Socialist Economic Bulletin

By John Ross

The following article, which shows the sharply rising proportion of fixed investment in the economy in the 250 years since the Industrial Revolution, was written in the context of a specific discussion of China’s economy. This is the claim that China invests too high a proportion of its economy. As the article shows, on the contrary, China’s approximately 40 percent of gross fixed investment/gross fixed capital formation in GDP is merely the latest stage of a process that has been going on for over two centuries. Such a deep process has, of course, profound implications for economic policy—as the article analyzes.

However, the data in this article relates to more general theoretical issues as well as the specific discussion of China. The rising proportion of the economy used for investment is one of the most central predictions of Marx’s Capital—or, as he terms it, the “rising organic composition of capital.” Such a rising proportion of investment in the economy was, less systematically, also predicted by Adam Smith, and by, for somewhat different reasons, by John Maynard Keynes. The attempt by Milton Friedman to refute this was found to be erroneous, even by neoliberals,­ thanks to modern econometric studies, as discussed below.

In light of this, it is therefore rather astonishing that attempts have been made to refute Marx on the rising organic composition of capital by some of those who claim to be presenting Marx. These critics argue that there is no reason why the proportion of investment in the economy should rise, and that subsequent theoretical work has shown that there is a pattern of technological change between the two sectors (wage goods and means of production) that can keep the ratio of consumption and investment steady in perpetuity.

Such claims mean that, from a theoretical viewpoint, such authors do not understand Marx’s economics. That, however, can be dealt with in a separate article. For present purposes, the issue is one of facts: the rising proportion of investment in the economy is a factual question that can be measured.

In Marx’s analysis, constant capital consists of two parts—circulating capital, which, in modern Western economics, would be termed “intermediate products,” and fixed investment. Factual studies confirmed that the most rapidly growing component of the economy is intermediate products/circulating capital. Thus, for example, in the United States, Jorgenson, Gollop and Fraumeni found: “the contribution of intermediate input is by far the most significant source of growth in output. The contribution of intermediate input alone exceeds the rate of productivity growth for thirty-six of the forty-five industries.”[1]

The same result is found for other economies, including China. For South Korea, Hak K. Pyo, Keun-Hee Rhee, and Bongchan Ha found that regarding intermediate inputs, “the relative magnitude of contribution to output growth is in the order of: material, capital, labor, TFP then energy.”[2] For Taiwan Province of China, analyzing twenty-six sectors in 1981–99, Chi-Yuan Liang found regarding intermediate material inputs were “the biggest contributor to output growth in all sectors during 1981–99, except…seven.”[3] For mainland China, Ren and Sun found that, from 1981 to 2000, subdivided into 1984–88, 1988–94, and 1994–2000, “intermediate input growth [was] the primary source of output growth in most industries.”[4]

However, although the evidence is that circulating capital/intermediate products rises more rapidly than both GDP growth and fixed investment, nevertheless, the facts are clear that there is historically a massive increase in the proportion of fixed investment in the economy—from around 3 percent of GDP in Britain at the time of the Industrial Revolution to 40 percent of GDP in China today. That is, there is also a massive increase in the proportion of the production of means of production in the economy. The facts show a massive increase in the organic composition of capital with economic development. Therefore, not only is it theoretically erroneous that some claiming to represent Marx align themselves with Friedman against Marx, Smith, and Keynes; more importantly, their claims are also entirely against the economic facts.

The data in the article below, which was originally published in Chinese by Guancha, therefore extends beyond the specific issue of China’s current development, to fundamental economic theories of development. Marx’s analysis of the rising proportion of the economy used for investment—that is, the rise of the proportion of the economy used for production of means of production—is one of his greatest achievements and entirely confirmed by 250 years of economic development, including by the 150 years since Marx accurately predicted it.

–John Ross

China’s very high level of investment reflects the historically advanced character of its economy

Accurate analysis of the role of investment in economic development is decisive for China, as it is for every country. The facts that follow confirm this. This applies not only to short-term economic policy but still more clearly to economic strategy—therefore, in particular, to China’s achievement of its goals for 2035 and 2049.

A false claim, a myth, however, is put forward in some sections of the Western media which attempt to obscure such an accurate assessment. This is the claim that China invests too high a proportion of its economy because its level of investment in GDP is much higher than that of Western countries. But in reality, as will be seen, the entire historical period of development since the Industrial Revolution—that is, since the creation of modern economies—has seen progressively higher ratios of investment in GDP. Each successive period has, in turn, been associated with higher economic growth rates. The facts show that China’s high level of investment is simply the latest stage of an international process of economic development that has been underway for over two centuries.

Once this fundamental historical trend is understood, it becomes clear that China’s higher investment rate relative to Western economies is not a problem for China’s economy. On the contrary, it reflects its historically advanced economic structure. China’s gross fixed investment accounts for approximately 40 percent of its economy, whereas the United States’ is only slightly over 20 percent. In the even more important measure of net fixed investment, which takes into account depreciation, China invests 16 percent of its GDP, whereas the United States invests only 5 percent.

As the historical trend below demonstrates, the reason for the difference between China and Western economies is that the level of investment in Western economies is too low for the present global historical stage of economic development. This results in slow growth and consequent social and political instability. In contrast, China’s higher level of investment reflects that it is today the leading part of a process that has been going on since the Industrial Revolution.

The conclusion of this article will consider the implications of this historical trend of the rising proportion of investment in the economy, the faster growth rates that it gives rise to, analysis of the reasons for this trend, and the latter’s policy implications. It will be seen that this trend of the rising percentage of investment in GDP is entirely as predicted by Marx’s analysis of the increasing organic composition of capital—that is, the increasing capital intensity of production.

First, however, before analyzing the implications and following the method of “seeking truth from facts,” the data regarding the historical trend of the rising proportion of the economy used for investment will be clearly established.

Both historical and short-term analyses of the role of investment are consistent

Earlier articles by the present author on these issues used relatively sophisticated econometric methods to analyze the extremely close relation between investment and economic growth over relatively short time frames.^[5] This was necessary because, during short time frames, economic growth may be affected not only by the most powerful long-term structural trends that determine an economy’s strategic development, but also by many purely short-term conjunctural fluctuations—business cycles, the impact of non-economic events, and so on. To use an analogy: in examining a short timeframe, it is difficult to distinguish the “signal” from the “noise,” necessitating the use of precise statistical methods to identify the underlying trend amid short-term fluctuations.

In this article a different, simpler method is used to show the clear trend of the rising proportion of investment in the economy. Over long timeframes, short-term, non-fundamental, peripheral, and secondary fluctuations have little effect, and only the most powerful processes dominate, allowing them to be clearly seen without the need for sophisticated econometric techniques. It is therefore hoped that this article, which requires no advanced statistical methods, will make clear to non-specialist readers the fundamental facts regarding the historically rising share of the economy allocated to investment.

It should be made clear, however, that these immediately visible trends neither replace nor contradict the statistical methods used in short-term studies. On the contrary, the two arrive at precisely the same conclusion. The longer-term historical studies provide the context within which the shorter-term processes operate.

The fundamental historical trend

To outline the most fundamental trend first, before considering individual countries in detail, Figure 1 shows the percentage of fixed investment—gross fixed capital formation, to be precise—in GDP in the lead economies in each period of economic development in the approximately 250 years since the Industrial Revolution. The “lead economy” is the major economy which had the fastest rate of economic growth during successive historical periods of economic development—that is, the economy which represented the growth frontier of these successive historic periods.

Figure 1

Figure 1 immediately makes clear that in each successive period, the lead economy had a higher proportion of fixed investment in the economy than the previous one—it will also be shown that each lead economy had a higher sustained growth rate than the previous one.

These lead growth economies, in successive chronological order of their development, were Britain; the United States; West Germany; Japan and South Korea; and China.

As Figure 1 shows, each of these successive lead economies had a higher level of investment in the economy than the one before. This began with Britain, with investment of about 3 percent of GDP at the time of the Industrial Revolution, then rising to 10 percent by the 1830s, followed by gross fixed capital formation of slightly over 20 percent in the United States after the Civil War, then 30 percent in postwar West Germany, over 35 percent in Japan and South Korea, and rising to slightly over 40 percent in China today.^[6] It is therefore clear that China’s high level of investment is simply the continuation of a process which has been taking place for 250 years since the Industrial Revolution.

The increasing rate of economic growth

Turning to the growth rates accompanying these increasingly high percentages of fixed investment, the successively faster economic growth rates in each of these periods are shown in Figure 2.

As what is important for fundamental economic development is sustained growth rates, not unsustainable and purely short-term spurts, long-term growth rates are considered here. To be able to make an exact comparison with China since the beginning of Reform and Opening Up, what is considered in each case is the maximum total economic growth achieved over a forty-six-year period during a country’s period of global economic growth leadership (i.e., a period equivalent to China’s growth in 1978–2024). In descending order of growth rate, which is also reverse chronological order, China’s is the fastest, then South Korea, then Japan, then West Germany, then the United States, then the United Kingdom.

Figure 2

Table 1 summarizes these growth rates, showing both the total growth over a forty-six-year period of each of these lead economies and its annual average growth rate during that period. Thus, during its period of global growth leadership, the United Kingdom, the first country to experience the Industrial Revolution and create a modern economy, achieved 2 percent average annual growth, the United States achieved 4.8 percent, West Germany 5.3 percent, Japan 6.4 percent, South Korea 8.4 percent, and China 8.9 percent.^[7]

The relation between this percentage of fixed investment in GDP shown earlier and the rate of growth is, of course, one to one. That is, the higher the percentage of fixed investment in GDP the faster the rate of economic growth. In terms of historical development, each historical period saw both a higher level of fixed investment in GDP and a higher rate of GDP growth than the one before.

This data therefore makes very clear that what has been taking place is a 250-year process since the Industrial Revolution of an historically increasing percentage of fixed investment in GDP and an increasingly fast rate of economic growth with progressive economic development. China’s level of investment in GDP (the highest of any major lead economy) and its fast growth rate (the most rapid of any major economy in human history) are therefore not an aberration, but simply the latest stage of this 250-year-long process.

Having shown the overall historic process, each of these lead economies will now be considered in detail—culminating with China.

Table 1 46-year GDP Growth Period China data is 1978–2024. Other states are maximum 46-year growth period after they became the leading growth economy

Britain: The first industrial economy

Britain, the first economy to achieve industrialization, raised its level of investment from around 3 percent of GDP on the eve of the Industrial Revolution to 10 percent by the 1830s (see Figure 3), achieving an economic growth rate of 2.3 percent by the end of this period.^[8]

Figure 3

During the 18th century and the beginning of the 19th century, Britain experienced economic acceleration, accompanied by introduction of radical new technologies and an increase in the percentage of fixed investment in GDP. [9] By the beginning of the 1820s, Britain had become the largest Western economy (i.e., excluding China and India), but with a per capita GDP almost four times that of China or India.^[10] By this process Britain became the first modern industrial state and the world’s most advanced economy.^[11]

The percentage of investment in England’s GDP was rising, initially extremely slowly, from the earliest periods for which data exists.^[12] The most detailed recent study concludes: “the fixed investment ratio fluctuated at a low level of one to two per cent during the medieval period, increasing to between 2 and 4 per cent during the early modern period. However, the major change was the sharp increase from the mid 18th century, reaching 10 per cent by the early nineteenth century.”^[13]

Britain’s economic growth was rapid by Western European standards even before the Industrial Revolution.^[14] But the Industrial Revolution saw a qualitative acceleration. Taking ten-year periods to eliminate the effect of purely short-term fluctuations: by the 1780s, British annual GDP growth had reached 1.6 percent, and by the 1830s, 2.3 percent.^[15] This secured the United Kingdom’s lead position in the world economy, already analyzed.

This rising trend in the share of gross fixed capital formation in the UK from the Industrial Revolution to 1950 is shown in Figure 3. The increase in the percentage of investment in GDP—a tripling or quadrupling, depending on the calculation made about the initial starting point—was of course enormous for this historical period, but only achieved a low level compared to later historical development.

In summary, from the 1760s to the 1830s, essentially covering the period of the Industrial Revolution, taking ten-year annual averages, Britain increased its percentage of investment in GDP from 3.3 percent to 10.5 percent and increased its annual average economic growth rate from 0.6 percent in 1700–60 to 2.3 percent. This established Britain as the leading economic state of the world.

The fact that Britain’s domestic investment did not progress beyond approximately 10 percent of GDP for a century from the 1830s then played a decisive role in Britain’s being overtaken by the United States as the world’s leading economy, as will be seen in the next section.

The United States overtakes the United Kingdom

The United States of course overtook Britain during the 19th century to become the leading international economy. The United States showed the next step upward in both the percentage of investment in GDP and the economic growth rate.

At the time of Britain’s Industrial Revolution, the United States was not among the world’s largest economies.^[16] In 1775, Britain’s economy was almost 6 times larger than that of the United States.^[17] Economic historians differ on the immediate development of the U.S. economy after independence, but by 1820, the most recent estimate is that the U.S. economy was still only 38 percent the size of the United Kingdom’s.^[18] However, by 1840, the U.S. economy was already more than half the size of the United Kingdom’s, and by 1850, it was 73 percent, with a higher growth rate as well as a higher level of investment in GDP.^[19] By the 1840s, therefore, the United States was already the most rapidly growing major economy; further U.S. economic acceleration after the Civil War was a continuation of this process. For that reason, the date of the United States’ becoming the major lead economy globally in terms of growth is taken here as dating from the 1840s—although it will be shown that taking a later date, for example, after the Civil War, makes no difference to the essential pattern. In terms of total GDP, the United States overtook Britain in the 1860s or 1870s, and by 1900, its total GDP was almost double that of the United Kingdom.^[20]

Estimates for gross investment as a percentage of the U.S. economy are, unfortunately, not available for the period of the onset of Britain’s Industrial Revolution—they only become available in current prices from the period 1839–1848. By then, the U.S. level of investment already exceeded the UK: the share of gross national capital formation in U.S. GDP was 14 percent. During the course of the 19th century, the percentage of fixed investment in U.S. GDP rose sharply, eventually far surpassing that of Britain. U.S. gross capital formation oscillated between 14 percent and 16 percent of GNP until 1858, the eve of the Civil War. After the Civil War, this level then rose rapidly to far exceed the UK level. By 1869–78 the U.S. level was 19 percent of GDP; by 1879–1888, 21 percent; and by 1888-98, 23 percent (see Figure 4, which compares the United States and the United Kingdom).^[21] This historically unprecedented U.S. investment boom, which had no equal in world history until that time, particularly following the Civil War, transformed the American economy.^[22]

Figure 4

In summary, the United States surged to global leadership based on a level of investment in GDP that at that time had no precedent in world history. The advantage of the United States over other economies in fixed investment continued for a prolonged period. As Maddison notes: “The rate of U.S. domestic investment was nearly twice the UK level for the sixty-year period 1890–1950. Its level of capital stock per person employed was twice as high as that of the United Kingdom in 1890, and its overwhelming advantage in this respect over all other countries continued until the early 1980s.”^[23]

As a result, from 1840 to 1950, the United States grew at an average annual rate of 3.9 percent—over 50 percent higher than the rate of British GDP after the latter had accelerated following the Industrial Revolution. ^[24]

The approximate level of fixed investment reached after the U.S. Civil War, slightly over 20 percent of GDP, with only a short-term catastrophic collapse during the Great Depression, was sustained, and still existed in the United States 140 years later, in the 2020s. The fact that, after far surpassing its British rival by the late 19th century, the United States did not increase its investment-to-GDP ratio for nearly a century and a half is crucial for explaining numerous trends in the modern world, as will be analyzed below.

