Failing growth and rampant costs:
First published in International Socialism Journal 2:96, Winter 2002.
Copyright © 2002 International Socialism.
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For most of human history the outlay on production – the amount of seed sowed, the amount of thread spun, even the time spent hunting – depended on the intended use of the product. Usually that was fairly well known – producer and consumer were one and the same, or in close contact, and even the greediest, most wasteful or most generous person was limited in the amount of things he or she could consume. With few exceptions needs were finite and known, and a “just price” thought to be attainable.
The direct link between producer and consumer loosened in the 18th century, and goods came to be made for unknown buyers. The market exploded. It became capable, in normal circumstances, of absorbing any amount of goods that any one supplier could provide – and the need to insure against the higher risk of producing for unknown people pressed producers to make as much as they could of the opportunity. Yardsticks of economic activity tied to consumption and sufficiency, or to the achievement of the good life, or to sustainability, however understood, lost their allure. A less evaluative, more objective and more producer-tied measure was required. Profit moved from being the specialist concern of professional merchants to society’s centre stage.
Profit is what remains when all outlays on production and distribution have been met. Some of these outlays are variable. They are linked to the volume of output – either directly, like the wages of those making the article or service sold (the machine operator or opera singer), or the costs of the materials used in producing it (steel or electricity) – or indirectly, as in maintaining the apparatus used repeatedly in production, and the labour which goes into servicing that apparatus (machine repairers, electricians, maintenance workers of all sorts, stage managers). More loosely connected to the volume of production than direct costs, these indirect costs nevertheless rise and fall in sympathy.
There are also outlays that respond feebly, if at all, to changes in output – fixed or overhead costs, to do with the organisation of production and with maintaining the conditions for it: buildings, the information network, the command and control apparatus (management), the security system.
Although the primary source of investment in the means for additional output, not all of profit is invested. Some is diverted to consumption by the owners, in law or in fact, of the productive apparatus. Some of it is siphoned off by the institutions that provide these owners with security – physical in the case of the state, or emotional in that of the church, clubs, therapists and other comforters. But where the producer is less important than the product, and sales by one producer can be substituted for sales by another, there are limits to the unproductive use of profits. In these circumstances it is imperative for each to invest in order to retain or increase market share, to grow in effectiveness and usually in scale, and to increase profit in an endless round.
This compulsion makes profit the finest indicator of the market system’s vitality. A high rate of profit is likely to be strongly associated with growth, a low rate with slow or no growth.
Measuring profit is not an exact science. Despite the image diligently promoted by the profession, and despite the enormous pretensions of the worldwide accountancy firms, accountancy is less a science than an art, and sometimes a highly creative one. Anyone inspecting the published accounts of a typical big firm is hard pressed to tell whether its profits came from continuing business or from windfall gains, how much its assets are worth or what its debts are, and even whether the firm is really profitable. Numbers are attached to all of those by the Arthur Andersens of the world, but what they mean is often unclear.
At any given moment the frontiers between costs and profit, or expenditure and income, are in dispute. As recently as August 1999 the Accounting Standards Board in Britain was proposing changes that would force companies to show their liabilities (for tax for example) more clearly, and so bring accounting practice in the UK more in line with the rest of the world. And, to this day, share options which account for three fifths of the pay of chief executives in big US companies are treated as cost when the firms calculate their profit for tax purposes, but not when calculate it for shareholders.
On the larger canvas of national accounts the anomalies and ambiguities are as great, if not greater. It is still true, even after the introduction of an improved System of National Accounts by the World Bank and other international agencies in 1994, that national income falls when a woman marries her driver or a man his housekeeper. More significant (except to the happy couples), it is still true that spending on cleaning the environment raises income, while the increase in value of the environment that results or the original damage that made it necessary are not taken into account. A country that hacks down its trees or exhausts its soil grows richer while the going’s good, but the depletion of natural productive capacity caused by the activity is ignored. Nor does the deterioration of the built environment form part of conventional accounting, although the spending on de-infestation or fumigation that follows (ridding buildings of rats, cockroaches, pharaoh ants or whatever) does. And so too with drug resistant diseases – the treatment that creates the new strains is counted in, while the cost of the resulting non-treatable condition is not. There is still nothing in conventional national accounting to indicate that the real cost of a hamburger might approach $200 or that of a mature forest tree in India might be $50,000 – nothing that might reflect the real cost of replacing or maintaining the assets used up or worn down in the act of production.
