Saving European capital: it’s an existential challenge – Michael Roberts

“To summarise, the Draghi report outlines the serious decline in European capital’s competitive performance in the 21^st century compared to the US and Asia. It is an ‘existential challenge’ that can only be overcome by a massive rise in investment, mainly in new technologies. This can only be achieved by the capitalist sector investing more. Public investment is too small and, anyway, the EU’s pro-business governments don’t want to take over the major private companies and have planned public investment instead. That would be the end of a capitalist Europe. So Draghi says what they need to do is to encourage Europe’s big business to invest more with cheaper credit, deregulated markets and increased government fiscal incentives to “unlock private investment”. However, the chances of the governments of the EU member states agreeing to spend more to help EU businesses sufficiently is slim.

“The only way that the required humungous upswing in productive investment could happen is if the profitability of European capital leaps forward. But that won’t be achieved by making credit costs cheaper, but only by a sharp rise in the exploitation of labour in Europe and by the ‘creative destruction’ of ‘middle technology’ to reduce costs. If that does not happen, then the EU’s relative decline globally will continue and even accelerate.”

Comment: It’s interesting to consider Thomas Piketty’s r > g observation in light of Europe’s declining profit and growth trends. Inequality will grow if r > g (return on capital exceeds economic growth) unless capital is arbitrarily shared down the economic pyramid. But inequality can also increase, it seems to me, if r = g (e.g., in a low growth, low profit environment). Or if r < g. The latter could happen if those at the top suppress wages, collect monopoly rents, and engineer government transfers from the bottom to the top. This scenario of course could increase political tension, provoke backlash, and ultimately could devolve into a medieval sort of stasis.

Financial Times

“If capitalism is badly broken – providing supernormal returns to special interest groups able to secure favourable regulations, subsidies and tax breaks – this can sustain inequality. And there is widespread evidence of powerful lobby groups influencing politicians and regulators, to secure a return on capital that is higher than economic growth for a period. The share of profit in GDP is already at near-record levels, supporting the idea of reduced competition. It could, of course, rise further if competition is further suppressed. But it cannot rise indefinitely, and the more it rises, the more political resistance there will be.”

The Problem With Piketty’s Inequality Formula – Atlantic