. There is borrowing at 0% to lend at 27% or 400% or whatever horrific rate can be baked into a private equity deal or some crazy scheme of insurance bound to drive up the cost of whatever services the purchase of which they finance parasitically.

4

Just an Australian 07.26.20 at 7:24 am

It seems premature to me to call this the ‘end’ of capitalism during a pandemic, along with several other unusual stresses on capitalism. it might just be temporary insanity.

I’m not saying that the fundamentals are not good, or that I disagree with the general assessment. just that you might want to hedge your bets.

Bring back communism, I say. As long as some other poor chumps get to experience it…

5

bob mcmanus 07.26.20 at 8:02 am

JQ: “If there is no real return to capital, then then there is no capitalism.”

If there is so much excess capital that there is no real return, then everything becomes capitalism, pace Negri, the real subsumption of society.

6

Hidari 07.26.20 at 9:10 am

If anything, this understates the matter, and understates what extraordinarily unusual times we live in.

According to this site (and yes, it looks a bit dodgy, and no I have no idea who these people are, so caveat lector) interest rates are the lowest, worldwide, generally speaking, than they have been in 670 years.

https://www.visualcapitalist.com/700-year-decline-of-interest-rates/

This other dubious site makes the even more dubious claim (based on rather questionable evidence), that current world wide interest rates are the lowest they have ever been.

https://www.businessinsider.com.au/chart-5000-years-of-interest-rates-history-2016-6

The first site suggests some opinions as to why this might be the case (assuming it is the case), which I lightheartedly put forward as semi-serious ‘solution’ to this mystery.

1: Productivity Growth. As everyone has noticed, in the ‘advanced’ capitalist states, productivity is dropping, as is ‘inventiveness’ broadly defined (this can be measured by patents). Have you all noticed that when you were growing up, there was a life changing technology development almost ever year or so, and since the development of the smartphone, it’s all basically stopped? (Electrification of existing commodities, e.g. cars, don’t count, and nor do things that don’t exist and which will never exist, like genuinely self-driving cars or moonbases/trips to Mars). CF John Horgan’s The End of Science, and the concept of ‘low hanging fruit’ which all seem to have been pretty much picked by now. No new products means no new firms to sell them, means less tax money, means less growth.

2: Demographics. Some ‘optimists’ have predicted that population will begin to drop this century. Even assuming they are correct, which is dubious, have you ever considered what that means? Old people are more conservative than young people, less productive, more sick, need more care. Ageing societies are not politically liberal vibrant societies. What we are likely to have is the worst of both worlds, in which population continues to increase for the next few decades in the Global South, increasingly ravaged by climate change, and drops in the Global North, meaning more conservatism, more Trumps, more of a ‘gerontocracy’, and of course whipping up hostility to immigrants facing their burning countries might keep them in power.

3: Economic Growth. Capitalism needs new markets, and now, as Branko Milanovic has pointed out in ‘Capitalism, Alone’, there are no new markets. Everywhere is capitalist so there are now no mechanisms available to ‘pump prime’ growth. There’s no new source of cheap labour, no new source of new consumers (China previously supplied that, keeping the global economy booming in the 1990s and until 2008 but that effect seems to be failing).

Also, of course, climate change, the ‘death of birth’ the ongoing ecopalypse etc.

So, by the mid to late 21st century (science fiction, prediction alert!), negative interest rates might be the norm. Indeed, this has already begun in Japan, which in many ways shows the way ahead to our future: an ageing, conservative, sick population, in a low growth country, where there is very little political or cultural change for decades, and where the major political ‘debates’ are how best to keep out foreigners.

As John will presumably go onto argue, this will more strongly resemble societies from the ancient world more than post-Renaissance capitalist societies, with gigantic inequality, little scientific or economic growth (or change), huge swathes of the population kept controlled and constrained via debt peonage (a sort of modern feudalism), increasingly hollowed out and pointless ‘democratic’ polities, and real power remaining with a de facto aristocratic class who made their money by inheriting it and kept it not by building things and making them, but by tax dodging and other ‘financial’ tricks, in a mediatised world that spends billions persuading the populace that none of this is happening (this is essentially the story of Trump).

So, lots to look forward to!

7

Paul 07.26.20 at 9:34 am

It seems to me that you are talking from the perspective of the financier, or saver, who buys bonds and receives little, no, or negative return. But the capitalist is a borrower, not a saver; a seller of bonds, not a buyer of bonds. She borrows money in order to make investments in productive, as opposed to financial, capital.

So low interest rates suit the capitalist just fine. What can be a problem for the capitalist is a low return on investment. Low growth – which we also have in the rich economies – is therefore a problem for capitalism because it tends to imply a low average return on investment. But in a world of zero interest rates, of course, you only need a minimal return on your investment in order to make it profitable. So capitalists and capitalism are still doing fine.

Put another way: when talking about ‘the return on capital’, at a minimum we have to distinguish between the return on financial capital and the return on investment.

Final note: as you know, Larry Summers and co-authors have been writing about the secular decline in interest rates and its causes for a few years now, as part of the discussion of secular stagnation.

8

reason 07.26.20 at 9:49 am

Will somebody finally admit that the Washington consensus (that a policy mix consisting of tight fiscal policy and loose monetary policy) has been failure, on it’s own terms. All it has done has inflated asset prices to such an extent that nobody trusts their value (hence negative expected return).

Secularly increasing the level of private indebtedness doesn’t make the system more resiliant. When you express it in those terms it sounds ridiculous, and yet that is what has been official policy for thirty years.

We need to be aiming ot increase government debt at a rate sufficient to maintain the money supply and should be aiming to gradually reduce the level of private indebtedness.

9

reason 07.26.20 at 9:52 am

Small correction – to maintain the money supply doesn’t mean to keep it constant, it should be rising in parallel with desired nominal GDP.

10

reason 07.26.20 at 10:03 am

I need to make my macro policy ideas more complete I think before people misunderstand what I mean.

We need
1. to run moderate deficits and securarly monetarise at least a significant fraction of them
2. actively redistribute income
3. remove the tax incentives encouraging debt over equity
4. discourage speculative lending on a no redemtion basis (especially lending to risky debters on the basis of expected asset inflation).

11

Tim Worstall 07.26.20 at 10:32 am

I think it’s Tyler who says never reason from a price change?

“But first let’s look at the real 30-year bond rate. The US Treasury is currently offering an inflation-protected 30 year bond at a rate of -0.3 per cent.”

How about a minor corollary, be careful of reasoning from a manipulated price?