Nor could there be – what is called natural capital is largely unrecorded because there are no property rights in it, and so no market or prices. Even the most shadowy of shadow prices cannot anticipate which aspects of the environment will be considered of value at some future date – practical value, as in some as yet undiscovered medicinal ingredient of a wild plant, or emotional value not related directly to any actual or potential use, as in some geographical feature (‘existence value” in the current jargon). Many parts of nature and nature itself (biodiversity, say, or the hydrological cycle) cannot be appropriated and therefore cannot be valued. Although a topic of heated controversy among economists and statisticians, the depletion effects of production are measurable in principle because the product is sold as timber or ore, for example, but its degeneration effects – the incidental pollution of air, water or land – are not, except in the most far-out academic circles.
And where it does recognise depletion, the system of national accounting treats the conversion of natural resources differently according to whether they are privately owned (in which case depletion is normally charged against the income earned from their sale) or in the public domain (where it is normally not charged). It still excludes from the reckoning some productive services, such as housework or parental care, and includes many unproductive ones, such as those covered by military spending, or much of law enforcement or marketing.
This said, and notwithstanding the imprecision that results, every measurement shows that the rate of profit and the associated rate of economic growth have been in decline since the mass market system’s earliest days.
Average enterprise profits in the salad days of the industrial revolution were high – between 20 and 35 percent a year in the late 1700s (compared with some 10 percent in the booming 1950s and 1960s, or some 5 percent in the 1970s and 1980s, and less in the 1990s). Robinson of Nottingham, a textile giant of the time, recovered the full value of its investment in mills and machinery in one year, 1784. The Dowlais Iron Company in Wales – then the world’s biggest – was regularly earning over 25 percent per year on its capital in its earliest days (the 1760s), as was the Phoenix Foundry in England. Fine cotton spinners McConnel and Kennedy’s annual profit fell below 26.5 percent on only one occasion between 1799 and 1804, fluctuating between that figure and 30.3 percent in the other five years. In France, Le Blanc, a textile giant in Lille, made over 75 percent per year on average during the Second Empire (1852-1870), and a foundry started in 1825 by the Fourchambault group was regularly returning more than two thirds on capital.
Compare these figures with those for similar landmark firms today. The stars of new technology – today’s analogues of the textile and iron making giants of 200 years ago – are rattling along on less than these pioneers’ pace: Microsoft, the giant software house, posted profits of 24 percent per year in the 1990s; Intel, the chip-maker, 24 percent; Compaq, the biggest PC manufacturer of the time, 13 percent.
Whole industries show the same trend. Profits in coal production in the UK fell from 13.7 percent in 1890 to 12.4 percent in 1913 (three-year moving averages).
A more direct gauge of the system’s dynamics is via “national income’ – the value of monetary transactions taking place within it. There are many difficulties in taking the measure. Monetary values are often wrongly assigned to output or services consumed outside the market, such as household services or agricultural goods for home consumption. On the other hand, and equally misguidedly, they are not fully imputed to transactions that take place unrecorded, as in the black economy, or when they are not mediated by money, as in barter deals between individuals, firms and even countries. The many currencies in use within the system need to be reduced to a common standard, which is difficult. The system itself is constantly reaching into places and economic sectors innocent of recording and statistical techniques. Until recently there were no agencies concerned with monitoring the system as a whole. Even today, international bodies such as the World Bank, which could be expected to take a system-wide view, avoid doing so, and confine themselves to aggregating separate national accounts.
The relative novelty of measuring national accounts – they were fashioned into an effective tool only in the 1950s – makes them untrustworthy when applied to earlier economic data collected without them in mind. The result is to suppress evidence of the market system’s initially explosive growth by embedding it in the lethargic performance of the prevailing non-market economy of the time.
In Britain, industry and commerce, themselves containing pre-capitalist ways of doing things, were bumbling along at a growth rate of something like 0.8 percent per year in the first four decades of the 18th century. Output took off in the middle decades, more than doubling to 1.7 percent per year (1740-1745), and almost quadrupling to 3.1 percent per year in the following decade (1750-1760). After some deceleration in the 1760s and 1770s, the real rate of growth of output in industry and commerce achieved levels fully equal to those of the East Asian Tigers of today – 8.8 percent per year cumulative in the 1780s and over 10 percent per year in the 1790s. Reconstructions of the national accounts show little of this remarkable growth. They reveal a sympathetic but greatly suppressed movement – a growth of 0.4 percent a year on average in the period 1695-1715 to 1725-1745 rising to 1.1 percent from 1725-1745 to 1745-1765 and after falling back to 0.8 percent a year in 1745-1765 to 1765-1785, rising strongly again to 2.1 percent a year in the period 1765-1785 to 1785-1801.