For approximately a century, in particular from the end of the Civil War to the immediate aftermath of the Second World War, the U.S. level of investment of slightly over 20 percent of GDP was the highest of any major economy and the United States was the world’s most rapidly growing major economy. From 1850 to 1950, the average annual GDP growth rate of the United States was 3.8 percent, Germany and Japan 1.7 percent, and the United Kingdom 1.6 percent.

The cumulative effect of such growth rates sustained for almost a century was overwhelming in establishing U.S. dominance. From 1850 to 1950, the U.S. economy increased in size by 3,880 percent, Japan’s by 460 percent, Germany’s by 450 percent, and the United Kingdom’s by 370 percent (see Figure 5).

Figure 5

With total growth over eight times as great as any major competitor, laying the base for defeating both Germany and Japan in the world wars, the economic dominance of the United States in the period up to 1950 was crushing.

West Germany becomes the first major advanced economy to overtake the U.S. growth rate

Given this U.S. growth dominance for over a century, it was therefore a crucial historic development after the Second World War that, for the first time, a series of major economies began to see levels of investment of significantly over 20 percent of GDP, i.e., above the U.S. level, and achieved more rapid economic growth than the U.S.

The first of these economies was West Germany. By 1955 West Germany had achieved a level of gross fixed capital formation of 26.5 percent of GDP, above the U.S. level, and by 1964 this rose to 30.5 percent (see Figure 6). The United States then launched a major counteroffensive against Germany in the 1960s and 1970s, particularly with U.S. abandonment of the convertibility of the dollar to gold and the end of the Bretton Woods currency system in 1971.[25]

Figure 6

From 1950 to 1971, West Germany achieved an average annual GDP growth rate of 5.9 percent—the first time in history a major economy had grown faster than that of the United States over a sustained period. Despite the sharp fall in the percentage of investment in West German GDP after 1971 and a deep fall in its growth rate, West Germany/Germany still outgrew the United States with a 5.3 percent annual average growth rate during this period, due to West Germany’s very high level of fixed investment, in the forty-six-year period from 1946 to 1992.

The fast-growing East Asian capitalist economies

The second major economy after West Germany to achieve a higher level of fixed investment in GDP and a far higher growth rate than those of the United States was Japan. Japan achieved an even higher percentage of fixed investment in GDP, and a faster growth rate, than West Germany. By 1960 Japan’s gross fixed capital formation was 33.2 percent of GDP and by 1971 it was 37.5 percent (see Figure 7). As with West Germany, Japan was also struck by the U.S. counteroffensive in 1971 as U.S. abandonment of dollar-to-gold convertibility led to a sharp decline in Japan’s percentage of investment in GDP and a sharp economic deceleration. Japan, however, became the first economy to achieve a level of investment of over 35 percent of GDP and over a 46-year period, its annual average GDP growth rate was 6.4 percent.

Figure 7

From the late 1970s onward, Japan’s level of fixed investment was matched by the so-called Asian Tigers: South Korea, Singapore, Hong Kong, and Taiwan Province of China. As South Korea is the largest of this group, it will be analyzed in detail.

Starting from an extremely low level of fixed investment in GDP in the early 1950s, by 1979 South Korea’s level of gross fixed capital formation in GDP had reached 35 percent (see Figure 8). This similar pattern of Japan and the Asian Tigers formed what might be termed the “East Asian rapid capitalist growth model.” In 1997 South Korea was struck by another U.S. counteroffensive in the form of the East Asian debt crisis, in the same way that West Germany and Japan had been struck in 1971.This led to a fall in the percentage of fixed investment in South Korea’s economy and a sharp decline in its growth rate.[26] Nevertheless, South Korea’s annual average GDP growth, during its most rapid forty-six-year period of growth, was 8.4 percent.

Figure 8

Socialist China

From 1978, with Reform and Opening Up and the construction of a socialist market economy, China attained the fastest rate of growth of any major economy in history. China’s level of gross fixed capital formation in GDP reached over 40 percent of GDP (see Figure 9), and its annual average growth rate from 1978 to 2024 was 8.9 percent.

Figure 9

This extremely high level of fixed investment in GDP and very fast growth rate differentiate China’s economy from Western economies today. However, it is entirely clear from the preceding data that China’s level of investment and growth rate is neither an “aberration” nor a “miracle” but simply the latest and most advanced stage of a process of the rising share of investment in the economy—that is, of the rising organic composition of capital—that has been taking place for over 250 years since the Industrial Revolution.

Conclusions

As stated at the beginning, the aim of this article is to make clear the historical process of the rising proportion of investment in the economy. It does so by taking the entire period of economic development since the Industrial Revolution, without the need to use sophisticated statistical techniques to separate powerful long-term processes from purely short-term shifts. Doing so has made clear that China’s high level of investment in GDP is merely the latest stage in an historical process which has been taking place for more than two centuries.

Because this is such a deep-rooted economic process, one confirmed by short-term studies and entirely consistent with the predictions of economic theory, it is clear that this historical trend will not stop with China’s current development. In the future, economies will develop that will invest more than 40 percent of GDP. The only issue is whether China will continue to lead this historical process or if another economy will do so. That, in turn, will be determined by China’s own policy choices.

Numerous consequences follow from this historically rising proportion of investment in the economy. For reasons of space, only a few of the most important can be summarized here; others will be dealt with, or have already been dealt with, in separate articles.

1. Clearly, there is no ambiguity as to the trend of the rising proportion of investment in the economy with historical development. This trend was predicted by Adam Smith, particularly analyzed by Marx (as the rising organic composition of capital), and again predicted by Keynes. While this article, for reasons already stated, has examined an extremely long historical period, this factual conclusion of the rising proportion of fixed investment in the economy is confirmed even by those opposed to both Marx and Keynes and who consider different timeframes.

For example, Barro (who, together with Lucas and Sargent, is one of the founders of New Classical Macroeconomics and of the theory of rational expectations) surveyed trends since 1870. He arrives at exactly the same conclusions: “For the United States, the striking observation…is the stability over time of the ratios for domestic investment and national saving…. The United States is, however, an outlier with respect to the stability of its investment and saving ratios; the data for the other…countries show a clear increase in these ratios over time. In particular, the ratios for 1950–89 are, in all cases, substantially greater than those from before World War II. The long-term data therefore suggest that the ratios to GDP of gross domestic investment and gross national saving tend to rise as an economy develops.”^[27]

In short, despite Barro’s overt opposition to Keynes and his attempt to totally ignore Marx, he is forced to arrive at the same economic conclusions as outlined above.

1. This more than 250-year historical pattern confirms the clear positive correlation between the percentage of investment in GDP and the rate of economic growth—that is, an increasing proportion of investment in the economy is accompanied by rising economic growth rates. The historical trend shown above is consistent with the strong positive correlation in large economies between the percentage of fixed investment in GDP and the economic growth rate during the most recent periods.[28]
2. The fact that systematic measures of net fixed capital formation, as opposed to only gross fixed capital formation, are available for more recent economic periods simply means that modern studies establish this extremely strong positive correlation between the percentage of fixed investment in GDP and the economic growth rate still more clearly than the long-term historical studies used here. For large economies, the recent correlation between the percentage of net fixed capital formation in GDP and the economic growth rate is over 0.9, i.e., as close to a perfect correlation as will be found in any real economic process.[29]
3. This strong positive historic correlation between the percentage of fixed investment and economic growth is entirely that which would be predicted by economic theory. This is because capital is an input into the production function in both Western and Marxist economic theory­.^[30] Therefore, increasing the proportion of the economy used for investment, by increasing inputs of fixed capital, would be predicted to increase the economic growth rate—precisely as confirmed by both historical and short-term studies.
4. The obverse of this positive correlation between the percentage of fixed investment in GDP and the economic growth rate is that the lower the percentage of fixed investment in GDP, the slower will be the economic growth rate. This is entirely confirmed by the facts.[31]
5. The consequences of raising the level of consumption in GDP are therefore clear. As investment plus consumption constitutes 100 percent of the domestic economy, increasing the percentage of consumption in GDP, because it necessarily means reducing the proportion of investment, will slow economic growth. Arguments in favor of increasing the proportion of consumption in China’s GDP are therefore, in fact, arguments in favor of slowing China’s rate of economic growth.
6. Furthermore, because there is an extremely strong positive correlation between the rate of growth of GDP and the rate of growth of consumption, an argument for increasing the percentage of consumption in GDP, by reducing the economic growth rate is, in fact, an argument in favor of slowing the rate of growth of consumption/living standards. This is why there exists a factual negative correlation between the percentage of consumption in GDP and the growth rate of consumption—that is, the higher the percentage of consumption in GDP, the lower will be the growth rate of consumption.[32]
7. This fact—that increasing the percentage of consumption in GDP leads to slower GDP growth—is in line with economic theory. Consumption, by definition, is not an input into production. Therefore, raising the percentage of consumption in GDP, which necessarily lowers the percentage of investment in GDP, means replacing something which is an input into production (investment) with something which is not an input into production (consumption). Lowering inputs into production necessarily lowers the economic growth rate. As the growth rate of consumption is strongly positively correlated with the GDP growth rate, lowering the rate of economic growth necessarily lowers the consumption growth rate.
8. From the viewpoint of verifying or falsifying economic theories, the historical data clearly and entirely confirms Smith’s, Marx’s, and Keynes’s conclusion that the percentage of fixed investment in GDP rises with economic development. Referring to investment as part of constant capital, Marx noted that “this law of the progressive increase in constant capital, in proportion to the variable, is confirmed at every step.”^[33] Marx’s analysis, developed in the 1860s at a time when, compared to the present day, the level of fixed investment was very low, and which therefore predicted almost over 150 years of economic development, is clearly a work of historical genius. It is also a strong confirmation of Xi Jinping’s analysis that “our study of political economy must be based on Marxist political economy and not any other economic theory.”^[34]
9. These economic facts clearly affect the type of stimulus programs which are required in China. The trends outlined above are fundamental and strategic—i.e., medium to long-term ones. They do not contradict the fact that, to deal with shorter-term economic fluctuations, consumer stimulus may be required. But strategically the rate of China’s economic growth depends on its high level of investment. Short-term stimulus must fit with this economic strategy.[35]
10. Increasing capital intensity of production is a key foundation of Justin Yifu Lin’s New Structural Economics (NSE). It is clear from the historical data given above, from shorter-term studies considered elsewhere, and from the factual studies carried out even by anti-Marxist and anti-Keynes economists, that this foundation stone of NSE is correct. That is, the historical development of production, and the advance to more developed stages of economic production, is one of increasing capital intensity of production. This confirms that NSE is entirely consistent in this respect with the economic facts and the conclusions on this reached by Smith, Marx and Keynes. Any theory which, unlike NSE, does not arrive at a conclusion of the rising capital intensity of production with economic development is not in line with the facts.

Finally, why are obviously correct things rejected?

But all these facts raise an obvious question. That investment rises as a proportion of the economy with economic development is unequivocally confirmed by historical data, by short-term studies (even by anti-Marxist and anti-Keynes analysts), and by economic theory. Why, therefore, are attempts made to deny this entirely clear fact? And why are attempts made to deny their practical consequences for China?

The first is conscious and unconscious Western arrogance. Factual comparison of economies immediately reveals that the structure of China’s economy, in terms of the level of investment, is different to that of a Western economy. But China’s annual average economic growth is around 5 percent and that of the United States is slightly above 2 percent. Any objective judgement, therefore, would logically conclude that China’s structure was superior to the West’s in producing economic growth.

But seeing that China’s economic structure differs from the West’s, Western commentators are immediately led to the entirely illogical conclusion that it must be China’s economic structure, not the West’s, which is the problem! Instead, the fact that China’s level of investment is much higher than that of Western economies should logically lead to the conclusion: Yes, of course, China is different. Of course China does not correspond to the average. Because China’s is a much more rapidly growing economy than the West. If China had the same economic structure as the West, then it would slow down to the same low speed as the West! The problem is therefore not China’s high level of investment, with its fast growth rate. China is just the latest stage in a process which has been going on for 250 years, since the Industrial Revolution, of a rising proportion of the economy which is used for investment.

China’s economy generates more rapid economic growth and more rapid growth of consumption. The problem is with the Western economies, which have fallen behind the historical trend of the rising percentage of investment in GDP and are therefore trapped in slower growth.

But Western arrogance means it is impossible for them to understand or admit that it is China’s investment level which is superior, and the continuation of a fundamental trend of economic development, and it is the Western economies which are falling behind.

An example: The illogicality of Goldman Sachs

To take a precise example: Goldman Sachs projects that China’s GDP growth will fall sharply to an average 3.4 percent in 2023–32. The reason for this alleged slowdown is because the annual increase in GDP growth created by capital investment is projected to fall by 2.4 percent. And, in turn, the reason for this predicted sharp slowdown is that, Goldman Sachs argues, China’s level of investment in its economy will fall sharply: “Investment as a share of GDP is forecast to decline from 42 percent in 2022 to 35 percent by 2032.”

The reason this will happen is allegedly because China’s level of investment is higher than other economies at a similar level of development. China is at present an upper middle-income economy, although approaching the level of a high-income economy, by World Bank standards, and “investment as a share of GDP in upper-middle-income countries is 34 percent.” Thus, it is argued that China should reduce its level of investment and slow down to the growth rate of other economies.

Why on earth should China do this? China is producing a more rapid increase in average living standards than these Western economies, it is creating more rapid economic growth, it has produced a more rapid reduction in poverty than they have, and so on. The economy with the most rapid economic development is, of course, different from countries with slower economic development. But China is different precisely because it is in line with a trend in economic development, which has been occurring for over two centuries,

A comparison will make the ridiculousness of the argument, and the unconscious Western arrogance, clear. Suppose a company wanted to enter a new industry and asked Goldman Sachs for advice, and Goldman Sachs reported: “In this industry one company is clearly growing much more rapidly than the others. Therefore, you should not learn from this more rapidly growing company, you should copy the more slowly growing companies.” Everyone would laugh at such a proposal—just before they cancelled the contract with Goldman Sachs. But in terms of country-level comparisons, that is exactly what is being proposed.

The only reason the absurdity of these arguments is not immediately clear is the conscious and unconscious arrogance of Western analysts, which makes them think that if there is a difference between China and the West, it must be the West which is correct, even if the objective evidence is to the contrary. That this is Western arrogance is transparently obvious, because the purely economic arguments are so fallacious and contrary to the facts of historical development.

Conclusion

China’s high level of investment is not an aberration. It is the latest stage of an economic process which has been taking place for 250 years since the Industrial Revolution. It is a sign of the historically advanced character of China’s economy, and its development, in a specific national situation, is in line with historical trends.

