From International Socialism (2nd series), No.119, Summer 2008.
Copyright © International Socialism.
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We cannot understand the system we live in or how to fight it simply by the repetition of slogans. We need serious analysis and debate. For that reason, I welcome Jim Kincaid’s rejoinder to my articles in recent issues of International Socialism. But I think it is wrong in some important respects. He misreads what has been happening to the system, does not fully grasp theoretically the dynamic of capitalism and misconstrues some of the things I have said.
Let’s start with the facts. Kincaid lays a lot of emphasis on the growth in the output of “goods and services” between 2001 and 2007. No one has denied that growth.  I wrote an article on the impact of Chinese growth on Europe two years ago that emphasised it.  But if you look closely at the IMF graph he provides, it is clear that the growth rate in 2002-6 was no greater than that in 1970-3 (with a much lower peak than in 1973)—that is, in the years that ended in the crisis which spelled the end of the long post-war boom. Furthermore, the graph starts in 1970. If it started five years earlier, in the mid-1960s, it would show an overall downward trend, not an upward one. In other words, worldwide growth is still substantially lower than in the 1960s (see figure 1). 
Figure 1: World GDP growth rate, 1961-2006
Kincaid then goes on to assert that “the past 25 years have seen rising profits, growth in output and levels of accumulation”. Interesting here is the time span he gives. Twenty five years takes us back to 1982-3. A key point in my argument has been that profit rates started recovering in the early 1980s from the very low point they reached in the late 1970s. But in 2000 they were far from the level of the late 1940s, the 1950s and early 1960s that had sustained the long boom. Differing calculations by, for instance, Gerard Duménil, Robert Brenner and Fred Moseley all come to this conclusion, as I showed in my article on the rate of profit last year. 
What is the picture over the past six or seven years, since recovery from the recession at the beginning of the present decade? Kincaid says profitability has recovered. He quotes the Bank for International Settlements’ assertion that profits as a share of global GDP “reached historical highs” in 2004. But profit as a share of GDP is not the same as the rate of profit. The profit share has grown because of increasing rates of exploitation worldwide (something I have repeatedly referred to). But that does not mean the ratio of profits to investment (ie the rate of profit) is at a record high. Kincaid also quotes Moseley. But Moseley’s own figures  show profit rates in the long boom as hovering between 18 percent and 22 percent (between 1947 and 1968); they then fall through the 1970s to between 11 percent and 12 percent; from there they rise to about 14 percent to 15 percent in the late 1980s; and then in the mid-1990s to between 16 percent and 18 percent. From this level they fall back to between 14 percent and 15 percent in the early 2000s before rising to 19 percent in 2004. In other words, in one year in the past 25—2004—they reached the lowest figure in the long boom. Reports on the balance sheets of major US companies suggest that profits began to decline in 2005-6.
Brenner has also calculated recent profit rates. His overall trends are not that different to Moseley’s, except that he shows the rise in profit rates from 2001 onwards as not exceeding the peak of 1997, and then beginning to decline in 2005-7—that is just before the onset of the financial crisis. The pattern shown by David Kotz’s calculations is even starker. He shows the profit rate in 2005 as 4.6 percent, compared with 6.9 percent in 1997. 
Reported profits and profit rates are always open to question, since they depend to some degree on what firms can get auditing accountants to agree to. According to Susan Dev, professor of accounting at the London School of Economics, quoted in a study of the Murdoch empire:
Profits are not facts; they are just opinions ... This is one of the great truths of accounting—privately admitted but fre-quently denied in public by accountants ... When a company draws up its accounts it needs to make a lot of assumptions. This is mainly because at the end of the year there is a lot of unfinished business, which creates uncertain-ties. For example, there are unpaid debts, and a judgment has to be made about whether these will be paid. There are lots of assets and a judgment has to be made about how long these will last. All these are subjective judgments: one company may decide that all the debts will be paid; another that none will be. The second company will then write off the debt and declare less profit that year. Profit then is a matter of opinion. 
I pointed in my last article to some of the indications profit rates have been inflated using such methods, noting increased investment by non-financial companies in US finance and real estate. Now we know what has been happening inside one of the US’s manufacturing giants, General Electric, whose boss, Jeffrey Immelt, revealed in April that profits were going to be half those he promised in December. As the Economist reported, in the past:
GE’s profits grew with the sort of predictable consistency that was made possible by laxer accounting standards and a talent for making good any unexpected shortfall with last-minute sales of assets held by the firm’s notoriously opaque finance arm, GE Capital.
But the credit crunch exposed how inflated the supposed values of its assets were:
It seems that the main cause of GE’s last-minute failure to hit its latest target was that the seizure of the capital markets prevented several asset sales from being completed in time. Despite its image as an industrial company—making wind turbines, lightbulbs and so on—40 percent of GE’s revenue now comes from GE Capital, so these incomplete deals made a big difference to the overall results. 