If modern Britain, with current economic growth – some 2.2 percent per year at the turn of the millennium – not far from what it is presumed to have been 200 years ago, seems to be doing not badly by comparison, it is because two very different beasts are being compared – one still half-buried in a consumption-oriented world, the other a mature, more or less pure market economy committed to growth. The relevant comparison is the one between Britain’s current economic growth and the expansion of industry and commerce in Britain two centuries ago. That shows a consistent, long term decline in the system’s, not the country’s, rate of growth.
Recent years confirm the trend. After a period of lusty economic expansion in the third quarter of the last century, fuelled by a vast monetisation of mass consumption as millions of peasants poured into the world’s big cities, and by the single-shot reduction in social overheads as these new town dwellers were made to make do without matching expenditure on housing, roads, public administration and so on – fuelled also by a rapid increase in the international division of labour (globalisation), by a conscious attempt on the part of governments to keep their countries’ production as close to capacity as possible, and by a host of attendant technological advances both precipitated by these developments and which made them possible – the rate of economic growth resumed its downward course, by a fifth on average between the 1960s and the 1970s.
The deceleration has been unevenly spread. Since the Second World War, and particularly in the 1980s and the first half of the 1990s, growth was spectacular in some areas, particularly in the Tiger economies of East Asia: Hong Kong and South Korea clocked up an average growth of over 9 percent per year for 20 years until 1997; the Chinese super-dragon raced ahead at 10.1 percent per year (if we are to believe the inflated official figures); Thailand, Indonesia and the Philippines performed as well and sometimes better in short spurts, but the picture for the system as a whole has not changed in its essentials.
For the rich countries – Western Europe, the US, Canada, Australia, New Zealand and Japan – responsible for some 55 percent of world output as conventionally measured – average growth rates fell from 6.04 percent per year in the 1950s and 1960s to 2.69 percent per year in the 1970s, 1980s and 1990s. In the world as a whole the annual average rate of growth – 4.91 percent between 1950 and 1973 – fell to 3.01 percent between 1973 and 1998.
Even during its “Goldilocks” business cycle of the 1990s, the US posted annual average growth rates in real gross domestic product (GDP) of 2.2 percent compared with the 1950s and 1960s, when growth averaged 3.5 percent and 4.5 percent per year respectively, and compared with an average of 3.5 percent per year since the civil war – and with 1.2 percent in 2001.
The declines in growth as measured by conventional national income accounting become precipitous when their social and environmental effects are considered.
Much of the “growth” in conventional national income accounting comes from shifting existing economic activity from the non-monetary social economy of households and communities to the money economy (leading to the loss of social capital); from depleting stocks of natural assets (forests, topsoil, fisheries, oil and mineral resources, stratospheric ozone) beyond their rates of renewal, and counting their decreases as income; and from treating as income the costs of repairing the damage caused by growth – waste disposal, clean-up of toxic dumps and oil spills, healthcare as a consequence of environmental diseases, rebuilding after floods caused by deforestation, and financing and installing pollution-control devices.
A reconstruction of national income accounts for the US from 1960 to 1986, counting only those increases in output that fed into improved well-being, and adjusting for the depletion of social and environmental resources – an index of economic welfare rather than output – suggested that individual welfare peaked in 1969, held steady in the 1970s, and then fell. Studies in Holland put the damage caused by pollution (air, water and noise) in 1986 at 0.5-0.9 percent of gross national product (GNP). Similar studies estimated that pollution damage in Germany was costing 6 percent of GNP. An earlier, more limited study for the US put the costs of pollution damage at 1.28 percent of GNP in 1978. A study of Costa Rica between 1970 and 1989 concluded that the average annual growth rate would have been more than a quarter less than recorded if the depreciation of forests, soils and fisheries had been taken into account – in 1989 alone deforestation cost the country 7.7 percent of GNP. The first, limited, green accounts in Britain, published in 1996, estimated the costs of oil and gas depletion at a quarter of the income of these industries (0.5 percent of GDP), and estimated that spending on pollution abatement by industry as a whole amounted to £2.3 billion in 1994 (1.5 percent of value added in industry). A study by the World Resources Institute in Washington DC concluded that Indonesia’s economic performance between 1971 and 1984 was not the 7 percent per year generally accepted, but 4 percent once the depletion of oil, forests and topsoil were included in the calculations.