Notes

[1] Jorgenson, Gollop, and Fraumeni 1987, 200. More precisely, Jorgenson, Gollop, and Fraumeni found: “The contribution of intermediate input is by far the most significant source of growth in output. The contribution of intermediate input alone exceeds the rate of productivity growth for thirty-six of the forty-five industries for which we have a measure of intermediate input…. If we focus attention on capital and labour inputs, excluding intermediate input from consideration, we find that the sum of contributions of capital and labour inputs exceeds the rate of productivity growth for twenty-nine of the forty-five industries for which we have a measure of productivity growth…the predominant contributions to output growth are those of intermediate, capital and labour inputs. By far the most important contribution is that of intermediate input.”

[2] Pyo, Rhee, and Ha, 2007.

[3] Liang 2007.

[4] Ren & Sun, 2007.

[5] See for example 从210个经济体大数据中，我们发现了中国和世界经济增长的密码 https://www.guancha.cn/LuoSiYi/2024_10_05_750743.shtml.

[6] If shorter time periods were used, the Soviet Union would be included because of its rapid growth in the 1930s—its 6 percent annual average growth from 1929 to 1939 was the fastest of any major economy (calculated from Maddison, 2010). This was accompanied by an internationally unprecedented increase in the share of investment in GDP: “the share of gross investment in the national product (measured at 1937 ruble factor cost) went up from roughly 12 per cent in 1928 to nearly 26 per cent in 1937” (Erlich, 1967). However, Soviet longer-term economic growth was greatly reduced by the catastrophic losses during the Second World War. In the immediate postwar period, Soviet economic growth was again fast, but not as fast as Japan—so the Soviet Union can only be considered the global growth leader in the 1930s.

[7] If the starting data of 1968 is taken then, due to the fall in GDP during the Cultural Revolution of the late 1960s, China’s growth rate would be even higher. However, to avoid any suggestion of artificially increasing rates, here only China’s growth from 1978 onwards is considered.

[8] As Britain was the first modern industrial economy, the processes leading to its early development have been intensively studied. There is debate among historians as to the exact dating of the onset of the Industrial Revolution, of detailed estimates of its economic growth rates, and the percentage of fixed investment in GDP during it—also whether it should be best described as a “revolution” or rather as a more gradual cumulative process. But for present comparative historical purposes, these differences are inconsequential, since all estimates are so low by the standards of a modern economy that they clearly indicate the subsequent historical trend.

[9] In terms of technology, individual examples of what constituted advanced machinery for that period began to be introduced from the early 18th century—machinery being fixed investment. The Newcomen steam engine, the first steam-powered pump, was introduced in 1712, the flying shuttle was introduced in 1733, and the first spinning machine was introduced in 1764. The beginning of the development of steam-powered railways, which required a significantly higher level of capital expenditures, began from 1804. Systematic introduction of machinery into textile production, considered the technological commencement of the Industrial Revolution, began in the last third of the 18th century. Railway construction, entailing a further significant increase in fixed investment, began soon after the start of the 19th century.

[10] Calculating from the data in Bolt and Zanden 2020, measured in 2011 PPPs, the United Kingdom’s GDP in 1820 was 70 billion, compared to 57 billion for France, 51 billion for what became Italy, 50 billion for what became Germany, and 27 billion for the United States. Per capita GDP for the United Kingdom in 1820 was 3,306 compared to 882 for China, a ratio of 3.7:1.

[11] Detailed figures for Britain from the most recent comprehensive studies are used here, but alternative estimates would not alter the qualitative trend relative to subsequent developments.

[12] This process began to occur even before the capitalist revolution of 1642–49, and the sharp increase that occurred during the Industrial Revolution. The percentage of fixed investment in GDP is estimated to have risen from about 1.8–1.9 percent of GDP around 1300 to approximately 2.5 percent of GDP by 1760 as the Industrial Revolution commenced (Broadberry and Pleijt 2021, Figure 5). Strikingly, and equally in line with Marx’s analysis, the proportion of fixed capital relative to working capital also rose during this period.

[13] Broadberry and Pleijt 2021, 23. In detail, the earliest data analysed to obtain a realistic account of the structure of the British economy date from 1688, shortly before the systematic introduction of advanced machinery. The first systematic estimates of investment as a percentage of British GDP during the early phase of this process of industrialization ranged from 2.5 percent to 5 percent, but more recent studies have tended to lower that figure still further (Broadberry and Pleijt 2021). The percentage of domestic investment in British GDP (“Domestic investment = fixed investment + stockbuilding” (Broadberry and Pleijt 2021, 36) then began to rise much more rapidly, from 3.3 percent in the 1760s to 7 percent in the 1790s, then fell slightly during the period surrounding the Revolutionary and Napoleonic Wars with France, before rising again to 7.5 percent in the 1830s, and reaching 10.5 percent by the 1840s (see Figure 4). It then failed to rise significantly above this level for almost one hundred years. The data for the period of the Industrial Revolution is from Broadberry and Pleijt 2021.

[14] Britain had an average annual economic growth rate of 0.6 percent between 1600 and 1700, compared with a Western European average of 0.2 percent – calculated from (Maddison, 2010). Broadberry, Campbell, Klein, Overton, and van Leeuwen 2015 gives a slightly higher estimate of British economic growth in 1600–1700 (0.7 percent), but does not provide a comparable estimate for Western Europe for the same period.

[15] Broadberry, Campbell, Klein, Overton, and van Leeuwen 2015, 199, Table 5.03.

[16]Leaving aside China and India, the largest economies globally after Britain in this period were those of France and what would later become Germany and Italy.

[17] For the U.S. interpolating the data of (U.S. Census Bureau., 1975.) for 1770 and 1780 gives a population of 2.5 million, while (Maddison Project, 2023) gives a GDP per capita in 2011 PPPs of 2,419—giving a total GDP of 6.0 billion. For the UK (Bank of England, 2024) gives the population of Great Britain as 8.21 million while calculating from the data of (Gráda, 1979) gives a population of 4.0 million, while (Maddison Project, 2023) give a per capita GDP of 2,895— a total GDP of 35.4 billion.

[18] Lindert and Williamson 2012, Table 4 shows a decline in 1840 constant dollar prices of per capita real incomes, from $85.26 in 1774 to $68.22 in 1800—i.e., a drop of 20 percent, implying a sharp economic contraction. However, Maddison Project 2023, based on calculation from McCusker and from Sutch 2006 gives, in 2011 PPPs, U.S. per capita GDP of $2,419 in 1775 of and $2,545 in 1800, which implies an extremely slow 0.2 percent annual increase averaged over the period. “38 percent the size of the United Kingdom’s”: calculated from Maddison Project 2023.

[19] Calculated from Maddison Project, 2023.

[20] Calculated from Maddison Project 2023, it was 96 percent higher.

[21] Gallman and Rhode 2020, Table 1.3

[22] From 1868 to 1892, 115,960 miles of railways were constructed—four times the total investment in railway construction and equipment compared to the period from 1840 to 1870. Capital per manufacturing establishment more than doubled from $8,400 in 1870 to $18,400 in 1890 (U.S. Census Bureau 1975.)

[23] Maddison 1991, p. 40.

[24] Calculated from Johnston and Williamson 2025.

[25] For a detailed analysis of this process, see 它曾成功“谋杀”了德国、日本、四小龙，现在想要劝中国“经济自杀.”

[26] See 它曾成功“谋杀”了德国、日本、四小龙，现在想要劝中国“经济自杀.”

[27] Barro and Sala-i-Martin 2004, 40.

[28] See, for example, 从210个经济体大数据中，我们发现了中国和世界经济增长的密码.

[29] See 从210个经济体大数据中，我们发现了中国和世界经济增长的密码.

[30] For a more detailed analysis of this see 误读提振消费策略，对中国应对美国竞争非常不利. In a Marxist production function, it is part of constant capital, which, with living labor, is one of the two inputs into production, and in “Western” economics, it is, with living labour and total factor productivity (TFP), one of the determinants of production.

[31] For detailed statistics on this, see 从210个经济体大数据中，我们发现了中国和世界经济增长的密码 and 误读提振消费策略，对中国应对美国竞争非常不利.

[32] For the detailed data on this, see 罗一和吉塞拉·塞尔纳达斯：从210个经济体大数据中，我们发现了误解促消费对经济的危害 and 误读提振消费策略，对中国应对美国竞争非常不利.

[33] Marx 1867, Chapter 25: The General Law of Capitalist Accumulation.

[34] Xi 2020.

[35] For a detailed formal analysis of this, see, in particular, Yu Yongding’s 消费驱动还是投资驱动？

Bibliography

Bank of England. (2024, August). A Millennium of Macroeconomic Data for the UK. Retrieved from bankofengland.co.uk: https://www.bankofengland.co.uk/statistics/research-datasets

Barro, R. J., and Sala-i-Martin, X. (2004). Economic Growth (Kindle Edition). Cambridge, MA: MIT Press.

Bolt, J., and Zanden, J. L. (2020). Maddison style estimates of the evolution of the world economy: A new 2020 update (Maddison-Project Working Paper WP-15. Retrieved from https://www.rug.nl/ggdc/historicaldevelopment/maddison/releases/maddison-project-database-2020

Broadberry, S., and Pleijt, A. d. (2021, February 27). Capital and Economic Growth in Britain, 1270-1870: Preliminary findings. Retrieved from University of Warwick: https://warwick.ac.uk/fac/soc/economics/research/centres/cage/publications/workingpapers/2021/capital_and_economic_growth_in_britain_1270_1870_preliminary_findings/

Broadberry, S., Campbell, B., Klein, A., Overton, M., and van Leeuwen, B. (2015). British Economic Growth, 1270– 1870. Cambridge: Cambridge University Press.

Erlich, A. (1967). Development Strategy and Planning: The Soviet Experience. Retrieved from http://www.nber.org/chapters/c1425

Gallman, R. E., and Rhode, P. W. (2020). Robert Gallman’s Capital Stock Project. In R. E. Gallman, and P. W. Rhode, Capital in the Nineteenth Century. University of Chicago Press. Retrieved from https://www.nber.org/books-and-chapters/capital-nineteenth-century

Gráda, C. Ó. (1979). The population of Ireland 1700-1900: a survey. Annales de démographie historique,, pp. 281-299. Retrieved from https://www.researchgate.net/publication/291613400_The_population_of_Ireland_1700-1900_a_survey

Johnston, L., and Williamson, S. H. (2025, October 21). What Was the U.S. GDP Then? Retrieved October 21, 2025, from MeasuringWorth.com: https://www.measuringworth.com/datasets/usgdp/

Jorgenson, D. W., Gollop, F. M., and Fraumeni, B. M. (1987). Productivity and US Economic Growth. New York: toExcel.

Liang, C.-Y. (2007). “Industry-Wide Total Factor Productivity and Output Growth in Taiwan, 1981–1999.” In D. W. Jorgenson, M. Kuroda, and K. Motohashi (Eds.), Productivity in Asia: Economic Growth and Competitiveness (pp. 146-184). Cheltenham: Edward Elgar.

Lindert, P., and Williamson, J. (2012). American incomes 1774–1860 (Working Paper No. 18396). National Bureau of Economic Research. Retrieved from https://doi.org/10.3386/w18396

Maddison Project. (2023). Maddison Project Database 2023. Retrieved from 10.34894/INZBF2

Maddison, A. (1991). Dynamic Forces in Capitalist Development. Oxford, UK: Oxford University Press.

Maddison, A. (2010). Statistics on World Population, GDP and Per Capita GDP, 1-2008 AD. Retrieved from Angus Maddison (1926-2010): http://www.ggdc.net/MADDISON/oriindex.htm

Marx, K. (1867 Chapter Twenty-Five: The General Law of Capitalist Accumulation). Karl Marx. Capital Volume One. Retrieved from https://www.marxists.org/archive/marx/works/1867-c1/ch25.htm

Marx, K., and Engels, F. (1845 (1976 Edition)). The German Ideology. In K. Marx, and F. Engels, Karl Marx, Frederick Engels Collected Works Vol.5 (1976 ed., Vol. 5, pp. 19-539). Moscow: Progress Publishers.

McCusker, J. F. (n.d.). Colonial Statistics. In S. S. S. B. Carter, Historical Statistics of the United States: Earliest Time to the Present. New York: Cambridge University Press.

Pyo, H. K., Rhee, K.-H., and Ha, B. (2007). “‘Growth Accounting and Productivity Analysis by 33 Industrial Sectors in Korea (1984-2002)’. In D. W. Jorgenson, M. Kuroda, and K. Motohashi (Eds.), Productivity in Asia: Economic Growth and Competitiveness (pp. 113-145). Cheltenham: Edward Elgar.

Ren, R., and Sun, L. l. (2007). Total Factor Productivity Growth in Chinese industries, 1981-2000. In D. W. Jorgenson, M. Kuroda, and K. Motohashi (Eds.), Productivity in Asia, Economic Growth and Competitiveness (pp. 76-112). Cheltenham: Edward Elgar.

Sutch, R. (2006). National Income and Product. In S. B. Carter, S. S. Gartner, and M. R. Haineset, Historical Statistics of the United States: Earliest Time to the Present. New York: Cambridge University Press.

U.S. Census Bureau. (1975). Historical Statistics of the United States, Colonial Times to 1970. Bicentennial Edition. Retrieved from https://fraser.stlouisfed.org/title/historical-statistics-united- states-237

Xi, J. (2020). Speech at the 28th group study session of the Political Bureau of the 18th CPC Central Committee on November 23, 2015. Qiushi (16).

The above article was originally published in English here on Monthly Review Online.

By Michael Burke

The main cost of the Iran War will be in human death toll. There is also the question of the national sovereignty of Iran, as the recent destruction of nations such as Syria, Iraq and Libya testifies.

In all cases the costs will be far-reaching and will mount the longer the attacks from the US, Israel and their allies continue, Britain chief among them. The same is true of the global economic and social costs of the war, which we already know will be considerable.

The supply of oil and of liquified natural gas (LNG) has been severely restricted through the Straits of Hormuz. So too has the passage of other essentials such as food and fertilisers. But there has also been structural damage to the supply of energy products, following the attacks on refining and port facilities across the region, both offensive attacks and the retaliatory ones.

The extent of this structural damage cannot be known until the war is ended. But it is possible to identify some of the parameters of the economic consequences that lie ahead.

Economic impact

Before the US launched its war, along with Israel, the price of the Brent crude benchmark was under $70 a barrel. At the time of writing it is $115/bbl and has traded as high as $120/bbl. An array of oil-based products has risen between 40% to 50% from a year ago, while gas prices are currently generally 90% higher than a year ago.

Globally, the net oil importers require approximately 40 million barrels of oil a day (almost a quarter of which normally passes through the Straits of Hormuz). That means their daily cost of oil consumption alone has risen from under $3 billion per day to over $4 billion.

But that is only part of the picture. All consumers of oil products, whether importers or not, are affected by the world price of oil, even if the direct impact is often mediated by taxes, subsidies and long-term supply contracts.

