Creative Accounting

 by Bruce Wallace

[Editor’s Note: This article was first published on May 7 in Wallace’s blog, Marx Returns from the Grave: Bruce’s Blog on Marxist Theory. We republish it here with the author’s permission.]

D. P. Gumby the arts

‘Oh accountancy was in my blood and so I ran away one day. Scribble away, balance the books and sing an accountancy shanty.’

http://www.youtube.com/watch?v=7YUiBBltOg4

 

Quote mining creationists

Rate of profit to fall deniers come in many shapes, sizes and political persuasion http://69.195.124.91/~brucieba/2013/04/26/stephanie-flanders-and-marxs-theory-of-crisis/. Some are in a complete state of denial i.e. they are unaware they are denying it and just don’t know it but  amongst  them underconsumptionists  are  the most active conscious rate of profit to fall deniers of all.  They take the biscuit in their use of creative accounting and selective data presentation to back up their argument that anything,  absolutely anything,  can cause a capitalist crisis other than the tendency for the rate of profit to fall. They claim to be Marxists through the use of out of context selective  quotations from Marx’s work, some of which are doctored through editing, which are usually either very general, obscure, opaque  and unspecific that can have a variety of interpretations. An obscure footnote in Volume II of Capital added by Engels from a fragmentory note by Marx is a hardy perenial. Quote mining is a sacred rite of passage for this lot and is also the stamp of fundamentalist christian creationists. ‘Fundamentalist’, perversely, usually being a common term of abuse thrown at classical Marxists by underconsumptionists.

In my last post I dealt with the exceedingly slim case made by the Monthly Review school for the argument that the capitalists are not investing in industrial production due to an excess of  industrial capacityhttp://69.195.124.91/~brucieba/?p=560&preview=true. In this post I am going to focus on the second pillar of the underconsumptionist creed;  that another major contributor to capitalist crisis is low and declining wages or inequality leading to a lack of consumer demand.

Numbers do matter

I must say here that before I begin my exposition, or is it expose’,  that part of my background is in social science research methodology. I just love poring over data looking for bias, misinterpretation, selectivity, misuse, abuse and downright fraud because all bourgeois social ‘science’ is littered with it. The dismal science of economics is no exception. If you believe this to be a rather boring or inane topic think again?

Last week the US bourgeois economists Carmen Reinhart and Kenneth Rogoff were mired in controversy and the main item in every economists blog and the financial media  because they had produced a study “Growth In A Time Of Debt,” in 2010  ‘proving’ that countries with a debt to GDP ratio of over 90% had lower growth rates. The ‘research’ by the eminent economists had been widely cited by international bourgeois politicians to justify brutal austerity budget cuts. What an abarassment that a lowly PhD student tried to replicate their results only to find that their data was completely wrong including a ‘goofy’ excell spreadsheet mishap. Who would have imagined that Chess Grandmaster Rogoff (he came 3rd in the world junior championship in 1976) could have made such a schoolboy error?!!! Rogoff can execute a deliscious kill with the English opening but can’t even count! The eminent duo  are now backing off the austerity brigade with scarlet blushes. So numbers do matter in both economic and political affairs.

Here is a speech I saw by Rogoff  last year where he says the data sets he and Carmen were working on were ‘absolutely amazing’. Indeed they were and in the speech Rogoff insightfully mentions that ‘well  in the world economy there is always something deeper going on.’ This must also include the depths of his brain! http://www.youtube.com/watch?v=2yIzfIXIoDU

Flat Earthers

Much less well known than the erroneous Grorwth in a Time of Debt  study the flat earth Monthly Review published  an article by Professors Fred Madgoff and John Bellamy Foster interestingly titled ‘Class War and Labour’s Declining Share’ in March. I’m sure I’ve seen a very similar title in another article  somewhere else? http://www.socialismtoday.org/165/wages.html. This produced data showing there had been a persistant decline in US worker’s wages and that this was another pillar of their analysis of the Great Recession.