Even disregarding environmental reckoning, the recent slowdown in the market system’s rate of expansion is without precedent. To be sure, there have been long declines in the past. The Great Depression in the last quarter of the 19th century took wholesale prices in Britain steadily downwards from 1873 to 1887, and then again between 1891 and 1896. But it scarcely interrupted real economic growth – the average annual growth of 2.2 percent registered between 1856 and 1873 dropped mildly to 2.1 percent between 1882 and 1899, and then regained its former rate. Net domestic capital formation, measured as a proportion of GDP, was not very different from what it had been before and after the depression years 1873-1896. In the system as a whole, with the US and Germany outpacing Britain, growth was even more robust. The workings of the international gold standard ensured that prices throughout the world fell in step with those in Britain, but production expanded strongly too – by 2.5 percent per year on average (1.4 percent per head) in the period. If there was a single cause of the Great Depression, it was the shortage of money. The supply of monetary gold on which the quantity of banknotes and deposits ultimately depended was tight until the end of the 1880s, while the demand for it rose mightily as new countries rushed to adopt the international gold standard after 1870.
The slump of the 1930s also had a lot to do with the inadequacy of finance. True, real output fell dramatically. World trade fell even more precipitously – by 83 percent between January 1929 and March 1933 (from $3 billion to $0.5 billion at constant prices). But the collapse of the banking system was even greater.
The current slowdown, however, is independent of crises in banking and finance. True, these exist in plenty – the “Third World” debt crisis in the 1980s, the Savings and Loan turmoil in the US, the worldwide property market collapse, the “derivatives debacle” in the mid-1990s, and the Asian “contagion” of the late 1990s. Except for the last these had little effect on the real economy.
The roots of the current slowdown seem to go deeper.
In the early days many inputs into production were “free”, or nearly free, in the sense that they were not, or hardly, paid for. Water was there for the taking as energy or raw material, wood likewise. Locations were easily and cheaply available. Finance was most likely to take the form of equity, not loans. Start-up costs in the new manufacturing were almost everywhere a small fraction of what they were in agriculture at the time – one eighth in Britain and Japan (around 1810 and 1905 respectively), one seventh in France and one sixth in Belgium (around 1850), between a half and a third in the US (in the 1890s). Business was organised in relatively small units with little by way of professional management. By and large monetary outlays went to pay for the direct input of labour and materials in production.
Indirect costs were few – machines were made mostly of wood, installed mostly within existing buildings, and their maintenance was normally within the competence of existing artisans. One does not come across the words “wear and tear” or “depreciation” in 18th century industrial accounts, or any evidence of a systematic application of the underlying concept.
There were few overheads. The total (fixed and circulating) capital needed per worker in big industry in England at the turn of the 19th century was about four to five months average male wages. In France a couple of decades later, reflecting higher prices for the more advanced techniques that had become available, it was six to eight months. (150 years later a new entrant would be investing 300-350 months average wages per worker employed.)
Social overheads in particular were not much of a burden. They were sustained for the most part by society outside the market system. Labour was reared and trained in the non-capitalist agrarian sector. Internal order, national security and most of transport and communications were embedded in it. They were available at little or no cost to capital. Some of it came from simple marauding and sale of booty, as in the European slave trade, and some from unrequited exports from the colonies – 1.7 percent of Dutch domestic product from Indonesia (1778-1780), 1.3 percent of British net domestic product from India (1868-1872). Most of it came from the home societies on which the spores of the market system fastened and in which they grew.
By the time the market system moved from its early, enterprise phase to its middle, national economy or state capitalist phase, it was outgrowing the supply of free goods and services. A growing portion of inputs needed to be sourced from within. There were still, naturally, the direct costs of production – labour and materials. But now, typically, plant and machinery were essential. Water which earlier had flowed freely had now to be bought in, as did refuse services. Transport and communications networks had to be built from scratch and maintained. Labour which earlier streamed in and out of the system as needed now had to be conserved within it, turned for the most part from a flow to a stock item, paid for to some extent whether used or not. Indirect costs formed a larger share of the total.
Overhead expenditure increased prodigiously. Fixed capital grew from 11.5 percent of GDP in the US in 1871-1880 to 13.2 percent in 1974-1979, from 4.6 percent in the UK in 1801-1810 to 15.3 percent in 1974-1979, and from 6.3 percent in Japan in 1881-1890 to 21.1 percent in 1974-1979. Fixed capital per worker increased 5.2 times in the US between 1890 and 1987, 7.6 times in Britain, 9 times in Germany and 54 times in Japan. Capital per worker in British coalmining rose 250 percent in constant prices between 1816 and 1913. Business organisation had grown so large and so complex as to require a permanent, professional management cadre to command, control and co-ordinate, and a permanent, professional purchasing and sales organisation. These people were largely unaffected by the cyclical pattern of business activity. In addition business was increasingly required to support the social overheads necessary for its existence – internal order, national security, a stable labour force, education and training, public health, and private welfare.
