The Retson Tedheke's Blog: Economics

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The Ideas of Karl Marx are Redefining Political Economy, Class Struggles and Humanity Today - Alan Woods

The ideas of Marx have never been more relevant than they are today. This is reflected in the thirst for Marxist theory at the present time. In this article, Alan Woods deals with the main ideas of Karl Marx and their relevance to the crisis we're passing through today.

It is 130 years since the death of Karl Marx. But why should we commemorate a man who died in 1883? In the early 1960s the then Labour Prime Minister Harold Wilson declared that we must not look for solutions in Highgate cemetery. And who can disagree with that? In the aforementioned cemetery one can only find old bones and dust and a rather ugly stone monument. However, when we speak of the relevance of Karl Marx today we refer not to cemeteries but to ideas—ideas that have withstood the test of time and have now emerged triumphant, as even some of the enemies of Marxism have been reluctantly forced to accept. The economic collapse of 2008 showed who was outdated, and it was certainly not Karl Marx. For decades the economists never tired of repeating that Marx’s predictions of an economic downturn were totally outdated. They were supposed to be ideas of the 19th century, and those who defended them were dismissed as hopeless dogmatists. But it now turns out that it is the ideas of the defenders of capitalism that must be consigned to the rubbish bin of history, while Marx has been completely vindicated. Not so long ago, Gordon Brown confidently proclaimed “the end of boom and bust”. After the crash of 2008 he was forced to eat his words. The crisis of the euro shows that the bourgeoisie has no idea how to solve the problems of Greece, Spain and Italy which in turn threaten the future of the European common currency and even the EU itself. This can easily be the catalyst for a new collapse on a world scale, which will be even deeper than the crisis of 2008.

The excesses of capitalism are not simply a question of bad management and a political unwillingness to properly regulate it by imposing the right sort of checks and balances, but symptoms of a fundamentally and irretrievably flawed system that tends toward destruction of human and other life.

The idea of capitalism as an expression of economic freedom that also secures moral and political freedom of thought, or the notion that "free-market" economies are guided by an impartial mechanism of supply and demand - an "invisible hand" to use Adam Smith's metaphor - are both powerful indoctrinating notions. As such, they bear little resemblance to actual reality. Smith himself never used the word "capitalism," preferring to call his economics a "system of natural liberty." In fact, the inner logic of capitalism can be difficult to get hold of simply because there have been different configurations of capitalism throughout history. In its classic form, before the advent of corporations (when there was still an implicit sense of social responsibility, and insatiable greed was considered a vice), capitalism might have appeared less virulent. Additionally, there is reason to believe that capitalism unfolded differently in different countries with distinct political and legal frameworks.

"The goal of neoliberal economic globalization is the removal of all barriers to commerce, and the privatization of all available resources and services. In this scenario, public life will be at the mercy of market forces, as the extracted profits benefit the few"

The thrust of international policy behind the phenomenon of economic globalization is neoliberal in nature. Being hugely profitable to corporations and the wealthy elite, neoliberal polices are propagated through the IMF, World Bank and WTO. Neoliberalism favours the free-market as the most efficient method of global resource allocation. Consequently it favours large-scale, corporate commerce and the privatization of resources. There has been much international attention recently on neoliberalism. Its ideologies have been rejected by influential countries in Latin America and its moral basis is now widely questioned. Recent protests against the WTO, IMF and World Bank were essentially protests against the neoliberal policies that these organizations implement, particularly in low-income countries. The neoliberal experiment has failed to combat extreme poverty, has exacerbated global inequality, and is hampering international aid and development efforts. This article presents an overview of neoliberalism and its effect on low income countries.

On the free market it is legal and customary to violate the dignity of our fellow human beings.

When I ask students attending my lectures at the Vienna University of Economics and Business what they understand human dignity to be, I frequently encounter a general, awkward silence. The students do not appear to have heard or learned anything about it in the course of their studies. This is all the more alarming considering the fact that dignity is the highest value: it is the first-named value in countless constitutions and it forms the basis of the Universal Declaration of Human Rights. Dignity signifies value: the same, unconditional, unalienable value of all human beings. Dignity requires no “achievement” other than existence. It is from the equal value of all human beings that our equality derives – in the sense that all human beings living in a democracy should have the same liberties, rights and opportunities. And only if everyone really does have the same liberties is the condition fulfilled for enabling everyone to be really free. Immanuel Kant wrote that human dignity can only be preserved in daily life and interactions if we deem and treat each other as being of equal value: “So act that you use humanity, whether in your own person or in the person of any other, always at the same time as an end, never merely as a means.” [emphasis Kant’s]

I reported earlier this month that the Financial Times published a pair of important articles asking why the goal of a firm is to maximize short-term shareholder value is still being taught in business schools. “While there is growing consensus that focusing on short-term shareholder value is not only bad for society but also leads to poor business results, much MBA teaching remains shaped by the shareholder primacy model.” The challenge is massive because shareholder value is now deeply embedded in the basic economics that is taught in business schools and economics faculties around the world. Moving on from the shareholder value theory, which even its foremost exemplar, Jack Welch, has called “the dumbest idea in the world”, will entail re-thinking and re-writing much of the basics of modern economics.