Anyway the basic idea is that US worker’s wages have been progressively declining as a share of Gross Domestic  Product (GDP) for decades while capitalist profits boomed as they directly stole a greater share of income from the working class according to the Monthly Review article . This forced US workers to use their  credit cards to maintain their consumption  piling up personal  debt on top of more debt. This was paralleled by a ballooning of government and business debt. Eventually the debt mountain destabilised the financial superstructure and the US housing bubble popped when toxic sub-prime mortgages crashed infecting the whole system in 2007-2008. Hence the credit crunch and financial panic that gripped the US in September 2008 that was precipitated, at root, by the masses attempt to maintain their consumption through debt.  The decline in worker’s real income was an underlying factor or ‘tendency’ that led to the crisis and global slump   The Great Recession was therefore primarily an irreducibly financial crisis which then hit the ‘real economy’ like the backwash of a Tsunami but its cause was a lack of consumer demand.

This has come to be known as the ‘conventional left account’ of the crisis but is also held by a number of radical Keynsians and prominent bourgeois economic pundits. Oh and Socialism Today.

Enter Colombo

However a lot of Marxists don’t buy into this one dimensional account which tends to sit within the existing orbit of  bourgeois economics even if it has a ‘left’ tinge.

One sharp, if not the sharpest, critic of this explanation is the Lieutenant Colombo of  Marxist economics

Andrew Kliman.

Kliman is an unsung hero of Marxist economics who has spent the past three decades at least in defending the theoretical validity of the whole of Marx’s Capital against numerous bourgeois attacks. His first book Reclaiming Marx’s Capital: A Refutation of the Myth of Inconsistency  (2007) is the account of how he restored the scientific validity of all three volumes of Marx’s Capital against the epigones who argued that Capital was logically incoherent and of no modern relevence accept as a failed attempt at a scientific critique of capitalism. It is a  difficult read but has been widely acknowledged as a scientific breakthrough which finally proves the completeness and logical coherence of Marx’s project. Even those mildly critical of his work have suggested he should receive an alternative Nobel Prize for this achievement. Every Marxist owes Kliman a debt for this  and it is quite a story but some Marxists have not even heard of it.

However Professor Kliman welcomes questions and querries and most of his research papers are available for free on his personal website. http://akliman.squarespace.com/

In his book The Failure of Capitalist Production: Underlying Causes of the Great Recession (2012) Kliman challenges the ‘conventional left account’ of the crisis by recourse to the classical Marxist theory of the tendency of the rate of profit to fall.  I will attempt to review this ground breaking and potentially politically decisive modern  contribution to Marxism  in a later post.

Anybody claiming to be a Marxist has to read this book even if they are sceptical about some aspects of Marx’s central argument or, as in most cases, don’t understand it. As Kliman explains:

‘In The Failure of Capitalist Production (Kliman 2012), I have put forward an alternative explanation of the underlying causes of the Great Recession, based on detailed analysis of official data as well as Karl Marx’s theory of capitalist crisis. Starting in the mid-1950s, U.S. corporations’ rate of profit fell and never recovered in a sustained manner under “neoliberalism.” This led to a slowdown in productive investment that in turn led to sluggish growth of output and income. (The growth of employee compensation slowed down because of this, not because of a redistribution from wages to profit.) Sluggish growth led to mounting debt burdens, as did government policies that repeatedly tried to manage or solve this complex of problems by throwing more debt at bad debt and encouraging a buildup of private-sector debt. The result was a series of worsening burst bubbles and debt crises, and ultimately the Great Recession.’

One section of Kliman’s book directly challenges the Monthly Review school’s main arguments that are based on the ideas of the economists  Baran and Sweezyhttp://69.195.124.91/~brucieba/2013/04/29/what-is-a-profitable-outlet/ that the crisis was mainly caused by a lack of consumption or ‘demand’.  Kliman shows that, even were their data true, that there has been a declining share of income going to the working class, that this would still not satisfactorily explain the crisis on logical grounds and this is substantively proven in his book.

However like Columbo  Kliman usually goes on to say ‘and one more thing?’ In this case the one more thing is ’ is the Monthly Review data right from their latest article’? Woe  betide the purveyor of false or misleading data if Kliman is on your trail because you will be bang to rights. http://www.youtube.com/watch?v=pZiv8vkxMac

Did Colombo read Hegel’s Phenomenology of Mind at the Police academy I wonder?