What is the purpose of QE? To lower the risk free interest rate. We’ve a lot of QE at present – some $7 trillion on the Fed balance sheet, something like that? That risk free rate is definitely manipulated.

We can, of course, assume that the manipulation is going to last forever. But that would be a strong assumption. If we’re trying to think about the underlying structure of the economy, rather than the current surface state of it, perhaps we might want to consider what the risk free interest rate would be without the manipulation. What would the 30 year inflation protected bond be paying in the absence of the $7 trillion of QE?

At a guess I’d say rather more than it currently is. Which is the same statement as QE works at its declared aim. It being that absenceofQE interest rate that should inform this speculation about capitalism.

Maybe.

12

BenK 07.26.20 at 11:34 am

Capitalism, briefly described, is the ‘the rewards of saving, organized’ or ‘the principle of indefinitely deferred consumption.’ Everything else is the results of that. If you repudiate that completely – then what are the implications? In the extreme, everyone must consume everything immediately. One major motivation for this is that if nothing lasts or is at high risk of being confiscated – in infinite regress.

13

Lee A. Arnold 07.26.20 at 12:26 pm

Rates have been descending for decades, so startup loans are cheaper to get, but the rate of new business startups has also fallen for decades.

Why don’t individuals invent new ideas for marketable goods and services, to employ themselves and others, and to get back in the capitalist game? Innovation does not seem to happen quickly enough.

Various reasons and complaints that are given for the lack of innovation include:

–Lack of competition, increasing monopolization, automation, intellectual property extension, superstars, winner-take-all, etc. (“market power”).
–Lack of skills, education, etc.
–Lack of individual initiative, laziness, etc.
–Regulations, zoning, government control, unions, socialization of private financial losses, rent-seeking (“socialism” in the current parlance).
–Growth of non-productive incomes, profits and tax breaks in the financial sector (“financialization”).
–Crowding, immigration, globalization (“‘they’re taking my job or business”).

Every time you turn around, someone gives one or more of these complaints. Some are pertinent to various sectors and circumstances of course. But in the whole, I don’t think it adds up. I don’t think the system is so sclerotic. A few industries are new, innovative and booming although they don’t create lots of employment. I don’t think these reasons add up to a convincing account for the lack of new marketable innovations, enough to keep everyone employed.

And it could get worse: labor-saving Schumpeterian concentration causes lower prices and is rewarded in the market. World population growth (more people looking for jobs) will continue for several more decades.

The demand side too may be waning, in the developed countries. There must an individual daily limit to the ability to consume. Your time is limited. Social media fulfill the last unmet human need and saturate the remaining attention.

Money is a type of information so perhaps the “end of interest” is correlated to the saturation of individual cognition.

14

steven t johnson 07.26.20 at 4:26 pm

As is so usual, there is a handy coincidence: https://thenextrecession.wordpress.com/2020/07/25/a-world-rate-of-profit-a-new-approach/

“The central idea of capitalism is, as the name implies, that of capital. Capital is accumulated through saving, then invested in machines, buildings and other capital assets to be used by workers in producing goods and services. Part of the value of those goods and services is paid out as wages, and the rest is returned to capital, as interest on loans and bonds or as profits for shareholders. Some of the return to capital is saved and reinvested, allowing growth to continue indefinitely. Workers, on this account, can become capitalists too, by saving and investing some of their wages. At a minimum, they should be able to save enough, while working, to finance a decent standard of living in retirement.”

Sentence by sentence…

“…central idea…” is not capital, I think, but capital markets. Perhaps a subtle difference, but important nonetheless. Capital in this sense was held by Roman bankers I think.

“…capital is accumulated through saving…” Historically capital was accumulated by robbery, taxation, expropriation of church lands, state efforts to create currency—accumulate gold—and a national market. Currently, capital is largely credit, from central banks, ordinary banks and shadow banking institutions too numerous to name.

“…invested in machines, buildings and other capital assets…” I do not think a medieval lord building a water mill was doing capitalism nor a central bank isn’t. I don’t think a peasant in Tang China was doing capitalism nor do I think a George Washington buying property claims on the frontier wasn’t.

” Part of the value of those goods and services is paid out as wages…” The labor is borrowed first, then paid later. Currently that’s usually two weeks later, but it has been quarterly or even annually if I remember correctly.

“…the rest is returned to capital, as interest on loans and bonds or as profits for shareholders.” Interest long predated capitalism so it’s not even clear how this relates. But if it does, interest historically was a kind of guaranteed profit, where risk was annulled by a property claim in default of re-payment. But if memory serves, there were capitalist enterprises predating a shares market, called partnerships, where ownership of the enterprise and the ongoing profits may be conceptually distinct…but weren’t in practice.

“Some of the return to capital is saved and reinvested…” Credit. Also, the difference between a peasant saving and buying the neighbors’ land when they fall on hard times is different from a Rockefeller buying oil companies, much less a mutual fund buying stocks.

“…allowing growth to continue indefinitely.” In a fully developed capitalist economy, growth is never indefinite, but always goes in cycles. If physical plant was a destructible as money, stocks, bonds, etc., humanity might be back in caves?

“Workers, on this account, can become capitalists too, by saving and investing some of their wages.” A practical definition of capitalist would be someone who someone who invests, in a factory or a hedge fund, to make a profit. There is a difference between a worker who buys a house to live in and a capitalist who buys a house to rent out.

“At a minimum, they should be able to save enough, while working, to finance a decent standard of living in retirement.” This is a kind sentiment, which I approve. But given that capitalist countries like imperial Britain in the nineteenth century did not provide enough food for the majority of the working class to reach modern-day stature, this doesn’t seem to have much to do with economics. Pious wishes are not useful analysis in my opinion.

Anyone who actually read may think, quibble, quibble, quibble. But framing the issue like this is misleading I think.

15

MisterMr 07.26.20 at 5:43 pm

My opinion:

Normally (by which I mean during booms) in a capitalist economy part of aggregate demand comes from net investment.
Continuous net investment requires more and more workers, which lowers unemployment and increases the wage share; at some point profits fall too much, capitalists stop investing but they don’t buy consumer goods either, so this causes a paradox of thrift effect and a crash.
The specific level of wages where this happens is not fixed though, and in recent times the wage share fell throughout the cycle.
This means that through the cycle and even towards the peak the profit share is quite high, but since capitalists don’t want to invest in real capital anymore they invest in speculative capital like houses, bitcoins etc..
Speculative capital reacts to increased demand in terms of price instead than in terms of quantity (in the 19th century this speculative capital was mostly land), so as the profit share increases throughout the cycle the wealth to income ratio increases. This increased wealth with fixed income necessariously lead to lower returns on wealth (note, on wealth, not on physical capital, as the profit share is still high).
This bubbly effect is needed to keep demand up so the government has to get along (e. G. If the fed increased the interest rate now it would cause a huge crisis).
This is not really different from what happened pre WW2; IMHO it is just a consequence of the winding down of the new deal, that caused the wage share to fall.