Just as misleading as Kincaid’s claims over profitability are those over accumulation. Here we are fortunate. The IMF published an empirical study on global saving and investment in 2005. It concluded:
Global saving and investment (as a percent of GDP) fell sharply in the decade following the first oil price shock in the early 1970s, but were then relatively stable until the late 1990s. More recently, however, they again declined, hitting historic lows in 2002 before modestly recovering over the past two years.
It recognised that “these global trends mainly reflect developments in the industrial countries, where both saving and investment have been trending downward since the 1970s”, and these were compensated for to some extent until the late 1990s by investment “increasing substantially” in “the emerging market and oil producing economies”. Nevertheless it points out that in these parts of the world too “investment” has “fallen” since “the time of the Asian financial crisis” and “remains below the levels of the mid-1990s”. 
In other words, far from global accumulation showing a rising long-term trend, as Kincaid contends, it has been falling (see figure 2).
That does not mean that there are not ups as well as downs in the system as a whole, or that there has been no long-term growth. As we have long argued in this journal, conditions so far have been quite different to those of the slump of the 1930s, just as they have been quite different to those of the post-war long boom. The system has, so far, been able to avoid a long drawn-out slump. But it has not been able to avoid repeated crises and long periods of stagnation in one part of the world system or another—witness the very deep recession of the former Eastern bloc countries in the 1990s and the near stagnation of the Japanese economy since 1992.
Figure 2: Global saving and investment
Kincaid objects to my theoretical arguments over the rate of profit. I do not want to rehearse them all here. I did this many years ago in a book that is still in print, and repeated the points last year in this journal.  So I will restrict myself to his claim that somehow increased productivity and “ongoing waves of innovation” have created “surplus profits”, which by allowing some firms to get greater profitability increase the profitability of the system as a whole. I am sorry, but he makes an elementary mistake here if he is attempting to proceed on the basis of Marx’s analysis.
Increased productivity anywhere in the system has the effect of reducing the socially necessary time required to produce its output, and therefore the value of that output. This counter-intuitive insight was one of Marx’s great advances on the classical economists who preceded him. Unfortunately, it is one that some Marxists have abandoned.  Now, it is true that the first capitalists to innovate get excess profits. But as the innovation is generalised across a sector, profit rates fall. The temporary surplus profits might conceivably lead to a more rapid rate of investment, as Kincaid claims. But here the evidence on investment seems to indicate otherwise. Kincaid admits with his quote from the Bank for International Settlements that “corporate investment as a share of GDP remains low in G3 economies”. Here he wants to have his cake and eat it.
He claims that “internal restructuring” by firms through shutting down “less profitable operations” can increase the rate of profit, not merely by increasing the pressure on the remaining workforce, but by “devaluing capital”. He forgets that shutting down plants that firms have spent money on does not miraculously do away with that spending. If they have borrowed to pay for that plant, they still have to repay what they owe. If they have shareholders, they still expect a return on their original investment, not its reduced current value. That is why bankruptcies have historically been a major way of the system recuperating from crisis: some capitals can recover their profitability by cannibalising the value contained in others. You cannot cannibalise yourself. 
Similarly, the fact that rapid innovation can cut the cost of new investment does not in any way help the capitalists who have already invested. Their existing investments suffer from more rapid obsolescence, adding to their depreciation costs. This was one very important feature of the mid to late 1990s, when “the standard measure of the average depreciation rate” became “invalid”. 
In fact, despite Kincaid’s claims, the burst of investment in the mid to late 1990s did not produce any miraculous growth in productivity. Productivity growth was higher in the US than in the 1980s, but lower than in the 1960s. Productivity increases that did take place were concentrated in certain sectors of the economy—in the sector making the new technology itself, in retail (especially one giant firm, WalMart) and in finance.  Robert Gordon found that computerisation produced little increase in labour productivity growth in 88 percent of the economy.  This “productivity paradox” has bewildered many mainstream economists. 
Finally, Kincaid tries to save his case by claiming, on the basis of the Bank for International Settlements report, that less is spent on investment in means of production because they have got cheaper. But it does not matter why less is spent on investment. If it falls while real wages are still being held back (indeed, cut in the US and Germany), then a gap opens up between supply and demand in the economy as a whole due to what Keynesians call a “liquidity trap”, an excess of saving over investment —unless something else fills the gap. That is what the credit and housing bubbles did, and that is why without them there would not have been a recovery from the 2001 recession on anything like the scale that actually occurred.
Kincaid’s final set of arguments claims that economies outside the advanced industrial world, especially China, “will plug the gap left by a diminished rate of growth of consumer demand in the industrial countries”.