In the Monthly Review article the following graph is produced.

As usual for data produced by inhabitants of planet underconsumption the graph shows a persistent downward trend but I would draw readers attention to the very impressive sources citation that our Professors include at the bottom of the graph:

‘Sources: “All employees” is government plus private sector employee. Compensation for government employees from Table 1.13, “National Income by Sector, Legal Form of Organization, and Type of Income,” National Income and Product Accounts (NIPA), Bureau of Economic Analysis (BEA); Compensation for private sector employees, is from unpublished Bureau of Labor Statistics (BLS) data; “Gross Domestic Product” (GDP), St. Louis Federal Reserve (FRED Database), http://research.stlouisfed.org/fred2. BLS data for private sector compensation provided by personal communication from the Supervisory Economist, Office of Productivity and Technology Division of Major Sector Productivity.’

Wow what an examplar of  absolutely scrupulous scientific rigour? It even includes ‘unpublished’ data from the Bureau of Labour Statistics (BLS) provided by ‘personal communication’. I’m immediately suspicious when I see ‘unpublished’ data used as a source amongst published data. If its unpublished I can’t see it or read it. I would hazard a guess that the ‘person’ who provided this data may well be a contact of Monthly Review. This is usually a tell tale sign that the reasearchers are up to no good and are indulging in biased research methods. Unfortunately like any false alibi concocted to conceal a crime this blunderbuss citation of data, usually effective in hiding suspect data from the unwary, begins to unfasten when subjected to scientific number crunching scrutiny a la  Kliman http://marxisthumanistinitiative.org/economic-crisis/more-misused-wage-data-from-monthly-review-the-overaccumulation-of-a-surplus-of-errors.html.

Kliman questions the notion of labour’s share straight away:

‘The problem is that “labor’s share” is an ambiguous term; it can mean many different things. For instance, economists typically use it, and the term “capital’s share,” to refer to “returns” to the owners of different “factors of production” as shares of the output that has been produced. When Magdoff and Foster use these terms, however, they seem to mean something different––the shares of one or another measure of output or income that accrue, respectively, to “working-class” workers and to everyone and everything else (though it is unclear exactly what they are trying to measure, or why).

In light of this ambiguity, it should not be surprising that some data, even some data in Magdoff and Foster’s new article, do show that there has been a decline in things that can be called “labor’s share” in some sense. For instance, the income of the working class has fallen as a share of personal income, and compensation of employees has fallen as a share of GDP. And the data can been tweaked in other ways that produce downward-sloping curves. It is crucial to understand that this is not sufficient. By itself, a decline in some “labor share” does not count as evidence in favor of Magdoff and Foster’s class war/declining labor share thesis.’

Now unfortunately I can’t download Kliman’s graphs but they can be viewed on his site but he proves that Magdoff and Foster have been at the capers with the data, I quote:

‘In support of their class war/declining labor share thesis, Magdoff and Foster tell us that compensation of employees fell as a share of U.S. GDP. Their Chart 1 indicates that it fell from about 57% to about 52.5% between 1982 and 2007.

‘However, the Magdoff-Foster employee-compensation share is seriously at variance with the one we get when we use the official compensation and GDP figures reported in the U.S. National Income and Product Accounts (NIPAs). Figure 1 superimposes the NIPA-based compensation share of GDP over the share that Magdoff and Foster presented in their Chart 1. Note, first of all, that their compensation share is persistently lower. More importantly, it falls below the NIPA-based compensation share to a greater and greater extent as time proceeds. In 1955, the Magdoff-Foster figure was about 1 ½ percentage points less; by 2011, it was about 4 points less. Thus, between 1982 and 2007, the NIPA-based compensation share fell by about 3 percentage points, but the fall in the Foster-Magdoff share, about 4.5 points, was roughly 50% greater. In  2007, the NIPA-based compensation share exceeded its average value during the 1956–1965 period, while, the Magdoff-Foster figure was about 1 ½ to 2 percentage points lower in 2007 than it was between 1956 and 1965.’