@Tim Worstall
We don’t know what the “natural” interest rate would be, but my understanding is that the fed can only push the interest rate up, not down.
In the end the interest rate reflects the expected return on new investment, but if nobody wants to invest that rate is 0?

16

Anarcissie 07.26.20 at 5:52 pm

@11 — Yes, what would the rate of interest be if borrowing and lending took place without the influence of the broad production of funny money? If there is any way of telling, that’s what you would want to compare to other interest rates in other times and places.

17

Omega Centauri 07.26.20 at 9:17 pm

Leaving aside the various “financial” games governments and others may play to try to manipulate/control interest rates, at some level there needs to be a balance struck between demand to supply capital and the demand to use it for capital investment. Clearly there are now more savers, than wanna-be borrowers. So what investment needs are going un-or under invested in?
I would say the energy transition away from fossil fuels to the renewable powered economy is a major need that is currently seriously being underinvested in. This applies at multiple levels:

(1) Design and production capital of “clean-energy” products. These can range from stuff like wind turbines and solar panels and various forms of energy storage, to “consumer” items, such as battery powered lawnmovers, bicycles and scooters as well as cars, and industrial trucks, uses and even construction equipment.
(2) Purchase and deployment of such.
(3) Education of a work force to deploy and service such.

There is plenty of scope here for a lot of societally beneficial investment. The key is government actions which unlocks the needed pace of investment in the sector.

18

Anders 07.26.20 at 9:28 pm

What about risk premia? Just because long-term real risk-free rates are zero or negative, there are still positive risk premia available. Investors (which include insurance companies and pension funds, not just evil speculators) can still expect to earn positive real returns, even if they’re compressed vs prior to QE. So capitalism’s alive and kicking.

It seems highly misleading to simplify analysis about ~returns~ to just a single proxy rate for the economy or system as a whole (as Piketty does too…), glossing over risk-free rates vs risk premia.

19

Peter T 07.26.20 at 11:37 pm

There’s production of real goods and services, and then there’s money. The relationship between the amount of the first and the amount of the second is not straightforward, nor even present in many cases (eg the roughly half of production that takes place in the non-monetised sectors of the ‘economy’). Capitalists (elites generally) want more money out than in, and usually get it. The question is – how?

The post points to zero or negative returns on instruments that convert money into money. What of the processes for converting production into money? I think it pertinent that more money leaves the US stockmarket than enters it – that is, it is now an instrument of disinvestment. Since the 60s in Britain and the 80s in the US, these elites have increasingly turned from putting money into production to get more money out, to selling off productive assets to get money out. The money piles up in tax havens and real estate, with nowhere to go. The return on the safest form of money shrinks accordingly.

This is not an accumulation of capital – ie resources available for investment. It is an accumulation of claims upon a shrinking productive base.

20

Fake Dave 07.26.20 at 11:54 pm

@13
I agree with Lee Arnold on a lot of this, but I think he’s missing the biggest single factor which is the global dismantling of social safety nets. Entrepreneurship is famously risky, but almost all that risk is bourn by working class folks who have to put everything they have into a business for years before it pays off. Rich folks can just pay someone else to risk years of their lives on ventures and write it off if they mess up. The rest of us either have to compete with that with no insurance for failure or be their middle management and hope to one day become the boss. If either US party genuinely cared about innovation or small businesses as the engine of growth, we’d have had universal health insurance, family support, and robust bankruptcy/job loss protections. The biggest businesses and knee-jerk he reactionaries wouldn’t like that at all though because it would upend the labor economy if millions of retail workers and corporate drones suddenly thought they could safely be their own boss. Even just the threat if widespread entrepreneurship and genuine self-employment would upend labor relations and probably kill the whole “gig economy” as we know it. Obviously, some very powerful people don’t want to see that happen.

21

Alan White 07.27.20 at 1:14 am

To show you how much CT can contribute to your life. . .

Tonight I was indulging myself with the final episodes of the original Batman series on H&I tv. One opened with a bank (about to be robbed by Ida Lupino and Howard Duff) that had this on its doors:

Gotham City Alchemical Bank and Trust company
A financial institution so conservative it pays no interest at all

The OP here and comments made me howl with delight at the serendipity!

22

Alan White 07.27.20 at 1:21 am

And it occurs to me to balance my previous comment with a sobering observation about this penultimate Batman episode: it was broadcast in March 1968, just before everything went to hell as it has been since our own March of this year.

23

J-D 07.27.20 at 4:53 am

There’s production of real goods and services, and then there’s money. The relationship between the amount of the first and the amount of the second is not straightforward, nor even present in many cases (eg the roughly half of production that takes place in the non-monetised sectors of the ‘economy’).

I’m not sure what difference it makes to your general point (maybe it makes none), but since you refer in that easy way to ‘production of real goods and services’, I want to point out that there’s production of goods and then there’s production of services.

Consider, as one example of each category, candles and haircuts.

Candles can be produced without being being consumed. The production of candles can easily be understood as distinct from the consumption of candles. Some candles get produced and then never get consumed. It makes sense, when referring to a business which sells candles, to ask how many candles it has available for sale.

Haircuts cannot be produced without being consumed. The production of a haircut and the consumption of a haircut are most easily understood as being the same event. It does not make sense to refer to a haircut as produced but not consumed. It does not make sense, when referring to a business which sells haircuts, to ask how many haircuts it has available for sale.

24

John Quiggin 07.27.20 at 5:45 am

Paul @7 A capitalist is an owner of capital: therefore a direct investor or lender. Someone who operates on borrowed capital, seeking a profit over and above the market return, is an entrepreneur. This, at least is the standard terminology.

In the standard classical or neoclassical model, the super-profits of the entrepreneur are ultimately competed away. The things that matter, in the long run, are labour and capital.

Risk and uncertainty change this, and I’ll talk more about that soon.

25

John Quiggin 07.27.20 at 5:48 am

Tim W. If the central bank can determine the rate of return to capital indefinitely into the future, capitalism really is finished. The point of QE was to reduce short-term rates in the emergency conditions of the GFC, The emergency has now become permanent, it seems.