By the time the market system had reached the limits of its second phase, in the third (and fourth) quarters of the last century, non-direct costs (taxes, enterprise overheads, indirect costs) were absorbing the lion’s share of all production in a typical large enterprise.
The rise in costs has not run its course. As the market system presses against environmental constraints, new items are being identified – the costs of abatement, renewal and recycling. The very concept of cost is undergoing further development. Time honoured accounting assumptions – that entities are defined in space and time and events which do not fall within the defined organisation (externalities) can be ignored; that the only events which need to be recognised are those which can be described in financial terms; that the only real cost of production is, ultimately, the cost of human labour; and that resources in terms of materials and energy, and waste absorption, are inexhaustible and interchangeable – are wearing thin. Increasingly the costs of production are seen to include the costs of environmental depletion and degradation, and production itself seen as a transformation – of capital into income – and not as an infinitely repeatable process.
Little remains of the free ride enjoyed in the market system’s early phase. Raw labour has for the most part ceased to be a flow, and has turned into a stock item. Skills can no longer be assumed to exist, but have to be formed. Materials have to be managed rather than gathered or mined. The environment can no longer be relied on to absorb all wastes. What previously could be grabbed for the price of providing the means of compulsion now has to be produced, and requires investment. More real costs enter the reckoning of incurred expenses, and of profit.
The second major reason for rising costs and for its obverse – declining profits and growth – stems from the ever more intricate division of labour which made the growth possible. As traditional society’s multi-stranded relationships separated out into autonomous threads, connected in principle only by episodic transactions, the costs of social coherence and continuity that were hidden, and relatively modest, in non-market society grew. These are the “overhead costs” of maintaining the physical and organisational integrity of business – and the rapidly increasing cost of maintaining the physical and organisational infrastructures of society as a whole.
Business overheads are increasing far faster than the variable costs of direct labour and materials. Whereas before, in the middle years of the 18th century, the costs of sales were negligible (even Josiah Wedgwood, 1730-1795, notoriously lavish in this respect, spent no more than one seventh of manufacturing expenses on sales), they now frequently top costs of production; in pharmaceuticals, in feature film production, in dot.coms. The costs of general and financial administration, which together currently constitute a large share of total outlays, were too small to merit separate mention in the typical accounts of a business 200 years ago.
Luxuriant as has been the growth in business overheads, it has been overshadowed by the growth of the social variety. Two hundred years ago few if any taxes were levied on business. Now, notwithstanding the most exquisitely crafted loopholes, a significant share of recorded business revenue is paid out in taxes and other government levies. Some of that is recycled into production, either directly by the state itself or indirectly through subsidies, or interest on or refinancing of government debt. Most, however, is spent on maintaining the physical and organisational structures of the market system itself – the arrangements which make ever increasing specialisation possible.
Spending on social overheads has risen relentlessly. The cost of coercion and the threat of coercion has ballooned. Military expenditure – which accounted for 2.8 percent of GDP in Britain in 1840 – now consumes some 3.2 percent of GDP (250 times larger in real terms) in the US, and 3.8 percent of gross world product. Military service, which directly employed 87,000 men in the army in Britain in the 1700s, 2.5 percent of the male population aged 20-44, occupies 2,863,000 people in the US today, 5.7 percent of 20-44 year olds.
Spending on professional law enforcement – the police, judiciary, prisons, etc – has grown even more. It absorbed perhaps 1.9 percent of GDP in mid-19th century Britain, compared with 0.8 percent in the US today. Most of this is state funded, although by no means all – there is a growing private sector comprising security guards, espionage agencies, private armies and mercenary groups. Law enforcement employs 932,780 people full time (and 84,171 people part time) in the US, some 0.7 percent of the employed civilian labour force. In some cases the costs of coercion are phenomenal. In its dying years the white South African regime was spending 37 percent of GDP on it, a large proportion on enforcing apartheid. The (East) German Democratic Republic shelled out equivalent sums on the same operations, and the still abiding Myanmar (Burmese) government is doing the same.
The same is true of general state administration. The number of civil servants in Britain rose by 3,500 percent between 1797 and 1991 (from 16,267 to 594,400), or from 0.2 percent of the economically active labour force to 2.2 percent. Government employees at all levels – federal, state and local – number 20.3 million in the US today, or 29 percent of the civilian labour force. Together with law enforcement, state administration accounted for some 0.9 percent of GDP in 1890 in Britain, and equivalent proportions in other early members of the market system. Now they absorb $1,375 billion in the US – some 13.8 percent of GDP – a huge relative intensification (even allowing for the 250-fold difference in real national income).