Global oil consumption is a little over 100 million barrels per day, implying that the total world cost of the consumption rises from $7 billion per day to well over $10 billion per day. Coincidentally, recent daily expenditure on gas consumption amounts to almost exactly the same, at around $10 billion, although the increase in costs has been greater, closer to $4.5 billion per day, rather than the $3 billion per day rise on outlays on oil.

As natural gas prices make up about 70% of the cost of fertilisers, the impact on these products has been considerable. Food production is already under pressure worldwide. There are also widespread reports of perishable food products rotting on ships that cannot pass through the Strait.  An additional factor arises from reports that the cost of shipping insurance has risen from 0.25% of the vessel’s value to 7.5%.

Indirect consequences

The widespread use of fossil fuel products in both the production and distribution of many other commodities means that changes in price have a very large effect on other sectors of the economy. A severe shortage of supply will limit both production and distribution for many sectors.

The International Monetary Fund (IMF) estimates that every 10% rise in the oil price adds 0.4% to global inflation and reduces world GDP growth by between 0.1% and 0.2%. Even though the US is now an oil exporter, the official assessment from the US central bank is broadly similar in its impact on the US economy.

In Britain, the Bank of England’s rule-of-thumb on the effects of an oil price shock are completely in line with this assessment, although both the Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF) suggest that Britain is going to be one of the worst-hit of the OECD member countries among the advanced industrialised nations.

This is because of two effects. One is the very high levels of energy imports in the British economy. The other is the peculiar system of energy pricing in this country, which regulates the price of all wholesale energy at the cost of the most expensive energy, which is usually gas.

It is this way that the market is structured (effectively at a permanent subsidy to gas producers) that makes nonsense of all the claims the reopening depleted North Sea fields will solve the energy crisis here. These fields have been closed because declining stocks mean that the remaining fossil fuels are extremely expensive to tap. An increase in output from this source would significantly increase the price of energy in this country.

But the greatest dislocation to the world economy is certain to be felt in large parts of the Global South. In many countries, short-time working and energy rationing has already been put in place.  The level of strategic energy reserves is often very limited or even close to zero. Soaring prices mean that some countries will simply be forced out of the energy market altogether.

In general, the economic effects from the attack on Iran will be very negative, even if the armed conflict ended tomorrow. The longer the conflict lasts, it becomes more likely that economic slump, surging inflation and outright shortages of essentials including food will be the norm.

The world economy is both more industrialised (and energy-dependent) than it was during the 1970s oil price shock and international trade is much bigger part of the world economy. Trade now accounts for about 60% of world GDP, compared to 25% in the 1970s.

The 1970s oil price shock was also preceded by the long boom following the end of World War II. Now, it arises after a prolong period of weak growth and high prices since the Global Financial Crash in 2007-08. As a result, the misery created could be very severe.

Of course, in all crises, the rich and powerful are somewhat insulated from the effects. It is workers and the poor who bear the brunt. As we have recently seen in the Covid crisis and the Ukraine war, energy companies, banks, food retailers and landlords are completely unscrupulous in profiteering even where there own costs are largely unaffected.

Government finances will also come under pressure when they are already weak. There will be a clamour to cut welfare, public spending and public sector pay to offset, although this will not be applied to military spending. It is the rampaging of the US, which seems to have declared war on half the world, which got us into this mess.

The question arises, why does the US believe that this is all a price worth paying? Even at the most self-interested level, the war effect on US gas prices is going to be extremely negative for the Republican party in the US mid-term elections in November.

Trump is operating strategically in the interests of US capital as a whole, and he has backing for his aggression. He is attempting to recoup militarily what has been lost economically, above all to China. The US is no longer the world’s sole economic superpower, but has far greater conventional military firepower than the rest of the world combined. The war in Iran is now the centrepiece of a global effort to reassert US global dominance on all fronts. As a result, this war, or other wars are very likely over the next period.

There could be a response that alleviates some of the worst effects of Trump’s forever wars. Radical measures to control prices, to direct investment and to push for renewable energy will be needed. The alternative is that workers and the poor globally will be left bearing the significant costs of yet another illegal war.

An earlier version of this piece appeared in the Morning Star here .

By Michael Burke

In Britain, Marxist economics is not very popular, even among Marxists. Instead, an eclectic mix of ideas prevails. Beginning with an objective analysis of the current state of the economy, the framework here is that Marxist analysis cuts through the popular misconceptions on the economy and addresses the sources of the current crisis.

It is now possible to argue that a chronic British crisis is becoming an acute one.

It is widely understood that historically, Britain was the dominant economic power in the world. That period lasted effectively after defeat of Napoleon and from 1820 onwards to 1870, when relative economic slowdown began. For a long time, this trend was obscured by the existence of the British Empire. It seems that in the minds of many, it still is. The cause of the decline was that British capitalism found more profitable outlets for investment internationally, where it could use superior technology and/or brute force to win and dominate new markets. The Empire meant that the potential for profits in the domestic market was always going to struggle to compete with starvation wages in the colonies.

This became the ‘British disease’, the lack of private investment and the inevitable economic relative decline that followed. That is the long history.

But this is also extended through to the current crisis. The chronic relative lack of investment has now become acute. In 6 years since the 1^st quarter of gross 2019 private sector investment has risen by just 8.7%. This is barely 1% a year and questionable whether this corresponds to a rise in net fixed capital formation, as it may well be less than the rate of depreciation and dilapidation.

The British economy’s Investment (Gross Fixed Capital Formation, GFCF) is about £500bn a year, equalling about 9% of existing capital stock. Most accountants would not allow a firm to depreciate its capital stock by just 9% a year, it would need to be much higher.  Even if ‘UK plc’s’ capital stock does include railways and bridges (which have a much longer useful lifespan than firms’ fixed capital), GFCF which is just 9% of the existing capital stock seems too low to match the replacement level. The functioning capital stock of the British economy may be contracting.

The competition with confusion

Marxism is not necessary to outline this crisis. But it is necessary to explain why this has happened in this way, or to begin to outline an effective response to the crisis.

Firstly, this is because mainstream economics offers only confusion where explanation should be. To give a very concrete example of this, the Bank of England insists that there is a ‘productivity puzzle’ in terms of explaining the low growth of the economy and of productivity in particular.  And there are 792 citations for 10 scholarly articles on the productivity puzzle on the first Google page alone. It is a very popular idea.

Yet there is no puzzle at all. If we take manufacturing, ONS data are startling and decisive. In real terms the manufacturing stock of fixed assets is almost unchanged over nearly 30 years. The means of production in the British manufacturing sector are not increasing.

As a result, it is extremely difficult to increase the output of the manufacturing sector. Yet, in fact, manufacturing production has increased at a very moderate pace over that time. In addition, when the total workforce and hours worked have also both declined sharply, the modest rise in output is closer to a productivity miracle than a productivity puzzle.

Of course, mainstream economics has a vested interest in obscuring the causes of the crisis, including at the very top like the Bank of England and the OBR. They represent the interests of the class that is responsible for the dearth of investment and the crisis overall. That is inevitable.

To take another example, there is an army of private sector economists in this country, many of them working in finance. Yet how many of them ever refer to the 2007-2008 crisis being caused by the over-speculation of the finance sector, its deregulation the economy’s over-reliance on finance and the role of US finances in provoking the global slump? Of course they do not. They have a vested interest in obscuring that truth too.

But what about the non-mainstream forces? The people who do not accept mainstream explanations for the crisis?  If the British capitalists are on an investment strike, why is the British left on a strike against Marxist economics? Why is the most popular economist on the British left Keynes, who was a Liberal? And, even then, why do they mostly reject his prescription for a “somewhat more comprehensive socialisation of investment”?

They refuse to accept the role of the public sector, the State, interfering in the realm of the private sector, which in a capitalist economy like Britain in peacetime, dominates the investment function. They do not advocate increasing socialisation of investment.

Instead they promote a series of alternative explanations. These merit discussion because unfortunately they dominate the economic thinking of the progressive forces in this country.

These ideas include, but are not exhausted by:

• The government can just print money to get out of the crisis
• Tax revenues don’t fund government spending
• Governments can spend without limit
• Boosting Consumption is the way of the crisis, because under-Consumption is the cause
• Financialisaton is the cause of the crisis, and ethical banks or bankers are the answer, there are many more.

The fact that most of these nostrums, where possible, have been tried in the very recent past and failed does not impinge on their thinking:

• Biden/Trump/Sunak boosted Consumption without Investment and all we got was inflation
• All the G7 central banks printed money without limit and we got no substantial economic recovery
• Liz Truss spent without limit, and look what happened next
• Aside from abolishing taxation, it is hard to test the claim that taxation does not fund government revenues, but we can be sure disaster would strike very quickly. Merely cutting taxation, like Reagan and Thatcher, or Milei now leads to ballooning deficits
• And, good luck with finding ethical banks or bankers!

As we know, Keynes was a Liberal, albeit one who, in the realm of finance and the economy was attempting a largely objective analysis of the various economic crises of his lifetime, related to WW1, Versailles, the 1929 Crash and WW2.

However, much of the inner workings of the economy remained a mystery to him, even though those inner workings, and their ‘laws of motion’ had already been analysed by Marx.  These include trade, which is how Capital begins, profits and their centrality under capitalism, the law of the tendency of the profit rate to fall, the Marxist law of value, and so on.

Many of these key analyses are either completely misunderstood or neglected altogether, even in left narratives on the economy. You are more likely to hear the word profits on a US business channel that you are in a political discussion about the economy.

But they all need to be reinstated, even if this seems like an uphill task. Because there are material interests and social forces which have every interest in removing Marxism from our lexicon, in denying his analysis and ignoring a whole body of work.

Harold Wilson famously said he had opened Capital at the second page and promptly closed it again. True or not, matters have not improved since.

The explanation for this lies in the role of the labour and trade union bureaucracy. They preach social peace, Marx does not. The prefer ‘keynesian’ solutions, not disruptive Marxist ones that might lead to conflict with capital. They hanker for a return to keynesianism now, when Marxism suggests that is no longer possible. Attacks on welfare, the war drive, repeated bouts of high inflation and the renewed turn to draining the public finances all point in the same direction. Capital is on a major offensive, essentially to increase the rate of exploitation as their way out of the crisis. They have no interest in listening to pleas for pump-priming the economy.

There is an alternative

Marxism tells us that a society develops economically through the accumulation of capital and the development of its productive capacity. In addition, the development of those productive forces outgrow and come into conflict with the existing relations of production, private ownership. But it also tells us that the capitalists’ dream is to accumulate without investment.

Taking these together, in Britain now we have instead the nightmare where the capitalists do not invest, the productive forces are not growing and their only method of accumulation is to increase the rate of exploitation.

A government attempting to operate in the interests of the working class and the oppressed would need to break this logjam. The main way to break it is through a sharp increase in public sector investment.

Of course, there is no reason in principle why at least sections of the ruling class might oppose such a policy. As for the allocators of capital in the bond markets, there are no borrowing restraints either when real long-term interest rates are below 1%, contrary to the claims of even some left economists.

After all, many private sector firms would benefit from public investment in housing, transport, IT and renewable energy. And many more would benefit indirectly from policies that improved conditions and health of workers, that cut delivery times, that improved connectivity or lowered their bills. The public sector has frequently rescued the private sector, most recently in the banking crisis of 2007-08.

But there is both a structural and conjunctural objection to these policies. In extremis, previously violent objections the public sector intervening in the economy can fall away if sectors of the economy have either exhausted their potential for profitable returns (say the train operating companies) and/or their disrepair undermines other sectors of the economy (such as the coal industry at the end of World War II). But these are exceptions, not the rule. Generally, there is ferocious resistance to any efforts by the state to encroach on private sector investment.

There is now also a conjunctural difficulty to a programme of public sector-led investment. The crisis of profitability of the British economy means there is a strong tide in favour of dismantling public sector institutions in favour of the private sector. This takes place through underfunding, outsourcing, overcharging, PFI and outright privatisation. The largest public sector organisation in the country is the NHS, and it is subject to all these impositions. But they are widely applied across the public sector.

The most recent development is to funnel public money to private arms’ manufacturers through an increase in the military budget, providing huge profits but no economic benefit whatsoever. There is too the general drive against wages, principally by the policy of stoking inflation, and reducing the social wage through cuts in welfare and the social safety net. Overall, the policy to increase the rate of exploitation to resolve the crisis.

Therefore, the central demand for public investment remains the appropriate economic response to the crisis, and all other schemes have failed over 15 years. But only the working class and its allies have no interests preventing the adoption of this policy.  Politically, advocates of the policy should expect to be ignored and dismissed and then viciously attacked only when these ideas become more popular.  

Overcoming the failed policies which have lasted centuries is sure to be a prolonged struggle.

The above are some notes made for a meeting at the Marx Memorial Library, ‘What can Marxism tell us about the crisis of UK plc?’ Video of all the presentations can be found here.

By Michael Burke

Austerity and war, leavened with racism and authoritarianism is what is now being served up to the bulk of the population in the NATO countries. The Alternative Defence Review (ADR) published by CND has a very different perspective to Britain’s recent Strategic Defence Review (SDR), could hardly be more timely or more pertinent.

A mass of evidence is assembled in the report to make a series of arguments that counter the assumptions and findings of the SDR. Here, the focus will be on the key economic arguments for opposing the war drive.

There is no surprise that the war drive is linked to a renewed austerity drive. It is now even drawing in the US, which had previously declined to follow the failed European austerity model.  But then Biden let inflation rip to hammer living standards, especially wages, and Trump is completing that one-two on workers and the poor by more traditional methods. In his ‘great big, beautiful bill’ he will raise military spending and cut taxes for the very wealthiest, funded by a combination of borrowing and cuts.  Social welfare programmes, especially Medicaid will be cut by $880 billion, which low-paid and poor Americans rely on for any access to health care at all.

Trump makes the link between his military bonanza and the cuts to social protection explicit.  There is also an effort in Britain by campaigners to link the two, through slogans such as ‘welfare not warfare.’

In fact, the linkage between the two areas of government spending is a logical economic imperative.  Grasping that logic will only strengthen the anti-war movements in this country and internationally.

There are only two broad categories for production; Consumption or Investment. Of the two, only Investment can augment the means of production, and so create the conditions for an increase in production which is the basis for prosperity – that increased production can then only be directed either towards consumption or towards Investment. Therefore, while the sustainable satisfaction of human needs (consumption) is or ought to be the purpose of economic policy, the necessary means to achieve that is Investment.

The definition of Investment is that it will add to or replace the existing means of production. Anything which adds to level of fixed assets in the economy is properly categorised as Investment (Adam Smith’s term for the level of fixed assets in the economy was simply ‘stock’).

Despite the best efforts of Keir Starmer and others, spending on the military is not Investment, not even military hardware. This is because missiles, bombs and fighter jets are not additions to the means of production. They can only destroy the means of production, as well as people. Military hardware is the opposite of Investment. They are the means of destruction.

As it is not an input into production military spending can only be categorised as consumption. But other items that are categorised as consumption are not only extremely useful but vital to the well-being of the population. These includes spending on health, or education, or social welfare.  Not all consumption is equal. Some of it is vitally necessary to human society, other consumption spending is simply destructive of it.

