Chris Harman

In Perspective

Rate of profit warning

(November 2007)

From Socialist Review, November 2007.
Copyright © Socialist Review.
Copied with thanks from the Socialist Review Website.
Marked up by Einde O’Callaghan for the Marxists’ Internet Archive.

No one can predict whether the recent financial crises will develop into a proper recession

Some have hailed China’s economic expansion and the development of computer technology as potential saviours of the world economy – Karl Marx would have disagreed.

The mainstream economic commentators have all been revising their calculations since the monetary crisis caused by lending to “subprime mortgages” broke in August. Alan Greenspan of the US Federal Reserve Bank thinks the odds on a recession next year have risen to about 50-50, and the International Monetary Fund seems to at least half agree.

But how serious is the situation, and what are its implications? My view is the monetary crisis is a reflection of the failure of capitalism to overcome a deeper problem that arose more than 30 years ago – a fall in average profit rates for reasons analysed by Karl Marx in his work Capital. Investment tends to grow more rapidly than labour – the ultimate source of profits – so the ratio of profits to investment falls.

There is agreement among most economists that profits fell drastically between the late 1960s and around 1982. Since then profit rates have recovered somewhat through mechanisms Marx also wrote about. In the last two recessions some big firms and one big economy (the USSR’s) have gone bust, leaving more room for others to grow. At the same time, continual upward pressures on workloads and downward pressures of pay (particularly in the US) have increased the share of output internationally going to profits as against wages. But this has only made up for about half the loss in profitability of the last 30 years.

This has been enough to allow some national economies to grow quite fast for a number of years – Germany and Japan through most of the 1980s, the Asian “tigers” until 1997, the US through the second half of the 1990s, and China through from the early 1990s to the present. But it has not been enough to generalise such rapid growth to the rest of the system, or to sustain it indefinitely. So Japan has more or less stagnated for 15 years, the Asian tigers have slowed down since 1997, and growth in most of continental Europe has been at a snail’s pace.

This situation has two effects. First, the low level of profits and the unevenness of growth rates intensify competition between firms and the nation states in which they are based. This translates itself into pressure on wages, workloads, working hours and the welfare provision that makes up the “social wage”.

Secondly, capitalists, desperate to find ways to use existing profits to make still more profits, are repeatedly attracted to speculation – whether in the stock exchange and the companies of the late 1990s, or in the subprime mortgage market in the mid-2000s. But speculation cannot create new sources of profits, so each bout eventually ends in disaster for those who do not get out of the game before the music stops.

There is an argument in some quarters that the increased productivity produced by new computer technologies (particularly in the US) and the growth of China are providing a way for capitalism to break out of this syndrome. Some people argued this at the recent highly successful conference on political economy organised by Socialist Review’s fellow publication, the International Socialism journal. A few even went so far as to say we were entering a new “long wave” of expansion for the system.

If this were true, it would have very important political implications. In a period of high and rising profitability, people would not have to struggle very hard to make capitalists pay higher real wages and governments to grant positive reforms of the sort they did in the heyday of the welfare state after the Second World War.

But the argument is mistaken. The US has experienced high levels of productivity due to computerisation, but they have mainly been centred in the computer industry itself and in the retail trade.

The effect of computerisation of profits is doubled edged. The cost of buying new computers is continually falling, making investment cheaper. But computers become out of date very quickly. So while a machine may last 15 or even 20 years before being obsolete, a computer rarely lasts more than three or four years. Firms have to invest in new equipment much sooner than in the past, putting more pressure on future profits.

As for China, its growth is very important. But it accounts for only about 15 percent of global production in purchase power parity terms, and only about 6 percent in the commercial exchange rates which matter when it comes to global profits. That is not enough to overcome the problems facing the world system.

For the moment China is adding to the competitive pressures. A successful new entrant into world markets always creates instability. Arguments over trade between the US, the European Union and China are an expression of the instability. So is the current financial crisis, since Chinese expansion depends in part on selling to US consumers goods which are then partly paid for by borrowing, including in the subprime mortgage market.

So the “credit crunch” is a product of deeper, as yet unresolved, problems in the system. The result may well be havoc over the next few months. No wonder Greenspan and others are worried. Such is the chaos of capitalism that no one knows whether their worries are justified. But the underlying problems have one other very important effect. The drive to try to force up profits at the expense of wages, working conditions and welfare provision will not go away. Hence Brown’s attacks on public sector wages in Britain and Sarkozy’s counter-reforms in France – and the strikes taking place against both.

Last updated on 27 December 2009