These recorded increases for spending and employment in social coercion almost certainly exaggerate the real increases that took place. Market society did not invent the function. All it did was unpick it, in stages, from the multi-stranded relationships – economic, religious and social – which underpinned the social order of the time. It professionalised what had been bundled with other activities, turning it into a special function that had to be paid for.
Much the same can be said of the three other broad categories of social overhead expenditure – spending on securing compliance with prevailing social arrangements, spending on physical infrastructure, and spending on the formation and maintenance of a workforce.
Spending on compliance – call it moral coercion, or attitude engineering, comprising spending on welfare, on official and unofficial propaganda, on production and other subsidies – has increased far more than the number of categories it covers, from perhaps 2.2 percent of gross product in the early 1800s to 36.8 percent in the UK (and 7.7 percent in the US) today.
Sometimes the spending is bizarre. Saudi wheat farmers whose costs of production exceed $600 a tonne have been known to sell their crop (to New Zealand) for under $100 a tonne. The US price of $65 a tonne charged to Algeria was coupled with a subsidy of equal amount. European beef has been sold to Brazil at less than one quarter of the official European Union price.
Spending on physical infrastructure – transport and communications – once an incidental expense of existence for all but a microscopic proportion of humanity, has soared in the same fashion, from some 0.1 percent of gross product in 1890 to well over 11 percent in the US today. And the pressure to spend yet more is unrelenting, as traffic jams on land and in the air turn into gelatinous brawn.
Spending on the formation and maintenance of the workforce – the lion’s share of educational outlays and of outlays on health, particularly its public health component – has grown even more remarkably, from possibly 0.6 percent of GDP in Britain in 1890 to 9.4 percent in the US today.
Let it be repeated – expenditure is the baldest indicator of developments. Activities that were enfolded in the normal fabric of social life separated out into specialisms, became public – and paid for. Their visibility outpaced their actual growth, but the growth was substantial all the same.
The increasing weight of overheads within total costs indicates an ominous trend within the market system – the amount of productive activity as a proportion of all organised activity gets ever smaller. This is particularly apparent in the current period when estimating the shift from production to maintenance is less of a Neanderthal exercise.
Take as productive any activity resulting in a product or a service that can be used for further production. It might be a bowl of cereal, a steel ingot, the delivery of a product or of a message about it, education or instruction. In market society not all of this necessary activity takes place inside the market. A part of it, a small and declining part it may be said, is still not fully captured in the web of monetary transactions – childcare for example, or food production for one’s own use. This part, although productive in a social sense, is not productive in terms of the market system.
On the other hand, not everything paid for is productive. The money spent on a battle tank is real, yet it buys nothing that can be used for further production – not even the most flamboyant militiaman will use it to get to the office or to plough a field. The same goes for work that goes into designing, making and servicing it – and for the food and other goods and services consumed by these people, and for the goods and services consumed by their suppliers in infinite regression.
If the military sector is the clearest example of unproductive activity, it is not the only one. Most central government outlay and some local government outlay is devoted to ends other than expanding production, such as the spending on coercion (police, prisons, law) or compliance (state pensions, subsidies, disability allowances), or both (general administration). Much production is generated in, and by, waste industries – economic sectors that act as proxies for personal expenditure by owners and their agents (business entertainment, gifts and travel); that are an expense of profit distribution amongst enterprises (finance, most insurance); or that redistribute existing assets (landed property or rental services other than maintenance and repair construction, sales of art and collectables). Another block of activity is generated in, and by, partially-waste industries, whose output is usable in principle as inputs into further production, although, in practice, a proportion is drained off into unproductive use – financial (as distinct from material) record keeping, planned obsolescence, the building and maintenance of prestige offices in central business districts. Then there is the production activity generated by the personal consumption expenditure of people engaged directly in waste production, of employees in unproductive occupations, and lavish personal consumption expenditure out of profit.
None of these is easy to define, let alone quantify. Living in the maw of a particular social system, particularly a global, all-consuming system, makes it difficult to distinguish the generic from the contingent conditions of social existence, or necessary costs from haphazard ones. Even if the distinction were easy in concept, it would be difficult to make in practice – there are no readily available statistics even in the hub of the system, and few numbers at all at the rim. This said, a crude, pioneering study concluded that only 39 percent of gross output in the US in 1970 was productive. This is a measure of actual output. It excludes output that might have existed were it not for unemployment (4.9 percent of the workforce in that year – say 12.5 percent of the productive workforce). It excludes productive output lost through duplication, excessive seemingly-productive consumption, irrational ideologically-induced methods of work, and so on. It is a measure, cautiously estimated, of the waste that goes on inside the market system. It does not measure the waste of the system. It is a measure capital would take of itself if only it could. Thirty years later real gross output as conventionally measured has increased by 160 percent, but a slightly larger part was unproductive. The productive economy in the US remained static.
