Professor Mariana Mazzucato is a heterodox economist at the UCL some way from Marxism but she shares with Marxists recognition of the importance of “value” in economic analysis. In neoclassical economics, the kind they currently teach in universities, a marginalist approach is adopted and value is synonymous with markets and market prices. For Marxists, value is the labour time consumed in producing a commodity, whether directly or through the consumption of other commodities in its manufacture.
Professor Mazzucato argues in an article in the Guardian today that neoclassical economics goes a long way to explaining the mess the world finds itself in today and the Covid-19 pandemic will provide an opportunity to abandon it and do capitalism differently . Since the 1980’s, she argues, it has resulted in: weakened institutions like the NHS that are needed to respond to crises; a loss of confidence in what governments can achieve; the destruction of the social safety net; and growing inequality.
There was, however, no golden age prior to the 1980s, just a brief period after the War when the mere existence of the USSR required western capitalists to treat their workers a little better.
Professor Mazzucato believes capitalism can be reformed provided governments
• invest in and, if necessary, create institutions to prevent and manage future crises.
• co-ordinate research and development, steering them to “public health goals”.
• structure public-private partnerships to ensure “both citizens and the economy benefit”.
• attach conditions to bail outs of private business to ensure that the firms we save with public money become part of a new economy delivering lower carbon emissions and “investing in workers”.
A version of “soft capitalism” that incorporated these features would certainly be a great improvement on the current version, but it ain’t gonna happen. Capitalism is a system whose sole purpose is the accumulation of capital. Until it is itself overturned, all obstacles that impede this accumulation will be swept away. When the current crisis is over, public institutions like the NHS that restrict capital accumulation will continue to be under-funded and undermined; private sector R&D will continue to be driven by profit, not social need; public-private partnerships will continue to rip off workers; and, while there are still hydrocarbons left in the ground that can be extracted and burnt at a profit, CO2 levels will continue to rise. This is how capitalism works. The only solution is a social revolution that ends it.
In the blog last week I suggested that the credibility of the agreement reached in Paris last weekend on climate change should be judged by what happened to the share prices of oil and gas producers following the announcement of the agreement – or at least following the first indication that such an agreement would be reached. If the agreement really signalled a switch away from oil and gas based economy, we could expect to see a significant fall in these share prices. What we actually saw was a fall of only some 3.6%. See the chart below:
Oil and Gas Producer’s index (NMX0530)
Under capitalism bad news tends to hit unexpectedly – or at least it comes as a surprise to the Nobel Prize winning economists and bank regulators who provide capitalism’s high priesthood. Under capitalism when problems are clearly predictable, they are, however, discounted at the so called “cost of capital”. This is the long run average return investors expect to rake in and is estimated by the priesthood to be about 5% per annum before inflation. Thus a cost, or loss of profits, occurring in 20 years time would be currently valued by markets at only 38% of the eventual cost in real (i.e. inflation adjusted) terms. Thus it could be argued that the observed 3.6% drop in share prices actually represents around a 10% drop in profits in 20 years time. But a fall in oil companies’ profits of only 10% by 2035 is hardly consistent with a target ceiling for global warming of 1.5 degrees centigrade and a new goal of net zero CO2 emissions by the second half of this century.
Conclusion: stock markets think capitalism is incapable of delivering the Paris Agreement. So do I. We need to replace capitalism.
Happy Christmas, everyone!
 In the past such crises tended to happen every fifteen years or twenty years, but the dot.com bubble bust in 2000 followed by the bank bust in 2007 suggests that such crises are now occurring more frequently.
 1.05-20 = 0.38
The agreement reached in Paris yesterday at the UN Convention on Climate Change (COP 21 See attached,) is to be welcomed. Recognition of a new target ceiling for global warming of 1.5 degrees centigrade and a new goal of net zero emissions by the second half of this century are both highly desirable. The first test of whether this agreement is to be taken seriously will be how stock markets respond when they open on Monday. If the share prices of oil, gas and coal companies fall substantially and stay down, this first test will be passed. We shall see.
It would be foolish to celebrate COP 21 and abandon all scepticism when the USA has yet to ratify the Kyoto Agreement and when our own government has been cutting green subsidies and is seeking to overcome environmental objections to a third runway at Heathrow (or the no less serious environmental objections to Gatwick expansion). Furthermore, there are no sanctions on governments who fail to deliver their obligations under COP 21. This is in sharp contrast to TTIP under which businesses will be able to prosecute governments who stand in their way of their profit making by taking into account environmental considerations. Can a government willing to sign up to TTIP be trusted to deliver under COP 21 when the latter has no sanctions?
A low carbon future is attainable, but whether it can be delivered without dismantling capitalism first is quite another matter.
It was Oscar Wilde at the end of the nineteenth century who gave us the definition of a cynic as someone who knows the price of everything and the value of nothing. It’s also a good description of 21st Century capitalism. Under capitalism, human activity is increasingly commodified and traded in markets. The market is held out to be the supreme arbiter, providing the price of everything from a loaf of bread to knowledge. Markets are assumed to be ‘perfect’ in the sense that they don’t reflect the interests of individual buyers or sellers and both have perfect knowledge about the commodity being traded. Any exceptions to these conditions are considered to be infrequent, relatively trivial and capable of being remedied by regulation. To the extent to which ‘value’ has any meaning under capitalism, it is the price indicated by a ‘perfect’ market and corresponds to the sum of future benefits from owning the commodity discounted to a present value, the discount rate being the so-called cost of capital, i.e. the average return on capital.
Marxists have a different view. Under capitalism, value derives from the labour, past and present, used to create a commodity. The function of markets is simply to re-distribute this labour value according to the current demand for the commodity. Furthermore, we don’t share the idealised view of markets held by neo-classical economists, the priesthood and apologist for capitalism. Many markets are far from ‘perfect’ and one in particular, the labour market, does not begin the approach this idealised fiction. The tendency in labour markets is to drive prices down to the minimum required for labour to replicate itself. When capitalism, riven by its own contradictions, is eventually overturned and the work to build a communist society begins, the role of markets will be reduced and the economy will be run to meet the needs of those who work, including future generations, not the needs of the 1% who currently own capital.
The difference between these two world views has been brought into sharp focus this week by the reports that, according to Professor Vladimir Romanovsky of the University of Alaska, permafrost in parts of Alaska would start to thaw by 2070, resulting in the release of huge quantities of methane into the atmosphere. Methane is a powerful greenhouse gas and its release could trigger a huge climatic and economic catastrophe 55 years from now. For Marxists, action must be taken now to avoid this catastrophe and protect future generations of workers. Our government should therefore be pressing at the UN Framework Convention on Climate Change in November for solid agreement on the policies needed to keep global warming under 2 degrees centigrade by 2050 and to make our contribution to achieving this. From the capitalist perspective, however, an event 55 years in the future has little impact on current market prices. Assuming a long run average annual return on capital of 6% real, the price of such a catastrophe, the price reflected in the market, is only 4% of its eventual cost. When we factor in the market ‘imperfection’ that the 1% who trade in capital markets expect to protect themselves and their families from the coming catastrophe which will disproportionately affect the poorest and we can begin to understand why our government, and other governments across the world, won’t be too concerned if they fail to reach the required agreement in Paris in November.