26

Tim Worstall 07.27.20 at 8:23 am

@20 “If either US party genuinely cared about innovation or small businesses as the engine of growth, we’d have had universal health insurance, ”

A point Dean Baker has been making for many years. Although it’s not quite as slam dunk as he puts it as being. The US has a low rate of new business formation as a whole. And a high rate for businesses designed or funded to expand into reasonably sized workforces. The bit the US is missing is the small company that opens as and intends to remain small.

Which rather supports Baker’s point actually. As such larger, better funded start ups etc will have the money to be able to provide health care. In a manner in which the one man bands the US is deficient in don’t.

@25 ” The point of QE was to reduce short-term rates in the emergency conditions of the GFC,”

We seem to disagree on that point. The traditional tools work rather nicely in determining short term interest rates. We do, generally, say that the central bank controls them after all. It’s the longer term that is more market influenced and that longer term that QE was aimed at.

27

Tim Worstall 07.27.20 at 8:52 am

@25 I also disagree with this:

“If the central bank can determine the rate of return to capital indefinitely into the future, capitalism really is finished.”

And this:

“Amid all the strange, alarming and exciting things that have happened lately, the fact that real long-term (30-year) interest rates have fallen below zero has been largely overlooked. Yet this is the end of capitalism, at least as it has traditionally been understood. Interest is the pure form of return to capital, excluding any return to monopoly power, corporate control, managerial skills or compensation for risk.”

It poses a difficulty, perhaps a decisive one, for investment, yes. But investment and capitalism are not synonymous.

Well, assuming that we agree on hte following. A workers’ cooperative is not capitalism. Do we agree? But a workers’ cooperative faces all the same decisions about how much of current income should be put by for investment in future production and output. That it’s the income of the workers making the decision doesn’t change the difference that the absence of interest makes. It’s still the same change in how much be given up now in order to gain whatever in the future.

Investment, that is, not being the defining feature of capitalism. So changes in the terms of investment don’t, to me at least, seem to kill it off. Whatever it is that will be changed is much wider than capitalsim – it would seem to be the terms of investment in whatever socioeconomic system we’ve got.

As to what is the defining feature of capitalsim I take that to be that the investors – the capitalists – are not part of whatever organisation is being invested in. I don’t see a zero interest rate as changing the desirability – say, investor diversification, possibly limited liability, the possibility of mobilising the assets of tens of thousands, millions, into a project – nor the undesirability – anomie and all that of capitalism.

A zero interest rate changes all calculations about investment, not merely capitalist ones.

28

nastywoman 07.27.20 at 10:46 am

@
”To complete the picture of returns to capital, we need to look at stock markets and corporate profits”.

and at some… ”Capitalists” – who always look at the whole ”Picture” in order to only play only the Casinos which offer the highest returns.

Like ”the Stock” or the Real Estate Casino – and as the Real Estate Casino is tanking BIGLY again -(even more ”bigly” than in 2008) – there are only Stocks (kind of) left –
and if – there – the gamblers will realise that the Party is over – too – soon ”the Utmost Clever Capitalist will have to go back to the ”Liquidation Casino” where y’all get EVERYTHING ”for peanuts” – (Bugattis – Ferraris – Golden Toilets – Whole Hotels and Casino – some tacky Chandeliers) – from the STUPID -(and overextended) – Capitalist – like Trump.
As I hope that everybody here knows – that Trump already is bankrupt and after he will be send back to golfing – he will have a very difficult time – finding one of his golf courses – who still is profitable – and where his employers don’t stare at him – when he cheats – and behind his back tell each other:

”There golfs the Cheating Loser”.

AND nothing – NOTHING hurts a Capitalist more -(besides losing all of his Capital) –
than considered to be a really bad golfer!

29

rjk 07.27.20 at 12:03 pm

Tim @ 11

I think it’s Tyler who says never reason from a price change?

The phrase originates with Scott Sumner, though Tyler has definitely used it.

30

Alex SL 07.27.20 at 1:19 pm

One of the most frustrating aspects of any discussion of capitalism is that no two people seem to mean the same thing with that term. The most common equivocation is, of course, its redefinition into free markets plus democratic elections, cleverly allowing the No True Scotsmanning of anti-communist dictatorships and monopolies as “not capitalism at all” and enabling the person using this definition to tally the victims of capitalist expansion up to a nice round zero.

To me, capitalism is a system where a minority of people own the means of production, and the rest are legally free but forced to sell their labour to the former class to earn their living. A few decades of very poor returns on bonds does not mean that there is a new system of “no capitalism” with social arrangements as comparably different to capitalism as the slave economies of antiquity, tribal societies, or Medieval feudalism, just as not having free elections does not change the economic system into “not capitalism”.

Regarding the reason for low returns, I get the problems of constantly reinflating bubbles, but I would take one step further back and ask why they exist in the first place when they had not existed for several decades c. 1940-1980ish. It seems to me as if the underlying problem is low wage growth and inequality. It is a situation of too much money sloshing around in the hands of billionaires and large companies, desperately trying to find some worthwhile investment opportunity but coming up largely with (1) loaning it out or (2) chasing speculative bubble after speculative bubble.

Why? Because most of that money is NOT being moved through the hands of the working class, who therefore cannot buy enough stuff, and therefore investment into producing additional stuff for the working class is not profitable. Too much money is constantly extracted from the economy, so the economy regularly stalls and has to be kept from crashing by the next injection of new money. But that injection goes to those who have enough money already to lobby for getting more, and only rarely to those who would immediately spend it on a new car, renovations, travel, clothes, better food, etc., so the downward spiral continues. (I see that MisterMr has expressed a very similar view.)

But even if that were all resolved by returning to an economically sustainable high tax, high wage system, we would next have to talk about sustainable consumption and limits to economic growth.

So: what Hidari said, only I would use more present tense than future.

Climate change is now. Population grows and aging populations in one place combined with too many young people with too little water and fertile land in another place is now. Very nearly the whole world already having been turned into capitalist market is now.

Perhaps most importantly, because it is what stands in the way of solving any of these problems: the malaise of contemporary politics in the richest countries seems to be precisely that it is dominated by well-off retirees who more reliably vote than young and poor citizens and who very reliably vote conservative. And it is not even only voting. When I was a young adult in my home country I was very politically active. As I remember our meetings, the local SPD (~labour) chapter was 2% young, progressive activists, 18% teachers and public servants in their 50s, and 80% pensioners who would reliably elect the most conservative of the second group to be chapter president, mayoral candidate, etc. The composition of the Tory party membership in the UK is another case in point, as is the primary electorate of the two large parties in the USA.

We are living in the world Hidari envisions for the second half of the century.