It is rash, but not ridiculous, to use the US as a template for the market system as a whole. There are signs of convergence in economic activities worldwide – while US spending on the military has dropped from 8.7 to 3.0 percent of GDP, military spending in the rest of the world has risen. Manufacturing employment in the US dropped from 29.1 to 14.8 percent of the total (1980-2000) and rose in the rest of the world. Not too much should be made of this. Structural convergence is slow and of itself proves nothing about the course of productive activity. But it does suggest a diminution in the sources of growth in the market system, particularly when taken together with the general decline in the rate of profit.
As a whole, the market system is still growing. Different parts are growing at different rates. But growth overall is decelerating – at something like 1.1 percent per year between 1980-1990 and 1990-1999. It is declining in productivity – more and more of its resources are devoted to maintaining its structures, and fewer and fewer to production and expansion. Slowly it is slowing down. For a system whose very essence is unbounded material growth, this is alarming.
And there is more to come. As the system presses against its natural limits, which are likely to remain relatively fixed, the real costs of material growth are set to rise and the very notion of growth comes under pressure.
Can the trend be reversed? A review of the structure of costs is instructive in this regard.
Direct costs of production – the costs of the raw materials and the energy, human or otherwise, which goes directly and wholly into the product or service delivered – have fallen precipitously. Ninety seven years ago it cost 13.2 pence to produce one kilo of beef carcass (£3.02 in today’s money). Today the equivalent cost is £1.74 – 58 percent as much in real terms. The cost of services are showing early signs of an equally precipitous decline – the operating costs of British banks dropped 34 percent between 1987 and 1997. No doubt further savings can be made in this area. But how large can they be?
If the art of such cost-cutting lies in increasing labour and environmental efficiency by the application of scientific methods and, in the case of labour, by the application of greater compulsion, direct or not, there are rising barriers to doing so.
In the case of environmental efficiency – improving the productivity of renewable resources (faster growing and higher yielding, possibly GM, crops for example), changes in agricultural techniques (modern irrigation, more careful tree felling), and improving the exploration and exploitation of non-renewables and their recycling – technical boundaries are already being approached in some areas. Decreasing returns are being encountered in modern intensive farming. More generally, there is a natural limit to the photosynthesis which governs plant – and all other – growth. Reserves of non-renewables are being depleted at an accelerated rate.
In the case of labour costs, there are social and human limits to cost reduction – redundancy on the one hand and physical and mental exhaustion on the other.
Even if direct costs could be edged into freefall, their reduction would do little to reverse the decline in productivity and growth – they are already so small a proportion of all costs that no conceivable cut could have much effect. Halving the wage bill of assembly line workers in TV tube production would reduce the running costs of a plant by no more than 2.5 to 5 percent.
Indirect costs, a popular refuge for fugitive direct costs, are more resistant to attack. The inexorable rise in capital intensity implies rising expenditure on maintenance and replacement, an associated rise in technological intensity with the implication of speedier obsolescence, and a rise in the costs of repairing the damage caused to the environment by material production. Not that there are no counter-examples. New materials can reduce the indirect costs of maintenance. But despite the constant efforts made to trim indirect costs (some of which are successful), they avail little against the rise in the relative importance of such costs, occasioned by the increasing complexity of production.
The area of costs most resistant to attack are overheads – not that the attempt to cut them is ever abandoned. The 1990s saw a sustained attack on business overheads, especially in the heartlands of the market system. Mighty behemoths cut swathes through their payrolls, including, to an unprecedented degree, their management cadres. In Europe in the 1990s enthusiastic “de-layering”, “downsizing”, “retrenchment” and “rationalisation” led to the elimination of thousands of jobs in general administration, white collar and headquarters jobs.
In the US tens of thousands of jobs went in the same period, at a time when the workforce was expanding. Even in Japan, citadel of “lifetime employment”, where many of the unemployed are still sheltering in companies that pay wages for no actual work done, managerial unemployment is growing.
Although business retrenchment peaked in the slowdown of the early 1990s, it hardly solved the problem. The ratio of overhead to direct expenditure in business continued its steady rise. The ratio of overhead to production jobs grew. Professional and managerial staff in Europe rose more than a twelfth from 16.9 percent to 18.4 percent of the labour force between 1992 and 1997.