Contemporary capitalism is characterized by a political economy which revolves around finance capital, is based on a savage form of free market fundamentalism, and thrives on a wave of globalizing processes and global financial networks that have produced global economic oligarchies with the capacity to influence the shaping of policymaking across nations. As a result, contemporary advanced capitalist societies are plagued by dangerous levels of income and wealth inequality, mass unemployment, rising poverty rates, social polarization, and collapsing social provisions. Furthermore, democracy and the social contract are under constant attack by the current system and there is an ongoing pressure by the corporate and financial elite to convert all public goods and services into private goods and services.

The rising inequality in advanced capitalist countries is well documented. Most recently, Thomas Piketty’s publishing sensation Capital in the Twentieth-First Century, translated into English and published by Harvard University Press, provides massive data showing a widening gap between the rich and the poor, thus questioning not only the claim that the capitalist economy works for all but also underscoring the point of how dangerous the current system is to democracy itself. Indeed, a few years ago, Larry M. Bartels’s Unequal Democracy: The Political Economy of the New Gilded Age, published by Princeton University Press, pointed to the same gap between the rich and poor in the United States under Republican administrations. The way wealth has changed in the United States over the last few decades, with those in Generation X and Generation Y accumulating “less wealth than their parents did at the same age 25 years ago”, is also demonstrated in a study produced by Eugene Steuerle, et. al. on behalf of the Urban Institute in Washington DC. And in a recent Strategic Analysis released just this past spring by the Levy Economics Institute with the title “Is Rising Inequality a Hindrance to the US Economic Recovery?”, the authors, Dimitri B. Papadimitriou, et al., demonstrate through macro modeling simulations that the current processes of inequality in the United States are unsustainable and that, if they continue, will result in weak growth and increased unemployment.

As for the problem of mass unemployment, the facts speak for themselves. Five years after the alleged end of the global financial crisis, the official unemployment rate in the US remains as of May at 6.3% (it averaged 5.8% from 1948 until 2014) while in the eurozone the official unemployment rate as of May 2014 stood at 11.6%. In the periphery of the eurozone, which has been hard hit by austerity policies conceived in Brussels, Frankfurt and Washington as part of the international bail-out programs that went into effect when several eurozone periphery countries reached the brink of bankruptcy after the global financial crisis of 2008-09 reached Europe’s shores, the official unemployment rates has reached stratospheric levels: 27% for Greece; 25% for Spain; 15% for Portugal; and 12% for Ireland, the nation with the highest emigration rate in all of Europe and whose government was actually asking the unemployed as of recently to leave and take jobs in other European countries. In Greece, six years of an austerity-caused depression have shrunk the nation’s GDP by a quarter. Yet, both European Union (EU) officials and their lackeys in Athens have been trying hard to convince Greek citizens that a “success story” is under way because the enforcement of a draconian fiscal adjustment which dropped the standard of living back to 1960 levels produced a primary surplus. In the meantime, the debt-to-GDP ratio has reached an all-time high, rising from less than 139% in 2009 to nearly 180%.

Ireland’s public debt, which stood at 25% of GDP in 2008, grew to nearly 65% by 2010 and climbed to over 125% by the end of 2013. Yet German Chancellor Angela Merkel also hailed Ireland’s experience with austerity as a “tremendous success story”. Portugal’s public debt, which was slightly less than 70% in 2008, jumped to over 100% by 2011 and then to over 130% by 2013. That’s another “success story”. And Spain’s public debt has surged to nearly 95% of GDP, standing at close to 1 trillion euros – three times as much as it was at the start of the crisis in 2008 – and is projected to go over 100% by the end of 2014. In short, all the bailed-out eurozone countries are sinking under the weight of debt while unemployment spreads like the plague – the result of the “voodoo” economics that the witch doctors of the EU and the International Monetary Fund cooked up in order to formulate the so-called “rescue” plans. However, according to national government and EU propaganda, everything in the periphery is working in compliance with the strategic plan for helping those countries exit the crisis.

Denial of reality, deception and distortion are traditional tactics used by the powers-that-be and their elite intellectual acolytes. We also saw this in the reaction of major media outlets like The Financial Times, Bloomberg, and Forbes Magazine, to name but just a few, to the publication of Piketty’s book. The Frenchman either adopted aflawed methodology, or got his data wrong, or is simply engaging in anti-capitalist propaganda. Indeed, as yet another commentator of the Financial Times stressed, with the belief that he hit a gold vein, upon reviewing Capital in the Twentieth-FirstCentury, even if Mr. Piketty’s data about increasing inequality in capitalist societies are correct, he is not telling us why inequality is bad! In other words, Mr. Martin Wolf was essentially pondering about just what is so wrong with predatory capitalism making the rich richer and the poor poorer? As actually existing capitalism has given up any pretext of being a “socially responsible” socioeconomic system and caters almost solely to the needs and interests of the rich and powerful by enforcing policies that are detrimental to the rest of society, the defenders of the status quo will get even more dangerous by denying the ugly truth about predatory capitalism. They don’t want to hear that actually existing capitalism is a system that favors passionately and defends ruthlessly the interests of the 1% over those of the rest of society. Doing so might jeopardize the goal of the elite to roll back the course of history to the detriment of the working populations so they can further enrich themselves and act like the new rulers of the world.