In this country and in many other NATO members there is a great deal of talk about public Investment. But the reality is very different. So, the recent announcement from Rachel Reeves following on from the Treasury’s Spending Review is that there will be £725bn in public Investment over the next 10 years. But this is less per year than the £77.6bn of public Investment in 2024. Public Investment is being cut.

But once the (smaller) envelope for public Investment has been set, that determines the level of funding available for consumption. In the domestic economy as a whole Investment + consumption must equal 100% of the economy. So, public Investment + public consumption must account for 100% of public spending.

The inescapable logic is that this government must choose between types of consumption within the total funds allocated to consumption. The Starmer government has chosen. It chose to cut international aid and to cut welfare in order to increase military spending. Essentially, under the current total allocated to public consumption, the government chose between welfare funding or military funding. It made the wrong choice.

Anti-war campaigners and anti-austerity campaigners objectively have unified interests. There are no additional funds currently available for military spending except by imposing austerity. This also means there is no logic in supporting increased military funding while opposing austerity. The first is not possible without the second.

The Alternative Defence Review has done a great service in raising these issues. The economic argument reinforces the overall campaign against austerity and war, in favour of prosperity and peace.

The Alternative Defence Review can be found here.

By Michael Burke

The government is in denial about its own austerity policy. It repeatedly claims that it is not reproducing the failed austerity policies of the Tory years. Ahead of the Spending Review this week, it is important to set the record straight – to show that the government’s policy is austerity and attempts to do that are misleading and counter-productive.

The latest effort is by Torsten Bell MP, who holds two junior ministerial posts at the Treasury and the Department for Work and Pensions. He previously worked as director of policy for Ed Miliband when he was leader of the Labour party and, more recently as a principal of the Resolution Foundation. He is widely considered to be one of the more astute economic brains in the Starmer government. So, his intervention in the government campaign of denial about austerity is worth consideration.

That intervention came in the form of a chart on his ‘X’ account, reproduced below, as well as a longer explanatory video which is also available there.

The chart shows Total Departmental Spending (TDEL) from 2009/10 to projections under the Labour government until 2029/30. On the face of it the red line of Labour planned spending clearly shows a rising trend, which seems to strongly supports the claim that austerity is over.

However, a closer examination of the chart does not support Bell’s contention. The dark black line starts to rise in in 2016/17. On this basis, “we” did not end austerity. The Tories did 9 years ago. All of us who have been complaining about austerity are fools! Austerity ended years ago, according to Bell’s chart.

Yet public services have deteriorated, NHS waiting lists lengthened and living standards have deteriorated over that time.  Austerity has been very much in place over the entire period.

The reason austerity did not end in 2016/17 despite real terms increases in government spending is because those increases were not sufficient to cope with the pressure of a rising and ageing population, or to reverse the damaging effects of previous austerity.

Under current plans, the Labour government will continue that trend. Spending will increase, but insufficiently to end austerity. The table below is taken from the March 2025 Economic and Fiscal Outlook from the Office for Budget Responsibility.

Table 1.  Total Departmental Expenditure Limits

The table shows that the government plans for TDEL (Total Departmental Expenditure), highlighted, are extremely weak, beginning with a cut over 1.6% in the last year of the Sunak government by ending with just 0.6% and 0.7% growth in the last 2 years of this parliament. Over the entire period, growth in Departmental spending will be little over 1% on average per year.

Of course, it is possible that the Spending Review will show a complete change of heart by the government, a recognition that austerity does not have the claimed effects and that large-scale public investment is necessary to lead economic recovery. But the signs do not look encouraging.

By Michael Burke

The whole world is caught up in the negative effects of Trump’s tariffs. But the US Administration’s principal target is clearly China, which has been singled out for extortionate levels of trade tariffs, combined with threats to third countries who continue to trade with China.

At the same time the rest of the world has been subject to far lower, but highly damaging tariffs, with the threat of further actions to come. A further consequence is the impact on the US itself, with the prospect of much lower growth, higher prices and job losses now widely anticipated. This in turn has caused turmoil in US financial markets and has led to the unusual situation where all main US assets, the stock market, government bonds and the US Dollar have all fallen at the same time.

The main questions posed are:

• Why has Trump conducted policy in such a reckless manner?
• What will be the effects of the tariffs?
• What are the long-term consequences?

Falling behind China

The context of the US economy’s weight in the world in framing Trump’s policies. The US economy has been growing at a considerably slower pace than China since at least the late 1970s and the beginning of the Chinese ‘reform and opening up’ period. For much of that time, this was of little consequence to the US.

But in terms of economic size (using Purchasing Power Parities, PPSs, to measure real output and ignoring the effects of currency differentials), the World Bank calculates that the Chinese economy surpassed the US economy in 2016, as shown below.

Chart 1. Chinese and US economies’ real GDP (PPPs)

Source: World Bank

The World Bank now estimates that the output of the Chinese economy was $34.66 trillion in 2023, versus $27.72 trillion for the US. This makes the Chinese economy effectively 25% bigger.

But the growth trends in the two economies are making this disparity an urgent matter for the US. This is because the growth gap continues to widen rapidly.

This is illustrated in the recently published IMF World Economic Outlook (WEO) database (April 2025). On their projections, by the end 2030 the US economy will be $37.15 trillion (PPP terms), while the Chinese economy will be $54.23 trillion. This means that by 2030 the Chinese economy will be 46% bigger than the US. For comparison, just six months ago in the October 2024 WEO, the IMF projected that by end-2029 the Chinese economy would be 38% larger than the US economy.

Over a slightly longer time frame, it is easier to see why there is a sense of urgency, even reckless urgency, from the Trump Administration. The US economy has doubled in size in last 17 years, according to World Bank data, while Chinese the economy doubled in size in 9 years. If both economies maintained that trend from their current starting points, the Chinese economy will be double the size of the US economy in little more than a decade. It would be four times the size of the US economy in 20 to 25 years’ time.

So in a very few years, on current trends, the Chinese economy will be out of sight compared to the US economy. The US will have decisively lost its position of global economic dominance and all that goes with it.

As this would be a world-historic defeat for the US, it is not something that its ruling circles are willing to accept at all. The ultra-aggressive stance on tariffs reflects both the scale of what is at stake and the urgency of their response.

Tariffs and how they operate

It has been widely shown that the supposed logic for the scale of the tariffs for each country is completely spurious. This is further underlined by the repeated changes to the tariff levels and, the date of their implementation and the the exemptions in certain sectors (and the U-turns).

This is because the tariffs themselves, while having a serious negative global economic effect are essentially politically determined.

At one end of the scale is a country like Britain, which regards itself as a close ally of the US, which has been hit with general tariffs of 10%, with 25% on cars and possibly more to come on pharmaceuticals. As noted previously, China is regarded in the US as its principal rival, if not enemy, and has been hit with 145% tariffs. This is effectively an attempt to end US-China trade. It is reinforced by the US threat of further sanctions on theird countries which continue to trade with China.

The negative effects for the global economy are widely acknowledged, if somewhat understated in terms of the impact on the economies of the Global South.  In the April 2025 WEO, for example, the IMF slashed growth forecasts as a result of the tariffs, while simultaneously raising inflation forecasts for the advanced industrialised countries.

By contrast, UNCTAD, the UN trade agency is much more pessimistic. UNCTAD forecasts that global growth will slow to just 2.3% this year, which below its marker for world recession of 2.5%. UNCTAD says  “developing countries and especially the most vulnerable economies” will be hardest. This is because, as UNCTAD argues, many low-income economies now face a “perfect storm” of tariffs and lower trade, existing unsustainable debt levels and slowing domestic growth.

It should also be remembered that an immediate casualty of the tariffs is the US economy itself. Although Trump continues to insist that the US is financially benefitting from tariff revenues, this cannot be true. This is because tariffs are never paid by the exporters, but by the businesses and individuals who are importing the goods. This means US businesses and consumers are paying Trump’s tariffs, which will reduce incomes in the US itself. It is in effect a Federal tax on the imports of US economy, whether for investment or consumption purposes.

Trump’s other key claim in favour of traiffs is that they will lead to ‘re-shoring’ of jobs. This is based on the false assumption that the jobs naturally belong in the US, and by punishing other countries and damaging their ability to export to the US, production will relocate to the US. Again, this includes all countries in its scope, but is particularly aimed at China.

The entire framework for this policy is shot through with contradictions and false assumptions. To highlight just some of the more important ones:

• The US economy now accounts for something over one quarter of world GDP and a little over one-eighth of world imports. Unless any country is almost wholly dependent on US imports (and for most of the world China is now a bigger trade partner) then higher import tariffs to the US will tend to force diversification to other markets (including into domestic markets) rather than economic collapse. Even for countries such as Mexico and Canada, the tariffs are so damaging and other demands from Trump so stringent they too are probably forced to diversify away from the US.
• Advanced manufacturing is increasingly complex, capital-intensive and relies on global supply chains.  Price (and raised prices via tariffs, or the cost of labour) are just one element in the question of the location of production. Access to high skills, openness to the required supply chains, access to raw materials and reliable energy sources, highly developed infrastructure and a large, growing domestic market are all key factors. In many instances, the US simply does not offer these prerequisites.
• The same issues apply to re-location as to location. The world is not obliged by costs to relocate to the US. In fact, in light of the tariffs to be paid by relocating to the US, there is an incentive to seek alternatives.
• Tariffs have been tried in the recent past, with little success. There was a roughly 10% increase in US manufacturing jobs in the years following both the tariffs of Trump’s first term and coming out of the pandemic. But neither of these were ‘re-shoring’ as world manufacturing jobs increased at a greater rate over the same period.

In effect, Trump’s policy is to lay siege to the whole world in order to isolate China. However, given the US weight in the world economy and global trade, as well as the enormous complexity of global supply chains, with China often at their hub Trump, he risks the main effect is to isolate the US economy.

Trump’s gambit

In any contest where one side is decisively losing, a high-risk strategy may become appealing for them. The increased risk contains its own pitfalls, but opens the possibility of eventual victory, which is more attractive than inevitable defeat.

Trump’s tariff policy is incoherent and unworkable, for reasons noted above. Fundamentally, they cut across a decisive factor of economic development. The necessary condition for optimal economic development is the fullest possible participation in the international division of labour (or more accurately, the socialisation of production).

For fledgling industries or even economies, protectionist tariffs can be a useful tool for economic development, with the intention to lower those tariffs when there has been sufficient development and participation can actually take place. But for advanced industrialised countries like the US, tariffs entail cutting off the economy from participation in the international division of labour.

The same applies too to protectionism in other advanced industrialised countries in the G7. Protectionism, subsidies without sufficient investment and ‘buy domestic’ campaigns just lead to a cycle of higher prices, low investment and decline. The EU was born as the European Coal and Steel Community behind tariff walls (with Britain treading the same path, sometimes independently) but now there is very little steel, coal, shipbuilding or other industries which are thriving in the rest of the world. Cars may be next.

But Trump’s tariffs are not designed to succeed by economic means. They are a device to politically re-engineer the world in the US’s favour.

As previously noted, China is the principal target for the US, as the singularly extortionate tariff levels show, the absence of a 90-day pause and the threat to third countries continuing to trade with China. The much softer but damaging tariff threat to third countries is designed to enlist those countries on the US side in the trade war with China. Even then, there will be a price to pay as Trump seeks to enrich the US at their expense. This aligns with his military policy, also increasingly directed at China, with strong pressures on other NATO countries (and others) to ramp up their funding of the US war efforts.

The tactic is to force other countries to choose the US over China as a trading partner, cemented by the US’s long-standing military dominance over all other countries. Clearly, China’s rejection of Trump’s various demands and ultimatums means it has no intention of acceding in its own demise.

But there are a number of other economies which have sufficient weight in the world economy and provide crucial links in global supply chains, which mean they have both the capacity and incentive to resist Trump’s enforced choice. Principally, these are the EU, India and Japan.

It is unclear ultimately how they will respond, but surprisingly militant and public pronouncements from Japan suggest that Trump will not get things all his own way. Many other countries simply cannot choose the US over China because of existing trade relationships, or have very little incentive to, given China’s active role in their economic development. This is especially true in poorer parts of Asia, much of Africa and some countries in Latin America.

By contrast, the incoming German Chancellor Merz is reported to have offered Trump a zero-zero tariff regime on trade. Others who have offered the same have been rebuffed by the US. But zero tariffs (and presumably alignment on food standards) would devastate European agriculture and cause huge social unrest.

The Trump offensive is also not confined to overseas opponents or enemies. It is also a two-pronged attack on American workers and the poor. In this way, Trump aims to increase the profits of major corporations and their share of national income.

The first prong is a direct attack on social spending with $2 trillion in planned government spending cuts. The largest slice of this is a planned $880 billion cut to Medicaid and other federal healthcare programs. But the second prong is inflation. Since the financial crisis of 2008 it has proved very hard for Western governments to cut nominal wages via austerity. It has been much easier to cut real wages by stoking up inflation, which began in the US in early 2020. Not only will the effect of tariffs be to increase US (and other) rates of inflation, that process will be reinforced by a simultaneous $1 trillion tax cut which will overwhelmingly benefit the ultra-rich.

Inflationary tax cuts for US oligarchs and social spending cuts for workers and the poor are a blatant class war approach to fiscal policy. It remains to be seen what resistance these policies meet from those most badly affected.

Finally, there is the Achilles’ Heel of Trump’s policies in the form of US financial markets. Typically, stock markets rise with improving sentiment on the economy, while bonds rise as economic optimism fades. The global dominance of the US Dollar should mean that either one ought to be the international ‘safe haven’ in a time of political and/or economic turmoil. But in response to Trump’s policies both main US financial markets have fallen simultaneously, along with the US Dollar itself. This directly impacts the market wealth of millions of Americans, and particularly the set of oligarchs that Trump represents. Any softening of the tariff policy is greeted with huge relief in these financial markets; every new threat from Trump provokes a renewed sell-off.

Conclusion

This combination of linked factors; China’s refusal to be subordinated, other countries’ reluctance, the conflict with American workers and the fragility of US financial markets all mean that Trump has lost the first battle in this war, as even arch neo-liberal outlets like the Wall Street Journal acknowledge.  ‘China called Trump’s bluff and seems to have won this round’, was its verdict.

But following from the analysis above, and the incredibly high stakes for the US, we can be certain that there will be many more rounds to come. The whole world will be affected for many years to come.

By Paul Atkin

The contrast between the way the crises in steel production at Scunthorpe and Port Talbot has been stark. Both plants owned by companies based overseas. Both seeking a way out of unprofitable production. Both in negotiation for subsidy from successive governments for outcomes that would lead to massive job losses. Both looking to close aging blast furnaces earlier than originally planned because they have been making significant losses.

In the case of Port Talbot, this led to a deal to convert to Electric Arc Furnaces to secure sustainable steel production at the site, but with the loss of 2,500 jobs and only 300 retained. This was dependent on a subsidy from the government of £500 million. A similar deal was not clinched at Scunthorpe, as the crisis was brought forward by Trump’s imposition of a 25% tariff on UK manufactured steel – which led to an announcement of imminent closure from the company the following morning. A closure would mean 2,700 jobs lost – on the same scale as Port Talbot.