Lee Arnold,

I am a bit puzzled by your point “Regulations, zoning, government control, unions, socialization of private financial losses, rent-seeking (“socialism” in the current parlance)”. Union power is at the moment extremely weak, and while the other factors are stronger you are mixing extremely different things into one. I don’t understand, for example, how socialisation of losses would inhibit innovation, as it would allow an investor to take more risks without going broke. Conversely, “regulations” is the exact opposite in that they aim to keep investors from socialising losses.

31

reason 07.27.20 at 2:09 pm

I’m just curious why nobody addressed this sentence:

“Secularly increasing the level of private indebtedness doesn’t make the system more resiliant. When you express it in those terms it sounds ridiculous, and yet that is what has been official policy for thirty years.”

Are you all missing the wood for the trees? Seems to me everybody is looking for something complicated when it is staring them in the face.

32

William Meyer 07.27.20 at 3:17 pm

Pointing to negative interest rates on 30-year Treasuries doesn’t mean that “capitalism” is over. Capitalism is a whole series of political acts (laws, regulations, incentives) that force the population to behave in a certain way. None of that has gone away, despite low or negative interest rates. If you doubt it, note that–at least in the USA–bankruptcy courts are about to have a world-historical run, dealing with an order of magnitude increase in business and personal bankruptcy cases. How will society handle the “social costs” of Covid-19? By putting people through a legal proceeding that largely imposes those costs on those directly involved–because in the USA the legal system (AKA the “real capitalism”) absolutely believes in atomistic individualism, and all the manipulations of the Federal Reserve do nothing about any of that.

What this does show is that the economics profession as a ridiculous tendency–without which it would collapse back into the more realistic subject “political economy”–to try to focus on “the economy” as if that were an entity completely divorced from, independent of, and possibly epistemically prior to the political/legal framework surrounding it. In the economics profession, an awful lot of work is done by the phrase “all else being equal,” where the most important causal pieces–which are political–are studiously ignored.

33

nastywoman 07.27.20 at 3:52 pm

@
”–at least in the USA–bankruptcy courts are about to have a world-historical run”

and this morning I went through Stresa – where. it doesn’t look a lot better –
BUT in between all the emptiness and the closed symbols of Capitalism there was one
infinity pool – absolutely BEAUTIFUL -(as Trump would say) – with a BEAUTIFUL view over the Lake and not a chaise empty – and when I came back to the Isola Pescatore there wasn’t a place empty at lunch – with all the usual joyful Lunchers from the Homeland Italy and Switzerland, France, Germany – and I even saw an Old Dude with a Oxfors University T-Shirt.

AND the two Mahogany Rivas in Front of the restaurant proved that Capitalism isn’t dead (yet) and that it will take a lot more to kill at least ”Italian Capitalism”.

34

Andres 07.27.20 at 5:05 pm

John: It’s not an easy step to equate long-term bond rates (e.g. the 30-year Treasury) to overall capitalist profits. According to Dead Bearded German Guy Who Must Not Be Named in Economics, the following is incorrect:

“Interest is the pure form of return to capital, excluding any return to monopoly power, corporate control, managerial skills or compensation for risk.”

Interest, monopoly power, corporate control, managerial skills, and compensation for risk are determinants of profits from the point of view of individual capitalists, but Marx would stress that these are superficial aspects of capital and that what matters in the end is first, surplus labor converted into surplus value, and second the ability to realize surplus value in a macroeconomic setting. Interest, dividends, rents, plus corporate profit and proprietor/partner income taxes are all redistribution of surplus value according to him. I am not in full agreement with Marx, as I think resource extraction and non-human labor are also sources of economic surplus, but that is tangential to this point.

I would argue that the downward trend in long term interest rates over the past decade is caused by an increased realization difficulty. Part of this difficulty is under-consumption: the wage share of income has fallen over the past two decades, real median incomes have been stagnant and in many regions real incomes lower than the median have fallen. The only way to prop up consumer spending in such an environment, especially spending on longer-term durable items such as houses and cars and longer-term intangibles such as education, is to have lower interest rates.

Second, the falling long-term rate may be indicative of what some macroeconomists call secular stagnation. As in perceived higher risk for investment projects due to lower productivity growth (in fact, the main driver of equipment investment is to ratify new technologies: potential productivity growth drives investment which drives actual productivity growth). With low potential productivity growth, perceived investment projects are riskier, causing a greater balance of capital to move to safe assets—Treasuries—thus driving down the T-bond rate.

What drives potential productivity growth is a black box, but the simplified heterodox economics argument is that strong aggregate demand correlates with strong consumer spending, which correlates with high relative wage costs, which correlates with increased productivity gain searches looking for either Fordist or Marx-specific (i.e. labor-saving) innovations, or niche-specific productivity gain searches where increased use-value for new commodities translates into increased nominal productivity.

Overall, a Marxist or Marx-influenced economist would point to the low labor share as pulling down productivity growth and thus pulling down long-term interest rates for safe assets such a Treasuries, whereas a secular stagnation analyst would point to the lack of epoch-making innovations (e.g., the end of geographical widening and capacity increasing for electronic technologies as opposed to data processing deepening) plus reduced business confidence in the post-2008 period and reduced global financial confidence in quick-flowing capital post-1997 as depressing business investment and thus pushing down on safe asset interest rates. The two explanations are not mutually exclusive.

None of this should point to either a coming end to capitalism or to Keynes’s fairy tale euthanasia of the rentier; as long as there is capitalism (and possibly even after capitalism) there will be rentiers. But the trend in interest rates does point to the need for global capitalism to have a new regime that discards neoliberalism. Low interest rates correlate with stagnant or even falling real labor income, which correlates with populist demagogy and increased international instability. Only when the international and domestic political instability is sorted out is it possible to shift back to a non-neoliberal capitalist regime and to usher in another 1945-1970 type growth period in which rentiers are subdued but definitely not euthanized.

35

Trader Joe 07.27.20 at 5:32 pm

This is somewhat teased by JQs last comment up above, but real 30Y rates are not below zero. Real rates including the risk and liquidity premium attached to Treasuries are below zero and that’s a different thing entirely.

From an investment market perspective – which is what’s being measured in the rates JQ cites – ever since Dodd Frank there has been an actual scarcity of UST paper of most kinds. That seems hard to believe in the context of +20T of government debt, but in fact from a supply/demand standpoint there is not near enough.

The reason is various collateral and settlement requirements imposed on banks post GFC. It used to be that collateral was anything a counterparty was willing to accept, now its only government paper – full stop. Accordingly the +$20T of debt (not all of which is held in a way that can be used as collateral) is collateralizing several times that amount of commercial and personal borrowing.