C.J. Polychroniou is a political economist/political scientist who has taught and worked in universities and research centers in Europe and the United States. His main research interests are in European economic integration, globalization, the political economy of the United States and the deconstruction of neoliberalism's politico-economic project.

The original article can be found here

"Americans need to realize that our economy has thrived not in spite of government, but in many ways because of government. Without a whole host of government rules, capitalism could not exist. Even regulations and social programs help sustain a market economy by fixing many of its serious social and economic problems.”

One of the most common and misleading economic myths in the United States is the idea that the free market is “natural” – that it exists in some natural world, separate from government. In this view, government rules and regulations only “interfere” with the natural beneficial workings of the market. Even the term “free market” implies that it can exist free from government and that it prospers best when government leaves it alone. Nothing could be further from the truth. In reality, a market economy does not exist separate from government – it is very much a product of government rules and regulations. The dirty little secret of our “free” market system is that it would simply not exist as we know it without the presence of an active government that creates and maintains the rules and conditions that allow it to operate efficiently.

With workers around the world burdened by joblessness and stagnant incomes, Marx’s critique that capitalism is inherently unjust and self-destructive cannot be so easily dismissed

Karl Marx was supposed to be dead and buried. With the collapse of the Soviet Union and China’s Great Leap Forward into capitalism, communism faded into the quaint backdrop of James Bond movies or the deviant mantra of Kim Jong Un. The class conflict that Marx believed determined the course of history seemed to melt away in a prosperous era of free trade and free enterprise. The far-reaching power of globalization, linking the most remote corners of the planet in lucrative bonds of finance, outsourcing and “borderless” manufacturing, offered everybody from Silicon Valley tech gurus to Chinese farm girls ample opportunities to get rich. Asia in the latter decades of the 20th century witnessed perhaps the most remarkable record of poverty alleviation in human history — all thanks to the very capitalist tools of trade, entrepreneurship and foreign investment.

Growth for the sake of growth is the ideology of the cancer cell –-Edward Abbey

A collection of paper money and coinage from around the world mixed together. Money, and more specifically, the profit motive, have put human life dangerously out of balance, with rampant inequality and poverty. (Flickr / epsos.de)

Capitalism can be defined as a system under which industries, trade and the means of production are largely or wholly privately owned and operated for profit. Following the end of feudalism, it dominated the Western world, and thanks to imperialism this domination extended to the global economic system by the end of the 19th century. Entering the 21st century, it continues to reign unchallenged as the world’s pre-eminent economic doctrine. The world’s richest person (Bill Gates) has a personal wealth of $78.7 billion. This is higher than the(nominal) GDP of 130 countries, including Uruguay (population 3.4m), Ecuador (population 15.9m), Bulgaria (population 7.2m) and Croatia (population 4.3m). The wealth of the top ten richest people combined is $544 billion — higher than the GDP of 172 of the 194 nations for which UN data is available, including Thailand (population 65m), South Africa (population 54m), Egypt (population 88m), Portugal (population 10.4m) and Czech Republic (population 10.5m). Almost half the world’s population, over 3 billion people, live on less than $2.50 a day. According to UNICEF, 22,000 children die EACH DAY due to poverty. They “die quietly in some of the poorest villages on earth, far removed from the scrutiny and the conscience of the world. Being meek and weak in life makes these dying multitudes even more invisible in death.” Nearly a billion people entered the 21st century unable to read a book or sign their names. For every $1 in aid a developing country receives, over $25 is spent on debt repayment. Less than one per cent of what the world spent every year on weapons was needed to put every child into school by the year 2000. [Sources. (Note: site last updated in January 2013. Some data is a few years out of date, meaning it is likely to be worse now as global inequality has widened.)

You’d think with all the “stimulus” from Washington over the fifteen years since the dotcome bust, American capitalism would be booming. It’s not. On the measures which count when it comes to sustainable growth and real wealth creation, the trends are slipping backwards — not leaping higher. After a look at new jobs data in April, we find the number of breadwinner jobs in the US economy is still two million below where it was when Bill Clinton still had his hands on matters in the Oval Office. Since then we have had two presidents boasting about how many millions of jobs they have created and three Fed chairmen taking bows for deftly guiding the US economy toward the nirvana of “full employment.” When you look under the hood, it’s actually worse. These “breadwinner jobs” are important because they’re the only sector of the payroll employment report where jobs generate enough annual wage income — about $50k — to actually support a family without public assistance. Moreover, within the 70 million breadwinner jobs category, the highest paying jobs which add the most to national productivity and growth — goods production — have slipped backward even more dramatically. There were actually 21 percent fewer payroll jobs in manufacturing, construction and mining/energy production reported in April than existed in early 2000.