In Port Talbot, in the absence of a serious just transition process involving the unions, which were excluded from the discussions by the company and the then Tory government, the job losses are being dealt with by the same sort of offers of retraining as have been proposed for the Grangemouth oil refinery in Scotland. In the case of Scunthorpe, also with no just transition process, the government has rightly stepped in to take charge of the plant to keep the blast furnaces running in the short term; which means that the losses previously borne by the company will now be borne by the Exchequer. With the company losing £255 million a year, the governments £2.5 billion steel transformation fund can absorb this in the short term. Workers at Port Talbot have expressed some bitterness that this was not considered for them.

What has been different is the mobilisation of Sinophobia around British Steel’s ownership by a Chinese company, Jingye. Indian based Tata Steel’s ownership of Port Talbot was certainly mentioned in news coverage, but not on the blanket, verging on obsessive scale that British Steel’s Chinese ownership has. Tata’s brinkmanship in negotiations was also mentioned, but they were not accused of “negotiating in bad faith” in the way that Jingye have. Both companies have behaved as you’d expect a capitalist company to behave, though if you read Jingye’s Group Introduction you can see how their operations inside China are turned to more positive social objectives –  from a high wages policy to greening their workplaces – from being based in a country run by a Communist Party, not by their own class. But here, both Tata and Jingye are in it for the money. Their UK operations have only been viable as a tiny loss making fragment of a much larger business, as part of an attempt to implant themselves in a variety of global markets in the hope of profitability in the medium to long term. Steel production at Port Talbot in 2022, for example, was just 10% of Tata’s global production of 35 million tonnes.

After Port Talbot, there have been no denunciation of Indian investment into the UK, nor any calls in the media or Parliament for any “urgent review” into India’s role in the UK, or paranoid accusations made explicitly by Farage but echoed by “senior Labour figures” as well as Tories in the media but not in the recent Saturday debate in Parliament, that the attempted closure in Scunthorpe is part of a dastardly plot by the Chinese government to sabotage a strategic British industry, not a commercial decision in which a company is seeking to cut its losses in all the ways British capitalist company law allows them to; including cancelling orders for the raw materials they’d need to keep running the blast furnaces they want to close. Instead, there has been serious negotiations with the Indian government to set up a trade deal, which was reported last week as “90% done”.

No decoupling there.

The attack on commercial engagement with China fulfills two objectives. One is a straightforward attempt to mobilise popular sentiment in defence of steel workers jobs behind a Cold War sentiment in a wider context in which the Trump administrations policies have shaken up popular faith in deference to the US. An anti Chinese attack distracts from that and pushes people back towards habitual hostilities.

The other opens another front in the resistance to any serious action on climate change that could threaten the profits of the fossil fuel sector. Accusations from the Right have been:

1. The blast furnaces could have been kept running with locally sourced coking coal from the cancelled Whitehaven mine. This misses the point that the coke from this mine – had it been developed – would have had such a heavy sulphur content that it was too poor quality to be used at Scunthorpe, so this is a consciously mendacious and fundamentally unserious talking point.
2. High energy prices in the UK are because of “Net Zero”. This, as they know, is the opposite of the truth. The UK has high energy costs because they are tied to the price of gas far more than any other country in the G7. See Figure 1. We should also note that the oft repeated “solution” to this problem from Reform or the Tories is massive investment in nuclear power instead. The problem with this is that the cost per Kilowatt hour of energy generated by nuclear power is higher than gas, which is higher than renewables. See figure 2. So their way forward would actually compound the problem. Paradoxically, their attack on Chinese investment in UK nuclear power development, and the withdrawal of Chinese investment from Sizewell C in Suffolk and Bradwell in Essex, is making the financing of these projects almost impossible. So, in this case, the contradictions of their politics means they will neither have their cake, nor eat it.

Figure 1

Figure 2

These themes came together in a front page broadside from the Times on 15th April directed at Ed Miliband’s recent trip to China aiming to improve relations and develop better sharing of expertise on the climate transition. Miliband’s is the head that the right wing press is keenest to have on its trophy wall of sacked ministers, hence quite limited and inadequate targets being described as “swivel eyed” and “eye watering” in a constant hammering of lead articles from the Sun to the Telegraph and all the low points in between. Attacks on solar panel installations are increasingly taking the form of accusations of “forced labour” in China, which are untrue, but because it is almost universally believed at Westminster, this threatens a reactionary result on the basis of an apparently progressive concern – as China is the source of 80% of the world’s solar panel supply. However, even if the UK sabotages its green transition by impeding imports of Chinese solar panels this will have little effect globally, as China is increasingly exporting them to the Global South. See Figure 3  Miliband is nevertheless the most popular government minister among Labour members in Labour List’s survey – in which he has a positive rating of 68, compared to Keir Starmer’s 13 – because he is seen as getting on with something positive and progressive, while Liz Kendall and Rachel Reeves are in negative territory.

Figure 3

The call from Dame Helena Kennedy for “an  urgent security review of all those Chinese companies operating within our infrastructure which could pose a threat to our national interests – and maybe not just confined to China” threatens to compound the damage already done by the UKs removal of Huewei’s investment in the 5G network, ensuring that the version the country has is slower and more expensive, and the financial difficulty set for Nuclear power station projects by the removal of Chinese investment on the basis of “national security” paranoia. Applied more widely, this neatly lines the UK up with Trump’s trade war against China and sets the UK up for a potential trade deal in which US capital is looking hungrily at the NHS, wants to sell chlorinated chicken and other additive saturated and nutrition less food from their agricultural industrial complex and open up a tax and regulation free for all for their abusive big tech companies, while their President is actively sabotaging global progress towards sustainability by doubling down on fossil fuels. China is doing none of these things. A more positive approach is that being taken by the PSOE government in Spain, which is both encouraging inward Chinese investment –  like the joint venture between CATL and Stellantis to build a battery factory in northern Spain and deals signed last year between Spain and Chinese companies Envision and Hygreen Energy to build green hydrogen infrastructure in the country.

Farage, and others on the Right are arguing for nationalisation as a temporary measure just in order for the company to be “sold on” – treating nationalisation as an emergency life support process for private capital -is that there is not exactly a huge queue of companies waiting to buy, and any that did would most likely to be looking at asset stripping. Jingye was the only company interested in 2019, when previous owner Graybull capital gave up on it.

This would also be the government’s preferred approach, because they are nervous of the capital costs involved in making the plant viable. There are three intertwined problems with this.

1. Attracting a viable private company prepared to put serious money into reviving the plant means attracting overseas capital. Given that more than 50% of global steel production is made by Chinese companies (see figure 4 below) Jonathan Reynolds has changed his tune since the weekend debate in Parliament. That Saturday he was decrying allowing Jingwe into UK steel manufacturing as a national security issue, but by mid-week, a few days later, he was prepared to be more pragmatic about it.
2. Making the plant viable cannot mean investing in new blast furnaces. These would become stranded assets before they had reached the end of their design life. Despite the determined rearguard action from Trump and others, trying to carry on as though the world isn’t changing makes no business sense. In 2024, for example, all new steel plants developed in China were Electric Arc Furnaces, designed to use scrap steel as raw material. As yet, production of virgin steel has been dependent on coking coal, but the first production using (green) hydrogen and electricity looks like coming on stream in Sweden by next year; so if virgin steel production is considered an imperative for the Scunthorpe site, that model will have to be looked at and emulated as a matter of urgency.
3. New investment in different production on the site – like almost all capital investment – replaces labour with capital. As with Port Talbot, far fewer workers would be needed for EAFs. Reynolds has talked about “a different employment footprint” for the plant; which is one way to put it. So, the issue of how the transition can be made in a way that opens up alternative employment with decent terms and conditions has to be negotiated with the workers themselves through their unions.

What’s needed is a clear industrial plan that consolidates the nationalisation as a precedent for other sectors and builds on the Scunthorpe plant’s strengths in producing, for example, 90% of railway tracks used in the UK, as part of a strategic plan for green transition. This has hitherto been focussed on a transition to Electric Arc Furnaces, but linking the production of green hydrogen to new generation furnaces capable of producing the tougher virgin steel needed for a full range of industrial applications should also be part of the process; because blast furnaces can’t be kept open indefinitely if we are to stop the climate running away out of a safe zone capable of sustaining human civilisation by mid century.

Appendix

UK steel production is the 35^th largest in the world, comparable to Sweden, Slovakia, Argentina and the UAE. Its 4 million tonnes in 2024 is just over a tenth of the production of Germany, a twentieth of the United States, a thirty seventh that of India and a 250^th that of China. See Figure 4.

Figure 4

The niche, almost token, position of UK based steel manufacturing reflects a wider process in which UK based capital is no longer primarily engaged with manufacture.

The last time the steel industry in the UK was nationalised in 1967 it had 268,500 workers from more than 14 previous UK based privately owned companies with 200 wholly or partly-owned subsidiaries. These companies were considered increasingly unviable because they had failed to invest and modernise, so were increasingly uncompetitive. This is part of a wider story about how the UK capitalist class has transformed itself since the 1960s. While the quantity of manufactured goods has increased since then, the proportion of manufacturing in the economy has shrunk from 30.1% in 1970 to 8.6% in 2024. The service sector  has grown from 56% to more than 80%. UK based capital primarily makes money from selling services, mostly financial, to manufacturing capitalists  at home and abroad. They are spectacularly bad at large scale manufacturing start ups, as the debacle of British Volt  (whose approach of setting themselves up a luxurious executive office suite before they’d secured funding to even build their factory might be described as cashing in on your chickens before you’ve sold any).

What that means is that most of “British Industry” is owned by firms based overseas, so might be better described as “manufacturing that happens to take place in Britain”. Consider the automotive sector. While there are locally based SMEs in the supply chain, all the big manufacturers depend on overseas investment. Nissan, Stellantis, BMW, VW, Geely, Tata (again). As with locally based steel production, firms like Morris, Austin, even Rover, are long gone for the same reasons as BSA – once the world’s biggest motorcycle company – now only builds retro classic designs as a niche luxury product and Guest Keen and Nettlefold had to be nationalised to save its assets.

By Michael Burke

Welfare cuts. Reductions in departmental spending. Job cuts in the public sector. But a boost to spending on the military.

These were the main elements of the Spring Statement delivered by the Chancellor.

Yet government ministers seem dismayed that they are accused of implementing austerity, pointing to rising spending in real terms. In reality, as the Joseph Rowntree Foundation shows, the average family will be £750 a year worse off by 2029, and 400,000 households will be pushed into poverty.

Under the Tories, austerity was characterised by cuts for ordinary people and the services they use, while providing tax cuts and tax breaks for big business and the rich. This time is different. Both the October 2024 Budget and the latest Spring Statement imposed cuts for ordinary people, while the statement also provided a bonanza for arms manufacturers. It is still austerity.

It is necessary to unpick some of the government’s policies to show the real changes being imposed, which stand in contrast to ministerial claims. The most important claims centre on the projected rise in day-to-day or current spending, and claims on the growth of public investment.

In the Spring Budget 2024 introduced by Sunak and Hunt, a string of austerity measures was announced, but only to be implemented after the election for obvious electoral reasons. Labour under Starmer signed up to those Tory cuts as part of its own election campaign. It began to implement them in October. The Spring Statement continues and deepens that process.

That explains why we have seen cuts to welfare for the most vulnerable, cuts to international aid, cuts to the winter fuel allowance, and many more austerity measures. The largest of which, by far, was the decision to implement Hunt’s freeze on income tax bands rather than raise them in line with inflation. This will take tens of billions of pounds out of the pockets of ordinary people over time, who will find chunks of any pay rises eaten up by the Inland Revenue.

By contrast, government ministers claim that there is no austerity because total spending is rising in real terms.

But there are a series of problems with this line of argument. The first is that two elements of government spending that are included by the austerity-deniers have no benefit at all in terms of public services. The first is defence spending, which is rising to 2.5 per cent of GDP.

The second, and even larger item, is the rise in debt interest payments. This was referenced in her Spring Statement by Rachel Reeves. In 2021, the cost of servicing government debt amounted to just 1.2 per cent of GDP but soared to 4.4 per cent of GDP two years later and remains at elevated levels. Both of these items are included in the total for government spending, which ministers and others claim “proves” this is not austerity.

Even when these two items are included, government spending is falling as a proportion of GDP. We know that the economy has effectively been stagnant over a prolonged period. The fact that government spending is not even increasing in line with the snail’s pace of GDP is evidence of how hard the handbrake has been applied to government spending.

There is a further factor that should be taken into account. As the population grows, the requirement for public services grows. This is especially true in areas such as health, where the population is not simply growing but ageing too.

As societies become richer, there is a natural tendency to spend more on areas which are fundamental to people’s wellbeing. Health and education are the most important contributions to wellbeing once the requirements for food, shelter, and clothing have been met.

Ministers who insist their cuts are not austerity are ignoring all of these factors. They are also ignoring the reality of the effect of their own policies. Destitution — the lack of these basics — is already on the rise and will accelerate because of these policies.

Scrutiny is needed for claims about the other key area of government expenditure: government investment. There is now a planned increase in capital expenditure, at least over the next two years. But as the Office for Budget Responsibility (OBR) points out, most of this planned increase in public investment is a by-product of the decision to slash the international aid budget to fund the military budget, which is a much more capital-intensive department.

Even with this artificial uplift, the government plans that its own capital investment will go back down in 2029 to the same levels as in 2026. This is not a long-term plan for growth. It is a short-term plan to boost the arms manufacturers, without any significant beneficial effect.

In the run-up to the Spring Statement, there was a lot of propaganda claiming that military spending would provide a significant boost to the economy and to jobs. Both of these claims are false, and the OBR does not include any wider benefit from it.

Capital investment either replaces or adds to the productive capacity of the economy. It enlarges what we used to call the means of production. So, investing in a factory, a machine tool, or a railway allows new production or faster or more efficient production. The opposite is the case for expenditure on a missile, or a tank, or an assault rifle. This can only be used, if at all, to destroy people or the means of production.

The supplementary argument is that investment in arms manufacturers is “jobs-rich.” Rachel Reeves promises to spread those economic benefits geographically across the country. But it is a false promise. As the OBR says, the military sector is capital-intensive, not labour-intensive.

In fact, detailed economic analysis shows that investment in the defence sector is one of the lowest generators of jobs of all. For example, the health sector generates 2½ times the number of jobs for the same level of investment as the defence sector, while also providing a major public benefit. The result of large increases in military spending is overwhelmingly the production of useless or destructive weaponry.

Behind the spin, the inclusion of debt interest payments as “spending,” and the false claims on the benefits of military spending, it is clear that the Spring Statement is deepening austerity. The poor will be made poorer, vital support will be removed, and the average household will be worse off. There is a drive to rearm, being paid for by disabled people, the poor, and the young. It will leave no-one except arms manufacturers better off.

The above article was originally published here by the Morning Star

By John Ross

What are the real U.S. economic choices facing Trump?