Accumulation in China, and to a lesser extent in India, has been rising. But the Chinese economy today is not big enough to be a locomotive that can pull the rest of the world economy behind it. At current exchange rates the IMF gave its GDP in 2006 as $2,600 billion—just behind Germany, just ahead of the UK and less than a fifth of the size of either the US or the EU. GDP can also be measured in “purchasing power parity”, which is based on domestic buying power. A revised World Bank estimate recently cut this down from 60 percent of US GDP to about 50 percent,  but, in any case, a country cannot trade according to purchasing power parities. A country that only accounts for 4 or 5 percent of global buying power cannot compensate for the effect of a major economic crisis in a country that accounts for over 20 percent.
But the faults with Kincaid’s argument go deeper than that. He claims that “extensive investment”, using relatively more labour than fixed capital, is taking place in China and the other “Brics” (that is, Brazil, Russia, India and South Africa as well as China), so providing a massive boost to profitability and investment worldwide. He justifies his claim by referring to a much hyped article by Richard Freeman, which claims:
The labour force available to global capital tripled from just over one billion workers in 1980s to over three billion in 2000—either for direct employment or as reserve army of labour ... 1.5 billon workers were added to the actual or potential labour force by its importation of China, India and the former Soviet bloc.
According to Freeman this has supposedly “cut the global
capital/labour ratio by just 55 to 60 percent of what it otherwise would have been”. The claim is astonishing in its disregard for facts. First, the idea that India was until quite recently not part of the world system should immediately be seen as wrong by any intelligent person: its share of world exports was three times higher in 1950 than it is today.  I would also argue that Russia and China were part of the world system, and in looking at its dynamics you have to take into account their fairly high rates of growth and accumulation 30 or 40 years ago.
Perhaps more importantly, the figures for worldwide employment are fanciful. In 2001 the non-agricultural workforce of the developing and transition economies was 1,135 million.  Self-employment accounted for a high proportion of these: 32 percent in Asia, 44 percent in Latin America and 48 percent in Africa.  Those proportions have grown everywhere with urbanisation. That reduces Freeman and Kincaid’s 1.5 billion potential new workers to about 700 million. Just as importantly, only a proportion of those who seek work gain employment in the formal sector in modern industry. Most are in very low productivity jobs, often working for firms with only a couple of workers.
Industrial employment in China actually fell from 78 million in 1997 to 54.4 million in 2001.  The fall was due to large-scale redundancies in the old industrial sectors, which was not compensated for by increased employment in newer sectors, despite the massive investment taking place there. In India in the early 1990s only 42.1 percent of the urban workforce were “regular employees”, while 41.7 percent were categorised as “self-employed”, and 16.2 percent as “casual employees”.  Things have not changed since. Employment growth is only a little over 1 percent a year and even less in manufacturing. 
These figures show something Marx would have recognised. International competition is leading the less industrialised countries to pursue patterns of accumulation based on high ratios of fixed capital to workers. The “organic composition of capital” has been rising at a rapid rate in China. “During 1980-2003 China’s capital stock grew by 11.3 percent per annum on average, far outpacing the annual average of 1.6 percent growth in labour”.  This is intensive accumulation, not the extensive version that, according to Kincaid, means a new wave of expansion for the global system.
His and Freeman’s mistake is to fall for a fallacy of neoclassical economics, the notion that means of production and labour are interchangeable according to their supposed marginal productivities. Marx had to deal with an earlier version of this argument, according to which accumulation depended on the growth of population. He, by contrast, recognised that the growth or otherwise of the employed population depended on the pattern of accumulation. This could lead to the apparent paradox of accumulation being accompanied by a massively expanding surplus population:
The additional capital formed in the course of accumulation attracts fewer and fewer labourers in proportion to its magnitude. The old capital ... repels more and more of the labourers formerly employed by it. 
This phenomenon in China leads to another very important process that Kincaid does not recognise. The rate of profit has been undergoing a long-term fall.
Kincaid writes of profit margins and the share of profits in GDP rising. This may be true, although it is very difficult for anyone to calculate the real profits of Chinese industrial enterprises because of the degree to which they are able to borrow from the banks, which have taken on a very large amount of bad debt.  In any case, profit margins and profit share are not the same as profitability. Recent studies of profitability in China show it as falling. Phillip O’Hara calculates it as declining from 47 percent in 1978 to 32 percent in 2000.  Another study by Editha Lavina and Emma Xiaoqin Fan points to the same trend, but different figures, showing a fall from 13.5 percent in 1980s to 8.5 percent in 2003. 