While identifying the data indicating income inequality, economists have little to say so far as to its fundamental causes—and even less to say about the jobs crisis.

Three global capitalist research institutes recently released reports documenting a growing ‘global jobs crisis’. The World Bank, the OECD, and the International Labor Organization (ILO) all came to the same conclusion. The Group of 20 nations’ employment ministers thereafter meeting in Australia issued a joint statement on the three institutes’ conclusion that “the world’s largest economies are failing to create enough jobs and too many of those that are being produced are of a low quality to generate a meaningful boost to global growth” (The Financial Times, September 10, 2014). As the World Bank’s senior director for jobs put it, “there is little doubt there is a global jobs crisis”. All three reports identify converging trends across all the advanced economies (AEs) of Europe, North America, and Japan. Not only is total unemployment rising long term, but the percentage of youth employment and the chronically long-term jobless are also growing. So too are part time and temp jobs rising sharply as a percent of the labor force in the AEs.

Like an old machine emitting a new and troubling sound that even the best mechanics can’t diagnose, the world economy continues its halting recovery from the 2008 recession. Look at what’s happening in the United States: Even today, 60 months after the scorekeepers declared the recession to be over, its economy is still grinding along, producing low growth and disappointing job numbers. One phenomenon we’ve observed is that, despite historically low interest rates, corporations are sitting on massive amounts of cash and failing to invest in innovations that might foster growth. That got us thinking: What is causing that behavior? Are great opportunities in short supply, or are executives failing to recognize them? And how is this behavior pattern linked to overall economic sluggishness? What is holding growth back? Most theories of growth are developed at the macroeconomic level—at 30,000 feet. That perspective is good for spotting correlations between innovation and growth.

Corporations are taking the retirement savings of elderly public employees and using them to inflate their stock prices so wealthy CEOs and their shareholders can enrich themselves at the expense of their companies. And it’s all completely legal. Under current financial regulations, corporate bosses are free to repurchase their own company’s shares, push stock prices into the stratosphere, skim off a generous bonuses for themselves in the form of executive compensation, and leave their companies drowning in red ink.

Even worse, a sizable portion of the money devoted to stock buybacks is coming from “massively underfunded public pension” funds that retired workers depend on for their survival. According to Brian Reynolds, Chief Market Strategist at New Albion Partners, “Pension funds have to make 7.5%,” so they are putting their money “in these levered credit funds that mimic Long-Term Capital Management in the 1990s.” Those funds, in turn, “buy enormous amounts of corporate bonds from companies which put cash onto company balance sheets…and they use it to jack their stock price up, either through buybacks or mergers and acquisitions…It’s just a daisy chain of financial engineering and it’s probably going to intensify in coming years.” (“How a Public Pension Crisis Is Driving an Epic Credit Boom“, Financial Sense). So, once again, ordinary working people are caught in the crosshairs of a corporate scam that could blow up in their faces and leave them without sufficient resources to muddle through their retirement years. The amount money that’s being funneled into buybacks is simply staggering. According to Dave Dayen at the Intercept:

“Last year, companies spent $553 billion to repurchase outstanding shares, just short of the record $589.1 billion in 2007. Large companies like Apple, General Motors, McDonald’s, Pfizer, Microsoft and more have engaged in buybacks in recent years. Returning profits to shareholders through buybacks and dividends accounted for 95 percent of all earnings in 2014. As a result, each additional dollar of corporate earnings now translates to under 10 cents of reinvestment, according to a study by J.W. Mason of the Roosevelt Institute.” (“SEC Admits It’s Not Monitoring Stock Buybacks to Prevent Market Manipulation“, Dave Dayen, Intercept)

This explains why business investment (Capex) is at record lows. It’s because the bulk of earnings is being recycled into buybacks, over $2.3 trillion dollars since 2009 to be precise. And it’s all connected to the Fed’s zero rate policy. Zero rates have created an environment in which corporations no longer look for ways to grow their businesses, expand operations, hire more employees or improve productivity. Instead, they look for the quick fix, that is, load up on debt, buy more shares, goose the stock price, and walk away with a bundle. It’s all about incentives. The Fed has created incentives that encourage financial engineering and stock manipulation as opposed to growth and productivity. And keep in mind that repurchasing shares is a form of margin buying, the same type of margin buying that triggered Stock Market Crash of 1929. According to Dayen: “Prior to the Reagan era, executives avoided buybacks due to fears that they would be prosecuted for market manipulation. But under SEC Rule 10b-18, adopted in 1982, companies receive a “safe harbor” from market manipulation liability on stock buybacks if they adhere to four limitations.” We won’t go over the regulations now because, as you can see, they obviously don’t work or these corporations wouldn’t be $2 trillion in the hole. But it is interesting to note that, at one time, policymakers saw how destructive buybacks were and were prepared to prosecute offenders for manipulation. I doubt that any of our regulators today would even dream of bringing a case against these corporate behemoths, after all, they pretty much own the whole show lock, stock and barrel.