China has set its economic growth target for 2025 at “about 5.0%”. That this can be successfully achieved, what is necessary to ensure it, and the implications for achieving China’s strategic goals to 2035, was analysed in an earlier article “China’s economy in 2024 continued to far outgrow the U.S.”. But the other key economy in the world, whose development has major implications for China is the United States. In particular Trump has set as his explicit goal speeding up the U.S. economy, and slowing down China’s. Given the U.S. tariffs, sanctions and other measures taken by the U.S. against China the comparative economic performance of China’s and the U.S. economies is a major factor for geopolitics and the situation facing China.

The aim of this, and a succeeding article, therefore, is to make the most precise analysis possible of the fundamental factors that will determine U.S. economic growth in the next period—and their interrelated geopolitical and U.S. domestic political consequences. This in turn, as will be seen, determines and is affected by the real, as opposed to illusory, choices which face the Trump presidency 2.0.

The real situation facing the U.S. economy as opposed to myths about it

President Trump habitually misrepresents his own economic record. For example, at his 2024 presidential campaign rallies he repeatedly claimed that during his first term the U.S. had the “greatest economy in our history”. In reality, during his first term, the U.S. economy had the slowest growth during any post-World War II presidency (see Figure 1).

Serious Western analysts do not bother to hide their disbelief in these, and similar, fallacious claims. Thus, for example, Financial Times U.S. affairs editor, Edward Luce, wrote of Trump’s recent speech to Congress:

“It is Mardi Gras in New Orleans. Yet no parade could match the carnival in Donald Trump’s Tuesday night speech to Congress… one could almost hear the remnants of the fact-checking community snap their laptops shut… It would be… futile to compare Trump’s address to any by his predecessors… This was in a category of one… Trump’s speech was a fever dream of extravagant promises. His pledge to cover America with a ‘golden dome’ modelled on Israel’s ‘iron dome’ would use up every gold bar in Fort Knox. A few minutes earlier, Trump had promised to balance the federal budget. Was his pledge to take Greenland ‘one way or another’ a threat or a fantasy? Ditto for the Panama Canal… when historians look back on March 4 2025, his speech might barely rate a footnote.”

Discussion in some sections of the media about the Trump presidency also frequently primarily focuses on speculations about his subjective intentions, or what he would like to achieve in a second term, or belief that some short term superficial measure by Trump could substantially speed up the underlying growth of the U.S. economy—as will be seen this is entirely untrue.

Both such approaches are unhelpful when assessing the practical choices possible for Trump: these are not determined by what Trump wants, or by his unreal propaganda claims, but primarily by the objective situation of U.S. politics/geopolitics and the U.S. economy and the interrelation of forces within this.

Making such an analysis of the objective situation facing the U.S. economy, in turn, requires as precise quantitative analysis as possible of the most powerful factors affecting the U.S. economy and their consequences for U.S. politics and geopolitics. The terms “systematic” and “accurate” are stressed here, as any analysis which focuses merely on a single Trump policy does not deal with the consequences of the fact that the U.S., as with every economy, forms an interlinked whole—any changes in one aspect of the U.S. economy therefore have consequences for, and are affected by, its other aspects. To be accurate, in turn, it is necessary to study in quantitative terms the interrelations which exist between the major determinants of U.S. economic performance.

To do this the author, therefore, gives below a great deal of precise quantitative data on the situation of the U.S. economy—and does not apologise for doing so. The situation of the U.S. economy, and its geopolitical implications, is one of the most important factors in the world—including for its consequences of China. It is therefore necessary to analyze the fundamental forces driving this in as much detail, and with the greatest accuracy, as possible—exaggeration or inaccuracy in any direction, “optimism” or pessimism”, is not helpful and is potentially dangerous in such a serious matter as the dynamics of the United States. “Seek truth from facts”, in the field of the economy, requires precise numbers not imprecise and vague generalities.

To deal with these interrelated issues this analysis is divided into four questions:

• What is actual situation of the U.S. economy, what are the domestic political consequences for Trump, and what are the geopolitical consequences, in particular as they affect China, that flow from that situation?
• What are the real steps that would be required to significantly increase the U.S. economic growth rate?
• What are the economic consequences of the policies Trump has chosen, and therefore can they succeed in significantly speeding up the U.S economy?
• What are the political and geopolitical implications of the economic means which Trump has chosen?

The first two of these questions are dealt with in this article, and the other two in the second article in this series.

Figure 1

Section 1—the immediate situation facing Trump

Starting with the immediate situation facing Trump. It is crucial to understand accurately the actual growth trajectory of the U.S. economy. Taking first the results simply for 2024, the U.S. economy grew by 2.8% while China’s economy grew by 5.0%—China’s economy grew 80% faster than the U.S..

This data alone highlights that much Western media during the last period served simply as propaganda rather than objective reporting. Statements from outlets like The Economist, claiming that the U.S. is “leaving its peers ever further in the dust,” or from the Wall Street Journal describing China as having “a stagnant economy,” were either deliberate lies, propaganda distortions, or failures to investigate the facts. Regardless of the reasons for putting them forward these statements are purely misleading, and it is therefore rather disgraceful, and a sign of the real worth of claimed quality “journalism”, which turns out to be propaganda or failure to investigate the facts, that similarly inaccurate statements regularly appeared in the medias.

Current slowing of the U.S. economy—why China’s growth lead over the U.S. is likely to somewhat increase in 2025

The reason that “in the last period” is stated above is because much discussion in the U.S. media now focuses on the possibility of significant slowdown in the U.S. economy. The modelling at the time of writing of “GDP Now” by the Atlanta section of the U.S. Federal Reserve, the U.S. central bank, for example, predicts that in the first quarter of 2025 the U.S. economy will actually contract by 2.4% on an annualised basis.

Whether or not the U.S. falls into an actual contraction or merely slows in 2025 in line with its long term growth rate—and present trends, for reasons shown below, do not indicate why there should be any serious recession in the U.S.—is not crucial for the present purposes of analyzing medium/long term growth trends in the U.S. economy. But what is the case is that in 2023 and 2024, with growth respectively at 2.9% and 2.8%, the U.S. was growing above its long-term trend—which is slightly above two percent annual growth. This means that in 2025, if China achieves its “about 5.0%” growth target, the growth rate lead of China over the U.S. is likely to increase somewhat — to a greater or lesser degree depending on how significant the slowdown in the U.S. economy is. This would have some significant psychological effect on international perceptions of the two economies. It is therefore important to explain this situation internationally—with no exaggeration but simply as an objective presentation of the facts.

What is also clear, however, for reasons analysed below, is that attempts by Trump to raise the medium/long-term U.S. growth rate will inevitably lead to clashes with a series of other countries and also produce conflict within U.S. politics.

Broader international comparisons

Regarding broader international comparisons, a detailed analysis of China’s economic performance in 2024 compared to other countries, including the U.S., was made in “China’s economy in 2024 continued to far outgrow the U.S.”. Therefore, only the most important facts for analysing the international economic situation facing the U.S. are summarized here.

Figure 2, therefore, shows the data now available for GDP growth in 2024 for the major economic centres. China, the U.S.’s, and Japan’s GDP growth of 5.0%, 2.8% and 0.1% are actual results, while the EU’s 1.1% is the IMF’s projections for full-year growth based on the first three quarters results. Based on this data, as well as China’s 2024 GDP growth rate being 80% higher than the U.S.’s, it was four and a half times faster than the EU’s, and fifty times faster than Japan’s.

Looking at this international situation from the U.S. viewpoint, its economic growth was two and a half times faster than the EU, 28 times faster than Japan, but only 56% the rate of China. The objective situation facing the U.S. is therefore that its economic growth considerably exceeds its major Western competitors, the EU and Japan, but is far slower than China—it for this evident reason that the Trump administration will focus its attention on China.

Figure 2

Medium term economic growth performance

Even more clarificatory for judging trends, as it removes the effect of short-term fluctuations due to lock downs during COVID and recovery since, is to take the situation of the major economic centres during the entire period since before the pandemic. Figure 3 shows that in the five years since 2019 China’s economy grew by 26.2% and the U.S. economy by 12.5%, That is, in the period since the beginning of the pandemic the U.S. economy grew at only 48%, less than half, China’s rate.

This once more confirms that to close the economic growth rate gap between the U.S. and China, the Trump administration must therefore achieve one, or both, of two aims:

• The U.S. must slow China’s economy.
• The U.S. must accelerate its own economy.

Taking the first of these, the U.S. attempt to slow China’s economy, the means available to the U.S. to attempt to achieve this were analysed in detail in the previous article “China’s economy in 2024 continued to far outgrow the U.S.”. To seriously slow China’s economy the U.S., for reasons analysed in that article and briefly below, must secure a significant reduction in the percentage of net fixed capital investment in China’s GDP. However, unlike previous uses of this method, to force their economies to slow down, against competitors which were economically and militarily subordinate to the U.S.—Germany, Japan and the Asian Tigers—the U.S. has no way to compel China to adopt such a course. The U.S. instead has to rely on attempting to persuade China to commit economic suicide by voluntarily reducing its level of investment in GDP—the means used to attempt to persuade it to do so being economically fallacious arguments about consumption, as the previous article discusses.

As the issue of the most serious means by which the U.S. could attempt to slow China’s economy was analysed in detail in the previous article it is not dealt with further here. The present articles only deal with the issues involved in any attempt by Trump to accelerate the growth of the U.S..

That is, the question addressed in these articles, is whether Trump can decrease China’s lead in growth over the U.S. by speeding up the U.S. economy?

Figure 3

Political situation in the U.S.

Turning to the implications of these U.S. economic growth figures for United States domestic politics, the reasons for Trump’s return to office, and therefore the political situation facing Trump, it is clarificatory to examine the trends in the U.S. economy in terms not only of total GDP but also per capita GDP—as per capita GDP is more closely related to living standards than total GDP.

Figure 4 therefore illustrates the long-term post-World War II trends in U.S. per capita GDP growth, using a 20-year moving average to smooth out short-term business cycle fluctuations. This shows a clear 70-year trend of declining U.S. annual per capita GDP growth—with this falling from 4.9% in 1953, to 2.8% in 1969, 2.4% in 2002, and 1.3% by 2024. This last figure is very slow, indeed bordering on stagnation.

Such a very slow rate of per capita economic growth necessarily fuels social and political discontent and instability in the U.S.. This has duly occurred with the increasingly bitter confrontations in U.S. politics during the first Trump term, the Biden presidency, and leading to the second Trump presidency—indices of this being the increasingly harsh rhetoric between the U.S. political parties, the physical attack on the U.S. Congress on 6 January 2021, the forced withdrawal of Biden from the presidential race 2024, the criminal cases started against Trump before the presidential election, the pardoning by Trump of large numbers of violent 6 January rioters, the rapid closing by Trump of entire government departments such as USAID on resuming the presidency etc. Unless the present slow growth of U.S. per capita GDP can be reversed it is impossible to stabilise the social and political tensions in the U.S. This, in turn, has major knock-on geopolitical consequences which affect China.

Figure 4

The U.S. economy under Biden—why Trump won the presidential election

More significantly still for understanding the U.S. social and political situation, is that an increase in U.S. per capita GDP only creates the potential for the possibility to increase living standards for the mass of the population. Whether this actually occurs depends on how that increase in GDP is distributed.

The data shows that In the U.S., in the recent period, the benefits of even the slow increase in per capita GDP which has been occurring did not go to the mass of the U.S. population—the statistics on this easily explain why the Democrats lost the election and why this was foreseeable in advance. During Biden’s presidency, up to latest available data for wages, which is for the third quarter of 2024, U.S. per capita GDP went up by 10.9%, but real inflation adjusted wages were actually lower than when Biden/Harris were inaugurated—see Figure 5. That is, American wage earners, who form the overwhelming majority of the population, became worse off under Biden.

Figure 5

The facts show that the Biden administration carried out a redistribution of wealth from workers, the mass of the population, to owners of capital. Figure 6 shows that during the period of the Biden presidency, from January 2021 to the latest available data for U.S. wages, the S&P500 share index rose by 55.7%, inflation by 21.0%, but U.S. median nominal weekly wages by only 20.4%. That is, owners of capital made large gains in real inflation adjusted terms while wage earners, that is the mass of the U.S. population, became worse off—while simultaneously those able to live from income from capital, a small part of the population, became substantially better off. It is therefore no surprise that social and political tensions in the U.S. rose.

This trajectory under Biden therefore also shows what is likely to happen to Trump if he in turn cannot improve U.S. living standards. Social tensions will rise again, and Trump will become unpopular. It is therefore significant that Trump’s poll approval rating at the end of February, at 45%, was the lowest for any U.S. President, at that time in their presidency, since World War II except for Trump’s first term’s 42%—the historical average approval rating for U.S. president’s since World War II after their first quarter in office was 61%. By 16 February the number of those disapproving of Trump, 51%, was already higher than those approving at 45%.

Figure 6

Economic failure during the first Trump presidency

To complete the immediate picture, it was already noted that, contrary to Trump’s claims that his first presidency was a great economic success, the data shows clearly that this was untrue. Figure 1 above showed that annual average GDP growth during the first Trump presidency, at 1.8%, was the lowest for any post-World War II president. Trump may claim that this was due to the impact of Covid, which was certainly a factor, but the factual reality is that Trump has no track record as president of fast economic growth. The slow economic growth during the first Trump presidency (together with the extremely powerful Black Lives Matter movement following the racist murder of George Floyd in May 2020), was clearly the key factor in the defeat of Trump in the 2020 presidential election

The consequences of the very slow growth of the U.S. economy under both the first Trump presidency, and under Biden, therefore, confirms the socially and politically destabilising effects of the present situation of very slow U.S. growth, and for significant sections of the population decline of U.S. living standards. Unless this trend can be reversed, and U.S. economic growth accelerated, socio-political tension in the U.S. will persist and the Trump administration itself will become unpopular. Failure to understand this factual situation, to instead believe Trump’s self-serving propaganda, or to concentrate on speculation about his subjective intentions, therefore leads to an inaccurate understanding of the dynamics within the U.S.

For both economic and political reason, therefore, the decisive issue for the Trump presidency is whether it can accelerate U.S. economic development. Analysing what would be necessary to achieve this therefore forms the subject of the rest of this series of articles.

The slowing U.S. economy

To initially assess how easy or difficult it is to speed up the U.S. economy, and the political and geopolitical consequences of this, it is necessary to consider long-term U.S. growth rates: these show the fundamental factors in the situation which are sometime obscured by purely short-term fluctuations. Figure 7 shows that U.S. annual average economic growth rates have been declining for almost 60 years. Taking a 20-year moving average, to remove the effect of short-term business cycle oscillations, U.S. annual average GDP growth fell from 4.4% in 1969 to only 2.1% by 2024—that is by more than half.

Clearly a process of economic slowdown which has been taking place for almost six-decades has extremely powerful roots. Only if Trump tackles these, therefore, can this powerful and prolonged slowdown of the U.S. economy be reversed.

Figure 7

Section 2—What is required to speed up U.S. economic growth?