And:

‘How do they arrive at results that differ so greatly from those we get using official data? And why do they go to such great lengths to produce their variant results? What I mean by “such great lengths” is that the NIPA data on compensation of all employees are immediately and readily available. They are reported in NIPA Table 1.12, a table that Magdoff and Foster cite later in their article. But for some reason, they didn’t use these data. Instead, they indicate that they received unpublished data on compensation of private-sector employees from a different government bureau. Then, adding NIPA figures on the compensation of government employees to their unpublished private-sector figures, they obtained their alternative figures for the compensation of all employees.

Obviously, this procedure is invalid; it is tantamount to adding apples to oranges from which some sections have been removed. Since their alternative compensation figures are smaller––and increasingly smaller––than the official ones, it must be the case that some private-sector workers have been left out of their unpublished data, or that the unpublished data omit some components of employee compensation that the NIPA data include, or both. But Magdoff and Foster do not seem to be concerned about this glaring problem with their total compensation numbers, if indeed they are aware of it. They don’t explain why they chose not to use the official NIPA compensation data for all employees. They don’t even tell us that such data exist, much less that they yield quite different results.’

The hammer blows continue in the Colombo spirit until it is clear that the ‘research’ of the Monthly Review mob is a cobweb of false creative accounting, distortion and sloppy methodology  produced by the underconsumptionist mind set.

I must say that Kliman is absolutely right that this approach is entirely unacceptable in a ‘class’ analysis  but virtually anything goes amongst the underconsuptionists to support their arguments.

However why Kliman’s technical demolition job is worth reading, or ploughing through, is that he shows that while wages did decline prior to the Great Recession, not by anything like what Magdoff and Foster claim, they are not the sole source of worker compensation and  and that the capitalist share also declined due to the fall in the rate of profit.

While I can’t paste Kliman’s graphs how about this table from the US Bureau of Economic Analysis (BEA) on ‘Stagnant or Rising’ worker compensation?

Such data will never find its way into an underconsumptionist publication because they show positive results which are impossible, according to them, except when an asteroid hits Chelyabinsk? Yes workers have definitely been negatively effected by the crisis in that wage compensation growth was negligable but real supplements actually increased during the hieght of the crisis but it is definitely not catastrophe land as made out by Monthly Review. Moreover the decline in the growth of  total worker compensation happens after the Great Recession so it can’t be considered a causation candidate for the crisis. 

Also what about Labours ‘share’ of income in the US? Here is the official statistics from the BEA of the share of Gross Domestic Income, which is a different measure of national wealth but probably better than GDP which is not necessarily the most accurate way to measure the division of social wealth. So i need to do some digging into the methodology and the measures etc.  I’ll probably do a post on this later on once I’ve done more research. Blue Line is Labour Income/Gross Domestic Income and yellow line Capital Income/Gross Domestic Income

Oh dear what a great personal disaster my underconsumptionist thesis has just completely  disintegrated before my very eyes! The stats show hardly any significant change. The gap has narrowed slightly in capital’s favour but it hardly constitutes major evidence of anything. If we look closely at the two measures we can see that labour’s share actually increased in 2007-9 while capital’s share decreased and it has since leveled off. This again suggests that workers compensation could hardly be blamed for the crisis?

I think I may wish to revisit the issue of inequality in more depth but to finish  thinking of the shenanigans of the Monthly Review the closing lines of a poem by the Beat poet Allen Ginsberg comes to mind that he could have written especially for the underconsumptionists.

‘Research

Research has shown that Elitist Individualism Spiritual Corruption & Degenerate Art caused Dictatorships in Soviet Union China and Germany

that possession of pornography by American Family Institute has resulted in 35% increase in sex crimes amongst institute librarians

viewing murderous behaviour on TV sitcoms resulted in 100% increased violent language behaviour by Intercontinental Heads of State

To conclude research has shown that the material universe does not exist’

May 20, 1992

The ‘material universe’ is a concept beyond the ken of the Monthly Review.

RIPE (Redford Institute for Political Economy)