The real danger of this buyback phenom, is that the corporations have piled on so much debt that any sharp decline in the market could push one or two of these giants into default. That, in turn, could quickly take down other counterparties touching off another financial crisis. So, the question regulators should be asking themselves, is how much red ink are these corporations hiding on their balance sheets and what are the risks to the public if they’re unable to repay their debts. According to Henry Blodget at Business Insider:

“As corporations have borrowed more and more money, the level of corporate debt relative to the size of the economy has continued to increase. As the chart below shows, this ratio is now at its highest level ever — even higher than it was in 2007, before the last debt-fueled economic implosion. Importantly, corporate net debt — the amount of debt that corporations are carrying minus the cash they have on hand (green line below) — is also at its highest level ever as a percent of the economy.”

(“Now It’s Time To Think About What Will Happen When Companies Stop Buying Back So Much Stock“, Business Insider)

Let’s summarize:

1. Buybacks are driving the stock market higher.

2. Corporations purchase buybacks with credit.

3. “The level of corporate debt relative to the size of the economy… is now at its highest level ever.”

What can we deduce from these three observations? First, that stock prices are a bubble and, second, that a significant stock market shakeout could leave some of the nation’s biggest corporations teetering towards insolvency. Of course, none of this is going to stop corporations from engaging in the same risky behavior. Heck, no. In fact, CEOs are actually looking for ways to speed up the buyback process. I’m not kidding. Check clip from yesterday’s Wall Street Journal:

“Companies are increasingly turning to accelerated share repurchase agreements…to return cash to shareholders and secure an immediate boost to per-share profits…..But these turbo-charged stock buybacks can backfire, especially when a steep market plunge—such as the 5.3% drop in the markets over the past two trading days. That’s because a steep plunge in stock prices can force the companies to potentially pay more to buy the shares through an ASR than what they would pay if they purchased the shares over time on the open market.   “Things can go wrong,” said Robert Leonard, head of specialty equity transactions at Citigroup Inc…. (“Accelerated Buybacks Less Favorable During Market Swoons“, Wall Street Journal)

You’re darn right, they can go wrong, but who gives a rip? Not America’s insatiable CEOs, that’s for sure. They’re just looking for faster ways to cash in, that’s all that matters to them. These guys aren’t even thinking about the health of their companies, let alone their customers. ‘Making widgets for the masses, is for suckers’, right? Corporate honchos have bigger fish to fry, like leveraging up their whole operation to its eyeballs, skimming the cream off the top, stuffing the moolah in an unmarked Caymans account, and slipping out the backdoor before the whole rickety structure comes crashing to earth. That’s modern-day capitalism in a nutshell. Slash and burn, Baby, just like big boys at the Pentagon. One last thing: Just to show the extent to which these corporate mandarins will go to enrich themselves at their company’s expense, check out this blurb from this 2014 article at Bloomberg:

“International Business Machines Corp. (IBM) is reducing stock buybacks after an $8.2 billion first-quarter splurge… IBM said last week it won’t sustain its rate of share repurchases in the first quarter, when buybacks more than tripled from a year earlier to the most since 2007. The company plans to spend less than $5.8 billion total in the final nine months of this year…. .   IBM’s sales have fallen from a year earlier for eight straight quarters…Declining sales and rising buybacks have squeezed IBM’s free cash flow…The repurchases, meanwhile, have taken a toll on IBM’s balance sheet. Total debt climbed to $44 billion in the first quarter, up from $33.4 billion a year ago….    During the first quarter, IBM issued $4.5 billion of new bonds, clearly used to fund buybacks, Black said…. “The company tapped the bond market five different times last year, then you have a pretty sizable February issuance,” Black said in the interview. “I feel like there is investor fatigue on the name.”  (“IBM End to Buyback Splurge Pressures CEO to Boost Revenue“, Bloomberg)

Okay, let’s translate this into English: IBM spent $8.2 billion in first-quarter on stock buybacks, even though “sales have dipped “from a year earlier for eight straight quarters”; even though “declining sales and rising buybacks have squeezed IBM’s free cash flow”; even though buybacks “have taken a toll on IBM’s balance sheet”; and even though “Total debt climbed to $44 billion in the first quarter, up from $33.4 billion a year ago.” Unbelievable, right? And that’s not even the best part. The best part is the fact that “The company tapped the bond market five different times last year.” In other words, they went to the bond market with ‘cup in hand’ and appealed to gullible investors to lend them more money to pay their lavish executive bonuses, to shower more dough on their worthless, do-nothing shareholders, and to keep this whole ridiculous farce going on a bit longer. Talk about balls! Tell me this, dear reader, when can we stop referring to this activity as “buybacks” and call it by its real name; looting?

Mike Whitney lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

The original article can be found here

The Consequences of Globalization and Neoliberal Policies - What are the Alternatives?

Are there alternatives to Plundering the Earth, Making War and Destroying the Planet?