When economies grow the demand for Treasuries rises. When the economy contracts uncertainty rises, demanding more collateral and increasing the demand for Treasuries. There is no steady state that produces a liquidation. This is what 50bp of US10T means to the investment markets and why its probable that it will eventually hit zero.

Whether that spells the end of capitalism or not seems dubious since JPM, Goldman, Citi et all seem to have several Trillion of capital and lending acitivity that suggests things are just fine.

Finally, as a practical matter, there is an over-abundance of money or money like instruments. Everything from Bit-coin to collateralized debt all is available to fund the capitalist, the entreprenuer, idiots and fools. This is what will end badly – not government debt at Zero real coupon.

36

Michael Connolly 07.27.20 at 6:35 pm

When reading about the past, present, and anticipated development of our political economies, I have taken to substituting the neologism “Investorism” for “Capitalism.” Marx lies decades back in my reading, but I remember him saying that he was describing social systems. Not religions or ideologies, except as they functioned in social systems. Capitalism / Investorism is the social system in which private investors – who, per #27, “are not part of whatever organisation is being invested in” – call the shots. That the interest rate has dropped below zero has many implications, many of which are opaque to me. But I expect that the investing class is going to have 90% of the input (and a veto over) the responses…

37

Tm 07.27.20 at 7:52 pm

I don’t think I understand capitalism more than superficially. And as both the OP and the comments demonstrate, neither does anybody else. I think nobody really has much of a clue, neither the capitalists, the bankers, the Corporate Leaders, the economists, nor unfortunately the anticapitalists, socialists and anarchists.

38

Lee A. Arnold 07.28.20 at 1:54 am

Alex SL #30: “I am a bit puzzled by your point…”

I was trying to make a comprehensive list of all of the reasons, given by both the left and the right, for the perceived lack of jobs and business opportunities, despite the decline of interest rates since around 1980. Whether the reasons are logical or not. So I gathered disparate and opposite reasons under broad categories. Safety nets (Fake Dave #30) is a good addition to the list: the left says we need them to reduce risk, the right says they slow down growth.

Labor unions, always blamed by conservatives for impeding business, saw a decline since around 1980 but of course their decline did not increase the rate of business startups. Public sector unions are still under attack today for making government “inefficient” thus a presumed drag on growth and opportunity. Libertarians e.g. Rand Paul even blame the socialization of losses: I don’t understand that, any more than you do. (Although they scarcely practice what they preach.)

My point is that I don’t think that any of the reasons, nor all of them together, will explain what has been going on for 40 years. If you smooth out the graphs of 10-year, 30-year Treasury rates and new business formation since around 1980, the declines look almost linear. Maybe capitalism has been massively successful, so successful that it is putting itself out of business, and we are growing out of it, just like Keynes and Schumpeter said we would.

While we are sorting it out, I would suggest creating a government monopsony that guarantees human needs which will still allow private entrepreneurialism for innovations.

39

Dr. Hilarius 07.28.20 at 3:47 am

Not being an economist of any kind I can only offer my 2 cents worth for consideration. There is so much money floating around in the upper reaches of the economy that interest rates are of little concern to its denizens. Their problem is one shared with drug dealers; where do you stash your money to keep it safe? Investing in zero or negative interest bonds is like paying a small fee for a safety deposit box for your valuables. Having more money than you could possibly spend makes it reasonable to buy luxury real estate and let it sit empty. Property taxes and maintenance represent negative cash flow, but who cares?

40

nastywoman 07.28.20 at 5:18 am

@37
”I don’t think I understand capitalism more than superficially. And as both the OP and the comments demonstrate, neither does anybody else”.

Hey!
I did – as I read the definition of ”Capitalism” before commenting – and as the definition says:
”An economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state”.
AND the Virus now made sure that even in the utmost ”capitalistic” countries ”the economic and political system” HAS to be controlled by ”the state”-(at least for the time being) ”Capitalism” is dead -(for the time being)

Killed by the Virus.

41

nastywoman 07.28.20 at 6:29 am

and let’s NOT forget how the hunt for ”good” returns – motivated all of these… people getting into the Stock Casino – during the lockdown – as there was nothing else to do – for a lock downed Capitalist) – than calling his or her broker –

And did you guys ever see the numbers of new ”Investors(gamblers) during the lockdown? It included ALL these retirees of my family who NEVER EVER would play with Stocks if there (still) would be ”decent” returns from saving accounts.

So in a very (ironius?) way the low interest rates created a whole new ”class” of InvestmentCapitalist who NOW pray that sooner than later ”Capitalism” -(in accordance to the words definition) returns to ”an economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state”.

42

J-D 07.28.20 at 8:28 am

One of the most frustrating aspects of any discussion of capitalism is that no two people seem to mean the same thing with that term.

https://rationalwiki.org/wiki/Rationalist_taboo

When you find yourself in philosophical difficulties, the first line of defense is not to define your problematic terms, but to see whether you can think without using those terms at all. … Describe outward observables and interior mechanisms; don’t use a single handle, whatever that handle may be.

More specifically, in this case, don’t waste time in futile joyless wrangling about which is the ‘correct’ definition of ‘capitalism’; instead, try to figure out if you can express whatever point it is that you are trying to make using terminology which is more concrete and less abstract*.

(The technique is not a panacea, but it does have value.)

It is impossible to avoid abstraction entirely when using language, because all language is abstract, but it’s not all equally abstract: there’s a big difference between more abstract language and more concrete language. Abstraction, like fear, fire, habit, and tradition, is a good servant but a bad master. Use it, but don’t let it run you.

43

Zamfir 07.28.20 at 10:15 am

If interest rates are low, is capital now easy to get? That would genuinely imply the end of capitalism, I think. For a wide range of definitons of capitalism.

But I see no sign of that. Some organizations can trivially get all the capital they want, but those are all organizations that don’t need it. That’s why they are considered such safe investments. And if you lend money to such organizations, they will not increase their investments (since they could financne any of their investment plans from regular cash flow). The lender is not really investing in them, in the sense of providing capital that the borrower needs. They are just storing money for future use, and might well be paying the borrower for that service.

But if you do need outside capital for plans, then you are almost by definition a somewhat risky investment, and often you are an idiosyncratic risk. An outside investor has to understand the pecularities of your situation, in order to judge the risk that they might be taking. You cannot just raise money from an arms-length, liquid market for abstract “capital”.