This can account for something else that Kincaid fails to recognise the significance of. The excess of “saving” (accumulated past surplus value) over investment is as much a feature of the Chinese economy as of those in the advanced industrial world. The sums that have been flowing across the Pacific to finance US indebtedness could have instead been invested productively in China. Chinese capital, whose current savings amount to a massive 50 percent of national output, has not felt profit rates are high enough to sustain investing more than 90 percent of these savings. There was already recognition five years ago that “investment in many sectors—including property, cement, steel, cars and aluminum—is being overdone”.  There are now even greater fears as the massive upsurge in investment forces up world raw material and food prices in a way that has not happened since the boom in the advanced industrial economies of 1971-3 that precipitated the first serious post-war crisis in 1974-6.
Chinese premier Wen Jiabao was rather more worried about the contradictions of Chinese capitalism than Jim Kincaid when he told the National People’s Congress in March 2007 that “the biggest problem with China’s economy is that the growth is unstable, unbalanced, uncoordinated, and unsustainable”. 
That is what capitalist booms are like. That does not necessarily mean the boom is going to collapse tomorrow. It does mean it is not going to go on forever, as so many people who write on China seem to think. It also means that China, far from alleviating the problems of global capitalism in 2008, is adding to the double crisis that besets it, with the credit crunch originating in the US on the one hand, and the surge in energy and food prices on the other.
On one thing Kincaid is right. It is still just possible that those running the bits of the world system will be lucky enough to find some way out of their immediate problems. Maybe pumping money into the US economy will somehow reflate the bubble—as happened in 1987 and 1998. Maybe that will happen without further fuelling the pressures on energy and food prices. But the chances are not very great. And in 1987 and 1998 they only succeeded in postponing a wider crisis for a couple of years.
Meanwhile, their failure to achieve a sustained recovery of profit rates forces them to try to push down hard on the rest of us. That is what the counter-reforms wrapped up in the ideology of neoliberalism are about. Precisely because capitalism has not recovered from the problems it first discovered in the 1970s, the attacks are going to continue hitting people and breeding further resistance. This is the most important point.
1. Although measurement of growth of services is a very contentious area, since non-traded services are measured in terms of the incomes of those paid to those who provide them. See, for instance, Kumar, 2006, pp.43-44, which questions growth figures for India.
2. Harman, 2006.
3. This graph recently appeared in Li, 2008.
4. Harman, 2007.
6. Kotz, 2008.
7. Belfield and Hird, 1991, pp.232-233. For a longer discussion of how British firms inflated their figures in the late 1980s, and how the Bank of England accepted the inflated figures, see Harman, 1993, pp.20-21. For the same phenomenon in the 1990s, see Harman, 2001, p.101.
8. “Immeltdown”, Economist, 17 April 2008, www.economist.com/business/displaystory.cfm?story_id=11058445.
9. IMF, 2005.
10. Harman, 1984, chapter one; Harman, 2007.
11. It is the great flaw, for instance, of Duménil and Lévy, 2004.
12. The exception is when a crisis or a war does such damage that those who have invested or lent are so desperate that they are prepared to write off vast sums, as in Germany or Japan after the Second World War.
13. Tevlin and Whelan, 2000.
14. See, for instance, Ark, Inklaar and McGuckin, 2003.
15. Gordon, 2000.
16. See the discussion in Hutchinson, 2008.
17. Despite Kincaid referring to “Keynesian underconsumptionism”, the first to have this insight was Marx with his refutation of Say’s Law. The problem Keynesians have is that they cannot deduce it from the dynamic of accumulation because they are stuck with a slightly amended version of neoclassical value theory and its assumptions about equilibrium.
18. Selim Elekdag and Subir Lall, Global Growth Estimates Trimmed After PPP Revisions, IMF Survey Magazine, 8 January 2008.
19. The growth of world trade means a smaller share counts for more today.
20. Summary of Food and Agricultural Statistics 2003, available from www.fao.org.
21. ILO, 2002.
22. Brooks, 2004.
23. Figures in Unni, 2001, p.2367.
24. Dasgupta and Singh, 2006.
25. Lavina and Fan, 2008, p.762.
26. Marx, 1961, p.628.
27. According to official estimates 20 percent of all loans were “non-performing” in 2003 – an unofficial estimate suggests that non-performing loans reached 45 percent of GDP – Financial Times, 23 September 2003.
28. O’Hara, 2006. But, as with all calculations of profit rates, there can be doubts as to the accuracy of the statistics O’Hara bases his calculations on – particularly since his figures indicate a decline in the rate of exploitation, which hardly fits in with the declining proportion of wages and consumption in GNP shown in Aziz and Li, 2007.
29. Lavina and Fan, 2008, p.748.
30. Financial Times, 18 November 2003.
31. Cited in Aziz and Dunaway, 2007.
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Last updated on 15 January 2010