No one asks these questions because they seem absurd. Yet, no one can escape them either. They have to be asked. Ultimate absurdity has taken hold of our lives. We are not only headed towards the world’s annihilation – we are headed towards it with ever increasing speed. The reason is the “globalization” of so-called “neoliberalism”. Its motto is TINA: “There Is No Alternative!” It is the deal of deals, the big feast, the final battle – Armageddon. Wrong? Exaggerated? Let us first clarify what globalization and neoliberalism are, where they come from, who they are directed by, what they claim, what they do, why their effects are so fatal, why they will fail, and why people nonetheless cling to them. Then, let us look at the responses of those who are not – or will not – be able to live with the consequences they cause.

There’s something seriously wrong with an economy that nurtures a few billionaires but can’t sustain the middle class. Many factors have been blamed for the plummeting fortunes of the American middle class: globalization, technology, deregulation, easy credit, the winner-take-all economy, and even the inevitable tide of history. But one under-appreciated factor is a pervasive business model that encourages top managers of American corporations to loot their company for short-term gains, depriving those companies of the funds they need to build and enlarge, and invest in their workers for the long haul. How do they loot their company? By using large stock buybacks to manage the short-term objectives that trigger higher compensation for themselves. By using those stock buybacks to manipulate the share price, which allows them to use inside information to time their own stock sales. By using buybacks to funnel most of the company’s profits back to shareholders (including themselves).

THEY USE THE STOCK MARKET TO LOOT THEIR COMPANIES:

“The ‘buyback corporation’ is in large part responsible for a national economy characterized by income inequality, employment instability, and diminished innovative capacity,” wrote William Lazonick, an economics professor at the University of Massachusetts at Lowell in a new paper published by the Brookings Institution. Lazonick argues that corporations — which once retained a sizable share of profits to reinvest (including investing in their workforce by paying them enough to get them to stay) — have adopted a “downsize-and-distribute” model. It’s not just lefty academics and pundits who think buybacks are ruining America. A few months ago, the CEOs of America’s 500 biggest companies received a letter from Lawrence Fink, CEO of BlackRock BLK, -0.51% the largest asset manager in the world, saying exactly the same thing. “The effects of the short-termist phenomenon are troubling both to those seeking to save for long-term goals such as retirement and for our broader economy,” Fink wrote, adding that favoring shareholders comes at the expense of investing in “innovation, skilled work forces or essential capital expenditures necessary to sustain long-term growth.” Other CEOs are beginning to agree. In April, Wisconsin Sen. Tammy Baldwin wrote to the Securities and Exchange Commission, asking the agency to re-evaluate its policies that encourage buybacks. “There is mounting evidence to suggest that buybacks have a negative effect on jobs, wages and investment, which in turn have negative impacts on innovation and long-term national economic growth, competitiveness, and security.”

HOW DID WE GET HERE?

In the early 1980s, in response to a crisis of non-competitiveness in American industry, a theory of “shareholder value” began to dominate American business, law and regulation.

"Share buybacks encourage executives to loot companies, stall innovation and depress wages"

According to this theory, anything that didn’t maximize the value of shareholders’ ownership was just a waste of time and money. The idea was that American companies couldn’t compete against the Japanese because managers weren’t doing what was in the interest of the owners. To get managers to think like owners, corporations made them owners. Top-level managers began to receive more of their compensation in the form of stock grants and options. In the 1980s, most CEOs and other top executives received most of their compensation in the form of an annual salary and a bonus, but by 2013 the highest paid executives received more than 80% of their compensation via stock options and grants. The pay of top executives has tripled in real terms since the early 1990s because of those options and grants. Top managers are paid according to how well the company’s share price is doing, especially in the short run, not on how well the company itself is positioned for long-term profits.

WHY DOES THIS MATTER?

Because one big reason for the increase in inequality in America since the 1980s is the explosion of compensation to top corporate executives, who now make up about 60% of the top 0.1% of earners. And because corporations are increasingly short-sighted, focused on maximizing the company’s share price over all other pursuits. So, when it comes to deciding whether the company should use its profits for risky investments that would pay off only in the long run, or whether that money should be used to buy back shares to boost the stock price and give managers a huge payday, the company’s managers often do the easy thing and take the money now. Even managers who are initially resistant to authorizing stock buybacks often succumb to the pressure of outside “activist investors” such as Carl Icahn, Daniel Loeb or T. Boone Pickens to “unlock” shareholder value by buying back as many shares as possible. Let’s be clear about our terminology here: Icahn is not really an investor in Apple Inc.; he’s a speculator in Apple shares AAPL, -0.05% Icahn has never contributed any financial or human capital to Apple’s success, unlike its original investors or its workers and executives, who provided the money and brains that made Apple the world’s most successful corporation. Or the taxpayers, for that matter, who funded the research that invented almost all the technology that makes an iPhone work.