That’s the playfield of professional capitalists, and they sure as hell are getting money and power from that field, even in th zero-interest world.

John talks about the “pure form of interest”, but I would say that capitalism is mostly about the non pure-parts, and those parts are not disappearing. The important capialists are not the people who put their monthly savings in treasuries and Microsoft bonds.

Those might be the median capitalists, just as the median musician is someone who sings in their shower. If showers were to becoming less resonant, it would not be the end of music as we know it.

44

Alex SL 07.28.20 at 10:15 am

Lee Arnold,

I see now, thanks!

45

reason 07.28.20 at 4:28 pm

Andres for once I disagree. The secular decline in interest rates (and all returns on investment) is because we (the West) has been increasing debt and using most of the debt to buy assets (mostly shares and land) considered safe and the higher the price the lower the return. Has nobody read “Between Debt and the Devil”. This is not complicated. We used to ration credit. Now we throw it around like confetti. And companies buy back stock using debt.

46

likbez 07.28.20 at 5:39 pm

There is “capitalism” and there is “financial capitalism. ” They are twoo different social models. Many people mix them, but they are very different.

Financial capitalism has huge and by-and-large parasitic superstructure of financial firms including investment banks, variety of hedge funds, private equity. and mutual funds companies like Vanguard and Fidelity which enrich themselves via stock and bond markets.

In this sense, the version of neoliberalism that currently exists in the USA can be called casino capitalism as stock marker clearly plays completely outsize role. They even manage to enroll regular schmucks via 401K plans ;-)

And those financial intermediaries are essentially the power behind the thrown. In other words they have almost absolute political power and rule the country. For example, Senator Schumer is not so much the senator from NY as the senator from Wall Street. As Dick Durbin aptly formulated it, the situation is such that:

“And the banks — hard to believe in a time when we’re facing a banking crisis that many of the banks created — are still the most powerful lobby on Capitol Hill. And they frankly own the place,”

The implications of this this fact need to be understood more fully.

47

Hidari 07.28.20 at 6:32 pm

For me capitalism is a solution to the problem: how do you make people do shit they don’t really want to do? And in any given society there are always lots of things that people don’t really want to do.

In the old slave societies (Rome, Greece etc.) the solution is very simple. You force them to work, and if they don’t, you torture or kill them. There are other things going on as well, of course (there is a land-owning aristocracy, and, in Rome, a system of advanced bribery of the poor called ‘the dole’) but that’s the basic system.

In feudalism, however that is defined, there is a web of mutual obligations between the rich and the poor. Both of these kinds of societies, non-coincidentally, are primarily agrarian, and, in the case of the slave societies, relatively technologically ‘backward’ (indeed, it was to a great extent because they were slave societies that they were ‘backward’: there was no incentive for an industrial revolution when you could just force people to do’ the dirty work’).

In capitalism, you pay people to sell their labour power in a (more or less) free market, usually in cities (which capitalism creates, and which capitalism also needs, in order that capitalists have access to a large labour market). Most of the rest of the stuff that capitalism allegedly ‘needs’ don’t strike is as essential to the system: e.g. private property which almost all cultures have that are not hunter-gatherers.

But capitalism must have the majority of its economy in private hands (not those of the state, or the landed aristocracy) who make their profits from hiring people to do things that they (i.e. the capitalists) either can’t or won’t do. Workers sell their labour power: in response they get cash. Capitalists buy raw materials (or other commodities, to make other commodities, or to create services which are, so to speak, parasitic on commodities) , pay workers to turn these raw materials into commodities, which are then sold in the ‘open market’ in exchange for cash, which, minus the cost of the initial commodities (i.e. the commodities used to make the commodities: i.e. .factor equipment etc) and minus the cost of workers’ wages, and other sundries, is profit.

So I’m not really convinced that low interest rates is going to stop this system. It means that capitalists can’t easily invest their profits in banks, but they can engage in countless other ways to increase their profits (investing in the stock market, crypto, god knows what else). Also it means it’s extremely cheap to borrow to buy plant and other things, and if interest rates go negative, well there’s another incentive.

Don’t get me wrong, capitalism is obviously in serious trouble, and, unlike in the 1970s, the last time it was in such serious trouble, there is no obvious way out. But I think there’s life in the old dog (or bitch) yet.

48

Peter T 07.29.20 at 10:22 am

Side notes:

The ‘dole’ in ancient Rome was just one version of an ordinary obligation assumed by many cities in the classical world – to ensure that all citizens had at least a basic subsistence. It was the Roman welfare net. It was widely seen as a duty of rulers to assure the food supply, both then and later.

Dr Hilarius @39 is right to point to drug dealers – the literature shows them to be extraordinarily careless of profit or even basic accounting, so long as there is enough for immediate luxury consumption (and there usually is). Losses as high as 50% of turnover are accepted with equanimity. In this light, it makes sense to ask what attitude the 1% have to their ‘wealth’.

49

steven t johnson 07.29.20 at 3:10 pm

The OP has anticipated Hidari@47, by explaining what capitalism is.

Peter T@48 remarks “… it makes sense to ask what attitude the 1% have to their ‘wealth’.”
Historically, such issues center on the reproduction of class wealth for the families. The true bourgeois family is estate and heirs. (The notion of the “nuclear family,” unless it’s seen as a child at the breast, is highly ideological in my opinion.)

50

steven t johnson 07.29.20 at 3:14 pm

PS likbez@46 reminded me of a line from the movie Reds. Warren Beatty’s John Reed spoke of people who “though Karl Marx wrote a good antitrust law.” This was not a favorable comment. The confusion of socialism and what might be called populism is quite, quite old. Jack London’s The Iron Heel has its hero pointing out even before the Great (Class) War that the normal operations of capitalism, concentration and centralization, destroyed the middle class paradise of equal competition. It wasn’t conspiracies.

51

likbez 07.29.20 at 11:56 pm

@steven t johnson 07.29.20 at 3:14 pm (50)

Jack London’s The Iron Heel has its hero pointing out even before the Great (Class) War that the normal operations of capitalism, concentration and centralization, destroyed the middle class paradise of equal competition.

I think the size of the USA military budget by itself means the doom for the middle class, even without referring to famous Jack London book (The Iron Heel is cited by George Orwell ‘s biographer Michael Shelden as having influenced Orwell’s most famous novel Nineteen Eighty-Four.).

Wall Street and MIC (especially intelligence agencies ; Allen Dulles was a Wall Street lawyer) are joined at the hip. And they both fully control MSM. As Jack London aptly said:

“The press of the United States? It is a parasitic growth that battens on the capitalist class. Its function is to serve the established by moulding public opinion, and right well it serves it.”
― Jack London, The Iron Heel

Financial capitalism is bloodthirstily by definition as it needs new markets. It fuels wars. In a sense, Bolton is the symbol of financial capitalism foreign policy.