What determines the speed of U.S. economic growth

To then ascertain which policies would be necessary to speed up the U.S. economy it is necessary to analyse the underlying relation between changes in the structure of the U.S. economy and changes in U.S. GDP growth rates. Table 1 shows these for the entire last U.S. business cycle of 2007-2019.

Statistically, to avoid distortions caused by short terms economic fluctuations, it is preferable to consider an entire business cycle, but to show that no “cherry picking” has been done Appendix 1 shows these correlations over the entire period from prior to the international financial crisis, 2007, up to 2024. This appendix shows that this makes no fundamental change to the relative significance of changes in the structure of the U.S. economy.

Table 1 shows an entirely clear pattern:

• If merely short-term periods are taken the correlation between changes in U.S. economic structure and its growth rate are moderate/low regardless of whether positive or negative correlations are considered—that is, whether an increase of the percentage of a particular component in U.S. GDP is associated with an acceleration or a deceleration of GDP growth. The highest correlation, taking a one-year period, is 0.53 for net fixed capital formation—a moderate correlation. All other one-year correlations, positive or negative, are between an extremely low 0.08 and a moderate/low 0.47.
• However as medium and longer-term periods are taken the correlations become progressively higher and higher. Taking positive relations, the correlation between the percentage of net fixed capital formation in GDP and GDP growth, the highest correlation for any factor in U.S. economic development, is 0.53 for one-year but rises to a high 0.71 for five years and an extremely high 0.85 over a 12-year period. Taking negative correlations, the 12-year correlations of household consumption in GDP, exports in GDP, imports in GDP and total consumption in GDP are all very high at between 0.77 and 0.85.

What such a data pattern demonstrates is that that in the short term no single factor in the U.S. economy is decisive. But in the medium/long term regarding positive correlations, the correlation of the percentage of net fixed capital formation in U.S. GDP and GDP growth is extremely high—that is an increase in the percentage of net fixed capital formation in U.S. GDP is associated with an increase in GDP growth. In direct contrast the correlation of the percentage of consumption in U.S. GDP and GDP growth is strongly negative—that is, the higher the percentage of consumption in U.S. GDP the slower will be GDP growth.

It is unnecessary, for present purposes, to establish the causal connection between the percentage of net fixed investment in GDP and GDP growth—that is whether the percentage of net fixed investment in GDP determines the rate of GDP growth, or the rate of GDP growth determines the percentage of net fixed investment in GDP, or some other factor(s) determine both. But the consequence of this extremely close correlation means that it is impossible to increase the rate of U.S. GDP growth without increasing the percentage of net fixed investment in GDP.

Therefore, for Trump to succeed in accelerating U.S. medium- and long-term growth, he has no option but to attempt to increase the percentage of net fixed capital formation in U.S. GDP.

Table 1

The short, medium and long term

To show this situation still more clearly, and grasp its practical implications, Figure 8 shows visually the correlation between the major domestic components of U.S. GDP and annual GDP growth taking moving averages for different periods of years. Thus, as can be seen, if only a one-year period is taken there is only the medium correlation, 0.53, between the percentage of net fixed investment in GDP and annual GDP growth. There is also a low correlation, 0.39, between the percentage of gross fixed capital formation in GDP and GDP growth. There are negative low/medium correlations, -0.35 and -0.47, between the percentage of household consumption and the percentage of total consumption in GDP, and U.S. GDP growth.

This once more illustrates, as already noted above, that in the purely short term no single factor has a decisive influence on U.S. GDP growth. However, as the time frame increases from the short to the medium and long term the correlations become higher and higher:

• Taking a 5-year period the positive correlation between the percentage of net fixed investment in GDP and GDP growth has become a high 0.71, and the negative correlation between the percentage of total consumption in GDP and GDP growth is on the verge of becoming high at 0.68.
• By the time a long term 12-year period is taken the positive correlation between the percentage of net fixed investment in GDP and GDP growth is an extremely high 0.85, and the negative correlation between the percentage of total consumption in GDP and economic growth is also a very high 0.83.

The practical implication of these correlations is clear. In the short-term Trump can use other factors (e.g. budget deficits, short term boosts to consumption) to increase U.S. GDP growth, but in the medium and long term the only way that Trump, or any other U.S. President, can increase GDP growth is by increasing the percentage of net fixed investment in U.S. GDP. Similarly, while in the short-term stimuluses to consumption may increase U.S. GDP growth, over the medium and long-term increasing the percentage of consumption in GDP will slow U.S. GDP growth.

It should be noted that in this regard the U.S. is in the same position as China and all large economies—for the detailed data on this see 从210个经济体大数据中，我们发现了中国和世界经济增长的密码.¹

Figure 8

U.S. economic correlations are in line with economic theory

These factual relations in the U.S. economy are entirely in line with economic theory. Consumption plus investment constitute 100% of domestic GDP. Investment is an input into production: therefore, increasing the percentage of the economy used for investment will increase the GDP growth rate. However, consumption, by definition, is not an input into production and therefore increasing the percentage of consumption in GDP, thereby reducing the percentage of inputs into production, will decrease the rate of GDP growth.

To take a longer period than the last business cycle, the extremely strong correlation between the long-term percentage of net fixed investment in U.S. GDP and U.S. GDP growth is confirmed in Figure 9 which takes the entire period of U.S. economic development since 1960—that is, over a 64 year period. As may be seen the long-term correlation between the percentage of net fixed investment in GDP and annual U.S. GDP growth is an extremely high 0.87.

Figure 9

Policy implications for Trump

In terms of practical policy for Trump, therefore already even in one year the percentage of net fixed investment in U.S. GDP has a significant if moderate correlation with annual U.S. GDP growth. But this correlation it is not so high that it dominates the situation. That is, in the short-term Trump could, at least theoretically, increase U.S. GDP growth by measures other than increasing the percentage of net fixed investment in GDP. But over the medium and long-term these extremely high correlations mean that this is impossible—the U.S. can only increase its rate of GDP growth by increasing the percentage of net fixed investment in GDP.

However, practically, a short-term period is quite insufficient to reverse the consequences of the situation of much lower growth in the U.S. than in China—this could only be reversed over a long time period. To accelerate the U.S. economy in a way capable of competing with China, therefore, Trump and succeeding U.S. presidents can only do this by increasing the level of net fixed investment in the U.S. economy. This objective situation strictly determines the policy choices which face Trump.

The negative relation between the percentage of consumption in GDP and the growth of consumption

Given a confused discussion on consumption in some sections of the media, as an aside it should also be noted that the correlation between the percentage of consumption in U.S. GDP and the rate of growth of U.S consumption is strongly negative. That is, the higher the percentage of consumption in U.S. GDP the slower is the growth rate of U.S. consumption. In the case of U.S., taking a five-year moving average, the negative correlation between the percentage of consumption in GDP and the growth rate of consumption is an extremely high 0.89—see Figure 10. This is, in the U.S., the same negative correlation between the percentage of consumption in GDP and the rate of growth of consumption which exists in China and other major economies—for comprehensive data see 从210个经济体大数据中，我们发现了误解促消费对经济的危害.

This negative correlation between the percentage of consumption in U.S. GDP and GDP growth therefore confirms the extreme importance of distinguishing between the percentage of consumption in GDP and the rate of growth of consumption. Not only are they different things but they move in the opposite direction. That is in the U.S., as in China, the higher the percentage of consumption in GDP the slower will be the growth rate of consumption, and therefore the slower the growth rate of living standards.

Figure 10

International comparisons

Finally, to complete the picture, it should be noted that this situation of the U.S. in regard to the relation between the percentage of net fixed investment in GDP and GDP growth, as already noted, is in line with other very large economies—all of which have very similar patterns of development. To see how strong this relation is, Figure 11 shows the development of the world’s 10 largest economies over the entire last international business cycle of 2007-2019. (Once again, the entire business cycle is taken to remove the effect of short-term business cycle fluctuations, although it should be noted that extending the figures to the latest available data makes no essential difference to the correlations despite the fluctuations created by Covid). For the world’s 10 largest economies, including China and the U.S., the positive correlation between the percentage of net fixed investment in GDP and annual GDP growth is 0.95—as close to a perfect correlation as will be found in any practical example.

Figure 11

Growth accounting

So far, to see accurately the determinants of U.S. economic development, the correlations of U.S. GDP growth with the structure of its economy as shown in the national accounts have been analysed. The reason for starting with this analysis is that national accounts are universally used in economics. However, it is also clarificatory to analyse the U.S. economy from the complementary viewpoint of growth accounting—that is measuring in terms of the inputs of capital, labour and total factor productivity (TFP). The fact that, as will be seen, the conclusions arrived at by the two methods are the same, confirms the decisive factors determining U.S. growth.

Taking long-term correlations, Figure 12 therefore shows the long-term correlation of the contributions of inputs of capital (capital services) to GDP growth and U.S. GDP growth during the whole of the last business cycle from 2007-2019. This shows an ultra-high correlation of 0.95 and an R squared of 0.90—once again as close to a perfect correlation as will be found in any real economic phenomenon.

Figure 12

For comparison Figure 13 shows the correlation in the U.S. economy of the contribution to GDP growth of labour inputs. As may be seen the correlation is 0.51 and the R squared is 0.26—that is a moderate/low correlation.

Figure 13

Figure 14 shows the correlation of the contribution of the growth of TFP and the annual growth of GDP in the U.S. economy. The correlation is 0.60 and the R squared 0.40—that is a moderate correlation.

Figure 14

In summary, there is an extremely high, almost perfect correlation, in the U.S. economy between capital inputs and GDP growth, a medium correlation between TFP growth and GDP growth, and a moderate/low correlation between labour inputs and GDP growth.

This finding of the extremely high correlation in the U.S. economy between capital inputs and GDP increase, using growth accounting methods, is entirely in line with the conclusion from national accounts data.

The contribution of factors of production to U.S. GDP growth

So far only the correlations between production inputs and GDP growth in the U.S. have been analysed. But this is insufficient by itself to analyse what are the key determinants of U.S. GDP growth: there may be a high correlation between an input into U.S. production and GDP growth, but if this factor of production only accounts for a small part of U.S. production it will not play a decisive role in U.S. GDP growth. Therefore, to accurately analyse the determining factors in U.S. growth, it is also necessary to know the relative weight of the different inputs. Figure 15 shows this. As may be seen by far the largest contributor to U.S. GDP growth is capital inputs (58%), second is labour inputs (33%) and finally growth in TFP is a small contribution (9%).

In short, therefore, summarising the significance of different factors of production in U.S. GDP growth:

• Capital investment dominates U.S. GDP growth, being both the highest contribution to growth and with the closest correlation to GDP growth.
• Labour inputs are the second largest source of growth in the U.S. economy, although having only slightly over half of the weight of capital inputs, but they have only a medium/low correlation with GDP growth.
• TFP has a moderate correlation with U.S. GDP growth but it only contributes a small part, 9%, of U.S. GDP growth.

In summary growth accounting confirms the national accounts data that capital investment is by far the decisive factor in U.S. economic growth.

Figure 15

Conclusion

In summary, to return to the starting point of whether Trump can close the gap in growth rates between China and the U.S.. If Trump cannot substantially slow China’s economy, the issue of which was discussed in 能否实现2035年远景目标？有一个关键事实中国无法回避, then it should be noted:

• In the short term, the U.S. economy under Trump is likely to experience some slowing in 2025.
• More fundamentally, the only way that Trump can increase the underlying growth rate of the U.S economy is by increasing the level of net fixed capital formation in U.S. GDP.

The reason that in this article such precise detail of the situation of the U.S. economy has been gone into is because this situation that Trump can only significantly increase the growth rate of the U.S. economy by increasing its level of net fixed investment in U.S. GDP is of fundamental importance—with huge consequences flowing from it. It means, if the U.S. cannot slow China’s economy, then the only way in which it can close the growth rate gap with China is by increasing the level of fixed investment in the U.S. The forms in which Trump attempts to increase the percentage of investment in GDP will therefore determine the dynamics of the U.S economy—with great consequences for U.S. domestic politics and U.S. geopolitics as it affects China.

Analysis of this will form the subject of the second article in this series.

Appendix 1—a technical statistical note

This appendix is not necessary to be read by non-economic specialists. It is included because the conclusion that it is impossible in practice to raise the U.S. GDP growth rate without increasing the level of net fixed capital formation in U.S. GDP is so fundamental in its consequences that it is included to show that there has been no “cherry picking” of the data and therefore it is impossible to escape the consequences of this correlation.

Statistically, as the U.S. economy, as with all capitalist ones, has business cycles, in addition to an underlying long term growth rate, it is preferable, to accurately see trends, to make calculations covering an entire business cycle—or from one point in one business cycle to the same point in another (for example from the top of one cycle to the top of another, or from bottom to bottom). Otherwise, cyclical effects obscure the fundamental trends or even produce entirely fallacious results. For example, if the starting point of measuring U.S. economic growth is taken as 1933, the bottom point of the Great Depression, to the peak of the last pre-World War II business cycle in 1937, then during that period the U.S. had an annual average growth rate of 9.4%. The 1930s might appear as a period of rapid economic growth! The reason for this is that the gigantic fall in U.S. GDP, of 26%, between 1929 and 1933 is ignored, that is two peaks in the business cycle are not being compared but a trough and a peak.

For this reason, in this article the entire U.S. business cycle from 2007-2019 is taken as the period focused on. However, to avoid any suggestion that 2019 is chosen as the end date to avoid bringing data up to date, Table 2 shows the entire period from 2007 to the latest available data, for 2024. As may be seen this makes no qualitative difference to the trends.

The one-year correlation between the percentage of net fixed capital formation in the U.S. economy and GDP growth is 0.50, which is a moderate correlation. However, if a five-year period is taken the correlation rises to a high 0.73 and if a 12-year correlation is taken it rises to an extremely high 0.85—by far the highest positive correlation of any major component of the U.S. economy and U.S. GDP growth.

This confirms the fact, the fundamental point, that in the short term no single factor has an extremely high correlation with U.S. GDP growth, but in the medium/long term the correlation between the percentage of net fixed capital formation and U.S. GDP growth is so high that it is impossible to speed up U.S. economic growth without increasing the percentage of net fixed capital formation in GDP and that any reduction in the percentage of net fixed capital formation will reduce the GDP growth rate.

If there is a strong underlying correlation, however, then if very long periods of time are taken, as in the 1960-2024 period in Figure 9 above, then the correlations typically become less affected by whether similar periods in the business cycle are being compared.

The conclusion is therefore clear. In practice the U.S. cannot break out of its present low average annual growth, of slightly above two percent a year, without increasing the percentage of net fixed capital formation in GDP. Or, in comparative terms, if the U.S, cannot succeed in slowing China’s economy, then the U.S. can only decrease China’s lead in growth rate by increasing the percentage of net fixed capital formation in the U.S. economy.

Table 2

Notes:

1. The only exceptions to this are the relatively small number of economies dominated by oil and gas exports, which is not relevant for either the U.S. or China, as neither are dominated by oil/gas exports.

This article was originally published in English at Monthly Review and in Chinese at Guancha.cn.

Michael Burke speaking at the Socialism or Barbarism Dayschool – 29 March 2025 – organised by Arise