STAGGERING SUMS:

The sums involved are staggering. In 2014, S&P 500 companies bought back $553 billion in shares, in addition to paying shareholders $350 billion in dividends. Total returns to shareholders equaled $904 billion, a bit shy of reported earnings of $909 billion. It’s not as if companies are raising lots of new capital from the stock market to replace the money they are handing over to shareholders. Banks are raising capital in the stock market, but net issuances of nonfinancial equities have been negative for 21 straight years. The companies that are doing the most buybacks — Exxon XOM, -2.06% IBMIBM, -1.05% Apple, Microsoft MSFT, -0.30% and Cisco CSCO, +0.56% — frequently return most of their annual profits to shareholders, leaving very little to invest in the future. From 2004 to 2013, Pfizer PFE, -0.43% returned 137% of profits to shareholders, Merck MRK, -0.47% returned 104%, and Hewlett-PackardHPQ, -2.48% returned 168%, according to Lazonick’s analysis. Stock buybacks are making a few people fabulously wealthy, but they are impoverishing the economy and the workers.

Lazonick argues that innovative companies need to invest time and money in facilities, equipment and especially in workers. Innovation and incremental productivity improvements come mainly from people who’ve learned how to work together and when a company allows itself to think in time periods longer than the next quarter or the next year. But buybacks hollow out a corporation’s ability to innovate. Workers don’t get the chance to learn how to solve problems together, because the managers need to downsize the company to make their short-term earnings targets and collect their millions. “The disappearance of this career employment in major business enterprises is central to the erosion of the American ‘middle class’ over the past three decades,” Lazonick concluded.

REX NUTTING; Is MarketWatch's international commentary editor, based in Washington. Previously he was Washington bureau chief, responsible for our economic and political coverage. Rex has been a journalist for more than 30 years, including 17 years with MarketWatch and long stints with UPI Financial, the Salt Lake Tribune and the (Quincy) Patriot-Ledger. He earned a master's degree in economics from The American University.

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Despite the fact that the manufacturers of ideas have elevated economics to the (contradictory) levels of both a science and a religion, a market theodicy, mainstream economics does not explain much when it comes to an understanding of real world developments. Indeed, as a neatly stylized discipline, economics has evolved into a corrupt, obfuscating and useless—nay, harmful—field of study. Harmful, because instead of explaining and clarifying it tends to mystify and justify.

One of the many flaws of the discipline is its static or ahistorical character, that is, a grave absence of a historical perspective. Despite significant changes over time in the market structure, the discipline continues to cling to the abstract, idealized model of competitive industrial capitalism of times long past. Not surprisingly, much of the current economic literature and most economic “experts” still try to explain the recent cycles of financial bubbles and bursts by the outdated traditional theories of economic/business cycles. Accordingly, policy makers at the head of central banks and treasury departments continue to issue monetary prescriptions that, instead of mitigating the frequency and severity of the cycles, tend to make them even more frequent and more gyrating. This crucially important void of a dynamic, long-term or historic perspective explains why, for example, most mainstream economists fail to see that the financial meltdown of 2008 in the United States, its spread to many other countries around the world, and the consequent global economic stagnation represent more than just another recessionary cycle. More importantly, they represent a structural change, a new phase in the development of capitalism, the age of finance capital.

A number of salient features distinguish the age of finance capital from earlier stages of capitalism, that is, stages when finance capital grew and/or circulated in tandem with industrial capital. One such distinctive feature of the age of finance capital is that, freed from regulatory constraints, finance capital at this stage can and often does grow independent of industrial or productive capital. Prior to the rise of big finance and the dismantlement of regulatory constraints, the role of finance was considered to be largely greasing the wheels of the economy. Commercial banks consolidated people’s savings as bank deposits and funneled them as credit to manufacturing and commercial enterprises. Under these circumstances, where regulatory standards stipulated the types and quantities of investments that commercial banks and other financial intermediaries could undertake, finance capital largely shadowed industrial capital; they grew or expanded more or less apace. Not so in the age of finance capital where buying and selling of ownership titles, instead of producing real values, has become the primary field of investment, and asset price inflation constitutes the main source of profit making and (parasitic) expansion. Not only has this slowed down the traditional flow of national savings (through the banking system) into productive investment in the real sector of the economy, it has, indeed, reversed that flow of funds into productive investment. Today, there is a net outflow of funds from the real into the financial sector.

The financial sector, properly functioning, primarily recycles idle balances into additional capital formation. Years of financial deregulation fostered the creation of new instruments, ever more reliant on Ponzi-like methods of profit acquisition, by reversing this dynamic and sucking profits out of production to expand the financial sector at the expense of productive investment. . . . The relationship between the financial sector and the nonfinancial sector had effectively morphed from symbiotic to parasitic [1].

A clear indication of this ominous trend of capital flight from the real to the financial sector is reflected in the glaring divergence between corporate profitability and real investment. Prior to 1980s, the two moved in tandem—both about 9% of GDP. Since then whereas corporate profits have increased to about 12% of GDP, real investment has declined to about 4% of GDP [2]. This obviously means that as larger and larger portions of corporate earnings are funneled out of the real sector into the financial sector (mostly through stock buybacks, dubious mergers and predatory takeovers), real investment has been dwindling accordingly. A closely related hallmark of the age of finance capital is that the draining mechanism of the real by the financial sector is facilitated by monetary policy, which is crafted by the financial aristocracy’s proxies at the head of central banks and treasury departments. Every sign of a market downturn is met with generous injections of cheap money into the banking and other financial institutions—ostensibly to stimulate production and employment by extending low-cost credit to real sector businesses/producers. In reality, however, the nearly interest-free funds thus bestowed upon the financial sector hardly leaks out to the real sector. Instead, it is invested in asset price inflation, or creation of market booms and busts. Each bust is “remedied,” once again, by injections of larger doses of public money and, thus, creation of a bigger bubble that, in turn, would entail higher social costs of bailing out the next bust—and so on.