It is important to understand that finance capitalism creates positive feedback loop in the economy increasing instability of the system. So bubbles are immanent feature of finance capitalism, not some exception or the result of excessive greed.

52

Andres 07.30.20 at 1:37 am

reason @45: I focused on Treasury bonds because that is what John emphasized. However, the flight to safe assets could include things like land and stock buybacks, although the perceived safety of either of the latter might come under question in the future. For example, possible depletion of the Ogallala Aquifer might seriously cut into the value of Great Plains farmland; summer wildfires might do the same with land in outlying California suburbs. And a large company that looked like a safe bet might temporarily or even permanently tank if there’s a large enough natural disaster, fundamental innovation (e.g. Nokia immediately after smart phones), or even policy intervention (anti-trust against Amazon? It happened to Standard Oil after all…).

But that doesn’t fundamentally change the picture: as productivity growth has dropped, the proportion of profitable and (relatively) safe capital improvement investment projects has dropped. So you get the seeming paradox of plentiful credit but relatively little investment, leading to slow aggregate demand growth (it took a full 12 years after 2008 for the economy to reach something like full capacity before covfefe virus pulled out the rug from under us) and anemic realized productivity gains.

That’s the worrying thing from the point of view of a Keynesian or Marxist. But the worrying thing is that despite the slower growth and the “secular stagnation” look of productivity gains, there wasn’t that much downward pressure on throughput, whether of carbon dioxide emissions, landfill wastes, microplastics and whatnot, until Mother Nature decided to send a reminder that she can still get medieval on us.

So the movement of big capital toward Treasuries is not surprising, even if it is suboptimal and investment in clean energy and ocean cleanup is far more pressing. likbez does have a point that U.S. capitalism at least is finance-dominated and therefore even less sensitive to environmental or distributive concerns than standard capitalism. To paraphrase Donald Rumsfeld, you get through the global crisis du jour with the capitalism you have, not the capitalism you think would be optimal.

53

steven t johnson 07.30.20 at 1:51 pm

likbez@51 is factually incorrect in calling The Iron Heel a “famous book,” even if it is why Jack London is now almost entirely the author of children’s animal stories. And if 1984 is anything, it is an negative of The Iron Heel. There is a reason it is taught to high school children but this is not flattering to Orwell. But enough quibbles: The last sentence should be something like, “So financial capitalism is the inevitable outcome of capitalist growth, not some exception to be remedied by simple reforms, nor the result of human greed in financiers and stupidity in voters.”

Andres@52 wrote “That’s the worrying thing from the point of view of a Keynesian or Marxist. But the worrying thing is that despite the slower growth and the
secular stagnation’ look of productivity gains, there wasn’t that much downward pressure on throughput, whether of carbon dioxide emissions, landfill wastes, microplastics and whatnot, until Mother Nature decided to send a reminder that she can still get medieval on us.”

Given that “throughput” includes things like food, clothing, shelter, etc. this is a lament that people are not yet dying in helpfully large enough numbers to save the earth. Or, possibly, to lament that China is growing so much (and to a lesser degree India etc.)

54

aepxc 07.30.20 at 2:20 pm

I think it is incorrect to view money as capital rather than as debt – if you pay me for my work, it means that I produced (but not consumed) something of value and you have given me a generalized IOU. From another perspective, find yourself stranded on a desert island with a million dollars in cash and another million in gold bullion, and you would do far worse than you would with a plough and a few sacks of potatoes. Returns to money, therefore, reflect more of what is happening with distribution of social power, than what is happening with economic productivity.

Identified problems with innovation or productivity growth are also indicative of the same. For productivity, the amount of human labour necessary to produce a widget or resolve a question. Imagine the effort it would have taken to film and globally distribute a video of your yawning cat even 100 years ago. Conversely, the fact that massive data centers are built to support 3-times-viewed cat videos and lots of clever people spend lots of time inventing lots of clever ways to make said videos load 0.001 second faster also does not mean that we have run out of problems to solve or the capacity to come up with ideas to solve them. Billions of people still exist (and deeply desire) basic and long-available innovations such as electricity, running water, and a centralized sewage system, let alone fridges or washing machines. It’s just that these people cannot afford these innovations, and that again is a money (and, therefore, power) allocation issue.

55

MisterMr 07.30.20 at 2:20 pm

In my opinion, financial capitalism is the normal form of capitalism, it is other forms of capitalism that are weird and are produced by specific situations (e.g. high marginal taxes and financial repression during the New Deal period).

What is the defining carachteristic of financial capitalism? In my opinion it is an high overall wealth to income ratio (as the high wealth is financial wealth).
If we go back to Piketty, we see that pre ww2 the wealth to income ratio was high, during the new deal it was low, and now it is high again (hence the death of interest, which doesn’t mean that the share of NDP that goes into interest is low but that the amount of credit that draws from that share is high).

However I’m sceptic of the idea that this is all something caused by Big Finance, rather I think that the increase in debt levels (and hence in wealth, since someone’s debt is someone else’s wealth) acts as a safety valve for a capitalist economy.

The problem is that it seems that we reached the end of said safety valve.

56

Andres 07.30.20 at 11:26 pm

steven t johnson @53: “Given that “throughput” includes things like food, clothing, shelter, etc. this is a lament that people are not yet dying in helpfully large enough numbers to save the earth. Or, possibly, to lament that China is growing so much (and to a lesser degree India etc.)”

Well steven, so much for my ever taking you seriously as a CT commenter.

Just to provide the arguments dumbed down to your satisfaction, the theory of reducing throughput is that it can be done by either (a) making the production technology more efficient, such as renewable energy instead of carbon emission-generating fossil fuels, and (b) reducing necessary throughput by slowing down population growth through voluntary means such as family planning, birth control, etc. Also, advocating reduced throughput is not the same thing as being a de-growth proponent. Growth can still theoretically be combined with reduced throughput through a greater emphasis on services and cleaner technologies, though there is considerable debate as to how much substitution can actually take place.

But I think you already knew all of this. If it’s any comfort, you are not the first blog commenter to have resorted to the “reduced throughput advocates are dog-whistle supporters of genocide or the impoverishment of Asian countries” pattern of argument. It gives off a malodorous stench of Roy Cohn on the white wine side and Andrei Vyshinsky on the red wine side. It also means I am done replying to you, ever.

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