This is not surprising. As businesses become more complex, more specialised, more global and more dependent on each other, the efforts needed, and the costs incurred, to ensure smooth internal coordination between their parts and functions, and to order their increasingly complex relations, become greater. Nothing short of a U-turn in these trends, which are both the expression and the cause of the market’s spread, could reverse the tendency.
The course of expenditure on social overheads mirrors, in magnified form, that of business overheads. They have been subjected to a sustained onslaught since the 1980s.
Yet, essentially, nothing has happened. The rise in social overheads has continued. State expenditure has marched relentlessly onward. In the relatively rich OECD countries it rose from 32.3 percent of combined GDP in 1970 to 41.6 percent in 1989 – by more than a quarter. Add to this increase the contribution of newly privatised firms and newly formed companies dedicated to social overhead activities in the newly deregulated environment – security and prison services in the US, Britain and South Africa, and telecoms, road building and other infrastructural activities in most of the hub countries – and the attack on overheads begins to resemble a mauling by a sheep.
This too should not come as a surprise. Without a constant, accelerating expansion of its infrastructural sinews, the market system could not have grown in depth and scope to the extent it has. Insofar as that growth presses against social and environmental constraints, which elicits curative, preventive and avoidance spending, social overheads are bound to increase.
Attempts to reverse the trend face not only these fundamentals of the market system itself, but also the institutional arrangements within which growth has taken place – namely, the sovereign states which, in aggregate, incur the lion’s share of the spending on social overheads. In the current, fragmented state system, agreement between states on spending priorities is not certain, and in any event is not easily reached. Even if reached, such agreements are not sacrosanct – and certainly not more treasured than the “national interests” which they are deemed to enshrine at the time they are made. And even if they are honoured in principle, the practical application of agreements in the form originally intended cannot be relied on where monitoring and enforcement are dispersed among the parties to the agreement. There is nothing to suggest that social overheads can be trimmed.
As the market system matures and the larger society loses its integrated character in a welter of discrete, specialist, loosely co-ordinated, separately funded functions, its tolerance for overhead expenditure, particularly social overhead expenditure, naturally decreases. At the same time, and for the same reasons, the relative weight of overhead expenditure in the total grows.
It is an acute dilemma for the system. Whichever policy is adopted – the conservative, hands-off, laissez faire prescriptions which leave the provision of overheads to market forces or to ad hoc coalitions of interested parties (Reaganomics or Thatcherism), or the social democratic, mildly interventionist policies which accept the need for systemic provision and provides for it (Clintonomics or Blairism) – society is impaled on one or the other horn of a dilemma. The one assumes that society can still provide the services that were once to be found within whole, self sufficient and fully functioning family and community structures even though these no longer command the resources and attitudes that would make such a policy feasible. The other, just as unrealistic, believes that adequate provision can be made through increases of efficiency and a rational allocation of resources, and assumes that the attitudes conducive to their mobilisation exists.
The dilemma grows sharper as the system grows ever more slowly, employs fewer and fewer productively, and the commitment of those included in it weakens. Global competition and the increasingly rapid changes that result make ever heavier demands on the individual as producer, bruise emotional and moral ties, and weaken the implicit contract – to exchange loyalty for security – between business and its privileged cadres of managerial workers and between the state and its citizens. The cost of maintaining the market system will continue to mount, the effort required to provide the conditions in which it is able to function will grow, the balance between production and control will continue to tilt against the former, the productivity of the market system as such will continue to decline, and the material growth that marks it out from every other society and is its indicator of health will continue to slow down.
It is the rich, hub countries that are most vulnerable to this decline. They are the most centralised, the most dependent on complex and delicate networks of connections, physical and relational, and on public commitment. They exist thanks to efficient delivery of countless goods and services, and the effective functioning of myriads of producers throughout the world. They are impelled to spend most on maintenance, causing slow growth relative to that of the aspiring rim regions, and so compounding their own difficulties and vulnerabilities.
It is possible that market society will go the way of the Doubledays. He, remember, is a senior inspector of taxes, she a tax avoidance accountant. Since between them they have more mutually cancelling work to do than time to enjoy their resulting opulence and, in addition, professional ethics require them to work well apart, they rarely meet. But they did get together long enough 16 years ago to have a son, Buster, who, alienated by his parents’ remoteness, expresses his disaffection by vandalising public property and injecting himself with private poisons.
One family among many might survive in this way, but an entire productive system, particularly one that has destroyed all others or reduced them to shadows of their former selves, will find it difficult.
Last updated on 20.6.2012