Thus, when the so-called Third World debt bubble burst in the 1980s, big finance abandoned the debt-burdened nations in South–Central America and moved to new markets in Russia, Turkey, Indonesia, Thailand, South Korea and others in South-East Asia in search of fresh speculative ventures. After blowing a series of financial bubbles in these new markets, which were followed by bursts and economic crises in the second half of the 1990s, international financial speculators, once again, packed and hurriedly left the scene of their crimes, so to speak, in the hunt for newer fields of speculation. Technology sector was considered a favorable candidate for this purpose. Following the implosion of the tech- or dot-com bubble in the early 2000s, speculative finance moved to yet another market, the housing/real estate market, whose fantastically huge bubble burst in 2008, with disastrous consequences for the 99%. It is therefore no exaggeration to argue that, in the age of finance capital, central banks have evolved as institutions designed to subsidize the powerful financial interests with public money. Win-win gambling is, of course, an oxymoronic expression. Yet, that’s exactly what Wall Street banks and other financial institutions are enjoying nowadays: they win as long as the financial bubbles they create continue expanding, but they also win when the bubbles burst; as they are then compensated for their losses with bail-out monies and all kinds of other shady rescue plans.

And who would ultimately pay for the blackmailing moneys thus bestowed upon the too-big-to-fail banks and other financial entities? The answer is, of course, the people—through extensive measures of austerity cuts. Under liberal capitalism of the competitive industrial era, a long cycle of economic contraction would usually wipe out not only jobs and production, but also the debt burdens that were accumulated during the expansionary cycle that preceded the cycle of contraction. Although such massive debt destructions were often painful, especially to giant financial speculators, they also occasioned much larger salutary effects of unburdening the society/economy of unsustainable debts and, thus, bringing about a fresh start, or a clean slate. By contrast, in the age of finance capital debt overhead is artificially propped up through its monetization, or socialization. Indeed, due to the influence of powerful financial interests, national debt burden is often exacerbated by governments’ generous bailout plans of the bankrupt financial giants and the transfer or conversion of private to public debt. It follows that, in the age of finance capital, monetary policy has turned into an instrument of redistribution of income and/or wealth from the bottom up. This is, of course, diametrically opposed to conventional monetary (and fiscal) policies of the New Deal/Social Democratic era where such policies were designed to temper income/wealth inequality in favor of the grassroots. Not surprisingly, in all the core capitalist countries inequality became slightly less lopsided from the late 1940s to late 1970s but has become increasingly more uneven since the late 1970 and early 1980.

It also follows that, in general, financial capitalism is more conducive to inequality than the earlier stages of capitalism, or even the pre-capitalist socioeconomic formations. Under pre-capitalist modes of production as well as in the earlier stages capitalism, that is, under manufacturing or industrial capitalism, profit making required commodity/industrial production and, thus, employment of labor force. This meant that although labor was still exploited, it nonetheless benefitted from production—poverty or subsistence levels of wages notwithstanding. In the age of finance capital, however, profit making is largely divorced from real production and employment, as it comes mostly from speculative investment, or through parasitic extraction from the rest of the economy. As such, it employs no or a very small percentage of labor force, which means that the financial sector generates income/profits without sharing it with the overwhelming majority of labor force and/or society. Not surprisingly, chronic stagnation and chronically high rates of unemployment signify another hallmark of the age of finance capital. As the financial sector systematically appropriates the major bulk of a society’s economic surplus, it thereby undermines that society’ productive capacity. At the heart of the persistent stagnation, as mentioned earlier, is an acute decline in productive investment. By steadily absorbing a society’s economic surplus and engaging in financial manipulations to augment their own personal wealth at the expense of the public, the financial elites deprive the society of expanding its productive capacity and providing employment and income for its citizens. The result is protracted economic sluggishness, chronically high rates of unemployment, steadily declining standards of living, and growing poverty and inequality.

Ismael Hossein-zadeh is Professor Emeritus of Economics (Drake University). He is the author of Beyond Mainstream Explanations of the Financial Crisis (Routledge 2014), The Political Economy of U.S. Militarism (Palgrave–Macmillan 2007), and the Soviet Non-capitalist Development: The Case of Nasser’s Egypt (Praeger Publishers 1989). He is also a contributor to Hopeless: Barack Obama and the Politics of Illusion.

References

[1]Barry Finger, “The Limits of State Intervention,” <http://www.solidarity-us.org/node/2927>.

[2] Robin Harding, “Corporate investment: A mysterious divergence,” Financial Times, <http://www.ft.com/intl/cms/s/0/8177af34-eb21-11e2-bfdb-00144feabdc0.html#axzz2dN45MG7r>.

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